Cowlitz Bancorporation (CWLZ) 10-Q 2005 Q2 Quarterly report

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 1934
	For the quarter ended June 30, 2005
[   ]	Transition report pursuant to section 13 or 15(d) of the Securities and Exchange act of 1934                                          For the transition period from ______ to ______

 

Commission file number 0-23881

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

Washington	91-1529841
(State or other jurisdiction	(I.R.S. Employer
of 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 [X] No [  ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, no par value on July 31, 2005: 4,186,446 shares

1

COWLITZ BANCORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
		PAGE
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Condition -	3
	June 30, 2005, and December 31, 2004
	Consolidated Statements of Income -	4
	Three and six months ended June 30, 2005 and June 30, 2004
	Consolidated Statements of Changes in Shareholders' Equity -	5
	Year ended December 31, 2004 and six months ended June 30, 2005
	Consolidated Statements of Cash Flows -	6
	Six months ended June 30, 2005 and 2004
	Notes to Consolidated Financial Statements	7-12
Item 2.	Management's Discussion and Analysis of Financial Condition
	And Results of Operations	12-21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21-22
Item 4.	Controls and Procedures	22
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults upon Senior Securities	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
Item 5.	Other Information	23
Item 6.	Exhibits	23
	Signatures	24
	Certification of Chief Executive Officer and Chief Financial Officer	25-27

Forward-Looking Statements

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

2

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
COWLITZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(dollars in thousands)
		June 30,	December 31,
ASSETS		2005		2004
Cash and cash equivalents	$	18,898	$	8,332
Investment securities:
Available-for-sale (at fair value, cost of $55,464 and $59,682 at
June 30, 2005 and December 31, 2004, respectively)		55,634		60,005
Total investment securities		55,634		60,005
Federal Home Loan Bank stock, at cost		1,050		1,047
Loans, net of deferred loan fees		208,731		189,346
Allowance for loan losses		(3,935)		(3,796)
Total loans, net		204,796		185,550
Cash surrender value of bank-owned life insurance		11,250		8,585
Premises and equipment, net of accumulated depreciation of $4,865 and
$4,703 at June 30, 2005 and December 31, 2004, respectively		3,949		4,017
Goodwill		852		852
Accrued interest receivable and other assets		5,402		4,898
TOTAL ASSETS	$	301,831	$	273,286
LIABILITIES
Deposits:
Non-interest-bearing demand	$	60,509	$	51,982
Savings and interest-bearing demand		81,363		77,709
Certificates of deposit		107,202		104,919
Total deposits		249,074		234,610
Federal funds purchased		450		475
Federal Home Loan Bank borrowings		400		473
Other borrowings		35		38
Junior subordinated debentures		12,372		-
Accrued interest payable and other liabilities		2,349		1,992
TOTAL LIABILITIES		264,680		237,588
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized; no shares
issued and outstanding at June 30, 2005 and December 31, 2004		-		-
Common stock, no par value; 25,000,000 shares authorized; with 4,186,446
and 4,173,552 shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively		19,624		19,511
Additional paid-in capital		2,022		2,022
Retained earnings		15,280		13,951
Accumulated other comprehensive income, net of taxes		225		214
TOTAL SHAREHOLDERS' EQUITY		37,151		35,698
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	301,831	$	273,286
See accompanying notes

3

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,
	2005			2004	2005		2004
INTEREST INCOME
Interest and fees on loans	$	3,821	$	3,070	$ 7,242	$	6,128
Interest on taxable investment securities		493		458	1,011		919
Interest on non-taxable investment securities		135		85	270		165
Other interest and dividend income		52		71	90		92
Total interest income		4,501		3,684	8,613		7,304
INTEREST EXPENSE
Savings and interest-bearing demand		185		206	370		390
Certificates of deposit		790		482	1,542		979
Federal funds purchased		19		2	24		5
Federal Home Loan Bank borrowings		7		11	15		30
Subordinated Debt		108		-	108		-
Other borrowings		1		35	2		86
Total interest expense		1,110		736	2,061		1,490
Net interest income before provision for loan losses		3,391		2,948	6,552		5,814
PROVISION FOR LOAN LOSSES		60		100	60		87
Net interest income after provision for loan losses		3,331		2,848	6,492		5,727
NON-INTEREST INCOME
Service charges on deposit accounts		144		173	281		361
(Losses) gains on loans sold		-		(33)	-		139
Mortgage brokerage fees		55		149	134		254
Credit card income		79		139	204		277
Fiduciary income		150		97	297		198
Increase in cash surrender value of bank-owned life insurance		83		103	165		236
Net gains (losses) on sale of repossessed assets		21		65	21		(15)
Other income		30		29	78		80
Total non-interest income		562		722	1,180		1,530
NON-INTEREST EXPENSE
Salaries and employee benefits		1,667		1,571	3,364		3,233
Net occupancy and equipment expense		346		377	694		812
Professional fees		191		181	384		341
Business taxes		55		49	106		104
Advertising		73		21	133		52
FDIC assessment		8		103	16		207
Credit card expense		57		136	193		266
Data processing and communications		65		76	138		154
Loan expense		10		12	18		27
Postage and freight		62		59	127		121
Travel and education		78		44	103		80
Stationery and supplies		42		30	74		67
Temporary help		2		2	13		6
Amortization of intangible assets		-		67	-		133
Insurance Premiums		44		48	86		89
Placement fees and other employee hiring expenses		3		38	5		88
Expenses relating to other real estate owned		19		23	34		42
Other expenses		237		180	386		368
Total non-interest expense		2,959		3,017	5,874		6,190
Income before provision for income taxes		934		553	1,798		1,067
INCOME TAX PROVISION		247		114	469		231
NET INCOME	$	687	$	439	$ 1,329	$	836
BASIC EARNINGS PER SHARE OF COMMON STOCK	$	0.16	$	0.11	$ 0.32	$	0.21
DILUTED EARNINGS PER SHARE OF COMMON STOCK	$	0.16	$	0.11	$ 0.31	$	0.20
WEIGHTED-AVERAGE SHARES OUTSTANDING – BASIC	4,176,724		3,914,493		4,175,440	3,910,436
WEIGHTED-AVERAGE SHARES OUTSTANDING – DILUTED	4,321,444		4,116,249		4,314,594	4,123,664
See accompanying notes

4

COWLITZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
									Accumulated
	Common stock			Additional					Other				Total
				Paid-in		Retained		Comprehensive			Shareholders'			Comprehensive
	Shares	Amount		Capital		Earnings			Income				Equity		Income (loss)
BALANCE, December 31, 2003	3,898,652	$	17,957	$	1,609	$	12,011		$	225		$	31,802
Comprehensive income:
Net income	-		-		-		1,940			-			1,940		$	1,940
Net unrealized gain on investments
reclassified from held-to-maturity
to available-for-sale, net of
deferred taxes of $134	-		-		-		-			261			261			261
Net change in unrealized gains on
investments available-for-sale,
net of deferred taxes of $140	-		-		-		-			(272)			(272)			(272)
Comprehensive income															$	1,929
Proceeds from the exercise of
stock options	274,900		1,554		-		-			-			1,554
Tax benefit from the exercise
of stock options	-		-		413		-			-			413
BALANCE, December 31, 2004	4,173,552	$	19,511	$	2,022	$	13,951		$	214		$	35,698
Comprehensive income:
Net income	-		-		-		1,329			-			1,329		$	1,329
Net changes in unrealized gains on
investments available-for-sale,
net of deferred taxes of $5	-		-		-		-			11			11			11
Comprehensive income															$	1,340
Proceeds from the exercise of stock
options and employee
stock purchases	12,894		113		-		-			-			113
BALANCE, June 30, 2005	4,186,446	$	19,624	$	2,022	$	15,280		$	225		$	37,151

5

COWLITZ BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
	Six Months Ended
	June 30,
	2005		2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from operations	$ 1,329	$	836
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	162		350
Provision for loan losses	60		87
Increase in cash surrender value of bank-owned life insurance	(165)		(236)
Federal Home Loan Bank stock dividends	(4)		(31)
Net amortization of investment security premiums and accretion of discounts	199		176
Net (gains) losses on sales of foreclosed assets	(21)		15
Net gains on the sale and disposal of premises and equipment	-		(4)
Net gains on loans sold	-		(139)
Origination of loans held-for-sale	-		(3,019)
Proceeds from loan sales	-		10,663
(Increase) decrease in accrued interest receivable and other assets	(443)		483
Increase (decrease) in accrued interest payable and other liabilities	357		(426)
Net cash from operating activities	1,474		8,755
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and sales of investment securities available-for-sale	4,371		11,447
Purchases of available-for-sale investment securities	-		(14,801)
Investment in Subsidiary Trust	(372)		-
Proceeds from redemption of Federal Home Loan Bank stock	-		872
Net increase in loans	(19,246)		(6,255)
Proceeds from sale of foreclosed assets	90		990
Purchases in bank-owned life insurance	(2,500)		-
Purchases of premises and equipment	(99)		(26)
Proceeds from the sale of premises and equipment	-		4
Net cash from investment activities	(17,756)		(7,769)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in savings, noninterest-bearing and interest-bearing demand deposits	12,181		(89)
Net increase (decrease) in certificates of deposit	2,283		(2,842)
Net (decrease) increase in federal funds purchased	(25)		400
Proceeds from Federal Home Loan Bank borrowings	-		10,000
Repayment of Federal Home Loan Bank borrowings	(73)		(15,090)
Proceeds from issuance of Junior Subordinated debentures	12,372		-
Repayment of other borrowings	(3)		(1,345)
Proceeds from the exercise of stock options	113		103
Net cash from financing activities	26,848		(8,863)
Net (decrease) increase in cash and cash equivalents	10,566		(7,877)
CASH AND CASH EQUIVALENTS, beginning of period	8,332		24,527
CASH AND CASH EQUIVALENTS, end of period	$ 18,898	$	16,650
See accompanying notes

6

1.Nature of Operations

Cowlitz Bancorporation (the "Company") was organized in 1991 under Washington law to become the holding company for The Cowlitz Bank (the "Bank"), a Washington state chartered bank that commenced operations in 1978. The principal executive offices of the Company are located in Longview, Washington. The 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 Cowlitz Bank also provides mortgage banking services through its Bay Mortgage division with offices in Longview, Castle Rock, Kalama, 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.

In April 2005, the Company formed Cowlitz Statutory Trust I (the Trust), a wholly-owned Delaware statutory business trust, for purposes of issuing guaranteed undivided beneficial interests in junior subordinated debentures (Trust Preferred Securities). During April 2005, the Trust then issued $12 million in Trust Preferred Securities. In accordance with Financial Accounting Standards Board's Interpretation No. 46 (revised December 2003) "Consolidation of Variable Interest Entities," the Company does not consolidate the Trust, as it is not the primary beneficiary.

The interim financial statements have been prepared without an audit and in accordance with the 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 a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the six months ended June 30, 2005 are not necessarily indicative of results to be anticipated for the year ending December 31, 2005.

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 including certificates of deposit, 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 Ended
	June 30,		June 30,
	2005	2004	2005	2004
Weighted-average shares – basic	4,176,724	3,914,493	4,175,440	3,910,436
Effect of assumed conversion of stock options	144,720	201,756	139,154	213,228
Weighted-average shares – diluted	4,321,444	4,116,249	4,314,594	4,123,664

7

6.Recently Issued Accounting Standards

In December 2004, the FASB issued Statement No. 123(R), "Share-Based Payment." This statement replaces existing requirements under SFAS No. 123, "Accounting for Stock-Based Compensation," and eliminates the ability to account for share-based compensation transactions under APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R) requires stock-based transactions to be recognized as compensation expense in the income statement based on their fair values at the date of grant. The fair value should be estimated using option-pricing models such as the Black-Scholes model or a binomial model. This statement is effective for interim and annual periods beginning after December 15, 2005. At this time, the Company does not believe the future impact on earnings to be materially different than what has historically been reported as the pro forma effect to income in Note 7. The impact to operating and financing cash flows is not considered to be material to the consolidated financial statements.

In March 2004, the Financial Accounting Standards Board (FASB) ratified the consensuses reached by the Emerging Issues Task Force (EITF) regarding Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments." Issue 03-1 provides guidance on recognition and measurement of other-than-temporary impairment and its application to certain investments, including all debt securities and equity securities that are subject to the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities."

On September 30, 2004, FASB issued a proposed Board-directed Staff Position, FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The proposed FSP will provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. The Board has delayed the effective date to provide further implementation guidance. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The delay of the effective date for paragraphs 10 through 20 of Issue 03-1 will be superceded concurrent with the final issuance of FSB EITF Issue 03-1-a. The Company does not anticipate adoption of this Staff Position will have a material effect on its financial condition or results of operations.

In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-3 (SOP 03-3), "Accounting for Certain Loans or Debt Securities Acquired in a Transfer," which addresses the accounting for certain loans acquired in a transfer when it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. SOP 03-3 is to be applied prospectively, effective for loans acquired in years beginning after December 15, 2004. SOP 03-3 requires acquired loans with evidence of credit deterioration to be recorded at fair value and prohibits recording any valuation allowance related to such loans at the time of purchase. This SOP limits the yield that may be accreted on such loans to the excess of the investor's estimated cash flows over its initial investment in the loan. The excess of contractual cash flows over cash flows expected to be collected is not to be recognized as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through adjustment of the loan's yield over its remaining life. Decreases in cash flows expected to be collected are recognized as impairment. Loans carried at fair value, mortgage loans held-for-sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of SOP 03-3. The Company does not anticipate adoption of this Statement of Position will have a material effect on its financial condition or results of operations.

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:

8

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
		June 30, 2005			June 30, 2004			June 30, 2005		June 30, 2004
		As	Pro		As	Pro		As	Pro	As		Pro
	Reported		Forma	Reported		Forma	Reported		Forma	Reported		Forma
				(dollars in thousands, except for share amounts)
Net income	$	687	$ 645	$	439	$ 397	$	1,329	$ 1,113	$	836	$ 752
Basic earnings per share	$	0.16	$ 0.15	$	0.11	$ 0.10	$	0.32	$ 0.27	$	0.21	$ 0.19
Diluted earnings per share	$	0.16	$ 0.15	$	0.11	$ 0.10	$	0.31	$ 0.26	$	0.20	$ 0.18

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 the periods ended June 30, 2005 and 2004.

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2005	2004	2005	2004
Dividend yield	0.00%	0.00%	0.00%	0.00%
Expected life (years)	4.26	4.26	4.26	4.26
Expected volatility	35.12%	38.40%	35.12%	38.40%
Risk-free rate	2.95%	2.98%	2.95%	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" on the consolidated statement of changes in shareholders' equity.

	Three Months Ended					Six Months Ended
		June 30,				June 30,
		2005		2004		2005		2004
Unrealized holding gains (losses) arising during the period, net of	$	255	$	(749)	$	11	$	(367)
Less reclassification adjustment for net realized (gains) losses
on securities available-for-sale included in net
income during the period, net of tax		-		-		-		-
Net unrealized holding gains (losses) included in
other comprehensive income	$	255	$	(749)	$	11	$	(367)

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 2004 annual report, except that some operating expenses are not allocated to segments.

Summarized financial information for the three months ended June 30, 2005 and six months ended June 30, 2005, concerning the Company's reportable segments is shown in the following tables:

9

				Three Months Ended June 30, 2005
			Mortgage		Holding
		Banking	Banking		Company		Intersegment		Consolidated
Interest income	$	4,502	$	-	$	9	$	(10)	$	4,501
Interest expense		1,012		-		108		(10)		1,110
Net interest income		3,490		-		(99)		-		3,391
Provision for loan losses		60		-		-		-		60
Non-interest income		486		55		-		21		562
Non-interest expense		2,737		108		93		21		2,959
Income (loss) before provision
(benefit) for income taxes		1,179		(53)		(192)		-		934
Provision (benefit) for income taxes		332		(18)		(92)		25		247
Net income (loss)	$	847	$	(35)	$	(100)	$	(25)	$	687
Depreciation and amortization	$	68	$	12	$	-	$	-	$	80
Total assets	$	301,161	$	91	$	48,950	$	(48,371)	$	301,831
				Three Months Ended June 30, 2004
			Mortgage		Holding
		Banking	Banking		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 (benefit) 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
Total assets	$	258,517	$	1,128	$	33,562	$	(33,453)	$	259,754

10

				Six Months Ended June 30, 2005
			Mortgage		Holding
		Banking	Banking		Company		Intersegment		Consolidated
Interest income	$	8,613	$	-	$	10	$	(10)	$	8,613
Interest expense		1,965		-		108		(12)		2,061
Net interest income		6,648		-		(98)		2		6,552
Provision (benefit) for loan losses		60		-		-		-		60
Non-interest income		1,026		161		-		(7)		1,180
Non-interest expense		5,458		225		168		23		5,874
Income (loss) before provision
(benefit) for income taxes		2,156		(64)		(266)		(28)		1,798
Provision (benefit) for income taxes		593		(32)		(92)		-		469
Net income (loss)	$	1,563	$	(32)	$	(174)	$	(28)	$	1,329
Depreciation and amortization	$	138	$	24	$	-	$	-	$	162
Total assets	$	301,161	$	91	$	48,950	$	(48,371)	$	301,831
				Six Months Ended June 30, 2004
			Mortgage		Holding
		Banking	Banking		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
(Benefit) provision 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

Compared to segment information reported during the three months ended June 30, 2005, the mortgage banking segment experienced 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. 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.

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Although mortgage operations have been significantly reduced, and have generated small losses, improved efficiencies and an increase in net interest income in the banking segment more than offset the losses. The banking segment reported net income of approximately $847,000 and $1.56 million during the three and six month periods ended June 30, 2005, respectively, compared to $613,000 and $1.17 million during the same periods of 2004, increases of $234,000 and $390,000, respectively.

10. Junior Subordinated Debentures

In April 2005, the Company formed a wholly-owned Delaware statutory business trust subsidiary, Cowlitz Statutory Trust I (the Trust), which issued $12,000,000 of guaranteed undivided beneficial interests in the Company's Junior Subordinated Deferrable Interest Debentures (Trust Preferred Securities). These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. The Company owns all of the common securities of the Trust. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by the Trust to purchase $12,372,000 of junior subordinated debentures of the Company. The debentures, which represent the sole asset of the Trust, accrue and pay distributions quarterly at a variable rate of 90-day LIBOR plus 1.75% per annum of the stated liquidation value of $1,000 per capital security. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (1) accrued and unpaid distributions required to be paid on the Trust Preferred Securities, (2) the redemption price with respect to any Trust Preferred Securities called for redemption by the Trust, and (3) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of the Trust. The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures on April 29 2035 or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by the Trust in whole or in part, on or after April 29, 2010. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. For the three month period ended June 30, 2005, the Company recorded interest expense related to the Trust Preferred Securities of $108,000.

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, 2005 and 2004

The Company's net income for the second quarter of 2005 was $687,000 or $0.16 per diluted share, compared to net income of $439,000, or $0.11 per diluted share for the second quarter of 2004. Net income was $248,000 or 56% higher during the three months ended June 30, 2005 compared to the same period of 2004. The Company's net income for six months ended June 30, 2005 was $1,329,000 or $0.31 per diluted share, compared to net income of $836,000 or $0.20 per diluted share for the same period of 2004. Net income for six months ended June 30, 2005 was 58.9% higher compared to the same period of 2004. Net interest income increased $443,000 the second quarter of 2005, compared to the same period in 2004. Average earning assets increased $32.9 million from $240.4 million in the second quarter of 2004 to $273.3 million for the period ending June 30, 2005. Average interest bearing liabilities increased $15.3 million from $174.0 million to $189.3 million during the same period. Net interest income increased $738,000 during the six month period ended June 30, 2005, as compared to the same period of 2004. Average earning assets for six months ended June 30, 2005 increased $32.7 million from $237.3 million to $270.0 million.

The banking segment recorded a provision for loan losses of $60,000 for the six months ended June 30, 2005. This provision, coupled with $38,000 in charge-offs and by $117,000 in recoveries, led to the increase in the allowance of $139,000 for the six months ended June 30, 2005.

Financial Condition as of June 30, 2005 and 2004

At June 30, 2005, total assets were $301.8 million, an increase of $28.6 million or 10.5% from December 31, 2004 and an increase of $42 million or 16.2% from June 30, 2004. Liabilities increased to $264.7 as of June 30, 2005 from $237.6 as of December 31, 2004 and $227.7 million as of June 30, 2004.

The primary increase in assets is reflected in loans with an increase of $19.2 million from December 31, 2004 to June 30, 2005. Cash and cash equivalents increased $10.6 million from December 2004 to June 2005. Bank-owned life insurance increased $2.7 million from December 2004 to June 2005. Total deposits increased $14.5 million of which $8.5 million was in non-interest bearing demand and $3.7 million was in the savings and interest-bearing demand deposit.

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,

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• 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.

Changes in the above factors could significantly affect 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 using 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. The $852,000 current balance of goodwill is related entirely to the Northern Bank of Commerce purchase. 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, net interest spread, and net interest margin result from changes in asset and liability volume, mix, and changes to rates earned or paid. Net interest spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Net interest margin is the ratio of net interest income to total interest-earning assets and is influenced by the volume and relative mix of interest-earning assets and interest-bearing liabilities. Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities.

Three months ended June 30, 2005 and 2004

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.

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		Three Months Ended
		June 30,				Increase
(dollars in thousands)		2005		2004		(Decrease)	Change
Interest income	$	4,501	$	3,684	$	817	22.2%
Tax effect of non-taxable interest income		69		39		30	76.9%
Tax equivalent interest income		4,570		3,723		847	22.8%
Interest expense		1,110		736		374	50.8%
Net interest income	$	3,460	$	2,987	$	473	15.8%
Average interest-earning assets	$	273,350	$	240,435	$	32,915	13.7%
Average interest-bearing liabilities	$	189,286	$	173,980	$	15,306	8.8%

Average yields earned (1)	6.69%	6.19%	50	b.p.	(3)
Average rates paid (1)	2.35%	1.69%	66	b.p.	(3)
Net interest spread (1)	4.34%	4.50%	(16)	b.p.	(3)
Net interest margin (1) (2)	5.06%	4.97%	9	b.p.	(3)

(1)	Ratios for the three months ended June 30, 2005 and 2004 have been annualized
(2)	Computed by dividing non-interest income by average interest-earning assets
(3)	b.p. stands for "basis points" (100 b.p. is equal to 1.0%)

		Six Months Ended
		June 30,				Increase
(dollars in thousands)		2005		2004		(Decrease)	Change
Interest income	$	8,613	$	7,304	$	1,309	17.9%
Tax effect of non-taxable interest income		139		77		62	80.5%
Tax equivalent interest income		8,752		7,381		1,371	18.6%
Interest expense		2,061		1,490		571	38.3%
Net interest income	$	6,691	$	5,891	$	800	13.6%
Average interest-earning assets	$	269,970	$	237,254	$	32,716	13.8%
Average interest-bearing liabilities	$	189,502	$	171,759	$	17,743	10.3%

Average yields earned (1)	6.48%	6.22%	26	b.p.	(3)
Average rates paid (1)	2.18%	1.73%	45	b.p.	(3)
Net interest spread (1)	4.30%	4.49%	(19)	b.p.	(3)
Net interest margin (1) (2)	4.96%	4.97%	(1)	b.p.	(3)

(1)	Ratios for the six months ended June 30, 2005 and 2004 have been annualized
(2)	Computed by dividing non-interest income by average interest-earning assets
(3)	b.p. stands for "basis points" (100 b.p. is equal to 1.0%)

Comparing the quarter ended June 30, 2005 to the quarter ended June 30, 2004, tax equivalent interest income was $847,000 higher, due to an increase of $32.9 million in average interest-earning assets. Interest expense increased $374,000 as average interest-bearing liabilities increased $15.3 million. With increasing interest rates, the interest margin for the three-months ended June 30, 2005 was 5.06%, compared to 4.97% for the same period in 2004. Prime rate has increased 100 basis points from 5.25% at December 31, 2004 to 6.25% as of June 30, 2005. For the six month period ended June 30, 2005, net interest margin decreased to 4.96% compared to 4.97% for the same period of 2004. The increase of 45 basis points in the average rates paid during the six month period ended June 30, 2005 is the primary contributor to the decrease in the net interest margin.

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

14

recorded as an increase to the allowance for loan losses are 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.

Six months ended June 30, 2005 and 2004

The banking segment recorded a $60,000 provision for loan losses during the first six months of 2005. This provision was taken to support the continued growth of the portfolio. During the first six months of 2005 the Banking segment has recorded $117,000 in recoveries versus $38,000 in charge-offs.

During the first six months of 2004 the banking segment recorded a provision for loan losses of $87,000. The banking segment recovered $163,000 form previously charged off loans.  

Non-Interest Income
Three and Six months ended June 30, 2005 and 2004
Non-interest income consists of the following components:
	Three Months Ended				Six Months Ended
		June 30,			June 30,
(dollars in thousands)	2005			2004	2005		2004
Service charge on deposit accounts	$	144	$	173	$ 281	$	361
(Losses) gains on loans sold		-		(33)	-		139
Mortgage brokerage fees		55		149	134		254
Escrow fees		-		-	-		-
Credit Card income		79		139	204		277
Fiduciary income		150		97	297		198
Increase in cash surrender value of bank-owned life insurance		83		103	165		236
ATM income		14		15	26		27
Safe deposit box fees		2		1	25		25
Gain (loss) on sale of repossessed assets		21		65	21		(15)
Other miscellaneous fees and income		14		13	27		28
Total non-interest income	$	562	$	722	$ 1,180	$	1,530

Total non-interest income declined $160,000 when comparing the quarters ending June 30, 2005, and 2004. Due to a slow down in home refinancing mortgage, brokerage fees for three months ended June 30, 2005 were $55,000 compared to $149,000 for the same period in 2004. Credit Card income for the second quarter of 2005 was $79,000 compared to $139,000 during the same period. The decline in Credit Card income is a result of converting to a new processor. This decline, as noted below, was more than offset by a decrease in Credit Card expenses to $57,000 for the three months ended June 30, 2005 from $136,000 for the same period in 2004. Fiduciary income increased $53,000 for the three months ended June 30, 2005, compared the same period of 2004. This was the result of increased business development activities.

Total non-interest income declined $350,000 for the six month period ended June 30, 2005, compared to the same period of 2004. A decline of mortgage brokerage fees of $120,000 due to a slowdown in this business segment accounts for 34% of the overall decline. A decline of $80,000 in service charges on deposit accounts was the result of higher average balances maintained in customer accounts. The decline of $139,000 in gains on loans sold was the result of closing the mortgage company offices in Bellevue and Seattle. Increased business develop activities resulted in a $99,000 increase in Fiduciary income for the six month period ended June 30, 2005, compared to the same period of 2004.

Non-Interest Expense

Three and Six ended June 30, 2005 and 2004

Non-interest expense consists of the following components:

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		Three Months Ended				Six Months Ended
(unaudited)		June 30,				June 30,
(dollars in thousands)		2005		2004		2005		2004
Salaries and employee benefits	$	1,667	$	1,571	$	3,364	$	3,233
Net occupancy and equipment		346		377		694		812
Professional fees		191		181		384		341
Business taxes		55		49		106		104
Advertising		73		21		133		52
FDIC insurance		8		103		16		207
Credit card expense		57		136		193		266
Data processing and communications		65		76		138		154
Loan expense		10		12		18		27
Postage and freight		62		59		127		121
Travel and education		78		44		103		80
Stationery and supplies		42		30		74		67
Temporary help		2		2		13		6
Amortization of intangible assets		-		67		-		133
Insurance Premiums		44		48		86		89
Placement fees and other employee hiring expenses		3		38		5		88
Expenses relating to other real estate owned		19		23		34		42
Other miscellaneous expenses		237		180		386		368
Total non-interest expense	$	2,959	$	3,017	$	5,874	$	6,190

At June 30, 2005, the Company had 114 full-time equivalent employees compared to 105 at June 30, 2004. Also included in salary expenses are ordinary annual wage increases for 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. When compared to June 30, 2004, there was a decrease of $31,000 due to less repair expenses.

The FDIC has regulations establishing a system for setting deposit insurance premiums based upon the risks a particular bank or savings association poses to the deposit insurance funds. This system bases an institution's risk category partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also assigned to one of three "supervisory" categories based on reviews by regulators, statistical analysis of financial statements and other relevant information. An institution's assessment rate depends upon the capital category and supervisory category to which it is assigned. Annual assessment rates currently range from zero per $100 of domestic deposits for the highest rated institution to $0.27 per $100 of domestic deposits for an institution in the lowest category. During the first Six months of 2004, the Bank paid an assessment rate of $0.17 per $100 of domestic deposits. The Bank was not required to pay an assessment rate during the last six months of 2004 and the first Six months of 2005, resulting in the lower expense during that period. In addition, 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 $0.0144 per $100 of deposits per year. Any increase in deposit insurance premiums or FICO assessments could have an adverse effect on Cowlitz Bank's earnings.

Advertising expense increased $81,000 for the six months ended June 30, 2005, compared to the same period of 2004. This was the result of increased advertising to attract deposits in the Company's market areas.

The full amortization in 2004 of the deposits purchased from Wells Fargo in 1997 resulted in the decrease in amortization of intangible assets expense of $133,000 during the six month period ended June 30, 2005, compared to the same period of 2004. Costs related to the operation and disposition of other real estate owned has declined as the number and value of properties has decreased.

The increase in other miscellaneous expenses in the second quarter of 2005 is primarily due to an $80,000 provision for a potential operating loss that may result from accepting a questionable deposit.

Income Taxes

Three and Six months ended June 30, 2005 and 2004

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During the second quarter of 2005 the provision for income taxes was $247,000 compared to $114,000 for the second quarter of 2004. The average effective tax rate for the three months ended June 30, 2005 was 25.69% compared to 20.64% during the same period in 2004.

For the six month period ended June 30, 2005 the provision for income taxes was $469,000 compared to $231,000 for the same period of 2004. The average effective tax rate for the six months of 2005 was 25.45% compared to 20.58% for the same period in 2004. The increase in the effective rate is a result of overall stronger performance by the Company.

Loans

Total loans outstanding were $208.7 million and $189.3 million at June 30, 2005 and December 31, 2004, respectively. Unfunded loan commitments such as home equity and other lines of credit, unused available credit on credit cards, and letters of credit, were $68.4 million at June 30, 2005 and $53.6 million at December 31, 2004.

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

		June 30, 2005			December 31, 2004
(dollars in thousands)		Amount	Percent		Amount	Percent
Commercial	$	66,046	31.54%	$	55,381	29.18%
Real estate construction		28,031	13.38%		25,258	13.31%
Real estate commercial		83,154	39.71%		79,128	41.68%
Real estate mortgage		27,920	13.33%		27,248	14.36%
Consumer and other		4,281	2.04%		2,784	1.47%
		209,432	100.00%		189,799	100.00%
Deferred loan fees		(701)			(453)
Total loans		208,731			189,346
Allowance for loan losses		(3,935)			(3,796)
Total loan, net	$	204,796		$	185,550

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 improves 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 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.

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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-specific;
• 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 $3.9 million at June 30, 2005 and $3.8 million December 31, 2004. The allowance, as a percentage of total loans, declined from 2.00% to 1.89% at June 30, 2005. Management believes the allowance for loan losses at June 30, 2005 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:

(unaudited)		June 30, 2005			December 31, 2004
(dollars in thousands)		Amount	Percent		Amount	Percent
General	$	2,016	51.23%	$	1,779	46.87%
Specific		237	6.02%		-	0.00%
Special		1,547	39.31%		1,382	36.41%
Unallocated		135	3.44%		635	16.73%
	$	3,935	100.00%	$	3,796	100.01%

Based on Management's assessment of the watch list loans, the unallocated amount of reserves has been decreased by $500,000 from December 31, 2004 to June 30, 2005 and reallocated to specific and special reserves. The reserve for specific loans was increased from 0.00% to 6.02% . Management believes the local economic recovery, excluding new housing construction segments, is still 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.

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	Six Months Ended			Year Ended
	June 30,			December 31,
(dollars in thousands)	2005		2004	2004
Loans outstanding at end of period, net of deferred fees (1)	$ 208,731	$	170,177	$ 189,346
Average loans outstanding during the period (1)	$ 202,541	$	167,633	$ 176,449
Allowance for loan losses, beginning of period	$ 3,796	$	3,968	$	3,968
Loans charged off:
Commercial	-		67		138
Real Estate	-		76		391
Consumer	31		8		58
Credit Cards	7		60		88
Total loans charged-off	38		211		675
Recoveries:
Commercial	64		165		212
Real Estate	38		25		44
Consumer	9		3		28
Credit Cards	6		5		9
Total recoveries	117		198		293
Provision for loan losses	60		87		210
Allowance for loan losses, end of period	$ 3,935	$	4,042	$	3,796
Net loans charged-off (recovered) during the period	(79)		13		382
Ratio of net loans charged-off to average loans outstanding	-0.04%		0.01%		0.22%
Ratio of allowance for loan losses to loans at end of period	1.89%		2.38%		2.00%
(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.

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:

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		June 30,		December 31,
(dollars in thousands)		2005		2004
Loans on non-accrual status	$	973	$	84
Loans past due greater than 90 days but not on non-accrual status		-		1
Other real estate owned		643		733
Other repossessed assets		-		-
Total non-performing assets	$	1,616	$	818
Total assets	$	301,831	$	273,286
Percentage of non-performing assets to total assets		0.54%		0.30%

Total non-performing assets at June 30, 2005 increased to $1.6 million from $818,000 as of December 31, 2004, primarily due to a single loan of $973,000 being placed on non-accrual status; however, this loan is fully guaranteed as to principal by an agency of the U.S. Government (USDA). This non-performing loan was paid in full in July.

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 funding source the Company utilizes to provide additional liquidity as necessary. At June 30, 2005, the Company's brokered certificate of deposit balance was $38.7 million compared to $41.3 million at December 31, 2004. Overnight federal funds borrowing lines with correspondent banks provide access to an additional $42.5 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 20% of the Bank's assets, or $57.2 million as of June 30, 2005, subject to collateral limitations. With the collateral available on June 30, 2005, the Company could borrow up to $37.0 million, subject to purchase of additional FHLB stock. The line is available for overnight federal funds, or notes with other terms and maturities. At June 30, 2005, notes payable to the FHLB were $400,000 compared to $472,900 at December 31, 2004. The notes payable at June 30, 2005 have original maturity periods ranging from 10 years through 15 years, bear interest at rates ranging from 6.11% to 8.62%, and mature from 2006 to 2009.

Investment in securities available-for-sale was $55.6 million at June 30, 2005 compared to $60.0 million at December 31, 2004.

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.

The following table presents selected capital information for the Company and the Bank as of June 30, 2005 and December 31, 2004:

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					To Be Well-Capitalized
					Under Prompt
			For Capital Adequacy		Corrective Action
	Actual		Purposes		Provision
	Amount	Ratio	Amount	Ratio	Amount	Ratio
June 30, 2005
Total risk-based capital:
Consolidated	$ 50,842	21.27%	$ 19,124	>8.00%	N/A	N/A
Bank	$ 46,129	19.36%	$ 19,062	>8.00%	$ 23,828	>10.00%
Tier 1 risk-based capital:
Consolidated	$ 47,842	20.01%	$ 9,562	>4.00%	N/A	N/A
Bank	$ 43,139	18.10%	$ 9,531	>4.00%	$ 14,297	>6.00%
Tier 1 (leverage) capital:
Consolidated	$ 47,842	16.46%	$ 11,668	>4.00%	N/A	N/A
Bank	$ 43,139	14.88%	$ 11,595	>4.00%	$ 14,494	>5.00%
December 31, 2004
Total risk-based capital:
Consolidated	$ 37,068	17.26%	$ 17,182	>8.00%	N/A	N/A
Bank	$ 36,297	16.95%	$ 17,136	>8.00%	$ 21,419	>10.00%
Tier 1 risk-based capital:
Consolidated	$ 34,370	16.00%	$ 8,591	>4.00%	N/A	N/A
Bank	$ 33,606	15.69%	$ 8,568	>4.00%	$ 12,852	>6.00%
Tier 1 (leverage) capital:
Consolidated	$ 34,370	12.64%	$ 10,879	>4.00%	N/A	N/A
Bank	$ 33,606	12.38%	$ 10,858	>4.00%	$ 13,572	>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, 2005 and December 31, 2004, Cowlitz Bancorporation and Cowlitz Bank substantially exceeded all relevant capital adequacy requirements.

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, cash flows, 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 using a computer based model. In a falling rate environment, the spread between interest yields earned and interest rates paid, may narrow, depending on the relative level of fixed and variable rate assets and liabilities. In a stable or increasing rate environment the Company's variable

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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.  For the period ended June 30, 2005 the Company is slightly asset sensitive.

Item 4. Controls and Procedures

As of June 30, 2005, 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 were no changes in the Company's internal controls over financial reporting during the second fiscal quarter that materially affected or is reasonably likely to materially affect these controls.

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. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3. Defaults upon Senior Securities

Not applicable

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

(a)	Cowlitz Bancorporation Annual Shareholder's Meeting was held on May 27, 2005.
(b)	All seven directors stood for election at the Annual Shareholder's Meeting and the seven individuals listed in Item 4(c) below were elected.
(c)	A brief description of the only matter voted upon at the Annual Shareholders' meeting held on May 27, 2005 and number of votes cast for, against, or withheld, including a separate tabulations with respect to each nominee is presented below:

Nominee	Votes For	Percentage of Voted	Withheld	Percentage of Voted
Mark F. Andrews Jr.	1,664,308	54.27	1,402,457	45.73
Ernie D. Ballou	1,664,308	54.27	1,402,457	45.73
Richard J. Fitzpatrick	1,664,308	54.27	1,402,457	45.73
John S. Maring	2,266,555	73.91	800,210	26.09
John M. Petersen	2,268,820	73.98	797,945	26.02
Phill S. Rowley	1,664,308	54.27	1,402,457	45.73
Linda M. Tubbs	2,268,890	73.98	797,875	26.02

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(d)None.

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

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

2	Agreement and Plan of Reorganization by and among the Company, Cowlitz Bank, AEA Bancshares, Inc. and Asia-Europe-Americas Bank dated May 3, 2005 (incorporated byreference to Exhibit 2 to the Company's Form 8-K filed May 4, 2005)
3.1	Restated and Amended Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed June 9, 2005)
3.2	Bylaws (incorporated by reference from the Company's Registration Statement on Form S-1, Reg. No. 333-44355)
10.1	Employment Agreement with Randy Blake, Vice President and Chief Financial Officer, datedJune 20, 2005 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filedJune 21, 2005)
10.2	Placement Agreement dated April 28, 2005, between the Company and its financing subsidiary Cowlitz Statutory Trust I, on the one hand, and FTN Financial Capital Markets and Keefe,Bruyette & Woods, Inc., as placement agents, relating to the issuance of trust preferred securities (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on FormS-4, Registration No. 333-126423)
10.3	Guarantee Agreement dated April 29, 2005 between the Company and Wilmington TrustCompany relating to the issuance of trust preferred securities (incorporated by reference toExhibit 10.8 to the Company's Registration Statement on Form S-4, Registration No. 333-126423)
31.1	Certification of Chief Executive Officer
31.2	Certification Chief Financial Officer
32	Certification of Chief Executive Officer and Chief Financial Officer

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SIGNATURES

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

Date: August 12, 2005

Cowlitz Bancorporation
(Registrant)

By:

/s/ Richard J. Fitzpatrick                                                                     

Richard J. Fitzpatrick, President and Chief Executive Officer

By:

/s/ Randy V. Blake                                                                               

Randy V. Blake, Vice-President, Chief Financial Officer

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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 materialfact 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 12, 2005

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

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Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Randy V. Blake, 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 materialfact 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 12, 2005

/s/ Randy V. Blake                                                               
Randy V. Blake, Chief Financial Officer
Cowlitz Bancorporation

26

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, 2005 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/ Randy V. Blake                                          
Randy V. Blake
Chief Financial Officer
Cowlitz Bancorporation

August 12, 2005

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