The west Puget Sound market benefits from a high quality of life, with significant outdoor recreational opportunities, median home prices significantly below the Seattle Metropolitan Statistical Area and a small community lifestyle. The Seattle Metropolitan Statistical Area has a diversified economy with major employers in a number of growth industries including aerospace, technology, health care, computer and telecommunications. Approximately 6,000 commuters ride the state ferries each day between their homes on Bainbridge Island and in other Kitsap County communities and downtown Seattle.

As of August 2006, the unemployment rate for Kitsap County was 5.2% which was slightly above the rate for the Seattle Metropolitan Statistical Area for the same period of 4.2%. Job growth is strong, with the area adding 1,700 jobs between the first quarter of 2005 and 2006. The median home price for Kitsap County increased 20.8% in 2005 to $250,000, but remained 35.8% below the median home price for the Seattle Metropolitan Statistical Area. According to the U.S. Department of Housing and Urban Development, the estimated median family income for Kitsap County in 2005 was $62,000, ranking it sixth highest out of 39 counties in the state of Washington.

In terms of population growth, Clallam County, which includes the city of Port Angeles, has grown at an average annual rate of 1.6% from 2000 through 2005. In Clallam County, total bank and thrift deposits grew 5.1% in 2006. Unemployment in the county as of August 2006 is 5.7%. While slightly higher than surrounding counties, the unemployment rate has seen steep declines, falling more than 30% since January 2005. Health care and tourism from Canada are among the key industries. The Kiplinger Letter recently named Port Angeles as a top area to start a new business. The city of Sequim, long known as a retirement haven, is establishing itself as a regional shopping center for the Olympic Peninsula. With an abundance of adequately zoned lot inventory, the population of Sequim, currently at 6,800, has been projected to double by 2011.

The Company provides banking services throughout its primary market area to real estate developers, contractors and small- to medium-sized businesses in its market. Many of the Company’s real estate customers are involved in the development, construction and resale of commercial and residential properties in and around the west Puget Sound and the Seattle Metropolitan Statistical Area.

The Company’s business customers are involved in light manufacturing, distribution or other services. The Company also provides a broad range of banking services and products to individuals, including personal checking and savings accounts and other consumer banking products, including electronic banking.

The Company has established portfolio thresholds for each of its lending categories and constantly monitors the diversification of its portfolio. The Company originates a variety of types of loans, including construction, commercial real estate, residential real estate, commercial, and to a lesser extent consumer based loans. From time to time the Company purchases and sells commercial loan participations to or from other banks within its market area.

The Company is focused on commercial and residential real estate lending throughout a project’s life cycle, from acquisition and development loans to acquire property, to permanent, long-term mortgage financing.

The Company makes commercial and industrial loans to qualified businesses in its market area. The Company’s commercial lending portfolio consists primarily of commercial and industrial loans for the financing of accounts receivable, inventory, property, plant and equipment. The Company also offers loans guaranteed by the U.S. Small Business Administration, or SBA.

Net interest income increased by $4.5 million, or 60.9%, from $7.5 million in the nine months ended September 30, 2005 to $12 million in the nine months ended September 30, 2006.

The cost of average interest-bearing liabilities increased to 4.45% for the nine months ended September 30, 2006 from 3.21% for the same period in 2005.

Average rate on interest-bearing deposits increased 1.17% from 3.19% during the nine months ended September 30, 2005 to 4.36% for the nine months ended September 30, 2006.