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 1934
          For the quarter ended June 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 July 31, 2002:  3,769,272 shares



1

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TABLE OF CONTENTS

Part I
Financial StatementsConsolidated Statements of Condition -
June 30, 2002 and December 31, 2001
3Consolidated Statements of Operations -
Three months ended June 30, 2002 and June 30, 2001 and year ended December 31, 2001
4Consolidated Statements of Changes in Shareholders' Equity
Year ended December 31, 2001 and six months ended June 30, 2002
5Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and June 30, 2001
6Notes to Consolidated Financial Statements
7Management's Discussion and Analysis of Financial Condition And Results of Operations
12Part II
OtherOther information
26Exhibits and Reports on Form 8-K
26Signatures
27Certification of Chief Executive Officer and Chief Financial Officer
28




2

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



June 30, 
2002
December 31,
2001(unaudited)ASSETSCash and cash equivalents
$ 22,646
$50,177Investment securities:Investments available-for-sale (at fair value, cost of $50,276 and

          $30,172 at June 30, 2002 and December 31, 2001, 		respectively)
50,753
30,188Investments held-to-maturity (at amortized cost, fair value of

          $2,106 and $4,157 at June 30, 2002 and December 31, 2001, 		respectively)
2,079
4,115Total investment securities
52,832
34,303Federal Home Loan Bank stock, at cost
3,646
3,531Loans held for sale
20,559
37,322Loans, net of deferred loan fees
226,441
235,212Allowance for loan losses
(5,525)
(5,997)Loans, net
220,916
229,215Premises and equipment, net of accumulated depreciation of $4,323

          and $4,029 at June 30, 2002 and December 31, 2001, respectively
4,896
5,235Goodwill
2,352
3,560Intangible assets, net of accumulated amortization of $1,336 and

          $1,203 at June 30, 2002 and December 31, 2001, respectively
634
767Accrued interest receivable and other assets
6,769
6,550Total assets
$335,250
$370,660LIABILITIESDeposits:Non-interest-bearing demand
$44,851
$43,225Savings and interest-bearing demand
103,445
96,587Certificates of deposit
131,826
175,678Total deposits
280,122
315,490Short-term borrowings
4,100
2,750Long-term borrowings
18,859
19,009Accrued interest payable and other liabilities
2,209
4,663Total liabilities
305,290
341,912SHAREHOLDERS' EQUITYPreferred stock, no par value; 5,000,000 shares authorized
          as of June 30, 2002 and December 31, 2001, no 	shares issued and outstanding
-
-Common stock, no par value; 25,000,000 authorized as of
     June 30, 2002 and December 31, 2001; 3,753,172
     and 3,692,560 shares issued and outstanding at June 30, 2002 
     and December 31, 2001, respectively
17,122
16,802Additional paid-in capital
1,538
1,538Retained earnings
10,986
10,398Accumulated other comprehensive income, net of taxes
314
10Total shareholders' equity
29,960
28,748Total liabilities and shareholders' equity
$335,250
$370,660


The 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
June 30,
Six months ended
June 30,2002
2001
2002
2001(unaudited)INTEREST INCOMEInterest and fees on loans
$ 4,891
$6,501
$9,951
$12,687Interest on taxable investment securities
516
155
883
339Interest on non-taxable investment securities
5
2
7
4Other interest and dividend income
148
405
408
626Total interest income
5,560
7,063
11,249
13,656INTEREST EXPENSESavings and interest-bearing demand
441
771
837
1,376Certificates of deposit
1,543
2,484
3,435
4,702Short-term borrowings
14
30
24
63Long-term borrowings
234
337
471
701Total interest expense
2,232
3,622
4,767
6,842Net interest income before provision for loan losses
3,328
3,441
6,482
6,814PROVISION FOR LOAN LOSSES
355
355
655
607Net interest income after provision for loan losses
2,973
3,086
5,827
6,207NON-INTEREST INCOMEService charges on deposit accounts
171
183
349
373Gains on loans sold
998
1,272
2,172
2,029Escrow fees
193
206
415
390Fiduciary income
71
59
142
120Credit card income
132
135
257
278Brokerage Fees
706
541
1,311
944Gain on sale of subsidiary
-
-
423
-Net gains (losses) on sale of repossessed assets
19
2
21
(13)Other income
45
39
106
95Net gains on sales of available-for-sale securities
39
19
39
37Total non-interest income
2,374
2,456
5,235
4,253NON-INTEREST EXPENSESalaries and employee benefits
2,604
2,431
5,050
4,596Net occupancy and equipment expense
545
607
1,100
1,222Business taxes
137
156
300
284Amortization of intangibles
67
148
133
295Net cost of operation of other real estate
47
15
131
30Data processing and communications
152
165
255
291Professional fees
261
134
562
280Postage and freight
116
125
241
234Credit card expense
131
106
247
213FDIC insurance
143
69
290
141Other operating expense
612
833
1,180
1,378Total non-interest expense
4,815
4,789
9,489
8,964INCOME BEFORE INCOME TAX EXPENSE (BENEFIT)
532
753
1,573
1,496Income tax expense (benefit)
(184)
337
194
623INCOME BEFORE CUMULATIVE EFFECT OF
     A CHANGE IN ACCOUNTING PRINCIPLE
716
416
1,379
873CUMULATIVE EFFECT ON PRIOR YEARS OF ACCTG
     CHANGE (Less applicable income taxes of $417,000)
-
-
791
-NET INCOME
$   716
$   416
$   588
$   873BASIC EARNINGS PER SHARE OF COMMON STOCK
$   0.19
$    0.11
$    0.16
$    0.24DILUTED EARNINGS PER SHARE-COMMON STOCK
$   0.19
$    0.11
$    0.15
$    0.23CUMULATIVE EFFECT OF ACCOUNTING CHANGE,NET OF TAX PER DILUTED SHARE OF COMMON STOCK
$       -
$       -
$    0.21
$       -


The accompanying notes are an integral part of these statements.



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

Additional 
Paid-in 
Capital

Retained 
Earnings

Accumulated 
Other 
Comprehensive 
Income (loss)

Total 
Shareholders' 
Equity

Comprehensive 
Income (loss)Common StockShares

AmountBALANCE 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 on
investments 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
-

-

-

588

-

588

$                 588Net change in unrealized gains on
investments available-for-sale, net
of deferred taxes of $157
-

-

-

-

304

304

304Comprehensive income
-

-

-

-

-

-

$                 892Issuance of common stock for cash
60,612

320

-

-

-

320BALANCE AT JUNE 30, 2002
3,753,172

$      17,122

$      1,538

$      10,986

$                  314

$         29,960(unaudited)


The accompanying notes are an integral part of these statements.



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Six months ended 
June 30,2002

2001(unaudited)CASH FLOWS FROM OPERATING ACTIVITIESNet income
$           588

$           873Adjustments to reconcile net income to net cash provided byOperating activities:Deferred tax benefit
(348)

-Depreciation and amortization
475

710Change in accounting principle
1,208

-Provision for loan losses
655

607Net gain on sale of subsidiary
(423)

-Net gains on sales of investments available-for-sale
(39)

(37)Net amortization of investment security premiums and accretion of discounts
146

(5)Net losses (gains) on sales of foreclosed assets
(21)

13Gains on loans sold
(2,172)

(2,029)Origination of loans held for sale
(178,406)

(227,678)Proceeds of loans sales
197,341

184,988Increase in accrued interest receivable and other assets
(80)

(1,416)Increase (decrease) accrued interest payable and other liabilities
(2,241)

740Federal Home Loan Bank stock dividends
(119)

(108)Net cash from operating activities
16,564

(43,342)CASH FLOWS FROM INVESTING ACTIVITIESProceeds from maturities of investment securities held-to-maturity
2,599

8,568Proceeds from sales and maturities of investment securities
available-for-sale
14,678

6,711Proceeds from sales of foreclosed assets
320

345Purchases of investment securities:Held-to-maturity
(559)

(5,599)Available-for-sale
(34,893)

(11,514)Net (increase) decrease in loans
7,728

(7,625)Net cash paid from sale of subsidiary
(104)

-Purchases of premises and equipment
(16)

(180)Net cash from investment activities
(10,247)

(9,294)CASH FLOWS FROM FINANCING ACTIVITIESNet increase in demand, savings, and interest bearingdemand deposits
8,484

37,486Net increase (decrease) in certificates of deposit
(43,852)

51,579Dividends paid
-

(133)Net increase in short-term borrowings
1,350

1,050Repayment of long-term borrowings
(150)

(2,092)Issuance of common stock for cash, net of amount paid forfractional shares and offering costs
320

14Net cash from financing activities
(33,848)

87,904Net increase (decrease) in cash and cash equivalents
(27,531)

35,268CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
50,177

25,589CASH AND CASH EQUIVALENTS AT END OF PERIOD
$      22,646

$      60,857


The accompanying notes are an integral part of these statements.



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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
Cowlitz Bancorporation (the "Company") was organized in 1991 under Washington law to become the holding company for Cowlitz Bank (also the "Company" or the "Bank"), a Washington state chartered bank that commenced operations in 1978. The principal executive offices of the Company are located in Longview, Washington.
The Company offers or makes available a broad range of financial services to its customers, primarily small and medium-sized businesses, professionals and retail customers. The Bank's commercial and personal banking services include commercial and real estate lending, consumer lending, mortgage origination and trust services. From 1998 through 2001, the Company also provided asset-based lending services to companies throughout the Western United States through its subsidiary, Business Finance Corporation ("BFC"), which was sold in the first quarter of 2002.
The Company's goal is to maintain its position as a community-based provider of financial services. The Company's growth strategy is based on providing both exceptional personal service and a wide range of financial services to its customers. This is done by emphasizing personal service and developing strong community ties, offering financial products and services that are focused on small and medium-sized businesses, and increasing business volume in existing markets. In accordance with this strategy, during 1999 and 2000, the Company acquired or opened several mortgage and escrow branches. Bay Mortgage and Bay Escrow of Bellevue, Washington, Bay Mortgage and Bay Escrow of Seattle, Washington, Bay Mortgage of Silverdale, Washington, and Bay Mortgage of Vancouver, Washington (collectively "Bay Mortgage") have joined together with the Longview mortgage operations as a branch of Cowlitz Bank. Bay Mortgage serves customers throughout the greater Bellevue/Seattle market area, Cowlitz County, and through the Vancouver office, the greater Portland, Oregon market. The Bank also expanded its commercial banking activities in the Seattle/Bellevue area with the September 1999 opening of a branch in Bellevue, Washington, which is doing business as Bay Bank. In mid-2000, the Company acquired Northern Bank of Commerce ("NBOC") of Portland, Oregon, which operates as a branch of the Bank doing business as Northern Bank of Commerce. NBOC operates its main office in downtown Portland, and has 11 limited service branches located within retirement centers in the Portland metropolitan area.
Certain reclassifications have been made to prior periods in order to conform with the current period presentation.  These reclassifications have no effect on the Company's previously reported financial position, results of operations, or earnings per share.
2. Principles of Consolidation
3. Supplemental Cash Flow Information
4. Use of Estimates in the Preparation of Financial Statements
5. Earnings Per Share

Net Income

Weighted
Avg. Shares

Per Share 
AmountFor the three months ended June 30, 2002Basic earnings per share
$             716

3,738,245

$         0.19Stock Options


117,443Diluted earnings per share
$             716

3,855,688

$         0.19For the three months ended June 30, 2001Basic earnings per share
$             416

3,691,865

$         0.11Stock Options


32,958Diluted earnings per share
$             416

3,724,823

$         0.11For the six months ended June 30, 2002Basic earnings per share
$             588

3,718,989

$         0.16Stock Options


75,708Diluted earnings per share
$             588

3,794,697

$         0.15For the six months ended June 30, 2001Basic earnings per share
$             873

3,691,115

$         0.24Stock Options


33,010Diluted earnings per share
$             873

3,724,125

$         0.23


Options to purchase 321,806 shares of common stock with exercise prices ranging from $6.19 to $12.00, with an  average price of $10.42, were outstanding at June 30, 2002 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares.  These options expire from 2008-2010.

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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



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

1. Comprehensive Income
For the Company, comprehensive income includes net income reported on the statements of income and changes in the fair value of its available-for-sale investments reported as a component of shareholders' equity.
The components of comprehensive income/(loss) for the periods ended June 30, 2002 and 2001 are as follows:



1. Segments of an Enterprise and Related Information:

> The Company is principally engaged in community banking activities through its branches and corporate offices.  The community banking activities include accepting deposits, providing loans and lines of credit to local individuals, businesses and governmental entities, investing in investment securities and money market instruments, and holding or managing assets in a fiduciary agency capacity on behalf of its customers and their beneficiaries.  The Company provided asset based financing to companies throughout the western United States through its BFC subsidiary, until its sale in the first quarter of 2002.  Bay Mortgage specializes in all facets of residential lending including FHA and VA loans, construction loans and bridge loans.
> The community banking, mortgage banking, and asset based financing activities are monitored and reported by Company management as separate operating segments.  The seven separate banking offices and 11 retirement center branches have been aggregated into a single reportable segment, "Banking," and Bay Mortgage is included as a segment, "Mortgage Banking."  The asset based financing segment does not meet the prescribed aggregation or materiality criteria and therefore is reported as "Other" in the following table below.  This segment, BFC, was sold during the first quarter of 2002.
> The accounting policies for the Company's segment information provided below are the same as those described for the Company in the summary of significant accounting policies footnote included in the Company's 2001 annual report, except that some operating expenses are not allocated to segments.
> Summarized financial information for the period ended June 30, 2002 and 2001 concerning the Company's reportable segments is shown in the following tables.

Three months ended June 30, 2002Mortgage 
Banking

Holding 
CompanyBanking



Other

Intersegment

ConsolidatedInterest income
$     5,176

$           699

$              3

$        -

$        (318)

$              5,560Interest expense
2,204

288

58

-

(318)

2,232Net interest income
2,972

411

(55)

-

-

3,328Provision for loan loss
400

-

(45)

-

-

355Non-interest income
451

1,923

-

-

-

2,374Non-interest expense
2,765

1,977

73

-

-

4,815Income (loss) before tax
258

357

(83)

-

-

532Income tax exp. (benefit)
99

123

(406)

-

-

(184)Net income(loss)
$        159

$           234

$          323

$        -

$              -

$                 716Depreciation/amortization
$        197

$             28

$               -

$        -

$              -

$                 225




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

Three months ended June 30, 2001Mortgage

HoldingBanking

Banking

Company

Other

Intersegment

ConsolidatedInterest income
$          6,496

$        1,153

$             20

$         306

$             (912)

$           7,063Interest expense
3,611

800

60

63

(912)

3,622Net interest income
2,885

353

(40)

243

-

3,441Provision for loan loss
211

106

-

38

-

355Non-interest income
399

2,057

-

-

-

2,456Non-interest expense
2,571

1,694

319

205

-

4,789Income (loss) before tax
502

610

(359)

-

-

753Income tax exp. (benefit)
179

207

(58)

9

-

337Net income(loss)
$             323

$           403

$         (301)

$           (9)

-

$              416Depreciation/amortization
$             257

$             71

-

$           28

-

$              356Six months ended June 30, 2002Mortgage

HoldingBanking

Banking

Company

Other

Intersegment

ConsolidatedInterest income
$        10,476

$        1,443

$               6

$         130

$             (806)

$         11,249Interest expense
4,719

713

117

24

(806)

4,767Net interest income
5,757

730

(111)

106

-

6,482Provision for loan loss
700

-

(45)

-

-

655Non-interest income
852

3,960

423

-

-

5,235Non-interest expense
5,399

3,699

258

133

-

9,489Income (loss) before tax
510

991

99

(27)

-

1,573Income tax exp. (benefit)
197

342

(336)

(9)

-

194Income (loss) before changein accounting principle
313

649

435

(18)

-

1,379Change in accountingprinciple net of tax
-

(791)

-

-

-

(791)Net income(loss)
$             313

$         (142)

$           435

$         (18)

-

$              588Depreciation/amortization
$             414

$             57

-

$             2

-

$              473Total assets
$      331,272

$      40,299

$      32,901

-

$        (69,222)

$       335,250Six months ended June 30, 2001Mortgage

HoldingBanking

Banking

Company

Other

Intersegment

ConsolidatedInterest income
$        12,473

$        1,912

$             64

$         643

$          (1,436)

$         13,656Interest expense
6,783

1,237

123

$         135

(1,436)

6,842Net interest income
5,690

675

(59)

508

-

6,814Provision for loan loss
421

106

-

80

-

607Non-interest income
852

3,401

-

-

-

4,253Non-interest expense
5,073

3,007

488

396

-

8,964Income (loss) before tax
1,048

963

(547)

32

-

1,496Income tax exp. (benefit)
373

327

(105)

28

-

623Net income(loss)
$             675

$           636

$         (442)

$             4

-

$              873Depreciation/amortization
$             514

$           139

-

$           57

-

$              710Total assets
$      379,365

$      74,759

$      34,024

$      5,718

$      (107,507)

$       386,359


1. Subsequent Events: None



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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.

For the second quarter and first six months of 2001, the Company has reclassified certain income and expense items relating to the loans funded or processed by Bay Mortgage in order to conform with changes in the current period presentation. Fees collected on loans brokered, but not funded, by Bay Mortgage to outside lenders had been recorded as interest income but are now properly classified as non-interest income. Similarly, loan origination fees related to loans held-for-sale previously reported as interest income have been reclassified as non-interest income. Loan origination fees on loans held-for-sale, net of certain direct origination costs, are deferred and amortized as an adjustment of the yield on the related loan using the interest method. Such net deferred loan origination fees are recognized when the related loans are subsequently sold or repaid. These reclassifications have no effect on the Company's previously reported financial position, results of operations, or earnings per share.

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."

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



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Results of Operations

Three months ended June 30, 2002 and 2001

During the second quarter of 2002 the Company had net income of $716,000, or $0.19 per diluted share, compared to net income of $416,000, or $.11 per diluted share, in the second quarter of 2001. For the second quarter of 2002, the Company's revenues (net interest income before provision for loan losses plus non-interest income) were $5.7 million, a slight decrease from the revenues of $5.9 million during the same period in 2001.  Non-interest expenses were unchanged from period to period at $4.8 million. The current quarter income includes an income tax benefit of $375,000 or $.10 per diluted share. The deferred tax benefit results from a reduction in the Company's valuation allowance held against certain deferred tax assets, which were recorded in the first quarter of 2002 in connection with the sale of BFC.

Under the adoption of SFAS No. 142 the Company is no longer recording amortization on unidentifiable intangible assets, specifically goodwill.  The following pro forma table restates prior period net income and earnings per share as if SFAS No. 142 had been in effect.

(Pro forma)Three months ended

Year endedJune 30,

December 31,(unaudited)
  (in thousands of dollars, except per share amounts)
2002

2001

2001Reported net income
$         716

$         416

$        (1,450)Add back: Goodwill amortization, net of tax
-

53

208Restated net income
$         716

$         469

$        (1,242)BASIC EARNINGS PER SHARE OF COMMON STOCKReported net income per share
$        0.19

$        0.11

$          (0.39)Add back: Goodwill amortization per share, net of tax
-

0.01

0.06Restated net income per share
$        0.19

$        0.12

$          (0.33)DILUTED EARNINGS PER SHARE OF COMMON STOCKReported net income per share
$        0.19

$        0.11

$          (0.39)Add back: Goodwill amortization per share, net of tax
-

0.01

0.06Restated net income per share
$        0.19

$        0.12

$          (0.33)


Six months ended June 30, 2002 and 2001

During the first quarter of 2002, the Company recorded a one-time impairment charge to the carrying amount of its goodwill from the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).  The impairment charge is recognized as a result of a transitional goodwill impairment test required by SFAS No. 142.  The effect of this new accounting principle is a charge of $791,000 or $.21 per diluted share, net of tax of $417,000.  The Company reported net income of $588,000 or $.16 per diluted share for the first six months of 2002 after adopting the provisions of SFAS No. 142, compared to net income of $873,000 or $0.23 per diluted share for the same period of 2001.



---



Under the adoption of SFAS No. 142 the Company is no longer recording amortization on unidentifiable intangible assets, specifically goodwill.  The following pro forma table restates prior period net income and earnings per share as if SFAS No. 142 had been in effect.

(Pro forma)Six months ended

Year endedJune 30,

December 31,(unaudited)
  (in thousands of dollars, except per share amounts)
2002

2001

2001Reported net income
$         588

$         873

$        (1,450)Add back: Goodwill amortization, net of tax
-

106

208Restated net income
$         588

$         979

$        (1,242)BASIC EARNINGS PER SHARE OF COMMON STOCKReported net income per share
$        0.16

$        0.24

$          (0.39)Add back: Goodwill amortization per share, net of tax
-

0.03

0.06Restated net income per share
$        0.16

$        0.27

$          (0.33)DILUTED EARNINGS PER SHARE OF COMMON STOCKReported net income per share
$        0.16

$        0.23

$          (0.39)Add back: Goodwill amortization per share, net of tax
-

0.03

0.06Restated net income per share
$        0.16

$        0.26

$          (0.33)


The current year to date net income also includes a gain on the sale of the Company's finance subsidiary, Business Finance Corp (BFC).  The following table summarizes the sale and calculation of the pre-tax gain of $423,000.

(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


For the first six months of 2002, the Company's revenues (net interest income before provision for loan losses plus non-interest income) were $11.7 million, a slight increase from the revenues of $11.1 million during the same period in 2001.  Non-interest expenses have also increased under the same comparison, from $9.0 to $9.5 million.

At June 30, 2002, total assets were $335.3 million and total liabilities were $305.3 million.  Assets have decreased $35.4 million or 9.5% from $370.7 million at December 31, 2001 and liabilities have decreased $36.6 million or 10.7% from $341.9 million at December 31, 2001.

The asset decline is due to a lower origination volume of loans held-for-sale, a decrease in cash and cash equivalents, and a reduction of net loans, offset by an increase in the Company's investment portfolio.  Loans held-for-sale have decreased $16.7 million since December 31, 2001 through a combination of lower demand for mortgage lending, and efficiencies developed in the process of originating and selling loans into the secondary market. Mortgage loan originations were down $49.3 million or 21% for the 6 months ending June 30, 2002 compared to the same period in 2001, from $227.7 million to $178.4 million. Loans, net of the allowance for loan losses, have decreased from $229.2 million at December 31, 2001 to $220.9 million at June 30, 2002.  The cash generated from the payoff of loans and loans held-for-sale has been used to increase the investment securities portfolio by $20.6 million, and to pay off the maturing certificates of deposit that were not renewed.

The decrease in liabilities from the year ended December 31, 2001 is primarily the maturity of brokered certificates of deposits purchased to fund the rapid growth of the mortgage segment during 2001.  These deposits were necessary to fund mortgage loans for 15-45 days before they are sold to the secondary market. As the volume of mortgage loan originations has declined during 2002, funding requirements have also declined, so most certificates of deposit have not been renewed as they mature.  The Company has the ability to purchase deposits in the future if the demand for mortgage loans should again increase.

---

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 June 30, 2002 and 2001

Net interest income for the quarter ended June 30, 2002 was $3.3 million, a slight decrease from $3.4 million for the same period of 2001.  The overall tax-equivalent earning asset yield was 6.98% for the quarter ended June 30, 2002 compared to 8.54% for the quarter ended June 30, 2001. The decrease in asset yield is primarily due to eight cuts in the national fed funds rate and the Company's prime rate from April to December of 2001. Earning assets averaged $318.7 million for the three months ended June 30, 2002 compared to $330.8 million for the same period of 2001. The average volume of loans held-for-sale and net loans have declined from the second quarter of 2001 to the second quarter of 2002 by about $43.0 million, while the average volume of cash, investment securities and other earning assets have increased $30.9 million under the same comparison. As cash was increased by the payoff of loans and loans held-for-sale, it was either reinvested into the securities portfolio, or used to pay for the run-off of broker certificates of deposit as they have matured.

The average cost of interest bearing liabilities decreased to 3.35% for the quarter ended June 30, 2002 from 5.15% for the same period of 2001. Average interest bearing liabilities decreased $14.4 million from $281.4 million for the three months ended June 30, 2001 to $266.8 million for the three months ended June 30, 2002. The majority of the decrease in volume of interest bearing liabilities was the run-off of brokered certificates of deposit as they have matured.

Decreases in national and the Company's 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 second quarter 2001 to the second quarter of 2002. The interest rate spread continues to improve as higher rate and longer term certificates of deposit mature and are replaced at the lower current rates. 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.  Approximately $21.8 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.

Analysis of Net Interest Income

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.

Three months endedJune 30,

Increase(unaudited)
  (in thousands of dollars)
2002

2001

(Decrease)

ChangeInterest income (1)
$     5,562

$     7,064

$   (1,502)

-21.3%Interest expense
2,232

3,622

(1,390)

-38.4%Net interest income
$     3,330

$     3,442

$      (112)

3.3%Average interest earning assets
$ 318,741

$ 330,839

$ (12,098)

-3.7%Average interest bearing liabilities
$ 266,848

$ 281,357

$ (14,509)

-5.2%Average yields earned (2)
6.98%

8.54%

-1.56%Average rates paid (2)
3.35%

5.15%

-1.80%Net interest spread (2)
3.63%

3.39%

0.24%Net interest margin (2)
4.18%

4.16%

0.02%


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

Six months ended June 30, 2002 and 2001

Net interest income for the six months ended June 30, 2002 was $6.5 million, a $300,000 or 4.4% decrease from $6.8 million for the same period of 2001.  The overall tax-equivalent yield on earning assets was 6.86% for the first six months of 2002 compared to 8.87% for the six months ended June 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 $328.0 million for the six months ended June 30, 2002 compared to $308.0 million for the same period of 2001. Commercial and consumer loans were 74.4% of total average earning assets for the first six months of 2002, and accounted for 87.9% under the same comparison for 2001. The shift in average earnings assets mix is an increase in the investment securities portfolio from $11.2 million for the first six months of 2001 to $47.3 million for the first six months of 2002. The growth in the mortgage lending segment didn't occur until late in the first quarter of 2001, which is why the average earning assets for the first half of 2001 is lower than for the first half of 2002.

The average cost of interest bearing liabilities decreased to 3.46% for the six months ended June 30, 2002 from 5.30% for the same period of 2001. Average interest bearing liabilities have increased $17.2 million from $258.3 million for the first six months of June 30, 2001 to $275.5 million for the six months ended June 30, 2002. The prior year average is lower because the growth in the mortgage lending segment didn't occur until late in the first quarter of 2001, so the broker deposits used to fund the growth weren't purchased until that time. In addition, the current year average is higher because the broker deposits brought in last year have begun to mature late in the first quarter and during the second quarter of this year.

Decreases in national and the Company's 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 first six months of 2001 to the same period of 2002. The interest rate spread continues to improve as higher rate and longer term certificates of deposit mature and are replaced at the lower current rates. 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.  Approximately $21.8 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 these certificates as they mature.



---



Analysis of Net Interest Income

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.

Six months endedJune 30,

Increase(unaudited)
  (in thousands of dollars)
2002

2001

(Decrease)

ChangeInterest income (1)
$   11,251

$   13,657

$   (2,406)

(17.6)%Interest expense
4,767

6,842

(2,075)

(30.3)%Net interest income
$     6,484

$     6,815

$      (331)

(4.9)%Average interest earning assets
$ 327,977

$ 307,986

$  19,991

6.5%Average interest bearing liabilities
$ 275,512

$ 258,259

$  17,253

6.7%Average yields earned (2)
6.86%

8.87%

(2.01)%Average rates paid (2)
3.46%

5.30%

(1.84)%Net interest spread (2)
3.40%

3.57%

(0.17)%Net interest margin (2)
3.95%

4.43%

(.48)%


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

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 increase 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 six 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.



---



Non-Interest Income

Three months ended June 30, 2002 and 2001

Non-interest income consists of the following components:

Three
      months ended June 30,2002
      
      
      2001Service charge on deposit
      accounts
      $
      171
      
      
      183Gains on loans sold
      
      998
      
      
      1,272Brokerage fees
      
      706
      
      
      541Fiduciary income
      
      71
      
      
      59Escrow fees
      
      193
      
      
      206Credit Card income
      
      132
      
      
      135ATM income
      
      37
      
      
      22Safe deposit box fees
      
      3
      
      
      3Gain on sale of repossessed
      assets
      
      19
      
      
      2Gains on sale of
      available-for-sale securities
      
      39
      
      
      19Other miscellaneous fees and
      income
      
      5
      
      
      14Total
      non-interest income
      $
      2,374
      
      $
      2,456




Non-interest income was $2.4 million for the quarter ended June 30, 2002, virtually unchanged from $2.5 million for the quarter ended June 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 accounted for 79.9% of the total non-interest income for the second quarter of 2002, and 82.2% for the same period of 2001. Implementation of a program to charge for non-customer ATM usage has generated additional ATM income for the second quarter of 2002.

Six months ended June 30, 2002 and 2001

Non-interest income consists of the following components:



Six months
      ended June 30,2002
      
      2001Service charge on deposit
      accounts
      $
      349
      $
      373Gains on loans sold
      
      2,172
      
      2,029Brokerage fees
      
      1,311
      
      944Fiduciary income
      
      142
      
      120Escrow fees
      
      415
      
      390Credit Card income
      
      257
      
      278ATM income
      
      65
      
      36Safe deposit box fees
      
      27
      
      31Gain on sale of subsidiary
      
      423
      
      -Gain (loss) on sale of
      repossessed assets
      
      21
      
      (13)Gains on sale of
      available-for-sale securities
      
      39
      
      37Other miscellaneous fees and
      income
      
      14
      
      28Total
      non-interest income
      $
      5,235
      $
      4,253




Non-interest income increased to $5.2 million for the six months ended June 30, 2002 from $4.3 million in the corresponding period of 2001, a 20.9% 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.  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 $3.9 million or 75.0% of total non-interest income for the first six months of 2002, and was $3.4 million or 79.1% of the total for the same period of 2001. Implementation of a program to charge for non-customer ATM usage has generated additional ATM income during 2002.



---



Non-Interest Expense

Three months ended June 30, 2002 and 2001

Non-interest expense consists of the following components:



Three
      months ended June 30,2002
      
      
      2001Salaries and employee
      benefits
      $
      2,604
      
      $
      2,431Net occupancy and equipment
      
      545
      
      
      607Amortization of intangible
      assets
      
      67
      
      
      148Net cost of operation of
      other real estate owned
      
      47
      
      
      15Business taxes
      
      137
      
      
      156Data processing and
      communications
      
      152
      
      
      165Stationary and supplies
      
      92
      
      
      72Credit card expense
      
      131
      
      
      106Parking, travel and
      education
      
      79
      
      
      78Loan expense
      
      156
      
      
      149Advertising
      
      43
      
      
      68Professional fees
      
      261
      
      
      134Postage and freight
      
      116
      
      
      125FDIC insurance
      
      143
      
      
      69Other miscellaneous expenses
      
      242
      
      
      466Total
      non-interest expense
      $
      4,815
      
      $
      4,789




Non-interest expenses were unchanged at $4.8 million for the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001.

Salary expenses have increased from $2.4 million to $2.6 million from the second quarter 2001 to the second quarter of 2002. At June 30, 2002, the Company had 195 full-time equivalent employees compared to 211 at June 30, 2001. Recent changes in executive management have resulted in an overlap of executive salaries for several months.  Also contributing to higher salaries is ordinary annual wage increases for existing employees, generally ranging from three to six percent per year.

Net occupancy 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 June 30, 2002 was $545,000 or 10.2% lower than $607,000 for the same period of 2001. The sale of BFC reduced this expense by approximately $13,000 per quarter.  In addition, depreciation expense has decreased by $46,000 comparing the two quarters as furniture and equipment has become fully depreciated.

The FDIC insurance has increased because in the second quarter of 2001, the Bank was required to pay $.10 per $100 of domestic deposits, which has increased to $.17 per $100 during the second quarter of 2002. These assessment charges are imposed based on FDIC analysis of the Bank's capital position, rating, and other factors. As these factors improve or deteriorate, the assessment rates change.

Professional fees include exam and audit expenses, consulting and legal fees, and other professional fees. The increase in these expenses during the first three months of 2002 compared to the same period of 2001 is the result of higher legal fees relating to the repossession of assets on defaulted loans, legal and professional fees related to the changes in the Company's executive management, and consulting on strategic alternatives.

Other miscellaneous expenses are lower in the second quarter of 2002 when compared to the same period of 2001 primarily due to a charge of $137,000 in 2001 to write down the cash surrender value of a key man life insurance policy held on the Company's Chairman and CEO, Benjamin Namatinia.



---



Six months ended June 30, 2002 and 2001

Non-interest expense consists of the following components:



Six months
      ended June 30,2002
      
      
      2001Salaries and employee
      benefits
      $
      5,050
      
      $
      4,596Net occupancy and equipment
      
      1,100
      
      
      1,222Amortization of intangible
      assets
      
      133
      
      
      295Net cost of operation of
      other real estate owned
      
      131
      
      
      30Business taxes
      
      300
      
      
      284Data processing and
      communications
      
      255
      
      
      291Stationary and supplies
      
      164
      
      
      132Credit card expense
      
      247
      
      
      213Parking, travel and
      education
      
      162
      
      
      160Loan expense
      
      234
      
      
      223Advertising
      
      88
      
      
      118Professional fees
      
      562
      
      
      280Postage and freight
      
      241
      
      
      234FDIC insurance
      
      290
      
      
      141Other miscellaneous expenses
      
      532
      
      
      745Total
      non-interest expense
      $
      9,489
      
      $
      8,964




Non-interest expenses increased 5.6% to $9.5 million for the six months ended June 30, 2002 compared to $9.0 million for the six months ended June 30, 2001.

Salary expenses have increased from $4.6 million to $5.1 million from the six months ended June 30, 2001 when compared to the same period of 2002. At June 30, 2002, the Company had 195 full-time equivalent employees compared to 211 at June 30, 2001. Recent changes in executive management have resulted in an overlap of executive salaries for several months. Also contributing to higher salaries is ordinary annual wage increases for existing employees, generally ranging from three to six percent per year.

Net occupancy 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 six months ended June 30, 2002 was $1.1 million compared to $1.2 million for the same period of 2001. The sale of BFC reduced this expense by approximately $13,000 per quarter.  In addition, depreciation expense has decreased by $67,000 comparing the six month periods as furniture and equipment has become fully depreciated.

The net cost of operation of other real estate owned has increased $101,000 during the first six 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. The increases in these expenses when comparing periods are higher legal fees relating to the repossession of assets on defaulted loans, legal and professional fees related to the changes in the Company's executive management, a broker commission related to the sale of BFC, and consulting on other strategic alternatives.

The FDIC insurance has increased because in the first half of 2001, the Bank was required to pay $.10 per $100 of domestic deposits, which has increased to $.17 per $100 for the first half of 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.

Other miscellaneous expenses appear lower for the six months ended June 30, 2002 because the first six 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 June 30, 2002 and 2001

During the second quarter of 2002 an income tax benefit of $184,000 was recorded compared to a provision for income taxes of $337,000 for the second quarter of 2001.  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 books which was fully reserved as of the end of the first quarter of 2002.  During the second quarter of 2002, the Company identified certain strategies for federal income tax purposes that resulted in the reversal of the valuation allowance with a corresponding income tax benefit of $375,000 for the period.  The effective tax rate for the second quarter of 2002, excluding the $375,000 benefit, was 35.9% compared to 44.8% for the three months ended June 30 2001.  The effective tax rate for the second quarter of 2001 is higher due to the non-tax deductible expense associated with the write down of the key man insurance policy.

Six months ended June 30, 2002 and 2001

The provision for income taxes was $194,000 and $623,000 for the six months ended June 30, 2002 and 2001, respectively.  These provisions resulted in an effective tax rate of 12.3% and 41.6% for the same periods of 2002 and 2001, respectively.  The effective tax rate for the year to date 2002, excluding the $375,000 tax benefit discussed above, was 36.2%.

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 June 30, 2002 and 2001

The Company's provision for loan losses was $355,000 for each of quarters ended June 30, 2002 and 2001.  Charge-offs, net of recoveries, were $447,000 for the three months ended June 30, 2002 compared to net charge-offs of $126,000 for the three months ended June 30, 2001 and $3.8 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, 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.

Six months ended June 30, 2002 and 2001

The Company's provision for loan losses was $655,000 and $607,000 for the six months ended June 30, 2002 and 2001, respectively.  Net charge-offs were $838,000 for the six months ended June 30, 2002 compared to net charge-offs of $1.8 million for the six months ended June 30, 2001 and $3.8 million for the year ended December 31, 2001. The Company recognized an adjustment to the allowance for loan losses of $289,000 related to the sale of BFC during the first quarter of 2002. At June 30, 2002, the allowance for loan losses as a percentage of total loans was 2.44%, down slightly from the level of 2.55% at December 31, 2001 and up from 1.41% at June 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.



---





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



(unaudited)
      (in thousands of dollars)
      
      
      Six months
      Ended June 30,
      
      
      Six months
      Ended June 30,
      
      
      Year Ended
      December 31,2002
      
      
      2001
      
      
      2001Loans outstanding at end of period
      $
      226,441
      
      $
      239,473
      
      $
      235,212Average loans outstanding during the period
      
      227,908
      
      $
      240,392
      
      $
      239,678Allowance for loan losses, beginning of period
      
      5,997
      
      $
      4,561
      
      $
      4,561Loans charged off:Commercial
      
      
      842
      
      
      674
      
      
      2,729Real Estate
      
      
      128
      
      
      1,130
      
      
      1,743Consumer
      
      
      2
      
      
      12
      
      
      53Credit Cards
      
      
      75
      
      
      39
      
      
      86Total loans charged-off
      
      1,047
      
      
      1,855
      
      
      4,611Recoveries:Commercial
      
      
      77
      
      
      19
      
      
      115Real Estate
      
      
      116
      
      
      30
      
      
      652Consumer
      
      
      1
      
      
      14
      
      
      15Credit Cards
      
      
      15
      
      
      1
      
      
      3Total recoveries
      
      209
      
      
      64
      
      
      785Provision for loan losses
      
      655
      
      
      607
      
      
      5,262Adjustment incident to sale of subsidiary
      
      (289)
      
      
      -
      
      
      -Allowance for loan losses, end of period
      $
      5,525
      
      $
      3,377
      
      $
      5,997Ratio of net loans charged-off to average loans outstanding
      
      0.37%
      
      
      0.75%
      
      
      1.60%Ratio of allowance for loan losses to loans at end of period
      
      2.44%
      
      
      1.41%
      
      
      2.55%




Loans

Total loans outstanding were $226.4 million and $235.2 million at June 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 $46.0 million at June 30, 2002 and $53.7 million at December 31, 2001. In addition, the Company had $20.6 million of loans held for sale at June 30, 2002 compared to $37.3 million at December 31, 2001.  During the first six months of 2002, the Company funded $178.4 million of loans to be sold into the secondary market, and delivered $193.1 million to the market.  This compares to $227.7 million funded and $184.5 million delivered during the first six months of 2001.

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



(unaudited)
      (in thousands of dollars)
      
      June 30, 2002
      
      December 31, 2001Amount
      
      Percentage
      
      Amount
      
      PercentageCommercial
      
      $
      52,734
      
      23.20%
      $
      50,152
      
      21.25%Real estate
      construction
      
      
      38,386
      
      16.89
      
      26,520
      
      11.24Real estate
      commercial
      
      
      95,422
      
      41.98
      
      111,437
      
      47.23Real estate
      mortgage
      
      
      35,450
      
      15.59
      
      36,190
      
      15.34Consumer and
      other
      
      
      5,326
      
      2.34
      
      11,650
      
      4.94227,318
      
      100.00%
      
      235,949
      
      100.00%Deferred loan
      fees
      
      
      (877)
      
      
      
      (737)Total loans
      
      226,441
      
      
      
      235,212Allowance for
      loan losses
      
      
      (5,525)
      
      
      
      (5,997)Total loans, net
      $
      220,916
      
      
      $
      229,215




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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.

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 $2.6 million at June 30, 2002 compared to $3.2 million at December 31, 2001.

At June 30, 2002, approximately $2.9 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.

Management's evaluation of the factors above resulted in allowances for loan losses of $5.5 million and $6.0 million at June 30, 2002 and December 31, 2001, respectively.  The sale of BFC accounted for $289,000 of the reduction in the allowance from December 31, 2001 to June 30, 2002.  The allowance as a percentage of total loans was 2.44% at June 30, 2002 and 2.55% 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)
      June 30, 2002
      
      December 31 2001Loans on non-accrual status
      
      4,321
      
      4,807Loans past due greater than 90 days but not on non-accrual status
      
      85
      
      1,178Other real estate owned
      
      1,403
      
      1,498Other Assets
      
      
      5
      
      5Total non-performing assets
      
      5,814
      
      7,488Percentage of non-performing assets to
      total assets
      
      1.73
      %
      2.02
      %




At June 30, 2002 non-performing assets were $5.8 million or 1.73% of
total assets compared to $7.5 million or 2.02% of total assets at December 31,
2001. The June 30, 2002 non-performing asset balance has declined from $6.2
million or 1.72% of total assets at March 31, 2002. Approximately $3.8 million
of the $4.3 million of non-accrual loans at June 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.

Other real estate owned declined from $1.5 million at December 31, 2001 to $1.4 million at June 30, 2002 as properties classified as other real estate have been sold or the 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 customers deposits, loan payments, sales of assets, advances from the FHLB and the use of the federal funds market.

As of June 30, 2002, approximately $8.7 million of the securities portfolio matures within one year, and another $12.6 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 June 30, 2002, bear interest at rates ranging from 2.39% to 8.62%. At June 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. Efficiencies developed late in 2001 in the process of loan origination and sale into the secondary market, combined with a decrease in demand in the mortgage lending market, make it unlikely the Company will experience a dramatic increase in loan volume as experienced during 2001.  If this assumption holds true during 2002, the Company anticipates a reduction in broker CD's as they mature, helping to reduce any excess liquidity. During the remainder of 2002, $21.8 million of broker and out-of-market certificates of deposit mature.

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 June 30, 2002, the Company's total risk-based capital and tier 1 risk-based capital ratios were 11.57% and 10.31%, respectively; and at December 31, 2001, the Company's ratios were 10.10% and 8.84%, respectively. At June 30, 2002, the Bank's total risk-based capital, tier 1 risk-based capital, and tier 1 leverage capital ratios were 11.96%, 10.70%, and 8.08%, 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 8.56%, and 8.14% at June 30, 2002 and December 31, 2001, respectively. Average assets for the year to date June 30, 2002 were $349.9 million and for the year ended December 31, 2001 average assets were $353.2 million.

---

Part II. Other Information

Item 4

Submission of Matters to a Vote of Security Holders

(a)	Cowlitz Bancorporation Annual Shareholders' Meeting was held on May 24, 2002.

(b)	Not Applicable.

(c)	A brief description of each matter voted upon at the Annual Shareholders' meeting held on May 24, 2002 and number of votes cast for, against, or withheld, including a separate tabulation with respect to each nominee for office is presented below:

(1)	Election of (5) directors for the terms expiring in 2002.

Directors:Mark F. Andrews,
      Jr.Votes cast for:
      2,902,359Votes cast
      against
      -Votes withheld
      182,392Paul L. CampbellVotes cast for:
      3,028,736Votes cast
      against
      -Votes withheld
      56,015John S. MaringVotes cast for:
      2,986,792Votes cast
      against
      -Votes withheld
      97,959Benjamin
      NamatiniaVotes cast for:
      2,708,129Votes cast
      against
      -Votes withheld
      376,622E Chris SearingVotes cast for:
      2,849,534Votes cast
      against
      -Votes withheld
      235,217




(d)	None

Item 5

Other Information

None

Item 6

(a)	Exhibits.  99.1 Certification of Chief Executive Officer and Chief Financial Officer

(b)	Reports of Form 8-K

1.	None.



---



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.

Cowlitz Bancorporation(Registrant)Dated:  August 14, 2002
/s/ Paul L. Campbell    Paul L. Campbell, PresidentDated:  August 14, 2002
/s/ Don P. Kiser   Don P. Kiser
   Vice-President/CFO/Secretary




---



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 June 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

August 14, 2002



---