<PAGE>
As filed with the Securities and Exchange Commission on September 29, 1997
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM SB-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
_______________
MOUNTAIN BANK HOLDING COMPANY
(Name of small business issuer in its charter)
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WASHINGTON 6712 91-1602736
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(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification no.)
</TABLE>
501 Roosevelt, Enumclaw, Washington 98022 (360) 825-0100
(Address and telephone number of principal executive offices and principal place
of business)
__________
ROY T. BROOKS
Chairman of the Board and Chief Executive Officer
501 Roosevelt
Enumclaw, Washington 98022
(360) 825-0100
(Name, address, and telephone number of agent for service)
___________
Copies of communications to:
STEPHEN M. KLEIN, ESQ.
WILLIAM E. BARTHOLDT, ESQ.
Graham & Dunn P.C.
1420 Fifth Avenue, 33rd Floor
Seattle, Washington 98101
___________
Approximate date of commencement of proposed sale of securities to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
CALCULATION OF REGISTRATION FEE
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Title of Each Proposed Proposed Maximum Amount of
Class of Securities Amount Being Offering Price Aggregate Registration
Being Registered Registered Per Share Offering Price(1) Fee
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Common Stock 100,000 shares $12.50 $1,250,000 $378.79
======================================================================================================
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(1) Estimated solely for purpose of determining registration fee pursuant to
Rule 457(a).
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
MOUNTAIN BANK HOLDING COMPANY
Cross Reference Sheet
Between Form SB-1 and Prospectus
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Registration Statement Item and Heading Location in Prospectus
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1. Inside Front and Outside Back Cover Pages
of Prospectus............................................... Inside Front and Back Pages; Available Information;
Table of Contents
2. Significant Parties......................................... Management
3. Relationship with Issuer of Experts Named in
Registration Statement...................................... Not Applicable
4. Legal Proceedings........................................... Not Applicable
5. Changes in and Disagreements with Accountants............... Not Applicable
6. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.............................. Indemnification
</TABLE>
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MODEL B ITEMS
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1. Cover Page.................................................. Front Cover Page
2. Distribution Spread......................................... Front Cover Page
3. Summary Information, Risk Factors and Dilution.............. Prospectus Summary; Risk Factors; Dilution
4. Plan of Distribution........................................ Prospectus Summary; Terms of the Offering
5. Use of Proceeds to Issuer................................... Prospectus Summary; Use of Proceeds
6. Description of Business..................................... Prospectus Summary; Business; Regulation and
Supervision
7. Description of Property..................................... Business
8. Directors, Executive Officers and Significant
Employees................................................... Management
9. Remuneration of Directors and Officers...................... Management
10. Security Ownership of Management and Certain
Securities Holders.......................................... Management
11. Interest of Management and Others in Certain
Transactions................................................ Management; Certain Transactions and
Relationships
12. Securities Being Offering................................... Front Cover Page; Prospectus Summary; Description
of Securities
</TABLE>
PART F/S
- --------
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1. Financial Information Required in Prospectus................ Financial Statements
</TABLE>
<PAGE>
MOUNTAIN BANK HOLDING COMPANY
501 Roosevelt
Enumclaw, WA 98022
(360) 825-0100
A Maximum of 100,000 Shares
(No Minimum Number of Shares)
$1.00 Par Value Common Stock
The 100,000 shares of common stock (the "Shares") being offered hereby are
being sold by Mountain Bank Holding Company (the "Company") to existing
Shareholders and the public (the "Offering") at an offering price of $12.50 per
share. Commencing November 1, 1997, the Company will offer 70,630 Shares to
existing shareholders ("Existing Shareholders") by offering each shareholder the
right to purchase one Share for each 10 Shares owned of record on September 15,
1997 ("Allocated Shares"). The remaining 29,370 Shares will be offered at the
same time to selected persons who are not presently shareholders of the Company
("New Shareholders") on a first come, first served basis. The exclusive offer
to Existing Shareholders and New Shareholders will expire on November 30, 1997.
If all Shares are not subscribed for by November 30, 1997, they will be offered
to the general public, and to Existing Shareholders wishing to increase their
stockholdings also on a first come, first served basis. The offering to the
general public will expire on December 31, 1997, unless terminated earlier or
unless extended by the Company. There is no minimum purchase for Existing
Shareholders. The minimum purchase for New Shareholders and the general public
is 100 Shares. No person will be permitted to purchase more than 2,500 Shares.
COMPLETION OF THE OFFERING IS NOT CONDITIONED UPON RECEIVING A MINIMUM OFFERING
AMOUNT. ONCE A SUBSCRIPTION HAS BEEN ACCEPTED BY THE COMPANY, IT CANNOT BE
WITHDRAWN BY THE INVESTOR. See "Terms of the Offering."
Although the Company is a public reporting company under the Securities
Exchange Act of 1934, prior to this Offering there has been no public market for
the Shares and there can be no assurance that an established market for such
Shares will develop.
INVESTMENT IN THE SECURITIES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 3 FOR INFORMATION THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR.
THE SECURITIES OFFERED BY MEANS OF THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS
OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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================================================================================
Price to Underwriting Discounts Proceeds to
Public (1) and Commissions(2) Company(3)
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Per Common Share $12.50 $0 $12.50
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Maximum Offering $1,250,000 $0 $1,250,000
================================================================================
</TABLE>
(1) The offering price for the Shares has been determined by the Company based
solely upon its belief of the fair market value of the Shares, and not on
any objective criteria.
(2) Neither an underwriter nor broker-dealer will be used in connection with
the Offering; all Shares are being offered on a best-efforts basis by
certain directors and executive officers of the Company and no commissions
will be paid on sales. See "Terms of the Offering."
(3) Before deducting estimated expenses of the Offering of approximately
$50,000, including registration fees, legal and accounting fees, printing
and other miscellaneous expenses payable by the Company.
The date of this Prospectus is October __, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission ("Commission"). Such reports and other information filed by the
Company may be examined without charge at, or copies obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and are
also available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. In addition, copies of the Registration Statement and related
documents may be obtained through the Commission's Internet address at
http://www.sec.gov.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a registration statement on Form SB-1 (together with any
amendments thereto, the "Registration Statement") under the Securities Act of
1933, as amended, with respect to the securities offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Shares,
reference is made to the Registration Statement and exhibits filed therewith,
which may be examined without charge at, or copies obtained upon payment of
prescribed fees from, the Commission and at the regional offices of the
Commission at the locations listed above. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
<PAGE>
TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY......................................................... 1
RISK FACTORS............................................................... 3
DIVIDEND POLICY............................................................ 5
TERMS OF THE OFFERING...................................................... 6
DILUTION................................................................... 8
USE OF PROCEEDS............................................................ 8
BUSINESS................................................................... 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.................. 25
MANAGEMENT................................................................. 28
CERTAIN TRANSACTIONS AND RELATIONSHIPS..................................... 33
BANK SUPERVISION AND REGULATION............................................ 34
DESCRIPTION OF SECURITIES.................................................. 41
EXPERTS.................................................................... 42
LEGAL MATTERS.............................................................. 43
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES............................. 43
INDEPENDENT AUDITOR'S REPORT............................................... F-1
FINANCIAL STATEMENTS....................................................... F-2
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all share amounts in
this Prospectus have been adjusted to reflect a two-for-one stock split effected
by the Company on February 17, 1995.
The Company
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, a national banking association organized under the laws of the United
States. The Company, with consolidated total assets of approximately $67.4
million at June 30, 1997, is headquartered in Enumclaw, Washington. 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
has received approval from the Comptroller of the Currency to open an additional
branch facility for the Bank in Black Diamond, Washington. The purchase of
property located at 31329 Third Avenue in Black Diamond has been completed. The
Company anticipates that the branch will open late in the fourth quarter of
1997.
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 in conjunction with the premises occupied by
the Bank.
The Bank provides a full range of retail banking services, including (i) the
acceptance of demand, savings and time deposits; (ii) the making of loans to
consumers, businesses and other institutions; (iii) the investment of excess
funds in the purchase of federal funds, U.S. government and agency obligations,
and state, county and municipal bonds; and (iv) other miscellaneous financial
services usually handled for customers by commercial banks.
Conditions of the Offering
Completion of the Offering is not conditioned upon receiving a minimum
Offering amount. There can be no assurance that the maximum offering of 100,000
shares will be attained. No escrow arrangements have been made with respect to
the Offering. As a consequence, all subscription funds received and accepted by
the Company will be retained. While no modification of the terms of the
Offering are anticipated, in the event of any material changes, subscribers will
be resolicited and will be given an opportunity to rescind their investment.
The purpose of the Offering is to raise capital to support the growth of the
Company, including the anticipated opening of a new branch in Black Diamond,
Washington. See "Use of Proceeds."
1
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The Offering
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Common Stock Offered............. 100,000 Shares
Common Stock to be Outstanding
After the Offering.............. 806,296 Shares
Minimum Subscription............. New Shareholders and the general public must
subscribe for a minimum of 100 Shares
Maximum Subscription............. 2,500 Shares
Price............................ $12.50 per Share
Use of Proceeds.................. To support the Company's growth, including
expansion into Black Diamond, Washington. See
"Use of Proceeds."
Special Factors to be Considered. The securities offered involve certain risks.
See "Risk Factors."
</TABLE>
Plan of Distribution. The Offering will be conducted in two stages:
PHASE 1. The first stage ("Phase 1") is an offer exclusively to
-------
Existing Shareholders of the Company and to New Shareholders. The Company
anticipates, subject to the filing and effectiveness of the Registration
Statement, that Phase 1 will commence on or about November 1, 1997, and continue
until November 30, 1997. Phase 1 of the Offering provides Existing Shareholders
the right to purchase one Share for each 10 Shares owned of record on September
15, 1997 ("Allocated Shares"), for a total of 70,630 Shares. There is no
minimum purchase for Existing Shareholders. Concurrent with the Offering to
Existing Shareholders, New Shareholders will have the right to purchase a total
of 29,370 Shares.
PHASE 2. If all Shares allocated to Existing Shareholders and New
-------
Shareholders are not subscribed for, they will be offered to the general public,
and to Existing Shareholders wishing to increase their stockholdings, commencing
December 1, 1997 ("Phase 2"). No person (whether an Existing Shareholder or New
Shareholder) will be permitted to purchase more than 2,500 Shares. Phase 2 of
the Offering will expire on December 31,1997, at 5:00 p.m. local time unless
sooner terminated or unless extended by the Company.
EXCEPT FOR ALLOCATED SHARES OFFERED TO EXISTING SHAREHOLDERS IN PHASE 1,
------------------------------------------------------------------------
ALL SUBSCRIPTIONS WILL BE ACCEPTED BY THE COMPANY ON A FIRST COME, FIRST SERVED
- -------------------------------------------------------------------------------
BASIS, AS THEY ARE RECEIVED BY THE COMPANY. Shares will be marketed on a best
- ------------------------------------------
efforts basis through certain of the Company's executive officers and directors,
none of whom will receive any commissions or other form of compensation in
connection with such efforts. Subscriptions may be accepted or rejected in
whole or in part by the Company for any reason. ONCE A SUBSCRIPTION HAS BEEN
ACCEPTED BY THE COMPANY, IT CANNOT BE WITHDRAWN BY THE INVESTOR. There are no
escrow arrangements with respect to this Offering. Accordingly, subscription
funds received and accepted by the Company will be available for immediate use
by the Company. See "Terms of the Offering."
2
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES BEING OFFERED INVOLVES CERTAIN RISKS. IN
ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, ANYONE
CONSIDERING AN INVESTMENT IN THE SHARES SHOULD READ AND CAREFULLY CONSIDER THE
FOLLOWING:
Changes in Government Regulation
The Company and the Bank operate in a highly regulated environment and
are subject to supervision by several governmental regulatory agencies,
including the Office of the Comptroller of the Currency (the "Comptroller" or
"OCC"), the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") and the Federal Deposit Insurance Corporation ("FDIC"). The
Company and the Bank are vulnerable to future legislation and government policy,
including bank deregulation and interstate expansion, which could adversely
affect the banking industry as a whole, including the operations of the Company
and the Bank. Presently, significant attention is focused on changing the
regulation of banks and the financial services industry. On September 29, 1994,
President Clinton signed the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act"), which, among other things,
permits interstate banking and branching subject to certain restrictions.
Additionally, since June 1, 1997, the Interstate Act permits interstate bank
mergers, subject to certain restrictions. The outcome, nature, timing, and
effect upon the Company of any changes resulting from the Interstate Act or from
other proposals before Congress cannot be predicted. See "Bank Supervision and
Regulation."
Unpredictable Economic Conditions
Commercial banks and other financial institutions are affected by
economic and political conditions, both domestic and international, and by
governmental monetary policies. Conditions such as inflation, recession,
unemployment, high interest rates, short money supply, scarce natural resources,
international disorders and other factors beyond the control of the Company may
adversely affect its profitability.
Lack of 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 subsidiaries.
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. See "Dividend Policy" and
"Bank Supervision and Regulation - Restrictions on Capital Distributions."
Uncertainty of Return on Investment
No assurance can be given that a purchaser of the Shares will realize
a substantial return on an investment, or any return at all. Further, as a
result of the uncertainty and risks associated with the Company's operations as
described in this "Risk Factors" section, it is possible that an investor could
lose his or her entire investment.
Dilution
Current holders of the Shares will suffer a dilution in their
percentage interest in the outstanding Shares to the extent that they do not
purchase sufficient Shares to maintain their proportionate interest in the
equity of
3
<PAGE>
the Company. This dilution will impact each shareholder's voting rights and the
amount of distributions, if any, received by shareholders from the Company.
Additionally, purchasers in this Offering will experience an immediate dilution
of their equity interest in the Company's common stock. See "Dilution."
Lack of Trading Market
The Shares are not listed on any stock exchange and there is very
little market activity in the stock. The Shares are not listed, traded or
quoted on any securities exchange or in the over-the-counter market, and no
dealer has committed to make or makes a market in the Shares, although isolated
transactions between individuals occur from time to time. There can be no
assurance that the Shares can be sold at a price equal to or greater than the
subscription price, following completion of the Offering. See "Market for
Common Equity and Related Stockholder Matters."
Restrictions on Change in Control
As a Washington corporation, the Company is subject to various
legislative acts set forth in the Washington Business Corporation Act, which
impose certain restrictions and require certain procedures with respect to
certain takeover offers and business combinations, including, but not limited
to, combinations with interested shareholders and share repurchases from certain
shareholders. See "Description of Securities -- Anti-Takeover Provisions."
Provisions of the Company's Articles of Incorporation requiring a staggered
board could be used to hinder or delay a takeover bid for the Company. Such
provisions may inhibit takeover bids and decrease the chance of shareholders
realizing a premium over market price for their Shares as a result of a takeover
bid. See "Management."
Potential Adverse Impact of Changes in Interest Rates
The Bank's profitability is dependent to a large extent upon net
interest income, which is the difference between its interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The banking industry has in recent years experienced significant fluctuations in
net interest income due to changing interest rates. The Bank will continue to
be affected by changes in levels of interest rates and other economic factors
beyond its control, particularly to the extent that such factors affect the
overall volume of their lending and deposit activities. 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 said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income while a positive gap would
tend to result in an increase in net interest income. During a period of
falling interest rates, a negative gap would tend to result in an increase in
net interest income while a positive gap would tend to adversely affect net
interest income. The Bank has a negative repricing gap within 12 months, which
could materially adversely affect future earnings in the event of a rise in
market interest rates. See "Business -- Asset and Liability Management."
Dependence on Local Economy
The future success of the Company and the Bank is largely dependent on
the general economic conditions of its primary service area, which is the city
of Enumclaw and its environs, which include the communities of Buckley and Black
Diamond. Any factors which adversely affect the economy of the Bank's
4
<PAGE>
primary service area could adversely affect the performance of the Company.
While the Company's primary service area was primarily dependent upon
agriculture a few years ago, there is currently a more diversified economic base
which includes manufacturing, retail and wholesale establishments and personal
and industrial services. There can be no assurance that a slowdown in the
economy as a result of market conditions would not have an adverse impact on the
business of the Company. See "Business -- Market Area and Competition."
Loan Concentration
The Bank's loan portfolio is concentrated in agriculture, dairy and
construction lending. "Loan concentrations" are categories of loans that exceed
25% of the Bank's capital structure and loan loss allowance. Although the
Company does not believe that the loan concentrations currently pose an undue
risk, the concentration in real estate construction loans could present risk in
the event of a downturn in the local economy. See "Business - Lending
Activities."
Dependence on Management
The Company and the Bank are, and for the foreseeable future will be,
dependent upon the services of Roy T. Brooks, Chairman of the Board and CEO of
the Company, and Steve W. Moergeli, President and CEO of the Bank, and the
experienced management team they have assembled. The loss of Mr. Brooks or Mr.
Moergeli, if not replaced shortly with equally competent persons, could have an
adverse effect on the Company and the Bank. Neither the Company nor the bank
has entered into an employment agreement with any of its employees. The Bank
will be required to continue to attract and retain qualified persons to be
successful in the competitive banking market.
Offering Price
The offering price of $12.50 per Share has been established by the
Company solely based upon its belief of the fair market value of the Shares.
The offering price of $12.50 represents a multiple of 1.6 times the book value
of the Shares, as of June 30, 1997. See the "Consolidated Balance Sheets" in
the Financial Statements. No independent investment banking firm or securities
dealer has been retained to assist in the valuation of the Shares offered hereby
or in the determination of the offering price.
Existence of Competition in the Company's Market Area
Commercial banking is a highly competitive business. The Company and
the Bank compete with other commercial banks, savings and loan associations,
credit unions and finance companies operating in Enumclaw and its environs and
elsewhere. The Bank is subject to substantial competition for loans and
deposits coming from other financial institutions in the market area. In
certain aspects of its business, the Bank also competes with credit unions,
small loan companies, insurance companies, mortgage companies, finance
companies, brokerage houses, and other financial institutions, some of which are
not subject to the same degree of regulation and restriction as the Bank and
some of which have financial resources greater than those of the Bank. The Bank
will compete for funds with other institutions, which, in most cases, are
significantly larger and are able to provide a greater variety of services than
the Bank and thus may obtain deposits at lower rates of interest. If the
Company were to become unable to compete effectively, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business -- Market Area and Competition."
5
<PAGE>
DIVIDEND POLICY
The Company currently intends to retain its earnings, if any, for use
in the business and does not anticipate paying any cash dividends in the
foreseeable future. The board of directors cannot predict when such dividends,
if any, will ever be made. The payment of dividends, if any, will at all times
be subject to the payment of the Company's expenses, the maintenance of adequate
liquidity and loan loss allowance, and minimum capital requirements for national
banks.
TERMS OF THE OFFERING
Method of Offering
Phase 1. The Company has elected to first offer up to 70,630 of the
-------
Shares offered by means of this Prospectus to Existing Shareholders at $12.50
per share, on the basis of one Share for each 10 Shares held of record as of the
close of business on September 15, 1997, and to offer the remaining 29,370
Shares to New Shareholders. There is no minimum number of Shares an Existing
Shareholder must purchase, though all subscriptions must be for whole Shares.
New Shareholders must purchase a minimum of 100 Shares. No investor will be
permitted to purchase more than 2,500 Shares through this Offering. Phase 1
will expire on November 30, 1997.
Phase 2. If all Shares allocated to Existing Shareholders and New
-------
Shareholders are not subscribed by November 30, 1997, the Company will offer any
remaining Shares to the general public, including Existing Shareholders wishing
to increase their stockholdings. The general public must purchase a minimum of
100 Shares. As explained below under "How to Subscribe," Existing Shareholders
who wish to purchase more than their Allocated Shares will so indicate in their
subscription agreement. Existing Shareholders will have a priority over the
general public in Phase 2, on a "first come, first served" basis, if they have
indicated a desire to purchase Additional Shares in their subscription
agreements during Phase 1. Phase 2 will expire on December 31, 1997, unless
sooner terminated or unless extended by the Company.
Except for Allocated Shares offered to Existing Shareholders in Phase
1, ALL SUBSCRIPTIONS WILL BE ACCEPTED BY THE COMPANY ON A FIRST COME, FIRST
------------------------------------------------------------------------
SERVED BASIS, AS THEY ARE RECEIVED BY THE COMPANY. All subscriptions will be
- -------------------------------------------------
accepted by the Company only for whole Shares. Existing Shareholders will be
permitted to purchase the number of Shares closest to the number of Shares to
which they are entitled, rounded to the next full share. The Company reserves
the right to reject any subscription in whole or in part. If any subscription
is rejected by the Company, the full amount of subscription funds tendered will
be returned promptly to the subscriber without any deductions.
How to Subscribe
The Company has prepared two forms of subscription agreement, one for
Existing Shareholders and one for New Shareholders. The appropriate form of
subscription agreement should be completed, signed by appropriate subscribers,
and sent with full payment for the number of Shares subscribed to: Mountain
Bank Holding Company, 501 Roosevelt Avenue, Enumclaw, Washington 98022. Fully
completed and signed subscription agreements, together with full payment for the
subscribed Shares, must be received at the offices of the Company no later than
5:00 p.m. local time on November 30, 1997, in order to participate in Phase 1.
SPECIAL INSTRUCTIONS FOR EXISTING SHAREHOLDERS. Existing shareholders
----------------------------------------------
who wish to purchase more than their Allocated Shares ("Additional Shares")
should so indicate on their subscription agreement. If Shares remain unsold at
the end of Phase 1, such Shares will be offered to the general public in Phase
2, including Existing Shareholders who have indicated a desire to purchase
Additional Shares on their
6
<PAGE>
subscription agreements. Existing Shareholders subscribing for Additional Shares
during Phase 1 will have priority over the general public during Phase 2.
IN PHASE 2, ADDITIONAL SHARES WILL BE SOLD TO EXISTING SHAREHOLDERS ON
A FIRST COME, FIRST SERVED BASIS AS SUBSCRIPTIONS ARE RECEIVED BY THE COMPANY.
As soon as possible following the expiration or termination of the Offering, the
Company will issue Additional Shares to Existing Shareholders who have requested
them.
Offering Expiration Date
Completed and signed subscription agreements, together with full
payment for Shares subscribed, must be received at the offices of the Company no
later than 5:00 p.m. local time on November 30, 1997, in order to participate in
Phase 1. Subscription agreements from Existing Shareholders (for either
Allocated Shares or Additional Shares) received after November 30, 1997, (but
before the expiration of Phase 2) will not qualify for Phase 1, and will thus
have no priority in the sale of Shares in Phase 2.
Completed and signed subscription agreements from members of the
general public (including Existing Shareholders) in Phase 2 must be received at
the Company not later than 5:00 p.m. on December 31, 1997, the expiration date
of the Offering. The Company reserves the right to terminate Phase 2 of the
Offering prior to December 31, 1997. The Company also has the right to extend
the Offering. The Company will not accept any subscriptions after the Offering
has expired or has been terminated.
Subscription Funds
All subscription funds received by the Company will become the
property of the Company. ONCE A SUBSCRIPTION HAS BEEN ACCEPTED BY THE COMPANY,
IT CANNOT BE WITHDRAWN BY THE INVESTOR.
Commissions
No commissions, fees, or other remuneration will be paid to any
directors, officers, or employees of the Company, or to any other person or
company for selling the Shares in this Offering.
Delivery of Stock Certificates
Certificates for Shares duly subscribed, paid for and accepted by the
Company will be issued as soon as practicable after completion of the Offering.
Purchase Intentions of Directors and Executive Officers
The directors and executive officers of the Company have expressed an
intent to purchase in the aggregate approximately 12,000 Allocated Shares made
available through this Offering on the same terms being offered to all Existing
Shareholders. If they do purchase 12,034 Shares in the aggregate, such persons
will beneficially own 198,206 outstanding Shares. See "Security Ownership of
Management and Certain Shareholders."
Representations of Subscribers
Each subscriber will also be required to represent that he or she has
received a copy of this Prospectus. This acknowledgement by a subscriber would
be asserted by the Company in defense of any claims against the Company by a
subscriber on the basis that he or she was not provided with a copy of the
Prospectus, as required
7
<PAGE>
under federal securities laws. By making this representation, subscribers are
not waiving any of their rights under the federal securities laws.
DILUTION
The net book value of the Company at June 30, 1997, was $5,517,374, or
$7.81 per share. Net book value per share is determined by dividing the net
worth of the Company (assets less total liabilities) by the number of Shares
outstanding. Without taking into account any changes in such net book value
after June 30, 1997, other than to give effect to the sale of 100,000 Shares
offered by the Company in this Offering (after deducting estimated offering
expenses payable by the Company), the pro forma net book value of the
outstanding Shares at June 30, 1997, would have been $6,717,374, or $8.33 per
share. This represents an immediate increase in net book value to present
shareholders of $.52 per share and an immediate dilution to new investors of
$4.17 per share. The following table illustrates the dilution on a per-share
basis:
<TABLE>
<S> <C> <C>
Offering price per share $12.50
Net book value per share before $7.81
offering
Increase in net book value per share
attributable to new investors $ .52
Pro forma net book value per share
after Offering $ 8.33
Dilution per share to new investors(1) $ 4.17
</TABLE>
__________________________
(1) Dilution to new investors is determined by subtracting pro forma net book
value per share after the offering from the $12.50 offering price per
share.
USE OF PROCEEDS
The net proceeds from the sale of Shares offered by the Company, assuming
that all 100,000 Shares offered by means of this Prospectus are sold, are
estimated to be $1,200,000. As this Offering is not conditioned on the sale of
a minimum number of Shares, the net proceeds to the Company will be reduced to
the extent of the maximum number of Shares in this Offering are not subscribed.
As a consequence, there can be no assurance that the maximum net proceeds of
$1,200,000 will be attained.
The net proceeds of the Offering will be utilized to support recent and
anticipated future growth of the Company and the Bank and for general corporate
purposes. The Company intends to use a portion of the offering proceeds to
defray costs associated with the establishment of a new branch facility for the
Bank in Black Diamond, Washington. See "Business - The Bank."
BUSINESS
Company Overview
The Company is a bank holding company organized under the laws of
Washington, chartered in 1993. The Company, with consolidated total assets of
approximately $67.4 million at June 30, 1997, is located in Enumclaw, Washington
and conducts its operations through its subsidiary, Mt. Rainier National Bank
(the
8
<PAGE>
"Bank"), a national banking association organized under the laws of the
United States in 1990. The Company does not engage in any substantial
activities other than acting as a bank holding company for the Bank. The
Company believes it can present an alternative to recent mega-mergers by
offering local ownership, local decision making and other personalized service
characteristics of community banks. The holding company structure provides
flexibility for expansion of the Company's banking business through acquisition
of other financial institutions and provision of additional banking-related
services which the traditional commercial bank may not provide under present
laws.
The Bank
The Bank primarily serves individuals and small and medium-sized
businesses located in its primary and secondary trade areas. The Bank offers
its customers a full range of deposit services that are typically available in
most financial institutions, including checking accounts, savings accounts and
other time deposits of various types, ranging from money market accounts to
longer term certificates of deposit. The transaction accounts and time
certificates are tailored to the principal market areas at rates competitive in
the area. In addition, retirement accounts such as IRAs (Individual Retirement
Accounts) are available. The Bank's deposits are attracted primarily from
individuals, merchants, small and medium-sized businesses, and professionals.
All deposit accounts are insured by the FDIC up to the maximum amount.
The principal sources of the Bank's revenues are: (i) interest and fees
on loans; (ii) deposit service charges; (iii) federal funds sold (funds loaned
on a short-term basis to other banks); and (iv) interest on investments
(principally government securities). The Bank's lending activity consists of
short-to-medium-term commercial and consumer loans, including operating loans
and lines, equipment loans, automobile loans, recreational vehicle and truck
loans, personal loans or lines of credit, home improvement and rehabilitation
loans and VISA national credit cards. The Bank also offers safe deposit boxes,
direct deposit of payroll and social security checks, automated teller machine
access, and automatic draft for various accounts. The Bank has a night
depository as well as drive-up services.
On February 6, 1995, the Bank opened its Buckley Branch located at 29290
Highway 410, Buckley, Washington. The branch and land are owned by Mountain
Real Estate Holdings, Inc., a wholly-owned subsidiary of the Company ("MREH").
The Bank leases the land and building from Mountain Real Estate Holdings, Inc.
at a monthly rent of $980. The facility has 3,100 square feet, a two-lane drive
up, an ATM and a night depository. At June 30, 1997, the branch had deposits of
$15.4 million. The Buckley Branch is staffed by nine persons and is anticipated
to ultimately be a full service branch. The Board of Directors believes that
the Buckley Branch is a natural extension of the Bank's market area.
The Company has received approval from the Comptroller to open a branch
facility for the Bank. MREH has purchased real estate located at 31329 Third
Avenue, Black Diamond, Washington. MREH will construct a full service facility
consisting of approximately 3,100 square feet, a two-lane drive up and a night
depository. It is estimated that the branch will open late in the fourth
quarter of 1997.
Market Area and Competition
The Bank competes with other commercial banks, savings and loan
associations, credit unions and finance companies operating in the Bank's
primary service area, which is the city of Enumclaw and its environs, including
the communities of Black Diamond and Buckley, and elsewhere. All of the major
regional commercial banks, including Seafirst, Key Bank and U.S. Bank, have a
branch or branches within the Bank's primary service area. The Company
estimates that a total of four banks are located in the Bank's primary service
area. The Bank is the only locally owned bank in Enumclaw. The Bank is subject
to substantial competition in all aspects of its business. Intense competition
for loans and deposits comes from other financial institutions in the market
area. In certain aspects of its business, the Bank also competes with credit
unions, small loan companies, insurance
9
<PAGE>
companies, mortgage companies, finance companies, brokerage houses and other
financial institutions, some of which are not subject to the same degree of
regulation and restriction as the Bank and some of which have financial
resources greater than those of the Bank. The future success of the Bank will
depend primarily upon the difference between the cost of its borrowing
(primarily interest paid on deposits) and income from operations (primarily
interest or fees earned on loans, sales of loans and investments). The Bank
competes for funds with other institutions, which, in most cases, are
significantly larger and are able to provide a greater variety of services than
the Bank and thus may obtain deposits at lower rates of interest.
The Bank's primary service area is South King County and East Pierce
County, including Enumclaw, Buckley, Black Diamond, and surrounding communities.
Enumclaw's population is 10,200, having experienced a 41.97% growth rate since
1990. Enumclaw is primarily considered a residential community, with most
growth in single family residences. The local economy is dependent upon the
forest products industry, farming, and tourism. Buckley has experienced less
growth with a population of 3,560. Buckley is a residential community with very
little business growth in the past few years. Black Diamond is now experiencing
increased growth, pending annexation of the Lake Sawyer area.
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 development, installment and consumer loans. Other products
and services include credit related insurance, ATMs, and safe deposit boxes.
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
10
<PAGE>
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 approved by the Bank's Loan Committee.
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. At December 31, 1996, the Bank had no securities Held to
Maturity.
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 may be disposed of
prior 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 $268,600 in
stock. This portion of the Bank's investment portfolio is not liquid.
The following table sets forth weighted average yields earned by the Bank
on its earning assets and the weighted average rates paid on its average
deposits and other interest-bearing liabilities for the periods indicated. The
table also presents a summary of changes in interest income, interest expense,
and the interest rate differential aggregated by the changes in volumes and
rates.
11
<PAGE>
<TABLE>
<CAPTION>
Year ended Dec. 31,
-----------------------------------------------------------------------------------
1996 1995
------------------------------------------ -------------------------------------
Annualized Annualized
Average Int Earned/ Yield/ Average Int Earned/ Yield/
Balance (1) Expense Rate Balance Expense Rate (2)
----------------------------------------------------------------------------------
Assets (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $34,102 $3,462 10.15% $27,728 $2,917 10.52%
Investments 10,893 672 6.17% 6,559 357 5.44%
Federal funds sold 2,211 123 5.56% 1,864 116 6.22%
---------------------- -------------------
Total interest earning assets 47,206 4,257 9.02% 36,151 3,390 9.38%
------ ------
Non-interest earning assets:
Cash and due from banks 2,947 2,263
Premises and equipment 2,288 2,288
Other assets 426 354
Reserve for possible loan losses (354) (317)
------- -------
Total assets $52,513 $40,739
======= =======
Liabilities and shareholders' equity
Interest bearing liabilities:
Interest bearing demand deposits $ 5,594 122 2.18% 4,362 102 2.34%
Savings 16,889 589 3.49% 12,292 453 3.69%
Certificates of deposit 12,603 693 5.50% 9,877 559 5.66%
Certificates of deposit over $100,000 5,819 321 5.52% 4,398 278 6.32%
---------------------- -------------------
Total interest bearing deposits 40,905 1,725 4.22% 30,929 1,392 4.50%
------- -------
Federal funds purchased 14 1 7.14% 254 28 11.02%
Other borrowings 47 4 8.51% 46 4 8.70%
---------------------- -------------------
Total interest bearing liabilities 40,966 1,730 4.22% 31,229 1,424 4.56%
------ ------
Non-interest bearing liabilities:
Demand deposits 6,141 5,254
Other liabilities 328 192
Redeemable stock -- 223
Shareholders equity 5,078 3,841
------- -------
$52,513 $40,739
======= =======
Net interest income $2,527 $1,966
===== ======
Net interest margin 5.35% 5.44%
CHANGES IN INTEREST INCOME AND
EXPENSE VOLUME AND RATE
VARIANCES
-----------------------------------------------------------
Net
Change Volume Rate
------------------------------------------------------------
Assets
Interest earning assets:
Loans $ 545 $ 651 $ (106)
Investments $ 315 $ 261 $ 54
Federal funds sold $ 7 $ 20 $ (13)
------------------------------------------------------------
Total interest earning assets $ 867 $ 932 $ (65)
------------------------------------------------------------
Non-interest earning assets:
Cash and due from banks
Premises and equipment
Other assets
Reserve for possible loan losses
Total assets
Liabilities and shareholders' equity
Interest bearing liabilities:
Interest bearing demand deposits $ 20 $ 28 $ (8)
Savings $ 136 $ 161 $ (25)
Certificates of deposit $ 134 $ 150 $ (16)
Certificates of deposit over $100,000 $ 43 $ 81 $ (38)
------------------------------------------------------------
Total interest bearing deposits $ 333 $ 420 $ (87)
------------------------------------------------------------
Federal funds purchased $ (27) $ (19) $ (8)
Other borrowings $ --- $ 0 $ 0
Total interest bearing liabilities $ 306 $ 401 $ (95)
------------------------------------------------------------
Non-interest bearing liabilities:
Demand deposits
Other liabilities
Redeemable stock
Shareholders equity
Net interest income $ 561
==============
Net interest margin
</TABLE>
12
<PAGE>
_________________
(1) For purposes of this schedule, non-accruing loans are included in the
average balances.
(2) Increases (decreases) are attributable to volume changes and rate changes
on the following basis: Volume Change equals change in volume times prior
year rate. Rate Change equals change in rate times prior year volumes.
The Rate/Volume Change equals the change in volume times the change in
rate, and it is allocated between Volume Change and Rate Change at the
ratio that the absolute value of each of these components bears to the
absolute value of their total.
Changes in interest income and expense and volume and rate variances for the
year ended December 31, 1995 are shown below:
<TABLE>
<CAPTION>
Net Change Volume Rate
Interest earning assets:
<S> <C> <C> <C>
Loans 746 608 137
Investments 24 41 (17)
Federal funds sold 58 19 39
Interest income 828 668 160
Interest bearing liabilities
Interest bearing demand deposits 14 (6) 20
Savings 166 64 102
Certificates of deposit 264 99 165
Certificates of deposit over $100,000 188 131 57
Total interest bearing deposits 632 289 343
Federal funds purchased 13 1 12
Other borrowings 4 4 --
Interest expense 649 294 355
Net interest income 179 374 (195)
</TABLE>
Asset and Liability Management
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 said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income while a positive gap would tend to result in an increase in net interest
income. During a period of falling interest rates, a negative gap would tend to
result in an increase in net interest income while a positive gap would tend to
adversely affect net interest income.
The asset/liability committee, which consists of the Chief Executive
Officer, the Senior Vice President/Cashier and other officers, is charged with
monitoring the liquidity and funds position of the Company. The Committee
regularly reviews (a) the rate sensitivity position on a three-month, six-month,
and one-year time horizon; (b) loans to deposit ratios; and (c) average maturity
for certain categories of liabilities.
13
<PAGE>
The Company does not operate an asset/liability management model. No
estimates of the impact of changing interest rates on historical or projected
earnings are available. The current level of interest rate risk can, however,
be inferred from maturity and repricing data. At December 31, 1996, the Company
had a negative cumulative repricing gap within one year of approximately $18
million, or approximately 63% of total earning assets. This negative repricing
gap indicates that the Company's future earnings may be materially adversely
impacted by a rise in market interest rates, as occurred in early 1995, and such
impact would primarily be felt in the twelve month period after such a rise in
rates.
The Company is in the process of selecting an asset/liability model with
which to simulate operations and subsequently develop policies regarding
permitted gap positions, permitted risks in deviations from budget earnings and
liquidity. In the interim, management is acquiring securities to be designated
available for sale in order to better manage unexpected liquidity needs and
swings in interest rates.
The following tables represent interest sensitivity profiles for the
Company as of December 31, 1996, and 1995. The tables represent a static point
in time and do not consider other variables, such as changing spread
relationships or interest rate levels. "Net repricing gap" is the difference
between total earning assets and total interest-bearing liabilities repricing in
any given period and "cumulative gap" is the sum of the net repricing gap from
period to period. Interest-bearing demand, savings and money market account
deposits are presented as repricing in the earliest period presented.
GAP ANALYSIS
<TABLE>
<CAPTION> ----------------------------------------------------------------
Total Within One Year to Over
One Year Five Years Five Years
----------------------------------------------------------------
Rate Sensitive Assets:
<S> <C> <C> <C>
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>
Deposit Liability Composition
The Bank's primary sources of funds are interest-bearing deposits. The
following table sets forth the Bank's deposit structure at December 31 for the
years indicated.
14
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Percent Percent
of Total of Total Dollar Percentage
Amounts Deposits Amounts Deposits Change Change
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
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 deposits.
The following table presents a breakdown by category of the average amount
of deposits and the weighted average rate paid on deposits for the periods as
indicated:
<TABLE>
<CAPTION> Year ended Dec. 31,
-------------------------------------------------------------------------------------
1996 1995
Annualized Annualized
Average Int Earned/ Yield/ Average Int Earned/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing demand deposits $ 5,594 122 2.18% 4,362 102 2.34%
Savings 16,889 589 3.49% 12,292 453 3.69%
Certificates of deposit 12,603 693 5.50% 9,877 559 5.66%
Certificates of deposit over $100,000 5,819 321 5.52% 4,398 278 6.32%
------------------------------------------------------------------------------------
Total interest bearing deposits 40,905 1,725 4.22% 30,929 1,392 4.50%
-------- --------
</TABLE>
At December 31, 1996 and December 31, 1995, time deposits greater than
$100,000 aggregated approximately $6.8 million and $5.9 million, respectively.
The following table indicates, as of December 31, 1996, and 1995 the dollar
amount of $100,000 or more deposits by the time remaining until maturity:
15
<PAGE>
<TABLE>
<CAPTION>
12/31/96 12/31/95
--------------------------------
<S> <C> <C>
Maturity in:
Three months or less: $3,366 $3,029
Over three months through twelve months $2,648 $2,442
Over one year through five years $ 783 $ 421
Over five years $ 0 $ 0
-------------------------------
TOTAL $6,797 $5,892
===============================
</TABLE>
Assets
Management of the Bank considers many criteria in managing assets,
including credit-worthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Bank's interest earning assets by category at December 31, 1996, and 1995.
EARNINGS ASSETS
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Percent Percent
of Earning of Earning
Amounts Assets Amounts Assets
------- ---------- ------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Loan Portfolio $37,543 64.12% $30,834 73.09%
Investment Portfolio 13,455 22.98% 8,110 19.23%
Interest Bearing Deposits 7,550 12.90% 2,825 6.70%
Loans Held for Sale -- 0.00% 415 0.98%
-----------------------------------------------
Total Earning Assets $58,548 100.00% $42,184 100.00%
===============================================
</TABLE>
At year end 1996, obligations of the United States Government or its
agencies and obligations of states and political subdivisions represented 78% of
the investment portfolio. The following table presents the composition of the
carrying value of the Bank's investment portfolio at December 31, 1996, and
1995.
16
<PAGE>
INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Dec. 31 Dec. 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 800 1,490 (690) -46.31%
Municipal bonds 329 352 (23) -6.53%
Federal Reserve and FHLB Stock 378 360 18 5.00%
------------------------------------
Total $13,455 $ 8,110 $ 5,345 65.91%
====================================================
</TABLE>
The following table presents the maturity distribution of the amortized
cost and estimated market value of the Bank's debt securities at December 31,
1996, and 1995. The weighted average yields on these instruments are presented
based on final maturity. Yields on obligations of states and political
subdivisions have not been adjusted to a fully-taxable equivalent basis.
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------
Over One Over Five
One Year or Less Through Five Years Through Ten Years
--------------------------------------------------------------
(in thousands)
Amount Yield Amount Yield Amount Yield
<S> <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 5.35% $ 547 5.84% $ 0
Municipal Bonds (1) $ 130 4.25% $ 0 $ 199 5.50%
--------------------------------------------------------------
Total $2,883 $8,717 $1,476
Weighted Average Yield 6.12% 6.10% 6.88%
<CAPTION>
December 31, 1995
--------------------------------------------------------------
Over One Over Five
One Year or Less Through Five Years Through Ten Years
--------------------------------------------------------------
(in thousands)
Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
US Treasury Securities $ 505 5.82% $3,139 5.31% $ 0
US Govt. and Agency Securities $1,005 5.73% $1,259 6.02% $ 0 6.75%
Mortgage Backed Securities $ 0 $ 0 $ 0 7.31%
Corporate Bonds $ 652 5.39% $ 838 5.47% $ 0
Municipal Bonds (1) $ 0 $ 130 4.25% $ 222 5.50%
--------------------------------------------------------------
Total $2,162 $5,366 $ 222
Weighted Average Yield 5.65% 5.60% 6.52%
</TABLE>
(1) Yields do not reflect tax-exempt status
Investment Policy
The objective of the Bank's investment policy is to invest funds not
otherwise needed to meet the loan demand of its market area to earn the maximum
return for the Bank, yet still maintain sufficient liquidity to meet
17
<PAGE>
fluctuations in the Bank's loan demand and deposit structure. In doing so, the
Bank balances the market and credit risks against the potential investment
return, makes investments compatible with the pledge requirements of the Bank's
deposits of public funds, maintains compliance with regulatory investment
requirements, and assists the various public entities with their financing
needs. The Chief Executive Officer and the Senior Vice President/Cashier are
authorized to execute security transactions for the investment portfolio based
on the decisions of the investment committee. The investment committee, which
consists of the President/Chief Executive Officer, Chairman of the Board, Senior
Vice President/Cashier and other directors, has full authority over the
investment portfolio and makes decisions on purchases and sales of securities.
All the investment transactions occurring since the previous board of directors'
meeting are reviewed by the board at its next monthly meeting, and the entire
portfolio is reviewed on a quarterly basis. The investment policy allows
portfolio holdings to include short-term securities purchased to provide the
Bank's needed liquidity and longer term securities purchased to generate level
income for the Bank over periods of interest rate fluctuations.
The Bank's investment securities portfolio of $13.5 million at December
31, 1996, consisted of securities available for sale which are carried at market
value. In addition, unrealized gains on investment securities available for
sale were $11,000 and unrealized losses were $48,000. The Bank's investment
securities portfolio of $8.1 million at December 31, 1995, consisted of
securities available for sale which are carried at market value. In addition,
unrealized gains on investment securities available for sale were $25,000 and
unrealized losses were $12,000.
The decline in the market value of the portfolio is due primarily to
the rising market interest rate environment in 1996.
At December 31, 1996, the Bank had approximately $1.748 million of
mortgage-backed securities in the available for sale category, which constitutes
approximately 3.4% of its investment securities portfolio. Structured notes
have uncertain cash flows which are driven by interest rate movements and expose
the Company to greater market risk than traditional medium-term notes. All of
the Bank's investments of this type are government agency issues (primarily
Federal Home Loan Bank and Federal National Mortgage Association).
Loan Portfolio
Total loans of $37.543 million at December 31, 1996 reflected an
increase of $6.709 million or 21.7%, compared to total loans for the period
ended December 31, 1995. Residential real estate loans, which historically have
had low loss experience, increased $6.002 million or 53.6%. Construction and
land development loans, loans secured by farmland and commercial real estate
loans increased by $1.7 million, or 91.5%. Commercial and industrial loans and
agricultural loans decreased by $1.9 million, or (14.2%). These types of loans
carry a higher level of risk in that the borrowers' ability to repay may be
affected by local economic trends. Installment and other consumer loans
increased by $.955 million, or 22.9%. These loans, generally secured by
automobiles and other consumer goods, contain an historically higher level of
risk; however, this risk is mitigated by the fact that these loans generally
consist of small individual balances. As the loan portfolio is concentrated in
Enumclaw and surrounding counties, there is a risk that the borrowers' ability
to repay the loans could be affected by changes in local economic conditions.
The following table sets forth the composition of the Company's loan
portfolio at December 31, 1996, and December 31, 1995.
18
<PAGE>
<TABLE>
<CAPTION>
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>
Loan Policy
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 approved by the Bank's Loan Committee.
The Bank has entered into agreements with other banks to participate in
certain of the Bank's commitments to extend credit to customers.
19
<PAGE>
Credit Risk Management and Allowance for Loan Losses
Credit risk and exposure to loss are inherent parts of the banking
business. Management seeks to manage and minimize these risks through its loan
and investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures that
it believes reflect the risk sensitive nature of the Company. The loan review
procedures are set to monitor adherence to the established criteria and to
ensure that on a continuing basis such standards are enforced and maintained.
Management's objective in establishing lending and investment standards
is to manage the risk of loss and provide for income generation through pricing
policies. To effectuate this policy, the Company makes commercial real estate
and farming loans with one year or less fixed maturity.
The loan portfolio is regularly reviewed and management determines the
amount of loans to be charged-off. In addition, such factors as the Bank's
previous loan loss experience, prevailing and anticipated economic conditions,
industry concentrations and the overall quality of the loan portfolio are
considered. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowances for losses on loans and real estate owned. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available at the time of their examinations. In
addition, any loan or portion thereof which is classified as a "loss" by
regulatory examiners is charged-off.
The allowance for loan losses is increased by charging operating
expense. The allowance is reduced by charging off loans at the time they are
deemed by management to be uncollectable, and the allowance is increased when
loans previously charged off are recovered. The resulting allowance for loan
losses is viewed by management as a single, unallocated allowance available for
all loans and, in management's opinion, is adequate to provide for reasonably
foreseeable potential loan losses. Rules and formulas relative to the adequacy
of the allowance, although useful as guidelines to management, are not rigidly
applied. The allowance for loan losses was $391,000 at year end 1996, or 1.04%
of loans outstanding, net of unearned income, compared to $334,000, or 1.08% at
year end 1995. The following table presents data related to the Company's
allowance for loan losses for the years ended December 31, 1996, and 1995.
SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------------------------------------
(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)
----------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
Recoveries of loans previously charged off:
Commercial and agricultural
Real estate construction
Real estate mortgage
Consumer
----------------------------------------------
Total 0 0
----------------------------------------------
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>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
<TABLE>
<CAPTION>
Percent of Loans
in each category
Balance at end of period applicable to: Amount to total loans
- -------------------------------------------- -------------------------------------
<S> <C> <C>
Commercial and Agriculture $199 31.12%
Real Estate Construction $ 31 9.42%
Real Estate Mortgage $ 50 45.81%
Installment Loans to Individuals $ 97 13.65%
Unallocated $ 14 0%
-------------------------------------
Total $391 100.00%
=====================================
</TABLE>
The allocation of the allowance is presented based in part on
evaluations of past history and composition of the loan portfolio. Since these
factors are subject to change, the current allocation of the allowance is not
necessarily indicative of the breakdown of future losses.
The following table sets forth information with respect to
nonperforming loans of the Company on the dates indicated. Accrual of interest
is discontinued when there is reasonable doubt as to the full, timely
collections of interest or principal. When a loan becomes contractually past
due 90 days with respect to interest or principal, it is reviewed and a
determination is made as to whether it should be placed on nonaccrual status.
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 where
the future collection of principal is probable. Interest accruals are resumed
on such loans only when they are brought fully current with respect to principal
and interest and when, in the judgment of management, the loans are estimated to
be fully collectible as to principal and interest. Restructured loans are those
loans on
21
<PAGE>
which concessions in terms have been granted because of a borrower's
financial difficulty. Interest is generally accrued on such loans in accordance
with the new terms.
RISK ELEMENTS - NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
(in thousands)
<TABLE>
<CAPTION>
90 Days or More Nonaccrual Restructured Lost Interest
Past Due
12/31/96 12/31/95 12/31/96 12/31/95 12/31/96 12/31/95 12/31/96 12/31/95
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and Agriculture $ 0 $ 0 $ 121 $ 52 $ 0 $ 0 $ 4 $ 2
Real Estate $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Consumer $ 0 $ 0 $ 16 $ 6 $ 0 $ 0 $ 1 $ 1
------------------------------------------------------------------------------------------------
$ 0 $ 0 $ 137 $ 58 $ 0 $ 0 $ 5 $ 3
</TABLE>
Capital Resources/Liquidity
Liquidity. Of primary importance to depositors, creditors and
---------
regulators is the ability to have readily available funds sufficient to repay
fully maturing liabilities. The Company's liquidity, represented by cash and
cash due from banks, is a result of its operating, investing and financing
activities. In order to ensure funds are available at all times, the Company
devotes resources to projecting on a monthly basis the amount of funds which
will be required and maintains relationships with a diversified customer base so
funds are accessible. Liquidity requirements can also be met through short-term
borrowings or the disposition of short-term assets which are generally matched
to correspond to the maturity of liabilities.
Although the Company has no formal liquidity policy, in the opinion of
management, its liquidity levels are considered adequate. Neither the Company
nor the Bank is subject to any specific liquidity requirements imposed by
regulatory orders. The Bank is subject to general FDIC guidelines which do not
require a minimum level of liquidity. Management believes its liquidity ratios
meet or exceed these guidelines. Management does not know of any trends or
demands which are reasonably likely to result in liquidity increasing or
decreasing in any material manner.
Impact of Inflation and Changing Prices.
The consolidated financial statements and related consolidated
financial data presented herein have been prepared in accordance with generally
accepted accounting principles which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time and
due to inflation. The impact of inflation on operations of the Company is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the price of goods and services.
Capital Adequacy
Capital adequacy refers to the level of capital required to sustain
asset growth over time and to absorb losses. The objective of the Company's
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures
used by management to monitor the results of these efforts are the ratios of
average equity to average assets, average tangible equity to average tangible
assets, and average equity to net loans.
22
<PAGE>
The Federal Reserve Board has adopted capital guidelines governing the
activities of bank holding companies. These guidelines require the maintenance
of an amount of capital based on risk-adjusted assets so that categories of
assets with potentially higher credit risk will require more capital backing
than assets with lower risk. In addition, banks and bank holding companies are
required to maintain capital to support, on a risk-adjusted basis, certain off-
balance sheet activities such as loan commitments.
The capital guidelines classify capital into two tiers, referred to as
Tier I and Tier II. Under risk-based capital requirements, total capital
consists of Tier I capital which is generally common stockholders' equity less
goodwill and Tier II capital which is primarily a portion of the allowance for
loan losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of risk-
adjusted assets through conversion factors established by the regulators. The
framework for calculating risk-based capital requires banks and bank holding
companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based
capital. In 1990 regulators added a leveraged computation to the capital
requirements, comparing Tier I capital to total average assets less goodwill.
On December 31, 1996, the Company exceeded the regulatory minimums and
qualified as a well-capitalized institution under the regulations.
The Federal Deposit Insurance Corporation Improvement Act of 1992
("FDICIA") established five capital categories for banks and bank holding
companies. The bank regulators adopted regulations defining these five capital
categories in September 1992. Under these new regulations each bank is
classified into one of the five categories based on its level of risk-based
capital as measured by Tier I capital, total risk-based capital, and Tier I
leverage ratios and its supervisory ratings. See Note 17 to the Consolidated
Financial Statements for Bank-only capital ratios.
RETURN ON ASSETS AND EQUITY
Following are performance rations of the Company for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Return on average assets 0.56% 0.23%
Return on average equity 5.75% 2.40%
Dividend payout ratio N/A N/A
Equity to assets ratio 9.67% 9.43%
</TABLE>
Employees
The Company has no paid employees. The Bank had a total of 34 full-
time equivalent employees at June 30, 1997.
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
23
<PAGE>
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 Company has received approval from the Comptroller to open a
branch facility for the Bank in Black Diamond. MREH has purchased real estate
located at 31329 Third Avenue, Black Diamond, Washington. MREH will construct a
full service facility consisting of approximately 3,100 square feet, a two-lane
drive up and a night depository. It is estimated that the branch will open late
in the fourth quarter of 1997.
Legal Proceedings
There are no material pending legal proceedings to which the Company
or the Bank is a party or of which any of their properties are subject; nor are
there material proceedings known to the Company to be contemplated by any
governmental authority; nor are there material proceedings known to the Company,
pending or contemplated, in which any director, officer or affiliate or any
principal security holder of the Company, or any associate of any of the
foregoing, is a party or has an interest adverse to the Company or the Bank.
Market for Common Equity and Related Stockholder Matters
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 Traded Price Range
<S> <C> <C>
1995 1,960 $10.00
1996 12,210 $10.00 to $11.50
1997 to August 31 18,703 $12.00 to $12.50
</TABLE>
To the best knowledge of the Company, the most recent transaction in
the Company's Shares was September 2, 1997, at a price of $12.50 per share.
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. All
140,000 shares were sold for a total offering of $1.4 million.
At September 15, 1997, stock options for 100,832 shares of Company
common stock were outstanding. See Note 13 of the financial statements for
additional information.
24
<PAGE>
Number of Equity Holders
As of September 15, 1997, there were 633 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. The ability of the Bank to pay
dividends to the Company is governed by various statutes. See "Bank Supervision
and Regulation -- Restrictions on Capital Distributions."
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The purpose of this discussion and analysis is to provide the reader
with a concise description of the financial condition and changes therein and
results of operations for the Company and the Bank for the six months ended June
30, 1997, and 1996, and the years ended December 31, 1996, and 1995. All
---
numbers presented in this section below are in thousands.
- --------------------------------------------------------
This discussion and analysis is intended to complement the audited
financial statements and footnotes and the supplemental financial data and
charts appearing elsewhere in this report, and should be read in conjunction
therewith. This discussion and analysis will focus on the following major
areas: Results of Operations, Financial Position, Capital Resources, Asset
Quality, Liquidity and Interest-Sensitivity.
Results of Operations
Six Months Ended June 30, 1997, and 1996
Net Income. The Company had net income of $225 or $0.32 per common
-----------
share for the first 6 months of 1997 compared to net income for the first six
months of 1996 of $120 or $0.18 per common share. The Company's annualized
returns on average assets and average common equity for the first half of 1997
were 0.68% and 8.35%, compared to .48% and 5.24%, respectively, for the first
half of 1996.
Net Interest Income. Net interest income for the first half of 1997
--------------------
increased $372 to $1,540 versus the first half of 1996 of $1,168. The increase
is attributable to loan growth and a slightly higher investment portfolio yield.
Loans grew 15.19% from the June 30, 1996, total of $33,719 to a total of $38,841
as of June 30, 1997. Total Company assets were $67,374 at June 30, 1997,
compared to $59,283 as of June 30,1996, which represents a growth of 13.64%.
Net Interest Margin. The net interest margin was 5.25% for the first
-------------------
half of 1997 compared to 5.26% for the first half of 1996. The yield on the
investment portfolio was 5.71% for the first half of 1997 compared to 5.18% for
the same period in 1996. The higher level of interest income from loans and
securities was offset by an increase in the cost of interest-bearing deposits.
Non-Interest Income. Non-interest income for the first half of 1997
-------------------
decreased $12 over the first half of 1996 to $328 from $340. The decrease is
attributable to reduced volume in the brokered loan fee income. Non-interest
expenses for the first 6 months of 1997 increased $121 to $1,431 compared to the
first 6 months of 1996 of $1,310. The increase in operation expenses is due to
an increase in personnel expense of $66 and other
25
<PAGE>
expense of $53. However as a percent of average assets, personnel expense
decreased to 2.22% in 1997 from 2.58% in 1995. Other expense decreased to 1.57%
in 1997 from 1.80% in 1996. Total non-interest expenses as a percent of average
assets has decreased from 5.26% as of June 30, 1996, to 4.47% as of June 30,
1997.
Years Ended December 31, 1996, and 1995
Net Income. Net income for 1996 was $292, which represents an
----------
increase of $200 from 1995. The Company's return on average assets was 0.56%
for 1996 and 0.22% for 1995. Its return on average equity was 5.75% for 1996
and 2.38% for 1995.
The Company's increased earnings for 1996 were impacted by the
following significant items:
Average earning assets for 1996 were $47,206 representing an increase
of $11,055 over 1995's average earning assets of $36,151.
Yield on average interest-bearing liabilities decreased from 4.50% for
1995 to 4.22% for 1996.
Average interest-bearing liabilities increased from $31,229 in 1995 to
$40,966 for 1996 representing an increase of $9,737.
Average earning assets to average total assets increased to 89.90% for
1996 from 88.74% for 1995.
Average interest-bearing liabilities to average assets increased to
78.01% in 1996 from 76.66% in 1995. Net average earning assets (average earning
assets minus average interest bearing liabilities) to average total assets
decreased from 12.08% for 1995 to 11.88% for 1996.
As a result of the foregoing, net interest income increased $553 to
$2,517 for 1996 from $1,964 for 1995.
Non-interest expense increased by $226 to $2,711 for 1996 compared to
$2,485 for 1995. Non-interest expense was 6.10% of average assets in 1995
compared to 5.16% of average assets in 1996.
Provision for Loan Loss. The provision for loan losses in 1995 was
------------------------
$32 compared to $67 for 1996. The provision for loan losses is the amount
management considers necessary to maintain an allowance for loan losses at a
level sufficient to meet risks inherent in the Bank's loan portfolio. The level
of the allowance is determined by management after conducting ongoing reviews of
the loan portfolio as well as considering the level and magnitude of non-
performing assets and loan delinquencies, general economic conditions in the
areas served by the Company, historic loan-loss experience, loan mix and the
level of loans relative to reserves.
Non-Interest Income. Non-interest income increased by $5 to $692 in
-------------------
1996 as compared to $686 in 1995. The increase in non-interest income is
negatively impacted by losses on securities sold to reposition the portfolio and
improve investment yields.
Assets. Company total assets grew 31.7% or $15,500 during 1996 to an
------
end of year total of $64,500. The growth in assets during 1996 is primarily
attributable to deposit growth of $15,100 from current and new banking
customers.
Portfolio securities grew by $5,300 during 1996 to $13,000 at year end
1996 from $7,700 at year end 1995.
26
<PAGE>
Loans grew during 1996 by $6,700 or 21.8% from $30,800 at year end
1995 to $37,500 at year end 1996. The majority of this growth was in real
estate loans which grew by 53.6% or $6,000 to $17,100 at December 31, 1996, and
consumer lending which grew $1,000 or 22.9% to $5,100 at December 31, 1996.
Deposits grew during 1996 by $15,100 or 34.6% to $58,800 at year end
1996. This includes $5,000 in deposits made on December 31, 1996, by two
customers. Management feels deposit growth should continue throughout 1997,
although somewhat slower due to the construction delay in opening the Black
Diamond facility.
Capital Requirements
The Company's equity capital was $5,279 at December 31, 1996, compared
to $4,567 at December 31, 1995. This increase of $712 consists of a $33
increase in unrealized loss on available for sale securities, reclassification
of redeemable stock of $437 and the Company's income of $292 for 1996. No
dividends were paid by the Company during 1996 and the Company does not expect
to pay dividends any time in the foreseeable future.
At December 31, 1996, the Company's Tier 1 Capital to Average Assets
was 9.15%, Tier 1 Capital to Risk Weighted Assets was 13.14% and Tier 2 Capital
was 14.11%. The Company is considered "well capitalized" within applicable
Federal banking regulatory guidelines at December 31, 1996.
Liquidity Resources
Management focuses on the need to meet both short-term funding
requirements and long-term growth objectives. Primary sources of funds for
liquidity include deposits, loan repayments and security repayments or sales of
available for sale securities. The Bank also has borrowing lines at three
correspondent banks in the aggregate amount of $3,000 and a borrowing line at
Federal Home Loan Bank in the approximate amount of $9,000 for a total available
of $12,000 for short-term funding.
Asset Liability Management
The long-term profitability of the Company depends on properly priced
products and services, asset quality and asset-liability management.
A traditional measure of interest rate sensitivity and its impact upon
the next year's earnings is the Company's one-year gap position (total assets
subject to repricing less total liabilities subject to repricing). At December
31, 1996, the Company had a cumulative one year negative gap of $18,100 in
liabilities repricing faster than assets. This negative gap is a result of the
Company's floating rate money market deposit accounts totaling $11,300 which
reprice on a monthly basis.
While the one-year-gap measure helps provide some information about a
financial institution's interest sensitivity, it does not predict the trends of
future earnings.
Asset Quality
Asset quality is good. Non-performing assets at June 30, 1997, were
$107 or 0.28% of loans. The provision for losses on loans was $100 for the
first half of 1997 which is an increase of $80 over the provision of $20 for the
first half of 1996. The increase in the provision is primarily attributable to
the increase in loan
27
<PAGE>
growth. At June 30, 1997, the allowance for losses on loans was 1.23% of loans
and approximately 450% of non-performing loans.
Non-performing and other loans past due 90 days or more were $137 at
year end 1996 compared to $58 at year end 1995 representing an increase of $79.
Non-performing loans as a percentage of net loans before the allowance for loan
losses was 0.32% at year end 1996 and 0.18% at year end 1995. The allowance for
loan losses to non-performing loans, which is a measure of the Bank's ability to
cover problem assets with existing reserves, was 575.8% at year end 1995 and
285.4% at year end 1996. The Company had no material restructured loans in 1996
or 1995. The asset quality of the Company continues to be good which is a
result of good underwriting standards coupled with aggressive collection efforts
and a good local economy.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s) Held
- ---- --- ----------------
<S> <C> <C>
Roy T. Brooks 56 Chairman and CEO
Susan K. Bowen-Hahto 49 Director
Brian W. Gallagher 48 Director
Terry L. Garrison 53 Director
Michael K. Jones 55 Director
Barry C. Kombol 46 Director
John W. Raeder 60 Director
Garrett S. Van Beek 62 Director
Hans Rudy Zurcher 60 Director
Steve W. Moergeli 43 Director and President/CEO
of the Bank
Sheila M. Brumley 42 Secretary and CFO of
the Company and Senior
Vice President and
Cashier of the Bank
</TABLE>
All directors have served since the incorporation of the Company in
1993 and have also served as members of the Board of Directors of the Bank since
the Bank commenced operations in 1990, with the exception of Mr. Moergeli who
has served since March 1997. No director of the Company is a director or
executive officer of another bank holding company, bank, savings and loan
association, or credit union.
Pursuant to the Company's Articles of Incorporation, the board of
directors is divided into three classes of directors, serving staggered terms.
The terms of Messrs. Kombol, Raeder, Van Beek and Zurcher expire at the
28
<PAGE>
date of the annual shareholder meeting in 1998; the terms of Messrs. Gallagher,
Garrison and Jones expire in 1999; the terms of Messrs. Brooks and Moergeli and
Ms. Bowen-Hahto expire in 2000.
Roy Truman Brooks is Chairman and President of the Company and
Chairman of the Bank. Mr. Brooks is also Chief Executive Officer of Westmark
Electronics, a manufacturer's representative and consulting firm. Mr. Brooks
has held progressively more responsible management positions in the electronics
industry during his 32 years of experience in the industry. He is also a
Director for Auburn Flight Service.
Susan Kay Bowen-Hahto is the owner of Travel Line, a travel agency.
She is a lifetime resident of the Buckley/Enumclaw area and has been active in
the community. Ms. Bowen-Hahto is a member of the Enumclaw Chamber of Commerce.
She is also active in the White River Wrestling Club serving as Treasurer. Ms.
Bowen-Hahto is a member of the Wabash Presbyterian Church.
Brian William Gallagher is President and owner of Northern Transport,
Inc., a logging company as well as a transportation company for logs, pilings
and poles. He has been in business in the Enumclaw area for over 20 years. Mr.
Gallagher is also active in the PTA of the White River School District and is a
board member of the Northwest Junior Livestock Show and also a board member of
the White River High School Vocational Agricultural Program.
Terry Lee Garrison is owner of Garrison and Associates, a medical
supply company, which distributes orthopedic devices to doctors and hospitals in
Washington, Oregon, Idaho and Alaska.
Michael Knapp Jones, Sr. is a licensed Certified Public Accountant and
operates his business under the name of Jones & Associates, Certified Public
Accountants. He has many clients on the Enumclaw Plateau. Mr. Jones is also
owner of Hyper Techna Products, Inc., a marine wholesale business. Mr. Jones
has been active in three professional accounting associations and four boating
associations where he has held numerous positions. Mr. Jones and his family
live on the Plateau.
Barry Christopher Kombol is an attorney in private practice. Mr.
Kombol has been a member of the Washington State Bar Association since 1978. He
serves as general counsel for Palmer Coking Coal Co. and Pacific Coal Company in
Black Diamond. He is secretary/treasurer of Pacific Coast Coal Company, a
company he helped found in 1982. Mr. Kombol also has served as Judge Pro-
Tem/Magistrate at Enumclaw Municipal and Aukeen District Courts in King County.
He is past president and a current member of the Enumclaw Lions Club; founder of
the Black Diamond Community Center; a coach in the Cascade Foothills Soccer
League (1992-1995); a member of King County's "Enumclaw Community Planning
Committee" (1987-88); and has been a member of the Sacred Heart Parish in
Enumclaw since 1978.
John William Raeder has been Chairman of the Board and co-owner of
Universal Refrigeration, Inc., a heating, ventilating, refrigeration and air
conditioning business since March, 1987. Prior to that time, he had been with
Jack Frost Company, a similar business, for 16 years. Mr. Raeder is on the
Board of Directors of the Auburn Chamber of Commerce and is Vice President of
the Government Affairs Division. Active in youth activities while his children
were young, he was baseball coach and basketball coach for Little League, and
Committee Chairman and Cub Scout Pack Leader with the Boy Scouts of America.
Mr. Raeder is also a member of Air Conditioning Contractors of America. Mr.
Raeder is an active member of Calvary Presbyterian Church, serving as Elder.
Garrett Simon Van Beek is a dairyman, operating a 120 acre farm. He
and his wife moved to the Enumclaw area and began farming over 28 years ago.
Mr. Van Beek has been a director of the King County Farm Bureau, director of the
Pierce County Farm Bureau and director of the Farm Bureau of Washington State.
He also served as a director for the Federal Land Bank of Puyallup from 1977
until 1985. He served on the Loan
29
<PAGE>
Committee and the Building Committee. Over the years, he has been involved in
youth activities such as Future Farmers of America. Active in Calvary
Presbyterian Church, Garrett has served as Sunday school teacher, youth leader
and Elder. In addition, he has participated on the Stewardship Committee and
Outreach Committee. Mr. Van Beek is a past member of the Governor's counsel for
agriculture and environment.
Hans Rudolf Zurcher, a dairy farmer since 1957, presently operates a
134 acre dairy farm. Mr. Zurcher served as President and Board member for the
King County Dairy Herd Improvement Association (D.H.I.A.). He has been on the
Board of the King-Pierce County Dairy Federation, a political action group,
since 1983 and has served as President since 1986. In addition, Mr. Zurcher has
served on the Advisory Committee for the Washington State University Dairy Short
Course. He is an alumni member of the Enumclaw Future Farmers of America Club,
and he and his wife have been active in 4-H along with their children. For the
past five years he has served on various committees at the Washington State
Dairy Products Commission.
Steve Wayne Moergeli is the President and Chief Executive Officer of
the Bank. Mr. Moergeli began his banking career in Enumclaw in 1978 with
Cascade Security Bank and served as Vice President and manager of Key Bank
before joining the Bank in May 1991 as its Senior Loan Officer. Mr. Moergeli is
past President of the Enumclaw Area Chamber of Commerce, past President of the
Enumclaw Lions Club and today, serves as Chairman of the Enumclaw City Board of
Adjustments.
Sheila Marie Brumley is the Senior Vice President and Cashier of the
Bank and the Secretary and Chief Financial Officer of the Company. She also
holds the position of Corporate Secretary of both entities. Ms. Brumley started
her banking career with Security Pacific National Bank in 1973. She served as
Vice President and Cashier with Puyallup Valley Bank prior to joining the Bank
in September of 1990.
Remuneration Of Officers And Directors
The Company has no paid employees. The following table sets forth
compensation paid by the Bank to its top three executive officers during the
fiscal year end 1996. Directors of the Company do not receive retainers, fees
for meetings attended, or other cash compensation. Non-Employee Directors of
the Bank (other than the Chairman) receive an annual retainer of $6,000 and $50
for each committee meeting attended.
<TABLE>
<CAPTION>
Name of Individual Capacities in Which
or Identity of Group Remuneration Was Received Aggregate Remuneration
- -------------------- -------------------------------- ----------------------
<S> <C> <C>
Roy T. Brooks Chairman and CEO of the Company; $ 42,000
Chairman of the Bank
Steve W. Moergeli President and CEO of the Bank (1) $ 65,734
Sheila M. Brumley Chief Financial Officer of the
Company; Senior Vice President and $ 69,667
Cashier of the Bank
All Executive Officers
as a group (3) $177,401
</TABLE>
(1) Served as Vice President and Senior Loan Officer in 1996. Appointed
Bank President in March 1997.
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
30
<PAGE>
compensation of $3,500. In December 1996, 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. See "Certain Transactions and Relationships."
Stock Option Plans
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 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 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 such options are presently exercised or
exercisable. No option can be exercised after the expiration of fifteen (15)
years from the date of grant. Shares subject to stock options held by the
directors of the Company are described in "Security Ownership of Management and
Certain Shareholders."
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 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
June 30, 1997, there were outstanding options to purchase 31,332 Shares and
28,668 Shares remain available under the Employee Plan for future growth.
Security Ownership Of Management And Certain Shareholders
The following table sets forth certain information including the
beneficial ownership of Shares as of September 15, 1997, with respect to (i)
each of the three highest paid persons who are officers or directors of the
Company or the Bank; (ii) the directors of the Company; and (iii) all officers
and directors as a group. The Company is not aware of any person who at
September 15, 1997, beneficially owned more than 5% of its outstanding Shares.
<TABLE>
<CAPTION>
Amount and Nature Percent
Name and Address of Ownership(1) Ownership
<S> <C> <C>
Roy T. Brooks, Chairman and CEO 25,720 (2) 3.63%
38908 254th SE, Enumclaw, WA 98022
Michael K. Jones, Director 24,245 (3) 3.41%
325 N. Central, Kent, WA 98032
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature Percent
Name and Address of Ownership(1) Ownership
<S> <C> <C>
Brian W. Gallagher, Director 15,154 (4) 2.13%
15727 Tubbs Road, Buckley, WA 98321
Terry L. Garrison, Director 13,314 (5) 1.87%
40421 268th SE, Enumclaw, WA 98022
Barry C. Kombol, Director 12,800 (6) 1.80%
31615 3rd Ave, Black Diamond, WA 98010
Garrett S. Van Beek, Director 19,715 (7) 2.78%
23423 SE 464th, Enumclaw, WA 98022
John W. Raeder, Director 17,753 (8) 2.50%
14142 SE 238th Lane, Kent, WA 98042
Susan K. Bowen-Hahto, Director 15,000 (9) 2.11%
22728 Entwhistle Road, Buckley, WA 98321
Hans Rudy Zurcher, Director 22,914 (10) 3.23%
39102 236th SE, Enumclaw, WA 98022
Steve W. Moergeli, Bank President and CEO, & 11,382 (11) 1.61%
Director 39703 - 253rd SE, Enumclaw, WA 98022
Sheila M. Brumley, Bank SVP & Company CFO 8,388 (12) 1.19%
5706 - 114th Avenue Ct E, Puyallup, WA 98372
All officers and directors as a 186,340 (14) 26.21%
group (11 persons) (13)
</TABLE>
(1) Shares held directly with sole voting power unless otherwise indicated.
(2) Includes 3,000 Shares held jointly with Mr. Brooks' spouse and 4,000 Shares
subject to stock options exercisable within 60 days.
(3) Includes 4,000 Shares held by Mr. Jones' spouse, 2,245 Shares held in
trusts for the benefit of Mr. Jones' children, and 6,000 Shares subject to
stock options exercisable within 60 days.
(4) Includes 2,278 Shares held joint with Mr. Gallagher's spouse, 1,386 Shares
held for the benefit of Mr. Gallagher's children, and 6,000 Shares subject
to stock options exercisable within 60 days.
(5) Includes 314 Shares held in a trust for the benefit of Mr. Garrison's
children and 6,000 Shares subject to stock options exercisable within 60
days.
(6) Includes 6,000 Shares subject to stock options exercisable within 60 days.
(7) Includes 2,278 Shares held by Mr. Van Beek's spouse, 2,972 Shares held
jointly with his spouse, and 6,000 Shares subject to stock options
exercisable within 60 days.
32
<PAGE>
(8) Includes 6,000 Shares subject to stock options exercisable within 60 days.
(9) Includes 1,000 Shares held jointly with Ms. Bowen-Hahto's spouse, 1,200
held in trusts for the benefit of her children, and 6,000 Shares subject to
stock options exercisable within 60 days.
(10) Includes 6,000 Shares subject to stock options exercisable within 60 days.
(11) Includes 7,000 Shares subject to stock options exercisable within 60 days.
(12) Includes 920 Shares held in trust for the benefit of Ms. Brumley's children
or jointly with her children and 7,000 Shares subject to stock options
exercisable within 60 days.
(13) As noted in "Terms of the Offering--Purchase Intentions of Directors and
Executive Officers," the directors and executive officers have indicated
they intend to acquire in the aggregate approximately 12,000 Shares in the
offering.
(14) Includes 66,000 Shares subject to stock options exercisable within 60 days.
Options, Warrants and Rights
The Shares included in the table above as "exercisable within 60 days"
are all exercisable at $5.00 per Share, except (i) 1,000 Shares under options
held by Mr. Moergeli that are exercisable at $6.25 per share, and (ii) 1,000
Shares under options held by Ms. Brumley that are exercisable at $6.25 per
share.
In addition to the Shares subject to options included in the table
above, Mr. Moergeli and Mr. Brooks have been granted options to purchase 7,500
Shares and 5,000 Shares, respectively, at $12.50 per Share. All such options
vest as to one-third of the total amount granted on August 1, 2000, August 1,
2001, and August 1, 2002.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
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 do 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 approximately $1.55 million and
$1.46 million, respectively. During 1996, $896,000 of new loans and advances
were made and repayments totaled $804,000. During 1995, $1.22 million of new
loans and advances were made, and repayments totaled $1.17 million. All such
loans are currently in good standing and are being paid in accordance with their
terms, except as discussed below.
In February 1997 two loans to businesses affiliated with director
Terry L. Garrison were identified by the Bank as having potential weaknesses,
because one of Mr. Garrison's businesses has ceased operations and the Bank
lacks current financial information regarding Mr. Garrison's businesses. The
two loans consist of a $100,000 line of credit with an outstanding balance of
approximately $65,000, and a term loan with an
33
<PAGE>
outstanding balance of $137,400. Both loans are being paid in accordance with
their terms, and the Bank believes are adequately secured by pledged real
estate. The Bank is monitoring the status of the loans closely.
As a result of several overdrafts to directors and/or their related
interests during 1996 and 1997, the Bank has completely rewritten its insider
overdraft policy and instituted new procedures as of April 1997 to ensure that
all insider accounts are properly handled. The Bank has suffered no losses in
connection with such overdrafts.
Effective December 17, 1996, the Board of Directors accepted the
resignation of Kenneth S. Borg, the President and Chief Operating Officer of the
Company. Mr. Borg had served as President and Chief Executive Officer of the
Bank since its opening in July 1990. In connection with his departure, the
Company and Mr. Borg entered into a Settlement Agreement which generally
provides that Mr. Borg receive certain benefits, including the payment of Mr.
Borg's salary for the period beginning January 15, 1997, and ending May 15,
1997, payable at his 1996 salary rate of $84,908 and, as permissible, medical
benefits.
At the time of his resignation, Mr. Borg held options to purchase
20,000 Shares at an aggregate exercise price of $100,000. As part of the
Settlement Agreement, Mr. Borg agreed to relinquish his right to exercise any
currently exercisable stock options previously granted by the Company. In
exchange for relinquishing these options, Mr. Borg has received or will receive
the sum of $155,000 payable as follows: $75,000 upon compliance with certain
terms specified in the Settlement Agreement and $80,000 payable on January 15,
1998.
The Settlement Agreement further prohibits Mr. Borg for a period of
three years from competing with the Company or the Bank in the Washington
communities of Auburn, Buckley, Bonney Lake, Black Diamond, Enumclaw, Maple
Valley and the Covington area.
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.
Moergeli was appointed President and Chief Executive Officer of the Bank in
March 1997.
BANK SUPERVISION AND REGULATION
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.
34
<PAGE>
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 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
35
<PAGE>
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 and 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 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.
36
<PAGE>
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 permits nationwide
interstate banking and branching. This legislation 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, since June 1, 1997, the Interstate Act permits interstate bank
mergers, subject to these state laws, unless the home state of either merging
bank has "opted-out" of these provisions by enacting "opt-out" legislation. 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.
37
<PAGE>
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 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 qualify, 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
38
<PAGE>
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.
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
39
<PAGE>
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 June 30, 1997, 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 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, that became 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
40
<PAGE>
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 the remainder of 1997 and until further action by the FDIC, 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 been adjusted by 4 basis points to a range of 0 to 27 basis points.
Banking regulators are empowered under the Funds Act to prohibit insured
institutions 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 continue to address comprehensive legislation on the
merger of the funds and elimination of the thrift charter.
DESCRIPTION OF SECURITIES
General
The Company's Articles of Incorporation authorize the Company to issue up
to 5,000,000 Shares of common stock, at a par value of $1.00 per Share, of which
706,296 Shares are outstanding. Assuming the sale of 100,000 Shares in the
Offering, the Company will have 806,296 Shares outstanding. All outstanding
Shares are fully paid and nonassessable. The Shares do not represent or
constitute deposit accounts and are not insured by the FDIC.
All Shares will be entitled to share equally in dividends from funds
legally available therefor, when, as, and if declared by the board of directors,
and upon liquidation or dissolution of the Company, whether voluntary or
involuntary, to share equally in all assets of the Company available for
distribution to the common stock shareholders. It is not anticipated that the
Company will pay any dividends on the Shares in the foreseeable future. See
"Dividend Policy." Each holder of Shares is entitled to one vote for each Share
on all matters submitted to the shareholders. There is no cumulative voting,
and there are no pre-emptive rights, redemption rights, sinking fund provisions,
or rights of conversion in existence with respect to the Shares.
41
<PAGE>
Shareholders' rights and related matters are governed by the Washington
Business Corporation Act (the "WBCA"), the Company's Articles of Incorporation
and its Bylaws. The Company's Articles of Incorporation may not be amended
without the affirmative vote of at least a majority of the Shares entitled to
vote generally in the election of directors, voting as a single group, as
provided by the WBCA. Article X of the Company's Articles of Incorporation,
which deals with the number of directors, the staggering of the terms of office
of the directors, the filling of vacancies on the board of directors, and the
removal of directors, may not be altered or repealed without the affirmative
vote of at least 80% of the Company's outstanding common stock. The Company's
Bylaws may be amended by either the board of directors or by the affirmative
vote of a majority of the Company's outstanding Shares. Any Bylaw amendment
adopted by the board of directors may be repealed, amended or reinstated by a
majority vote of the outstanding Shares, at the next meeting of shareholders
following the board's amendment.
Staggered Board of Directors
The Company's board of directors is divided into three classes of
directors serving staggered terms. The Company's Articles of Incorporation,
including the use of a staggered board, may render more difficult a change in
control of the Company or removal of incumbent management.
State Anti-Takeover Provisions
Certain provisions of the Washington Business Corporation Act ("WBCA"),
summarized below, may be considered to have an anti-takeover effect and may
delay, deter, or prevent a tender offer, proxy contest or other takeover attempt
that a stockholder might consider to be in such stockholder's best interest,
including such an attempt as might result in payment of a premium over the
market price for shares held by stockholders.
As a Washington corporation, the Company is subject to the provisions of
the WBCA, including Section 23B.19. In general, Section 23B.19 prohibits a
Washington corporation from engaging in a "significant business transaction" for
a period of five years after the acquisition of ten percent or more of the
corporation's outstanding stock by a third party (an "acquiring person"), unless
the significant business transaction or the acquisition of the threshold number
of shares by the acquiring person is approved, prior to the acquisition of the
shares, by a majority of the directors of the corporation. "Significant
business transactions" are defined to include, among other things, (i) merger of
the target corporation or any subsidiary thereof with the acquiring person or
any affiliate; (ii) sale, lease, mortgage, or other disposition or encumbrance,
to or with the acquiring person or affiliate, of five percent or more of the
target corporation's assets; (iii) termination of five percent or more of the
employees of the target corporation or its subsidiaries employed in Washington;
(iv) issuance, transfer or redemption by the target corporation or any
subsidiary, of shares, or of options, warrants, or rights to acquire shares of
the target corporation or any subsidiary, to or beneficially owned by an
acquiring person, unless on the same terms as are offered to all other target
corporation shareholders; and (v) the liquidation or dissolution of the target
corporation proposed by, or pursuant to an agreement or understanding with, an
acquiring person or affiliate.
EXPERTS
The financial statements included in this Prospectus, to the extent and
for the periods indicated in their reports, have been audited by Knight, Vale &
Gregory, independent certified public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
42
<PAGE>
LEGAL MATTERS
The validity of the Shares offered by the Company will be passed upon for
the Company by Graham & Dunn, 1420 Fifth Avenue, 33rd Floor, Seattle, Washington
98101-2390.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company have been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report............................................................. F-1
Consolidated Balance Sheets at June 30, 1997 (Unaudited), and at December 31, 1996....... F-2
Consolidated Statements of Income for the six months ended June 30, 1997, and 1996
(Unaudited), and for the years ended December 31, 1996, and 1995...................... F-3
Consolidated Statements of Shareholders' Equity for the six months ended June 30, 1997
(Unaudited), and for the years ended December 31, 1996, and 1995..................... F-4
Consolidated Statements of Cash Flows for the six months ended June 30, 1997,
and 1996 (Unaudited), and for the years ended December 31, 1996, and 1995............. F-5
Notes to Consolidated Financial Statements................................................ F-7
</TABLE>
44
<PAGE>
Independent Auditors' Report
Board of Directors
Mountain Bank Holding Company and Subsidiaries
Enumclaw, Washington
We have audited the accompanying consolidated balance sheet of Mountain Bank
Holding Company and Subsidiaries as of December 31, 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years ended December 31, 1996 and 1995. 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 the results of
their operations and their cash flows for the years ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.
KNIGHT, VALE & GREGORY, INC., P.S.
/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-1
<PAGE>
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
June 30, 1997 and December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks (Note 3) $ 3,022 $ 3,651
Federal funds sold and interest bearing deposits in banks 3,550 7,550
Securities available for sale (Note 4) 19,422 13,455
Loans held for sale 152 --
Loans (Notes 5 and 11) 38,841 37,543
Less allowance for credit losses (Note 5) (476) (391)
Loans, net 38,365 37,152
Premises and equipment (Note 6) 2,101 2,206
Accrued interest receivable 489 373
Other assets 273 174
Total assets $67,374 $64,561
Liabilities
Deposits:
Demand $ 8,598 $ 8,565
Savings, NOW and money market 29,757 29,622
Time deposits (Note 7) 21,262 20,617
Total deposits 59,617 58,804
Other borrowed money (Note 11) 1,800 --
Accrued interest payable 211 226
Note payable (Note 8) 46 46
Other liabilities 183 206
Total liabilities 61,857 59,282
Commitments and Contingencies (Note 11) -- --
Shareholders' Equity
Common stock (par value $1); authorized 1,000,000 shares;
issued and outstanding: 1997 - 706,296 shares;
1996 - 704,398 shares (Notes 13 and 18) 706 704
Paid-in capital 3,986 3,969
Retained earnings (Note 17) 855 630
Net unrealized depreciation on securities available for sale,
net of tax of $15 in 1997 and $13 in 1996 (30) (24)
Total shareholders' equity 5,517 5,279
Total liabilities and shareholders' equity $67,374 $64,561
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
Consolidated Statements of Income
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Six Months Ended June 30, 1997 and 1996 and
Years Ended December 31, 1996 and 1995
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1996 1995
(Unaudited)
<S> <C> <C> <C> <C>
Interest Income
Loans $ 1,944 $ 1,646 $ 3,462 $ 2,917
Securities available for sale 555 275 661 355
Federal funds sold and deposits in banks 87 64 123 116
Total interest income 2,586 1,985 4,246 3,388
Interest Expense
Deposits 1,044 815 1,725 1,392
Short-term borrowings 1 -- 1 15
Note payable 1 2 4 4
Other -- -- -- 13
Total interest expense 1,046 817 1,730 1,424
Net interest income 1,540 1,168 2,516 1,964
Provision for Credit Losses (Note 5) 100 20 67 32
Net interest income after provision for credit losses 1,440 1,148 2,449 1,932
Non-Interest Income
Service charges on deposit accounts 178 175 360 297
Origination fees and gains on loans sold 97 112 234 287
Loss on sale of securities available for sale (12) (1) (11) (1)
Other 65 54 109 103
Total non-interest income 328 340 692 686
Non-Interest Expenses
Salaries and employee benefits 709 643 1,324 1,222
Occupancy and equipment 221 219 438 409
Other (Note 20) 501 448 949 854
Total non-interest expenses 1,431 1,310 2,711 2,485
Income before income taxes 337 178 430 133
Income Taxes (Note 9) 112 58 138 41
Net income $ 225 $ 120 $ 292 $ 92
Earnings Per Common Shares
Primary $ .32 $ .18 $ .43 $ .16
Fully diluted .30 .17 .40 .14
Average Number of Common Shares Outstanding
Primary 704,714 661,075 671,715 588,710
Fully diluted 751,793 714,120 723,590 638,126
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Six Months Ended June 30, 1997 and
Years Ended December 31, 1996 and 1995
(Dollars in Thousands)
<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 $557 $2,674 $246 $(39) $3,438
Sale of common stock (102,042 shares) 102 894 -- -- 996
Options exercised (2,000 shares) 2 8 -- -- 10
Net income -- -- 92 -- 92
Interest on redeemable stock (Note 18) -- -- (17) -- (17)
Change in net unrealized appreciation
(depreciation) on securities available
for sale, net of tax -- -- -- 48 48
Balance at December 31, 1995 661 3,576 321 9 4,567
Sale of common stock (730 shares) -- 7 -- -- 7
Transfer of redeemable stock (Note 18) 43 386 17 -- 446
Net income -- -- 292 -- 292
Change in net unrealized appreciation
(depreciation) on securities available
for sale, net of tax -- -- -- (33) (33)
Balance at December 31, 1996 704 3,969 630 (24) 5,279
Net income (unaudited) -- -- 225 -- 225
Sale of common stock
(1,898 shares) (unaudited) 2 17 -- -- 19
Change in net unrealized appreciation
(depreciation) on securities available
for sale, net of tax (unaudited) -- -- -- (6) (6)
Balance at June 30, 1997 (unaudited) $706 $3,986 $855 $(30) $5,517
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Six Months Ended June 30, 1997 and 1996 and
Years Ended December 31, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1996 1995
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 225 $ 120 $ 292 $ 91
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 100 20 67 32
Depreciation and amortization 135 142 282 268
Amortization, net of accretion (1) 17 4 38
Deferred Federal income taxes -- -- (18) 19
Loss on securities available for sale 12 1 11 1
Gain on loans sold (97) (38) (86) (142)
Originations of loans held for sale (3,974) (5,376) (10,796) (12,135)
Proceeds from sales of loans 3,919 5,706 11,212 12,033
Increase in accrued interest receivable (116) (64) (86) (23)
Increase (decrease) in accrued interest payable (15) 21 81 74
Other - net (133) 115 56 (22)
Net cash provided by operating activities 55 664 1,019 234
Cash Flows from Investing Activities
Net (increase) decrease in Federal funds sold
and interest bearing deposits in banks 4,000 1,825 (4,725) (2,825)
Purchase of securities available for sale (11,475) (5,048) (11,894) (4,760)
Proceeds from sales of securities available for sale 5,502 2,452 6,449 1,134
Proceeds from maturities of securities available for sale -- -- 71 1,800
Increase in loans made to customers, net of
principal collections (1,313) (2,766) (6,634) (5,130)
Additions to premises and equipment (30) (31) (109) (582)
Net cash used in investing activities (3,316) (3,568) (16,842) (10,363)
Cash Flows from Financing Activities
Net increase in demand, savings, NOW and
money market deposits 168 1,218 11,800 6,395
Net increase in time deposits 645 668 3,322 5,877
Net proceeds from issuance of stock -- -- 7 996
Proceeds from issuance of redeemable stock -- -- -- 429
Stock options exercised 19 6 -- 10
Increase (decrease) in short-term borrowings 1,800 (47) -- (575)
Repayment of long-term debt -- -- (1) (1)
Net cash provided by financing activities 2,632 1,845 15,128 13,131
Net change in cash and due from banks (629) (1,059) (695) 3,002
Cash and Due from Banks
Beginning of period 3,651 4,346 4,346 1,344
End of period $ 3,022 $ 3,287 $ 3,651 $ 4,346
</TABLE>
(continued)
See notes to consolidated financial statements.
F-5
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(concluded)
Mountain Bank Holding Company and Subsidiaries
Six Months Ended June 30, 1997 and 1996 and
Years Ended December 31, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1996 1995
(Unaudited)
<S> <C> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Interest paid $1,061 $ 796 $1,649 $1,350
Income taxes paid 205 45 71 --
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Change in unrealized appreciation (depreciation)
on securities available for sale, net of tax (6) (31) $ (33) $ 48
Transfer of redeemable stock to common stock -- -- 446 --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
All amounts shown as of and for the periods ended June 30, 1997 and 1996 are
unaudited.
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.
Securities Available for Sale
Securities available for sale consist of 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 write-downs of the individual
securities to their fair value. Such write-downs 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-7
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
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-8
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
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-9
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
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 thousand and $447 thousand, respectively.
Note 4 - Securities Available for Sale
Securities available for sale have been classified according to management's
intent. The carrying amounts of securities and their approximate fair values at
June 30, 1997 and December 31, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities Available for Sale
June 30, 1997
U.S. Treasury securities $ 4,420 $ 7 $ 3 $ 4,424
U.S. Government agency securities 12,058 7 34 12,031
Mortgage backed securities 2,387 -- 7 2,380
State and municipal securities 199 -- -- 199
Federal Reserve Bank and
Federal Home Loan Bank stock 388 -- -- 388
$19,452 $14 $44 $19,422
December 31, 1996
U.S. Treasury securities $ 3,150 $-- $ 5 $ 3,145
U.S. Government agency securities 8,832 10 39 8,803
Mortgage backed securities 803 1 4 800
State and municipal securities 329 -- -- 329
Federal Reserve Bank and
Federal Home Loan Bank stock 378 -- -- 378
$13,492 $11 $48 $13,455
</TABLE>
(continued)
F-10
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Note 4 - Debt Securities (concluded)
Gross realized gains and losses on sales of securities available for sale for
the six months ended June 30, 1997 and 1996, and for the years ended December
31, 1996 and 1995 were (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Gross Realized Gains
U.S. Government and agency securities $-- $1 $ 1 $ 4
Gross Realized Losses
U.S. Treasury securities $ 4 $1 $ 6 $--
U.S. Government and agency securities 5 1 4 --
Mortgage backed securities 3 -- 2 5
$12 $2 $12 $ 5
</TABLE>
The scheduled maturities of debt securities available for sale at June 30, 1997
and December 31, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 2,889 $ 2,883
Due in one to five years 15,331 15,313 8,743 8,718
Due in five years or more 3,733 3,721 1,482 1,476
$19,064 $19,034 $13,114 $13,077
</TABLE>
Securities with a carrying value of $1.014 million and $499 thousand at June 30,
1997 and December 31, 1996, respectively, were assigned or pledged to secure
public deposits, certain short-term borrowings, and for other purposes as
required by law.
F-11
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Note 5 - Loans
Loans at June 30, 1997 and December 31, 1996 consist of the following (dollars
in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
Commercial and agricultural $12,366 $11,685
Real estate:
Construction and land development 3,444 3,537
Mortgage 18,722 17,198
Consumer 4,309 5,123
$38,841 $37,543
</TABLE>
Changes in the allowance for credit losses for the six months ended June 30,
1997 and 1996 and for the years ended December 31, 1996 and 1995 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Balance at beginning of period $ 391 $ 334 $ 334 $ 318
Provision for credit losses 100 20 67 32
Charge-offs (15) (10) (10) (16)
Balance at end of period $ 476 $ 344 $ 391 $ 334
</TABLE>
The recorded investment in impaired loans was $106 thousand at June 30, 1997 and
$137 thousand at December 31, 1996. 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.
Maturity and repricing information for the Bank's loan portfolio at June 30,
1997 and December 31, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
Fixed Rate Floating Rate Fixed Rate Floating Rate
Maturing in Repricing in Total Maturing in Maturing in Total
<S> <C> <C> <C> <C> <C> <C>
0 - 90 days $ 3,000 $8,004 $11,004 $ 4,812 $9,286 $14,098
91 - 365 days 3,096 -- 3,096 4,394 -- 4,394
1 year - 5 years 24,385 -- 24,385 18,729 -- 18,729
5 years or more 250 -- 250 185 -- 185
$30,731 $8,004 38,735 $28,120 $9,286 37,406
Impaired loans 106 137
$38,841 $37,543
</TABLE>
F-12
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Note 6 - Premises and Equipment
The components of premises and equipment at June 30, 1997 and December 31, 1996
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
Land $ 471 $ 471
Buildings 1,452 1,452
Equipment, furniture and fixtures 1,203 1,172
Total cost 3,126 3,095
Less accumulated depreciation 1,025 889
$2,101 $2,206
</TABLE>
Note 7 - Deposits
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100 thousand, is approximately $6,797 thousand and
$5,892 thousand at June 30, 1997 and December 31, 1996, respectively.
At June 30, 1997 and December 31, 1996, the scheduled maturities of certificates
of deposit are as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
1 year $17,838 $17,424
2 years 2,329 2,313
3 years 855 201
4 years 208 657
5 years and over 32 22
$21,262 $20,617
</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
thousand; 1998 - $1 thousand; 1999 - $2 thousand; 2000 - $2 thousand; 2001 - $2
thousand; and thereafter - $38 thousand.
F-13
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Note 9 - Income Taxes
The components of the provision for income taxes are as follows for the six
months ended June 30, 1997 and 1996 and for the years ended December 31, 1996
and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Current $ 112 $ 58 $ 156 $ 22
Deferred (benefit) -- -- (18) 19
Income taxes $ 112 $ 58 $ 138 $ 41
</TABLE>
The effect of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at June 30, 1997 and December 31, 1996
follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
Deferred Tax Assets
Provision for loan losses $ 100 $ 100
Unrealized loss on securities available for sale 15 13
Deferred compensation 5 5
Total deferred tax assets 120 118
Deferred Tax Liabilities
Depreciation 22 22
Cash basis tax accounting 38 38
Deferred loan fee income 54 54
Market value adjustment 2 2
Federal Home Loan stock dividends 11 11
Total deferred tax liabilities 127 127
Net deferred tax liabilities $ 7 $ 9
</TABLE>
(continued)
F-14
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Note 9 - Income Taxes (concluded)
The following is a reconciliation between the statutory and effective federal
income tax rates for the six months ended June 30, 1997 and 1996 and for the
years ended December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
Percent of Percent of
Pre-tax Pre-tax
Amount Income Amount Income
<S> <C> <C> <C> <C>
Income tax at statutory rate $ 115 34.0% $ 61 34.0%
Increase (decrease) resulting from:
Tax exempt income (1) (.3) (3) (1.4)
Other (2) (.5) -- --
Total income tax expense $ 112 33.2% $ 58 32.6%
<CAPTION>
Years Ended December 31,
1996 1995
Percent of Percent of
Pre-tax Pre-tax
Amount Income Amount Income
Income tax at statutory rate $ 146 34.0% $ 45 34.0%
Increase (decrease) resulting from:
Tax exempt income (7) (1.7) -- --
Other (1) (.2) (4) (3.1)
Total income tax expense $ 138 32.1% $ 41 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 million and $1.456 million, respectively. During
1996, $896 thousand of new loans and advances were made, and repayments totaled
$804 thousand. During 1995, $1.219 million of new loans and advances were made,
and repayments totaled $1.172 million.
F-15
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
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 (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
Commercial and agriculture $3,347 $2,273
Real estate 1,996 1,661
Credit cards 1,443 1,308
$6,786 $5,242
</TABLE>
Outstanding commitments under letters of credit totaled $15 thousand and $151
thousand at June 30, 1997 and December 31, 1996, 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 million, none of which was used at
December 31, 1996. At June 30, 1997, the Bank had $1.8 million in Federal Home
Loan Bank borrowings, due July 1, 1997, collateralized by unencumbered eligible
collateral.
F-16
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
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%.
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 thousand.
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. Two thousand of these options have been exercised.
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.
(continued)
F-17
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Note 13 - Stock Option Plans (continued)
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 (dollars in thousands except per share
amounts):
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Net income:
As reported $ 225 $ 120 $ 292 $ 92
Pro forma 225 120 285 89
Primary earnings per share:
As reported $ .32 $ .18 $ .43 $ .16
Pro forma .32 .18 .42 .12
Fully diluted earnings per share:
As reported $ .30 $ .17 $ .40 $ .14
Pro forma .30 .17 .39 .11
</TABLE>
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 Company's stock options and
the related transactions for the six months ended June 30, 1997 and 1996, and
for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of period 103,332 $ 5.36 99,332 $5.13
Granted -- -- -- --
Expired/forfeited (20,000) (5.00) -- --
Outstanding at end of period 83,332 5.44 99,332 5.13
Options exercisable at period 77,332 5.29 97,332 5.03
</TABLE>
(continued)
F-18
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Note 13 - Stock Option Plans (concluded)
<TABLE>
<CAPTION>
Years Ended December 31,
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 June 30,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
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
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 six months ended June 30, 1997 and 1996 totaled $11
thousand and $10 thousand, respectively, and for the years ended December 31,
1996 and 1995 totaled $24 thousand and $20 thousand, 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 thousand and $11 thousand at December 31,
1996 and 1995, respectively. Expenses associated with this plan were $3
thousand and $2 thousand in the six months ended June 30, 1997 and 1996,
respectively, and $4 thousand in both the years ended December 31, 1996 and
1995. 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 17,372 and 19,270 at
June 30, 1997 and December 31, 1996, respectively. No employee can purchase
more than 200 shares or common stock valued at more than $25 thousand in any
plan year. In the six months ended June 30, 1997, 1,898 shares were issued at a
price of $10 per share. 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
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 (dollars in thousands).
<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>
June 30, 1997
Tier 1 capital (to average assets):
Consolidated $5,547 8.66% $2,561 4.00% N/A N/A
Bank 4,942 7.78 2,541 4.00 $3,176 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 5,547 13.23 1,677 4.00 N/A N/A
Bank 4,942 11.93 1,657 4.00 2,486 6.00
Tier 2 capital:
Consolidated 6,023 14.37 3,354 8.00 N/A N/A
Bank 5,418 13.08 3,314 8.00 4,143 10.00
December 31, 1996
Tier 1 capital (to average assets):
Consolidated $5,304 9.15% $2,316 4.00% N/A N/A
Bank 4,776 8.33 2,995 4.00 $2,268 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 5,304 13.14 1,614 4.00 N/A N/A
Bank 4,776 12.00 1,592 4.00 2,388 6.00
Tier 2 capital:
Consolidated 5,694 14.11 3,229 8.00 N/A N/A
Bank 5,142 12.92 3,185 8.00 3,981 10.00
</TABLE>
Management believes, as of June 30, 1997 and 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 $726 thousand as of June 30, 1997.
F-21
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Note 18 - Redeemable Stock
On June 25, 1995, the Company sold 140,000 shares of its common stock at a total
offering price of $1.4 million ($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 thousand, 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 (Dollars in
Thousands)
Condensed Balance Sheets - June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
Assets
Cash $ 23 $ 7
Investment in the Bank 4,897 4,714
Investment in Mountain Real Estate Holdings, Inc. 503 503
Due from subsidiaries -- 154
Other assets 150 17
Total assets $5,573 $5,395
Liabilities and Shareholders' Equity
Accrued liabilities $ 56 $ 116
Shareholders' equity 5,517 5,279
Total liabilities and shareholders' equity $5,573 $5,395
</TABLE>
(continued)
F-22
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
Note 19 - Condensed Financial Information - Parent Company Only
(Dollars in Thousands) (concluded)
Condensed Statements of Income - Six Months Ended June 30, 1997 and 1996
and Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Operating Income/Bank
Dividend from subsidiary $ 75 $ -- $ 60 $ --
Operating Expenses (61) (38) (71) (35)
Income (loss) before income taxes and equity
in undistributed income of subsidiaries 14 (38) (11) (35)
Income Taxes (Benefit) (20) (12) (25) (16)
Income (loss) before equity in
undistributed income of subsidiaries 34 (26) 14 (19)
Equity in Undistributed Income of Subsidiaries 191 146 278 111
Net income $ 225 $ 120 $ 292 $ 92
<CAPTION>
Condensed Statements of Cash Flows - Six Months Ended June 30, 1997 and 1996
and Years Ended December 31, 1996 and 1995
Cash Flows from Operating Activities
Net income $ 225 $ 120 $ 292 $ 92
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization 23 1 3 3
Equity in undistributed income of subsidiaries (191) (146) (278) (111)
(Increase) decrease in receivable from subsidiaries 154 42 (112) (63)
Other (59) (10) 86 108
Net cash provided by (used in) operating activities 152 7 (9) 29
Cash Flows from Investing Activities
Decrease in interest bearing deposit in the Bank -- -- -- 40
Noncompete agreement (155) -- -- --
Net cash provided by (used in) investing activities (155) -- -- 40
Cash Flows from Financing Activities
Cost of stock offering -- -- -- (25)
Proceeds from issuance of common stock 19 7 7 1,450
Stock options exercised -- -- -- 10
Investment in subsidiaries -- -- -- (1,505)
Net cash provided by (used in) financing activities 19 7 7 (70)
Net change in cash 16 14 (2) (1)
Cash, Beginning of Period 7 9 9 10
Cash, end of period $ 23 $ 23 $ 7 $ 9
</TABLE>
F-23
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
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 six months ended June
30, 1997 and 1996 and for the years ended December 31, 1996 and 1995
(dollars in thousands):
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Marketing and advertising $ 12 $ 13 $ 61 $ 63
Consulting 1 24 61 45
Legal and accounting 54 52 97 46
Regulatory assessments 13 12 23 57
Data processing 137 119 269 202
Office supplies and expenses 17 16 92 96
Business taxes 34 30 62 56
</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 thousand
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 II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 1. Indemnification of Directors and Officers
The Bylaws of the Company provide that the Company will indemnify any
individual made a party to a proceeding because the individual is or was a
director against liability incurred in the proceeding if:
(a) the individual acted in good faith; and
(b) the individual reasonably believed:
(i) in the case of conduct in the individual's official capacity
with the corporation, that the individual's conduct was in
its best interests; and
(ii) in all other cases, that the individual's conduct was at
least not opposed to its best interests; and
(c) in the case of any criminal proceeding, the individual had no
reasonable cause to believe the individual's conduct was
unlawful.
The Company will not indemnify an individual made a party to a proceeding
because the individual is or was a director against liability incurred in the
proceeding if:
(a) in connection with a proceeding by or in the right of the
corporation in which the director is adjudged liable to the
corporation; or
(b) in connection with any other proceeding charging improper
personal benefit to the director, whether or not involving action
in the director's official capacity, in which the director was
adjudged liable on the basis that personal benefit was improperly
received by the director.
The Company has a Directors' and Officers' Liability Insurance Policy which
provides coverage sufficiently broad to permit indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended.
Item 2. Other Expenses of Issuance and Distribution
The Registrant estimates that the expenses payable by it in connection with
this Offering, as described in this Registration Statement, will be as follows:
<TABLE>
<S> <C>
SEC Registration fees $ 400
Legal fees and expenses $40,000
Accounting fees and expenses $ 4,000
Printing expenses $ 3,000
Miscellaneous $ 2,600
Total Offering Expenses $50,000
</TABLE>
II-1
<PAGE>
Item 3. Undertakings
(a) The undersigned Registrant hereby undertakes:
1. To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
2. That, for the purpose of determining liability under the
Securities Act, treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
3. To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
Item 4. Unregistered Securities Issued or Sold Within One Year
None.
Item 5. Index to Exhibits
See Exhibit Index on page II-5.
Item 6. Description of Exhibits.
See Exhibit Index on page II-5.
II-2
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that the
Registrant meets all of the requirements of filing on Form SB-1 and authorized
this registration statement to be signed on its behalf by the undersigned, in
the City of Enumclaw, State of Washington on September 23, 1997.
MOUNTAIN BANK HOLDING COMPANY
By: /s/ Roy T. Brooks
--------------------
Roy T. Brooks, Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Roy T. Brooks and Steve W. Moergeli and
each of them, with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary fully to all intents and purposes as
he might or could do in person thereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity
- ---------------------------------------------------------------- ----------------------------------------------
<S> <C>
/s/ Roy T. Brooks Chairman of the Board and Director
- ----------------------------------------------------------------
Roy T. Brooks (Principal Executive Officer)
/s/ Sheila M. Brumley Chief Financial Officer
- ----------------------------------------------------------------
Sheila M. Brumley (Principal Financial and Accounting Officer)
/s/ Susan K. Bowen-Hahto Director
- ----------------------------------------------------------------
Susan K. Bowen-Hahto
/s/ Brian W. Gallagher Director
- ----------------------------------------------------------------
Brian W. Gallagher
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
/s/ Terry L. Garrison Director
- ----------------------------------------------------------------
Terry L. Garrison
/s/ Michael K. Jones Director
- ----------------------------------------------------------------
Michael K. Jones
/s/ Barry C. Kombol Director
- ----------------------------------------------------------------
Barry C. Kombol
/s/ Steve W. Moergeli Director
- ----------------------------------------------------------------
Steve W. Moergeli
/s/ John W. Raeder Director
- ----------------------------------------------------------------
John W. Raeder
/s/ Garrett S. Van Beek Director
- ----------------------------------------------------------------
Garrett S. Van Beek
/s/ Hans Rudy Zurcher Director
- ----------------------------------------------------------------
Hans Rudy Zurcher
</TABLE>
Dated: September 23, 1997
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
<C> <S>
2.1 Articles of Incorporation of Mountain Bank Holding Company, as amended*
2.2 Bylaws of Mountain Bank Holding Company *
4.1 Form of Subscription Agreement (Existing Shareholder)
4.2 Form of Subscription Agreement (New Shareholder)
6.1 Lease Agreement between The Company and its subsidiary, Mt. Rainier National Bank *
6.2 1990 Stock Option Plan *
6.3 1990 Director Stock Option Plan *
6.4 1995 Employee Stock Purchase Plan *
10.1 Consent of Independent Certified Public Accountants
10.2 Consent of Legal Counsel (included in legal opinion - filed as Exhibit 11.1)
11.1 Opinion of Graham & Dunn regarding legality of the securities covered by the Registration
Statement
12.1 Form Letter to Shareholders
12.2 Form Letter to Potential Investors
</TABLE>
___________________
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form 10-SB, Registration No. 000-28394.
II-5
<PAGE>
EXHIBIT 4.1
SUBSCRIPTION FOR COMMON STOCK
MOUNTAIN BANK HOLDING COMPANY
(Existing Shareholder)
STOCK ISSUE: 100,000 shares of common stock, par value $1.00 each ("Common
Stock"), are to be subscribed for and issued at $12.50 per share. 70,630 of
such shares have been allocated to existing shareholders, who may purchase such
shares on the basis of 1 share for each 10 shares owned.
The undersigned, having received and read the Offering Circular of MOUNTAIN
BANK HOLDING COMPANY (the "Company"), dated October__, 1997, hereby offers to
purchase the number of shares of the Common Stock of the Company set forth below
at a subscription price of $12.50 per share, and encloses herewith the full
aggregate subscription price. Checks or money orders should be made payable to
MOUNTAIN BANK HOLDING COMPANY.
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Shares subscribed for.........................................
---------------
(No minimum; maximum--1 share for each 10 owned)
Aggregate purchase price (enclosed)........................... $
--------------
=================================================================================
</TABLE>
PLEASE INDICATE BELOW IF YOU DESIRE TO PURCHASE ADDITIONAL SHARES OF COMMON
STOCK IF THE OFFERING IS NOT FULLY SUBSCRIBED DURING THE EXCLUSIVE PERIOD.
ADDITIONAL SHARES, IF AVAILABLE, WILL BE SOLD ON A FIRST COME, FIRST SERVED
BASIS.
[_] I would be interested in purchasing _________additional shares. Please
contact me if additional shares are available for purchase at the closing
of the exclusivity period.
SUBSCRIPTION SHOULD BE RECEIVED BY THE COMPANY NOT LATER THAN 5:00 P.M. LOCAL
TIME ON NOVEMBER 30, 1997, THE EXPIRATION DATE OF THE EXCLUSIVE OFFERING TO
EXISTING SHAREHOLDERS. SUBSCRIPTIONS RECEIVED AFTER NOVEMBER 30, 1997, AND
PRIOR TO DECEMBER 31, 1997, UNLESS THE OFFERING IS TERMINATED EARLIER, WILL BE
TREATED ON A FIRST-COME, FIRST-SERVED BASIS, AS WILL ALL SUBSCRIPTIONS FOR
ADDITIONAL SHARES. THE COMPANY RESERVES THE RIGHT TO REJECT ANY SUBSCRIPTION, IN
WHOLE OR IN PART.
Shares purchased by the undersigned shall be registered as listed below. (If
certificates for shares are to be issued in more than one name, please specify
whether ownership is to be as tenants in common, joint tenants, etc. If
certificates for shares are to be issued in the name of one person for the
benefit of another, please indicate whether registration should be as trustee or
custodian for such other person.)
<TABLE>
<CAPTION>
How Shares To Be Registered (Please Print) No. of Shares (at $12.50 per share)
<S> <C>
_____________________________________ _______________
_____________________________________ _______________
</TABLE>
IN WITNESS WHEREOF, I/we have executed this Subscription, retaining a copy for
my/our records, and returning a copy by mail or delivery to:
<TABLE>
<CAPTION>
MOUNTAIN BANK HOLDING COMPANY
501 Roosevelt Avenue
Enumclaw, Washington 98022
Date: _______________________, 1997
<S> <C>
- ----------------------------------------------------------------- ----------------------------------------------------
(Signature) (Signature) (If shares to be issued in more than
one name)
- ----------------------------------------------------------------- ----------------------------------------------------
Name (Please print or type) Name (Please print or type)
- ----------------------------------------------------------------- ----------------------------------------------------
Street Address Street Address
- ----------------------------------------------------------------- ----------------------------------------------------
City and State ZIP City and State ZIP
Telephone:_______________________________________________________ Telephone:__________________________________________
Social Security No.:_____________________________________________ Social Security No.:________________________________
or Taxpayer I.D. No. or Taxpayer I.D. No.
</TABLE>
IF SHARES TO BE HELD IN JOINT OWNERSHIP, ALL JOINT OWNERS SHOULD SIGN THIS
SUBSCRIPTION.
<PAGE>
EXHIBIT 4.2
SUBSCRIPTION FOR COMMON STOCK
MOUNTAIN BANK HOLDING COMPANY
(New Shareholder)
STOCK ISSUE: 100,000 shares of common stock, par value $1.00 each ("Common
Stock"), are to be subscribed for and issued at $12.50 per share. 29,370 of
such shares have been reserved for New Shareholders. This subscription applies
to such 29,370 shares. ALL SALES TO NEW SHAREHOLDERS ARE ON A FIRST-COME,
FIRST-SERVED BASIS.
The undersigned, having received and read the Offering Circular of MOUNTAIN
BANK HOLDING COMPANY (the "Company"), dated October __, 1997, hereby offers to
purchase the number of shares of the Common Stock of the Company (minimum 100
shares--maximum 2,500 shares) set forth below at a subscription price of $12.50
per share, and encloses herewith the full aggregate subscription price. Checks
or money orders should be made payable to MOUNTAIN BANK HOLDING COMPANY.
<TABLE>
<CAPTION>
=================================================================
<S> <C>
Shares subscribed for.........................
--------------
(Minimum 100 shares--maximum 2,500 shares)
Aggregate purchase price (enclosed)........... $
-------------
=================================================================
</TABLE>
SUBSCRIPTIONS SHOULD BE RECEIVED BY THE COMPANY NOT LATER THAN 5:00 P.M.
LOCAL TIME ON NOVEMBER 30, 1997, THE EXPIRATION DATE OF THE EXCLUSIVE OFFER TO
NEW SHAREHOLDERS. FOLLOWING THE EXCLUSIVE OFFERING PERIOD, THE OFFERING WILL
CONTINUE UNTIL DECEMBER 31, 1997, UNLESS TERMINATED EARLIER. ALL SALES IN THE
OFFERING ARE ON A FIRST-COME, FIRST-SERVED BASIS. THE COMPANY RESERVES THE RIGHT
TO REJECT ANY SUBSCRIPTION, IN WHOLE OR IN PART.
Shares purchased by the undersigned shall be registered as listed below.
(If certificates for shares are to be issued in more than one name, please
specify whether ownership is to be as tenants in common, joint tenants, etc. If
certificates for shares are to be issued in the name of one person for the
benefit of another, please indicate whether registration should be as trustee or
custodian for such other person.)
<TABLE>
<CAPTION>
How Shares To Be Registered (Please Print) No. of Shares (at $12.50 per share)
<S> <C>
____________________________________ _______________
____________________________________ _______________
</TABLE>
IN WITNESS WHEREOF, I/we have executed this Subscription, retaining a copy
for my/our records, and returning a copy by mail or delivery to:
<TABLE>
<CAPTION>
MOUNTAIN BANK HOLDING COMPANY
501 Roosevelt Avenue
Enumclaw, Washington 98022
Date: _______________________, 1997
<S> <C>
- ----------------------------------------------------------------- ----------------------------------------------------
(Signature) (Signature) (If shares to be issued in more than
one name)
- ----------------------------------------------------------------- ----------------------------------------------------
Name (Please print or type) Name (Please print or type)
- ----------------------------------------------------------------- ----------------------------------------------------
Street Address Street Address
- ----------------------------------------------------------------- ----------------------------------------------------
City and State ZIP City and State ZIP
Telephone:_______________________________________________________ Telephone:__________________________________________
Social Security No.:_____________________________________________ Social Security No.:________________________________
or Taxpayer ID No. or Taxpayer ID No.
</TABLE>
IF SHARES TO BE HELD IN JOINT OWNERSHIP, ALL JOINT OWNERS SHOULD SIGN THIS
SUBSCRIPTION.
<PAGE>
EXHIBIT 10.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of our report, dated
February 7, 1997, relating to the consolidated financial statements of Mountain
Bank Holding Company and Subsidiaries, and to the reference to our firm under
the caption "EXPERTS" in the Prospectus.
/s/ Knight, Vale Gregory, Inc., P.S.
Tacoma, Washington
September 26, 1997
<PAGE>
EXHIBIT 11.1
September 29, 1997
Board of Directors
Mountain Bank Holding Company
501 Roosevelt
Enumclaw, WA 98022
Re: Legality of Shares to be Issued
Dear Ladies and Gentlemen:
We are acting as counsel for Mountain Bank Holding Company, a Washington
corporation (the "Company") in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of a maximum of 100,000 shares
of the Company's common stock, $1.00 par value per share (the "Shares") to be
sold by the Company in an offering to existing shareholders and to the public.
A Registration Statement on Form SB-1, including the Prospectus contained
therein (collectively the "Registration Statement"), is being filed under the
Act with respect to the offering of the Shares.
In connection with the offering of the Shares by the Company, we have
examined (a) the Company's Articles of Incorporation, as amended; (b) the
Registration Statement; and (c) such other documents as we have deemed necessary
to form the opinion hereinafter expressed. As to various questions of fact
material to such opinions, where relevant facts were not independently
established, we have relied upon statements of officers of the Company.
Based and relying solely upon the foregoing, we advise you that in our
opinion the Shares, or any portion thereof, when sold by the Company after the
Registration Statement has become effective, will be legally issued under the
laws of the State of Washington, fully paid and non-assessable.
Consent is hereby given to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference in the Prospectus to this firm under
the caption "Legal Matters" as having passed upon the legality of the Shares.
In giving this consent, we do not admit that we are experts within the meaning
of the Act.
Very truly yours,
GRAHAM & DUNN
/s/ Graham & Dunn
<PAGE>
EXHIBIT 12.1
[Mountain Bank Holding Company Logo]
October __, 1997
Dear Shareholders,
The Board of Directors of Mountain Bank Holding Company has authorized a
stock offering of 100,000 shares of common stock at $12.50 per share. This is
the fifth offering since Mt. Rainier National Bank opened in July of 1990. The
new capital from this offering will be used to support the growth of the
Company, including the long-awaited opening of the new bank branch in Black
Diamond.
As with our last offering, existing shareholders like you, as well as those
who have been waiting to become shareholders, will have an opportunity to
subscribe for shares. Please review the enclosed prospectus for a full
explanation of the offering.
During Phase 1 of this offering (November 1 through November 30, 1997),
existing shareholders may purchase up to one share for each ten shares now held.
In addition, existing shareholders are given the opportunity during Phase 1 to
indicate their interest in purchasing more than their allocated shares (up to a
total of 2,500 additional shares).
If shares are still available after November 30, 1997, they will be offered
to existing and new shareholders on a first come, first served basis from
December 1 through December 31, 1997, unless the offering is terminated earlier.
On behalf of the directors, management and staff, I'd like to thank you for
the support you have shown the Bank in the past. If you have any questions
regarding this offering, please contact Sandi Franz, Roy Brooks, or me at the
Bank.
Sincerely,
Steve W. Moergeli
President, Mt. Rainier National Bank
<PAGE>
EXHIBIT 12.2
[Mountain Bank Holding Company Logo]
October __, 1997
RE: Mountain Bank Holding Company Shares
Since you have expressed an interest in acquiring shares of our Company's
common stock, I would like to inform you that the Board of Directors has
announced a stock offering for Mountain Bank Holding Company, the parent company
of Mt. Rainier National Bank.
During Phase I of this new offering (November 1 through November 30, 1997),
29,370 of the 100,000 shares being offered have been reserved for new
shareholders on a first come, first served basis. New shareholders may acquire
from a minimum of 100 shares to a maximum of 2,500 shares at $12.50 per share.
If shares are still available after November 30, 1997, they will be offered
to both existing and new shareholders on a first come, first served basis from
December 1 through December 31, 1997, unless the offering is terminated earlier.
Please review the enclosed prospectus for a full explanation of the
offering. If you are interested in purchasing stock, complete the subscription
agreement and return it with your check or money order made payable to Mountain
Bank Holding Company.
We appreciate the interest you have expressed in the Bank and the Company.
If you have any questions regarding this offering, please contact Sandi Franz,
Roy Brooks, or me at the Bank.
Sincerely,
Steve W. Moergeli
President, Mt. Rainier National Bank
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000898018
<NAME> MOUNTAIN BANK HOLDING CO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,022
<INT-BEARING-DEPOSITS> 3,550
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,422
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 38,841
<ALLOWANCE> 476
<TOTAL-ASSETS> 67,374
<DEPOSITS> 59,617
<SHORT-TERM> 1,800
<LIABILITIES-OTHER> 394
<LONG-TERM> 46
0
0
<COMMON> 706
<OTHER-SE> 4,811
<TOTAL-LIABILITIES-AND-EQUITY> 67,374
<INTEREST-LOAN> 1,944
<INTEREST-INVEST> 555
<INTEREST-OTHER> 87
<INTEREST-TOTAL> 2,586
<INTEREST-DEPOSIT> 1,044
<INTEREST-EXPENSE> 1,046
<INTEREST-INCOME-NET> 1,540
<LOAN-LOSSES> 100
<SECURITIES-GAINS> (12)
<EXPENSE-OTHER> 1,431
<INCOME-PRETAX> 337
<INCOME-PRE-EXTRAORDINARY> 337
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.3
<YIELD-ACTUAL> 5.26
<LOANS-NON> 106
<LOANS-PAST> 70
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5
<ALLOWANCE-OPEN> 391
<CHARGE-OFFS> 15
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 476
<ALLOWANCE-DOMESTIC> 476
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
