President and Chairman’s Message

Dear Shareholders,

The economic environment during this recession and, particularly, the past eighteen months has been difficult for the majority of Americans, businesses, and financial institutions. While this created hardships and challenges for many, we believe it also presents a tremendous opportunity. In particular, financial institutions that have received cease-and-desist orders from federal regulators are actively de-leveraging their balance sheets in order to be compliant with regulatory capital requirements. This process may include sales of profitable loans and potential severing of valuable relationships with high balance depositors and borrowers. Also, with the forced sale of distressed financial institutions to larger, out of area banks, the level of customer service and commitment to the community may be changing. In light of these changes, we see a unique opportunity to grow our business.

We recently began to see an increase in the Bank’s retail deposits as a result of negative press on our competitors, including those facing regulatory actions or FDIC sales. Specifically, a market leader was closed in the Thurston County market and its deposits subsequently acquired by an out-of-state bank. Our deposit base has grown by over $23 million in the past 15 months averaging a growth rate of over $1.5 million per month. A great deal of this growth has been in transactional deposits, which represents a stable and low cost source of funding for the Bank. In addition, we have found that high profile local business borrowers have become increasingly open to receiving proposals that include moving their entire banking relationship. We are currently reviewing loan applications exceeding $60 million, the majority of which qualify for U.S. Government guarantees.

Capital is being raised in a private placement that will bolster our Tier 1 and Total Risk Based Capital and permit us to be proactive, and deploy new capital to take advantage of the opportunities that exist in Thurston County. The Bank intends to deploy the additional capital in reduced risk loans to borrowers who bring full relationships to the Bank. Growth of the Bank can be managed without significant increases in overhead expense. While we are not immune to credit risk and losses, we have worked hard to achieve positive net income for the past six quarters including the first quarter of 2010. I am pleased that 25% of our total loan portfolio now carries Government guarantees, reducing the risk profile of the portfolio. As long as economic conditions do not deteriorate further, we expect to maintain profitability this year.

If you have any questions about Thurston First Bank, the contents of this letter, or the private placement, please feel free to call us at the Bank.

Stephen J. Bean
Chairman of the Board

James H. Haley
President and CEO