Rainier Pacific Financial (RPFG) 10-Q 2005 Q2 Quarterly report

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

FORM 10-Q

(Mark One)

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

                 For the quarterly period ended ..............................June 30, 2005

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

                 For the transition period from ________________ to _________________

Commission File Number000-50362

RAINIER PACIFIC FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

                            Washington                                                                                                                       87-0700148
                      (State or other jurisdiction of                                                                                                              (I.R.S. Employer
                      incorporation or organization)                                                                                                              Identification No.)

1498 Pacific Avenue, Tacoma, WA 98402
(Address of principal executive offices and zip code)

(253) 926-4000
(Registrant's telephone number, including area code)

__________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
            YesX . No .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YesX.No ____.

APPLICABLE ONLY TO CORPORATE ISSUERS

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

               Title of class:                                                                                                                          As of June 30, 2005

        Common stock, no par value                                                                                                                   6,988,766*

*  Includes 560,004 shares held by the Rainier Pacific 401(k) Employee Stock Ownership Plan that have not been
    released, committed to be released, or allocated to participant accounts; and 262,240 restricted shares granted under
    the Rainier Pacific Financial Group, Inc. 2004 Management Recognition Plan that have not yet vested.

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RAINIER PACIFIC FINANCIAL GROUP, INC.

Table of Contents

PART 1 -	FINANCIAL INFORMATION		Page
ITEM 1 -	Financial Statements:
	Consolidated Statements of Financial Condition as
		of June 30, 2005 and December 31, 2004	2
	Consolidated Statements of Income for the
		Three Months and Six Months Ended June 30, 2005 and 2004	3
	Consolidated Statements of Cash Flows for the
		Six Months Ended June 30, 2005 and 2004	4
	Consolidated Statements of Shareholders' Equity
		for the Six Months Ended June 30, 2005 and for the Year Ended December 31, 2004	6
	Selected Notes to Unaudited Interim Consolidated Financial Statements		7
ITEM 2 -	Management's Discussion and Analysis of Financial Condition and Results of Operations:
	Forward-Looking Statements		10
	Comparison of Financial Condition at       June 30, 2005 and December 31, 2004		10
	Comparison of Operating Results for the
		Three Months Ended June 30, 2005 and June 30, 2004	12
	Comparison of Operating Results for the
		Six Months Ended June 30, 2005 and June 30, 2004	14
	Liquidity and Capital Resources		17
ITEM 3 -	Quantitative and Qualitative Disclosures about Market Risk		18
ITEM 4 -	Controls and Procedures		18
PART II -	OTHER INFORMATION
ITEM 1 -	Legal Proceedings		19
ITEM 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		19
ITEM 3 -	Defaults Upon Senior Securities		19
ITEM 4 -	Submission of Matters to a Vote of Security Holders		20
ITEM 5 -	Other Information		20
ITEM 6 -	Exhibits		20
SIGNATURES			21

1

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

		At June 30,		At December 31,
		2005		2004
ASSETS
ASSETS
Cash and cash equivalents		$                  7,499		$                       8,927
Interest-bearing deposits with banks		416		1,271
Securities available-for-sale		109,682		97,436
Securities held-to-maturity (fair value of $86,624 at June 30, 2005, $92,779           at December 31, 2004)		87,285		93,540
Federal Home Loan Bank ("FHLB") stock, at cost		13,712		13,374
Loans		515,995		502,719
Less: allowance for loan losses		(8,799)		(8,981)
Loans, net		507,196		493,738
Premises and equipment, net		34,654		34,684
Accrued interest receivable		3,412		3,354
Other assets		5,562		5,452
TOTAL ASSETS		$            769,418		$                   751,776
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing		$             28,028		$                     29,654
Interest-bearing		345,777		315,262
Total Deposits		373,805		344,916
Borrowed funds		299,559		295,722
Corporate drafts payable		3,433		3,839
Accrued compensation and benefits		1,972		1,828
Other liabilities		2,176		6,665
TOTAL LIABILITIES		680,945		652,970
SHAREHOLDERS' EQUITY
Common stock, no par value: 49,000,000 shares authorized; 6,988,766         shares issued and 6,167,797 shares outstanding at June 30, 2005;          7,672,260 shares issued and 6,779,634 shares outstanding at          December 31, 2004		53,532		64,672
Unearned Employee Stock Ownership Plan ("ESOP") shares			(5,600)		(5,940)
Accumulated other comprehensive loss, net of tax			(802)		(725)
Retained earnings	41,343				40,799
TOTAL SHAREHOLDERS' EQUITY		88,473		98,806
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$             769,418		$                  751,776

2

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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Dollars In Thousands, Except Earnings Per Share

	Three Months Ended June 30,		Six Months Ended June 30,
	2005	2004	2005	2004
INTEREST INCOME
Loans	$                8,364	$              8,030	$              16,537	$            15,863
Securities available-for-sale	1,129	1,105	2,145	1,949
Securities held-to-maturity	812	1,019	1,654	1,987
Interest-bearing deposits	5	1	9	2
FHLB stock dividends	-	124	54	238
Total interest income	10,310	10,279	20,399	20,039
INTEREST EXPENSE
Deposits	1,599	966	2,856	1,795
Borrowed funds	2,723	1,820	5,193	3,574
Total interest expense	4,322	2,786	8,049	5,369
Net interest income	5,988	7,493	12,350	14,670
PROVISION FOR LOAN LOSSES	150	600	450	1,500
Net interest income after provision for loan losses	5,838	6,893	11,900	13,170
NON-INTEREST INCOME
Deposit service fees	971	1,069	1,845	1,923
Loan service fees	238	203	456	477
Insurance service fees	133	135	300	294
Investment service fees	124	70	256	155
Gain/(loss) on sale of securities, net	(2)	-	(2)	179
Gain on sale of loans, net	109	144	316	282
Gain/(loss) on sale of premise and equipment, net	(2)	43	286	82
Other operating income	120	17	204	20
Total non-interest income	1,691	1,681	3,661	3,412
NON-INTEREST EXPENSE
Compensation and benefits	3,604	3,588	7,171	6,888
Office operations	1,312	1,240	2,752	2,498
Occupancy, net	472	357	960	701
Loan servicing	132	114	236	193
Outside and professional services	403	744	705	1,757
Marketing	238	314	563	723
Other operating expenses	408	776	1,055	1,260
Total non-interest expense	6,569	7,133	13,442	14,020
INCOME BEFORE PROVISION FOR FEDERAL INCOME TAX	960	1,441	2,119	2,562
PROVISION FOR FEDERAL INCOME TAX	325	469	719	836
NET INCOME	$                   635	$                    972	$��                  400	$               1,726
EARNINGS PER COMMON SHARE
Basic	$                 0.10	$                   0.12	$                 0.22	$                 0.22
Diluted	$                 0.10	$                   0.12	$                 0.22	$                 0.22
Weighted average shares outstanding - Basic	6,148,455(1)	7,708,216(2)	6,294,499(1)	7,747,433(2)
Weighted average shares outstanding - Diluted	6,150,112(1)	7,708,216(2)	6,316,767(1)	7,747,433(2)

(1)     Weighted average shares outstanding (both Basic and Diluted) include 67,335 shares of the 328,300 restricted shares granted and issued under the
         Company's 2004 Management Recognition Plan ("MRP").

(2)     Weighted average shares outstanding (both Basic and Diluted) include 1,310 shares of the 336,800 restricted shares granted and issued under the
         MRP. Diluted weighted average shares outstanding exclude the impact of 680,000 options (with an exercise price of $16.26 per share) granted under
         the 2004 Stock Option Plan and 335,490 of restricted shares granted under the MRP, as a result of such options and restricted shares not being
         dilutive at June 30, 2004.

3

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

	Six Months Ended
	June 30,
	2005	2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$                       1,400	$                        1,726
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	1,831	1,499
Provision for loan losses	450	1,500
FHLB stock dividends	(54)	(238)
Deferred income tax expense	26	641
Loss/(gain) on sale of securities, net	2	(179)
Loss/(gain) on sale of premises and equipment	(286)	(82)
Loss/(gain) on sale of loans, net	(316)	(282)
Accrued compensation for restricted stock awards	530	21
Amortization (accretion) of premium and discount on                     securities	515	667
Change in operating assets and liabilities:
Accrued interest receivable	(58)	(147)
Other assets	(96)	(586)
Corporate drafts payable	(406)	(5,472)
Other liabilities	(4,345)	(3,637)
Net cash from operating activities	(807)	(4,569)
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in securities available-for-sale:
Sales	11,156	17,348
Maturities, prepayments, and calls	5,916	-
Purchases	(29,751)	(61,912)
Activity in securities held-to-maturity:
Maturities, prepayments, and calls	6,054	11,936
Purchases of FHLB stock	(284)	(1,442)
Increase in loans, net	(33,174)	(47,765)
Proceeds from sales of loans	19,582	15,191
Purchases of premises and equipment	(1,515)	(8,756)
Increase (decrease) in interest-bearing deposits with                   banks	855	(2,649)
Net cash from investing activities	(21,161)	(78,049)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	28,889	29,545
Advances on borrowed funds	1,156,074	491,964
Repayments of borrowed funds	(1,152,237)	(431,567)
Earned ESOP shares released	340	339
Change in value of ESOP shares	156	201
Dividends paid	(856)	(837)
Common stock repurchased	(11,826)	(5,474)
Net cash from financing activities	20,540	84,171
NET CHANGE IN CASH AND CASH EQUIVALENTS	(1,428)	1,553
CASH AND CASH EQUIVALENTS (at beginning of year)	8,927	9,922
CASH AND CASH EQUIVALENTS (at end of year)	$                        7,499	$                     11,475

4

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

	Six Months Ended
	June 30,
	2005	2004
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest	$                     8,074	$                    5,406
Income taxes	$                        555	$                       350
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING   ACTIVITIES
Unrealized losses on securities available-for sale, net of tax	$                         (77)	$                   (1,449)

5

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

	Common Stock		Unearned ESOP	Retained	Accumulated Other Comprehensive
	Shares	Amount	Shares	Earnings		(Loss)	Total
Balance, December 31, 2003	8,442,840	$82,570	$(6,618)	$38,837		$(232)	$114,557
Common stock repurchased	(1,103,880)	(18,858)					(18,858)
Common stock issued for MRP	336,800
MRP forfeitures	(3,500)
Earned ESOP shares released			678				678
ESOP activity-change in value of       shares committed to be released		152					152
Dividends paid				(1,665)			(1,665)
Amortization of compensation        related to MRP		561					561
Comprehensive income:
Net income				3,627			3,627
Other comprehensive income         (loss):
Change in unrealized gain             (loss) on securities, net of tax             of $254						(493)	(493)
Reclassification adjustment for             gains on securities included             in net income, net of tax		247					247
Total comprehensive income							3,381
Balance, December 31, 2004	7,672,260	64,672	(5,940)	40,799		(725)	98,806
Common stock repurchased	(678,494)	(11,826)					(11,826)
MRP forfeitures	(5,000)
Earned ESOP shares released			340				340
ESOP activity-change in value of       shares committed to be released		156					156
Dividends paid				(856)			(856)
Amortization of compensation        related to MRP		530					530
Comprehensive income:
Net income				1,400			1,400
Other comprehensive income     (loss):
Change in unrealized gain (loss)          on securities, net of tax of $40						(77)	(77)
Total comprehensive income							1,323
Balance, June 30, 2005	6,988,766	$53,532	$(5,600)	$41,343		$(802)	$88,473

6

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RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
SELECTED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005

Note 1 - Organization and Basis of Presentation

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

        The Bank provides a full range of banking services to consumers and limited banking services to small- and medium-sized businesses and professionals through 12 banking offices located in Pierce County and South King County. Support Systems, Inc. ("SSI"), a wholly-owned subsidiary of the Bank, operates Rainier Pacific Insurance Agency and Rainier Pacific Financial Services.

        Basis of Presentation. The consolidated financial statements presented in this quarterly report include the accounts of the Company, the Bank, and SSI. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for condensed interim financial information and predominant practices followed by the financial services industry, are unaudited, and do not include all of the information and footnotes required for complete financial statements. These consolidated financial statements should be read in conjunction with our December 31, 2004 audited consolidated financial statements and the accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 ("2004 Form 10-K"), which was filed with the Securities and Exchange Commission ("SEC") on March 9, 2005. All significant inter-company transactions and balances have been eliminated. In the opinion of the Company's management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the financial condition and results of operations for the interim periods included herein have been made. Certain reclassifications of prior year amounts have been made to conform to current presentation. These reclassifications had no effect on net income. Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

Note 2 - Summary of Significant Accounting Policies

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

        Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses, deferred income taxes, and the valuation of real estate or other collateral acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed or repossessed assets held-for-sale, management obtains independent appraisals for significant properties. At June 30, 2005, there were no material changes in the Company's significant accounting policies or critical accounting estimates from those disclosed in the 2004 Form 10-K.

Note 3 - Mutual-to-Stock Conversion of the Bank

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

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

7

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

Note 4 - Stock-Based Compensation

        The Company measures its employee stock-based compensation arrangements using the provisions outlined in Accounting Principles Board Opinion ("APB") No. 25,Accounting for Stock Issued to Employees, which is an intrinsic value-based method of recognizing compensation costs. The Company has adopted the disclosure-only requirements of SFAS No. 123, as amended by SFAS No. 148,Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123. As such, no compensation expense was recorded on the date the options were granted and would only have been recorded if the then current market price of the underlying stock exceeded the exercise price.

        If the Company had elected to recognize compensation cost based on the fair value at the grant dates for awards under its stock-based compensation plans, consistent with the method described in SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below for the following periods (in thousands, except per share data):

	Three Months Ended June 30,	Six Months Ended June 30,
	2005	2005
Pro forma disclosure:
Net income, as reported	$                                        635	$                                 1,400
Compensation expense, net of tax	(163)	(347)
Pro forma net income	$                            ��           472	$                                1,053
Basic earnings per share:
As reported	$                                       0.10	$                                   0.22
Pro forma	$                                       0.08	$                                   0.17
Diluted earnings per share:
As reported	$                                       0.10	$                                   0.22
Pro forma	$                                       0.08	$                                   0.17

        The fair value of options granted during 2004 is estimated on the date of grant using a binomial option-pricing model. There were no options granted during the three or six months ended June 30, 2005.

        At June 30, 2005, the Company had an aggregate of 173,284 options available for future issuance under the 2004 Stock Option Plan.

Note 5 - Earnings Per Share

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

8

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

		Three Months Ended June 30,			Six Months Ended June 30,
	2005		2004	2005		2004
Numerator:
Net Income	$        635		$            972	$     1,400		$         1,726
Denominator:
Denominator for basic net income per share:
Weighted average shares	6,148,455		7,708,216	6,294,499		7,747,433
Effect of dilutive securities:
Stock options	-		-	16,117		-
Restricted stock	1,657		-	6,151		-
Denominator for diluted net income per share:
Weighted average shares and assumed conversion of        dilutive stock options and restricted stock	6,150,112		7,708,216	6,316,767		7,747,433
Basic earnings per share	$       0.10		$           0.12	$       0.22		$            0.22
Diluted earnings per share	$       0.10		$           0.12	$       0.22		$            0.22

Note 6 - Cash Dividends

        On May 13, 2005, the Company announced a quarterly cash dividend of $0.06 cents per share payable on June 10, 2005 to shareholders of record on May 27, 2005.

Note 7 - Recently Issued Accounting Standards

        On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123 (revised 2004),Share Based Payment, which is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation. Statement 123 (R) supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,Statement of Cash Flows. Generally, the approach in Statement 123 (R) is similar to the approach described in Statement No. 123. However, Statement 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair value. Pro forma disclosure is no longer an alternative.

        The SEC announced on April 14, 2005 that it would provide for a phased-in implementation process for Statement 123 (R). Based on this announcement, Statement 123 (R) must be adopted no later than January 1, 2006 and the Company expects to adopt the Statement on this date. The Company plans to adopt Statement 123 (R) using the "modified prospective" method in which compensation cost is recognized beginning with the effective date based on the requirements of Statement 123 (R) for all share-based payments granted after the effective date and for all awards granted to employees prior to the effective date of Statement 123 (R) that remain unvested on the effective date.

        As permitted by Statement 123, the Company currently accounts for share-based payments to employees using the intrinsic value method as detailed in APB Opinion No. 25 and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123 (R)'s fair value method will have an impact on the Company's results of operations. The impact of adopting Statement 123 (R) cannot be predicted at this time due to all implementation issues not yet being fully resolved or clarified.

9

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

Forward-Looking Statements

        This Form 10-Q contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential." These forward-looking statements relate to, among other things, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding the Company's mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. The Company's actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking state ments as a result of a wide variety or range of factors including, but not limited to: interest rate fluctuations; economic conditions in the Company's primary market area; deposit flows; demand for residential, commercial real estate, consumer, and other types of loans; real estate values; success of new products; competitive conditions between banks and non-bank financial service providers; regulatory and accounting changes; technological factors affecting operations; pricing of products and services; and other risks detailed in the Company's reports filed with the SEC, including its 2004 Form 10-K. Accordingly, these factors should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. The Company undertakes no responsibility to update or revise any forward-looking statements.

Comparison of Financial Condition at June 30, 2005 and December 31, 2004

        General. Total assetsincreased by $17.6 million, or 2.3% to $769.4 million at June 30, 2005 from $751.8 million at December 31, 2004. The increase in total assets reflects increases in our loan portfolio of $13.3 million to $516.0 million from $502.7 million, and investment securities (including mortgage-backed securities but excluding FHLB of Seattle stock) of $6.0 million to $197.0 million from $191.0 million. Deposits increased $28.9 million to $373.8 million from $344.9 million, and borrowed funds from the FHLB of Seattleincreased $3.9 million to $299.6 million from $295.7 million. Shareholders' equity decreased $10.3 million to $88.5 million from $98.8 million, which was primarily attributable to stock repurchases and dividends paid to shareholders.

        Assets. Our loan portfolio increased $13.3 million, or 2.6% to $516.0 million at June 30, 2005 from $502.7 million at December 31, 2004. The Company continued to focus on increasing its commercial, multi-family, and residential real estate construction loans. The $13.3 million net increase in the loan portfolio during the first six months of 2005 consisted primarily of construction loans, which increased $18.1 million, or 111.7%, to $34.3 million from $16.2 million, and commercial real estate loans, which increased $8.2 million, or 5.7%, to $152.9 million from $144.7 million. These increases were partially offset by prepayments of commercial real estate loans of $22.0 million, the sale of $19.6 million of single-family loans, and a decrease in consumer loans of $8.7 million, or 7.5%, to $106.9 million from $115.6 million.

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The following table sets forth the Company's loan portfolio by type as of the dates indicated (in thousands):

	June 30, 2005	December 31, 2004
Real estate:
One-to-four family residential	$                                     88,867	$                                   97,455
Multi-family residential	127,439	126,199
Commercial	152,857	144,717
	369,163	368,371
Real estate construction:
One to four-family residential	34,290	16,183
Consumer:
Automobile	45,057	52,567
Home equity loans	30,373	28,775
Credit cards	21,357	22,447
Other	10,122	11,802
	106,909	115,591
Commercial / business	6,148	2,828
Subtotal	516,510	502,973
Less:
Deferred loan fees, net	(515)	(254)
Allowance for loan losses	(8,799)	(8,981)
Loans, net	$                                  507,196	$                                493,738

        Our investment securities portfolio (including mortgage-backed securities but excluding FHLB of Seattle stock) increased $6.0 million, or 3.1% to $197.0 million at June 30, 2005 from $191.0 million at December 31, 2004. The growth in the investment portfolio resulted primarily from the addition of adjustable rate trust preferred securities. Trust preferred securities increased by $24.6 million, or 63.6%, to $63.3 million at June 30, 2005 from $38.7 million at December 31, 2004. Mortgage-backed securities decreased $16.9 million, or 15.8%, to $90.0 million at June 30, 2005 from $106.9 million at December 31, 2004. All other securities decreased by a net amount of $1.7 million.

        The trust preferred securities purchased were variable rate securities with an average yield of 4.44% which reprice quarterly based on a London Interbank Offered Rate ("LIBOR") index. These securities were purchased to increase our interest-earning assets while managing our interest rate risk exposure in the investment securities portfolio.

        FHLB of Seattle stock, while not classified as an investment security for purposes of this discussion, remained relatively stable with an increase of $338,000, or 2.5%, to $13.7 million at June 30, 2005 from $13.4 million at December 31, 2004. We purchased additional FHLB of Seattle stock to meet the minimum stock requirements to support our level of borrowed funds from the FHLB of Seattle.

        Deposits. Our total deposits increased $28.9 million, or 8.4%, to $373.8 million at June 30, 2005 from $344.9 million at December 31, 2004. The increase was concentrated in interest-bearing deposits, which increased $30.5 million, or 9.7%, to $345.8 million at June 30, 2005 from $315.3 million at December 31, 2004. Non-interest bearing deposits, consisting of checking accounts, decreased $1.6 million during this same period. Certificates of deposit (excluding individual retirement account certificates of deposit) increased $42.9 million to $191.3 at June 30, 2005 from $148.4 million at December 31, 2004. Brokered certificates of deposit increased $25.5 million to $35.9 million at June 30, 2005 from $10.4 million at December 31, 2004. Core deposits, which are comprised of checking, savings, money market, and individual retirement accounts, totaled $182.5 million, or 48.8% of total deposits at June 30, 2005.

        Borrowed Funds. Borrowed funds consisted of FHLB of Seattle advances, increased $3.9 million, or 1.3%, to $299.6 million at June 30, 2005 from $295.7 million at December 31, 2004. We used the borrowed funds for funding loans and investment securities, and as part of our capital leverage and interest rate risk management strategies.

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        Shareholders' Equity.Total shareholders' equity (or "capital") decreased $10.3 million, or 10.4%, to $88.5 million at June 30, 2005 from $98.8 million at December 31, 2004. Our capital-to-assets ratio was 11.50% at June 30, 2005 compared to 13.14% at December 31, 2004. The decrease in our capital for the six months ended June 30, 2005 was a result of $11.8 million of common stock repurchases, $856,000 in dividends paid to shareholders, and a $77,000 net decline in the value of our available-for-sale investment securities, offset in part by $1.4 million in net income, a $496,000 increase in equity related to our ESOP, and a $530,000 increase in equity for the accrual of stock-based compensation related to the MRP.

Comparison of Operating Results for the Three Months Ended June 30, 2005 and June 30, 2004

        General.Net incomedecreased$337,000, or 34.7%, to $635,000 for the three months ended June 30, 2005 from $972,000 for the three months ended June 30, 2004. The decrease in net income was primarily the result of a lower net interest income, partially offset by a lower provision for loan losses and lower operating expenses.

        Net Interest Income.Net interest income was $6.0 million for the three months ended June 30, 2005 which was $1.5 million, or 20.0%, less than the $7.5 million for the three months ended June 30, 2004. The decline in net interest income was primarily attributable to the increase in the Company's cost of funds as a result of rising short-term interest rates. Interest income was relatively unchanged for the three months ended June 30, 2005 compared to the same period a year before. Interest expense, however, increased $1.5 million to $4.3 million for the three months ended June 30, 2005 compared to the same period in 2004. Average interest-earning assets increased $10.3 million to $717.2 million for the three months ended June 30, 2005 from $706.9 million for the three months ended June 30, 2004. Offsetting this increase was a 90 basis point decline in our net interest margin to 3.33% for the three months ended June 30, 2005 from 4.23% for the three mo nths ended June 30, 2004.

        Interest Income.Interest income for the three months ended June 30, 2005 increased $31,000, or 0.3%, unchanged at $10.3 million compared to the same period in 2004.  An increase of $10.3 million in the average balance of interest-earning assets for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 mitigated the impact from the lower yields on loans. The increase in interest-earning assets was primarily a result of increased loan volume. Interest earned on loans for the three months ended June 30, 2005 was $8.4 million compared to $8.0 million for the three months ended June 30, 2004. The average yield on loans declined 20 basis points to 6.63% for the three months ended June 30, 2005 compared to 6.83% for the three months ended June 30, 2004.

        Interest income on investment securities (including mortgage-backed securities but excluding FHLB of Seattle stock) decreased slightly to $1.9 million for the three months ended June 30, 2005 from $2.1 million for the three months ended June 30, 2004. The decrease resulted from an average balance of investments that was $25.4 million lower during the second quarter of 2005 than it was for the same period a year ago. However, this was partially offset by an 11 basis point rise in the average yield on investments to 3.92% for the three months ended June 30, 2005 from 3.81% for the three months ended June 30, 2004.

        We did not receive a dividend of FHLB of Seattle stock during the second quarter of 2005, compared to dividends of $124,000 during the same quarter a year ago.  The FHLB of Seattle is operating under a regulatory directive and in May 2005 announced that all future dividends will be suspended until its financial position and performance improves.

        Interest Expense.Interest expense increased $1.5 million, or 53.6%, to $4.3 million for the three months ended June 30, 2005 compared to $2.8 million for the three months ended June 30, 2004. Interest paid on deposits, increased $633,000, or 65.5% to $1.6 million for the three months ended June 30, 2005 compared to $966,000 for the same period a year earlier. This increase was primarily attributable to the average cost of interest-bearing deposits increasing 69 basis points to 1.92% for the three months ended June 30, 2005 from 1.23% for the three months ended June 30, 2004. This rise in rates was coupled with an increase in the average balance of interest-bearing deposits of $19.0 million, or 6.0%, to $333.8 million for the three months ended June 30, 2005 from $314.8 million for the three months ended June 30, 2004.

        Interest expense on FHLB of Seattle advances increased $903,000, or 49.6%, for the three months ended June 30, 2005 to $2.7 million from $1.8 million for the three months ended June 30, 2004. The increase was attributable to a higher cost of advances as short-term rates continued to rise and a higher average outstanding balance of FHLB of Seattle advances totaling $301.7 million for the three months ended June 30, 2005 compared to $279.7 million for the three months ended June 30, 2004. FHLB of Seattle overnight and term advances continue to be used to fund growth in the loan portfolio.

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

	Three months ended June 30, 2005		Three months ended June 30, 2004
	Average Balance	Average Yield/Cost	Average Balance	Average Yield/Cost
INTEREST-EARNING ASSETS
Loans, net	$           505,111	6.63%	$         470,774	6.83%
Investment securities	197,664	3.92%	223,072	3.81%
FHLB stock	13,679	0.00%	12,434	4.01%
Interest-bearing deposits in other banks	761	2.61%	614	0.79%
Total interest-earning assets	717,215	5.75%	706,894	5.82%
Non-interest-earning assets	45,259		40,898
Total assets	$          762,474		$         747,792
INTEREST-BEARING LIABILITIES
Interest-bearing deposits	$          333,769	1.92%	$         314,823	1.23%
FHLB advances	301,715	3.62%	279,738	2.62%
Total interest-bearing liabilities	635,484	2.73%	594,561	1.89%
Non-interest-bearing liabilities:
Non-interest-bearing checking	28,665		27,746
Other	10,245		12,394
Total non-interest-bearing liabilities	38,910		40,140
Total liabilities	674,394		634,701
Equity	88,080		113,091
Total liabilities and equity	$         762,474		$         747,792
Net interest income	$             5,988		$             7,493
Interest rate spread		3.02%		3.93%
Net interest margin	3.33%		4.23%

        Provision for Loan Losses. Our Asset/Liability Committee (the "Committee") assesses the adequacy of the allowance for loan losses on a quarterly basis. In connection with the quarterly assessment, the Committee analyzes several different factors, including delinquency ratios, charge-off rates, underwriting criteria, and the changing risk profile of the loan portfolio, as well as local economic conditions including unemployment rates, bankruptcies, and vacancy rates of commercial and residential properties.

        Our methodology for analyzing the allowance for loan losses consists of three components: formula, specific, and general allowances. The formula allowance component is determined by applying an estimated loss percentage to various groups of loans. The loss percentages are principally based on historical measures, which could affect the collectibility of the respective loan types such as the amount and types of classified loans, past due ratios, and the actual loss experience. The specific allowance component is created when management believes that the collectibility of a specific large loan, such as multi-family or commercial real estate or commercial/business loan, has been impaired and a loss is probable. The general allowance component is established to ensure the adequacy of the allowance for loan losses in situations where the Committee believes that there are risk factors associated with the collectibility of the portfolio that may not be adequately ad dressed in the formula or specific allowance components. Information considered for the general allowance component includes local economic and employment data.

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         The provision for loan losses decreased $450,000 to $150,000 for the three months ended June 30, 2005, compared to $600,000 for the three months ended June 30, 2004. The decrease was primarily a result of the continued improvement in the credit quality of the loan portfolio. Net charge-offs were $378,000 for the three month period ended June 30, 2005, compared to $512,000 for the three month period ended June 30, 2004. The provision for the three months ended June 30, 2005 was set at $150,000 primarily as a result of the increased percentage of loans secured by real estate, low net charge-offs and delinquencies, and the improving regional and local economy.

	Three Months Ended	Three Months Ended
	June 30, 2005	June 30, 2004
	(in thousands)
Allowance as of beginning of period	$                                      9,027	$                                    8,593
Provision for losses on loans	150	600
Recoveries	94	93
Charge-offs	(472)	(605)
Allowance as of the end of period	$                                   8,799	$                                  8,681

        Non-interest Income. Non-interest income was $1.7 million for the three months ended June 30, 2005 unchanged from $1.7 million for the three months ended June 30, 2004. The $98,000 decrease in deposit service fees was essentially offset by increases in investment service fees of $54,000 and loan service fees of $35,000. All other categories of non-interest income increased $19,000 for the three months ended June 30, 2005 compared to the same period a year ago.

        Non-interest Expense.Non-interest expense was $6.6 million for the three months ended June 30, 2005, and was $564,000, or 7.9%, less than the $7.1 million of non-interest expenses recognized during the same quarter in 2004. While compensation and benefits expense was unchanged, there were decreases of $341,000 in outside and professional services and $76,000 in marketing expense.

        Compensation and benefits for the three months ended June 30, 2005 were unchanged at $3.6 million compared to the three months ended June 30, 2004. Compensation costs represented 54.9% and 50.3% of total non-interest expenses for the three months ended June 30, 2005, and 2004, respectively. As of June 30, 2005, we employed 205 full-time equivalent employees, compared to 218 at June 30, 2004.

        Occupancy expense increased $115,000 to $472,000 for the three months ended June 30, 2005 from $357,000 for the three months ended June 30, 2004. This increase is primarily attributable to higher building depreciation and maintenance costs associated with our new corporate office building that we relocated into in December 2004.

        Outside and professional services decreased $341,000 to $403,000 for the three months ended June 30, 2005 from $744,000 for the three months ended June 30, 2004. This decrease is primarily related to costs associated with completing our technology initiative that were still being incurred in the second quarter of 2004.

        Income Tax Expense.Income tax expense decreased $144,000 to $325,000 for the three months ended June 30, 2005 from $469,000 for the same period a year ago. Income before federal income tax was $960,000 for the three months ended June 30, 2005 compared to $1.4 million for the three months ended June 30, 2004, with effective tax rates of 33.9% and 32.6%, respectively.

Comparison of Operating Results for the Six Months Ended June 30, 2005 and June 30, 2004

        General.Net incomedecreased$326,000, or 17.6%, to $1.4 million for the six months ended June 30, 2005 compared to $1.7 million for the six months ended June 30, 2004. The decrease in net income was primarily the result of lower net interest income due to a decrease in our net interest margin. This decrease was partially offset by a lower provision for loan losses, higher non-interest income and lower non-interest expenses.

        Net Interest Income.Net interest income decreased $2.3 million, or 15.6%, to $12.4 million for the six months ended June 30, 2005 compared to $14.7 million for the six months ended June 30, 2004. This decrease resulted from an increase in interest expense

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of $2.7 million partially offset by an increase in interest income of $360,000. Average interest-earning assets increased to $712.7 million for the six months ended June 30, 2005 from $683.4 million for the six months ended June 30, 2004. Offsetting this increase in average interest-earning assets was an 81 basis point decline in our net interest margin to 3.47% for the six months ended June 30, 2005 from 4.28% for the six months ended June 30, 2004. The decline in the net interest margin was primarily attributable to rising costs of customer deposits and borrowed funds due to increased short-term interest rates and the flattening of the yield curve.

        Interest Income.Interest income for the six months ended June 30, 2005 increased $360,000, or 1.8%, to $20.4 million compared to $20.0 million for the same period in 2004. The increase was the result of a $29.3 million increase in the average balance of interest-earning assets from the six months ended June 30, 2004. Interest earned on total loans for the six months ended June 30, 2005 was $16.5 million compared to $15.9 million for the same period a year ago. However, the average yield on total loans declined to 6.59% for the six months ended June 30, 2005 compared to 6.91% for the six months ended June 30, 2004.

        Interest income on investment securities (including mortgage-backed securities but excluding FHLB of Seattle stock) decreased $137,000 to $3.8 million for the six months ended June 30, 2005 compared to $3.9 million for the six months ended June 30, 2004. The decrease resulted from a $15.8 million decrease in average investments to $195.2 million for the six months ended June 30, 2005 compared to $211.0 million for the six months ended June 30, 2004. This decrease was partially offset by a 15 basis point increase in the average yield on investments to 3.89% for the six months ended June 30, 2005 from 3.74% for the six months ended June 30, 2004. We did not receive a dividend of FHLB of Seattle stock during the second quarter of 2005.  The FHLB of Seattle is operating under a regulatory directive and in May 2005 announced that all future dividends would be suspended until their financial position and performance improved.

        Interest Expense.Interest expense increased $2.6 million, or 48.1%, to $8.0 million for the six months ended June 30, 2005 compared to $5.4 million for the six months ended June 30, 2004. The increase is primarily attributable to the average cost of interest-bearing liabilities increasing 68 basis points to 2.59% for the six months ended June 30, 2005 from 1.91% for the six months ended June 30, 2004. Further accentuating this cost of funds increase, the average balance of interest-bearing liabilities increased $59.2 million to $626.1 million for the six months ended June 30, 2005 from $566.9 million for the six months ended June 30, 2004.

        Interest expense on FHLB of Seattle advances increased $1.6 million, or 44.4%, for the six months ended June 30, 2005 to $5.2 million from $3.6 million for the six months ended June 30, 2004. The increase is attributable to a larger average balance of FHLB of Seattle advances outstanding of $299.9 million for the six months ended June 30, 2005 compared to $263.0 million for the six months ended June 30, 2004 and a higher cost of funds as short-term rates rose. Overnight and term borrowings continue to be used to fund growth in loans.

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

	Six Months Ended June 30, 2005		Six Months Ended June 30, 2004
	Average Balance	Average Yield/Cost	Average Balance	Average Yield/Cost
INTEREST-EARNING ASSETS
Loans, net	$            503,251	6.59%	$            459,708	6.91%
Investment securities	195,176	3.89%	210,966	3.74%
FHLB stock	13,548	0.80%	12,009	3.97%
Interest-bearing deposits in other banks	692	2.60%	723	0.62%
Total interest-earning assets	712,667	5.74%	683,406	5.87%
Non-interest-earning assets	45,337		40,961
Total assets	$            758,004		$            724,367
INTEREST-BEARING LIABILITIES
Interest-bearing deposits	$            326,275	1.76%	$            303,840	1.19%
FHLB advances	299,868	3.49%	263,032	2.74%
Total interest-bearing liabilities	626,143	2.59%	566,872	1.91%
Non-interest-bearing liabilities:
Non-interest-bearing checking	28,583		27,684
Other	12,357		15,984
Total non-interest-bearing liabilities	40,940		43,668
Total liabilities	667,083		610,540
Equity	90,921		113,827
Total liabilities and equity	$           758,004		$            724,367
Net interest income	$             12,350		$              14,670
Interest rate spread		3.15%		3.96%
Net interest margin	3.47%		4.28%

        Provision for Loan Losses. The provision for loan losses decreased $1.1 million to $450,000 for the six months ended June 30, 2005 compared to $1.5 million for the six months ended June 30, 2004. We decreased the provision primarily as a result of the improving credit quality of the loan portfolio, the increased percentage of loans secured by real estate and the strengthening regional and local economies. Charge-offs for the six months ended June 30, 2005 totaled $632,000, compared to $1.1 million for the same period a year ago.

	Six Months Ended	Six Months Ended
	June 30, 2005	June 30, 2004
	(in thousands)
Allowance as of beginning of period	$                            8,981	$                             8,237
Provision for losses on loans	450	1,500
Recoveries	187	189
Charge-offs	(819)	(1,245)
Allowance as of the end of period	$                          8,799	$                             8,681

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        Non-interest Income. Non-interest income increased $249,000 to $3.7 million for the six months ended June 30, 2005 compared to $3.4 million for the six months ended June 30, 2004. The increase is primarily the result of a gain on the sale of one of our branches that was relocated and netted $288,000, and an increase in investment service fees of $101,000, partially offset by a decrease in gain on sale of investments of $181,000. All other categories of non-interest income increased by a net amount of $41,000.

        Non-interest Expense.Non-interest expense decreased $578,000, or 4.1%, to $13.4 million for the six months ended June 30, 2005 from $14.0 million for the six months ended June 30, 2004. This decrease was primarily the result of lower outside and professional services; partially offset by higher compensation and benefit costs, office operations, and other non-interest expenses.

        Compensation and benefits increased $283,000 to $7.2 million for the six months ended June 30, 2005 compared to $6.9 million for the six months ended June 30, 2004. Compensation and benefits costs represented 53.3% and 49.1% of total non-interest expense for the six months ended June 30, 2005, and 2004, respectively.

        Office operations increased $254,000 to $2.8 million for the six months ended June 30, 2005 compared to $2.5 million for the six months ended June 30, 2004. This increase was primarily attributable to higher data processing maintenance and depreciation costs associated with upgrading our communications and our data processing operations.

        Outside professional services decreased $1.1 million to $705,000 for the six months ended June 30, 2005 compared to $1.8 million for the six months ended June 30, 2004. This decrease was primarily attributable to lower costs associated with completing our technology initiative in 2004.

        Income Tax Expense. Income tax expense decreased $117,000 to $719,000 for the six months ended June 30, 2005 compared to $836,000 for the same period a year ago. Income before federal income tax was $2.1 million for the six months ended June 30, 2005 compared to $2.6 million for the six months ended June 30, 2004 with effective tax rates of 33.9% and 32.6%, respectively.

Liquidity and Capital Resources

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

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

        At June 30, 2005, we maintained a credit facility with the FHLB of Seattle equal to 45.0% of the Bank's total assets, with an unused portion of the facility amounting to 6.1% of the Bank's total assets, or $46.7 million. This credit facility depends on us having sufficient collateral to pledge to the FHLB of Seattle. At June 30, 2005, we were in compliance with our collateral requirements. In addition, we held available-for-sale investment securities and readily saleable loans for liquidity purposes.

        At June 30, 2005, certificates of deposit (excluding individual retirement account certificates of deposit) amounted to $191.3 million or 51.2% of total deposits, including $35.9 million of brokered deposits which are scheduled to mature by December 31, 2005. Historically, we have been able to retain a significant amount of our retail deposits as they mature. We have used brokered deposits for funding purposes to reduce disintermediation from our lower cost retail deposits. We have also elected to borrow from the FHLB of Seattle to supplement deposit funding. Management believes that we have adequate resources to fund all loan commitments through deposits, borrowing from the FHLB of Seattle, the sale of mortgage loans or investments, and brokered deposits. Management also believes that we can adjust the offering rates of certificates of deposit to increase, retain, or decrease deposits in changing interest rate environments.

        In addition, the Company has been repurchasing its common stock. For information regarding the Company's repurchase of its outstanding common stock during the quarter ended June 30, 2005, see "Common Stock Repurchases" contained inItem 2 - Unregistered Sales of Equity Securities and Use of Proceeds under Part II - Other Information of this quarterly report.

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        Capital. Consistent with our objective to operate a sound and profitable financial institution, we have maintained and will continue to focus on maintaining a "well-capitalized" rating from regulatory authorities. In addition, we are subject to certain capital requirements set by our regulatory agencies. As of June 30, 2005, the Bank was classified as a "well-capitalized" institution under the criteria established by the Federal Deposit Insurance Corporation and exceeded all minimum capital requirements. Total equity was $88.5 million at June 30, 2005, or 11.50% of total assets on that date. Our regulatory capital ratios at June 30, 2005 were as follows: Tier I leverage of 11.32%; Tier I risk-based capital of 15.68%; and total risk-based capital of 16.94%.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

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

        The Bank is exposed to interest rate risk and actively manages the impact of interest rate changes on net interest income and capital. Management employs various strategies to manage the Bank's interest rate sensitivity including: (1) selling long-term fixed-rate mortgage loans; (2) borrowing intermediate- to long-term funds at fixed rates; (3) originating consumer and income property or residential construction loans with shorter maturities or at variable rates; (4) purchasing securities with short to intermediate maturities or repricing features; (5) appropriately modifying loan and deposit pricing to capitalize on the then-current market opportunities; and (6) increasing core deposits, such as savings, checking and money-market accounts, in order to reduce reliance on the traditionally higher cost, more rate sensitive certificates of deposit. At June 30, 2005, there were no material changes in the Bank's market risk from the information provided in the 2004 Form 10-K which was filed with the SEC on March 9, 2005.

        At June 30, 2005, the Bank had no off-balance sheet derivative financial instruments. In addition, the Bank did not maintain a trading account for any class of financial instruments, nor has it engaged in hedging activities or purchased high risk derivative instruments. Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk.

ITEM 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

        During the period covered by this quarterly report, management has implemented changes in the Company's internal controls relating to information technology systems' security and access privileges, segregation of duties, and the related management oversight thereof. Management does not believe any of the changes made or currently underway in the Company's systems of internal control, or in other factors that could significantly affect internal control, have resulted in any significant deficiencies or material weaknesses in the Company's internal control subsequent to the date of their most recent evaluation.

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

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acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

ITEM 1 - Legal Proceedings

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

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

        The Company's common stock is traded on the NASDAQ National Market under the symbol "RPFG". As of June 30, 2005, there were 6,988,766 shares of common stock issued, including 560,004 unearned ESOP shares and 262,240 unvested restricted shares granted under the MRP. During the quarter ended June 30, 2005, the Company did not sell any securities that were not registered under the Securities Act of 1933.

Common Stock Repurchases

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

        The following table sets forth information about the Company's repurchases of its outstanding common stock during the quarter ended June 30, 2005.

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
April 1, 2005 - April 30, 2005	12,600	$15.31	12,600	8,216
May 1, 2005 - May 31, 2005	-	-	-	8,216
June 1, 2005 - June 30, 2005	-	-	-	8,216
Total	12,600	$15.31	12,600

(1)    The Company announced its intention to purchase an additional 5% of its outstanding shares (336,400) on February 16, 2005. This purchase is
        expected to be completed over six months. At June 30, 2005, there were 8,216 share remaining to be purchased under this repurchase program.

        On July 22, 2005, the Company announced the completion of its fourth repurchase program of 336,400 of its shares at an average price of $16.73 per share. The Company announced its intention to purchase an additional 5% of its outstanding shares (321,000) on July 25, 2005. This fifth repurchase plan is expected to be completed within twelve months of the announcement date.

ITEM 3 - Defaults Upon Senior Securities

Not applicable.

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

        The Company's Annual Meeting of Shareholders was held on April 25, 2005 at the Sheraton Tacoma Hotel located at 1320 Broadway Avenue, Tacoma, Washington. Three directors were elected at the meeting (Charles E. Cuzzetto, Stephen M. Bader, and John A. Hall) and six directors continued their terms in office (Edward J. Brooks, Karyn R. Clarke, Robert H. Combs, Brian E. Knutson, Alan M. Somers, and Alfred H. Treleven, III). The results of the vote item presented at the meeting are as follows:

Election of Directors

Shareholders elected the following nominees to the Board of Directors for the terms indicated by the following vote:

		FOR		WITHHELD
	Term to	Number		Number
	Expire	of Votes	Percentage	of Votes	Percentage
Charles E. Cuzzetto	2008	6,297,123	97.2%	181,085	2.8%
Stephen M. Bader	2008	6,303,143	97.3%	175,065	2.7%
John A. Hall	2008	6,303,156	97.3%	175,052	2.7%

ITEM 5 - Other Information

Not applicable.

ITEM 6 - Exhibits

                        3.1    Articles of Incorporation of the Registrant⁽¹⁾
                       3.2    Bylaws of the Registrant⁽¹⁾
                     10.1    Form of Employment Agreement for President and Chief Executive Officer⁽¹⁾
                     10.2    Form of Severance Agreement⁽¹⁾
                     10.3    Form of Rainier Pacific Savings Bank Employee Severance Compensation Plan⁽¹⁾
                     10.4    Rainier Pacific 2004 Stock Option Plan⁽²⁾
                     10.5    Rainier Pacific 2004 Management Recognition Plan⁽²⁾
                       14     Code of Ethics⁽³⁾
                     31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
                      31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
                       32      Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
                                 Sarbanes- Oxley Act

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

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SIGNATURES

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

                                                                                            Rainier Pacific Financial Group, Inc.

August 3, 2005                                                               /s/ John A. Hall______________________
                                                                                          John A. Hall
                                                                                          President and Chief Executive Officer
                                                                                         (Principal Executive Officer)

August 3, 2005                                                                /s/ Joel G. Edwards__________________
                                                                                           Joel G. Edwards
                                                                                           Chief Financial Officer
                                                                                           (Principal Financial and Accounting Officer)

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EXHIBIT 31.1

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

I, John A. Hall, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: August 3, 2005                                                         /s/ John A. Hall______________________
                                                                                               John A. Hall
                                                                                               President and Chief Executive Officer

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EXHIBIT 31.2

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

I, Joel G. Edwards, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: August 3, 2005                                                        /s/ Joel G. Edwards__________________
                                                                                              Joel G. Edwards
                                                                                              Chief Financial Officer

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EXHIBIT 32

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

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

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



2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

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

     Dated: August 3, 2005

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