** **

** **

**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-KSB**

 

**ý****         Annual report underSection 13 or 15(d) of the Securities**

**Exchange Act of 1934 *(Fee required)***

** **

**For thefiscal year ended December 31, 2001.**

** **

**o****         Transition report underSection 13 or 15(d) of the Securities**

**Exchange Act of 1934 *(No fee required)***

** **

**CommissionFile Number:  0 - 28394**

 

**MOUNTAIN BANK HOLDING COMPANY**

(exact name of registrantas specified in its charter)

 

| **WASHINGTON**                   |   | **91-1602736**         |
|----------------------------------|--------|------------------------|
| (State or other  jurisdiction of |   | (IRS Employer          |
| incorporation or  organization)  |   | identification Number) |
|                             |   |                   |

**501 Roosevelt Avenue, PO Box 98, Enumclaw, WA  98022**

                (address of principal executive offices)            (zip code)

 

| Registrant’s telephone number:   **(360)  825-0100** |   |                            |
|--------------------------------------------------------------------------|--------|---------------------------------|
|                                                                     |   |                            |
| Securities registered pursuant to Section 12(b) of  the Act:             |   | **None**                        |
|                                                                     |   |                            |
| Securities registered pursuant to Section 12(g) of  the Act:             |   | **Common  Stock, no par value** |
|                                                                     |   |  (title of class)          |

 

Check whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes     **ý**                No     o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this form 10-KSB   **o**

 

State the issuer’s revenues for its most recent fiscal year:   **$9,408,000**

 

State the aggregate market value of the voting stock held bynon-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 datewithin the past 60 days:           **at January31, 2002 - $20,816,472**

 

Number of shares of common stock outstanding as of January 31, 2001:**  2,070,901**

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

The Proxy Statement for the 2002 Annual Meeting of Shareholders isincorporated by reference into Part I of this Annual Report on Form 10-KSB.

 

## **Transitional SmallBusiness Disclosure Format:       Yes**   ý    No    o

## ** **

 

## **TABLE OF CONTENTS**

**Part I**

**(ITEMS 6-11, FORM 1-A, MODEL B)**

** **
| **ITEM 6.**   | **DESCRIPTION OF  BUSINESS**                                                                     |
|---------------|--------------------------------------------------------------------------------------------------|
|          | *General*                                                                                        |
|          |                                                                                             |
|          | **Description of  Mt. Rainier National Bank**                                                    |
|          | *Mt. Rainier Bank*                                                                               |
|          | *History*                                                                                        |
|          | *Business*                                                                                       |
|          | *Service Area*                                                                                   |
|          | *Employees*                                                                                      |
|          | *Competition*                                                                                    |
|          | *Products and Services*                                                                          |
|          | *Marketing*                                                                                      |
|          | *Lending Activities*                                                                             |
|          | *Investment Portfolio*                                                                           |
|          | *Forward Looking  Statement Disclosure*                                                          |
|          | *Statistical  Information About Mountain Bank Holding*                                           |
|          | Loan Portfolio                                                                                   |
|          | Credit  Risk Management and Allowance for Credit Losses                                          |
|          | Loan  Loss Experience                                                                            |
|          | Allocation  of the Allowance for Credit Losses By Loan Classification                            |
|          | Risk  Elements — Non-Accrual, Past Due and Restructured Loans                               |
|          | Investment Securities  Portfolio                                                                 |
|          | Deposits                                                                                         |
|          | GAP Analysis                                                                                     |
|          | Distribution  of Average Assets, Liabilities and Shareholders’ Equity & Interest Yields |
|          | Changes  in Interest Income and Expense Volume and Rate Variances                                |
|          | *Supervision and Regulation*                                                                     |
|          | Significant  Changes in Banking Laws and Regulations                                             |
|          | Mountain  Bank Holding Company                                                                   |
|          | Bank Holding Company  Regulation                                                                 |
|          | Transactions with  Affiliates                                                                    |
|          | Tie-In  Arrangements                                                                             |
|          | State  Law Restrictions                                                                          |
|          | Mt.  Rainier National Bank                                                                       |
|          | Interstate Banking and  Branching                                                                |
|          | Deposit  Insurance                                                                               |
|          | Dividends                                                                                        |
|          | Capital  Adequacy                                                                                |
|          | Effects of  Government Monetary Policy                                                           |
|          |                                                                                             |
| **ITEM 7.**   | **DESCRIPTION OF PROPERTY**                                                                      |
|          |                                                                                             |
| **ITEM  8.**  | **DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT**                                          |
|          |                                                                                             |
| **ITEM 9.**   | **REMUNERATION  OF DIRECTORS AND OFFICERS**                                                      |
|          |                                                                                             |
| **ITEM  10.** | **SECURITY  OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS**                                   |
|          |                                                                                             |
| **ITEM  11.** | **INTEREST  OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS**                                   |

** **

 

2

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**Part II**

**(ITEMS 1-6, FORM 1-A, MODEL B)**

 
| **ITEM  1.** | **MARKET  PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY** |
|--------------|---------------------------------------------------------------------------|
|         | *Market Information*                                                      |
|         | *Number of Equity Holders*                                                |
|         | *Stock Dividends*                                                         |
|         | *Payment of Dividends*                                                    |
|         |                                                                      |
| **ITEM 2.**  | **LEGAL PROCEEDINGS**                                                     |
|         |                                                                      |
| **ITEM  3.** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS**                        |
|         |                                                                      |
| **ITEM  4.** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                  |
|         |                                                                      |
| **ITEM  5.** | **COMPLIANCE  WITH SECTION 16(a) OF THE EXCHANGE ACT**                    |
|         |                                                                      |
| **ITEM 6.**  | **REPORTS ON FORM 8-K**                                                   |

 

 

**Part F/S**

**FINANCIAL STATEMENTS**

 

 

**FINANCIAL STATEMENTS**

* *

 

**Part III**

**EXHIBITS**

 

 

**EXHIBITS**

 

 

## **SIGNATURES**

 

 

**SIGNATURES**

 

 

3

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**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)**

 

**ITEM6.  DESCRIPTION OF BUSINESS**

 

*General*

 

                Mountain BankHolding Company (“Mountain Bank Holding”) is a Washington corporation formed in1993 primarily to hold all of the Common Stock of Mt. Rainier National Bank(“Mt. Rainier Bank”), a National Banking Association organized under the lawsof the United States.  Mt. Rainier Bankprovides personal and commercial banking and related financial services at itsmain office located at 501 Roosevelt Avenue, Enumclaw, Washington, at itsbranch offices located in Buckley, Washington, at 29290 Highway 410, andlocated in Black Diamond, Washington, at 31329 Third Avenue, and located inAuburn, Washington, at 1436 Auburn Way South. Mountain Bank Holding 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 definedas a company that has direct or indirect control of a bank.  Mountain Bank Holding qualifies as a bankholding company because it owns one hundred percent (100%) of the outstandingsecurities of Mt. Rainier Bank.  AtDecember 31, 2001, Mountain Bank Holding reported on a consolidated basis totalassets of $125,881,000, total deposits of $112,111,000, and shareholders’ equityof $13,303,000.

 

Mountain Bank Holding’s strategy is to capitalize onits investment in Mt. Rainier Bank through continued growth in Mt. RainierBank’s assets, deposits and earnings, and creation of long-term value forCompany shareholders by pursuing the following:

 

—                                   Monitoring and improving the creditquality of Mt. Rainier Bank’s existing asset base;

—                                   Concentrating on expense control,interest spread maximization and marketing of fee-based products, as well asmaintaining adequate liquidity and capital levels;

—                                   Emphasizing close working relationshipsbetween Mt. Rainier Bank’s senior management, directors, loan officers andcommercial customers; and

—                                   Focusing on training programs to ensurethat management and staff have knowledge necessary to serve customers andremain in compliance with all legal and regulatory obligations.

 

There can be no assurance that Mt. Rainier Bank willachieve these objectives.

 

 

 

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**DESCRIPTION OF MT. RAINIER NATIONAL BANK**

*Mt. Rainier Bank*

 

                Mt. RainierNational Bank is a wholly-owned subsidiary of Mountain Bank Holding.  While Mountain Bank Holding and Mt. RainierBank are distinctly different entities regulated by different regulatorybodies, the income of Mountain Bank Holding presently is almost entirelyderived from dividends upstreamed from Mt. Rainier Bank to Mountain BankHolding.  Therefore, the value of thesecurities of Mountain Bank Holding is, to a large extent, dependent upon thesuccess of Mt. Rainier Bank.

 

*History*

 

                Mt. Rainier Bankopened on July 2, 1990, in Enumclaw, Washington, and has been operating sincethat date.

 

*Business*

 

                Mt. Rainier Bank,through its four branches, offers a full line of commercial banking servicesincluding checking accounts, savings programs, ATMs, night depository services,customer safe deposit box facilities, consumer loans, residential loans,commercial loans, real estate and construction loans and agriculture loans, NOWaccounts and certificates of deposit.

 

                The principalsources of Mt. Rainier Bank’s revenues are: (i) interest and fees on loans;(ii) deposit service charges; (iii) interest on deposits in other banks(generally on an overnight basis); (iv) gains on mortgages originated and soldto the secondary market; (v) interest on investments, and (vi) fees from salesof non-deposit investment products. 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, homeimprovement and rehabilitation loans, VISA national credit cards, andresidential mortgage lending.  Mt.Rainier Bank also offers safe deposit boxes, direct deposit of payroll andsocial security checks, automated teller machine access, debit cards, automaticdrafts for various accounts, and telephone banking.  Mt. Rainier Bank has a night depository and an ATM, as well asdrive-up services, at each of its offices.

 

                Mt. Rainier Bank’score deposit base generally has been enhanced through advertising and depositpromotions, and focusing on securing the entire banking relationship of each ofits customers.  Mt. Rainier Bank has notused brokered deposits as a source of funds.

 

                Mt. Rainier Bank’scommercial banking activities target high net worth individuals and theirbusinesses with an emphasis on small to medium size businesses.  Mt. Rainier Bank’s operating strategy is tooffer personal service, flexibility and timely responsiveness to the needs ofits customers.  Senior management of Mt.Rainier Bank and Mountain Bank Holding maintain close personal contact andclose working relationships with Mt. Rainier Bank’s commercial customers andtheir businesses, and Mt. Rainier Bank’s and the Company’s Boards of Directorsprimarily include local business people from Mt. Rainier Bank’s primary servicearea.  Most of Mt. Rainier Bank’s newcommercial banking business consists of referrals from existing customers.  Mountain Bank Holding believes that Mt.Rainier Bank’s loan portfolio is appropriately diversified.  All floating rate loans are priced at primeor higher.

 

                Mountain BankHolding believes that the growth in loans and profitability achieved by Mt.Rainier Bank also is attributable in large measure to its strategy of targetingsmaller and medium size businesses in the manner described above and to thebusiness and personal relationships and experience of Mt. Rainier Bank’s andMountain Bank Holding’s management and Directors, rather than the result ofgreater risk-taking or price concessions. In addition, there have been numerous acquisitions and mergers of banksin Mt. Rainier Bank’s primary service area which have made the largerinstitutions in the market even larger. This has resulted in Mt. Rainier Bank focusing primarily on the needs ofthe smaller and medium size commercial customers.

 

 

5

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*ServiceArea*

 

                Mt. Rainier Bank’sprimary service area is South King County and East Pierce County, includingEnumclaw, Buckley, Black Diamond, Auburn, and surrounding communities.  Enumclaw’s population is 11,100, havingexperienced 46% growth since 1990. Enumclaw is primarily considered a residential community, with mostgrowth in single family residences.  Thelocal economy is dependent upon the forest products industry, farming, andtourism.  Buckley has experienced lessgrowth with a population of 4,330*.* Buckley is a residential community with very little business growth inthe past few years.  Black Diamond isnow experiencing increased growth, with a population of 3*,*850, up from 1,760in 1990.  Auburn is a larger communitywith a population of 42,000, up from 35,230 in 1990.  All of the major regional banks and savings and loans are locatedin Auburn.

 

*Employees*

 

                As of December 31,2001, Mountain Bank Holding employed a full-time President and CEO and ahalf-time Chief Financial Officer and a half-time AdministrativeAssistant.  As of the same date, Mt.Rainier Bank had 54 full-time-equivalent employees, including three ExecutiveOfficers.  None of Mt. Rainier Bank’semployees is presently represented by a union or covered by a collectivebargaining agreement.  Mt. Rainier Bankconsiders its relationships with its employees to be good.

 

*Competition*

 

                The bankingbusiness in Mt. Rainier Bank’s primary service area is highly competitive withrespect to both loans and deposits.  Allthe major out-of-state commercial banks which operate in Washington (includingBank of America, Key Bank, Washington Mutual, Wells Fargo and U.S. Bank) have abranch or branches within Mt. Rainier Bank’s primary service area.  Among the advantages such major banks haveare their ability to finance wide-ranging advertising campaigns and to allocatetheir investment assets to geographic regions of higher yield and demand.  Such banks offer certain services which arenot offered directly by Mt. Rainier Bank (but are offered indirectly throughcorrespondent institutions); and, by virtue of their greater totalcapitalization (legal lending limits to an individual customer are based upon apercentage of a bank’s total shareholder equity accounts), such banks havesubstantially higher lending limits than Mt. Rainier Bank.

 

                Mt. Rainier Bankalso competes with a number of non-bank competitors such as insurancecompanies, small loan companies, finance companies, mortgage companies, creditunions, brokerage houses, and other financial institutions.  Many of Mountain Bank Holding’s non-bankcompetitors are not subject to the extensive federal and state regulations whichgovern Mountain Bank Holding and, as a result, have a competitive advantageover the Company in providing certain services.

 

                Mt. Rainier Bankbelieves its competitive position has been strengthened by the consolidation inthe banking industry which has resulted in a focus by the larger banks on theirlarger accounts, with less direct contact between the officers and theircustomers.  Mt. Rainier Bank’s strategy,by contrast, is to remain a middle market lender which maintains close,long-term contact with its customers.

 

*Products and Services*

 

                Inconjunction with the growth of its asset base, Mt. Rainier Bank has introducednew products and services to position itself to compete in its highlycompetitive market.  Mt. Rainier Bank’scustomers demand not only a wide range of financial products but also efficientand convenient service.  In response tothese demands, Mt. Rainier Bank has developed a mix of products and servicesutilizing technology available to the banking industry such as telephone bankingand automated teller machines.  Additionally,Mt. Rainier Bank offers a wide range of commercial and retail banking productsand services to its customers.  Depositaccounts include certificates of deposit, individual retirement accounts andother time deposits, checking and other demand deposit accounts,interest-bearing checking accounts, savings accounts and money marketaccounts.   Loans include residentialreal estate, commercial, financial and real estate construction anddevelopment, installment and consumer loans. Other products and services include: credit related insurance; ATMs,safe deposit boxes and non-deposit investment products.

 

 

6

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*Marketing*

 

                Mt. Rainier Bankuses to the fullest extent possible the flexibility which is accorded by itsindependent status.  This includes anemphasis on specialized services, local promotional activity, and personalcontacts by Mt. Rainier Bank’s officers, directors and employees.  Mt. Rainier Bank also seeks to providespecial services and programs for individuals in its primary service area whoare employed in the business and professional fields.  In the event there are customers whose loan demands exceed Mt.Rainier Bank’s lending limits, Mt. Rainier Bank arranges for such loans on aparticipation basis with other financial institutions.

 

*Lending Activities*

 

                Thetwo main areas in which Mt. Rainier Bank has directed its lendable funds arecommercial and real estate loans.  AtDecember 31, 2001, these categories accounted for approximately 27% and 65%,respectively, of Mt. Rainier Bank’s total loan portfolio.  Mt. Rainier Bank’s major source of income isinterest and fees charged on loans.

 

                Interestincome on loans is recognized based on principal amounts outstanding, atapplicable interest rates.  Accrual ofinterest on impaired loans is discontinued when reasonable doubt exists as tothe full, timely collection of interest or principal or when payment ofprincipal or interest is contractually past due 90 days, unless the loan iswell secured and in the process of collection. When a loan is placed on non-accrual status, all interest previouslyaccrued, but not collected, is reversed against current period interestincome.  Income on such loans is thenrecognized only to the extent that cash is received and when the futurecollection of principal is probable. Interest accruals are resumed on such loans only when they are broughtcurrent with respect to principal and interest and when, in the opinion ofmanagement, the loans are estimated to be fully collectible as to bothprincipal and interest.

 

                In general, Mt.Rainier Bank is permitted by law to make loans to single borrowers in aggregateamounts of up to fifteen percent (15%) of Mt. Rainier Bank’s unimpaired capitaland unimpaired surplus.  Mt. RainierBank, on occasion, sells participations in loans when necessary to stay withinlending limits or to otherwise limit Mt. Rainier Bank’s exposure.  Mt. Rainier Bank’s goal is to reduce therisk of undue concentrations of loans to multiple borrowers engaged in similaractivities that would cause them to be similarly impacted by economic or otherconditions.  At December 31, 2001, nosuch concentration exceeded 10% of Mt. Rainier Bank’s loan portfolio, althoughapproximately 3% of Mt. Rainier Bank’s loan portfolio consisted of agriculturalloans and approximately 8% of interim real estate construction loans.  Mt. Rainier Bank has no loans to foreigncountries and its policy is to lend within Washington State, however Mt.Rainier Bank does have some loans to out-of-state borrowers.

 

                In the normalcourse of business there are various commitments outstanding and commitments toextend credit which are not reflected in the financial statements.  These commitments generally require thecustomers to maintain certain credit standards and have fixed expiration datesor other termination clauses.  Mt.Rainier Bank uses the same credit policies in making commitments as it does forloans.  Management does not expect thatall such commitments will be fully utilized.

 

                Lending activitiesare conducted pursuant to a written Loan Policy which has been adopted by theBoard of Directors of Mt. Rainier Bank. Each loan officer has a defined lending authority.  Regardless of lending authority, aggregateloans over $350,000 are approved by Mt. Rainier Bank’s Loan Committee, andaggregate loans over $250,000 are reviewed by Mt. Rainier Bank’s LoanCommittee.

 

                The bank’smortgage activity consists of originating residential loans wherein the closingof each loan is preceded by its negotiated sale on the secondary market.  Primarily, these loans are funded by thebank and promptly sold.  The bank alsomakes residential construction loans wherein a “take-out” is negotiated on thesecondary market.  Bank guidelines forloan-to-value ratios are closely adhered to.

 

*Investment Portfolio*

 

                The investmentpolicy of Mt. Rainier Bank is an integral part of the overall asset/liabilitymanagement of Mt. Rainier Bank.  Mt.Rainier Bank’s investment policy is to establish a portfolio which will 

 

 

7

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provide liquidity necessary to facilitate making loans and to coverdeposit fluctuations while at the same time achieving a satisfactory investmentreturn on the funds invested.  Theinvestment policy is reviewed annually by Mt. Rainier Bank’s Board ofDirectors.  Mt. Rainier Bank stressesthe following attributes for its investments: capital protection, liquidity, yield, risk management andpledgeability.  With its implementationof Statement of Financial Accounting Standards (SFAS) No. 115, *Accountingfor Certain**Investments in Debt and Equity Securities*,Mt. Rainier Bank is required to classify its portfolio into threecategories:  Held to Maturity, TradingSecurities, and Available for Sale.

 

                Held to Maturitysecurities include debt securities that Mt. Rainier Bank has positive intentand ability to hold to maturity; these securities are reported at amortizedcost.  As of December 31, 2001, Mt.Rainier Bank held no securities as Held to Maturity.

 

                Trading Securitiesinclude debt and equity securities that are purchased and held solely for thepurpose of selling them in the short-term future for trading profits.  Trading Securities are reported at fairmarket value with unrealized gains and losses included in earnings.  As of December 31, 2001,  Mt. Rainier Bank held no securities asTrading Securities.

 

                Available for Salesecurities include those which may be sold to implement Mt. Rainier Bank’sasset/liability management strategies and in response to changes in interestrates, prepayment rates and similar factors. These securities are reported at fair market value with unrealized gainsand losses excluded from the earnings and reported as a separate component ofshareholders’ equity.  All of Mt. RainierBank’s investment securities at December 31, 2001, were classified as Availablefor Sale.

 

                As a national bankand member of the Federal Reserve System, Mt. Rainier Bank is required to have$264,000 invested in Federal Reserve Bank Stock.  Also, as a member of the Federal Home Loan Bank, Mt. Rainier Bankis required to keep $370,000 in stock. This portion of Mt. Rainier Bank’s investment portfolio is not liquid.

 

#### *ForwardLooking Statement Disclosure*

 

                Inaddition to historical information, this report may contain certain “forwardlooking statements” within the meaning of the Private Securities LitigationReform Act of 1995 (PSLRA).  Thisstatement is included for the express purpose of availing Mountain Bank Holdingof the protections of the safe harbor provisions of the PSLRA.  The forward-looking statements contained inthis report are subject to factors, risks, and uncertainties that may causeactual results to differ materially from those projected.  Important factors that might cause such amaterial difference include, but are not limited to, those discussed in thisreport.  Such items that could causeactual results to differ materially from the forward looking statements in thisreport are:  general economicconditions, world and national events that could impact the economy andinterest rates, including their impact on capital expenditures; businessconditions in the banking industry; the regulatory environment; newlegislation; vendor quality and efficiency; employee retention factors; rapidlychanging technology and evolving banking industry standards; competitivestandards; competitive factors, including increased competition with community,regional, and national financial institutions; fluctuating interest rateenvironments; and similar matters. Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate of the statement.  Mountain BankHolding undertakes no obligation to publicly revise or update these forward-lookingstatements to reflect events or circumstances that arise after the date of thisreport.  Readers should carefully reviewthe risk factors described in this and other documents we file from time totime with the Securities and Exchange Commission.

 

*StatisticalInformation about Mountain Bank Holding*

 

The following statistical information should be readin conjunction with the consolidated financial statements and accompanyingnotes included elsewhere herein.

 

 

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The composition of the loan portfolio (excluding loansheld for sale, which are normally held only for a short period) is summarizedas follows:

 

LOAN PORTFOLIO — TYPES OF LOANS

 
|                         |   | **December  31, 2001**      |   | **December  31, 2000**      |   |
|------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                         |   | **Amounts**                 |   | **Percent of  Total Loans** |   | **Amounts** |   | **Percent of  Total Loans** |   |
|                         |   | **(dollars  in thousands)** |   |
| Commercial and  Agricultural |   | $                           | 18,483 |                        | 26.83  | % | $ | 15,869 |   | 24.17 | % |
| Real Estate:                 |   |                        |   |                        |   |   |   |   |   |
| Construction                 |   | 5,506                       |   | 7.99                        | %      | 5,829 |   | 8.88 | % |
| Mortgage                     |   | 39,583                      |   | 57.46                       | %      | 38,649 |   | 58.88 | % |
| Consumer                     |   | 5,315                       |   | 7.72                        | %      | 5,295 |   | 8.07 | % |
| Total Loans                  |   | $                           | 68,887 |                        | 100.00 | % | $ | 65,642 |   | 100.00 | % |

 

 

LOAN PORTFOLIO —MATURITIES AND SENSITIVITIES ON LOANS

 
|                         |   | **One Year  Or Less** |   | **Over One  Through Five Years** |   | **Maturing  After Five Years** |   | **TOTAL** |   |
|------------------------------|--------|-----------------------|--------|----------------------------------|--------|--------------------------------|--------|-----------|--------|
|                         |   | **(in  thousands)**   |   |
|                         |   | Amount                |   | Fixed                            |   | Fixed                          |   |      |   |
| Commercial and  Agricultural |   | $                     | 8,993  |                             | $      | 7,939                          |   | $         | 1,551  |   | $ | 18,483 |   |
| Real Estate                  |   |                  |   |                             |   |                           |   |      |   |
| Construction                 |   | 4,279                 |   | 249                              |   | 978                            |   | 5,506     |   |
| Mortgage                     |   | 5,062                 |   | 17,536                           |   | 16,985                         |   | 39,583    |   |
| Consumer                     |   | 1,285                 |   | 3,012                            |   | 1,018                          |   | 5,315     |   |
| Total                        |   | 19,619                |   | $                                | 28,736 |                           | $      | 20,532    |   | $ | 68,887 |   |
|                              |        |                       |        |                                  |        |                                |        |           |        |  |  |  |  |

 

There were no loans longer than one year havingvariable rates.

 

#### *CREDIT RISK MANAGEMENT AND ALLOWANCEFOR CREDIT LOSSES*

 

Credit risk and exposure to loss are inherent parts ofthe banking business.  Management seeksto manage and minimize these risks through its loan and investment policies andloan review procedures.  Managementestablishes and continually reviews lending and investment criteria andapproval procedures that it believes reflect the risk sensitive nature of Mt.Rainier Bank’s operations.  The loanreview procedures are designed to monitor adherence to established criteria andto ensure that on a continuing basis such standards are enforced and maintained.

 

Management’s objective in establishing lending andinvestment standards is to manage the risk of loss and provide for incomegeneration through pricing policies.  Toeffectuate this policy, we have established specific terms and maturity schedulesfor each loan type, such as commercial, real estate, consumer, etc.

 

The loan portfolio is regularly reviewed andmanagement determines the amount of loans to be charged off.  In addition, such factors as Mt. RainierBank’s previous loan loss experience, prevailing economic conditions, industryconcentrations and the overall quality of the loan portfolio areconsidered.  While management usesavailable information to recognize losses on loans and real estate owned,future additions to the allowance may be necessary based on changes in economicconditions.  In addition, variousregulatory agencies, as part of their examination process, periodically reviewthe allowances for losses on loans and real estate owned.  Such agencies may require Mt. Rainier Bankto recognize additions to the allowances based on their judgments aboutinformation available at the time of their examinations.  In addition, any loan or portion of a loanthat is classified as a ‘loss’ by regulatory examiners is charged-off.

 

The allowance for credit losses is maintained at a levelmanagement considers adequate to provide for estimated losses based onevaluating known and inherent risks in the loan portfolio.  The allowance is reduced by loans chargedoff and increased by provisions charged to earnings and 

 

 

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recoveries on loans previously charged off.  The allowance is based on management’s periodic evaluation offactors underlying the quality of the loan portfolio, including changes in thesize and composition of the loan portfolio, actual loan loss experience,current economic conditions, and detailed analysis of individual loans forwhich full collectibility may not be assured. This evaluation is inherently subjective as it requires estimates thatare susceptible to significant revision as more information becomes available.

 

When information confirms that specific loans orportions of loans are uncollectible, these amounts are charged off against theallowance for credit losses.  Theexistence of some or all of the following criteria will generally confirm thata loss has been incurred: the loan is significantly delinquent and the borrowerhas not evidenced the ability or intent to bring the loan current; Mt. RainierBank has no recourse to the borrower, or if it does, the borrower hasinsufficient assets to pay the debt; the estimated fair value of the collateralis significantly below the current loan balance, and there is little or nonear-term prospect for improvement.

 

The allowance for credit losses is estimated by managementbased on historical loss experience and known changes within the loan portfolioat the measurement date.  The provisionthat is charged to income is the amount needed to maintain an adequateallowance for credit losses.  Theallowance for credit losses at December 31, 2001, was $753,000, or 1.09% ofloans outstanding.  The allowance forcredit losses at year end 2000 was $700,000 or 1.07% of loans outstanding.  The following table presents data related toMt. Rainier Bank’s allowance for credit losses for the twelve months endedDecember 31, 2001 and 2000:

 

 

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SUMMARY OF LOAN LOSSEXPERIENCE AND RELATED INFORMATION

 
|                                                         |   | **Year Ended    December 31,   2001** |       | **Year Ended    December 31,   2000** |       |
|--------------------------------------------------------------|--------|---------------------------------------|------------|---------------------------------------|------------|
|                                                         |   | **(dollars in thousands)**            |       |
| Allowance for  credit losses                                 |   |                                  |       |                                  | ** ** |
| *(beginning of period)*                                      |   | **$**                                 | **700**    | ** **                            | **$**      | **607** |   |
|                                                         |   |                                  |       |                                  |       |
| Loans charged  off:                                          |   |                                  |       |                                  |       |
| Commercial and  agricultural                                 |   | 13                                    |       | 0                                     |       |
| Real estate  construction                                    |   | 0                                     |       | 0                                     |       |
| Real estate  mortgage                                        |   | 0                                     |       | 0                                     |       |
| Consumer                                                     |   | 25                                    |       | 0                                     |       |
| Total                                                        |   | 38                                    |       | 0                                     |       |
|                                                         |   |                                  |       |                                  |       |
| Recoveries of  loans previously charged off:                 |   |                                  |       |                                  |       |
| Commercial and  agricultural                                 |   | 0                                     |       | 0                                     |       |
| Real estate  construction                                    |   | 0                                     |       | 0                                     |       |
| Real estate  mortgage                                        |   | 0                                     |       | 0                                     |       |
| Consumer                                                     |   | 6                                     |       | 0                                     |       |
| Total                                                        |   | 6                                     |       | 0                                     |       |
|                                                         |   |                                  |       |                                  |       |
| Net loans  charged off                                       |   | **32**                                | ** ** | **0**                                 | ** ** |
|                                                         |   |                                  |       |                                  |       |
| Provision for  possible loan losses                          |   | **85**                                | ** ** | **93**                                | ** ** |
|                                                         |   |                                  |       |                                  |       |
| Allowance for  possible credit losses                        |   |                                  |       |                                  |       |
| *(end of period)*                                            |   | **753**                               | ** ** | **700**                               | ** ** |
|                                                         |   |                                  | ** ** |                                  | ** ** |
| Loans  outstanding:                                          |   |                                  |       |                                  |       |
| Average                                                      |   | $                                     | 67,875     |                                  | $          | 61,675 |   |
| End of period                                                |   | 68,887                                |       | 65,642                                |       |
| Ratio of  allowance for loan loss to total loans outstanding |   |                                  |       |                                  |       |
| Average                                                      |   | 1.11                                  | %          | 1.13                                  | %          |
| End of period                                                |   | 1.09                                  | %          | 1.07                                  | %          |
| Ratio of net  charge-offs to average loans outstanding       |   | 0.05                                  | %          | 0.00                                  | %          |

 

 

ALLOCATION OF THEALLOWANCE FOR CREDIT LOSSES BY LOAN CLASSIFICATION

 

                Managementdoes not normally allocate the allowance for credit losses to specific loancategories.  An allocation to majorcategories is made for presentation purposes only.  This allocation does not necessarily measure anticipated futurecredit losses; rather it seeks to measure management’s current assessment ofperceived credit loss exposure and the impact of current and anticipatedeconomic conditions.

 

 

11

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                Theallowance for credit losses, in management’s judgement, is allocated as followsto cover probable loan losses:

 
|                        |   | **December  31, 2001**                            |   | **December  31, 2000**           |   |
|-----------------------------|--------|---------------------------------------------------|--------|----------------------------------|--------|
|                        |   | **Allocation  of   allowance for  credit losses** |   | **% of loans  to   total loans** |   | **Allocation  of   allowance for   credit losses** |   | **% of loans  to   total loans** |   |
| Commercial and  agriculture |   | $                                                 | 223    |                             | 26.8   | % | $ | 185 |   | 24.2 | % |
| Real estate  construction   |   | 25                                                |   | 8.0                              | %      | 24 |   | 8.9 | % |
| Real estate  mortgage       |   | 347                                               |   | 57.5                             | %      | 318 |   | 58.9 | % |
| Consumer                    |   | 158                                               |   | 7.7                              | %      | 173 |   | 8.0 | % |
| Total                       |   | $                                                 | 753    |                             | 100.00 | % | $ | 700 |   | 100.00 | % |

 

 

The foregoing conditionsand adjustments reflect management’s best estimate of items recognized whenadjusting the loss percentage for each pool of loans, and adjustments tohistorical experience.  These factorsaffect our assessment of low and high estimates of losses in ourportfolio.  The determination of theamounts of the provisions for loan losses is based on management’s currentjudgment and the quality of the loan portfolio, and considers all known,relevant internal and external factors that affect loan collectibility.  These include regional economic indicatorssuch as employment; retail sales; real estate trends and specific areas ofconcentration for our market including the forest and dairy/agriculturalindustries.  Mt. Rainier Bank has alsoaccounted for categories of loan risk not reflected in the table aboveincluding such potential advances as letters of credit, unfunded commitments tolend and mortgages held for sale.

 

During 2001, the loan loss allocations by categorymade only marginal adjustments as the overall percentages of loans in each poolof loans changed.  Consumer loans, as apercentage of overall loans decreased from 20.51% of the bank’s loan portfolioto 16.93% as of December 31, 2001.  Likewise,commercial and agriculture loans increased from 24.32% to 27.50%.  On the other hand, less risky loans such asreal estate mortgages increased from 45.35% of the portfolio to 46.19% whichhad the effect of balancing out the need to increase loss reserves in anyhigher proportion than the portfolio grew as a whole.  During this period, Mt. Rainier Bank made no changes in itsestimation methods or assumptions that affect the allowance.

 

Other factors affecting loan loss reserve allocationswere loan quality and changes in criticized and classified credits within theportfolio.  Loan quality remainedsatisfactory with only $28,000 in past due loans at year-end.  Criticized-classified loans ended the yearwith a marginal increase of $182,000 from the prior year-end, indicating thatthe portfolio, by Mt. Rainier Bank’s evaluation, remains stable with noexpected trends to impair this conclusion.

 

RISK ELEMENTS — NON-ACCRUAL, PAST DUE AND RESTRUCTUREDLOANS

 

                The following table sets forthinformation regarding non-performing loans of Mt. Rainier Bank on the datesindicated.  Accrual of interest isdiscontinued when there is reasonable doubt as to the full, timely collectionof interest or principal.  When a loanbecomes contractually past due 90 days with respect to interest or principal,it is reviewed and a determination is made as to whether it should be placed onnon-accrual status.  When a loan isplaced on non-accrual status, all interest previously accrued but not collectedis reversed against current period interest income.  Income on such loans is then recognized only to the extent thatcash is received and where the future collection of principal is probable.  Interest accruals are resumed on such loansonly when they are brought fully current with respect to principal and interestand when, in the judgment of management, the loans are estimated to be fullycollectible as to principal and interest. Restructured loans are those loans on which concessions in terms havebeen granted because of a borrower’s financial difficulty.  Interest is generally accrued on such loansin accordance with the new terms.

 

 

12

----

 
|                         |   | **2001**                        |   |
|------------------------------|--------|---------------------------------|--------|
|                         |   | **90 Days or    More Past Due** |   | **Non-accrual** |   | **Restructured** |   | **Lost   Interest** |   |
|                         |   | **(dollars  in thousands)**     |   |
| Commercial and  Agricultural |   | $                               | 0      |   | $ | 0 |   | $ | 0 |   | N/A |   |
| Real Estate                  |   | 0                               |   | 0 |   | 0 |   | N/A |   |
| Consumer                     |   | 0                               |   | 0 |   | 0 |   | N/A |   |
| Total                        |   | $                               | 0      |   | $ | 0 |   | $ | 0 |   | N/A |   |

 

** **
|                         |   | **2000**                        |   |
|------------------------------|--------|---------------------------------|--------|
|                         |   | **90 Days or    More Past Due** |   | **Non-accrual** |   | **Restructured** |   | **Lost   Interest** |   |
|                         |   | **(dollars  in thousands)**     |   |
| Commercial and  Agricultural |   | $                               | 0      |   | $ | 17 |   | $ | 0 |   | $ | 0 |   |
| Real Estate                  |   | 0                               |   | 0 |   | 0 |   | N/A |   |
| Consumer                     |   | 0                               |   | 0 |   | 0 |   | N/A |   |
| Total                        |   | $                               | 0      |   | $ | 17 |   | $ | 0 |   | $ | 0 |   |

 

INVESTMENT SECURITIES PORTFOLIO

 

                Thefollowing table presents the composition and carrying value of Mt. RainierBank’s investment portfolio at December 31, 2001 and 2000, and the dollar andpercentage changes of each investment category.

 
|                                 |   | **December  31,   2001**    |   | **December  31,   2000** |   | **Dollar   Change** |   | **Percentage    Change** |   |
|--------------------------------------|--------|-----------------------------|--------|--------------------------|--------|---------------------|--------|--------------------------|--------|
|                                 |   | **(dollars  in thousands)** |   |
| US Treasury  securities              |   | $                           | 3,090  |                     | $      | 2,018               |   | $                        | 1,072  |   | 53.12 | % |
| US Government  and agency securities |   | 8,238                       |   | 12,488                   |   | (4,250              | )      | —34.03              | %      |
| Mortgage backed  securities          |   | 11,769                      |   | 5,643                    |   | 6,126               |   | 108.56                   | %      |
| Municipal bonds                      |   | 502                         |   | 297                      |   | 205                 |   | 69.02                    | %      |
| Corporate bonds                      |   | 8,013                       |   | 0                        |   | 8,013               |   |                     |   |
| Total                                |   | $                           | 31,612 |                     | $      | 20,446              |   | 11,166                   |   | 54.61 | % |
|                                      |        |                             |        |                          |        |                     |        |                          |        |  |  |  |

 

 

13

----

 

**               **The carrying value and fair value ofinvestment securities and the maturities and yield information on theinvestment portfolio is as follows:

** **
|                             |   | **December  31, 2001** |   |
|----------------------------------|--------|------------------------|--------|
|                             |   | **One Year   Or Less** |   | **Over One   Through   Five Years** |   | **Over Five   Through   Ten Years** |   | **Over Ten   Years** |   |
|                             |   | **Amount**             |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   |
| US Treasury  Securities          |   | $                      | 1,007  |   | 6.25 | % | $ | 2,083 |   | 4.98 | % | $ | 0 |   | 0 | % | $ | 0 |   | 0 | % |
| US Government  Agency Securities |   | 0                      |   |   |   | 8,238 |   | 5.13 | % | 0 |   | 0 | % | 0 |   | 0 | % |
| Mortgage Backed  Securities      |   | 519                    |   | 6.55 | % | 6,182 |   | 6.46 | % | 5,068 |   | 6.35 | % | 0 |   | 0 | % |
| Corporate Bonds                  |   | 155                    |   | 6.85 | % | 7,858 |   | 6.05 | % |   |   |   |   |   |   |   |   |
| Municipal Bonds  (1)             |   | 91                     |   | 4.32 | % | 384 |   | 4.81 | % | 27 |   | 5.50 | % | 0 |   | 0 | % |
| Total                            |   | $                      | 1,772  |   |   |   | $ |  24,745 |   |   |   | $ |  5,095 |   |   |   | $ |  0 |   |   |   |
| Weighted Average Yield           |   |                   |   | 6.29 | % |   |   | 5.74 | % |   |   | 6.34 | % |   |   | 0 | % |

----

(1) Yield onmunicipal bonds is not calculated on a tax equivalent basis

 

DEPOSITS

 

                Mt. Rainier Bank’s primary sources of funds areinterest-bearing deposits.  The followingtable sets forth the average amount of and average rates paid on Mt. RainierBank’s deposit accounts for the years ended.

 
|                                   |   | **December  31, 2001**      |   | **December  31, 2000** |   |
|----------------------------------------|--------|-----------------------------|--------|------------------------|--------|
|                                   |   | **Average  Amounts**        |   | **Average  Rate Paid** |   | **Average  Amounts** |   | **Average  Rate Paid** |   |
|                                   |   | **(dollars  in thousands)** |   |
| Non-interest  bearing demand           |   | $                           | 15,240 |                   | 0.00   | % | $ | 14,377 |   | 0.00 | % |
| Interest-bearing  demand               |   | 29,018                      |   | 2.62                   | %      | 26,351 |   | 3.04 | % |
| Savings                                |   | 10,384                      |   | 1.76                   | %      | 10,095 |   | 2.21 | % |
| Certificates of  deposit               |   | 30,671                      |   | 5.67                   | %      | 23,150 |   | 5.68 | % |
| Certificates of  deposit over $100,000 |   | 14,194                      |   | 5.94                   | %      | 9,205 |   | 6.13 | % |
| Total                                  |   | $                           | 99,507 |                   | 4.18   | % | $ | 83,178 |   | 4.22 | % |

 

 

                At December 31, 2001, the scheduled maturities ofcertificates of deposit were:

 
|                                   |   | **December  31, 2001**      |   |
|----------------------------------------|--------|-----------------------------|--------|
|                                   |   | **Less Than   $100,000**    |   | **$100,000   or More** |   |
|                                   |   | **(dollars  in thousands)** |   |
| Maturity in:                           |   |                        |   |   |   |
| Three months or  less                  |   | $                           | 8,379  |   | $ | 2,893 |   |
| Over three  months through six months  |   | 6,621                       |   | 3,476 |   |
| Over six months  through twelve months |   | 12,952                      |   | 8,225 |   |
| Over twelve  months                    |   | 3,114                       |   | 2,459 |   |
| Total                                  |   | $                           | 31,066 |   | $ | 17,053 |   |

 

 

14

----

                The followingratios applicable to Mountain Bank Holding are among those commonly used inanalyzing bank holding companies:

 
|                                    |   | **Year Ended  December 31,** |   |
|-----------------------------------------|--------|------------------------------|--------|
|                                    |   | **2001**                     |   | **2000** |   |
| Return on  Average Assets               |   | 0.83                         | %      | 0.96 | % |
| Return on  Average Equity               |   | 7.35                         | %      | 8.63 | % |
| Dividend Payout  Ratio                  |   | 0                            | %      | 0 | % |
| Average Equity  to Average Assets Ratio |   | 11.22                        | %      | 11.17 | % |

 

                At December 31, 2001, and December 31, 2000, neitherMt. Rainier Bank nor Mountain Bank Holding had any short-term borrowings.

 

                The matching of assets and liabilities may beanalyzed by examining the extent to which such assets and liabilities areinterest rate sensitive and by monitoring an institution’s interest ratesensitivity “gap”.  An asset orliability is interest rate sensitive within a specific time period if it willreprice within that time period.  Theinterest rate sensitivity gap is defined as the difference between the amountof interest-bearing assets anticipated, based upon certain assumptions, to matureor reprice within a specific time period and the amount of interest-bearingliabilities anticipated, based upon certain assumptions, to mature or repricewithin that time period.  A gap isconsidered positive when the amount of interest rate sensitive assets maturingwithin a specific time frame exceeds the amount of interest sensitiveliabilities maturing within that same time frame.  If negative, the reverse is true.

 

                The following table representsan interest rate sensitivity analysis at December 31, 2001.

 

GAP ANALYSIS

 
|                                             |   | **Total   Within One   Year** |    | **One Year  to   Five Years** |   | **Over Five   Years** |   |
|--------------------------------------------------|--------|-------------------------------|---------|-------------------------------|--------|-----------------------|--------|
|                                             |   | **(dollars  in thousands)**   |    |
| Rate Sensitive  Assets:                          |   |                          |    |                          |   |                  |   |
| Loans, including  loans held for sale            |   | $                             | 19,619  |                          | $      | 28,736                |   | $ | 21,625 |   |
| Investments                                      |   | 1,761                         |    | 24,756                        |   | 5,095                 |   |
| Interest Bearing  Deposits                       |   |                          |    | 941                           |   |                  |   |
|                                             |   | 12,514                        |    |                          |   |                  |   |
| Total                                            |   | $                             | 33,894  |                          | $      | 54,433                |   | $ | 26,720 |   |
|                                             |   |                          |    |                          |   |                  |   |
| Rate Sensitive  Liabilities:                     |   |                          |    |                          |   |                  |   |
| Savings, NOW and  Interest Checking              |   | $                             | 46,983  |                          |   |                  |   |   |
| Time Deposits                                    |   | 47,165                        |    | 954                           |   |                  |   |
| Total                                            |   | $                             | 94,148  |                          | $      | 954                   |   | $ | 0 |   |
|                                             |   |                          |    |                          |   |                  |   |
| Interest  Sensitive Gap                          |   | $                             | (60,254 | )                             | $      | 53,479                |   | $ | 26,720 |   |
| Cumulative Gap                                   |   | $                             | (60,254 | )                             | $      | (6,775                | )      | $ | 19,945 |   |
| Cumulative Gap  as a % of Average Earning Assets |   | 57.01                         | %       | 6.41                          | %      | 18.87                 | %      |

 

                Currently, Mt. Rainier Bank’s interest sensitivitygap is negative within one year. Assuming that general market interest rate changes affected therepricing of assets and liabilities in equal magnitudes, this indicates thatthe effect of rising interest rates on Mountain Bank Holding would be adecrease in the net interest margin, whereas falling interest rates would causea corresponding increase in margin.

 

 

15

----

DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES ANDSHAREHOLDERS’ EQUITY AND INTEREST YIELDS

 

                The following table sets forththe average balance sheets of Mountain Bank Holding for the past two yearsalong with an analysis of net interest earnings for each major category ofinterest earning assets and interest bearing liabilities, the average rate paidin each category, and net yield on earning assets.  Average non-accrual loans were $15 in 2001 and $21 in 2000 andare included in average total loans. Loan fees of $342 in 2001 and $357 in 2000 are included in interestincome.

 
|                                            |   | **2001**                    |    | **2000**                         |   |
|-------------------------------------------------|--------|-----------------------------|---------|----------------------------------|--------|
|                                            |   | **Average   Balance**       |    | **Interest   Earned/   Expense** |   | **Annualized    Yield/ Rate** |   | **Average   Balance** |   | **Interest   Earned/   Expense** |   | **Annualized    Yield/   Rate** |   |
|                                            |   | **(dollars  in thousands)** |    |
| ASSETS                                          |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| Interest earning  assets:                       |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| Loans                                           |   | $                           | 67,875  |                             | $      | 6,376 |   | 9.4 | % | $ | 61,675 |   | $ | 6,005 |   | 9.7 | % |
| Investments                                     |   | 25,837                      |    | 1,444                            | *      | 5.6 | % | 24,083 |   | 1,460 | * | 6.1 | % |
| Federal funds  sold and deposits in banks       |   | 11,976                      |    | 449                              |   | 3.7 | % | 1,760 |   | 110 |   | 6.3 | % |
| Total interest earning assets                   |   | 105,688                     |    | $                                | 8,269  |   | 7.8 | % | 87,518 |   | $ | 7,575 |   | 8.7 | % |
| Non-interest  earning assets:                   |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| Cash and due  from banks                        |   | 3,591                       |    |                             |   |   |   | 3,503 |   |   |   |   |   |
| Premises and  equipment                         |   | 3,447                       |    |                             |   |   |   | 3,462 |   |   |   |   |   |
| Other assets                                    |   | 774                         |    |                             |   |   |   | 895 |   |   |   |   |   |
| Allowance for  possible credit losses           |   | (732                        | )       |                             |   |   |   | (642 | ) |   |   |   |   |
| TOTAL ASSETS                                    |   | $                           | 112,768 |                             |   |   |   |   | $ | 94,736 |   |   |   |   |   |
|                                            |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY      |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                  |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| Interest bearing  demand deposits               |   | $                           | 29,018  |                             | $      | 760 |   | 2.6 | % | $ | 26,351 |   | $ | 801 |   | 3.0 | % |
| Savings                                         |   | 10,384                      |    | 183                              |   | 1.8 | % | 10,095 |   | 223 |   | 2.2 | % |
| Certificates of  deposit                        |   | 30,671                      |    | 1,739                            |   | 5.7 | % | 23,150 |   | 1,315 |   | 5.7 | % |
| Certificates of  deposit over $100,000          |   | 14,194                      |    | 843                              |   | 5.9 | % | 9,205 |   | 564 |   | 6.1 | % |
| Total interest bearing deposits                 |   | $                           | 84,267  |                             | $      | 3,525 |   | 4.2 | % | $ | 68,801 |   | $ | 2,903 |   | 4.2 | % |
|                                            |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| Federal funds  purchased                        |   | $                           | 0       |                             | $      | 0 |   |   |   |   | $ | 475 |   | $ | 31 |   | 6.3 | % |
| Other borrowings                                |   | 39                          |    | 3                                |   | 7.7 | % | 41 |   | 3 |   | 7.3 | % |
| Total interest bearing liabilities              |   | $                           | 84,306  |                             | $      | 3,528 |   | 4.2 | % | $ | 69,317 |   | $ | 2,937 |   | 4.2 | % |
|                                            |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:              |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |   | $                           | 15,240  |                             |   |   |   |   | $ | 14,377 |   |   |   |   |   |
| Other  liabilities                              |   | 527                         |    |                             |   |   |   | 464 |   |   |   |   |   |
| Shareholders’  equity                      |   | 12,695                      |    |                             |   |   |   | 10,578 |   |   |   |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |   | $                           | 112,768 |                             |   |   |   |   | $ | 94,736 |   |   |   |   |   |
|                                            |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| Net interest  income                            |   |                        |    | $                                | 4,741  |   |   |   |   |   | $ | 4,638 |   |   |   |
|                                            |   |                        |    |                             |   |   |   |   |   |   |   |   |   |
| Net interest  margin                            |   |                        |    |                             |   | 4.5 | % |   |   |   |   | 5.3 | % |
|                                                 |        |                             |         |                                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

*Tax equivalent basis

 

 

16

----

CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATEVARIANCES

 

                The change in interest due toboth volume and yield has been allocated to volume and yield changes inproportion to the relationship of the absolute dollar amount of the change ineach amount.

 
|                                   |   | **2001**                    |   | **2000**         |   |
|----------------------------------------|--------|-----------------------------|--------|------------------|--------|
|                                   |   | **Net   Change**            |   | **Net   Change** |   |
|                                   |   | **Net   Change**            |   | **Volume**       |   | **Yield** |   | **Net   Change** |   | **Volume** |   | **Yield** |   |
|                                   |   | **(dollars  in thousands)** |   |
| Loans                                  |   | $                           | 371    |             | $      | 588 |   | $ | (217 | ) | $ | 1,280 |   | $ | 1,330 |   | $ | (50 | ) |
| Investments                            |   | (16                         | )      | 97               |   | (113 | ) | (99 | ) | (184 | ) | 85 |   |
| Federal Funds  Sold                    |   | 339                         |   | 399              |   | (60 | ) | (183 | ) | (247 | ) | 64 |   |
| Total                                  |   | $                           | 694    |             | $      | 1,084 |   | $ | (390 | ) | $ | 998 |   | $ | 899 |   | $ | 99 |   |
|                                   |   |                        |   |             |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Demand               |   | $                           | (41    | )                | $      | 76 |   | $ | (117 | ) | $ | 59 |   | $ | (11 | ) | $ | 70 |   |
| Savings                                |   | (40                         | )      | (6               | )      | (46 | ) | (26 | ) | (6 | ) | (20 | ) |
| Certificates of  deposit               |   | 424                         |   | 426              |   | (2 | ) | 359 |   | 188 |   | 171 |   |
| Certificates of  deposit over $100,000 |   | 279                         |   | (297             | )      | (18 | ) | 154 |   | 68 |   | 86 |   |
| Total                                  |   | $                           | 622    |             | $      | 805 |   | $ | 183 |   | $ | 546 |   | $ | 239 |   | $ | 307 |   |
|                                   |   |                        |   |             |   |   |   |   |   |   |   |   |   |
| Fed Funds  Purchased                   |   |                        |   |             |   |   |   |   |   |   | $ | 30 |   | $ | 30 |   | $ | 0 |   |
| Other Borrowings                       |   | $                           | (31    | )                | $      | (31 | ) | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Total                                  |   | $                           | 591    |             | $      | 774 |   | $ | (183 | ) | $ | 576 |   | $ | 269 |   | $ | 307 |   |
|                                   |   |                        |   |             |   |   |   |   |   |   |   |   |   |
| Net Interest  Income                   |   | $                           | 103    |             | $      | 310 |   | $ | (207 | ) | $ | 422 |   | $ | 630 |   | $ | (208 | ) |
|                                        |        |                             |        |                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

# ** **

# **SUPERVISION ANDREGULATION**

# ** **

                Thefollowing discussion is only intended to provide brief summaries of significantstatutes and regulations that affect the banking industry and therefore is notcomplete. Changes in applicable laws or regulations, and in the policies ofregulators, may have a material effect on our business and prospects. We cannotaccurately predict the nature or extent of the effects on our business andearnings that fiscal or monetary policies, or new federal or state laws, may havein the future.

 

**Significant Changes in Banking Lawsand Regulations**

 

Financial ServicesModernization.  The laws and regulations that affect banksand bank holding companies recently underwent significant changes as a resultof the Financial Services Modernization Act of 1999, also known as theGramm-Leach-Bliley Act of 1999. Generally, the act *(i)* repealed the historical restrictionson preventing banks from affiliating with securities firms, *(ii)*provided a uniform framework for the activities of banks, savings institutionsand their holding companies, *(iii)* broadened the activities that may beconducted by national banks and banking subsidiaries of bank holding companies,*(iv)*providedan enhanced framework for protecting the privacy of consumers’ information and *(v)*addresseda variety of other legal and regulatory issues affecting both day-to-dayoperations and long-term activities of financial institutions.

 

                Bank holdingcompanies may now engage in a wider variety of financial activities than permittedunder previous law, particularly insurance and securities activities.  In addition, in a change from previous law,a bank holding company may be owned, controlled or acquired by any companyengaged in financially related activities, so long as such company meetscertain regulatory requirements.  Theact also permits national banks (and certain state banks), either directly orthrough operating subsidiaries, to engage in certain non-banking financialactivities.

 

 

17

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                We do not believethat the act will negatively affect our operations.  However, to the extent the act permits banks, securities firmsand insurance companies to affiliate, the financial services industry mayexperience further consolidation.  Thisconsolidation could result in a growing number of larger financial institutionsthat offer a wider variety of financial services than we currently offer andthat can aggressively compete in the markets we currently serve.

 

USA Patriot Act of 2001.  On October26, 2001, President Bush signed the Uniting and Strengthening America byProviding Appropriate Tools Required to Intercept and Obstruct Terrorism (“USAPatriot Act”) of 2001.  Among otherthings, the USA Patriot Act *(i)*prohibits banks from providingcorrespondent accounts directly to foreign shell banks;  *(ii)*imposes due diligence requirements onbanks opening or holding accounts for foreign financial institutions or wealthyforeign individuals; *(iii)* requires financial institutions toestablish an anti-money-laundering compliance program; and *(iv)* eliminates civilliability for persons who file suspicious activity reports.  The USA Patriot Act also increasesgovernmental powers to investigate terrorism, including expanded governmentaccess to account records.  TheDepartment of the Treasury is empowered to administer and make rules toimplement the USA Patriot Act.  While webelieve the USA Patriot Act may, to some degree, affect our recordkeeping andreporting expenses, we do not believe that it will have a material adverseeffect on our business and operations.

 

**MountainBank Holding**

 

**General**

 

                Asa bank holding company, we are subject to the Bank Holding Company Act of 1956,which places us under the supervision of the Board of Governors of the FederalReserve.  We must file annual reportswith the Federal Reserve and must provide it with such additional informationas it may require.  In addition, theFederal Reserve periodically examines us and Mt. Rainier Bank.

 

### **BankHolding Company Regulation**

                In general, theBank Holding Company Act limits bank holding company business to owning orcontrolling banks and engaging in other banking-related activities.  Bank holding companies must obtain theFederal Reserve Board’s approval before they:

•                    acquire direct or indirectownership or control of any voting shares of any bank that results in totalownership or control, directly or indirectly, of more than 5% of the votingshares of such bank;

•                    merge or consolidate withanother bank holding company; or

•                    acquire substantially all of theassets of any additional banks.

 

Subject to certain state laws, a bank holding companythat is adequately capitalized and adequately managed may acquire the assets ofboth in-state and out-of-state banks. Under the Gramm-Leach-Bliley Act, a bank holding company meeting certainqualifications may apply to the Federal Reserve Board to become a financialholding company, and thereby engage (directly or through a subsidiary) incertain activities deemed financial in nature, such as securities brokerage andinsurance underwriting.

 

                Control ofNonbanks.  With certain exceptions,the Bank Holding Company Act prohibits bank holding companies from acquiringdirect or indirect ownership or control of voting shares in any company that isnot a bank or a bank holding company unless the Federal Reserve Boarddetermines such activities are incidental or closely related to the business ofbanking.

 

                ControlTransactions.  The Change in BankControl Act of 1978 requires a person (or group of persons acting in concert)acquiring “control” of a bank holding company to provide the Federal ReserveBoard with 60 days’ prior written notice of the proposed acquisition.  Following receipt of this notice, theFederal Reserve Board has 60 days (or up to 90 days if extended) within whichto issue a notice disapproving the proposed acquisition.  In addition, any “company” must obtain theFederal Reserve Board’s approval before acquiring 25% (5% if the “company” is abank holding company) or more of the outstanding shares or otherwise obtainingcontrol over Mountain Bank Holding.

 

 

18

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**Transactionswith Affiliates**

 

                Mountain BankHolding and Mt. Rainier Bank are deemed affiliates within the meaning of theFederal Reserve Act, and transactions between affiliates are subject to certainrestrictions.  Generally, the FederalReserve Act limits the extent to which a financial institution or itssubsidiaries may engage in “covered transactions” with an affiliate. It alsorequires all transactions with an affiliate, whether or not “coveredtransactions,” to be on terms substantially the same, or at least as favorableto the institution or subsidiary, as those provided to a non-affiliate.  The term “covered transaction” includes themaking of loans, purchase of assets, issuance of a guarantee and other similartypes of transactions.

 

**Tie-In Arrangements**

 

                Mountain BankHolding and Mt. Rainier Bank cannot engage in certain tie-in arrangements inconnection with any extension of credit, sale or lease of property orfurnishing of services.  For example,with certain exceptions, neither we nor Mt. Rainier Bank may condition anextension of credit on either a requirement that the customer obtain additionalservices provided by either of us, or an agreement by the customer to refrainfrom obtaining other services from a competitor.

 

                The Federal Reserve Board has adopted exceptions to its anti-tyingrules that allow banks greater flexibility to package products with their affiliates.These exceptions were designed to enhance competition in banking and nonbankingproducts and to allow banks and their affiliates to provide more efficient,lower cost service to their customers.

 

**State Law Restrictions**

 

                As a Washington businesscorporation, we may be subject to certain limitations and restrictions underapplicable Washington corporate law.  Inaddition, although Mt. Rainier Bank is a national bank and therefore primarilyregulated by the Office of the Comptroller of the Currency, Washington bankinglaw may restrict certain activities of Mt. Rainier Bank.

 

**Mt.Rainier National Bank**

 

**General**

 

                Mt. Rainier Bank, as a nationalbanking association, is subject to regulation and examination by the OCC.  The federal laws that apply to Mt. RainierBank regulate, among other things, the scope of its business, its investments,its reserves against deposits, the timing of the availability of depositedfunds and the nature and amount of and collateral for loans.  The laws and regulations governing Mt.Rainier Bank generally have been promulgated to protect depositors and not toprotect stockholders of Mountain Bank Holding or Mt. Rainier Bank.

 

                *CommunityReinvestment Act. *TheCommunity Reinvestment Act requires that, in connection with examinations offinancial institutions within their jurisdiction, the Office of the Comptrollerof the Currency evaluate the record of the financial institutions in meetingthe credit needs of their local communities, including low and moderate incomeneighborhoods, consistent with the safe and sound operation of thosebanks.  These factors are alsoconsidered in evaluating mergers, acquisitions, and applications to open abranch or facility.

 

                *InsiderCredit Transactions. *Banksare also subject to certain restrictions imposed by the Federal Reserve Act onextensions of credit to executive officers, directors, principal shareholders,or any related interests of such persons. Extensions of credit must be made on substantially the same terms,including interest rates and collateral, and follow credit underwritingprocedures that are not less stringent than those prevailing at the time forcomparable transactions with persons not covered above and who are notemployees. Also, such extensions of credit must not involve more than thenormal risk of repayment or present other unfavorable features.

 

 

19

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                *FederalDeposit Insurance Corporation Improvement Act. *Under the Federal Deposit Insurance Corporation ImprovementAct of 1991 each federal banking agency has prescribed, by regulation,noncapital safety and soundness standards for institutions under itsauthority.  These standards coverinternal controls, information systems, and internal audit systems, loandocumentation, credit underwriting, interest rate exposure, asset growth,compensation, fees and benefits, such other operational and managerialstandards as the agency determines to be appropriate, and standards for assetquality, earnings and stock valuation. We believe that Mt. Rainier Bank meetsall such standards and do not believe that these regulatory standardsmaterially affect our business operations.

 

**InterstateBanking and Branching**

 

                The Riegle-NealInterstate Banking and Branching Efficiency Act of 1994 permits nationwideinterstate banking and branching under certain circumstances.  This legislation generally authorizesinterstate branching and relaxes federal law restrictions on interstatebanking. Currently, bank holding companies may purchase banks in any state, andstates may not prohibit such purchases. Additionally, banks are permitted to merge with banks in other states aslong as the home state of neither merging bank has “opted out.”  The Interstate Act requires regulators toconsult with community organizations before permitting an interstateinstitution to close a branch in a low-income area.

 

                Under recentFederal Deposit Insurance Corporation regulations, banks are prohibited fromusing their interstate branches primarily for deposit production.  The Federal Deposit Insurance Corporationhas accordingly implemented a loan-to-deposit ratio screen to ensure compliancewith this prohibition.

 

Washington has“opted in” to the Interstate Act and allows in-state banks to merge without-of-state banks subject to certain aging requirements.  Washington law generally authorizes theacquisition of an in-state bank by an out-of-state bank by merger with aWashington financial institution that has been in existence for at least 5years prior to the acquisition.  Withregard to interstate bank branching, out-of-state banks that do not alreadyoperate a branch in Washington may not establish de novo branches in Washingtonor establish and operate a branch by acquiring a branch in Washington.

 

**Deposit Insurance**

 

                The deposits ofMt. Rainier Bank are currently insured to a maximum of $100,000 per depositorthrough the Bank Insurance Fund administered by the Federal Deposit InsuranceCorporation.  All insured banks arerequired to pay semi-annual deposit insurance premium assessments to theFederal Deposit Insurance Corporation.

 

**Dividends**

 

                The principal source of Mountain Bank Holding’s cashrevenues is dividends received from Mt. Rainier Bank.  The payment of dividends is subject to certain restrictions.  For example, a national bank generally canpay dividends out of its undivided profits. However, a national bank cannot pay dividends unless the bank’s capitalsurplus equals or exceeds its capital stock. There are two exceptions to that restriction.  First, a national bank can pay an annual dividend if the bankfirst transfers ten percent of its net income for the preceding four quartersto capital surplus. Second, a national bank can declare quarterly or semiannualdividends if the bank transfers ten percent or more of its net income for thepreceding two quarters to capital surplus. Overlaying these restrictions is an additional restriction that limitsthe payment of dividends during any calendar year to the extent of the bank’sretained net income for the previous two years, unless approved by the Officeof the Comptroller of the Currency. Other than the laws and regulations noted above, which apply to allnational banks and bank holding companies, neither we nor Mt. Rainier Bank arecurrently subject to any regulatory restrictions on our dividends.

 

**Capital Adequacy**

 

                Federal bankregulatory agencies use capital adequacy guidelines in the examination andregulation of bank holding companies and banks.  If capital falls below minimum guideline levels, the holdingcompany or bank may be denied approval to acquire or establish additional banksor nonbank businesses or to open new facilities.

 

 

20

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                The FederalDeposit Insurance Corporation and Federal Reserve use risk-based capitalguidelines for banks and bank holding companies.  These are designed to make such capital requirements moresensitive to differences in risk profiles among banks and bank holdingcompanies, to account for off-balance sheet exposure and to minimizedisincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad riskcategories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of totalrisk-weighted assets and off-balance sheet items. The guidelines are minimums,and the Federal Reserve has noted that bank holding companies contemplatingsignificant expansion programs should not allow expansion to diminish theircapital ratios and should maintain ratios well in excess of the minimum.  The current guidelines require all bankholding companies and federally-regulated banks to maintain a minimumrisk-based total capital ratio equal to 8%, of which at least 4% must be Tier Icapital. Tier I capital for bank holding companies includes commonshareholders’ equity, certain qualifying perpetual preferred stock and minorityinterests in equity accounts of consolidated subsidiaries, less intangiblesexcept as described above.

 

                The FederalReserve also employs a leverage ratio, which is Tier I capital as a percentageof total assets less intangibles, to be used as a supplement to risk-basedguidelines.  The principal objective ofthe leverage ratio is to constrain the maximum degree to which a bank holdingcompany may leverage its equity capital base. The Federal Reserve requires a minimum leverage ratio of 3%.  However, for all but the most highly ratedbank holding companies and for bank holding companies seeking to expand, theFederal Reserve expects an additional cushion of at least 1% to 2%.

 

                The FederalDeposit Insurance Corporation Improvement Act created a statutory framework ofsupervisory actions indexed to the capital level of the individualinstitution.  Under regulations adoptedby the Federal Deposit Insurance Corporation, an institution is assigned to oneof five capital categories depending on its total risk-based capital ratio,Tier I risk-based capital ratio, and leverage ratio, together with certainsubjective factors.  Institutions whichare deemed to be “undercapitalized” depending on the category to which they areassigned are subject to certain mandatory supervisory corrective actions.  We do not believe that these regulationshave any material effect on our operations.

 

**Effectsof Government Monetary Policy**

 

                Our earnings andgrowth are affected not only by general economic conditions, but also by thefiscal and monetary policies of the federal government, particularly theFederal Reserve.  The Federal Reserveimplements national monetary policy for such purposes as curbing inflation andcombating recession, but its open market operations in U.S. governmentsecurities, control of the discount rate applicable to borrowings from theFederal Reserve, and establishment of reserve requirements against certain deposits,influence the growth of bank loans, investments and deposits, and also affectinterest rates charged on loans or paid on deposits.  We cannot predict with certainty the nature and impact of futurechanges in monetary policies and their impact on Mountain Bank Holding and Mt.Rainier Bank.

 

 

21

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# **ITEM 7.  DESCRIPTION OF PROPERTY**

                Mt. Rainier Bank’smain office is in Enumclaw, Washington, at 501 Roosevelt Avenue, in an officebuilding owned by Mt. Rainier Bank.  Thefacility has 10,275 square feet with two drive-up windows, an automated tellermachine (ATM), and a night depository. The premises are fully equipped and include teller counters, keydrawers, safe, safe deposit boxes, signs and alarm equipment.

 

                On February 6,1995, Mt. Rainier Bank opened its Buckley Branch located at 29290 Highway 410,Buckley, Washington.  The facility has3,100 square feet, a two-lane drive up, an ATM and a night depository.

 

                On January 26,1998, Mt. Rainier Bank opened its Black Diamond Branch located at 31329 ThirdAvenue, Black Diamond, Washington.  Thefacility has 3,100 square feet, a two-lane driveup, an ATM and a nightdepository.

 

                OnNovember 16, 1998, Mt. Rainier Bank opened its Auburn Branch located at 1436 AuburnWay So, Auburn, Washington.  Thefacility has approximately 2,624 square feet, a two-lane driveup, and includesan ATM and a night depository.

 

                Mt. Rainier Bankis in the process of constructing a branch office located at 23924 225thWay SE in Maple Valley, Washington.  Thefacility will have approximately 3,100 square feet and will be a full servicefacility with a two-lane driveup, an ATM and a night depository.  Construction is estimated to be completeapproximately mid March, 2002.

 

                Mt. Rainier Bankowns all of the facilities described above.

 

                Mt. Rainier Bankalso owns approximately 33,000 square feet of commercial property located at15114 East Main in Sumner, Washington. This property is intended for a Mt. Rainier National Bank branch which isexpected to open in late 2002 or early 2003.

 

 

**ITEM8.  DIRECTORS AND EXECUTIVE OFFICERS OFTHE  REGISTRANT**

 

**               **Information regarding “Directors and ExecutiveOfficers” of Mountain Bank Holding is incorporated by reference from MountainBank Holding’s 2002 Annual Proxy Statement (“Proxy Statement”) under thecaptions “INFORMATION WITH RESPECT TO NOMINEES AND DIRECTORS WHOSE TERMSCONTINUE” and “MANAGEMENT”.

 

 

**ITEM9.  REMUNERATION OF DIRECTORS AND OFFICERS**

 

                Informationregarding “Remuneration of Directors and Officers” of Mountain Bank Holding isincorporated by reference from Mountain Bank Holding’s Proxy Statement underthe captions “INFORMATION WITH RESPECT TO NOMINEES AND DIRECTORS WHOSE TERMSCONTINUE — Compensation of Directors” and “EXECUTIVE COMPENSATION”.

 

 

**ITEM10.               SECURITY OWNERSHIP OFMANAGEMENT AND CERTAIN SHAREHOLDERS**

 

**               **Information regarding “Security Ownership ofManagement and Certain Shareholders” of Mountain Bank Holding is incorporatedby reference from Mountain Bank Holding’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”.

 

 

**ITEM11.               INTEREST OF MANAGEMENTAND OTHERS IN CERTAIN TRANSACTIONS**

 

                Informationregarding “Interest of Management and Others in Certain Transactions” ofMountain Bank Holding is incorporated by reference from Mountain Bank Holding’sProxy Statement under the caption “TRANSACTIONS WITH MANAGEMENT”.

 

 

22

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**PART II**

 

**Item1.  Market Price of and Dividends on theRegistrant’s Common Equity**

 

*Market Information*

 

No broker makes a market in Mountain Bank Holding’scommon stock, and trading has not been extensive.  Trades that have occurred cannot be characterized as amounting toan active market.  The stock is tradedby individuals on a personal basis and is not listed on any exchange or tradedon the over-the-counter market.  Due tothe limited information available, the following price information may notaccurately reflect the actual market value of the shares.  The following data includes trades betweenindividual investors.  It does notinclude new issuances of stock, the exercise of stock options or shares issuedunder the Employee Stock Purchase Plan.

 
| **Period**   |   | **# of  Shares Traded (1)** |   | **Price  Range(1)** |   |
|--------------|--------|-----------------------------|--------|---------------------|--------|
| 2000         |   |                        |   |                |   |
| 1st  Quarter |   | 16,478                      |   | $9.00               |   |
| 2nd  Quarter |   | 8,418                       |   | $9.00               |   |
| 3rd  Quarter |   | 16,460                      |   | $9.25 to $10.00     |   |
| 4th  Quarter |   | 3,574                       |   | $10.00 to $10.50    |   |
|         |   |                        |   |                |   |
| 2001         |   |                        |   |                |   |
| 1st  Quarter |   | 6,264                       |   | $11.00              |   |
| 2nd  Quarter |   | 17,307                      |   | $11.00              |   |
| 3rd  Quarter |   | 4,099                       |   | $11.00 to $12.00    |   |
| 4th  Quarter |   | 14,639                      |   | $10.75 to $11.50    |   |

 

----

(1)  Adjusted to reflect atwo-for-one stock split effective April 24, 2000.  The price information was obtained from Mt. Rainier Bank actingas transfer agent for Mountain Bank Holding.

 

On November 9, 2000, Mountain Bank Holding offered forsale 75,000 shares of no par value common stock at a subscription price of$11.00 per share.  The offering wassuccessfully completed on January 12, 2001.

 

                As of December 31,2001, there were 2,067,401 shares of Mountain Bank Holding Company common stockissued and outstanding.

 

At December 31, 2001,stock options for 232,550 shares of Mountain Bank Holding Company common stockwere outstanding.  See Note 11 of theaudited financial statements for additional information.

 

*Number of Equity Holders*

 

As of January 31, 2002, there were 1,032 holders ofrecord of Mountain Bank Holding’s common stock.

 

*Stock Dividends*

 

Dividends, when and if paid, will be subject todetermination and declaration by the Board of Directors, which will take intoaccount the financial condition of Mt. Rainier Bank and Mountain Bank Holding,results of operations, tax considerations, industry standards, economicconditions and other relevant factors. In 2001 the Board of Directors declared a 5% (1 share for every twentyshares owned) stock dividend payable to shareholders of record as of June 15,2001. All per share amounts contained in this filing have been adjusted toreflect this stock dividend. The ability of Mountain Bank Holding to paydividends in the future will depend primarily upon the earnings of Mt. RainierBank and its ability to pay dividends to Mountain Bank Holding.

 

 

23

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*Payment of Dividends*

 

                The principalsource of Mountain Bank Holding’s cash revenues is dividends received from Mt.Rainier Bank.  The payment of dividendsis subject to government regulation, in that regulatory authorities mayprohibit banks and bank holding companies from paying dividends that wouldconstitute an unsafe or unsound banking practice.  In addition, a bank has certain restrictions on the payment ofdividends and also may not pay cash dividends if that payment could reduce theamount of its capital below that necessary to meet minimum applicableregulatory capital requirements.  See“SUPERVISION AND REGULATION — MT. RAINIER NATIONAL BANK” contained elsewhere inthis Annual Report.  Other than the lawsand regulations noted above, which apply to all banks and bank holdingcompanies, neither we nor Mt. Rainier Bank are currently subject to anyregulatory restrictions on our dividends.

 

**               **Mountain Bank Holding’s policy has been to retainearnings to support the growth of Mt. Rainier Bank.  Accordingly, no cash dividend has been declared to shareholderssince the inception of Mt. Rainier Bank.

 

**Item 2.  Legal Proceedings**

 

                There are nomaterial pending legal proceedings to which we or Mt. Rainier Bank are a partyor of which any of our properties are subject; nor are there materialproceedings known to us to be contemplated by any governmental authority; norare there material proceedings known to us, pending or contemplated, in whichany director, officer or affiliate or any principal security holder, or anyassociate of any of the foregoing, is a party or has an interest adverse to usor Mt. Rainier Bank.

 

**Item3.  Changes in and Disagreements withAccountants**

 

There was a change inMountain Bank Holding’s independent accountants during the third quarter of2001 as reported on Form 8-K filed with the SEC on September 10, 2001.  This change was a result of the acquisitionof the accounting firm which Mountain Bank Holding has used since inception.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

During the fourth quarterof the year ended December 31, 2001, no matters were submitted to the securityholders through the solicitation of proxies or otherwise.

 

**Item5.  Compliance with Section 16(a) of theExchange Act**

 

Mountain Bank Holding hasadopted procedures to assist its directors and executive officers with Section16(a) of the Securities Exchange Act, which includes assisting the officer ordirector in preparing forms for filing with the Securities Exchange Commission.  Based on the review of such forms, MountainBank Holding believes that all of its executive officers and directors compliedwith all filing requirements applicable to them in 2001 except that thefollowing persons inadvertently failed to timely file Forms 4 in connectionwith share purchases and sales made in 2001: Mr. Gallagher (one late report with respect to one transaction); Mr.Jones (two late reports with respect to two transactions); Mr. Moergeli (onelate report with respect to 810 shares owned by Mr. Moergeli’s wife as a resultof marriage in November 2001); and Mr. Raeder (three late reports with respectto four transactions, and one late report with respect to 420 shares owned byMr. Raeder’s wife not previously reported as benefically owned).  Filings on Form 5 for each such person havebeen made.

** **

**Item 6.  Reports on Form 8-K**

 

There were no reportsfiled on Form 8-K during the last quarter of the period ending December 31,2001.

 

24

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Mountain

 

Bank

 

Holding

 

Company

 

and

 

Subsidiary

 

 

 

**Consolidated**

 

**Financial**

 

**Report**

 

 

 

December 31

 

2001

 

 

----

 

 

 

**Contents**

 

 

**Independent Auditor’s Reporton 2001 Financial Statements**

**Independent Auditor’s Reporton 2000 Consolidated Financial Statements**

 

**Consolidated FinancialStatements**

 

Consolidated Balance Sheets

 

Consolidated Statementsof Income

 

ConsolidatedStatements of Shareholders’ Equity

 

ConsolidatedStatements of Cash Flows

 

Notes toConsolidated Financial Statements

 

 

 

F-2

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**IndependentAuditor’s Report**

 

 

 

Board of Directors

**Mountain Bank Holding Company**

Enumclaw,Washington

 

 

We have auditedthe accompanying consolidated balance sheet of **Mountain Bank Holding Company andSubsidiary** as of December 31, 2001, and the related consolidatedstatements of income, shareholders’ equity and cash flows for the year thenended.  These consolidated financialstatements are the responsibility of Mountain Bank Holding’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audit.

 

We conducted ouraudit in accordance with auditing standards generally accepted in the UnitedStates of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of **Mountain Bank Holding Company andSubsidiary** as of December 31, 2001, and the results of theiroperations and their cash flows for the year then ended, in conformity withaccounting principles generally accepted in the United States of America.

 

 

/s/ McGladrey& Pullen, LLP

 

 

 

Tacoma, Washington

January 11, 2002

 

 

F-3

----

 

 

**IndependentAuditor’s Report**

 

 

 

Board of Directors

**Mountain Bank Holding Company**

Enumclaw,Washington

 

 

We have auditedthe accompanying consolidated balance sheet of **Mountain Bank Holding Company andSubsidiary** as of December 31, 2000, and the related consolidatedstatements of income, shareholders’ equity and cash flows for the year thenended.  These consolidated financialstatements are the responsibility of Mountain Bank Holding’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audit.

 

We conducted ouraudit in accordance with auditing standards generally accepted in the UnitedStates of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of **Mountain Bank Holding Company andSubsidiary** as of December 31, 2000, and the results of theiroperations and their cash flows for the year then ended, in conformity withaccounting principles generally accepted in the United States of America.

 

 

/s/ Knight, Vale& Gregory PLLC

 

 

 

Tacoma, Washington

January 15, 2001

 

 

F-4

----

 

 

 

**Consolidated Financial Statements**

** **

** **

 

F-5

----

 

 

**ConsolidatedBalance Sheets**

(Dollars inThousands)

 

Mountain BankHolding Company and Subsidiary

December 31, 2001and 2000

 
|                                                                                                                                         |   | **2001**    |        | **2000**   |       |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|------------|------------|
| **Assets**                                                                                                                                   |   |        |        |       |       |
| Cash  and due from banks                                                                                                                     |   | $           | 3,620       |       | $          | 3,947 |   |
| Interest  bearing deposits at other financial institutions                                                                                   |   | 13,455      |        | 7,338      |       |
| Securities  available for sale                                                                                                               |   | 31,612      |        | 20,446     |       |
| Federal Home Loan Bank  and Federal Reserve Bank stocks, at cost                                                                             |   | 634         |        | 581        |       |
| Loans held for sale                                                                                                                          |   | 1,093       |        | 536        |       |
|                                                                                                                                         |   |        |        |       |       |
| Loans                                                                                                                                        |   | 68,887      |        | 65,642     |       |
| Allowance  for credit losses                                                                                                                 |   | 753         |        | 700        |       |
| **Net  loans**                                                                                                                               |   | **68,134**  | ** **  | **64,942** | ** ** |
|                                                                                                                                         |   |        |        |       |       |
| Premises  and equipment                                                                                                                      |   | 3,545       |        | 3,544      |       |
| Accrued  interest receivable                                                                                                                 |   | 650         |        | 623        |       |
| Bank  owned life insurance                                                                                                                   |   | 3,031       |        | —     |       |
| Other  assets                                                                                                                                |   | 107         |        | 184        |       |
|                                                                                                                                         |   |        |        |       |       |
| **Total  assets**                                                                                                                            |   | **$**       | **125,881** | ** ** | **$**      | **102,141** | ** ** |
|                                                                                                                                         |   |        |        |       |       |
|                                                                                                                                         |   |        |        |       |       |
| **Liabilities**                                                                                                                              |   |        |        |       |       |
| Deposits:                                                                                                                                    |   |        |        |       |       |
| Demand                                                                                                                                       |   | $           | 17,009      |       | $          | 15,075 |   |
| Savings  and interest-bearing demand                                                                                                         |   | 46,983      |        | 33,858     |       |
| Time                                                                                                                                         |   | 48,119      |        | 40,644     |       |
| **Total  deposits**                                                                                                                          |   | **112,111** | ** **  | **89,577** | ** ** |
|                                                                                                                                         |   |        |        |       |       |
| Accrued  interest payable                                                                                                                    |   | 292         |        | 306        |       |
| Note  payable                                                                                                                                |   | 38          |        | 40         |       |
| Other  liabilities                                                                                                                           |   | 137         |        | 68         |       |
|                                                                                                                                         |   |        |        |       |       |
| **Total  liabilities**                                                                                                                       |   | **112,578** | ** **  | **89,991** | ** ** |
|                                                                                                                                         |   |        |        |       |       |
| **Commitments  and Contingencies**                                                                                                           |   | **—**  | ** **  | **—** | ** ** |
|                                                                                                                                         |   |        |        |       |       |
| **Shareholders’  Equity**                                                                                                               |   |        |        |       |       |
| Common  stock (no par value); authorized 10,000,000 shares; issued and  outstanding:  2001 - 2,067,401 shares;  2000 - 1,945,136 shares |   | 1,034       |        | 973        |       |
| Additional paid-in capital                                                                                                                   |   | 8,698       |        | 7,543      |       |
| Retained  earnings                                                                                                                           |   | 3,474       |        | 3,616      |       |
| Accumulated other comprehensive income                                                                                                       |   | 97          |        | 18         |       |
| **Total  shareholders’ equity**                                                                                                         |   | **13,303**  | ** **  | **12,150** | ** ** |
|                                                                                                                                         |   |        |        |       |       |
| **Total  liabilities and shareholders’ equity**                                                                                         |   | **$**       | **125,881** | ** ** | **$**      | **102,141** | ** ** |

 

 

*See notes to consolidated financialstatements.*

 

 

F-6

----

 

 

 

 

**ConsolidatedStatements of Income**

(Dollars inThousands, Except Per Share Amounts)

 

Mountain BankHolding Company and Subsidiary

YearsEnded December 31, 2001 and 2000

 

 
|                                                       |   | **2001**  |       | **2000**   |       |
|------------------------------------------------------------|--------|-----------|------------|------------|------------|
| **Interest  Income**                                       |   |      |       |       |       |
| Loans                                                      |   | $         | 6,376      |       | $          | 6,005 |   |
| Deposits  in banks                                         |   | 449       |       | 110        |       |
| Investment  income:                                        |   |      |       |       |       |
| Taxable                                                    |   | 1,421     |       | 1,442      |       |
| Tax-exempt                                                 |   | 15        |       | 12         |       |
| **Total  interest income**                                 |   | **8,261** | ** ** | **7,569**  | ** ** |
|                                                       |   |      |       |       |       |
| **Interest  Expense**                                      |   |      |       |       |       |
| Deposits                                                   |   | 3,525     |       | 2,903      |       |
| Federal  funds purchased                                   |   | —    |       | 31         |       |
| Note  payable                                              |   | 3         |       | 3          |       |
| **Total  interest expense**                                |   | **3,528** | ** ** | **2,937**  | ** ** |
|                                                       |   |      |       |       |       |
| **Net  interest income**                                   |   | **4,733** | ** ** | **4,632**  | ** ** |
|                                                       |   |      |       |       |       |
| **Provision  for Credit Losses**                           |   | 85        |       | 93         |       |
|                                                       |   |      |       |       |       |
| **Net  interest income after provision for credit losses** |   | **4,648** | ** ** | **4,539**  | ** ** |
|                                                       |   |      |       |       |       |
| **Non-Interest  Income**                                   |   |      |       |       |       |
| Service charges on deposit accounts                        |   | 519       |       | 529        |       |
| Gains  on sales of mortgage loans                          |   | 291       |       | 109        |       |
| Gains  (losses) on sale of securities available for sale   |   | 31        |       | (3         | )          |
| Other                                                      |   | 306       |       | 235        |       |
| **Total  non-interest income**                             |   | **1,147** | ** ** | **870**    | ** ** |
|                                                       |   |      |       |       |       |
| **Non-Interest  Expenses**                                 |   |      |       |       |       |
| Salaries  and employee benefits                            |   | 2,534     |       | 2,224      |       |
| Occupancy                                                  |   | 218       |       | 248        |       |
| Equipment                                                  |   | 372       |       | 355        |       |
| Other                                                      |   | 1,253     |       | 1,205      |       |
| **Total  non-interest expenses**                           |   | **4,377** | ** ** | **4,032**  | ** ** |
|                                                       |   |      |       |       |       |
| **Income  before income taxes**                            |   | **1,418** | ** ** | **1,377**  | ** ** |
|                                                       |   |      |       |       |       |
| **Income  Taxes**                                          |   | 478       |       | 464        |       |
|                                                       |   |      |       |       |       |
| **Net  income**                                            |   | **$**     | **940**    | ** ** | **$**      | **913** | ** ** |
|                                                       |   |      |       |       |       |
|                                                       |   |      |       |       |       |
| **Earnings  Per Share**                                    |   |      |       |       |       |
| Basic                                                      |   | $         | .46        |       | $          | .47 |   |
| Diluted                                                    |   | .44       |       | .45        |       |

 

 

*See notes to consolidated financialstatements.*

 

 

F-7

----

 

 

**ConsolidatedStatements of Shareholders’ Equity**

(Dollars inThousands)

 

Mountain BankHolding Company and Subsidiary

Years EndedDecember 31, 2001 and 2000

 

 
| ** **                                               | ** Shares of**CommonStock | ** ** | ** **CommonStock | ** ** | **Additional**Paid-inCapital | ** ** | **Retained**Earnings | ** ** | **Accumulated  Other  Comprehensive**Income (Loss) | ** ** | **Total**  | ** ** |
|----------------------------------------------------------|--------------------------------|------------|-----------------------|------------|------------------------------|------------|----------------------|------------|----------------------------------------------------|------------|------------|------------|
| Balance  at December 31, 1999                            | 924,013                        |       | $                     | 924        |                         | $          | 6,785                |       | $                                                  | 2,703      |       | $          | (250 | ) | $ | 10,162 |   |
|                                                     |                           |       |                  |       |                         |       |                 |       |                                               |       |       |       |
| Comprehensive  income:                                   |                           |       |                  |       |                         |       |                 |       |                                               |       |       |       |
| Net  income                                              | —                         |       | —                |       | —                       |       | 913                  |       | —                                             |       | 913        |       |
| Other comprehensive  income, net of tax:                 |                           |       |                  |       |                         |       |                 |       |                                               |       |       |       |
| Change in fair value  of securities available for sale   | —                         |       | —                |       | —                       |       | —               |       | 268                                                |       | 268        |       |
| **Comprehensive  income**                                |                           |       |                  |       |                         |       |                 |       |                                               |       | **1,181**  |       |
|                                                     |                           |       |                  |       |                         |       |                 |       |                                               |       |       |       |
| 2-for-1  stock split                                     | 924,013                        |       | —                |       | —                       |       | —               |       | —                                             |       | —     |       |
| Sale of common stock  under employee stock purchase plan | 1,732                          |       | 1                     |       | 14                           |       | —               |       | —                                             |       | 15         |       |
| Exercise  of stock options                               | 26,664                         |       | 13                    |       | 54                           |       | —               |       | —                                             |       | 67         |       |
| Sale  of common stock                                    | 68,714                         |       | 35                    |       | 678                          |       | —               |       | —                                             |       | 713        |       |
| Tax benefit from  exercise of stock options              | —                         |       | —                |       | 12                           |       | —               |       | —                                             |       | 12         |       |
|                                                     |                           |       |                  |       |                         |       |                 |       |                                               |       |       |       |
| **Balance  at   December 31, 2000**                      | **1,945,136**                  | ** ** | **973**               | ** ** | **7,543**                    | ** ** | **3,616**            | ** ** | **18**                                             | ** ** | **12,150** | ** ** |
|                                                     |                           |       |                  |       |                         |       |                 |       |                                               |       |       |       |
| Comprehensive  income:                                   |                           |       |                  |       |                         |       |                 |       |                                               |       |       |       |
| Net  income                                              | —                         |       | —                |       | —                       |       | 940                  |       | —                                             |       | 940        |       |
| Other comprehensive  income, net of tax:                 |                           |       |                  |       |                         |       |                 |       |                                               |       |       |       |
| Change in fair value  of securities available for sale   | —                         |       | —                |       | —                       |       | —               |       | 79                                                 |       | 79         |       |
| **Comprehensive  income**                                |                           |       |                  |       |                         |       |                 |       |                                               |       | **1,019**  |       |
|                                                     |                           |       |                  |       |                         |       |                 |       |                                               |       |       |       |
| 5%  stock dividend                                       | 98,198                         |       | 49                    |       | 1,031                        |       | (1,082               | )          | —                                             |       | (2         | )          |
| Sale of common stock  under employee stock purchase plan | 1,781                          |       | 1                     |       | 15                           |       | —               |       | —                                             |       | 16         |       |
| Exercise  of stock options                               | 16,000                         |       | 8                     |       | 32                           |       | —               |       | —                                             |       | 40         |       |
| Sale  of common stock                                    | 6,286                          |       | 3                     |       | 66                           |       | —               |       | —                                             |       | 69         |       |
| Tax benefit from  exercise of stock options              | —                         |       | —                |       | 11                           |       | —               |       | —                                             |       | 11         |       |
|                                                     |                           |       |                  |       |                         |       |                 |       |                                               |       |       |       |
| **Balance  at   December 31, 2001**                      | **2,067,401**                  | ** ** | **$**                 | **1,034**  | ** **                   | **$**      | **8,698**            | ** ** | **$**                                              | **3,474**  | ** ** | **$**      | **97** | ** ** | **$** | **13,303** | ** ** |

 

 

*See notes to consolidated financialstatements.*

 

 

F-8

----

**Consolidated Statements of Cash Flows**

(Dollars inThousands)

 

Mountain BankHolding Company and Subsidiary

Years EndedDecember 31, 2001 and 2000

 
|                                                                               |   | **2001**    |       | **2000**   |       |
|------------------------------------------------------------------------------------|--------|-------------|------------|------------|------------|
| **Cash  Flows from Operating Activities**                                          |   |        |       |       |       |
| Net income                                                                         |   | $           | 940        |       | $          | 913 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |        |       |       |       |
| Provision  for credit losses                                                       |   | 85          |       | 93         |       |
| Depreciation and amortization                                                      |   | 345         |       | 342        |       |
| Deferred  federal income tax benefit                                               |   | (51         | )          | (24        | )          |
| (Gain)  loss on sales of securities available for sale                             |   | (31         | )          | 3          |       |
| Stock  dividends received                                                          |   | (30         | )          | (22        | )          |
| Gains  on loans sold                                                               |   | (291        | )          | (109       | )          |
| Originations  of loans held for sale                                               |   | (28,415     | )          | (9,339     | )          |
| Proceeds  from sales of loans                                                      |   | 28,149      |       | 9,206      |       |
| Increase  in accrued interest receivable                                           |   | (27         | )          | (87        | )          |
| Increase  (decrease) in accrued interest payable                                   |   | (14         | )          | 112        |       |
| Other  - net                                                                       |   | 274         |       | (5         | )          |
| **Net  cash provided by operating activities**                                     |   | **934**     | ** ** | **1,083**  | ** ** |
|                                                                               |   |        |       |       |       |
| **Cash  Flows from Investing Activities**                                          |   |        |       |       |       |
| Net  increase in interest-bearing deposits in banks                                |   | (6,117      | )          | (3,775     | )          |
| Activity in  securities available for sale:                                        |   |        |       |       |       |
| Purchases                                                                          |   | (30,675     | )          | (1,071     | )          |
| Maturities,  prepayments and calls                                                 |   | 18,475      |       | 6,475      |       |
| Sales                                                                              |   | 1,029       |       | 999        |       |
| Increase  in loans made to customers, net of principal collections                 |   | (3,283      | )          | (11,591    | )          |
| Additions  to premises and equipment                                               |   | (345        | )          | (537       | )          |
| Purchase  of bank owned life insurance                                             |   | (3,000      | )          | —     |       |
| **Net  cash used in investing activities**                                         |   | **(23,916** | **)**      | **(9,500** | **)**      |
|                                                                               |   |        |       |       |       |
| **Cash  Flows from Financing Activities**                                          |   |        |       |       |       |
| Net  increase in deposits                                                          |   | 22,534      |       | 8,331      |       |
| Net  proceeds from issuance of stock                                               |   | 125         |       | 795        |       |
| Repayment  of note payable                                                         |   | (2          | )          | (2         | )          |
| Payment  for fractional shares in stock dividend                                   |   | (2          | )          | —     |       |
| **Net  cash provided by financing activities**                                     |   | **22,655**  | ** ** | **9,124**  | ** ** |
|                                                                               |   |        |       |       |       |
| **Net  change in cash and due from banks**                                         |   | **(327**    | **)**      | **707**    | ** ** |
|                                                                               |   |        |       |       |       |
| **Cash  and Due from Banks**                                                       |   |        |       |       |       |
| Beginning  of year                                                                 |   | 3,947       |       | 3,240      |       |
|                                                                               |   |        | ** ** |       | ** ** |
| **End of year**                                                                    |   | **$**       | **3,620**  | ** ** | **$**      | **3,947** | ** ** |
|                                                                               |   |        |       |       |       |
| **Supplemental  Disclosures of Cash Flow Information**                             |   |        |       |       |       |
| Interest  paid                                                                     |   | $           | 3,542      |       | $          | 2,824 |   |
| Income  taxes paid                                                                 |   | 460         |       | 440        |       |
|                                                                               |   |        |       |       |       |
| **Supplemental  Disclosures of Non-Cash Investing and Financing Activities**       |   |        |       |       |       |
| Unrealized gain on securities available  for sale, net of tax                      |   | $           | 79         |       | $          | 268 |   |
| Tax benefit from exercise of stock  options                                        |   | 11          |       | 12         |       |
| Stock dividend                                                                     |   | 1,080       |       | —     |       |

 

 

*See notes to consolidated financialstatements*.

 

 

F-9

----

 

**Notesto Consolidated Financial Statements**

 

 

Mountain BankHolding Company and Subsidiary

December 31, 2001and 2000

 

 

**Note 1 - Summary of SignificantAccounting Policies**

 

**Basis of Consolidation and Operations**

 

The consolidatedfinancial statements include the accounts of Mountain Bank Holding Company (theCompany) and its wholly owned subsidiary, Mt. Rainier National Bank (the Bank).  All significant intercompany transactionsand balances have been eliminated.  TheCompany is a holding company, which operates primarily through its majorsubsidiary, the Bank.

 

The Bank operatesfour branches and has a customer base centered in and around southeastern KingCounty and northeastern Pierce County, Washington.  The Bank provides loan and deposit services to customers, who arepredominantly small- and middle-market businesses and middle-income individualsin western Washington.  Its primaryfunding source is deposits from businesses and individuals in its market area.

 

**ConsolidatedFinancial Statement Presentation**

 

The consolidated financial statementshave been prepared in accordance with generally accepted accounting principlesand practices within the banking industry. The preparation of financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, and the disclosure of contingent assets and liabilities, as of thedate of the balance sheet, and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ significantly from those estimates.  Material estimates that are particularlysusceptible to significant change in the near term relate to the determinationof the allowance for credit losses and the valuation of loans held for sale anddeferred tax assets.

 

Certain prior year amounts have been reclassified to conform to the2001 presentation.  All dollar amounts,except per share information, are stated in thousands.

 

**SecuritiesAvailable for Sale**

 

Securities available for sale consist of debtsecurities that the Bank intends to hold for an indefinite period, but notnecessarily to maturity.  Suchsecurities may be sold to implement the Bank’s asset/liability managementstrategies and in response to changes in interest rates and similar factors,and certain equity securities. Securities available for sale are reported at fair value.  Unrealized gains and losses, net of the relateddeferred tax effect, are reported as a net amount in a separate component ofshareholders’ equity entitled “accumulated other comprehensive income(loss).”  Realized gains and losses onsecurities available for sale, determined using the specific identificationmethod, are included in earnings. Amortization of premiums and accretion of discounts are recognized ininterest income over the period to maturity.

 

Declinesin the fair value of individual securities available for sale below their costthat are other than temporary result in write-downs of the individualsecurities to their fair value.  Suchwrite-downs are included in earnings as realized losses.

 

 

F-10

----

 

**LoansHeld for Sale**

 

Mortgage loans originated for sale in the foreseeable future in thesecondary market are carried at the lower of aggregate cost or estimated marketvalue.  Gains and losses on sales ofloans are recognized at settlement date and are determined by the differencebetween the sales proceeds and the carrying value of the loans.  All sales are made without recourse.* *Net unrealized losses arerecognized through a valuation allowance established by charges to income.

 

**Loans**

 

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

 

Generally the accrual of interest onloans is discontinued when, in management’s opinion, the borrower may be unableto meet payments as they become due or when they are past due 90 days as toeither principal or interest, unless they are well secured and in the processof collection.  When interest accrual isdiscontinued, all unpaid accrued interest is reversed against currentincome.  If management determines thatthe ultimate collectibility of principal is in doubt, cash receipts onnonaccrual loans are applied to reduce the principal balance.

 

**Allowancefor Credit Losses**

 

Theallowance for credit losses is maintained at a level considered adequate toprovide for estimated losses on existing loans based on evaluating known andinherent risks in the loan portfolio. The allowance is reduced by loans charged off, and increased byprovisions charged to earnings and recoveries on loans previously chargedoff.  The allowance is based onmanagement’s periodic, systematic evaluation of factors underlying the qualityof the loan portfolio, including changes in the size and composition of theloan portfolio, the estimated value of any underlying collateral, actual loanloss experience, current economic conditions, and detailed analysis ofindividual loans for which full collectibility may not be assured.  This evaluation is inherently subjective asit requires estimates that are susceptible to significant revision as moreinformation becomes available.  Whilemanagement uses the best information available to make its estimates, futureadjustments to the allowance may be necessary if there is a significant change ineconomic conditions.

 

When available informationconfirms that specific loans or portions thereof are uncollectible, theseamounts are charged off against the allowance for credit losses.  The existence of some or all of thefollowing criteria will generally confirm that a loss has been incurred:  the loan is significantly delinquent and theborrower has not evidenced the ability or intent to bring the loan current; theBank has no recourse to the borrower, or if it does, the borrower hasinsufficient assets to pay the debt; the estimated fair value of the loancollateral is significantly below the current loan balance, and there is littleor no near-term prospect for improvement.

 

 

F-11

----

 

When management determines that it isprobable that a borrower will be unable to repay all amounts due according tothe terms of the loan agreement, including scheduled interest payments, theloan is considered impaired.  Factorsconsidered by management in determining impairment include payment status,collateral value, and the probability of collecting scheduled principal andinterest payments when due.  Loans thatexperience insignificant payment delays and payment shortfalls are generallynot classified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount ofshortfall in relation to the principal and interest owed.  The amount of impairment is measured basedon the present value of expected future cash flows discounted at the loan’seffective interest rate or, when the primary source of repayment is provided byreal estate collateral, at the fair value of the collateral less estimatedselling costs.

 

The ultimate recovery of all loans is susceptible tofuture market factors beyond the Bank’s control.  These factors may result in losses or recoveries differingsignificantly from those provided for in the financial statements.

 

**Premisesand 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 livesof the assets.  Gains or losses ondispositions are reflected in earnings.

 

**Transfersof Financial Assets**

 

Transfers of financial assets areaccounted for as sales when control over the assets has been surrendered.  Control over transferred assets is deemed tobe surrendered when (1) the assets have been isolated from the Bank, (2) thetransferee obtains the right (free of conditions that constrain it from takingadvantage of that right) to pledge or exchange the transferred assets, and (3)the Bank does not maintain effective control over the transferred assetsthrough an agreement to repurchase them before their maturity.

 

**IncomeTaxes**

 

Deferred tax assets and liabilitiesresult from differences between the financial statement carrying amounts andthe tax bases of assets and liabilities, and are reflected at currently enactedincome tax rates applicable to the period in which the deferred tax assets orliabilities are expected to be realized or settled.  The deferred tax provision represents the difference between thenet deferred tax asset/liability at the beginning and end of the year.  As changes in tax laws or rates are enacted,deferred tax assets and liabilities are adjusted through the provision forincome taxes.

 

The Bank provides for income taxes on a separate return basis andremits to the Company amounts currently payable.

 

 

F-12

----

 

**Cash andCash Equivalents**

 

For purposes of presentation in the consolidated statements of cash flows,cash and cash equivalents are defined as those amounts included in the balancesheet caption “Cash and due from banks.” The Bank maintains its cash in depository institution accounts which, attimes, may exceed federally insured limits. The Bank has not experienced any losses in such accounts.

 

**Stock-BasedCompensation**

 

The Company accounts for stock-based awards to employees using theintrinsic value method, in accordance with APB No. 25, *Accounting for Stock Issued toEmployees*.  Accordingly, nocompensation expense has been recognized in the financial statements foremployee stock arrangements.  However,the required pro forma disclosures of the effects of all options granted on orafter January 1, 1995 have been provided in accordance with SFAS No. 123, *Accountingfor Stock-Based Compensation*.

 

**EarningsPer Share**

 

Basic earnings per share exclude dilution and are computed by dividingnet income by the weighted average number of common shares outstanding.  The diluted earnings per share reflect the potentialdilution that could occur if common shares were issued pursuant to the exerciseof options under the Company’s stock option plans.

 

**ComprehensiveIncome**

 

The Company applies Statement of Financial Accounting Standards No.130, *ReportingComprehensive Income* (SFAS No. 130), which requires that an entityreport and display comprehensive income in a financial statement that isdisplayed with the same prominence as other financial statements.  Comprehensive income is defined as thechange in equity of a business enterprise during a period from transactions andother events and circumstances from non-owner sources.  It includes all changes in equity during aperiod except those resulting from investments by owners and distributions toowners.  With regard to the Company,comprehensive income includes the net income reported in the statements ofincome and any changes in fair value of securities available for sale, reportedas a component of shareholders’ equity.

 

**RecentAccounting Pronouncements**

 

SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, became effectiveand was adopted by the Company effective January 1, 2001.  The Company does not engage in hedgingactivities, nor did it have any derivatives at December 31, 2001 or 2000.  The adoption of SFAS No. 133 had no effecton the Company’s financial position or results of operations as of or for theyear ended December 31, 2001.

 

 

F-13

----

 

**Note 2 -Restricted Assets**

 

Federal Reserve Board regulations require maintenance of minimumreserve balances either in cash or on deposit with the Federal ReserveBank.  The amounts of such balances forthe years ended December 31, 2001 and 2000 were $930 and $848, respectively.

 

 

**Note 3 -Debt and Equity Securities**

 

Debt and equity securities have been classified according tomanagement’s intent.

 

The carrying amounts of securities and their approximate fair valuesare as follows:

 
| ** **                                        | ** ** | **Amortized   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair   Value** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------|------------|
| **Securities Available for Sale**                 |       |                 |       |                           |       |                            |       |             |       |
|                                              |       |                 |       |                           |       |                            |       |             |       |
| **December 31, 2001**                             |       |                 |       |                           |       |                            |       |             |       |
| U.S. Treasury securities                          |       | $                    | 3,106      |                           | $          | 12                              |       | $                | 28         |   | $ | 3,090 |   |
| U.S.  Government and agency securities            |       | 8,154                |       | 116                            |       | 32                              |       | 8,238            |       |
| Mortgage-backed  securities                       |       | 11,707               |       | 86                             |       | 24                              |       | 11,769           |       |
| Obligations  of states and political subdivisions |       | 495                  |       | 7                              |       | —                          |       | 502              |       |
| Corporate  securities                             |       | 8,003                |       | 57                             |       | 47                              |       | 8,013            |       |
|                                              |       |                 |       |                           |       |                            |       |             |       |
|                                              |       | **$**                | **31,465** |                           | **$**      | **278**                         | ** ** | **$**            | **131**    | ** ** | **$** | **31,612** |   |
|                                              |       |                 |       |                           |       |                            |       |             |       |
|                                              |       |                 |       |                           |       |                            |       |             |       |
| **December 31, 2000**                             |       |                 |       |                           |       |                            |       |             |       |
| U.S. Treasury securities                          |       | $                    | 2,008      |                           | $          | 10                              |       | $                | —     |   | $ | 2,018 |   |
| U.S.  Government and agency securities            |       | 12,499               |       | 20                             |       | 31                              |       | 12,488           |       |
| Mortgage-backed  securities                       |       | 5,617                |       | 31                             |       | 5                               |       | 5,643            |       |
| Obligations  of states and political subdivisions |       | 295                  |       | 2                              |       | —                          |       | 297              |       |
|                                              |       |                 |       |                           |       |                            |       |             |       |
|                                              |       | **$**                | **20,419** |                           | **$**      | **63**                          | ** ** | **$**            | **36**     | ** ** | **$** | **20,446** |   |

 

 

F-14

----

 

Gross gains on thesales of securities were $31 in 2001. Gross losses on the sales of securities were $3 in 2000.

 

Thecarrying amount and approximate market value of debt securities at December 31,2001 by contractual maturity are shown below. Expected maturities may differ from contractual maturities becauseborrowers may have the right to call or prepay obligations, with or withoutcall or prepayment penalties.

 
| ** **                | ** ** | **Amortized**Cost | ** ** | **Fair**Value | ** ** |
|---------------------------|------------|-------------------|------------|---------------|------------|
| Due in one year or less   |       | $                 | 1,753      |          | $          | 1,772 |   |
| Due  in one to five years |       | 24,625            |       | 24,745        |       |
| Due in five years or more |       | 5,087             |       | 5,095         |       |
|                      |       |              |       |          |       |
|                      |       | **$**             | **31,465** |          | **$**      | **31,612** |   |

 

Securities with acarrying value of $1,000 and $1,001 at December 31, 2001 and 2000,respectively, were assigned or pledged to secure public deposits, certainshort-term borrowings, and for other purposes as required by law.

 

 

**Note 4 - Loans**

 

Loans at December31 consist of the following:

 
|                        |   | **2001** |       | **2000**   |   |
|-----------------------------|--------|----------|------------|------------|--------|
| Commercial and agricultural |   | $        | 18,483     |       | $      | 15,869 |   |
| Real estate:                |   |     |       |       |   |
| Residential  1-4 family     |   | 13,790   |       | 16,395     |   |
| Commercial                  |   | 25,793   |       | 22,254     |   |
| Construction                |   | 5,506    |       | 5,829      |   |
| Consumer                    |   | 5,315    |       | 5,295      |   |
|                        |   |     |       |       |   |
| **Total  loans**            |   | **$**    | **68,887** | ** ** | **$**  | **65,642** | ** ** |

 

Changes in theallowance for credit losses for the years ended December 31 are as follows:

 
|                          |   | **2001** |    | **2000**   |       |
|-------------------------------|--------|----------|---------|------------|------------|
| Balance  at beginning of year |   | $        | 700     |       | $          | 607 |   |
| Provision for  credit losses  |   | 85       |    | 93         |       |
|                          |   |     |    |       |       |
| Charge-offs                   |   | (38      | )       | —     |       |
| Recoveries                    |   | 6        |    | —     |       |
| **Net charge-offs**           |   | **(32**  | **)**   | **—** | ** ** |
|                          |   |     |    |       |       |
| **Balance at end of year**    |   | **$**    | **753** | ** ** | **$**      | **700** | ** ** |

 

 

F-15

----

 

Followingis a summary of information pertaining to impaired loans:

 
|                                                          |   | **2001** |   | **2000**   |   |
|---------------------------------------------------------------|--------|----------|--------|------------|--------|
| **December 31**                                               |   |     |   |       |   |
| Impaired loans without  a valuation allowance                 |   | $        | — |       | $      | 17 |   |
| Impaired loans with a  valuation allowance                    |   | —   |   | —     |   |
|                                                          |   |     |   |       |   |
| **Total impaired loans**                                      |   | **$**    | — | ** ** | **$**  | **17** | ** ** |
|                                                          |   |     |   |       |   |
| **Valuation allowance related to impaired loans**             |   | **$**    | — | ** ** | **$**  | — | ** ** |
|                                                          |   |     |   |       |   |
| **Years Ended December 31**                                   |   |     |   |       |   |
| Average investment in  impaired loans                         |   | $        | 15     |       | $      | 21 |   |
| Interest income  recognized on a cash basis on impaired loans |   | —   |   | —     |   |

 

At December 31,2001, there were no commitments to lend additional funds to borrowers whoseloans have been modified.  There were noloans 90 days and over past due still accruing interest at December 31, 2001 or2000.

 

At December 31,2001 and 2000, certain officers and directors, or companies in which they have10% or more beneficial interest, were indebted to the Bank in the aggregateamount of $2,817 and $4,074, respectively. During 2001 advances of $1,775 were made, and repayments totaled $3,032.

 

 

**Note 5 - Premises and Equipment**

 

The components ofpremises and equipment at December 31 are as follows:

 
|                               |   | **2001**  |      | **2000**   |   |
|------------------------------------|--------|-----------|-----------|------------|--------|
| Land                               |   | $         | 1,111     |       | $      | 1,111 |   |
| Buildings                          |   | 2,520     |      | 2,494      |   |
| Equipment,  furniture and fixtures |   | 1,927     |      | 1,835      |   |
| Construction  in process           |   | 215       |      | —     |   |
|                               |   | **5,773** |      | **5,440**  |   |
| Less  accumulated depreciation     |   | 2,228     |      | 1,896      |   |
|                               |   |      |      |       |   |
| **Total  premises and equipment**  |   | **$**     | **3,545** | ** ** | **$**  | **3,544** | ** ** |

 

Construction inprocess includes construction costs to date related to two new branches.  The estimated cost to finish both branchesin 2002 is estimated to be $1.1 million.

 

 

F-16

----

 

**Note 6 - Deposits**

 

The composition ofdeposits at December 31 is as follows:

 
|                                   |   | **2001** |        | **2000**   |   |
|----------------------------------------|--------|----------|-------------|------------|--------|
| Demand deposits,  non-interest bearing |   | $        | 17,009      |       | $      | 15,075 |   |
| NOW and money  market accounts         |   | 35,466   |        | 24,248     |   |
| Savings deposits                       |   | 11,517   |        | 9,610      |   |
| Time certificates,  $100,000 or more   |   | 17,053   |        | 13,485     |   |
| Other time  certificates               |   | 31,066   |        | 27,159     |   |
|                                   |   |     |        |       |   |
| **Total**                              |   | **$**    | **112,111** | ** ** | **$**  | **89,577** | ** ** |

 

Scheduledmaturities of certificates of deposit for future years ending December 31 areas follows:

 
| 2002       |   | $      | 42,546     |   |
|------------|--------|--------|------------|--------|
| 2003       |   | 4,417  |       |
| 2004       |   | 202    |       |
| 2005       |   | 586    |       |
| 2006       |   | 368    |       |
| Thereafter |   | — |       |
|       |   |   |       |
|       |   | **$**  | **48,119** |   |

 

 

**Note 7 - Note Payable**

 

The note payableis secured by land, and is payable at $1 monthly, including interest of8%.  Future principal maturities are $2annually through 2006, and $28 thereafter.

 

 

**Note 8 - Income Taxes**

 

The components ofthe provision for income taxes are as follows at December 31:

 
|              |   | **2001** |    | **2000**   |   |
|-------------------|--------|----------|---------|------------|--------|
| Current           |   | $        | 529     |       | $      | 488 |   |
| Deferred benefit  |   | (51      | )       | (24        | )      |
|              |   |     |    |       |   |
| **Income  taxes** |   | **$**    | **478** | ** ** | **$**  | **464** | ** ** |

 

 

F-17

----

 

The effect oftemporary differences that give rise to significant portions of deferred taxassets and liabilities at December 31 follows:

 
|                                              |   | **2001** |       | **2000**   |       |
|---------------------------------------------------|--------|----------|------------|------------|------------|
| **Deferred  Tax Assets**                          |   |     |       |       |       |
| Allowance  for credit losses                      |   | $        | 248        |       | $          | 219 |   |
| Deferred  compensation                            |   | 14       |       | 12         |       |
| Accumulated  depreciation                         |   | 28       |       | 27         |       |
| Other                                             |   | 8        |       | 4          |       |
| **Total  deferred tax assets**                    |   | **298**  | ** ** | **262**    | ** ** |
|                                              |   |     |       |       |       |
| **Deferred  Tax Liabilities**                     |   |     |       |       |       |
| Cash  basis tax accounting                        |   | 26       |       | 52         |       |
| Deferred  income                                  |   | 212      |       | 201        |       |
| Unrealized  gain on securities available for sale |   | 50       |       | 9          |       |
| **Total  deferred tax liabilities**               |   | **288**  | ** ** | **262**    | ** ** |
|                                              |   |     | ** ** |       | ** ** |
| **Net deferred tax assets**                       |   | **$**    | **10**     | ** ** | **$**      | **—** | ** ** |

 

 

Thefollowing is a reconciliation between the statutory and effective federalincome tax rates for the years ended December 31:

 
|                                 |       | **2001**   |       | **2000**                             |       |
|--------------------------------------|------------|------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **Amount** | ** ** | **Percent of Pre-tax   Income** | ** ** | **Amount** | ** ** | **Percent of    Pre-tax   Income** | ** ** |
| Income  tax at statutory rate        |       | $          | 482        |                                 | 34.0       | % | $ | 469 |   | 34.0 | % |
| Increase  (decrease) resulting from: |       |       |       |                                 |       |   |   |   |   |
| Tax-exempt  income                   |       | (5         | )          | (.3                                  | )          | (4 | ) | (.2 | ) |
| Other                                |       | 1          |       | —                               |       | (1 | ) | (.1 | ) |
|                                 |       |       |       |                                 |       |   |   |   |   |
| **Total  income tax expense**        |       | **$**      | **478**    | ** **                           | **33.7**   | **%** | **$** | **464** | ** ** | **33.7** | **%** |

 

 

F-18

----

 

**Note 9 - Commitments andContingencies**

 

The Bank is party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  The financial instruments includecommitments 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 consolidatedbalance sheets.

 

The Bank’s exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit and letters of credit isrepresented by the contractual amount of those instruments.  The Bank uses the same credit policies inmaking commitments and conditional obligations as it does for on-balance-sheetinstruments.  A summary of the Bank’scommitments is as follows:

 
|                        |   | **2001** |       | **2000** |   |
|-----------------------------|--------|----------|------------|----------|--------|
| Commercial  and agriculture |   | $        | 6,826      |     | $      | 6,750 |   |
| Real  estate                |   | 1,250    |       | 2,959    |   |
| Credit  cards               |   | 2,777    |       | 3,200    |   |
|                        |   |     |       |     |   |
|                        |   | **$**    | **10,853** |     | **$**  | **12,909** |   |

 

Outstanding commitments under letters ofcredit totaled $519 and $627 at December 31, 2001 and 2000, respectively.

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  The Bank’s experience hasbeen that approximately 75% of loan commitments are drawn upon by customers.  The Bank evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank uponextension of credit, is based on management’s credit evaluation of theparty.  Collateral held varies, but mayinclude accounts receivable, inventory, property and equipment, residentialreal estate, and income-producing commercial properties.

 

Letters of credit areconditional commitments issued by the Bank to guarantee the performance of acustomer to a third party.  Thoseguarantees are primarily issued to support public and private borrowingarrangements.  The credit risk involvedin issuing letters of credit is essentially the same as that involved inextending loans to customers. Collateral held varies as specified above, and is required in instanceswhere the Bank deems necessary.

 

The Bank hasagreements with commercial banks for lines of credit totaling approximately$4,200, and a credit line with the Federal Home Loan Bank totaling 10% ofassets.  The Bank has entered into ablanket pledge agreement with the Federal Home Loan Bank to secure this creditline.  These lines were not drawn uponat December 31, 2001 or 2000.

 

On February 13,1997, the Company entered into a settlement agreement with the Bank’s formerpresident whereby the Company agreed to pay $155 for a three-year noncompeteagreement and other benefits.  Inaddition, the executive agreed to forfeit stock options for 20,000 fully vestedshares at an option price of $5 per share. Amortization of this non-compete agreement totaled $4 for the year endedDecember 31, 2000 when the agreement was fully amortized.

 

 

F-19

----

 

**Note 10 - Concentration of CreditRisk**

 

The Bank hascredit risk exposure, including off-balance-sheet credit risk exposure, asdisclosed in Notes 4 and 9.  Theultimate collectibility of a substantial portion of the loan portfolio issusceptible to changes in economic and market conditions in the region.  The Bank generally requires collateral onall real estate loans and typically maintains loan-to-value ratios of nogreater than 75% - 80%.  Loans aregenerally limited, by federal and state banking regulations, to 15% of theBank’s shareholder’s equity, excluding accumulated other comprehensive income(loss).  The Bank, as a matter ofpractice, generally does not extend credit to any single borrower or group ofrelated borrowers in excess of $1,500.

 

The contractualamounts of credit related financial instruments such as commitments to extendcredit, credit card arrangements, and letters of credit represent the amountsof potential accounting loss should the contract be fully drawn upon, thecustomer default, and the value of any existing collateral become worthless.

 

Investments inobligations of states and political subdivisions involve governmental entitieswithin the Bank’s market area.  Lettersof credit were granted primarily to commercial borrowers.

 

 

**Note 11 - Stock Option Plans**

 

**Director Plans**

 

The 1990 Director StockOption Plan grants a director an option to purchase 12,600 shares of common stockupon initial election to the Board of Directors at an exercise price equal tothe fair market value of the common stock at the date of grant.  Options are exercisable on a cumulativebasis in annual installments of one-third each on the third, fourth and fifthanniversary of the date of grant.  Atotal of 126,000 shares of the Company’s common stock were reserved for optionunder this plan, of which options for 113,400 shares at $2.38 per share weregranted on June 13, 1990, to expire on June 13, 2005 and options for 3,150shares at $10.48 per share were granted April 24, 2001, to expire April 24,2016.  Options granted in 1990 are fullyvested at December 31, 2001.  Optionsgranted in 2001 are not vested at December 31, 2001.  Options for 4,200 shares were exercised in both 2001 and 2000under this director plan.

 

The 1999 Director StockOption Plan grants a director an option to purchase shares of common stock atan exercise price which must be no less than the greater of the fair marketvalue of the common stock or the net book value of the common stock at the timeof grant.  A total of 42,000 shares ofthe Company’s common stock were reserved for option under this plan, of whichoptions for 33,600 shares at $10.48 per share were granted November 21, 2000,expiring on November 21, 2015; none of these options granted are vested atDecember 31, 2001.

 

**Employee Plans**

 

In 1990 and 1999,the Company adopted plans providing for granting certain key employees optionsto purchase common stock.  Under theterms of the plans, options are incentive stock options (as defined in theInternal Revenue Code).  The optionprice will be fair market value at the date of grant or a price determined bythe Board of Directors, but not less than fair value.  Options are exercisable on a cumulative basis in annualinstallments of one-third each on the third, fourth and fifth anniversary ofthe date of grant.  Pursuant to theseplans, 84,000 shares are reserved for option as of December 31, 2001, of which48,800 shares (after forfeitures) have been granted.  A total of 35,200 shares remain available for future grant underthe 1999 plan at December 31, 2001.  In2001 and 2000, options for 12,600 shares and 23,797 shares, respectively, wereexercised under the employee plans.

 

 

F-20

----

 

The Company has adoptedthe disclosure-only provisions of SFAS No. 123, but applies APB Opinion No. 25in accounting for its plans.  If theCompany had elected to recognize compensation cost for stock options issuedsubsequent to December 31, 1994 based on the fair value at the grant dates,consistent with the method prescribed by SFAS No. 123, net income and earningsper share would have been changed to the pro forma amounts indicated below:

 
|                 |   | **2001** |   | **2000** |   |
|----------------------|--------|----------|--------|----------|--------|
| Net income:          |   |     |   |     |   |
| As reported          |   | $        | 940    |     | $      | 913 |   |
| Pro forma            |   | 855      |   | 850      |   |
|                 |   |     |   |     |   |
| Earnings per  share: |   |     |   |     |   |
| Basic:               |   |     |   |     |   |
| As reported          |   | $        | .46    |     | $      | .47 |   |
| Pro forma            |   | .42      |   | .44      |   |
| Diluted:             |   |     |   |     |   |
| As reported          |   | .44      |   | .45      |   |
| Pro forma            |   | .41      |   | .43      |   |

 

 

The fair value ofeach option grant is estimated on the date of grant, based on the Black-Scholesoption pricing model and using the following weighted-average assumptions:

 
|                             |   | **2001**       |   | **2000**       |   |
|----------------------------------|--------|----------------|--------|----------------|--------|
| Dividend yield                   |   | —         | %      | —         | %      |
| Expected life                    |   | 10 to 15 years |   | 10 to 15 years |   |
| Average  risk-free interest rate |   | 4.88           | %      | 5.91           | %      |

 

 

The weightedaverage fair value of options granted during 2001 and 2000 was $4.11 and $4.42,respectively.

 

 

F-21

----

 

A summary of thestatus of the Company’s stock option plans as of December 31, 2001 and 2000,and changes during the years ending on those dates, is presented below:

 
|                              |       | **2001**    |       | **2000**                                 |       |
|-----------------------------------|------------|-------------|------------|------------------------------------------|------------|
| ** **                        | ** ** | **Shares**  | ** ** | **Weighted   Average  Exercise   Price** | ** ** | **Shares** | ** ** | **Weighted   Average   Exercise   Price** | ** ** |
| Outstanding at  beginning of year |       | 244,650     |       | $                                        | 5.62       |   | 242,722 |   | $ | 9.24 |   |
| Granted                           |       | 20,450      |       | 10.76                                    |       | 37,800 |   | 10.27 |   |
| Exercised                         |       | (16,800     | )          | 2.38                                     |       | (27,997 | ) | 2.38 |   |
| Forfeited                         |       | (15,750     | )          | 8.47                                     |       | (7,875 | ) | 8.50 |   |
|                              |       |        |       |                                     |       |   |   |   |   |
| **Outstanding at end of year**    |       | **232,550** | ** ** | **$**                                    | **6.09**   | ** ** | **244,650** | ** ** | **$** | **5.62** | ** ** |
|                              |       |        |       |                                     |       |   |   |   |   |
| Options exercisable at  year-end  |       | 122,150     |       |                                     |       | 121,798 |   |   |   |

 

 

The followinginformation summarizes information about stock options outstanding andexercisable at December 31, 2001:

 
| **Range of**ExercisePrices | ** ** | **Number**Outstanding | ** ** | **Weighted    Average   Remaining**ContractualLife (Years) | ** ** | **Weighted    Average**ExercisePrice | ** ** | **Number**Exercisable | ** ** | **Weighted    Average**ExercisePrice | ** ** |
|----------------------------|------------|-----------------------|------------|------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| $2.38 - $2.97              |       | 88,200                |       | 3.5                                                        |       | $                                    | 2.41       |                  | 88,200     |                                 | $          | 2.41 |   |
| $5.24 - $6.19              |       | 47,250                |       | 5.5                                                        |       | 5.87                                 |       | 32,550                |       | 5.82                                 |       |
| $8.33 - $11.00             |       | 97,100                |       | 10.3                                                       |       | 9.60                                 |       | 1,400                 |       | 8.33                                 |       |
|                            |            |                       |            |                                                            |            |                                      |            |                       |            |                                      |            |  |  |

 

 

**Note 12 — Profit Sharing Plan**

 

The Bank’s definedcontribution profit sharing plan covers substantially all employees who havecompleted one year or more of service. Employees are eligible to defer up to 25% of their gross salary, withemployer contributions to the Plan made at the discretion of the Board ofDirectors.  The Bank’s contributions forthe years ended December 31, 2001 and 2000 totaled $40 and $36, respectively.

 

 

F-22

----

 

**Note 13 — Deferred CompensationAgreement**

 

In 1993 the Bankestablished a deferred compensation agreement with a director under which thedirector will defer his director fees. At retirement he will receive a benefit of $1 per month for 120months.  The accrued liability relatedto this agreement totaled $42 and $37 at December 31, 2001 and 2000,respectively.  Expenses associated withthis plan were $5 and $6 in 2001 and 2000, respectively.  The Bank has also purchased a whole-lifeinsurance policy on the director, which may be used to fund benefits under thedeferred compensation agreement.

 

 

**Note 14 — Employee Stock PurchasePlan**

 

Effective July 1, 1995,the Company adopted an employee stock purchase plan whereby eligible employeescan purchase common stock at the lesser of the stock’s fair market value at thebeginning or the end of the plan year. The aggregate number of shares reserved under this plan is 42,000.  No employee can purchase more than 420shares of common stock valued at more than $11.88 per share in any plan year;1,870 and 1,819 shares were issued at a price of $8.57 and $5.95 per share forthe years ended December 31, 2001 and 2000, respectively.

 

 

**Note 15 — Regulatory Matters**

 

The Company andthe Bank are subject to various regulatory capital requirements administered byfederal banking agencies.  Failure tomeet minimum capital requirements can cause certain mandatory — and possiblyadditional discretionary — actions by regulators that, if undertaken, couldhave a direct material effect on the Company’s and the Bank’s financialstatements.  Under capital adequacyguidelines of the regulatory framework for prompt corrective action, theCompany and the Bank must meet specific capital adequacy guidelines thatinvolve quantitative measures of the Company’s and the Bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Company’s andthe Bank’s capital classifications are also subject to qualitative judgments bythe regulators about components, risk weightings and other factors.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany and the Bank to maintain minimum amounts and ratios (set forth in thetable below) of Tier 1 capital (as defined in the regulations) to total averageassets (as defined), and minimum ratios of Tier 1 and total capital (asdefined) to risk-weighted assets (as defined).

 

As of December 31, 2001, the most recentnotification from the Bank’s regulator categorized the Bank as well capitalizedunder the regulatory framework for prompt corrective action.  To be categorized as well capitalized, theBank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1leverage ratios as set forth in the table. There are no conditions or eventssince that notification that management believes have changed the institution’scategory.

 

 

F-23

----

 

The Company’s andthe Bank’s actual capital amounts and ratios are also presented in the table.

 
|                                         |       | **Actual** |       | **Capital  Adequacy Purposes** |       | **To be Well  Capitalized Under Prompt Corrective Action Provisions** |       |
|----------------------------------------------|------------|------------|------------|--------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Amount** | ** ** | **Ratio**                      | ** ** | **Amount**                                                            | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **December 31, 2001**                        |       |       |       |                           |       |                                                                  |       |   |   |   |   |   |   |
| *Tier 1 capital (to average  assets):*       |       |       |       |                           |       |                                                                  |       |   |   |   |   |
| Consolidated                                 |       | $          | 13,206     |                           | 10.72      | %                                                                     | $          | 4,927 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                                         |       | 13,111     |       | 10.64                          |       | 4,927                                                                 |       | 4.00 |   | $ | 6,159 |   | 5.00 | % |
| *Tier 1 capital (to risk-weighted  assets):* |       |       |       |                           |       |                                                                  |       |   |   |   |   |
| Consolidated                                 |       | 13,206     |       | 13.39                          |       | 3,946                                                                 |       | 4.00 |   | N/A |   | N/A |   |
| Bank                                         |       | 13,111     |       | 13.29                          |       | 3,946                                                                 |       | 4.00 |   | 5,915 |   | 6.00 |   |
| *Total capital:*                             |       |       |       |                           |       |                                                                  |       |   |   |   |   |   |   |
| Consolidated                                 |       | 13,959     |       | 14.15                          |       | 7,892                                                                 |       | 8.00 |   | N/A |   | N/A |   |
| Bank                                         |       | 13,864     |       | 14.05                          |       | 7,892                                                                 |       | 8.00 |   | 9,864 |   | 10.00 |   |
|                                         |       |       |       |                           |       |                                                                  |       |   |   |   |   |   |   |
| **December 31, 2000**                        |       |       |       |                           |       |                                                                  |       |   |   |   |   |   |   |
| *Tier 1 capital (to average  assets):*       |       |       |       |                           |       |                                                                  |       |   |   |   |   |
| Consolidated                                 |       | $          | 12,132     |                           | 12.29      | %                                                                     | $          | 3,950 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                                         |       | 12,050     |       | 12.20                          |       | 3,950                                                                 |       | 4.00 |   | $ | 4,937 |   | 5.00 | % |
| *Tier 1 capital (to risk-weighted  assets):* |       |       |       |                           |       |                                                                  |       |   |   |   |   |
| Consolidated                                 |       | 12,132     |       | 17.53                          |       | 2,768                                                                 |       | 4.00 |   | N/A |   | N/A |   |
| Bank                                         |       | 12,050     |       | 17.41                          |       | 2,768                                                                 |       | 4.00 |   | 4,153 |   | 6.00 |   |
| *Total capital:*                             |       |       |       |                           |       |                                                                  |       |   |   |   |   |   |   |
| Consolidated                                 |       | 12,832     |       | 18.54                          |       | 5,537                                                                 |       | 8.00 |   | N/A |   | N/A |   |
| Bank                                         |       | 12,750     |       | 18.42                          |       | 5,537                                                                 |       | 8.00 |   | 6,921 |   | 10.00 |   |

 

Management believes, asof December 31, 2001, that the Company and the Bank meet all capitalrequirements to which they are subject.

 

**Restrictions on Retained Earnings**

 

National banks caninitiate dividend payments in a given year, without prior regulatory approval,equal to net profits, as defined, for that year plus retained net profits forthe preceding two years.  The Bank candistribute as dividends to the parent company approximately $2,913 as ofDecember 31, 2001 without regulatory approval.

 

 

F-24

----

 

**Note 16 — Condensed FinancialInformation — Parent Company Only**

 

**Condensed Balance Sheets — December31**

 
|                                                                         |       | **2001** |       | **2000**   |       |
|------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| **Assets**                                                                   |       |     |       |       |       |
| Cash                                                                         |       | $        | 83         |       | $          | 82 |   |
| Investment  in the Bank                                                      |       | 13,208   |       | 12,068     |       |
| Other  assets                                                                |       | 12       |       | —     |       |
|                                                                         |       |     |       |       |       |
| **Total  assets**                                                            |       | **$**    | **13,303** | ** ** | **$**      | **12,150** | ** ** |
|                                                                         |       |     |       |       |       |
|                                                                         |       |     |       |       |       |
| **Shareholders’  Equity**                                               |       | **$**    | **13,303** | ** ** | **$**      | **12,150** | ** ** |
|                                                                         |       |     |       |       |       |
|                                                                         |       |     | ** ** |       | ** ** |
| **Condensed Statements of Income — Years Ended  December 31**           |       |     | ** ** |       | ** ** |
|                                                                         |       |     | ** ** |       | ** ** |
| **Operating  Expenses**                                                      |       | $        | (184       | )          | $          | (163 | ) |
|                                                                         |       |     | ** ** |       | ** ** |
| **Loss before income taxes and equity in undistributed  income of the Bank** | ** ** | **(184** | **)**      | **(163**   | **)**      |
|                                                                         |       |     |       |       |       |
| **Income  Tax Benefit**                                                      |       | 63       |       | 55         |       |
|                                                                         |       |     |       |       |       |
| **Loss  before equity in****undistributed  income of the Bank**              |       | **(121** | **)**      | **(108**   | **)**      |
|                                                                         |       |     |       |       |       |
| **Equity  in Undistributed Income of the Bank**                              |       | 1,061    |       | 1,021      |       |
|                                                                         |       |     | ** ** |       | ** ** |
| **Net income**                                                               |       | **$**    | **940**    | ** ** | **$**      | **913** | ** ** |

 

 

F-25

----

 

**Condensed Statements of Cash Flows —Years Ended December 31**

 

 
|                                                                                          |   | **2001**   |       | **2000**   |       |
|-----------------------------------------------------------------------------------------------|--------|------------|------------|------------|------------|
| **Cash  Flows from Operating Activities**                                                     |   |       |       |       |       |
| Net income                                                                                    |   | $          | 940        |       | $          | 913 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |   |       |       |       |       |
| Amortization  of covenant not to compete                                                      |   | —     |       | 4          |       |
| Equity in undistributed income of  subsidiary                                                 |   | (1,061     | )          | (1,021     | )          |
| Decrease  in receivable from subsidiary                                                       |   | —     |       | 37         |       |
| Other                                                                                         |   | (1         | )          | 79         |       |
| **Net  cash provided by (used in) operating activities**                                      |   | **(122**   | **)**      | **12**     | ** ** |
|                                                                                          |   |       | ** ** |       | ** ** |
| **Cash Flows from Investing Activities**                                                      |   |       | ** ** |       | ** ** |
|                                                                                          |   |       |       |       |       |
| **Investment  in subsidiary**                                                                 |   | **—** | ** ** | **(756**   | **)**      |
|                                                                                          |   |       |       |       |       |
| **Cash  Flows from Financing Activities**                                                     |   |       |       |       |       |
| Proceeds  from issuance of common stock                                                       |   | 125        |       | 795        |       |
| Payment  for fractional shares in stock dividend                                              |   | (2         | )          | —     |       |
| **Net  cash provided by financing activities**                                                |   | **123**    | ** ** | **795**    | ** ** |
|                                                                                          |   |       |       |       |       |
| **Net  change in cash**                                                                       |   | **1**      | ** ** | **51**     | ** ** |
|                                                                                          |   |       |       |       |       |
| **Cash**                                                                                      |   |       |       |       |       |
| Beginning  of year                                                                            |   | 82         |       | 31         |       |
|                                                                                          |   |       | ** ** |       | ** ** |
| **End of year**                                                                               |   | **$**      | **83**     | ** ** | **$**      | **82** | ** ** |

 

 

**Note 17 — Other Expenses**

 

Other expensesinclude the following amounts which are in excess of 1% of the total ofinterest income and non-interest income for the years ended December 31:

 
|                          |   | **2001** |   | **2000** |   |
|-------------------------------|--------|----------|--------|----------|--------|
| Professional  fees            |   | $        | 91     |     | $      | 86 |   |
| Data processing               |   | 361      |   | 442      |   |
| Office supplies  and expenses |   | 124      |   | 103      |   |
| State taxes                   |   | 104      |   | 50       |   |
|                               |        |          |        |          |        |  |  |

 

 

F-26

----

 

# **Note 18 — Earnings Per Share Disclosures**

 

Followingis information regarding the calculation of basic and diluted earnings pershare for the years indicated:

 
| ** **                        | ** ** | **Net Income    (Numerator)** | ** ** | **Shares   (Denominator)** | ** **    | **Per Share   Amount** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|----------------------------|---------------|------------------------|------------|
| **Year  Ended December 31, 2001** |       |                          | ** ** |                       | ** **    |                   | ** ** |
| Basic earnings  per share:        |       |                          |       |                       |          |                   |       |
| Net income                        |       | $                             | 940        |                       | 2,061,662     |                   | $          | .46 |   |
| Effect of  dilutive securities:   |       |                          |       |                       |          |                   |       |
| Options                           |       | —                        |       | 74,289                     |          | (.02                   | )          |
| Diluted earnings  per share:      |       |                          |       |                       |          |                   |       |
| **Net income**                    |       | **$**                         | **940**    | ** **                 | **2,135,951** | ** **             | **$**      | **.44** | ** ** |
|                              |       |                          | ** ** |                       | ** **    |                   | ** ** |
| **Year  Ended December 31, 2000** |       |                          | ** ** |                       | ** **    |                   | ** ** |
| Basic earnings  per share:        |       |                          |       |                       |          |                   |       |
| Net income                        |       | $                             | 913        |                       | 1,955,518     |                   | $          | .47 |   |
| Effect of  dilutive securities:   |       |                          |       |                       |          |                   |       |
| Options                           |       | —                        |       | 62,463                     |          | (.02                   | )          |
| Diluted earnings  per share:      |       |                          |       |                       |          |                   |       |
| **Net income**                    |       | **$**                         | **913**    | ** **                 | **2,017,981** | ** **             | **$**      | **.45** | ** ** |

 

 

Thenumber of shares shown for “options” is the number of incremental shares thatwould result from exercise of options and use of the proceeds to repurchaseshares at the average market price during the year.

 

 

**Note 19— Stock Dividend**

 

On March 27, 2001,the Board of Directors announced a 5% stock dividend payable to shareholders ofrecord as of June 15, 2001.  The averagenumber of common shares outstanding, and earnings per share and stock optioninformation for the year ended December 31, 2000 have been restated to show theeffect of the dividend.  On March 28,2000, the Board of Directors announced a two-for-one stock split payable toshareholders of record as of April 10, 2000. In connection with the stock split, the par value of the Company’scommon stock was changed from $1.00 per share to no par value and the number ofauthorized shares was increased from 5 million to 10 million.

 

 

F-27

----

 

**Note 20— Comprehensive Income**

 

Netunrealized gains and losses include, net of tax, $100 of unrealized gainsarising during 2001 and $267 of unrealized gains arising during 2000, lessreclassification adjustments of $31 and $3 for gains included in net income in2001 and 2000, respectively, as follows:

 
| ** **                                                      | ** ** | **Before-    Tax   Amount** | ** ** | **Tax    Benefit   (Expense)** | ** ** | **Net-of-Tax    Amount** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|--------------------------|------------|
| **2001**                                                        |       |                        |       |                           |       |                     |       |
| Unrealized holding  gains arising during the year               |       | $                           | 151        |                           | $          | (51                      | )          | $ | 100 |   |
| Reclassification  adjustments for gains realized in net income  |       | (31                         | )          | 10                             |       | (21                      | )          |
|                                                            |       |                        |       |                           |       |                     |       |
| **Net unrealized gains**                                        |       | **$**                       | **120**    | ** **                     | **$**      | **(41**                  | **)**      | **$** | **79** | ** ** |
|                                                            |       |                        |       |                           |       |                     |       |
| **2000**                                                        |       |                        |       |                           |       |                     |       |
| Unrealized holding  gains arising during the year               |       | $                           | 404        |                           | $          | (137                     | )          | $ | 267 |   |
| Reclassification  adjustments for losses realized in net income |       | 3                           |       | (2                             | )          | 1                        |       |
|                                                            |       |                        |       |                           |       |                     |       |
| **Net unrealized gains**                                        |       | **$**                       | **407**    | ** **                     | **$**      | **(139**                 | **)**      | **$** | **268** | ** ** |

 

 

# **Note 21 — FairValues of Financial Instruments**

 

The estimated fair valuesof the Bank’s financial instruments at December 31 were as follows:

 
|                                                             |       | **2001**              |       | **2000**         |       |
|------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                                       | ** ** | **Carrying   Amount** | ** ** | **Fair   Value** | ** ** | **Carrying   Amount** | ** ** | **Fair   Value** | ** ** |
| **Financial Assets**                                             |       |                  |       |             |       |   |   |   |   |
| Cash and due  from banks, and interest bearing deposits in banks |       | $                     | 17,075     |             | $          | 17,075 |   | $ | 11,285 |   | $ | 11,285 |   |
| Securities  available for sale                                   |       | 31,612                |       | 31,612           |       | 21,027 |   | 21,027 |   |
| Federal Home  Loan Bank and Federal Reserve Bank stocks          |       | 634                   |       | 634              |       | 581 |   | 581 |   |
| Loans receivable                                                 |       | 68,134                |       | 68,512           |       | 64,942 |   | 63,462 |   |
| Loans held for  sale                                             |       | 1,093                 |       | 1,093            |       | 536 |   | 536 |   |
| Accrued interest  receivable                                     |       | 650                   |       | 650              |       | 623 |   | 623 |   |
| Letters of  credit                                               |       | 519                   |       | 519              |       | 627 |   | 627 |   |
|                                                             |       |                  |       |             |       |   |   |   |   |
| **Financial Liabilities**                                        |       |                  |       |             |       |   |   |   |   |
| Deposits                                                         |       | $                     | 112,111    |             | $          | 112,561 |   | $ | 89,577 |   | $ | 89,845 |   |
| Long-term  borrowings                                            |       | 38                    |       | 38               |       | 40 |   | 40 |   |
| Accrued interest  payable                                        |       | 292                   |       | 292              |       | 306 |   | 306 |   |

 

 

F-28

----

 

**Note 22— Quarterly Data (Unaudited)**

 
| ** **                       | ** ** | **First    Quarter** | ** ** | **Second    Quarter** | ** ** | **Third    Quarter** | ** ** | **Fourth    Quarter** | ** ** |
|----------------------------------|------------|----------------------|------------|-----------------------|------------|----------------------|------------|-----------------------|------------|
| **Year Ended December 31, 2001** |       |                 |       |                  |       |                 |       |                  |       |
| Interest income                  |       | $                    | 1,962      |                  | $          | 1,986                |       | $                     | 2,044      |   | $ | 2,039 |   |
| Interest expense                 |       | 918                  |       | 903                   |       | 897                  |       | 810                   |       |
| **Net interest income**          |       | **1,044**            | ** ** | **1,083**             | ** ** | **1,147**            | ** ** | **1,229**             | ** ** |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| Provision for credit  losses     |       | 9                    |       | 27                    |       | 22                   |       | 27                    |       |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| Noninterest income               |       | 329                  |       | 359                   |       | 293                  |       | 396                   |       |
| Noninterest expenses             |       | 1,113                |       | 1,055                 |       | 1,131                |       | 1,078                 |       |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| **Income before income taxes**   |       | **251**              | ** ** | **360**               | ** ** | **287**              | ** ** | **520**               | ** ** |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| Income taxes                     |       | 85                   |       | 120                   |       | 96                   |       | 177                   |       |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| **Net income**                   |       | **$**                | **166**    | ** **            | **$**      | **240**              | ** ** | **$**                 | **191**    | ** ** | **$** | **343** | ** ** |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| Earnings per common  share:      |       |                 |       |                  |       |                 |       |                  |       |
| Basic                            |       | $                    | .09        |                  | $          | .12                  |       | $                     | .09        |   | $ | .16 |   |
| Diluted                          |       | .08                  |       | .11                   |       | .09                  |       | .16                   |       |
|                             |       |                 |       |                  |       |                 |       |                  |       |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| **Year Ended December 31, 2000** |       |                 |       |                  |       |                 |       |                  |       |
| Interest income                  |       | $                    | 1,788      |                  | $          | 1,835                |       | $                     | 1,889      |   | $ | 1,979 |   |
| Interest expense                 |       | 639                  |       | 698                   |       | 766                  |       | 834                   |       |
| **Net interest income**          |       | **1,149**            | ** ** | **1,137**             | ** ** | **1,123**            | ** ** | **1,145**             | ** ** |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| Provision for credit  losses     |       | 14                   |       | 26                    |       | 9                    |       | 44                    |       |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| Noninterest income               |       | 214                  |       | 219                   |       | 251                  |       | 264                   |       |
| Noninterest expenses             |       | 1,007                |       | 958                   |       | 1,041                |       | 1,026                 |       |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| **Income before income taxes**   |       | **342**              | ** ** | **372**               | ** ** | **324**              | ** ** | **339**               | ** ** |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| Income taxes                     |       | 113                  |       | 126                   |       | 111                  |       | 114                   |       |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| **Net income**                   |       | **$**                | **229**    | ** **            | **$**      | **246**              | ** ** | **$**                 | **213**    | ** ** | **$** | **225** | ** ** |
|                             |       |                 |       |                  |       |                 |       |                  |       |
|                             |       |                 |       |                  |       |                 |       |                  |       |
| Earnings per common  share:      |       |                 |       |                  |       |                 |       |                  |       |
| Basic                            |       | $                    | .12        |                  | $          | .12                  |       | $                     | .11        |   | $ | .12 |   |
| Diluted                          |       | .12                  |       | .11                   |       | .10                  |       | .12                   |       |

 

 

F-29

----

 

 

##### **PART III**

**EXHIBITS**

 

 
| **Exhibit  No.** |   | **Description**                                                       |   |
|------------------|--------|-----------------------------------------------------------------------|--------|
|             |   |                                                                  |   |
| 6.5              |   | Amended and Restated Articles of Incorporation of  the registrant (1) |   |
|             |   |                                                                  |   |
| 6.6              |   | Amended and Restated By-laws of the registrant (2)                    |   |
|             |   |                                                                  |   |
| 2.3              |   | Amendment to the By-laws dated February 16, 2001 (2)                  |   |
|             |   |                                                                  |   |
| 6.7              |   | Mt. Rainier National Bank 1990 Employee Stock Option  Plan (3)        |   |
|             |   |                                                                  |   |
| 6.8              |   | Mt. Rainier National Bank 1990 Director Stock Option  Plan (3)        |   |
|             |   |                                                                  |   |
| 6.9              |   | Mountain Bank Holding Company 1995 Employee Stock  Purchase Plan (3)  |   |
|             |   |                                                                  |   |
| 6.10             |   | Mountain Bank Holding Company 1999 Employee Stock  Option Plan (4)    |   |
|             |   |                                                                  |   |
| 6.11             |   | 1999 Employee Stock Option Agreement (4)                              |   |
|             |   |                                                                  |   |
| 6.12             |   | Mountain Bank Holding Company 1999 Director Stock  Option Plan (4)    |   |
|             |   |                                                                  |   |
| 6.13             |   | 1999 Director Stock Option Agreement (4)                              |   |
|             |   |                                                                  |   |
| 6.14             |   | Independent Auditor’s Consents                                   |   |

 

----

(1)          Incorporated by reference to Exhibit 3.1 of theCompany’s quarterly report on Form 10Q for the quarter ended June 30, 2000.

(2)          Incorporated by reference to exhibits included in theRegistrant’s Annual Report on Form 10K-SB for the fiscal year ended December31, 2000.

(3)          Incorporated by reference to exhibits included in theRegistrant’s Registration Statement on Form 10K-SB, Registration No. 000-28394.

(4)          Incorporated by reference to exhibits included in theRegistrant’s Annual Report on Form 10K-SB for the fiscal year ended December31, 1999.

 

 

E-1

----

**SIGNATURES**

 

                In accordance withSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrantcaused this registration statement to be signed on its behalf by theundersigned, thereunto duly authorized on February 19, 2002.

 

**MountainBank Holding Company**

 

 

 

 
| By:    |                                            | /s/ |   |
|--------|-------------------------------------------------|-----|--------|
|   | Roy T. Brooks,  Chairman of the Board & CEO |

 

 

                In accordance withthe Exchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities indicated on the 19th day ofFebruary, 2002.

 

 

 
| By:    |                                            | /s/ |   |
|--------|-------------------------------------------------|-----|--------|
|   | Roy T. Brooks,  Chairman of the Board & CEO |
|   | (Principal  Executive Officer)                  |

 
| By:    |                                                 | /s/ |   |
|--------|------------------------------------------------------|-----|--------|
|   | Sheila M.  Brumley, CFO & Secretary to the Board |
|   | (Principal  Accounting Officer)                      |

 

 
| By:    |                            | /s/    |                          | By:    |   | /s/    |   |
|--------|---------------------------------|--------|-------------------------------|--------|--------|--------|--------|
|   | Susan K.  Bowen-Hahto, Director |   | Brian W.  Gallagher, Director |
|   |                            |   |                          |   |   |   |   |
|   |                            |   |                          |   |   |   |   |
| By:    |                            | /s/    |                          | By:    |   | /s/    |   |
|   | Michael K.  Jones, Director     |   | Barry C. Kombol,  Director    |
|   |                            |   |                          |   |   |   |   |
|   |                            |   |                          |   |   |   |   |
| By:    |                            | /s/    |                          | By:    |   | /s/    |   |
|   | Steve W.  Moergeli, Director    |   | John W. Raeder,  Director     |
|   |                            |   |                          |   |   |   |   |
|   |                            |   |                          |   |   |   |   |
| By:    |                            | /s/    |                          | By:    |   | /s/    |   |
|   | Garrett S. Van  Beek, Director  |   | Hans R. Zurcher,  Director    |
|   |                            |   |                          |   |   |   |   |
|   |                            |   |                          |   |   |   |   |
| By:    |                            | /s/    |                          |   |   |   |   |
|   | J.B. Rupert,  Director          |   |                          |   |   |

 

 

 

S-1

----