U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549
                                    Form 10-K

            [X] Annual Report Pursuant to section 13 or 15(d) of the
                       Securities and Exchange act of 1934

                   For the fiscal year ended December 31, 1998

                             Commission file number
                                     0-23881
                             COWLITZ BANCORPORATION
             (Exact name of registrant as specified in its charter)

                  Washington                    91-152984
         (State or other jurisdiction of      (IRS Employer
         incorporation or organization)      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)

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act
                           Common Stock, No par value
                                (Title of Class)

     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____

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of the Form of this form 10-K. [ X]

     The approximate aggregate market value of Registrant's Common Stock held by
non-affiliates of the Registrant on February 28, 1999, was $ 21,218,148.

     Common Stock, no par value on February 28, 1999: 4,002,377

                       DOCUMENTS INCORPORATED BY REFERENCE

     List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K into which the document is  incorporated:  Portions of the
registrants proxy statement dated April 13, 1999, for the 1999 annual meeting of
shareholders is incorporated by reference in Part III hereof.



<PAGE>


                                TABLE OF CONTENTS

                                                                        Page
Part I

Item 1.  Business........................................................3

Item 2.  Properties......................................................10

Item 3.  Legal Proceedings...............................................10

Item 4.  Submission of matters to vote of securities
         holders.........................................................11


Part II

Item 5.  Market price and dividends on registrant's
         common equity and related stockholder matters...................11

Item 6.  Financial Highlights............................................12

Item 7.  Management's discussion and analysis of
         financial condition and results of operations...................13

Item 8.  Financial statements and supplementary data.....................29

Item 9.  Changes in and disagreements with accountants
         on accounting and financial disclosure..........................53


Part III

Item 10. Director and executive officers of
         the registrant..................................................53

Item 11. Executive compensation..........................................53

Item 12. Security ownership of certain beneficial
         owners and management...........................................53

Item 13. Certain relationships and related
         transactions....................................................53


Part IV

Item 14. Exhibits, financial statement
         schedules, and reports on form 8-K..............................53



                                       2

<PAGE>
                                     Part I
Item 1.  Business
Introduction

     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 Company offers or makes  available a broad range of financial  services
to its customers, primarily small and medium-sized businesses, professionals and
retail  customers.  In addition to the Bank's  normal  commercial  and  personal
banking  services,  which include  commercial and real estate lending,  consumer
lending,  mortgage  origination  and  trust  services,  the Bank  has  developed
relationships  with a securities  brokerage  firm and  insurance  agency with an
estate  planner  to  provide  its  customers  access to a variety  of  financial
services which are generally not available in community banks. In 1997, the Bank
established  a  trust   department  to  offer  trust  services  to  individuals,
corporations and  institutions.  It is the only such trust department in Cowlitz
County.  It is the  intention of the Company to provide  customers  with similar
banking services offered by larger  competitors while retaining the character of
a community bank and the level of personal  service which larger banks generally
no  longer  provide.   During  1998,  the  Company  acquired   Business  Finance
Corporation  ("BFC") which provides  asset-based  lending  services to companies
throughout the western United States.

     The Company's goal is to maintain its position as a leading community based
provider  of  financial  services  in  Cowlitz  County  and to become one of the
leading community based providers of financial  services in other selected areas
of Washington and Oregon.  The Company's  growth  strategy is based on providing
both exceptional  personal service and a wide range of financial services to its
customers   including:   emphasizing  personal  service  and  developing  strong
community  ties,  providing a broad range of financial  products  and  services,
increasing business volume in existing markets, and exploring  opportunities for
regional expansion through acquisitions.

Products and Services

     The Company offers a broad  portfolio of products and services  tailored to
meet the banking  requirements  of targeted  customers  in its market  area.  It
believes this portfolio is generally  competitive with the products and services
of its competitors, including major regional and national banks. These include:

     Deposit  Products.  The Company  provides an array of deposit  products for
customers,  including  non-interest-bearing checking accounts,  interest-bearing
checking  and savings  accounts,  money  market  accounts  and  certificates  of
deposit.  These  accounts  generally  earn  interest  at  rates  established  by
management  based on  competitive  market  factors  and  management's  desire to
increase  certain types or maturities of deposit  liabilities.  The Company does
not pay  brokerage  commissions  to attract  deposits.  It strives to  establish
customer   relations   to  attract   core   deposits   in   non-interest-bearing
transactional accounts and thus to reduce its cost of funds.

     Loan  Products.  The Company  offers a broad array of loan  products to its
small to medium  size  business  customers.  The  Company  maintains  sound loan
underwriting standards with written loan policies,  conservative  individual and
branch  limits  and  reviews  by the  Loan  Committee.  Further,  in the case of
particularly large loan commitments or loan  participations,  loans are reviewed
by the Board of  Directors.  Underwriting  standards  are  designed to achieve a
high-quality loan portfolio, compliance with lending regulations and the desired
mix of loan maturities and industry concentrations. Management seeks to minimize
credit losses by closely monitoring the financial condition of its borrowers and
the value of collateral.

     Commercial Loans. The Company offers specialized loans for its business and
commercial customers. These include equipment and inventory financing, operating
lines of credit and accounts  receivable  financing.  Commercial  lending is the
primary focus of the Company's lending activities,  and a significant portion of
its loan portfolio  consists of commercial  loans.  For regulatory  purposes,  a
substantial  portion of the Company's  commercial  loans are  designated as real
estate  loans,  as the loans are  secured by  mortgages  and trust deeds on real
property,  although the loans may be made for  purposes of financing  commercial
activities,  such as accounts  receivable,  equipment purchases and inventory or
other working capital needs.  Lending decisions are based on careful  evaluation
of the financial  strength,  management and credit history of the borrower,  and
the quality of the  collateral  securing the loan.  Commercial  loans secured by
real property are limited to70% of the value of the  collateral.  In some cases,
the Company may require personal guarantees and secondary sources of repayment.
                                       3
<PAGE>
     Real  Estate  Loans.  Real estate  loans are  available  for  construction,
purchasing and refinancing  residential  owner-occupied  and rental  properties.
Borrowers  can choose from a variety of fixed and  adjustable  rate  options and
terms. Real estate loans reflected in the loan portfolio also include loans made
to commercial customers that are secured by real property.  The Company provides
customers  access to  long-term  conventional  real  estate  loans  through  its
mortgage loan department,  which makes  FNMA-conforming  loans and sells them in
the secondary market.

     Payments  on loans are often  dependent  on the  successful  operation  and
management of the  properties  securing the loans,  and are  therefore  strongly
affected by the  conditions of the local real estate  market.  Fluctuating  land
values  and local  economic  conditions  make  loans  secured  by real  property
difficult to evaluate and monitor.

     Consumer Loans.  The Company  provides loans to individual  borrowers for a
variety of  purposes,  including  secured and  unsecured  personal  loans,  home
equity,  personal  lines of credit and motor vehicle  loans.  Consumer loans can
carry significantly greater risks than other loan products,  even if secured, if
the collateral  consists of rapidly  depreciating assets such as automobiles and
equipment.  Repossessed  collateral  securing a defaulted  consumer loan may not
provide an adequate source of repayment of the loan.  Consumer loan  collections
are dependent on borrowers' continuing financial stability, and are sensitive to
job loss, illness and other personal factors. The Company attempts to manage the
risks  inherent in consumer  lending by following  strict credit  guidelines and
conservative underwriting practices. The Company also offers Visa and MasterCard
credit cards to its customers.

     Other  Banking   Products  and  Services.   In  support  of  its  focus  on
personalized  service,  the Company offers additional  products and services for
the convenience of its customers.  These include a debit card program, automated
teller  machines  located  at each of the  Company's  offices  and an  automated
telephone  banking  service  with  24-hour  access to accounts  that also allows
customers to speak directly with a customer service representative during normal
banking hours or leave a message after normal  banking  hours.  The Company does
not  currently  charge  fees for any of these  services.  The  Company  provides
drive-through facilities at four of its branches.

     Trust Services.  The Company has established a trust  department,  which is
the only one located in Cowlitz  County.  The trust  department  provides  trust
services to individuals, partnerships, corporations and institutions and acts as
fiduciary of estates and  conservatorships and as a trustee under various wills,
trusts  and  other  plans.  The  Company  believes  this  service  will  attract
additional customers to the Bank.

     Other Financial Services. The Company believes that providing its customers
a full range of financial  services is an  important  element of its strategy to
attract and retain  customers.  To this end,  the Company has entered into lease
arrangements with Raymond James Financial  Services,  Inc., a securities broker,
and Commerce  Business & Estate Planning  Services,  Inc., an insurance  agency.
Each of these organizations maintains an office on the main floor of the Cowlitz
Financial Center, where the main office of the Company is located and has access
to space in the Company's  other  branches.  Representatives  of these companies
meet with clients at each of the Bank's branches,  thereby making these services
available  to all of the  Company's  customers.  The  Company  has no  financial
interest  in either of these  companies.  The  Company  believes  that by making
available through these relationships,  brokerage and insurance services, it can
increase foot traffic through its branches and market more  extensively its full
line of core banking products and services.

Acquisitions

     On August 31, 1998, the Company acquired Business Finance Corporation (BFC)
of Bellevue,  Washington.  The  acquisition was accounted for using the purchase
method,  including  issuance of common  stock with a value of  $465,000.  A cash
payment was made in the amount of $1.8  million  with an  adjustment  to be made
based on final determination of BFC's shareholder's  equity. A future contingent
issuance of common stock valued at approximately  $500,000 will be issued if BFC
achieves earning targets for the twelve-month period following acquisition.

Results

     For the year ended  December 31, 1998,  the Company  earned $2.2 million in
net income,  or $.57 per diluted share. The Company's  consolidated  assets were
$178.3 million and shareholders'  equity was $30.9 million at December 31, 1998.
Net loans were $130.2  million with total deposits of $122.4 million at year-end
1998. The Company's principal subsidiary Cowlitz Bank is the only community bank
headquartered  in the county with five full service branches located in Longview
(2), Kelso, Kalama, and Castle Rock.
                                       4
<PAGE>

Market area

     The Company's  primary market area from which it accepts deposits and makes
loans is Cowlitz County,  Washington, and the surrounding counties in Washington
and Oregon. As a community bank, the Bank has certain competitive advantages due
to its local focus, but is also more closely tied to the local economy than many
of its  competitors,  which serve a number of geographic  markets.  BFC provides
assets-based lending services throughout the western United States.

Employees

     As of December  31,  1998,  the Company  employed a total of 105  full-time
equivalent  employees.  None  of  the  employees  are  subject  to a  collective
bargaining  agreement  and the  Company  considers  its  relationships  with its
employees to be favorable.

Risk Factors

     Exposure to Local Economy

     The Company's performance is materially dependent upon and sensitive to the
economy of its  market  area  consisting  primarily  of  Cowlitz  County and the
surrounding areas in southwest Washington and northwest Oregon. Adverse economic
developments  may affect loan demand and the  collectibility  of existing loans,
and have a negative  effect on the Company's  earnings and financial  condition.
Historically,  the economy of Cowlitz  County  depended  primarily on the forest
products  industry.  Particularly  in the  1980's,  the  Company's  market  area
experienced  high  unemployment  as a result of the reduction in forest products
manufacturing  jobs.  While the forest  products  industry  is still the leading
employer  in  Cowlitz   County,   the  economy  is  becoming   more  diverse  as
manufacturers  enter  the  region.  Subsequent  developments  have  reduced  the
dependence  of the local  economy  on  forest  products  manufacturing  and have
increased the number of  non-manufacturing  jobs. There can be no assurance that
future economic changes will not have significant adverse effect on the Company.

     Credit Risk

     The Company,  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.  Although the Company has  established  lending
criteria and most loans are secured by collateral,  a downturn in the economy or
the local real estate market in Cowlitz  County or a rapid  increase in interest
rates could have a negative effect on collateral  values and borrowers'  ability
to repay.

Interest Rate Risk

     The Company'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  which  are  beyond  the  control  of the  Company'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
depends on the maturity of the asset and liability. Although the Company strives
to minimize interest rate risk through asset/liability management policies, from
time to time  maturities  are not balanced.  Further,  while rates have remained
stable in recent  periods,  an  unanticipated  rapid  decrease  or  increase  in
interest rates could have an adverse effect on the spreads  between the interest
rates  earned  on assets  and the rates of  interest  paid on  liabilities,  and
therefore on the level of net interest income.


                                       5

<PAGE>
     Regulation

     The Company is subject to  extensive  regulations  under  federal and state
laws.  These laws and regulations are intended  primarily to protect  depositors
and the deposit  insurance fund, rather than  shareholders.  The Bank is a state
chartered  commercial  bank which is not a member of the Federal  Reserve System
and is  subject  to  primary  regulation  and  supervision  by the  Director  of
Financial  Institutions of the State of Washington (the  "Washington  Director")
and by the  Federal  Deposit  Insurance  Corporation  (the  "FDIC"),  which also
insures bank deposits. The Company is also subject to regulation and supervision
by the Board of Governors of the Federal Reserve System (the "Federal Reserve").
Federal and state regulations place banks at a competitive disadvantage compared
to less regulated competitors such as finance companies, credit unions, mortgage
banking companies and leasing  companies.  Although the Company has been able to
compete  effectively  in its market area in the past,  there can be no assurance
that it will be able to continue to do so.  Further,  future  changes in federal
and state banking  regulations  could adversely  affect the Company's  operating
results  and ability to continue to compete  effectively.  See  "Regulation  and
Supervision."

     Year 2000

     Based on its current  assessments and remediation  plans,  the Company does
not expect  that it will suffer any  material  disruption  of its  business as a
result of Year 2000 issues. Although the Company has no reason to believe that a
material disruption will occur, the most likely worst case scenario would result
from a Y2K failure in the power supply,  voice and data transmission  systems or
the federal  government.  If such a failure  were to occur,  the  Company  would
implement its contingency  plan. In such event, it is likely that there would be
temporary  disruption  of  customer  service  and  customer   inconvenience  and
additional  costs from the  implementation  of the  contingency  plan. It is not
possible to  quantify  those costs at the  present  time.  Although  the Company
believes its contingency plan will  satisfactorily  address these issues,  there
can be no  assurance  that the  Company's  contingency  plan  will  function  as
anticipated  or that  the  results  of  operations  of the  Company  will not be
adversely affected in the event of a prolonged disruption of service. For a more
detailed disclosure see "Management Discussion and Analysis, Year 2000."

Competition

     Competition in the banking  industry has intensified for deposits and loans
with  decreased  interest  rates  over the last one to two  years.  Furthermore,
competition  from outside the  traditional  banking  system from credit  unions,
investment banking firms,  insurance  companies and related industries  offering
bank-like  products has widened the competition for deposits and loans. Based on
published reports,  it is estimated that credit unions held approximately 56% of
deposits in the Company's market area as of June 30, 1997.

     The banking industry in the market area is generally  characterized by well
established  branches of large banks with headquarters located out of the market
area and in many cases, out of the state. These large multi-bank holding company
branches located in the  Longview-Kelso  area have transferred a number of their
banking  functions  outside the local area. There are also thrift  institutions,
including  a branch of the  country's  largest  thrift  institution,  and credit
unions  within the market  area that are very  competitive  in the  deposit  and
consumer lending areas.

     The major  competition  for commercial  banking  services in Cowlitz County
comes  from U.S.  Bank,  Key Bank,  Bank of  America  (which  does  business  in
Washington as Seafirst Bank) and Columbia State Bank. None of these  competitors
are headquartered in Cowlitz County and many have relocated key functions (e.g.,
loan  decisions)  into regional  offices outside of the area. Its local decision
making and strong  community ties have allowed the Company to provide a level of
personal  service  and direct  customer  contact  that  management  believes  is
superior to that provided by other banks.

     The offices of the major financial institutions have competitive advantages
over the  Company in that they have high  public  visibility,  may offer a wider
variety  of  products  and  are  able  to  maintain  advertising  and  marketing
activities  on a much larger scale than the Company can  economically  maintain.
Since single borrower lending limits imposed by law are dependent on the capital
of the institution, the branches of larger institutions with substantial capital
bases also have an  advantage  with  respect to loan  applications  which are in
excess of the Company's legal lending limits.

     In competing  for deposits,  the Company is subject to certain  limitations
not  applicable  to nonbank  financial  institution  competitors.  Previous laws
limiting  the deposit  instruments  and lending  activities  of savings and loan
associations have been substantially eliminated, thus increasing the competition
from these institutions.
                                       6
<PAGE>
Regulation and Supervision

     The Company and the Bank are subject to extensive  regulation under federal
and state laws. The laws, together with the regulations  promulgated under them,
significantly  affect respective  activities of the Company and the Bank and the
competitive  environment  in which they operate.  The laws and  regulations  are
primarily  intended to protect depositors and the deposit insurance fund, rather
than shareholders.

     The  description  herein  of the laws  and  regulations  applicable  to the
Company and the Bank, does not purport to be a complete  description of the laws
and regulations mentioned herein or of all such laws and regulations. Any change
in applicable laws or regulations may have a material effect on the business and
prospects  of the Company and the Bank.  The  operations  of the Company and the
Bank may be affected by legislative and regulatory changes as well as by changes
in the policies of various regulatory authorities. The Company cannot accurately
predict  the nature or the extent of the effects  that such  changes may have in
the future on its business and earnings.

     Bank Holding  Company  Regulation.  The Company is a bank  holding  company
within the meaning of the Bank Holding Company Act of 1956, as amended  ("BHCA")
and, as such, is subject to the regulations of the Federal Reserve. Bank holding
companies are required to file periodic reports with and are subject to periodic
examination by the Federal Reserve.  The Federal Reserve has issued  regulations
under  the BHCA  requiring  a bank  holding  company  to  serve  as a source  of
financial and managerial  strength to its subsidiary  banks. It is the policy of
the Federal Reserve that,  pursuant to this requirement,  a bank holding company
should stand ready to use its resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity.  Additionally,
under  the  Federal  Deposit  Insurance  Corporation  Improvement  Act  of  1991
("FDICIA"),  a bank holding  company is required to guarantee the  compliance of
any insured depository institution subsidiary that may become "undercapitalized"
(as defined in the statute) with the terms of any capital restoration plan filed
by such subsidiary with its appropriate  federal banking agency up to the lesser
of (i) an amount equal to 5% of the  institution's  total assets at the time the
institution  became  undercapitalized,  or (ii) the amount that is necessary (or
would have been  necessary) to bring the  institution  into  compliance with all
applicable capital standards as of the time the institution fails to comply with
such  capital  restoration  plan.  Under the BHCA,  the Federal  Reserve has the
authority  to  require a bank  holding  company to  terminate  any  activity  or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the Federal  Reserve's  determination  that such  activity or control
constitutes a serious risk to the financial  soundness and stability of any bank
subsidiary of the bank holding company.

     The Company is  prohibited  by the BHCA from  acquiring  direct or indirect
control of more than 5% of the  outstanding  shares of any class of voting stock
or substantially all of the assets of any bank or merging or consolidating  with
another bank holding  company  without  prior  approval of the Federal  Reserve.
Additionally,  the Company is  prohibited  by the BHCA from  engaging in or from
acquiring  ownership or control of more than 5% of the outstanding shares of any
class of voting stock of any company  engaged in a non-banking  business  unless
such business is determined by the Federal  Reserve to be so closely  related to
banking as to be a proper incident thereto.

     Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve
is the federal  regulatory and examining  authority for bank holding  companies.
The Federal  Reserve has adopted  capital  adequacy  guidelines for bank holding
companies.  These  guidelines are similar to,  although not identical  with, the
guidelines applicable to banks. See "Bank Capital Requirements." At December 31,
1998,  the  Company's  Tier 1  leverage  capital  ratio was  15.81%,  its Tier 1
risk-based  capital ratio was 22.21% and its total risk-based  capital ratio was
23.46%.

     Bank  Regulation.  The Bank is  organized  under  the laws of the  State of
Washington  and is subject to the  supervision  of the  Department  of Financial
Institutions  ("DFI"),  whose examiners  conduct periodic  examinations of state
banks. The Bank is not a member of the Federal Reserve System,  so its principal
federal regulator is the FDIC, which also conducts periodic  examinations of the
Bank. The Bank's deposits are insured,  to the maximum extent  permitted by law,
by the Bank Insurance Fund ("BIF")  administered  by the FDIC and are subject to
the FDIC's rules and  regulations  respecting  the  insurance  of deposits.  See
"Deposit Insurance."

     Both federal and state laws  extensively  regulate  various  aspects of the
banking   business   such  as   reserve   requirements,   truth-in-lending   and
truth-in-savings  disclosures,  equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking  operations.  Current federal
law also requires banks,  among other things,  to make deposited funds available
within specified time periods.
                                       7
<PAGE>
     Insured  state-chartered  banks are generally  prohibited under FDICIA from
engaging as principal in activities  that are not permitted for national  banks,
unless (i) the FDIC determines that the activity would pose no significant  risk
to the appropriate  deposit  insurance fund, and (ii) the bank is, and continues
to be, in compliance with all applicable capital standards. The Company does not
believe  that  these  restrictions  will have a material  adverse  effect on its
current operations.

     Bank Capital  Requirements.  The FDIC has adopted  risk-based capital ratio
guidelines to which the Bank is subject.  The guidelines  establish a systematic
analytical  framework that makes regulatory capital  requirements more sensitive
to differences in risk profiles among banking organizations.  Risk-based capital
ratios are  determined by  allocating  assets and  specified  off-balance  sheet
commitments  to four risk  weighted  categories,  with higher  levels of capital
being required for the categories perceived as representing greater risk.

     These  guidelines  divide a bank's capital into two tiers.  Tier 1 includes
common  equity,  certain  noncumulative  perpetual  preferred  stock  (excluding
auction rate issues) and minority  interest in equity  accounts of  consolidated
subsidiaries, less goodwill and certain other intangible assets (except mortgage
servicing  rights and purchased  credit card  relationships,  subject to certain
limitations).  Supplementary  (Tier 2)  capital  includes,  among  other  items,
cumulative  perpetual and long-term,  limited-life,  preferred stock,  mandatory
convertible  securities,  certain hybrid capital instruments,  term-subordinated
debt  and  the  allowance  for  loan  and  lease  losses,   subject  to  certain
limitations,  less required  deductions.  Banks are required to maintain a total
risk-based  capital  ratio of 8%, of which 4% must be Tier 1  capital.  The FDIC
may,  however,   set  higher  capital  requirements  when  a  bank's  particular
circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions,  well
above the minimum levels.

     In addition, the FDIC has established guidelines prescribing a minimum Tier
1 leverage  ratio (Tier 1 capital to adjusted  total  assets as specified in the
guidelines).  These guidelines provide for a minimum Tier 1 leverage ratio of 3%
for banks that meet certain  specified  criteria,  including  that they have the
highest  regulatory rating and are not experiencing or anticipating  significant
growth.  All other banks are required to maintain a Tier 1 leverage  ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.

     Certain  regulatory capital ratios for the Company and the Bank at December
31, 1998 are set forth below:
                                                          Company          Bank
Tier 1 Capital to Risk-Weighted Assets . . . . . . . . .  22.21%        12.07%
Total-Risk Based Capital to Risk-Weighted Assets . . . .  23.46%        13.32%
Tier 1 Leverage Ratio . . . . . . . . . . . . . . . . .   15.81%         8.72%

     Dividends. The principal source of the Company's cash revenues is dividends
from the Bank. Under Washington law, the Bank may not pay dividends in an amount
greater  than  its  retained  earnings  as  determined  by  generally   accepted
accounting  principles.  In  addition,  the DFI has the  authority  to require a
state-chartered bank to suspend payment of dividends. The FDIC has the authority
to  prohibit a bank from paying  dividends  if, in its  opinion,  the payment of
dividends  would  constitute  an  unsafe  or  unsound  practice  in light of the
financial  condition  of  the  bank  or if it  would  cause  a  bank  to  become
undercapitalized.

     Lending  Limits.  Under  Washington  law, the total loans and extensions of
credit by a Washington-chartered  bank to a borrower outstanding at one time may
not exceed 20% of such bank's capital and surplus. However, this limitation does
not apply to loans or  extensions  of credit which are fully  secured by readily
marketable  collateral having market value of at least 115% of the amount of the
loan or the extension of credit at all times.

     Branches  and  Affiliates.  Establishment  of bank  branches  is subject to
approval of the DFI and FDIC and  geographic  limits  established by state laws.
Washington's  branch  banking law permits a bank having its  principal  place of
business in the State of Washington to establish branch offices in any county in
Washington  without  geographic  restrictions.  A bank may also  merge  with any
national or state  chartered  bank located  anywhere in the State of  Washington
without geographic restrictions.

     Under Oregon law, an  out-of-state  bank or bank holding  company may merge
with or acquire an Oregon state  chartered  bank or bank holding  company if the
Oregon bank, or in the case of a bank holding company,  the subsidiary bank, has
been in  existence  for a minimum  of three  years,  and the law of the state in
which the  acquiring  bank in located  permits such merger.  Branches may not be
acquired  or  opened  separately,  but once an  out-of-state  bank has  acquired
branches in Oregon, either through a merger with or acquisition of substantially
all of the assets of an Oregon bank, the bank may open additional branches.
                                       8
<PAGE>
     The Bank is subject to Sections 22 (h), 23A and 23B of the Federal  Reserve
Act,  which  restrict  financial   transactions  between  banks  and  affiliated
companies.  The  statute  limits  credit  transactions  between  a bank  and its
executive officers and its affiliates,  prescribes terms and conditions for bank
affiliate  transactions  deemed to be  consistent  with  safe and sound  banking
practices,   and  restricts  the  types  of  collateral  security  permitted  in
connection with a bank's extension of credit to an affiliate.

     FDICIA.  FDICIA  requires,  among other  things,  federal  bank  regulatory
authorities  to take "prompt  corrective  action" with respect to banks which do
not meet minimum capital  requirements.  For these purposes,  FDICIA establishes
five capital tiers: well capitalized, adequately capitalized,  undercapitalized,
significantly undercapitalized, and critically undercapitalized.

     The FDIC has adoped  regulations to implement the prompt  corrective action
provisions of FDICIA.  Among other things,  the regulations  define the relevant
capital measures for the five capital categories. An institution is deemed to be
"well  capitalized"  if it  has a  total,  risk-based  capital  ratio  of 10% or
greater,  a Tier 1  risk-based  capital  ratio of 6% or greater,  and a leverage
ratio of 5% or greater,  and is not subject to a regulatory order,  agreement or
directive to meet and maintain a specific capital level for any capital measure.
The Bank currently exceeds all of the ratios.

     FDICIA further directs that each federal banking agency prescribe standards
for  depository  institutions  and  depository  institutions  holding  companies
relating to internal controls, information systems, internal audit systems, loan
documentation,  credit  underwriting,  interest  rate  exposure,  asset  growth,
management  compensation,  a maximum  ratio of  classified  assets  to  capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value to
book value of  publicly  traded  shares and such other  standards  as the agency
deems appropriate.

     Deposit  Insurance.  The Bank's  deposits  are insured up to  $100,000  per
insured account by the BIF. As an institution whose deposits are insured by BIF,
the Bank is required to pay deposit insurance premiums to BIF.

     FDICIA  required the FDIC to issue  regulations  establishing  a system for
setting  deposit  insurance  premiums based upon the risks a particular  bank or
savings  association  poses to the deposit insurance funds. This system bases an
institution's  risk  category  partly  upon  whether  the  institution  is  well
capitalized,  adequately capitalized or less than adequately  capitalized.  Each
insured  depository  institution is also assigned to one of three  "supervisory"
categories  based on reviews by  regulators,  statistical  analysis of financial
statements and other relevant  information.  An  institution's  assessment  rate
depends  upon the  capital  category  and  supervisory  category  to which it is
assigned. Annual assessment rates currently range from $.03 per $100 of domestic
deposits  for the  highest  rated  institution  to $0.27  per  $100 of  domestic
deposits for an institution in the lowest category. The Bank is currently in the
class of the  highest  rated  institutions  and,  accordingly,  pays the minimum
assessment  for  deposit  insurance.   Under  legislation  enacted  in  1996  to
recapitalize the Savings  Association  Insurance Fund, the FDIC is authorized to
collect  assessments  against  insured  deposits  to be  paid  to the  Financing
Corporation  ("FICO") to service FICO debt  incurred in the 1980's.  The current
FICO  assessment  rate  for BIF  insured  deposits  is 1.220  cents  per $100 of
deposits per year. Any increase in deposit  insurance of FICO assessments  could
have an adverse effect on the Bank's earnings.

     Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
financial  institutions  regulated by the federal financial supervisory agencies
to  ascertain  and help meet the credit needs of their  delineated  communities,
including low-income and moderate-income neighborhoods within those communities,
while  maintaining  safe and sound  banking  practices.  The  regulatory  agency
assigns one of four possible ratings to an institution's  CRA performance and is
required to make public an institution's rating and written evaluation. The four
possible  ratings  are  "outstanding,"  satisfactory,"  "needs to  improve"  and
"substantial noncompliance."

     Under new regulations  that apply to CRA performance  ratings after July 1,
1997,  many  factors  play a role in  assessing  a financial  institution's  CRA
performance.  The institution's  regulator must consider its financial  capacity
and size, legal impediments,  local economic conditions and demographics and the
competitive  environment in which it operates.  The evaluation  does not rely on
absolute  standards  and  financial  institutions  are not  required  to perform
specific activities or to provide specific amounts or types of credit.

     The  Company's  most  recent  rating  under  CRA  (using  the   regulations
applicable  prior to July 1, 1997) is  "outstanding."  This rating  reflects the
Company's  commitment to meeting the credit needs of the  communities it serves.
No assurance can be given, however, that the Company will be able to maintain an
"outstanding"  rating  under the new  regulations  in the  future.  The Bank has
recently had a CRA exam under the new  regulations  but has not yet received the
final results

                                       9
<PAGE>

     Additional Matters. In addition to the matters discussed above, the Company
and the Bank are subject to additional regulation of their activities, including
a variety of consumer protection  regulations  affecting their lending,  deposit
and collection  activities and regulations  affecting  secondary mortgage market
activities.

     The earnings of financial institutions, including the Company and the Bank,
are also affected by general economic  conditions and prevailing interest rates,
both  domestic and foreign and by the  monetary and fiscal  policies of the U.S.
Government and its various agencies, particularly the Federal Reserve.

     Additional  legislation and  administrative  actions  affecting the banking
industry  may be  considered  by the  United  States  Congress,  the  Washington
Legislature and various regulatory agencies,  including those referred to above.
It cannot be predicted with certainty whether such legislation or administrative
action will be enacted or the extent to which the banking industry in general or
the Company and the Bank in particular would be affected thereby.

2. Properties

     The Company owns its main office space at the Cowlitz Financial Center. The
Bank occupies  approximately  27,500 square feet of this  facility.  The Company
leases  space  in the  Cowlitz  Financial  Center  to  Raymond  James  Financial
Services,  Inc. and to Commerce  Business & Estate Service,  Inc., both of which
provide services to the Bank's customers. The Company owns branches in Kelso and
Kalama and leases  facilities  for branches in the Triangle Mall in Longview and
Castle Rock. Each facility has automated  teller machines and each branch except
Kalama provides  drive-up  services.  Business  Finance  Corporation  leases its
facilities in Bellevue, Washington.

Cowlitz Bancorporation
Cowlitz Financial Center
927 Commerce Ave.
Longview, Wa  98632
(360) 423-9800

Kalama Branch                        Castle Rock Branch
195 N. 1st St.                       202 Cowlitz St. W.
Kalama, Was  98625                   Castle Rock, Wa  98625
(360) 673-2226                       (360) 274-6685


Triangle Mall Branch                 Business Finance Corporation
800 Triangle Mall                    1404 140th N.E., STE 103
Longview, Wa  98632                  Bellevue, Wa  98007
(360) 577-6067                       (425) 649-0258


Kelso Branch
13th & Grade St
Kelso, Wa  98626
(360) 423-7800


Item 3.  Legal Proceedings

     The Company may occasionally have pending routine litigation resulting from
the collection of the 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.  Currently, 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.

                                       10
<PAGE>

Item 4.  Submission of matters to a vote of securities holders

     No matters were submitted to a vote of securities holders of the registrant
during the quarter ended December 31, 1998.


                                     PART II

Item 5.  Market price and dividends on the registrant's common equity and
         related stockholder matters

     Effective March 12, 1998, Cowlitz Bancorporation stock began trading on the
Nasdaq  National Market under the symbol "CWLZ".  Prior to that date,  there had
been no  organized  market for the Common  Stock,  and to the  knowledge  of the
Company, no third party bid and asked information was available.


                                                        1998
                                            Market Price      Cash Dividend
                                         High       Low         declared
   1st Quarter*                          13.19      12.00          .013
   2nd Quarter                           14.13      11.88          .015
   3rd Quarter                           12.13       7.75          .015
   4th Quarter                            9.00       7.25          .015

   *First day of trading was March 12, 1998

     As of  December  31,  1998  there  were  4,001,999  shares of common  stock
outstanding, held by approximately 335 shareholders.

Changes in Securities and Use of Proceeds

     On March 12, 1998, the Company completed an initial public offering issuing
a total  of  1,380,000  shares  of  common  stock at  $12.00  per  share.  After
underwriting  discounts of $1.2 million and other offering  expenses of $472,000
net proceeds were $14.9 million. Of these proceeds $1.1 million has been used to
repay  long-term debt and a subordinated  note, $1.8 million was used to acquire
BFC as described below and the remainder is being used for working capital.  The
managing  underwriters were Black & Company,  Inc. and Pacific Crest Securities,
Inc.

     Effective   August  31,  1998,  the  Company   acquired   Business  Finance
Corporation (BFC) of Bellevue,  Washington. BFC provides factoring, leasing, and
inventory financing services in Washington,  Oregon, California, and Nevada. The
acquisition  was accounted for using the purchase method and included an initial
issuance of common  stock with a value of  $465,000.  A cash payment was made in
the  amount  of $1.8  million,  with an  adjustment  to be made  based  on final
determination  of BFC's  shareholders  equity. A future  contingent  issuance of
common stock  valued at  approximately  $500,000  will be issued if BFC achieves
earnings targets for the twelve-month period following the acquisition.


                                       11

<PAGE>

Item 6.  Financial Highlights

<TABLE>
<CAPTION>

                                                               Year Ended December 31,
                                             1998          1997         1996          1995         1994
                                                    (dollars in thousands except per share data)
<S>                                           <C>           <C>          <C>           <C>          <C>
  Income Statement Data
Interest income                               $16,366       $15,086      $13,633       $10,644       $7,492
Interest expense                                6,501         6,943        6,174         4,548        2,841
                                               ------        ------      -------       -------       ------
Net interest income                             9,865         8,143        7,459         6,096        4,651
Provision for loan loss                           509           375          281           694          533
                                               ------        ------      -------       -------       ------
Net interest income after provision for
 loan loss                                      9,356         7,768        7,178         5,402        4,118
Non-interest income                               978           749          296           877          287
Non-interest expense                            6,927         5,284        3,682         3,093        2,363
                                               ------        ------      -------       -------       ------
Income before provision for income
 taxes                                          3,407         3,233        3,792         3,186        2,042
Provision for income taxes                      1,181         1,109        1,295         1,088          697
                                               ------        ------      -------       -------       ------
Net income                                     $2,226        $2,124       $2,497        $2,098       $1,345
                                               ======        ======      =======       =======       ======

Dividends
Cash                                             $212          $126         $101           $80          $49
Ratio of dividends to net income                9.52%         5.93%        4.04%         3.81%        3.64%
Per Share Data
Diluted earnings per share                      $0.57         $0.78        $0.97         $0.83        $0.78
Cash dividends per common share                 $0.06         $0.05        $0.04         $0.03        $0.03
Weighted average shares outstanding         3,715,901     2,601,650    2,586,711     2,514,769    1,723,733
Balance Sheet Data (at period end)
Investment securities                         $11,530        $8,481       $5,391        $3,263       $3,565
Trading assets                                     --            --           --         2,016        2,781
Loans, net                                    130,232       129,993      124,657       105,900       75,564
Total assets                                  178,345       173,293      159,157       131,348       94,728
Total deposits                                122,361       136,209      123,297       106,371       81,083
Total short-term borrowings                     2,275           725          550         2,625        1,350
Total long-term borrowings                     21,799        21,900       22,842        12,393        6,811
Total shareholders' equity                     30,920        13,887       11,813         9,391        5,182
Selected Ratios
Return on average total assets                  1.24%         1.28%        1.75%         1.90%        1.57%
Return on average shareholders'
 equity                                         8.34%        16.65%       23.93%        26.06%       30.21%
Net interest margin                             6.08%         5.33%        5.56%         5.91%        5.94%
Efficiency ratio (1)                           63.89%        59.42%       47.48%        44.36%       47.85%
Asset Quality Ratios
Allowance for loan losses to:
     Ending total loans                         1.37%         1.49%        1.50%         1.64%        1.50%
     Nonperforming assets (2)                  54.66%        81.51%      328.82%       540.80%      548.57%
Nonperforming assets to ending total assets     1.86%         1.39%        0.36%         0.25%        0.22%
Net loan charge-offs to average loans           0.54%         0.23%        0.13%         0.09%        0.20%
Capital Ratios
Average shareholders' equity to average
 assets                                        14.93%         7.69%        7.31%         7.30%        5.21%
Tier 1 capital ratio (3)                       22.21%         9.61%       10.11%         9.86%        7.68%
Total risk based capital ratio(4)              23.46%        11.34%       11.88%        11.96%       10.42%

(1)   Efficiency ratio is noninterest expense divided by the sum of net interest income plus noninterest income.
(2)   Nonperforming assets consist of nonaccrual loans, loans contractually past due 90 days or more and other real estate owned.
(3)   Tier 1 capital divided by risk-weighted assets.
(4)   Total risk-based capital divided by risk-weighted assets.

</TABLE>
                                       12
<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following  Management's  Discussion and Analysis of Financial Condition
and Results of Operations includes a discussion of certain significant  business
trends and  uncertainties  as well as other  forward-looking  statements  and is
intended to be read in  conjunction  with and is  qualified  in its  entirety be
reference  to  the  consolidated   financial   statements  of  the  Company  and
accompanying  notes  included  elsewhere  in this report.  For a  discussion  of
important factors that could cause actual results to differ materially from such
forward-looking statements, see "risk factors."

Introduction

     The  Company  has  recently  undertaken  significant  business  changes  to
strengthen  its position as a leading  bank in Cowlitz  County and to expand its
services throughout western Washington.  Beginning in November 1996, the Company
expanded its operating  base by opening a branch in Kelso,  Washington.  In July
1997, the Company  acquired  three Wells Fargo Bank branches,  located in Castle
Rock,  Kalama,  and Longview,  Washington  (the "Branch  Acquisition").  In this
acquisition,  the Company acquired branch sites, retained the existing employees
and assumed  approximately  $25.2  million in deposit  liabilities,  but did not
acquire any loans or other revenue  producing  assets.  During 1997, the Company
established a trust  department  at its main office in Longview.  In March 1998,
the Company  completed an initial  public  offering and in September  1998,  the
Company acquired Business Finance Corporation  ("BFC") of Bellevue,  Washington.
BFC provides  asset-based  lending services to companies  throughout the western
United States.

Results of Operations

Net Interest Income

     For  financial  institutions,  the  primary  component  of  earnings is net
interest income.  Net interest income is the difference between interest income,
principally  from  loans and  investment  securities  portfolios,  and  interest
expense, principally on customer deposits. Changes in net interest income result
from changes in "volume,"  "spread" and  "margin."  Volume  refers to the dollar
level of interest-earning assets and interest-bearing liabilities. 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 level and
relative mix of interest-earning assets and interest-bearing liabilities.

     Net interest  income for the year ended  December 31, 1998 was $9.9 million
an increase of 21.1% from $8.1 million in 1997,  which was $684,000  higher than
1996.  Total interest  earning assets averaged $162.2 million for the year ended
December  31,  1998,  compared  to $152.9  million  and $134.2  million  for the
corresponding  periods in 1997 and 1996,  respectively.  The increase in average
earning assets between 1998 and 1997 was  attributable to an increase in taxable
securities and interest  earning balances due from banks after the Company's IPO
in  March  of  1998,  as well as the  increase  in  loans  after  the  Company's
acquisition  of BFC.  For the year ended  December  31,  1997,  the  increase in
average earning assets was $18.6 million,  the largest component of which was an
increase in the amount of loans.  The overall  tax-equivalent  yield on interest
earning assets was 10.09% in 1998, compared to 9.87% in 1997 and 10.16% in 1996.
The yield on interest-earning assets increased in 1998 when compared to 1997 due
to loans at BFC which  produce  higher  yields than loans at the Bank.  Interest
yields also  increased  on  investments.  In 1997,  yields were lower on earning
assets when compared to 1996, primarily due to lower interest rates on loans due
to market conditions in the Bank's market area.

     Interest  expense as a percentage of earning  assets  decreased to 4.01% in
1998,  compared to 4.54% in 1997 and 4.60% in 1996. The average cost of interest
bearing  liabilities  remained 5.30% in 1998 and 1997 compared to 5.35% in 1996.
The Company's net interest spread was 4.79% in 1998, 4.57% in 1997, and 4.81% in
1996. The increase between 1998 and 1997 resulted from higher yields received on
interest earning assets.  Local competitive pricing conditions and funding needs
for the Company's  investments and loans were the primary  determinants of rates
paid for deposits during 1998, 1997 and 1996.


                                       13

<PAGE>

     Average  Balances and Average Rates Earned and Paid.  The  following  table
sets forth,  for the periods  indicated,  information with regard to (i) average
balances of assets and  liabilities,  (ii) the total dollar  amounts of interest
income on interest  earning  assets and  interest  expense on  interest  bearing
liabilities,  (iii) resulting yields or costs,  (iv) net interest income and (v)
net interest  spread.  Nonaccrual loans have been included in the table as loans
carrying a zero yield.  Loan fees are  recognized  as income  using the interest
method over the life of the loan.

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                           1998                             1997                            1996
                             Average                           Average     Interest           Average      Interest
                             Outstanding Interest              Outstanding Earned/             Outstanding Earned/  
                              Balance    Earned/Paid Yield/Rate Balance    Paid     Yield/Rate  Balance    Paid       Yield/Rate

                                                                   (dollars in thousands)
<S>                           <C>        <C>          <C>      <C>        <C>          <C>      <C>        <C>         <C>
ASSETS:
Loans                          $131,495  $14,103       10.73%   $130,362  $13,700      10.51%    $118,957  $12,721     10.69%
Taxable Securities               15,071      955        6.34%     10,261      667       6.50%       6,890      386      5.60%
Nontaxable securities(1)             81        4        4.94%          -        -       0.00%          36        3      8.33%
Trading assets                        -        -        0.00%          -        -       0.00%         589       34      5.77%
Federal funds sold                    -        -        0.00%          -        -       0.00%           -        -      0.00%
Interest earning balances
 due from Banks                  15,512    1,305        8.41%     12,259      719       5.87%       7,777      490      6.30%
                               --------  -------       -----    --------  -------      -----     --------  -------     -----
     Total interest
      earning assets           $162,159  $16,367       10.09%   $152,882  $15,086       9.87%    $134,249  $13,634     10.16%
Cash and due from banks           8,528                            7,553                            6,021
Premises and equipment, net       5,846                            5,064                            2,309
Allowance for loan losses        (1,930)                          (1,935)                          (1,801)
Net intangibles                   2,171                              580                                -
Other assets                      2,045                            1,846                            1,861
                               --------                         --------                         --------                    
      Total assets             $178,819                         $165,990                         $142,639
                               ========                         ========                         ========                    

LIABILITIES AND SHAREHOLDERS EQUITY:
Savings and interest-bearing
demand deposits                  $46,291  $1,894        4.09%    $37,568   $1,253       3.34%     $30,834   $1,031      3.34%
Certificates of deposits          52,682   3,048        5.79%     70,641    4,246       6.01%      64,863    3,960      6.11%
Long-term borrowings              21,755   1,469        6.75%     21,773    1,401       6.43%      17,315    1,073      6.20%
Short-term borrowings              1,865      90        4.83%        955       43       4.50%       2,359      110      4.66%
                                -------- -------       -----    --------  -------      -----     --------  -------     -----
     Total interest
      bearing liabilities       $122,593  $6,501        5.30%   $130,937   $6,943       5.30%    $115,371   $6,174      5.35%
Non-interest bearing deposits     28,672                          21,621                           16,196
Other liabilities                    851                             675                              639
     Total liabilities           152,116                         153,233                          132,206
      Shareholders' equity        26,703                          12,757                           10,433
                                --------                        --------                         --------                    
     Total liabilities and
     shareholders' Equity       $178,819                        $165,990                         $142,639
                               =========                        ========                         ========                    

Net interest income                       $9,866                           $8,143                           $7,460
                                         =======                          =======                           ====== 
Net interest spread                                     4.79%                           4.57%                           4.81%
Average yield on earning assets                        10.09%                           9.87%                          10.16%
Interest expense to
 earning assets                                         4.01%                           4.54%                           4.60%
Net interest income to
 earning assets                                         6.08%                           5.33%                           5.56%

(1) Interest earned on nontaxable securities has been computed on a 34 percent tax equivalent basis.

</TABLE>




                                       14




<PAGE>


     Analysis of changes in interest differential. The following table shows the
dollar amount of the increase  (decrease)  in the Company's net interest  income
and expense and  attributes  such dollar amounts to changes in volume as well as
changes in rates. Rate/volume variance have been allocated to volume changes:

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                    1998 versus 1997                       1997 versus 1996
                                              Increase                                 Increase
                                           (Decrease) Due to                       (Decrease) Due to
                                                                Total Increase/                         Total Increase/
                                           Volume     Rate         (Decrease)     Volume        Rate      (Decrease)

                                                                  (dollars in thousands)
<S>                                      <C>         <C>               <C>        <C>       <C>         <C>
Interest income:
     Interest earning balances due
         From banks                         $275       $311             $586       $262     $(33)         $229
     Trading account income                    -          -                -       (34)                   (34)
Investment security income:
     Taxable securities                      304       (16)              288        219        62          281
     Nontaxable securities                     3          -                3        (2)         -          (2)
     Loans, including fees on loans          116        287              403      1,193     (214)          979
                                            ----       ----            -----     ------    -----        ------
          Total interest income              698        582            1,280      1,638     (185)        1,453
                                            ----       ----            -----     ------    -----        ------
Interest expense:
     Savings and interest bearing
          Demand                             359        282              641        222         -          222
     Certificates of deposit             (1,043)      (155)          (1,198)        351      (65)          286
     Short-term borrowings                    44          3               47       (63)       (4)         (67)
     Long-term borrowings                    (2)         70               68        288        40          328
                                            ----       ----            -----     ------    -----        ------
          Total interest expense           (642)        200            (442)        798      (29)          769
                                            ----       ----            -----     ------    -----        ------
Net interest spread                       $1,340       $382           $1,722       $840    $(156)         $684
                                           =====       ====           ======     ======    =====        ======

</TABLE>

Provision for Loan Losses

     The amount of the  allowance for loan 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 loan losses is
recorded, the amount is based on past charge-off experience,  a careful analysis
of the current loan portfolio,  the level of  nonperforming  and impaired loans,
evaluation of future  economic  trends in the Company's  market area,  and other
factors relevant to the loan portfolio. See Allowance for Loan Losses disclosure
for a more detailed discussion.

     The Company's provision for loan losses was $509,000, $375,000 and $281,000
for the  years  ended  December  31,  1998,  1997 and  1996,  respectively.  Net
charge-offs  were $710,000 in 1998 compared to net  charge-offs  of $299,000 and
$150,000 for 1997 and 1996  respectively.  Total charge-offs of $727,000 in 1998
reflect  losses  realized  in the  portfolio  that the  Company  had  recognized
previously  through the  provision  for loan  losses.  Management  continues  to
closely monitor the loan quality and existing relationships.

     Nonaccrual loans were $2.7 million at December 31, 1998 and $1.9 million at
December  31,  1997.  During  1998,  nonaccrual  loans  increased  primarily  in
commercial  loans secured by real estate.  Included in the  nonaccrual  loans of
$2.7 million are five borrowing  relationships  with an aggregate  total of $1.7
million  that are largely  secured by real  estate.  Another  component  of this
increase is approximately  $331,000 of loans at the Company's subsidiary BFC. It
is not  unusual  in the  normal  course of  business  for BFC to have loans that
become more than 90 days past due and are therefore placed on nonaccrual status,
although  management  does not  necessarily  believe that losses are probable on
these loans.  Other real estate  increased  $485,000 during 1998, as a result of
the  reclassification of these loans from nonacrual in 1997 to other real estate
owned in 1998. Any losses on nonaccrual  loans,  which are considered  probable,
have been  estimated by  management in its regular  quarterly  assessment of the
allowance  for loan  losses  as  discussed  in the  Allowance  for  Loan  Losses
disclosure.  The increase in the  provision for loan losses each year is largely
reflective of the increases in nonaccrual  loans during the periods.  For a more
detailed discussion see Allowance for Loan Losses disclosure.

                                       15
<PAGE>

Non-Interest Income

     Non-interest income consists of the following components:

<TABLE>
<CAPTION>
                  Non-interest income
                                                                                     December 31,
                                                                  1998                  1997             1996
                  <S>                                           <C>                    <C>              <C>
                  Service charge on deposit accounts            $   656                $  563           $  387
                  Net gains on sales of securities                    5                     -             (309)
                  Credit Card income                                114                   100               81
                  Fiduciary income                                   57                     -                -
                  ATM income                                         40                    13                -
                  Safe deposit box fees                              30                    15               12
                  Insurance Commissions                               9                    13               26
                  Data processing income                              -                    11               25
                  Other miscellaneous fees and income                67                    34               74
                                                                -------                ------           ------
                  Total non-interest income                     $   978                $  749           $  296
                                                                =======                ======           ======
</TABLE>

   Total non-interest  income has ranged from $978,000 for 1998, to $749,000 for
1997 and $296,000 for 1996.  Service  charges on deposit  accounts  increased to
$656,000 in 1998 from $563,000 in 1997 and $387,000 in 1996 primarily because of
the increase in deposits from the Branch  Acquisition  in July 1997.  ATM income
and safe deposit income have also increased  after the Branch  Acquisition.  The
opening of the trust  department  added  $57,000 in  non-interest  income during
1998.  The  increase  in  non-interest  income  of  $453,000  from  1996 to 1997
primarily  reflects  the loss in the  Company's  trading  account of $309,000 in
1996. The loss was due primarily to the volatility of interest rates during this
period. The Company did not conduct any trading activities during 1998 or 1997.

Non-Interest Expense

     Non-interest  expense  consists  principally  of  employees'  salaries  and
benefits,  occupancy costs,  data processing and  communication  expenses,  FDIC
(Federal Deposit Insurance Corporation)  insurance premiums,  professional fees,
and other non-interest  expenses.  Non-interest expenses increased 31.1% to $6.9
million for the year ended  December  31, 1998  compared to $5.3 million for the
year ended  December 31, 1997,  which was an increase of 43.5%  compared to $3.7
million for the year ended  December 31, 1996. As discussed  below,  the primary
reasons for this increase were increased  staffing costs, as well as an increase
in other  operating  expense such as occupancy  expense and  amortization of the
deposit  premium  from the  Branch  Acquisition  in July  1997 and the  goodwill
amortization from the acquisition of BFC in September 1998.

     A measure of the Company's ability to contain non-interest  expenses is the
efficiency  ratio.  This  statistic  is derived by dividing  total  non-interest
expenses by total net interest  income and  non-interest  income.  The Company's
efficiency  ratio  increased  to 63.89% for the year  ended  December  31,  1998
compared to 59.42% for the corresponding  period in 1997 and 47.48% for the year
ended  December  31,  1996,  largely  as a  result  of the  Company's  expansion
activities during these periods.


                                       16
<PAGE>

     Salaries  and  benefits  expense  of $3.8  million in 1998  represented  an
increase  of  $997,000  or 36% from  $2.8  million  reported  in 1997  which was
$641,000 or 30% higher than the $2.1  million  reported  in 1996.  In 1997,  the
salary  expense  reflected the addition of the employees  that remained with the
Bank after the Branch  Acquisition  in July 1997.  During  1998,  the salary and
benefit  expense  includes the addition of  approximately  22 employees from the
branches for a twelve-month period. All of these employees were with the Company
at both  December 31, 1997 and December 31,  1998,  but only  received  five and
one-half  months  salary  from the  Company in 1997.  Also  contributing  to the
increase  were  ordinary  increases in salary for existing  employees  generally
ranging from three to six percent a year. At December 31, 1998,  the Company had
105 full-time  equivalent  employees  compared to 99 and 63 at December 31, 1997
and 1996, respectively.

     Net occupancy  expenses  consist of depreciation on premises,  lease costs,
equipment,  maintenance and repair expenses, utilities and related expenses. The
Company's net occupancy expense in 1998 of $888,000 was $164,000 or 22.7% higher
than the $724,000  reported in 1997, which was $331,000 or 84.2% higher than the
$393,000  reported in 1996.  The increase in occupancy  expense in these periods
was due primarily to building a new branch in Castle Rock and the remodel of the
Triangle  branch,  both of which occurred in 1998.  Also  contributing  to these
increases were the expansion of the Company's main office  facility,  the Branch
Acquisition in July 1997 and the opening of a branch in Kelso in late 1996.

     Intangible  assets  included  a deposit  premium of $1.6  million  and $1.8
million,  net of  accumulated  amortization,  at  December  31,  1998 and  1997,
respectively. The deposit premium is being amortized using an accelerated method
over a ten-year  life.  Intangible  assets at December  31,  1998 also  included
goodwill of $1.5 million,  net of  accumulated  amortization,  representing  the
excess of  acquisition  costs over the fair  value of net  assets  that arose in
connection  with the  acquisition of Business  Finance  Corporation and is being
amortized on a straight-line  basis over a fifteen-year  period. At December 31,
1998, expenses related to the amortization of intangibles were $309,000 compared
to $123,000 at December 31, 1997 and $0 at December 31, 1996.

     Other operating expenses such as insurance,  legal and accounting expenses,
service  charges,  postage,  and other  business  expenses  were $1.7 million at
December  31,  1998,  $1.4  million at December  31,  1997,  and $1.0 million at
December 31, 1996.  The  increases  from year to year were due to the  Company's
continued growth and expansion.

Income Taxes

     The provision for income taxes  amounted to $1.2 million,  $1.1 million and
$1.3 million for 1998, 1997, and 1996,  respectively.  The provision resulted in
an effective tax rate of 34.7% in 1998, 34.3% in 1997, and 34.2% in 1996.

Allowance for Loan Losses

     The allowance for loan losses represents  management's estimate of probable
losses which have occurred as of the date of the financial statements.  The loan
portfolio is regularly  reviewed to evaluate the adequacy of the  allowance  for
loan losses.  In determining the level of the allowance,  the Company  evaluates
the allowance necessary for specific  non-performing  loans and estimates losses
inherent in other loan exposures. An important building block in determining the
adequacy of an allowance  for loan losses is an analysis of loans by loan rating
categories.  The risk of a credit is evaluated by the  Company's  management  at
inception of the loan using an established  grading system.  This grading system
currently  includes  ten levels of risk.  Risk  gradings  range from "1" for the
strongest  credits to "10" for the  weakest;  a "10"  rated loan would  normally
represent a loss.  These gradings are reviewed  annually or when indicators show
that a credit may have weakened, such as operating losses, collateral impairment
or delinquency problems.

The result is an allowance with two components:

     Specific Reserves:  The amount of specific reserves is determined through a
loan-by-loan  analysis of  classified  and  nonperforming  loans that  considers
expected  future cash flows,  the value of collateral and other factors that may
impact the borrower's ability to pay.

                                       17
<PAGE>

     General  Allowance:  The amount of the general  allowance  is based on loss
factors  assigned to the  Company's  loan  exposures  based on  internal  credit
ratings. These loss factors are determined on the basis of historical charge-off
experience.  The general  allowance  is composed  of two  categories.  The first
component is  calculated  based upon the loan  balances  classified  in the five
higher  risk loan  categories  of  "management  attention",  "special  mention",
"substandard",  "doubtful"  and "loss" in the  Company's  Watch List.  Suggested
regulatory loss reserve factors are then applied to each of these  categories of
classified  loan  balances.  The second  component  is  calculated  by  applying
historical loss factors to the outstanding  loan balance less any loans that are
included in the Company's  specific or higher risk allowances  discussed  above.
Three levels of charge off history are  considered  by management in arriving at
this  component  of the  general  allowance.  They  are  average  five-year  net
charge-offs, the previous year's actual net charge-offs and an estimated maximum
charge-off factor. Each of these amounts is combined with the first component of
the  general  allowance  yielding  a range  for  the  total  general  allowance.
Management  selects a general allowance  somewhere within this calculated range.
Factors  considered by management in making this decision include the volume and
mix of the  existing  loan  portfolio,  including  the  volume and  severity  of
nonperforming  loans  and  adversely   classified   credits;   analysis  of  net
charge-offs  experienced on previously classified loans; the nature and value of
collateral  securing the loans;  the trend in loan growth,  including  any rapid
increase in loan volume within a relatively  short period of time;  management's
subjective  evaluation  of general and local  economic and  business  conditions
affecting the  collectibility of the Company's loans; the relationship and trend
over the past  several  years of  recoveries  in  relation to  charge-offs;  and
available  outside  information  of  a  comparable  nature  regarding  the  loan
portfolios  of other banks,  including  peer group  banks.  This  decision  also
reflects management's attempt to ensure that the overall allowance appropriately
reflects a margin for the  imprecision  necessarily  inherent  in  estimates  of
expected loan losses.

     The  quarterly  analysis of specific  and general  loss  components  of the
allowance  is the  principal  method  relied upon by  management  to ensure that
changes in  estimated  loan 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 loss  experience  more  remote in time is
replaced by more recent  experience.  In its  analysis of the  specific  and the
general components of the allowance, management also considers the experience of
peer  institutions  and  regulatory  guidance in addition to the  Company's  own
experience.

     Loans and other  extensions of credit deemed  uncollectable  are charged to
the  allowance.  Subsequent  recoveries,  if any, are credited to the allowance.
Actual  losses may vary from current  estimates  and the amount of the provision
may be either  greater  than or less than  actual net  charge-offs.  The related
provision for loan losses,  which is charged to income,  is the amount necessary
to adjust the allowance to the level determined through the above process.

     At December  31, 1998,  approximately  $700,000 of the  allowance  for loan
losses was  allocated  based on an estimate of the amount that was  necessary to
provide for potential  losses related to specific  classified and  nonperforming
loans  (including   impaired  loans)  only,  while  approximately  $1.1  million
comprised the general portion of the allowance.

     Management's  evaluation  of the factors above  resulted in allowances  for
loan  losses  of $1.8  million  and $2.0  million  at the end of 1998 and  1997,
respectively.  The  allowance as a percentage of year-end  total loans  declined
from 1.49% at year-end 1997 to 1.37% at year-end 1998. This decline reflects the
increased  level of charge-offs  in 1998 which were  considered by management in
its  determination  of the adequacy of the  allowance for loan losses in periods
prior to  charge-off.  As such,  these  charge-offs  reflect the  realization of
losses in the portfolio that were recognized  previously  through provisions for
loan losses.

     The  allowance for loan losses is based upon  estimates of probable  losses
inherent in the loan portfolio.  The amount  actually  observed for these losses
can vary significantly from the estimated amounts.


                                       18

<PAGE>

     The  following  table shows the  Company's  loan loss  performance  for the
periods indicated:

<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                                   1998            1997           1996
                                                                          (dollars in thousands)
<S>                                                                 <C>             <C>            <C>
Loans outstanding at end of period                                  $132,046        $131,963       $126,551
Average loans outstanding during the period                         $131,495        $130,362       $118,957
Allowance for loan losses, beginning of period                        $1,970          $1,894         $1,763
Loans charged off:
     Commercial                                                          618             186             36
     Real estate                                                          --               3             30
     Consumer                                                             22              23             22
     Credit cards                                                         87             112             70
                                                                      ------          ------         ------
          Total loans charged-off                                        727             324            158
                                                                      ------          ------         ------
Recoveries:
     Commercial                                                           --               5              5
     Real estate                                                           3              --             --
     Consumer                                                              4              20              1
     Credit cards                                                         10              --              2
                                                                      ------          ------         ------
          Total recoveries                                                17              25              8
                                                                      ------          ------         ------
Provision for loan losses                                                509             375            281
                                                                      ------          ------         ------
Adjustment incident to acquisition                                        45              --             --
                                                                      ------          ------         ------
Allowance for loan losses, end of period                              $1,814          $1,970         $1,894
                                                                      ======          ======         ======
Ratio of net loans charged-off to average loans outstanding            0.54%           0.23%          0.13%
Ratio of allowance for loan losses to loans at year end                1.37%           1.49%          1.50%


</TABLE>

Financial Condition

<TABLE>
<CAPTION>
                                                       Summary Balance Sheet

                                              December 31,                      Increase (Decrease)
                                       1998      1997       1996      12/31/97-12/31/98     12/31/96-12/31/97
                                                                     (dollars)  (percent)  (dollars)  (percent)
                                                           (dollars in thousands)
<S>                                   <C>        <C>        <C>         <C>        <C>        <C>        <C>
ASSETS
     Cash and due from banks          $22,705    $23,109    $20,905     $(404)     (1.7)%     $2,204     10.5%
     Investment securities             11,530      8,481      5,391      3,049      36.0%      3,090     57.3%
     Loans, net                       130,232    129,993    124,657        239       0.2%      5,336      4.3%
     Other assets                      13,878     11,710      8,204      2,168      18.5%      3,506     42.7%
                                     --------   --------   --------    -------               -------    
          Total assets               $178,345   $173,293   $159,157     $5,052       2.9%    $14,136      8.9%
                                     ========   ========   ========    =======               =======         

LIABILITIES
     Non-interest-bearing             $33,062    $27,141    $16,821     $5,921      21.8%    $10,320     61.4%
deposits   
     Interest-bearing deposits         89,299    109,068    106,476   (19,769)    (18.1)%      2,592      2.4%
                                     --------   --------   --------    -------               -------
     Total deposits                   122,361    136,209    123,297   (13,848)    (10.2)%     12,912     10.5%
     Other liabilities                 25,064     23,197     24,047      1,867       8.0%      (850)    (3.5)%
SHAREHOLDERS' EQUITY                   30,920     13,887     11,813     17,033     122.7%      2,074     17.6%
                                     --------   --------   --------    -------               -------          
     Total liabilities and
shareholders' equity                 $178,345   $173,293   $159,157     $5,052       2.9%    $14,136      8.9%
                                     ========   ========   ========    =======               =======    
</TABLE>

                                       19
<PAGE>
Investment Securities

     At December 31, 1998,  the  Company's  portfolio of  investment  securities
totaled $11.5 million, a 36% increase when compared to a securities portfolio of
$8.5 million at December 31, 1997. The  investment  portfolio  increased  during
1998 primarily as a result of the  investment of the offering  proceeds in March
1998.

   The Company  follows a financial  accounting  principle  which  requires  the
identification of investment securities as held-to-maturity,  available-for-sale
or trading assets.  Securities designated as held-to-maturity are those that the
Company  has the intent and  ability  to hold until they  mature or are  called.
Available-for-sale  securities  are those that  management may sell if liquidity
requirements  dictate or alternative  investment  opportunities  arise.  Trading
assets are  purchased  and held  principally  for the purpose of reselling  them
within  a  short   period   of   time.   The  mix  of   available-for-sale   and
held-to-maturity  investment  securities  is  considered  in the  context of the
Company's overall asset-liability policy and illustrates management's assessment
of the relative  liquidity of the Company.  At December 31, 1998, the investment
portfolio   consisted   of  61.3%   available-for-sale   securities   and  38.7%
held-to-maturity   investments.   At  December  31,   1997,   available-for-sale
securities  were  47.4%  and  held-to-maturity  investments  were  52.6%  of the
investment portfolio.  The Company did not conduct any trading activities during
1998 or 1997. See Note 2 to the Consolidated Financial Statements.

   The following  table  provides the book value of the  Company's  portfolio of
investment securities as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
                                                            December 31,
                                                    1998                       1997
                                          Amortized       Fair        Amortized       Fair
                                             Cost                       Cost         Value
                                                     (dollars in thousands)
<S>                                     <C>            <C>             <C>          <C>
Available-for-sale
U.S. Treasury securities                    $6,994        $7,065       $3,993        $4,017
                                            ------        ------       ------        ------
                    Total                   $6,994        $7,065       $3,993        $4,017
                                            ======        ======       ======        ======
Held-to-maturity
U.S. Treasury securities                      $999        $1,021       $2,978        $3,000
Municipal bond                                 199           199           --            --
Certificates of deposit                      3,267         3,267        1,486         1,486
                                            ------        ------       ------        ------
                    Total                   $4,465         4,487       $4,464        $4,486
                                            ======        ======       ======        ======
</TABLE>

     At December 31, 1998, the Company's available-for-sale and held-to-maturity
investments  had a total net unrealized  gains of  approximately  $93,000.  This
compares to net unrealized gains of approximately  $46,000 at December 31, 1997.
Unrealized  gains and losses  reflect  changes in market  conditions  and do not
represent  the amount of actual  profits or losses the  Company  may  ultimately
realize.  Actual  realized  gains  and  losses  occur  at  the  time  investment
securities are sold or redeemed.

     In 1991,  the Company  became a member and  shareholder in the Federal Home
Loan Bank of Seattle.  The Company's  relationship and stock investment with the
FHLB provides a borrowing source for meeting liquidity requirements, in addition
to dividend earnings.  Investment in FHLB stock was $2.9 million at December 31,
1998 compared to $2.7 million at December 31, 1997.

     At December 31, 1998, net unrealized gains on available-for-sale securities
were  $47,000  representing  0.41% of the  total  portfolio.  Management  has no
current plans to sell any of these securities.

     The following  table  summarizes  the  contractual  maturities and weighted
average yields of investment securities at December 31, 1998:
<TABLE>
<CAPTION>
                                                    One                    After 5               Due
                              One year             through                 through             through
                               or less     Yield   5 years      Yield     10 years  Yield      10 years  Yield   Total      Yield
<S>                            <C>         <C>     <C>          <C>        <C>      <C>         <C>      <C>     <C>
U.S. Treasury securities        $2,008     6.13%     $6,056     5.63%        $--       --         --       --     $8,064     5.77%
Other securities                 3,267     5.88%        100     4.00%         99    4.10%         --       --      3,466     5.78%
                                ------               ------                  ---                ----             -------    
Total                           $5,275     5.90%     $6,156     5.23%        $99    4.10%         --       --    $11,530     5.78%
                                ======               ======                  ===                ====             =======
</TABLE>
                                       20
<PAGE>
Loans

     Outstanding loans totaled  $132,046,000 at December 31, 1998,  representing
an increase of $83,000  compared to  $131,963,000  at December  31,  1997.  Loan
commitments were $24.7 million at December 31, 1998. Loan  commitments  amounted
to $16.6 million at December 31, 1997.

     The  following  table  presents  the  composition  of  the  Company's  loan
portfolio at the dates indicated.

<TABLE>
<CAPTION>  
                                                                   Year Ended December 31,
                                                          1998                              1997
                                                 Amount         Percentage         Amount         Percentage
                                                               (dollars in thousands)
<S>                                             <C>               <C>             <C>               <C>
Commercial                                      $103,473           78.04%          $93,829           70.75%
Real estate construction                           3,206            2.42%            3,495            2.64%
Real estate commercial                             7,026            5.30%            5,475            4.13%
Real estate mortgage                              13,774           10.39%           24,167           18.22%
Consumer and other                                 5,063            3.82%            5,571            4.20%
Contracts purchased                                   45            0.03%               81            0.06%
                                                --------          ------          --------          ------
                                                 132,587          100.00%          132,618          100.00%
                                                                  ======                            ======
Deferred loan fees                                  (541)                             (655)
                                                --------                          --------
          Total loans                            132,046                           131,963
Allowance for loan losses                         (1,814)                           (1,970)
                                                --------                          --------
          Total loans, net                      $130,232                          $129,993
                                                ========                          ========
</TABLE>

     The following  table shows the maturities and  sensitivity of the Company's
loans to changes in interest rates at the dates indicated:

<TABLE>
<CAPTION>
                                                                    December 31, 1998
                                                            Due after one 
                                         Due in one year   through 5 years     Due after 5 
                                              or less                              years          Total Loans
                                                             (dollars in thousands)
<S>                                           <C>              <C>               <C>               <C>
Commercial Loans                              $40,416           $49,584           $13,473          $103,473
Real estate construction                        1,251             1,537               418             3,206
Real estate commercial                          2,744             3,367               915             7,026
Real estate mortgage                            5,380             6,601             1,793            13,774
Consumer and other                              1,996             2,447               620             5,063

Contracts purchased                                 -                 -                45                45
                                              -------          --------           -------          --------
                                              $51,787           $63,536           $17,264          $132,587
                                              =======          ========           =======          ========
Loans with fixed interest rates                                                                   $97,584
Loans with floating interest rates                                                                   35,003
                                                                                                   -------- 
          Total                                                                                    $132,587
                                                                                                   ========

</TABLE>

     In May 1993, the Financial  Accounting  Standards  Board (FASB) issued SFAS
No. 114,  "Accounting by Creditors for Impairment of a Loan" and in October 1996
issued SFAS No. 118,  "Accounting  by Creditors for  Impairment of a Loan-Income
Recognition  Disclosures,  an  amendment  to SFAS No. 114." The adoption of SFAS
Nos.  114 and 118 did not have a  material  impact on the  comparability  of the
tables provided herein.  The Company,  during its normal loan review procedures,
considers a loan to be impaired  when it is  probable  that the Company  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).  The  Company  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,
after considering  economic and business  conditions,  collection  efforts,  and
collateral  position,  that  the  borrowers  financial  condition  is such  that
collection of principal is not probable.

                                       21
<PAGE>
     At December 31, 1998 and 1997, the Company's recorded investment in certain
loans that were  considered  to be impaired was $2.7  million and $2.3  million,
respectively.  Of these  impaired  loans,  $891,000  and  $302,000  have related
valuation allowance of $65,000 and $199,000, while $1.8 million and $2.0 million
did not require a valuation  allowance.  The balance of the  allowance  for loan
losses in excess of these  specific  reserves is available to absorb losses from
all loans. The average recorded investment in impaired loans for the years ended
December 31, 1998, 1997, and 1996, was approximately $2.4 million, $1.3 million,
and  $342,000,  respectively.  The  Company's  policy is to disclose as impaired
loans all  loans  that are past due 90 days or more as to  either  principal  or
interest, except loans that are currently measured at fair value or the lower of
cost or fair value and  credit  card  receivables,  which are  considered  large
groups  of  smaller  homogeneous  loans  and  are  collectively   evaluated  for
impairment.  Interest  payments  received  on  impaired  loans are  recorded  as
interest income,  unless collection of the remaining recorded  investment is not
probable,  in which case  payments  received  are  recorded  as a  reduction  of
principal.  For the years ended  December 31,  1998,  1997,  and 1996,  interest
income  recognized on impaired  loans  totaled  $77,000,  $36,000,  and $14,000,
respectively, all of which was recognized on a cash basis.

     Generally, no interest is accrued on loans when factors indicate collection
of interest is doubtful or when the  principal  or interest  payment  becomes 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.

     The Company  manages the general  risks  inherent in the loan  portfolio by
following loan policies and underwriting practices designed to result in prudent
lending  activities.  The following table presents  information  with respect to
nonperforming assets:
<TABLE>
<CAPTION>
                                                                            December 31,
                                                                          1998        1997
<S>                                                                      <C>         <C>
Loans on nonaccrual status                                               $2,737      $1,897
Loans past due greater than 90 days but not on nonaccrual status              9         432
Other real estate owned                                                     573          88
Troubled debt restructurings                                                 --          --
                                                                         ------      ------
          Total nonperforming assets                                     $3,319      $2,417
                                                                         ======      ======
Percentage of nonperforming assets to total assets                         1.86%       1.39%
</TABLE>

     The increase in nonperforming  loans from December 31, 1997 to December 31,
1998 is  reflective  of 5 borrowing  relationships  with an aggregate  principal
balance of $1.7 million primarily  secured by real estate.  Also included in the
increase is approximately  $331,000 of loans at the Company's subsidiary BFC. It
is not  unusual  in the  normal  course of  business  for BFC to have loans that
become more than 90 days past due and are therefore placed on nonaccrual status,
although  management  does not  necessarily  believe that losses are probable on
these loans.  Other real estate owned has increased  $485,000 and all properties
are being actively  marketed by local real estate agencies.  Any probable losses
have been considered in management's analysis of the allowance for loan losses.

Deposits

     The  following  table  sets forth the  average  balances  of the  Company's
interest  bearing  liabilities,  interest expense and average rates paid for the
period indicated:
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                  1998                          1997                          1996
                                       Average   Interest Average   Average   Interest  Average   Average   Interest  Average
                                       Balance   Expense    Rate    Balance   Expense     Rate    Balance   Expense     Rate
                                                                       (dollars in thousands)
<S>                                     <C>       <C>        <C>     <C>        <C>        <C>    <C>         <C>       <C>
Interest-bearing checking                $28,912  $1,396     4.83%    $21,956     $766     3.49%   $16,209      $533     3.29%
Savings                                   17,379     498     2.87%     15,612      487     3.12%    14,625       498     3.41%
Certificates of deposit                   52,682   3,048     5.79%     70,641    4,246     6.01%    64,863     3,960     6.11%
Long-term borrowings                      21,755   1,469     6.75%     21,773    1,401     6.43%    17,315     1,073     6.20%
Short-term borrowings                      1,865      90     4.83%        955       43     4.50%     2,359       110     4.66%
                                        --------  ------             --------   ------            --------    ------
     Total interest-bearing             $122,593  $6,501     5.30%   $130,937   $6,943     5.30%  $115,371    $6,174     5.35%
liabilities                                       ======                        ======                        ======
Total noninterest-bearing liabilities     29,523                       22,296                       16,835
                                        --------                     --------                     --------
     Total interest and noninterest-
          Bearing liabilities           $152,116                     $153,233                     $132,206
                                        ========                     ========                     ========
</TABLE>
                                       22
<PAGE>
     Deposits  decreased  to $122.4  million at December 31, 1998, a decrease of
10.2% from $136.2 at December  31,  1997,  primarily  as a result of the Company
reducing  pricing  on  certain of its  higher  yielding  certificates  after the
acquisition of deposits from the Branch Acquisitions in July of 1997,  intending
to eliminate these higher cost certificates of deposit at maturity.  The decline
in deposits  has been  primarily  in time  deposits.  Nonvolatile,  non-interest
bearing deposits,  also referred to as core deposits, have grown as a percentage
of the  Company's  deposit  base. To the extent that the Company is able to fund
operations with  non-interest  bearing core deposits,  net interest spread,  the
difference  between  interest  income and interest  expense,  will  improve.  At
December  31,1998,  non-interest  bearing  demand  deposits  were  27% of  total
deposits, compared to 19.9% of total deposits at December 31, 1997

     Interest bearing  deposits  consist of NOW, money market,  savings and time
certificate  accounts.  By their nature,  interest bearing account balances will
tend to grow or decline as the Company reacts to changes in competitors' pricing
and interest  payment  strategies.  At December 31, 1998, total interest bearing
deposit accounts of $89.3 million decreased $19.8 million or 18.1% from December
31, 1997. This decline was  concentrated  in certificate of deposit  accounts as
discussed above.

     The Company  has from time to time  funded its growth with higher  interest
rate  certificates  of  deposit  over  $100,000.  At  December  31,  1998,  time
certificates of deposit in excess of $100,000  totaled $13.6 million or 32.5% of
total  outstanding  time  deposits,  compared to $18.6 million or 29.7% of total
outstanding time deposits at December 31, 1997. This decline in time deposits in
excess of $100,000 during 1998 and 1997 reflects  management's decision to allow
this type of deposit to run-off following the Branch Acquisition in July 1997.

     The following  table sets forth,  by time  remaining to maturity,  all time
certificates of deposit accounts outstanding at December 31, 1998:
<TABLE>
<CAPTION>
                                                      Time deposits of $100,000 or more (1)    All other time deposits (2)
                                                                                (dollars in thousands)
<S>                                                     <C>                 <C>                <C>                <C>
Reprice/Mature in three months or less                  $     6,796         49.89%             $     10,547       37.26%
Reprice/Mature after three months through six months          1,179          8.65%                    6,898       24.37%
Reprice/Mature after six months through one year              2,522         18.51%                    5,908       20.87%
Reprice/Mature after one year through five years              2,806         20.60%                    4,706       16.62%
Reprice/Mature after five years                                 320          2.35%                      250         .88%
                                                        ----------         ------              ------------      ------
     Total                                              $   13,623         100.00%             $     28,309      100.00%
                                                        ==========         ======              ============      ======

(1) Time deposits of $100,000 or more represent 32.5% of total time deposits at December 31, 1998.
(2) All other time deposits represent 67.5% of total time deposits at December 31, 1998.
</TABLE>

     At December 31, 1998,  other  borrowings have the following times remaining
to maturity:
<TABLE>
<CAPTION>
                                                                      Due        Due
                                                                     after 3    after
                                                         Due in 3    months     one year     Due
                                                          months     through    through     after 5
                                                          or less   one year    5 years       years     Total
                                                                       (dollars in thousands)
<S>                                                        <C>         <C>      <C>         <C>       <C>
Short-term borrowings                                      $2,275        $--        $--        $--      $2,275
Long-term borrowings                                           --        517     15,586      5,696      21,799
                                                           ------       ----    -------     ------     -------
     Total borrowings                                      $2,275       $517    $15,586     $5,696     $24,074
                                                           ======       ====    =======     ======     =======
</TABLE>

     Historically  the  Company  has  utilized  borrowings  from  the FHLB as an
important  source of funding  for its growth.  The  Company  has an  established
borrowing  line with the FHLB  that  permits  it to borrow up to 25% of  assets.
Advances  from the FHLB  have  terms  ranging  from 1  through  15 years  and at
December 31, 1998,  bear interest at rates from 5.17% to 8.80%.  At December 31,
1998,  $21.7 million in advances were  outstanding from the FHLB and the Company
had  additional  borrowing  capacity  for cash  advances of $22.8  million.  The
Company may increase its percentage of borrowings from the FHLB in the future if
circumstances warrant.
                                       23
<PAGE>

Asset-Liability Management/Interest Rate Sensitivity

     The  principal  purpose  of  asset-liability  management  is to manage  the
Company's  sources  and uses of funds to  maximize  net  interest  income  under
different  interest rate conditions with minimal risk. A part of asset-liability
management involves interest rate sensitivity,  the difference between repricing
assets and repricing  liabilities  in a specific time period.  The policy of the
Company is to  control  the  exposure  of the  Company's  earnings  to  changing
interest rates by generally  maintaining a position within a narrow range around
an  "earnings  neutral"  or  "balanced"  position.  The Board of  Directors  has
established guidelines for maintaining the Company's earnings risk due to future
interest  rate changes.  This  analysis  provides an indication of the Company's
earnings risk due to future  interest rate  changes.  At December 31, 1998,  the
analysis  indicated  that the  earnings  risk was  within the  Company's  policy
guidelines.

     A key component of the  asset-liability  management is the  measurement  of
interest-rate sensitivity. Interest-rate sensitivity refers to the volatility in
earnings  resulting from  fluctuations in interest rates,  variability in spread
relationships,  and the  mismatch  of  repricing  intervals  between  assets and
liabilities.  Interest-rate sensitivity management attempts to maximize earnings
growth by minimizing the effects of changing rates, asset and liability mix, and
prepayment trends.

     The following table presents interest-rate sensitivity data at December 31,
1998.  The interest rate gaps reported in the table arise when assets are funded
with liabilities  having  different  repricing  intervals.  Since these gaps are
actively managed and change daily as adjustments are made in interest rate views
and market outlook,  positions at the end of any period may not be reflective of
the  Company's  interest  rate view in  subsequent  periods.  Active  management
dictates that  longer-term  economic views are balanced against the prospects of
short-term interest rate changes in all repricing intervals.

<TABLE>
<CAPTION>
                                                Estimated Maturity or Repricing at December 31, 1998
                                           0-3           3-6        6-12        1-5         Over
                                          Months       Months      Months       Years       5 Years     Total
                                                               (dollars in thousands)
<S>                                      <C>           <C>       <C>         <C>        <C>        <C>
Interest Earning Assets:
     Interest earning balances due
          From banks                      $11,816         $--        $--         $--         $--     $11,816
     Investments available for sale         1,002       1,006         --       5,057          --       7,065
(1)
     Investments held to maturity             991       1,979        297       1,098         100       4,465
     Federal Home Loan Bank
          Stock (1)                         2,869          --         --          --          --       2,869
     Loans, including fees                 41,506       4,790      5,491      62,995      17,264     132,046
                                          -------     -------    -------     -------     -------    --------
          Total interest earning assets   $58,184      $7,775     $5,788     $69,150     $17,364    $158,261
                                          =======     =======    =======     =======     =======    ========
Allowance for loan losses                                                                            (1,814)
Cash and due from banks                                                                               10,889
Other assets                                                                                          11,009
                                                                                                    --------
          Total assets                                                                              $178,345
                                                                                                    ========
Interest Bearing Liabilities:
     Savings and interest demand
          Deposits                        $29,613         $--        $--         $--     $17,754     $47,367
     Certificates of deposit               17,343       8,077      8,430       7,981         101      41,932
     Borrowings                            17,026         207        127         100       6,614      24,074
                                          -------     -------    -------     -------     -------    --------
          Total interest bearing
               Liabilities                 63,982       8,284      8,557       8,081      24,469    $113,373
                                          =======     =======    =======     =======     =======    ========
Other liabilities                                                                                     34,052
Shareholders' equity                                                                                  30,920
                                                                                                    --------
          Total liabilities &
               Shareholders' equity                                                                 $178,345
Interest sensitivity gap                  (5,798)       (509)    (2,769)      61,069     (7,105)     $44,888
                                          -------     -------    -------     -------     -------    ========
Cumulative interest sensitivity gap      $(5,798)    $(6,307)   $(9,076)     $51,993     $44,888
                                          =======     =======    =======     =======     =======

(1)   Equity investments have been placed in the 0-3 month category
</TABLE>
                                       24
<PAGE>

     The table  illustrates  that the  Company  is  liability  sensitive  in all
periods  except  in the 1-5 year  period in which it is  asset-sensitive.  In an
environment of increasing  interest rates,  the theoretical net interest margins
of the Company would be adversely  affected for the 12 months following December
31,1998,  and favorably  thereafter.  Conversely,  in a declining  interest-rate
environment,  the Company's  theoretical net interest margins would be favorably
affected for the 12 month period  following  December  31, 1998,  and  adversely
thereafter.

Market Risk

     Interest  rate and  credit  risks  are the most  significant  market  risks
impacting the Company's performance. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities. The Company relies on loan reviews,
prudent loan underwriting standards and an adequate allowance for loan losses to
mitigate credit risk.

     Interest rate risk is managed  through the  monitoring of the Company's gap
position  (see   Asset-Liability   Management/Interest   Rate  Sensitivity)  and
sensitivity to interest rate risk by subjecting  the Company's  balance sheet to
hypothetical  interest rate shocks.  The Company's primary objective in managing
interest  rate risk is to  minimize  the  adverse  impact of changes in interest
rates on the Company's net interest  income and capital,  while  structuring the
Company's  asset/liability  position to obtain the maximum  yield-cost spread on
that structure.

     Rate shock is an instantaneous  and complete  adjustment in market rates of
various  magnitudes  on a static or level  balance sheet to determine the effect
such a change in rates would have on the Company's  net interest  income for the
succeeding twelve months, and the fair values of financial instruments.

   The  Company  utilizes  asset/liability-modeling  software to  determine  the
effect of a shift in market  interest  rates,  with  scenarios of interest rates
increasing 100 and 200 basis points and decreasing 100 and 200 basis points. The
model utilized to create the table  presented below is based on the concept that
all rates do not move by the same amount or at the same time.  Although  certain
assets and liabilities may have similar maturities or periods to repricing, they
may not react  correspondingly to changes in market interest rates. In addition,
interest  rates on certain types of assets and  liabilities  may fluctuate  with
changes in market  interest  rates,  while  interest  rates on certain  types of
assets may lag behind changes in market rates. Further, in the event of a change
in interest rates,  prepayment and early withdrawal  levels would likely deviate
from those  assumed  in the table.  The  ability  of certain  borrowers  to make
scheduled  payments on the adjustable rate loans may decrease in the event of an
interest rate increase due to adjustments in the amount of the payments.

     The model attempts to account for such  limitations by imposing  weights on
the gaps between  assets and  liabilities.  These weights are based on the ratio
between the amount of rate change and each category of asset/liability,  and the
amount  of any  change in the  federal  funds  rate.  Local  conditions  and the
strategy of the Company  determine the weights for loan and core  deposits;  the
others are set by national markets.  In addition,  a timing factor has been used
as (a) fixed rate instruments do not reprice  immediately;  (b)renewals may have
different  term  than  original  maturities;  and (c)  there is a timing  factor
between rates on different  instruments (i.e. core deposits usually reprice well
after there has been a change in the  federal  funds  rate).  Due to the various
assumptions  used for this simulation  analysis,  no assurance can be given that
actual results will correspond with projected results.

     The following  table shows the estimated  impact of the interest rate shock
on net interest income and the fair values of financial  instruments at December
31, 1998:

<TABLE>
<CAPTION>
                                                                       Fair Values of Financial Instruments
                                        Net Interest Income                    Assets                    Liabilities
                                    Amount           %Change            Amount        % Change      Amount       %Change
                                                                 (all amounts in thousands)
<S>                                  <C>                 <C>         <C>               <C>        <C>            <C>
+200 basis points                    10,008               1.5%       165,303           (3.1)%     146,366        (1.0)%
+100 basis points                     9,937               0.7%       169,973           (1.4)%     147,081        (0.5)%
Static                                9,865               0.0%       170,617            0.0%      147,817         0.0%
-100 basis points                     9,793              (0.7)%      176,124            2.2%      148,603         0.5%
-200 basis points                     9,722              (1.5)%      179,438            4.1%      149,426         1.1%
</TABLE>
                                       25

<PAGE>

     Loans and  certificates of deposit  represent the majority of interest rate
exposure.  Investments  only  represent  9.3% of  interest  earning  assets  and
therefore,  the impact of the investments on net interest income of moving rates
would not be significant.  Historically,  savings and interest-bearing  checking
accounts have not repriced in proportion to changes in overall  market  interest
rates.  The change in net interest  income can be  attributed  to the balance of
loans  and  certificates  of  deposit  maturing/repricing.  As a  result,  in an
increasing/decreasing  interest  rate  environment  net  interest  income  would
increase/decrease.

     The change in fair values of  financial  assets is mainly a result of total
loans  representing  83.4% of total  interest-earning  assets.  Of these loans $
97,584 have fixed  interest  rates,  which  decline in value  during a period of
rising interest rates.

     While  asset/liability  models have become a main focus of risk management,
the Company  believes  that  statistical  models alone do not provide a reliable
method of monitoring and controlling  risk. The  quantitative  risk  information
provided  is limited by the  parameters  established  in  creating  the  related
models.  Therefore,  the Company uses these models only as a supplement to other
risk management tools.

Return on Equity and Assets

     Net income for the year ended December 31, 1998, totaled $2.2 million for a
return on average  shareholders'  equity of 8.34% and a return on average  total
assets of 1.24%.  These returns compare to a 16.65% return on average equity and
1.28% return on average total assets for the corresponding period in 1997. These
declines reflect the additional  common stock issued in the Company's March 1998
IPO and an increase in assets for the year ended December 31, 1998. The increase
in assets is related to the increase in cash after the March IPO.

     Return on daily average  assets and equity and certain other ratios for the
periods indicated are presented below:

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                        1998          1997          1996
                                                                    (dollars in thousands except per share data)
               <S>                                                      <C>           <C>          <C>
               Net income                                                 $2,226        $2,124       $2,497
               Average assets                                           $178,819      $165,990     $142,639
               Return on average assets                                    1.24%         1.28%        1.75%

               Net income                                                 $2,226        $2,124       $2,497
               Average equity                                            $26,703       $12,757      $10,433
               Return on average equity                                    8.34%        16.65%       23.93%

               Cash dividends paid per share                               $0.06         $0.05        $0.04
               Diluted earnings per share                                  $0.57         $0.78        $0.97
               Dividend payout ratio                                      10.53%         6.41%        4.12%

               Average equity                                            $26,703       $12,757      $10,433
               Average assets                                           $178,819      $165,990     $142,639
               Average equity to asset ratio                              14.93%         7.69%        7.31%
</TABLE>

                                       26

<PAGE>

Liquidity

     Liquidity  represents the ability to meet deposit  withdrawals to fund loan
demand,   while   retaining  the  flexibility  to  take  advantage  of  business
opportunities.  The Company's  primary  sources of funds are customer  deposits,
loan  payments,  sales  of  assets,  advances  from  the FHLB and the use of the
federal funds market. As of December 31, 1998, approximately $5.3 million of the
securities portfolio matures within one year.

     On March 12, 1998, the Company completed an initial public offering issuing
a total  of  1,380,000  shares  of  common  stock at  $12.00  per  share.  After
underwriting  discounts of $1.2 million and other offering  expenses of $472,000
net proceeds were $14.9 million. Of these proceeds $1.1 million has been used to
repay  long-term  debt and a  subordinated  note. On August 31, 1998 the Company
acquired  BFC. The  acquisition  was  accounted  for using the purchase  method,
including issuance of common stock with a value of $465,000.  A cash payment was
made  totaling  $1.8  million,  with an  adjustment  to be made  based  on final
determination  of BFC's  shareholders  equity. A future  contingent  issuance of
common stock  valued at  approximately  $500,000  will be issued if BFC achieves
earnings targets for the twelve-month period following the acquisition.  As part
of the  acquisition,  goodwill was recorded in the amount of $1.6 million and is
being amortized on a straight-line basis over a 15 year period.

     Historically  the  Company  has  utilized  borrowings  from  the FHLB as an
important  source of funding  for its growth.  The  Company  has an  established
borrowing  line with the FHLB  that  permits  it to borrow up to 25% of  assets.
Advances  from the FHLB  have  terms  ranging  from 1  through  15 years  and at
December 31, 1998,  bear interest at rates from 5.17% to 8.80%.  At December 31,
1998,  $21.7 million in advances were  outstanding from the FHLB and the Company
had  additional  borrowing  capacity  for cash  advances of $22.8  million.  The
Company may increase its percentage of borrowings from the FHLB in the future if
circumstances warrant.

Capital

     The Company is required  to  maintain  minimum  amounts of capital to "risk
weighted" assets, as defined by banking  regulators.  The Company is required to
have Tier 1 and Total Capital ratios of 4.0% and 8.0%, respectively. At December
31, 1998, the Company's ratios were 22.21% and 23.46%, respectively. At December
31, 1997, the Company's ratios were 9.61% and 11.34%, respectively. The ratio of
shareholder's equity to average assets was 15.81% and 6.94% at December 31, 1998
and 1997,  respectively.  December 31, 1998 ratios are significantly higher than
those at December 31, 1997 due to the initial public  offering on March 12, 1998
in which $14.9 million was raised in additional capital.

Year 2000

     This  section  constitutes  a Year 2000  readiness  statement  and contains
forward-looking statements that have been prepared on the basis of the Company's
best  judgments  and  currently  available  information.  These  forward-looking
statements  are  inherently  subject to  significant  business,  third party and
regulatory uncertainties and contingencies, many of which are beyond the control
of the Company. In addition,  these forward-looking  statements are based on the
Company's current  assessments and remediation plans, which are based on certain
representations  of third  party  service  providers  and are subject to change.
Accordingly,  there can be no assurance that the Company's results of operations
will not be adversely  affected by  difficulties  or delays in the  Company's or
third parties' Year 2000 readiness  efforts.  See "Risks" below for a discussion
of factors that may cause such forward-looking  statements to differ from actual
results.

     The Company  has an active Y2K plan and  committee  addressing  all systems
affected by the  millennium  issue.  The plan  includes  five phases  Awareness,
Assessment, Renovation, Validation, and Implementation.

Awareness

     The Company's senior management  participates on the committee as well as a
representative  from each critical  area of the Bank.  The board of directors is
updated on the progress of the plan on a monthly basis.  The awareness phase has
been  completed  but  will  continue  to be an on going  effort  in  regards  to
educating  customers  and keeping  abreast of all new Y2K  issues.  The Bank has
implemented several awareness programs for customers and is sponsoring Year 2000
seminars for its larger business customers.

                                       27
<PAGE>

Assessment

     Assessment   of  the   Company's   systems  has  been   completed  and  all
hardware/software as well as non-hardware/software systems have been identified.
The  committee  has  developed  a list of  products  and  systems  that could be
affected  by the Year 2000 date  change.  All vendors  and  suppliers  have been
contacted and have been individually  assessed for both their criticality to the
operation  of the  Company  and if they  are  satisfactory  in their  Year  2000
efforts.

Renovation and Validation

     The Company is currently in the  renovation  and  validation  phases of the
project.  All mission  critical  systems will be validated for Y2K compliance by
March 31, 1999 with minor systems  completed by the end of the second quarter of
1999.

Implementation

     Any system found to be not in compliance with the Year 2000 date change has
been brought to the  attention  of senior  management  and is being  upgraded or
replaced.  The systems that have been  identified  are included in the Company's
Year 2000 budget. A budget has been approved and the additional costs to address
the Year 2000 issues at this time are  estimated to be  $235,000.  The Year 2000
related costs incurred by the Company to date are approximately $122,000.

Contingency plan

     A contingency  plan has been  established  that would be carried out in the
event that the preventative measures put in place do not prove successful.  Each
area of the Company has completed a mission  critical  operating plan that would
be initiated using manual processing.  In the event that this plan would need to
be  implemented  there would be a  substantial  increase in staffing and related
expenses. This plan addresses business operations to be carried out assuming the
telephone and electrical systems are in working order. The contingency plan will
continue to be updated throughout 1999.

Risks

     The Company has attempted to assess the Year 2000 readiness of its loan and
deposit customers.  If these customers were adversely affected by the Year 2000,
no  assurance  can be given  that  their  ability  to repay  debt  would  not be
affected.

     Based on its current  assessments and remediation  plans,  the Company does
not expect  that it will suffer any  material  disruption  of its  business as a
result of Year 2000 issues. Although the Company has no reason to believe that a
material disruption will occur, the most likely worst case scenario would result
from a Y2K failure in the power supply,  voice and data transmission  systems or
the federal  government.  If such a failure  were to occur,  the  Company  would
implement its contingency  plan. In such event, it is likely that there would be
temporary  disruption  of  customer  service  and  customer   inconvenience  and
additional  costs from the  implementation  of the  contingency  plan. It is not
possible to  quantify  those costs at the  present  time.  Although  the Company
believes its contingency plan will  satisfactorily  address these issues,  there
can be no  assurance  that the  Company's  contingency  plan  will  function  as
anticipated  or that  the  results  of  operations  of the  Company  will not be
adversely affected in the event of a prolonged disruption of service.


                                       28

<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders and Board of Directors
of Cowlitz Bancorporation:

We have audited the accompanying consolidated statements of condition of Cowlitz
Bancorporation  (a Washington  Corporation)  and Subsidiaries as of December 31,
1998 and 1997,  and the related  consolidated  statements of income,  changes in
shareholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1998. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Cowlitz  Bancorporation  and
Subsidiaries  as of  December  31,  1998  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.



Arthur Andersen LLP



Portland, Oregon
January 15, 1999








                                       29



<PAGE>

                             COWLITZ BANCORPORATION
                      CONSOLIDATED STATEMENTS OF CONDITION
                           December 31, 1998 and 1997
               (in thousands of dollars, except number of shares)
<TABLE>
<CAPTION>
                                                                            1998             1997
<S>                                                                    <C>              <C>
ASSETS
Cash and due from banks...........................................     $  22,705        $  23,109
Investment securities:
   Investments available-for-sale (at fair value, cost of $6,994 and
     $3,993 at December 31, 1998 and December 31, 1997,
     respectively)................................................         7,065            4,017
   Investments held-to-maturity (at amortized cost, fair value
     of $4,487 and $4,486 at December 31, 1998 and
     December 31, 1997, respectively).............................         4,465            4,464
                                                                      ----------        ---------
     Total investment securities..................................        11,530            8,481
                                                                      ----------        ---------
Loans.............................................................       132,046          131,963
Allowance for loan losses.........................................        (1,814)          (1,970)
                                                                      ----------        ---------
   Loans, net.....................................................       130,232          129,993
                                                                      ----------        ---------
Premises and equipment, net of accumulated depreciation of $1,837
   and $1,354 at December 31, 1998 and December 31, 1997,
   respectively...................................................         5,859            5,653
Federal Home Loan Bank stock......................................         2,869            2,658
Intangible assets, net of accumulated amortization of
   $432 and $123 at December 31, 1998 and December 31, 1997,
   respectively...................................................         3,110            1,847
Other assets......................................................         2,040            1,552
                                                                      ----------        ---------
     Total assets.................................................     $ 178,345        $ 173,293
                                                                      ==========        =========

LIABILITIES
Deposits:
   Demand.........................................................     $  33,062        $  27,141
   Savings and interest-bearing demand............................        47,367           46,454
   Certificates of deposit........................................        41,932           62,614
                                                                      ----------        ---------
     Total deposits...............................................       122,361          136,209
Short-term borrowings.............................................         2,275              725
Long-term borrowings..............................................        21,799           21,900
Other liabilities.................................................           990              572
                                                                      ----------        ---------
     Total liabilities............................................     $ 147,425         $159,406
                                                                      ----------        ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 and no shares authorized
   as of December 31, 1998 and December 31, 1997, respectively;
    no shares issued and outstanding at December 31, 1998 and
   December 31, 1997, respectively................................     $       -        $       -
Common stock, no par value; 25,000,000 and 3,937,500 shares
   authorized as of December 31, 1998 and December 31, 1997,
   respectively; 4,001,999 and 2,604,543 shares issued and
   outstanding at December 31, 1998 and December 31, 1997,
    respectively..................................................        18,251            3,262
Additional paid in capital........................................         1,538            1,538
Retained earnings.................................................        11,085            9,071
Accumulated other comprehensive income............................            46               16
                                                                      ----------        ---------

     Total shareholders' equity...................................        30,920           13,887
                                                                      ----------        ---------
     Total liabilities and shareholders' equity...................     $ 178,345        $ 173,293
                                                                      ==========        =========
</TABLE>
        The accompanying notes are an integral part of these statements.
                                       30

<PAGE>
                                COWLITZ BANCORPORATION
                          CONSOLIDATED STATEMENTS OF INCOME
                           December 31, 1998, 1997 and 1996
                   (in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
                                                                     1998           1997            1996
<S>                                                           <C>               <C>            <C>
INTEREST INCOME
Interest and fees on loans.............................       $    14,103       $ 13,700       $  12,721
Interest on taxable investment securities..............               955            667             386
Interest on non-taxable investments securities.........                 3              -               2
Trading account interest...............................                 -              -              34
Interest from other banks..............................             1,305            719             490
                                                              -----------       --------       ---------
   Total interest income...............................            16,366         15,086          13,633
                                                              -----------       --------       ---------
INTEREST EXPENSE
Savings and interest-bearing demand....................             1,894          1,253           1,031
Certificates of deposit................................             3,048          4,246           3,960
Short-term borrowings..................................                90             43             110
Long-term borrowings...................................             1,469          1,401           1,073
                                                              -----------       --------       ---------
   Total interest expense..............................             6,501          6,943           6,174
                                                              -----------       --------       ---------
   Net interest income before provision for loan losses             9,865          8,143           7,459

PROVISION FOR LOAN LOSSES..............................              (509)          (375)           (281)
                                                              -----------       --------       ---------
   Net interest income after provision for loan losses.             9,356          7,768           7,178
                                                              -----------       --------       ---------
NONINTEREST INCOME
   Service charges on deposit accounts.................               656            563             387
   Other income........................................               317            186             218
   Net gains on sales of securities....................                 5              -            (309)
                                                              -----------       --------       ---------
     Total noninterest income..........................               978            749             296
                                                              -----------       --------       ---------
NONINTEREST EXPENSE
   Salaries and employee benefits......................             3,775          2,778           2,137
   Net occupancy and equipment expense.................               888            724             393
   Business tax expense................................               242            224             202
   Amortization of intangibles.........................               309            123               -
   Other operating expense.............................             1,713          1,435             950
                                                              -----------       --------       ---------
     Total noninterest expense.........................             6,927          5,284           3,682
                                                              -----------       --------       ---------
     Income before income tax expense..................             3,407          3,233           3,792

INCOME TAX EXPENSE.....................................             1,181          1,109           1,295
                                                              -----------       --------       ---------
     Net income........................................       $     2,226       $  2,124       $   2,497
                                                              ===========       ========       =========
BASIC EARNINGS PER SHARE...............................       $      0.60       $   0.82       $    0.97
DILUTED EARNINGS PER SHARE.............................       $      0.57       $   0.78       $    0.97

</TABLE>
        The accompanying notes are an integral part of these statements.
                                       31

<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    For the Years Ended 1998, 1997, and 1996
                            (in thousands of dollars)

<TABLE>
<CAPTION>
                                                                            1998         1997         1996
 <S>                                                                 <C>          <C>          <C>
 CASH FLOWS FROM OPERATING ACTIVITIES
  Net income.....................................................    $     2,226  $     2,124  $     2,497
  Adjustments to reconcile net income to net cash provided by
    operating activities:
   Depreciation and amortization.................................            833          557          191
   Provision for loan losses.....................................            509          375          281
    Net losses (gains) on sales of trading securities............              -            -          309
    Net losses (gains) on sales of investments securities
      available-for-sale.........................................             (5)           -            -
    Net amortization of investment security premiums and
      accretion of discounts.....................................             (5)          (2)          (3)
    (Increase) decrease in other assets..........................            182         (248)          49
    Increase (decrease) in other liabilities.....................           (111)         (83)          87
    Federal Home Loan Bank stock dividends.......................           (211)        (195)        (180)
    Purchase of trading securities...............................              -            -      (64,500)
    Sales of trading securities..................................                           -       66,204
                                                                     -----------   ----------   ----------
      Net cash provided by operating activities..................          3,418        2,528        4,935
                                                                     -----------   ----------   ----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from maturities of investment securities
    held-to-maturity.............................................          3,669        3,784        2,860
  Proceeds from maturities of investment securities
    available-for-sale...........................................          1,000            -            -
  Purchases of investment securities:
    Held-to-maturity.............................................         (3,665)      (1,994)      (2,969)
    Available-for-sale...........................................         (3,996)      (4,857)      (2,006)
  Net (increase) decrease in loans...............................          1,065       (5,711)     (19,038)
  Purchases of premises and equipment............................           (725)      (1,300)      (2,797)
  Proceeds from assumption of deposit liabilities................              -       22,885            -
  Acquisition of business, net of cash acquired..................         (1,776)           -            -
                                                                     -----------   ----------   ----------
      Net cash (used in) provided by investment activities.......         (4,428)      12,807      (23,950)
                                                                     -----------   ----------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase (decrease) in demand, savings, and interest-bearing
    demand deposits..............................................          6,834        5,536       (1,207)
  Net increase (decrease) in certificates of deposit.............        (20,682)     (17,841)      18,133
  Dividends paid.................................................           (212)        (126)        (101)
  Net increase (decrease) in short-term borrowings...............          1,550          175       (2,075)
  Proceeds from long-term borrowings.............................          5,000        2,000       15,070
  Repayment of long-term borrowings..............................         (6,408)      (2,942)      (4,621)
  Repurchase of common stock.....................................           (494)           -            -
  Issuance of common stock for cash, net of amount paid for
       fractional shares and offering costs......................         15,018           67           19
                                                                     -----------   ----------   ----------
      Net cash provided by (used in) financing activities........            606      (13,131)      25,218
                                                                     -----------   ----------   ----------
      Net increase (decrease) in cash and due from banks.........           (404)       2,204        6,203
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR.....................         23,109       20,905       14,702
                                                                     -----------   ----------   ----------
CASH AND DUE FROM BANKS AT END OF PERIOD.........................    $    22,705  $    23,109  $    20,905
                                                                     ===========   ==========   ==========
CASH PAID FOR INTEREST...........................................    $     6,548  $     6,990  $     6,143
CASH PAID FOR INCOME TAXES.......................................    $     1,193  $     1,068  $     1,245
LOANS TRANSFERRED TO OREO........................................    $       544  $         -  $         -

</TABLE>
        The accompanying notes are an integral part of these statements.

                                       32
<PAGE>

                     COWLITZ BANCORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
               (in thousands of dollars, except number of shares)


<TABLE>
<CAPTION>                                                                            Accumulated
                                                               Additional                 Other        Total
                                             Common Stock        Paid-in    Retained  Comprehensive Shareholders' Comprehensive
                                         Shares       Amount     Capital    Earnings      Income       Equity        Income
<S>                                       <C>         <C>        <C>        <C>          <C>       <C>            <C>
BALANCE AT DECEMBER 31, 1995              2,585,608   $  3,176   $  1,538   $  4,677     $    -    $   9,391
Comprehensive Income:
  Net income...........................           -          -          -      2,497          -        2,497       $  2,497
  Net changes in unrealized gains on
     Investments available-for-sale, net
     Of deferred taxes of $3...........           -          -          -          -          7            7              7
                                                                                                                   --------
  Other comprehensive income, net of tax          -          -          -          -          -            -              7
                                                                                                                   --------
  Comprehensive Income.................           -          -          -          -          -            -       $  2,504
                                                                                                                   ========
Issuance of common stock for cash......       4,795         19          -          -          -           19
Cash dividend paid ($.04 per share)....           -          -          -       (101)         -         (101)
                                          ---------   --------     ------     ------    -------     --------
BALANCE AT DECEMBER 31, 1996              2,590,403      3,195      1,538      7,073          7       11,813
Comprehensive Income:
  Net income...........................           -          -          -      2,124          -        2,124       $  2,124
  Net changes in unrealized gains on
     investments available-for-sale, net
     of deferred taxes of $5...........           -          -          -          -          9            9              9
                                          ---------   --------     ------     ------    -------     --------       --------
  Other comprehensive income, net of tax          -          -          -          -          -            -              9
                                                                                                                   --------
  Comprehensive Income.................           -          -          -          -          -            -       $  2,133
                                                                                                                   ========
Issuance of common stock for cash......      14,140         67          -          -          -           67
Cash dividend paid ($.05 per share)....           -          -          -       (126)         -         (126)
                                          ---------   --------     ------     ------    -------     --------
BALANCE AT DECEMBER 31, 1997              2,604,543      3,262      1,538      9,071         16       13,887
Comprehensive Income:
  Net income...........................           -          -          -      2,226          -        2,226          2,226
  Net changes in unrealized gains on
     investments available-for-sale, net
     of deferred taxes of $16..........           -          -          -          -         30           30             30
                                                                                                                    -------
  Other comprehensive income, net of tax          -          -          -          -          -            -             30
                                                                                                                    -------
  Comprehensive Income.................           -          -          -          -          -            -       $  2,256
                                                                                                                    =======
  Issuance of common stock for cash....   1,396,251     15,019          -          -          -       15,019
  Purchase of treasury stock...........     (50,000)      (494)         -          -          -         (494)
  Issuance of common stock for
  acquisition..........................      51,282        465          -          -          -          465
  Cash dividends paid ($.06 per share).           -          -          -       (212)         -         (212)
Cash paid for fractional shares........         (77)        (1)         -          -          -           (1)
                                          ---------   --------     ------     ------    -------     --------
BALANCE AT DECEMBER 31, 1998              4,001,999   $ 18,251     $1,538    $11,085   $    46      $ 30,920
                                          =========   ========     ======     ======    =======     ========
</TABLE>
        The accompanying notes are an integral part of these statements.


                                       33

<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

1. Summary of Significant Accounting Policies

Nature of Operations

     Cowlitz  Bancorporation (the Company) is a one-bank holding company located
in Southwest Washington.  The Company's principal subsidiary,  Cowlitz Bank (the
Bank), a Washington  state-chartered commercial bank, is the only community bank
headquartered in Cowlitz County and offers commercial banking services primarily
to small and  medium-sized  businesses,  professionals,  and  retail  customers.
During  the  third  quarter  of  1998  the  Company  acquired  Business  Finance
Corporation (BFC) of Bellevue, Washington. Business Finance Corporation provides
asset based financing to companies throughout the western United States.

Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
the Company and its subsidiaries.  All significant intercompany transactions and
balances have been eliminated.

Investment Securities

     Investment securities are classified as either trading,  available-for-sale
or  held-to-maturity.  Securities  are classified as  held-to-maturity  when the
Company  has the  positive  intent  and  ability  to hold  those  securities  to
maturity.  Securities  that are bought and held  principally  for the purpose of
selling them in the near term are classified as trading  securities.  Securities
not  classified  as  either   held-to-maturity  or  trading  are  classified  as
available-for-sale. Trading securities are carried at fair value. Net unrealized
gains  and  losses  on  trading  securities  are  included  in the  consolidated
statements of income.  Available-for-sale  securities  are carried at fair value
with unrealized gains and losses,  net of tax effect,  added to or deducted from
shareholders' equity. Held-to-maturity securities are carried at amortized cost.

Loans

     Interest  income on simple interest loans is accrued daily on the principal
balance  outstanding.  Generally,  no interest is accrued on loans when  factors
indicate that  collection of interest is doubtful or when  principal or interest
payments become 90 days past due, unless collection of principal and interest is
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 that payments are
subsequently  received and  collection of the remaining  recorded  investment is
probable.  Loan fees are offset  against  operating  expenses to the extent that
these fees cover the direct  expense  of  originating  loans.  Fees in excess of
origination  costs are  deferred  and  amortized to income over the related loan
period.

Stock-Based Compensation

     Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based  Compensation,"  requires disclosure about stock -based compensation
arrangements  regardless of the method used to account for them. As permitted by
SFAS No.  123,  the  Company  has  opted to  continue  to apply  the  accounting
provisions  of Accounting  Principles  Board (APB) Opinion No. 25, and therefore
discloses the difference  between  compensation  cost included in net income and
the related cost  measured by the  fair-value-based  method  defined by SFAS No.
123,  including  tax  effects,  that  would have been  recognized  in the income
statement if the fair-value method has been used.



                                       34
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

Allowance for Loan Losses

     The  allowance  for  loan  losses  is  based  on  management's   estimates.
Management  determines  the  adequacy  of the  allowance  based upon  reviews of
individual loans, recent loss experience,  current economic conditions, the risk
characteristics  of the various categories of loans and other pertinent factors.
Actual losses may vary from the current estimates.  These estimates are reviewed
periodically and are adjusted as deemed  necessary.  Loans deemed  uncollectible
are charged to the allowance. Provisions for loan losses and recoveries on loans
previously charged off are added to the allowance.

     A loan is  impaired  when,  based on current  information  and events it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Company's policy is to included
in  impaired  loans  all  loans  that are past due 90 days or more as to  either
principal  or  interest,  except for loans that are  currently  measured at fair
value or at the lower of cost or fair value, and credit card receivables,  which
are  considered  large  groups of  smaller  balance  homogeneous  loans that are
collectively evaluated for impairment.  The Company measures impairment based on
the  present  value of  expected  future  cash  flows  discounted  at the loan's
effective  interest  rate or, as a practical  expedient,  impairment is measured
based on the loan's  observable market price or the fair value of the collateral
if the loan is collateral dependent. Impaired loans are charged to the allowance
when management  believes,  after considering  economic and business conditions,
collection  efforts,  and collateral  position,  that the  borrowers'  financial
condition is such that collection of principal is not probable.

Premises and Equipment

     Premises and  equipment are stated at cost less  accumulated  depreciation.
The provision for depreciation is computed on the straight-line  method over the
estimated  useful  lives for the  majority of the assets,  which range from 3 to
39.5 years.

     Improvements  are  capitalized  and  depreciated  over the  lesser of their
estimated  useful lives or the life of the lease.  When  property is replaced or
otherwise  disposed  of,  the cost of such  assets and the  related  accumulated
depreciation are removed from their respective accounts.


Intangible Assets

     Intangible  assets  include a deposit  premium of $1,570 and $1,847 (net of
accumulated  amortization)  at  December  31, 1998 and 1997,  respectively.  The
deposit premium is being  amortized using an accelerated  method over a ten-year
life.  Intangible  assets at December 31, 1998 also  include  goodwill of $1,540
(net of accumulated amortization),  representing the excess of acquisition costs
over the fair value of net assets that arose in connection  with the acquisition
of Business Finance  Corporation and is being amortized on a straight-line basis
over a fifteen-year period.

Other Borrowings

     Federal funds purchased  generally  mature within one to four days from the
transaction  date. Other  short-term  borrowed funds mature within one year from
the transaction date. Other long-term borrowed funds extend beyond one year.



                                       35
<PAGE>

                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)


Income Taxes

     Income taxes are accounted for using the asset and liability method.  Under
this  method,  a deferred  tax asset or  liability  is  determined  based on the
enacted  tax rates,  which will be in effect  when the  differences  between the
financial  statement  carrying  amounts  and tax bases of  existing  assets  and
liabilities are expected to be reported in the Company's income tax returns. The
deferred tax  provision  for the year is equal to the net change in the deferred
tax asset or liability  from the beginning to the end of the year,  less amounts
applicable to the change in value related to investments available-for-sale. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.

Earnings per Share

     Earnings per share  computations  are computed  using the weighted  average
number of common and dilutive common  equivalent  shares (stock options) assumed
to be outstanding during the period using the treasury stock method.

     The following  table  reconciles the numerator and denominator of the basic
and diluted earnings per share computations:

<TABLE>
<CAPTION>
                                                                       WeightedPer Share
                                                     Net Income        Avg Shares       Amount

                                                       For the year ended December 31, 1998
                  <S>                                <C>               <C>              <C>
                  Basic earnings per share           $ 2,226           3,715,901        $0.60
                  Stock Options                                          178,194
                  Diluted earnings per share         $ 2,226           3,894,095        $0.57

                                                       For the year ended December 31, 1997

                  Basic earnings per share           $ 2,124           2,601,650        $0.82
                  Stock Options                                          109,862
                  Diluted earnings per share         $ 2,124           2,711,512        $0.78

                                                       For the year ended December 31, 1996

                  Basic earnings per share           $ 2,497           2,586,711        $0.97
                  Stock Options                                                -
                  Diluted earnings per share         $ 2,497           2,586,711        $0.97

</TABLE>

     The Company for the periods  reported had no reconciling  items between net
income and income available to common shareholders.

Supplemental Cash Flow Information

     For the purpose of presentation  in the statements of cash flows,  cash and
cash equivalents are defined as those amounts in the balance sheet caption "Cash
and due from banks" and include cash on hand, amounts due from banks and federal
funds sold. Federal funds sold generally mature the day following purchase.


                                       36
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)


Use of Estimates in the Preparation of Financial Statements

     The  preparation  of financial  statements  in  conformity  with  generally
accepted accounting principles 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.


Off-Balance-Sheet Financial Instruments

     In  the  ordinary  course  of  business,   the  Company  has  entered  into
off-balance-sheet  financial  instruments  consisting of  commitments  to extend
credit,  commitments  under  credit card  arrangements  and  standby  letters of
credit. Such financial instruments are recorded in the financial statements when
they become payable.

Recently Issued Accounting Standards

SAB No. 98

     In February 1998, the Securities and Exchange Commission (SEC) issued Staff
Accounting  Bulletin (SAB) No. 98 on computations of earnings per share. SAB No.
98,  which was  effective  upon  issuance,  revised  the SEC's  guidance  on the
treatment of stock options  issued  shortly  before an Initial  Public  Offering
(IPO) in earnings per share  calculations.  Prior to the issuance of SAB No. 98,
the SEC  required  that  stock  options  issued  within  one year of an IPO with
exercise  prices below the IPO price be treated as outstanding for all reporting
periods for purposes of  calculating  earnings per share.  The Company  followed
this guidance for the stock options granted September 30, 1997 and,  accordingly
treated the options as  outstanding  for all periods in computing both basic and
diluted  earnings  per  share.  SAB  No.  98 now  requires  that  only  "nominal
issuances"  of stock or stock  options be  reflected  in all  earnings per share
calculations for all periods presented.  The Company's September 30, 1997, stock
options do not meet the SEC's definition of a nominal  issuance.  As required by
SAB No. 98, these stock options are now included in the  calculation  of diluted
earnings per share only for periods  subsequent  to their  issuance on September
30, 1997, and are not included in the basic earnings per share calculation.

     As required by SAB No. 98, the Company has  restated its  historical  basic
and diluted earnings per share to conform with this new guidance.  The following
is a summary of the historical and restated earnings per share amounts:

<TABLE>
<CAPTION>
                                                Year ended                    Year ended
                                            December 30, 1997               December 30, 1996
                                          Basic         Diluted          Basic          Diluted
     <S>                                <C>            <C>             <C>            <C>
     Previously reported EPS........    $  0.76        $   0.76        $  0.90        $  0.90
     Restated EPS...................    $  0.82        $   0.78        $  0.97        $  0.97
</TABLE>

SFAS No. 133

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative  Instruments and Hedging  Activities."  The Statement
establishes   accounting  and  reporting  standards  requiring  that  derivative
instruments   (including  certain  derivative   instruments  embedded  in  other
contracts)  be recorded  in the balance  sheet as either an asset or a liability
measured  at  its  fair  value.  The  Statement  requires  that  changes  in the
derivative's  fair value be  recognized  currently in earnings  unless  specific
hedge  accounting  criteria are met.  Special  accounting for qualifying  hedges
allows a derivative's  gain and losses to offset  related  results on the hedged
item  in the  income  statement,  and  requires  that a  company  must  formally
document,  designate,  and assess the effectiveness of transactions that receive
hedge accounting.

                                       37
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)


     SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also  implement  the  Statement  as of the  beginning  of any fiscal
quarter after  issuance  (that is, fiscal  quarters  beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively.  SFAS No. 133 must be
applied to (a) derivative  instruments  and (b) certain  derivative  instruments
embedded  in hybrid  contracts  that were  issued,  acquired,  or  substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).

     The  implementation  of this  Statement  is not expected to have a material
impact on the Company's financial position or results of operation.

Comprehensive Income

     The Company has adopted Statement of Financial Accounting Standards No. 130
"Reporting  Comprehensive  Income,"  effective  January 1, 1998.  This statement
establishes  standards for the reporting and display of comprehensive income and
it's  components in the  financial  statements.  For the Company,  comprehensive
income  includes net income  reported on the statements of income and changes in
the fair value of its available-for-sale  investments reported as a component of
shareholders' equity.

   The components of comprehensive income for the years ended December 31, 1998,
1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                           1998       1997           1996
                               <S>                                     <C>            <C>          <C>
                               Unrealized gain (loss) arising during
                                 the period, net of tax..............  $      33      $     9      $     7
                               Reclassification adjustment for
                                 net realized gains (losses) on
                                 securities available-for-sale
                                 included in net income during the
                                 year, net of tax of $2, $0, and $0..          3             -           -
                                                                       ---------      --------   ----------
                                 Net unrealized gain included in
                                    other comprehensive income.......  $      30      $      9   $        7
                                                                       =========      ========   ==========
</TABLE>

Prior Year Reclassifications

     Certain  prior year  amounts  have been  reclassified  to conform  with the
current year presentation.

2.   Investment Securities

     The amortized  cost and estimated  fair values of investment  securities at
December 31 are shown below:

<TABLE>
<CAPTION>
                  December 31, 1998                                    Available-for-Sale
                                                                     Gross        Gross      Estimated
                                                     Amortized    Unrealized    Unrealized      Fair
                                                       Cost          Gains        Losses       Value
   <S>                                               <C>          <C>           <C>          <C>
   U.S. Government and agency securities............ $   6,994    $      71     $       -    $  7,065
                                                     ---------    ---------     ---------    --------
                  Total............................. $   6,994    $      71     $       -    $  7,065
                                                     =========    =========     =========    ========
</TABLE>
                                       38
<PAGE>

                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)


<TABLE>
<CAPTION>
                                                                         Held-to-Maturity
                                                                     Gross        Gross      Estimated
                                                     Amortized    Unrealized    Unrealized      Fair
                                                       Cost          Gains       Losses        Value
   <S>                                              <C>            <C>           <C>           <C>
   Municipal Bonds.................................. $     199     $     -       $    -        $    199
   U.S. Government and agency securities............       999           22           -           1,021
   Certificates of deposit..........................     3,267           -            -           3,267
                                                     ---------     --------      ------        --------
                  Total............................. $   4,465     $     22      $    -        $  4,487
                                                     =========     ========      ======        ========
</TABLE>

<TABLE>
<CAPTION>
                  December 31, 1997                                    Available-for-Sale
                                                                     Gross        Gross      Estimated
                                                     Amortized    Unrealized    Unrealized      Fair
                                                       Cost          Gains        Losses       Value
   <S>                                              <C>           <C>           <C>          <C>
   U.S. Government and agency securities............ $   3,993    $      24     $       -    $  4,017
                                                     ---------     --------      --------    --------
                  Total............................. $   3,993    $      24     $       -    $  4,017
                                                     =========    =========     =========    ========
</TABLE>

<TABLE>
<CAPTION>
                                                                         Held-to-Maturity
                                                                     Gross        Gross      Estimated
                                                     Amortized    Unrealized    Unrealized      Fair
                                                       Cost          Gains       Losses        Value
   <S>                                              <C>           <C>           <C>          <C>
   U.S. Government and agency securities.............$   2,978    $      22     $       -    $  3,000
   Certificates of deposit...........................    1,486            -             -       1,486
                                                     ---------    ---------     ---------    --------
                  Total..............................$   4,464    $      22     $       -    $  4,486
                                                     =========    =========     =========    ========
</TABLE>

     Gross  gains of $5, $0, and $379 and gross  losses of $0, $0, and $688 were
realized on sales of trading and  available-for-sales  securities in 1998, 1997,
and 1996, respectively. There were no sales of held-to-maturity securities.

Maturity of Investments

     The  carrying  amount  and  estimated  fair  value  of debt  securities  by
contractual maturity at December 31, 1998, are shown below.  Expected maturities
may differ from contractual  maturities  because borrowers may have the right to
call or prepay the obligation.

<TABLE>
<CAPTION>
                                                       Available-for-Sale              Held-to-Maturity
                                                     Amortized    Estimated         Amortized    Estimated
                                                        Cost      Fair Value          Cost       Fair Value
   <S>                                              <C>           <C>              <C>         <C>
   Due in one year or less...........................$   2,002    $   2,008         $   3,267   $    3,267
   Due after one year through five years.............    4,992        5,057             1,099        1,121
   Due after five years through fifteen years........        -            -                99           99
                                                     ---------    ---------         ---------   ----------
                  Total..............................$   6,994    $   7,065         $   4,465   $    4,487
                                                     =========    =========         =========   ==========
</TABLE>

     At December 31, 1998 and 1997 a security with a par value of $1 million was
pledged to secure the  treasury,  tax and loan  account at the Federal  Reserve.
Another  security with a par value of $1 million was pledged for trust  deposits
held in the Bank.
                                       39
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

3.  Loans and Allowance for Loan Losses

   The loan portfolio as of December 31 consists of the following:
<TABLE>
<CAPTION>
                                                                            1998              1997
  <S>                                                                  <C>              <C>
   Commercial loans..................................                  $  103,473       $   93,829
   Real estate:
         Construction................................                       3,206            3,495
         Mortgage....................................                      13,774           24,167
         Commercial..................................                       7,026            5,475
   Installment and other consumer....................                       5,063            5,571
   Contracts purchased...............................                          45               81
                                                                       ----------       ----------
                                                                          132,587          132,618
   Less:
         Deferred loan fees                                                  (541)            (655)
         Allowance for loan losses                                         (1,814)          (1,970)
                                                                       ----------       ----------
                  Total loans, net...................                  $  130,232       $  129,993
                                                                       ==========       ==========
</TABLE>

An analysis of the change in the  allowance  for loan losses for the years ended
December 31 is as follows:

<TABLE>
<CAPTION>
                                                              1998         1997           1996
<S>                                                       <C>              <C>            <C>
Balance, beginning of year...........................     $   1,970        $  1,894       $  1,763
   Provision for loan losses.........................           509             375            281
   Loans charged to the allowance ...................          (727)           (324)          (158)
   Recoveries credited to the allowance..............            17              25              8
   Adjustment incident to acquisition................            45               -              -
                                                          ---------        --------       --------
Balance, end of year.................................     $   1,814        $  1,970       $  1,894
                                                          =========        ========       ========
</TABLE>

     Loans on which the accrual of interest  has been  discontinued  amounted to
approximately  $2,737,  $1,897,  and $407 at December 31, 1998,  1997, and 1996,
respectively. Interest forgone on nonaccrual loans was approximately $297, $177,
and $41 in 1998, 1997, and 1996, respectively.

     At December 31, 1998 and 1997, the Company's recorded investment in certain
loans that were  considered to be impaired was $2,736 and $2,270,  respectively.
Of these impaired loans, $891 and $302 have related valuation  allowances of $65
and $199,  while  $1,845 and $1,968 did not require a valuation  allowance.  The
balance of the allowance for loan losses in excess of these specific reserves is
available to absorb losses from all loans.  The average  recorded  investment in
impaired  loans for the years ended  December  31,  1998,  1997,  and 1996,  was
approximately $2,420, $1,300, and $342, respectively. Interest payments received
on impaired  loans are recorded as interest  income,  unless  collection  of the
remaining recorded  investment is not probable,  in which case payments received
are recorded as a reduction of principal. For the years ended December 31, 1998,
1997,  and 1996 interest  income  recognized on impaired loans totaled $77, $36,
and $14, respectively, all of which was recognized on a cash basis.


                                       40
<PAGE>

                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

4.  Premises and Equipment

   Premises and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                                1998    1997
         <S>                                                               <C>          <C>
         Land........................................                      $     858    $    633
         Buildings and improvements..................                          4,415       4,208
         Furniture and equipment.....................                          2,386       2,157
         Construction in process.....................                             37           9
                                                                           ---------    --------
                                                                               7,696       7,007
         Accumulated depreciation....................                         (1,837)     (1,354)
                                                                           ---------    --------
                           Total.....................                      $   5,859    $  5,653
                                                                           =========    ========
</TABLE>

     Depreciation  included in net occupancy and equipment  expense  amounted to
$524,  $432,  and $191 for the years ended  December 31, 1998,  1997,  and 1996,
respectively.

5.  Borrowings

     Short-term borrowings consist of Federal Funds purchased of $2,275 and $725
at December 31, 1998 and 1997, respectively.

<TABLE>
<CAPTION>
                                                                                  1998             1997
   <S>                                                                          <C>            <C>
   Long-term borrowings consist of the following at December 31:
     Notes payable to Federal Home Loan Bank; interest from 5.17 percent to 8.80
       percent at  December  31,  1998,  payable in  monthly  installments  plus
       interest due 1999 to 2013,
       secured by certain investment securities and mortgage loans.........     $21,738        $ 20,517

     Note payable to a bank,  due January  1999,paid in April 1998;  interest at
        prime  plus 1  percent;  interest  not to fall  below 8.5  percent or to
        exceed 14 percent (9.25 percent at December 1997);  principal payable in
        annual installments; interest payable in
       quarterly installments, secured by bank stock ......................           -              319

     Subordinated  promissory notes of the Company,  due February 2000; interest
       at 8.5 percent; interest payable semiannually on June 30 
       and December 31     ................................................           -            1,000

     Contract payable to private party; interest 9.0 percent, payable in monthly
       installments plus interest through
       October 2010        ................................................          61              64
                                                                                -------       ----------
           Total           ................................................     $21,799       $   21,900
                                                                                =======       ==========
   The aggregate  maturities  of notes payable  subsequent to December 31, 1998,
are as follows:

           1999            .................................................    $   517
           2000            .................................................      5,933
           2001            .................................................      7,284
           2002            .................................................      2,184
           2003            .................................................        185
           Thereafter      .................................................      5,696
                                                                                -------
                                                                                $21,799
                                                                                =======
</TABLE>
                                       41
<PAGE>

                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

6.  Income Taxes

   The components of the provision for income taxes for the years ended December
31 were as follows:
<TABLE>
<CAPTION>
                                                                  1998          1997        1996
                                                                -------      -------    --------
<S>                                                             <C>          <C>        <C>  
   
                  Current.................................      $ 1,069      $ 1,044    $  1,274
                  Deferred................................          112           65          21
                                                                -------      -------    --------
                      Total provision for income taxes....      $ 1,181      $ 1,109    $  1,295
                                                                =======      =======    ========
</TABLE>


   The federal statutory income tax rate and effective tax rate of the provision
do not vary significantly.

   The tax effect of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31 was as follows:
<TABLE>
<CAPTION>
                                                                            1998        1997
                                                                         -------      -------
<S>                                                                       <C>         <C>
         Deferred tax assets:
           Allowance for loan losses                                      $   522     $   596
           Amortization of intangible assets                                   84          23
           Loan origination fees                                               15          31
                                                                          -------     -------
                                                                              621         650
                                                                          -------     -------
         Deferred tax liabilities:
           Cash-basis adjustments                                               -         (29)
           Accumulated depreciation                                           (91)        (67)
           Federal Home Loan Bank stock dividends                            (469)       (396)
           Unrealized gains on available-for-sale securities                  (24)         (8)
           Other                                                                -          (1)
                                                                          -------     -------
                                                                             (584)       (501)
                                                                          -------     -------
                           Net deferred tax                               $    37     $   149
                                                                          =======     =======
</TABLE>

7.  Certificates of Deposit:

     Included in certificates of deposit are  certificates in  denominations  of
$100 or greater  totaling  $13,623 and  $18,633 at  December  31, 1998 and 1997,
respectively.   Interest   expense   relating  to  certificates  of  deposit  in
denominations  of $100 or  greater  was $933,  $1,297,  and $1,360 for the years
ended December 31, 1998, 1997, and 1996, respectively.

8.  Shareholders Equity and Regulatory Capital 

     Dividends  are paid by the Company  from its retained  earnings,  which are
principally  provided  through  dividends  and  income  from  its  subsidiaries.
However,  state agencies restrict the amount of funds the Company's subsidiaries
may  transfer to the Company in the form of cash  dividends,  loans or advances.
Transfers are limited by the subsidiary's retained earnings,  which for the Bank
were $10,159 at December 31, 1998.

                                       42
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)


     The  Company  and the  Bank  are  subject  to  various  regulatory  capital
requirements  as  established  by  the  applicable   federal  or  state  banking
regulatory  authorities.  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 the Bank's
assets,  liabilities  and  certain  off-balance-sheet  items.  The  quantitative
measures  for  capital  adequacy  require  the  Company and the Bank to maintain
minimum  amounts and ratios of total and Tier 1 capital to risk weighted  assets
and of Tier 1 capital  to  average  assets  (leverage).  The  Company's  capital
components,  classification,  risk weightings and other factors are also subject
to  qualitative  judgements  by  regulators.  Failure  to meet  minimum  capital
requirements  can initiate  certain  actions by regulators  that, if undertaken,
could have a material effect on the Company's financial  statements.  Management
believes that as of December 31, 1998, the Company and the Bank meet all minimum
capital  adequacy  requirements  to which  they  are  subject.  The most  recent
notification from the Federal Deposit Insurance Corporation categorized the Bank
as well-capitalized under the regulatory framework for prompt corrective action.
Management  believes  that no events or  changes  in  conditions  have  occurred
subsequent to such notification to change the Bank's category.

     The following table presents  selected capital  information for the Company
(consolidated) and the Bank as of December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                                             To Be Well
                                                                     For Capital          Capitalized under
                                                                      Adequacy            Prompt Corrective
                                                 Actual               Purposes            Action Provisions
                                          -----------------     ------------------       --------------------
                                          Amount      Ratio     Amount       Ratio       Amount         Ratio
<S>                                      <C>          <C>      <C>           <C>        <C>             <C>
As of December 31, 1998
   Total risk-based capital:
      Consolidated....................   $  29,330    23.46%   $  10,001       8.00%    $  12,501       10.00%
      Bank ...........................      16,383    13.32        9,841       8.00        12,301       10.00
   Tier 1 risk-based capital:
      Consolidated....................      27,764    22.21        5,000       4.00         7,501        6.00
      Bank ...........................      14,842    12.07        4,921       4.00         7,381        6.00
   Tier 1 (leverage) capital:
      Consolidated....................      27,764    15.81        7,026       4.00         8,782        5.00
      Bank ...........................      14,842     8.72        6,806       4.00         8,507        5.00

As of December 31, 1997

   Total risk-based capital:
      Consolidated....................      14,194    11.34       10,007       8.00        12,503       10.00
      Bank ...........................      13,852    11.09        9,994       8.00        12,993       10.00
   Tier 1 risk-based capital:
      Consolidated....................      12,025     9.61        5,003       4.00         7,505        6.00
      Bank ...........................      12,285     9.83        4,997       4.00         7,496        6.00
   Tier 1 (leverage) capital:
      Consolidated....................      12,025     6.94        7,002       4.00         8,752        5.00
      Bank ...........................      12,285     7.12        6,898       4.00         8,623        5.00

</TABLE>
                                       43
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)


9.  Stock Option and Employee Stock Purchase Plans:

   During 1997, the Company  adopted the 1997 Stock Option Plan (the 1997 Plan),
which  authorizes up to 525,000 shares of common stock for issuance  thereunder.
Under  the  1997  Plan,  options  may be  granted  to the  Company's  employees,
directors and  consultants.  The exercise price of incentive stock options under
the 1997 Plan must be at least  equal to the fair value of the  common  stock on
the date of grant.  Options granted under the 1997 Plan will generally vest over
a  five-year  period,  at the  discretion  of the  compensation  committee.  All
incentive  stock options  granted under the 1997 Plan will expire ten years from
the date of grant unless  terminated  sooner  pursuant to the  provisions of the
1997 Plan.  At December 31, 1998 and  December  31, 1997,  options to purchase a
total of 446,000 and 385,000 shares,  respectively,  have been granted under the
1997 plan to executives and directors of the Company and the Bank.

   The Company  adopted an employee stock purchase plan during 1996. The Company
may sell up to 175,000  shares of common stock to its eligible  employees  under
the plan.  During  1998,  the Company sold 5,301 shares of stock under the plan.
The employee is granted the right to purchase the stock at a price equal to fair
value at the date of  grant,  as  determined  by the Board of  Directors.  These
grants are made to qualified  employees each quarter and expire within the month
they are granted.

   A summary of option  activity for the years ended December 31, 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
                                            1998         1998           1997           1997         1996       1996
                                           Common      Weighted        Common        Weighted      Common      Weighted
                                           Shares      Avg. Price      Shares        Avg. Price    Shares      Avg. Price
                                           ---------  -----------     ----------     ----------    ---------  -----------
<S>                                        <C>         <C>            <C>            <C>           <C>         <C>      
Balance, beginning of year..............     400,208   $   5.69           13,945     $   4.29             -    $   -
   Granted..............................      95,193       8.02          428,732         5.63        29,594        4.16
   Exercised............................     (16,174)      5.55          (13,441)        4.43        (4,795)       4.06
   Forfeited............................     (18,019)     10.52          (29,028)        4.67       (10,854)       4.06
Balance, end of year....................     461,208       5.82          400,208         5.69        13,945        4.29
Exercisable, end of year................     166,200       5.37          111,458         5.64        13,945        4.29
Fair value of options granted...........                 $ 1.08                        $ 1.49                    $ 0.06

</TABLE>

     At December 31, 1998,  exercise prices for outstanding  options ranged from
$5.71 to $7.94.  For the options  outstanding at December 31, 1998, the weighted
average contractual life is 9.1 years.

     The Company accounts for both the 1997 Plan and the Employee Stock Purchase
Plan  under APB  Opinion  No.  25,  under  which no  compensation  cost has been
recognized.  Had compensation cost for these plans been determined  consistently
with SFAS No. 123 and  recognized  over the vesting  period,  the  Company's net
income and earnings per share would have been reduced to the following pro forma
amounts:

<TABLE>
<CAPTION>
                                                                       1998              1997              1996
                                                                     ------          --------           -------
<S>                                 <C>                              <C>              <C>               <C>
   Net Income:                      As reported                      $ 2,226          $  2,124          $ 2,497
                                    Pro Forma                        $ 2,152          $  2,024          $ 2,496

   Basic earnings per share:        As reported                      $  0.60          $  0.82           $  0.97
                                    Pro Forma                        $  0.58          $  0.78           $  0.97

   Diluted earnings per share:      As reported                      $  0.57          $  0.78           $  0.97
                                    Pro Forma                        $  0.55          $  0.75           $  0.97

</TABLE>

                                       44
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

   The fair value of each option granted is estimated on the date of grant using
the  Black-Scholes  option  pricing model,  with the following  weighted-average
assumptions used for grants in 1998, 1997, and 1996:  risk-free interest rate of
4.56 percent,  7 percent and 7 percent;  expected dividend yield of 0.58 percent
for all years; and an expected volatility of 2.28 percent, 2.24 percent and 2.24
percent.  Expected  lives for options  granted in 1998 and 1997 were 6 years and
0.25 year for options granted in 1996. Due to the discretionary  nature of stock
option grants,  the  compensation  cost included in the 1998,  1997 and 1996 pro
forma net income per SFAS No. 123 may not be  representative of that expected in
future years.

10.   Contingent Liabilities and Commitments with Off-Balance-Sheet Risk:

   The  Company's  consolidated  financial  statements  do not  reflect  various
commitments  and contingent  liabilities of the  subsidiaries  that arise in the
normal  course of business  and 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  subsidiary's  undisbursed  commitments and contingent
liabilities at December 31, 1998 is as follows:

               Commitments to extend credit....................     $  20,424
               Credit card commitments.........................         3,974
               Standby letters of credit.......................           258
                                                                    ---------
                   Total.......................................     $  24,656
                                                                    =========

     Commitments to extend credit,  credit card arrangements and standby letters
of  credit  all   include   exposure  to  some  credit  loss  in  the  event  of
nonperformance  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 on the  consolidated  balance sheets.  Because 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.

     Most of the Bank's lending  activity is with  customers  located in Cowlitz
County,  Washington.  An economic downturn in Cowlitz County would likely have a
negative  impact on the Bank's results of operations,  depending on the severity
of the downturn.  The Bank  maintains a diversified  portfolio and does not have
significant on- or off-  balance-sheet  concentrations of credit risk in any one
industry.

11.   Balances with the Federal Reserve Bank:

     The Bank is  required  to  maintain  reserves  in cash or with the  Federal
Reserve Bank equal to a percentage of its reservable deposits. Required reserves
were  approximately  $1,023,  $929, and $580 as of December 31, 1998,  1997, and
1996, respectively.

12.   Related-Party Transactions:

     Certain  directors,  executive  officers and their spouses,  associates and
related  organizations,  had banking  transactions with the Bank in the ordinary
course of business. All loans and commitments to loan were made on substantially
the same terms and  conditions,  including  collateral  required  as  comparable
transactions with  unaffiliated  parties.  Directors and executive  officers are
charged the same rates of interest  and loan fees as are charged to employees of
the Company,  which  interest  rates and fees are slightly lower than charged to
nonemployee borrowers. The amounts of loans outstanding to directors,  executive
officers,  principal shareholders,  and companies with which they are associated
was as follows: 45
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                       1998              1997
                                                                   --------          --------
<S>                                                               <C>                <C>    
                  Beginning balance ............................  $   1,077          $  1,318
                  Loans made....................................        186               704
                  Loan repayments made..........................       (319)             (698)
                  Other.........................................          -              (247)
                                                                  ----------         --------
                  Ending balance................................  $     944          $  1,077
                                                                  =========          ========
</TABLE>

     Certain directors at December 31, 1996 were no longer directors at December
31, 1997.  The balances  outstanding  to such persons are reflected in the Other
category above.

     The  chairman of the  Company  owns a  securities  brokerage  franchise  of
Raymond James Financial Services, Inc., which leases space from the Company.

13.   Employee Benefit Plan:

     The  Company  has  a   contributory   retirement   savings  plan   covering
substantially all full-time and part-time employees. The amount of the Company's
annual  contribution  is at the  discretion of the Board of Directors.  The Bank
contributed  $164 and $115 for the  years  ended  December  31,  1998 and  1997,
respectively.

14.   Fair Value of Financial Instruments:

     SFAS No.  107,  "Disclosures  about Fair Value of  Financial  Instruments,"
requires the disclosure of the fair value of financial instruments.  A financial
instrument is defined as cash, evidence of ownership interest in an entity, or a
contract that conveys or imposes the  contractual  right or obligation to either
receive or deliver cash or another financial  instrument.  Examples of financial
instruments  included in the Company's  balance  sheets are cash,  federal funds
sold or purchased; debt and equity securities;  loans; demand, savings and other
interest  bearing  deposits;   notes  and  debentures.   Examples  of  financial
instruments,  which  are not  included  in the  Company's  balance  sheets,  are
commitments to extend credit and standby letters of credit.

     Fair value is defined as the amount at which a financial  instrument  could
be exchanged in a current transaction  between willing parties,  other than in a
forced sale or  liquidation,  and is best  evidenced by a quoted market price if
one exists.

     The statement requires the fair value of deposit liabilities with no stated
maturity,  such as demand deposits,  NOW and money market accounts, to equal the
carrying  value of these  financial  instruments  and  does  not  allow  for the
recognition of the inherent value of core deposit relationships when determining
fair value. While the statement does not require disclosure of the fair value of
nonfinancial  instruments,  such as the Company's  premises and  equipment,  its
banking and trust  franchises  and its core deposit  relationships,  the Company
believes that these nonfinancial instruments have significant fair value.

     The following  methods and assumptions were used to estimate the fair value
of each class of financial  instruments  for which it is practicable to estimate
that value:

     Cash and due from banks - For these  short-term  instruments,  the carrying
amount is a reasonable estimate of fair value.

     Investment  securities - For securities held for investment purposes,  fair
values are based on quoted market prices or dealer quotes. For other securities,
fair value equals quoted market prices,  if available.  If a quoted market price
is not available, fair value is estimated using quoted market prices for similar
securities.


                                       46
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)


     Loans - For  certain  variable  rate  loans,  fair  value is  estimated  at
carrying value, as these loans reprice to market  frequently.  The fair value of
other types of loans is estimated by  discounting  the future cash flows,  using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.

     Deposit  Liabilities - The fair value of demand deposits,  savings accounts
and  certain  money  market  deposits  is the  amount  payable  on demand at the
reporting  date.  The fair value of  fixed-maturity  certificates  of deposit is
estimated by discounting  future cash flows,  using the rates currently  offered
for deposits of similar remaining maturities.

     Short-term  borrowing - The carrying amounts of borrowings under repurchase
agreements and short-term borrowings approximate their fair values.

     Long-term  borrowing - Rates currently  available to the Bank for debt with
similar  terms and remaining  maturities  are used to estimate the fair value of
existing debt.

     Commitments to extend credit,  credit card  commitments and standby letters
of  credit - The fair  values  of  commitments  to extend  credit,  credit  card
commitments  and standby  letters of credit were not material as of December 31,
1998 and 1997.

     The  estimated  fair  values  of the  Company's  financial  instruments  at
December 31 were as follows:
<TABLE>
<CAPTION>
                                                                         1998                  1997
                                                                  -----------------     -------------------
                                                                  Carrying   Fair       Carrying   Fair
                                                                  Amount     Value      Amount     Value
<S>                                                             <C>        <C>        <C>        <C>    
Financial assets:
   Cash and due from banks....................................  $   22,705 $ 22,705   $   23,109 $   23,109
   Investment securities......................................      11,530   11,552        8,481      8,503
   Loans, net of allowances for loan losses...................     130,232  133,491      129,993    130,093
   Federal Home Loan Bank stock...............................       2,869    2,869        2,658      2,658
Financial liabilities:
   Demand.....................................................      33,062   33,062       27,141     27,141
   Savings and interest-bearing deposits......................      47,367   47,367       46,454     46,454
   Certificates of deposit....................................      41,932   42,326       62,614     62,524
   Short-term borrowings......................................       2,275    2,275          725        725
   Long-term borrowings.......................................      21,799   22,787       21,900     21,824

</TABLE>


15.   Segments of an Enterprise and Related Information:

     The Company adopted  Statement of Financial  Accounting  Standards No. 131,
"Disclosure  about  Segments of an  Enterprise  and Related  Information"  as of
January 1, 1998.  This  statement  establishes  standards  for the reporting and
display of  information  about  operating  segments in financial  statements and
related disclosures.

     The Company is principally  engaged in community banking activities through
its five Bank branches and corporate  offices.  The 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,  and holding or managing  assets in a
fiduciary agency capacity on behalf of its customers and their beneficiaries. In
addition,   beginning  in  1998  with  the   acquisition  of  Business   Finance
Corporation,  the Company provides asset based financing to companies throughout
the Western United States.


                                       47
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

     The community  banking and asset based  financing  activities are monitored
and reported by Company management as separate operating segments.  As permitted
under the Statement, the five separate banking offices have been aggregated into
a single  reportable  segment,  Community  Banking.  The asset  based  financing
operating  segment  does not  meet the  prescribed  aggregation  or  materiality
criteria and therefore is reported as Other in the following table below.

     The  accounting  policies for the Company's  segment  information  provided
below are the same as those  described  in Note 1,  except  that some  operating
expenses are not allocated to segments.

     Summarized  financial  information  for the year ended  December  31,  1998
concerning the Company's  reportable  segments is shown in the following  table.
Prior to 1998, the Company had only one operating segment, Community Banking.

<TABLE>
<CAPTION>
                                        Banking           Other            Intersegment           Consolidated
                                      ----------       --------            ------------           -------------
<S>                                  <C>               <C>                <C>                    <C>   
Interest income                       $   15,870       $    556            $       (60)           $      16,366
Interest expense                           6,501             60                    (60)                   6,501
                                      ----------       --------            -----------            -------------
   Net interest income                     9,369            496                      -                    9,865
Provision for loan loss                      509              -                      -                      509
Noninterest income                           978              -                      -                      978
Noninterest expense                        6,710            217                      -                    6,927
                                      ----------       --------            -----------            -------------
   Income before taxes                     3,128            279                      -                    3,407
Provision for income taxes                 1,086             95                      -                    1,181
                                      ----------       --------            -----------            -------------
   Net income                         $    2,042       $    184            $         -            $       2,226
                                      ==========       ========            ===========            =============
Depreciation and amortization         $      524       $      -            $         -            $         524
                                      ==========       ========            ===========            =============
Assets                                $  175,410       $  4,797            $    (1,862)           $     178,345
                                      ==========       ========            ===========            =============
</TABLE>

16.   Acquisition

     On August 31, 1998, the Company acquired Business Finance Corporation (BFC)
of  Bellevue,  Washington.  BFC  provides  asset-based  financing  to  companies
throughout the Western United States. A cash payment of approximately $1,776 was
made and  51,282  shares of Company  stock  with a value of $465 were  issued in
connection with the  acquisition.  Available cash resources were used to finance
the  acquisition.  A future  contingent  issuance of the Company's  common stock
valued at approximately $500 will be made if BFC achieves certain earnings goals
for  the  twelve-month  period  following  the  acquisition.  The  value  of any
subsequently issued shares will be allocated to cost in excess of the fair value
of the net assets acquired.


                                       48
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

     The BFC  acquisition  was recorded under the purchase method of accounting;
and accordingly, the results of operations of BFC for the period from August 31,
1998 are included in the accompanying  consolidated  financial  statements.  The
purchase price has been allocated to the assets acquired and liabilities assumed
based on fair market value at the date of acquisition.  The fair value of assets
acquired and liabilities assumed is summarized as follows:

   
                             Factored receivables...........  $  2,357
                             Other assets...................        273
                             Goodwill  .....................      1,571
                             Liabilities assumed............     (1,836)
                             Stock issued...................       (465)
                                                              ---------
                             Cash paid for acquisition......      1,900
                             Cash acquired..................       (124)
                                                              ---------
                             Net cash paid for acquisition..  $   1,776
                                                              =========


     The following  unaudited pro forma  financial  information  for the Company
gives  effect to the BFC  acquisition  as if it had occurred on January 1, 1997.
These pro forma results have been prepared for comparative  purposes only and do
not purport to be indicative of the results of operations  which  actually would
have resulted had the acquisition  occurred on the date indicated,  or which may
result  in the  future  for the  combined  companies  under  the  ownership  and
management of the Company.  The pro forma results include  certain  adjustments,
such as additional expense as a result of goodwill amortization.

<TABLE>
<CAPTION>
                                                                              Pro Forma
                                                                             (unaudited)
                                                                  Year ended             Year ended
                                                                December 31, 1998     December 31, 1997
<S>                                                             <C>                   <C>  
                      Interest income.........................   $     16,519          $    $15,180
                      Net income..............................   $      2,423          $      2,210
                      Diluted earnings per share..............   $       0.62          $       0.81
</TABLE>
                                       49
<PAGE>
                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)


17.   Parent-Company-Only Financial Data:

     The following sets forth condensed financial  information of the Company on
a stand-alone basis:

<TABLE>
<CAPTION>
                             Statements of Condition
                                (unconsolidated)
                                                                           December 31,
                                                                         1998            1997
<S>                                                                  <C>            <C>    
Assets:
   Cash and due from depository institutions......................   $ 11,250       $     937
   Investment in bank subsidiary..................................     16,458          14,147
   Investment in non-bank subsidiary..............................      2,424               -
   Receivables due from non-bank subsidiary.......................        579               -
   Other assets...................................................        320             156
                                                                     --------       ---------
         Total assets.............................................   $ 31,031       $  15,240
                                                                     ========       =========
Liabilities and shareholders' equity:
   Liabilities:
     Long-term borrowings.........................................   $      -       $   1,319
     Other liabilities............................................        111              34
         Total liabilities........................................        111           1,353
   Shareholders' equity...........................................     30,920          13,887
                                                                     --------       ---------
         Total liabilities and shareholders' equity...............   $ 31,031       $  15,240
                                                                     ========       =========
</TABLE>

<TABLE>
<CAPTION>
                              Statements of Income
                                (unconsolidated)
                                  
                                                                                 Year Ended December 31,
                                                                                 -----------------------
                                                                              1998       1997       1996
<S>                                                                       <C>         <C>        <C>   
  Income:
   Income from subsidiaries.......................................        $    495    $    54    $    56
                                                                          --------    -------    -------    
         Total income.............................................             495         54         56
                                                                          --------    -------    -------    
Expenses:
   Interest expense...............................................              30        116        130
   Other expense..................................................             800        353        334
                                                                          --------    -------    -------    
         Total expense............................................             830        469        464
                                                                          --------    -------    -------    
         Loss before income tax benefit and equity in
           Undistributed earnings of subsidiaries.................            (335)      (415)      (408)
         Income tax benefit.......................................              97        135        138
                                                                          --------    -------    -------    
         Net loss before equity in undistributed earnings
           Of subsidiaries........................................            (238)      (280)      (270)
Equity in undistributed earnings of subsidiaries..................           2,464      2,404      2,767
                                                                          --------    -------    -------    
         Net income...............................................        $  2,226    $ 2,124    $ 2,497
                                                                          ========    =======    =======
</TABLE>

                                       50
<PAGE>

                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

<TABLE>
<CAPTION>
                            Statements of Cash Flows


                                                                           Year Ended December 31,
                                                                           -----------------------
                                                                         1998         1997        1996
<S>                                                                   <C>        <C>         <C>    
Cash flow from operating activities:
   Net income.....................................................    $  2,226   $  2,124    $  2,497
   Adjustments to reconcile net income to net cash (used for)
     operating activities:
       Undistributed earnings of the subsidiaries ................      (2,464)    (2,404)     (2,767)
       Decrease (increase) in other assets........................        (164)      (149)         39
       Increase (decrease) in other liabilities...................          77         23          (5)
                                                                      --------    -------    --------
         Net cash used by operating activities....................        (325)      (406)       (236)
                                                                      --------    -------    --------
Cash flows from investing activities:
   Capital payments from bank.....................................           -        500           -
   Acquisition of business, net of cash acquired..................      (1,776)         -           -
   Advances to subsidiaries.......................................        (579)         -           -
                                                                      --------    -------    --------
         Net cash (used for) provided by investing activities.....      (2,355)       500           -
                                                                      --------    -------    --------
Cash flows from financing activities:
   Net repayments of long-term borrowings.........................      (1,319)      (159)       (146)
   Purchase of treasury stock.....................................        (494)         -           -
   Proceeds from issuance of common stock.........................      15,018         67          19
   Dividends paid.................................................        (212)      (126)       (101)
                                                                      --------    -------    --------
         Net cash provided by (used for) financing activities.....      12,993       (218)       (228)
                                                                      --------    -------    --------
Net increase (decrease) in cash and cash equivalents..............      10,313       (124)       (464)
Cash and cash equivalents at beginning of year....................         937      1,061       1,525
                                                                      --------    -------    --------
Cash and cash equivalents at end of year..........................    $ 11,250   $    937   $   1,061
                                                                     =========   ========   =========
</TABLE>

18.   Quarterly Financial Information (unaudited):

<TABLE>
<CAPTION>
                                                                       March 31     June 30  September 30    December 31
                                                                      ---------    --------  ------------    -----------
<S>                                                                  <C>          <C>        <C>             <C>    
1998
Interest income...................................................   $     3,781  $  4,189    $      4,104    $     4,292
Interest expense..................................................         1,661     1,722           1,571          1,547
                                                                     -----------  --------    ------------    -----------
Net interest income...............................................         2,120     2,467           2,533          2,745
Provision for loan losses.........................................          (106)      (26)           (111)          (266)
Noninterest income................................................           264       231             239            244
Noninterest expense...............................................         1,619     1,681           1,734          1,893
                                                                     -----------  --------    ------------    -----------
     Income before income taxes...................................           659       991             927            830
Provision for income taxes........................................           224       337             315            305
                                                                     -----------  --------    ------------    -----------
     Net income...................................................   $       435  $    654    $        612    $       525
                                                                     ===========  ========    ============    ===========
Basic earnings per share..........................................   $      .15   $    .16    $        .15    $       .13
                                                                     ===========  ========    ============    ===========
Diluted earnings per share........................................   $      .14   $    .15    $        .15    $       .13
                                                                     ===========  ========    ============    ===========
</TABLE>

                                       51
<PAGE>

                     COWLITZ BANCORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands of dollars, except number of shares and per share amounts)

<TABLE>
<CAPTION>
                                                                       March 31     June 30   September 30     December 31
                                                                     ----------   ---------   ------------     -----------
<S>                                                                  <C>          <C>        <C>              <C>    
1997
Interest income...................................................   $     3,594  $  3,622    $      3,919    $     3,951
Interest expense..................................................         1,761     1,676           1,796          1,709
                                                                      ----------  --------    ------------    -----------
Net interest income...............................................         1,833     1,946           2,123          2,242
Provision for loan losses.........................................           (91)      (98)           (111)           (75)
Noninterest income................................................           154       161             219            215
Noninterest expense...............................................         1,116     1,214           1,509          1,446
                                                                      ----------  --------    ------------    -----------
     Income before income taxes...................................           780       795             722            936
Provision for income taxes........................................           265       271             245            328
                                                                      ----------  --------    ------------    -----------
     Net income...................................................   $       515  $    524    $        477    $       608
                                                                     ===========  ========    ============    ===========
Basic earnings per share..........................................   $      .20   $    .20    $        .18    $       .23
                                                                     ===========  ========    ============    ===========
Diluted earnings per share........................................   $      .20   $    .20    $        .18    $       .22
                                                                     ===========  ========    ============    ===========
</TABLE>

     As discussed in Footnote 1, the Company has restated its  historical  basic
and diluted earnings per share to conform with SAB No. 98.

<TABLE>
<CAPTION>

                                     Quarter ended        Quarter ended        Quarter ended                Quarter ended
                                     March 31, 1997       June 30, 1997      September 30, 1997          December 31, 1997
                                   Basic    Diluted     Basic   Diluted       Basic     Diluted          Basic     Diluted
                                   -----    -------     -----   -------       -----     -------          -----     -------
<S>                              <C>        <C>         <C>     <C>          <C>        <C>             <C> 
   Previously reported EPS.....  $   .17    $   .17     $  .19  $ .19        $  .17     $ .17            $ .22     $ .22
   Restated EPS................  $   .20    $   .20     $  .20  $ .20        $  .18     $ .18            $ .23     $ .22

</TABLE>



















                                       52
<PAGE>

Item 9.  Changes in and disagreements with accountants

     None

                                    PART III

Item 10.  Directors and executive officers of the registrant

     The  response to this item is  incorporated  by  reference  to the sections
entitled "Security  ownership of directors and executive  officers,  Election of
directors,  Information regarding the board of directors and its committees," in
the Company's 1999 Proxy Statement.

Item 11  Executive Compensation

     The  response  to this item is  incorporated  by  reference  to the section
entitled "Executive Compensation" in the Company's 1999 Proxy Statement.

Item 12  Security ownership of certain beneficial owners and management

     The response to this item is incorporated by reference  entitled  "Security
ownership of directors  and  executive  officers"  in the  Company's  1999 Proxy
Statement.

Item 13  Certain relationships and related transactions

     The response to this item is  incorporated by reference  entitled  "Related
party transactions" in the Company's 1999 Proxy Statement.

Item 14  Exhibits, Financial Statement schedules and reports on form 8-K

     a.  No Form 8-Ks were filed during the fourth quarter.

     b.  The exhibit list is set forth on the Exhibit Index included herein.























                                       53

<PAGE>
                                   Signatures

     Pursuant  to the  requirements  of  Section  13 or 159d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 25th day of
March, 1999.


COWLITZ BANCORPORATION
(Registrant)


/s/ Charles W. Jarrett
Charles W. Jarrett
President/Chief Operating Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant in the capacities indicated on the 25th day of March, 1999.

Principal Executive Officer:

/s/ Charles W. Jarrett
President/Chief Operating Officer


Principal Executive Officer:

/s/ Don P. Kiser
Don P. Kiser
Vice President/Chief Financial Officer

Accounting Officer:

/s/ Donna P. Gardner
Donna P. Gardner
Vice-President/Secretary-Treasurer

Remaining Directors:

/s/ Benjamin Namatinia                       /s/ Mark F. Andrews, Jr.
Benjamin Namatinia                           Mark F. Andrews, Jr.
Chairman/Chief Executive Officer             Director

/s/ E. Chris Searing                         /s/ Larry M. Larson
E. Chris Searing                             Larry M. Larson
Director                                     Director

<PAGE>
                                  EXHIBIT INDEX

3.1*     Form of Restated and Amended Articles of Incorporation of Registrant.
3.2*     Bylaws of Registrant.
10.1*    Advances Security and Deposit Agreement dated March 29, 1991 between
          Federal Home Loan Bank of Seattle and Cowlitz Bank.
10.2*    Federal Home Loan Bank of Seattle Form of Promissory Note
          (Credit Line Fixed Rate Advance).
10.3*    Purchase and Assumption Agreement dated as of March 5, 1997 between
          Wells Fargo Bank, N.A. and Cowlitz Bank.
10.4*    Lease Agreement dated October 7, 1963 between Twin City
          Development Co. and Bank of Cowlitz County.
10.5*    Assignment of Lease dated March 4, 1976 between Bank of the West
          and Old National Bank of Washington.
10.6*    Assignment of Lease dated March 30, 1979 between Old National Bank
          of Washington and Pacific National Bank of Washington.
10.7*    Extension of Lease dated April 1, 1989 between Triangle Development
          Company and First Interstate Bank of Washington, N.A.
10.8*    Employment Agreement dated January 1, 1998 between Cowlitz
          Bancorporation and Charles W. Jarrett.
10.9*    Employment Agreement dated January 1, 1998 between Cowlitz
          Bancorporation and Ben Namatinia.
10.10*   Cowlitz Bancorporation 1997 Stock Option Plan.
10.11*   Form of Stock Option Agreement.
10.12*   Cowlitz Bancorporation Employee Stock Purchase Plan.
11.1     Computation of Per Share Earnings. (Included in Note 1 to the
          Consolidated Financial Statements included herein)
21*      List of all Subsidiaries of the Registrant
23       Consent of Arthur Andersen LLP
27       Financial Data Schedule.

     * Incorporated by reference from  Registration  Statement on Form S-1, Reg.
No. 333-44355