<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/ x / Annual report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 (FEE REQUIRED)
For the fiscal year ended DECEMBER 31, 1998.
/ / Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 (NO FEE REQUIRED)
Commission File Number: 0 - 28394
MOUNTAIN BANK HOLDING COMPANY
(exact name of registrant as specified in its charter)
WASHINGTON 91-1602736
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification Number)
501 ROOSEVELT AVENUE, PO BOX 98, ENUMCLAW, WA 98022
(address of principal executive offices) (zip code)
Registrant's telephone number: (360) 825-0100
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $1.00 PAR VALUE
(title of class)
</TABLE>
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
---------- ---------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB [ X ]
State the issuer's revenues for its most recent fiscal year: $7,071,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: at February 22, 1999 - $13,187,843
----------------------------------------
Number of shares of common stock outstanding as of January 31, 1999: 907,482
------------
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 1999 Annual Meeting of Shareholders is incorporated
by reference into Part I of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format: Yes X No
------- ------
<PAGE>
TABLE OF CONTENTS
PART I
(ITEMS 6-11, FORM 1-A, MODEL B)
<TABLE>
<CAPTION>
Page
#
<S> <C> <C>
ITEM 6. DESCRIPTION OF BUSINESS.......................................................... 1
GENERAL..................................................................... 1
DESCRIPTION OF MT. RAINIER NATIONAL BANK......................................... 2
THE BANK.................................................................... 2
HISTORY..................................................................... 2
BUSINESS.................................................................... 2
SERVICE AREA................................................................ 3
EMPLOYEES................................................................... 3
COMPETITION................................................................. 3
PRODUCTS AND SERVICES....................................................... 3
MARKETING................................................................... 4
LENDING ACTIVITIES.......................................................... 4
INVESTMENT PORTFOLIO........................................................ 5
STATISTICAL INFORMATION ABOUT THE COMPANY................................... 6
Loan Portfolio.......................................................... 6
Loan Loss Experience.................................................... 7
Allocation of Loan Loss By Loan Classification.......................... 7
Investment Securities Portfolio......................................... 8
Deposit Liability Composition........................................... 8
GAP Analysis............................................................ 9
Distribution of Average Assets, Liability and Shareholders' Equity...... 10
Changes in Interest Income and Expense Volume and Rate Variance......... 10
SUPERVISION AND REGULATION................................................... 11
The Company............................................................ 11
Bank Holding Company Regulation........................................ 11
Transactions with Affiliates........................................... 12
Regulation of Management............................................... 12
Tie-In Arrangements.................................................... 12
State Law Restrictions................................................. 12
Mt. Rainier National Bank.............................................. 13
Interstate Banking and Branching....................................... 13
Deposit Insurance...................................................... 14
Dividends.............................................................. 14
Capital Adequacy....................................................... 14
Effects of Government Monetary Policy.................................. 15
Changes in Banking Laws and Regulations................................ 16
YEAR 2000................................................................... 16
The Company's State of Readiness...................................... 16
Estimated Costs to Address the Company's Year 2000 Issues............. 17
Risks Related to Year 2000 Issues..................................... 17
The Company's Contingency Plans....................................... 18
FORWARD LOOKING STATEMENTS.................................................. 18
ITEM 7. DESCRIPTION OF PROPERTY.......................................................... 19
ITEM 8. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES.......................... 19
ITEM 9. REMUNERATION OF DIRECTORS AND OFFICERS........................................... 19
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
PART I
(ITEMS 6-11, FORM 1-A, MODEL B)
(CONTINUED)
<TABLE>
<CAPTION>
Page #
<S> <C> <C>
ITEM 10. SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN SECURITY HOLDERS........................................................ 19
ITEM 11. INTEREST OF MANAGEMENT AND OTHERS IN 20
CERTAIN TRANSACTIONS............................................................
PART II
(ITEMS 1-6, FORM 1-A, MODEL B)
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE 21
REGISTRANT'S COMMON EQUITY......................................................
MARKET INFORMATION......................................................... 21
NUMBER OF EQUITY HOLDERS................................................... 21
CASH DIVIDENDS............................................................. 21
PAYMENT OF DIVIDENDS....................................................... 22
ITEM 2. LEGAL PROCEEDINGS............................................................... 22
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................. 22
ITEM 5. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT............................... 22
ITEM 6. REPORTS ON FORM 8-K............................................................. 22
PART F/S
FINANCIAL STATEMENTS
Page #
FINANCIAL STATEMENTS............................................................. F-1
PART III
EXHIBITS
Page #
EXHIBITS......................................................................... E-1
SIGNATURES
Page #
SIGNATURES....................................................................... S-1
</TABLE>
ii
<PAGE>
FORM 10-KSB AMENDMENT NO. 2
TRANSITIONAL SMALL BUSINESS ISSUER
DISCLOSURE PURSUANT TO ALTERNATIVE 2
PART I
(ITEMS 6-11, MODEL B, FORM 1-A)
ITEM 6. DESCRIPTION OF BUSINESS
GENERAL
Mountain Bank Holding Company (the "Company") is a Washington
corporation formed in 1993 primarily to hold all of the Common Stock of Mt.
Rainier National Bank (the "Bank"), a National Banking Association organized
under the laws of the United States. The Bank provides personal and commercial
banking and related financial services at its main office located at 501
Roosevelt Avenue, Enumclaw, Washington, at its branch offices located in
Buckley, Washington, at 29290 Highway 410, and located in Black Diamond,
Washington, at 31329 Third Ave. and located in Auburn, Washington, at 1436
Auburn Way So. The Company is regulated by the Federal Reserve Board (the "FRB")
under the Bank Holding Company Act of 1956, as amended. A bank holding company
is generally defined as a company that has direct or indirect control of a bank.
The Company qualifies as a bank holding company because it owns one hundred
percent (100%) of the outstanding securities of the Bank. At December 31, 1998,
the Company reported on a consolidated basis total assets of $87,735,000, total
deposits of $77,593,000, and shareholders' equity of $9,691,000.
The Company previously had one subsidiary other than the Bank. That subsidiary
was Mountain Real Estate Holdings, Inc., which was incorporated on March 10,
1994. The purpose of Mountain Real Estate Holdings, Inc. was to engage solely in
the business of holding premises occupied or to be occupied by the Bank,
together with fixed assets used in conjunction with the premises occupied by the
Bank. The premises have subsequently been transferred to the Bank. At that time
Mountain Real Estate Holdings, Inc. became inactive.
The Company's strategy is to capitalize on its investment in the Bank through
continued growth in the Bank's assets, deposits and earnings, and creation of
long-term value for Company shareholders by pursuing the following:
- Monitoring and improving the credit quality of the Bank's
existing asset base;
- Concentrating on expense control, interest spread
maximization and marketing of fee-based products, as well as
maintaining adequate liquidity and capital levels;
- Emphasizing close working relationships between the Bank's
senior management, directors, loan officers and commercial
customers; and
- Focusing on training programs to ensure that management and
staff have knowledge necessary to serve customers and remain
in compliance with all legal and regulatory obligations.
There can be no assurance that the Bank will achieve these objectives.
<PAGE>
DESCRIPTION OF MT. RAINIER NATIONAL BANK
THE BANK
Mt. Rainier National Bank is a wholly-owned subsidiary of the Company.
While the Company and the Bank are distinctly different entities regulated by
different regulatory bodies, the income of the Company presently is almost
entirely derived from dividends upstreamed from the Bank to the Company.
Therefore, the value of the securities of the Company is, to a large extent,
dependent upon the success of the Bank.
HISTORY
The Bank opened on July 2, 1990, in Enumclaw, Washngton, and has been
operating since that date.
BUSINESS
The Bank offers a full line of commercial banking services including
checking accounts, savings programs, ATMs, night depository services, customer
deposit box facilities, consumer loans, residential loans, commercial loans,
real estate and construction loans and agriculture loans, NOW accounts and
certificates of deposit.
The principal sources of the Bank's revenues are: (i) interest and fees
on loans; (ii) deposit service charges; (iii) interest on federal funds sold
(funds loaned on a short-term basis to other banks); (iv) gains on mortgages
originated and sold to the secondary market; and (v) interest on investments.
Loans include short-to-medium-term commercial and consumer loans, including
operating loans and lines, equipment loans, automobile loans, recreational
vehicle and truck loans, personal loans and lines of credit, home improvement
and rehabilitation loans, VISA national credit cards, and residential mortgage
lending. Residential loans are currently sold into the secondary market. The
Bank also offers safe deposit boxes, direct deposit of payroll and social
security checks, automated teller machine access, and automatic drafts for
various accounts. The Bank has a night depository and an ATM, as well as
drive-up services, at each of its offices.
The Bank's core deposit base generally has been enhanced through
advertising and deposit promotions, and focusing on securing the entire banking
relationship of each of its customers. The Bank has not used brokered deposits
as a source of funds.
The Bank's commercial banking activities target high net worth
individuals and their businesses with an emphasis on small to medium size
businesses. The Bank's operating strategy is to offer personal service,
flexibility and timely responsiveness to the needs of its customers. Senior
management of the Bank and the Company maintain close personal contact and close
working relationships with the Bank's commercial customers and their businesses,
and the Bank's and the Company's Board of Directors primarily include local
business people from the Bank's primary service area. Most of the Bank's new
commercial banking business consists of referrals from existing customers. The
Company believes that the Bank's loan portfolio is appropriately diversified.
All floating rate loans are priced at prime or higher.
The Company believes that the growth in loans and profitability
achieved by the Bank also is attributable in large measure to its strategy of
targeting smaller and medium size businesses in the manner described above and
to the business and personal relationships and experience of the Bank's and the
Company's management and Directors, rather than the result of greater
risk-taking or price concessions. In addition, there have been numerous
acquisitions and mergers of
2
<PAGE>
banks in the Bank's primary service area which have made the larger institutions
in the market even larger. This has resulted in the Bank being the only locally
owned commercial bank in its primary service area focusing primarily on the
needs of the smaller and medium size commercial customers.
SERVICE AREA
The primary service area of the Bank is the city of Enumclaw, Black
Diamond, Buckley, Auburn and surrounding communities.
EMPLOYEES
As of December 31, 1998, the Company had no full time employees. As of
the same date, the Bank had 46.25 full time equivalent employees, including
three Executive Officers. None of the Bank's employees is presently represented
by a union or covered by a collective bargaining agreement. The Bank considers
its relationships with its employees to be good.
COMPETITION
The banking business in the Bank's primary service area is highly
competitive with respect to both loans and deposits. All the major out-of-state
commercial banks which operate in Washington (including Seafirst, Key Bank,
Wells Fargo and U.S. Bank) have a branch or branches within the Bank's primary
service area. Among the advantages such major banks have are their ability to
finance wide-ranging advertising campaigns and to allocate their investment
assets to geographic regions of higher yield and demand. Such banks offer
certain services which are not offered directly by the Bank (but are offered
indirectly through correspondent institutions); and, by virtue of their greater
total capitalization (legal lending limits to an individual customer are based
upon a percentage of a bank's total shareholder equity accounts), such banks
have substantially higher lending limits than the Bank. The primary service area
is also served by savings and loan associations and credit unions.
The Bank also competes with a number of non-bank competitors such as
insurance companies, small loan companies, finance companies, mortgage
companies, credit unions, thrifts, and other funds providers. Many of the
Company's non-bank competitors are not subject to the extensive federal and
state regulations which govern the Company and, as a result, have a competitive
advantage over the Company in providing certain services.
The Bank believes its competitive position has been strengthened by the
consolidation in the banking industry which has resulted in a focus by the
larger banks on their larger accounts, with less direct contact between the
officers and their customers. The Bank's strategy, by contrast, is to remain a
middle market lender which maintains close, long-term contact with its
customers.
PRODUCTS AND SERVICES
In conjunction with the growth of its asset base, the Bank has
introduced new products and services to position itself to compete in its highly
competitive market. The Bank's customers demand not only a wide range of
financial products but also efficient and convenient service. In response to
these demands, the Bank has developed a mix of products and services utilizing
newly developed technology available to the banking industry; for example, the
addition of automatic teller machines. Additionally, the bank offers a wide
range of commercial and retail banking products and services to its customers.
Deposit accounts include certificates of deposit, individual retirement accounts
and other time deposits, checking and other demand deposit accounts,
interest-bearing checking accounts, savings accounts and money market accounts.
3
<PAGE>
Loans include residential real estate, commercial, financial and real estate
construction and development, installment and consumer loans. Other products and
services include: credit related insurance; ATMs, and safe deposit boxes.
MARKETING
The Bank uses to the fullest extent possible the flexibility which is
accorded by its independent status. This includes an emphasis on specialized
services, local promotional activity, and personal contacts by the Bank's
officers, directors and employees. The Bank also seeks to provide special
services and programs for individuals in its primary service area who are
employed in the business and professional fields. In the event there are
customers whose loan demands exceed the Bank's lending limits, the Bank arranges
for such loans on a participation basis with other financial institutions.
LENDING ACTIVITIES
The two main areas in which the Bank has directed its lendable funds
are commercial and real estate loans. At December 31, 1998, these categories
accounted for approximately 30% and 59%, respectively, of the Bank's total loan
portfolio. The Bank's major source of income is interest and fees charged on
loans.
Interest income on loans is recognized based on principal amounts
outstanding, at applicable interest rates. Accrual of interest on impaired loans
is discontinued when reasonable doubt exists as to the full, timely collection
of interest or principal or when payment of principal or interest is
contractually past due 90 days, unless the loan is well secured and in the
process of collection. When a loan is placed on nonaccrual status, all interest
previously accrued, but not collected, is reversed against current period
interest income. Income on such loans is then recognized only to the extent that
cash is received and when the future collection of principal is probable.
Interest accruals are resumed on such loans only when they are brought current
with respect to principal and interest and when, in the opinion of management,
the loans are estimated to be fully collectible as to both principal and
interest.
In general, the Bank is permitted by law to make loans to single
borrowers in aggregate amounts of up to fifteen percent (15%) of the Bank's
unimpaired capital and unimpaired surplus. The Bank, on occasion, sells
participations in loans when necessary to stay within lending limits or to
otherwise limit the Bank's exposure. The Bank's goal is to reduce the risk of
undue concentrations of loans to multiple borrowers engaged in similar
activities that would cause them to be similarly impacted by economic or other
conditions. At December 31, 1998, no such concentration exceeded 10% of the
Bank's loan portfolio, although approximately 2.5% of the Bank's loan portfolio
consists of agricultural loans and approximately 9.5% 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.
4
<PAGE>
The Bank has entered into agreements with other banks to participate in
certain of the Bank's commitments to extend credit to customers.
INVESTMENT PORTFOLIO
The investment policy of the Bank is an integral part of the overall
asset/liability management of the Bank. The Bank's investment policy is to
establish a portfolio which will provide liquidity necessary to facilitate
making loans and to cover deposit fluctuations while at the same time achieving
a satisfactory investment return on the funds invested. The investment policy is
reviewed annually by the Bank's Board of Directors. The Bank stresses the
following attributes for its investments: safety of principal, liquidity, yield,
price appreciation and pledgeability. With its implementation of Statement of
Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, the Bank is required to classify its
portfolio into three categories: Held to Maturity, Trading Securities, and
Available for Sale.
Held to Maturity includes debt securities that the Bank has positive
intent and ability to hold to maturity; these securities are reported at
amortized cost.
Trading Securities include debt and equity securities that are
purchased and held solely for the purpose of selling them in the short-term
future for trading profits. Trading Securities are reported at fair market value
with unrealized gains and losses included in earnings. As of December 31, 1998,
the Bank held no securities as Trading Securities.
Available for Sale securities include those which may be sold to
implement the Bank's asset/liability management strategies, and in response to
changes in interest rates, prepayment rates and similar factors. These
securities are reported at fair market value with unrealized gains and losses
excluded from the earnings and reported as a separate component of shareholders'
equity. All of the Banks investment securities at December 31, 1998 were
classified as available for sale.
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 $295,700
in stock. This portion of the Bank's investment portfolio is not liquid.
5
<PAGE>
STATISTICAL INFORMATION ABOUT THE COMPANY
The following statistical information should be read in conjunction with the
consolidated financial statements and accompanying notes included elsewhere
herein.
The composition of the loan portfolio is summarized as follows:
LOAN PORTFOLIO - TYPES OF LOANS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNTS LOANS AMOUNTS LOANS
----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural $ 13,449 30.03% $ 12,004 28.21%
Real Estate:
Construction 4,255 9.50% 4,453 10.47%
Mortgage 22,036 49.20% 21,145 49.70%
Consumer 5,045 11.27% 4,943 11.62%
----------------------------------------------------------------
Total loans $ 44,785 100.00% $ 42,545 100.00%
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
LOAN PORTFOLIO - MATURITIES AND SENSITIVITIES ON LOANS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Over One
One Year Through Maturing
Or Less Five Years After Five Years TOTAL
-----------------------------------------------------------------------------------------------
Amount Fixed Variable Fixed Variable
<S> <C> <C> <C> <C> <C> <C>
Commercial and Agriculture $7,992 $5,216 $0 $241 $0 $13,449
Real Estate $8,480 $13,753 $0 $4,058 $0 $26,291
Consumer $1,081 $3,765 $0 $199 $0 $5,045
-----------------------------------------------------------------------------------------------
Total $17,553 $22,734 $0 $4,498 $0 $44,785
</TABLE>
The following table summarizes nonperforming assets by category:
RISK ELEMENTS - NONACCRUAL, PAST DUE AND RESTRUCTERED LOANS
<TABLE>
<CAPTION>
90 Days or More
Past Due Nonaccrual Restructured Lost Interest
------------------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Commercial and Agriculture $0 $0 $0 $0
Real Estate $0 $441 $0 $17
Consumer $0 $6 $0 $1
---- ---- ---- ----
$0 $447 $0 $18
</TABLE>
At December 31, 1998, the Bank had no other assets that would be considered
nonaccrual, past due or restructured if such assets were loans.
6
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
---------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allowance for loan losses
(beginning of period) $ 555 $ 391
Loans charged off:
Commercial and agricultural -- (9)
Real estate construction
Real estate mortgage
Consumer (15) (6)
---------------------------
Total (15) (15)
---------------------------
Recoveries of loans previously
charged off:
Commercial and agricultural
Real estate construction
Real estate mortgage
Consumer
---------------------------
Total 0 0
---------------------------
Net loans charged off (15) (15)
Provision for possible loan losses 78 179
Allowance for possible loan losses
---------------------------
(end of period) $ 618 $ 555
---------------------------
---------------------------
Loans outstanding:
Average $ 43,831 $ 39,964
End of period 44,785 42,545
Ratio of allowance for loan loss
to total loans outstanding
Average 1.41% 1.39%
End of period 1.38% 1.30%
Ratio of net charge-offs to average
loans outstanding 0.03% 0.04%
</TABLE>
ALLOCATION OF LOAN LOSS BY LOAN
CLASSIFICATION
Management does not normally allocate the allowance for loan losses to specific
loan categories. An allocation to major categories is made for presentation
purposes only. This allocation process does not necessarily measure anticipated
future credit losses, rather it seeks to measure management's current assessment
of perceived credit loss exposure and the impact of current and anticipated
economic conditions.
<TABLE>
<CAPTION>
Percent of categories to total end of
period loans: 12/31/98 12/31/97
---------------------------------------------
<S> <C> <C>
Commercial and agricultural 30.03% 28.21%
Real estate construction 9.50% 10.47%
Real estate mortgage 49.20% 49.70%
Consumer 11.26% 11.62%
---------------------------------------------
Total loans 100.00% 100.00%
---------------------------------------------
---------------------------------------------
</TABLE>
Financial Accounting Standards Board Statements No. 114 "Accounting for
Creditors for Impairment of a Loan" and No. 118 "Accounting for Impairment of a
Loan-Income Recognition Disclosures, an amendment to SFAS No. 114" contain
accounting and reporting considerations for impaired loans. The Company measures
impaired loans based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the fair market value of the collateral if the loan is collateral dependent.
Certain groups of smaller balance homogeneous loans are measured collectively
for impairment.
Quarterly changes in loan loss reserve allocations were influenced by changes in
loan portfolio category distribution and quality. The loan loss reserve analysis
compared different factors affecting the level of credit risk. We then segmented
the portfolio into different loan types, industries and concentrations as well
as criticized classifications. Loss factors for each category were reviewed as
established based upon changes in industry averages, peer bank experiences and
estimated losses based upon management's review of all classified credits.
Weight was placed upon nationally reported growth in bankruptcies and increases
in our average loan size. Because of the quality of consumer, commercial and
mortgage loan portfolios, slight changes were made to factors affecting
suggested allocations by category. Overall, no allocations to loan loss reserves
were made in the 3rd and 4th quarters of 1998.
At December 31, 1998 and 1997, the Company's recorded investment in certain
loans that were considered to be impaired was $447,000 and $59,000,
respectively, all of which was classified as non-accrual. None of these loans
required a specific valuation allowance based on the value of the underlying
collateral. The balance of the allowance for credit losses is available to
absorb losses from all loans.
7
<PAGE>
The carrying value of investment securities and the maturities and yield
information on the investment portfolio is as follows:
INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DOLLAR PERCENTAGE
1998 1997 CHANGE CHANGE
------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
US Treasury securities $ 5,508 $ 4,972 $ 536 10.78%
US Government and agency
securities 12,617 14,320 (1,703) -11.89%
Mortgage Backed Securities 5,838 2,963 2,875 97.03%
Corporate bonds 301 - 301 0.00%
Municipal bonds 296 309 (13) -4.21%
Federal Home Loan Bank and 435 398 37 9.30%
Federal Reserve Stock
------------------------------------------------------------------
Total $ 24,995 $ 22,962 $ 2,033 8.85%
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------------------------
Over One Over Five
One Year or Less Through Five Years Through Ten Years Over Ten Years
----------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
US Treasury Securities $1,765 6.32% $3,744 6.41%
US Govt. and Agency Securities $9,303 5.98% $3,314 6.35%
Mortgage Backed Securities $5,474 6.78% $364 7.00%
Corporate Bonds $301 7.09%
Municipal Bonds (1) $15 3.90% $129 4.90% $151 5.01%
----------------------------------------------------------------------------------------------------
Total $2,081 $18,650 $3,829 $0
Weighted Average Yield 6.41% 6.29% 6.35%
</TABLE>
(1) Yields have not been calculated on a tax equivalent basis.
The following tables set forth the distribution of the Bank's deposit accounts
at the dates indicated:
DEPOSIT LIABILITY COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-----------------------------------------------------------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL DOLLAR PERCENTAGE
AMOUNTS DEPOSITS AMOUNTS DEPOSITS CHANGE CHANGE
-----------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 11,717 15.10% $ 8,991 13.63% $ 2,726 30.32%
Interest-bearing demand 28,374 36.57% 23,973 36.34% 4,401 18.36%
Savings 10,213 13.16% 7,617 11.55% 2,596 34.08%
Certificates of deposit 18,730 24.14% 17,134 25.97% 1,596 9.31%
Certificates of deposit over $100,000 8,559 11.03% 8,253 12.51% 306 3.71%
-------------------------------------------------------------------
Total $ 77,593 100.00% $ 65,968 100.00% $ 11,625 17.62%
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE
AMOUNTS PAID AMOUNTS PAID
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-interest bearing demand $ 10,385 0.00% $ 8,991 0.00%
Interest-bearing demand 25,598 3.13% 23,973 3.33%
Savings 8,960 2.79% 7,617 2.80%
Certificates of deposit 17,823 5.41% 17,134 5.44%
Certificates of deposit over $100,000 8,333 5.74% 8,253 5.70%
----------------------------------------------------------------------------
Total $ 71,099 4.11% $ 65,968 4.17%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the scheduled maturities of certificates of deposit was:
<TABLE>
<CAPTION>
Balances
---------------------------------------------------
Less Than $100,000
$100,000 or More
-------------------- ----------------
<S> <C> <C>
Maturity in:
Three months or less: $4,973 $2,656
Over three months through six months $4,810 $2,093
Over six months through twelve months $6,872 $3,550
Over twelve months $2,075 $ 260
---------------------------------------------------
TOTAL $18,730 $8,559
---------------------------------------------------
---------------------------------------------------
</TABLE>
8
<PAGE>
The following ratios applicable to the Company are among those commonly used in
analyzing bank holding companies:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
Return on Average Assets 0.98% 0.89%
Return on Average Equity 12.59% 10.86%
Dividend Payout Ratio 0% 0%
Equity to Assets Ratio 7.82% 8.21%
</TABLE>
At December 31, 1998, and December 31, 1997, neither the Bank nor the Company
had any short term borrowings.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are interest rate sensitive and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is interest rate sensitive within a specific time period if it will
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-bearing assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period and
the amount of interest-bearing liabilities anticipated, based upon certain
assumptions, to mature or reprice within that time period. A gap is considered
positive when the amount of interest rate sensitive assets maturing within a
specific time frame exceeds the amount of interest sensitive liabilities
maturing within that same time frame. If negative, the reverse is true.
The following table represents an interest rate sensitivity analysis at December
31, 1998:
GAP ANALYSIS
<TABLE>
<CAPTION>
---------------------------------------------------
Total Within One Year To Over
One Year Five Years Five Years
---------------------------------------------------
Rate Sensitive Assets:
<S> <C> <C> <C>
Loans $17,553 $22,734 $4,498
Investments $2,081 $18,650 $3,829
Federal Funds Sold $9,650
---------------------------------------------
TOTAL $29,284 $41,384 $8,327
Rate Sensitive Liabilities:
Savings, Now and Interest Checking $38,587
Time Deposits $24,954 $2,335
---------------------------------------------
TOTAL $63,541 $2,335 $0
Interest Sensitive Gap ($34,257) $39,049 $8,327
---------------------------------------------------
---------------------------------------------------
</TABLE>
Currently, the Bank's interest sensitivity gap is negative within one year.
Assuming that general market interest rate changes affected the repricing of
assets and liabilities in equal magnitudes, this indicates that the effects of
rising interest rates on the Company would be a decrease in the net interest
margin, whereas falling interest rates would cause a corresponding increase in
margin.
9
<PAGE>
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND
INTEREST YIELDS
The following table sets forth the average balance sheets of Mountain Bank
Holding Company for the past two years along with an analysis of net interest
earnings for each major category of interest earning assets and interest bearing
liabilities, the average rate paid in each category, and net yield on earning
assets. Non-accrual loans have been included in the table as loans carrying a
zero yield. Loans fees of $340 in 1998 and $254 in 1997 are included in interest
income.
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
1998 1997
ANNUALIZED ANNUALIZED
AVERAGE INT EARNED/ YIELD/ AVERAGE INT EARNED/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------------------------------------------------------------------------------------
Assets (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $ 43,831 $ 4,441 10.13% $ 39,964 $ 4,074 10.19%
Investments 23,674 1,432 6.05% 18,951 1,243 6.56%
Federal funds sold and deposits in banks 5,371 296 5.51% 2,544 147 5.78%
------------------ ------------------------
Total interest earning assets 72,876 6,169 8.47% 61,459 5,464 8.89%
------- -------
Non-interest earning assets:
Cash and due from banks 3,532 2,897
Premises and equipment 2,855 2,195
Other assets 996 880
Reserve for possible loan losses (608) (466)
-------- ---------
Total assets $ 79,651 $ 66,965
-------- ---------
-------- ---------
Liabilities and shareholders' equity
Interest bearing liabilities:
Interest bearing demand deposits $ 25,598 802 3.13% 22,670 754 3.33%
Savings 8,960 250 2.79% 7,713 216 2.80%
Certificates of deposit 17,823 965 5.41% 15,379 836 5.44%
Certificates of deposit over $100,000 8,333 478 5.74% 6,581 375 5.70%
------------------ ---------
Total interest bearing deposits 60,714 2,495 4.11% 52,343 2,181 4.17%
-------- ---------
Federal funds purchased - - 24 1 4.17%
Other borrowings 44 4 9.09% 45 4 8.89%
------------------ -----------------------
Total interest bearing liabilities 60,758 2,499 52,412 2,186
------- -------
Non-interest bearing liabilities:
Demand deposits 10,385 8,356
Other liabilities 767 701
Shareholders' equity 7,741 5,496
-------- --------
$ 79,651 $ 66,965
-------- --------
-------- --------
Net interest income $ 3,670 $ 3,278
------- -------
------- -------
Net interest margin 5.04% 5.33%
</TABLE>
CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE VARIANCES
The change in interest due to both volume and yield has been allocated to volume
and yield changes in proportion to the relationship of the absolute dollar
amount of the change in each amount.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
1998 1997
Net Net
Change Volume Yield Change Volume Yield
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 367 $ 392 $ (25) $ 612 $ 598 $ 14
Investments $ 189 $ 292 $(103) $ 582 $ 525 $ 57
Federal Funds Sold $ 149 $ 156 $ (7) $ 24 $ 19 $ 5
---------------------------------------------------------------------------
$ 705 $ 840 $(135) $1,218 $1,142 $ 76
---------------------------------------------------------------------------
Interest Bearing Demand $ 48 $ 94 ($46) $ 254 $ 254 $ -
Savings $ 34 $ 35 ($1) $ 6 $ 6 $ -
Certificates of deposit $ 129 $ 132 ($3) $ 142 $ 150 $ (8)
Certificates of deposit over $100,000 $ 103 $ 100 $ 3 $ 54 $ 43 $ 11
---------------------------------------------------------------------------
$ 314 $ 361 $(47) $ 456 $ 453 $ 3
---------------------------------------------------------------------------
$ (1) $ (1) $ - $ - $ - $ -
$ - $ - $ - $ - $ - $ -
---------------------------------------------------------------------------
$ 313 $ 360 $ (47) $ 456 $ 453 $ 3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net Interest Income $ 392 $ 480 $ (88) $ 762 $ 689 $ 73
---------------------------------------------------------------------------
</TABLE>
10
<PAGE>
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 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. 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.
BANK HOLDING COMPANY REGULATION
In general, the BHCA limits bank holding company business to owning or
controlling banks and engaging in other banking-related activities. Bank holding
companies must obtain the FRB's approval before they: (1) acquire direct or
indirect ownership or control of any voting shares of any bank that results in
total ownership or control, directly or indirectly, of more than 5% of the
voting shares of such bank; (2) merge or consolidate with another bank holding
company; or (3) acquire substantially all of the assets of any additional banks.
Subject to certain state laws, such as age and contingency laws, a bank holding
company that is adequately capitalized and adequately managed may acquire the
assets of both in-state and out-of-state banks.
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 that is not a bank or a bank holding company unless
the FRB determines that the activities of such company are incidental or closely
related to the business of banking. If a bank holding company is
well-capitalized and meets certain criteria specified by the FRB, it may engage
de novo in certain permissible nonbanking activities without prior FRB approval.
CONTROL TRANSACTIONS. The Change in Bank Control Act of 1978, as
amended, requires a person (or group of persons acting in concert) acquiring
"control" of a bank holding company to provide the FRB with 60 days' prior
written notice of the proposed acquisition. Following receipt of this notice,
the FRB has 60 days within which to issue a notice disapproving the proposed
acquisition, but the FRB may extend this time period for up to another 30 days.
An acquisition may be completed before expiration of the disapproval period if
the FRB issues written notice of its intent not to disapprove the transaction.
In addition, any "company" must obtain the FRB's approval before acquiring 25%
(5% if the "company" is a bank holding company) or more of the outstanding
shares or otherwise obtaining control over the Company.
11
<PAGE>
TRANSACTIONS WITH AFFILIATES
The Company and the Bank are deemed affiliates within the meaning of
the Federal Reserve Act, and transactions between affiliates are subject to
certain restrictions. Accordingly, the Company and the Bank must comply with
Sections 23A and 23B of the Federal Reserve Act. Generally, Sections 23A and 23B
(1) limit the extent to which a financial institution or its subsidiaries may
engage in "covered transactions" with an affiliate, as defined, to an amount
equal to 10% of such institution's capital and surplus and an aggregate limit on
all such transactions with all affiliates to an amount equal to 20% of such
capital and surplus, and (2) require all transactions with an affiliate, whether
or not "covered transactions," to be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.
REGULATION OF MANAGEMENT
Federal law (1) sets forth the circumstances under which officers or
directors of a financial institution may be removed by the institution's federal
supervisory agency; (2) places restraints on lending by an institution to its
executive officers, directors, principal stockholders, and their related
interests; and (3) prohibits management personnel from serving as a director or
in other management positions with another financial institution which has
assets exceeding a specified amount or which has an office within a specified
geographic area.
TIE-IN ARRANGEMENTS
The Company and the Bank cannot engage in certain tie-in arrangements
in connection with any extension of credit, sale or lease of property or
furnishing of services. For example, with certain exceptions, neither the
Company nor the Bank may condition an extension of credit on either (1) a
requirement that the customer obtain additional services provided by it or (2)
an agreement by the customer to refrain from obtaining other services from a
competitor.
The FRB has adopted significant amendments to its anti-tying rules
that: (1) removed FRB-imposed anti-tying restrictions on bank holding companies
and their non-bank subsidiaries; (2) 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 were designed to
enhance competition in banking and nonbanking products and to allow banks and
their affiliates to provide more efficient, lower cost service to their
customers. However, the impact of the amendments on the Company and the Bank is
unclear at this time.
STATE LAW RESTRICTIONS
As a Washington business corporation, the Company may be subject to
certain limitations and restrictions as provided under applicable Washington
corporate law. In addition, although the Bank is a national bank and therefore
primarily regulated by the Office of the Comptroller of the Currency ("OCC"),
Washington banking law may restrict certain activities of the Bank.
12
<PAGE>
MT. RAINIER NATIONAL BANK
GENERAL
The Bank, as a national banking association, is subject to regulation
and examination by the OCC. The federal laws that apply to the Bank regulate,
among other things, the scope of its business, its investments, its reserves
against deposits, the timing of the availability of deposited funds and the
nature and amount of and collateral for loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and not
to protect stockholders of the bank or its holding company.
CRA. The Community Reinvestment Act (the "CRA") requires that, in
connection with examinations of financial institutions within their
jurisdiction, the OCC evaluates the record of the financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
banks. These factors are also considered in evaluating mergers, acquisitions,
and applications to open a branch or facility.
INSIDER CREDIT TRANSACTIONS. Banks are also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of that bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 (the "FDICIA"), each federal banking agency has prescribed, by
regulation, noncapital 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 of the Company believes that the Bank meets all
such standards, and therefore, does not believe that these regulatory standards
materially affect the Company's business operations.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") permits nationwide interstate banking and branching under
certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law
13
<PAGE>
restrictions on interstate banking. Currently, bank holding companies may
purchase banks in any state, and states may not prohibit such purchases.
Additionally, banks are permitted to merge with banks in other states as long as
the home state of neither merging bank has "opted out." The Interstate Act
requires regulators to consult with community organizations before permitting an
interstate institution to close a branch in a low-income area.
Under recent FDIC regulations, banks are prohibited from using their
interstate branches primarily for deposit production. The FDIC has accordingly
implemented a loan-to-deposit ratio screen to ensure compliance with this
prohibition.
With regard to interstate bank mergers, Washington has "opted in" to
the Interstate Act and allows in-state banks to merge with out-of-state banks
subject to certain aging requirements. Washington law generally authorizes the
acquisition of an in-state bank by an out-of-state bank through merger with a
Washington financial institution that has been in existence for at least 5 years
prior to the acquisition. With regard to interstate bank branching, out-of-state
banks that do not already operate a branch in Washington may not establish de
novo branches in Washington or establish and operate a branch by acquiring a
branch in Washington.
DEPOSIT 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.
All insured banks are required to pay semi-annual deposit insurance premium
assessments to the FDIC.
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 how much risk they present to the 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.
DIVIDENDS
The principal source of the Company's cash revenues is dividends
received from the Bank. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends which would constitute an unsafe or unsound
banking practice. In addition, a bank may not pay cash dividends if that payment
could reduce the amount of its capital below that necessary to meet minimum
applicable regulatory capital requirements. Other than the laws and regulations
noted above, which apply to all banks and bank holding companies, neither the
Company nor the Bank is currently subject to any regulatory restrictions on its
dividends.
CAPITAL ADEQUACY
Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below minimum guideline
14
<PAGE>
levels, the holding company or bank may be denied approval to acquire or
establish additional banks or nonbank businesses or to open new facilities.
The FDIC and Federal Reserve use risk-based capital guidelines for
banks and bank holding companies. These are designed to make such capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the Federal
Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier I capital. Tier I capital for bank holding companies includes common
shareholders' equity, certain qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
except as described above.
The Federal Reserve also employs a leverage ratio, which is Tier I
capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to constrain the maximum degree to which a bank holding company may
leverage its equity capital base. The Federal Reserve requires a minimum
leverage ratio of 3%. However, for all but the most highly rated bank holding
companies and for bank holding companies seeking to expand, the Federal Reserve
expects an additional cushion of at least 1% to 2%.
FDICIA created a statutory framework of supervisory actions indexed to
the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories depending
on its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. The
Company does not believe that these regulations have any material effect on
their operations.
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
and the Bank cannot be predicted with certainty.
15
<PAGE>
CHANGES IN BANKING LAWS AND REGULATIONS
The laws and regulations that affect banks and bank holding companies
are currently undergoing significant changes. In 1998, legislation was proposed
in the United States Congress which contained proposals to alter the structure,
regulation, and competitive relationships of the nation's financial
institutions. Although the legislation was not passed in the 1998 general
session of Congress, similar legislation may be proposed in the coming years
and, if enacted into law, such 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 may 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
and the Bank might be affected thereby, cannot be predicted with certainty.
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
16
<PAGE>
vendors. The Company has also identified, and begun 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 or 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.
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.
17
<PAGE>
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 century date change for the year
2000 includes certain "forward looking statements" concerning the future
operations of the Company. The Company desires to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 as
they apply to forward looking statements. This statement is for the express
purpose of availing the Company of the protections of such safe harbor with
respect to all "forward looking statements". Management's ability to predict
results of the effect 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 Company's success in
identifying systems and programs that are not year 2000 compliant; the
possibility that systems modifications will not operate as intended; unexpected
costs associated with remediation, including labor and consulting costs; the
uncertainty associated with the impact of the century change on the Company's
customers, vendors and third party service providers; and the economy generally.
18
<PAGE>
ITEM 7. DESCRIPTION OF PROPERTY
The Bank's Main Office is located in Enumclaw, Washington, at 501
Roosevelt Avenue, in an office building owned by the Bank. The facility has
10,275 square feet with two drive-up windows, an automatic teller machine (ATM),
and a night depository. The premises are fully equipped and include teller
counters, key drawers, safe, lock boxes with keys, signs and alarm equipment.
On February 6, 1995, the Bank opened its Buckley Branch located at
29290 Highway 410, Buckley, Washington. The facility is owned by the Bank and
has 3,100 square feet, a two-lane drive up, an ATM and a night depository.
On January 26, 1998, the Bank opened its Black Diamond Branch located
at 31329 Third Avenue, Black Diamond, Washington. The facility is owned by the
Bank and has 3,080 square feet, a two lane driveup and a night depository.
On November 16, 1998, the Bank opened its Auburn Branch located at 1436
Auburn Way So, Auburn, Washington. The facility is owned by the Bank and has
2,624 square feet, a two lane driveup, an ATM and a night depository.
The Bank has also leased space for an ATM located at 31605 Third
Avenue, Black Diamond, Washington. That ATM was placed in service on March 7,
1995. Customers of the Bank are charged no fee for utilization of the ATM.
ITEM 8. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding "Directors and Executive Officers" of the Company
is incorporated by reference from the Company's 1999 Annual Proxy Statement
("Proxy Statement") under the captions "INFORMATION WITH RESPECT TO NOMINEES AND
DIRECTORS WHOSE TERMS CONTINUE" and "MANAGEMENT".
ITEM 9. REMUNERATION OF DIRECTORS AND OFFICERS
Information regarding "Remuneration of Directors and Officers" of the
Company is incorporated by reference from the Company's Proxy Statement under
the captions "INFORMATION WITH RESPECT TO NOMINEES AND DIRECTORS WHOSE TERMS
CONTINUE - Compensation of Directors" and "EXECUTIVE COMPENSATION".
ITEM 10. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS
Information regarding "Security Ownership of Management and Certain
Shareholders" of the Company is incorporated by reference from the Company's
Proxy Statement under the captions "INFORMATION WITH RESPECT TO NOMINEES AND
DIRECTORS WHOSE TERMS CONTINUE" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT".
19
<PAGE>
ITEM 11. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Information regarding "Interest of Management and Others in Certain
Transactions" of the Company is incorporated by reference from the Company's
Proxy Statement under the caption "TRANSACTIONS WITH MANAGEMENT".
20
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
MARKET INFORMATION
No broker makes a market in the Company's common stock, and trading has not been
extensive. Trades that have occurred cannot be characterized as amounting to an
active market. The stock is traded by individuals on a personal basis and is not
listed on any exchange or traded on the over-the-counter market. Due to the
limited information available, the following price information may not
accurately reflect the actual market value of the Company's shares. The
following data includes trades between individual investors. It does not include
new issuances of stock, the exercise of stock options or shares issued under the
Employee Stock Purchase Plan.
<TABLE>
<CAPTION>
Period # of Shares Price
Traded Range
<S> <C> <C>
1997 21,116 $12.00 to $12.50
1998 11,466 $12.50 to $17.50
</TABLE>
On October 1, 1998, the Company distributed an offering circular for 100,000
shares of common stock at $17.50 per share. 100,000 shares were sold for a total
offering of $1,750,000, which was completed on December 14, 1998.
At December 31, 1998, stock options for 107,332 shares of Mountain Bank Holding
Company common stock were outstanding. See Note 11 of the audited financial
statements for additional information.
NUMBER OF EQUITY HOLDERS
As of January 31, 1999, there were 868 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 relevant factors. The ability of the
Company to pay dividends in the future will depend primarily upon the earnings
of the Bank and its ability to pay dividends to the Company.
21
<PAGE>
PAYMENT OF DIVIDENDS
The principal source of the Company's cash revenues is dividends
received from the Bank. The ability of the Bank to pay dividends is governed by
various statutes. These statutes provide that the Board of Directors of the Bank
may declare a dividend of so much of the net profits of the Bank as they judge
expedient, except that until the surplus funds of the Bank shall equal common
capital, no dividend may be declared unless there has been carried to surplus
not less than one-tenth of the net profits of the Bank of the preceding half
year in the case of quarterly or semi-annual dividends, or not less than
one-tenth of its net profits from the two preceding consecutive half-year
periods in the case of annual dividends. In addition, the approval of the Office
of the Comptroller of the Currency is required if the total of all dividends,
including a proposed dividend, declared by a bank in any calendar year, exceeds
the total of such bank's net profits of that year combined with its retained net
profits of the preceding two years.
Pursuant to authority contained in 12 USC 1818 (b), the OCC may
prohibit, by several types of enforcement action including the issuance of a
cease and desist order, those certain actions by the Bank, including payment of
dividends, which are deemed unsafe and unsound business practices.
The payment of dividends by the Bank may also be affected by other
factors, such as the maintenance of adequate capital for the Bank.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any legal actions. From time to time in
the ordinary course of business, the Company or the Bank may be involved in
litigation. Management believes that there are no proceedings threatened or
pending against the Company or the Bank other than routine litigation, which, if
determined adversely, would have a material effect on the business or the
financial position of the Company or the Bank.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There has not been a change in either the Company or the Bank's independent
accountants during the two most recent fiscal years.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1998, no matters were
submitted to the security holders through the solicitation of proxies or
otherwise.
ITEM 5. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company has adopted procedures to assist its directors and executive
officers with Section 16(a) of the Securities Exchange Act, which includes
assisting the officer or director in preparing forms for filing with the
Securities Exchange Commission. Based on the review of such forms, the Company
believes that all of its executive officers and directors complied with all
filing requirements applicable to them in 1998.
ITEM 6. REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the last quarter of the period
ending December 31, 1998.
22
<PAGE>
Mountain
Bank
Holding
Company
And
Subsidiary
CONSOLIDATED
FINANCIAL
REPORT
December 31
1998
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT.............................................F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets..............................................F-2
Consolidated Statements of Income........................................F-3
Consolidated Statements of Shareholders' Equity..........................F-4
Consolidated Statements of Cash Flows....................................F-5
Notes to Consolidated Financial Statements............................F-6-22
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
MOUNTAIN BANK HOLDING COMPANY
Enumclaw, Washington
We have audited the accompanying consolidated balance sheets of MOUNTAIN BANK
HOLDING COMPANY AND SUBSIDIARY as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MOUNTAIN BANK
HOLDING COMPANY AND SUBSIDIARY as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Tacoma, Washington
January 11, 1999
F-1
<PAGE>
CONSOLIDATED
FINANCIAL
STATEMENTS
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks $ 3,369 $ 2,827
Federal funds sold and interest bearing deposits in banks 10,546 2,448
Securities available for sale 24,995 22,962
Loans held for sale 675 332
Loans 44,785 42,545
Allowance for credit losses 618 555
NET LOANS 44,167 41,990
Premises and equipment 3,323 2,483
Accrued interest receivable 530 550
Other assets 130 180
TOTAL ASSETS $87,735 $73,772
LIABILITIES
Deposits:
Demand $11,717 $ 8,991
Savings and interest-bearing demand 38,587 31,590
Time 27,289 25,387
TOTAL DEPOSITS 77,593 65,968
Accrued interest payable 215 240
Note payable 43 45
Other liabilities 193 368
TOTAL LIABILITIES 78,044 66,621
SHAREHOLDERS' EQUITY
Common stock (par value $1); authorized 5,000,000 shares;
issued and outstanding: 1998 - 907,482 shares; 1997 - 803,374 shares 907 803
Paid-in capital 6,694 5,058
Retained earnings 1,999 1,227
Accumulated other comprehensive income 91 63
TOTAL SHAREHOLDERS' EQUITY 9,691 7,151
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $87,735 $73,772
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
Mountain Bank Holding Company and Subsidiary
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
INTEREST INCOME
<S> <C> <C>
Loans $4,441 $4,074
Federal funds sold and deposits in banks 296 147
Investment taxable income 1,416 1,232
Investment tax-exempt income 16 11
TOTAL INTEREST INCOME 6,169 5,464
INTEREST EXPENSE
Deposits 2,495 2,181
Note payable 4 5
TOTAL INTEREST EXPENSE 2,499 2,186
NET INTEREST INCOME 3,670 3,278
PROVISION FOR CREDIT LOSSES 78 179
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 3,592 3,099
NON-INTEREST INCOME
Service charges on deposit accounts 416 357
Origination fees and gains on mortgage loans sold 293 228
Gain (loss) on sales of securities available for sale 23 (12)
Other 132 124
TOTAL NON-INTEREST INCOME 864 697
NON-INTEREST EXPENSES
Salaries 1,461 1,219
Employee benefits 252 218
Occupancy 135 132
Equipment 319 299
Other 1,124 981
TOTAL NON-INTEREST EXPENSES 3,291 2,849
INCOME BEFORE INCOME TAXES 1,165 947
INCOME TAXES 393 350
NET INCOME $ 772 $ 597
EARNINGS PER SHARE DATA
Basic earnings per share $.96 $.84
Diluted earnings per share .90 .79
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Mountain Bank Holding Company and Subsidiary
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
<S> <C> <C> <C> <C> <C>
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
Comprehensive income:
Net income - - - - 597 - - 597
Other comprehensive income,
net of tax:
Unrealized gain on
securities, net of
reclassification adjustment - - - - - - 88 88
COMPREHENSIVE INCOME 685
BALANCE AT DECEMBER 31, 1997 803 5,058 1,227 63 7,151
Sale of common stock under employee
stock purchase plan (1,186 shares) 1 14 - - - - 15
Sale of common stock 103 1,622 - - - - 1,725
Comprehensive income:
Net income - - - - 772 - - 772
Other comprehensive income,
net of tax:
Unrealized gain on
securities, net of
reclassification adjustment - - - - - - 28 28
COMPREHENSIVE INCOME 800
BALANCE AT DECEMBER 31, 1998 $907 $6,694 $1,999 $91 $9,691
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Mountain Bank Holding Company and Subsidiary
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 772 $ 597
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 78 179
Depreciation and amortization 342 322
Deferred federal income taxes (8) - -
(Gain) loss on sales of securities available for sale (23) 12
Gain on loans sold (119) (82)
Originations of loans held for sale (13,929) (9,848)
Proceeds from sales of loans 13,705 9,598
(Increase) decrease in accrued interest receivable 20 (177)
Increase (decrease) in accrued interest payable (25) 14
Other - net (153) 2
NET CASH PROVIDED BY OPERATING ACTIVITIES 660 617
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold and
interest-bearing deposits in banks (8,098) 5,102
Purchase of securities available for sale (15,463) (19,436)
Proceeds from sales of securities available for sale - - 9,651
Proceeds from maturities of securities available for sale 13,464 436
Increase in loans made to customers, net of principal collections (2,255) (5,049)
Additions to premises and equipment (1,129) (548)
NET CASH USED IN INVESTING ACTIVITIES (13,481) (9,844)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest-bearing demand deposits 9,723 2,447
Net increase in time deposits 1,902 4,770
Net proceeds from issuance of stock 1,740 1,187
Repayment of note payable (2) (1)
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,363 8,403
NET CHANGE IN CASH AND DUE FROM BANKS 542 (824)
CASH AND DUE FROM BANKS
Beginning of year 2,827 3,651
END OF YEAR $ 3,369 $ 2,827
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $2,530 $2,172
Income taxes paid 495 275
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain on securities available for sale, net of tax $28 $88
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
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 subsidiary, Mt. Rainier
National Bank (the Bank). 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 Company previously had a wholly
owned subsidiary, Mountain Real Estate Holdings, Inc. In 1998 this subsidiary
was dissolved by the Company; the assets were invested in the Bank.
The Bank operates two branches and has a customer base centered in and around
Southeastern King County and Northeastern Pierce County, Washington. The Bank's
primary source of revenue is providing loans to customers, who are predominantly
small and middle-market businesses and middle-income individuals.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, as of the date of the balance
sheet, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ significantly from those estimates.
Certain prior year amounts have been reclassified to conform to the 1998
presentation. All dollar amounts, except per share information, are stated in
thousands.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt securities, which may be sold to
implement the Company's asset/liability management strategies and in response to
changes in interest rates, prepayment rates and similar factors, and certain
restricted equity securities. Securities available for sale are reported at fair
value. Unrealized gains and losses, net of the related deferred tax effect, are
reported as a net amount in a separate component of shareholders' equity.
Realized gains and losses on securities available for sale, determined using the
specific identification method, are included in earnings. Amortization of
premiums and accretion of discounts are recognized in interest income over the
period to maturity.
Declines in the fair value of individual securities available for sale below
their cost that are other than temporary result in write-downs of the individual
securities to their fair value. Such write-downs are included in earnings as
realized losses.
LOANS HELD FOR SALE
Mortgage loans originated for sale in the secondary market are carried at the
lower of cost or estimated market value. Net unrealized losses are recognized
through a valuation allowance established by charges to income.
(CONTINUED)
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 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.
Subsidiaries provide for income taxes on a separate return basis and remit to
the Company amounts currently payable.
(CONTINUED)
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
CASH AND CASH EQUIVALENTS
For purposes of presentation in the consolidated statements of cash flows, cash
and cash equivalents are defined as those amounts included in the balance sheet
caption "Cash and due from banks." The Bank maintains its cash in depository
institution accounts, which, at times, may exceed federally insured limits. The
Bank has not experienced any losses in such accounts.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the 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
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.
COMPREHENSIVE INCOME
Effective January 1, 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 in a financial statement
that is displayed 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
non-owner 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, comprehensive income includes net income reported in the
statement of income, and changes in fair value of its securities available for
sale, reported as a component of shareholders' equity. There was no effect on
previously reported net income as a result of this reporting change.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair value.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. This statement is
effective for all fiscal years beginning after June 15, 1999. The Bank had no
derivatives as of December 31, 1998, nor does the Bank engage in any hedging
activities. The Bank does not anticipate that the adoption of SFAS No. 133 will
have a material effect on its financial position or results of operations.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 2 - RESTRICTED ASSETS
Federal Reserve Board regulations require maintenance of minimum reserve
balances with the Federal Reserve Bank. The amount of such balances for the
years ended December 31, 1998 and 1997 was $300 and $541, respectively.
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
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1998
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,425 $ 83 $ - - $ 5,508
U.S. Government and agency securities 18,404 84 33 18,455
Municipal bonds 291 5 - - 296
Corporate bonds 302 - - 1 301
Federal Home Loan Bank and
Federal Reserve Bank stock 435 - - - - 435
$24,857 $172 $34 $24,995
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>
(CONTINUED)
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 3 - DEBT AND EQUITY SECURITIES (CONCLUDED)
Gross realized gains and losses on sales of securities available for sale for
the years ended December 31 were:
<TABLE>
<CAPTION>
1998 1997
GROSS REALIZED GAINS
<S> <C> <C>
U.S. Treasury securities $-- $ 1
U.S. Government and agency securities 23 5
$23 $ 6
GROSS REALIZED LOSSES
U.S. Treasury securities $-- $ 5
U.S. Government and agency securities -- 11
Corporate bonds -- 2
$-- $18
</TABLE>
The scheduled maturities of debt securities available for sale at December 31,
1998, are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less $ 2,069 $ 2,081
Due in one to five years 18,538 18,650
Due in five years or more 3,815 3,829
$24,422 $24,560
</TABLE>
Securities with a carrying value of $1,008 and $1,013 at December 31, 1998 and
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 December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commercial and agricultural $13,449 $12,004
Real estate:
Construction and land development 4,255 4,453
Mortgage 22,036 21,145
Consumer 5,045 4,943
$44,785 $42,545
</TABLE>
(CONTINUED)
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 4 - LOANS (CONCLUDED)
Changes in the allowance for credit losses for the years ended December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance at beginning of year $555 $391
Provision for credit losses 78 179
Charge-offs (15) (15)
BALANCE AT END OF YEAR $618 $555
</TABLE>
The recorded investment in impaired loans, which were all on nonaccrual status,
was $447 and $59 at December 31, 1998 and 1997, respectively. No allocation of
the allowance for credit losses was considered necessary for these impaired
loans. The average recorded investment in impaired loans during the years ended
December 31, 1998 and 1997 was $230 and $98, respectively. Interest income
recognized on impaired loans, which was collected in cash, totaled $35 in 1998
and $15 in 1997.
At December 31, 1998, there were no commitments to lend additional funds to
borrowers whose loans have been modified. There were no loans 90 days and over
past due still accruing interest at December 31, 1998 or 1997.
At December 31, 1998 and 1997, certain officers and directors, or companies in
which they have 10% or more beneficial interest, were indebted to the Bank in
the aggregate amount of $1,707 and $2,176, respectively.
During 1998 advances of $489 were made, and repayments totaled $958.
NOTE 5 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 821 $ 615
Buildings 2,395 1,452
Equipment, furniture and fixtures 1,550 1,214
Construction in progress 7 362
TOTAL COST 4,773 3,643
Less accumulated depreciation 1,450 1,160
$3,323 $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-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 6 - DEPOSITS
The aggregate amount of certificates of deposit with a minimum denomination of
one hundred thousand dollars is approximately $8,559 and $8,253 at December 31,
1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C> <C>
1999 $24,959
2000 1,813
2001 78
2002 239
2003 and thereafter 200
$27,289
</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: 1999 - $2; 2000 -
$2; 2001 - $2; 2002 - $2; 2003 - $2; and thereafter - $33.
NOTE 8 - INCOME TAXES
The components of the provision for income taxes are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current $401 $350
Deferred benefit (8) - -
INCOME TAXES $393 $350
</TABLE>
(CONTINUED)
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 8 - INCOME TAXES (CONCLUDED)
The effect of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at December 31 follows:
<TABLE>
<CAPTION>
1998 1997
DEFERRED TAX ASSETS
<S> <C> <C>
Provision for credit losses $187 $161
Deferred compensation 9 7
Other 6 - -
TOTAL DEFERRED TAX ASSETS 202 168
DEFERRED TAX LIABILITIES
Depreciation - - 16
Cash basis tax accounting 98 92
Deferred income 117 81
Unrealized gain on securities available for sale 47 34
TOTAL DEFERRED TAX LIABILITIES 262 223
NET DEFERRED TAX LIABILITIES $ 60 $ 55
</TABLE>
The following is a reconciliation between the statutory and effective federal
income tax rates for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
PERCENT OF PERCENT OF
PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C>
Income tax at statutory rate $396 34.0% $322 34.0%
Increase (decrease) resulting from:
Tax-exempt income (6) (.5) (4) (.4)
Other 3 .2 32 3.3
TOTAL INCOME TAX EXPENSE $393 33.7% $350 36.9%
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 9 - 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>
1998 1997
<S> <C> <C>
Commercial and agriculture $3,227 $4,194
Real estate 2,296 1,993
Credit cards 2,436 1,434
$7,959 $7,621
</TABLE>
Outstanding commitments under letters of credit totaled $113 and $105 at
December 31, 1998 and 1997, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank's experience has been that approximately 60% 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 $3,450, and a credit line with the Federal Home Loan Bank totaling
10% of assets. The Bank has entered into a blanket pledge agreement with the
Federal Home Loan Bank to secure this credit line. These lines were not drawn
upon in 1998 or 1997.
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 $52 and $47 for
the years ended December 31, 1998 and 1997, respectively.
(CONTINUED)
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 10 - 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
$800.
The contractual amounts of credit related financial instruments such as
commitments to extend credit, credit card arrangements, and letters of credit
represent the amounts of potential accounting loss should the contract be fully
drawn upon, the customer default, and the value of any existing collateral
become worthless.
NOTE 11 - STOCK OPTION PLANS
DIRECTOR PLAN
The 1990 Director Stock Option Plan grants a director an option to purchase
6,000 shares of common stock upon initial election to the Board of Directors at
an exercise price equal to the fair market value of the common stock at the date
of grant. Options are exercisable on a cumulative basis in annual installments
of one-third each on the third, fourth and fifth anniversary of the date of
grant. A total of 60,000 shares of the Company's common stock were reserved for
option under this plan, of which 54,000 options at $5 per share were granted on
June 13, 1990, to expire on June 13, 2005. All options granted are fully vested
at December 31, 1998.
EMPLOYEE PLAN
In 1990, the Company adopted a plan providing for granting certain key employees
options to purchase common stock. Under the terms of the plan, options are
incentive stock options (as defined in the Internal Revenue Code). The option
price will be fair market value at the date of grant or a price determined by
the Board of Directors, but not less than fair value. Options are exercisable on
a cumulative basis in annual installments of one-third each on the third, fourth
and fifth anniversary of the date of grant. Pursuant to this plan, 60,000 shares
are reserved for option as of December 31, 1998, of which 56,000 shares have
been granted.
(CONTINUED)
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 11 - STOCK OPTION PLANS (CONTINUED)
EMPLOYEE PLAN (CONCLUDED)
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies APB Opinion No. 25 in accounting for its plans. If the Company had
elected to recognize compensation cost for stock options issued subsequent to
December 31, 1995, based on the fair value at the grant dates, consistent with
the method prescribed by SFAS No. 123, net income and earnings per share would
have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
Net income:
<S> <C> <C>
As reported $ 772 $ 597
Pro forma 732 580
Basic:
As reported $ .96 $ .84
Pro forma .91 .81
Diluted:
As reported $ .90 $ .79
Pro forma .86 .78
</TABLE>
The fair value of each option grant is estimated on the date of grant, based on
the Black-Scholes option-pricing model and using the following weighted-average
assumptions: dividend yield of 0.0% for all years; risk-free interest rates of
6.00%; and expected holding periods ranging from 8 to 10 years. The weighted
average fair value of stock options, calculated using the Black-Scholes
option-pricing model, granted in 1998 and 1997 was $5.32 and $5.15,
respectively. Management believes that the estimated fair values calculated
using this pricing model are highly subjective. There is no active market for
the options granted, and use of other models could result in different estimated
fair values.
Presented below is a summary of the status of the stock options held by
directors and employees, and the related transactions for the years presented:
<TABLE>
<CAPTION>
1998 WEIGHTED 1997 WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 103,832 $ 6.83 103,332 $ 5.36
Granted 5,500 16.27 20,500 12.50
Forfeited (2,000) 10.00 (20,000) 5.00
OUTSTANDING AT END OF YEAR 107,332 7.25 103,832 6.83
Options exercisable at year-end 77,332 77,332
</TABLE>
(CONTINUED)
F-16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 11 - STOCK OPTION PLANS (CONCLUDED)
The following summarizes information about stock options outstanding at December
31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING NUMBER
PRICE OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISABLE
<S> <C> <C> <C> <C>
$ 5.00 75,332 5.0 75,332
6.25 2,000 3.4 2,000
11.00 4,000 7.5 - -
12.50 20,500 8.6 - -
13.00 1,500 9.4 - -
17.50 4,000 9.8 - -
</TABLE>
NOTE 12 - PROFIT SHARING PLAN
The Bank's defined contribution profit sharing plan covers substantially all
employees who have completed one year or more of service. Employees are eligible
to defer up to 15% of their gross salary, with employer contributions to the
Plan made at the discretion of the Board of Directors. The Bank's contribution
for the years ended December 31, 1998 and 1997, totaled $31 and $23,
respectively.
NOTE 13 - DEFERRED COMPENSATION AGREEMENT
In 1993 the Bank established a deferred compensation agreement with a director
under which the director will defer his director fees. At retirement he will
receive a benefit of $1 per month for 120 months. The accrued liability related
to this agreement totaled $26 and $21 at December 31, 1998 and 1997,
respectively. Expenses associated with this plan were $5 and $6 in 1998 and
1997, respectively. The Bank has also purchased a whole-life insurance policy,
which may be used to fund benefits under the deferred compensation agreement.
NOTE 14 - 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 the end of the plan year. The
aggregate number of shares reserved under this plan is 19,270. No employee can
purchase more than 200 shares of common stock valued at more than $25 in any
plan year; 1,186 and 1,898 shares were issued at a price of $12.50 and $10.00
per share for the years ended December 31, 1998 and 1997, respectively.
F-17
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 15 - 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, 1998, the most recent notification from the Bank's regulator
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $ 9,600 11.39% $3,371 4.00% N/A N/A
Bank 9,441 11.21 3,369 4.00 $4,211 5.00
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 9,600 18.79 2,044 4.00 N/A N/A
Bank 9,441 18.47 2,044 4.00 3,066 6.00
TIER 2 CAPITAL:
Consolidated 10,218 19.99 4,089 8.00 N/A N/A
Bank 10,059 19.68 4,089 8.00 5,111 10.00
</TABLE>
(CONTINUED)
F-18
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 15 - REGULATORY MATTERS (CONCLUDED)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 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, 1998, 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 $1,071 as of December 31, 1998,
without regulatory approval.
NOTE 16 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS - DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
ASSETS
<S> <C> <C>
Cash $ 73 $ 680
Investment in the Bank 9,532 5,785
Investment in Mountain Real Estate Holdings, Inc. - - 653
Due from subsidiaries 127 195
Other assets 56 109
TOTAL ASSETS $9,788 $7,422
LIABILITIES AND SHAREHOLDERS' EQUITY
Federal income taxes payable $ 97 $ 191
Other liabilities - - 80
Shareholders' equity 9,691 7,151
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,788 $7,422
</TABLE>
(CONTINUED)
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 16 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONCLUDED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
OPERATING INCOME/BANK
Dividend from subsidiary $500 $225
OPERATING EXPENSES (70) (99)
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 430 126
INCOME TAX BENEFIT (26) - -
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES 456 126
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 316 471
NET INCOME $772 $597
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 772 $ 597
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of organization costs 1 3
Amortization of covenant not to compete 52 47
Equity in undistributed income of subsidiaries (316) (471)
Increase in covenant not to compete - - (155)
(Increase) decrease in receivable from subsidiaries 68 (41)
Increase (decrease) in federal income taxes (94) 76
Increase (decrease) in other liabilities (80) 80
NET CASH PROVIDED BY OPERATING ACTIVITIES 403 136
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries (2,750) (650)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,740 1,187
NET CHANGE IN CASH (607) 673
CASH, BEGINNING OF YEAR 680 7
CASH, END OF YEAR $ 73 $ 680
</TABLE>
F-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 17 - OTHER EXPENSES
Other expenses include the following amounts which are in excess of 1% of the
total of interest income and non-interest income for the years ended December
31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Professional fees $ 76 $ 81
Data processing 347 295
Office supplies and expenses 119 91
Business taxes 79 69
</TABLE>
NOTE 18 - EARNINGS PER SHARE DISCLOSURES
Following is information regarding the calculation of basic and diluted earnings
per share for the years indicated:
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Basic earnings per share:
Net income $772 807,732 $.96
Effect of dilutive securities:
Options - - 51,240 (.06)
Diluted earnings per share:
NET INCOME $772 858,972 $.90
YEAR ENDED DECEMBER 31, 1997
Basic earnings per share:
Net income $597 713,437 $.84
Effect of dilutive securities:
Options - - 43,457 (.05)
Diluted earnings per share:
NET INCOME $597 756,894 $.79
</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 19 - CAPITAL OFFERING
On October 1, 1998, the Company offered for sale 100,000 shares of one-dollar
par value common stock at a subscription price of $17.50 per share. The offering
was to the general public and was concluded on December 14, 1998.
F-21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Mountain Bank Holding Company and Subsidiary
December 31, 1998 and 1997
NOTE 20 - COMPREHENSIVE INCOME
Net unrealized gains include, net of tax, $43 and $81 of unrealized gains
arising during 1998 and 1997, respectively, less reclassification adjustments of
$15 and $7 for gains and losses included in net income for 1998 and 1997,
respectively, as follows:
<TABLE>
<CAPTION>
BEFORE- TAX
TAX BENEFIT NET-OF-TAX
AMOUNT (EXPENSE) AMOUNT
<S> <C> <C> <C>
1998
Unrealized holding gains arising during the year $64 $21 $43
Reclassification adjustments for gains realized in net income (23) (8) (15)
NET UNREALIZED GAINS $41 $13 $28
1997
Unrealized holding gains arising during the year $122 $41 $81
Reclassification adjustments for losses realized in net income 12 5 7
NET UNREALIZED GAINS $134 $46 $88
</TABLE>
NOTE 21 - YEAR 2000 ISSUES
As the year 2000 approaches, business issues are emerging regarding how existing
computer software programs and operating systems can accommodate the date value.
Many software systems are designed to recognize only a two-digit date field, and
may read the year 2000 as the year 1900. Thus computations of interest and other
similar calculations may be based on wrong dates, or the systems may not be able
to process information at all.
The Bank primarily utilizes a third-party service bureau for processing the
mission-critical data that might be affected by this problem. The service bureau
is in the process of testing, updating, and modifying its computer systems to
ensure year 2000 compliance. The first phase of testing those systems was
successfully completed before December 31, 1998. Internally, the Bank has
implemented a year 2000 compliance program, which is aggressively reviewing year
2000 issues that may be faced by its other outside vendors and customers and
that affect its internal computer systems. In the event that significant
suppliers or customers do not successfully and timely achieve year 2000
compliance, the Bank's business could be adversely affected. However, management
believes that the Bank's own internal systems, networks and resources would
allow the Bank to effectively operate and service its customers. To the extent
necessary, the Bank will engage alternative vendors and suppliers to facilitate
normal operations after January 1, 2000. The costs incurred to date on year 2000
compliance issues have not been material. While it is impossible to estimate the
potential impact on the Bank's business after January 1, 2000, management
estimates that the costs the Bank will incur prior to that date in its
activities necessary to ensure year 2000 compliance will not have a significant
effect on its financial position or results of operations.
F-22
<PAGE>
PART III
EXHIBITS
The following exhibits are incorporated by reference to the Company's
registration statement on Form SB-1 (File No. 333-36647).
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
2.1 Articles of Incorporation and Amendment, of the registrant
2.2 By-laws of the registrant, currently in effect
6.2 Mt. Rainier National Bank 1990 Employee Stock Option Plan
6.3 Mt. Rainier National Bank 1990 Director Stock Option Plan
6.4 Mt. Rainier National Bank 1995 Employee Stock Purchase Plan
27 Financial Data Schedule
</TABLE>
E-1
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
MOUNTAIN BANK HOLDING COMPANY
Date: March 15, 1999
By: /S/
------------------------------------------------
Roy T. Brooks, Chairman of the Board & CEO
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /S/ Date: March 15, 1999
----------------------------------------------------
Roy T. Brooks, Chairman of the Board & CEO
(Principal Executive Officer)
By: /S/ Date: March 15, 1999
----------------------------------------------------
Sheila M. Brumley, Cashier & Secretary to the Board
(Principal Accounting Officer)
By: /S/ By: /S/
-------------------------------------- ----------------------------------
Susan K. Bowen-Hahto, Director Brian W. Gallagher, Director
Date: March 15, 1999 Date: March 15, 1999
By: /S/ By: /S/
-------------------------------------- ----------------------------------
Terry L. Garrison, Director Michael K. Jones, Director
Date: March 15, 1999 Date: March 15, 1999
By: /S/ By: /S/
-------------------------------------- ----------------------------------
Barry C. Kombol, Director John W. Raeder, Director
Date: March 15, 1999 Date: March 15, 1999
By: /S/ By: /S/
-------------------------------------- ----------------------------------
Garrett S. Van Beek, Director Hans Rudy Zurcher, Director
Date: March 15, 1999 Date: March 15, 1999
By: /S/
--------------------------------------
Steve W. Moergeli, Director
Date: March 15, 1999
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000898018
<NAME> MOUNTAIN BANK HOLDING COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,369
<INT-BEARING-DEPOSITS> 10,546
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,995
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 44,785
<ALLOWANCE> 618
<TOTAL-ASSETS> 87,735
<DEPOSITS> 77,593
<SHORT-TERM> 0
<LIABILITIES-OTHER> 408
<LONG-TERM> 43
0
0
<COMMON> 907
<OTHER-SE> 8,784
<TOTAL-LIABILITIES-AND-EQUITY> 87,735
<INTEREST-LOAN> 4,441
<INTEREST-INVEST> 1,432
<INTEREST-OTHER> 296
<INTEREST-TOTAL> 6,169
<INTEREST-DEPOSIT> 2,495
<INTEREST-EXPENSE> 2,499
<INTEREST-INCOME-NET> 3,670
<LOAN-LOSSES> 78
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 3,291
<INCOME-PRETAX> 1,165
<INCOME-PRE-EXTRAORDINARY> 1,165
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 772
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.9
<YIELD-ACTUAL> 5.04
<LOANS-NON> 447
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 555
<CHARGE-OFFS> (15)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 618
<ALLOWANCE-DOMESTIC> 618
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
