---

---





U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C.  20549



Form 10-Q



|[X]  | Quarterly report Pursuant to section 13 or 15(d) of the Securities and Exchange act of 1934
                                        For the quarter ended September 30, 2003
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[  ] | Transition report pursuant to section 13 or 15(d) of the Securities and Exchange act of 1934
          For the transition period from ________ to ________                  

Commission file number  0-23881



COWLITZ BANCORPORATION
(Exact name of registrant as specified in its charter)



|Washington
Sate or other jurisdiction of
incorporation or organization | 91-1529841
(IRS Employer Identification No.)
|---------------------------------------------------------------------- | --------------------------------------------

927 Commerce Ave., Longview, Washington  98632
(Address of principal executive offices)  (Zip Code)



(360) 423-9800(Registrant's telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

Yes[ ] No [X]

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

Common Stock, no par value on October 31, 2003: 3,885,652 shares



1

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COWLITZ BANCORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS



PAGEPart I
FINANCIAL INFORMATIONItem 1.
Financial StatementsConsolidated Statements of Condition -
     September 30, 2003 and December 31, 2002
3Consolidated Statements of Income -
     Three months and nine months ended September 30, 2003 and September 30, 2002
4Consolidated Statements of Changes in Shareholders' Equity -
     Year ended December 31, 2002 and nine months ended September 30, 2003
5Consolidated Statements of Cash Flows -
     Nine months ended September 30, 2003 and September 30, 2002
6Notes to Consolidated Financial Statements
7-13Item 2.
Management's Discussion and Analysis of Financial Condition 
     And Results of Operations
14-25Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26Item 4.
Controls and Procedures
26Part II
OTHER INFORMATIONItem 1.
Legal Proceedings
26Item 2.
Changes in Securities and Use of Proceeds
26Item 3.
Defaults upon Senior Securities
26Item 4.
Submission of Matters to a Vote of Security Holders
27Item 5.
Other Information
27Item 6.
Exhibits and Reports on Form 8-K
27Signatures
28Certification of Chief Executive Officer and Chief Financial Officer
29-31


Forward-Looking Statements

Management's discussion and the information in this document and the accompanying financial statements contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by words such as "expect", "believe", "intend", "anticipate", "estimate" or similar expressions, and are subject to risks and uncertainties that could cause actual results to differ materially from those stated.  Examples of such risks and uncertainties that could have a material adverse effect on the operations and future prospects of the Company, and could render actual results different from those expressed in the forward-looking statements, include, without limitation: changes in general economic conditions, competition for financial services in the market area of the Company, the level of demand for loans, quality of the loan and investment portfolio, deposit flows, legislative and regulatory initiatives, and monetary and fiscal policies of the U.S. Government affecting interest rates. The reader is advised that this list of risks is not exhaustive and should not be construed as any prediction by the Company as to which risks would cause actual results to differ materially from those indicated by the forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements.



2

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements



COWLITZ BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CONDITION(dollars in thousands)(unaudited)
      
      (audited)September 30,
      
      December 31,ASSETS
      
      2003
      
      2002Cash and cash equivalents
      $
      35,290
      $
      43,691Investment securities:Investments available-for-sale (at fair value, cost of $37,279 and$32,759 at September 30, 2003 and December 31, 2002, respectively)
      
      37,649
      
      33,276Investments held-to-maturity (at amortized cost, fair value of $5,346 and$362 at September 30, 2003 and December 31, 2002, respectively)
      
      5,319
      
      357Total
      investment securities
      
      42,968
      
      33,633Federal Home Loan Bank stock, at cost
      
      2,013
      
      2,346Loans held-for-sale
      
      11,221
      
      63,645Loans, net of deferred loan fees
      
      167,307
      
      194,506Allowance for loan losses
      
      (5,621)
      
      (6,150)Total loans, net
      
      161,686
      
      188,356Premises and equipment, net of accumulated depreciation of $4,870 and$4,586 at September 30, 2003 and December 31, 2002, respectively
      
      4,289
      
      4,377Cash surrender value of bank owned life insurance
      
      8,074
      
      -Goodwill
      
      2,323
      
      2,352Intangible assets, net of accumulated amortization of $1,668 and$1,468 at September 30, 2003 and December 31, 2002, respectively
      
      302
      
      502Accrued interest receivable and other assets
      
      5,408
      
      6,262TOTAL ASSETS
      $
      273,574
      $
      345,164LIABILITIESDeposits:Non-interest-bearing demand
      $
      51,381
      $
      46,539Savings and interest-bearing demand
      
      99,091
      
      108,961Certificates of deposit
      
      79,054
      
      134,620Total deposits
      
      229,526
      
      290,120Short-term borrowings
      
      1,000
      
      2,525Long-term borrowings
      
      8,471
      
      18,706Accrued interest payable and other liabilities
      
      1,773
      
      2,550TOTAL LIABILITIES
      
      240,770
      
      313,901SHAREHOLDERS' EQUITYPreferred stock, no par value; 5,000,000 shares authorized, no sharesissued and outstanding at September 30, 2003 and December 31, 2002
      
      -
      
      -Common stock, no par value; 25,000,000 shares authorized with3,884,232 and 3,818,272 shares issued and outstanding atSeptember 30, 2003 and December 31, 2002, respectively
      
      17,880
      
      17,491Additional paid-in capital
      
      1,538
      
      1,538Retained earnings
      
      13,142
      
      11,894Accumulated other comprehensive income, net of taxes
      
      244
      
      340TOTAL SHAREHOLDERS' EQUITY
      
      32,804
      
      31,263TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
      $
      273,574
      $
      345,164See accompanying notes




3



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COWLITZ
      BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(dollars
      in thousands, except per share amounts)Three Months
      Ended
      
      Nine Months
      EndedSeptember 30,
      
      September 30,(unaudited)
      
      2003
      
      2002
      
      2003
      
      2002INTEREST
      INCOMEInterest and
      fees on loans
      $
      3,439
      $
      4,830
      $
      11,451
      $
      14,651Interest on
      taxable investment securities
      
      205
      
      441
      
      659
      
      1,324Interest on
      non-taxable investment securities
      
      27
      
      4
      
      36
      
      11Other interest
      and dividend income
      
      115
      
      155
      
      450
      
      563Total interest income
      
      3,786
      
      5,430
      
      12,596
      
      16,549INTEREST
      EXPENSESavings and
      interest-bearing demand
      
      276
      
      475
      
      915
      
      1,312Certificates
      of deposit
      
      682
      
      1,320
      
      2,546
      
      4,755Short-term
      borrowings
      
      3
      
      12
      
      15
      
      36Long-term
      borrowings
      
      164
      
      235
      
      533
      
      706Total interest expense
      
      1,125
      
      2,042
      
      4,009
      
      6,809Net interest income before
      provision for loan losses
      
      2,661
      
      3,388
      
      8,587
      
      9,740PROVISION
      (BENEFIT) FOR LOAN LOSSES
      
      (36)
      
      352
      
      530
      
      1,007Net interest income after
      provision for loan losses
      
      2,697
      
      3,036
      
      8,057
      
      8,733NON-INTEREST INCOMEGains on loans
      sold
      
      1,110
      
      1,323
      
      4,106
      
      3,495Other mortgage
      and escrow fees
      
      580
      
      1,169
      
      2,735
      
      2,895Service
      charges on deposit accounts
      
      211
      
      191
      
      695
      
      540Credit card
      income
      
      175
      
      142
      
      471
      
      399Increase in
      cash surrender value of bank-owned life insurance
      
      74
      
      -
      
      74
      
      -Net gains on
      sales of investment securities available-for-sale
      
      -
      
      49
      
      -
      
      88Loss on sale
      of repossessed assets
      
      (87)
      
      (42)
      
      (50)
      
      (21)Fees for
      fiduciary and other customer services
      
      112
      
      141
      
      348
      
      389Total non-interest income
      
      2,175
      
      2,973
      
      8,379
      
      7,785NON-INTEREST EXPENSESalaries and
      employee benefits
      
      2,208
      
      2,897
      
      7,297
      
      7,915Net occupancy
      and equipment expense
      
      566
      
      572
      
      1,778
      
      1,740Accounting,
      legal and other professional services
      
      329
      
      326
      
      1,275
      
      862Credit card
      expense
      
      163
      
      135
      
      469
      
      382FDIC deposit
      insurance
      
      119
      
      140
      
      390
      
      430Cost relating
      to other real estate owned
      
      46
      
      78
      
      147
      
      209Other
      non-interest expenses
      
      974
      
      1,060
      
      3,173
      
      3,026Total non-interest expense
      
      4,405
      
      5,208
      
      14,529
      
      14,564Income from continuing
      operations before provision for income taxes
      
      467
      
      801
      
      1,907
      
      1,954PROVISION
      FOR INCOME TAXES
      
      147
      
      287
      
      659
      
      346Income from continuing
      operations
      
      320
      
      514
      
      1,248
      
      1,608DISCONTINUED OPERATIONS:INCOME FROM
      OPERATIONS, NET OF TAX
      
      -
      
      -
      
      -
      
      6GAIN ON
      DISPOSAL, NET OF TAX
      
      -
      
      -
      
      -
      
      279Income from discontinued
      operations
      
      -
      
      -
      
      -
      
      285Income before cumulative
      effect of a change in accounting principle
      
      320
      
      514
      
      1,248
      
      1,893CUMULATIVE
      EFFECT OF A CHANGE INACCOUNTING
      PRINCIPLE, NET OF TAX
      
      -
      
      -
      
      -
      
      (791)Net income
      $
      320
      $
      514
      $
      1,248
      $
      1,102BASIC
      EARNINGS (LOSS) PER SHARE OF COMMON STOCKContinuing
      operations
      $
      0.08
      $
      0.14
      $
      0.32
      $
      0.42Discontinued
      operations
      
      -
      
      -
      
      -
      
      0.08Cumulative
      effect of a change in accounting principle
      
      -
      
      -
      
      -
      
      (0.21)Net income per
      basic share of common stock
      $
      0.08
      $
      0.14
      $
      0.32
      $
      0.29DILUTED
      EARNINGS (LOSS) PER SHARE OF COMMON STOCKContinuing
      operations
      $
      0.08
      $
      0.13
      $
      0.31
      $
      0.42Discontinued
      operations
      
      -
      
      -
      
      -
      
      0.08Cumulative
      effect of a change in accounting principle
      
      -
      
      -
      
      -
      
      (0.21)Net income per
      diluted share of common stock
      $
      0.08
      $
      0.13
      $
      0.31
      $
      0.29WEIGHTED-AVERAGE SHARES OUTSTANDING - BASIC
      
      3,872,052
      
      3,779,679
      
      3,842,438
      
      3,739,441WEIGHTED-AVERAGE SHARES OUTSTANDING - DILUTED
      
      4,037,631
      
      3,892,895
      
      3,967,981
      
      3,824,697See
      accompanying notes




4



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COWLITZ
      BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY(dollars
      in thousands)AccumulatedAdditional
      
      
      
      Other
      
      TotalCommon stock
      
      Paid-in
      
      Retained
      
      Comprehensive
      
      Shareholders'
      
      ComprehensiveShares
      
      
      Amount
      
      Capital
      
      Earnings
      
      Income (Loss)
      
      Equity
      
      Income (Loss)BALANCE,
      December 31, 2001
      
      3,692,560
      
      $
      16,802
      $
      1,538
      $
      10,398
      $
      10
      $
      28,748Comprehensive
      income:Net income
      
      -
      
      
      -
      
      -
      
      1,496
      
      -
      
      1,496
      $
      1,496Net changes in
      unrealized gains oninvestments
      available-for-sale,net of deferred taxes of
      $176
      
      -
      
      
      -
      
      -
      
      -
      
      330
      
      330
      
      330Comprehensive
      income
      
      
      
      
      
      
      
      
      
      
      
      
      
      $
      1,826Proceeds from
      the exercise ofstock options
      
      87,600
      
      
      479
      
      -
      
      -
      
      -
      
      479Issuance of
      common stock inconnection with
      acquisition
      
      38,112
      
      
      210
      
      -
      
      -
      
      -
      
      210BALANCE,
      December 31, 2002
      
      3,818,272
      
      
      17,491
      
      1,538
      
      11,894
      
      340
      
      31,263Comprehensive
      income:Net income
      
      -
      
      
      -
      
      -
      
      1,248
      
      -
      
      1,248
      $
      1,248Net changes in
      unrealized gains oninvestments
      available-for-sale,net of deferred taxes of
      $42
      
      -
      
      
      -
      
      -
      
      -
      
      (96)
      
      (96)
      
      (96)Comprehensive
      income
      
      
      
      
      
      
      
      
      
      
      
      
      
      $
      1,152Proceeds from
      the exercise ofstock options
      
      65,960
      
      
      389
      
      -
      
      -
      
      -
      
      389BALANCE,
      September 30, 2003
      
      3,884,232
      
      $
      17,880
      $
      1,538
      $
      13,142
      $
      244
      $
      32,804(unaudited)See
      accompanying notes




5



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COWLITZ
      BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(dollars
      in thousands)Nine
      Months EndedSeptember
      30,2003
      
      2002(unaudited)CASH FLOWS FROM
      OPERATING ACTIVITIESNet income from continuing
      operations, net of a change in accounting principle in 2002
      
      $
      1,248
      $
      817Adjustments to reconcile
      net income from continuing operations to net cash from operating
      activities:Deferred tax provision
      (benefit)
      
      
      52
      
      (348)Depreciation and
      amortization
      
      
      604
      
      671Impairment of goodwill
      
      
      -
      
      1,208Provision for loan losses
      
      
      530
      
      1,007Increase in cash surrender
      value of bank owned life insurance
      
      
      (74)
      
      -Net amortization of
      investment security premiums and accretion of discounts
      
      
      101
      
      251Federal Home Loan Bank
      stock dividends
      
      
      (95)
      
      (174)Net loss on sales of
      repossessed assets
      
      
      50
      
      21Gain on the sale of
      investment securities available-for-sale
      
      
      -
      
      (88)Loss on the disposal of
      premises and equipment
      
      
      11
      
      20Gains on loans sold
      
      
      (4,106)
      
      (3,495)Origination of loans
      held-for-sale
      
      
      (334,781)
      
      (312,354)Proceeds from loan sales
      
      
      391,311
      
      304,025Decrease (increase) in
      accrued interest receivable and other assets
      
      
      811
      
      (387)Decrease in accrued
      interest payable and other liabilities
      
      
      (777)
      
      (1,333)Net cash from continuing
      operations
      
      
      54,885
      
      (10,159)Net income from
      discontinued operations
      
      
      -
      
      285Adjustments to reconcile
      net income from discontinued operations to net cash from operating
      activities:Gain on sale of
      discontinued operations
      
      
      -
      
      (423)Increase in accrued
      interest receivable and other assets
      
      
      -
      
      (16)Increase in accrued
      interest payable and other liabilities
      
      
      -
      
      120Net cash from discontinued
      operations
      
      
      -
      
      (34)Net cash from operating
      activities
      
      
      54,885
      
      (10,193)CASH FLOWS FROM
      INVESTING ACTIVITIESPurchase of bank owned
      life insurance
      
      
      (8,000)
      
      -Proceeds from sale of
      foreclosed assets
      
      
      1,634
      
      529Proceeds from maturities
      of investment securities held-to-maturity
      
      
      -
      
      2,599Proceeds from maturities
      and sales of investment securities available-for-sale
      
      
      17,967
      
      26,866Purchases of investment
      securities:Held-to-maturity
      
      
      (4,965)
      
      (559)Available-for-sale
      
      
      (22,586)
      
      (36,356)Proceeds from redemption
      of Federal Home Loan Bank stock
      
      
      428
      
      1,391Net decrease in loans
      
      
      24,529
      
      15,206Purchases of premises and
      equipment
      
      
      (331)
      
      (58)Proceeds from the sale of
      premise and equipment
      
      
      3
      
      318Net proceeds from the sale
      of discontinued operations
      
      
      -
      
      3,345Net cash from investment
      activities
      
      
      8,679
      
      13,281CASH FLOWS FROM
      FINANCING ACTIVITIESNet (decrease) increase in
      demand, savings, and interest-bearing demand deposits
      
      
      (5,028)
      
      33,494Net decrease in
      certificates of deposit
      
      
      (55,566)
      
      (42,962)Net decrease in short-term
      borrowings
      
      
      (1,525)
      
      -Repayment of long-term
      borrowings
      
      
      (10,235)
      
      (227)Proceeds from the exercise
      of stock options
      
      
      389
      
      623Net cash from financing
      activities
      
      
      (71,965)
      
      (9,072)Net decrease in cash and
      cash equivalents
      
      
      (8,401)
      
      (5,984)CASH AND CASH
      EQUIVALENTS, beginning of period
      
      
      43,691
      
      50,177CASH AND CASH
      EQUIVALENTS, end of period
      
      $
      35,290
      $
      44,193See accompanying notes




6



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



1. Nature of Operations
2. Principles of Consolidation
3. Cash and Cash Equivalents
4. Use of Estimates in the Preparation of Financial Statements



7



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



1. Earnings Per Share



Three Months
      EndedSeptember 30,2003
      
      2002Weighted-average shares -
      basic
      
      3,872,052
      
      3,779,679Effect of assumed
      conversion of stock options
      
      165,579
      
      113,216Weighted-average shares -
      diluted
      
      4,037,631
      
      3,892,895Nine Months
      EndedSeptember 30,2003
      
      2002Weighted-average shares -
      basic
      
      3,842,438
      
      3,739,441Effect of assumed
      conversion of stock options
      
      125,543
      
      85,256Weighted-average shares -
      diluted
      
      3,967,981
      
      3,824,697




> Options to purchase 275,066 shares of common stock with exercise prices ranging from $7.91 to $12.00, with an average price of $11.09, were outstanding at September 30, 2003 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares.  These options expire from 2008-2013.

1. Recently Issued Accounting Standards



8



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



1. Stock-Based Compensation



9



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



1. Comprehensive Income
2. Segments of an Enterprise and Related Information



10



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



> Summarized financial information for the three months and nine months ended September 30, 2003 and 2002, concerning the Company's reportable segments is shown in the following tables:



Three Months Ended September 30, 2003Mortgage
      
      HoldingBanking
      
      Banking
      
      Company
      
      Intersegment
      
      Consolidated(unaudited)Interest income
      $
      3,594
      $
      543
      $
      3
      $
      (354)
      $
      3,786Interest expense
      
      1,110
      
      313
      
      56
      
      (354)
      
      1,125Net interest
      income
      
      2,484
      
      230
      
      (53)
      
      -
      
      2,661Provision (benefit) for loan losses
      
      126
      
      -
      
      (162)
      
      -
      
      (36)Non-interest income
      
      473
      
      1,696
      
      6
      
      -
      
      2,175Non-interest expense
      
      2,709
      
      1,635
      
      61
      
      -
      
      4,405Income before provisionfor
      income taxes
      
      122
      
      291
      
      54
      
      -
      
      467Provision for income taxes
      
      27
      
      100
      
      20
      
      -
      
      147Net
      income
      $
      95
      $
      191
      $
      34
      $
      -
      $
      320Depreciation and amortization
      $
      158
      $
      29
      $
      -
      $
      -
      $
      187Three Months Ended September 30, 2002Mortgage
      
      HoldingBanking
      
      Banking
      
      Company
      
      Intersegment
      
      Consolidated(unaudited)Interest income
      $
      4,916
      $
      872
      $
      4
      $
      (362)
      $
      5,430Interest expense
      
      2,036
      
      309
      
      59
      
      (362)
      
      2,042Net interest
      income
      
      2,880
      
      563
      
      (55)
      
      -
      
      3,388Provision for loan losses
      
      355
      
      -
      
      (3)
      
      -
      
      352Non-interest income
      
      430
      
      2,543
      
      -
      
      -
      
      2,973Non-interest expense
      
      2,793
      
      2,335
      
      80
      
      -
      
      5,208Income (loss) before provision(benefit) for income taxes
      
      162
      
      771
      
      (132)
      
      -
      
      801Provision (benefit) for income taxes
      
      67
      
      266
      
      (46)
      
      -
      
      287Net
      income (loss)
      $
      95
      $
      505
      $
      (86)
      $
      -
      $
      514Depreciation and amortization
      $
      170
      $
      27
      $
      -
      $
      -
      $
      197




The segment information for the three months ended September 30, 2003 includes a credit to the provision for loan losses for the Holding Company segment, generated from the recovery of a previously charged-off loan.



11



---



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



Nine Months Ended September 30, 2003Mortgage
      
      HoldingBanking
      
      Banking
      
      Company
      
      Intersegment
      
      Consolidated(unaudited)Interest income
      $
      11,672
      $
      2,239
      $
      18
      $
      (1,333)
      $
      12,596Interest expense
      
      3,969
      
      1,204
      
      169
      
      (1,333)
      
      4,009Net interest
      income
      
      7,703
      
      1,035
      
      (151)
      
      -
      
      8,587Provision for loan losses
      
      (526)
      
      -
      
      1,056
      
      -
      
      530Non-interest income
      
      1,533
      
      6,840
      
      6
      
      -
      
      8,379Non-interest expense
      
      8,203
      
      6,068
      
      258
      
      -
      
      14,529Income (loss) before provision(benefit) for income taxes
      
      1,559
      
      1,807
      
      (1,459)
      
      -
      
      1,907Provision (benefit) for income taxes
      
      533
      
      623
      
      (497)
      
      -
      
      659Net
      income (loss)
      $
      1,026
      $
      1,184
      $
      (962)
      $
      -
      $
      1,248Depreciation and amortization
      $
      520
      $
      84
      $
      -
      $
      -
      $
      604Total assets
      $
      269,432
      $
      22,457
      $
      35,568
      $
      (53,883)
      $
      273,574




The segment information for the nine months ended September 30, 2003 includes a reclassification between the Banking and Holding Company segments of $901,000 for the provision for loan losses. This reclassification does not affect the consolidated results of operation or earnings per share, but has resulted in a benefit to the Banking segment presentation for the nine months ended September 30, 2003.



12



---



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



Nine Months Ended September 30, 2002Mortgage
      
      HoldingBanking
      
      Banking
      
      Company
      
      Intersegment
      
      Consolidated(unaudited)Interest income
      $
      15,392
      $
      2,315
      $
      10
      $
      (1,168)
      $
      16,549Interest expense
      
      6,755
      
      1,022
      
      176
      
      (1,144)
      
      6,809Net interest
      income
      
      8,637
      
      1,293
      
      (166)
      
      (24)
      
      9,740Provision for loan losses
      
      1,055
      
      -
      
      (48)
      
      -
      
      1,007Non-interest income
      
      1,282
      
      6,503
      
      -
      
      -
      
      7,785Non-interest expense
      
      8,192
      
      6,034
      
      338
      
      -
      
      14,564Income (loss) before provision(benefit) for income taxes
      
      672
      
      1,762
      
      (456)
      
      (24)
      
      1,954Provision (benefit) for income taxes
      
      264
      
      608
      
      (526)
      
      -
      
      346Net
      income (loss) from continuing operationsbefore cumulative effect of a change inin
      accounting principle anddiscontinued operations
      
      408
      
      1,154
      
      70
      
      (24)
      
      1,608Cumulative effect of a change inaccounting principle, net of tax
      
      -
      
      (791)
      
      -
      
      -
      
      (791)Net
      income (loss) from continuingoperations
      $
      408
      $
      363
      $
      70
      $
      (24)
      
      817Income from discontinuedoperations, net of tax
      
      
      
      
      
      
      
      
      
      285Net
      income
      
      
      
      
      
      
      
      
      $
      1,102Depreciation and amortization
      $
      584
      $
      84
      $
      -
      $
      -
      $
      668Total assets
      $
      356,207
      $
      69,504
      $
      33,748
      $
      (97,846)
      $
      361,613




13



---



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



1. Business Acquisitions and Sales:

> In February 2002, the Company sold substantially all assets of Business Finance Corporation (BFC) for a pre-tax gain of $423,000, or $279,000 after tax. The sale represents the disposal of a business segment and the gain from disposition has been recorded within discontinued operations for the nine months ended September 30, 2002. The following table summarizes the sale transaction:
>   
>   Net finance receivables sold
>         $
>         2,800Allowance for finance receivable
>         
>         (289)Other assets sold
>         
>         119Total assets
>         sold
>         $
>         2,630Loan payable to Company
>         $
>         2,800Other liabilities assumed
>         
>         212Cash paid by purchaser
>         
>         41Total
>         liabilities assumed
>         $
>         3,053Pre-tax gain
>         on sale
>         $
>         423

14



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Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended September 30, 2003 and 2002

During the third quarter of 2003 the Company's net income was $320,000, or $0.08 per diluted share, compared to net income of $514,000, or $0.13 per diluted share, in the third quarter of 2002. Net interest income was $727,000 lower for the three months ended September 30, 2003 when compared to the same period of 2002, but the Company benefited from a reduction in the provision for loan losses of $388,000. The third quarter of 2003 includes a credit to the provision for loan losses of $36,000, the result of a $162,000 recovery at the Holding Company of a previously charged-off loan. Both non-interest income and non-interest expenses are approximately $800,000 lower during the third quarter of 2003 when compared to the third quarter of 2002.

Results of Operations for the Nine Months Ended September 30, 2003 and 2002

During the nine months ended September 30, 2003, the Company recorded net income of $1.2 million, or $0.31 per diluted share, compared to net income of $1.1 million, or $0.29 per diluted share, for the comparable period of 2002. Net income from continuing operations prior to a change in accounting principle and discontinued operations (both discussed below) for the first nine months of 2002 was $1.6 million or $0.42 per diluted share. For the first three quarters of 2003, the Company's revenues (net interest income before provision for loan losses plus non-interest income) were $17.0 million, compared to revenues of $17.5 million during the same period in 2002. Non-interest expenses were $14.5 million for the nine months ended September 30, 2003 compared to $14.6 million for the nine months ended September 30, 2002.

During the first quarter of 2002, the Company recorded an impairment charge to the carrying amount of its goodwill from the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).  The impairment charge was recognized as a result of a transitional goodwill impairment test required by SFAS No. 142.  The charge totaled $791,000 or $0.21 per diluted share, net of tax of $417,000. The Company does not currently anticipate additional adjustments or charges related to SFAS No. 142. Net income from continuing and discontinued operations for the first nine months of 2002, prior to this charge, was $1.9 million or $0.50 per diluted share.

Net income for the nine months ended September 30, 2002 also included income from the discontinued operations of Business Finance Corporation (BFC) of $285,000, or $0.08 per diluted share, net of tax. Included in discontinued operations is a gain, net of tax, of $279,000 from the sale of BFC during the first quarter of 2002. The Company originally purchased BFC to diversify its business and to offer asset-based lending services to its customers. However, due to a poor return on investment and the desire to focus resources on the core banking business, the BFC subsidiary was sold in February 2002.

Net income for the nine months ended September 30, 2002 also includes an income tax benefit of $375,000 or $0.10 per diluted share. The deferred tax benefit resulted from a reduction in the Company's valuation allowance held against certain deferred tax assets, which were recorded in the first quarter of 2002 in connection with the sale of BFC. Income from continuing operations before provision for income taxes was $1.9 million and $2.0 million for the first nine months of 2003 and 2002, respectively.

Financial Condition as of September 30, 2003 and December 31, 2002

At September 30, 2003, total assets were $273.6 million and total liabilities were $240.8 million. Total assets have decreased $71.6 million or 20.7% from $345.2 million at December 31, 2002 and liabilities have decreased $73.1 million or 23.3% from $313.9 million at December 31, 2002.

The decline in total assets is due to a reduction of both loans and loans held-for-sale since December 31, 2002. At September 30, 2003, loans were $167.3 million compared to $194.5 million at December 31, 2002, a decline of $27.2 million or 14.0%. This reduction in loans is from a combination of charged-off balances of approximately $1.4 million and balances transferred to repossessed assets of approximately $1.6 million with loan pay-downs and pay-offs accounting for the remaining decline. The rate of decline in loans has slowed during the third quarter of 2003. At June 30, 2003, loans were $168.9 million. During the first six months of 2003 loan pay-offs were relatively high because during that time, many borrowers sought to renew their loans at lower rates. While the Bank makes every effort to be competitive for and retain favorable client relationships, management also used this time as an opportunity to encourage some customers representing weaker credits to seek alternative lending relationships. In other circumstances, the Bank decided not to match rates on loans that management deemed unprofitable.

Loans held-for-sale have decreased $52.4 million or 82.4% from $63.6 million at December 31, 2002 to $11.2 million at September 30, 2003. Although the prime and federal funds rates have declined 25 basis points during the first nine months of 2003, interest rates on mortgage loans have increased in the third quarter. The volumes of loans originated though the Company's mortgage segment has rapidly declined during the third quarter. An average of $119.2 million of residential mortgage loans were originated during each of the first two quarters of 2003, but only $96.4 million were originated during the quarter ended September 30, 2003.



15



---



A portion of the cash flows associated with the reductions in loans and loans held-for-sale have been reinvested in the Company's securities portfolio. Total securities are $9.4 million higher at September 30, 2003 than at December 31, 2002. In addition, an investment of $8.0 million was made in bank owned life insurance (BOLI) during the third quarter of 2003. The remaining cash was used to reduce the Company's brokered and out of area certificates of deposit and long-term borrowings as discussed below.

At September 30, 2003, the carrying value of the Company's goodwill is $29,000 lower than the balance at December 31, 2002. During 2001, an estimate of the final earn-out payment related to the purchase of Bay Mortgage of Bellevue, Washington was recognized and resulted in an increase to goodwill of $772,000. After all final adjustments to the earn-out calculation had been recorded and final payments had been made, a balance of $29,000 remained in the payable. During the third quarter of 2003, this balance was reversed against goodwill, resulting in the decline.

Reductions in the volumes of brokered and other higher rate certificates of deposit and borrowings from the Federal Home Loan Bank (FHLB) account for the majority of the decline in total liabilities from December 31, 2002 to September 30, 2003. The Company had $14.6 million in brokered deposits at September 30, 2003, or 6.4% of the $229.5 million total deposits compared to $29.7 million or 10.2% of $290.1 million of total deposits at December 31, 2002. Approximately $4.3 million of these brokered deposits are scheduled to mature during the remainder of 2003. Approximately $18.8 million in public fund certificates matured during the first nine months of 2003 and were not renewed. A reduction of $10.1 million in FHLB borrowings during the first two quarters of 2003 has reduced the Company's long-term borrowings to $8.5 million at September 30, 2003 compared to $18.7 million at December 31, 2002. Because the reduction in loans and loans held-for-sale has generated some excess cash and liquidity, management's current practice is to not renew brokered and public fund certificates or long-term borrowings as they mature. If future circumstances change to warrant increasing liquidity or cash balances, the Company retains the ability to access these funding sources.

Critical Accounting Policies

The Company's most critical accounting policy is related to the allowance for loan losses. The Company utilizes both quantitative and qualitative considerations in establishing an allowance for loan losses believed to be appropriate as of each reporting date. Quantitative factors include:

- historical loss experience,
- recent delinquency and charge-off experience,
- changes in the levels of non-performing loans,
- portfolio size, and
- other known factors regarding specific loans.



Qualitative factors include assessments of the types of loans within the loan portfolio as well as current local, regional, and national economic considerations. Changes in the above factors could have a significant affect on the determination of the allowance for loan losses. Management performs a full analysis, no less often than quarterly, to ensure that changes in estimated loan loss levels are adjusted on a timely basis. For further discussion of this significant management estimate, see "Allowance for Loan Losses."

Another critical accounting policy for the Company is that related to the carrying value of goodwill. During the first quarter of 2002, the Company recorded an impairment charge to the carrying amount of its goodwill related to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).  The impairment charge was recognized as a result of a transitional goodwill impairment test required by SFAS No. 142. The Company adopted a market valuation approach in assessing goodwill impairment and will measure the carrying value similarly at least annually under these accounting rules. Ongoing impairment analysis of the fair value of the remaining goodwill will involve a substantial amount of judgment, as will establishing and monitoring estimated amounts and lives of other intangible assets.  Also as required upon adoption of SFAS No. 142, the Company ceased amortization of goodwill on January 1, 2002.

Analysis of 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 the investment securities portfolio, and interest expense, principally on customer deposits and borrowings.  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.



16



---



Three months ended September 30, 2003 and 2002

The following table presents interest income and expense and the resulting yields earned, rates paid, interest rate spread, and net interest margin for the periods indicated.



Three Months Ended(unaudited)
        
        September 30,
        
        Increase(dollars in
        thousands)
        
        2003
        
        2002
        
        (Decrease)
        
        ChangeInterest
        Income (1)
        $
        3,806
        $
        5,431
        $
        (1,625)
        
        -29.9%Interest
        Expense
        
        1,125
        
        2,042
        
        (917)
        
        -44.9%Net Interest
        Income
        $
        2,681
        $
        3,389
        $
        (708)
        
        -20.9%Average
        Interest-Earning Assets
        $
        262,643
        $
        318,431
        $
        (55,788)
        
        -17.5%Average
        Interest-Bearing Liabilities
        $
        199,714
        $
        262,140
        $
        (62,426)
        
        -23.8%Average
        Yields Earned (2)
        
        5.80%
        
        6.82%
        
        -1.02%Average Rates
        Paid (2)
        
        2.25%
        
        3.12%
        
        -0.87%Net Interest
        Spread (2)
        
        3.55%
        
        3.70%
        
        -0.15%Net Interest
        Margin (2)
        
        4.08%
        
        4.26%
        
        -0.18%(1) Interest earned on non-taxable securities and loans has been
        computed on a 34% tax equivalent basis(2) Ratios for the three months ended September 30, 2003 and 2002 have
        been annualized




Comparing the quarter ended September 30, 2003 to the quarter ended September 30, 2002, interest income declined $1.6 million, interest expense declined $917,000, and tax effected net interest income decreased $708,000. Because yields earned declined more than rates paid, both the net interest spread and the net interest margin for the quarter ended September 30, 2003 were lower than during the quarter ended September 30, 2002.

The overall tax-equivalent average earning asset yield was 5.80% for the quarter ended September 30, 2003 compared to 6.82% for the quarter ended September 30, 2002. Contributing to the decline in interest rates was a 50 basis points reduction in the national federal funds rate and the Company's prime rate in November 2002. These interest rates declined another 25 basis points in June 2003. Earning assets averaged $262.6 million for the three months ended September 30, 2003, a decline of $55.8 million compared to $318.4 million for the same period of 2002. A change in asset mix from loans, loans held-for-sale, and investment securities to lower rate interest-earning deposits has also contributed to a lower overall yield comparing the periods. During the three months ended September 30, 2002, average loans and loans held-for-sale were 76.6% of total average interest-earning assets, and average interest-earning deposits were 5.8% of the total. During the same period of 2003, average loans and loans held-for-sale declined to 73.4% of average interest-earning assets, while average interest-earning deposits increased to 11.0% of the total. Total average investment securities, including both available-for-sale and held-to-maturity, have also declined contributing to the increase in interest-earning deposits. Average investment securities declined from 15.2% to 12.6% of the total average interest-earning assets for the three months ended September 30, 2003 and 2002, respectively.

The average cost of interest-bearing liabilities decreased to 2.25% for the quarter ended September 30, 2003 from 3.12% for the same period of 2002. Average interest-bearing liabilities decreased $62.4 million from $262.1 million for the three months ended September 30, 2002 to $199.7 million for the three months ended September 30, 2003. The majority of the decline in average interest-bearing liabilities is due to a reduction in brokered and public fund certificates of deposit, and FHLB borrowings. At September 30, 2003 the volume of brokered certificates was $14.6 million compared to $28.5 million at September 30, 2002. In addition, public fund certificates of deposit declined by $18.8 million comparing the two quarters. During the third quarter of 2003 the average volume of other borrowed money decreased to $8.5 million from $18.8 million during the third quarter of 2002.



17



---



Nine months ended September 30, 2003 and 2002

The following table presents interest income and expense and the resulting yields earned, rates paid, interest rate spread, and net interest margin for the periods indicated.



Nine Months
      Ended(unaudited)
      
      September 30,
      
      Increase(dollars in thousands)
      
      2003
      
      2002
      
      (Decrease)
      
      ChangeInterest Income (1)
      $
      12,636
      $
      16,553
      $
      (3,917)
      
      -23.7%Interest Expense
      
      4,009
      
      6,809
      
      (2,800)
      
      -41.1%Net Interest Income
      $
      8,627
      $
      9,744
      $
      (1,117)
      
      -11.5%Average Interest-Earning
      Assets
      $
      282,090
      $
      324,190
      $
      (42,100)
      
      -13.0%Average Interest-Bearing
      Liabilities
      $
      219,975
      $
      270,815
      $
      (50,840)
      
      -18.8%Average Yields Earned (2)
      
      5.97%
      
      6.81%
      
      -0.84%Average Rates Paid (2)
      
      2.43%
      
      3.35%
      
      -0.92%Net Interest Spread (2)
      
      3.54%
      
      3.46%
      
      0.08%Net Interest Margin (2)
      
      4.08%
      
      4.01%
      
      0.07%(1) Interest
      earned on non-taxable securities and loans has been computed on a 34% tax
      equivalent basis(2) Ratios for
      the nine months ended September 30, 2003 and 2002 have been annualized




Comparing the nine months ended September 30, 2003 to the nine months ended September 30, 2002, interest income declined $3.9 million, interest expense declined $2.8 million, and tax effected net interest income decreased $1.1 million. The average rates paid declined slightly more than the average yields earned resulting in a modest increase in both the net interest spread and net interest margin when comparing the nine-month periods.

The overall tax-equivalent average earning asset yield was 5.97% for the first nine months of 2003 compared to 6.81% for the same period of 2002. Contributing to the decline in interest rates was a 50 basis points reduction in the national federal funds rate and the Company's prime rate in November 2002. These interest rates declined another 25 basis points in June 2003. Earning assets averaged $282.1 million for the nine months ended September 30, 2003, a decline of $42.1 million compared to $324.2 million for the same period of 2002. A change in asset mix from loans, loans held-for-sale, and investment securities to lower rate interest-earning deposits has also contributed to a lower overall yield comparing the periods. During the nine months ended September 30, 2002, average loans, loans held-for-sale, and securities were 89.1% of total average interest-earning assets, and average interest-earning deposits were 8.9% of the total. During the same period of 2003, average loans, loans held-for-sale, and investment securities declined to 84.4% of average interest-earning assets, while average interest-earning deposits increased to 13.0% of the total.

The average cost of interest-bearing liabilities decreased to 2.43% for the nine months ended September 30, 2003 from 3.35% for the same period of 2002. Average interest-bearing liabilities decreased $50.8 million from $270.8 million for the first three quarters of 2002 to $220.0 million for the same period of 2003. The majority of the decline in average interest-bearing liabilities is due to a reduction in brokered and public fund certificates of deposit and FHLB borrowings as discussed above. During the nine months ended September 30, 2003, the average volume of other borrowed money decreased to $11.4 million from $18.9 million during the same period of 2002.

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 non-performing and impaired loans, evaluation of future economic trends in the Company's market area, and other factors relevant to the loan portfolio. The quarterly provision recorded as an increase to the allowance for loan losses is based upon estimates of probable losses inherent in the loan portfolio. The loss amount actually realized for these loans can vary significantly from the estimated amounts. See the "Allowance for Loan Losses" discussion for additional detail.



18



---



Three months ended September 30, 2003 and 2002

The Company's provision for loan losses was a credit of $36,000 for the quarter ended September 30, 2003 compared to $352,000 for the same period of 2002. During the third quarter of 2003, the Banking segment added $126,000 to its provision for loan losses, while the Holding Company recovered $162,000 of a loan previously charged-off. Because the Holding Company does not currently have any loans or an allowance for loan losses, any recovery of previously charged-off amounts flow through the income statement as a credit to the provision expense. For the three months ended September 30, 2003, charge-offs, net of recoveries, were $210,000 compared to net charge-offs of $114,000 for the three months ended September 30, 2002 and $2.3 million for the year ended December 31, 2002.

Nine months ended September 30, 2003 and 2002

The Company's provision for loan losses was $530,000 for the nine months ended September 30, 2003 and $1.0 million for the nine months ended September 30, 2002. Charge-offs, net of recoveries, were $1.1 million for the first nine months of 2003 compared to net charge-offs of $954,000 for the same period of 2002 and $2.3 million for the year ended December 31, 2002.

Future loan loss provisions will be based on Management's quarterly adequacy analysis of the allowance for loan losses. Management anticipates a possible further reduction in future provisions if the economy strengthens and bolsters the Company's borrowers' ability to repay or increases underlying collateral values of the loans.

Non-Interest Income

Three and nine months ended September 30, 2003 and 2002

Non-interest income consists of the following components:



Three
        Months Ended
        
        Nine Months
        Ended(unaudited)
        
        September 30,
        
        September 30,(dollars in thousands)
        
        2003
        
        2002
        
        2003
        
        2002Service charge on deposit
        accounts
        $
        211
        $
        191
        $
        695
        $
        540Gains on loans sold
        
        1,110
        
        1,323
        
        4,106
        
        3,495Mortgage brokerage fees
        
        336
        
        858
        
        1,830
        
        2,169Fiduciary income
        
        70
        
        63
        
        240
        
        205Escrow fees
        
        244
        
        311
        
        905
        
        726Credit Card income
        
        175
        
        142
        
        471
        
        399ATM income
        
        13
        
        4
        
        39
        
        69Safe deposit box fees
        
        -
        
        1
        
        27
        
        28Increase in cash
        surrender value of BOLI
        
        74
        
        -
        
        74
        
        -Loss on sale of
        repossessed assets
        
        (87)
        
        (42)
        
        (50)
        
        (21)Gain on sale of
        available-for-sale securities
        
        -
        
        49
        
        -
        
        88Other miscellaneous fees
        and income
        
        29
        
        73
        
        42
        
        87Total non-interest income
        $
        2,175
        $
        2,973
        $
        8,379
        $
        7,785




Non-interest income was $2.2 million for the quarter ended September 30, 2003, a decline of $798,000 from $3.0 million for the same period of 2002. For the nine-month periods ended September 30, 2003 and 2002, non-interest income was $8.4 million and $7.8 million, respectively, an increase of $594,000. Non-interest income generated by the mortgage banking segment continued to account for the majority of the total non-interest income for the periods. Gains on loans sold, mortgage brokerage fees, and escrow fees were $1.7 million, which accounted for 77.3% of the total non-interest income for the third quarter of 2003, and were $2.5 million or 83.3% for the same period of 2002. These income categories were $6.8 million, or 81.0% of the total non-interest income for the first three quarters of 2003, and were $6.4 million or 82.1% of the total non-interest income for the same period of 2002. The non-interest income generated by the mortgage banking segment is expected to continue to decrease as the volume of mortgage loans originated are declining. An investment of $8.0 million in bank owned life insurance (BOLI) during the third quarter of 2003 has generated $74,000 of non-interest income. Write-downs of the carrying value of certain repossessed assets generated a loss of $87,000 during the period.



19



---



Non-Interest Expense

Three and nine months ended September 30, 2003 and 2002

Non-interest expense consists of the following components:



Three Months Ended
        
        Nine Months Ended(unaudited)
        
        September 30,
        
        September 30,(dollars in
        thousands)
        
        2003
        
        2002
        
        2003
        
        2002Salaries and
        employee benefits
        $
        2,208
        $
        2,897
        $
        7,297
        $
        7,915Net occupancy
        and equipment
        
        566
        
        572
        
        1,778
        
        1,740Amortization
        of intangible assets
        
        66
        
        66
        
        199
        
        199Net cost of
        operation of other real estate owned
        
        46
        
        78
        
        147
        
        209Business
        taxes
        
        79
        
        139
        
        310
        
        438Data
        processing and communications
        
        126
        
        129
        
        363
        
        382Stationery
        and supplies
        
        54
        
        68
        
        169
        
        231Credit card
        expense
        
        163
        
        135
        
        469
        
        382Travel and
        education
        
        65
        
        61
        
        202
        
        147Loan expense
        
        268
        
        187
        
        469
        
        395Advertising
        
        47
        
        53
        
        103
        
        135Professional
        fees
        
        329
        
        326
        
        1,275
        
        862Postage and
        freight
        
        104
        
        131
        
        335
        
        371Contracted
        temporary employees
        
        45
        
        20
        
        338
        
        71FDIC
        insurance
        
        119
        
        140
        
        390
        
        430Other
        miscellaneous expenses
        
        120
        
        206
        
        685
        
        657Total
        non-interest expense
        $
        4,405
        $
        5,208
        $
        14,529
        $
        14,564




Total non-interest expenses declined $803,000 to $4.4 million for the quarter ended September 30, 2003 compared to $5.2 million for the quarter ended September 30, 2002. For the nine months ended September 30, 2003, total non-interest expenses of $14.5 million were relatively unchanged from $14.6 million for the same period of 2002.

Salary expenses have declined when comparing both the three and nine months ended September 30, 2003 to the same periods of 2002. At September 30, 2003, the Company had 172 full-time equivalent employees compared to 198 at September 30, 2002. During the third quarter of 2003, the volume of mortgage loans originated declined, contributing to a lower commission expense when compared to the third quarter of 2002. During the third quarter of 2003, Bay Mortgage originated $96.4 million of mortgage loans, down $37.5 million from $133.9 million originated during the third quarter of 2002. Also included in salary expenses are ordinary annual wage increases for many existing employees.

Net occupancy and equipment expenses consist of depreciation on premises and equipment, lease costs, parking, maintenance and repair expenses, utilities and related expenses. The Company's net occupancy expense was relatively steady when comparing the three and nine month periods ended September 30, 2003 to the corresponding periods of 2002.

Although the FDIC insurance premium rate remains unchanged at $.17 per $100 of domestic deposits when comparing the quarters and nine month periods ended September 30, 2003 and 2002, the total expense has declined due to a reduction in deposit volume. The FDIC sets 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 zero 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. 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 $0.0162 per $100 of deposits per year. Any increase in deposit insurance of FICO assessments could have an adverse effect on Cowlitz Bank's earnings.

Professional fees include exam and audit expenses, accounting, consulting and legal fees, and other professional fees. These expenses were unchanged from quarter to quarter, but have increased to $1.3 million for the nine months ended September 30, 2003 compared to $862,000 for the nine months ended September 30, 2002 Approximately $63,000 of the $413,000 increase comparing the nine month periods is legal expenditures for advice and opinions related to contracts, regulatory documentation, collection and repossession of loans, and various other administrative issues. Another $287,000 of the remaining increase comparing the nine month periods is attributable to consultation to establish or improve internal controls and procedures to improve regulatory reporting, and for employee placement services.



20



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Loan expenses for the nine month period ended September 30, 2003 include approximately $100,000 resulting from the write-off of prepaid mortgage loan expenses. These expenses, including appraisals and credit reports, were prepaid on behalf of potential borrowers when they applied for a mortgage loan. In some cases, these expenses were not collected from the borrower at the close of the loan, or the loan never closed. A recent review of prepaid mortgage expenses indicated these items should be charged to expense.

Contracted temporary employees have been utilized during 2003 to assist management on various special projects and to help during the transition of new management. The third quarter saw a reduction in the number and cost of these temporary employees, a trend Management expects to continue for the remainder of 2003. Business taxes are based on adjusted revenues, and the expense has declined when comparing the periods of 2003 to the periods of 2002 as overall revenues have declined. Although credit card expenses have increased during the three and nine months ended September 30, 2003 when compared to the same periods of 2002, an increase to the non-interest income associated with credit card fees has offset the higher expenses.

Income Taxes

Three months ended September 30, 20003 and 2002

During the third quarter of 2003 the provision for income taxes was $147,000 compared to $287,000 for the third quarter of 2002. These provisions resulted in an effective tax rate of 31.5% and 35.8% for the quarters ended September 30, 2003 and 2002, respectively.

Nine months ended September 30, 2003 and 2002

During the first three quarters of 2003 the provision for income taxes was $659,000 compared to $346,000 for the first three quarters of 2002. These provisions resulted in an effective tax rate of 34.6% and 17.7% for the same periods of 2003 and 2002, respectively. The second quarter of 2002 includes a $375,000 tax benefit related to the reversal of a deferred tax valuation allowance resulting from the sale of BFC in the first quarter of 2002. The sale of BFC generated a capital loss for tax purposes and a deferred tax asset on the Company's books, which was fully reserved as of the end of the first quarter of 2002. During the second quarter of 2002, the Company identified certain strategies for federal income tax purposes that resulted in the reversal of the valuation allowance with a corresponding income tax benefit of $375,000 for the period. The effective tax rate for the third quarter of 2002, excluding the $375,000 benefit, was 36.9%. The results from discontinued operations and the cumulative effect of a change in accounting principles disclosed on the consolidated statements of income are net of income taxes.

Loans

Total loans outstanding were $167.3 million and $194.5 million at September 30, 2003 and December 31, 2002, respectively.  Loan commitments such as home equity and other lines of credit, unused available credit on credit cards, and letters of credit, were $41.2 million at September 30, 2003 and $39.9 million at December 31, 2002. In addition, the Company had $11.2 million of loans held-for-sale at September 30, 2003 compared to $63.6 million at December 31, 2002.  During the first nine months of 2003, the Company funded $334.8 million of loans to be sold into the secondary market, and delivered $391.3 million to the market.  This compares to $312.4 million funded and $304.0 million delivered during the first nine months of 2002.

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



(unaudited)
        
        September 30, 2003
        
        December 31, 2002(dollars in
        thousands)
        
        Amount
        
        Percent
        
        Amount
        
        PercentCommercial
        $
        37,585
        
        22.39%
        $
        42,200
        
        21.62%Real estate
        construction
        
        19,976
        
        11.90%
        
        37,229
        
        19.07%Real estate
        commercial
        
        78,915
        
        47.00%
        
        82,763
        
        42.41%Real estate
        mortgage
        
        27,534
        
        16.40%
        
        28,370
        
        14.53%Consumer and
        other
        
        3,886
        
        2.31%
        
        4,626
        
        2.37%167,896
        
        100.00%
        
        195,188
        
        100.00%Deferred loan
        fees
        
        (589)
        
        
        
        (682)Total loans
        
        167,307
        
        
        
        194,506Allowance for
        loan losses
        
        (5,621)
        
        
        
        (6,150)Total loan, net
        $
        161,686
        
        
        $
        188,356




21



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Allowance for Loan Losses

The allowance for loan losses represents management's estimate of potential losses that 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 amount necessary for specific non-performing loans and estimates losses inherent in other loans. An important element in determining the adequacy of the allowance for loan losses is an analysis of loans by loan rating categories. At a loan's inception, management evaluates the credit risk by using a 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, and all loans rated 7-10 collectively comprise the Company's "watch list". The specific grades from 7-10 are "special mention", "substandard", "doubtful", and "loss", respectively. When indicators such as operating losses, collateral impairment or delinquency problems show that a credit may have weakened, the credit will be downgraded as appropriate. Similarly, as borrowers bring loans current, show improved cash flows, or improve the collateral position of a loan, the credits may be upgraded. Management reviews all credits periodically for changes in such factors. The result is an allowance with four components, specific reserves, a general allowance, special reserves, and unallocated reserves.

- Specific.
- General.
- Special.
- Unallocated.

Management establishes the allowance for loan losses by analyzing the volume and mix of the existing loan portfolio, in addition to other factors. Management analyzes:

- the volume and severity of non-performing loans and adversely classified credits;
- the level of net charge-offs previously experienced;
- 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;
- the general and local economic and business conditions affecting the Company's ability to collect on these loans;
- the relationship and trend over the past several years of recoveries in relation to charge-offs; and
- any changes in lending policies, lending management, or the loan review system.

Management also attempts 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 all 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 regulatory guidance in addition to the Company's own experience. There have been no changes to the Company's allowance for loan losses related to changes in methods or assumptions since December 31, 2002. Any adjustments or changes in the elements and components of the allowance since year-end are primarily the result of loan quality assessments and variations in total loan volumes.



22



---



Loans and other extensions of credit deemed uncollectible 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 that is charged to income is the amount necessary to adjust the allowance to the level determined through the above process.

Management's evaluation of the loan portfolio resulted in total allowances for loan losses of $5.6 million and $6.2 million at September 30, 2003 and December 31, 2002, respectively, a decline of approximately $600,000. The allowance, as a percentage of total loans, increased from 3.2% at year-end 2002 to 3.4% at September 30, 2003. Management believes the allowance for loan losses at both September 30, 2003 and December 31, 2002 is adequate to absorb potential losses.

In accordance with the Company's methodology for assessing the appropriate allowance for loan losses, the general portion of the allowance was $2.6 million at September 30, 2003 compared to $4.1 million at December 31, 2002. The general allowance has decreased from period to period as the volume of total loans has declined, and as loans on the Company's watch list requiring a higher reserve allocation have been upgraded to levels requiring a smaller reserve percentage. During the first nine months of 2003, the volume of loans on the Company's watch list has decreased by approximately $9.3 million.

At September 30, 2003, approximately $2.1 million 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 loans, an increase from $1.6 million at December 31, 2002.

The combined special and unallocated allowance was $876,000 and $460,000 at September 30, 2003 and December 31, 2002, respectively. Although the volume of loans requiring specific or general reserves has declined, the combined special and unallocated allowance has increased to reflect imprecision in the valuation process and the continuing weakness in local economies.

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



(unaudited)
        
        Nine Months Ended
        
        Year Ended(balances exclude amounts from discontinued operations)
        
        September 30,
        December
        31,(dollars in thousands)
        
        2003
        
        2002
        
        2002Loans outstanding at end of period, net of deferred fees (1)
        $
        167,307
        $
        215,266
        $
        194,506Average loans outstanding during the period
        $
        176,470
        $
        224,155
        $
        219,231Allowance for loan losses, beginning of period
        $
        6,150
        $
        5,710
        $
        5,710Loans charged off:Commercial
        
        818
        
        925
        
        2,111Real Estate
        
        488
        
        164
        
        415Consumer
        
        71
        
        7
        
        7Credit Cards
        
        30
        
        79
        
        83Total loans
        charged-off
        
        1,407
        
        1,175
        
        2,616Recoveries:Commercial
        
        84
        
        78
        
        99Real Estate
        
        205
        
        126
        
        156Consumer
        
        52
        
        1
        
        1Credit Cards
        
        7
        
        16
        
        17Total
        recoveries
        
        348
        
        221
        
        273Provision for loan losses
        
        530
        
        1,007
        
        2,783Allowance for loan losses, end of period
        $
        5,621
        $
        5,763
        $
        6,150Net loans charged-off during the period
        
        1,059
        
        954
        
        2,343Ratio of net loans charged-off to average loans outstanding
        
        0.60%
        
        0.43%
        
        1.07%Ratio of allowance for loan losses to loans at end of period
        
        3.36%
        
        2.68%
        
        3.16%(1) Excludes loans held-for-sale




23



---



Impaired Loans

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) unless available information strongly suggests impairment. 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 that, after considering economic and business conditions, collection efforts, and collateral position, the borrower's financial condition indicates that collection of principal is not probable.

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

Non-Performing Assets

Non-performing loans include all loans greater than 90 days past due with respect to either principal or interest, and all loans to which the accrual of interest has been suspended. These loans, combined with repossessed real estate and other repossessed assets, are collectively considered to be non-performing assets. The following table presents information on all non-performing assets:



(unaudited)
        
        September 30,
        
        December 31,(dollars in thousands)
        
        2003
        
        2002Loans on non-accrual status
        $
        5,481
        $
        5,097Loans past due greater than 90 days but
        not on non-accrual status
        
        15
        
        982Other real estate owned
        
        1,233
        
        1,304Other repossessed assets
        
        2
        
        4Total non-performing assets
        $
        6,731
        $
        7,387Total assets
        $
        273,574
        $
        345,164Percentage of non-performing assets to
        total assets
        
        2.46%
        
        2.14%




At September 30, 2003 non-performing assets were $6.7 million or 2.46% of total assets compared to $7.4 million or 2.14% of total assets at December 31, 2002. Comparing the balances at December 31, 2002 to the balances at September 30, 2003, an increase of $384,000 in total non-accrual loans has been offset by a decrease of $967,000 in loans over 90 days past due but still accruing, and a decline of $71,000 in the balance of other real estate owned. Approximately $4.5 million of the $5.5 million of non-accrual loans at September 30, 2003 are primarily secured by real estate and the remainder consists of commercial and consumer loans with varying collateral. Any losses on non-accrual loans that are considered probable have been estimated by management in its routine assessment of the allowance for loan losses as discussed above.

Other real estate owned was $1.2 million at September 30, 2003, a slight decrease compared to $1.3 million at December 31, 2002. During the first nine months of 2003, multiple properties were sold or had a reduction in their carrying value resulting in a $1.7 million decline in the balance of other real estate owned. During the same time period of 2003, $1.6 million of properties were repossessed and added to the carrying value of other real estate owned.

The Company is actively working on identifying and reducing the level of non-performing assets, and has undertaken a more aggressive approach relating to the collection and ultimate reduction of non-performing assets. As these impaired loans are brought current, charged-off, or the repossessed collateral sold, the level of non-performing assets is expected to decrease.

Consistent with the Company's strategy to reduce the level of non-performing assets, subsequent to September 30, 2003, $5.3 million of commercial and real estate loans were sold to investors at an average of 76% of loan balance at the time of sale, net of selling costs. Approximately $4.3 million of these loans were reported on non-accrual status at September 30, 2003. The difference between the sales price and the loan balance was charged against the allowance for loan losses, resulting in a reduction to the allowance of approximately $1.3 million.



24



---



Liquidity

Liquidity represents the ability to meet deposit withdrawals and fund loan demand, while retaining the flexibility to take advantage of business opportunities. The Company's primary sources of funds have been customer and brokered deposits, loan payments, sales or maturities of investments, sales of loans or other assets, borrowings, and the use of the federal funds market.

As of September 30, 2003, approximately $10.8 million of the securities portfolio is scheduled to mature within one year, and another $2.3 million is callable within one year. The maturities of mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the current expected maturity of the underlying collateral. Mortgage-backed securities may mature earlier than their stated contractual maturities because of accelerated principal repayments of the underlying loans.

Historically the Company has utilized borrowings from the FHLB as an important source of funding for its growth. Currently, the Company is permitted to borrow, for periods of up to one year, amounts equal to a discounted value of assets, including certain loans and securities, physically delivered to the FHLB. The Company's current advances from the FHLB have original maturities ranging from 4 through 15 years and at September 30, 2003, bear interest at rates ranging from 6.11% to 8.62%. The remaining maturities of the Company's FHLB advances range from 6 months through 6 years. Because the Company had excess cash on hand during the first nine months of 2003, $10.1 million of advances matured and were not renewed. At September 30, 2003, $5.7 million in advances were outstanding from the FHLB compared to $15.8 million at December 31, 2002.

Currently, the Company's relatively high liquidity is related to changes in the origination volume of loans held-for-sale. In order to take advantage of income generated from high volumes of mortgage lending during 2002 and 2001, the Company utilized brokered certificates of deposit to help fund the mortgage lending growth. As loans held-for-sale and other loan volumes have declined, the excess funds generated have been deposited in the Company's cash account with the FHLB. To offset this increase in cash and the resulting increase in liquidity, high rate brokered certificates of deposit have not been renewed as they mature. At September 30, 2003, brokered certificates of deposit have decreased to $14.6 million or 6.4% of total deposits compared to $29.7 million or 10.2% of total deposits at December 31, 2002 and to $56.7 million or 18.0% of total deposits at December 31, 2001. An additional $18.8 million of public funds certificates of deposit matured during the first three quarters of 2003, and have not been renewed. During the first nine months 2003, total loans have decreased $27.2 million and loans held-for-sale have declined $52.4 million, offsetting the reduction in deposits and FHLB borrowings.

Regulatory Capital

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



25



---



The following table presents selected capital information for the Company and the Bank as of September 30, 2003 and December 31, 2002:



To Be Well-CapitalizedUnder PromptFor Capital Adequacy
        
        Corrective ActionActual
        
        Purposes
        
        ProvisionAmount
        
        Ratio
        
        Amount
        
        Ratio
        
        Amount
        
        RatioSeptember 30, 2003Total risk-based capital:Consolidated
        
        
        $
        32,143
        
        16.02%
        $
        16,049
        
        >8.00%
        $
        20,062
        
        >10.00%Bank
        
        
        $
        33,363
        
        16.64%
        $
        16,037
        
        >8.00%
        $
        20,047
        
        >10.00%Tier 1 risk-based capital:Consolidated
        
        
        $
        29,596
        
        14.75%
        $
        8,025
        
        >4.00%
        $
        12,037
        
        >6.00%Bank
        
        
        $
        30,819
        
        15.37%
        $
        8,019
        
        >4.00%
        $
        12,028
        
        >6.00%Tier 1 (leverage) capital:Consolidated
        
        
        $
        29,596
        
        10.47%
        $
        11,303
        
        >4.00%
        
        N/A
        
        N/ABank
        
        
        $
        30,819
        
        10.91%
        $
        11,296
        
        >4.00%
        $
        14,120
        
        >5.00%December 31, 2002Total risk-based capital:Consolidated
        
        
        $
        30,732
        
        12.56%
        $
        19,582
        
        >8.00%
        $
        24,477
        
        >10.00%Bank
        
        
        $
        31,380
        
        12.83%
        $
        19,564
        
        >8.00%
        $
        24,455
        
        >10.00%Tier 1 risk-based capital:Consolidated
        
        
        $
        27,634
        
        11.29%
        $
        9,791
        
        >4.00%
        $
        14,686
        
        >6.00%Bank
        
        
        $
        28,285
        
        11.57%
        $
        9,782
        
        >4.00%
        $
        14,673
        
        >6.00%Tier 1 (leverage) capital:Consolidated
        
        
        $
        27,634
        
        8.05%
        $
        13,728
        
        >4.00%
        
        N/A
        
        N/ABank
        
        
        $
        28,285
        
        8.28%
        $
        13,668
        
        >4.00%
        $
        17,085
        
        >5.00%




Quantitative measures established by regulation to ensure capital adequacy require Cowlitz Bancorporation and Cowlitz Bank to maintain minimum amounts and ratios (set forth in the tables above) of Tier 1 capital to average assets, and Tier 1 and total risk-based capital to risk-weighted assets (all as defined in the regulations). Currently, under a regulatory consent order issued by the FDIC, Cowlitz Bank is required to maintain a Tier 1 leverage capital ratio of at least 8%. Management believes that as of September 30, 2003 and December 31, 2002, Cowlitz Bancorporation and Cowlitz Bank met or exceeded all relevant capital adequacy requirements.

Regulatory Consent Order

On May 15, 2003, effective May 25, the FDIC, Cowlitz Bank's primary federal regulator, issued a Consent Order requiring a series of affirmative actions to address weaknesses and deficiencies identified in an earlier examination of the Bank with respect to its condition as of September 30, 2002. Since the examination date, the Bank has taken a number of steps to address the requirements, chief among them was hiring the replacements for the previous President/Chief Executive Officer and Credit Administrator. Under the Order, the Bank, among other things, will: refrain from paying any dividends without FDIC consent; review its strategic, profitability and liquidity plans; provide progress reports to the FDIC; maintain its well-capitalized status pursuant to a capital plan to ensure Tier 1 capital equaling or exceeding 8.0% of the Bank's total assets; establish and maintain an adequate allowance for loan and lease losses; refrain from extending credit to borrowers whose previous loans have been charged off; undertake a full internal audit of its Bay Mortgage division; retain an internal auditor and formulate and implement an effective internal audit policy; and will reduce the amount of classified assets identified in the examination to no more than 50% of Tier 1 capital plus the allowance for loan and lease losses by November 30, 2003 and will further reduce the amount to no more than 25% by December 31, 2004. If the Bank fails to adhere to the terms of the Order, the FDIC is empowered by federal statutes and regulations to assess civil monetary penalties or initiate other enforcement actions against the Bank, its management or the Board of Directors. Management believes the Bank is, or within the timelines set forth in the Order, will be, in compliance with the requirements of the Order.



26



---





Specifically, the Bank has not paid any dividends, has revised its strategic, profitability, and liquidity plans, which have been submitted to the FDIC for review, and has provided progress reports as required by the Order. The Bank's current Tier 1 leverage ratio is 10.91%, exceeding the requirement to maintain Tier 1 capital at 8% of the Bank's total assets.  Management believes that it has followed the provisions of the Order that require the Bank to establish and maintain an adequate allowance for loan losses and to refrain from extending credit to borrowers as outlined in the Order. The Bank's previously engaged internal audit firm has undertaken a full audit of the Bay Mortgage division. An internal auditor has been hired and will work with the Bank's current internal audit firm to formulate and implement an effective internal audit policy. From December 31, 2002 to September 30, 2003, the amount of classified assets identified in the examination had been reduced to 35.5% of Tier 1 capital plus the allowance for loan and lease losses. The objective of no more than 50% has been reached prior to the November 30, 2003 target date. Subsequent to the sale of non-performing assets during October 2003 as discussed under the "non-performing assets" header, this ratio has declined to 22.9% at October 31, 2003, below the December 31, 2004 requirement of no more than 25%.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 an adequate allowance for loan losses to help mitigate credit risk, a continued downturn in the economy or the real estate market or a rapid increase in interest rates could have a negative effect on collateral values and borrowers' ability to repay. The Company's targeted customers are small to medium-size businesses, professionals and retail customers that may have limited capital resources to repay loans during a prolonged economic downturn.

Interest Rate Risk

The 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 that 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 maturities of the assets and liabilities. 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. Interest rate risk is managed through the monitoring of the Company's gap position and sensitivity to interest rate risk by subjecting the Company's balance sheet to hypothetical interest rate shocks. In a falling rate environment, the spread between interest yields earned and interest rates paid, may narrow, depending on the relative level of fixed and variable rate assets and liabilities. In a stable or increasing rate environment the Company's variable rate loans will remain steady or increase immediately with changes in interest rates, while fixed rate liabilities, particularly certificates of deposit will only re-price as the liability matures.

Item 4. Controls and Procedures

In July 2003, the Company evaluated, under the supervision and the participation of Management, including the Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of disclosure controls and procedures.  Based on that evaluation, Management, including the Chief Executive Officer and Chief Financial Officer, concluded that disclosure controls and procedures were effective.

There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings

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

Item 2.	Changes in Securities and Use of Proceeds

Not applicable

Item 3.	Defaults upon Senior Securities

Not applicable



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

Not applicable

Item 5. 	Other Information

Not applicable

Item 6.	Exhibits and Reports on Form 8-K

1. Exhibits.  The following constitutes the exhibit index.

3.1*
Restated and Amended Articles of Incorporation of Registrant3.2*
Bylaws of Registrant31.1
Certification of Chief Executive Officer31.2
Certification Chief Financial Officer32
Certification of Chief Executive Officer and Chief Financial Officer


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





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SIGNATURES

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



Dated: November 12, 2003

Cowlitz Bancorporation
(Registrant)
By:/s/ Richard J. FitzpatrickRichard J. Fitzpatrick, President and Chief Executive Officer/s/ Donna P. GardnerDonna P. Gardner, Vice-President, Chief Financial Officer




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Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Richard J. Fitzpatrick, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cowlitz Bancorporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is likely to materially affect the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date: November 12, 2003

> /s/ Richard J. FitzpatrickRichard J. Fitzpatrick, Chief Executive Officer
> Cowlitz Bancorporation

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Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Donna P. Gardner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cowlitz Bancorporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is likely to materially affect the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date: November 12, 2003

> /s/ Donna P. GardnerDonna P. Gardner, Chief Financial Officer
> Cowlitz Bancorporation



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Exhibit 32

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

This certification is given by the undersigned Chief Executive Officer and Chief Financial Officer of Cowlitz Bancorporation (the "Registrant") pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  Each of the undersigned hereby certifies, with respect to the Registrant's quarterly report of Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



/s/ Richard J. Fitzpatrick
Richard J. Fitzpatrick
Chief Executive Officer
Cowlitz Bancorporation

/s/ Donna P. Gardner
Donna P. Gardner
Chief Financial Officer
Cowlitz Bancorporation

November 12, 2003



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