U.S. SECURITIES AND EXCHANGE COMMISSION



Form 10-Q



[X]
Quarterly report pursuant to section 13 or 15(d) of the Securities and Exchange act of 1934For the quarter ended September 30, 2002[  ]
Transition report pursuant to section 13 or 15(d) of the Securities and Exchange act of 1934
For the transition period from ________ to ________


Commission file number  0-23881



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



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

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



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



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

Yes X   No _____

Indicate 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, 2002: 3,805,772 shares



1

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COWLITZ BANCORPORATION
TABLE OF CONTENTS

PAGEPart I
FINANCIAL INFORMATIONItem 1.
Financial StatementsConsolidated Statements of Condition -
     September 30, 2002 and December 31, 2001
3Consolidated Statements of Operations -
     Three and nine months ended September 30, 2002 and September 30, 2001
4Consolidated Statements of Changes in Shareholders' Equity -
     Year ended December 31, 2001 and nine months ended September 30, 2002
5Consolidated Statements of Cash Flows -
     Nine months ended September 30, 2002 and September 30, 2001
6Notes to Consolidated Financial Statements
7-15Item 2.
Management's Discussion and Analysis of Financial Condition 
     And Results of Operations
16Item 3.
Quantitative and Qualitative Disclosures About Market Risk
30Item 4.
Controls and Procedures
30Part II
OTHER INFORMATIONItem 5.
Submission of Matters to a Vote of Security Holders
30Item 6.
Exhibits and Reports on Form 8-K
30Signatures
31Certification of Chief Executive Officer and Chief Financial Officer
32-34




2

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands of dollars, except number of shares)



(unaudited)
      
      
      September 30, 2002
      
      
      December 31, 2001ASSETSCash and cash equivalents
      $
      44,193
      
      $
      50,171Investment securities:Investments available-for-sale (at
      fair value, cost of $39,494 and$30,172
      at September 30, 2002 and December 31, 2001, respectively)
      
      40,038
      
      
      30,188Investments held-to-maturity (at
      amortized cost, fair value of $2,099 and$4,157
      at September 30, 2002 and December 31, 2001, respectively)
      
      2,081
      
      
      4,115Total
      investment securities
      
      42,119
      
      
      34,303Federal Home Loan Bank stock, at
      cost
      
      2,364
      
      
      3,531Loans held for sale
      
      49,146
      
      
      37,322Loans, net of deferred loan fees
      
      215,266
      
      
      231,921Allowance for loan losses
      
      (5,763)
      
      
      (5,710)Loans, net
      
      209,503
      
      
      226,211Premises and equipment, net of
      accumulated depreciation of $4,443 and$4,029 at September 30, 2002 and
      December 31, 2001, respectively
      
      4,484
      
      
      5,221Goodwill
      
      
      2,352
      
      
      3,560Intangible assets, net of
      accumulated amortization of $1,402 and$1,203 at September 30, 2002 and
      December 31, 2001, respectively
      
      568
      
      
      767Accrued interest receivable and
      other assets
      
      6,884
      
      
      5,929Total
      assets from operations
      
      361,613
      
      
      367,015Net
      assets from discontinued operations
      
      -
      
      
      3,248Total
      assets
      $
      361,613
      
      $
      370,263LIABILITIESDeposits:Non-interest-bearing demand
      $
      50,397
      
      $
      43,225Savings and interest-bearing demand
      
      122,909
      
      
      96,587Certificates of deposit
      
      132,716
      
      
      175,678Total deposits
      
      306,022
      
      
      315,490Short-term borrowings
      
      2,750
      
      
      2,750Long-term borrowings
      
      18,782
      
      
      19,009Accrued interest payable and other
      liabilities
      
      3,237
      
      
      4,266Total
      liabilities
      
      330,791
      
      
      341,515SHAREHOLDERS' EQUITYPreferred stock, no par value;
      5,000,000 shares authorized, no shares issued andoutstanding at September 30, 2002
      and December 31, 2001
      
      -
      
      
      -Common stock, no par value;
      25,000,000 authorized, 3,804,172 and 3,692,560 sharesissued and outstanding at September
      30, 2002 and December 31, 2001, respectively
      
      17,425
      
      
      16,802Additional paid-in capital
      
      1,538
      
      
      1,538Retained earnings
      
      
      11,500
      
      
      10,398Accumulated other comprehensive
      income, net of taxes
      
      359
      
      
      10Total shareholders' equity
      
      30,822
      
      
      28,748Total liabilities and shareholders'
      equity
      $
      361,613
      
      $
      370,263The accompanying notes are an
      integral part of these statements.




3

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COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except per share amounts)



Three months ended September 30,
      
      
      Nine months ended September 30,2002
      
      
      2001
      
      
      2002
      
      
      2001(unaudited)INTEREST INCOMEInterest and fees on loans
      $
      4,830
      
      $
      6,041
      
      $
      14,651
      
      $
      18,085Interest on taxable investment securities
      
      441
      
      
      413
      
      
      1,324
      
      
      752Interest on non-taxable investment securities
      
      4
      
      
      2
      
      
      11
      
      
      6Other
      interest and dividend income
      
      155
      
      
      271
      
      
      563
      
      
      897Total
      interest income
      
      5,430
      
      
      6,727
      
      
      16,549
      
      
      19,740INTEREST EXPENSESavings
      and interest-bearing demand
      
      475
      
      
      718
      
      
      1,312
      
      
      2,094Certificates of deposit
      
      1,320
      
      
      2,485
      
      
      4,755
      
      
      7,187Short-term borrowings
      
      12
      
      
      31
      
      
      36
      
      
      94Long-term borrowings
      
      235
      
      
      306
      
      
      706
      
      
      1,007Total
      interest expense
      
      2,042
      
      
      3,540
      
      
      6,809
      
      
      10,382Net
      interest income before provision for loan losses
      
      3,388
      
      
      3,187
      
      
      9,740
      
      
      9,358PROVISION FOR LOAN LOSSES
      
      352
      
      
      2,095
      
      
      1,007
      
      
      2,622Net
      interest income after provision for loan losses
      
      3,036
      
      
      1,092
      
      
      8,733
      
      
      6,736NON-INTEREST INCOMEService
      charges on deposit accounts
      
      191
      
      
      187
      
      
      540
      
      
      560Gains
      on loans sold
      
      1,323
      
      
      1,047
      
      
      3,495
      
      
      3,076Escrow
      fees
      
      311
      
      
      184
      
      
      726
      
      
      574Fiduciary income
      
      63
      
      
      74
      
      
      205
      
      
      194Credit
      card income
      
      142
      
      
      119
      
      
      399
      
      
      397Brokerage Fees
      
      858
      
      
      565
      
      
      2,169
      
      
      1,509Gain on
      sale of subsidiary
      
      -
      
      
      -
      
      
      423
      
      
      -Net
      losses on sale of repossessed assets
      
      (42)
      
      
      (497)
      
      
      (21)
      
      
      (479)Other
      income
      
      78
      
      
      59
      
      
      184
      
      
      123Net
      gains on sales of available-for-sale securities
      
      49
      
      
      52
      
      
      88
      
      
      89Total
      non-interest income
      
      2,973
      
      
      1,790
      
      
      8,208
      
      
      6,043NON-INTEREST EXPENSESalaries and employee benefits
      
      2,897
      
      
      2,240
      
      
      7,915
      
      
      6,667Net
      occupancy and equipment expense
      
      540
      
      
      597
      
      
      1,635
      
      
      1,791Business taxes
      
      139
      
      
      158
      
      
      438
      
      
      437Amortization of intangibles
      
      66
      
      
      122
      
      
      199
      
      
      367Net
      cost of operation of other real estate
      
      78
      
      
      97
      
      
      209
      
      
      127Data
      processing and communications
      
      129
      
      
      146
      
      
      382
      
      
      428Professional fees
      
      224
      
      
      106
      
      
      760
      
      
      297Postage
      and freight
      
      131
      
      
      126
      
      
      371
      
      
      359Credit
      card expense
      
      135
      
      
      99
      
      
      382
      
      
      312FDIC
      insurance
      
      140
      
      
      35
      
      
      430
      
      
      176Other
      operating expense
      
      729
      
      
      636
      
      
      1,843
      
      
      1,969Total
      non-interest expense
      
      5,208
      
      
      4,362
      
      
      14,564
      
      
      12,930INCOME (LOSS) FROM CONTINUING
      OPERATIONS BEFORE INCOMETAX
      EXPENSE (BENEFIT)
      
      801
      
      
      (1,480)
      
      
      2,377
      
      
      (151)Income
      tax expense (benefit)
      
      287
      
      
      (468)
      
      
      490
      
      
      127NET INCOME (LOSS) FROM CONTINUING
      OPERATIONS BEFOREDISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OFA
      CHANGE IN ACCOUNTING PRINCIPLE
      
      514
      
      
      (1,012)
      
      
      1,887
      
      
      (278)INCOME FROM DISCONTINUED OPERATIONS,
      NET OF TAX
      
      -
      
      
      60
      
      
      6
      
      
      199NET INCOME (LOSS) BEFORE CUMULATIVE
      EFFECT OF A CHANGEIN
      ACCOUNTING PRINCIPLE
      
      514
      
      
      (952)
      
      
      1,893
      
      
      (79)CUMULATIVE EFFECT OF ACCOUNTING
      CHANGE, NET OF TAX
      
      -
      
      
      -
      
      
      (791)
      
      
      -NET INCOME (LOSS)
      $
      514
      
      $
      (952)
      
      $
      1,102
      
      $
      (79)BASIC EARNINGS PER SHARE OF COMMON
      STOCKContinuing operations
      $
      0.14
      
      $
      (0.27)
      
      $
      0.50
      
      $
      (0.08)Discontinued operations
      
      -
      
      
      0.01
      
      
      -
      
      
      0.06Cumulative Effect of Accounting Change
      
      -
      
      
      -
      
      
      (0.21)
      
      
      -NET
      INCOME (LOSS) PER SHARE OF COMMON STOCK
      $
      0.14
      
      $
      (0.26)
      
      $
      0.29
      
      $
      (0.02)DILUTED EARNINGS PER SHARE-COMMON
      STOCKContinuing operations
      $
      0.13
      
      $
      (0.27)
      
      $
      0.50
      
      $
      (0.07)Discontinued operations
      
      -
      
      
      0.02
      
      
      -
      
      
      0.05Cumulative Effect of Accounting Change
      
      -
      
      
      -
      
      
      (0.21)
      
      
      -NET
      INCOME (LOSS) PER DILUTED SHARE OF COMMON STOCK
      $
      0.13
      
      $
      (0.25)
      
      $
      0.29
      
      $
      (0.02)The accompanying notes are an
      integral part of these statements.




4

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



AccumulatedAdditional
      
      
      
      
      
      Other
      
      
      TotalCommon Stock
      
      
      Paid-in
      
      
      Retained
      
      
      Comprehensive
      
      
      Shareholders'
      
      
      ComprehensiveShares
      
      
      Amount
      
      
      Capital
      
      
      Earnings
      
      
      Income (loss)
      
      
      Equity
      
      
      Income (loss)BALANCE AT DECEMBER 31, 2000
      
      3,689,327
      
      $
      16,785
      
      $
      1,538
      
      $
      12,048
      
      $
      38
      
      $
      30,409Comprehensive Income:Net loss
      
      -
      
      
      -
      
      
      -
      
      
      (1,450)
      
      
      -
      
      
      (1,450)
      
      $
      (1,450)Net change in unrealized gains oninvestments available-for-sale,net of
      deferred taxes of $8
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      (28)
      
      
      (28)
      
      
      (28)Comprehensive loss
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      (1,478)Issuance of common stock for cash
      
      3,233
      
      
      17
      
      
      -
      
      
      -
      
      
      -
      
      
      17Cash dividends paid ($.05 per
      share)
      
      -
      
      
      -
      
      
      -
      
      
      (200)
      
      
      -
      
      
      (200)BALANCE AT DECEMBER 31, 2001
      
      3,692,560
      
      
      16,802
      
      
      1,538
      
      
      10,398
      
      
      10
      
      
      28,748Comprehensive Income:Net income
      
      -
      
      
      -
      
      
      -
      
      
      1,102
      
      
      -
      
      
      1,102
      
      $
      1,102Net change in unrealized gains oninvestments available-for-sale,net of
      deferred taxes of $180
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      349
      
      
      349
      
      
      349Comprehensive income
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      $
      1,451Issuance of common stock for cash
      
      111,612
      
      
      623
      
      
      -
      
      
      -
      
      
      -
      
      
      623BALANCE AT SEPTEMBER 30, 2002
      
      3,804,172
      
      $
      17,425
      
      $
      1,538
      
      $
      11,500
      
      $
      359
      
      $
      30,822(unaudited)The accompanying notes are an
      integral part of these statements.




5

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COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)



Nine months endedSeptember 30,2002
      
      
      2001(unaudited)CASH FLOWS FROM OPERATING ACTIVITIESNet income
      $
      1,102
      
      $
      (79)Adjustments to reconcile net income
      to net cash provided byOperating activities:Deferred tax benefit
      
      (348)
      
      
      -Depreciation and amortization
      
      671
      
      
      970Cumulative effect of change in
      accounting principle
      
      1,208
      
      
      -Provision for loan losses
      
      1,007
      
      
      2,622Net gain on sale of subsidiary
      
      (423)
      
      
      -Net gains on sales of investments
      available-for-sale
      
      (88)
      
      
      (89)Net amortization of investment
      security premiums and accretionof discounts
      
      251
      
      
      (7)Net losses on sales of foreclosed
      assets
      
      21
      
      
      479Gains on loans sold
      
      (3,495)
      
      
      (3,076)Origination of loans held for sale
      
      (312,354)
      
      
      (326,545)Proceeds of loans sales
      
      304,025
      
      
      289,554Increase in accrued interest
      receivable and other assets
      
      (1,020)
      
      
      (3,185)Increase (decrease) accrued interest
      payable and other liabilities
      
      (816)
      
      
      573Federal Home Loan Bank stock
      dividends
      
      (174)
      
      
      (167)Net
      cash from operating activities
      
      (10,433)
      
      
      (38,950)CASH FLOWS FROM INVESTING ACTIVITIESProceeds from maturities of
      investment securitiesheld-to-maturity
      
      2,599
      
      
      8,865Proceeds from sales and maturities
      of investment securitiesavailable-for-sale
      
      26,866
      
      
      10,318Proceeds from sales of foreclosed
      assets
      
      529
      
      
      1,246Proceeds from redemption of Federal
      Home Loan Bank stock
      
      1,391
      
      
      -Purchases of investment securities:Held-to-maturity
      
      (559)
      
      
      (8,099)Available-for-sale
      
      (36,356)
      
      
      (17,635)Net (increase) decrease in loans
      
      15,661
      
      
      (7,582)Net cash paid from sale of
      subsidiary
      
      (104)
      
      
      -Net sales (purchases) of premises
      and equipment
      
      252
      
      
      (404)Net
      cash from investment activities
      
      10,279
      
      
      (13,291)CASH FLOWS FROM FINANCING ACTIVITIESNet increase in demand, savings, and
      interest bearingdemand deposits
      
      33,494
      
      
      26,105Net increase (decrease) in
      certificates of deposit
      
      (42,962)
      
      
      52,925Dividends paid
      
      -
      
      
      (200)Net increase in short-term
      borrowings
      
      -
      
      
      4,350Repayment of long-term borrowings
      
      (227)
      
      
      (2,265)Issuance of common stock for cash,
      net of amount paid forfractional shares and offering
      costs
      
      623
      
      
      15Net
      cash from financing activities
      
      (9,072)
      
      
      80,930Net
      increase (decrease) in cash and cash equivalents
      
      (9,226)
      
      
      28,689Net
      cash from discontinued operations
      
      3,248
      
      
      (230)CASH AND CASH EQUIVALENTS AT
      BEGINNING OF YEAR
      
      50,171
      
      
      25,585CASH AND CASH EQUIVALENTS AT END OF
      PERIOD
      $
      44,193
      
      $
      54,044The accompanying notes are an
      integral part of these statements.




6

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

1. Nature of Operations
2. Principles of Consolidation



7

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

1. Cash and Cash Equivalents
2. Use of Estimates in the Preparation of Financial Statements
3. Earnings Per Share



8

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

1. Recently Issued Accounting Standards



9

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

> The aggregate amortization expense for goodwill and other intangibles for the quarter ended September 30, 2002 and 2001 amounted to $66,000 and $122,000, respectively. The aggregate amortization expense for the nine months ended September 30, 2002 and 2001 amounted to $199,000 and $367,000, respectively.
> The transitional disclosure requirements of SFAS No. 142 require presentation of income for all periods reported, adjusted for amortization expense for all goodwill and intangible assets.  The following adjusted income amounts are reconciled to reported net income:
> 
> 
> 
>   (Pro forma)Three months ended
>         
>         
>         Year
>         endedSeptember 30,
>         
>         
>         December 31,(unaudited)
>         
>         
>         2002
>         
>         
>         2001
>         
>         
>         2001Reported net income
>         $
>         514
>         
>         $
>         (952)
>         
>         $
>         (1,450)Add:Goodwill amortization from
>         operations, net of tax
>         
>         -
>         
>         
>         37
>         
>         
>         147Goodwill amortization from
>         discontinued operations, net of tax
>         
>         -
>         
>         
>         16
>         
>         
>         61Restated net income
>         $
>         514
>         
>         $
>         (899)
>         
>         $
>         (1,242)BASIC EARNINGS PER SHARE OF COMMON
>         STOCKReported net income per share
>         $
>         0.14
>         
>         $
>         (0.26)
>         
>         $
>         (0.39)Add:Total goodwill amortization
>         per share, net of tax
>         
>         -
>         
>         
>         0.01
>         
>         
>         0.06Restated net income per share
>         $
>         0.14
>         
>         $
>         (0.25)
>         
>         $
>         (0.33)DILUTED EARNINGS PER SHARE OF
>         COMMON STOCKReported net income per share
>         $
>         0.13
>         
>         $
>         (0.25)
>         
>         $
>         (0.39)Add:Total goodwill amortization
>         per share, net of tax
>         
>         -
>         
>         
>         0.01
>         
>         
>         0.06Restated net income per share
>         $
>         0.13
>         
>         $
>         (0.24)
>         
>         $
>         (0.33)(Pro forma)Nine months ended
>         
>         
>         Year endedSeptember 30,
>         
>         
>         December 31,(unaudited)
>         
>         
>         2002
>         
>         
>         2001
>         
>         
>         2001Reported net income
>         $
>         1,102
>         
>         $
>         (79)
>         
>         $
>         (1,450)Add:Goodwill amortization from
>         operations, net of tax
>         
>         -
>         
>         
>         111
>         
>         
>         147Goodwill amortization from
>         discontinued operations, net of tax
>         
>         -
>         
>         
>         50
>         
>         
>         61Restated net income
>         $
>         1,102
>         
>         $
>         82
>         
>         $
>         (1,242)BASIC EARNINGS PER SHARE OF COMMON
>         STOCKReported net income per share
>         $
>         0.29
>         
>         $
>         (0.02)
>         
>         $
>         (0.39)Add:Total goodwill amortization
>         per share, net of tax
>         
>         -
>         
>         
>         0.04
>         
>         
>         0.06Restated net income per share
>         $
>         0.29
>         
>         $
>         0.02
>         
>         $
>         (0.33)DILUTED EARNINGS PER SHARE OF
>         COMMON STOCKReported net income per share
>         $
>         0.29
>         
>         $
>         (0.02)
>         
>         $
>         (0.39)Add:Total goodwill amortization
>         per share, net of tax
>         
>         -
>         
>         
>         0.04
>         
>         
>         0.06Restated net income per share
>         $
>         0.29
>         
>         $
>         0.02
>         
>         $
>         (0.33)
> The Company has applied the new rules of accounting for goodwill and other intangible assets during 2002. Application of the non-amortization provisions of SFAS No. 142 is expected to result in an increase in net income of $325,000 per year. During the first quarter of 2002, upon adoption of SFAS 142, the Company performed a transitional impairment test of goodwill and indefinite lived intangible assets.  The effect of changing to this new accounting principle is a one-time charge of $791,000 net of tax, related to the Company's mortgage banking segment. The impairment test was performed using a market valuation approach, utilizing recent sales data of similar mortgage operations. The resulting valuation indicated an impairment of existing goodwill and its value was adjusted to reflect the impairment. The writedown is included in the Company's consolidated statement of operations as a separately captioned item entitled "Cumulative Effect of an Accounting Change." The Company does not anticipate any additional future impairment charges related to the carrying value of its goodwill, and no adjustments are expected to be made to the first quarter's calculated impairment charge of $791,000 related to the adoption of SFAS No. 142.



10

---



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

> In June 2001, the FASB issued SFAS No. 143 - "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This Statement amends FASB Statement No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies." This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002, so will become effective for the Company in the first quarter of 2003. The Company's management does not expect that the application of the provisions of this Statement will have a material impact on the Company's consolidated financial statements.
> 
> In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."  This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company has adopted this standard, but management does not expect that the application of the provisions of this Statement will have a material impact on the Company's consolidated financial statements.
> 
> In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The Statement is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has not yet adopted this standard. Management does not expect that the application of the provisions of this Statement will have a material impact on the Company's consolidated financial statements.
> 
> In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial Institutions." This statement provides guidance on the accounting for the acquisition of a financial institution and applies to all acquisitions except those between two or more mutual enterprises. The provisions of this Statement reflect the following important conclusions reached by the FASB:
> 
>   The excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination represents goodwill that should be accounted for under SFAS No. 142, "Goodwill and Other Intangible Assets." Thus, the specialized accounting guidance in paragraph 5 of SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" will not apply after September 30, 2002.  If certain criteria in SFAS No. 147 are met, the amount of the unidentifiable intangible asset will be reclassified to goodwill upon adoption of that Statement.
> 
> Financial institutions meeting conditions outlined in SFAS No. 147 will be required to restate previously issued financial statements. The objective of that restatement requirement is to present the balance sheet and income statement as if the amount  accounted for under SFAS No. 72 as an unidentifiable intangible asset had been reclassified to goodwill as of the date SFAS No. 142 was initially applied. (For example, a financial institution that adopted SFAS No. 142 on January 1, 2002 would retroactively reclassify the unidentifiable intangible asset to goodwill as of that date and restate previously issued income statements to remove the
> amortization expense recognized in 2002). Those transition provisions are effective on October 1, 2002; however, early application is permitted.



11

---



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

> The scope of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," is amended to include long-term customer-relationship intangible assets such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets.
> 
> The Company has adopted this standard, but management does not expect that the application of the provisions of this Statement will have a material impact on the Company's consolidated financial statements.

1. Critical Accounting Policies
2. Comprehensive Income



12

---



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

1. Segments of an Enterprise and Related Information:



13

---



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

> Nine months ended September 30, 2002Mortgage
>       
>       
>       HoldingBanking
>       
>       
>       Banking
>       
>       
>       Company
>       
>       
>       Intersegment
>       
>       
>       ConsolidatedInterest income
>       $
>       15,368
>       
>       $
>       2,315
>       
>       $
>       10
>       
>       $
>       (1,144)
>       
>       $
>       16,549Interest expense
>       
>       6,755
>       
>       
>       1,022
>       
>       
>       176
>       
>       
>       (1,144)
>       
>       
>       6,809Net
>       interest income
>       
>       8,613
>       
>       
>       1,293
>       
>       
>       (166)
>       
>       
>       -
>       
>       
>       9,740Provision for loan loss
>       
>       1,055
>       
>       
>       -
>       
>       
>       (48)
>       
>       
>       -
>       
>       
>       1,007Non-interest income
>       
>       1,282
>       
>       
>       6,503
>       
>       
>       423
>       
>       
>       -
>       
>       
>       8,208Non-interest expense
>       
>       8,192
>       
>       
>       6,034
>       
>       
>       338
>       
>       
>       -
>       
>       
>       14,564Income (loss) from continuing
>       operations beforeincome
>       tax expense (benefit)
>       
>       648
>       
>       
>       1,762
>       
>       
>       (33)
>       
>       
>       -
>       
>       
>       2,377Income tax expense (benefit)
>       
>       264
>       
>       
>       608
>       
>       
>       (382)
>       
>       
>       -
>       
>       
>       490Net income from continuing
>       operations beforediscontinued operations and cumulativeeffect
>       of a change in accounting principle
>       
>       384
>       
>       
>       1,154
>       
>       
>       349
>       
>       
>       -
>       
>       
>       1,887Income from discontinued operations,
>       net of tax
>       
>       -
>       
>       
>       -
>       
>       
>       -
>       
>       
>       -
>       
>       
>       6Net income before cumulative effect
>       of a changein
>       accounting principle
>       
>       384
>       
>       
>       1,154
>       
>       
>       349
>       
>       
>       -
>       
>       
>       1,893Cumulative effect of change in
>       accountingprinciple, net of tax
>       
>       -
>       
>       
>       (791)
>       
>       
>       -
>       
>       
>       -
>       
>       
>       (791)Net income
>       $
>       384
>       
>       $
>       363
>       
>       $
>       349
>       
>       $
>       -
>       
>       
>       1,102Depreciation/amortization
>       $
>       584
>       
>       $
>       84
>       
>       $
>       -
>       
>       $
>       -
>       
>       $
>       668Total assets
>       $
>       356,207
>       
>       $
>       69,504
>       
>       $
>       33,748
>       
>       $
>       (97,846)
>       
>       $
>       361,613Nine months ended September 30, 2001Mortgage
>       
>       
>       HoldingBanking
>       
>       
>       Banking
>       
>       
>       Company
>       
>       
>       Intersegment
>       
>       
>       ConsolidatedInterest income
>       $
>       18,626
>       
>       $
>       3,182
>       
>       $
>       75
>       
>       $
>       (2,143)
>       
>       $
>       19,740Interest expense
>       
>       10,272
>       
>       
>       2,068
>       
>       
>       185
>       
>       
>       (2,143)
>       
>       
>       10,382Net
>       interest income
>       
>       8,354
>       
>       
>       1,114
>       
>       
>       (110)
>       
>       
>       -
>       
>       
>       9,358Provision for loan loss
>       
>       2,433
>       
>       
>       189
>       
>       
>       -
>       
>       
>       -
>       
>       
>       2,622Non-interest income
>       
>       784
>       
>       
>       5,229
>       
>       
>       30
>       
>       
>       -
>       
>       
>       6,043Non-interest expense
>       
>       7,694
>       
>       
>       4,605
>       
>       
>       631
>       
>       
>       -
>       
>       
>       12,930Income (loss) from continuing
>       operations beforeincome
>       tax expense (benefit)
>       
>       (989)
>       
>       
>       1,549
>       
>       
>       (711)
>       
>       
>       -
>       
>       
>       (151)Income tax expense (benefit)
>       
>       (238)
>       
>       
>       527
>       
>       
>       (162)
>       
>       
>       -
>       
>       
>       127Net income (loss) from continuing
>       operations
>       $
>       (751)
>       
>       $
>       1,022
>       
>       $
>       (549)
>       
>       $
>       -
>       
>       
>       (278)Net income from discontinued
>       operations
>       
>       -
>       
>       
>       -
>       
>       
>       -
>       
>       
>       -
>       
>       
>       199Net income (loss)
>       $
>       (751)
>       
>       $
>       1,022
>       
>       $
>       (549)
>       
>       $
>       -
>       
>       $
>       (79)Depreciation/amortization
>       $
>       755
>       
>       $
>       215
>       
>       $
>       
>       
>       $
>       -
>       
>       $
>       970Total assets
>       $
>       367,194
>       
>       $
>       70,443
>       
>       $
>       33,219
>       
>       $
>       (98,567)
>       
>       $
>       372,289

1. Business Acquisitions and Sales:

> Year to date net income for 2002 includes a gain on the sale of the Company's finance subsidiary, Business Finance Corp (BFC). BFC was purchased in August of 1998 in order to diversify the Company's holdings and to provide accounts receivable financing as an additional income source and a service to customers in the Western United States. However, during 2001, due to a poor return on investment, and a desire to focus resources more fully on its core banking business, the Company began evaluating alternatives for this segment, including the possibility of selling the segment or reducing the level and scope of its operations. Charges taken in the fourth quarter of 2001 related to loan loss provisions and goodwill impairment, also contributed to the Company's decision to reduce its future commitment and investment in this segment. A formal plan of disposal for the segment was established in January 2002. The only cost associated with the disposal of the BFC segment was for severance pay and this amount, which was recognized during the first quarter, was not significant.
> On February 15, 2002, after a thorough evaluation of options had been considered by management, the Company completed its sale of BFC and recognized a pre-tax gain of $423,000 from the sale of all remaining assets. The assets sold consisted primarily of the segment's collateralized factored receivable accounts that also possessed a positive credit and collection history. Since the final decision and formal plan to sell BFC was not made until January 2002, the gain was reported in the first quarter of 2002 in accordance with the provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", which was effective through December 31, 2001 until it was later superceded by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which became effective for the Company beginning January 1, 2002.
> 
> 14

---



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

> The following table summarizes the sale transaction.
> 
>   (dollars in thousands)Net finance receivables sold
>         $
>         2,511Other assets sold
>         
>         120Total
>         assets sold
>         
>         2,631Loans assumed
>         
>         2,800Other liabilities assumed
>         
>         213Due from purchaser
>         
>         41Total
>         liabilities assumed and due from purchaser
>         
>         3,054Pre-tax gain on sale
>         $
>         423

> 15

---



Item 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULT OF OPERATIONS



The following Management's Discussion and Analysis of Financial Conditions and Results of Operations includes a discussion of certain significant business trends and uncertainties as well as certain forward-looking statements and is intended to be read in conjunction with and is qualified in its entirety by reference to the consolidated financial statements of the Company and accompanying notes included elsewhere in this report.

This discussion and information in the accompanying financial statements contains certain 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 affect on the operations and future prospects of the company, and could render actual results different from those expressed in the forward-looking statement, include, without limitation: changes in general economic conditions, competition for financial services in the market area of the company, the level of demand for loans, quality of the loan and investment portfolio, deposit flows, legislative and regulatory initiatives, and monetary and fiscal policies of the U.S. Government affecting interest rates. The reader is advised that this list of risks is not exhaustive and should not be construed as any prediction by the Company as to which risks would cause actual results to differ materially from those indicated by the forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements.

During the first quarter of 2002 the Company sold its asset-based lending segment, BFC.  Pursuant to the requirements of generally accepted accounting principles and by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", this segment has been reported as discontinued operations in the Company's financial statements. Consequently, many of the tables and much of the discussion in the Management's Discussion and Analysis exclude the current year to date and prior period results of operation of BFC.

The Bank currently operates 11 limited service branches in the greater Portland, Oregon market as branches of Cowlitz Bank, doing business as Northern Bank of Commerce. The Bank plans to close 10 of these locations in December 2002 or January 2003 due to relatively high interest rates paid on low deposit volumes at these branches. At September 30, 2002, these locations had an aggregate deposit balance of $19.9 million of which $13.2 million are certificates of deposit. Management will attempt to move the servicing of these deposits to the main NBOC branch in downtown Portland, but expects some of the deposits will withdraw from the Bank.

Results of Operations

Three months ended September 30, 2002 and 2001

During the third quarter of 2002 the Company had net income of $514,000, or $0.13 per diluted share, compared to a net loss of $952,000, or $(0.25) per diluted share, in the third quarter of 2001. For the third quarter of 2002, the Company's revenues (net interest income before provision for loan losses plus non-interest income) were $6.4 million, an increase of $1.4 million from the revenues of $5.0 million during the same period in 2001.  Non-interest expenses were $5.2 million for the three months ended September 30, 2002 compared to $4.4 million for the comparable period of 2001. The increase in net income of $1.5 million for the third quarter of 2002 when compared to the third quarter of 2001 is primarily due to a decrease of $1.7 million of provision for loan losses.



> 16

---



Nine months ended September 30, 2002 and 2001

Net income for the nine months ended September 31, 2002 was $1.1 million or $0.29 per diluted share compared to a net loss of $79,000 or $(0.02) per diluted share for the same period of 2001. During the first quarter of 2002, the Company recorded a one-time impairment charge of $1.2 million to the carrying amount of its goodwill from the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).  The impairment charge is recognized as a result of a transitional goodwill impairment test required by SFAS No. 142.  The effect on net income of the adoption of this new accounting principle is a charge of $791,000 or $.21 per diluted share, net of tax of $417,000. This is a final calculation of the impairment charge, and the Company does not anticipate additional adjustments or charges related to the adoption of SFAS No. 142. Net income, prior to the impairment charge, was $1.9 million for the nine months ended September 30, 2002 compared to a net loss of $79,000 for the nine months ended September 30, 2001. The current year to date net income also includes a gain on the sale of BFC, of $284,000 after tax or $.08 per diluted share.

For the first nine months of 2002, the Company's revenues (net interest income before provision for loan losses plus non-interest income) were $17.9 million, an increase of $2.5 million from the revenues of $15.4 million during the same period in 2001.  Non-interest expenses have also increased under the same comparison, from $12.9 million to $14.6 million.

At September 30, 2002, total assets were $361.6 million and total liabilities were $330.8 million.  Assets from operations have decreased $5.4 million or 1.5% from $367.0 million at December 31, 2001 and liabilities have decreased $10.7 million or 3.1% from $341.5 million at December 31, 2001.

Although total assets have decreased slightly, the current asset mix is much different from the asset mix at December 31, 2001. Loans held-for-sale at September 30, 2002 have increased $11.8 million to $49.2 million since December 31, 2001 and have increased $28.5 million from June 30, 2002. Demand for mortgage loans, which had been declining through much of 2002, compared to the demand during 2001, has increased again during the third quarter of 2002. For the current quarter, mortgage loan originations were $134.0 million compared to $98.8 million for the same quarter of 2001 and compared to $178.4 million for the first six months of 2002. Mortgage loan originations were down only $14.1 million or 4.3% for the nine months ending September 30, 2002 compared to the same period in 2001, from $326.5 million to $312.4 million. Loans, net of the allowance for loan losses, have decreased from $226.2 million at December 31, 2001 to $209.5 million at September 30, 2002, a decline of $16.7 million, or 7.4%. Cash and cash equivalents have decreased $6.0 million and total investment securities have increased $7.8 million since December 31, 2001.

Total liabilities have decreased to $330.8 million at September 30, 2002, a decline of $10.7 million from $341.5 million at December 31, 2001. Certificates of deposit have decreased $43.0 million under the same comparison, primarily due to the maturity of brokered certificates of deposits purchased during 2001. Non-interest bearing demand deposits and lower rate saving and interest-bearing demand accounts have increased a total of $33.5 million since December 31, 2001, offsetting the decline in certificates of deposit during that time. At September 30, 2002, the Company had $28.5 million in broker deposits or 9.3% of the $306.0 million total deposits. Approximately $9.3 million of these broker deposits are scheduled to mature during the remainder of 2002. The Company has the ability to purchase deposits in the future if the demand for mortgage loans should again increase.

Critical Accounting Policies

Cowlitz Bancorporation (the "Company") and its wholly owned subsidiary, Cowlitz Bank (also the "Company" or the "Bank") have identified one of their most critical accounting policy to be that related to the allowance for loan losses. The Company utilizes both quantitative and qualitative considerations in establishing an allowance for loan losses believed to be appropriate as of each reporting date. Quantitative factors include historical loss experience, recent delinquency and charge-off experience, changes in the levels of non-performing loans, portfolio size, and other known factors with specific loans. Qualitative factors include assessments of the types and quality of the loans within the loan portfolio as well as current local, regional, and national economic considerations. Changes in the above factors could have a significant affect on the determination of the allowance for loan losses. Therefore, a full analysis is performed by management on a quarterly basis to ensure that changes in estimated loan loss levels are adjusted on a timely basis. For further discussion of this significant management estimate, see "Allowance for Loan Losses."



> 17

---



Another critical accounting policy of the Company is that related to the carrying value of goodwill. During the first quarter of 2002, the Company has taken a one-time impairment charge to the carrying amount of its goodwill related to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).  The impairment charge is recognized as a result of a transitional goodwill impairment test required by SFAS No. 142. The Company adopted primarily a market approach in assessing goodwill impairment and will measure the carrying value at least annually under the new accounting rules. For further discussion of the adoption of SFAS No. 142 and its effects on the Company's operations, see note 6, "Recently Issued Accounting Statements."

Analysis of Net Interest Income

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

Three months ended September 30, 2002 and 2001

Net interest income for the quarter ended September 30, 2002 was $3.4 million, a slight increase from $3.2 million for the same period of 2001.  The overall tax-equivalent average earning asset yield was 6.82% for the quarter ended September 30, 2002 compared to 7.80% for the quarter ended September 30, 2001. The decrease in average asset yield is primarily due to a decrease of 1.25% in the national fed funds rate and the Company's prime rate from October to December of 2001. Earning assets averaged $318.4 million for the three months ended September 30, 2002 compared to $345.2 million for the same period of 2001. A change in asset mix from higher yielding loans and loans held for sale to lower rate investment securities and cash has also contributed to a lower overall yield comparing the periods. The average volume of loans held-for-sale and net loans have declined from the third quarter of 2001 to the third quarter of 2002 by about $35.7 million, while the average volume of cash, investment securities and other earning assets have increased $8.9 million under the same comparison. As cash was increased by the payoff of loans and loans held-for-sale, the majority of it was either reinvested into the available-for-sale securities portfolio which has increased $9.8 million since year end, or used to pay for the run-off of broker certificates of deposit as they have matured.  Certificates of deposit have declined $43.0 million since December 31, 2001.

The average cost of interest-bearing liabilities decreased to 3.12% for the quarter ended September 30, 2002 from 4.74% for the same period of 2001. Average interest-bearing liabilities decreased $36.5 million from $298.6 million for the three months ended September 30, 2001 to $262.1 million for the three months ended September 30, 2002. The majority of the decrease in volume and rate of interest-bearing liabilities was the run-off of brokered certificates of deposit as they have matured.

> 18

---



The following table presents information regarding yields and interest earning assets, expense on interest-bearing liabilities, and net yields on interest-earning assets for periods indicated on a tax equivalent basis.

(unaudited)
      (in thousands of dollars)
      
      Three
      months endedSeptember 30,
      
      
      Increase2002
      
      
      2001
      
      
      (Decrease)
      
      
      ChangeInterest income (1)
      $
      5,431
      
      $
      6,728
      
      $
      (1,297)
      
      
      (19.3)
      %Interest expense
      
      2,042
      
      
      3,540
      
      
      (1,498)
      
      
      (42.3)
      %Net interest income
      $
      3,389
      
      $
      3,188
      
      $
      201
      
      
      6.3
      %Average
      interest-earning assets
      $
      318,431
      
      $
      345,202
      
      $
      (26,771)
      
      
      (7.8)
      %Average
      interest-bearing liabilities
      $
      262,140
      
      $
      298,637
      
      $
      (36,497)
      
      
      (12.2)Average yields
      earned (2)
      
      6.82
      %
      
      7.80
      %
      
      (0.98)
      %Average rates paid
      (2)
      
      3.12
      %
      
      4.74
      %
      
      (1.62)
      %Net interest spread
      (2)
      
      3.70
      %
      
      3.06
      %
      
      0.64
      %Net interest margin
      (2)
      
      4.26
      %
      
      3.69
      %
      
      0.57
      %


1. Interest earned on non-taxable securities has been computed on a 34% tax equivalent basis.
2. Ratios for the three months ended September 30, 2002 and 2001 have been annualized.

Nine months ended September 30, 2002 and 2001

Net interest income for the nine months ended September 30, 2002 was $9.7 million, a $300,000 or 3.2% increase from $9.4 million for the same period of 2001.  The overall tax-equivalent yield on earning assets was 6.81% for the first nine months of 2002 compared to 8.29% for the nine months ended September 30, 2001. The decrease in asset yield is primarily due to eleven cuts in the national fed funds rate and the Company's prime rate during 2001. Another factor is a change in the mix of earnings assets with a lower percentage of commercial and consumer loans, and a higher percentage of lower rate cash, mortgage loans held-for-sale, and securities. Earning assets averaged $324.2 million for the nine months ended September 30, 2002 compared to $317.5 million for the same period of 2001. Commercial and consumer loans averaged $224.2 million or 69.1% of total average earning assets for the first nine months of 2002, and accounted for 74.4% or $236.2 million under the same comparison for 2001. Other earning assets such as cash, investments securities, and loans held for sale averaged $100.0 million for the nine months ended September 30, 2002 an increase of $18.7 million from an average of $81.3 million for the first nine months of 2001.

The average cost of interest bearing liabilities decreased to 3.35% for the nine months ended September 30, 2002 from 5.10% for the same period of 2001. Average interest bearing liabilities have decreased slightly from $271.5 million for the nine months ended September 30, 2001 to $270.8 million for the nine months ended September 30, 2002. Declining interest rates on deposit products, which lag somewhat behind changes in federal funds and other national interest rates, has been the major contributor to the lower cost of funds during the current year. Another factor is a change in the mix of deposits from the prior year.  The average balance of higher rate certificates of deposit has declined, while the average balance of low cost money market and demand deposit accounts has increased.

> 19

---



Decreases in national and the local interest rates during 2001 have been the major contributor toward the decline in both the average yields earned on interest-earning assets, and the average cost of interest-bearing liabilities from the third quarter of 2001 to the third quarter of 2002. The interest rate spread continues to improve as higher rate and longer term certificates of deposit mature and, if they are renewed, do so at lower, current rates. The average liability cost has declined more than the average asset yield, comparing the third quarters of 2002 and 2001, widening the interest spread. Excess cash on deposit with the Federal Home Loan Bank, earning the federal funds rate, has been used to pay-off some broker certificates as they matured.  The interest rate the Company is paying on these deposits is higher than the federal funds rate that is currently being earned, creating a negative interest rate spread. This imbalance has been, and will continue to be corrected as the broker certificates mature, helping to widen the overall interest rate spread, and increase net interest income. In addition, as higher rate broker certificates of deposit have matured, the remaining liability mix results in a lower average liability cost. Approximately $9.3 million of broker and out of area certificates of deposit are scheduled to mature during the rest of 2002. Depending on cash flow and liquidity needs, the Company may not renew many of these certificates as they mature, but retains the ability to purchase additional deposits if funding or liquidity needs arise. The Company may choose to purchase deposits in the future, despite some exposure to interest rate and liquidity risks.  Because broker certificates are extremely rate sensitive, they are potentially volatile deposits that are generally priced higher than the Company's other deposit products. Nevertheless, because the Bank's primary market in Cowlitz County, Washington has a very high concentration of credit unions, which offer higher than average deposit rates, the Company's rates are also somewhat higher than average. The rates for broker certificates of deposit are often lower than the rates for the Company's certificates of deposit.

The following table presents information regarding yields and interest earning assets, expense on interest bearing liabilities, and net yields on interest earning assets for periods indicated on a tax equivalent basis.

(unaudited) 
      (in thousands of dollars)
      
      Nine
      months endedSeptember 30,
      
      
      Increase2002
      
      
      2001
      
      
      (Decrease)
      
      
      ChangeInterest income (1)
      $
      16,553
      
      $
      19,742
      
      $
      (3,189)
      
      
      (16.2)
      %Interest expense
      
      6,809
      
      
      10,382
      
      
      (3,573)
      
      
      (34.4)
      %Net interest income
      $
      9,744
      
      $
      9,360
      
      $
      384
      
      
      4.1
      %Average
      interest-earning assets
      $
      324,190
      
      $
      317,547
      
      $
      6,643
      
      
      2.1
      %Average
      interest-bearing liabilities
      $
      270,815
      
      $
      271,576
      
      $
      (761)
      
      
      (0.3)
      %Average yields
      earned (2)
      
      6.81
      %
      
      8.29
      %
      
      (1.48)
      %Average rates paid
      (2)
      
      3.35
      %
      
      5.10
      %
      
      (1.75)
      %Net interest spread
      (2)
      
      3.46
      %
      
      3.19
      %
      
      0.27
      %Net interest margin
      (2)
      
      4.01
      %
      
      3.93
      %
      
      0.08
      %


1. Interest earned on non-taxable securities has been computed on a 34% tax equivalent basis.
2. Ratios for the nine months ended September 30, 2002 and 2001 have been annualized.

> 20

---



Non-Interest Income

Three months ended September 30, 2002 and 2001

Non-interest income consists of the following components:

Three months ended
      September 30,2002
      
      
      2001Service
      charge on deposit accounts
      $
      191
      
      $
      187Gains
      on loans sold
      
      1,323
      
      
      1,047Brokerage fees
      
      858
      
      
      565Fiduciary income
      
      63
      
      
      74Escrow
      fees
      
      311
      
      
      184Credit
      Card income
      
      142
      
      
      119ATM
      income
      
      37
      
      
      23Safe
      deposit box fees
      
      1
      
      
      1Loss on
      sale of repossessed assets
      
      (42)
      
      
      (497)Gains
      on sale of available-for-sale securities
      
      49
      
      
      52Other
      miscellaneous fees and income
      
      40
      
      
      35Total non-interest income
      $
      2,973
      
      $
      1,790


Non-interest income was $3.0 million for the quarter ended September 30, 2002, an increase of $1.2 million from $1.8 million for the quarter ended September 30, 2001.  Non-interest income generated by the mortgage banking segment continued to account for the majority of the total non-interest income for the periods.  Gains on loans sold, brokerage fees, and escrow fees were $2.5 million, which accounted for 83.8% of the total non-interest income for the third quarter of 2002, and were $1.8 million or 100.0% for the same period of 2001. The 2001 percentage is distorted due to a $497,000 loss on the revaluation of repossessed assets, which offsets other non-interest income. Excluding the loss, mortgage non-interest income was 78.7% of total non-interest income for the three months ended September 30, 2001. Implementation of a program to charge for non-customer ATM usage has generated an additional $14,000 of ATM income for the third quarter of 2002.

Nine months ended September 30, 2002 and 2001

Non-interest income consists of the following components:

Nine months ended
      September 30,2002
      
      
      2001Service
      charge on deposit accounts
      $
      540
      
      $
      560Gains
      on loans sold
      
      3,495
      
      
      3,076Brokerage fees
      
      2,169
      
      
      1,509Fiduciary income
      
      205
      
      
      194Escrow
      fees
      
      726
      
      
      574Credit
      Card income
      
      399
      
      
      397ATM
      income
      
      102
      
      
      59Safe
      deposit box fees
      
      28
      
      
      32Gain on
      sale of subsidiary
      
      423
      
      
      -Loss on
      sale of repossessed assets
      
      (21)
      
      
      (479)Gains
      on sale of available-for-sale securities
      
      88
      
      
      89Other
      miscellaneous fees and income
      
      54
      
      
      32Total non-interest income
      $
      8,208
      
      $
      6,043


> 21

---



Non-interest income increased to $8.2 million for the nine months ended September 30, 2002 from $6.0 million in the corresponding period of 2001, a 35.8% increase.  Much of this increase is due to the gain of $423,000 on the sale of the Company's finance subsidiary, BFC during the first quarter of 2002. In addition, the third quarter 2001 non-interest income is reduced by a loss of $497,000 on the revaluation of repossessed assets. The remaining increase is primarily due to non-interest income generated by the mortgage banking segment including gains on loans sold, brokerage fees, and escrow fees. Total mortgage related non-interest income was $6.4 million or 78.0% of total non-interest income for the first nine months of 2002, and was $5.2 million or 86.7% of the total for the same period of 2001. Excluding the gain on sale of subsidiary in 2002, mortgage income accounted for 82.1% of the total non-interest income for the nine month period of 2002. Excluding the loss of 479,000 included in the non-interest income for the nine months ended September 30, 2001, mortgage income was 80.0% of the non-interest income for that period. Implementation of a program to charge for non-customer ATM usage has generated an additional $43,000 of ATM income during 2002 when compared to ATM income from the first nine months of 2001.

Non-Interest Expense

Three months ended September 30, 2002 and 2001

Non-interest expense consists of the following components:

Three months ended
      September 30,2002
      
      
      2001Salaries and employee benefits
      $
      2,897
      
      $
      2,240Net
      occupancy and equipment
      
      540
      
      
      597Amortization of intangible assets
      
      66
      
      
      122Net
      cost of operation of other real estate owned
      
      78
      
      
      97Business taxes
      
      139
      
      
      158Data
      processing and communications
      
      129
      
      
      146Stationary and supplies
      
      82
      
      
      55Credit
      card expense
      
      135
      
      
      99Parking, travel and education
      
      103
      
      
      89Loan
      expense
      
      161
      
      
      156Advertising
      
      53
      
      
      47Professional fees
      
      224
      
      
      106Postage
      and freight
      
      131
      
      
      126FDIC
      insurance
      
      140
      
      
      35Other
      miscellaneous expenses
      
      330
      
      
      289Total non-interest expense
      $
      5,208
      
      $
      4,362


Non-interest expenses increased to $5.2 million for the quarter ended September 30, 2002 compared to $4.4 million for the quarter ended September 30, 2001.

Salary expenses have accounted for the majority of the increase in total non-interest expenses.  Salaries and employee benefits have increased to $2.9 million from $2.2 million from the third quarter 2001 to the third quarter of 2002. At September 30, 2002, the Company had 198 full-time equivalent employees compared to 205 at September 30, 2001. Although the number of employees has declined, commission expenses at Bay Mortgage have increased from period to period by approximately $568,000. An increase in mortgage lending non-interest income has resulted in a higher commission expense. Also contributing to higher salaries is ordinary annual wage increases for many existing employees, generally ranging from three to six percent per year.

Net occupancy and equipment expenses consist of depreciation on premises, lease costs, equipment, maintenance and repair expenses, utilities and related expenses.  The Company's net occupancy expense for the quarter ended September 30, 2002 was $540,000 or 9.5% lower than $597,000 for the same period of 2001. Depreciation expense has decreased by $75,000 comparing the two quarters as fixed assets have become fully depreciated or sold.

> 22

---



Amortization expenses are lower for the third quarter of 2002 when compared to the third quarter of 2001 because the Company is no longer amortizing goodwill. Under the adoption of SFAS No. 142 the Company is no longer recording amortization on unidentifiable intangible assets, specifically goodwill. The entire decline in amortization expense of $56,000 from quarter to quarter is the result of the adoption of SFAS No. 142.

The FDIC insurance has increased because in the third quarter of 2001, the Bank was required to pay $.03 per $100 of domestic deposits, which has increased to $.17 per $100 for the third quarter of 2002. The FDIC issued regulations establishing a system for setting deposit insurance premiums based upon the risks a particular bank or savings association poses to the deposit insurance funds. This system bases an institution's risk category partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also assigned to one of three "supervisory" categories based on reviews by regulators, statistical analysis of financial statements and other relevant information. An institution's assessment rate depends upon the capital category and supervisory category to which it is assigned. Annual assessment rates currently range from zero per $100 of domestic deposits for the highest rated institution to $0.27 per $100 of domestic deposits for an institution in the lowest category. Under legislation enacted in 1996 to recapitalize the Savings Association Insurance Fund, the FDIC is authorized to collect assessments against insured deposits to be paid to the Financing Corporation ("FICO") to service FICO debt incurred in the 1980's. The current FICO assessment rate for BIF insured deposits is $0.0170 per $100 of deposits per year. Any increase in deposit insurance of FICO assessments could have an adverse effect on Cowlitz Bank's earnings.

Professional fees include exam and audit expenses, consulting and legal fees, and other professional fees. The increase of $118,000 in these expenses during the three months ended September 30, 2002 compared to the same period of 2001 is primarily attributable to an increase in legal fees of $93,000.

Nine months ended September 30, 2002 and 2001

Non-interest expense consists of the following components:

Nine months ended
      September 30,2002
      
      
      2001Salaries and employee benefits
      $
      7,915
      
      $
      6,667Net
      occupancy and equipment
      
      1,635
      
      
      1,791Amortization of intangible assets
      
      199
      
      
      367Net
      cost of operation of other real estate owned
      
      209
      
      
      127Business taxes
      
      438
      
      
      437Data
      processing and communications
      
      382
      
      
      428Stationary and supplies
      
      245
      
      
      183Credit
      card expense
      
      382
      
      
      312Parking, travel and education
      
      262
      
      
      244Loan
      expense
      
      395
      
      
      379Advertising
      
      135
      
      
      149Professional fees
      
      760
      
      
      297Postage
      and freight
      
      371
      
      
      359FDIC
      insurance
      
      430
      
      
      176Other
      miscellaneous expenses
      
      806
      
      
      1,014Total non-interest expense
      $
      14,564
      
      $
      12,930




Non-interest expenses increased $1.7 million or 13.2% to $14.6 million for the nine months ended September 30, 2002 compared to $12.9 million for the nine months ended September 30, 2001.

> 23

---



Salary expenses have increased $1.2 million to $7.9 million for the nine months ended September 30, 2002, from $6.7 million for the same period of 2001. At September 30, 2002, the Company had 198 full-time equivalent employees compared to 205 at September 30, 2001. Although the number of employees has declined, commission expenses at Bay Mortgage have increased from period to period by approximately $435,000. An increase in mortgage lending non-interest income has resulted in a higher commission expense. In addition, current year changes in executive management resulted in an overlap of executive salaries for several months during the year. Also contributing to higher salaries is ordinary annual wage increases for many existing employees, generally ranging from three to six percent per year.

Net occupancy and equipment expenses consist of depreciation on premises, lease costs, equipment, maintenance and repair expenses, utilities and related expenses.  The Company's net occupancy expense for the nine months ended September 30, 2002 was $1.6 million compared to $1.8 million for the same period of 2001. Depreciation expense has decreased by $142,000 comparing the nine months ended September 30, 2002 to the same period of 2001 as fixed assets have become fully depreciated or sold.

Amortization expenses are lower for the first nine months of 2002 when compared to the first nine months of 2001 because the Company is no longer amortizing goodwill. Under the adoption of SFAS No. 142 the Company is no longer recording amortization on unidentifiable intangible assets, specifically goodwill. The entire decline in amortization expense of $168,000 from year to year is the result of the adoption of SFAS No. 142.

The net cost of operation of other real estate owned has increased $82,000 during the first nine months of 2002 when compared to the net costs for the same period of 2001. As management has aggressively sought to decrease the volume of impaired and defaulted loans, the costs to repossess, carry, and resell the underlying collateral of these loans has increased.

Professional fees include exam and audit expenses, consulting and legal fees, and other professional fees. Professional fees have increased $463,000 when comparing the first nine months of 2002 to the same period of 2001. Legal fees relating to the repossession of assets on defaulted loans, to changes in the Company's executive management, and to the sale of BFC are $177,000 higher in the current year.  A broker commission of $92,000 was paid in the current year related to the sale of BFC, and other consulting and professional fees are $194,000 higher during 2002 than during 2001.

The FDIC insurance has increased because during the first six months and the third quarter of 2001, the Bank was required to pay $.10 and $.03, respectively per $100 of domestic deposits. This rate has been increased to $.17 per $100 during the nine months ended September 30, 2002. These premiums are set based on FDIC analysis of the Bank's capital position, rating, and other factors. As these factors improve or deteriorate, the assessment rates change. See the discussion of FDIC insurance under non-interest expense for the three months ended September 30, 2002 and 2001 for additional information.

Other miscellaneous expenses appear lower for the nine months ended September 30, 2002 because the first nine months of 2001 includes a write down of $162,000 relating to the cash surrender value of a key man life insurance policy held on the Company's Chairman and CEO, Benjamin Namatinia.

Income Taxes

Three months ended September 30, 2002 and 2001

During the third quarter of 2002 the provision for income taxes was $287,000 compared to an income tax benefit of $468,000 for the third quarter of 2001. The effective tax rate for the third quarter of 2002 was 35.8% compared to 31.6% for the three months ended September 30 2001.

> 

24

---



Nine months ended September 30, 2002 and 2001

The provision for income taxes was $490,000 and $127,000 for the nine months ended September 30, 2002 and 2001, respectively. The second quarter of 2002 includes a $375,000 tax benefit related to the sale of BFC in the first quarter of 2002. The sale of BFC generated a capital loss for tax purposes and a deferred tax asset on the Company's balance sheet. The Company had also recorded a full valuation allowance against the asset as of the end of the first quarter of 2002 because, at that time, the Company was unsure if it would be able to utilize the deferred tax asset.  During the second quarter of 2002, the Company identified certain strategies for federal income tax purposes to utilize the deferred tax asset.  This resulted in the reversal of the valuation allowance with a corresponding income tax benefit of $375,000 for the period.  The income tax provision for the nine months ended September 30, 2002 resulted in an effective tax rate of 20.6% for the nine month period. The effective tax rate for the year to date 2002, excluding the $375,000 tax benefit discussed above, was 36.2%. The effective tax rate for the nine months ended September 30, 2001 has not been calculated since there is a loss before income taxes. The Company has recorded a tax expense for the nine months ended September 30, 2001 due to non-tax deductible expense associated with the write down of the key man insurance policy during 2001.

Provision for Loan Losses

The amount of the allowance for loan losses is analyzed by management on a regular basis to ensure that it is adequate to absorb losses inherent in the loan portfolio as of the reporting date.  When a provision for loan losses is recorded, the amount is based on past charge-off experience, a careful analysis of the current loan portfolio, the level of non-performing and impaired loans, evaluation of future economic trends in the Company's market area, and other factors relevant to the loan portfolio.  The quarterly provision recorded into the allowance for loan losses is based upon estimates of probable losses inherent in the loan portfolio.  The loss amount actually realized for these loans can vary significantly from the estimated amounts. See the "Allowance for Loan Losses" disclosure for a more detailed discussion.

Three months ended September 30, 2002 and 2001

The Company's provision for loan losses was $352,000 for the quarter ended September 30, 2002 and $2.1 million for the quarter ended September 30, 2001. Charge-offs, net of recoveries, were $114,000 for the three months ended September 30, 2002 compared to net charge-offs of $216,000 for the three months ended September 30, 2001 and $2.2 million for the year ended December 31, 2001. With the slow regional and national economic conditions experienced during 2001 and thus far in 2002, charge-offs have been relatively high. As the economy recovers and loan related internal controls are strengthened, the Company expects to see declines in the level of impaired assets and charged-off loans, and a corresponding decrease in the provision for loan losses. The large provision in the third quarter of 2001 was management's response to the downturn in the local and national economies during that time, which had a negative impact on the quality of the Company's credits.  During the third quarter 2001 analysis of the loan portfolio, certain loans were reclassified into higher risk categories requiring additional specific reserves on those credits.  A strengthening in the allowance for loan losses was necessary to remain adequately reserved under the analysis of the loan portfolio at that time.  Management continuously monitors existing loans for signs of impairment, and strives to reduce the level of loans previously classified as impaired.

Nine months ended September 30, 2002 and 2001

The Company's provision for loan losses was $1.0 million and $2.6 for the nine months ended September 30, 2002 and 2001, respectively, and $3.5 million for the year ended December 31, 2001.  Net charge-offs were $954,000 for the nine months ended September 30, 2002 compared to net charge-offs of $2.0 million for the nine months ended September 30, 2001 and $2.2 million for the year ended December 31, 2001. At September 30, 2002, the allowance for loan losses as a percentage of total loans was 2.68%, an increase from 2.46% at December 31, 2001 and from 2.15% at September 30, 2001.  With the slow regional and national economic conditions experienced during 2001 and thus far in 2002, charge-offs have been relatively high. As the economy recovers and loan related internal controls are strengthened, the Company expects to see declines in the level of impaired assets and charged off loans, and a corresponding decrease in the provision for loan losses.  Management continuously monitors existing loans for signs of impairment, and strives to reduce the level of loans previously classified as impaired.

> 25

---



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

(unaudited)(in thousands of
      dollars)
      
      Nine Months Ended
      
      
      Nine Months Ended
      
      
      Year EndedSeptember 30,
      
      
      September 30,
      
      
      December 31,2002
      
      
      2001
      
      
      2001Loans
      outstanding at end of period
      $
      215,266
      
      $
      234,569
      
      $
      231,921Average
      loans outstanding during the period
      $
      224,155
      
      $
      236,196
      
      $
      235,165Allowance for loan losses, beginning of period
      $
      5,710
      
      $
      4,432
      
      $
      4,432Loans
      charged off:Commercial
      
      925
      
      
      1,099
      
      
      1,099Real
      Estate
      
      164
      
      
      1,492
      
      
      1,743Consumer
      
      7
      
      
      38
      
      
      53Credit
      Cards
      
      79
      
      
      57
      
      
      86Total loans
      charged-off
      
      1,175
      
      
      2,686
      
      
      2,981Recoveries:Commercial
      
      78
      
      
      27
      
      
      97Real
      Estate
      
      126
      
      
      636
      
      
      652Consumer
      
      1
      
      
      14
      
      
      15Credit
      Cards
      
      16
      
      
      2
      
      
      3Total recoveries
      
      221
      
      
      679
      
      
      767Provision for loan losses
      
      1,007
      
      
      2,622
      
      
      3,492Allowance for loan losses, end of period
      $
      5,763
      
      $
      5,047
      
      $
      5,710Net
      loans charged-off during the period
      
      954
      
      
      2,007
      
      
      2,214Ratio
      of net loans charged-off to average loans outstanding
      
      0.43
      %
      
      0.85
      %
      
      0.94
      %Ratio
      of allowance for loan losses to loans at end of period
      
      2.68
      %
      
      2.15
      %
      
      2.46
      %


Loans

Total loans outstanding were $215.3 million and $231.9 million at September 30, 2002 and December 31, 2001, respectively.  Loan commitments such as home equity and other lines of credit, unused available credit on credit cards, and letters of credit, were $40.7 million at September 30, 2002 and $51.8 million at December 31, 2001. In addition, the Company had $49.1 million of loans held for sale at September 30, 2002 compared to $37.3 million at December 31, 2001.  During the first nine months of 2002, the Company funded $312.4 million of loans to be sold into the secondary market, and delivered $304.0 million to the market.  This compares to $326.5 million funded and $289.1 million delivered during the first nine months of 2001.

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

(unaudited)(in thousands of dollars)
      
      September 30, 2002
      
      
      December 31, 2001Amount
      
      Percentage
      
      
      Amount
      
      PercentageCommercial
      $
      48,983
      
      22.67
      %
      $
      46,861
      
      16.89
      %Real estate construction
      
      39,571
      
      18.31
      
      
      26,520
      
      16.89Real estate commercial
      
      89,963
      
      41.64
      
      
      111,437
      
      41.98Real estate mortgage
      
      32,722
      
      15.14
      
      
      36,190
      
      15.59Consumer and other
      
      4,851
      
      2.24
      
      
      11,650
      
      2.34216,090
      
      100.00
      %
      
      232,658
      
      100.00
      %Deferred loan fees
      
      (824)
      
      
      
      
      (737)Total
      loans
      
      215,266
      
      
      
      
      231,921Allowance for loan losses
      
      (5,763)
      
      
      
      
      (5,710)Total loans, net
      $
      209,503
      
      
      
      $
      226,211


> 26

---



Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable losses which have occurred as of the date of the financial statements. The loan portfolio is regularly reviewed to evaluate the adequacy of the allowance for loan losses. In determining the level of the allowance, the Company evaluates the amount necessary for specific non-performing loans and estimates losses inherent in other loans. An important element in determining the adequacy of an allowance for loan losses is an analysis of loans by loan rating categories. The risk of a credit is evaluated by the Company's management at inception of the loan using an established grading system. This grading system currently includes ten levels of risk. Risk gradings range from "1" for the strongest credits to "10" for the weakest; a "10" rated loan would normally represent a loss, and all loans rated 6-10 are collectively the Company's watch list. The specific gradings from 6-10 are "management attention", "special mention", "substandard", "doubtful", or "loss". When indicators such as operating losses, collateral impairment or delinquency problems show that a credit may have weakened, the credits will be downgraded as appropriate. Similarly, as borrowers bring loans current, show improved cash flows, or improve the collateral position of the loan, the credits may be upgraded. Management reviews all credits periodically for changes in such factors. There have been no changes to the Company's allowance for loan losses related to changes in methods or assumptions since December 31, 2001. Any adjustments or changes in the elements and components of the allowance since year end are primarily the result of loan quality assessments, and variations in total loan volumes.

The result is an allowance with two components:

Specific Reserves: Loans on the Company's watch list, as described above, are specifically reserved for by applying a separate reserve factor to the volume of loans within each risk grade. The reserve factors are determined on the basis of suggested regulatory guidelines. Management assesses each loan on the watch list to assure the reserve factor applied to each risk grade is sufficient for each individual loan within the pool. When significant conditions or circumstances exist on an individual loan indicating greater risk, additional specific reserves may be required. 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.

General Allowance: Any loan that does not require a specific reserve is subject to a general reserve loss factor. Management determines this factor by analyzing the volume and mix of the existing loan portfolio, including the volume and severity of non-performing loans and adversely classified credits; analysis of net charge-offs experienced on previously classified loans; the nature and value of collateral securing the loans; the trend in loan growth, including any rapid increase in loan volume within a relatively short period of time; management's subjective evaluation of general and local economic and business conditions affecting the collectibility of the Company's loans; the relationship and trend over the past several years of recoveries in relation to charge-offs; and any changes in lending policies, lending management, or the loan review system. This decision also reflects management's attempt to ensure that the overall allowance appropriately reflects a margin for the imprecision necessarily inherent in estimates of expected loan losses.

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

Loans and other extensions of credit deemed uncollectable are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Actual losses may vary from current estimates and the amount of the provision may be either greater than or less than actual net charge-offs. The related provision for loan losses that is charged to income is the amount necessary to adjust the allowance to the level determined through the above process. In accordance with the Company's methodology for assessing the appropriate allowance for loan losses, the general portion of the allowance was $2.3 million at September 30, 2002 compared to $2.9 million at December 31, 2001. The reduction to the general allowance is a combination of a reduction in total loans to $215.3 million at September 30, 2002 from $231.9 million at December 31, 2001, and a migration of over $9.0 million in loans onto the Company's watch list. Once a loan is added to the watch list, as discussed above, a specific reserve is assigned to that loan rather than a general reserve allowance.

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At September 30, 2002, approximately $3.5 million of the allowance for loan losses was allocated based on an estimate of the amount that was necessary to provide for potential losses related to the watch list and other specific loans, compared to $2.8 million at December 31, 2001. Specific reserves decline as those loans requiring specific reserves are reduced by either principal payments, reclassification assessments, or have been charged off, and increase as additional loans requiring specific reserves are identified. During the first nine months of 2002, $1.1 million of loans requiring specific reserves were charged against the reserve. This reduction in specific reserve was offset by a migration of over $9.0 million of loans onto the company's watch list from the general loan pool, resulting in the increase in the specific reserve allowance since December 31, 2001. Total loans on the Company's watch list increased from $27.1 million at December 31, 2001 to $37.6 million at September 30, 2002.

Management's evaluation of the factors above resulted in allowances for loan losses of $5.8 million and $5.7 million at September 30, 2002 and December 31, 2001, respectively. The allowance as a percentage of total loans was 2.68% at September 30, 2002 and 2.46% at December 31, 2001.

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

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

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

The Company manages the general risks inherent in the loan portfolio by following loan policies and underwriting practices designed to result in prudent lending activities.  The following table presents information with respect to non-performing assets:

(unaudited)
      
      (in thousands of dollars)
      
      September 30,
 2002
      
      December 31,
 2001Loans
      on non-accrual status
      
      $
      5,839
      $
      4,590Loans
      past due greater than 90 days but not on non-accrual status
      
      
      215
      
      1,178Other
      real estate owned
      
      
      1,280
      
      1,498Other
      Assets
      
      
      3
      
      5Total
      non-performing assets
      
      $
      7,337
      $
      7,271Percentage of non-performing assets from operations to total assets
      
      
      2.03
      %
      1.98
      %




At September 30, 2002 non-performing assets were $7.3 million or 2.03% of total assets compared to $7.3 million or 1.98% of total assets at December 31, 2001. The September 30, 2002 non-performing asset balance has increased from $5.8 million or 1.73% of total assets at June 30, 2002. Approximately $5.5 million of the $5.8 million of non-accrual loans at September 30, 2002 are primarily secured by real estate and the remainder consists of commercial and consumer loans with varying collateral. Any losses on non-accrual loans that are considered probable have been estimated by management in its regular quarterly assessment of the allowance for loan losses as discussed above.

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

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Other real estate owned declined from $1.5 million at December 31, 2001 to $1.3 million at September 30, 2002 as properties classified as other real estate have been sold or the carrying valuations of the properties have been adjusted.

Liquidity

Liquidity represents the ability to meet deposit withdrawals and fund loan demand, while retaining the flexibility to take advantage of business opportunities.  The Company's primary sources of funds are customer deposits, loan payments, sales of assets, advances from the FHLB and the use of the federal funds market.

As of September 30, 2002, approximately $10.9 million of the securities portfolio matures within one year, and another $6.5 million is callable within one year. The maturities of mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the expected maturity of the underlying collateral. Mortgage-backed securities may mature earlier than their stated contractual maturities because of accelerated principal repayments of the underlying loans.

Historically the Company has utilized borrowings from the FHLB as an important source of funding for its growth. The Company has an established borrowing line with the FHLB that permits it to borrow up to 15% of the Bank's assets, subject to collateral limitations. Advances from the FHLB have maturity periods ranging from 1 through 15 years and at September 30, 2002, bear interest at rates ranging from 1.90% to 8.62%. At September 30, 2002, $15.9 million in advances were outstanding from the FHLB.

During 2001, the Company experienced extremely rapid growth in its residential lending segment as consumers took advantage of relatively low housing market interest rates to refinance, build, or purchase homes. Although these residential mortgage loans are typically sold within 15-45 days after funding, the volume funded but unsold grew from $10.0 million at December 31, 2000 to over $55.0 million during the first quarter of 2001, and to over $68.0 million at the peak during the fourth quarter of 2001. In order to take advantage of the income generated by the increase in mortgage loan volume, the Company utilized the broker CD market to fund the growth. As origination volumes of loans held-for-sale began to taper off toward the end of 2001 and into the first half of 2002, the excess funds were deposited in the Company's cash account with the FHLB, increasing the Company's liquidity. Much of this cash has been used to pay-off higher rate broker deposits as they have matured during 2002 or to purchase investment securities. During the current quarter, demand for mortgage lending has once again increased to the levels experienced during much of 2001. The volume of mortgage loans held-for-sale at September 30, 2002 has increased to $49.1 million at September 30, 2002 compared with $37.3 million at December 31, 2001 and $20.6 million at June 30, 2002. Cash and cash equivalents remains adequate to fund this most recent increase in the demand for mortgage lending.  The volume of cash at September 30, 2002 is $44.2 million, which has declined only $9.9 million from the December 31, 2001 level, despite a reduction in broker and other certificates of deposit of $43.0 million under the same comparison. Cash has been bolstered by an increase of $33.5 million in demand and savings accounts since December 31, 2001 and $16.6 million from the payoff of commercial loans during the same period. The Company retains the ability to create additional liquidity as needed to fund any additional increases in mortgage lending volumes through the use of cash on hand, existing borrowing lines, from the sale of available-for-sale investment securities, or through the purchase of out of market or broker certificates of deposit.

Capital

The Company and the Bank are required to maintain minimum amounts of capital to "risk weighted" assets, as defined by banking regulators.  The Company and the Bank are required to have a total risk-based capital and a tier 1 risk-based capital ratio of 8.0% and 4.0%, respectively.  In addition, the Bank is required to maintain a tier 1 leverage capital ratio of not less than 4%.  At September 30, 2002, the Company's total risk-based capital and tier 1 risk-based capital ratios were 11.65% and 10.39%, respectively; and at December 31, 2001, the Company's ratios were 10.10% and 8.84%, respectively. At September 30, 2002, the Bank's total risk-based capital, tier 1 risk-based capital, and tier 1 leverage capital ratios were 11.94%, 10.68%, and 8.29%, respectively, and at December 31, 2001 were 10.72%, 9.46%, and 6.99%, respectively. The Company's ratio of shareholders' equity to average assets was 8.08%, and 8.14% at September 30, 2002 and December 31, 2001, respectively. The Bank's average total assets for leverage capital purposes for the quarter ended September 30, 2002 were $334.4 million and for the quarter ended December 31, 2001 were $364.8 million.

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To be considered "well capitalized" as defined by banking regulators, the Bank and the Company must maintain a total capital ratio of greater than 10%, a tier 1 capital ratio of greater than 6%, and the Bank must maintain a tier 1 leverage capital ratio of greater than 5%. At September 30, 2002 and at December 31, 2001, both the Company and the Bank exceeded the minimum requirements to be considered "well capitalized" under banking regulations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Credit Risk

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

Interest Rate Risk

The Company's earnings are largely derived from net interest income, which is interest income and fees earned on loans and investment income, less interest expense paid on deposits and other borrowings. Interest rates are highly sensitive to many factors which are beyond the control of the Company's management, including general economic conditions, and the policies of various governmental and regulatory authorities. As interest rates change, net interest income is affected. With fixed rate assets (such as fixed rate loans) and liabilities (such as certificates of deposit), the effect on net interest income depends on the maturity of the asset and liability. The Company's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while structuring the Company's asset/liability position to obtain the maximum yield-cost spread on that structure. Interest rate risk is managed through the monitoring of the Company's gap position and sensitivity to interest rate risk by subjecting the Company's balance sheet to hypothetical interest rate shocks.  In a falling rate environment, as experienced in 2001, the spread between interest yields earned and interest rates paid, may narrow, depending on the relative level of fixed and variable rate assets and liabilities.  In a stable or increasing rate environment the Company's variable rate loans will remain steady or increase immediately with changes in interest rates, while fixed rate liabilities, particularly certificates of deposit will only re-price as the liability matures.  As experienced in the stable rate environment during the first nine months of 2002, the interest rate spread has widened as long-term certificates of deposit have matured and re-priced at the current, lower rates.

Item 4. Controls and Procedures

In October 2002, the Company evaluated, under the supervision and the participation of Management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of disclosure controls and procedures.  Based on that evaluation, Management, including the Chief Executive Officer and Chief Financial Officer, concluded that disclosure controls and procedures were effective.

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

Part II. OTHER INFORMATION

Item 5. 	Submission of Matters to a Vote of Security Holders

None

Item 6.	Exhibits and Reports on Form 8-K

> (a)        Exhibits99.1 Certification of Chief Executive Officer and Chief Financial Officer
> 
> (b)	       The Company did not file any reports on Form 8-K during the quarter ended September 30, 2002.



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SIGNATURES

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

Dated: November 14, 2002

| | Cowlitz Bancorporation(Registrant)
By:                                              
| | ------------------------------------------------------------------------------------
| | /s/ Paul L. CampbellPaul L. Campbell, President and Chief Executive Officer         
| |                                                                                     
| | /s/ Don P. KiserDon P. Kiser, Vice-President, Chief Financial Officer, and Secretary

> 

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CERTIFICATION OF THE QUARTERLY REPORT AS ADOPTED PURSUANT TO 
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Paul L. Campbell, certify that:

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

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

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

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

> a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
> b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
> c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

> a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
> b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Date: November 14, 2002 | /s/ Paul L. CampbellPaul L. Campbell, 
Chief Executive Officer 
Cowlitz Bancorporation
|----------------------- | --------------------------------------------------------------------------------------

> 

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CERTIFICATION OF THE QUARTERLY REPORT AS ADOPTED PURSUANT TO 
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Don P. Kiser, certify that:

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

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

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

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

> a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
> b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
> c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

> a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
> b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|Date: November 14, 2002 | /s/ Don P. KiserDon P. Kiser, Chief Financial Officer
Cowlitz Bancorporation
|----------------------- | ----------------------------------------------------------------------------

> 

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Exhibit 99.1

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

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

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



/s/ Paul L. Campbell			Paul L. Campbell
Chief Executive Officer
Cowlitz Bancorporation

/s/ Don P. Kiser				Don P. Kiser
Chief Financial Officer
Cowlitz Bancorporation

November 14, 2002



> 

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