COWLITZ BANCORPORATION, 10-K405, 2000-03-29

COWLITZ BANCORPORATION
10-K405, 2000-03-29
STATE COMMERCIAL BANKS

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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

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FORM 10-K

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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

COMMISSION FILE NUMBER

0-23881

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COWLITZ BANCORPORATION

(Exact name of registrant as specified in its charter)

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WASHINGTON 91-152984
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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927 COMMERCE AVE., LONGVIEW, WASHINGTON 98632
(Address of principal executive offices) (Zip Code)

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

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Securities registered pursuant to Section 12(b) of the Act:
None

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Securities registered pursuant to Section 12(g) of the Act
Common Stock, No par value
(Title of Class)

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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form of this form 10-K. /X/

The approximate aggregate market value of Registrant's Common Stock held by
non-affiliates of the Registrant on February 29, 2000, was $ 13,932,170.

Common Stock, no par value on February 29, 2000: 4,026,732

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K into which the document is incorporated: Portions of the
registrants proxy statement dated April 13, 2000, for the 2000 annual meeting of
shareholders is incorporated by reference in Part III hereof.

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TABLE OF CONTENTS

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Part I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of matters to vote of securities holders......... 11

Part II
Item 5. Market price and dividends on registrant's common equity and
related stockholder matters............................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's discussion and analysis of financial condition
and results of operations................................. 14
Item 8. Financial statements and supplementary data................. 31
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure.................................. 56

Part III
Item 10. Director and executive officers of the registrant........... 56
Item 11. Executive compensation...................................... 56
Item 12. Security ownership of certain beneficial owners and
management................................................ 56
Item 13. Certain relationships and related transactions.............. 56

Part IV
Item 14. Exhibits, financial statement schedules, and reports on form
8-K....................................................... 56
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PART I

ITEM 1. BUSINESS

INTRODUCTION

Cowlitz Bancorporation (the "Company") was organized in 1991 under
Washington law to become the holding company for Cowlitz Bank, a Washington
state chartered bank that commenced operations in 1978. The principal executive
offices of the Company are located in Longview, 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. Cowlitz Bank's commercial and personal banking services
include commercial and real estate lending, consumer lending, mortgage
origination and trust services. Cowlitz Bank has also developed relationships
with a securities brokerage firm and insurance agency with an estate planner to
provide its customers access to a variety of financial services, which are
generally not available in community banks.

The Company's goal is to expand its position as a leading community based
provider of financial services in Cowlitz County and to become one of the
leading community based providers of financial services in other selected areas
of Washington and Oregon. In accordance with this strategy, during 1999 the
Company commenced operations in the Seattle, Washington area through the
acquisition of Bay Mortgage of Bellevue, Washington, Bay Mortgage of Seattle,
Washington and Bay Escrow of Seattle, Washington. The Company also expanded its
operation in the Seattle/Bellevue area with the September 1999 opening of a DE
NOVO branch of Cowlitz Bank in Bellevue, Washington, doing business as Bay Bank.
During 1998, the Company acquired Business Finance Corporation which provides
asset-based lending services to companies throughout the western United States.
In addition to these acquisitions, the Company has expanded by opening a loan
office in Vancouver, Washington. The Company's growth strategy is based on
providing both exceptional personal service and a wide range of financial
services to its customers including: emphasizing personal service and developing
strong community ties, providing a broad range of financial products and
services, increasing business volume in existing markets, and continuing to
explore opportunities for regional expansion through acquisitions.

PRODUCTS AND SERVICES

The Company offers a broad portfolio of products and services tailored to
meet the financial needs of targeted customers in its market areas. It believes
this portfolio is generally competitive with the products and services of its
competitors, including major regional and national banks. These products and
services include:

DEPOSIT PRODUCTS. The Company provides a range of deposit products for
customers, including non-interest-bearing checking accounts, interest-bearing
checking and savings accounts, money market accounts and certificates of
deposit. These accounts generally earn interest at rates established by
management based on competitive market factors and management's desire to
increase certain types or maturities of deposit liabilities. The Company does
not pay brokerage commissions to attract deposits. It strives to establish
customer relations to attract core deposits in non-interest-bearing
transactional accounts and thus to reduce its cost of funds.

LOAN PRODUCTS. The Company offers a broad range of loan products to its
retail and business customers. The Company maintains loan underwriting standards
with written loan policies, conservative individual and branch limits and
reviews by the loan committee. Further, in the case of particularly large loan
commitments or loan participations, loans are reviewed by the Company's board of
directors. Underwriting standards are designed to achieve a high-quality loan
portfolio, compliance with lending regulations and the desired mix of loan
maturities and industry concentrations. Management seeks to minimize credit
losses by closely monitoring the financial condition of its borrowers and the
value of collateral.

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COMMERCIAL LOANS. Commercial lending is the primary focus of the Company's
lending activities, and a significant portion of its loan portfolio consists of
commercial loans. The Company offers specialized loans for its business and
commercial customers. These include equipment and inventory financing, operating
lines of credit and accounts receivable financing. For regulatory purposes, a
substantial portion of the Company's commercial loans are designated as real
estate loans, as the loans are secured by mortgages and trust deeds on real
property, although the loans may be made for purposes of financing commercial
activities, such as accounts receivable, equipment purchases and inventory or
other working capital needs. Lending decisions are based on careful evaluation
of the financial strength, management and credit history of the borrower, and
the quality of the collateral securing the loan. Commercial loans secured by
real property are limited to 70% of the value of the collateral. In some cases,
the Company may require personal guarantees and secondary sources of repayment.
In competing with major regional and national banks, the Company is limited by
its single borrower lending limits imposed by law. See "Risk Factors" for
further discussion. The Company also offers asset-based lending through its
subsidiary Business Finance Corporation. These loans tend to have higher credit
risk, but provide a higher rate of return than the Company's core commercial
portfolio.

REAL ESTATE LOANS. Real estate loans are available for construction,
purchasing and refinancing residential owner-occupied and rental properties.
Borrowers can choose from a variety of fixed and adjustable rate options and
terms. Real estate loans reflected in the loan portfolio also include loans made
to commercial customers that are secured by real property.

The Company provides customers access to long-term conventional real estate
loans through Cowlitz Bank's Cowlitz Mortgage and Bay Mortgage divisions. These
divisions specialize in all facets of residential lending from single family
homes to small multi-plexes, including FHA and VA loans, construction and bridge
loans.

Payments on loans are often dependent on the successful operation and
management of the properties securing the loans, and are therefore strongly
affected by the conditions of the local real estate market. Fluctuating land
values and local economic conditions make loans secured by real property
difficult to evaluate and monitor.

CONSUMER LOANS. The Company provides loans to individual borrowers for a
variety of purposes, including secured and unsecured personal loans, home
equity, personal lines of credit and motor vehicle loans. Consumer loans can
carry significantly greater risks than other loan products, even if secured, if
the collateral consists of rapidly depreciating assets such as automobiles and
equipment. Repossessed collateral securing a defaulted consumer loan may not
provide an adequate source of repayment of the loan. Consumer loan collections
are dependent on borrowers' continuing financial stability, and are sensitive to
job loss, illness and other personal factors. The Company attempts to manage the
risks inherent in consumer lending by following strict credit guidelines and
conservative underwriting practices. The Company also offers Visa and MasterCard
credit cards to its customers.

OTHER BANKING PRODUCTS AND SERVICES. In support of its focus on
personalized service, the Company offers additional products and services for
the convenience of its customers. These services include a debit card program,
automated teller machines located at five branch locations and an automated
telephone banking service with 24-hour access to accounts that also allows
customers to speak directly with a customer service representative during normal
banking hours or leave a message after normal banking hours. The Company does
not currently charge fees for any of these services. The Company provides
drive-through facilities at four of its branches.

TRUST SERVICES. The Company has established a trust department, which is
the only one located in Cowlitz County. The trust department provides trust
services to individuals, partnerships, corporations and institutions and acts as
fiduciary of estates and conservatorships and as a trustee under various

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wills, trusts and other plans. The Company believes this service has attracted
additional customers to Cowlitz Bank, and helps provide local access to these
services which were previously sought at out of area financial institutions.

OTHER FINANCIAL SERVICES. The Company believes that providing its customers
a full range of financial services is an important element of its strategy to
attract and retain customers. To this end, the Company has entered into lease
arrangements with Raymond James Financial Services, Inc., a securities broker,
and Commerce Business & Estate Planning Services, Inc., an insurance agency.
Each of these organizations maintains an office on the main floor of the Cowlitz
Financial Center, where the main office of the Company is located and has access
to space in the Company's other branches. Representatives of these companies
meet with clients at each of Cowlitz Bank's Cowlitz County branches, thereby
making these services available to all of these customers. The Company has no
financial interest in either of these companies. The Company believes that by
making available through these relationships, brokerage and insurance services,
it can increase foot traffic through its branches and market more extensively
its full line of core banking products and services.

ACQUISITIONS

On July 1, 1999, the Company acquired Bay Mortgage, of Bellevue, Washington.
The acquisition was accounted for using the purchase method, including a cash
payment of $1 million and issuance of common stock with a value of $977,000.
Remaining payments of approximately $840,000 in cash and common stock may be
issued under the terms of a two-year performance earn-out agreement. Bay
Mortgage specializes in all facets of residential lending from single family
homes to small multi-plexes, including FHA and VA loans, construction loans and
bridge loans. Bay Mortgage will operate as a division of Cowlitz Bank and serves
customers throughout the greater Bellevue/Seattle market areas.

On August 1, 1999, the Company acquired Bay Mortgage, of Seattle,
Washington. The acquisition was accounted for using the purchase method,
including a cash payment of $697,000. Remaining payments of approximately
$180,000 in cash may be paid under the terms of a three-year performance
earn-out agreement. Bay Mortgage of Seattle and Bay Mortgage of Bellevue have
joined together as a division of Cowlitz Bank and serve customers throughout the
greater Bellevue/Seattle market area.

On September 1, 1999, the Company acquired Bay Escrow, of Seattle,
Washington. The acquisition was accounted for using the purchase method,
including a cash payment of $164,000. Bay escrow operates as a separate division
of Cowlitz Bank and completes escrow transactions for Bay Mortgage.

MARKET AREAS

The Company's primary market areas from which it accepts deposits and makes
loans is Cowlitz County, Washington, King County, Washington and the surrounding
counties in Washington and northwest Oregon. As a community bank, Cowlitz Bank
has certain competitive advantages due to its local focus, but is also more
closely tied to the local economy than many of its competitors, which serve a
number of geographic markets. BFC provides assets-based lending services
throughout the western United States.

EMPLOYEES

As of December 31, 1999, the Company employed a total of 169 full-time
equivalent employees. None of the employees are subject to a collective
bargaining agreement and the Company considers its relationships with its
employees to be favorable.

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RISK FACTORS

EXPOSURE TO LOCAL ECONOMY

The Company's performance is materially dependent upon and sensitive to the
economy of its market area consisting primarily of Cowlitz County, the greater
Seattle area and the surrounding areas in Washington and northwest Oregon.
Adverse economic developments may affect loan demand and the collectibility of
existing loans, and have a negative effect on the Company's earnings and
financial condition. Historically, the economy of Cowlitz County depended
primarily on the forest products industry. Particularly in the 1980's, this
market area experienced high unemployment as a result of the reduction in forest
products manufacturing jobs. While the forest products industry is still the
leading employer in Cowlitz County, the economy is becoming more diverse as
manufacturers enter the region. Subsequent developments have reduced the
dependence of the local economy on forest products manufacturing and have
increased the number of non-manufacturing jobs. There can be no assurance that
future economic changes will not have significant adverse effect on the Company.

CREDIT RISK

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

INTEREST RATE RISK

The Company's earnings are largely derived from net interest income, which
is interest income and fees earned on loans and investment income, less interest
expense paid on deposits and other borrowings. Interest rates are highly
sensitive to many factors which are beyond the control of the Company's
management, including general economic conditions, and the policies of various
governmental and regulatory authorities. As interest rates change, net interest
income is affected. With fixed rate assets (such as fixed rate loans) and
liabilities (such as certificates of deposit), the effect on net interest income
depends on the maturity of the asset and liability. Although the Company strives
to minimize interest rate risk through asset/liability management policies, from
time to time maturities are not balanced. Further, an unanticipated rapid
decrease or increase in interest rates could have an adverse effect on the
spreads between the interest rates earned on assets and the rates of interest
paid on liabilities, and therefore on the level of net interest income.

REGULATION

The Company is subject to extensive regulations under federal and state
laws. These laws and regulations are intended primarily to protect depositors
and the deposit insurance fund, rather than shareholders. Cowlitz Bank is a
state chartered commercial bank which is not a member of the Federal Reserve
System and is subject to primary regulation and supervision by the Director of
Financial Institutions of the State of Washington (the "Washington Director")
and by the Federal Deposit Insurance Corporation (the "FDIC"), which also
insures bank deposits. The Company is also subject to regulation and supervision
by the Board of Governors of the Federal Reserve System (the "Federal Reserve").
Federal and state regulations place banks at a competitive disadvantage compared
to less regulated competitors such as finance companies, credit unions, mortgage
banking companies and leasing companies. Although the Company has been able to
compete effectively in its market area in the past, there can be no assurance
that it will be able to continue to do so. Further, future changes in

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federal and state banking regulations could adversely affect the Company's
operating results and ability to continue to compete effectively. See
"Regulation and Supervision."

COMPETITION

Competition in the banking industry has intensified for deposits and loans
over the last few years. Competition from outside the traditional banking system
from credit unions, investment banking firms, insurance companies and related
industries offering bank-like products has increased the competition for
deposits and loans.

The banking industry in the market areas is generally characterized by well
established large banks. There are also thrift institutions, other community
banks and credit unions within the market areas that are very competitive in the
deposit and consumer lending areas.

The major competition for commercial banking services in Cowlitz County
comes from U.S. Bank, Key Bank, Bank of America and Columbia State Bank. None of
these competitors are headquartered in Cowlitz County and many have relocated
key functions (e.g., loan decisions) into regional offices outside of the area.
In the Company's greater Seattle market area, the main source of competition is
U.S. Bank, Key Bank, Bank of America, Wells Fargo, Washington Mutual, Evergreen
State Bank, Western Bank, Columbia Bank, and other community banks and mortgage
companies located in the greater Seattle/Bellevue area.

The offices of the major financial institutions have competitive advantages
over the Company in that they have high public visibility, may offer a wider
variety of products and are able to maintain advertising and marketing
activities on a much larger scale than the Company can economically maintain.
Since single borrower lending limits imposed by law are dependent on the capital
of the institution, the branches of larger institutions with substantial capital
bases also have an advantage with respect to loan applications which are in
excess of the Company's legal lending limits.

In competing for deposits, the Company is subject to certain limitations not
applicable to nonbank financial institution competitors. Previous laws limiting
the deposit instruments and lending activities of savings and loan associations
have been substantially eliminated, thus increasing the competition from these
institutions. In the Company's Cowlitz County market area the main source of
competition for deposits is major credit unions such as Fibre Federal Credit
Union and Weyehaeuser Employees Credit Union.

REGULATION AND SUPERVISION

The Company and Cowlitz Bank are subject to extensive regulation under
federal and state laws. The laws, together with the regulations promulgated
under them, significantly affect respective activities of the Company and
Cowlitz Bank and the competitive environment in which they operate. The laws and
regulations are primarily intended to protect depositors and the deposit
insurance fund, rather than shareholders.

The description herein of the laws and regulations applicable to the Company
and Cowlitz Bank, does not purport to be a complete description of the laws and
regulations mentioned herein or of all such laws and regulations. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of the Company and Cowlitz Bank. The operations of the Company and
Cowlitz Bank may be affected by legislative and regulatory changes as well as by
changes in the policies of various regulatory authorities. The Company cannot
accurately predict the nature or the extent of the effects that such changes may
have in the future on its business and earnings.

BANK HOLDING COMPANY REGULATION. The Company is a bank holding company
within the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA")
and, as such, is subject to the regulations of the Federal Reserve. Bank holding
companies are required to file periodic reports with

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and are subject to periodic examination by the Federal Reserve. The Federal
Reserve has issued regulations under the BHCA requiring a bank holding company
to serve as a source of financial and managerial strength to its subsidiary
banks. It is the policy of the Federal Reserve that, pursuant to this
requirement, a bank holding company should stand ready to use its resources to
provide adequate capital funds to its subsidiary banks during periods of
financial stress or adversity. Additionally, under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is
required to guarantee the compliance of any insured depository institution
subsidiary that may become "undercapitalized" (as defined in the statute) with
the terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under the BHCA, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.

CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES. The Federal Reserve
is the federal regulatory and examining authority for bank holding companies.
The Federal Reserve has adopted capital adequacy guidelines for bank holding
companies. These guidelines are similar to, although not identical with, the
guidelines applicable to banks. See "Bank Capital Requirements." At
December 31, 1999, the Company's Tier 1 leverage capital ratio was 13.89%, its
Tier 1 risk-based capital ratio was 17.51% and its total risk-based capital
ratio was 18.76%.

BANK REGULATION. Cowlitz Bank is organized under the laws of the State of
Washington and is subject to the supervision of the Department of Financial
Institutions ("DFI"), whose examiners conduct periodic examinations of state
banks. Cowlitz Bank is not a member of the Federal Reserve System, so its
principal federal regulator is the FDIC, which also conducts periodic
examinations of Cowlitz Bank. Cowlitz Bank's deposits are insured, to the
maximum extent permitted by law, by the Bank Insurance Fund ("BIF") administered
by the FDIC and are subject to the Federal Deposit Insurance Corporation's
("FDIC") rules and regulations respecting the insurance of deposits. See
"Deposit Insurance."

Both federal and state laws extensively regulate various aspects of the
banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosures, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things, to make deposited funds available
within specified time periods.

Insured state-chartered banks are generally prohibited under FDICIA from
engaging as principal in activities that are not permitted for national banks,
unless (i) the FDIC determines that the activity would pose no significant risk
to the appropriate deposit insurance fund, and (ii) the bank is, and continues
to be, in compliance with all applicable capital standards. The Company does not
believe that these restrictions will have a material adverse effect on its
current operations.

BANK CAPITAL REQUIREMENTS. The FDIC has adopted risk-based capital ratio
guidelines to which Cowlitz Bank is subject. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations.
Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet commitments to four risk weighted categories, with higher
levels of capital being required for the categories perceived as representing
greater risk.

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These guidelines divide a bank's capital into two tiers. Tier 1 includes
common equity, certain noncumulative perpetual preferred stock (excluding
auction rate issues) and minority interest in equity accounts of consolidated
subsidiaries, less goodwill and certain other intangible assets (except mortgage
servicing rights and purchased credit card relationships, subject to certain
limitations). Supplementary (Tier 2) capital includes, among other items,
cumulative perpetual and long-term, limited-life, preferred stock, mandatory
convertible securities, certain hybrid capital instruments, term-subordinated
debt and the allowance for loan and lease losses, subject to certain
limitations, less required deductions. Banks are required to maintain a total
risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The FDIC
may, however, set higher capital requirements when a bank's particular
circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.

In addition, the FDIC has established guidelines prescribing a minimum Tier
1 leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier 1 leverage ratio of not
less than 4%.

Certain regulatory capital ratios for the Company and Cowlitz Bank at
December 31, 1999 are set forth below:

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Tier 1 Capital to Risk-Weighted Assets...................... 17.51% 10.71%
Total-Risk Based Capital to Risk-Weighted Assets............ 18.76% 11.96%
Tier 1 Leverage Ratio....................................... 13.89% 8.58%
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DIVIDENDS. The principal source of the Company's cash revenues is dividends
from Cowlitz Bank. Under Washington law, Cowlitz Bank may not pay dividends in
an amount greater than its retained earnings as determined by generally accepted
accounting principles. In addition, the DFI has the authority to require a
state-chartered bank to suspend payment of dividends. The FDIC has the authority
to prohibit a bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe or unsound practice in light of the
financial condition of the bank or if it would cause a bank to become
undercapitalized.

LENDING LIMITS. Under Washington law, the total loans and extensions of
credit by a Washington-chartered bank to a borrower outstanding at one time may
not exceed 20% of such bank's capital and surplus. However, this limitation does
not apply to loans or extensions of credit which are fully secured by readily
marketable collateral having market value of at least 115% of the amount of the
loan or the extension of credit at all times.

BRANCHES AND AFFILIATES. Establishment of bank branches is subject to
approval of the DFI and FDIC and geographic limits established by state laws.
Washington's branch banking law permits a bank having its principal place of
business in the State of Washington to establish branch offices in any county in
Washington without geographic restrictions. A bank may also merge with any
national or state chartered bank located anywhere in the State of Washington
without geographic restrictions.

Under Oregon law, an out-of-state bank or bank holding company may merge
with or acquire an Oregon state chartered bank or bank holding company if the
Oregon bank, or in the case of a bank holding company, the subsidiary bank, has
been in existence for a minimum of three years, and the law of the state in
which the acquiring bank in located permits such merger. Branches may not be
acquired or opened separately, but once an out-of-state bank has acquired
branches in Oregon, either through a merger with or acquisition of substantially
all of the assets of an Oregon bank, the bank may open additional branches.

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The Bank is subject to Sections 22 (h), 23A and 23B of the Federal Reserve
Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank and its
executive officers and its affiliates, prescribes terms and conditions for bank
affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.

FDICIA. FDICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to banks which do
not meet minimum capital requirements. For these purposes, FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.

The FDIC has adopted regulations to implement the prompt corrective action
provisions of FDICIA. Among other things, the regulations define the relevant
capital measures for the five capital categories. An institution is deemed to be
"well capitalized" if it has a total, risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage
ratio of 5% or greater, and is not subject to a regulatory order, agreement or
directive to meet and maintain a specific capital level for any capital measure.
Cowlitz Bank currently exceeds all of the ratios.

FDICIA further directs that each federal banking agency prescribe standards
for depository institutions and depository institution holding companies
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
management compensation, a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value to
book value of publicly traded shares and such other standards as the agency
deems appropriate.

The Federal Reserve Board classifies a bank holding company as "well
capitalized" if it has a total, risk-based capital ratio of 10% or greater and a
Tier 1 risk-based capital ratio of 6% or greater. The Company currently exceeds
all of these ratios.

DEPOSIT INSURANCE. Cowlitz Bank's deposits are insured up to $100,000 per
insured account by the BIF. As an institution whose deposits are insured by BIF,
Cowlitz Bank is required to pay deposit insurance premiums to BIF.

FDICIA required the FDIC to issue regulations establishing a system for
setting deposit insurance premiums based upon the risks a particular bank or
savings association poses to the deposit insurance funds. This system bases an
institution's risk category partly upon whether the institution is well
capitalized, adequately capitalized or less than adequately capitalized. Each
insured depository institution is also assigned to one of three "supervisory"
categories based on reviews by regulators, statistical analysis of financial
statements and other relevant information. An institution's assessment rate
depends upon the capital category and supervisory category to which it is
assigned. Annual assessment rates currently range from zero per $100 of domestic
deposits for the highest rated institution to $0.27 per $100 of domestic
deposits for an institution in the lowest category. Cowlitz Bank is currently in
the class of the highest rated institutions and, accordingly, pays the no
assessment for deposit insurance in 1999. Under legislation enacted in 1996 to
recapitalize the Savings Association Insurance Fund, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Financing
Corporation ("FICO") to service FICO debt incurred in the 1980's. The current
FICO assessment rate for BIF insured deposits is 2.12 cents per $100 of deposits
per year. Any increase in deposit insurance of FICO assessments could have an
adverse effect on Cowlitz Bank's earnings.

GRAMM-LEACH-BLILEY ACT. On November 12, 1999, President Clinton signed into
law the Gramm-Leach-Bliley Act (the "GLB Act"), which significantly reforms
various aspects of the financial services business. Among the provisions in the
GLB Act are those which:

10
<PAGE>
- establish a new framework under which bank holding companies and banks can
own securities firms, insurance companies and other financial companies;

- provide consumers with new protections regarding the transfer and use of
their nonpublic personal information by financial institutions; and

- change the Federal Home Loan Bank ("FHLB") system in numerous ways
including a change in the manner of calculating the Resolution Funding
Corporation obligations payable by the FHLBs and a broadening of the
purposes for which FHLB advances may be used.

COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act ("CRA") requires
financial institutions regulated by the federal financial supervisory agencies
to ascertain and help meet the credit needs of their delineated communities,
including low-income and moderate-income neighborhoods within those communities,
while maintaining safe and sound banking practices. The regulatory agency
assigns one of four possible ratings to an institution's CRA performance and is
required to make public an institution's rating and written evaluation. The four
possible ratings are "outstanding," satisfactory," "needs to improve" and
"substantial noncompliance."

Under new regulations that apply to CRA performance ratings after July 1,
1997, many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics and the
competitive environment in which it operates. The evaluation does not rely on
absolute standards and financial institutions are not required to perform
specific activities or to provide specific amounts or types of credit.

The Company's most recent rating under CRA is "outstanding." This rating
reflects the Company's commitment to meeting the credit needs of the communities
it serves. No assurance can be given, however, that the Company will be able to
maintain an "outstanding" rating under the new regulations in the future.

ADDITIONAL MATTERS. In addition to the matters discussed above, the Company
and Cowlitz Bank are subject to additional regulation of their activities,
including a variety of consumer protection regulations affecting their lending,
deposit and collection activities and regulations affecting secondary mortgage
market activities.

The earnings of financial institutions, including the Company and Cowlitz
Bank, are also affected by general economic conditions and prevailing interest
rates, both domestic and foreign and by the monetary and fiscal policies of the
U.S. Government and its various agencies, particularly the Federal Reserve.

Additional legislation and administrative actions affecting the banking
industry may be considered by the United States Congress, the Washington
Legislature and various regulatory agencies, including those referred to above.
It cannot be predicted with certainty whether such legislation or administrative
action will be enacted or the extent to which the banking industry in general or
the Company and Cowlitz Bank in particular would be affected thereby.

2. PROPERTIES

The Company owns its main office space at the Cowlitz Financial Center.
Cowlitz Bank occupies approximately 27,500 square feet of this facility. The
Company leases space in the Cowlitz Financial Center to Raymond James Financial
Services, Inc. and to Commerce Business & Estate Service, Inc., both of which
provide services to Cowlitz Bank's customers. The Company owns branches in Kelso
and Kalama and leases facilities for branches in the Triangle Mall in Longview,
Castle Rock, Bellevue,

11
<PAGE>
Seattle, and Vancouver. Five of these offices have automated teller machines and
four provide drive-up services. Business Finance Corporation leases its
facilities in Bellevue, Washington.

<TABLE>
<S> <C> <C>
COWLITZ BANCORPORATION
COWLITZ FINANCIAL CENTER
927 Commerce Ave.
Longview, Wa 98632
(360) 423-9800

COWLITZ BANK COWLITZ BANK
KALAMA BRANCH CASTLE ROCK BRANCH BAY BANK BRANCH
195 N. 1(st) St. 202 Cowlitz St. W. 10500 NE 8(th) Street, STE
Kalama, Wa 98625 Castle Rock, Wa 98611 1750
(360) 673-2226 (360) 274-6685 Bellevue, Wa 98004
(425) 452-1543

COWLITZ BANK
TRIANGLE MALL BRANCH BUSINESS FINANCE CORPORATION BAY MORTGAGE--BELLEVUE
800 Triangle Mall 1404 140(th) N.E. Pl., STE 103 10500 NE 8(th) Street, STE
Longview, Wa 98632 Bellevue, Wa 98007 1550 Bellevue, Wa 98004
(360) 577-6067 (425) 649-0258 (425) 635-5151

COWLITZ BANK
KELSO BRANCH BAY MORTGAGE--SEATTLE BAY ESCROW--BELLEVUE
1000 South 13(th) 2825 Eastlake E., STE 300 10500 NE 8(th) Street, STE
Kelso, Wa 98626 Seattle, Wa 98102 (206) 324-7777 1550
(360) 423-7800 Bellevue, Wa 98004
(425) 635-5151

BAY ESCROW--SEATTLE COWLITZ MORTGAGE--VANCOUVER COWLITZ MORTGAGE--LONGVIEW
2825 Eastlake E., STE 300 12306 SE Mill Plain Blvd., STE 105 800 Triangle Shopping Center
Seattle, Wa 98102 Vancouver, Wa 98684 Longview, Wa 98632
(206) 324-7787 (360) 944-9431 (360) 577-6232
</TABLE>

ITEM 3. LEGAL PROCEEDINGS

The Company may occasionally have pending routine litigation resulting from
the collection of the 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. Currently, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

None

12
<PAGE>
PART II

ITEM 5. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Effective March 12, 1998, Cowlitz Bancorporation stock began trading on the
Nasdaq National Market under the symbol "CWLZ". Prior to that date, there had
been no organized market for the Common Stock, and to the knowledge of the
Company, no third party bid and asked information was available.

<TABLE>
<CAPTION>
1999 1998
----------------------------------- -----------------------------------
MARKET PRICE MARKET PRICE
------------------- CASH DIVIDEND ------------------- CASH DIVIDEND
HIGH LOW DECLARED HIGH LOW DECLARED
-------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
1(st) Quarter*................................ 8.00 6.44 .015 13.19 12.00 .013
2(nd) Quarter................................. 7.13 6.00 .018 14.13 11.88 .015
3(rd) Quarter................................. 7.00 5.13 .018 12.13 7.75 .015
4(th) Quarter................................. 6.50 4.88 .018 9.00 7.25 .015
</TABLE>

- ------------------------

* First day of trading was March 12, 1998

As of February 29, 2000 there were 4,026,732 shares of common stock
outstanding, held by approximately 328 shareholders.

CHANGES IN SECURITIES AND USE OF PROCEEDS

On March 12, 1998, the Company completed an initial public offering issuing
a total of 1,380,000 shares of common stock at $12.00 per share. After
underwriting discounts of $1.2 million and other offering expenses of $472,000
net proceeds were $14.9 million. Of these proceeds $1.1 million has been used to
repay long-term debt and a subordinated note and $1.8 million was used to
acquire BFC as described below. In addition, $1.9 million was used to acquire
Bay Mortgage of Bellevue, Washington, Bay Mortgage of Seattle, Washington, and
Bay Escrow of Seattle, Washington as described below and the remainder is being
used for working capital. The managing underwriters were Black & Company, Inc.
and Pacific Crest Securities, Inc.

Effective August 31, 1998, the Company acquired Business Finance Corporation
(BFC) of Bellevue, Washington. BFC provides factoring, leasing, and inventory
financing services in Washington, Oregon, California, Nevada, and Hawaii. The
acquisition was accounted for using the purchase method and included an initial
issuance of common stock with a value of $465,000 and a cash payment in the
amount of $1.8 million.

On July 1, 1999, the Company acquired Bay Mortgage, of Bellevue, Washington.
The acquisition was accounted for using the purchase method, including a cash
payment of $1 million and issuance of common stock with a value of $977,000.
Remaining payments of approximately $840,000 million in cash and common stock
may be issued under the terms of a two-year performance earn-out agreement. Bay
Mortgage specializes in all facets of residential lending from single family
homes to small multi-plexes, including FHA and VA loans, construction loans and
bridge loans. Bay Mortgage operates as a division of Cowlitz Bank and serves
customers throughout the greater Bellevue/Seattle market area.

On September 1, 1999, the Company acquired Bay Escrow, of Seattle,
Washington. The acquisition was accounted for using the purchase method,
including a cash payment of $164,000. Bay Escrow operates as a division of
Cowlitz Bank and completes escrow transactions for Bay Mortgage.

The remainder of these proceeds have been used as working capital and to
decrease the reliance on FHLB borrowings.

13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income............................ $ 16,719 $ 15,838 $ 15,032 $ 13,633 $ 10,644
Interest expense........................... 5,248 5,973 6,889 6,174 4,548
---------- ---------- ---------- ---------- ----------
Net interest income........................ 11,471 9,865 8,143 7,459 6,096
Provision for loan loss.................... 1,349 509 375 281 694
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan loss................................ 10,122 9,356 7,768 7,178 5,402
Non-interest income........................ 1,825 978 749 296 877
Non-interest expense....................... 10,871 6,927 5,284 3,682 3,093
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes... 1,076 3,407 3,233 3,792 3,186
Provision for income taxes................. 420 1,181 1,109 1,295 1,088
---------- ---------- ---------- ---------- ----------
Net income................................. $ 656 $ 2,226 $ 2,124 $ 2,497 $ 2,098
========== ========== ========== ========== ==========
DIVIDENDS
Cash....................................... 281 212 126 101 80
Ratio of dividends to net income........... 42.84% 9.52% 5.93% 4.04% 3.81%
PER SHARE DATA
Diluted earnings per share................. $ 0.16 $ 0.57 $ 0.78 $ 0.97 $ 0.83
Cash dividends per common share............ $ 0.07 $ 0.06 $ 0.05 $ 0.04 $ 0.03
Weighted average shares outstanding........ 4,054,657 3,715,901 2,601,650 2,586,711 2,514,769
BALANCE SHEET DATA (AT PERIOD END)
Investment securities...................... $ 12,991 $ 11,530 $ 8,481 $ 5,391 $ 3,263
Trading assets............................. -- -- -- -- 2,016
Loans, net................................. 147,105 129,160 129,993 124,657 105,900
Total assets............................... 198,495 178,345 173,293 159,157 131,348
Total deposits............................. 137,607 122,361 136,209 123,297 106,371
Total short-term borrowings................ 3,825 2,275 725 550 2,625
Total long-term borrowings................. 24,281 21,799 21,900 22,842 12,393
Total shareholders' equity................. 31,490 30,920 13,887 11,813 9,391
SELECTED RATIOS
Return on average total assets............. 0.37% 1.24% 1.28% 1.75% 1.90%
Return on average shareholders' equity..... 2.08% 8.34% 16.65% 23.93% 26.06%
Net interest margin........................ 7.22% 6.08% 5.33% 5.56% 5.91%
Efficiency ratio (1)....................... 81.76% 63.89% 59.42% 47.48% 44.36%
ASSET QUALITY RATIOS
Allowance for loan losses to:
Ending total loans....................... 1.53% 1.39% 1.49% 1.50% 1.64%
Nonperforming assets (2)................. 76.88% 54.66% 81.51% 328.82% 540.80%
Nonperforming assets to ending total
assets................................... 1.49% 1.86% 1.39% 0.36% 0.25%
Net loan charge-offs to average loans...... 0.67% 0.54% 0.23% 0.13% 0.09%
CAPITAL RATIOS
Average shareholders' equity to
Average assets........................... 17.69% 14.93% 7.69% 7.31% 7.30%
Tier 1 capital ratio (3)................. 17.51% 22.21% 9.61% 10.11% 9.86%
Total risk based capital ratio (4)....... 18.76% 23.46% 11.34% 11.88% 11.96%
</TABLE>

- --------------------------

(1) Efficiency ratio is noninterest expense divided by the sum of net interest
income plus noninterest income.

(2) Nonperforming assets consist of nonaccrual loans, loans contractually past
due 90 days or more and other real estate owned.

(3) Tier 1 capital divided by risk-weighted assets.

(4) Total risk-based capital divided by risk-weighted assets.

14
<PAGE>
ITEM 7

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS INCLUDES A DISCUSSION OF CERTAIN SIGNIFICANT BUSINESS
TRENDS AND UNCERTAINTIES AS WELL AS OTHER FORWARD-LOOKING STATEMENTS AND IS
INTENDED TO BE READ IN CONJUNCTION WITH AND IS QUALIFIED IN ITS ENTIRETY BE
REFERENCE TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND
ACCOMPANYING NOTES INCLUDED ELSEWHERE IN THIS REPORT. FOR A DISCUSSION OF
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
FORWARD-LOOKING STATEMENTS, SEE "RISK FACTORS."

INTRODUCTION

The Company has recently undertaken significant business changes to
strengthen its position as a leading provider of financial services in Cowlitz
County and to expand its services throughout western Washington. Beginning in
November 1996, the Company expanded its operating base by opening a branch in
Kelso, Washington. In July 1997, the Company acquired three Wells Fargo Bank
branches, located in Castle Rock, Kalama, and Longview, Washington (the "Branch
Acquisition"). In this acquisition, the Company acquired branch sites, retained
the existing employees and assumed approximately $25.2 million in deposit
liabilities, but did not acquire any loans or other revenue producing assets.
During 1997, the Company established a trust department at its main office in
Longview. In March 1998, the Company completed an initial public offering and in
September 1998, the Company acquired Business Finance Corporation ("BFC") of
Bellevue, Washington which provides asset-based lending services to companies
throughout the western United States.

During 1999, the Company has continued to expand its business operations.
Beginning in February 1999, the Company opened a loan office in Vancouver,
Washington. In July and August 1999, the Company acquired Bay Mortgage of
Bellevue, Washington and Bay Mortgage of Seattle, Washington, both of which are
residential mortgage companies located in the greater Seattle area. In
September 1999, Cowlitz Bank opened a DE NOVO branch in Bellevue doing business
as Bay Bank and acquired Bay Escrow of Seattle, Washington. The addition of
these new divisions has increased the Company's interest yields on earning
assets, although this increase in income has been offset by the initial cost of
this expansion.

Net income has declined in 1999, primarily as a result of increases in the
provision for loan losses and noninterest expense. During the first quarter of
1999, the Company determined that approximately $348,000 in receivables
purchased by Business Finance Corporation subsidiary was not collectible. These
receivables have been charged off and the Company has increased its provision
for loan losses accordingly. The increase in the provision also reflects the
increase in average nonaccrual loans and the level of net charge offs.
Noninterest expense has increased as a result of staffing costs and other
operating expenses such as occupancy expense and amortization of intangible
assets, related to the Company's recent expansion.

Offsetting these items was an increase in net interest income. Cowlitz Bank
has made a strategic decision to lower its cost of funds by not aggressively
repricing out of area certificates of deposit as they matured. The Company's
average cost of funds has declined to 3.61% for the year ended December 31, 1999
compared to 3.95% and 4.52% during the same periods in 1998 and 1997. Although
higher yielding loans increased at December 31, 1999 from December 31, 1998,
average earning assets declined due to a decrease in excess funds invested at
FHLB.

15
<PAGE>
RESULTS OF OPERATIONS

NET INTEREST INCOME

For financial institutions, the primary component of earnings is net
interest income. Net interest income is the difference between interest income,
principally from loans and investment securities portfolios, and interest
expense, principally on customer deposits. 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.

Net interest income for the year ended December 31, 1999 was $11.5 million
an increase of 16.3% from $9.9 million in 1998, which was $1.7 million higher
than 1997. Total interest earning assets averaged $158.9 million for the year
ended December 31, 1999, compared to $162.2 million and $152.9 million for the
corresponding periods in 1998 and 1997, respectively. Average earning assets
declined from December 31, 1998 to December 31, 1999 as the excess funds
invested at the FHLB have decreased, due to the Company's decision to reduce its
higher rate, out of state certificates of deposit in the first eight months of
1999 and to use its cash to pay for acquisitions during the third quarter of
1999. The increase in average earning assets between 1998 and 1997 was
attributable to an increase in taxable securities and interest earning balances
due from banks after the Company's IPO in March of 1998, as well as the increase
in loans after the Company's acquisition of BFC. The overall tax-equivalent
yield on interest earning assets was 10.52% in 1999, compared to 9.77% in 1998
and 9.83% in 1997. The increase in the yield in 1999 was a result of investing
funds in higher yielding loans at BFC, the Bank's mortgage division, and the new
branch in Bellevue, Washington. The yield on interest-earning assets decreased
in 1998 when compared to 1997 due primarily to lower yields received on
securities.

Interest expense as a percentage of earning assets decreased to 3.30% in
1999, compared to 3.68% in 1998 and 4.51% in 1997. The average cost of interest
bearing liabilities also declined to 4.50% in 1999 compared to 4.87% in 1998 and
5.26% in 1997. This decline is primarily reflective of lower rates paid on money
market, super now accounts, and certificates of deposit during 1999. The
Company's net interest spread was 6.02% in 1999, 4.90% in 1998, and 4.57% in
1997. The increase from year to year was primarily a result of higher yields
received on interest earning assets and lower yields paid on certificates of
deposit and saving and interest bearing demand deposits. Local competitive
pricing conditions and funding needs for the Company's investments and loans
were the primary determinants of rates paid for deposits during 1999, 1998 and
1997.

16
<PAGE>
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID. The following table
sets forth, for the periods indicated, information with regard to (i) average
balances of assets and liabilities, (ii) the total dollar amount of interest
income on interest earning assets and interest expense on interest bearing
liabilities, (iii) resulting yields or costs, (iv) net interest income and
(v) net interest spread. Nonaccrual loans have been included in the table as
loans carrying a zero yield. Loan fees are recognized as income using the
interest method over the life of the loan.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- -------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans........................ $134,017 $15,344 11.45% $131,495 $14,043 10.68%
Taxable securities........... 15,205 902 5.93% 15,071 955 6.34%
Nontaxable securities (1).... 200 11 5.50% 81 4 4.94%
Federal funds sold........... 6 -- 0.00% -- -- 0.00%
Interest earning balances due
from banks................. 9,514 465 4.89% 15,512 837 5.40%
-------- ------- ------ -------- ------- ------
Total interest earning
assets..................... 158,942 16,722 10.52% 162,159 15,839 9.77%
Cash and due from banks...... 8,792 8,528
Premises and equipment,
net........................ 5,953 5,846
Allowance for loan losses.... (1,996) (1,930)
Net intangibles.............. 3,911 2,171
Other assets................. 2,055 2,045
-------- --------
Total assets............. $177,657 $178,819
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Savings and interest-bearing
demand deposits............ $ 49,128 $ 1,469 2.99% $ 46,291 $ 1,426 3.08%
Certificates of deposit...... 43,299 2,332 5.39% 52,682 3,048 5.79%
Long-term borrowings......... 22,067 1,350 6.12% 21,755 1,409 6.48%
Short-term borrowings........ 2,117 97 4.58% 1,865 90 4.83%
-------- ------- ------ -------- ------- ------
Total interest bearing
liabilities................ 116,611 5,248 4.50% $122,593 5,973 4.87%
Non-interest bearing
deposits................... 28,602 28,672
Other liabilities............ 1,024 851
-------- --------
Total liabilities............ 146,237 152,116
Shareholders' equity......... 31,420 26,703
-------- --------
Total liabilities and
Shareholders' equity....... $177,657 $178,819
======== ========
Net interest income.......... $11,474 $ 9,866
======= =======
Net interest spread.......... 6.02% 4.90%
Average yield on earning
assets..................... 10.52% 9.77%
Interest expense to earning
assets..................... 3.30% 3.68%
Net interest income to
earning assets............. 7.22% 6.08%

<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997
---------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Loans........................ $130,362 $13,700 10.51%
Taxable securities........... 10,261 667 6.50%
Nontaxable securities (1).... -- -- 0.00%
Federal funds sold........... -- -- 0.00%
Interest earning balances due
from banks................. 12,259 665 5.42%
-------- ------- ------
Total interest earning
assets..................... 152,882 15,032 9.83%
Cash and due from banks...... 7,553
Premises and equipment,
net........................ 5,064
Allowance for loan losses.... (1,935)
Net intangibles.............. 580
Other assets................. 1,846
--------
Total assets............. $165,990
========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Savings and interest-bearing
demand deposits............ $ 37,568 $ 1,199 3.19%
Certificates of deposit...... 70,641 4,246 6.01%
Long-term borrowings......... 21,773 1,401 6.43%
Short-term borrowings........ 955 43 4.50%
-------- ------- ------
Total interest bearing
liabilities................ 130,937 6,889 5.26%
Non-interest bearing
deposits................... 21,621
Other liabilities............ 675
--------
Total liabilities............ 153,233
Shareholders' equity......... 12,757
--------
Total liabilities and
Shareholders' equity....... $165,990
========
Net interest income.......... $ 8,143
=======
Net interest spread.......... 4.57%
Average yield on earning
assets..................... 9.83%
Interest expense to earning
assets..................... 4.51%
Net interest income to
earning assets............. 5.33%
</TABLE>

- ------------------------------

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

17
<PAGE>
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL. The following table shows the
dollar amount of the increase (decrease) in the Company's net interest income
and expense and attributes such dollar amounts to changes in volume as well as
changes in rates. Rate/volume variance have been allocated to volume changes:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 VERSUS 1998 1998 VERSUS 1997
------------------------------------- --------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
------------------- TOTAL INCREASE/ ------------------- TOTAL INCREASE/
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
-------- -------- --------------- -------- -------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest earning balances due
From banks..................... $(293) $ (79) $ (372) $ 174 $ (2) $ 172
Investment security income:
Taxable securities............... 9 (62) (53) 304 (16) 288
Nontaxable securities............ 7 -- 7 4 -- 4
Loans, including fees on loans... 288 1,013 1,301 121 222 343
----- ------ ------ ------- ----- -------
Total interest income........ 11 872 883 603 204 807
----- ------ ------ ------- ----- -------
Interest expense:
Savings and interest bearing
Demand......................... 84 (42) 42 268 (41) 227
Certificates of deposit.......... (505) (211) (716) (1,043) (155) (1,198)
Short-term borrowings............ 12 (5) 7 44 3 47
Long-term borrowings............. 20 (78) (58) (3) 11 8
----- ------ ------ ------- ----- -------
Total interest expense....... (389) (336) (725) (734) (182) (916)
----- ------ ------ ------- ----- -------
Net interest spread................ $ 400 $1,208 $1,608 $ 1,337 $ 385 $ 1,723
===== ====== ====== ======= ===== =======
</TABLE>

NON-INTEREST INCOME

Non-interest income consists of the following components:

NON-INTEREST INCOME

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charge on deposit accounts..................... $ 698 $656 $563
Gains on loans sold.................................... 509 -- --
Fiduciary income....................................... 151 57 --
Credit Card income..................................... 136 114 100
Escrow fees............................................ 105 -- --
Underwriting fees...................................... 79 -- --
ATM income............................................. 54 40 13
Safe deposit box fees.................................. 32 30 15
Other miscellaneous fees and income.................... 61 81 58
------ ---- ----
Total non-interest income.............................. $1,825 $978 $749
====== ==== ====
</TABLE>

18
<PAGE>
Total non-interest income has increased year to year to $1.8 million for
1999, from $978,000 for 1998 and $749,000 for 1997. Service charges on deposit
accounts increased to $698,000 in 1999 from $656,000 in 1998 due to an increase
of $49,000 in NSF and overdrafts fees collected, and $563,000 in 1997 primarily
because of the increase in deposits from the Branch Acquisition in July 1997.
ATM income has continued to increase after the Branch Acquisition in 1997 and as
the customers have become accustomed to using these services. The opening of the
trust department added $151,000 and $57,000 in non-interest income during 1999
and 1998, respectively. Also adding to the increase in non-interest income were
gains on loans sold of $509,000, underwriting fees of $79,000 and escrow fees of
$105,000 in 1999. These fees were related to the expansion of the mortgage
division and the acquisition of Bay Mortgage and Bay Escrow during 1999.

NON-INTEREST EXPENSE

Non-interest expense consists principally of employees' salaries and
benefits, occupancy costs, data processing and communication expenses, FDIC
(Federal Deposit Insurance Corporation) insurance premiums, professional fees,
and other non-interest expenses. Non-interest expenses increased 56.9% to
$10.9 million for the year ended December 31, 1999 compared to $6.9 million for
the year ended December 31, 1998, which was an increase of 31.1% compared to
$5.3 million for the year ended December 31, 1997. As discussed below, the
primary reasons for these increases were increased staffing costs, as well as an
increase in other operating expense such as occupancy expense and amortization
of the deposit premium from the Branch Acquisition in July 1997 and the
intangible asset amortization from the acquisition of BFC in September 1998, Bay
Mortgage of Bellevue in July 1999, Bay Mortgage of Seattle in August 1999, and
Bay Escrow in September 1999.

A measure of the Company's ability to contain non-interest expenses is the
efficiency ratio. This statistic is derived by dividing total non-interest
expenses by total net interest income and non-interest income. The Company's
efficiency ratio increased to 81.76% for the year ended December 31, 1999
compared to 63.89% for the corresponding period in 1998 and 59.42% for the year
ended December 31, 1997, largely as a result of the Company's expansion
activities during these periods.

Salaries and benefits expense of $6.1 million in 1999 represented an
increase of $2.3 million or 61.3% from $3.8 million reported in 1998 which was
$997,000 or 35.9% higher than the $2.8 million reported in 1997. The increase
from 1998 to 1999 reflects the addition of 59 employees after the Company's
recent acquisitions and 5 employees due to growth in the Company's business.
During 1998, the salary and benefit expense includes the addition of
approximately 22 employees from the branches for a twelve-month period. All of
these employees were with the Company at both December 31, 1997 and
December 31, 1998, but only received five and one-half months salary from the
Company in 1997. Also contributing to the increases in both years were ordinary
increases in salary for existing employees generally ranging from three to six
percent a year. At December 31, 1999, the Company had 169 full-time equivalent
employees compared to 105 and 99 at December 31, 1998 and 1997, respectively.

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 in 1999 of $1.5 million was $569,000 or 64.1%
higher than the $888,000 reported in 1998, which was $164,000 or 22.7% higher
than the $724,000 reported in 1997. The increase in occupancy expenses in 1999
reflects an increase of $302,000 in lease payments after the acquisition of Bay
Mortgage and the start up of Bay Bank in Bellevue, Washington. Also contributing
to this increase is the amortization of leasehold improvements completed at
branch locations and the new Vancouver loan office in 1998 and during the first
quarter of 1999. During 1998, the increase in occupancy expense was due
primarily to building a new branch in Castle Rock and the remodel of the
Triangle branch, both of which occurred in 1998. Also contributing to these
increases were the expansion of the Company's main office facility and the
Branch Acquisition in July 1997.

19
<PAGE>
Intangible assets included a deposit premium of $1.3 million and
$1.6 million, net of accumulated amortization, at December 31, 1999 and 1998,
respectively. The deposit premium is being amortized using an accelerated method
over a ten-year life. Intangible assets at December 31, 1999 and 1998 also
included goodwill of $3.7 and $1.5 million, net of accumulated amortization,
respectively. The goodwill represents the excess of acquisition costs over the
fair value of net assets that arose in connection with the acquisitions of
Business Finance Corporation, Bay Mortgage of Bellevue, Washington, Bay Mortgage
of Seattle, Washington, and Bay Escrow. All goodwill is being amortized on a
straight-line basis over a fifteen-year period. At December 31, 1999, expenses
related to the amortization of intangibles were $445,000 compared to $309,000 at
December 31, 1998 and $123,000 at December 31, 1997.

Other operating expenses such as insurance, legal and accounting expenses,
service charges, postage, and other business expenses were $2.6 million at
December 31, 1999, $1.7 million at December 31, 1998, and $1.4 million at
December 31, 1997. The increases from year to year were due to the Company's
continued growth and expansion.

INCOME TAXES

The provision for income taxes amounted to $420,000, $1.2 million and
$1.1 million for 1999, 1998, and 1997, respectively. The provision resulted in
an effective tax rate of 39% in 1999, 34.6% in 1998, and 34.3% in 1997. This
increase was due to the amortization of goodwill associated with the BFC
acquisition that is not deductible for income tax purposes.

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 nonperforming and impaired loans,
evaluation of future economic trends in the Company's market area, and other
factors relevant to the loan portfolio. See Allowance for Loan Losses disclosure
for a more detailed discussion.

The Company's provision for loan losses was $1.3 million, $509,000 and
$375,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Net
charge-offs were $882,000 in 1999 compared to net charge-offs of $710,000 and
$299,000 for 1998 and 1997 respectively. During the first quarter of 1999, the
Company determined that approximately $348,000 in receivables purchased by its
subsidiary BFC was not collectible. These receivables were charged off during
the first quarter and the Company increased its provision for loan losses
accordingly. The increase in the provision also reflects the increase in average
nonperforming loans and level of net charge-offs during the period. Also
contributing was the growth in loans late in 1999. Management continues to
closely monitor the loan quality and existing relationships.

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.

20
<PAGE>
The following table shows the Company's loan loss performance for the
periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans outstanding at end of period........................ $149,386 $130,974 $131,963
Average loans outstanding during the period............... $132,002 $130,907 $130,362
Allowance for loan losses, beginning of period............ $ 1,814 $ 1,970 $ 1,894
Loans charged off:
Commercial.............................................. 838 618 186
Real estate............................................. 41 -- 3
Consumer................................................ 50 22 23
Credit cards............................................ 96 87 112
-------- -------- --------
Total loans charged-off............................... 1,025 727 324
-------- -------- --------
Recoveries:
Commercial.............................................. 104 -- 5
Real estate............................................. 15 3 --
Consumer................................................ 1 4 20
Credit cards............................................ 23 10 --
-------- -------- --------
Total recoveries...................................... 143 17 25
-------- -------- --------
Provision for loan losses................................. 1,349 509 375
-------- -------- --------
Adjustment incident to acquisition........................ -- 45 --
-------- -------- --------
Allowance for loan losses, end of period.................. $ 2,281 $ 1,814 $ 1,970
======== ======== ========
Ratio of net loans charged-off to average loans
outstanding............................................. 0.67% 0.54% 0.23%
Ratio of allowance for loan losses to loans at year end... 1.53% 1.39% 1.49%
</TABLE>

FINANCIAL CONDITION

<TABLE>
<CAPTION>
INCREASE (DECREASE)
SUMMARY BALANCE SHEET ----------------------------------------------
DECEMBER 31, 12/31/98--12/31/99 12/31/97--12/31/98
------------------------------- ---------------------- ---------------------
1999 1998 1997 (DOLLARS) (PERCENT) (DOLLARS) (PERCENT)
-------- -------- --------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks......... $ 19,054 $ 22,705 $ 23,109 $ (3,651) (16.1)% $ (404) (1.7)%
Investment securities........... 12,991 11,530 8,481 1,461 12.7% 3,049 36.0%
Loans, net...................... 147,105 129,160 129,993 17,945 13.9% (833) (0.6)%
Other assets.................... 19,345 14,950 11,710 4,395 29.4% 3,240 27.7%
-------- -------- -------- -------- --------
Total assets.................. $198,495 $178,345 $173,293 $ 20,150 11.3% $ 5,052 2.9%
======== ======== ======== ======== ========
LIABILITIES
Non-interest bearing deposits... $ 28,004 $ 33,062 $ 27,141 $ (5,058) (15.3)% $ 5,921 21.8%
Interest-bearing deposits....... 109,603 89,299 109,068 20,304 22.7% (19,769) (18.1)%
-------- -------- -------- -------- --------
Total deposits.................. 137,607 122,361 136,209 15,246 12.5% (13,848) (10.2)%
Other liabilities............... 29,398 25,064 23,197 4,334 17.3% 1,867 8.0%

SHAREHOLDERS' EQUITY............ 31,490 30,920 13,887 570 1.8% 17,033 122.7%
-------- -------- -------- -------- --------
Total liabilities and
Shareholders
equity........................ $198,495 $178,345 $173,293 $ 20,150 11.3% $ 5,052 2.9%
======== ======== ======== ======== ========
</TABLE>

21
<PAGE>
INVESTMENT SECURITIES

At December 31, 1999, the Company's portfolio of investment securities
totaled $13.0 million, a 12.7% increase when compared to a securities portfolio
of $11.5 million at December 31, 1998. The investment portfolio increased during
1999 primarily as a result of the purchase of available-for-sale securities.

The Company follows a financial accounting principle which requires the
identification of investment securities as held-to-maturity, available-for-sale
or trading assets. Securities designated as held-to-maturity are those that the
Company has the intent and ability to hold until they mature or are called.
Available-for-sale securities are those that management may sell if liquidity
requirements dictate or alternative investment opportunities arise. Trading
assets are purchased and held principally for the purpose of reselling them
within a short period of time. The mix of available-for-sale and
held-to-maturity investment securities is considered in the context of the
Company's overall asset-liability management policy and illustrates management's
assessment of the relative liquidity of the Company. At December 31, 1999, the
investment portfolio consisted of 64.9% available-for-sale securities and 35.1%
held-to-maturity investments. At December 31, 1998, available-for-sale
securities were 61.3% and held-to-maturity investments were 38.7% of the
investment portfolio. The Company did not conduct any trading activities during
1999 or 1998. See Note 2 to the Consolidated Financial Statements.

The following table provides the amortized cost and fair value of the
Company's investment securities as of December 31, 1999 and 1998.

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities................................. $8,484 $8,427 $6,994 $7,065
------ ------ ------ ------
Total.................................................. $8,484 $8,427 $6,994 $7,065
====== ====== ====== ======
HELD-TO-MATURITY
U.S. Treasury securities................................. $ 999 $1,000 $ 999 $1,021
Municipal bond........................................... 200 193 199 199
Certificates of deposit.................................. 3,365 3,365 3,267 3,267
------ ------ ------ ------
Total.................................................. $4,564 $4,558 $4,465 $4,487
====== ====== ====== ======
</TABLE>

At December 31, 1999, the Company's available-for-sale and held-to-maturity
investments had a total net unrealized losses of approximately $63,000. This
compares to net unrealized gains of approximately $93,000 at December 31, 1998.
Unrealized gains and losses reflect changes in market conditions and do not
represent the amount of actual profits or losses the Company may ultimately
realize. Actual realized gains and losses occur at the time investment
securities are sold or redeemed.

In 1991, the Company became a member and shareholder in the Federal Home
Loan Bank of Seattle. The Company's relationship and stock investment with the
FHLB provides a borrowing source for meeting liquidity requirements, in addition
to dividend earnings. Investment in FHLB stock was $3.1 million at December 31,
1999 compared to $2.9 million at December 31, 1998.

At December 31, 1999, net unrealized losses on available-for-sale securities
were $38,000 representing 0.29% of the total portfolio. Management has no
current plans to sell any of these securities.

22
<PAGE>
The following table summarizes the contractual maturities and weighted
average yields of investment securities at December 31, 1999.
<TABLE>
<CAPTION>
ONE AFTER 5 DUE
ONE YEAR THROUGH THROUGH THROUGH
OR LESS YIELD 5 YEARS YIELD 10 YEARS YIELD 10 YEARS YIELD TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities..... $5,000 5.69% $4,426 5.30% $ -- -- $ -- -- $ 9,426
Other securities............. 3,365 5.42% 100 4.00% 100 4.10% -- -- 3,565
------ ----- ------ ----- ---- ----- ---- --- -------
Total...................... $8,365 5.45% $4,526 5.09% $100 4.10% $ -- -- $12,991
====== ===== ====== ===== ==== ===== ==== === =======

YIELD
--------
<S> <C>
U.S. Treasury securities..... 5.47%
Other securities............. 5.34%
-----
Total...................... 5.37%
=====
</TABLE>

LOANS

Outstanding loans totaled $149.4 million at December 31, 1999, representing
an increase of $18.4 compared to $131.0 million at December 31, 1998. Loan
commitments were $27.6 million at December 31, 1999 and amounted to
$24.7 million at December 31, 1998.

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial.......................................... $123,701 82.47% $103,473 78.68%
Real estate construction............................ 3,104 2.07% 3,206 2.44%
Real estate commercial.............................. 9,859 6.58% 7,026 5.34%
Real estate mortgage................................ 8,194 5.46% 12,702 9.66%
Consumer and other.................................. 5,134 3.42% 5,063 3.85%
Contracts purchased................................. -- -- 45 0.03%
-------- ------- -------- -------
149,992 100.00% 131,515 100.00%
Deferred loan fees.................................. (606) (541)
-------- --------
Total loans....................................... 149,386 130,974
-------- --------
Allowance for loan losses........................... (2,281) (1,814)
-------- --------
Total loans, net.................................. $147,105 $129,160
======== ========
</TABLE>

23
<PAGE>
The following table shows the contractual maturities of the Company's loans
to changes in interest rates at the dates indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------
DUE AFTER ONE
DUE IN ONE THROUGH DUE AFTER TOTAL
YEAR OR LESS 5 YEARS 5 YEARS LOANS
------------ ------------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial loans.................................. $54,489 $48,178 $21,034 $123,701
Real estate construction.......................... 1,304 1,428 372 3,104
Real estate commercial............................ 4,140 4,538 1,181 9,859
Real estate mortgage.............................. 3,560 3,677 957 8,194
Consumer and other................................ 329 4,548 257 5,134
Contracts purchased............................... -- -- -- --
------- ------- ------- --------
$63,822 $62,369 $23,801 $149,992
======= ======= ======= ========
Loans with fixed interest rates................... $103,392
Loans with floating interest rates................ 46,600
--------
Total........................................... $149,992
========
</TABLE>

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management's estimate of probable
losses which have occurred 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 annually or when indicators show
that a credit may have weakened, 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 previous year's actual net charge-offs
and an estimated maximum charge-off factor. Each of these amounts is combined
with the first component of the general allowance

24
<PAGE>
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 nonperforming 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 uncorrectable 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 increased to $1.7 million at
December 31, 1999 compared to $1.1 million at December 31, 1998. Management
believes this increase is prudent given the increase in the average nonaccrual
loans and the level of net charge-offs during the 1999.

At December 31, 1999, approximately $551,000 of the allowance for loan
losses was allocated based on an estimate of the amount that was necessary to
provide for potential losses related to specific loans, compared to $681,000 at
December 31, 1998. Specific reserves declined as those loans requiring specific
reserves have been reduced by either principal payments or have been charged
off.

Management's evaluation of the factors above resulted in allowances for loan
losses of $2.3 million and $1.8 million at the end of 1999 and 1998,
respectively. The allowance as a percentage of year-end total loans increased
from 1.39% at year-end 1998 to 1.53% at year-end 1999. The increase between
December 31, 1998 and December 31, 1999 was due primarily to the level of
nonaccrual loans and the growth of the loan portfolio late in 1999.

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

At December 31, 1999 and 1998, the Company's recorded investment in certain
loans that were considered to be impaired was $3.2 million and $4.9 million,
respectively. Of these impaired loans,

25
<PAGE>
$1.9 million and $3.1 million have related specific reserves of $551,000 and
$681,000, while $1.3 million and $1.8 million did not require specific reserves.
The balance of the allowance for loan losses in excess of these specific
reserves is available to absorb losses from all loans. The average recorded
investment in impaired loans for the years ended December 31, 1999, 1998, and
1997, was approximately $3.7 million, $4.4 million, and $1.3 million,
respectively. The Company's policy is to disclose as impaired loans all loans
that are past due 90 days or more as to either principal or interest and any
loans that the Company believes collection of principal or interest is doubtful,
except loans that are currently measured at fair value or the lower of cost or
fair value and credit card receivables, which are considered large groups of
smaller homogeneous loans and are collectively evaluated for impairment.
Interest payments received on impaired loans are recorded as interest income,
unless collection of the remaining recorded investment is not probable, in which
case payments received are recorded as a reduction of principal. For the years
ended December 31, 1999, 1998, and 1997, interest income recognized on impaired
loans totaled $153,000, $289,000, and $36,000, respectively, all of which was
recognized on a cash basis.

Generally, no interest is accrued on loans when factors indicate collection
of interest is doubtful or when the principal or interest payment becomes
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.

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Loans on nonaccrual status.................................. $2,387 $2,737
Loans past due greater than 90 days but not on nonaccrual
status.................................................... -- 9
Other real estate owned..................................... 580 573
Troubled debt restructuring................................. -- --
------ ------
Total nonperforming assets................................ $2,967 $3,319
====== ======
Percentage of nonperforming assets to total assets.......... 1.49% 1.86%
</TABLE>

At December 31, 1999 nonperforming assets were $3.0 million or 1.5% of total
assets compared to $3.3 million at December 31, 1998. Nonaccrual loans were
$2.4 million at December 31, 1999 and $2.7 million at December 31, 1998. BFC
accounted for approximately $172,000 of the total nonaccrual loans at
December 31, 1999, reflecting the more aggressive lending mix of its portfolio.
It is not unusual in the normal course of business for BFC to have loans that
become more than 90 days past due and are therefore placed on nonaccrual status,
although management does not necessarily believe that losses are probable on
these loans. Approximately $1.6 million of the non-accrual loans reflect loans
primarily secured by real estate and the remainder consists of commercial and
consumer loans with various collateral. Any losses on non-accrual loans that are
considered probable have been estimated by management in its regular quarterly
assessment of the allowance for loan losses as discussed in the Allowance for
Loan Losses disclosure. The increase in the provision for loan losses each year
is largely reflective of the increases in the average nonaccrual loans and the
level of net charge-offs during the periods. Also contributing is the growth in
loans late in 1999. For a more detailed discussion see Allowance for Loan Losses
disclosure.

Other real estate owned increased slightly from 1998 to 1999, as a result of
the reclassification of loans from nonaccrual to other real estate owned. All
properties are being actively marketed through local real estate agencies.

26
<PAGE>
DEPOSITS

The following table sets forth the average balances of the Company's
interest bearing liabilities, interest expense and average rates paid for the
period indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
checking............... $ 32,200 $ 990 3.07% $ 28,912 $ 928 3.21% $ 21,956 $ 712 3.24%
Savings.................. 16,928 479 2.83% 17,379 498 2.87% 15,612 487 3.12%
Certificates of
deposit................ 43,299 2,332 5.39% 52,682 3,048 5.79% 70,641 4,246 6.01%
Long-term borrowings..... 22,067 1,350 6.12% 21,755 1,409 6.48% 21,773 1,401 6.43%
Short-term borrowings.... 2,117 97 4.58% 1,865 90 4.83% 955 43 4.50%
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities.......... $116,611 $5,248 4.50% $122,593 $5,973 4.87% $130,937 $6,889 5.26%
====== ====== ======
Total
non-interest-bearing
liabilities............ 29,626 29,523 22,296
-------- -------- --------
Total interest and non-
interest-bearing
liabilities.......... $146,237 $152,116 $153,233
======== ======== ========
</TABLE>

Deposits increased to $137.6 million at December 31, 1999, an increase of
12.5% from $122.4 at December 31, 1998, primarily as a result of a marketing
campaign that began late in the third quarter of 1999. The funds brought in
through this local campaign have increased certificates of deposit, but at
generally lower rates than out of state certificates of deposit. These funds
have been invested in new loans. Since this initiative occurred late in the
third quarter of 1999, average certificates of deposits do not fully reflect
these changes. Nonvolatile, non-interest bearing deposits, also referred to as
core deposits, have declined slightly as a percentage of the Company's deposit
base. At December 31,1999, non-interest bearing demand deposits were 20.4% of
total deposits, compared to 27.0% of total deposits at December 31, 1998.

Interest bearing deposits consist of NOW, money market, savings and time
certificate accounts. By their nature, interest bearing account balances will
tend to grow or decline as the Company reacts to changes in competitors' pricing
and interest payment strategies. At December 31, 1999, total interest bearing
deposit accounts of $109.6 million increased $20.3 million or 22.7% from
December 31, 1998. This growth was concentrated in certificate of deposit
accounts as discussed above.

The Company has from time to time funded its growth with higher interest
rate certificates of deposit over $100,000. At December 31, 1999, time
certificates of deposit in excess of $100,000 totaled $24.1 million or 40.2% of
total outstanding certificates of deposit, compared to $13.6 million or 32.5% of
total outstanding certificates of deposit at December 31, 1998. As discussed
above, the Company has increased certificates late in the third quarter of 1999
through a local marketing campaign.

27
<PAGE>
The following table sets forth, by time remaining to maturity, all time
certificates of deposit accounts outstanding at December 31, 1999:

<TABLE>
<CAPTION>
TIME DEPOSITS OF ALL OTHER TIME
$100,000 OR MORE (1) DEPOSITS (2)
---------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
--------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Reprice/Mature in three months or less................ $13,723 56.89% $ 9,849 27.44%
Reprice/Mature after three months through six
months.............................................. 6,799 28.19% 16,313 45.45%
Reprice/Mature after six months through one year...... 3,279 13.59% 9,375 26.12%
Reprice/Mature after one year through five years...... 320 1.33% 354 0.99%
------- ------ ------- ------
Total............................................... $24,121 100.00% $35,891 100.00%
======= ====== ======= ======
</TABLE>

- ------------------------

(1) Time certificates of deposit of $100,000 or more represent 40.2% of total
outstanding time certificates of deposit at December 31, 1999.

(2) All other time certificates of deposit represent 59.8% of total time
certificates of deposit at December 31, 1999.

At December 31, 1999, other borrowings have the following times remaining to
maturity:

<TABLE>
<CAPTION>
DUE DUE
AFTER 3 AFTER ONE
DUE IN 3 MONTHS YEAR DUE
MONTHS THROUGH THROUGH AFTER 5
OR LESS ONE YEAR 5 YEARS YEARS TOTAL
-------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Short-term borrowings........................... $3,825 $ -- $ -- $ -- $ 3,825
Long-term borrowings............................ 500 5,250 7,100 11,431 24,281
------ ------ ------ ------- -------
Total borrowings.............................. $4,325 $5,250 $7,100 $11,431 $28,106
====== ====== ====== ======= =======
</TABLE>

Historically 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 25% of assets.
Advances from the FHLB have terms ranging from 1 through 15 years and at
December 31, 1999, bear interest at rates from 5.45% to 8.80%. At December 31,
1999, $24.3 million in advances were outstanding from the FHLB and the Company
had additional borrowing capacity for cash advances of $23.8 million. The
Company may increase its percentage of borrowings from the FHLB in the future if
circumstances warrant.

ASSET-LIABILITY MANAGEMENT/INTEREST RATE SENSITIVITY

The principal purpose of asset-liability management is to manage the
Company's sources and uses of funds to maximize net interest income under
different interest rate conditions with minimal risk. A part of asset-liability
management involves interest rate sensitivity, the difference between repricing
assets and repricing liabilities in a specific time period. The policy of the
Company is to control the exposure of the Company's earnings to changing
interest rates by generally maintaining a position within a narrow range around
an "earnings neutral" or "balanced" position. The Board of Directors has
established guidelines for maintaining the Company's earnings risk due to future
interest rate changes. This analysis provides an indication of the Company's
earnings risk due to future interest rate changes. At December 31, 1999, the
analysis indicated that the earnings risk was within the Company's policy
guidelines.

A key component of the asset-liability management is the measurement of
interest-rate sensitivity. Interest-rate sensitivity refers to the volatility in
earnings resulting from fluctuations in interest rates,

28
<PAGE>
variability in spread relationships, and the mismatch of repricing intervals
between assets and liabilities. Interest-rate sensitivity management attempts to
maximize earnings growth by minimizing the effects of changing rates, asset and
liability mix, and prepayment trends.

The following table presents interest-rate sensitivity data at December 31,
1999. The interest rate gaps reported in the table arise when assets are funded
with liabilities having different repricing intervals. Since these gaps are
actively managed and change daily as adjustments are made in interest rate views
and market outlook, positions at the end of any period may not be reflective of
the Company's interest rate view in subsequent periods. Active management
dictates that longer-term economic views are balanced against the prospects of
short-term interest rate changes in all repricing intervals.

<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING AT DECEMBER 31, 1999
---------------------------------------------------------------
0-3 3-6 6-12 1-5 OVER
MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Interest earning balances due
From banks.............................. $ 9,475 $ -- $ -- $ -- $ -- $ 9,475
Investments available for sale (1)........ 4,001 -- -- 4,426 -- 8,427
Investments held to maturity.............. 990 2,078 1,296 100 100 4,564
Federal Home Loan Bank Stock (1).......... 3,090 -- -- -- -- 3,090
Loans held for sale....................... -- 2,255 -- -- -- 2,255
Loans, including fees..................... 55,651 4,298 5,522 62,369 21,546 149,386
------- ------- -------- ------- ------- --------
Total interest earning assets......... $73,207 $ 8,631 $ 6,818 $66,895 $21,646 $177,197
======= ======= ======== ======= ======= ========
Allowance for loan losses................... (2,281)
Cash and due from banks..................... 9,579
Other assets................................ 14,000
--------
Total assets.......................... $198,495
========
Interest Bearing Liabilities:
Savings and interest demand deposits...... $33,907 $ -- $ -- $ -- $15,684 $ 49,591
Certificates of deposit................... 23,572 9,222 13,890 13,229 99 60,012
Borrowings................................ 16,575 5,000 -- 100 6,431 28,106
------- ------- -------- ------- ------- --------
Total interest bearing liabilities.... $74,054 $14,222 $ 13,890 $13,329 $22,214 $137,709
======= ======= ======== ======= ======= ========
Other liabilities........................... 29,296
Shareholders' equity........................ 31,490
--------
Total liabilities and shareholders'
equity.............................. $198,495
========
Interest sensitivity gap.................... (847) (5,591) (7,072) 53,566 (568) $ 39,488
------- ------- -------- ------- ------- --------
Cumulative interest sensitivity gap......... $ (847) $(6,438) $(13,510) $40,056 $39,488
------- ------- -------- ------- -------
</TABLE>

- ------------------------

(1) Equity investments have been placed in the 0 3 month category

MARKET RISK

Interest rate and credit risks are the most significant market risks
impacting the Company's performance. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities. The Company relies on loan reviews,
prudent loan underwriting standards and an adequate allowance for loan losses to
mitigate credit risk.

29
<PAGE>
Interest rate risk is managed through the monitoring of the Company's gap
position (see Asset-Liability Management/Interest Rate Sensitivity) 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.

Rate shock is an instantaneous and complete adjustment in market rates of
various magnitudes on a static or level balance sheet to determine the effect
such a change in rates would have on the Company's net interest income for the
succeeding twelve months, and the fair values of financial instruments.

The Company utilizes asset/liability-modeling software to determine the
effect of a shift in market interest rates, with scenarios of interest rates
increasing 100 and 200 basis points and decreasing 100 and 200 basis points. The
model utilized to create the table presented below is based on the concept that
all rates do not move by the same amount or at the same time. Although certain
assets and liabilities may have similar maturities or periods to repricing, they
may not react correspondingly to changes in market interest rates. In addition,
interest rates on certain types of assets and liabilities may fluctuate with
changes in market interest rates, while interest rates on certain types of
assets may lag behind changes in market rates. Further, in the event of a change
in interest rates, prepayment and early withdrawal levels would likely deviate
from those assumed in the table. The ability of certain borrowers to make
scheduled payments on the adjustable rate loans may decrease in the event of an
interest rate increase due to adjustments in the amount of the payments.

The model attempts to account for such limitations by imposing weights on
the gaps between assets and liabilities. These weights are based on the ratio
between the amount of rate change and each category of asset/liability, and the
amount of any change in the federal funds rate. Local conditions and the
strategy of the Company determine the weights for loan and core deposits; the
others are set by national markets. In addition, a timing factor has been used
as (a) fixed rate instruments do not reprice immediately; (b) renewals may have
different term than original maturities; and (c) there is a timing factor
between rates on different instruments (i.e. core deposits usually reprice well
after there has been a change in the federal funds rate). Due to the various
assumptions used for this simulation analysis, no assurance can be given that
actual results will correspond with projected results.

The following table shows the estimated impact of the interest rate shock on
net interest income and the fair values of financial instruments at
December 31, 1999:

<TABLE>
<CAPTION>
FAIR VALUES OF FINANCIAL INSTRUMENTS
--------------------------------------------------
NET INTEREST INCOME ASSETS LIABILITIES
---------------------- ---------------------- ----------------------
AMOUNT %CHANGE AMOUNT %CHANGE AMOUNT %CHANGE
-------- -------- -------- -------- -------- --------
(ALL AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
+200 basis points............... 11,671 1.7 % 178,718 (3.5)% 163,922 (0.6)%
+100 basis points............... 11,588 1.0 % 181,885 (1.8)% 164,387 (0.3)%
Static.......................... 11,471 0.0 % 184,667 0.0 % 164,867 0.0 %
- -100 basis points............... 11,339 (1.2)% 188,738 1.9 % 165,361 0.3 %
- -200 basis points............... 11,207 (2.3)% 192,450 3.9 % 165,869 0.6 %
</TABLE>

Loans and certificates of deposit represent the majority of interest rate
exposure. Investments only represent 7.3% of interest earning assets and
therefore, the impact of the investments on net interest income of moving rates
would not be significant. Historically, savings and interest-bearing checking
accounts have not repriced in proportion to changes in overall market interest
rates. The change in net interest income can be attributed to the balance of
loans and certificates of deposit maturing/repricing. As a result, in an
increasing/decreasing interest rate environment net interest income would
increase/decrease.

30
<PAGE>
The change in fair values of financial assets is mainly a result of total
loans representing 84.3% of total interest-earning assets. Of these loans
$103.4 million have fixed interest rates, which decline in value during a period
of rising interest rates.

While asset/liability models have become a main focus of risk management,
the Company believes that statistical models alone do not provide a reliable
method of monitoring and controlling risk. The quantitative risk information
provided is limited by the parameters established in creating the related
models. Therefore, the Company uses these models only as a supplement to other
risk management tools.

RETURN ON EQUITY AND ASSETS

Net income for the year ended December 31, 1999, totaled $656,000 for a
return on average shareholders' equity of 2.09% and a return on average total
assets of 0.37%. These returns compare to a 8.34% return on average equity and
1.24% return on average total assets for the corresponding period in 1998. These
declines reflect the decline in the Company's net income due to the expansion
activities throughout 1999.

Return on daily average assets and equity and certain other ratios for the
periods indicated are presented below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 656 $ 2,226 $ 2,124
Average assets.............................................. $177,657 $178,819 $165,990
Return on average assets.................................... 0.37% 1.24% 1.28%

Net income.................................................. $ 656 $ 2,226 $ 2,124
Average equity.............................................. $ 31,420 $ 26,703 $ 12,757
Return on average equity.................................... 2.09% 8.34% 16.65%

Cash dividends paid per share............................... $ 0.07 $ 0.06 $ 0.05
Diluted earnings per share.................................. $ 0.16 $ 0.57 $ 0.78
Dividend payout ratio....................................... 43.75% 10.53% 6.41%

Average equity.............................................. $ 31,420 $ 26,703 $ 12,757
Average assets.............................................. $177,657 $178,819 $165,990
Average equity to asset ratio............................... 17.69% 14.93% 7.69%
</TABLE>

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. As of December 31, 1999, approximately
$8.4 million of the securities portfolio matures within one year.

Historically 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 25% of the Bank's
assets. Advances from the FHLB have terms ranging from 1 through 15 years and at
December 31, 1999 bear interest at rates from 5.45% to 8.80%. At December 31,
1999, $24.3 million in advances were outstanding from the FHLB and the Company
had additional borrowing capacity for cash advances of $23.8 million. The
Company may increase its percentage of borrowings from the FHLB in the future if
circumstances warrant.

31
<PAGE>
CAPITAL

The Company and Cowlitz Bank are required to maintain minimum amounts of
capital to "risk weighted" assets, as defined by banking regulators. The Company
and Cowlitz Bank are required to have Tier 1 and Total Capital ratios of 4.0%
and 8.0%, respectively. In addition Cowlitz Bank is required to maintain a
Tier 1 leverage ratio of not less than 4%. At December 31, 1999, the Company's
ratios were 17.51% and 18.76%, respectively and at December 31, 1998, the
Company's ratios were 22.21% and 23.46%, respectively. The ratio of
shareholder's equity to average assets was 17.73% and 17.29% at December 31,
1999 and 1998, respectively. At December 31, 1999, Cowlitz Bank's Tier 1, Total
Capital, and Tier 1 leverage ratios were 10.71%, 11.96%, and 8.58%, respectively
and at December 31, 1998 were 12.07%, 13.32%, and 8.72%, respectively.

YEAR 2000

The Company has not incurred any systems or other problems related to the
millennium issue. All systems have been tested and all primary vendors have been
contacted. As part of the Company's preparations for the year 2000, all systems
that were not in compliance with Year 2000 were either replaced or upgraded. The
Company approved a budget of $268,000 that included these system upgrades,
staffing, and other cost associated with the Year 2000. As of December 31, 1999
the Company had incurred costs of $239,000. The Company does not anticipate any
material business changes in the future as a result of the Year 2000 issue.

32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors
of Cowlitz Bancorporation:

We have audited the accompanying consolidated statements of condition of
Cowlitz Bancorporation (a Washington Corporation) and Subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cowlitz Bancorporation and
Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.

Arthur Andersen LLP

Portland, Oregon
January 21, 2000 (except for the matters discussed
in Note 19, as to which the date
is March 24, 2000)

33
<PAGE>
COWLITZ BANCORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

DECEMBER 31, 1999 AND 1998

(IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 19,054 $ 22,705
Investment securities:
Investments available-for-sale (at fair value, cost of
$8,484 and $6,994 at December 31, 1999 and December 31,
1998, respectively)..................................... 8,427 7,065
Investments held-to-maturity (at amortized cost, fair
value of $4,558 and $4,487 at December 31, 1999 and
December 31, 1998, respectively)........................ 4,564 4,465
-------- --------
Total investment securities........................... 12,991 11,530
-------- --------
Loans....................................................... 149,386 130,974
Allowance for loan losses................................... (2,281) (1,814)
-------- --------
Loans, net................................................ 147,105 129,160
-------- --------
Loans held for sale......................................... 2,255 1,072
Premises and equipment, net of accumulated depreciation of
$2,491 and $1,837 at December 31, 1999 and December 31,
1998, respectively........................................ 5,930 5,859
Federal Home Loan Bank stock................................ 3,090 2,869
Intangible assets, net of accumulated amortization of
$877and $432 at December 31, 1999 and December 31, 1998,
respectively.............................................. 4,963 3,110
Other assets................................................ 3,107 2,040
-------- --------
Total assets.......................................... $198,495 $178,345
======== ========
LIABILITIES
Deposits:
Demand.................................................... $ 28,004 $ 33,062
Savings and interest-bearing demand....................... 49,591 47,367
Certificates of deposit................................... 60,012 41,932
-------- --------
Total deposits........................................ 137,607 122,361
Short-term borrowings....................................... 3,825 2,275
Long-term borrowings........................................ 24,281 21,799
Other liabilities........................................... 1,292 990
-------- --------
Total liabilities..................................... $167,005 $147,425
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized
as of December 31, 1999 and December 31, 1998,
respectively; no shares issued and outstanding at December
31, 1999 and December 31, 1998, respectively.............. $ -- $ --
Common stock, no par value; 25,000,000 shares authorized as
of December 31, 1999 and December 31, 1998, respectively;
4,022,052 and 4,001,999 shares issued and outstanding at
December 31, 1999 and December 31, 1998, respectively..... 18,530 18,251
Additional paid in capital.................................. 1,538 1,538
Retained earnings........................................... 11,460 11,085
Accumulated other comprehensive income (loss)............... (38) 46
-------- --------
Total shareholders' equity............................ 31,490 30,920
-------- --------
Total liabilities and shareholders' equity............ $198,495 $178,345
======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

34
<PAGE>
COWLITZ BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

DECEMBER 31, 1999, 1998 AND 1997

(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.................................. $15,344 $14,043 $13,700
Interest on taxable investment securities................... 902 955 667
Interest on non-taxable investments securities.............. 8 3 --
Interest from other banks................................... 465 837 665
------- ------- -------
Total interest income................................... 16,719 15,838 15,032
------- ------- -------

INTEREST EXPENSE
Savings and interest-bearing demand......................... 1,469 1,426 1,199
Certificates of deposit..................................... 2,332 3,048 4,246
Short-term borrowings....................................... 97 90 43
Long-term borrowings........................................ 1,350 1,409 1,401
------- ------- -------
Total interest expense.................................. 5,248 5,973 6,889
------- ------- -------
Net interest income before provision for loan losses.... 11,471 9,865 8,143

PROVISION FOR LOAN LOSSES................................... (1,349) (509) (375)
------- ------- -------
Net interest income after provision for loan losses..... 10,122 9,356 7,768
------- ------- -------

NONINTEREST INCOME
Service charges on deposit accounts....................... 698 656 563
Gains on loans sold....................................... 509 -- --
Fiduciary income.......................................... 151 57 --
Other income.............................................. 469 260 186
Net gains (losses) on maturities and sales of
available-for-sale securities........................... (2) 5 --
------- ------- -------
Total noninterest income................................ 1,825 978 749
------- ------- -------

NONINTEREST EXPENSE
Salaries and employee benefits............................ 6,088 3,775 2,778
Net occupancy and equipment expense....................... 1,457 888 724
Business tax expense...................................... 274 242 224
Amortization of intangibles............................... 445 309 123
Other operating expense................................... 2,607 1,713 1,435
------- ------- -------
Total noninterest expense............................... 10,871 6,927 5,284
------- ------- -------
Income before income tax expense........................ 1,076 3,407 3,233

INCOME TAX EXPENSE.......................................... 420 1,181 1,109
------- ------- -------
Net income.............................................. $ 656 $ 2,226 $ 2,124
======= ======= =======

BASIC EARNINGS PER SHARE.................................... $ 0.16 $ 0.60 $ 0.82
DILUTED EARNINGS PER SHARE.................................. $ 0.16 $ 0.57 $ 0.78
</TABLE>

The accompanying notes are an integral part of these statements.

35
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY INCOME
--------- -------- ---------- -------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996..... 2,590,403 $ 3,195 $1,538 $ 7,073 $ 7 $11,813
Comprehensive Income:
Net income..................... -- -- -- 2,124 -- 2,124 $2,124
Net changes in unrealized gains
on Investments
available-for-sale, net of
deferred taxes of $5......... -- -- -- -- 9 9 9
------
Other comprehensive income, net
of tax....................... -- -- -- -- -- -- 9
------
Comprehensive Income........... -- -- -- -- -- -- $2,133
======
Issuance of common stock for
cash........................... 14,140 67 -- -- -- 67
Cash dividend paid ($.05 per
share)......................... -- -- -- (126) -- (126)
--------- ------- ------ ------- ---- -------
BALANCE AT DECEMBER 31, 1997..... 2,604,543 3,262 1,538 9,071 16 13,887
Comprehensive Income:
Net income..................... -- -- -- 2,226 -- 2,226 $2,226
Net changes in unrealized gains
on investments
available-for-sale, net of
deferred taxes of $16........ -- -- -- -- 30 30 30
------
Other comprehensive income, net
of tax....................... -- -- -- -- -- -- 30
------
Comprehensive Income............. -- -- -- -- -- -- $2,256
======
Issuance of common stock for
cash........................... 1,396,251 15,019 -- -- -- 15,019
Purchase of treasury stock....... (50,000) (494) -- -- -- (494)
Issuance of common stock for
acquisition.................... 51,282 465 -- -- -- 465
Cash dividend paid ($.06 per
share)......................... -- -- -- (212) -- (212)
Cash paid for fractional
shares......................... (77) (1) -- -- -- (1)
--------- ------- ------ ------- ---- -------
BALANCE AT DECEMBER 31, 1998..... 4,001,999 18,251 1,538 11,085 46 30,920
Comprehensive Income:
Net income..................... -- -- -- 656 -- 656 $ 656
Net changes in unrealized gains
(losses) on investments
available-for-sale, net of
deferred taxes of $43........ -- -- -- -- (84) (84) (84)
------
Other comprehensive income, net
of tax....................... -- -- -- -- -- -- (84)
------
Comprehensive Income........... -- -- -- -- -- -- $ 572
======
Issuance of common stock for
cash........................... 5,743 34 -- -- -- 34
Purchase of treasury stock....... (134,500) (732) -- -- -- (732)
Issuance of common stock for
acquisition.................... 148,810 977 -- -- -- 977
Cash dividends paid ($.07 per
share)......................... -- -- -- (281) -- (281)
--------- ------- ------ ------- ---- -------
BALANCE AT DECEMBER 31, 1999..... 4,022,052 $18,530 $1,538 $11,460 $(38) $31,490
========= ======= ====== ======= ==== =======
</TABLE>

The accompanying notes are an integral part of these statements.

36
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED 1999, 1998, AND 1997

(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 656 $ 2,226 $ 2,124
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred tax provision.................................... (211) 112 65
Depreciation and amortization............................. 1,098 833 557
Provision for loan losses................................. 1,349 509 375
Net losses (gains) on sales of investments securities
available-for-sale...................................... 2 (5) --
Net amortization of investment security premiums and
accretion of discounts.................................. (1) (5) (2)
(Gains) on loans sold..................................... (509) -- --
Origination of loans held for sale........................ (63,084) (1,072) --
Proceeds of loan sales.................................... 62,410 -- --
(Increase) decrease in other assets....................... 62 70 (313)
Increase in other liabilities............................. (154) (111) (83)
Federal Home Loan Bank stock dividends.................... (221) (211) (195)
-------- -------- --------
Net cash provided by operating activities............. 1,397 2,346 2,528

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities
held-to-maturity........................................ 3,267 3,669 3,784
Proceeds from maturities and sales of investment
securities available-for-sale........................... 2,000 1,000 --
Purchases of investment securities:
Held-to-maturity........................................ (3,365) (3,665) (1,994)
Available-for-sale...................................... (3,490) (3,996) (4,857)
Net (increase) decrease in loans.......................... (15,291) 2,137 (5,711)
Purchases of premises and equipment....................... (609) (725) (1,300)
Proceeds from assumption of deposit liabilities........... -- -- 22,885
Acquisition of business, net of cash acquired............. (1,565) (1,776) --
-------- -------- --------
Net cash (used in) provided by investment
activities........................................... (19,053) (3,356) 12,807
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings, and
interest-bearing demand deposits........................ (2,834) 6,834 5,536
Net increase (decrease) in certificates of deposit........ 18,080 (20,682) 17,841
Dividends paid............................................ (281) (212) (126)
Net increase in short-term borrowings..................... 1,550 1,550 175
Proceeds from long-term borrowings........................ 5,000 5,000 2,000
Repayment of long-term borrowings......................... (6,812) (6,408) (2,942)
Repurchase of common stock................................ (732) (494) --
Issuance of common stock for cash, net of amount paid for
fractional shares and offering costs.................... 34 15,018 67
-------- -------- --------
Net cash provided by (used in) financing activities... 14,005 606 (13,131)
-------- -------- --------
Net increase (decrease) in cash and due from banks.... (3,651) (404) 2,204
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR................ 22,705 23,109 20,905
-------- -------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD.................... $ 19,054 $ 22,705 $ 23,109
======== ======== ========
CASH PAID FOR INTEREST...................................... $ 5,221 $ 6,548 $ 6,990
CASH PAID FOR INCOME TAXES.................................. $ 560 $ 1,193 $ 1,068
LOANS TRANSFERRED TO OREO................................... $ 769 $ 544 $ --
</TABLE>

The accompanying notes are an integral part of these statements.

37
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Cowlitz Bancorporation (the Company) is a one-bank 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. Business Finance Corporation
provides asset based financing to companies throughout the western United
States. During the third quarter of 1999, the Company acquired Bay Mortgage of
Bellevue, Washington and Bay Mortgage of Seattle, Washington. Bay Mortgage of
Seattle and Bay Mortgage of Bellevue have joined together as a division of
Cowlitz Bank and serve customers throughout the greater Bellevue/Seattle market
area. Also during the third quarter of 1999, the Company acquired Bay Escrow of
Seattle, Washington. Bay Escrow will operate as a division of Cowlitz Bank and
will complete escrow transactions for Bay Mortgage.

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.

INVESTMENT SECURITIES

Investment securities are classified as trading, available-for-sale or
held-to-maturity. Securities are classified as held-to-maturity when the Company
has the positive intent and ability to hold those securities to maturity.
Securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities. Securities not classified
as either held-to-maturity or trading are classified as available-for-sale.
Trading securities are carried at fair value. Net unrealized gains and losses on
trading securities are included in the consolidated statements of income.
Available-for-sale securities are carried at fair value with unrealized gains
and losses, net of tax effect, added to or deducted from shareholders' equity.
Held-to-maturity securities are carried at amortized cost.

LOANS

Interest income on simple interest loans is accrued daily on the principal
balance outstanding. Generally, no interest is accrued on loans when factors
indicate that collection of interest is doubtful or when principal or interest
payments become 90 days past due, unless collection of principal and interest is
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 that payments are
subsequently received and collection of the remaining recorded investment is
probable. Non-accrual loans are returned to accrual status when the loans are
paid current as to principal and interest and future payments are expected to be
made in accordance with the contractual terms of the loan. Loan fees are offset
against operating expenses to the extent that these fees cover the direct
expense of originating loans. Fees in excess of origination costs are deferred
and amortized to income over the related loan period.

38
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS HELD FOR SALE

Loan held for sale are carried at the lower of cost or market. Market value
is determined in the aggregate.

STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," requires disclosure about stock-based compensation
arrangements regardless of the method used to account for them. As permitted by
SFAS No. 123, the Company has opted to continue to apply the accounting
provisions of Accounting Principles Board (APB) Opinion No. 25, and therefore
discloses the difference between compensation cost included in net income and
the related cost measured by the fair-value-based method defined by SFAS
No. 123, including tax effects, that would have been recognized in the income
statement if the fair-value method had been used.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is based on management's estimates. Management
determines the adequacy of the allowance based upon reviews of individual loans,
delinquencies, recent loss experience, current economic conditions, the risk
characteristics of the various categories of loans and other pertinent factors.
Actual losses may vary from the current estimates. These estimates are reviewed
periodically and are adjusted as deemed necessary. Loans deemed uncollectible
are charged to the allowance. Provisions for loan losses and recoveries on loans
previously charged off are added to the allowance.

A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Company's policy is to include
in impaired loans all loans that are past due 90 days or more as to either
principal or interest and any loans that the Company believes collection of
principal or interest is doubtful, except for loans that are currently measured
at fair value or at the lower of cost or fair value, and credit card
receivables, which are considered large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. The Company measures
impairment based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, impairment
is measured based on the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. Impaired loans are charged to
the allowance when management believes, after considering economic and business
conditions, collection efforts, and collateral position, that the borrowers'
financial condition is such that collection of principal is not probable.

OTHER REAL ESTATE OWNED

Other real estate owned (OREO), acquired through foreclosure, is carried at
the lower of cost or estimated fair value, less estimated costs to sell. Prior
to foreclosure, the balance of the underlying loan is written down to the
estimated fair value of the real estate to be acquired, less estimated costs to
sell, by a charge to the allowance for loan losses, when necessary. Any
subsequent write-downs are recorded

39
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
as a valuation allowance with a charge to noninterest expense. Other real estate
owned is included in other assets on the balance sheet.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation. The
provision for depreciation is computed on the straight-line method over the
estimated useful lives for the majority of the assets, which range from 3 to
39.5 years.

Improvements are capitalized and depreciated over the lesser of their
estimated useful lives or the life of the lease. When property is replaced or
otherwise disposed of, the cost of such assets and the related accumulated
depreciation are removed from their respective accounts.

INTANGIBLE ASSETS

Intangible assets include a deposit premium of $1,298 and $1,570 (net of
accumulated amortization) at December 31, 1999 and 1998, respectively. The
deposit premium is being amortized using an accelerated method over a ten-year
life. Intangible assets at December 31, 1999 and 1998 also include goodwill of
$3,665 and $1,540, respectively (net of accumulated amortization). The goodwill
represents the excess of acquisition costs over the fair value of net assets
that arose in connection with the acquisitions of Business Finance Corporation,
Bay Mortgage of Bellevue, Washington, Bay Mortgage of Seattle, Washington and
Bay Escrow. The goodwill is being amortized on a straight-line basis over a
fifteen-year period.

OTHER BORROWINGS

Federal funds purchased generally mature within one to four days from the
transaction date. Other short-term borrowed funds mature within one year from
the transaction date. Other long-term borrowed funds extend beyond one year.

INCOME TAXES

Income taxes are accounted for using the asset and liability method. Under
this method, a deferred tax asset or liability is determined based on the
enacted tax rates, which will be in effect when the differences between the
financial statement carrying amounts and tax bases of existing assets and
liabilities are expected to be reported in the Company's income tax returns. The
deferred tax provision for the year is equal to the net change in the deferred
tax asset or liability from the beginning to the end of the year, less amounts
applicable to the change in value related to investments available-for-sale. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.

EARNINGS PER SHARE

Earnings per share computations are computed using the weighted average
number of common and dilutive common equivalent shares (stock options) assumed
to be outstanding during the period using the treasury stock method.

40
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table reconciles the numerator and denominator of the basic
and diluted earnings per share computations:

<TABLE>
<CAPTION>
WEIGHTED PER SHARE
NET INCOME AVG SHARES AMOUNT
---------- ---------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999
Basic earnings per share................... $ 656 4,054,657 $0.16
Stock Options.............................. 42,591
Diluted earnings per share................. $ 656 4,097,248 $0.16

FOR THE YEAR ENDED DECEMBER 31, 1998
Basic earnings per share................... $2,226 3,715,901 $0.60
Stock Options.............................. 178,194
Diluted earnings per share................. $2,226 3,894,095 $0.57

FOR THE YEAR ENDED DECEMBER 31, 1997
Basic earnings per share................... $2,124 2,601,650 $0.82
Stock Options.............................. 109,862
Diluted earnings per share................. $2,124 2,711,512 $0.78
</TABLE>

For the periods reported the Company had no reconciling items between net
income and income available to common shareholders.

Options to purchase 96,000 shares of common stock at a price ranging from
$5.55 to $6.42 were outstanding at December 31, 1999 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 in 2008 and 2009. At December 31, 1998 there were 61,000 shares
with an exercise price of $7.94 not included in diluted earnings per share due
to a greater exercise price than the average market price, these options will
expire in 2008.

SUPPLEMENTAL CASH FLOW INFORMATION

For the purpose of presentation in the statements of cash flows, cash and
cash equivalents are defined as those amounts in the statement of condition
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.

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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

41
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements and standby letters of
credit. Such financial instruments are recorded in the financial statements when
they become payable.

RECENTLY ISSUED ACCOUNTING STANDARDS

SFAS No. 133 and SFAS No. 137

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." 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.

SFAS No. 133 was to have been effective for fiscal years beginning after
June 15, 1999. A company may also implement the Statement as of the beginning of
any fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS
No. 133 must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election,
before January 1, 1998).

In May 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of SFAS No. 133", that amends SFAS No. 133 and defers the
effective date to fiscal years beginning after June 15, 2000.

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

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.

42
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The components of comprehensive income for the years ended December 31,
1999, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Unrealized gain (loss) arising during the period, net of
tax..................................................... $(86) $33 $9
Reclassification adjustment for net realized gains
(losses) on securities available-for-sale included in
net income during the year, net of tax of $0, $2, and
$0...................................................... (2) 3 --
---- --- --
Net unrealized gain (loss) included in other comprehensive
income.................................................. $(84) $30 $9
==== === ==
</TABLE>

PRIOR YEAR RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the
current year presentation.

2. INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities at
December 31 are shown below:

<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government and agency securities................ $8,484 $-- $57 $8,427
------ --- --- ------
Total.............................................. $8,484 $-- $57 $8,427
====== === === ======
</TABLE>

43
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

2. INVESTMENT SECURITIES (CONTINUED)

<TABLE>
<CAPTION>
HELD-TO-MATURITY
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Municipal Bonds...................................... $ 200 $-- $ 7 $ 193
U.S. Government and agency securities................ 999 1 -- 1,000
Certificates of deposit.............................. 3,365 -- -- 3,365
------ --- --- ------
Total.............................................. $4,564 $ 1 $ 7 $4,558
====== === === ======
</TABLE>

<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
-----------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government and agency securities................ $6,994 $71 $-- $7,065
------ --- --- ------
Total.............................................. $6,994 $71 $-- $7,065
====== === === ======
</TABLE>

<TABLE>
<CAPTION>
HELD-TO-MATURITY
-----------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Municipal Bonds...................................... $ 199 $-- $-- $ 199
U.S. Government and agency securities................ 999 22 -- 1,021
Certificates of deposit.............................. 3,267 -- -- 3,267
------ --- --- ------
Total.............................................. $4,465 $22 $-- $4,487
====== === === ======
</TABLE>

Gross gains of $0, $5, and $0 and gross losses of $2, $0, and $0 were
realized on maturities and sales of available-for-sales securities in 1999,
1998, and 1997, respectively. There were no sales of held-to-maturity
securities.

MATURITY OF INVESTMENTS

The carrying amount and estimated fair value of debt securities by
contractual maturity at December 31, 1999, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay the obligation.

<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less.............................. $3,994 $4,001 $4,364 $4,365
Due after one year through five years................ 4,490 4,426 100 98
Due after five years through fifteen years........... -- -- 100 95
------ ------ ------ ------
Total.............................................. $8,484 $8,427 $4,564 $4,558
====== ====== ====== ======
</TABLE>

44
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

2. INVESTMENT SECURITIES (CONTINUED)
At December 31, 1999 and 1998 a security with a par value of $1 million was
pledged to secure the treasury, tax and loan account at the Federal Reserve.
Another security with a par value of $1 million was pledged for trust deposits
held in the Bank.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

The loan portfolio as of December 31 consists of the following:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Commercial loans........................................ $123,701 $103,473
Real estate:
Construction.......................................... 3,104 3,206
Mortgage.............................................. 8,194 12,702
Commercial............................................ 9,859 7,026
Installment and other consumer.......................... 5,134 5,063
Contracts purchased..................................... -- 45
-------- --------
149,992 131,515
Less:
Deferred loan fees.................................... (606) (541)
Allowance for loan losses............................. (2,281) (1,814)
-------- --------
Total loans, net.................................... $147,105 $129,160
======== ========
</TABLE>

An analysis of the change in the allowance for loan losses for the years
ended December 31 is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 1,814 $1,970 $1,894
Provision for loan losses................................. 1,349 509 375
Loans charged to the allowance............................ (1,025) (727) (324)
Recoveries credited to the allowance...................... 143 17 25
Adjustment incident to acquisition........................ -- 45 --
------- ------ ------
Balance, end of year........................................ $ 2,281 $1,814 $1,970
======= ====== ======
</TABLE>

Loans on which the accrual of interest has been discontinued amounted to
approximately $2,387, $2,737, and $1,897 at December 31, 1999, 1998, and 1997,
respectively. Interest forgone on nonaccrual loans was approximately $424, $297,
and $177 in 1999, 1998, and 1997, respectively.

At December 31, 1999 and 1998, the Company's recorded investment in certain
loans that were considered to be impaired was $3,220 and $4,906, respectively.
Of these impaired loans, $1,948 and $3,061 have related specific reserves of
$551 and $681, while $1,272 and $1,845 did not require specific reserves. The
balance of the allowance for loan losses in excess of these specific reserves is
available to absorb losses from all loans. The average recorded investment in
impaired loans for the years ended December 31, 1999, 1998, and 1997, was
approximately $3,682, $4,405, and $1,300, respectively. Interest

45
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

3. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
payments received on impaired loans are recorded as interest income, unless
collection of the remaining recorded investment is not probable, in which case
payments received are recorded as a reduction of principal. For the years ended
December 31, 1999, 1998, and 1997 interest income recognized on impaired loans
totaled $153, $289, and $36, respectively, all of which was recognized on a cash
basis.

4. PREMISES AND EQUIPMENT

Premises and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land...................................................... $ 858 $ 858
Buildings and improvements................................ 4,448 4,415
Furniture and equipment................................... 3,115 2,386
Construction in process................................... -- 37
------- -------
8,421 7,696
Accumulated depreciation.................................. (2,491) (1,837)
------- -------
Total................................................... $ 5,930 $ 5,859
======= =======
</TABLE>

Depreciation included in net occupancy and equipment expense amounted to
$654, $524, and $432 for the years ended December 31, 1999, 1998, and 1997,
respectively.

5. BORROWINGS

Short-term borrowings consist of Federal Funds purchased of $3,825 and
$2,275 at December 31, 1999 and 1998, respectively.

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Long-term borrowings consist of the following at December
31:
Notes payable to Federal Home Loan Bank; interest from
5.92 percent to 8.80 percent at December 31, 1999,
payable in monthly installments plus interest due 2000
to 2013, secured by certain investment securities and
mortgage loans.......................................... $24,222 $21,738
Contract payable to private party; interest 9.0 percent,
payable in monthly installments plus interest through
October 2010.............................................. 59 61
------- -------
Total..................................................... $24,281 $21,799
======= =======
</TABLE>

The aggregate maturities of notes payable subsequent to December 31, 1999,
are as follows:

<TABLE>
<S> <C>
2000........................................................ $ 5,933
2001........................................................ 7,284
2002........................................................ 184
2003........................................................ 184
2004........................................................ 185
Thereafter.................................................. 10,511
-------
$24,281
=======
</TABLE>

46
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

6. INCOME TAXES

The components of the provision for income taxes for the years ended
December 31 were as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current.............................................. $ 631 $1,069 $1,044
Deferred............................................. (211) 112 65
----- ------ ------
Total provision for income taxes................... $ 420 $1,181 $1,109
===== ====== ======
</TABLE>

The federal statutory income tax rate and effective tax rate of the
provision do not vary significantly.

The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 was as follows:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................. $ 749 $ 522
Loan origination fees..................................... 10 15
Amortization of intangible assets......................... 121 70
Unrealized (gain) loss on AFS............................. 20 (24)
----- -----
900 583
----- -----
Deferred tax liabilities:
Accumulated depreciation.................................. (78) (91)
Federal Home Loan Bank stock dividends.................... (544) (469)
Other..................................................... (2) (2)
----- -----
(624) (562)
----- -----
Net deferred tax........................................ $ 276 $ 21
===== =====
</TABLE>

7. CERTIFICATES OF DEPOSIT:

Included in certificates of deposit are certificates in denominations of
$100 or greater totaling $24,121 and $13,623 at December 31, 1999 and 1998,
respectively. Interest expense relating to certificates of deposit in
denominations of $100 or greater was $858, $933, and $1,297 for the years ended
December 31, 1999, 1998, and 1997, respectively.

8. SHAREHOLDERS EQUITY AND REGULATORY CAPITAL

Dividends are paid by the Company from its retained earnings, which are
principally provided through dividends and income from its subsidiaries.
However, state agencies restrict the amount of funds the Bank may transfer to
the Company in the form of cash dividends, loans or advances. Transfers are
limited by the Bank's retained earnings, which for the Bank were $11,048 at
December 31, 1999.

47
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

8. SHAREHOLDERS EQUITY AND REGULATORY CAPITAL (CONTINUED)
The Company and the Bank are subject to various regulatory capital
requirements as established by the applicable federal or state banking
regulatory authorities. 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 the Bank's
assets, liabilities and certain off-balance-sheet items. The quantitative
measures for capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios of total and Tier 1 capital to risk weighted assets
and of Tier 1 capital to average assets (leverage). The Company's capital
components, classification, risk weightings and other factors are also subject
to qualitative judgements by regulators. Failure to meet minimum capital
requirements can initiate certain actions by regulators that, if undertaken,
could have a material effect on the Company's financial statements. Management
believes that as of December 31, 1999, the Company and the Bank meet all minimum
capital adequacy requirements to which they are subject. The most recent
notification from the Federal Deposit Insurance Corporation categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action.
Management believes that no events or changes in conditions have occurred
subsequent to such notification to change the Bank's category.

The following table presents selected capital information for the Company
(consolidated) and the Bank as of December 31, 1999 and 1998:

<TABLE>
<CAPTION>
FOR CAPITAL
ADEQUACY TO BE WELL
ACTUAL PURPOSES CAPITALIZED
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total risk-based capital:
Consolidated............................. $28,466 18.76% $12,139 8.00% $15,174 10.00%
Bank..................................... 17,563 11.96 11,749 8.00 14,686 10.00
Tier 1 risk-based capital:
Consolidated............................. 26,565 17.51 6,069 4.00 9,104 6.00
Bank..................................... 15,723 10.71 5,874 4.00 8,812 6.00
Tier 1 (leverage) capital:
Consolidated............................. 26,565 13.89 7,649 4.00 9,562 N/A
Bank..................................... 15,723 8.58 7,332 4.00 9,165 5.00

As of December 31, 1998
Total risk-based capital:
Consolidated............................. 29,330 23.46 10,001 8.00 12,501 10.00
Bank..................................... 16,383 13.32 9,841 8.00 12,301 10.00
Tier 1 risk-based capital:
Consolidated............................. 27,764 22.21 5,000 4.00 7,501 6.00
Bank..................................... 14,842 12.07 4,921 4.00 7,381 6.00
Tier 1 (leverage) capital:
Consolidated............................. 27,764 15.81 7,026 4.00 8,782 N/A
Bank..................................... 14,842 8.72 6,806 4.00 8,507 5.00
</TABLE>

48
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

9. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS:

During 1997, the Company adopted the 1997 Stock Option Plan (the 1997 Plan),
which authorizes up to 525,000 shares of common stock for issuance thereunder.
Under the 1997 Plan, options may be granted to the Company's employees,
directors and consultants. The exercise price of incentive stock options under
the 1997 Plan must be at least equal to the fair value of the common stock on
the date of grant. Options granted under the 1997 Plan will generally vest over
a five-year period, at the discretion of the compensation committee. All
incentive stock options granted under the 1997 Plan will expire ten years from
the date of grant unless terminated sooner pursuant to the provisions of the
1997 Plan. At December 31, 1999 and December 31, 1998, options to purchase a
total of 524,000 and 446,000 shares, respectively, have been granted under the
1997 plan to executives and directors of the Company and the Bank. All stock
options granted under the 1997 Plan were made with exercise prices equal to the
fair market value of the underlying stock on the date of grant.

During 1999, the Company granted incentive stock options to purchase 20,000
shares of common stock to certain officers of Bay Mortgage and Bay Bank. These
options vest equally over a five-year period and expire ten years after the
grant dates. The exercise prices are equal to the fair value of the underlying
common stock. These options were granted by the Company outside of the 1997
Plan.

Also during 1999, the Company granted up to 54,000 performance based stock
options to an officer of Bay Bank. The number of performance based stock options
actually issued varies depending on Bay Bank's achievement of certain earnings
targets over a three year period. The exercise price of these performance based
stock options was equal to the fair market value of the underlying common stock
on the grant date. The Company accrues compensation expense for these
performance based stock options over the performance period based on changes in
the fair market value of the underlying common stock and estimates of the number
of stock options to be issued based on the performance targets. Compensation
expense charged against (credited to) income for this performance based stock
option was $0 in 1999.

The Company adopted an employee stock purchase plan during 1996. The Company
may sell up to 175,000 shares of common stock to its eligible employees under
the plan. During 1999, the Company sold 5,743 shares of stock under the plan.
The employee is granted the right to purchase the stock at a price equal to fair
value at the date of grant, as determined by the Board of Directors. These
grants are made to qualified employees each quarter and expire within the month
they are granted.

A summary of option activity for the years ended December 31, 1999, 1998 and
1997 is as follows:

<TABLE>
<CAPTION>
1999 1999 1998 1998 1997 1997
COMMON WEIGHTED COMMON WEIGHTED COMMON WEIGHTED
SHARES AVG. PRICE SHARES AVG. PRICE SHARES AVG. PRICE
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year.................. 454,092 $6.08 400,208 $5.69 13,945 $4.29
Granted................................... 224,041 5.90 95,193 8.02 428,732 5.63
Exercised................................. (5,778) 6.09 (20,519) 5.46 (13,441) 4.43
Forfeited................................. (74,355) 6.73 (20,790) 9.98 (29,028) 4.67
Balance, end of year........................ 598,000 5.92 454,092 6.08 400,208 5.69
Exercisable, end of year.................... 284,500 5.89 174,292 6.05 111,458 5.64
Fair value of options granted............... $4.02 $4.07 $1.49
</TABLE>

49
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

9. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS: (CONTINUED)
At December 31, 1999, exercise prices for outstanding options ranged from
$4.94 to $7.94. For the options outstanding at December 31, 1999, the weighted
average contractual life is 8.4 years.

As of December 31, 1999, outstanding stock options consist of the following:

<TABLE>
<CAPTION>
EXERCISE OPTIONS WEIGHTED AVG. WEIGHTED AVG. OPTIONS WEIGHTED AVG.
PRICE RANGE OUTSTANDING EXERCISE PRICE REMAINING LIFE EXERCISABLE EXERCISE PRICE
- ----------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$4.00 - $5.00......................... 81,000 $4.94 10.0 16,200 $4.94
$5.00 - $6.00......................... 385,000 $5.71 7.8 231,000 $5.71
$6.00 - $7.00......................... 75,000 $6.50 9.6 14,500 $6.51
$7.00 - $8.00......................... 57,000 $7.94 9.0 22,800 $7.94
------- -------
598,000 $5.92 8.4 284,500 $5.89
======= =======
</TABLE>

The Company accounts for the 1997 Plan, options granted outside of the 1997
Plan and the Employee Stock Purchase Plan under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistently with SFAS No. 123 and recognized over the vesting
period, the Company's net income and earnings per share would have been reduced
to the following pro forma amounts:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Net Income: As reported............... $ 656 $2,226 $2,124
Pro Forma................. $ 501 $2,130 $2,024

Basic earnings per share: As reported............... $0.16 $ 0.60 $ 0.82
Pro Forma................. $0.12 $ 0.57 $ 0.78

Diluted earnings per
share: As reported............... $0.16 $ 0.57 $ 0.78
Pro Forma................. $0.12 $ 0.55 $ 0.75
</TABLE>

The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model, with the following
weighted-average assumptions used for grants in 1999, 1998, and 1997: risk-free
average interest rate of 5.10 percent, 4.56 percent and 7 percent; expected
dividend yield was 1.08 percent, 0.58 percent, and 0.58 percent for 1999, 1998,
and 1997, respectively; and an expected volatility of 63.61 percent,
38.04 percent and 2.24 percent, respectively. Expected lives for options granted
were between 5 and 6 years. Due to the discretionary nature of stock option
grants, the compensation cost included in the 1999, 1998 and 1997 pro forma net
income per SFAS No. 123 may not be representative of that expected in future
years.

10. CONTINGENT LIABILITIES AND COMMITMENTS WITH OFF-BALANCE-SHEET RISK:

The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities of the subsidiaries that arise in the
normal course of business and 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. A

50
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

10. CONTINGENT LIABILITIES AND COMMITMENTS WITH OFF-BALANCE-SHEET RISK:
(CONTINUED)
summary of the subsidiary's undisbursed commitments and contingent liabilities
at December 31, 1999 is as follows:

<TABLE>
<S> <C>
Commitments to extend credit................................ $24,311
Credit card commitments..................................... 3,115
Standby letters of credit................................... 164
-------
Total..................................................... $27,590
=======
</TABLE>

Commitments to extend credit, credit card arrangements and standby letters
of credit all include exposure to some credit loss in the event of
nonperformance 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 on the consolidated statements of condition. Because
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.

Most of the Bank's lending activity is with customers located in Cowlitz
County, Washington. An economic downturn in Cowlitz County would likely have a
negative impact on the Bank's results of operations, depending on the severity
of the downturn. The Bank maintains a diversified portfolio and does not have
significant on- or off- balance-sheet concentrations of credit risk in any one
industry.

11. BALANCES WITH THE FEDERAL RESERVE BANK:

The Bank is required to maintain reserves in cash or with the Federal
Reserve Bank equal to a percentage of its reservable deposits. Required reserves
were approximately $1,067, $1,023, and $929 as of December 31, 1999, 1998, and
1997, respectively.

12. RELATED-PARTY TRANSACTIONS:

Certain directors, executive officers and their spouses, associates and
related organizations, had banking transactions with the Bank in the ordinary
course of business. All loans and commitments to loan were made on substantially
the same terms and conditions, including collateral required, as comparable
transactions with unaffiliated parties. Directors and executive officers are
charged the same rates of interest and loan fees as are charged to employees of
the Company, which interest rates and fees are slightly lower than charged to
nonemployee borrowers. The amounts of loans outstanding to directors, executive
officers, principal shareholders, and companies with which they are associated
was as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Beginning balance........................................... $1,701 $1,077
Loans made.................................................. -- 943
Loan repayments made........................................ (193) (319)
Other....................................................... (109) --
------ ------
Ending balance.............................................. $1,399 $1,701
====== ======
</TABLE>

51
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

12. RELATED-PARTY TRANSACTIONS: (CONTINUED)
Certain officers at December 31, 1998 were no longer officers at
December 31, 1999. The balances outstanding to such persons are reflected in the
Other category above.

The chairman of the Company owns a securities brokerage franchise of Raymond
James Financial Services, Inc., which leases space from the Company.

13. EMPLOYEE BENEFIT PLAN:

The Company has a contributory retirement savings plan covering
substantially all full-time and part-time employees. The amount of the Company's
annual contribution is at the discretion of the Board of Directors. The Company
contributed $236 and $164 for he years ended December 31, 1999 and 1998,
respectively.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS:

A financial instrument is defined as cash, evidence of ownership interest in
an entity, or a contract that conveys or imposes the contractual right or
obligation to either receive or deliver cash or another financial instrument.
Examples of financial instruments included in the Company's statements of
condition are cash, federal funds sold or purchased; debt and equity securities;
loans; demand, savings and other interest bearing deposits; notes and
debentures. Examples of financial instruments, which are not included in the
Company's statements of condition, are commitments to extend credit and standby
letters of credit.

Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price if
one exists.

The fair value of deposit liabilities with no stated maturity, such as
demand deposits, NOW and money market accounts are to equal the carrying value
of these financial instruments and does not recognize the inherent value of core
deposit relationships when determining fair value. Disclosure of the fair value
of nonfinancial instruments, such as the Company's premises and equipment, its
banking and trust franchises and its core deposit relationships is not required.
The Company believes that these nonfinancial instruments have significant fair
value.

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

- Cash and due from banks--For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.

- Investment securities--For securities held for investment purposes, fair
values are based on quoted market prices or dealer quotes. For other
securities, fair value equals quoted market prices, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.

- Loans--For certain variable rate loans, fair value is estimated at
carrying value, as these loans reprice to market frequently. The fair
value of other types of loans is estimated by discounting

52
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

14. FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
the future cash flows, using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities.

- Deposit Liabilities--The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit
is estimated by discounting future cash flows, using the rates currently
offered for deposits of similar remaining maturities.

- Short-term borrowing--The carrying amounts of borrowings under repurchase
agreements and short-term borrowings approximate their fair values.

- Long-term borrowing--Rates currently available to the Bank for debt with
similar terms and remaining maturities are used to estimate the fair value
of existing debt.

- Commitments to extend credit, credit card commitments and standby letters
of credit--The fair values of commitments to extend credit, credit card
commitments and standby letters of credit were not material as of
December 31, 1999 and 1998.

The estimated fair values of the Company's financial instruments at
December 31 were as follows:

<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks......................... $ 19,054 $ 19,054 $ 22,705 $ 22,705
Investment securities........................... 12,991 12,985 11,530 11,552
Loans, net of allowances for loan losses........ 147,105 147,283 129,160 132,419
Loans held for sale............................. 2,255 2,255 1,072 1,072
Federal Home Loan Bank stock.................... 3,090 3,090 2,869 2,869
Financial liabilities:
Demand.......................................... 28,004 28,004 33,062 33,062
Savings and interest-bearing deposits........... 49,591 49,591 47,367 47,367
Certificates of deposit......................... 60,012 60,139 41,932 42,326
Short-term borrowings........................... 3,825 3,825 2,275 2,275
Long-term borrowings............................ 24,281 23,308 21,799 22,787
</TABLE>

15. 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. Beginning in 1998
with the acquisition of Business Finance Corporation, the Company provides asset
based financing to companies throughout the western United States. In the third
quarter of 1999, the Company acquired Bay Mortgage of Bellevue, Washington, Bay
Mortgage of Seattle, Washington, and Bay Escrow of Seattle, Washington. These
companies specialize in all facets of residential lending including FHA and VA
loans, construction loans and bridge loans.

53
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

15. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION: (CONTINUED)

The community banking, asset based financing activity, and mortgage banking
activities are monitored and reported by Company management as separate
operating segments. The six separate banking offices have been aggregated into a
single reportable segment, Community Banking and the Mortgage Banking 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 in Note 1, except that some operating expenses
are not allocated to segments.

Summarized financial information for the years ended December 31, 1999 and
1998 concerning the Company's reportable segments is shown in the following
tables.

<TABLE>
<CAPTION>
MORTGAGE HOLDING
1999 BANKING BANKING COMPANY OTHER INTERSEGMENT CONSOLIDATED
- ---- -------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest income......................... $ 14,118 $1,187 $ 586 $1,482 $ (654) $ 16,719
Interest expense........................ 5,638 -- -- 264 (654) 5,248
-------- ------ ------- ------ -------- --------
Net interest income................... 8,480 1,187 586 1,218 -- 11,471
Provision for loan loss................. 963 -- 8 378 -- 1,349
Noninterest income...................... 1,311 514 -- -- -- 1,825
Noninterest expense..................... 7,220 1,948 900 803 -- 10,871
-------- ------ ------- ------ -------- --------
Income before tax....................... 1,608 (247) (322) 37 -- 1,076
Provision for income
Taxes................................. 554 (84) (95) 45 -- 420
-------- ------ ------- ------ -------- --------
Net income.............................. $ 1,054 $ (163) $ (227) $ (8) $ -- $ 656
======== ====== ======= ====== ======== ========

Depreciation and amortization........... $ 903 $ 83 $ -- $ 112 $ -- $ 1,098
======== ====== ======= ====== ======== ========

Assets.................................. $190,244 $1,977 $31,594 $6,588 $(31,908) $198,495
======== ====== ======= ====== ======== ========
</TABLE>

<TABLE>
<CAPTION>
MORTGAGE HOLDING
1998 BANKING BANKING COMPANY OTHER INTERSEGMENT CONSOLIDATED
- ---- -------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest income......................... $ 15,315 $ -- $ 495 $ 556 $ (528) $ 15,838
Interest expense........................ 6,411 -- 30 60 (528) 5,973
-------- ------ ------- ------ -------- --------
Net interest income................... 8,904 -- 465 496 -- 9,865
Provision for loan loss................. 509 -- -- -- -- 509
Noninterest income...................... 978 -- -- -- -- 978
Noninterest expense..................... 5,910 -- 800 217 -- 6,927
-------- ------ ------- ------ -------- --------
Income before tax....................... 3,463 -- (335) 279 -- 3,407
Provision for income
Taxes................................. 1,183 -- (97) 95 -- 1,181
-------- ------ ------- ------ -------- --------
Net income.............................. $ 2,280 $ -- $ (238) $ 184 $ -- $ 2,226
======== ====== ======= ====== ======== ========

Depreciation and amortization........... $ 492 $ -- $ -- $ 32 $ -- $ 524
======== ====== ======= ====== ======== ========

Assets.................................. $174,563 $ -- $31,014 $4,797 $(32,029) $178,345
======== ====== ======= ====== ======== ========
</TABLE>

54
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

16. ACQUISITIONS

On July 1, 1999, the Company acquired Bay Mortgage, of Bellevue, Washington.
The acquisition was accounted for using the purchase method, including a cash
payment of $1 million and issuance of common stock with a value of $977,000.
Remaining payments of approximately $840,000 in cash and common stock may be
issued under the terms of a two-year performance earn-out agreement. Bay
Mortgage specializes in all facets of residential lending from single family
homes to small multi-plexes, including FHA and VA loans, construction loans and
bridge loans. Bay Mortgage operates as a division of Cowlitz Bank and serves
customers throughout the greater Bellevue/Seattle market area.

On September 1, 1999, the Company acquired Bay Escrow, of Seattle,
Washington. The acquisition was accounted for using the purchase method,
including a cash payment of $164,000. Bay Escrow operates as a division of
Cowlitz Bank and completes escrow transactions for Bay Mortgage.

The following table reconciles the acquisition of Bay Mortgage of Bellevue,
Washington, Bay Mortgage of Seattle, Washington, and Bay Escrow of Seattle,
Washington. As part of these transactions, $2.3 million was recorded in goodwill
and is amortized on a straight-line basis over a fifteen year period:

<TABLE>
<CAPTION>
BAY MORTGAGE BAY MORTGAGE BAY ESCROW
BELLEVUE SEATTLE SEATTLE
------------ ------------ ----------
<S> <C> <C> <C>
Fair value of assets acquired,
including goodwill..................... $6,623 $793 $171
Less liabilities assumed................. 4,646 96 7
Less stock issued........................ 977 -- --
------ ---- ----
Cash paid for acquisition................ 1,000 697 164
Less cash acquired....................... 89 146 61
------ ---- ----
Net cash paid in acquisition............. $ 911 $551 $103
====== ==== ====
</TABLE>

On August 31, 1998, the Company acquired BFC of Bellevue, Washington. A cash
payment of approximately $1,776 was made and 51,282 shares of Company stock with
a total value of $465 were issued in connection with the acquisition. The BFC
acquisition was recorded under the purchase method of accounting; and
accordingly, the results of operations of BFC for the period from August 31,
1998 are included in the accompanying consolidated financial statements. The
purchase

55
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

16. ACQUISITIONS (CONTINUED)
price has been allocated to the assets acquired and liabilities assumed based on
fair market value at the date of acquisition. The fair value of assets acquired
and liabilities assumed is summarized as follows:

<TABLE>
<S> <C>
Factored receivables........................................ $2,357
Other assets................................................ 273
Goodwill.................................................... 1,571
Liabilities assumed......................................... (1,836)
Stock issued................................................ (465)
------
Cash paid for acquisition................................... 1,900
Cash acquired............................................... (124)
------
Net cash paid for acquisition............................... $1,776
======
</TABLE>

The following unaudited pro forma financial information for the Company
gives effect to the acquisitions of BFC, Bay Mortgage of Bellevue, Washington,
Bay Mortgage of Seattle, Washington and Bay Escrow as if they had occurred on
January 1, 1998. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future for the combined companies under
the ownership and management of the Company. The pro forma results include
certain adjustments, such as additional expense, as a result of goodwill
amortization.

<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED)
-------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Interest income............................. $19,664 $22,622
Net income.................................. $ 856 $ 2,823
Diluted earnings per share.................. $ 0.21 $ 0.70
</TABLE>

56
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

17. PARENT-COMPANY-ONLY FINANCIAL DATA:

The following sets forth condensed financial information of the Company on a
stand-alone basis:

STATEMENTS OF CONDITION
(UNCONSOLIDATED)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Assets:
Cash and due from depository institutions................. $ 6,501 $11,250
Loans, net................................................ 492 --
Investment in bank subsidiary............................. 19,240 16,458
Investment in non-bank subsidiary......................... 2,386 2,424
Receivables due from non-bank subsidiary.................. 2,294 579
Other assets.............................................. 681 320
------- -------
Total assets........................................ $31,594 $31,031
======= =======
Liabilities and shareholders' equity:
Liabilities:
Long-term borrowings.................................... $ -- $ --
Other liabilities....................................... 104 111
------- -------
Total liabilities................................... 104 111
Shareholders' equity........................................ 31,490 30,920
------- -------
Total liabilities and shareholders' equity.......... $31,594 $31,031
======= =======
</TABLE>

57
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

17. PARENT-COMPANY-ONLY FINANCIAL DATA: (CONTINUED)
STATEMENTS OF INCOME
(UNCONSOLIDATED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income:
Income from subsidiaries.................................. $571 $ 495 $ 54
Other income.............................................. 15 -- --
---- ------ ------
Total income........................................ 586 495 54
---- ------ ------
Expenses:
Interest expense.......................................... -- 30 116
Other expense............................................. 907 800 353
---- ------ ------
Total expense....................................... 907 830 469
---- ------ ------
Loss before income tax benefit and equity in
Undistributed earnings of subsidiaries............ (321) (335) (415)
Income tax benefit.......................................... 95 97 135
---- ------ ------
Net loss before equity in undistributed earnings Of
subsidiaries...................................... (226) (238) (280)
Equity in undistributed earnings of subsidiaries............ 882 2,464 2,404
---- ------ ------
Net income.......................................... $656 $2,226 $2,124
==== ====== ======
</TABLE>

58
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

17. PARENT-COMPANY-ONLY FINANCIAL DATA: (CONTINUED)
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income................................................ $ 656 $ 2,226 $ 2,124
Adjustments to reconcile net income to net cash (used for)
operating activities:
Undistributed earnings of the subsidiaries.............. (882) (2,464) (2,404)
Decrease (increase) in other assets..................... (359) (164) (149)
Increase (decrease) in other liabilities................ (7) 77 23
------- ------- -------
Net cash used by operating activities................. (592) (325) (406)
------- ------- -------
Cash flows from investing activities:
Increase in loans......................................... (500) -- --
Capital payments from bank................................ -- -- 500
Acquisition of business, net of cash acquired............. (967) (1,776) --
Advances to subsidiaries.................................. (5,104) (579) --
Repayment of advances to subsidiaries..................... 3,393 -- --
------- ------- -------
Net cash (used for) provided by investing
activities.......................................... (3,178) (2,355) 500
------- ------- -------
Cash flows from financing activities:
Net repayments of long-term borrowings.................... -- (1,319) (159)
Purchase of treasury stock................................ (732) (494) --
Proceeds from issuance of common stock.................... 34 15,018 67
Dividends paid............................................ (281) (212) (126)
------- ------- -------
Net cash provided by (used for) financing
activities.......................................... (979) 12,993 (218)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents......................................... (4,749) 10,313 (124)
Cash and cash equivalents at beginning of year........ 11,250 937 1,061
------- ------- -------
Cash and cash equivalents at end of year.............. $ 6,501 $11,250 $ 937
======= ======= =======
</TABLE>

59
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1999
Interest income.................................... $4,053 $3,806 $4,587 $4,273
Interest expense................................... 1,459 1,345 1,386 1,058
------ ------ ------ ------
Net interest income................................ 2,594 2,461 3,201 3,215
Provision for loan losses.......................... (634) (196) (235) (284)
Noninterest income................................. 271 385 544 625
Noninterest expense................................ 2,076 2,135 3,288 3,372
------ ------ ------ ------
Income before income taxes....................... 155 515 222 184
Provision for income taxes......................... 53 200 88 79
------ ------ ------ ------
Net income....................................... $ 102 $ 315 $ 134 $ 105
====== ====== ====== ======
Basic earnings per share........................... $ .03 $ .08 $ .03 $ .03
====== ====== ====== ======
Diluted earnings per share......................... $ .02 $ .08 $ .03 $ .03
====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Interest income.................................... $3,781 $4,189 $4,104 $4,292
Interest expense................................... 1,661 1,722 1,571 1,547
------ ------ ------ ------

Net interest income................................ 2,120 2,467 2,533 2,745
Provision for loan losses.......................... (106) (26) (111) (266)
Noninterest income................................. 264 231 239 244
Noninterest expense................................ 1,619 1,681 1,734 1,893
------ ------ ------ ------
Income before income taxes....................... 659 991 927 830
Provision for income taxes......................... 224 337 315 305
------ ------ ------ ------
Net income....................................... $ 435 $ 654 $ 612 $ 525
====== ====== ====== ======
Basic earnings per share........................... $ .15 $ .16 $ .15 $ .13
====== ====== ====== ======
Diluted earnings per share......................... $ .14 $ .15 $ .15 $ .13
====== ====== ====== ======
</TABLE>

19. SUBSEQUENT EVENT

On September 14, 1999, the Company announced a definitive agreement to
acquire Northern Bank of Commerce (NBOC). Under the terms of the definitive
agreement, the shareholders of NBOC would receive up to .82584 shares of the
Company's common stock and $1.63 in cash for each share of NBOC stock. The
amount of stock merger consideration would be reduced if NBOC shareholders'
equity did not meet specified thresholds immediately prior to the closing date.
The cash portion of the merger consideration would be deposited in an escrow
account, on behalf of NBOC's shareholders, to indemnify the Company for losses
it incurs on certain specified NBOC loans in excess of established thresholds
during a two-year period following the merger. The merger required the approval
of both

60
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)

19. SUBSEQUENT EVENT (CONTINUED)
the shareholders of the Company and NBOC. The Company's shareholders approved
the acquisition on February 17, 2000. The shareholders of NBOC declined to
approve the merger at a special shareholders meeting on March 9, 2000 and as a
result NBOC exercised its rights to terminate the merger agreement. The Company
and NBOC are continuing their negotiations regarding a possible merger. The
Company has deferred approximately $470,000 of costs incurred as of
December 31, 1999, related to the merger, primarily legal, printing and
accounting, that are included in the other asset caption of the December 31,
1999 consolidated statement of condition.

Effective March 22, 2000, the President and Chief Operating Officer of the
Company resigned his position. As a result of his departure, during the first
quarter of 2000, the Company will record a severance charge of approximately
$540,000.

61
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this item is incorporated by reference to the sections
entitled "Security ownership of directors and executive officers, Election of
directors, Information regarding the board of directors and its committees," in
the Company's 2000 Proxy Statement.

ITEM 11 EXECUTIVE COMPENSATION

The response to this item is incorporated by reference to the section
entitled "Executive Compensation" in the Company's 2000 Proxy Statement.

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is incorporated by reference entitled "Security
ownership of directors and executive officers" in the Company's 2000 Proxy
Statement.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this item is incorporated by reference entitled "Related
party transactions" in the Company's 2000 Proxy Statement.

ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

a. No Form 8-Ks were filed during the fourth quarter.

b. The exhibit list is set forth on the Exhibit Index included herein.

62
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 159d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 23rd day of
March, 2000.

<TABLE>
<S> <C> <C>
COWLITZ BANCORPORATION
(Registrant)

/s/ BENJAMIN NAMATINIA
-----------------------------------------
Benjamin Namatinia
CHAIRMAN/CHIEF EXECUTIVE OFFICER
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 23rd day of March 2000.

<TABLE>
<S> <C>
Principal Executive Officer:

/s/ BENJAMIN NAMATINIA
------------------------------- Chairman/Chief Executive Officer
Benjamin Namatinia

Principal Executive Officer:

/s/ DON P. KISER
------------------------------- Vice President/Chief Financial Officer
Don P. Kiser

Accounting Officer:

/s/ DONNA P. GARDNER
------------------------------- Vice-President/Secretary-Treasurer
Donna P. Gardner
</TABLE>

<TABLE>
<S> <C> <C> <C>
Remaining Directors:

/s/ CHARLES W. JARRETT /s/ MARK F. ANDREWS, JR.
- --------------------------- Director --------------------------- Director
Charles W. Jarrett Mark F. Andrews, Jr.

/s/ E. CHRIS SEARING /s/ LARRY M. LARSON
- --------------------------- Director --------------------------- Director
E. Chris Searing Larry M. Larson
</TABLE>

63
<PAGE>
EXHIBIT INDEX

<TABLE>
<C> <S>
3.1* Form of Restated and Amended Articles of Incorporation of
Registrant.
3.2* Bylaws of Registrant.
10.1* Advances Security and Deposit Agreement dated March 29, 1991
between Federal Home Loan Bank of Seattle and Cowlitz Bank.
10.2* Federal Home Loan Bank of Seattle Form of Promissory Note
(Credit Line Fixed Rate Advance).
10.3* Purchase and Assumption Agreement dated as of March 5, 1997
between Wells Fargo Bank, N.A. and Cowlitz Bank.
10.4* Lease Agreement dated October 7, 1963 between Twin City
Development Co. and Bank of Cowlitz County.
10.5* Assignment of Lease dated March 4, 1976 between Bank of the
West and Old National Bank of Washington.
10.6* Assignment of Lease dated March 30, 1979 between Old
National Bank of Washington and Pacific National Bank of
Washington.
10.7* Extension of Lease dated April 1, 1989 between Triangle
Development Company and First Interstate Bank of Washington,
N.A.
10.8* Employment Agreement dated January 1, 1998 between Cowlitz
Bancorporation and Charles W. Jarrett.
10.9* Employment Agreement dated January 1, 1998 between Cowlitz
Bancorporation and Ben Namatinia.
10.10* Cowlitz Bancorporation 1997 Stock Option Plan.
10.11* Form of Stock Option Agreement.
10.12* Cowlitz Bancorporation Employee Stock Purchase Plan.
11.1 Computation of Per Share Earnings. (Included in Note 1 to
the Consolidated Financial Statements included herein)
21* List of all Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule.
</TABLE>

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

<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included (or incorporated by reference) in the Form 10-K, into the
Company's previously filed Registration Statement File No. 333-48607.

/s/ Arthur Andersen LLP

Portland, Oregon
March 27, 2000

<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS OF COWLITZ BANCORPORATION AS OF DECEMBER 31, 1999
AND DECEMBER 31, 1998 AND RELATED CONSOLIDATED STATEMENTS OF INCOME. CHANGES IN
SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE PERIOD ENDED DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,054
<INT-BEARING-DEPOSITS> 109,603
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,427
<INVESTMENTS-CARRYING> 4,564
<INVESTMENTS-MARKET> 4,558
<LOANS> 149,386
<ALLOWANCE> 2,281
<TOTAL-ASSETS> 198,495
<DEPOSITS> 137,607
<SHORT-TERM> 3,825
<LIABILITIES-OTHER> 1,292
<LONG-TERM> 24,281
0
0
<COMMON> 18,530
<OTHER-SE> 12,960
<TOTAL-LIABILITIES-AND-EQUITY> 198,495
<INTEREST-LOAN> 15,344
<INTEREST-INVEST> 910
<INTEREST-OTHER> 465
<INTEREST-TOTAL> 16,719
<INTEREST-DEPOSIT> 3,801
<INTEREST-EXPENSE> 1,447
<INTEREST-INCOME-NET> 11,471
<LOAN-LOSSES> 1,349
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 10,871
<INCOME-PRETAX> 1,076
<INCOME-PRE-EXTRAORDINARY> 1,076
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 656
<EPS-BASIC> .16
<EPS-DILUTED> .16
<YIELD-ACTUAL> 10.52
<LOANS-NON> 2,387
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,814
<CHARGE-OFFS> 1,025
<RECOVERIES> 143
<ALLOWANCE-CLOSE> 1,349
<ALLOWANCE-DOMESTIC> 1,349
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>