COWLITZ BANCORPORATION - 10-Q Quarterly Report

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


		PAGE
Part I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Condition -	3
	June 30, 2004 and December 31, 2003

	Consolidated Statements of Income -	4
	Three and six months ended June 30, 2004 and 2003

	Consolidated Statements of Changes in Shareholders' Equity -	5
	Year ended December 31, 2003 and six months ended June 30, 2004

	Consolidated Statements of Cash Flows -	6
	Six months ended June 30, 2004 and 2003

	Notes to Consolidated Financial Statements	7-12

Item 2.	Management's Discussion and Analysis of Financial Condition	13-23
	And Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 2.	Changes in Securities and Use of Proceeds	25

Item 3.	Defaults upon Senior Securities	25

Item 4.	Submission of Matters to a Vote of Security Holders	25

Item 5.	Other Information	26

Item 6.	Exhibits and Reports on Form 8-K	26

	Signatures	27

	Certification of Chief Executive Officer and Chief Financial Officer	29-31

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.

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


		June 30,		December 31,
ASSETS		2004		2003
Cash and cash equivalents	$	16,650	$	24,527
Investment securities:
Available-for-sale (at fair value, cost of $57,881 and $46,658 at
June 30, 2004 and December 31, 2003, respectively)		57,325		47,000
Held-to-maturity (at amortized cost, fair value of $100 and $8,270
at June 30, 2004 and December 31, 2003, respectively)		100		8,144
Total investment securities		57,425		55,144

Federal Home Loan Bank stock, at cost		1,133		1,974

Loans held-for-sale		-		8,360

Loans, net of deferred loan fees		170,177		163,490
Allowance for loan losses		(4,042)		(3,968)
Total loans, net		166,135		159,522

Cash surrender value of bank-owned life insurance		8,406		8,170
Premises and equipment, net of accumulated depreciation of $4,538 and
$4,350 at June 30, 2004 and December 31, 2003, respectively		3,980		4,171
Goodwill, net of impairment adjustments and accumulated amoritzation
of $1,987 at June 30, 2004 and December 31, 2003		852		852
Intangible assets, net of accumulated amortization of $1,867 and
$1,734 at June 30, 2004 and December 31, 2003, respectively		103		236
Accrued interest receivable and other assets		5,070		5,843
TOTAL ASSETS	$	259,754	$	268,799

LIABILITIES
Deposits:
Non-interest-bearing demand	$	57,274	$	60,572
Savings and interest-bearing demand		89,584		86,375
Certificates of deposit		76,691		79,533
Total deposits		223,549		226,480

Federal funds purchased		625		225
Federal Home Loan Bank borrowings		563		5,653
Other borrowings		1,394		2,739
Accrued interest payable and other liabilities		1,474		1,900
TOTAL LIABILITIES		227,605		236,997

SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized; no shares
issued and outstanding at June 30, 2004 and December 31, 2003		-		-
Common stock, no par value; 25,000,000 shares authorized; with 3,917,975
and 3,898,652 shares issued and outstanding at June 30, 2004 and
December 31, 2003, respectively		18,060		17,957
Additional paid-in capital		1,609		1,609
Retained earnings		12,847		12,011
Accumulated other comprehensive (loss) income, net of taxes		(367)		225
TOTAL SHAREHOLDERS' EQUITY		32,149		31,802

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	259,754	$	268,799

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


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2004		2003		2004		2003
INTEREST INCOME
Interest and fees on loans	$	3,070	$	3,779	$	6,128	$	8,012
Interest on taxable investment securities		458		204		919		454
Interest on non-taxable investment securities		85		6		165		9
Other interest and dividend income		71		162		92		335
Total interest income		3,684		4,151		7,304		8,810

INTEREST EXPENSE
Savings and interest-bearing demand		206		315		390		639
Certificates of deposit		482		861		979		1,864
Federal funds purchased		2		5		5		12
Federal Home Loan Bank borrowings		11		114		30		254
Other borrowings		35		58		86		115
Total interest expense		736		1,353		1,490		2,884

Net interest income before provision for loan losses		2,948		2,798		5,814		5,926

PROVISION FOR LOAN LOSSES		100		43		87		566
Net interest income after provision for loan losses		2,848		2,755		5,727		5,360

NON-INTEREST INCOME
Service charges on deposit accounts		173		238		361		484
(Losses) gains on loans sold		(33)		1,247		139		2,996
Mortgage brokerage fees		149		651		254		1,494
Escrow fees		-		324		-		661
Credit card income		139		143		277		296
Fiduciary income		97		80		198		170
Increase in cash surrender value of bank-owned life insurance		103		-		236		-
Net gains (losses) on sale of repossessed assets		65		4		(15)		37
Other income		29		23		80		66
Total non-interest income		722		2,710		1,530		6,204

NON-INTEREST EXPENSE
Salaries and employee benefits		1,571		2,465		3,233		5,089
Net occupancy and equipment expense		377		565		812		1,212
Professional fees		181		479		341		946
Business taxes		49		98		104		231
FDIC assessment		103		133		207		271
Credit card expense		136		151		266		306
Data processing and communications		76		108		154		237
Loan expense		12		240		27		353
Postage and freight		59		128		121		231
Travel and education		44		66		80		137
Stationery and supplies		30		54		67		115
Temporary help		2		159		6		293
Amortization of intangible assets		67		67		133		133
Expenses relating to other real estate owned		23		74		42		101
Other expenses		287		232		597		469
Total non-interest expense		3,017		5,019		6,190		10,124
Income before provision for income taxes		553		446		1,067		1,440
INCOME TAX PROVISION		114		161		231		512
NET INCOME	$	439	$	285	$	836	$	928

BASIC EARNINGS PER SHARE OF COMMON STOCK	$	0.11	$	0.07	$	0.21	$	0.24
DILUTED EARNINGS PER SHARE OF COMMON STOCK	$	0.11	$	0.07	$	0.20	$	0.24
WEIGHTED-AVERAGE SHARES OUTSTANDING - BASIC		3,914,493		3,835,261		3,910,436		3,827,386
WEIGHTED-AVERAGE SHARES OUTSTANDING - DILUTED		4,116,249		3,959,677		4,123,664		3,936,297
See accompanying notes

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


									Accumulated
					Additional				Other		Total
	Common stock				Paid-in		Retained		Comprehensive		Shareholders’			Comprehensive
	Shares		Amount		Capital		Earnings		Income (loss)		Equity			Income (loss)

BALANCE, December 31, 2002	3,818,272	$	17,491	$	1,538	$	11,894	$	340	$		31,263
Comprehensive income:
Net income	-		-		-		117		-			117	$	117
Net changes in unrealized gains on
investments available-for-sale,
net of deferred taxes of $42	-		-		-		-		(115)			(115)		(115)
Comprehensive income													$	2
Proceeds from the exercise of
stock options	80,380		466		-		-		-			466
Tax benefit from the exercise
of stock options	-		-		71		-		-			71

BALANCE, December 31, 2003	3,898,652		17,957		1,609		12,011		225			31,802
Comprehensive income:
Net income	-		-		-		836		-			836	$		836
Net unrealized gains on investments
reclassified from held-to-maturity
to available-for-sale, net of
deferred taxes of $134	-		-		-		-		261			261			261
Net changes in unrealized gains on
investments available-for-sale,
net of deferred taxes of $(439)	-		-		-		-		(853)		(853)			(853)
Comprehensive income													$	244
Proceeds from the exercise of
stock options	19,323		103		-		-		-		103

BALANCE, June 30, 2004	3,917,975	$	18,060	$	1,609	$	12,847	$	(367)	$	32,149

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


		Six Months Ended
		June30,
		2004		2003

CASH FLOWS FROM OPERATING ACTIVITIES
Net income from operations	$	836	$	928
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		350		416
Provision for loan losses		87		566
Increase 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		116
Net losses (gains) on sales of foreclosed assets		15		(37)
Net (gains) losses on the sale and disposal of premises and equipment		(4)		10
Net gains on loans sold		(139)		(2,996)
Origination of loans held-for-sale		(3,019)		(238,339)
Proceeds from loan sales		10,663		277,963
Decrease in accrued interest receivable and other assets		483		428
Decrease in accrued interest payable and other liabilities		(426)		(502)
Net cash from operating activities		8,755		38,485

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and sales of investment securities available-for-sale		11,447		12,309
Purchases 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		100
Net (increase) decrease in loans		(6,255)		23,164
Proceeds from sale of foreclosed assets		990		872
Purchases of premises and equipment		(26)		(210)
Proceeds from the sale of premises and equipment		4		4
Net cash from investment activities		(7,769)		27,451

CASH FLOWS FROM FINANCING ACTIVITIES
Net 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		255
Net cash from financing activities		(8,863)		(47,224)

Net (decrease) increase in cash and cash equivalents		(7,877)		18,712
CASH AND CASH EQUIVALENTS, beginning of period		24,527		43,691
CASH AND CASH EQUIVALENTS, end of period	$	16,650	$	62,403

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

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.

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.

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.

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.

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

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.

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.

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.

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:

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.

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.

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.

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, 2004
		Banking			Mortgage Banking			Holding Company			Intersegment			Consolidated
Interest income	$	4,084		$	22		$	2		$	(424)		$	3,684
Interest expense		1,105			21			34			(424)			736
Net interest income		2,979			1			(32)			-			2,948
Provision for loan losses		100			-			-			-			100
Non-interest income		604			118			-			-			722
Non-interest expense		2,663			245			109			-			3,017
Income (loss) before provision
(benefit) for income taxes		820			(126)			(141)			-			553
Provision (benefit) for income taxes		207			(44)			(49)			-			114
Net income (loss)	$	613	$		(82)	$		(92)	$		-	$		439
Depreciation and amortization	$	156	$		15	$		-	$		-	$		171

		Three Months Ended June 30, 2003
		Banking			Mortgage Banking			Holding Company			Intersegment			Consolidated
Interest income	$	3,796	$		752	$		7	$		(404)	$		4,151
Interest expense		1,334			366			57			(404)			1,353
Net interest income		2,462			386			(50)			-			2,798
Provision (benefit) for loan losses		100			-			(57)			-			43
Non-interest income		495			2,215			-			-			2,710
Non-interest expense		2,759			2,126			134			-			5,019
Income (loss) before provision
(benefit) for income taxes		98			475			(127)			-			446
Provision (benefit) for income taxes		38			164			(41)			-			161
Net income (loss)	$	60	$		311	$		(86)	$		-	$		285
Depreciation and amortization	$	173	$		27	$		-	$		-	$		200

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, 2004
		Banking		Mortgage Banking		Holding Company		Intersegment		Consolidated
Interest income	$	8,155	$	129	$	5	$	(985)	$	7,304
Interest expense		2,278		113		84		(985)		1,490
Net interest income		5,877		16		(79)		-		5,814
Provision (benefit) for loan losses		250		-		(163)		-		87
Non-interest income		1,135		395		-		-		1,530
Non-interest expense		5,182		729		279		-		6,190
Income (loss) before provision
(benefit) for income taxes		1,580		(318)		(195)		-		1,067
Provision (benefit) for income taxes		407		(110)		(66)		-		231
Net income (loss)	$	1,173	$	(208)	$	(129)	$	-	$	836
Depreciation and amortization	$	318	$	32	$	-	$	-	$	350
Total assets	$	258,517	$	1,128	$	33,562	$	(33,453)	$	259,754

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

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.

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.

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.

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:

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.

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.

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 Ended
		June30,				Increase
(dollars in thousands)		2004		2003		(Decrease)	Change
Interest 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)

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.

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
		June30,				Increase
(dollars in thousands)		2004		2003		(Decrease)	Change
Interest 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)

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.

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% .

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.

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.


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

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.


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

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.

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.

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	Percent
Commercial	$	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			163,490
Allowance for loan losses		(4,042)			(3,968)
Total loan, net	$	166,135		$	159,522

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:

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:

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:

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.

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 Ended
		June 30,				December 31,
(dollars in thousands)		2004		2003		2003
Loans outstanding at end of period, net of deferred fees (1)	$	170,177	$	168,948	$	163,490
Average loans outstanding during the period (1)	$	167,633	$	180,352	$	173,966
Allowance for loan losses, beginning of period	$	3,968	$	6,150	$	6,150
Loans charged off:
Commercial		67		644		1,409
Real Estate		76		201		1,671
Consumer		8		71		83
Credit Cards		60		24		61
Total loans charged-off		211		940		3,224

Recoveries:
Commercial		165		65		504
Real Estate		25		20		237
Consumer		3		3		56
Credit Cards		5		3		8
Total recoveries		198		91		805
Provision for loan losses		87		566		237
Allowance for loan losses, end of period	$	4,042	$	5,867	$	3,968

Net loans charged-off during the period		13		849		2,419
Ratio 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%

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.

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:

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 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.

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.

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-Capitalized
									Under Prompt
					For Capital Adequacy				Corrective Action
		Actual			Purposes				Provision
		Amount	Ratio		Amount	Ratio			Amount	Ratio
June 30, 2004
Total risk-based capital:
Consolidated	$	33,802	16.81%	$	16,087	> 8.00%			N/A	N/A
Bank	$	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/A
Bank	$	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/A
Bank	$	32,231	12.26%	$	10,516	> 4.00%		$	13,145	>5.00%

December 31, 2003
Total risk-based capital:
Consolidated	$	32,679	16.38%	$	15,962	> 8.00%			N/A	N/A
Bank	$	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/A
Bank	$	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/A
Bank	$	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.

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.

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.

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.

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.

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

(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:

* 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.

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.

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.

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.

___________________________ By:_____________________________
Ernie Ballou

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:

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):

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

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:

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

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


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

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


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


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


Mark F. Andrews, Jr.
Votes cast for:		3,000,232
Votes cast against:		-
Votes withheld:		298,779
Ernie D. Ballou
Votes cast for:		2,950,399
Votes cast against:		-
Votes withheld:		348,612
Richard J. Fitzpatrick
Votes cast for:		2,950,399
Votes cast against:		-
Votes withheld:		348,612
John S. Maring
Votes cast for:		2,998,420
Votes cast against:		-
Votes withheld:		300,591
Phill S. Rowley
Votes cast for:		2,950,399
Votes cast against:		-
Votes withheld:		348,612


Dated: August 13, 2004
	Cowlitz Bancorporation
	(Registrant)
	By:
	/s/ Richard J. Fitzpatrick
	Richard J. Fitzpatrick, President and Chief Executive Officer

	/s/ Donna P. Gardner
	Donna P. Gardner, Vice-President, Chief Financial Officer

		Six Months Ended June 30, 2003
		Banking		Mortgage Banking		Holding Company		Intersegment		Consolidated
Interest income	$	8,078	$	1,696	$	15	$	(979)	$	8,810
Interest expense		2,859		891		113		(979)		2,884
Net interest income		5,219		805		(98)		-		5,926
(Benefit) provision for loan losses		(651)		-		1,217		-		566
Non-interest income		1,060		5,144		-		-		6,204
Non-interest expense		5,494		4,433		197		-		10,124
Income (loss) before provision
(benefit) for income taxes		1,436		1,516		(1,512)		-		1,440
Provision (benefit) for income taxes		506		523		(517)		-		512
Net income (loss)	$	930	$	993	$	(995)	$	-	$	928
Depreciation and amortization	$	361	$	55	$	-	$	-	$	416
Total assets	$	293,673	$	41,864	$	35,168	$	(72,421)	$	298,284

(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%)

(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%)


		June 30, 2004			December 31, 2003
(dollars in thousands)		Amount	Percent		Amount	Percent
General	$	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%