Financial Performance

Dear Shareholder:

Northwest Bank reported a net loss of $804,000 in the second quarter of 2010. The loss was largely attributed to replenishment of reserves for the market valuation write-down of a Central Oregon commercial real estate loan and additional reserves established for a restructured but performing loan placed on nonaccrual status in the quarter. This loss compares to a second quarter 2009 net loss of $1,835,000 and a first quarter 2010 net loss of $55,000. The second quarter 2009 net loss was attributed primarily to the $1 million loss on sale of an Other Real Estate Owned (OREO) townhouse development in Central Oregon combined with charge-offs on other nonperforming loans to better reflect market value at that time. Real estate values continue to be somewhat elusive, with few sales to substantiate market value.

For the first six months of 2010 Northwest Bank reported a net loss of $859,000, compared to a loss of $1,943,000 after a tax benefit of $1,192,000 in the same period in the prior year. As a reminder, in the fourth quarter of 2009, Northwest Bank established a full valuation reserve against our deferred tax assets of $5,347,000, and as such no tax provision or tax benefit will be recorded for future periods until such time as we determine the valuation reserve can be eliminated. This recapture is contingent upon the Bank’s reaching sustained profitability, which remains a top priority for Northwest Bank.

Our liquidity remained strong, with $40,550,000 in cash and investments at June 30, 2010, an increase of $21,191,000 from year-end, and representing 31% of total assets. While these assets provide relatively low yields, the Bank feels it is prudent to maintain a strong liquidity position, foregoing potential revenue as a result.

Total loans decreased $9,396,000 in the second quarter to $90,293,000 at June 30, 2010, and decreased $10,813,000 from year-end, despite the approval in 2010 of $12,770,000 in new loans, resulting in loan balances of $8,220,000 at June 30, 2010. The desired runoff of troubled and other loans has more than offset new loan production for the year.

Total Deposits increased $10,274,000 in the second quarter, to $120,737,000, and increased $9,964,000 since year-end. Higher cost brokered CDs were reduced $4,156,000 in the first half of 2010. The Bank added $19,358,000 in longer term national deposits in the first half of 2010, locking in funding at favorable rates for interest rate risk management and liquidity planning purposes. With the signing of the Financial Reform Act, the likelihood of extension of full FDIC insurance protection to qualifying interest earning NOW accounts in the TAG (Transaction Account Guarantee) Program is remote at best, potentially impacting community Bank clients. The proactive liquidity management steps Northwest Bank has taken are necessary to provide us well-diversified funding sources in light of this uncertain regulatory environment. Non-interest deposit accounts will continue to be provided full FDIC insurance under the TAG program through December 31, 2012.

Total equity was $10,238,000 at June 30, 2010, which equates to a book value per share of $4.16. Again, our year-end 2009 book value was reduced $2.19 per share as a result of the establishment of the deferred tax valuation reserve. Our risk based capital ratios continue to exceed the published regulatory guidelines for “Well Capitalized” institutions. Our leveraged capital ratio was 7.97% at June 30, 2010.

The Net Interest Margin for the second quarter of 2010 was 3.92%, a decrease of 41 basis points from the first quarter of 2010 which was the result of the Bank’s significantly improved liquidity and the reduction of earning loans. The Bank’s cost of deposits remains low at 1.00% in the second quarter, compared to .91% in the first quarter. The increase was primarily attributed to the longer-term deposit funding acquired, and remains low relative to peer banks.

Nonperforming assets (loans 90 days or more past due or on nonaccrual, plus Other Real Estate Owned) were $10,454,000 or 9.30% of total assets at June 30, 2010, an 11% or $1,308,000 reduction from December 31, 2009. Additions in 2010 of $2,161,000 were more than offset through the sale of notes and real estate, and additional market valuation adjustments. Loans past due 30-89 days totaled $597,000 at June 30, 2010, the majority of which was current in July. Additional information about nonperforming assets can be found in the table below.

The Allowance for Loan Losses stands at 3.50% of loans outstanding at June 30, 2010, significantly higher than the 2.90% at year-end 2009 and than one year earlier at 2.37%. All nonaccrual loans are either considered impaired and are carried at the lower of their expected liquidation value or the loan balance, or have specific reserves identified to the particular loan.

Details of the nonperforming assets are included in the table below.

The Bank’s real estate acquisition and development portfolio, exclusive of the nonperforming loans reflected above, is $12,571,000 at June 30, 2010, $3,013,000 of which represents short-term residential construction loans to strong, reputable buyers and/or pre-sold to accommodate the sale of lot developments, which has proven to be a successful strategy for the Bank. Our goal remains to significantly reduce our exposure in acquisition and development loans in 2010.

The second quarter 2010 results are disappointing. We continue to aggressively pursue liquidation alternatives for our problem loans, and while we have made progress it has not been as quickly as we had expected, with several expected actions carrying over into the last half of 2010. Our team continues to seek business opportunities which include credit relationships that reflect our mission as a Business and Private Banking Bank. Our priorities for 2010 remain unchanged: 1) a significant reduction in our nonperforming assets, 2) progress towards achieving sustained profitability, 3) staying true to our mission of local relationship banking, 4) continued focus on cost control, accountability and transparency, and 5) retention of our high performing employees; all of which will translate into improved shareholder value.

If you have any questions regarding the Bank’s financial condition, please contact Sue Campo, CFO at (503) 906-3941.

Sincerely,

Karen Lantz Fornshell
President & CEO

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