Evergreenbancorp (EVGGQ) 10-Q 2005 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2005

o 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 98109-5407
(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.

Yesþ Noo

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

Yeso Noþ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

     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 November 10, 2005: 2,000,188 shares
No Preferred Stock was issued or outstanding.

PART I
FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Financial Statements.
	Unaudited Consolidated Balance Sheets -- September 30, 2005 and December 31, 2004.
	Unaudited Consolidated Statements of Income - For the three months and nine months ended September 30, 2005 and 2004.
	Unaudited Consolidated Statements of Stockholders' Equity - For the nine months ended September 30, 2005 and 2004.
	Unaudited Consolidated Statements of Comprehensive Income - For the three months and nine months ended September 30, 2005 and 2004.
	Unaudited Consolidated Statements of Cash Flows - For the nine months ended September 30, 2005 and 2004.
	Notes to Unaudited Consolidated Financial Information.
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.
Item 4.	Controls and Procedures.
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3.	Defaults Upon Senior Securities.
Item 4.	Submission of Matters to a Vote of Security Holders.
Item 5.	Other Information.
Item 6.	Exhibits and Reports on Form 8-K.
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
September 30, 2005 and December 31, 2004
(in thousands, except per share data)

	September 30,			December 31,
	2005			2004
Assets
Cash and due from banks	$	12,151		$	9,407
Federal funds sold		9,926			2,736
Interest-bearing deposits in financial institutions		3			2
Total cash and cash equivalents		22,080			12,145
Securities available for sale		34,923			35,170
Loans		165,091			159,656
Allowance for loan losses		(1,931	)		(1,887	)
Net loans		163,160			157,769
Premises and equipment		3,243			2,576
Cash surrender value of bank owned life insurance		5,035			—
Accrued interest and other assets		2,952			1,970
Total assets	$	231,393		$	209,630
Liabilities
Deposits
Noninterest-bearing	$	56,893		$	54,193
Interest-bearing		136,283			119,608
Total deposits		193,176			173,801
Federal Home Loan Bank advances		13,065			11,067
Junior subordinated debt		5,000			5,000
Accrued expenses and other liabilities		2,449			2,277
Total liabilities	$	213,690		$	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; 2,000,659 shares issued at September 30, 2005; 1,992,428 shares at December 31, 2004		16,008			15,927
Retained earnings		2,055			1,678
Accumulated other comprehensive loss		(360	)		(120	)
Total stockholders’ equity		17,703			17,485
Total liabilities and stockholders’ equity	$	231,393		$	209,630

See accompanying notes to unaudited consolidated financial statements.

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

	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Interest income
Loans, including fees	$	3,164	$	2,572	$	8,967	$	7,435
Taxable securities		265		234		772		733
Tax exempt securities		35		24		91		68
Federal funds sold and other		49		12		149		33
Total interest income		3,513		2,842		9,979		8,269
Interest expense
Deposits		676		361		1,786		1,023
Federal funds purchased		4		3		8		9
Federal Home Loan Bank advances		135		129		369		410
Junior subordinated debt		90		62		249		188
Total interest expense		905		555		2,412		1,630
Net interest income		2,608		2,287		7,567		6,639
Provision for loan losses		144		50		291		190
Net interest income after Provision for loan losses		2,464		2,237		7,276		6,449
Noninterest income
Service charges on deposit accounts		233		233		765		693
Merchant credit card processing		37		36		115		116
Gain on sales of securities available-for-sale		—		—		—		15
Other commissions and fees		32		20		94		97
Net earnings on bank owned life insurance		35		—		35		—
Other noninterest income		73		118		271		357
Total noninterest income		410		407		1,280		1,278
Noninterest expense
Salaries and employee benefits		1,278		1,084		3,616		3,172
Occupancy and equipment		449		362		1,260		1,032
Data processing		182		164		566		522
Marketing		152		62		355		183
Loss on other real estate owned		—		—		—		132
Other noninterest expense		537		523		1,702		1,391
Total noninterest expense		2,598		2,195		7,499		6,432
Income before income tax expense		276		449		1,057		1,295
Income tax expense		75		148		343		428
Net income	$	201	$	301	$	714	$	867
Basic earnings per share of common stock	$	0.10	$	0.15	$	0.36	$	0.44
Diluted earnings per share of common stock	$	0.10	$	0.15	$	0.35	$	0.43

See accompanying notes to unaudited consolidated financial statements.

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

								Accumulated
			Common					other
	Common		stock					comprehen-			Total
	stock		and		Retained			sive			stockholders'
	shares		surplus		earnings			income (loss)			equity
Balance at January 1, 2004		1,983,943	$	15,854	$	778		$	(49	)	$	16,583
Comprehensive income:
Net income		—		—		867			—			867
Change in net unrealized gain (loss) on securities available for sale, net of deferred income tax benefit of $25		—		—		—			(48	)		(48	)
Total comprehensive income												819
Cash dividends ($.143 per share)		—		—		(287	)		—			(287	)
Exercise of stock options		5,204		44		—			—			44
Balance at September 30, 2004		1,989,147	$	15,898	$	1,358		$	(97	)	$	17,159

								Accumulated
			Common					other
	Common		stock					comprehen-			Total
	stock		and		Retained			sive			stockholders'
	shares		surplus		earnings			income (loss)			equity
Balance at January 1, 2005		1,992,428	$	15,927	$	1,678		$	(120	)	$	17,485
Comprehensive income:
Net income		—		—		714			—			714
Change in net unrealized gain (loss) on securities available for sale, net of deferred income tax benefit of $124		—		—		—			(240	)		(240	)
Total comprehensive income												474
Cash dividends ($.169 per share)		—		—		(337	)		—			(337	)
Exercise of stock options and related tax benefit		8,231		81		—			—			81
Balance at September 30, 2005		2,000,659	$	16,008	$	2,055		$	(360	)	$	17,703

See accompanying notes to unaudited consolidated financial statements.

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EVERGREENBANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three month and nine month periods ended September 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 September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Net income	$	201		$	301		$	714		$	867
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities available for sale		(80	)		349			(364	)		(58	)
Reclassification adjustment for gains included in net income		—			—			—			(15	)
Net unrealized gains (losses)		(80	)		349			(364	)		(73	)
Tax effect		27			(119	)		124			25
Total other comprehensive income (loss)		( 53	)		230			(240	)		(48	)
Total comprehensive income	$	148		$	531		$	474		$	819

See accompanying notes to unaudited consolidated financial statements.

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

	September 30,			September 30,
	2005			2004
Cash flows from operating activities
Net income	$	714		$	867
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		579			485
Provision for loan losses		291			190
Gain from sale of available-for-sale securities		—			(15	)
Write-down of other real estate owned		—			132
Amortization of premiums and discounts on securities		45			61
Federal Home Loan Bank stock dividends		(6	)		(39	)
Dividends reinvested		(190	)		(252	)
Net earnings on bank owned life insurance		(35	)		—
Other changes, net		(672	)		454
Net cash provided by operating activities		726			1,883
Cash flows from investing activities
Proceeds from sales, maturities and principal payments on securities available for sale		1,158			5,985
Net (increase) decrease in loans		(5,682	)		(7,819	)
Purchase of bank owned life insurance		(5,000	)		—
Purchases of securities available for sale		(1,124	)		(1,526	)
Proceeds from sale of other real estate owned		—			2,527
Purchases of premises and equipment		(1,246	)		(353	)
Net cash provided by (used in) investing activities		(11,894	)		(1,186	)
Cash flows from financing activities
Net increase in deposits		19,375			8,985
Net decrease (increase) in federal funds purchased		—			(1,654	)
Proceeds (repayments) from Federal Home Loan Bank advances		1,998			(3,098	)
Proceeds from exercise of stock options		67			37
Dividends paid		(337	)		(287	)
Net cash provided by financing activities		21,103			3,983
Net increase in cash and cash equivalents		9,935			4,680
Cash and cash equivalents at beginning of year	$	12,145		$	10,625
Cash and cash equivalents at end of period	$	22,080		$	15,305

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 December 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 $97,000 in 2006, $72,000 in 2007, $57,000 in 2008, $36,000 in 2009, and $24,000 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 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.

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	Three months ended September 30,
(in thousands, except per share data)	2005		2004
Net income as reported	$	201	$	301
Deduct: Stock-based compensation expense determined under fair value based method		17		14
Pro forma net income	$	184	$	287
Basic earnings per share as reported	$	0.10	$	0.15
Pro forma basic earnings per share		0.09		0.14
Diluted earnings per share as reported		0.10		0.15
Pro forma diluted earnings per share		0.09		0.14

	Nine months ended September 30,
(in thousands, except per share data)	2005		2004
Net income as reported	$	714	$	867
Deduct: Stock-based compensation expense determined under fair value based method		62		38
Pro forma net income	$	652	$	829
Basic earnings per share as reported	$	0.36	$	0.44
Pro forma basic earnings per share		0.33		0.42
Diluted earnings per share as reported		0.35		0.43
Pro forma diluted earnings per share		0.32		0.41

The weighted average fair value of individual options granted during the third quarter of 2005 and 2004 were $3.74 and $1.94 respectively. There were 17,333 options granted in the third 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			Three months ended
	September 30, 2005			September 30, 2004
Risk-free interest rate		4.08	%		3.65	%
Expected option life	7.5 years			7.5 years
Expected stock price volatility		22	%		13	%
Dividend yield		1.6	%		1.8	%

Note 2: Stock split

On October 25, 2005, the Company effected a four-for-three stock split and on November 30, 2004, the Company effected a five-for-four stock split. All references to number of shares as well as earnings per share for the periods presented have been restated.

Note 3: Stock options

During the third quarter of 2005, 17,333 stock options were granted and there were 3,449 options exercised. During the second quarter of 2005, there were 25,333 stock options granted and there were 2,448 options exercised. During the first quarter of 2005, there were 2,667 stock options granted and there were 2,334 options exercised. The total stock options outstanding were 228,529 at September 30, 2005 with exercise prices ranging between $6.85 and $13.88 and expiration dates between October 23, 2010 and August 18, 2015. All stock options are granted at market value as of date of grant.

Note 4: Securities available for sale

Investment securities available for sale include $6,108,000 in mortgage-backed securities at September 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 $14,854,000 at September 30, 2005.

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Securities with unrealized losses at September 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	$	5,443	$	(69	)	$	2,470	$	(30	)	$	7,913	$	(99	)
State and political subdivisions		3,400		(20	)		149		(2	)		3,549		(22	)
Mortgage-backed securities		—		—			5,304		(88	)		5,304		(88	)
AMF Adjustable Rate Mortgage Fund		286		(3	)		14,568		(350	)		14,854		(353	)
Total temporarily impaired	$	9,129	$	(92	)	$	22,491	$	(470	)	$	31,620	$	(562	)

At September 30, 2005, securities with unrealized losses have an aggregate depreciation of 1.8 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.

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		—			6,241		(36	)
AMF Adjustable Rate Mortgage Fund		283		(1	)		14,549		(184	)		14,832		(185	)
Total temporarily impaired	$	10,879	$	(66	)	$	15,568	$	(196	)	$	26,447	$	(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 November 2004 five-for-four stock split and the October 2005 four-for-three 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.

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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 September 30,
(in thousands, except share and per share data):	2005		2004
Income (numerator):
Net income	$	201	$	301
Shares (denominator):
Weighted average number of common stock shares outstanding - basic		1,999,487		1,989,017
Dilutive effect of outstanding employee and director stock options		56,687		32,281
Weighted average number of common stock shares outstanding and assumed conversion — diluted		2,056,174		2,021,298
Basic earnings per share of common stock	$	0.10	$	0.15
Diluted earnings per share of common stock	$	0.10	$	0.15

	Nine months ended September 30,
(in thousands, except share and per share data):	2005		2004
Income (numerator):
Net income	$	714	$	867
Shares (denominator):
Weighted average number of common stock shares outstanding - basic		1,998,206		1,987,851
Dilutive effect of outstanding employee and director stock options		44,854		31,892
Weighted average number of common stock shares outstanding and assumed conversion — diluted		2,043,060		2,019,743
Basic earnings per share of common stock	$	0.36	$	0.44
Diluted earnings per share of common stock	$	0.35	$	0.43

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 September 30, 2005 and 2004 were $87,000 and $67,000, respectively. Contributions to the plan for the first nine months of 2005 and 2004 were $242,000 and $213,000, respectively.

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.

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Components of net periodic benefit cost:

	Three months ended				Nine months ended
	September 30,				September 30,
(in thousands)	2005		2004		2005		2004
Service cost	$	22	$	23	$	66	$	69
Interest cost		23		22		69		66
Amortization of transition obligation		10		10		30		30
Recognized actuarial (gain) loss		0		0		0		0
Net periodic benefit cost	$	55	$	55	$	165	$	165

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 and other noninterest income. Operating expenses of the Bank include employee compensation and benefits, occupancy and equipment 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. Results are also affected by monetary and fiscal policies of federal agencies, and actions of regulatory authorities.

The following discussion contains a review of the consolidated operating results and financial condition of the Company for the three and nine month periods 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 nine months ended September 30, 2005 and 2004

For the third quarter of 2005, the Company reported net income of $201,000 compared to $301,000 for the third quarter of 2004, a decrease of 33.22 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 and the South Lake Union office opened in November 2004. The growth in expenses was partially offset by higher net interest income due to growth in loans and improved net interest margins.

Basic and diluted earnings per common share were $0.10 for the third quarter of 2005 compared to $0.15 for the same period one year ago.

For the third quarter of 2005, return on average common equity and return on average assets was 4.55 percent and .36 percent respectively, compared to 7.08 percent and .62 percent, respectively, for the same period one year ago.

For the first nine months of 2005, net income was $714,000, compared with $867,000 for the first nine months of 2004, a decrease of 17.65 percent. Basic and diluted earnings per common share were $0.36 and $0.35 for the first

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nine months of 2005 respectively, and $0.44 and $0.43 for the same period in 2004. Return on average assets was .45 percent for 2005 and .59 percent for 2004. Return on average common equity was 5.43 percent for the first nine months of 2005 and 6.86 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 third quarter 2005 and 2004.

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 $2,608,000 for the third quarter of 2005, compared to $2,287,000 for the same period in 2004, an increase of 14.04 percent. Net interest income was $7,567,000 for the first nine months of 2005, compared with $6,639,000 for the first nine months of 2004, an increase of 13.98 percent. The increase was primarily attributable to growth in the average balance of the loan portfolio.

The net interest margin, which is the ratio of taxable-equivalent net interest income to average earning assets, was 5.11 percent for the first nine months of 2005 compared to 4.96 percent for the same period one year ago. The weighted average yield on interest earning assets was 6.73 percent for the first nine months of 2005 compared to 6.17 percent during the first nine months of 2004. Interest expense as a percentage of average earning assets was 1.61 percent for the first nine months of 2005, compared to 1.21 percent during the same period in 2004.

Interest income for the three months ended September 30, 2005 was $3,513,000 compared to $2,842,000 for the three months ended September 30, 2004, an increase of $671,000 or 23.61 percent. This increase was primarily attributable to an increase in the average loan balance of $19,400,000, offset by a decrease in the average yield on earning assets.

Interest income for the nine months ended September 30, 2005 was $9,979,000 compared to $8,269,000 for the nine months ended September 30, 2004, an increase of 20.68 percent. The increase is due primarily to 13.12 percent growth in average loan balances and an increase of .56 percent in the average yield in earning assets.

Interest expense for the three months ended September 30, 2005 was $905,000 compared to $555,000 for the three months ended September 30, 2004, an increase of $350,000 or 63.06 percent. This was largely due to an increase in the average rate paid on interest bearing liabilities and an increase of $19,300,000 in the average balance of interest bearing liabilities.

Interest expense for the nine months ended September 30, 2005 was $2,412,000 compared with $1,630,000 for the same period a year ago, an increase of $782,000 or 47.98 percent. The higher expense year to date is attributable to an increase in the average balance of interest-bearing deposits along with higher rates paid.

Noninterest Income/Expense

Noninterest income in the third quarter of 2005 was $410,000 compared to $407,000 in the same quarter of 2004, an increase of $3,000 or 0.74 percent. Noninterest income for the nine months ended September 30, 2005 was $1,280,000 compared with $1,278,000 for the same period of 2004, an increase of $2,000 or 0.16 percent. The increase in service charges on deposit accounts was largely offset by lower other noninterest income, as more customers pay fees by way of earnings credits on demand account balances. In August 2005, the Company purchased $5,000,000 in bank owned life insurance. Net earnings on this asset totaled $35,000 in the three and nine months ended September 30, 2005.

Noninterest expense was $2,598,000 in the third quarter of 2005, compared to $2,195,000 in the same quarter of 2004, an increase of $403,000, or 18.36 percent. The increase was due primarily to the costs associated with the opening of two new offices which resulted in increased salary, occupancy, and depreciation expense. For these same reasons, noninterest expense increased for the nine months ended September 30, 2005, ending at $7,499,000 compared with $6,432,000 for the same period of 2004, an increase of $1,067,000 or 16.59 percent.

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Income tax expense

The Company recognized income tax expense of $75,000 during the third quarter of 2005, down from $148,000 in the same quarter of 2004. Income tax expense for the nine months ended September 30, 2005 was $343,000, compared to $428,000 for the same period of 2004, a decrease of $85,000 or 19.86 percent. The decrease reflects a $238,000, or 18.38 percent drop in pre-tax income to $1,057,000 for the nine months ended September 30, 2005. The effective income tax rate has remained consistent, approximately 33 percent, for each period reported, however, the effective tax rate declined to approximately 27 percent for the three months ended September 30, 2005 as a result of lower taxable income due to earnings on bank owned life insurance and an increase in tax exempt securities income.

Provision and Allowance for Loan Losses

Included in the results of operations for the quarters ending September 30, 2005 and 2004 is a non-cash expense of $144,000 and $50,000, respectively, related to the provision for loan losses. The provision for loan losses for the nine months ended September 30, 2005 was $291,000 compared to $190,000 for the same period of 2004. This increase in the provision is due largely to higher net loan chargeoffs, an increase in loans, and changes in loan portfolio composition.

At September 30, 2005, the allowance for loan losses was $1,931,000 compared to $1,887,000 at December 31, 2004. The ratio of the allowance to total loans outstanding was 1.17 percent at September 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 September 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 September 30, 2005, loans totaled $165,091,000 compared to $159,656,000 at December 31, 2004, an increase of $5,435,000 or 3.40 percent.

At September 30, 2005, the Bank had $97,958,000 in loans 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 September 30, 2005 and December 31, 2004:

Types of Loans

	September 30,		December 31,
(in thousands)	2005		2004
Commercial	$	52,086	$	55,563
Real estate:
Commercial		78,216		67,165
Construction		10,117		11,538
Residential 1-4 family		9,625		11,508
Consumer and other		15,047		13,882
Total	$	165,091	$	159,656

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Allocation of the Allowance for Loan Losses

In the following table, the allowance for loan losses at September 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.

	September 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	$	899			32	%	$	1,000			35	%
Real estate:
Commercial		708			47			568			42
Construction		107			6			117			7
Residential 1-4 family		12			6			11			7
Consumer and other		205			9			191			9
Total	$	1,931			100	%	$	1,887			100	%
% of Loan portfolio		1.17	%					1.18	%

The 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.

	Nine months ended		Nine months ended
(in thousands)	September 30, 2005		September 30, 2004
Beginning Balance	$	1,887	$	1,636
Chargeoffs
Commercial		252		—
Real estate:
Commercial		1		—
Construction		—		—
Residential 1-4 family		—		—
Consumer and other		23		74
Total chargeoffs	$	276	$	74
Recoveries
Commercial	$	17	$	85
Real estate:
Commercial		—		—
Construction		—		—
Residential 1-4 family		—		—
Consumer and other		12		10
Total Recoveries	$	29	$	95
Net chargeoffs/(recoveries)	$	247	$	(21	)
Provision		291		190
Ending balance	$	1,931	$	1,847

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Total loans classified as impaired at September 30, 2005 and December 31, 2004 were $263,000 and $548,000, respectively. 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 $39,000 at September 30, 2005 compared with $298,000 at December 31, 2004.

Investments

At September 30, 2005, investments totaled $34,923,000, a decrease of $247,000 or 0.70 percent from $35,170,000 at December 31, 2004. The decrease in investments was primarily due to maturities and prepayments of securities.

Bank Owned Life Insurance

In August 2005, the Bank purchased life insurance on certain employees of the Bank, which provides $5,000,000 in cash surrender value to the Bank. Increases in cash surrender value of the policies will be used to fund future employee benefit plan expense.

Deposits

At September 30, 2005, total deposits were $193,176,000, compared to $173,801,000 at December 31, 2004. This represents an 11.15 percent increase from December 31, 2004. Non-interest bearing deposits totaled $56,893,000 at September 30, 2005 compared to $54,193,000 at December 31, 2004, an increase of $2,700,000 or 4.98 percent. Interest bearing deposits totaled $136,283,000 at September 30, 2005, compared to $119,608,000 at December 31, 2004, an increase of $16,675,000 or 13.94 percent.

Borrowings

At September 30, 2005, the Bank’s Federal Home Loan Bank borrowings were $13,065,000 compared to $11,067,000 at December 31, 2004. This represents an 18.05 percent increase from December 31, 2004 and is due to increased borrowings for funding loan growth.

Stockholders’ Equity and Capital Resources

Stockholders’ equity totaled $17,703,000 at September 30, 2005, an increase of $218,000 or 1.25 percent over December 31, 2004. This increase in stockholders’ equity is primarily the result of net income of $714,000, less cash dividends paid of $337,000. The change in unrealized losses on securities available for sale, net of deferred taxes, reduced stockholders’ equity by $240,000. Equity increased by $81,000 in common stock and surplus due to the exercise of 8,231 stock options.

Book value per share was $8.85 at September 30, 2005 compared to $8.78 at December 31, 2004. Book value per share is calculated by dividing total equity by total shares outstanding.

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The following table displays the capital ratios at September 30, 2005 and December 31, 2004 for Bancorp and the Bank. As the table illustrates, the capital ratios exceed those required to be considered well-capitalized.

											Minimum to Be
											Well Capitalized
						Minimum for					Under the Prompt
						Capital Adequacy					Corrective Action
	Actual					Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2005
Total capital (to risk-weighted assets) Consolidated	$	24,761		12.95	%	$	15,297		8.00	%		19,121		10.00	%
Bank		24,418		12.78			15,288		8.00			19,110		10.00
Tier 1 capital (to risk-weighted assets) Consolidated		22,830		11.94			7,649		4.00			11,473		6.00
Bank		22,487		11.77			7,644		4.00			11,466		6.00
Tier 1 capital (to average assets) Consolidated		22,830		10.47			8,723		4.00			10,904		5.00
Bank		22,487		10.31			8,723		4.00			10,904		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 September 30, 2005, the Company had commitments to extend credit and contingent liabilities under lines of credit, standby letters of credit and similar arrangements totaling $51,378,000. 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
September 30, 2005:

	Within						After
(in thousands)	1 Year		1-3 Years		3-5 Years		5 Years		Total
Federal Home Loan Bank advances	$	2,880	$	3,185	$	3,000	$	4,000	$	13,065
Junior subordinated debt		—		—		—		5,000		5,000
Time Deposits		53,693		7,367		1,200		—		62,260
Operating leases		653		928		704		1,201		3,486
Purchase obligations		—		—		—		—		—
Total	$	57,226	$	11,480	$	4,904	$	10,201	$	83,811

Purchase obligations are primarily contracts with vendors to provide services, such as information processing. 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. Approximately six percent of the investment balances within this portfolio mature within one year. 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 September 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 September 30, 2005

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

	ANNUALIZED DOLLAR CHANGE
IMMEDIATE RATE CHANGE	IN NET INTEREST INCOME			PERCENT CHANGE
	(IN THOUSANDS)
+200bp		747			6.87
+100bp		396			3.64
+ 50bp		198			1.82
- 50bp		(183	)		(1.68	)
-100bp		(365	)		(3.35	)
-200bp		(1,025	)		(9.42	)

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 3.64 percent or approximately $396,000. An immediate 100 basis point decrease in rates indicates a potential reduction of net interest income by 3.35 percent or approximately $365,000.

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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 September 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 results to differ materially 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. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission, including its 2004 Form 10-K.

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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

None

ITEM 5. OTHER INFORMATION

On August 18, 2005, Bancorp’s board of directors reviewed and approved the executive committee’s recommendation, in its capacity as the compensation committee, increasing the annual fee for audit committee service in 2005 from $2,500 to $5,000.

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

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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: November 14, 2005

EVERGREENBANCORP, INC.

/s/ William G. Filer II

William G. Filer II

Executive Vice President and Chief Financial Officer

(Authorized Officer and Principal Financial Officer)

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