<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee required)
For the fiscal year ended DECEMBER 31, 1996.
[_] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
Commission File Number: 0 - 28394
MOUNTAIN BANK HOLDING COMPANY
(exact name of registrant as specified in its charter)
WASHINGTON 91-1602736
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification Number)
501 ROOSEVELT AVENUE, PO BOX 98, ENUMCLAW, WA 98022
(address of principal executive offices) (zip code)
Registrant's telephone number: (360) 825-0100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$1.00 PAR VALUE
(title of class)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB [ X ]
State the issuer's revenues for its most recent fiscal year: $4,937,563
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: AT FEBRUARY 28, 1997 - $7,302,825
---------------------------------
Number of shares of common stock outstanding as of February 28, 1997: 704,398
---------
Transitional Small Business Disclosure Format: Yes X No
--- ---
<PAGE>
FORM 10-KSB AMENDMENT NO. 2
TRANSITIONAL SMALL BUSINESS ISSUER
DISCLOSURE PURSUANT TO ALTERNATIVE 2
PART I
(ITEMS 6-11, MODEL B, FORM 1-A)
ITEM 6. DESCRIPTION OF BUSINESS
General
Mountain Bank Holding Company (the "Company") is a Washington corporation
formed in 1993 primarily to hold all of the Common Stock of Mt. Rainier National
Bank (the "Bank"), a National Banking Association organized under the laws of
the United States. The Bank provides personal and commercial banking and related
financial services at its main office located at 501 Roosevelt Avenue, Enumclaw,
Washington, and at its branch office located in Buckley, Washington, at 29290
Highway 410. The Company is regulated by the Federal Reserve Board (the "FRB")
under the Bank Holding Company Act of 1956, as amended. A bank holding company
is generally defined as a company that has direct or indirect control of a bank.
The Company qualifies as a bank holding company because it owns one hundred
percent (100%) of the outstanding securities of the Bank. At December 31, 1996,
the Company reported on a consolidated basis total assets of $64,561,274, total
deposits of $58,803,847, and shareholders' equity of $5,278,878.
The Company presently has one subsidiary other than the Bank. That subsidiary is
Mountain Real Estate Holdings, Inc., which was incorporated on March 10, 1994.
The purpose of Mountain Real Estate Holdings, Inc. is to engage solely in the
business of holding premises occupied or to be occupied by the Bank, together
with fixed assets used in conjunction with the premises occupied by the Bank. By
using this affiliate corporation to hold premises occupied by the Bank or its
branches, the Bank subsidiary can lend money to it for the cost of acquiring
needed premises without the collateral requirements applicable to a loan made
directly from the Bank to the Company.
The Company strategy is to capitalize on its investment in the Bank through
continued growth in the Bank's assets, deposits and earnings, and creation of
long-term value for Company shareholders by pursuing the following:
- Monitoring and improving the credit quality of the Bank's existing
asset base;
- Concentrating on expense control, interest spread maximization and
marketing of fee-based products, as well as maintaining adequate
liquidity and capital levels;
- Emphasizing close working relationships between the Bank's senior
management, directors, loan officers and commercial customers; and
- Focusing on training programs to ensure that management and staff have
knowledge necessary to serve customers and remain in compliance with
all legal and regulatory obligations.
There can be no assurance that the Bank will achieve these objectives.
1
<PAGE>
DESCRIPTION OF MT. RAINIER NATIONAL BANK
The Bank
Mt. Rainier National Bank is a wholly-owned subsidiary of the Company.
While the Company and the Bank are distinctly different entities regulated by
different regulatory bodies, the income of the Company will be almost entirely
derived from dividends upstreamed from the Bank to the Company. Therefore, the
value of the securities of the Company are, to a large extent, dependent upon
the success of the Bank.
History
The Bank opened on July 2, 1990, and has been operating since that date.
Business
The Bank offers a full line of commercial banking services including
checking accounts, savings programs, ATMs, night depository services, customer
deposit box facilities, consumer loans, residential loans, commercial loans,
real estate and construction loans and agriculture loans, NOW accounts and
certificates of deposit.
The principal sources of the Bank's revenues are: (i) interest and fees on
loans; (ii) deposit service charges; (iii) interest on federal funds sold (funds
loaned on a short-term basis to other banks); (iv) gains on mortgages originated
and sold to the secondary market; and (v) interest on investments. Loans include
short-to-medium-term commercial and consumer loans, including operating loans
and lines, equipment loans, automobile loans, recreational vehicle and truck
loans, personal loans and lines of credit, home improvement and rehabilitation
loans, VISA national credit cards, and residential mortgage lending. Residential
loans are currently sold into the secondary market. The Bank also offers safe
deposit boxes, direct deposit of payroll and social security checks, automated
teller machine access, and automatic drafts for various accounts. The Bank has a
night depository, an ATM, as well as drive-up services at each of its offices.
The Bank's core deposit base generally has been enhanced through
advertising and deposit promotions, and focusing on securing the entire banking
relationship of each of its customers. The Bank has not used brokered deposits
as a source of funds.
The Bank's commercial banking activities target high net worth individuals
and their businesses with an emphasis on the small to medium size businesses.
The Bank's operating strategy is to offer personal service, flexibility and
timely responsiveness to the needs of its customers. Senior management of the
Bank and the Company maintain close personal contact and close working
relationships with the Bank's commercial customers and their businesses, and the
Bank's and the Company's Board of Directors primarily include local business
people from the Bank's primary service area. Most of the Bank's new commercial
banking business consists of referrals from existing customers. The Company
believes that the Bank's loan portfolio is appropriately diversified. All
floating rate loans are priced at prime or higher.
The Company believes that the growth in loans and profitability achieved by
the Bank also is attributable in large measure to its strategy of targeting
smaller and medium size businesses in the manner described above and to the
business and personal relationships and experience of the Bank's and the
Company's management and Directors, rather than the result of greater risk-
taking or price concessions. In addition, there have been numerous acquisitions
and mergers of banks in the primary service area which have made the larger
institutions in the market even
2
<PAGE>
larger and left the Bank, at the present time, as the only small commercial bank
in the Bank's primary service area focusing primarily on the needs of the
smaller and medium size commercial customers.
Service Area
The primary service area of the Bank is the city of Enumclaw and its
environs which include the communities of Black Diamond and Buckley.
Employees
As of December 31, 1996, the Company had no full time employees. As of the
same date, the Bank had 32.46 full time equivalent employees, including three
Executive Officers. None of the Bank's employees is presently represented by a
union or covered by a collective bargaining agreement. The Bank considers its
relationships with its employees to be good.
Competition
The banking business in the Bank's primary service area is highly
competitive with respect to both loans and deposits. All the major commercial
banks, including Seafirst, Key Bank, Wells Fargo and U.S. Bank, have a branch or
branches within the Bank's primary service area. Among the advantages such major
banks have are their ability to finance wide-ranging advertising campaigns and
to allocate their investment assets to geographic regions of higher yield and
demand. Such banks offer certain services which are not offered directly by the
Bank (but are offered indirectly through correspondent institutions); and, by
virtue of their greater total capitalization (legal lending limits to an
individual customer are based upon a percentage of a bank's total shareholder
equity accounts), such banks have substantially higher lending limits than the
Bank. The primary service area is also served by savings and loan associations
and credit unions.
The Bank also competes with a number of non-bank competitors such as
insurance companies, small loan companies, finance companies, mortgage
companies, and other sources of funds. Many of the Company's non-bank
competitors are not subject to the extensive federal and state regulations which
govern the Company and, as a result, have a competitive advantage over the
Company in providing certain services.
The Bank believes its competitive position has been strengthened by the
consolidation in the banking industry which has resulted in a focus by the
larger banks on their larger accounts, with less direct contact between the
officers and their customers. The Bank's strategy, by contrast, is to remain a
middle market lender which maintains close, long-term contact with its
customers.
Products and Services
In conjunction with the growth of its asset base, the Bank has introduced
new products and services to position itself to compete in its highly
competitive market. The Bank's customers demand not only a wide range of
financial products but also efficient and convenient service. In response to
these demands, the Bank has developed a mix of products and services utilizing
newly developed technology available to the banking industry; for example, the
addition of automatic teller machines. Additionally, the bank offers a wide
range of commercial and retail banking products and services to its customers.
Deposit accounts include certificates of deposit, individual retirement accounts
and other time deposits, checking and other demand deposit accounts, interest-
bearing checking accounts, savings accounts and money market accounts. Loans
include residential real estate, commercial, financial and real estate
construction and
3
<PAGE>
development, installment and consumer loans. Other products and services
include: credit related insurance; ATMs, and safe deposit boxes.
Marketing
The Bank uses to the fullest extent possible the flexibility which is
accorded by its independent status. This includes an emphasis on specialized
services, local promotional activity, and personal contacts by the Bank's
officers, directors and employees. The Bank also seeks to provide special
services and programs for individuals in its primary service area who are
employed in the business and professional fields. In the event there are
customers whose loan demands exceed the Bank's lending limits, the Bank arranges
for such loans on a participation basis with other financial institutions.
Lending Activities
The two main areas in which the Bank has directed its lendable funds are
commercial and real estate loans. At December 31, 1996, these categories
accounted for approximately 31% and 55%, respectively, of the Bank's total loan
portfolio. The Bank's major source of income is interest and fees charged on
loans.
Interest income on loans is recognized based on principal amounts
outstanding, at applicable interest rates. Accrual of interest on impaired loans
is discontinued when reasonable doubt exists as to the full, timely collection
of interest or principal or when payment of principal or interest is
contractually past due 90 days, unless the loan is well secured and in the
process of collection. When a loan is placed on nonaccrual status, all interest
previously accrued, but not collected, is reversed against current period
interest income. Income on such loans is then recognized only to the extent that
cash is received and when the future collection of principal is probable.
Interest accruals are resumed on such loans only when they are brought current
with respect to principal and interest and when, in the opinion of management,
the loans are estimated to be fully collectible as to both principal and
interest.
In general, the Bank is permitted by law to make loans to single borrowers
in aggregate amounts of up to fifteen percent (15%) of the Bank's unimpaired
capital and unimpaired surplus. The Bank, on occasion, sells participations in
loans when necessary to stay within lending limits or to otherwise limit the
Bank's exposure. The Bank's goal is to reduce the risk of undue concentrations
of loans to multiple borrowers engaged in similar activities that would cause
them to be similarly impacted by economic or other conditions. At December 31,
1996, no such concentration exceeded 10% of the Bank's loan portfolio, although
approximately 6.4% of the Bank's loan portfolio consists of agricultural loans
and approximately 7.6% of interim real estate construction loans. The Bank has
no loans to foreign countries and its policy is to lend within Washington State,
however the bank does have some loans to out-of-state borrowers.
In the normal course of business there are various commitments outstanding
and commitments to extend credit which are not reflected in the financial
statements. These commitments generally require the customers to maintain
certain credit standards and have fixed expiration dates or other termination
clauses. The Bank uses the same credit policies in making commitments as it
does for loans. Management does not expect that all such commitments will be
fully utilized.
Lending activities are conducted pursuant to a written Loan Policy which
has been adopted by the Board of Directors of the bank. Each loan officer has a
defined lending authority. Regardless of lending authority, individual loans
over $100,000 are reviewed by the Bank's Loan Committee.
4
<PAGE>
The Bank has entered into agreements with other banks to participate in
certain of the Bank's commitments to extend credit to customers.
Investment Portfolio
The investment policy of the Bank is an integral part of the overall
asset/liability management of the Bank. The Bank's investment policy is to
establish a portfolio which will provide liquidity necessary to facilitate
making loans and to cover deposit fluctuations while at the same time achieving
a satisfactory investment return on the funds invested. The investment policy is
reviewed annually by the Bank's Board of Directors. The Bank stresses the
following attributes for its investments: safety of principal, liquidity, yield,
price appreciation and pledgeability. With its implementation of Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities, the Bank is required to classify its
portfolio into three categories: Held to Maturity, Trading Securities, and
Available for Sale.
Held to Maturity includes debt securities that the Bank has positive intent
and ability to hold to maturity; these securities are reported at amortized
cost.
Trading Securities include debt and equity securities that are purchased
and held solely for the purpose of selling them in the short-term future for
trading profits. Trading Securities are reported at fair market value with
unrealized gains and losses included in earnings. As of December 31, 1996, the
Bank held no securities as Trading Securities.
Available for Sale securities include those which are acquired with the
intention to dispose of the asset prior to maturity; however, these securities
may be held to maturity. These securities are reported at fair market value
with unrealized gains and losses excluded from the earnings and reported as a
separate component of shareholders' equity.
As a national bank and member of the Federal Reserve System, the Bank is
required to have $124,200 invested in the Federal Reserve Bank Stock. Also, as
a member of the Federal Home Loan Bank, the Bank is required to keep $254,000 in
stock. This portion of the Bank's investment portfolio is not liquid.
5
<PAGE>
Statistical Information About the Company
The following statistical information should be read in conjunction with the
consolidated financial statements and accompanying notes included elsewhere
herein.
The composition of the loan portfolio is summarized as follows:
<TABLE>
<CAPTION>
LOAN PORTFOLIO - TYPES OF LOANS
December 31, 1996 December 31, 1995
-------------------------------------------------------
Percent Percent
of Total of Total
Amounts Loans Amounts Loans
-------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Commercial and agricultural $11,685 31.12% $13,622 44.18%
Real Estate:
Construction 3,537 9.42% 1,847 5.99%
Mortgage 17,198 45.81% 11,196 36.31%
Consumer 5,123 13.65% 4,169 13.52%
-------------------------------------------------------
Total loans $37,543 100.00% $30,834 100.00%
=======================================================
</TABLE>
<TABLE>
<CAPTION>
LOAN PORTFOLIO - MATURITIES AND SENSITIVITIES ON LOANS
----------------------------------------------------------------------------------------
Over One Maturing
One Year or Less Through Five Years After Five Years TOTAL
----------------------------------------------------------------------------------------
Amount Fixed Variable Fixed Variable
<S> <C> <C> <C> <C> <C> <C>
Commercial and Agriculture $ 7,361 $ 4,243 $0 $ 81 $0 $11,685
Real Estate $ 9,815 $10,866 $0 $ 54 $0 $20,735
Consumer $ 1,316 $ 3,757 $0 $ 50 $0 $ 5,123
-------------------------------------------------------------------------------
Total $18,492 $18,866 $0 $185 $0 $37,543
</TABLE>
The following table summarizes nonperforming assets by category:
<TABLE>
<CAPTION>
RISK ELEMENTS - NONACCRUAL, PAST DUE AND RESTRUCTERED LOANS
90 Days or More
Past Due Nonaccrual Restructured Lost Interest
--------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Commercial and Agriculture $0 $121 $0 $4
Real Estate $0 $ 0 $0 $0
Consumer $0 $ 16 $0 $1
-- ---- -- --
$0 $137 $0 $5
</TABLE>
At December 31, 1996, the Bank had no other assets that would be considered
nonaccrual, past due or restructured if such assets were loans.
6
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION
<TABLE>
<CAPTION>
Year Year
Ended Ended
December 31, December 31,
1996 1995
------------------------------
(dollars in thousands)
<S> <C> <C>
Allowance for loan losses
(beginning of period) $ 334 $ 318
Loans charged off:
Commercial and agricultural (16)
Real estate construction
Real estate mortgage
Consumer (10)
------------------------------
Total (10) (16)
------------------------------
Recoveries of loans previously
charged off:
Commercial and agricultural
Real estate construction
Real estate mortgage
Consumer
------------------------------
Total
------------------------------
Net loans charged off (10) (16)
Provision for possible loan losses 67 32
------------------------------
Allowance for possible loan losses
(end of period) $ 391 $ 334
==============================
Loans outstanding:
Average $ 34,102 $ 27,728
End of period 37,543 30,834
Ratio of allowance for loan loss
to total loans outstanding
Average 1.15% 1.20%
End of period 1.04% 1.08%
Ratio of net charge-offs to average
loans outstanding (0.03)% (0.06)%
</TABLE>
<TABLE>
<CAPTION>
Allocation of Loan Loss
12/31/96 12/31/95 By Loan Classification
---------------------------- -----------------------
<S> <C> <C> <C>
Percent of categories to total end of
period loans:
Commercial and agricultural 31.12% 44.18% $122
Real estate construction 9.42% 5.99% $ 37
Real estate mortgage 45.81% 36.31% $179
Consumer 13.65% 13.52% $ 53
---------------------------- ----
Total loans 100.00% 100.00% $391
============================ ====
</TABLE>
7
<PAGE>
The carrying value of investment securities and the maturities and yield
information on the investment portfolio is as follows:
INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Dec. 31 December 31, Dollar Percentage
1996 1995 Change Change
-------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
US Treasury securities $ 3,145 $ 3,644 $ (499) -13.69%
US Government and agency
securities 7,055 2,264 4,791 211.62%
Mortgage Backed Securities 1,748 - 1,748 100.00%
Corporate bonds 799 1,490 (691) -46.38%
Municipal bonds 329 352 (23) -6.53%
Total $ 13,076 $ 7,750 $ 5,326 68.72%
===================== =============== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------------------------------
Over One Over Five
One Year or Less Through Five Years Through Ten Years Over Ten Years
--------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C>
US Treasury Securities $2,501 6.30% $644 5.13% $ 0
US Govt. and Agency Securities $6,561 6.12% $494 6.75%
Mortgage Backed Securities $965 6.75% $783 7.31%
Corporate Bonds $252 9.25% $547 5.84% $0
Municipal Bonds (1) $130 4.25% $0 $199 5.50%
--------------------------------------------------------------------------------------------
Total $2,883 $8,717 1,476 $0
Weighted Average Yield 6.03% 6.10% 6.88%
(1) Yields have not been calculated on a tax equivalent basis.
</TABLE>
8
<PAGE>
The following tables set forth the distribution of the Bank's deposit accounts
at the dates indicated:
DEPOSIT LIABILITY COMPOSITION
<TABLE>
<CAPTION>
31-Dec-96 31-Dec-95
-------------------------------------------------------------
Percent Percent
of Total of Total Dollar Percentage
Amounts Deposits Amounts Deposits Change Change
----------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 8,565 14.57% $ 6,251 14.31% $ 2,314 37.02%
Interest-bearing demand (1) 21,892 37.23% 13,060 29.90% 8,832 67.63%
Savings 7,730 13.15% 7,075 16.20% 655 9.26%
Certificates of deposit 13,820 23.50% 11,403 26.11% 2,417 21.20%
Certificates of deposit over $100,000 6,797 11.56% 5,892 13.49% 905 15.36%
--------------------------------------------------------------------
Total $58,804 100.00% $43,681 100.00% $15,123 34.62%
====================================================================
</TABLE>
(1) At December 31, 1996, the Bank received approximately $5,000,000 from two
depositors which is included in interest bearing demand. It is unknown how long
these deposits will remain.
At December 31, 1996, the scheduled maturities of certificates of deposit was:
<TABLE>
<CAPTION>
Balances
---------------------------------------
Less Than $100,000
$100,000 or More
---------------- ------------
<S> <C> <C>
Maturity in:
Three months or less: $ 3,714 $3,366
Over three months through twelve months $ 7,696 $2,648
Over one year through five years $ 2,410 $ 783
Over five years $ 0 $ 0
---------------------------------------
TOTAL $13,820 $6,797
======================================
</TABLE>
The following ratios applicable to the Company are among those commonly used in
analyzing bank holding companies:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
Return on Average Assets 0.56% 0.23%
Return on Average Equity 5.75% 2.16%
Dividend Payout Ratio 0% 0%
Equity to Assets Ratio 9.67% 10.49%
</TABLE>
At December 31, 1996 and December 31, 1995, neither the Bank nor the Company had
any short term borrowings.
9
<PAGE>
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are interest rate sensitive and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is interest rate sensitive within a specific time period if it will
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-bearing assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period and
the amount of interest-bearing liabilities anticipated, based upon certain
assumptions, to mature or reprice within that time period. A gap is considered
positive when the amount of interest rate sensitive assets maturing within a
specific time frame exceeds the amount of interest sensitive liabilities
maturing within that same time frame. If negative, the reverse is true.
The following table represents an interest rate sensitivity analysis at December
31, 1996:
GAP ANALYSIS
<TABLE>
<CAPTION>
---------------------------------------------
Total Within One Year To Over
One Year Five Years Five Years
---------------------------------------------
<S> <C> <C> <C>
Rate Sensitive Assets:
Loans $18,492 $18,866 $185
Investments $2,883 $8,717 $1,476
Federal Funds Sold $7,550
---------------------------------------------
TOTAL $28,925 $27,583 $1,661
Rate Sensitive Liabilities:
Savings, Now and Interest Checking $29,622
Time Deposits $17,425 $3,192
---------------------------------------------
TOTAL $47,047 $3,192 $0
Interest Sensitive Gap ($18,122) $24,391 $1,661
=============================================
</TABLE>
Currently, the Bank's interest sensitivity gap is negative within one year.
Assuming that general market interest rate changes affected the repricing of
assets and liabilities in equal magnitudes, this indicates that the effects of
rising interest rates on the Company would be a decrease in the net interest
margin, whereas falling interest rates would cause a corresponding increase in
margin.
10
<PAGE>
The following tables set forth the distribution of the Bank's deposit accounts
at the dates indicated:
DEPOSIT LIABILITY COMPOSITION
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------------------------------------
Percent Percent
of Total of Total Dollar Percentage
Amounts Deposits Amounts Deposits Change Change
-------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 8,565 14.57% $ 6,251 14.31% $ 2,314 37.02%
Interest-bearing demand (1) 21,892 37.23% 13,060 29.90% 8,832 67.63%
Savings 7,730 13.15% 7,075 16.20% 655 9.26%
Certificates of deposit 13,820 23.50% 11,403 26.11% 2,417 21.20%
Certificates of deposit over $100,000 6,797 11.56% 5,892 13.49% 905 15.36%
----------------------------------------------------------------------
Total $ 58,804 100.00% $43,681 100.00% $15,123 34.62%
======================================================================
</TABLE>
(1) At December 31, 1996, the Bank received approximately $5,000,000 from two
depositors which is included in interest bearing demand. It is unknown how long
these deposits will remain.
At December 31, 1996, the scheduled maturities of certificates of deposit was:
<TABLE>
<CAPTION>
Balances
------------------------------
Less Than $100,000
$100,000 or More
---------------- ------------
<S> <C> <C>
Maturity in:
Three months or less: $3,714 $3,366
Over three months through twelve months $7,696 $2,648
Over one year through five years $2,410 $783
Over five years $0 $0
------------------------------
TOTAL $13,820 $6,797
==============================
</TABLE>
The following ratios applicable to the Company are among those commonly used in
analyzing bank holding companies:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995
------------------------------
<S> <C> <C>
Return on Average Assets 0.56% 0.23%
Return on Average Equity 5.75% 2.16%
Dividend Payout Ratio 0% 0%
Equity to Assets Ratio 9.67% 10.49%
</TABLE>
At December 31, 1996 and December 31, 1995, neither the Bank nor the Company
had any short term borrowings.
11
<PAGE>
Regulation and Supervision
The following generally refers to certain significant statutes and
regulations affecting the banking industry. These references are only intended
to provide brief summaries and therefore, are not complete and are qualified by
the statutes and regulations referenced. In addition, due to the numerous
statutes and regulations which apply to and regulate the banking industry, many
are not referenced below.
The Company
- -----------
General. As a bank holding company, the Company is subject to the Bank
Holding Company Act of 1956 ("BHCA"), as amended, which places the Company under
the supervision of the Board of Governors of the Federal Reserve System ("FRB").
In general, the BHCA limits the business of bank holding companies to owning or
controlling banks and engaging in other activities related to banking. Certain
recent legislation designed to expand interstate branching and relax federal
restrictions on interstate banking has been phased in and may expand
opportunities for bank holding companies (for additional information see below
under the heading "The Bank - Recent Federal Legislation - Interstate Banking
and Branching"). However, the impact of this legislation on the Company is
unclear at this time.
Holding Company Structure
- -------------------------
FRB Regulation. The Company must obtain the approval of the FRB before it:
(1) acquires direct or indirect ownership or control of any voting shares of a
bank if, after such acquisition, it would own or control, directly or
indirectly, more than 5% of the bank's voting shares; (2) merges or consolidates
with another bank holding company; and (3) acquires substantially all of the
assets of any additional banks. Until September of 1995, the BHCA also
prohibited the acquisition by the Company of any such interest in any bank or
bank holding company located in a state other than Washington unless the laws of
that state expressly authorized such acquisition. Now, subject to certain state
laws, such as age and contingency laws, a bank holding company that is
adequately capitalized and adequately managed may acquire the assets of an out-
of-state bank.
The Company files annual and quarterly reports and any other reports the
FRB may require from time to time. In addition, the FRB periodically examines
the Company and its subsidiary Bank.
Holding Company Control of Nonbanks. With certain exceptions, the BHCA
prohibits bank holding companies from acquiring direct or indirect ownership or
control of voting shares in any company other than a bank or a bank holding
company unless the FRB finds the company's business activities to be incidental
to the business of banking or managing or controlling banks. When making this
determination, the FRB in part considers whether allowing a bank holding company
to engage in those activities would offer advantages to the public that would
outweigh possible adverse effects.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("Economic Growth Act") amended the BHCA to eliminate the requirement that a
bank holding company seek FRB approval before engaging de novo in permissible
nonbanking activities, if the holding company is well capitalized and meets
certain other criteria specified in the statute. A bank holding company meeting
the specifications is now required only to notify the FRB within 10 business
days after the activity has begun. On February 28, 1997, the FRB issued a final
rule incorporating the changes enacted by the Economic Growth Act. Effective
April 21, 1997, a well-run bank holding company, without any prior notice or FRB
approval, may commence immediately
12
<PAGE>
any activity that is currently or at the time of commencement included in the
FRB's list of acceptable nonbanking activities.
Acceptable nonbanking activities include: (1) operating an industrial loan
company, mortgage company, finance company, trust company, or credit card
company; (2) performing certain data processing operations; and (3) providing
investment and financial advice. In contrast, prohibited nonbanking activities
include real estate brokerage and syndication, land development, property
management, and the underwriting of life insurance not related to credit
transactions. From time to time, the FRB may add to or delete from the list of
activities permissible for bank holding companies.
Transactions With Affiliates. The Company and the Bank are considered
affiliates within the meaning of the Federal Reserve Act, and transactions
between affiliates are subject to certain restrictions. Section 23A of the
Federal Reserve Act limits certain covered transactions. These covered
transactions include, subject to specific exceptions, loans by bank subsidiaries
to affiliates, investments by bank subsidiaries in securities issued by an
affiliate or acceptance of such securities as collateral, and the purchase by a
bank subsidiary of an affiliate's assets. Section 23B of the Federal Reserve
Act, among other things, restricts an institution from engaging in specified
transactions with certain affiliates unless the transactions are on terms
substantially the same, or at least as favorable, to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.
Tie-In Arrangements. The Company and the Bank cannot engage in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither the Company nor the Bank may condition an extension of credit on either
(1) a requirement that the customer obtain additional services provided by it or
(2) an agreement by the customer to refrain from obtaining other services from a
competitor. Effective April 21, 1997, the FRB has adopted significant
amendments to its anti-tying rules that: (1) remove FRB-imposed anti-tying
restrictions on bank holding companies and their non-bank subsidiaries; (2)
create exemptions from the statutory restriction on bank tying arrangements to
allow banks greater flexibility to package products with their affiliates; and
(3) establish a safe harbor from the tying restrictions for certain foreign
transactions. These amendments are designed to enhance competition in banking
and nonbanking products and allow banks and their affiliates to provide more
efficient a lower-cost service to customers. However, the impact of the
amendments on the Company and the Bank is unclear at this time.
State Law Restrictions. As a corporation chartered under the laws of the
State of Washington, the Company is also be subject to certain limitations and
restrictions under applicable Washington corporate laws.
Securities Registration and Reporting. The common stock of the Company is
registered as a class with the Securities and Exchange Commission ("SEC") under
the Securities Exchange Act of 1934. Thus, the Company is subject to the
periodic reporting and proxy solicitation requirements and the insider-trading
restrictions of that Act. The periodic reports, proxy statements, and other
information filed by the Company under that Act can be inspected and copied at
or obtained from the Washington, D.C. office of the SEC. In addition, the
securities issued by the Company are subject to the registration requirements of
the Securities Act of 1933 and applicable state securities laws, unless
exemptions are available.
Control Transactions
- --------------------
The Change in Bank Control Act of 1978, as amended, requires a person (or
group of persons acting in concert) acquiring "control" of a bank holding
company to provide the FRB with at least 60 days' advance written notice of the
proposed acquisition. Following receipt of this
13
<PAGE>
notice, the FRB has 60 days to issue a notice disapproving the proposed
acquisition, but the FRB may extend this time period for up to an additional 30
days. An acquisition may be completed before the expiration of the disapproval
period if the FRB issues written notice of its intent not to disapprove the
transaction.
In addition, any "company" must obtain the FRB's approval under the BHCA
before acquiring 25% (5% if the company is a bank holding company) or more of
the outstanding shares of the Company, or otherwise obtaining control over the
Company.
The Bank
- --------
General. Despite some recent legislative initiatives to reduce regulatory
burdens, banking remains a highly regulated industry. Legislation enacted from
time to time may increase the cost of doing business, limit or expand
permissible activities, or affect the competitive balance between banks and
other financial and nonfinancial institutions. Proposals to change the laws and
regulations governing the operations and taxation of banks and other financial
institutions are frequently made in Congress, in state legislatures, and before
various bank regulatory agencies. In addition, there continue to be proposals
in Congress to restructure the banking system.
Some of the significant areas of bank regulation are generally discussed
below.
Regulation of National Banks. The Bank, as a national banking
association, is subject to primary regulation and examination by the OCC. It is
also subject to regulation by the FRB and, to a more limited extent, by the
Federal Deposit Insurance Corporation ("FDIC"). Federal statutes and
regulations which govern the Bank's operations relate to required reserves
against deposits, investments, loans, mergers and consolidations, borrowings,
issuance of securities, payment of dividends, establishment of branches, and
other aspects of its operations. The National Bank Act restricts the Bank to
performing commercial banking business and engaging in activities incidental to
the business of banking and prohibits the Bank from investing in equity
securities, except in its fiduciary capacity. The OCC also may prohibit a
national bank from engaging in activities it considers unsafe and unsound
business practices.
Regulation of Management. Federal law: (1) sets forth circumstances under
which officers or directors of a bank may be removed by the institution's
federal supervisory agency, (2) places restraints on lending by a bank to its
executive officers, directors, principal shareholders, and their related
interests, and (3) prohibits management personnel of a bank from serving as a
director or in other management positions of another financial institution whose
assets exceed a specified amount or which has an office within a specified
geographic area.
Control of Financial Institutions. No person may acquire "control" of a
bank unless the appropriate federal agency has been given sixty days prior
written notice and within that time the agency has not disapproved the
acquisition. Substantial monetary penalties may be imposed for violation of the
change in control or other provisions of banking laws.
Recent Federal Banking Legislation
- ----------------------------------
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act") generally will, over the
next few months, permit nationwide interstate banking and branching. This
legislation generally authorizes interstate branching and relaxes federal law
restrictions on interstate banking. Subject to certain state laws, such as age
and contingency laws, the Interstate Act allows adequately capitalized and
adequately managed bank holding companies to purchase the assets of out-of-state
banks (effective as of September 29, 1995). Additionally, beginning June 1,
1997, the Interstate Act permits interstate bank mergers, subject to certain
state laws, such as age and contingency laws, unless the home state of either
14
<PAGE>
merging bank has "opted-out" of these provisions by enacting "opt-out"
legislation. States may also "opt-in" to these bank merger provisions early by
enacting non-discriminatory "opting-in" legislation permitting interstate
mergers within their own borders before June 1, 1997. The Interstate Act does
allow states to impose certain conditions on interstate bank mergers within
their borders; for example, states may require that the in-state merging bank
exist for up to five years before the interstate merger. Under the Interstate
Act, states may also "opt-in" to de novo branching, allowing out-of-state banks
to establish de novo branches within the state.
In 1996, Washington enacted "opting in" legislation authorizing interstate
mergers pursuant to the Interstate Act. Accordingly, as of June 6, 1996, an
out-of-state bank holding company may now acquire more than 5% of the voting
shares of a Washington-based bank, regardless of reciprocity, provided such bank
or its predecessor has been doing business for at least five years prior to the
acquisition. Further, an out-of-state bank may engage in banking in Washington
if the requirements of Washington's interstate banking statute are met, and the
bank either (1) was lawfully engaged in banking in Washington on June 6, 1996,
(2) resulted from an interstate combination pursuant to Washington law, (3)
resulted from a relocation of a head office of a state bank or a main office of
a national bank pursuant to federal law, or (4) resulted from the establishment
of a savings bank branch in compliance with applicable Washington law.
Additionally, the Washington Director of Financial Institutions may approve
interstate combinations if the basis for such approval does not discriminate
against out-of-state banks, out-of-state holding companies, or their
subsidiaries.
Regulatory Improvement. In 1994, Congress enacted the Community
Development and Regulatory Improvement Act ("Regulatory Improvement Act") with
the intent of, among other things, reducing the regulatory burden on financial
institutions. This Act is intended to streamline certain regulatory procedures
and relax certain regulatory compliance requirements. In addition, the
Regulatory Improvement Act specifically directs each federal banking agency to
review and streamline its regulations and written supervisory policies.
Other Significant Federal Banking Legislation
- ---------------------------------------------
Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"). FDICIA was enacted into law in late 1991. As required by FDICIA,
numerous regulations have been adopted by federal bank regulatory agencies,
including the following: (1) federal bank regulatory authorities have
established five different capital levels for banks and, as a general matter,
enable banks with higher capital levels to engage in a broader range of
activities; (2) the FRB has issued regulations requiring standardized
disclosures with respect to interest paid on deposits; (3) the FDIC has imposed
restrictions on the acceptance of brokered deposits by weaker banks; (4) the
FDIC has implemented risk-based deposit insurance premiums; and (5) the FDIC has
issued regulations requiring state chartered banks to comply with certain
restrictions with respect to equity investments and activities in which the
banks act as a principal.
FDICIA recapitalized the Bank Insurance Fund ("BIF") and required the FDIC
to maintain the BIF and Savings Association Insurance Fund ("SAIF") at 1.25% of
insured deposits by increasing deposit insurance premiums as necessary to
maintain such ratio. FDICIA also required federal bank regulatory authorities to
implement the following: (1) non-capital standards of safety and soundness; (2)
operational and managerial standards for banks; (3) asset and earnings standards
for banks and bank holding companies addressing such areas as classified assets,
capital, and stock price; and (4) standards for compensation of executive
officers and directors of banks.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"). FIRREA became effective on August 9, 1989. Among other things, this
far-reaching legislation (1) phased in significant increases in the FDIC
insurance premiums paid by commercial banks; (2) created two deposit insurance
pools within the FDIC, one to insure commercial bank and savings
15
<PAGE>
bank deposits and the other to insure savings association deposits; (3) for the
first time, permitted bank holding companies to acquire healthy savings
associations; (4) permitted commercial banks that meet certain housing-related
asset requirements to secure advances and other federal services from their
local Federal Home Loan Banks; and (5) greatly enhanced the regulators'
enforcement powers by removing procedural barriers and sharply increasing the
civil and criminal penalties for violating statutes and regulations.
Restrictions on Capital Distributions
- -------------------------------------
Dividends paid by the Bank to the Company are a material source of the
Company's cash flow. Various federal statutory provisions limit the amount of
dividends the Bank is permitted to pay to the Company without regulatory
approval. FRB policy further limits the circumstances under which bank holding
companies may declare dividends. For example, a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality, and
overall financial condition.
If, in the opinion of the applicable federal banking agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
institution, could include the payment of dividends), the agency may require,
after notice and hearing, that the institution cease and desist from that
practice. In addition, the FRB and the FDIC have issued policy statements which
provide that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings.
Under the National Bank Act, national banks may only pay dividends without
advance approval of the OCC, if the total of all dividends declared by the
national bank in any calendar year will exceed the sum of its net profits (as
defined) for that year plus its retained profits for the preceding two calendar
years, less any required transfers to surplus. The National Bank Act also
prohibits national banks from paying dividends that would be in an amount
greater than net profits then on hand (as defined) after deducting losses and
bad debts (as defined).
Capital Requirements
- --------------------
Capital Adequacy Requirements. The FRB, the FDIC, and the OCC
(collectively, the "Agencies") have adopted risk-based capital guidelines for
banks and bank holding companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios in excess
of the minimums. Failure to achieve and maintain adequate capital levels may
give rise to supervisory action through the issuance of a capital directive to
ensure the maintenance of required capital levels.
The current guidelines require all federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, but excludes goodwill and most other intangibles and
the allowance for loan and lease losses. Tier 2 capital includes the excess of
any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate term-
preferred stock, and general reserves for loan and lease losses up to 1.25% of
risk-weighted assets. The Bank has not received any notice indicating that it
will be subject to higher capital requirements.
16
<PAGE>
Under these guidelines, banks' assets are given risk-weights of 0%, 20%,
50% or 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total risk-
weighted assets. Most loans are assigned to the 100% risk category, except for
first mortgage loans fully secured by residential property and, under certain
circumstances, residential construction loans (both carry a 50% rating). Most
investment securities are assigned to the 20% category, except for municipal or
state revenue bonds (which have a 50% rating) and direct obligations of or
obligations guaranteed by the United States Treasury or United States Government
Agencies (which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to
Tier 1 capital as a percentage of average total assets less intangibles, to be
used as a supplement to the risk-based guidelines. The principal objective of
the leverage ratio is to place a constraint on the maximum degree to which a
bank may leverage its equity capital base. The minimum required leverage ratio
for top-rated institutions is 3%, but most institutions are required to maintain
an additional cushion of at least 100 to 200 basis points. Any institution
operating at or near the 3% level is expected to have well-diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity and good earnings, and in general, to be a strong banking organization
without any supervisory, financial or operational weaknesses or deficiencies.
Any institutions experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
Regulations adopted by the Agencies as required by FDICIA impose even more
stringent capital requirements. The regulators require the OCC and other Federal
Banking Agencies to take certain "prompt corrective action" when a bank fails to
meet certain capital requirements. The regulations establish and define five
capital levels: (1) "well-capitalized," (2) "adequately capitalized," (3)
"undercapitalized," (4) "significantly undercapitalized" and (5) "critically
undercapitalized." To qualify as "well-capitalized," an institution must
maintain at least 10% total risk-based capital, 6% Tier 1 risk-based capital,
and a leverage ratio of no less than 5%. Increasingly severe restrictions are
imposed on the payment of dividends and management fees, asset growth and other
aspects of the operations of institutions that fall below the category of being
"adequately capitalized" (which requires at least 8% total risk-based capital,
4% Tier 1 risk-based capital, and a leverage ratio of at least 4%).
Undercapitalized institutions are required to develop and implement capital
plans acceptable to the appropriate federal regulatory agency. Such plans must
require that any company that controls the undercapitalized institution must
provide certain guarantees that the institution will comply with the plan until
it is adequately capitalized. As of December 31, 1996, neither the Company nor
the Bank were subject to any regulatory order, agreement, or directive to meet
and maintain a specific capital level for any capital measure.
In August of 1995, the Federal Banking Agencies adopted a final rule
implementing the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. Effective September 1,
1995, when evaluating the capital adequacy of a bank, the Federal Banking
Agencies' examiners will consider exposure to declines in the economic value of
the bank's capital due to changes in interest rates. A bank may be required to
hold additional capital for interest rate risk if it has a significant exposure
or a weak interest rate risk management process. Concurrent with the publication
of this final rule, the Agencies proposed for comment a joint policy statement
describing the process the Agencies will use to measure and assess a bank's
interest rate risk. This joint policy statement was superseded by an updated
Joint Policy Statement in June of 1996. Any impact the joint final rule and the
Joint Policy Statement may have on the Company or the Bank cannot be predicted
at this time.
In addition, the Agencies published a joint final rule on September 6,
1996, amending their
17
<PAGE>
respective risk-based capital standards to incorporate a measure for market risk
to cover all positions located in an institution's trading account and foreign
exchange and commodity positions wherever located. This final rule, effective
January 1, 1997, implements an amendment to the Basle Capital Accord that sets
forth a supervisory framework for measuring market risk. The final rule
effectively requires banks and bank holding companies with significant exposure
to market risk to measure that risk using its own internal value-at-risk model,
subject to the parameters of the final rule, and to hold a sufficient amount of
capital to support the institution's risk exposure.
Institutions subject to this final rule must be in compliance with it by
January 1, 1998. This final rule applies to any bank or bank holding company,
regardless of size, whose trading activity equals 10% or more of its total
assets, or whose trading activity equals $1 billion or more. An institution's
trading activity is defined as the sum of its trading assets and trading
liabilities as reported in its most recent call report for a bank, or its most
recent Y-9C Report for a bank holding company. Total assets means quarter-end
total assets. The Agencies may require an institution not otherwise subject to
the final rule to comply with it for safety and soundness reasons and also may
exempt an institution otherwise subject to the final rule from compliance under
certain circumstances.
FDIC Insurance
- --------------
Generally, customer deposit accounts in banks are insured by the FDIC for
up to a maximum amount of $100,000. The FDIC has adopted a risk-based insurance
assessment system under which depository institutions contribute funds to the
BIF and the SAIF based on their risk classification. The FDIC assigns
institutions a risk classification based on three capital groups and three
supervisory subgroups. The capital groups are "well capitalized," "adequately
capitalized," and "undercapitalized." The three supervisory subgroups are Group
"A" (for financially sound institutions with only a few minor weaknesses), Group
"B" (for those institutions with weaknesses which, if uncorrected, could cause
substantial deterioration of the institution and increase risk to the deposit
insurance fund), and Group "C" (for those institutions with a substantial
probability of loss to the fund absent effective corrective action).
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds
Act") was enacted. The Funds Act provides, among other things, for the
recapitalization of the SAIF through a special assessment on all depository
institutions that hold SAIF insured deposits. The one-time assessment is
designed to place the SAIF at its 1.25 reserve ratio goal.
The Funds Act, for the three year period beginning in 1997, subjects BIF
insured deposits to a Financing Corporation ("FICO") premium assessment on
domestic deposits at one-fifth the premium rate (approximately 1.3 basis points)
imposed on SAIF insured deposits (approximately 6.5 basis points). In addition,
service debt funding on FICO bonds for the first half of 1997 is expected to
result in BIF insured institutions paying .64 cents for each $100 of assessed
deposits, and SAIF insured institutions paying 3.2 cents on each $100 of
deposits. Beginning in the year 2000, BIF insured institutions will be required
to pay the FICO obligations on a pro-rata basis with all thrift institutions;
annual assessments are expected to equal approximately 2.4 basis points until
2017, to be phased out completely by 2019.
For at least the first half of 1997, BIF premiums will be maintained at
their current level. Accordingly, institutions in the lowest risk category will
continue to pay no premiums, and other institutions will be assessed based on a
range of rates, with those in the highest risk category paying 27 cents for
every $100 of BIF insured deposits. Rates in the SAIF assessment schedule,
previously ranging from 4 to 31 basis points, have recently been adjusted by 4
basis points to a range of 0 to 27 basis points (as of October 1, 1996).
Banking regulators are empowered under the Funds Act to prohibit insured
institutions
18
<PAGE>
and their holding companies from facilitating or encouraging the shifting of
deposits from the SAIF to the BIF in order to avoid higher assessment rates.
Accordingly, the FDIC recently proposed a rule that would, if adopted as
proposed, impose entrance and exit fees on depository institutions attempting to
shift deposits from the SAIF to the BIF as contemplated by the Funds Act. The
Funds Act also provides for the merger of the BIF and SAIF on January 1, 1999,
only if no thrift institutions exist on that date. It is expected that Congress
will address comprehensive legislation on the merger of the funds and
elimination of the thrift charter during the 1997 session.
19
<PAGE>
EMPLOYEES ITEM 7. DESCRIPTION OF PROPERTY
The Bank's Main Office is located in Enumclaw, Washington, at 501 Roosevelt
Avenue, in an office building owned by the Bank. The facility has 10,275 square
feet with two drive-up windows, an automatic teller machine (ATM), and a night
depository. The premises are fully equipped and include teller counters, key
drawers, safe, lock boxes with keys, signs and alarm equipment.
On February 6, 1995, the Bank opened its Buckley Branch located at 29290
Highway 410, Buckley, Washington. The facility, which is leased, has 3,100
square feet, a two-lane drive up, an ATM and a night depository.
The Bank has also leased space for an ATM located at 31605 Third Avenue,
Black Diamond, Washington. That ATM was placed in service on March 7, 1995.
Customers of the Bank are charged no fee for utilization of the ATM. The site
will accept deposits as well as disburse withdrawals.
The Company has received approval from the Comptroller of the Currency to
open a branch facility for the Bank. A pending offer exists on real estate
located at 31329 Third Ave., Black Diamond, Washington. Mountain Real Estate
Holdings, Inc. will construct a full service facility consisting of
approximately 3,500 square feet, a two-lane drive up and a night depository. It
is estimated that the branch will open in mid-year 1997.
20
<PAGE>
ITEM 8. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information with respect to the directors
of the Company or predecessor companies, and executive officers of the Company
and the Bank as of December 31, 1996. The table below includes their ages,
their principal occupations during the last five years, the year they first
became a director, the year in which their term expires, and their position with
the Company or the Bank.
<TABLE>
<CAPTION>
NAME AND AGE YEAR PRINCIPAL MBHC MBHC
BECAME OCCUPATION CORPORATE TERM
MBHC AFFILIATION EXPIRES
DIRECTOR
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ROY T. BROOKS (56) 1993 Chairman & Chairman and Chief 1997
CEO, Executive Officer
Westmark of MBHC, Interim
Electronics President and Chief
Executive Officer
of Bank
- ---------------------------------------------------------------------------------------------
MICHAEL K. JONES (54) 1993 President, Director 1999
Jones and
Associates
- ---------------------------------------------------------------------------------------------
BRIAN W. GALLAGHER (47) 1993 President, Director 1999
Northern
Transport
- ---------------------------------------------------------------------------------------------
TERRY L. GARRISON (52) 1993 President, Director 1999
Garrison and
Associates
- ---------------------------------------------------------------------------------------------
BARRY C. KOMBOL (46) 1993 Owner, Director 1998
Rainier
Legal
Services
- ---------------------------------------------------------------------------------------------
GARRETT S. VANBEEK(61) 1993 Owner, Director 1998
VanBeek &
Sons Dairy
- ---------------------------------------------------------------------------------------------
JOHN W. RAEDER (59) 1993 Retired, Director 1998
Universal
Refrigeration
- ---------------------------------------------------------------------------------------------
SUSAN K. BOWEN-HAHTO (48) 1993 Partner, The Director 1997
Travel Line
- ---------------------------------------------------------------------------------------------
HANS RUDY ZURCHER (59) 1993 Partner, Director 1998
Zurcher Dairy
- ---------------------------------------------------------------------------------------------
KENNETH S. BORG (52) * 1993
- ---------------------------------------------------------------------------------------------
SHEILA M. BRUMLEY (42) N/A Senior Vice Secretary
President & to the
Cashier of Board
the Bank
- ---------------------------------------------------------------------------------------------
STEVE W. MOERGELI (42) ** N/A Vice
President
and Senior
Loan Officer
of the Bank
- ---------------------------------------------------------------------------------------------
</TABLE>
* As of December 17, 1996, Kenneth S. Borg resigned his senior management and
Board positions from the Bank and the Company. The Chairman and Chief Executive
Officer of the Company, Roy T. Brooks, has assumed the position of President of
the Company. The Company has entered into a settlement agreement with Mr. Borg
as referenced by Note 21 in the Financial Statements.
** In March 1997, Steve W. Moergeli was appointed President and Chief Executive
Officer and a Director of the Bank. He was also appointed a director of the
Company to serve until the 1997 Annual Meeting of Shareholders, at which time he
will stand for election.
21
<PAGE>
ITEM 9. REMUNERATION OF DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Name of Individual
or Number in Group Capacities in Which Served Cash Compensation
- ------------------ -------------------------- -----------------
<S> <C> <C>
Executive Officers President and Chief Executive $220,309
Officer, Vice President and Senior
Loan Officer, Senior Vice President
and Cashier
All Executive Officers
as a group (3) $220,309
</TABLE>
Directors of the Company do not receive fees for meetings attended.
Roy T. Brooks, Chairman of the Board and Chief Executive Officer of the
Company and Chairman of the Board of the Bank, served as a consultant to the
Company and the Bank in 1996 for which he received monthly compensation of
$3,500. Following the resignation of President Kenneth Borg, Mr. Brooks was
appointed Interim President and Chief Executive Officer of the Bank, at which
time he became an employee at an annual salary of $44,100.
Director Stock Option Plan. At the first Annual Meeting of Shareholders of
the Bank, the shareholders approved the 1990 Director Stock Option Plan (the
"Director Plan"). The Director Plan has been assumed and adopted by the
Company. Under the terms of the Director Plan, an outside director is granted
an option to purchase 6,000 shares of Common Stock upon his or her initial
election to the Board of Directors at an exercise price equal to the fair market
value of such shares on the date of the grant. The options are exercisable on a
cumulative basis in annual installments of 33% each on the third, fourth and
fifth anniversary of the date of grant. The service as a director must be
continuous for such vesting to occur.
A total of 60,000 shares of the Company's Common Stock may be issued under
the Director Plan. Options to purchase 54,000 shares at $5.00 per share were
issued on June 13, 1990, and expire on June 13, 2005. All options are presently
exercised or exercisable. No option can be exercised after the expiration of
fifteen (15) years from the date of grant.
Employee Stock Option Plan. At the first Annual Meeting of the
Shareholders of the Bank, the shareholders approved the 1990 Employee Stock
Option Plan (the "Employee Plan"). The Employee Plan has been assumed and
adopted by the Company. Under the terms of the Employee Plan, both incentive
and non-qualified options may be granted to key employees of the bank. The
exercise price of the options may not be less than 100% of the fair market value
of the shares of the Company on the date in which the option is granted. In
general, an incentive stock option may be exercised during a period of not more
than 10 years from the date of the grant, although a shorter period may be
specified, and in such amounts as the Board may determine. A non-qualified
stock option may be exercised during the period specified by the Board. The
Board has the authority to thereafter accelerate the period within which any
option may be exercised.
A total of 60,000 shares may be issued under the Employee Plan. At
December 31, 1996, there were outstanding options to purchase 51,332 shares of
the Company's Common Stock and 8,668 shares remain available under the Employee
Plan for future grant.
22
<PAGE>
ITEM 10. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS
The following table sets forth certain information including the beneficial
ownership of shares of the Company's Common Stock as of February 29, 1997 with
respect to each of the three highest paid persons who are officers or directors
of the Company, all officers and directors as a group and each shareholder who
owns more than 10% of the Company's Common Stock.
<TABLE>
<CAPTION>
====================================================================================================================================
Direct Beneficial Vested Nonvested Option Percent
NAME Ownership Ownership Options Options Price Total Ownership
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Roy T. Brooks, Chairman & CEO 18,720 3,000 4,000 $5.00 25,720 3.63%
38908 254th SE, Enumclaw,
WA 98022
Michael K. Jones, Director 12,000 6,200 6,000 $5.00 24,200 3.41%
325 N. Central, Kent,
WA 98032
Brian W. Gallagher, Director 5,490 3,664 6,000 $5.00 15,154 2.13%
15727 Tubbs Rd., Buckley,
WA 98321
Terry L. Garrison, Director 7,000 314 6,000 $5.00 13,314 1.87%
40421 268th SE, Enumclaw,
WA 98022
Barry C. Kombol, Director 6,800 0 6,000 $5.00 12,800 1.80%
31615 3rd Ave., Black Diamond,
WA 98010
Garrett S. VanBeek, Director 8,000 5,715 6,000 $5.00 19,715 2.78%
23423 SE 464th, Enumclaw,
WA 98022
John W. Raeder, Director 11,753 0 6,000 $5.00 17,753 2.50%
14142 SE 238th Ln., Kent,
WA 98042
Susan K. Bowen-Hahto, Director 6,800 2,200 6,000 $5.00 15,000 2.11%
22728 Entwhistle Rd., Buckley,
WA 98321
Hans Rudy Zurcher, Director 16,914 0 6,000 $5.00 22,914 3.23%
391022 236th SE, Enumclaw,
WA 98022
Steven W. Moergeli, VP & 4,334 7,000 $5.00/$6.25 11,334 1.59%
Senior Loan Officer
39703 253rd SE, Enumclaw,
WA 98022
Sheila M. Brumley, SVP & Cashier 468 800 7,000 $5.00/$6.25 8,268 1.16%
5706 114th Ave. Ct. E., Puyallup,
WA 98372 66,000 186,172
Shares Outstanding as of 12-31-96 704,398
</TABLE>
23
<PAGE>
ITEM 11. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS
The Bank had, and expects to have in the future, banking transactions in
the ordinary course of its business with certain of the directors and officers
of the Company and the Bank, and members of their immediate families and firms
and corporations with which they are associated including borrowing and
investing in certificates of deposit. All such loans and investments have been
made on substantially the same terms, including interest rates paid or charged
and collateral required, as those prevailing at the same time for comparable
transactions with unaffiliated persons, and not involve more than the normal
risk of collectability or present other unfavorable features.
At December 31, 1996, and December 31, 1995, certain officers and
directors, or companies in which they have 10% or more beneficial interest, were
indebted to the Bank in the aggregate amount of $1,548,507 and $1,456,719,
respectively. During 1996, $895,693 of new loans and advances were made and
repayments totaled $803,905. During 1995, $1,218,611 of new loans and advances
were made, and repayments totaled $1,172,337.
<TABLE>
<CAPTION>
NAME AGGREGATE
LOAN TOTAL
- -------------------------------------------------------
<S> <C>
Susan K. Bowen-Hahto, Director $ 356,981.70
Brian W. Gallagher, Director $ 177,619.39
Terry L. Garrison, Director $ 192,297.48
Michael K. Jones, Director $ 164,477.08
Barry C. Kombol, Director $ 64,277.97
John W. Raeder, Director $ 15,487.24
Garrett S. VanBeek, Director $ 226,616.54
Hans Rudy Zurcher, Director $ 307,640.18
Steve W. Moergeli, Executive Officer $ 43,109.52
-------------
Total $1,548,507.10
- -------------------------------------------------------
</TABLE>
Roy T. Brooks, Chairman of the Board and Chief Executive Officer of the
Company and Chairman of the Board of the Bank, served as a consultant to the
Company and the Bank in 1996 for which he received monthly compensation of
$3,500. Following the resignation of President Kenneth Borg, Mr. Brooks was
appointed Interim President and Chief Executive Officer of the Bank, at which
time he temporarily became an employee at an annual salary of $44,100. Mr.
Brooks has since been appointed as President of the Company and Mr. Moergeli has
been appointed President and Chief Executive Officer of the Bank.
24
<PAGE>
PART II
-------
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY
Market Information
No broker makes a market in the Company's common stock, and trading has not been
extensive. Trades that have occurred cannot be characterized as amounting to an
active market. The stock is traded by individuals on a personal basis and is
not listed on any exchange or traded on the over-the-counter market. Due to the
limited information available, the following price information may not
accurately reflect the actual market value of the Company's shares. The
following data includes trades between individual investors and new issues of
stock. It does not include the exercise of stock options or shares issued under
the Employee Stock Purchase Plan.
<TABLE>
<CAPTION>
Period # of Shares Price
Traded Range
<S> <C> <C>
1995 1,960 $10.00
1996 12,210 $10.00 to $11.50
</TABLE>
On March 31, 1995, the Company distributed an offering circular for 100,000
shares of common stock at $10.00 per share. The offering was amended on May 2,
1995, to increase the number of shares offered to 140,000 shares. 140,000
shares were sold for a total offering of $1,400,000.00.
At December 31, 1996, stock options for 97,332 shares of Mountain Bank Holding
Company common stock were outstanding. See Note 13 of the audited financial
statements for additional information.
Number of Equity Holders
As of February 28, 1997, there were 580 holders of record of the Company's
common stock.
Cash Dividends
The Company has never paid a cash dividend, and does not anticipate paying
a cash dividend in the foreseeable future. The Company expects to retain all
earnings to provide capital for operation and expansion of its subsidiary.
Dividends, when and if paid, will be subject to determination and declaration by
the Board of Directors, which will take into account the financial condition of
the Bank and the Company, results of operations, tax considerations, industry
standards, economic conditions and other factors. The ability of the Company to
pay dividends in the future will depend primarily upon the earnings of the Bank
and its ability to pay dividends to the Company.
25
<PAGE>
Payment of Dividends
The principal source of the Company's cash revenues is dividends received
from the Bank. The ability of the Bank to pay dividends is governed by various
statutes. These statutes provide that the Board of Directors of the Bank may
quarterly, semi-annually or annually declare a dividend of so much of the net
profits of the Bank as they judge expedient, except that until the surplus funds
of the Bank shall equal common capital, no dividend may be declared unless there
has been carried to surplus not less than one-tenth of the net profits of the
Bank of the preceding half year in the case of quarterly or semi-annual
dividends, or not less than one-tenth of its net profits from the two preceding
consecutive half-year periods in the case of annual dividends. In addition, the
approval of the Office of the Comptroller of the Currency is required if the
total of all dividends, including a proposed dividend, declared by a bank in any
calendar year, exceeds the total of such bank's net profits of that year
combined with its retained net profits of the preceding two years.
Pursuant to authority contained in 12 USC 1818 (b), the Office of the
Comptroller of the Currency may prohibit, by several types of enforcement action
including the issuance of a cease and desist order, those certain actions by the
Bank, including payment of dividends, which are deemed unsafe and unsound
business practices.
The payment of dividends by the Bank may also be affected by other factors,
such as the maintenance of adequate capital for the Bank.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any legal actions. From time to time in the
ordinary course of business, the Company or the Bank may be involved in
litigation. Management believes that there are no proceedings threatened or
pending against the Company or the Bank other than routine litigation, which, if
determined adversely, would have a material effect on the business or the
financial position of the Company or the Bank.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There has not been a change in either the Company or the Bank's independent
accountants during the two most recent fiscal years.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1996, no matters were
submitted to the security holders through the solicitation of proxies or
otherwise.
ITEM 5. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Mountain Bank Holding Company has adopted procedures to assist its directors and
executive officers with Section 16(a) of the Securities Exchange Act, which
includes assisting the officer or director in preparing forms for filing with
the Securities Exchange Commission. Based on the review of such forms, the
Company believes that all of its executive officers and directors complied with
all filing requirements applicable to them in 1996.
26
<PAGE>
ITEM 6. REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the last quarter of the period
ending December 31, 1996.
ITEM 7. RECENT SALES OF UNREGISTERED SECURITIES
On June 25, 1995, the company sold 140,000 shares of its common stock at a
total offering price of $1,400,000 ($10 per share). Exemption from Federal
registration was claimed pursuant to the intrastate offering exemption, Sec.
3(a)(11) of the Securities Act of 1933. Exemption from State registration was
claimed pursuant to the State existing shareholder exemption, RCW 21.20.320(11).
In March 1996 it was discovered that 42,958 shares in this offering had been
sold to purchasers who were not existing shareholders. As a result, the Company
had a potential contingent liability for the sale of unregistered securities
totaling $429,580, plus interest at 8% from the date of the sale. The Company
offered each purchaser who was not an existing shareholder the right of
rescission to refund the amount paid for the stock plus interest from the date
of payment. The proceeds from the sale of this stock plus accrued, unpaid
interest, were recorded on the balance sheet at December 31, 1995, as redeemable
stock.
As of September 17, 1996, the rescission offer expired with no shareholders
accepting the offer, therefore, the redeemable stock was transferred to
outstanding common stock.
27
<PAGE>
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Independent Auditors' Report .................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets....................... F-3
Consolidated Statements of Income................. F-4
Consolidated Statements of Shareholders' Equity... F-5
Consolidated Statements of Cash Flows............. F-6 - F-7
Notes to Consolidated Financial Statements........ F-8 - F-24
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
Board of Directors
Mountain Bank Holding Company and Subsidiaries
Enumclaw, Washington
We have audited the accompanying consolidated balance sheets of Mountain Bank
Holding Company and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mountain Bank
Holding Company and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/Knight, Vale & Gregory, Inc., P.S.
Tacoma, Washington
February 7, 1997, except for Note 21 as to which the date is February 13, 1997
F-2
<PAGE>
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Cash and due from banks (Note 3) $ 3,651,280 $ 4,346,269
Federal funds sold and interest bearing deposits in banks 7,550,000 2,825,000
Securities available for sale (Note 4) 13,076,512 7,749,931
Loans held for sale - - 415,500
Loans (Notes 5 and 11) 37,543,137 30,833,513
Less allowance for credit losses (Note 5) (390,683) (334,282)
Loans, net 37,152,454 30,499,231
Federal Home Loan and Federal Reserve Bank stock, at cost 378,200 359,800
Premises and equipment (Note 6) 2,205,910 2,384,725
Accrued interest receivable 373,382 287,570
Other assets 173,536 146,932
Total assets $64,561,274 $49,014,958
Liabilities
Deposits:
Demand $ 8,564,964 $ 6,250,508
Savings, NOW and money market 29,621,810 20,135,648
Time deposits (Note 7) 20,617,073 17,295,248
Total deposits 58,803,847 43,681,404
Accrued interest payable 225,844 145,154
Note payable (Note 8) 46,214 47,447
Deferred taxes (Note 9) 9,042 44,517
Other liabilities 197,449 83,454
Total liabilities 59,282,396 44,001,976
Commitments and Contingencies (Note 11) - - - -
Redeemable Stock
42,958 shares outstanding, 8% interest (Note 18) - - 446,904
Shareholders' Equity
Common stock (par value $1); authorized 1,000,000 shares;
issued and outstanding: 1996 - 704,398 shares;
1995 - 660,710 shares (Notes 13 and 18) 704,398 660,710
Paid-in capital 3,969,348 3,576,156
Retained earnings (Note 17) 629,877 320,586
Net unrealized appreciation (depreciation) on securities available for sale,
net of tax of $12,747 in 1996 and $4,443 in 1995 (24,745) 8,626
Total shareholders' equity 5,278,878 4,566,078
Total liabilities and shareholders' equity $64,561,274 $49,014,958
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Consolidated Statements of Income
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mountain Bank Holding Company and Subsidiaries
Years Ended December 31, 1996 and 1995
1996 1995
<S> <C> <C>
Interest Income
Loans $3,461,638 $2,916,948
Securities available for sale 638,582 335,697
Federal Home Loan Bank and Federal Reserve Bank 22,250 19,298
Federal funds sold and deposits in banks 123,431 115,738
Total interest income 4,245,901 3,387,681
Interest Expense
Deposits 1,724,949 1,392,087
Short-term borrowings 540 15,352
Note payable 3,763 3,846
Other - - 12,272
Total interest expense 1,729,252 1,423,557
Net interest income 2,516,649 1,964,124
Provision for Credit Losses (Note 5) 67,228 32,000
Net interest income after provision for credit losses 2,449,421 1,932,124
Non-Interest Income
Service charges on deposit accounts 360,122 296,902
Origination fees on mortgage loans sold 148,067 144,658
Gain on loans sold 86,057 142,242
Loss on sale of securities available for sale (11,133) (762)
Other 108,549 103,319
Total non-interest income 691,662 686,359
Non-Interest Expenses
Salaries 1,121,226 1,033,798
Employee benefits 203,115 188,112
Occupancy 141,844 133,098
Equipment 296,050 276,262
Other (Note 10) 948,699 854,851
Total non-interest expenses 2,710,934 2,486,121
Income before income taxes 430,149 132,362
Income Taxes (Note 9) 138,182 40,892
Net income $ 291,967 $ 91,470
Earnings Per Common Shares
Primary $.43 $.13
Fully diluted .40 .12
Average Number of Common Shares Outstanding
Primary 671,715 588,710
Fully diluted 723,590 638,126
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Consolidated Statements of Shareholders' Equity
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
Common Paid-in Retained on Securities
Stock Capital Earnings Available for Sale Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $556,668 $2,674,353 $246,440 ($39,769) $3,437,692
Sale of common stock
(102,042 shares) 102,042 893,803 - - - - 995,845
Options exercised
(2,000 shares) 2,000 8,000 - - - - 10,000
Net income - - - - 91,470 - - 91,470
Interest on redeemable stock (Note 18) - - - - (17,324) - - (17,324)
Net unrealized appreciation on
securities available for sale,
net of tax - - - - - - 48,395 48,395
Balance at December 31, 1995 660,710 3,576,156 320,586 8,626 4,566,078
Sale of common stock
(730 shares) 730 6,570 - - - - 7,300
Transfer of redeemable stock (Note 18) 42,958 386,622 17,324 - - 446,904
Net income - - - - 291,967 - - 291,967
Net unrealized depreciation on
securities available for sale,
net of tax - - - - - - (33,371) (33,371)
Balance at December 31, 1996 $704,398 $3,969,348 $629,877 ($24,745) $5,278,878
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 291,967 $ 91,470
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 67,228 32,000
Depreciation and amortization 282,371 267,987
Amortization, net of accretion 3,824 37,862
Deferred Federal income taxes (18,285) 19,049
Loss on securities available for sale 11,133 762
Gain on loans sold (86,055) (142,242)
Originations of loans held for sale (10,796,159) (12,135,020)
Proceeds from sales of loans 11,211,659 12,032,765
Increase in accrued interest receivable (85,812) (22,743)
Increase in accrued interest payable 80,690 73,957
Other - net 56,066 (22,024)
Net cash provided by operating activities 1,018,627 233,823
Cash Flows from Investing Activities
Net increase in Federal funds sold and
interest bearing deposits in banks (4,725,000) (2,825,000)
Purchase of securities available for sale (11,894,231) (4,759,748)
Proceeds from sales of securities available for sale 6,448,884 1,133,813
Proceeds from maturities of securities available for sale 71,648 1,800,000
Increase in loans made to customers, net of principal collections (6,634,393) (5,130,221)
Additions to premises and equipment (109,034) (581,844)
Net cash used in investing activities (16,842,126) (10,363,000)
Cash Flows from Financing Activities
Net increase in demand, savings, NOW and money market deposits 11,800,618 6,395,365
Net increase in time deposits 3,321,825 5,876,871
Net proceeds from issuance of stock 7,300 995,845
Proceeds from issuance of redeemable stock - - 429,580
Stock options exercised - - 10,000
Decrease in short-term borrowings - - (575,000)
Repayment of long-term debt (1,233) (1,140)
Net cash provided by financing activities 15,128,510 13,131,521
Net change in cash and due from banks (694,989) 3,002,344
Cash and Due from Banks
Beginning of year 4,346,269 1,343,925
End of Year $ 3,651,280 $ 4,346,269
</TABLE>
(continued)
See notes to consolidated financial statements.
F-6
<PAGE>
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
(concluded)
Mountain Bank Holding Company and Subsidiaries
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Interest paid $1,648,562 $1,349,600
Income taxes paid 71,000 - -
Supplemental Schedule of Non-Cash Investing and Financing Activities
Change in unrealized appreciation (depreciation) on securities
available for sale, net of tax ($ 33,371) $ 48,395
Transfer of redeemable stock to common stock 446,904 - -
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 1 - Summary of Significant Accounting Policies
Basis of Consolidation and Operations
The consolidated financial statements include the accounts of Mountain Bank
Holding Company (the Company) and its wholly owned subsidiaries, Mt. Rainier
National Bank (the Bank), and Mountain Real Estate Holdings, Inc.
All significant intercompany transactions and balances have been eliminated.
The Company is a holding company which operates primarily through its major
subsidiary, the Bank.
The Bank operates two branches and has a customer base centered in and around
Southeastern King County and Northeastern Pierce County, Washington. The Bank's
primary source of revenue is providing loans to customers, who are predominantly
small and middle-market businesses and middle-income individuals.
Financial Statement Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet, and revenues and
expenses for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for credit losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance
for credit losses and the valuation of foreclosed real estate, management
obtains independent appraisals for significant properties.
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
Securities Available for Sale
Securities available for sale consist of debt securities not classified as
trading or as securities held to maturity. Securities available for sale are
reported at fair value. Unrealized appreciation and depreciation, net of the
related deferred tax effect, are reported as a net amount in a separate
component of shareholders' equity. Realized gains and losses on securities
available for sale, determined using the specific identification method, are
included in earnings. Amortization of premiums and accretion of discounts are
recognized in interest income over the period to maturity.
Declines in the fair value of individual securities available for sale below
their cost that are other than temporary result in writedowns of the individual
securities to their fair value. Such writedowns are included in earnings as
realized losses.
Loans Held for Sale
Mortgage loans originated for sale in the secondary market are carried at the
lower of cost or estimated market value. Net unrealized losses are recognized
through a valuation allowance established by charges to income.
(continued)
F-8
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 1 - Summary of Significant Accounting Policies (continued)
Loans
Loans are stated at the amount of unpaid principal, reduced by deferred loan
fees and an allowance for credit losses. Interest on loans is accrued daily
based on the principal amount outstanding.
The accrual of interest on loans is discontinued when, in management's opinion,
the borrower may be unable to meet payments as they become due or when they are
past due 90 days as to either principal or interest. When interest accrual is
discontinued, all unpaid accrued interest is reversed against current income.
If management determines that the ultimate collectibility of principal is in
doubt, cash receipts on nonaccrual loans are applied to reduce the principal
income.
Allowance for Credit Losses
The allowance for credit losses is increased by provisions charged to operations
and reduced by loans charged off, net of recoveries. The allowance is based on
management's periodic evaluation of potential losses in the loan portfolio after
consideration of historical loss experience, adverse situations that may affect
the borrowers' ability to repay, the estimated value of any underlying
collateral, economic conditions, the results of examination of individual loans,
the evaluation of the overall portfolio by senior credit personnel and federal
and state regulatory agencies, and other risks inherent in the portfolio.
When management determines that it is possible that a borrower will be unable to
repay all amounts due according to the terms of the loan agreement, including
scheduled interest payments, the loan is considered impaired. The amount of
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or when the primary source of
repayment is provided by real estate collateral, at the fair value of the
collateral less estimated selling costs. The amount of impairment and any
subsequent charges are recorded through the provision for credit losses as an
adjustment to the allowance for credit losses.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation, which is computed on the straight-line method over the
estimated useful lives of the assets.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
The Bank and Mountain Real Estate Holdings, Inc. provide for income taxes on a
separate return basis and remit to the Company amounts currently payable.
(continued)
F-9
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 1 - Summary of Significant Accounting Policies (concluded)
Cash and Cash Equivalents
For purposes of presentation in the consolidated statements of cash flows, cash
and cash equivalents are defined as those amounts included in the balance sheet
caption "Cash and due from banks." The Bank maintains its cash in depository
institution accounts which, at times, may exceed federally insured limits. The
Bank has not experienced any losses in such accounts.
Earnings Per Common Share
Earnings per common share, assuming no dilution, are computed by dividing net
income by the weighted average number of common shares outstanding during each
year. Fully diluted earnings per common share are computed assuming the
exercise of stock options.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (SFAS No. 125), which establishes accounting and reporting
standards based on consistent application of a financial components approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when satisfied. The Statement
also provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. The Statement
is effective for the year beginning after December 15, 1996 and may not be
applied retroactively. The Company has not assessed the impact of SFAS No. 125
on its future operations.
In December 1996, the Financial Accounting Standards Board issued SFAS No. 127,
Deferral of the Effective Date of Certain Provisions of FASB No. 125, which
defers certain requirements of SFAS No. 125 to calendar year 1998.
Note 2 - Accounting Changes
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). As
permitted under SFAS No. 123, the Company will continue to measure compensation
expense for its stock-based employee compensation plan using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB Opinion No. 25), and will provide pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense. Adopting this
Statement will result only in additional disclosures for the Company, and as
such, its adoption will have no effect on financial position or results of
operations. Required pro forma disclosures are included in Note 13.
F-10
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 3 - Restricted Assets
Federal Reserve Board regulations require maintenance of minimum reserve
balances in the form of cash and balances with the Federal Reserve Bank. The
amounts of such balances for the years ended December 31, 1996 and 1995 were
approximately $300,000 and $447,000, respectively.
Note 4 - Debt Securities
Debt securities have been classified according to management's intent. In 1995,
management transferred several securities that had previously been classified as
"held to maturity" to "available for sale". In accordance with generally
accepted accounting principles, this transfer requires management to place all
securities in the "available for sale" classification. Amortized cost of
securities transferred to "available for sale" was $3,267,640. The related
unrealized gain associated with this transfer was $26,535, which is included in
the "unrealized appreciation (depreciation) on securities available for sale,
net of tax" component of shareholders' equity. The carrying amounts of
securities and their approximate fair values at December 31 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities Available for Sale
December 31, 1996
U.S. Treasury securities $ 3,149,463 $ 363 $ 4,677 $ 3,145,149
U.S. Government and agency securities 8,832,199 10,063 39,242 8,803,020
Corporate bonds 803,170 433 4,432 799,171
Municipal bonds 329,172 - - - - 329,172
$13,114,004 $10,859 $48,351 $13,076,512
December 31, 1995
U.S. Treasury securities $ 3,632,811 $16,397 $ 5,568 $ 3,643,640
U.S. Government and agency securities 2,258,939 5,522 236 2,264,225
Corporate bonds 1,493,079 2,556 6,050 1,489,585
Municipal bonds 352,033 448 - - 352,481
$ 7,736,862 $24,923 $11,854 $ 7,749,931
</TABLE>
(continued)
F-11
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 4 - Debt Securities (concluded)
Gross realized gains and losses on sales of securities available for sale for
the years ended December 31 were:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Gross Realized Gains
U.S. Treasury securities $ 314 $ - -
U.S. Government and agency securities 348 4,401
$ 662 $ 4,401
Gross Realized Losses
U.S. Treasury securities $ 6,179 $ - -
U.S. Government and agency securities 4,232 - -
Corporate bonds 1,384 5,163
$ 11,795 $ 5,163
The scheduled maturities of securities available for sale at
December 31, 1996 are as follows:
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 2,889,205 $ 2,883,438
Due in one to five years 8,743,355 8,716,628
Due in five years or more 1,481,444 1,476,446
$13,114,004 $13,076,512
</TABLE>
Securities with a carrying value of $499,395 and $500,938 at December 31, 1996
and 1995, respectively, were assigned or pledged to secure public deposits,
certain short-term borrowings, and for other purposes as required by law.
Note 5 - Loans
<TABLE>
<CAPTION>
Loans at December 31 consist of the following:
1996 1995
<S> <C> <C>
Commercial and agricultural $11,684,514 $13,621,689
Real estate:
Construction and land development 3,536,833 1,846,852
Mortgage 17,198,331 11,196,441
Consumer 5,123,459 4,168,531
$37,543,137 $30,833,513
</TABLE>
(continued)
F-12
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 5 - Loans (concluded)
Changes in the allowance for credit losses for the years ended December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance at beginning of year $334,282 $317,921
Provision for credit losses 67,228 32,000
Charge-offs (10,827) (15,639)
Balance at end of year $390,683 $334,282
</TABLE>
The recorded investment in impaired loans was $136,965 at December 31, 1996, and
was not material at December 31, 1995. At December 31, 1996, there were no
commitments to lend additional funds to borrowers whose loans have been
modified. There were no loans 90 days and over past due still accruing interest
at December 31, 1996 or 1995.
Maturity and repricing information for the Bank's loan portfolio at December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Fixed Rate Floating Rate
Maturing in Repricing in Total
<S> <C> <C> <C>
0 - 90 days $ 4,811,669 $9,285,977 $14,097,646
91 - 365 days 4,394,069 - - 4,394,069
1 year - 5 years 18,729,318 - - 18,729,318
5 years or more 185,139 - - 185,139
$28,120,195 $9,285,977 37,406,172
Impaired loans 136,965
$37,543,137
</TABLE>
F-13
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 6 - Premises and Equipment
The components of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 470,966 $ 470,966
Buildings 1,452,163 1,451,378
Equipment, furniture and fixtures 1,172,049 1,086,829
Total cost 3,095,178 3,009,173
Less accumulated depreciation 889,268 624,448
$2,205,910 $2,384,725
</TABLE>
Note 7 - Deposits
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000, is approximately $6,796,616 and $5,891,777 at
December 31, 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $17,424,261
1998 2,312,612
1999 201,266
2000 657,064
2001 and thereafter 21,870
$20,617,073
</TABLE>
Note 8 - Note Payable
The note payable is secured by land, and is payable at $415 monthly, including
interest of 8%. Future principal maturities are as follows: 1997 - $1,338;
1998 - $1,448; 1999 - $1,568; 2000 - 1,697; 2001 - $1,840; and thereafter -
$38,323.
F-14
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 9 - Income Taxes
The components of the provision for income taxes are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current $156,467 $21,843
Deferred (benefit) (18,285) 19,049
Income taxes $138,182 $40,892
</TABLE>
The effect of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred Tax Assets
Provision for loan losses $100,147 $ 76,352
Unrealized loss on securities available for sale 12,747 - -
Market value adjustment - - 2,260
Deferred compensation 5,157 3,754
Total deferred tax assets 118,051 82,366
Deferred Tax Liabilities
Depreciation 22,221 18,652
Cash basis tax accounting 38,380 47,633
Deferred loan fee income 53,608 52,002
Unrealized gain on securities available for sale - - 4,443
Market value adjustment 2,077 4,153
Federal Home Loan and Federal Reserve Bank stock dividends 10,807 - -
Total deferred tax liabilities 127,093 126,883
Net deferred tax liabilities $ 9,042 $ 44,517
</TABLE>
(continued)
F-15
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 9 - Income Taxes (concluded)
The following is a reconciliation between the statutory and effective federal
income tax rates for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
Percent of Percent of
Pre-tax Pre-tax
Amount Income Amount Income
<S> <C> <C> <C> <C>
Income tax at statutory rate $146,251 34.0% $45,003 34.0%
Increase (decrease) resulting from:
Tax exempt income (7,340) (1.7) - - - -
Surtax - - - - (7,132) (5.4)
Other (729) (.2) 3,021 2.3
Total income tax expense $138,182 32.1% $40,892 30.9%
</TABLE>
Note 10 - Related Party Transactions
At December 31, 1996 and 1995, certain officers and directors, or companies in
which they have 10% or more beneficial interest, were indebted to the Bank in
the aggregate amount of $1,548,507 and $1,456,719, respectively.
During 1996, $895,693 of new loans and advances were made, and repayments
totaled $803,905. During 1995, $1,218,611 of new loans and advances were made,
and repayments totaled $1,172,337.
Note 11 - Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. A summary of the
Bank's commitments is as follows:
(continued)
F-16
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 11 - Commitments and Contingencies (concluded)
Financial Instruments with Off-Balance-Sheet Risk (concluded)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commercial and agriculture $2,272,535 $ 795,668
Real estate 1,661,317 2,331,147
Credit cards 1,308,500 1,082,672
$5,242,352 $4,209,487
</TABLE>
Outstanding commitments under letters of credit totaled $151,000 and $265,000 at
December 31, 1996 and 1995, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank's experience has been that approximately 70% of loan commitments are drawn
upon by customers. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and income-producing
commercial properties.
Letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held varies as specified
above, and is required in instances where the Bank deems necessary.
The Bank has agreements with commercial banks and the Federal Home Loan Bank for
lines of credit totaling approximately $12,000,000, none of which was used at
December 31, 1996.
Note 12 - Concentration of Credit Risk
The Bank has credit risk exposure, including off-balance-sheet credit risk
exposure, as disclosed in Notes 5 and 11.
The ultimate collectibility of a substantial portion of the loan portfolio is
susceptible to changes in economic and market conditions in the region. The
bank generally requires collateral on all real estate loans and typically
maintains loan-to-value ratios of no greater than 75%.
(continued)
F-17
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 12 - Concentration of Credit Risk (concluded)
Investments in state and municipal securities involve governmental entities
within the Bank's market area. Letters of credit were granted primarily to
commercial borrowers. The Bank, as a matter of practice, generally does not
extend credit to any single borrower or group of related borrowers in excess of
$500,000.
The contractual amounts of credit related financial instruments such as
commitments to extend credit, credit card arrangements, and letters of credit
represent the amounts of potential accounting loss should the contract be fully
drawn upon, the customer default, and the value of any existing collateral
become worthless.
Note 13 - Stock Option Plans
Directors Plan
The 1990 Director Stock Option Plan grants an option to purchase 6,000 shares of
common stock upon initial election to the Board of Directors at an exercise
price equal to the fair market value of the common stock at the date of grant.
Options are exercisable on a cumulative basis in annual installments of 33% each
on the third, fourth and fifth anniversary of the date of grant. A total of
58,000 shares of the Company's common stock were reserved for option under this
plan, of which 54,000 options at $5 per share were granted on June 13, 1990, to
expire on June 13, 2005.
Employee Plan
In 1990, the Bank adopted a plan providing for granting certain key employees
options to purchase common stock. Under the terms of the plan, options are
incentive stock options (as defined in the Internal Revenue Code). The option
price will be fair market value at the date of grant or a price determined by
the Board of Directors, but not less than fair value. Pursuant to this plan,
60,000 shares are reserved for option as of December 31, 1996, of which 51,332
have been granted.
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies APB Opinion No. 25 in accounting for its plans (see Note 2). If the
Company had elected to recognize compensation cost for the stock options based
on the fair value at the grant dates, consistent with the method prescribed by
SFAS No. 123, net income and earnings per share would have been changed to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income:
As reported $291,967 $91,470
Pro forma 285,125 89,332
Primary earnings per share:
As reported $ .43 $ .13
Pro forma .42 .12
Fully diluted earnings per share:
As reported $ .40 $ .12
Pro forma .39 .11
</TABLE>
(continued)
F-18
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 13 - Stock Option Plans (concluded)
The fair value of each option grant is estimated on the date of grant, based on
the Black-Scholes option-pricing model and using the following weighted-average
assumptions: dividend yield of 0.0% for all years; risk-free interest rates of
6.00%; and expected holding periods ranging from 6.5 to 9.5 years.
Presented below is a summary of the status of the stock options held by the
Bank's employees, and the related transactions for the years presented:
<TABLE>
<CAPTION>
1996 1995
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 99,332 $ 5.13 100,332 $ 5.07
Granted 4,000 11.00 2,000 10.00
Expired - - - - (3,000) 6.25
Outstanding at end of year 103,332 5.36 99,332 5.13
Options exercisable at year end 97,332 96,664
</TABLE>
The weighted average fair value of stock options, calculated using the Black-
Scholes option-pricing model, granted during 1996 and 1995 was $4.54 and $4.12,
respectively.
The following summarizes information about stock options outstanding at December
31, 1996:
Options Outstanding
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Exercise Number Contractual Number
Prices Outstanding Life Exercisable
<S> <C> <C> <C>
$ 5.00 95,332 3.7 years 95,332
6.25 2,000 5.5 years 2,000
10.00 2,000 8.7 years - -
11.00 4,000 9.5 years - -
103,332 97,332
</TABLE>
F-19
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 14 - Profit Sharing Plan
The Bank's defined contribution profit sharing plan covers substantially all
employees who have completed one year or more of service. Employees are
eligible to defer up to 15% of their gross salary, with employer contributions
to the Plan made at the discretion of the Board of Directors. The Bank's
contribution for the years ended December 31, 1996 and 1995 totaled $23,904 and
$19,611, respectively.
Note 15 - Deferred Compensation Agreement
In 1993 the Bank established a deferred compensation agreement with a director
under which the director will defer his directors' fees. At retirement he will
receive a benefit of $975 per month for 120 months. The accrued liability
related to this agreement totaled $15,169 and $10,937 at December 31, 1996 and
1995, respectively. Expenses associated with this plan were $4,231 and $3,963
in 1996 and 1995, respectively. The Bank has also purchased a whole-life
insurance policy which may be used to fund benefits under the deferred
compensation agreement.
Note 16 - Employee Stock Purchase Plan
Effective July 1, 1995, the Company adopted an employee stock purchase plan
whereby eligible employees can purchase common stock at the lesser of the
stock's fair market value at the beginning or ending of the plan year.
The aggregate number of shares reserved under this plan is 19,270. No employee
can purchase more than 200 shares or common stock valued at more than $25,000 in
any plan year. In 1996, 730 shares were issued at a price of $10 per share.
None were issued in 1995.
Note 17 - Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can cause certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines of the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital adequacy guidelines
that involve quantitative measures of the Company's and the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's capital classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the regulatory
framework for prompt corrective action, the Bank must maintain minimum Tier 1
leverage, Tier 1 risk-based, and total risk-based ratios as set forth in the
table.
(continued)
F-20
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 17 - Regulatory Matters (concluded)
As of December 31, 1996, the most recent notification from the Bank's regulator
categorized the Company and the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company and the Bank must maintain minimum total risk-based, Tier 1 risk-
based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To be Well Capitalized
Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Tier 1 capital (to average assets):
Consolidated $5,303,623 9.15% $2,315,730 4.00% N/A N/A
Bank 4,776,369 8.33 2,294,640 4.00 $2,668,300 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 5,303,623 13.14 1,614,400 4.00 N/A N/A
Bank 4,776,369 12.00 1,592,320 4.00 2,388,480 6.00
Tier 2 capital:
Consolidated 5,694,306 14.11 3,228,800 8.00 N/A N/A
Bank 5,142,307 12.92 3,184,640 8.00 3,980,800 10.00
December 31, 1995
Tier 1 capital (to average assets):
Consolidated $4,987,032 10.82% $1,844,188 4.00% N/A N/A
Bank 4,473,912 9.72 1,841,160 4.00 $2,301,450 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 4,987,032 15.63 1,275,948 4.00 N/A N/A
Bank 4,473,912 14.06 1,272,800 4.00 1,909,200 6.00
Tier 2 capital:
Consolidated 5,321,314 16.68 2,551,897 8.00 N/A N/A
Bank 4,808,193 15.11 2,545,600 8.00 3,182,000 10.00
</TABLE>
Management believes, as of December 31, 1996, that the Company and the Bank meet
all capital requirements to which they are subject.
Restrictions on Retained Earnings
National banks can initiate dividend payments in a given year, without prior
regulatory approval, equal to net profits, as defined, for that year plus
retained net profits for the preceding two years. The Bank can distribute as
dividends to the parent company approximately $625,000 as of December 31, 1996.
F-21
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 18 - Redeemable Stock
On June 25, 1995, the Company sold 140,000 shares of its common stock at a total
offering price of $1,400,000 ($10 per share). Exemption from Federal
registration was claimed pursuant to the intrastate offering exemption,
Sec. 3(a)(11) of the Securities Act of 1933. Exemption from State registration
was claimed pursuant to the State existing shareholder exemption, RCW
21.20.320(11). In March 1996 it was discovered that 42,958 shares in this
offering had been sold to purchasers who were not existing shareholders. As a
result, the Company had a potential contingent liability for the sale of
unregistered securities totaling $429,580, plus interest at 8% from the date of
sale. The Company offered each purchaser who was not an existing shareholder the
right of rescission to refund the amount paid for the stock plus interest from
the date of payment. The proceeds from the sale of this stock plus accrued,
unpaid interest, were recorded on the balance sheet at December 31, 1995 as
redeemable stock.
As of September 17, 1996, the rescission offer expired with no shareholders
accepting the offer; therefore, the redeemable stock was transferred to
outstanding common stock.
Note 19 - Condensed Financial Information - Parent Company Only
Condensed Balance Sheets - December 31
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Cash $ 7,068 $ 9,476
Investment in the Bank 4,714,128 4,486,183
Investment in Mountain Real Estate Holdings, Inc. 502,579 502,575
Due from subsidiaries 154,483 42,845
Deferred tax 12,743 - -
Organizational costs, net 3,947 6,906
Total assets $5,394,948 $5,047,985
Liabilities and Shareholders' Equity
Federal income taxes payable $ 116,070 $ 30,560
Deferred tax - - 4,443
Shareholders' equity 5,278,878 5,012,982
Total liabilities and shareholders' equity $5,394,948 $5,047,985
</TABLE>
(continued)
F-22
<PAGE>
Notes to Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 19 - Condensed Financial Information - Parent Company Only (concluded)
Condensed Statements of Income - Years Ended December 31
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Operating Income/Bank
Dividend from subsidiary $ 60,000 $ - -
Investment income - - 247
Operating Expenses (70,512) (34,917)
Loss before income taxes and equity
in undistributed income of subsidiaries (10,512) (34,670)
Income Taxes (Benefit) (24,771) (15,675)
Income (loss) before equity in
undistributed income of subsidiaries 14,259 (18,995)
Equity in Undistributed Income of Subsidiaries 277,708 110,465
Net income $ 291,967 $ 91,470
Condensed Statements of Cash Flows - Years Ended December 31
Cash Flows from Operating Activities
Net income $ 291,967 $ 91,470
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of organization costs 2,960 2,960
Equity in undistributed income of subsidiaries (277,708) (110,465)
Increase in receivable from subsidiaries (112,437) (62,984)
Increase in Federal income taxes 85,510 47,308
Other - - 60,258
Net cash provided by (used in) operating activities (9,708) 28,547
Cash Flows from Investing Activities
Decrease in interest bearing deposit in the Bank - - 39,744
Cash Flows from Financing Activities
Cost of stock offering - - (24,575)
Proceeds from issuance of common stock 7,300 1,450,000
Stock options exercised - - 10,000
Investment in subsidiaries - - (1,505,000)
Net cash provided by (used in) financing activities 7,300 (69,575)
Net decrease in cash (2,408) (1,284)
Cash, Beginning of Year 9,476 10,760
Cash, end of year $ 7,068 $ 9,476
</TABLE>
F-23
<PAGE>
Notes to Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1996 and 1995
Note 20 - Other Expenses
Other expenses include the following amounts which are in excess of 1% of the
total of interest income and non-interest income for the years ended December
31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Marketing and advertising $ 60,890 $ 63,484
Consulting 61,263 45,162
Legal and accounting 96,568 45,980
Regulatory assessments 22,876 56,825
Data processing 268,800 202,198
Office supplies and expenses 91,690 96,346
Business taxes 61,535 55,504
</TABLE>
Note 21 - Subsequent Event
On February 13, 1997, the Company entered into a settlement agreement with the
Bank's former executive officer whereby the Company agreed to pay $186,278 for a
three-year noncompete agreement and other benefits. In addition, the executive
agreed to forfeit stock options totaling 20,000 fully vested shares at an option
price of $5 per share.
F-24
<PAGE>
PART III
EXHIBITS
--------
The following exhibits are incorporated by reference to the Company's
registration statement on Form 10-KSB filed on August 16, 1996.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Articles of Incorporation and Amendment, of the registrant
2.2 By-laws of the registrant, currently in effect
3.1 Form of Stock Certificate for Common Stock
6.1 Lease Agreement for Buckley Branch office dated February 1, 1995.
6.2 Mt. Rainier National Bank 1990 Employee Stock Option Plan
6.3 Mt. Rainier National Bank 1990 Director Stock Option Plan
6.4 Mt. Rainier National Bank 1995 Employee Stock Purchase Plan
27 Financial Data Schedule*
</TABLE>
___________
*Filed herein
E-1
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
MOUNTAIN BANK HOLDING COMPANY
Date: March 25, 1997
By: /s/ Roy T. Brooks
------------------------------------------
Roy T. Brooks, Chairman of the Board & CEO
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Roy T. Brooks, Date: March 25, 1997
------------------------------------------
Roy T. Brooks, Chairman of the Board & CEO
(Principal Executive Officer)
By: /s/ Sheila M. Brumley Date: March 25, 1997
------------------------------------------
Sheila M. Brumley, Cashier & Secretary to the Board
(Principal Accounting Officer)
By: /s/ Susan K. Bowen-Hahto By: /s/ Brian W. Gallagher
------------------------------ ------------------------------
Susan K. Bowen-Hahto, Director Brian W. Gallagher, Director
Date: March 25, 1997 Date: March 25, 1997
By: /s/ Terry L. Garrison By: /s/ Michael K. Jones
------------------------------ ------------------------------
Terry L. Garrison, Director Michael K. Jones, Director
Date: March 25, 1997 Date: March 25, 1997
By: /s/ Barry C. Kombol By: /s/ John W. Raeder
------------------------------ ------------------------------
Barry C. Kombol, Director John W. Raeder, Director
Date: March 25, 1997 Date: March 25, 1997
By: /s/ Garrett S. Van Beek By: /s/ Hans Rudy Zurcher
------------------------------ ------------------------------
Garrett S. Van Beek, Director Hans Rudy Zurcher, Director
Date: March 25, 1997 Date: March 25, 1997
S-1
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