Financial Performance

Dear Shareholder:

Northwest Bank reported net income of $240,000 for the second quarter of 2008, compared to a net loss of $154,000 for the same period in 2007, and a net loss of $150,000 for the first quarter of 2008. For the six months ended June 30, 2008 the Bank reported net income of $90,000, compared to a net loss of $291,000 for the same period in 2007. The second quarter 2008 earnings include a significant partial recovery of a loan charged off in the second half of 2007. The Bank was successful in its negotiations to acquire real estate collateral for this previously unsecured charge-off, enabling this significant loan loss recovery, and remains cautiously optimistic on the prospects for additional recovery. Loans outstanding, gross, increased $1,742,000 in the second quarter of 2008, to $102,563,000, and grew $12,117,000 or 13% in the first six months of 2008. Deposits grew $9,788,000 in the second quarter of 2008 to $89,899,000, and grew $9,778,000 or 12% in the first half of the year. Growth was centered in local core deposits, and further reduced reliance on non-core funding sources. As of June 30, 2008 the Bank’s total assets were $111,017,000 and total equity was $20,242,000, which equates to a book value per share of $9.16. Core deposit and loan growth, balanced with profitability remain the Bank’s primary focus areas for 2008.

The Bank remains “well-capitalized” under the banking regulation definition, with a leveraged capital ratio of 17.9% at June 30, 2008. “Well-capitalized” status requires that a bank’s leverage ratio be in excess of 5%.

The 2008 operating results include several significant items, namely the operating costs for our recently opened Central Eastside Banking Center, opened late 2007, which is expected to negatively impact earnings during the first year of its operation; the impact of the aggressive rate cuts taken by the Federal Reserve Bank in the first quarter, directly affecting the yield on our loan portfolio; the $922,000 loan loss recovery discussed above; and the impact on the loan loss provision for certain nonperforming real estate assets. Nonperforming assets (loans 90 days or more past due or on nonaccrual) are 3.08% of gross loans outstanding, and consists of three borrower relationships, but is concentrated in one real estate secured land development loan.

The Bank’s overall credit quality remains sound. As of June 30, 2008 our Allowance for Loan Losses stands at 1.83% of loans outstanding, which was increased from 1.38% at March 31 to address the nonperforming assets. The $1,099,000 in Other Real Estate Owned, represents two properties associated with one former borrower; an interest in a commercial building and a land development project acquired through negotiation. We have thoroughly reviewed our loan portfolio, and it remains well diversified, with acceptable levels of exposure to land development and construction loans that are being closely monitored. We have no subprime loans.

While the current economic environment remains very challenging, we continue to diligently monitor our loan portfolio and aggressively manage the inherent risk. The bank remains focused on organic growth and diversification of our revenue base, improved operating margins, and enhancement of shareholder return. We are pleased with our progress over this last quarter and excited about the team of professionals we have in place to continue to move the bank forward.

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

Report to Shareholders

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