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U.S. SECURITIES AND EXCHANGE COMMISSIONWashington D.C.  20549

Form 10-Q

|[X]  | Quarterly report Pursuant to section 13 or 15(d) of the Securities and Exchange act of 1934
                                        For the quarter ended June 30, 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 July 31, 2003:   3,868,432 shares



1

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COWLITZ BANCORPORATION AND SUBSIDIARIESTABLE OF CONTENTS

|        |                                                                                                                                   | PAGE 
|------- | --------------------------------------------------------------------------------------------------------------------------------- | -----
|Part I  | FINANCIAL INFORMATION                                                                                                             |      
|Item 1. | Financial Statements                                                                                                              |      
|        | Consolidated Statements of Condition -
     June 30, 2003 and December 31, 2002                                                   | 3    
|        | Consolidated Statements of Income -
     Three months and six months ended June 30, 2003 and June 30, 2002                        | 4    
|        | Consolidated Statements of Changes in Shareholders' Equity -
     Year ended December 31, 2002 and six months ended June 30, 2003 | 5    
|        | Consolidated Statements of Cash Flows -
     Six months ended June 30, 2003 and June 30, 2002                                     | 6    
|        | Notes to Consolidated Financial Statements                                                                                        | 7-14 
|Item 2. | Management's Discussion and Analysis of Financial Condition 
     And Results of Operations                                       | 15-27
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                                                        | 27   
|Item 4. | Controls and Procedures                                                                                                           | 28   
|Part II | OTHER INFORMATION                                                                                                                 |      
|Item 1. | Legal Proceedings                                                                                                                 | 29   
|Item 2. | Changes in Securities and Use of Proceeds                                                                                         | 29   
|Item 3. | Defaults upon Senior Securities                                                                                                   | 29   
|Item 4. | Submission of Matters to a Vote of Security Holders                                                                               | 29   
|Item 5. | Other Information                                                                                                                 | 29   
|Item 6. | Exhibits and Reports on Form 8-K                                                                                                  | 29   
|        | Signatures                                                                                                                        | 30   
|        | Certification of Chief Executive Officer and Chief Financial Officer                                                              | 31-33

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.

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

|COWLITZ BANCORPORATION AND SUBSIDIARIES                              
|---------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CONDITION                                 
|(dollars in thousands)                                               
|                                                                     
|                                                                     
|ASSETS                                                               
|Cash and cash equivalents                                            
|Investment securities:                                               
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Federal Home Loan Bank stock, at cost                                
|                                                                     
|Loans held-for-sale                                                  
|                                                                     
|Loans, net of deferred loan fees                                     
|Allowance for loan losses                                            
|                                                                     
|Premises and equipment, net of accumulated depreciation of $4,850 and
|                                                                     
|Goodwill                                                             
|Intangible assets, net of accumulated amortization of $1,601 and     
|                                                                     
|Accrued interest receivable and other assets                         
|TOTAL ASSETS                                                         
|                                                                     
|LIABILITIES                                                          
|Deposits:                                                            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Short-term borrowings                                                
|Long-term borrowings                                                 
|Accrued interest payable and other liabilities                       
|TOTAL LIABILITIES                                                    
|                                                                     
|SHAREHOLDERS' EQUITY                                                 
|Preferred stock, no par value; 5,000,000 shares authorized, no shares
|                                                                     
|Common stock, no par value; 25,000,000 shares authorized with        
|                                                                     
|                                                                     
|Additional paid-in capital                                           
|Retained earnings                                                    
|Accumulated other comprehensive income, net of taxes                 
|TOTAL SHAREHOLDERS' EQUITY                                           
|                                                                     
|                                                                     
|                                                                     
|See accompanying notes                                               
|                                                                     
|                                                                     

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COWLITZ BANCORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF
      INCOME(dollars in thousands, except per share amounts)Year EndedThree
      Months Ended
      
      Six
      Months Ended
      
      
      December 31June 30,
      
      June 30,
      
      
      2002(unaudited)
      
      
      2003
      
      2002
      
      2003
      
      2002
      
      
      (audited)INTEREST INCOMEInterest and fees on loans
      
      
      $ 3,779
      
      $ 4,891
      
      $ 8,012
      
      $ 9,821
      
      
      $ 19,725Interest on taxable investment securities
      
      
      204
      
      516
      
      454
      
      883
      
      
      1,604Interest on non-taxable investment securities
      
      
      6
      
      5
      
      9
      
      7
      
      
      15Other
      interest and dividend income
      
      
      162
      
      148
      
      335
      
      408
      
      
      695Total interest
      income
      
      
      4,151
      
      5,560
      
      8,810
      
      11,119
      
      
      22,039INTEREST EXPENSESavings
      and interest-bearing demand
      
      
      315
      
      441
      
      639
      
      837
      
      
      1,714Certificates of deposit
      
      
      861
      
      1,543
      
      1,864
      
      3,435
      
      
      5,920Short-term borrowings
      
      
      5
      
      14
      
      12
      
      24
      
      
      44Long-term borrowings
      
      
      172
      
      234
      
      369
      
      471
      
      
      933Total interest
      expense
      
      
      1,353
      
      2,232
      
      2,884
      
      4,767
      
      
      8,611Net interest income
      before provision for loan losses
      
      
      2,798
      
      3,328
      
      5,926
      
      6,352
      
      
      13,428PROVISION FOR LOAN LOSSES
      
      
      43
      
      355
      
      566
      
      655
      
      
      2,783Net interest income
      after provision for loan losses
      
      
      2,755
      
      2,973
      
      5,360
      
      5,697
      
      
      10,645NON-INTEREST INCOMEGains
      on loans sold
      
      
      1,247
      
      998
      
      2,996
      
      2,172
      
      
      5,655Mortgage brokerage fees
      
      
      651
      
      706
      
      1,494
      
      1,311
      
      
      3,221Escrow
      fees
      
      
      324
      
      193
      
      661
      
      415
      
      
      1,140Service
      charges on deposit accounts
      
      
      238
      
      171
      
      484
      
      349
      
      
      752Credit
      card income
      
      
      143
      
      132
      
      296
      
      257
      
      
      547Fiduciary income
      
      
      80
      
      71
      
      170
      
      142
      
      
      275Net
      gains on sales of investment securities available-for-sale
      
      
      -
      
      39
      
      -
      
      39
      
      
      183Gain on
      sale of repossessed assets
      
      
      4
      
      19
      
      37
      
      21
      
      
      (113)Other
      income
      
      
      23
      
      45
      
      66
      
      106
      
      
      233Total non-interest
      income
      
      
      2,710
      
      2,374
      
      6,204
      
      4,812
      
      
      11,893NON-INTEREST EXPENSESalaries and employee benefits
      
      
      2,465
      
      2,604
      
      5,089
      
      5,018
      
      
      10,722Net
      occupancy and equipment expense
      
      
      565
      
      588
      
      1,212
      
      1,168
      
      
      2,260Professional fees
      
      
      479
      
      261
      
      946
      
      536
      
      
      1,491Business taxes
      
      
      98
      
      137
      
      231
      
      299
      
      
      606FDIC
      assessment
      
      
      133
      
      143
      
      271
      
      290
      
      
      557Credit
      card expense
      
      
      151
      
      131
      
      306
      
      247
      
      
      527Data
      processing and communications
      
      
      108
      
      152
      
      237
      
      253
      
      
      512Loan
      expense
      
      
      240
      
      130
      
      353
      
      208
      
      
      503Postage
      and freight
      
      
      128
      
      116
      
      231
      
      240
      
      
      484Travel
      and education
      
      
      66
      
      36
      
      137
      
      86
      
      
      401Stationery and supplies
      
      
      54
      
      92
      
      115
      
      163
      
      
      337Amortization of intangible assets
      
      
      67
      
      67
      
      133
      
      133
      
      
      265Cost
      relating to other real estate owned
      
      
      74
      
      47
      
      101
      
      131
      
      
      260Other
      expenses
      
      
      391
      
      311
      
      762
      
      584
      
      
      1,272Total non-interest
      expense
      
      
      5,019
      
      4,815
      
      10,124
      
      9,356
      
      
      20,197Income from
      continuing operations before provision for income taxes
      
      
      446
      
      532
      
      1,440
      
      1,153
      
      
      2,341PROVISION FOR INCOME TAXES
      
      
      161
      
      (184)
      
      512
      
      59
      
      
      339Income from
      continuing operations
      
      
      285
      
      716
      
      928
      
      1,094
      
      
      2,002DISCONTINUED OPERATIONS:INCOME FROM OPERATIONS, NET OF TAX
      
      
      -
      
      -
      
      -
      
      6
      
      
      6GAIN
      ON DISPOSAL, NET OF TAX
      
      
      -
      
      -
      
      -
      
      279
      
      
      279Income from
      discontinued operations
      
      
      -
      
      -
      
      -
      
      285
      
      
      285Income before
      cumulative effect of a change in accounting principle
      
      
      285
      
      716
      
      928
      
      1,379
      
      
      2,287CUMULATIVE EFFECT OF A CHANGE INACCOUNTING PRINCIPLE, NET OF TAX
      
      
      -
      
      -
      
      -
      
      (791)
      
      
      (791)Net income
      
      
      $ 285
      
      $ 716
      
      $ 928
      
      $ 588
      
      
      $ 1,496BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCKContinuing operations
      
      
      $ 0.07
      
      $ 0.19
      
      $ 0.24
      
      $ 0.29
      
      
      $ 0.53Discontinued operations
      
      
      -
      
      -
      
      -
      
      0.08
      
      
      0.08Cumulative effect of a change in accounting principle
      
      
      -
      
      -
      
      -
      
      (0.21)
      
      
      (0.21)Net
      income per basic share of common stock
      
      
      $ 0.07
      
      $ 0.19
      
      $ 0.24
      
      $ 0.16
      
      
      $ 0.40DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCKContinuing operations
      
      
      $ 0.07
      
      $ 0.19
      
      $ 0.24
      
      $ 0.28
      
      
      $ 0.53Discontinued operations
      
      
      -
      
      -
      
      -
      
      0.08
      
      
      0.07Cumulative effect of a change in accounting principle
      
      
      -
      
      -
      
      -
      
      (0.21)
      
      
      (0.21)Net
      income per diluted share of common stock
      
      
      $ 0.07
      
      $ 0.19
      
      $ 0.24
      
      $ 0.15
      
      
      $ 0.39WEIGHTED-AVERAGE SHARES OUTSTANDING - BASIC
      
      
      3,835,261
      
      3,738,245
      
      3,827,386
      
      3,718,989
      
      
      3,757,608WEIGHTED-AVERAGE SHARES OUTSTANDING - DILUTED
      
      
      3,959,677
      
      3,855,688
      
      3,936,297
      
      3,794,697
      
      
      3,851,196See
      accompanying notes




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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
      
      
      -
      
      -
      
      -
      
      928
      
      -
      
      928
      
      $ 928Net
      changes in unrealized gains oninvestments
      available-for-sale,net of deferred
      taxes of $42
      
      
      -
      
      -
      
      -
      
      -
      
      (82)
      
      (82)
      
      (82)Comprehensive income
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      $ 846Proceeds from the exercise ofstock
      options
      
      
      43,160
      
      255
      
      -
      
      -
      
      -
      
      255BALANCE, June 30, 2003
      
      
      3,861,432
      
      $ 17,746
      
      $ 1,538
      
      $ 12,822
      
      $ 258
      
      $ 32,364(unaudited)See
      accompanying notes




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COWLITZ BANCORPORATION AND
      SUBSIDIARIESCONSOLIDATED STATEMENTS OF
      CASH FLOWS(dollars in thousands)Six Months EndedJune 30,2003
      
      2002(unaudited)CASH FLOWS FROM OPERATING
      ACTIVITIESNet income from continuing
      operations, net of a change in accounting principle in 2001
      
      $ 928
      
      $ 303Adjustments to reconcile net income
      from continuing operations to net cash from operating activities:Deferred tax provision (benefit)
      
      52
      
      (348)Depreciation and amortization
      
      416
      
      475Impairment of goodwill
      
      -
      
      1,208Provision for loan losses
      
      566
      
      655Net amortization of investment
      security premiums and accretion of discounts
      
      116
      
      146Federal Home Loan Bank stock
      dividends
      
      (68)
      
      (119)Net gain on sales of repossessed
      assets
      
      (37)
      
      (21)Gain on the sale of investment
      securities available-for-sale
      
      -
      
      (39)Loss on the sale of premises and
      equipment
      
      10
      
      8Gains on loans sold
      
      (2,996)
      
      (2,172)Origination of loans held-for-sale
      
      (238,339)
      
      (178,406)Proceeds from loan sales
      
      277,963
      
      197,341Decrease (increase) in accrued
      interest receivable and other assets
      
      376
      
      (67)Decrease in accrued interest
      payable and other liabilities
      
      (502)
      
      (2,361)Net
      cash from continuing operations
      
      38,485
      
      16,603Net 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
      
      38,485
      
      16,569CASH FLOWS FROM INVESTING
      ACTIVITIESProceeds from sale of foreclosed
      assets
      
      872
      
      320Proceeds from maturities of
      investment securities held-to-maturity
      
      -
      
      2,599Proceeds from maturities and sales
      of investment securities available-for-sale
      
      12,309
      
      14,678Purchases of investment securities:Held-to-maturity
      
      (671)
      
      (559)Available-for-sale
      
      (8,117)
      
      (34,893)Proceeds from redemption of Federal
      Home Loan Bank stock
      
      100
      
      -Net decrease in loans - continuing
      operations
      
      23,164
      
      4,269Purchases of premises and equipment
      
      (210)
      
      (24)Proceeds from the sale of premise
      and equipment
      
      4
      
      13Net proceeds from the sale of
      discontinued operations
      
      -
      
      3,345Net
      cash from investment activities
      
      27,451
      
      (10,252)CASH FLOWS FROM FINANCING
      ACTIVITIESNet (decrease) increase in demand,
      savings, and interest-bearing demand deposits
      
      (1,495)
      
      8,484Net decrease in certificates of
      deposit
      
      (35,277)
      
      (43,852)Net (decrease) increase in
      short-term borrowings
      
      (550)
      
      1,350Repayment of long-term borrowings
      
      (10,157)
      
      (150)Proceeds from the exercise of stock
      options
      
      255
      
      320Net
      cash from financing activities
      
      (47,224)
      
      (33,848)Net
      increase (decrease) in cash and cash equivalents
      
      18,712
      
      (27,531)CASH AND CASH EQUIVALENTS,
      beginning of period
      
      43,691
      
      50,177CASH AND CASH EQUIVALENTS, end
      of period
      
      $ 62,403
      
      $ 22,646See accompanying notes




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COWLITZ BANCORPORATION AND SUBSIDIARIESNOTES 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



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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
2. Recently Issued Accounting Standards
3. Stock-Based Compensation



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



Three Months Ended
        
        Three Months Ended
        
        Six
        Months Ended
        
        Six
        Months EndedJune 30, 2003
        
        June 30, 2002
        
        June 30, 2003
        
        June 30, 2002As
        
        Pro
        
        As
        
        Pro
        
        As
        
        Pro
        
        As
        
        ProReported
        
        Forma
        
        Reported
        
        Forma
        
        Reported
        
        Forma
        
        Reported
        
        FormaNet
        income
        $ 285
        
        $ 225
        
        $ 716
        
        $ 647
        
        $ 928
        
        $ 718
        
        $ 588
        
        $ 462Basic
        earnings (loss) per share:Continuing operations
        $ 0.07
        
        $ 0.06
        
        $ 0.19
        
        $ 0.17
        
        $ 0.24
        
        $ 0.19
        
        $ 0.29
        
        $ 0.25Discontinued operations
        -
        
        -
        
        -
        
        -
        
        -
        
        -
        
        0.08
        
        0.08Cumulative effect of a changein accounting
        principle
        -
        
        -
        
        -
        
        -
        
        -
        
        -
        
        (0.21)
        
        (0.21)$ 0.07
        
        $ 0.06
        
        $ 0.19
        
        $ 0.17
        
        $ 0.24
        
        $ 0.19
        
        $ 0.16
        
        $ 0.12Diluted earnings (loss) per share:Continuing operations
        $ 0.07
        
        $ 0.06
        
        $ 0.19
        
        $ 0.17
        
        $ 0.24
        
        $ 0.18
        
        $ 0.28
        
        $ 0.25Discontinued operations
        -
        
        -
        
        -
        
        -
        
        -
        
        -
        
        0.08
        
        0.08Cumulative effect of a changein accounting
        principle
        -
        
        -
        
        -
        
        -
        
        -
        
        -
        
        (0.21)
        
        (0.21)$ 0.07
        
        $ 0.06
        
        $ 0.19
        
        $ 0.17
        
        $ 0.24
        
        $ 0.18
        
        $ 0.15
        
        $ 0.12




The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for June 30, 2003 and 2002.



> Three
>       Months Ended
>       
>       Six
>       Months EndedJune 30,
>       
>       June 30,2003
>       
>       2002
>       
>       2003
>       
>       2002Dividend yield
>       
>       
>       
>       
>       0.00%
>       
>       0.00%
>       
>       0.00%
>       
>       0.00%Expected life
>       (years)
>       
>       
>       
>       
>       4.17
>       
>       4.17
>       
>       4.17
>       
>       4.17Expected volatility
>       
>       
>       
>       
>       52.11%
>       
>       52.02%
>       
>       52.11%
>       
>       52.02%Risk-free rate
>       
>       
>       
>       
>       2.98%
>       
>       4.25%
>       
>       2.98%
>       
>       4.25%



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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:
The Company is principally engaged in community banking activities through its branches and corporate offices.  Community banking activities include accepting deposits, providing loans and lines of credit to local individuals, businesses and governmental entities, investing in securities and money market instruments, and holding or managing assets in a fiduciary agency capacity on behalf of its customers and their beneficiaries. The mortgage banking segment, Bay Mortgage, specializes in all facets of residential lending including FHA and VA loans, construction loans and bridge loans. Prior to the sale of Business Finance Corporation in the first quarter of 2002, the Company provided asset-based financing to companies throughout the western United States.
The community banking and mortgage banking activities are monitored and reported by Company management as separate operating segments. The asset-based financing activity, conducted through Business Finance Corporation, was previously considered to be an additional segment of business.  However, in the following table for the six months ended June 30, 2002, this former segment of business is reported as discontinued operations.
The accounting policies for the Company's segment information provided in the following tables are the same as those described for the Company in the summary of significant accounting policies footnote included in the Company's 2002 annual report, except that some operating expenses and the results of discontinued operations are not allocated to segments.



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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 six months ended June 30, 2003 and 2002, concerning the Company's reportable segments is shown in the following tables:



Three Months Ended June 30, 2003Mortgage
        
        HoldingBanking
        
        Banking
        
        Company
        
        Intersegment
        
        Consolidated(unaudited)Interest income
        
        
        $ 3,796
        
        $ 752
        
        $ 7
        
        $ (404)
        
        $ 4,151Interest expense
        
        
        1,334
        
        366
        
        57
        
        (404)
        
        1,353Net interest
        income
        
        
        2,462
        
        386
        
        (50)
        
        -
        
        2,798Provision for loan losses
        
        
        100
        
        -
        
        (57)
        
        -
        
        43Non-interest income
        
        
        495
        
        2,215
        
        -
        
        -
        
        2,710Non-interest expense
        
        
        2,759
        
        2,126
        
        134
        
        -
        
        5,019Income (loss) before provision(benefit) for income taxes
        
        
        98
        
        475
        
        (127)
        
        -
        
        446Provision (benefit) for income taxes
        
        
        38
        
        164
        
        (41)
        
        -
        
        161Net
        income (loss)
        
        
        $ 60
        
        $ 311
        
        $ (86)
        
        $ -
        
        $ 285Depreciation and amortization
        
        
        $ 173
        
        $ 27
        
        $ -
        
        $ -
        
        $ 200Three Months Ended June 30, 2002Mortgage
        
        HoldingBanking
        
        Banking
        
        Company
        
        Intersegment
        
        Consolidated(unaudited)Interest income
        
        
        $ 5,176
        
        $ 699
        
        $ 3
        
        $ (318)
        
        $ 5,560Interest expense
        
        
        2,204
        
        288
        
        58
        
        (318)
        
        2,232Net interest
        income
        
        
        2,972
        
        411
        
        (55)
        
        -
        
        3,328Provision for loan losses
        
        
        400
        
        -
        
        (45)
        
        -
        
        355Non-interest income
        
        
        451
        
        1,923
        
        -
        
        -
        
        2,374Non-interest expense
        
        
        2,765
        
        1,977
        
        73
        
        -
        
        4,815Income (loss) before provision(benefit) for income taxes
        
        
        258
        
        357
        
        (83)
        
        -
        
        532Provision (benefit) for income taxes
        
        
        99
        
        123
        
        (406)
        
        -
        
        (184)Net
        income
        
        
        $ 159
        
        $ 234
        
        $ 323
        
        $ -
        
        $ 716Depreciation and amortization
        
        
        $ 197
        
        $ 28
        
        $ -
        
        $ -
        
        $ 225




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



> Six Months Ended June 30, 2003Mortgage
>       
>       HoldingBanking
>       
>       Banking
>       
>       Company
>       
>       Intersegment
>       
>       Consolidated(unaudited)Interest income
>       
>       
>       $ 8,078
>       
>       $ 1,696
>       
>       $ 15
>       
>       $ (979)
>       
>       $ 8,810Interest expense
>       
>       
>       2,859
>       
>       891
>       
>       113
>       
>       (979)
>       
>       2,884Net interest income
>       
>       
>       5,219
>       
>       805
>       
>       (98)
>       
>       -
>       
>       5,926Provision for loan losses
>       
>       
>       (651)
>       
>       -
>       
>       1,217
>       
>       -
>       
>       566Non-interest income
>       
>       
>       1,060
>       
>       5,144
>       
>       -
>       
>       -
>       
>       6,204Non-interest expense
>       
>       
>       5,494
>       
>       4,433
>       
>       197
>       
>       -
>       
>       10,124Income
>       (loss) before provision(benefit) for income taxes
>       
>       
>       1,436
>       
>       1,516
>       
>       (1,512)
>       
>       -
>       
>       1,440Provision (benefit) for income taxes
>       
>       
>       506
>       
>       523
>       
>       (517)
>       
>       -
>       
>       512Net
>       income (loss)
>       
>       
>       $ 930
>       
>       $ 993
>       
>       $ (995)
>       
>       $ -
>       
>       $ 928Depreciation and amortization
>       
>       
>       $ 361
>       
>       $ 55
>       
>       $ -
>       
>       $ -
>       
>       $ 416Total
>       assets
>       
>       
>       $ 293,673
>       
>       $ 41,864
>       
>       $ 35,168
>       
>       $ (72,421)
>       
>       $ 298,284



> The segment information for the six months ended June 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 six months ended June 30, 2003.



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



> Six Months Ended June 30, 2002Mortgage
> 
> Banking
>       
>       Holding
> 
> Company
>       
>       Intersegment
>       
>       ConsolidatedBanking(unaudited)Interest income
>       
>       
>       $ 10,476
>       
>       $ 1,443
>       
>       $ 6
>       
>       $ (806)
>       
>       $ 11,119Interest expense
>       
>       
>       4,719
>       
>       713
>       
>       117
>       
>       (782)
>       
>       4,767Net interest income
>       
>       
>       5,757
>       
>       730
>       
>       (111)
>       
>       (24)
>       
>       6,352Provision for loan losses
>       
>       
>       700
>       
>       -
>       
>       (45)
>       
>       -
>       
>       655Non-interest income
>       
>       
>       852
>       
>       3,960
>       
>       -
>       
>       -
>       
>       4,812Non-interest expense
>       
>       
>       5,399
>       
>       3,699
>       
>       258
>       
>       -
>       
>       9,356Income
>       (loss) before provision(benefit) for income taxes
>       
>       
>       510
>       
>       991
>       
>       (324)
>       
>       (24)
>       
>       1,153Provision (benefit) for income taxes
>       
>       
>       197
>       
>       342
>       
>       (480)
>       
>       -
>       
>       59Net
>       income (loss) from continuing operationsbefore
>       cumulative effect of a changein
>       accounting principle
>       
>       
>       313
>       
>       649
>       
>       156
>       
>       (24)
>       
>       1,094Cumulative effect of a change inaccounting principle
>       
>       
>       -
>       
>       (791)
>       
>       -
>       
>       -
>       
>       (791)Net
>       income (loss) from continuingoperations
>       
>       
>       $ 313
>       
>       $ (142)
>       
>       $ 156
>       
>       $ (24)
>       
>       303Net
>       income from discontinuedoperations
>       
>       
>       
>       
>       
>       
>       
>       
>       
>       
>       285Net
>       income
>       
>       
>       
>       
>       
>       
>       
>       
>       
>       
>       $ 588Depreciation and amortization
>       
>       
>       $ 418
>       
>       $ 57
>       
>       $ -
>       
>       $ -
>       
>       $ 475Total
>       assets
>       
>       
>       $ 331,272
>       
>       $ 40,299
>       
>       $ 32,901
>       
>       $ (69,222)
>       
>       $ 335,250

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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. 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 six months ended June 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



> During December 2002 and January 2003, the Bank closed 11 limited service branches in the greater Portland, Oregon market that were doing business as Northern Bank of Commerce. This decision was partially due to relatively high interest rates paid on low deposit volumes at these branches. At June 30, 2003, the deposit volume associated with these former locations was $12.7 million of which $9.4 million consisted of certificates of deposit. This compares to $15.2 million of total deposits and $11.1 million in certificates at March 31, 2003. At December 31, 2002, these locations had an aggregate deposit balance of $17.3 million of which $11.9 million were certificates of deposit. Although the Bank will attempt to retain the lower cost deposits by moving the deposit relationships to the main NBOC branch in Portland, management expects additional deposit accounts to be withdrawn and closed.



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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 June 30, 2003 and 2002

During the second quarter of 2003 the Company had net income of $285,000, or $0.07 per diluted share, compared to net income of $716,000, or $0.19 per diluted share, in the second quarter of 2002. Income from continuing operations before the provision for income taxes reported for the second quarter 2003 was $86,000 lower than the amount reported for the second quarter 2002. The primary reason for the higher net income during the second quarter 2002 was an income tax benefit of $375,000 recognized during that period. The tax benefit resulted from a reduction in the Company's deferred tax valuation allowance, which was recorded in the first quarter of 2002 in connection with the sale of BFC.

Comparing the quarter ended June 30, 2003 to the quarter ended June 30, 2002, the provision for loan losses was $312,000 lower and non-interest income was $336,000 higher. These bolstered net income, but were offset by a reduction of net interest income of $530,000 and an increase of $204,000 in non-interest expenses.

Results of Operations for the Six Months Ended June 30, 2003 and 2002

During the six months ended June 30, 2003, the Company recorded net income of $928,000, or $0.24 per diluted share, compared to net income of $588,000, or $0.15 per diluted share, for the comparable period of 2002. Net income from continuing operations prior to a change in accounting principle and net income from discontinued operations (both discussed below) for the first two quarters of 2002 was $1.1 million or $0.28 per diluted share. For the first half of 2003, the Company's revenues (net interest income before provision for loan losses plus non-interest income) were $12.1 million, an increase of $900,000 from revenues of $11.2 million during the same period in 2002.  Non-interest expenses were $10.1 million for the six months ended June 30, 2003 compared to $9.4 million for the six months ended June 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 six months of 2002, prior to this charge, was $1.4 million or $0.36 per diluted share.

Net income for the first half of 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 six months ended June 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 $1.4 million and $1.2 million for the first six months of 2003 and 2002, respectively. The increase from period to period is primarily due to an increase in mortgage lending activity and the associated non-interest income generated. Non-interest income was $1.4 million higher during the first half of 2003 compared to the first half of 2002. This increase in non-interest income was offset by a decrease of $337,000 in net interest income after the provision for loan losses and an increase of $768,000 in non-interest expenses when comparing the six-month periods of 2003 and 2002.

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

At June 30, 2003, total assets were $298.3 million and total liabilities were $265.9 million. Total assets have decreased $46.9 million or 13.6% from $345.2 million at December 31, 2002 and liabilities have decreased $48.0 million or 15.3% from $313.9 million at December 31, 2002.



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The decline in total assets is due to a reduction in volume of both loans and loans held-for-sale since December 31, 2002. At June 30, 2003, loans were $168.9 million compared to $194.5 million at December 31, 2002, a decline of $25.6 million or 13.2%. This reduction in loan volume is a combination of charged-off balances of approximately $900,000 and balances transferred to repossessed assets of approximately $1.5 million with loan pay-downs and pay-offs accounting for the remaining decline. Loans held-for-sale have decreased $36.6 million or 57.5% from $63.6 million at December 31, 2002 to $27.0 million at June 30, 2003. During the first half of 2003 loan pay-offs were relatively high because, under the current low rate environment, 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 sees 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.

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 June 30, 2003. At June 30, 2003, the Company had $19.9 million in brokered deposits or 7.9% of the $253.3 million total deposits compared to $29.7 million or 10.2% of $290.1 million of total deposits at December 31, 2002. Approximately $9.7 million of these brokered deposits are scheduled to mature during the remainder of 2003. Approximately $13.0 million in public fund certificates matured during the first six months of 2003 and were not renewed and an additional $5.8 million is expected to mature during July 2003. 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 June 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 and quality of the 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.



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Three months ended June 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)
      June 30,
      
      Increase(dollars in
      thousands)
      2003
      2002
      
      (Decrease)
      
      ChangeInterest Income (1)
      $ 4,153
      $ 5,562
      
      $ (1,409)
      
      -25.3%Interest Expense
      1,353
      2,232
      
      (879)
      
      -39.4%Net Interest Income
      $ 2,800
      $ 3,330
      
      $ (530)
      
      -15.9%Average
      Interest-Earning Assets
      $ 279,600
      $ 318,741
      
      $ (39,141)
      
      -12.3%Average
      Interest-Bearing Liabilities
      $ 218,511
      $ 266,848
      
      $ (48,337)
      
      -18.1%Average Yields
      Earned (2)
      5.94%
      6.98%
      
      -1.04%Average Rates Paid
      (2)
      2.48%
      3.35%
      
      -0.87%Net Interest Spread
      (2)
      3.46%
      3.63%
      
      -0.17%Net Interest Margin
      (2)
      4.01%
      4.18%
      
      -0.17%(1) Interest earned
      on non-taxable securities has been computed on a 34% tax equivalent basis(2) Ratios for the
      three months ended June 30, 2003 and 2002 have been annualized




Comparing the quarter ended June 30, 2003 to the quarter ended June 30, 2002, interest income declined $1.4 million, interest expense declined $879,000, and net interest income decreased $530,000. Because yields earned declined more than rates paid, both the net interest spread and the net interest margin for the quarter ended June 30, 2003 were slightly lower than during the quarter ended June 30, 2002.

The overall tax-equivalent average earning asset yield was 5.94% for the quarter ended June 30, 2003 compared to 6.98% for the quarter ended June 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 $279.6 million for the three months ended June 30, 2003, a decline of $39.1 million compared to $318.7 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 June 30, 2002, average loans and loans held-for-sale were 75.2% of total average interest-earning assets, and average interest-earning deposits was 6.1% of the total. During the same period of 2003, average loans and loans held-for-sale declined to 71.6% of average interest-earning assets, while average interest-earning deposits increased to 14.2% 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 16.5% to 11.8% of the total average interest-earning assets for the three months ended June 30, 2003 and 2002, respectively.

The average cost of interest-bearing liabilities decreased to 2.48% for the quarter ended June 30, 2003 from 3.35% for the same period of 2002. Average interest-bearing liabilities decreased $48.3 million from $266.8 million for the three months ended June 30, 2002 to $218.5 million for the three months ended June 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 June 30, 2003 the volume of brokered certificates was $19.9 million compared to $32.2 million at June 30, 2002. In addition, public fund certificates of deposit declined by $12.0 million comparing the two quarters. During the second quarter of 2003 the average volume of other borrowed money decreased to $9.6 million from $18.9 million during the second quarter of 2002.



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Six months ended June 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.

|                                                                                                  | Six
    Months Ended |           |          |            | 
|------------------------------------------------------------------------------------------------- | -------------------- | --------- | -------- | ---------- | 
|(unaudited)                                                                                       | June 30,             |           | Increase |            | 
|(dollars in
    thousands)                                                                        | 2003                 | 2002      |          | (Decrease) | 
|Interest Income (1)                                                                               | $ 8,813              | $ 11,251  |          | $ (2,438)  | 
|Interest Expense                                                                                  | 2,884                | 4,767     |          | (1,883)    | 
|Net Interest Income                                                                               | $ 5,929              | $ 6,484   |          | $ (555)    | 
|                                                                                                  |                      |           |          |            | 
|Average
    Interest-Earning Assets                                                               | $ 291,975            | $ 327,977 |          | $ (36,002) | 
|Average
    Interest-Bearing Liabilities                                                          | $ 230,274            | $ 275,512 |          | $ (45,238) | 
|                                                                                                  |                      |           |          |            | 
|Average Yields Earned
    (2)                                                                     | 6.04%                | 6.86%     |          | -0.82%     | 
|Average Rates Paid
    (2)                                                                        | 2.50%                | 3.46%     |          | -0.96%     | 
|Net Interest Spread
    (2)                                                                       | 3.54%                | 3.40%     |          | 0.14%      | 
|Net Interest Margin
    (2)                                                                       | 4.06%                | 3.95%     |          | 0.11%      | 
|                                                                                                  |                      |           |          |            | 
|(1) Interest earned
    on non-taxable securities has been computed on a 34% tax equivalent basis |                      |           |          |            | 
|(2) Ratios for the
    six months ended June 30, 2003 and 2002 have been annualized               |                      |           |          |            | 

Comparing the six months ended June 30, 2003 to the six months ended June 30, 2002, interest income declined $2.4 million, interest expense declined $1.9 million, and net interest income decreased $555,000. The average yields earned and average rates paid both declined nearly the same amount, keeping the net interest spread and net interest margin relatively unchanged when comparing the six-month periods.

The overall tax-equivalent average earning asset yield was 6.04% for the first six months of 2003 compared to 6.86% 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 $292.0 million for the six months ended June 30, 2003, a decline of $36.0 million compared to $328.0 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 six months ended June 30, 2002, average loans, loans held-for-sale, and securities were 87.7% of total average interest-earning assets, and average interest-earning deposits was 10.5% of the total. During the same period of 2003, average loans, loans held-for-sale, and investment securities declined to 83.7% of average interest-earning assets, while average interest-earning deposits increased to 13.9% of the total.

The average cost of interest-bearing liabilities decreased to 2.50% for the six months ended June 30, 2003 from 3.46% for the same period of 2002. Average interest-bearing liabilities decreased $45.2 million from $275.5 million for the first half of 2002 to $230.3 million for the first half 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 six months ended June 30, 2003, the average volume of other borrowed money decreased to $12.8 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.



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Three months ended June 30, 2003 and 2002

The Company's provision for loan losses was $43,000 for the quarter ended June 30, 2003 and $355,000 for the quarter ended June 30, 2002. Charge-offs, net of recoveries, were $146,000 for the three months ended June 30, 2003 compared to net charge-offs of $447,000 for the three months ended June 31, 2002 and $2.3 million for the year ended December 31, 2002. The provision for the quarter ended June 30, 2003 includes $100,000 of expense recorded at the Banking segment, and a recovery of $57,000 received on a charged-off loan at the Holding Company. Because the Holding Company has no loans to reserve against, any recovery of previously charged-off loans is credited to the allowance, but immediately reversed against the provision for loan losses.

Six months ended June 30, 2003 and 2002

The Company's provision for loan losses was $566,000 for the six months ended June 30, 2003 and $655,000 for the six months ended June 30, 2002. Charge-offs, net of recoveries, were $849,000 for the first half of 2003 compared to net charge-offs of $838,000 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 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 six months ended June 30, 2003 and 2002

Non-interest income consists of the following components:



Three
      Months Ended
      
      Six
      Months Ended(unaudited)
      June 30,
      
      June 30,(dollars in
      thousands)
      2003
      
      2002
      
      2003
      
      2002Service charge on
      deposit accounts
      $ 238
      
      $ 171
      
      $ 484
      
      $ 349Gains on loans sold
      1,247
      
      998
      
      2,996
      
      2,172Mortgage brokerage
      fees
      651
      
      706
      
      1,494
      
      1,311Fiduciary income
      80
      
      71
      
      170
      
      142Escrow fees
      324
      
      193
      
      661
      
      415Credit Card income
      143
      
      132
      
      296
      
      257ATM income
      13
      
      37
      
      26
      
      65Safe deposit box
      fees
      2
      
      3
      
      27
      
      27Gain on sale of
      repossessed assets
      4
      
      19
      
      37
      
      21Gain on sale of
      available-for-sale securities
      -
      
      39
      
      -
      
      39Other miscellaneous
      fees and income
      8
      
      5
      
      13
      
      14Total
      non-interest income
      $ 2,710
      
      $ 2,374
      
      $ 6,204
      
      $ 4,812




Non-interest income was $2.7 million for the quarter ended June 30, 2003, an increase of $336,000 from $2.4 million for the same period of 2002. For the six-month periods ended June 30 2003 and 2002, non-interest income was $6.2 million and $4.8 million, respectively, an increase of $1.4 million. 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 $2.2 million, which accounted for 81.5% of the total non-interest income for the second quarter of 2003, and were $1.9 million or 79.2% for the same period of 2002. These income categories were $5.2 million, or 83.9% of the total non-interest income for the first two quarters of 2003, and were $3.9 million or 81.3% of the total non-interest income for the same period of 2002.



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Non-Interest Expense

Three and six months ended June 30, 2003 and 2002

Non-interest expense consists of the following components:



Three
      Months Ended
      
      Six
      Months Ended(unaudited)
      June 30,
      
      June 30,(dollars in
      thousands)
      2003
      
      2002
      
      2003
      
      2002Salaries and
      employee benefits
      $ 2,465
      
      $ 2,604
      
      $ 5,089
      
      $ 5,018Net occupancy and
      equipment
      565
      
      588
      
      1,212
      
      1,168Amortization of
      intangible assets
      67
      
      67
      
      133
      
      133Net cost of
      operation of other real estate owned
      74
      
      47
      
      101
      
      131Business taxes
      98
      
      137
      
      231
      
      299Data processing and
      communications
      108
      
      152
      
      237
      
      253Stationery and
      supplies
      54
      
      92
      
      115
      
      163Credit card expense
      151
      
      131
      
      306
      
      247Travel and
      education
      66
      
      36
      
      137
      
      86Loan expense
      240
      
      130
      
      353
      
      208Advertising
      39
      
      43
      
      56
      
      82Professional fees
      479
      
      261
      
      946
      
      536Postage and freight
      128
      
      116
      
      231
      
      240FDIC insurance
      133
      
      143
      
      271
      
      290Other miscellaneous
      expenses
      352
      
      268
      
      706
      
      502Total non-interest
      expense
      $ 5,019
      
      $ 4,815
      
      $ 10,124
      
      $ 9,356




Total non-interest expenses increased $204,000 to $5.0 million for the quarter ended June 30, 2003 compared to $4.8 million for the quarter ended June 30, 2002. For the six months ended June 30, 2003, total non-interest expenses increased $768,000 to $10.1 million compared to $9.4 million for the same period of 2002.

Salary expenses have declined by $139,000 comparing the second quarter of 2003 to the second quarter of 2002. Salary expenses have increased slightly comparing the first six months of 2003 to the first six months of 2002. At June 30, 2003, the Company had 170 full-time equivalent employees compared to 195 at June 30, 2002. Although the number of employees has declined significantly, commission expenses at Bay Mortgage have increased from period to period due to a higher volume of mortgage loans originated and sold, keeping the total salary expenses relatively high. During the second quarter of 2003, Bay Mortgage originated $113.3 million of mortgage loans, an increase of $27.8 million from $85.5 million originated during the second quarter of 2002. During the first six months of 2003, Bay Mortgage originated $238.3 million of mortgage loans, an increase of $59.9 million from $178.4 million originated during the first six months of 2002. Also contributing to keeping the salary expense relatively higher is ordinary annual wage increases for many existing employees, generally ranging from three to six percent per year.

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 for the quarter ended June 30, 2003 was $565,000 or 3.9% lower than $588,000 for the same period of 2002. The lease cost savings related to a closure of a branch of Bay Mortgage early in 2003 contributed to lower overall occupancy expenses when comparing the quarters. The Company's net occupancy expense for the six months ended June 30, 2003 was $1.2 million, which is unchanged from the same period of 2002.



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Although the FDIC insurance premium rate remains unchanged at $.17 per $100 of domestic deposits when comparing the quarters and six months periods ended June 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, consulting and legal fees, and other professional fees. These expenses were $479,000 for the three months ended June 30, 2003 compared to $261,000 for the three months ended June 30, 2002. These expenses were $946,000 for the six months ended June 30, 2003 compared to $536,000 for the six months ended June 30, 2002 Approximately $150,000 of the $218,000 increase comparing the three month periods and $128,000 of the $409,000 increase comparing the six month periods, is legal expenditures for advice and opinions related to contracts, regulatory documentation, and various other administrative issues, and collection and repossession of loans. Another $117,000 and $362,000 of the remaining increases for the three and six month periods, respectively, are attributable to consultation to establish or improve internal controls and procedures to improve regulatory reporting, and for employee placement services. Declines in accounting expenses of $74,000 and $100,000 comparing the three and six month periods, respectively have somewhat offset the increases in legal and consulting expenses.

Loan expenses for both the three and six month periods ended June 30, 2003 include approximately $130,000 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.

Other miscellaneous expenses were higher during the three and six month periods ended June 30, 2003 when compared to the same periods of 2002 primarily due to higher temporary help costs. 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 Company expects to see a reduction in these expenses during the remainder of 2003.

Income Taxes

Three months ended June 30, 20003 and 2002

During the second quarter of 2003 the provision for income taxes was $161,000 compared to an income tax benefit of $184,000 for the second quarter of 2002. 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 second quarter of 2002, excluding the $375,000 benefit, was 35.9% compared to 36.1% for the three months ended June 30 2003.

Six months ended June 30, 2003 and 2002

During the first two quarters of 2003 the provision for income taxes was $512,000 compared to $59,000 for the first two quarters of 2002. These provisions resulted in an effective tax rate of 35.6% and 5.1% for the same periods of 2003 and 2002, respectively. The effective tax rate for the year to date 2002, excluding the $375,000 tax benefit discussed above, was 37.6%. 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.



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Loans

Total loans outstanding were $168.9 million and $194.5 million at June 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 $31.4 million at June 30, 2003 and $39.9 million at December 31, 2002. In addition, the Company had $27.0 million of loans held-for-sale at June 30, 2003 compared to $63.6 million at December 31, 2002.  During the first six months of 2003, the Company funded $238.3 million of loans to be sold into the secondary market, and delivered $278.0 million to the market.  This compares to $178.4 million funded and $197.3 million delivered during the first six months of 2002.

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

(unaudited)
      June 30, 2003
      
      December 31, 2002(dollars in thousands)
      Amount
      
      Percent
      
      Amount
      
      PercentCommercial
      $ 36,565
      
      21.57%
      
      $ 42,200
      
      21.62%Real
      estate construction
      26,306
      
      15.52%
      
      37,229
      
      19.07%Real
      estate commercial
      76,615
      
      45.19%
      
      82,763
      
      42.41%Real
      estate mortgage
      25,631
      
      15.12%
      
      28,370
      
      14.53%Consumer and other
      4,410
      
      2.60%
      
      4,626
      
      2.37%169,527
      
      100.00%
      
      195,188
      
      100.00%Deferred loan fees
      (579)
      
      
      
      (682)Total loans
      168,948
      
      
      
      194,506Allowance for loan losses
      (5,867)
      
      
      
      (6,150)Total loan, net
      $ 163,081
      
      
      
      $ 188,356




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.  Specific reserves may be assigned to loans graded substandard or worse to cover the amount of exposure the bank has calculated for each loan, in accordance with FASB 114.  In some cases a specific reserve may be assigned to better graded credits for specific reasons. Depending on the circumstances of a particular loan, specific reserves may be higher or lower than the general reserve percentage applied to the pool of loans within that loan grade.

- General.

- Special.



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- 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.

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 $5.9 million and $6.2 million at June 30, 2003 and December 31, 2002, respectively, a decline of approximately $300,000. The allowance, as a percentage of total loans, increased from 3.2% at year-end 2002 to 3.5% at June 30, 2003. Management believes the allowance for loan losses at both June 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 $3.4 million at June 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 six months of 2003, the volume of loans on the Company's watch list has decreased by approximately $10.1 million.

At June 30, 2003, approximately $1.6 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, unchanged from $1.6 million at December 31, 2002.

The combined special and unallocated allowance was $1.1 million and $460,000 at June 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.



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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)
      Six
      Months Ended
      
      Year Ended(balances exclude amounts from discontinued operations)
      June 30,
      December 31,(dollars in thousands)
      2003
      
      2002
      
      2002Loans
      outstanding at end of period, net of deferred fees (1)
      $ 168,948
      
      $ 226,441
      
      $ 194,506Average
      loans outstanding during the period
      $ 180,352
      
      $ 227,051
      
      $ 219,231Allowance for loan losses, beginning of period
      $ 6,150
      
      $ 5,710
      
      $ 5,710Loans
      charged off:Commercial
      644
      
      842
      
      2,111Real
      Estate
      201
      
      128
      
      415Consumer
      71
      
      2
      
      7Credit
      Cards
      24
      
      75
      
      83Total loans
      charged-off
      940
      
      1,047
      
      2,616Recoveries:Commercial
      65
      
      75
      
      99Real
      Estate
      20
      
      116
      
      156Consumer
      3
      
      1
      
      1Credit
      Cards
      3
      
      15
      
      17Total recoveries
      91
      
      207
      
      273Provision for loan losses
      566
      
      655
      
      2,783Allowance for loan losses, end of period
      $ 5,867
      
      $ 5,525
      
      $ 6,150Net
      loans charged-off during the period
      849
      
      840
      
      2,343Ratio
      of net loans charged-off to average loans outstanding
      0.47%
      
      0.37%
      
      1.07%Ratio
      of allowance for loan losses to loans at end of period
      3.47%
      
      2.44%
      
      3.16%(1)
      Excludes loans held-for-sale




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.



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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)
      
      June 30,
      
      December 31,(dollars in thousands)
      
      2003
      
      2002Loans
      on non-accrual status
      
      $ 3,616
      
      $ 5,097Loans
      past due greater than 90 days but not on non-accrual status
      
      149
      
      982Other
      real estate owned
      
      2,016
      
      1,304Other
      repossessed assets
      
      2
      
      4Total
      non-performing assets
      
      $ 5,783
      
      $ 7,387Total
      assets
      
      $ 298,284
      
      $ 345,164Percentage of non-performing assets to total assets
      
      1.94%
      
      2.14%




At June 30, 2003 non-performing assets were $5.8 million or 1.94% of total assets compared to $7.4 million or 2.14% of total assets at December 31, 2002. A reduction in total non-accrual loans of $1.5 million accounts for the majority of the decrease, and is related to loans for $1.8 million to a real estate development company whose loans were brought current and taken off of non-accrual status. Approximately $2.8 million of the $3.6 million of non-accrual loans at June 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.

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.

Other real estate owned increased to $2.0 million at June 30, 2003 compared to $1.3 million at December 31, 2002. During the first six months of 2003, six properties with a total cost basis of $822,000 were sold, while nine properties were repossessed with a total asset value of $1.5 million.

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 of investments, sales of loans or other assets, borrowings, and the use of the federal funds market.

As of June 30, 2003, approximately $13.1 million of the securities portfolio is scheduled to mature within one year, and another $4.0 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 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 June 30, 2003, bear interest at rates ranging from 6.11% to 8.62%. The remaining maturities of the Company's FHLB advances range from 9 months through 6 1/2 years. Because the Company currently has excess liquidity, during the first six months of 2003, $10.1 million of advances matured and were not renewed. At June 30, 2003, $5.7 million in advances were outstanding from the FHLB compared to $15.8 million at December 31, 2002.



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Currently, the Company's excess 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 June 30, 2003, brokered certificates of deposit have decreased to $19.9 million or 7.9% 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 $13.0 million of public funds certificates of deposit matured during the first quarter of 2003, and have not been renewed. During the first six months 2003, total loans have decreased $25.6 million and loans held-for-sale have declined $36.6 million, offsetting the reduction in deposits and keeping the cash balance and liquidity higher.

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.

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

To Be
      Well-CapitalizedUnder
      PromptFor
      Capital Adequacy
      
      Corrective ActionActual
      
      Purposes
      
      ProvisionAmount
      
      Ratio
      
      Amount
      
      Ratio
      
      Amount
      
      RatioJune 30, 2003Total
      risk-based capital:Consolidated
      
      
      $ 31,613
      
      15.56%
      
      $ 16,255
      
      >8.00%
      
      $ 20,319
      
      >10.00%Bank
      
      
      $ 33,000
      
      16.26%
      
      $ 16,240
      
      >8.00%
      
      $ 20,300
      
      >10.00%Tier 1
      risk-based capital:Consolidated
      
      
      $ 29,032
      
      14.29%
      
      $ 8,127
      
      >4.00%
      
      $ 12,191
      
      >6.00%Bank
      
      
      $ 30,421
      
      14.99%
      
      $ 8,120
      
      >4.00%
      
      $ 12,180
      
      >6.00%Tier 1
      (leverage) capital:Consolidated
      
      
      $ 29,032
      
      9.87%
      
      $ 11,765
      
      >4.00%
      
      N/A
      
      N/ABank
      
      
      $ 30,421
      
      10.37%
      
      $ 11,740
      
      >4.00%
      
      $ 14,674
      
      >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 June 30, 2003 and December 31, 2002, Cowlitz Bancorporation and Cowlitz Bank met or exceeded all relevant capital adequacy requirements.



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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.

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 Company's current Tier 1 leverage ratio is 10.37%, 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 and 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 June 30, 2003, the amount of classified assets identified in the examination had been reduced to 44.7% of Tier 1 capital plus the allowance for loan and lease losses. The objective of no more than 50% has been reached five months prior to the November 30, 2003 target date.

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.  As experienced in the relatively stable rate environment during 2002 and the first six months of 2003, the interest rate spread has widened as long-term certificates of deposit have matured and re-priced at the current, lower rates or not been renewed.



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Item 4. Controls and Procedures

In April 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.



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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

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



3.1*
Restated and Amended Articles of Incorporation of Registrant3.2*
Bylaws of Registrant10.1
Cowlitz Bancorporation 2003 Stock Incentive Plan (incorporated by reference to appendix B to the Company's proxy statement for the 2003 annual meeting of shareholders filed April 15th, 2003.10.2
Cowlitz Bancorporation Employee Stock Purchase Plan (incorporated by reference to appendix A to the Company's proxy statement for the 2003 annual meeting of shareholders filed April 15th, 2003.31.1
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

(b)    The Company did not file any reports
on Form 8-K during the quarter ended June 30, 2003.



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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: August 13, 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; and



Date: August 13, 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; and





Date: August 13, 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 June 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

August 13, 2003



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