UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



|Washington, D.C. 20549
|----------------------

|FORM 10-Q                     
|------------------------------
|[X]                           
|                              
|[  ]                          
|                              
|Commission file number 0-23881

|COWLITZ BANCORPORATION                                                                                    
|----------------------------------------------------------------------------------------------------------
|(Exact name of registrant as specified in its charter)                                                    
|                                                                                                          
|                                                                                                          
|Washington                                                                                                
|(State or other jurisdiction                                                                              
|of incorporation or organization)                                                                         
|                                                                                                          
|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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):

[  ] Large accelerated filer        [  ] Accelerated filer         [X] Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (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, 2006: 4,884,748 shares

1



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|COWLITZ BANCORPORATION AND SUBSIDIARY
|-------------------------------------
|TABLE OF CONTENTS                    
|                                     
|Part I                               
|Item 1.                              
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|Item 2.                              
|                                     
|Item 3.                              
|Item 4.                              
|Part II                              
|Item 1.                              
|Item 1A.                             
|Item 2.                              
|Item 3.                              
|Item 4.                              
|Item 5.                              
|Item 6.                              
|                                     



|Forward-Looking Statements
|--------------------------

Managements discussion and the information in this document and the accompanying financial statements contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by words such as "expect", "believe", "intend", "anticipate", "estimate" or similar
expressions, and are subject to risks and uncertainties that could cause actual results to differ materially from those stated. Examples of such risks and uncertainties that could have a material adverse effect on the operations and future prospects
of the Company, and could render actual results different from those expressed in the forward-looking statements, include, without limitation: those set forth in our most recent Form 10-K and other filings with the SEC, changes in general economic
conditions, competition for financial services in the market area of the Company, the level of demand for loans, quality of the loan and investment portfolio, deposit flows, legislative and regulatory initiatives, and monetary and fiscal policies of
the U.S. Government affecting interest rates. The reader is advised that this list of risks is not exhaustive and should not be construed as any prediction by the Company as to which risks would cause actual results to differ materially from those
indicated by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

2

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|Part I. FINANCIAL INFORMATION                                         |  |   |  |               |  |         |   |  |              |  |         |  
|--------------------------------------------------------------------- |  | - |  | ------------- |  | ------- | - |  | ------------ |  | ------- | -
|Item 1. Financial Statements                                          |  |   |  |               |  |         |   |  |              |  |         |  
|                                                                     
|                                                                     
|COWLITZ BANCORPORATION AND SUBSIDIARY                                
|CONSOLIDATED STATEMENTS OF CONDITION                                 
|(UNAUDITED)                                                          
|                                                                     
|                                                                     
|                                                                      |  |   |  | September 30, |  |         |   |  | December 31, | 
|(dollars in thousands)                                                |  |   |  | 2006          |  |         |   |  | 2005         | 
|                                                                      |  |  
|Assets                                                                |  |   |  |               |  |         |   |  |              |  |         |  
|Cash and cash equivalents                                             |  | $ |  | 32,234        |  |         | $ |  | 23,457       | 
|Securities available for sale at fair value                           |  |   |  |               |  |         |   |  |              |  |         |  
|(amortized cost: $54,226 and $52,880 at September 30, 2006            |  |   |  |               |  | 54,158  |   |  |              |  | 52,462  |  
|and December 31, 2005, respectively)                                  |  |   |  |               |  |         |   |  |              |  |         |  
|Federal Home Loan Bank stock, at cost                                 |  |   |  |               |  | 1,247   |   |  |              |  | 1,247   |  
|Loans, net of deferred loan fees                                      |  |   |  |               |  | 344,273 |   |  |              |  | 270,247 |  
|Allowance for loan losses                                             |  |   |  |               |  | (5,208  | ) |  |              |  | (4,417  | )
|                                                                      |  |  
|Total loans, net                                                      |  |   |  |               |  | 339,065 |   |  |              |  | 265,830 |  
|Cash surrender value of bank-owned life insurance                     |  |   |  |               |  | 13,364  |   |  |              |  | 11,475  |  
|Premises and equipment, net                                           |  |   |  |               |  | 5,360   |   |  |              |  | 4,269   |  
|Goodwill and other intangibles                                        |  |   |  |               |  | 1,899   |   |  |              |  | 2,135   |  
|Accrued interest receivable and other assets                          |  |   |  |               |  | 9,288   |   |  |              |  | 9,471   |  
|                                                                      |  |  
|Total assets                                                          |  | $ |  | 456,615       |  |         | $ |  | 370,346      | 
|                                                                      |  |  
|                                                                     
|Liabilities                                                           |  |   |  |               |  |         |   |  |              |  |         |  
|Deposits:                                                             |  |   |  |               |  |         |   |  |              |  |         |  
|Non-interest-bearing demand                                           |  | $ |  | 118,765       |  |         | $ |  | 97,327       | 
|Savings, interest-bearing demand and money market                     |  |   |  |               |  | 93,198  |   |  |              |  | 98,360  |  
|Certificates of deposit                                               |  |   |  |               |  | 174,846 |   |  |              |  | 113,508 |  
|                                                                      |  |  
|Total deposits                                                        |  |   |  |               |  | 386,809 |   |  |              |  | 309,195 |  
|Federal funds purchased and other borrowings                          |  |   |  |               |  | 694     |   |  |              |  | 817     |  
|Junior subordinated debentures                                        |  |   |  |               |  | 12,372  |   |  |              |  | 12,372  |  
|Accrued interest payable and other liabilities                        |  |   |  |               |  | 6,800   |   |  |              |  | 3,021   |  
|                                                                      |  |  
|Total liabilities                                                     |  |   |  |               |  | 406,675 |   |  |              |  | 325,405 |  
|Commitments and contingent liabilities(Note 8)                        |  |   |  |               |  |         |   |  |              |  |         |  
|Shareholders' equity                                                  |  |   |  |               |  |         |   |  |              |  |         |  
|Preferred stock, no par value; 5,000,000 shares authorized; no shares |  |   |  |               |  |         |   |  |              |  |         |  
|issued and outstanding at September 30, 2006 and December 31, 2005    |  |   |  |               |  | -       |   |  |              |  | -       |  
|Common stock, no par value; 25,000,000 shares authorized              |  |   |  |               |  |         |   |  |              |  |         |  
|with 4,884,748 and 4,772,251 shares issued and outstanding            |  |   |  |               |  |         |   |  |              |  |         |  
|at September 30, 2006 and December 31, 2005, respectively             |  |   |  |               |  | 27,219  |   |  |              |  | 26,266  |  
|Additional paid-in capital                                            |  |   |  |               |  | 2,344   |   |  |              |  | 2,043   |  
|Retained earnings                                                     |  |   |  |               |  | 20,422  |   |  |              |  | 16,908  |  
|Accumulated other comprehensive loss, net of taxes                    |  |   |  |               |  | (45     | ) |  |              |  | (276    | )
|                                                                      |  |  
|Total shareholders' equity                                            |  |   |  |               |  | 49,940  |   |  |              |  | 44,941  |  
|                                                                      |  |  
|                                                                     
|Total liabilities and shareholders' equity                            |  | $ |  | 456,615       |  |         | $ |  | 370,346      | 
|                                                                      |  |  
|                                                                     
|See accompanying notes                                                |  |   |  |               |  |         |   |  |              |  |         |  

3

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|COWLITZ BANCORPORATION AND SUBSIDIARY                        
|-------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF INCOME                            
|(UNAUDITED)                                                  
|                                                             
|                                                             
|                                                             
|                                                             
|(dollars in thousands, except per share amounts)             
|                                                             
|Interest income                                              
|Interest and fees on loans                                   
|Interest on taxable investment securities                    
|Interest on non-taxable investment securities                
|Other interest and dividend income                           
|                                                             
|Total interest income                                        
|                                                             
|Interest expense                                             
|Savings and interest-bearing demand                          
|Certificates of deposit                                      
|Federal funds purchased and other borrowings                 
|Junior subordinated debentures                               
|                                                             
|Total interest expense                                       
|                                                             
|Net interest income before provision for credit losses       
|Provision for credit losses                                  
|                                                             
|Net interest income after provision for credit losses        
|                                                             
|Non-interest income                                          
|Service charges on deposit accounts                          
|Mortgage brokerage fees                                      
|Card services income                                         
|Fiduciary income                                             
|Increase in cash surrender value of bank-owned life insurance
|Wire fees                                                    
|International trade fees                                     
|Net loss on sales of investment securities                   
|Net gain on sale of other real estate owned                  
|Other income                                                 
|                                                             
|Total non-interest income                                    
|                                                             
|Non-interest expense                                         
|Salaries and employee benefits                               
|Net occupancy and equipment expense                          
|Professional fees                                            
|Equity in limited partnership losses                         
|Business taxes                                               
|Advertising                                                  
|Card services expense                                        
|Data processing and communications                           
|Postage and freight                                          
|Travel and education                                         
|Stationery and supplies                                      
|Amortization of intangible assets                            
|Interest rate floor valuation adjustment                     
|Insurance premiums                                           
|Loan expense                                                 
|Other expenses                                               
|                                                             
|Total non-interest expense                                   
|                                                             
|Income before provision for income taxes                     
|Income tax provision                                         
|                                                             
|Net income                                                   
|                                                             
|                                                             
|Earnings per common share:                                   
|Basic                                                        
|                                                             
|Diluted                                                      
|                                                             
|Weighted average shares outstanding:                         
|Basic                                                        
|                                                             
|Diluted                                                      
|                                                             
|                                                             
|See accompanying notes                                       

4

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|COWLITZ BANCORPORATION AND SUBSIDIARY              
|---------------------------------------------------
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
|EQUITY AND COMPREHENSIVE INCOME                    
|(UNAUDITED)                                        
|                                                   
|                                                   
|                                                   
|                                                   
|(dollars in thousands)                             
|                                                   
|Balance, December 31, 2004                         
|Comprehensive income:                              
|Net income                                         
|Net change in unrealized gain on                   
|investments available-for-sale,                    
|net of deferred taxes of $343                      
|                                                   
|Comprehensive income                               
|                                                   
|Issuance of common stock in                        
|connection with acquisition                        
|Proceeds from the exercise of                      
|stock options and employee stock                   
|purchases                                          
|Tax benefit from the exercise                      
|of stock options                                   
|                                                   
|Balance, December 31, 2005                         
|Comprehensive income:                              
|Net income                                         
|Net change in unrealized gain on                   
|investments available-for-sale,                    
|net of deferred taxes of $223                      
|                                                   
|Comprehensive income                               
|                                                   
|Proceeds from the exercise of                      
|stock options and employee stock                   
|purchase plan                                      
|Tax benefit from the exercise                      
|of stock options                                   
|Recognition of                                     
|stock-based compensation                           
|                                                   
|Balance, September 30, 2006                        
|                                                   
|                                                   
|See accompanying notes                             

5

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|COWLITZ BANCORPORATION AND SUBSIDIARY                                            
|---------------------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                            
|(UNAUDITED)                                                                      
|                                                                                 
|                                                                                 
|                                                                                 
|(dollars in thousands)                                                           
|                                                                                 
|Cash flows from operating activities                                             
|Net income from operations                                                       
|Adjustments to reconcile net income to net cash from operating activities:       
|Stock-based compensation                                                         
|Tax benefit of stock options exercised                                           
|Depreciation and amortization                                                    
|Provision for credit losses                                                      
|Increase in cash surrender value of bank-owned life insurance                    
|Federal Home Loan Bank stock dividends                                           
|Net loss on sales of investment securities available for sale                    
|Net gain on sales of foreclosed assets                                           
|Net amortization of investment security premiums and accretion of discounts      
|Interest rate floor valuation adjustment                                         
|Increase (decrease) in accrued interest receivable and other assets              
|Increase in accrued interest payable and other liabilities                       
|                                                                                 
|Net cash from operating activities                                               
|                                                                                 
|Cash flows used by investing activities                                          
|Proceeds from maturities and sales of investment securities available-for-sale   
|Purchases of available-for-sale investment securities                            
|Investment in statutory trust subsidiary                                         
|Net increase in loans                                                            
|Proceeds from sale of foreclosed assets                                          
|Purchases of bank-owned life insurance                                           
|Purchases of premises and equipment                                              
|                                                                                 
|Net cash used by investment activities                                           
|                                                                                 
|Cash flows from financing activities                                             
|Net increase in savings, noninterest-bearing and interest-bearing demand deposits
|Net increase in certificates of deposit                                          
|Net increase (decrease) in federal funds purchased and other borrowings          
|Proceeds from issuance of junior subordinated debentures                         
|Repayment of other borrowings                                                    
|Proceeds from the exercise of stock options and employee stock purchase plan     
|Excess tax benefit of stock options exercised                                    
|                                                                                 
|Net cash from financing activities                                               
|                                                                                 
|Net increase in cash and cash equivalents                                        
|Cash and cash equivalents, beginning of period                                   
|                                                                                 
|Cash and cash equivalents, end of period                                         
|                                                                                 
|                                                                                 
|See accompanying notes                                                           

6

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization and Summary of Significant Accounting Policies

Organization-Cowlitz Bancorporation (the Company) was organized in 1991 under Washington law to become the holding company for Cowlitz Bank (the Bank), a Washington state-chartered
bank that commenced operations in 1978. The principal executive offices of the Company are located in Longview, Washington. The Bank operates four branches in Cowlitz County in southwest Washington. Outside of Cowlitz County, the Bank does business
under the name Bay Bank with branches in Seattle, Bellevue and Vancouver, Washington, a full service branch in Portland, Oregon and a limited service branch in a retirement center in Wilsonville, Oregon. The Bank also provides mortgage-banking
services through its Bay Mortgage division with offices in Longview and Vancouver.

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, international banking services, internet banking, trust services, mortgage banking and consumer lending.

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. Certain reclassifications have been made in prior years data to conform to the current years presentation.

The interim financial statements have been prepared without an audit and in accordance with the instructions to Form 10-Q, generally accepted accounting principles, and banking industry practices. Accordingly, they do not
include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals
necessary for a fair presentation of the financial condition and results of operations for the interim periods included herein, have been made. The results of operations for the three and nine months ended September 30, 2006 are not necessarily
indicative of results to be anticipated for the year ending December 31, 2006. The interim consolidated financial statements should be read in conjunction with the December 31, 2005 consolidated financial statements, including the notes thereto,
included in the Companys 2005 Form 10-K.

Operating segments-Internal financial information is primarily recorded and aggregated in three lines of business: commercial banking, mortgage banking, and trust services. While
management monitors the revenue streams of the various products and services, the mortgage banking, international trade services and trust segments are not individually material and operations are managed and financial performance is evaluated on a
company-wide basis. Accordingly, all financial service operations are considered by management to be aggregated within one reportable operating segment.

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

Hedging activities-In the ordinary course of business, the Company may enter into derivative transactions to manage its exposure to interest rate fluctuations. Derivatives that may
be used for interest rate risk management include interest rate swaps, futures, forward and option structures with indices that relate to the pricing of specific on-balance sheet assets. Under the guidance of Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, all derivative instruments that qualify for hedge accounting are recorded on the balance sheet at fair value and classified either as a
hedge of the fair value of a recognized asset, liability or firm commitment (fair value hedge) or as a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability or a forecasted transaction (cash flow
hedge). The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy, at the inception of each hedge transaction. The Company performs an assessment, both at
inception of the hedge and on a quarterly basis thereafter, when required, to determine whether these derivatives are highly effective in offsetting changes in the value of the hedged items.

In March 2006, the Company entered into a 5-year interest rate floor agreement to hedge the variability of expected interest income related to loans priced with a floating rate index. The notional amount of this agreement
is $50 million. For the purpose of this hedge, the Company elected to exclude the time value portion of the interest rate

7

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floor agreement. The effective portion of the change in the fair value of the derivative instrument is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods
during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in other
non-interest expenses during the period of change.

Recently Issued Accounting Standards-In February 2006, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 155,Accounting
for Certain Hybrid Instruments. The Statement provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its
host contract in accordance with Statement 133. Statement 155 allows an entity to make an irrevocable election to measure such a hybrid financial instrument at fair value in its entirety, with changes in fair value recognized in earnings. The
Statement also (1) clarifies which interest-only strips and principal-only strips are not subject to Statement 133; (2) establishes a requirement for holders of securitized financial assets to evaluate whether the interest is a freestanding
derivative or a hybrid financial instrument that contains an embedded derivative requiring bifurcation; (3) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (4) eliminates the prohibition on
a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Statement is effective for all financial instruments acquired, issued
or subject to a re-measurement event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006, and is not expected to have any significant impact on the Company's financial condition or results of
operations.

In March 2006, the FASB issued Statement No. 156,Accounting for Servicing of Financial Assets. The Statement provides relief for loan servicers that
use derivatives to economically hedge fluctuations in the fair value of loan servicing rights. The Statement allows servicers the option to measure their servicing rights at fair value, which is the same accounting basis used to measure derivatives.
A servicer can also choose to continue applying the existing amortization method in Statement 140. The Statement also requires additional disclosures regardless of which method is applied. The Statement is effective as of the beginning of the first
fiscal year that begins after September 15, 2006, and is not expected to have a significant impact on the Company's financial condition or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109. FIN 48 clarifies Statement 109,Accounting for Income Taxes, to indicate a criterion that an individual tax position would have to meet for some or all of the
benefit of that position to be recognized in an entity's financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is not expected to have a significant impact on the Company's consolidated financial condition
or results of operations.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements.The Statement provides enhanced guidance for measuring assets and
liabilities using fair value and applies whenever other standards require or permit assets or liabilities to be measured at fair value. Statement 157 also requires expanded disclosure of items that are measured at fair value, the information used to
measure fair value, and the effect of fair value measurements on earnings. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is not expected to have a significant impact on the
Company's consolidated financial condition or results of operations.

In October 2006, the FASB issued SFAS No. 158,Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans.The Statement is an
amendment of Statements No. 87, 88, 106, and 132(R). Statement 158 requires most public companies, as defined in the Statement, to fully recognize an asset or liability for the overfunded or underfunded status of their post retirement benefit plans
in financial statements. The Statement is effective for entities with publicly traded equity securities for fiscal years ending after December 15, 2006 and is not expected to have a significant impact on the Company's consolidated financial
condition or results of operations.



|2. Cash and Cash Equivalents
|----------------------------

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



|3. Earnings Per Share
|---------------------

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

8

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|                                              |  | Three Months Ended |  | Nine Months Ended
|--------------------------------------------- |  | ------------------ |  | -----------------
|                                              |  | September 30,      |  | September 30,    
|                                              |  |                   
|                                              |  | 2006               |  | 2005             
|                                              |  |                   
|Weighted-average shares  basic               |  | 4,881,525          |  | 4,186,713        
|Effect of assumed conversion of stock options |  | 249,843            |  | 208,458          
|                                              |  |                   
|                                             
|Weighted-average shares  diluted             |  | 5,131,368          |  | 4,395,171        
|                                              |  |                   
|                                             
|4. Stock-Based Compensation                   |  |                    |  |                  

At September 30, 2006, the Company had one stock-based compensation plan (the Plan) available for issuing option grants and an Employee Stock Purchase Plan (ESPP). Under the Plan, options may be
granted to the Companys employees, non-employee directors and others whom management believes contribute to the long-term financial success of the Company. The Plan permits the grant of stock options and restricted stock grants for up to
500,000 shares, of which 4,000 share grants remained available for issue at September 30, 2006. The exercise price of nonqualified stock options under the Plan must be at least equal to the fair value of the common stock on the date of grant, and
the vesting schedule is set at the discretion of the Board of Directors Compensation Committee.

The Company adopted SFAS No. 123(R) on January 1, 2006 using the modified prospective method, and, accordingly, did not restate consolidated net income for prior interim periods or fiscal years. Compensation cost recognized
in the first quarter of 2006 included: (1) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with SFAS 123; and (2) compensation cost
for all share-based awards granted on or after January 1, 2006. Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of
Cash Flows. SFAS No. 123(R) requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation costs recognized for those options (excess tax benefits) to be classified as financing cash flows.

As a result of adopting SFAS No. 123(R) on January 1, 2006, the Companys income before income taxes was lower by $15,000 and $48,000 in the third quarter and first nine months of 2006, respectively. Net income
was lower by $10,000 for the third quarter and $31,000 for the first nine months of 2006 than if the Company had continued to account for share-based compensation under APB No. 25. There was no significant impact on basic and diluted
earnings per share, cash flows from operations or financing activities for the third quarter or first nine months of 2006 related to the expensing of stock-based compensation. In addition, during the first six months of 2006, the Company recognized
expense of $43,000 related to the accelerated vesting of stock options for one former employee and one former director whose services ceased during the period. As of September 30, 2006, there was approximately $30,000 of unrecognized
compensation costs related to stock options, expected to be recognized over a weighted-average period of 0.7 years.

The following table summarizes information about stock option activity for the nine months ended September 30, 2006:

|                             |  |             |   |  |   |  |                |  | Weighted-Avg.         |  |   |  | Aggregate      
|---------------------------- |  | ----------- | - |  | - |  | -------------- |  | --------------------- |  | - |  | ---------------
|                             |  | Options     |   |  |   |  | Weighted-Avg.  |  | Remaining Contractual |  |   |  | Intrinsic Value
|                             |  | Outstanding |   |  |   |  | Exercise Price |  | Term (years)          |  |   |  | (in thousands) 
|                             |  |            
|Balance, beginning of period |  | 984,236     |   |  | $ |  | 10.42          |  |                       |  |   |  |                
|Granted                      |  | -           |   |  |   |  | -              |  |                       |  |   |  |                
|Exercised                    |  | (109,500    | ) |  |   |  | 8.37           |  |                       |  |   |  |                
|Forfeited/expired            |  | (1,250      | ) |  |   |  | 4.74           |  |                       |  |   |  |                
|                             |  |             |   | 
|Balance, end of period       |  | 873,486     |   |  |   |  | 10.68          |  | 6.4                   |  | $ |  | 4,993          
|                             |  |             |   | 
|Exercisable, end of period   |  | 757,306     |   |  |   |  | 10.76          |  | 6.3                   |  | $ |  | 4,267          
|                             |  |             |   | 

The fair value of each option grant was estimated as of the grant date using the Black-Scholes option-pricing model based on the following assumptions. Expected volatility is based on the historical volatility of the price
of the Companys stock for a period consistent with the expected life of the options. The Company uses historical data to estimate option exercise and employee termination rates within the valuation model. The expected term of options
represents the period of time that stock options are expected to be outstanding and is estimated based on historical exercise and forfeiture activity. Expected dividends are estimated to be zero due to the Companys recent historical practice
of not paying dividends. The risk-free rate of return for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

9

---

Under SFAS No. 123, the Black-Scholes option pricing model was used to estimate the fair value of options granted in the first nine months of 2005 using weighted average assumptions as follows: expected volatility of 35.1%;
expected term of 4.26 years; dividend yield of zero; and risk-free interest rate of 4.00% . Pro forma net income and earnings per share information are provided in the following table as if the Company accounted for employee stock option plans under
the fair value method of SFAS No. 123 in the first nine months of 2005.

|                                                 |  |   |  | Three Months Ended |  |   |  | Nine Months Ended 
|------------------------------------------------ |  | - |  | ------------------ |  | - |  | ------------------
|                                                 |  |   |  | September 30, 2005 |  |   |  | September 30, 2005
|                                                 |  |  
|                                                 |  |   |  | As                 |  |   |  | Pro               
|(dollars in thousands, except per share amounts) |  |   |  | Reported           |  |   |  | Forma             
|                                                 |  |  
|Net income                                       |  | $ |  | 756                |  | $ |  | 737               
|                                                 |  |  
|                                                
|Basic earnings per share                         |  | $ |  | 0.18               |  | $ |  | 0.18              
|                                                 |  |  
|                                                
|Diluted earnings per share                       |  | $ |  | 0.17               |  | $ |  | 0.17              
|                                                 |  |  

Stock options granted in the first nine months of 2005 were fully vested upon grant, resulting in full recognition of stock-based compensation expense under the fair value method in the pro forma amounts in the table
above.

The Companys ESPP allows eligible employees to defer from 1% to 10% of their salaries over a period of six months in order to purchase shares of company stock. The purchase price is set at 85% of the lowest market
price on either the first or last day of the six-month deferral period. The Company is authorized to issue up to 175,000 shares of common stock under the ESPP. The Company issued 2,997 shares on June 30, 2006 under the ESPP, and there were 108,257
shares remaining for issuance. Shares issued under the ESPP in 2005 totaled 5,925. Under SFAS No.123(R), the plan is considered compensatory, however, compensation expense related to the ESPP for the first nine months of 2006 and 2005 was not
significant.



|5. 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
Accumulated Other Comprehensive Income (Loss) on the consolidated statement of changes in shareholders equity.

|                                                                        |  |   |  | Three Months Ended |  |   |  |      | Nine Months Ended |   
|----------------------------------------------------------------------- |  | - |  | ------------------ |  | - |  | ---- | ----------------- | --
|                                                                        |  |   |  | September 30,      |  |   |  |      | September 30,    
|                                                                        |  |  
|(dollars in thousands)                                                  |  |   |  | 2006               |  |   |  | 2005 |                   |   
|                                                                        |  |  
|Unrealized holding gains (losses) arising during the period, net of tax |  | $ |  | 838                |  | $ |  | (464 | )                 |   
|Less reclassification adjustment for net realized (gains) losses        |  |   |  |                    |  |   |  |      |                   |   
|on securities available-for-sale included in net                        |  |   |  |                    |  |   |  |      |                   |   
|income during the period, net of tax                                    |  |   |  | 121                |  |   |  |      |                   | 68
|                                                                        |  |  
|Net unrealized holding gains (losses) included in accumulated           |  |   |  |                    |  |   |  |      |                   |   
|other comprehensive income (loss)                                       |  | $ |  | 959                |  | $ |  | (396 | )                 |   
|                                                                        |  |  

6. Investment Securities

The following table presents the composition and carrying value of the Companys available for sale investment portfolio:

| |                            |  |   |  | September 30, |  |   |  | December 31,
| | -------------------------- |  | - |  | ------------- |  | - |  | ------------
| | (dollars in thousands)     |  |   |  | 2006          |  |   |  | 2005        
| |                            |  |  
| | Mortgage-backed securities |  | $ |  | 33,656        |  | $ |  | 34,316      
| | Municipal bonds            |  |   |  | 20,502        |  |   |  | 18,146      
| |                            |  |  
| |                            |  | $ |  | 54,158        |  | $ |  | 52,462      
| |                            |  |  

The following table presents the gross unrealized losses and fair value of the Companys investment securities aggregated by investment category and length of time that individual securities have been in a continuous
unrealized loss position at September 30, 2006:

10

---

|                           |  |   |  | Less Than 12 Months |  |   |  |            | 12 Months or More |  |   |  |        | Total |   |  |           
|-------------------------- |  | - |  | ------------------- |  | - |  | ---------- | ----------------- |  | - |  | ------ | ----- | - |  | ----------
|                           |  |  
|                           |  |   |  | Fair                |  |   |  | Unrealized |                   |  |   |  | Fair   |       |   |  | Unrealized
|(dollars in thousands)     |  |   |  | Value               |  |   |  | Losses     |                   |  |   |  | Value  |       |   |  | Losses    
|                           |  |  
|Mortgage-backed securities |  | $ |  | 13,903              |  | $ |  | (47        | )                 |  | $ |  | 11,601 |       | $ |  | (265      
|Municipal bonds            |  |   |  | 2,119               |  |   |  | (11        | )                 |  |   |  | 4,616  |       |   |  | (30       
|                           |  |  
|                           |  | $ |  | 16,022              |  | $ |  | (58        | )                 |  | $ |  | 16,217 |       | $ |  | (295      
|                           |  |  

At September 30, 2006, there were 46 investment securities in an unrealized loss position, of which 32 were in a continuous loss position for 12 months or more. The Company believes these unrealized losses were due to
changes in market interest rates and not credit quality. The Company has the ability and intent to hold these securities until a market price recovery or to maturity, and, therefore, the unrealized losses on these securities are not considered
other-than-temporarily impaired. The Company periodically reviews its investment securities portfolio as part of its asset/liability management. As a result of this review certain securities may be sold and other securities acquired to improve the
overall yield of the portfolio or modify future cash flows.



|7. Allowance for Credit Losses
|------------------------------

As of March 31, 2006, the Company reclassified the portion of its allowance for credit losses related to unfunded lending commitments to a separate liability account included in other liabilities in the consolidated balance
sheet. The amount at December 31, 2005 ($251,000) was also reclassified. The reclassifications had no effect on the provision for credit losses as reported.



|8. Commitments and Contingent Liabilities
|-----------------------------------------

The Companys consolidated financial statements do not reflect various commitments and contingent liabilities of the Bank that arise in the normal course of business and that involve elements of credit risk, interest
rate risk, and liquidity risk. These commitments and contingent liabilities are commitments to extend credit, credit card arrangements, and standby letters of credit.

A summary of the Banks undisbursed commitments and contingent liabilities at September 30, 2006, was as follows:

| | (dollars in thousands)       |  |   |  | Total  
| | ---------------------------- |  | - |  | -------
| |                              |  |  
| | Commitments to extend credit |  | $ |  | 103,688
| | Credit card commitments      |  |   |  | 4,458  
| | Standby letters of credit    |  |   |  | 2,804  
| |                              |  |  
| |                              |  | $ |  | 110,950
| |                              |  |  

Commitments to extend credit, credit card arrangements, and standby letters of credit all include exposure to some credit loss in the event of non-performance of the customer. The Banks credit policies and procedures
for credit commitments and financial guarantees are the same as those for extension of credit that are recorded in the consolidated statements of condition. Because most of these instruments have fixed maturity dates and many of them expire without
being drawn upon, they do not generally present a significant liquidity risk to the Bank.



|9. Junior Subordinated Debentures
|---------------------------------

As of September 30, 2006, the Company had one wholly owned Delaware statutory business trust subsidiary, Cowlitz Statutory Trust I (the Trust), which issued $12,000,000 of guaranteed undivided beneficial interests in
the Companys Junior Subordinated Deferrable Interest Debentures (Trust Preferred Securities) in 2005. The Company owns all of the common securities of the Trust. The proceeds from the issuance of the common securities and the Trust Preferred
Securities were used by the Trust to purchase $12,372,000 of junior subordinated debentures of the Company. In accordance with Financial Accounting Standards Boards Interpretation No. 46 (revised December 2003) Consolidation of
Variable Interest Entities, the Company does not consolidate the Trust because it is not the primary beneficiary.

The debentures, which represent the sole asset of the Trust, accrue and pay distributions quarterly at a variable rate of 90-day LIBOR plus 1.75% per annum of the stated liquidation value of $1,000 per capital security.
These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. Federal Reserve guidelines limit inclusion of trust-preferred securities and certain other preferred capital elements to 25% of Tier 1 capital. As of September 30,
2006, trust preferred securities accounted for 20% of Tier 1 capital. There can be no assurance that

11

---

the Federal Reserve Board will not further limit the amount of trust preferred securities permitted to be included in Tier 1 capital for regulatory capital purposes.

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



|Critical Accounting Policies
|----------------------------

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



|Quantitative factors include:
|-----------------------------

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



|Qualitative factors include:
|----------------------------

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

Changes in the above factors could significantly affect the determination of the adequacy of the allowance for credit losses. Management performs a full analysis, no less often than quarterly, to ensure that changes in
estimated loan loss levels are adjusted on a timely basis. For further discussion of this significant management estimate, see Allowance for Credit Losses. Another critical accounting policy of the Company is related to the carrying
value of goodwill and other intangibles. Under Statement of Financial Accounting Standards No. 142,"Goodwill and Other Intangible Assets" (SFAS No. 142), the Company ceased
amortization of goodwill on January 1, 2002 and at least annually tests intangibles with indefinite lives for impairment. Impairment analysis of the fair value of goodwill involves a substantial amount of judgment, as does establishing and
monitoring estimated amounts and lives of other intangible assets.

Results of Operations for the Three and Nine Months Ended September 30, 2006



|Overview
|--------

The Companys net income for the third quarter of 2006 was $1.3 million, or $0.26 per diluted share, compared with net income of $756,000, or $0.17 per diluted share for the third quarter of 2005. Net
income was $585,000, or 77%, higher in the third quarter of 2006 compared with the same period of 2005. Net income for the first nine months of 2006 was $3.5 million, or $0.69 per diluted share, compared with $2.1 million, or
$0.48 per diluted share, in the same period of 2005. The Companys increase in net income in 2006 was primarily due to higher average loans outstanding and a higher net interest spread. A significant portion of the loan increase was related
to the acquisition of Asia-Europe-Americas Bancshares, Inc. in the fourth quarter of 2005.

Net interest income was $2.2 million higher in the third quarter of 2006, compared with the same period in 2005. Through September 30, 2006, net interest income was $5.8 million higher than the first nine months of
2005. Average earning assets were $401.5 million in the third quarter of 2006, compared with $296.7 million in the third quarter of 2005. Average interest-bearing liabilities in the third quarter of 2006 were $280.5 million, compared
with $209.5 million in the third quarter of 2005.

The Company recorded a provision for credit losses of $800,000 in the third quarter of 2006 and $1.5 million for the first nine months of 2006. This compares with a provision for credit losses of $310,000 in the
third quarter and $370,000 for the first nine months of 2005. The 2006 provision increased the allowance for credit losses to primarily support loan growth.

12

---

At September 30, 2006, total assets were $456.6 million, an increase of $86.3 million, or 23%, from December 31, 2005. Interest-bearing liabilities increased to $281.1 million as of September 30, 2006 from
$225.1 million as of year-end 2005. Non-interest-bearing demand deposits increased $21.4 million during the same period. Total loans were up $74.0 million, or 27%, from year-end 2005. Loan growth was funded by an increase in deposits,
primarily certificates of deposits, and a decrease in cash and cash equivalents from year-end 2005.



|Analysis of Net Interest Income
|-------------------------------

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

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

|                                          |  |   |  | Three Months Ended |  |          |  |         |  |   | 
|----------------------------------------- |  | - |  | ------------------ |  | -------- |  | ------- |  | - | 
|                                          |  |   |  | September 30,      |  |          |  |         |  |   | 
|                                          |  |   |  |                    |  | Increase |  |         | 
|(dollars in thousands)                    |  |   |  | 2006               |  |          |  | 2005    |  |   | 
|                                          |  |  
|Interest income                           |  | $ |  | 8,603              |  | $        |  | 5,108   |  | $ | 
|Tax effect of non-taxable interest income |  |   |  | 80                 |  |          |  | 64      |  |   | 
|                                          |  |   |  |                   
|Tax equivalent interest income            |  |   |  | 8,683              |  |          |  | 5,172   |  |   | 
|Interest expense                          |  |   |  | 2,624              |  |          |  | 1,350   |  |   | 
|                                          |  |   |  |                   
|Net interest income                       |  | $ |  | 6,059              |  | $        |  | 3,822   |  | $ | 
|                                          |  |   |  |                   
|                                         
|Average interest-earning assets           |  | $ |  | 401,529            |  | $        |  | 296,673 |  | $ | 
|Average interest-bearing liabilities      |  | $ |  | 280,545            |  | $        |  | 209,540 |  | $ | 

|Average yields earned (1)   |  | 8.65 | % |  | 6.97 | % |  | 168 |  | b.p. |  | (3 | )
|--------------------------- |  | ---- | - |  | ---- | - |  | --- |  | ---- |  | -- | -
|Average rates paid (1)      |  | 3.74 | % |  | 2.58 | % |  | 116 |  | b.p. |  | (3 | )
|Net interest spread (1)     |  | 4.91 | % |  | 4.39 | % |  | 52  |  | b.p. |  | (3 | )
|Net interest margin (1) (2) |  | 6.04 | % |  | 5.15 | % |  | 89  |  | b.p. |  | (3 | )

|(1)   Ratios have been annualized. Tax exempt interest income has been adjusted to a taxable equivalent basis using a 34% tax rate
|----------------------------------------------------------------------------------------------------------------------------------
|(2) 
Computed by dividing net interest income by average interest-earning assets                                                  
|(3)   b.p. stands for "basis points" (100 b.p. is equal to 1.0%)                                                                  
|                                                                                                                                  

13

---

|                                          |  |   |  | Nine Months Ended |  |          |  |         |  |   | 
|----------------------------------------- |  | - |  | ----------------- |  | -------- |  | ------- |  | - | 
|                                          |  |   |  | September 30,     |  |          |  |         |  |   | 
|                                          |  |   |  |                   |  | Increase |  |         | 
|(dollars in thousands)                    |  |   |  | 2006              |  |          |  | 2005    |  |   | 
|                                          |  |  
|Interest income                           |  | $ |  | 22,558            |  | $        |  | 13,721  |  | $ | 
|Tax effect of non-taxable interest income |  |   |  | 230               |  |          |  | 174     |  |   | 
|                                          |  |   |  |                  
|Tax equivalent interest income            |  |   |  | 22,788            |  |          |  | 13,895  |  |   | 
|Interest expense                          |  |   |  | 6,439             |  |          |  | 3,411   |  |   | 
|                                          |  |   |  |                  
|Net interest income                       |  | $ |  | 16,349            |  | $        |  | 10,484  |  | $ | 
|                                          |  |   |  |                  
|                                         
|Average interest-earning assets           |  | $ |  | 370,694           |  | $        |  | 280,609 |  | $ | 
|Average interest-bearing liabilities      |  | $ |  | 259,177           |  | $        |  | 197,967 |  | $ | 

|Average yields earned (1)   |  | 8.20 | % |  | 6.60 | % |  | 160 |  | b.p. |  | (3 | )
|--------------------------- |  | ---- | - |  | ---- | - |  | --- |  | ---- |  | -- | -
|Average rates paid (1)      |  | 3.31 | % |  | 2.30 | % |  | 101 |  | b.p. |  | (3 | )
|Net interest spread (1)     |  | 4.89 | % |  | 4.30 | % |  | 59  |  | b.p. |  | (3 | )
|Net interest margin (1) (2) |  | 5.88 | % |  | 4.98 | % |  | 90  |  | b.p. |  | (3 | )

|(1) | Ratios have been annualized. Tax exempt interest income has been adjusted to a taxable equivalent basis using a 34% tax rate
|--- | ----------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Computed by dividing net interest income by average interest-earning assets                                                 
|   
|(3) | b.p. stands for "basis points" (100 b.p. is equal to 1.0%)                                                                  
|   

Comparing the third quarter of 2006 to the third quarter of 2005, tax-equivalent net interest income was $2.2 million higher, primarily due to an increase of $104.9 million in average interest-earning assets and an
increase in the net interest spread. Interest expense increased $1.3 million, as the volume of average interest-bearing liabilities increased $71.0 million, and average rates paid increased 116 b.p. The third quarter of 2006 net interest
margin increased 89 b.p. over the third quarter of 2005, due to a higher net interest spread and an increase in the value of non-interest-bearing deposits in a higher rate environment. The higher spread was primarily due to steadily increasing
market interest rates since the third quarter of 2005. On a year-to-date basis, the net interest margin in 2006 increased 90 b.p. over the same period of 2005. The Companys margin in the second quarter of 2006 included $157,000 of interest
income previously unrecognized on non-accrual loans paid off in the quarter. The Company estimates the year-to-date 2006 impact on its net interest margin of this recovery of previously unrecognized nonaccrued interest to be an increase of 6
b.p.



|Provision for Credit Losses
|---------------------------

The amount of the allowance for credit losses is analyzed by management on a regular basis to ensure that it is adequate to absorb losses inherent in the loan portfolio as of the reporting date. When a provision for credit
losses is recorded, the amount is based on the current volume of loans and commitments to extend credit, anticipated changes in loan volumes, past charge-off experience, managements assessment of the risk of loss on current loans, the level of
non-performing and impaired loans, evaluation of future economic trends in the Company's market area, and other factors relevant to the loan portfolio. An internal loan risk grading system is used to evaluate potential losses of individual loans.
The Company does not, as part of its analysis, group loans together by loan type to assign risk. See "Allowance for Credit Losses" below for a more detailed discussion.

The Company recorded a provision for credit losses of $800,000 in the third quarter and $1.5 million year-to-date in 2006, compared with a $310,000 provision in the third quarter and $370,000 for the first
nine months of 2005. The 2006 provision reflected loan growth during the period and the higher level of net loan charge-offs when compared with the same period of 2005.



|Non-Interest Income
|-------------------

Non-interest income consists of the following components:

14

---

|                                                              |  |   |  | Three Months Ended |   |  |   |  | Nine Months Ended |  
|------------------------------------------------------------- |  | - |  | ------------------ | - |  | - |  | ----------------- | -
|                                                              |  |   |  | September 30,      |   |  |   |  | September 30,     |  
|                                                              |  |  
|(dollars in thousands)                                        |  |   |  | 2006               |   |  |   |  | 2005              |  
|                                                              |  |  
|Service charges on deposit accounts                           |  | $ |  | 205                |   |  | $ |  | 139               |  
|Mortgage brokerage fees                                       |  |   |  | 67                 |   |  |   |  | 106               |  
|Card services income                                          |  |   |  | 97                 |   |  |   |  | 83                |  
|Fiduciary income                                              |  |   |  | 125                |   |  |   |  | 142               |  
|Increase in cash surrender value of bank-owned life insurance |  |   |  | 140                |   |  |   |  | 114               |  
|Wire fees                                                     |  |   |  | 116                |   |  |   |  | 3                 |  
|International trade fees                                      |  |   |  | 54                 |   |  |   |  | -                 |  
|Net loss on sales of investment securities                    |  |   |  | (184               | ) |  |   |  | (68               | )
|Net gain on sale of other real estate owned                   |  |   |  | -                  |   |  |   |  | 96                |  
|Other income                                                  |  |   |  | 37                 |   |  |   |  | 27                |  
|                                                              |  |  
|Total non-interest income                                     |  | $ |  | 657                |   |  | $ |  | 642               |  
|                                                              |  |  

Total non-interest income, excluding securities and sale of other real estate owned transactions, increased $227,000, or 37%, when comparing the quarters ending September 30, 2006 and 2005, and $594,000, or 34%,
when comparing the first nine months of 2006 with the same period of 2005. Wire fee revenues increased in 2006 as compared with 2005, primarily due to customer services available in the Companys Seattle branch, which was acquired in the fourth
quarter of 2005. In addition, the Company expanded its international trade finance capabilities in the second quarter of 2006 resulting in higher fees associated with foreign exchange and letter of credit services. Service charges on deposit
accounts and earnings related to bank owned life insurance were also higher in 2006. In the third quarter of 2006, the Company sold 10 securities with a book value of $7.1 million at a loss of $184,000 and replaced them primarily with higher
yielding securities.

|Non-Interest Expense                                       |  |   |  |                    |   |  |   |                   |       |  |   |  |        |  |   |  |      
|---------------------------------------------------------- |  | - |  | ------------------ | - |  | - | ----------------- | ----- |  | - |  | ------ |  | - |  | -----
|Non-interest expense consists of the following components: |  |   |  |                    |   |  |   |                   |       |  |   |  |       
|                                                           |  |   |  | Three Months Ended |   |  |   | Nine Months Ended
|                                                           |  |   |  | September 30,      |   |  |   | September 30,    
|                                                           |  |  
|(dollars in thousands)                                     |  |   |  | 2006               |   |  |   |                   | 2005  |  |   |  | 2006   |  |   |  | 2005 
|                                                           |  |  
|Salaries and employee benefits                             |  | $ |  | 2,166              |   |  | $ |                   | 1,675 |  | $ |  | 6,316  |  | $ |  | 5,039
|Net occupancy and equipment                                |  |   |  | 556                |   |  |   |                   | 353   |  |   |  | 1,582  |  |   |  | 1,084
|Professional fees                                          |  |   |  | 202                |   |  |   |                   | 183   |  |   |  | 681    |  |   |  | 529  
|Equity in limited partnership losses                       |  |   |  | 53                 |   |  |   |                   | 136   |  |   |  | 103    |  |   |  | 136  
|Business taxes                                             |  |   |  | 93                 |   |  |   |                   | 57    |  |   |  | 267    |  |   |  | 163  
|Advertising                                                |  |   |  | 94                 |   |  |   |                   | 86    |  |   |  | 268    |  |   |  | 219  
|Card services expense                                      |  |   |  | 51                 |   |  |   |                   | 56    |  |   |  | 183    |  |   |  | 249  
|Data processing and communications                         |  |   |  | 295                |   |  |   |                   | 95    |  |   |  | 613    |  |   |  | 259  
|Postage and freight                                        |  |   |  | 84                 |   |  |   |                   | 68    |  |   |  | 248    |  |   |  | 195  
|Travel and education                                       |  |   |  | 119                |   |  |   |                   | 59    |  |   |  | 318    |  |   |  | 163  
|Stationery and supplies                                    |  |   |  | 53                 |   |  |   |                   | 46    |  |   |  | 153    |  |   |  | 120  
|Amortization of intangible assets                          |  |   |  | 26                 |   |  |   |                   | -     |  |   |  | 78     |  |   |  | -    
|Interest rate floor valuation adjustment                   |  |   |  | (67                | ) |  |   |                   | -     |  |   |  | 115    |  |   |  | -    
|Insurance premiums                                         |  |   |  | 27                 |   |  |   |                   | 37    |  |   |  | 112    |  |   |  | 124  
|Loan expense                                               |  |   |  | 23                 |   |  |   |                   | 31    |  |   |  | 132    |  |   |  | 51   
|Other expenses                                             |  |   |  | 219                |   |  |   |                   | 174   |  |   |  | 710    |  |   |  | 599  
|                                                           |  |  
|Total non-interest expense                                 |  | $ |  | 3,994              |   |  | $ |                   | 3,056 |  | $ |  | 11,879 |  | $ |  | 8,930
|                                                           |  |  

Almost every type of non-interest expense was higher in the 2006 periods compared with the 2005 periods. These increases primarily reflected an overall higher level of staffing, occupancy, data processing and branch
activities due to loan growth and two additional branches. In addition to the Seattle branch acquisition, the Company opened a full-service branch in Vancouver, Washington in the first quarter and added an international trade finance department in
the second quarter of 2006. At September 30, 2006, the Company had 129 full-time equivalent employees compared with 107 at September 30, 2005.

15

---

During the third quarter of 2006, the Company underwent a conversion of core processing, lending and internet banking systems. These system conversions are expected to improve long-term operating and financial reporting
efficiencies, as well as provide the infrastructure to support the Companys plans for growth. Beginning in August 2006, the Company outsourced its core processing systems to a third party service provider. Costs associated with the outsourced
core processing in the third quarter of 2006 were approximately $160,000. In addition, prepaid maintenance contracts and computer equipment associated with the Companys former in-house core processing system of approximately $52,000
were written off during the quarter. The higher level of travel and education in the 2006 periods was partially attributable to travel to attend training for the new systems.

In March 2006, the Company entered into a five-year interest rate floor agreement to hedge the variability of expected interest income related to loans priced with a floating rate index. The notional amount of this
agreement was $50 million and the deferred transaction fee was $880,000. The floor contains a strike price of 7.50% . If the prime rate decreases below the strike price at any time during the term of the agreement, the Company will receive a
monthly payment for the difference between the strike price and the prime rate. Under a rate scenario in which the prime rate remains above the strike price of the floor during the contracts 5-year life, the Companys pre-tax earnings
will decrease $880,000, which is the cost of the transaction fee associated with the floor. The interest rate floor assists the Company in managing the impact of declining interest rates on earnings. In the third quarter of 2006, the Company
recorded an increase of $67,000 in the carrying value of the interest rate floor contract. In the second quarter of 2006, the Company recorded a decrease in the carrying value of the contract of $206,000 ($182,000 recorded in
non-interest expense and $24,000 as a reduction of non-interest income related to the valuation adjustment recorded at March 31, 2006). The valuation adjustment in the third quarter of 2006 related primarily to decreases in forward market
interest rates subsequent to June 30, 2006.



|Income Taxes
|------------

The effective tax rate for the first nine months of 2006 was 27% compared with 26% during the same period of 2005. The higher effective rate was primarily due to the higher level of earnings and a decrease in the relative
proportion of nontaxable interest income.



|Financial ConditionInvestment Securities
|----------------------------------------

The following table presents the composition and carrying value of the Companys available for sale investment portfolio:

| |                            |  |   |  | September 30, |  |   |  | December 31,
| | -------------------------- |  | - |  | ------------- |  | - |  | ------------
| | (dollars in thousands)     |  |   |  | 2006          |  |   |  | 2005        
| |                            |  |  
| | Mortgage-backed securities |  | $ |  | 33,656        |  | $ |  | 34,316      
| | Municipal bonds            |  |   |  | 20,502        |  |   |  | 18,146      
| |                            |  |  
| |                            |  | $ |  | 54,158        |  | $ |  | 52,462      
| |                            |  |  

Total investment securities as of September 30, 2006 were $54.2 million, compared with $52.5 million at December 31, 2005. The increase was primarily due to the purchase of $16.9 million of securities, which
exceeded maturities and sales of securities sold of $14.9 million. Proceeds from maturities and sales of securities in 2006 were used to invest in higher yielding loans or reinvested in other securities to improve the overall yield of the
portfolio. Securities sold resulted in a realized loss of $348,000 in the first nine months of 2006. The Companys securities, classified as available for sale, are used by management as part of its asset/liability management strategy and
may be sold in response to changes in interest rates or significant prepayment risk.



|Loans
|-----

Total loans outstanding were $344.3 million and $270.2 million at September 30, 2006 and December 31, 2005, respectively. Unfunded loan commitments were $111.0 million at September 30, 2006 and $87.6 million
at December 31, 2005.

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

16

---

|                                 |  |   |  | September 30, 2006 |   |  |         |   | December 31, 2005 |  
|-------------------------------- |  | - |  | ------------------ | - |  | ------- | - | ----------------- | -
|                                 |  |  
|(dollars in thousands)           |  |   |  | Amount             |   |  | Percent |   |                   |  
|                                 |  |  
|Real estate secured:             |  |   |  |                    |   |  |         |   |                   |  
|One-to-four family residential   |  | $ |  | 31,918             |   |  | 9       | % |                   | $
|Multifamily                      |  |   |  | 13,631             |   |  | 4       | % |                   |  
|Construction                     |  |   |  | 73,138             |   |  | 21      | % |                   |  
|Commercial real estate           |  |   |  | 118,517            |   |  | 34      | % |                   |  
|                                 |  |  
|Total real estate                |  |   |  | 237,204            |   |  | 68      | % |                   |  
|Commercial and industrial        |  |   |  | 104,610            |   |  | 31      | % |                   |  
|Consumer and other               |  |   |  | 3,565              |   |  | 1       | % |                   |  
|                                 |  |  
|                                 |  |   |  | 345,379            |   |  | 100     | % |                   |  
|                                 |  |   |  |                    |   | 
|Deferred loan fees               |  |   |  | (1,106             | ) |  |         |   |                   |  
|                                 |  |   |  |                    |   |  |         |  
|Loans, net of deferred loan fees |  | $ |  | 344,273            |   |  |         |   |                   | $
|                                 |  |   |  |                    |   |  |         |  



|Allowance for Credit Losses
|---------------------------

The allowance for credit losses represents management's estimate of potential losses as of the date of the financial statements. The loan portfolio is regularly reviewed to evaluate the adequacy of the allowance for credit
losses. In determining the level of the allowance, the Company estimates losses inherent in all loans and commitments to make loans, and evaluates non-performing loans to determine the amount, if any, necessary for a specific reserve. An important
element in determining the adequacy of the allowance for credit losses is an analysis of loans by loan risk-rating categories. At a loans inception and periodically throughout the life of the loan, management evaluates the credit risk by using
a risk-rating system. This grading system currently includes eleven levels of risk. Risk ratings range from 1 for the strongest credits to 10 for the weakest. A 10 rated loan would normally represent a loss. All
loans rated 7-10 collectively comprise the Company's Watch List. The specific grades from 7-10 are watch list (risk-rating 7), special mention (risk-rating 7.5), substandard (risk-rating 8),
doubtful (risk-rating 9), and loss (risk-rating 10). When indicators such as operating losses, collateral impairment or delinquency problems show that a credit may have weakened, the credit will be downgraded as appropriate.
Similarly, as borrowers bring loans current, show improved cash flows or improve the collateral position of a loan, the credits may be upgraded. The result of managements ongoing evaluations and the risk ratings of the portfolio is an
allowance with four components: specific reserves; general reserves; special reserves; and an amount available for other factors.

Specific Allowance. Loans on the Bank's Watch List, as described above, are specifically reviewed and analyzed. Management considers in its analysis expected future cash flows, the
value of collateral and other factors that may impact the borrower's ability to pay. When significant conditions or circumstances exist on an individual loan indicating greater risk, a specific allowance may be allocated in addition to the general
allowance percentage for that particular risk rating, as outlined in Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan.

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

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

Special Allowance. From time to time, special allowances 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-specific;
- Competitive issues that impact loan underwriting/structure;
- Economic conditions, including interest rate trends; and
- Introduction of various loan products and/or special marketing.

17

---

Amounts Available for Other Factors. Management also attempts to ensure that the overall allowance appropriately reflects a margin for the imprecision necessarily inherent in
estimates of expected credit losses.

The quarterly analysis of specific, general, and special allocations of the allowance is the principal method relied upon by management to ensure that changes in estimated credit loss levels are adjusted on a timely basis.
The inclusion of historical loss factors in the process of determining the general component of the allowance also acts as a self-correcting mechanism of management's estimation process, as past and more remote loss experience is replaced by more
recent experience. In its analysis of the specific, general, and special allocations of the allowance, management also considers regulatory guidance in addition to the Company's own experience.

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 for credit losses may be either greater than or less than actual net
charge-offs when and if they occur. The related provision for credit losses that
is charged to income is the amount necessary to adjust the allowance for loan
losses and the liability for unfunded credit commitments to the level determined
through the above process.

Management's evaluation of the loan portfolio resulted
in a total allowance for credit losses of $5.5 million at September 30, 2006 and
$4.7 million December 31, 2005. The increase in the allowance for credit losses
primarily related to growth of the loan portfolio. The allowance for credit
losses, as a percentage of total loans, decreased from 1.73% on December 31,
2005 to 1.59% at September 30, 2006. Management believes the allowance for
credit losses at September 30, 2006 is adequate to absorb current potential or
anticipated losses.

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

|                                          |  |   |  | September 30, 2006 |  |         |   |  | December 31, 2005 | 
|----------------------------------------- |  | - |  | ------------------ |  | ------- | - |  | ----------------- | 
|                                          |  |  
|(dollars in thousands)                    |  |   |  | Amount             |  | Percent |   |  |                   | 
|                                          |  |  
|Allowance for loan losses-                |  |   |  |                    |  |         |   |  |                   | 
|General                                   |  | $ |  | 3,179              |  | 61      | % |  | $                 | 
|Specific                                  |  |   |  | 522                |  | 10      | % |  |                   | 
|Special                                   |  |   |  | 1,272              |  | 24      | % |  |                   | 
|Available for other factors               |  |   |  | 235                |  | 5       | % |  |                   | 
|                                          |  |  
|Total allowance for loan losses           |  |   |  | 5,208              |  | 100     | % |  |                   | 
|                                          |  |   |  |                    |  |        
|Liability for unfunded credit commitments |  |   |  | 275                |  |         |   |  |                   | 
|                                          |  |   |  |                    |  |         |   | 
|Total allowance for credit losses         |  | $ |  | 5,483              |  |         |   |  | $                 | 
|                                          |  |   |  |                    |  |         |   | 

In the third quarter of 2006, the company charged off $500,000 of a commercial loan that was specifically reserved for in the first quarter of 2006. Additional specific reserves totaling $343,000 were added in the
third quarter of 2006, primarily related to two commercial loans. In the first quarter of 2006, the Company reclassified the portion of the allowance for loan losses related to unfunded credit commitments to other liabilities on the balance sheet in
accordance with GAAP and bank regulatory requirements. Amounts at December 31, 2005 were reclassified.

The allowance for credit losses is based upon estimates of probable losses inherent in the loan portfolio and the Companys commitments to extend credit to borrowers. The amount of loss ultimately incurred for these
loans can vary significantly from the estimated amounts. The following table shows the Companys loan loss performance for the periods indicated.

18

---

|                                                            |  |   |  | Three Months Ended |   |  |   |  | Nine Months Ended | 
|----------------------------------------------------------- |  | - |  | ------------------ | - |  | - |  | ----------------- | 
|                                                            |  |   |  | September 30,      |   |  |   |  |                   | 
|                                                            |  |  
|(dollars in thousands)                                      |  |   |  | 2006               |   |  |   |  | 2005              | 
|                                                            |  |  
|Allowance for credit losses, beginning of period            |  | $ |  | 5,367              |   |  | $ |  | 3,935             | 
|Loans charged off:                                          |  |   |  |                    |   |  |   |  |                   | 
|Commercial and industrial                                   |  |   |  | 900                |   |  |   |  |                   | 
|Real estate                                                 |  |   |  | -                  |   |  |   |  |                   | 
|Consumer and other                                          |  |   |  | 18                 |   |  |   |  |                   | 
|                                                            |  |  
|Total loans charged-off                                     |  |   |  | 918                |   |  |   |  |                   | 
|                                                            |  |  
|Recoveries:                                                 |  |   |  |                    |   |  |   |  |                   | 
|Commercial and industrial                                   |  |   |  | 224                |   |  |   |  |                   | 
|Real estate                                                 |  |   |  | -                  |   |  |   |  |                   | 
|Consumer and other                                          |  |   |  | 10                 |   |  |   |  |                   | 
|                                                            |  |  
|Total recoveries                                            |  |   |  | 234                |   |  |   |  |                   | 
|                                                            |  |  
|Net loans charged off during the period                     |  |   |  | 684                |   |  |   |  |                   | 
|Provision for credit losses                                 |  |   |  | 800                |   |  |   |  |                   | 
|                                                            |  |  
|Allowance for credit losses, end of period                  |  | $ |  | 5,483              |   |  | $ |  | 4,054             | 
|                                                            |  |  
|Components:                                                 |  |   |  |                    |   |  |   |  |                   | 
|Allowance for loan losses                                   |  |   |  |                    |   |  |   |  |                   | 
|Liability for unfunded credit commitments                   |  |   |  |                    |   |  |   |  |                   | 
|                                                            |  |  
|Total allowance for credit losses                           |  |   |  |                    |   |  |   |  |                   | 
|                                                            |  |  
|Average loans outstanding during the period                 |  | $ |  | 337,942            |   |  | $ |  | 221,602           | 
|Ratio of net loans charged off to average loans outstanding |  |   |  | 0.20               | % |  |   |  |                   | 
|Loans outstanding at end of period, net of deferred fees    |  |   |  |                    |   |  |   |  |                   | 
|Allowance for loan losses/total loans                       |  |   |  |                    |   |  |   |  |                   | 
|Allowance for credit losses/total loans                     |  |   |  |                    |   |  |   |  |                   | 
|Allowance for credit losses/non-performing loans            |  |   |  |                    |   |  |   |  |                   | 
|N/M- Not meaningful                                         |  |   |  |                    |   |  |   |  |                   | 



|Impaired Loans
|--------------

The Bank, during its normal loan review procedures,
considers a loan to be impaired when it is probable that the Bank will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. A loan is not considered to be impaired during a period of minimal
delay (less than 90 days) unless available information strongly suggests
impairment. The Bank measures impaired loans based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
market value of the collateral if the loan is collateral dependent. Impaired
loans are charged to the allowance when management believes that, after
considering economic and business conditions, collection efforts, and collateral
position, the borrower's financial condition indicates that collection of
principal is not probable.

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



|Non-Performing Assets
|---------------------

Non-performing assets includes repossessed real estate or other assets and loans for which the accrual of interest has been suspended. The following table presents information on the Companys non-performing assets at
the dates indicated:

19

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|                                                         |  |   |  | September 30, |   |  |   |  | December 31, |  
|-------------------------------------------------------- |  | - |  | ------------- | - |  | - |  | ------------ | -
|(dollars in thousands)                                   |  |   |  | 2006          |   |  |   |  | 2005         |  
|                                                         |  |  
|Loans on non-accrual status                              |  | $ |  | 2,021         |   |  | $ |  | 4,156        |  
|Other real estate owned                                  |  |   |  | -             |   |  |   |  | -            |  
|                                                         |  |  
|Total non-performing assets                              |  | $ |  | 2,021         |   |  | $ |  | 4,156        |  
|                                                         |  |  
|                                                        
|Total assets                                             |  | $ |  | 456,615       |   |  | $ |  | 370,346      |  
|                                                         |  |  
|                                                        
|Percentage of non-performing assets to total assets      |  |   |  | 0.44          | % |  |   |  | 1.12         | %
|                                                         |  |  
|Allowance for loan losses as a % of non-performing loans |  |   |  | 258           | % |  |   |  | 106          | %
|                                                         |  |  

Total non-performing assets at September 30, 2006 decreased to $2.0 million from $4.2 million at December 31, 2005. Of the total non-performing loans at September 30, 2006, $1.1 million is fully guaranteed by an
agency of the U.S. government, and the workout period for this loan is currently expected to extend to 2007. The Company has not identified any other potential problem loans that were not classified as non-performing but for which known information
about the borrowers financial condition caused management to have concern about the ability of the borrowers to comply with the repayment terms of their loans.



|Liquidity
|---------

Liquidity represents the ability to meet deposit withdrawals and fund loan demand, while retaining the flexibility to take advantage of business opportunities. The Bank'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. Investment in securities available-for-sale was $54.2 million at September 30, 2006
compared with $52.5 million at December 31, 2005.

The following table presents the composition of the Companys deposit liabilities on the dates indicated:

| |                                        |  |   |  | September 30, |  |   |  | December 31,
| | -------------------------------------- |  | - |  | ------------- |  | - |  | ------------
| | (dollars in thousands)                 |  |   |  | 2006          |  |   |  | 2005        
| |                                        |  |  
| | Non-interest-bearing demand deposits   |  | $ |  | 118,765       |  | $ |  | 97,327      
| | Savings                                |  |   |  | 17,606        |  |   |  | 17,112      
| | Interest-bearing demand deposits       |  |   |  | 16,078        |  |   |  | 19,063      
| | Money market accounts                  |  |   |  | 59,514        |  |   |  | 62,185      
| | Certificates of deposit under $100,000 |  |   |  | 44,118        |  |   |  | 36,511      
| | Certificates of deposit over $100,000  |  |   |  | 130,728       |  |   |  | 76,997      
| |                                        |  |  
| | Total                                  |  | $ |  | 386,809       |  | $ |  | 309,195     
| |                                        |  |  

The Companys loan growth in the first nine months of 2006 exceeded its core deposit generation, and the Company has supplemented its core deposits with brokered certificates of deposits. At September 30, 2006, the
Banks brokered certificate of deposit totaled $68.0 million, compared with $33.0 million at December 31, 2005. The Bank has overnight federal funds borrowing lines with correspondent banks that provide access to an additional $45.0
million for short-term liquidity needs. In addition, the parent company has a $2 million line of credit with a correspondent bank. The Bank also has an established borrowing line with the Federal Home Loan Bank (the FHLB) that
permits it to borrow up to 20% of the Bank's assets subject to collateral limitations. With the collateral available on September 30, 2006, the Bank could borrow up to $64.6 million. FHLB borrowings in excess of $47.2 million would require
the Company to purchase additional FHLB stock. The line is available for overnight federal funds, or notes with other terms and maturities. At September 30, 2006, the Company had no overnight federal funds borrowings with FHLB.

As disclosed in the accompanying Consolidated Statements of Cash Flows, net cash from operating activities was $9.9 million for the first nine months of 2006, principally from earnings and an increase in accrued
interest payable and other liabilities. The increase in accrued interest and other liabilities primarily related to income tax refunds received in the second quarter of 2006 and applied to net taxes payable. Net cash from operating activities in the
first nine months of 2005 was principally from earnings. Net cash used by investing activities in the 2006 and 2005 periods was due primarily to loan growth, and, to a lesser extent, an increase in investment securities. Cash provided by financing
activities in the first nine months of 2006 was primarily related to the $61.3 million increase in certificates of deposits and a $16.3 million increase in other deposits. In the first nine months of 2005, net deposit growth provided
$21.3 million of cash. In addition, in April 2005, the Company received $12.4 million from the issuance of junior subordinated debentures.

20

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|Regulatory Capital
|------------------

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

The following table presents selected capital information for the Company and the Bank as of September 30, 2006 and December 31, 2005:

|                           |  |   |  |        |  |       |   |  |          |  |                      |  |   |           |       |                   |  |   |  | To Be Well-Capitalized | 
|-------------------------- |  | - |  | ------ |  | ----- | - |  | -------- |  | -------------------- |  | - | --------- | ----- | ----------------- |  | - |  | ---------------------- | 
|                           |  |   |  |        |  |       |   |  |          |  |                      |  |   |           |       |                   |  |   |  | Under Prompt           | 
|                           |  |   |  |        |  |       |   |  |          |  | For Capital Adequacy |  |   |           |       | Corrective Action | 
|                           |  |   |  | Actual |  |       |   |  | Purposes |  |                      |  |   | Provision |      
|                           |  |  
|                           |  |   |  | Amount |  | Ratio |   |  |          |  | Amount               |  |   |           | Ratio |                   |  |   |  | Amount                 | 
|                           |  |  
|September 30, 2006         |  |   |  |        |  |       |   |  |          |  |                      |  |   |           |       |                   |  |   |  |                        | 
|Total risk-based capital:  |  |   |  |        |  |       |   |  |          |  |                      |  |   |           |       |                   |  |   |  |                        | 
|Consolidated               |  | $ |  | 64,609 |  | 16.32 | % |  | $        |  | 31,663               |  | > |           | 8.00  | %                 |  |   |  | N/A                    | 
|Bank                       |  | $ |  | 62,032 |  | 15.71 | % |  | $        |  | 31,594               |  | > |           | 8.00  | %                 |  | $ |  | 39,493                 | 
|Tier 1 risk-based capital: |  |   |  |        |  |       |   |  |          |  |                      |  |   |           |       |                   |  |   |  |                        | 
|Consolidated               |  | $ |  | 59,930 |  | 15.14 | % |  | $        |  | 15,832               |  | > |           | 4.00  | %                 |  |   |  | N/A                    | 
|Bank                       |  | $ |  | 57,089 |  | 14.46 | % |  | $        |  | 15,797               |  | > |           | 4.00  | %                 |  | $ |  | 23,696                 | 
|Tier 1 (leverage) capital: |  |   |  |        |  |       |   |  |          |  |                      |  |   |           |       |                   |  |   |  |                        | 
|Consolidated               |  | $ |  | 59,930 |  | 13.68 | % |  | $        |  | 17,529               |  | > |           | 4.00  | %                 |  |   |  | N/A                    | 
|Bank                       |  | $ |  | 57,089 |  | 13.06 | % |  | $        |  | 17,483               |  | > |           | 4.00  | %                 |  | $ |  | 21,854                 | 
|December 31, 2005          |  |   |  |        |  |       |   |  |          |  |                      |  |   |           |       |                   |  |   |  |                        | 
|Total risk-based capital:  |  |   |  |        |  |       |   |  |          |  |                      |  |   |           |       |                   |  |   |  |                        | 
|Consolidated               |  | $ |  | 58,839 |  | 18.89 | % |  | $        |  | 24,922               |  | > |           | 8.00  | %                 |  |   |  | N/A                    | 
|Bank                       |  | $ |  | 56,664 |  | 18.28 | % |  | $        |  | 24,804               |  | > |           | 8.00  | %                 |  | $ |  | 31,005                 | 
|Tier 1 risk-based capital: |  |   |  |        |  |       |   |  |          |  |                      |  |   |           |       |                   |  |   |  |                        | 
|Consolidated               |  | $ |  | 54,935 |  | 17.63 | % |  | $        |  | 12,461               |  | > |           | 4.00  | %                 |  |   |  | N/A                    | 
|Bank                       |  | $ |  | 52,779 |  | 17.02 | % |  | $        |  | 12,402               |  | > |           | 4.00  | %                 |  | $ |  | 18,603                 | 
|Tier 1 (leverage) capital: |  |   |  |        |  |       |   |  |          |  |                      |  |   |           |       |                   |  |   |  |                        | 
|Consolidated               |  | $ |  | 54,935 |  | 15.92 | % |  | $        |  | 13,804               |  | > |           | 4.00  | %                 |  |   |  | N/A                    | 
|Bank                       |  | $ |  | 52,779 |  | 15.38 | % |  | $        |  | 13,730               |  | > |           | 4.00  | %                 |  | $ |  | 17,163                 | 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the tables above) of Tier 1 capital to average assets, and
Tier 1 and total risk-based capital to risk-weighted assets (all as defined in the regulations). As of September 30, 2006 and December 31, 2005, the Company and the Bank substantially exceeded all relevant capital adequacy requirements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk



|Credit Risk
|-----------

The Bank, like other lenders, is subject to credit risk, which is the risk of losing principal and interest due to customers' failure to repay loans in accordance with their terms. The Bank relies on loan reviews, prudent
loan underwriting standards and an adequate allowance for credit losses to help mitigate credit risk. However, a downturn in economic conditions or in the real estate market, or a rapid increase in interest rates could have a negative effect on
collateral values, cash flows, and borrowers' ability to repay. The Bank's targeted customers are small to medium-size businesses, professionals and retail customers that may have limited capital resources to repay loans during a prolonged economic
downturn.

21

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|Interest Rate Risk
|------------------

The Banks earnings are largely derived from net interest income, which is interest income and fees earned on loans and investment income, less interest expense paid on deposits and other borrowings. Interest rates are
highly sensitive to many factors that are beyond the control of the Banks management, including general economic conditions, and the policies of various governmental and regulatory authorities. As interest rates change, net interest income is
affected. With fixed rate assets (such as fixed rate loans) and liabilities (such as certificates of deposit), the effect on net interest income is dependent upon on the maturities of the assets and liabilities. The Banks primary objective in
managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Banks net interest income and capital, while structuring the Banks asset/liability position to obtain the maximum yield-cost spread on that
structure. Such structuring includes the use of interest rate derivative contracts. Interest rate risk is managed through the monitoring of the Banks gap position and sensitivity to interest rate risk by subjecting the Banks balance
sheet to hypothetical interest rate shocks using a computer based model. In a falling rate environment, the spread between interest yields earned and interest rates paid may narrow, depending on the relative level of fixed and variable rate assets
and liabilities. In a stable or increasing rate environment the Banks variable rate loans will remain steady or increase immediately with changes in interest rates, while fixed rate liabilities, particularly certificates of deposit, will only
re-price as the liability matures. As of September 30, 2006, the Bank was asset sensitive.

For a complete description of the Companys disclosures about market risk, see Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A of the Annual Report on Form 10-K for the year
end December 31, 2005.



|Item 4. Controls and Procedures
|-------------------------------

As of September 30, 2006, 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 in timely
alerting them to material information relating to the Company that is required
to be included in its periodic SEC filings.

There have been no 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.

During the quarter ended September 30, 2006, the Company changed its core data processing system, including its core financial reporting system. In connection with this system conversion, internal controls and procedures
have been modified as necessary to reflect the new system environments, however, our overall financial reporting controls have not changed significantly. No other material changes to internal controls and procedures occurred during the three months
ended September 30, 2006.

22

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|Part II. OTHER INFORMATIONItem 1. Legal Proceedings
|---------------------------------------------------

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



|Item 1A. Risk Factors
|---------------------

There were no material changes to the risk factors set forth in the Companys Form 10-K for the year ended December 31, 2005.

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
|-------------------------



| | None
| | ----



|Item 6. Exhibits
|----------------

|(a) | Exhibits. The following constitutes the exhibit index.
|--- | ------------------------------------------------------
|   
|    | 3.1                                                   
|   
|    | 3.2                                                   
|   
|    | 31.1                                                  
|   
|    | 31.2                                                  
|   
|    | 32                                                    
|   

23

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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 13, 2006
|-----------------------



| | Cowlitz Bancorporation(Registrant)                           
| | -------------------------------------------------------------
| |                                                              
| | By:                                                          
| |                                                              
| | /s/ Richard J. Fitzpatrick                                   
| | Richard J. Fitzpatrick, President and Chief Executive Officer
| |                                                              
| | /s/ Gerald L. Brickey                                        
| | Gerald L. Brickey, Vice-President and Chief Financial Officer

24

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