##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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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,
    2003                                                                   
|          
|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



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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 check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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 check mark whether the registrant is an accelerated filer 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, 2003 (the last business day of
the most recent second fiscal quarter), was $17,396,979.

The
number of shares outstanding of the registrants no par
value common stock as of March 10, 2004 was
1,191,946 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Designated
portions of the Proxy Statement for the 2004 Annual Meeting of
Shareholders (Part III, Items 10-14).



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EVERGREENBANCORP, INC.

FORM 10-K

ANNUAL REPORT


TABLE OF CONTENTS

|             |  |                                                                                               |    |      |    | 
|------------ |  | --------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|             |  |                                                                                               |    | Page
|             |  |                                                                                               |    |     
|PART I      
|Item 1.      |  | Business                                                                                      |    |      | 2  | 
|Item 2.      |  | Properties                                                                                    |    |      | 8  | 
|Item 3.      |  | Legal Proceedings                                                                             |    |      | 9  | 
|Item 4.      |  | Submission of Matters to a
    Vote of Security Holders                                       |    |      | 9  | 
|PART II     
|Item 5.      |  | Market for Registrants
    Common Equity and Related Stockholder Matters                     |    |      | 9  | 
|Item 6.      |  | Selected Consolidated
    Financial Data                                                      |    |      | 10 | 
|Item 7.      |  | Managements Discussion
    and Analysis of Financial Condition and
    Results of Operations |    |      | 11 | 
|Item 7A.     |  | Quantitative and Qualitative
    Disclosures About Market Risk                                |    |      | 26 | 
|Item 8.      |  | Financial Statements                                                                          |    |      | 26 | 
|Item 9.      |  | Changes in and Disagreements
    with Accountants on Accounting and
    Financial Disclosure  |    |      | 50 | 
|Item 9A.     |  | Controls and Procedures                                                                       |    |      | 50 | 
|PART III    
|Item 10.     |  | Directors and Executive
    Officers of the Registrant                                        |    |      | 50 | 
|Item 11.     |  | Executive Compensation                                                                        |    |      | 50 | 
|Item 12.     |  | Security Ownership of
    Certain Beneficial Owners and Management                            |    |      | 50 | 
|Item 13.     |  | Certain Relationships and
    Related Transactions                                            |    |      | 51 | 
|Item 14.     |  | Principal Accountant Fees
    and Services                                                    |    |      | 51 | 
|PART IV     
|Item 15.     |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                           |    |      | 51 | 
|SIGNATURES   |  |                                                                                               | 53 |     
|EXHIBIT 14  
|EXHIBIT 21  
|EXHIBIT 23.1
|EXHIBIT 23.2
|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. Such
forward-looking statements are intended to be covered by the
safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995 and this
statement is included 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 registrant and its wholly owned bank
subsidiary (collectively referred to as the
Company), are generally identifiable by use of the
words believe, expect,
intend, anticipate,
estimate, project, or similar
expressions. The Companys ability to predict results or
the actual effect of future plans or strategies is inherently
uncertain. Important factors which could cause actual events to
differ from the Companys expectation include, but are not
limited to, fluctuation in interest rates and loan and deposit
pricing, which could reduce the Companys net interest
margins, asset valuations and expense expectations; a
deterioration in the economy or business conditions, either
nationally or in the Companys market areas, that could
increase credit-related losses and expenses; a national or local
disaster, including acts of terrorism; 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 the
Companys new banking centers, or slower than expected
earning assets growth which could extend anticipated breakeven
periods at these locations; 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.






|        |         
|------- | --------
|Item 1. | Business

EvergreenBancorp, Inc.

EvergreenBancorp, Inc. (Bancorp)
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 new 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.

The Company remains committed to community
banking and intends to remain community-focused. In 2003,the Bank continued to conduct its banking business in
substantially the same manner as prior to the reorganization,
with the same name, management structure and personnel. Two new
members joined the Companys Board of Directors in 2003 as
a result of two long-time directors retiring at the end of 2002.
The boards philosophies and overall structure remain
unchanged.

The Companys consolidated net income for
2003 was $1,036,000, or $0.87 per basic share
($0.86 per diluted share), and its consolidated equity at
December 31, 2003 was $16,583,000, with 1,190,366 common
shares outstanding and a book value of $13.93 per share. At
December 31, 2003, the Company had total consolidated
assets of approximately $194,556,000, loans of approximately
$138,468,000, and deposits of approximately $152,683,000. For
more information regarding the Companys financial results,
see Managements Discussion and Analysis of Financial
Condition and Results of Operations and Financial
Statements and Supplementary Data of this 10-K report.

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EvergreenBank

EvergreenBank is a Washington commercial bank
organized in 1971 under the name Teachers State Bank with its
main office in Seattle. In February of 1993, the Bank opened a
branch office in Lynnwood, approximately 16 miles north of
the Seattle office. In July 2001, the Bank opened a second
branch office in Bellevue, approximately 20 miles to the
east of Seattle, and in September 2003, it opened a third branch
office in Federal Way, approximately 25 miles south of
Seattle.

Over the years, the Bank 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 a 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 from its main office location in
Seattle and has since expanded its market with the addition of
three branches within a 40 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, 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
sweep accounts, electronic funds transfers, electronic tax
payment, and safe deposit boxes. The Bank also offers 24-hour
telephone banking, 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, Bank of America, and
Washington Mutual Bank, which together account for a majority 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
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, 2003, the Bank employed
49 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. In
general, the securities will not be 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 and provide additional information with the Federal
Reserve. 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 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.

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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 its subsidiaries 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 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.

Lending Limits.Washington state banking law generally limits the amount of
funds that a bank may lend to a single borrower to 20% of the
banks capital and surplus.

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 who are not
employees, 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 sets forth
circumstances under which officers or directors of a bank may be
removed by the institutions federal supervisory agency.
Federal law also 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. Washington restricts an
out-of-state bank from opening de novo branches. However, once
an out-of-state bank has acquired a bank within the state,
either through merger or acquisition of all or substantially all
of the banks assets, 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 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.

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.

Dividends

The principal source of the Company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

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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
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.On July 30, 2002, the
President signed into law the Sarbanes-Oxley Act of 2002 (the
Act) to address corporate and accounting fraud. The
Act establishes a new accounting oversight board to enforce
auditing standards and restricts 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
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. We anticipate that we will incur additional
expense 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.On October 26, 2001,
President Bush signed the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism (USA

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PATRIOT Act) of 2001. 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. Industry consolidation has
resulted in a number of larger financial institutions within the
Banks primary market area 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, but its 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 2. | Properties

The Bank conducts business from four leased
office locations: the main office at 301 Eastlake Avenue
East, northeast of downtown 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 leased premises are fully used for current
operations and are deemed suitable for present needs.

8



---



##### Table of Contents



The Company leases premises and parking
facilities for the Seattle and Lynnwood offices from PEMCO
Mutual Insurance Company, under leases expiring from
March 31, 2004 to May 31, 2007. The Company leases the
Bellevue and Federal Way office premises from other parties and
those leases expire May 31, 2011 and June 30, 2008,
respectively. See Note 14 Leases to the
Consolidated Financial Statements at page 44.

Items of furniture, fixtures, and equipment are
purchased as needed by the Bank, or are leased under a master
lease with rentals and terms agreed upon at the time of leasing.
The Bank is responsible for maintenance, repairs, operating
expenses, and insurance. Under the master lease, the Bank may
cancel individual equipment leases on thirty days notice
after the initial, six-month period. Upon termination, the Bank
realizes any gain and is obligated for any loss on disposition
of the rental property over depreciated value under an agreed
upon formula.






|        |                  
|------- | -----------------
|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 2003.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Bancorps common stock is traded on the OTC
Bulletin Board under the symbol EVGG.

As of March 10, 2004, there were 680 holders
of record of Bancorps common stock, and an estimated
250 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 three-for-two stock split in July
2001, the 15 percent stock dividend in July 2002, and the
10 percent stock dividend in November 2003)

|               |  |          |      |      |  |      |       |          |  |      |       |     |  |  |      |  |  |  |       |  |  |  |       | 
|-------------- |  | -------- | ---- | ---- |  | ---- | ----- | -------- |  | ---- | ----- | --- |  |  | ---- |  |  |  | ----- |  |  |  | ----- | 
|               |  |          |      |     
|               |  | 2003     |      | 2002
|               |  |          |      |     
|               |  | Cash     |      |      |  | Cash |       |         
|               |  | Dividend |      | High |  | Low  |       | Dividend |  | High |       | Low
|               |  |          |      |      |  |      |       |          |  |      |       |    
|First Quarter  |  |          | .182 |      |  |      | 14.95 |          |  |      | 14.01 |     |  |  | .143 |  |  |  | 13.44 |  |  |  | 13.22 | 
|Second Quarter |  |          |      |      |  |      | 14.77 |          |  |      | 14.68 |     |  |  |      |  |  |  | 13.52 |  |  |  | 13.36 | 
|Third Quarter  |  |          |      |      |  |      | 16.14 |          |  |      | 14.91 |     |  |  |      |  |  |  | 14.36 |  |  |  | 13.52 | 
|Fourth Quarter |  |          | .127 |      |  |      | 20.00 |          |  |      | 15.86 |     |  |  |      |  |  |  | 15.00 |  |  |  | 13.95 | 

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. The Board of Directors
recently approved the declaration of dividends on a quarterly,
rather than an annual, basis. 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

9



---



##### Table of Contents



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.






|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

|                                                                |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                |  | 2003                                  |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                                |  |                                       |         |      |  |      |         |      |  |     
|                                                                |  |                                      
|                                                                |  | (In thousands, except per share data)
|INCOME STATEMENT DATA                                           |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net interest income                                             |  | $                                     | 8,200   |      |  | $    | 8,337   |      |  | $    | 7,714   |   |  | $ | 7,169   |   |  | $ | 6,329   |  
|Provision for loan losses                                       |  |                                       | 233     |      |  |      | 330     |      |  |      | 479     |   |  |   | 455     |   |  |   | 300     |  
|Noninterest income                                              |  |                                       | 1,755   |      |  |      | 2,387   |      |  |      | 2,938   |   |  |   | 2,212   |   |  |   | 2,024   |  
|Noninterest expense                                             |  |                                       | 8,196   |      |  |      | 8,371   |      |  |      | 8,344   |   |  |   | 7,192   |   |  |   | 6,515   |  
|Net income                                                      |  |                                       | 1,036   |      |  |      | 1,343   |      |  |      | 1,240   |   |  |   | 1,210   |   |  |   | 1,075   |  
|                                                                |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|PER SHARE DATA(1)                                               |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Earnings per common share                                       |  | $                                     | 0.87    |      |  | $    | 1.14    |      |  | $    | 1.02    |   |  | $ | 0.95    |   |  | $ | .81     |  
|Diluted earnings per common share                               |  |                                       | 0.86    |      |  |      | 1.13    |      |  |      | 1.02    |   |  |   | 0.95    |   |  |   | .81     |  
|Dividends declared per common share                             |  |                                       | 0.309   |      |  |      | 0.143   |      |  |      | 0.132   |   |  |   | 0.121   |   |  |   | 0.116   |  
|                                                                |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|BALANCE SHEET DATA                                              |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total loans                                                     |  | $                                     | 138,468 |      |  | $    | 121,509 |      |  | $    | 122,219 |   |  | $ | 113,058 |   |  | $ | 90,637  |  
|Allowance for loan losses                                       |  |                                       | 1,636   |      |  |      | 1,690   |      |  |      | 1,498   |   |  |   | 1,323   |   |  |   | 1,055   |  
|Real estate owned                                               |  |                                       | 2,659   |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|Total assets                                                    |  |                                       | 194,556 |      |  |      | 169,926 |      |  |      | 156,365 |   |  |   | 151,752 |   |  |   | 162,092 |  
|Total deposits                                                  |  |                                       | 152,683 |      |  |      | 132,174 |      |  |      | 130,344 |   |  |   | 125,425 |   |  |   | 108,866 |  
|Total long-term debt                                            |  |                                       | 20,381  |      |  |      | 16,783  |      |  |      | 4,005   |   |  |   | 2,000   |   |  |   |        |  
|Stockholders equity                                            |  |                                       | 16,583  |      |  |      | 15,960  |      |  |      | 14,738  |   |  |   | 14,577  |   |  |   | 14,152  |  
|                                                                |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|SELECTED FINANCIAL RATIOS                                       |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Return on average assets                                        |  |                                       | 0.60    | %    |  |      | 0.82    | %    |  |      | 0.83    | % |  |   | 0.81    | % |  |   | 0.70    | %
|Return on average equity                                        |  |                                       | 6.42    |      |  |      | 8.84    |      |  |      | 8.50    |   |  |   | 8.67    |   |  |   | 7.83    |  
|Dividend payout ratio                                           |  |                                       | 35.33   |      |  |      | 12.51   |      |  |      | 13.39   |   |  |   | 13.31   |   |  |   | 14.33   |  
|Average equity to average assets                                |  |                                       | 9.29    |      |  |      | 9.31    |      |  |      | 9.70    |   |  |   | 9.29    |   |  |   | 8.86    |  
|Net interest margin (tax equivalent)                            |  |                                       | 5.02    |      |  |      | 5.48    |      |  |      | 5.52    |   |  |   | 5.36    |   |  |   | 4.58    |  
|Allowance for loan losses to total loans at the
    end of year |  |                                       | 1.18    |      |  |      | 1.39    |      |  |      | 1.23    |   |  |   | 1.17    |   |  |   | 1.16    |  
|Nonperforming loans to total loans at the end of
    year(2)    |  |                                       | 0.46    |      |  |      | 0.66    |      |  |      | 0.95    |   |  |   | 0.49    |   |  |   | 1.28    |  
|Net loans charged off to average total loans                    |  |                                       | 0.24    |      |  |      | 0.11    |      |  |      | 0.26    |   |  |   | 0.18    |   |  |   | 0.19    |  
|                                                                |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  



---



|    |                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All per share amounts have been adjusted to
    reflect the three-for-two stock split in July 2001, the July
    2002 15 percent stock dividend, and the November 2003 10%
    stock dividend.
|   
|(2) | Nonperforming loans include nonaccrual, impaired
    and other loans 90 days or more past due.                                                                                                

10



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

General

EvergreenBancorp, Inc. (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). 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; financial planning and
investment services, Internet banking, and merchant credit card
processing services. The Bank conducts business from four
locations: the main office northeast of downtown Seattle, the
Lynnwood branch office north of Seattle, the downtown Bellevue
branch office east of Seattle, and the downtown Federal Way
branch office south of Seattle, which opened in September of
2003.

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

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

The following discussion 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 the three-for-two stock
split in July 2001, the 15 percent stock dividend in July
2002, and the 10 percent stock dividend in November 2003.
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

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.

11



---



##### Table of Contents



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
enables us to regularly evaluate the adequacy of the allowance.

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.

Temporary Decline in Fair Value of Debt
Securities.The fair value of certain
debt securities was less than amortized cost. The decline in
market value below cost does not represent an
other-than-temporary impairment, and thus no loss was recognized
on the income statement. Criteria used to determine whether an
unrealized loss is considered other than temporary are the
credit quality of the issuers, and the effect of the current
rate environment.

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, and noninterest 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, technology,
marketing, 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.

During 2003 the general level of interest rates
stayed at historically low levels, national and regional
economic conditions remained sluggish, showing signs of
improvement toward the end of the year, and employment growth
stayed flat compared to the prior year. Lower rates continued to
spur a fast pace of loan refinancing. The Company benefited from
refinancing through additional loan fees and lower provisions
for loan loss, however, through the first half of the year loan
totals remained flat as loan originations were offset by loan
refinancing and payoffs. The net interest margin compressed as
the composition of assets changed from higher yielding loans to
investments. In the second half of the year, loan demand
increased substantially and by year-end loan totals had reached
record levels, up 14% over the prior year. Credit quality was
favorable as

12



---



##### Table of Contents



the ratio of nonperforming loans to total loans
declined year-over-year, and ended at a low level. In the fourth
quarter, the Bank foreclosed upon a residential real estate
property which is classified as other real estate
owned on the December 31, 2003 consolidated balance
sheet. Overall financial results for 2003 included higher costs
associated with the opening of the Federal Way branch office and
professional services costs, partially offset by higher revenue
from banking fees and investment services commissions.


Capital activities in 2003 included an annual
cash dividend paid in February, a special cash dividend paid in
September, and a 10 percent stock dividend distributed in
November. Capital ratios remain strong with the equity-to-assets
ratio at 8.5 percent at December 31, 2003.

Results of Operations 2003 Compared to
2002

The Companys 2003 net income was
$1,036,000 compared to $1,343,000 in 2002. Net income per basic
share was $0.87 compared to $1.14 in 2002. Return on average
assets was 0.60 percent for 2003 and 0.82 percent for
2002. Return on average common equity was 6.42 percent and
8.84 percent, respectively. The net interest margin (net
interest income on a tax-equivalent basis divided by average
earning assets) was 5.02 percent compared to
5.48 percent in 2002.

The results of operations in 2003 reflected lower
net interest income due to compression in the net interest
margin. The lower margin was largely due to a change in the mix
of interest-earning assets from loans to securities. A lower
total provision for loan losses offset the decline in net
interest income so that net interest income after the provision
for loan losses was approximately equivalent to the prior year.
The provision for loan losses declined because of improvements
in overall credit quality and favorable loan loss experience.

For the year, noninterest income increased
14.2 percent due to higher fees and increased investment
services commissions. Operating expenses rose 9.0 percent
and included additional professional services expense and costs
associated with opening the new Federal Way branch.

The table of selected consolidated financial
data, which appears on page 10, summarizes the
Companys financial performance for each of the past five
years.

2002 Compared to 2001

The Companys 2002 net income was
$1,343,000, representing an 8.3 percent increase over
$1,240,000 in 2001. Net income per basic share was $1.14
compared to $1.02 in 2001. Return on average assets was
0.82 percent for 2002 and 0.83 percent for 2001. Return on
average common equity was 8.84 percent and
8.50 percent, respectively. The net interest margin was
5.48 percent compared to 5.52 percent in 2001. Loans
decreased .6 percent and deposits increased
1.4 percent from December 31, 2001 totals.

The results of operations in 2002 reflected
improvement in net interest income and a lower provision for
loan losses. Operating expenses increased just .3 percent
and the Company recorded fewer nonrecurring gains on sales of
investments and other assets than in 2001. Net merchant
processing revenue declined due to reduced processing volumes.

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 15 and 16.

2003 Compared to 2002

Net interest income for 2003 was $8,200,000
compared to $8,337,000 in 2002. The 1.6 percent decrease
was principally due to a change in the percentage mix of
interest-earning assets from loans to securities and a change in
the mix of funding from deposits to borrowings, largely offset
by overall growth in interest-earning assets. For the same
reasons, the net interest margin declined to 5.02 percent
in 2003, compared to 5.48 percent in 2002.

13



---



##### Table of Contents



Total interest income was $10,408,000 in 2003,
compared to $11,049,000 in 2002. The decrease of
5.8 percent resulted from lower average yields on loans and
investment securities, partially offset by a higher average
balance of investment securities.

Total interest expense was $2,208,000 in 2003,
compared to $2,712,000 in 2002, a decrease of 18.6 percent
due primarily to lower interest rates and a change in the mix of
deposits from higher cost certificates of deposit to lower cost
money market and savings accounts, offset by a higher percentage
of funding from borrowings.

2002 Compared to 2001

Net interest income for 2002 was $8,337,000
compared to $7,714,000 in 2001. The 8.1 percent improvement
was principally due to growth in interest-earning assets and a
change in the mix of deposits. The net interest margin declined
slightly to 5.48 percent in 2002, compared to
5.52 percent in 2001 as yields on earning assets decreased
slightly more than the rates paid on funding liabilities. The
net interest margin was also affected by the issuance of the
junior subordinated debt. Proceeds from the debt issuance were
invested primarily in loans and the Company further leveraged
this new capital source by purchasing mortgage-related
securities with funding provided primarily by Federal Home
Loan Bank borrowings.

Total interest income was $11,049,000 in 2002,
compared to $11,749,000 in 2001. The decrease of
6.0 percent resulted from lower average rates on loans,
partially offset by higher average loan and investment balances.

Total interest expense was $2,712,000 in 2002,
compared to $4,035,000 in 2001, a decrease of 32.8 percent
due primarily to lower interest rates and a change in the mix of
deposits from higher cost certificates of deposit to lower cost
money market and savings accounts.

14



---



##### Table of Contents



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

|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |      |  
|----------------------------------------------------------------------------- | ------------------------ | ------------------------ | ------- | -------------- |  | ----------------------- | ------ | ------- |  | -------- | ---- | ------ | - | ------ | ------- | ------ |  | - | ------ | ----- |  |  | ---- | ---- | - |  | ---- | ---- | - |  | ---- | ---- | -
|                                                                              |                          |                         
|                                                                              |                          | Years Ended December 31,
|                                                                              |                          |                         
|                                                                              |                          |                          |         |               
|                                                                              |                          |                          |         | 2003 Over 2002
|                                                                              |                          |                          |         |                |  |                        
|                                                                              |                          | 2003                     |         | 2002           |  |                        
|                                                                              |                          |                          |         |                |  | Change in income due to
|                                                                              |                          | Average                  |         |                |  | Yield/                  |        | Average |  |          |      | Yield/ |   |       
|                                                                              |                          | Balance                  |         | Interest       |  | Rate                    |        | Balance |  | Interest |      | Rate   |   | Volume |         | Rate  
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |       
|                                                                              |                          |                         
|                                                                              |                          | (In thousands)          
|ASSETS                                                                       
|Loans:                                                                        |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|                                                                              | Commercial and financial |                          | $       | 53,822         |  |                         | $      | 3,839   |  |          |      | 7.13   | % |        | $       | 57,833 |  |   | $      | 4,489 |  |  |      | 7.76 | % |  | $    | (300 | ) |  | $    | (350 | )
|                                                                              | Real estate              |                          |         | 52,809         |  |                         |        | 4,037   |  |          |      | 7.64   |   |        |         | 47,350 |  |   |        | 3,958 |  |  |      | 8.36 |   |  |      | 305  |   |  |      | (226 | )
|                                                                              | Consumer and other       |                          |         | 14,129         |  |                         |        | 1,410   |  |          |      | 9.98   |   |        |         | 16,549 |  |   |        | 1,627 |  |  |      | 9.83 |   |  |      | (242 | ) |  |      | 25   |  
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Total loans                                                                   |                          |                          | 120,760 |                |  |                         | 9,286  |         |  |          | 7.69 |        |   |        | 121,732 |        |  |   | 10,074 |       |  |  | 8.28 |      |   |  | (237 | )    |   |  | (551 | )   
|Federal funds sold                                                            |                          |                          | 8,425   |                |  |                         | 90     |         |  |          | 1.07 |        |   |        | 12,297  |        |  |   | 200    |       |  |  | 1.63 |      |   |  | (52  | )    |   |  | ( 58 | )   
|Interest-bearing deposits in financial
    institutions                       |                          |                          | 1,328   |                |  |                         | 12     |         |  |          | 0.90 |        |   |        | 1,479   |        |  |   | 8      |       |  |  | .54  |      |   |  | (1   | )    |   |  | 5    |     
|Investment securities                                                         |                          |                          | 33,828  |                |  |                         | 1,078  |         |  |          | 3.19 |        |   |        | 18,765  |        |  |   | 890    |       |  |  | 4.74 |      |   |  | 318  |      |   |  | (130 | )   
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Total earning assets                                                          |                          |                          | 164,341 |                |  |                         | 10,466 |         |  |          | 6.37 |        |   |        | 154,273 |        |  |   | 11,172 |       |  |  | 7.24 |      |   |  | 28   |      |   |  | (734 | )   
|Cash and due from banks                                                       |                          |                          | 6,953   |                |  |                         |        |         |  |          |      |        |   |        | 7,124   |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Premises and equipment                                                        |                          |                          | 2,377   |                |  |                         |        |         |  |          |      |        |   |        | 2,012   |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Other real estate owned                                                       |                          |                          | 144     |                |  |                         |        |         |  |          |      |        |   |        | 0       |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Accrued interest and other assets                                             |                          |                          | 1,641   |                |  |                         |        |         |  |          |      |        |   |        | 1,499   |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Allowance for loan losses                                                     |                          |                          | (1,657  | )              |  |                         |        |         |  |          |      |        |   |        | (1,665  | )      |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Total assets                                                                  |                          | $                        | 173,799 |                |  |                         |        |         |  |          |      |        |   | $      | 163,243 |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|LIABILITIES                                                                  
|Interest-bearing deposits:                                                    |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|                                                                              | Demand deposits          |                          | $       | 10,208         |  |                         |        | 20      |  |          |      | 0.19   |   |        | $       | 9,094  |  |   |        | 23    |  |  |      | 0.25 |   |  |      | 4    |   |  |      | (7   | )
|                                                                              | Savings deposits         |                          |         | 48,677         |  |                         |        | 513     |  |          |      | 1.05   |   |        |         | 45,875 |  |   |        | 814   |  |  |      | 1.77 |   |  |      | 53   |   |  |      | (354 | )
|                                                                              | Time deposits            |                          |         | 36,868         |  |                         |        | 829     |  |          |      | 2.25   |   |        |         | 39,270 |  |   |        | 1,240 |  |  |      | 3.16 |   |  |      | (72  | ) |  |      | (339 | )
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Total interest-bearing deposits                                               |                          |                          | 95,753  |                |  |                         | 1,362  |         |  |          | 1.42 |        |   |        | 94,239  |        |  |   | 2,077  |       |  |  | 2.20 |      |   |  | (15  | )    |   |  | (700 | )   
|Federal funds purchased                                                       |                          |                          | 3,054   |                |  |                         | 20     |         |  |          | .65  |        |   |        | 4,721   |        |  |   | 56     |       |  |  | 1.19 |      |   |  | (16  | )    |   |  | (20  | )   
|Federal Home Loan Bank advances                                               |                          |                          | 14,313  |                |  |                         | 586    |         |  |          | 4.09 |        |   |        | 8,555   |        |  |   | 413    |       |  |  | 4.83 |      |   |  | 223  |      |   |  | (50  | )   
|Junior subordinated debt                                                      |                          |                          | 5,000   |                |  |                         | 240    |         |  |          | 4.80 |        |   |        | 3,059   |        |  |   | 166    |       |  |  | 5.43 |      |   |  | 92   |      |   |  | (18  | )   
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Total interest-bearing liabilities                                            |                          |                          | 118,120 |                |  |                         | 2,208  |         |  |          | 1.87 |        |   |        | 110,574 |        |  |   | 2,712  |       |  |  | 2.46 |      |   |  | 284  |      |   |  | (788 | )   
|Noninterest-bearing deposits                                                  |                          |                          | 37,940  |                |  |                         |        |         |  |          |      |        |   |        | 35,464  |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Accrued interest and other liabilities                                        |                          |                          | 1,593   |                |  |                         |        |         |  |          |      |        |   |        | 2,013   |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Total liabilities                                                             |                          |                          | 157,653 |                |  |                         |        |         |  |          |      |        |   |        | 148,051 |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Stockholders equity                                                          |                          |                          | 16,146  |                |  |                         |        |         |  |          |      |        |   |        | 15,192  |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Total liabilities and stockholders equity                                    |                          | $                        | 173,799 |                |  |                         |        |         |  |          |      |        |   | $      | 163,243 |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Interest revenue as a percentage of average
    earning assets                |                          |                          |         |                |  |                         |        |         |  |          | 6.37 | %      |   |        |         |        |  |   |        |       |  |  | 7.24 | %    |   |  |      |      |   |  |      |     
|Interest expense as a percentage of average
    earning assets                |                          |                          |         |                |  |                         |        |         |  |          | 1.34 | %      |   |        |         |        |  |   |        |       |  |  | 1.76 | %    |   |  |      |      |   |  |      |     
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     
|Net interest income on a taxable-equivalent basis
    and net interest margin |                          |                          |         |                |  | $                       | 8,258  |         |  |          | 5.02 | %      |   |        |         |        |  | $ | 8,460  |       |  |  | 5.48 | %    |   |  |      |      |   |  |      |     
|                                                                              |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |      |      |   |  |      |     

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.

15



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##### Table of Contents



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

|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |      |  
|------------------------------------------------------------------------------ | ------------------------ | ------------------------ | ------- | -------------- |  | ----------------------- | ------ | ------- |  | -------- | ---- | ------ | - | ------ | ------- | ------ |  | - | ------ | ----- |  |  | ---- | ---- | - |  | --- | ---- | - |  | ------ | ---- | -
|                                                                               |                          |                         
|                                                                               |                          | Years Ended December 31,
|                                                                               |                          |                         
|                                                                               |                          |                          |         |               
|                                                                               |                          |                          |         | 2002 Over 2001
|                                                                               |                          |                          |         |                |  |                        
|                                                                               |                          | 2002                     |         | 2001           |  |                        
|                                                                               |                          |                          |         |                |  | Change in income due to
|                                                                               |                          | Average                  |         |                |  | Yield/                  |        | Average |  |          |      | Yield/ |   |       
|                                                                               |                          | Balance                  |         | Interest       |  | Rate                    |        | Balance |  | Interest |      | Rate   |   | Volume |         | Rate  
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |       
|                                                                               |                          |                         
|                                                                               |                          | (In thousands)          
|ASSETS                                                                        
|Loans:                                                                         |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|                                                                               | Commercial and financial |                          | $       | 57,833         |  |                         | $      | 4,489   |  |          |      | 7.76   | % |        | $       | 54,132 |  |   | $      | 4,980 |  |  |      | 9.20 | % |  | $   | 382  |   |  | $      | (873 | )
|                                                                               | Real estate              |                          |         | 47,350         |  |                         |        | 3,958   |  |          |      | 8.36   |   |        |         | 41,758 |  |   |        | 3,643 |  |  |      | 8.73 |   |  |     | 461  |   |  |        | (146 | )
|                                                                               | Consumer and other       |                          |         | 16,549         |  |                         |        | 1,627   |  |          |      | 9.83   |   |        |         | 21,524 |  |   |        | 2,092 |  |  |      | 9.72 |   |  |     | (489 | ) |  |        | 24   |  
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Total loans                                                                    |                          |                          | 121,732 |                |  |                         | 10,074 |         |  |          | 8.28 |        |   |        | 117,414 |        |  |   | 10,715 |       |  |  | 9.13 |      |   |  | 354 |      |   |  | (995   | )   
|Federal funds sold                                                             |                          |                          | 12,297  |                |  |                         | 200    |         |  |          | 1.63 |        |   |        | 12,060  |        |  |   | 435    |       |  |  | 3.61 |      |   |  | 9   |      |   |  | (244   | )   
|Interest-bearing deposits in financial
    institutions                        |                          |                          | 1,479   |                |  |                         | 8      |         |  |          | 0.54 |        |   |        | 1,275   |        |  |   | 37     |       |  |  | 2.91 |      |   |  | 7   |      |   |  | (36    | )   
|Investment securities                                                          |                          |                          | 18,765  |                |  |                         | 890    |         |  |          | 4.74 |        |   |        | 11,649  |        |  |   | 702    |       |  |  | 6.03 |      |   |  | 289 |      |   |  | (101   | )   
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Total earning assets                                                           |                          |                          | 154,273 |                |  |                         | 11,172 |         |  |          | 7.24 |        |   |        | 142,398 |        |  |   | 11,889 |       |  |  | 8.35 |      |   |  | 659 |      |   |  | (1,376 | )   
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Cash and due from banks                                                        |                          |                          | 7,124   |                |  |                         |        |         |  |          |      |        |   |        | 6,513   |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Premises and equipment                                                         |                          |                          | 2,012   |                |  |                         |        |         |  |          |      |        |   |        | 1,452   |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Other real estate owned                                                        |                          |                          | 0       |                |  |                         |        |         |  |          |      |        |   |        | 0       |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Accrued interest and other assets                                              |                          |                          | 1,499   |                |  |                         |        |         |  |          |      |        |   |        | 1,509   |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Allowance for loan losses                                                      |                          |                          | (1,665  | )              |  |                         |        |         |  |          |      |        |   |        | (1,486  | )      |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Total assets                                                                   |                          | $                        | 163,243 |                |  |                         |        |         |  |          |      |        |   | $      | 150,386 |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|LIABILITIES                                                                   
|Interest-bearing deposits:                                                     |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|                                                                               | Demand deposits          |                          | $       | 9,094          |  |                         |        | 23      |  |          |      | 0.25   |   |        | $       | 10,225 |  |   |        | 54    |  |  |      | 0.53 |   |  |     | (5   | ) |  |        | (26  | )
|                                                                               | Savings deposits         |                          |         | 45,875         |  |                         |        | 814     |  |          |      | 1.77   |   |        |         | 35,114 |  |   |        | 1,057 |  |  |      | 3.01 |   |  |     | 715  |   |  |        | (958 | )
|                                                                               | Time deposits            |                          |         | 39,270         |  |                         |        | 1,240   |  |          |      | 3.16   |   |        |         | 46,705 |  |   |        | 2,482 |  |  |      | 5.31 |   |  |     | (350 | ) |  |        | (892 | )
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Total interest-bearing deposits                                                |                          |                          | 94,239  |                |  |                         | 2,077  |         |  |          | 2.20 |        |   |        | 92,044  |        |  |   | 3,593  |       |  |  | 3.90 |      |   |  | 360 |      |   |  | (1,876 | )   
|Federal funds purchased                                                        |                          |                          | 4,721   |                |  |                         | 56     |         |  |          | 1.19 |        |   |        | 6,527   |        |  |   | 235    |       |  |  | 3.60 |      |   |  | (52 | )    |   |  | (127   | )   
|Federal Home Loan Bank advances                                                |                          |                          | 8,555   |                |  |                         | 413    |         |  |          | 4.83 |        |   |        | 3,459   |        |  |   | 207    |       |  |  | 5.98 |      |   |  | 237 |      |   |  | (31    | )   
|Junior subordinated debt                                                       |                          |                          | 3,059   |                |  |                         | 166    |         |  |          | 5.43 |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  | 166 |      |   |  | 0      |     
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Total interest-bearing liabilities                                             |                          |                          | 110,574 |                |  |                         | 2,712  |         |  |          | 2.46 |        |   |        | 102,030 |        |  |   | 4,035  |       |  |  | 3.95 |      |   |  | 711 |      |   |  | (2,034 | )   
|Noninterest-bearing deposits                                                   |                          |                          | 35,464  |                |  |                         |        |         |  |          |      |        |   |        | 31,938  |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Accrued interest and other liabilities                                         |                          |                          | 2,013   |                |  |                         |        |         |  |          |      |        |   |        | 1,830   |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Total liabilities                                                              |                          |                          | 148,051 |                |  |                         |        |         |  |          |      |        |   |        | 135,798 |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Stockholders equity                                                           |                          |                          | 15,192  |                |  |                         |        |         |  |          |      |        |   |        | 14,588  |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Total liabilities and stockholders equity                                     |                          | $                        | 163,243 |                |  |                         |        |         |  |          |      |        |   | $      | 150,386 |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Interest revenue as a percentage of average
    earning assets                 |                          |                          |         |                |  |                         |        |         |  |          | 7.24 | %      |   |        |         |        |  |   |        |       |  |  | 8.35 | %    |   |  |     |      |   |  |        |     
|Interest expense as a percentage of average
    earning assets                 |                          |                          |         |                |  |                         |        |         |  |          | 1.76 | %      |   |        |         |        |  |   |        |       |  |  | 2.83 | %    |   |  |     |      |   |  |        |     
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     
|Net interest income on a taxable- equivalent
    basis and net interest margin |                          |                          |         |                |  | $                       | 8,460  |         |  |          | 5.48 | %      |   |        |         |        |  | $ | 7,854  |       |  |  | 5.52 | %    |   |  |     |      |   |  |        |     
|                                                                               |                          |                          |         |                |  |                         |        |         |  |          |      |        |   |        |         |        |  |   |        |       |  |  |      |      |   |  |     |      |   |  |        |     

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.

16



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##### Table of Contents



Provision and Allowance for Loan
Losses

The provision for loan losses was $233,000 for
2003 compared to $330,000 and $479,000 for 2002 and 2001,
respectively. At December 31, 2003, the allowance for loan
losses was $1,636,000, or 1.18 percent of total loans,
compared with $1,690,000, or 1.39 percent at
December 31, 2002. Nonperforming loans (nonaccrual loans
and loans over 90 days past due) to total loans at the end
of 2003 were .46 percent compared to .66 percent at
December 31, 2002.

The provision for loan losses for 2003 declined
because of improvements in overall credit quality and favorable
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.

The allowance for loan losses is maintained at a
level considered adequate to absorb probable incurred losses.
Management evaluates the adequacy of the allowance on a monthly
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, loan
commitments outstanding and other factors.

The Company considers the allowance for loan
losses of $1,636,000 at December 31, 2003 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 individual borrowers
may require changes in the level of the allowance, and in turn
cause fluctuations in reported earnings and provisions for loan
losses.

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 2003, 2002, and 2001
totaled $1,755,000, $1,537,000, and $1,807,000, respectively.

The increase of 14.2 percent in 2003 was
primarily due to higher revenue from service charges on deposit
accounts, increased investment services commissions, and higher
recorded gains on sales of investment securities and loans.

The decrease of 14.9 percent in 2002
compared to 2001 was primarily due to lower revenue from
merchant credit card processing fees, and less recorded gains on
sales of securities and loans. Nonrecurring revenue in 2001
included $143,000 from the repurchase of the Companys
interest in a company that provides ATM electronic services.

Noninterest Expense

The Companys total noninterest expense for
2003, 2002, and 2001 was $8,196,000, $7,521,000, and $7,213,000,
respectively.

Noninterest expense increased $675,000 or
9.0 percent in 2003. The change in this category was
primarily due to increases in employee wages and benefits,
occupancy and equipment, and professional services expense.
Noninterest expense for 2003 included certain nonrecurring
costs, including marketing, associated with opening a new branch
in Federal Way in September 2003.

Noninterest expense increased $308,000 or
4.3 percent in 2002 compared to 2001. The relatively small
change in this category was primarily due to the effect of
reducing staffing levels to 52 full time equivalent employees in
2002 compared to 55 full time equivalent employees in 2001,
offset by increased employee wages

17



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##### Table of Contents



and benefit costs. Noninterest expense for 2001
included certain nonrecurring costs associated with opening the
Bellevue office in July 2001.


Review of Financial Condition

Total assets increased 14.5 percent in 2003
to $194,556,000, securities increased 68.1 percent to
$39,818,000, loans increased 14.0 percent to $138,468,000,
and deposits increased 15.5 percent to $152,683,000.

Analysis of Securities

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

|                                                                       |  |                |        |          |  |          |        |  |  |   |        | 
|---------------------------------------------------------------------- |  | -------------- | ------ | -------- |  | -------- | ------ |  |  | - | ------ | 
|                                                                       |  | 2003           |        | 2002     |  | 2001    
|                                                                       |  | Carrying       |        | Carrying |  | Carrying
|                                                                       |  | Value          |        | Value    |  | Value   
|                                                                       |  |                |        |          |  |         
|                                                                       |  |               
|                                                                       |  | (In thousands)
|U.S. agencies                                                          |  | $              | 8,481  |          |  | $        | 3,032  |  |  | $ | 2,044  | 
|State and political subdivisions                                       |  |                | 3,567  |          |  |          | 2,123  |  |  |   | 1,810  | 
|AMF Adjustable Rate Mortgage Fund                                      |  |                | 16,586 |          |  |          | 5,397  |  |  |   | 10,137 | 
|Mortgage-backed securities and collateralized
    mortgage obligations |  |                | 9,812  |          |  |          | 11,843 |  |  |   |       | 
|Federal Home Loan Bank stock                                           |  |                | 1,372  |          |  |          | 1,299  |  |  |   | 1,223  | 
|                                                                       |  |                |        |          |  |          |        |  |  |   |        | 
|Total                                                                  |  | $              | 39,818 |          |  | $        | 23,694 |  |  | $ | 15,214 | 
|                                                                       |  |                |        |          |  |          |        |  |  |   |        | 

The securities portfolio increased $16,279,000
from December 31, 2002 to December 31, 2003. The
increase was funded primarily with deposit growth and proceeds
from Federal Home Loan Bank borrowings.

The growth in the securities portfolio from
December 31, 2001 to December 31, 2002 resulted
primarily from a growth strategy involving the purchase of
mortgage-backed securities and collateralized mortgage
obligations using funding provided by Federal Home
Loan Bank borrowings.

The following table sets forth the maturities of
securities at December 31, 2003. 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                                                          |  | $                              | 507    |              |  | $             | 3,499 |           |  | $         | 4,475 |   |  | $ |       |   |  | $ | 8,481  |  
|                                                                       |  |                                | 4.57   | %            |  |               | 2.88  | %         |  |           | 3.55  | % |  |   |       |   |  |   | 3.34   | %
|State and political subdivisions                                       |  |                                |        |              |  |               | 1,527 |           |  |           | 2,040 |   |  |   |       |   |  |   | 3,567  |  
|                                                                       |  |                                |        |              |  |               | 3.55  | %         |  |           | 4.63  | % |  |   |       |   |  |   | 4.17   | %
|AMF Adjustable Rate Mortgage Fund*                                     |  |                                | 16,586 |              |  |               |       |           |  |           |       |   |  |   |       |   |  |   | 16,586 |  
|                                                                       |  |                                | 2.13   | %            |  |               |       |           |  |           |       |   |  |   |       |   |  |   | 2.13   | %
|Mortgage-backed securities and collateralized
    mortgage obligations |  |                                |        |              |  |               |       |           |  |           | 854   |   |  |   | 8,958 |   |  |   | 9,812  |  
|                                                                       |  |                                |        |              |  |               |       |           |  |           | 4.56  | % |  |   | 4.27  | % |  |   | 4.31   | %
|Federal Home Loan Bank stock*                                          |  |                                | 1,372  |              |  |               |       |           |  |           |       |   |  |   |       |   |  |   | 1,372  |  
|                                                                       |  |                                | 5.36   | %            |  |               |       |           |  |           |       |   |  |   |       |   |  |   | 5.36   | %
|                                                                       |  |                                |        |              |  |               |       |           |  |           |       |   |  |   |       |   |  |   |        |  
|Total                                                                  |  | $                              | 18,465 |              |  | $             | 5,026 |           |  | $         | 7,369 |   |  | $ | 8,958 |   |  | $ | 39,818 |  
|                                                                       |  |                                |        |              |  |               |       |           |  |           |       |   |  |   |       |   |  |   |        |  
|                                                                       |  |                                | 2.44   | %            |  |               | 3.08  | %         |  |           | 3.97  | % |  |   | 4.27  | % |  |   | 3.14   | %
|                                                                       |  |                                |        |              |  |               |       |           |  |           |       |   |  |   |       |   |  |   |        |  



---

* Securities without a stated maturity.

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Loans

At December 31, 2003, loans totaled
$138,468,000, an increase of $16,959,000 or 14.0 percent
over December 31, 2002. At December 31, 2003, the Bank
had $71,845,000 in loans secured by real estate. The
collectibility of a substantial portion of the loan portfolio is
susceptible to changes in economic and market conditions in the
region. The Bank generally requires collateral on all real
estate exposures and typically maintains loan-to-value ratios of
no greater than 80 percent.

The following tables set out the composition of
the types of loans, the allocation of the allowance for loan
losses, and the analysis of the allowance for loan losses as of
December 31, 2003 and 2002:



| |               
| | --------------
| | Types of Loans

|                   |                        |                |         |        |  |   |         |        | 
|------------------ | ---------------------- | -------------- | ------- | ------ |  | - | ------- | ------ | 
|                   |                        | 2003           |         | 2002  
|                   |                        |                |         |       
|                   |                        |               
|                   |                        | (In thousands)
|Commercial         |                        | $              | 53,770  |        |  | $ | 47,603  |       
|Real estate:       |                        |                |         |        |  |   |         |       
|                   | Commercial             |                |         | 48,963 |  |   |         | 42,497 | 
|                   | Construction           |                |         | 10,911 |  |   |         | 5,574  | 
|                   | Residential 1-4 family |                |         | 11,971 |  |   |         | 10,821 | 
|Consumer and other |                        |                | 12,853  |        |  |   | 15,014  |       
|                   |                        |                |         |        |  |   |         |       
|Total              |                        | $              | 138,468 |        |  | $ | 121,509 |       
|                   |                        |                |         |        |  |   |         |       

The following table shows the amounts maturing or
repricing as of December 31, 2003:

|                   |                        |                |        |        |  |         |        |        |  |   |       |       |  |   |         |        | 
|------------------ | ---------------------- | -------------- | ------ | ------ |  | ------- | ------ | ------ |  | - | ----- | ----- |  | - | ------- | ------ | 
|                   |                        | Within         |        | 1-5    |  | After   |        |       
|                   |                        | 1 Year         |        | Years  |  | 5 Years |        | Total 
|                   |                        |                |        |        |  |         |        |       
|                   |                        |               
|                   |                        | (In thousands)
|Commercial         |                        | $              | 33,486 |        |  | $       | 17,409 |        |  | $ | 2,875 |       |  | $ | 53,770  |       
|Real estate:       |                        |                |        |        |  |         |        |        |  |   |       |       |  |   |         |       
|                   | Commercial             |                |        | 11,231 |  |         |        | 32,528 |  |   |       | 5,204 |  |   |         | 48,963 | 
|                   | Construction           |                |        | 8,137  |  |         |        | 2,774  |  |   |       | 0     |  |   |         | 10,911 | 
|                   | Residential 1-4 family |                |        | 5,287  |  |         |        | 6,528  |  |   |       | 156   |  |   |         | 11,971 | 
|Consumer and other |                        |                | 8,705  |        |  |         | 3,876  |        |  |   | 272   |       |  |   | 12,853  |       
|                   |                        |                |        |        |  |         |        |        |  |   |       |       |  |   |         |       
|Total              |                        | $              | 66,846 |        |  | $       | 63,115 |        |  | $ | 8,507 |       |  | $ | 138,468 |       
|                   |                        |                |        |        |  |         |        |        |  |   |       |       |  |   |         |       

Loans maturing by fixed or variable rates after
one year:

|               |  |                |        |         |  |   |       | 
|-------------- |  | -------------- | ------ | ------- |  | - | ----- | 
|               |  | 1-5            |        | After  
|               |  | Years          |        | 5 Years
|               |  |                |        |        
|               |  |               
|               |  | (In thousands)
|Fixed rates    |  | $              | 37,537 |         |  | $ | 7,576 | 
|Variable rates |  |                | 25,578 |         |  |   | 931   | 
|               |  |                |        |         |  |   |       | 
|Total          |  | $              | 63,115 |         |  | $ | 8,507 | 
|               |  |                |        |         |  |   |       | 

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| |                                                
| | -----------------------------------------------
| | Allocation of the Allowance for Loan
    Losses

In the following table, the allowance for loan
losses at December 31, 2003, and 2002 has been allocated
among major loan categories based on a number of factors
including quality, volume, current economic outlook and other
business considerations.

|                    |                        |                |       |                |  |           |     |                |  |   |       |     |  |  |     |    | 
|------------------- | ---------------------- | -------------- | ----- | -------------- |  | --------- | --- | -------------- |  | - | ----- | --- |  |  | --- | -- | 
|                    |                        | 2003           |       | % of Loans in  |  | 2002      |     | % of Loans in 
|                    |                        | Allocated      |       | Each Category  |  | Allocated |     | Each Category 
|                    |                        | Amount         |       | to Total Loans |  | Amount    |     | to Total Loans
|                    |                        |                |       |                |  |           |     |               
|                    |                        |               
|                    |                        | (In thousands)
|Commercial          |                        | $              | 885   |                |  |           | 39  | %              |  | $ | 1,024 |     |  |  | 39  | % 
|Real estate:        |                        |                |       |                |  |           |     |                |  |   |       |     |  |  |     |   
|                    | Commercial             |                |       | 436            |  |           |     | 35             |  |   |       | 423 |  |  |     | 35 | 
|                    | Construction           |                |       | 110            |  |           |     | 8              |  |   |       | 59  |  |  |     | 5  | 
|                    | Residential 1-4 family |                |       | 9              |  |           |     | 9              |  |   |       | 28  |  |  |     | 9  | 
|Consumer and other  |                        |                | 196   |                |  |           | 9   |                |  |   | 156   |     |  |  | 12  |   
|                    |                        |                |       |                |  |           |     |                |  |   |       |     |  |  |     |   
|Total               |                        | $              | 1,636 |                |  |           | 100 | %              |  | $ | 1,690 |     |  |  | 100 | % 
|                    |                        |                |       |                |  |           |     |                |  |   |       |     |  |  |     |   
|% of loan portfolio |                        |                | 1.18  | %              |  |           |     |                |  |   | 1.39  | %   |  |  |     |   
|                    |                        |                |       |                |  |           |     |                |  |   |       |     |  |  |     |   

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.

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.

|                   |                        |                |       |      |  |   |       |    | 
|------------------ | ---------------------- | -------------- | ----- | ---- |  | - | ----- | -- | 
|                   |                        |               
|                   |                        | Year Ending   
|                   |                        | December 31,  
|                   |                        |               
|                   |                        | 2003           |       | 2002
|                   |                        |                |       |     
|                   |                        |               
|                   |                        | (In thousands)
|Beginning balance  |                        | $              | 1,690 |      |  | $ | 1,498 |   
|Charge-offs:       |                        |                |       |      |  |   |       |   
|Commercial         |                        |                | 81    |      |  |   | 108   |   
|Real estate:       |                        |                |       |      |  |   |       |   
|                   | Commercial             |                |       | 0    |  |   |       | 20 | 
|                   | Construction           |                |       | 0    |  |   |       | 0  | 
|                   | Residential 1-4 family |                |       | 184  |  |   |       | 0  | 
|Consumer and other |                        |                | 67    |      |  |   | 63    |   
|                   |                        |                |       |      |  |   |       |   
|Total charge-offs  |                        |                | 332   |      |  |   | 191   |   
|Recoveries:        |                        |                |       |      |  |   |       |   
|Commercial         |                        |                | 17    |      |  |   | 22    |   
|Real estate:       |                        |                |       |      |  |   |       |   
|                   | Commercial             |                |       | 20   |  |   |       | 0  | 
|                   | Construction           |                |       | 0    |  |   |       | 1  | 
|                   | Residential 1-4 family |                |       | 8    |  |   |       | 0  | 
|Consumer and other |                        |                | 0     |      |  |   | 30    |   
|                   |                        |                |       |      |  |   |       |   
|Total recoveries   |                        |                | 45    |      |  |   | 53    |   
|                   |                        |                |       |      |  |   |       |   

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|                                                          |  |                |       |      |  |   |       |  
|--------------------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | -
|                                                          |  |               
|                                                          |  | Year Ending   
|                                                          |  | December 31,  
|                                                          |  |               
|                                                          |  | 2003           |       | 2002
|                                                          |  |                |       |     
|                                                          |  |               
|                                                          |  | (In thousands)
|Net charge-offs/(recoveries)                              |  |                | 287   |      |  |   | 138   |  
|Provision                                                 |  |                | 233   |      |  |   | 330   |  
|                                                          |  |                |       |      |  |   |       |  
|Ending balance                                            |  | $              | 1,636 |      |  | $ | 1,690 |  
|                                                          |  |                |       |      |  |   |       |  
|Ratio of net charge-offs to average loans
    outstanding |  |                | 0.24  | %    |  |   | 0.11  | %
|                                                          |  |                |       |      |  |   |       |  



| |                                   
| | ----------------------------------
| | 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:

|                                                          |  |                |       |      |  |   |      |  
|--------------------------------------------------------- |  | -------------- | ----- | ---- |  | - | ---- | -
|                                                          |  | 2003           |       | 2002
|                                                          |  |                |       |     
|                                                          |  |               
|                                                          |  | (In thousands)
|Non-accruing loans:                                       |  |                |       |      |  |   |      |  
|Commercial                                                |  | $              | 112   |      |  | $ | 309  |  
|Real Estate                                               |  |                | 0     |      |  |   | 462  |  
|Consumer                                                  |  |                | 0     |      |  |   | 1    |  
|                                                          |  |                |       |      |  |   |      |  
|Total                                                     |  |                | 112   |      |  |   | 772  |  
|Accruing loans delinquent 90 days or more:                |  |                |       |      |  |   |      |  
|Commercial                                                |  |                | 464   |      |  |   | 15   |  
|Real Estate                                               |  |                | 0     |      |  |   | 0    |  
|Consumer                                                  |  |                | 67    |      |  |   | 12   |  
|                                                          |  |                |       |      |  |   |      |  
|Total                                                     |  |                | 531   |      |  |   | 27   |  
|Total non-performing loans                                |  |                | 643   |      |  |   | 799  |  
|Other real estate owned                                   |  |                | 2,659 |      |  |   | 0    |  
|Total non-performing assets                               |  | $              | 3,302 |      |  | $ | 799  |  
|                                                          |  |                |       |      |  |   |      |  
|Total non-performing loans as a percentage of
    loans   |  |                | 0.46  | %    |  |   | 0.66 | %
|                                                          |  |                |       |      |  |   |      |  
|Total non-performing assets as a percentage of
    assets |  |                | 1.70  | %    |  |   | 0.47 | %
|                                                          |  |                |       |      |  |   |      |  

The other real estate owned at December 31,
2003 is 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 is 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.

Nonperforming loans include non-accrual loans and
accruing loans delinquent 90 days or more. Loans are
generally placed on non-accrual 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.

21



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##### Table of Contents



Deposits

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

|                           |                                        |                |         |        |  |        |      |      |  |        |         |        |  |  |      |      |  |   |         |        |  |  |      |      | 
|-------------------------- | -------------------------------------- | -------------- | ------- | ------ |  | ------ | ---- | ---- |  | ------ | ------- | ------ |  |  | ---- | ---- |  | - | ------- | ------ |  |  | ---- | ---- | 
|                           |                                        |                |         |        |  |       
|                           |                                        | 2003           |         | 2002   |  | 2001  
|                           |                                        |                |         |        |  |       
|                           |                                        | Amount         |         | Rate   |  | Amount |      | Rate |  | Amount |         | Rate  
|                           |                                        |                |         |        |  |        |      |      |  |        |         |       
|                           |                                        |               
|                           |                                        | (In thousands)
|DEPOSITS                   |                                        |                |         |        |  |        |      |      |  |        |         |        |  |  |      |      |  |   |         |        |  |  |      |     
|Noninterest bearing demand |                                        | $              | 37,940  |        |  |        | 0.00 | %    |  | $      | 35,464  |        |  |  | 0.00 | %    |  | $ | 31,938  |        |  |  | 0.00 | %   
|Interest bearing demand    |                                        |                | 10,208  |        |  |        | 0.19 |      |  |        | 9,094   |        |  |  | 0.25 |      |  |   | 10,225  |        |  |  | 0.53 |     
|Savings deposits           |                                        |                | 48,677  |        |  |        | 1.05 |      |  |        | 45,875  |        |  |  | 1.77 |      |  |   | 35,114  |        |  |  | 3.01 |     
|Time deposits:             |                                        |                |         |        |  |        |      |      |  |        |         |        |  |  |      |      |  |   |         |        |  |  |      |     
|                           | Certificate of deposit, under $100,000 |                |         | 19,839 |  |        |      | 2.53 |  |        |         | 22,278 |  |  |      | 3.30 |  |   |         | 24,304 |  |  |      | 5.57 | 
|                           | Certificate of deposit, over $100,000  |                |         | 14,640 |  |        |      | 2.03 |  |        |         | 14,166 |  |  |      | 3.21 |  |   |         | 18,244 |  |  |      | 5.20 | 
|                           | Public Funds                           |                |         | 2,389  |  |        |      | 1.28 |  |        |         | 2,826  |  |  |      | 1.77 |  |   |         | 4,157  |  |  |      | 4.26 | 
|                           |                                        |                |         |        |  |        |      |      |  |        |         |        |  |  |      |      |  |   |         |        |  |  |      |     
|Total time deposits        |                                        |                | 36,868  |        |  |        | 2.25 | %    |  |        | 39,270  |        |  |  | 3.16 | %    |  |   | 46,705  |        |  |  | 5.31 | %   
|                           |                                        |                |         |        |  |        |      |      |  |        |         |        |  |  |      |      |  |   |         |        |  |  |      |     
|Total                      |                                        | $              | 133,693 |        |  |        |      |      |  | $      | 129,703 |        |  |  |      |      |  | $ | 123,982 |        |  |  |      |     
|                           |                                        |                |         |        |  |        |      |      |  |        |         |        |  |  |      |      |  |   |         |        |  |  |      |     

Maturities of time certificates of deposits of
$100,000 or more outstanding as of December 31, 2003 are
summarized as follows:

|                                |  |                |        | 
|------------------------------- |  | -------------- | ------ | 
|                                |  | Amount        
|                                |  |               
|                                |  | (In thousands)
|3 months or less                |  | $              | 13,122 | 
|Over 3 months through 6 months  |  |                | 2,061  | 
|Over 6 months through 12 months |  |                | 1,607  | 
|Over 12 months                  |  |                | 5,104  | 
|                                |  |                |        | 
|Total                           |  | $              | 21,894 | 
|                                |  |                |        | 

Borrowings

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

|                                               |  |                   |       |                   |  |                   |       |   |  |   |        |  
|---------------------------------------------- |  | ----------------- | ----- | ----------------- |  | ----------------- | ----- | - |  | - | ------ | -
|Federal Funds Purchased                        |  | December 31, 2003 |       | December 31, 2002 |  | December 31, 2001
|                                               |  |                   |       |                   |  |                  
|                                               |  |                  
|                                               |  | ($ in thousands) 
|Balance at end of year                         |  | $                 | 3,097 |                   |  | $                 | 3,353 |   |  | $ | 5,597  |  
|Weighted average interest rate at end of year  |  |                   | 0.50  | %                 |  |                   | 0.80  | % |  |   | 1.20   | %
|Maximum amount outstanding(1)                  |  |                   | 4,666 |                   |  |                   | 7,921 |   |  |   | 13,022 |  
|Average amount outstanding                     |  |                   | 3,054 |                   |  |                   | 4,721 |   |  |   | 6,527  |  
|Weighted average interest rate during the year |  |                   | 0.65  | %                 |  |                   | 1.19  | % |  |   | 3.60   | %



---



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

22



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##### Table of Contents



|                                               |  |                   |        |                   |  |                   |        |   |  |   |       |  
|---------------------------------------------- |  | ----------------- | ------ | ----------------- |  | ----------------- | ------ | - |  | - | ----- | -
|FHLB Advances                                  |  | December 31, 2003 |        | December 31, 2002 |  | December 31, 2001
|                                               |  |                   |        |                   |  |                  
|                                               |  |                  
|                                               |  | ($ in thousands) 
|Balance at end of year                         |  | $                 | 15,381 |                   |  | $                 | 11,783 |   |  | $ | 4,005 |  
|Weighted average interest rate at end of year  |  |                   | 3.81   | %                 |  |                   | 4.26   | % |  |   | 5.92  | %
|Maximum amount outstanding(1)                  |  |                   | 19,339 |                   |  |                   | 12,499 |   |  |   | 4,005 |  
|Average amount outstanding                     |  |                   | 14,313 |                   |  |                   | 8,555  |   |  |   | 3,459 |  
|Weighted average interest rate during the year |  |                   | 4.09   | %                 |  |                   | 4.85   | % |  |   | 5.98  | %



---



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

The increase in Federal Home Loan Bank
borrowings in 2003 provided the primary source of funding for
additional purchases of mortgaged-backed securities.

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 and a wholly
owned financing subsidiary of 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, 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% (4.66% at December 31, 2003), provided
that this rate cannot exceed 12.0% through June 30, 2007.
The junior subordinated 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 new
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.

23



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##### Table of Contents



At December 31, 2003, the Company had commitments
to extend credit and contingent liabilities under lines of
credit, standby letters of credit and similar arrangements
totaling $36,802,000. 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, 2003:

|                                |  |                |       |           |  |           |       |         |  |       |       |  |  |   |       |  |  |   |        | 
|------------------------------- |  | -------------- | ----- | --------- |  | --------- | ----- | ------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                |  | Within         |       |           |  |           |       | After   |  |      
|                                |  | 1 Year         |       | 1-3 Years |  | 3-5 Years |       | 5 Years |  | Total
|                                |  |                |       |           |  |           |       |         |  |      
|                                |  |               
|                                |  | (In thousands)
|Federal Home Loan Bank advances |  | $              | 3,450 |           |  | $         | 6,934 |         |  | $     | 3,997 |  |  | $ | 1,000 |  |  | $ | 15,381 | 
|Junior subordinated debt        |  |                |       |           |  |           |       |         |  |       |       |  |  |   | 5,000 |  |  |   | 5,000  | 
|Operating leases                |  |                | 508   |           |  |           | 1,036 |         |  |       | 402   |  |  |   | 289   |  |  |   | 2,235  | 
|Purchase obligations            |  |                | 90    |           |  |           |       |         |  |       |       |  |  |   |       |  |  |   | 90     | 
|                                |  |                |       |           |  |           |       |         |  |       |       |  |  |   |       |  |  |   |        | 
|Total                           |  | $              | 4,048 |           |  | $         | 7,970 |         |  | $     | 4,399 |  |  | $ | 6,289 |  |  | $ | 22,706 | 
|                                |  |                |       |           |  |           |       |         |  |       |       |  |  |   |       |  |  |   |        | 

Purchase obligations are primarily contracts with
vendors to provide services, such as information processing. For
additional discussion of Federal Home Loan Bank advances and
junior subordinated debt, see Note 8 Federal Funds
Purchased, Advances from Federal Home Loan Bank
(FHLB) and Junior Subordinated Debt to the
Consolidated Financial Statements.

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 on page
31 provides information on the sources and uses of cash for the
years ended December 31, 2003, 2002 and 2001. 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
activities that have required the greatest use of cash include
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 Federal Home Loan Bank
borrowings.

24



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##### Table of Contents



In 2002, under a planned growth strategy, the
Company added certain mortgage-related securities to the
investment portfolio, funded largely by Federal Home Loan Bank
advances. The strategy was designed to provide a steady positive
monthly cash flow from the investment portfolio for reinvestment
into loans and to meet other liquidity needs.

Interest Rate Risk

The Companys profitability depends largely
upon its net interest income, which is the difference between
interest earned on assets, such as loans and investments, and
the interest expense incurred on its liabilities, such as
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.

2003 Net Interest Income Analysis

December 31, 2003 (in thousands; rate
changes in basis points (bp) = 1/100 of 1%):

|                      |  |        |      |         |  |  |       |  
|--------------------- |  | ------ | ---- | ------- |  |  | ----- | -
|                      |  | Dollar |      | Percent
|Immediate Rate Change |  | Change |      | Change 
|                      |  |        |      |        
|+100bp                |  | $      | 190  |         |  |  | 2.23  | %
|+50bp                 |  |        | 95   |         |  |  | 1.12  |  
|-50bp                 |  |        | (184 | )       |  |  | (2.16 | )
|-100bp                |  |        | (367 | )       |  |  | (4.31 | )

The table above indicates that, at
December 31, 2003, the effect of an immediate 100 basis
point increase in interest rates would increase the
Companys net interest income by 2.23 percent or
approximately $190,000. An immediate 100 basis point decrease in
rates indicates a potential reduction of net interest income by
4.31 percent or approximately $367,000.

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

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

Capital Resources

Stockholders equity on December 31,
2003, was $16,583,000 compared with $15,960,000 at
December 31, 2002, an increase of $623,000 or
3.9 percent. Current earnings were $1,036,000 and dividends
paid were $366,000. Unrealized losses on securities
available-for-sale, net of deferred taxes, and totaling
$109,0000, also reduced the total December 31, 2003
stockholders equity.

25



---



##### Table of Contents



At December 31, 2003, the Company had total
risk-based capital of $23,178,000 which exceeded the
well-capitalized threshold of $15,262,000, as
defined by federal banking regulators. 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 2003 included
the payment of an annual cash dividend in February, a special
cash dividend in September and distribution of a 10 percent
stock dividend in November.

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

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

|                                                    |  |      |    | 
|--------------------------------------------------- |  | ---- | -- | 
|                                                    |  | Page
|                                                    |  |     
|Reports of Independent Auditors                     |  |      | 27 | 
|Consolidated Balance Sheets                         |  |      | 28 | 
|Consolidated Statements of Income                   |  |      | 29 | 
|Consolidated Statements of Stockholders
    Equity |  |      | 30 | 
|Consolidated Statements of Cash Flows               |  |      | 31 | 
|Notes to Consolidated Financial Statements          |  |      | 32 | 

26



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##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

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, 2003 and 2002, and the related consolidated
statements of income, stockholders equity, and cash flows
for the years then ended. 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
auditing standards generally accepted in the United States of
America. 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, 2003 and 2002, and the results of its
operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America.



| |                                     
| | ------------------------------------
| | (CROWE CHIZEK AND COMPANY SIGNATURE)
| | CROWE CHIZEK AND COMPANY LLC        

Oak Brook, Illinois

February 6, 2004


INDEPENDENT AUDITORS REPORT

To the Board of Directors and

Stockholders of EvergreenBancorp, Inc.:


We have audited the accompanying consolidated
balance sheet of EvergreenBancorp, Inc. as of
December 31, 2001, and the related consolidated statements
of income, stockholders equity, and cash flows for the
year then ended. 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 audit in accordance with
auditing standards generally accepted in the United States of
America. 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 audit
provides 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, 2001, and the results of its operations and
its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.



| |                                
| | -------------------------------
| | JOHN L. OBRIEN & COMPANY, PLLC

Seattle, Washington

January 25, 2002


27



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##### Table of Contents



EVERGREENBANCORP, INC.

CONSOLIDATED BALANCE SHEETS

|                                              |                                                                                                                      |                             |         |         |   |   |         |         |  
|--------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | ------- | - | - | ------- | ------- | -
|                                              |                                                                                                                      |                            
|                                              |                                                                                                                      | December 31,               
|                                              |                                                                                                                      |                            
|                                              |                                                                                                                      | 2003                        |         | 2002   
|                                              |                                                                                                                      |                             |         |        
|                                              |                                                                                                                      |                            
|                                              |                                                                                                                      | (In thousands, except share
|                                              |                                                                                                                      | and per share data)        
|ASSETS                                       
|CASH AND CASH EQUIVALENTS:                    |                                                                                                                      |                             |         |         |   |   |         |        
|                                              | Cash and due from banks                                                                                              |                             | $       | 9,701   |   |   | $       | 9,479   |  
|                                              | Interest-bearing deposits in financial
    institutions                                                              |                             |         | 744     |   |   |         | 6,141   |  
|                                              | Federal funds sold                                                                                                   |                             |         | 180     |   |   |         | 7,000   |  
|                                              |                                                                                                                      |                             |         |         |   |   |         |        
|TOTAL CASH AND CASH EQUIVALENTS               |                                                                                                                      |                             | 10,625  |         |   |   | 22,620  |        
|SECURITIES                                    |                                                                                                                      |                             |         |         |   |   |         |        
|                                              | Available-for-sale                                                                                                   |                             |         | 39,818  |   |   |         | 23,694  |  
|LOANS                                         |                                                                                                                      |                             |         |         |   |   |         |        
|                                              | Loans                                                                                                                |                             |         | 138,468 |   |   |         | 121,509 |  
|                                              | Allowance for loan losses                                                                                            |                             |         | (1,636  | ) |   |         | (1,690  | )
|                                              |                                                                                                                      |                             |         |         |   |   |         |        
|NET LOANS                                     |                                                                                                                      |                             | 136,832 |         |   |   | 119,819 |        
|Premises and equipment                        |                                                                                                                      |                             | 2,469   |         |   |   | 2,174   |        
|Other real estate owned                       |                                                                                                                      |                             | 2,659   |         |   |   |        |        
|Accrued interest and other assets             |                                                                                                                      |                             | 2,153   |         |   |   | 1,619   |        
|                                              |                                                                                                                      |                             |         |         |   |   |         |        
|TOTAL ASSETS                                  |                                                                                                                      | $                           | 194,556 |         |   | $ | 169,926 |        
|                                              |                                                                                                                      |                             |         |         |   |   |         |        
|LIABILITIES                                  
|DEPOSITS                                      |                                                                                                                      |                             |         |         |   |   |         |        
|                                              | Noninterest-bearing                                                                                                  |                             | $       | 47,132  |   |   | $       | 38,750  |  
|                                              | Interest-bearing                                                                                                     |                             |         | 105,551 |   |   |         | 93,424  |  
|                                              |                                                                                                                      |                             |         |         |   |   |         |        
|TOTAL DEPOSITS                                |                                                                                                                      |                             | 152,683 |         |   |   | 132,174 |        
|Federal funds purchased                       |                                                                                                                      |                             | 3,097   |         |   |   | 3,353   |        
|Advances from Federal Home Loan Bank          |                                                                                                                      |                             | 15,381  |         |   |   | 11,783  |        
|Accrued expenses and other liabilities        |                                                                                                                      |                             | 1,812   |         |   |   | 1,656   |        
|Junior subordinated debt                      |                                                                                                                      |                             | 5,000   |         |   |   | 5,000   |        
|                                              |                                                                                                                      |                             |         |         |   |   |         |        
|TOTAL LIABILITIES                             |                                                                                                                      |                             | 177,973 |         |   |   | 153,966 |        
|STOCKHOLDERS EQUITY                         
|Preferred stock:                              |                                                                                                                      |                             |         |         |   |   |         |        
|                                              | No par value; 100,000 shares authorized;
    none issued                                                             |                             |         |        |   |   |         |        |  
|Common stock and surplus:                     |                                                                                                                      |                             |         |         |   |   |         |        
|                                              | No par value; 15,000,000 shares authorized;
    1,190,366 shares issued at 2003; 1,075,461 shares
    issued at 2002 |                             |         | 15,854  |   |   |         | 13,597  |  
|Retained earnings                             |                                                                                                                      |                             | 778     |         |   |   | 2,266   |        
|Accumulated other comprehensive income (loss) |                                                                                                                      |                             | (49     | )       |   |   | 97      |        
|                                              |                                                                                                                      |                             |         |         |   |   |         |        
|TOTAL STOCKHOLDERS EQUITY                    |                                                                                                                      |                             | 16,583  |         |   |   | 15,960  |        
|                                              |                                                                                                                      |                             |         |         |   |   |         |        
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY    |                                                                                                                      | $                           | 194,556 |         |   | $ | 169,926 |        
|                                              |                                                                                                                      |                             |         |         |   |   |         |        

See accompanying notes to consolidated financial
statements.

28



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##### Table of Contents



EVERGREENBANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |     | 
|------------------------------------------------------- | ------------------------------ | ------------------------------------- | ------ | ---- |  | ---- | ------ | --- |  | - | ------ | --- | 
|                                                        |                                |                                      
|                                                        |                                | Years Ended December 31,             
|                                                        |                                |                                      
|                                                        |                                | 2003                                  |        | 2002 |  | 2001
|                                                        |                                |                                       |        |      |  |     
|                                                        |                                |                                      
|                                                        |                                | (In thousands, except per share data)
|INTEREST INCOME                                         |                                |                                       |        |      |  |      |        |     |  |   |        |    
|Loans, including fees                                   |                                | $                                     | 9,286  |      |  | $    | 10,074 |     |  | $ | 10,716 |    
|Federal funds sold and other                            |                                |                                       | 90     |      |  |      | 200    |     |  |   | 472    |    
|Securities                                              |                                |                                       |        |      |  |      |        |     |  |   |        |    
|                                                        | Taxable                        |                                       |        | 955  |  |      |        | 705 |  |   |        | 396 | 
|                                                        | Exempt from federal income tax |                                       |        | 77   |  |      |        | 70  |  |   |        | 165 | 
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|TOTAL INTEREST INCOME                                   |                                |                                       | 10,408 |      |  |      | 11,049 |     |  |   | 11,749 |    
|INTEREST EXPENSE                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|Deposits                                                |                                |                                       | 1,362  |      |  |      | 2,077  |     |  |   | 3,593  |    
|Federal funds purchased                                 |                                |                                       | 20     |      |  |      | 56     |     |  |   | 235    |    
|Advances from Federal Home Loan Bank                    |                                |                                       | 586    |      |  |      | 413    |     |  |   | 207    |    
|Junior subordinated debt                                |                                |                                       | 240    |      |  |      | 166    |     |  |   |       |    
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|TOTAL INTEREST EXPENSE                                  |                                |                                       | 2,208  |      |  |      | 2,712  |     |  |   | 4,035  |    
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|Net interest income                                     |                                |                                       | 8,200  |      |  |      | 8,337  |     |  |   | 7,714  |    
|Provision for loan losses                               |                                |                                       | 233    |      |  |      | 330    |     |  |   | 479    |    
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|NET INTEREST INCOME AFTER PROVISION FOR LOAN
    LOSSES |                                |                                       | 7,967  |      |  |      | 8,007  |     |  |   | 7,235  |    
|NONINTEREST INCOME                                      |                                |                                       |        |      |  |      |        |     |  |   |        |    
|Service charges on deposit accounts                     |                                |                                       | 1,176  |      |  |      | 1,072  |     |  |   | 1,037  |    
|Merchant credit card processing                         |                                |                                       | 166    |      |  |      | 155    |     |  |   | 189    |    
|Gain from sales of loans                                |                                |                                       | 10     |      |  |      |       |     |  |   | 9      |    
|Gain on sales of securities available-for-sale          |                                |                                       | 56     |      |  |      | 10     |     |  |   | 118    |    
|Other noninterest income                                |                                |                                       | 347    |      |  |      | 300    |     |  |   | 454    |    
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|Total noninterest income                                |                                |                                       | 1,755  |      |  |      | 1,537  |     |  |   | 1,807  |    
|NONINTEREST EXPENSE                                     |                                |                                       |        |      |  |      |        |     |  |   |        |    
|Salaries and employee benefits                          |                                |                                       | 4,036  |      |  |      | 3,879  |     |  |   | 3,882  |    
|Occupancy and equipment                                 |                                |                                       | 1,318  |      |  |      | 1,196  |     |  |   | 1,055  |    
|Other noninterest expense                               |                                |                                       | 2,842  |      |  |      | 2,446  |     |  |   | 2,276  |    
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|Total noninterest expense                               |                                |                                       | 8,196  |      |  |      | 7,521  |     |  |   | 7,213  |    
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|INCOME BEFORE INCOME TAX EXPENSE                        |                                |                                       | 1,526  |      |  |      | 2,023  |     |  |   | 1,829  |    
|Income tax expense                                      |                                |                                       | 490    |      |  |      | 680    |     |  |   | 589    |    
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|NET INCOME                                              |                                | $                                     | 1,036  |      |  | $    | 1,343  |     |  | $ | 1,240  |    
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|Basic earnings per share of common stock                |                                | $                                     | 0.87   |      |  | $    | 1.14   |     |  | $ | 1.02   |    
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    
|Diluted earnings per share of common stock              |                                | $                                     | 0.86   |      |  | $    | 1.13   |     |  | $ | 1.02   |    
|                                                        |                                |                                       |        |      |  |      |        |     |  |   |        |    

See accompanying notes to consolidated financial
statements.

29



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##### Table of Contents



EVERGREENBANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

Years Ended December 31, 2003, 2002, and
2001


|                                                                                                                                                                |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |       |      |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------- | --------- | ------- | - | --------- | ------ | ------- | - | -------- | ------ | ------------- | - | ------------- | ------- | - | - | - | ------ | ----- | - | - | --- | - | ---- | - | ------ | ----- | ---- | -
|                                                                                                                                                                |                                         |                                                                                                            |           | Common  |   |           |        |         |   |          |        | Accumulated   |   |              
|                                                                                                                                                                |                                         | Common                                                                                                     |           | Stock   |   | Common    |        |         |   |          |        | Other         |   | Total        
|                                                                                                                                                                |                                         | Stock                                                                                                      |           | and     |   | Stock     |        |         |   | Retained |        | Comprehensive |   | Stockholders
|                                                                                                                                                                |                                         | Shares                                                                                                     |           | Surplus |   | Par Value |        | Surplus |   | Earnings |        | Income (Loss) |   | Equity       
|                                                                                                                                                                |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |              
|                                                                                                                                                                |                                         |                                                                                                           
|                                                                                                                                                                |                                         | (In thousands, except share and per share data)                                                           
|BALANCE AT JANUARY 1, 2001                                                                                                                                      |                                         |                                                                                                            | 663,462   |         |   | $         |       |         |   | $        | 6,634  |               |   | $             | 5,838   |   |   | $ | 2,124  |       |   | $ | (19 | ) |      | $ | 14,577 |      
|Comprehensive income                                                                                                                                            |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |      
|                                                                                                                                                                | Net income                              |                                                                                                            |           |        |   |           |        |        |   |          |        |              |   |               |         |  |   |   |        | 1,240 |   |   |     |  |      |   |        | 1,240 |     
|                                                                                                                                                                | Other comprehensive income, net of tax: |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |       |     
|                                                                                                                                                                |                                         | Change in unrealized gain (loss) on securities
    available-for-sale, net of deferred income tax of $63   |           |         |  |           |        |         |  |          |        |               |  |               |         |   |  |   |        |       |  |   |     |   | 122  |   |        |       |      |  
|                                                                                                                                                                |                                         | Reclassification adjustments included in net
    income, net of deferred income tax benefit of $(40)       |           |         |  |           |        |         |  |          |        |               |  |               |         |   |  |   |        |       |  |   |     |   | (79  | ) |        |       | 43   |  
|                                                                                                                                                                |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |      
|                                                                                                                                                                | Total comprehensive income              |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        | 1,283 |     
|Cumulative effect of reclassifying certain
    securities from held-to-maturity to available-for-sale as of
    June 1, 2001, net of deferred income tax of $16 |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   | 31  |   |      |   | 31     |      
|Cash dividend ($.145 per share)                                                                                                                                 |                                         |                                                                                                            |          |         |   |           |       |         |   |          |       |               |   |               |        |   |   |   | (166   | )     |   |   |    |   |      |   | (166   | )    
|Change in par value of common stock from
    $10 to $1                                                                                                          |                                         |                                                                                                            |          |         |   |           |       |         |   |          | (5,971 | )             |   |               | 5,971   |   |   |   |       |       |   |   |    |   |      |   |       |      
|Change in par value from $1 to no par value                                                                                                                     |                                         |                                                                                                            |          |         |   |           | 11,475 |         |   |          | (623   | )             |   |               | (10,852 | ) |   |   |       |       |   |   |    |   |      |   |       |      
|Repurchase of common stock                                                                                                                                      |                                         |                                                                                                            | (40,700   | )       |   |           |       |         |   |          | (40    | )             |   |               | (957    | ) |   |   |       |       |   |   |    |   |      |   | (997   | )    
|Three-for-two stock split                                                                                                                                       |                                         |                                                                                                            | 311,355   |         |   |           |       |         |   |          |       |               |   |               |        |   |   |   |       |       |   |   |    |   |      |   |       |      
|Exercise of stock options                                                                                                                                       |                                         |                                                                                                            | 700       |         |   |           | 10     |         |   |          |       |               |   |               |        |   |   |   |       |       |   |   |    |   |      |   | 10     |      
|                                                                                                                                                                |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |      
|BALANCE AT DECEMBER 31, 2001                                                                                                                                    |                                         |                                                                                                            | 934,817   |         |   |           | 11,485 |         |   |          |       |               |   |               |        |   |   |   | 3,198  |       |   |   | 55  |   |      |   | 14,738 |      
|Comprehensive income                                                                                                                                            |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |      
|                                                                                                                                                                | Net income                              |                                                                                                            |           |        |   |           |        |        |   |          |        |              |   |               |         |  |   |   |        | 1,343 |   |   |     |  |      |   |        | 1,343 |     
|                                                                                                                                                                | Other comprehensive income, net of tax: |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |       |     
|                                                                                                                                                                |                                         | Change in unrealized gain (loss) on securities
    available-for-sale, net of deferred income tax of $25   |           |         |  |           |        |         |  |          |        |               |  |               |         |   |  |   |        |       |  |   |     |   | 49   |   |        |       |      |  
|                                                                                                                                                                |                                         | Reclassification adjustments included in net
    income, net of deferred income tax benefit of $(3)        |           |         |  |           |        |         |  |          |        |               |  |               |         |   |  |   |        |       |  |   |     |   | (7   | ) |        |       | 42   |  
|                                                                                                                                                                |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |      
|                                                                                                                                                                | Total comprehensive income              |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        | 1,385 |     
|Cash dividend ($.157 per share)                                                                                                                                 |                                         |                                                                                                            |          |         |   |           |       |         |   |          |       |               |   |               |        |   |   |   | (168   | )     |   |   |    |   |      |   | (168   | )    
|Stock dividend (15%)                                                                                                                                            |                                         |                                                                                                            | 140,223   |         |   |           | 2,107  |         |   |          |       |               |   |               |        |   |   |   | (2,107 | )     |   |   |    |   |      |   |       |      
|Repurchase of fractional shares                                                                                                                                 |                                         |                                                                                                            | (269      | )       |   |           | (4     | )       |   |          |       |               |   |               |        |   |   |   |       |       |   |   |    |   |      |   | (4     | )    
|Exercise of stock options                                                                                                                                       |                                         |                                                                                                            | 690       |         |   |           | 9      |         |   |          |       |               |   |               |        |   |   |   |       |       |   |   |    |   |      |   | 9      |      
|                                                                                                                                                                |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |      
|BALANCE AT DECEMBER 31, 2002                                                                                                                                    |                                         |                                                                                                            | 1,075,461 |         |   |           | 13,597 |         |   |          |       |               |   |               |        |   |   |   | 2,266  |       |   |   | 97  |   |      |   | 15,960 |      
|Comprehensive income                                                                                                                                            |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |      
|                                                                                                                                                                | Net income                              |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        | 1,036 |   |   |     |   |      |   |        | 1,036 |     
|                                                                                                                                                                | Other comprehensive income, net of tax: |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |       |     
|                                                                                                                                                                |                                         | Change in unrealized gain (loss) on securities
    available-for-sale, net of deferred income tax of $(57) |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   | (109 | ) |        |       |      |  
|                                                                                                                                                                |                                         | Reclassification adjustments included in net
    income, net of deferred income tax benefit of $(19)       |           |         |  |           |        |         |  |          |        |               |  |               |         |   |  |   |        |       |  |   |     |   | (37  | ) |        |       | (146 | )
|                                                                                                                                                                |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |      
|                                                                                                                                                                | Total comprehensive income              |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        | 890   |     
|Cash dividend ($.31 per share)                                                                                                                                  |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   | (366   | )     |   |   |     |   |      |   | (366   | )    
|Stock dividend (10%)                                                                                                                                            |                                         |                                                                                                            | 107,944   |         |   |           | 2,158  |         |   |          |        |               |   |               |         |   |   |   | (2,158 | )     |   |   |     |   |      |   |       |      
|Exercise of stock options                                                                                                                                       |                                         |                                                                                                            | 6,961     |         |   |           | 99     |         |   |          |       |               |   |               |        |   |   |   |       |       |   |   |    |   |      |   | 99     |      
|                                                                                                                                                                |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |      
|BALANCE AT DECEMBER 31, 2003                                                                                                                                    |                                         |                                                                                                            | 1,190,366 |         |   | $         | 15,854 |         |   | $        |       |               |   | $             |        |   |   | $ | 778    |       |   | $ | (49 | ) |      | $ | 16,583 |      
|                                                                                                                                                                |                                         |                                                                                                            |           |         |   |           |        |         |   |          |        |               |   |               |         |   |   |   |        |       |   |   |     |   |      |   |        |      

See accompanying notes to consolidated financial
statements.

30



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##### Table of Contents



EVERGREENBANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                      |                                             |                          |         |       |   |      |         |      |   |   |         |      |  
|------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | ------- | ----- | - | ---- | ------- | ---- | - | - | ------- | ---- | -
|                                                                                      |                                             |                         
|                                                                                      |                                             | Years Ended December 31,
|                                                                                      |                                             |                         
|                                                                                      |                                             | 2003                     |         | 2002  |   | 2001
|                                                                                      |                                             |                          |         |       |   |     
|                                                                                      |                                             |                         
|                                                                                      |                                             | (In thousands)          
|CASH FLOWS FROM OPERATING ACTIVITIES                                                  |                                             |                          |         |       |   |      |         |      |   |   |         |     
|Net income                                                                            |                                             | $                        | 1,036   |       |   | $    | 1,343   |      |   | $ | 1,240   |     
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                             |                          |         |       |   |      |         |      |   |   |         |     
|                                                                                      | Depreciation                                |                          |         | 597   |   |      |         | 492  |   |   |         | 369  |  
|                                                                                      | Provision for loan losses                   |                          |         | 233   |   |      |         | 330  |   |   |         | 479  |  
|                                                                                      | Gain from sales of securities               |                          |         | (56   | ) |      |         | (10  | ) |   |         | (118 | )
|                                                                                      | Gain on sales of loans                      |                          |         | (10   | ) |      |         |     |   |   |         | (9   | )
|                                                                                      | Gain on sale of other assets                |                          |         |      |   |      |         |     |   |   |         | (158 | )
|                                                                                      | Net amortization of premium on securities   |                          |         | 159   |   |      |         | 65   |   |   |         | 23   |  
|                                                                                      | Federal Home Loan Bank stock dividends      |                          |         | (74   | ) |      |         | (76  | ) |   |         | (80  | )
|                                                                                      | Dividends reinvested                        |                          |         | (290  | ) |      |         | (251 | ) |   |         | (127 | )
|                                                                                      | Other changes, net                          |                          |         | (291  | ) |      |         | (326 | ) |   |         | 46   |  
|                                                                                      |                                             |                          |         |       |   |      |         |      |   |   |         |     
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                             |                                             |                          | 1,304   |       |   |      | 1,567   |      |   |   | 1,665   |     
|CASH FLOWS FROM INVESTING ACTIVITIES                                                  |                                             |                          |         |       |   |      |         |      |   |   |         |     
|Proceeds from sales and maturities of securities
    available-for-sale               |                                             |                          | 9,524   |       |   |      | 7,047   |      |   |   | 12,239  |     
|Proceeds from maturities of securities
    held-to-maturity                           |                                             |                          |        |       |   |      |        |      |   |   | 30      |     
|Purchases of securities available-for-sale                                            |                                             |                          | (32,767 | )     |   |      | (16,115 | )    |   |   | (12,020 | )   
|Net (increase) decrease in loans                                                      |                                             |                          | (20,199 | )     |   |      | 572     |      |   |   | (9,594  | )   
|Proceeds from sales of loans                                                          |                                             |                          | 304     |       |   |      |        |      |   |   | 138     |     
|Proceeds from sales of other assets                                                   |                                             |                          |        |       |   |      |        |      |   |   | 158     |     
|Purchases of premises and equipment                                                   |                                             |                          | (892    | )     |   |      | (741    | )    |   |   | (1,247  | )   
|Proceeds from prepayments of securities
    available-for-sale                        |                                             |                          | 7,158   |       |   |      | 923     |      |   |   |        |     
|                                                                                      |                                             |                          |         |       |   |      |         |      |   |   |         |     
|NET CASH USED IN INVESTING ACTIVITIES                                                 |                                             |                          | (36,872 | )     |   |      | (8,314  | )    |   |   | (10,296 | )   
|CASH FLOWS FROM FINANCING ACTIVITIES                                                  |                                             |                          |         |       |   |      |         |      |   |   |         |     
|Net increase in deposits                                                              |                                             |                          | 20,509  |       |   |      | 1,830   |      |   |   | 4,919   |     
|Net decrease in federal funds purchased                                               |                                             |                          | (256    | )     |   |      | (2,244  | )    |   |   | (2,389  | )   
|Advances from Federal Home Loan Bank                                                  |                                             |                          | 5,460   |       |   |      | 8,700   |      |   |   | 2,005   |     
|Repayment of advances from Federal Home
    Loan Bank                                 |                                             |                          | (1,862  | )     |   |      | (922    | )    |   |   |        |     
|Proceeds from issuance of junior subordinated debt                                    |                                             |                          |        |       |   |      | 5,000   |      |   |   |        |     
|Repurchase of common stock                                                            |                                             |                          |        |       |   |      | (4      | )    |   |   | (997    | )   
|Proceeds from exercise of stock options                                               |                                             |                          | 88      |       |   |      | 9       |      |   |   | 10      |     
|Dividends paid                                                                        |                                             |                          | (366    | )     |   |      | (168    | )    |   |   | (166    | )   
|                                                                                      |                                             |                          |         |       |   |      |         |      |   |   |         |     
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                             |                                             |                          | 23,573  |       |   |      | 12,201  |      |   |   | 3,382   |     
|                                                                                      |                                             |                          |         |       |   |      |         |      |   |   |         |     
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                              |                                             |                          | (11,995 | )     |   |      | 5,454   |      |   |   | (5,249  | )   
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                        |                                             |                          | 22,620  |       |   |      | 17,166  |      |   |   | 22,415  |     
|                                                                                      |                                             |                          |         |       |   |      |         |      |   |   |         |     
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                              |                                             | $                        | 10,625  |       |   | $    | 22,620  |      |   | $ | 17,166  |     
|                                                                                      |                                             |                          |         |       |   |      |         |      |   |   |         |     
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                      |                                             |                          |         |       |   |      |         |      |   |   |         |     
|Interest paid                                                                         |                                             | $                        | 2,221   |       |   | $    | 2,906   |      |   | $ | 3,985   |     
|Income taxes paid                                                                     |                                             |                          | 760     |       |   |      | 766     |      |   |   | 757     |     
|SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
    ACTIVITIES                          |                                             |                          |         |       |   |      |         |      |   |   |         |     
|                                                                                      | Transfer of loan to other real estate owned |                          |         | 2,659 |   |      |         |     |   |   |         |     |  

See accompanying notes to consolidated financial
statements.

31



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##### Table of Contents



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, 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 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.

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 accounting principles generally
accepted in the United States of America 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 are classified as held-to-maturity when the Company
has the ability and management has the positive intent to hold
those securities to maturity. Accordingly they are stated at
cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized in interest income using the
interest method. 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 Federal Home
Loan Bank stock, are carried at cost.

Interest income includes amortization of purchase
premium or discount. Securities are written down to fair value
when a decline in fair value is not temporary.

Loans.Loans are
reported at the principal amount outstanding, net of unearned
income. Unearned income, which includes deferred fees net of
deferred direct incremental loan origination costs, is amortized
to

32



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EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

interest income generally over the contractual
life of the loan using an interest method or the straight-line
method if not materially different. Loans are classified
according to the purpose of the loan and the use of loan
proceeds. Interest on loans is calculated using the simple
interest method on the daily balance of the principal amount
outstanding.

Interest accrual is discontinued on loans
90 days or more past due when the collateral is inadequate
to cover principal and interest. If management believes that
collection is doubtful after considering relevant conditions,
the accrual of interest is discontinued immediately. Accrued
interest on nonaccruing loans is charged against interest income
when a loan is transferred to the nonaccruing classification.

Impairment of a loan occurs when, based on
current information and events, it is probable that all amounts
due according to the contractual terms of the loan agreement are
not expected to be collected. Impaired loans are carried at the
present value of expected future cash flows or the fair value of
the related collateral if the loan is considered to be
collateral dependent.

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.

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 or the terms of the related leases. The Company leases
the premises upon which it conducts business. Furniture and
equipment are leased as needed by the Company under a master
lease. Maintenance, repairs, taxes, and insurance are charged to
noninterest expense.

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 includes
both net income and other comprehensive income elements,
including the change in unrealized gains and losses on
securities available-for-sale, net of income tax.

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EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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.

Derivative Instruments and Hedging
Activities.The Company has adopted
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities.The Statement was adopted to reclassify certain securities
from held-to-maturity to available-for-sale, as permitted. The
Company does not currently participate in derivative or hedging
activities.

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.

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, Accounting for Stock-Based Compensation.
Certain adjustments were made to the pro forma calculations in
prior years to be consistent with the current year presentation.
Earnings and dividends per share are restated for all stock
splits and dividends through the date of issue of the financial
statements.

|                                                                                      |  |                        |       |      |  |      |       |  |  |   |       | 
|------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                      |  | 2003                   |       | 2002 |  | 2001
|                                                                                      |  |                        |       |      |  |     
|                                                                                      |  |                       
|                                                                                      |  | (In thousands,        
|                                                                                      |  | except per share data)
|Net income as reported                                                                |  | $                      | 1,036 |      |  | $    | 1,343 |  |  | $ | 1,240 | 
|Deduct: Stock-based compensation expense
    determined under fair value based method |  |                        | 49    |      |  |      | 38    |  |  |   | 28    | 
|                                                                                      |  |                        |       |      |  |      |       |  |  |   |       | 
|Pro forma net income                                                                  |  | $                      | 987   |      |  | $    | 1,305 |  |  | $ | 1,212 | 
|                                                                                      |  |                        |       |      |  |      |       |  |  |   |       | 
|Basic earnings per share as reported                                                  |  | $                      | 0.87  |      |  | $    | 1.14  |  |  | $ | 1.02  | 
|Pro forma basic earnings per share                                                    |  |                        | 0.83  |      |  |      | 1.10  |  |  |   | 0.99  | 
|Diluted earnings per share as reported                                                |  | $                      | 0.86  |      |  | $    | 1.13  |  |  | $ | 1.02  | 
|Pro forma diluted earnings per share                                                  |  |                        | 0.82  |      |  |      | 1.09  |  |  |   | 0.99  | 

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EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The weighted average fair value of individual
options granted was $3.03, $3.68, and $3.79 in 2003, 2002, and
2001. The pro forma effects are computed using option pricing
models, using the following weighted-average assumptions as of
grant date.

|                                |  |      |            |      |  |      |            |   |  |  |            |  
|------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                                |  | 2003 |            | 2002 |  | 2001
|                                |  |      |            |      |  |     
|Risk-free interest rate         |  |      | 3.00       | %    |  |      | 4.64       | % |  |  | 5.21       | %
|Expected option life            |  |      | 7.50 years |      |  |      | 7.50 years |   |  |  | 7.38 years |  
|Expected stock price volatility |  |      | 12         | %    |  |      | 13         | % |  |  | 22         | %
|Dividend yield                  |  |      | 1.1        | %    |  |      | 1.1        | % |  |  | 1.7        | %

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. Earnings and dividends per share are restated for
all stock splits and dividends through the date of issue of the
financial statements.

Adoption of New Accounting
Standards.During 2003, the Company
adopted FASB Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, FASB
Statement 150, Accounting for Certain Financial Instruments
With Characteristics of Both Liabilities and Equities, FASB
Statement 132 (revised 2003), Employers
Disclosures About Pensions and Other Postretirement
Benefits, FASB Interpretation 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, and
FASB Interpretation 46, Consolidation of Variable Interest
Entities. Adoption of the new standards did not materially
affect the Companys operating results or financial
condition.

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

Federal Reserve Board regulations require that
the Bank maintain certain minimum reserve balances with the
Federal Reserve Bank. The amounts of such balances at
December 31, 2003 and 2002 were approximately $996,000 and
$589,000, respectively.

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EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 3: Securities

The fair value of securities available-for-sale
and the related 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, 2003                                                      |                                     |       |        |            |  |            |    |     |  |   |     |     
|U.S. agencies                                                          |                                     | $     | 8,481  |            |  | $          | 30 |     |  | $ | (49 | )   
|States and political subdivisions                                      |                                     |       | 3,567  |            |  |            | 49 |     |  |   | (4  | )   
|Mortgage-backed securities and collateralized
    mortgage obligations |                                     |       | 9,812  |            |  |            | 38 |     |  |   | (49 | )   
|AMF Adjustable Rate Mortgage Fund                                      |                                     |       | 16,586 |            |  |            |   |     |  |   | (91 | )   
|Federal Home Loan Bank stock                                           |                                     |       | 1,372  |            |  |            |   |     |  |   |    |     
|                                                                       |                                     |       |        |            |  |            |    |     |  |   |     |     
|                                                                       | Total securities available-for-sale |       | $      | 39,818     |  |            | $  | 117 |  |   | $   | (193 | )
|                                                                       |                                     |       |        |            |  |            |    |     |  |   |     |     
|DECEMBER 31, 2002                                                      |                                     |       |        |            |  |            |    |     |  |   |     |     
|U.S. agencies                                                          |                                     | $     | 3,032  |            |  | $          | 32 |     |  | $ |    |     
|States and political subdivisions                                      |                                     |       | 2,123  |            |  |            | 30 |     |  |   | (2  | )   
|Mortgage-backed securities and collateralized
    mortgage obligations |                                     |       | 11,843 |            |  |            | 77 |     |  |   |    |     
|AMF Adjustable Rate Mortgage Fund                                      |                                     |       | 5,397  |            |  |            | 10 |     |  |   |    |     
|Federal Home Loan Bank stock                                           |                                     |       | 1,299  |            |  |            |   |     |  |   |    |     
|                                                                       |                                     |       |        |            |  |            |    |     |  |   |     |     
|                                                                       | Total securities available-for-sale |       | $      | 23,694     |  |            | $  | 149 |  |   | $   | (2   | )
|                                                                       |                                     |       |        |            |  |            |    |     |  |   |     |     

The scheduled maturities of securities
available-for-sale at December 31, 2003, were as follows
(in thousands):

|                                                                       |       |       |        |        | 
|---------------------------------------------------------------------- | ----- | ----- | ------ | ------ | 
|                                                                       |       | Fair 
|                                                                       |       | Value
|                                                                       |       |      
|Due in one year or less                                                |       | $     | 507    |       
|Due after one year through five years                                  |       |       | 5,026  |       
|Due after five years through ten years                                 |       |       | 6,515  |       
|                                                                       |       |       |        |       
|                                                                       | Total |       |        | 12,048 | 
|AMF Adjustable Rate Mortgage Fund                                      |       |       | 16,586 |       
|Mortgage-backed securities and collateralized
    mortgage obligations |       |       | 9,812  |       
|Federal Home Loan Bank stock                                           |       |       | 1,372  |       
|                                                                       |       |       |        |       
|                                                                       | Total |       | $      | 39,818 | 
|                                                                       |       |       |        |       

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

|             |  |      |       |      |  |      |       |  |  |   |       | 
|------------ |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|             |  | 2003 |       | 2002 |  | 2001
|             |  |      |       |      |  |     
|Proceeds     |  | $    | 5,433 |      |  | $    | 5,000 |  |  | $ | 5,699 | 
|Gross gains  |  |      | 56    |      |  |      | 10    |  |  |   | 118   | 
|Gross losses |  |      |      |      |  |      |      |  |  |   |      | 

Securities with an estimated carrying value of
$1,511,000 and $1,028,000 at December 31, 2003 and 2002,
respectively, were pledged to secure public deposits and for
other purposes required or permitted by law.

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##### Table of Contents



EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company is required to maintain a minimum
investment in the stock of the Federal Home Loan Bank of
Seattle (FHLB) based on certain percentages of
outstanding mortgage loans or advances from FHLB. At
December 31, 2003, the minimum required investment was
$843,000, which the Company exceeded. Dividend income from the
Federal Home Loan Bank stock was $74,000, $76,000, and
$81,000 for 2003, 2002, and 2001, respectively.

At December 31, 2003, there are no
securities that have carried unrealized losses for more than one
year. All unrealized losses are considered temporary and are due
to fluctuations in interest rates for similar type issuances.

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):

|                           |       |      |        |         |  |   |        |         | 
|-------------------------- | ----- | ---- | ------ | ------- |  | - | ------ | ------- | 
|                           |       | 2003 |        | 2002   
|                           |       |      |        |        
|Commercial                 |       | $    | 53,770 |         |  | $ | 47,603 |        
|Real estate mortgage       |       |      | 60,934 |         |  |   | 53,318 |        
|Real estate construction   |       |      | 10,911 |         |  |   | 5,574  |        
|Consumer                   |       |      | 12,778 |         |  |   | 14,842 |        
|Other including overdrafts |       |      | 75     |         |  |   | 172    |        
|                           |       |      |        |         |  |   |        |        
|                           | Total |      | $      | 138,468 |  |   | $      | 121,509 | 
|                           |       |      |        |         |  |   |        |        

Loans at December 31, 2003, by maturity or
repricing date were as follows (in thousands):

|                                                                 |       |       |        |          |  |       |        |        |  |   |        |         | 
|---------------------------------------------------------------- | ----- | ----- | ------ | -------- |  | ----- | ------ | ------ |  | - | ------ | ------- | 
|                                                                 |       | Fixed |        | Variable |  |      
|                                                                 |       | Rate  |        | Rate     |  | Total
|                                                                 |       |       |        |          |  |      
|Due in one year or less                                          |       | $     | 6,301  |          |  | $     | 60,433 |        |  | $ | 66,734 |        
|Due after one year through five years                            |       |       | 37,537 |          |  |       | 25,578 |        |  |   | 63,115 |        
|Due after five years                                             |       |       | 7,576  |          |  |       | 931    |        |  |   | 8,507  |        
|                                                                 |       |       |        |          |  |       |        |        |  |   |        |        
|                                                                 | Total |       | $      | 51,414   |  |       | $      | 86,942 |  |   |        | 138,356 | 
|                                                                 |       |       |        |          |  |       |        |        |  |   |        |        
|Loans on which the accrual of interest has been
    discontinued |       |       |        |          |  |       |        |        |  |   | 112    |        
|                                                                 |       |       |        |          |  |       |        |        |  |   |        |        
|                                                                 | Total |       |        |          |  |       |        |        |  |   | $      | 138,468 | 
|                                                                 |       |       |        |          |  |       |        |        |  |   |        |        

Unamortized deferred loan fees net of unamortized
origination costs were $637,000 and $479,000 at
December 31, 2003 and 2002, respectively.

The aggregate amount of loans serviced for
others, including loan participations and the sold portion of
U.S. government guaranteed loans, was $7,454,000 at
December 31, 2003 and $9,435,000 at December 31, 2002.

At December 31, 2003 and 2002, loans
aggregating $19,026,000 and $16,253,000, respectively, were
reported as available as collateral for the advances from the
Federal Home Loan Bank of Seattle, as described in
Note 8.

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EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Loans to principal officers, directors, and their
affiliates in 2003 were as follows.

|                  |  |   |       |  
|----------------- |  | - | ----- | -
|Beginning balance |  | $ | 1,138 |  
|Repayments        |  |   | (107  | )
|Additions         |  |   | 751   |  
|                  |  |   |       |  
|Ending balance    |  | $ | 1,782 |  
|                  |  |   |       |  

Note 5: Allowance for Loan
Losses

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

|                                     |  |      |       |      |  |      |       |   |  |   |       |  
|------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                     |  | 2003 |       | 2002 |  | 2001
|                                     |  |      |       |      |  |     
|Balance at January 1                 |  | $    | 1,690 |      |  | $    | 1,498 |   |  | $ | 1,323 |  
|Recoveries credited to the allowance |  |      | 45    |      |  |      | 53    |   |  |   | 57    |  
|Provision for loan losses            |  |      | 233   |      |  |      | 330   |   |  |   | 479   |  
|Loans charged off                    |  |      | (332  | )    |  |      | (191  | ) |  |   | (361  | )
|                                     |  |      |       |      |  |      |       |   |  |   |       |  
|Balance at December 31               |  | $    | 1,636 |      |  | $    | 1,690 |   |  | $ | 1,498 |  
|                                     |  |      |       |      |  |      |       |   |  |   |       |  

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:

|                                                                        |       |      |    |      |  |   |     |     | 
|----------------------------------------------------------------------- | ----- | ---- | -- | ---- |  | - | --- | --- | 
|                                                                        |       | 2003 |    | 2002
|                                                                        |       |      |    |     
|Impaired loans for which no allowance for loan
    losses was allocated |       | $    | 58 |      |  | $ | 185 |    
|Impaired loans with an allocation of the
    allowance for loan losses  |       |      | 54 |      |  |   | 587 |    
|                                                                        |       |      |    |      |  |   |     |    
|                                                                        | Total |      | $  | 112  |  |   |     | 772 | 
|                                                                        |       |      |    |      |  |   |     |    
|Amount of the allowance for loan losses allocated                       |       | $    | 11 |      |  | $ | 45  |    
|                                                                        |       |      |    |      |  |   |     |    

|                                             |  |      |     |      |  |      |     |  |  |   |     | 
|-------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                             |  | 2003 |     | 2002 |  | 2001
|                                             |  |      |     |      |  |     
|Average of impaired loans during the year    |  | $    | 832 |      |  | $    | 816 |  |  | $ | 354 | 
|Interest income recognized during impairment |  |      |    |      |  |      |    |  |  |   |    | 
|Cash-basis interest income recognized        |  |      |    |      |  |      |    |  |  |   |    | 

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

|                                                                                           |  |      |     |      |  |   |     | 
|------------------------------------------------------------------------------------------ |  | ---- | --- | ---- |  | - | --- | 
|                                                                                           |  | 2003 |     | 2002
|                                                                                           |  |      |     |     
|Loans past due 90 days or more and still
    accruing                                      |  | $    | 531 |      |  | $ | 27  | 
|Loans accounted for on a nonaccrual basis                                                  |  |      | 112 |      |  |   | 772 | 
|If interest on these nonaccrual loans had been
    recognized, such income would have been |  |      | 9   |      |  |   | 68  | 

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.

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##### Table of Contents



EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6: Premises and Equipment

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

|                                          |       |      |        |       |  |   |        |       | 
|----------------------------------------- | ----- | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                          |       | 2003 |        | 2002 
|                                          |       |      |        |      
|Equipment and furniture                   |       | $    | 3,405  |       |  | $ | 2,839  |      
|Leasehold improvements                    |       |      | 2,040  |       |  |   | 1,714  |      
|Accumulated depreciation and amortization |       |      | (2,976 | )     |  |   | (2,379 | )    
|                                          |       |      |        |       |  |   |        |      
|                                          | Total |      | $      | 2,469 |  |   | $      | 2,174 | 
|                                          |       |      |        |       |  |   |        |      

Depreciation expense amounted to $597,000,
$492,000, and $369,000 for 2003, 2002, and 2001, respectively.

Note 7: Deposits

The average rate paid on deposits was 1.42% for
2003 and 2.20% for 2002. Time certificates of deposit in
denominations of $100,000 or more aggregated $21,894,000 and
$12,140,000 at December 31, 2003 and 2002, respectively,
including $9,800,000 of public funds from the State of
Washington at December 31, 2003. Interest expense on time
deposits of $100,000 or more in 2003, 2002, and 2001 was
$298,000, $505,000, and $1,132,000, respectively.

The scheduled maturities of certificates of
deposits at December 31, 2003, were as follows (in
thousands):

|     |       |   |        |        | 
|---- | ----- | - | ------ | ------ | 
|2004 |       | $ | 35,464 |       
|2005 |       |   | 6,530  |       
|2006 |       |   | 3,685  |       
|2007 |       |   | 208    |       
|     |       |   |        |       
|     | Total |   | $      | 45,887 | 
|     |       |   |        |       



|        |                                                                                                            
|------- | -----------------------------------------------------------------------------------------------------------
|Note 8: | Federal Funds Purchased, Advances from Federal
    Home Loan Bank (FHLB) and Junior Subordinated
    Debt

The daily average amount outstanding for federal
funds purchased was $3,054,000 for 2003 and $4,721,000 for 2002.
The weighted average interest rate was 0.66% during 2003 and
1.19% during 2002. The weighted average interest rate at
December 31 was 0.50% for 2003 and .80% for 2002. The
maximum amount outstanding at the end of any month was
$4,666,000 during 2003 and $7,951,000 during 2002.

39



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##### Table of Contents



EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Advances from the FHLB are summarized as follows:

|                           |      |              |  |        |      |              |   |        |        |  |  |      |      |   |   |       |        | 
|-------------------------- | ---- | ------------ |  | ------ | ---- | ------------ | - | ------ | ------ |  |  | ---- | ---- | - | - | ----- | ------ | 
|                           |      |             
|                           |      | December 31,
|                           |      |             
|                           |      |              |  |       
|                           |      | 2003         |  | 2002  
|                           |      |              |  |       
|                           |      | Weighted     |  |        |      | Weighted     |   |       
|                           |      | Average Rate |  | Amount |      | Average Rate |   | Amount
|                           |      |              |  |        |      |              |   |       
|Advances from the FHLB due |      |              |  |        |      |              |   |        |        |  |  |      |      |   |   |      
|                           | 2003 |              |  |       | %    |              | $ |       |        |  |  | 2.70 | %    |   | $ | 1,000 |       
|                           | 2004 |              |  | 1.57   |      |              |   | 3,450  |        |  |  | 3.40 |      |   |   | 500   |       
|                           | 2005 |              |  | 4.68   |      |              |   | 4,054  |        |  |  | 4.16 |      |   |   | 3,504 |       
|                           | 2006 |              |  | 4.84   |      |              |   | 2,880  |        |  |  | 5.18 |      |   |   | 2,505 |       
|                           | 2007 |              |  | 4.17   |      |              |   | 2,811  |        |  |  | 4.17 |      |   |   | 3,274 |       
|                           | 2008 |              |  | 3.37   |      |              |   | 1,186  |        |  |  |     |      |   |   |      |       
|                           | 2009 |              |  | 4.57   |      |              |   | 1,000  |        |  |  | 4.57 |      |   |   | 1,000 |       
|                           |      |              |  |        |      |              |   |        |        |  |  |      |      |   |   |      
|                           |      | Total        |  |        | 3.81 | %            |   | $      | 15,381 |  |  |      | 4.26 | % |   | $     | 11,783 | 
|                           |      |              |  |        |      |              |   |        |        |  |  |      |      |   |   |      

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,
2003, approximately $1,600,000 of the advances have adjustable
rates.

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, Capital
Trust issued $5 million in trust preferred securities in a
private placement offering. Simultaneously with the issuance of
the trust preferred securities by Capital Trust, the Bancorp
issued junior subordinated debentures to Capital Trust. The
junior subordinated debentures are the sole assets of Capital
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% (4.66% at December 31,
2003), provided that this rate cannot exceed 12.0% through
June 30, 2007. The junior subordinated 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 Capital 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 new
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.

40



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##### Table of Contents



EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 9: Stockholders
Equity

Effective June 20, 2001, the Bank became a
wholly owned subsidiary of the Bancorp. The reorganization
resulted in a share-for-share exchange of stock whereby
stockholders of the Bank became stockholders of the Bancorp. The
capital accounts of the Bank were carried forward, without
change, as the capital accounts of the Bancorp.

On February 20, 2001, prior to the
reorganization, the Bank amended and restated its articles of
incorporation to change the par value of its common and
preferred stock from $10 to $1 per share. This amendment
was recognized in the financial statements by transferring
$5,971,000 from common stock par value to surplus.

The articles of incorporation of the Bancorp were
amended and restated effective July 31, 2001, to increase
the amount of authorized common stock to 15,000,000 shares
and to change both common and preferred stock to no par value.
These amendments were recognized in the financial statements by
combining the amounts of common stock and surplus and
reclassifying the total in a single category, common stock and
surplus.

Two stockholders, owning 40,700 shares of
Bank common stock, exercised their right to dissent to
reorganization. These dissenting stockholders received $24.50
for each share of Bank stock held. The Bank recognized the
settlement prior to June 20, 2001 by recording a liability
to the dissenting stockholders, and payment was made following
completion of the reorganization.

On May 17, 2001,the Bancorps
Board of Directors approved a three-for-two stock split payable
July 31, 2001 to stockholders of record as of July 1,
2001. The three-for-two stock split also affected stock options
previously granted and shares available for grant under the 2000
Stock Option Plan.

On June 20, 2002, the Bancorps Board
of Directors approved a 15% stock dividend payable on
July 15, 2002 to stockholders of record as of July 8,
2002. The stock dividend also affected stock options previously
granted and shares available for grant under the 2000 Stock
Option Plan.

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 2000 Stock Option Plan.

Note 10: Income Taxes

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

|                  |       |      |     |      |  |      |     |     |  |   |     |     | 
|----------------- | ----- | ---- | --- | ---- |  | ---- | --- | --- |  | - | --- | --- | 
|                  |       | 2003 |     | 2002 |  | 2001
|                  |       |      |     |      |  |     
|Currently payable |       | $    | 572 |      |  | $    | 708 |     |  | $ | 620 |    
|Deferred          |       |      | (82 | )    |  |      | (28 | )   |  |   | (31 | )  
|                  |       |      |     |      |  |      |     |     |  |   |     |    
|                  | Total |      | $   | 490  |  |      | $   | 680 |  |   | $   | 589 | 
|                  |       |      |     |      |  |      |     |     |  |   |     |    

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

|                                                                |       |      |     |      |  |      |     |     |  |   |     |     | 
|--------------------------------------------------------------- | ----- | ---- | --- | ---- |  | ---- | --- | --- |  | - | --- | --- | 
|                                                                |       | 2003 |     | 2002 |  | 2001
|                                                                |       |      |     |      |  |     
|Federal income tax at statutory rates                           |       | $    | 519 |      |  | $    | 688 |     |  | $ | 622 |    
|Decrease in taxes resulting from tax-exempt
    interest income |       |      | (31 | )    |  |      | (28 | )   |  |   | (53 | )  
|Nondeductible expenses and other                                |       |      | 2   |      |  |      | 20  |     |  |   | 20  |    
|                                                                |       |      |     |      |  |      |     |     |  |   |     |    
|                                                                | Total |      | $   | 490  |  |      | $   | 680 |  |   | $   | 589 | 
|                                                                |       |      |     |      |  |      |     |     |  |   |     |    

41



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##### Table of Contents



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):

|                       |                                                    |      |       |      |   |  |      |      |  
|---------------------- | -------------------------------------------------- | ---- | ----- | ---- | - |  | ---- | ---- | -
|                       |                                                    | 2003 |       | 2002
|                       |                                                    |      |       |     
|DEFERRED TAX ASSET     |                                                    |      |       |      |   |  |      |     
|                       | Provision for loan losses                          |      | $     | 472  |   |  | $    | 480  |  
|                       | Postretirement health care benefits                |      |       | 315  |   |  |      | 304  |  
|                       | Unamortized loan fees, net of loan costs           |      |       | 217  |   |  |      | 75   |  
|                       | Accrued vacation pay                               |      |       | 80   |   |  |      | 75   |  
|                       | Unrealized losses on securities available-for-sale |      |       | 25   |   |  |      |     |  
|                       |                                                    |      |       |      |   |  |      |     
|                       |                                                    |      | 1,109 |      |   |  | 934  |     
|                       |                                                    |      |       |      |   |  |      |     
|                      
|DEFERRED TAX LIABILITY |                                                    |      |       |      |   |  |      |     
|                       | Federal Home Loan Bank stock dividends             |      | $     | (242 | ) |  | $    | (217 | )
|                       | Depreciation                                       |      |       | (171 | ) |  |      | (128 | )
|                       | Unrealized gain on securities available-for-sale   |      |       |     |   |  |      | (50  | )
|                       |                                                    |      |       |      |   |  |      |     
|                       |                                                    |      | (413  | )    |   |  | (395 | )   
|                       |                                                    |      |       |      |   |  |      |     
|                       | Net deferred income tax asset                      |      | $     | 696  |   |  | $    | 539  |  
|                       |                                                    |      |       |      |   |  |      |     

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 (the
2000 Plan). In April of 2003, the shareholders of
Bancorp approved an amendment to the 2000 Plan to increase the
number of shares available under the plan by 66,000. The 2000
Plan currently provides for the grant of options to purchase up
to 197,835 shares of common stock. Options available under
the plan were adjusted for the July 2001 stock split, and the
July 2002 and the November 2003 stock dividends. As of
December 31, 2003, approximately 82,502 shares of
common stock were available for future grant under the 2000 Plan.

The 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:

|                                         |  |        |         |           |  |        |       |           |  |        |        |           |  |   |       |  |  |  |        |   |  |   |       | 
|---------------------------------------- |  | ------ | ------- | --------- |  | ------ | ----- | --------- |  | ------ | ------ | --------- |  | - | ----- |  |  |  | ------ | - |  | - | ----- | 
|                                         |  |        |         |           |  |       
|                                         |  | 2003   |         | 2002      |  | 2001  
|                                         |  |        |         |           |  |       
|                                         |  |        |         | Weighted- |  |        |       | Weighted- |  |        |        | Weighted-
|                                         |  |        |         | Average   |  |        |       | Average   |  |        |        | Average  
|                                         |  |        |         | Exercise  |  |        |       | Exercise  |  |        |        | Exercise 
|                                         |  | Shares |         | Price     |  | Shares |       | Price     |  | Shares |        | Price    
|                                         |  |        |         |           |  |        |       |           |  |        |        |          
|Outstanding at the beginning of the year |  |        | 86,104  |           |  | $      | 12.12 |           |  |        | 71,884 |           |  | $ | 11.55 |  |  |  | 41,460 |   |  | $ | 11.40 | 
|Granted                                  |  |        | 33,550  |           |  |        | 14.82 |           |  |        | 22,770 |           |  |   | 13.36 |  |  |  | 37,002 |   |  |   | 11.71 | 
|Exercised                                |  |        | (7,626  | )         |  |        | 11.48 |           |  |        | (759   | )         |  |   | 11.40 |  |  |  | (886   | ) |  |   | 11.40 | 
|Forfeited                                |  |        | (5,966  | )         |  |        | 13.84 |           |  |        | (7,791 | )         |  |   | 11.55 |  |  |  | (5,692 | ) |  |   | 11.57 | 
|                                         |  |        |         |           |  |        |       |           |  |        |        |           |  |   |       |  |  |  |        |   |  |   |       | 
|Outstanding at the end of the year       |  |        | 106,062 |           |  | $      | 12.70 |           |  |        | 86,104 |           |  | $ | 12.12 |  |  |  | 71,884 |   |  | $ | 11.55 | 
|                                         |  |        |         |           |  |        |       |           |  |        |        |           |  |   |       |  |  |  |        |   |  |   |       | 

42



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##### Table of Contents



EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Outstanding and exercisable stock options at
year-end 2003 were as follows:

|                        |  |         |      |             |  |                  |         |        |  |                |            |  |  |  |        |  |  |   |       | 
|----------------------- |  | ------- | ---- | ----------- |  | ---------------- | ------- | ------ |  | -------------- | ---------- |  |  |  | ------ |  |  | - | ----- | 
|                        |  |         |      |             |  |                 
|                        |  |         |      | Outstanding |  | Exercisable     
|                        |  |         |      |             |  |                 
|                        |  |         |      |             |  | Weighted-        |         |       
|                        |  |         |      |             |  | Average          |         |        |  | Weighted-     
|                        |  | Year of |      |             |  | Remaining        |         |        |  | Average       
|Exercise Price          |  | Grant   |      | Number      |  | Contractual Life |         | Number |  | Exercise Price
|                        |  |         |      |             |  |                  |         |        |  |               
|$14.82                  |  |         | 2003 |             |  |                  | 31,350  |        |  |                | 9.25 years |  |  |  |       |  |  | $ | 14.82 | 
|$13.36                  |  |         | 2002 |             |  |                  | 22,133  |        |  |                | 8.30 years |  |  |  | 4,431  |  |  |   | 13.36 | 
|$11.70                  |  |         | 2001 |             |  |                  | 27,108  |        |  |                | 7.07 years |  |  |  | 10,887 |  |  |   | 11.70 | 
|$11.40                  |  |         | 2000 |             |  |                  | 25,471  |        |  |                | 6.81 years |  |  |  | 16,294 |  |  |   | 11.40 | 
|                        |  |         |      |             |  |                  |         |        |  |                |            |  |  |  |        |  |  |   |       | 
|Outstanding at year end |  |         |      |             |  |                  | 106,062 |        |  |                | 7.91 years |  |  |  | 31,612 |  |  | $ | 11.79 | 
|                        |  |         |      |             |  |                  |         |        |  |                |            |  |  |  |        |  |  |   |       | 

Note 12: Earnings Per Share of
Common Stock

Basic earnings per share of common stock is
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 the 2001
three-for-two stock split, the 2002 15% stock dividend, and the
2003 10% stock dividend.

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):

|                                           |                                                                                                  |      |      |           |  |      |      |           |  |   |      |           | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------ | ---- | ---- | --------- |  | ---- | ---- | --------- |  | - | ---- | --------- | 
|                                           |                                                                                                  | 2003 |      | 2002      |  | 2001
|                                           |                                                                                                  |      |      |           |  |     
|INCOME (NUMERATOR):                        |                                                                                                  |      |      |           |  |      |      |           |  |   |      |          
|                                           | Net Income                                                                                       |      | $    | 1,036     |  |      | $    | 1,343     |  |   | $    | 1,240     | 
|                                           |                                                                                                  |      |      |           |  |      |      |           |  |   |      |          
|SHARES (DENOMINATOR):                      |                                                                                                  |      |      |           |  |      |      |           |  |   |      |          
|                                           | Weighted average number of common stock shares
    outstanding  basic                           |      |      | 1,185,953 |  |      |      | 1,182,943 |  |   |      | 1,217,645 | 
|                                           | Dilutive effect of outstanding employee and
    director stock options                           |      |      | 12,917    |  |      |      | 10,307    |  |   |      | 2,396     | 
|                                           |                                                                                                  |      |      |           |  |      |      |           |  |   |      |          
|                                           | Weighted average number of common stock shares
    outstanding and assumed conversions  diluted |      |      | 1,198,870 |  |      |      | 1,193,250 |  |   |      | 1,220,041 | 
|                                           |                                                                                                  |      |      |           |  |      |      |           |  |   |      |          
|Basic earnings per share of common stock   |                                                                                                  | $    | 0.87 |           |  | $    | 1.14 |           |  | $ | 1.02 |          
|                                           |                                                                                                  |      |      |           |  |      |      |           |  |   |      |          
|Diluted earnings per share of common stock |                                                                                                  | $    | 0.86 |           |  | $    | 1.13 |           |  | $ | 1.02 |          
|                                           |                                                                                                  |      |      |           |  |      |      |           |  |   |      |          

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 2003, 2002, and
2001 were $266,000, $255,000, and $270,000, respectively.
Specific plan asset and accumulated benefit information for the
Companys portion of the fund is not available. Under
ERISA, a contributor to a multi-employer pension plan may be
liable in the event of complete or partial withdrawal for the
benefit payment guaranteed under ERISA, but there is no
intention to withdraw.

43



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##### Table of Contents



EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company also participates in multi-employer
defined benefit postretirement health care plans that provide
medical and dental coverage to directors and surviving spouses
and to employees who retire after age 62 and 15 years
of full-time service and their dependents. The medical and
dental plans are noncontributory and nonfunded. Net periodic
postretirement benefit cost under SFAS No. 106 was
$145,000 in 2003, $167,000 in 2002, and $125,000 in 2001.

Note 14: Leases

The Company leases premises and parking
facilities for the Seattle and Lynnwood offices from PEMCO
Mutual Insurance Company under leases expiring from
March 31, 2004 to May 31, 2007. The Company leases the
Bellevue and Federal Way office premises from other parties.
These leases expire from June 30, 2008 to May 31,
2011. Furniture and equipment is leased from PEMCO Corporation.
Total rental expense, including amounts paid under
month-to-month cancelable leases, amounted to $556,000,
$598,000, and $587,000 for 2003, 2002, and 2001, respectively.

The future minimum rental commitments as of
December 31, 2003, for all noncancelable leases are as
follows:

|           |       |   |         |           | 
|---------- | ----- | - | ------- | --------- | 
|2004       |       | $ | 508,000 |          
|2005       |       |   | 511,000 |          
|2006       |       |   | 525,000 |          
|2007       |       |   | 259,000 |          
|2008       |       |   | 143,000 |          
|Thereafter |       |   | 289,000 |          
|           |       |   |         |          
|           | Total |   | $       | 2,235,000 | 
|           |       |   |         |          

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, PEMCO Technology
Services, Inc., Public Employees Insurance
Agency, Inc., and School Employees Credit Union of
Washington. Such shared functions include human resources,
employee benefits, marketing, and purchasing. Total costs
associated with these shared services, amounted to $325,000 and
$280,000 for 2003 and 2002, respectively.

In addition, data processing expense for services
provided by PEMCO Corporation, PEMCO Mutual Insurance Company,
and PEMCO Technology Services, Inc. for 2003, 2002, and
2001 was $424,000, $356,000, and $327,000, respectively.

At December 31, 2003, approximately 10.1% 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

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##### Table of Contents



EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. 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.

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

|                                                   |  |      |        |      |  |   |        | 
|-------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                   |  | 2003 |        | 2002
|                                                   |  |      |        |     
|Lines of credit                                    |  | $    | 36,607 |      |  | $ | 30,871 | 
|Standby letters of credit and similar arrangements |  |      | 195    |      |  |   | 150    | 

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):

|                                                                               |  |       |         |       |  |       |         |       |  |   |         |  |  |   |         | 
|------------------------------------------------------------------------------ |  | ----- | ------- | ----- |  | ----- | ------- | ----- |  | - | ------- |  |  | - | ------- | 
|                                                                               |  |       |         |      
|                                                                               |  | 2003  |         | 2002 
|                                                                               |  |       |         |      
|                                                                               |  | Book  |         | Fair  |  | Book  |         | Fair 
|                                                                               |  | Value |         | Value |  | Value |         | Value
|                                                                               |  |       |         |       |  |       |         |      
|FINANCIAL ASSETS                                                               |  |       |         |       |  |       |         |       |  |   |         |  |  |   |         | 
|Cash and cash equivalents                                                      |  | $     | 10,625  |       |  | $     | 10,625  |       |  | $ | 22,620  |  |  | $ | 22,620  | 
|Securities available-for-sale                                                  |  |       | 39,818  |       |  |       | 39,818  |       |  |   | 23,694  |  |  |   | 23,694  | 
|Net loans                                                                      |  |       | 136,832 |       |  |       | 136,710 |       |  |   | 119,819 |  |  |   | 120,196 | 
|Accrued interest receivable                                                    |  |       | 641     |       |  |       | 641     |       |  |   | 663     |  |  |   | 663     | 
|                                                                              
|FINANCIAL LIABILITIES                                                          |  |       |         |       |  |       |         |       |  |   |         |  |  |   |         | 
|Deposits                                                                       |  | $     | 152,683 |       |  | $     | 152,663 |       |  | $ | 132,174 |  |  | $ | 132,568 | 
|Federal funds purchased and securities sold under
    agreements to repurchase |  |       | 3,097   |       |  |       | 3,097   |       |  |   | 3,353   |  |  |   | 3,353   | 
|Advances from Federal Home Loan Bank                                           |  |       | 15,381  |       |  |       | 15,785  |       |  |   | 11,783  |  |  |   | 11,861  | 
|Junior subordinated debt                                                       |  |       | 5,000   |       |  |       | 5,000   |       |  |   | 5,000   |  |  |   | 5,000   | 
|Accrued interest payable                                                       |  |       | 142     |       |  |       | 142     |       |  |   | 155     |  |  |   | 155     | 

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, Federal Home
Loan Bank 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

45



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##### Table of Contents



EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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 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, 2003                        |              |        |   |                  |  |                   |  |                  |   |               |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|Total capital (to risk-weighted assets)  |              |        |   |                  |  |                   |  |                  |   |               |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                         | Consolidated |        | $ | 23,178           |  |                   |  | 15.19            | % |               | $ | 12,209 |  |  |  | 8.00 | % |  | $ | 15,262 |  |  |  | 10.00 | %
|                                         | Bank         |        |   | 22,293           |  |                   |  | 14.63            |   |               |   | 12,194 |  |  |  | 8.00 |   |  |   | 15,242 |  |  |  | 10.00 |  
|Tier 1 capital (to risk-weighted assets) |              |        |   |                  |  |                   |  |                  |   |               |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                         | Consolidated |        |   | 21,542           |  |                   |  | 14.11            |   |               |   | 6,105  |  |  |  | 4.00 |   |  |   | 9,157  |  |  |  | 6.00  |  
|                                         | Bank         |        |   | 20,657           |  |                   |  | 13.55            |   |               |   | 6,097  |  |  |  | 4.00 |   |  |   | 9,145  |  |  |  | 6.00  |  
|Tier 1 capital (to average assets)(1)    |              |        |   |                  |  |                   |  |                  |   |               |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                         | Consolidated |        |   | 21,542           |  |                   |  | 11.76            |   |               |   | 7,326  |  |  |  | 4.00 |   |  |   | 9,153  |  |  |  | 5.00  |  
|                                         | Bank         |        |   | 20,657           |  |                   |  | 11.30            |   |               |   | 7,314  |  |  |  | 4.00 |   |  |   | 9,143  |  |  |  | 5.00  |  

46



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EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                         |              |        |   |                  |  |                   |  |                  |   |               |   |        |  |  |  |      |   |  |   |        |  |  |  |       |  
|---------------------------------------- | ------------ | ------ | - | ---------------- |  | ----------------- |  | ---------------- | - | ------------- | - | ------ |  |  |  | ---- | - |  | - | ------ |  |  |  | ----- | -
|                                         |              |        |   |                  |  |                   |  |                  |   |              
|                                         |              |        |   |                  |  |                   |  |                  |   | 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, 2002                        |              |        |   |                  |  |                   |  |                  |   |               |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|Total capital (to risk-weighted assets)  |              |        |   |                  |  |                   |  |                  |   |               |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                         | Consolidated |        | $ | 22,499           |  |                   |  | 17.20            | % |               | $ | 10,467 |  |  |  | 8.00 | % |  | $ | 13,084 |  |  |  | 10.00 | %
|                                         | Bank         |        |   | 22,071           |  |                   |  | 16.87            |   |               |   | 10,467 |  |  |  | 8.00 |   |  |   | 13,084 |  |  |  | 10.00 |  
|Tier 1 capital (to risk-weighted assets) |              |        |   |                  |  |                   |  |                  |   |               |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                         | Consolidated |        |   | 20,863           |  |                   |  | 15.95            |   |               |   | 5,234  |  |  |  | 4.00 |   |  |   | 7,850  |  |  |  | 6.00  |  
|                                         | Bank         |        |   | 20,438           |  |                   |  | 15.62            |   |               |   | 5,234  |  |  |  | 4.00 |   |  |   | 7,850  |  |  |  | 6.00  |  
|Tier 1 capital (to average assets)(1)    |              |        |   |                  |  |                   |  |                  |   |               |   |        |  |  |  |      |   |  |   |        |  |  |  |      
|                                         | Consolidated |        |   | 20,863           |  |                   |  | 12.78            |   |               |   | 6,530  |  |  |  | 4.00 |   |  |   | 8,162  |  |  |  | 5.00  |  
|                                         | Bank         |        |   | 20,438           |  |                   |  | 12.53            |   |               |   | 6,527  |  |  |  | 4.00 |   |  |   | 8,158  |  |  |  | 5.00  |  



---



|    |                                       
|--- | --------------------------------------
|(1) | Also referred to as the leverage ratio

Note 19: Condensed Financial
Statements of Bancorp.

The following are condensed balance sheets at
December 31, 2003 and 2002 and the related condensed
statements of income and cash flows for the year ended
December 31, 2003 and 2002.

CONDENSED BALANCE SHEETS (in thousands):

|                                      |                                            |      |        |        |  |   |        |        | 
|------------------------------------- | ------------------------------------------ | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                      |                                            | 2003 |        | 2002  
|                                      |                                            |      |        |       
|ASSETS:                               |                                            |      |        |        |  |   |        |       
|Due from EvergreenBank                |                                            | $    | 532    |        |  | $ | 163    |       
|Investment in subsidiaries            |                                            |      | 20,698 |        |  |   | 20,689 |       
|Other assets                          |                                            |      | 353    |        |  |   | 276    |       
|                                      |                                            |      |        |        |  |   |        |       
|                                      | TOTAL ASSETS                               |      | $      | 21,583 |  |   | $      | 21,128 | 
|                                      |                                            |      |        |        |  |   |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY: |                                            |      |        |        |  |   |        |       
|Stockholders equity                  |                                            | $    | 16,583 |        |  | $ | 15,960 |       
|Junior subordinated debt              |                                            |      | 5,000  |        |  |   | 5,155  |       
|Other liabilities                     |                                            |      | 0      |        |  |   | 13     |       
|                                      |                                            |      |        |        |  |   |        |       
|                                      | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |      | $      | 21,583 |  |   | $      | 21,128 | 
|                                      |                                            |      |        |        |  |   |        |       

47



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EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CONDENSED STATEMENTS OF INCOME (in thousands):

|                                                                                |                             |      |     |       |  |      |       |       |  |  |     |     | 
|------------------------------------------------------------------------------- | --------------------------- | ---- | --- | ----- |  | ---- | ----- | ----- |  |  | --- | --- | 
|                                                                                |                             | 2003 |     | 2002  |  | 2001
|                                                                                |                             |      |     |       |  |     
|INCOME:                                                                         |                             |      |     |       |  |      |       |       |  |  |     |    
|                                                                                | Dividend from EvergreenBank |      | $   | 886   |  |      | $     | 443   |  |  | $   | 75  | 
|EXPENSE:                                                                        |                             |      |     |       |  |      |       |       |  |  |     |    
|                                                                                | Interest expense            |      |     | 240   |  |      |       | 166   |  |  |     |    | 
|                                                                                | Other expense               |      |     | 3     |  |      |       | 42    |  |  |     | 3   | 
|                                                                                |                             |      |     |       |  |      |       |       |  |  |     |    
|Income before income taxes and equity in
    undistributed income of subsidiary |                             |      | 643 |       |  |      | 235   |       |  |  | 72  |    
|Income tax benefit                                                              |                             |      | 83  |       |  |      | 72    |       |  |  | 1   |    
|Equity in undistributed income of subsidiary                                    |                             |      | 310 |       |  |      | 1,036 |       |  |  | 551 |    
|                                                                                |                             |      |     |       |  |      |       |       |  |  |     |    
|                                                                                | NET INCOME                  |      | $   | 1,036 |  |      | $     | 1,343 |  |  | $   | 624 | 
|                                                                                |                             |      |     |       |  |      |       |       |  |  |     |    

CONDENSED STATEMENTS OF CASH FLOWS (in thousands):

|                                                            |                                                                                      |                                                    |      |       |      |      |        |       |        |   |    |     |      |  
|----------------------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------------------------------- | ---- | ----- | ---- | ---- | ------ | ----- | ------ | - | -- | --- | ---- | -
|                                                            |                                                                                      | 2003                                               |      | 2002  |      | 2001
|                                                            |                                                                                      |                                                    |      |       |      |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                       |                                                                                      |                                                    |      |       |      |      |        |       |        |   |    |    
|                                                            | Net income                                                                           |                                                    | $    | 1,036 |      |      | $      | 1,343 |        |   | $  | 624 |     
|                                                            | Adjustments to reconcile net income to net cash
    provided by operating activities |                                                    |      |       |      |      |        |       |        |   |    |     |     
|                                                            |                                                                                      | Equity in undistributed income of subsidiary       |      |       | (310 | )    |        |       | (1,036 | ) |    |     | (551 | )
|                                                            |                                                                                      | Other changes, net                                 |      |       | (79  | )    |        |       | (55    | ) |    |     |     |  
|                                                            |                                                                                      |                                                    |      |       |      |      |        |       |        |   |    |    
|NET CASH PROVIDED BY OPERATING ACTIVITIES                   |                                                                                      |                                                    | 647  |       |      |      | 252    |       |        |   | 73 |    
|CASH FLOWS FROM INVESTING ACTIVITIES                        |                                                                                      |                                                    |      |       |      |      |        |       |        |   |    |    
|                                                            |                                                                                      | Capital contributed to subsidiary                  |      |       |     |      |        |       | (4,800 | ) |    |     |     |  
|                                                            |                                                                                      | Investment in EvergreenBancorp Capital
    Trust I |      |       |     |      |        |       | (155   | ) |    |     |     |  
|                                                            |                                                                                      |                                                    |      |       |      |      |        |       |        |   |    |    
|CASH FLOWS USED IN INVESTING ACTIVITIES                     |                                                                                      |                                                    |     |       |      |      | (4,955 | )     |        |   |   |    
|CASH FLOWS FROM FINANCING ACTIVITIES                        |                                                                                      |                                                    |      |       |      |      |        |       |        |   |    |    
|                                                            | Payment of dividends                                                                 |                                                    |      | (366  | )    |      |        | (168  | )      |   |    |    |     
|                                                            | Repurchase of fractional shares                                                      |                                                    |      |      |      |      |        | (4    | )      |   |    |    |     
|                                                            | Proceeds from issuance of subordinated debts, net                                    |                                                    |      |      |      |      |        | 4,946 |        |   |    |    |     
|                                                            | Proceeds from exercise of stock options                                              |                                                    |      | 88    |      |      |        | 9     |        |   |    | 10  |     
|                                                            |                                                                                      |                                                    |      |       |      |      |        |       |        |   |    |    
|NET CASH PROVIDED BY (USED IN) FINANCING
    ACTIVITIES     |                                                                                      |                                                    | (278 | )     |      |      | 4,783  |       |        |   | 10 |    
|                                                            |                                                                                      |                                                    |      |       |      |      |        |       |        |   |    |    
|NET INCREASE IN CASH                                        |                                                                                      |                                                    | 369  |       |      |      | 80     |       |        |   | 83 |    
|CASH ON DEPOSIT WITH EVERGREENBANK AT BEGINNING
    OF YEAR |                                                                                      |                                                    | 163  |       |      |      | 83     |       |        |   |   |    
|                                                            |                                                                                      |                                                    |      |       |      |      |        |       |        |   |    |    
|CASH ON DEPOSIT WITH EVERGREENBANK AT
    END OF YEAR       |                                                                                      | $                                                  | 532  |       |      | $    | 163    |       |        | $ | 83 |    
|                                                            |                                                                                      |                                                    |      |       |      |      |        |       |        |   |    |    

48



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##### Table of Contents



EVERGREENBANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 20: Selected Quarterly Data
(Unaudited)

|     |                            |                                       |   |         |  |              |   |             |  |  |   |       |  |  |   |       | 
|---- | -------------------------- | ------------------------------------- | - | ------- |  | ------------ | - | ----------- |  |  | - | ----- |  |  | - | ----- | 
|     |                            |                                      
|     |                            | Quarter Ended                        
|     |                            |                                      
|     |                            | March 31                              |   | June 30 |  | September 30 |   | December 31
|     |                            |                                       |   |         |  |              |   |            
|     |                            |                                      
|     |                            | (In thousands, except per share data)
|2003 |                            |                                       |   |         |  |              |   |             |  |  |   |       |  |  |   |      
|     | Interest income            |                                       | $ | 2,610   |  |              | $ | 2,533       |  |  | $ | 2,574 |  |  | $ | 2,691 | 
|     | Net interest income        |                                       |   | 2,023   |  |              |   | 1,980       |  |  |   | 2,051 |  |  |   | 2,146 | 
|     | Net income                 |                                       |   | 298     |  |              |   | 223         |  |  |   | 234   |  |  |   | 281   | 
|     | Basic earnings per share   |                                       |   | 0.25    |  |              |   | 0.19        |  |  |   | 0.20  |  |  |   | 0.24  | 
|     | Diluted earnings per share |                                       |   | 0.25    |  |              |   | 0.19        |  |  |   | 0.19  |  |  |   | 0.23  | 
|2002 |                            |                                       |   |         |  |              |   |             |  |  |   |       |  |  |   |      
|     | Interest income            |                                       | $ | 2,711   |  |              | $ | 2,729       |  |  | $ | 2,803 |  |  | $ | 2,806 | 
|     | Net interest income        |                                       |   | 2,043   |  |              |   | 2,064       |  |  |   | 2,096 |  |  |   | 2,134 | 
|     | Net income                 |                                       |   | 301     |  |              |   | 335         |  |  |   | 350   |  |  |   | 357   | 
|     | Basic earnings per share   |                                       |   | 0.25    |  |              |   | 0.28        |  |  |   | 0.29  |  |  |   | 0.31  | 
|     | Diluted earnings per share |                                       |   | 0.25    |  |              |   | 0.28        |  |  |   | 0.29  |  |  |   | 0.30  | 

49



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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, 2003.
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. There were no significant deficiencies or material
weaknesses identified in the evaluation and, therefore, no
corrective actions were taken.




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
2004 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 this annual report.






|         |                       
|-------- | ----------------------
|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.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

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.

Information concerning equity compensation plan
information is included in the section entitled Equity
Compensation Plan Information in Bancorps Proxy
Statement and is incorporated herein by reference.

50



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##### Table of Contents








|         |                                                   
|-------- | --------------------------------------------------
|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 Accountant Fees and
    Services

Information regarding the fees Bancorp paid to
its independent accountants, Crowe Chizek and Company LLC,
during 2003 is included in Bancorps Proxy Statement under
the heading Auditors and the information included
therein is incorporated herein by reference.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(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) | Reports on Form 8-K

Bancorp did not file any reports on Form 8-K
during the fourth quarter 2003.

Bancorp furnished a Current Report on
Form 8-K with the SEC dated November 5, 2003, under
Item 12 Results of operations and financial
condition, announcing its earnings for the third quarter
2003. A copy of the October 29, 2003 press release issued
by Bancorp was attached to that form as
Exhibit No. 99.1.

Bancorp furnished a Current Report on
Form 8-K with the SEC dated November 26, 2003, under
Item 12 Results of operations and financial
condition, furnishing copies of the following items
attached thereto as Exhibit Nos. 99.1, 99.2, and 99.3,
respectively: Presidents Letter to Shareholders re Third
Quarter Results; Consolidated Statements of Income (Unaudited);
and Consolidated Balance Sheets (Unaudited).

51



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##### Table of Contents



(c)Exhibits

|            |    |             |  |                                                                                                                                                                         
|----------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 3  | .1(1)       |  | Restated Articles of Incorporation of Registrant
    dated July 25, 2001                                                                                                
|            | 3  | .2(1)       |  | Bylaws of Registrant dated February 14, 2001                                                                                                                            
|            | 10 | .1(2)       |  | 2000 Stock Option Plan dated February 17,
    2000 and adopted by Registrant effective June 20, 2001                                                                    
|            | 10 | .2(2)       |  | Incentive Stock Option Letter Agreement                                                                                                                                 
|            | 10 | .3(2)       |  | Nonqualified Stock Option Letter Agreement                                                                                                                              
|            | 10 | .4(2)       |  | Directors Nonqualified Stock Option Letter
    Agreement                                                                                                                
|            | 10 | .5(1)       |  | PEMCO Deferred Compensation Plan dated as of
    December 17, 1998 and adopted by Registrant effective
    June 20, 2001                                                
|            | 10 | .6(1)       |  | PEMCO Directors Deferred Compensation Plan
    dated as of December 17, 1998 and adopted by Registrant
    effective June 20, 2001                                     
|            | 14 |             |  | Code of Ethics for Senior Financial Officers                                                                                                                            
|            | 21 |             |  | Subsidiaries of the Registrant                                                                                                                                          
|            | 23 | .1          |  | Independent Auditors Consent 
    Crowe Chizek and Company LLC                                                                                                        
|            | 23 | .2          |  | Independent Auditors Consent 
    John L. OBrien & Company, PLLC                                                                                                     
|            | 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



---



|    |                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Exhibits 3.1,
    3.2, 10.2 and 10.3, respectively, of Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2001.                
|   
|(2) | Incorporated by reference to Exhibits 99.1,
    99.2, 99.3 and 99.4, respectively, of Registrants
    Registration Statement on Form S-8 (Reg.
    No. 333-67956) filed August 20, 2001.

52



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##### Table of Contents






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 18th day of
March, 2004.



| |                       
| | ----------------------
| | 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 18th day of March, 2004.

|                                           |  |                                                                                       |  | 
|------------------------------------------ |  | ------------------------------------------------------------------------------------- |  | 
|                                           |  |                                                                                      
|Signature                                  |  | Title                                                                                
|                                           |  |                                                                                      
|                                          
|/s/ GERALD O. HATLERGerald O. Hatler       |  | President, Chief Executive Officer and
    Director
    (Principal Executive Officer)
|                                          
|/s/ WILLIAM G. FILER IIWilliam G. Filer II |  | Sr. Vice President and Chief Financial Officer
    (Principal Accounting Officer)    
|                                          
|/s/ RICHARD W. BALDWINRichard W. Baldwin   |  | Director                                                                             
|                                          
|/s/ C. DON FILERC. Don Filer               |  | Director                                                                             
|                                          
|/s/ CAROLE J. GRISHAMCarole J. Grisham     |  | Director                                                                             
|                                          
|/s/ ROBERT J. GROSSMANRobert J. Grossman   |  | Director                                                                             
|                                          
|/s/ J. THOMAS HANDYJ. Thomas Handy         |  | Director                                                                             
|                                          
|                                          
|/s/ ROBERT W. HOWISEYRobert W. Howisey     |  | Director                                                                             
|                                          
|/s/ STAN W. MCNAUGHTONStan W. McNaughton   |  | Director                                                                             
|                                          
|/s/ RUSSEL E. OLSONRussel E. Olson         |  | Director                                                                             

53