Cowlitz Bancorporation (CWLZ) 10-Q 2008 Q2 Quarterly report

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     x Smaller 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

		PAGE
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Condition - June 30, 2008 and December 31, 2007	3
	Consolidated Statements of Income -  Three and six months ended June 30, 2008 and June 30, 2007	4
	Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income - Six months ended June 30, 2008 and year ended December 31, 2007	5
	Consolidated Statements of Cash Flows - Six months ended June 30, 2008 and June 30, 2007	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition And Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4T.	Controls and Procedures	25
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
	Signatures	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		$	31,251
Investment securities		43,538			51,578
Federal Home Loan Bank stock, at cost		1,247			1,247
Loans, net of deferred loan fees		428,187			397,325
Allowance for loan losses		(14,033	)		(5,801	)
Total loans, net		414,154			391,524
Cash surrender value of bank-owned life insurance		14,634			14,328
Premises and equipment		6,312			6,515
Goodwill and other intangibles		1,798			1,834
Accrued interest receivable and other assets		20,021			15,903
Total assets	$	530,310		$	514,180
Liabilities
Deposits:
Non-interest-bearing demand	$	86,984		$	91,662
Savings and interest-bearing demand		30,783			35,792
Money market		78,839			86,658
Certificates of deposit		268,766			227,067
Total deposits		465,372			441,179
Federal funds purchased		475			1,050
Junior subordinated debentures and other borrowings		12,460			12,501
Accrued 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			28,936
Additional paid-in capital		2,519			2,484
Retained earnings		14,564			21,753
Accumulated 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 Ended
	June 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		$	16,289
Interest on taxable investment securities		341			457		705			943
Interest on non-taxable investment securities		263			220		525			440
Other interest and dividend income		58			56		163			120
Total interest income		8,932			9,024		18,079			17,792
Interest expense
Savings and interest-bearing demand deposits		450			493		1,049			800
Certificates of deposit		2,583			2,737		5,523			5,206
Federal funds purchased and other borrowings		26			36		39			63
Junior subordinated debentures		138			218		331			431
Total interest expense		3,197			3,484		6,942			6,500
Net interest income before provision for credit losses		5,735			5,540		11,137			11,292
Provision 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			337
International trade fees		135			133		335			279
Fiduciary income		163			174		336			364
Increase in cash surrender value of bank-owned life insurance		154			137		306			273
Wire fees		84			94		165			175
Mortgage brokerage fees		46			81		108			133
Securities losses		(432	)		-		(432	)		-
Other income		118			119		248			254
Total non-interest income		447			909		1,409			1,815
Non-interest expense
Salaries and employee benefits		2,500			2,419		5,007			4,915
Net occupancy and equipment		630			553		1,247			1,092
Professional services		208			384		471			771
Data processing and communications		231			210		446			470
Business taxes		125			117		242			210
Interest rate contracts adjustments		89			506		317			633
FDIC assessment		96			12		187			24
Foreclosed asset expense, net		2,036			422		1,874			422
Other expense		1,009			921		1,743			1,649
Total 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	)	$	0.40
Diluted	$	(1.60	)	$	0.13	$	(1.42	)	$	0.38
Weighted average shares outstanding:
Basic		5,055,621			4,944,457		5,055,047			4,922,595
Diluted		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	)	$	50,725
Comprehensive income:
Net income		-		-		-		86			-			86
Net change in unrealized gain on:
Investments available-for-sale, net of taxes of $7		-		-		-		-			14			14
Cash flow hedges, net of taxes of $1,582		-		-		-		-			2,940			2,940
Comprehensive income														3,040
Proceeds from the exercise of stock options and employee stock purchases		165,114		1,657		-		-			-			1,657
Share-based compensation		-		-		118		-			-			118
Balance, December 31, 2007		5,054,437		28,936		2,484		21,753			2,367			55,540
Comprehensive 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			77
Comprehensive loss														(7,417	)
Proceeds from the exercise of stock options and employee stock purchases		12,942		77		-		-			-			77
Share-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	)	$	1,951
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred tax provision		(5,394	)		695
Share-based compensation		43			280
Excess tax benefit on stock options exercised		-			(56	)
Depreciation and amortization		847			472
Provision for credit losses		13,595			275
Increase 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			633
Net (gain) loss on sale of foreclosed assets		(236	)		306
Write-down of foreclosed assets		1,952			305
Increase in accrued interest receivable and other assets		(412	)		(700	)
Decrease in accrued interest payable and other liabilities		(205	)		(382	)
Other		30			28
Net cash provided by operating activities		3,418			3,534
Cash flows from investing activities
Proceeds from maturities and sales of investment securities		10,414			3,394
Net increase in loans		(40,725	)		(24,820	)
Proceeds from sale of foreclosed assets		1,102			317
Purchases 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			18,474
Net increase (decrease) in federal funds purchased		(575	)		375
Repayment of Federal Home Loan Bank and other borrowings		(41	)		(62	)
Proceeds from the exercise of stock options		77			725
Excess tax benefit on stock options exercised		-			56
Net 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		2007
Weighted-average shares outstanding – basic		5,055,621		4,944,457		5,055,047		4,922,595
Effect of assumed conversion of stock options		-		247,143		-		263,089
Weighted-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 Contractual Term (years)		Aggregate  Intrinsic Value  (in thousands)
Balance, beginning of period		722,136		$	10.92
Granted		-			-
Exercised		(3,070	)		4.53
Forfeited/Expired		(42,000	)		10.70
Balance, end of period		677,066			10.96		4.7	$	140,260
Exercisable, 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			2007
Net income (loss) reported	$	(8,091	)	$	673		$	(7,189	)	$	1,951
Unrealized gain (loss) from securities:
Net unrealized loss on available-for-sale securities arising during the period, net of tax		(750	)		(607	)		(585	)		(536	)
Reclassification adjustment of loss included in income, 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 instruments arising during the period, net of tax		(2,529	)		(1,027	)		(70	)		(860	)
Reclassification adjustment of loss included in income, net of tax		28			326			147			408
Net 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,  2007
Agency securities	$	1,540	$	1,514
Mortgage-backed securities		19,545		27,263
Municipal 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  Losses
Agency 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,  2007
Commercial	$	94,468		$	92,496
Real estate:
Construction		123,779			109,417
Residential 1-4 family		37,130			33,224
Multifamily		3,937			6,298
Commercial		165,445			153,139
Installment and other consumer		4,547			3,945
Total loans, gross		429,306			398,519
Deferred 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, 2007
Balance at beginning of period	$	6,425		$	5,098		$	5,990		$	4,825
Provision for credit losses		13,002			-			13,595			275
Recoveries		15			148			27			172
Charge-offs		(5,195	)		(61	)		(5,365	)		(87	)
Balance at end of period	$	14,247		$	5,185		$	14,247		$	5,185
Components
Allowance for loan losses	$	14,033		$	4,875		$	14,033		$	4,875
Liability for unfunded credit commitments		214			310			214			310
Total 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)	Total
Commitments to extend credit	$	78,409
Credit card commitments		3,609
Standby 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.

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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.

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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		-		-		6,842
Total	$	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.”

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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.

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	For Three Months Ended June 30,
	2008								2007
	Average			Interest					Average			Interest
	Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
(dollars in thousands)	Balance			Paid		Rate			Balance			Paid		Rate
Assets
Interest-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								47,907
Total assets	$	534,410							$	485,801
Liabilities and shareholders' equity
Interest-bearing liabilities:
Savings, money market and interest-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								99,740
Other liabilities		3,889								5,132
Total liabilities		477,258								432,600
Shareholders' equity		57,152								53,201
Total liabilities and shareholders' equity	$	534,410							$	485,801
Net interest income (2)				$	5,881							$	5,623
Net 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.

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	For Six Months Ended June 30,
	2008								2007
	Average			Interest					Average			Interest
	Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
(dollars in thousands)	Balance			Paid		Rate			Balance			Paid		Rate
Assets
Interest-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								46,494
Total assets	$	530,553							$	473,109
Liabilities and shareholders' equity
Interest-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								100,599
Other liabilities		3,961								5,098
Total liabilities		473,851								420,882
Shareholders' equity		56,702								52,227
Total liabilities and shareholders' equity	$	530,553							$	473,109
Net interest income (2)				$	11,427							$	11,458
Net interest spread							3.97	%							4.23	%
Yield on average interest-earning assets							7.66	%							8.39	%
Interest expense to average interest-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.

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

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Non-Interest Expense

Non-interest expense consists of the following components:

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

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	June 30,		December 31,
(dollars in thousands)	2008		2007
Agency securities	$	1,540	$	1,514
Mortgage-backed securities		19,545		27,263
Municipal 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			Percent
Commercial	$	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.”

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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.

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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		Percent
General	$	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 Ended
	June 30,						June 30,
(dollars in thousands)	2008			2007			2008			2007
Loans outstanding at end of period, net of deferred fees	$	428,187		$	382,711		$	428,187		$	382,711
Average loans outstanding during the period		425,731			382,440			419,319			369,672
Allowance for credit losses, beginning of period	$	6,425		$	5,098		$	5,990		$	4,825
Loans charged off:
Commercial		849			50			1,012			50
Real estate		4,317			-			4,317			-
Consumer and other		29			11			36			37
Total loans charged-off		5,195			61			5,365			87
Recoveries:
Commercial		1			95			2			106
Real estate		-			1			4			2
Consumer and other		14			52			21			64
Total recoveries		15			148			27			172
Net loans charged off (recovered) during the period		5,180			(87	)		5,338			(85	)
Provision for credit losses		13,002			-			13,595			275
Allowance for credit losses, end of period	$	14,247		$	5,185		$	14,247		$	5,185
Components
Allowance for loan losses	$	14,033		$	4,875		$	14,033		$	4,875
Liability for unfunded credit commitments		214			310			214			310
Total allowance for credit losses	$	14,247		$	5,185		$	14,247		$	5,185
Ratio of net loans charged off (recovered) to average loans outstanding (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.

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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			2007
Loans on non-accrual status	$	8,635		$	10,827
Loans past due greater than 90 days and accruing		98			149
Total non-performing loans		8,733			10,976
Other real estate owned		3,925			2,240
Other repossessed assets		285			10
Total non-performing assets	$	12,943		$	13,226
Total assets	$	530,310		$	514,180
Percentage 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:

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

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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-Capitalized
											Under Prompt
						For Capital Adequacy					Corrective Action
	Actual					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/A
Bank	$	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/A
Bank	$	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/A
Bank	$	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/A
Bank	$	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/A
Bank	$	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/A
Bank	$	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.

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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.

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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 Voted
Ernie D. Ballou	2,061,920	67.25	1,004,329	32.75
Richard J. Fitzpatrick	2,136,920	69.69	929,329	31.31
Brian E. Magnuson	2,109,060	68.78	957,189	31.22
John M. Petersen	2,109,060	68.78	957,189	31.22
Phillip S. Rowley	2,089,960	68.16	976,289	31.84
Linda 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 Officer
31.2	Certification of Chief Financial Officer
32	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. Fitzpatrick

Richard J. Fitzpatrick, President and Chief Executive Officer

/s/ Gerald L. Brickey

Gerald L. Brickey, Vice-President and Chief Financial Officer

27