**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549







**FORM
      10-Q**




x
            Quarterly
                report Pursuant to section 13 or 15(d) of the Securities and Exchange
                act
                of 1934
              **For
                the quarter ended June 30, 2008**o
            Transition
                report pursuant to section 13 or 15(d) of the Securities and Exchange
                act
                of 1934
              For
                the transition period from ________ to
                ________




**Commission
      file number 0-23881**







**COWLITZ
      BANCORPORATION**


(Exact
      name of registrant as specified in its charter)




**Washington**
            **91-1529841**(State
                or other jurisdiction
              of
                incorporation or organization)
            (I.R.S.
                Employer
              Identification
                No.)





927
      Commerce Ave., Longview, Washington 98632


(Address
      of principal executive offices) (Zip Code)




(360)
      423-9800


(Registrant's
      telephone number, including area code)




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.


Yes
x
      No o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See
      definition of “large accelerated filer”, “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




o Large
      accelerated
      filer    o Accelerated
      filer     o Non-accelerated
      filer xSmaller
      reporting
      company




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).


Yes
o
      No x




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




Common
      Stock, no par value on July 31, 2008: 5,067,379 shares









**COWLITZ
      BANCORPORATION AND SUBSIDIARY**


**TABLE
      OF CONTENTS**




PAGEPart
                I
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                StatementsConsolidated
                Statements of Condition -
              June
                30, 2008 and December 31, 2007
            3Consolidated
                Statements of Income -
              Three
                and six months ended June 30, 2008 and June 30, 2007
            4Consolidated
                Statements of Changes in Shareholders' Equity and Comprehensive Income
                -
              Six
                months ended June 30, 2008 and year ended December 31,
                2007
            5Consolidated
                Statements of Cash Flows -
              Six
                months ended June 30, 2008 and June 30, 2007
            6Notes
                to Consolidated Financial Statements
            7Item
                2.
            Management's
                Discussion and Analysis of Financial Condition
              And
                Results of Operations
            13Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            24Item
                4T.
            Controls
                and Procedures
            25Part
                II
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            25Item
                1A.
            Risk
                Factors
            25Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            26Item
                3.
            Defaults
                upon Senior Securities
            26Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            26Item
                5.
            Other
                Information
            26Item
                6.
            Exhibits
            26Signatures
            27




Forward-Looking
      Statements




Management’s
      discussion and the information in this document and the accompanying financial
      statements contain forward-looking statements, within the meaning of the Private
      Securities Litigation Reform Act of 1995. Forward-looking statements, which
      are
      based on certain assumptions and describe future plans, strategies and
      expectations of the Company, are generally identifiable by words such as
      "expect", "believe", "intend", "anticipate", "estimate" or similar expressions,
      and are subject to risks and uncertainties that could cause actual results
      to
      differ materially from those stated. Examples of such risks and uncertainties
      that could have a material adverse effect on the operations and future prospects
      of the Company, and could render actual results different from those expressed
      in the forward-looking statements, include, without limitation: those set forth
      in our most recent Form 10-K and other filings with the SEC, changes in general
      economic conditions, competition for financial services in the market area
      of
      the Company, the impact of the current national and regional economy (including
      real estate values) or loan demand and borrowers’ financial capacity in the
      Company’s market, quality of the loan and investment portfolio, deposit flows,
      legislative and regulatory initiatives, and monetary and fiscal policies of
      the
      U.S. Government affecting interest rates. The reader is advised that this list
      of risks is not exhaustive and should not be construed as any prediction by
      the
      Company as to which risks would cause actual results to differ materially from
      those indicated by the forward-looking statements. Readers are cautioned not
      to
      place undue reliance on these forward-looking statements. Risks identified
      are
      applicable as of the date made. Forward looking statements in this document
      include, without limitation, statements regarding the adequacy of our allowance
      for loan losses and liquidity. We undertake no obligation to update publicly
      or
      revise any forward-looking statements. You should not place undue reliance
      on
      forward-looking statements, which speak only as of the date on which they are
      made.




2


**Part
      I. FINANCIAL INFORMATION**




**Item
      1. Financial Statements**




**COWLITZ
      BANCORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CONDITION**


**(UNAUDITED)**


*(dollars
                  in thousands)*
              
              June
                  30,
                2008
              
              December
                  31,
                2007**Assets**Cash
                  and cash equivalents
              
              $
              28,606
              
              $
              31,251Investment
                  securities
              
              
              43,538
              
              
              51,578Federal
                  Home Loan Bank stock, at cost
              
              
              1,247
              
              
              1,247Loans,
                  net of deferred loan fees
              
              
              428,187
              
              
              397,325Allowance
                  for loan losses
              
              
              (14,033
              )
              
              (5,801
              )Total
                  loans, net
              
              
              414,154
              
              
              391,524Cash
                  surrender value of bank-owned life insurance
              
              
              14,634
              
              
              14,328Premises
                  and equipment
              
              
              6,312
              
              
              6,515Goodwill
                  and other intangibles
              
              
              1,798
              
              
              1,834Accrued
                  interest receivable and other assets
              
              
              20,021
              
              
              15,903**Total
                  assets**
              
              $
              530,310
              
              $
              514,180**Liabilities**Deposits:Non-interest-bearing
                  demand
              
              $
              86,984
              
              $
              91,662Savings
                  and interest-bearing demand
              
              
              30,783
              
              
              35,792Money
                  market
              
              
              78,839
              
              
              86,658Certificates
                  of deposit
              
              
              268,766
              
              
              227,067Total
                  deposits
              
              
              465,372
              
              
              441,179Federal
                  funds purchased
              
              
              475
              
              
              1,050Junior
                  subordinated debentures and other borrowings
              
              
              12,460
              
              
              12,501Accrued
                  interest payable and other liabilities
              
              
              3,768
              
              
              3,910**Total
                  liabilities**
              
              
              482,075
              
              
              458,640**Commitments
                  and contingencies**(Note 8)**Shareholders'
                  equity**Preferred
                  stock, no par value; 5,000,000 shares authorized; no shares issued
                  and outstanding at June 30, 2008 and December 31, 2007
              
              
              -
              
              
              -Common
                  stock, no par value; 25,000,000 shares authorized with 5,067,379 and
                  5,054,437 shares issued and outstanding at June 30, 2008 and December
                  31, 2007, respectively
              
              
              29,013
              
              
              28,936Additional
                  paid-in capital
              
              
              2,519
              
              
              2,484Retained
                  earnings
              
              
              14,564
              
              
              21,753Accumulated
                  other comprehensive income
              
              
              2,139
              
              
              2,367**Total
                  shareholders' equity**
              
              
              48,235
              
              
              55,540**Total
                  liabilities and shareholders' equity**
              
              $
              530,310
              
              $
              514,180




*See
      accompanying notes*




3




**COWLITZ
      BANCORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(UNAUDITED)**


Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30,
              
              June
                  30*(dollars
                  in thousands, except per share amounts)*
              
              2008
              
              2007
              
              2008
              
              2007**Interest
                  income**Interest
                  and fees on loans
              
              $
              8,270
              
              $
              8,291
              
              $
              16,686
              
              $
              16,289Interest
                  on taxable investment securities
              
              
              341
              
              
              457
              
              
              705
              
              
              943Interest
                  on non-taxable investment securities
              
              
              263
              
              
              220
              
              
              525
              
              
              440Other
                  interest and dividend income
              
              
              58
              
              
              56
              
              
              163
              
              
              120Total
                  interest income
              
              
              8,932
              
              
              9,024
              
              
              18,079
              
              
              17,792**Interest
                  expense**Savings
                  and interest-bearing demand deposits
              
              
              450
              
              
              493
              
              
              1,049
              
              
              800Certificates
                  of deposit
              
              
              2,583
              
              
              2,737
              
              
              5,523
              
              
              5,206Federal
                  funds purchased and other borrowings
              
              
              26
              
              
              36
              
              
              39
              
              
              63Junior
                  subordinated debentures
              
              
              138
              
              
              218
              
              
              331
              
              
              431Total
                  interest expense
              
              
              3,197
              
              
              3,484
              
              
              6,942
              
              
              6,500**Net
                  interest income before provision for credit
                  losses**
              
              
              5,735
              
              
              5,540
              
              
              11,137
              
              
              11,292Provision
                  for credit losses
              
              
              13,002
              
              
              -
              
              
              13,595
              
              
              275**Net
                  interest income (loss) after provision for credit
                  losses**
              
              
              (7,267
              )
              
              5,540
              
              
              (2,458
              )
              
              11,017**Non-interest
                  income**Service
                  charges on deposit accounts
              
              
              179
              
              
              171
              
              
              343
              
              
              337International
                  trade fees
              
              
              135
              
              
              133
              
              
              335
              
              
              279Fiduciary
                  income
              
              
              163
              
              
              174
              
              
              336
              
              
              364Increase
                  in cash surrender value of bank-owned life insurance
              
              
              154
              
              
              137
              
              
              306
              
              
              273Wire
                  fees
              
              
              84
              
              
              94
              
              
              165
              
              
              175Mortgage
                  brokerage fees
              
              
              46
              
              
              81
              
              
              108
              
              
              133Securities
                  losses
              
              
              (432
              )
              
              -
              
              
              (432
              )
              
              -Other
                  income
              
              
              118
              
              
              119
              
              
              248
              
              
              254Total
                  non-interest income
              
              
              447
              
              
              909
              
              
              1,409
              
              
              1,815**Non-interest
                  expense**Salaries
                  and employee benefits
              
              
              2,500
              
              
              2,419
              
              
              5,007
              
              
              4,915Net
                  occupancy and equipment
              
              
              630
              
              
              553
              
              
              1,247
              
              
              1,092Professional
                  services
              
              
              208
              
              
              384
              
              
              471
              
              
              771Data
                  processing and communications
              
              
              231
              
              
              210
              
              
              446
              
              
              470Business
                  taxes
              
              
              125
              
              
              117
              
              
              242
              
              
              210Interest
                  rate contracts adjustments
              
              
              89
              
              
              506
              
              
              317
              
              
              633FDIC
                  assessment
              
              
              96
              
              
              12
              
              
              187
              
              
              24Foreclosed
                  asset expense, net
              
              
              2,036
              
              
              422
              
              
              1,874
              
              
              422Other
                  expense
              
              
              1,009
              
              
              921
              
              
              1,743
              
              
              1,649Total
                  non-interest expense
              
              
              6,924
              
              
              5,544
              
              
              11,534
              
              
              10,186**Income
                  (loss) before provision for income taxes**
              
              
              (13,744
              )
              
              905
              
              
              (12,583
              )
              
              2,646**Income
                  tax provision (benefit)**
              
              
              (5,653
              )
              
              232
              
              
              (5,394
              )
              
              695**Net
                  income (loss)**
              
              $
              (8,091
              )
              $
              673
              
              $
              (7,189
              )
              $
              1,951**Earnings
                  (loss) per common share:**Basic
              
              $
              (1.60
              )
              $
              0.14
              
              $
              (1.42
              )
              $
              0.40Diluted
              
              $
              (1.60
              )
              $
              0.13
              
              $
              (1.42
              )
              $
              0.38**Weighted
                  average shares outstanding:**Basic
              
              
              5,055,621
              
              
              4,944,457
              
              
              5,055,047
              
              
              4,922,595Diluted
              
              
              5,055,621
              
              
              5,191,600
              
              
              5,055,047
              
              
              5,185,684




*See
      accompanying notes*




4




**COWLITZ
      BANCORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS'**


**EQUITY
      AND COMPREHENSIVE INCOME (LOSS)**


**(UNAUDITED)**


**Accumulated****Additional**
              
              
              
              **Other**
              
              **Total****Common
                  stock**
              
              **Paid-in**
              
              **Retained**
              
              **Comprehensive**
              
              **Shareholders’***(dollars
                  in thousands, except shares)*
              
              **Shares**
              
              **Amount**
              
              **Capital**
              
              **Earnings**
              
              **Income
                  (Loss)**
              
              **Equity****Balance,
                  December 31, 2006**
              
              
              4,889,323
              
              $
              27,279
              
              $
              2,366
              
              $
              21,667
              
              $
              (587
              )
              $
              50,725Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              86
              
              
              -
              
              
              86Net
                  change in unrealized gain on:Investments
                  available-for-sale, net of taxes of $7
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              14
              
              
              14Cash
                  flow hedges, net of taxes of $1,582
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,940
              
              
              2,940Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,040Proceeds
                  from the exercise of stock options and employee
                  stock purchases
              
              
              165,114
              
              
              1,657
              
              
              -
              
              
              -
              
              
              -
              
              
              1,657Share-based
                  compensation
              
              
              -
              
              
              -
              
              
              118
              
              
              -
              
              
              -
              
              
              118**Balance,
                  December 31, 2007**
              
              
              5,054,437
              
              
              28,936
              
              
              2,484
              
              
              21,753
              
              
              2,367
              
              
              55,540Comprehensive
                  loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (7,189
              )
              
              -
              
              
              (7,189
              )Net
                  change in unrealized gain (loss) on:Investments
                  available-for-sale, net of taxes of ($165)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (305
              )
              
              (305
              )Cash
                  flow hedges, net of taxes of $42
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              77
              
              
              77Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,417
              )Proceeds
                  from the exercise of stock options and employee
                  stock purchases
              
              
              12,942
              
              
              77
              
              
              -
              
              
              -
              
              
              -
              
              
              77Share-based
                  compensation
              
              
              -
              
              
              -
              
              
              35
              
              
              -
              
              
              -
              
              
              35**Balance,
                  June 30, 2008**
              
              
              5,067,379
              
              $
              29,013
              
              $
              2,519
              
              $
              14,564
              
              $
              2,139
              
              $
              48,235




*See
      accompanying notes*




5




**COWLITZ
      BANCORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**




Six
                    Months Ended
                  June
                    30,*(dollars
                    in thousands)*
                
                2008
                
                2007**Cash
                    flows from operating activities**Net
                    income (loss)
                
                $
                (7,189
                )
                $
                1,951Adjustments
                    to reconcile net income (loss) to net cash provided by operating
                    activities:Deferred
                    tax provision
                
                
                (5,394
                )
                
                695Share-based
                    compensation
                
                
                43
                
                
                280Excess
                    tax benefit on stock options exercised
                
                
                -
                
                
                (56
                )Depreciation
                    and amortization
                
                
                847
                
                
                472Provision
                    for credit losses
                
                
                13,595
                
                
                275Increase
                    in cash surrender value of bank-owned life insurance
                
                
                (306
                )
                
                (273
                )Net
                    loss on sales and write-downs of investment securities
                
                
                432
                
                
                -Interest
                    rate contracts adjustments
                
                
                261
                
                
                633Net
                    (gain) loss on sale of foreclosed assets
                
                
                (236
                )
                
                306Write-down
                    of foreclosed assets
                
                
                1,952
                
                
                305Increase
                    in accrued interest receivable and other assets
                
                
                (412
                )
                
                (700
                )Decrease
                    in accrued interest payable and other liabilities
                
                
                (205
                )
                
                (382
                )Other
                
                
                30
                
                
                28Net
                    cash provided by operating activities
                
                
                3,418
                
                
                3,534**Cash
                    flows from investing activities**Proceeds
                    from maturities and sales of investment securities
                
                
                10,414
                
                
                3,394Net
                    increase in loans
                
                
                (40,725
                )
                
                (24,820
                )Proceeds
                    from sale of foreclosed assets
                
                
                1,102
                
                
                317Purchases
                    of investment securities
                
                
                (405
                )
                
                -Proceeds
                    from termination of cash flow hedging instrument
                
                
                482
                
                
                -Purchases
                    of bank-owned life insurance
                
                
                -
                
                
                (267
                )Purchases
                    of premises and equipment
                
                
                (257
                )
                
                (760
                )Net
                    cash used by investing activities
                
                
                (29,389
                )
                
                (22,136
                )**Cash
                    flows from financing activities**Net
                    increase in deposits
                
                
                23,865
                
                
                18,474Net
                    increase (decrease) in federal funds purchased
                
                
                (575
                )
                
                375Repayment
                    of Federal Home Loan Bank and other borrowings
                
                
                (41
                )
                
                (62
                )Proceeds
                    from the exercise of stock options
                
                
                77
                
                
                725Excess
                    tax benefit on stock options exercised
                
                
                -
                
                
                56Net
                    cash provided by financing activities
                
                
                23,326
                
                
                19,568**Net
                    increase (decrease) in cash and cash equivalents**
                
                
                (2,645
                )
                
                966**Cash
                    and cash equivalents, beginning of period**
                
                
                31,251
                
                
                26,581**Cash
                    and cash equivalents, end of period**
                
                $
                28,606
                
                $
                27,547**Supplemental
                    disclosure of cash flow information**Cash
                    paid for interest
                
                $
                7,244
                
                $
                6,050**Supplemental
                    disclosure of investing and financing activities**Loans
                    transferred to foreclosed assets
                
                $
                4,525
                
                $
                618




*See
      accompanying notes*




6




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**




**1.** **Organization
          and Summary of Significant Accounting Policies**




**Organization –** Cowlitz
      Bancorporation (the Company) was organized in 1991 under Washington law to
      become the holding company for Cowlitz Bank (the “Bank”), a Washington state
      chartered bank that commenced operations in 1978. The principal executive
      offices of the Company are located in Longview, Washington. The Bank operates
      four branches in Cowlitz County in southwest Washington. Outside of Cowlitz
      County, the Bank does business under the name Bay Bank with branches in
      Bellevue, Seattle, and Vancouver, Washington, and Portland, Oregon, and a
      limited service branch in a retirement center in Wilsonville, Oregon. The Bank
      also provides mortgage banking services through its Bay Mortgage division with
      offices in Longview and Vancouver, Washington.




The
      Company offers or makes available a broad range of financial services to its
      customers, primarily small- and medium-sized businesses, professionals, and
      retail customers. The Bank's commercial and personal banking services include
      commercial and real estate lending, consumer lending, international banking
      services, internet banking, mortgage banking and trust services.




**Principles
      of consolidation** -
      The
      accompanying consolidated financial statements include the accounts of the
      Company and its subsidiary. All significant intercompany transactions and
      balances have been eliminated. The Company has one wholly-owned trust, Cowlitz
      Statutory Trust I (the Trust), for purposes of issuing guaranteed undivided
      beneficial interests in junior subordinated debentures (Trust Preferred
      Securities). In accordance with Financial Accounting Standards Board’s
      Interpretation No. 46 (revised December 2003) “Consolidation of Variable
      Interest Entities,” the Company does not consolidate the Trust. Certain
      reclassifications have been made in prior year’s data to conform to the current
      year’s presentation.




The
      interim financial statements have been prepared without an audit and in
      accordance with the instructions to Form 10-Q, generally accepted accounting
      principles, and banking industry practices. Accordingly, they do not include
      all
      the information and footnotes required by accounting principles generally
      accepted in the United States of America for complete financial statements.
      In
      the opinion of management, all adjustments, including 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. The results
      of operations for the three and six months ended June 30, 2008 are not
      necessarily indicative of results to be anticipated for the year ending December
      31, 2008. The interim consolidated financial statements should be read in
      conjunction with the December 31, 2007 consolidated financial statements,
      including the notes thereto, included in the Company’s 2007 Annual Report on
      Form 10-K.




**Operating
      Segments –** The
      Company is principally engaged in community banking activities through its
      branches and corporate offices. Community banking activities include accepting
      deposits, providing loans and lines of credit to local individuals, businesses
      and governmental entities, investing in investment securities and money market
      instruments, international banking services, and holding or managing assets
      in a
      fiduciary agency capacity on behalf of its trust customers and their
      beneficiaries. The Company also provides mortgage lending solutions for its
      customers, consisting of all facets of residential lending including FHA and
      VA
      loans, construction loans, and “bridge” loans. While management monitors the
      revenue streams of the various products and services, financial performance
      is
      being evaluated on a company-wide basis for 2008 and in 2007. Accordingly,
      operations were considered by management to be aggregated within one reportable
      operating segment.




**Use
      of estimates in preparation of the consolidated financial statements -** Preparation
      of the consolidated financial statements, in conformity with accounting
      principles generally accepted in the United States of America, requires
      management to make certain estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the financial statements and the reported amounts
      of
      revenues and expenses during the reporting period. Actual results could differ
      from those estimates. Significant estimates include the allowance for credit
      losses and carrying values of the Company's goodwill and other real estate
      owned.




**Derivative
      Financial Instruments -** In
      the
      ordinary course of business, the Company enters into derivative transactions
      to
      manage its interest rate risk. All derivative instruments are recorded as either
      other assets or other liabilities at fair value. Subsequent changes in a
      derivative’s fair value are recognized currently in earnings and included in
      non-interest expense unless specific hedge accounting criteria are met.




All
      derivative instruments that qualify for hedge accounting are recorded at fair
      value and classified either as a hedge of the fair value of a recognized asset
      or liability (“fair value” hedge) or as a hedge of the variability of cash flows
      to be received or paid related to a recognized asset or liability or a
      forecasted transaction (“cash flow” hedge). Changes in the fair value of a
      derivative that is highly effective and designated as a fair value hedge and
      the
      offsetting changes in the fair value of the hedged item are recorded in income.
      Changes in the fair value of a derivative that is highly effective and
      designated as a cash flow hedge are recognized in other comprehensive income
      until income from the cash flows of the hedged item is recognized. The Company
      performs an assessment, both at the inception of the hedge and on a quarterly
      basis thereafter, when required, to determine whether these derivatives are
      expected to continue to be highly effective in offsetting changes in the value
      of the hedged items. Any change in fair value resulting from hedge
      ineffectiveness is immediately recorded in non-interest expense.




7




If
      a
      derivative designated as a cash flow hedge is terminated or ceases to be highly
      effective, the gain or loss is amortized to earnings over the same period(s)
      that the forecasted hedged transactions impact earnings (cash flow hedge).
      If
      the hedged item is disposed of, or the forecasted transaction is no longer
      probable, the derivative is recorded at fair value with any resulting gain
      or
      loss included in the gain or loss from the disposition of the hedged item or,
      in
      the case of a forecasted transaction that is no longer probable, included in
      earnings immediately.




**Recently
      Issued Accounting Standards -** In
      September 2006, the FASB issued Statement No. 157, “ *Fair
      Value Measurements* ,”
(SFAS
      157). This statement defines fair value, establishes a framework for measuring
      fair value, and expands disclosures about fair value measurements. The statement
      establishes a fair value hierarchy about the assumptions used to measure fair
      value and clarifies assumptions about risk and the effect of a restriction
      on
      the sale or use of an asset. The Company adopted this statement on January
      1,
      2008. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2,
      “ *Effective
      Date of FASB Statement No. 157”.* This FSP
      delayed the effective date of FAS 157 for all nonfinancial assets and
      nonfinancial liabilities, except those that are recognized or disclosed at
      fair
      value on a recurring basis (at least annually) to fiscal years beginning after
      November 15, 2008, and interim periods within those fiscal years. The Company’s
      adoption of FAS 157-2 is not expected to have a material impact on the Company’s
      financial statements.




In
      December 2007, FASB issued SFAS No. 141 (revised), *Business
      Combinations* .
      SFAS
      No. 141R establishes principles and requirements for how an acquirer recognizes
      and measures in its financial statements the identifiable assets acquired,
      the
      liabilities assumed, any non-controlling interest in the acquired entity and
      the
      goodwill acquired. SFAS No. 141R also establishes disclosure requirements to
      enable the evaluation of the nature and financial effects of the business
      combination. This statement applies prospectively to business combinations
      for
      which the acquisition date is on or after January 1, 2009. We are currently
      evaluating the impact of the adoption of SFAS No. 141R.




In
      March
      2008, the FASB issued Statement of Financial Accounting Standards No. 161,
      “ *Disclosures
      about Derivative Instruments and Hedging Activities—an amendment of FASB
      Statement No. 133,”* (SFAS
      161). This Statement requires enhanced disclosures about an entity’s derivative
      and hedging activities and is effective for financial statements issued for
      fiscal years and interim periods beginning after November 15, 2008. The Company
      plans to apply the enhanced disclosure provisions of SFAS 161 to all derivative
      and hedging activities.




**2.** **Cash
          and Cash Equivalents**




For
      the
      purpose of presentation in the statements of cash flows, cash and cash
      equivalents include cash on hand, amounts due from banks including short-term
      certificates of deposit (original maturities of 90 days or less), and federal
      funds sold. Federal funds sold generally mature the day following
      purchase.




**3.** **Earnings
          (Loss) Per Share**




The
      following table reconciles the denominator of the basic and diluted earnings
      (loss) per share computations:




Three
                Months Ended
              June
                30,
            
            Six
                Months Ended
              June
                30,2008
            
            2007
            
            2008
            
            2007Weighted-average
                shares outstanding – basic
            
            
            5,055,621
            
            
            4,944,457
            
            
            5,055,047
            
            
            4,922,595Effect
                of assumed conversion of stock options
            
            
            -
            
            
            247,143
            
            
            -
            
            
            263,089Weighted-average
                shares outstanding – diluted
            
            
            5,055,621
            
            
            5,191,600
            
            
            5,055,047
            
            
            5,185,684




No
      options to purchase shares were included in the computation of diluted earnings
      (loss) per share for the three and six months ended June 30, 2008, as their
      inclusion would be anti-dilutive. All options outstanding were included in
      the
      computation of diluted earnings (loss) per share for the three and six-month
      periods of 2007.




**4.**  **Share-Based
      Compensation**




The
      Company has a stock option plan and a stock appreciation rights (SAR) plan.
      Compensation costs related to these plans are recognized on a straight-line
      basis. Compensation cost charged against income for the plans was $36,000 and
      $43,000 for the three and six-months ended June 30, 2008, respectively, compared
      with $55,000 and $280,000 for the same periods of 2007, respectively. Income
      tax
      benefits recognized in the income statement for share-based compensation were
      $13,000 and $15,000 for the three and six-months of 2008, respectively, compared
      with $19,000 and $95,000 for the same periods of 2007, respectively. At June
      30,
      2008, unrecognized estimated compensation cost related to non-vested SARs and
      stock options was $167,000 and $10,200 respectively, which is expected to be
      recognized over weighted average periods of 2.0 and 0.9 years, respectively.




8




The
      Company generally grants its annual SAR awards in the first quarter of the
      calendar year. The Company awarded 147,900 and 125,800 SARs in the first
      quarters of 2008 and 2007, respectively, with grant date fair values of $9.15
      and $16.65, respectively. The fair value of the SARs awarded in 2008 was
      estimated on grant date using the Black-Scholes option pricing model with the
      following assumptions: expected volatility of 26.85%; expected term of 5.11
      years; dividend yield of zero; and risk free rate of return of 3.36%. The fair
      value of each SAR awarded in 2007 was estimated using the following weighted
      average assumptions: expected volatility of 26.46%; expected term of 5.11 years;
      dividend yield of zero; and risk free rate of return of 4.47%. The fair value
      of
      all SAR awards outstanding were revalued as of June 30, 2008 with a market
      close
      price of $7.55 and the following weighted average assumptions: expected
      volatility of 27.81%; expected term of 4.29 years; dividend yield of zero;
      and
      risk-free rate of return of 4.01%. After revaluation of all SAR awards
      outstanding at June 30, 2008, the Company recognized $33,700 of compensation
      expense in the second quarter of 2008. The expense recognized in the second
      quarter of 2007 related to SAR awards outstanding at June 30, 2007, was
      $42,000.




The
      fair
      value of each stock option grant is estimated as of the grant date using the
      Black-Scholes option-pricing model. There were no stock options granted in
      the
      six months ended June 30, 2008. During the first six months of 2007, 7,000
      stock
      options were granted with the fair value of the options estimated using the
      following assumptions: expected volatility of 26.46%; expected term of 5.11
      years; dividend yield of zero; and risk free rate of return of 4.47%.
      Compensation expense related to stock options was $4,600 and $69,100 in the
      first six months of 2008 and 2007, respectively. Share-based compensation cost
      in 2007 also included $49,800 of costs related to the accelerated vesting of
      stock options granted in prior years for a retiring director. The following
      table summarizes stock option activity for the six months ended June 30,
      2008:




(dollars
                in thousands)
            
            Options
              Outstanding
            
            Weighted-Avg.
              Exercise Price
            
            Weighted-Avg.
              Remaining
                ContractualTerm
              (years)
            
            Aggregate
              Intrinsic Value
              (in thousands)Balance,
                beginning of period
            
            
            722,136
            
            $
            10.92Granted
            
            
            -
            
            
            -Exercised
            
            
            (3,070
            )
            
            4.53Forfeited/Expired
            
            
            (42,000
            )
            
            10.70Balance,
                end of period
            
            
            677,066
            
            
            10.96
            
            
            4.7
            
            $
            140,260Exercisable,
                end of period
            
            
            672,866
            
            
            10.92
            
            
            4.7
            
            $
            140,260




The
      total
      intrinsic value of options exercised was $13,000 and $300,800 in the first
      six
      months of 2008 and 2007, respectively. The amount of cash received from the
      exercise of stock options was $14,000 and $668,400 in the comparable periods
      of
      2008 and 2007, respectively.




**5.
      Comprehensive Income (Loss)**




For
      the
      Company, comprehensive income (loss) primarily includes net income (loss)
      reported on the statements of operations and changes in the fair value of
      available-for-sale investment securities and interest rate contracts accounted
      for as cash flow hedges. These amounts are included in “Accumulated Other
      Comprehensive Income (Loss)” on the consolidated statement of changes in
      shareholders’ equity.




9


Three
                    Months Ended
                  June
                    30,
                
                Six
                    Months Ended
                  June
                    30,(dollars
                    in thousands)
                
                2008
                
                2007
                
                2008
                
                2007Net
                    income (loss) reported
                
                $
                (8,091
                )
                $
                673
                
                $
                (7,189
                )
                $
                1,951Unrealized
                    gain (loss) from securities:Net
                    unrealized loss on available-for-sale securities arisingduring
                    the period, net of tax
                
                
                (750
                )
                
                (607
                )
                
                (585
                )
                
                (536
                )Reclassification
                    adjustment of loss included inincome,
                    net of tax
                
                
                280
                
                
                -
                
                
                280
                
                
                -Net
                    unrealized loss from securities
                
                
                (470
                )
                
                (607
                )
                
                (305
                )
                
                (536
                )Unrealized
                    gain (loss) from cash flow hedging instruments:Net
                    unrealized loss from cash flow hedging instrumentsarising
                    during the period, net of tax
                
                
                (2,529
                )
                
                (1,027
                )
                
                (70
                )
                
                (860
                )Reclassification
                    adjustment of loss included inincome,
                    net of tax
                
                
                28
                
                
                326
                
                
                147
                
                
                408Net
                    unrealized gain (loss) from cash flow hedging instruments
                
                
                (2,501
                )
                
                (701
                )
                
                77
                
                
                (452
                )Total
                    comprehensive income (loss)
                
                $
                (11,062
                )
                $
                (635
                )
                $
                (7,417
                )
                $
                963




**6.** **Investment
          Securities**




The
      following table presents the composition and carrying value of the Company’s
      available for sale investment portfolio:




(dollars
                in thousands)
            
            June
                30,
              2008
            
            December
                31,
              2007Agency
                securities
            
            $
            1,540
            
            $
            1,514Mortgage-backed
                securities
            
            
            19,545
            
            
            27,263Municipal
                bonds
            
            
            22,453
            
            
            22,801$
            43,538
            
            $
            51,578




The
      following table presents the gross unrealized losses and fair value of the
      Company’s investment securities aggregated by investment category and length of
      time that individual securities have been in a continuous unrealized loss
      position at June 30, 2008:




Less
                Than 12 Months
            
            12
                Months or More
            
            Total(dollars
                in thousands)
            
            Fair
              Value
            
            Unrealized
              Losses
            
            Fair
              Value
            
            Unrealized
              Losses
            
            Fair
              Value
            
            Unrealized
              LossesAgency
                securities
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Mortgage-backed
                securities
            
            
            9,948
            
            
            (346
            )
            
            1,843
            
            
            (51
            )
            
            11,791
            
            
            (397
            )Municipal
                bonds
            
            
            12,954
            
            
            (301
            )
            
            274
            
            
            (11
            )
            
            13,228
            
            
            (312
            )$
            22,902
            
            $
            (647
            )
            $
            2,117
            
            $
            (62
            )
            $
            25,019
            
            $
            (709
            )




At
      June
      30, 2008, there were 61 investment securities in an unrealized loss position,
      of
      which 4 were in a continuous loss position for 12 months or more. The Company
      uses an independent third party to determine current market values of the
      securities it holds. These fair market values are compared to current carrying
      values to determine if a security is in a gain or loss position. As market
      rates
      fluctuate, a security’s fair value can move from a gain or loss position. Due to
      the extraordinarily unsettled equity market for government-sponsored
      enterprises, the Company recorded an other-than-temporary impairment charge
      of
      $232,000 on one FNMA investment grade perpetual callable preferred security
      in
      the second quarter of 2008. The Company believes that the unrealized losses
      on
      its other securities that were in a loss position as of June 30, 2008, were
      primarily due to changes in market rates and not credit quality. The Company
      has
      the ability and intent to hold these investments until a market price recovery
      or to maturity, therefore, the unrealized loss on these investments are not
      considered other-than-temporarily impaired.




**7.
      Loans and Allowance for Credit Losses**




The
      following table presents the loan portfolio, in accordance with Bank regulatory
      guidance, as of June 30, 2008 and December 31, 2007:




10




(dollars
                in thousands)
            
            June
                30,
              2008
            
            December
                31,
              2007Commercial
            
            $
            94,468
            
            $
            92,496Real
                estate:Construction
            
            
            123,779
            
            
            109,417Residential
                1-4 family
            
            
            37,130
            
            
            33,224Multifamily
            
            
            3,937
            
            
            6,298Commercial
            
            
            165,445
            
            
            153,139Installment
                and other consumer
            
            
            4,547
            
            
            3,945Total
                loans, gross
            
            
            429,306
            
            
            398,519Deferred
                loan fees
            
            
            (1,119
            )
            
            (1,194
            )Loans,
                net of deferred loan fees
            
            $
            428,187
            
            $
            397,325




The
      allowance for credit losses is based upon estimates of probable losses inherent
      in the loan portfolio and the Company’s commitments to extend credit to
      borrowers. The amount of loss ultimately incurred for these loans can vary
      significantly from the estimated amounts. An analysis of the change in the
      allowance for credit losses is as follows for the periods
      indicated:




Three
                Months Ended
            
            Six
                Months Ended(dollars
                in thousands)
            
            June
                30, 2008
            
            June
                30, 2007
            
            June
                30, 2008
            
            June
                30, 2007Balance
                at beginning of period
            
            $
            6,425
            
            $
            5,098
            
            $
            5,990
            
            $
            4,825Provision
                for credit losses
            
            
            13,002
            
            
            -
            
            
            13,595
            
            
            275Recoveries
            
            
            15
            
            
            148
            
            
            27
            
            
            172Charge-offs
            
            
            (5,195
            )
            
            (61
            )
            
            (5,365
            )
            
            (87
            )Balance
                at end of period
            
            $
            14,247
            
            $
            5,185
            
            $
            14,247
            
            $
            5,185ComponentsAllowance
                for loan losses
            
            $
            14,033
            
            $
            4,875
            
            $
            14,033
            
            $
            4,875Liability
                for unfunded credit commitments
            
            
            214
            
            
            310
            
            
            214
            
            
            310Total
                allowance for credit losses
            
            $
            14,247
            
            $
            5,185
            
            $
            14,247
            
            $
            5,185




Loans
      on
      which the accrual of interest has been discontinued totaled $8.6 million and
      $10.8 million at June 30, 2008 and December 31, 2007, respectively. Loans past
      due more than 90 days and still accruing interest totaled $98,000 and $149,000
      at June 30, 2008 and December 31, 2007 respectively.




**8.
      Commitments and Contingencies**




In
      the
      normal course of business, the Bank enters into agreements with customers that
      give rise to various commitments and contingent liabilities that involve
      elements of credit risk, interest rate risk, and liquidity risk. These
      commitments and contingent liabilities are commitments to extend credit, credit
      card arrangements, and standby letters of credit.




A
      summary
      of the Bank’s undisbursed commitments and contingent liabilities at June 30,
      2008, was as follows:


(dollars
                  in thousands)
              
              TotalCommitments
                  to extend credit
              
              $
              78,409Credit
                  card commitments
              
              
              3,609Standby
                  letters of credit
              
              
              2,411$
              84,429




Commitments
      to extend credit, credit card arrangements, and standby letters of credit all
      include exposure to some credit loss in the event of non-performance of the
      customer. The Bank’s credit policies and procedures for credit commitments and
      financial guarantees are the same as those for extension of credit that are
      recorded in the consolidated statements of condition. Because most of these
      instruments have fixed maturity dates and many of them expire without being
      drawn upon, they do not generally present a significant liquidity risk to the
      Bank.




11




**9.**  **Income
      Taxes**




The
      Company and its subsidiary file income tax returns in the U.S. federal
      jurisdiction and the state of Oregon. The Company is no longer subject to U.S.
      federal, state and local income tax examinations by tax authorities for years
      prior to 2003. The Company’s policy is to recognize interest related to
      unrealized tax benefits and penalties as operating expenses. There were no
      interest or penalties paid during the six-month period ended June 30, 2008
      or
      the twelve-month period ended December 31, 2007. There were no accrued interest
      or penalties as of June 30, 2008 or December 31, 2007. The Company believes
      that
      it has appropriate support for the income tax positions taken and to be taken
      on
      its tax returns, and that its accruals for tax liabilities are adequate for
      all
      open years based on an assessment of many factors including past experience
      and
      interpretations of tax law applied to the facts of each matter.




**10.
      Derivative Instruments and Hedging Activities**




The
      Company holds loans that have variable rates, thus creating exposure to the
      variability or uncertainty of future cash flows due to changes in interest
      rates. The Company’s objective and strategy is to reduce its exposure to
      decreases in cash flows relating to interest receipts on its prime-based
      variable-rate loans. The Company has entered into interest rate contracts to
      manage this risk of overall changes in cash flows associated with those
      prime-based variable-rate loans. The Company entered into three interest rate
      contracts in 2006, an interest rate floor and two interest rate swaps; one
      swap
      was sold in June of 2008. At the time of sale of the swap, the unrealized gain
      was $312,800, net of taxes of $169,200. Since the forecasted transaction at
      the
      inception of the hedging relationship remains probable, this amount will be
      recognized in earnings over approximately the next 35 months. All interest
      rate
      contracts are reported at their fair value in the Consolidated Statements of
      Condition.




At
      June
      30, 2008, interest rate contracts with a fair value of $3.7 million were
      included in other assets and $2.5 million of deferred unrealized gains (net
      of
      taxes of $1.3 million) were included in accumulated other comprehensive income.
      At December 31, 2007, interest rate contracts with a fair value of $4.3 million
      were included in other assets and $2.4 million of deferred unrealized gains
      (net
      of taxes of $1.3 million) were included in accumulated other comprehensive
      income.




**11.
      Fair Value Measurements**




SFAS
      157
      defines fair value as the exchange price that would be received for an asset
      or
      paid to transfer a liability (an exit price) in the principal or most
      advantageous market for the asset or liability in an orderly transaction between
      market participants on the measurement date. SFAS 157 also establishes a fair
      value hierarchy which requires an entity to maximize the use of observable
      inputs and minimize the use of unobservable inputs when measuring fair value.
      The standard describes three levels of inputs that may be used to measure fair
      value:




*Level
      1.* Quoted
      prices (unadjusted) for identical assets or liabilities in active markets that
      the entity has the ability to access as of the measurement date. An active
      market is a market in which transactions for the asset or liability occur with
      significant frequency and volume to provide pricing information on an ongoing
      basis.




*Level
      2.* Significant other observable inputs other than Level 1 prices, such as quoted
      prices for similar assets or liabilities, quoted prices in markets that are
      not
      active, and other inputs that are observable or can be corroborated by
      observable market data by correlation or other means.




*Level
      3.* Significant unobservable inputs that reflect a company’s own assumptions about
      the assumptions that market participants would use in pricing an asset or
      liability developed based on the best information available in the
      circumstances.




The
      Company used the following methods and significant assumptions to estimate
      fair
      value.




*Securities:* The fair
      values of securities available for sale are determined by obtaining quoted
      prices on nationally recognized securities exchanges or matrix pricing, which
      is
      a mathematical technique used widely in the industry to value debt securities
      without relying exclusively on quoted prices for the specific securities but
      rather by relying on the securities’ relationship to other benchmark quoted
      securities.




*Interest
      Rate Contracts:* The
      Company has elected to use the income approach to value the interest rate
      contracts, using observable Level 2 market expectations at measurement date
      and
      standard valuation techniques to convert future amounts to a single present
      amount assuming that participants are motivated, but not compelled to transact.
      As such, significant fair value inputs can generally be verified and do not
      typically involve significant judgments by management.




*Impaired
      Loans:* Impaired
      loans are evaluated and valued at the time the loan is identified as impaired,
      at the lower of cost or fair value. As a practical expedient, fair value may
      be
      measured based on a loan’s observable market price or the underlying collateral
      securing the loan. Collateral may be real estate or business assets including
      equipment. The value of collateral is determined based on independent
      appraisals.




12




Financial
      instruments are broken down in the table that follows by recurring or
      nonrecurring measurement status. Recurring assets are initially measured at
      fair
      value and are required to be remeasured at fair value in the financial
      statements at each reporting date. Assets measured on a nonrecurring basis
      are
      assets that due to an event or circumstance were required to be remeasured
      at
      fair value after initial recognition in the financial statements at some time
      during the reporting period.




June
                30, 2008
            
            Quoted
                Prices
              in
                Active
              Markets
                for
              Identical
              Assets
              (Level
                1)
            
            Significant
              Other
              Observable
              Inputs
              (Level
                2)
            
            Significant
              Unobservable
              Inputs
              (Level
                3)Recurring
                basis:Available
                for sale securities
            
            $
            43,538
            
            $
            1,540
            
            $
            41,998
            
            $
            -Interest
                rate contracts
            
            
            3,702
            
            
            -
            
            
            3,702
            
            
            -Nonrecurring
                basis:Impaired
                loans
            
            
            6,842
            
            
            -
            
            
            -
            
            
            6,842Total
            
            $
            54,082
            
            $
            1,540
            
            $
            45,700
            
            $
            6,842




The
      loans
      in the table above represent impaired, collateral dependent loans that have
      been
      adjusted to fair value. When management determines that the value of the
      underlying collateral is less than the recorded investment in the loan, the
      Company recognizes this impairment and adjusts the carrying value of the loan
      to
      fair value by charging-off the amount of the impairment to the allowance for
      loan losses.




**Item
      2.**  **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**




**Critical
      Accounting Estimates**




The
      Company’s most critical accounting estimate is related to the allowance for
      credit losses. The Company utilizes both quantitative and qualitative
      considerations in establishing an allowance for credit losses believed to be
      appropriate as of each reporting date.




Quantitative
      factors include:




·
            the
                volume and severity of non-performing loans and adversely classified
                credits,


·
            the
                level of net charge-offs experienced on previously classified loans,


·
            the
                nature and value of collateral securing the loans,


·
            the
                trend in loan growth and the percentage of
                change,


·
            the
                level of geographic and/or industry
                concentration,


·
            the
                relationship and trend over the past several years of recoveries
                in
                relation to charge-offs, and


·
            other
                known factors regarding specific loans.




Qualitative
      factors include:




·
            the
                effectiveness of credit administration,


·
            the
                adequacy of loan review,


·
            the
                adequacy of loan operations personnel and processes,


·
            the
                effect of competitive issues that impact loan underwriting and
                structure,


·
            the
                impact of economic conditions, including interest rate trends,


·
            the
                introduction of new loan products or specific marketing
                efforts,


·
            large
                credit exposure and trends, and


·
            industry
                segments that are exhibiting stress.




Changes
      in the above factors could significantly affect the determination of the
      adequacy of the allowance for credit losses. Management performs a full
      analysis, no less often than quarterly, to ensure that changes in estimated
      loan
      loss levels are adjusted on a timely basis. For further discussion of this
      significant management estimate, see “Allowance for Credit Losses.”




13




Another
      critical accounting estimate of the Company is that related to the carrying
      value of goodwill. Impairment analysis of the fair value of goodwill involves
      a
      substantial amount of judgment. Under Statement of Financial Accounting
      Standards No. 142, “ *Goodwill
      and Other Intangible Assets”* (SFAS
      No.
      142), the Company ceased amortization of goodwill on January 1, 2002 and
      periodically tests goodwill for impairment.




**Results
      of Operations for the Three and Six Months Ended June 30, 2008 and
      2007**




*Overview*




The
      Company’s net loss for the quarter ended June 30, 2008 was $8.1 million, or
      ($1.60) per share, compared with net income of $673,000, or $0.13 per diluted
      share during the same period of 2007. For the first six months of 2008, the
      Company’s net loss was $7.2 million, compared with net income of $2.0 million in
      the first half of 2007.




Net
      interest income was $0.2 million higher in the second quarter of 2008, compared
      with the same period in 2007. For the first six months of 2008, net interest
      income was down $0.2 million from the same period in 2007. Average earning
      assets were $485.4 million in the second quarter of 2008, compared with $442.8
      million in the second quarter of 2007. The increase related primarily to higher
      loan balances. Average interest-bearing liabilities in the second quarter of
      2008 were $382.4 million, compared with $327.7 million in the second quarter
      of
      2007, as these deposits were primarily used to fund loan growth.




The
      provision for credit losses was $13.0 million in the second quarter of 2008.
      There was no provision in the second quarter of 2007. For the six months period
      ended June 30, 2008, the provision for credit losses was $13.6 million compared
      with $275,000 in the same period of 2007. The higher provision in 2008 reflected
      primarily unfavorable conditions in the residential real estate market that
      affected home builders and developers and an increase in loans charged-off
      during the process. A slowdown in home buying has resulted in slower sales
      and
      declining real estate valuations, which have significantly affected these
      borrowers’ liquidity and ability to repay loans.




At
      June
      30, 2008, total assets were $530.3 million, an increase of $16.1 million, or
      3.1%, from December 31, 2007. Total loans increased 8% to $428.2 million, from
      $397.3 million at December 31, 2007. Loans grew at an annualized rate of 16%
      in
      the first six months of 2008. Total deposits increased 5% to $465.4 million
      at
      June 30, 2008 from $441.2 million at December 31, 2007. The Company continues
      to
      maintain capital ratios in excess of regulatory levels required to be
      well-capitalized. In addition, management believes the Company has significant
      amounts of liquidity readily available.




*Analysis
      of Net Interest Income*




The
      primary component of the Company’s earnings is net interest income. Net interest
      income is the difference between interest income, principally from loans and
      the
      investment securities portfolio, and interest expense, principally on customer
      deposits and borrowings. Changes in net interest income, net interest spread,
      and net interest margin result from changes in asset and liability volume and
      mix, and to rates earned or paid. Net interest spread refers to the difference
      between the yield on interest-earning assets and the cost of interest-bearing
      liabilities. Net interest margin is the ratio of net interest income to total
      interest-earning assets and is influenced by the volume and relative mix of
      interest-earning assets and interest-bearing liabilities. Volume refers to
      the
      dollar level of interest-earning assets and interest-bearing
      liabilities.




Interest
      income from certain of the Company’s earning assets is non-taxable. The
      following tables present interest income and expense, including adjustments
      for
      non-taxable interest income, and the resulting tax-adjusted yields earned,
      rates
      paid, interest rate spread, and net interest margin for the periods indicated
      on
      an annualized basis.




14




For
                Three Months Ended June 30,2008
            
            2007Average
            
            Interest
            
            
            
            Average
            
            InterestOutstanding
            
            Earned/
            
            Yield/
            
            Outstanding
            
            Earned/
            
            Yield/(dollars
                in thousands)
            
            Balance
            
            Paid
            
            Rate
            
            Balance
            
            Paid
            
            RateAssetsInterest-earning
                assets:Loans
                (1) (2) (3)
            
            $
            425,731
            
            $
            8,282
            
            
            7.82
            %
            $
            382,440
            
            $
            8,300
            
            
            8.70
            %Taxable
                securities
            
            
            25,228
            
            
            341
            
            
            5.44
            %
            
            33,936
            
            
            458
            
            
            5.41
            %Non-taxable
                securities (2)
            
            
            24,496
            
            
            397
            
            
            6.52
            %
            
            21,356
            
            
            293
            
            
            5.50
            %Temporary
                investments
            
            
            9,934
            
            
            58
            
            
            2.35
            %
            
            5,113
            
            
            56
            
            
            4.39
            %Total
                interest-earning assets (2)
            
            
            485,389
            
            $
            9,078
            
            
            7.52
            %
            
            442,845
            
            $
            9,107
            
            
            8.25
            %Allowance
                for loan losses
            
            
            (8,283
            )
            
            
            
            
            
            
            
            (4,951
            )Other
                assets
            
            
            57,304
            
            
            
            
            
            
            
            
            47,907Total
                assets
            
            $
            534,410
            
            
            
            
            
            
            
            $
            485,801Liabilities
                and shareholders' equityInterest-bearing
                liabilities:Savings,
                money market andinterest-bearing
                demand deposits
            
            $
            115,641
            
            $
            450
            
            
            1.57
            %
            $
            95,220
            
            $
            493
            
            
            2.08
            %Certificates
                of deposit
            
            
            250,724
            
            
            2,583
            
            
            4.14
            %
            
            217,613
            
            
            2,737
            
            
            5.04
            %Federal
                funds purchased
            
            
            3,536
            
            
            24
            
            
            2.73
            %
            
            2,337
            
            
            32
            
            
            5.49
            %Junior
                subordinated debentures
            
            
            12,372
            
            
            138
            
            
            4.49
            %
            
            12,372
            
            
            218
            
            
            7.07
            %FHLB
                and other borrowings
            
            
            94
            
            
            2
            
            
            8.56
            %
            
            186
            
            
            4
            
            
            8.63
            %Total
                interest-bearing liabilities
            
            
            382,367
            
            $
            3,197
            
            
            3.36
            %
            
            327,728
            
            $
            3,484
            
            
            4.26
            %Non-interest-bearing
                deposits
            
            
            91,002
            
            
            
            
            
            
            
            
            99,740Other
                liabilities
            
            
            3,889
            
            
            
            
            
            
            
            
            5,132Total
                liabilities
            
            
            477,258
            
            
            
            
            
            
            
            
            432,600Shareholders'
                equity
            
            
            57,152
            
            
            
            
            
            
            
            
            53,201Total
                liabilities andshareholders'
                equity
            
            $
            534,410
            
            
            
            
            
            
            
            $
            485,801Net
                interest income (2)
            
            
            
            
            $
            5,881
            
            
            
            
            
            
            
            $
            5,623Net
                interest spread
            
            
            
            
            
            
            
            
            4.16
            %
            
            
            
            
            
            
            
            3.99
            %Yield
                on average interest-earning assets
            
            
            
            
            
            
            
            
            7.52
            %
            
            
            
            
            
            
            
            8.25
            %Interest
                expense to average interest-earning assets
            
            
            
            
            
            
            
            
            2.65
            %
            
            
            
            
            
            
            
            3.16
            %Net
                interest income to average interest-earning assets (net interest
                margin)
            
            
            
            
            
            
            
            
            4.87
            %
            
            
            
            
            
            
            
            5.09
            %




(1)
            Loans
                include loans on which the accrual of interest has been
                discontinued.


(2)
            Interest
                earned on non-taxable securities and loans has been computed on a
                34
                percent tax-equivalent basis.


(3)
            Loan
                interest income includes net loan fee income of $401,900 and $443,900
                for
                2008 and 2007, respectively.


15




For
                Six Months Ended June 30,2008
            
            2007Average
            
            Interest
            
            
            
            Average
            
            InterestOutstanding
            
            Earned/
            
            Yield/
            
            Outstanding
            
            Earned/
            
            Yield/(dollars
                in thousands)
            
            Balance
            
            Paid
            
            Rate
            
            Balance
            
            Paid
            
            RateAssetsInterest-earning
                assets:Loans
                (1) (2) (3)
            
            $
            419,319
            
            $
            16,709
            
            
            8.01
            %
            $
            369,672
            
            $
            16,306
            
            
            8.89
            %Taxable
                securities
            
            
            26,208
            
            
            705
            
            
            5.41
            %
            
            34,773
            
            
            943
            
            
            5.47
            %Non-taxable
                securities (2)
            
            
            24,409
            
            
            792
            
            
            6.53
            %
            
            21,413
            
            
            589
            
            
            5.55
            %Temporary
                investments
            
            
            12,513
            
            
            163
            
            
            2.62
            %
            
            5,596
            
            
            120
            
            
            4.32
            %Total
                interest-earning assets (2)
            
            
            482,449
            
            $
            18,369
            
            
            7.66
            %
            
            431,454
            
            $
            17,958
            
            
            8.39
            %Allowance
                for loan losses
            
            
            (7,135
            )
            
            
            
            
            
            
            
            (4,839
            )Other
                assets
            
            
            55,239
            
            
            
            
            
            
            
            
            46,494Total
                assets
            
            $
            530,553
            
            
            
            
            
            
            
            $
            473,109Liabilities
                and shareholders' equityInterest-bearing
                liabilities:Savings,
                money market and interest-bearing demand deposits
            
            $
            118,557
            
            $
            1,049
            
            
            1.78
            %
            $
            91,477
            
            $
            800
            
            
            1.76
            %Certificates
                of deposit
            
            
            245,050
            
            
            5,523
            
            
            4.53
            %
            
            209,107
            
            
            5,206
            
            
            5.02
            %Federal
                funds purchased
            
            
            2,438
            
            
            35
            
            
            2.89
            %
            
            2,028
            
            
            55
            
            
            5.47
            %Junior
                subordinated debentures
            
            
            12,372
            
            
            331
            
            
            5.38
            %
            
            12,372
            
            
            431
            
            
            7.03
            %FHLB
                and other borrowings
            
            
            104
            
            
            4
            
            
            7.73
            %
            
            201
            
            
            8
            
            
            8.03
            %Total
                interest-bearing liabilities
            
            
            378,521
            
            $
            6,942
            
            
            3.69
            %
            
            315,185
            
            $
            6,500
            
            
            4.16
            %Non-interest-bearing
                deposits
            
            
            91,369
            
            
            
            
            
            
            
            
            100,599Other
                liabilities
            
            
            3,961
            
            
            
            
            
            
            
            
            5,098Total
                liabilities
            
            
            473,851
            
            
            
            
            
            
            
            
            420,882Shareholders'
                equity
            
            
            56,702
            
            
            
            
            
            
            
            
            52,227Total
                liabilities andshareholders'
                equity
            
            $
            530,553
            
            
            
            
            
            
            
            $
            473,109Net
                interest income (2)
            
            
            
            
            $
            11,427
            
            
            
            
            
            
            
            $
            11,458Net
                interest spread
            
            
            
            
            
            
            
            
            3.97
            %
            
            
            
            
            
            
            
            4.23
            %Yield
                on average interest-earning assets
            
            
            
            
            
            
            
            
            7.66
            %
            
            
            
            
            
            
            
            8.39
            %Interest
                expense to averageinterest-earning
                assets
            
            
            
            
            
            
            
            
            2.89
            %
            
            
            
            
            
            
            
            3.04
            %Net
                interest income to average interest-earning assets (net interest
                margin)
            
            
            
            
            
            
            
            
            4.76
            %
            
            
            
            
            
            
            
            5.36
            %




(1)
            Loans
                include loans on which the accrual of interest has been
                discontinued.


(2)
            Interest
                earned on non-taxable securities and loans has been computed on a
                34
                percent tax-equivalent basis.


(3)
            Loan
                interest income includes net loan fee income of $889,500 and $912,400
                for
                2008 and 2007, respectively.




Net
      interest margin as a percentage was 4.87% in the second quarter of 2008,
      compared with 5.09% in the same quarter last year and 4.76% and 5.36% for the
      six months ended June 30, 2008 and 2007, respectively. Comparing the first
      six
      months of 2008 to the first six months of 2007, tax-equivalent interest income
      was $0.4 million higher, primarily due to an increase of $51.0 million in
      average interest-earning assets. Interest expense increased $0.4 million, as
      the
      volume of average interest-bearing liabilities increased $63.3 million. Net
      interest margin decreased 22 b.p in the second quarter of 2008 compared to
      the
      second quarter of 2007. The first six months of 2008 net interest margin
      decreased 60 b.p. compared with the first six months of 2007. The net interest
      margin was affected by several factors, including dramatic rate cuts of 325
      basis points over the last 12 months by the Federal Reserve, competitive market
      pricing on both sides of the balance sheet, the impact of an elevated level
      of
      nonperforming loans and a lower level of noninterest-bearing demand deposit
      accounts year-over-year. The net cash received by the Company for interest
      payments from counterparties in the three and six-month periods ended June
      30,
      2008 was $820,100 and $1,251,300, respectively, compared to net payments to
      counterparties of $57,300 in the same periods of 2007.


16


The
      2008
      net interest margins were also affected by the Company’s election to redeem
      $45.1 million in callable certificates of deposit, with $21.5 million settling
      in March of 2008 and the balance in the second quarter of 2008. The new
      certificates of deposit have an approximately 150 basis point lower average
      cost
      and a slightly longer duration. In connection with the redemptions, the Company
      wrote off all unamortized premiums associated with those deposits. The deposit
      premium write-off increased the average cost of interest-bearing liabilities
      and
      decreased the net interest margin by approximately 6 basis points in the second
      quarter of 2008, and increased the average cost of interest-bearing liabilities
      by 13 basis points and decreased the margin by 10 basis points in the first
      quarter of 2008. The margin in the second quarter of 2007 was lower by
      approximately 25 basis points as the result of interest reversals on non-accrual
      loans in that quarter.




*Provision
      for Credit Losses*




The
      Company recorded a provision for credit losses of $13 million in the second
      quarter of 2008, compared with no provision in the second quarter 2007 and
      $13.6
      million in the first six months of 2008 compared to $275,000 in the same period
      in 2007. The amount of the allowance for credit losses is analyzed by management
      on a regular basis to ensure that it is adequate to absorb losses inherent
      in
      the loan portfolio as of the reporting date. When a provision for credit losses
      is recorded, the amount is based on the current volume of loans and commitments
      to extend credit, anticipated changes in loan volumes, past charge-off
      experience, management’s assessment of the risk of loss on current loans, the
      level of non-performing and impaired loans, evaluation of future economic trends
      in the Company's market area, and other factors relevant to the loan portfolio.
      An internal loan risk grading system is used to evaluate potential losses of
      individual loans. The Company does not, as part of its analysis, group loans
      together by loan type to assign risk. See "Allowance for Credit Losses" below
      for a more detailed discussion.




*Non-Interest
      Income*




Non-interest
      income consists of the following components:




Three Months Ended
            
            Six Months EndedJune 30,
            
            June
                30,(dollars
                in thousands)
            
            2008
            
            2007
            
            2008
            
            2007Service
                charges on deposit accounts
            
            
            179
            
            $
            171
            
            $
            343
            
            $
            337International
                trade fees
            
            
            135
            
            
            133
            
            
            335
            
            
            279Fiduciary
                income
            
            
            163
            
            
            174
            
            
            336
            
            
            364Increase
                in cash surrender value of bank-owned life insurance
            
            
            154
            
            
            137
            
            
            306
            
            
            273Wire
                fees
            
            
            84
            
            
            94
            
            
            165
            
            
            175Mortgage
                brokerage fees
            
            
            46
            
            
            81
            
            
            108
            
            
            133Securities
                losses
            
            
            (432
            )
            
            -
            
            
            (432
            )
            
            -Other
                income
            
            
            118
            
            
            119
            
            
            248
            
            
            254Total
                non-interest income
            
            $
            447
            
            $
            909
            
            $
            1,409
            
            $
            1,815




Non-interest
      income decreased $462,000 in the second quarter of 2008 when compared to the
      second quarter of 2007. Non-interest income in the first six months of 2008
      was
      $1.4 million, a decrease of $406,000 over the same period in 2007. Securities
      losses in the three and six month periods ending June 30, 2008 were $432,000
      compared to no losses in the same periods in 2007 Of this loss, $200,000 was
      related to the sale of four mortgage-backed securities. The balance of $232,000
      was due to the recognition of an other-than-temporary impairment charge on
      one
      FNMA investment grade perpetual callable preferred security, reflecting the
      extraordinarily unsettled equity market for this government-sponsored enterprise
      (GSE). Continued uncertainties regarding the future outlook for FNMA and other
      GSE’s could lead to additional impairment charges for these securities.


17


*Non-Interest
      Expense*




Non-interest
      expense consists of the following components:




Three Months Ended
            
            Six Months EndedJune 30,
            
            June 30,(dollars
                in thousands)
            
            2008
            
            2007
            
            2008
            
            2007Salaries
                and employee benefits
            
            
            2,500
            
            
            2,419
            
            
            5,007
            
            
            4,915Net
                occupancy and equipment
            
            
            630
            
            
            553
            
            
            1,247
            
            
            1,092Professional
                services
            
            
            208
            
            
            384
            
            
            471
            
            
            771Data
                processing and communications
            
            
            231
            
            
            210
            
            
            446
            
            
            470Business
                taxes
            
            
            125
            
            
            117
            
            
            242
            
            
            210Interest
                rate contracts adjustments
            
            
            89
            
            
            506
            
            
            317
            
            
            633FDIC
                assessment
            
            
            96
            
            
            12
            
            
            187
            
            
            24Foreclosed
                asset expense, net
            
            
            2,036
            
            
            422
            
            
            1,874
            
            
            422Other
                expense
            
            
            1,009
            
            
            921
            
            
            1,743
            
            
            1,649Total
                non-interest expense
            
            $
            6,924
            
            $
            5,544
            
            $
            11,534
            
            $
            10,186




Non-interest
      expenses in the second quarter of 2008 were $6.9 million, up $1.4 million from
      the second quarter of 2007. The increase was primarily due to higher foreclosed
      asset expenses of $1.6 million due to $1.9 million of OREO write-downs in the
      second quarter of 2008 to reflect recent appraisals and management’s assessment
      of amounts ultimately collectible on disposition of the properties.




Salaries
      and employee benefits for the three and six-month periods of 2008 were
      approximately equal to the amounts in the same periods of 2007. In the first
      quarter of 2008, the Company substantially completed a planned reduction of
      approximately 7% in its workforce primarily through attrition and better
      matching of staffing levels to customer traffic flows, as well as job
      eliminations. The number of full-time equivalent employees was 129 at June
      30,
      2008, compared with 142 at June 30, 2007.




On
      a
      year-to-date basis, net occupancy and equipment expenses in the first half
      of
      2008 were higher than the first half of 2007 primarily due to higher levels
      of
      depreciation related to branch remodeling and related asset acquisitions in
      mid-2007. Professional services were down significantly in the first half of
      2008 compared with the first half of 2007, primarily due to costs associated
      with Sarbanes-Oxley compliance efforts which were down $182,000 in 2008 when
      compared to the same period in 2007.




Non-cash
      charges for the ineffective portion of the Company’s cash flow hedges in the
      second quarter of the 2008 was $89,000, compared with $506,000 in the same
      quarter last year. In June 2008, the Company sold its $25 million notional
      value
      swap for a gain of $482,000. The sale was in response to management’s assessment
      of the Bank’s interest rate risk profile and favorable market conditions. The
      swap was sold for $482,000 and the unrealized gain in comprehensive income
      will
      be recognized ratably through interest income as the originally hedged
      forecasted transactions (interest payments on variable-rate loans) affect
      earnings. The Company expects to accrete $256,000 and $198,000 of the deferred
      gain through earnings during 2008 and 2009, respectively, and immaterial amounts
      in 2010 and 2011.




*Income
      Taxes*




The
      Company’s effective tax rate for the first six months of 2008 was 43%, compared
      with 26% for the first six months of 2007. When the Company incurs a pre-tax
      loss, its effective tax rate is higher than the Federal statutory rate of 35%
      primarily due to tax-exempt income related to its municipal securities portfolio
      and investments in bank-owned life insurance. The Company’s effective tax rate
      for interim periods is based on projections of taxable income or loss for the
      full year and is affected by the relative amounts of taxable and non-taxable
      income and the amount of available tax credits.




**Financial
      Condition**




*Investment
      Securities*




The
      following table presents the composition and carrying value of the Company’s
      available for sale investment portfolio:


18




June
                30,
            
            December
                31,(dollars
                in thousands)
            
            2008
            
            2007Agency
                securities
            
            $
            1,540
            
            $
            1,514Mortgage-backed
                securities
            
            
            19,545
            
            
            27,263Municipal
                bonds
            
            
            22,453
            
            
            22,801$
            43,538
            
            $
            51,578




Total
      investment securities as of June 30, 2008 were $43.5 million, compared with
      $51.6 million at December 31, 2007. The decrease in total securities from
      year-end 2007 primarily reflected the sale of four non-agency mortgage-backed
      securities, as well as scheduled principal payments. The Company’s securities,
      classified as available for sale, are used by management as part of its
      asset/liability management strategy and may be sold in response to changes
      in
      interest rates or significant prepayment risk.




*Loans*




Total
      loans outstanding were $428.2 million and $397.3 million at June 30, 2008 and
      December 31, 2007, respectively. Unfunded loan commitments were $84.4 million
      at
      June 30, 2008 and $96.3 million at December 31, 2007.




The
      following table presents the composition of the Company's loan portfolio, in
      accordance with bank regulatory guidelines, at the dates indicated:




June
                30, 2008
            
            December
                31, 2007(dollars
                in thousands)
            
            Amount
            
            Percent
            
            Amount
            
            PercentCommercial
            
            $
            94,468
            
            
            22.0
            %
            $
            92,496
            
            
            23.2
            %Real
                estate:Construction
            
            
            123,779
            
            
            28.8
            %
            
            109,417
            
            
            27.5
            %Residential
                1-4 family
            
            
            37,130
            
            
            8.7
            %
            
            33,224
            
            
            8.3
            %Multifamily
            
            
            3,937
            
            
            0.9
            %
            
            6,298
            
            
            1.6
            %Commercial
            
            
            165,445
            
            
            38.5
            %
            
            153,139
            
            
            38.4
            %Installment
                and other consumer
            
            
            4,547
            
            
            1.1
            %
            
            3,945
            
            
            1.0
            %Total
                loans, gross
            
            
            429,306
            
            
            100.0
            %
            
            398,519
            
            
            100.0
            %Deferred
                loan fees
            
            
            (1,119
            )
            
            
            
            
            (1,194
            )Loans,
                net of deferred loan fees
            
            $
            428,187
            
            
            
            
            $
            397,325




*Allowance
      for Credit Losses*




The
      allowance for credit losses represents management's estimate of potential losses
      as of the date of the financial statements. The loan portfolio is regularly
      reviewed to evaluate the adequacy of the allowance for credit losses. In
      determining the level of the allowance, the Company estimates losses inherent
      in
      all loans and commitments to make loans, and evaluates non-performing loans
      to
      determine the amount, if any, necessary for a specific reserve. An important
      element in determining the adequacy of the allowance for credit losses is an
      analysis of loans by loan risk-rating categories. At a loan’s inception and
      periodically throughout the life of the loan, management evaluates the credit
      risk by using a risk-rating system. This grading system currently includes
      eleven levels of risk. Risk ratings range from “1” for the strongest credits to
“10” for the weakest. A “10” rated loan would normally represent a loss. All
      loans rated 7-10 collectively comprise the Company's “Watch List”. The specific
      grades from 7-10 are “watch list” (risk-rating 7), “special mention”
(risk-rating 7.5), “substandard” (risk-rating 8), “doubtful” (risk-rating 9),
      and “loss” (risk-rating 10). When indicators such as operating losses,
      collateral impairment or delinquency problems show that a credit may have
      weakened, the credit will be downgraded as appropriate. Similarly, as borrowers
      bring loans current, show improved cash flows or improve the collateral position
      of a loan, the credits may be upgraded. The result of management’s ongoing
      evaluations and the risk ratings of the portfolio is an allowance with four
      components: specific; general; special; and an amount available for other
      factors.




*Specific
      Allowance* .
      Loans
      on the Bank's Watch List, as described above, are specifically reviewed and
      analyzed. Management considers in its analysis expected future cash flows,
      the
      value of collateral and other factors that may impact the borrower's ability
      to
      pay. When significant conditions or circumstances exist on an individual loan
      indicating greater risk, a specific allowance may be allocated in addition
      to
      the general allowance percentage for that particular risk rating, as outlined
      in
      Statement of Financial Accounting Standards No. 114, “ *Accounting
      by Creditors for Impairment of a Loan.”*


19


*General
      Allowance* .
      All
      loans that do not require a specific allocation are subject to a general
      allocation based upon historic loss factors. Management determines these factors
      by analyzing the volume and mix of the existing loan portfolio, in addition
      to
      other factors. Management also analyzes the following:




·
            the
                volume and severity of non-performing loans and adversely classified
                credits;


·
            the
                level of net charge-offs experienced on previously classified
                loans;


·
            the
                nature and value of collateral securing the loans;
                and


·
            the
                relationship and trend over the past several years of recoveries
                in
                relation to charge-offs.





*Special
      Allowance* .
      Special
      allowances are established to facilitate changes in the Bank’s strategy and
      other factors. Special allocations are to take into consideration various
      factors that include, but are not limited to:




·
            effectiveness
                of credit administration;


·
            adequacy
                of loan review;


·
            the
                adequacy of loan operations personnel and
                processes;


·
            the
                trend in loan growth and the percentage of
                change;


·
            the
                level of geographic and/or industry
                concentration;


·
            the
                effect of competitive issues that impact loan underwriting and
                structure;


·
            the
                impact of economic conditions, including interest rate
                trends;


·
            the
                introduction of new loan products or special marketing
                efforts;


·
            large
                credit exposure and trends; and


·
            commercial
                real estate acquisition and development
                portfolio.





*Amounts
      Available for Other Factors* .
      Management also attempts to ensure that the overall allowance appropriately
      reflects a margin for the imprecision necessarily inherent in estimates of
      expected credit losses. The quarterly analysis of specific, general, and special
      allocations of the allowance is the principal method relied upon by management
      to ensure that changes in estimated credit loss levels are adjusted on a timely
      basis. The inclusion of historical loss factors in the process of determining
      the general component of the allowance also acts as a self-correcting mechanism
      of management's estimation process, as past and more remote loss experience
      is
      replaced by more recent experience. In its analysis of the specific, general,
      and special allocations of the allowance, management also considers regulatory
      guidance in addition to the Company's own experience.




*Liability
      for Unfunded Credit Commitments* .
      Management determines the adequacy of the liability for unfunded credit
      commitments based upon reviews of individual credit facilities, current economic
      conditions, the risk characteristics of the various categories of commitments
      and other relevant factors. The liability is based on estimates, which are
      evaluated on a regular basis, and, as adjustments become necessary, they are
      reported in earnings in periods in which they become known.




Loans
      and
      other extensions of credit deemed uncollectible are charged to the allowance
      for
      loan losses. Subsequent recoveries, if any, are credited to the allowance.
      Draws
      on unfunded commitments that are considered uncollectible at the time funds
      are
      advanced are charged to the allowance for loan losses. Provisions for unfunded
      commitment losses are added to the liability for unfunded commitments, which
      is
      included in other liabilities in the consolidated balance sheets. Actual losses
      may vary from current estimates and the amount of the provision for credit
      losses may be either greater than or less than actual net charge-offs when
      and
      if they occur. The related provision for credit losses that is charged to income
      is the amount necessary to adjust the allowance for credit losses to the level
      determined through the above process.




During
      the second quarter of 2008, management performed an extensive internal loan
      process review of construction and land loans and commercial real estate loans.
      The Company’s non-performing loans at June 30, 2008 relate to four relationships
      involved with residential real estate development. Collateral values for these
      loans declined significantly in the second quarter of 2008, and a slowdown in
      home buying has reduced the borrowers’ cash flows. Consistent with regulatory
      guidelines and industry trends, the Company has charged-off impairment reserves
      to the period when estimated collateral values are less than the loan balance
      for collateral dependent loans. In the second quarter of 2008, net charge-offs
      were $5.2 million, compared with a net recovery of $87,000 in the second quarter
      of 2007.


20


The
      provision for loan losses was $13.0 million in the second quarter of 2008,
      compared with no provision in the same quarter last year. Management's
      evaluation of the loan portfolio resulted in a total allowance for credit losses
      of $14.2 million at June 30, 2008 and $6.0 million December 31, 2007. The
      allowance for credit losses, as a percentage of total loans, increased from
      1.50% on December 31, 2007 to 3.33% at June 30, 2008. The allowance for credit
      losses represented 163% of non-performing loans at June, 2008 compared with
      32%
      at June 30, 2007. Management believes the allowance for credit losses at June
      30, 2008 is adequate to absorb current potential or anticipated
      losses.




The
      following table shows the components of the allowance for credit loss for the
      periods indicated:




June
                30, 2008
            
            December
                31, 2007(dollars
                in thousands)
            
            Amount
            
            Percent
            
            Amount
            
            PercentGeneral
            
            $
            5,255
            
            
            37
            %
            $
            2,733
            
            
            46
            %Specific
            
            
            -
            
            
            -
            
            
            -
            
            
            -Special
            
            
            8,769
            
            
            61
            %
            
            3,167
            
            
            52
            %Available
                for other factors
            
            
            223
            
            
            2
            %
            
            90
            
            
            2
            %Total
                allowance for credit losses
            
            $
            14,247
            
            
            100
            %
            $
            5,990
            
            
            100
            %




The
      allowance for credit losses is based upon estimates of probable losses inherent
      in the loan portfolio and the Company’s commitments to extend credit to
      borrowers. The amount of loss ultimately incurred for these loans can vary
      significantly from the estimated amounts. The following table shows the
      Company’s loan loss performance for the periods indicated.




Three Months Ended
            
            Six Months EndedJune 30,
            
            June 30,(dollars in
                thousands)
            
            2008
            
            2007
            
            2008
            
            2007Loans
                outstanding at end of period, net of deferred fees
            
            $
            428,187
            
            $
            382,711
            
            $
            428,187
            
            $
            382,711Average
                loans outstanding during the period
            
            
            425,731
            
            
            382,440
            
            
            419,319
            
            
            369,672Allowance
                for credit losses, beginning of period
            
            $
            6,425
            
            $
            5,098
            
            $
            5,990
            
            $
            4,825Loans
                charged off:Commercial
            
            
            849
            
            
            50
            
            
            1,012
            
            
            50Real
                estate
            
            
            4,317
            
            
            -
            
            
            4,317
            
            
            -Consumer
                and other
            
            
            29
            
            
            11
            
            
            36
            
            
            37Total
                loans charged-off
            
            
            5,195
            
            
            61
            
            
            5,365
            
            
            87Recoveries:Commercial
            
            
            1
            
            
            95
            
            
            2
            
            
            106Real
                estate
            
            
            -
            
            
            1
            
            
            4
            
            
            2Consumer
                and other
            
            
            14
            
            
            52
            
            
            21
            
            
            64Total
                recoveries
            
            
            15
            
            
            148
            
            
            27
            
            
            172Net
                loans charged off (recovered) during the period
            
            
            5,180
            
            
            (87
            )
            
            5,338
            
            
            (85
            )Provision
                for credit losses
            
            
            13,002
            
            
            -
            
            
            13,595
            
            
            275Allowance
                for credit losses, end of period
            
            $
            14,247
            
            $
            5,185
            
            $
            14,247
            
            $
            5,185ComponentsAllowance
                for loan losses
            
            $
            14,033
            
            $
            4,875
            
            $
            14,033
            
            $
            4,875Liability
                for unfunded credit commitments
            
            
            214
            
            
            310
            
            
            214
            
            
            310Total
                allowance for credit losses
            
            $
            14,247
            
            $
            5,185
            
            $
            14,247
            
            $
            5,185Ratio
                of net loans charged off (recovered) to average loansoutstanding
                (annualized)
            
            
            4.88
            %
            
            -0.09
            %
            
            2.56
            %
            
            -0.05
            %Allowance
                for loan losses/total loans
            
            
            3.28
            %
            
            1.27
            %
            
            3.28
            %
            
            1.27
            %Allowance
                for credit losses/total loans
            
            
            3.33
            %
            
            1.35
            %
            
            3.33
            %
            
            1.35
            %Allowance
                for loan loss/non-performing loans
            
            
            161
            %
            
            30
            %
            
            161
            %
            
            30
            %Allowance
                for credit losses/non-performing loans
            
            
            163
            %
            
            32
            %
            
            163
            %
            
            32
            %




*Impaired
      Loans*




The
      Company, during its normal loan review procedures, considers a loan to be
      impaired when it is probable that the Bank will be unable to collect all amounts
      due according to the contractual terms of the loan agreement. A loan is not
      considered to be impaired during a period of minimal delay (less than 90 days)
      unless available information strongly suggests impairment. The Bank measures
      impaired loans based on the present value of expected future cash flows
      discounted at the loan's effective interest rate or, as a practical expedient,
      at the loan's observable market price or the fair market value of the collateral
      if the loan is collateral dependent. Impaired loans are charged to the allowance
      when management believes that, after considering economic and business
      conditions, collection efforts, and collateral position, the borrower's
      financial condition indicates that collection of principal is not
      probable.




Generally,
      no interest is accrued on loans when factors indicate collection of interest
      is
      doubtful or when principal or interest payments become 90 days past due, unless
      collection of principal and interest are anticipated within a reasonable period
      of time and the loans are well secured. For such loans, previously accrued
      but
      uncollected interest is charged against current earnings, and income is only
      recognized to the extent payments are subsequently received and collection
      of
      the remaining recorded principal balance is considered
      probable.


21


At
      June
      30, 2008 the Company’s recorded investment in impaired loans was $11.2 million
      compared with $13.6 million at December 31, 2007. For these loans, there were
      no
      specific reserves at June 30, 2008 and December 31, 2007.




*Non-Performing
      Assets*




Non-performing
      assets includes repossessed real estate or other assets, loans for which the
      accrual of interest has been suspended and loans past due greater than 90 days
      and still accruing. The following table presents information on the Company’s
      non-performing assets at the dates indicated:




June
                30,
            
            December
                31,(dollars
                in thousands)
            
            2008
            
            2007Loans
                on non-accrual status
            
            $
            8,635
            
            $
            10,827Loans
                past due greater than 90 days and accruing
            
            
            98
            
            
            149Total
                non-performing loans
            
            
            8,733
            
            
            10,976Other
                real estate owned
            
            
            3,925
            
            
            2,240Other
                repossessed assets
            
            
            285
            
            
            10Total
                non-performing assets
            
            $
            12,943
            
            $
            13,226Total
                assets
            
            $
            530,310
            
            $
            514,180Percentage
                of non-performing assets to total assets
            
            
            2.44
            %
            
            2.57
            %




Total
      nonperforming assets at June 30, 2008 were $12.9 million, down from $13.2
      million at December 31, 2007. As a percentage of total assets, non-performing
      assets were 2.44% at June 20, 2008 compared to 2.57% at December 31,
      2007.




Non-accrual
      loans at June 30, 2008 consisted of four relationships totaling $8.6 million.
      All of these relationships related to land acquisition and development loans
      in
      Oregon and Washington. During the second quarter of 2008, the Company charged
      off to the allowance for loan losses two smaller relationships totaling $720,000
      and recorded charge-offs on two other real estate relationships totaling
      approximately $3.2 million. Two new real estate related relationships were
      placed on non-accrual in the quarter, totaling approximately $4.5
      million.




Other
      real estate owned (OREO) totaled $3.9 million at June 30, 2008, up from $2.2
      million at December 31, 2007. The increase was primarily due to the addition
      of
      two properties related to a residential real estate development project totaling
      $4.0 million, offset by foreclosed asset write-downs totaling approximately
      $1.9
      million to reflect recent appraisals and management’s assessment of amounts
      ultimately collectible on disposition of the properties. OREO properties at
      June
      30, 2008 consisted primarily of one residential real estate development project
      and one parcel of land in the Portland, Oregon area.




*Liquidity*




Liquidity
      represents the ability to meet deposit withdrawals and fund loan demand, while
      retaining the flexibility to take advantage of business opportunities. Daily
      and
      short-term liquidity needs are principally met with deposits from customers,
      payments on loans, maturities and paydowns of investment securities, and
      wholesale borrowings, including brokered CDs, federal funds purchased, and
      depending on the availability of collateral, borrowings from the Federal Reserve
      and FHLB.




Secondary
      sources of liquidity include sale of investment securities which are not held
      for pledging purposes and other classes of assets. Securities classified as
      available for sale which are not pledged may be sold in response to changes
      in
      interest rates or liquidity needs. Investments in securities available for
      sale
      were $43.5 million at June 30, 2008.




Longer
      term funding needs can be met through a variety of wholesale sources that have
      a
      broader range of maturities than customer deposits and add flexibility in
      liquidity planning and management. These wholesale sources include advances
      from
      the FHLB with longer maturities, brokered CDs and investments that qualify
      as
      regulatory capital, including trust preferred securities and subordinated debt.
      In addition, the Company may also issue equity capital to address liquidity
      or
      capital needs.




The
      following table presents the composition of the Company’s deposit liabilities on
      the dates indicated:


22




June 30,
            
            December 31,(dollars
                in thousands)
            
            2008
            
            2007Non-interest-bearing
                demand deposits
            
            $
            86,984
            
            $
            91,662Savings
            
            
            15,836
            
            
            17,687Interest-bearing
                demand deposits
            
            
            14,947
            
            
            18,105Money
                market accounts
            
            
            78,839
            
            
            86,658Certificates
                of deposit under $100,000
            
            
            72,417
            
            
            66,137Certificates
                of deposit over $100,000
            
            
            196,349
            
            
            160,930Total
            
            $
            465,372
            
            $
            441,179




Total
      deposits increased $24.2 million in the first half of 2008, or 5%, over total
      deposits at December 31, 2007. At June 30, 2008, the Bank’s brokered deposits
      totaled $155.7 million, compared with $121.4 million at December 31, 2007.
      The
      Company’s loan growth in 2008 and 2007 exceeded its core deposit generation, and
      the Company has supplemented its core deposits with brokered certificates of
      deposits and brokered money market deposits. The Company’s brokered deposits
      have maturities ranging from 90 days to five years. At June 30, 2008,
      approximately 89% of the Company’s brokered CDs had original maturities of one
      year or more. The Company’s brokered money market deposits are provided to the
      Bank under long-term contracts, providing a relatively stable source of funds.
      The Bank has overnight federal funds borrowing lines with correspondent banks
      that provide access to an additional $20.0 million for short-term liquidity
      needs. The Bank also has an established borrowing line with the Federal Home
      Loan Bank (the “FHLB”) that permits it to borrow up to 20% of the Bank's assets,
      subject to collateral limitations. With the collateral available on June 30,
      2008, the Company believes the Bank could borrow up to approximately $101.4
      million. FHLB borrowings in excess of $26.3 million would require the Company
      to
      purchase additional FHLB stock. At June 30, 2008, the Company had only minor
      amounts of borrowings from the FHLB.




*Capital
      Resources*




Capital
      Ratios




The
      Company and the Bank are subject to various regulatory capital requirements
      administered by federal and state banking agencies. Failure to meet minimum
      capital requirements can initiate certain mandatory or discretionary actions
      by
      regulators that, if undertaken, could have a direct material effect on the
      Company’s consolidated financial statements. Under capital adequacy guidelines
      and the regulatory framework for prompt corrective action, the Company and
      the
      Bank must meet specific capital guidelines that involve quantitative measures
      of
      assets, liabilities, and certain off-balance-sheet items as calculated under
      regulatory accounting practices. Capital amounts and classification are also
      subject to qualitative judgments by the regulators about components, risk
      weightings, and other factors.




As
      of
      June 30, 2008, the Company had one wholly owned Delaware statutory business
      trust subsidiary, Cowlitz Statutory Trust I (the Trust), which issued
      $12,000,000 of guaranteed undivided beneficial interests in the Company’s Junior
      Subordinated Deferrable Interest Debentures (Trust Preferred Securities). The
      proceeds from the issuance of the common securities and the Trust Preferred
      Securities were used by the Trust to purchase $12,372,000 of junior subordinated
      debentures of the Company. These debentures qualify as Tier 1 capital under
      Federal Reserve Board guidelines. Federal Reserve guidelines limit inclusion
      of
      trust-preferred securities and certain other preferred capital elements to
      25%
      of Tier 1 capital. As of June 30, 2008, trust preferred securities accounted
      for
      23% of Tier 1 capital. There can be no assurance that the Federal Reserve Board
      will not further limit the amount of trust preferred securities permitted to
      be
      included in Tier 1 capital for regulatory capital purposes.




23




The
      following table presents selected capital information for the Company and the
      Bank as of June 30, 2008 and December 31, 2007:




To Be Well-CapitalizedUnder PromptFor Capital Adequacy
            
            Corrective ActionActual
            
            Purposes
            
            Provisions(dollars in thousands)
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio**June
                30, 2008**Total
                risk-based capital:Consolidated
            
            $
            59,445
            
            
            12.21
            %
            $
            38,958
            
            
            >8.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            57,252
            
            
            11.78
            %
            $
            42,366
            
            
            >8.00
            %
            $
            48,604
            
            
            >10.00
            %Tier
                1 risk-based capital:Consolidated
            
            $
            53,257
            
            
            10.94
            %
            $
            19,479
            
            
            >4.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            51,076
            
            
            10.51
            %
            $
            19,442
            
            
            >4.00
            %
            $
            29,163
            
            
            >6.00
            %Tier
                1 (leverage) capital:Consolidated
            
            $
            53,257
            
            
            10.06
            %
            $
            21,183
            
            
            >4.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            51,076
            
            
            9.63
            %
            $
            21,215
            
            
            >4.00
            %
            $
            26,519
            
            
            >5.00
            %**December
                31, 2007**Total
                risk-based capital:Consolidated
            
            $
            69,095
            
            
            14.82
            %
            $
            37,310
            
            
            >8.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            65,421
            
            
            14.06
            %
            $
            37,220
            
            
            >8.00
            %
            $
            46,525
            
            
            >10.00
            %Tier
                1 risk-based capital:Consolidated
            
            $
            63,260
            
            
            13.56
            %
            $
            18,655
            
            
            >4.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            59,603
            
            
            12.81
            %
            $
            18,610
            
            
            >4.00
            %
            $
            27,915
            
            
            >6.00
            %Tier
                1 (leverage) capital:Consolidated
            
            $
            63,260
            
            
            12.51
            %
            $
            20,233
            
            
            >4.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            59,603
            
            
            11.78
            %
            $
            20,236
            
            
            >4.00
            %
            $
            25,296
            
            
            >5.00
            %




Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company and the Bank to maintain minimum amounts and ratios (set forth in the
      tables above) of Tier 1 capital to average assets, and Tier 1 and total
      risk-based capital to risk-weighted assets (all as defined in the regulations).
      As of June 30, 2008 and December 31, 2007, the Company and the Bank
      substantially exceeded all relevant capital adequacy requirements.




Stock
      Repurchase Program




In
      September, 2007, the Company announced a stock repurchase program for up to
      500,000 shares. The Company intends to use existing funds to finance the
      repurchases. When evaluating timing and amount of common stock repurchases,
      management considers a number of factors including, but not limited to,
      projected earnings generation, risk weighted asset growth, capital ratios
      relative to regulatory capital guidelines, availability and cost of other
      capital resources and the market valuation of its stock price. As of June 30,
      2008, the Company has not repurchased any of its shares of common
      stock.




**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**




*Credit
      Risk*




The
      Bank,
      like other lenders, is subject to credit risk, which is the risk of losing
      principal and interest due to customers' failure to repay loans in accordance
      with their terms. The Bank relies on loan reviews, prudent loan underwriting
      standards and an adequate allowance for credit losses to help mitigate credit
      risk. However, a downturn in economic conditions or in the real estate market,
      or a rapid increase in interest rates could have a negative effect on collateral
      values, cash flows, and borrowers' ability to repay. The Bank's targeted
      customers are small to medium-size businesses, professionals and retail
      customers that may have limited capital resources to repay loans during a
      prolonged economic downturn.




*Interest
      Rate Risk*




The
      Bank’s earnings are largely derived from net interest income, which is interest
      income and fees earned on loans and investment income, less interest expense
      paid on deposits and other borrowings. Interest rates are highly sensitive
      to
      many factors that are beyond the control of the Bank’s management, including
      general economic conditions, and the policies of various governmental and
      regulatory authorities. As interest rates change, net interest income is
      affected. With fixed rate assets (such as fixed rate loans) and liabilities
      (such as certificates of deposit), the effect on net interest income is
      dependent upon on the maturities of the assets and liabilities. The Bank’s
      primary objective in managing interest rate risk is to minimize the adverse
      impact of changes in interest rates on the Bank’s net interest income and
      capital, while structuring the Bank’s asset/liability position to obtain the
      maximum yield-cost spread on that structure. Such structuring includes the
      use
      of interest rate derivative contracts. Interest rate risk is managed through
      the
      monitoring of the Bank’s gap position and sensitivity to interest rate risk by
      subjecting the Bank’s balance sheet to hypothetical interest rate shocks using a
      computer based model. In a falling rate environment, the spread between interest
      yields earned and interest rates paid may narrow, depending on the relative
      level of fixed and variable rate assets and liabilities. In a stable or
      increasing rate environment the Bank’s variable rate loans will remain steady or
      increase immediately with changes in interest rates, while fixed rate
      liabilities, particularly certificates of deposit, will only re-price as the
      liability matures.


24


For
      a
      complete description of the Company’s disclosures about market risk, see
“Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A
      of the Annual Report on Form 10-K for the year ended December 31,
      2007.




**Item
      4T. Controls and Procedures**




As
      of the
      end of the period covered by this report, the Company carried out evaluations,
      under the supervision and with the participation of management, including the
      Chief Executive Officer and Chief Financial Officer, of the effectiveness of
      the
      design and operation of disclosure controls and procedures pursuant to Rule
      13a-15(b) of the Securities Exchange Act of 1934. Based upon that evaluation,
      management, including the Chief Executive Officer and Chief Financial Officer,
      concluded that the existing disclosure controls and procedures are effective
      in
      timely alerting them to material information relating to the Company that is
      required to be included in its periodic SEC filings.




There
      have been no changes in our internal controls or in other factors that have
      materially affected or are likely to materially affect our internal controls
      over financial reporting subsequent to the date of the evaluation.




**Part
      II. OTHER INFORMATION**




**Item
      1.**  **Legal
      Proceedings**




The
      Company from time to time enters into routine litigation resulting from the
      collection of secured and unsecured indebtedness as part of its business of
      providing financial services. In some cases, such litigation will involve
      counterclaims or other claims against the Company. Such proceedings against
      financial institutions sometimes also involve claims for punitive damages in
      addition to other specific relief. The Company is not a party to any litigation
      other than in the ordinary course of business. In the opinion of management,
      the
      ultimate outcome of all pending legal proceedings will not individually or
      in
      the aggregate have a material adverse effect on the financial condition or
      the
      results of operations of the Company.




**Item
      1A. Risk Factors**




Except
      as
      noted below, there were no material changes to the risk factors set forth in
      the
      Company’s Form 10-K for the year ended December 31, 2007.




*A
      significant decline in the Company’s market value could result in an impairment
      of goodwill.*




Recently,
      the Company’s common stock has been trading at a price below its book value,
      including goodwill. If impairment of goodwill was deemed to exist, the Company
      would be required to write down the carrying value of its goodwill asset,
      resulting in a charge to earnings.




*The
      value of certain securities in the Company’s investment securities portfolio may
      be negatively affected by disruptions in the market for these
      securities.*




The
      market for certain investment securities held within the Company’s investment
      portfolio has over the past year become more volatile. The volatile market
      may
      affect the value of these securities, such as through reduced valuations due
      to
      the perception of heightened credit and liquidity risks, in addition to interest
      rate risk typically associated with these securities. There can be no assurance
      that the declines in market value associated with these disruptions will not
      result in impairments of these assets, which would lead to accounting charges
      that could have a material adverse effect on the Company’s net income, equity
      and capital ratios.




*Market
      and other constraints on our construction loan origination volumes are expected
      to lead to decreases in the Company’s interest and fee income that are not
      expected to be offset by reductions in our non-interest
      expenses.*




Due
      to
      existing conditions in housing markets in the areas where the Company operates
      and other factors, management projects our construction loan originations to
      be
      materially constrained for the remainder of 2008 and 2009. This will lower
      interest income and fees generated from this part of the Company’s business.
      Unless this revenue decline is offset by other areas of the Company’s
      operations, our total revenues may decline relative to our total non-interest
      expenses. Management expects that it will be difficult to find new revenue
      sources in the near term to completely offset expected declines in our interest
      income.


25


**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**




Not
      applicable




**Item
      3.**  **Defaults
      upon Senior Securities**




Not
      applicable




**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**




(a)  Cowlitz
      Bancorporation Annual Shareholder’s Meeting was held on May 23,
      2008




(b)  All
      six
      directors stood for election at the Annual Shareholder’s Meeting and the six
      individuals listed in Item 4(c)(1) below were elected.




(c)  The
      number of votes cast for, against, or withheld, including a separate tabulations
      with respect to each nominee is presented below:


Nominee
              
              Votes
                  For
              
              Percentage
                  of Voted
              
              Withheld
              
              Percentage
                  of VotedErnie
                  D. Ballou
              
              2,061,920
              
              67.25
              
              1,004,329
              
              32.75Richard
                  J. Fitzpatrick
              
              2,136,920
              
              69.69
              
              929,329
              
              31.31Brian
                  E. Magnuson
              
              2,109,060
              
              68.78
              
              957,189
              
              31.22John
                  M. Petersen
              
              2,109,060
              
              68.78
              
              957,189
              
              31.22Phillip
                  S. Rowley
              
              2,089,960
              
              68.16
              
              976,289
              
              31.84Linda
                  M. Tubbs
              
              2,109,060
              
              68.78
              
              957,189
              
              31.22




**Item
      5.**  **Other
      Information**




None




**Item
      6.**  **Exhibits**




(a) Exhibits.
      The following constitutes the exhibit index.




3.1
            
            Restated
                Articles of Incorporation (incorporated by reference to Exhibit 3.1
                to the
                Company’s Registration Statement on Form S-1 filed January 15, 1998; File
                No. 333-44355/Film No. 98507908)3.2
            
            Amended
                and Restated Bylaws (incorporated by reference to Exhibit 3(ii) to
                the
                Company’s Form 8-K filed October 29, 2007; File No. 000-23881/Film No.
                071196564)31.1
            
            Certification
                of Chief Executive Officer31.2
            
            Certification
                of Chief Financial Officer32
            
            Certification
                of Chief Executive Officer and Chief Financial
                Officer


26


SIGNATURES





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




Date:
      August 14, 2008




Cowlitz
                Bancorporation
              (Registrant)
              By:/s/
                Richard J. FitzpatrickRichard
                J. Fitzpatrick, President and Chief Executive Officer/s/
                Gerald L. BrickeyGerald
                L. Brickey, Vice-President and Chief Financial
                Officer


27