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

FORM 10-Q

(Mark One)

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

For the quarterly period endedJune 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 000-50362RAINIER 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
 (Address of principal executive offices and zip code)(253) 926-4000(Registrant's telephone number, including area code)
____________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)





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.
Yes  X      No  ___          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ____                                     Accelerated filer X                                 Non-accelerated filer 
       
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___No  X   
.

APPLICABLE ONLY TO CORPORATE ISSUERS

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

|                               |                    
|------------------------------ | -------------------
|Title of class:                | As of June 30, 2007
|                               |                    
|Common stock, no par
    value | 6,568,470 *        

|  |                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Includes 424,211 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 132,482 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                                      |                                                                    
|                  |                                                                                        | June 30, 2007 and December 31, 2006                                
|                  | Consolidated Statements of Income for the                                              |                                                                    
|                  |                                                                                        | Three Months and Six Months Ended June 30, 2007 and 2006           
|                  | Consolidated Statements of Shareholders' Equity for the                                |                                                                    
|                  |                                                                                        | Six Months Ended June 30, 2007 and the Year Ended December 31, 2006
|                  | Consolidated Statements of Cash Flows for the                                          |                                                                    
|                  |                                                                                        | Six Months Ended June 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                                                             | 11                                                                 
|                  | Comparison of Financial Condition at                                                   | 11                                                                 
|                  | June 30, 2007 and December 31, 2006                                                    |                                                                    
|                  | Comparison of Operating Results for the                                                | 14                                                                 
|                  | Three Months Ended June 30, 2007 and 2006                                              |                                                                    
|                  | Comparison of Operating Results for the                                                | 18                                                                 
|                  | Six Months Ended June 30, 2007 and 2006                                                | 22                                                                 
|                  | Liquidity and Capital Resources                                                        |                                                                    
|                  |                                                                                        |                                                                    
|ITEM 3 -          | Quantitative and Qualitative Disclosures about Market Risk                             | 22                                                                 
|                  |                                                                                        |                                                                    
|ITEM 4 -          | Controls and Procedures                                                                | 23                                                                 
|                  |                                                                                        |                                                                    
|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**
|----------

|                                                                                                              |  | At June 30,      |  | At December 31,    
|------------------------------------------------------------------------------------------------------------- |  | ---------------- |  | -------------------
|                                                                                                              |  | 2007             |  | 2006               
|                                                                                                              |  |                  |  |                    
|Cash and cash equivalents                                                                                     |  | $        	12,626 |  | $           	11,847
|Interest-bearing deposits with banks                                                                          |  | 625              |  | 57                 
|Securities available-for-sale                                                                                 |  | 141,543          |  | 145,110            
|Securities held-to-maturity (fair value of $47,453 at June 30, 2007 and $51,589 		      at December 31, 2006) |  | 49,110           |  | 52,652             
|Federal Home Loan Bank of Seattle ("FHLB") stock, at cost                                                     |  | 13,712           |  | 13,712             
|                                                                                                              |  |                  |  |                    
|Loans                                                                                                         |  | 647,385          |  | 639,378            
|Less allowance for loan losses                                                                                |  | (8,235)          |  | (8,283)            
|Loans, net                                                                                                    |  | 639,150          |  | 631,095            
|                                                                                                              |  |                  |  |                    
|Premises and equipment, net                                                                                   |  | 33,858           |  | 34,383             
|Accrued interest receivable                                                                                   |  | 4,035            |  | 4,177              
|Other assets                                                                                                  |  | 10,184           |  | 9,664              
|                                                                                                              |  |                  |  |                    
|TOTAL ASSETS                                                                                                  |  | $      
904,843  |  | $         
902,697 
|                                                                                                              |  |                  |  |                    

|                                        
|----------------------------------------
|**LIABILITIES AND SHAREHOLDERS' EQUITY**

|                                                                                                                                                                                                                           |  |                    |  |                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ |  | ----------------------
|LIABILITIES:                                                                                                                                                                                                               |  |                    |  |                       
|Deposits                                                                                                                                                                                                                   |  |                    |  |                       
|Non interest-bearing                                                                                                                                                                                                       |  | $          	36,941 |  | $              	33,722
|Interest-bearing                                                                                                                                                                                                           |  | 423,375            |  | 423,703               
|                                                                                                                                                                                                                           |  |                    |  |                       
|Total deposits                                                                                                                                                                                                             |  | 460,316            |  | 457,425               
|                                                                                                                                                                                                                           |  |                    |  |                       
|Borrowed funds                                                                                                                                                                                                             |  | 343,615            |  | 345,395               
|Corporate drafts payable                                                                                                                                                                                                   |  | 4,200              |  | 3,537                 
|Accrued compensation and benefits                                                                                                                                                                                          |  | 1,415              |  | 2,111                 
|Other liabilities                                                                                                                                                                                                          |  | 5,387              |  | 6,399                 
|                                                                                                                                                                                                                           |  |                    |  |                       
|TOTAL LIABILITIES                                                                                                                                                                                                          |  | 814,933            |  | 814,867               
|                                                                                                                                                                                                                           |  |                    |  |                       
|SHAREHOLDERS' EQUITY:                                                                                                                                                                                                      |  |                    |  |                       
|Common stock, no par value: 49,000,000 shares authorized;

6,568,470 issued and 6,011,777 outstanding at

June 30, 2007; and 6,587,670 shares issued and 5,971,913 shares 								        outstanding at December 31, 2006 |  | 50,434             |  | 50,038                

|Unearned Employee Stock Ownership Plan ("ESOP") shares |  | (4,242)      |  | (4,582)          
|------------------------------------------------------ |  | ------------ |  | -----------------
|Accumulated other comprehensive loss, net of tax       |  | (480)        |  | (806)            
|Retained earnings                                      |  | 44,198       |  | 43,180           
|                                                       |  |              |  |                  
|TOTAL SHAREHOLDERS' EQUITY                             |  | 89,910       |  | 87,830           
|                                                       |  |              |  |                  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY             |  | $   
904,843 |  | $        
902,697

2

<PAGE>

**RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY****Consolidated Statements of Income**(Dollars in Thousands, except per share data)

|                                                    |  | Three Months Ended

June 30, |  | Six Months Ended June 30,
|--------------------------------------------------- |  | ---------------------------- |  | -------------------------
|                                                    |  | 2007                         |  | 2006                     
|INTEREST INCOME                                     |  |                              |  |                          
|Loans                                               |  | $      	11,645               |  | $      	10,414           
|Securities available-for-sale                       |  | 2,032                        |  | 2,005                    
|Securities held-to-maturity                         |  | 546                          |  | 723                      
|Interest-bearing deposits                           |  | 70                           |  | 52                       
|FHLB dividends                                      |  | 20                           |  | -                        
|Total interest income                               |  | 14,313                       |  | 13,194                   
|                                                    |  |                              |  |                          
|INTEREST EXPENSE                                    |  |                              |  |                          
|Deposits                                            |  | 4,053                        |  | 3,277                    
|Borrowed funds                                      |  | 3,841                        |  | 3,821                    
|Total interest expense                              |  | 7,894                        |  | 7,098                    
|Net interest income                                 |  | 6,419                        |  | 6,096                    
|                                                    |  |                              |  |                          
|PROVISION FOR LOAN LOSSES                           |  | 150                          |  | 150                      
|Net interest income after provision for loan losses |  | 6,269                        |  | 5,946                    
|                                                    |  |                              |  |                          
|NON-INTEREST INCOME                                 |  |                              |  |                          
|Deposit service fees                                |  | 879                          |  | 897                      
|Loan service fees                                   |  | 346                          |  | 290                      
|Insurance service fees                              |  | 622                          |  | 518                      
|Investment service fees                             |  | 144                          |  | 163                      
|Real estate lease income                            |  | 271                          |  | 281                      
|Gain on sale of loans, net                          |  | 66                           |  | 46                       
|Gain on sale of premises and equipment, net         |  | -                            |  | -                        
|Other operating income                              |  | 16                           |  | 27                       
|Total non-interest income                           |  | 2,344                        |  | 2,222                    
|                                                    |  |                              |  |                          
|NON-INTEREST EXPENSE                                |  |                              |  |                          
|Compensation and benefits                           |  | 4,068                        |  | 4,034                    
|Office operations                                   |  | 956                          |  | 1,308                    
|Occupancy                                           |  | 624                          |  | 635                      
|Loan servicing                                      |  | 129                          |  | 144                      
|Outside and professional services                   |  | 258                          |  | 237                      
|Marketing                                           |  | 289                          |  | 222                      
|Other operating expenses                            |  | 778                          |  | 523                      
|Total non-interest expense                          |  | 7,102                        |  | 7,103                    
|                                                    |  |                              |  |                          
|INCOME BEFORE PROVISION FOR FEDERAL
  
INCOME TAX   |  | 1,511                        |  | 1,065                    
|                                                    |  |                              |  |                          
|PROVISION FOR FEDERAL INCOME TAX                    |  | 529                          |  | 372                      
|                                                    |  |                              |  |                          
|NET INCOME                                          |  | $           	982             |  | $           	693         
|                                                    |  |                              |  |                          
|EARNINGS PER COMMON SHARE:                          |  |                              |  |                          
|Basic                                               |  | $          	0.16             |  | $          	0.12         
|Diluted                                             |  | $          	0.16             |  | $          	0.12         
|Weighted average shares outstanding-Basic           |  | 5,995,114 (1)                |  | 5,924,609 (2)            
|Weighted average shares outstanding-Diluted         |  | 6,073,991 (1)                |  | 5,935,785 (2)            
|                                                    |  |                              |  |                          
|Dividends declared per share                        |  | $      	0.065                |  | $        0.060           

|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Weighted average shares outstanding - Basic includes 196,818 vested and ratably earned shares of the 329,300 restricted shares granted and issued under the 2004
Management Recognition Plan ("MRP"), net of forfeited shares.
|    |                                                                                                                                                                                                                               
|(2) | Weighted average shares outstanding - Basic includes 133,430 vested and ratably earned shares of the 324,000 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
ComprehensiveShares

Amount

Shares

Earnings

Income/(Loss)

TotalBalance, December 31, 2005

6,690,847

$	49,598

$	(5,261)

$	41,814

$	(1,441)

$	84,710Common stock repurchased

(100,477)

(1,700)







(1,700)MRP forfeitures

(2,700)Earned ESOP shares released





679





679ESOP activity - Change in value of
shares 				        committed to be released



631







631Dividends paid







(1,594)



(1,594)Amortization of compensation
related to MRP



1,032







1,032Amortization of compensation
related to the 			        2004 Stock Option
Plan ("SOP")



477







477Comprehensive income:Net income







2,960



2,960Unrealized gain on securities, net
of  						tax of $342









635

635Total comprehensive income











3,595Balance, December 31, 2006

6,587,670

$	50,038

$	(4,582)

$	43,180

$	(806)

$	87,830Common stock repurchased

(26,700)

(550)







(550)Common stock issued for MRP

10,000MRP forfeitures

(3,500)Earned ESOP shares released





340





340ESOP activity - Change in value of
shares 				        committed to be released



237







237Dividends paid







(854)



(854)Amortization of compensation
related to MRP



513







513Amortization of compensation
related to SOP



180







180Exercise of stock options

1,000

16







16Comprehensive income:Net income







1,872



1,872Unrealized gain on securities, net
of  						tax of $176









326

326Total comprehensive income











2,198Balance, June 30, 2007

6,568,470

$	50,434

$	(4,242)

$	44,198

$	(480)

$	89,910




4

<PAGE>

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

|                                                                           |  | Six Months Ended June 30,
|-------------------------------------------------------------------------- |  | -------------------------
|                                                                           |  | 2007                     
|CASH FLOWS FROM OPERATING ACTIVITIES                                       |  |                          
|Net income                                                                 |  | $     	1,872             
|Adjustments to reconcile net income to net cash from operating
activities: |  |                          
|Depreciation                                                               |  | 1,138                    
|Provision for loan losses                                                  |  | 300                      
|Deferred income tax/(benefit)                                              |  | (323)                    
|Gain on sale of premises and equipment, net                                |  | (10)                     
|Gain on sale of loans, net                                                 |  | (202)                    
|Amortization of premiums and discounts on securities                       |  | 331                      
|Amortization of intangible assets                                          |  | 130                      
|Accrued compensation for restricted stock awards                           |  | 513                      
|Accrued compensation for stock options                                     |  | 180                      
|Change in operating assets and liabilities, net:                           |  |                          
|Accrued interest receivable                                                |  | 142                      
|Other assets                                                               |  | (469)                    
|Corporate drafts payable                                                   |  | 663                      
|Other liabilities                                                          |  | (482)                    
|                                                                           |  |                          
|Net cash provided from operating activities                                |  | 3,783                    
|                                                                           |  |                          
|CASH FLOWS FROM INVESTING ACTIVITIES                                       |  |                          
|Increase in interest-bearing deposits with banks                           |  | (568)                    
|Activity in securities available-for-sale:                                 |  |                          
|Maturities, prepayments, and calls                                         |  | 3,778                    
|Purchases                                                                  |  | -                        
|Activity in securities held-to-maturity:                                   |  |                          
|Maturities, prepayments, and calls                                         |  | 3,468                    
|Increase in loans, net                                                     |  | (20,530)                 
|Proceeds from sales of loans                                               |  | 12,377                   
|Purchases of premises and equipment                                        |  | (613)                    
|Proceeds from sales of premises and equipment                              |  | 10                       
|                                                                           |  |                          
|Net cash used in investing activities                                      |  | (2,078)                  
|                                                                           |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES                                       |  |                          
|Net increase in deposits                                                   |  | 2,891                    
|Advances on borrowed funds                                                 |  | 128,617                  
|Repayments of borrowed funds                                               |  | (130,397)                
|Repayment of ESOP debt                                                     |  | 340                      
|Cash payments related to acquisition of insurance agencies                 |  | (1,226)                  
|Change in value of ESOP shares committed to be released                    |  | 237                      
|Proceeds from exercise of stock options                                    |  | 16                       
|Dividends paid                                                             |  | (854)                    
|Common stock repurchased                                                   |  | (550)                    
|                                                                           |  |                          
|Net cash provided from/(used in) financing activities                      |  | (926)                    
|                                                                           |  |                          
|NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                       |  | 779                      
|                                                                           |  |                          
|CASH AND CASH EQUIVALENTS, at beginning of period                          |  | 11,847                   
|                                                                           |  |                          
|CASH AND CASH EQUIVALENTS, at end of period                                |  | $   	12,626              

5

<PAGE>

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

|                                                           |  | Six  Months Ended June 30,
|---------------------------------------------------------- |  | --------------------------
|                                                           |  | 2007                      
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          |  |                           
|Cash payments for:                                         |  |                           
|Interest                                                   |  | $	15,780                  
|                                                           |  |                           
|Income taxes                                               |  | $  	1,215                 
|                                                           |  |                           
|SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES  |  |                           
|Unrealized gains/(losses) on available-for-sale securities |  | $      502                
|                                                           |  |                           



****

****
**6**

**<PAGE>**

******RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
SELECTED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007**

******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.**The consolidated financial statements presented in this quarterly report include the accounts of the Company
and the Bank.  The unaudited consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America for interim financial information and predominant practices followed by the financial services
industry, and do not include all of the information and footnotes required for complete financial statements.  These consolidated
financial statements should be read in conjunction with our December 31, 2006 audited consolidated financial statements and the
accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006 which were
filed with the Securities and Exchange Commission ("SEC") on March 14, 2007 (the "Company's 2006 Form 10-K").  All significant
intercompany transactions and balances have been eliminated.  In the opinion of the Company's management, all adjustments,
including normal recurring accruals, necessary for a fair presentation of the financial condition and results of operations for the interim
periods included herein have been made.  Operating results for the three and six months ended June 30, 2007 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2007.

**Reclassifications.**  Certain amounts in the prior periods have been reclassified to conform with the June 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 June 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.  Management believes 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 June 30, 2007 that would rise to the level of having a material
effect on our financial statements.  We have concluded, as of June 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 six months ended June 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                                 |  | 948                          
|Forfeited/Cancelled          | (4,600)            |  | 16.30                                 |  |                              
|                             |                    |  |                                       |  |                              
|Balance at June 30, 2007     | 723,800            |  | $      	       16.68                  |  | $            	448,756        

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     

8

<PAGE>

Financial data pertaining to the stock options at June 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          |  | 633,000                       |  | 7.00                                                  |  | $	16.26                                                |  | 379,800            |  | $	16.26                                                
|2005          |  | 18,800                        |  | 8.25                                                  |  | 16.72                                                  |  | 3,760              |  | 16.72                                                  
|2007          |  | 72,000                        |  | 10.00                                                 |  | 20.40                                                  |  | -                  |  | 20.40                                                  
|              |  | 723,800                       |  | 7.33                                                  |  | $  	16.68                                              |  | 383,560            |  | $	16.26                                                

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 of such 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 five years as compensation expense.  Compensation expense related to all MRP awards
was $513,000 and $522,000 for the six months ended June 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 $2.2 million and $2.6 million at June 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 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 June 30, |  | Six Months Ended June 30,
|-------------------------------------------------------------------------------------------- |  | --------------------------- |  | -------------------------
|                                                                                             |  | 2007                        |  | 2006                     
|**Numerator:**                                                                               |  |                             |  |                          
|Net income                                                                                   |  | $         	982              |  | $         	693           
|                                                                                             |  |                             |  |                          
|**Denominator:**                                                                             |  |                             |  |                          
|Denominator for basic EPS:                                                                   |  |                             |  |                          
|Weighted average shares                                                                      |  | 5,995,114                   |  | 5,924,609                
|Effect of dilutive common stock equivalents:                                                 |  |                             |  |                          
|Stock options                                                                                |  | 73,460                      |  | 1,414                    
|MRP restricted stock                                                                         |  | 5,417                       |  | 9,762                    
|Denominator for diluted EPS:                                                                 |  |                             |  |                          
|Weighted average shares and assumed conversionof dilutive stock options and restricted stock |  | 6,073,991                   |  | 5,935,785                
|                                                                                             |  |                             |  |                          
|Basic earnings per share                                                                     |  | $        	0.16              |  | $       	0.12            
|                                                                                             |  |                             |  |                          
|Diluted earnings per share                                                                   |  | $       	0.16               |  | $       	0.12            

On May 18, 2007, the Company announced a quarterly cash dividend of $0.065 per share payable on June 11, 2007 to shareholders
of record on May 28, 2007.

**Note 7 - Recently Issued Accounting Standards**

****In February 2006, the FASB issued SFAS No. 155, *Accounting for Certain Hybrid Financial Instruments* ("SFAS 155") - an
amendment to SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities* ("SFAS 133"), and SFAS No. 140,
*Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities* ("SFAS 140").  SFAS 155 provides the
framework for fair value remeasurement of any hybrid financial instrument that contains an embedded derivative that otherwise would
require bifurcation as well as establishes a requirement to evaluate interests in securitized financial assets.  SFAS 155 further amends
SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial instrument. The SFAS 155 guidance also clarifies which interest-only strips and principal-only strips are not subject to the requirement of SFAS 133 and which concentrations of credit risk in the form
of subordination are not embedded derivatives.  SFAS 155 became effective for fiscal years that began after September 15, 2006.  The
Company adopted SFAS 155 on January 1, 2007, which did not have a material effect on our consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, *Accounting for Servicing of Financial Assets* ("SFAS 156") - an amendment of
SFAS 140.  SFAS 156 requires the recognition of a servicing asset or servicing liability under certain circumstances when an obligation
to service a financial asset is created by entering into a servicing contract.  SFAS 156 also requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value utilizing the amortization method or fair market value method.  SFAS
156 became effective for fiscal years that began after September 15, 2006.  The Company adopted SFAS 156 on January 1, 2007, which
did not have a material effect on our consolidated financial statements.

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,*Accounting for Certain Investments in Debt and Equity Securities**,*applies to

10

<PAGE>

all entities with available-for-sale
and trading securities. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and is not expected to have a material effect
on our consolidated financial statements.

**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 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 Securities Exchange Commission. 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 June 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 June 30,    |  | At December 31, |  | $ Increase  |  | % Increase
|------------------------------------ | -------------- |  | --------------- |  | ----------- |  | ----------
|                                     | 2007           |  | 2006            |  | (Decrease)  |  | (Decrease)
|                                     |                |  |                 |  |             |  |           
|Total assets                         | $    	 904,843 |  | $    	902,697   |  | $    	2,146 |  | 0.2%      
|Investment securities (1)            | 190,653        |  | 197,762         |  | (7,109)     |  | (3.6)     
|Interest-bearing deposits with banks | 625            |  | 57              |  | 568         |  | 996.5     
|Loans, net                           | 639,150        |  | 631,095         |  | 8,055       |  | 1.3       
|Deposits                             | 460,316        |  | 457,425         |  | 2,891       |  | 0.6       
|Borrowed funds                       | 343,615        |  | 345,395         |  | (1,780)     |  | (0.5)     
|Total shareholders' equity           | 89,910         |  | 87,830          |  | 2,080       |  | 2.4       

Total assets increased by $2.1 million, or 0.2%, to $904.8 million at June 30, 2007 from $902.7 million at December 31, 2006.  This increase
reflects an $8.1 million increase in net loans and a $568,000 increase in interest-bearing deposits, partially offset by a $7.1 million
decrease in investment securities.  The increase in loans is the result of continued growth of commercial real estate and commercial
business loan portfolios.  The decrease in investment securities is primarily the result of principal repayments on mortgage-backed
securities.  Mortgage-backed securities decreased $6.5 million, or 10.2%, to $56.5 million at June 30, 2007 from $63.0 million at December
31, 2006.  Deposits increased $2.9 million to $460.3 million at June 30, 2007 from $457.4 million at December 31, 2006, resulting primarily
from increases in core customer deposits, predominantly composed of money market and checking account relationships.
Shareholders' equity increased $2.1 million to $89.9 million at June 30, 2007 from $87.8 million at December 31, 2006, primarily as a result
of the net income earned during the six months ended June 30, 2007.

11

<PAGE>

|                                |                  |  |                      |  |               |  |           
|------------------------------- | ---------------- |  | -------------------- |  | ------------- |  | ----------
|                                | At June 30, 2007 |  | At December 31, 2006 |  | $ Increase    |  | % Increase
|                                | Amount           |  | Percent              |  | Amount        |  | Percent   
|Real estate:                    |                  |  |                      |  |               |  |           
|One-to four-family residential  | $     	 79,018   |  | 12.2%                |  | $     
81,542 |  | 12.8%     
|Five or more family residential | 159,137          |  | 24.6                 |  | 163,060       |  | 25.5      
|Commercial                      | 215,442          |  | 33.3                 |  | 195,854       |  | 30.6      
|Total real estate               | 453,597          |  | 70.1                 |  | 440,456       |  | 68.9      
|                                |                  |  |                      |  |               |  |           
|Real estate construction:       |                  |  |                      |  |               |  |           
|One-to four-family residential  | 72,838           |  | 11.2                 |  | 75,508        |  | 11.8      
|Five or more family residential | 3,187            |  | 0.5                  |  | 4,180         |  | 0.7       
|Commercial                      | -                |  | -                    |  | -             |  | -         
|Total real estate construction  | 76,025           |  | 11.7                 |  | 79,688        |  | 12.5      
|                                |                  |  |                      |  |               |  |           
|Consumer:                       |                  |  |                      |  |               |  |           
|Automobile                      | 26,623           |  | 4.1                  |  | 31,888        |  | 5.0       
|Home equity                     | 44,610           |  | 6.9                  |  | 42,718        |  | 6.7       
|Credit cards                    | 22,018           |  | 3.4                  |  | 23,327        |  | 3.6       
|Other                           | 7,310            |  | 1.1                  |  | 8,179         |  | 1.3       
|Total consumer                  | 100,561          |  | 15.5                 |  | 106,112       |  | 16.6      
|                                |                  |  |                      |  |               |  |           
|Commercial/business             | 17,202           |  | 2.7                  |  | 13,122        |  | 2.0       
|                                |                  |  |                      |  |               |  |           
|Total loans                     | 647,385          |  | 100.0%               |  | 639,378       |  | 100.0%    
|                                |                  |  |                      |  |               |  |           
|Less allowance for loan losses  | (8,235)          |  |                      |  | (8,283)       |  |           
|                                |                  |  |                      |  |               |  |           
|Loans, net                      | $ 	639,150       |  |                      |  | $ 	631,095    |  |           

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's common stock is presented at cost
and for reference purposes only (dollars in thousands):

|                                    | At June 30,        |  | At December 31,    |  | $ Increase      |  | % Increase
|----------------------------------- | ------------------ |  | ------------------ |  | --------------- |  | ----------
|                                    | 2007               |  | 2006               |  | (Decrease)      |  | (Decrease)
|**Available-for-sale:**             |                    |  |                    |  |                 |  |           
|U. S. Government Agency obligations | $          	 5,615 |  | $          	 5,565 |  | $          	 50 |  | 0.9%      
|Corporate obligations               | 5,045              |  | 5,077              |  | (32)            |  | (0.6)     
|Trust preferred securities          | 110,644            |  | 111,312            |  | (668)           |  | (0.6)     
|Mortgage-backed securities          | 20,239             |  | 23,156             |  | (2,917)         |  | (12.6)    
|Total available-for-sale portfolio  | 141,543            |  | 145,110            |  | (3,567)         |  | (2.5)     
|                                    |                    |  |                    |  |                 |  |           
|**Held-to-maturity:**               |                    |  |                    |  |                 |  |           
|Municipal obligations               | 12,780             |  | 12,780             |  | -               |  | -         
|Mortgage-backed securities          | 36,330             |  | 39,872             |  | (3,542)         |  | (8.9)     
|Total held-to-maturity portfolio    | 49,110             |  | 52,652             |  | (3,542)         |  | (6.7)     
|                                    |                    |  |                    |  |                 |  |           
|Total investment securities         | 190,653            |  | 197,762            |  | (7,109)         |  | (3.6)     
|                                    |                    |  |                    |  |                 |  |           
|FHLB stock                          | 13,712             |  | 13,712             |  | -               |  | -         
|                                    |                    |  |                    |  |                 |  |           
|Total                               | $	204,365          |  | $	211,474          |  | $	(7,109)       |  | (3.4)%    

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

|                              | At June 30, 2007 |  | At December 31, 2006 |  | $ Increase  |  | % Increase
|----------------------------- | ---------------- |  | -------------------- |  | ----------- |  | ----------
|                              | Amount           |  | Percent              |  | Amount      |  | Percent   
|                              |                  |  |                      |  |             |  |           
|Non-interest-bearing checking | $	36,941         |  | 8.0%                 |  | $   	33,722 |  | 7.4%      
|Interest-bearing checking     | 42,990           |  | 9.4                  |  | 41,548      |  | 9.1       
|Savings accounts              | 31,440           |  | 6.8                  |  | 30,487      |  | 6.7       
|Money market accounts         | 125,113          |  | 27.2                 |  | 108,990     |  | 23.8      
|IRA accounts                  | 5,962            |  | 1.3                  |  | 5,605       |  | 1.2       
|Certificates of deposit       | 217,870          |  | 47.3                 |  | 237,073     |  | 51.8      
|Total deposits                | $	460,316        |  | 100.0%               |  | $	457,425   |  | 100.0%    
|                              |                  |  |                      |  |             |  |           
|Core deposits                 | $	242,446        |  | 52.7%                |  | $	220,352   |  | 48.2%     
|Non-core deposits             | 217,870          |  | 47.3                 |  | 237,073     |  | 51.8      
|Total deposits                | $	460,316        |  | 100.0%               |  | $	457,425   |  | 100.0%    

13

<PAGE>

**Borrowed Funds.**  Borrowed funds decreased $1.8 million, or 0.5%, to $343.6 million at June 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 six months of 2007 was due primarily to
a change in short-term funding needs.

**Capital.**  Total shareholders' equity increased $2.1 million, or 2.4%, to $89.9 million at June 30, 2007 from $87.8 million at December
31, 2006.  The increase in equity from December 31, 2006 to June 30, 2007 was the result of three items totaling $3.5 million, as follows:
$1.9 million in net income, $1.3 million in equity adjustments related to stock compensation and benefits, and $326,000 in unrealized
gains on securities, net of taxes.  This increase in equity was partially offset by $854,000 of cash dividends paid to shareholders and
$550,000 of common stock repurchases.  As a result of these factors, and the $2.1 million increase in assets, our capital-to-assets ratio
increased to 9.94% at June 30, 2007 compared to 9.73% at December 31, 2006.

******Comparison of Operating Results for the Three Months Ended June 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 June 30, |  | $ Increase |  | % Increase
|------------------------- | --------------------------- |  | ---------- |  | ----------
|                          | 2007                        |  | 2006       |  | (Decrease)
|                          |                             |  |            |  |           
|Net interest income       | $	6,419                     |  | $	6,096    |  | $	323     
|Non-interest income       | 2,344                       |  | 2,222      |  | 122       
|Total revenue             | 8,763                       |  | 8,318      |  | 445       
|Provision for loan losses | 150                         |  | 150        |  | -         
|Non-interest expense      | 7,102                       |  | 7,103      |  | (1)       
|Net income                | 982                         |  | 693        |  | 289       

|                              |                             |  |            |  |           
|----------------------------- | --------------------------- |  | ---------- |  | ----------
|                              | Three Months Ended June 30, |  | $ Increase |  | % Increase
|                              | 2007                        |  | 2006       |  | (Decrease)
|Interest income:              |                             |  |            |  |           
|Loans                         | $	11,645                    |  | $	10,414   |  | $	1,231   
|Securities available-for-sale | 2,032                       |  | 2,005      |  | 27        
|Securities held-to-maturity   | 546                         |  | 723        |  | (177)     
|Interest-bearing deposits     | 70                          |  | 52         |  | 18        
|FHLB dividends                | 20                          |  | -          |  | 20        
|Total interest income         | 14,313                      |  | 13,194     |  | 1,119     
|                              |                             |  |            |  |           
|Interest expense:             |                             |  |            |  |           
|Deposits                      | 4,053                       |  | 3,277      |  | 776       
|Borrowed funds                | 3,841                       |  | 3,821      |  | 20        
|Total interest expense        | 7,894                       |  | 7,098      |  | 796       
|Net interest income           | $  6,419                    |  | $ 	6,096   |  | $ 	323    

Our net interest income increased $323,000, or 5.3%, to $6.4 million for the three months ended June 30, 2007 from $6.1 million for
the three months ended June 30, 2006.  The net interest income increase was the result of a $4.6 million increase in the average balance
of earning assets and a 49 basis point yield increase on interest-earning assets.

**Interest Income.**
Our interest income increased $1.1 million, or 8.5%, to $14.3 million for the
three months ended June 30, 2007 from $13.2 million for the three months ended
June 30, 2006. Interest earned on loans for the three months ended June 30, 2007
and 2006 was $11.6 million and $10.4 million, respectively. The average yield on
total loans was 7.27% for the three months ended June 30, 2007 compared to 6.92%
for the same period in 2006 reflecting higher market rates for loans. The
average balance of total loans also increased by $39.3 million to $641.7 million
for the three months ended June 30, 2007 from $602.4 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
commercial/business loans, however, generally

14

<PAGE>

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.

Interest income on investment securities (including mortgage-backed securities) decreased $150,000, or 5.5%, to $2.6 million for the
three months ended June 30, 2007 from $2.7 million for the three months ended June 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 June 30, 2007 and
2006 were $193.0 million and $228.5 million, respectively.  The average yield on investment securities increased to 5.34% for the three
months ended June 30, 2007 from 4.77% for the three months ended June 30, 2006, primarily as a result of $87.4 million of floating rate
trust preferred securities repricing upward in connection with increased short-term interest rates and principal repayments of lower
coupon mortgage-backed securities.

**Interest Expense.**  Our interest expense increased $796,000, or 11.2%, to $7.9 million for the three months ended June 30, 2007 from
$7.1 million for the three months ended June 30, 2006.  In addition to an increase in the average balances of our deposits and borrowed
funds, rising market rates increased our deposit and borrowing costs.

Interest expense on deposits
increased $776,000, or 23.7%, to $4.1 million for the three months ended June
30, 2007 from $3.3 million for the three months ended June 30, 2006. The average
cost of interest-bearing deposits increased 57 basis points to 3.83% for the
three months ended June 30, 2007 from 3.26% for the three months ended June 30,
2006. This increase in deposit costs for the three months ended June 30, 2007
was primarily a result of average balance increases of $41.9 million in higher
rate money market accounts, partially offset by a $20.6 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 was relatively unchanged at $3.8 million despite a $22.4 million decrease in the average balance
of borrowed funds.  The average balance of borrowed funds was $345.3 million for the three months ended June 30, 2007, compared to
$367.7 million for the three months ended June 30, 2006.  The primary reason for the increase is a 29 basis point increase in the cost of
borrowed funds to 4.45% for the three months ended June 30, 2007 from 4.16% 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 theThree Months Ended June 30, |  | $ Increase |  | % Increase
|-------------------------------- | ---------------------------------------- |  | ---------- |  | ----------
|                                 | 2007                                     |  | 2006       |  | (Decrease)
|Allowance at beginning of period | $	8,276                                  |  | $	8,487    |  | $	(211)   
|Provision for loan losses        | 150                                      |  | 150        |  | -         
|Recoveries                       | 80                                       |  | 55         |  | 25        
|Charge-offs                      | (271)                                    |  | (282)      |  | 11        
|Allowance at end of period       | $	8,235                                  |  | $	8,410    |  | $	(175)   

Management believes our allowance for loan losses as of June 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 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.****

15

<PAGE>

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

|                           | Three Months Ended June 30, |  | $ Increase |  | % Increase
|-------------------------- | --------------------------- |  | ---------- |  | ----------
|                           | 2007                        |  | 2006       |  | (Decrease)
|Deposit service fees       | $     879                   |  | $     	897 |  | $   	(18) 
|Loan service fees          | 346                         |  | 290        |  | 56        
|Insurance service fees     | 622                         |  | 518        |  | 104       
|Investment service fees    | 144                         |  | 163        |  | (19)      
|Real estate lease income   | 271                         |  | 281        |  | (10)      
|Gain on sale of loans, net | 66                          |  | 46         |  | 20        
|Other operating income     | 16                          |  | 27         |  | (11)      
|Total non-interest income  | $   	2,344                  |  | $   	2,222 |  | $   	122  

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

|                                  | Three Months Ended June 30, |  | $ Increase |  | % Increase
|--------------------------------- | --------------------------- |  | ---------- |  | ----------
|                                  | 2007                        |  | 2006       |  | (Decrease)
|Compensation and benefits         | $	4,068                     |  | $	4,034    |  | $   	34   
|Office operations                 | 956                         |  | 1,308      |  | (352)     
|Occupancy                         | 624                         |  | 635        |  | (11)      
|Loan servicing                    | 129                         |  | 144        |  | (15)      
|Outside and professional services | 258                         |  | 237        |  | 21        
|Marketing                         | 289                         |  | 222        |  | 67        
|Other operating expenses          | 778                         |  | 523        |  | 255       
|Total non-interest expense        | $	7,102                     |  | $	7,103    |  | $    	(1) 

Our non-interest expense was essentially unchanged at $7.1 million for the three months ended June 30, 2007 and June 30, 2006,
respectively.

Office operations expense decreased $352,000, or 26.9%, to $956,000 for the three months ended June 30, 2007 from $1.3 million for the
three months ended June 30, 2006.  The decrease was primarily attributable to a $350,000 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 an increase in other operating expenses which increased $255,000, or 48.8%, to $778,000 from $523,000 for
the same period a year earlier.  This increase included an $80,000 increase in VISA check card expenses, a $73,000 increase for FDIC
deposit insurance premiums, a $33,000 increase in operational losses, and a $22,000 increase in business and operating tax ("B&O") as
a result of increased revenue.  The $80,000 VISA check card expense increase was the result of receiving a volume rebate in 2007 in the
three months ended March 31, 2007 compared to receiving a similar rebate in 2006 in the three months ended March 31, 2006.  The
increase in operational losses includes such items as check and debit card losses and other operating losses.  The remaining other
operating expense increases were spread throughout various expense categories.  All other non-interest expenses increased by a net
amount of $96,000 for the three months ended June 30, 2007 compared to the same period in 2006.

16

<PAGE>

**Average Balances, Interest and Average Yield/Costs.**The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the 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).****

|                                         | Three Months Ended June 30, 2007 |  | Three Months Ended June 30, 2006 |  |                     |  |                   
|---------------------------------------- | -------------------------------- |  | -------------------------------- |  | ------------------- |  | ------------------
|                                         | Average
Balance                  |  | Average
Yield/Cost               |  | Average
Balance     |  | Average
Yield/Cost
|INTEREST-EARNING ASSETS:                 |                                  |  |                                  |  |                     |  |                   
|Total loans                              | $		641,708                       |  | 7.27%                            |  | $		602,370          |  | 6.92%             
|Mortgage-backed securities               | 59,267                           |  | 4.33                             |  | 73,107              |  | 4.12              
|Investment securities                    | 133,723                          |  | 5.79                             |  | 155,428             |  | 5.09              
|FHLB stock                               | 13,712                           |  | 0.60                             |  | 13,712              |  | -                 
|Interest-bearing deposits in other banks | 5,399                            |  | 5.08                             |  | 4,626               |  | 4.38              
|Total interest-earning assets            | 853,809                          |  | 6.71                             |  | 849,243             |  | 6.22              
|                                         |                                  |  |                                  |  |                     |  |                   
|Non-interest-earning assets              | 51,432                           |  |                                  |  | 52,863              |  |                   
|                                         |                                  |  |                                  |  |                     |  |                   
|Total assets                             | $		 905,241                      |  |                                  |  | $ 		 902,106        |  |                   
|                                         |                                  |  |                                  |  |                     |  |                   
|                                         |                                  |  |                                  |  |                     |  |                   
|INTEREST-BEARING LIABILITIES:            |                                  |  |                                  |  |                     |  |                   
|Savings accounts                         | $  		 32,795                     |  | 0.25                             |  | $   		36,058        |  | 0.28              
|Interest-bearing checking accounts       | 42,858                           |  | 1.74                             |  | 39,928              |  | 1.95              
|Money market deposit accounts            | 129,573                          |  | 3.85                             |  | 87,715              |  | 2.80              
|Certificates of deposit                  | 219,138                          |  | 4.75                             |  | 239,742             |  | 4.09              
|Total deposits                           | 424,364                          |  | 3.83                             |  | 403,443             |  | 3.26              
|                                         |                                  |  |                                  |  |                     |  |                   
|Borrowed funds                           | 345,309                          |  | 4.45                             |  | 367,661             |  | 4.16              
|                                         |                                  |  |                                  |  |                     |  |                   
|Total interest-bearing liabilities       | 769,673                          |  | 4.11                             |  | 771,104             |  | 3.69              
|                                         |                                  |  |                                  |  |                     |  |                   
|Non-interest-bearing liabilities:        |                                  |  |                                  |  |                     |  |                   
|Non-interest bearing checking            | 34,869                           |  |                                  |  | 29,957              |  |                   
|Other                                    | 11,228                           |  |                                  |  | 16,092              |  |                   
|Total non-interest bearing liabilities   | 46,097                           |  |                                  |  | 46,049              |  |                   
|                                         |                                  |  |                                  |  |                     |  |                   
|Total liabilities                        | 815,770                          |  |                                  |  | 817,153             |  |                   
|                                         |                                  |  |                                  |  |                     |  |                   
|Equity                                   | 89,471                           |  |                                  |  | 84,953              |  |                   
|                                         |                                  |  |                                  |  |                     |  |                   
|Total liabilities and equity             | $		 905,241                      |  |                                  |  | $		 902,106         |  |                   
|                                         |                                  |  |                                  |  |                     |  |                   
|Net interest income                      | $    6,419                       |  |                                  |  | $    		       6,096 |  |                   
|Interest rate spread(1)                  |                                  |  | 2.60%                            |  |                     |  | 2.53%             
|Net interest margin (2)                  | 3.01%                            |  |                                  |  | 2.87%               |  |                   

(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 Six Months Ended
June 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):

|                          | Six Months Ended June 30, |  | $ Increase |  | % Increase
|------------------------- | ------------------------- |  | ---------- |  | ----------
|                          | 2007                      |  | 2006       |  | (Decrease)
|                          |                           |  |            |  |           
|Net interest income       | $	12,805                  |  | $	12,496   |  | $	309     
|Non-interest income       | 4,586                     |  | 4,242      |  | 344       
|Total revenue             | 17,391                    |  | 16,738     |  | 653       
|Provision for loan losses | 300                       |  | 300        |  | -         
|Non-interest expense      | 14,211                    |  | 14,384     |  | (173)     
|Net income                | 1,872                     |  | 1,335      |  | 537       

|                              |                           |  |            |  |           
|----------------------------- | ------------------------- |  | ---------- |  | ----------
|                              | Six Months Ended June 30, |  | $ Increase |  | % Increase
|                              | 2007                      |  | 2006       |  | (Decrease)
|Interest income:              |                           |  |            |  |           
|Loans                         | $	23,244                  |  | $	20,407   |  | $	2,837   
|Securities available-for-sale | 4,084                     |  | 3,930      |  | 154       
|Securities held-to-maturity   | 1,111                     |  | 1,465      |  | (354)     
|Interest-bearing deposits     | 80                        |  | 116        |  | (36)      
|FHLB dividends                | 34                        |  | -          |  | 34        
|Total interest income         | 28,553                    |  | 25,918     |  | 2,635     
|                              |                           |  |            |  |           
|Interest expense:             |                           |  |            |  |           
|Deposits                      | 8,164                     |  | 6,276      |  | 1,888     
|Borrowed funds                | 7,584                     |  | 7,146      |  | 438       
|Total interest expense        | 15,748                    |  | 13,422     |  | 2,326     
|Net interest income           | $	12,805                  |  | $	12,496   |  | $   	309  

**Interest Income.**  Our interest income increased $2.6 million, or 10.2%, to $28.6 million for the six months ended June 30, 2007 from
$25.9 million for the six months ended June 30, 2006.  Interest earned on loans for the six months ended June 30, 2007 and 2006 was
$23.2 million and $20.4 million, respectively.  The average yield on total loans was 7.26% for the six months ended June 30, 2007
compared to 6.86% for the same period in 2006 reflecting an increase in market interest rates for loans.  The average balance of total
loans also increased by $46.0 million to $642.8 million for the six months ended June 30, 2007 from $596.8 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.

Interest income on investment securities (including mortgage-backed securities) decreased $200,000, or 3.7%, to $5.2 million for the
six months ended June 30, 2007 from $5.4 million for the six months ended June 30, 2006 as a result of a lower average balance, partially
offset by higher yields earned.  The average balances of investment securities for the six months ended June 30, 2007 and 2006 were
$194.8 million and $229.9 million, respectively.  The average yield on investment securities increased to 5.34% for the six months ended
June 30, 2007 from 4.69% for the six months ended June 30, 2006, primarily as a result of $87.4 million of floating rate trust preferred
securities repricing upward in connection with increased short-term interest rates and the principal reduction of lower yielding
mortgage-backed securities.

18

<PAGE>

**Interest Expense.**  Our interest expense increased $2.3 million, or 17.3%, to $15.7 million for the six months ended June 30, 2007
from $13.4 million for the six months ended June 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 were up $1.9 million, or 30.1%, to $8.2 million for the six months ended June 30, 2007 from $6.3 million
for the six months ended June 30, 2006.  The average cost of deposits increased 76 basis points to 3.86% for the six months ended June
30, 2007 from 3.10% for the six months ended June 30, 2006.  This increase in deposit costs for the six months ended June 30, 2007 was
primarily a result of average balance increases of $35.1 million in higher rate money market accounts, partially offset by a $16.4 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 $438,000, or 6.1%, to $7.6 million for the six months ended June 30, 2007 from $7.1
million for the six months ended June 30, 2006, despite a $15.4 million decrease in the average balance of borrowed funds.  The average
balance of borrowed funds was $343.8 million for the six months ended June 30, 2007, compared to $359.2 million for the same period in
2006.  The primary reason for the increase was a 44 basis point increase in the cost of borrowed funds to 4.45% for the six months
ended June 30, 2007 from 4.01% 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 theSix Months Ended June 30, |  | $ Increase |  | % Increase
|-------------------------------- | -------------------------------------- |  | ---------- |  | ----------
|                                 | 2007                                   |  | 2006       |  | (Decrease)
|Allowance at beginning of period | $	8,283                                |  | $	8,597    |  | $	(314)   
|Provision for loan losses        | 300                                    |  | 300        |  | -         
|Recoveries                       | 166                                    |  | 139        |  | 27        
|Charge-offs                      | (514)                                  |  | (626)      |  | 112       
|Allowance at end of period       | $ 8,235                                |  | $ 8,410    |  | $ (175)   

****Our provision for loan losses was unchanged at $300,000 for the six month periods ended June 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.

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

|                                                 | Six Months Ended June 30, |  | $ Increase |  | % Increase
|------------------------------------------------ | ------------------------- |  | ---------- |  | ----------
|                                                 | 2007                      |  | 2006       |  | (Decrease)
|Deposit service fees                             | $  	1,705                 |  | $  	1,701  |  | $       	4
|Loan service fees                                | 638                       |  | 550        |  | 88        
|Insurance service fees                           | 1,165                     |  | 1,034      |  | 131       
|Investment service fees                          | 257                       |  | 284        |  | (27)      
|Real estate lease income                         | 565                       |  | 564        |  | 1         
|Gain on sale of loans, net                       | 202                       |  | 52         |  | 150       
|Gain on sale of premises and

  

equipment, net | 10                        |  | -          |  | 10        
|Other operating income                           | 44                        |  | 57         |  | (13)      
|Total non-interest income                        | $   	4,586                |  | $   	4,242 |  | $   	344  

19

<PAGE>

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

|                                  | Six Months Ended June 30, |  | $ Increase |  | % Increase
|--------------------------------- | ------------------------- |  | ---------- |  | ----------
|                                  | 2007                      |  | 2006       |  | (Decrease)
|Compensation and benefits         | $   	8,061                |  | $  	8,064  |  | $    	(3) 
|Office operations                 | 1,942                     |  | 2,606      |  | (664)     
|Occupancy                         | 1,259                     |  | 1,275      |  | (16)      
|Loan servicing                    | 239                       |  | 261        |  | (22)      
|Outside and professional services | 690                       |  | 656        |  | 34        
|Marketing                         | 532                       |  | 451        |  | 81        
|Other operating expenses          | 1,488                     |  | 1,071      |  | 417       
|Total non-interest expense        | $	14,211                  |  | $	14,384   |  | $	(173)   

Our non-interest expense decreased $173,000, or 1.2%, to $14.2 million for the six months ended June 30, 2007 from $14.4 million for
the six months ended June 30, 2006.  The decrease was primarily attributable to lower office operations expense of $664,000 partially
offset by a $417,000 increase in other operating expenses.

Office operations expense decreased $664,000, or 25.5%, to $1.9 million for the six months ended June 30, 2007 from $2.6 million for the
six months ended June 30, 2006.  The decrease was primarily attributable to a $690,000 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 $417,000 or 38.9% to $1.5 million from $1.1 million for the same
period.  The $417,000 increase in other operating expenses included a $122,000 increase for FDIC deposit insurance premiums, a $93,000
increase in FDIC regulatory examination expense, and a $73,000 increase in B&O taxes related to increased revenue for the first six
months of 2007 compared to the same period in 2006 (which included a $25,000 refund as a result of a prior year B&O tax audit).
Additionally, operational losses increased $59,000 and VISA check card expenses increased $33,000 for the same period.  The
remaining increase in other operating expense was spread throughout various expense categories.  All other non-interest expenses
increased by a net amount of $74,000 for the six months ended June 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).****

|                                         | Six Months Ended June 30, 2007 |  | Six Months Ended June 30, 2006 |  |                 |  |                   
|---------------------------------------- | ------------------------------ |  | ------------------------------ |  | --------------- |  | ------------------
|                                         | Average
Balance                |  | Average
Yield/Cost             |  | Average
Balance |  | Average
Yield/Cost
|INTEREST-EARNING ASSETS:                 |                                |  |                                |  |                 |  |                   
|Total loans                              | $		642,752                     |  | 7.26%                          |  | $		596,776      |  | 6.86%             
|Mortgage-backed securities               | 60,817                         |  | 4.33                           |  | 75,117          |  | 4.13              
|Investment securities                    | 133,971                        |  | 5.79                           |  | 154,770         |  | 5.01              
|FHLB stock                               | 13,712                         |  | 0.50                           |  | 13,712          |  | -                 
|Interest-bearing deposits in other banks | 3,096                          |  | 5.11                           |  | 5,278           |  | 4.36              
|Total interest-earning assets            | 854,348                        |  | 6.70                           |  | 845,653         |  | 6.14              
|                                         |                                |  |                                |  |                 |  |                   
|Non-interest-earning assets              | 50,454                         |  |                                |  | 49,976          |  |                   
|                                         |                                |  |                                |  |                 |  |                   
|Total assets                             | $		 904,802                    |  |                                |  | $		 895,629     |  |                   
|                                         |                                |  |                                |  |                 |  |                   
|                                         |                                |  |                                |  |                 |  |                   
|INTEREST-BEARING
  LIABILITIES:          |                                |  |                                |  |                 |  |                   
|Savings accounts                         | $  		 32,419                   |  | 0.25                           |  | $  		36,505     |  | 0.27              
|Interest-bearing checking accounts       | 41,783                         |  | 1.83                           |  | 38,014          |  | 1.84              
|Money market deposit accounts            | 123,289                        |  | 3.73                           |  | 88,216          |  | 2.60              
|Certificates of deposit                  | 229,087                        |  | 4.75                           |  | 245,437         |  | 3.90              
|Total deposits                           | 426,578                        |  | 3.86                           |  | 408,172         |  | 3.10              
|                                         |                                |  |                                |  |                 |  |                   
|Borrowed funds                           | 343,789                        |  | 4.45                           |  | 359,153         |  | 4.01              
|                                         |                                |  |                                |  |                 |  |                   
|Total interest-bearing liabilities       | 770,367                        |  | 4.12                           |  | 767,325         |  | 3.53              
|                                         |                                |  |                                |  |                 |  |                   
|Non-interest-bearing liabilities:        |                                |  |                                |  |                 |  |                   
|Non-interest bearing checking            | 33,851                         |  |                                |  | 29,395          |  |                   
|Other                                    | 11,573                         |  |                                |  | 13,958          |  |                   
|Total non-interest bearing liabilities   | 45,424                         |  |                                |  | 43,353          |  |                   
|                                         |                                |  |                                |  |                 |  |                   
|Total liabilities                        | 815,791                        |  |                                |  | 810,678         |  |                   
|                                         |                                |  |                                |  |                 |  |                   
|Equity                                   | 89,011                         |  |                                |  | 84,951          |  |                   
|                                         |                                |  |                                |  |                 |  |                   
|Total liabilities and equity             | $		 904,802                    |  |                                |  | $		 895,629     |  |                   
|                                         |                                |  |                                |  |                 |  |                   
|Net interest income                      | $  		     12,805               |  |                                |  | $  		12,496     |  |                   
|Interest rate spread(1)                  |                                |  | 2.58%                          |  |                 |  | 2.61%             
|Net interest margin (2)                  | 2.98%                          |  |                                |  | 2.94%           |  |                   

(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.**  We actively analyze and manage our liquidity with the objectives of maintaining an adequate level of liquidity to ensure
the availability of sufficient cash flows to support loan growth, fund deposit withdrawals, fund operations, and our continuing operations,
and to satisfy other financial commitments.  See "Consolidated Statements of Cash Flows" contained in Part I, Item 1 - "Financial
Statements" of this quarterly report.

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 June 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 June 30, 2007, we had an available
amount on this line of $36.4 million.  The Bank also maintains a $100.0 million credit line collateralized by specific investment securities with
Fortis Securities, LLC as an additional source of liquidity.  There were no outstanding balances on this credit line at June 30, 2007.  In
addition, we held certain available-for-sale investment securities and 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 June 30, 2007, certificates of deposit (excluding individual retirement
account certificates of deposit) amounted to $217.9 million, or 47.3%, of total deposits, including $50.6 million of brokered deposits which
are scheduled to mature and be renewed through January 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 June 30, 2007, the Bank was classified as a "well capitalized" institution under the criteria established
by the Federal Deposit Insurance Corporation and exceeded all minimum capital requirements.  Total equity at the Bank was $87.4 million
at June 30, 2007, or 9.68% of total assets on that date.  Our regulatory capital ratios at June 30, 2007, were as follows:  Tier I leverage of
9.43%; Tier I risk-based capital of 11.41%; and total risk-based capital of 12.53%.****

**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
Rainier Pacific Savings Bank holds, as well as the associated yields and costs.

The asset liability management policy and the committee guide us in managing Rainier Pacific Savings 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 June 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 June 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.  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

22

<PAGE>

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 June 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
June 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 June 30, 2007, there were
6,568,470 shares of common stock issued, including 424,211 shares held by the ESOP that have not been released, committed, or allocated
to participant accounts; and 132,482 restricted shares granted under the MRP that have not yet vested.  During the quarter ended June
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

<PAGE>

The following table sets forth our purchases of Rainier Pacific Financial Group, Inc. outstanding common stock during the three months
ended June 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
|------------------------------- |  | -------------------------------- |  | ---------------------------- |  | ------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------
|                                |  |                                  |  |                              |  |                                                                                      |  |                                                                               
|April 1, 2007 -  April 30, 2007 |  | -                                |  | $        
-                  |  | -                                                                                    |  | 223,920                                                                       
|May 1, 2007 - May 31, 2007      |  | 10,000                           |  | 20.70                        |  | 10,000                                                                               |  | 213,920                                                                       
|June 1, 2007 - June 30, 2007    |  | -                                |  | -                            |  | -                                                                                    |  | 213,920                                                                       
|                                |  |                                  |  |                              |  |                                                                                      |  |                                                                               
|Total                           |  | 10,000                           |  | $	20.70                      |  | 10,000                                                                               |  |                                                                               

**ITEM 3 - Defaults Upon Senior Securities**

****Not applicable.

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

On April 23, 2007, the company held its Annual Meeting of Shareholders.  The following directors were re-elected for an additional
3-year term: Edward J. Brooks, Robert H. Combs, and Karyn D. Clarke.

******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 Act31.2       Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act32          Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906of the Sarbanes-Oxley Act

24

<PAGE>

******SIGNATURES**

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

|               | Rainier Pacific Financial Group, Inc.       
|-------------- | --------------------------------------------
|               |                                             
|               |                                             
|August 3, 2007 | /s/John A. Hall                             
|               | John A. Hall                                
|               | President and Chief Executive Officer       
|               | (Principal Executive Officer)               
|               |                                             
|               |                                             
|August 3, 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) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;         
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                        
|b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;                
|   |                                                                                                                                                                                                                                                                                                                                                                                        
|c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                        
|d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and







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





|a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                          
|b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.                                                                                               



|                     |                                      
|-------------------- | -------------------------------------
|                     |                                      
|Date: August 3, 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) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;         
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                        
|b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;                
|   |                                                                                                                                                                                                                                                                                                                                                                                        
|c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                        
|d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and







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





|a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                          
|b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.                                                                                               

|                     |                        
|-------------------- | -----------------------
|                     |                        
|Date: August 3, 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 June 30, 2007, 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: August  3, 2007

<PAGE>