##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 o
    
    Transition Report Under Section 13 or 15(d) of the Exchange Act
 For the transition period from  to
 Commission File No. 000-32915
 EVERGREENBANCORP, INC.
  WASHINGTON
    
    91-2097262(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)
 301 Eastlake Avenue East
Seattle, Washington 98109-5407
 (206) 628-4250
 þ o
  o o þ
 o þ




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##### 



PART I  FINANCIAL INFORMATIONItem 1. Unaudited Consolidated Financial StatementsUnaudited Consolidated Balance Sheets  September 30, 2006 and December 31, 2005Unaudited Consolidated Statements of Income  For the three months and nine months
ended September 30, 2006 and 2005Unaudited Consolidated Statements of Stockholders Equity  For the nine months ended
September 30, 2006 and 2005Unaudited Consolidated Statements of Comprehensive Income  For the three months and
nine months ended September 30, 2006 and 2005Unaudited Consolidated Statements of Cash Flows  For the nine months ended September
30, 2006 and 2005Notes to Unaudited Consolidated Financial InformationItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART IIOTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits on Form 8-KEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I  FINANCIAL INFORMATION
 
 ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
    September 30,
    
    
    December 31,2006
    
    
    2005AssetsCash and due from banks
    
    $
    4,591
    
    
    $
    12,379Federal funds sold
    
    
    5,869
    
    
    
    2,112Interest-bearing deposits in financial institutions
    
    
    4,127
    
    
    
    2,811Total cash and cash equivalents
    
    
    14,587
    
    
    
    17,302Securities available for sale
    
    
    32,022
    
    
    
    33,550Loans
    
    
    253,279
    
    
    
    189,188Allowance for loan losses
    
    
    (2,631
    )
    
    
    (2,056
    )Net loans
    
    
    250,648
    
    
    
    187,132Premises and equipment
    
    
    2,720
    
    
    
    3,179Cash surrender value of bank owned life insurance
    
    
    5,259
    
    
    
    5,090Accrued interest and other assets
    
    
    2,948
    
    
    
    2,939Total assets
    
    $
    308,184
    
    
    $
    249,192LiabilitiesDepositsNoninterest-bearing
    
    $
    54,647
    
    
    $
    64,635Interest-bearing
    
    
    180,387
    
    
    
    135,255Total deposits
    
    
    235,034
    
    
    
    199,890Federal Home Loan Bank advances
    
    
    46,721
    
    
    
    23,849Junior subordinated debt
    
    
    5,000
    
    
    
    5,000Accrued expenses and other liabilities
    
    
    2,586
    
    
    
    2,717Total liabilities
    
    $
    289,341
    
    
    $
    231,456Stockholders equityPreferred stock; no par value; 100,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock and surplus; no par value; 15,000,000 shares
authorized; 2,011,002 shares issued at September 30, 2006;
2,000,467 shares at
December 31, 2005
    
    
    16,218
    
    
    
    16,005Retained earnings
    
    
    3,052
    
    
    
    2,187Accumulated other comprehensive loss
    
    
    (427
    )
    
    
    (456
    )Total stockholders equity
    
    
    18,843
    
    
    
    17,736Total liabilities and stockholders equity
    
    $
    308,184
    
    
    $
    249,192
 See accompanying notes to unaudited consolidated financial statements.
 3




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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest incomeLoans, including fees
    
    $
    5,170
    
    
    $
    3,164
    
    
    $
    13,570
    
    
    $
    8,967Taxable securities
    
    
    302
    
    
    
    265
    
    
    
    868
    
    
    
    772Tax exempt securities
    
    
    35
    
    
    
    35
    
    
    
    103
    
    
    
    91Federal funds sold and other
    
    
    33
    
    
    
    49
    
    
    
    86
    
    
    
    149Total interest income
    
    
    5,540
    
    
    
    3,513
    
    
    
    14,627
    
    
    
    9,979Interest expenseDeposits
    
    
    1,636
    
    
    
    676
    
    
    
    3,857
    
    
    
    1,786Federal funds purchased
    
    
    15
    
    
    
    4
    
    
    
    50
    
    
    
    8Federal Home Loan Bank advances
    
    
    516
    
    
    
    135
    
    
    
    1,357
    
    
    
    369Junior subordinated debt
    
    
    115
    
    
    
    90
    
    
    
    323
    
    
    
    249Total interest expense
    
    
    2,282
    
    
    
    905
    
    
    
    5,587
    
    
    
    2,412Net interest income
    
    
    3,258
    
    
    
    2,608
    
    
    
    9,040
    
    
    
    7,567Provision for loan losses
    
    
    230
    
    
    
    144
    
    
    
    578
    
    
    
    291Net interest income after provision for
loan losses
    
    
    3,028
    
    
    
    2,464
    
    
    
    8,462
    
    
    
    7,276Noninterest incomeService charges on deposit accounts
    
    
    292
    
    
    
    280
    
    
    
    847
    
    
    
    921Merchant credit card processing
    
    
    42
    
    
    
    37
    
    
    
    112
    
    
    
    115Other commissions and fees
    
    
    23
    
    
    
    32
    
    
    
    119
    
    
    
    94Net earnings on bank owned life insurance
    
    
    57
    
    
    
    35
    
    
    
    169
    
    
    
    35Other noninterest income
    
    
    29
    
    
    
    26
    
    
    
    96
    
    
    
    115Total noninterest income
    
    
    443
    
    
    
    410
    
    
    
    1,343
    
    
    
    1,280Noninterest expenseSalaries and employee benefits
    
    
    1,303
    
    
    
    1,224
    
    
    
    3,916
    
    
    
    3,492Occupancy and equipment
    
    
    418
    
    
    
    449
    
    
    
    1,299
    
    
    
    1,260Data processing
    
    
    208
    
    
    
    182
    
    
    
    619
    
    
    
    566Professional fees
    
    
    82
    
    
    
    64
    
    
    
    225
    
    
    
    292Marketing
    
    
    159
    
    
    
    152
    
    
    
    349
    
    
    
    355State revenue and sales tax expense
    
    
    98
    
    
    
    70
    
    
    
    254
    
    
    
    237Other noninterest expense
    
    
    451
    
    
    
    457
    
    
    
    1,399
    
    
    
    1,297Total noninterest expense
    
    
    2,719
    
    
    
    2,598
    
    
    
    8,061
    
    
    
    7,499Income before income taxes
    
    
    752
    
    
    
    276
    
    
    
    1,744
    
    
    
    1,057Income tax expense
    
    
    235
    
    
    
    75
    
    
    
    518
    
    
    
    343Net income
    
    $
    517
    
    
    $
    201
    
    
    $
    1,226
    
    
    $
    714Basic earnings per share
    
    $
    0.26
    
    
    $
    0.10
    
    
    $
    0.61
    
    
    $
    0.36Diluted earnings per share
    
    $
    0.25
    
    
    $
    0.10
    
    
    $
    0.60
    
    
    $
    0.35
 See accompanying notes to unaudited consolidated financial statements.
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AccumulatedCommon
    
    
    
    
    
    
    otherCommon
    
    
    stock
    
    
    
    
    
    
    comprehen-
    
    
    Total stock-stock
    
    
    and
    
    
    Retained
    
    
    sive
    
    
    holdersshares
    
    
    surplus
    
    
    earnings
    
    
    income
    
    
    equityBalance at January 1, 2005
    
    
    1,992,428
    
    
    $
    15,927
    
    
    $
    1,678
    
    
    $
    (120
    )
    
    $
    17,485Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    714
    
    
    
    
    
    
    
    714Change in net unrealized gain
(loss) on securities available for
sale, net of reclassification and
tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (240
    )
    
    
    (240
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    474Cash dividends ($.169 per share)
    
    
    
    
    
    
    
    
    
    
    (337
    )
    
    
    
    
    
    
    (337
    )Exercise of stock options and
related tax benefit
    
    
    8,231
    
    
    
    81
    
    
    
    
    
    
    
    
    
    
    
    81Balance at September 30, 2005
    
    
    2,000,659
    
    
    $
    16,008
    
    
    $
    2,055
    
    
    $
    (360
    )
    
    $
    17,703
 AccumulatedCommon
    
    
    
    
    
    
    otherCommon
    
    
    stock
    
    
    
    
    
    
    comprehen-
    
    
    Total stock-stock
    
    
    and
    
    
    Retained
    
    
    sive
    
    
    holdersshares
    
    
    surplus
    
    
    earnings
    
    
    income (loss)
    
    
    equityBalance at January 1, 2006
    
    
    2,000,467
    
    
    $
    16,005
    
    
    $
    2,187
    
    
    $
    (456
    )
    
    $
    17,736Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    1,226
    
    
    
    
    
    
    
    1,226Change in net unrealized gain
(loss) on securities available for
sale, net of reclassification and
tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    29Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,255Cash dividends ($.180 per share)
    
    
    
    
    
    
    
    
    
    
    (361
    )
    
    
    
    
    
    
    (361
    )Exercise of stock options and
related tax benefit
    
    
    10,535
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    118Stock options earned
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    95Balance at September 30, 2006
    
    
    2,011,002
    
    
    $
    16,218
    
    
    $
    3,052
    
    
    $
    (427
    )
    
    $
    18,843
 See accompanying notes to unaudited consolidated financial statements.
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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    517
    
    
    $
    201
    
    
    $
    1,226
    
    
    $
    714Other comprehensive income (loss):Change in unrealized gain (loss) on
securities available for sale
    
    
    194
    
    
    
    (80
    )
    
    
    44
    
    
    
    (364
    )Reclassification adjustment for gains included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net unrealized gains (losses)
    
    
    194
    
    
    
    (80
    )
    
    
    44
    
    
    
    (364
    )Tax effect
    
    
    (66
    )
    
    
    27
    
    
    
    (15
    )
    
    
    124Total other comprehensive income (loss)
    
    
    128
    
    
    
    (53
    )
    
    
    29
    
    
    
    (240
    )Total comprehensive income
    
    $
    645
    
    
    $
    148
    
    
    $
    1,255
    
    
    $
    474
 See accompanying notes to unaudited consolidated financial statements.
 6




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September 30,
    
    
    September 30,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    1,226
    
    
    $
    714Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation
    
    
    636
    
    
    
    579Provision for loan losses
    
    
    578
    
    
    
    291Amortization of premiums and discounts on securities
    
    
    33
    
    
    
    45Federal Home Loan Bank stock dividends
    
    
    
    
    
    
    (6
    )Dividends reinvested
    
    
    
    
    
    
    (190
    )Net earnings on bank owned life insurance
    
    
    (169
    )
    
    
    (35
    )Stock option compensation expense
    
    
    95
    
    
    
    Other changes, net
    
    
    (155
    )
    
    
    (672
    )Net cash provided by operating activities
    
    
    2,244
    
    
    
    726Cash flows from investing activitiesProceeds from sales, maturities and principal
payments on securities available for sale
    
    
    1,672
    
    
    
    1,158Net increase in loans
    
    
    (64,094
    )
    
    
    (5,682
    )Purchase of bank owned life insurance
    
    
    
    
    
    
    (5,000
    )Purchases of securities available for sale
    
    
    (133
    )
    
    
    (1,124
    )Purchases of premises and equipment
    
    
    (177
    )
    
    
    (1,246
    )Net cash provided by (used in) investing activities
    
    
    (62,732
    )
    
    
    (11,894
    )Cash flows from financing activitiesNet increase in deposits
    
    
    35,144
    
    
    
    19,375Proceeds from Federal Home Loan Bank advances
    
    
    26,900
    
    
    
    6,000Repayments of Federal Home Loan Bank advances
    
    
    (4,028
    )
    
    
    (4,002
    )Proceeds from exercise of stock options
    
    
    118
    
    
    
    67Dividends paid
    
    
    (361
    )
    
    
    (337
    )Net cash provided by financing activities
    
    
    57,773
    
    
    
    21,103Net increase (decrease) in cash and cash equivalents
    
    
    (2,715
    )
    
    
    9,935Cash and cash equivalents at beginning of year
    
    
    17,302
    
    
    
    12,145Cash and cash equivalents at end of period
    
    $
    14,587
    
    
    $
    22,080
 See accompanying notes to unaudited consolidated financial statements.
 7




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##### Table of Contents



EVERGREENBANCORP, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL INFORMATION
 Note 1: Summary of Significant Accounting Policies
 Organization.
   Operating Segments
 Principles of consolidation.
 Critical accounting policies and use of estimates.
 Newly issued accounting pronouncements.
 8




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9




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##### Table of Contents



Note 2: Stock Offering
  Note 3: Stock options
 Stock option and equity compensation plan.
   Nine Months Ended
    
    
    Twelve Months EndedSeptember 30, 2006
    
    
    December 31, 2005Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at the beginning
of the period
    
    
    228,250
    
    
    $
    9.32
    
    
    
    191,440
    
    
    $
    8.15Granted
    
    
    38,500
    
    
    
    14.31
    
    
    
    45,334
    
    
    
    13.72Exercised
    
    
    (10,535
    )
    
    
    8.33
    
    
    
    (8,524
    )
    
    
    6.29Forfeited
    
    
    (17,068
    )
    
    
    8.66
    
    
    
    
    
    
    
    Outstanding at the end of
the period
    
    
    239,147
    
    
    $
    10.21
    
    
    
    228,250
    
    
    $
    9.32
 10




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Outstanding
    
    
    
    
    
    
    ExercisableWeighted-
    
    
    
    
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Weighted-
    
    
    AverageYear of
    
    
    
    
    
    Remaining
    
    
    
    
    
    
    Average
    
    
    RemainingExercise Price
    
    Grant
    
    Number
    
    
    Contractual Life
    
    
    Number
    
    
    Exercise Price
    
    
    Contractual Life$14.31
    
    2006
    
    
    37,500
    
    
    8.40 years
    
    
    
    
    
    $
    14.31
    
    
    

13.72
    
    2005
    
    
    41,772
    
    
    6.15 years
    
    
    13,352
    
    
    
    13.72
    
    
    4.20 years10.65
    
    2004
    
    
    27,497
    
    
    6.01 years
    
    
    14,451
    
    
    
    10.65
    
    
    4.66 years8.90
    
    2003
    
    
    26,578
    
    
    5.19 years
    
    
    18,160
    
    
    
    8.90
    
    
    4.59 years8.02
    
    2002
    
    
    28,454
    
    
    4.56 years
    
    
    23,822
    
    
    
    8.02
    
    
    4.37 years7.01
    
    2001
    
    
    42,664
    
    
    3.88 years
    
    
    42,664
    
    
    
    7.01
    
    
    3.88 years6.84
    
    2000
    
    
    34,682
    
    
    3.53 years
    
    
    34,682
    
    
    
    6.84
    
    
    3.53 yearsOutstanding at end of period
    
    
    
    
    239,147
    
    
    5.41 years
    
    
    147,131
    
    
    $
    8.33
    
    
    4.07 years
  Stock based compensation.
 .
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,(in thousands, except per share data)
    
    2005
    
    
    2005Net income as reported
    
    $
    201
    
    
    $
    714Deduct: Stock-based compensation
expense determined under fair value
based method
    
    
    17
    
    
    
    62184
    
    
    
    652Pro forma net incomeBasic earnings per share as reported
    
    $
    0.10
    
    
    $
    0.36Pro forma basic earnings per share
    
    
    0.09
    
    
    
    0.33Diluted earnings per share as reported
    
    
    0.10
    
    
    
    0.35Pro forma diluted earnings per share
    
    
    0.09
    
    
    
    0.32
 11




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Three months endedSeptember 30,2006
    
    2005Risk-free interest rate
    
    
    4.74
    %
    
    
    4.08
    %Expected option life
    
    7.5 years
    
    
    7.5 yearsExpected stock price volatility
    
    
    25
    %
    
    
    22
    %Dividend yield
    
    
    1.6
    %
    
    
    1.6
    %
 Nine months endedSeptember 30,2006
    
    2005Risk-free interest rate
    
    
    4.94
    %
    
    
    3.94
    %Expected option life
    
    7.5 years
    
    
    7.5 yearsExpected stock price volatility
    
    
    24
    %
    
    
    22
    %Dividend yield
    
    
    1.7
    %
    
    
    1.6
    %
   Note 4: Securities available for sale
  12




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##### Table of Contents



Less than 12 Months
    
    
    12 Months or More
    
    
    Total(in thousands)
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossUS agencies
    
    $
    
    
    
    $
    
    
    
    $
    6,453
    
    
    $
    (53
    )
    
    $
    6,453
    
    
    $
    (53
    )State and political subdivisions
    
    
    477
    
    
    
    (2
    )
    
    
    3,962
    
    
    
    (57
    )
    
    
    4,439
    
    
    
    (59
    )Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    4,515
    
    
    
    (153
    )
    
    
    4,515
    
    
    
    (153
    )AMF Ultra Short Mortgage Fund
    
    
    
    
    
    
    
    
    
    
    14,823
    
    
    
    (383
    )
    
    
    14,823
    
    
    
    (383
    )Total temporarily impaired
    
    $
    477
    
    
    $
    (2
    )
    
    $
    29,753
    
    
    $
    (646
    )
    
    $
    30,230
    
    
    $
    (648
    )
     Less than 12 Months
    
    
    12 Months or More
    
    
    Total(in thousands)
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossUS agencies
    
    $
    496
    
    
    $
    (4
    )
    
    $
    6,898
    
    
    $
    (112
    )
    
    $
    7,394
    
    
    $
    (116
    )State and political subdivisions
    
    
    3,278
    
    
    
    (41
    )
    
    
    694
    
    
    
    (11
    )
    
    
    3,972
    
    
    
    (52
    )Mortgage-backed securities
    
    
    436
    
    
    
    (3
    )
    
    
    4,755
    
    
    
    (141
    )
    
    
    5,191
    
    
    
    (144
    )AMF Ultra Short Mortgage Fund
    
    
    188
    
    
    
    (2
    )
    
    
    14,635
    
    
    
    (381
    )
    
    
    14,823
    
    
    
    (383
    )Total temporarily impaired
    
    $
    4,398
    
    
    $
    (50
    )
    
    $
    26,982
    
    
    $
    (645
    )
    
    $
    31,380
    
    
    $
    (695
    )
 13




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##### Table of Contents



Note 5: Earnings per share
   Three months ended September 30,(in thousands, except share and per share data):
    
    2006
    
    2005Income (numerator):Net income
    
    $
    517
    
    
    $
    201Income (denominator):Weighted
average number of common stock shares outstanding - basic
    
    
    2,011,002
    
    
    
    1,999,487Dilutive effect of outstanding employee and director stock options
    
    
    41,711
    
    
    
    56,687Weighted average number of common stock shares outstanding and
assumed conversion  diluted
    
    
    2,052,713
    
    
    
    2,056,174Basic earnings per share of common stock
    
    $
    0.26
    
    
    $
    0.10Diluted earnings per share of common stock
    
    $
    0.25
    
    
    $
    0.10
 Nine months ended September 30,(in thousands, except share and per share data):
    
    2006
    
    2005Income (numerator):Net income
    
    $
    1,226
    
    
    $
    714Income (denominator):Weighted average number of common stock shares outstanding -
basic
    
    
    2,007,153
    
    
    
    1,998,206Dilutive effect of outstanding employee and director stock options
    
    
    33,454
    
    
    
    44,854Weighted average number of common stock shares outstanding and
assumed conversion  diluted
    
    
    2,040,607
    
    
    
    2,043,060Basic earnings per share of common stock
    
    $
    0.61
    
    
    $
    0.36Diluted earnings per share of common stock
    
    $
    0.60
    
    
    $
    0.35
  Note 6: Retirement Benefits
   14




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##### Table of Contents



Components of net periodic benefit cost
 Three months
    
    
    Nine monthsended
    
    
    endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    41
    
    
    $
    22
    
    
    $
    123
    
    
    $
    66Interest cost
    
    
    28
    
    
    
    23
    
    
    
    84
    
    
    
    69Amortization of transition obligation
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    30Amortization of prior service cost
    
    
    (1
    )
    
    
    
    
    
    
    (4
    )
    
    
    Recognized actuarial (gain) loss
    
    
    8
    
    
    
    0
    
    
    
    24
    
    
    
    0Net periodic benefit cost
    
    $
    76
    
    
    $
    55
    
    
    $
    227
    
    
    $
    165
 15




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    RESULTS OF OPERATIONS
 Net Income
 Three months and nine months ended September 30, 2006 and 2005
     Net Interest Income and Net Interest Margin
   16




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##### Table of Contents



Three Months Ended
    
    
    Year to DateSeptember 30,
    
    
    September 30,(in thousands, except ratio data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net Interest MarginInterest income (GAAP)
    
    $
    5,540
    
    
    $
    3,513
    
    
    $
    14,627
    
    
    $
    9,979Taxable-equivalent
adjustment:Loans
    
    
    3
    
    
    
    3
    
    
    
    9
    
    
    
    9Investments
    
    
    17
    
    
    
    18
    
    
    
    53
    
    
    
    47Interest income  FTE
    
    
    5,560
    
    
    
    3,534
    
    
    
    14,689
    
    
    
    10,035Interest expense (GAAP)
    
    
    2,282
    
    
    
    905
    
    
    
    5,587
    
    
    
    2,412Net interest income  FTE
    
    $
    3,278
    
    
    $
    2,629
    
    
    $
    9,102
    
    
    $
    7,623Net interest income -
(GAAP)
    
    $
    3,258
    
    
    $
    2,608
    
    
    $
    9,040
    
    
    $
    7,567Average interest earning
assets
    
    $
    280,791
    
    
    $
    203,835
    
    
    $
    257,933
    
    
    $
    199,450Net interest margin
(GAAP)
    
    
    4.60
    %
    
    
    5.08
    %
    
    
    4.69
    %
    
    
    5.07
    %Net interest margin  FTE
    
    
    4.63
    %
    
    
    5.12
    %
    
    
    4.72
    %
    
    
    5.11
    %
 17




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##### Table of Contents



Noninterest Income/Expense
    18




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##### Table of Contents



Income tax expense
  Provision and Allowance for Loan Losses
     19




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##### Table of Contents



FINANCIAL CONDITION
 Loans
    Types of Loans
 September 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Commercial
    
    $
    71,946
    
    
    $
    61,921Real estate:Commercial
    
    
    100,145
    
    
    
    76,902Construction
    
    
    28,283
    
    
    
    6,953Residential 1-4 family*
    
    
    35,955
    
    
    
    28,195Consumer and other
    
    
    16,950
    
    
    
    15,217Total
    
    $
    253,279
    
    
    $
    189,188
 
 *
    
    Residential 1-4 family includes loans purchased from a mortgage broker of $5,753,000 in
the first quarter of 2006 and $13,882,000 in the fourth quarter of 2005. Allocation of the Allowance for Loan Losses
  September 30,
    
    
    % of loans in
    
    
    December 31,
    
    
    % of loans in2006
    
    
    each category
    
    
    2005
    
    
    each category(in thousands)
    
    Amount
    
    
    to total loans
    
    
    Amount
    
    
    to Total LoansCommercial
    
    $
    1,133
    
    
    
    28
    %
    
    $
    987
    
    
    
    33
    %Real estate:Commercial
    
    
    866
    
    
    
    40
    
    
    
    651
    
    
    
    40Construction
    
    
    245
    
    
    
    11
    
    
    
    72
    
    
    
    4Residential 1-4 family
    
    
    129
    
    
    
    14
    
    
    
    106
    
    
    
    15Consumer and other
    
    
    258
    
    
    
    7
    
    
    
    240
    
    
    
    8Total
    
    $
    2,631
    
    
    
    100
    %
    
    $
    2,056
    
    
    
    100
    %% of Loan portfolio
    
    
    1.04
    %
    
    
    
    
    
    
    1.09
    %
  20




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##### Table of Contents



Analysis of Allowance for Loan Losses
  Nine months ended
    
    
    Nine months ended(in thousands)
    
    September 30, 2006
    
    
    September 30, 2005Beginning Balance
    
    $
    2,056
    
    
    $
    1,887ChargeoffsCommercial
    
    
    
    
    
    
    252Real estate:Commercial
    
    
    
    
    
    
    1Construction
    
    
    
    
    
    
    Residential 1-4 family
    
    
    
    
    
    
    Consumer and other
    
    
    19
    
    
    
    23Total chargeoffs
    
    $
    19
    
    
    $
    276RecoveriesCommercial
    
    $
    8
    
    
    $
    17Real estate:Commercial
    
    
    
    
    
    
    Construction
    
    
    
    
    
    
    Residential 1-4 family
    
    
    
    
    
    
    Consumer and other
    
    
    8
    
    
    
    12Total Recoveries
    
    $
    16
    
    
    $
    29Net chargeoffs/(recoveries)
    
    $
    3
    
    
    $
    247Provision
    
    
    578
    
    
    
    291Ending balance
    
    $
    2,631
    
    
    $
    1,931
 Investments
   Deposits
  Borrowings and Junior Subordinated Debt
  21




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##### Table of Contents



Stockholders Equity and Capital Resources
    Minimum to BeWell CapitalizedMinimum for
    
    Under the PromptCapital Adequacy
    
    Corrective ActionActual
    
    Purposes
    
    Provisions(in
thousands, except ratio data)
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioSeptember 30, 2006Total capital (to risk-weighted assets)Consolidated
    
    $
    26,649
    
    
    
    10.01
    %
    
    $
    21,297
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    26,331
    
    
    
    10.10
    
    
    
    20,862
    
    
    
    8.00
    
    
    $
    26,077
    
    
    
    10.00
    %Tier 1 capital (to risk-weighted assets)Consolidated
    
    
    24,018
    
    
    
    9.02
    
    
    
    10,648
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    23,700
    
    
    
    9.09
    
    
    
    10,431
    
    
    
    4.00
    
    
    
    15,646
    
    
    
    6.00Tier 1 capital (to average assets) (1)Consolidated
    
    
    24,018
    
    
    
    8.14
    
    
    
    11,808
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    23,700
    
    
    
    8.03
    
    
    
    11,808
    
    
    
    4.00
    
    
    
    14,761
    
    
    
    5.00December 31, 2005Total capital (to risk-weighted assets)Consolidated
    
    $
    24,997
    
    
    
    12.55
    %
    
    $
    15,939
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    24,626
    
    
    
    12.39
    
    
    
    15,898
    
    
    
    8.00
    
    
    $
    19,873
    
    
    
    10.00
    %Tier 1 capital (to risk-weighted assets)Consolidated
    
    
    22,941
    
    
    
    11.51
    
    
    
    7,953
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    22,570
    
    
    
    11.36
    
    
    
    7,949
    
    
    
    4.00
    
    
    
    11,924
    
    
    
    6.00Tier 1 capital (to average assets) (1)Consolidated
    
    
    22,941
    
    
    
    10.25
    
    
    
    8,952
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    22,570
    
    
    
    10.10
    
    
    
    8,935
    
    
    
    4.00
    
    
    
    11,169
    
    
    
    5.00
 
 (1)
    
    Also referred to as the leverage ratio 22




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##### Table of Contents



Contractual Obligations and Commitments
     Within
    
    
    
    
    
    
    
    
    
    
    After(in thousands)
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years
    
    
    TotalFederal Home Loan
Bank advances
    
    $
    26,736
    
    
    $
    4,985
    
    
    $
    5,000
    
    
    $
    10,000
    
    
    $
    46,721Junior subordinated debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    5,000Time Deposits
    
    
    77,756
    
    
    
    17,187
    
    
    
    4,499
    
    
    
    
    
    
    
    99,442Operating leases
    
    
    599
    
    
    
    920
    
    
    
    662
    
    
    
    888
    
    
    
    3,069Purchase obligations *
    
    
    183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183Total
    
    $
    105,274
    
    
    $
    23,092
    
    
    $
    10,161
    
    
    $
    15,888
    
    
    $
    154,415
 
 *
    
    Purchase obligations include approximately $86,000 and $97,000 for a new telephone system
and office remodel, respectively, both of which the Company anticipates will be completed in the
fourth quarter of 2006. Liquidity
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  23




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##### Table of Contents



Net
interest income analysis as of September 30, 2006:
  ANNUALIZED DOLLAR CHANGEIMMEDIATE RATE CHANGE
    
    IN NET INTEREST INCOME
    
    PERCENT CHANGE+200bp
    
    
    816
    
    
    
    7.02+100bp
    
    
    425
    
    
    
    3.66+ 50bp
    
    
    213
    
    
    
    1.83- 50bp
    
    
    (201
    )
    
    
    (1.73
    )-100bp
    
    
    (402
    )
    
    
    (3.45
    )-200bp
    
    
    (804
    )
    
    
    (6.91
    )
    
 ITEM 4. CONTROLS AND PROCEDURES
   Forward-Looking Information Statement
  24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 (a) Exhibits
 Exhibit 31.1  Certification of Chief Executive Officer Pursuant to Rule 13a- 15(e) /15d-15(e)
 Exhibit 31.2  Certification of Chief Financial Officer Pursuant to Rule 13a- 15(e) /15d-15(e)
 Exhibit 32.1  Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 Exhibit 32.2  Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 25




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##### Table of Contents



/s/ Gordon D. Browning

Gordon D. BrowningExecutive Vice President and Chief Financial Officer(Authorized Officer and Principal Financial Officer)
 26