Evergreenbancorp (EVGGQ) 10-Q 2007 Q3 Quarterly report

UNITED STATES
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, 2007

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)

1111 Third Avenue, Suite 2100
Seattle, Washington 98101
(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 þ     No o

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

Large accelerated filer o                    Accelerated filer o                    Non-accelerated filer þ

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

Yes o     No þ

     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 5, 2007: 2,388,904
No Preferred Stock was issued or outstanding.

	PART I
	FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Financial Statements	3
	Unaudited Consolidated Balance Sheets — September 30, 2007 and December 31, 2006	3
	Unaudited Consolidated Statements of Income — For the three months and nine months ended September 30, 2007 and 2006	4
	Unaudited Consolidated Statements of Stockholders’ Equity — For the nine months ended September 30, 2007 and 2006	5
	Unaudited Consolidated Statements of Cash Flows — For the nine months ended September 30, 2007 and 2006	6
	Notes to Unaudited Consolidated Financial Information	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
	PART II
	OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
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, 2007 and December 31, 2006
(in thousands, except share data)

	September 30,			December 31,
	2007			2006
Assets
Cash and due from banks	$	8,276		$	9,160
Federal funds sold		1,932			1,983
Interest-bearing deposits in financial institutions		8,213			760
Total cash and cash equivalents		18,421			11,903
Securities available-for-sale		26,388			29,531
Loans		354,438			292,449
Allowance for loan losses		(3,710	)		(2,784	)
Net loans		350,728			289,665
Premises and equipment		3,082			3,078
Cash surrender value of bank owned life insurance		5,487			5,316
Accrued interest and other assets		5,859			4,027
Total assets	$	409,965		$	343,520
Liabilities
Deposits
Noninterest-bearing	$	56,040		$	55,373
Interest-bearing		264,458			201,062
Total deposits		320,498			256,435
Federal Home Loan Bank advances		46,010			46,805
Junior subordinated debt		12,372			12,217
Accrued expenses and other liabilities		5,407			4,244
Total liabilities		384,287			319,701
Commitments and Contingencies
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; 2,378,388 shares issued at September 30, 2007 (includes 19,500 unvested restricted stock); 2,353,262 shares issued at December 31, 2006		21,277			21,129
Retained earnings		5,163			3,453
Accumulated other comprehensive loss		(762	)		(763	)
Total stockholders’ equity		25,678			23,819
Total liabilities and stockholders’ equity	$	409,965		$	343,520

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, 2007 and 2006
(in thousands, except per share data)

	Three months ended				Nine months ended
	September 30,				September 30,
	2007		2006		2007		2006
Interest income
Loans, including fees	$	7,622	$	5,170	$	20,878	$	13,570
Taxable securities		276		302		848		868
Tax exempt securities		31		35		94		103
Federal funds sold and other		104		33		211		86
Total interest income		8,033		5,540		22,031		14,627
Interest expense
Deposits		3,033		1,636		7,799		3,857
Federal funds purchased		17		15		81		50
Federal Home Loan Bank advances		470		516		1,588		1,357
Junior subordinated debt		215		115		763		323
Total interest expense		3,735		2,282		10,231		5,587
Net interest income		4,298		3,258		11,800		9,040
Provision for loan losses		525		230		1,021		578
Net interest income after provision for loan losses		3,773		3,028		10,779		8,462
Noninterest income
Service charges on deposit accounts		363		292		1,061		847
Merchant credit card processing		45		42		137		112
Other commissions and fees		16		23		47		119
Net earnings on bank owned life insurance		56		57		171		169
Other noninterest income		35		29		95		96
Total noninterest income		515		443		1,511		1,343
Noninterest expense
Salaries and employee benefits		1,517		1,325		4,370		4,011
Occupancy and equipment		501		418		1,464		1,299
Data processing		232		208		710		619
Professional fees		70		82		262		225
Marketing		140		159		366		349
State revenue and sales tax expense		150		98		396		254
Other noninterest expense		493		429		1,470		1,304
Total noninterest expense		3,103		2,719		9,038		8,061
Income before income taxes		1,185		752		3,252		1,744
Income tax expense		383		235		1,047		518
Net income	$	802	$	517	$	2,205	$	1,226
Total comprehensive income	$	872	$	645	$	2,206	$	1,255
Basic earnings per share	$	0.34	$	0.26	$	0.94	$	0.61
Diluted earnings per share	$	0.33	$	0.25	$	0.92	$	0.60

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, 2007, and 2006
(in thousands, except per share data)

								Accumulated
			Common					other
	Common		stock					comprehen-			Total
	stock		and		Retained			sive			stock-holders’
	shares		surplus		earnings			income			equity
Balance at January 1, 2006		2,000,467	$	16,005	$	2,136		$	(456	)	$	17,685
Comprehensive income
Net income		—		—		1,226			—			1,226
Change in net unrealized gain (loss) on securities available-for- sale, net of reclassification and tax effects		—		—		—			29			29
Total comprehensive income												1,255
Cash dividends ($.18 per share)		—		—		(361	)		—			(361	)
Exercise of stock options		10,535		118		—			—			118
Stock options earned		—		95		—			—			95
Balance at September 30, 2006		2,011,002	$	16,218	$	3,001		$	(427	)	$	18,792

								Accumulated
			Common					other
	Common		stock					comprehen-			Total
	stock		and		Retained			sive			stock-holders’
	shares		surplus		earnings			income (loss)			equity
Balance at January 1, 2007		2,353,262	$	21,129	$	3,453		$	(763	)	$	23,819
Comprehensive income
Net income		—		—		2,205			—			2,205
Change in net unrealized gain (loss) on securities available-for- sale, net of reclassification and tax effects		—		—		—			5			5
Change in post-retirement benefit obligation, net of tax effects		—		—		—			(4	)		(4	)
Total comprehensive income												2,206
Cash dividends ($.21 per share)		—		—		(495	)		—			(495	)
Exercise of stock options		5,626		69		—			—			69
Restricted stock grants		19,500		—		—			—			—
Stock options earned		—		79		—			—			79
Balance at September 30, 2007		2,378,388	$	21,277	$	5,163		$	(762	)	$	25,678

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, 2007, and 2006
(in thousands)

	September 30,			September 30,
	2007			2006
Cash flows from operating activities
Net income	$	2,205		$	1,226
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		719			636
Provision for loan losses		1,021			578
Amortization of premiums and discounts on securities		28			33
Net earnings on bank owned life insurance		(171	)		(169	)
Stock option compensation expense		79			95
Other changes, net		(676	)		(155	)
Net cash provided by operating activities		3,205			2,244
Cash flows from investing activities
Proceeds from maturities and principal payments on securities available-for-sale		3,123			1,672
Net increase in loans		(62,084	)		(64,094	)
Purchases of securities available-for-sale		—			(133	)
Purchases of premises and equipment		(723	)		(177	)
Net cash provided by (used in) investing activities		(59,684	)		(62,732	)
Cash flows from financing activities
Net increase in deposits		64,063			35,144
Proceeds from Federal Home Loan Bank advances		216,937			26,900
Repayments of Federal Home Loan Bank advances		(217,732	)		(4,028	)
Proceeds from the issuance of junior subordinated debt		5,155			—
Repayment on redemption of junior subordinated debt		(5,000	)		—
Proceeds from the exercise of stock options		69			118
Dividends paid		(495	)		(361	)
Net cash provided by financing activities		62,997			57,773
Net increase (decrease) in cash and cash equivalents		6,518			(2,715	)
Cash and cash equivalents at beginning of year		11,903			17,302
Cash and cash equivalents at end of period	$	18,421		$	14,587

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 to a maximum of $100,000 per depositor (in some instances up to $250,000 per deposit account, depending on the ownership category of the account) by the Federal Deposit Insurance Corporation (“the FDIC”).

Bancorp and the Bank are collectively referred to as “the Company.” EvergreenBancorp Capital Trust II (“Trust II”) and EvergreenBancorp Statutory Trust III (“Trust III”) are special purpose business trusts formed by Bancorp in November 2006, and April 2007, respectively, to raise capital through trust preferred securities offerings. Under current accounting guidance, Financial Accounting Standards Board (“FASB”) Interpretation No. 46, as revised in December 2003, the trusts are not consolidated with the Company.

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 than temporary impairment of securities, 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, 2006. 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.In September 2006, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurements, to provide guidance on how to measure fair value, which would apply broadly to financial and non-financial assets and liabilities that are measured at fair value under other authoritative accounting pronouncements. The statement defines fair value, provides a hierarchy that prioritizes inputs that should be used in valuation techniques used to measure fair value, and expands current disclosures about the use of fair value to measure assets and liabilities. The disclosures focus on the methods used for the measurements and their effect on earnings and would apply whether the assets were measured at fair value in all periods, such as trading securities, or

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in only some periods, such as for impaired assets. A transition adjustment would be recognized as a cumulative-effect adjustment to beginning retained earnings for the fiscal year in which statement is initially adopted. This adjustment is measured as the difference between the carrying amounts and the fair values of those financial instruments at the date of adoption. The statement is effective for fiscal years beginning after November 15, 2007 (or January 1, 2008 for calendar-year companies) and interim periods within those fiscal years. The Company will adopt the statement on January 1, 2008. The fair value disclosures required by this statement will be effective for the first interim period in which the statement is adopted. The Company is currently evaluating the impact of the statement on its financial position, results of operations, and liquidity.

On February 15, 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities- including an Amendment of SFAS No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of the statement on its financial position and results of operation.

In September 2006, the FASB Emerging Issues Task Force (“EITF”) finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. EITF Issue No. 06-4 is effective for fiscal years beginning after December 15, 2007. Given the similarities between the endorsement split-dollar life insurance arrangements in EITF Issue no. 06-4 and collateral assignment split-dollar life insurance arrangements, questions have arisen regarding whether similar liability recognition models should be used to account for these types of arrangements. To address these questions, the EITF Issue No. 06-10 was issued. The objective of Issue 06-10 is to determine when and at what amount to recognize the asset, liability and related compensation costs for a collateral assignment split-dollar life insurance arrangement that provides a benefit to an employee that extends into postretirement periods. EITF Issue No. 06-10 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company has evaluated the impact of the issues and believes there would be no impact to the Company’s financial position and results of operations.

Effective January 1, 2007, the Company adopted the EITF finalized Issue No. 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. The adoption of this issue did not have a material impact on the consolidated financial position or results of operations.

Effective January 1, 2007, the Company adopted the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140. This Statement permits fair value re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. The adoption of this statement did not have a material impact on the consolidated financial position or results of operations.

Effective January 1, 2007, the Company adopted the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This Statement provides the following: 1)

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revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. The adoption of this statement did not have a material impact on the consolidated financial position or results of operations.

Effective January 1, 2007, the Company adopted FASB Interpretation 48,Accounting for Uncertainty in Income Taxes(“FIN 48”). A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no affect on the Company’s financial statements.

The Company and its subsidiaries are subject to U.S. federal income tax. The Company is no longer subject to examination by Federal taxing authorities (“IRS”) for years before 2003. At September 30, 2007, the Company did not have any unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at September 30, 2007.

Note 2: Stock-based compensation

Stock option and equity compensation plan.In April of 2000, the shareholders of the Bank adopted the 2000 Stock Option Plan that was subsequently adopted by Bancorp as a result of the holding company formation. In April of 2003, the shareholders of Bancorp approved an amendment to the 2000 Stock Option Plan to increase the number of shares available under the plan by 66,000. In April of 2006, the shareholders adopted the Second Amended 2000 Stock Option and Equity Compensation Plan (the “Second Amended 2000 Plan”) which allows greater flexibility in the type of equity compensation to be awarded and to the terms of such awards. Up to 329,724 shares of common stock may be awarded under the Second Amended 2000 Plan. Awards available under the Second Amended Plan are subject to adjustment for all stock dividends and stock splits paid by the Company. As of September 30, 2007, 22,107 shares of common stock were available for future grant under the Second Amended 2000 Plan.

In addition to stock options, the Second Amended 2000 Plan provides for the granting of restricted stock, stock appreciation rights, and restricted stock units. All employees, officers, and directors of the Company or a related corporation, and independent contractors who perform services for the Company or a related corporation, are eligible to be granted awards. The terms of each award are set forth in individual award agreements. To date, nonqualified stock options and restricted stock have been awarded to employees and directors.

Stock options.All outstanding nonqualified stock options awarded to date to employees vest over a five-year period and expire after ten years from the date of grant. All outstanding nonqualified stock options awarded to date to directors vest over a three-year period and expire after three years, three months from the date of grant.

The fair value of each stock option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the tables below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. Employee and director options are tracked separately. The expected term of options granted is based on historical data and represents the period of

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time that options granted are expected to be outstanding. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted during the third quarter of 2007 and 2006 were determined using the following weighted-average assumptions as of grant date.

	Three months ended		Three months ended
	September 30, 2007		September 30, 2006
Risk-free interest rate		—		4.74	%
Expected option life		—	7.5 years
Expected stock price volatility		—		25	%
Dividend yield		—		1.6	%

The fair value of options granted during the first nine months of 2007 and 2006 were determined using the following weighted-average assumptions as of grant date.

	Nine months ended			Nine months ended
	September 30, 2007			September 30, 2006
Risk-free interest rate		4.47	%		4.94	%
Expected option life	6.5 years			7.5 years
Expected stock price volatility		20	%		24	%
Dividend yield		1.8	%		1.7	%

During the third quarter of 2007, no stock options were granted or forfeited and 554 options were exercised. During the third quarter of 2006, 3,000 nonqualified options were granted, none were exercised and 5,207 options were forfeited or canceled.

During the first nine months of 2007, 6,000 stock options were granted, 5,626 options were exercised, and 364 were forfeited. During the first nine months of 2006, 38,500 stock options were granted, 10,535 options were exercised, and 17,068 options were forfeited.

A summary of option activity under the stock option plan for the nine months ended September 30, 2007 is as follows:

				Weighted-		Weighted Average	Aggregate
				Average		Remaining	Intrinsic
	Shares			Exercise Price		Contractual Term	Value
Outstanding at the beginning of the year		207,434		$	10.37
Granted		6,000			15.25
Exercised		(5,626	)		11.11
Forfeited		(364	)		8.89
Outstanding at the end of the period		207,444		$	10.49	5.36 years	$	956,317
Exercisable at the end of the period		140,488		$	8.85	4.48 years	$	878,050

Stock Awards.Restricted stock awards provide for the immediate issuance of shares of Company common stock to the recipient. In the event the shares are granted subject to certain conditions or vesting schedules, such shares are held in escrow until those conditions are met, or until such shares have vested. Recipients of restricted shares do not pay any cash consideration to the Company for the shares, have the right to vote all shares subject to such grant, and receive all dividends with respect to such shares, whether or not the shares have vested. The fair value of share awards is equal to the fair market value of the Company’s common stock on the date of grant.

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During the third quarter of 2007, restricted stock awards for 19,500 shares were granted to employees of the Company. The awards become fully vested after the employees’ completion of five years of employment. In the event the employee resigns or is terminated during the five year vesting period, all shares subject to the award are forfeited. In addition, on September 20, 2007, the Compensation Committee approved a restricted stock award of 400 shares to each director (an aggregate of 3,600 shares) that became fully vested immediately upon the date of grant. The award, although approved during the third quarter of 2007, was not granted until October 23, 2007 following the release of third quarter earnings. However, all compensation expense associated with the director restricted stock award was recognized during the third quarter of 2007. Compensation expense is recognized over the vesting period of the award based upon the fair market value of the Company’s common stock at the date of grant.

A summary of the status of the Company’s nonvested shares as of September 30, 2007 is as follows:

			Weighted-Average
			Grant-Date Fair
Nonvested Shares	Shares		Value
Nonvested at January 1, 2007		—	$	—
Granted		19,500		14.75
Vested		—		—
Forfeited		—		—
Nonvested at September 30, 2007		19,500	$	14.75

As of September 30, 2007, there was $497,000 of total unrecognized compensation cost related to nonvested stock options and unvested restricted shares granted under the Plan. The cost expected to be recognized by year is approximately $37,000 in the remainder of 2007, $139,000 in 2008, $117,000 in 2009, $97,000 in 2010, $72,000 in 2011, and $35,000 in 2012.

Note 3: Securities

Investment securities available-for-sale include $3,786,000 in mortgage-backed securities at September 30, 2007. This investment by the Bank in mortgage-backed securities qualifies as collateral for advances from the Federal Home Loan Bank of Seattle. Investment securities available-for-sale also include the AMF Ultra Short Mortgage Fund (“USM Fund,” formerly the AMF Adjustable Rate Mortgage Fund or ARM Fund) with a fair market value of $14,716,000 at September 30, 2007.

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Securities with unrealized losses at September 30, 2007 and December 31, 2006, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

September 30, 2007

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
(in thousands)
Description of Securities
US agencies	$	—	$	—		$	500	$	(1	)	$	500	$	(1	)
State and political subdivisions		—		—			3,475		(31	)		3,475		(31	)
Mortgage-backed securities		107		(1	)		3,279		(104	)		3,386		(105	)
AMF Ultra Short Mortgage Fund		—		—			14,716		(490	)		14,716		(490	)
Total temporarily impaired	$	107	$	(1	)	$	21,970	$	(626	)	$	22,077	$	(627	)

December 31, 2006

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
(in thousands)
Description of Securities
US agencies	$	—	$	—		$	3,477	$	(27	)	$	3,477	$	(27	)
State and political subdivisions		135		(1	)		3,663		(44	)		3,798		(45	)
Mortgage-backed securities		315		(1	)		4,021		(133	)		4,336		(134	)
AMF Ultra Short Mortgage Fund		—		—			14,793		(413	)		14,793		(413	)
Total temporarily impaired	$	450	$	(2	)	$	25,954	$	(617	)	$	26,404	$	(619	)

At September 30, 2007 and December 31, 2006, securities with unrealized losses have an aggregate depreciation of 2.8 percent and 2.3 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 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 forecasted recovery, which may be maturity in some cases.

The AMF Ultra Short Mortgage Fund has market losses that are due to rising interest rates and are not the result of credit deterioration. The fund is assigned an ‘AAAf’ credit quality rating (the highest rating possible) by a nationally-recognized rating organization. When short-term rates stabilized in mid-2006, the fund’s net asset value also stabilized and has fluctuated since that time, along with variations in short-term rates. In addition, fluctuating spreads between the yields on mortgage-related instruments and U.S. Treasury securities have also impacted the fund’s net asset value. If rates were to move downward in the future, the market value of this investment would rise accordingly. The Company has the ability and the intent to hold this investment for a period of time sufficient for a market price recovery. As a result, management does not consider the USM Fund to be other-than-temporarily impaired.

Note 4: 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, excluding unvested restricted stock. 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 and unvested restricted stock. All computations of basic and diluted earnings per share are adjusted for all applicable stock splits and dividends effected on the Company’s common stock and exclude shares considered to be antidilutive.

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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 (in thousands, except share and per share data):

	Three months ended September 30,
	2007		2006
Income (numerator):
Net income	$	802	$	517
Income (denominator):
Weighted average number of common stock shares outstanding — basic		2,358,394		2,011,002
Dilutive effect of outstanding employee and director stock options and unvested restricted stock		38,817		41,711
Weighted average number of common stock shares outstanding and assumed conversion — diluted		2,397,211		2,052,713
Basic earnings per share	$	0.34	$	0.26
Diluted earnings per share	$	0.33	$	0.25

	Nine months ended September 30,
	2007		2006
Income (numerator):
Net income	$	2,205	$	1,226
Income (denominator):
Weighted average number of common stock shares outstanding — basic		2,356,095		2,007,153
Dilutive effect of outstanding employee and director stock options and unvested restricted stock		38,581		33,454
Weighted average number of common stock shares outstanding and assumed conversion — diluted		2,394,676		2,040,607
Basic earnings per share of common stock	$	0.94	$	0.61
Diluted earnings per share of common stock	$	0.92	$	0.60

For the earnings per share calculation for the nine month period ended September 30, 2007, 75,205 stock options and 18,810 restricted shares of common stock were considered anti-dilutive. For the earnings per share calculation for the three month period ended September 30, 2007, 75,205 stock options and 18,814 restricted shares of common stock were considered anti-dilutive.

Note 5: 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 percent of gross salary. For the first 6 percent, the Company contributes two dollars for each dollar the employee contributes. Partial vesting of Company contributions to the plan begins at 20 percent after two years of employment, and such contributions are 100 percent vested with five years of employment. The Company’s contributions to the plan for the quarters ended September 30, 2007 and 2006 were $108,000 and $91,000, respectively. Contributions to the plan for the first nine months of 2007 were $298,000 and $270,000 for the same period in 2006.

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. Effective January 1, 2005, new medical plans and a new dental plan were implemented, and a separate vision plan, previously included as part of the former medical plans, was added. Under the new plans, employees reimburse the Company for a portion of the premiums. The medical, dental, and vision 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)	2007			2006			2007			2006
Service cost	$	33		$	41		$	99		$	123
Interest cost		25			28			75			84
Amortization of transition obligation		—			—			—			—
Amortization of prior service cost		(5	)		(1	)		(15	)		(4	)
Recognized net actuarial (gain) loss		3			8			9			24
Net periodic benefit cost	$	56		$	76		$	168		$	227

Note 6: Junior Subordinated Debt

In April of 2007, the Company formed EvergreenBancorp Statutory Trust III (“Trust III”) a statutory trust formed under the laws of the State of Delaware. Trust III issued $5 million in trust preferred securities in a private placement offering. Simultaneously with the issuance of the trust preferred securities by Trust III, the Company issued junior subordinated debentures to Trust III. The junior subordinated debentures are the sole assets of Trust III. The junior subordinated debentures and the trust preferred securities pay distributions and dividends, respectively, on a quarterly basis, which are included in interest expense. The interest rate payable on the debentures and the trust preferred securities resets quarterly and is equal to the three-month LIBOR plus 1.65 percent. The junior subordinated debentures are redeemable at par beginning in December 2011; the debentures will mature in June 2037, at which time the preferred securities must be redeemed.

In July of 2007, the Company used the net proceeds from the trust preferred issuance to call $5 million of trust preferred securities issued in May 2002 and concurrently redeemed related trust preferred securities issued to the public.

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, data processing costs, professional fees, marketing, state and local taxes, federal deposit insurance premiums and other administrative expenses.

The Bank’s results of operations are affected by economic and competitive conditions, and 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 ended September 30, 2007. 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 2006 and

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to the previous year ended December 31, 2006. 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, 2006.

Forward-Looking Statements

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 Annual Report for 2006 on Form 10-K.

RESULTS OF OPERATIONS

Overview

The profitability of the Company’s operations depends primarily on the net interest income from its banking operations and investment activities, the provision for losses on loans, noninterest income, noninterest expense, and income tax expense. Net interest income is the difference between the interest income the Company receives on its loan and investment portfolios and its cost of funds, which consists of interest paid on deposits and borrowings. The provision for loan losses reflects the cost of credit risk in the Company’s loan portfolio. Noninterest income includes service charges on deposit accounts, net merchant credit card processing fees, earnings on bank owned life insurance, and gains from sales of loans and investment securities. Noninterest expense includes operating costs such as salaries and employee benefits, occupancy and equipment, data processing, professional fees, marketing, state and local taxes, and other administrative expense.

Net interest income is dependent on the amounts and yields on interest-earning assets as compared to the amounts and rates on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the Company’s asset/liability management procedures in dealing with such changes.

The provision for loan losses is dependent on management’s assessment of the collectibility of the loan portfolio under current economic conditions. Other expenses are influenced by the growth of operations, with additional employees necessary to staff and operate new banking offices and marketing expenses

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necessary to promote them. Growth in the number of account relationships directly affects expenses such as technology costs, supplies, postage, and miscellaneous expenses.

Capital activities in the third quarter of 2007 included a quarterly cash dividend paid in August. Capital ratios remain adequate with the equity-to-assets ratio at 6.26 percent at September 30, 2007.

Net Income

Three months and nine months ended September 30, 2007 and 2006

For the third quarter of 2007, the Company reported net income of $802,000 compared to $517,000 for the third quarter of 2006, an increase of 55 percent. The primary reason for the increase in net income was higher net interest income due to growth in commercial real estate and construction loans. The increase in interest income was offset by larger provision for loan losses of $525,000 for the quarter ended September 30, 2007 as compared to $230,000 for the quarter ended September 30, 2006. Also offsetting the increase in interest income was an increase in noninterest expense of $384,000 for the third quarter of 2007 as compared to the same period one year ago.

Basic and diluted earnings per common share for the third quarter of 2007 were $0.34 and $0.33, respectively, compared to $0.26 and $0.25, respectively, for the same period one year ago.

For the third quarter of 2007, annualized return on average common equity and return on average assets was 13 percent and 0.81 percent, respectively, compared to 11 percent and 0.70 percent, respectively, for the same period in 2006.

For the first nine months of 2007, net income was $2,205,000, compared with $1,226,000 for the first nine months of 2006, an increase of $979,000 or 80 percent. The primary reason for the increase in net income was higher net interest income due to an increase in commercial real estate and construction loans. The increase in interest income was offset by larger provision for loan losses of $1,021,000 for the nine months ended September 30, 2007 as compared with $578,000 for the same period in 2006, an increase of $443,000 or 77 percent. Also offsetting the increase in interest income was an increase in noninterest expense of $977,000 for the nine months ended September 30, 2007 as compared to the same period a year ago.

Basic and diluted earnings per common share were $0.94 and $0.92, respectively, for the first nine months of 2007 and $0.61 and $0.60, respectively, for the same period in 2006. Annualized return on average assets was 0.79 percent for 2007 and 0.60 percent for 2006. Annualized return on average common equity was 12 percent for the first nine months of 2007 and 9 percent for the same period of 2006.

Additional analysis of financial components is contained in the discussion that follows.

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 $4,298,000 for the third quarter of 2007, compared to $3,258,000 for the same period in 2006, an increase of $1,040,000 or 32 percent. Net interest income was $11,800,000 for the first nine months of 2007 compared with $9,040,000 for the first nine months of 2006, an increase of $2,760,000 or 31 percent.

Interest income for the third quarter of 2007 was $8,033,000 as compared with $5,540,000 in the same quarter of 2006. The increase in interest income was primarily attributable to a 35 percent growth in

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average interest-earning assets, which totaled $380,117,000 for the quarter ended September 30, 2007 as compared to $280,791,000 for the same period the prior year, an increase of $99,326,000. The average yield on these assets increased 54 basis points from 7.86 percent for the quarter ended September 30, 2006 to 8.40 percent for the quarter ended September 30, 2007. The increase in the interest earning assets and the average yield was primarily attributable to the growth in the loan portfolio. Average loans rose from $245,160,000 for the three months ended September 30, 2006 to $344,978,000 for the same period in 2007. Yield on average loan balances increased 40 basis points from the third quarter of 2006 to the third quarter of 2007.

Interest income for the first nine months of 2007 was $22,031,000 as compared with $14,627,000 in the first nine months of 2006, an increase of $7,404,000 or 51 percent. The increase is primarily due to a rise in average loan balances of $101,192,000 for the nine months ended September 30, 2007 as compared with the nine months ended September 30, 2006, an increase of 46 percent. The average yield on loans increased by 47 basis points when comparing the nine months ended September 30, 2007 to September 30, 2006.

Offsetting the increase in interest income was an increase in interest expense, which for the three months ended September 30, 2007 was $3,735,000 compared to $2,282,000 for the same period in the prior year, an increase of $1,453,000 or 64 percent. Average interest-bearing deposits increased from $173,785,000 for the quarter ended September 30, 2006 to $265,146,000 for the same period ended September 30, 2007. The rates paid on these liabilities increased 81 basis points from 3.73 percent for the three months ended September 30, 2006 to 4.54 percent for the same period in 2007 reflecting a greater reliance on non-core funding with the use of brokered deposits and bulletin board certificates of deposit.

For the nine months ended September 30, 2007, interest expense totaled $10,231,000 as compared to $5,587,000 for the same period in 2006, an increase of $4,644,000 or 83 percent. Average interest-bearing deposits increased from $155,741,000 for the nine months ended September 30, 2006 to $236,215,000 for the same period in 2007. Rates on these deposits increased 110 basis points growing from 3.31 percent to 4.41 percent from September 30, 2006 to September 30, 2007 reflecting the Company’s increased use of higher cost brokered funds including brokered deposits and bulletin board certificates of deposit. Average FHLB advance balances rose from $36,599,000 for the nine months ended September 30, 2006 to $40,805,000 for the nine months ended September 30, 2007. The average rates paid on these advances increased 24 basis points from 4.96 percent for the nine months ended September 30, 2006 to 5.20 percent for the nine months ended September 30, 2007.

The Company continues to evaluate its net interest margin and as such, it completed a $5 million trust preferred securities transaction (“Trust III”) in April 2007. The purpose of the Trust III transaction was to replace the trust preferred securities issued through EvergreenBancorp Capital Trust I in 2002 (“Trust I”). Trust I’s securities carried an interest rate of 3-month LIBOR plus 3.50 percent; Trust III’s securities carry an interest rate of 3-month LIBOR plus 1.65 percent. The Company redeemed the Trust I securities in July 2007. Interest costs on junior subordinated debt fell from an average of 9.13 percent in the third quarter of 2006 to an average of 6.91 percent in the same period this year.

The net interest margin, which is the ratio of taxable-equivalent net interest income to average earning assets, was 4.51 percent for the quarter ended September 30, 2007 compared with 4.63 percent for the same period in 2006. The net interest margin was 4.44 percent for the first nine months of 2007 compared to 4.72 percent for the same period one year ago. The weighted average yield on interest earning assets was 8.27 percent for the first nine months of 2007, compared to 7.61 percent for the first nine months of 2006, an increase of 66 basis points. Interest expense as a percentage of average earning assets was 3.83 percent for the first nine months of 2007, compared to 2.90 percent during the same period in 2006, an increase of 93 basis points. The larger increase in rates paid on interest-bearing liabilities as compared with the increase in yields on interest-earning assets caused a decrease in the net interest margin. This is primarily the result of the Company’s placing more reliance on non-core funding sources to meet strong loan demand.

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In the third quarter of 2007, the Company received payment in full of a loan on which interest had not been accrued since 2005. The payment included all principal, interest that would have been earned by the Company over that time period and reimbursement for legal and other expenses incurred by the Company from its collection efforts. The large, one-time interest payment of $181,000 resulted in a 19 and 7 basis point increase in the quarterly average net interest margin and the yearly average net interest margin, respectively.

Yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries are reviewed on a fully taxable-equivalent basis (“FTE”). In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. The following table shows the reconciliation between net interest income and the taxable-equivalent net interest income as of September 30, 2007 and September 30, 2006:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands, except ratio data)	2007			2006			2007			2006
Net Interest Margin
Interest income (GAAP)	$	8,033		$	5,540		$	22,031		$	14,627
Taxable-equivalent adjustment:
Loans		3			3			9			9
Investments		17			17			48			53
Interest income — FTE		8,053			5,560			22,088			14,689
Interest expense (GAAP)		3,735			2,282			10,231			5,587
Net interest income — FTE	$	4,318		$	3,278		$	11,857		$	9,102
Net interest income — (GAAP)	$	4,298		$	3,258		$	11,800		$	9,040
Average interest earning assets	$	380,117		$	280,791		$	357,081		$	257,933
Net interest margin (GAAP)		4.49	%		4.60	%		4.42	%		4.69	%
Net interest margin — FTE		4.51	%		4.63	%		4.44	%		4.72	%

Noninterest Income/Expense

Noninterest income in the third quarter of 2007 was $515,000 compared to $443,000 in the same quarter of 2006, an increase of $72,000 or 16 percent. Income from service charges accounted for the majority of the increase, rising from $292,000 for the three months ended September 30, 2006 to $363,000 in the same period of 2007, an increase of $71,000 or 24 percent. The increase was primarily due to higher income from overdraft and account analysis fees. This increase was slightly offset by a decline in other commissions and fees, which decreased to $16,000 for the quarter ended September 30, 2007 as compared to $23,000 in the same period of 2006. This decrease of $7,000 or 30 percent, resulted from the Company no longer offering the financial planning and investment services in 2007 that were previously offered in 2006.

Noninterest income for the nine months ended September 30, 2007 was $1,511,000 compared with $1,343,000 for the same period of 2006, an increase of $168,000 or 13 percent. This increase was primarily due to a rise in income from service charges on deposit accounts, which rose from $847,000 for the nine months ended September 30, 2006 to $1,061,000 for the same period in 2007, partially offset by a decline in income from other commissions and fees, which fell to $47,000 for the nine months ended September 30, 2007 from $119,000 for the same period in 2006. The increase in income from service charges was a result of higher income from overdraft and account analysis fees, while the decrease in other commissions

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and fees is a result of the Company no longer offering the financial planning and investment services in 2007 that were previously offered in 2006.

Noninterest expense was $3,103,000 in the third quarter of 2007, compared to $2,719,000 in the same quarter of 2006, an increase of $384,000, or 14 percent. The increase is partially due to a rise in salaries and benefits expense, which was $1,517,000 for third quarter of 2007, compared with $1,325,000 for the same period in 2006. This was an increase of $192,000 or 15 percent, partly attributable to the addition of approximately 6 full-time equivalent staff (“FTE’s”) as compared with the same quarter in 2006. The objective in the addition of the new FTE’s was to reduce expense related to the outsourcing of certain functions and to increase support in strategic areas to facilitate growth in the Company. The rise in salaries and benefits expense is also due to stock compensation costs resulting from the award of restricted stock in the third quarter of 2007. Occupancy and equipment expense was $501,000 for the three months ended September 30, 2007, an $83,000 or 20 percent increase from the same period in 2006 and is partially due to costs associated with additional depreciation expense related to a branch remodel completed in the fourth quarter of 2006. The Company also accelerated depreciation expense on leasehold improvements for one of its branches as a result of a change in estimated useful life. Data processing was $232,000 for the three months ended September 30, 2007 as compared to $208,000 for the same period in the previous year, an increase of $24,000 or 12 percent. This increase is attributable to a rise in costs associated with a change in core system data processing that occurred in the second quarter of 2007. Marketing expense for the third quarter was $140,000 compared with $159,000 for the same period in 2006, a decrease of $19,000 or 12 percent. State revenue and sales tax expense rose $52,000 or 53 percent from $98,000 for the quarter ended September 30, 2006 compared with $150,000 in the same quarter in 2007. This rise was attributable to the Company’s higher revenues during the period. The rise in other noninterest expense of $64,000 to $493,000 for the third quarter of 2007 as compared to $429,000 in the same period in 2006 was primarily due to an increase in expense related to staff recruiting and an increase in charitable contributions. The increase in other noninterest expense was somewhat offset by a reimbursement of legal fees of $72,000 made to the Company when it received payment in full of a loan on which interest had not been accrued since 2005. The repayment included all principal, interest that would have been earned by the Company over that time period and reimbursement for legal and other expenses incurred by the Company from its collection efforts.

Noninterest expense for the nine months ended September 30, 2007 was $9,038,000 compared with $8,061,000 for the same period of 2006, an increase of $977,000 or 12 percent. The increase was partially due to an increase in salaries and benefits expense of $359,000, or 9 percent for the nine months ended September 30, 2007, as compared with the same period in 2006, partially a result of staff additions and stock compensation expense resulting from the award of restricted stock in the third quarter of 2007. The increase of $165,000, or 13 percent, in occupancy expense for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 was primarily due to costs associated with additional depreciation expense related to a branch remodel completed in the fourth quarter of 2006. The Company also accelerated depreciation expense on leasehold improvements relating to one of its branches as a result of a change in estimated useful life. Data processing increased $91,000 or 15 percent for the nine months ended September 30, 2007 as compared with the same period in 2006 and is primarily attributable to one time charges and ongoing monthly costs related to a change in the Company’s core data processor completed in the second quarter of 2007. Professional fees were $262,000 for the nine months ended September 30, 2007 as compared with $225,000 for the same period in 2006. This increase was due to higher expense incurred for internal and external audits. Marketing expense grew to $366,000 for the year-to-date period ended September 30, 2007 from $349,000 for the same period in 2006, an increase of $17,000 or 5 percent. State revenue and sales tax expense for the first nine months of 2007 increased by $142,000 or 56 percent primarily due to increased revenues in 2007 as compared to the same period in 2006. The increase in other noninterest expense of $166,000 or 13 percent for the first nine months of 2007 as compared to the same six months in 2006 is primarily related to increased expense for staff recruiting, charitable contributions, and liability insurance. Other noninterest expense was partially offset by a reimbursement of legal fees of $72,000 made to the Company when it received full repayment of a loan on which no interest had been accrued since 2005. The repayment included all principal, interest that would have been earned by the Company over that time period and reimbursement for legal and other expenses incurred by the Company from its collection efforts.

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Income tax expense

The Company recognized income tax expense of $383,000 during the third quarter of 2007, up from $235,000 in the same quarter of 2006, an increase of 63 percent, or $148,000. Income tax expense for the nine months ended September 30, 2007 was $1,047,000, compared to $518,000 for the same period of 2006, an increase of 102 percent or $529,000. The effective income tax rate for the third quarter of 2007 was 32 percent as compared with 31 percent for the same period in 2006. The effective tax rate for nine months ended September 30, 2007 was 32 percent as compared to 30 percent for the same period in 2006. The increase in the effective tax rate for the three and nine months ended September 30, 2007 as compared to the same periods in 2006 is due to a decrease in the ratio of nontaxable items to taxable income.

Provision and Allowance for Loan Losses

Included in the results of operations for the quarters ended September 30, 2007 and 2006 is expense of $525,000 and $230,000, respectively, related to the provision for loan losses. The increase in the provision for loan losses in the third quarter of 2007 resulted largely from an increase in the level of credit risk inherent in the Bank’s loan portfolio.

The provision for loan losses for the nine months ended September 30, 2007 was $1,021,000 compared to $578,000 for the same period of 2006. The increase in the provision for loan losses resulted largely from an increase in the level of credit risk inherent in the Bank’s loan portfolio due to higher overall loan balances.

Contributing to the increase in the provision was a rise in SFAS 114 impaired loans. At September 30, 2007, allocation for impaired loans increased to $364,000 compared with $49,000 at September 30, 2006. Higher overall loan balances for the third quarter and year-to-date 2007 compared with the same periods in 2006 also contributed to the increase in the provision for loan losses.

At September 30, 2007, the allowance for loan losses was $3,710,000 compared to $2,784,000 at December 31, 2006. The ratio of the allowance to total loans outstanding was 1.05 percent at September 30, 2007, and 0.95 percent at December 31, 2006.

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, 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, 2007, there can be no assurance that such losses will not exceed estimated amounts.

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

FINANCIAL CONDITION

Loans

At September 30, 2007, loans totaled $354,438,000 compared to $292,449,000 at December 31, 2006, an increase of $61,989,000 or 21 percent.

At September 30, 2007, the Bank had $286,691,000 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.

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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, 2007 and December 31, 2006:

Types of Loans

	September 30,		December 31,
(in thousands)	2007		2006
Commercial	$	87,906	$	85,067
Real estate:
Commercial		146,539		118,070
Construction		57,041		34,813
Residential 1-4 family		40,442		36,875
Consumer and other		22,510		17,624
Total	$	354,438	$	292,449

Allocation of the Allowance for Loan Losses

In the following table, the allowance for loan losses at September 30, 2007 and December 31, 2006 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
	2007			each category			2006			each category
(in thousands)	Amount			to Total Loans			Amount			to Total Loans
Commercial	$	1,307			25	%	$	919			29	%
Real estate:
Commercial		1,459			42			1,120			40
Construction		572			16			440			12
Residential 1-4 family		42			11			36			13
Consumer and other		330			6			269			6
Total	$	3,710			100	%	$	2,784			100	%
% of Loan portfolio		1.05	%					0.95	%

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.

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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, 2007		September 30, 2006
Beginning Balance	$	2,784	$	2,056
Chargeoffs
Commercial		120		—
Real estate:
Commercial		—		—
Construction		—		—
Residential 1-4 family		—		—
Consumer and other		40		19
Total charge-offs		160		19
Recoveries
Commercial		61		8
Real estate:
Commercial		—		—
Construction		—		—
Residential 1-4 family		—		—
Consumer and other		4		8
Total Recoveries		65		16
Net chargeoffs/(recoveries)		95		3
Provision		1,021		578
Ending balance	$	3,710	$	2,631

The Company’s nonperforming loans were $1,072,000 at September 30, 2007, or 0.26 percent of total assets as compared to $497,000, or 0.14 percent of total assets, at December 31, 2006. Impaired loans were $487,000 at September 30, 2007 as compared with $123,000 at December 31, 2006.

Investments

At September 30, 2007, investments totaled $26,388,000, a decrease of $3,143,000 or 11 percent from $29,531,000 at December 31, 2006. The decrease in investments was primarily due to maturities and principal payments on securities available-for-sale.

For more information regarding securities, see Note 3, “Securities” to the unaudited consolidated financial statements.

Deposits

At September 30, 2007, total deposits were $320,498,000, compared to $256,435,000 at December 31, 2006, a 25 percent increase from December 31, 2006. Noninterest-bearing deposits totaled $56,040,000 at September 30, 2007 compared to $55,373,000 at December 31, 2006, an increase of $667,000 or 1 percent.

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Interest-bearing deposits totaled $264,458,000 at September 30, 2007, compared to $201,062,000 at December 31, 2006, an increase of $63,396,000 or 32 percent.

Approximately $47,971,000 or 76 percent of the net growth in interest-bearing deposits in the first nine months of 2007 was through the use of non-retail deposit sources, including brokered and bulletin board certificates of deposit.

The Company currently has deposit relationships with companies that are part of PEMCO Financial Services Group (“PFS”). PFS has recently notified the Company of its intentions to move a large portion of its deposit relationship away from the Company over the next year. This will have the net effect of a reduction of approximately 12 percent of total non-interest bearing balances, or approximately 2 percent of total deposits. The Company does not expect to experience funding difficulties nor a decline in net income as a result of this.

Borrowings and Junior Subordinated Debt

At September 30, 2007, the Bank’s Federal Home Loan Bank advances were $46,010,000 compared to $46,805,000 at December 31, 2006, a 2 percent decrease. The decrease is attributable to net repayment of advances that matured during the period.

At September 30, 2007 and December 31, 2006 the Company had junior subordinated debt totaling $12,372,000 and $12,217,000, respectively. For discussion of Trust III and the related redemption of trust preferred securities, see Note 6, “Junior Subordinated Debt” to the unaudited consolidated financial statements.

For discussion of Federal Home Loan Bank advances and junior subordinated debt, see Note 8, “Borrowings and Junior Subordinated Debt” to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K as of December 31, 2006.

Stockholders’ Equity and Capital Resources

Stockholders’ equity totaled $25,678,000 at September 30, 2007, an increase of $1,859,000 or 8 percent over December 31, 2006. Current earnings were $2,205,000 and dividends paid were $495,000 for the nine months ended September 30, 2007. The change in unrealized losses on securities available-for-sale and the change in post-retirement obligations, net of deferred taxes, increased stockholders’ equity by $1,000. Stockholders’ equity increased by $79,000 in common stock and surplus due to the recognition of stock option compensation expense, and by $69,000 in surplus from the exercise of 5,626 stock options in the third quarter of 2007.

Beginning stockholders’ equity at January 1, 2006 was adjusted by $51,000 as a result of a cumulative affect adjustment for the Company’s adoption of Staff Accounting Bulletin (“SAB”) No. 108. For further discussion of the Company’s adoption of SAB No. 108, see Note 1 “Summary of Significant Accounting Policies” and Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operationsto the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K as of December 31, 2006.

Book value per share was $10.80 at September 30, 2007 and $10.12 at December 31, 2006. Book value per share is calculated by dividing total equity by total shares outstanding.

The following table displays the capital ratios at September 30, 2007 and December 31, 2006 for the Company and the Bank. As the table illustrates, the Bank’s capital ratios exceed those required for the Bank 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
(in thousands, except ratio data)	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2007
Total capital (to risk-weighted assets)
Consolidated	$	42,199		11.70	%	$	28,845		8.00	%		N/A		N/A
Bank		41,786		11.84			28,228		8.00		$	35,285		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		34,530		9.58			14,422		4.00			N/A		N/A
Bank		38,076		10.79			14,114		4.00			21,171		6.00
Tier 1 capital (to average assets)(1)
Consolidated		34,530		8.56			16,147		4.00			N/A		N/A
Bank		38,076		9.60			15,861		4.00			19,826		5.00
December 31, 2006
Total capital (to risk-weighted assets)
Consolidated	$	39,310		13.20	%	$	23,819		8.00	%		N/A		N/A
Bank		38,504		12.94			23,795		8.00		$	29,744		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		32,412		10.89			11,910		4.00			N/A		N/A
Bank		35,720		12.01			11,898		4.00			17,847		6.00
Tier 1 capital (to average assets)(1)
Consolidated		32,412		9.92			13,074		4.00			N/A		N/A
Bank		35,720		11.15			12,817		4.00			16,022		5.00

(1) Also referred to as the leverage ratio

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, 2007, the Company had commitments to extend credit and contingent liabilities under lines of credit, standby letters of credit and similar arrangements totaling $94,419,000. 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, 2006.

The following table summarizes the Company’s significant contractual obligations and commitments (excluding commitments to extend credit and contingent liabilities under lines of credit, standby letters of credit and similar arrangements) at September 30, 2007:

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	Within						After
(in thousands)	1 Year		1-3 Years		3-5 Years		5 Years		Total
Federal Home Loan Bank advances	$	21,285	$	10,675	$	7,050	$	7,000	$	46,010
Junior subordinated debt		—		—		—		12,372		12,372
Time Deposits		159,080		15,404		2,164		259		176,907
Operating leases		713		1,285		941		650		3,589
Total	$	181,078	$	27,364	$	10,155	$	20,281	$	238,878

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 3 percent of the investment balances within this portfolio mature within one year. Liquidity is also provided by deposit growth, federal funds purchased, borrowings, and maturities and sales of 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, 2007 and 2006. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 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, 2006. The 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, 2007:

     In thousands; rate changes in basis points (bp) = 1/100 of 1%.

	ANNUALIZED DOLLAR CHANGE
IMMEDIATE RATE CHANGE	IN NET INTEREST INCOME			PERCENT CHANGE
+200bp		991			6.38
+100bp		500			3.22
+ 50bp		246			1.58
- 50bp		(261	)		(1.68	)
-100bp		(478	)		(3.08	)
-200bp		(887	)		(5.71	)

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 3.22 percent or approximately $500,000. An immediate 100 basis point decrease in rates indicates a potential reduction of net interest income by 3.08 percent or approximately $478,000.

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

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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, 2007. 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.

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 condition or results of operations of the Company.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

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

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

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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 9, 2007

EVERGREENBANCORP, INC.

/s/ Gordon D. Browning

Gordon D. Browning

Executive Vice President and Chief Financial Officer

(Authorized Officer and Principal Financial Officer)

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