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

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

|   | For      the transition period from _____ to_____ |
|--------|---------------------------------------------------|

| FIRST FINANCIAL NORTHWEST,      INC.                                                                                                                                                                                                                                                     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of      registrant as specified in its charter)                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                     |   |   |
| Washington                                              |   | 26-0610707 |
| (State or other      jurisdiction of incorporation or organization                                                                                                                                                                                                                  |   | (I.R.S. Employer      Identification Number)  |
|                                                                                                                                                                                                                                                                                     |   |   |
| 201      Wells Avenue South, Renton, Washington                                                                                                                                                                                                                                          |   | 98057 |
| (Address of      principal executive offices)                                                                                                                                                                                                                                       |   | (Zip      Code)  |
|                                                                                                                                                                                                                                                                                     |   |   |
| Registrant’s      telephone number, including area code:                                                                                                                                                                                                                      |   | (425)255-4400 |

----

| PART 1 - FINANCIAL      INFORMATION                                                                                                                    |                                  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|
|                                                                                                                                                   | Page                             |
| Item 1 - Financial      Statements                                                                                                                |           3  |
|                                                                                                                                                   |                                  |
| Item      2 - Management’s Discussion and Analysis of Financial      Conditionand Results of      Operations       |     23            |
|                                                                                                                                                   |                                  |
| Item 3 -      Quantitative and Qualitative Disclosures About Market Risk                                                                          |    40             |
|                                                                                                                                                   |                                  |
| Item 4 - Controls      and Procedures                                                                                                             |    43             |
|                                                                                                                                                   |                                  |
| PART      II - OTHER INFORMATION                                                                                                                       |                                  |
|                                                                                                                                                   |                                  |
|  Item 1 - Legal      Proceedings                                                                                                        |    44             |
|                                                                                                                                                   |                                  |
|  Item 1A - Risk      Factors                                                                                                                 |    44             |
|                                                                                                                                                   |                                  |
|  Item 2 -      Unregistered Sales of Equity Securities and Use ofProceeds                                                                    |    46                  |
|                                                                                                                                                   |                                  |
|  Item 3 -      Defaults upon Senior Securities                                                                                               |    46             |
|                                                                                                                                                   |                                  |
|  Item 4 –      [Removed and Reserved]                                                                                                  |    46             |
|                                                                                                                                                   |                                  |
|  Item 5 - Other      Information                                                                                                             |    46             |
|                                                                                                                                                   |                                  |
|  Item 6 -      Exhibits                                                                                                                      |    46             |
|                                                                                                                                                   |                                  |
| SIGNATURES                                                                                                                                             |    48             |

----

| FIRST FINANCIAL NORTHWEST, INC.      AND SUBSIDIARIES                                                                                          |
|------------------------------------------------------------------------------------------------------------------------------------------------|
| Consolidated      Balance Sheets                                                                                                               |
| (Dollars      in thousands, except share data)                                                                                                 |
| (Unaudited)                                                                                                                                    |
|                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                           |   |   |   |   |   |   | September      30, |   | December      31, |
| Assets                                                                                                                                         | 2010 |   | 2009 |
|                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Cash      on hand and in banks                                                                                                                 | $ | 7,809        |   | $ | 8,937        |
| Interest-bearing      deposits                                                                                                                 |   | 132,058        |   |   | 96,033        |
| Investments      available for sale                                                                                                            |   | 157,563        |   |   | 97,383        |
| Loans      receivable, net of allowance of $28,400 and $33,039                                                                                 |   | 915,562        |   |   | 1,039,300        |
| Premises      and equipment, net                                                                                                               |   | 20,077        |   |   | 19,585        |
| Federal      Home Loan Bank stock, at cost                                                                                                     |   | 7,413        |   |   | 7,413        |
| Accrued      interest receivable                                                                                                               |   | 4,711        |   |   | 4,880        |
| Federal      income tax receivable                                                                                                             |   | 5,720        |   |   | 9,499        |
| Deferred      tax assets, net                                                                                                                  |   | —   |   |   | 12,139        |
| Other      real estate owned, net                                                                                                              |   | 22,927        |   |   | 11,835        |
| Prepaid      expenses and other assets                                                                                                         |   | 6,617        |   |   | 8,330        |
|                                                                                                                                           |   |        Total      assets | $ | 1,280,457        |   | $ | 1,315,334        |
|                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities      and Stockholders' Equity                                                                                                      |   |   |   |   |   |
|                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                                                       |   |   |   | $ | 952,748        |   | $ | 939,423        |
| Advances      from the Federal Home Loan Bank                                                                                                  |   | 143,066        |   |   | 139,900        |
| Advance      payments from borrowers for taxes and insurance                                                                                   |   | 4,506        |   |   | 2,377        |
| Accrued      interest payable                                                                                                                  |   | 395        |   |   | 457        |
| Other      liabilities                                                                                                                         |   |   | 5,073        |   |   | 4,660        |
|                                                                                                                                           |   |        Total      liabilities |   | 1,105,788        |   |   | 1,086,817        |
|                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |
|                   Commitments      and contingencies |   |   |   |   |   |
|                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders'      Equity                                                                                                                      |   |   |   |   |   |
|                                                                                                                                           | Preferred      stock, $0.01 par value; authorized 10,000,000 |   |   |   |   |   |
|                                                                                                                                           |   | shares,      no shares issued or outstanding |   | —   |   |   | —   |
|                                                                                                                                           | Common      stock, $0.01 par value; authorized 90,000,000 |   |   |   |   |   |
|                                                                                                                                           |   | shares;      issued and outstanding 18,805,168 and 18,823,068 |   |   |   |   |
|                                                                                                                                           |   | shares      at September 30, 2010 and December 31, 2009 |   | 188        |   |   | 188        |
|                                                                                                                                           | Additional      paid-in capital |   | 187,069        |   |   | 186,120        |
|                                                                                                                                           | Retained      earnings (deficit), substantially restricted |   | (874) |   |   | 55,251        |
|                                                                                                                                           | Accumulated      other comprehensive income, net of tax |   | 1,828        |   |   | 1,347        |
|                                                                                                                                           | Unearned      Employee Stock Ownership Plan shares |   | (13,542) |   |   | (14,389) |
|                                                                                                                                           |   |        Total      stockholders' equity |   | 174,669        |   |   | 228,517        |
|                                                                                                                                           |   |        Total      liabilities and stockholders' equity | $ | 1,280,457        |   | $ | 1,315,334        |
|                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |
| See      accompanying notes to consolidated financial  statements.                                                                             |

----

| FIRST      FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES              |
|--------------------------------------------------------------------|
| Consolidated      Statements of Operations                         |
| (Dollars      in thousands, except share data)                     |
| (Unaudited)                                                        |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |   |   |   |   |   | Three      Months Ended |   | Nine      Months Ended |
|                                                               |   |   |   |   |   |   | September      30, |   | September      30, |
|                                                               |   |   |   |   |   |   | 2010 |   | 2009 |   | 2010 |   | 2009 |
| Interest      income                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               | Loans,      including fees | $ | 13,677         |   |   | 14,376         |   | $ | 42,516         |   |   | 43,515         |
|                                                               | Investments      available for sale |   | 1,254         |   |   | 1,813         |   |   | 3,367         |   |   | 5,129         |
|                                                               | Federal      funds sold and interest-bearing deposits with banks |   | 80         |   |   | 32         |   |   | 214         |   |   | 54         |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |        Total      interest income | $ | 15,011         |   | $ | 16,221         |   | $ | 46,097         |   | $ | 48,698         |
| Interest      expense                                              |   |   |   |   |   |   |   |   |   |   |   |
|                                                               | Deposits |   |   |   | 5,563         |   |   | 7,262         |   |   | 18,456         |   |   | 22,019         |
|                                                               | Federal      Home Loan Bank advances |   | 1,057         |   |   | 1,310         |   |   | 3,115         |   |   | 3,868         |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |        Total      interest expense | $ | 6,620         |   | $ | 8,572         |   | $ | 21,571         |   | $ | 25,887         |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |        Net      interest income |   | 8,391         |   |   | 7,649         |   |   | 24,526         |   |   | 22,811         |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Provision      for loan losses                                     |   | 12,000         |   |   | 7,795         |   |   | 51,000         |   |   | 27,595         |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |        Net      interest loss after provision for loan losses | $ | (3,609)        |   | $ | (146)        |   | $ | (26,474)        |   | $ | (4,784)        |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest      income                                            |   |   |   |   |   |   |   |   |   |   |   |
|                                                               | Net      gain (loss) on sale of investments |   | —     |   |   | (2)        |   |   | —     |   |   | 74         |
|                                                               | Other-than-temporary      impairment loss on investments |   | —     |   |   | —     |   |   | —     |   |   | (152)        |
|                                                               | Other |   |   |   |   | 38         |   |   | 74         |   |   | 146         |   |   | 183         |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |        Total      noninterest income | $ | 38         |   | $ | 72         |   | $ | 146         |   | $ | 105         |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest      expense                                           |   |   |   |   |   |   |   |   |   |   |   |
|                                                               | Salaries      and employee benefits |   | 3,258         |   |   | 3,077         |   |   | 9,339         |   |   | 9,153         |
|                                                               | Occupancy      and equipment |   | 411         |   |   | 343         |   |   | 1,260         |   |   | 1,986         |
|                                                               | Professional      fees |   | 664         |   |   | 332         |   |   | 1,610         |   |   | 1,028         |
|                                                               | Data      processing |   | 191         |   |   | 178         |   |   | 533         |   |   | 472         |
|                                                               | Loss      (gain) on sale of OREO property, net |   | (205)        |   |   | —     |   |   | 218         |   |   | —     |
|                                                               | OREO      market value adjustments |   | 2,016         |   |   | —     |   |   | 5,184         |   |   | —     |
|                                                               | OREO      related expenses, net |   | 962         |   |   | 37         |   |   | 2,372         |   |   | 152         |
|                                                               | FDIC/OTS      assessments |   | 910         |   |   | 352         |   |   | 2,005         |   |   | 1,930         |
|                                                               | Insurance      and bond premiums |   | 150         |   |   | 17         |   |   | 449         |   |   | 54         |
|                                                               | Goodwill      impairment |   | —     |   |   | —     |   |   | —     |   |   | 14,206         |
|                                                               | Other      general and administrative |   | 143         |   |   | 553         |   |   | 1,407         |   |   | 1,759         |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |        Total      noninterest expense | $ | 8,500         |   | $ | 4,889         |   | $ | 24,377         |   | $ | 30,740         |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |        Loss      before provision (benefit) for federal income taxes |   | (12,071)        |   |   | (4,963)        |   |   | (50,705)        |   |   | (35,419)        |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Provision      (benefit) for federal income taxes                  |   | —     |   |   | (3,304)        |   |   | 3,999         |   |   | (6,959)        |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |        Net      loss | $ | (12,071)        |   | $ | (1,659)        |   | $ | (54,704)        |   | $ | (28,460)        |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |        Basic      loss per share | $ |                 (0.69) |   |   |                 (0.09) |   |   |                 (3.14) |   |   |                 (1.50) |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |        Diluted      loss per share | $ | (0.69) |   |   |                 (0.09) |   |   |                 (3.14) |   |   |                 (1.50) |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See      accompanying notes to consolidated financial  statements. |

----

| FIRST FINANCIAL NORTHWEST, INC.      AND SUBSIDIARIES                                     |
|-------------------------------------------------------------------------------------------|
| Consolidated      Statements of Stockholders' Equity and Comprehensive Income      (Loss) |
| For      the Nine Months Ended September 30, 2010                                         |
| (Dollars      in thousands, except share data)                                            |
| (Unaudited)                                                                               |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |   |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   | Additional |   | Retained |   | Other |   | Unearned |   | Total |
|                                                                                      |   |   |   |   |   |   |   |   | Common |   | Paid-in |   | Earnings |   | Comprehensive |   | ESOP |   | Stockholders' |
|                                                                                      |   |   |   |   |   |   | Shares |   | Stock |   | Capital |   | (Deficit) |   | Income,      net of tax |   | Shares |   | Equity |
| Balances      at December 31, 2009                                                        | 18,823,068         |   | $ | 188         |   | $ | 186,120         |   | $ | 55,251         |   | $ | 1,347         |   | $ | (14,389)        |   | $ | 228,517         |
| Comprehensive      loss:                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                      | Net      loss |   |   |        --    |   |   | --         |   |   |        --    |   |   | (54,704) |   |   |  --    |   |   |  --    |   |   | (54,704)        |
|                                                                                      | Change      in fair value of investments |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                      |   | available      for sale |        --    |   |   |        --    |   |   |        --    |   |   |        --    |   |   | 481         |   |   |        --    |   |   | 481         |
|                                                                                      |   |   |        Total      comprehensive loss: |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (54,223)        |
| Cash      dividend declared and paid ($0.085 per share)                                   |        --    |   |   |        --    |   |   |        --    |   |   | (1,421)        |   |   |        --    |   |   |        --    |   |   | (1,421)        |
| Purchase      and retirement of common stock                                              | (17,900)        |   |   |        --    |   |   | (106)        |   |   |        --    |   |   |        --    |   |   |        --    |   |   | (106)        |
| Compensation      related to stock options                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                      |   | and      restricted stock awards |        --    |   |   |        --    |   |   | 1,441         |   |   | --    |   |   |        --    |   |   |        --    |   |   | 1,441         |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allocation      of 84,640 ESOP shares                                                     |        --    |   |   |        --    |   |   | (386)        |   |   |        --    |   |   |        --    |   |   | 847         |   |   | 461         |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balances      at September 30, 2010                                                       | 18,805,168         |   | $ | 188         |   | $ | 187,069         |   | $ | (874) |   | $ | 1,828         |   | $ | (13,542) |   | $ | 174,669         |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See      accompanying notes to consolidated financial  statements.                        |

----

| FIRST FINANCIAL NORTHWEST, INC.      AND SUBSIDIARIES |
|-------------------------------------------------------|
| Consolidated      Statements of Cash Flows            |
| (In      thousands)                                   |
| (Unaudited)                                           |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |   |   |   |   |   |   | Nine      Months Ended September 30, |
|                                                  |   |   |   |   |   |   | 2010 |   | 2009 |
| Cash      flows from operating activities:            |   |   |   |   |   |   |
|                                                  | Net      loss |   |   |   | $ | (54,704)  |   |   | (28,460)  |
|                                                  | Adjustments      to reconcile net loss to |   |   |   |   |   |   |
|                                                  |   | net      cash provided by operating activities: |   |   |   |   |   |   |
|                                                  |   |   | Provision      for loan losses |   |   | 51,000        |   |   | 27,595        |
|                                                  |   |   | Goodwill      impairment |   |   | —    |   |   | 14,206        |
|                                                  |   |   | OREO      market value adjustments |   |   | 5,184        |   |   | —    |
|                                                  |   |   | Loss      on sale of OREO property, net |   |   | 218        |   |   | —    |
|                                                  |   |   | Depreciation      and amortization of premises and equipment |   |   | 829        |   |   | 596        |
|                                                  |   |   | Net      amortization of premiums and discounts on investments |   |   | 1,119        |   |   | 785        |
|                                                  |   |   | ESOP      expense |   |   | 461        |   |   | 676        |
|                                                  |   |   | Compensation      expense related to stock options and restricted stock    awards |   |   | 1,441        |   |   | 1,569        |
|                                                  |   |   | Net      realized gain on investments available for sale |   |   | —    |   |   | (74)  |
|                                                  |   |   | Other-than-temporary      impairment loss on investments |   |   | —    |   |   | 152        |
|                                                  |   |   | Loss      on disposal of equipment |   |   | —    |   |   | 983        |
|                                                  |   |   | Deferred      federal income taxes |   |   | 11,878        |   |   | (5,806)  |
|                                                  |   |   | Changes      in operating assets and liabilities: |   |   |   |   |   |   |
|                                                  |   |   |   | Other      assets |   |   | 1,713        |   |   | 1,321        |
|                                                  |   |   |   | Accrued      interest receivable |   |   | 169        |   |   | 267        |
|                                                  |   |   |   | Accrued      interest payable |   |   | (62)  |   |   | 44        |
|                                                  |   |   |   | Other      liabilities |   |   | 413        |   |   | 2,410        |
|                                                  |   |   |   | Federal      income taxes |   |   | 3,779        |   |   | (1,602)  |
|                                                  |   |   |   |   | Net      cash provided by operating activities |   | $ | 23,438        |   | $ | 14,662        |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |
| Cash      flows from investing activities:            |   |   |   |   |   |   |
|                                                  |   | Proceeds      from sales of investments |   |   | —    |   |   | 6,853        |
|                                                  |   | Capitalized      improvements in OREO |   |   | (488)  |   |   | —    |
|                                                  |   | Proceeds      from sales of OREO properties |   |   | 18,837        |   |   | —    |
|                                                  |   | Principal      repayments on investments available for sale |   |   | 23,851        |   |   | 32,180        |
|                                                  |   | Purchases      of investments available for sale |   |   | (84,408)  |   |   | (60,081)  |
|                                                  |   | Net      (increase) decrease in loans receivable, net |   |   | 37,895        |   |   | (48,320)  |
|                                                  |   | Purchases      of premises and equipment |   |   | (1,321)  |   |   | (5,162)  |
|                                                  |   |   |   |   | Net      cash used by investing activities |   | $ | (5,634)  |   | $ | (74,530)  |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |   |   |   |   | Balance,      carried forward |   | $ | 17,804        |   | $ | (59,868)  |

----

| FIRST      FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES              |
|--------------------------------------------------------------------|
| Consolidated      Statements of Cash Flows                         |
| (In      thousands)                                                |
| (Unaudited)                                                        |
|                                                               |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |   |   |   |   | Nine      Months Ended September 30, |
|                                                               |   |   |   |   |   | 2010 |   | 2009 |
|                                                               |   |   |   |   | Balance,      brought forward | $ | 17,804        |   |   | (59,868)  |
| Cash      flows from financing activities:                         |   |   |   |   |   |
|                                                               | Net      increase in deposits |   | 13,325        |   |   | 116,730        |
|                                                               | Advances      from the Federal Home Loan Bank |   | 53,173        |   |   | 16,750        |
|                                                               | Repayments      of advances from the Federal Home Loan Bank |   | (50,007)  |   |   | (23,000)  |
|                                                               | Net      increase (decrease) in advance payments from borrowers for taxes and      insurance |   | 2,129        |   |   | 1,630        |
|                                                               | Repurchase      and retirement of common stock |   | (106)  |   |   | (9,945)  |
|                                                               | Dividends      paid |   | (1,421)  |   |   | (4,839)  |
|                                                               |   |   |   | Net      cash provided by financing activities | $ | 17,093        |   | $ | 97,326        |
|                                                               |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |   |   | Net      increase in cash |   | 34,897        |   |   | 37,458        |
| Cash      and cash equivalents:                                    |   |   |   |   |   |
|                                                               | Beginning      of period |   | 104,970        |   |   | 5,756        |
|                                                               | End      of period |   | $ | 139,867        |   | $ | 43,214        |
|                                                               |   |   |   |   |   |   |   |   |   |   |
| Supplemental      disclosures of cash flow information:            |   |   |   |   |   |
|                                                               | Cash      paid during the period for: |   |   |   |   |   |
|                                                               |   | Interest |   | $ | 21,633        |   |   | 25,843        |
|                                                               |   | Federal      income taxes | $ | —    |   |   | 450        |
| Noncash      transactions:                                         |   |   |   |   |   |
|                                                               | Loans,      net of deferred loan fees and allowance for loan losses, transferred to      OREO | $ | 34,843        |   |   | —    |
|                                                               |   |   |   |   |   |   |   |   |   |   |
| See      accompanying notes to consolidated financial  statements. |

----

----

----

|                                          |   |              |              |               |            |            | September      30, 2010 |
|-----------------------------------------------|--------|-------------------|-------------------|--------------------|-----------------|-----------------|-------------------------|
|                                          |   |              |              |               |            |            |                    |   |   | Gross |   | Gross |   |   |   |
|                                          |   |              |              |               |            |            | Amortized               |   | Unrealized |   | Unrealized |   |   |   |
|                                          |   |              |              |               |            |            | Cost                    |   | Gains |   | Losses |   | Fair      Value |
|                                          |   |              |              |               |            |            | (In      thousands)     |
| Mortgage-backed      and related investments: |   |              |              |               |            |            |                    |   |   |   |   |
|                                          |   | Fannie      Mae   | $                 | 99,211        |            | $               | 1,762              |   | $ | (342) |   | $ | 100,631        |
|                                          |   | Freddie      Mac  |              | 40,067        |            |            | 1,091              |   |   | (105) |   |   | 41,053        |
|                                          |   | Ginnie      Mae   |              | 4,351         |            |            | 109                |   |   | 0 |   |   | 4,460        |
| Tax-exempt      municipal bonds               |   | 4,207        |              |               | 81         |            |                    | (298) |   |   | 3,990        |
| Taxable      municipal bonds                  |   | 648          |              |               | 12         |            |                    | 0 |   |   | 660        |
| U.S.      Government agencies                 |   | 1,805        |              |               | 232        |            |                    | 0 |   |   | 2,037        |
| Mutual      fund (1)                          |   |              | 4,460        |               |            | 272        |                    |   | 0 |   |   | 4,732        |
|                                          |   |              |              |               |            |            | $                       | 154,749        |   | $ | 3,559        |   | $ | (745) |   | $ | 157,563        |

|                                          |   |              |              |               |                |            | December      31, 2009 |
|-----------------------------------------------|--------|-------------------|-------------------|--------------------|---------------------|-----------------|------------------------|
|                                          |   |              |              |               |                |            |                   |   |   | Gross |   | Gross |   |   |   |
|                                          |   |              |              |               |                |            | Amortized              |   | Unrealized |   | Unrealized |   |   |   |
|                                          |   |              |              |               |                |            | Cost                   |   | Gains |   | Losses |   | Fair      Value |
|                                          |   |              |              |               |                |            | (In      thousands)    |
| Mortgage-backed      and related investments: |   |              |              |               |                |            |                   |   |   |   |   |
|                                          |   | Fannie      Mae   | $                 | 50,025        |                | $               | 1,267             |   | $ | ($21) |   | $ | 51,271        |
|                                          |   | Freddie      Mac  |              | 28,924        |                |            | 1,020             |   |   | ($3) |   |   | 29,941        |
|                                          |   | Ginnie      Mae   |              | 5,099         |                |            | 84                |   |   | $0 |   |   | 5,183        |
| Tax-exempt      municipal bonds               |   | 4,207        |              |               | 49             |            |                   | ($484) |   |   | 3,772        |
| Taxable      municipal bonds                  |   | 650          |              |               | —   |            |                   | ($48) |   |   | 602        |
| U.S.      Government agencies                 |   | 1,946        |              |               | 57             |            |                   | $0 |   |   | 2,003        |
| Mutual      fund (1)                          |   |              | 4,460        |               |                | 151        |                   |   | $0 |   |   | 4,611        |
|                                          |   |              |              |               |                |            | $                      | 95,311        |   | $ | 2,628        |   | $ | ($556) |   | $ | 97,383        |

| (1)   | Represents an investment in the      AMF Ultra Short Mortgage Fund. The majority of the fund value is invested      in U.S. Government or agencysecurities. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                            |   |    |                                                                     |                                                                     |    |                                                                                            | September      30, 2010                                                                         |
|---------------------------------|--------|---------|--------------------------------------------------------------------------|--------------------------------------------------------------------------|---------|-------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|                            |   |    |                                                                     |                                                                     |    |                                                                                            | Less      Than 12 Months                                                                        |   | 12      Months or Longer |   | Total |
|                            |   |    |                                                                     |                                                                     |    |                                                                                            |                                                                                            |   |   | Unrealized |   |   |   |   | Unrealized |   |   |   |   | Unrealized |
|                            |   |    |                                                                     |                                                                     |    |                                                                                            | Fair      Value                                                                                 |   | Loss |   | Fair      Value |   | Loss |   | Fair      Value |   | Loss |
|                            |   |    |                                                                     |                                                                     |    |                                                                                            |                                                                                            |                                                    (In      thousands) |   |   |   |   |
| Fannie      Mae                 |   |    | $                                                                        |            45,381 |    | $                                                                                               |                (342) |   | $ |  -  |   | $ |  -  |   | $ |            45,381 |   | $ |                (342) |
| Freddie      Mac                |   |    |            15,824 |                                                                     |    |                (105) |                                                                                            |   |                 154 |   |   |  -  |   |   |            15,978 |   |   |                (105) |
| Tax-exempt      municipal bonds |   |  - |                                                                     |                                                                     |  - |                                                                                            |                                                                                            |              1,810 |   |   |                (298) |   |   |              1,810 |   |   |                (298) |
| Taxable      municipal bonds    |   |  - |                                                                     |                                                                     |  - |                                                                                            |                                                                                            |  - |   |   |  -   |   |   |  -  |   |   |  -   |
|                            |   |    |                                                                     |                                                                     |    |                                                                                            | $                                                                                               |            61,205 |   | $ |                (447) |   | $ |              1,964 |   | $ |                (298) |   | $ |            63,169 |   | $ |                (745) |

|                            |   |                                                                                                                            |                                                                                                                            |   |                                                                                                                            |                                                                                                                            | December      31, 2009   |
|---------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|--------------------------|
|                            |   |                                                                                                                            |                                                                                                                            |   |                                                                                                                            |                                                                                                                            | Less      Than 12 Months |   | 12      Months or Longer |   | Total |
|                            |   |                                                                                                                            |                                                                                                                            |   |                                                                                                                            |                                                                                                                            |                     |   |   | Unrealized |   |   |   |   | Unrealized |   |   |   |   | Unrealized |
|                            |   |                                                                                                                            |                                                                                                                            |   |                                                                                                                            |                                                                                                                            | Fair      Value          |   | Loss |   | Fair      Value |   | Loss |   | Fair      Value |   | Loss |
|                            |   |                                                                                                                            |                                                                                                                            |   |                                                                                                                            |                                                                                                                            |                     |                                                    (In      thousands) |   |   |   |   |
| Fannie      Mae                 |   |                                                                                                                            | $                                                                                                                               | 3,255  |                                                                                                                            | $                                                                                                                               | (21)                     |   | $ |                      - |   | $ |                      - |   | $ | 3,255 |   | $ | (21) |
| Freddie      Mac                |   |                                                                                                                            |                      - |   |                                                                                                                            |                      - |                     |   | 255 |   |   | (3) |   |   | 255 |   |   | (3) |
| Tax-exempt      municipal bonds |   |                      - |                                                                                                                            |   |                      - |                                                                                                                            |                     | 1,625 |   |   | (484) |   |   | 1,625 |   |   | (484) |
| Taxable      municipal bonds    |   |                      - |                                                                                                                            |   |                      - |                                                                                                                            |                     | 602 |   |   | (48) |   |   | 602 |   |   | (48) |
|                            |   |                                                                                                                            |                                                                                                                            |   |                                                                                                                            |                                                                                                                            | $                        |              3,255 |   | $ |                  (21) |   | $ |              2,482 |   | $ |                (535) |   | $ |              5,737 |   | $ |                (556) |

----

|                                        |   |                                                                                                                    |   |                                                                                                                    |                                                                                                                    |   | September      30, 2010                                                                                                 |
|---------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|
|                                        |   |                                                                                                                    |   |                                                                                                                    |                                                                                                                    |   | Amortized      Cost                                                                                                     |   | Fair      Value |
|                                        |   |                                                                                                                    |   |                                                                                                                    |                                                                                                                    |   | (In      thousands)                                                                                                     |
| Due      within one year                    | $      |  -                                                                                                                 |   | $                                                                                                                       |  -                                                                                                                 |
| Due      after one year through five years  |   |                    1,173 |   |                                                                                                                    |                    1,269 |
| Due      after five years through ten years |   |                    1,179 |   |                                                                                                                    |                    1,213 |
| Due      after ten years                    |   |                    4,308 |   |                                                                                                                    |                    4,205 |
|                                        |   |                                                                                                                    |   |                                                                                                                    |                                                                                                                    |   |                                                                                                                    |                    6,660 |   |   |                    6,687 |
|                                        |   |                                                                                                                    |   |                                                                                                                    |                                                                                                                    |   |                                                                                                                    |   |   |   |   |
| Mortgage-backed      investments            |   |                143,629                       |   |                                                                                                                    |                146,144                       |
| Mutual      fund                            |   |                                                                                                                    |   |                    4,460 |                                                                                                                    |   |                    4,732 |
|                                        |   |                                                                                                                    |   |                                                                                                                    |                                                                                                                    |   | $                                                                                                                       |                154,749 |   | $ |                157,563 |

----

|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               | September      30, 2010                                                                                                            |                 | December      31, 2009                                                                                                             |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|--------|---------|--------------------|---------------------|------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|----------------------|------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               | Amount                                                                                                                             |                 | Percent                                                                                                                            |   | Amount |   | Percent |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               | (Dollars      in thousands)                                                                                                        |
| One-to-four      family residential (1):                                                                                                                         |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |
|                                                                                                                                                             | Permanent                           |   |    |               | $                   | 424,959                                                                                                                       |                                                                                                                               |                    44.18            |        %        | $                                                                                                                                  | 481,046        |   |                    43.13 |        % |
|                                                                                                                                                             | Construction                        |   |    |               | 6,648          |                                                                                                                               |                      0.69 |                                                                                                                               |                 |                                                                                                                               | 15,685        |   |                      1.41 |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               | 431,607         |                                                                                                                               | 44.87 |   |   |   | 496,731        |   |                    44.54 |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |   |   |   |   |   |   |
| Multifamily      residential:                                                                                                                                    |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |
|                                                                                                                                                             | Permanent                           |   |    |               |                | 137,842                                                                                                                       |                                                                                                                               |                    14.34            |                 |                                                                                                                               |   | 128,943        |   |                    11.56 |   |
|                                                                                                                                                             | Construction                        |   |    |               | 19,364         |                                                                                                                               |                      2.01 |                                                                                                                               |                 |                                                                                                                               | 17,565        |   |                      1.58 |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               | 157,206         |                                                                                                                               | 16.35 |   |   |   | 146,508        |   |                    13.14 |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |   |   |   |   |   |   |
| Commercial      real estate:                                                                                                                                     |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |
|                                                                                                                                                             | Permanent                           |   |    |               |                | 241,996                                                                                                                       |                                                                                                                               |                    25.16            |                 |                                                                                                                               |   | 251,185        |   |                    22.52 |   |
|                                                                                                                                                             | Construction                        |   |    |               | 31,112         |                                                                                                                               |                      3.24 |                                                                                                                               |                 |                                                                                                                               | 31,605        |   |                      2.83 |   |
|                                                                                                                                                             | Land                                |   |    |               |                |                                                                                                                               |                                                                                                                               | 6,474                                                                                                                         |                 |                      0.67 |   |   |   | 6,206        |   |                      0.56 |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               | 279,582         |                                                                                                                               | 29.07 |   |   |   | 288,996        |   |                    25.91 |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |   |   |   |   |   |   |
| Construction/land      development:                                                                                                                              |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |
|                                                                                                                                                             | One-to-four      family residential |   |    | 42,266        |                |                      4.40 |                                                                                                                               |                                                                                                                               |                 | 95,699                                                                                                                        |   |                      8.58 |   |
|                                                                                                                                                             | Multifamily      residential        |   |    | 1,283         |                |                      0.13 |                                                                                                                               |                                                                                                                               |                 | 3,624                                                                                                                         |   |                      0.33 |   |
|                                                                                                                                                             | Commercial                          |   |    |               | 1,108          |                                                                                                                               |                      0.12 |                                                                                                                               |                 |                                                                                                                               | 1,129        |   |                      0.10 |   |
|                                                                                                                                                             | Land      development               |   |    | 29,173        |                |                      3.03 |                                                                                                                               |                                                                                                                               |                 | 63,501                                                                                                                        |   |                      5.69 |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               | 73,830          |                                                                                                                               | 7.68 |   |   |   | 163,953        |   |                    14.70 |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |   |   |   |   |   |   |
| Business                                                                                                                                                         |                                |   |    |               |                | 323                                                                                                                           |                                                                                                                               |                      0.03 |                 |                                                                                                                               |   | 353        |   |                      0.03 |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |   |   |   |   |   |   |
| Consumer                                                                                                                                                         |                                |   |    |               |                | 19,239                                                                                                                        |                                                                                                                               |                      2.00 |                 |                                                                                                                               |   | 18,678        |   |                      1.68 |   |
| Total      loans                                                                                                                                                 |                                |   |    | $                  | 961,787        |                                                                                                                               |                  100.00                       |        %                                                                                                                      |                 | $                                                                                                                                  | 1,115,29   |   |                  100.00 |        % |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |   |   |   |   |   |   |
| Less:                                                                                                                                                            |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |   |   |   |   |
|                                                                                                                                                             | Loans      in process               |   |    | 15,138        |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 | 39,942                                                                                                                        |   |   |   |
|                                                                                                                                                             | Deferred      loan fees             |   |    | 2,687         |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 | 2,938                                                                                                                         |   |   |   |
|                                                                                                                                                             | Allowance      for loan losses      |   |    | 28,400        |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 | 33,039                                                                                                                        |   |   |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |   |
| Loans      receivable, net                                                                                                                                       |                                | $      | 915,562 |               |                |                                                                                                                               |                                                                                                                               | $                                                                                                                                  | 1,039,30   |                                                                                                                               |   |   |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |   |   |   |   |   |   |
| (1)   Includes      $191.7 million and $230.8 million of non-owner occupied loans at September      30, 2010 and December 31, 2009, respectively. |
|                                                                                                                                                             |                                |   |    |               |                |                                                                                                                               |                                                                                                                               |                                                                                                                               |                 |                                                                                                                               |   |   |   |   |   |   |   |   |

----

|                                        |   |                                                                     |   |                                                                                                |                                                                                             |   | Three      Months Ended September 30, |                                                                     | Nine      Months Ended September 30, |
|---------------------------------------------|--------|--------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------------------------------------------------------------------------|--------------------------------------|
|                                        |   |                                                                     |   |                                                                                                |                                                                                             |   | 2010                                  |                                                                     | 2009                                 |   | 2010 |   | 2009 |
|                                        |   |                                                                     |   |                                                                                                |                                                                                             |   | (In      thousands)                   |
| Balance      at the beginning of the period | $      |            29,858 |   |                                                                                                | 32,450                                                                                      |   |                                  |            33,039 |                                 |   | 16,982        |
| Provision      for loan losses              |   |            12,000 |   |                                                                                                | 7,795                                                                                       |   |                                  |            51,000 |                                 |   | 27,595        |
| Charge-offs                                 |   |                                                                     |   |          (14,121)                                      |                                                                                             |   | ($9,154)                              |                                                                     |                                 |          (56,506) |   |   | ($13,486) |
| Recoveries                                  |   |                                                                     |   |                 663 |                                                                                             |   | 43                               |                                                                     |                                 |                 867 |   |   | 43        |
| Balance      at the end of the period       | $      |            28,400 |   | $                                                                                                   |                31,134 |   | $                                     |            28,400 |                                 | $ |            31,134 |

|                                                                                                                                                                                                                                                            | September      30,               |                            | December      31,  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|---------------------------------|-------------------------|
|                                                                                                                                                                                                                                                            | 2010                             |                            | 2009               |
|                                                                                                                                                                                                                                                            | (In      thousands)                   |
|                                                                                                                                                                                                                                                            |                                  |                            |                    |   |   |
| Impaired      loans without a valuation allowance                                                                                                                                                                                                          |            $ | 13,201                     |                    |            $ | 46,282  |
| Impaired      loans with a valuation allowance                                                                                                                                                                                                             |                                  | 123,134                    |                    |   |  109,897 |
|     Total      impaired loans                                                                                                                                                                                                               |            $ | 136,335                    |                    |            $ |  156,161 |
|                                                                                                                                                                                                                                                            |                                  |                            |                    |   |   |
| Valuation      allowance related to impaired loans                                                                                                                                                                                                              | $                                     | 9,513                 |                    | $ | 13,432 |
|                                                                                                                                                                                                                                                            |                                  |                            |                    |   |   |
| Average      investment of impaired loans                                                                                                                                                                                                                       | $                                     | 151,627               |                    |  $ | 117,644 |
|                                                                                                                                                                                                                                                            |                                  |                            |                    |   |   |
| Interest      income recognized on a cash basis on impaired loans                                                                                                                                                                                               | $                                     | 2,205                 |                    |  $ | 2,134 |
|                                                                                                                                                                                                                                                            |                                  |                            |                    |   |   |
| Nonperforming      assets:                                                                                                                                                                                                                                      |                                  |                            |                    |   |   |
|     90      days or more past due and still accruing                                                                                                                                                                                        | $                                     | —     |                    | $ | —     |
|     Nonaccrual      loans                                                                                                                                                                                                                   |                                  | 65,056                |                    |   | 94,682 |
|     Nonaccrual      troubled debt restructured loans (1)                                                                                                                                                                                    |                                  | 28,387                |                    |   | 26,021 |
| Total      nonperforming loans                                                                                                                                                                                                                                  |                                  | 93,443                |                    |   | 120,703 |
|     Other      real estate owned                                                                                                                                                                                                            |                                  | 22,927                |                    |   | 11,835 |
| Total      nonperforming assets                                                                                                                                                                                                                                 | $                                     | 116,370               |                    | $ | 132,538 |
|                                                                                                                                                                                                                                                            |                                  |                            |                    |   |   |
| Performing      troubled debt restructured loans (2)                                                                                                                                                                                                            | $                                     | 42,891                |                    | $ | 35,458 |
| Nonaccrual      troubled debt restructured loans (1)                                                                                                                                                                                                            |                                  | 28,387                |                    |   | 26,021 |
| Total      troubled debt restructured loans                                                                                                                                                                                                                     | $                                     | 71,278                |                    | $ | 61,479 |
|                                                                                                                                                                                                                                                            |                                  |                            |                    |   |   |
| (1)      Troubled debt restuctured loans are also considered impaired loans and are      included in the impaired      category at the beginning of the table.                                                                                                  |
|                                                                                                                                                                                                                                                            |                                  |                            |                    |   |   |
| (2)      Performing troubled debt restructured loans are loans that have been      modified due to financial difficulty      of the borrower where the borrower has complied with the terms of the loan      modification for a      minimum of sixmonths. |

----

|                                                         | Nine      Months Ended            |                                                                        | Twelve      Months Ended        |
|--------------------------------------------------------------|-----------------------------------|-----------------------------------------------------------------------------|---------------------------------|
|                                                         | September      30, 2010           |                                                                        | December      31, 2009          |
|                                                         |  Amount                      |                                                                        |  Number      of Properties |   |  Amount |   |  Number      of Properties |
|                                                         |  (Dollars      in thousands) |
| Balance      at the beginning of the period                  | $                                 |        11,835                            |                            |   |              32 |   | $ |                 - |   |   |                 - |
|      Loans      transferred to OREO |                              |        34,843                            |                            |   |             121 |   |   |        11,835 |   |   |              32 |
|      Capitalized      improvements  |                              |             488 |                            |   |  N/A |   |   |                 - |   |   |  N/A |
|      Market      value adjustments  |                              |         (5,184)                     |                            |   |  N/A |   |   |                 - |   |   |  N/A |
|      Dispositions      of OREO      |                              |       (19,055)                                |                            |   |             (52) |   |   |                 - |   |   |                 - |
| Balance      at the end of the period                        | $                                 |        22,927                            |                            |   |             101 |   | $ |        11,835 |   |   |              32 |

| · |   Level 1      –  | Quoted prices for      identical instruments in active markets.                                                                                                                                                       |
|--------|-----------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   Level 2      –  | Quoted prices for      similar instruments in active markets; quoted prices for identical or      similar instruments in markets that are not active; and model-derived      valuations whose inputs are observable.  |
| · |   Level 3      –  | Instruments whose      significant value drivers areunobservable.                                                                                                                                                     |

----

|                                |                                           |   | Fair      Value Measurements at September 30, 2010 |
|-------------------------------------|------------------------------------------------|--------|----------------------------------------------------|
|                                |                                           |   |                                               |   |   | Quoted      Prices in |   | Significant |   |   |   |
|                                |                                           |   |                                               |   |   | Active      Markets |   | Other |   | Significant |
|                                |                                           |   | Fair      Value                                    |   | for      Identical |   | Observable |   | Unobservable |
|                                |                                           |   | Measurements                                       |   | Assets      (Level 1) |   | Inputs      (Level 2) |   | Inputs      (Level 3) |
|                                |                                           |   | (In      thousands)                                |
| Available      for sale investments |                                           |   |                                               |   |   |   |   |   |   |   |   |   |
|                                | Mortgage-backed      investments               |   |                                               |   |   |   |   |   |   |   |   |   |   |
|                                |      Fannie      Mae  |   | $                                                  |               100,631 |   | $ |                            - |   | $ |                100,631 |   | $ |                          - |
|                                |      Freddie      Mac |   |                                               |                 41,053 |   |   |                            - |   |   |                  41,053 |   |   |                          - |
|                                |      Ginnie      Mae  |   |                                               |                   4,460 |   |   |                            - |   |   |                    4,460 |   |   |                          - |
|                                | Tax-exempt      municipal bonds                |   |                                               |                   3,990 |   |   |                            - |   |   |                    3,990 |   |   |                          - |
|                                | Taxable      municipal bonds                   |   |                                               |                     660 |   |   |                            - |   |   |                      660 |   |   |                          - |
|                                | U.S.      Government agencies                  |   |                                               |                   2,037 |   |   |                            - |   |   |                    2,037 |   |   |                          - |
|                                | Mutual      Fund                               |   |                                               |                   4,732 |   |   |                      4,732 |   |   |                          - |   |   |                          - |
|                                |                                           |   | $                                                  |                             157,563 |   | $ |                                     4,732 |   | $ |                                   152,831 |   | $ |                                            - |

|                                |                                           |   | Fair      Value Measurements at December 31, 2009 |
|-------------------------------------|------------------------------------------------|--------|---------------------------------------------------|
|                                |                                           |   |                                              |   |   |   | Quoted      Prices in |   |   | Significant |   |   |   |
|                                |                                           |   |                                              |   |   | Active      Markets |   |   | Other |   |   | Significant |
|                                |                                           |   | Fair      Value                                   |   |   | for      Identical |   |   | Observable |   |   | Unobservable |
|                                |                                           |   | Measurements                                      |   |   | Assets      (Level 1) |   |   | Inputs      (Level 2) |   |   | Inputs      (Level 3) |
|                                |                                           |   | (In      thousands)                               |
| Available      for sale investments |                                           |   |                                              |   |   |   |   |   |   |   |   |   |
|                                | Mortgage-backed      investments               |   |                                              |   |   |   |   |   |   |   |   |   |   |
|                                |      Fannie      Mae  |   | $                                                 |                 51,271 |   | $ |                            - |   | $ |                  51,271 |   | $ |                          - |
|                                |      Freddie      Mac |   |                                              |                 29,941 |   |   |                            - |   |   |                  29,941 |   |   |                          - |
|                                |      Ginnie      Mae  |   |                                              |                   5,183 |   |   |                            - |   |   |                    5,183 |   |   |                          - |
|                                | Tax-exempt      municipal bonds                |   |                                              |                   3,772 |   |   |                            - |   |   |                    3,772 |   |   |                          - |
|                                | Taxable      municipal bonds                   |   |                                              |                     602 |   |   |                            - |   |   |                      602 |   |   |                          - |
|                                | U.S.      Government agencies                  |   |                                              |                   2,003 |   |   |                            - |   |   |                    2,003 |   |   |                          - |
|                                | Mutual      Fund                               |   |                                              |                   4,611 |   |   |                      4,611 |   |   |                          - |   |   |                          - |
|                                |                                           |   | $                                                 |                                   97,383 |   | $ |                                   4,611 |   | $ |                                     92,772 |   | $ |                                              - |

----

|                                                                                                                                                            |                                                                                    | Fair      Value Measurements at September 30, 2010                                                     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |                                                                                    |                                                                                                   |   |   | Quoted      Prices in |   | Significant |   |   |   |   |   |   |
|                                                                                                                                                            |                                                                                    |                                                                                                   |   |   | Active      Markets |   | Other |   | Significant |   |   |   |
|                                                                                                                                                            |                                                                                    | Fair      Value                                                                                        |   | for      Identical |   | Observable |   | Unobservable |   | Total      (Gains) |
|                                                                                                                                                            |                                                                                    | Measurements                                                                                           |   | Assets      (Level 1) |   | Inputs      (Level 2) |   | Inputs      (Level 3) |   | Losses(1) |
|                                                                                                                                                            |                                                                                    | (In      thousands)                                                                                    |
| Impaired      loans including undisbursed but committed funds            of      $2.6 million      (included in loans receivable, net) | $                                                                                       |               129,434            |   | $ |                            - |   | $ |                          - |   | $ |                129,434 |   | $ |            (3,919) |
| Other      real estate owned                                                                                                                                    |                                                                                    |                 22,927 |   |   |                            - |   |   |                          - |   |   |                  22,927 |   |   |              5,184 |
|                                                                                                                                                            |                                                                                    | $                                                                                                      |               152,361 |   | $ |                            - |   | $ |                          - |   | $ |                152,361 |   | $ |              1,265 |
|                                                                                                                                                            |                                                                                    |                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                            | (1)      This represents the (gain) loss for the quarter ended      September 30, 2010. |                                                                                                   |   |   |   |

|                                                                                                                                                      |                                                                       | Fair      Value Measurements at December 31, 2009                                                                                                 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                      |                                                                       |                                                                                                                                              |   |   | Quoted      Prices in |   | Significant |   |   |   |   |   |   |
|                                                                                                                                                      |                                                                       |                                                                                                                                              |   |   | Active      Markets |   | Other |   | Significant |   |   |   |
|                                                                                                                                                      |                                                                       | Fair      Value                                                                                                                                   |   | for      Identical |   | Observable |   | Unobservable |   | Total |
|                                                                                                                                                      |                                                                       | Measurements                                                                                                                                      |   | Assets      (Level 1) |   | Inputs      (Level 2) |   | Inputs      (Level 3) |   | Losses      (1) |
|                                                                                                                                                      |                                                                       | (In      thousands)                                                                                                                               |
| Impaired      loans including undisbursed but committed funds          of      $10.6 million      (included in loans receivable, net) | $                                                                          |               153,300                                                       |   | $ |                            - |   | $ |                          - |   | $ |                153,300 |   | $ |              4,895 |
| Goodwill      impairment                                                                                                                                  |                                                                       |                         - |   |   |                            - |   |   |                          - |   |   |                          - |   |   |            14,206 |
| Other      real estate owned                                                                                                                              |                                                                       |                 11,835                                            |   |   |                            - |   |   |                          - |   |   |                  11,835 |   |   |                    - |
|                                                                                                                                                      |                                                                       | $                                                                                                                                                 |               165,135 |   | $ |                            - |   | $ |                          - |   | $ |                165,135 |   | $ | 19,101 |
|                                                                                                                                                      |                                                                       |                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                      | (1)      This represents the loss for the year ended December 31,    2009. |                                                                                                                                              |   |   |   |   |   |   |   |

----

|         |                                |           |   |                                                                                                |                                                          |                                                          |                                                                                                | September      30, 2010                                       |                                                          | December      31, 2009                                                                              |
|--------------|-------------------------------------|----------------|--------|-----------------------------------------------------------------------------------------------------|---------------------------------------------------------------|---------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|---------------------------------------------------------------|---------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|         |                                |           |   |                                                                                                |                                                          |                                                          |                                                                                                | Carrying                                                      |                                                          | Estimated                                                                                           |   | Carrying |   | Estimated |
|         |                                |           |   |                                                                                                |                                                          |                                                          |                                                                                                | value                                                         |                                                          | fair      value                                                                                     |   | value |   | fair      value |
|         |                                |           |   |                                                                                                |                                                          |                                                          | (In      thousands)                                                                                 |
| Assets:      |                                |           |   |                                                                                                |                                                          |                                                          |                                                                                                |                                                          |                                                          |                                                                                                |   |   |   |   |   |
|         | Cash      on hand and in banks      |           | $      |              7,809                 |                                                          | $                                                             |              7,809                 |                                                          | $                                                             |              8,937                 |   | $ |              8,937 |
|         | Interest-bearing      deposits      |           |   |          132,058                                       |                                                          |                                                          |          132,058                                       |                                                          |                                                          |            96,033                            |   |   |            96,033 |
|         | Investments      available for sale |           |   |          157,563                                       |                                                          |                                                          |          157,563                                       |                                                          |                                                          |            97,383                            |   |   |            97,383 |
|         | Loans      receivable, net          |           |   |          915,562                                       |                                                          |                                                          |          897,583                                       |                                                          |                                                          |       1,039,300                                                       |   |   |       1,001,562 |
|         | Federal      Home Loan Bank stock   |           |   |              7,413                 |                                                          |                                                          |              7,413                 |                                                          |                                                          |              7,413                 |   |   |              7,413 |
|         | Accrued      interest receivable    |           |   |              4,711                 |                                                          |                                                          |              4,711                 |                                                          |                                                          |              4,880                 |   |   |              4,880 |
|         | OREO                                |           |   |                                                                                                |                                                          |                                                          |            22,927                            |                                                          |                                                          |            22,927                            |   |   |            11,835 |   |   |            11,835 |
| Liabilities: |                                |           |   |                                                                                                |                                                          |                                                          |                                                                                                |                                                          |                                                          |                                                                                                |   |   |   |   |
|         | Deposits                            |           |   |                                                                                                |                                                          |          233,532 |                                                                                                |                                                          |          233,532 |                                                                                                |   |          225,772 |   |   |          225,772 |
|         | Certificates      of deposit        |           |   |          719,216                                       |                                                          |                                                          |          738,391                                       |                                                          |                                                          |          713,651                                       |   |   |          727,250 |
|         | Advances      from the Federal Home |           |   |                                                                                                |                                                          |                                                          |                                                                                                |                                                          |                                                          |                                                                                                |   |   |
|         |                                | Loan      Bank |   |                                                                                                |          143,066 |                                                          |                                                                                                |          146,629 |                                                          |                                                                                                |          139,900 |   |   |          140,994 |
|         | Accrued      interest payable       |           |   |                 395 |                                                          |                                                          |                 395 |                                                          |                                                          |                 457 |   |   |                 457 |

| ·   | Financial instruments with      book value equal to fair value: The fair value of financial      instruments that are short-term or reprice frequently and that have little      or no risk are considered to have a fair value equal to book      value. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Investments: The fair      value of all investments excluding Federal Home Loan Bank of Seattle      (“FHLB”) stock was based upon quoted market prices. FHLB stock is not      publicly-traded, however it may be redeemed on a dollar-for-dollar basis,      for any amount the Bank is not required to hold. The fair value is      therefore equal to the book value. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Loans receivable: For      variable rate loans that reprice frequently and with no significant change      in credit risk, fair values are based on carrying values. The fair value      of fixed-rate loans is estimated using discounted cash flow analysis      utilizing current interest rates that would be offered for loans with      similar terms to borrowers of similar credit quality. As a result of the      current market conditions, cash flow estimates have been further      discounted to include a credit factor. The fair value of nonperforming      loans is estimated using the fair value of the underlying      collateral. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | OREO: The carrying      amount represents fair value. |
|--------------------|-------------------------------------------------------|

| ·   | Liabilities: The fair      value of deposits with no stated maturity, such as statement, NOW and      money market accounts, is equal to the amount payable on demand. The fair      value of certificates of deposit is based on the discounted value of      contractual cash flows. The fair value of FHLB advances is estimated based      on discounting the future cash flows using current interest rates for debt      with similar remaining maturities. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Off-balance sheet      commitments: No fair value adjustment is necessary for commitments      made to extend credit, which represents commitments for loan originations      or for outstanding commitments to purchase loans. These commitments are at      variable rates, are for loans with terms of less than one year and have      interest rates which approximate prevailing market rates, or are set at      the time of loan closing. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                           |                                                                            |                                                                                       |   |                                           |                                           |                                                                               | Weighted-Average                                                                                              |   |                                                                                                    | Aggregate                                                                                               |
|------------------------------------------------|---------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|--------|------------------------------------------------|------------------------------------------------|------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                           |                                                                            |                                                                                       |   |                                           | Weighted-Average                               |                                                                               | Remaining      Contractual                                                                                    |   |                                                                                                    | Intrinsic                                                                                               |
|                                           |                                                                            | Shares                                                                                     |   |                                           | Exercise Price                                 |                                                                               | Term      in Years                                                                                            |   |                                                                                                    | Value                                                                                                   |
|                                           |                                                                            |                                                                                       |   |                                           |                                           |                                                                               |                                                                                                          |   |                                                                                                    |                                                                                                    |
| Outstanding      at January 1, 2010            |          1,433,524                 |                                                                                       | $      |        9.73 |                                           |              8.52 |                                                                                                          |   |             1.93                            |
|                                           | Granted                                                                         |               50,000 |   |                                           |        4.03 |                                                                               |              9.73                            |   |                                                                                                    |             1.28                            |
|                                           | Exercised                                                                       |  -                                                                                    |   |                                           |  -                                        |                                                                               |                   - |   |                                                                                                    |  -                                                                                                 |
|                                           | Forfeited      or expired                                                       |             (65,000)           |   |                                           |        9.78 |                                                                               |                   - |   |                                                                                                    |             1.92                            |
| Outstanding      at September 30, 2010         |          1,418,524                 |                                                                                       | $      |        9.53 |                                           |              7.85 |                                                                                                          | $      |             1.91                            |
|                                           |                                                                            |                                                                                       |   |                                           |                                           |                                                                               |                                                                                                          |   |                                                                                                    |                                                                                                    |
| Expected      to vest assuming a 3% forfeiture |                                                                            |                                                                                       |   |                                           |                                           |                                                                               |                                                                                                          |   |                                                                                                    |
|                                           | rate      over the vesting term                                                 |             843,032            |   | $                                              |        9.38 |                                                                               |              7.90                            |   | $                                                                                                       |                  - |
|                                           |                                                                            |                                                                                       |   |                                           |                                           |                                                                               |                                                                                                          |   |                                                                                                    |                                                                                                    |
| Exercisable      at September 30, 2010         |             549,410 |                                                                                       | $      |        9.75 |                                           |              7.77 |                                                                                                          | $      |                  - |

----

|                                           |                                                    |   |                                                               |                                                                                                                                                       | Weighted-Average |
|------------------------------------------------|---------------------------------------------------------|--------|--------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------|
|                                           |                                                    |   |                                                               |                                                                                                                                                       | Grant-Date       |
|                                           | Non-vested      Shares                                  |   | Shares                                                             |                                                                                                                                                       | Fair      Value  |
|                                           |                                                    |   |                                                               |                                                                                                                                                       |             |   |
| Non-vested      at January 1, 2010             |         604,987 |   | $                                                                  |                        10.22            |
|                                           | Granted                                                 |   |           32,000 |                                                                                                                                                       |             |                          4.03 |
|                                           | Vested                                                  |   |        (141,247)                |                                                                                                                                                       |             |                        10.21 |
|                                           | Forfeited                                               |   |          (33,600)     |                                                                                                                                                       |             |                        10.69 |
| Non-vested      at September 30, 2010          |         462,140 |   | $                                                                  |                          9.75 |
|                                           |                                                    |   |                                                               |                                                                                                                                                       |             |   |
| Expected      to vest assuming a 3% forfeiture |                                                    |   |                                                               |                                                                                                                                                       |
|                                           | rate      over the vesting term                         |   |         448,274            |                                                                                                                                                       |             |   |

----

|                                            |   |                        |   |                                                                                                   | Three      Months Ended September 30,          |   | Nine      Months Ended September 30, |
|-------------------------------------------------|--------|-----------------------------|--------|--------------------------------------------------------------------------------------------------------|------------------------------------------------|--------|--------------------------------------|
|                                            |   |                        |   |                                                                                                   | 2010                                           |   | 2009                                 |   | 2010 |   | 2009 |
|                                            |   |                        |   |                                                                                                   | (Dollars      in thousands, except share data) |
| Net      loss                                   |   |                        |   | $                                                                                                      | ($12,071)                                      |   | $                                    |               (1,659) |   | $ |             (54,704) |   | $ |             (28,460) |
| Weighted-average      common shares outstanding |   | 17,432,309             |   |                                                                                                   |       18,735,393 |   |                                 |       17,411,169 |   |   |       18,960,280 |
|                                            |   | Basic      loss per share   | $      |                 (0.69) |                                           | $      | (0.09)                               |   | $ |                 (3.14) |   | $ | (1.50) |
|                                            |   | Diluted      loss per share | $      |                 (0.69) |                                           | $      | (0.09)                               |   | $ |                 (3.14) |   | $ | (1.50) |

----

----

| ·   | Maintain      and preserve qualified management; |
|--------------------|--------------------------------------------------|

| ·   | Increase      the Board of Directors’ participation in the Bank’s    affairs; |
|--------------------|-------------------------------------------------------------------------------------------|

| ·   | Obtain      an independent study of management and the personnel structure of the      Bank; |
|--------------------|----------------------------------------------------------------------------------------------|

| ·   | Maintain      specified capital levels; |
|--------------------|-----------------------------------------|

| ·   | Eliminate      loans classified as “Loss” at its regulatory examination, and reduce the      loans classified as “Doubtful” and “Substandard” as a percent of      capital; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Revise      its policy with respect to the allowance for loan  losses; |
|--------------------|------------------------------------------------------------------------|

| ·   | Not      extend additional credit to borrowers whose loan had been classified as      “Loss” and is uncollected; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------|

| ·   | Revise      its lending and collection policies and  practices; |
|--------------------|-----------------------------------------------------------------|

| ·   | Develop      a plan to reduce the amount of commercial real estate    loans; |
|--------------------|------------------------------------------------------------------------------|

| ·   | Enhance      its written funds management and liquidity  policy; |
|--------------------|------------------------------------------------------------------|

| ·   | Develop      a three-year strategic plan; |
|--------------------|-------------------------------------------|

| ·   | Not      solicit brokered deposits and comply with certain deposit rate      restrictions; |
|--------------------|--------------------------------------------------------------------------------------------|

| ·   | Eliminate      and correct all violations of laws;and |
|--------------------|-------------------------------------------------------|

| ·   | Prepare      and submit progress reports to the FDIC andDFI. |
|--------------------|--------------------------------------------------------------|

----

----

|                                                                                                                                                                        | September      30, 2010 |                               |             |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------|------------------------------------|------------------|
|                                                                                                                                                                        | Aggregate      Amount   |                               | Number           |
| Borrower      (1)                                                                                                                                                           | of      Loans (2)       |                               | of      Loans    |
|                                                                                                                                                                        |                    |                               |             |   |   |
| Real      estate builder                                                                                                                                                    | $                       |      34.5 | million      (3) |   |         134 |
| Real      estate builder                                                                                                                                                    |                    |      28.1 | million          |   |         111 |
| Real      estate builder                                                                                                                                                    |                    |      27.5 | million      (4) |   |         124 |
| Real      estate investor                                                                                                                                                   |                    |      17.5 | million          |   |             3 |
| Real      estate investor                                                                                                                                                   |                    |      17.5 | million          |   |             3 |
| Total                                                                                                                                                                       | $                       |    125.1            | million          |   |         375 |
| (1)   The      composition of borrowers represented in the table may change from one      period to the next.                                                |
| (2)   Net      of undisbursed funds.                                                                                                                         |                    |                               |             |
| (3)   Of      this amount, $33.5 million are considered impaired loans (of which $13.3      million are performing and $20.2 million      are nonperforming) |
| (4)   Of      this amount, $25.8 million are considered impaired loans (of which $12.0      million are performing and $13.8 million      are nonperforming) |

|                                                                                                                                                                                                                                   | Permanent                |                                                          | Permanent                |   | Permanent                |                                                                      |                      |   |                  |                                                |                |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|---------------------------------------------------------------|--------------------------|--------|--------------------------|---------------------------------------------------------------------------|---------------------------|--------|-----------------------|-----------------------------------------------------|---------------------|
|                                                                                                                                                                                                                                   | One-to-Four      Family  |                                                          | Multifamily              |   | Commercial               |                                                                      |                      |   |                  |                                                |                |   |
|                                                                                                                                                                                                                                   | Residential      Loans   |                                                          | Loans                    |   | Loans                    |                                                                      | Construction/             |   | Aggregate      Amount |
| Borrower                                                                                                                                                                                                                               | (Rental      Properties) |                                                          | (Rental      Properties) |   | (Rental      Properties) |                                                                      | Land      Development (1) |   | of      Loans (1)     |
|                                                                                                                                                                                                                                   |                     |                                                          |                     |   |                     |                                                                      |                      |   |                  |                                                |                |   |   |   |   |   |   |   |   |
| Real      estate builder (2)                                                                                                                                                                                                           | $                        |       17.4                      |        million      |   | $                        |           -   |                      |   | $                     |         1.7 |        million |   | $ |       15.4 |        million |   | $ |       34.5        |        million |
| Real      estate builder                                                                                                                                                                                                               |                     |       18.0                      |        million      |   |                     |         1.0             |        million       |   |                  |         0.1 |        million |   |   |         9.0 |        million |   |   |       28.1        |        million |
| Real      estate builder (3)                                                                                                                                                                                                           |                     |       21.4                      |        million      |   |                     |           -   |                      |   |                  |         0.8 |        million |   |   |         5.3 |        million |   |   |       27.5        |        million |
| Real      estate investor                                                                                                                                                                                                              |                     |           - |                     |   |                     |           -   |                      |   |                  |       17.5            |        million |   |   |           - |   |   |   |       17.5        |        million |
| Real      estate investor                                                                                                                                                                                                              |                     |           - |                     |   |                     |           -   |                      |   |                  |       17.5            |        million |   |   |           - |   |   |   |       17.5        |        million |
| Total                                                                                                                                                                                                                                  | $                        |       56.8                      |        million      |   | $                        |         1.0             |        million       |   | $                     |       37.6            |        million |   | $ |       29.7 |        million |   | $ |      125.1        |        million |
| __________________                                                                                                                                                                                                                     |                     |                                                          |                     |   |                     |                                                                      |                      |   |                  |                                                |                |   |   |   |   |   |   |
| (1)   Net      of undisbursed funds.                                                                                                                                                                                    |                     |                                                          |                     |   |                     |                                                                      |                      |   |                  |                                                |                |   |   |   |   |   |   |
| (2)  Of      the $33.5 million loans considered impaired, $16.4 million are one-to-four      family residential loans, $15.4 million are construction/land      development loans and $1.7 million are commercialloans. |
| (3)  Of      the $25.8 million loans considered impaired, $20.5 million are one-to-four      family residential loans and $5.3 million are construction/land      development loans.                                         |

----

|                                                                                      |   |                                                                    |                                                                    |   |             |   |          |   |                 |                                                                                                                    |                                                                                                                    |      | Nonperforming   |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|-------------------------------------------------------------------------|--------|------------------|--------|---------------|--------|----------------------|-------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|-----------|-----------------|--------|
|                                                                                      |   |                                                                    |                                                                    |   |             |   |          |   |                 |                                                                                                                    |                                                                                                                    |      | Loans      as a |   |
|                                                                                      |   |                                                                    |                                                                    |   | Percent      of  |   | Nonperforming |   | Percent      of Loan |                                                                                                                    |
| County                                                                                    |   | Loan      Balance (1)                                                   |                                                                    |   | Loan Balance (1) |   |          | Loans  |                 | Balance (2)                                                                                                             |                                                                                                                    |
| (Dollars      in thousands)                                                               |
| King                                                                                      |   | $                                                                       |          31,244            |   |             | 45.6   | %             |   |                 | $                                                                                                                       |                  22,030            |      | 70.5            | %      |
| Pierce                                                                                    |   |                                                                    |          11,337            |   |             | 16.6   |          |   |                 |                                                                                                                    |                    7,096 |      | 62.6            |   |
| Kitsap                                                                                    |   |                                                                    |            7,894 |   |             | 11.5   |          |   |                 |                                                                                                                    |                    7,315 |      | 92.7            |   |
| Thurston                                                                                  |   |                                                                    |            6,680 |   |             | 9.7    |          |   |                 |                                                                                                                    |                    2,313 |      | 34.6            |   |
| Whatcom                                                                                   |   |                                                                    |            4,381 |   |             | 6.4    |          |   |                 |                                                                                                                    |                    4,381 |  (3) | 100.0           |   |
| All      other counties                                                                   |   |            7,014 |                                                                    |   | 10.2             |   |          |   |                 |                    4,537 |                                                                                                                    | 64.7      |            |
| Total                                                                                     |   | $                                                                       |          68,550            |   |             | 100.0  | %             |   |                 | $                                                                                                                       |                  47,672            |      | 69.5            | %      |
| (1)      Net of undisbursed funds.                                                        |   |                                                                    |                                                                    |   |             |   |          |   |                 |                                                                                                                    |                                                                                                                    |      |
| (2)      Represents the percent of the loan balance by county that is      nonperforming. |   |                                                                    |                                                                    |   |             |
| (3)      Represents one loan.                                                             |   |                                                                    |                                                                    |   |             |   |          |   |                 |                                                                                                                    |                                                                                                                    |      |

----

----

|                                      |                        |                                                                                                                                                              |                   | Increase/(Decrease) |                                                                                                                                                                                                                            |   |                                                                                                                                                                      |
|-------------------------------------------|-----------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|---------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                      | Balance      at             |                                                                                                                                                              | from                   |                | Percentage                                                                                                                                                                                                                      |
|                                      | September      30, 2010     |                                                                                                                                                              | December      31, 2009 |                | Increase/(Decrease)                                                                                                                                                                                                             |
|                                      | (Dollars      in thousands) |
|                                      |                        |                                                                                                                                                              |                   |                |                                                                                                                                                                                                                            |   |                                                                                                                                                                      |   |
| Cash      on hand and in banks            | $                           |                           7,809 |                   | $                   |                            (1,128)                                                       |   |                      (12.62)                                     | % |
| Interest-bearing      deposits            |                        |                       132,058                       |                   |                |                            36,025                                                        |   |                        37.51                           |   |
| Investments      available for sale       |                        |                       157,563                       |                   |                |                            60,180                                                        |   |                        61.80                           |   |
| Loans      receivable, net                |                        |                       915,562                       |                   |                |                        (123,738)                                                                             |   |                      (11.91)                                     |   |
| Premises      and equipment, net          |                        |                         20,077            |                   |                |                                 492                             |   |                          2.51                |   |
| Federal      Home Loan Bank               |                        |                                                                                                                                                              |                   |                |                                                                                                                                                                                                                            |   |                                                                                                                                                                      |   |
|    stock,      at cost     |                        |                           7,413 |                   |                |                                      - |   |                             - |   |
| Accrued      interest receivable          |                        |                           4,711 |                   |                |                               (169)                                       |   |                        (3.46)                          |   |
| Federal      income tax receivable        |                        |                           5,720 |                   |                |                            (3,779)                                                       |   |                      (39.78)                                     |   |
| Deferred      tax assets, net             |                        |  -                                                                                                                                                           |                   |                |                          (12,139)                                                                  |   |                    (100.00)                                                |   |
| Other      real estate owned              |                        |                         22,927            |                   |                |                            11,092                                                        |   |                        93.72                           |   |
| Prepaid      expenses and other assets    |                        |                           6,617 |                   |                |                            (1,713)                                                       |   |                      (20.56)                                     |   |
|     Total      assets | $                           |                    1,280,457                                       |                   | $                   |                          (34,877)                                                                  |   |                        (2.65)                          | % |

----

|                              |   |                                                                                |   |   |                |   | September      30,  |                                                          | December      31, |
|-----------------------------------|--------|-------------------------------------------------------------------------------------|--------|--------|---------------------|--------|---------------------|---------------------------------------------------------------|-------------------|
|                              |   |                                                                                |   |   |                |   | 2010                |                                                          | 2009              |
|                              |   |                                                                                |   |   |                |   | (In      thousands) |
| Noninterest-bearing      accounts | $      |              5,010 |   | $      | 3,294          |
| NOW      accounts                 |   |            13,097            |   |   | 12,740         |
| Statement      savings accounts   |   |            16,052            |   |   | 15,423         |
| Money      market accounts        |   |          199,373                       |   |   | 194,315        |
| Certificates      of deposit      |   |          719,216                       |   |   | 713,651        |
|                              |   |                                                                                |   |   |                |   | $                   |          952,748 |              | $ | 939,423        |

----

|                                                           | Three      Months Ended September 30, 2010              |                                                                                                            | Nine      Months Ended September 30, 2010               |
|----------------------------------------------------------------|---------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|
|                                                           | Compared      to September 30, 2009 Increase (Decrease) |                                                                                                            | Compared      to September 30, 2009 Increase (Decrease) |
|                                                           |  Rate                                              |                                                                                                            |  Volume                                            |   |  Total |   |  Rate |   |  Volume |   |  Total |
|                                                           |  (Dollars      in thousands)                       |
| Interest-earning      assets:                                  |                                                    |                                                                                                            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Loans      receivable, net                   | $                                                       |                 471             |                                                    | $ |            (1,170) |   | $ |                         (699) |   | $ |                 613 |   | $ |            (1,612) |   | $ |               (999) |
|    Investments      available for sale          |                                                    |               (262)                       |                                                    |   |               (297) |   |   |                         (559) |   |   |               (621) |   |   |            (1,141) |   |   |            (1,762) |
|    Federal      funds sold and interest-        |                                                    |                                                                                                            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      bearing      deposits with banks |                                                    |                   (6) |                                                    |   |                   54 |   |   |                             48 |   |   |                   43 |   |   |                 117 |   |   |                 160 |
|                                                           |                                                    |                                                                                                            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total      net change in income on                             |                                                    |                                                                                                            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    interest-earning      assets                 |                                                    |                 203             |                                                    |   |            (1,413) |   |   |                      (1,210) |   |   |                   35 |   |   |            (2,636) |   |   |            (2,601) |
|                                                           |                                                    |                                                                                                            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing      liabilities:                             |                                                    |                                                                                                            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    NOW      accounts                            |                                                    |                 (13)            |                                                    |   |                     2 |   |   |                           (11) |   |   |                 (29) |   |   |                   11 |   |   |                 (18) |
|    Statement      savings accounts              |                                                    |                 (26)            |                                                    |   |                     8 |   |   |                           (18) |   |   |                 (63) |   |   |                   27 |   |   |                 (36) |
|    Money      market accounts                   |                                                    |               (386)                       |                                                    |   |                   34 |   |   |                         (352) |   |   |               (908) |   |   |                 571 |   |   |               (337) |
|    Certificates      of deposit                 |                                                    |            (1,792)                                       |                                                    |   |                 474 |   |   |                      (1,318) |   |   |            (4,989) |   |   |              1,817 |   |   |            (3,172) |
|    Advances      from the Federal               |                                                    |                                                                                                            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      Home      Loan Bank              |                                                    |               (185)                       |                                                    |   |                 (68) |   |   |                         (253) |   |   |               (560) |   |   |               (193) |   |   |               (753) |
|                                                           |                                                    |                                                                                                            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total      net change in expense on                            |                                                    |                                                                                                            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    interest-bearing      liabilities            |                                                    |            (2,402)                                       |                                                    |   |                 450 |   |   |                      (1,952) |   |   |            (6,549) |   |   |              2,233 |   |   |            (4,316) |
|                                                           |                                                    |                                                                                                            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      change in net interest income                         | $                                                       |              2,605                             |                                                    | $ |            (1,863) |   | $ |                           742 |   | $ |              6,584 |   | $ |            (4,869) |   | $ |              1,715 |

----

|                                         |                                  |                                                                          |               |                                                                      |              |    |   |                                                                                      |   |                                                                      |     |   | Increase/                                                                                                           |
|----------------------------------------------|---------------------------------------|-------------------------------------------------------------------------------|--------------------|---------------------------------------------------------------------------|-------------------|---------|--------|-------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|----------|--------|---------------------------------------------------------------------------------------------------------------------|
|                                         | Three      Months Ended September 30, |                                                                          | (Decrease)      in |
|                                         | 2010                                  |                                                                          | 2009               |                                                                      | Interest      and |
|                                         | Average                               |                                                                          |               |                                                                      |              | Average |   |                                                                                      |   |                                                                      | Dividend |
|                                         | Balance                               |                                                                          | Yield              |                                                                      | Balance           |    | Yield  |                                                                                      | Income |
|                                         |                                  | (Dollars      in thousands)                                                   |
|                                         |                                  |                                                                          |               |                                                                      |              |    |   |                                                                                      |   |                                                                      |     |   |                                                                                                                |   |
| Loans      receivable, net                   | $                                     |         957,529                       |               |         5.71                      | %                 |    | $      |        1,043,877                                       |   |         5.51                      | %        |   | $                                                                                                                   |             (699) |
| Investments      available for sale          |                                  |         147,304                       |               |         3.41                      |              |    |   |           176,090                       |   |         4.12                      |     |   |                                                                                                                |             (559) |
| Federal      funds sold and interest-bearing |                                  |                                                                          |               |                                                                      |              |    |   |                                                                                      |   |                                                                      |     |   |                    - |
|    deposits                   |                                  |         125,367                       |               |         0.26                      |              |    |   |             46,485            |   |         0.28                      |     |   |                                                                                                                |                 48 |
| Federal      Home Loan Bank stock            |                                  |             7,413 |               |             - |              |    |   |               7,413 |   |             - |     |   |                                                                                                                |                    - |
| Total      interest-earning assets           | $                                     |      1,237,613                                       |               |         4.85                      | %                 |    | $      |        1,273,865                                       |   |         5.09                      | %        |   | $                                                                                                                   |          (1,210) |

|                                         |                                 |                                                                          |               |                                                                      |              |    |   |                                                                                      |   |                                                                      |     |   | Increase/ |
|----------------------------------------------|--------------------------------------|-------------------------------------------------------------------------------|--------------------|---------------------------------------------------------------------------|-------------------|---------|--------|-------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|----------|--------|-----------|
|                                         | Nine      Months Ended September 30, |                                                                          | (Decrease)      in |
|                                         | 2010                                 |                                                                          | 2009               |                                                                      | Interest      and |
|                                         | Average                              |                                                                          |               |                                                                      |              | Average |   |                                                                                      |   |                                                                      | Dividend |
|                                         | Balance                              |                                                                          | Yield              |                                                                      | Balance           |    | Yield  |                                                                                      | Income |
|                                         |                                 | (Dollars      in thousands)                                                   |
|                                         |                                 |                                                                          |               |                                                                      |              |    |   |                                                                                      |   |                                                                      |     |   |      |   |
| Loans      receivable, net                   | $                                    |         999,414                       |               |         5.67                      | %                 |    | $      |        1,037,045                                       |   |         5.59                      | %        |   | $         |             (999) |
| Investments      available for sale          |                                 |         123,654                       |               |         3.63                      |              |    |   |           159,011                       |   |         4.30                      |     |   |      |          (1,762) |
| Federal      funds sold and interest-bearing |                                 |                                                                          |               |                                                                      |              |    |   |                                                                                      |   |                                                                      |     |   |      |
|    deposits                   |                                 |         113,533                       |               |         0.25                      |              |    |   |             35,686            |   |         0.20                      |     |   |      |               160 |
| Federal      Home Loan Bank stock            |                                 |             7,413 |               |             - |              |    |   |               7,413 |   |             - |     |   |      |                    - |
| Total      interest-earning assets           | $                                    |      1,244,014                                       |               |         4.94                      | %                 |    | $      |        1,239,155                                       |   |         5.24                      | %        |   | $         |          (2,601) |

----

|                                                      | Three      Months Ended September 30, |                                                               |   |                                                                   |
|-----------------------------------------------------------|---------------------------------------|--------------------------------------------------------------------|--------|------------------------------------------------------------------------|
|                                                      | 2010                                  |                                                               | 2009   |                                                                   | Increase/ |
|                                                      |                                  |                                                               |   |                                                                   |   |   |   |   |   |   |   |   | (Decrease)      in |
|                                                      | Average                               |                                                               |   |                                                                   |   | Average |   |   |   |   | Interest |
|                                                      | Balance                               |                                                               | Cost   |                                                                   | Balance |   | Cost |   | Expense |
|                                                      |                                  | (Dollars      in thousands)                                        |
|                                                      |                                  |                                                               |   |                                                                   |   |   |   |   |   |   |   |   |   |   |
| NOW      accounts                                         | $                                     |           13,578 |   |            0.38 |        % |   | $ |            12,470 |   |             0.77 |        % |   | $ |                    (11) |
| Statement      savings accounts                           |                                  |           16,523 |   |            1.02 |   |   |   |            14,679 |   |             1.63 |   |   |   |                    (18) |
| Money      market accounts                                |                                  |         196,945            |   |            1.03 |   |   |   |          189,400 |   |             1.81 |   |   |   |                  (352) |
| Certificates      of deposit                              |                                  |         727,314            |   |            2.75 |   |   |   |          676,409 |   |             3.74 |   |   |   |               (1,318) |
| Advances      from the Federal Home Loan        Bank |                                  |         142,069            |   |            2.98 |   |   |   |          149,900 |   |             3.50 |   |   |   |                  (253) |
| Total      interest-bearing liabilities                   | $                                     |      1,096,429                            |   |            2.42 |        % |   | $ |       1,042,858 |   |             3.29 |        % |   | $ |               (1,952) |

|                                                      | Nine      Months Ended September 30, |                                                               |   |                                                                   |
|-----------------------------------------------------------|--------------------------------------|--------------------------------------------------------------------|--------|------------------------------------------------------------------------|
|                                                      | 2010                                 |                                                               | 2009   |                                                                   | Increase/ |
|                                                      |                                 |                                                               |   |                                                                   |   |   |   |   |   |   |   |   | (Decrease)      in |
|                                                      | Average                              |                                                               |   |                                                                   |   | Average |   |   |   |   | Interest |
|                                                      | Balance                              |                                                               | Cost   |                                                                   | Balance |   | Cost |   | Expense |
|                                                      |                                 | (Dollars      in thousands)                                        |
|                                                      |                                 |                                                               |   |                                                                   |   |   |   |   |   |   |   |   |   |   |
| NOW      accounts                                         | $                                    |           13,175 |   |            0.44 |        % |   | $ |           11,147 |   |             0.73 |        % |   | $ |                    (18) |
| Statement      savings accounts                           |                                 |           15,711 |   |            1.16 |   |   |   |           13,557 |   |             1.70 |   |   |   |                    (36) |
| Money      market accounts                                |                                 |         196,787            |   |            1.31 |   |   |   |         157,910 |   |             1.91 |   |   |   |                  (337) |
| Certificates      of deposit                              |                                 |         726,313            |   |            3.00 |   |   |   |         664,239 |   |             3.92 |   |   |   |               (3,172) |
| Advances      from the Federal Home Loan        Bank |                                 |         140,631            |   |            2.95 |   |   |   |         148,018 |   |             3.48 |   |   |   |                  (753) |
| Total      interest-bearing liabilities                   | $                                    |      1,092,617                            |   |            2.63 |        % |   | $ |         994,871 |   |             3.47 |        % |   | $ |               (4,316) |

----

|                                                                                              |                |                                                                                                                  |          |   |                                                                                                                                          |   |              |                                                                                                                                          |   |               |                                                                                                                              |   |   |                                                                                                                  |
|---------------------------------------------------------------------------------------------------|---------------------|-----------------------------------------------------------------------------------------------------------------------|---------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                              |                |                                                                                                                  |          |   |                                                                                                                                          |   |              |                                                                                                                                          |   |               |                                                                                                                              |   |   |                                                                                                                  |
|                                                                                              | September      30,  |                                                                                                                  | June      30, |   | March      31,                                                                                                                                |   | December      31, |                                                                                                                                          |   | September      30, |
|                                                                                              | 2010                |                                                                                                                  | 2010          |   | 2010                                                                                                                                          |   | 2009              |                                                                                                                                          |   | 2009      (2)      |
|                                                                                              | (In      thousands) |                                                                                                                  |          |   |                                                                                                                                          |
|      One-to-four      family residential (1)                             | $                   |               37,420                            |          | $      |                   48,246                            |   | $                 |                   48,035                            |   | $                  |                 36,874                            |   | $      |               41,281                            |   |
|      Commercial      real estate                                         |                |                 8,170                 |          |   |                   14,657                            |   |              |                   14,108                            |   |               |                 11,535                            |   |   |               18,527                            |   |
|      Construction/land      development                                  |                |               47,672                            |          |   |                   56,995                            |   |              |                   83,016                            |   |               |                 71,780                            |   |   |               88,757                            |   |
|      Consumer                                                            |                |                    181 |          |   |                        747 |   |              |                        759 |   |               |                      514 |   |   |                    425 |   |
| Total      nonperforming loans                                                                    | $                   |               93,443                            |          | $      |                 120,645                                       |   | $                 |                 145,918                                       |   | $                  |               120,703                                       |   | $      |             148,990                                       |   |
|                                                                                              |                |                                                                                                                  |          |   |                                                                                                                                          |   |              |                                                                                                                                          |   |               |                                                                                                                              |   |   |                                                                                                                  |   |
| Other      real estate owned                                                                      |                |               22,927                            |          |   |                   16,493                            |   |              |                   20,500                            |   |               |                 11,835                            |   |   |  -                                                                                                               |   |
|                                                                                              |                |                                                                                                                  |          |   |                                                                                                                                          |   |              |                                                                                                                                          |   |               |                                                                                                                              |   |   |                                                                                                                  |   |
| Total      nonperforming assets                                                                   | $                   |             116,370                                       |          | $      |                 137,138                                       |   | $                 |                 166,418                                       |   | $                  |               132,538                                       |   | $      |             148,990                                       |   |
|                                                                                              |                |                                                                                                                  |          |   |                                                                                                                                          |   |              |                                                                                                                                          |   |               |                                                                                                                              |   |   |                                                                                                                  |   |
| (1)      The majority of these loans are related to our merchant builders rental      properties. |                |                                                                                                                  |          |   |                                                                                                                                          |   |              |                                                                                                                                          |   |               |
| (2)      Includes $907,000 of loans 90 days or more past due and still accruing      interest.    |                |                                                                                                                  |          |   |                                                                                                                                          |   |              |                                                                                                                                          |   |               |

----

|                                                  |  King      County            |                                                |  Pierce      County |   |  Snohomish      County         |   |  Kitsap      County |                                                                                                                            |  All      other counties |   | Total      Other Real      Estate Owned             |   | Percent      of Total      Other Real      Estate Owned |
|-------------------------------------------------------|-----------------------------------|-----------------------------------------------------|--------------------------|--------|-------------------------------------|--------|--------------------------|---------------------------------------------------------------------------------------------------------------------------------|-------------------------------|--------|-----------------------------------------------------|--------|---------------------------------------------------------|
|                                                  |  (Dollars      in thousands) |
| One-to-four      family         residential | $                                 |      3,938                 |                     | $      |      2,964 |   | $                        |                  285                       |                          | $      |      3,799                 |   | $                                                       |              1,218 |   | $ |               12,204 |   |            53.42 | % |
| Commercial                                            |                              |         573 |                     |   |      1,995 |   |                     |                      - |                          |   |         155 |   |                                                    |                      - |   |   |                 2,723 |   |            11.76 |   |
| Construction/land              development  |                              |      1,642                 |                     |   |      1,544 |   |                     |               1,318                                       |                          |   |      1,570                 |   |                                                    |              1,926 |   |   |                 8,000 |   |            34.82 |   |
| Total      other real estate         owned  | $                                 |      6,153                 |                     | $      |      6,503 |   | $                        |               1,603                                       |                          | $      |      5,524                 |   | $                                                       |              3,144 |   | $ |               22,927 |   |          100.00 | % |

----

|                                                                    | September      30,        |                                                                                       | June      30, | March      31, |                                                                                 | December      31, |
|-------------------------------------------------------------------------|---------------------------|--------------------------------------------------------------------------------------------|---------------|----------------|--------------------------------------------------------------------------------------|-------------------|
|                                                                    | 2010                      |                                                                                       | 2010          | 2010           |                                                                                 | 2009              |
|                                                                    |  (In      thousands) |
| Performing      troubled debt restructured loans                        | $                         |               42,891 |          | $              |              46,575 | $                 |                      22,948 | $ |                                   35,458 |   |
| Nonaccrual      troubled debt restructured loans (1)                    |                      |               28,387 |          |           |              33,208 |              |                      37,783 |   |                                   26,021 |   |
|      Troubled      debt restructured loans     | $                         |               71,278 |          | $              |              79,783 | $                 |                      60,731 | $ |                                   61,479 |   |
| _____________                                                           |                      |                                                                                       |          |           |                                                                                 |              |   |   |
| (1)  Balances      represent loans, net of undisbursed funds. |                      |                                                                                       |          |           |                                                                            |              |   |   |

|                                                                                    | At      or For the Nine Months Ended September 30, |
|-----------------------------------------------------------------------------------------|----------------------------------------------------|
|                                                                                    | 2010                                               |   | 2009 |
|                                                                                    | (Dollars      in thousands)                        |
|                                                                                    |                                               |   |   |   |   |   |   |
| Provision      for loan losses                                                          | $                                                  |          51,000 |   |   | $ |           27,595 |   |
| Charge-offs                                                                             | $                                                  |          56,506 |   |   | $ |           13,486 |   |
| Recoveries                                                                              | $                                                  |               867 |   |   | $ |                  43 |   |
| Allowance      for loan losses                                                          | $                                                  |          28,400 |   |   | $ |           31,134 |   |
| Allowance      for loan losses as a percent of total loans outstanding                  |                                               |   |   |   |   |   |   |
|    at      the end of the period, net of undisbursed funds               |                                               |              3.00 |        % |   |   |               2.86 |        % |
| Allowance      for loan losses as a percent of nonperforming loans                      |                                               |   |   |   |   |   |   |
|    at      the end of the period, net of undisbursed funds               |                                               |            30.39 |        % |   |   |             20.90 |        % |
| Total      nonaccrual and 90 days or more past due loans, net of undisbursed      funds | $                                                  |          93,443 |   |   | $ |         148,990 |   |
| Nonaccrual      and 90 days or more past due loans as a                                 |                                               |   |   |   |   |   |   |
|    percent      of total loans, net of undisbursed funds                 |                                               |              9.87 |        % |   |   |             13.67 |        % |
| Total      loans receivable, net of undisbursed funds                                   | $                                                  |        946,649 |   |   | $ |      1,089,917 |   |
| Total      loans originated, net of undisbursed funds                                   | $                                                  |          55,339 |   |   | $ |         156,576 |   |

----

|                                    | Three      Months           |                                                                                                                                                                             | Increase/(Decrease)     |   |                                                                        |   |   |
|-----------------------------------------|-----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------|--------|-----------------------------------------------------------------------------|--------|--------|
|                                    | Ended                       |                                                                                                                                                                             | from                    |   | Percentage                                                                  |
|                                    | September      30, 2010     |                                                                                                                                                                             | September      30, 2009 |   | Increase/(Decrease)                                                         |
|                                    | (Dollars      in thousands) |
|                                    |                        |                                                                                                                                                                             |                    |   |                                                                        |   |   |   |   |   |
| Compensation      and benefits          | $                           |                         3,258                            |                    | $      |          181                   |   |   |   |                 5.88 |        % |
| Occupancy      and equipment            |                        |                            411            |                    |   |            68        |   |   |   |               19.83 |   |
| Professional      fees                  |                        |                            664            |                    |   |          332                   |   |   |   |             100.00 |   |
| Data      processing                    |                        |                            191            |                    |   |            13        |   |   |   |                 7.30 |   |
| Marketing                               |                        |                              49 |                    |   |           (11)            |   |   |   |             (18.33) |   |
| Office      supplies and postage        |                        |                              48 |                    |   |             (4) |   |   |   |               (7.69) |   |
| Gain      on sale of OREO property, net |                        |                          (205)                      |                    |   |         (205)                       |   |   |   |           (100.00) |   |
| OREO      valuation expense             |                        |                         2,016                            |                    |   |       2,016                                   |   |   |   |             100.00 |   |
| OREO      related expenses, net         |                        |                            962            |                    |   |          925                   |   |   |   |          2,500.00 |   |
| FDIC/OTS      assessments               |                        |                            910            |                    |   |          558                   |   |   |   |             158.52 |   |
| Bank      and ATM charges               |                        |                              33 |                    |   |             (5) |   |   |   |             (13.16) |   |
| Insurance/Bond      premiums            |                        |                            150            |                    |   |          133                   |   |   |   |             782.35 |   |
| Other                                   |                        |                              13 |                    |   |         (390)                       |   |   |   |             (96.77) |   |
| Total      noninterest expense          | $                           |                         8,500                            |                    | $      |       3,611                                   |   |   |   |               73.86 |        % |

----

|                                    | Nine      Months            |                                                                                                                                                                                              | Increase/(Decrease)     |   |                                                                            |   |   |
|-----------------------------------------|-----------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------|--------|---------------------------------------------------------------------------------|--------|--------|
|                                    | Ended                       |                                                                                                                                                                                              | from                    |   | Percentage                                                                      |
|                                    | September      30, 2010     |                                                                                                                                                                                              | September      30, 2009 |   | Increase/(Decrease)                                                             |
|                                    | (Dollars      in thousands) |
|                                    |                        |                                                                                                                                                                                              |                    |   |                                                                            |   |   |   |   |   |
| Compensation      and benefits          | $                           |                         9,339                                             |                    | $      |          186                       |   |   |   |                 2.03 |        % |
| Occupancy      and equipment            |                        |                         1,260                                             |                    |   |         (726)                           |   |   |   |             (36.56) |   |
| Professional      fees                  |                        |                         1,610                                             |                    |   |          582                       |   |   |   |               56.61 |   |
| Data      processing                    |                        |                            533                             |                    |   |            61            |   |   |   |               12.92 |   |
| Marketing                               |                        |                            170                             |                    |   |           (25)                |   |   |   |             (12.82) |   |
| Office      supplies and postage        |                        |                            180                             |                    |   |              6 |   |   |   |                 3.45 |   |
| Loss      on sale of OREO property, net |                        |                            218                             |                    |   |          218                       |   |   |   |             100.00 |   |
| OREO      valuation expense             |                        |                         5,184                                             |                    |   |       5,184                                       |   |   |   |             100.00 |   |
| OREO      related expenses, net         |                        |                         2,372                                             |                    |   |       2,220                                       |   |   |   |          1,460.53 |   |
| FDIC/OTS      assessments               |                        |                         2,005                                             |                    |   |            75            |   |   |   |                 3.89 |   |
| Goodwill                                |                        |                                 - |                    |   |    (14,206)                                                      |   |   |   |           (100.00) |   |
| Bank      and ATM charges               |                        |                            101                             |                    |   |             (8)     |   |   |   |               (7.34) |   |
| Insurance/Bond      premiums            |                        |                            449                             |                    |   |          395                       |   |   |   |             731.48 |   |
| Other                                   |                        |                            956                             |                    |   |         (325)                           |   |   |   |             (25.37) |   |
| Total      noninterest expense          | $                           |                       24,377                                                        |                    | $      |      (6,363)                                           |   |   |   | (20.70) |        % |

----

|                                                             |                |                                                                                |          | Amount      of Commitment Expiration - Per Period |
|------------------------------------------------------------------|---------------------|-------------------------------------------------------------------------------------|---------------|---------------------------------------------------|
|                                                             |                |                                                                                |          |                                              |   |   | After |   | After |   |   |   |
|                                                             |                |                                                                                |          |                                              |   |   | One |   | Three |   |   |   |
|                                                             | Total               |                                                                                |          |                                              |   | Through |   | Through |   | After |
|                                                             | Amounts             |                                                                                | Through       |                                              | Three |   | Five |   | Five |
|                                                             | Committed           |                                                                                | One      Year |                                              | Years |   | Years |   | Years |
|                                                             | (In      thousands) |
|                                                             |                |                                                                                |          |                                              |   |   |   |   |   |   |   |   |   |   |
| Commitments      to originate loans                              | $                   |              2,136 |          | $                                                 |          2,136 |   | $ |                  - |   | $ |                  - |   | $ |                  - |
| Unused      portion of lines of credit                           |                |              9,315 |          |                                              |             308 |   |   |                  - |   |   |          2,617 |   |   |          6,390 |
| Undisbursed      portion of construction loans                   |                |            15,138            |          |                                              |        13,651 |   |   |             987 |   |   |             500 |   |   |                  - |
|        Total      commitments | $                   |            26,589            |          | $                                                 |        16,095 |   | $ |             987 |   | $ |          3,117 |   | $ |          6,390 |

----

----

|   | September      30, 2010                                                                             |
|--------|-----------------------------------------------------------------------------------------------------|
|   | Net      Interest Income Change                                                                     |
|   | Basis      PointChange      in Rates                                                                |   | %      Change |
|   | +300                                                                                                |   |                    8.36 |        % |
|   | +200                                                                                                |   |                    7.74 |   |
|   | +100                                                                                                |   |                    6.80 |   |
|   | Base                                                                                                |   |                    4.19 |   |
|   | (100)                                                                                               |   |                    1.30 |   |
| (1)    | (200)                                                                                               |   | N/A |   |
| (1)    | (300)                                                                                               |   | N/A |   |
|   |                                                                                                |   |   |   |
| (1)    | The      current federal funds rate is 0.25% making      a 200 and 300 basis point drop impossible. |

----

| September 30, 2010          |
|-----------------------------|
|                        |   |   |   |   |   |   |   |   |   |   | Net      Portfolio as % of |   |   |   |
| Basis      Point            |   | Net      Portfolio Value (2) |   | Portfolio      Value of Assets |   | Market      Value |
| Change      in Rates        |   |   | Amount |   | $      Change |   | %      Change |   | NPV      Ratio (3) |   | %      Change (4) |   | of      Assets (5) |
| (Dollars      in thousands) |
| +300                        |   | $ |           115,456 |   | $ |      (58,808) |   |        (33.75) |        % |           9.68 |        % |          (4.51) |        % |   | $ |          1,192,746 |
| +200                        |   |   |           134,654 |   |   |      (39,610) |   |        (22.73) |   |   |         10.96 |   |   |          (3.04) |   |   |   |          1,228,573 |
| +100                        |   |   |           155,559 |   |   |      (18,705) |   |        (10.73) |   |   |         12.28 |   |   |          (1.44) |   |   |   |          1,266,626 |
| Base                        |   |   |           174,264 |   |   |               - |   |               - |   |   |         13.37 |   |   |               - |   |   |   |          1,303,023 |
| (100)                       |   |   |           183,089 |   |   |         8,825 |   |           5.06 |   |   |         13.78 |   |   |           0.68 |   |   |   |          1,328,840 |
| (200)                       | (1) |   | N/A |   |   | N/A |   | N/A |   |   | N/A |   |   |          N/A |   |   |   | N/A |
| (300)                       | (1) |   | N/A |   |   | N/A |   | N/A |   |   | N/A |   |   |          N/A |   |   |   | N/A |

| (1)   | The      current federal funds rate is 0.25%, making a 200 or 300 basis point      decrease in rates impossible. |
|-----------------|------------------------------------------------------------------------------------------------------------------|

| (2)   | The      difference between the present value of discounted cash flows for assets      and liabilities represents the net portfolio value or the market value of      equity. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | Net      portfolio value divided by the market value of  assets. |
|-----------------|------------------------------------------------------------------|

| (4)   | The      increase or decrease in the net portfolio value divided by the market      value of assets (base case). |
|-----------------|------------------------------------------------------------------------------------------------------------------|

| (5)   | Calculated      based on the present value of the discounted cash flows from      assets. |
|-----------------|-------------------------------------------------------------------------------------------|

----

| (a)   | Evaluation of Disclosure      Controls and Procedures: An evaluation of our disclosure controls      and procedures (as defined in Rule 13a-15(e) of the Exchange Act) was      carried out under the supervision and with the participation of our Chief      Executive Officer, Chief Financial Officer (Principal Financial and      Accounting Officer) and several other members of our senior management as      of the end of the period covered by this report. Our Chief Executive      Officer and Chief Financial Officer concluded that, as of September 30,      2010, our disclosure controls and procedures were effective in ensuring      that the information required to be disclosed by us in the reports we file      or submit under the Exchange Act is (i) accumulated and communicated to      our 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. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b)   | Changes in Internal Controls:      In the quarter ended September 30, 2010, there was no change in our      internal control over financial reporting that has materially affected, or      is reasonably likely to materially affect, our internal control over      financial reporting. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| ·   | the      cash flow of the borrower and/or the project being    financed; |
|--------------------|--------------------------------------------------------------------------|

| ·   | changes      and uncertainties as to the future value of the collateral, in the case of      a collateralized loan; |
|--------------------|---------------------------------------------------------------------------------------------------------------------|

| ·   | the      duration of the loan; |
|--------------------|--------------------------------|

| ·   | the      credit history of a particular borrowerand |
|--------------------|-----------------------------------------------------|

| ·   | changes      in economic and industryconditions. |
|--------------------|--------------------------------------------------|

| ·   | our      general reserve, based on our historical default and loss experience and      certain macroeconomic factors based on management’s expectations of future      events and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | our      specific reserve, based on our evaluation of nonperforming loans and their      underlying collateral. |
|--------------------|-----------------------------------------------------------------------------------------------------------------|

----

|   | 3.1   | Articles of      Incorporation of First Financial Northwest (1)                                                                                                  |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 3.2   | Bylaws of First      Financial Northwest (1)                                                                                                                     |
|   | 4     | Form of stock      certificate of First Financial Northwest (1)                                                                                                  |
|   | 10.1  | Form of Employment      Agreement for President and Chief Executive Officer (1)                                                                                  |
|   | 10.2  | Form of Change in      Control Severance Agreement for Executive Officers (1)                                                                                    |
|   | 10.3  | Form of First      Savings Bank Employee Severance Compensation Plan (1)                                                                                         |
|   | 10.4  | Form      of Supplemental Executive Retirement Agreement entered into by First      Savings Bank with Victor Karpiak, Harry A. Blencoe and Robert H. Gagnier      (1) |

----

|   | 10.5  | Form of Financial      Institutions Retirement Fund (1)                                               |
|--------|------------|------------------------------------------------------------------------------------------------------------|
|   | 10.6  | Form of 401(k)      Retirement Plan (2)                                                               |
|   | 10.7  | 2008 Equity      Incentive Plan (3)                                                                   |
|   | 10.8  | Forms of incentive      and non-qualified stock option award agreements (4)                           |
|   | 10.9  | Form of restricted      stock award agreement (4)                                                     |
|   | 14    | Code of Business      Conduct and Ethics (5)                                                          |
|   | 21    | Subsidiaries of the      Registrant                                                                   |
|   | 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  |
|   | 32.1  | Certification of      Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley      Act  |
|   | 32.2  | Certification of      Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley      Act  |

| (1)  | Filed as an exhibit      to First Financial Northwest’s Registration Statement on Form S-1      (333-143549).                                                        |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Filed      as an exhibit to First Financial Northwest’s Quarterly Report on Form 10-Q      for the quarter ended June 30, 2007 and incorporated herein by      reference. |
| (3)  | Filed as Appendix A      to First Financial Northwest’s definitive proxy statement dated April 15,      2008.                                                        |
| (4)  | Filed as an exhibit      to First Financial Northwest’s Current Report on Form 8-K dated July 1,      2008.                                                          |
| (5)  | Filed      as an exhibit to First Financial Northwest’s Annual Report on Form 10-K      for the year ended December 31, 2007 and incorporated herein by      reference.   |

----

|                              | First      Financial Northwest, Inc.                    |
|-----------------------------------|---------------------------------------------------------|
|                              |                                                    |
|                              |                                                    |
|                              |                                                    |
| Date: November 5,      2010  | /s/ Victor Karpiak                                      |
|                              | Victor      Karpiak                                |
|                              | Chairman of the      Board, President and          |
|                              | Chief Executive      Officer                       |
|                              | (Principal Executive      Officer)                 |
|                              |                                                    |
|                              |                                                    |
| Date: November 5,      2010  | /s/ Kari Stenslie                                       |
|                              | Kari      Stenslie                                 |
|                              | Chief Financial      Officer                       |
|                              | (Principal Financial      and Accounting Officer)  |

----

| 31.1 | Certification      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley      Act                                                |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 | Certification      of Chief Financial Officer and Principal Financial and Accounting 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                    |

----