U.S. SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

[X] Quarterly report Pursuant to section 13 or 15(d) of the
Securities and Exchange act of 1934

For the quarter ended September 30, 2001

[_] 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 91-152984
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

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

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

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

Yes [X] No [_]

Indicate 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 October 31, 2001: 3,692,560 shares

TABLE OF CONTENTS

Page
Part I
Financial Statements

Consolidated Statements of Condition -
September 30, 2001 and December 31, 2000 3

Consolidated Statements of Income -
Three and nine months ended September 30, 2001 and September 30, 2000 4

Consolidated Statements of Changes in Shareholders' Equity
Year ended December 31, 2000 and nine months ended September 30, 2001 5

Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 and September 30, 2000 6

Notes to Consolidated Financial Statements 7

Management's Discussion and Analysis of Financial Condition
And Results of Operations 13

Part II

Other

Other information 26

Exhibits and Reports on Form 8-K 26

Signatures 27

COWLITZ BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(in thousand of dollars, except number of shares)

September 30, December 31,
2001 2000
(unaudited)

ASSETS
Cash and due from banks........................................... $ 54,058 $ 25,589
Investment securities:
Investments available-for-sale (at fair value, cost of $14,724
and $7,441 at September 30, 2001 and December 31, 2000,
respectively)................................................ 14,932 7,499
Investments held-to-maturity (at amortized cost, fair value of
$3,865 and $4,569 at September 30, 2001 and December 31, 2000,
respectively)................................................ 3,813 4,572
--------- ---------
Total investment securities.................................. 18,745 12,071
--------- ---------

Federal Home Loan Bank stock...................................... 3,469 3,302

Loans held for sale............................................... 50,080 10,013

Loans............................................................. 239,633 233,639
Allowance for loan losses......................................... (5,286) (4,561)
--------- ---------
Loans, net..................................................... 234,347 229,078
--------- ---------
Premises and equipment, net of accumulated depreciation of $3,827
and $3,238 at September 30, 2001 and December 31, 2000,
respectively................................................... 5,416 5,625
Other real estate owned........................................... 3,146 1,247
Intangible assets, net of accumulated amortization of $1,878 and
$1,435 at September 30, 2001 and December 31, 2000, respectively 4,908 5,352
Other assets...................................................... 4,252 4,621
--------- ---------
Total assets................................................. $ 378,421 $ 296,898
========= =========

LIABILITIES
Deposits:
Demand......................................................... $ 44,156 $ 40,201
Savings and interest-bearing demand............................ 95,920 73,770
Certificates of deposit........................................ 180,170 127,245
--------- ---------
Total deposits............................................... 320,246 241,216
Short-term borrowings............................................. 5,625 1,275
Long-term borrowings.............................................. 19,083 21,348
Accrued interest payable and other liabilities.................... 3,224 2,650
--------- ---------
Total liabilities............................................ $ 348,178 $266,489
--------- ---------

SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 and no shares authorized
as of September 30, 2001 and December 31, 2000, respectively;
outstanding at September 30, 2001 and
no shares issued andDecember 31, 2000, respectively............ $ - $ -
Common stock, no par value; 25,000,000 authorized as of
September 30, 2001 and December 31, 2000, respectively;
3,692,150 and 3,689,327 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively......... 16,800 16,785
Additional paid in capital........................................ 1,538 1,538
Retained earnings................................................. 11,769 12,048
Accumulated other comprehensive income(loss)...................... 136 38
--------- ---------
Total shareholders' equity................................... 30,243 30,409
--------- ---------
Total liabilities and shareholders' equity................... $ 378,421 $ 296,898
========= =========

The accompanying notes are an integral part of these statements.

COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousand of dollars, except number of shares and per share amounts)

Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- -------- ---------
(unaudited)

INTEREST INCOME
Interest and fees on loans.............................. $ 6,299 $ 6,094 $ 18,986 $ 15,099
Interest on taxable investment securities............... 292 232 752 630
Interest on non-taxable investment securities........... 2 2 6 6
Interest from other banks............................... 392 266 897 467
------- ------- -------- --------
Total interest income................................. 6,985 6,594 20,641 16,202
------- ------- -------- --------

INTEREST EXPENSE
Savings and interest-bearing demand..................... 718 613 2,094 1,527
Certificates of deposit................................. 2,485 2,000 7,187 4,018
Short-term borrowings................................... 31 18 94 80
Long-term borrowings.................................... 306 368 1,007 1,179
------- ------- -------- --------
Total interest expense................................ 3,540 2,999 10,382 6,804
------- ------- -------- --------
Net interest income before provision for loan losses.. 3,445 3,595 10,259 9,398

PROVISION FOR LOAN LOSSES.................................. (2,125) (214) (2,732) (955)
------- ------- -------- ---------
Net interest income after provision for loan losses..... 1,320 3,381 7,527 8,443
------- ------- -------- --------

NON-INTEREST INCOME
Service charges on deposit accounts..................... 187 189 560 533
Gains on loans sold..................................... 1,047 553 3,076 998
Escrow fees............................................. 184 100 574 245
Fiduciary income........................................ 74 64 194 209
Credit card income...................................... 119 95 397 285
Brokerage fees.......................................... 565 388 1,509 1,128
Other income............................................ (438) 35 (356) 135
Net gains on sales of available-for-sale securities..... 52 1 89 7
------- ------- -------- --------
Total non-interest income............................. 1,790 1,425 6,043 3,540
------- ------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits.......................... 2,306 2,268 6,902 6,453
Net occupancy and equipment expense..................... 609 603 1,831 1,538
Business tax expense.................................... 161 111 445 298
Amortization of intangibles............................. 148 145 443 408
Other operating expense................................. 1,295 1,140 3,862 2,680
--------- --------- -------- --------
Total non-interest expense............................ 4,519 4,267 13,483 11,377
--------- --------- -------- --------
Income before income tax expense...................... (1,409) 539 87 606

INCOME TAX EXPENSE......................................... (457) 203 166 242
---------- --------- -------- --------
Net income............................................ $ (952) $ 336 $ (79) $ 364
========== ========= ========= ========

BASIC EARNINGS PER SHARE................................... $ (0.26) $ 0.09 $ (0.02) $ 0.09
DILUTED EARNINGS PER SHARE................................. $ (0.25) $ 0.09 $ (0.02) $ 0.09

The accompanying notes are an integral part of these statements.

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

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

BALANCE AT DECEMBER 31, 1999 4,022,052 $ 18,530 $ 1,538 $ 11,460 $ (38) $ 31,490
Comprehensive Income:
Net income.............................. - - - 869 - 869 $ 869
Net change in unrealized gains on
investments available-for-sale,
net of deferred taxes of $38........ - - - - 76 76 76
--------
Comprehensive Income.................... - - - - - - $ 945
========
Issuance of common stock for cash....... 8,207 39 - - - 39
Purchase of treasury stock.............. (340,932) (1,784) - - - (1,784)
Cash dividends paid ($.07 per share).... - - - (281) - (281)
--------- -------- ------ -------- ------ ---------

BALANCE AT DECEMBER 31, 2000 3,689,327 16,785 1,538 12,048 38 30,409
Comprehensive Income:
Net income.............................. - - - (79) - (79) $ (79)
Net change in unrealized gains on
investments available-for-sale,net
of deferred taxes of $57............. - - - - 98 98 98
--------
Comprehensive Income/(Loss)............. - - - - - - $ 19
========
Issuance of common stock for cash....... 2,823 15 - - - 15
Cash dividends paid ($.054 per share) - - - (200) - (200)
--------- -------- ------ -------- ------ ---------

BALANCE AT SEPTEMBER 30, 2001 ............ 3,692,150 $ 16,800 $ 1,538 $ 11,769 $ 136 $ 30,243
========= ======== ======== ========= ====== =========

The accompanying notes are an integral part of these statements.

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

Nine months ended
September 30,
2001 2000
--------- ---------

(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................. $ (79) $ 364
Adjustments to reconcile net income (loss) to net cash provided by
Operating activities:
Depreciation and amortization................................... 1,057 958
Provision for loan losses....................................... 2,622 954
Net losses (gains) on sales of investments available-for-sale... (52) (7)
Net amortization of investment security premiums and accretion
of discounts.................................................. (7) (2)
Net losses (gains) on sales of foreclosed assets................ 479 (17)
(Gains) on loans sold........................................... (2,633) (713)
Origination of loans held for sale.............................. (326,545) (95,738)
Proceeds of loans sales......................................... 289,111 87,235
(Increase) in other assets...................................... (3,220) (756)
Increase (decrease) in other liabilities........................ 574 1,024
Federal Home Loan Bank stock dividends.......................... (167) (156)
--------- ---------
Net cash provided by (used in) operating activities........... (38,860) (6,854)
--------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
held-to-maturity................................................ 8,865 4,365
available-for-sale.............................................. 10,318 4,694
Proceeds from sales of foreclosed assets.......................... 1,246 424
Purchases of investment securities:
Held-to-maturity................................................ (8,099) (4,369)
Available-for-sale.............................................. (17,635) -
Net (increase) decrease in loans.................................. (7,891) (48,089)
Purchases of premises and equipment............................... (405) (207)
Net cash received (paid) in acquisition of business............... - 3,296
--------- ---------
Net cash (used in) provided by investment activities.......... (13,601) (39,886)
--------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings, and interest bearing
demand deposits................................................. 26,105 13,274
Net increase (decrease) in certificates of deposit................ 52,925 50,253
Dividends paid.................................................... (199) (215)
Net increase (decrease) in short-term borrowings.................. 4,350 (2,625)
Proceeds of long-term borrowings.................................. - 11,000
Repayment of long-term borrowings................................. (2,265) (16,887)
Repurchase of common stock........................................ - (1,102)
Issuance of common stock for cash, net of amount paid for ........
fractional shares............................................. 14 39
--------- ---------
Net cash provided by financing activities..................... 80,930 53,737
--------- ---------
Net increase (decrease) in cash and due from banks............ 28,469 6,997

CASH AND DUE FROM BANKS AT BEGINNING OF YEAR......................... 25,589 19,054
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD............................. $ 54,058 $ 26,051
========= =========

The accompanying notes are an integral part of these statements.

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

1. Nature of Operations

Cowlitz Bancorporation (the Company) is a holding company located in
southwest Washington. The Company's principal subsidiary, Cowlitz Bank (the
Bank), a Washington state-chartered commercial bank, is the largest community
bank headquartered in Cowlitz County and offers commercial banking services
primarily to small and medium-sized businesses, professionals, and retail
customers. The Company acquired Business Finance Corporation (BFC) of Bellevue,
Washington during the third quarter of 1998. BFC provides asset based financing
to companies throughout the Western United States. During 1999 and 2000, the
Company acquired or opened several mortgage and escrow branches. Bay Mortgage
and Bay Escrow of Bellevue, Washington, Bay Mortgage and Bay Escrow of Seattle,
Washington, Bay Mortgage of Silverdale, Washington, and Bay Mortgage of
Vancouver, Washington (collectively "Bay Mortgage") have joined together as a
division of Cowlitz Bank. Bay Mortgage serves customers throughout the greater
Bellevue/Seattle market area, and through the Vancouver office, the greater
Portland, Oregon market. The Bank also expanded its commercial banking
activities in the Seattle/Bellevue area with the September 1999 opening of a
branch in Bellevue, Washington, which is doing business as Bay Bank. In
mid-2000, the Company acquired Northern Bank of Commerce (NBOC) of Portland,
Oregon, which operates as a branch of the Bank doing business as Northern Bank
of Commerce. NBOC operates its main office in downtown Portland, and has twelve
limited service branches located within retirement centers in the Portland
metropolitan area.

Certain reclassifications have been made to prior period classifications of
interest income, non-interest income, and non-interest expenses relating to
gains on loans sold in order to conform with the current period presentation.
These reclassifications have no effect on the Company's previously reported
financial position, results of operations, or earnings per share.

2. Principles of Consolidation

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

The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, including normal recurring accruals
necessary for fair presentation of results of operations for the interim periods
included herein have been made. The results of operations for the nine months
ended September 30, 2001 are not necessarily indicative of results to be
anticipated for the year ending December 31, 2001.

3. Supplemental Cash Flow Information

For purposes of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts in the balance sheet caption "Cash and
due from banks" and include cash on hand, amounts due from banks and federal
funds sold. Federal funds sold generally mature the day following purchase.

4. Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

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

5. Earnings Per Share

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

Weighted Per Share
Net Income Avg. Shares Amount

For the three months ended September 30, 2001

Basic earnings per share $ (952) 3,692,137 $(.26)
Stock Options 49,896
Diluted earnings per share $ (952) 3,742,033 $(.25)

For the three months ended September 30, 2000

Basic earnings per share $ 336 3,825,364 $ .09
Stock Options -
Diluted earnings per share $ 336 3,825,364 $ .09

For the nine months ended September 30, 2001

Basic earnings per share $ (79) 3,691,459 $(.02)
Stock Options 38,431
Diluted earnings per share $ (79) 3,729,890 $(.02)

For the nine months ended September 30, 2000

Basic earnings per share $ 364 3,912,674 $ .09
Stock Options -
Diluted earnings per share $ 364 3,912,674 $ .09

Options to purchase 539,466 shares of common stock at an average price of
$8.55 were outstanding at September 30, 2001 but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares. These options
expire from 2007-2009.

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

6. Recently Issued Accounting Standards

SFAS No. 133 and SFAS No. 137

SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is now effective for the Company, beginning in the quarter ended
March 31, 2001. The Statement establishes accounting and reporting standards
requiring that derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded in the statement of condition as either
an asset or a liability measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gain and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.

In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," an amendment of SFAS No.
133. This statement amends a limited number of issues causing implementation
difficulties, and is effective for all fiscal quarters and all fiscal years
beginning after June 15, 2001.

During 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities - a replacement
of FASB Statement No. 125," effective for transfers and extinguishments
occurring after March 31, 2001.

The implementation of these Statements is not expected to have a material
impact on the Company's financial position or results of operation.

SFAS No. 141 and SFAS No. 142

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.

The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement is expected to result in an
increase in net income of $325,000 ($.09 per share) per year. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.

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

7. Comprehensive Income

For the Company, comprehensive income includes net income reported on the
statements of income and changes in the fair value of its available-for-sale
investments reported as a component of shareholders' equity.

The components of comprehensive income/(loss) for the periods ended
September 30, 2001 and 2000 are as follows:

Three months ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
----- ---- ---- ----

Unrealized gain (loss) arising during
the period, net of tax .................... $ 170 $ 21 $ 157 $ 32
Reclassification adjustment for net
realized gains (losses) on
securities available-for-sale
included in net income during the
year, net of tax .................... 16 7 59 8
------ ----- ----- ----
Comprehensive income/(loss)..................... $ 154 $ 14 $ 98 $ 24
====== ====== ===== ====

8. Segments of an Enterprise and Related Information:

The Company is principally engaged in community banking activities through
its branches and corporate offices. The community banking activities include
accepting deposits, providing loans and lines of credit to local individuals,
businesses and governmental entities, investing in investment securities and
money market instruments, and holding or managing assets in a fiduciary agency
capacity on behalf of its customers and their beneficiaries. The Company
provides asset based financing to companies throughout the western United States
through its BFC subsidiary. Bay Mortgage specializes in all facets of
residential lending including FHA and VA loans, construction loans and bridge
loans.

The community banking, asset based financing activity, and mortgage-banking
activities are monitored and reported by Company management as separate
operating segments. The seven separate banking offices and twelve retirement
center branches have been aggregated into a single reportable segment, Community
Banking and Bay Mortgage is included as a segment. The asset based financing
segment does not meet the prescribed aggregation or materiality criteria and
therefore is reported as "Other" in the following table below.

The accounting policies for the Company's segment information provided
below are the same as those described for the Company in the summary of
significant accounting policies footnote included in the Company's 2000 annual
report, except that some operating expenses are not allocated to segments.

Summarized financial information for the periods ended September 30, 2001 and
2000 concerning the Company's reportable segments is shown in the following
tables.

Three months ended September 30, 2001
Mortgage Holding
Banking Banking Company Other Intersegment Consolidated
---------- --------- ---------- --------- ------------ -------------

Interest income............... $ 6,353 $ 1,270 $ 11 $ 258 $ (907) $ 6,985
Interest expense.............. 3,489 831 62 65 (907) 3,540
-------- ------- ------ ------ ------- ---------
Net interest income ....... 2,864 439 (51) 193 - 3,445
Provision for loan loss ...... 2,012 83 - 30 - 2,125
Non-interest income........... 6 1,828 30 - (74) 1,790
Non-interest expense.......... 2,695 1,598 143 157 (74) 4,519
-------- ------- ------ ------ -------- ---------
Income/(loss) before
tax........................ (1,837) 586 (164) 6 - (1,409)
Provision/(benefit) for
income taxes.............. (611) 200 (57) 11 - (457)
--------- ------- ------ ------ ------- ----------
Net income/(loss)............. $ (1,226) $ 386 $ (107) $ (5) $ - $ (952)
========= ======= ====== ======= ======= ==========

Three months ended September 30, 2000

Mortgage Holding
Banking Banking Company Other Intersegment Consolidated
---------- ------- ------- --------- ------------ ------------

Interest income............... $ 6,052 $ 361 $ 80 $ 386 $ (285) $ 6,594
Interest expense.............. 3,024 158 - 102 (285) 2,999
-------- ------- ------ ------- ------- --------
Net interest income ....... 3,028 203 80 284 - 3,595
Provision for loan loss ...... 161 - - 53 - 214
Non-interest income........... 539 893 - - (7) 1,425
Non-interest expense.......... 3,267 623 202 182 (7) 4,267
-------- ------- ------ ------- -------- --------
Income/(loss) before
tax........................ 139 473 (122) 49 - 539
Provision/(benefit) for
income taxes.............. 47 161 (36) 31 - 203
-------- ------- ------ ------- ------- --------
Net income/(loss)............. $ 92 $ 312 $ (86) $ 18 $ - $ 336
======== ======= ====== ======= ======= ========

Nine months ended September 30, 2001

Mortgage Holding
Banking Banking Company Other Intersegment Consolidated
---------- ------- ------- --------- ------------ ------------

Interest income....... ....... $ 18,826 $ 3,182 $ 75 $ 901 $ (2,343) $ 20,641
Interest expense...... ....... 10,272 2,068 185 200 (2,343) 10,382
-------- -------- ------- ------ --------- --------
Net interest income ....... 8,554 1,114 (110) 701 - 10,259
Provision for loan loss 2,433 189 - 110 - 2,732
Non-interest income... 1,002 5,229 30 - (218) 6,043
Non-interest expense.. 7,912 4,605 631 553 (218) 13,483
-------- -------- ------- ------ ---------- --------
Income/(loss) before
tax................ (789) 1,549 (711) 38 - 87
Provision/(benefit) for
income taxes...... (238) 527 (162) 39 - 166
--------- -------- ------- ------ --------- --------
Net income/(loss)..... $ (551) $ 1,022 $ (549) $ (1) $ - $ (79)
========= ======== ======= ======= ========= =========

Nine months ended September 30, 2000

Mortgage Holding
Banking Banking Company Other Intersegment Consolidated
---------- ------- ------- --------- ------------ ------------

Interest income....... $ 15,126 $ 519 $ 338 $1,173 $ (954) $ 16,202
Interest expense...... 6,957 475 - 326 (954) 6,804
-------- ------- ------- ------ --------- --------
Net interest income 8,169 44 338 847 - 9,398
Provision for loan loss 850 - (8) 113 - 955
Non-interest income... 1,534 2,078 - - (72) 3,540
Non-interest expense.. 7,923 2,364 605 557 (72) 11,377
-------- ------- ------- ------ ---------- --------
Income/(loss) before
tax................ 930 (242) (259) 177 - 606
Provision/(benefit) for
income taxes...... 316 (82) (78) 86 - 242
-------- -------- ------- ------ --------- --------
Net income/(loss)..... $ 614 $ (160) $ (181) $ 91 $ - $ 364
======== ======== ======= ====== ========= ========

9. Subsequent Events: None

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULT OF OPERATIONS

The following Management's Discussion and Analysis of Financial Conditions
and Results of Operations includes a discussion of certain significant business
trends and uncertainties, as well as certain forward-looking statements, and is
intended to be read in conjunction with, and is qualified in its entirety by,
reference to the consolidated financial statements of the Company and
accompanying notes included elsewhere herein.

Results of Operations

For all periods reported, the Company has reclassified certain income and
expense items relating to the loans funded or processed by Bay Mortgage in order
to conform with changes in the current period presentation. Fees collected on
loans brokered, but not funded, by Bay Mortgage to outside lenders had been
recorded as interest income but are now reclassified as non-interest income.
Similarly, loan origination fees previously reported as interest income have
been reclassified according to the following discussion. Loan origination fees,
net of certain direct origination costs, are deferred and amortized as an
adjustment of the yield on the related loan using the interest method. Such net
deferred loan origination fees are recognized when the related loans are
subsequently sold or repaid. Gain or loss on the sale of loans is measured as
the difference between the net carrying value of the loan and the proceeds from
the sale. These reclassifications have no effect on the Company's previously
reported financial position, results of operations, or earnings per share.

Three months ended September 30, 2001 and 2000

During the third quarter of 2001 the Company recorded a net loss of
$952,000, or $0.25 per diluted share, compared to net income of $336,000, or
$.09 per diluted share, in the third quarter of 2000. The primary factor
contributing to the third quarter 2001 loss was the recognition of approximately
$2.1 million ($1.4 million after tax) in provision for loan losses during the
quarter. Net income prior to the provision for loan losses was $448,000, or $.12
per diluted share. Management's decision to bolster the Company's loan loss
reserves was in response to the overall downturn in the economy and the
deterioration of the Company's existing loan portfolio. This action, in
conjunction with the reduction of executive salaries by approximately 30%,
suspension of quarterly dividends, and other cost saving measures, is expected
to strengthen the Company's financial position and help it succeed in the
current uncertain economic environment. For the third quarter of 2001, the
Company's revenues (net interest income before provision for loan losses plus
non-interest income) were $5.2 million, an increase of 4.0% above the revenues
of $5.0 million during the same period in 2000. Increased activity in the
mortgage lending segment has kept revenues steady in the third quarter of 2001
compared to the third quarter of 2000, offsetting the lower commercial banking
revenues due to the reductions in interest rates in 2001. Non-interest expenses
have increased modestly by 4.7% under the same comparison, from $4.3 to $4.5
million.

Nine months ended September 30, 2001 and 2000

For the nine months ended September 30, 2001, the Company had a net loss of
$79,000 or $0.02 per diluted share, compared to net income for the same period
of 2000 of $364,000 or $0.09 per diluted share. The primary factor contributing
to the 2001 year to date loss was the recognition of approximately $2.1 million
($1.4 million after tax) in provision for loan losses during the third quarter
of 2001. Net income for the nine months ended September 30, 2001, prior to the
provision for loan losses recorded in the third quarter, was $1.3 million, or
$.35 per diluted share. Bay Mortgage, which continues to experience a high
volume of loans with the relatively low current interest rates, had net income
of $1.0 million for the nine months ended September 30, 2001 compared to a loss
of $160,000 for the same period of 2000. The one time severance charge of
$540,000 recorded in the first quarter of 2000 suppressed income for the nine
months ended September 30, 2000.

For the first nine months of 2001, the Company's revenues (net interest
income before provision for loan losses plus non-interest income) were $16.3
million, an increase of 26.4% above the revenues of $12.9 million during the
same period in 2000. Non-interest expenses have increased by 18.4% under the
same comparison, from $11.4 to $13.5 million. NBOC was acquired in the third
quarter of 2000, so the effect of its operations on income and expenses is part
of the reason 2001 is higher than 2000. The higher activity at Bay Mortgage also
contributed to higher revenues and expenses, offsetting the decrease in net
interest income from the commercial banking segment in 2001 when compared to
2000.

At September 30, 2001, total assets were $378.4 million and total
liabilities were $348.2 million. Assets increased $81.5 million or 27.5% from
$296.9 million at December 31, 2000 and liabilities increased $81.7 million or
30.7% from $266.5 million at December 31, 2000.

The asset growth is explained by a significant increase in the volume of
mortgage loans booked by Bay Mortgage in the first nine months of 2001 and the
continued growth of Bay Bank in 2001. Loans held for sale, which account for
49.1% of the asset growth, increased $40.1 million during the first nine months
of 2001 and assets at Bay Bank are $19.7 million higher than at December 31,
2000. With the reductions in interest rates by the Federal Reserve during 2001,
Bay Mortgage has experienced increased volumes of mortgage, re-financing,
construction, and bridge loans as consumers take advantage of the relatively low
current interest rates. The increased mortgage activity has resulted in
additional non-interest income in the form of escrow fees, brokerage fees and
gains on mortgage loans sold, as well as interest income on the loans funded by
Bay Mortgage for the 15 to 45 days prior to sale to the secondary market. The
number of full-time equivalent employees (both commissioned loan officers, and
salaried processors) at Bay Mortgage has increased to 88 employees at September
30, 2001 compared to 64 at December 31, 2000 to facilitate the processing of
additional loans generated in the current market environment. Cash and due from
banks has also increased significantly since December 31, 2000 from $25.6
million to $54.1 million at September 30, 2001. The cash is available to fund
potential additional increases in mortgage loans held for sale, as discussed
below, and to provide for the Company's liquidity needs. A portion of the cash
raised has been used to increase the Company's investments in available-for-sale
securities to $14.9 million at September 30, 2001 from $7.5 million at December
31, 2000. These investments are typically short term, with a current average
life of 1.4 years, and are purchased to earn a better return on investment than
the current fed funds rate.

The increase in liabilities, specifically deposits, from the year ended
December 31, 2000 comes from the need to fund the mortgage loans held for sale
generated at Bay Mortgage, and to provide increased liquidity for the Company.
The Company has raised an additional $79.0 million in deposit liabilities in the
first nine months of 2001 for these purposes, but did not pay a premium on the
funds. The additional deposits are necessary to fund the loans for the short
time they are on Bay Mortgage's books before they are sold to the secondary
market. The holding period on these loans held for sale is typically 15 to 45
days.

Analysis of Net Interest Income

For financial institutions, a primary component of earnings is net interest
income. Net interest income is the difference between interest income,
principally from loans and the investment securities portfolio, and interest
expense, principally on customer deposits and borrowings. Changes in net
interest income result from changes in "volume," "spread," and "margin." Volume
refers to the dollar level of interest-earning assets and interest-bearing
liabilities. Spread refers to the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities. Net
interest margin is the ratio of net interest income to total interest-earning
assets and is influenced by the level and relative mix of interest-earning
assets and interest-bearing liabilities.

Three months ended September 30, 2001 and 2000

The following table presents information regarding yields and interest
earning assets, expense on interest bearing liabilities, and net yields on
interest earning assets for periods indicated on a tax equivalent basis.

Three Months Ended
(unaudited) September 30, Increase
(in thousands of dollars) 2001 2000 (Decrease Change
-------- --------- --------- ------

Interest income (1)...................... $ 6,986 $ 6,595 $ 391 5.9%
Interest expense......................... 3,540 2,999 541 18.0%
-------- --------- --------
Net interest income...................... $ 3,446 $ 3,596 $ (150) (4.2)%
======== ========= ========

Average interest earning assets.......... $349,881 $ 272,022 77,859 28.6%
Average interest bearing liabilities $298,931 $ 220,133 78,798 35.8%

Average yields earned (2)................ 7.99% 9.70% (1.71)
Average rates paid (2)................... 4.74% 5.45% (.71)
Net interest spread (2).................. 3.25% 4.25% (1.00)
Net interest margin (2).................. 3.94% 5.29% (1.35)

(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.

(2) Ratios for the three months ended September 30, 2001 and 2000 have been
annualized.

Net interest income for the quarter ended September 30, 2001 was $3.4
million, which was a decrease of 5.6% from $3.6 million for the same period of
2000. Both interest income and interest expenses were higher for the three
months ended September 30, 2001 when compared with the three months ended
September 30, 2000, however, interest expenses increased more than interest
income causing the decline in net interest income.

Interest income increased $400,000 or 5.9% to $7.0 million for the quarter
ended September 30, 2001 from $6.6 million for the same period of 2000. The
overall tax-equivalent earning asset yield dropped to 7.99% for the quarter
ended September 30, 2001 compared to 9.70% for the quarter ended September 30,
2000. Earning assets averaged $349.9 million for the three months ended
September 30, 2001 compared to $272.0 million for the same period of 2000, an
increase of $77.9 million, or 28.6%. Interest income is higher for the third
quarter of 2001 when compared to the third quarter of 2000 due to the increase
in volume of average interest earning assets. Loan growth at Bay Bank, increased
mortgage lending, purchase of available for sale securities, and a higher volume
of interest bearing cash due from banks account for the increase. Bay Mortgage's
loans held for sale generate interest income for the 15-45 day holding period
from the time the loans are funded, until they are sold to the secondary market.
Loans held for sale averaged approximately $42.7 million and $9.3 million for
the third quarters of 2001 and 2000, respectively.

Interest expense was $3.5 million for the three months ended September 30,
2001, an increase of $500,000 or 18.0% compared to $3.0 million for the same
period of 2000. The average cost of interest bearing liabilities decreased to
4.74% for the quarter ended September 30, 2001 from 5.45% for the same period of
2000. Average interest bearing liabilities increased $78.9 million from $220.1
million for the three months ended September 30, 2000 to $298.9 million for the
three months ended September 30, 2001. Deposit growth is primarily due to growth
at Bay Bank and increased balances in CD's which are used to increase liquidity
and to fund the short-term loans

held for sale generated by Bay Mortgage. These loans are booked with a
commitment to be sold into the secondary market, but there is typically a 15-45
day holding period before the sale is finalized.

Decreases in national interest rates during 2001 have been the major
contributors toward the decline in both the average yields earned on interest
earning assets, and the average cost of interest bearing liabilities from the
third quarter 2000 to the third quarter of 2001. These rate decreases have also
contributed to the smaller interest rate spread of 3.25% for the three months
ended September 30, 2001 when compared to 4.25% for the same period of 2000.
Prime based loans re-price immediately when the prime rate is adjusted, but
fixed rate liabilities, particularly CD's, do not immediately adjust with prime
changes, so do not re-price until the CD matures and is replaced at the lower
rates. The Company's current mix of loans includes approximately 60% fixed rate
loans, and 40% that re-price to prime. The falling rate environment experienced
in the first nine months of 2001 causes yields on assets to decline more rapidly
than the liability costs, narrowing the interest spread. Increased volumes of
average interest earning assets and average interest bearing liabilities have
offset the decline in rates earned and paid, resulting in the increase in both
interest income and interest expense for the third quarter 2001 when compared to
the third quarter of 2000. The decline in interest margin between the two
periods is due to the mix of interest earning assets, and interest bearing
liabilities. Higher yielding fixed rate commercial loans made up a lower
percentage of the total interest earning assets with the increase in volume of
lower rate loans held for sale, interest bearing deposits due from banks, and
available for sale investments. Conversely, certificates of deposit, which
typically carry a higher rate than other deposit products, made up a higher
percentage of average total interest bearing liabilities during the third
quarter of 2001 than during the third quarter of 2000.

Nine months ended September 30, 2001 and 2000

Nine Months Ended
(unaudited) September 30, Increase
(in thousands of dollars) 2001 2000 (Decrease) Change
-------- --------- --------- ------

Interest income (1)................ $ 20,643 $ 16,204 $ 4,439 27.4%
Interest expense................... 10,382 6,804 3,578 52.6%
-------- --------- ----------
Net interest income................ $ 10,261 $ 9,400 $ 861 9.2%
======== ========= ==========

Average interest earning assets.... $322,105 $ 221,085 101,020 45.7%
Averageinterestbearingliabilities $271,965 $ 175,055 96,910 55.4%

Average yields earned (2).......... 8.55% 9.77% (1.22)
Average rates paid (2)............. 5.09% 5.18% (.09)
Net interest spread (2)............ 3.46% 4.59% (1.13)
Net interest margin (2)............ 4.25% 5.67% (1.42)

(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.

(2) Ratios for the nine months ended September 30, 2001 and 2000 have been
annualized.

Net interest income for the nine months ended September 30, 2001 was $10.3
million, which was an increase of 9.2% from $9.4 million for the same period of
2000. Both interest income and interest expenses were higher for the nine months
ended September 30, 2001 when compared with the nine months ended September 30,
2000, with interest income increasing slightly more than interest expenses
resulting in the increase in net interest income.

Interest income increased $4.4 million or 27.4% to $20.6 million for the
nine months ended September 30, 2001 from $16.2 million for the same period of
2000. The overall tax-equivalent earning asset yield dropped to 8.55% for the
year to date September 30, 2001 compared to 9.77% for the year to date September
30, 2000. Earning assets averaged $322.1 million for the nine months ended
September 30, 2001 compared to $221.0 million for the same period of 2000, an
increase of $101.0 million, or 45.7%. Interest income is higher for the third
quarter of 2001 when compared to the third quarter of 2000 due to the increase
in volume of average interest earning assets. Assets acquired in the acquisition
of NBOC, loan growth at Bay Bank, increased mortgage lending, purchase of
available for sale securities, and a higher volume of interest bearing cash due
from banks account for the increase. Bay

Mortgage's loans held for sale generate interest income for the 15-45 day
holding period from the time the loans are funded, until they are sold to the
secondary market. Loans held for sale averaged approximately $34.6 million and
$5.3 million for the nine months ended September 30, 2001 and 2000,
respectively.

Interest expense was $10.4 million for the nine months ended September 30,
2001, an increase of $3.6 million or 52.6% compared to $6.8 million for the same
period of 2000. The average cost of interest bearing liabilities decreased to
5.09% for the year to date September 30, 2001 from 5.18% for the same period of
2000. Average interest bearing liabilities increased $96.9 million from $175.1
million for the nine months ended September 30, 2000 to $272.0 million for the
nine months ended September 30, 2001. Deposit growth is primarily due to the
acquisition of NBOC, growth at Bay Bank and increased balances of CD's which are
used to increase liquidity and to fund the short-term loans held for sale
generated by Bay Mortgage. These loans are booked with a commitment to be sold
into the secondary market, but there is typically a 15-45 day holding period
before the sale is finalized.

Decreases in national interest rates during 2001 have been the major
contributors toward the decline in both the average yields earned on interest
earning assets, and the average cost of interest bearing liabilities from the
third quarter 2000 to the third quarter of 2001. These rate decreases have also
contributed to the smaller interest rate spread of 3.46% for the nine months
ended September 30, 2001 when compared to 4.59% for the same period of 2000.
Prime based loans re-price immediately when the prime rate is adjusted, but
fixed rate liabilities, particularly CD's, do not immediately adjust with prime
changes, so do not re-price until the CD matures and is replaced at the lower
rates. The Company's current mix of loans includes approximately 60% fixed rate
loans, and 40% that re-price to prime. The falling rate environment experienced
in the first nine months of 2001 causes yields on assets to decline more rapidly
than the liability costs, narrowing the interest spread. Increased volumes of
average interest earning assets and average interest bearing liabilities have
offset the decline in rates earned and paid, resulting in the increase in both
interest income and interest expense for the third quarter 2001 when compared to
the third quarter of 2000. The decline in interest margin between the two
periods is due to the mix of interest earning assets, and interest bearing
liabilities. Higher yielding fixed rate commercial loans made up a lower
percentage of the total interest earning assets with the increase in volume of
lower rate loans held for sale, interest bearing deposits due from banks, and
available for sale investments. Conversely, certificates of deposit, which
typically carry a higher rate than other deposit products, made up a higher
percentage of average total interest bearing liabilities during the third
quarter of 2001 than during the third quarter of 2000.

Market Risk

Interest rate risk and credit risk are the most significant market risks
impacting the Company's performance. The Company relies on loan reviews, prudent
loan underwriting standards and an adequate allowance for loan losses to
mitigate credit risk. Interest rate risk is managed through the monitoring of
the Company's gap position and sensitivity to interest rate risk by subjecting
the Company's balance sheet to hypothetical interest rate shocks. The Company's
primary objective in managing interest rate risk is to minimize the adverse
impact of changes in interest rates on the Company's net interest income and
capital, while structuring the Company's asset/liability position to obtain the
maximum yield-cost spread on that structure. Since December 31, 2000, the
national prime rate has decreased 3.50%, which caused the immediate re-pricing
of approximately 40% of the Company's loans, reducing interest income.
Conversely, the decrease in national interest rates has caused the residential
real estate lending, specifically loans held for sale, to increase significantly
from $10.0 million at December 31, 2001 to $50.1 million at September 30, 2001.
The increase in loan fees and interest earned on these loans has more than
offset the interest income lost on prime based loans. In order to help fund the
growth of the residential real estate lending, and to strengthen its liquidity
position, the Company has increased deposit liabilities, particularly money
market accounts broker certificates of deposit, and out of market certificates
of deposits. While these types of deposits may be more sensitive to fluctuations
in interest rates, they are a primary source of funding the increases in loans
held for sale. In the future, when the current interest rate trends reverse, the
Company expects loans held for sale volumes to decrease, reducing the need to
carry the excess out of market and broker deposits.

Non-Interest Income

Three months ended September 30, 2001 and 2000

Non-interest income consists of the following components: (unaudited) (in
thousands of dollars)

Three months ended
September 30,
2001 2000
------- -------
Service charge on deposit accounts............ $ 187 $ 189
Gains on loans sold........................... 1,047 553
Fiduciary income.............................. 74 64
Escrow fees................................... 184 100
Credit Card income............................ 119 95
Brokerage fees................................ 565 388
ATM income.................................... 23 19
Safe deposit box fees......................... 1 -
Gains/(loss) on sale of repossessed assets.... (492) -
Gains on sale of available-for-sale securities 52 1
Other miscellaneous fees and income........... 30 16
------- -------
Total non-interest income..................... $ 1,790 $ 1,425
======= =======

Non-interest income increased to $1.8 million for the quarter ended
September 30, 2001 from $1.4 million in the corresponding period of 2000. This
increase is due to non-interest income generated by mortgage lending activities
including gains on loans sold, escrow fees and brokerage fees. These fees were
generated by Bay Mortgage as volumes of mortgage, construction, re-finance and
bridge loans have increased to coincide with the reductions in interest rates
during 2001. Non-interest income for the three month ended September 2001
reflects a loss of $492,000 on the sale of repossessed assets compared to no
loss or gain for the corresponding period of 2000.

Nine months ended September 30, 2001 and 2000

Non-interest income consists of the following components:
(unaudited) (in thousands of dollars)

Nine months ended
September 30
--------------------
2001 2000
------- -------
Service charge on deposit accounts............ $ 560 $ 533
Gains on loans sold........................... 3,076 998
Fiduciary income.............................. 194 209
Escrow fees................................... 574 245
Credit Card income............................ 397 285
Brokerage fees................................ 1,509 1,128
ATM income.................................... 59 53
Safe deposit box fees......................... 32 31
Gains/(loss) on sale of repossessed assets.... (479) 17
Gains on sale of available-for-sale securities 89 7
Other miscellaneous fees and income........... 32 34
------- -------
Total non-interest income................. $ 6,043 $ 3,540
======= =======

Non-interest income increased to $6.0 million for the nine months ended
September 30, 2001 from $3.5 million in the corresponding period of 2000. This
increase is due to non-interest income generated by mortgage lending activities
including gains on loans sold, escrow fees and brokerage fees. These fees were
generated by Bay Mortgage as volumes of mortgage, construction, re-finance and
bridge loans have increased to coincide with reductions in interest rates during
2001. Also reflected in non-interest income is a loss on the sale of repossessed
assets of $479,000 for the period ending September 30, 20001 compared to a gain
of $17,000 in the same period in 2000.

Non-Interest Expense

Three months ended September 30, 2001 and 2000

Non-interest expense consists of the following components:
(unaudited) (in thousands of dollars)
Three months ended
September 30,
2001 2000
------- -------
Salaries and employee benefits................... $ 2,075 $ 1,976
Mortgage division commission expense............. 231 292
Net occupancy and equipment...................... 609 603
Amortization of intangible assets................ 148 145
Business taxes................................... 161 111
Data processing and communications............... 149 183
Stationary and supplies.......................... 58 88
Credit card expense.............................. 99 75
Parking, travel and education.................... 92 73
Loan expense..................................... 253 63
Advertising...................................... 59 76
Professional fees................................ 140 206
Postage and freight.............................. 127 107
FDIC insurance................................... 35 41
Other miscellaneous expenses..................... 283 228
------- -------
Total non-interest expense....................... $ 4,519 $ 4,267
======= =======

Non-interest expenses have increased modestly by 4.7% to $4.5 from $4.3 for
the three months ended September 30, 2001 and 2000 respectively.

Salary expenses have increased slightly from the third quarter 2000 to the
third quarter 2001 primarily due to ordinary salary increases for existing
employees generally ranging from three to six percent per year. At September 30,
2001, the Company had 207 full-time equivalent employees compared to 174 at
September 30, 2000. Many of these additional employees are commissioned mortgage
loan officers, and the majority of their wages are reclassified into the
carrying value of mortgage loans as direct origination costs. See the discussion
in the results of operations section for more detail regarding carrying value of
mortgage loans and reclassification of direct origination costs.

Loan expenses have increased to 253,000 for the third quarter of 2001 from
63,000 for the third quarter of 2000, in part due to the increased loan activity
at Bay Mortgage, and also due to expenses related to other real estate owned,
and repossession of assets on defaulted loans.

Beginning in January 2002, with the adoption of SFAS No. 141 and No. 142,
non-interest expenses will be reduced by the amortization expense on
unidentifiable intangible assets. See note 6 for additional discussion of SFAS
No. 141 and No. 142.

Nine months ended September 30, 2001 and 2000

Non-interest expense consists of the following components:
(unaudited) (in thousands of dollars)

Nine months ended
September 30,
--------------------
2001 2000
------- -------
Salaries and employee benefits............. $ 6,272 $ 5,801
Mortgage division commission expense....... 630 652
Net occupancy and equipment................ 1,831 1,538
Amortization of intangible assets.......... 443 408
Business taxes............................. 445 298
Data processing and communications......... 440 334
Stationary and supplies.................... 190 191
Credit card expense........................ 312 230
Parking, travel and education.............. 252 171
Loan expense............................... 506 138
Advertising................................ 177 174
Professional fees.......................... 420 476
Postage and freight........................ 361 219
FDIC insurance............................. 176 55
Other miscellaneous expenses............... 1,028 692
------- -------
Total non-interest expense................. $13,483 $11,377
======= =======

Non-interest expenses increased 18.5% to $13.5 million for the nine months
ended September 30, 2001 compared to $11.3 million for the nine months ended
September 30, 2000, primarily due to the acquisition of NBOC. Also contributing
was an increase in FDIC insurance and expenses attributed to increased mortgage
loan volumes.

Salary expenses have increased from $5.8 million to $6.3 million from the
first nine months of 2000 to the first nine months of 2001. This increase is a
result of the addition of employees from the acquisition of NBOC in the third
quarter of 2000, as well as ordinary salary increases for existing employees
generally ranging from three to six percent a year. At September 30, 2001, the
Company had 207 full-time equivalent employees compared to 174 at September 30,
2000. Many of these additional employees are commissioned mortgage loan
officers, and the majority of their wages are reclassified into the carrying
value of mortgage loans as direct origination costs. See the discussion in the
results of operations section for more detail regarding carrying value of
mortgage loans and reclassification of direct origination costs.

Net occupancy expenses consist of depreciation on premises, lease costs,
equipment, maintenance and repair expenses, utilities and related expenses. The
Company's net occupancy expense for the nine months ended September 30, 2001 was
$1.8 million or 16.1% higher than $1.5 million for the same period of 2000. The
increase in occupancy expense in 2001 was due primarily to the acquisition of
NBOC, which added a lease expense of approximately $65,000 per quarter as well
as related occupancy costs.

The FDIC insurance has increased because in the first six months of 2000,
the Bank was not required to pay an assessment charge, but during the same
period of 2001, was required to pay $.10 per $100.00 of domestic deposits. Loan
expenses have increased in part due to the increased loan activity at Bay
Mortgage, and also due to expenses related to other real estate owned, and
repossession of assets on defaulted loans.

Included in other miscellaneous expenses in the first nine months of 2001,
is a write down of $162,000 relating to the cash surrender value of a key man
life insurance policy held on the Company's Chairman and CEO, Benjamin
Namatinia. The cash surrender value is based on the estimated fair market value
of an underlying securities fund. During the first six months of 2001, the
underlying securities fund lost value as a result of the overall reductions in
values within the general stock market. Because the cash surrender value of the
policy decreased during this time, the Company wrote down the asset. The
underlying investments supporting the cash surrender value of the key man life
insurance policy have since been transferred to a guaranteed fixed income
portfolio in order to retain, and potentially grow, the cash surrender value of
the policy in the future.

Income Taxes

Three months ended September 30, 2001 and 2000

The provisions for income taxes were a benefit of $457,000 and expense of
$203,000 for the quarters ended September 30, 2001 and 2000, respectively. These
provisions resulted in an effective tax rate of 32.4% for the three months ended
September 30, 2001 and 37.7% for the three months ended September 30 2000.

Nine months ended September 30, 2001 and 2000

The provisions for income taxes were $166,000 and $242,000 for the nine
months ended September 30, 2001 and 2000, respectively. These provisions
resulted in an effective tax rate of 190.8% and 39.9% for the same periods of
2001 and 2000, respectively. With a relatively low income before tax of 87,000,
non-deductible expenses (key-man insurance, certain intangible amortization,
etc.) become a much higher percentage of net income, and when added back to
income to calculate tax expense, resulted in a higher tax expense than taxable
income. This is the case with the nine months ended September 30, 2001, which
results in the extremely high effective tax rate.

Provision for Loan Losses

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

Three months ended September 30, 2001 and 2000

The Company's provision for loan losses was $2.1 million and $214,000 for
the quarters ended September 30, 2001 and 2000, respectively. Net charge-offs
(total charge-offs net of recoveries) were $216,000 for the three months ended
September 30, 2001 compared to net charge-offs of $295,000 for the three months
ended September 30, 2000 and $863,000 for the year ended December 31, 2000.
Total charge-offs were $831,000 and $369,000 for the third quarter ended
September 30, 2001 and 2000 respectively and $2.1 million for the year ended
December 31, 2000. The large provision in the third quarter of 2001 is
management's response to the recent local and national economic downturn, which
has had a negative impact on the quality of the Company's credits. During the
current quarter analysis of the Company's loan portfolio, certain loans were
reclassified into higher risk categories requiring additional specific reserves
on those credits. A strengthening in the allowance for loan losses was necessary
to remain adequately reserved under the analysis of the current loan portfolio.
Management continuously monitors existing loans for signs of impairment, and
strives to reduce the level of loans previously classified as impaired. For
additional discussion, please see Allowance for Loan Losses.

Nine months ended September 30, 2001 and 2000

The Company's provision for loan losses was $2.7 million and $955,000 for
the nine months ended September 30, 2001 and 2000, respectively. Net charge-offs
(total charge-offs net of recoveries) were $2.0 million for the nine months
ended September 30, 2001 compared to net charge-offs of $452,000 for the nine
months ended September 30, 2000 and $863,000 for the year ended December 31,
2000. Total charge-offs were $2.7 million and $653,000 for the nine months ended
September 30, 2001 and 2000 respectively and $2.1 million for the year ended
December 31, 2000. Many of the Company's loans are real estate backed or have
some other type of collateral with sufficient value so that management expects
little or no loss associated with those loans. However, some loans did not have
sufficient collateral backing, or the loan quality has deteriorated to coincide
with recent economic conditions, so management has written off or increased the
specific reserves associated with these loans in 2001. The loan loss reserves to
total loans were 1.95% at December 31, 2000 and 2.21% at September 30, 2001.
Management

continuously monitors existing loans for signs of impairment, and
strives to reduce the level of loans previously classified as impaired.

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

Nine months Nine months
Ended Ended Year ended
(unaudited) September 30, September 30, December 31,
(in thousands of dollars) 2001 2000 2000
----------- ------------ ----------

Loans outstanding at end of period................................ $239,633 $232,028 $233,639
Average loans outstanding during the period....................... $240,755 $191,369 $201,978
Allowance for loan losses, beginning of period.................... $ 4,561 $ 2,281 $ 2,281
Loans charged off:
Commercial..................................................... 1,099 579 1,983
Real Estate.................................................... 1,492 - -
Consumer....................................................... 38 35 36
Credit Cards................................................... 57 39 51
-------- -------- --------
Total loans charged-off...................................... 2,686 653 2,070
-------- -------- --------

Recoveries:
Commercial..................................................... 27 180 1,183
Real Estate.................................................... 636 - -
Consumer....................................................... 14 8 9
Credit Cards................................................... 2 13 15
-------- -------- --------
Total recoveries............................................. 679 201 1,207
-------- -------- --------
Provision for loan losses......................................... 2,732 955 1,155
Adjustment incident to acquisition................................ - 1988 1,988
-------- -------- --------
Allowance for loan losses, end of period.......................... $ 5,286 $ 4,772 $ 4,561
======== ======== ========

Net loans charged-off during the period........................... $2,007 $ 452 $ 863
Ratio of net loans charged-off to average loans outstanding....... .83% .24% .43%
Ratio of allowance for loan losses to loans at end of period...... 2.21% 2.06% 1.95%

Loans

Total loans outstanding were $239.6 million and $233.6 million at September
30, 2001 and December 31, 2000, respectively. Loan commitments were $49.3
million at September 30, 2001 and $54.4 million at December 31, 2000. In
addition, the Company had $50.1 million of loans held for sale at September 30,
2001 compared to $10.0 million at December 31, 2000. During the first nine
months of 2001, the Company funded $326.5 million of loans to be sold into the
secondary market, and delivered $289.1 million to the market. This compares to
$95.7 million funded and $87.2 million delivered during the first nine months of
2000.

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

(unaudited) September 30, 2001 December 31, 2000
(in thousands of dollars) Amount Percentage Amount Percentage
------------------------- --------------------------

Commercial ................................. $ 51,767 21.53% $ 46,738 19.94%
Real estate construction.................... 28,624 11.90 10,744 4.58
Real estate commercial...................... 109,575 45.57 130,272 55.58
Real estate mortgage........................ 40,528 16.86 34,402 14.68
Consumer and other.......................... 9,950 4.14 12,247 5.22
-------- ------ ---------- ------
240,444 100.00% 234,403 100.00%
====== ======
Deferred loan fees.......................... (811) (764)
-------- ---------
Total loans............................ 239,633 233,639
Allowance for loan losses................... (5,286) (4,561)
-------- ---------
Total loans, net....................... $234,347 $ 229,078
======== =========

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable
losses, which exist as of the date of the financial statements. The loan
portfolio is regularly reviewed to evaluate the adequacy of the allowance for
loan losses. In determining the level of the allowance, the Company evaluates
the allowance necessary for specific non-performing loans and estimates losses
inherent in other loan exposures. An important element in determining the
adequacy of an allowance for loan losses is an analysis of loans by loan rating
categories. The risk of a credit is evaluated by the Company's management at
inception of the loan using an established grading system. This grading system
currently includes ten levels of risk. Risk gradings range from "1" for the
strongest credits to "10" for the weakest; a "10" rated loan would normally
represent a loss. These gradings are reviewed periodically or when indicators
show that a credit may have weakened, from factors such as operating losses,
collateral impairment or delinquency problems.

The result is an allowance with two components:

Specific Reserves: The amount of specific reserves are established when
there are significant conditions or circumstances related to a loan that would
indicate that a loss would be incurred. Management considers in its analysis
expected future cash flows, the value of collateral and other factors that may
impact the borrower's ability to pay.

General Allowance: The amount of the general allowance is based on loss
factors assigned to the Company's loan exposures based on internal credit
ratings. These loss factors are determined on the basis of historical charge-off
experience and suggested regulatory guidelines. The general allowance is
composed of two categories. The first component is calculated based upon the
loan balances classified in the five higher risk loan categories of "management
attention", "special mention", "substandard", "doubtful" and "loss" in the
Company's Watch List. Suggested regulatory loss reserve factors are then applied
to each of these categories of classified loan balances. The second component is
calculated by applying historical loss factors to the outstanding loan balance
less any loans that are included in the Company's specific or higher risk
allowances discussed above. Three levels of charge-off history are considered by
management in arriving at this component of the general allowance. They are
average five-year net charge-offs, the highest years' actual net charge-offs
within the past 5 years and an estimated maximum charge-off factor. Each of
these amounts is combined with the first component of the general allowance
yielding a range for the total general allowance. Management selects a general
allowance somewhere within this calculated range. Factors considered by
management in making this decision include the volume and mix of the existing
loan portfolio, including the volume and severity of non-performing loans and
adversely classified credits; analysis of net charge-offs experienced on
previously classified loans; the nature and value of collateral securing the
loans; the trend in loan growth, including any rapid increase in loan volume
within a relatively short period of time; management's subjective evaluation of
general and local economic and business conditions affecting the collectibility
of the Company's loans; the relationship and trend over the past several years
of recoveries in relation to charge-offs; and available outside information of a
comparable nature regarding the loan portfolios of other banks, including peer
group banks. This decision also reflects management's attempt to ensure that the
overall allowance appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected loan losses.

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

Loans and other extensions of credit deemed uncollectable are charged to
the allowance. Subsequent recoveries, if any, are credited to the allowance.
Actual losses may vary from current estimates and the amount of the provision
may be either greater than or less than actual net charge-offs. The related
provision for loan losses that is charged to income is the amount necessary to
adjust the allowance to the level determined through the above process. In
accordance with the Company's methodology for assessing the appropriate
allowance for loan losses, the general portion of the allowance was $2.0 million
at September 30, 2001 and $3.1 million at December 31, 2000.

At September 30, 2001, approximately $3.0 million of the allowance for loan
losses was allocated based on an estimate of the amount that was necessary to
provide for inherent losses related to specific loans, compared to $1.3 million
at December 31, 2000. Specific reserves increased in the third quarter of 2001
as management's assessment of specific credits, its evaluation of local and
national economic conditions, and other analysis identified an increased
impairment in the existing loan portfolio.

Management's evaluation of the factors above resulted in allowances for
loan losses of $5.3 million and $4.6 million at September 30, 2001 and December
31, 2000, respectively. The allowance as a percentage of total loans was 2.21%
at September 30, 2001 and 1.95% at December 31, 2000.

The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed for these losses
can vary significantly from the estimated amounts.

During its normal loan review procedures, the Company considers a loan to
be impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. A loan is
not considered to be impaired during a period of minimal delay (less than 90
days). The Company measures impaired loans based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
as a practical expedient, at the loan's observable market price or the fair
market value of the collateral if the loan is collateral dependent. Impaired
loans are charged to the allowance for loan losses when management believes
after considering economic and business conditions, collection efforts, and
collateral position, that the borrowers' financial condition is such that
collection of the principal is not probable.

Generally, no interest is accrued on loans when factors indicate collection
of the interest is doubtful or when the principal or interest payment becomes 90
days past due, unless collection of the 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 the collection of the remaining recorded principal balance is
considered probable.

The Company manages the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in prudent
lending activities. The following table presents information with respect to
non-performing assets:

(unaudited) September 30, December 31,
(in thousands of dollars) 2001 2000
------------ -----------

Loans on non-accrual status 5,266 5,110
Loans past due greater than 90 days but not on
non-accrual status 399 1,170
Other real estate owned 3,146 1,247
Other Assets 13 312
----- -----
Total non-performing assets 8,824 7,839
===== =====
Percentage of non-performing assets to total assets 2.33% 2.64%
===== =====

At September 30,2001 non-performing assets were $8.8 million or 2.33% of
total assets compared to $7.8 million or 2.64% of total assets at December 31,
2000. Analysis performed in the current quarter on existing credits and
valuations of repossessed assets, combined with management's subjective analysis
of local and national current economic conditions, warranted the charge-off of
$831,000 of loans and the valuation write-down of $341,000 of repossessed assets
during the quarter. Non-performing assets increased during the quarter due to
the identification of impairment of additional loans previously classified as
performing. Total non-performing assets increased from $7.7 million at June 30,
2001 to the current level. Approximately $3.7 million and $4.0 million of the
non-accrual loans at September 30, 2001 and December 31, 2000 reflect loans
primarily secured by real estate and the remainder consists of commercial and
consumer loans with varying collateral.

Other real estate owned increased from $1.2 million at December 31, 2000 to
$3.1 at September 30, 2001 as non-accrual loans are foreclosed and the
underlying collateral is taken in as OREO. The Company is actively marketing
these assets.

Liquidity

Liquidity represents the ability to meet deposit withdrawals and fund loan
demand, while retaining the flexibility to take advantage of business
opportunities. The Company's primary sources of funds are customers deposits,
loan payments, sales of assets, advances from the FHLB (Federal Home Loan Bank)
and the use of the federal funds market. At September 30, 2001, $2.8 million of
the securities portfolio matures within one year.

The Company has utilized borrowings from the FHLB as an important source of
funding for its growth. The Company has an established borrowing line with the
FHLB that permits it to borrow up to 15% of the Bank's assets, subject to
collateral limitations. Advances from the FHLB have terms ranging from 1 through
15 years and at September 30, 2001 bear interest at rates from 3.25% to 8.62%.
At September 30, 2001, $16.1 million in advances were outstanding from the FHLB.
The Company has also significantly increased deposit liabilities and cash/due
from banks in order to help fund the growth in loans held for sale experienced
at Bay Mortgage during 2001 and to better the Company's liquidity position. At
September 30, 2001 total cash and due from banks was $54.1 million compared to
$25.6 million at December 31, 2000. Total deposits, particularly money market
and broker certificates of deposit, have increased from $241.2 million to $320.2
million at December 31, 2000 and September 30, 2001, respectively. Although
deposits and cash have increased in order to help fund the loans held for sale,
the loans themselves are fairly liquid. The loans are held on the balance sheet
for a short period of time, typically 15 to 45 days before they are sold to the
secondary market.

Capital

The Company and the Bank are required to maintain minimum amounts of
capital to "risk weighted" assets, as defined by banking regulators. The Company
is required to have tier 1 leverage capital, tier 1 risk-based capital, and
total risk-based capital ratios of 4.0%, 4.0%, and 8.0%, respectively. At
September 30, 2001, the Company's ratios were 6.68%, 8.80% and 10.06%,
respectively. At December 31, 2000, the Company's ratios were 8.48%, 9.74% and
10.99%, respectively. The ratio of shareholders' equity to average assets was
8.73% and 11.93% at September 30, 2001 and December 31, 2000, respectively.

The Bank's requirements for tier 1 leverage capital, tier 1 risk-based
capital, and total risk-based capital ratios are also 4.0%, 4.0%, and 8.0%,
respectively. At September 30, 2001, the Bank's ratios were 6.82%, 9.02%, and
10.28%, respectively. At December 31, 2000, the Bank's ratios were 8.19%, 9.37%,
and 10.62%, respectively.

Part II. Other Information

Item 5

Other Information

None

Item 6

(a) Exhibits. The list of exhibits is set forth on the Exhibit Index
attached hereto.

(b) None.

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

Cowlitz Bancorporation
(Registrant)

Dated: August 13, 2001 ___/s/____________________
Harve E. Menkens
President

Dated: August 13, 2001 ___/s/____________________
Don P. Kiser
Vice-President/CFO/Secretary

Exhibit Index

Exhibit No.

3.1* Restated and Amended Articles of Incorporation of the Company

3.2* Bylaws of the Company

*Incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 333-44355