---

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TABLE OF CONTENTS

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

FORM 10-Q

[X] Quarterly report Pursuant to section 13 or 15(d)
of the Securities and Exchange act of 1934
For the quarter ended September 30, 2004

[ ] Transition report
pursuant to section 13 or 15(d) of the Securities and Exchange act of 1934

For the transition period from ________ to  ________

Commission file number 0-23881

---

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

---

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


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

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

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

> Yes [X] No [ ]

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

> Yes[ ] No [X]

Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest practicable date. Common
Stock, no par value on October 31, 2004: 4,170,975 shares

1

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TABLE OF CONTENTS

COWLITZ BANCORPORATION AND SUBSIDIARY

TABLE OF CONTENTS

PAGEPart I
	
	FINANCIAL INFORMATIONItem 1.
	
	Financial StatementsConsolidated Statements of Condition -
	
	3September 30, 2004 and December 31, 2003Consolidated Statements of Income -
	
	4Three and nine months ended September 30, 2004 and
2003Consolidated Statements of Changes in Shareholders'
Equity -
	
	5Year ended December 31, 2003 and nine months ended
September 30, 2004Consolidated Statements of Cash Flows -
	
	6Nine months ended September 30, 2004 and 2003Notes to Consolidated Financial Statements
	
	7-12Item 2.
	
	Management's Discussion and Analysis of Financial
Condition
	
	13-22And Results of OperationsItem 3.
	
	Quantitative and Qualitative Disclosures About Market
Risk
	
	22-23Item 4.
	
	Controls and Procedures
	
	23Part II
	
	OTHER INFORMATIONItem 1.
	
	Legal Proceedings
	
	23Item 2.
	
	Unregistered Sales of Equity Securities and Use of
Proceeds
	
	23Item 3.
	
	Defaults upon Senior Securities
	
	23Item 4.
	
	Submission of Matters to a Vote of Security Holders
	
	23Item 5.
	
	Other Information
	
	23Item 6.
	
	Exhibits and Reports on Form 8-K
	
	23Signatures
	
	24Certification of Chief Executive Officer and Chief
Financial Officer
	
	25-27


Forward-Looking Statements

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

2

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TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION 
Item 1. Financial Statements

COWLITZ BANCORPORATION AND
SUBSIDIARY CONSOLIDATED STATEMENTS OF CONDITION
(dollars in thousands)

September 30,
      
      December 31,ASSETS
      
      2004
      
      2003Cash and cash
      equivalents
      $
      6,914
      $
      24,527Investment securities:Available-for-sale (at
      fair value, cost of $58,400 and $46,658 atSeptember 30, 2004 and
      December 31, 2003, respectively)
      
      58,817
      
      47,000Held-to-maturity (at
      amortized cost, fair value of $385 and $8,270at September 30, 2004
      and December 31, 2003, respectively)
      
      385
      
      8,144Total investment
      securities
      
      59,202
      
      55,144Federal Home Loan Bank
      stock, at cost
      
      1,047
      
      1,974Loans held-for-sale
      
      -
      
      8,360Loans, net of deferred
      loan fees
      
      186,692
      
      163,490Allowance for loan
      losses
      
      (3,942)
      
      (3,968)Total loans, net
      
      182,750
      
      159,522Cash surrender value of
      bank-owned life insurance
      
      8,502
      
      8,170Premises and equipment,
      net of accumulated depreciation of $4,625 and$4,350 at September 30,
      2004 and December 31, 2003, respectively
      
      3,961
      
      4,171Goodwill, net of
      impairment adjustments and accumulated amoritzationof $1,987 at September
      30, 2004 and December 31, 2003
      
      852
      
      852Intangible assets, net
      of accumulated amortization of $1,933 and$1,734 at September 30,
      2004 and December 31, 2003, respectively
      
      37
      
      236Accrued interest
      receivable and other assets
      
      5,174
      
      5,843TOTAL ASSETS
      $
      268,439
      $
      268,799LIABILITIESDeposits:Non-interest-bearing
      demand
      $
      55,172
      $
      60,572Savings and
      interest-bearing demand
      
      78,014
      
      86,375Certificates of deposit
      
      88,030
      
      79,533Total deposits
      
      221,216
      
      226,480Federal funds purchased
      
      9,300
      
      225Federal Home Loan Bank
      notes payable
      
      518
      
      5,653Other borrowings
      
      39
      
      2,739Accrued interest
      payable and other liabilities
      
      2,258
      
      1,900TOTAL LIABILITIES
      
      233,331
      
      236,997SHAREHOLDERS' EQUITYPreferred stock, no par
      value; 5,000,000 shares authorized; no sharesissued and outstanding
      at September 30, 2004 and December 31, 2003
      
      -
      
      -Common stock, no par
      value; 25,000,000 shares authorized; with 4,165,975and 3,898,652 shares
      issued and outstanding at September 30, 2004 andDecember 31, 2003,
      respectively
      
      19,453
      
      17,957Additional paid-in
      capital
      
      2,017
      
      1,609Retained earnings
      
      13,364
      
      12,011Accumulated other
      comprehensive income, net of taxes
      
      274
      
      225TOTAL SHAREHOLDERS'
      EQUITY
      
      35,108
      
      31,802TOTAL LIABILITIES AND
      SHAREHOLDERS' EQUITY
      $
      268,439
      $
      268,799


See accompanying notes

3



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TABLE OF CONTENTS

COWLITZ BANCORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME 
(dollars in thousands, except per share amounts)

Three Months Ended
	
	
	Nine Months EndedSeptember 30,
	
	
	September 30,2004
	
	
	2003
	
	
	2004
	
	
	2003INTEREST INCOMEInterest and fees on loans
	$
	3,207
	
	$
	3,439
	
	$
	9,335
	
	$
	11,451Interest on taxable investment securities
	
	501
	
	
	205
	
	
	1,420
	
	
	659Interest on non-taxable investment securities
	
	96
	
	
	27
	
	
	261
	
	
	36Other interest and dividend income
	
	19
	
	
	115
	
	
	111
	
	
	450Total interest income
	
	3,823
	
	
	3,786
	
	
	11,127
	
	
	12,596INTEREST EXPENSESavings and interest-bearing demand
	
	202
	
	
	276
	
	
	592
	
	
	915Certificates of deposit
	
	490
	
	
	682
	
	
	1,469
	
	
	2,546Federal funds purchased
	
	12
	
	
	3
	
	
	17
	
	
	15Federal Home Loan Bank notes payable
	
	10
	
	
	107
	
	
	40
	
	
	361Other borrowings
	
	13
	
	
	57
	
	
	99
	
	
	172Total interest expense
	
	727
	
	
	1,125
	
	
	2,217
	
	
	4,009Net interest income before provision
(benefit) for loan losses
	
	3,096
	
	
	2,661
	
	
	8,910
	
	
	8,587PROVISION (BENEFIT) FOR LOAN LOSSES
	
	73
	
	
	(36)
	
	
	160
	
	
	530Net interest income after provision
(benefit) for loan losses
	
	3,023
	
	
	2,697
	
	
	8,750
	
	
	8,057NON-INTEREST INCOMEService charges on deposit accounts
	
	174
	
	
	211
	
	
	535
	
	
	695(Losses) gains on loans sold
	
	(17)
	
	
	1,110
	
	
	122
	
	
	4,106Mortgage brokerage fees
	
	73
	
	
	336
	
	
	327
	
	
	1,830Escrow fees
	
	-
	
	
	244
	
	
	-
	
	
	905Credit card income
	
	159
	
	
	175
	
	
	436
	
	
	471Fiduciary income
	
	104
	
	
	70
	
	
	302
	
	
	240Increase in cash surrender value of bank-owned
life insurance
	
	96
	
	
	74
	
	
	332
	
	
	74Net gains on sale of available for sale
securities
	
	8
	
	
	-
	
	
	8
	
	
	-Net gains (losses) on sale of repossessed assets
	
	6
	
	
	(87)
	
	
	(9)
	
	
	(50)Other income
	
	32
	
	
	42
	
	
	112
	
	
	108Total non-interest income
	
	635
	
	
	2,175
	
	
	2,165
	
	
	8,379NON-INTEREST EXPENSESalaries and employee benefits
	
	1,499
	
	
	2,208
	
	
	4,732
	
	
	7,297Net occupancy and equipment expense
	
	353
	
	
	566
	
	
	1,165
	
	
	1,778Professional fees
	
	187
	
	
	
	
	
	528
	
	
	1,275Business taxes
	
	69
	
	
	79
	
	
	173
	
	
	310FDIC insurance assessment
	
	8
	
	
	119
	
	
	215
	
	
	390Credit card expense
	
	154
	
	
	163
	
	
	420
	
	
	469Data processing and communications
	
	73
	
	
	126
	
	
	227
	
	
	363Loan expense
	
	-
	
	
	116
	
	
	27
	
	
	469Postage and freight
	
	55
	
	
	104
	
	
	176
	
	
	335Travel and education
	
	45
	
	
	65
	
	
	125
	
	
	202Stationery and supplies
	
	29
	
	
	54
	
	
	96
	
	
	169Temporary help
	
	53
	
	
	45
	
	
	59
	
	
	338Amortization of intangible assets
	
	66
	
	
	66
	
	
	199
	
	
	199Expenses relating to other real estate owned
	
	29
	
	
	46
	
	
	71
	
	
	147Other expenses
	
	350
	
	
	319
	
	
	947
	
	
	788Total non-interest expense
	
	2,970
	
	
	4,405
	
	
	9,160
	
	
	14,529Income before provision for income taxes
	
	688
	
	
	467
	
	
	1,755
	
	
	1,907INCOME TAX PROVISION
	
	171
	
	
	147
	
	
	402
	
	
	659NET INCOME
	$
	517
	
	$
	320
	
	$
	1,353
	
	$
	1,248BASIC EARNINGS PER SHARE OF COMMON STOCK
	$
	0.13
	
	$
	0.08
	
	$
	0.34
	
	$
	0.32DILUTED EARNINGS PER SHARE OF COMMON STOCK
	$
	0.13
	
	$
	0.08
	
	$
	0.34
	
	$
	0.31WEIGHTED-AVERAGE SHARES OUTSTANDING - BASIC
	
	4,004,149
	
	
	3,872,052
	
	
	3,941,902
	
	
	3,842,438WEIGHTED-AVERAGE SHARES OUTSTANDING - DILUTED
	
	4,097,244
	
	
	4,037,631
	
	
	4,037,722
	
	
	3,967,981


See accompanying notes

4

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TABLE OF CONTENTS

COWLITZ BANCORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)

AccumulatedAdditional
	
	
	
	Other
	
	
	
	TotalCommon stock
	
	Paid-in
	
	Retained
	
	Comprehensive
	
	Shareholders'
	
	ComprehensiveShares
	
	Amount
	
	Capital
	
	Earnings
	
	Income
	
	
	
	Equity
	
	Income (loss)BALANCE, December 31, 2002
	
	3,818,272
	$
	17,491
	$
	1,538
	$
	11,894
	$
	340
	
	
	$
	31,263Comprehensive income:Net income
	
	-
	
	-
	
	-
	
	117
	
	-
	
	
	
	117
	$
	117Net changes in unrealized gains oninvestments available-for-sale,net of deferred taxes of $42
	
	-
	
	-
	
	-
	
	-
	
	(115)
	
	
	
	(115)
	
	(115)Comprehensive income
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	$
	2Proceeds from the exercise ofstock options
	
	80,380
	
	466
	
	-
	
	-
	
	-
	
	
	
	466Tax benefit from the exerciseof stock options
	
	-
	
	-
	
	71
	
	-
	
	-
	
	
	
	71BALANCE, December 31, 2003
	
	3,898,652
	
	17,957
	
	1,609
	
	12,011
	
	225
	
	
	
	31,802Comprehensive income:Net income
	
	-
	
	-
	
	-
	
	1,353
	
	-
	
	
	
	1,353
	$
	1,353Net unrealized gains on investmentsreclassified from held-to-maturityto available-for-sale, net ofdeferred taxes of $134
	
	-
	
	-
	
	-
	
	-
	
	261
	
	
	
	261
	
	261Net changes in unrealized gains oninvestments available-for-sale,net of deferred taxes of $109
	
	-
	
	-
	
	-
	
	-
	
	(212)
	
	
	
	(212)
	
	(212)Comprehensive income
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	$
	1,402Proceeds from the exercise ofstock options
	
	267,323
	
	1,496
	
	-
	
	-
	
	-
	
	
	
	1,496Tax benefit from the exerciseof stock options
	
	-
	
	-
	
	408
	
	-
	
	-
	
	
	
	408BALANCE, September 30, 2004
	
	4,165,975
	$
	19,453
	$
	2,017
	$
	13,364
	$
	274
	
	
	$
	35,108


See accompanying notes

5

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TABLE OF CONTENTS

COWLITZ BANCORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

Nine Months EndedSeptember 30,2004
	
	2003CASH FLOWS FROM OPERATING ACTIVITIESNet income from operations
	$
	1,353
	$
	1,248Adjustments to reconcile net income to net cash
from operating activities:Deferred tax expense
	
	-
	
	52Depreciation and amortization
	
	503
	
	604Provision for loan losses
	
	160
	
	530Increase in cash surrender value of
bank-owned life insurance
	
	(332)
	
	(74)Federal Home Loan Bank stock dividends
	
	(40)
	
	(95)Net gains on maturities and sales of
investment securities available-for-sale
	
	(8)
	
	-Net amortization of investment security
premiums and accretion of discounts
	
	259
	
	101Net losses on sales of foreclosed assets
	
	9
	
	50Net (gains) losses on the sale and disposal
of premises and equipment
	
	(4)
	
	11Net gains on loans sold
	
	(122)
	
	(4,106)Origination of loans held-for-sale
	
	(3,019)
	
	(334,781)Proceeds from loan sales
	
	10,663
	
	391,311Decrease in accrued interest receivable and
other assets
	
	504
	
	811Increase (decrease) in accrued interest
payable and other liabilities
	
	358
	
	(777)Net cash from operating activities
	
	10,284
	
	54,885CASH FLOWS FROM INVESTING ACTIVITIESProceeds from maturities of investment securities
held-to-maturity
	
	95
	
	-Proceeds from maturities and sales of investment
securities available-for-sale
	
	20,707
	
	17,967Purchases of held-to-maturity investment
securities
	
	(380)
	
	(4,965)Purchases of available-for-sale investment
securities
	
	(24,656)
	
	(22,586)Proceeds from redemption of Federal Home Loan
Bank stock
	
	977
	
	428Purchase of Federal Home Loan Bank stock
	
	(10)
	
	-Net (increase) decrease in loans
	
	(23,071)
	
	24,529Proceeds from sale of foreclosed assets
	
	1,059
	
	1,634Purchases of premises and equipment
	
	(94)
	
	(331)Proceeds from the sale of premises and equipment
	
	4
	
	3Purchase of bank-owned life insurance
	
	-
	
	(8,000)Net cash from investment activities
	
	(25,369)
	
	8,679CASH FLOWS FROM FINANCING ACTIVITIESNet decrease in savings, noninterest-bearing and
interest-bearing demand deposits
	
	(13,761)
	
	(5,028)Net increase (decrease) in certificates of
deposit
	
	8,497
	
	(55,566)Net increase (decrease) in federal funds
purchased
	
	9,075
	
	(1,525)Proceeds from Federal Home Loan Bank notes
payable
	
	10,000
	
	-Repayment of Federal Home Loan Bank notes payable
	
	(15,135)
	
	(10,135)Proceeds from other borrowings
	
	1,360
	
	-Repayment of other borrowings
	
	(4,060)
	
	(100)Proceeds from the exercise of stock options
	
	1,496
	
	389Net cash from financing activities
	
	(2,528)
	
	(71,965)Net decrease in cash and cash
equivalents
	
	(17,613)
	
	(8,401)CASH AND CASH EQUIVALENTS, beginning of period
	
	24,527
	
	43,691CASH AND CASH EQUIVALENTS, end of period
	$
	6,914
	$
	35,290


See accompanying notes

6

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TABLE OF CONTENTS

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

1. Nature of Operations

Cowlitz Bancorporation (the "Company") was organized
in 1991 under Washington law to become the holding company for Cowlitz Bank (the
"Bank"), a Washington state chartered bank that commenced operations in 1978.
The principal executive offices of the Company are located in Longview,
Washington. Cowlitz Bank operates four branches in Cowlitz County in southwest
Washington. Outside of Cowlitz County, the Bank does business under the name Bay
Bank with branches in Bellevue, Washington, and Portland, Oregon, a loan
production office in Vancouver, Washington, and a limited service branch in a
retirement center in Wilsonville, Oregon. The Oregon branches of Bay Bank were
previously operated under the name Northern Bank of Commerce (NBOC). Cowlitz
Bank also provides mortgage banking services through its Bay Mortgage division
with offices in Longview, Castle Rock, Kalama, and Vancouver, Washington. During
much of 2003, the Company also operated Bay Mortgage and Bay Escrow offices in
Bellevue and Seattle, Washington. As part of a strategy to consolidate resources
into commercial banking, and reduce reliance on mortgage lending activities,
those offices were closed during the fourth quarter of 2003 and the first
quarter of 2004.

The Company offers or makes available a broad range of
financial services to its customers, primarily small and medium-sized
businesses, professionals, and retail customers. The Bank's commercial and
personal banking services include commercial and real estate lending, consumer
lending, and trust services. The Company's goals are to offer exceptional
customer service and to invest in the markets it serves through its business
practices and community service.

2. Principles of Consolidation

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

The interim financial statements have been prepared
without an audit and in accordance with the instructions to Form 10-Q, generally
accepted accounting principals, and banking industry practices. Accordingly,
they do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments, including
normal recurring accruals necessary for a fair presentation of results of
operations for the interim periods included herein have been made. The results
of operations for the three and nine months ended September 30, 2004 are not
necessarily indicative of results to be anticipated for the year ending December
31, 2004.

3. Cash and Cash Equivalents

For the purpose of presentation in the statements of
cash flows, cash and cash equivalents include cash on hand, amounts due from
banks and federal funds sold. Federal funds sold generally mature the day
following purchase.

4. Use of Estimates in the Preparation of Financial Statements

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

5. Earnings Per Share

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

Three Months Ended
	
	Nine Months EndedSeptember 30,
	
	September 30,2004
	
	2003
	
	2004
	
	2003Weighted-average shares - basic
	
	4,004,149
	
	3,872,052
	
	3,941,902
	
	3,842,438Effect of assumed conversion of stock options
	
	93,095
	
	165,579
	
	95,820
	
	125,543Weighted-average shares - diluted
	
	4,097,244
	
	4,037,631
	
	4,037,722
	
	3,967,981


Options to purchase 556,466 shares of common stock
with exercise prices ranging from $10.73 to $12.00, with an average price of
$11.13, were outstanding at September 30, 2004 but were not included in the
computation of diluted earnings per share for the three and nine months ended
September 30, 2004 because the options' exercise price was greater than the
average market price of the common shares for those periods. These options
expire from 2010-2014.

7

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TABLE OF CONTENTS

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

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

6. Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards
Board ("FASB") issued Interpretation No. 46("FIN 46R"),Consolidation of Variable Interest Entities (revised December 2003).
In December 2003, the FASB made revisions and delayed implementation of certain
provisions of FIN 46R. FIN 46R provides guidance on how to identify the primary
beneficiary of a variable interest entity ("VIE") and determine when the VIE
should be consolidated by the primary beneficiary. The recognition and
measurement provisions of FIN 46R, as revised, were adopted for the quarter
ended March 31, 2004. The Company does not have any VIEs and, accordingly, the
implementation of this Interpretation did not impact its consolidated financial
statements or results of operations. In March 2004, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 105 ("SAB 105"),Application of Accounting Principles to Loan
Commitments. SAB 105 provides guidance on
the accounting for loan commitments accounted for as derivative instruments. The
Company adopted SAB 105 in March 2004. The adoption did not have a material
impact on the Company's consolidated financial statements or results of
operation.

In March 2004, the FASB ratified the consensus reached
by the Emerging Issues Task Force regarding issue 03-1The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments("EITF 03-01"). The consensus
provided guidance for determining when an investment is
other-than-temporarily-impaired. The guidance was effective for periods
beginning after June 15, 2004. On September 30, 2004, the FASB deferred the
implementation of the recognition criteria of EITF 03-01 until the fourth
quarter of 2004 pending a review of the guidance in light of comments received.
The Company will evaluate the potential impact this guidance may have on its
financial statements and results of operations when it is released in final
form.

7. Stock-Based Compensation

SFAS No. 123, "Accounting for Stock-Based
Compensation," requires disclosure about stock-based compensation arrangements
regardless of the method used to account for them. As permitted by SFAS No. 123,
the Company has decided to apply the accounting provisions of Accounting
Principles Board (APB) Opinion No. 25, and therefore discloses the difference
between compensation cost included in net income and the related cost measured
by the fair value-based method defined by SFAS No. 123, including tax effects,
that would have been recognized in the statement of income if the fair value
method had been used. Under APB Opinion No. 25, no compensation cost has been
recognized for the Company's stock option plans. Had compensation cost for these
plans been determined consistent with SFAS No. 123 and recognized over the
vesting period, the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:

Three Months Ended
	
	Three Months Ended
	
	Nine Months Ended
	
	Nine Months EndedSeptember 30, 2004
	
	September 30, 2003
	
	September 30, 2004
	
	September 30, 2003As
	
	Pro
	
	As
	
	Pro
	
	As
	
	Pro
	
	As
	
	ProReported
	
	Forma
	
	Reported
	
	Forma
	
	Reported
	
	Forma
	
	Reported
	
	Forma(dollars in thousands, except for share amounts)Net income
	$
	517
	$
	430
	$
	320
	$
	258
	$
	1,353
	$
	1,182
	$
	1,248
	$
	977Basic earnings per share
	$
	0.13
	$
	0.11
	$
	0.08
	$
	0.07
	$
	0.34
	$
	0.30
	$
	0.32
	$
	0.25Diluted earnings per share
	$
	0.13
	$
	0.10
	$
	0.08
	$
	0.06
	$
	0.34
	$
	0.29
	$
	0.31
	$
	0.25


8

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TABLE OF CONTENTS

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

The fair value of each option granted is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for the periods ended September 30, 2004 and 2003.

Three Months Ended
	
	Nine Months EndedSeptember 30,
	
	September 30,2004
	
	2003
	
	2004
	
	2003Dividend yield
	
	0.00%
	
	0.00%
	
	0.00%
	
	0.00%Expected life (years)
	
	4.26
	
	4.17
	
	4.26
	
	4.17Expected volatility
	
	35.81%
	
	49.39%
	
	35.81% - 38.40%
	
	49.39% - 52.11%Risk-free rate
	
	2.78%
	
	2.87%
	
	2.78% - 2.98%
	
	2.87% - 2.98%


8. Comprehensive Income

For the Company, comprehensive income primarily
includes net income reported on the statements of income and changes in the fair
value of available-for-sale investment securities. These amounts are included in
"Other Comprehensive Income" on the consolidated statement of changes in
shareholders' equity. In March 2004, the Company transferred $8.0 million of
investment securities previously classified as "held-to-maturity" to
"available-for-sale" classification. As a result of this re-classification, an
unrealized loss of $853,000, net of deferred taxes of $436,000, was recognized
in comprehensive income and a component of other comprehensive income for the
nine months ended September 30, 2004.

9. 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 investment
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, offers a full line of residential
lending products including FHA and VA loans, construction loans, and bridge
loans.

The community banking and mortgage banking activities
are monitored and reported by Company management as separate operating segments.
Despite the closure of Bay Escrow and the Bellevue and Seattle offices of Bay
Mortgage during the fourth quarter of 2003, mortgage lending activities in the
remaining locations will continue to be reported as a separate operating
segment.

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 2003 annual report, except that some operating expenses and the
results of discontinued operations are not allocated to segments.

9

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TABLE OF CONTENTS

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

Summarized financial information for the three and
nine months ended September 30, 2004 and 2003, concerning the Company's
reportable segments is shown in the following tables:

Three Months Ended September 30,
2004Mortgage
	
	
	HoldingBanking
	
	
	Banking
	
	
	Company
	
	
	
	Intersegment
	
	
	ConsolidatedInterest income
	
	$
	4,311
	
	$
	7
	
	$
	1
	
	$
	(496)
	
	$
	3,823Interest expense
	
	
	1,201
	
	
	10
	
	
	12
	
	
	(496)
	
	
	727Net interest income (expense)
	
	
	3,110
	
	
	(3)
	
	
	(11)
	
	
	-
	
	
	3,096Provision (benefit) for loan losses
	
	
	100
	
	
	-
	
	
	(27)
	
	
	-
	
	
	73Non-interest income
	
	
	567
	
	
	68
	
	
	-
	
	
	-
	
	
	635Non-interest expense
	
	
	2,721
	
	
	153
	
	
	96
	
	
	-
	
	
	2,970Income (loss) before provision(benefit) for income taxes
	
	
	856
	
	
	(88)
	
	
	(80)
	
	
	-
	
	
	688Provision (benefit) for income taxes
	
	
	223
	
	
	(30)
	
	
	(22)
	
	
	-
	
	
	171Net income (loss)
	
	$
	633
	
	$
	(58)
	
	$
	(58)
	
	$
	-
	
	$
	517Depreciation and amortization
	
	$
	142
	
	$
	12
	
	$
	-
	
	$
	-
	
	$
	154Three Months Ended September 30,
2003Mortgage
	
	
	HoldingBanking
	
	
	Banking
	
	
	Company
	
	
	
	Intersegment
	
	
	ConsolidatedInterest income
	
	$
	3,594
	
	$
	543
	
	$
	3
	
	$
	(354)
	
	$
	3,786Interest expense
	
	
	1,110
	
	
	313
	
	
	56
	
	
	(354)
	
	
	1,125Net interest income (expense)
	
	
	2,484
	
	
	230
	
	
	(53)
	
	
	-
	
	
	2,661Provision (benefit) for loan losses
	
	
	126
	
	
	-
	
	
	(162)
	
	
	-
	
	
	(36)Non-interest income
	
	
	473
	
	
	1,696
	
	
	6
	
	
	-
	
	
	2,175Non-interest expense
	
	
	2,709
	
	
	1,635
	
	
	61
	
	
	-
	
	
	4,405Income before provision forincome taxes
	
	
	122
	
	
	291
	
	
	54
	
	
	-
	
	
	467Provision for income taxes
	
	
	27
	
	
	100
	
	
	20
	
	
	-
	
	
	147Net income
	
	$
	95
	
	$
	191
	
	$
	34
	
	$
	-
	
	$
	320Depreciation and amortization
	
	$
	158
	
	$
	29
	
	$
	-
	
	$
	-
	
	$
	187


10

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TABLE OF CONTENTS

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



Nine Months Ended September 30,
2004Mortgage
	
	
	HoldingBanking
	
	
	Banking
	
	
	Company
	
	
	Intersegment
	
	
	ConsolidatedInterest income
	
	$
	12,466
	
	$
	136
	
	$
	6
	
	$
	(1,481)
	
	$
	11,127Interest expense
	
	
	3,479
	
	
	123
	
	
	96
	
	
	(1,481)
	
	
	2,217Net interest income (expense)
	
	
	8,987
	
	
	13
	
	
	(90)
	
	
	-
	
	
	8,910Provision (benefit) for loan losses
	
	
	350
	
	
	-
	
	
	(190)
	
	
	-
	
	
	160Non-interest income
	
	
	1,702
	
	
	463
	
	
	-
	
	
	-
	
	
	2,165Non-interest expense
	
	
	7,903
	
	
	882
	
	
	375
	
	
	-
	
	
	9,160Income (loss) before provision(benefit) for income taxes
	
	
	2,436
	
	
	(406)
	
	
	(275)
	
	
	-
	
	
	1,755Provision (benefit) for income taxes
	
	
	630
	
	
	(140)
	
	
	(88)
	
	
	-
	
	
	402Net income (loss)
	
	$
	1,806
	
	$
	(266)
	
	$
	(187)
	
	$
	-
	
	$
	1,353Depreciation and amortization
	
	$
	460
	
	$
	44
	
	$
	-
	
	$
	-
	
	$
	504Total assets
	
	$
	267,803
	
	$
	103
	$
	35,212
	
	$
	(34,679)
	
	$
	268,439


11

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

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


Compared to segment information reported during the
three and nine months ended September 30, 2003, the mortgage banking segment
experienced significantly lower activity during the corresponding periods of
2004. In December 2003 and the first quarter of 2004, the Company reduced the
size of its mortgage banking operations by closing its Bay Mortgage offices in
Bellevue and Seattle. Management believes that the net losses reported for the
mortgage banking segment during 2004 could have been significantly higher if the
segment had continued to operate as it had during 2003. Reduced demand for
mortgage refinance loans and a desire to concentrate resources on the core
banking segment were significant factors leading to the decision to scale back
the mortgage banking segment.

The credit to the provision for loan losses reported
during the three and nine months ended September 30, 2004 and the three months
ended September 30, 2003 in the holding company segment were generated from
recoveries of previously charged-off loans in a segment that no longer carries a
loan portfolio.

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

Although mortgage operations have been significantly
reduced, and have generated small losses during 2004, improved efficiencies and
an increase in net interest income in the banking segment more than offset the
losses. Excluding the provision reclassification discussed above, the banking
segment reported net income of approximately $431,000 during the first nine
months of 2003, compared to $1.8 million during the same period of 2004, an
increase of about $1.4 million. The efficiency ratio (non-interest expense
divided by the sum of non-interest income and net interest income) for the
banking segment has improved significantly to 74.0% and 73.9% for the three and
nine months ended September 30, 2004, respectively, from 91.6% and 88.8% for the
same periods of 2003, respectively.

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

Results of Operations for the Three and Nine Months
Ended September 30, 2004 and 2003

The Company's net income for the third quarter of 2004
was $517,000, or $0.13 per diluted share, compared to net income of $320,000, or
$0.08 per diluted share for the third quarter of 2003. Net income for the nine
months ended September 30, 2004 and 2003 was $1.4 million, or $0.34 per diluted
share, and $1.2 million or $0.31 per diluted share, respectively. Net interest
income was $3.1 million or 14.8% higher during the three months ended September
30, 2004 compared to $2.7 million during the same period of 2003. During the
third quarter of 2004, the banking segment recorded a $100,000 provision for
loan losses, which was offset by a credit to the provision for loan losses of
$27,000 resulting from a recovery by the holding company of a previously
charged-off loan. Similarly, the components of the year to date provision for
2004 of $160,000 include a provision by the banking segment of $350,000 offset
by recoveries by the holding company of $190,000. The provision recorded during
the first nine months of 2003 was higher based on management's assessment of the
adequacy of the allowance for loan losses at that time. Non-interest income and
non-interest expenses are lower in the current periods when compared to 2003,
primarily from reductions in the Company's mortgage operations and initiatives
implemented that target expense reductions.

Financial Condition as of September 30, 2004 and
December 31, 2003

At September 30, 2004, total assets were $268.4
million, virtually unchanged from $268.8 million at December 31, 2003. Total
liabilities were $233.3 million at September 30, 2004, a decline of $3.7 million
or 1.6% from $237.0 million at December 31, 2003. Although total assets have
declined only slightly from the December 31, 2003 level, the mix of assets has
changed substantially. At December 31, 2003, the balance of loans held-for-sale
was $8.4 million but as of March 31, 2004, the entire balance had been sold into
the secondary market. As part of the strategy to curtail mortgage operations,
the Company will no longer originate loans for sale into the secondary market.
Although the Company has ceased its secondary market function and closed its Bay
Mortgage offices in Bellevue and Seattle, Washington, mortgage lending products
will continue to be offered to the Company's customers in its remaining Bay
Mortgage locations in Longview and Vancouver, Washington. Loans, net of deferred
fees, have increased $23.2 million since December 31, 2003 to $186.7 million at
September 30, 2004. Approximately $16.5 million of this increase has occurred
during the third quarter. The increase in loans was offset primarily by a
reduction of $17.6 million in cash and cash equivalents from December 31, 2003
to September 30, 2004. Total investment securities have increased approximately
$4.0 million during the first nine months of 2004. A reclassification of $8.0
million of municipal bond investments from held-to-maturity to
available-for-sale accounts for the large variance in the components of the
Company's investment securities holdings.

The mix of liabilities at September 30, 2004 has also
changed considerably since December 31, 2003. Total deposits have declined $5.3
million during the first nine months of 2004, despite an increase of $8.5
million in certificates of deposit. FHLB notes payable and other borrowings were
$7.8 million lower at September 30, 2004 than at December 31, 2003, but fed
funds purchased were $9.1 million higher. At September 30, 2004, the Company had
$26.0 million in brokered certificates of deposits or 11.8% of $221.2 million in
total deposits. This compares to $10.4 million of brokered certificates of
deposit at December 31, 2003 or 4.6% of $226.5 million in total deposits.

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:

- the volume and severity of non-performing loans and
adversely classified credits,
- the level of net charge-offs experienced on previously
classified loans,
- the nature and value of collateral securing the loans,
- the trend in loan growth and the percentage of change,
- the level of geographic and/or industry concentration,
- the relationship and trend over the past several years
of recoveries in relation to charge-offs, and
- other known factors regarding specific loans.

Qualitative factors include:

- the effectiveness of credit administration,
- the adequacy of loan review,
- the adequacy of loan operations personnel and
processes,
- the effect of competitive issues that impact loan
underwriting and structure,
- the impact of economic conditions, and
- the introduction of new loan products or specific
marketing efforts.

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Changes in the above factors could significantly
effect the determination of the adequacy 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. Goodwill was recognized as the excess of cost
over the fair value of net assets acquired from the purchase of Bay Mortgage,
and the Portland, Oregon branch of Bay Bank, formerly Northern Bank of Commerce.
Goodwill was amortized using the straight-line method over a 15-year period
until December 31, 2001. Effective January 1, 2002, pursuant to Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets," the Bank ceased amortization of goodwill and completed its first of
ongoing assessments of goodwill impairment in March 2002. The $852,000 current
balance of goodwill is related entirely to the Northern Bank of Commerce
purchase. Goodwill impairment will be deemed to exist in the future if the net
book value of a reporting unit, considered by the Bank to represent its
operating segments, exceeds its estimated fair value.

Analysis of Net Interest Income

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

Three months ended September 30, 2004 and 2003

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

Three Months EndedSeptember 30,
	
	
	Increase(dollars in thousands)
	
	2004
	2003
	
	
	(Decrease)
	
	ChangeInterest income
	$
	3,823
	
	$
	3,786
	
	$
	37
	
	1.0%Tax effect of non-taxable interest income
	
	44
	
	
	20
	
	
	24
	
	120.0%Tax equivalent interest income
	
	3,867
	
	
	3,806
	
	
	61
	
	1.6%Interest expense
	
	727
	
	
	1,125
	
	
	(398)
	
	-35.4%Net interest income
	$
	3,140
	
	$
	2,681
	
	$
	459
	
	17.1%Average interest-earning assets
	$
	243,739
	
	$
	262,643
	
	$
	(18,904)
	
	-7.2%Average interest-bearing liabilities
	$
	174,425
	
	$
	199,714
	
	$
	(25,289)
	
	-12.7%Average yields earned (1)
	
	6.35%
	
	
	5.80%
	
	
	55
	b.p.(3)Average rates paid (1)
	
	1.67%
	
	
	2.25%
	
	
	(58)
	b.p.(3)Net interest spread (1)
	
	4.68%
	
	
	3.55%
	
	
	113
	b.p.(3)Net interest margin (1) (2)
	
	5.15%
	
	
	4.08%
	
	
	107
	b.p.(3)


(1)
	Ratios for the three months ended September 30, 2004
and 2003 have been annualized(2)
	Computed by dividing non-interest income by average
interest-earning assets(3)
	b.p. stands for "basis points" (100 b.p. is equal to
1.0%)


Comparing the quarter ended September 30, 2004 to the
quarter ended September 30, 2003, tax equivalent interest income was $61,000
higher, despite a decline in total interest-earning assets of $18.9 million.
Changes to both the asset mix and interest rates contributed to this result.
During the third quarter of 2003, the balance of loans held-for-sale, which
earned a lower yield than the general loan portfolio, averaged $23.9 million.
The Company no longer carries loans held-for-sale, consistent with the
reorganization of the mortgage segment during late 2003 and early 2004. Loans
(excluding loans held-for-sale) averaged $168.8 million during the third quarter
of 2003 compared to $181.6 million during the same period of 2004. Other changes
in asset mix when comparing the

14

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TABLE OF CONTENTS

periods include a reduction of $28.4 million in
average balances of low yield cash and cash equivalents, and an increase of
$25.2 million in relatively higher yielding investment securities.

Increases in interest rates, including the Company's
prime lending rate, have also contributed to a higher yield earned on average
interest-earning assets when comparing the third quarter of 2003 to the third
quarter of 2004. The prime rate increased by 25 basis points two separate times
during the third quarter of 2004 and is now 4.75% compared to 4.00% during the
third quarter of 2003. Prime based loans, which account for approximately 40% of
the overall loan portfolio, reprice immediately with changes to the prime rate.

Interest expense was $398,000 lower during the third
quarter of 2004 compared to the same period of 2003. Both the volume of
interest-bearing liabilities and the rates paid on them declined comparing the
two periods. The decline in average rates paid on interest-bearing liabilities
is primarily attributable to the continued maturity of higher rate long-term
certificates of deposit, which either did not renew or were re-priced at
current, lower rates. Certificates of deposit averaged $86.5 million during the
third quarter of 2003, but declined to an average of $81.2 million during the
third quarter of 2004. The average rates paid on certificates of deposit were
also approximately 70 basis points lower in 2004 when comparing the two
quarters. The interest rates paid on other interest-bearing deposits were also
slightly lower during the three months ended September 30, 2004 when compared to
the three months ended September 30, 2003. In addition, the Company paid off a
$5.0 million FHLB note that was bearing an interest rate of 7.44% during the
third quarter of 2003. The Company also paid off a note at the holding company
with an average balance of $1.9 million through August 2004 and an interest rate
of 8.0% .

Nine months ended September 30, 2004 and 2003

Nine Months EndedSeptember 30,
	
	
	Increase(dollars in thousands)
	
	2004
	
	2003
	
	
	(Decrease)
	
	ChangeInterest income
	$
	11,127
	$
	12,596
	
	$
	(1,469)
	
	-11.7%Tax effect of non-taxable interest income
	
	121
	
	40
	
	
	81
	
	202.5%Tax equivalent interest income
	
	11,248
	
	12,636
	
	
	(1,388)
	
	-11.0%Interest expense
	
	2,217
	
	4,009
	
	
	(1,792)
	
	-44.7%Net interest income
	$
	9,031
	$
	8,627
	
	$
	404
	
	4.7%Average interest-earning assets
	$
	239,432
	$
	282,090
	
	$
	(42,658)
	
	-15.1%Average interest-bearing liabilities
	$
	172,653
	$
	219,975
	
	$
	(47,322)
	
	-21.5%Average yields earned (1)
	
	6.26%
	
	5.97%
	
	
	29
	b.p. (3)Average rates paid (1)
	
	1.71%
	
	2.43%
	
	
	(72)
	b.p. (3)Net interest spread (1)
	
	4.55%
	
	3.54%
	
	
	101
	b.p. (3)Net interest margin (1) (2)
	
	5.03%
	
	4.08%
	
	
	95
	b.p. (3)


(1)
	Ratios for the nine months ended September 30, 2004
and 2003 have been annualized(2)
	Computed by dividing non-interest income by average
interest-earning assets(3)
	b.p. stands for "basis points" (100 b.p. is equal to
1.0%)


Comparing the nine months ended September 30, 2004 to
the nine months ended September 30, 2003, tax equivalent interest income was
$1.4 million lower, primarily due to a decline in average interest-earnings
assets of $42.7 million. Reductions in loans held-for-sale resulting from the
mortgage segment realignment account for $27.7 million of this decline. Interest
bearing cash and cash equivalent balances are $35.9 million lower comparing the
two nine month periods. The average yields earned were higher during the first
nine months of 2004 compared to the same period of 2003, despite a lower average
prime rate during the 2004 period. The change in asset mix from lower rate cash
accounts and loans held-for-sale into higher yielding investment securities and
loans offset the overall lower rate environment.

Interest expense was $1.8 million lower during the
third quarter of 2004 compared to the same period of 2003. Both the volume of
interest-bearing liabilities and the rates paid on them declined significantly
comparing the two periods. The decline in average rates paid on interest-bearing
liabilities is primarily attributable to the continued maturity of higher rate
long-term certificates of deposit, which either did not renew or were re-priced
at current, lower rates. Certificates of deposit averaged $107.1 million during
the first nine months of 2003, but declined to an average of $79.8 million
during the same period of 2004. Similar to the quarterly analysis above, the
average rates paid on certificates of deposit were approximately 70 basis points
lower comparing the nine month periods. The interest rates paid on other
interest-bearing deposits were also slightly lower during the nine months ended
September 30, 2004

15

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when compared to the nine months ended September 30,
2003. In addition, the Company paid off a $5.0 million FHLB note that was
bearing an interest rate of 7.44% during the first nine months of 2003. The
Company also paid off a note at the holding company with an average balance of
$1.9 million through August 2004 and an interest rate of 8.0% .

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.

Three and nine months ended September 30, 2004 and
2003

The net provision for loan losses was $73,000 for the
quarter ended September 30, 2004 compared to a benefit of $36,000 for the same
period of 2003. For the first nine months of 2004, the provision was $160,000
compared to $530,000 for the same period of 2003. The provision recorded during
2004 is lower than during 2003 due to an overall strengthening in loan quality,
and holding company recoveries discussed below.

During 2004 and 2003, the holding company received
payments as recoveries of loans previously charged-off. Because the holding
company does not currently have any loans or an allowance for loan losses, any
recovery of previously charged-off amounts flow through the income statement as
a credit, or benefit, to the provision expense. These benefits are recorded on
the Company's consolidated statements of income net of loan loss provisions
recorded during the periods. The banking segment recorded provisions for loan
losses of $100,000 and $350,000 for the three and nine month periods ended
September 30, 2004, respectively, compared to $126,000 and $375,000, net of a
reclassification adjustment with the holding company, for the corresponding
periods of 2003, respectively.

Non-Interest Income

Three and nine months ended September 30, 2004 and
2003

Non-interest income consists of the following
components:

Three Months Ended
	
	Nine Months EndedSeptember 30,
	
	September 30,(dollars in thousands)
	
	2004
	
	2003
	
	2004
	
	2003Service charge on deposit accounts
	$
	174
	$
	211
	$
	535
	$
	695(Losses) gains on loans sold
	
	(17)
	
	1,110
	
	122
	
	4,106Mortgage brokerage fees
	
	73
	
	336
	
	327
	
	1,830Escrow fees
	
	-
	
	244
	
	-
	
	905Credit card income
	
	159
	
	175
	
	436
	
	471Fiduciary income
	
	104
	
	70
	
	302
	
	240Increase in cash surrender value of bank-owned life
insurance
	
	96
	
	74
	
	332
	
	74ATM income
	
	15
	
	13
	
	42
	
	39Safe deposit box fees
	
	1
	
	-
	
	26
	
	27Gain on sale of available-for-sale securities
	
	8
	
	-
	
	8
	
	-Gain (loss) on sale of repossessed assets
	
	6
	
	(87)
	
	(9)
	
	(50)Other miscellaneous fees and income
	
	16
	
	29
	
	44
	
	42Total non-interest income
	$
	635
	$
	2,175
	$
	2,165
	$
	8,379


Total non-interest income has declined substantially
when comparing the three and nine month periods ended September 30, 2004 to the
same periods of 2003. Reductions in non-interest income generated by the
mortgage banking segment due to the reorganization of that segment is the
primary factor. Gains on loans sold and escrow fees will no longer be generated
under the current structure, and mortgage brokerage fees will be significantly
lower than in past periods. The loss on loans sold of $17,000 recognized during
the third quarter of 2004 was the result of repurchased loans previously sold
into the secondary market. The purchasers of these loans have the ability to
sell the loan back to the Company and recover the premiums they paid to the
Company for loans purchased if the borrower re-finances the loan within 90 days
after it is acquired, or if the borrower becomes delinquent.

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Non-Interest Expense

Three and nine months ended September 30, 2004 and
2003

Non-interest expense consists of the following
components:

Three Months Ended
	
	Nine Months EndedSeptember 30,
	
	September 30,(dollars in thousands)
	
	2004
	
	2003
	
	2004
	
	2003Salaries and employee benefits
	$
	1,499
	$
	2,208
	$
	4,732
	$
	7,297Net occupancy and equipment expense
	
	353
	
	566
	
	1,165
	
	1,778Professional fees
	
	187
	
	329
	
	528
	
	1,275Business taxes
	
	69
	
	79
	
	173
	
	310FDIC insurance assessment
	
	8
	
	119
	
	215
	
	390Credit card expense
	
	154
	
	163
	
	420
	
	469Data processing and communications
	
	73
	
	126
	
	227
	
	363Loan expense
	
	-
	
	116
	
	27
	
	469Postage and freight
	
	55
	
	104
	
	176
	
	335Travel and education
	
	45
	
	65
	
	125
	
	202Stationery and supplies
	
	29
	
	54
	
	96
	
	169Temporary help
	
	53
	
	45
	
	59
	
	338Amortization of intangible assets
	
	66
	
	66
	
	199
	
	199Expenses relating to other real estate owned
	
	29
	
	46
	
	71
	
	147Advertising
	
	45
	
	47
	
	97
	
	103Other miscellaneous expenses
	
	305
	
	272
	
	850
	
	685Total non-interest expense
	$
	2,970
	$
	4,405
	$
	9,160
	$
	14,529


Consistent with non-interest income discussed above,
the majority of the decline in total non-interest expense is attributable to the
reorganization of the Company's mortgage segment during the fourth quarter of
2003. Salaries and employee benefits, net occupancy and equipment, professional
fees, business taxes, data processing and communications, postage and freight,
stationery and supplies, and temporary help are all lower in part because of the
closure of the Bellevue and Seattle mortgage offices and the cessation of the
mortgage loan secondary marketing function.

At September 30, 2004, the Company had 105 full-time
equivalent employees compared to 172 at September 30, 2003. The mortgage segment
reorganization decreased the full-time equivalent employee count by 67 when
comparing the two periods. Also included in salary expenses are ordinary annual
wage increases for many existing employees.

Net occupancy and equipment expenses consist of
depreciation on premises and equipment, lease costs, parking, maintenance and
repair expenses, utilities and related expenses. During the second quarter, the
Company entered into a new lease agreement at one of its banking branches that
has decreased occupancy expenses by approximately $5,000 per month.

Professional fees include exam and audit expenses,
accounting, consulting and legal fees, and other professional fees. These
expenses were significantly lower during the three and nine month periods ended
September 30, 2004 compared to the same periods of 2003. Legal and consulting
fees were higher during 2003 as the Company sought advice and opinions regarding
contracts, regulatory documentation, establishing or improving internal controls
to improve regulatory reporting, collection and repossession of loans, and
various other administrative issues. Also included during the first quarter 2003
was approximately $79,000 in professional fees associated with a State of
Washington Department of Financial Institutions examination conducted in 2002.

Business taxes are based on adjusted revenues, and the
expense has declined when comparing the third quarter and first nine months of
2004 to the same periods of 2003 as overall revenues, specifically from the
mortgage segment, have declined.

The FDIC insurance premium rate for the bank was
reduced to zero during the third quarter of 2004 compared to $0.17 per $100 of
domestic deposits for all other periods presented. 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

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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 insured deposits is $0.0148 per $100 of deposits per year.
Any increase in deposit insurance premiums or FICO assessments could have an
adverse effect on Cowlitz Bank's earnings.

Loan expenses have declined significantly during the
three and nine months ended September 30, 2004 compared to the same periods of
2003. Approximately $130,000 of expense was recognized during 2003 to write-off
prepaid mortgage 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. This amount was
determined to be the potential charge to expense pending additional review of
each individual loan account. Included in third quarter 2004 loan expenses, as
this analysis was concluded, is a recovery of $20,000 of previously written-off
prepaid mortgage expenses. The remaining decline in expenses during 2004 when
compared to 2003 is attributable to the mortgage segment realignment, and
resulting lower volume of mortgage loans processed.

Temporary help expenses have increased during the
third quarter 2004 as additional temporary audit staff has been retained to
assist in the implementation of a Company wide, extensive audit plan. The plan
includes the audit and documentation of financial reporting processes and
procedures as required by public companies under the Sarbanes-Oxley legislation.

Income Taxes

Three and nine months ended September 30, 2004 and
2003

During the third quarter of 2004 the provision for
income taxes was $171,000 compared to $147,000 for the third quarter of 2003.
These provisions resulted in an effective tax rate of 24.9% and 31.5% for the
quarters ended September 30, 2004 and 2003, respectively. During the nine months
ended September 30, 2004, the provision was $402,000 and the effective rate was
22.9% compared to $659,000 and 34.6% for the same period of 2003. Non-taxable
income generated from increased investment in non-taxable municipal bonds and
from the $8.0 million of bank-owned life insurance resulted in the reduced
effective tax rate for the third quarter and first nine months of 2004.

Loans

Total loans outstanding were $186.7 million and $163.5
million at September 30, 2004 and December 31, 2003, respectively. Unfunded loan
commitments such as home equity and other lines of credit, unused available
credit on credit cards, and letters of credit, were $40.3 million at September
30, 2004 and $42.4 million at December 31, 2003.

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

September 30, 2004
	
	December 31, 2003(dollars in thousands)
	
	Amount
	
	Percent
	
	Amount
	
	PercentCommercial
	$
	55,536
	
	29.67%
	$
	38,793
	
	23.63%Real estate construction
	
	24,804
	
	13.25%
	
	18,305
	
	11.15%Real estate commercial
	
	75,550
	
	40.38%
	
	77,412
	
	47.17%Real estate mortgage
	
	28,363
	
	15.15%
	
	25,530
	
	15.55%Consumer and other
	
	2,907
	
	1.55%
	
	4,103
	
	2.50%187,160
	
	100.00%
	
	164,143
	
	100.00%Deferred loan fees
	
	(468)
	
	
	
	(653)Total loans
	
	186,692
	
	
	
	163,490Allowance for loan losses
	
	(3,942)
	
	
	
	(3,968)Total loan, net
	$
	182,750
	
	
	$
	159,522


Allowance for Loan Losses

The allowance for loan losses represents management's
estimate of potential losses as of the date of the financial statements. The
loan portfolio is regularly reviewed to evaluate the adequacy of the allowance
for 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 risk-rating
categories. At a loan's inception, management evaluates the credit risk by using
a risk-rating system. This grading system currently includes eleven levels of
risk. Risk ratings range from "1" for the strongest credits to "10" for the
weakest. A "10" rated loan would normally represent a loss. All loans rated 7-10
are collectively the Company's "Watch List". The specific grades from 7-10 are
"watch list" (risk-rating 7), "special mention" (risk-rating 7.5), "substandard"
(risk-rating 8), "doubtful" (risk-rating 9), and "loss" (risk-rating 10).

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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 allowance, general allowance, special allowance, and an unallocated
allowance.

Specific Allowance.Loans on the Company's Watch List, as described above, are specifically reviewed
and analyzed. Management considers in its analysis expected future cash flows,
the value of collateral and other factors that may impact the borrower's ability
to pay. When significant conditions or circumstances exist on an individual loan
indicating greater risk, specific reserves may be allocated in addition to the
general reserve percentage for that particular risk-rating.

General Allowance.All loans are risk-rated 1 to 10. Those that do not require a specific
allocation are subject to a general allocation based upon historic loss factors.
Management determines these factors by analyzing the volume and mix of the
existing loan portfolio, in addition to other factors. Management also analyzes
the following:

- the volume and severity of non-performing loans and
adversely classified credits;
- the level of net charge-offs experienced on previously
classified loans;
- the nature and value of collateral securing the loans;
and
- the relationship and trend over the past several years
of recoveries in relation to charge-offs.

Special Allowance.From time to time, special reserves will be established to facilitate a change
in the Bank's strategy and other factors. Special allocations are to take into
consideration various factors that include, but are not limited to:

- Effectiveness of credit administration;
- Adequacy of loan review;
- Loan operations;
- The trend in loan growth and the percentage of change;
- Concentrations both geographic and industry;
- Competitive issues that impact loan
underwriting/structure;
- Economic conditions; and
- Any special marketing or introduction of various loan
products.

Unallocated Allowance.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 specific, general, and
special allocations 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, the general, and special allocations of the allowance, management
also considers regulatory guidance in addition to the Company's own experience.

Loans and other extensions of credit deemed
uncollectable are charged to the allowance. Subsequent recoveries, if any, are
credited to the allowance. Actual losses may vary from current estimates and the
amount of the provision may be either greater than or less than actual net
charge-offs when and if they occur. 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 $3.9 million at September 30, 2004
compared to $4.0 million at December 31, 2003. The allowance, as a percentage of
total loans, declined from 2.43% at December 31, 2003 to 2.11% at September 30,
2004. Management believes the allowance for loan losses at both September 30,
2004 and December 31, 2003 is adequate to absorb current potential or
anticipated losses.

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

September 30, 2004
	
	
	December 31, 2003(dollars in thousands)
	
	
	Amount
	
	Percent
	
	
	Amount
	
	PercentGeneral
	
	$
	2,098
	
	53.21%
	
	$
	2,362
	
	59.53%Specific
	
	
	46
	
	1.17%
	
	
	456
	
	11.49%Special
	
	
	1,715
	
	43.51%
	
	
	709
	
	17.87%Unallocated
	
	
	83
	
	2.11%
	
	
	441
	
	11.11%$
	3,942
	
	100.00%
	
	$
	3,968
	
	100.00%


The specific portion of the allowance has declined
during the first nine months of 2004. Based on Management's assessment of the
watch list loans, a lower volume of loans require specific reserves. The special
reserves have increased from December 31, 2003 to September 30, 2004 based upon
a more in-depth analysis of potential risk factors related to the current
interest rate environment in the local economy. Management believes the local
economic recovery, excluding new housing construction segments, is substantially
behind the national trend. Coupled with the anticipation of an increasing
interest rate environment, additional special reserves have been allocated
against potential cash flow strains of the Company's borrowers.

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.

Nine Months Ended
	
	Year EndedSeptember 30,
	
	December 31,(dollars in thousands)
	
	
	2004
	
	2003
	
	2003Loans outstanding at end of period, net of deferred
fees (1)
	
	$
	186,692
	$
	167,307
	$
	163,490Average loans outstanding during the period (1)
	
	$
	172,314
	$
	176,470
	$
	173,966Allowance for loan losses, beginning of period
	
	$
	3,968
	$
	6,150
	$
	6,150Loans charged off:Commercial
	
	
	126
	
	818
	
	1,409Real Estate
	
	
	180
	
	488
	
	1,671Consumer
	
	
	36
	
	71
	
	83Credit Cards
	
	
	82
	
	30
	
	61Total loans charged-off
	
	
	424
	
	1,407
	
	3,224Recoveries:Commercial
	
	
	198
	
	84
	
	504Real Estate
	
	
	28
	
	205
	
	237Consumer
	
	
	6
	
	52
	
	56Credit Cards
	
	
	6
	
	7
	
	8Total recoveries
	
	
	238
	
	348
	
	805Provision for loan losses
	
	
	160
	
	530
	
	237Allowance for loan losses, end of period
	
	$
	3,942
	$
	5,621
	$
	3,968Net loans charged-off during the period
	
	
	186
	
	1,059
	
	2,419Ratio of net loans charged-off to average loans
outstanding
	
	
	0.11%
	
	0.60%
	
	1.39%Ratio of allowance for loan losses to loans at end of
period
	
	
	2.11%
	
	3.36%
	
	2.43%


(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

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a practical expedient, at the loan's observable market
price or the fair market value of the collateral if the loan is collateral
dependent. Impaired loans are charged to the allowance when management believes
that, after considering economic and business conditions, collection efforts,
and collateral position, the borrower's financial condition indicates that
collection of principal is not probable. Generally, no interest is accrued on
loans when factors indicate collection of interest is doubtful or when principal
or interest payments become 90 days past due, unless collection of principal and
interest are anticipated within a reasonable period of time and the loans are
well secured. For such loans, previously accrued but uncollected interest is
charged against current earnings, and income is only recognized to the extent
payments are subsequently received and collection of the remaining recorded
principal balance is considered probable.

Non-Performing Assets

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

September 30,
	
	December 31,(dollars in thousands)
	
	2004
	
	2003Loans on non-accrual status
	$
	572
	$
	1,856Loans past due greater than 90 days but not on
non-accrual status
	
	-
	
	17Other real estate owned
	
	805
	
	1,352Other repossessed assets
	
	-
	
	-Total non-performing assets
	$
	1,377
	$
	3,225Total assets
	$
	268,439
	$
	268,799Percentage of non-performing assets to total assets
	
	0.51%
	
	1.20%


The reduction of $1.8 million since December 31, 2003
is due to a concerted effort by management to minimize the level of
non-performing assets. While it may be difficult to maintain a ratio of
non-performing assets to total assets at the current level, Management expects
to keep the level below the trend experienced during 2003.

During the first nine months of 2004, 13 properties
were sold or had a reduction in their carrying value resulting in an approximate
$1.0 million decline in the balance of other real estate owned. During the same
time period of 2004, $490,000 of properties were repossessed and added to the
carrying value of other real estate owned.

Liquidity

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

Brokered certificates of deposit are a funding source
the Company utilizes to provide additional liquidity as necessary. At September
30, 2004, the Company's broker certificate of deposit balance was $26.0 million
compared to $10.4 million at December 31, 2003. Overnight federal funds
borrowing lines with correspondent banks provide access to an additional $24.5
million for short-term liquidity needs. In addition, the Company has an
established borrowing line with the FHLB that permits it to borrow up to 20% of
the Bank's assets, subject to collateral limitations. The line is available for
overnight federal funds, or notes with other terms and maturities. At September
30, 2004, notes payable to the FHLB were $518,000 compared to $5.7 million at
December 31, 2003. The notes payable at September 30, 2004 have original
maturity periods ranging from 10 years through 15 years, bear interest at rates
ranging from 6.11% to 8.62%, and mature from 2005 to 2009.

In order to maintain the ability to access cash
through sale of securities, during the first quarter of 2004, $8.0 million of
held-to-maturity investments were reclassified as available-for-sale.
Accordingly, the fair value of these investment securities was recognized within
accumulated other comprehensive income upon their reclassification. Investment
securities available-for-sale were $58.8 million at September 30, 2004 compared
to $47.0 million at December 31, 2003.

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

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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 September 30, 2004 and December
31, 2003:

To Be Well-CapitalizedUnder PromptFor Capital Adequacy
	
	
	Corrective ActionActual
	
	
	Purposes
	
	
	ProvisionAmount
	
	Ratio
	
	
	Amount
	
	Ratio
	
	
	Amount
	
	RatioSeptember 30, 2004Total risk-based capital:Consolidated
	
	$
	36,321
	
	17.22%
	
	$
	16,875
	
	> 8.00%
	
	
	N/A
	
	N/ABank
	
	$
	35,534
	
	16.89%
	
	$
	16,832
	
	> 8.00%
	
	$
	21,040
	
	>10.00%Tier 1 risk-based capital:Consolidated
	
	$
	33,668
	
	15.96%
	
	$
	8,438
	
	> 4.00%
	
	
	N/A
	
	N/ABank
	
	$
	32,888
	
	15.63%
	
	$
	8,416
	
	> 4.00%
	
	$
	12,624
	
	>6.00%Tier 1 (leverage) capital:Consolidated
	
	$
	33,668
	
	12.72%
	
	$
	10,584
	
	> 4.00%
	
	
	N/A
	
	N/ABank
	
	$
	32,888
	
	12.43%
	
	$
	10,579
	
	> 4.00%
	
	$
	13,224
	
	>5.00%December 31, 2003Total risk-based capital:Consolidated
	
	$
	32,679
	
	16.38%
	
	$
	15,962
	
	> 8.00%
	
	
	N/A
	
	N/ABank
	
	$
	33,614
	
	16.85%
	
	$
	15,956
	
	> 8.00%
	
	$
	19,946
	
	>10.00%Tier 1 risk-based capital:Consolidated
	
	$
	30,166
	
	15.12%
	
	$
	7,981
	
	> 4.00%
	
	
	N/A
	
	N/ABank
	
	$
	31,102
	
	15.59%
	
	$
	7,978
	
	> 4.00%
	
	$
	11,967
	
	>6.00%Tier 1 (leverage) capital:Consolidated
	
	$
	30,166
	
	11.39%
	
	$
	10,597
	
	> 4.00%
	
	
	N/A
	
	N/ABank
	
	$
	31,102
	
	11.75%
	
	$
	10,591
	
	> 4.00%
	
	$
	13,239
	
	>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). Management believes
that as of September 30, 2004 and December 31, 2003, Cowlitz Bancorporation and
Cowlitz Bank substantially exceeded all relevant capital adequacy requirements.

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 downturn in economic conditions or in the real estate
market, or a rapid increase in interest rates could have a negative effect on
collateral values, cash flows, and borrowers' ability to repay. The 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



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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 using a computer based model.
In a falling rate environment, the spread between interest yields earned and
interest rates paid, may narrow, depending on the relative level of fixed and
variable rate assets and liabilities. In a stable or increasing rate environment
the Company's variable rate loans will remain steady or increase immediately
with changes in interest rates, while fixed rate liabilities, particularly
certificates of deposit will only re-price as the liability matures.

Item 4. Controls and Procedures

As of September 30, 2004, the Company evaluated, under
the supervision and the participation of Management, including the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the design
and operation of disclosure controls and procedures. Based on that evaluation,
Management, including the Chief Executive Officer and Chief Financial Officer,
concluded that disclosure controls and procedures were effective.

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

Part II. OTHER INFORMATION

Item 1.   
Legal Proceedings

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

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

Not applicable

Item 3.   
Defaults upon Senior Securities

Not applicable

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

Not applicable

Item 5.   
Other Information

Not applicable

Item 6.   
Exhibits and Reports on Form 8-K

(a)
	
	Exhibits. The following constitutes the exhibit index.3.1*
	
	Restated and Amended Articles of Incorporation of
Registrant3.2*
	
	Bylaws of Registrant31.1
	
	Certification of Chief Executive Officer31.2
	
	Certification Chief Financial Officer32
	
	Certification of Chief Executive Officer and Chief
Financial Officer


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

> (b) During the quarter ended September 30, 2004, the
> Company furnished information under Item 12 of Form 8-K on July 30, 2004. The
> Company
>       also reported the appointment of two directors under Item 5.02 of Form
> 8-K on September 27, 2004.

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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.

Date: November 12, 2004

> Cowlitz Bancorporation
> (Registrant)
> By:
> /s/ Richard J. Fitzpatrick              
> Richard J. Fitzpatrick, President and Chief Executive Officer
> /s/ Donna P. Gardner
>               
> Donna 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 quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements,
and other financial information included in this quarterly 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
quarterly 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-14 and 15d-14) for the
registrant and have:

> a) designed such disclosure controls and procedures 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 quarterly 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 quarterly report any change in
> the registrant's internal control over financial reporting that occurred during
> the registrant's most recent fiscal quarter that has materially affected, or is
> likely to materially affect the registrant's internal control over financial
> reporting;

5. The registrant's other certifying officers 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
functions):

> a) all significant deficiencies in the design or
> operation of internal controls over financial reporting which are reasonably
> likely to adversely affect the registrant's ability to record, process,
> summarize and report financial information; and
> b) any fraud, whether or not material, that involves
> management or other employees who have a significant role in the registrant's
> internal control over financial reporting.

Date: November 12, 2004

> /s/ Richard J. Fitzpatrick 
> Richard 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 quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements,
and other financial information included in this quarterly 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
quarterly 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-14 and 15d-14) for the
registrant and have:

> a) designed such disclosure controls and procedures 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 quarterly 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 quarterly report any change in
> the registrant's internal control over financial reporting that occurred during
> the registrant's most recent fiscal quarter that has materially affected, or is
> likely to materially affect the registrant's internal control over financial
> reporting;

5. The registrant's other certifying officers 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
functions):

> a) all significant deficiencies in the design or
> operation of internal controls over financial reporting which are reasonably
> likely to adversely affect the registrant's ability to record, process,
> summarize and report financial information; and
> b) any fraud, whether or not material, that involves
> management or other employees who have a significant role in the registrant's
> internal control over financial reporting.

Date: November 12, 2004

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

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Exhibit 32

CERTIFICATION OF 
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

This certification is given by the undersigned Chief
Executive Officer and Chief Financial Officer of Cowlitz Bancorporation (the
"Registrant") pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Each of
the undersigned hereby certifies, with respect to the Registrant's quarterly
report of Form 10-Q for the period ended September 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), that:

> (1) The Report fully complies with the requirements of
> section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
> (2) The information contained in the Report fairly
> presents, in all material respects, the financial condition and result of
> operations of the Company.

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

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

November 12, 2004

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