<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual report under Section 13 or 15(d) of the Securities [X]
Exchange Act of 1934 (FEE REQUIRED)
For the fiscal year ended DECEMBER 31, 1997.
Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (NO FEE REQUIRED)
Commission File Number: 0 - 28394
MOUNTAIN BANK HOLDING COMPANY
(exact name of registrant as specified in its charter)
WASHINGTON 91-1602736
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification Number)
501 ROOSEVELT AVENUE, PO BOX 98, ENUMCLAW, WA 98022
(address of principal executive offices) (zip code)
Registrant's telephone number: (360) 825-0100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$1.00 PAR VALUE
(title of class)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
------ ------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB [ ]
State the issuer's revenues for its most recent fiscal year: $6,173,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: AT JANUARY 31, 1998 - $10,078,700
--------------------------------------
Number of shares of common stock outstanding as of January 31, 1998: 806,296
---------
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 1998 Annual Meeting of Shareholders is incorporated
by reference into Part I of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format: Yes X No
-------- --------
<PAGE>
TABLE OF CONTENTS
PART I
(ITEMS 6-11, FORM 1-A, MODEL B)
<TABLE>
<CAPTION>
Page #
<C> <S> <C>
ITEM 6. DESCRIPTION OF BUSINESS....................................... 1
GENERAL.................................................. 1
DESCRIPTION OF MT. RAINIER NATIONAL BANK...................... 2
THE BANK................................................. 2
HISTORY.................................................. 2
BUSINESS................................................. 2
SERVICE AREA............................................. 3
EMPLOYEES................................................ 3
COMPETITION.............................................. 3
PRODUCTS AND SERVICES.................................... 3
MARKETING................................................ 4
LENDING ACTIVITIES....................................... 4
INVESTMENT PORTFOLIO..................................... 5
STATISTICAL INFORMATION ABOUT THE COMPANY................ 6
Loan Portfolio....................................... 6
Loan Loss Experience................................. 7
Allocation of Loan Loss By Loan Classification....... 8
Investment Securities Portfolio...................... 9
Deposit Liability Composition........................ 9
GAP Analysis......................................... 10
Distribution of Average Assets, Liability and
Shareholders' Equity............................... 11
Changes in Interest Income and Expense Volume and
Rate Variance...................................... 12
SUPERVISION AND REGULATION............................... 13
The Company.......................................... 13
Holding Company Structure............................ 13
Control Transactions................................. 14
The Bank............................................. 15
Recent Federal Banking Legislation................... 15
Other Significant Federal Banking Legislation........ 16
Restrictions on Capital Distributions................ 17
Capital Requirements................................. 17
FDIC Insurance....................................... 18
ITEM 7. DESCRIPTION OF PROPERTY....................................... 20
ITEM 8. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES....... 20
ITEM 9. REMUNERATION OF DIRECTORS AND OFFICERS........................ 20
ITEM 10. SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN SECURITY HOLDERS...................................... 20
ITEM 11. INTEREST OF MANAGEMENT AND OTHERS IN
CERTAIN TRANSACTIONS.......................................... 20
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
PART II
(ITEMS 1-6, FORM 1-A, MODEL B)
<TABLE>
<CAPTION>
Page #
<C> <S> <C>
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY.................................... 21
MARKET INFORMATION....................................... 21
NUMBER OF EQUITY HOLDERS................................. 21
CASH DIVIDENDS........................................... 21
PAYMENT OF DIVIDENDS..................................... 22
ITEM 2. LEGAL PROCEEDINGS............................................. 22
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS................. 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 22
ITEM 5. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT............. 22
ITEM 6. REPORTS ON FORM 8-K........................................... 23
</TABLE>
PART F/S
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page #
<S> <C>
FINANCIAL STATEMENTS F-1
</TABLE>
PART III
EXHIBITS
<TABLE>
<CAPTION>
Page #
<S> <C>
EXHIBITS E-1
</TABLE>
SIGNATURES
<TABLE>
<CAPTION>
Page #
<S> <C>
SIGNATURES S-1
</TABLE>
ii
<PAGE>
FORM 10-KSB AMENDMENT NO. 2
TRANSITIONAL SMALL BUSINESS ISSUER
DISCLOSURE PURSUANT TO ALTERNATIVE 2
PART I
(ITEMS 6-11, MODEL B, FORM 1-A)
ITEM 6. DESCRIPTION OF BUSINESS
GENERAL
Mountain Bank Holding Company (the "Company") is a Washington corporation
formed in 1993 primarily to hold all of the Common Stock of Mt. Rainier National
Bank (the "Bank"), a National Banking Association organized under the laws of
the United States. The Bank provides personal and commercial banking and
related financial services at its main office located at 501 Roosevelt Avenue,
Enumclaw, Washington, at its branch offices located in Buckley, Washington, at
29290 Highway 410, and located in Black Diamond, Washington at 31329 Third Ave.
The Company is regulated by the Federal Reserve Board (the "FRB") under the Bank
Holding Company Act of 1956, as amended. A bank holding company is generally
defined as a company that has direct or indirect control of a bank. The Company
qualifies as a bank holding company because it owns one hundred percent (100%)
of the outstanding securities of the Bank. At December 31, 1997, the Company
reported on a consolidated basis total assets of $73,865, total deposits of
$66,021, and shareholders' equity of $7,151.
The Company presently has one subsidiary other than the Bank. That subsidiary
is Mountain Real Estate Holdings, Inc., which was incorporated on March 10,
1994. The purpose of Mountain Real Estate Holdings, Inc. is to engage solely in
the business of holding premises occupied or to be occupied by the Bank,
together with fixed assets used in conjunction with the premises occupied by the
Bank. By using this affiliate corporation to hold premises occupied by the Bank
or its branches, the Bank subsidiary can lend money to it for the cost of
acquiring needed premises without the collateral requirements applicable to a
loan made directly from the Bank to the Company.
The Company strategy is to capitalize on its investment in the Bank through
continued growth in the Bank's assets, deposits and earnings, and creation of
long-term value for Company shareholders by pursuing the following:
- Monitoring and improving the credit quality of the Bank's existing
asset base;
- Concentrating on expense control, interest spread maximization and
marketing of fee-based products, as well as maintaining
adequate liquidity and capital levels;
- Emphasizing close working relationships between the Bank's senior
management, directors, loan officers and commercial customers; and
- Focusing on training programs to ensure that management and staff have
knowledge necessary to serve customers and remain in compliance with
all legal and regulatory obligations.
There can be no assurance that the Bank will achieve these objectives.
<PAGE>
DESCRIPTION OF MT. RAINIER NATIONAL BANK
THE BANK
Mt. Rainier National Bank is a wholly-owned subsidiary of the Company.
While the Company and the Bank are distinctly different entities regulated by
different regulatory bodies, the income of the Company will be almost entirely
derived from dividends upstreamed from the Bank to the Company. Therefore, the
value of the securities of the Company are, to a large extent, dependent upon
the success of the Bank.
HISTORY
The Bank opened on July 2, 1990, and has been operating since that date.
BUSINESS
The Bank offers a full line of commercial banking services including
checking accounts, savings programs, ATMs, night depository services, customer
deposit box facilities, consumer loans, residential loans, commercial loans,
real estate and construction loans and agriculture loans, NOW accounts and
certificates of deposit.
The principal sources of the Bank's revenues are: (i) interest and fees on
loans; (ii) deposit service charges; (iii) interest on federal funds sold (funds
loaned on a short-term basis to other banks); (iv) gains on mortgages originated
and sold to the secondary market; and (v) interest on investments. Loans
include short-to-medium-term commercial and consumer loans, including operating
loans and lines, equipment loans, automobile loans, recreational vehicle and
truck loans, personal loans and lines of credit, home improvement and
rehabilitation loans, VISA national credit cards, and residential mortgage
lending. Residential loans are currently sold into the secondary market. The
Bank also offers safe deposit boxes, direct deposit of payroll and social
security checks, automated teller machine access, and automatic drafts for
various accounts. The Bank has a night depository, an ATM, as well as drive-up
services at each of its offices.
The Bank's core deposit base generally has been enhanced through
advertising and deposit promotions, and focusing on securing the entire banking
relationship of each of its customers. The Bank has not used brokered deposits
as a source of funds.
The Bank's commercial banking activities target high net worth individuals
and their businesses with an emphasis on the small to medium size businesses.
The Bank's operating strategy is to offer personal service, flexibility and
timely responsiveness to the needs of its customers. Senior management of the
Bank and the Company maintain close personal contact and close working
relationships with the Bank's commercial customers and their businesses, and the
Bank's and the Company's Board of Directors primarily include local business
people from the Bank's primary service area. Most of the Bank's new commercial
banking business consists of referrals from existing customers. The Company
believes that the Bank's loan portfolio is appropriately diversified. All
floating rate loans are priced at prime or higher.
The Company believes that the growth in loans and profitability achieved
by the Bank also is attributable in large measure to its strategy of
targeting smaller and medium size businesses in the manner described above
and to the business and personal relationships and experience of the Bank's
and the Company's management and Directors, rather than the result of greater
risk-taking or price concessions. In addition, there have been numerous
acquisitions and mergers of banks in the primary service area which have made
the larger institutions in the market even
2
<PAGE>
larger and left the Bank, at the present time, as the only small commercial
bank in the Bank's primary service area focusing primarily on the needs of
the smaller and medium size commercial customers.
SERVICE AREA
The primary service area of the Bank is the city of Enumclaw and its
environs which include the communities of Black Diamond and Buckley.
EMPLOYEES
As of December 31, 1997, the Company had no full time employees. As of the
same date, the Bank had 34.28 full time equivalent employees, including three
Executive Officers. None of the Bank's employees is presently represented by a
union or covered by a collective bargaining agreement. The Bank considers its
relationships with its employees to be good.
COMPETITION
The banking business in the Bank's primary service area is highly
competitive with respect to both loans and deposits. All the major commercial
banks, including Seafirst, Key Bank, Wells Fargo and U.S. Bank, have a branch or
branches within the Bank's primary service area. Among the advantages such
major banks have are their ability to finance wide-ranging advertising campaigns
and to allocate their investment assets to geographic regions of higher yield
and demand. Such banks offer certain services which are not offered directly by
the Bank (but are offered indirectly through correspondent institutions); and,
by virtue of their greater total capitalization (legal lending limits to an
individual customer are based upon a percentage of a bank's total shareholder
equity accounts), such banks have substantially higher lending limits than the
Bank. The primary service area is also served by savings and loan associations
and credit unions.
The Bank also competes with a number of non-bank competitors such as
insurance companies, small loan companies, finance companies, mortgage
companies, and other sources of funds. Many of the Company's non-bank
competitors are not subject to the extensive federal and state regulations
which govern the Company and, as a result, have a competitive advantage over
the Company in providing certain services.
The Bank believes its competitive position has been strengthened by the
consolidation in the banking industry which has resulted in a focus by the
larger banks on their larger accounts, with less direct contact between the
officers and their customers. The Bank's strategy, by contrast, is to remain a
middle market lender which maintains close, long-term contact with its
customers.
PRODUCTS AND SERVICES
In conjunction with the growth of its asset base, the Bank has
introduced new products and services to position itself to compete in its
highly competitive market. The Bank's customers demand not only a wide range
of financial products but also efficient and convenient service. In response
to these demands, the Bank has developed a mix of products and services
utilizing newly developed technology available to the banking industry; for
example, the addition of automatic teller machines. Additionally, the bank
offers a wide range of commercial and retail banking products and services to
its customers. Deposit accounts include certificates of deposit, individual
retirement accounts and other time deposits, checking and other demand
deposit accounts, interest-bearing checking accounts, savings accounts and
money market accounts. Loans include residential real estate, commercial,
financial and real estate construction and
3
<PAGE>
development, installment and consumer loans. Other products and services
include: credit related insurance; ATMs, and safe deposit boxes.
MARKETING
The Bank uses to the fullest extent possible the flexibility which is
accorded by its independent status. This includes an emphasis on specialized
services, local promotional activity, and personal contacts by the Bank's
officers, directors and employees. The Bank also seeks to provide special
services and programs for individuals in its primary service area who are
employed in the business and professional fields. In the event there are
customers whose loan demands exceed the Bank's lending limits, the Bank arranges
for such loans on a participation basis with other financial institutions.
LENDING ACTIVITIES
The two main areas in which the Bank has directed its lendable funds are
commercial and real estate loans. At December 31, 1997, these categories
accounted for approximately 28% and 60%, 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,
1997, no such concentration exceeded 10% of the Bank's loan portfolio, although
approximately 4.9% of the Bank's loan portfolio consists of agricultural loans
and approximately 8.8% of interim real estate construction loans. The Bank has
no loans to foreign countries and its policy is to lend within Washington State,
however the bank does have some loans to out-of-state borrowers.
In the normal course of business there are various commitments outstanding
and commitments to extend credit which are not reflected in the financial
statements. These commitments generally require the customers to maintain
certain credit standards and have fixed expiration dates or other termination
clauses. The Bank uses the same credit policies in making commitments as it
does for loans. Management does not expect that all such commitments will be
fully utilized.
Lending activities are conducted pursuant to a written Loan Policy which
has been adopted by the Board of Directors of the bank. Each loan officer has a
defined lending authority. Regardless of lending authority, individual loans
over $100,000 are reviewed by the Bank's Loan Committee.
4
<PAGE>
The Bank has entered into agreements with other banks to participate in
certain of the Bank's commitments to extend credit to customers.
INVESTMENT PORTFOLIO
The investment policy of the Bank is an integral part of the overall
asset/liability management of the Bank. The Bank's investment policy is to
establish a portfolio which will provide liquidity necessary to facilitate
making loans and to cover deposit fluctuations while at the same time achieving
a satisfactory investment return on the funds invested. The investment policy
is reviewed annually by the Bank's Board of Directors. The Bank stresses the
following attributes for its investments: safety of principal, liquidity,
yield, price appreciation and pledgeability. With its implementation of
Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, the Bank is required to
classify its portfolio into three categories: Held to Maturity, Trading
Securities, and Available for Sale.
Held to Maturity includes debt securities that the Bank has positive intent
and ability to hold to maturity; these securities are reported at amortized
cost.
Trading Securities include debt and equity securities that are purchased
and held solely for the purpose of selling them in the short-term future for
trading profits. Trading Securities are reported at fair market value with
unrealized gains and losses included in earnings. As of December 31, 1997, the
Bank held no securities as Trading Securities.
Available for Sale securities include those which may be sold to implement
the Bank's asset/liability management strategies, and in response to changes in
interest rates, prepayment rates and similar factors. 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 $274,000 in
stock. This portion of the Bank's investment portfolio is not liquid.
5
<PAGE>
The following statistical information should be read in conjunction with the
consolidated financial statements and accompanying notes included elsewhere
herein.
The composition of the loan portfolio is summarized as follows:
LOAN PORTFOLIO - TYPES OF LOANS
<TABLE>
<CAPTION>
-------------------------------------------------------
December 31, 1997 December 31, 1996
Percent Percent
of Total of Total
Amounts Loans Amounts Loans
-------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural $ 12,004 28.19% $ 11,685 31.12%
Real Estate:
Construction 4,453 10.46% 3,537 9.42%
Mortgage 21,145 49.66% 17,198 45.81%
Consumer 4,975 11.69% 5,123 13.65%
-------------------------------------------------------
Total loans $ 42,577 100.00% $ 37,543 100.00%
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
LOAN PORTFOLIO - MATURITIES AND SENSITIVITIES ON LOANS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
One Year Over One Maturing
Or Less Through Five Years After Five Years TOTAL
-----------------------------------------------------------------------------------
Amount Fixed Variable Fixed Variable
<S> <C> <C> <C> <C> <C> <C>
Commercial and Agriculture $ 6,679 $ 5,325 $0 $ 0 $0 $12,004
Real Estate $ 8,770 $16,668 $0 $160 $0 $25,598
Consumer $ 1,112 $ 3,740 $0 $123 $0 $ 4,975
-----------------------------------------------------------------------------------
Total $16,561 $25,733 $0 $283 $0 $42,577
</TABLE>
The following table summarizes nonperforming assets by category:
RISK ELEMENTS - NONACCRUAL, PAST DUE AND RESTRUCTERED LOANS
<TABLE>
<CAPTION>
90 Days or More
Past Due Nonaccrual Restructured Lost Interest
--------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Commercial and Agriculture $0 $59 $0 $4
Real Estate $0 $ 0 $0 $0
Consumer $0 $ 0 $0 $1
$0 $59 $0 $5
-- --- -- --
</TABLE>
At December 31, 1997, the Bank had no other assets that would be considered
nonaccrual, past due or restructured if such assets were loans.
6
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION
<TABLE>
<CAPTION>
Year Year
Ended Ended
December 31, December 31,
1997 1996
---------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allowance for loan losses
(beginning of period) $ 391 $ 334
Loans charged off:
Commercial and agricultural (9)
Real estate construction
Real estate mortgage
Consumer (6) (10)
---------------------------
Total (15) (10)
---------------------------
Recoveries of loans previously
charged off:
Commercial and agricultural
Real estate construction
Real estate mortgage
Consumer
---------------------------
Total
---------------------------
Net loans charged off (15) (10)
Provision for possible loan losses 179 67
Allowance for possible loan losses
---------------------------
(end of period) $ 555 $ 391
---------------------------
---------------------------
Loans outstanding:
Average $39,964 $34,102
End of period 42,577 37,543
Ratio of allowance for loan loss
to total loans outstanding
Average 1.39% 1.15%
End of period 1.30% 1.04%
Ratio of net charge-offs to average
loans outstanding 0.04% 0.03%
Percent of categories to total end of
period loans: 12/31/97 12/31/96
---------------------------
Commercial and agricultural 28.19% 31.12%
Real estate construction 10.46% 9.42%
Real estate mortgage 49.66% 45.81%
Consumer 11.68% 13.65%
Total loans 100.00% 100.00%
---------------------------
---------------------------
</TABLE>
7
<PAGE>
Management does not normally allocate the allowance for loan losses to
specific loan categories. An allocation to major categories is made for
presentation purposes only. This allocation process does not necessarily
measure anticipated future credit losses, rather it seeks to measure
management's current assessment of perceived credit loss exposure and the
impact of current and anticipated economic conditions.
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
$156 $173
$58 $52
$276 $254
$65 $76
- ------------------------------------------------------------------
$555 $555
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
Financial Accounting Standards Board Statements No. 114 Accounting for
Creditors for Impairment of a Loan and No. 118 Accounting for Impairment of a
Loan-Income Recognition Disclosures, an amendment to SFAS No. 114 contain
accounting and reporting considerations for impaired loans. The Company
measures impaired loans based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the fair market value of the collateral if the loan is
collateral dependent. Certain groups of smaller balance homogeneous loans
are measured collectively for impairment.
At December 31, 1997 and 1996, the Company's recorded investment in certain
loans that were considered to be impaired was $59,000 and $137,000,
respectively, all of which was classified as non-accrual. None of these loans
required a specific valuation allowance based on the value of the underlying
collateral. The balance of the allowance for credit losses is available to
absorb losses from all loans.
8
<PAGE>
The carrying value of investment securities and the maturities and yield
information on the investment portfolio is as follows:
INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Dec. 31 December 31, Dollar Percentage
1997 1996 Change Change
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
US Treasury securities $ 4,972 $ 3,146 $ 1,826 58.04%
US Government and agency
securities 14,320 7,055 7,265 102.98%
Mortgage Backed Securities 2,963 1,748 1,215 100.00%
Corporate bonds -- 799 (799) (100.00%)
Municipal bonds 309 329 (20) (6.08%)
Federal Home Loan Bank and 398 378
Federal Reserve Stock
---------------------------------------
Total $ 22,962 $ 13,455 $ 9,507 70.66%
---------------------------------------
---------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------------
Over One Over Five
One Year or Less Through Five Years Through Ten Years Over Ten Years
------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US Treasury Securities $504 5.75% $4,468 6.52%
US Govt. and Agency Securities $10,010 6.34% $4,310 6.69%
Mortgage Backed Securities $1,728 7.08% $1,235 7.16%
Municipal Bonds (1) $64 5.50% $245 4.89%
------------------------------------------------------------------------------------------------
Total $504 $16,270 $5,790 $0
Weighted Average Yield 5.75% 6.45% 6.71%
</TABLE>
(1) Yields have not been calculated on a tax equivalent basis.
The following tables set forth the distribution of the Bank's deposit accounts
at the dates indicated:
DEPOSIT LIABILITY COMPOSITION
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Percent Percent
of Total of Total Dollar Percentage
Amounts Deposits Amounts Deposits Change Change
------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 8,991 13.62% $ 8,565 14.57% $ 426 4.97%
Interest-bearing demand (1) 24,026 36.39% 21,892 37.23% 2,134 9.75%
Savings 7,617 11.54% 7,730 13.15% (113) (1.46%)
Certificates of deposit 17,134 25.95% 13,820 23.50% 3,314 23.98%
Certificates of deposit over $100,000 8,253 12.50% 6,797 11.56% 1,456 21.42%
---------------------------------------------------------------------
Total $ 66,021 100.00% $ 58,804 100.00% $ 7,217 12.27%
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
At December 31, 1997, the scheduled maturities of certificates of deposit was:
<TABLE>
<CAPTION>
Balances
--------------------------
Less Than $100,000
$100,000 or More
------------ ----------
<S> <C> <C>
Maturity in:
Three months or less: $3,981 $1,846
Over three months through six months $3,978 $1,441
Over six months through twelve months $6,832 $3,906
Over twelve months $2,343 $1,060
--------------------------
TOTAL $17,134 $8,253
--------------------------
--------------------------
</TABLE>
The following ratios applicable to the Company are among those commonly used in
analyzing bank holding companies:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996
--------------------------
<S> <C> <C>
Return on Average Assets 0.89% 0.56%
Return on Average Equity 10.86% 5.75%
Dividend Payout Ratio 0% 0%
Equity to Assets Ratio 8.21% 9.67%
</TABLE>
At December 31, 1997 and December 31, 1996, neither the Bank nor the Company had
any short term borrowings.
9
<PAGE>
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are interest rate sensitive and
by monitoring an institution's interest rate sensitivity gap. An asset or
liability is interest rate sensitive within a specific time period if it will
reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-bearing assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities
anticipated, based upon certain assumptions, to mature or reprice within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets maturing within a specific time frame exceeds the amount of
interest sensitive liabilities maturing within that same time frame. If
negative, the reverse is true.
The following table represents an interest rate sensitivity analysis at December
31, 1997:
<TABLE>
<CAPTION>
GAP ANALYSIS
------------------------------------------
Total Within One Year To Over
One Year Five Years Five Years
------------------------------------------
<S> <C> <C> <C>
Rate Sensitive Assets:
Loans $16,561 $25,733 $ 283
Investments $ 504 $16,270 $5,790
Federal Funds Sold $ 2,350
------------------------------------------
TOTAL $19,415 $42,003 $6,073
Rate Sensitive Liabilities:
Savings, Now and Interest Checking $31,643
Time Deposits $21,979 $ 3,408
------------------------------------------
TOTAL $53,622 $ 3,408 $ 0
Interest Sensitive Gap ($34,207) $38,595 $6,073
------------------------------------------
------------------------------------------
</TABLE>
Currently, the Bank's interest sensitivity gap is negative within one year.
Assuming that general market interest rate changes affected the repricing of
assets and liabilities in equal magnitudes, this indicates that the effects
of rising interest rates on the Company would be a decrease in the net
interest margin, whereas falling interest rates would cause a corresponding
increase in margin.
10
<PAGE>
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
INTEREST YIELDS
The following table sets forth the average balance sheets of Mountain Bank
Holding Company for the past two years along with an analysis of net interest
earnings for each major category of interest earning assets and interest bearing
liabilities, the average rate paid in each category, and net yield on
earning assets. Non accrual loans have been included in the table as loans
carrying a zero yield. Loans fees of $254 in 1997 and $209 in 1996
are included in interest income.
<TABLE>
<CAPTION>
Year Ended Dec. 31,
-----------------------------------------------------------------------------------------
1997 1996
Annualized Annualized
Average Int Earned/ Yield/ Average Int Earned/ Yield/
Balance Expense Rate Balance Expense Rate (1)
-----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans $ 39,964 $ 4,074 10.19% $ 34,102 $ 3,462 10.15%
Investments 18,951 1,243 6.56% 10,893 661 6.07%
Federal funds sold 2,544 147 5.78% 2,211 123 5.56%
--------------------- -------------------
Total interest earning assets 61,459 5,464 8.89% 47,206 4,246 8.99%
-------- --------
Non-interest earning assets:
Cash and due from banks 2,897 2,947
Premises and equipment 2,195 2,288
Other assets 880 426
Reserve for possible loan losses (466) (354)
--------- --------
Total assets $ 66,965 $ 52,513
--------- --------
--------- --------
Liabilities and shareholders' equity
Interest bearing liabilities:
Interest bearing demand deposits $ 22,670 754 3.33% 15,001 500 3.33%
Savings 7,713 216 2.80% 7,482 210 2.81%
Certificates of deposit 15,379 836 5.44% 12,603 694 5.51%
Certificates of deposit over $100,000 6,581 375 5.70% 5,819 321 5.52%
--------------------- -------------------
Total interest bearing deposits 52,343 2,181 4.17% 40,905 1,725 4.22%
--------- --------
Federal funds purchased 24 1 4.17% 14 1 7.14%
Other borrowings 45 4 8.89% 47 4 8.51%
--------------------- -------------------
Total interest bearing liabilities 52,412 2,186 40,966 1,730
----- --------
Non-interest bearing liabilities:
Demand deposits 8,356 6,141
Other liabilities 701 328
Shareholders' equity 5,496 5,078
--------- --------
$ 66,965 $ 52,513
--------- --------
--------- --------
Net interest income $ 3,278 $ 2,516
-------- --------
-------- --------
Net interest margin 5.33% 5.33%
</TABLE>
11
<PAGE>
CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE VARIANCES
The change in interest due to both volume and yield has been allocated to volume
and yield changes in proportion to the relationship of the absolute dollar
amount of the change in each amount.
<TABLE>
<CAPTION>
1997 1996
Net Net
Change Volume Yield Change Volume Yield
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 612 $ 598 $ 14 $ 545 $ 671 ($ 102)
Investments $ 582 $ 525 $ 57 $ 306 $ 235 $ 43
Federal Funds Sold $ 24 $ 19 $ 5 $ 7 $ 22 ($ 12)
-------------------------------------------------------------------------------------
$ 1,218 $ 1,142 $ 76 $ 858 $ 928 $ (71)
-------------------------------------------------------------------------------------
Interest Bearing Demand $ 254 $ 254 $ 0 $ 19 $ 29 ($ 8)
Savings $ 6 $ 6 $ 0 $ 136 $ 169 ($ 24)
Certificates of Deposit $ 142 $ 150 ($ 8) $ 134 $ 154 ($ 16)
Certificates of deposit over $100,000 $ 54 $ 42 $ 11 $ 43 $ 90 ($ 35)
-------------------------------------------------------------------------------------
$ 456 $ 453 $ 3 $ 332 $ 442 $ (83)
-------------------------------------------------------------------------------------
$ -- $ -- $ -- $ (27) $ (26) $ (10)
$ -- $ -- $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------
$ 456 $ 453 $ 3 $ 305 $ 416 $ (93)
-------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
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.
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. 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
13
<PAGE>
management, and the underwriting of life insurance not related to credit
transactions. From time to time, the FRB may add to or delete from the list
of activities permissible for bank holding companies.
TRANSACTIONS WITH AFFILIATES. The Company and the Bank are considered
affiliates within the meaning of the Federal Reserve Act, and transactions
between affiliates are subject to certain restrictions. Section 23A of the
Federal Reserve Act limits certain covered transactions. These covered
transactions include, subject to specific exceptions, loans by bank
subsidiaries to affiliates, investments by bank subsidiaries in securities
issued by an affiliate or acceptance of such securities as collateral, and
the purchase by a bank subsidiary of an affiliate's assets. Section 23B of
the Federal Reserve Act, among other things, restricts an institution from
engaging in specified transactions with certain affiliates unless the
transactions are on terms substantially the same, or at least as favorable,
to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.
TIE-IN ARRANGEMENTS. The Company and the Bank cannot engage in certain
tie-in arrangements in connection with any extension of credit, sale or lease
of property or furnishing of services. For example, with certain exceptions,
neither the Company nor the Bank may condition an extension of credit on
either (1) a requirement that the customer obtain additional services
provided by it or (2) an agreement by the customer to refrain from obtaining
other services from a competitor. In April of 1997, the FRB 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 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.
14
<PAGE>
THE BANK
GENERAL
Despite some recent legislative initiatives to reduce regulatory
burdens, banking remains a highly regulated industry. Legislation enacted
from time to time may increase the cost of doing business, limit or expand
permissible activities, or affect the competitive balance between banks and
other financial and nonfinancial institutions. Proposals to change the laws
and regulations governing the operations and taxation of banks and other
financial institutions are frequently made in Congress, in state
legislatures, and before various bank regulatory agencies. In addition,
there continue to be proposals in Congress to restructure the banking system.
Some of the significant areas of bank regulation are generally discussed
below.
REGULATION OF NATIONAL BANKS
The Bank, as a national banking association, is subject to primary
regulation and examination by the OCC. It is also subject to regulation by
the FRB and, to a more limited extent, by the Federal Deposit Insurance
Corporation ("FDIC"). Federal statutes and regulations which govern the
Bank's operations relate to required reserves against deposits, investments,
loans, mergers and consolidations, borrowings, issuance of securities,
payment of dividends, establishment of branches, and other aspects of its
operations. The National Bank Act restricts the Bank to performing
commercial banking business and engaging in activities incidental to the
business of banking and prohibits the Bank from investing in equity
securities, except in its fiduciary capacity. The OCC also may prohibit a
national bank from engaging in activities it considers unsafe and unsound
business practices.
The OCC charges each national bank under its supervision a semi-annual
assessment, which is based on a predetermined regulatory formula. Effective
in 1998, the OCC has amended its assessment regulations so that a national
bank that receives a CAMELS rating of 3, 4, or 5 will be required to pay a
surcharge equal to 25% of the amount of the assessment that the bank would
otherwise pay. This increase is intended to offset the higher costs incurred
by the OCC in supervising banks with these ratings. The Bank does not expect
to be subject to the surcharge.
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 by authorizing interstate
branching and relaxing 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).
15
<PAGE>
Additionally, as of June 1, 1997, the Interstate Act permits interstate bank
mergers, subject to certain state laws, such as age and contingency laws,
unless the home state of either merging bank has "opted-out" of these
provisions by enacting "opt-out" legislation. Some states may have
"opted-in" to these bank merger provisions early by enacting before June 1,
1997, non-discriminatory legislation permitting interstate mergers within
their own borders. The Interstate Act allows 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 have
"opted-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, 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.
Effective October, 1997, the OCC, FDIC and FRB have adopted a rule under
the Interstate Act that prohibits a bank from establishing or acquiring
branches outside the bank's home state for the purpose of deposit production.
The rule provides guidelines for determining whether such bank is reasonably
helping to meet the credit needs of the communities served by these branches.
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.
16
<PAGE>
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 quality, and overall financial condition.
If, in the opinion of the applicable federal banking agency, a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the institution, could include the payment of dividends), the
agency may require, after notice and hearing, that the institution cease and
desist from that practice. In addition, the FRB and the FDIC have issued
policy statements which provide that insured banks and bank holding companies
should generally pay dividends only out of current operating earnings.
Under the National Bank Act, national banks may only pay dividends
without advance approval of the OCC, if the total of all dividends declared
by the national bank in any calendar year will not 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). The amount available for
dividend distribution by the Bank as of December 31, 1997, was approximately
$858,000.
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.
17
<PAGE>
Under these guidelines, banks' assets are given risk-weights of 0%, 20%,
50% or 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property and,
under certain circumstances, residential construction loans (both carry a 50%
rating). Most investment securities are assigned to the 20% category, except
for municipal or state revenue bonds (which have a 50% rating) and direct
obligations of or obligations guaranteed by the United States Treasury or
United States Government Agencies (which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to
Tier 1 capital as a percentage of average total assets less intangibles, to
be used as a supplement to the risk-based guidelines. The principal objective
of the leverage ratio is to place a constraint on the maximum degree to which
a bank may leverage its equity capital base. The minimum required leverage
ratio for top-rated institutions is 3%, but most institutions are required to
maintain an additional cushion of at least 100 to 200 basis points. Any
institution operating at or near the 3% level is expected to have
well-diversified risk and in general, to be a strong banking organization
without any supervisory, financial or operational weaknesses or deficiencies.
Any institutions experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions,
well above the minimum levels.
Regulations adopted by the Agencies as required by FDICIA impose even
more stringent capital requirements. The regulators require the OCC and other
Federal Banking Agencies to take certain "prompt corrective action" when a
bank fails to meet certain capital requirements. The regulations establish
and define five capital levels: (1) "well-capitalized," (2) "adequately
capitalized," (3) "undercapitalized," (4) "significantly undercapitalized"
and (5) "critically undercapitalized." A well-capitalized 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 must develop and implement capital
plans acceptable to the appropriate federal regulatory agency. Such plans
must require any company that controls the undercapitalized institution to
provide certain guarantees that the institution will comply with the plan
until it is adequately capitalized. As of December 31, 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.
FDIC INSURANCE
Generally, customer deposit accounts in banks are insured by the FDIC
for up to a maximum amount of $100,000. The FDIC has adopted a risk-based
insurance assessment system under which depository institutions contribute
funds to the BIF and the SAIF based on their risk classification. The FDIC
assigns institutions a risk classification based on three capital groups and
three supervisory subgroups. The capital groups are "well capitalized,"
"adequately capitalized," and "undercapitalized." The three supervisory
subgroups are Group "A" (for financially sound institutions with only a few
minor weaknesses), Group "B" (for those institutions with weaknesses which,
if uncorrected, could cause substantial deterioration of the institution and
increase risk to the deposit insurance fund), and Group "C" (for those
institutions with a substantial probability of loss to the fund absent
effective corrective action).
The recently enacted Deposit Insurance Funds Act of 1996 ("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 was designed to place the SAIF at its 1.25
reserve ratio goal. Additionally, 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). Beginning in the year 2000, BIF insured
institutions will be required to pay the FICO obligations
18
<PAGE>
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.
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.
The Funds Act 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.
19
<PAGE>
ITEM 7. DESCRIPTION OF PROPERTY
The Bank's Main Office is located in Enumclaw, Washington, at 501
Roosevelt Avenue, in an office building owned by the Bank. The facility has
10,275 square feet with two drive-up windows, an automatic teller machine
(ATM), and a night depository. The premises are fully equipped and include
teller counters, key drawers, safe, lock boxes with keys, signs and alarm
equipment.
On February 6, 1995, the Bank opened its Buckley Branch located at 29290
Highway 410, Buckley, Washington. The facility, which is leased, has 3,100
square feet, a two-lane drive up, an ATM and a night depository.
On January 26, 1998, the Bank opened its Black Diamond Branch located at
31329 Third Avenue, Black Diamond, Washington. The facility, which is
leased, has 3,080 square feet, a two lane driveup and a night depository.
The Bank has also leased space for an ATM located at 31605 Third Avenue,
Black Diamond, Washington. That ATM was placed in service on March 7, 1995.
Customers of the Bank are charged no fee for utilization of the ATM. The
site will accept deposits as well as disburse withdrawals.
ITEM 8. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Information regarding "Directors and Executive Officers" of the Company
located on pages 3, 4 and 11 of the Proxy Statement is incorporated by
reference.
ITEM 9. REMUNERATION OF DIRECTORS AND OFFICERS
Information regarding "Remuneration of Directors and Officers" located
on pages 7-10 of the Proxy Statement is incorporated by reference.
ITEM 10. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SHAREHOLDERS
Information regarding "Security Ownership of Management and Certain
Shareholders" located on page 11 of the Proxy Statement is incorporated by
reference.
ITEM 11. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS
Information regarding "Interest of Management and Others in Certain
Transactions" located on page 11 of the Proxy Statement is incorporated by
reference.
20
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY
MARKET INFORMATION
No broker makes a market in the Company's common stock, and trading has not
been extensive. Trades that have occurred cannot be characterized as
amounting to an active market. The stock is traded by individuals on a
personal basis and is not listed on any exchange or traded on the
over-the-counter market. Due to the limited information available, the
following price information may not accurately reflect the actual market
value of the Company's shares. The following data includes trades between
individual investors and new issues of stock. It does not include the
exercise of stock options or shares issued under the Employee Stock Purchase
Plan.
<TABLE>
<CAPTION>
Period # of Shares Price
Traded Range
<S> <C> <C>
1996 12,210 $10.00 to $11.50
1997 121,116 $12.00 to $12.50
</TABLE>
On October 17, 1997, the Company distributed an offering circular for 100,000
shares of common stock at $12.50 per share. 100,000 shares were sold for a
total offering of $1,250,000.
At December 31, 1997, stock options for 103,832 shares of Mountain Bank
Holding Company common stock were outstanding. See Note 13 of the audited
financial statements for additional information.
NUMBER OF EQUITY HOLDERS
As of January 31, 1998, there were 734 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.
21
<PAGE>
PAYMENT OF DIVIDENDS
The principal source of the Company's cash revenues is dividends
received from the Bank. The ability of the Bank to pay dividends is governed
by various statutes. These statutes provide that the Board of Directors of
the Bank may quarterly, semi-annually or annually declare a dividend of so
much of the net profits of the Bank as they judge expedient, except that
until the surplus funds of the Bank shall equal common capital, no dividend
may be declared unless there has been carried to surplus not less than
one-tenth of the net profits of the Bank of the preceding half year in the
case of quarterly or semi-annual dividends, or not less than one-tenth of its
net profits from the two preceding consecutive half-year periods in the case
of annual dividends. In addition, the approval of the Office of the
Comptroller of the Currency is required if the total of all dividends,
including a proposed dividend, declared by a bank in any calendar year,
exceeds the total of such bank's net profits of that year combined with its
retained net profits of the preceding two years.
Pursuant to authority contained in 12 USC 1818 (b), the Office of the
Comptroller of the Currency may prohibit, by several types of enforcement
action including the issuance of a cease and desist order, those certain
actions by the Bank, including payment of dividends, which are deemed unsafe
and unsound business practices.
The payment of dividends by the Bank may also be affected by other
factors, such as the maintenance of adequate capital for the Bank.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any legal actions. From time to time in
the ordinary course of business, the Company or the Bank may be involved in
litigation. Management believes that there are no proceedings threatened or
pending against the Company or the Bank other than routine litigation, which,
if determined adversely, would have a material effect on the business or the
financial position of the Company or the Bank.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There has not been a change in either the Company or the Bank's independent
accountants during the two most recent fiscal years.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1997, no matters
were submitted to the security holders through the solicitation of proxies or
otherwise.
ITEM 5. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company has adopted procedures to assist its directors and executive
officers with Section 16(a) of the Securities Exchange Act, which includes
assisting the officer or director in preparing forms for filing with the
Securities Exchange Commission. Based on the review of such forms, the
Company believes that all of its executive officers and directors complied
with all filing requirements applicable to them in 1997, except that the
following individuals inadvertantly failed to file the following forms: (1)
the Form 3 for VP/Credit Administrator Sterlin Franks, who was appointed as
an executive officer of the Bank in October 1997; (2) Forms 4 for Executive
Officer
22
<PAGE>
Franks and Directors Brooks, Gallagher, Garrison, Jones, Kombol, Moergeli,
Raeder and Van Beek to report shares purchased during the Company's stock
offering that closed in December 1997, but for which shares were not issued
until Janauary 1998; and (3) Form 4 for Director Gallagher to report shares
purchased in a private sale in June 1997. All ownership changes described
above have been reported on Forms 5 filed with the SEC on February 13, 1998.
ITEM 6. REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the last quarter of the period
ending December 31, 1997.
23
<PAGE>
Mountain
Bank
Holding
Company
And
Subsidiaries
CONSOLIDATED
FINANCIAL
REPORT
December 31
1997
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
- --------------------------------------------------------------------------------
<S> <C>
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income. . . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity. . . . . . . . F-5
Consolidated Statements of Cash Flows. . . . . . . . . . . . F-6-7
Notes to Consolidated Financial Statements . . . . . . . . .F-8-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARIES
Enumclaw, Washington
We have audited the accompanying consolidated balance sheets of MOUNTAIN BANK
HOLDING COMPANY AND SUBSIDIARIES as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated 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, 1997 and 1996, and
the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/
Knight, Vale & Gregory, Inc., P.S.
Tacoma, Washington
January 20, 1998
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,827 $ 3,651
Federal funds sold and interest bearing deposits in banks 2,448 7,550
Securities available for sale 22,962 13,455
Loans held for sale 332 --
Loans 42,577 37,543
Allowance for credit losses 555 391
NET LOANS 42,022 37,152
Premises and equipment 2,483 2,206
Accrued interest receivable 550 373
Other assets 241 174
TOTAL ASSETS $ 73,865 $ 64,561
LIABILITIES
Deposits:
Demand $ 8,991 $ 8,565
Savings and interest-bearing demand 31,643 29,622
Time 25,387 20,617
TOTAL DEPOSITS 66,021 58,804
Accrued interest payable 240 226
Note payable 45 46
Other liabilities 408 206
TOTAL LIABILITIES 66,714 59,282
SHAREHOLDERS' EQUITY
Common stock (par value $1); authorized 5,000,000 shares;
issued and outstanding: 1997 - 803,374 shares;
1996 - 704,398 shares 803 704
Paid-in capital 5,058 3,970
Retained earnings 1,227 630
Net unrealized gain (loss) on securities available for sale,
net of tax of $34 in 1997 and ($12) in 1996 63 (25)
TOTAL SHAREHOLDERS' EQUITY 7,151 5,279
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 73,865 $ 64,561
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
Mountain Bank Holding Company and Subsidiaries
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
INTEREST INCOME
Loans $4,074 $3,462
Federal funds sold and deposits in banks 147 123
Securities available for sale 1,243 661
TOTAL INTEREST INCOME 5,464 4,246
INTEREST EXPENSE
Deposits 2,181 1,725
Note payable 5 5
TOTAL INTEREST EXPENSE 2,186 1,730
NET INTEREST INCOME 3,278 2,516
PROVISION FOR CREDIT LOSSES 179 67
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 3,099 2,449
NON-INTEREST INCOME
Service charges on deposit accounts 357 360
Origination fees and gains on mortgage loans sold 228 234
Loss on sale of securities available for sale (12) (11)
Other 124 109
TOTAL NON-INTEREST INCOME 697 692
NON-INTEREST EXPENSES
Salaries 1,219 1,121
Employee benefits 218 203
Occupancy 132 142
Equipment 299 296
Other 981 949
TOTAL NON-INTEREST EXPENSES 2,849 2,711
INCOME BEFORE INCOME TAXES 947 430
INCOME TAXES 350 138
NET INCOME $ 597 $ 292
EARNINGS PER SHARE DATA
Basic earnings per share $ .84 $ .43
Diluted earnings per share .79 .40
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Mountain Bank Holding Company and Subsidiaries
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
COMMON PAID-IN RETAINED ON SECURITIES
STOCK CAPITAL EARNINGS AVAILABLE FOR SALE TOTAL
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $661 $3,576 $ 321 $ 8 $4,566
Sale of common stock under employee
stock purchase plan (730 shares) -- 7 -- -- 7
Transfer of redeemable stock 43 387 17 -- 447
Net income -- -- 292 -- 292
Valuation adjustments, net of tax -- -- -- (33) (33)
BALANCE AT DECEMBER 31, 1996 704 3,970 630 (25) 5,279
Sale of common stock under employee
stock purchase plan (1,898 shares) 2 17 -- -- 19
Sale of common stock
97 1,071 -- -- 1,168
Net income -- -- 597 -- 597
Valuation adjustments, net of tax -- -- -- 88 88
BALANCE AT DECEMBER 31, 1997 $803 $5,058 $1,227 $ 63 $7,151
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
(Dollars in Thousands)
Mountain Bank Holding Company and Subsidiaries
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 597 $ 292
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 179 67
Depreciation and amortization 322 282
Deferred Federal income taxes -- (18)
Loss on sales of securities available for sale 12 11
Gain on loans sold (82) (86)
Originations of loans held for sale (9,848) (10,796)
Proceeds from sales of loans 9,598 11,212
Increase in accrued interest receivable (177) (86)
Increase in accrued interest payable 14 81
Other - net 2 60
NET CASH PROVIDED BY OPERATING ACTIVITIES 617 1,019
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in Federal funds sold and
interest bearing deposits in banks 5,102 (4,725)
Purchase of securities available for sale (19,436) (11,894)
Proceeds from sales of securities available for sale 9,651 6,449
Proceeds from maturities of securities available for sale 436 72
Increase in loans made to customers, net of principal
collections (5,049) (6,635)
Additions to premises and equipment (548) (110)
NET CASH USED IN INVESTING ACTIVITIES (9,844) (16,843)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest-bearing
demand deposits 2,447 11,801
Net increase in time deposits 4,770 3,322
Net proceeds from issuance of stock 1,187 7
Repayment of note payable (1) (1)
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,403 15,129
NET CHANGE IN CASH AND DUE FROM BANKS (824) (695)
CASH AND DUE FROM BANKS
Beginning of year 3,651 4,346
END OF YEAR $ 2,827 $ 3,651
</TABLE>
(CONTINUED)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
(CONCLUDED) (Dollars in Thousands)
Mountain Bank Holding Company and Subsidiaries
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $2,172 $1,649
Income taxes paid 275 71
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Change in unrealized gain (loss) on securities
available for sale, net of tax $ 88 ($33)
Transfer of redeemable stock to common stock -- 447
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
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.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, as of the
date of the balance sheet, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates.
Certain prior year amounts have been reclassified to conform to the 1997
presentation. All dollar amounts, except per share information, are stated
in thousands.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt securities, which may be sold
to implement the Company's asset/liability management strategies and in
response to changes in interest rates, prepayment rates and similar factors,
and certain restricted equity securities. Securities available for sale are
reported at fair value. Unrealized gain and loss, net of the related
deferred tax effect, are reported as a net amount in a separate component of
shareholders' equity. Realized gains and losses on securities available for
sale, determined using the specific identification method, are included in
earnings. Amortization of premiums and accretion of discounts are recognized
in interest income over the period to maturity.
Declines in the fair value of individual securities available for sale below
their cost that are other than temporary result in writedowns of the
individual securities to their fair value. Such writedowns are included in
earnings as realized losses.
LOANS HELD FOR SALE
Mortgage loans originated for sale in the secondary market are carried at the
lower of cost or estimated market value. Net unrealized losses are
recognized through a valuation allowance established by charges to income.
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.
(CONTINUED)
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Generally 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 maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The allowance 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. This
evaluation requires the use of current estimates, which may vary from the
ultimate collectibility experienced in the future. The estimates used are
reviewed periodically and, as adjustments become necessary, they are charged
to operations in the period in which they become known.
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. Gains or losses on dispositions
are reflected in earnings.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
The Bank and Mountain Real Estate Holdings, Inc. provide for income taxes on
a separate return basis and remit to the Company amounts currently payable.
(CONTINUED)
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the instrinsic
value method, in accordance with APB No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements. However, the required
pro forma disclosures have been provided in accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS No. 128),
which the Company adopted in the fourth quarter of 1997. SFAS No. 128
requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share exclude dilution and are computed by dividing net income
by the weighted average number of common shares outstanding. Diluted
earnings per share reflect the potential dilution that could occur if common
shares were issued pursuant to the exercise of options under the Company's
stock option plans. Earnings per share for 1996 have been restated to
conform to the presentation required by SFAS No. 128.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Accounting Standards Nos. 130, REPORTING COMPREHENSIVE INCOME, and 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, both of
which are effective for years beginning after December 31, 1997. SFAS No.
130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income will have to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Also, the accumulated balance of other comprehensive income will
have to be displayed separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. SFAS No. 131 requires
that public enterprises report financial and descriptive information about
their reportable operating segments. Both of these pronouncements will
require additional disclosures about the Company's operations, but are not
anticipated to have any effect on financial position or results of operations.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 2 - RESTRICTED ASSETS
Federal Reserve Board regulations require maintenance of minimum reserve
balances with the Federal Reserve Bank. The amount of such balances for the
years ended December 31, 1997 and 1996 was $541.
NOTE 3 - DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified according to management's
intent.
The carrying amounts of securities and their approximate fair values are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1997
U.S. Treasury securities $ 4,925 $ 48 $ 1 $ 4,972
U.S. Government and agency securities 17,236 67 20 17,283
Municipal bonds 306 3 -- 309
Federal Home Loan Bank and
Federal Reserve Bank stock 398 -- -- 398
$22,865 $118 $ 21 $22,962
DECEMBER 31, 1996
U.S. Treasury securities $ 3,150 $ -- $ 4 $ 3,146
U.S. Government and agency securities 8,832 10 39 8,803
Corporate bonds 803 -- 4 799
Municipal bonds 329 -- -- 329
Federal Home Loan Bank and
Federal Reserve Bank stock 378 -- -- 378
$13,492 $ 10 $ 47 $13,455
</TABLE>
(CONTINUED)
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 3 - DEBT AND EQUITY SECURITIES (CONCLUDED)
Gross realized gains and losses on sales of securities available for sale for
the years ended December 31 were:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
GROSS REALIZED GAINS
U.S. Treasury securities $ 1 $--
U.S. Government and agency securities 5 1
$ 6 $ 1
GROSS REALIZED LOSSES
U.S. Treasury securities $ 5 $ 6
U.S. Government and agency securities 11 4
Corporate bonds 2 2
$18 $12
</TABLE>
The scheduled maturities of debt securities available for sale
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less $ 497 $ 504
Due in one to five years 16,199 16,270
Due in five years or more 5,771 5,790
$22,467 $22,564
</TABLE>
Securities with a carrying value of $1,013 and $499 at December 31, 1997 and
1996, respectively, were assigned or pledged to secure public deposits, certain
short-term borrowings, and for other purposes as required by law.
NOTE 4 - LOANS
Loans at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Commercial and agricultural $12,004 $11,685
Real estate:
Construction and land development 4,453 3,537
Mortgage 21,145 17,198
Consumer 4,975 5,123
$42,577 $37,543
</TABLE>
(CONTINUED)
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 4 - LOANS (CONCLUDED)
Changes in the allowance for credit losses for the years ended December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance at beginning of year $391 $334
Provision for credit losses 179 67
Charge-offs (15) (10)
BALANCE AT END OF YEAR $555 $391
</TABLE>
The recorded investment in impaired loans, which were all on nonaccrual status,
was $59 and $137 at December 31, 1997 and 1996, respectively. No allocation of
the allowance for credit losses was considered necessary for these impaired
loans. The average recorded investment in impaired loans during the years ended
December 31, 1997 and 1996 was $98 and $45, respectively. Interest income
recognized on impaired loans, which was collected in cash, totaled $15 in 1997.
No interest income on impaired loans was collected in 1996.
At December 31, 1997, 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, 1997 or 1996.
NOTE 5 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 615 $ 472
Buildings 1,452 1,452
Equipment, furniture and fixtures 1,214 1,171
Construction in progress 362 --
TOTAL COST 3,643 3,095
Less accumulated depreciation 1,160 889
$2,483 $2,206
</TABLE>
Construction in progress at December 31, 1997 relates to construction of a new
branch in Black Diamond, Washington. The branch opened in January 1998.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 6 - DEPOSITS
The aggregate amount of certificates of deposit with a minimum denomination
of one hundred thousand dollars is approximately $8,253 and $6,797 at
December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<S> <C>
1998 $21,978
1999 2,322
2000 788
2001 71
2002 and thereafter 228
$25,387
</TABLE>
NOTE 7 - NOTE PAYABLE
The note payable is secured by land, and is payable at $1 monthly, including
interest of 8%. Future principal maturities are as follows: 1998 - $1;
1999 - $2; 2000 - $2; 2001 - $2; 2002 - $2 and thereafter - $36.
NOTE 8 - INCOME TAXES
The components of the provision for income taxes are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current $350 $156
Deferred benefit -- (18)
INCOME TAXES $350 $138
</TABLE>
(CONTINUED)
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 8 - INCOME TAXES - (CONCLUDED)
The effect of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at December 31 follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
DEFERRED TAX ASSETS
Provision for credit losses $161 $100
Unrealized loss on securities available for sale -- 12
Deferred compensation 7 5
TOTAL DEFERRED TAX ASSETS 168 117
DEFERRED TAX LIABILITIES
Depreciation 16 22
Cash basis tax accounting 92 38
Deferred income 81 66
Unrealized gain on securities available for sale 34 --
TOTAL DEFERRED TAX LIABILITIES 223 126
NET DEFERRED TAX LIABILITIES $ 55 $ 9
</TABLE>
The following is a reconciliation between the statutory and effective federal
income tax rates for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
PERCENT OF PERCENT OF
PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C>
Income tax at statutory rate $322 34.0% $146 34.0%
Increase (decrease) resulting from:
Tax exempt income (4) (.4) (7) (1.7)
Other 32 3.3 (1) (.2)
TOTAL INCOME TAX EXPENSE $350 36.9% $138 32.1%
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 9 - RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, 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 $2,176 and $1,549, respectively. During 1997,
$1,652 of advances were made, and repayments totaled $1,025. During 1996,
$896 of advances were made, and repayments totaled $804.
NOTE 10 - 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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Commercial and agriculture $4,194 $2,273
Real estate 1,993 1,661
Credit cards 1,434 1,308
$7,621 $5,242
</TABLE>
Outstanding commitments under letters of credit totaled $105 and $151 at
December 31, 1997 and 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.
(CONTINUED)
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONCLUDED)
The Bank has agreements with commercial banks for lines of credit totaling
approximately $3,700, and a credit line with the Federal Home Loan Bank
totaling 10% of assets. The Bank has entered into a blanket pledge agreement
with the Federal Home Loan Bank to secure this credit line. These lines were
not drawn upon in 1997 or 1996.
On February 13, 1997, the Company entered into a settlement agreement with
the Bank's former president whereby the Company agreed to pay $155 for a
three-year noncompete agreement and other benefits. In addition, the
executive agreed to forfeit stock options for 20,000 fully vested shares at
an option price of $5 per share. Amortization of this non-compete agreement
totaled $47 for the year ended December 31, 1997.
NOTE 11 - CONCENTRATION OF CREDIT RISK
The Bank has credit risk exposure, including off-balance-sheet credit risk
exposure, as disclosed in Notes 4 and 10. 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.
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 12 - STOCK OPTION PLANS
DIRECTORS PLAN
The 1990 Director Stock Option Plan grants a director 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 one-third each on the third, fourth and fifth anniversary of
the date of grant. A total of 60,000 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. All options
granted are fully vested at December 31, 1997.
EMPLOYEE PLAN
In 1990, the Company 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.
Options are exercisable on a cumulative basis in annual installments of
one-third each on the third, fourth and fifth anniversary of the date of
grant. Pursuant to this plan, 60,000 shares are reserved for option as of
December 31, 1997, of which 51,832 have been granted.
(CONTINUED)
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 12 - STOCK OPTION PLANS (CONTINUED)
EMPLOYEE PLAN (CONCLUDED)
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies APB Opinion No. 25 in accounting for its plans. If the Company had
elected to recognize compensation cost for the stock options based on the
fair value at the grant dates, consistent with the method prescribed by SFAS
No. 123, net income and earnings per share would have been changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net income:
As reported $597 $292
Pro forma 580 288
Basic:
As reported $.84 $.43
Pro forma .81 .43
Diluted:
As reported $.79 $.40
Pro forma .78 .40
</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
8 to 10 years. The weighted average fair value of stock options, calculated
using the Black-Scholes option-pricing model, granted in 1997 and 1996,
respectively was $5.15 and $4.54, respectively. Management believes that the
estimated fair values calculated using this pricing model are highly
subjective. There is no active market for the options granted, and use of
other models could result in different estimated fair values.
Presented below is a summary of the status of the stock options held by
directors and employees, and the related transactions for the years presented:
<TABLE>
<CAPTION>
1997 1996
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 103,332 $ 5.36 99,332 $ 5.13
Granted 20,500 12.50 4,000 11.00
Forfeited (20,000) 5.00 -- --
OUTSTANDING AT END OF YEAR 103,832 6.83 103,332 5.36
Options exercisable at year-end 77,332 97,332
</TABLE>
(CONTINUED)
F-18
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 12 - STOCK OPTION PLANS (CONCLUDED)
The following summarizes information about stock options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL NUMBER
PRICES OUTSTANDING LIFE EXERCISABLE
<S> <C> <C> <C>
$ 5.00 75,332 2.8 years 75,332
6.25 2,000 4.5 years 2,000
10.00 2,000 7.7 years --
11.00 4,000 8.5 years --
12.50 20,500 9.5 years --
</TABLE>
NOTE 13 - PROFIT SHARING PLAN
The Bank's defined contribution profit sharing plan covers substantially all
employees who have completed one year or more of service. Employees are
eligible to defer up to 15% of their gross salary, with employer
contributions to the Plan made at the discretion of the Board of Directors.
The Bank's contribution for the years ended December 31, 1997 and 1996
totaled $23 and $24, respectively.
NOTE 14 - DEFERRED COMPENSATION AGREEMENT
In 1993 the Bank established a deferred compensation agreement with a
director under which the director will defer his director's fees. At
retirement he will receive a benefit of $1 per month for 120 months. The
accrued liability related to this agreement totaled $21 and $15 at December
31, 1997 and 1996, respectively. Expenses associated with this plan were $6
and $4 in 1997 and 1996, respectively. The Bank has also purchased a
whole-life insurance policy which may be used to fund benefits under the
deferred compensation agreement.
NOTE 15 - EMPLOYEE STOCK PURCHASE PLAN
Effective July 1, 1995, the Company adopted an employee stock purchase plan
whereby eligible employees can purchase common stock at the lesser of the
stock's fair market value at the beginning or ending of the plan year. The
aggregate number of shares reserved under this plan is 19,270. No employee
can purchase more than 200 shares of common stock valued at more than $25 in
any plan year; 1,898 and 730 shares were issued at a price of $10.00 per
share for the years ended December 31, 1997 and 1996, respectively.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 16 - 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.
As of December 31, 1997, the most recent notification from the Bank's
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the institution's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $7,088 10.24% $2,769 4.00% N/A N/A
Bank 5,723 8.65 2,646 4.00 $3,308 5.00%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 7,088 15.51 1,828 4.00 N/A N/A
Bank 5,723 12.70 1,803 4.00 2,704 6.00
TIER 2 CAPITAL:
Consolidated 7,643 16.73 3,655 8.00 N/A N/A
Bank 6,278 13.92 3,608 8.00 4,510 10.00
</TABLE>
(CONTINUED)
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 16 - REGULATORY MATTERS (CONCLUDED)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $5,304 9.15% $2,316 4.00% N/A N/A
Bank 4,776 8.33 2,295 4.00 $2,668 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 December 31, 1997, 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 $858 as of December 31, 1997
without regulatory approval.
NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS - DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash $ 680 $ 7
Investment in the Bank 5,785 4,727
Investment in Mountain Real Estate Holdings, Inc. 653 503
Due from subsidiaries 195 154
Other assets 109 4
TOTAL ASSETS $ 7,422 $ 5,395
LIABILITIES AND SHAREHOLDERS' EQUITY
Federal income taxes payable $ 191 $ 116
Other liabilities 80 --
Shareholders' equity 7,151 5,279
Total liabilities and shareholders' equity $ 7,422 $ 5,395
</TABLE>
(CONTINUED)
F-21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 and 1996
NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONCLUDED)
CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
<TABLE>
<S> <C> <C>
OPERATING INCOME/BANK
Dividend from subsidiary $ 225 $ 60
OPERATING EXPENSES (99) (71)
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 126 (11)
INCOME TAX BENEFIT -- (25)
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES 126 14
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 471 278
NET INCOME $ 597 $ 292
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 597 $ 292
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of organization costs 3 3
Amortization of covenant not to compete 47 --
Equity in undistributed income of subsidiaries (471) (278)
Increase in covenant not to compete (155) --
Increase in receivable from subsidiaries (41) (112)
Increase in Federal income taxes 76 86
Increase in other liabilities 80 --
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 136 (9)
CASH FLOWS FROM INVESTING ACTIVITIES/INVESTMENT IN SUBSIDIARIES (650) --
CASH FLOWS FROM FINANCING ACTIVITIES
Cost of stock offering (45) --
Proceeds from issuance of common stock 1,232 7
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,187 7
NET INCREASE (DECREASE) IN CASH 673 (2)
CASH, BEGINNING OF YEAR 7 9
CASH, END OF YEAR $ 680 $ 7
</TABLE>
F-22
<PAGE>
Notes to Financial Statements
Mountain Bank Holding Company and Subsidiaries
December 31, 1997 AND 1996
NOTE 18 - OTHER EXPENSES
Other expenses include the following amounts which are in excess of 1% of
the total of interest income and non-interest income for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Marketing and advertising $ 46 $ 61
Professional fees 81 158
Regulatory assessments 34 23
Data processing 295 269
Office supplies and expenses 91 92
Business taxes 69 62
</TABLE>
NOTE 19 - EARNINGS PER SHARE DISCLOSURES
Following is information regarding the calculation of basic and diluted earnings
per share for the years indicated.
<TABLE>
<CAPTION>
NET
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Basic earnings per share:
Net income $597 713,437 $.84
Effect of dilutive securities:
Options -- 43,457 (.05)
Diluted earnings per share:
Net income 597 756,894 .79
YEAR ENDED DECEMBER 31, 1996
Basic earnings per share:
Net income $292 671,715 $.43
Effect of dilutive securities:
Options -- 51,875 (.03)
Diluted earnings per share:
Net income 292 723,590 .40
</TABLE>
The number of shares shown for "options" is the number of incremental shares
that would result from exercise of options and use of the proceeds to repurchase
shares at the average market price during the year.
NOTE 20 - STOCK OFFERING
On October 17, 1997, the Company offered for sale 100,000 shares of one dollar
par value common stock at a subscription price of $12.50 per share. The
offering was to the general public and completed on December 20, 1997.
F-23
<PAGE>
PART III
EXHIBITS
The following exhibits are incorporated by reference to the Company's
registration statement on Form SB-1 (File No. 333-36647).
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
2.1 Articles of Incorporation and Amendment, of the registrant
2.2 By-laws of the registrant, currently in effect
6.1 Lease Agreement for Buckley Branch office dated February 1, 1995.
6.2 Mt. Rainier National Bank 1990 Employee Stock Option Plan
6.3 Mt. Rainier National Bank 1990 Director Stock Option Plan
6.4 Mt. Rainier National Bank 1995 Employee Stock Purchase Plan
</TABLE>
E-1
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
MOUNTAIN BANK HOLDING COMPANY
Date: March 10, 1998
By: /s/
--------------------------------------------------
Roy T. Brooks, Chairman of the Board & CEO
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Date: March 10, 1998
--------------------------------------------------
Roy T. Brooks, Chairman of the Board & CEO
(Principal Executive Officer)
By: /s/ Date: March 10, 1998
--------------------------------------------------
Sheila M. Brumley, Cashier & Secretary to the Board
(Principal Accounting Officer)
By: /s/ By: /s/
------------------------------------- --------------------------------
Susan K. Bowen-Hahto, Director Brian W. Gallagher, Director
Date: March 10, 1998 Date: March 10, 1998
By: /s/ By: /s/
--------------------------------- --------------------------------
Terry L. Garrison, Director Michael K. Jones, Director
Date: March 10, 1998 Date: March 10, 1998
By: /s/ By: /s/
--------------------------------- --------------------------------
Barry C. Kombol, Director John W. Raeder, Director
Date: March 10, 1998 Date: March 10, 1998
By: /s/ By: /s/
--------------------------------- ---------------------------------
Garrett S. Van Beek, Director Hans Rudy Zurcher, Director
Date: March 10, 1998 Date: March 10, 1998
By: /s/
---------------------------------
Steve W. Moergeli, Director
Date: March 10, 1998
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,827
<INT-BEARING-DEPOSITS> 2,448
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,982
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 42,577
<ALLOWANCE> 555
<TOTAL-ASSETS> 73,865
<DEPOSITS> 66,021
<SHORT-TERM> 0
<LIABILITIES-OTHER> 408
<LONG-TERM> 45
0
0
<COMMON> 803
<OTHER-SE> 6,348
<TOTAL-LIABILITIES-AND-EQUITY> 73,865
<INTEREST-LOAN> 4,074
<INTEREST-INVEST> 1,243
<INTEREST-OTHER> 147
<INTEREST-TOTAL> 5,464
<INTEREST-DEPOSIT> 2,181
<INTEREST-EXPENSE> 2,186
<INTEREST-INCOME-NET> 3,278
<LOAN-LOSSES> 179
<SECURITIES-GAINS> (12)
<EXPENSE-OTHER> 2,849
<INCOME-PRETAX> 947
<INCOME-PRE-EXTRAORDINARY> 947
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 597
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.79
<YIELD-ACTUAL> 5.33
<LOANS-NON> 59
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 391
<CHARGE-OFFS> (15)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 555
<ALLOWANCE-DOMESTIC> 555
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
