MOUNTAIN BANK HOLDING CO, SB-1, 1998-09-21

MOUNTAIN BANK HOLDING CO
SB-1, 1998-09-21
NATIONAL COMMERCIAL BANKS

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As filed with the Securities and Exchange Commission on September 21, 1998
Registration No. 333-______
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MOUNTAIN BANK HOLDING COMPANY
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

WASHINGTON 6712 91-1602736
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
ORGANIZATION) CODE NUMBER)

501 ROOSEVELT, ENUMCLAW, WASHINGTON 98022 (360) 825-0100
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)

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ROY T. BROOKS
Chairman of the Board and Chief Executive Officer
501 Roosevelt
Enumclaw, Washington 98022
(360) 825-0100
(NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)

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Copies of communications to:

STEPHEN M. KLEIN, ESQ.
WILLIAM E. BARTHOLDT, ESQ.
Graham & Dunn PC
1420 Fifth Avenue, 33rd Floor
Seattle, Washington 98101-2390

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the following box. [X]

CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
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Title of Each Proposed Proposed Maximum Amount of
Class of Securities Amount Being Offering Price Aggregate Registration
Being Registered Registered Per Share Offering Price(1) Fee
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 100,000 shares $17.50 $1,750,000 $516.25
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</TABLE>

(1) Estimated solely for purpose of determining registration fee pursuant to
Rule 457(a).

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

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MOUNTAIN BANK HOLDING COMPANY

501 ROOSEVELT
ENUMCLAW, WA 98022
(360) 825-0100

A MAXIMUM OF 100,000 SHARES
(NO MINIMUM NUMBER OF SHARES)
$1.00 PAR VALUE COMMON STOCK

The 100,000 shares of common stock (the "Shares") being offered hereby are
being sold by Mountain Bank Holding Company (the "Company") to existing
Shareholders and the public (the "Offering") at an offering price of $17.50 per
share. Commencing October 1, 1998, the Company will offer 50,000 Shares to
existing shareholders ("Existing Shareholders") by offering each shareholder the
right to purchase one Share for each 16 Shares owned of record on September 15,
1998 ("Allocated Shares"). The remaining 50,000 Shares will be offered at the
same time to selected persons who are not presently shareholders of the Company
("New Shareholders") on a first come, first served basis. The exclusive offer
to Existing Shareholders and New Shareholders will expire on October 31, 1998.
If all Shares are not subscribed for by October 31, 1998, they will be offered
to the general public, and to Existing Shareholders wishing to increase their
stockholdings also on a first come, first served basis. The offering to the
general public will expire on November 30, 1998, unless terminated earlier or
unless extended by the Company. There is no minimum purchase for Existing
Shareholders. The minimum purchase for New Shareholders and the general public
is 100 Shares. No person will be permitted to purchase more than 2,500 Shares.
COMPLETION OF THE OFFERING IS NOT CONDITIONED UPON RECEIVING A MINIMUM AGGREGATE
OFFERING AMOUNT. ONCE A SUBSCRIPTION HAS BEEN ACCEPTED BY THE COMPANY, IT
CANNOT BE WITHDRAWN BY THE INVESTOR. See "Terms of the Offering."

Although the Company is a public reporting company under the Securities
Exchange Act of 1934, prior to this Offering there has been no public market for
the Shares and there can be no assurance that an established market for such
Shares will develop.

INVESTMENT IN THE SECURITIES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 3 FOR INFORMATION THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR.

THE SECURITIES OFFERED BY MEANS OF THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS
OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS
AND PROCEEDS TO
PRICE TO PUBLIC (1) COMMISSIONS(2) COMPANY(3)
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<S> <C> <C> <C>
Per Common Share $17.50 $0 $17.50
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Maximum Offering $1,750,000 $0 $1,750,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

</TABLE>

(1) The offering price for the Shares has been determined by the Company based
solely upon its belief of the fair market value of the Shares, and not on
any objective criteria.
(2) Neither an underwriter nor broker-dealer will be used in connection with
the Offering; all Shares are being offered on a best-efforts basis by
certain directors and executive officers of the Company and no commissions
will be paid on sales. See "Terms of the Offering."
(3) Before deducting estimated expenses of the Offering of approximately
$50,000, including registration fees, legal and accounting fees, printing
and other miscellaneous expenses payable by the Company.

The date of this Prospectus is September ___, 1998.

<PAGE>

AVAILABLE INFORMATION

The Company files annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission
("Commission"). You may read and copy any reports, statements, or other
information that the Company files at the Commission's public reference room in
Washington, D.C. You can request copies of those documents, upon payment of a
copying fee, by writing to the Commission. Please call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The Company's Commission filings are also available to the public at the
Commission's Internet address at http://www.sec.gov.

The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a registration statement on Form SB-1 (together with any
amendments, the "Registration Statement") under the Securities Act of 1933, as
amended, with respect to the securities offered. This Prospectus, which is part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement and its exhibits. For further information with
respect to the Company and the Shares, reference is made to the Registration
Statement and the exhibits filed therewith, which may be examined, or copies
obtained, from the Commission as described above. Any statements contained in
this Prospectus concerning the provisions of any document are not necessarily
complete, and in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.

<PAGE>

TABLE OF CONTENTS

PAGE

PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . .1

RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . .6

TERMS OF THE OFFERING. . . . . . . . . . . . . . . . . . . . . . . .6

DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . .9

BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. . . . . 27

MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

CERTAIN TRANSACTIONS AND RELATIONSHIPS . . . . . . . . . . . . . . 37

SUPERVISION AND REGULATION . . . . . . . . . . . . . . . . . . . . 37

DESCRIPTION OF COMMON STOCK. . . . . . . . . . . . . . . . . . . . 42

INDEMNIFICATION FOR SECURITIES ACT LIABILITIES . . . . . . . . . . 44

EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 44

INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . F-1

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . F-2

<PAGE>

PROSPECTUS SUMMARY

The following summary explains the significant aspects of the stock
offering. The Summary is qualified in its entirety by the more detailed
information and the financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.

THE COMPANY

Mountain Bank Holding Company (the "Company") is a Washington corporation
formed in 1993 primarily to hold all of the Common Stock of Mt. Rainier National
Bank (the "Bank"), a national banking association organized under the laws of
the United States in July, 1990. The Company, with consolidated total assets of
approximately $79 million at June 30, 1998, is headquartered in Enumclaw,
Washington. The Bank provides personal and commercial banking and related
financial services at its main office located at 501 Roosevelt Avenue, Enumclaw,
Washington, and at its branch offices located in Buckley, Washington, at 29290
Highway 410, and Black Diamond, Washington, at 31329 Third Avenue. The Company
has received approval from the Comptroller of the Currency to open an additional
branch facility for the Bank in Auburn, Washington, at 1436 Auburn Way South.
Property has been purchased and the existing building is being remodeled. The
Company anticipates that the branch will open in the fourth quarter of 1998.

The Company presently has one subsidiary other than the Bank. That
subsidiary is Mountain Real Estate Holdings, Inc. ("MREH"), which was
incorporated on March 10, 1994. The purpose of MREH is to engage solely in the
business of holding premises occupied or to be occupied by the Bank, together
with fixed assets in conjunction with the premises occupied by the Bank.

The Bank provides a full range of retail banking services, including (i)
the acceptance of demand, savings and time deposits; (ii) the making of loans to
consumers, businesses and other institutions; (iii) the investment of excess
funds in the purchase of federal funds, U.S. government and agency obligations,
and state, county and municipal bonds; and (iv) other miscellaneous financial
services usually handled for customers by commercial banks.

CONDITIONS OF THE OFFERING

Completion of the Offering is not conditioned upon receiving a minimum
aggregate Offering amount. There can be no assurance that the maximum offering
of 100,000 Shares will be attained. No escrow arrangements have been made with
respect to the Offering. As a consequence, all subscription funds received and
accepted by the Company will be retained. While no modification of the terms of
the Offering are anticipated, in the event of any material changes, subscribers
will be resolicited and will be given an opportunity to rescind their
investment. The purpose of the Offering is to raise capital to support the
growth of the Company, including the anticipated opening of a new branch in
Auburn, Washington. See "USE OF PROCEEDS."

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THE OFFERING

Common Stock Offered............... 100,000 Shares

Common Stock to be Outstanding
After the Offering................. 907,482 Shares (Assuming all Shares
offered are sold and no stock options
are exercised).

Minimum Subscription............... New Shareholders and the general public
must subscribe for a minimum of 100
Shares.

Maximum Subscription............... 2,500 Shares

Price.............................. $17.50 per Share

Use of Proceeds.................... To support the Company's growth,
including planned expansion into Auburn,
Washington. See "USE OF PROCEEDS."

Special Factors to be Considered... The securities offered involve certain
risks. See "RISK FACTORS."

PLAN OF DISTRIBUTION. The Offering will be conducted in two stages:

PHASE 1. The first stage ("Phase 1") is an offer exclusively to Existing
Shareholders of the Company and to New Shareholders. The Company anticipates,
subject to the filing and effectiveness of the Registration Statement, that
Phase 1 will commence on or about OCTOBER 1, 1998, and continue until OCTOBER
31, 1998. Phase 1 of the Offering provides Existing Shareholders the right to
purchase one Share for each 16 Shares owned of record on September 15, 1998
("Allocated Shares"), for a total of 50,000 Shares. There is no minimum
purchase for Existing Shareholders. Concurrent with the Offering to Existing
Shareholders, New Shareholders will have the right to purchase a total of 50,000
Shares. New Shareholders will be required, in their subscription agreements, to
certify that they are Washington State residents.

PHASE 2. If all Shares allocated to Existing Shareholders and New
Shareholders are not subscribed for, they will be offered to the general public
(who must be Washington State residents), and to Existing Shareholders wishing
to increase their stockholdings, commencing NOVEMBER 1, 1998 ("Phase 2"). No
person (whether an Existing Shareholder or New Shareholder) will be permitted to
purchase a total of more than 2,500 Shares. Phase 2 of the Offering will expire
on NOVEMBER 30, 1998, at 5:00 p.m. local time unless sooner terminated or unless
extended by the Company.

EXCEPT FOR ALLOCATED SHARES OFFERED TO EXISTING SHAREHOLDERS IN PHASE 1,
ALL SUBSCRIPTIONS WILL BE ACCEPTED BY THE COMPANY ON A FIRST COME, FIRST SERVED
BASIS, AS THEY ARE RECEIVED BY THE COMPANY. Shares will be marketed on a best
efforts basis through certain of the Company's executive officers and directors,
none of whom will receive any commissions or other form of compensation in
connection with such efforts. Subscriptions may be accepted or rejected in
whole or in part by the Company for any reason. ONCE A SUBSCRIPTION HAS BEEN
ACCEPTED BY THE COMPANY, IT CANNOT BE WITHDRAWN BY THE INVESTOR. There are no
escrow arrangements with respect to this Offering. Accordingly, subscription
funds received and accepted by the Company will be available for immediate use
by the Company. See "TERMS OF THE OFFERING."

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RISK FACTORS

AN INVESTMENT IN THE SHARES BEING OFFERED INVOLVES CERTAIN RISKS. IN
ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, ANYONE
CONSIDERING AN INVESTMENT IN THE SHARES SHOULD READ AND CAREFULLY CONSIDER THE
FOLLOWING:

UNPREDICTABLE ECONOMIC CONDITIONS

Commercial banks and other financial institutions are affected by economic
and political conditions, both domestic and international, and by governmental
monetary policies. Conditions such as inflation, recession, unemployment, high
interest rates, short money supply, scarce natural resources, international
disorders and other factors beyond the control of the Company may adversely
affect its profitability. Among the factors beyond the control, to some extent,
of the Company are risks related to the Year 2000 as it affects computer
systems. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Year
2000."

LACK OF DIVIDENDS

The Company has never paid a cash dividend, and does not anticipate paying
a cash dividend in the foreseeable future. The Company expects to retain all
earnings to provide capital for operation and expansion of its subsidiaries.
Dividends, when and if paid, will be subject to determination and declaration by
the Board of Directors, which will take into account the financial condition of
the Bank and the Company, results of operations, tax considerations, industry
standards, economic conditions and other factors. The ability of the Company to
pay dividends in the future will depend primarily upon the earnings of the Bank
and its ability to pay dividends to the Company. See "DIVIDEND POLICY" and
"SUPERVISION AND REGULATION - Restrictions on Capital Distributions."

UNCERTAINTY OF RETURN ON INVESTMENT

No assurance can be given that a purchaser of the Shares will realize a
substantial return on an investment, or any return at all. Further, as a result
of the uncertainty and risks associated with the Company's operations as
described in this "RISK FACTORS" section, it is possible that an investor could
lose his or her entire investment.

DILUTION

Current holders of the Shares will suffer a dilution in their percentage
interest in the outstanding Shares to the extent that they do not purchase
sufficient Shares to maintain their proportionate interest in the equity of the
Company. This dilution will impact each shareholder's voting rights and the
amount of distributions, if any, received by shareholders from the Company.
Additionally, purchasers in this Offering will experience an immediate dilution
of their equity interest in the Company's common stock. See "DILUTION."

LACK OF TRADING MARKET

The Shares are not listed on any stock exchange and there is very little
market activity in the stock. The Shares are not listed, traded or quoted on
any securities exchange or in the over-the-counter market, and no dealer has
committed to make or makes a market in the Shares, although isolated
transactions between individuals occur from time to time. There can be no
assurance that the Shares can be sold at a price equal to or greater than the
subscription price, following completion of the Offering. See "Market for
Common Equity and Related Stockholder Matters." While the Shares are not listed
or traded on any market, traded stocks have recently experienced a decline in
stock prices, particularly in the financial services segment. Although there is

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no direct correlation between the trading prices of stocks on the national stock
markets and the trading price of Company stock, significant negative
fluctuations in the markets could negatively affect the price of the Shares.

RESTRICTIONS ON CHANGE IN CONTROL

As a Washington corporation, the Company is subject to various legislative
acts set forth in the Washington Business Corporation Act, which impose certain
restrictions and require certain procedures with respect to certain takeover
offers and business combinations, including, but not limited to, combinations
with interested shareholders and share repurchases from certain shareholders.
See "DESCRIPTION OF COMMON STOCK - Anti-Takeover Provisions." Provisions of the
Company's Articles of Incorporation requiring a staggered board could be used to
hinder or delay a takeover bid for the Company. Such provisions may inhibit
takeover bids and could decrease the chance of shareholders realizing a premium
over market price for their Shares as a result of a takeover bid. See
"DESCRIPTION OF COMMON STOCK - Staggered Board of Directors."

POTENTIAL ADVERSE IMPACT OF CHANGES IN INTEREST RATES

The Bank's profitability is dependent to a large extent upon net interest
income, which is the difference between its interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The banking
industry has in recent years experienced significant fluctuations in net
interest income due to changing interest rates. The Bank will continue to be
affected by changes in levels of interest rates and other economic factors
beyond its control, particularly to the extent that such factors affect the
overall volume of their lending and deposit activities. The matching of assets
and liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income while a positive gap would
tend to result in an increase in net interest income. During a period of
falling interest rates, a negative gap would tend to result in an increase in
net interest income while a positive gap would tend to adversely affect net
interest income. The Bank has a negative repricing gap within 12 months, which
could materially adversely affect future earnings in the event of a rise in
market interest rates. See "BUSINESS - Asset and Liability Management."

DEPENDENCE ON LOCAL ECONOMY

The future success of the Company and the Bank is largely dependent on the
general economic conditions of its primary service area, which is the city of
Enumclaw and its environs, which include the communities of Buckley, Black
Diamond, and upon the anticipated completion of its new branch, Auburn. Any
factors which adversely affect the economy of the Bank's primary service area
could adversely affect the performance of the Company. While the Company's
primary service area was primarily dependent upon agriculture a few years ago,
there is currently a more diversified economic base which includes
manufacturing, retail and wholesale establishments and personal and industrial
services. The Company's expansion into the Auburn market, which is typified by
larger businesses such as larger industries, retail outlets and corporate
headquarters, and including a large Boeing plant, will present new opportunities
but also new challenges in terms of dependence on the local economy. There can
be no assurance that a slowdown in the economy as a result of

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market conditions would not have an adverse impact on the business of the
Company. See "BUSINESS - Market Area and Competition."

BRANCH EXPANSION INTO THE AUBURN MARKET

The Company's planned opening of a new branch in Auburn, Washington, in the
fourth quarter of 1998 presents certain challenges. The Auburn market is
essentially a suburban Seattle/Tacoma market, at least in comparison to the
Company's existing branch locations. The economic base and business mix in
Auburn will differ significantly from that of the Company's current branch
locations, and the types of loans made and other banking activities in that
market can be expected to differ as well. Although Auburn is not currently
served by a community-owned bank, the Company faces competition from all of the
major regional banks and financial institutions. See "BUSINESS - Market Area
and Competition." The Company also faces challenges in efficiently and
effectively managing its branches as the number of such branches grows.
Additionally, the expenses involved in opening a new branch have a negative
effect on Company earnings in the short term, until the branch is sufficiently
established.

LOAN CONCENTRATION

The Bank's loan portfolio is concentrated in real estate, commercial,
dairy/agriculture and construction lending as well as consumer loans. "Loan
concentrations" are categories of loans that exceed 25% of the Bank's capital
structure and loan loss allowance. Although the Company does not believe that
the loan concentrations currently pose an undue risk, the concentration in real
estate construction loans could present risk in the event of a downturn in the
local economy. See "BUSINESS - Lending Activities."

DEPENDENCE ON MANAGEMENT

The Company and the Bank are, and for the foreseeable future will be,
dependent upon the services of Roy T. Brooks, Chairman of the Board and CEO of
the Company, and Steve W. Moergeli, President and CEO of the Bank, and the
experienced management team they have assembled. The loss of Mr. Brooks or Mr.
Moergeli, if not replaced shortly with equally competent persons, could have an
adverse effect on the Company and the Bank. Neither the Company nor the bank
has entered into an employment agreement with any of its executive personnel.
The Bank will be required to continue to attract and retain qualified persons to
be successful in the competitive banking market.

OFFERING PRICE

The offering price of $17.50 per Share has been established by the Company
solely based upon its belief of the fair market value of the Shares. The
offering price of $17.50 represents a multiple of 1.9 times the book value of
the Shares, as of June 30, 1998. See the "Consolidated Balance Sheets" in the
Financial Statements. No independent investment banking firm or securities
dealer has been retained to assist in the valuation of the Shares offered hereby
or in the determination of the offering price.

EXISTENCE OF COMPETITION IN THE COMPANY'S MARKET AREA

Commercial banking is a highly competitive business. The Company and the
Bank compete with other commercial banks, savings and loan associations, credit
unions and finance companies operating in Enumclaw and its environs and
elsewhere. The Bank is subject to substantial competition for loans and
deposits coming from other financial institutions in the market area. In
certain aspects of its business, the Bank also competes with credit unions,
small loan companies, insurance companies, mortgage companies, finance
companies, brokerage houses, and other financial institutions, some of which are
not subject to the same degree of regulation and restriction as the Bank and
some of which have financial resources greater than those of the Bank. The Bank
will compete for funds with other institutions, which, in most cases, are
significantly larger and are able to

<PAGE>

provide a greater variety of services than the Bank and thus may obtain deposits
at lower rates of interest. If the Company were to become unable to compete
effectively, the Company's business, financial condition and results of
operations could be materially adversely affected. See "BUSINESS - Market Area
and Competition."

GOVERNMENT REGULATION

The Company is supervised and regulated by federal and state governments.
The primary concern of the regulators is to protect depositors, not
shareholders. These regulators include the Federal Deposit Insurance
Corporation (the "FDIC") which insures bank deposits, the Office of the
Comptroller of the Currency (the "OCC"), and the Board of Governors of the
Federal Reserve System (the "Federal Reserve"). Federal and state regulations
place banks at a competitive disadvantage, because other competitors, such as
finance companies, credit unions, mortgage banking companies and leasing
companies, are not scrutinized so closely. The Company has so far been able to
compete effectively in its market areas. However, there is no assurance it will
continue to do so. Further, future changes in federal and state banking
regulations could adversely affect the Company's operating results and its
ability to continue to compete effectively. See "SUPERVISION AND REGULATION."

DIVIDEND POLICY

The Company currently intends to retain its earnings, if any, for use in
the business and does not anticipate paying any cash dividends in the
foreseeable future. The board of directors cannot predict when such dividends,
if any, will ever be made. The payment of dividends, if any, will at all times
be subject to the payment of the Company's expenses, the maintenance of adequate
liquidity and loan loss allowance, and minimum capital requirements for national
banks.

TERMS OF THE OFFERING

METHOD OF OFFERING

PHASE 1. The Company has elected to first offer up to 50,000 of the Shares
offered by means of this Prospectus to Existing Shareholders at $17.50 per
share, on the basis of one Share for each 16 Shares held of record as of the
close of business on September 15, 1998, and to offer the remaining 50,000
Shares to New Shareholders. There is no minimum number of Shares an Existing
Shareholder must purchase, though all subscriptions must be for whole Shares.
New Shareholders must purchase a minimum of 100 Shares. No investor will be
permitted to purchase more than 2,500 Shares through this Offering. Phase 1
will expire on OCTOBER 31, 1998.

PHASE 2. If all Shares allocated to Existing Shareholders and New
Shareholders are not subscribed by OCTOBER 31, 1998, the Company will offer any
remaining Shares to the general public, including Existing Shareholders wishing
to increase their stockholdings. The general public must purchase a minimum of
100 Shares. As explained below under "How to Subscribe," Existing Shareholders
who wish to purchase more than their Allocated Shares will so indicate in their
subscription agreement. Existing Shareholders will have a priority over the
general public in Phase 2, on a "first come, first served" basis, if they have
indicated a desire to purchase Additional Shares in their subscription
agreements during Phase 1. Phase 2 will expire on NOVEMBER 30, 1998, unless
sooner terminated or unless extended by the Company.

Except for Allocated Shares offered to Existing Shareholders in Phase 1,
ALL SUBSCRIPTIONS WILL BE ACCEPTED BY THE COMPANY ON A FIRST COME, FIRST SERVED
BASIS, AS THEY ARE RECEIVED BY THE COMPANY. All subscriptions will be accepted
by the Company only for whole Shares. Existing Shareholders will be permitted
to purchase the number of Shares closest to the number of Shares to which they
are entitled, rounded to the next full share. The Company reserves the right to
reject any

<PAGE>

subscription in whole or in part. If any subscription is rejected by the
Company, the full amount of subscription funds tendered will be returned
promptly to the subscriber without any deductions.

RESIDENCY REQUIREMENT FOR NEW SHAREHOLDERS

Persons acquiring Shares in the Offering who are not Existing Shareholders
(that is, New Shareholders in either Phase 1 or 2, or the general public in
Phase 2) will be required to certify that they are BONA FIDE residents of the
State of Washington. This certification, which is contained in the form of
subscription agreement that each such person will complete, is required in order
to comply with applicable state securities laws.

HOW TO SUBSCRIBE

The Company has prepared two forms of subscription agreement, one for
Existing Shareholders and one for New Shareholders. The appropriate form of
subscription agreement should be completed, signed by appropriate subscribers,
and sent with full payment for the number of Shares subscribed to: Mountain
Bank Holding Company, 501 Roosevelt Avenue, Enumclaw, Washington 98022. Fully
completed and signed subscription agreements, together with full payment for the
subscribed Shares, must be received at the offices of the Company no later than
5:00 p.m. local time on OCTOBER 31, 1998, in order to participate in Phase 1.

SPECIAL INSTRUCTIONS FOR EXISTING SHAREHOLDERS. Existing shareholders who
wish to purchase more than their Allocated Shares ("Additional Shares") should
so indicate on their subscription agreement. If Shares remain unsold at the end
of Phase 1, such Shares will be offered to the general public in Phase 2,
including Existing Shareholders who have indicated a desire to purchase
Additional Shares on their subscription agreements. Existing Shareholders
subscribing for Additional Shares during Phase 1 will have priority over the
general public during Phase 2.

IN PHASE 2, ADDITIONAL SHARES WILL BE SOLD TO EXISTING SHAREHOLDERS ON A
FIRST COME, FIRST SERVED BASIS AS SUBSCRIPTIONS ARE RECEIVED BY THE COMPANY. As
soon as possible following the expiration or termination of the Offering, the
Company will issue Additional Shares to Existing Shareholders who have requested
them.

OFFERING EXPIRATION DATE

Completed and signed subscription agreements, together with full payment
for Shares subscribed, must be received at the offices of the Company no later
than 5:00 p.m. local time on OCTOBER 31, 1998, in order to participate in
Phase 1. Subscription agreements from Existing Shareholders (for either
Allocated Shares or Additional Shares) received after OCTOBER 31, 1998, (but
before the expiration of Phase 2) will not qualify for Phase 1, and will thus
have no priority in the sale of Shares in Phase 2.

Completed and signed subscription agreements from members of the general
public (including Existing Shareholders who return subscription agreements after
October 31, 1998) in Phase 2 must be received at the Company not later than 5:00
p.m. on NOVEMBER 30, 1998, the expiration date of the Offering. The Company
reserves the right to terminate Phase 2 of the Offering prior to November 30,
1998. The Company also has the right to extend the Offering. The Company will
not accept any subscriptions after the Offering has expired or has been
terminated.

SUBSCRIPTION FUNDS

All subscription funds received by the Company will become the property of
the Company. ONCE A SUBSCRIPTION HAS BEEN ACCEPTED BY THE COMPANY, IT CANNOT BE
WITHDRAWN BY THE INVESTOR.

<PAGE>

COMMISSIONS

No commissions, fees, or other remuneration will be paid to any directors,
officers, or employees of the Company, or to any other person or company for
selling the Shares in this Offering.

DELIVERY OF STOCK CERTIFICATES

Certificates for Shares duly subscribed, paid for and accepted by the
Company will be issued as soon as practicable after completion of the Offering.

PURCHASE INTENTIONS OF DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company have expressed an
intent to purchase in the aggregate approximately 7,793 Allocated Shares made
available through this Offering on the same terms being offered to all Existing
Shareholders. If they do purchase 7,793 Shares in the aggregate, such persons
will beneficially own 145,517 outstanding Shares. Such persons may also acquire
Additional Shares, although the number of such Additional Shares to be purchased
is not known at this time. See "Security Ownership of Management and Certain
Shareholders."

REPRESENTATIONS OF SUBSCRIBERS

Each subscriber will also be required to represent that he or she has
received a copy of this Prospectus. This acknowledgement by a subscriber would
be asserted by the Company in defense of any claims against the Company by a
subscriber on the basis that he or she was not provided with a copy of the
Prospectus, as required under federal securities laws. By making this
representation, subscribers are not waiving any of their rights under the
federal securities laws.

DILUTION

The net book value of the Company at June 30, 1998, was $7,497,000, or
$9.28 per share. Net book value per share is determined by dividing the net
worth of the Company (assets less total liabilities) by the number of Shares
outstanding. Without taking into account any changes in such net book value
after June 30, 1998, other than to give effect to the sale of 100,000 Shares
offered by the Company in this Offering (after deducting estimated offering
expenses payable by the Company), the pro forma net book value of the
outstanding Shares at June 30, 1998, would have been $9,197,000, or $10.13 per
share. This represents an immediate increase in net book value to present
shareholders of $.85 per share and an immediate dilution to new investors of
$7.37 per share. The following table illustrates the dilution on a per-share
basis:

<S> <C> <C>
Offering price per share $17.50
Net book value per share $9.28
before offering
Increase in net book value
per share attributable to new $ .85
investors
Pro forma net book value per
share after Offering $10.13
Dilution per share to new $ 7.37
investors(1)

</TABLE>

- -------------------------
(1) Dilution to new investors is determined by subtracting pro forma net book
value per share after the offering from the $17.50 offering price per share.

<PAGE>

USE OF PROCEEDS

The net proceeds from the sale of Shares offered by the Company, assuming
that all 100,000 Shares offered by means of this Prospectus are sold, are
estimated to be $1,700,000. As this Offering is not conditioned on the sale of
a minimum number of Shares, the net proceeds to the Company will be reduced to
the extent of the maximum number of Shares in this Offering are not subscribed.
As a consequence, there can be no assurance that the maximum net proceeds of
$1,700,000 will be attained.

The net proceeds of the Offering will be utilized to support recent and
anticipated future growth of the Company and the Bank and for general corporate
purposes. The Company intends to use a portion of the offering proceeds to
defray costs associated with the establishment of a new branch facility for the
Bank in Auburn, Washington. See "BUSINESS - The Bank."

BUSINESS

COMPANY OVERVIEW

The Company is a bank holding company organized under the laws of
Washington, chartered in 1993. The Company, with consolidated total assets of
approximately $79 million at June 30, 1998, is located in Enumclaw, Washington,
and conducts its operations through its subsidiary, Mt. Rainier National Bank
(the "Bank"), a national banking association organized under the laws of the
United States in 1990. The Company does not engage in any substantial
activities other than acting as a bank holding company for the Bank. The
Company believes it can present an alternative to recent mega-mergers by
offering local ownership, local decision making and other personalized service
characteristics of community banks. The holding company structure provides
flexibility for expansion of the Company's banking business through acquisition
of other financial institutions and provision of additional banking-related
services which the traditional commercial bank may not provide under present
laws.

THE BANK

The Bank primarily serves individuals and small and medium-sized businesses
located in its primary and secondary trade areas. The Bank offers its customers
a full range of deposit services that are typically available in most financial
institutions, including checking accounts, savings accounts and other time
deposits of various types, ranging from money market accounts to longer term
certificates of deposit. The transaction accounts and time certificates are
tailored to the principal market areas at rates competitive in the area. In
addition, retirement accounts such as IRAs (Individual Retirement Accounts) are
available. The Bank's deposits are attracted primarily from individuals,
merchants, small and medium-sized businesses, and professionals. All deposit
accounts are insured by the FDIC up to the maximum amount.

The principal sources of the Bank's revenues are: (i) interest and fees on
loans; (ii) deposit service charges; (iii) federal funds sold (funds loaned on a
short-term basis to other banks); and (iv) interest on investments (principally
government securities). The Bank's lending activity consists of
short-to-medium-term commercial and consumer loans, including operating loans
and lines, equipment loans, automobile loans, recreational vehicle and truck
loans, personal loans or lines of credit, home improvement and rehabilitation
loans and VISA national credit cards. The Bank also offers safe deposit boxes,
direct deposit of payroll and social security checks, automated teller machine
access, debit cards and automatic draft for various accounts. The Bank has a
night depository as well as drive-up services.

On February 6, 1995, the Bank opened its Buckley Branch located at 29290
Highway 410, Buckley, Washington. The branch and land are owned by MREH. The
Bank leases the land and building from MREH at a monthly rent of $1,015. The
facility has 3,100 square feet, a two-lane drive up, an ATM and a night
depository.

<PAGE>

At June 30, 1998, the branch had deposits of $16.9 million. The Buckley Branch
is staffed by nine persons and is anticipated to ultimately be a full service
branch.

On January 26, 1998, the Bank opened its Black Diamond Branch located at
31329 Third Avenue, Black Diamond, Washington. The Bank leases the land and
building from MREH at a monthly rent of $1,450. The facility consists of
approximately 3,100 square feet, a two-lane drive up and a night depository. At
June 30, 1998, the branch had deposits of $6.4 million. The Black Diamond
Branch is staffed by seven persons and is anticipated to ultimately be a full
service branch.

The Company has received approval from the OCC to open an additional branch
facility for the Bank. MREH has purchased real estate at 1436 Auburn Way South,
Auburn, Washington. The existing building has approximately 2,624 square feet
and a two-lane drive up and is being remodeled to include an ATM and a night
depository. It is estimated that the branch will open in the fourth quarter of
1998.

MARKET AREA AND COMPETITION

The Bank competes with other commercial banks, savings and loan
associations, credit unions and finance companies operating in the Bank's
primary service area, which is the city of Enumclaw and its environs, including
the communities of Black Diamond and Buckley, plus Auburn after the opening of
the new branch, and elsewhere. All of the major regional commercial banks,
including Seafirst, Key Bank and U.S. Bank, have a branch or branches within the
Bank's primary service area. The Bank is the only locally owned bank in
Enumclaw. The Bank is subject to substantial competition in all aspects of its
business. Intense competition for loans and deposits comes from other financial
institutions in the market area. In certain aspects of its business, the Bank
also competes with credit unions, small loan companies, insurance companies,
mortgage companies, finance companies, brokerage houses and other financial
institutions, some of which are not subject to the same degree of regulation and
restriction as the Bank and some of which have financial resources greater than
those of the Bank. The future success of the Bank will depend primarily upon
the difference between the cost of its borrowing (primarily interest paid on
deposits) and income from operations (primarily interest or fees earned on
loans, sales of loans and investments). The Bank competes for funds with other
institutions, which, in most cases, are significantly larger and are able to
provide a greater variety of services than the Bank and thus may obtain deposits
at lower rates of interest.

The Bank's primary service area is South King County and East Pierce
County, including Enumclaw, Buckley, Black Diamond, Auburn and surrounding
communities. Enumclaw's population is 10,600, having experienced a 43.62%
growth rate since 1990. Enumclaw is primarily considered a residential
community, with most growth in single family residences. The local economy is
dependent upon the forest products industry, farming, and tourism. Buckley has
experienced less growth with a population of 3,920. Buckley is a residential
community with very little business growth in the past few years. Black Diamond
is now experiencing increased growth, with a population of 3,720, up from 1,760
in 1990, which includes the annexation of the Lake Sawyer area.

Opening the Auburn branch this fall represents a new market for the Bank.
Auburn is a larger community with a population of 36,720, up from 35,230 in
1990. All of the major regional banks and savings and loans are located in
Auburn, but the only locally owned bank was purchased in late 1997. Opening the
Auburn branch presents the Company with significant opportunity for growth, but
also involves certain risks. See "RISK FACTORS - Branch Expansion into the
Auburn Market."

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

<PAGE>

of financial products but also efficient and convenient service. In response to
these demands, the Bank has developed a mix of products and services utilizing
newly developed technology available to the banking industry; for example, the
addition of automatic teller machines. Additionally, the Bank offers a wide
range of commercial and retail banking products and services to its customers.
Deposit accounts include certificates of deposit, individual retirement accounts
and other time deposits, checking and other demand deposit accounts,
interest-bearing checking accounts, savings accounts and money market accounts.
Loans include residential real estate, commercial, financial and real estate
construction and development, installment and consumer loans. Other products
and services include credit related insurance, ATMs, debit cards and safe
deposit boxes.

LENDING ACTIVITIES

The two main areas in which the Bank has directed its lendable funds are
commercial and real estate loans. At June 30, 1998, these categories
accounted for approximately 33% and 46%, 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 June 30,
1998, no such concentration exceeded 10% of the Bank's loan portfolio, although
approximately 4.2% of the Bank's loan portfolio consists of dairy/agricultural
loans and approximately 8.9% 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 $150,000 are approved by the Bank's Loan Committee. Loans over $100,000
require joint approval of the President and the Credit Administrator.

The Bank has entered into agreements with other banks to participate in
certain of the Bank's commitments to extend credit to customers.

<PAGE>

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: Capital protection, liquidity, yield,
risk management 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 securities include debt securities that the Bank has
positive intent and ability to hold to maturity; these securities are reported
at amortized cost. At June 30, 1998, the Bank had no securities Held to
Maturity.

Trading Securities include debt and equity securities that are purchased
and held solely for the purpose of selling them in the short-term future for
trading profits. Trading Securities are reported at fair market value with
unrealized gains and losses included in earnings. As of June 30, 1998, the Bank
held no securities as Trading Securities.

Available for Sale securities include 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. 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 $139,200 invested in the Federal Reserve Bank Stock. Also, as
a member of the Federal Home Loan Bank, the Bank is required to keep $284,800 in
stock. This portion of the Bank's investment portfolio is not liquid.

The following table sets forth weighted average yields earned by the Bank
on its earning assets and the weighted average rates paid on its average
deposits and other interest-bearing liabilities for the periods indicated. The
table also presents a summary of changes in interest income, interest expense,
and the interest rate differential aggregated by the changes in volumes and
rates.

<PAGE>

SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------------------------
ANNUALIZED ANNUALIZED
AVERAGE INT EARNED/ YIELD/ AVERAGE INT EARNED/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans $ 42,781(1) $ 2,164(2) 10.12% $ 38,356(1) $ 1,944(2) 10.14%
Investments 22,618 699 6.18% 17,329 555 6.41%
Federal funds sold 4,710 134 5.69% 2,963 87 5.87%
---------------------------- ----------------------------
Total interest earning assets 70,109 2,997 8.55% 58,648 2,586 8.82%
----------- ----------
Non-interest earning assets:
Cash and due from banks 3,244 2,941
Premises and equipment 2,452 2,156
Other assets 926 713
Allowance for possible credit losses (592) (470)
------------- ------------
Total assets $ 76,139 $ 63,988
------------- ------------
------------- ------------
Liabilities and shareholders' equity
Interest bearing liabilities:
Interest bearing demand deposits $ 8,226 68 1.65% 7,115 77 2.16%
Savings 25,106 451 3.59% 23,324 413 3.54%
Certificates of deposit 17,583 480 5.46% 14,144 376 5.32%
Certificates of deposit over $100,000 8,191 237 5.79% 5,996 176 5.87%
---------------------------- ----------------------------
Total interest bearing deposits 59,106 1,236 4.18% 50,579 1,042 4.12%
------------- ------------
Federal funds purchased --- --- 38 2 10.53%
Other borrowings 44 2 9.09% 46 2 8.70%
---------------------------- ----------------------------
Total interest bearing liabilities 59,150 1,238 4.19% 50,663 1,046 4.13%
------------- ----------
Non-interest bearing liabilities:
Demand deposits 9,651 7,563
Other liabilities 739 566
Shareholders' equity 6,599 5,196
------------- ------------
$ 76,139 $ 63,988
------------- ------------
------------- ------------
Net Interest income $ 1,759 $ 1,540
------------- ----------
------------- ----------
Net interest margin 5.02% 5.25%

</TABLE>

<PAGE>

YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------------------
ANNUALIZED ANNUALIZED
AVERAGE INT EARNED/ YIELD/ AVERAGE INT EARNED/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans $ 39,964(1) $ 4,074(2) 10.19% $ 34,102(1) $ 3,462(2) 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
Allowance for possible credit losses (466) (354)
------------- ----------
Total assets $ 66,965 $ 52,513
------------- ----------
------------- ----------
Liabilities and shareholders' equity
Interest bearing liabilities:
Interest bearing demand deposits $ 7,291 141 1.93% 5,594 122 2.18%
Savings 23,092 829 3.59% 16,889 589 3.49%
Certificates of deposit 15,379 836 5.44% 12,603 693 5.50%
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 4.17% 40,966 1,730 4.22%
----------- -------------
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>

<PAGE>

_________________

(1) For purposes of these schedules, non-accruing loans are included in the
average balances.

(2) Loan fees of $162 and $136 for the six months ended June 30, 1998 and 1997,
respectively, and $254 and $209 for the years ended December 31, 1997 and 1996,
have been included in interest income.

Changes in interest income and expense and volume and rate variances for the six
months ended June 30, 1998, and for the years ended December 31, 1997, and
December 31, 1996, are shown below:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Net Change Volume Yield
----------------------------------------------------------------------------------------------------
6/30/98 12/31/97 12/31/96 6/30/98 12/31/97 12/31/96 6/30/98 12/31/97 12/31/96
--------- --------- ---------- -------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
Loans $ 220 $ 612 $ 545 $ 224 $ 598 $ 671 $ (4) $ 14 $(102)
Investments $ 144 $ 582 $ 306 $ 164 $ 525 $ 235 $ (20) $ 57 $ 43
Federal Funds Sold $ 47 $ 24 $ 7 $ 50 $ 19 $ 22 $ (3) $ 5 $ (12)
----------------------------------------------------------------------------------------------------
Interest Income $ 411 $ 1,218 $ 858 $ 438 $ 1,142 $ 928 $ (27) $ 76 $ (71)
----------------------------------------------------------------------------------------------------

Interest bearing
liabilities
Interest Bearing Demand $ (9) $ 19 $ 19 $ 11 $ 34 $ 29 $ (20) $ (15) $ (8)
Savings $ 38 $ 240 $ 136 $ 32 $ 223 $ 169 $ 6 $ 17 $ (24)
Certificates of Deposit $ 104 $ 143 $ 134 $ 94 $ 151 $ 154 $ 10 $ (8) $ (16)
Certificates of deposit
over $100,000 $ 61 $ 54 $ 43 $ 64 $ 43 $ 90 $ (3) $ 11 $ (35)
----------------------------------------------------------------------------------------------------
Total Interest Bearing
Deposits $ 194 $ 456 $ 332 $ 201 $ 451 $ 442 $ (7) $ 5 $ (83)
----------------------------------------------------------------------------------------------------

Federal Funds Purchased $ (2) $ -- $ (27) $ (2) $ -- $ (27) $ -- $ -- $ (10)
Other Borrowings $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
----------------------------------------------------------------------------------------------------
Total Interest Expense $ 192 $ 456 $ 305 $ 199 $ 451 $ 415 $ (7) $ 5 $ (93)
----------------------------------------------------------------------------------------------------
Net Interest Income $ 219 $ 762 $ 553 $ 239 $ 691 $ 513 $ (20) $ 71 $ 22
----------------------------------------------------------------------------------------------------

</TABLE>

_________________

(1) Increases (decreases) are attributable to volume changes and rate changes
on the following basis: Volume Change equals change in volume times prior year
rate. Rate Change equals change in rate times prior year volumes. The
Rate/Volume Change equals the change in volume times the change in rate, and it
is allocated between Volume Change and Rate Change at the ratio that the
absolute value of each of these components bears to the absolute value of their
total.

ASSET AND LIABILITY MANAGEMENT

The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income while a positive gap
would tend to adversely affect net interest income.

The asset/liability committee, which consists of the Chief Executive
Officer, the Senior Vice President/Cashier, the Credit Administrator and other
officers, is charged with monitoring the liquidity and funds

15
<PAGE>

position of the Company. The Committee regularly reviews (a) information on
current economic conditions and the outlook for interest rates; (b) the
asset/liability position of the Bank; (c) the Bank's current and projected
liquidity position; (d) maturity/average life of the portfolio as a whole; (e)
composition of the portfolio; and (f) tax position of the institution.

The Company utilizes the "ALIX" asset liability management model, a
proprietary system. At June 30, 1998, the Company had a negative cumulative
repricing gap within one year of approximately $36 million, or approximately
49.5% of total earning assets. This negative repricing gap indicates that the
Company's future earnings may be materially adversely impacted by a rise in
market interest rates, and such impact would primarily be felt in the twelve
month period after such a rise in rates.

The following table represents interest sensitivity profiles for the
Company as of June 30, 1998. The table represents a static point in time and
does not consider other variables, such as changing spread relationships or
interest rate levels. "Interest sensitive gap" is the difference between total
earning assets and total interest-bearing liabilities repricing in any given
period.

GAP ANALYSIS
JUNE 30, 1998

-----------------------------------------------
Total Within One Year to Over
One Year Five Years Five Years
-----------------------------------------------
<S> <C> <C> <C>
Rate Sensitive Assets:
Loans $16,410 $24,754 $2,623
Investments $ 2,272 $17,212 $4,712
Federal Funds Sold $ 3,925
-----------------------------------------------
TOTAL $22,607 $41,966 $7,335

Rate Sensitive Liabilities:
Savings, Now and Interest Checking $35,179
Time Deposits $23,392 $2,319
-----------------------------------------------
TOTAL $58,571 $2,319 $0

Interest Sensitive Gap ($35,964) $39,647 $7,335
-----------------------------------------------
-----------------------------------------------

</TABLE>

DEPOSIT LIABILITY COMPOSITION

The Bank's primary sources of funds are interest-bearing deposits. The
following table sets forth the Bank's deposit structure at June 30, 1998, and at
December 31, 1997 and 1996.

JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AMOUNTS DEPOSITS AMOUNTS DEPOSITS AMOUNTS DEPOSITS
------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 9,632 13.84% $ 8,991 13.62% $ 8,565 14.57%
Interest-bearing demand 26,116 36.96% 24,026 36.39% 21,892 27.23%
Savings 9,063 12.82% 7,617 11.54% 7,730 13.15%
Certificates of deposit 17,675 25.08% 17,134 25.95% 13,820 23.50%
Certificates of deposit over $100,000 8,036 11.31% 8,253 12.50% 6,797 11.56%
------------------------------------------------------------------------------------
Total $70,522 100.00% $66,021 100.00% $58,804 100.00%
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------

</TABLE>

<PAGE>

The following tables present a breakdown by category of the average amount
of deposits and the weighted average rate paid on deposits for the periods as
indicated:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
INTEREST ANNUALIZED
AVERAGE EARNED/ YIELD/RATE
BALANCE EXPENSE (1)
------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest bearing demand deposits $ 8,226 $ 68 1.65%
Savings 25,106 451 3.59%
Certificates of deposit 17,583 480 5.46%
Certificates of deposit over $100,000 8,191 237 5.79%
------------------------------
Total $59,106 $1,236 4.18%
------------------------------
------------------------------

</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996
----------------------------- ------------------------------
INTEREST INTEREST
AVERAGE EARNED/ ANNUALIZED AVERAGE EARNED/ ANNUALIZED
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
-------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing demand deposits $ 7,291 $ 141 1.93% $ 5,594 $ 122 2.18%
Savings 23,092 829 3.59% 16,889 589 3.49%
Certificates of deposit 15,379 836 5.44% 12,603 693 5.50%
Certificates of deposit over $100,000 6,581 375 5.70% 5,819 321 5.52%
-------------------------------------------------------------
Total $52,343 $ 2,181 4.17% $40,905 $ 1,725 4.22%
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>

At June 30, 1998, December 31, 1997 and 1996, time deposits greater than
$100,000 aggregated approximately $8.0 million, $8.3 million and $6.8 million,
respectively. The following table indicates, as of June 30, 1998, December 31,
1997 and 1996 the dollar amount of $100,000 or more deposits by the time
remaining until maturity:

<TABLE>
<CAPTION>
6/30/98 12/31/97 12/31/96
-----------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Maturity in:

Three months or less: $2,385 $1,846 $3,366

Over three months through twelve months $5,197 $5,347 $2,648

Over one year through five years $454 $1,060 $783

Over five years $0 $0 $0
-----------------------------
TOTAL $8,036 $8,253 $6,797
-----------------------------
-----------------------------
</TABLE>

ASSETS

Management of the Bank considers many criteria in managing assets,
including credit-worthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Bank's interest earning assets by category at June 30, 1998 and at December
31, 1997 and 1996.

17
<PAGE>

EARNING ASSETS

<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNTS EARNING ASSETS AMOUNTS EARNING ASSETS AMOUNTS EARNING ASSETS
--------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loan Portfolio $43,324 59.75% $42,577 62.32% $ 37,543 64.12%
Investment Portfolio 24,620 33.95% 22,962 33.61% 13,455 22.98%
Federal Funds Sold and
Interest Bearing Deposits 4,105 5.66% 2,448 3.58% 7,550 12.90%
Loans Held for Sale 463 0.64% 332 0.49% -- 0.00%
--------------------------------------------------------------------------------------------
Total Earning Assets $72,512 100.00% $68,319 100.00% $ 58,548 100.00%
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>

At June 30, 1998 and year end 1997 and 1996, obligations of the United
States Government or its agencies and obligations of states and political
subdivisions represented 77%, 85% and 78% of the investment portfolio,
respectively. The following table presents the composition of the carrying
value of the Bank's investment portfolio at June 30, 1998, December 31, 1997 and
1996.

INVESTMENT SECURITIES PORTFOLIO

<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------------------------
<S> <C> <C> <C>
US Treasury securities $ 5,976 $ 4,972 $ 3,146
US Government and agency securities 13,077 14,320 7,055
Mortgage Backed Securities 4,799 2,963 1,748
Corporate bonds --- --- 799
Municipal bonds 344 309 329
Federal Reserve and FHLB Stock 424 398 378
----------------------------------------------------
Total $24,620 $22,962 $13,455
----------------------------------------------------
----------------------------------------------------
</TABLE>

The following tables present the maturity distribution of the amortized
cost and estimated market value of the Bank's debt securities at June 30, 1998,
December 31, 1997 and 1996. The weighted average yields on these instruments
are presented based on final maturity. Yields on obligations of states and
political subdivisions have not been adjusted to a fully-taxable equivalent
basis.

<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------------------------
Over One Over Five
One Year or Less Through Five Years Through Ten Years
--------------------------------------------------------
(in thousands)
Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
US Treasury securities $1,253 5.93% $4,723 6.43%
US Government and agency securities $ 998 4.88% $9,263 6.16% $2,816 6.74%
Mortgage Backed Securities $3,147 6.91% $1,652 7.00%
Municipal bonds (1) $20 3.75% $79 4.70% $ 245 4.89%
--------------------------------------------------------
Total $2,271 $17,212 $4,713

Weighted Average Yield 5.45% 6.36% 6.73%
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------
Over One Over Five
One Year or Less Through Five Years Through Ten Years
-------------------------------------------------------------
(in thousands)
Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
US Treasury securities $504 5.75% $4,468 6.52%
US Government 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

Weighted Average Yield 5.75% 6.45% 6.71%
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------
Over One Over Five
One Year or Less Through Five Years Through Ten Years
---------------------------------------------------------------
(in thousands)
Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
US Treasury securities $2,501 6.30% $644 5.13% $0
US Government and agency securities $6,561 6.12% $494 6.75%
Mortgage Backed Securities $965 6.75% $783 7.31%
Corporate bonds $252 5.35% $547 5.84% $0
Municipal bonds (1) $130 4.25% $0 $199 5.50%

---------------------------------------------------------------
Total $2,883 $8,717 $1,476

Weighted Average Yield 6.12% 6.10% 6.88%
</TABLE>

(1) Yields do not reflect tax-exempt status.

INVESTMENT POLICY

The objective of the Bank's investment policy is to invest funds not
otherwise needed to meet the loan demand of its market area to earn the maximum
return for the Bank, yet still maintain sufficient liquidity to meet
fluctuations in the Bank's loan demand and deposit structure. In doing so, the
Bank balances the market and credit risks against the potential investment
return, makes investments compatible with the pledge requirements of the Bank's
deposits of public funds, maintains compliance with regulatory investment
requirements, and assists the various public entities with their financing
needs. The Chief Executive Officer and the Senior Vice President/Cashier are
authorized to execute security transactions for the investment portfolio based
on the decisions of the funds management committee. The funds management
committee, which consists of the President/Chief Executive Officer, Chairman of
the Board, Senior Vice President/Cashier and other directors, has full authority
over the investment portfolio and makes decisions on purchases and sales of
securities. All the investment transactions occurring since the previous board
of directors' meeting are reviewed by the board at its next monthly meeting, and
the entire portfolio is reviewed on a quarterly basis. The investment policy
allows portfolio holdings to include short-term securities purchased to provide
the Bank's needed liquidity and longer term securities purchased to generate
level income for the Bank over periods of interest rate fluctuations.

The Bank's investment securities portfolio of $24.620 million at June 30,
1998, consisted of securities available for sale which are carried at market
value. In addition, unrealized gains on investment securities available for
sale were $113,000 and unrealized losses were $20,715. The Bank's investment
securities portfolio

19
<PAGE>

of $22.962 million at December 31, 1997, consisted of securities available for
sale which are carried at market value. In addition, unrealized gains on
investment securities available for sale were $118,000 and unrealized losses
were $21,000. The Bank's investment securities portfolio of $13.500 million at
December 31, 1996, consisted of securities available for sale which are carried
at market value. In addition, unrealized gains on investment securities
available for sale were $10,000 and unrealized losses were $47,000.

At June 30, 1998, the Bank had approximately $4.8 million of
mortgage-backed securities in the available for sale category, which constitutes
approximately 19% of its investment securities portfolio. Structured notes have
uncertain cash flows which are driven by interest rate movements and expose the
Company to greater market risk than traditional medium-term notes. All of the
Bank's investments of this type are government agency issues (primarily Federal
Home Loan Bank and Federal National Mortgage Association).

LOAN PORTFOLIO

Total loans of $43.324 million at June 30, 1998, reflected an increase of
$747,000 or 1.8%, compared to total loans for the year ended December 31, 1997.
Residential real estate loans, which historically have had low loss experience,
decreased $344,000 or 2.7%. Construction and land development loans, loans
secured by farmland, and commercial real estate loans increased by $126,000, or
1%. Commercial and industrial loans and agricultural loans increased by
$1.001 million, or 8.2%. These types of loans carry a higher level of risk in
that the borrowers' ability to repay may be affected by local economic trends.
Installment and other consumer loans increased by $67,000, or 1.3%. These
loans, generally secured by automobiles and other consumer goods, contain an
historically higher level of risk; however, this risk is mitigated by the fact
that these loans generally consist of small individual balances. As the loan
portfolio is concentrated in Enumclaw and surrounding counties, there is a risk
that the borrowers' ability to repay the loans could be affected by changes in
local economic conditions.

The following table sets forth the composition of the Company's loan
portfolio at June 30, 1998, and December 31, 1997 and 1996.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------------------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AMOUNTS LOANS AMOUNTS LOANS AMOUNTS LOANS
---------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial and agricultural $14,347 33.12% $12,004 28.19% $11,685 31.12%
Real Estate:
Construction 3,877 8.95% 4,453 10.46% 3,537 9.42%
Mortgage 20,058 46.30% 21,145 49.66% 17,198 45.81%
Consumer 5,042 11.64% 4,975 11.68% 5,123 13.65%
---------------------------------------------------------------
Total loans $43,324 100.00% $42,577 100.00% $37,543 100.00%
---------------------------------------------------------------
---------------------------------------------------------------
</TABLE>
The following table sets forth the maturities and interest sensitivities of
the Company's loan portfolio at June 30, 1998.
<TABLE>
<CAPTION>
Over One
One Year Through Five Maturing
or Less Years After Five Years Total
----------------------------------------------------------

Amount Fixed Variable Fixed Variable
<S> <C> <C> <C> <C> <C> <C>
Commercial and Agriculture $7,694 $5,581 $0 $0 $0 $13,275
Real Estate $7,498 $15,547 $0 $2,004 $0 $25,049
Consumer $1,208 $3,635 $0 $157 $0 $5,000
----------------------------------------------------------
Total $16,400 $24,763 $0 $2,161 $0 $43,324
----------------------------------------------------------
----------------------------------------------------------
</TABLE>

20
<PAGE>

LOAN POLICY

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 June 30,
1998, no such concentration exceeded 10% of the Bank's loan portfolio, although
approximately 2.65% of the Bank's loan portfolio consists of dairy/agricultural
loans and approximately 8.95% 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.

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 $150,000 are approved by the Bank's Loan Committee.

The Bank has entered into agreements with other banks to participate in
certain of the Bank's commitments to extend credit to customers.

CREDIT RISK MANAGEMENT AND ALLOWANCE FOR CREDIT LOSSES

Credit risk and exposure to loss are inherent parts of the banking
business. Management seeks to manage and minimize these risks through its loan
and investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures that
it believes reflect the risk sensitive nature of the Company. The loan review
procedures are set to monitor adherence to the established criteria and to
ensure that on a continuing basis such standards are enforced and maintained.

21
<PAGE>

Management's objective in establishing lending and investment standards is
to manage the risk of loss and provide for income generation through pricing
policies. To effectuate this policy, the Company has established specific terms
and maturity schedules for each loan type, such as commercial, real estate,
consumer, etc.

The loan portfolio is regularly reviewed and management determines the
amount of loans to be charged-off. In addition, such factors as the Bank's
previous loan loss experience, prevailing and anticipated economic conditions,
industry concentrations and the overall quality of the loan portfolio are
considered. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowances for losses on loans and real estate owned. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available at the time of their examinations. In
addition, any loan or portion thereof which is classified as a "loss" by
regulatory examiners is charged-off.

The allowance for credit losses is increased by charging operating
expense. The allowance is reduced by charging off loans at the time they are
deemed by management to be uncollectable, and the allowance is increased when
loans previously charged off are recovered. The resulting allowance for
credit losses is viewed by management as a single, unallocated allowance
available for all loans and, in management's opinion, is adequate to provide
for reasonably foreseeable potential credit losses. Rules and formulas
relative to the adequacy of the allowance, although useful as guidelines to
management, are not rigidly applied. The allowance for credit losses at June
30, 1998, was $628,000, or 1.45% of loans outstanding. The allowance for
credit losses at year end 1997 was $555,000, or 1.31% of loans outstanding,
net of unearned income, compared to $391,000, or 1.04% at year end 1996. The
following table presents data related to the Company's allowance for credit
losses for the six months ended June 30, 1998, and for the years ended
December 31, 1997 and 1996.

SUMMARY OF CREDIT LOSS EXPERIENCE AND RELATED INFORMATION

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED YEAR ENDED
ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
-------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for credit losses
(beginning of period) $ 555 $ 391 $ 334
Loans charged off:
Commercial and agricultural (9)
Real estate construction
Real estate mortgage
Consumer (5) (6) (10)
-------------------------------------------
Total (5) (15) (10)
-------------------------------------------
Recoveries of loans previously charged off:
Commercial and agricultural
Real estate construction
Real estate mortgage
Consumer
-------------------------------------------
Total
-------------------------------------------
Net loans charged off (5) (15) (10)

Provision for possible loan losses 78 179 67
-------------------------------------------
Allowance for possible credit losses
(end of period) $ 628 $ 555 $ 391
-------------------------------------------
-------------------------------------------

22
<PAGE>

Loans outstanding:
Average $ 43,324 $ 39,964 $ 34,102
End of period 43,787 42,577 37,543
Ratio of allowance for credit losses to total
loans outstanding
Average 1.45% 1.39% 1.15%
End of period 1.43% 1.30% 1.04%
Ratio of net charge-offs to average loans 0.03% 0.04% 0.03%
outstanding
</TABLE>

ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
(IN THOUSANDS)

<TABLE>
<CAPTION>
Percent of Loans
in each category
Balance at June 30, 1998: Amount to total loans
- ------------------------------ -----------------------------
<S> <C> <C>
Commercial and Agriculture $208 33.12%
Real Estate Construction 56 8.91%
Real Estate Mortgage 291 46.30%
Consumer 73 11.64%
-----------------------
Total loans $628 100.00%
-----------------------
-----------------------
</TABLE>

The allocation of the allowance is presented based in part on evaluations
of past history and composition of the loan portfolio. Since these factors are
subject to change, the current allocation of the allowance is not necessarily
indicative of the breakdown of future losses.

The following table sets forth information with respect to nonperforming
loans of the Company on the dates indicated. Accrual of interest is
discontinued when there is reasonable doubt as to the full, timely collections
of interest or principal. When a loan becomes contractually past due 90 days
with respect to interest or principal, it is reviewed and a determination is
made as to whether it should be placed on nonaccrual status. When a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is reversed against current period interest income. Income on such loans is
then recognized only to the extent that cash is received and where the future
collection of principal is probable. Interest accruals are resumed on such
loans only when they are brought fully current with respect to principal and
interest and when, in the judgment of management, the loans are estimated to be
fully collectible as to principal and interest. Restructured loans are those
loans on which concessions in terms have been granted because of a borrower's
financial difficulty. Interest is generally accrued on such loans in accordance
with the new terms.

RISK ELEMENTS - NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
(IN THOUSANDS)

AT JUNE 30, 1998

<TABLE>
<CAPTION>
90 Days or More Nonaccrual Restructured Lost Interest
Past Due
6/30/98 6/30/98 6/30/98 6/30/98
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and Agriculture $0 $499 $0 $0
Real Estate $0 $ 0 $0 $0
Consumer $0 $ 0 $0 $0
--------------------------------------------------------------
$0 $499 $0 $0
</TABLE>

23
<PAGE>

AT DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
90 Days or More Nonaccrual Restructured Lost Interest
Past Due
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and Agriculture $0 $0 $59 $121 $0 $0 $0 $4
Real Estate $0 $0 $0 $0 $0 $0 $0 $0
Consumer $0 $0 $0 $16 $0 $0 $0 $1
-------------------------------------------------------------------------------
$0 $0 $0 $137 $0 $0 $0 $5
</TABLE>

CAPITAL RESOURCES/LIQUIDITY

LIQUIDITY. Of primary importance to depositors, creditors and regulators
is the ability to have readily available funds sufficient to repay fully
maturing liabilities. The Company's liquidity, represented by cash and cash due
from banks, federal funds sold and interest-bearing deposits in other banks, is
a result of its operating, investing and financing activities. In order to
ensure funds are available at all times, the Company devotes resources to
projecting on a monthly basis the amount of funds which will be required and
maintains relationships with a diversified customer base so funds are
accessible. Liquidity requirements can also be met through short-term
borrowings or the disposition of short-term assets which are generally matched
to correspond to the maturity of liabilities.

Although the Company has no formal liquidity policy, in the opinion of
management, its liquidity levels are considered adequate. Neither the Company
nor the Bank is subject to any specific liquidity requirements imposed by
regulatory orders. The Bank is subject to general FDIC guidelines which do not
require a minimum level of liquidity. Management believes its liquidity ratios
meet or exceed these guidelines. Management does not know of any trends or
demands which are reasonably likely to result in liquidity increasing or
decreasing in any material manner.

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and related consolidated financial
data presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time and due to inflation. The
impact of inflation on operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of the Company are monetary in nature. As a result, interest
rates have a more significant impact on the Company's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services.

CAPITAL ADEQUACY

Capital adequacy refers to the level of capital required to sustain asset
growth over time and to absorb losses. The objective of the Company's
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures
used by management to monitor the results of these efforts are the ratios of
average equity to average assets, average tangible equity to average tangible
assets, and average equity to net loans.

The Federal Reserve Board has adopted capital guidelines governing the
activities of bank holding companies. These guidelines require the maintenance
of an amount of capital based on risk-adjusted assets so that categories of
assets with potentially higher credit risk will require more capital backing
than assets with

24
<PAGE>

lower risk. In addition, banks and bank holding companies are required to
maintain capital to support, on a risk-adjusted basis, certain off-balance sheet
activities such as loan commitments.

The capital guidelines classify capital into two tiers, referred to as Tier
I and Tier II. Under risk-based capital requirements, total capital consists of
Tier I capital which is generally common stockholders' equity less goodwill and
Tier II capital which is primarily a portion of the allowance for credit losses
and certain qualifying debt instruments. In determining risk-based capital
requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
The framework for calculating risk-based capital requires banks and bank holding
companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based
capital. In 1990 regulators added a leveraged computation to the capital
requirements, comparing Tier I capital to total average assets less goodwill.

On June 30, 1998, the Company exceeded the regulatory minimums and
qualified as a well-capitalized institution under the regulations.

The Federal Deposit Insurance Corporation Improvement Act of 1992
("FDICIA") established five capital categories for banks and bank holding
companies. The bank regulators adopted regulations defining these five capital
categories in September 1992. Under these new regulations each bank is
classified into one of the five categories based on its level of risk-based
capital as measured by Tier I capital, total risk-based capital, and Tier I
leverage ratios and its supervisory ratings. See Note 17 to the Consolidated
Financial Statements for Bank-only capital ratios.

RETURN ON ASSETS AND EQUITY

Following are performance ratios of the Company for the six months ended
June 30, 1998, and for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
<S> <C> <C> <C>
Return on average assets 0.78% 0.89% 0.56%
Return on average equity 9.00% 10.86% 5.75%
Dividend payout ratio N/A N/A N/A
Equity to assets ratio 8.67% 8.12% 9.67%
</TABLE>

EMPLOYEES

The Company has no paid employees. The Bank had a total of 37 full-time
equivalent employees at June 30, 1998.

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.

25
<PAGE>

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.

On January 26, 1998, the Bank opened its Black Diamond Branch at 31329
Third Avenue, Black Diamond, Washington. The facility, which is leased, has
3,100 square feet, a two-lane drive up and a night depository.

LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company or the
Bank is a party or of which any of their properties are subject; nor are there
material proceedings known to the Company to be contemplated by any governmental
authority; nor are there material proceedings known to the Company, pending or
contemplated, in which any director, officer or affiliate or any principal
security holder of the Company, or any associate of any of the foregoing, is a
party or has an interest adverse to the Company or the Bank.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION. No broker makes a market in the Company's common
stock, and trading has not been extensive. Trades that have occurred cannot be
characterized as amounting to an active market. The stock is traded by
individuals on a personal basis and is not listed on any exchange or traded on
the over-the-counter market. Due to the limited information available, the
following price information may not accurately reflect the actual market value
of the Company's shares. The following data includes trades between individual
investors and new issues of stock. It does not include the exercise of stock
options or shares issued under the Employee Stock Purchase Plan.

<TABLE>
<CAPTION>
PERIOD # OF SHARES TRADED PRICE RANGE
<S> <C> <C>
1996 12,210 $10.00 to 11.50
1997 21,116 $12.00 to 12.50
1998 to July 31 8,007 $12.50 to 13.00
</TABLE>

To the best knowledge of the Company, the most recent transaction in the
Company's Shares was July 8, 1998, at a price of $13.00 per share.

On March 31, 1995, the Company distributed an offering circular for 100,000
shares of common stock at $10.00 per share. The offering was amended on May 2,
1995, to increase the number of shares offered to 140,000 shares. All 140,000
shares were sold for a total offering of $1.4 million. In October and November
1997, pursuant to a prospectus dated October 17, 1997, the Company offered and
sold 100,000 shares of common stock at $12.50 per share, in an offering to
existing shareholders and certain new shareholders, raising $1.2 million net of
offering expenses.

At August 15, 1998, stock options for 105,332 shares of Company common
stock were outstanding. See Note 13 of the financial statements for additional
information.

26
<PAGE>

NUMBER OF EQUITY HOLDERS

As of August 31, 1998, there were 751 holders of record of the Company's
Common Stock.

CASH DIVIDENDS

The Company has never paid a cash dividend, and does not anticipate paying
a cash dividend in the foreseeable future. The Company expects to retain all
earnings to provide capital for operation and expansion of its subsidiary.
Dividends, when and if paid, will be subject to determination and declaration by
the Board of Directors, which will take into account the financial condition of
the Bank and the Company, results of operations, tax considerations, industry
standards, economic conditions and other factors. The ability of the Company to
pay dividends in the future will depend primarily upon the earnings of the Bank
and its ability to pay dividends to the Company. The ability of the Bank to pay
dividends to the Company is governed by various statutes. See "SUPERVISION AND
REGULATION -- Restrictions on Capital Distributions."

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The purpose of this discussion and analysis is to provide the reader with a
concise description of the financial condition and changes therein and results
of operations for the Company and the Bank for the six months ended June 30,
1998 and 1997, and the years ended December 31, 1997 and 1996. ALL NUMBERS
PRESENTED IN THIS SECTION BELOW ARE IN THOUSANDS.

This discussion and analysis is intended to complement the audited
financial statements and footnotes and the supplemental financial data and
charts appearing elsewhere in this report, and should be read in conjunction
therewith. This discussion and analysis will focus on the following major
areas: Results of Operations, Capital Requirements, Liquidity Resources, Asset
Liability Management, Asset Quality, and Year 2000 issues.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1998 AND 1997

NET INCOME. The Company had net income of $297 or $0.37 per common share
for the first 6 months of 1998 compared to net income for the first six months
of 1997 of $205 or $0.29 per common share. The Company's annualized returns on
average assets and average common equity for the first half of 1998 were .78%
and 9.00%, compared to .64% and 7.89%, respectively, for the first half of 1997.

NET INTEREST INCOME. Net interest income for the first half of 1998
increased $219 to $1,759 versus the first half of 1997 of $1,540. The
increase is attributable to loan growth and a slightly higher investment
portfolio yield. Loans grew 11.54% from the June 30, 1997, total of $38,841
to a total of $43,324 as of June 30, 1998. Total Company assets were $79,060
at June 30, 1998, compared to $67,374 as of June 30,1997, which represents a
growth of 17.34%.

NET INTEREST MARGIN. The net interest margin was 5.02% for the first half
of 1998 compared to 5.25% for the first half of 1997. Yields on the investment
portfolio and overnight investments declined by 23 and 18 basis points,
respectively. Also, the percentage of average earning assets in loans, the
highest yielding asset, declined from 1997. These factors, combined with a 6
basis point increase in average cost of funds, resulted in the lower net
interest margin.

NON-INTEREST INCOME. Non-interest income for the first half of 1998
increased $109 over the first half of 1997 to $437 from $328. Non-interest
expenses for the first six months of 1998 increased $219 to $1,650

27
<PAGE>

compared to the first six months of 1997 of $1,431. The increase in operation
expenses is due to an increase in personnel expense of $94 and other expense of
$113. Other expense increased to 1.61% in 1998 from 1.57% in 1997. Total
non-interest expenses as a percent of average assets has decreased from 4.47% as
of June 30, 1997, to 4.33% as of June 30, 1998.

YEARS ENDED DECEMBER 31, 1997 AND 1996

NET INCOME. Net income for 1997 was $597, which represents an increase of
$305 from 1996. The Company's return on average assets was .89% for 1997 and
0.56% for 1996. Its return on average equity was 10.86% for 1997 and 5.75% for
1996.

The Company's increased earnings for 1997 were impacted by the following
significant items:

Average earning assets for 1997 were $61,459 representing an increase of
$14,253 over 1996's average earning assets of $47,206. The yield on earning
assets was 8.89% in 1997, compared to 8.99% in 1996.

Average interest-bearing liabilities increased from $40,966 in 1996 to
$52,412 for 1997 representing an increase of $11,446. The cost of average
interest-bearing liabilities decreased from 4.22% for 1996 to 4.17% for 1997.

Average earning assets to average total assets increased to 91.78% for 1997
from 89.90% for 1996.

Average interest-bearing liabilities to average assets increased to 78.26%
in 1997 from 78.01% in 1996. Net average earning assets (average earning assets
minus average interest bearing liabilities) to average total assets increased
from 11.89% for 1996 to 13.52% for 1997.

As a result of the foregoing, net interest income increased $762 to $3,278
for 1997 from $2,516 for 1996.

Non-interest expense increased by $138 to $2,849 for 1997 compared to
$2,711 for 1996. Non-interest expense was 5.16% of average assets in 1996
compared to 4.25% of average assets in 1997.

PROVISION FOR CREDIT LOSSES. The provision for credit losses in 1997 was
$179 compared to $67 for 1996. The provision for credit losses is the amount
management considers necessary to maintain an allowance for credit losses at a
level sufficient to meet risks inherent in the Bank's loan portfolio. The level
of the allowance is determined by management after conducting ongoing reviews of
the loan portfolio as well as considering the level and magnitude of
non-performing assets and loan delinquencies, general economic conditions in the
areas served by the Company, historic credit-loss experience, loan mix and the
level of loans relative to reserves.

NON-INTEREST INCOME. Non-interest income increased by $5 to $697 in 1997
as compared to $692 in 1996.

ASSETS. Company total assets grew 14.41% or $9,304 during 1997 to an end
of year total of $73,865. The growth in assets during 1997 is primarily
attributable to deposit growth of $7,217 from current and new banking customers.

The investment securities portfolio grew by $9,507 during 1997 to $22,962
at year end 1997 from $13,455 at year end 1996.

Loans grew during 1997 by $5,034 or 13.41% from $37,543 at year end 1996 to
$42,577 at year end 1997. The majority of this growth was in real estate loans
which grew by 22.95% or $3,947 to $21,145 at December 31, 1997, and construction
loans which grew $916 or 25.89% to $4,453 at December 31, 1997.

28
<PAGE>

Deposits grew during 1997 by $7,217 or 12.27% to $66,021 at year end 1997.

CAPITAL REQUIREMENTS

The Company's equity capital was $7,151 at December 31, 1997, compared to
$5,279 at December 31, 1996. This increase of $1,872 consists of a $88 increase
in unrealized gains on available for sale securities, the Company's income of
$597 for 1997 and the proceeds of $1,187 from sale of common stock in 1997. No
dividends were paid by the Company during 1997 and the Company does not expect
to pay dividends any time in the foreseeable future.

At December 31, 1997, the Company's Tier 1 Capital to Average Assets was
10.24%, Tier 1 Capital to Risk Weighted Assets was 15.51% and Tier 2 Capital was
16.73%. The Company is considered "well capitalized" within applicable Federal
banking regulatory guidelines at December 31, 1997.

LIQUIDITY RESOURCES

Management focuses on the need to meet both short-term funding requirements
and long-term growth objectives. Primary sources of funds for liquidity include
deposits, loan repayments and security repayments or sales of available for sale
securities. The Bank also has borrowing lines at three correspondent banks in
the aggregate amount of $3,000 and a borrowing line at Federal Home Loan Bank in
the approximate amount of $9,000 for a total available of $12,000 for short-term
funding.

ASSET LIABILITY MANAGEMENT

The long-term profitability of the Company depends on properly priced
products and services, asset quality and asset-liability management.

A traditional measure of interest rate sensitivity and its impact upon the
next year's earnings is the Company's one-year gap position (total assets
subject to repricing less total liabilities subject to repricing). At June 30,
1998, the Company had a cumulative one year negative gap of $35.964 million in
liabilities repricing faster than assets.

While the one-year-gap measure helps provide some information about a
financial institution's interest sensitivity, it does not predict the trends of
future earnings.

ASSET QUALITY

Asset quality is good. Non-performing assets at June 30, 1998, were $499
or 1.15% of loans. The provision for losses on loans was $78 for the first half
of 1998 which is a decrease of $22 over the provision of $100 for the first half
of 1997. At June 30, 1998, the allowance for losses on loans was 1.45% of loans
and approximately 126% of non-performing loans.

Non-performing and other loans past due 90 days or more were $59 at year
end 1997 compared to $137 at year end 1996 representing a decrease of $78.
Non-performing loans as a percentage of net loans before the allowance for loan
losses was 0.14% at year end 1997 and 0.36% at year end 1996. The allowance for
loan losses to non-performing loans, which is a measure of the Bank's ability to
cover problem assets with existing reserves, was 285.4% at year end 1996 and
940.6% at year end 1997. The Company had no material restructured loans in 1997
or 1996. The asset quality of the Company continues to be good which is a
result of good underwriting standards coupled with aggressive collection efforts
and a good local economy.

29
<PAGE>

YEAR 2000

The century date change for the year 2000 is a serious issue that may
impact virtually every organization, including the Company. Many software
programs are not able to recognize the year 2000, since most programs and
systems were designed to store calendar years in the 1900s by assuming the "19"
and storing only the last two digits of the year. The problem is especially
important to financial institutions since many transactions, such as interest
accruals and payments, are date sensitive, and because the Bank interacts with
numerous customers, vendors and third party service providers who must also
address the year 2000 issue. The problem is not limited to computer systems.
Year 2000 issues will potentially affect every system that has an embedded
microchip, such as automated teller machines, elevators and vaults.

THE COMPANY'S STATE OF READINESS

The Company and the Bank are committed to addressing these Year 2000 issues
in a prompt and responsible manner, and they have dedicated the resources to do
so. Management has completed an assessment of its automated systems and has
implemented a program consistent with applicable regulatory guidelines, to
complete all steps necessary to resolve identified issues. The Company's
compliance program has several phases, including (1) project management; (2)
assessment; (3) testing; and (4) remediation and implementation.

PROJECT MANAGEMENT. The Company has formed a Year 2000 compliance
committee consisting of senior management and departmental representatives. The
committee has met regularly since September 1997. A Year 2000 compliance plan
was developed and regular meetings have been held to discuss the process, assign
tasks, determine priorities and monitor progress. The committee regularly
reports to the Company's Board.

ASSESSMENT. All of the Bank's computer equipment and mission-critical
software programs have been identified. This phase is essentially complete.
The Bank's primary software vendors were also assessed during this phase, and
vendors who provide mission-critical software have been contacted. The Company
will continue to monitor and work with these vendors. The Company has also
identified, and began working with, the Bank's significant borrowers to assess
the extent to which they may be affected by year 2000 issues.

TESTING. Updating and testing of the Company's and the Bank's automated
systems is currently underway and the Company anticipates that all testing will
be complete by June 30, 1999. Upon completion, the Company will be able to
identify any internal computer systems that remain non-compliant.

REMEDIATION AND IMPLEMENTATION. This phase involves obtaining and
implementing renovated software applications provided by the Company's vendors.
As these applications are received and implemented, the Company will test them
for year 2000 compliance. This phase also involves upgrading and replacing
automated systems where appropriate, and will continue throughout 1998 and 1999.

ESTIMATED COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES

The total financial effect that year 2000 issues will have on the Company
and the Bank cannot be predicted with any certainty at this time. In fact, in
spite of all efforts being made to rectify these problems, the success of the
Company's efforts will not be known until the year 2000 actually arrives.
However, based on its assessment to date, the Company does not believe that
expenses related to meeting Year 2000 challenges will have a material effect on
the operations or financial condition of the Company or the Bank. Year 2000
challenges facing vendors of mission-critical software and systems, and facing
Bank customers, could have a material effect on the operations or financial
condition of the Company and the Bank, to the extent such parties are materially
affected by such challenges.

30
<PAGE>

RISKS RELATED TO YEAR 2000 ISSUES

The year 2000 poses certain risks to the Company and the Bank and their
operations. Some of these risks are present because the Company purchases
technology and information systems applications from other parties who face Year
2000 challenges. Other risks are inherent in the business of banking or are
risks faced by many companies. Although it is impossible to identify all
possible risks that the Company may face moving into the millennium, management
has identified the following significant potential risks:

Commercial banks may experience a contraction in their deposit base, if
a significant amount of deposited funds are withdrawn by customers prior to
the year 2000, and interest rates may increase as the millennium approaches.
This potential deposit contraction could make it necessary for the Bank to
change its sources of funding and could impact future earnings. The Company
established a contingency plan for addressing this situation, should it
arise, into its asset and liability management policies. The plan includes
maintaining the ability to borrow funds from correspondent banks and the
Federal Home Loan Bank of Seattle. Significant demand for funds from other
banks could reduce the amount of funds available for the Bank to borrow. If
insufficient funds are available from these sources, the Bank may also sell
investment securities or other liquid assets to meet liquidity needs.

The Bank lends significant amounts to businesses in its marketing area. If
these businesses are adversely affected by year 2000 problems, their ability to
repay loans could be impaired. This increased credit risk could adversely
affect the Bank's financial performance. During the assessment phase of the
Company's Year 2000 program, each of the Bank's substantial borrowers were
identified, and the Bank is working with such borrowers to ascertain their
levels of exposure to year 2000 problems. To the extent that the Bank is unable
to assure itself of the year 2000 readiness of such borrowers, it intends to
apply additional risk assessment criteria to the indebtedness of such borrowers
and make any necessary related adjustments to the Bank's provision for loan
losses.

The Company's and the Bank's operations, like those of many other
companies, can be adversely affected by the year 2000 triggered failures of
other companies upon whom the Company and the Bank depend for the functioning of
their automated systems. Accordingly, the Company's and the Bank's operations
could be materially affected, if the operations of mission-critical third party
service providers are adversely affected. As described above, the Company has
identified its mission-critical vendors and is monitoring their year 2000
compliance programs.

THE COMPANY'S CONTINGENCY PLANS

The Company has not yet developed any specific contingency plans related to
year 2000 issues, other than those described above. As the Company and the Bank
continue the testing phase, and based on future ongoing assessment of the
readiness of vendors, service providers and substantial borrowers, the Company
will develop appropriate contingency plans. Certain circumstances, as described
above in "Risks", may occur for which there are no completely satisfactory
contingency plans.

FORWARD LOOKING STATEMENTS

The discussion above regarding the Company's Year 2000 issues includes
certain "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "PLSRA"). The Company desires to
take advantage of the "safe harbor" provisions of the PLSRA as they apply to
forward looking statements. The Company's ability to predict the results of
future plans is inherently uncertain, and is subject to factors that may cause
actual results to differ materially from those projected. Factors that could
affect the actual results include the possibility that systems modifications
will not operate as intended, unexpected costs

31
<PAGE>

associated with compliance programs, and the uncertainty associated with the
impact of the century change on the Bank's customers, vendors, third party
providers, and on the economy generally.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>

NAME AGE POSITION(S) HELD
---- --- ----------------
<S> <C> <C>
Roy T. Brooks 57 Chairman and CEO

Susan K. Bowen-Hahto 50 Director

Brian W. Gallagher 49 Director

Terry L. Garrison 54 Director

Michael K. Jones 56 Director

Barry C. Kombol 47 Director

John W. Raeder 61 Director

Garrett S. Van Beek 63 Director

Hans Rudy Zurcher 61 Director

Steve W. Moergeli 44 Director and
President/CEO of
the Bank

Sheila M. Brumley 43 Secretary and CFO
of the Company and
Senior Vice
President and
Cashier of the
Bank

</TABLE>

All directors have served since the incorporation of the Company in 1993
and have also served as members of the Board of Directors of the Bank since the
Bank commenced operations in 1990, with the exception of Mr. Moergeli who has
served since March 1997. No director of the Company is a director or executive
officer of another bank holding company, bank, savings and loan association, or
credit union.

Pursuant to the Company's Articles of Incorporation, the board of directors
is divided into three classes of directors, serving staggered terms. The terms
of Messrs. Gallagher, Garrison and Jones expire in 1999; the terms of Messrs.
Brooks and Moergeli and Ms. Bowen-Hahto expire in 2000; and the terms of Messrs.
Kombol, Raeder, Van Beek and Zurcher expire at the date of the annual
shareholder meeting in 2001.

ROY T. BROOKS is Chairman and President of the Company and Chairman of the
Bank. Mr. Brooks is also Chief Executive Officer of Westmark Electronics, a
manufacturer's representative and consulting firm. Mr. Brooks has held
progressively more responsible management positions in the electronics industry
during his 32 years of experience in the industry.

SUSAN K. BOWEN-HAHTO is a lifetime resident of the Buckley/Enumclaw area
and has been active in the community. Ms. Bowen-Hahto is a member of the
Enumclaw Chamber of Commerce. She is also active in the

32
<PAGE>

White River Wrestling Club serving as Treasurer. Ms. Bowen-Hahto is a member
of the Wabash Presbyterian Church.

BRIAN W. GALLAGHER is President and owner of Northern Transport, Inc., a
logging company as well as a transportation company for logs, pilings and
poles. He has been in business in the Enumclaw area for over 20 years. Mr.
Gallagher is also active in the PTA of the White River School District and is
a board member of the Northwest Junior Livestock Show.

TERRY L. GARRISON is owner of Garrison and Associates, a medical supply
company, which distributes orthopedic devices to doctors and hospitals in
Washington, Oregon, Idaho and Alaska.

MICHAEL K. JONES, SR. is a licensed Certified Public Accountant and
operates his business under the name of Jones & Associates, Certified Public
Accountants. He has many clients on the Enumclaw Plateau. Mr. Jones is also
owner of U7 Racing, Inc., a marine business. Mr. Jones has been active in three
professional accounting associations and four boating associations where he has
held numerous positions. Mr. Jones and his family live on the Plateau.

BARRY C. KOMBOL is an attorney in private practice. Mr. Kombol has been a
member of the Washington State Bar Association since 1978. He serves as general
counsel for Palmer Coking Coal Co. and Pacific Coal Company in Black Diamond.
He is secretary/treasurer of Pacific Coast Coal Company, a company he helped
found in 1982. Mr. Kombol also has served as Judge Pro-Tem/Magistrate at
Enumclaw Municipal and Aukeen District Courts in King County. He is past
president and a current member of the Enumclaw Lions Club; founder of the Black
Diamond Community Center; a coach in the Cascade Foothills Soccer League
(1992-1998); a member of King County's "Enumclaw Community Planning Committee"
(1987-88); was a member of the Sacred Heart Parish in Enumclaw from 1978-1997
and has been a member of St. Barbara's Parish since 1998.

JOHN W. RAEDER has been Chairman of the Board of Universal Refrigeration,
Inc., a heating, ventilating, refrigeration and air conditioning business, since
March, 1987. Prior to that time, he had been with Jack Frost Company, a similar
business, for 16 years. Mr. Raeder is the Board Chairman and CEO of the Auburn
Chamber of Commerce. Active in youth activities while his children were young,
he was baseball coach and basketball coach for Little League, and Committee
Chairman and Cub Scout Pack Leader with the Boy Scouts of America. Mr. Raeder
is also a member of Air Conditioning Contractors of America. Mr. Raeder is an
active member of Calvary Presbyterian Church, serving as Elder, and chaired the
Economic Development Advisory Panel for the City of Enumclaw in 1997.

GARRETT S. VAN BEEK is a dairyman, operating a 120 acre farm. He and
his wife moved to the Enumclaw area and began farming over 35 years ago. Mr.
Van Beek has been a director of the King County Farm Bureau, director of the
Pierce County Farm Bureau and director of the Farm Bureau of Washington
State. He also served as a director for the Federal Land Bank of Puyallup
from 1977 until 1985. He served on the Loan Committee and the Building
Committee. Over the years, he has been involved in youth activities such as
Future Farmers of America. Active in Calvary Presbyterian Church, Garrett
has served as Sunday school teacher, youth leader and Elder. In addition, he
has participated on the Stewardship Committee and Outreach Committee. Mr.
Van Beek is a past member of the Governor's counsel for agriculture and
environment.

HANS RUDOLF ZURCHER, a dairy farmer since 1957, presently operates (in
partnership with his son) a 208 acre dairy farm in Eastern Washington.
Mr. Zurcher served as President and Board member for the King County Dairy Herd
Improvement Association (D.H.I.A.). He was on the Board of the King-Pierce
County Dairy Federation, a political action group, from 1983 to 1989 and served
as President from 1986 to 1989. In addition, Mr. Zurcher has served on the
Advisory Committee for the Washington State University Dairy Short Course. He
is an alumni member of the Enumclaw Future Farmers of America Club, and he and
his wife have been active in

33
<PAGE>

4-H along with their children. From 1992 to 1997 he has served on various
committees at the Washington State Dairy Products Commission.

STEVE W. MOERGELI is the President and Chief Executive Officer of the
Bank. Mr. Moergeli began his banking career in Enumclaw in 1978 with Cascade
Security Bank and served as Vice President and manager of Key Bank before
joining the Bank in May 1991 as its Senior Loan Officer. Mr. Moergeli is
past President of the Enumclaw Area Chamber of Commerce, past President of
the Enumclaw Lions Club and today, serves as Chairman of the Enumclaw City
Board of Adjustments.

SHEILA M. BRUMLEY is the Senior Vice President and Cashier of the Bank and
the Secretary and Chief Financial Officer of the Company. She also holds the
position of Corporate Secretary of both entities. Ms. Brumley started her
banking career with Security Pacific National Bank in 1973. She served as Vice
President and Cashier with Puyallup Valley Bank prior to joining the Bank in
September of 1990.

REMUNERATION OF OFFICERS AND DIRECTORS

The Company has no paid employees. The following table sets forth
compensation paid by the Bank to its top three executive officers during the
fiscal year 1997. Directors of the Company do not receive retainers, fees for
meetings attended, or other cash compensation. Non-Employee Directors of the
Bank (other than the Chairman) receive annual compensation of $7,200 and $75 for
each committee meeting attended.
<TABLE>
<CAPTION>

NAME OF INDIVIDUAL CAPACITIES IN WHICH
OR IDENTITY OF GROUP REMUNERATION WAS RECEIVED AGGREGATE REMUNERATION
-------------------- ------------------------- ----------------------
<S> <C> <C>

Roy T. Brooks Chairman and CEO of the $46,700
Company; Chairman of the
Bank

Steve W. Moergeli President and CEO of the
Bank $72,925

Sheila M. Brumley Chief Financial Officer
of the Company; Senior $70,633
Vice President and
Cashier of the Bank

All Executive Officers
as a group (3 persons) $190,258

</TABLE>

STOCK OPTION PLANS

DIRECTOR STOCK OPTION PLAN. At the first Annual Meeting of Shareholders of
the Bank, the shareholders approved the 1990 Director Stock Option Plan (the
"Director Plan"). The Director Plan has been assumed and adopted by the
Company. Under the terms of the Director Plan, an outside director is granted
an option to purchase 6,000 Shares upon his or her initial election to the Board
of Directors at an exercise price equal to the fair market value of such Shares
on the date of the grant. The options are exercisable on a cumulative basis in
annual installments of 33% each on the third, fourth and fifth anniversary of
the date of grant. The service as a director must be continuous for such
vesting to occur.

A total of 60,000 Shares may be issued under the Director Plan. Options to
purchase 54,000 Shares at $5.00 per Share were issued on June 13, 1990, and
expire on June 13, 2005. All such options are presently exercised or
exercisable. No option can be exercised after the expiration of fifteen (15)
years from the date of grant. Shares subject to stock options held by the
directors of the Company are described in "Security Ownership of Management and
Certain Shareholders."

34
<PAGE>

EMPLOYEE STOCK OPTION PLAN. At the first Annual Meeting of the
Shareholders of the Bank, the shareholders approved the 1990 Employee Stock
Option Plan (the "Employee Plan"). The Employee Plan has been assumed and
adopted by the Company. Under the terms of the Employee Plan, both incentive
and non-qualified options may be granted to key employees of the Bank. The
exercise price of the options may not be less than 100% of the fair market value
of the Shares on the date in which the option is granted. In general, an
incentive stock option may be exercised during a period of not more than 10
years from the date of the grant, although a shorter period may be specified,
and in such amounts as the Board may determine. A non-qualified stock option
may be exercised during the period specified by the Board. The Board has the
authority to thereafter accelerate the period within which any option may be
exercised.

A total of 60,000 Shares may be issued under the Employee Plan. At June
30, 1998, there were outstanding options to purchase 53,332 Shares and 6,668
Shares remain available under the Employee Plan for future growth.

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS

The following table sets forth certain information including the beneficial
ownership of Shares as of August 31, 1998, with respect to (i) each of the three
highest paid persons who are officers or directors of the Company or the Bank;
(ii) the directors of the Company; and (iii) all officers and directors as a
group. The Company is not aware of any person who at August 31, 1998,
beneficially owned more than 5% of its outstanding Shares.

<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME AND ADDRESS OF OWNERSHIP(1) OWNERSHIP
<S> <C> <C>
Roy T. Brooks, Chairman and CEO 27,892 (2) 3.44%
38908 254th SE, Enumclaw, WA 98022

Michael K. Jones, Director 26,020 (3) 3.20%
325 N. Central, Kent, WA 98032

Brian W. Gallagher, Director 24,973 (4) 3.07%
15727 Tubbs Road, Buckley, WA 98321

Terry L. Garrison, Director 13,345 (5) 1.64%
40421 268th SE, Enumclaw, WA 98022

Barry C. Kombol, Director 13,300 (6) 1.64%
30411 234th SE, Maple Valley, WA 98038

Garrett S. Van Beek, Director 21,086 (7) 2.59%
23423 SE 464th, Enumclaw, WA 98022

John W. Raeder, Director 18,928 (8) 2.33%
14142 SE 238th Lane, Kent, WA 98042

Susan K. Bowen-Hahto, Director 15,000 (9) 1.84%
22728 Entwhistle Road, Buckley, WA 98321

35
<PAGE>

<CAPTION>
AMOUNT AND NATURE PERCENT
NAME AND ADDRESS OF OWNERSHIP(1) OWNERSHIP
<S> <C> <C>
Hans Rudy Zurcher, Director 22,914 (10) 2.82%
39102 236th SE, Enumclaw, WA 98022

Steve W. Moergeli, Bank President 11,782 (11) 1.45%
and CEO, & Director 39703 - 253rd
SE, Enumclaw, WA 98022

Sheila M. Brumley, Bank SVP & 8,484 (12) 1.04%
Company CFO
5706 - 114th Avenue Ct E, Puyallup,
WA 98372

All officers and directors as a 203,724 (14) 23.32%
group (11 persons) (13)

</TABLE>

(1) Shares held directly with sole voting power unless otherwise indicated.

(2) Includes 3,300 Shares held jointly with Mr. Brooks' spouse and 4,000 Shares
subject to stock options exercisable within 60 days.

(3) Includes 4,400 Shares held by Mr. Jones' spouse, 2,260 Shares held in
trusts for the benefit of Mr. Jones' children, 160 Shares held by Mr.
Jones' minor child, and 6,000 Shares subject to stock options exercisable
within 60 days.

(4) Includes 1,000 Shares held jointly with Mr. Gallagher's spouse, 3,630
Shares held for the benefit of Mr. Gallagher's children, 2,492 held by Mr.
Gallagher's minor children, and 6,000 Shares subject to stock options
exercisable within 60 days.

(5) Includes 345 Shares held in a trust for the benefit of Mr. Garrison's
children and 6,000 Shares subject to stock options exercisable within 60
days.

(6) Includes 6,000 Shares subject to stock options exercisable within 60 days.

(7) Includes 2,743 Shares held by Mr. Van Beek's spouse, 4,343 Shares held
jointly with his spouse, and 6,000 Shares subject to stock options
exercisable within 60 days.

(8) Includes 6,000 Shares subject to stock options exercisable within 60 days.

(9) Includes 1,000 Shares held jointly with Ms. Bowen-Hahto's spouse, 1,200
held in trusts for the benefit of her children, and 6,000 Shares subject to
stock options exercisable within 60 days.

(10) Includes 6,000 Shares subject to stock options exercisable within 60 days.

(11) Includes 7,000 Shares subject to stock options exercisable within 60 days.

(12) Includes 920 Shares held in trust for the benefit of Ms. Brumley's children
or jointly with her children and 7,000 Shares subject to stock options
exercisable within 60 days.

(13) As noted in "Terms of the Offering -- Purchase Intentions of Directors and
Executive Officers," the directors and executive officers have indicated
they intend to acquire in the aggregate approximately 7,793 Allocated
Shares in the offering, and may also purchase Additional Shares.

(14) Includes 66,000 Shares subject to stock options exercisable within 60
days.

<PAGE>

OPTIONS, WARRANTS AND RIGHTS

The Shares included in the table above as "exercisable within 60 days" are
all exercisable at $5.00 per Share, except (i) 1,000 Shares under options held
by Mr. Moergeli that are exercisable at $6.25 per share, and (ii) 1,000 Shares
under options held by Ms. Brumley that are exercisable at $6.25 per share.

In addition to the Shares subject to options included in the table above,
Mr. Moergeli and Mr. Brooks have been granted options to purchase 7,500 Shares
and 5,000 Shares, respectively, at $12.50 per Share. All such options vest as
to one-third of the total amount granted on August 1, 2000, August 1, 2001, and
August 1, 2002. Ms. Brumley has been granted options to purchase 1,500 shares
at $13.00 per share. Such options vest as to one-third of the total amount
granted on June 3, 2001; June 3, 2002; and June 3, 2003.

CERTAIN TRANSACTIONS AND RELATIONSHIPS

The Bank had, and expects to have in the future, banking transactions in
the ordinary course of its business with certain of the directors and officers
of the Company and the Bank, and members of their immediate families and firms
and corporations with which they are associated including borrowing and
investing in certificates of deposit. All such loans and investments have been
made on substantially the same terms, including interest rates paid or charged
and collateral required, as those prevailing at the same time for comparable
transactions with unaffiliated persons, and do not involve more than the normal
risk of collectability or present other unfavorable features.

At December 31, 1997 and December 31, 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 approximately $2.18 million and
$1.55 million, respectively. During 1997, $1.65 million of new loans and
advances were made and repayments totaled $1.03 million. At June 30, 1998,
loans to directors and officers totaled approximately $2.3 million. All such
loans are currently in good standing and are being paid in accordance with their
terms, except as discussed below.

In February 1997 two loans to businesses affiliated with director Terry L.
Garrison were identified by the Bank as having potential weaknesses, because one
of Mr. Garrison's businesses has ceased operations and the Bank lacks current
financial information regarding Mr. Garrison's businesses. The two loans
consist of a $100,000 line of credit with an outstanding balance of
approximately $70,700, and a term loan with an outstanding balance of $132,500.
Both loans are being paid in accordance with their terms, and the Bank believes
are adequately secured by pledged real estate. The line of credit has recently
matured and the Bank and Mr. Garrison are exploring alternatives, including the
possible renewal of the line of credit. The Bank is continuing to monitor the
status of the term loan closely.

As a result of several overdrafts to directors and/or their related
interests during 1996 and 1997, the Bank has completely rewritten its insider
overdraft policy and instituted new procedures as of April 1997 to ensure that
all insider accounts are properly handled. The Bank has suffered no losses in
connection with such overdrafts.

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. Changes in applicable laws or
regulations may have a material effect on the business and prospects of the
Company. The operations of the Company may also be affected by changes in the
policies of banking and other government regulators. The Company cannot
accurately

37
<PAGE>

predict the nature or extent of the effects on its business and earnings that
fiscal or monetary policies, or new federal or state laws, may have in the
future.

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. In general, the
BHCA limits the business of bank holding companies to owning or controlling
banks and engaging in other activities related to banking. The Company must file
annual reports with the Federal Reserve and must provide it with such additional
information as it may require. In addition, the Federal Reserve periodically
examines the Company and its subsidiary Bank.

FEDERAL BANK HOLDING COMPANY REGULATION

HOLDING COMPANY BANK OWNERSHIP. The Company must obtain the approval of
the Federal Reserve 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.

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 Federal Reserve finds the company's business activities to be
incidental to the business of banking or managing or controlling banks. When
making this determination, the Federal Reserve 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 Federal Reserve 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 Federal
Reserve within 10 business days after the activity has begun. In addition,
Federal Reserve regulations provide that a well-run bank holding company,
without any prior notice or Federal Reserve approval, may commence immediately
any activity that is currently or at the time of commencement included in the
Federal Reserve's list of acceptable nonbanking activities.

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

38
<PAGE>

certain exceptions, neither the Company nor the Bank may condition an extension
of credit on either (1) a requirement that the customer obtain additional
services provided by it or (2) an agreement by the customer to refrain from
obtaining other services from a competitor. The Federal Reserve has recently
adopted significant amendments to its anti-tying rules that: (1) remove Federal
Reserve-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.

CONTROL OF FINANCIAL INSTITUTIONS

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 or a bank to provide the Federal Reserve with at least 60 days' advance
written notice of the proposed acquisition. Following receipt of this notice,
the Federal Reserve has 60 days to issue a notice disapproving the proposed
acquisition, but the Federal Reserve 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 Federal Reserve issues written notice of its
intent not to disapprove the transaction.

In addition, any "company" must obtain the Federal Reserve's approval under
the BHCA before acquiring 25% (5% if the company is a bank holding company) or
more of the outstanding shares of the Company, or otherwise obtaining control
over the Company.

THE BANK

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
Federal Reserve and, to a more limited extent, by the Federal Deposit Insurance
Corporation ("FDIC"). Federal statutes and regulations which govern the Bank's
operations relate to required reserves against deposits, investments, loans,
mergers and consolidations, borrowings, issuance of securities, payment of
dividends, establishment of branches, and other aspects of its operations. The
National Bank Act restricts the Bank to performing commercial banking business
and engaging in activities incidental to the business of banking and prohibits
the Bank from investing in equity securities, except in its fiduciary capacity.
The OCC also may prohibit a national bank from engaging in activities it
considers unsafe and unsound business practices.

REGULATION OF MANAGEMENT

Federal law: (1) sets forth circumstances under which officers or directors
of a bank may be removed by the institution's federal supervisory agency, (2)
places restraints on lending by a bank to its executive officers, directors,
principal shareholders, and their related interests, and (3) prohibits
management personnel of a bank from serving as a director or in other management
positions of another financial institution whose assets exceed a specified
amount or which has an office within a specified geographic area.

FDIC INSURANCE

The deposits of the Bank are currently insured to a maximum of
$100,000 per depositor through the Bank Insurance Fund ("BIF") administered by
the FDIC. The Bank is required to pay semiannual deposit insurance premium
assessments to the FDIC.

39
<PAGE>

The FDICIA included provisions to reform the Federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources or for any other purpose the FDIC deems necessary.
The FDIC has implemented a risk-based insurance premium system under which banks
are assessed insurance premiums based on much risk they present to BIF. Banks
with higher levels of capital and a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or a higher
degree of supervisory concern.

INTERSTATE BANK AND BRANCHING

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Act") generally permits nationwide interstate banking and
branching. This legislation authorizes interstate branching and relaxes federal
law restrictions on interstate banking. Subject to certain state laws, such as
age and contingency laws, the Interstate Act allows adequately capitalized and
adequately managed bank holding companies to purchase the assets of out-of-state
banks. Additionally, the Interstate Act permits interstate bank mergers,
subject to these state aging laws, unless the home state of either merging bank
has "opted-out" of these provisions by enacting "opt-out" legislation. Under
the Interstate Act, states may also "opt-in" to de novo branching, allowing
out-of-state banks to establish de novo branches within the state.

In 1996, Washington enacted "opting in" legislation authorizing interstate
mergers pursuant to the Interstate Act. In general, an out-of-state bank
holding company may 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.

FDICIA

Under the Federal Deposit Insurance Corporation Improvement Act (the
"FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution which fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions.
Management believes that the Bank meets all such standards, and therefore does
not believe that these regulatory standards materially affect the Company's
business operations.

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. Federal Reserve policy further limits the circumstances under which
bank holding companies may declare dividends. For example, a bank holding
company should not continue its existing rate of cash dividends on its common
stock unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital
needs, asset qualify, and overall financial condition.

If, in the opinion of the applicable federal banking agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
institution, could include the payment of dividends), the agency may require,
after notice and hearing, that the

40
<PAGE>

institution cease and desist from that practice. In addition, the Federal
Reserve and the FDIC have issued policy statements which provide that insured
banks and bank holding companies should generally pay dividends only out of
current operating earnings.

Under the National Bank Act, national banks may only pay dividends without
advance approval of the OCC, if the total of all dividends declared by the
national bank in any calendar year will exceed the sum of its net profits (as
defined) for that year plus its retained profits for the preceding two calendar
years, less any required transfers to surplus. The National Bank Act also
prohibits national banks from paying dividends that would be in an amount
greater than net profits then on hand (as defined) after deducting losses and
bad debts (as defined).

CAPITAL REQUIREMENTS

CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve, the FDIC, and the OCC
(collectively, the "Agencies") have adopted risk-based capital guidelines for
banks and bank holding companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios in excess
of the minimums. Failure to achieve and maintain adequate capital levels may
give rise to supervisory action through the issuance of a capital directive to
ensure the maintenance of required capital levels.

The current guidelines require all federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, but excludes goodwill and most other intangibles and
the allowance for loan and lease losses. Tier 2 capital includes the excess of
any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate
term-preferred stock, and general reserves for loan and lease losses up to 1.25%
of risk-weighted assets. The Bank has not received any notice indicating that
it will be subject to higher capital requirements.

Under these guidelines, banks' assets are given risk-weights of 0%, 20%,
50% or 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for first mortgage loans fully secured by residential property and, under
certain circumstances, residential construction loans (both carry a 50% rating).
Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds (which have a 50% rating) and direct
obligations of or obligations guaranteed by the United States Treasury or United
States Government Agencies (which have a 0% rating).

The Agencies have also implemented a leverage ratio, which is equal to Tier
1 capital as a percentage of average total assets less intangibles, to be used
as a supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to place a constraint on the maximum degree to which a bank
may leverage its equity capital base. The minimum required leverage ratio for
top-rated institutions is 3%, but most institutions are required to maintain an
additional cushion of at least 100 to 200 basis points. Any institution
operating at or near the 3% level is expected to have well-diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity and good earnings, and in general, to be a strong banking organization
without any supervisory, financial or operational weaknesses or deficiencies.
Any institutions experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.

41
<PAGE>

Regulations adopted by the Agencies as required by FDICIA impose even more
stringent capital requirements. The regulators require the OCC and other Federal
Banking Agencies to take certain "prompt corrective action" when a bank fails to
meet certain capital requirements. The regulations establish and define five
capital levels: (1) "well-capitalized," (2) "adequately capitalized," (3)
"undercapitalized," (4) "significantly undercapitalized" and (5) "critically
undercapitalized." To qualify as "well-capitalized," an institution must
maintain at least 10% total risk-based capital, 6% Tier 1 risk-based capital,
and a leverage ratio of no less than 5%. Increasingly severe restrictions are
imposed on the payment of dividends and management fees, asset growth and other
aspects of the operations of institutions that fall below the category of being
"adequately capitalized" (which requires at least 8% total risk-based capital,
4% Tier 1 risk-based capital, and a leverage ratio of at least 4%).
Undercapitalized institutions are required to develop and implement capital
plans acceptable to the appropriate federal regulatory agency. Such plans must
require that any company that controls the undercapitalized institution must
provide certain guarantees that the institution will comply with the plan until
it is adequately capitalized. As of June 30, 1998, 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.

EFFECTS OF GOVERNMENT MONETARY POLICY

The earnings and growth of the Company are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and
combating recession, but its open market operations in U.S. government
securities, control of the discount rate applicable to borrowings from the
Federal Reserve, and establishment of reserve requirements against certain
deposits, influence the growth of bank loans, investments and deposits, and also
affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies and their impact on the Company
cannot be predicted with certainty.

CHANGES IN BANKING LAWS AND REGULATIONS

The laws and regulations that affect banks and bank holding companies are
currently undergoing significant changes. Bills are now pending or expected to
be introduced in the United States Congress that contain proposals to alter the
structure, regulation, and competitive relationships of the nation's financial
institutions. If enacted into law, these bills could have the effect of
increasing or decreasing the cost of doing business, limiting or expanding
permissible activities (including activities in the insurance and securities
fields), or affecting the competitive balance among banks, savings associations,
and other financial institutions. Some of these bills would reduce the extent
of federal deposit insurance, broaden the powers or the geographical range of
operations of bank holding companies, alter the extent to which banks could
engage in securities activities, and change the structure and jurisdiction of
various financial institution regulatory agencies. Whether or in what form such
legislation may be adopted, or the extent to which the business of the Company
or the Bank might be affected thereby, cannot be predicted with certainty.

DESCRIPTION OF COMMON STOCK

GENERAL

The Company's Articles of Incorporation authorize the Company to issue up
to 5,000,000 Shares of common stock, at a par value of $1.00 per Share, of which
807,482 Shares are outstanding at June 30, 1998. Assuming the sale of 100,000
Shares in the Offering, the Company will have 907,482 Shares outstanding. All
outstanding Shares are fully paid and nonassessable. The Shares do not
represent or constitute deposit accounts and are not insured by the FDIC.

42
<PAGE>

All Shares will be entitled to share equally in dividends from funds
legally available therefor, when, as, and if declared by the board of directors,
and upon liquidation or dissolution of the Company, whether voluntary or
involuntary, to share equally in all assets of the Company available for
distribution to the common stock shareholders. It is not anticipated that the
Company will pay any dividends on the Shares in the foreseeable future. See
"DIVIDEND POLICY." Each holder of Shares is entitled to one vote for each Share
on all matters submitted to the shareholders. There is no cumulative voting,
and there are no pre-emptive rights, redemption rights, sinking fund provisions,
or rights of conversion in existence with respect to the Shares.

Shareholders' rights and related matters are governed by the Washington
Business Corporation Act (the "WBCA"), the Company's Articles of Incorporation
and its Bylaws. The Company's Articles of Incorporation may not be amended
without the affirmative vote of at least a majority of the Shares entitled to
vote generally in the election of directors, voting as a single group, as
provided by the WBCA. Article X of the Company's Articles of Incorporation,
which deals with the number of directors, the staggering of the terms of office
of the directors, the filling of vacancies on the board of directors, and the
removal of directors, may not be altered or repealed without the affirmative
vote of at least 80% of the Company's outstanding common stock. The Company's
Bylaws may be amended by either the board of directors or by the affirmative
vote of a majority of the Company's outstanding Shares. Any Bylaw amendment
adopted by the board of directors may be repealed, amended or reinstated by a
majority vote of the outstanding Shares, at the next meeting of shareholders
following the board's amendment.

STAGGERED BOARD OF DIRECTORS

The Company's board of directors is divided into three classes of directors
serving staggered terms. The Company's Articles of Incorporation, including the
use of a staggered board, may render more difficult a change in control of the
Company or removal of incumbent management.

STATE ANTI-TAKEOVER PROVISIONS

Certain provisions of the Washington Business Corporation Act ("WBCA"),
summarized below, may be considered to have an anti-takeover effect and may
delay, deter, or prevent a tender offer, proxy contest or other takeover attempt
that a stockholder might consider to be in such stockholder's best interest,
including such an attempt as might result in payment of a premium over the
market price for shares held by stockholders.

As a Washington corporation, the Company is subject to the provisions of
the WBCA, including Section 23B.19. In general, Section 23B.19 prohibits a
Washington corporation from engaging in a "significant business transaction" for
a period of five years after the acquisition of ten percent or more of the
corporation's outstanding stock by a third party (an "acquiring person"), unless
the significant business transaction or the acquisition of the threshold number
of shares by the acquiring person is approved, prior to the acquisition of the
shares, by a majority of the directors of the corporation. "Significant
business transactions" are defined to include, among other things, (i) merger of
the target corporation or any subsidiary thereof with the acquiring person or
any affiliate; (ii) sale, lease, mortgage, or other disposition or encumbrance,
to or with the acquiring person or affiliate, of five percent or more of the
target corporation's assets; (iii) termination of five percent or more of the
employees of the target corporation or its subsidiaries employed in Washington;
(iv) issuance, transfer or redemption by the target corporation or any
subsidiary, of shares, or of options, warrants, or rights to acquire shares of
the target corporation or any subsidiary, to or beneficially owned by an
acquiring person, unless on the same terms as are offered to all other target
corporation shareholders; and (v) the liquidation or dissolution of the target
corporation proposed by, or pursuant to an agreement or understanding with, an
acquiring person or affiliate.

43
<PAGE>

INDEMNIFICATION

The Company's Bylaws contain provisions for the indemnification of officers
and directors of the Company in connection with certain types of legal liability
incurred by such individuals because of actions or omissions in their capacities
as officers or directors. Such provisions do not allow indemnification,
however, in connection with a proceeding by or in the right of the Company in
which the officer or director is adjudged liable to the Company, or any other
proceeding charging improper personal benefit to the individual, whether or not
involving action in such person's official capacity, in which such person is
adjudged liable on the basis that personal benefit was improperly received. The
Company also maintains a Directors and Officers' Liability Insurance Policy.

INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers or
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.

EXPERTS

The financial statements included in this Prospectus, to the extent and for
the periods indicated in their reports, have been audited by Knight, Vale &
Gregory, Inc., P.S. independent certified public accountants, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.

LEGAL MATTERS

The validity of the Shares offered by the Company will be passed upon for
the Company by Graham & Dunn, PC, Seattle/Tacoma, Washington, 1420 Fifth Avenue,
33rd Floor, Seattle, Washington 98101-2390.

44
<PAGE>

INDEX TO FINANCIAL STATEMENTS

AS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND FOR THE FISCAL YEARS
ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
<S> <C>
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . F-1

Consolidated Balance Sheets at June 30, 1998 (Unaudited),
and at December 31, 1997 . . . . . . . . . . . . . . . . . . . . F-2

Consolidated Statements of Income for the six
months ended June 30, 1998 and 1997
(Unaudited), and for the years ended December 31, 1997
and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Shareholders' Equity for
the six months ended June 30, 1998
(Unaudited), and for the years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Cash Flows for the
six months ended June 30, 1998, and 1997
(Unaudited), and for the years ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . F-5

Notes to Consolidated Financial Statements. . . . . . . . . . . . F-7

</TABLE>

45
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARIES
Enumclaw, Washington

We have audited the accompanying consolidated balance sheet of MOUNTAIN BANK
HOLDING COMPANY AND SUBSIDIARIES as of December 31, 1997, and the related
consolidated statements of income and comprehensive income, shareholders'
equity and cash flows for the years ended December 31, 1997 and 1996. 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 the
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, in conformity with generally accepted accounting
principles.

/s/ Knight, Vale & Gregory, Inc., P.S.

KNIGHT, VALE & GREGORY, INC., P.S.

Tacoma, Washington
January 20, 1998

F-1

<PAGE>

CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(Dollars in Thousands)

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,579 $ 2,827
Federal funds sold and interest bearing deposits in banks 4,105 2,448
Securities available for sale 24,620 22,962
Loans held for sale 463 332

Loans 43,324 42,577
Allowance for credit losses 628 555
NET LOANS 42,696 42,022

Premises and equipment 2,643 2,483
Accrued interest receivable 556 550
Other assets 398 241

TOTAL ASSETS $79,060 $73,865

LIABILITIES
Deposits:
Demand $ 9,632 $ 8,991
Savings and interest-bearing demand 35,179 31,643
Time 25,711 25,387
TOTAL DEPOSITS 70,522 66,021

Accrued interest payable 278 240
Note payable 44 45
Other borrowed money 400 - -
Other liabilities 302 408

TOTAL LIABILITIES 71,546 66,714

SHAREHOLDERS' EQUITY
Common stock (par value $1); authorized 5,000,000 shares;
issued and outstanding: 1998 - 807,482; 1997 - 803,374 shares 807 803
Paid-in capital 5,105 5,058
Retained earnings 1,541 1,227
Accumulated other comprehensive income 61 63
TOTAL SHAREHOLDERS' EQUITY 7,514 7,151

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $79,060 $73,865
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-2

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)

Mountain Bank Holding Company and Subsidiaries
Six Months Ended June 30, 1998 and 1997, and
Years Ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1997 1996
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $2,164 $1,944 $4,074 $3,462
Federal funds sold and deposits in banks 134 87 147 123
Securities available for sale 699 555 1,243 661
TOTAL INTEREST INCOME 2,997 2,586 5,464 4,246

INTEREST EXPENSE
Deposits 1,236 1,044 2,181 1,725
Note payable and other borrowings 2 2 5 5
TOTAL INTEREST EXPENSE 1,238 1,046 2,186 1,730

NET INTEREST INCOME 1,759 1,540 3,278 2,516

PROVISION FOR CREDIT LOSSES 78 100 179 67

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,681 1,440 3,099 2,449

NON-INTEREST INCOME
Service charges on deposit accounts 190 178 357 360
Origination fees and gains on mortgage loans sold 150 97 228 234
Gain (loss) on sale of securities available for sale 13 (12) (12) (11)
Other 84 65 124 109
TOTAL NON-INTEREST INCOME 437 328 697 692

NON-INTEREST EXPENSES
Salaries and employee benefits 803 709 1,437 1,324
Occupancy and equipment 233 221 431 438
Other 614 501 981 949
TOTAL NON-INTEREST EXPENSES 1,650 1,431 2,849 2,711

INCOME BEFORE INCOME TAXES 468 337 947 430

INCOME TAXES 154 112 350 138

NET INCOME 314 225 597 292

OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized holding gains (losses) arising on
securities available for sale during period (2) (5) 88 (33)

COMPREHENSIVE INCOME $ 312 $ 220 $ 685 $ 259

EARNINGS PER SHARE DATA
Basic earnings per share $.39 $.32 $.84 $.43
Diluted earnings per share .37 .30 .79 .40
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-3

<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
(Dollars in Thousands)

Mountain Bank Holding Company and Subsidiaries
Six Months Ended June 30, 1998 and
Years Ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME 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

Net income (unaudited) - - - - 314 - - 314

Sale of common stock under employee
stock purchase plan (1,186 shares)
(unaudited) 1 13 - - - - 14

Sale of common stock (unaudited) 3 34 - - - - 37

Valuation adjustments, net of tax
(unaudited) - - - - - - (2) (2)

BALANCE AT JUNE 30, 1998
(UNAUDITED) $807 $5,105 $1,541 $61 $7,514
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(Dollars in Thousands)

Mountain Bank Holding Company and Subsidiaries
Six Months Ended June 30, 1998 and 1997, and
Years Ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1997 1996
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 314 $ 225 $ 597 $ 292
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 78 100 179 67
Depreciation and amortization 141 135 322 282
Deferred Federal income taxes - - - - - - (18)
(Gain) loss on sales of securities available for sale (13) 12 12 11
Gain on loans sold (150) (97) (82) (86)
Originations of loans held for sale (6,916) (3,974) (9,848) (10,796)
Proceeds from sales of loans 6,935 3,919 9,598 11,212
Increase in accrued interest receivable (6) (116) (177) (86)
Increase (decrease) in accrued interest payable 38 (15) 14 81
Other - net (246) (134) 2 60
NET CASH PROVIDED BY OPERATING ACTIVITIES 175 55 617 1,019

CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in Federal funds sold and
interest bearing deposits in banks (1,657) 4,000 5,102 (4,725)
Purchase of securities available for sale (8,161) (11,475) (19,436) (11,894)
Proceeds from sales of securities available for sale 6,497 5,502 9,651 6,449
Proceeds from maturities of securities available for sale - - - - 436 72
Increase in loans made to customers,
net of principal collections (752) (1,313) (5,049) (6,635)
Additions to premises and equipment (301) (30) (548) (110)
NET CASH USED IN INVESTING ACTIVITIES (4,374) (3,316) (9,844) (16,843)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and
interest-bearing demand deposits 4,177 168 2,447 11,801
Net increase in time deposits 324 645 4,770 3,322
Net proceeds from issuance of stock 51 19 1,187 7
Increase in other borrowings 400 1,800 - - - -
Repayment of note payable (1) - - (1) (1)
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,951 2,632 8,403 15,129

NET CHANGE IN CASH AND DUE FROM BANKS 752 (629) (824) (695)

CASH AND DUE FROM BANKS
Beginning of period 2,827 3,651 3,651 4,346

END OF PERIOD $3,579 $ 3,022 $ 2,827 $ 3,651
</TABLE>

(CONTINUED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-5

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(CONCLUDED) (Dollars in Thousands)

Mountain Bank Holding Company and Subsidiaries
Six Months Ended June 30, 1998 and 1997, and
Years Ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1997 1996
(Unaudited)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $1,200 $1,061 $2,172 $1,649
Income taxes paid 171 205 275 71

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Change in unrealized gain (loss) on securities
available for sale, net of tax ($ 2) ($ 5) $88 ($ 33)
Transfer of redeemable stock to common stock - - - - - - 447
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-6

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 ARE
UNAUDITED.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION AND OPERATIONS

The consolidated financial statements include the accounts of Mountain Bank
Holding Company (the Company) and its wholly owned subsidiaries, Mt. Rainier
National Bank (the Bank), and Mountain Real Estate Holdings, Inc. All
significant intercompany transactions and balances have been eliminated. The
Company is a holding company which operates primarily through its major
subsidiary, the Bank.

The Bank operates three 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.

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.

(CONTINUED)

F-7

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOANS

Loans are stated at the amount of unpaid principal, reduced by allowance for
credit losses. Interest on loans is accrued daily based on the principal
amount outstanding.

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-8

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 intrinsic
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.

ACCOUNTING CHANGE

In the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
No. 130), which was effective for years beginning after December 15, 1997.
SFAS No. 130 requires that an entity report and display comprehensive income
with the same prominence as other financial statements. Comprehensive income
is defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. With regard to the
Company, currently the only items of comprehensive income are changes in the
fair value of its available for sale securities portfolio. Accordingly,
changes in the value of that portfolio during the period, net of tax, are
reported as "Other Comprehensive Income" in the accompanying consolidated
statement of income and comprehensive income. Changes in the fair value of
the available for sale securities portfolio for the six months ended June 30,
1997, which were previously reported in the consolidated statement of
shareholders' equity, have been reclassified and retroactively reported as
other comprehensive income. The cumulative adjustment, net of taxes, to
record the available for sale securities portfolio at fair value at period
end was previously reported as "Net unrealized gain (loss) on securities
available for sale, net of tax" in the Company's consolidated balance sheets.
That cumulative adjustment is now termed "Accumulated other comprehensive
income". There was no effect on previously reported net income as a result of
this reporting change.

(CONTINUED)

F-9

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, which is effective for years beginning after December
31, 1997. SFAS No. 131 requires that public enterprises report financial and
descriptive information about their reportable operating segments. It will
not have any effect on financial position and results of operations. The
Company is analyzing the pronouncement to determine what, if any, additional
disclosures will be required in its December 31, 1998 consolidated financial
statements.

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
six months ended June 30, 1998 and for the year ended December 31, 1997 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

JUNE 30, 1998
U.S. Treasury securities $ 5,933 $ 44 $ 1 $ 5,976
U.S. Government and agency securities 17,831 67 22 17,876
Municipal bonds 341 3 - - 344
Federal Home Loan Bank and
Federal Reserve Bank stock 424 - - - - 424

$24,529 $114 $23 $24,620
</TABLE>
(CONTINUED)

F-10

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 3 - DEBT AND EQUITY SECURITIES (CONTINUED)

<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
</TABLE>

Gross realized gains and losses on sales of securities available for sale for
the six months ended June 30, 1998 and 1997, and for the years ended December
31, 1997 and 1996 were:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1997 1996
<S> <C> <C> <C> <C>
GROSS REALIZED GAINS
U.S. Treasury securities $- - $- - $1 $- -
U.S. Government and agency securities 13 - - 5 1

$13 $- - $6 $ 1

GROSS REALIZED LOSSES
U.S. Treasury securities $- - $ 4 $ 5 $ 6
U.S. Government and agency securities - - 8 11 4
Corporate bonds - - - - 2 2

$- - $12 $18 $12
</TABLE>

(CONTINUED)

F-11

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 3 - DEBT AND EQUITY SECURITIES (CONCLUDED)

The scheduled maturities of debt securities available for sale at June 30,
1998 and December 31, 1997 are as follows:

<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 2,269 $ 2,271 $ 497 $ 504
Due in one to five years 17,133 17,212 16,199 16,270
Due in five years or more 4,703 4,713 5,771 5,790

$24,105 $24,196 $22,467 $22,564
</TABLE>

Securities with a carrying value of $1,025 and $1,013 at June 30, 1998 and
December 31, 1997, 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 June 30, 1998 and December 31, 1997 consist of the following:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
<S> <C> <C>
Commercial and agricultural $14,347 $12,004
Real estate:
Construction and land development 3,877 4,453
Mortgage 20,058 21,145
Consumer 5,042 4,975

$43,324 $42,577
</TABLE>

Changes in the allowance for credit losses for the six months ended June 30,
1998 and 1997, and for the years ended December 31, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1997 1996
<S> <C> <C> <C> <C>
Balance at beginning of period $555 $391 $391 $334
Provision for credit losses 78 100 179 67
Charge-offs (5) (15) (15) (10)

BALANCE AT END OF PERIOD $628 $476 $555 $391
</TABLE>

(CONTINUED)

F-12

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 4 - LOANS (CONCLUDED)

The recorded investment in impaired loans, which were all on nonaccrual
status, was $499 at June 30, 1998 and $59 at December 31, 1997. No allocation
of the allowance for credit losses was considered necessary for these
impaired loans. The average recorded investment in impaired loans during the
six months ended June 30, 1998 and 1997, and for the years ended December 31,
1997 and 1996 was $252, $106, $98 and $45, respectively. Interest income
recognized on impaired loans, which was collected in cash, totaled $11 in the
six months ended June 30, 1998 and $15 in the year ended December 31, 1997.
No interest income on impaired loans was collected in 1996.

At June 30, 1998 and 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 June 30, 1998,
December 31, 1997 or 1996.

NOTE 5 - PREMISES AND EQUIPMENT

The components of premises and equipment at June 30, 1998 and December 31,
1997 are as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
<S> <C> <C>
Land $ 615 $ 615
Buildings 1,973 1,452
Equipment, furniture and fixtures 1,357 1,214
Construction in progress - - 362
TOTAL COST 3,945 3,643
Less accumulated depreciation 1,302 1,160

$2,643 $2,483
</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
June 30, 1998 and December 31, 1997

NOTE 6 - DEPOSITS

The aggregate amount of certificates of deposit with a minimum denomination
of one hundred thousand dollars is approximately $7,989 at June 30, 1998 and
$8,253 at December 31, 1997.

At June 30, 1998 and December 31, 1997, the scheduled maturities of
certificates of deposit are as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
<S> <C> <C>
One year $23,392 $21,978
Two years 1,931 2,322
Three years 126 788
Four years 35 71
Five years and over 227 228

$25,711 $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 - $35.

NOTE 8 - INCOME TAXES

The components of the provision for income taxes are as follows for the six
months ended June 30, 1998 and 1997, and for the years ended December 31,
1997 and 1996:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1997 1996
<S> <C> <C> <C> <C>
Current $154 $112 $350 $156
Deferred benefit - - - - - - (18)

INCOME TAXES $154 $112 $350 $138
</TABLE>

(CONTINUED)

F-14

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 8 - INCOME TAXES (CONTINUED)

The effect of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at June 30, 1998 and December 31, 1997
follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
<S> <C> <C>
DEFERRED TAX ASSETS
Provision for credit losses $161 $161
Deferred compensation 7 7
TOTAL DEFERRED TAX ASSETS 168 168

DEFERRED TAX LIABILITIES
Depreciation 16 16
Cash basis tax accounting 92 92
Deferred income 81 81
Unrealized gain on securities available for sale 30 34
TOTAL DEFERRED TAX LIABILITIES 219 223

NET DEFERRED TAX LIABILITIES $ 51 $ 55
</TABLE>

The following is a reconciliation between the statutory and effective federal
income tax rates for the six months ended June 30, 1998 and 1997, and for
years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
JUNE 30,
1998 1997
PERCENT OF PERCENT OF
PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C>
Income tax at statutory rate $ 159 34.0% $ 115 34.0%
Increase (decrease) resulting from:
Tax exempt income (5) (1.1) (1) (.3)
Other - - - - (2) (.5)

TOTAL INCOME TAX EXPENSE $ 154 32.9% $ 112 33.2%
</TABLE>

(CONTINUED)

F-15

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 8 - INCOME TAXES (CONCLUDED)

<TABLE>
<CAPTION>
DECEMBER 31,
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>

NOTE 9 - RELATED PARTY TRANSACTIONS

At June 30, 1998, 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 $2,300, $2,176 and $1,549,
respectively. During 1998, $384 of advances were made and repayments totaled
$260. During 1997, $1,652 of advances were made, and repayments totaled
$1,025.

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>
JUNE 30, DECEMBER 31,
1998 1997
<S> <C> <C>
Commercial and agriculture $2,848 $4,194
Real estate 1,199 1,993
Credit cards 2,308 1,434

$6,355 $7,621
</TABLE>

Outstanding commitments under letters of credit totaled $48 and $105 at June
30, 1998 and December 31, 1997, respectively.

(CONTINUED)

F-16

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONCLUDED)

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank's experience has been that approximately 70% of loan
commitments are drawn upon by customers. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies, but may
include accounts receivable, inventory, property and equipment, residential
real estate, and income-producing commercial properties.

Letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held
varies as specified above, and is required in instances where the Bank deems
necessary.

The Bank has agreements with commercial banks 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.

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 $26 and $22 for the six months ended June 30, 1998 and 1997,
respectively, and $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.

F-17

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

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 June 30, 1998 and 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
June 30, 1998 and December 31, 1997, of which 51,332 and 49,832 have been
granted at June 30, 1998 and December 31, 1997, respectively.

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 for the six months ended June 30, 1998 and
1997, and for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1997 1996
<S> <C> <C> <C> <C>
Net income:
As reported $314 $225 $597 $292
Pro forma 284 225 580 288

Basic earnings per share:
As reported $.39 $.32 $.84 $.43
Pro forma .37 .32 .81 .43

Diluted earnings per share:
As reported $.37 $.30 $.79 $.40
Pro forma .35 .30 .78 .40
</TABLE>

(CONTINUED)

F-18

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 12 - STOCK OPTION PLANS (CONTINUED)

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%; 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 the six months ended June 30,
1998 and the years ended December 31, 1997 and 1996 was $5.41, $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 six months
ended June 30, 1998 and 1997, and for the years ended December 31, 1997 and
1996:

<TABLE>
<CAPTION>
JUNE 30,
1998 1997
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of period 103,832 $ 6.83 103,332 $5.36
Granted 1,500 13.80 - - - -
Forfeited - - - - (20,000) (5.00)

OUTSTANDING AT END OF PERIOD 105,332 6.95 83,332 5.44

Options exercisable at period end 80,667 77,332 5.29
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
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-19

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 12 - STOCK OPTION PLANS (CONCLUDED)

The following summarizes information about stock options outstanding at June
30, 1998 and December 31, 1997:

OPTIONS OUTSTANDING

WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL NUMBER
PRICES OUTSTANDING LIFE EXERCISABLE
<S> <C> <C> <C>
DECEMBER 31, 1997 AND JUNE 30, 1998

$ 5.00 75,332 2.75 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 - -

JUNE 30, 1998

13.00 1,500 9.75 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 six months ended June 30, 1998 and 1997, and
for the years ended December 31, 1997 and 1996 totaled $15, $11, $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 $23 and $21 at June 30,
1998 and December 31, 1997, respectively. Expenses associated with this plan
were $3 for both the six months periods ended June 30, 1998 and 1997, and $6
and $4 for years ended December 31, 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.

F-20

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

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 or common stock valued at more than $25 in
any plan year. In the six months ended June 30, 1998, 1,186 shares were
issued at a price of $12.50 per share. In the six months ended June 30, 1997,
1,898 shares were issued at a price of $10.00 per share. In the years ended
December 31, 1997 and 1996, 1,898 and 730 shares, respectively, were issued
at a price of $10.00 per share.

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.

(CONTINUED)

F-21

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 16 - REGULATORY MATTERS (CONCLUDED)

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>
JUNE 30, 1998
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $7,436 9.70% $3,066 4.00% N/A N/A
Bank 6,069 7.96 3,048 4.00 $3,810 5.00%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 7,436 15.99 18,60 4.00 N/A N/A
Bank 6,069 13.07 1,858 4.00 2,787 6.00
TIER 2 CAPITAL:
Consolidated 8,017 17.24 3,720 8.00 N/A N/A
Bank 6,650 14.32 3,715 8.00 4,644 10.00

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>

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 $1,204 as of June 30, 1998 and
$858 as of December 31, 1997 without regulatory approval.

F-22

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

CONDENSED BALANCE SHEETS - JUNE 30, 1998 AND DECEMBER 31, 1997

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
<S> <C> <C>
ASSETS
Cash $ 129 $ 680
Investment in the Bank 6,161 5,785
Investment in Mountain Real Estate Holdings, Inc. 1,152 653
Due from subsidiaries 195 195
Other assets 51 109

TOTAL ASSETS $7,688 $7,422

LIABILITIES AND SHAREHOLDERS' EQUITY
Federal income taxes payable $ 174 $ 191
Other liabilities - - 80
Shareholders' equity 7,514 7,151

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,688 $7,422
</TABLE>

CONDENSED STATEMENTS OF INCOME - SIX MONTHS ENDED JUNE 30, 1998 AND 1997, AND
YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1997 1996
<S> <C> <C> <C> <C>
OPERATING INCOME/BANK
Dividend from subsidiary $ - - $ 75 $225 $ 60

OPERATING EXPENSES (49) (61) (99) (71)

INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF SUBSIDIARIES (49) 14 126 (11)

INCOME TAX BENEFIT (17) (20) - - (25)

INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES (32) 34 126 14

EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 346 191 471 278

NET INCOME $314 $225 $597 $292
</TABLE>

(CONTINUED)

F-23

<PAGE>

NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 17 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONCLUDED)

CONDENSED STATEMENTS OF CASH FLOWS - SIX MONTHS ENDED JUNE 30, 1998 AND 1997,
AND YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1997 1996
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net income $314 $225 $ 597 $292
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization 27 23 50 3
Equity in undistributed income of subsidiaries (346) (191) (471) (278)
Increase in receivable from subsidiaries - - 154 (41) (112)
Increase (decrease) in Federal income taxes (17) - - 76 86
Other (49) (59) 80 - -
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 71 152 291 (9)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries (531) - - (650) - -
Noncompete agreement - - (155) (155) - -
NET CASH USED IN INVESTING ACTIVITIES (531) (155) (805) - -

CASH FLOWS FROM FINANCING ACTIVITIES
Cost of stock offering - - - - (45) - -
Proceeds from issuance of common stock 51 19 1,232 7
NET CASH PROVIDED BY FINANCING ACTIVITIES 51 19 1,187 7

NET INCREASE (DECREASE) IN CASH (551) 16 673 (2)

CASH, BEGINNING OF PERIOD 680 7 7 9

CASH, END OF PERIOD $129 $ 23 $ 680 $ 7
</TABLE>

F-24

<PAGE>

NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

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 six months ended
June 30, 1998 and 1997, and for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1997 1996
<S> <C> <C> <C> <C>
Marketing and advertising $ 11 $ 12 $ 46 $ 61
Professional fees 28 54 81 158
Regulatory assessments 20 13 34 23
Data processing 154 137 295 269
Office supplies and expenses 24 17 91 92
Business taxes 39 34 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>
SIX MONTHS ENDED JUNE 30, 1998
Basic earnings per share:
Net income $ 314 806,506 $ .39
Effect of dilutive options - - 49,843 (.02)
Diluted earnings per share:
NET INCOME $ 314 856,349 $ .37

SIX MONTHS ENDED JUNE 30, 1997
Basic earnings per share:
Net income $ 225 704,714 $ .32
Effect of dilutive options - - 47,079 (.02)
Diluted earnings per share:
NET INCOME $ 225 751,793 $ .30
</TABLE>

(CONTINUED)

F-25

<PAGE>

NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Mountain Bank Holding Company and Subsidiaries
June 30, 1998 and December 31, 1997

NOTE 19 - EARNINGS PER SHARE DISCLOSURES (CONCLUDED)

<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 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 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 - CAPITAL 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 was concluded on January
1998.

F-26
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Bylaws of the Company provide that the Company will indemnify any
individual made a party to a proceeding because the individual is or was a
director against liability incurred in the proceeding if:

(a) the individual acted in good faith; and

(b) the individual reasonably believed:

(i) in the case of conduct in the individual's official capacity
with the corporation, that the individual's conduct was in
its best interests; and

(ii) in all other cases, that the individual's conduct was at
least not opposed to its best interests; and

(c) in the case of any criminal proceeding, the individual had no
reasonable cause to believe the individual's conduct was
unlawful.

The Company will not indemnify an individual made a party to a proceeding
because the individual is or was a director against liability incurred in the
proceeding if:

(a) in connection with a proceeding by or in the right of the
corporation in which the director is adjudged liable to the
corporation; or

(b) in connection with any other proceeding charging improper
personal benefit to the director, whether or not involving action
in the director's official capacity, in which the director was
adjudged liable on the basis that personal benefit was improperly
received by the director.

The Company has a Directors' and Officers' Liability Insurance Policy which
provides coverage sufficiently broad to permit indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended.

ITEM 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The Registrant estimates that the expenses payable by it in connection with
this Offering, as described in this Registration Statement, will be as follows:

<TABLE>
<CAPTION>
<S> <C>
SEC Registration fees $ 525
Legal fees and expenses $35,000
Accounting fees and expenses $ 4,000
Printing expenses $ 8,500
Miscellaneous $ 1,975

Total Offering Expenses $50,000

</TABLE>

II-1

<PAGE>

ITEM 3. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes:

1. To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:

(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and

(iii) Include any additional or changed material information on the
plan of distribution.

2. That, for the purpose of determining liability under the
Securities Act, treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities at that
time to be the initial bona fide offering.

3. To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.

(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.

ITEM 4. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR

None.

ITEM 5. INDEX TO EXHIBITS

See Exhibit Index on page II-5.

ITEM 6. DESCRIPTION OF EXHIBITS.

See Exhibit Index on page II-5.

II-2

<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that the
Registrant meets all of the requirements of filing on Form SB-1 and authorized
this registration statement to be signed on its behalf by the undersigned, in
the City of Enumclaw, State of Washington on September 15, 1998.

MOUNTAIN BANK HOLDING COMPANY

By:/s/ ROY T. BROOKS
--------------------------------
Roy T. Brooks, Chairman of the Board and
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Roy T. Brooks and Steve W. Moergeli and each of
them, with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary fully to all intents and purposes as
he might or could do in person thereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities on September 15, 1998.

Signature Capacity
- --------- --------

/s/ Roy T. Brooks Chairman of the Board and Director
- ----------------------------------- (Principal Executive Officer)
Roy T. Brooks

/s/ Sheila M. Brumley Chief Financial Officer
- ----------------------------------- (Principal Financial and Accounting
Sheila M. Brumley Officer)

/s/ Susan K. Bowen-Hahto Director
- -----------------------------------
Susan K. Bowen-Hahto

/s/ Brian W. Gallagher Director
- -----------------------------------
Brian W. Gallagher

II-3

<PAGE>

/s/ Terry L. Garrison Director
- -----------------------------------
Terry L. Garrison

/s/ Michael K. Jones Director
- -----------------------------------
Michael K. Jones

/s/ Barry C. Kombol Director
- -----------------------------------
Barry C. Kombol

/s/ Steve W. Moergeli Director
- -----------------------------------
Steve W. Moergeli

/s/ John W. Raeder Director
- -----------------------------------
John W. Raeder

/s/ Garrett S. Van Beek Director
- -----------------------------------
Garrett S. Van Beek

/s/ Hans Rudy Zurcher Director
- -----------------------------------
Hans Rudy Zurcher

II-4

<PAGE>

INDEX TO EXHIBITS

EXHIBIT NUMBER DESCRIPTION
<S> <C>
2.1 Articles of Incorporation of Mountain Bank Holding Company,
as amended*

2.2 Bylaws of Mountain Bank Holding Company *

4.1 Form of Subscription Agreements

6.1 Lease Agreement between The Company and its subsidiary, Mt.
Rainier National Bank *

6.2 1990 Stock Option Plan *

6.3 1990 Director Stock Option Plan *

6.4 1995 Employee Stock Purchase Plan *

10.1 Consent of Independent Certified Public Accountants

10.2 Consent of Legal Counsel (included in legal opinion - filed
as Exhibit 11.1)

11.1 Opinion of Graham & Dunn regarding legality of the
securities covered by the Registration Statement

12.1 Form Letter to Shareholders

12.2 Form Letter to Potential Investors

</TABLE>

- -------------------

* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form 10-SB, Registration No. 000-28394.

II-5

<PAGE>

SUBSCRIPTION FOR COMMON STOCK
MOUNTAIN BANK HOLDING COMPANY
(NEW SHAREHOLDER)

STOCK ISSUE: 100,000 shares of common stock, par value $1.00 each ("Common
Stock"), are to be subscribed for and issued at $17.50 per share. 50,000 of
such shares have been reserved for New Shareholders. This subscription applies
to such 50,000 shares. ALL SALES TO NEW SHAREHOLDERS ARE ON A FIRST-COME,
FIRST-SERVED BASIS.

The undersigned, having received and read the Offering Circular of MOUNTAIN
BANK HOLDING COMPANY (the "Company"), dated September __, 1998, hereby offers to
purchase the number of shares of the Common Stock of the Company (minimum 100
shares - maximum 2,500 shares) set forth below at a subscription price of $17.50
per share, and encloses herewith the full aggregate subscription price. Checks
or money orders should be made payable to MOUNTAIN BANK HOLDING COMPANY.

<TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<S> <C>
Shares subscribed for . . . . . . . . . . . . . . .
(MINIMUM 100 SHARES -- MAXIMUM 2,500 SHARES) ---------------

Aggregate purchase price (enclosed) . . . . . . . . . . $
---------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>

SUBSCRIPTIONS SHOULD BE RECEIVED BY THE COMPANY NOT LATER THAN 5:00 P.M.
LOCAL TIME ON OCTOBER 31, 1998, THE EXPIRATION DATE OF THE EXCLUSIVE OFFER TO
NEW SHAREHOLDERS. FOLLOWING THE EXCLUSIVE OFFERING PERIOD, THE OFFERING WILL
CONTINUE UNTIL NOVEMBER 30, 1998, UNLESS TERMINATED EARLIER. ALL SALES IN THE
OFFERING ARE ON A FIRST-COME, FIRST-SERVED BASIS. THE COMPANY RESERVES THE RIGHT
TO REJECT ANY SUBSCRIPTION, IN WHOLE OR IN PART.

Shares purchased by the undersigned shall be registered as listed below.
(If certificates for shares are to be issued in more than one name, please
specify whether ownership is to be as tenants in common, joint tenants, etc. If
certificates for shares are to be issued in the name of one person for the
benefit of another, please indicate whether registration should be as trustee or
custodian for such other person.)

How Shares To Be Registered No. of Shares (AT $17.50
(PLEASE PRINT) PER SHARE)

____________________________________ _______________

/ / I/we hereby certify that I/we am/are bona fide residents of the State
of Washington. (Check box if applicable. If not applicable, indicate
state of residence:___________________).

IN WITNESS WHEREOF, I/we have executed this Subscription, retaining a copy
for my/our records, and returning a copy by mail or delivery to:

MOUNTAIN BANK HOLDING COMPANY
501 Roosevelt Avenue
Enumclaw, Washington 98022

Date: _______________________, 1998

_____________________________________ ____________________________________
(Signature) (Signature) (If shares to be issued in
more than one name)

_____________________________________ ____________________________________
Name (Please print or type) Name (Please print or type)

_____________________________________ ____________________________________
Street Address Street Address

_____________________________________ ____________________________________
City and State ZIP City and State ZIP

Telephone:__________________________ Telephone:__________________________

Social Security No.:________________ Social Security No.:________________
or Taxpayer ID No. or Taxpayer ID No.

IF SHARES TO BE HELD IN JOINT OWNERSHIP, ALL JOINT OWNERS SHOULD SIGN THIS
SUBSCRIPTION.

<PAGE>

SUBSCRIPTION FOR COMMON STOCK
MOUNTAIN BANK HOLDING COMPANY
(EXISTING SHAREHOLDER)

STOCK ISSUE: 100,000 shares of common stock, par value $1.00 each ("Common
Stock"), are to be subscribed for and issued at $17.50 per share. 50,000 of
such shares have been allocated to existing shareholders, who may purchase such
shares on the basis of 1 share for each 16 shares owned.

The undersigned, having received and read the Offering Circular of MOUNTAIN
BANK HOLDING COMPANY (the "Company"), dated September __, 1998, hereby offers to
purchase the number of shares of the Common Stock of the Company set forth below
at a subscription price of $17.50 per share, and encloses herewith the full
aggregate subscription price. Checks or money orders should be made payable to
MOUNTAIN BANK HOLDING COMPANY.

<TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<S> <C>
Shares subscribed for . . . . . . . . . . . . . . .
(NO MINIMUM -- MAXIMUM -- 1 SHARE FOR EACH 16 OWNED) ---------------

PLEASE INDICATE BELOW IF YOU DESIRE TO PURCHASE ADDITIONAL SHARES OF COMMON
STOCK IF THE OFFERING IS NOT FULLY SUBSCRIBED DURING THE EXCLUSIVE PERIOD.
ADDITIONAL SHARES, IF AVAILABLE, WILL BE SOLD ON A FIRST COME, FIRST SERVED
BASIS.

[ ] I would be interested in purchasing _________ additional shares. Please
contact me if additional shares are available for purchase at the closing
of the exclusivity period.

SUBSCRIPTION SHOULD BE RECEIVED BY THE COMPANY NOT LATER THAN 5:00 P.M.
LOCAL TIME ON OCTOBER 31, 1998, THE EXPIRATION DATE OF THE EXCLUSIVE OFFERING TO
EXISTING SHAREHOLDERS. SUBSCRIPTIONS RECEIVED AFTER OCTOBER 31, 1998, AND PRIOR
TO NOVEMBER 30, 1998, UNLESS THE OFFERING IS TERMINATED EARLIER, WILL BE TREATED
ON A FIRST-COME, FIRST-SERVED BASIS, AS WILL ALL SUBSCRIPTIONS FOR ADDITIONAL
SHARES. THE COMPANY RESERVES THE RIGHT TO REJECT ANY SUBSCRIPTION, IN WHOLE OR
IN PART.

Shares purchased by the undersigned shall be registered as listed below. (If
certificates for shares are to be issued in more than one name, please specify
whether ownership is to be as tenants in common, joint tenants, etc. If
certificates for shares are to be issued in the name of one person for the
benefit of another, please indicate whether registration should be as trustee or
custodian for such other person.)

How Shares To Be Registered No. of Shares (AT $17.50
(PLEASE PRINT) PER SHARE)

____________________________________ _______________

IN WITNESS WHEREOF, I/we have executed this Subscription, retaining a copy
for my/our records, and returning a copy by mail or delivery to:

MOUNTAIN BANK HOLDING COMPANY
501 Roosevelt Avenue
Enumclaw, Washington 98022

Date: _______________________, 1998

_____________________________________ ____________________________________
(Signature) (Signature) (If shares to be issued in
more than one name)

_____________________________________ ____________________________________
Name (Please print or type) Name (Please print or type)

_____________________________________ ____________________________________
Street Address Street Address

_____________________________________ ____________________________________
City and State ZIP City and State ZIP

Telephone:__________________________ Telephone:__________________________

Social Security No.:________________ Social Security No.:________________
or Taxpayer ID No. or Taxpayer ID No.

IF SHARES TO BE HELD IN JOINT OWNERSHIP, ALL JOINT OWNERS SHOULD SIGN THIS
SUBSCRIPTION.

<PAGE>

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We hereby consent to the use in this Registration Statement of our report, dated
January 20, 1998, relating to the consolidated financial statements of Mountain
Bank Holding Company and Subsidiaries, and to the reference to our firm under
the caption "EXPERTS" in the Prospectus.

/s/ Knight, Vale & Gregory, Inc., P.S.

Knight, Vale & Gregory, Inc., P.S.

Tacoma, Washington
September 16, 1998

<PAGE>

September 21, 1998

Board of Directors
Mountain Bank Holding Company
501 Roosevelt Avenue
Enumclaw, WA 98022

RE: LEGALITY OF SHARES TO BE ISSUED

Dear Ladies and Gentlemen:

We are acting as counsel for Mountain Bank Holding Company, a Washington
corporation (the "Company") in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of a maximum of 100,000 shares
of the Company's common stock, $1.00 par value per share (the "Shares") to be
sold by the Company in an offering to existing shareholders and to the public.
A Registration Statement on Form SB-1, including the Prospectus contained
therein (collectively the "Registration Statement"), is being filed under the
Act with respect to the offering of the Shares.

In connection with the offering of the Shares by the Company, we have
examined (a) the Company's Articles of Incorporation, as amended; (b) the
Registration Statement; and (c) such other documents as we have deemed necessary
to form the opinion hereinafter expressed. As to various questions of fact
material to such opinions, where relevant facts were not independently
established, we have relied upon statements of officers of the Company.

Based and relying solely upon the foregoing, we advise you that in our
opinion the Shares, or any portion thereof, when sold by the Company after the
Registration Statement has become effective, will be legally issued, fully paid
and non-assessable under the laws of the State of Washington.

Consent is hereby given to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference in the Prospectus to this firm under
the caption "Legal Matters" as having passed upon the legality of the Shares.
In giving this consent, we do not admit that we are experts within the meaning
of the Act.

Very truly yours,

GRAHAM & DUNN

/s/ Graham & Dunn

<PAGE>

[MOUNTAIN BANK HOLDING COMPANY LOGO]

September __, 1998

Dear Shareholders,

The Board of Directors of Mountain Bank Holding Company has authorized a
stock offering of 100,000 shares of common stock at $17.50 per share. This
is the sixth offering since Mt. Rainier National Bank opened in July of 1990.
The new capital from this offering will be used to support the growth of the
Company, including the opening of a new bank branch facility in Auburn,
Washington.

As with our last offering, existing shareholders, as well as those who
have been waiting to become shareholders, will have an opportunity to
subscribe for shares. Please review the enclosed prospectus for a full
explanation of the offering.

During Phase 1 of this offering (October 1 through October 31, 1998),
existing shareholders may purchase up to one share for each sixteen (16)
shares now held. In addition, existing shareholders are given the
opportunity during Phase 1 to indicate their interest in purchasing more than
their allocated shares (up to a total of 2,500 additional shares).

If shares are still available after October 31, 1998, they will be
offered to existing and new shareholders on a first come, first served basis
from November 1 through November 30, 1998, unless the offering is terminated
earlier.

On behalf of the directors, management and staff, we would like to thank
you for the support you have shown the Bank in the past. If you have any
questions regarding this offering, please contact Sandi Franz, Roy Brooks, or
Steve Moergeli at the Bank.

Sincerely,

Roy T. Brooks Steve W. Moergeli
Chief Executive Officer President
Mountain Bank Holding Company Mt. Rainier National Bank

<PAGE>

[MOUNTAIN BANK HOLDING COMPANY LOGO]

September __, 1998

RE: Mountain Bank Holding Company Shares

Since you have expressed an interest in acquiring shares of our Company's
common stock, we would like to inform you that the Board of Directors has
announced a stock offering for Mountain Bank Holding Company, the parent company
of Mt. Rainier National Bank.

During Phase 1 of this new offering (October 1 through October 31, 1998),
50,000 of the 100,000 shares being offered have been reserved for new
shareholders on a first come, first served basis. New shareholders may acquire
from a minimum of 100 shares to a maximum of 2,500 shares at $17.50 per share.

If shares are still available after October 31, 1998, they will be offered
to both existing and new shareholders on a first come, first served basis from
November 1 through November 30, 1998, unless the offering is terminated earlier.

Please review the enclosed prospectus for a full explanation of the
offering. If you are interested in purchasing stock, complete the subscription
agreement and return it with your check or money order made payable to Mountain
Bank Holding Company. Please note that in order to comply with applicable state
securities laws, new shareholders will be required to certify that they are
residents of the state of Washington; offers to new shareholders in other states
are conditioned upon the availability of an exemption from registration in such
state.

We appreciate the interest you have expressed in the Bank and the Company.
If you have any questions regarding this offering, please contact Sandi Franz,
Roy Brooks, or Steve Moergeli at the Bank.

Sincerely,

Roy T. Brooks Steve W. Moergeli
Chief Executive Officer President
Mountain Bank Holding Company Mt. Rainier National Bank