Evergreenbancorp (EVGGQ) 10-Q 2005 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2005

[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act

For the transition period from ______to ______

Commission File No. 000-32915

EVERGREENBANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

WASHINGTON	91-2097262
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

301 Eastlake Avenue East
Seattle, Washington 98109
(Address of Principal Executive Offices) (Zip Code)

(206) 628-4250
(Registrant’s Telephone Number, Including Area Code)

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

Yes [X]               No [  ]

     Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act.

Yes [  ]               No [X]

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

Common Stock, no par value, outstanding as of August 11, 2005: 1,498,827
No Preferred Stock was issued or outstanding.

PART I FINANCIAL INFORMATION
Item 1.Unaudited Consolidated Financial Statements.	3
Unaudited Consolidated Balance Sheets — June 30, 2005 and December 31, 2004.	3
Unaudited Consolidated Statements of Income — For the three months and six months ended June 30, 2005 and 2004.	4
Unaudited Consolidated Statements of Stockholders’ Equity — For the six months ended June 30, 2005 and 2004.	5
Unaudited Consolidated Statements of Comprehensive Income — For the three months and six months ended June 30, 2005	6
Unaudited Consolidated Statements of Cash Flows — For the six months ended June 30, 2005 and 2004.	7
Notes to Unaudited Consolidated Financial Information.	8
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.	13
Item 3.Quantitative and Qualitative Disclosure About Market Risk.	19
Item 4.Controls and Procedures.	20
PART II OTHER INFORMATION	21
Item 1.Legal Proceedings.	21
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.	21
Item 3.Defaults Upon Senior Securities.	21
Item 4.Submission of Matters to a Vote of Security Holders.	21
Item 5.Other Information.	21
Item 6.Exhibits.	22
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

EVERGREENBANCORP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, 2005 and December 31, 2004
(in thousands, except per share data)

	June 30,			December 31,
	2005			2004
Assets
Cash and due from banks	$	7,403		$	9,407
Federal funds sold		13,583			2,736
Interest-bearing deposits in financial institutions		1,337			2
Total cash and cash equivalents		22,323			12,145
Securities available for sale		35,462			35,170
Loans		154,169			159,656
Allowance for loan losses		(1,898	)		(1,887	)
Net loans		152,271			157,769
Premises and equipment		3,028			2,576
Accrued interest and other assets		2,923			1,970
Total assets	$	216,007		$	209,630
Liabilities
Deposits
Noninterest-bearing	$	53,901		$	54,193
Interest-bearing		127,847			119,608
Total deposits		181,748			173,801
Federal Home Loan Bank advances		9,181			11,067
Accrued expenses and other liabilities		2,445			2,277
Junior subordinated debt		5,000			5,000
Total liabilities	$	198,374		$	192,145
Stockholders’ equity
Preferred stock: no par value; 100,000 shares authorized; none issued		—			—
Common stock and surplus: No par value; 15,000,000 shares authorized; 1,497,907 shares issued at June 30, 2005; 1,494,321 shares at December 31, 2004		15,973			15,927
Retained earnings		1,967			1,678
Accumulated other comprehensive loss		(307	)		(120	)
Total stockholders’ equity		17,633			17,485
Total liabilities and stockholders’ equity	$	216,007		$	209,630

See accompanying notes to unaudited consolidated financial statements.

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EVERGREENBANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three month and six month periods ended June 30, 2005 and 2004
(in thousands, except per share data)

	Three months ended June 30,				Six months ended June 30,
	2005		2004		2005		2004
Interest income
Loans, including fees	$	2,926	$	2,427	$	5,804	$	4,863
Taxable securities		257		237		507		500
Tax exempt securities		29		22		55		44
Federal funds sold and other		75		16		100		20
Total interest income		3,287		2,702		6,466		5,427
Interest expense
Deposits		591		339		1,110		662
Federal funds purchased		—		3		4		6
Federal Home Loan Bank advances		115		134		234		281
Junior subordinated debt		83		68		159		127
Total interest expense		789		544		1,507		1,076
Net interest income		2,498		2,158		4,959		4,351
Provision for loan losses		66		80		147		140
Net interest income after provision for loan losses		2,432		2,078		4,812		4,211
Noninterest income
Service charges on deposit accounts		284		231		532		460
Merchant credit card processing		39		36		78		81
Gain on sales of securities available for sale		—		—		—		15
Other commissions and fees		37		37		63		76
Other noninterest income		82		118		198		240
Total noninterest income		442		422		871		872
Noninterest expense
Salaries and employee benefits		1,204		1,036		2,338		2,088
Occupancy and equipment		421		338		810		670
Data processing		196		180		385		358
Marketing		108		119		203		177
Loss on other real estate owned		—		—		—		132
Other noninterest expense		609		406		1,165		812
Total noninterest expense		2,538		2,079		4,901		4,237
Income before income taxes		336		421		782		846
Income tax expense		122		141		269		280
Net income	$	214	$	280	$	513	$	566
Basic earnings per share	$	0.14	$	0.19	$	0.34	$	0.38
Diluted earnings per share	$	0.14	$	0.18	$	0.34	$	0.37

See accompanying notes to unaudited consolidated financial statements.

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EVERGREENBANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Six months ended June 30, 2005, and 2004 (in thousands, except share and per share data):

								Accumulated
			Common					other
	Common		stock					comprehen-			Total stock-
	stock		and		Retained			sive			holders’
	shares		surplus		earnings			come			equity
Balance at January 1, 2004		1,190,366	$	15,854	$	778		$	(49	)	$	16,583
Comprehensive income
Net income		—		—		566			—			566
Change in net unrealized gain (loss) on securities available for sale, net of deferred income tax benefit of $143		—		—		—			(278	)		(278	)
Total comprehensive income												288
Cash dividends ($.128 per share)		—		—		(191	)		—			(191	)
Exercise of stock options and related tax benefit		2,514		35		—			—			35
Balance at June 30, 2004		1,192,880	$	15,889	$	1,153		$	(327	)	$	16,715

								Accumulated
			Common					other
	Common		stock					comprehen-			Total stock-
	stock		and		Retained			sive			holders’
	shares		surplus		earnings			income (loss)			equity
Balance at January 1, 2005		1,494,321	$	15,927	$	1,678		$	(120	)	$	17,485
Comprehensive income
Net income		—		—		513			—			513
Change in net unrealized gain (loss) on securities available for sale, net of deferred income tax benefit of $96		—		—		—			(187	)		(187	)
Total comprehensive income												326
Cash dividends ($.15 per share)		—		—		(224	)		—			(224	)
Exercise of stock options and related tax benefit		3,586		46		—			—			46
Balance at June 30, 2005		1,497,907	$	15,973	$	1,967		$	(307	)	$	17,633

See accompanying notes to unaudited consolidated financial statements.

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EVERGREENBANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three month and six month periods ended June 30, 2005 and 2004
(in thousands)

The Company’s only component of other comprehensive earnings is the unrealized gain (loss) on securities available for sale. Comprehensive income (loss) components and related tax effects are as follows:

	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Net income	$	214		$	280		$	513		$	566
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities available for sale		12			(621	)		(283	)		(406	)
Reclassification adjustment for gains included in net income		—			—			—			(15	)
Net unrealized gains (losses)		12			(621	)		(283	)		(421	)
Tax effect		(4	)		211			96			143
Total other comprehensive income (loss)		8			(410	)	$	(187	)	$	(278	)
Total comprehensive income (loss)	$	222		$	(130	)	$	326		$	288

See accompanying notes to unaudited consolidated financial statements.

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EVERGREENBANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2005, and 2004
(in thousands, except share and per share data)

	June 30,			June 30,
	2005			2004
Cash flows from operating activities
Net income	$	513		$	566
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		366			321
Provision for loan losses		147			140
Gain from sales of securities		—			(15	)
Write-down of other real estate owned		—			132
Amortization of premiums and discounts on securities		30			39
Federal Home Loan Bank stock dividends		(6	)		(27	)
Dividends reinvested		(190	)		(176	)
Other changes, net		(681	)		47
Net cash provided by operating activities		179			1,027
Cash flows from investing activities
Proceeds from sales, maturities and principal payments on securities available for sale		715			4,026
Net (increase) decrease in loans		5,351			72
Purchases of securities available for sale		(1,124	)		1,190
Proceeds from sale of other real estate owned		—			2,539
Purchases of premises and equipment		(818	)		(190	)
Net cash provided by (used in) investing activities		4,124			7,637
Cash flows from financing activities
Net increase in deposits		7,947			5,757
Net decrease in federal funds purchased		—			(1,524	)
Repayments Federal Home Loan Bank advances		(1,886	)		(3,882	)
Proceeds from exercise of stock options		38			29
Dividends paid		(224	)		(191	)
Net cash provided by financing activities		5,875			189
Net increase in cash and cash equivalents		10,178			8,853
Cash and cash equivalents at beginning of year		12,145			10,625
Cash and cash equivalents at end of period	$	22,323		$	19,478

See accompanying notes to unaudited consolidated financial statements.

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EVERGREENBANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL INFORMATION

Note 1: Summary of Significant Accounting Policies

Organization.EvergreenBancorp, Inc. (“Bancorp”) was formed February 9, 2001 and is a Washington corporation chartered as a bank holding company. Bancorp holds all of the issued and outstanding shares of EvergreenBank (“the Bank”). The Bank is a Washington state chartered financial institution established in 1971 that engages in general commercial and consumer banking operations. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (“the FDIC”). Bancorp and the Bank are collectively referred to as “the Company.” EvergreenBancorp Capital Trust I (“the Trust”) , a special purpose business trust formed by Bancorp in May 2002 to raise capital through a trust preferred securities offering, had previously been consolidated with the Company and is now reported separately.

The Bank offers a broad spectrum of personal and business banking services, including commercial, consumer, and real estate lending. The Bank’s offices are centered in the Puget Sound region in the Seattle, Lynnwood, Bellevue, and Federal Way communities.

Operating Segments. While the Company’s management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable segment.

Principles of consolidation.The accompanying condensed consolidated financial statements include the combined accounts of Bancorp and the Bank for all periods reported. All significant intercompany balances and transactions have been eliminated.

Critical accounting policies and use of estimates.The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, including contingent amounts, 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. Management has identified certain policies as being particularly sensitive in terms of judgments and the extent to which estimates are used. These policies relate to the determination of the allowance for loan losses on loans, other real estate owned, and the fair value of financial instruments and are described in greater detail in subsequent sections of Management’s Discussion and Analysis and in the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, estimates and assumptions, material differences in the results of operations or financial condition could result.

Newly issued accounting pronouncements.FAS 123R requires all public companies to record compensation costs for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This will apply to awards granted or modified after the first fiscal year beginning after June 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after the adoption date are expected to result in additional compensation expense of approximately $78,000 in 2006, $53,000 in 2007, $38,000 in 2008, $32,000 in 2009, and $20,000 in 2010. There will be no significant effect on the Company’s financial position as total equity will not change; the effect on results of operations is not expected to be material upon and after adoption.

Stock-Based Compensation.Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise

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price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of Statement of Financial Accounting Standard No. 123,Accounting for Stock-Based Compensation.Certain adjustments were made to the pro forma calculations in prior years to be consistent with the current year presentation. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.

	Three months ended June 30,
(in thousands, except per share data)	2005		2004
Net income as reported	$	214	$	280
Deduct: Stock-based compensation expense determined under fair value based method		14		12
Pro forma net income		200	$	268
Basic earnings per share as reported	$	0.14	$	0.19
Pro forma basic earnings per share		0.13		0.18
Diluted earnings per share as reported		0.14		0.18
Pro forma diluted earnings per share		0.13		0.18

	Six months ended June 30,
(in thousands, except per share data)	2005		2004
Net income as reported	$	513	$	566
Deduct: Stock-based compensation expense determined under fair value based method		28		24
Pro forma net income	$	485	$	542
Basic earnings per share as reported	$	0.34	$	0.38
Pro forma basic earnings per share		0.32		0.36
Diluted earnings per share as reported		0.34		0.37
Pro forma diluted earnings per share		0.31		0.36

     The weighted average fair value of individual options granted during the second quarter 2005 was $4.97. There were 19,000 options granted in the second quarter of 2005. The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.

	Three months ended
	June 30, 2005
Risk-free interest rate		3.87	%
Expected option life	7.5 years
Expected stock price volatility		22	%
Dividend yield		1.6	%

	Six months ended
	June 30, 2005
Risk-free interest rate		3.86	%
Expected option life	7.5 years
Expected stock price volatility		21	%
Dividend yield		1.6	%

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Note 2: Stock split

On November 30, 2004, the Company effected a five-for-four stock split. All references to number of shares issued and outstanding (basic and diluted) and earnings per share, for the periods presented have been restated.

Note 3: Stock options

During the second quarter of 2005, 19,000 stock options were granted and there were 1,836 options exercised. During the first quarter of 2005, 2,000 stock options were granted and there were 1,750 options exercised. The total stock options outstanding were 160,994 at June 30, 2005 with exercise prices ranging between $9.12 and $18.50 and expiration dates between October 23, 2010 and June 16, 2015. All options are granted at market value as of the date of grant.

Note 4: Securities available for sale

Investment securities available for sale include $6,584,000 in mortgage-backed securities at June 30, 2005. This investment by the Bank in mortgage-backed securities qualifies as collateral for advances from Federal Home Loan Bank of Seattle. Investment securities available for sale also include the AMF Adjustable Rate Mortgage Fund with a fair market value of $14,915,000 at June 30, 2005.

Securities with unrealized losses at June 30, 2005, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

	Less than 12 Months					12 Months or More							Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. agencies	$	5,456	$	(57	)	$	2,472	$	(29	)	$	7,928	$	(86	)
State and political subdivisions		3,537		(29	)		149		(2	)		3,686		(31	)
Mortgage-backed securities		—		—			5,661		(72	)		5,661		(72	)
AMF Adjustable Rate Mortgage Fund		375		(44	)		14,540		(247	)		14,915		(291	)
Total temporarily impaired	$	9,368	$	(130	)	$	22,822	$	(350	)	$	32,190	$	(480	)

At June 30, 2005, securities with unrealized losses have an aggregate depreciation of 1.47 percent from the Company’s amortized cost basis. The unrealized losses are predominately the result of changing market values due to increasing short-term (less than two years) market interest rates, and are expected to regain the lost value with stable or declining interest rates and, accordingly, are considered as temporary. No credit issues have been identified that cause management to believe the declines in market value are other than temporary. The Company has the ability and intent to hold these securities until maturity or for the foreseeable future.

The Net Asset Value (NAV) of the AMF Adjustable Rate Mortgage Fund has declined with recent increases in short term interest rates. With respect to the ARM Fund investment, the historical performance of the fund shows that as interest rates slow their rate of ascent, are stable, or as rates decline, the fund recovers its value (that is, the degree of impairment reverses) through increases in its market net asset value. Management expects the ARM Fund to recover value following a decline due to a rising interest rate environment once rates stabilize and the underlying adjustable rate mortgages reprice to market. The Company has the ability and intent to hold the investment for a sufficient period of time for any anticipated recovery in fair value.

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Securities with unrealized losses at December 31, 2004, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

	Less than 12 Months					12 Months or More							Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. agencies	$	3,495	$	(25	)	$	988	$	(12	)	$	4,483	$	(37	)
State and political subdivisions		891		(4	)		—		—			891		(4	)
Mortgage-backed securities		6,210		(36	)		31		—			6,240		(36	)
AMF Adjustable Rate Mortgage Fund		283		(1	)		14,549		(184	)		14,832		(185	)
Total temporarily impaired	$	10,879	$	(66	)	$	15,568	$	(196	)	$	26,446	$	(262	)

At December 31, 2004, securities with unrealized losses have an aggregate depreciation of 1.0 percent from the Company’s amortized cost basis. The unrealized losses are predominately the result of changing market values due to increasing short-term (less than two years) market interest rates, are expected to regain the lost value with stable or declining interest rates and, accordingly, are considered as temporary. No credit issues have been identified that cause management to believe the declines in market value are other than temporary.

Note 5: Earnings per share

Basic earnings per share of common stock is computed on the basis of the weighted average number of common stock shares outstanding adjusted for the 2004 five-for-four stock split. Diluted earnings per share of common stock is computed on the basis of the weighted average number of common shares outstanding plus the effect of the assumed conversion of outstanding stock options.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share of common stock is as follows:

	Three months ended June 30,
	2005		2004
(in thousands, except share and per share data):
Income (numerator):
Net income	$	214	$	280
Income (denominator):
Weighted average number of common stock shares outstanding – basic		1,497,554		1,490,813
Dilutive effect of outstanding employee and director stock options		33,411		24,171
Weighted average number of common stock shares outstanding and assumed conversion – diluted		1,530,965		1,514,984
Basic earnings per share	$	0.14	$	0.19
Diluted earnings per share	$	0.14	$	0.18

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	Six months ended June 30,
	2005		2004
(in thousands, except share and per share data):
Income (numerator):
Net income	$	513	$	566
Income (denominator):
Weighted average number of common stock shares outstanding – basic		1,497,556		1,490,443
Dilutive effect of outstanding employee and director stock options		32,624		24,569
Weighted average number of common stock shares outstanding and assumed conversion – diluted		1,530,180		1,515,012
Basic earnings per share of common stock	$	0.34	$	0.38
Diluted earnings per share of common stock	$	0.34	$	0.37

Note 6: Retirement Benefits

The Company participates in a defined contribution retirement plan. The 401(k) plan permits all salaried employees to contribute up to a maximum of 15% of gross salary per month. For the first 6%, the Company contributes two dollars for each dollar the employee contributes. Partial vesting of Company contributions to the plan begins at 20% after two years of employment, and such contributions are 100% vested with five years of employment. The Company’s contributions to the plan for the quarters ended June 30, 2005 and 2004 were $80,000 and $74,000, respectively. Contributions to the plan for the first six months of 2005 were $154,000 and $146,000 for the same period in 2004.

The Company also participates in multiple-employer defined benefit postretirement health care plans that provide medical and dental coverage to directors and surviving spouses and to employees who retire after age 62 and 15 years of full-time service and their dependents. The medical and dental plans are nonfunded.

Components of net periodic benefit cost:

	Three months ended				Six months
	June 30,				ended June 30,
(in thousands)	2005		2004		2005		2004
Service cost	$	22	$	23	$	44	$	46
Interest cost		23		22		46		44
Amortization of transition obligation		10		10		20		20
Recognized actuarial (gain) loss		0		0		0		0
Net periodic benefit cost	$	55	$	55	$	110	$	110

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Bank’s results of operations primarily depend on net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowed funds. The Bank’s operating results are also affected by loan fees, service charges on deposit accounts, net merchant credit card processing fees, gains from sales of loans and investments, other commissions and fees, and other noninterest income. Operating expenses of the Bank include employee compensation and benefits, occupancy and equipment costs, data processing costs, marketing costs, federal deposit insurance premiums and other administrative expenses.

The Bank’s results of operations are further affected by economic and competitive conditions, particularly changes in market interest rates and real estate values. Results are also affected by monetary and fiscal policies of federal agencies, and actions of regulatory and taxing authorities.

The following discussion contains a review of the consolidated operating results and financial condition of the Company for the three and six month period of 2005. This discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes contained elsewhere in this report. When warranted, comparisons are made to the same periods in 2004 and to the previous year ended December 31, 2004. For additional information, refer to the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

RESULTS OF OPERATIONS

Net Income

Three months and six months ended June 30, 2005 and 2004

For the second quarter of 2005, the Company reported net income of $214,000 compared to $280,000 for the second quarter of 2004, a decrease of 23.57 percent. The main reason for the decrease in profits was higher operating expenses due to additional staffing for the new Third and Seneca office opened in June 2005, combined with added costs of compliance with upcoming requirements of the Sarbanes-Oxley Act. The growth in expenses was largely offset by higher net interest income due to growth in loans and improved net interest margins.

Basic and diluted earnings per common share were $0.14 for the second quarter of 2005 compared to $0.19 and $0.18, respectively, for the same period one year ago.

For the second quarter of 2005, return on average common equity and return on average assets was 4.88 percent and .41 percent respectively, compared to 6.68 percent and .57 percent, respectively, for the same period one year ago.

For the first six months of 2005, net income was $513,000, compared with $566,000 for the first six months of 2004, a decrease of 9.36 percent. Basic and diluted earnings per common share were $0.34 for the first six months of 2005 and $0.38 and $0.37, respectively, for the same period in 2004. Return on average assets was .49 percent for 2005 and .58 percent for 2004. Return on average common equity was 5.86 percent for the first six months of 2005 and 6.74 percent for the same period of 2004. Additional analysis of financial components is contained in the discussion that follows. Unless otherwise stated, comparisons are between the second quarter 2005 and 2004.

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Net Interest Income and Net Interest Margin

The Company’s principal source of earnings is net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowed funds. Several factors can contribute to changes in net interest income, such as changes in average balances or in the rates on earning assets and rates paid for interest bearing liabilities, the level of noninterest bearing deposits, and the level of nonaccrual loans.

Net interest income before the provision for loan losses was $2,498,000 for the second quarter of 2005, compared to $2,158,000 for the same period in 2004, an increase of 15.76 percent. Net interest income was $4,959,000 for the first six months of 2005, compared with $4,351,000 for the first six months of 2004, an increase of 13.97 percent. The increase was primarily attributable to substantial growth in the average balances of the loan portfolio that occurred during the fourth quarter 2004.

The net interest margin, which is the ratio of taxable-equivalent net interest income to average earning assets, was 5.10 percent for the first six months of 2005 compared to 4.93 percent for the same period one year ago. The weighted average yield on interest earning assets was 6.64 percent for the first six months of 2005, compared to 6.14 percent for the first six months of 2004. Interest expense as a percentage of average earning assets was 1.54 percent for the first six months of 2005, compared to 1.21 percent during the same period in 2004.

Interest income for the three months ended June 30, 2005 was $3,287,000 compared to $2,702,000 for the three months ended June 30, 2004, an increase of $587,000 or 21.65 percent. This increase was primarily attributable to an increase in the average loan balance of $16,200,000, an increase of 0.56 percent in the average yield on earning assets, and was partially offset by the level of nonaccrual loans.

Interest income for the six months ended June 30, 2005 was $6,466,000 compared to $5,427,000 for the six months ended June 30, 2004, an increase of 19.15 percent.

Interest expense for the three months ended June 30, 2005 was $789,000 compared to $544,000 for the three months ended June 30, 2004, an increase of $245,000 or 45.04 percent. This was largely due to an increase in the average rate paid on interest bearing liabilities and an increase of $16,500,000 in the average balance of interest bearing liabilities.

Interest expense for the six months ended June 30, 2005 was $1,507,000 compared with $1,076,000 for the same period a year ago, an increase of $431,000 or 40.06 percent.

Noninterest Income/Expense

Noninterest income in the second quarter of 2005 was $442,000 compared to $422,000 in the same quarter of 2004, an increase of $20,000 or 4.74 percent. Noninterest income for the six months ended June 30, 2004 was $871,000 compared with $872,000 for the same period of 2004, a decrease of $1,000 or 0.11 percent. Growth in service charges on deposit accounts was largely offset by lower other noninterest income.

Noninterest expense was $2,538,000 in the second quarter of 2005, compared to $2,079,000 in the same quarter of 2004, an increase of $459,000, or 22.08 percent. Noninterest expense for the six months ended June 30, 2005 was $4,901,000 compared with $4,237,000 for the same period of 2004, an increase of $664,000 or 15.67 percent. The increase was due primarily to the costs associated with the opening of the new Third and Seneca office which resulted in increased salary, occupancy, and depreciation expense, and added costs of compliance with upcoming requirements of the Sarbanes-Oxley Act.

Income tax expense

The Company recognized income tax expense of $122,000 during the second quarter of 2005, down from $141,000 in the same quarter of 2004. Income tax expense for the six months ended June 30, 2005 was $269,000, compared to $280,000 for the same period of 2004, a decrease of 3.93 percent or $11,000.

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Provision and Allowance for Loan Losses

Included in the results of operations for the quarters ending June 30, 2005 and 2004 is a non-cash expense of $66,000 and $80,000, respectively, related to the provision for loan losses. The decrease of 17.5 percent was predominately due to fewer classified loans. The provision for loan losses for the six months ended June 30, 2005 was $147,000 compared to $140,000 for the same period of 2004.

At June 30, 2005, the allowance for loan losses was $1,898,000 compared to $1,887,000 at December 31, 2004. The ratio of the allowance to total loans outstanding was 1.23 percent at June 30, 2005, and 1.18 percent at December 31, 2004.

Management evaluates the adequacy of the allowance for loan losses on a quarterly basis after consideration of a number of factors, including the volume and composition of the loan portfolio, potential impairment of individual loans, concentrations of credit, past loss experience, current delinquencies, information about specific borrowers, current economic conditions, and other factors. Although management believes the allowance for loan losses was at a level adequate to absorb probable incurred losses on existing loans at June 30, 2005, there can be no assurance that such losses will not exceed estimated amounts.

While management is encouraged by recent trends and the current health of the national and regional economy, local economic conditions could still adversely affect cash flows for both commercial and individual borrowers, as a result of which the Company could experience increases in problem assets, delinquencies and losses on loans.

FINANCIAL CONDITION

Loans

At June 30, 2005, loans totaled $154,169,000 compared to $159,656,000 at December 31, 2004, a reduction of $5,487,000 or 3.44 percent.

At June 30, 2005, the Bank had $90,080,000 in loans secured by real estate, which includes loans primarily for a commercial purpose, secured by real estate. The collectibility of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions in the region. The Bank generally requires collateral on all real estate exposures and typically maintains loan-to-value ratios of no greater than 80 percent.

The following tables set out the composition of the types of loans, the allocation of the allowance for loan losses and the analysis of the allowance for loan losses as of June 30, 2005 and December 31, 2004:

Types of Loans

	June 30,		December 31,
(in thousands)	2005		2004
Commercial	$	49,815	$	55,563
Real estate:
Commercial		74,233		67,165
Construction		7,339		11,538
Residential 1-4 family		8,508		11,508
Consumer and other		14,274		13,882
Total	$	154,169	$	159,656

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Allocation of the Allowance for Loan Losses

In the following table, the allowance for loan losses at June 30, 2005 and December 31, 2004 has been allocated among major loan categories based on a number of factors including quality, volume, current economic outlook and other business considerations.

	June 30,			% of loans in			December 31,			% of loans in
	2005			each category			2004			each category
(in thousands)	Amount			to Total Loans			Amount			to Total Loans
Commercial	$	962			32	%	$	1,000			35	%
Real estate:
Commercial		653			48			568			42
Construction		74			5			117			7
Residential 1-4 family		14			6			11			7
Consumer and other		195			9			191			9
Total	$	1,898			100	%	$	1,887			100	%
% of Loan portfolio		1.23	%					1.18	%

This analysis of the allowance for loan losses should not be interpreted as an indication that chargeoffs will occur in these amounts or proportions, or that the allocation indicates future chargeoff trends. Furthermore, the portion allocated to each category is not the total amount available for future losses that might occur within each category.

Analysis of Allowance for Loan Losses

The following table summarizes transactions in the allowance for loan losses and details the chargeoffs, recoveries and net loan losses by loan category.

	Six months ended		Six months ended
(in thousands)	June 30, 2005		June 30, 2004
Beginning Balance	$	1,887	$	1,636
Chargeoffs
Commercial		138		—
Real estate:
Commercial		1		—
Construction		—		—
Residential 1-4 family		—		—
Consumer and other		11		58
Total charge-offs	$	150	$	58
Recoveries
Commercial	$	5	$	6
Real estate:
Commercial		—		—
Construction		—		—
Residential 1-4 family		—		—
Consumer and other		9		8
Total Recoveries	$	14	$	14
Net chargeoffs/(recoveries)	$	136	$	44
Provision		147		140
Ending balance	$	1,898	$	1,732

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Total loans classified as impaired at June 30, 2005 and December 31, 2004 were $1,876,000 and $548,000, respectively. The increase in the impaired loans total was primarily due to one loan classified as impaired because the borrower stopped making payments, but management believes no loss is expected to be realized. The Company considers a loan impaired if full principal and interest will not be collected according to the contractual terms of the note. Nonaccrual loans are included as impaired. Impaired loans are carried at the present value of expected cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral, if the loan is collateral dependent. The amount of the allowance for loan losses specifically allocated for impaired loans was $76,000 at June 30, 2005 compared with $298,000 at December 31, 2004.

Commercial loan charge-offs for the six months ended June 30, 2005 resulted primarily from one loan, classified as impaired and fully reserved at December 31, 2004.

Investments

At June 30, 2005, investments totaled $35,462,000, an increase of $292,000 or 0.83 percent from $35,170,000 at December 31, 2004. The increase in investments was primarily due to the purchase of $1,124,000 of municipal bonds in the second quarter, offset by principal payments on securities available-for-sale and an increase in the unrealized losses.

Deposits

At June 30, 2005, total deposits were $181,748,000, compared to $173,801,000 at December 31, 2004. This represents a 4.57 percent increase from December 31, 2004. Non-interest bearing deposits totaled $53,901,000 at June 30, 2005 compared to $54,193,000 at December 31, 2004, a decrease of $292,000 or 0.54 percent. Interest bearing deposits totaled $127,847,000 at June 30, 2005, compared to $119,608,000 at December 31, 2004, an increase of $8,239,000 or 6.89 percent.

Borrowings

At June 30, 2005, the Bank’s Federal Home Loan Bank borrowings were $9,181,000 compared to $11,067,000 at December 31, 2004. This represents a 17.04 percent decrease from December 31, 2004 and is due to regular repayment of maturing and amortizing advances. Due to increased liquidity, these advances were not replaced.

Stockholders’ Equity and Capital Resources

Stockholders’ equity totaled $17,633,000 at June 30, 2005, an increase of $148,000 or 0.85 percent over December 31, 2004. This increase in stockholders’ equity is primarily the result of net income of $513,000, less cash dividends paid of $224,000. The change in unrealized losses on securities available for sale, net of deferred taxes, reduced stockholders’ equity by $187,000. Equity increased by $46,000 in common stock and surplus due to the exercise of 3,586 stock options.

Book value per share was $11.77 at June 30, 2005 compared to $11.70 at December 31, 2004. Book value per share is calculated by dividing total equity by total shares outstanding.

The following tables display the capital ratios at June 30, 2005 and December 31, 2004 for the Company and the Bank. As the tables illustrate, the capital ratios exceed those required to be considered well-capitalized.

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											Minimum to Be
											Well Capitalized
						Minimum for					Under the Prompt
						Capital Adequacy					Corrective Action
	Actual					Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2005
Total capital (to risk-weighted assets)
Consolidated	$	24,662		14.12	%	$	13,972		8.00	%	$	17,465		10.00	%
Bank		24,286		13.92			13,962		8.00			17,452		10.00
Tier 1 capital (to risk-weighted assets)
Consolidated		22,764		13.03			6,986		4.00			10,479		6.00
Bank		22,388		12.83			6,981		4.00			10,471		6.00
Tier 1 capital (to average assets)
Consolidated		22,764		10.86			8,387		4.00			10,483		5.00
Bank		22,388		10.68			8,387		4.00			10,483		5.00
December 31, 2004
Total capital (to risk-weighted assets)
Consolidated	$	24,305		14.03	%	$	13,826		8.00	%	$	17,282		10.00	%
Bank		23,651		13.71			13,805		8.00			17,256		10.00
Tier 1 capital (to risk-weighted assets)
Consolidated		22,419		12.94			6,913		4.00			10,369		6.00
Bank		21,764		12.61			6,902		4.00			10,354		6.00
Tier 1 capital (to average assets)
Consolidated		22,419		11.07			8,083		4.00			10,104		5.00
Bank		21,764		10.77			8,083		4.00			10,104		5.00

Contractual Obligations and Commitments

In the normal course of business, to meet the financing needs of its customers, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. Such off-balance sheet items are recognized in the financial statements when they are funded or related fees are received. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The off-balance sheet items do not represent unusual elements of credit risk in excess of the amounts recognized in the balance sheets.

At June 30, 2005, the Company had commitments to extend credit and contingent liabilities under lines of credit, standby letters of credit and similar arrangements totaling $45,758,000. Since many lines of credit do not fully disburse, or expire without being drawn upon, the total amount does not necessarily reflect future cash requirements.

For additional information regarding off-balance sheet items, refer to Note 16 “Commitments and Contingencies” to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K as of December 31, 2004.

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The following table summarizes the Company’s significant contractual obligations and commitments at June 30, 2005:

	Within						After
(in thousands)	1 Year		1-3 Years		3-5 Years		5 Years		Total
Federal Home Loan Bank advances	$	4,880	$	2,449	$	1,852	$	0	$	9,181
Junior subordinated debt		—		—		—		5,000		5,000
Time Deposits		48,457		9,263		1,273		—		58,993
Operating leases		759		1,073		709		1,298		3,839
Total	$	54,096	$	12,785	$	3,834	$	6,298	$	77,012

For discussion of Federal Home Loan Bank advances and junior subordinated debt, see Note 8, “Federal Funds Purchased, Advances from Federal Home Loan Bank (“FHLB”) and Junior Subordinated Debt” to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K as of December 31, 2004.

Liquidity

Liquidity is defined as the ability to provide sufficient cash to fund operations and meet obligations and commitments on a timely basis. Through asset and liability management, the Company controls its liquidity position to ensure that sufficient funds are available to meet the needs of depositors, borrowers, and creditors.

In addition to cash and cash equivalents, asset liquidity is provided by the available-for-sale securities portfolio. Liquidity is further enhanced by deposit growth, federal funds purchased and securities sold under agreements to repurchase, borrowings, and planned cash flows, maturities and sales of investments and loans.

The consolidated statement of cash flows contained in this report provides information on the sources and uses of cash for the respective year-to-date periods ended June 30, 2005 and 2004. See the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2004 for additional information.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in information about market risk from that provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The latest available analysis of the potential impact of rate on net interest income is indicated in the tables below.

Net interest income analysis as of June 30, 2005:

     Rate changes in basis points (bp) = 1/100 of 1%.

	ANNUALIZED DOLLAR CHANGE
IMMEDIATE RATE CHANGE	IN NET INTEREST INCOME			PERCENT CHANGE
+200bp		793			7.65
+100bp		397			3.83
+ 50bp		199			1.92
- 50bp		(187	)		(1.81	)
-100bp		(374	)		(3.61	)
-200bp		(1,043	)		(10.07	)

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The table above indicates, for example, that the estimated effect of an immediate 100 basis point increase in interest rates would increase the Company’s net interest income by an estimated 3.83 percent or approximately $397,000. An immediate 100 basis point decrease in rates indicates a potential reduction of net interest income by 3.61 percent or approximately $374,000.

While net interest income or “rate shock” analysis is a useful tool to assess interest rate risk, the methodology has inherent limitations. For example, certain assets and liabilities may have similar maturities or periods to repricing, but may react in different degrees to changes in market interest rates. Prepayment and early withdrawal levels could vary significantly from assumptions made in calculating the tables. In addition, the ability of borrowers to service their debt may decrease in the event of significant interest rate increases. Finally, actual results may vary as management may not adjust rates equally as general levels of interest rates rise or fall.

The Company does not use interest rate risk management products, such as interest rate swaps, hedges, or derivatives.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2005. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the periodic reports the Company is required to file and submit to the SEC under the Exchange Act.

There were no significant changes to the Company’s internal controls or in other factors that could significantly affect these internal controls subsequent to the date the Company carried out its evaluation of its internal controls. There were no significant deficiencies or material weaknesses identified in the evaluation and, therefore, no corrective actions were taken.

Forward-Looking Information Statement

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. EvergreenBancorp, Inc. (the “Company”) intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Important factors which could cause actual events to differ from the Company’s expectation include, but are not limited to: fluctuation in interest rates and loan and deposit pricing, which could reduce the Company’s net interest margins, asset valuations and expense expectations; a deterioration in the economy or business conditions, either nationally or in the Company’s market areas, that could increase credit-related losses and expenses; a national or local disaster, including acts of terrorism; challenges the Company may experience in retaining or replacing key executives or employees in an effective manner; increases in defaults by borrowers and other loan delinquencies resulting in increases in the Company’s provision for loan losses and related expenses; higher than anticipated costs related to business combinations and the integration of acquired businesses which may be more difficult or expensive than expected, or slower than expected earning assets growth which could extend anticipated breakeven periods relating to such strategic expansion; significant increases in competition; legislative or regulatory changes applicable to bank holding companies or the Company’s banking or other subsidiaries; and possible changes in tax rates, tax laws, or tax law interpretation.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Bancorp and the Bank from time to time may be parties to various legal actions arising in the normal course of business. Management believes that there is no proceeding threatened or pending against Bancorp or the Bank which, if determined adversely, would have a material adverse effect on the consolidated financial conditions or results of operations of the Company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     (a) Bancorp’s Annual Meeting of Stockholders was held on April 28, 2005 at 301 Eastlake Avenue East, Seattle, Washington. A total of 1,147,668 of the Company’s shares were present or represented by proxy at the meeting. This represented 76.71 percent of the Company’s outstanding votable shares.

     The matters approved by the stockholders at the meeting and the number of votes cast for, against or withheld (as well as the number of abstentions and broker non-votes) as to each matter are set forth below:

Proposal No. 1:Election of Directors

Director	For		Against		Withheld
Richard W. Baldwin		1,140,874		0		6,794
C. Don Filer		1,139,701		0		7,967

Proposal No. 2:Ratification of Crowe Chizek and Company LLC as the Company’s Independent Registered Public Accounting Firm:

For	Against		Abstain
1,137,795		1,714		8,159

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

(a) Exhibits

Exhibit 31.1 — Certification of Chief Executive Officer Pursuant to Rule 13a-15(e)/15d-15(e)

Exhibit 31.2 — Certification of Chief Financial Officer Pursuant to Rule 13a-15(e)/15d-15(e)

Exhibit 32.1 — Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 — Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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

Dated: August 12, 2005

EVERGREENBANCORP, INC.
 

/s/ William G. Filer II  

William G. Filer II 

Senior Vice President and Chief Financial Officer (Authorized Officer and Principal Financial Officer) 

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