Evergreenbancorp (EVGGQ) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

¨ 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  ¨

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

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  ¨ Smaller reporting company  þ

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

Yes  ¨    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 4, 2008: 2,423,000

No Preferred Stock was issued or outstanding.

	PART I
	FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Financial Statements	3
	Unaudited Consolidated Balance Sheets – September 30, 2008 and December 31, 2007	3
	Unaudited Consolidated Statements of Income - For the three months and nine months ended September 30, 2008 and  2007	4
	Unaudited Consolidated Statements of Stockholders’ Equity - For the nine months ended September 30, 2008 and  2007	5
	Unaudited Consolidated Statements of Cash Flows - For the nine months ended September 30, 2008 and 2007	6
	Notes to Unaudited Consolidated Financial Information	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
	PART II
	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
	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, 2008 and December 31, 2007

(in thousands, except share and per data)

	September 30, 2008			December 31, 2007
Assets
Cash and due from banks	$	11,058		$	14,076
Federal funds sold		3,294			2,383
Interest-bearing deposits in financial institutions		4,528			5,923
Total cash and cash equivalents		18,880			22,382
Securities available-for-sale		10,990			12,521
Federal Home Loan Bank stock		3,639			1,925
Loans		422,521			375,428
Allowance for loan losses		(6,085	)		(4,166	)
Net loans		416,436			371,262
Premises and equipment		3,600			2,886
Bank owned life insurance		5,701			5,537
Interest in escrow of Visa stock		1,009			—
Accrued interest and other assets		5,280			6,274
Total assets	$	465,535		$	422,787
Liabilities
Deposits
Noninterest-bearing	$	51,622		$	59,458
Interest-bearing		308,640			250,013
Total deposits		360,262			309,471
Federal Home Loan Bank advances		59,725			69,910
Indemnification liabilities		1,581			2,122
Junior subordinated debt		12,372			12,372
Accrued expenses and other liabilities		2,887			3,476
Total liabilities		436,827			397,351
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; 2,423,000 shares issued at September 30, 2008; 2,388,804 shares issued at December 31, 2007		21,764			21,467
Retained earnings		6,978			3,972
Accumulated other comprehensive loss		(34	)		(3	)
Total stockholders’ equity		28,708			25,436
Total liabilities and stockholders’ equity	$	465,535		$	422,787

See accompanying notes to unaudited consolidated financial statements.

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EVERGREENBANCORP, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

Three month and nine month periods ended September 30, 2008 and 2007

(in thousands, except per share data)

	Three months ended September 30,					Nine months ended September 30,
	2008			2007		2008		2007
Interest income
Loans, including fees	$	7,085		$	7,622	$	21,173	$	20,878
Taxable securities		117			276		344		848
Tax exempt securities		25			31		77		94
Federal funds sold and other		31			104		138		211
Total interest income		7,258			8,033		21,732		22,031
Interest expense
Deposits		2,380			3,033		7,155		7,799
Federal funds purchased		6			17		9		81
Federal Home Loan Bank advances		595			470		2,086		1,588
Junior subordinated debt		136			215		465		763
Total interest expense		3,117			3,735		9,715		10,231
Net interest income		4,141			4,298		12,017		11,800
Provision for loan losses		501			525		2,842		1,021
Net interest income after provision for loan losses		3,640			3,773		9,175		10,779
Noninterest income
Service charges on deposit accounts		285			363		887		1,061
Merchant credit card processing		24			45		71		137
Net earnings on bank owned life insurance		58			56		164		171
Gain on redemption and interest in escrow fund of Visa stock		—			—		5,587		—
Other noninterest income		37			51		128		142
Total noninterest income		404			515		6,837		1,511
Noninterest expense
Salaries and employee benefits		1,764			1,517		4,838		4,370
Occupancy and equipment		533			501		1,623		1,464
Data processing		252			232		722		710
Professional fees		137			70		356		262
Visa indemnification charge		572			—		572		—
Marketing		122			140		489		366
State revenue and sales tax expense		129			150		451		396
Other noninterest expense		639			493		1,951		1,470
Total noninterest expense		4,148			3,103		11,002		9,038
Income (loss) before income taxes		(104	)		1,185		5,010		3,252
Income tax (benefit) expense		(57	)		383		1,499		1,047
Net income (loss)	$	(47	)	$	802	$	3,511	$	2,205
Total comprehensive income (loss)	$	(16	)	$	872	$	3,480	$	2,206
Basic earnings (loss) per share	$	(0.02	)	$	0.34	$	1.46	$	0.94
Diluted earnings (loss) per share	$	(0.02	)	$	0.33	$	1.45	$	0.92

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, 2008 and 2007

(in thousands, except share and per share data)

	Common stock shares	Common stock and surplus		Retained earnings			Accumulated other comprehensive income			Total stock-holders’ 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 ($.18 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
	Common stock shares	Common stock and surplus		Retained earnings			Accumulated other comprehensive income (loss)			Total stock-holders’ equity
Balance at January 1, 2008	2,388,804	$	21,467	$	3,972		$	(3	)	$	25,436
Comprehensive income
Net income	—		—		3,511			—			3,511
Change in net unrealized gain (loss) on securities available-for- sale, net of reclassification and tax effects	—		—		—			(31	)		(31	)
Total comprehensive income											3,480
Cash dividends ($.21 per share)	—		—		(505	)		—			(505	)
Exercise of stock options	21,805		171		—			—			171
Restricted stock grants, net	11,350		—		—			—			—
Shares issued through dividend reinvestment plan	1,041		—		—			—			—
Stock options earned	—		91		—			—			91
Tax benefit from stock related compensation	—		35		—			—			35
Balance at September 30, 2008	2,423,000	$	21,764	$	6,978		$	(34	)	$	28,708

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, 2008, and 2007

(in thousands)

	September 30, 2008			September 30, 2007
Cash flows from operating activities
Net income	$	3,511		$	2,205
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		739			719
Provision for loan losses		2,842			1,021
Gain on redemption of Visa stock		(3,465	)		—
Interest in escrow fund of Visa stock		(1,009	)		—
Visa indemnification charge		572			—
Amortization of premiums and discounts on securities		16			28
Net earnings on bank owned life insurance		(164	)		(171	)
Stock option compensation expense		91			79
Other changes, net		(657	)		(676	)
Net cash provided by operating activities		2,476			3,205
Cash flows from investing activities
Proceeds from maturities and principal payments on securities available-for- sale		4,467			3,123
Proceeds from redemption of Visa stock		3,465			—
Purchases of securities available-for-sale		(2,995	)		—
Purchases of Federal Home Loan Bank stock		(2,222	)		—
Redemption of Federal Home Loan Bank stock		504			—
Net loan originations		(48,016	)		(62,084	)
Purchases of premises and equipment		(1,453	)		(723	)
Net cash provided by (used in) investing activities		(46,250	)		(59,684	)
Cash flows from financing activities
Net increase in deposits		50,791			64,063
Proceeds from Federal Home Loan Bank advances		276,851			216,937
Repayments of Federal Home Loan Bank advances		(287,036	)		(217,732	)
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		171			69
Dividends paid		(505	)		(495	)
Net cash provided by financing activities		40,272			62,997
Net increase (decrease) in cash and cash equivalents		(3,502	)		6,518
Cash and cash equivalents at beginning of year		22,382			11,903
Cash and cash equivalents at end of period	$	18,880		$	18,421

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 currently insured to a maximum of $250,000 per depositor (in some instances insurance is unlimited depending on the type of the account) by the Federal Deposit Insurance Corporation (“the FDIC”).

Bancorp and the Bank are collectively referred to as “the Company.” EvergreenBancorp Statutory Trust II (“Trust II”) and EvergreenBancorp Capital 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, Federal Way, and Kent 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, contingencies and guarantees, 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, 2007. 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 December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R,Business Combinations. SFAS 141R replaces the current standard on business combinations and will significantly change the accounting for and reporting of business combinations in consolidated financial statements. This statement requires an entity to measure the business acquired at fair value and to recognize goodwill attributable to any noncontrolling interests (previously referred to as minority interests) rather than just the portion attributable to the acquirer. The statement will also result in fewer exceptions to the principle of measuring assets acquired and liabilities assumed in a business combination at fair value. In addition, the statement will result in payments to third parties for consulting, legal, and similar services associated with an acquisition to be recognized as expenses when incurred rather than capitalized as part of the business combination. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008.

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On March 19, 2008, the FASB issued FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133. Statement 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Specifically, Statement 161 requires: disclosure of the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation; disclosure of the fair values of derivative instruments and their gains and losses in a tabular format; disclosure of information about credit-risk-related contingent features; and cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed. Statement 161 is effective for fiscal years and interim periods beginning after November 15, 2008.

In June 2008, the FASB issued Staff Position EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). The FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The FSP affects entities that accrue cash dividends on share-based payment awards during the awards’ service period when the dividends do not need to be returned if the employees forfeit the awards. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The Company does not accrue cash dividends and therefore does not anticipate there to be an impact on the Company’s consolidated financial position, results of operations or cash flows.

On September 12, 2008, The FASB issued Staff Position FSP No. FAS 133-1 and FIN 45-4,Disclosures and Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (Issued September 12, 2008). This FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. It amends FAS 133,Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The FSP also amends FIN 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. This amendment of FIN 45 reflects the Board’s belief that instruments with similar risks should have similar disclosures. This FSP amended paragraph 13(a) of FIN 45 to require that the “current status (that is, as of the date of the statement of financial position) of the payment performance risk of the guarantee” be disclosed. The provisions that amend FAS 133 and FIN 45 are effective for reporting periods (annual or interim) ending after November 15, 2008.

Adoption of new accounting standards.In September 2006, the FASB issued Statement No. 157,Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material. See Note 7, “Fair Value” for disclosures related to the adoption of SFAS 157.

In February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets

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and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008, the effective date of the standard.

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. In April 2008, the shareholders adopted the Stock Option and Equity Compensation Plan (“Amended Plan”) which increased the number of shares available under the plan by 120,000. Up to 449,724 shares of common stock may be awarded under the Amended Plan. Awards available under the plan are subject to adjustment for all stock dividends and stock splits paid by the Company. As of September 30, 2008, approximately 137,988 shares of common stock were available for future grant under the Amended 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.

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 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.

During the third quarter of 2008, no nonqualified options were granted, 2,970 were exercised and 2,601 options were forfeited or canceled. During the third quarter of 2007, no stock options were granted or forfeited and 554 options were exercised.

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

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

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A summary of option activity under the stock option plan for the nine months ended September 30, 2008 is as follows:

	Shares		Weighted-Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at the beginning of the year	198,628		$	10.43
Granted	—			—
Exercised	(21,805	)		7.36
Forfeited	(8,831	)		10.14
Outstanding at the end of the period	167,992		$	10.84	4.52 years	N/A
Exercisable at the end of the period	132,004		$	9.35	3.80 years	19,800
Vested or expected to vest	159,592		$	10.84	4.52 years	N/A

As of September 30, 2008, there was $102,000 of total unrecognized compensation cost related to outstanding stock options granted under the Plan. The cost is expected to be recognized over a weighted average period of 0.78 years.

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.

During the third quarter of 2008, restricted stock awards for 12,650 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. 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, 2008 is as follows:

Nonvested Shares	Shares	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2008	18,500	$	14.75
Granted	12,650		9.45
Vested	200		14.75
Forfeited	1,300		14.75
Nonvested at September 30, 2008	29,650		12.49

As of September 30, 2008, there was $302,000 of total unrecognized compensation cost related to nonvested stock options and unvested restricted shares granted under the Plan. The cost is expected to be recognized over a weighted average period of 4.32 years.

Note 3: Securities

Investment securities available-for-sale include $2,992,000 in mortgage-backed securities at September 30, 2008. This investment by the Bank in mortgage-backed securities qualifies as collateral for advances from the Federal Home Loan Bank of Seattle.

There were no sales of available-for-sale securities during the first nine months of 2008 or 2007.

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Securities with unrealized losses at September 30, 2008 and December 31, 2007, 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, 2008
(in thousands)	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. agencies	$	2,936	$	(63	)	$	—	$	—		$	2,936	$	(63	)
State and political subdivisions		155		(1	)		—		—			155		(1	)
Mortgage-backed securities		1,527		(16	)		1,373		(29	)		2,900		(45	)
Total temporarily impaired	$	4,618	$	(80	)	$	1,373	$	(29	)	$	5,991	$	(109	)
December 31, 2007
(in thousands)	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
State and political subdivisions	$	—	$	—		$	2,450	$	(10	)	$	2,450	$	(10	)
Mortgage-backed securities		95		(1	)		3,173		(52	)		3,268		(53	)
Total temporarily impaired	$	95	$	(1	)	$	5,623	$	(62	)	$	5,718	$	(63	)

At September 30, 2008 and December 31, 2007, securities with unrealized losses have an aggregate depreciation of 1.8 percent and 1.1 percent from the Company’s amortized cost basis. The unrealized losses are predominately the result of changing market values due to increasing short-term 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 recovery, which may be maturity.

The scheduled maturities of securities available-for-sale at September 30, 2008 were as follows. Securities not due at a single maturity date are shown separately:

	Fair Value
(in thousands)	September 30, 2008		December 31, 2007
Due in one year or less	$	1,478	$	1,856
Due after one year through five years		6,365		6,569
Due after five years through ten years		155		503
Total		7,998		8,928
Mortgage-backed securities and collateralized mortgage obligations		2,992		3,593
Total	$	10,990	$	12,251

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,
	2008			2007
Income (numerator):
Net income (loss)	$	(47	)	$	802
Income (denominator):
Weighted average number of common stock shares outstanding – basic		2,408,984			2,358,394
Dilutive effect of outstanding employee and director stock options and unvested restricted stock		1,506			38,817
Weighted average number of common stock shares outstanding and assumed conversion – diluted		2,410,490			2,397,211
Basic earnings (loss) per share	$	(0.02	)	$	0.34
Diluted earnings (loss) per share	$	(0.02	)	$	0.33
	Nine months ended September 30,
	2008			2007
Income (numerator):
Net income	$	3,511		$	2,205
Income (denominator):
Weighted average number of common stock shares outstanding – basic		2,400,723			2,356,095
Dilutive effect of outstanding employee and director stock options and unvested restricted stock		17,078			38,581
Weighted average number of common stock shares outstanding and assumed conversion – diluted		2,417,801			2,394,676
Basic earnings per share of common stock	$	1.46		$	0.94
Diluted earnings per share of common stock	$	1.45		$	0.92

For the diluted earnings per share calculation for the nine month period ended September 30, 2008, 68,214 stock options were considered anti-dilutive. For the diluted earnings per share calculation for the three month period ended September 30, 2008, 83,890 stock options 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, 2008 and 2007 were $122,000 and $108,000, respectively. Contributions to the plan for the first nine months of 2008 were $369,000 and $298,000 for the same period in 2007.

In 2007, the Company also participated in a multiple-employer defined benefit postretirement health care plan that provided medical and dental coverage to directors and surviving spouses and to employees who retired after age 62 and 15 years of full-time service and their dependents. On November 30, 2007 the post-retirement plan was terminated. The following table shows post-retirement plan information for the three and nine months ended September 30, 2007.

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Components of net periodic benefit cost

(in thousands)	Three months ended,			Nine months ended,
	September 30, 2007
Service cost	$	33		$	99
Interest cost		25			75
Amortization of transition obligation		—			—
Amortization of prior service cost		(5	)		(15	)
Recognized net actuarial (gain) loss		3			9
Net periodic benefit cost	$	56		$	168

For further discussion of post-retirement benefits, see Note 13, “Retirement Benefits” to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K as of December 31, 2007.

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 (4.47 percent at September 30, 2008). The junior subordinated debentures are redeemable at par beginning in December 2012; the debentures will mature in June 2037, at which time the preferred securities must be redeemed. The Company has the option to defer interest payments on these subordinated debentures from time to time for a period not to exceed twenty consecutive quarterly periods. 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.

In November 2006, Bancorp formed EvergreenBancorp Statutory Trust II (“Trust II”) a statutory trust formed under the laws of the State of Connecticut. In November 2006, Trust II issued $7 million in trust preferred securities in a private placement offering. Simultaneously with the issuance of the trust preferred securities by Trust II, Bancorp issued junior subordinated debentures to Trust II. The junior subordinated debentures are the sole assets of Trust II. 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 1.70 percent (4.52 percent at September 30, 2008). The junior subordinated debentures are redeemable at par beginning in December 2011; the debentures will mature in December 2036, at which time the preferred securities must be redeemed. The Company has the option to defer interest payments on these subordinated debentures from time to time for a period not to exceed twenty consecutive quarterly periods. Bancorp has provided a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of Trust II under the preferred securities as set forth in such guarantee agreement.

Under current accounting guidance, FASB Interpretation No. 46, as revised in December 2003, Trust II and Trust III are not consolidated with the Company. Accordingly, the Company does not report the securities issued by Trust II and Trust III as liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by Trust II and Trust III, as these are not eliminated in consolidation. The Company’s investment in the common stock of Trust II and Trust III was $217,000 and $155,000, respectively, and is included in accrued interest and other assets on the Consolidated Balance Sheets.

Note 7: Fair Value

FASB Statement No. 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

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Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used to in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements at September 30, 2008 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets at September 30, 2008:
Available for sale securities	$	10,990	—	$	10,990	—

The following assets and liabilities were measured at fair value on a non-recurring basis:

	Fair Value Measurements at September 30, 2008 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets at September 30, 2008:
Impaired loans	$	3,284	—	—	$	3,284

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had an outstanding balance of $3,284,000 at September 30, 2008 as compared to $3,509,000 at June 30, 2008 and $779,000 at December 31, 2007. The fair value of collateral is calculated using a third party appraisal. The valuation allowance for these loans was $1,758,000 at September 30, 2008 as compared to $1,287,000 at June 30, 2008 and $630,000 at December 31, 2007. An additional provision for loan losses of $478,000 and $1,694,000 was made during the quarter and nine months ended September 30, 2008 relating to impaired loans.

Note 8: Participation in the Treasury Capital Purchase Program

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”), which provides the U. S. secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the Act is the Treasury Capital Purchase Program (“CPP”), which provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock

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redemptions and declaration of dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The CPP provides for a minimum investment of 1% of Risk-Weighted Assets, with a maximum investment equal to the lesser of 3 percent of Total Risk-Weighted Assets or $25 billion. The perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9%, thereafter. The CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. The Company is evaluating whether to apply for participation in the CPP. Participation in the program is not automatic and subject to approval by the Treasury.

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, 2008. 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 2007 and to the previous year ended December 31, 2007. 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, 2007.

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; significant increases in competition; legislative or regulatory changes applicable to bank holding companies or the Company’s banking or other subsidiaries; increases in FDIC deposit insurance premiums which will increase operating costs; 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 2007 on Form 10-K.

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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 and gains or losses from sales of 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 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 2008 included a quarterly cash dividend paid in August. Capital ratios remain adequate with the equity-to-assets ratio at 6.17 percent at September 30, 2008.

Net Income

Three months and nine months ended September 30, 2008 and 2007

For the third quarter of 2008, the Company reported a net loss of $47,000 compared to net income of $802,000 for the third quarter of 2007, a decrease of 106 percent. The primary reason for the decrease in net income was a non-cash charge totaling $572,000 related to the Company’s estimate of its proportionate share of obligations to indemnify Visa, Inc. for certain litigation matters. For further discussion of the Company’s indemnification obligation to Visa, Inc. see page 24, Contractual Obligations and Commitments. Additionally, the Company experienced a significant decline in interest income primarily attributable to a drop in the yield earned on interest-earning assets, most evident in commercial loans. In addition to the decline in interest income, noninterest expense increased $1,045,000 for the third quarter of 2008 as compared to the same period one year ago.

Net loss per common share for the third quarter of 2008 was ($0.02) compared to basic earnings per common share of $0.34 and diluted earnings per common share of $0.33 for the same period one year ago. Annualized return on average common equity and return on average assets was (1) percent and (0.04) percent, respectively, compared to 13 percent and 0.81 percent, respectively, for the same period in 2007.

For the first nine months of 2008, net income was $3,511,000, compared with $2,205,000 for the first nine months of 2007, an increase of $1,306,000 or 59 percent. The primary reason for the increase in net income was an increase in noninterest income due to a gain totaling $5,587,000 that the Company realized as a result of Visa, Inc.’s initial public offering (“IPO”) in March 2008. Net interest income after provision for loan losses was lower in the first nine months of 2008 compared with the same period in 2007 due primarily to a larger provision for loan losses. The provision for loan losses was $2,842,000 for the nine months ended September 30, 2008 as compared with $1,021,000 for the same period in 2007.

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Basic and diluted earnings per common share were $1.46 and $1.45, respectively, for the first nine months of 2008 and $0.94 and $0.92, respectively, for the same period in 2007. Annualized return on average assets was 1 percent for 2008 and 0.79 percent for 2007. Annualized return on average common equity was 17 percent for the first nine months of 2008 and 12 percent for the same period of 2007.

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 $4,141,000 for the third quarter of 2008, compared to $4,298,000 for the same period in 2007, a decrease of $157,000 or 4 percent. Net interest income was $12,017,000 for the first nine months of 2008 compared with $11,800,000 for the first nine months of 2007, an increase of $217,000 or 2 percent.

Interest income for the third quarter of 2008 was $7,258,000 as compared with $8,033,000 in the same quarter of 2007. The decrease in interest income was primarily attributable to a decline in the average yield on interest-earning assets. The yield on these assets decreased 185 basis points from 8.40 percent for the quarter ended September 30, 2007 to 6.55 percent for the quarter ended September 30, 2008. This decrease in yield was offset by a significant increase in average interest-earning asset balances, which rose to $440,556,000 in the third quarter of 2008 compared with $380,117,000 in the third quarter of 2007. The increase in interest earning assets was primarily attributable to the growth in the loan portfolio. Average loans rose from $344,978,000 for the three months ended September 30, 2007 to $419,240,000 for the same period in 2008.

Interest income for the first nine months of 2008 was $21,732,000 as compared with $22,031,000 in the first nine months of 2007, a decrease of $299,000 or 1 percent. The decrease is primarily due to a decline of 142 basis points in the average yield on interest-earning assets from the period ended September 30, 2007 to the same period in 2008. This decline reflects the significant drop in short-term interest rates that began at the end of 2007 and continued into 2008. Average interest-earning asset balances grew from $357,081,000 for the nine months ended September 30, 2007 to $423,767,000 for the same period in 2008. This increase was primarily due to an increase in average loan balances which grew to $400,766,000 for the nine months ended September 30, 2008 from $323,305,000 for the same period in 2007. The average yields on loans decrease by 160 basis points primarily due to declines in short-term interest rates and the reversal of interest income on several loan relationships that were put on non-accrual status in the second and third quarter of 2008. The $77,461,000 or 24 percent increase in average loan balances was partially offset by a decrease in average investment securities balances, which dropped 46 percent from $28,189,000 for the period ended September 30, 2007 to $15,129,000 for the same period in 2008. This decline was mainly due to the sale of a security in the fourth quarter of 2007. The yield on average investment securities declined by 64 basis points from 4.69 percent for the nine months ended September 30, 2007 to 4.05 percent in 2008.

Interest expense for the three months ended September 30, 2008 was $3,117,000 compared to $3,735,000 for the same period in the prior year, a decrease of $618,000 or 17 percent. Average interest-bearing deposits increased from $265,146,000 for the quarter ended September 30, 2007 to $299,553,000 for the same period ended September 30, 2008. The rates paid on these liabilities decreased 139 basis points from 4.54 percent for the three months ended September 30, 2007 to 3.15 percent for the same period in 2008. Average rates paid on Federal Home Loan Bank (“FHLB”) advances fell 131 basis points from an average of 5.15 percent for the third quarter of 2007 to 3.84 percent for the same period this year. These rate

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decreases reflect the succeeding cuts in interest rates that began in late 2007, as well as a shift in the mix of borrowings to less costly, shorter-term advances. The decrease in average rates paid on liabilities was partially offset by an increase in average interest-bearing liabilities. Along with the increase in average interest-bearing deposits, the average balance in FHLB advances increased to $61,574,000 for the quarter ended September 30, 2008 compared to $36,131,000 for the quarter ended September 30, 2007.

For the nine months ended September 30, 2008, interest expense totaled $9,715,000 as compared to $10,231,000 for the same period in 2007, a decrease of $516,000 or 5 percent. Average interest-bearing deposits increased from $236,215,000 for the nine months ended September 30, 2007 to $272,080,000 for the same period in 2008. An increase in the use of noncore funding, including brokered deposits and bulletin board certificates of deposit, accounts for the majority of the increase, rising from $100,726,000 at September 30, 2007 to $136,792,000 at September 30, 2008. Offsetting the increase in interest-bearing balances, rates on these deposits decreased 91 basis points from 4.41 percent for the nine month period ended September 30, 2007 to 3.50 percent for the same period in 2008. Average FHLB advance balances rose from $40,805,000 for the nine months ended September 30, 2007 to $72,333,000 for the nine months ended September 30, 2008 while the average rates paid on these advances fell 136 basis points from 5.20 percent for the nine months ended September 30, 2007 to 3.84 percent for the nine months ended September 30, 2008.

The net interest margin, which is the ratio of taxable-equivalent net interest income to average earning assets, was 3.80 percent for the quarter ended September 30, 2008 compared with 4.51 percent for the same period in 2007. The net interest margin was 3.79 percent for the first nine months of 2008 compared to 4.44 percent for the same period one year ago. The weighted average yield on interest earning assets was 6.85 percent for the first nine months of 2008, compared to 8.27 percent for the first nine months of 2007, a decrease of 142 basis points. Interest expense as a percentage of average earning assets was 3.05 percent for the first nine months of 2008, compared to 3.83 percent during the same period in 2007, a decrease of 78 basis points. The smaller decrease in rates paid on interest-bearing liabilities as compared with the decrease in yields on interest-earning assets caused compression in the net interest margin. This is primarily the result of the Company’s interest-earning assets repricing more quickly than its interest-bearing liabilities as interest rates declined during the latter part of 2007 and into 2008.

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, 2008 and September 30, 2007:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands, except ratio data)	2008			2007			2008			2007
Net Interest Margin
Interest income (GAAP)	$	7,258		$	8,033		$	21,732		$	22,031
Taxable-equivalent adjustment:
Loans		3			3			9			9
Investments		13			17			40			48
Interest income - FTE		7,274			8,053			21,781			22,088
Interest expense (GAAP)		3,117			3,735			9,715			10,231
Net interest income - FTE	$	4,157		$	4,318		$	12,066		$	11,857
Net interest income - (GAAP)	$	4,141		$	4,298		$	12,017		$	11,800
Average interest earning assets	$	440,556		$	380,117		$	423,767		$	357,081
Net interest margin (GAAP)		3.78	%		4.49	%		3.77	%		4.42	%
Net interest margin - FTE		3.80	%		4.51	%		3.79	%		4.44	%

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Noninterest Income/Expense

Noninterest income in the third quarter of 2008 was $404,000 compared to $515,000 in the same quarter of 2007, a decrease of $111,000 or 22 percent. Income from service charges accounted for the majority of the decrease, falling from $363,000 for the three months ended September 30, 2007 to $285,000 in the same period of 2008 a decrease of $78,000 or 21 percent. The decrease was primarily a result of a decline in NSF fee income, which fell $56,000 from the third quarter of 2007 to the same quarter in 2008. The decrease in noninterest income was also attributable to lower income from merchant credit card processing fees, which fell from $45,000 for the third quarter of 2007 to $24,000 in the same quarter of 2008. This decrease was mostly attributable to the decision of several significant credit card processing customers to move their credit card processing relationship away from the Company in 2008.

Noninterest income for the nine months ended September 30, 2008 was $6,837,000 compared with $1,511,000 for the same period of 2007 an increase of $5,326,000 or 352 percent. This increase was primarily due to a gain of $5,587,000 resulting from Visa, Inc.’s IPO that occurred in March 2008. This amount included a cash gain of $3,465,000 recorded as a result of the mandatory redemption of a portion of the Company’s Visa shares. An additional non-cash gain of $2,122,000 was recorded as a result of Visa establishing an escrow account to cover certain litigation judgments and settlements that the Company had recorded in the fourth quarter of 2007. This gain was partially offset by a decline in service charge fee income due to a decrease in NSF fees of $167,000 and a decrease in merchant credit card processing income of $66,000. Merchant credit card processing income fell as a result of the loss of several credit card processing customers in 2008.

Noninterest expense was $4,148,000 in the third quarter of 2008, compared to $3,103,000 in the same quarter of 2007, an increase of $1,045,000, or 34 percent. The increase is primarily due to the $572,000 non-cash charge the Company recorded in the third quarter of 2008 for its Visa, Inc. obligation to indemnify certain litigation matters. For further discussion of the Company’s indemnification obligation to Visa, Inc. see page 24, Contractual Obligations and Commitments. In addition, salaries and benefits expense rose to $1,764,000 for third quarter of 2008, from $1,517,000 for the same period in 2007. This was an increase of $247,000 or 16 percent, primarily attributable to the addition of approximately 8 full-time equivalent staff (“FTE’s”) as compared with the same quarter in 2007. This increase was partially offset by the elimination of the post-retirement benefits plan in late 2007. This reduced salaries expense for the third quarter of 2008 by $45,000 compared with the same quarter in 2007. Occupancy and equipment expense was $533,000 for the three months ended September 30, 2008, a $32,000 or 6 percent increase from the same period in 2007 and is primarily due to increased rent expense due to the opening of the Kent office in 2008. Data processing was $252,000 for the three months ended September 30, 2008 as compared to $232,000 for the same period in the previous year, an increase of $20,000 or 9 percent. Professional fees were up $67,000 or 96 percent from the third quarter of 2008 compared with the same period in 2007. This increase was mostly attributable to a rise in legal fees, some of which are related to pending recoveries on problem assets. Marketing expense for the third quarter was $122,000 compared with $140,000 for the same period in 2007, a decrease of $18,000 or 13 percent. State revenue and sales tax expense fell $21,000 or 14 percent from $150,000 for the quarter ended September 30, 2007 compared with $129,000 in the same quarter of 2008. This decrease was attributable to the Company’s lower revenues during the period. The rise in other noninterest expense of $146,000 to $639,000 for the third quarter of 2008 as compared to $493,000 in the same period in 2007 was primarily due to increased FDIC premium assessments. In 2007, other noninterest expense was decreased 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.

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Noninterest expense for the nine months ended September 30, 2008 was $11,002,000 compared with $9,038,000 for the same period of 2007, an increase of $1,964,000 or 22 percent. The increase is mainly due to the $572,000 non-cash charge recognized in the third quarter of 2008 for the Company’s indemnification obligation to Visa, Inc. For further discussion of the Company’s indemnification obligation to Visa, Inc. see page 24, Contractual Obligations and Commitments. Additionally, the increase in noninterest expense was partially due to an increase in salaries and benefits expense of $468,000, or 11 percent for the nine months ended September 30, 2008, as compared with the same period in 2007, primarily a result of the addition of approximately 12 FTE’s. The increase of $159,000, or 11 percent, in occupancy expense for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 was primarily due to costs associated with the opening of the Kent branch office in April 2008. Data processing increased $12,000 or 2 percent for the nine months ended September 30, 2008 as compared with the same period in 2007. Professional fees increased $94,000, or 36 percent for the nine months ended September 30, 2008 as compared with $262,000 for the same period in 2007, mostly attributable to loan legal fees. Marketing expense grew to $489,000 for the year-to-date period ended September 30, 2008 from $366,000 for the same period in 2007, an increase of $123,000 or 34 percent primarily due to the sponsorship of the Seattle Streetcar and related advertising which began in 2008. State revenue and sales tax expense for the first nine months of 2008 increased by $55,000 or 14 percent primarily due to increased revenues in 2008 as compared to the same period in 2007 related to the gain resulting from Visa, Inc.’s IPO recognized in the first quarter of 2008. The increase in other noninterest expense of $481,000 or 33 percent for the first nine months of 2008 as compared to the same nine months in 2007 is primarily related to an increase in FDIC insurance premiums, which grew $208,000 from the first nine months of 2007 to the same period in 2008. In 2007, 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.

Income tax expense

The Company recognized an income tax benefit of $57,000 during the third quarter of 2008, compared with income tax expense of $383,000 in the same quarter of 2007, a decrease of 115 percent, or $440,000. Income tax expense for the nine months ended September 30, 2008 was $1,499,000, compared to $1,047,000 for the same period of 2007, an increase of 43 percent or $452,000. The effective income tax rate for the third quarter of 2008 was 54 percent as compared with 32 percent for the same period in 2007. The effective tax rate for the nine months ended September 30, 2008 was 30 percent as compared to 32 percent for the same period in 2007.

Provision and Allowance for Loan Losses

Included in the results of operations for the quarters ended September 30, 2008 and 2007 is expense of $501,000 and $525,000, respectively, related to the provision for loan losses. The provision for loan losses for the nine months ended September 30, 2008 was $2,842,000 compared to $1,021,000 for the same period of 2007. The increase in the provision for loan losses was a result of an increase in the allowance allocated to impaired loans, an increase in net charge-offs, and as a result of loan growth.

FINANCIAL CONDITION

Loans

At September 30, 2008, loans totaled $422,521,000 compared to $375,428,000 at December 31, 2007, an increase of $47,093,000 or 13 percent.

At September 30, 2008, the Bank had $355,577,000 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, 2008 and December 31, 2007:

Types of Loans

(in thousands)	September 30, 2008		% of loans in each category to total loans	December 31, 2007		% of loans in each category to total loans
Commercial	$	94,503	22	$	89,146	24
Real estate:
Commercial		218,556	52		159,167	42
Construction		53,276	13		58,968	16
Residential 1-4 family		33,232	8		44,598	12
Consumer and other		22,954	5		23,549	6
Total	$	422,521	100	$	375,428	100

Allowance for Loan Losses

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, 2008, there can be no assurance that such losses will not exceed estimated amounts.

Over the past few months, significant deterioration in the national economy has become more apparent. To a lesser degree to date, the local economy is also showing signs of slowdown. Residential real estate sales volumes have declined and the housing prices have declined modestly in the Company’s market area. While net loan charge-offs and the provision for loan losses both increased quarter over quarter, the Company has not yet experienced broad-based credit quality deterioration in any segment of its loan portfolio. The Company recognizes, however, that further deterioration in the local economy could adversely affect cash flows for both commercial and individual borrowers. As a result, the Company could experience increases in problem assets, delinquencies, and losses on loans.

At September 30, 2008, the allowance for loan losses was $6,085,000 compared to $4,166,000 at December 31, 2007. The ratio of the allowance to total loans outstanding was 1.44 percent at September 30, 2008, and 1.11 percent at December 31, 2007.

In the following table, the allowance for loan losses at September 30, 2008 and December 31, 2007 has been allocated among major loan categories based on a number of factors including quality, volume, current economic outlook, and other business considerations.

(in thousands)	September 30, 2008 Amount			% of Loans in Each Category to Total Loans	December 31, 2007 Amount			% of Loans in Each Category to Total Loans
Commercial	$	1,872		22	$	1,644		24
Real estate:
Commercial		1,766		52		1,526		42
Construction		1,827		13		663		16
Residential 1-4 family		255		8		42		12
Consumer and other		365		5		291		6
Total	$	6,085		100	$	4,166		100
% of Loan portfolio		1.44	%			1.11	%

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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.

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

(in thousands)	Nine months ended September 30, 2008		Nine months ended September 30, 2007
Beginning Balance	$	4,166	$	2,784
Chargeoffs
Commercial		717		120
Real estate:
Commercial		—		—
Construction		—		—
Residential 1-4 family		103		—
Consumer and other		166		40
Total charge-offs		986		160
Recoveries
Commercial		13		61
Real estate:
Commercial		—		—
Construction		—		—
Residential 1-4 family		25		—
Consumer and other		25		4
Total Recoveries		63		65
Net chargeoffs/(recoveries)		923		95
Provision		2,842		1,021
Ending balance	$	6,085	$	3,710

Nonperforming loans at September 30, 2008 and December 31, 2007 were as follows:

(in thousands except ratio data)	September 30, 2008			December 31, 2007
Loans past due 90 days or more and still accruing	$	20		$	36
Loans accounted for on a nonaccrual basis		8,650			779
Nonperforming loans to allowance for loan losses		142.5	%		19.6	%
Nonperforming loans to total loans		2.05	%		0.22	%

A portion of the allowance for loan losses is allocated to impaired loans. A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. Information with respect to impaired loans and the related allowance for loan losses is as follows (in thousands):

	September 30, 2008		December 31, 2007
Impaired loans for which no allowance for loan losses was allocated	$	4,314	$	898
Impaired loans with an allocation of the allowance for loan losses		5,042		779
Total	$	9,356	$	1,677
Amount of the allowance for loan losses allocated	$	1,758	$	630

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Impaired loans were $9,356,000 at September 30, 2008 as compared to $7,390,000 at June 30, 2008 and $1,677,000 at December 31, 2007. Of the $1,758,000 in allowance for loan losses allocated, $1,200,000 was charged off in October 2008. Accordingly, these charge-offs will be considered in the Company’s historical loss factors in future evaluations of the adequacy of the allowance for loan losses.

Investments

At September 30, 2008, investments totaled $14,629,000, an increase of $183,000 or 1 percent from $14,446,000 at December 31, 2007. The increase in investments was primarily due to net purchases of additional Federal Home Loan Bank (“FHLB”) stock totaling approximately $1,700,000 and two new securities totaling $3,000,000. These were mostly offset by 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, 2008, total deposits were $360,262,000, compared to $309,471,000 at December 31, 2007, a 16 percent increase. Noninterest-bearing deposits totaled $51,622,000 at September 30, 2008 compared to $59,458,000 at December 31, 2007, a decrease of $7,836,000 or 13 percent. Approximately $6,326,000 or 81 percent of the decrease was attributable to a decision made by PEMCO Financial Services Group (“PFS”) to move a portion of their deposit relationship away from the Company in 2008. Interest-bearing deposits totaled $308,640,000 at September 30, 2008, compared to $250,013,000 at December 31, 2007, an increase of $58,627,000 or 23 percent.

Approximately $41,566,000 or 71 percent of the net growth in interest-bearing deposits in the first nine months of 2008 was through the use of non-retail deposit sources, including brokered and bulletin board certificates of deposit. At September 30, 2008, brokered and bulletin board deposits balances totaled $136,792,000 compared with $95,226,000 on December 31, 2007.

Borrowings and Junior Subordinated Debt

At September 30, 2008, the Bank’s Federal Home Loan Bank advances were $59,725,000 compared to $69,910,000 at December 31, 2007, a 15 percent decrease. The decrease is attributable to net repayment of advances that matured during the period.

At September 30, 2008 and December 31, 2007 the Company had junior subordinated debt totaling $12,372,000. For discussion 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, 2007.

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Stockholders’ Equity and Capital Resources

Stockholders’ equity totaled $28,708,000 at September 30, 2008, an increase of $3,030,000 or 12 percent over December 31, 2007. Current earnings were $3,511,000 and dividends paid were $505,000 for the nine months ended September 30, 2008. The change in unrealized losses on securities available-for-sale, net of deferred taxes, reduced stockholders’ equity by $31,000. Stockholders’ equity increased by $91,000 in common stock and surplus due to the recognition of stock option compensation expense, and by $206,000 in surplus from the exercise of 21,805 stock options in the first nine months of 2008.

Book value per share was $11.85 at September 30, 2008 and $10.65 at December 31, 2007. Book value per share is calculated by dividing total equity by total shares outstanding.

The following table displays the capital ratios at September 30, 2008 and December 31, 2007 for the Company and the Bank. Banking regulators require holding companies and banks to maintain certain minimum capital levels. As the table illustrates, the Bank’s capital ratios exceed those required for the Bank to be considered well-capitalized. On October 3, 2008, Congress approved and the President signed the Emergency Economic Stabilization Act of 2008 (the “Act”). The Troubled Assets Relief Program (“TARP”) is the heart of the Act and provides the Secretary of the Treasury the authority to purchase troubled assets from eligible financial institutions in an aggregate amount of up to $700 billion. Under the Act, the Treasury created the Capital Purchase Program (“CPP”) that enables the federal government to purchase equity in participating financial institutions to help restore credit markets. Application to participate in the CPP must be submitted by November 14, 2008. The Company is considering possible participation in the CPP.

(in thousands, except ratio data)	Actual				Minimum for Capital Adequacy Purposes				Minimum to Be Well Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2008
Total capital (to risk-weighted assets)
Consolidated	$	46,307	11.17	%	$	33,236	8.00	%		N/A	N/A
Bank		45,504	11.02			33,137	8.00		$	41,421	10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		38,323	9.24			16,618	4.00			N/A	N/A
Bank		40,329	9.76			16,568	4.00			24,852	6.00
Tier 1 capital (to average assets)(1)
Consolidated		38,323	8.33			18,406	4.00			N/A	N/A
Bank		40,329	8.84			18,259	4.00			22,824	5.00
December 31, 2007
Total capital (to risk-weighted assets)
Consolidated	$	41,977	11.24	%	$	29,877	8.00	%		N/A	N/A
Bank		41,200	11.28			29,212	8.00		$	36,515	10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		33,951	9.09			4,938	4.00			N/A	N/A
Bank		37,034	10.14			14,606	4.00			21,909	6.00
Tier 1 capital (to average assets)(1)
Consolidated		33,951	8.19			16,585	4.00			N/A	N/A
Bank		37,034	8.97			16,518	4.00			20,647	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.

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At September 30, 2008, the Company had commitments to extend credit and contingent liabilities under lines of credit, standby letters of credit and similar arrangements totaling $85,048,000. 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.

The Company, as a Visa member bank, is obligated to indemnify Visa for certain litigation losses. In the fourth quarter of 2007, the Company recognized indemnification charges of $2,122,000 related to this obligation. A receivable was recorded to offset the litigation reserve in March 2008 when, upon completion of its IPO, Visa, Inc. established an escrow account to be used to settle certain litigation judgments and settlements. In October 2008, the Company received notice from Visa, Inc. that it had reached a settlement in principle with Discover Financial Services, and as a result of the settlement recorded additional indemnification charges and an increase in its litigation liability totaling $572,000. In addition, the Company recorded a reduction of $1,113,000 in the receivable it booked in March 2008 due to payments made by Visa to American Express that reduced its litigation liability. The Company currently owns approximately 129,000 shares of Visa, Inc. Class B common stock, which will convert into approximately 92,000 shares of Class A common stock using the current conversion rate. The Company expects that it will be able to record a gain that will fully offset the $572,000 indemnification charges when Visa adjusts the conversion rate between Class A and Class B Visa, Inc. shares of common stock, currently scheduled to occur in the fourth quarter of 2008. The Company expects that the shares it owns of Visa Inc., which are currently restricted, will be sufficient to cover any future possible litigation against Visa, Inc.

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, 2007.

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, 2008:

(in thousands)	Within 1 Year		1-3 Years		3-5 Years		After 5 Years		Total
Federal Home Loan Bank advances	$	28,000	$	5,675	$	17,050	$	9,000	$	59,725
Junior subordinated debt		—		—		—		12,372		12,372
Time Deposits		214,143		10,709		1,344		—		226,196
Operating leases		907		1,626		1,025		1,167		4,725
Total	$	243,050	$	18,010	$	19,419	$	22,539	$	303,018

Liquidity

Liquidity is defined as the ability to provide sufficient cash to fund operations and meet obligations and commitments on a timely basis.

Liquidity is provided in part by cash flows from operations. As indicated on the Consolidated Statement of Cash Flows, net cash from operating activities for the nine months ended September 30, 2008, contributed $2,476,000 to liquidity compared to $3,205,000 for the nine months ended September 30, 2007. In addition to cash and cash equivalents, asset liquidity is provided by the available-for-sale securities portfolio. Approximately 10 percent of the investment balances within this portfolio mature within one year. Funding needs are met through existing liquidity balances, deposit growth, FHLB advances and other borrowings, as well as the repayment of existing loans and the sale of loans.

Subject to the availability of eligible collateral and certain requirements, the Company’s credit line with the Federal Home Loan Bank (“FHLB”) is 30% of Bank assets or up to approximately $139,129,000 at current asset levels. At September 30, 2008, the Company had $59,725,000 in advances and an unused line of credit from FHLB of approximately $42,327,000 subject to the ability to pledge eligible collateral. The Company also has a total of $20,500,000 in Federal funds lines with four correspondent banks.

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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. Management utilizes various tools to manage its liquidity position including pro forma cash flow statements to identify any potential funding shortfalls or gaps. In addition, the Company has an established a Contingency Funding Plan, which identifies potential liquidity risks and details managements’ roles and responsibilities in the event of a liquidity stress situation.

In the opinion of management, liquid assets and available credit lines are considered adequate to meet anticipated cash flow needs for loan funding and depositor withdrawals. The recent turmoil in the credit markets did not have a direct impact on the Company’s liquidity management practices; access to the FHLB, the brokered deposit market, and our correspondent banks, remained open.

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, 2008 and 2007. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 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, 2007. 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, 2008:

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

IMMEDIATE RATE CHANGE	ANNUALIZED DOLLAR CHANGE IN NET INTEREST INCOME		PERCENT CHANGE
+200bp	(763	)	(4.79	)
+100bp	(407	)	(2.55	)
+ 50bp	(217	)	(1.36	)
- 50bp	183		1.15
-100bp	429		2.69
-200bp	415		2.61

The table above indicates, for example, that the estimated effect of an immediate 100 basis point increase in interest rates would decrease the Company’s net interest income by an estimated 2.55 percent or approximately $407,000. An immediate 100 basis point decrease in rates indicates a potential increase in net interest income by 2.69 percent or approximately $429,000.

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

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

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2008. Based

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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 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

Our business exposes us to certain risks. The following is a discussion of the most significant risks and uncertainties that may affect our business, financial condition, and future results.

• Fluctuating interest rates can adversely affect our profitability

Our profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread, and, in turn, our profitability. We cannot make assurances that we can minimize our interest rate risk. In addition, interest rates also affect the amount of money we can lend. When interest rates rise, the cost of borrowing also increases. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume, business and prospects. We assess rate risk by various means including analysis of financial data and by modeling the impact of rate changes on financial performance. Current information suggests that the Company is slightly “asset-sensitive,” suggesting that rising interest rates may tend to increase net interest income and improve profits, and that falling interest rates would have the opposite effect.

• Our allowance for loan losses may not be adequate to cover actual loan losses, which could adversely affect our earnings and capital

We maintain an allowance for loan losses in an amount that we believe is adequate to provide for probable incurred losses in the portfolio. While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that are identified. As a result, future additions to the allowance may be necessary. Additionally, future additions to the allowance may be required based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions or as a result of incorrect assumptions by management in determining the allowance. Furthermore, federal banking regulators, as an integral part of their supervisory function,

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periodically review our allowance for loan losses. These regulatory agencies may require us to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses could have a negative effect on our financial condition and results of operation.

• We cannot predict the effect of the recently enacted federal rescue plan

Congress recently enacted the Emergency Economic Stabilization Act of 2008, which is intended to stabilize the financial markets, including providing funding of up to $700 billion to purchase troubled assets and loans from financial institutions. The legislation also increases the amount of deposit account insurance coverage from $100,000 to $250,000 for interest-bearing deposit accounts and non-interest bearing transaction accounts, the latter of which are fully insured until December 31, 2009. Most recently, the federal government agreed to invest $125 billion in preferred stock of nine U.S. financial institutions, and to make available up to another $125 billion for investment in preferred stock of other U.S. financial institutions, on certain terms and conditions. The full effect of this wide-ranging legislation on the national economy and financial institutions, particularly on mid-sized institutions like us, cannot now be predicted.

• Our loan portfolio contains a high percentage of commercial and commercial real estate loans in relation to our total loans and total assets

Commercial and commercial real estate loans generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. These types of loans also typically are larger than residential real estate loans. Further deterioration in the local economy could adversely affect cash flows for both commercial and individual borrowers, thus causing the Company to experience increases in problem assets, delinquencies, and losses on loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in: a loss of earnings from these loans; an increase in the provision for loan losses; or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.

• Further economic downturn in the market area we serve may cause us to have lower earnings and could increase our credit risk associated with our loan portfolio

The inability of borrowers to repay loans can erode our earnings. Substantially all of our loans are to businesses and individuals in the Seattle, Bellevue, Lynnwood, Federal Way, and Kent communities, and any further decline in the economy of this market area could impact us adversely. As a lender, we are exposed to the risk that our customers will be unable to repay their loans in accordance with their terms, and that any collateral securing the payment of their loans may not be sufficient to assure repayment.

• Further tightening of the credit market may make it difficult to obtain available money to fund loan growth, which could adversely affect our earnings

A tightening of the credit market and the inability to obtain adequate money to fund continued loan growth may negatively affect our asset growth and liquidity position and, therefore, our earnings capability. In addition to core deposit growth, maturity of investment securities and loan payments, the Bank also relies on alternative funding sources through correspondent banking and a borrowing line with the FHLB to fund loans. In the event of a downturn in the economy, particularly in the housing market, these resources could be negatively affected, which would limit the funds available to the Bank.

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• Competition in our market area may limit our future success

Commercial banking is a highly competitive business. We compete with other commercial banks, savings and loan associations, credit unions, and finance companies operating in our market area. We are subject to substantial competition for loans and deposits from other financial institutions. Some of our competitors are not subject to the same degree of regulation and restriction as we are. Some of our competitors have greater financial resources than we do. We compete for funds with other financial institutions that, in most cases, are significantly larger and able to provide a greater variety of services than we do and thus may obtain deposits at lower rates of interest. If we are unable to effectively compete in our market area, our business and results of operations could be adversely affected.

• There is not significant trading activity of our shares, which could result in price volatility

Our shares are traded on the OTC Bulletin Board under the symbol “EVGG.” There is not what would be characterized as an active trading market for the shares, and trading volume is not substantial. Accordingly, the trading price of our shares may be more susceptible to fluctuation, for example in the event of a transaction involving a significant block of shares, than a stock that was more actively traded. There can be no assurance that an active and liquid market for our common stock will develop. Accordingly, shareholders may find it difficult to sell a significant number of shares at the prevailing market price.

• We would be adversely affected if we lost the services of key personnel

We depend upon the services of Gerald Hatler, our President and CEO, and the experienced management he has assembled. The loss of Mr. Hatler in particular, if not replaced shortly with an equally competent person, could disrupt our operations and have an adverse effect on us. If Mr. Hatler were to die, EvergreenBank has a bank owned life insurance policy that would provide approximately $831,000. The proceeds from this death benefit could be used to mitigate costs that we may incur in locating and hiring a replacement.

Our business success is also dependent upon our ability to continue to attract, hire, motivate and retain skilled personnel to develop our customer relationships, as well as new financial products and services. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or solicit their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult. The market for these people is competitive, and we cannot be assured that we will be successful in attracting, hiring, motivating or retaining them.

• There are restrictions on changes in control of the Company that could decrease our shareholders’ chance to realize a premium on their shares

As a Washington corporation, we are subject to various provisions of the Washington Business Corporation Act that impose restrictions on certain takeover offers and business combinations, such as combinations with interested shareholders and share repurchases from certain shareholders. Provisions in our Articles of Incorporation requiring a staggered Board and/or containing fairness provisions could have the effect of hindering, delaying or preventing a takeover bid. These provisions may inhibit takeover bids and could decrease the chance of shareholders realizing a premium over market price for their shares as a result of the takeover bid.

• The FDIC has increased deposit insurance premiums to rebuild and maintain the federal deposit insurance fund, which could have a material affect on earnings

Due to recent events and the state of the economy, the FDIC has significantly increased federal deposit insurance premiums beginning in the first quarter of 2009. The increase of these premiums will add to our cost of operations and could have a significant impact on the Company.

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

None

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None.

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 5, 2008

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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