Cowlitz Bancorporation (CWLZ) 10-Q 2009 Q1 Quarterly report

UNITED STATES

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 March 31, 2009

¨ 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 of incorporation or organization)	(I.R.S. Employer Identification No.)

927 Commerce Ave., Longview, Washington 98632

(Address of principal executive offices) (Zip Code)

(360) 423-9800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

¨  Large accelerated filer ¨  Accelerated filer ¨  Non-accelerated filer x  Smaller reporting company

Indicate by check mark whether the registrant is a shell company (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 April 30, 2009: 5,122,608 shares

COWLITZ BANCORPORATION AND SUBSIDIARY

TABLE OF CONTENTS

		PAGE
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Condition - March 31, 2009 and December 31, 2008	1
	Consolidated Statements of Operations - Three months ended March 31, 2009 and March 31, 2008	2
	Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Loss - Three months ended March 31, 2009 and year ended December 31, 2008	3
	Consolidated Statements of Cash Flows - Three months ended March 31, 2009 and March 31, 2008	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition And Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4T.	Controls and Procedures	24
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity 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	25
Item 6.	Exhibits	25
	Signatures	26

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 impact of the current national and regional economy (including real estate values) on loan demand and borrower’s financial capacity in the Company’s market, 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. Forward-looking statements in this document include, without limitation, statements regarding the adequacy of our allowance for loan losses, effect of hedged forecasted transactions and sources and adequacy of liquidity. We undertake no obligation to update publicly or revise any forward-looking statements. You should not place undue reliance on forward-looking statements, which speak only as of the date on which they are made.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

COWLITZ BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION

(UNAUDITED)

(dollars in thousands)	March 31, 2009			December 31, 2008
Assets
Cash and cash equivalents	$	74,262		$	55,106
Investment securities		62,179			64,064
Federal Home Loan Bank stock, at cost		1,247			1,247
Loans, net of deferred loan fees		418,199			433,215
Allowance for loan losses		(8,427	)		(13,712	)
Total loans, net		409,772			419,503
Cash surrender value of bank-owned life insurance		15,092			14,942
Premises and equipment		5,980			6,185
Other real estate owned		5,226			4,838
Goodwill and other intangibles		1,798			1,798
Accrued interest receivable and other assets		17,249			19,743
Total assets	$	592,805		$	587,426
Liabilities
Deposits:
Non-interest-bearing demand	$	53,373		$	70,329
Savings and interest-bearing demand		29,770			29,674
Money market		65,153			72,465
Certificates of deposit		381,041			349,102
Total deposits		529,337			521,570
Junior subordinated debentures and other borrowings		12,408			12,423
Accrued interest payable and other liabilities		3,964			4,652
Total liabilities		545,709			538,645
Commitments and contingencies (Note 8)
Shareholders’ equity
Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding at March 31, 2009 and December 31, 2008		—			—
Common stock, no par value; 25,000,000 shares authorized with 5,122,608 and 5,110,358 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively		29,327			29,270
Additional paid-in capital		2,548			2,539
Retained earnings		11,753			13,655
Accumulated other comprehensive income		3,468			3,317
Total shareholders’ equity		47,096			48,781
Total liabilities and shareholders’ equity	$	592,805		$	587,426

See accompanying notes

1

COWLITZ BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended March 31
(dollars in thousands, except per share amounts)	2009			2008
Interest income
Interest and fees on loans	$	6,960		$	8,416
Interest on taxable investment securities		545			364
Interest on non-taxable investment securities		231			262
Other interest and dividend income		29			105
Total interest income		7,765			9,147
Interest expense
Savings and interest-bearing demand deposits		44			53
Money market		165			546
Certificates of deposit		3,257			2,940
Federal funds purchased and other borrowings		1			13
Junior subordinated debentures		109			193
Total interest expense		3,576			3,745
Net interest income before provision for credit losses		4,189			5,402
Provision for credit losses		3,505			593
Net interest income after provision for credit losses		684			4,809
Noninterest income
Service charges on deposit accounts		230			164
International trade fees		63			200
Fiduciary income		226			173
Increase in cash surrender value of bank-owned life insurance		150			152
Wire fees		29			81
Mortgage brokerage fees		60			62
Securities losses		(11	)		—
Other income		116			130
Total noninterest income		863			962
Noninterest expense
Salaries and employee benefits		2,185			2,507
Net occupancy and equipment		640			617
Professional services		570			263
Data processing and communications		311			215
Interest rate contracts adjustments		114			228
Federal deposit insurance		491			91
Foreclosed asset expense (income)		60			(162	)
Other expense		765			851
Total noninterest expense		5,136			4,610
(Loss) income before provision for income taxes		(3,589	)		1,161
Income tax (benefit) provision		(1,687	)		259
Net (loss) income	$	(1,902	)	$	902
(Loss) earnings per common share:
Basic	$	(0.37	)	$	0.18
Diluted	$	(0.37	)	$	0.18
Weighted average shares outstanding:
Basic		5,115,447			5,054,473
Diluted		5,115,447			5,093,039

See accompanying notes

2

COWLITZ BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’

EQUITY AND COMPREHENSIVE LOSS

(UNAUDITED)

	Common stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
(dollars in thousands, except per share amounts)	Shares	Amount
Balance, December 31, 2007	5,054,437	$	28,936	$	2,484	$	21,753		$	2,367			55,540
Comprehensive loss:
Net loss	—		—		—		(8,098	)		—			(8,098	)
Net change in unrealized gain (loss) on:
Investments available-for-sale, net of taxes of $494	—		—		—		—			(917	)		(917	)
Cash flow hedges, net of taxes of ($1,010)	—		—		—		—			1,867			1,867
Comprehensive loss													(7,148	)
Proceeds from exercise of stock options and stock purchase plan	20,222		114		—		—			—			114
Issuance of common stock	35,699		220										220
Share-based compensation	—		—		55		—			—			55
Balance, December 31, 2008	5,110,358		29,270		2,539		13,655			3,317			48,781
Comprehensive loss:
Net loss	—		—		—		(1,902	)		—			(1,902	)
Net change in unrealized gain (loss) on:
Investments available-for-sale, net of taxes of $405	—		—		—		—			748			748
Cash flow hedges, net of taxes of $(323)	—		—		—		—			(597	)		(597	)
Comprehensive loss													(1,751	)
Proceeds from the exercise of stock options	12,250		57		—		—			—			57
Share-based compensation	—		—		9		—			—			9
Balance, March 31, 2009	5,122,608	$	29,327	$	2,548	$	11,753		$	3,468		$	47,096

See accompanying notes

3

COWLITZ BANCORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
(dollars in thousands)	2009			2008
Cash flows from operating activities
Net (loss) income	$	(1,902	)	$	902
Adjustments to reconcile net (loss) income to net cash from operating activities:
Deferred tax (benefit) provision		(1,687	)		259
Share-based compensation		(43	)		16
Depreciation and amortization		396			458
Provision for credit losses		3,505			593
Increase in cash surrender value of bank-owned life insurance		(150	)		(152	)
Investment securities impairment		11			—
Interest rate contracts adjustments		(287	)		228
Net gain on sales of foreclosed assets		(11	)		(217	)
Net increase in accrued interest receivable and other assets		(340	)		(193	)
Net decrease in accrued interest payable and other liabilities		(695	)		(424	)
Net cash (used by) from operations activities		(1,203	)		1,470
Cash flows from investing activities
Proceeds from maturities and sales of investment securities		2,959			4,045
Net (increase) decrease in loans		3,359			(22,545	)
Proceeds from sale of foreclosed assets		2,549			650
Proceeds from termination of cash flow hedging instrument		3,807			—
Purchases of premises and equipment		(35	)		(171	)
Net cash from (used by) investment activities		12,639			(18,021	)
Cash flows from financing activities
Net increase in deposits		7,678			30,938
Net decrease in federal funds purchased		—			(75	)
Repayment of Federal Home Loan Bank and other borrowings		(15	)		(23	)
Proceeds from exercise of stock options		57			—
Net cash from financing activities		7,720			30,840
Net increase in cash and cash equivalents		19,156			14,289
Cash and cash equivalents, beginning of period		55,106			31,251
Cash and cash equivalents, end of period	$	74,262		$	45,540
Supplemental disclosure of cash flow information
Cash paid for interest	$	4,432		$	3,969
Supplemental disclosure of investing and financing activities
Loans transferred to foreclosed assets	$	2,926		$	4,240
Change in fair value of available-for-sale investment securities and interest rate contracts	$	151		$	2,743

See accompanying notes

4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization and Summary of Significant Accounting Policies

Organization –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. The 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, Seattle, and Vancouver, Washington, and Portland, Oregon, and a limited service branch in a retirement center in Wilsonville, Oregon. The Bank also provides mortgage banking services through its Bay Mortgage division with offices in Longview and Vancouver, Washington.

The Company offers or makes available a broad range of financial services to its customers, primarily small- and medium-sized businesses, professionals, and retail customers. The Bank’s commercial and personal banking services include commercial and real estate lending, consumer lending, international banking services, internet banking, cash management, mortgage banking and trust services.

Principles of consolidation - The accompanying consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany transactions and balances have been eliminated. The Company has one wholly-owned trust, Cowlitz Statutory Trust I (the Trust), for purposes of issuing guaranteed undivided beneficial interests in junior subordinated debentures. The interest on these debentures may be deferred at the sole determination of the issuer. Under such circumstances, the Company would continue to accrue interest but not make payments. 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.

The interim financial statements have been prepared without an audit and in accordance with the instructions to Form 10-Q, generally accepted accounting principles, 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 the financial condition and results of operations for the interim periods included herein, have been made. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of results to be anticipated for the year ending December 31, 2009. The interim consolidated financial statements should be read in conjunction with the December 31, 2008 consolidated financial statements, including the notes thereto, included in the Company’s 2008 Annual Report on Form 10-K.

Operating Segments –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, international banking services, and holding or managing assets in a fiduciary agency capacity on behalf of its trust customers and their beneficiaries. The Company also provides mortgage lending solutions for its customers, consisting of all facets of residential lending including FHA and VA loans, construction loans, and “bridge” loans. While management monitors the revenue streams of the various products and services, financial performance is being evaluated on a company-wide basis for 2009 and in 2008. Accordingly, operations were considered by management to be aggregated within one reportable operating segment.

Use of estimates in preparation of the consolidated 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for credit losses, carrying values of the Company’s goodwill, impaired loans, fair value of interest rate contracts and other real estate owned.

Recently Issued Accounting Standards –In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007) (SFAS No. 141R), “Business Combinations”. SFAS No. 141R replaces SFAS No. 141, “Business Combinations” and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS No. 141R retains the fundamental requirements of SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for the acquirer to be identified for each business combination. SFAS No. 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of the acquisition date. SFAS No. 141R also requires an acquirer to recognize assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. This changes the requirements of SFAS No. 141 which permitted deferred recognition of preacquisition contingencies, until the recognition criteria for SFAS No. 5,

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“Accounting for Contingencies” were met. SFAS No. 141R will also require acquirers to expense acquisition-related costs as incurred rather than require allocation of such costs to the assets acquired and liabilities assumed. SFAS No. 141R is effective for business combination reporting for fiscal years beginning after December 15, 2008. In April, 2009, the FASB issued FSP SFAS 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”
(FSP 141(R)-1). FSP 141(R)-1 amends the guidance in SFAS No. 141R and is effective for the first annual reporting period beginning on or after December 15, 2008. The provisions of SFAS No. 141R and FSP 141(R)-1 will apply to any business combination entered into by the Company closing on or after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160 amends Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. Prior to SFAS No. 160, net income attributable to the noncontrolling interest generally was reported as expense or other deduction in arriving at consolidated net income. Additional disclosures are required as a result of SFAS No. 160 to clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS No. 160 as of January 1, 2009 did not have a significant effect on the Company’s condensed consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133.” SFAS No. 161 expands disclosure requirements regarding an entity’s derivative instruments and hedging activities. Expanded qualitative disclosures that will be required under SFAS No. 161 include: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 also requires several added quantitative disclosures in financial statements. SFAS No. 161 was effective for the Company on January 1, 2009 and did not have a significant effect on the Company’s condensed consolidated financial statements.

In June 2008, FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 concludes that nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This statement is effective for fiscal years beginning after December 15, 2008, to be applied retrospectively. The adoption of FSP EITF 03-6-1 as of January 1, 2009 did not have a significant effect on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued the following three FSP’s intended to provide additional guidance and enhance disclosures regarding fair value measurements and impairment of securities.

FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of FSP FAS 157-4 are effective for the Company’s interim period ending on June 30, 2009. Management is currently evaluating the effect that the provisions of FSP FAS 157-4 may have on the Company’s condensed consolidated financial statements.

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Company’s interim period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Company’s condensed consolidated financial statements.

FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance

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related to other-than-temporary impairments of equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company’s interim period ending on June 30, 2009. Management is currently evaluating the effect that the provisions of FSP FAS 115-2 and FAS 124-2 may have on the Company’s condensed consolidated financial statements.

2. 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 short-term certificates of deposit, and federal funds sold. Federal funds sold generally mature the day following purchase.

3. Earnings (Loss) Per Share

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

	Three Months Ended March 31
	2009	2008
Weighted-average shares outstanding – basic	5,115,447	5,054,473
Effect of assumed conversion of stock options	—	38,566
Weighted-average shares outstanding – diluted	5,115,447	5,093,039

No options to purchase shares were included in the computation of diluted loss per share for the three month period ended March 31, 2009, as their inclusion would be anti-dilutive. Options to purchase 559,566 shares with exercise prices ranging from $9.85 to $16.81 were not included in the computation of diluted earnings per share for the quarter ended March 31, 2008 because the exercise price was greater than the average market price for the quarter.

4. Share-Based Compensation

The Company has a stock option plan, a stock appreciation rights (SAR) plan and an employee stock purchase plan, which are described below. Compensation expense related to these plans was a net credit of $44,000, primarily due to the reversal of previously accrued expense of $52,000 related to the SAR plan due to the decline in the Company’s stock price. Compensation costs charged against income for the plans were $15,900 in the first quarter of 2008. Income tax benefits recognized in the income statement for share-based compensation were $15,500 in the first quarter of 2009 compared with an income tax provision of $5,600 for first quarter 2008. At March 31, 2009, unrecognized estimated compensation cost related to non-vested SARs and stock options was not significant.

The average fair value of stock options and SARs is estimated on the date of grant using the Black-Scholes option pricing model. There were no stock options granted in the first quarter of 2009 or 2008. The Company awarded 147,900 SARs in the first quarter of 2008 and none in the first quarter of 2009. The following assumptions were used in the fair value calculations for the SARs awarded in January 2008: risk free rate of return: 3.3 percent; expected term: 5.1 years; expected volatility: 26.9 percent, and expected dividend: none.

Stock Option Plan

The Company has one active shareholder approved stock option plan (the 2003 Plan) that permits the grant of stock options and stock awards for up to 500,000 shares, of which 16,301 were available for issue at March 31, 2009. Under the 2003 Plan, options may be granted to the Company’s employees, non-employee directors, and others whom management believes contributed to the long-term financial success of the Company. From time-to-time, the Company also grants stock options outside the 2003 Plan in the process of recruiting senior management. The exercise price of all stock option awards must be at least equal to the fair value of the common stock on the date of grant and can vest immediately or over time at the discretion of the Board of Directors’ Compensation Committee and expire ten years after the date of grant. It is the Company’s policy to issue new shares for stock options exercised or stock awards.

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The following table summarizes stock option activity for the quarter ended March 31, 2009:

(dollars in thousands)	Options Outstanding		Weighted-Avg. Exercise Price		Weighted-Avg. Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Balance, beginning of period	672,066		$	10.98
Granted	—			—
Exercised	(12,250	)		4.62
Forfeited/Expired	(17,300	)		12.52
Balance, end of period	642,516		$	11.06	4.0	$	—
Exercisable, end of period	639,716		$	11.02	3.9	$	—

The total intrinsic value of options exercised was not significant in the first quarter of 2009 and 2008. During the first quarter of 2009 the amount of cash received from the exercise of stock options was $56,600 and not material in the comparable period of 2008.

Stock Appreciation Rights

In January 2007, the Company’s Board of Directors approved the 2007 Stock Appreciation Rights Plan (SAR Plan). The SAR Plan provides for the award of SARs to directors and officers of the Company. Each stock appreciation right represents the right to receive an amount in cash equal to the excess of the fair market value of a share of the Company’s common stock on the award date. The amount of the cash liability under the SAR Plan is estimated quarterly using the Black-Scholes option pricing model with updated assumptions. SARs vest 20 percent on the date of grant and 20 percent on each anniversary of the grant with accelerated vesting upon death, disability, a change in control and upon retirement after reaching age 62 while employed with at least five years of service. Unvested SARs are forfeited upon termination. SARs automatically convert into a deemed investment account at 10 years from the date of grant and can be converted into the deemed investment account at any time upon election of the recipient. SARs do not have dividend or voting rights or any other rights of the owner of an actual share of common stock. Recipient accounts are distributed in cash upon termination or, if elected by the recipient in advance, a specific distribution date not later than the later of termination or the January following the date the recipient reaches age 65.

Employee Stock Purchase Plan

The Company maintains an employee stock purchase plan (ESPP). The ESPP allows eligible employees to defer a whole percentage of their salary, from 1 percent to 10 percent, over a period of six months in order to purchase Company shares of common stock. The price is determined at 85 percent of the lowest market price on either the first or last day of the six-month deferral period. The company is authorized to issue up to 175,000 shares of common stock under the ESPP. As of March 31, 2009, there were 129,323 shares remaining under the ESPP.

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5. Comprehensive Income (Loss)

For the Company, comprehensive income (loss) primarily includes net income (loss) reported on the statements of operations and changes in the fair value of available-for-sale investment securities and interest rate contracts accounted for as cash flow hedges. These amounts are included in “Accumulated Other Comprehensive Income” on the consolidated statement of changes in shareholders’ equity.

	Three Months Ended March 31
(dollars in thousands)	2009			2008
Net (loss) income reported	$	(1,902	)	$	902
Unrealized gain from securities:
Net unrealized gain on available-for-sale securities arising during the period, net of tax		741			165
Reclassification adjustment of losses included in income, net of tax		7			—
Net unrealized gain from securities		748			165
Unrealized (loss) gain from cash flow hedging instruments:
Net unrealized (loss) gain from cash flow hedging instruments arising during the period, net of tax		(410	)		2,459
Reclassification adjustment of (gains) losses included in income, net of tax		(187	)		119
Net unrealized (loss) gain from cash flow hedging instruments		(597	)		2,578
Total comprehensive (loss) income	$	(1,751	)	$	3,645

6. Investment Securities

The following table presents the composition and carrying value of the Company’s available for sale investment portfolio:

(dollars in thousands)	March 31, 2009		December 31, 2008
Agency mortgage-backed securities	$	37,273	$	39,818
Non-agency mortgage-backed securities		2,451		2,414
Municipal bonds		21,909		21,281
FNMA preferred stock		35		46
Mutual fund		511		505
	$	62,179	$	64,064

The following table presents the gross unrealized losses and fair value of the Company’s investment securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2009:

	Less Than 12 Months					12 Months or More					Total
(dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Non-agency mortgage-backed securities	$	—	$	—		$	2,451	$	(1,433	)	$	2,451	$	(1,433	)
Municipal bonds		9,946		(432	)		142		(6	)		10,088		(438	)
	$	9,946	$	(432	)	$	2,593	$	(1,439	)	$	12,539	$	(1,871	)

At March 31, 2009, there were 32 investment securities in an unrealized loss position, of which 4 were in a continuous loss position for 12 months or more. The Company uses an independent third party to determine current market values of the securities it holds. These fair market values are compared to current carrying values to determine if a security is in a gain or loss position. As market rates fluctuate, a security’s fair value can move from a gain or loss position. Illiquidity in the capital markets and adverse changes in credit ratings for the Company’s municipal bonds, consistent with the industry, has negatively affected the fair values of the company’s securities portfolio. The Company’s impairment evaluation process for non-agency mortgage-backed securities considers all available evidence, including such factors as expected cash flows of the security, delinquency and default rates of the underlying mortgages, loss severities of the underlying collateral and investment downgrades by rating agencies. Due to the credit worthiness of the issuers and the quality of mortgages underlying mortgage-backed securities, and because the future direction of interest rates is unknown, the impairments are deemed to be temporary. The Company has the ability and intent to hold these investments until a market price recovery or to maturity when full payment would be received. There are no known current funding needs that would require their liquidation.

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7. Loans and Allowance for Credit Losses

The following table presents the loan portfolio, in accordance with Bank regulatory guidance, as of March 31, 2009 and December 31, 2008:

(dollars in thousands)	March 31, 2009			December 31, 2008
Commercial	$	110,748		$	113,991
Real estate:
Construction		82,797			93,191
Residential 1-4 family		38,813			36,662
Multifamily		2,917			3,028
Commercial		180,984			184,213
Installment and other consumer		2,882			3,146
Total loans, gross		419,141			434,231
Deferred loan fees		(942	)		(1,016	)
Loans, net of deferred loan fees	$	418,199		$	433,215

The allowance for credit losses is based upon estimates of probable losses inherent in the loan portfolio and the Company’s commitments to extend credit to borrowers. The amount of loss ultimately incurred for these loans can vary significantly from the estimated amounts. An analysis of the change in the allowance for credit losses is as follows for the periods indicated:

	Quarter Ending
(dollars in thousands)	March 31, 2009			March 31, 2008
Balance at beginning of period	$	13,994		$	5,990
Provision for credit losses		3,505			593
Recoveries		500			12
Charge-offs		(9,230	)		(170	)
Balance at end of period	$	8,769		$	6,425
Components
Allowance for loan losses	$	8,427		$	6,235
Liability for unfunded loan commitments		342			190
Total allowance for credit losses	$	8,769		$	6,425

Loans on which the accrual of interest has been discontinued totaled $32.2 million and $15.7 million at March 31, 2009 and December 31, 2008, respectively. There were no loans 90 days past due and still on accrual at March 31, 2009 and 2008.

At March 31, 2009, the recorded investment in loans classified as impaired totaled $32.2 million with no associated specific allowance. At December 31, 2008, the recorded investment in impaired loans was $15.7 million, with $98,000 specific allowance. The average recorded investment in impaired loans was approximately $24.5 million and $8.9 million for the three months ended March 31, 2009 and 2008, respectively. The amount of interest recognized on impaired loans during the periods they were impaired was not significant.

8. Commitments and Contingencies

In the normal course of business, the Bank enters into agreements with customers that give rise to various commitments and contingent liabilities that involve elements of credit risk, interest rate risk, and liquidity risk. These commitments and contingent liabilities are commitments to extend credit, credit card arrangements, and standby letters of credit.

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A summary of the Bank’s undisbursed commitments and contingent liabilities at March 31, 2009, was as follows:

(dollars in thousands)
Commitments to extend credit	$	50,061
Credit card commitments		3,558
Standby letters of credit		1,937
	$	55,556

Commitments to extend credit, credit card arrangements, and standby letters of credit all include exposure to some credit loss in the event of non-performance of the customer. The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extension of credit that are recorded in the consolidated statements of condition. Because most of these instruments have fixed maturity dates and many of them expire without being drawn upon, they do not generally present a significant liquidity risk to the Bank.

9. Income Taxes

The Company and its subsidiary file income tax returns in the U.S. federal jurisdiction and the state of Oregon. The years 2005 through 2007 remain open for federal income taxes, and years 2004 through 2007 remain open for state examination. The Company’s policy is to recognize interest related to unrealized tax benefits and penalties as operating expenses. There were no interest or penalties paid during the three-month period ended March 31, 2009 or the twelve-month period ended December 31, 2008. There were no accrued interest or penalties as of March 31, 2009 or December 31, 2008. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns, and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

10. Derivative Instruments

The Company holds loans that have variable rates, thus creating exposure to the variability or uncertainty of future cash flows due to changes in interest rates. At March 31, 2009, approximately 61 percent of the Company’s loan portfolio had variable rates. The Company’s objective and strategy is to reduce its exposure to decreases in cash flows relating to interest receipts on its prime-based variable-rate loans. The Company has entered into interest rate contracts to manage this risk of overall changes in cash flows associated with those prime-based variable-rate loans. Derivative instruments utilized by the Company include an interest rate floor and interest rate swaps.

In the first quarter of 2006, the Company purchased a $50 million five-year prime-based interest rate floor with an effective date of March 29, 2006. In November 2006, the Company purchased two interest rate swaps with an aggregate notional value totaling $75 million. The interest rate swap contracts expire in May 2011. On the date the contracts were entered into, none of the contracts were designated as hedging instruments and, as such, gains or losses related to changes in the fair value of the instruments were recognized in earnings in the period of change.

The Company began applying cash flow hedge accounting treatment, as prescribed by SFAS No. 133, as amended, as of December 12, 2006 to all of its interest rate contracts. In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings. When a hedged item is de-designated prior to maturity, previous adjustments to accumulated other comprehensive income or loss are recognized in earnings to match the earnings recognition pattern over the life of the hedged item if the expected cash flows are probable of occurring as originally specified at inception of the initial hedging relationship.

The Company sold its $25 million notional interest rate swap contract in June 2008, resulting in a pre-tax gain of $482,000, and sold its $50 million notional interest rate swap in February, 2009, realizing a pre-tax gain of $3.8 million. At the time of the sales, the forecasted transactions at the inception of the hedging relationship remained probable. Therefore, the realized gains are being amortized into earnings over the remaining life of the forecasted transactions.

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At March 31, 2009 and December 31, 2008, the fair value of the Company’s interest rate contracts (included in other assets on the Consolidated Statements of Condition) was $3.7 million and $8.1 million, respectively. The following table shows the location and amount of gains and losses reported in the Consolidated Statement of Operations on the Company’s interest rate contracts, designated as hedging instruments, for the three months ended March 31, 2009:

(dollars in thousands)
Amount of Gain or (Loss) Recognized in OCI (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated OCI Into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI Into Income (Effective Portion)		Location of Gain or (Loss) Recognized in Income (Ineffective Portion)	Amount of Gain or (Loss) Recognized in Income (Ineffective Portion)
$	(537	)	Interest Income	$	715	Noninterest Expense	$	(96	)

The table below shows the location and amount of gains and losses reported in the Consolidated Statement of Operations on the Company’s interest rate swaps no longer designated as hedging instruments:

(dollars in thousands)
Location of Gain or (Loss) Reclassified from Accumulated OCI Into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI Into Income (Effective Portion)		Location of Gain or (Loss) Recognized in Income (Ineffective Portion)	Amount of Gain or (Loss) Recognized in Income (Ineffective Portion)
Interest Income	$	401	Noninterest Expense	$	(18	)

In the next twelve months, it is estimated that the hedged forecasted transactions will affect earnings such that a non-cash credit of $712,000 will be reclassified into earnings from accumulated other comprehensive income.

11. Fair Value Measurements

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1. Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. An active market is a market in which transactions for the asset or liability occur with significant frequency and volume to provide pricing information on an ongoing basis.

Level 2. Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data by correlation or other means.

Level 3. Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

The Company used the following methods and significant assumptions to estimate fair value.

Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Interest Rate Contracts: The Company has elected to use the income approach to value the interest rate contracts, using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. As such, significant fair value inputs can generally be verified and do not typically involve significant judgments by management.

Impaired Loans: Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. As a practical expedient, fair value may be measured based on a loan’s observable market price or the underlying collateral securing the loan. Collateral may be real estate or business assets including equipment. The value of collateral is determined based on independent appraisals.

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Other Real Estate Owned: OREO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO is recorded at the lower of the carrying amount of the loan or fair value less estimated costs to sell. This amount becomes the property’s new basis. Any write-downs based on the property fair value less estimated cost to sell at the date of acquisition are charged to the allowance for loan and lease losses. Management periodically reviews OREO in an effort to ensure the property is carried at the lower of its new basis or fair value, net of estimated costs to sell. Any write-downs subsequent to acquisition are charged to earnings.

Financial instruments are broken down in the table that follows by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that due to an event or circumstance were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.

(dollars in thousands)	March 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Losses Included in Earnings			Valuation Allowance
Recurring basis:
Available for sale securities	$	62,179	$	511	$	61,668	$	—
Interest rate contracts		3,671		—		3,671		—
Nonrecurring basis:
Impaired loans		15,467		—		—		15,467	$	(4,646	)	$	—
Other real estate owned		5,226		—		—		5,226		—			—
Total	$	86,543	$	511	$	65,339	$	20,693	$	(4,646	)	$	—

The loans in the table above represent impaired, collateral dependent loans that have been adjusted to fair value. When management determines that the value of the underlying collateral is less than the recorded investment in the loan, the Company recognizes this impairment and adjusts the carrying value of the loan to fair value by charging-off the amount of the impairment to the allowance for loan losses.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates

Allowance for Credit Losses

The allowance for credit losses represents the estimate of probable losses associated with the Bank’s loan portfolio and commitments to extend credit. The Company utilizes both quantitative and qualitative considerations in establishing the allowance for credit losses believed to be appropriate as of each reporting date.

Quantitative factors include:

• the volume and severity of nonperforming loans and adversely classified credits,

• the level of net charge-offs experienced on previously classified loans,

• the nature and value of collateral securing the loans,

• the trend in loan growth and the percentage of change,

• the level of geographic and/or industry concentration,

• the relationship and trend over the past several years of recoveries in relation to charge-offs, and

• other known factors regarding specific loans.

Qualitative factors include:

• the effectiveness of credit administration,

• the adequacy of loan review,

• the adequacy of loan operations personnel and processes,

• the effect of competitive issues that impact loan underwriting and structure,

• the impact of economic conditions, including interest rate trends,

• the introduction of new loan products or specific marketing efforts,

• large credit exposure and trends, and

13

• industry segments that are exhibiting stress.

Changes in the above factors could significantly affect the determination of the adequacy of the allowance for credit losses. Management performs a full analysis, no less often than quarterly, to ensure that changes in estimated credit loss levels are adjusted on a timely basis.

Goodwill

Another critical accounting policy of the Company is that related to the carrying value of goodwill. Impairment analysis of the fair value of goodwill involves a substantial amount of judgment. Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Asset”(SFAS No. 142), the Company ceased amortization of goodwill on January 1, 2002 and periodically tests goodwill for impairment.

The goodwill impairment analysis requires management to make highly subjective judgments in determining if an indicator of impairment has occurred. Events and factors that may significantly affect the analysis include: a significant decline in the Company’s expected future cash flows, a substantial increase in the discount factor, a sustained, significant decline in the Company’s stock price and market capitalization, a significant adverse change in legal factors or in the business climate. Other factors might include changing competitive forces, customer behaviors and attrition, revenue trends and cost structures, along with specific industry and market conditions, Adverse change in these factors could have a significant impact on the recoverability of intangible assets and could have a material impact on the Company’s consolidated financial statements.

The goodwill impairment analysis involves a two-step process. The first step is a comparison of the Company’s fair value to its carrying value. Management estimates fair value using a combination of the income approach and market approach with the best information available, including market information and discounted cash flow analysis. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. For purposes of the goodwill impairment test, the Company was identified as a single reporting unit. The market approach estimates the fair value of a company by examining the price at which similar companies, or shares of similar companies, are exchanged. Based on management’s goodwill impairment analysis, it was determined that the Company’s carrying value exceeded its fair value and therefore indicated potential impairment under step one of the process.

The amount of impairment is determined by comparing the implied fair value of the reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, a company allocates the fair value to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference. The analysis performed in the second step indicated that no impairment charge was required since the implied fair value of the Company’s goodwill was greater than the carrying value of the goodwill.

Due to the ongoing uncertainty in market conditions, which may continue to negatively impact the performance of the Company as well as the market valuations of financial institutions, including Cowlitz Bancorporation, management will continue to monitor and evaluate the carrying value of goodwill. Goodwill impairment could be recorded in future periods and such impairment could be material to the Company’s results of operations.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Determination of the deferred and current provision requires analysis by management of certain transactions and the related tax laws and regulations. Management exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. Those judgments and estimates are re-evaluated on a continual basis as regulatory and business factors change.

The Company periodically reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary. If, based on the available evidence in future periods, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized, a deferred tax valuation allowance would be established and could be material to its results of operations. Consideration is given to all positive and negative evidence related to the realization of the deferred tax assets.

In evaluating the available evidence, management considers historical financial performance, expectation of future earnings, the ability to carryback losses to recoup taxes previously paid, length of statutory carryforward periods, experience with operating loss and tax credit carryforwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. The Company’s evaluation is based on current tax laws as well as management’s expectations of future performance based on its strategic initiatives. Changes in existing tax laws and future results that differ from expectations may result in significant changes in the deferred tax asset valuation allowance.

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Recent Developments

In December 2008, the Company submitted an application for approval to issue up to three percent of its total risk-weighted assets in preferred stock to the United States Department of the Treasury (Treasury) under the Troubled Asset Relief Program’s Capital Purchase Program (TARP-CPP). This application reflected the Company’s understanding that an investment by the Treasury though the TARP-CPP might be conditioned on the Company’s receipt of a significant amount of private equity capital. On May 1, 2009 the Company submitted a letter to the Federal Reserve, which serves as the primary regulator for the Company, indicating its intention to withdraw its TARP-CPP application. The decision to withdraw the application was based upon a number of factors, including the expectation that private equity co-investment will not be consummated prior to the deadline for the processing of final TARP-CPP investments. The private equity markets for banks have been extremely limited since mid-2008. In the event additional new capital is not available in the near term, the Company may instead take additional steps to preserve capital, including slowing or reducing lending, selling certain assets, and/or increasing loan participations. The Company does not pay cash dividends.

Results of Operations for the Three Months Ended March 31, 2009 and 2008

Overview

The Company’s net loss for the first quarter of 2009 was $1,902,000, or ($0.37) per diluted share, compared with net income of $902,000, or $0.18 per diluted share for the first quarter of 2008. Net interest income of $4.2 million was down 22 percent from $5.4 million in the first quarter of 2008

The Company recorded a provision for credit losses of $3,505,000 in the first quarter of 2009, compared with a provision for credit losses of $593,000 in the first quarter of 2008. The higher provision in 2009 primarily reflected the higher level of net charge-offs due to the significant slowdown in the housing industry, affecting the Company’s residential land acquisition and development loan portfolio.

Non-interest income was lower by $99,000 in the first quarter of 2009 when compared to first quarter of 2008, primarily due to declines of $137,000 in international trade fees and wire fees of $52,000 that were offset with increases in service charges of $66,000 and fiduciary income of $53,000.

Non-interest expenses totaled $5.1 million in the first quarter of 2009, compared with $4.6 million in the first quarter of 2008. Salaries and benefits decreased $322,000 in the first quarter of 2009 compared with the first quarter of 2008 as the number of full-time equivalent employees at March 31, 2009 decreased 14 percent from the number of full-time equivalent employees at March 31, 2008. FDIC deposit insurance assessments and Washington State public deposit assessments increased $400,000 over the first quarter of 2008, reflecting the FDIC’s higher base assessment rate for 2009, expenses related to the FDIC’s proposed emergency special assessment and the Company’s pro-rata share of the loss of public deposits arising from the failure of the Bank of Clark County.

At March 31, 2009, total assets were $592.8 million, compared with $587.4 at December 31, 2008 and $548.5 million at March 31, 2008. Total loans increased $2.7 million to $418.2 million, from $415.5 million at March 31, 2008, but down from $433.2 million at December 31, 2008. Total deposits increased 12 percent to $529.3 million at March 31, 2009 from $472.3 million at March 31, 2008. The Company continues to be “well-capitalized” under regulatory requirements.

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 and mix, and 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.

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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 on an annualized basis.

	For the Quarter Ended March 31,
	2009							2008
(dollars in thousands)	Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate
Assets
Interest-Earning Assets:
Loans (1) (2) (3)	$	431,166		$	6,985	6.57	%	$	412,907		$	8,428	8.21	%
Taxable securities		41,702			545	5.30	%		27,188			364	5.38	%
Non-taxable securities (2)		21,903			350	6.48	%		24,322			393	6.50	%
Federal funds sold		44,165			28	0.26	%		13,170			97	2.96	%
Interest-earning balances due from banks and FHLB stock		2,484			1	0.16	%		1,923			8	1.67	%
Total interest-earning assets (2)		541,420			7,909	5.92	%		479,510			9,290	7.79	%
Cash and due from banks		15,713							17,081
Allowance for loan losses		(13,241	)						(5,987	)
Other assets		44,465							36,093
Total assets	$	588,357						$	526,697
Liabilities and Shareholders’ Equity
Interest-Bearing Liabilities:
Savings, money market and interest-bearing demand deposits	$	98,775		$	209	0.86	%	$	121,473		$	599	1.98	%
Certificates of deposit		364,243			3,257	3.63	%		239,378			2,940	4.94	%
Federal funds purchased		—			—	—			1,340			11	3.30	%
Junior subordinated debentures		12,372			109	3.57	%		12,372			193	6.27	%
FHLB and other borrowings		41			1	8.83	%		114			2	7.06	%
Total interest-bearing liabilities		475,431			3,576	3.05	%		374,677			3,745	4.02	%
Non-interest-bearing deposits		59,686							91,736
Other liabilities		4,549							4,032
Total liabilities		539,666							470,445
Shareholders’ equity		48,691							56,252
Total liabilities and shareholders’ equity	$	588,357						$	526,697
Net interest income (2)				$	4,333						$	5,545
Net interest spread						2.87	%						3.77	%
Yield on average interest-earning assets						5.92	%						7.79	%
Interest expense to average interest-earning assets						2.68	%						3.14	%
Net interest income to average interest-earning assets (net interest margin)						3.25	%						4.65	%

(1) Loans include loans on which the accrual of interest has been discontinued.

(2) Interest earned on non-taxable securities and loans has been computed on a 34 percent tax-equivalent basis.

(3) Loan interest income includes net loan fees of $286,000 and $488,000 for the first quarter of 2009 and 2008, respectively.

Net interest margin as a percentage was 3.25 percent for the first quarter of 2009, compared with 4.65 percent in the first quarter of 2008. Net interest income was $4.2 million in the first quarter of 2009, compared with $5.4 million in the same quarter last year. The Company’s net interest margin relative to the first quarter 2008 was affected by several factors, including significant rate reductions by the Federal Reserve in the second half of 2008, interest reversals, continued competitive market pricing on both sides of the balance sheet, a higher level of nonperforming assets and a lower level of non-interest-bearing demand and low-cost money market deposit accounts.

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The Company’s yield on average earning assets was 5.92 percent in the first quarter of 2009, compared with 7.79 percent in the first quarter of 2008. The Company estimates that interest reversals of $771,000 reduced the first quarter 2009 average yield on earning assets by 58 basis points. The first quarter 2009 average yield on earning assets was also affected by a higher level of federal funds sold as part of the Company’s liquidity management. The average rate on interest-bearing liabilities fell to 3.05 percent in the first quarter of 2009 from 4.02 percent in the first quarter a year ago. Average funding costs have improved as deposits issued in the first quarter of 2009 were issued in a lower interest rate environment.

Provision for Credit Losses

The amount of the allowance for credit 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 credit losses is recorded, the amount is based on the current volume of loans and commitments to extend credit, anticipated changes in loan volumes, past charge-off experience, management’s assessment of the risk of loss on current loans, the level of nonperforming and impaired loans, evaluation of future economic trends in the Company’s market area, and other factors relevant to the loan portfolio. An internal loan risk grading system is used to evaluate potential losses of individual loans. The Company does not, as part of its analysis, group loans together by loan type to assign risk. See “Allowance for Credit Losses” below for a more detailed discussion.

The Company recorded a provision for credit losses of $3,505,000 in the first quarter of 2009, compared with a $593,000 provision in the first quarter of 2008. The higher provision in 2009 primarily reflected the higher level of net charge-offs in the quarter and the on-going weakness in the regional real estate markets and the economy in general. Net charge-offs of $8.7 million and $158,000 were recorded for the three-month periods ended March 31, 2009 and 2008, respectively.

The Company’s approach to the determination of carrying value of its real estate loans is based on the assumption that the only source of repayment will be collateral liquidation. While many loans include personal guarantees of the borrowers, the recovery of material amounts through legal action is considered by management, in most cases, limited.

Non-Interest Income

Non-interest income consists of the following components:

	Three Months Ended March 31,
(dollars in thousands)	2009			2008
Service charges on deposit accounts	$	230		$	164
International trade fees		63			200
Fiduciary income		226			173
Increase in cash surrender value of bank-owned life insurance		150			152
Wire fees		29			81
Mortgage brokerage fees		60			62
Securities losses		(11	)		—
Other income		116			130
Total noninterest income	$	863		$	962

Total non-interest income was $863,000 for the first quarter of 2009, compared with $962,000 for the first quarter of 2008. Service charges increased $66,000 and fiduciary income increased $53,000. Offsetting these increases were declines of $137,000 in international trade fees and $52,000 in wire fees. These decreases related primarily to a planned reduction in the number of non-resident relationships serviced by our Seattle-based international trade department and wire room. There were 193 accounts closed with an average daily balance of approximately $8.3 million.

17

Non-Interest Expense

Non-interest expense consists of the following components:

	Three Months Ended March 31,
(dollars in thousands)	2009		2008
Salaries and employee benefits	$	2,185	$	2,507
Net occupancy and equipment		640		617
Professional services		570		263
Data processing and communications		311		215
Interest rate contracts adjustments		114		228
Federal deposit insurance		491		91
Foreclosed asset expense (income)		60		(162	)
Other expense		765		851
Total noninterest expense	$	5,136	$	4,610

Non-interest expenses in the first quarter of 2009 were $5.1 million, compared with $4.6 million in the first quarter of 2008. Salaries and employee benefits decreased $322,000, or 13 percent, in the first quarter of 2009 compared with the first quarter of 2008. The number of full-time equivalent employees at March 31, 2009 was 14 percent less than the same time a year ago, and reflects management’s efforts to streamline operations and reduce overall employee-related costs, while maintaining or improving customer service.

FDIC deposit insurance assessments increased $400,000 over the first quarter of 2008, reflecting the FDIC’s higher base assessment rate for 2009, expenses related to the FDIC’s proposed emergency special assessment and the Company’s pro-rata share of the loss of public deposits arising from the failure of the Bank of Clark County. In February 2009, the FDIC announced a 20 basis point special assessment on deposits as of June 30, 2009, payable September 30, 2009. On May 6, 2009, the U.S. Senate passed a bill increasing the FDIC’s Treasury borrowing authority from $30 billion to $100 billion. It is expected that this bill, upon final approval by the U.S. House of Representatives and the President, will reduce the proposed emergency special assessment to 10 basis points. The increase in the FDIC’s borrowing authority, combined with other measures the FDIC has taken, could reduce the special assessment to approximately 8 basis points. The rule would also permit the FDIC to impose an additional emergency special assessment after June 30, 2009, of up to 10 basis points. The Company expects to incur additional FDIC insurance costs in the second quarter of 2009.

Professional services increased $307,000 over the same period last year and related primarily to higher legal expenses associated with nonperforming loans, costs related to professional assistance with the Company’s capital raising initiative and first-time costs of the independent auditor’s review of the Company’s internal controls over financial reporting under the Sarbanes-Oxley act. Net costs related to foreclosed assets in the first quarter of 2008 included a $216,500 gain on sale of assets, with no such gains recorded in the first quarter of 2009.

Income Taxes

The effective tax rate for the first quarter of 2009 was 47.0 percent compared with 22.3 percent during the same period of 2008. The Company’s effective tax rate for interim periods is based on projections of taxable income or loss for the full year and is affected by the relative amounts of taxable and non-taxable income and the amount of available tax credits.

Financial Condition

Investment Securities

The following table presents the composition and carrying value of the Company’s available for sale investment portfolio:

(dollars in thousands)	March 31, 2009		December 31, 2008
Agency mortgage-backed securities	$	37,273	$	39,818
Non-agency mortgage-backed securities		2,451		2,414
Municipal bonds		21,909		21,281
Other securities		546		551
	$	62,179	$	64,064

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Total investment securities as of March 31, 2009 were $62.2 million, compared with $64.1 million at December 31, 2008. The decrease primarily relates to principal reductions of the Company’s mortgage-backed securities. The Company’s securities, classified as available for sale, are used by management as part of its asset/liability management strategy and may be sold in response to changes in interest rates or significant prepayment risk.

Loans

Total loans outstanding were $418.2 million and $433.2 million at March 31, 2009 and December 31, 2008, respectively. The Company reduced loans $15.0 million, or 3 percent, in the first quarter of 2009. This reduction included $8.7 million of net loan charge-offs. Management currently believes it prudent to reduce loan balances when possible until it is apparent that the economic downturn has run its course. Unfunded loan commitments were $55.6 million at March 31, 2009 and $60.6 million at December 31, 2008. Management believes that the Bank’s available resources will be sufficient to fund its commitments in the normal course of business.

The following table presents the composition of the Company’s loan portfolio in accordance with bank regulatory guidelines, at the dates indicated:

	March 31, 2009					December 31, 2008
(dollars in thousands)	Amount			Percent		Amount			Percent
Commercial	$	110,748		26.4	%	$	113,991		26.3	%
Real estate:
Construction		82,797		19.8	%		93,191		21.5	%
Residential 1-4 family		38,813		9.3	%		36,662		8.4	%
Multifamily		2,917		0.7	%		3,028		0.7	%
Commercial		180,984		43.1	%		184,213		42.4	%
Installment and other consumer		2,882		0.7	%		3,146		0.7	%
Total loans, gross		419,141		100.0	%		434,231		100.0	%
Deferred loan fees		(942	)				(1,016	)
Loans, net of deferred loan fees	$	418,199				$	433,215

The Company’s real estate construction and land development loans were 19.8 percent of the loan portfolio at March 31, 2009, down from 21.5 percent at year-end 2008. The following table illustrates real estate construction loans by project type.

	March 31, 2009		December 31, 2008
Residential construction
1-4 family residential	$	9,361	$	18,386
Multi-family/condominiums		13,780		12,636
Residential land development		19,416		22,621
Commercial construction		40,240		39,548
	$	82,797	$	93,191

The Company’s commercial real estate portfolio to-date has experienced low delinquency rates and only modest deterioration in the present downturn. Management believes that commercial real estate collateral may provide an additional measure of security for these loans, and that lending to owner-occupied businesses mitigates, but does not eliminate, commercial real estate risk. The table below illustrates the breakdown of the commercial real estate portfolio.

	March 31, 2009		December 31, 2008
Commercial real estate
Owner occupied	$	106,770	$	106,545
Non-owner occupied		74,214		77,668
	$	180,984	$	184,213

Allowance for Credit Losses

Management’s evaluation of the loan portfolio resulted in a total allowance for credit losses of $8.8 million at March 31, 2009, compared with $14.0 million December 31, 2008. The allowance for loan losses, as a percentage of total loans, decreased from 3.17 percent on December 31, 2008 to 2.02 percent at March 31, 2009. Management believes the allowance for credit losses at March 31, 2009 is adequate to absorb current potential or anticipated losses.

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

	March 31, 2009				December 31, 2008
(dollars in thousands)	Amount		Percent		Amount		Percent
General	$	5,925	68	%	$	5,615	40	%
Specific		—	—			98	1	%
Special		2,844	32	%		8,281	59	%
Total allowance for credit losses	$	8,769	100	%	$	13,994	100	%

The allowance for credit losses is based upon estimates of probable losses inherent in the loan portfolio and the Company’s commitments to extend credit to borrowers. The amount of loss ultimately incurred for these loans can vary significantly from the estimated amounts. The following table shows the Company’s loan loss performance for the periods indicated.

	Three Months Ended March 31,
(dollars in thousands)	2009		2008
Loans outstanding at end of period, net of deferred fees	$	418,199	$	415,474
Average loans outstanding during the period	$	431,166	$	412,907
Allowance for credit losses, beginning of period	$	13,994	$	5,990
Loans charged off:
Commercial		2,541		163
Real estate		6,681		—
Consumer and other		8		7
Total loans charged-off		9,230		170
Recoveries:
Commercial		490		1
Real estate		5		4
Consumer and other		5		7
Total recoveries		500		12
Net loans charged off during the period		8,730		158
Provision for credit losses		3,505		593
Allowance for credit losses, end of period	$	8,769	$	6,425
Components:
Allowance for loan losses	$	8,427	$	6,235
Liability for unfunded credit commitments		342		190
Total allowance for credit losses	$	8,769	$	6,425

The following table provides summary information concerning asset quality as of and for the quarters ended March 31, 2009 and December 31, 2008, respectively:

	March 31, 2009		December 31, 2008
Ratio of net loans charged off to average loans outstanding (annualized)	8.21	%	1.79	%
Allowance for loan losses/total loans	2.02	%	3.17	%
Allowance for credit losses/total loans	2.10	%	3.23	%
Allowance for loan losses/nonperforming loans	26	%	87	%
Allowance for credit losses/nonperforming loans	27	%	89	%

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Nonperforming Assets

Nonperforming assets includes repossessed real estate or other assets and loans for which the accrual of interest has been suspended. The following table presents information on the Company’s nonperforming assets and loans past due 90 days or more and still on accrual, at the dates indicated:

(dollars in thousands)	March 31, 2009			December 31, 2008
Loans on nonaccrual status
Residential real estate construction and development	$	20,541		$	9,832
Commercial real estate		8,813			4,337
Multifamily		—			90
Commercial and industrial		2,813			1,430
Total loans on nonaccrual status		32,167			15,689
Other real estate owned		5,226			4,838
Total nonperforming assets	$	37,393		$	20,527
Total assets	$	592,805		$	587,426
Percentage of nonperforming assets to total assets		6.31	%		3.49	%
Percentage of nonaccrual loans to total loans		7.69	%		3.62	%
Loans past due greater than 90 days and accruing	$	—		$	6,247

Total nonperforming assets were $37.4 million at March 31, 2009, compared with $20.5 million at December 31, 2008. At March 31, 2009, there were no loans 90 days past due and still on accrual. At December 31, 2008 two loans totaling $6.2 million were 90 days past due and still on accrual. One of these loans totaling $6.0 million was brought current in January 2009.

The Company, during its normal loan review procedures, considers a loan to be impaired when it is probable that the Bank 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 Bank 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.

At March 31, 2009 the Company’s recorded investment in impaired loans was $32.2 million compared with $15.7 million at December 31, 2008. These loans were evaluated for impairment and it was determined that a specific reserve of $98,000 was required at December 31, 2008. No specific reserve was required at March 31, 2009.

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.

Nonaccrual loans at March 31, 2009 totaled $32.2 million, an increase of $16.5 million from December 31, 2008. Loans placed on nonaccrual during the quarter totaled $31.3 million. Of these loans $17.4 million related to residential real estate construction and development and related loans and $10.8 million related to commercial real estate loans. New commercial and industrial nonaccrual loans in 2009 totaled approximately $3.0 million and related to several borrowers. During the first quarter of 2009, nonaccrual loans were reduced by pay-offs/take-outs of $7.1 million and charge-offs of $4.7 million. Loans totaling $2.9 million were foreclosed and transferred to other real estate owned.

Other real estate owned totaled $5.2 million at March 31, 2009, up $0.4 million from December 31, 2008. One property was sold in the first quarter of 2009 for $2.5 million dollars with no significant gain or loss, mostly offsetting new foreclosures of $2.9 million.

Liquidity

Liquidity represents the ability to meet deposit withdrawals and fund loan demand, while retaining the flexibility to take advantage of business opportunities. The Bank’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. Investment in securities available-for-sale was $62.2 million at March 31, 2009 and $64.1 million at December 31, 2008.

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The following table presents the composition of the Company’s deposit liabilities on the dates indicated:

(dollars in thousands)	March 31, 2009		December 31, 2008
Noninterest-bearing demand deposits	$	53,373	$	70,329
Savings deposits		16,071		16,127
Interest-bearing demand deposits		13,699		13,547
Money market deposits		65,153		72,465
Certificates of deposit under $100,000		115,955		93,880
Certificates of deposit over $100,000		265,086		255,222
Total	$	529,337	$	521,570

Total deposits increased $7.8 million in the first quarter of 2009 over total deposits at December 31, 2008. Non-interest-bearing demand deposits at March 31, 2009 decreased $17.0 million from year-end 2008, primarily due to the Company’s planned reduction in the number of non-resident relationships served by its Seattle-based international trade department and wire room. Money market deposits decreased $7.3 million during the same period, reflecting the loss of non-resident accounts in the Seattle branch as well as a $3.3 million decrease in brokered money market accounts.

To offset reduced relationship deposits, the Bank utilizes internet listing service time deposits and national market brokered CD’s. Internet listing sourced deposits increased $35.0 million in the first quarter of 2009, while national brokered CD’s decreased $5.2 million. In addition, local, relationship based reciprocal CDARs deposits increased $2.4 million to $17.7 million at March 31, 2009. Total brokered deposits (national brokered CD’s, CDARs deposits and money market accounts defined as brokered deposits) were $203.4 million at March 31, 2009 compared with $209.5 million at December 31, 2008.

The Bank is currently limited in its deposit pricing under FDIC Rules and Regulations. The Bank has historically been able to replace maturing deposits as necessary, however, the Bank may not be able to replace brokered CD’s or other volatile sources of funds as determined by the FDIC in the future if, among other things, the Bank’s results of operations, financial condition or capital ratings were to change.

The Bank has overnight federal funds borrowing lines with correspondent banks that provide access to an additional $20.0 million for short-term liquidity needs. The Bank also has an established borrowing line with the Federal Home Loan Bank (the “FHLB”) that permits it to borrow up to 20 percent of the Bank’s assets, subject to collateral limitations. The line is available for overnight federal funds, or notes with other terms and maturities. With the collateral available on March 31, 2009, the Company believes the Bank could borrow up to approximately $119 million. FHLB borrowings in excess of $26.4 million would require the Company to purchase additional FHLB stock. At March 31, 2009, the Company had no overnight federal funds borrowings with FHLB. The Bank also has access to additional liquidity through the Federal Reserve’s collateralized primary credit program.

As disclosed in the accompanying Consolidated Statements of Cash Flows, net cash flows from (used by) operations in the first quarters of 2009 and 2008 were ($1.2 million) and $1.5 million, respectively. The net cash used by operations in the first quarter of 2009 was primarily due to the net loss for the quarter. The net cash flow from operations in the same quarter of 2008 was primarily from earnings. Net cash flows from investing activities of $12.6 million in the first quarter of 2009 was primarily from proceeds of maturities of investment securities and sales of foreclosed assets and an interest rate swap. Net cash used by investment activities in the first quarter of 2008 related primarily to the increase in loans during the period. Cash from financing activities in the first three months of 2009 and 2008 was primarily provided by net deposit growth.

Capital Resources

Capital Ratios

The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory or discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the 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. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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As of March 31, 2009, the Company had one 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) in 2005. 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 interest on these debentures may be deferred at the sole determination of the issuer. Under such circumstances, the Company would continue to accrue interest but not make payments. These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. Federal Reserve guidelines limit inclusion of trust-preferred securities and certain other preferred capital elements to 25 percent of core capital elements. As of March 31, 2009, trust preferred securities accounted for 23 percent of the Company’s core capital elements. There can be no assurance that the Federal Reserve Board will not further limit the amount of trust preferred securities permitted to be included in Tier 1 capital for regulatory capital purposes.

The following table presents selected capital information for the Company and the Bank as of March 31, 2009 and December 31, 2008:

	Actual				For Capital Adequacy Purposes				To Be Well-Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2009
Total risk-based capital:
Consolidated	$	50,986	10.97	%	$	37,185	³8.00	%		N/A	N/A
Bank	$	49,376	10.64	%	$	37,140	³8.00	%	$	46,424	³10.00	%
Tier 1 risk-based capital:
Consolidated	$	45,140	9.71	%	$	18,592	³4.00	%		N/A	N/A
Bank	$	43,536	9.38	%	$	18,570	³4.00	%	$	27,855	³6.00	%
Tier 1 (leverage) capital:
Consolidated	$	45,140	7.81	%	$	23,115	³4.00	%		N/A	N/A
Bank	$	43,536	7.54	%	$	23,107	³4.00	%	$	28,884	³5.00	%
December 31, 2008
Total risk-based capital:
Consolidated	$	54,637	11.47	%	$	38,118	³8.00	%		N/A	N/A
Bank	$	52,819	11.10	%	$	38,076	³8.00	%	$	47,595	³10.00	%
Tier 1 risk-based capital:
Consolidated	$	48,582	10.20	%	$	19,059	³4.00	%		N/A	N/A
Bank	$	46,770	9.83	%	$	19,038	³4.00	%	$	28,557	³6.00	%
Tier 1 (leverage) capital:
Consolidated	$	48,582	8.74	%	$	22,240	³4.00	%		N/A	N/A
Bank	$	46,770	8.41	%	$	22,243	³4.00	%	$	27,804	³5.00	%

Quantitative measures established by regulation to ensure capital adequacy require the Company and the 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). As of March 31, 2009 and December 31, 2008, the Company and the Bank exceeded all relevant capital adequacy requirements.

During the fourth quarter of 2008, the holding company invested $1.0 million in the Bank, using available cash balances. The holding company has approximately $1.6 million of available cash at March 31, 2009, and continues to analyze all of its capital management options.

Stock Repurchase Program

In September, 2007, the Company announced a stock repurchase program for up to 500,000 shares. As of March 31, 2009, the Company has not repurchased any of its shares of common stock.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Bank’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 Bank’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 is dependent upon on the maturities of the assets and liabilities. The Bank’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Bank’s net interest income and capital, while structuring the Bank’s asset/liability position to obtain the maximum yield-cost spread on that structure. Such structuring includes the use of interest rate derivative contracts. Interest rate risk is managed through the monitoring of the Bank’s gap position and sensitivity to interest rate risk by subjecting the Bank’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 Bank’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. The Company’s assessment of market risk as of March 31, 2009 indicates there were no material changes in the quantitative and qualitative disclosures from those made in “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of the Annual Report on Form 10-K for the year end December 31, 2008.

Item 4T. Controls and Procedures

As of the end of the period covered by this report, the Company carried out evaluations, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934. Based upon that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that the existing disclosure controls and procedures are effective in timely alerting them to material information relating to the Company that is required to be included in its periodic SEC filings.

There have been no changes in our internal controls or in other factors that have materially affected or are likely to materially affect our internal controls over financial reporting subsequent to the date of the evaluation.

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 1A. Risk Factors

Except as noted below, there were no material changes to the risk factors set forth in the Company’s Form 10-K for the year ended December 31, 2008.

Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.

Liquidity is crucial to the operation of the Company and the Bank. Liquidity risk is the potential that we will be unable to fund increases in assets or meet payment obligations, including obligations to depositors, as they become due because of an inability to obtain adequate funding or liquidate assets. For example, funding illiquidity may arise if we are unable to attract core deposits or are unable to renew at acceptable pricing long-term borrowings or short-term borrowings from the overnight inter-bank market, the Federal Home Loan Bank System, brokered deposits, or the Federal Reserve discount window. Illiquidity may also arise if our regulatory capital levels decrease or capital ratings were to change, our lenders require additional collateral to secure our repayment obligations, or a large amount of our deposits are withdrawn. Our access to brokered deposits may be significantly limited if our capital rating decreases. In addition, the Washington Public Deposit Protection Commission required 100 percent collateral to pledge against public deposits held at the Bank by June 30, 2009. This action has the net effect of reducing total secured borrowing capacity. As with many community banks, correspondent banks have withdrawn or reduced unsecured lines of credit or now require collateralization for the purchases of federal funds in a short-term basis due to the current adverse economic environment.

24

We may also experience illiquidity due to unexpected cash outflows on committed lines of credit or financial guarantees or due to unexpected events. The increasingly competitive retail deposit environment increases liquidity risk (and increases our cost of funds) as increasingly sophisticated depositors move funds more frequently in search of higher rates or better opportunities. The Company’s liquidity may be negatively impacted by regulatory or statutory restrictions on payment of cash dividends by the Bank. We monitor our liquidity risk and seek to avoid over concentration of funding sources and to establish and maintain back-up funding facilities that we can draw down if formal funding sources become unavailable. If we fail to control our liquidity risks, there may be materially adverse effects on our results of operations and financial condition.

The Company’s future growth is dependent on raising capital and regulatory approval.

We are seeking additional capital to bolster capital and liquidity levels to provide for future growth. We may not be able to obtain any equity financing on terms favorable to existing shareholders or even acceptable to the Company.

The Bank must obtain regulatory approval to substantially grow assets or materially change its balance sheet structure, including increasing brokered deposits or volatile funding. Obtaining regulatory approval to grow assets is highly dependent on the Bank obtaining additional equity. If we are unable to obtain regulatory approval to grow the Bank’s balance sheet, we would be precluded from making acquisitions or executing other growth initiatives to improve the Bank’s financial condition and results of operations.

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

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

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

3.1	Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed June 9, 2005
3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Form 10-K filed March 31, 2009
10.1	Form of Indemnification Agreement for directors.*
10.2	Form of Indemnification Agreement for officers.*
31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer
32	Certification of Chief Executive Officer and Chief Financial Officer

* Indicates a management contract or compensatory plan, contract or arrangement.

25

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: May 15, 2009

Cowlitz Bancorporation

(Registrant)

By: 

/s/ Richard J. Fitzpatrick

Richard J. Fitzpatrick, President and Chief Executive Officer

/s/ Gerald L. Brickey

Gerald L. Brickey, Vice-President and Chief Financial Officer

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