10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2005
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	(No Fee Required)

Commission file number 000-32915

EvergreenBancorp, Inc.

(Exact name of Registrant as specified in its Charter)

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

301 Eastlake Avenue East, Seattle, Washington 98109

(Address of Principal Executive Offices) (ZIP Code)

Registrant’s telephone number, including area code:

(206) 628-4250

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value per share

      Indicate by checkmark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o          No þ

      Indicate by checkmark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o          No þ

      Indicate by checkmark 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 twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.     Yes þ          No o

      Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

      Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

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

      Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o          No þ

      The aggregate market value of the voting common equity held by non-affiliates, based on the closing price as quoted on the OTC Bulletin Board at June 30, 2005 (the last business day of the most recent second fiscal quarter), was $26,587,849.

      The number of shares outstanding of the registrant’s no par value common stock as of March 15, 2006 was 2,000,467 shares.

DOCUMENTS INCORPORATED BY REFERENCE

      Designated portions of the Proxy Statement for the 2006 Annual Meeting of Shareholders (Part III, Items 10-14).

EVERGREENBANCORP, INC.

FORM 10-K

ANNUAL REPORT

TABLE OF CONTENTS

		Page
	PART I		3
Item 1.	Business		3
Item 1A.	Risk Factors		10
Item 1B.	Unresolved Staff Comments		11
Item 2.	Properties		11
Item 3.	Legal Proceedings		12
Item 4.	Submission of Matters to a Vote of Security Holders		12
	PART II		12
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		12
Item 6.	Selected Consolidated Financial Data		14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		33
Item 8.	Financial Statements and Supplementary Data		33
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		60
Item 9A.	Controls and Procedures		60
Item 9B.	Other Information		60
	PART III		60
Item 10.	Directors and Executive Officers of the Registrant		60
Item 11.	Executive Compensation		60
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		61
Item 13.	Certain Relationships and Related Transactions		61
Item 14.	Principal Accounting Fees and Services		61
	PART IV		61
Item 15.	Exhibits and Financial Statement Schedules		61
SIGNATURES			63
EXHIBIT 21
EXHIBIT 23
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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PART I

Forward-Looking Information Statement

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

Item 1. Business

EvergreenBancorp, Inc.

      EvergreenBancorp, Inc. is a bank holding company organized under the laws of the State of Washington. Bancorp was formed in 2001 pursuant to the reorganization of EvergreenBank (“the Bank”), whereby the Bank became a wholly owned subsidiary of Bancorp. This tax-free reorganization resulted in a share-for-share exchange of stock whereby stockholders of the Bank became stockholders of Bancorp. The bank holding company structure provides flexibility for financing and growth, as well as for acquiring or establishing other banking operations or businesses related to banking. In May 2002, Bancorp formed EvergreenBancorp Capital Trust I (“the Trust”) to raise capital through a trust preferred securities offering. Prior to 2003, the Trust was consolidated in the Company’s financial statements. Under current accounting guidance, the Trust is no longer consolidated with the Company. Bancorp and Bank are collectively referred to herein as “the Company.” The terms “we,” “us,” and “our” refer to Bancorp, Bank or Trust where applicable. Additional information regarding the Trust can be found in Note 8, “Borrowings and Junior Subordinated Debt” to the notes to the consolidated financial statements.

      The Company remains committed to community banking and intends to remain community-focused. In 2005, the Bank continued to conduct its banking business in substantially the same manner as in prior years. The Company continues to look for possible acquisition opportunities that can offer both compatibility of business operations and enhanced shareholder value. The Board’s philosophies and overall structure remain unchanged.

      The Company’s consolidated net income for 2005 was $966,000, or $0.48 per basic share ($0.47 per diluted share), and its consolidated equity at December 31, 2005 was $17,736,000, with 2,000,467 common shares outstanding and a book value of $8.87 per share. At December 31, 2005, the Company had total consolidated assets of approximately $249,192,000, loans of approximately $189,188,000, and deposits of approximately $199,890,000. For more information regarding the Company’s financial results, see “Manage-

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ment’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements and Supplementary Data” of this 10-K report.

EvergreenBank

      EvergreenBank is a Washington chartered commercial bank organized in 1971 under the name Teachers State Bank with its main office at 301 Eastlake Avenue East in Seattle (“Eastlake” office). Since 1993, the Bank has opened five additional offices located in Lynnwood, Bellevue, Federal Way, and Seattle. Over the years, the Bank has changed its business focus. In the late seventies, regulatory changes that allowed credit unions to issue drafts against their members’ share accounts created an opportunity for the Bank. In 1977, the Bank began marketing a share draft system that could process credit union’s share drafts for the Federal Reserve System. To reflect the Bank’s growing interest in consumer and commercial markets, and to clarify for potential customers that the Bank’s products and services were not limited to “teachers,” in 1980, its name was changed to “EvergreenBank.” In early 2000, because of narrowing profit margins and increased competition in the check clearing business, the Bank withdrew from that business and management began to restructure the Bank’s balance sheet and focus primarily on its business in consumer and commercial lending and deposits. The Bank now focuses on general commercial banking business, offering commercial banking services to small and medium-sized businesses, professionals, and retail customers in its market area.

Market

      The Bank’s primary market area consists of King, Pierce, and Snohomish counties in western Washington. The Bank began its operations in 1971 from its Eastlake office location in Seattle and has since expanded its market with the addition of five offices since 1993 within a 25-mile radius of Seattle.

      Deposit accounts include certificates of deposit, individual retirement accounts and other time deposits, checking and other demand deposit accounts, interest-bearing checking accounts, savings accounts, health savings accounts, and money market accounts. Loans include commercial, real estate construction and development, installment and consumer loans, and residential real estate. Other products and services include merchant credit card processing, financial planning and investment services, cash management services, electronic funds transfers, electronic tax payment, and safe deposit boxes. The Bank also offers 24-hour telephone banking, an ATM network, as well as Internet banking and bill paying services.

Competition

      Commercial banking in the state of Washington is highly competitive with respect to providing banking services, including making loans and attracting deposits. The Bank competes with other banks, as well as with savings and loan associations, savings banks, credit unions, mortgage companies, investment banks, insurance companies, securities brokerages, and other financial institutions. Banking in Washington is dominated by several large banking institutions, including U.S. Bank, Wells Fargo Bank, Key Bank, Bank of America, and Washington Mutual Bank, which together account for over 60 percent of the total commercial and savings bank deposits in Washington. These competitors have significantly greater financial resources and offer a greater number of branch locations (with statewide branch networks), higher lending limits, and a variety of services not offered by the Bank. In addition, the Bank has experienced competition for both deposits and loans from “non-bank” financial service providers, such as brokerage firms, captive automobile financing and equipment leasing companies.

      The adoption of the Gramm-Leach-Bliley Act of 1999 (“the Financial Services Modernization Act”) in November 1999 has led to further intensification of competition in the banking industry. The Financial Services Modernization Act has eliminated many of the barriers to affiliation among providers of various types of financial services and has permitted business combinations among financial providers such as banks, insurance companies, securities or brokerage firms, and other financial service providers. This has led to increased competition in both the market for providing financial services and in the market for acquisitions in which Bancorp also participates.

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      In general, the financial services industry has experienced widespread consolidation in recent years. The Company anticipates that consolidation among financial institutions in its market area will continue. Other financial institutions, many with substantially greater resources, compete in the acquisition market against the Company. Some of these institutions, among other items, have greater access to capital markets, larger cash reserves, and a more liquid currency than the Company. Additionally, the rapid adoption of financial services through the Internet has reduced the barrier to entry by financial services providers physically located outside our market area. Although the Company has been able to compete effectively in the financial services business in its markets to date, there can be no assurance that it will be able to continue to do so in the future.

Employees

      On December 31, 2005, the Bank employed 64 full-time employees and 2 part-time employees. Employees are not represented by any collective bargaining agreement. Management considers its relations with employees to be good.

EvergreenBancorp Capital Trust I

      On May 23, 2002, Bancorp completed an issuance of $5 million in trust preferred securities through a newly formed special purpose business trust, EvergreenBancorp Capital Trust I. The securities were sold in a private placement pursuant to an exemption from registration under the Securities Act of 1933, as amended.

      Under the terms of the transaction, the trust preferred securities have a maturity of 30 years and the holders are entitled to receive cumulative cash distributions on a quarterly basis at a variable annual rate, reset quarterly, equal to the three month LIBOR plus 3.50 percent. The securities are not redeemable until 2007 except in the event of certain special redemption events. Most of the proceeds from the sale of the securities were contributed to the Bank as Tier 1 capital to support lending and other operations.

SUPERVISION AND REGULATION

General

      We are extensively regulated under federal and state law. These laws and regulations are primarily intended to protect depositors, not shareholders. The discussion below describes and summarizes certain statutes and regulations. These descriptions and summaries are qualified in their entirety by reference to the particular statute or regulation. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our operations may also be affected by changes in the policies of banking and other government regulators. We cannot accurately predict the nature or extent of the possible future effects on our business and earnings of changes in fiscal or monetary policies, or new federal or state laws and regulations.

Federal Bank Holding Company Regulation

      General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended, and is therefore subject to regulation, supervision, and examination by the Federal Reserve. In general, the Bank Holding Company Act limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. The Company must also file reports with the Federal Reserve and must provide it with such additional information as it may require. Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain expanded activities deemed financial in nature, such as securities brokerage and insurance underwriting.

      Holding Company Bank Ownership. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before (1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it

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would own or control more than 5% of such shares, (2) acquiring all or substantially all of the assets of another bank or bank holding company, or (3) merging or consolidating with another bank holding company.

      Holding Company Control of Nonbanks. With some exceptions, the Bank Holding Company Act also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.

      Transactions with Affiliates. Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in their securities, and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for payment of dividends, interest, and operational expenses.

      Tying Arrangements. We are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services. For example, with certain exceptions, neither the Company nor the Bank may condition an extension of credit to a customer on either (1) a requirement that the customer obtain additional services provided by us or (2) an agreement by the customer to refrain from obtaining other services from a competitor.

      Support of Subsidiary Banks. Under Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to the Bank. This means that the Company is required to commit, as necessary, resources to support the Bank. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.

      State Law Restrictions. As a Washington corporation, the Company is subject to certain limitations and restrictions under applicable Washington corporate law. For example, state law restrictions in Washington include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers, or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.

Federal and State Regulation of EvergreenBank

      General. The Bank is a Washington chartered commercial bank with deposits insured by the FDIC. As a result, the Bank is subject to supervision and regulation by the Washington State Department of Financial Institutions, Division of Banks and the FDIC. These agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe or unsound banking practices.

      Community Reinvestment. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluate the record of the financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.

      Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders, or any related interests of such persons. Extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not covered above, and (2) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, the imposition of a cease and desist order, and other regulatory sanctions.

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      Regulation of Management. Federal law (1) sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency; (2) places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and (3) prohibits management personnel of a bank from serving as a director or in a management position of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

      Safety and Soundness Standards. Federal law imposes upon banks certain non-capital safety and soundness standards. These standards cover, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, and benefits. Additional standards apply to asset quality, earnings, and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to its regulators, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.

Interstate Banking and Branching

      The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) permits nationwide interstate banking and branching under certain circumstances. This legislation generally authorizes interstate branching and relaxes federal law restrictions on interstate banking. Currently, bank holding companies may purchase banks in any state, and states may not prohibit these purchases. Additionally, banks are permitted to merge with banks in other states, as long as the home state of neither merging bank has opted out under the legislation. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area.

      FDIC regulations prohibit banks from using their interstate branches primarily for deposit production. The FDIC has implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

      Washington enacted “opting in” legislation in accordance with the Interstate Act, allowing banks to engage in interstate merger transactions, subject to certain “aging” requirements. Until recently, Washington restricted out-of-state banks from opening de novo branches, however, in 2005, Washington interstate branching laws were amended so that an out-of-state bank may, subject to the Director’s approval, open de novo branches in Washington or acquire an in-state branch so long as the home state of the out-of-state bank has reciprocal laws with respect to de novo branching or branch acquisitions. Once an out-of-state bank has acquired a bank within Washington, either through merger or acquisition of all or substantially all of the bank’s assets or through authorized de novo branching, the out-of-state bank may open additional branches within the state.

Deposit Insurance

      The Bank’s deposits are currently insured to a maximum of $100,000 per depositor (in some instances up to $100,000 per deposit account, depending on the ownership category of the account) through the Bank Insurance Fund administered by the FDIC. The Bank is required to pay deposit insurance premiums, which are assessed semiannually and paid quarterly. The premium amount is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern. Under the Federal Deposit Insurance Reform Act of 2005, the Bank Insurance Fund will be merged with the Savings Association Insurance Fund into a new Deposit Insurance Fund, and the maximum deposit insurance amounts will be subject to inflation adjustments every five years, commencing April, 2010.

      The FDIC is also empowered to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary.

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Dividends

      The principal source of Bancorp’s cash reserves is dividends received from the Bank. The payment of dividends is subject to government regulation, in that regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if doing so would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. State laws also limit a bank’s ability to pay dividends.

Capital Adequacy

      Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.

      Tier 1 and Tier 2 Capital. Under the guidelines, an institution’s capital is divided into two broad categories, Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common stockholders’ equity, surplus, and undivided profits. Tier 2 capital generally consists of the allowance for loan losses, hybrid capital instruments, and term subordinated debt. The sum of Tier 1 capital and Tier 2 capital represents an institution’s total capital. The guidelines require that at least 50% of an institution’s total capital consist of Tier 1 capital.

      Risk-Based Capital Ratios. The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institution’s risk-weighted assets are then compared with its Tier 1 capital and total capital to arrive at a Tier 1 risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier 1 risk-based ratio of 4% and a minimum total risk-based ratio of 8%.

      Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier 1 capital as a percentage of total assets, less intangibles. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, regulators expect an additional cushion of at least 1% to 2%.

      Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from “well-capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory supervisory corrective actions.

Corporate Governance and Accounting Legislation

      Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (“the Act”) addresses corporate and accounting fraud. The Act established a new accounting oversight board to enforce auditing standards and restricted the scope of services that accounting firms may provide to their public company audit clients. Among other things, the Act also (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (“the SEC”); (ii) imposes new disclosure requirements regarding internal controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; and (iv) requires companies to disclose whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert.”

      The Act also requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings. To deter wrongdoing, the Act: (i) subjects bonuses issued to top executives to

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disgorgement if a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer or director from misleading or coercing an auditor; (iii) prohibits insider trades during pension fund “blackout periods;” (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v) extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.

      As a publicly reporting company, we are subject to the requirements of the Act and related rules and regulations issued by the SEC. Currently, the SEC granted an extension to comply with the reporting requirements of Section 404 to 2007. We anticipate that we will incur additional expense, including ongoing compliance with Section 404, as a result of the Act, but we do not expect that such compliance will have a material impact on our business.

Anti-Terrorism Legislation

      USA PATRIOT Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) is intended to combat terrorism. Among other things, the USA PATRIOT Act (1) prohibits banks from providing correspondent accounts directly to foreign shell banks, (2) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals, (3) requires financial institutions to establish an anti-money-laundering compliance program, and (4) eliminates civil liability for persons who file suspicious activity reports. The Act also increases governmental powers to investigate terrorism, including expanded government access to account records. The Department of the Treasury is empowered to administer and make rules to implement the Act. While we believe the USA PATRIOT Act may, to some degree, affect our recordkeeping and reporting expenses, we do not believe that the Act will have a material adverse effect on our business and operations.

Financial Services Modernization

      Gramm-Leach-Bliley Act of 1999. The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act, brought about significant changes to the laws affecting banks and bank holding companies. Generally, the Act (i) repealed the historical restrictions on preventing banks from affiliating with securities firms; (ii) provided a uniform framework for the activities of banks, savings institutions, and their holding companies; (iii) broadened the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; (iv) provided an enhanced framework for protecting the privacy of consumer information; and (v) addressed a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.

      Bank holding companies that qualify and elect to become financial holding companies can engage in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities underwriting activities. In addition, in a change from previous law, bank holding companies will be in a position to be owned, controlled or acquired by any company engaged in financially related activities, so long as the company meets certain regulatory requirements. The act also permits national banks (and, in states with wildcard statutes, certain state banks), either directly or through operating subsidiaries, to engage in certain non-banking financial activities.

      We do not believe that the act will negatively affect our operations in the short term, however, to the extent the legislation permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. This consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than we currently offer, and these companies may be able to aggressively compete in the markets we currently serve.

Effects of Government Monetary Policy

      Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve can and does implement national monetary policy for such purposes as curbing inflation and combating recession. Its

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open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits influence the growth of bank loans, investments, and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.

Item 1A. Risk Factors

      Our business exposes us to certain risks. The following is a discussion of what management believes are currently 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. See page 32 for further discussion and analysis of interest rate risk.

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

      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, 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.

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 and other commercial 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

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for loan losses; or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.

An 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, and Federal Way communities, and any 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.

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 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 governing a staggered Board 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.

Item 1B. Unresolved Staff Comments

      There were no unresolved staff comments as of December 31, 2005.

Item 2. Properties

      The Bank conducts business from six leased office locations: the Eastlake office at 301 Eastlake Avenue East, northeast of downtown Seattle; the South Lake Union office at 307 Westlake Avenue North, northwest of downtown Seattle; the downtown Seattle office at 1111 Third Avenue, Seattle; the Lynnwood office located at 2502 196th Street Southwest, Lynnwood; the Bellevue office located at 110 110th Avenue Northeast, Bellevue; and the Federal Way office located at 1300 South 320th Street, Federal Way.

      The Company leases premises and parking facilities for the Eastlake and Lynnwood offices from PEMCO Mutual Insurance Company, under leases expiring from March 31, 2006 to March 31, 2007. The Company leases the Federal Way, South Lake Union, Bellevue, and downtown Seattle premises from other parties and those leases expire June 30, 2008, August 31, 2009, May 31, 2011, and April 30, 2015, respectively. See Note 14 “Leases” to the consolidated financial statements.

      Items of furniture, fixtures, and equipment are purchased as needed by the Bank. The Bank is responsible for maintenance, repairs, operating expenses, and insurance.

11

Item 3. 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 4. Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders in the fourth quarter of 2005.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

      Bancorp’s common stock is traded on the OTC Bulletin Board under the symbol “EVGG.” As of March 13, 2006, there were 618 holders of record of Bancorp’s common stock, and an estimated 343 holders of its stock in “street name” by brokerage firms.

      The table below shows, for the periods indicated, the reported high and low closing sale prices and cash dividends paid (adjusted to reflect the five-for-four stock split in November 2004 and the four-for-three stock split in October 2005).

	2005						2004
	Cash						Cash
	Dividend		High		Low		Dividend		High		Low
First Quarter		0.056		13.09		12.11		0.048		11.06		10.83
Second Quarter		0.056		14.07		11.80		0.048		10.83		10.42
Third Quarter		0.056		14.68		13.07		0.048		11.06		10.45
Fourth Quarter		0.060		16.93		13.49		0.048		13.50		10.97

      Holders of common stock are entitled to receive such dividends as may be declared by the Board of Directors from time to time and paid out of funds legally available. Because the Company’s consolidated net income consists largely of the net income of the Bank, Bancorp’s ability to pay dividends depends upon its receipt of dividends from the Bank. The Bank’s ability to pay dividends is regulated by banking statutes. See “Supervision and Regulation — Dividends” in Part I. The declaration of dividends by Bancorp is discretionary and depends on Bancorp’s earnings and financial condition, regulatory limitations, tax considerations, and other factors. In January 2004, the Board of Directors approved the move to quarterly dividends rather than annual. While the Board of Directors expects to continue to declare dividends, there can be no assurance that dividends will be paid in the future.

      Investor information, including Bancorp filings with the Securities and Exchange Commission and press releases, are available on Bancorp’s website at www.EvergreenBancorp.com, or by written request to EvergreenBancorp, Inc., 301 Eastlake Avenue East, Seattle, Washington, 98109, Attention: Investor Relations.

      Inquiries regarding stock transfers should be directed to Computershare Trust Company, Inc., 350 Indiana Street Suite 800, Golden, Colorado 80401, (800) 962-4284.

      No shares of common stock were repurchased by Bancorp during the fourth quarter of 2005.

12

Equity Compensation Plan Information

      We currently maintain one compensation plan that provides for the issuance of the Company’s common stock to officers and other employees, directors, and consultants. The Company’s Amended 2000 Stock Option Plan was approved by the shareholders. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the plan as of December 31, 2005:

					Number of Shares
	Number of Shares				Remaining Available for
	to be Issued		Weighted-Average		Future Issuance Under
	upon Exercise of		Exercise Price of		Equity Compensation
	Outstanding Options		Outstanding Options,		Plans (Excluding Shares
	Warrants and Rights		Warrants and Rights		Reflected in Column (a))
Plan Category	(a)		(b)		(c)
Equity compensation plans approved by shareholders(1)		228,250	$	9.32		68,675
Equity compensation plans not approved by shareholders		N/A		N/A		N/A
Total		228,250	$	9.32		68,675

(1)  Amounts have been adjusted to reflect all applicable stock splits and dividends paid on the Company’s common stock.

13

Item 6. Selected Consolidated Financial Data

	2005			2004			2003			2002			2001
	(In thousands, except per share and ratio data)
INCOME STATEMENT DATA
Net interest income	$	10,263		$	9,102		$	8,200		$	8,337		$	7,714
Provision for loan losses		423			321			233			330			479
Noninterest income		1,693			1,709			1,755			1,537			1,807
Noninterest expense		10,150			8,602			8,196			7,521			7,213
Net income		966			1,282			1,036			1,343			1,240
PER SHARE DATA(1)
Earnings per common share	$	0.48		$	0.64		$	0.52		$	0.68		$	0.62
Diluted earnings per common share		0.47			0.63			0.52			0.68			0.62
Dividends declared per common share		0.228			0.192			0.185			0.086			0.080
BALANCE SHEET DATA
Total loans	$	189,188		$	159,656		$	138,468		$	121,509		$	122,219
Allowance for loan losses		2,056			1,887			1,636			1,690			1,498
Real estate owned		—			—			2,659			—			—
Total assets		249,192			209,630			194,556			169,926			156,365
Total deposits		199,890			173,801			152,683			132,174			130,344
Total long-term debt		28,849			16,067			20,381			16,783			4,005
Stockholders’ equity		17,736			17,485			16,583			15,960			14,738
SELECTED FINANCIAL RATIOS
Return on average assets		0.45	%		0.66	%		0.60	%		0.82	%		0.83	%
Return on average equity		5.51			7.58			6.42			8.84			8.50
Dividend payout ratio		47.31			29.80			35.33			12.51			13.39
Average equity to average assets		8.16			8.71			9.29			9.31			9.70
Net interest margin (tax equivalent)		5.15			5.02			5.02			5.48			5.52
Allowance for loan losses to total loans at the end of year		1.09			1.18			1.18			1.39			1.23
Nonperforming loans to total loans at the end of year(2)		0.61			0.14			0.46			0.66			0.95
Net loans charged off to average total loans		0.16			0.05			0.24			0.11			0.26

(1)	All per share amounts have been adjusted to reflect all applicable stock splits and dividends paid on the Company’s common stock.
(2)	Nonperforming loans include nonaccrual loans, and other loans 90 days or more past due.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

      Bancorp is a Washington chartered bank holding company formed in 2001 and headquartered in Seattle, Washington. Bancorp has as its primary business activity ownership of EvergreenBank. The Bank’s principal business is personal and business banking. Services offered include commercial, real estate and consumer lending; savings, checking and certificate of deposit accounts; health savings accounts; financial planning and

14

investment services; ATM network; Internet banking; cash management services; and merchant credit card processing services. EvergreenBank operates six offices in Washington located in Seattle, Bellevue, Lynnwood, and Federal Way. The Bank’s newest locations include the South Lake Union office, which opened in November of 2004, and the Third and Seneca office, which opened in downtown Seattle in June of 2005. Generally speaking, new branches have a negative impact on earnings in the short term until they reach a level of assets to support the initial overhead expenses incurred.

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

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

      The following discussion should be read along with the accompanying financial statements and notes. All share and per-share information in this annual report has been restated to give retroactive effect to all applicable stock splits and dividends paid on the Company’s stock. In the following discussion, unless otherwise noted, references to increases or decreases in balances for a particular period or date refer to the comparison with corresponding amounts for the period or date one year earlier.

Forward-Looking Statements

      In addition to historical information, the following management’s discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed elsewhere in this report, including changes in interest rates, economic conditions, competition, requirements of regulators, and the demand for financial products and services in the Company’s market area. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements.

      Further information concerning the Company and its business, including additional factors that could materially affect its financial results, is included in the Company’s filings with the Securities and Exchange Commission. Reports and additional information, including Company press releases, can be found on the Bancorp’s website at www.EvergreenBancorp.com.

Critical Accounting Policies

      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. The policies relate to the determination of the allowance for loan losses, other real estate owned, and the fair value of financial instruments, as described in further detail below, and in the accompanying consolidated financial statements and footnotes thereto contained in this Form 10-K. 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.

15

      Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

      The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

      A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

      Management recognizes a certain level of imprecision exists in the manner in which the allowance for loan losses is calculated, owing to intangible factors.

      Finally, management regularly monitors the performance of the loan portfolio with regard to levels of criticized and classified loans, as well as assessing regional economic factors which may impact the loan portfolio. This provides additional information for management’s regular evaluation of the allowance.

      Temporary Decline in Fair Value of Securities. Under current accounting rules, declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. In determining whether an unrealized loss is considered other-than-temporary, management considers: (1) the length of time and extent that fair value has been less than cost; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair values. In management’s view, the decline in market value of the securities that were below amortized cost at December 31, 2005 does not represent other-than-temporary impairment, and thus no loss was recognized on the income statement. Additional information regarding these securities can be found in Note 3, “Securities” to the notes to consolidated financial statements.

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 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, gains from sales of loans and investment securities, and investment services commissions. 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.

16

      In 2005, national and regional economic conditions continued to improve, real estate values rose, and short-term interest rates continued to increase. The Federal Reserve Bank sustained its “measured pace” of rate increases, moving the federal funds target rate in 0.25 percent increments, a process that began in May of 2004 with the rate at 1.00 percent. By year-end 2004, the federal funds target rate reached 2.25 percent and 2005 FRB actions further increased this key rate to 4.25 percent by year-end 2005. Despite the increase in short-term rates engineered by the Federal Reserve, long term interest rates stayed at historically low levels, and continued to prompt borrowers to refinance loans. Loan totals during the first half of the year increased only slightly as loan originations were offset by loan refinancing and payoffs. During the second half of the year, loan totals increased as a result of favorable loan demand, plus the benefits of an increased number of office locations and qualified lending personnel. Loan totals also reflect the purchase of $13,882,000 of residential real estate loans from a mortgage broker. By the end of 2005, loan totals had reached $189,188,000, up $39,600,000 or 18.50 percent over the prior year-end and deposit totals increased $26,100,000, up 15.01 percent, and ending 2005 at a record $199,890,000. The net interest margin improved to average 5.15 percent in 2005 compared to 5.02 percent in 2004. Credit quality was favorable as the ratio of nonperforming loans to total loans, although higher than the prior year, stayed at low levels, with nonperforming loans as a ratio of total loans at 0.61 percent compared with 0.14 percent last year. Net income declined 24.65 percent to $966,000 or $0.47 per diluted share, compared to $1,282,000 or $0.63 per diluted share. The main reason for the decrease in profits was higher operating costs resulting from new offices and personnel, which were not fully offset by higher net interest income due to growth in loans, and improved net interest margins.

      Capital activities in 2005 included quarterly cash dividends paid in February, May, August, and November, and a four-for-three stock split effective in October. Capital ratios remain strong with the equity-to-assets ratio at 7.12 percent at December 31, 2005.

Results of Operations 2005 Compared to 2004

      The Company’s 2005 net income was $966,000 compared to $1,282,000 in 2005, a decrease of 24.65 percent. Basic and diluted earnings per share for 2005 were $0.48 and $0.47, respectively, compared to $0.64 and $0.63 for 2004. Return on average assets was 0.45 percent for 2005 and 0.66 percent for 2004. Returns on average common equity were 5.51 percent and 7.58 percent, respectively. The net interest margin (net interest income on a taxable-equivalent basis divided by average earning assets) was 5.15 percent compared to 5.02 percent in 2004.

      The results of operations in 2005 reflected higher net interest income. This increase was primarily attributable to an increase in the average balance of the loan portfolio and an increase in interest rates.

      For the year, noninterest income including gains on sales of loans and investments decreased 0.94 percent. Operating expenses rose 17.99 percent due primarily to the costs associated with the opening of two new offices which resulted in increased salary, occupancy, and depreciation expense.

      The table of selected consolidated financial data, which appears on page 14 summarizes the Company’s financial performance for each of the past five years. Additional analysis of financial components is contained in the discussion that follows.

Results of Operations 2004 Compared to 2003

      The Company’s 2004 net income was $1,282,000 compared $1,036,000 in 2003, an increase of 23.7 percent. Basic and diluted earnings per share for 2004 were $0.64 and $0.63, respectively, compared to $0.52 and $0.52 for 2003. Return on average assets was 0.66 percent for 2004 and 0.60 percent for 2003. Returns on average common equity were 7.58 percent and 6.42 percent, respectively. The net interest margin (net interest income on a taxable-equivalent basis divided by average earning assets) was stable at 5.02 percent in 2004 and 2003.

17

      The results of operations in 2004 reflected higher net interest income due to growth in loans. 2004 operating results included additional expense of $132,000 recorded in the first quarter of 2004 to write down Bank-owned real estate to the value realized upon its sale in May 2004.

      For 2004, noninterest income including gains on sales of loans and investments decreased 2.6 percent. Operating expenses rose 5.0 percent and included additional professional services expense and costs associated with opening the new South Lake Union branch.

Net Interest Income

      The Company’s principal source of earnings is net interest income, which is the difference between interest income, including loan-related fee income, and interest expense. The individual components of net interest income and net interest margin are presented on pages 19 and 20.

      2005 Compared to 2004

      Net interest income for 2005 was $10,263,000 compared to $9,102,000 in 2004. The 12.8 percent increase was principally due to growth in the average balance of the loan portfolio, and partially due to a rise in interest rates, which increased the net interest margin to 5.15 percent in 2005, compared to 5.02 percent in 2004. The expanding net interest margin reflected the net repricing of earning assets and paying liabilities to higher rates.

      Total interest income was $13,712,000 in 2005, compared to $11,363,000 in 2004. This increase of $2,349,000 or 20.7 percent was primarily attributable to a 12.7 percent increase in average loan balances, higher rates on variable-rate loans and investments, and new loans funded at higher rates.

      Total interest expense was $3,449,000 in 2005 compared to $2,261,000 in 2004, an increase of $1,188,000 or 52.5 percent. This increase was largely due to higher rates on average interest-bearing deposits, and an increase in average interest-bearing deposit balances.

      2004 Compared to 2003

      Net interest income for 2004 was $9,102,000 compared to $8,200,000 in 2003. The 11.0 percent increase was principally due to growth in the average balance of the loan portfolio, and partially due to a change in the mix of earning assets from federal funds sold to higher yielding loans and securities. The net interest margin was stable year over year, remaining at 5.02 percent in 2004 and 2003.

      Total interest income was $11,363,000 in 2004, compared to $10,408,000 in 2003. This increase of 9.2 percent was primarily attributable to a 17.8 percent increase in average loan balances, a change in the mix of earning assets from federal funds and securities sold to higher yielding loans, partially offset by lower rates on new and refinanced loans.

      Total interest expense was $2,261,000 in 2004 compared to $2,208,000 in 2003, an increase of 2.4 percent. This increase was largely due to growth in average time deposits outstanding, largely offset by the repricing of existing time deposits to lower interest rates.

18

Analysis of Average Balances, Net Interest Income, and Net Interest Margin

		Years Ended December 31,
																		2005 Over 2004
		2005								2004								Change in income
																		due to
		Average					Yield/			Average					Yield/
		Balance			Interest		Rate			Balance			Interest		Rate			Volume			Rate
		(In thousands)
ASSETS
Loans:
	Commercial and financial	$	56,551		$	4,688		8.29	%	$	62,706		$	4,504		7.18	%	$	(469	)	$	653
	Real estate		89,433			6,303		7.05			66,352			4,456		6.72			1,617			230
	Consumer and other		14,238			1,380		9.69			13,170			1,283		9.74			104			(7	)
Total loans			160,222			12,371		7.72			142,228			10,243		7.20			1,252			876
Federal funds sold			5,350			164		3.06			3,564			44		1.24			31			89
Interest-bearing deposits in financial institutions			849			15		1.77			962			4		0.42			(1	)		12
Investment securities			34,816			1,245		3.58			35,575			1,129		3.18			(24	)		140
Total earning assets			201,237			13,795		6.86			182,329			11,420		6.26			1,258			1,117
Cash and due from banks			8,756								7,500
Premises and equipment			2,942								3,402
Other real estate owned			—								330
Accrued interest and other assets			3,901								2,220
Allowance for loan losses			(1,937	)							(1,677	)
Total assets		$	214,899							$	194,104
LIABILITIES
Interest-bearing deposits:
	Demand deposits		12,529			21		0.17			11,133			12		0.11			2			7
	Savings deposits		55,299			777		1.40			49,384			469		0.95			62			246
	Time deposits		58,342			1,723		2.95			48,953			972		1.99			212			539
Total interest-bearing deposits			126,170			2,521		2.00			109,470			1,453		1.33			276			792
Federal funds purchased			323			15		4.65			1,715			14		0.82			(19	)		20
Federal Home Loan Bank advances			12,351			568		4.60			12,663			541		4.27			(14	)		41
Junior subordinated debt			5,000			345		6.90			5,000			253		5.06			—			92
Total interest-bearing liabilities			143,844			3,449		2.40			128,848			2,261		1.75			243			945
Noninterest-bearing deposits			51,576								46,323
Accrued interest and other liabilities			1,937								2,024
Total liabilities			197,357							$	177,195
Stockholders’ equity			17,542								16,909
Total liabilities and stockholders’ equity		$	214,899							$	194,104
Interest revenue as a percentage of average earning assets								6.86	%							6.26	%
Interest expense as a percentage of average earning assets								1.71	%							1.24	%
Net interest income on a taxable- equivalent basis and net interest margin					$	10,346		5.15	%				$	9,159		5.02	%

      Changes in income and expense which are not due solely to rate or volume have been allocated proportionately. Average loan balances include nonaccrual loans. Taxable-equivalent adjustments relate to tax-exempt investment securities.

19

Analysis of Average Balances, Net Interest Income, and Net Interest Margin

		Years Ended December 31,
																		2004 Over 2003
		2004								2003								Change in income
																		due to
		Average					Yield/			Average					Yield/
		Balance			Interest		Rate			Balance			Interest		Rate			Volume			Rate
		(In thousands)
ASSETS
Loans:
	Commercial and financial	$	62,706		$	4,504		7.18	%	$	53,822		$	3,839		7.13	%	$	648		$	17
	Real estate		66,352			4,456		6.72			52,809			4,037		7.64			810			(391	)
	Consumer and other		13,170			1,283		9.74			14,129			1,410		9.98			(92	)		(35	)
Total loans			142,228			10,243		7.20			120,760			9,286		7.69			1,366			(409	)
Federal funds sold			3,564			44		1.24			8,425			90		1.07			(63	)		17
Interest-bearing deposits in financial institutions			962			4		0.42			1,328			12		0.90			(3	)		(5	)
Investment securities			35,575			1,129		3.18			33,828			1,078		3.19			59			(8	)
Total earning assets			182,329			11,420		6.26			164,341			10,466		6.37			1,359			(405	)
Cash and due from banks			7,500								6,953
Premises and equipment			3,402								2,377
Other real estate owned			330								144
Accrued interest and other assets			2,220								1,641
Allowance for loan losses			(1,677	)							(1,657	)
Total assets		$	194,104							$	173,799
LIABILITIES
Interest-bearing deposits:
	Demand deposits		11,133			12		0.11			10,208			20		0.19			2			(10	)
	Savings deposits		49,384			469		0.95			48,677			513		1.05			7			(51	)
	Time deposits		48,953			972		1.99			36,868			829		2.25			224			(82	)
Total interest-bearing deposits			109,470			1,453		1.33			95,753			1,362		1.42			234			(143	)
Federal funds purchased			1,715			14		0.82			3,054			20		0.65			(14	)		8
Federal Home Loan Bank advances			12,663			541		4.27			14,313			586		4.09			(71	)		26
Junior subordinated debt			5,000			253		5.06			5,000			240		4.80			—			13
Total interest-bearing liabilities			128,848			2,261		1.75			118,120			2,208		1.87			149			(96	)
Noninterest-bearing deposits			46,323								37,940
Accrued interest and other liabilities			2,024								1,593
Total liabilities			177,195								157,653
Stockholders’ equity			16,909								16,146
Total liabilities and stockholders’ equity		$	194,104							$	173,799
Interest revenue as a percentage of average earning assets								6.26	%							6.37	%
Interest expense as a percentage of average earning assets								1.24	%							1.34	%
Net interest income on a taxable- equivalent basis and net interest margin					$	9,159		5.02	%				$	8,258		5.02	%

      Changes in income and expense which are not due solely to rate or volume have been allocated proportionately. Average loan balances include nonaccrual loans. Taxable-equivalent adjustments relate to tax-exempt investment securities.

20

Provision and Allowance for Loan Losses

      The provision for loan losses was $423,000 in 2005 compared to $321,000 and $233,000 for 2004 and 2003, respectively. At December 31, 2005, the allowance for loan losses was $2,056,000, or 1.09 percent of total loans, compared with $1,887,000 or 1.18 percent of total loans December 31, 2004. At December 31, 2004, the allowance for loan losses was $1,887,000, compared to $1,636,000, or 1.18 percent of total loans at December 31, 2003. Nonperforming loans (nonaccrual loans and loans over 90 days past due) to total loans at the end of 2005 were 0.61 percent compared to 0.14 percent at December 31, 2004 and 0.46 percent at December 31, 2003.

      The increase in the provision for loan losses in 2005 resulted largely from an increase in loan charge-offs, an increase in nonperforming loans, and changes in loan portfolio composition, as well as an increase in loans. The ratio of the allowance for loan losses to total loans at December 31, 2005 was lower than year-end 2004 primarily because of higher credit quality of new loans, including $13,882,000 of residential real estate loans purchased in the fourth quarter of 2005.

      The increase in the provision for loan losses for 2004 compared to 2003 resulted largely from changes in portfolio composition, offset by improved net loan loss experience. The allowance for loan losses to total loans percentage was lower at the end of 2003 primarily because most loan growth occurred late in the year, reflecting the higher credit quality of the new loans. In addition, a fourth quarter foreclosure action on one loan resulted in a lower level of nonperforming loans in the allowance calculation. A portion of the loan was charged off to the allowance for loan losses to record the acquired property in the “other real estate owned” category at the lower of cost or realizable value.

      Management evaluates the adequacy of the allowance on a quarterly basis after consideration of a number of factors, including the volume and composition of the loan portfolio, potential impairment of individual loans, concentrations of credit, past loss experience, current delinquencies, information about specific borrowers, current economic conditions, and other factors.

      The Company considers the allowance for loan losses adequate to cover probable incurred losses, however, no assurance can be given that actual losses will not exceed estimated amounts. In addition, changes in factors such as regional economic conditions and the financial strength of commercial and individual borrowers may require changes in the level of the allowance, cause increases in problem assets, delinquencies and losses on loans, and result in fluctuations in reported earnings.

      An analysis of the changes in the allowance for loan losses, including provisions, recoveries, and loans charged off is presented in Note 5, “Allowance for Loan Losses” to the consolidated financial statements.

Noninterest Income

      Noninterest income in 2005, 2004, and 2003 totaled $1,693,000, $1,709,000, and $1,755,000, respectively.

      The decrease of 0.94 percent in 2005 was primarily due to a decrease in service charges on deposit accounts, offset by an increase in net earnings on bank-owned life insurance and other noninterest income. In August 2005, the Bank purchased life insurance on certain employees of the Bank, which provides $5,000,000 in cash surrender value to the Bank. Increases in cash surrender value of the policies will be used to fund future employee benefit plan expense.

      The decrease of 2.6 percent in 2004 compared to 2003 was primarily due to lower recorded gains on sales of securities available for sale and lower commissions and fees, offset by higher revenue from service charges on deposit accounts.

Noninterest Expense

      The Company’s total noninterest expense for 2005, 2004, and 2003 was $10,150,000, $8,602,000, and $8,196,000, respectively.

21

      Noninterest expense increased $1,548,000 or 17.99 percent in 2005. The change in this category was primarily due to an increase of $945,000 due primarily to costs associated with the opening of two new offices and increased salary and benefits expense.

      Noninterest expense increased $406,000 or 5.0 percent in 2004. The change in this category was primarily due to an increase of $223,000 in salaries and employee benefits. Noninterest expense for 2004 included the first quarter write-down of $132,000 in the value of other real estate owned, additional professional services expense, and certain costs associated with opening a new branch in the South Lake Union area of Seattle in November 2004.

Review of Financial Condition

      Total assets increased 18.87 percent in 2005 to $249,192,000, securities decreased 4.61 percent to $33,550,000, loans increased 18.50 percent to $189,188,000, and deposits increased 15.01 percent to $199,890,000.

Analysis of Securities

      The components of the investment portfolio were as follows at December 31:

	2005		2004		2003
	Carrying		Carrying		Carrying
	Value		Value		Value
	(In thousands)
U.S. agencies	$	7,394	$	8,004	$	8,481
State and political subdivisions		4,454		3,555		3,567
AMF Adjustable Rate Mortgage Fund		14,823		14,832		16,586
Mortgage-backed securities and collateralized mortgage obligations		5,461		7,367		9,812
Federal Home Loan Bank stock		1,418		1,412		1,372
Total	$	33,550	$	35,170	$	39,818

      The securities portfolio decreased $1,620,000 from December 31, 2004 to December 31, 2005. The decrease resulted primarily from $2,368,000 in proceeds from sales, maturities, and principal payments on securities, offset by purchases of securities totaling $1,125,000.

      In May 2005, FHLB of Seattle suspended payment of dividends when, due in part to declining income, FHLB entered into a written agreement with its regulator, the Federal Housing Finance Board. The written agreement called for a significant transition in FHLB’s business model and an indefinite suspension of dividend payments.

      The securities portfolio decreased $4,648,000 from December 31, 2003 to December 31, 2004. The decrease resulted primarily from $6,390,000 in proceeds from sales, maturities, and principal payments on securities, offset by purchases of securities totaling $1,523,000.

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      The following table sets forth the maturities of securities at December 31, 2005. Taxable equivalent values are used in calculating yields assuming a tax rate of 34 percent.

				After 1 Year			After 5 Years						Total and
				But Within			But Within			After			Weighted
	Within 1 Year/			5 Years/			10 Years/			10 Years/			Average
	Yield			Yield			Yield			Yield			Yield
	(In thousands, carrying value)
U.S. agencies	$	987		$	6,407			—			—		$	7,394
		3.05	%		3.22	%								3.20	%
State and political subdivisions		311			2,991			1,152			—			4,454
		3.17	%		4.11	%		5.17	%					4.32	%
AMF Adjustable Rate Mortgage Fund*		14,823			—			—			—			14,823
		4.05	%											4.05	%
Mortgage-backed securities and collateralized mortgage obligations		—			—			270			5,191			5,461
		—			—			3.54	%		4.05	%		4.02	%
Federal Home Loan Bank stock*		1,418			—			—			—			1,418
Total	$	17,539		$	9,398		$	1,422		$	5,191		$	33,550

*  Securities without a stated maturity.

For more information and analysis regarding securities see the preceding discussion of Critical Accounting Policies, Temporary Decline in the Fair Value of Securities on page 16 and Note 3 to the consolidated financial statements.

Loans

      At December 31, 2005, loans totaled $189,188,000, compared to $159,656,000 at December 31, 2004, an increase of $29,532,000 or 18.50 percent over December 31, 2004. At December 31, 2005, the Bank had $112,050,000 in loans secured by real estate, compared to $90,211,000 at December 31, 2004.

      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 for the years ended December 31:

Types of Loans

		2005			2004		2003		2002		2001
		(In thousands)
Commercial		$	61,921		$	55,563	$	53,770	$	47,603	$	53,791
Real estate:
	Commercial		76,902			67,165		48,963		42,497		28,349
	Construction		6,953			11,538		10,911		5,574		7,002
	Residential 1-4 family		28,195	*		11,508		11,971		10,821		13,942
Consumer and other			15,217			13,882		12,853		15,014		19,135
Total		$	189,188		$	159,656	$	138,468	$	121,509	$	122,219

*  Residential 1-4 family includes $13,882,000 of loans purchased from a mortgage broker in the fourth quarter 2005.

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      Origination of Loans The lending activities of the Bank are subject to the written underwriting standards and loan origination procedures established by the Board of Directors and management. Loan originations are obtained through a variety of sources, including referrals from customers, builders and real estate brokers, along with direct marketing efforts of the loan officers. Written loan applications and credit analysis is performed by the loan officers. The loan officers also supervise the procurement of credit reports, appraisals, and other documentation involved with a loan. Property valuations are performed by independent outside appraisers.

      The Bank’s loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan and adequacy of the value of any collateral that will secure the loan. The Bank’s loan policy authorizes senior vice presidents to approve aggregate extensions of credit up to $500,000 and the President/ CEO and the Chief Credit Officer to approve aggregate extensions of credit up to $1,000,000. The Loan Committee, comprised of board members, is authorized to approve extensions of credit over $1,000,000.

      Commercial Loans At December 31, 2005, commercial loans amounted to $61,921,000, or 32.7 percent of the loan portfolio. Commercial loans generally have a term of up to five years and may have either floating rates tied to the Bank’s internal base rate or fixed rates of interest. Commercial loans are made to small and medium-sized businesses within the Bank’s market area. A majority of the Bank’s commercial loans are secured by real estate, equipment, and other corporate assets. The Bank also generally obtains personal guarantees from the principals of the borrower. In addition, the Bank may extend loans for a commercial business purpose which are secured by a mortgage on the proprietor’s home or business property.

      Commercial Real Estate Loans The commercial real estate loan portfolio generally consists of loans secured by office buildings, warehouses, production facilities, and retail stores generally located within the Seattle metropolitan area. In addition, the Bank has purchased participation interests in commercial real estate loans from various financial institutions in the region. Commercial real estate loans amounted to $76,902,000, or 40.6 percent of the total loan portfolio at December 31, 2005. Participation interest in commercial real estate loans purchased amounted to $5,646,000, or 7.3 percent of the commercial real estate portfolio at December 31, 2005. Before purchasing such loans, the Bank utilizes the same underwriting standard and criteria as it would if it had originated the loans.

      The Bank’s commercial real estate loans typically have a loan-to-value ratio of 80 percent or less and generally have shorter maturities than one-to-four family residential loans. The maximum term of the Bank’s commercial real estate loans is from 5 to 10 years based on up to a 25-year amortization schedule. Most have adjustable rates tied to the Seattle Federal Home Loan Bank rates, but some have fixed rates. For each real estate loan, the Bank requires a title insurance policy, fire and extended coverage casualty insurance, and a flood insurance policy when the property is in a flood hazard area.

      Commercial real estate lending is generally considered to have a higher degree of risk than one-to-four family residential lending. Such lending typically involves large loan balances concentrated in single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. The Bank typically attempts to mitigate the risk associated with its real estate lending by, among other things, lending primarily in its market area and using conforming loan-to-value ratios in the underwriting process.

      The Bank also offers multi-family (over four units) residential loans. The multi-family residential mortgage loans are underwritten on substantially the same basis as its commercial real estate loans, with loan-to-value ratios of up to 80 percent. At December 31, 2005, the Bank had $11,489,000 in multi-family residential mortgage loans which amounted to 14.9 percent of the commercial real estate portfolio.

      Construction Loans The Bank provides construction financing for both single family home builders, and for commercial construction projects. To mitigate the higher risk factors associated with construction financing, the Bank typically underwrites loans with conservative loan-to-value ratios, with maximum loan-to-value ratios of 80 percent and maximum loan-to-construction cost ratios of 90 percent. All construction loan advances are subject to inspection requirements of a third party construction monitoring expert. Construction

24

lending is limited to experienced developers and contractors, and all loans have recourse to the ownership group. Construction loans are typically variable rate loans, with short 12-18 month maturities, with identified take-out financing.

      One-to-Four Family Residential Real Estate Loans The Bank originates a limited number of loans secured by one-to-four family residences to commercial clients of the bank. In December of 2005, the Bank augmented its loan portfolio with the purchase of a variety of residential loans from a mortgage broker. This included 31 individual loans with a total balance of $13,882,000. These loans included a mix of adjustable rate mortgages and fixed rate loans, and were underwritten in accordance with the Bank’s conservative guidelines. As of December 31, 2005, $28,195,000, or 14.9 percent of the total portfolio, before net items, consisted of one-to-four family residential loans.

      For residential real estate lending, loan-to-value ratios, maturities, and other provisions of the loans made by the Bank generally have reflected the policy of making less than the maximum loan permissible under applicable regulations, in accordance with sound lending practices, market conditions, and underwriting standards established by the Bank. The Bank’s present lending policies on one-to-four family residential mortgage loans generally limit the maximum loan-to-value ratio to 80 percent of the lesser of the appraised value or purchase price of the property. Residential mortgage loans are amortized on a monthly basis with principal and interest due each month. The loans generally include “due-on-sale” clauses.

      Under the lending policy of the Bank, a title insurance policy must be obtained for each real estate loan. The Bank also requires fire and extended coverage casualty insurance, in order to protect the properties securing its real estate loans. Borrowers must also obtain flood insurance policies when the property is in a flood plain as designated by the Department of Housing and Urban Development.

      Consumer Loans The Bank originates consumer loans in order to provide a full range of financial services to its customers and because such loans generally have shorter terms and higher interest rates than residential mortgage loans. At December 31, 2005, the Bank had $15,217,000 in consumer loan debt, or 8.0 percent of the Bank’s total loan portfolio. The consumer loans offered by the Bank include home equity loans, automobile loans, credit card balances, and a small aggregate amount of unsecured lines of credit.

      Collections The Bank mails delinquency notices to borrowers when a borrower fails to make a required payment within 15 days of the date due. Additional notices are sent out when a loan becomes 30 days or 60 days past due. If a loan becomes 90 days past due, the Bank generally mails a notice indicating that the Bank may refer it to an attorney within 30 days to commence foreclosure. In most cases, deficiencies are cured promptly. While the Bank generally prefers to work with borrowers to resolve such problems, the Bank will institute foreclosure or other collection proceedings when necessary to minimize any potential loss.

      Nonaccrual Loans Loans are placed on nonaccrual status when management believes the probability of collection of interest is insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. As a matter of policy, the Bank generally discontinues the accrual of interest income when the loan becomes 90 days past due as to principal or interest. Standard Bank loan documentation entitles the Bank to charge a higher default rate of interest when a loan becomes 90 days past due.

25

      Loans maturing or repricing as of December 31, 2005:

		Within				After
		1 Year		1-5 Years		5 Years		Total
				(In thousands)
Commercial		$	42,957	$	15,430	$	3,534	$	61,921
Real estate:
	Commercial		25,647		39,942		11,313		76,902
	Construction		5,403		1,550		—		6,953
	Residential 1-4 family		10,725		5,830		11,640		28,195
Consumer and other			10,392		4,566		259		15,217
Total		$	95,124	$	67,318	$	26,746	$	189,188

      Loans maturing (excluding loans repricing that have not matured) by fixed or variable rates after one year:

			After
	1-5 Years		5 Years
	(In thousands)
Fixed rates	$	23,893	$	21,736
Variable rates		16,098		58,976
Total	$	39,991	$	80,712

Allocation of the Allowance for Loan Losses

      In the following table, the allowance for loan losses has been allocated among major loan categories based on a number of factors including quality, volume, current economic outlook, and other business considerations for the years ended December 31:

					% of					% of					% of					% of					% of
					Loans					Loans					Loans					Loans					Loans
					in Each					in Each					in Each					in Each					in Each
		2005			Category		2004			Category		2003			Category		2002			Category		2001			Category
		Allocated			to Total		Allocated			to Total		Allocated			to Total		Allocated			to Total		Allocated			to Total
		Amount			Loans		Amount			Loans		Amount			Loans		Amount			Loans		Amount			Loans
		(In thousands)
Commercial		$	987			33	$	1,000			35	$	885			39	$	1,024			39	$	908			44
Real estate:
	Commercial		651			40		568			42		436			35		423			35		261			23
	Construction		72			4		117			7		110			8		59			5		65			6
	Residential 1-4 family		106			15		11			7		9			9		28			9		12			11
Consumer and other			240			8		191			9		196			9		156			12		252			16
Total		$	2,056			100	$	1,887			100	$	1,636			100	$	1,690			100	$	1,498			100
% of loan portfolio			1.09	%				1.18	%				1.18	%				1.39	%				1.23	%

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

26

Analysis of the Allowance for Loan Losses

      The following table summarizes transactions in the allowance for loan losses and details the charge-offs, recoveries, and net loan losses by loan category for the years ended December 31:

		2005			2004			2003			2002			2001
		(In thousands)
Beginning balance		$	1,887		$	1,636		$	1,690		$	1,498		$	1,323
Charge-offs:
Commercial			252			24			81			108			185
Real estate:
	Commercial		1			—			—			20			—
	Construction		—			—			—			—			—
	Residential 1-4 family		—			—			184			—			—
Consumer and other			41			146			67			63			176
Total charge-offs			294			170			332			191			361
Recoveries:
Commercial			26			87			17			22			57
Real estate:
	Commercial		—			—			20			—			—
	Construction		—			—			—			1			—
	Residential 1-4 family		—			—			8			—			—
Consumer and other			14			13			—			30			—
Total recoveries			40			100			45			53			57
Net charge-offs/(recoveries)			254			70			287			138			304
Provision			423			321			233			330			479
Ending balance		$	2,056		$	1,887		$	1,636		$	1,690		$	1,498
Ratio of net charge-offs to average loans outstanding			0.16	%		0.05	%		0.24	%		0.11	%		0.26	%

      For the year ended December 31, 2005, commercial loan charge-offs included a charge-off of $115,000 resulting from one loan.

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Nonperforming Loans and Assets

      The following table sets forth the amounts and categories of non-performing loans and assets for the years ended December 31:

	2005			2004			2003			2002			2001
	(In thousands)
Nonaccruing loans:
Commercial	$	37		$	182		$	112		$	309		$	463
Real Estate		661			—			—			462			90
Consumer		37			31			—			1			—
Total(1)		735			213			112			772			553
Accruing loans delinquent 90 days or more:
Commercial		401			5			464			15			444
Real Estate		—			—			—			—			111
Consumer		13			—			67			12			47
Total		414			5			531			27			602
Total non-performing loans		1,149			218			643			799			1,155
Other real estate owned		—			—			2,659			—			—
Total non-performing assets	$	1,149		$	218		$	3,302		$	799		$	1,155
Total non-performing loans as a percentage of loans		0.61	%		0.14	%		0.46	%		0.66	%		0.95	%
Total non-performing assets as a percentage of assets		0.46	%		0.10	%		1.70	%		0.47	%		0.74	%

(1)  If interest on these nonaccruing loans had been recognized, such income would have been $29,000, $9,000, $9,000, $68,000, and $22,000 for 2005, 2004, 2003, 2002, and 2001.

      The decrease in other real estate owned at December 31, 2004 resulted from the sale of foreclosed property in May 2004.

      At December 31, 2003, other real estate owned consisted of one residential real estate property acquired through foreclosure in December 2003. Upon foreclosure, the Bank charged off a portion of the non-performing loan secured by the foreclosed property and transferred the remaining balance to other real estate owned. The property was recorded at the lower of cost or realizable value, based on a third party appraisal less estimated selling costs.

      There were no commitments for additional funds related to the loans noted above. At December 31, 2005, there were no potential problem loans that are not now disclosed where known information causes management to have serious doubts as to the ability of the borrower to comply with present loan repayment terms.

      At December 31, 2005, nonaccruing real estate loans included one well-secured loan of $479,000.

      Nonperforming loans include nonaccrual loans and accruing loans delinquent 90 days or more. Loans are generally placed on nonaccrual status when the loan is 90 days or more past due as to principal and interest, unless the loan is well-secured and in the process of collection. If management believes that collection is doubtful after considering relevant conditions, accrual of interest is discontinued immediately.

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Deposits

      The average daily amount of deposits and rates paid on interest bearing deposits is summarized for the periods indicated in the following table:

		2005					2004					2003
		Amount		Rate			Amount		Rate			Amount		Rate
		(In thousands)
DEPOSITS
Noninterest bearing demand		$	51,576		0.00	%	$	46,323		0.00	%	$	37,940		0.00	%
Interest bearing demand			12,529		0.17			11,133		0.11			10,208		0.19
Savings deposits			55,299		1.40			49,384		0.95			48,677		1.05
Time deposits:
	Certificate of deposit, under $100,000		23,861		2.79			22,369		2.08			19,839		2.53
	Certificate of deposit, over $100,000		17,970		2.74			13,184		2.14			14,640		2.03
	Public Funds		16,511		3.41			13,400		1.66			2,389		1.28
Total time deposits			58,342		2.95	%		48,953		1.99	%		36,868		2.25	%
Total		$	177,746				$	155,793				$	133,693

      Maturities of time certificates of deposits of $100,000 or more outstanding as of December 31, 2005 are summarized as follows:

	Amount
	(In thousands)
3 months or less	$	26,170
Over 3 months through 6 months		4,115
Over 6 months through 12 months		6,052
Over 12 months		3,267
Total	$	39,604

Borrowings

      The following tables set forth certain information with respect to federal funds purchased and FHLB advances for the periods indicated:

Federal Funds Purchased	December 31, 2005			December 31, 2004			December 31, 2003
	(In thousands)
Balance at end of year	$	—		$	—		$	3,097
Weighted average interest rate at end of year		—			—			0.50	%
Maximum amount outstanding(1)		3,020			3,212			4,666
Average amount outstanding		323			1,715			3,054
Weighted average interest rate during the year		4.65	%		0.82	%		0.65	%

(1)  Based on average amount outstanding at month end during each year.

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FHLB Advances	December 31, 2005			December 31, 2004			December 31, 2003
	(In thousands)
Balance at end of year	$	23,849		$	11,067		$	15,381
Weighted average interest rate at end of year		4.73	%		4.50	%		3.81	%
Maximum amount outstanding(1)		23,849			17,537			19,339
Average amount outstanding		12,351			12,663			14,313
Weighted average interest rate during the year		4.60	%		4.27	%		4.09	%

(1)  Based on average amount outstanding for the month during each year.

Junior Subordinated Debt (Trust Preferred Securities)

      In May 2002, Bancorp formed EvergreenBancorp Capital Trust I (“the Trust”) a statutory trust formed under the laws of the State of Delaware. In May 2002, the Trust issued $5 million in trust preferred securities in a private placement offering. Simultaneously with the issuance of the trust preferred securities by the Trust, Bancorp issued junior subordinated debentures to the Trust. The junior subordinated debentures are the sole assets of the Trust. 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 3.50% (7.55% at December 31, 2005), provided that this rate cannot exceed 12.0% through June 30, 2007. The junior subordinated debentures are callable in 2007, at which time management will examine options to refinance; the debentures will mature in 2032, at which time the preferred securities must be redeemed. Bancorp has provided a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the Trust under the preferred securities as set forth in such guarantee agreement. Debt issuance costs totaling $209,000 were capitalized related to the offering and are being amortized over the estimated life of the junior subordinated debentures.

      Prior to 2003, the Trust was consolidated in the Company’s financial statements, with the trust preferred securities issued by the Trust reported in liabilities as “guaranteed preferred beneficial interests” and the subordinated debentures eliminated in consolidation. Under current accounting guidance, FASB Interpretation No. 46, as revised in December 2003, the Trust is no longer consolidated with the Company. Accordingly, the Company does not report the securities issued by the Trust as liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by the Trust, as these are no longer eliminated in consolidation. The effect of no longer consolidating the Trust does not change the amounts reported as the Company’s assets, liabilities, equity, or interest expense. Accordingly, the amounts previously reported as “guaranteed preferred beneficial interests” in liabilities have been recaptioned “junior subordinated debt” and continue to be presented in liabilities on the balance sheet.

      Bancorp invested $4,800,000 of the proceeds from the trust preferred offering in the Bank, which used the funds to support its lending and other operations. The proceeds are considered Tier 1 capital under regulatory guidelines.

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.

30

      At December 31, 2005, the Company had commitments to extend credit and contingent liabilities under lines of credit, standby letters of credit, and similar arrangements totaling $52,341,000. Since many lines of credit do not fully disburse, or expire without being drawn upon, the total amount does not necessarily reflect future cash requirements.

      For additional information regarding off-balance-sheet items, refer to Note 16, “Commitments and Contingencies” to the consolidated financial statements.

      The following table summarizes the Company’s significant contractual obligations and commitments at December 31, 2005:

	Within						After
	1 Year		1-3 Years		3-5 Years		5 Years		Total
	(In thousands)
Federal Home Loan Bank advances	$	5,580	$	7,269	$	5,000	$	6,000	$	23,849
Junior subordinated debt		—		—		—		5,000		5,000
Time deposits		60,089		6,715		75		—		66,879
Operating leases		647		857		702		1,113		3,319
Total	$	66,316	$	14,841	$	5,777	$	12,113	$	99,047

      For additional discussion of FHLB advances and junior subordinated debt, see Note 8 “Borrowings and Junior Subordinated Debt” to the consolidated financial statements.

Asset/ Liability Management

      The principal objectives of asset/liability management are to manage changes in net interest income and earnings due to changes in interest rates, maintain adequate liquidity, and manage capital adequacy. Asset/liability management encompasses structuring the mix of assets, deposits, and borrowings to limit exposure to interest rate risk and enhance long-term profitability.

      The following discussion and analysis addresses managing liquidity, interest rate risk, and capital resources. These elements provide the framework for the Company’s asset/liability management policy. The asset/liability committee consists of the senior management of the Bank and meets at least quarterly to implement policy guidelines.

Liquidity

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

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

      The Consolidated Statements of Cash Flows provides information on the sources and uses of cash for the years ended December 31, 2005, 2004, and 2003. As shown in these statements, the Company’s largest cash flows relate to both investing and financing activities.

      Over the past year, the primary investing and financing activities that have required the greatest use of cash include lending, purchases of loans, and a purchase of bank owned life insurance. The primary sources of cash flows have been growth in deposits, proceeds from Federal Home Loan Bank advances, and proceeds from paydowns and maturities of securities available for sale.

      In 2004, the primary investing and financing activities that have required the greatest use of cash include lending and the repayment of Federal Home Loan Bank advances. The primary sources of cash flows have been growth in deposits, and sales, maturities, and principal paydowns on securities available for sale.

31

      In 2003, the primary investing activities that required the greatest use of cash included lending and purchases of new securities. Purchases of securities in 2003 were predominately in an adjustable rate mortgage-backed securities fund to maintain overall liquidity and control interest rate risk. The primary sources of cash flows have been growth in deposits and an increase in FHLB borrowings.

      The Bank has a credit line through the Federal Home Loan Bank for properly collateralized borrowings up to 30% of the Bank’s total assets. In addition, the Bank has approved credit lines with correspondent banks for overnight funds credit facilities aggregating $16,500,000.

Interest Rate Risk

      The Company’s profitability depends largely upon its net interest income, which is the difference between interest earned on assets, primarily loans and investments, and the interest expense incurred on its liabilities, largely deposits and borrowings. Interest rate risk is the variation in bank performance introduced by changes in interest rates over time. The Company’s objective in managing interest rate risk is to minimize the impact on net income due to significant changes in interest rates.

      The Company monitors interest rate risk by monthly reports that highlight the level, trend, and composition of net interest income and net interest margin, by quarterly reports matching rate-sensitive assets to rate-sensitive liabilities, and by reports of interest rate sensitivity through net interest income analysis.

      Net interest income analysis is the primary tool used by management to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. This method of analysis assesses overall interest rate sensitivity by modeling the impact on net interest income from sudden and sustained increases and decreases in market interest rates. The following table presents a summary of the potential changes in net interest income over a one year time horizon resulting from immediate and sustained changes in market interest rates.

      Net Interest Income Analysis (in thousands; rate changes in basis points (bp) = 1/100 of 1%):

December 31, 2005
	Dollar			Percent
Immediate Rate Change	Change			Change
+200bp	$	252			2.31	%
+100bp		94			0.86
+50bp		47			0.43
-50bp		(122	)		(1.11	)
-100bp		(243	)		(2.22	)
-200bp		(750	)		(6.87	)

December 31, 2004
	Dollar			Percent
Immediate Rate Change	Change			Change
+200bp	$	653			6.45	%
+100bp		309			3.05
+50bp		155			1.53
-50bp		(167	)		(1.65	)
-100bp		(334	)		(3.30	)
-200bp		(1,172	)		(11.58	)

      The tables above reflect the effect of interest rate changes on the Company’s net interest income. At December 31, 2005, the table to the left indicates that the effect of an immediate 100 basis point increase in interest rates would increase the Company’s net interest income by 0.86 percent or approximately $94,000. An immediate 100 basis point decrease in rates indicates a potential reduction of net interest income by 2.22 percent or approximately $243,000. For comparison purposes, the table to the right presents the rate risk profile as of December 31, 2004.

      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.

32

Capital Resources

      Stockholders’ equity on December 31, 2005 was $17,736,000, compared to $17,485,000 at December 31, 2004, an increase of $251,000 or 1.44 percent. Current earnings were $966,000 and dividends paid were $457,000. The change in unrealized losses on securities available-for-sale, net of deferred taxes, also reduced the total stockholders’ equity by $336,000 during 2005.

      At December 31, 2005, the Company had total “risk-based capital” of $24,997,000 as compared to $24,305,000 at December 31, 2004. See Note 18 “Regulatory Capital Requirements” to the consolidated financial statements for additional information on risk-based capital and other regulated capital ratios.

      Capital management activities in 2005 included the payment of four quarterly cash dividends and a four-for-three stock split in October.

      Management has issued no material commitments for major capital expenditures and knows of no trends or uncertainties, favorable or unfavorable, other than increased competition that would materially impact capital resources. Adequate reserves are maintained to provide for loan losses. The principal source of capital is undivided profits.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      The discussion relating to quantitative and qualitative disclosures about market risk is included in Item 7 above, specifically in the sections titled “Interest Rate Risk” and “2003 Net Interest Income Analysis.”

Item 8. Financial Statements and Supplementary Data

      The following audited consolidated financial statements and related documents are set forth below on the pages indicated:

	Page
Report of Independent Auditors		34
Consolidated Balance Sheets		35
Consolidated Statements of Income		36
Consolidated Statements of Stockholders’ Equity		37
Consolidated Statements of Comprehensive Income		38
Consolidated Statements of Cash Flows		39
Notes to Consolidated Financial Statements		40

33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of EvergreenBancorp, Inc.

      We have audited the accompanying consolidated balance sheets of EvergreenBancorp, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EvergreenBancorp, Inc. at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

CROWE CHIZEK AND COMPANY LLC

Oak Brook, Illinois

February 25, 2006

34

EVERGREENBANCORP, INC.

CONSOLIDATED BALANCE SHEETS

			December 31,
			2005			2004
			(In thousands, except
			share and per
			share data)
Assets
Cash and due from banks			$	12,379		$	9,407
Federal funds sold				2,112			2,736
Interest-bearing deposits in financial institutions				2,811			2
	Total cash and cash equivalents			17,302			12,145
Securities available-for-sale				33,550			35,170
Loans				189,188			159,656
Allowance for loan losses				(2,056	)		(1,887	)
	Net loans			187,132			157,769
Premises and equipment				3,179			2,576
Cash surrender value of bank owned life insurance				5,090			—
Accrued interest and other assets				2,939			1,970
	Total assets		$	249,192		$	209,630
Liabilities
Deposits
	Noninterest-bearing		$	64,635		$	54,193
	Interest-bearing			135,255			119,608
		Total deposits		199,890			173,801
Federal Home Loan Bank advances				23,849			11,067
Junior subordinated debt				5,000			5,000
Accrued expenses and other liabilities				2,717			2,277
	Total liabilities			231,456			192,145
Stockholders’ equity
Preferred stock; no par value; 100,000 shares authorized; none issued				—			—
Common stock and surplus; no par value; 15,000,000 shares authorized; 2,000,467 shares issued at 2005; 1,992,428 shares issued at 2004				16,005			15,927
Retained earnings				2,187			1,678
Accumulated other comprehensive loss				(456	)		(120	)
	Total stockholders’ equity			17,736			17,485
Total liabilities and stockholders’ equity			$	249,192		$	209,630

See accompanying notes to consolidated financial statements.

35

EVERGREENBANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

			Years Ended December 31,
			2005		2004		2003
			(In thousands, except
			per share data)
Interest income
	Loans, including fees		$	12,371	$	10,243	$	9,286
	Taxable securities			1,036		976		955
	Tax exempt securities			126		94		77
	Federal funds sold and other			179		50		90
		Total interest income		13,712		11,363		10,408
Interest expense
	Deposits			2,521		1,453		1,362
	Federal funds purchased			15		14		20
	Federal Home Loan Bank advances			568		541		586
	Junior subordinated debt			345		253		240
		Total interest expense		3,449		2,261		2,208
Net interest income				10,263		9,102		8,200
Provision for loan losses				423		321		233
Net interest income after provision for loan losses				9,840		8,781		7,967
Noninterest income
	Service charges on deposit accounts			1,177		1,305		1,176
	Merchant credit card processing			151		145		166
	Gain from sales of loans			—		—		10
	Gain on sales of securities available-for-sale			—		15		56
	Other commissions and fees			128		136		180
	Net earnings on bank owned life insurance			90		—		—
	Other noninterest income			147		108		167
		Total noninterest income		1,693		1,709		1,755
Noninterest expense
	Salaries and employee benefits			4,898		4,259		4,036
	Occupancy and equipment			1,697		1,391		1,318
	Data processing			744		727		728
	Professional fees			391		241		150
	Marketing			473		393		362
	State revenue and sales tax expense			306		257		49
	Loss on other real estate owned			—		132		—
	Other noninterest expense			1,641		1,202		1,553
		Total noninterest expense		10,150		8,602		8,196
Income before income taxes				1,383		1,888		1,526
Income tax expense				417		606		490
Net income			$	966	$	1,282	$	1,036
Basic earnings per share			$	0.48	$	0.64	$	0.52
Diluted earnings per share			$	0.47	$	0.63	$	0.52

See accompanying notes to consolidated financial statements.

36

EVERGREENBANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2005, 2004, and 2003

												Accumulated
						Common						Other
			Common			Stock						Comprehensive			Total
			Stock			and			Retained			Income			Stockholders’
			Shares			Surplus			Earnings			(Loss)			Equity
			(In thousands, except per share data)
Balance at January 1, 2003				1,075,461		$	13,597		$	2,266		$	97		$	15,960
Comprehensive income
	Net income			—			—			1,036			—			1,036
Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects				—			—			—			(146	)		(146	)
		Total comprehensive income														890
Cash dividends ($.185 per share)				—			—			(366	)		—			(366	)
Stock dividend (10%)				107,944			2,158			(2,158	)		—			—
Exercise of stock options				6,961			88			—			—			88
Tax benefit from stock related compensation				—			11			—			—			11
Balance at December 31, 2003				1,190,366			15,854			778			(49	)		16,583
Comprehensive income
	Net income			—			—			1,282			—			1,282
Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects				—			—			—			(71	)		(71	)
		Total comprehensive income														1,211
Cash dividends ($.192 per share)				—			—			(382	)		—			(382	)
Stock split (five-for-four)				298,645			—			—			—			—
Repurchase of fractional shares				(296	)		(7	)		—			—			(7	)
Exercise of stock options				5,606			69			—			—			69
Tax benefit from stock related compensation				—			11			—			—			11
Balance at December 31, 2004				1,494,321			15,927			1,678			(120	)		17,485
Comprehensive income
	Net income			—			—			966			—			966
Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects				—			—			—			(336	)		(336	)
		Total comprehensive income														630
Cash dividends ($.228 per share)				—			—			(457	)		—			(457	)
Stock split (four-for-three)				500,165			—			—			—			—
Repurchase of fractional shares				(471	)		(7	)		—			—			(7	)
Exercise of stock options				6,452			71			—			—			71
Tax benefit from stock related compensation				—			14			—			—			14
Balance at December 31, 2005				2,000,467		$	16,005		$	2,187		$	(456	)	$	17,736

See accompanying notes to consolidated financial statements.

37

EVERGREENBANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Years Ended December 31,
	2005			2004			2003
	(In thousands)
Net income	$	966		$	1,282		$	1,036
Other comprehensive income:
Change in unrealized gain (loss) on securities available for sale		(509	)		(91	)		(166	)
Reclassification adjustment for gains included in net income		—			(15	)		(56	)
Net unrealized gains (losses)		(509	)		(106	)		(222	)
Tax effect		173			35			76
Total other comprehensive income (loss)		(336	)		(71	)		(146	)
Total comprehensive income	$	630		$	1,211		$	890

See accompanying notes to consolidated financial statements.

38

EVERGREENBANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Years Ended December 31,
		2005			2004			2003
		(In thousands)
Cash flows from operating activities
Net income		$	966		$	1,282		$	1,036
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation		801			663			597
	Provision for loan losses		423			321			233
	Gain from sales of securities		—			(15	)		(56	)
	Gain on sales of loans		—			—			(10	)
	Write-down of other real estate owned		—			132			—
	Amortization of premiums and discounts on securities		64			79			159
	Federal Home Loan Bank stock dividends		(6	)		(40	)		(74	)
	Dividends reinvested		(190	)		(349	)		(290	)
	Net earnings on bank owned life insurance		(90	)		—			—
	Other changes, net		(342	)		694			(291	)
Net cash provided by operating activities			1,626			2,767			1,304
Cash flows from investing activities
Proceeds from sales, maturities and principal payments on securities available for sale			2,368			6,390			9,524
Purchases of securities available for sale			(1,125	)		(1,523	)		(32,767	)
Purchases of loans			(13,882	)		—			—
Net loan originations			(15,904	)		(21,258	)		(20,199	)
Purchase of bank owned life insurance			(5,000	)		—			—
Proceeds from sales of loans			—			—			304
Proceeds from sale of other real estate owned			—			2,527			—
Purchases of premises and equipment			(1,404	)		(770	)		(892	)
Proceeds from prepayments of securities available-for-sale			—			—			7,158
Net cash used in investing activities			(34,947	)		(14,634	)		(36,872	)
Cash flows from financing activities
Net increase in deposits			26,089			21,118			20,509
Net decrease (increase) in federal funds purchased			—			(3,097	)		(256	)
Proceeds from Federal Home Loan Bank advances			16,900			—			5,460
Repayments of Federal Home Loan Bank advances			(4,118	)		(4,314	)		(1,862	)
Repurchase of common stock			(7	)		(7	)		—
Proceeds from exercise of stock options			71			69			88
Dividends paid			(457	)		(382	)		(366	)
Net cash provided by financing activities			38,478			13,387			23,573
Net increase (decrease) in cash and cash equivalents			5,157			1,520			(11,995	)
Cash and cash equivalents at beginning of year			12,145			10,625			22,620
Cash and cash equivalents at end of year		$	17,302		$	12,145		$	10,625
Supplemental disclosures of cash flow information
Interest paid		$	3,292		$	2,203		$	2,221
Income taxes paid			810			326			760
Supplemental disclosures of noncash investing activities
	Transfer of loan to other real estate owned		—			—			2,659

See accompanying notes to consolidated financial statements.

39

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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”). As further discussed in Note 8 “Borrowings and Junior Subordinated Debt” to the consolidated financial statements, EvergreenBancorp Capital Trust I (“the Trust”) had previously been consolidated with the Company and is now reported separately. The consolidated entities are collectively referred to as “the Company.” The Bank is a Washington state chartered financial institution established in 1971 that engages in general commercial and consumer banking operations. Deposits in the Bank are insured to a maximum of $100,000 per depositor (in some instances up to $100,000 per deposit account, depending on the ownership category of the account) by the Federal Deposit Insurance Corporation (“the FDIC”).

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

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

      Holding Company Information. The Bank became a wholly owned subsidiary of the Bancorp on June 20, 2001 in accordance with the Plan and Agreement of Reorganization and Merger dated February 14, 2001, which provided that each share of the Bank’s common stock be exchanged for an equal number of shares of the common stock of the Bancorp. This was treated as an internal reorganization; accordingly, the capital accounts of the Bank as of June 20, 2001 were carried forward, without change, as the capital accounts of the Bancorp.

      Principles of Consolidation and Use of Estimates. The accompanying consolidated financial statements include the combined accounts of the Bancorp and the Bank. Significant intercompany balances and transactions have been eliminated.

      The accompanying financial statements have been prepared in conformity with U.S. generally accepted accounting principles and with the general practices in the banking industry. The preparation of financial statements in conformity with these principles requires management to make 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.

      Cash and Cash Equivalents. Cash and cash equivalents include cash on hand, cash items, clearings and exchanges, amounts due from correspondent banks, interest-bearing deposits in other financial institutions, and federal funds sold. Federal funds sold generally mature within one to four days from the transaction date.

      Securities. Securities classified as available-for-sale are reported at fair value, with the net unrealized gains or losses, net of tax, reported in other comprehensive income (loss), a separate component of stockholders’ equity. Realized gains or losses on securities sold are based on the net proceeds and adjusted book values of the securities sold, using the specific identification method. Other securities, such as FHLB stock, are carried at cost.

      Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

40

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

      Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

      Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in the process of collection. Consumer and credit card loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. Loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

      All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

      Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

      The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

      A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

      Other Real Estate Owned. Other real estate owned is comprised of a property recorded at the lower of cost or market based upon the appraised value.

      Premises and Equipment. Premises and equipment include leasehold improvements and are stated at cost, less accumulated depreciation and amortization on the straight-line method over the shorter of the estimated useful lives of the assets ranging from 5 to 10 years or the terms of the related leases. The Company leases the premises upon which it conducts business. Furniture, fixtures, and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 5 to 7 years. Maintenance, repairs, taxes, and insurance are charged to noninterest expense.

41

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Foreclosed Assets. Assets acquired through or instead of loan foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

      Income Taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.

      Comprehensive Income. Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes the reclassification and tax effects of the change in unrealized gains and losses on available for sale securities, which are recognized as a separate component of equity.

      Postretirement Health Care Benefits. The liability for postretirement benefits is reported by recognizing the expense for such benefits over the period services are rendered by employees.

      Fair Values of Financial Instruments. Fair values of financial instruments are estimated using relevant market information and other assumptions as more fully disclosed in Note 17 “Fair Values of Financial Instruments” to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

      Loan Commitments and Related Financial Instruments. Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments, such as standby letters of credit, that are considered financial guarantees in accordance with FASB Interpretation No. 45 are recorded at fair value.

      Loss Contingencies. Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

42

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Stock-Based Compensation. Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of Statement of Financial Accounting Standard Statement No. 123(R), Accounting for Stock-Based Compensation. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.

	2005		2004		2003
	(In thousands, except per
	share data)
Net income as reported	$	966	$	1,282	$	1,036
Deduct: Stock-based compensation expense determined under fair value based method		64		52		49
Pro forma net income	$	902	$	1,230	$	987
Basic earnings per share as reported	$	0.48	$	0.64	$	0.52
Pro forma basic earnings per share		0.45		0.62		0.50
Diluted earnings per share as reported		0.47		0.63		0.52
Pro forma diluted earnings per share		0.44		0.61		0.49

      The weighted average fair value of individual options granted was $3.68, $1.94, and $1.82 in 2005, 2004, and 2003. The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.

	2005		2004		2003
Risk-free interest rate		3.94%		3.65%		3.00%
Expected option life		7.50  years		7.50  years		7.50  years
Expected stock price volatility		22%		13%		12%
Dividend yield		1.7%		1.8%		1.1%

      Earnings Per Share. Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options.

      Newly issued accounting pronouncements. FAS 123R requires all public companies to record compensation costs for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This applies to awards granted or modified after the first year beginning after December 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that vest after adoption date are expected to result in additional compensation expense pre tax of approximately $98,000 in 2006, $80,000 in 2007, $63,000 in 2008, $36,000 in 2009, and $25,000 in 2010. There will be no significant effect on financial position as total equity will not change.

      SOP 03-3 requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition and should not be recorded at acquisition. It applies to any loan acquired in a transfer that showed evidence of credit quality deterioration since it was made.

43

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Dividend Restriction. Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends that may be paid by the Bank to the Bancorp or by the Bancorp to the stockholders.

      Reclassifications. Certain items in prior years’ financial statements have been reclassified to conform with the current year’s presentation. These reclassifications did not change previously reported stockholders’ equity or net income.

Note 2: Restrictions on Cash and Due from Banks

      Cash on hand or on deposit with the Federal Reserve Bank of $1,113,000 and $1,423,000 was required to meet regulatory reserve and clearing requirements at year end 2005 and 2004. These balances do not earn interest.

Note 3: Securities

      The fair value of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows (in thousands):

				Gross		Gross
		Fair		Unrealized		Unrealized
		Value		Gains		Losses
December 31, 2005
U.S. agencies		$	7,394	$	—	$	(116	)
States and political subdivisions			4,454		2		(52	)
Mortgage-backed securities and collateralized mortgage obligations			5,461		2		(144	)
AMF Adjustable Rate Mortgage Fund			14,823		—		(383	)
Federal Home Loan Bank stock			1,418		—		—
	Total securities available-for-sale	$	33,550	$	4	$	(695	)
December 31, 2004
U.S. agencies		$	8,004	$	21	$	(37	)
States and political subdivisions			3,555		38		(4	)
Mortgage-backed securities and collateralized mortgage obligations			7,367		21		(36	)
AMF Adjustable Rate Mortgage Fund			14,832		—		(185	)
Federal Home Loan Bank stock			1,412		—		—
	Total securities available-for-sale	$	35,170	$	80	$	(262	)

44

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The scheduled maturities of securities available-for-sale at December 31, 2005 were as follows. Securities not due at a single maturity date are shown separately (in thousands):

		Fair Value
Due in one year or less		$	1,298
Due after one year through five years			9,398
Due after five years through ten years			1,152
	Total		11,848
AMF Adjustable Rate Mortgage Fund			14,823
Mortgage-backed securities and collateralized mortgage obligations			5,461
Federal Home Loan Bank stock			1,418
	Total	$	33,550

      Sales of securities available-for-sale were as follows (in thousands):

	2005		2004			2003
Proceeds	$	—	$	2,525		$	5,433
Gross gains		—		25			56
Gross losses		—		(10	)		—

      Securities with an estimated carrying value of $16,070,000 and $9,880,000 at December 31, 2005 and 2004, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The Company is required to maintain a minimum investment in the stock of the FHLB of Seattle based on certain percentages of outstanding mortgage loans or advances from FHLB. At December 31, 2005, the minimum required investment was $1,151,500, which the Company exceeded. Dividend income from the FHLB stock was $6,000, $40,000, and $74,000, for 2005, 2004, and 2003, respectively.

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

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
Description of Securities
US agencies	$	496	$	(4	)	$	6,898	$	(112	)	$	7,394	$	(116	)
State and political subdivisions		3,278		(41	)		694		(11	)		3,972		(52	)
Mortgage-backed securities		436		(3	)		4,755		(141	)		5,191		(144	)
AMF Adjustable Rate Mortgage Fund		188		(2	)		14,635		(381	)		14,823		(383	)
Total temporarily impaired	$	4,398	$	(50	)	$	26,982	$	(645	)	$	31,380	$	(695	)

      At December 31, 2005, securities with unrealized losses have an aggregate depreciation of 2.2 percent from the Company’s amortized cost basis. The unrealized losses are predominately the result of changing market values due to increasing short-term (less than two years) market interest rates, are expected to regain the lost value with stable or declining interest rates in keeping with the pattern of past economic cycles, 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 to hold these securities until maturity or for the foreseeable future.

45

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
Description of Securities
U.S. agencies	$	3,495	$	(25	)	$	988	$	(12	)	$	4,483	$	(37	)
State and political subdivisions		891		(4	)		—		—			891		(4	)
Mortgage-backed securities		6,210		(36	)		31		—			6,241		(36	)
AMF Adjustable Rate Mortgage Fund		283		(1	)		14,549		(184	)		14,832		(185	)
Total temporarily impaired	$	10,879	$	(66	)	$	15,568	$	(196	)	$	26,447	$	(262	)

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

Note 4: Loans

      The Company originates loans primarily in King, Snohomish, and Pierce Counties. Although the Company has a diversified loan portfolio, local economic conditions may affect the borrower’s ability to meet stated repayment terms. Collateral may, depending on the loan, include accounts receivable, inventory, equipment, and real estate. Loans are originated at both fixed and variable rates.

      Loans at December 31 consisted of the following (in thousands):

		2005		2004
Commercial		$	61,921	$	55,563
Real estate mortgage			105,097		78,673
Real estate construction			6,953		11,538
Consumer			14,939		13,685
Other including overdrafts			278		197
	Total	$	189,188	$	159,656

46

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Loans at December 31, 2005, by maturity or repricing date were as follows (in thousands):

		Fixed		Variable
		Rate		Rate		Total
Due in one year or less		$	11,100	$	83,471	$	94,571
Due after one year through five years			23,893		43,243		67,136
Due after five years			21,776		4,970		26,746
	Total	$	56,769	$	131,684	$	188,453
Loans on which the accrual of interest has been discontinued							735
	Total					$	189,188

      Unamortized deferred loan fees net of unamortized origination costs were $797,000 and $695,000 at December 31, 2005 and 2004, respectively.

      The aggregate amount of loans serviced for others, including loan participations and the sold portion of U.S. government guaranteed loans, was $7,995,000 at December 31, 2005 and $9,388,000 at December 31, 2004.

      At December 31, 2005 and 2004, loans aggregating $40,281,000 and $22,258,000, respectively, were reported as available as collateral for the advances from the FHLB of Seattle, as described in Note 8 “Borrowings and Junior Subordinated Debt” to the consolidated financial statements.

      Loans to principal officers, directors, and their affiliates in 2005 were as follows (in thousands):

Beginning balance	$	1,048
Repayments		(2,784	)
Additions		1,808
Ending balance	$	72

Note 5: Allowance for Loan Losses

      Changes in the allowance for loan losses were as follows (in thousands):

	2005			2004			2003
Balance at January 1	$	1,887		$	1,636		$	1,690
Recoveries credited to the allowance		40			100			45
Provision for loan losses		423			321			233
Loans charged off		(294	)		(170	)		(332	)
Balance at December 31	$	2,056		$	1,887		$	1,636

      A portion of the allowance for loan losses is allocated to impaired loans. Information with respect to impaired loans and the related allowance for loan losses is as follows (in thousands):

		2005		2004
Impaired loans for which no allowance for loan losses was allocated		$	516	$	65
Impaired loans with an allocation of the allowance for loan losses			219		483
	Total	$	735	$	548
Amount of the allowance for loan losses allocated		$	37	$	298

47

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	2005		2004
Average of impaired loans during the year	$	648	$	155
Interest income recognized during impairment		93		2
Cash-basis interest income recognized		93		—

      Nonperforming loans at December 31 were as follows (in thousands):

	2005		2004
Loans past due 90 days or more and still accruing	$	414	$	5
Loans accounted for on a nonaccrual basis		735		213
If interest on these nonaccrual loans had been recognized, such income would have been		29		9

      Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category.

Note 6: Premises and Equipment

      Premises and equipment at December 31 consisted of the following (in thousands):

		2005			2004
Equipment and furniture		$	4,623		$	3,948
Leasehold improvements			2,959			2,267
Accumulated depreciation and amortization			(4,403	)		(3,639	)
	Total	$	3,179		$	2,576

      Depreciation expense amounted to $801,000, $663,000, and $597,000 for 2005, 2004, and 2003, respectively.

Note 7: Deposits

      The average rate paid on deposits was 2.00% for 2005 and 1.33% for 2004. Time certificates of deposit in denominations of $100,000 or more aggregated $39,604,000 and $30,399,000, including $19,300,000 and $15,800,000 of public funds from the State of Washington at December 31, 2005 and 2004, respectively. Interest expense on time deposits of $100,000 or more in 2005, 2004, and 2003 was $1,056,000, $503,000, and $298,000, respectively.

      The scheduled maturities of certificates of deposits at December 31, 2005 were as follows (in thousands):

2006		$	60,089
2007			4,953
2008			1,762
2009			75
	Total	$	66,879

Note 8: Borrowings and Junior Subordinated Debt

      At December 31, 2005, the Company has a $5,000,000 revolving line of credit with a correspondent bank, of which none is outstanding. The note is secured by the common stock of the Bank and bears interest at Prime less 0.50 percent, payable quarterly.

48

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Advances from the Federal Home Loan Bank (“FHLB”) are summarized as follows (in thousands):

			December 31,
			2005					2004
			Weighted					Weighted
			Average Rate			Amount		Average Rate			Amount
Advances from the FHLB due
	2006			4.74	%	$	5,580		4.78	%	$	3,654
	2007			4.64			5,084		4.84			2,880
	2008			4.10			2,185		4.17			2,347
	2009			4.77			3,000		3.37			1,186
	2010			4.91			2,000		4.57			1,000
	2011			4.96			2,000		—			—
	2012			4.98			2,000		—			—
	2013			4.92			1,000		—			—
	2014			4.95			1,000		—			—
		Total		4.73	%	$	23,849		4.50	%	$	11,067

      These advances were collateralized in aggregate, as provided for in the Advance Security and Deposit Agreement with the FHLB, by FHLB stock owned, deposits with the FHLB, qualifying first mortgage loans, and certain U.S. government agency securities. At December 31, 2005, none of the advances have adjustable rates. Although the Company does not anticipate replacement of FHLB advances, if repayments were to occur prior to the contractual maturities, prepayment fees could be assessed.

      In May 2002, Bancorp formed EvergreenBancorp Capital Trust I (“the Trust”) a statutory trust formed under the laws of the State of Delaware and a wholly owned financing subsidiary of the Bancorp. In May 2002, the Trust issued $5 million in trust preferred securities in a private placement offering. Simultaneously with the issuance of the trust preferred securities by the Trust, the Bancorp issued junior subordinated debentures to the Trust. The junior subordinated debentures are the sole assets of the Trust. 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 3.50% (7.55% at December 31, 2005), provided that this rate cannot exceed 12.0% through June 30, 2007. The junior subordinated debentures are callable in 2007, at which time management will examine options to refinance; the debentures will mature in 2032, at which time the preferred securities must be redeemed. The Bancorp has provided a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the Trust under the preferred securities as set forth in such guarantee agreement. Debt issuance costs totaling $209,000 were capitalized related to the offering and are being amortized over the estimated life of the junior subordinated debentures.

      Prior to 2003, the Trust was consolidated in the Company’s financial statements, with the trust preferred securities issued by the Trust reported in liabilities as “guaranteed preferred beneficial interests” and the subordinated debentures eliminated in consolidation. Under current accounting guidance, FASB Interpretation No. 46, as revised in December 2003, the Trust is no longer consolidated with the Company. Accordingly, the Company does not report the securities issued by the Trust as liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by the Trust, as these are no longer eliminated in consolidation. The effect of no longer consolidating the Trust does not change the amounts reported as the Company’s assets, liabilities, equity, or interest expense. Accordingly, the amounts previously reported as “guaranteed preferred beneficial interests” in liabilities have been recaptioned “junior subordinated debt” and continue to be presented in liabilities on the balance sheet.

49

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9: Stockholders’ Equity

      On November 4, 2003, the Bancorp’s Board of Directors approved a 10% stock dividend payable on November 26, 2003 to stockholders of record as of November 14, 2003. The stock dividend also affected stock options previously granted and shares available for grant under the Amended 2000 Plan.

      On October 21, 2004, the Bancorp’s Board of Directors approved a five-for-four stock split payable November 30, 2004 to stockholders of record as of November 15, 2004. The five-for-four stock split also affected stock options previously granted and shares available for grant under the Amended 2000 Plan.

      On September 15, 2005, the Bancorp’s Board of Directors approved a four-for-three stock split payable October 25, 2005 to stockholders of record as of October 11, 2005. The four-for-three stock split also affected stock options previously granted and shares available for grant under the Amended 2000 Plan.

Note 10: Income Taxes

      Income tax expense for the years ended December 31 consisted of the following (in thousands):

		2005			2004			2003
Currently payable		$	595		$	816		$	572
Deferred			(178	)		(210	)		(82	)
	Total	$	417		$	606		$	490

      A reconciliation between the statutory federal income tax rates (maximum of 34%) and the effective income tax rate was as follows (in thousands):

		2005			2004			2003
Federal income tax at statutory rates		$	470		$	642		$	519
Decrease in taxes resulting from tax-exempt interest income			(39	)		(30	)		(31	)
Bank owned life insurance			(31	)		—			—
Nondeductible expenses and other			17			(6	)		2
	Total	$	417		$	606		$	490

50

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The components of the deferred income tax asset included in other assets were as follows (in thousands):

		2005			2004
Deferred tax asset
	Provision for loan losses	$	607		$	559
	Postretirement health care benefits		472			414
	Unamortized loan fees, net of loan costs		265			236
	Accrued vacation pay		108			89
	Unrealized losses on securities available-for-sale net		235			62
			1,687			1,360
Deferred tax liability
	Federal Home Loan Bank stock dividends	$	(262	)	$	(258	)
	Depreciation		(121	)		(144	)
	Other		(10	)		(15	)
			(393	)		(417	)
	Net deferred income tax asset	$	1,294		$	943

Note 11: Stock Option 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 (“Amended 2000 Plan”). The Amended 2000 Plan currently provides for the grant of options to purchase up to 329,724 shares of common stock. Options available under the plan have been adjusted for all applicable stock dividends and stock splits paid by the Company. As of December 31, 2005, approximately 68,675 shares of common stock were available for future grant under the Amended 2000 Plan.

      The Amended 2000 Plan provides for the granting of non-qualified and incentive stock options to certain employees and directors. Non-qualified stock options granted to employees vest over a five-year period and expire after ten years from the date of grant. Nonqualified stock options granted to directors vest over a three-year period and expire after three years, three months from the date of grant.

      Stock option transactions were as follows:

	2005					2004					2003
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at the beginning of the year		191,440		$	8.15		176,771		$	7.62		143,507		$	7.28
Granted		45,334			13.72		31,667			10.65		55,917			8.90
Exercised		(8,524	)		6.29		(8,899	)		7.76		(12,711	)		6.89
Forfeited		—			—		(8,099	)		8.28		(9,942	)		8.30
Outstanding at the end of the year		228,250		$	9.32		191,440		$	8.15		176,771		$	7.62

51

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Outstanding and exercisable stock options at year-end 2005 were as follows:

			Outstanding				Exercisable
					Weighted-
					Average				Weighted-
	Year of				Remaining				Average
Exercise Price	Grant		Number		Contractual Life		Number		Exercise Price
$13.72		2005		45,326		7.72 years		—	$	13.72
10.65		2004		31,107		8.12 years		6,125		10.65
8.90		2003		40,941		6.23 years		15,802		8.90
8.02		2002		33,530		6.30 years		19,636		8.02
7.01		2001		42,664		5.28 years		34,143		7.01
6.84		2000		34,682		4.81 years		34,682		6.84
Outstanding at end of year				228,250		6.40 years		110,388	$	9.30

Note 12: Earnings Per Share of Common Stock

      Basic earnings per share of common stock are computed on the basis of the weighted average number of common stock shares outstanding. 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. All computations of basic and diluted earnings per share are adjusted for all applicable stock splits and dividends paid on the Company’s common stock.

      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):

		2005		2004		2003
Income (numerator):
	Net Income	$	966	$	1,282	$	1,036
Shares (denominator):
	Weighted average number of common stock shares outstanding — basic		1,997,429		1,988,979		1,976,588
	Dilutive effect of outstanding employee and director stock options		45,276		34,502		21,529
	Weighted average number of common stock shares outstanding and assumed conversions — diluted		2,042,705		2,023,481		1,998,117
Basic earnings per share of common stock		$	0.48	$	0.64	$	0.52
Diluted earnings per share of common stock		$	0.47	$	0.63	$	0.52

Note 13: Retirement Benefits

      The Company participates in a multi-employer defined contribution retirement plan. The 401(k) plan permits all salaried employees to contribute up to a maximum of 15% of gross salary per month. For the first 6%, the Company contributes two dollars for each dollar the employee contributes. Partial vesting of Company contributions to the plan begins at 20% after two years of employment, and such contributions are 100% vested with five years of employment. The Company’s contributions to the plan for 2005, 2004, and 2003 were $321,000, $275,000, and $266,000, respectively.

52

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Company also participates in multiple-employer defined benefit postretirement health care plans that provide medical and dental coverage to directors and surviving spouses and to employees who retire after age 62 and 15 years of full-time service and their dependents. Effective January 1, 2005, new medical plans were implemented, a new dental plan was implemented, and a separate vision plan, previously included as part of the former medical plans, was added. Retirees are eligible for one medical plan. The medical, dental and vision plans are nonfunded.

      The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. SFAS No. 106 requires that employers recognize the cost of providing postretirement benefits over an employee’s active service period. Net periodic postretirement benefit cost under SFAS No. 106 was $236,000 in 2005, $218,000 in 2004, and $178,000 in 2003.

      The Company uses a September 30 measurement date for its plans. Net periodic postretirement benefit cost for 2005, 2004, and 2003 included the following components (in thousands):

	2005			2004		2003
Service cost	$	126		$	90	$	68
Interest cost		95			87		73
Amortization of transition obligation		—			41		41
Amortization of prior service cost		(5	)		—		—
Recognized actuarial (gain) loss		20			—		(4	)
Net periodic benefit cost	$	236		$	218	$	178

      A reconciliation of the benefit obligation at the beginning and end of the year and the effects attributable to each cost component for 2005, 2004, and 2003 are as follows (in thousands):

	2005			2004			2003
Benefit obligation at beginning of year	$	1,605		$	1,337		$	1,204
Service cost		125			90			68
Interest cost		95			87			73
Plan participants’ contributions		3			—			—
Amendments		(396	)		—			—
Actuarial loss		533			128			24
Benefits paid		(37	)		(37	)		(32	)
Benefit obligation at end of year	$	1,928		$	1,605		$	1,337

      The fair value of plan assets at the beginning and end of the year and the changes during 2005, 2004, and 2003 are as follows (in thousands):

	2005			2004			2003
Fair value of plan assets at beginning of year	$	—		$	—		$	—
Employer contribution		37			37			32
Benefits paid		(37	)		(37	)		(32	)
Fair value of plan assets at end of year	$	—		$	—		$	—

53

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The funded status (the excess of the benefit obligation over the fair value of plan assets at the end of the year) of the plan is reconciled to the accrued benefit cost at December 31, 2005, 2004, and 2003, as follows (in thousands):

	2005			2004			2003
Funded status	$	(1,928	)	$	(1,605	)	$	(1,337	)
Unrecognized transition obligation		—			326			367
Unrecognized prior service cost		(66	)		—			—
Unrecognized actuarial (gain) loss		577			60			(69	)
Accrued benefit cost	$	(1,417	)	$	(1,219	)	$	(1,039	)

      The weighted-average discount rate used in determining the benefit obligation was 5.50% for 2005, 5.75% for 2004, and 6.00% for 2003. The weighted average discount rate used in determining the net periodic benefit cost was 5.75% in 2005, 6.00% in 2004, and 6.50% in 2003.

      The assumed rate of increase for 2006 in per capita cost of covered benefits is 11.0% for medical benefits, 7.5% for dental benefits, and 3.0% for vision benefits. The rate for medical benefits was assumed to decrease gradually to 5.0% in 2018, while the rate for vision benefits was assumed to be constant at 3.0%.

      Assumed health-care-cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health-care-cost trend rates would have the following effects (in thousands):

	1-Percentage-		1-Percentage-
	Point		Point
	Increase		Decrease
Effect on total of service and interest cost components	$	55	$	(42	)
Effect on benefit obligation	$	404	$	(317	)

      The Company does not expect to make contributions in excess of benefits payments in 2006. The following benefits payments, which reflect expected future service, are expected (in thousands):

2006	$	44
2007		47
2008		52
2009		58
2010		65
2011-2016		560

Note 14: Leases

      The Company leases premises and parking facilities for the Eastlake and Lynnwood offices from PEMCO Mutual Insurance Company under leases expiring from March 31, 2006 to March 31, 2007. The Company leases the Federal Way, South Lake Union, Bellevue, and Third & Seneca premises from other parties. These leases expire from June 30, 2008, August 31, 2009, May 31, 2011, and April 30, 2015, respectively. Total rental expense, including amounts paid under month-to-month cancelable leases, amounted to $678,000, $575,000, and $556,000 for 2005, 2004, and 2003, respectively.

54

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The future minimum rental commitments as of December 31, 2005 for all noncancelable leases are as follows (in thousands):

2006		$	647
2007			469
2008			388
2009			356
2010			346
Thereafter			1,113
	Total	$	3,319

Note 15: Agreements with Related Parties

      The Company shares common services and support activities with other companies located at PEMCO Financial Center. Those companies include PEMCO Insurance Company, PEMCO Mutual Insurance Company, PEMCO Life Insurance Company, PEMCO Foundation, Inc., PEMCO Corporation, PCCS, Inc., PEMCO Technology Services, Inc., Public Employees Insurance Agency, Inc., and School Employees Credit Union of Washington. Such shared functions include human resources, employee benefits, legal services, and purchasing. Total costs associated with these shared services amounted to $239,000, $256,000, and $325,000 for 2005, 2004, and 2003, respectively.

      In addition, data processing expense for services provided by PCCS, Inc., PEMCO Corporation, PEMCO Mutual Insurance Company, and PEMCO Technology Services, Inc. for 2005, 2004, and 2003 was $346,000, $346,000, and $424,000, respectively.

      At December 31, 2005, approximately 13.50% of the Company’s deposits are from other companies located at PEMCO Financial Center.

      Two of the members of the Boards of Directors of the Bancorp and the Bank are also minority directors of one or more of the other companies located at PEMCO Financial Center, except for the School Employees Credit Union of Washington.

Note 16: Commitments and Contingencies

      In the normal course of business, there are various commitments and contingent liabilities (such as guarantees, commitments to extend credit, letters of credit, and lines of credit) that are not presented in the financial statements. 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.

      The distribution of commitments to extend credit approximates the distribution of loans outstanding as set forth in Note 4 “Loans” to the consolidated financial statements. Commercial and standby letters of credit and similar arrangements are granted primarily to commercial borrowers.

      The Company is not aware of any claims or lawsuits that would have a materially adverse effect on the financial position of the Company.

55

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Company’s significant commitments and contingent liabilities at December 31, 2005 were as follows (in thousands):

	2005				2004
	Fixed		Variable		Fixed		Variable
Lines of credit	$	6,696	$	40,250	$	6,369	$	38,287
Commitments to extend credit		—		5,340		—		1,935
Standby letters of credit and similar arrangements		—		145		—		95

Note 17: Fair Values of Financial Instruments

      The estimated fair values of the Company’s financial instruments at December 31 were as follows (in thousands):

		2005				2004
		Book		Fair		Book		Fair
		Value		Value		Value		Value
Financial assets
	Cash and cash equivalents	$	17,302	$	17,302	$	12,145	$	12,145
	Securities available-for-sale		33,550		33,550		35,170		35,170
	Net loans		187,132		185,596		157,769		157,491
	Accrued interest receivable		931		931		684		684
Financial liabilities
	Deposits	$	199,890	$	199,820	$	173,801	$	173,639
	Advances from Federal Home Loan Bank		23,849		23,702		11,067		11,194
	Junior subordinated debt		5,000		5,000		5,000		5,000
	Accrued interest payable		347		347		190		190

      The methods and assumptions used to estimate fair value are described as follows.

      Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, FHLB stock, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes and, if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. The fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements.

Note 18: Regulatory Capital Requirements

      The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital adequacy guidelines that involve quantitative measures of each entity’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications also are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

56

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Quantitative measures established by regulation to ensure capital adequacy require banks and bank holding companies to maintain the minimum amounts and ratios of total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets as set forth in the table below. Under the regulatory framework for prompt corrective action, the Company must maintain other minimum risk-based ratios as set forth in the table.

      The most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Company must maintain the minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios set forth in the table. There are no conditions or events since that notification that management believes have changed the Company’s category. The Company’s regulatory capital includes trust preferred securities, which qualify up to 25 percent of Tier 1 Capital.

      The actual capital amounts (in thousands) and ratios of the Company and the Bank are presented in the table below.

												Minimum to Be
												Well Capitalized
							Minimum for					Under the Prompt
							Capital Adequacy					Corrective Action
		Actual					Purposes					Provisions
		Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2005
Total capital (to risk-weighted assets)
	Consolidated	$	24,997		12.55	%	$	15,939		8.00	%		N/A		N/A
	Bank		24,626		12.39			15,898		8.00		$	19,873		10.00	%
Tier 1 capital (to risk-weighted assets)
	Consolidated		22,941		11.51			7,953		4.00			N/A		N/A
	Bank		22,570		11.36			7,949		4.00			11,924		6.00
Tier 1 capital (to average assets)(1)
	Consolidated		22,941		10.25			8,952		4.00			N/A		N/A
	Bank		22,570		10.10			8,935		4.00			11,169		5.00
December 31, 2004
Total capital (to risk-weighted assets)
	Consolidated	$	24,305		14.03	%	$	13,826		8.00	%		N/A		N/A
	Bank		23,651		13.71			13,805		8.00		$	17,256		10.00	%
Tier 1 capital (to risk-weighted assets)
	Consolidated		22,419		12.94			6,913		4.00			N/A		N/A
	Bank		21,764		12.61			6,902		4.00			10,354		6.00
Tier 1 capital (to average assets)(1)
	Consolidated		22,419		11.07			8,083		4.00			N/A		N/A
	Bank		21,764		10.77			8,083		4.00			10,104		5.00

(1)  Also referred to as the leverage ratio

57

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 19: Condensed Financial Statements of Bancorp

      The following are condensed balance sheets at December 31, 2005 and 2004 and the related condensed statements of income and cash flows for the years ended December 31, 2005 and 2004.

CONDENSED BALANCE SHEETS (in thousands):

		2005		2004
Assets
Due from EvergreenBank		$	285	$	438
Investment in subsidiaries			22,365		21,830
Other assets			413		284
	Total assets	$	23,063	$	22,552
Liabilities and stockholders’ equity
Stockholders’ equity		$	17,736	$	17,485
Junior subordinated debt			5,000		5,000
Other liabilities			327		67
	Total liabilities and stockholders’ equity	$	23,063	$	22,552

CONDENSED STATEMENTS OF INCOME (in thousands):

		2005		2004			2003
Dividend income from EvergreenBank		$	870	$	495		$	886
Interest expense			345		253			240
Other expense			453		370			3
Income (loss) before income taxes and equity in undistributed income of subsidiary			72		(128	)		643
Income tax benefit			243		208			83
Equity in undistributed income of subsidiary			651		1,202			310
	Net income	$	966	$	1,282		$	1,036

58

EVERGREENBANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED STATEMENTS OF CASH FLOWS (in thousands):

			2005			2004			2003
Cash flows from operating activities
	Net income		$	966		$	1,282		$	1,036
	Adjustments to reconcile net income to net cash provided by operating activities
		Equity in undistributed income of subsidiary		(651	)		(1,202	)		(310	)
		Other changes, net		231			146			(79	)
Net cash provided by operating activities				546			226			647
Cash flows from investing activities
		Capital contributed to subsidiary		—			—			—
		Investment in EvergreenBancorp Capital Trust I		—			—			—
Cash flows used in investing activities				—			—			—
Cash flows from financing activities
	Payment of dividends			(457	)		(382	)		(366	)
	Repurchase of fractional shares			(7	)		(7	)		—
	Proceeds from issuance of subordinated debt, net			—			—			—
	Proceeds from exercise of stock options			71			69			88
Net cash provided by (used in) financing activities				(393	)		(320	)		(278	)
Net increase (decrease) in cash				(153	)		(94	)		369
Cash on deposit with EvergreenBank at beginning of year				438			532			163
Cash on deposit with EvergreenBank at end of year			$	285		$	438		$	532

Note 20: Selected Quarterly Data (Unaudited)

		Quarter Ended
		March 31		June 30		September 30		December 31
		(In thousands, except per share data)
2005
	Interest income	$	3,179	$	3,287	$	3,513	$	3,733
	Net interest income		2,461		2,498		2,608		2,696
	Net income		299		214		201		252
	Basic earnings per share		0.15		0.10		0.10		0.13
	Diluted earnings per share		0.15		0.10		0.10		0.12
2004
	Interest income	$	2,725	$	2,702	$	2,842	$	3,094
	Net interest income		2,193		2,158		2,287		2,464
	Net income		286		280		301		415
	Basic earnings per share		0.14		0.14		0.15		0.21
	Diluted earnings per share		0.14		0.14		0.15		0.20

59

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

Item 9A. 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 December 31, 2005. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, 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 disclosed in the 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.

Item 9B. Other Information

      Upon the recommendation of the compensation committee, in 2005, Bancorp’s board of directors approved an increase to the fees paid to those nonemployee directors serving on the audit committee from $2,500 to $5,000 per year.

PART III

Item 10. Directors and Executive Officers of the Registrant

      Information regarding directors and executive officers is included in Bancorp’s Proxy Statement for its 2006 Annual Meeting of Shareholders (“the Proxy Statement”) under the heading “Election of Directors — Information with Respect to Nominees and Directors Whose Terms Continue,” “Executive Officers,” and “Compliance with Section 16(a) Filing Requirements” and is incorporated herein by reference. References within the Proxy Statement to “the Company” refer only to Bancorp.

      Bancorp’s Board of Directors has determined that Carole J. Grisham, Bancorp’s Audit Committee Chair, is an audit committee financial expert as described in Item 401(h)(2)-(3) of Regulation S-K. Ms. Grisham is independent of management, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.

      Bancorp has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, and any persons performing similar functions. A copy of Bancorp’s Code of Ethics for Senior Financial Officers can be found as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2003.

Item 11. Executive Compensation

      Information concerning compensation of executive officers and directors is included in Bancorp’s Proxy Statement under the headings “Meetings and Committees of the Board of Directors — Compensation of Directors” and “Executive Compensation” and is incorporated herein by reference.

60

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

      Information regarding security ownership of certain beneficial owners and management is included in Bancorp’s Proxy Statement under the headings “Security Ownership — Directors and Executive Officers” and “Beneficial Owners” and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

      Information regarding certain relationships and related transactions is included in Bancorp’s Proxy Statement under the heading entitled “Transactions with Directors, Executive Officers and Associates” and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

      Information regarding the fees Bancorp paid to its independent accountants, Crowe Chizek and Company LLC, during 2005 is included in Bancorp’s Proxy Statement under the heading “Independent Registered Public Accounting Firm” and the information included therein is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

      (a)(1) Financial Statements

      The financial statements required by Item 8 of this report are filed as part of this report.

      (a)(2) Financial Statement Schedules

      All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or the notes thereto.

      (b) Exhibits

Exhibit No.			Description
	3	.1	Restated Articles of Incorporation of Registrant dated July 25, 2001 (incorporated by reference to Registrant’s Form 10-K for the year ended December 31, 2001)
	3	.2	Bylaws of Registrant dated February 14, 2001 (incorporated by reference to Registrant’s Form 10-K for the year ended December 31, 2001)
	10	.1	2000 Stock Option Plan dated February 17, 2000 and adopted by Registrant effective June 20, 2001 (incorporated by reference to Registrant’s Form S-8 Filed August 20, 2001; Reg. No. 333-67956)
	10	.2	Incentive Stock Option Letter Agreement (incorporated by reference to Registrant’s Form S-8 Filed August 20, 2001; Reg. No. 333-67956)
	10	.3	Nonqualified Stock Option Letter Agreement (incorporated by reference to Registrant’s Form S-8 Filed August 20, 2001; Reg. No. 333-67956)
	10	.4	Directors Nonqualified Stock Option Letter Agreement (incorporated by reference to Registrant’s Form S-8 Filed August 20, 2001; Reg. No. 333-67956)
	10	.5	Form of Change of Control Severance Agreement effective May 24, 2005 between the Bank and each of Gerald O. Hatler and William G. Filer II (incorporated by reference to Registrant’s Form 8-K filed May 27, 2005)
	10	.6	PEMCO Executive Deferred Compensation Plan, effective August 1, 2005 (incorporated by reference to Registrant’s Form 8-K filed July 27, 2005)
	10	.7	PEMCO Directors’ Deferred Compensation Plan, effective August 1, 2005 (incorporated by reference to Registrant’s Form 8-K filed July 27, 2005)

61

Exhibit No.			Description
	10	.8	Form of Change of Control Severance Agreement effective February 2, 2006 between the Bank and each of Michelle P. Worden and Valerie K. Blake (incorporated by reference to Registrant’s Form 8-K filed February 8, 2006)
	10	.9	Separation Agreement between the Bank and Susan L. Gates dated February 3, 2006 (incorporated by reference to Registrant’s Form 8-K filed February 8, 2006)
	10	.10	Lease between the Bank and EOP-Northwest Properties, L.L.C. dated January 17, 2005 (incorporated by reference to Registrant’s Form 10-Q for the quarter ended March 31, 2005.)
	14		Code of Ethics for Senior Financial Officers (incorporated by reference to Registrant’s Form 10-K for the year ended December 31, 2003)
	21		Subsidiaries of the Registrant
	23		Independent Auditors’ Consent — Crowe Chizek and Company LLC
	31	.1	Certification of Chief Executive Officer of Registrant required by Rule 13a-14(a)/15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification of Chief Financial Officer of Registrant required by Rule 13a-14(a)/15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification of Chief Executive Officer of Registrant required by 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification of the Chief Financial Officer of Registrant required by 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

62

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 17th day of March, 2006.

EVERGREENBANCORP, INC.

By:  /s/ GERALD O. HATLER

Gerald O. Hatler

President and Chief Executive Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated and on the 17th day of March, 2006.

Signature	Title
/s/ GERALD O. HATLER Gerald O. Hatler	President, Chief Executive Officer and Director (Principal Executive Officer)
/s/ WILLIAM G. FILER II William G. Filer II	Executive Vice President and Chief Financial Officer (Principal Accounting Officer)
/s/ RICHARD W. BALDWIN Richard W. Baldwin	Director
/s/ C. DON FILER C. Don Filer	Director
/s/ CAROLE J. GRISHAM Carole J. Grisham	Director
/s/ ROBERT J. GROSSMAN Robert J. Grossman	Director
/s/ J. THOMAS HANDY J. Thomas Handy	Director
/s/ STAN W. MCNAUGHTON Stan W. McNaughton	Director
/s/ RUSSEL E. OLSON Russel E. Olson	Director

63 EX-21 2 v16802exv21.txt EXHIBIT 21 . . . EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT

PERCENTAGE OF JURISDICTION OR STATE SUBSIDIARY OWNERSHIP OF INCORPORATION ---------- ------------- --------------------- EvergreenBank 100% Washington EvergreenBancorp Capital Trust I 100% Delaware

EX-23 3 v16802exv23.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 333-67956 on Form S-8 of EvergreenBancorp, Inc. of our report dated February 25, 2006 appearing in this Annual Report on Form 10-K of EvergreenBancorp, Inc. for the year ended December 31, 2005. /s/ Crowe Chizek and Company LLC -------------------------------- Crowe Chizek and Company LLC Oak Brook, Illinois March 15, 2006 EX-31.1 4 v16802exv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13A-15(E) AND 15D-15(E) I, Gerald O. Hatler, certify that: 1. I have reviewed this Annual Report on Form 10-K of EvergreenBancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 17, 2006 /s/ Gerald O. Hatler - ------------------------------------- Gerald O. Hatler President and Chief Executive Officer EX-31.2 5 v16802exv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13A-15(E) AND 15D-15(E) I, William G. Filer II, Chief Financial Officer, certify that: 1. I have reviewed this Annual Report on Form 10-K of EvergreenBancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 17, 2006 /s/ William G. Filer II - ------------------------------------- William G. Filer II Executive Vice President and Chief Financial Officer EX-32.1 6 v16802exv32w1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of EvergreenBancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald O. Hatler, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Gerald O. Hatler - ------------------------------------- Gerald O. Hatler President and Chief Executive Officer March 17, 2006 EX-32.2 7 v16802exv32w2.txt EXHIBIT 32.2 EXHBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of EvergreenBancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William G. Filer II, Chief Accounting Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. /s/ William G. Filer II - ------------------------------------- William G. 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EX-21

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                                                                               .
                                                                               .

                                                                      EXHIBIT 21

                         SUBSIDIARIES OF THE REGISTRANT



                                   PERCENTAGE OF   JURISDICTION OR STATE
           SUBSIDIARY                OWNERSHIP        OF INCORPORATION
           ----------              -------------   ---------------------
                                             
EvergreenBank                           100%             Washington
EvergreenBancorp Capital Trust I        100%              Delaware

EX-23

                                                                      Exhibit 23




            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



We consent to the incorporation by reference in Registration Statement
No. 333-67956 on Form S-8 of EvergreenBancorp, Inc. of our report dated
February 25, 2006 appearing in this Annual Report on Form 10-K of
EvergreenBancorp, Inc. for the year ended December 31, 2005.


                                        /s/ Crowe Chizek and Company LLC
                                        --------------------------------
                                        Crowe Chizek and Company LLC



Oak Brook, Illinois
March 15, 2006

EX-31.1

                                                                    EXHIBIT 31.1

                  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

                    PURSUANT TO RULE 13A-15(E) AND 15D-15(E)

I, Gerald O. Hatler, certify that:

1.   I have reviewed this Annual Report on Form 10-K of EvergreenBancorp, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     (a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known to
          us by others within those entities, particularly during the period in
          which this report is being prepared;

     (b)  Evaluated the effectiveness of the registrant's disclosure controls
          and procedures and presented in this report our conclusions about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     (c)  Disclosed in this report any change in the registrant's internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's fourth fiscal quarter in
          the case of an annual report) that has materially affected, or is
          reasonably likely to materially affect, the registrant's internal
          control over financial reporting; and

5.   The registrant's other certifying officer(s) and I have disclosed, based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     (a)  All significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the registrant's ability to
          record, process, summarize and report financial information; and

     (b)  Any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          control over financial reporting.

     Date: March 17, 2006


/s/ Gerald O. Hatler
- -------------------------------------
Gerald O. Hatler
President and Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

                    PURSUANT TO RULE 13A-15(E) AND 15D-15(E)

I, William G. Filer II, Chief Financial Officer, certify that:

1.   I have reviewed this Annual Report on Form 10-K of EvergreenBancorp, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     (a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known to
          us by others within those entities, particularly during the period in
          which this report is being prepared;

     (b)  Evaluated the effectiveness of the registrant's disclosure controls
          and procedures and presented in this report our conclusions about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     (c)  Disclosed in this report any change in the registrant's internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's fourth fiscal quarter in
          the case of an annual report) that has materially affected, or is
          reasonably likely to materially affect, the registrant's internal
          control over financial reporting; and

5.   The registrant's other certifying officer(s) and I have disclosed, based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     (a)  All significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the registrant's ability to
          record, process, summarize and report financial information; and

     (b)  Any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          control over financial reporting.

     Date: March 17, 2006


/s/ William G. Filer II
- -------------------------------------
William G. Filer II
Executive Vice President and
Chief Financial Officer

EX-32.1

                                                                    EXHIBIT 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of EvergreenBancorp, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald
O. Hatler, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1)  The Report fully complies with the requirements of Section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     (2)  The information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
          of the Company.

A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.


/s/ Gerald O. Hatler
- -------------------------------------
Gerald O. Hatler
President and Chief Executive Officer

March 17, 2006

EX-32.2

                                                                     EXHBIT 32.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of EvergreenBancorp, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, William
G. Filer II, Chief Accounting Officer, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

     (1)  The Report fully complies with the requirements of Section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     (2)  The information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
          of the Company.

A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.


/s/ William G. Filer II
- -------------------------------------
William G. Filer II
Executive Vice President and
Chief Financial Officer

March 17, 2006