---

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

FORM 10-Q

[X]
	
	Quarterly report Pursuant to section 13 or 15(d) of the Securities and Exchange act of 1934For the quarter ended June 30, 2004[ ]
	
	Transition report pursuant to section 13 or 15(d) of the Securities and Exchange act of 1934For the transition period from __________ to __________


Commission file number 0-23881

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

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


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

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

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

Yes [X] No [ ]

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

Yes[ ] No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value on July 31, 2004: 3,917,975 shares

1

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COWLITZ BANCORPORATION AND SUBSIDIARY 
TABLE OF CONTENTS

PAGEPart I
	
	FINANCIAL INFORMATIONItem 1.
	
	Financial StatementsConsolidated Statements of Condition -
	
	3June 30, 2004 and December 31, 2003Consolidated Statements of Income -
	
	4Three and six months ended June 30, 2004 and 2003Consolidated Statements of Changes in Shareholders' Equity -
	
	5Year ended December 31, 2003 and six months ended June 30, 2004Consolidated Statements of Cash Flows -
	
	6Six months ended June 30, 2004 and 2003Notes to Consolidated Financial Statements
	
	7-12Item 2.
	
	Management's Discussion and Analysis of Financial Condition
	
	13-23And Results of OperationsItem 3.
	
	Quantitative and Qualitative Disclosures About Market Risk
	
	24Item 4.
	
	Controls and Procedures
	
	24Part II
	
	OTHER INFORMATIONItem 1.
	
	Legal Proceedings
	
	25Item 2.
	
	Changes in Securities and Use of Proceeds
	
	25Item 3.
	
	Defaults upon Senior Securities
	
	25Item 4.
	
	Submission of Matters to a Vote of Security Holders
	
	25Item 5.
	
	Other Information
	
	26Item 6.
	
	Exhibits and Reports on Form 8-K
	
	26Signatures
	
	27Certification of Chief Executive Officer and Chief Financial Officer
	
	29-31


Forward-Looking Statements

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

2

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Part I. FINANCIAL INFORMATION 
Item 1. Financial Statements

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

June 30,
      
      December 31,ASSETS
      
      
      
      2004
      
      2003Cash and cash
      equivalents
      
      
      $
      16,650
      $
      24,527Investment securities:Available-for-sale
      (at fair value, cost of $57,881 and $46,658 atJune
      30, 2004 and December 31, 2003, respectively)
      
      
      
      57,325
      
      47,000Held-to-maturity
      (at amortized cost, fair value of $100 and $8,270at
      June 30, 2004 and December 31, 2003, respectively)
      
      
      
      100
      
      8,144Total
      investment securities
      
      
      
      57,425
      
      55,144Federal Home Loan Bank
      stock, at cost
      
      
      
      1,133
      
      1,974Loans held-for-sale
      
      
      
      -
      
      8,360Loans, net of deferred
      loan fees
      
      
      
      170,177
      
      163,490Allowance for loan
      losses
      
      
      
      (4,042)
      
      (3,968)Total
      loans, net
      
      
      
      166,135
      
      159,522Cash surrender value of
      bank-owned life insurance
      
      
      
      8,406
      
      8,170Premises and equipment,
      net of accumulated depreciation of $4,538 and$4,350
      at June 30, 2004 and December 31, 2003, respectively
      
      
      
      3,980
      
      4,171Goodwill, net of
      impairment adjustments and accumulated amoritzationof
      $1,987 at June 30, 2004 and December 31, 2003
      
      
      
      852
      
      852Intangible assets, net
      of accumulated amortization of $1,867 and$1,734
      at June 30, 2004 and December 31, 2003, respectively
      
      
      
      103
      
      236Accrued interest
      receivable and other assets
      
      
      
      5,070
      
      5,843TOTAL ASSETS
      
      
      $
      259,754
      $
      268,799LIABILITIESDeposits:Non-interest-bearing
      demand
      
      
      $
      57,274
      $
      60,572Savings
      and interest-bearing demand
      
      
      
      89,584
      
      86,375Certificates
      of deposit
      
      
      
      76,691
      
      79,533Total
      deposits
      
      
      
      223,549
      
      226,480Federal funds purchased
      
      
      
      625
      
      225Federal Home Loan Bank
      borrowings
      
      
      
      563
      
      5,653Other borrowings
      
      
      
      1,394
      
      2,739Accrued interest
      payable and other liabilities
      
      
      
      1,474
      
      1,900TOTAL LIABILITIES
      
      
      
      227,605
      
      236,997SHAREHOLDERS' EQUITYPreferred stock, no par
      value; 5,000,000 shares authorized; no sharesissued
      and outstanding at June 30, 2004 and December 31, 2003
      
      
      
      -
      
      -Common stock, no par
      value; 25,000,000 shares authorized; with 3,917,975and
      3,898,652 shares issued and outstanding at June 30, 2004 andDecember
      31, 2003, respectively
      
      
      
      18,060
      
      17,957Additional paid-in
      capital
      
      
      
      1,609
      
      1,609Retained earnings
      
      
      
      12,847
      
      12,011Accumulated other
      comprehensive (loss) income, net of taxes
      
      
      
      (367)
      
      225TOTAL SHAREHOLDERS'
      EQUITY
      
      
      
      32,149
      
      31,802TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
      
      
      $
      259,754
      $
      268,799




See accompanying notes

3

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

Three Months Ended
	
	
	
	Six Months EndedJune 30,
	
	
	
	June 30,2004
	
	
	
	2003
	
	
	
	2004
	
	
	
	2003INTEREST INCOMEInterest and fees on loans
	
	$
	
	3,070
	
	$
	
	3,779
	
	$
	
	6,128
	
	$
	
	8,012Interest on taxable investment securities
	
	
	
	458
	
	
	
	204
	
	
	
	919
	
	
	
	454Interest on non-taxable investment securities
	
	
	
	85
	
	
	
	6
	
	
	
	165
	
	
	
	9Other interest and dividend income
	
	
	
	71
	
	
	
	162
	
	
	
	92
	
	
	
	335Total interest income
	
	
	
	3,684
	
	
	
	4,151
	
	
	
	7,304
	
	
	
	8,810INTEREST EXPENSESavings and interest-bearing demand
	
	
	
	206
	
	
	
	315
	
	
	
	390
	
	
	
	639Certificates of deposit
	
	
	
	482
	
	
	
	861
	
	
	
	979
	
	
	
	1,864Federal funds purchased
	
	
	
	2
	
	
	
	5
	
	
	
	5
	
	
	
	12Federal Home Loan Bank borrowings
	
	
	
	11
	
	
	
	114
	
	
	
	30
	
	
	
	254Other borrowings
	
	
	
	35
	
	
	
	58
	
	
	
	86
	
	
	
	115Total interest expense
	
	
	
	736
	
	
	
	1,353
	
	
	
	1,490
	
	
	
	2,884Net interest income before provision for loan losses
	
	
	
	2,948
	
	
	
	2,798
	
	
	
	5,814
	
	
	
	5,926PROVISION FOR LOAN LOSSES
	
	
	
	100
	
	
	
	43
	
	
	
	87
	
	
	
	566Net interest income after provision for loan losses
	
	
	
	2,848
	
	
	
	2,755
	
	
	
	5,727
	
	
	
	5,360NON-INTEREST INCOMEService charges on deposit accounts
	
	
	
	173
	
	
	
	238
	
	
	
	361
	
	
	
	484(Losses) gains on loans sold
	
	
	
	(33)
	
	
	
	1,247
	
	
	
	139
	
	
	
	2,996Mortgage brokerage fees
	
	
	
	149
	
	
	
	651
	
	
	
	254
	
	
	
	1,494Escrow fees
	
	
	
	-
	
	
	
	324
	
	
	
	-
	
	
	
	661Credit card income
	
	
	
	139
	
	
	
	143
	
	
	
	277
	
	
	
	296Fiduciary income
	
	
	
	97
	
	
	
	80
	
	
	
	198
	
	
	
	170Increase in cash surrender value of bank-owned life insurance
	
	
	
	103
	
	
	
	-
	
	
	
	236
	
	
	
	-Net gains (losses) on sale of repossessed assets
	
	
	
	65
	
	
	
	4
	
	
	
	(15)
	
	
	
	37Other income
	
	
	
	29
	
	
	
	23
	
	
	
	80
	
	
	
	66Total non-interest income
	
	
	
	722
	
	
	
	2,710
	
	
	
	1,530
	
	
	
	6,204NON-INTEREST EXPENSESalaries and employee benefits
	
	
	
	1,571
	
	
	
	2,465
	
	
	
	3,233
	
	
	
	5,089Net occupancy and equipment expense
	
	
	
	377
	
	
	
	565
	
	
	
	812
	
	
	
	1,212Professional fees
	
	
	
	181
	
	
	
	479
	
	
	
	341
	
	
	
	946Business taxes
	
	
	
	49
	
	
	
	98
	
	
	
	104
	
	
	
	231FDIC assessment
	
	
	
	103
	
	
	
	133
	
	
	
	207
	
	
	
	271Credit card expense
	
	
	
	136
	
	
	
	151
	
	
	
	266
	
	
	
	306Data processing and communications
	
	
	
	76
	
	
	
	108
	
	
	
	154
	
	
	
	237Loan expense
	
	
	
	12
	
	
	
	240
	
	
	
	27
	
	
	
	353Postage and freight
	
	
	
	59
	
	
	
	128
	
	
	
	121
	
	
	
	231Travel and education
	
	
	
	44
	
	
	
	66
	
	
	
	80
	
	
	
	137Stationery and supplies
	
	
	
	30
	
	
	
	54
	
	
	
	67
	
	
	
	115Temporary help
	
	
	
	2
	
	
	
	159
	
	
	
	6
	
	
	
	293Amortization of intangible assets
	
	
	
	67
	
	
	
	67
	
	
	
	133
	
	
	
	133Expenses relating to other real estate owned
	
	
	
	23
	
	
	
	74
	
	
	
	42
	
	
	
	101Other expenses
	
	
	
	287
	
	
	
	232
	
	
	
	597
	
	
	
	469Total non-interest expense
	
	
	
	3,017
	
	
	
	5,019
	
	
	
	6,190
	
	
	
	10,124Income before provision for income taxes
	
	
	
	553
	
	
	
	446
	
	
	
	1,067
	
	
	
	1,440INCOME TAX PROVISION
	
	
	
	114
	
	
	
	161
	
	
	
	231
	
	
	
	512NET INCOME
	
	$
	
	439
	
	$
	
	285
	
	$
	
	836
	
	$
	
	928BASIC EARNINGS PER SHARE OF COMMON STOCK
	
	$
	
	0.11
	
	$
	
	0.07
	
	$
	
	0.21
	
	$
	
	0.24DILUTED EARNINGS PER SHARE OF COMMON STOCK
	
	$
	
	0.11
	
	$
	
	0.07
	
	$
	
	0.20
	
	$
	
	0.24WEIGHTED-AVERAGE SHARES OUTSTANDING - BASIC
	
	
	
	3,914,493
	
	
	
	3,835,261
	
	
	
	3,910,436
	
	
	
	3,827,386WEIGHTED-AVERAGE SHARES OUTSTANDING - DILUTED
	
	
	
	4,116,249
	
	
	
	3,959,677
	
	
	
	4,123,664
	
	
	
	3,936,297See accompanying notes


4

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

AccumulatedAdditional
	
	
	
	Other
	
	TotalCommon stock
	
	Paid-in
	
	Retained
	
	Comprehensive
	
	Shareholders
	
	ComprehensiveShares
	
	Amount
	
	Capital
	
	Earnings
	
	Income (loss)
	
	Equity
	
	Income





(loss)BALANCE, December 31, 2002
	
	3,818,272
	$
	17,491
	$
	1,538
	$
	11,894
	$
	340
	$
	
	
	31,263Comprehensive income:Net income
	
	-
	
	-
	
	-
	
	117
	
	-
	
	
	
	117
	$
	117Net changes in unrealized gains oninvestments available-for-sale,net of deferred taxes of $42
	
	-
	
	-
	
	-
	
	-
	
	(115)
	
	
	
	(115)
	
	(115)Comprehensive income
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	$
	2Proceeds from the exercise ofstock options
	
	80,380
	
	466
	
	-
	
	-
	
	-
	
	
	
	466Tax benefit from the exerciseof stock options
	
	-
	
	-
	
	71
	
	-
	
	-
	
	
	
	71BALANCE, December 31, 2003
	
	3,898,652
	
	17,957
	
	1,609
	
	12,011
	
	225
	
	
	
	31,802Comprehensive income:Net income
	
	-
	
	-
	
	-
	
	836
	
	-
	
	
	
	836
	$
	
	
	836Net unrealized gains on investmentsreclassified from held-to-maturityto available-for-sale, net ofdeferred taxes of $134
	
	-
	
	-
	
	-
	
	-
	
	261
	
	
	
	261
	
	
	
	261Net changes in unrealized gains oninvestments available-for-sale,net of deferred taxes of $(439)
	
	-
	
	-
	
	-
	
	-
	
	(853)
	
	(853)
	
	(853)Comprehensive income
	
	
	
	
	
	
	
	
	
	
	
	
	
	
	$
	244Proceeds from the exercise ofstock options
	
	19,323
	
	103
	
	-
	
	-
	
	-
	
	103BALANCE, June 30, 2004
	
	3,917,975
	$
	18,060
	$
	1,609
	$
	12,847
	$
	(367)
	$
	32,149


See accompanying notes

5

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

Six Months EndedJune30,2004
	
	2003CASH FLOWS FROM OPERATING ACTIVITIESNet income from operations
	$
	836
	$
	928Adjustments to reconcile net income to net cash from operating activities:Depreciation and amortization
	
	350
	
	416Provision for loan losses
	
	87
	
	566Increase in cash surrender value of bank-owned life insurance
	
	(236)
	
	-Federal Home Loan Bank stock dividends
	
	(31)
	
	(68)Net amortization of investment security premiums and accretion of discounts
	
	176
	
	116Net losses (gains) on sales of foreclosed assets
	
	15
	
	(37)Net (gains) losses on the sale and disposal of premises and equipment
	
	(4)
	
	10Net gains on loans sold
	
	(139)
	
	(2,996)Origination of loans held-for-sale
	
	(3,019)
	
	(238,339)Proceeds from loan sales
	
	10,663
	
	277,963Decrease in accrued interest receivable and other assets
	
	483
	
	428Decrease in accrued interest payable and other liabilities
	
	(426)
	
	(502)Net cash from operating activities
	
	8,755
	
	38,485CASH FLOWS FROM INVESTING ACTIVITIESProceeds from maturities and sales of investment securities available-for-sale
	
	11,447
	
	12,309Purchases of held-to-maturity investment securities
	
	-
	
	(671)Purchases of available-for-sale investment securities
	
	(14,801)
	
	(8,117)Proceeds from redemption of Federal Home Loan Bank stock
	
	872
	
	100Net (increase) decrease in loans
	
	(6,255)
	
	23,164Proceeds from sale of foreclosed assets
	
	990
	
	872Purchases of premises and equipment
	
	(26)
	
	(210)Proceeds from the sale of premises and equipment
	
	4
	
	4Net cash from investment activities
	
	(7,769)
	
	27,451CASH FLOWS FROM FINANCING ACTIVITIESNet decrease in savings, noninterest-bearing and interest-bearing demand deposits
	
	(89)
	
	(1,495)Net decrease in certificates of deposit
	
	(2,842)
	
	(35,277)Net increase (decrease) in federal funds purchased
	
	400
	
	(550)Proceeds from Federal Home Loan Bank borrowings
	
	10,000
	
	-Repayment of Federal Home Loan Bank borrowings
	
	(15,090)
	
	(10,090)Repayment of other borrowings
	
	(1,345)
	
	(67)Proceeds from the exercise of stock options
	
	103
	
	255Net cash from financing activities
	
	(8,863)
	
	(47,224)Net (decrease) increase in cash and cash equivalents
	
	(7,877)
	
	18,712CASH AND CASH EQUIVALENTS, beginning of period
	
	24,527
	
	43,691CASH AND CASH EQUIVALENTS, end of period
	$
	16,650
	$
	62,403


See accompanying notes

6

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

1. Nature of Operations

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

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

2. Principles of Consolidation

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

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

3. Cash and Cash Equivalents

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

4. Use of Estimates in the Preparation of Financial Statements

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

5. Earnings Per Share

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

Three Months Ended
	
	Six Months EndedJune 30,
	
	June 30,2004
	
	2003
	
	2004
	
	2003Weighted-average shares - basic
	
	3,914,493
	
	3,835,261
	
	3,910,436
	
	3,827,386Effect of assumed conversion of stock options
	
	201,756
	
	124,416
	
	213,228
	
	108,911Weighted-average shares - diluted
	
	4,116,249
	
	3,959,677
	
	4,123,664
	
	3,936,297


Options to purchase 536,466 shares of common stock with exercise prices ranging from $10.73 to $12.00, with an average price of $11.14, were outstanding at June 30, 2004 but were not included in the computation of diluted
earnings per share for the three and six months ended June 30, 2004 because the options' exercise price was greater than the average market price of the common shares for those periods. These options expire from 2009-2014.

7

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



Options to purchase 276,066 shares of common stock
with exercise prices ranging from $7.50 to $12.00, with an average price of
$11.07, were outstanding at June 30, 2003 but were not included in the
computation of diluted earnings per share for the three and six



months ended June 30, 2003 because the
options' exercise price was greater than the average market price of the common
shares for those periods. These options expire from 2008-2012.

6. Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities. It defined a variable interest entity ("VIE") as a corporation, partnership, trust,
or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. This
interpretation will require a VIE to be consolidated or deconsolidated by a company if that company is subject to a majority of the risk of loss from the VIE's activities or entitled to receive a majority of the entity's residual return. In December
2003, FASB made revisions and delayed implementation of certain provisions of FIN 46. The Company is now required to apply FIN 46 to all unconsolidated variable interest entities no later than March 31, 2004. The Company does not have any VIEs and,
accordingly, the implementation of this Interpretation did not impact its consolidated financial statements.

In April 2003, FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement is effective for contracts entered into or modified after June 30, 2003. Adoption of this statement did not impact the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these financial
instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and was otherwise effective at the beginning of the first interim period beginning after June 15,
2003. Adoption of this statement did not impact the Company's consolidated financial statements.

7. Stock-Based Compensation

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

Three Months Ended
	
	Three Months Ended
	
	Six Months Ended
	
	Six Months EndedJune 30,2004
	
	June 30,2003
	
	June 30, 2004
	
	June 30,2003As
	
	Pro
	
	As
	
	Pro
	
	As
	
	Pro
	
	As
	
	ProReported
	
	Forma
	
	Reported
	
	Forma
	
	Reported
	
	Forma
	
	Reported
	
	Forma(dollars in thousands, except for share amounts)Net income
	
	$ 439
	
	$ 397
	
	$ 285
	
	$ 225
	
	$ 836
	
	$ 752
	
	$ 928
	
	$ 718Basic earnings per share
	
	$ 0.11
	
	$ 0.10
	
	$ 0.07
	
	$ 0.06
	
	$ 0.21
	
	$ 0.19
	
	$ 0.24
	
	$ 0.19Diluted earnings per share
	
	$ 0.11
	
	$ 0.10
	
	$ 0.07
	
	$ 0.06
	
	$ 0.20
	
	$ 0.18
	
	$ 0.24
	
	$ 0.18


8

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



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



Three Months Ended
	
	Six Months EndedJune 30,
	
	June 30,2004
	
	2003
	
	2004
	
	2003Dividend yield
	
	0.00%
	
	0.00%
	
	0.00%
	
	0.00%Expected life (years)
	
	4.26
	
	4.17
	
	4.26
	
	4.17Expected volatility
	
	38.40%
	
	52.11%
	
	38.40%
	
	52.11%Risk-free rate
	
	2.98%
	
	2.98%
	
	2.98%
	
	2.98%


8. Comprehensive Income

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

9. Segments of an Enterprise and Related Information

The Company is principally engaged in community banking activities through its branches and corporate offices. Community banking activities include accepting deposits, providing loans and lines of credit to local
individuals, businesses and governmental entities, investing in investment securities and money market instruments, and holding or managing assets in a fiduciary agency capacity on behalf of its customers and their beneficiaries. The mortgage
banking segment, Bay Mortgage, offers a full line of residential lending products including FHA and VA loans, construction loans, and bridge loans.

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

The accounting policies for the Company's segment information provided in the following tables are the same as those described for the Company in the summary of significant accounting policies footnote included in the
Company's 2003 annual report, except that some operating expenses  are not allocated to segments.

9

---

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

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

Three Months Ended June 30, 2004Banking
	
	
	
	MortgageBanking
	
	
	
	Holding

















Company
	
	
	
	Intersegment
	
	
	
	ConsolidatedInterest income
	
	
	$
	4,084
	
	
	$
	22
	
	
	$
	2
	
	
	$
	(424)
	
	
	$
	3,684Interest expense
	
	
	
	1,105
	
	
	
	21
	
	
	
	34
	
	
	
	(424)
	
	
	
	736Net interest income
	
	
	
	2,979
	
	
	
	1
	
	
	
	(32)
	
	
	
	-
	
	
	
	2,948Provision for loan losses
	
	
	
	100
	
	
	
	-
	
	
	
	-
	
	
	
	-
	
	
	
	100Non-interest income
	
	
	
	604
	
	
	
	118
	
	
	
	-
	
	
	
	-
	
	
	
	722Non-interest expense
	
	
	
	2,663
	
	
	
	245
	
	
	
	109
	
	
	
	-
	
	
	
	3,017Income (loss) before provision(benefit) for income taxes
	
	
	
	820
	
	
	
	(126)
	
	
	
	(141)
	
	
	
	-
	
	
	
	553Provision (benefit) for income taxes
	
	
	
	207
	
	
	
	(44)
	
	
	
	(49)
	
	
	
	-
	
	
	
	114Net income (loss)
	
	
	$
	613
	
	
	$
	(82)
	
	
	$
	(92)
	
	
	$
	-
	
	
	$
	439Depreciation and amortization
	
	
	$
	156
	
	
	$
	15
	
	
	$
	-
	
	
	$
	-
	
	
	$
	171Three Months Ended June 30, 2003Banking









	









	









	









	MortgageBanking









	









	









	









	Holding

















Company









	









	









	









	Intersegment









	









	









	









	ConsolidatedInterest income
	
	
	$
	3,796
	
	
	$
	752
	
	
	$
	7
	
	
	$
	(404)
	
	
	$
	4,151Interest expense
	
	
	
	1,334
	
	
	
	366
	
	
	
	57
	
	
	
	(404)
	
	
	
	1,353Net interest income
	
	
	
	2,462
	
	
	
	386
	
	
	
	(50)
	
	
	
	-
	
	
	
	2,798Provision (benefit) for loan losses
	
	
	
	100
	
	
	
	-
	
	
	
	(57)
	
	
	
	-
	
	
	
	43Non-interest income
	
	
	
	495
	
	
	
	2,215
	
	
	
	-
	
	
	
	-
	
	
	
	2,710Non-interest expense
	
	
	
	2,759
	
	
	
	2,126
	
	
	
	134
	
	
	
	-
	
	
	
	5,019Income (loss) before provision(benefit) for income taxes
	
	
	
	98
	
	
	
	475
	
	
	
	(127)
	
	
	
	-
	
	
	
	446Provision (benefit) for income taxes
	
	
	
	38
	
	
	
	164
	
	
	
	(41)
	
	
	
	-
	
	
	
	161Net income (loss)
	
	
	$
	60
	
	
	$
	311
	
	
	$
	(86)
	
	
	$
	-
	
	
	$
	285Depreciation and amortization
	
	
	$
	173
	
	
	$
	27
	
	
	$
	-
	
	
	$
	-
	
	
	$
	200


10

---

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

Six Months Ended June 30, 2004Banking
	
	
	
	Mortgage









Banking
	
	Holding




Company
	
	
	
	Intersegment
	
	
	
	ConsolidatedInterest income
	
	
	$
	8,155
	
	
	$
	129
	$
	5
	
	
	$
	(985)
	
	
	$
	7,304Interest expense
	
	
	
	2,278
	
	
	
	113
	
	84
	
	
	
	(985)
	
	
	
	1,490Net interest income
	
	
	
	5,877
	
	
	
	16
	
	(79)
	
	
	
	-
	
	
	
	5,814Provision (benefit) for loan losses
	
	
	
	250
	
	
	
	-
	
	(163)
	
	
	
	-
	
	
	
	87Non-interest income
	
	
	
	1,135
	
	
	
	395
	
	-
	
	
	
	-
	
	
	
	1,530Non-interest expense
	
	
	
	5,182
	
	
	
	729
	
	279
	
	
	
	-
	
	
	
	6,190Income (loss) before provision(benefit) for income taxes
	
	
	
	1,580
	
	
	
	(318)
	
	(195)
	
	
	
	-
	
	
	
	1,067Provision (benefit) for income taxes
	
	
	
	407
	
	
	
	(110)
	
	(66)
	
	
	
	-
	
	
	
	231Net income (loss)
	
	
	$
	1,173
	
	
	$
	(208)
	$
	(129)
	
	
	$
	-
	
	
	$
	836Depreciation and amortization
	
	
	$
	318
	
	
	$
	32
	$
	-
	
	
	$
	-
	
	
	$
	350Total assets
	
	
	$
	258,517
	
	
	$
	1,128
	$
	33,562
	
	
	$
	(33,453)
	
	
	$
	259,754


11

---

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



|                                     |  |  |   | Six Months Ended June 30, 2003
|------------------------------------ |  |  | - | ------------------------------
|                                     |  |  |   | Banking                       
|Interest income                      |  |  | $ | 8,078                         
|Interest expense                     |  |  |   | 2,859                         
|Net interest income                  |  |  |   | 5,219                         
|(Benefit) provision for loan losses  |  |  |   | (651)                         
|Non-interest income                  |  |  |   | 1,060                         
|Non-interest expense                 |  |  |   | 5,494                         
|Income (loss) before provision       |  |  |   |                               
|(benefit) for income taxes           |  |  |   | 1,436                         
|Provision (benefit) for income taxes |  |  |   | 506                           
|Net income (loss)                    |  |  | $ | 930                           
|Depreciation and amortization        |  |  | $ | 361                           
|Total assets                         |  |  | $ | 293,673                       



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

The credit to the provision for loan losses reported during the six months ended June 30, 2004 in their holding company segment was generated from the recovery of a previously charged-off loan in a segment that no longer
carries a loan portfolio.

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

Although the mortgage segment has been scaled down and has generated small losses during 2004, improved efficiencies in the banking segment more than offset them. Excluding the provision reclassification discussed above,
the banking segment reported net income of approximately $335,000 during the first six months of 2003, compared to $1.2 million during the same period of 2004, an increase of $818,000. The efficiency ratio (non-interest expense divided by the sum of
non-interest income and net interest income) for the banking segment has improved significantly to 74.3% and 73.9% for the three and six months ended June 30, 2004, respectively, from 93.3% and 87.5% for the same periods of 2003,
respectively.

12

---

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

Results of Operations for the Three and Six Months Ended June 30, 2004 and 2003

For the second quarter of 2004 the Company's net income was $439,000, or $0.11 per diluted share, compared to net income of $285,000, or $0.07 per diluted share, for the second quarter of 2003. Net income for the six months
ended June 30, 2004 and 2003 was $836,000, or $0.20 per diluted share, and $928,000 or $0.24 per diluted share, respectively. Net interest income for both the quarter and six months ended June 30, 2004 did not vary significantly from the same
periods of 2003. During 2004, the banking segment recorded a $250,000 provision for loan losses, which has been offset by a credit to the provision for loan losses of $163,000 resulting from a recovery by the Holding Company of a previously
charged-off loan. The provision recorded during the first six months of 2003 was higher based on management's assessment of the adequacy of the allowance for loan losses at that time. Non-interest income and non-interest expenses are lower in the
current periods when compared to 2003, primarily from reductions in the Company's mortgage operations and initiatives implemented that target expense reductions.

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

At June 30, 2004, total assets were $259.8 million and total liabilities were $227.6 million. Total assets have decreased $9.0 million or 3.3% from $268.8 million at December 31, 2003 and liabilities have decreased $9.4
million or 4.0% from $237.0 million at December 31, 2003.

The decline in total assets is primarily due to a reduction in loans held-for-sale since December 31, 2003. At December 31, 2003, the balance of loans held-for-sale was $8.4 million but as of March 31, 2004, the entire
balance had been sold into the secondary market. As part of the strategy to curtail mortgage operations, the Company will no longer originate loans for sale into the secondary market. Although the Company has ceased its secondary market function and
closed its Bay Mortgage offices in Bellevue and Seattle, Washington, mortgage lending products will continue to be offered to the Company's customers in its remaining Bay Mortgage locations in Longview and Vancouver, Washington. Loans have increased
$6.7 million since December 31, 2003 to $170.2 million at June 30, 2004. Approximately $4.3 million of this increase has occurred during the second quarter. The increase in loans was offset primarily by a reduction of $7.9 million in cash and cash
equivalents. Total investment securities have increased approximately $2.3 million during the first six months of 2004. A reclassification of municipal bond investments from held-to-maturity to available-for-sale explains the large variance in the
components of the Company's investment securities holdings.

Despite an increase in brokered certificates of deposit, total certificates of deposit and Federal Home Loan Bank (FHLB) borrowings, account for the majority of the decline in total liabilities from December 31, 2003 to
June 30, 2004. FHLB borrowings were $5.1 million lower at June 30, 2004 than at December 31, 2003. The Company had $15.9 million in brokered certificates of deposits at June 30, 2004, or 7.1% of the $223.5 million total deposits compared to $10.4
million or 4.6% of $226.5 million of total deposits at December 31, 2003. Fluctuations in the levels of demand and savings deposits have offset one another during the first six months of 2004.

Critical Accounting Policies

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

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

Qualitative factors include:

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

13

---

Changes in the above factors could significantly effect the determination of the adequacy of the allowance for loan losses. Management performs a full analysis, no less often than quarterly, to ensure that changes in
estimated loan loss levels are adjusted on a timely basis. For further discussion of this significant management estimate, see "Allowance for Loan Losses." Another critical accounting policy for the Company is that related to the carrying value of
goodwill. Goodwill was recognized as the excess of cost over the fair value of net assets acquired from the purchase of Bay Mortgage, and the Portland, Oregon branch of Bay Bank, formerly Northern Bank of Commerce. Goodwill was amortized by the
straight-line method over a 15-year period until December 31, 2001.  Effective January 1, 2002, pursuant to Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," the Bank ceased amortization of goodwill
and completed its first of ongoing assessments of goodwill impairment in March 2002. Goodwill impairment will be deemed to exist in the future if the net book value of a reporting unit, considered by the Bank to represent its operating segments,
exceeds its estimated fair value.

Analysis of Net Interest Income

The primary component of the Company's earnings is net interest income. Net interest income is the difference between interest income, principally from loans and the investment securities portfolio, and interest expense,
principally on customer deposits and borrowings. Changes in net interest income 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 volume and relative mix of
interest-earning assets and interest-bearing liabilities.

Three months ended June 30, 2004 and 2003

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

Three Months EndedJune30,
	
	
	
	Increase(dollars in thousands)
	
	2004
	
	
	
	2003
	
	
	
	(Decrease)
	
	ChangeInterest income
	$
	3,684
	
	
	$
	4,151
	
	
	$
	(467)
	
	-11.3%Tax effect of non-taxable interest income
	
	39
	
	
	
	12
	
	
	
	27
	
	225.0%Tax equivalent interest income
	
	3,723
	
	
	
	4,163
	
	
	
	(440)
	
	-10.6%Interest expense
	
	736
	
	
	
	1,353
	
	
	
	(617)
	
	-45.6%Net interest income
	$
	2,987
	
	
	$
	2,810
	
	
	$
	177
	
	6.3%Average interest-earning assets
	$
	240,435
	
	
	$
	279,600
	
	
	$
	(39,165)
	
	-14.0%Average interest-bearing liabilities
	$
	173,980
	
	
	$
	218,511
	
	
	$
	(44,531)
	
	-20.4%Average yields earned (1)
	
	6.19%
	
	
	
	5.96%
	
	
	
	23 b.p.(3)Average rates paid (1)
	
	1.69%
	
	
	
	2.48%
	
	
	
	(79) b.p.(3)Net interest spread (1)
	
	4.50%
	
	
	
	3.48%
	
	
	
	102 b.p.(3)Net interest margin (1) (2)
	
	4.97%
	
	
	
	4.02%
	
	
	
	95 b.p.(3)


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

Comparing the quarter ended June 30, 2004 to the quarter ended June 30, 2003, tax equivalent interest income declined $440,000, interest expense declined $617,000, and net interest income was $177,000 higher. The Company's
average interest-earning assets and interest-bearing liabilities declined $39.2 million and $44.5 million, respectively, under the same comparison. The overall tax-equivalent average earning asset yield was 6.19%	 for the second quarter of 2004
compared to 5.96%	 for the second quarter of 2003. Under the same comparison, the average rates paid on interest-bearing liabilities declined substantially, from 2.48%	 to 1.69%	. Because of the decline in rates paid, both the interest spread and
interest margin were higher during the quarter ended June 30, 2004 compared to the same period of 2003.

14

---

Reductions in the average balances of cash and cash equivalents, including fed funds sold, account for the majority of the total interest-earning asset decline between the second quarter of 2003 and the second quarter of
2004. The average balance during the quarter ended June 30, 2004 was $13.6 million, down from $44.3 million during the quarter ended June 30, 2003. Mortgage loans held-for-sale, which are no longer emphasized due to the reorganization of the mortgage segment, have declined to zero from an average of $26.3 million during the second quarter of 2003. Partially offsetting these
reductions was an increase in the average balance of investment securities. These averaged $22.8 million more during the second quarter of 2004 at $55.7 million compared to $32.9 million during the same quarter of 2003. This change in asset mix is
also primarily responsible for the higher yields earned during the second quarter of 2004 compared to the second quarter of 2003, as relatively lower rate cash accounts and loans held-for-sale became a much smaller percentage of total
interest-earning assets.

The decline in average rates paid on interest-bearing liabilities is primarily attributable to higher rate long-term certificates of deposit maturing during 2003 and early 2004, which either did not renew or were re-priced
at current, lower rates. Certificates of deposit averaged $108.0 million during the second quarter of 2003, but declined to an average of $80.3 million during the second quarter of 2004. With this decline, the mix of interest-bearing liabilities
shifted toward a higher percentage in comparatively lower rate savings and money market accounts. In addition, the Company paid off a $5.0 million FHLB borrowing that, during the second quarter of 2003, was bearing an interest rate of 7.44%	.

Six months ended June 30, 2004 and 2003

Six Months EndedJune30,
	
	
	
	Increase(dollars in thousands)
	
	2004
	
	
	
	2003
	
	
	
	(Decrease)
	
	ChangeInterest income
	$
	7,304
	
	
	$
	8,810
	
	
	$
	(1,506)
	
	-17.1%Tax effect of non-taxable interest income
	
	77
	
	
	
	20
	
	
	
	57
	
	285.0%Tax equivalent interest income
	
	7,381
	
	
	
	8,830
	
	
	
	(1,449)
	
	-16.4%Interest expense
	
	1,490
	
	
	
	2,884
	
	
	
	(1,394)
	
	-48.3%Net interest income
	$
	5,891
	
	
	$
	5,946
	
	
	$
	(55)
	
	-0.9%Average interest-earning assets
	$
	237,254
	
	
	$
	291,975
	
	
	$
	(54,721)
	
	-18.7%Average interest-bearing liabilities
	$
	171,759
	
	
	$
	230,274
	
	
	$
	(58,515)
	
	-25.4%Average yields earned (1)
	
	6.22%
	
	
	
	6.05%
	
	
	
	17 b.p.(3)Average rates paid (1)
	
	1.73%
	
	
	
	2.50%
	
	
	
	(77) b.p.(3)Net interest spread (1)
	
	4.49%
	
	
	
	3.55%
	
	
	
	94 b.p.(3)Net interest margin (1) (2)
	
	4.97%
	
	
	
	4.07%
	
	
	
	90 b.p.(3)


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

Comparing the six months ended June 30, 2004 to the same period of 2003, tax equivalent interest income declined $1.4 million, interest expense declined $1.4 million, and net interest income decreased $55,000. The Company's
average interest-earning assets and interest-bearing liabilities declined $54.7 million and $58.5 million, respectively, under the same comparison. The overall tax-equivalent average earning asset yield was 6.22%	 for the first six months of 2004
compared to 6.05%	 for the first six months of 2003. Under the same comparison, the average rates paid on interest-bearing liabilities were substantially lower, from 2.50%	 to 1.73%	. Because of the decline in rates paid, both the interest spread
and interest margin were higher during the six months ended June 30, 2004 compared to the same period of 2003.

Reductions in the average balances of and cash equivalents, including fed funds sold, account for the majority of the total interest-earning asset decline when comparing the six months ended June 30, 2003 to the six months
ended June 30, 2004. The average balance during this period of 2004 was $12.7 million, down from $45.1 million during the six month period of 2003. Mortgage loans held-for-sale, which are which are no longer emphasized due to the reorganization of
the mortgage segment, have declined to zero from an average of $30.8 million during the first six months of 2003. Partially offsetting these reductions was an increase in the average balance of investment securities. These averaged $20.8 million
more during the first six months of 2004 at $54.2 million compared to $33.4 million during the same period of 2003. This change in asset mix is primarily responsible for the higher yields earned during the six months ended June 30, 2004 compared to
the six months ended June 30, 2003, as relatively lower rate cash accounts and loans held-for-sale became a much smaller percentage of total interest-earning assets.

15

---

The decline in average rates paid on interest-bearing liabilities is primarily attributable to higher rate long-term certificates of deposit maturing during 2003 and early 2004, which either did not renew or were re-priced
at current, lower rates. Certificates of deposit averaged $117.7 million during the first six months of 2003, but declined to an average of $79.1 million during the same period of 2004. With this decline, the mix of interest-bearing liabilities shifted toward a higher percentage in comparatively lower rate savings and money market accounts. In addition, the Company paid off a $5.0 million FHLB
borrowing that, during the first six months of 2003, was bearing an interest rate of 7.44%	.

Provision for Loan Losses

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

Three and six months ended June 30, 2004 and 2003

The provision for loan losses was $100,000 for the quarter ended June 30, 2004 compared to $43,000 for the same period of 2003. For the first six months of 2004, the provision was $87,000 compared to $566,000 for the same
period of 2003. The provision recorded during 2004 is lower than during 2003 due to an overall strengthening in loan quality, and holding company recoveries discussed below.

During the first quarter of 2004, and during the second quarter of 2003, the holding company recovered $163,000 and $57,000, respectively of loans previously charged-off. Because the holding company does not currently have
any loans or an allowance for loan losses, any recovery of previously charged-off amounts flow through the income statement as a credit, or benefit, to the provision expense. These benefits are disclosed on the Company's consolidated statements of
income net of loan loss provisions recorded during the periods.

Non-Interest Income

Three and six months ended June 30, 2004 and 2003

Non-interest income consists of the following components:

Three Months Ended
	
	Six Months EndedJune 30,
	
	June 30,(dollars in thousands)
	
	2004
	
	
	
	2003
	
	2004
	
	
	
	2003Service charge on deposit accounts
	$
	173
	
	
	$
	238
	$
	361
	
	
	$
	484(Losses) gains on loans sold
	
	(33)
	
	
	
	1,247
	
	139
	
	
	
	2,996Mortgage brokerage fees
	
	149
	
	
	
	651
	
	254
	
	
	
	1,494Escrow fees
	
	-
	
	
	
	324
	
	-
	
	
	
	661Credit Card income
	
	139
	
	
	
	143
	
	277
	
	
	
	296Fiduciary income
	
	97
	
	
	
	80
	
	198
	
	
	
	170Increase in cash surrender value of bank-owned life insurance
	
	103
	
	
	
	-
	
	236
	
	
	
	-ATM income
	
	15
	
	
	
	13
	
	27
	
	
	
	26Safe deposit box fees
	
	1
	
	
	
	2
	
	25
	
	
	
	27Gain (loss) on sale of repossessed assets
	
	65
	
	
	
	4
	
	(15)
	
	
	
	37Other miscellaneous fees and income
	
	13
	
	
	
	8
	
	28
	
	
	
	13Total non-interest income
	$
	722
	
	
	$
	2,710
	$
	1,530
	
	
	$
	6,204


Non-interest income was $722,000 for the quarter ended June 30, 2004, a decline of $2.0 million from the same period of 2003. For the six-month periods ended June 30 2004 and 2003, non-interest income was $1.5 million and
$6.2 million, respectively, a decline of $4.7 million. Non-interest income generated by the mortgage banking segment has declined substantially due to the reorganization of that segment. Gains on loans sold and escrow fees will no longer be
generated under the current structure, and mortgage brokerage fees will be significantly lower than in past periods. The loss on loans sold of $33,000 recognized during the second quarter of 2004 was the result of "early pay-off" penalties related
to loans previously sold into the secondary market. The purchasers of these loans have the ability to recover the premiums they paid to the Company for loans purchased if the borrower re-finances the loan within 90 days after it is
acquired.

16

---

Increases in the cash surrender value of bank-owned life insurance that was purchased during the third quarter of 2004, generated income of $103,000 and $236,000 for the three and six months ended June 30, 2004,
respectively. During the second quarter of 2004, the Company sold certain repossessed assets for a gain of $65,000. At June 30, 2004, the Company's investment in repossessed assets was $757,000. These increases partially offset the reductions
realized from curtailed mortgage operations.

Non-Interest Expense

Three and six months ended June 30, 2004 and 2003

Non-interest expense consists of the following components:

Three Months Ended
	
	
	
	Six Months EndedJune 30,
	
	
	
	June 30,(dollars in thousands)
	
	2004
	
	
	
	2003
	
	
	
	2004
	
	
	
	2003Salaries and employee benefits
	$
	1,571
	
	
	$
	2,465
	
	
	$
	3,233
	
	
	$
	5,089Net occupancy and equipment
	
	377
	
	
	
	565
	
	
	
	812
	
	
	
	1,212Professional fees
	
	181
	
	
	
	479
	
	
	
	341
	
	
	
	946Business taxes
	
	49
	
	
	
	98
	
	
	
	104
	
	
	
	231FDIC insurance
	
	103
	
	
	
	133
	
	
	
	207
	
	
	
	271Credit card expense
	
	136
	
	
	
	151
	
	
	
	266
	
	
	
	306Data processing and communications
	
	76
	
	
	
	108
	
	
	
	154
	
	
	
	237Loan expense
	
	12
	
	
	
	240
	
	
	
	27
	
	
	
	353Postage and freight
	
	59
	
	
	
	128
	
	
	
	121
	
	
	
	231Travel and education
	
	44
	
	
	
	66
	
	
	
	80
	
	
	
	137Stationery and supplies
	
	30
	
	
	
	54
	
	
	
	67
	
	
	
	115Temporary help
	
	2
	
	
	
	159
	
	
	
	6
	
	
	
	293Amortization of intangible assets
	
	67
	
	
	
	67
	
	
	
	133
	
	
	
	133Expenses relating to other real estate owned
	
	23
	
	
	
	74
	
	
	
	42
	
	
	
	101Advertising
	
	31
	
	
	
	39
	
	
	
	52
	
	
	
	56Other miscellaneous expenses
	
	256
	
	
	
	193
	
	
	
	545
	
	
	
	413Total non-interest expense
	$
	3,017
	
	
	$
	5,019
	
	
	$
	6,190
	
	
	$
	10,124


Total non-interest expenses declined $2.0 million to $3.0 million for the quarter ended June 30, 2004 compared to $5.0 million for the quarter ended June 30, 2003. For the six month periods ended June 30, 2004 and 2003,
respectively, non-interest expenses were $6.2 million and $10.1 million. The majority of the decline is attributable to the reorganization of the Company's mortgage segment during the fourth quarter of 2003. Salaries and employee benefits, net
occupancy and equipment, professional fees, business taxes, data processing and communications, postage and freight, stationery and supplies, and temporary help are all lower in part because of the closure of the Bellevue and Seattle mortgage
offices and the cessation of the mortgage loan secondary marketing function. Expense reductions realized in the banking segment have also contributed to the decline.

At June 30, 2004, the Company had 105 full-time equivalent employees compared to 170 at June 30, 2003. The mortgage segment reorganization decreased the full-time equivalent employee count by 67 when comparing the two
periods. Also included in salary expenses are ordinary annual wage increases for many existing employees.

Net occupancy and equipment expenses consist of depreciation on premises and equipment, lease costs, parking, maintenance and repair expenses, utilities and related expenses. The Company's net occupancy expense was reduced
by $188,000 when comparing the three months ended June 30, 2004 to the same period of 2003. These costs were $400,000 lower when comparing the six month periods. During the second quarter, the Company entered into a new lease agreement at one of its
banking branches that has decreased occupancy expenses by approximately $5,000 per month.

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

17

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

Although the FDIC insurance premium rate for the bank remains unchanged at $0.17 per $100 of domestic deposits when comparing the quarters ended June 30, 2004 and 2003, the total expense has declined due to a reduction in
deposit volume. The FDIC sets deposit insurance premiums based upon the risks a particular bank or savings association poses to the deposit insurance funds. This system bases an institution's risk category partly upon whether the institution is well
capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also assigned to one of three "supervisory" categories based on reviews by regulators, statistical analysis of financial statements and
other relevant information. An institution's assessment rate depends upon the capital category and supervisory category to which it is assigned. Annual assessment rates currently range from zero per $100 of domestic deposits for the highest rated
institution to $0.27 per $100 of domestic deposits for an institution in the lowest category. Under legislation enacted in 1996 to recapitalize the Savings Association Insurance Fund, the FDIC is authorized to collect assessments against insured
deposits to be paid to the Financing Corporation ("FICO") to service FICO debt incurred in the 1980's. The current FICO assessment rate for insured deposits is $0.0148	 per $100 of deposits per year. Any increase in deposit insurance of FICO
assessments could have an adverse effect on Cowlitz Bank's earnings. The FDIC insurance rate paid by the Company has declined to zero from $0.17 per $100 effective July 1, 2004. Loan expenses have declined significantly during the three and six
months ended June 30, 2004 compared to the same periods of 2003. Approximately $130,000 of expense was recognized during 2003 to write-off prepaid mortgage expenses. These expenses, including appraisals and credit reports, were prepaid on behalf of
potential borrowers when they applied for a mortgage loan. In some cases, these expenses were not collected from the borrower at the close of the loan, or the loan never closed. A review of prepaid mortgage expenses conducted during the second
quarter of 2003 indicated these items should be charged to expense. The remaining decline in expenses during 2004 when compared to 2003 is attributable to the mortgage segment realignment, and resulting lower volume of mortgage loans processed.

Temporary help expenses have been reduced dramatically when comparing the periods of 2004 to 2003. Contracted temporary employees were utilized during 2003 to assist management on various special projects, primarily in the
mortgage segment, and to help during the transition of new management.

Income Taxes

Three and six months ended June 30, 2004 and 2003

During the second quarter of 2004 the provision for income taxes was $114,000 compared to $161,000 for the second quarter of 2003. These provisions resulted in an effective tax rate of 20.6% and 36.1% for the quarters ended
June 30, 2004 and 2003, respectively. During the six months ended June 30, 2004, the provision was $231,000 and the effective rate was 21.6% compared to $512,000 and 35.6% for the same period of 2003. Non-taxable income generated from increased
investment in non-taxable municipal bonds and from the $8.0 million of bank-owned life insurance resulted in the reduced effective tax rate for the first quarter and first six months of 2004.

18

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Loans

Total loans outstanding were $170.2 million and $163.5 million at June 30, 2004 and December 31, 2003, respectively. Unfunded loan commitments such as home equity and other lines of credit, unused available credit on credit
cards, and letters of credit, were $49.7 million at June 30, 2004 and $42.4 million at December 31, 2003.

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

June30, 2004
	
	December31, 2003(dollars in thousands)
	
	Amount
	
	Percent
	
	Amount
	
	PercentCommercial
	$
	41,741
	
	24.47%
	$
	38,793
	
	23.63%Real estate construction
	
	23,299
	
	13.66%
	
	18,305
	
	11.15%Real estate commercial
	
	75,205
	
	44.10%
	
	77,412
	
	47.17%Real estate mortgage
	
	27,018
	
	15.84%
	
	25,530
	
	15.55%Consumer and other
	
	3,295
	
	1.93%
	
	4,103
	
	2.50%170,558
	
	100.00%
	
	164,143
	
	100.00%Deferred loan fees
	
	(381)
	
	
	
	(653)Total loans
	
	170,177
	
	
	
	163,490Allowance for loan losses
	
	(4,042)
	
	
	
	(3,968)Total loan, net
	$
	166,135
	
	
	$
	159,522


Allowance for Loan Losses

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

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

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

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

19

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

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

Unallocated Allowance.Management also attempts to ensure that the overall allowance appropriately reflects a margin for the imprecision necessarily inherent in estimates of expected
loan losses.

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

Loans and other extensions of credit deemed uncollectable are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Actual losses may vary from current estimates and the amount of the
provision may be either greater than or less than actual net charge-offs when and if they occur. The related provision for loan losses that is charged to income is the amount necessary to adjust the allowance to the level determined through the
above process.

Management's evaluation of the loan portfolio resulted in total allowances for loan losses of $4.0 million at both June 30, 2004 and December 31, 2003. The allowance, as a percentage of total loans, was also relatively
unchanged at 2.38%	 at June 30, 2004 and 2.43%	 at December 31, 2003. Management believes the allowance for loan losses at both June 30, 2004 and December 31, 2003 is adequate to absorb current potential or anticipated losses.

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

June 30, 2004
	
	
	
	December 31, 2003(dollars in thousands)
	
	Amount
	
	Percent
	
	
	
	Amount
	
	PercentGeneral
	$
	2,087
	
	51.63%
	
	
	$
	2,362
	
	59.53%Specific
	
	28
	
	0.69%
	
	
	
	456
	
	11.49%Special
	
	1,586
	
	39.24%
	
	
	
	709
	
	17.87%Unallocated
	
	341
	
	8.44%
	
	
	
	441
	
	11.11%$
	4,042
	
	100.00%
	
	
	$
	3,968
	
	100.00%


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

20

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The allowance for loan losses is based upon estimates of probable losses inherent in the loan portfolio. The amount actually observed for these losses can vary significantly from the estimated amounts. The following table
shows the Company's loan loss performance for the periods indicated.

Six Months Ended
	
	
	
	Year EndedJune 30,
	
	
	
	December 31,(dollars in thousands)
	
	
	
	2004
	
	
	
	2003
	
	
	
	2003Loans outstanding at end of period, net of deferred fees (1)
	
	
	$
	170,177
	
	
	$
	168,948
	
	
	$
	163,490Average loans outstanding during the period (1)
	
	
	$
	167,633
	
	
	$
	180,352
	
	
	$
	173,966Allowance for loan losses, beginning of period
	
	
	$
	3,968
	
	
	$
	6,150
	
	
	$
	6,150Loans charged off:Commercial
	
	
	
	67
	
	
	
	644
	
	
	
	1,409Real Estate
	
	
	
	76
	
	
	
	201
	
	
	
	1,671Consumer
	
	
	
	8
	
	
	
	71
	
	
	
	83Credit Cards
	
	
	
	60
	
	
	
	24
	
	
	
	61Total loans charged-off
	
	
	
	211
	
	
	
	940
	
	
	
	3,224Recoveries:Commercial
	
	
	
	165
	
	
	
	65
	
	
	
	504Real Estate
	
	
	
	25
	
	
	
	20
	
	
	
	237Consumer
	
	
	
	3
	
	
	
	3
	
	
	
	56Credit Cards
	
	
	
	5
	
	
	
	3
	
	
	
	8Total recoveries
	
	
	
	198
	
	
	
	91
	
	
	
	805Provision for loan losses
	
	
	
	87
	
	
	
	566
	
	
	
	237Allowance for loan losses, end of period
	
	
	$
	4,042
	
	
	$
	5,867
	
	
	$
	3,968Net loans charged-off during the period
	
	
	
	13
	
	
	
	849
	
	
	
	2,419Ratio of net loans charged-off to average loans outstanding
	
	
	
	0.01%
	
	
	
	0.47%
	
	
	
	1.39%Ratio of allowance for loan losses to loans at end of period
	
	
	
	2.38%
	
	
	
	3.47%
	
	
	
	2.43%


(1) Excludes loans held-for-sale

Impaired Loans

The Company, during its normal loan review procedures, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.
A loan is not considered to be impaired during a period of minimal delay (less than 90 days) unless available information strongly suggests impairment. The Company measures impaired loans based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair market value of the collateral if the loan is collateral dependent. Impaired loans are charged to the allowance when
management believes that, after considering economic and business conditions, collection efforts, and collateral position, the borrower's financial condition indicates that collection of principal is not probable. Generally, no interest is accrued
on loans when factors indicate collection of interest is doubtful or when principal or interest payments become 90 days past due, unless collection of principal and interest are anticipated within a reasonable period of time and the loans are well
secured. For such loans, previously accrued but uncollected interest is charged against current earnings, and income is only recognized to the extent payments are subsequently received and collection of the remaining recorded principal balance is
considered probable.

21

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Non-Performing Assets

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

June 30,
	
	December 31,(dollars in thousands)
	
	2004
	
	2003Loans on non-accrual status
	$
	495
	$
	1,856Loans past due greater than 90 days but not on non-accrual status
	
	7
	
	17Other real estate owned
	
	757
	
	1,352Other repossessed assets
	
	-
	
	-Total non-performing assets
	$
	1,259
	$
	3,225Total assets
	$
	259,754
	$
	268,799Percentage of non-performing assets to total assets
	
	0.48%
	
	1.20%


At June 30, 2004 non-performing assets were $1.3 million or 0.48%	 of total assets compared to $3.2 million or 1.20%	 of total assets at December 31, 2003. The reduction is due to a concerted effort by management to
minimize the level of non-performing assets. While it will be extremely difficult to maintain a ratio of non-performing assets to total assets at less than one-half of one percent, Management does hope to keep the level well below the trend
experienced during 2003.

Other real estate owned was $757,000 at June 30, 2004, a decrease of $595,000 compared to $1.4 million at December 31, 2003. During the first six months of 2004, 13 properties were sold or had a reduction in their carrying
value resulting in a $976,000 decline in the balance of other real estate owned. During the same time period of 2004, $381,000 of properties were repossessed and added to the carrying value of other real estate owned.

Liquidity

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

Brokered certificates of deposit are a primary funding source the Company utilizes to provide additional liquidity as necessary. At June 30, 2004, the Company's broker certificate of deposit balance was $15.9 million
compared to $10.4 million at December 31, 2003. Overnight federal funds borrowing lines with correspondent banks provide access to an additional $21.5 million for short-term liquidity needs. In addition, the Company has an established borrowing line
with the FHLB that permits it to borrow up to 15% of the Bank's assets, subject to collateral limitations. At June 30, 2004, the Company's advances from the FHLB have original maturity periods ranging from 10 years through 15 years and bear interest
at rates ranging from 6.11%	 to 8.62%	. At December 31, 2003, $5.7 million in advances were outstanding from the FHLB, and at June 30, 2004 had been reduced to $563,000. These borrowings mature from 2005 to 2009.

In order to maintain the ability to access cash through sale of securities, during the first quarter of 2004, $8.0 million of held-to-maturity investments were reclassified as available-for-sale. Accordingly, the fair value
of these investment securities was recognized within Accumulated Other Comprehensive Income upon their reclassification.

Regulatory Capital

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

22

---

The following table presents selected capital information for the Company and the Bank as of June 30, 2004 and December 31, 2003:

To Be Well-CapitalizedUnder PromptFor Capital Adequacy
	
	
	
	Corrective ActionActual
	
	
	
	Purposes
	
	
	
	ProvisionAmount
	
	Ratio
	
	
	
	Amount
	
	Ratio
	
	
	
	Amount
	
	RatioJune 30, 2004Total risk-based capital:Consolidated
	
	
	$
	33,802
	
	16.81%
	
	
	$
	16,087
	
	> 8.00%
	
	
	
	N/A
	
	N/ABank
	
	
	$
	34,762
	
	17.30%
	
	
	$
	16,078
	
	> 8.00%
	
	
	$
	20,098
	
	>10.00%Tier 1 risk-based capital:Consolidated
	
	
	$
	31,269
	
	15.55%
	
	
	$
	8,044
	
	> 4.00%
	
	
	
	N/A
	
	N/ABank
	
	
	$
	32,231
	
	16.04%
	
	
	$
	8,039
	
	> 4.00%
	
	
	$
	12,059
	
	>6.00%Tier 1 (leverage) capital:Consolidated
	
	
	$
	31,269
	
	11.89%
	
	
	$
	10,519
	
	> 4.00%
	
	
	
	N/A
	
	N/ABank
	
	
	$
	32,231
	
	12.26%
	
	
	$
	10,516
	
	> 4.00%
	
	
	$
	13,145
	
	>5.00%December 31, 2003Total risk-based capital:Consolidated
	
	
	$
	32,679
	
	16.38%
	
	
	$
	15,962
	
	> 8.00%
	
	
	
	N/A
	
	N/ABank
	
	
	$
	33,614
	
	16.85%
	
	
	$
	15,956
	
	> 8.00%
	
	
	$
	19,946
	
	>10.00%Tier 1 risk-based capital:Consolidated
	
	
	$
	30,166
	
	15.12%
	
	
	$
	7,981
	
	> 4.00%
	
	
	
	N/A
	
	N/ABank
	
	
	$
	31,102
	
	15.59%
	
	
	$
	7,978
	
	> 4.00%
	
	
	$
	11,967
	
	>6.00%Tier 1 (leverage) capital:Consolidated
	
	
	$
	30,166
	
	11.39%
	
	
	$
	10,597
	
	> 4.00%
	
	
	
	N/A
	
	N/ABank
	
	
	$
	31,102
	
	11.75%
	
	
	$
	10,591
	
	> 4.00%
	
	
	$
	13,239
	
	>5.00%


Quantitative measures established by regulation to ensure capital adequacy require Cowlitz Bancorporation and Cowlitz Bank to maintain minimum amounts and ratios (set forth in the tables above) of Tier 1 capital to average
assets, and Tier 1 and total risk-based capital to risk-weighted assets (all as defined in the regulations). Management believes that as of June 30, 2004 and December 31, 2003, Cowlitz Bancorporation and Cowlitz Bank met or exceeded all relevant
capital adequacy requirements.

23

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Credit Risk

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

Interest Rate Risk

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

Item 4. Controls and Procedures

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

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

24

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities and Use of Proceeds

Not applicable

Item 3. Defaults upon Senior Securities

Not applicable

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

(a)     Cowlitz Bancorporation
Annual Shareholder's Meeting was held on May 21, 2004.

(b)     Not Applicable.

(c)     A brief description of each matter voted upon at the Annual Shareholders' meeting held on May 21, 2004 and number of votes cast for, against, or withheld,
                 
including a separate tabulations with respect to each nominee for office is
presented below:

(1) Election of (3) directors for the terms expiring
in 2004 Directors:

> Mark F. Andrews, Jr.Votes cast for:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	3,000,232Votes cast against:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	-Votes withheld:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	298,779Ernie D. BallouVotes cast for:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	2,950,399Votes cast against:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	-Votes withheld:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	348,612Richard J. FitzpatrickVotes cast for:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	2,950,399Votes cast against:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	-Votes withheld:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	348,612John S. MaringVotes cast for:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	2,998,420Votes cast against:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	-Votes withheld:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	300,591Phill S. RowleyVotes cast for:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	2,950,399Votes cast against:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	-Votes withheld:
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	
> 
> 
> 
> 
> 
> 
> 
> 
> 
> 	348,612



(d)     None.

25

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Item 5. Other Information

Not applicable

Item 6. Exhibits and Reports on Form 8-K

(a)Exhibits. The following constitutes the exhibit index.

3.1*        
Restated and Amended Articles of Incorporation of Registrant

3.2*        
Bylaws of Registrant

10.1        
Amendment to Ernie Ballou's Employment Agreement

31.1        
Certification of Chief Executive Officer

31.2        
Certification Chief Financial Officer

32            
Certification of Chief Executive Officer and Chief Financial Officer

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

(b)     During the quarter ended June 30, 2004, the Company furnished information under Item 12 of Form 8-K on April 30, 2004.

26

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SIGNATURES

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

Dated: August 13, 2004Cowlitz Bancorporation(Registrant)By:/s/ Richard J. FitzpatrickRichard J. Fitzpatrick, President and Chief
Executive Officer/s/ Donna P. GardnerDonna P. Gardner, Vice-President, Chief Financial Officer


27

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Exhibit 10.1

AMENDMENT TO EMPLOYMENT
AGREEMENT

The
Employment Agreement between Cowlitz Bancorporation, Cowlitz Bank and Ernie
Ballou dated January 13, 2003 is hereby amended effective May 1, 2004 as stated
below.

1. Section 6(b) is amended to read:

> (b)        
>     If termination is after the first anniversary of the effective date of this
>     Agreement, Employee shall receive twelve (12) months Base Salary based on
>     Employee's Base Salary just prior to termination;

2. Section 9 is amended to read:

> 9.        
>     Noncompetition. During his
>     employment and for the duration of the Noncompete Period (defined below)
>     Employee will not, without the prior written consent of the Bank, be
>     associated with any other financial institution (as such term is defined in
>     the Gramm-Leach-Bliley Act of 1999) or mortgage company or their affiliates,
>     having branches or offices within 30 miles of any branch or office of the
>     Bank, whether directly or indirectly, alone or as a member of a partnership,
>     or as an officer, director, employee, shareholder (except as a holder of
>     less than 1% of any company with securities registered under Section 12 of
>     the Securities Exchange Act of 1934). The Noncompete Period shall be for a
>     period of nine (9) months after termination of employment if the termination
>     occurs prior to the first anniversary of the effective date of this
>     Agreement, or twelve (12) months after termination of employment if the
>     termination occurs after the first anniversary of the effective date of this
>     Agreement. If Employee is entitled to a Change in Control Benefit under
>     Section 7 or a Walk-Away Right Benefit under Section 8 above, the Noncompete
>     Period shall be extended to 24 months after termination of employment with
>     respect to a Change in Control or 18 months following commencement of the
>     Walk-Away Benefit, respectively. Should Employee fail to honor the
>     noncompetition covenant set forth in this Section, the Bank will be relieved
>     from its obligation to make any further payments under this Agreement, but
>     such relief of the Bank's obligation shall not discharge Employee of his
>     commitment under this Section. In the event that the Bank fails to honor its
>     obligations with regard to benefits under Sections 6, 7, or 8 of this
>     Agreement, Employee will be relieved from his obligations under this
>     Section.
>     Notwithstanding the foregoing, the following activities are not
>     restricted: (i) activities set forth in Section 1 above; (ii) engagements as
>     an independent consultant involving teaching and credit training; (iii)
>     engagements as an independent consultant to perform independent loan
>     reviews; and (iv) engagements as an independent consultant in the area of
>     credit policy and procedure.

The
Employment Agreement shall continue in full force and effect, subject only to
the amendments stated herein. IN WITNESS WHEREOF, the parties have caused this
Amendment to be executed as of the effective date stated above.

EMPLOYEECOWLITZ BANCORPORATION

___________________________By:_____________________________Ernie Ballou

Its:







                                                                                                                   






_____________________________

COWLITZ BANK

By:







                                                                                                                   






_____________________________

Its:







                                                                                                                   






_____________________________



28



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Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Richard J. Fitzpatrick, certify that:

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

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

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

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

> a) designed such disclosure controls and procedures to
> ensure that material information relating to the registrant, including its
> consolidated subsidiaries, is made known to us by others within those entities,
> particularly during the period in which this quarterly report is being prepared;
> b) evaluated the effectiveness of the registrant's
> disclosure controls and procedures and presented in this report our conclusions
> about the effectiveness of the disclosure controls and procedures, as of the end
> of the period covered by this report based on such evaluation; and
> c) disclosed in this quarterly report any change in
> the registrant's internal control over financial reporting that occurred during
> the registrant's most recent fiscal quarter that has materially affected, or is
> likely to materially affect the registrant's internal control over financial
> reporting;

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

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

Date: August 13, 2004

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



29



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Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Donna P. Gardner, certify that:

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

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

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

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

> a) designed such disclosure controls and procedures to
> ensure that material information relating to the registrant, including its
> consolidated subsidiaries, is made known to us by others within those entities,
> particularly during the period in which this quarterly report is being prepared;
> b) evaluated the effectiveness of the registrant's
> disclosure controls and procedures and presented in this report our conclusions
> about the effectiveness of the disclosure controls and procedures, as of the end
> of the period covered by this report based on such evaluation; and
> c) disclosed in this quarterly report any change in
> the registrant's internal control over financial reporting that occurred during
> the registrant's most recent fiscal quarter that has materially affected, or is
> likely to materially affect the registrant's internal control over financial
> reporting;

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

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

Date: August 13, 2004

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



30



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Exhibit 32

CERTIFICATION OF 
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

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

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

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

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

August 13, 2004



31



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