UNITED STATES SECURITIES AND EXCHANGE COMMISSION

SECURITIES AND EXCHANGE COMMISSION

Washington D.C., 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2009~~2010

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-52096

SKAGIT STATE BANCORP, INC.

(Exact name of registrant as specified in its charter)

Washington		20-5048602
(State of Incorporation)		(IRS Employer Identification No.)
301 E. Fairhaven Avenue
Burlington, Washington		98233
(Address of principal executive offices)		(Zip Code)

(360) 755-0411

(Registrant’s telephone number, including area code)

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

		Name of Each Exchange
Title of Each Class		on Which Registered

None		Not Applicable

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

Common Stock, $0no par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

~~Yes~~Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark ifwhether the registrant is(1) has ~~not required~~filed toall ~~file~~ reports ~~pursuant~~required to be filed by Section 13 or ~~Section~~ 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

~~Yes~~Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x o

Indicate by check mark ~~whether~~ ~~the~~if ~~registrant~~disclosure ~~(1) has~~of ~~filed~~delinquent ~~all~~filers ~~reports~~pursuant ~~required~~ to beItem ~~filed~~405 ~~by Section 13 or 15(d)~~ of ~~the~~Regulation ~~Securities~~S-K ~~Exchange~~is ~~Act~~not ofcontained ~~1934~~herein, ~~during~~and ~~the~~will ~~preceding~~not ~~12 months~~be ~~(or~~contained, ~~for~~to ~~such~~the ~~shorter~~best ~~periods~~of ~~that~~ the registrant’s ~~was~~knowledge, ~~required~~in todefinitive ~~file such~~proxy ~~reports),~~or ~~and~~information ~~(2) has~~statements ~~been~~incorporated ~~subject~~by toreference ~~such~~in ~~filing~~Part III ~~requirements~~of ~~for the~~this ~~past~~Form 10-K 90or ~~days.~~any amendment to this Form 10-K x

~~Yes~~Indicate ~~x No o~~by check mark whether the registrant is a large accelerated filer, an accelerate filer, or a non-accelerate.

~~Indicate~~Large byaccelerated ~~check~~filer ~~mark whether~~o ~~the~~Accelerated ~~registrant~~filer ~~has~~o ~~submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S~~Non-Taccelerated ~~during~~filer ~~the~~o ~~preceding~~Smaller ~~12 months~~reporting ~~(or~~company ~~for such shorter period that the registrant was required to submit and post such files).~~x

~~Yes~~Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No o x

~~Indicate~~There byis ~~check~~no ~~mark~~active ~~if disclosure~~trading ofmarket ~~delinquent~~for ~~filers~~the ~~pursuant~~Registrant’s tovoting ~~Item~~securities. The ~~405~~Registrant’s ofvoting ~~Regulation~~common ~~S-K~~stock is not ~~contained~~ ~~herein,~~listed ~~and~~on ~~will~~any ~~not~~exchange beor ~~contained,~~quoted toon NASDAQ. The aggregate market value of the ~~best~~voting common stock held by non-affiliates of the registrant~~’s knowledge~~ as of June 30, in2010 ~~definitive~~(the ~~proxy~~last orbusiness ~~information~~day ~~statements~~of ~~incorporated~~the ~~by reference~~most inrecent ~~Part III~~second ofquarter), ~~this~~was ~~Form~~$81.5 million (based on the June ~~10-K~~30, or2010 ~~any~~market ~~amendment~~price toof $175 ~~this~~per ~~Form 10-K x~~share).

~~Indicate~~The bynumber ~~check~~of ~~mark whether~~shares outstanding of each of the registrant’s isclasses aof ~~large~~common ~~accelerated~~stock ~~filer,~~as anof ~~accelerate filer~~March 4, or2011 ~~a non-accelerate.~~was:

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

Title of Class		Number of Shares Outstanding
Common Stock, No Par Value		588,346

~~Indicate~~DOCUMENTS byINCORPORATED ~~check~~BY ~~mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).~~REFERENCE

~~Yes~~1. Portions ~~o No x~~of the Annual Report to Stockholders for the year ended December 31, 2010 are incorporated by reference into Part II of this Annual Report.

~~There is no active trading market for the Registrant’s voting securities~~2. ~~The~~ Portions ~~Registrant’s voting common stock is not listed on any exchange or quoted on NASDAQ. The aggregate market value~~ of the ~~voting common~~Proxy ~~stock~~Statement ~~held~~relating byto ~~non-affiliates of~~ the ~~registrant~~2011 asAnnual ofMeeting ~~June 30, 2009 (the last business day~~ of ~~the~~Shareholders ~~most~~are ~~recent~~incorporated ~~second~~by ~~quarter),~~reference ~~was~~into ~~$91.2 million (based on the June~~Part ~~30,~~III ~~2009 market price~~ of ~~$195~~this ~~per~~Annual ~~share)~~Report.

~~The~~Table ~~number~~ of ~~shares outstanding of each of the registrant’s classes of common stock as of March 19, 2010 was:~~Contents

Title of Class		Number of Shares Outstanding
Common Stock, $0 Par Value		588,469

S K A G I T S T A T E B A N C O R P, I N C.

~~DOCUMENTS INCORPORATED~~2010 BYAnnual ~~REFERENCE~~Report on Form 10-K

~~1. Portions~~TABLE ofOF ~~the Annual Report to Stockholders for the year ended December 31, 2009 are incorporated by reference into Part II of this Annual Report.~~CONTENTS

2. Portions of the Proxy Statement relating to the 2010 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report.

		PAGE

Part I
Item 1: Business
	Bancorp’s Primary Market Area	2
	Competition	3
	Services Provided	3
	Employees	4
	Supervision and Regulation	4
Item 1A: Risk Factors		10
Item 1B: Unresolved Staff Comments		13
Item 2: Properties		13
Item 3: Legal Proceedings		14
Item 4: [Removed and Reserved]		14

Part II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		15
Item 6: Selected Financial Data		16
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 7A: Quantitative and Qualitative Disclosures about Market Risk		16
Item 8: Financial Statements and Supplementary Data		16
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		16
Item 9A: Controls and Procedures		16
Item 9B: Other Information		17

Part III
Item 10: Directors and Executives Officers and Corporate Governance		18
Item 11: Executive Compensation		18
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		18
Item 13: Certain Relationships and Related Transactions and Director Independence		18
Item 14: Principal Accountant Fees and Services		18

Part IV
Item 15: Exhibits and Financial Statement Schedules		19
Signatures		20

~~Table of Contents~~1

~~SKAGIT~~Table ~~STATE~~of ~~BANCORP, INC.~~Contents

~~2009 Annual Report on Form~~PART ~~10-K~~I

~~TABLE~~Forward OFLooking ~~CONTENTS~~Statements

		PAGE
Part I
Item 1: Business
Bancorp’s Primary Market Area		2
Competition		3
Services Provided		3
Employees		4
Supervision and Regulation		4
Item 1A: Risk Factors		9
Item 1B: Unresolved Staff Comments		13
Item 2: Properties		13
Item 3: Legal Proceedings		13
Item 4: Removed and Reserved		13
Part II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		14
Item 6: Selected Financial Data		14
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 7A: Quanitative and Qualitative Disclosures about Market Risk		15
Item 8: Financial Statements and Supplementary Data		15
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		15
Item 9A(T): Controls and Procedures of the Registrant		15
Item 9B: Other Information		15
Part III
Item 10: Directors and Executives Officers and Corporate Governance		16
Item 11: Executive Compensation		16
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		16
Item 13: Certain Relationships and Related Transactions and Director Independence		16
Item 14: Principal Accountant Fees and Services		16
Part IV
Item 15: Exhibits and Financial Statement Schedules		17
Signatures		18

This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about management’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond Bancorp’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations in the forward-looking statements, including those set forth in this Annual Report and Form 10-K, or the documents incorporated by reference:

1· the risks associated with lending and potential adverse changes in the credit quality of loans in our portfolio, including as a result of declines in the housing and real estate markets in our market areas;

~~Table~~· increased ofloan ~~Contents~~delinquency rates;

~~PART I~~· the risks presented by a continued economic downturn, which could adversely affect credit quality, loan collateral values, investment values, liquidity levels, and loan originations;

~~Forward Looking~~· changes ~~Statements~~in market interest rates, which could adversely affect our net interest income and profitability;

~~This~~· legislative ~~Annual~~or ~~Report~~regulatory onchanges Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about management’s plans, objectives, expectations and intentions that ~~are~~adversely ~~not~~affect ~~historical~~our ~~facts,~~business ~~and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates”~~ or ~~words~~our ofability ~~similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject~~ to ~~significant~~complete ~~business,~~pending ~~economic~~or ~~and~~prospective ~~competitive uncertainties and contingencies, many of which are beyond Bancorp’s control. In addition, these forward-looking statements are subject to assumptions with respect to~~ future ~~business~~ strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations in the forward-looking statements, including those set forth in this Annual Report on Form 10-K, or the documents incorporated by reference:acquisitions;

· ~~the~~ reduced ~~risks~~demand ~~associated~~for ~~with~~banking ~~lending~~products and ~~potential adverse changes in the credit quality of loans in our portfolio, including as a result of declines in the housing and real estate markets in our market areas~~services;

· ~~increased~~ competition ~~loan~~from ~~delinquency~~other ~~rates~~financial services companies in our markets; and

· ~~the~~ Bancorp’s ~~risks~~success ~~presented~~in bymanaging arisks ~~continued~~involved ~~economic~~in ~~downturn, which~~the ~~could adversely affect credit quality, loan collateral values, investment values, liquidity levels, and loan originations;~~foregoing.

~~· changes~~Additional factors that could cause actual results to differ materially from those expressed in ~~market~~the ~~interest~~forward-looking ~~rates,~~statements ~~which~~are ~~could adversely~~discussed ~~affect~~in ~~our~~Risk ~~net~~Factors ~~interest~~in ~~income~~Item ~~and~~1A. ~~profitability;~~Please take into account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K or documents incorporated by reference. Skagit State Bancorp does not undertake any obligation to publicly correct or update any forward-looking statement if we later become aware that actual results are likely to differ materially from these expressed in such forward looking statement.

~~· legislative~~ITEM or1. ~~regulatory changes that adversely affect our business or our ability to complete pending or prospective future acquisitions;~~BUSINESS

~~· reduced~~Skagit ~~demand~~State ~~for~~Bancorp, Inc. ~~banking~~is ~~products~~a bank holding company with one wholly owned subsidiary - Skagit State Bank (collectively, “Bancorp” or “Company”). Skagit State Bank (“the Bank”) was established in 1958 by the late James P. Bishop and ~~services;~~other investors. The Bank was formed under the laws of the State of Washington and is regulated by the Department of Financial Institutions, Division of Banks (“Director”) and by the Federal Deposit Insurance Corporation (“FDIC”), its primary federal regulator and the insurer of its deposits. Skagit State Bancorp, Inc. is regulated by the Federal Reserve Bank. The Bank is headquartered in Burlington, Skagit County, Washington. At December 31, 2010, Bancorp had 779 shareholders of record owning 588,346 shares of the Bancorp’s no par value common stock (“Common Stock”).

~~· competition~~Bancorp’s ~~from~~Primary ~~other~~Market ~~financial services companies in our markets; and~~Area

· Skagit State Bank conducts its banking business through its main office in Burlington and eleven other branches located within Skagit, Snohomish and Whatcom Counties. The Bank focuses its banking and other services on individuals, professionals, and small to medium-sized businesses throughout its market area. Bancorp’s ~~success~~provides a full range of banking services and products to both businesses and individuals. Bancorp operates its main office in ~~managing~~Burlington ~~risks~~(Skagit ~~involved~~County), three branches in ~~the foregoing~~Mount Vernon (Skagit County), two branches in Sedro-Woolley (Skagit County), a branch in Anacortes (Skagit County), a branch in Stanwood (Snohomish County), two branches in Bellingham (Whatcom County), one branch in Arlington (Snohomish County) and one branch in Lynden (Whatcom County). As of December 31, 2010, Bancorp had total assets of $692.9 million.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Risk Factors in Item 1A. Please take into account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K or documents incorporated by reference. Bancorp does not undertake any obligation to publicly correct or update any forward-looking statement if we later become aware that actual results are likely to differ materially from these expressed in such forward looking statement.2

~~ITEM~~Table 1.of ~~BUSINESS~~Contents

Skagit State Bancorp, Inc. is a bank holding company with one wholly owned subsidiary - Skagit State Bank (collectively, “Bancorp” or “Company”). Skagit State Bank (“the Bank”) was established in 1958 by the late James P. Bishop and other investors. The Bank was formed under the laws of the State of Washington and is regulated by the Department of Financial Institutions, Division of Banks (“Director”) and by the Federal Deposit Insurance Corporation (“FDIC”), its primary federal regulator and the insurer of its deposits. Skagit State Bancorp, Inc. is regulated by the Federal Reserve Bank. The Bank is headquartered in Burlington, Skagit County, Washington. At December 31, 2009, Bancorp had 776 shareholders of record owning 588,469 shares of the Bancorp’s no par value common stock (“Common Stock”).Competition

The banking industry is highly competitive and Bancorp’s ~~Primary~~competes ~~Market~~with ~~Area~~a number of financial institutions within Skagit, Snohomish and Whatcom Counties, including state-wide banking organizations, local community banks, savings banks, savings and loans, and credit unions. In addition to competition from other banking institutions, Bancorp competes against financial service companies, brokerage houses, mutual funds and other financial service organizations. Although Bancorp has been able to compete effectively in its market areas to date, there can be no assurance that it will be able to continue to do so in the future.

~~Skagit~~Services State Bank conducts its banking business through its main office in Burlington and eleven other branches located within Skagit, Snohomish and Whatcom Counties. The Bank focuses its banking and other services on individuals, professionals, and small to medium-sized businesses throughout its market area. Bancorp provides a full range of banking services and products to both businesses and individuals. Bancorp operates its main office in Burlington (Skagit County), three branches in Mount Vernon (Skagit County), two branches in Sedro-Woolley (Skagit County), a branch in Anacortes (Skagit County), a branch in Stanwood (Snohomish County), two branches in Bellingham (Whatcom County), one branch in Arlington (Snohomish County) and one branch in Lynden (Whatcom County). As of December 31, 2009, Bancorp had total assets of $647.9 million.Provided

2Skagit State Bank places the highest priority on customer service and assisting customers in making informed decisions when selecting from the products and services the Bank offers. To ensure the Bank provides customers with the tools needed to meet their financial needs, the Bank reviews its products and services on a regular basis.

~~Table~~Lending ofActivities. Bancorp’s ~~Contents~~primary lending activities includes real estate loans, commercial loans which include agriculture production loans and consumer purpose loans.

~~Competition~~Commercial Loans: Commercial loans, secured and unsecured, are made primarily for commercial and industrial purposes to small and medium-sized businesses including farms operating within Skagit, Snohomish and Whatcom Counties. These loans are available for general operating purposes, acquisition of fixed assets, purchases of equipment and machinery, financing of inventory and accounts receivable, and other business purposes. Bancorp originates Small Business Administration (SBA) loans, including 504 and 7A loans.

~~The~~Commercial ~~banking~~Real ~~industry~~Estate: ~~is highly~~Commercial ~~competitive~~real ~~and~~estate ~~Bancorp~~loans ~~competes~~consist ~~with~~of areal ~~number~~estate ofsecured ~~financial~~loans ~~institutions within~~advanced ~~Skagit,~~for ~~Snohomish~~non-owner ~~and~~occupied ~~Whatcom~~commercial ~~Counties,~~real ~~including~~estate ~~state-wide~~which ~~banking organizations~~includes, ~~local~~but ~~community~~is ~~banks,~~not ~~savings~~limited ~~banks~~to, ~~savings~~office ~~and~~buildings, ~~loans~~retail centers, multifamily and ~~credit~~ ~~unions~~warehouses. In ~~addition~~These ~~to competition~~loans ~~from~~are ~~other~~typically ~~banking~~term ~~institutions,~~loans ~~Bancorp~~and ~~competes~~are ~~against~~made ~~financial service~~to ~~companies,~~purchase ~~brokerage~~or ~~houses,~~refinance ~~mutual~~non-owner ~~funds~~occupied ~~and~~commercial ~~other~~real ~~financial service organizations~~estate. Commercial ~~Although~~real ~~Bancorp~~estate ~~has~~loans ~~been~~also ~~able~~include toreal ~~compete~~estate ~~effectively~~secured inraw ~~its market~~land ~~areas~~loans toand ~~date,~~land ~~there~~development ~~can~~loans bewhich noare ~~assurance~~made ~~that~~to itacquire ~~will~~land beor ~~able~~finance ~~to continue~~development preparatory to doerecting soresidential inor ~~the~~commercial ~~future~~structures.

~~Services~~Other ~~Provided~~Real Estate Loans: Other real estate loans are typically made for, the purchase of or refinance of, residential real estate, real estate used for agricultural purposes including timberland, and owner-occupied real estate utilized by small to medium sized businesses and individuals for their business operations. They are typically term loans secured by the property being purchased or refinanced.

~~Skagit~~Real ~~State~~Estate ~~Bank places~~Construction: Real estate construction loans are short term loans made for the ~~highest~~construction ~~priority~~period onrequired ~~customer~~for ~~service~~both commercial construction projects and ~~assisting~~residential ~~customers~~construction ~~in making~~projects. ~~informed~~These ~~decisions~~loans ~~when~~are ~~selecting~~generally ~~from~~secured by the ~~products~~real ~~and~~estate ~~services~~project ~~the Bank~~being ~~offers~~constructed. ToCommercial ~~ensure~~construction ~~the~~loans ~~Bank~~are ~~provides~~available ~~customers~~for ~~with~~owner-occupied ~~the~~real ~~tools~~estate ~~needed~~utilized by small to ~~meet~~ medium ~~their~~sized ~~financial~~businesses ~~needs,~~and ~~the~~individuals ~~Bank~~for ~~reviews~~their ~~its~~business ~~products~~operations and ~~services~~for onnon-owner ~~a regular~~occupied ~~basis~~real estate.

~~Lending Activities. Bancorp~~Consumer ~~concentrates on five areas of lending~~Loans: ~~loans~~Bancorp tomakes ~~individuals~~secured ~~for~~and ~~business~~unsecured ~~purposes,~~consumer loans ~~for~~including ~~small and medium-sized businesses, agricultural~~ loans, ~~loans~~ to ~~commercial~~individuals, ~~enterprises for~~primarily ~~real~~customers ~~estate~~of ~~transactions and consumer purpose loans.~~ Bancorp’s, ~~primary~~for ~~lending~~various ~~activities~~purposes, ~~include commercial~~including ~~real~~home ~~estate~~equity loans, ~~commercial~~purchases ~~loans~~of ~~which~~automobiles, ~~include~~mobile ~~agriculture production~~homes, ~~loans~~boats and ~~consumer~~other ~~purpose~~recreational ~~loans.~~vehicles, ~~Most~~home ofimprovement ~~Bancorp’s~~loans ~~business activity is with customers located within Skagit, Snohomish~~ and ~~Whatcom Counties.~~loans ~~Bancorp~~for ~~originates~~education ~~commercial, real estate~~ and ~~consumer~~personal ~~loans~~investments.

~~Real~~Additional ~~Estate~~information relating to “Loans:” ~~Real~~is ~~estate~~set ~~loans~~forth ~~comprise~~in the ~~largest category~~“Management ofDiscussion ~~loans~~ and ~~our~~Analysis” ~~real~~section ~~estate portfolio consists~~ of commercial and residential loans which are secured by property such as office buildings, retail buildings, owner occupied commercial business properties, farm land, timber land, residential land development properties and residential properties. The primary repayment source of these specific loan types are from the ~~cash~~2010 ~~flows~~Annual ~~generated by the occupant business~~Report, ~~occupant~~portions ~~farm operation, or the sale~~ of ~~properties.~~which ~~While~~is ~~Bancorp~~contained ~~has significant~~in ~~balances~~Exhibit 13 ~~secured by real estate, Bancorp believes that its lending policies~~ and ~~concentration~~is ~~policies~~incorporated ~~are~~herein ~~sufficient~~by ~~to minimize risks~~reference. ~~However, economic conditions may affect a borrower’s ability to meet the stated repayment terms.~~

~~Commercial~~Deposit ~~Loans:~~Services. ~~Commercial~~Bancorp ~~loans,~~offers ~~secured~~a ~~and~~full ~~unsecured, are~~range ~~made~~of ~~primarily~~deposit toservices ~~small~~including ~~and~~checking ~~medium-sized~~accounts, ~~businesses~~savings ~~including~~accounts, ~~farms operating~~money ~~within~~market ~~Skagit,~~accounts ~~Snohomish~~ and ~~Whatcom~~various ~~Counties. These~~types ~~loans~~of ~~are~~certificates ~~available~~of ~~for~~deposit. The ~~general operating~~transaction ~~purposes,~~accounts ~~acquisition~~and certificates of ~~fixed~~deposit ~~assets,~~are ~~purchases~~tailored ofto ~~equipment~~Bancorp’s ~~and machinery,~~primary ~~financing~~market ofarea ~~inventory~~at ~~and~~rates ~~accounts~~competitive ~~receivable,~~with ~~and~~those ~~other~~offered ~~business purposes. Bancorp~~in ~~originates~~the ~~Small Business~~area. ~~Administration~~Bancorp ~~(SBA)~~offers ~~loans,~~both ~~including~~interest ~~504~~ and 7Anon-interest ~~loans~~bearing checking accounts.

~~Consumer~~All ~~Loans:~~deposit ~~Bancorp~~accounts, ~~makes~~up ~~secured and unsecured consumer loans including loans~~ to ~~individuals,~~the ~~primarily~~maximum ~~customers~~permitted ofby ~~Bancorp~~law, ~~for~~ ~~various~~are ~~purposes,~~insured ~~including~~by ~~home~~the ~~equity loans, purchases of automobiles, mobile homes, boats and other recreational vehicles, home improvement loans and loans for education and personal investments~~FDIC.

The extension of credit to individuals and businesses is a significant portion of Bancorp’s principal business activity and requires ongoing portfolio and credit management. As such, Bancorp has established lending policies and procedures to manage and monitor risk. These lending policies and procedures include guidelines for concentrations of credit, loan terms, loan-to-value ratios, collateral appraisals and loan approval limits.3

~~Additional~~Table ~~information relating to “Loans” is set forth in the “Management Discussion and Analysis” section~~ of ~~the 2009 Annual Report, portions of which is contained in Exhibit 13 and is incorporated herein by reference.~~Contents

~~Deposit~~Additional ~~Services.~~information ~~Bancorp~~relating ~~offers~~to a“Deposits” ~~full~~is ~~range~~set offorth ~~deposit services~~in ~~including~~the ~~checking~~“Management ~~accounts,~~Discussion ~~savings accounts, money market accounts~~ and ~~various~~Analysis” ~~types~~section of ~~certificates~~the of2010 ~~deposit. The~~Annual ~~transaction~~Report, ~~accounts~~portions ~~and certificates~~ of ~~deposit~~which ~~are~~is ~~tailored~~contained ~~to Bancorp’s primary market area at rates competitive with those offered~~ in ~~the area.~~Exhibit 13 ~~Bancorp offers both interest~~ and ~~non-interest~~is ~~bearing~~incorporated ~~checking~~herein ~~accounts~~by reference.

~~All~~Other ~~deposit~~Services. Bancorp ~~accounts~~provides other traditional commercial and consumer banking services, ~~up to~~including ~~the~~remote ~~maximum~~data ~~permitted~~capture, bymerchant ~~law~~card services, ~~are~~safe ~~insured~~deposit bybox ~~the~~services, ~~FDIC.~~debit Inand ~~addition~~automated teller machine cards, ~~Skagit State~~on-line ~~Bank~~banking, ismobile abanking, ~~participant~~credit incard ~~the~~services, ~~FDIC~~savings bonds, cashiers’s ~~Transaction~~checks, ~~Account~~travelers’ ~~Guarantee Program~~checks, notary services, and other services. ~~Under~~New ~~this~~technologies ~~program,~~and ~~all~~services ~~non-interest bearing~~are reviewed for business development and cost saving purposes.

3Bancorp’s on-line banking service provides customers a convenient way to process balance inquiries, transfers, bill paying and other services. Bancorp’s website address is www.skagitbank.com.

~~Table of Contents~~Employees

~~transaction~~As ~~accounts~~of ~~plus various~~December 31, ~~interest~~2010, Bancorp had 164 full-~~bearing~~time ~~transaction~~equivalent ~~accounts~~employees. None of the Bancorp’s employees are ~~fully~~covered ~~guaranteed~~by a collective bargaining agreement or represented by ~~the~~a ~~FDIC for~~collective ~~the~~bargaining ~~entire~~group. Management ~~amount~~believes ofits ~~the~~employee ~~account~~relations to be good.

~~Additional~~Supervision ~~information relating to “Deposits” is set forth in the “Management Discussion~~ and ~~Analysis” section of the 2009 Annual Report, portions of which is contained in Exhibit 13 and is incorporated herein by reference.~~Regulation

Other Services. Bancorp provides other traditional commercial and consumer banking services, including remote data capture, merchant card services, safe deposit services, debit and automated teller machine cards, on-line banking, credit card services, savings bonds, cashiers’ checks, travelers’ checks, notary services, and other services. New technologies and services are reviewed for business development and cost saving purposes.General

~~Bancorp’s~~The ~~on-line~~following ~~banking service~~discussion provides ~~customers~~an aoverview ~~convenient~~of ~~way~~certain elements of the extensive regulatory framework applicable to ~~process~~Skagit ~~balance~~State ~~inquiries, transfers,~~Bancorp ~~bill~~(the ~~paying~~“Company”) and ~~other~~Skagit ~~services~~State Bank (the “Bank”). ~~Bancorp’s~~ ~~website~~This ~~address~~regulatory framework is ~~www~~primarily designed for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than specifically for the protection of shareholders.~~skagitbank~~ Due to the breadth and growth of this regulatory framework, our costs of compliance continue to increase in order to monitor and satisfy these requirements.~~com.~~

~~Employees~~To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to those provisions. These statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to us, including the interpretation or implementation thereof, could have a material effect on our business or operations. Recently, in light of the recent financial crisis, numerous proposals to modify or expand banking regulation have surfaced. Based on past history, if any are approved, they will add to the complexity and cost of our business.

AsFederal ofBank ~~December 31, 2009,~~Holding ~~Bancorp~~Company ~~had 168 full-time equivalent employees.~~Regulation

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

~~General~~Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) 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; (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.

~~The following~~Holding ~~discussion~~Company ~~provides~~Control ~~an overview~~ of ~~certain~~Nonbanks. ~~elements~~With ofsome exceptions, the ~~extensive regulatory~~BHCA ~~framework~~also ~~applicable~~prohibits toa ~~Skagit~~bank ~~State~~holding ~~Bancorp~~company (from ~~“Bancorp”)~~acquiring ~~and~~or ~~Skagit State~~retaining ~~Bank~~direct ~~(the~~or ~~“Bank”).~~indirect ~~This~~ownership ~~regulatory~~or ~~framework~~control isof ~~primarily~~more ~~designed~~than ~~for the~~5% ~~protection~~ of ~~depositors,~~the ~~federal~~voting ~~deposit~~shares ~~insurance~~of ~~funds~~any ~~and~~company ~~the~~that ~~banking system~~is asnot a ~~whole,~~bank ~~rather~~or ~~than~~bank ~~specifically~~holding ~~for~~company, ~~the~~or ~~protection~~from ofengaging ~~shareholders. Due~~directly toor ~~the~~indirectly ~~breadth~~in ~~and~~activities ~~growth~~other ofthan ~~this~~those ~~regulatory~~of ~~framework~~banking, ~~our~~managing ~~costs~~or ~~of compliance~~controlling ~~continue~~banks toor ~~increase~~providing inservices ~~order~~for toits ~~monitor~~subsidiaries. ~~and~~The ~~satisfy~~principal ~~these requirements.~~exceptions

To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to those provisions. These statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to us, including the interpretation or implementation thereof, could have a material effect on our business or operations. Recently, in light of the recent financial crisis, numerous proposals to modify or expand banking regulation have surfaced. Based on past history, if any are approved, they will add to the complexity and cost of our business.4

~~Federal~~Table ~~Bank~~of ~~Holding Company Regulation~~Contents

~~General.~~to ~~Bancorp~~these ~~is a~~prohibitions ~~bank~~involve ~~holding~~certain ~~company~~non-bank asactivities ~~defined in the Bank Holding Company Act of 1956~~that, ~~as amended~~by ~~(“BHCA”),~~statute ~~and~~or ~~is therefore subject to regulation, supervision and examination~~ by ~~the~~ Federal Reserve. Inregulation ~~general, the BHCA limits the business of bank holding companies to owning~~ or ~~controlling~~order, ~~banks~~have ~~and~~been ~~engaging~~identified inas ~~other~~ activities closely related to ~~banking. Bancorp must file reports with and provide~~ the ~~Federal~~business ~~Reserve~~of ~~such~~banking ~~additional~~or ~~information as it may require. Under the Financial Services Modernization Act~~ of ~~1999,~~managing ~~a bank holding company may apply to the Federal Reserve to become a financial holding company, and thereby engage (directly~~ or ~~through~~controlling ~~a subsidiary) in certain expanded activities deemed financial in nature, such as securities brokerage and insurance underwriting~~banks.

~~Holding Company~~Transactions ~~Bank~~with ~~Ownership~~Affiliates. ~~The~~Subsidiary ~~BHCA~~banks ~~requires~~of ~~every~~a bank holding company toare ~~obtain~~subject ~~the~~to ~~prior~~restrictions ~~approval~~imposed ofby the Federal Reserve ~~before~~Act ~~(i) acquiring, directly~~on extensions of credit to the holding company or ~~indirectly~~its subsidiaries, ~~ownership~~on orinvestments ~~control~~in oftheir ~~any~~securities, ~~voting~~and ~~shares~~on ofthe ~~another bank~~use orof ~~bank~~their ~~holding~~securities ~~company~~as ~~if,~~collateral ~~after~~for ~~such~~loans ~~acquisition,~~to itany ~~would~~borrower. ~~own~~These ~~or control~~regulations ~~more~~and ~~than~~restrictions 5%may oflimit ~~such~~the ~~shares;~~Company’s ~~(ii) acquiring~~ability ~~all~~to orobtain ~~substantially all~~funds offrom the ~~assets~~Bank offor ~~another~~its ~~bank~~cash orneeds, ~~bank~~including ~~holding~~funds ~~company;~~for orpayment ~~(iii) merging or~~of ~~consolidating~~dividends, ~~with~~interest ~~another~~and ~~bank~~operational ~~holding company~~expenses.

~~Holding Company~~Tying ~~Control~~Arrangements. ofWe ~~Nonbanks.~~are ~~With~~prohibited ~~some~~from ~~exceptions,~~engaging ~~the~~in ~~BHCA~~certain ~~also prohibits~~tie-in aarrangements ~~bank~~in ~~holding~~connection ~~company~~with ~~from~~any ~~acquiring~~extension orof ~~retaining~~credit, ~~direct~~sale or ~~indirect ownership~~lease of property or ~~control~~furnishing of ~~more~~services. ~~than~~For 5%example, ofwith certain exceptions, neither the ~~voting~~Company ~~shares~~nor ofthe ~~any~~Bank ~~company~~may ~~that is~~condition ~~not~~an aextension ~~bank~~of orcredit ~~bank~~to ~~holding~~a ~~company,~~customer oron ~~from~~either ~~engaging~~(i) a ~~directly~~requirement orthat ~~indirectly in~~the ~~activities~~customer ~~other~~obtain ~~than~~additional ~~those~~services ofprovided ~~banking,~~by ~~managing~~us; or ~~controlling~~(ii) an ~~banks~~agreement ~~or providing~~by ~~services~~the ~~for~~customer ~~its~~to ~~subsidiaries.~~refrain ~~The~~from ~~principal~~obtaining ~~exceptions~~other services from a competitor.

4Support 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.

~~Table~~ 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 ~~Contents~~directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records and minutes, and observance of certain corporate formalities.

~~to these prohibitions involve certain non-bank activities that, by statute or by~~ Federal ~~Reserve~~and ~~regulation~~State orRegulation ~~order, have been identified as activities closely related to the business~~ of ~~banking~~Skagit orState ~~of managing or controlling banks.~~Bank

~~Transactions with Affiliates~~General. ~~Subsidiary~~The ~~banks~~Bank ofis a ~~bank~~Washington ~~holding company~~state-chartered ~~are~~commercial ~~subject~~bank towith ~~restrictions~~deposits ~~imposed~~insured by the ~~Federal~~FDIC. As ~~Reserve~~a ~~Act~~result, ~~on extensions~~the ofBank ~~credit~~is subject to ~~the~~supervision ~~holding~~and ~~company~~regulation orby ~~its~~the ~~subsidiaries,~~Washington onDepartment ~~investments in~~of ~~their~~Financial ~~securities~~Institutions, ~~and~~Division ~~on the use~~ of ~~their~~Banks ~~securities~~and asthe ~~collateral for loans to any borrower~~FDIC. These ~~regulations~~agencies ~~and~~have ~~restrictions~~the ~~may~~authority ~~limit Bancorp’s ability~~ to ~~obtain~~prohibit ~~funds~~banks from ~~the~~engaging ~~Bank~~in ~~for~~what ~~its~~they ~~cash~~believe ~~needs,~~constitute ~~including~~unsafe ~~funds~~or ~~for~~unsound ~~payment of~~banking ~~dividends, interest and operational expenses~~practices.

~~Tying Arrangements~~Community Reinvestment. The WeCommunity ~~are~~Reinvestment ~~prohibited~~Act ~~from~~of ~~engaging~~1977 inrequires ~~certain~~that, ~~tie-~~in ~~arrangements~~ in connection with ~~any~~examinations ~~extension~~ of ~~credit~~financial institutions within their jurisdiction, ~~sale~~the Federal Reserve or ~~lease~~the ~~of property~~FDIC orevaluate ~~furnishing~~the record of ~~services.~~the ~~For~~financial ~~example,~~institution ~~with~~in ~~certain~~meeting ~~exceptions, neither~~the ~~Bancorp~~credit ~~nor~~needs ~~the~~of ~~Bank~~its ~~may~~local ~~condition~~communities, anincluding ~~extension~~low ofand ~~credit~~moderate-income toneighborhoods, aconsistent ~~customer on~~with ~~either~~the ~~(i) a~~safe ~~requirement~~and ~~that~~sound operation of the ~~customer~~institution. ~~obtain~~A ~~additional~~bank’s ~~services provided~~community byreinvestment ~~us;~~record oris ~~(ii) an~~also ~~agreement~~considered by the ~~customer~~applicable tobanking ~~refrain~~agencies ~~from obtaining~~in ~~other~~evaluating ~~services~~mergers, ~~from~~acquisitions and applications to open a ~~competitor~~branch or facility.

~~Support of~~Insider ~~Subsidiary~~Credit ~~Banks~~Transactions. ~~Under~~Banks are also subject to certain restrictions imposed by the Federal Reserve ~~policy, Bancorp~~Act ison ~~expected~~extensions of credit to ~~act~~executive asofficers, adirectors, ~~source~~principal ofshareholders ~~financial~~or ~~and~~any ~~managerial~~related ~~strength~~interests ~~to the~~of ~~Bank~~such persons. ~~This~~ ~~means~~Extensions ~~that~~of credit (i) must be made on substantially the ~~Company~~same isterms, ~~required~~including tointerest ~~commit~~rates and collateral, and follow credit underwriting procedures that are at least as ~~necessary~~ stringent, ~~resources~~as tothose ~~support~~prevailing at the ~~Bank.~~time ~~Any~~for ~~capital~~comparable ~~loans~~transactions awith ~~bank~~persons ~~holding company~~not ~~makes~~covered toabove, ~~its~~and ~~subsidiary~~who ~~banks~~are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are ~~subordinate~~also subject to ~~deposits~~certain lending limits and restrictions on overdrafts to ~~certain~~ ~~other~~insiders. ~~indebtedness~~A violation of ~~those~~these ~~subsidiary~~restrictions ~~banks~~may result in the assessment of substantial civil monetary penalties, the imposition of a cease and desist order, and other regulatory sanctions.

~~State Law~~Regulation ~~Restrictions~~of Management. AsFederal alaw ~~Washington~~(i) sets ~~corporation, Bancorp~~forth iscircumstances ~~subject~~under towhich ~~certain~~officers ~~limitations~~or ~~and~~directors ~~restrictions~~of ~~under~~a ~~applicable Washington~~bank ~~corporate~~may ~~law.~~be ~~For~~removed ~~example,~~by ~~state~~the ~~law~~institution’s ~~restrictions~~federal insupervisory ~~Washington include~~agency; ~~limitations~~(ii) places ~~and~~restraints ~~restrictions~~on ~~relating~~lending by a bank to ~~indemnification~~its ofexecutive officers, directors, ~~distributions~~ toprincipal shareholders, ~~transactions~~and ~~involving~~their ~~directors,~~related ~~officers~~interests; ~~or interested~~and ~~shareholders,~~(iii) prohibits ~~maintenance~~management personnel of ~~books,~~a ~~records~~bank ~~and~~from ~~minutes,~~serving ~~and observance~~as a director or in a management position of ~~certain~~another ~~corporate~~financial ~~formalities~~institution whose assets exceed a specified amount or which has an office within a specified geographic area.

Safety and Soundness Standards. Federal law imposes certain non-capital safety and ~~State Regulation~~soundness ofstandards ~~Skagit~~upon ~~State~~banks. ~~Bank~~These standards cover internal controls, information systems and internal audit systems, loan documentation,

General. The Bank is a Washington state-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.5

~~Community Reinvestment. The~~Table ~~Community Reinvestment Act~~ of 1977 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. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions and applications to open a branch or facility.Contents

~~Insider Credit~~credit ~~Transactions.~~underwriting, ~~Banks~~interest ~~are~~rate ~~also~~exposure, ~~subject~~asset ~~to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers~~growth, ~~directors~~compensation, ~~principal~~fees ~~shareholders~~and orbenefits, ~~any related interests of~~ such ~~persons.~~other ~~Extensions~~operational ofand ~~credit~~managerial ~~(i) must~~standards beas ~~made on substantially~~ the ~~same~~agency ~~terms,~~determines ~~including~~to ~~interest~~be ~~rates and collateral~~appropriate, and ~~follow~~standards ~~credit underwriting procedures that are at least as stringent, as those prevailing at the time~~ for ~~comparable~~asset ~~transactions with persons not covered above~~quality, ~~and~~earnings ~~who are not employees;~~ and ~~(ii) must~~stock ~~not~~valuation. ~~involve~~An ~~more~~institution ~~than~~that ~~the~~fails ~~normal~~to ~~risk~~meet ~~of repayment~~these orstandards ~~present~~must ~~other~~develop ~~unfavorable~~a ~~features.~~plan ~~Banks~~acceptable ~~are also subject~~ to ~~certain~~ ~~lending~~its ~~limits~~regulators, ~~and~~specifying ~~restrictions~~the onsteps ~~overdrafts~~that tothe ~~insiders.~~institution Awill ~~violation of~~take ~~these~~to ~~restrictions~~meet ~~may result in~~ the ~~assessment~~standards. ofFailure ~~substantial~~to ~~civil monetary~~submit ~~penalties,~~or ~~the~~implement ~~imposition~~such of a ~~cease~~plan ~~and~~may ~~desist~~subject ~~order,~~the ~~and~~institution ~~other~~ to regulatory sanctions.

~~Regulation of~~Interstate ~~Management.~~Banking Federal law (i) sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency; (ii) places restraints on lending by a bank to its executive officers, directors, principal shareholders and their related interests; and (iii) 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.Branching

~~Safety~~ The Riegle-Neal Interstate Banking and ~~Soundness~~Branching ~~Standards. Federal~~Efficiency Act of 1994 (“Interstate Act”) relaxed prior interstate branching restrictions under federal law ~~imposes~~by permitting nationwide interstate banking and branching under certain ~~non~~ circumstances. Generally, bank holding companies may purchase banks in any state, and states may not prohibit these purchases. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-~~capital~~income ~~safety~~area. Federal banking agency regulations prohibit banks from using their interstate branches primarily for deposit production and ~~soundness~~the ~~standards~~federal ~~upon~~banking agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition. As a result of the Dodd-Frank Act, prior restrictions on de novo branching by out of state banks have been removed. ~~These~~The ~~standards~~Dodd-Frank ~~cover internal~~Act ~~controls~~generally permits all banks to branch into other states by opening a new branch or purchasing a branch from another financial institution, ~~information~~to ~~systems~~the ~~and~~extent ~~internal~~that ~~audit~~banks ~~systems~~chartered under the state in which the new branch is located can do so. In the past, ~~loan documentation~~the Interstate Act barred all financial institutions, except for thrifts, from branching into other states unless they purchased or merged with a bank located in the other state.

5Dividends

~~Table~~ The principal source of ~~Contents~~the Company’s cash is from dividends received from the Bank, which are subject to government regulation and limitations. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice or would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Washington law also limits a bank’s ability to pay dividends that are greater than the bank’s retained earnings without approval of the Department of Financial Institutions. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.

~~credit underwriting,~~Capital interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for 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.Adequacy

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

~~The Riegle-Neal~~Tier ~~Interstate~~I ~~Banking~~ and ~~Branching~~Tier ~~Efficiency~~II ~~Act~~Capital. Under ofthe ~~1994~~guidelines, ~~(“Interstate Act”)~~an ~~relaxed~~institution’s ~~prior~~capital ~~interstate~~is ~~branching~~divided ~~restrictions~~into ~~under~~two ~~federal~~broad ~~law~~categories, ~~by permitting~~Tier ~~nationwide~~I ~~interstate~~capital ~~banking~~ and ~~branching~~Tier ~~under~~II ~~certain circumstances~~capital. ~~Generally,~~ Tier ~~bank~~I ~~holding~~capital ~~companies~~generally ~~may~~consists ~~purchase~~of ~~banks~~common instockholders’ ~~any state~~equity, surplus and ~~states may~~undivided ~~not prohibit these purchases~~profits. Tier ~~Additionally,~~II ~~banks~~capital ~~are~~generally ~~permitted~~consists toof ~~merge with~~the ~~banks~~allowance infor ~~other~~loan ~~states~~losses, ashybrid ~~long~~capital asinstruments, ~~the~~and ~~home~~subordinated ~~state of neither merging bank has opted out under the legislation~~debt. The ~~Interstate~~sum ~~Act~~of ~~requires~~Tier ~~regulators~~I ~~to consult~~capital ~~with~~and ~~community~~Tier ~~organizations~~II ~~before~~capital ~~permitting~~represents an ~~interstate~~ institution’s tototal ~~close a branch in a low-income area~~capital. The ~~Federal~~guidelines ~~banking~~require ~~agency regulations~~that ~~prohibit~~at ~~banks~~least ~~from~~50% ~~using~~of ~~their~~an ~~interstate~~institution’s ~~branches~~total ~~primarily~~capital ~~for deposit~~consist ~~production~~of ~~and~~Tier ~~the~~I ~~federal banking agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition~~capital.

~~Washington enacted~~Risk-based ~~“opting~~Capital ~~in”~~Ratios. The ~~legislation~~adequacy inof ~~accordance~~an ~~with~~institution’s ~~the~~capital ~~Interstate~~is ~~Act,~~gauged ~~allowing banks~~primarily with reference to ~~engage~~the ininstitution’s ~~interstate~~risk-weighted ~~merger~~assets. The ~~transactions,~~guidelines ~~subject~~assign torisk ~~certain~~weightings ~~“aging” requirements.~~to ~~Under~~an ~~Washington~~institution’s ~~law,~~assets in an ~~out-of-state~~effort ~~bank~~to ~~may,~~quantify ~~subject~~the ~~to Department~~relative risk of ~~Financial~~each ~~Institutions’~~asset ~~approval,~~and ~~open~~to dedetermine ~~novo~~the ~~branches~~minimum ~~in Washington~~capital orrequired ~~acquire~~to ansupport ~~in-state~~that ~~branch~~risk. An soinstitution’s ~~long~~risk-weighted asassets ~~the~~are ~~home~~then ~~state~~compared ofwith ~~the out-of-state~~its ~~bank~~Tier ~~has~~I ~~reciprocal~~capital ~~laws~~and ~~with~~total ~~respect~~capital to dearrive ~~novo~~at ~~branching~~a ~~or branch~~Tier ~~acquisitions. Once~~I ~~an out~~risk-~~of-state~~based ~~bank~~ratio ~~has~~and ~~acquired~~ a ~~bank~~total ~~within Washington~~risk-based ratio, ~~either~~respectively. The ~~through~~guidelines ~~merger~~provide orthat ~~acquisition~~an ofinstitution ~~all~~must orhave ~~substantially~~a ~~all~~minimum ~~of the~~Tier ~~bank’s~~I ~~assets~~risk-based orratio ~~through~~of ~~authorized~~4% deand ~~novo~~a ~~branching,~~minimum ~~the~~total ~~out~~risk-~~of-state bank~~based ~~may~~ratio ~~open~~of ~~additional branches within the state~~8%.

~~Dividends~~Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of average 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%.

The principal source of Bancorp’s cash is from dividends received from the Bank, which are subject to government regulation and limitations. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice or would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Washington law also limits a bank’s ability to pay dividends that are greater than the bank’s retained earnings without approval of the Department of Financial Institutions. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on Bancorp’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.6

~~Capital~~Table ~~Adequacy~~of Contents

~~Regulatory Capital~~Prompt ~~Guidelines~~Corrective Action. ~~Federal~~ ~~bank~~Under ~~regulatory agencies~~the ~~use~~guidelines, an institution is assigned to one of five capital ~~adequacy~~categories ~~guidelines~~depending inon ~~the~~its ~~examination~~total ~~and~~risk-based ~~regulation~~capital ~~of bank~~ratio, ~~holding~~Tier ~~companies~~I risk-based capital ratio, and ~~banks~~leverage ratio, together with certain subjective factors. The ~~guidelines~~categories ~~are~~range from “~~risk-based,~~well capitalized” ~~meaning~~to “critically undercapitalized.” Institutions that ~~they~~ are ~~designed~~“undercapitalized” or lower are subject to ~~make~~certain mandatory supervisory corrective actions. At each successively lower capital ~~requirements~~category, ~~more~~an ~~sensitive~~insured bank is subject to ~~differences~~increased ~~in risk~~restrictions ~~profiles~~on ~~among~~its ~~banks~~operations. ~~and~~During ~~bank~~these ~~holding~~challenging ~~companies~~economic times, the federal banking regulators have actively enforced these provisions.

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

~~Risk-based Capital Ratios.~~ The ~~adequacy~~Federal ofReserve ~~an institution’s~~conducts ~~capital~~periodic isinspections ~~gauged~~of ~~primarily~~bank ~~with~~holding ~~reference~~companies, towhich ~~the~~are ~~institution’s risk-weighted~~performed ~~assets. The~~both ~~guidelines~~onsite ~~assign~~and ~~risk~~offsite. ~~weightings~~The tosupervisory ~~an institution’s~~objectives ~~assets~~of inthe aninspection ~~effort~~program are to ~~quantify~~ascertain whether the ~~relative~~financial ~~risk~~strength of ~~each~~the ~~asset and~~bank toholding ~~determine~~company ~~the~~is ~~minimum~~being ~~capital~~maintained ~~required~~on toan ~~support~~ongoing ~~that~~basis ~~risk. An institution’s~~and ~~risk-weighted~~to ~~assets~~determine ~~are~~the ~~then~~effects ~~compared~~or ~~with~~consequences ~~its~~of ~~Tier~~transactions Ibetween ~~capital and~~a ~~total~~holding ~~capital~~company toor ~~arrive~~its atnon-banking asubsidiaries ~~Tier~~and Iits ~~risk-based~~subsidiary ~~ratio~~banks. ~~and~~For aholding ~~total~~companies ~~risk-based ratio,~~under ~~respectively. The~~$10 ~~guidelines~~billion ~~provide~~in ~~that~~assets, anthe ~~institution~~inspection ~~must~~type ~~have a~~and ~~minimum~~frequency ~~Tier~~varies Idepending ~~risk-based~~on ~~ratio~~asset size, complexity of 4%the organization, and athe ~~minimum~~holding ~~total~~company’s ~~risk-based~~rating ~~ratio~~at ~~of 8%~~its last inspection.

6Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.

~~Table of~~Corporate ~~Contents~~Governance and Accounting

~~Leverage Ratio~~Sarbanes-Oxley Act of 2002. The ~~guidelines~~Sarbanes-Oxley ~~also~~Act ~~employ~~of a2002 ~~leverage~~(the ~~ratio~~“Act”) addresses, ~~which~~among ~~is Tier~~other Ithings, ~~capital~~corporate asgovernance, aauditing ~~percentage~~and ofaccounting, ~~average~~enhanced ~~total~~and ~~assets~~timely disclosure of corporate information, ~~less~~and ~~intangibles. The~~penalties ~~principal~~for ~~objective~~non-compliance. ofGenerally, the ~~leverage~~Act ~~ratio~~(i) requires ischief toexecutive ~~constrain~~officers ~~the~~and ~~maximum degree~~chief financial officers to ~~which~~certify ato ~~bank~~the ~~holding~~accuracy ~~company~~of ~~may~~periodic ~~leverage~~reports ~~its~~filed ~~equity~~with ~~capital~~the ~~base. The~~Securities ~~minimum~~and ~~leverage~~Exchange ~~ratio~~Commission is(the 3%“SEC”); ~~however,~~(ii) imposes ~~for~~specific ~~all~~and ~~but~~enhanced corporate disclosure requirements; (iii) accelerates the ~~most~~time ~~highly~~frame ~~rated bank~~for ~~holding~~reporting ~~companies~~of insider transactions and ~~for~~periodic ~~bank~~disclosures ~~holding~~by public companies; ~~seeking~~(iv) requires companies to ~~expand~~adopt and disclose information about corporate governance practices, ~~regulators~~ ~~expect~~including anwhether ~~additional~~or ~~cushion~~not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least 1%one “audit committee financial expert;” and (v) requires the SEC, based on certain enumerated factors, to 2%regularly and systematically review corporate filings.

~~Prompt Corrective~~As ~~Action.~~a ~~Under~~publicly ~~the~~reporting ~~guidelines~~company, ~~an institution~~we isare ~~assigned~~subject to ~~one~~the requirements of ~~five~~the ~~capital~~Act ~~categories~~and ~~depending~~related onrules and ~~its total~~regulations ~~risk-based~~issued ~~capital~~by ~~ratio,~~the ~~Tier~~SEC. IAfter ~~risk-based~~enactment, ~~capital~~we ~~ratio,~~updated our policies and ~~leverage ratio,~~procedures ~~together~~to comply with ~~certain~~the ~~subjective~~Act’s ~~factors.~~requirements ~~The~~and ~~categories~~have ~~range~~found ~~from~~that ~~“well capitalized”~~such tocompliance, ~~“critically~~including ~~undercapitalized.” Institutions~~compliance ~~that~~with ~~are~~Section 404 ~~“undercapitalized” or~~of ~~lower~~the ~~are~~Act ~~subject~~relating to ~~certain~~management ~~mandatory~~control ~~supervisory~~over ~~corrective~~financial ~~actions. During~~reporting, ~~these~~has ~~challenging~~resulted ~~economic~~in ~~times,~~significant additional expense for the ~~federal~~Company. ~~banking~~We ~~regulators~~anticipate ~~have actively~~that ~~enforced~~we ~~these~~will ~~provisions~~continue to incur such additional expense in our ongoing compliance.

~~Regulatory Oversight and Examination~~Anti-terrorism

~~The~~USA ~~Federal~~Patriot ~~Reserve~~Act ~~conducts~~of ~~periodic inspections~~2001. The ofUniting ~~bank~~and ~~holding~~Strengthening ~~companies,~~America ~~which~~by ~~are~~Providing ~~performed~~Appropriate ~~both~~Tools ~~onsite~~Required to Intercept and ~~offsite.~~ ~~The~~Obstruct ~~supervisory~~Terrorism ~~objectives~~Act of ~~the~~2001, ~~inspection~~intended ~~program~~to ~~are~~combat toterrorism, ~~ascertain whether~~was renewed with certain amendments in 2006 (the ~~financial~~“Patriot ~~strength~~Act”). Certain provisions of the ~~bank~~Patriot ~~holding~~Act ~~company~~were ismade ~~being~~permanent ~~maintained on~~and another ~~ongoing~~sections ~~basis~~were ~~and~~made subject to ~~determine~~extended ~~the~~“sunset” ~~effects~~provisions. orThe ~~consequences~~Patriot ~~of transactions~~Act, ~~between~~in arelevant ~~holding~~part, ~~company~~(i) prohibits orbanks ~~its~~from ~~non-banking~~providing ~~subsidiaries~~correspondent ~~and~~accounts ~~its subsidiary~~directly to foreign shell banks.; ~~For~~(ii) imposes due diligence requirements on banks opening or holding ~~companies~~accounts ~~under~~for ~~$10~~foreign ~~billion~~financial ininstitutions ~~assets,~~or ~~the inspection~~wealthy ~~type~~foreign ~~and~~individuals; ~~frequency~~(iii) requires ~~varies~~financial ~~depending~~institutions onto ~~asset~~establish ~~size,~~an ~~complexity~~anti-money-laundering ofcompliance ~~the organization,~~program; and ~~the~~(iv) eliminates ~~holding~~civil ~~company’s~~liability ~~rating~~for atpersons ~~its~~who ~~last~~file ~~inspection~~suspicious activity reports.

Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.7

~~Corporate~~Table ~~Governance~~of ~~and Accounting Legislation~~Contents

~~Sarbanes-Oxley Act~~Financial ofServices 2002. The Sarbanes-Oxley Act of 2002 (the “Act”) addresses, among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally, the Act (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 specific and enhanced corporate disclosure requirements; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; (iv) requires companies to adopt and disclose information about corporate governance practices, including 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;” and (v) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.Modernization

~~To deter~~Gramm-Leach-Bliley ~~wrongdoing,~~Act ~~the~~of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act ~~(i) subjects~~of ~~bonuses~~1999 ~~issued~~brought toabout ~~top~~significant ~~executives~~changes to ~~disgorgement~~ ifthe alaws ~~restatement~~affecting ofbanks aand ~~company’s~~bank ~~financial~~holding ~~statements~~companies. Generally, ~~was~~the ~~due~~Act ~~to corporate~~(i) repeals ~~misconduct~~historical restrictions on preventing banks from affiliating with securities firms; (ii) ~~prohibits~~provides ana ~~officer~~uniform orframework ~~director~~for ~~misleading~~the ~~or coercing~~activities anof ~~auditor~~banks, savings institutions and their holding companies; (iii) ~~prohibits~~broadens ~~insider~~the ~~trades~~activities ~~during~~that ~~pension~~may ~~fund~~be ~~“blackout periods”~~conducted by national banks and banking subsidiaries of bank holding companies; (iv) ~~imposes~~provides ~~new~~an ~~criminal~~enhanced ~~penalties~~framework for ~~fraud~~protecting the privacy of consumer information and ~~other~~requires ~~wrongful acts~~notification to consumers of bank privacy policies; and (v) ~~extends~~addresses ~~the~~a ~~period~~variety ~~during~~of ~~which~~other ~~certain~~legal ~~securities~~and ~~fraud lawsuits~~regulatory ~~can~~issues beaffecting ~~brought~~both ~~against~~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 ~~company~~wider orvariety ~~its~~of ~~officers~~financial activities than permitted under previous law, particularly with respect to insurance and securities underwriting activities.

~~As a~~The ~~publicly~~Emergency ~~reporting~~Economic ~~company,~~Stabilization ~~we are subject to the requirements of the~~ Act and related rules and regulations issued by the SEC and NASDAQ. After enactment, we updated our policies and procedures to comply with the Act’s requirements and have found that such compliance, including compliance with Section 404(a) of ~~the~~ Act relating to management control over financial reporting, has resulted in significant additional expense for Bancorp. We anticipate that we will continue to incur such additional expense in our ongoing compliance.2008

7Emergency Economic Stabilization Act of 2008. In response to the market turmoil and financial crises affecting the overall banking system and financial markets in the United States, the Emergency Economic Stabilization Act of 2008 ( “EESA”) was enacted on October 3, 2008. EESA provides the United States Department of the Treasury (the “Treasury”) with broad authority to implement certain actions intended to help restore stability and liquidity to the U.S. financial markets.

~~Table~~ Troubled Asset Relief Program. Under the EESA, the Treasury has authority, among other things, to purchase up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions pursuant to the Troubled Asset Relief Program (“TARP”). The purpose of ~~Contents~~TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase lending to customers and to each other. Pursuant to the EESA, the Treasury was initially authorized to use $350 billion for TARP. Of this amount, the Treasury allocated $250 billion to the TARP Capital Purchase Program, which funds were used to purchase preferred stock from qualifying financial institutions. The Company received approval for participation in the TARP CPP, but determined not to participate in light of its strong capital position.

~~Anti~~Temporary Liquidity Guarantee Program Another program established pursuant to the EESA is the Temporary Liquidity Guarantee Program (“TLGP”), which (i) removed the limit on FDIC deposit insurance coverage for non-~~terrorism~~interest ~~Legislation~~bearing transaction accounts through December 31, 2009, and (ii) provided FDIC backing for certain types of senior unsecured debt issued from October 14, 2008 through June 30, 2009. The end-date for issuing senior unsecured debt was later extended to October 31, 2009 and the FDIC also extended the Transaction Account Guarantee portion of the TLGP through December 31, 2010. Financial institutions that did not opt out of unlimited coverage for non-interest bearing accounts were initially charged an annualized 10 basis points on individual account balances exceeding $250,000, and those issuing FDIC-backed senior unsecured debt were initially charged an annualized 75 basis points on all such debt, although those rates were subsequently increased. We initially elected to fully participate in both parts of the TLGP, however we elected not to participate in the extension of the deposit insurance coverage for non-interest bearing transactions accounts through December 31, 2010.

~~USA Patriot~~Deposit Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (the “Patriot Act”). Certain provisions of the Patriot Act were made permanent and other sections were made subject to extended “sunset” provisions. The Patriot Act, in relevant part, (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (iii) requires financial institutions to establish an anti-money-laundering compliance program; and (iv) eliminates civil liability for persons who file suspicious activity reports. The Act also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank account records. While the Patriot Act has had minimal effect on our record keeping and reporting expenses, we do not believe that the renewal and amendment will have a material adverse effect on our business or operations.Insurance

~~Financial~~The ~~Services Modernization~~Bank’s deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are subject to deposit insurance assessments designed to tie what banks pay for deposit insurance more closely to the risks they pose. The Bank has prepaid its quarterly deposit insurance assessments for 2011 and 2012 pursuant to applicable FDIC regulations, but the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in July 2010 required the FDIC to amend its regulations to redefine the assessment base used for calculating deposit insurance assessments. As a result, in February 2011, the FDIC approved new rules to, among other things, change the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets (average consolidated total assets minus average tangible equity). Since the new assessment base is larger than the base used under prior regulations, the rules also lower assessment rates, so that the total amount of revenue collected by the FDIC from the industry is not significantly altered. The rule also revises the deposit insurance assessment system for large financial institutions, defined as institutions with at least $10 billion in assets. The rules revise the assessment rate schedule, effective April 1, 2011, and adopt additional rate schedules that will go into effect when the Deposit Insurance Fund reserve ratio reaches various milestones

Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 brought about significant changes to the laws affecting banks and bank holding companies. Generally, the Act (i) repeals historical restrictions on preventing banks from affiliating with securities firms; (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies; (iii) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; (iv) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and (v) addresses 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.8

~~Recent Legislation~~Table of Contents

~~Emergency~~Insurance ~~Economic Stabilization Act~~ of ~~2008~~Deposit Accounts. The InEESA ~~response~~included a provision for a temporary increase from $100,000 to ~~the~~$250,000 ~~recent~~per ~~financial~~depositor ~~crisis~~in deposit insurance effective October 3, ~~the~~2008 ~~United~~through ~~States government~~December 31, ~~passed~~2010. On May 20, 2009, the ~~Emergency~~temporary ~~Economic~~increase ~~Stabilization~~was extended through December 31, 2013. The Dodd-Frank Act ofpermanently ~~2008~~raises (the ~~“EESA”) on~~current ~~October 3~~standard maximum deposit insurance amount to $250,000. ~~2008~~The FDIC insurance coverage limit applies per depositor, ~~which~~per ~~provides~~insured ~~the~~depository ~~United~~institution ~~States~~for ~~Department~~each ofaccount ~~the Treasury~~ownership (category. EESA also temporarily raised the ~~“Treasury”)~~limit ~~with~~on ~~broad~~federal ~~authority~~deposit insurance coverage to ~~implement~~an ~~certain~~unlimited ~~actions intended~~amount tofor ~~help~~non-interest ~~restore~~or ~~stability~~low-interest ~~and~~bearing ~~liquidity~~demand deposits. Pursuant to the ~~U.S.~~Dodd-Frank ~~financial~~Act, ~~markets~~unlimited coverage for non-interest transaction accounts will continue upon expiration of the TLGP until December 31, 2012.

~~Insurance~~Recent of Deposit Accounts. The EESA included a provision for a temporary increase from $100,000 to $250,000 per depositor in deposit insurance effective October 3, 2008 through December 31, 2013. Deposit accounts are otherwise insured by the FDIC, generally up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts.Legislation

~~Deposit Insurance~~Dodd-Frank ~~Assessments~~Wall Street Reform and Consumer Protection Act. ~~The~~As ~~FDIC~~a ~~imposes~~result anof ~~assessment against~~the ~~institutions~~recent ~~for~~financial ~~deposit~~crises, ~~insurance~~on July 21, 2010 the Dodd-Frank Act was signed into law. The ~~This~~Dodd-Frank ~~assessment~~Act is ~~based~~expected to have a broad impact on the ~~risk~~ ~~category~~financial ofservices ~~the~~industry, ~~institution~~including significant regulatory and ~~ranges~~compliance ~~from~~changes 5and changes to 43corporate ~~basis~~governance ~~points~~matters affecting public companies. Many of the ~~institution’s~~ ~~deposits.~~requirements Incalled ~~December,~~for ~~2008,~~in the ~~FDIC~~Dodd-Frank ~~adopted~~Act awill ~~rule that raised~~be ~~the~~implemented ~~current~~over ~~deposit~~time ~~insurance~~and ~~assessment~~most ~~rates~~will ~~uniformly~~be ~~for~~subject ~~all institutions~~to byimplementing 7regulations ~~basis~~over ~~points~~the ~~(to~~course aof ~~range~~several ~~from~~years. 12Among toother 50things, ~~basis~~the ~~points~~legislation (i) centralizes responsibility for ~~the first~~consumer ~~quarter~~financial ofprotection ~~2009.~~by Increating ~~February 2009~~a new agency responsible for implementing, ~~the~~examining ~~FDIC~~and ~~adopted~~enforcing acompliance ~~final~~with ~~rule~~federal consumer financial laws; (ii) ~~modifying~~ applies the same leverage and risk-based ~~assessment~~capital ~~system~~requirements ~~and~~that ~~setting~~apply ~~initial~~to ~~base~~insured ~~assessment~~depository ~~rates beginning~~institutions ~~April~~to bank holding companies; (iii) 1,requires ~~2009,~~the atFDIC 12to seek to 45make ~~basis~~its ~~points.~~capital ~~The~~requirements ~~rule also gives~~for ~~the~~banks ~~FDIC~~countercyclical so that the ~~authority~~amount of capital required to, asbe ~~necessary,~~maintained ~~implement~~increases ~~emergency~~in ~~special assessments~~times toof ~~maintain~~economic ~~the~~expansion ~~deposit~~and ~~insurance~~decreases ~~fund.~~in Intimes ~~November~~of economic contraction; (iv) ~~2009,~~changes the ~~FDIC~~ ~~approved~~assessment abase ~~final~~for ~~rule requiring~~federal ~~all~~deposit ~~FDIC-~~insurance from the amount of insured ~~depository institutions~~deposits to ~~prepay~~consolidated ~~estimated~~assets ~~quarterly~~less ~~assessments~~tangible ~~for~~capital; (v) requires the ~~fourth~~SEC ~~quarter of~~to ~~2009~~complete studies and ~~for~~develop ~~all~~rules or ofapprove ~~2010~~stock exchange rules regarding various investor protection issues, ~~2011~~including shareholder access to the proxy process, and ~~2012.~~various ~~The~~matters ~~prepayment~~pertaining ~~was~~to ~~collected~~executive oncompensation ~~December~~and compensation committee oversight; (vi) 30makes permanent the $250, ~~2009,~~000 ~~along~~limit ~~with~~for ~~our~~federal ~~regular~~deposit ~~quarterly~~insurance and provides unlimited federal deposit insurance ~~assessments~~until December 31, 2012, for ~~the third~~non-interest ~~quarter~~bearing oftransaction ~~2009.~~accounts; ~~For~~(vii) removes ~~the~~prior ~~fourth~~restrictions ~~quarter~~on ofinterstate ~~2009~~de novo branching; and ~~2010,~~(viii) repeals the ~~prepaid assessments~~federal ~~was~~prohibitions ~~based~~on the payment of interest on andemand ~~institution’s~~deposits, ~~total~~thereby ~~base~~permitting ~~assessment~~depository ~~rate~~institutions into ~~effect~~ pay interest on ~~September 30,~~business ~~2009~~transaction and other accounts. ~~The~~Many ~~rate~~aspects of the Dodd-Frank Act are subject to rulemaking and will betake ~~increased~~effect byover ~~three~~several ~~basis~~years, ~~points for~~making ~~2011~~it difficult to anticipate the overall financial impact on the Company, the Bank and ~~2012~~the ~~prepayments~~financial services industry more generally. However, ~~The~~based ~~prepaid~~on ~~assessments~~past ~~will~~experience with new legislation, it can be ~~accounted~~anticipated ~~for~~that ~~as a~~the ~~prepaid~~Dodd-Frank ~~expenses~~Act, ~~amortized~~directly ~~over~~and indirectly, will impact the ~~three~~business ~~year~~of ~~period~~the Company and the Bank and increase compliance costs.

~~Troubled~~American ~~Asset~~Recovery ~~Relief~~and ~~Program.~~Reinvestment ~~Pursuant~~Act toof ~~the~~2009. ~~EESA~~On February 17, 2009, the ~~Treasury~~American ~~has~~Recovery ~~the~~and ~~ability~~Reinvestment ~~to purchase~~Act orof ~~insure~~2009 up(“ARRA”) towas ~~$700 billion~~signed ininto ~~troubled~~law. ~~assets~~ARRA ~~held~~is byintended ~~financial institutions~~to ~~under~~help stimulate the ~~Troubled~~economy ~~Asset~~through ~~Relief~~a ~~Program~~combination ~~(“TARP”).~~of Ontax ~~October 14, 2008,~~cuts ~~the~~and ~~Treasury~~spending ~~announced~~provisions itapplicable ~~would~~to ~~initially~~a ~~purchase~~broad ~~equity~~range ~~stakes~~of ~~in financial~~areas ~~institutions~~with ~~under~~an aestimated ~~Capital~~cost ~~Purchase~~of ~~Program~~$787 ~~(the~~billion. ~~“CPP”)~~The ofimpact upthat ~~to $350 billion~~ARRA ofmay have on the ~~$700 billion~~US ~~authorized~~economy, ~~under~~the Company and the ~~TARP~~Bank cannot be predicted with certainty.

8Overdrafts. On November 17, 2009, the Board of Governors of the Federal Reserve System promulgated the Electronic Fund Transfer rule with an effective date of January 19, 2010 and a mandatory compliance date of July 1, 2010. The rule, which applies to all FDIC-regulated institutions, prohibits financial institutions from assessing an overdraft fee for paying automated teller machine (ATM) and one-time point-of-sale debit card transactions, unless the customer affirmatively opts in to the overdraft service for those types of transactions. The opt-in provision establishes requirements for clear disclosure of fees and terms of overdraft services for ATM and one-time debit card transactions.

~~Table of~~Proposed ~~Contents~~Legislation

Proposed legislation~~. The~~ ~~CPP~~is ~~provides~~introduced ~~direct~~in ~~equity~~almost ~~investment~~every legislative session. Certain of ~~perpetual~~such ~~preferred~~legislation ~~stock~~could bydramatically affect the ~~Treasury~~ inregulation ~~qualified~~of ~~financial~~the ~~institutions~~banking industry. ~~The~~We ~~program~~cannot ispredict ~~voluntary~~if ~~and requires~~any ansuch ~~institution~~legislation towill ~~comply~~be ~~with~~adopted aor ~~number~~if ofit ~~restrictions~~is ~~and~~adopted ~~provisions, including~~how ~~limits~~it onwould ~~executive~~affect ~~compensation,~~the ~~stock~~business ~~redemptions~~of ~~and~~the ~~declaration of~~Company ~~dividends~~or the Bank. ~~Bancorp~~ ~~received~~Past ~~approval~~history ~~for~~has ~~participation~~demonstrated inthat ~~the~~new ~~CPP,~~legislation ~~but determined~~or ~~not~~changes to ~~participate~~existing laws or regulations usually results in ~~light~~a ofgreater ~~its~~compliance ~~strong~~burden ~~capital~~and ~~position~~therefore generally increases the cost of doing business.

Temporary Liquidity Guarantee Program. In October 2008, the FDIC announced the Temporary Liquidity Guarantee Program, which has two components—the Debt Guarantee Program and the Transaction Account Guarantee Program. Under the Transaction Account Guarantee Program any participating depository institution is able to provide full deposit insurance coverage for non-interest bearing transaction accounts, regardless of the dollar amount. Under the program, effective November 14, 2008, insured depository institutions that have not opted out of the FDIC Temporary Liquidity Guarantee Program will be subject to a 10 basis point surcharge through December 31, 2009, applied to non-interest bearing transaction deposit account balances in excess of $250,000, which surcharge will be added to the institution’s existing risk-based deposit insurance assessments. Beginning January 1, 2010, the surcharge will range from 15 to 25 basis point depending on the institution’s risk category. The Transaction Account Guarantee Program will expire on June 30, 2010. Under the Debt Guarantee Program, qualifying unsecured senior debt issued by a participating institution can be guaranteed by the FDIC. The Debt Guarantee Program has been extended for senior unsecured debt issued after April 1, 2009 and before October 31, 2009 and maturing on or before December 31, 2012. The Company and the Bank chose to participate in both components of the FDIC Temporary Liquidity Guaranty Program.9

~~American~~Table ~~Recovery and Reinvestment Act~~ of 2009. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. ARRA is intended to help stimulate the economy and is a combination of tax cuts and spending provisions applicable to a broad range of areas with an estimated cost of $787 billion. The impact that ARRA may have on the US economy, the Company and the Bank cannot be predicted with certainty.Contents

~~Proposed Legislation~~Effects of Government Monetary Policy

~~Proposed legislation~~Our isearnings ~~introduced~~and ingrowth ~~almost~~are ~~every~~affected ~~legislative~~not ~~session.~~only ~~Certain~~by ofgeneral ~~such legislation~~economic ~~could~~conditions, ~~dramatically~~but ~~affect~~also ~~the~~by ~~regulation of~~ the ~~banking~~fiscal ~~industry. In~~and ~~light~~monetary policies of the ~~2008~~federal ~~financial crisis~~government, ~~legislation~~particularly ~~reshaping~~ the ~~regulatory landscape~~Federal ~~for~~Reserve. ~~financial~~The ~~institutions~~Federal ~~has~~Reserve ~~been~~implements ~~proposed.~~national Amonetary ~~current~~policy ~~proposal includes~~for ~~measures~~such ~~aimed~~purposes toas ~~prevent~~curbing ~~another~~inflation ~~financial~~and ~~crisis~~combating ~~like~~recession, ~~the~~but ~~one~~its ~~in 2008~~open bymarket ~~forming~~operations ain ~~regulatory~~U.S. ~~body~~government tosecurities, ~~protect~~control of the ~~interest~~discount ofrate ~~consumer~~applicable ~~by preventing~~to ~~abusive~~borrowings ~~and~~from ~~risky~~the ~~lending~~Federal ~~practices~~Reserve, ~~increasing supervision~~ and ~~regulation~~ onestablishment ~~financial~~of ~~firms~~reserve ~~deemed~~requirements ~~too~~against ~~big~~certain ~~to fail~~deposits, ~~giving~~influence ~~shareholders~~the ~~an advisory~~growth ~~vote~~of onbank ~~executive pay~~loans, investments and ~~regulating~~deposits, ~~complex~~and ~~derivatives instruments. We~~also ~~cannot~~affect ~~predict~~interest ifrates ~~any such~~charged ~~legislation~~on ~~will~~loans ~~be adopted~~ or ifpaid iton isdeposits. ~~adopted~~The ~~how~~nature itand ~~would~~impact ~~affect the business~~ of ~~Bancorp~~future ~~or the Bank. Past history has demonstrated that new legislation or~~ changes ~~to existing laws or regulations usually results~~ in ~~a greater~~monetary ~~compliance~~policies ~~burden~~ and ~~therefore~~their ~~generally~~impact ~~increases~~on ~~the~~us ~~cost~~cannot ofbe ~~doing business~~predicted with certainty.

~~Effects~~ITEM of1A. ~~Government Monetary~~RISK ~~Policy~~FACTORS

~~Our earnings~~There ~~and growth~~ are ~~affected~~certain ~~not~~risks ~~only~~inherent byto ~~general~~Bancorp’s ~~economic~~business. The ~~conditions,~~material ~~but also~~risks ~~by the fiscal~~ and ~~monetary~~uncertainties ~~policies~~that ofmanagement ~~the~~believes ~~federal~~affect ~~government, particularly~~Bancorp ~~the~~are ~~Federal~~described ~~Reserve~~below. Although ~~The~~we ~~Federal~~have ~~Reserve~~risk ~~implements~~management ~~national monetary~~policies, ~~policy~~procedures ~~for~~and ~~such~~verification ~~purposes~~procedures asin ~~curbing inflation and combating recession~~place, ~~but~~ ~~its~~additional ~~open~~risks ~~market~~and ~~operations~~uncertainties inthat ~~U.S.~~management ~~government~~is ~~securities,~~not ~~control~~aware of ~~the discount~~or ~~rate~~focused ~~applicable~~on toor ~~borrowings~~that ~~from~~management ~~the~~currently ~~Federal~~deems ~~Reserve,~~immaterial ~~and establishment~~may ofalso ~~reserve~~impair ~~requirements~~Bancorp’s ~~against~~business ~~certain~~operations. If ~~deposits,~~any ~~influence~~of the ~~growth~~ offollowing ~~bank~~risks ~~loans,~~actually ~~investments and deposits~~occur, ~~and~~our ~~also~~financial ~~affect~~condition ~~interest rates charged on loans or paid on deposits. The nature~~ and ~~impact~~results of ~~future~~operations ~~changes in~~could ~~monetary~~be ~~policies~~materially and ~~their~~adversely ~~impact on us cannot be predicted with certainty~~affected.

~~ITEM~~The ~~1A.~~continued ~~RISK~~challenging ~~FACTORS~~economic environment could have a material adverse effect on our future results of operations or trading price of our stock.

~~There~~ The national economy, and the financial services sector in particular, are ~~certain~~still ~~risks~~facing ~~inherent~~significant challenges. Substantially all of our loans are to ~~Bancorp’s~~businesses ~~business. The~~and ~~material~~individuals ~~risks~~in Skagit, Snohomish or Whatcom Counties, Washington, markets facing many of the same challenges as the national economy, including elevated unemployment and ~~uncertainties~~ ~~that~~declines ~~management~~in ~~believes~~commercial ~~affect~~and ~~Bancorp~~residential ~~are~~real ~~described below~~estate. Although wesome ~~have~~economic ~~risk~~indicators ~~management~~are ~~policies,~~improving ~~procedures~~both nationally and ~~verification~~ ~~procedures~~ in ~~place~~the markets we serve, ~~additional~~unemployment ~~risks~~remains high and ~~uncertainties~~there ~~that management~~remains issubstantial ~~not~~uncertainty ~~aware~~regarding ofwhen and how strongly a sustained economic recovery will occur. A further deterioration in economic conditions in the nation as a whole or ~~focused~~in onthe markets we serve or ~~that~~a ~~management~~protracted ~~currently~~recovery ~~deems immaterial~~period could result in the following consequences, any of which could have an adverse impact, which may ~~also~~be ~~impair~~material, ~~Bancorp’s~~on our business, ~~operations. If~~financial ~~any~~condition, results of operations and prospects, and could also cause the market price of our stock to decline:

9· economic conditions may worsen, increasing the likelihood of credit defaults by borrowers;

~~Table~~· loan collateral values, especially as they relate to commercial and residential real estate, may decline further, thereby increasing the severity of ~~Contents~~loss in the event of loan defaults;

~~following risks~~· demand ~~actually~~for ~~occur,~~banking ~~our~~products ~~financial~~and ~~condition~~services ~~and~~may ~~results~~decline, ofincluding ~~operations~~services ~~could be~~for ~~materially~~low cost and ~~adversely~~non-interest-bearing ~~affected.~~deposits; and

We· changes ~~cannot~~and ~~accurately~~volatility ~~predict~~in ~~the~~interest ~~effect~~rates ofmay ~~the~~negatively ~~national economic~~impact ~~situation~~the yields on ~~Bancorp’s~~earning ~~future~~assets ~~results~~and the cost of ~~operations~~interest-bearing liabilities.

~~The national~~Bancorp’s ~~economy~~concentration ~~and the financial services sector~~ in ~~particular~~real ~~are~~estate ~~currently facing~~loans ~~challenges~~could ~~of a scope unprecedented in recent history. The Company cannot accurately predict the severity or duration of the current economic downturn, which has~~ adversely ~~impacted~~affect ~~the~~Bancorp’s ~~markets~~earnings ~~we serve. Any further deterioration~~ in ~~the economies of the nation as a whole or in our markets would have~~ an ~~adverse effect, which could be material, on our business, financial condition, results of operations and prospects. While it is impossible to predict how long these conditions may exist, the~~ economic downturn ~~could continue to present risks for some time for the industry and our company~~.

Real estate related loans, including those loans that are collateralized by real estate, comprise the largest category of loans, representing 75 percent of Bancorp’s ~~concentration~~total inloans. Our real estate portfolio consists of commercial and residential lending. These loans are secured by property such as office buildings, commercial business properties, healthcare buildings, agricultural land, timber land and residential properties. Commercial and commercial real estate loans generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. Typically, these types of loans are larger than residential real estate loans and other loans. Because the loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could ~~adversely affect~~result ~~Bancorp’s~~in a loss of earnings infrom these loans, an ~~economic~~increase ~~downturn.~~in the provision for

Real estate loans comprise the largest category of loans and represent 66.4 percent of Bancorp’s total loans at December 31, 2009. Our real estate portfolio consists of commercial and residential lending. These loans are secured by property such as office buildings, commercial business properties, healthcare buildings, agricultural land, timber land and residential properties. Commercial and commercial real estate loans generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. Typically, these types of loans are larger than residential real estate loans and other loans. Because the loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition.10

~~There has~~Table ~~been an economic downturn throughout the country, particularly in the housing and commercial real estate sectors. While the Pacific Northwest economy typically lags the national economy, the effects~~ of the economic downturn are now significantly impacting our market area. Further downturn in the market areas we serve may cause us to have lower earnings and could increase our credit risk associated with our loan portfolio, as the collateral securing those loans may decrease in value. A continued downturn in the local economy could have a material adverse effect on both the ability of borrowers to repay loans, as well as the value of the real property held as collateral. Substantially all of our loans are to businesses and individuals in Skagit, Snohomish or Whatcom Counties and any decline in the economy of this market area could impact us adversely. As a lender, we are exposed to the risk that our customers will be unable to repay their loans in accordance with their terms, and that any collateral securing the payment of their loans may not be sufficient to assure repayment.Contents

~~Our allowance for~~ loan losses ~~may~~or ~~not~~an beincrease ~~adequate~~in ~~to cover actual~~ loan ~~losses~~charge-offs, which could ~~adversely~~have ~~affect~~an adverse impact on our ~~earnings~~results of operations and financial condition.

~~Bancorp maintains~~The anBank ~~allowance~~has for loan losses in an amount that we believe is adequate to provide for losses inherent in our loan portfolio. While we strive to carefully manage and monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as nonperforming or potential problem loans. By closely monitoring our credit quality, we attempt to identify deteriorating loans before they become nonperforming assets and adjust the loan loss reserve accordingly. However, because future events are uncertain, and if the economy continues to deteriorate, there may be loans that deteriorate to a ~~nonperforming~~high ~~status~~concentration ~~in an accelerated time frame. As a result, future additions to the allowance may be necessary. Because the loan portfolio contains a number~~ of loans ~~with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans, requiring an increase~~ to ~~the loan loss allowance. As~~ a ~~result,~~relatively ~~future additions~~small togroup ~~the allowance at elevated levels may be required based on changes in the mix~~ of ~~loans~~large ~~comprising the portfolio, changes in the financial condition of~~ borrowers, ~~such~~which ascould ~~may~~adversely ~~result~~affect ~~from~~Bancorp’s ~~changes~~earnings inif ~~economic~~some ~~conditions, or as a result~~ of ~~incorrect~~those ~~assumptions~~customers bycease ~~management~~doing inbusiness ~~determining~~with the allowance. Additionally, banking regulators, as an integral part of their supervisory function, periodically review our loan portfolio and the adequacy of our allowance for loan losses. These regulatory agencies may require us ~~to recognize further loan loss provisions~~ or ~~charge-offs~~certain ~~based upon~~of ~~their~~those ~~judgments,~~larger ~~which~~loans ~~may~~incur be problems.

10Approximately 48% of our loan portfolio as of December 31, 2010 was comprised of loans to a group of approximately 44 customers. If any material portion of those customers ceased doing business with the Bank, it could have a materially adverse effect on Bancorp’s earnings and financial condition.

~~Table~~Our ofallowance ~~Contents~~for loan losses may not be adequate to cover actual loan losses, which could adversely affect our earnings.

~~different from~~Bancorp ~~ours~~maintains an allowance for loan losses in an amount that we believe is adequate to provide for losses inherent in the loan portfolio. ~~Any~~While we strive to carefully manage and monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as nonperforming or potential problem loans. By closely monitoring our credit quality, we attempt to identify deteriorating loans before they become nonperforming assets and adjust the loan loss reserve accordingly. However, because future events are uncertain, and if the economy continues to deteriorate, there may be loans that deteriorate to a nonperforming status in an accelerated time frame. As a result, future additions to the allowance may be necessary. Because the loan portfolio contains a number of loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans, requiring an increase to the loan loss allowance. As a result, future additions to the allowance at elevated levels may be required based on changes in the mix of loans comprising the portfolio, changes in the financial condition of borrowers, such as may result from changes in economic conditions, or as a result of actual events being different from assumptions used by management in determining the allowance. Additionally, banking regulators, as an integral part of their supervisory function, periodically review our loan portfolio and the adequacy of our allowance for loan losses. These ~~would~~regulatory ~~have an~~agencies ~~adverse~~may ~~effect~~require us to recognize further loan loss provisions or charge-offs based upon their judgments, which may be ~~material,~~different from ours. Any increase in the allowance for loan losses could have a negative effect on our financial condition and results of ~~operations~~operation.

A continued tightening of the credit markets may make it difficult to obtain adequate funding for loan growth, which could adversely affect our earnings.

A continued tightening of the credit markets and the inability to obtain or retain adequate funds for continued loan growth at an acceptable cost may negatively affect our asset growth and liquidity position and, therefore, our earnings capability. In addition to core deposit growth, maturity of investment securities and loan payments, Bancorp also relies on alternative funding sources through correspondent banking, and borrowing lines with the Federal Reserve Bank to fund loans. In the event the current economic downturn continues, particularly in the housing market, these resources could be negatively affected, both as to price and availability, which would limit and or raise the cost of the funds available to Bancorp.

Fluctuating interest rates can adversely affect Bancorp’s profitability.

Bancorp’s profitability and cash flows are dependent to a large extent upon net interest income. Net interest income is the difference (or “spread”) between the interest earned on loans, securities and other interest-earning assets and Bancorp’s cost of funds, primarily interest expense on deposits and borrowings. Interest rates are highly sensitive to many factors that are beyond our control including, but not limited to, general economic conditions, and policies of various governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, impact the level of loans, deposits and investments, the credit profile of existing loans and the rates received on loans and investment securities and the rates paid on deposits and borrowings. If the interest paid on deposits increases at a faster rate than the interest received on loans and investment securities, Bancorp’s net interest income, and therefore earnings could be adversely affected. Earnings could also be adversely affected if interest received on loans and investments ~~decrease~~ decreases faster than interest paid on deposits.

~~Competition in our market area may limit Bancorp’s future success.~~11

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

WeCompetition ~~operate~~ in aour ~~highly~~market ~~regulated~~area ~~environment~~may ~~and~~limit weBancorp’s ~~cannot predict~~future ~~the effect of recent and pending federal legislation~~success.

~~As discussed~~Commercial ~~more~~banking ~~fully~~is ina ~~the~~highly ~~section~~competitive ~~entitled “Supervision and Regulation”,~~ business. Bancorp iscompetes ~~subject~~with toother ~~extensive~~commercial ~~regulation~~banks, ~~supervision~~savings and ~~examination~~loan ~~by federal~~associations, ~~and~~credit ~~state~~unions ~~banking~~and ~~authorities. In~~finance ~~addition,~~companies asoperating ain ~~publicly~~our ~~traded company,~~market ~~Bancorp~~area. We isare subject to ~~regulation~~substantial bycompetition ~~the~~for ~~Securities~~loans and ~~Exchange Commission. Any~~deposits ~~change~~from inother ~~applicable regulations~~financial ~~or federal, state or local legislation could have a substantial impact on Bancorp and its operations~~institutions. ~~Additional~~Some ~~legislation~~of ~~and regulations~~our ~~that~~competitors ~~could~~are ~~significantly~~not ~~affect~~subject ~~Bancorp’s~~to ~~powers,~~the ~~authority~~same ~~and operations~~degree ~~may~~of beregulation ~~enacted~~and orrestriction ~~adopted~~as inwe ~~the~~are. Some ~~future,~~of ~~which~~our ~~could~~competitors have agreater ~~material adverse effect on Bancorp’s~~ financial ~~condition~~resources ~~and~~than ~~results~~we ~~of operations~~do. ~~Further,~~We ~~regulators~~compete ~~have~~for ~~significant~~funds ~~discretion~~with ~~and~~other ~~authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by~~ financial institutions ~~and~~that, ~~holding companies~~ in ~~the~~most ~~performance of~~cases, ~~their~~are ~~supervisory~~larger and ~~enforcement~~able ~~duties. Recently~~to ~~these~~provide ~~powers~~a ~~have been~~greater ~~utilized~~variety ~~more~~of ~~frequently~~services ~~due~~than towe ~~the~~do ~~serious~~and ~~national,~~thus ~~regional~~may ~~and~~obtain ~~local economic~~deposits ~~conditions~~at ~~Bancorp~~lower isrates ~~facing~~of interest. ~~The~~If ~~exercise~~we ofare ~~regulatory authority~~unable ~~may~~to ~~have~~effectively acompete ~~negative~~in ~~impact~~our onmarket ~~Bancorp’s~~area, ~~financial~~our ~~condition~~business and results of operations could be adversely affected.

~~Bancorp cannot~~We ~~predict~~operate ~~the~~in ~~actual~~a ~~effects~~highly ofregulated ~~recent~~environment ~~legislation or the proposed regulatory reform measures~~ and ~~various~~changes ~~governmental,~~of ~~regulatory,~~or ~~monetary~~increases ~~and fiscal initiatives which have been and may be enacted on the financial markets~~in, on ~~Bancorp. The~~or ~~terms~~supervisory ~~and~~enforcement ~~costs~~ of ~~these activities~~, banking or ~~the~~other ~~failure~~laws ~~of these~~and ~~actions~~regulations toor ~~help~~governmental ~~stabilize~~fiscal ~~the financial markets, asset prices, market liquidity and a continuation~~ or ~~worsening~~monetary ofpolicies ~~current~~could ~~financial~~adversely ~~market~~affect ~~and~~ us.

11Bancorp is subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly reporting company, Bancorp is subject to regulation by the Securities and Exchange Commission. Any change in applicable regulations or federal, state or local legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on Bancorp and its operations. Changes in laws and regulations may also increase Bancorp’s expenses by imposing additional fees or taxes or restrictions on its operations. Additional legislation and regulations that could significantly affect Bancorp’s powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on Bancorp’s financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to Bancorp’s reputation, all of which could adversely affect our business, financial condition or results of operations.

~~Table~~In that regard, sweeping financial regulatory reform legislation was enacted in July 2010. Among other provisions, the new legislation (i) creates a new Bureau of ~~Contents~~Consumer Financial Protection with broad powers to regulate consumer financial products such as credit cards and mortgages, (ii) creates a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, (iii) will lead to new capital requirements from federal banking agencies, (iv) places new limits on electronic debt card interchange fees, and (v) will require the Securities and Exchange Commission and national stock exchanges to adopt significant new corporate governance and executive compensation reforms. The new legislation and regulations are expected to increase the overall costs of regulatory compliance.

~~economic conditions~~Further, ~~could~~regulators ~~materially~~have significant discretion and ~~adversely~~authority ~~affect~~to ~~our~~prevent ~~business~~or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. Recently, these powers have been utilized more frequently due to the serious national, regional and local economic conditions we are facing. The exercise of regulatory authority may have a negative impact on Bancorp’s financial condition, and results of operations. Additionally, ~~and~~Bancorp’s business is affected significantly by the ~~trading~~fiscal ~~price~~and monetary policies of ~~our~~the ~~common~~U.S. ~~stock~~federal government and its agencies, including the Federal Reserve Board.

~~Our~~Bancorp ~~ability~~cannot toaccurately ~~access~~predict ~~markets~~the ~~for~~full ~~funding~~effects ~~and~~of ~~acquire~~recent legislation or the various other governmental, regulatory, monetary and ~~retain~~ ~~customers~~fiscal ~~could~~initiatives which have been and may be ~~adversely~~enacted ~~affected~~on bythe financial markets, on Bancorp and on the ~~deterioration~~Bank. The terms and costs of ~~other financial~~these ~~institutions~~activities, or the failure of these actions to ~~the~~help ~~extent~~stabilize the financial ~~service~~markets, ~~industry’s reputation~~asset isprices, ~~damaged~~market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.

~~Reputation risk~~Our isability ~~the risk~~ to ~~liquidity,~~access ~~earnings~~markets ~~and~~for ~~capital~~funding ~~arising from negative publicity regarding the financial services industry. The financial services industry continues to be featured in negative headlines about the global~~ and ~~national~~acquire ~~credit crisis~~ and ~~the~~retain ~~resulting~~customers stabilization legislation enacted by the U.S. federal government. These reports can be damaging to the industry’s image and potentially erode consumer confidence in insured financial institutions, such as our banking subsidiary. In addition, our ability to engage in routine funding and other transactions could be adversely affected by the ~~actions~~deterioration ~~and financial condition~~ of other financial ~~institutions.~~ ~~Financial services~~ institutions ~~are interrelated as a result of trading, clearing, counterparty~~ or ~~other~~to ~~relationships.~~the Asextent ~~a result, defaults by, or even rumors or questions about, one or more financial services institutions, or~~ the financial ~~services~~service industry generally, could lead to market-wide liquidity problems, losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience material changes in the level of deposits as a direct or indirect result of other banks’s ~~difficulties~~reputation oris ~~failure, which could affect the amount of capital we need~~damaged.

~~The~~Reputation ~~FDIC has~~risk ~~increased~~is ~~insurance~~the ~~premiums~~risk to ~~restore~~liquidity, earnings and ~~maintain~~capital arising from negative publicity regarding the ~~federal~~financial ~~deposit insurance~~services ~~fund,~~industry. The ~~and~~financial ~~there~~services ~~may~~industry continues to be ~~additional~~featured ~~future~~in ~~premium~~negative ~~increases~~headlines about the global and ~~special~~ ~~assessments~~national credit crisis and the resulting stabilization legislation enacted by the U.S. federal government. These

The FDIC adopted a final rule revising its risk-based assessment system, effective April 1, 2009. The changes to the assessment system involve adjustments to the risk-based calculation of an institution’s unsecured debt, secured liabilities and brokered deposits. The potential increase in FDIC insurance premiums could have a significant impact on Bancorp.12

~~The FDIC~~Table ~~also has recently required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter~~ of 2009 and for 2010, 2011 and 2012, and increased the regular assessment rate by three basis points effective January 1, 2011, as a means of replenishing the deposit insurance fund. The prepayment was collected on December 30, 2009, and was accounted for as a prepaid expense amortized over the prepayment period.Contents

~~The FDIC~~reports ~~also~~can ~~recently~~be ~~imposed~~damaging ato ~~special~~the ~~deposit~~industry’s ~~insurance~~image ~~assessment~~and ofpotentially ~~five~~erode ~~basis points~~consumer onconfidence ~~all~~in insured financial institutions, such as our banking subsidiary. ~~This~~In ~~emergency~~addition, ~~assessment~~our ~~was calculated~~ability ~~based~~to onengage in routine funding and other transactions could be adversely affected by the ~~insured~~actions ~~institution’s~~and ~~assets~~financial atcondition ~~June 30~~of other financial institutions. Financial services institutions are interrelated as a result of trading, ~~2009~~clearing, ~~and collected~~counterparty onor ~~September 30,~~other ~~2009~~relationships. ~~Based~~ onAs ~~our~~a ~~June 30~~result, ~~2009 assets~~defaults ~~subject~~by, toor ~~the~~even ~~FDIC~~rumors ~~assessment~~or questions about, one or more financial services institutions, or the ~~special~~financial ~~assessment~~services ~~was~~industry ~~approximately $260~~generally,~~000~~ could lead to market-wide liquidity problems, losses of depositors, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. ~~This~~ ~~special~~We ~~assessment~~could ~~was~~experience material changes in ~~addition~~the tolevel of deposits as a direct or indirect result of other banks’ difficulties or failure, which could affect the ~~regular quarterly~~amount ~~risk-based~~of ~~assessment~~capital we need.

The FDIC ~~deposit~~has increased insurance ~~fund~~premiums ~~may~~to ~~suffer~~restore ~~additional~~and ~~losses~~maintain in the ~~future~~federal ~~due to bank failures. There can be no assurance that there will not be additional significant~~ deposit insurance ~~premium increases~~fund, ~~special~~and ~~assessments or~~there ~~prepayments~~may inbe ~~order~~additional tofuture ~~restore the insurance fund’s reserve ratio. Any significant~~ premium increases, ~~special assessments or prepayment requirements could have a material adverse effect on our financial condition~~ and ~~results~~special ~~of operations~~assessments.

~~There~~In is2009, ~~little~~the ~~trading~~FDIC ~~activity~~imposed ina ~~Bancorp’s~~special ~~stock~~deposit insurance assessment of five basis points on all insured institutions, and also required insured institutions to prepay estimated quarterly risk-based assessments through 2012.

~~There is~~The noDodd-Frank ~~active~~Act ~~market~~established ~~for~~1.35% ~~our~~as ~~outstanding~~the ~~shares,~~minimum ~~and~~deposit itinsurance isfund ~~unlikely~~reserve ratio. The FDIC has determined that ~~an established~~the ~~market~~fund ~~for~~reserve ~~our~~ratio ~~shares~~should be 2.0% and has adopted a plan under which it will ~~develop~~meet inthe statutory minimum fund reserve ratio of 1.35% by the ~~near~~statutory ~~future~~deadline of September 30, 2020. ~~We presently~~ doThe ~~not~~Dodd-Frank ~~intend~~Act requires the FDIC to ~~seek~~offset ~~listing~~the effect on institutions with assets less than $10 billion of the ~~shares~~increase onin ~~any~~the ~~securities exchange~~statutory minimum fund reserve ratio to 1. It35% isfrom ~~not~~the ~~known~~former ~~whether~~statutory ~~significant~~minimum ~~trading~~of ~~activity~~1.15%. The ~~will~~FDIC ~~take place~~has ~~for~~not ~~several~~announced ~~years,~~how ifit atwill ~~all. Accordingly,~~implement ~~our~~this ~~shares~~offset ~~should~~or ~~be considered~~how aslarger ainstitutions ~~long-term~~will ~~investment~~be affected by it.

~~There~~Despite ~~are~~the ~~restrictions~~FDIC’s onactions ~~changes~~to restore the deposit insurance fund, the fund will suffer additional losses in ~~control~~the future due to failures of ~~Bancorp~~insured institutions. There can be no assurance that ~~could~~ ~~decrease~~there ~~our~~will ~~shareholders’~~not ~~chance~~be additional significant deposit insurance premium increases, special assessments or prepayments in order to ~~realize~~restore athe insurance fund’s reserve ratio. Any significant premium increases or special assessments could have a material adverse effect on ~~their~~the ~~shares~~Company’s financial condition and results of operations.

12There is little trading activity in Bancorp’s stock

~~Table~~There is no active market for our outstanding shares, and it is unlikely that an established market for our shares will develop in the near future. We presently do not intend to seek listing of ~~Contents~~the shares on any securities exchange. It is not known whether significant trading activity will take place for several years, if at all. Accordingly, our shares should be considered as a long-term investment.

~~Provisions in~~There ~~our~~are ~~Articles~~restrictions ofon ~~Incorporation~~changes ~~include~~in acontrol ~~staggered Board~~ of ~~Directors,~~Bancorp ~~and non-monetary~~that ~~factor~~could ~~provisions~~decrease ~~and~~our anshareholders’ ~~affirmative~~chance ~~vote of two-thirds of shares (entitled~~ to berealize ~~counted)~~a topremium ~~approve~~on antheir ~~interested shareholder transaction, any or all of which could have the effect of hindering, delaying or preventing a takeover bid~~shares.

~~ITEM~~Provisions ~~1B.~~in ~~UNRESOLVED~~our ~~STAFF~~Articles ~~COMMENTS~~of Incorporation include a staggered Board of Directors, and non-monetary factor provisions and an affirmative vote of two-thirds of shares (entitled to be counted) to approve an interested shareholder transaction, any or all of which could have the effect of hindering, delaying or preventing a takeover bid.

~~None~~ITEM 1B. UNRESOLVED STAFF COMMENTS

~~ITEM 2. PROPERTIES~~None

~~Bancorp~~ITEM ~~is headquartered in Burlington, Washington~~2. The building at 301 East Fairhaven Avenue is owned by Bancorp and houses a branch and administrative offices. Bancorp completed construction and occupied the building in 1961. There is also a building at 121 North Spruce Street in Burlington, a building at 323 E. Fairhaven Avenue and at 327 Fairhaven Avenue in Burlington that houses some of the administrative offices. There are eleven branches in addition to the head office. In 2008, Bancorp announced the closure of its Boulevard branch in Burlington and on October 31, 2008, the branch was closed.PROPERTIES

Bancorp ~~owns~~is ~~the buildings~~headquartered ~~and~~in ~~land~~Burlington, ~~occupied~~Washington. byThe ~~twelve~~building ~~(12)~~at ~~branches.~~301 ~~All~~East ~~offices~~Fairhaven ~~are functional,~~Avenue ~~properly~~is ~~located~~owned by Bancorp and ~~provide~~houses ~~adequate~~a ~~working~~branch ~~facilities. In~~and ~~addition~~administrative tooffices. ~~the~~Bancorp ~~land~~completed construction and ~~buildings~~occupied ~~owned by~~the ~~Bancorp,~~building itin 1961. There is also ~~owns~~a ~~all~~building ofat ~~its~~121 ~~furniture~~North Spruce Street in Burlington, ~~fixtures~~a ~~and~~building ~~equipment~~at ~~including data~~323 ~~processing~~E. ~~equipment~~Fairhaven Avenue and ~~much~~at of327 ~~its software~~E. AtFairhaven ~~December 31,~~Avenue ~~2009, the~~in ~~net~~Burlington ~~book~~that ~~value~~houses some of ~~Bancorp’s~~the ~~premises~~administrative ~~and~~offices. ~~equipment~~There ~~was~~are ~~$10.9~~eleven ~~million~~branches in addition to the head office.

~~ITEM 3. LEGAL PROCEEDINGS~~13

~~From~~Table ~~time to time, Bancorp may be a plaintiff and/or defendant in certain claims and legal actions arising in the ordinary course~~ of commercial banking involving real estate lending transactions and other ordinary routine litigation incidental to the business of Bancorp. Bancorp is not a party to any pending legal proceedings that Bancorp believes would have a material adverse effect on the financial condition of Bancorp.Contents

~~ITEM~~Bancorp 4owns the buildings and land occupied by twelve (12) branches. ~~REMOVED~~All ~~AND~~offices ~~RESERVED~~are functional, properly located and provide adequate working facilities. In addition to the land and buildings owned by Bancorp, it also owns all of its furniture, fixtures and equipment including data processing equipment and much of its software. At December 31, 2010, the net book value of Bancorp’s premises and equipment was $10.8 million.

~~None~~ITEM 3. LEGAL PROCEEDINGS

13From time to time, Bancorp may be a plaintiff and/or defendant in certain claims and legal actions arising in the ordinary course of commercial banking involving real estate lending transactions and other ordinary routine litigation incidental to the business of Bancorp. Bancorp is not a party to any pending legal proceedings that Bancorp believes would have a material adverse effect on the financial condition of Bancorp.

~~Table of~~ITEM ~~Contents~~4. [REMOVED AND RESERVED]

~~PART II~~None.

~~ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES~~14

~~Bancorp~~Table ~~has only one class~~ of stock, which is common stock and at December 31, 2009, there were 776 shareholders of record. Bancorp’s stock is not actively traded or quoted and no broker currently makes a market in the stock. However, sales and transfers of the stock do occur periodically. Skagit State Bank acts as transfer agent for Bancorp stock. To facilitate trading, the Bank maintains a list of persons interested (known to the Bank) in either purchasing or selling Bancorp stock. Purchasers and sellers then negotiate their own transactions with the Bank acting as transfer agent for those transactions. Bancorp did not repurchase any shares for year ended 2009. The following table summarizes the Bancorp’s share repurchases for year ended 2008.Contents

Period		Total Number of Shares Purchased(1)		Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Program		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - March 31, 2008		85,022		$	180.00		—		—

PART II

~~(1)Represents~~ITEM ~~shares~~5. ~~that were~~MARKET ~~purchased~~FOR inREGISTRANT’S aCOMMON ~~private~~EQUITY, ~~purchase~~RELATED ~~from~~STOCKHOLDER ~~one~~MATTERS ~~corporate~~AND ~~owner.~~ISSUER PURCHASES OF EQUITY SECURITIES

~~The~~Bancorp ~~table~~has ~~below~~only ~~indicates the~~one ~~high~~class of stock, which is common stock and ~~low~~at ~~market~~December 31, ~~price~~2010, there were 779 shareholders of record. Bancorp’s stock is not actively traded or quoted and ~~the~~no ~~cash~~broker ~~dividends~~currently ~~paid~~makes ~~over the~~a ~~last~~market ~~two~~in ~~years. The~~the stock. ~~transfer records~~However, ~~maintained~~sales byand transfers of the ~~Bank,~~stock asdo ~~transfer~~occur ~~agent,~~periodically. Skagit ~~indicate~~State ~~that~~Bank ~~there~~acts ~~have been~~as ~~limited~~transfer ~~transactions~~agent ~~involving~~for Bancorp’s stock. ~~The~~To ~~price~~facilitate ~~information~~trading, ~~shown~~the inBank ~~the~~maintains ~~following table~~a islist of persons interested (known to the ~~best~~Bank) ~~knowledge~~in ofeither ~~management~~purchasing ~~based~~or ~~upon~~selling ~~information~~Bancorp ~~provided informally~~stock. Purchasers byand ~~the~~sellers ~~parties~~then tonegotiate their own transactions with the Bank acting as transfer agent for those transactions. No ~~assurance~~From ~~can~~time beto ~~given~~time, ~~that~~Bancorp ~~such~~may ~~prices~~also ~~are~~repurchase ~~representative~~shares offrom ~~the actual~~existing ~~market~~shareholders. Bancorp ~~value~~did ofnot ~~the~~repurchase ~~Common~~any ~~Stock~~shares for year ended 2010.

~~Year~~The ~~Ended~~table ~~12/31/2009~~below indicates the high and low market price of Bancorp stock and the cash dividends paid over the last two years. The stock transfer records maintained by the Bank, as transfer agent, indicate that there have been limited transactions involving Bancorp’s stock. The price information shown in the following table is to the best knowledge of management based upon information provided informally by the parties to the transactions. No assurance can be given that such prices are representative of the actual market value of the Common Stock, particularly because of the limited trading in Bancorp’s stock.

	Market Price				Cash Dividend
	High		Low		Declared
1st Qtr	$	205.00	$	161.00	$	—
2nd Qtr	200.00		166.67		2.25
3rd Qtr	193.00		175.00		—
4th Qtr	185.00		150.00		1.25

Year Ended 12/31/2010

Year Ended 12/31/2008

	Market Price				Cash Dividend
	High		Low		Declared
1st Qtr	$	200.00	$	150.00	$	—
2nd Qtr	200.00		150.00		1.75
3rd Qtr	170.00		150.00		—
4th Qtr	160.00		150.00		2.25

	Market Price				Cash Dividend
	High		Low		Declared
1st Qtr	$	200.50	$	180.00	$	—
2nd Qtr	200.00		190.00		2.25
3rd Qtr	200.00		190.00		—
4th Qtr	200.00		167.00		2.25

Year Ended 12/31/2009

The following table summarizes information about the Bank’s equity compensation plan as of December 31, 2009.

	Market Price				Cash Dividend
	High		Low		Declared
1st Qtr	$	205.00	$	161.00	$	—
2nd Qtr	200.00		166.67		2.25
3rd Qtr	193.00		175.00		—
4th Qtr	185.00		150.00		1.25

		Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights			Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders		30,325		$	170.15		68,710

~~ITEM~~Table 6.of ~~SELECTED FINANCIAL DATA~~Contents

The ~~information~~following ~~captioned “Selected~~table ~~Financial~~summarizes ~~Data”~~information ~~contained~~about in the ~~2009~~Company’s ~~Annual~~equity ~~Report~~compensation toplan ~~Shareholders (Annual~~as ~~Report),~~of ~~which is required by this item is incorporated by reference to the Section~~December ~~filed~~31, ~~as Exhibit 13 to this report~~2010.

	Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders	28,955	$	173.89	69,608

~~Table of~~ITEM ~~Contents~~6. SELECTED FINANCIAL DATA

~~ITEM~~The 7.information ~~MANAGEMENT’S~~captioned ~~DISCUSSION~~“Selected ~~AND~~Financial ~~ANALYSIS~~Data” OFcontained ~~FINANCIAL~~in ~~CONDITION~~the ~~AND~~2010 ~~RESULTS~~Annual OFReport ~~OPERATIONS~~to Shareholders (Annual Report), which is required by this item is incorporated by reference to the Section filed as Exhibit 13 to this report.

~~The~~ITEM ~~information~~7. ~~required by~~MANAGEMENT’S ~~this~~DISCUSSION ~~item~~AND isANALYSIS ~~incorporated~~OF byFINANCIAL ~~reference~~CONDITION toAND ~~the~~RESULTS ~~section~~OF ~~captioned “Management Discussion and Analysis” section in the Annual Report, which is filed as Exhibit 13 to this report.~~OPERATIONS

~~ITEM~~The ~~7A.~~information ~~QUANTITATIVE~~required ~~AND~~by ~~QUALITATIVE~~this ~~DISCLOSURES~~item ~~ABOUT~~is ~~MARKET~~incorporated ~~RISK~~by reference to the section captioned “Management Discussion and Analysis” section in the Annual Report, which is filed as Exhibit 13 to this report.

~~The~~ITEM ~~information~~7A. ~~required by~~QUANTITATIVE ~~this~~AND ~~item~~QUALITATIVE isDISCLOSURES ~~incorporated~~ABOUT byMARKET ~~reference to the section “Market Risk” in the “Management Discussion and Analysis” in the Annual Report, which is filed as Exhibit 13 to this report.~~RISK

~~ITEM~~The 8.information ~~FINANCIAL~~required ~~STATEMENTS~~by ~~AND~~this ~~SUPPLEMENTARY~~item ~~DATA~~is incorporated by reference to the section “Market Risk” in the “Management Discussion and Analysis” in the Annual Report, which is filed as Exhibit 13 to this report.

~~The~~ITEM ~~financial statements~~8. ~~required~~FINANCIAL bySTATEMENTS ~~this~~AND ~~item~~SUPPLEMENTARY ~~are incorporated by reference from the Annual Report, which is filed as Exhibit 13 to this report.~~DATA

~~(a)(1) Financial~~The ~~Statements~~financial statements required by this item are incorporated by reference from the Annual Report, which is filed as Exhibit 13 to this report.

Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income Consolidated Statements of Cash Flow Notes to Consolidated Financial Statements

		(a)(1)	Financial Statements
			Report of Independent Registered Public Accounting Firm
			Consolidated Balance Sheets
			Consolidated Statements of Income
			Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
			Consolidated Statements of Cash Flow
			Notes to Consolidated Financial Statements

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A~~(T)~~. CONTROLS AND PROCEDURES AND CORPORATE GOVERNANCE

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of Bancorp’s management, including the President/Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the President/CEO and CFO have concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms.

~~Changes in Internal Controls~~16

~~The~~Table ~~management~~ of Bancorp has assessed the effectiveness of its internal control over financial reporting at December 31, 2009. To make this assessment, Bancorp used the criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, Bancorp believes that as of December 31, 2009, the internal control system over financial reporting met those criteria.Contents

~~This~~information ~~annual~~required ~~report~~to onbe ~~Form 10-K does~~disclosed ~~not~~by ~~include~~us anin ~~attestation~~reports ~~report~~that ofwe ~~our~~file ~~registered~~or ~~public~~submit ~~accounting~~under ~~firm regarding~~the ~~internal~~Securities ~~control~~Exchange ~~over~~Act ~~financial~~of ~~reporting. Additionally, management’s~~1934 ~~report~~is ~~was~~recorded, ~~not~~processed, ~~subject~~summarized toand ~~attestation~~timely byreported ~~our~~as ~~registered~~provided ~~public accounting~~in ~~firm~~the ~~pursuant~~SEC’s ~~to temporary~~ rules ~~of the Securities~~ and ~~Exchange Commission that permits us to provide only management’s report in this annual report~~forms.

~~ITEM~~Management’s ~~9B.~~Annual ~~OTHER~~Report ~~INFORMATION~~on Internal Control over Financial Reporting

~~None~~Bancorp’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control system has been designed to provide reasonable assurance to Bancorp’s management and Board of Directors regarding the preparation and fair presentation of Bancorp’s published financial statements. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect Bancorp’s transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of Bancorp’s financial statements; providing reasonable assurance that receipts and expenditures are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on Bancorp’s financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of Bancorp’s financial statements would be prevented or detected.

15Pursuant to Section 404(c) of the Sarbanes-Oxley Act and amended rules promulgated thereunder, as a non-accelerated filer, Bancorp is not required to obtain an attestation report of our registered public accounting firm regarding internal control over financial reporting.

~~Table of~~ITEM ~~Contents~~9B. OTHER INFORMATION

~~PART III~~None

~~ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT~~17

~~For~~Table ~~information concerning directors and certain executive officers~~ of Bancorp and compliance with Section 16 filing requirements, see the sections entitled “Information with Respect to Nominees and Continuing Directors” and “Compliance with Section 16(a) Filing Requirements” in Bancorp’s definitive 2010 Annual Meeting Proxy Statement (“Proxy Statement”) that is incorporated herein by reference.Contents

For information regarding our code of ethics applicable to our principal executive officer and our principal financial officer see the section entitled “Corporate Governance — Code of Ethics” in Bancorp’s Proxy Statement which is incorporated herein by reference. Information regarding Bancorp’s audit committee and financial expert appears under the section entitled “Meetings and Committees of the Board of Directors — Certain Committees of the Board of Directors” in our Proxy Statement and is incorporated by reference.PART III

ITEM 1110. DIRECTORS AND EXECUTIVE ~~COMPENSATION~~OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT

For information concerning directors and certain executive ~~compensation~~officers of Bancorp and compliance with Section 16 filing requirements, see the sections entitled “~~Compensation~~Information of with Respect to Nominees and Continuing Directors” and “~~Executive~~Compliance ~~Compensation~~with Section 16(a) Filing Requirements” in Bancorp’s definitive 2011 Annual Meeting Proxy Statement (“Proxy Statement”) that is incorporated herein by reference.

~~ITEM~~For 12information regarding our code of ethics applicable to our principal executive officer and our principal financial officer see the section entitled “Corporate Governance — Code of Ethics” in Bancorp’s Proxy Statement which is incorporated herein by reference. Information ~~SECURITY~~regarding ~~OWNERSHIP~~Bancorp’s OFaudit ~~CERTAIN~~committee ~~BENEFICIAL~~and ~~OWNERS~~financial ~~AND~~expert ~~MANAGEMENT~~appears ~~AND~~under ~~RELATED~~the ~~STOCKHOLDER~~section ~~MATTERS~~entitled “Meetings and Committees of the Board of Directors — Certain Committees of the Board of Directors” in our Proxy Statement and is incorporated by reference.

~~For~~ITEM ~~information concerning~~11. ~~ownership~~EXECUTIVE of certain beneficial owners and management, see the section entitled “Security Ownership of Certain Beneficial Owners and Management” in Bancorp’s Proxy Statement that is incorporated herein by reference.COMPENSATION

~~ITEM~~For ~~13.~~information ~~CERTAIN~~concerning ~~RELATIONSHIPS~~executive ~~AND~~compensation ~~RELATED~~see ~~TRANSACTIONS~~the ~~AND~~sections ~~DIRECTOR~~entitled ~~INDEPENDENCE~~“Compensation of Directors” and “Executive Compensation” in Bancorp’s Proxy Statement that is incorporated herein by reference.

~~For~~ITEM ~~information concerning~~12. ~~transactions~~SECURITY ~~with~~OWNERSHIP ~~management~~OF ~~and~~CERTAIN ~~director~~BENEFICIAL ~~independence,~~OWNERS ~~see~~AND ~~the sections~~MANAGEMENT ~~entitled~~AND ~~“Transactions~~RELATED ~~with~~STOCKHOLDER ~~Management” and “Corporate Governance — Director Independence” in Bancorp’s Proxy Statement that is incorporated herein by reference.~~MATTERS

~~ITEM~~For ~~14.~~information ~~PRINCIPAL~~concerning ~~ACCOUNTANT~~ownership ~~FEES~~of ~~AND~~certain ~~SERVICES~~beneficial owners and management, see the section entitled “Security Ownership of Certain Beneficial Owners and Management” in Bancorp’s Proxy Statement that is incorporated herein by reference.

~~For~~ITEM ~~information concerning~~13. ~~principal~~CERTAIN ~~accountant~~RELATIONSHIPS ~~fees~~AND ~~and~~RELATED ~~services,~~TRANSACTIONS ~~see~~AND ~~the~~DIRECTOR ~~section entitled “Independent Registered Public Accounting Firm” in Bancorp’s Proxy Statement that is incorporated herein by reference.~~INDEPENDENCE

16For information concerning transactions with management and director independence, see the sections entitled “Transactions with Management” and “Corporate Governance — Director Independence” in Bancorp’s Proxy Statement that is incorporated herein by reference.

~~Table of~~ITEM ~~Contents~~14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

~~PART IV~~For information concerning principal accountant fees and services, see the section entitled “Independent Registered Public Accounting Firm” in Bancorp’s Proxy Statement that is incorporated herein by reference.

~~ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES~~18

~~The index~~Table ~~to the consolidated financial statements required by this item are set forth in Item 8~~ of ~~this report.~~Contents

~~(a)(2) Schedules: None~~PART IV

~~(a)(3) Exhibits:~~ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation (1)
3.2		Bylaws (1)
10.1*		Change of Control Agreement between the Bank and Richard C. Humphrey dated August 15, 2006(1)
10.2*		Change in Control Agreement between the Bank and Carla Tucker dated November 26, 2007(2)
10.3*		2005 Incentive Stock Plan(3)
10.4*		Restricted Stock Agreement(3)
10.5*		Form of Stock Option Agreement(3)
13		Portions of the 2009 Annual Report
14		Code of Ethics (4)
23		Consent of Moss Adams
31.1		Certification of Cheryl R. Bishop, Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Executive Vice President/Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certifications Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

The index to the consolidated financial statements required by this item are set forth in Item 8 of this report.

* Denotes Compensation plan or agreement.

		(a)(2)	Schedules: None

		(a)(3)	Exhibits:

(1) Incorporated by reference to Exhibits 3.1, 3.2 and 10.1, respectively of Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

Exhibit No.		Description

3.1		Amended and Restated Articles of Incorporation (1)

3.2		Bylaws (1)

10.1*		Change of Control Agreement between the Bank and Richard C. Humphrey dated August 15, 2006(1)

10.2*		Change in Control Agreement between the Bank and Carla Tucker dated November 26, 2007(2)

10.3*		2005 Incentive Stock Plan(3)

10.4*		Restricted Stock Agreement(3)

10.5*		Form of Stock Option Agreement(3)

13		Portions of the 2010 Annual Report

14		Code of Ethics (4)

23		Consent of Moss Adams, LLP

31.1		Certification of Cheryl R. Bishop, Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Executive Vice President/Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certifications Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~(2) Incorporated~~* byDenotes ~~reference~~Compensation toplan ~~Exhibit 10.2 of~~or ~~Bancorp’s 2007 Annual Report on Form 10-K~~agreement.

(31) Incorporated by reference to Exhibits ~~99-1-99~~ 3.1, 3.2 and 10.1, respectively, of Bancorp’s ~~Registration~~Quarterly ~~Statement~~Report on Form S10-~~8: (File~~Q ~~No. 333-138665)~~for ~~filed~~the onquarter ~~November~~ended September 1330, 2006.

(42) Incorporated by reference to Exhibit 14 10.2 of Bancorp’s ~~2006~~2007 Annual Report on Form 10-K.

(b3) Incorporated by reference to Exhibits~~: Exhibits~~ ~~are~~99-1-99.3, ~~listed~~respectively, inof ~~response~~Bancorp’s toRegistration ~~Item~~Statement ~~15(a)~~on Form S-8: (3File No. 333-138665) filed on November 13, 2006.

(c4) ~~Financial~~ Incorporated ~~Statement~~by ~~Schedules: None~~reference to Exhibit 14 of Bancorp’s 2006 Annual Report on Form 10-K.

17(b) Exhibits: Exhibits are listed in response to Item 15(a) (3).

~~Table~~(c) Financial ofStatement ~~Contents~~Schedules: None

~~SIGNATURES~~19

~~Pursuant to~~Table ~~the requirements~~ of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized,Contents

	SKAGIT STATE BANCORP, INC.
	(Registrant)
Date: March 22, 2010	By:	/s/ Cheryl R. Bishop
	Cheryl R. Bishop, President and Chief Executive Officer

SIGNATURES

~~SIGNATURES~~Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized,

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 March 22, 2010.

	SKAGIT STATE BANCORP, INC.
	(Registrant)

Date: March 10, 2011	By:	/s/ Cheryl R. Bishop
	Cheryl R. Bishop, President and Chief Executive Officer

/s/ Cheryl R. Bishop President and Chief Executive Officer and Director Cheryl R. Bishop (Principal Executive Officer) /s/ Carla F. Tucker EVP/Chief Financial Officer Carla F. Tucker (Chief Accounting Officer) /s/ B. Marvin Omdal Chairman of the Board B. Marvin Omdal /s/ Gerald W. Christensen Director Gerald W. Christensen /s/ Michael F. Janicki Director Michael F. Janicki /s/ Richard N. Nelson Director Richard N. Nelson /s/ Michael E. Pegram Director Michael E. Pegram /s/ Daniel R. Peth Director Daniel R. PethSIGNATURES

18Pursuant 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 March 10, 2011.

/s/ Cheryl R. Bishop		President and Chief Executive Officer and Director
Cheryl R. Bishop		(Principal Executive Officer)

/s/ Carla F. Tucker		EVP/Chief Financial Officer
Carla F. Tucker		(Chief Accounting Officer)

/s/ B. Marvin Omdal		Chairman of the Board
B. Marvin Omdal

/s/ Gerald W. Christensen		Director
Gerald W. Christensen

/s/ Michael F. Janicki		Director
Michael F. Janicki

/s/ Richard N. Nelson		Director
Richard N. Nelson

/s/ Michael E. Pegram		Director
Michael E. Pegram

/s/ Daniel R. Peth		Director
Daniel R. Peth

Filing Compare · Skagit State Bancorp, Inc.