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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

For the transition period from              to             

Commission File Number : 0-28394

MOUNTAIN BANK HOLDING COMPANY

(Exact Name of Registrant as Specified in Its Charter)

501 Roosevelt Avenue

Enumclaw, Washington 98022

(Address of Principal Executive Offices)

(360) 825-0100

(Issuer’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)

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MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)

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MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (In thousands)

Balance Ended March 31

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MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

(1) Summary of Significant Accounting Policies

(a) Basis of Presentation: The accompanying unaudited consolidated financial statements for Mountain Bank Holding Company (the Company) were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions for Form 10-Q and therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments, which are, in the opinion of management, necessary for a fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in the Mountain Bank Holding Company 2003 Annual Report on Form 10-KSB. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2004.

(b) Principles of Consolidation: The interim consolidated financial statements include the accounts of Mountain Bank Holding Company and its wholly-owned subsidiary, Mt. Rainier National Bank. All significant intercompany balances have been eliminated.

(c) Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 2 – Earnings Per Common Share

Basic earnings per share is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted earnings per common share are computed assuming the exercise of stock options.

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Note 3 – Stock Based Compensation

At March 31, 2004 the Company has four stock-based employee and director compensation plans and an employee stock purchase plan. The Company accounts for those plans under the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, no stock-based compensation cost is reflected in net income as all options granted under those plans and the purchase price under the stock purchase plan were equal to the market value of the Company’s stock on the date of grant. The following table illustrates the effect on net income and earnings per share for the three months ended March 31, 2004 and 2003 if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based compensation awards for the effects of all options granted on or after January 1, 1995 and stock purchased under the stock purchase plan.

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Note 4 – Commitments and Contingencies

The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. The financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Bank’s commitments is as follows:

Outstanding commitments under letters of credit totaled $383 and $374 at March 31, 2004 and December 31, 2003, respectively.

Note 5 – Subsequent Event

The Company commenced an offering of up to 60,000 shares of its common stock at $15.00 per share on April 1, 2004. The proceeds of the offering will be used to pay for construction and other costs associated with the 2003 opening of the bank’s Sumner, Washington branch and the Company’s 2003 purchase of a storage facility and a vacant lot, both in Enumclaw, Washington. The costs of both the Sumner branch and the building and lot in Enumclaw have been paid for from existing funds, and neither involved borrowing funds from a third party. We will use the proceeds of this offering to replenish our working capital with respect to these expenditures. Any remaining net proceeds will be used for general corporate purposes and future branch expansion.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This discussion should be read in conjunction with the unaudited consolidated condensed financial statements of Mountain Bank Holding Company, (the “Company”) and notes thereto presented elsewhere in this report. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in terms of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.

The following analysis discusses the material changes in the financial condition and results of operations of the Company at and for the three months ended March 31, 2004. This report contains certain “forward looking statements.” The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protection of such safe harbor with forward looking statements. These forward-looking statements may describe future plans or strategies and include the Company’s expectations of future

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financial results. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and similar expressions identify forward-looking statements. The Company’s ability to predict results of the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include competition in the financial services market for both deposits and loans, interest rate trends, the economic climate in the Company’s market areas and the country as a whole, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.

Comparison of Financial Condition at March 31, 2004 and December 31, 2003

Total Assets: Total assets increased $7.6 to $163.8 million at March 31, 2004. This change is due primarily to an increase in loans, including loans held for sale, of $3.8 million and interest bearing deposits in banks of $2 million, which was funded by an increase in deposits of $7.1 million.

Interest Bearing Deposits At Other Financial Institutions: Interest bearing deposits at other financial institutions increased by $2.1 million to $16.0 million from $13.9 million at December 31, 2003.

Securities: Securities increased $1.6 million to $33.9 million as of March 31, 2004. The company’s securities portfolio was comprised of US Treasury notes of $3.2 million, US government sponsored agency securities of $10.3 million, mortgage-backed securities of $17.3 million, corporate and municipal securities of $3 million and bankers bank stock of $60 thousand.

The following table presents the composition and carrying value of Mt. Rainier Bank’s investment portfolio at March 31, 2004 and December 31, 2003 and the dollar and percentage changes of each investment category.

Loans: Net loans receivable, including loans held for sale, increased by $3.8 million to $102.5 million at March 31, 2004. The increase in the loan portfolio was a result of a $1.6 million increase in commercial and agriculture loans, a $2.1 million increase in construction and residential real estate loans, a $1 million increase in commercial real estate loans and a decrease of $911 thousand in consumer loans. The Sumner location contributed $1.3 million of the total increase.

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The following table sets forth the composition of the Company’s loan portfolio by type of loan:

Non-performing assets:

The following table sets forth information with respect to the Company’s non-performing assets at the dates indicated:

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Activity in the Allowance for Credit Losses: Activity in the allowance for credit losses in the three months ended March 31, 2004 and 2003 is as follows:

Real Estate Owned: The Company continues to have one foreclosed property in the amount of $139,000. The property is rented with the option to purchase.

Premises and Equipment: On March 15, 2004 the bank opened a loan production office in Federal Way, Washington. The office is a leased facility with approximately 1,000 square feet. Two loan officers and a receptionist from the Federal Way area have been hired to staff the facility. The Company is looking for property in the area to open a full service branch.

Deposits: Deposits increased $7.1 million or 5.15% from December 31, 2003. Certificates of deposits increased $3.9 million, savings increased $.9 million and interest bearing deposits, which include money market accounts and NOW accounts increased $1.9 million. Demand deposits increased slightly at $377 thousand for the first quarter. Approximately $1.6 million of the increase was attributed to the Sumner location.

The following table sets forth the balance of deposits in the various types of accounts offered by the Bank at the dates indicated:

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Shareholders Equity:

On March 3, 2004, the Company filed a Form S-1 Registration Statement with the Securities and Exchange Commission to offer 60,000 shares of common stock at a price of $15.00 per share to commence on or about April 1, 2004. This marks the Company’s ninth stock offering. As of April 8, 2004, all 60,000 shares had been subscribed for. The offering is expected to net $850,000 in proceeds.

Comparison of Operating Results for the Three Months Ended March 31, 2004 and 2003

Net Income: Net income for the quarter ended March 31, 2004 was $267,000 or $.12 per diluted share ($.12 per basic share) compared to $296,000 or $.13 per diluted share ($.13 per basic share) for the quarter ended March 31, 2003. The lower earnings for the current quarter were primarily a result of decreased income from loan sales and increased non-interest expenses related to the addition of the Sumner location in March 26, 2003.

Net Interest Income: Net interest income increased $145,000 to $1,613,000 in 2004 compared to $1,468,000 in 2003. Average earning assets increased to $146.8 million from $130.9 million, which represented a 12.1% increase. However, the yield on average earning assets decreased from 6.2% to 5.8% or .4%. We are asset sensitive, which means that our assets reprice faster than our liabilities. In periods of declining interest rates such as we have experienced in the last few years, our net interest margin is compressed until we can reprice our liabilities. Average interest bearing liabilities increased $11 million or 10.4% while the yield on interest bearing liabilities decreased .5% from 2.0% to 1.5%. Mt. Rainier Bank’s net interest margin decreased to 4.6% as of March 31, 2004 from 4.7% as of March 31, 2003.

Provision for Credit Losses: The provision for loan losses for the quarter ended March 31, 2004 increased $11,000 to $69,000 from $58,000 for the quarter ended March 31, 2003. The Bank has established a systematic methodology for the determination of provisions of credit losses. On a quarterly basis the Bank performs an analysis taking into consideration historic loss experience for various loan segments, changes in economic conditions, delinquency ratios, and other factors to determine the level of allowance for credit losses needed.

Based on its analysis, management deemed the allowance for credit losses of $1.167 million at March 31, 2004 (1.15% of outstanding loans and 458% of non-performing loans) adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio at that date. The allowance for credit losses was $884 thousand (1.03% of outstanding loans and 191% of non-performing loans) at March 31, 2003. The company had net charge-offs of $3 thousand for the quarter ended March 31, 2004 compared to $26 thousand in net charge-offs for the quarter ended March 31, 2003.

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Non-interest Income: Total non-interest income decreased $81,000 to $304,000 for the quarter ended March 31, 2004 from $385,000 for the quarter ended March 31, 2003, primarily due to a $97,000 decrease in income from mortgage loan sales. The stabilization of interest rates has decreased the amount of mortgage refinance applications substantially.

Non-interest Expense: Total non-interest expense increased $105,000 to $1,535,000 at March 31, 2004 from $1,430,000 at March 31, 2003. Salaries and employee benefits increased $51,000, occupancy and equipment expense increased $42,000 and other expenses increased $12,000. The increase in expenses was attributed to the opening of the Sumner office on March 26, 2003.

Liquidity and Capital Resources: The Company’s primary sources of funds are customer deposits, proceeds from principal and interest payments on loans and mortgage backed securities, and proceeds from the sale of loans, and maturing securities. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

An analysis of liquidity should include a review of the changes that appear in the consolidated statement of cash flows for the three months ended March 31, 2004. The statement of cash flows includes operating, investing and financing categories. Operating activities include net income, which is adjusted for non-cash items, and increases or decreases in cash due to certain changes in assets and liabilities. Investing activities consist primarily of proceeds from maturities and sales of securities, purchase of securities, and the net change in loans. Financing activities present the cash flows associated with the Company’s deposit accounts, other borrowings, and sale of common stock.

The Company’s consolidated total of cash and due from banks and interest bearing deposits increased by $2.124 million.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds for loan originations and deposit withdrawals, to satisfy other financial commitments and to take advantage of investment opportunities. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2004, the Bank’s liquidity ratio was 17%. The Bank also maintains borrowing lines at the Federal Home Loan Bank of Seattle and other correspondents with available advances up to $23 million. As of March 31, 2004, there are no advances on these lines of credit.

Liquidity management is both a short and long-term responsibility of the Bank’s management. The Bank adjusts its investments in liquid assets based upon management’s assessment of (a) expected loan demand, (b) expected deposit flows, and (c) yields available on interest-bearing deposits. Excess liquidity is invested generally in interest bearing overnight deposits and other short-term investments. If the Bank requires funds beyond its ability to generate them internally, it has the borrowing capacity at the FHLB and other correspondent banks.

The Bank’s primary investing activity is the origination of real estate, commercial, and consumer loans. At March 31, 2004, the Bank had loan commitments and undisbursed loans in process totaling $15 million. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2004 totaled $35 million. Historically, the Bank has been able to retain a significant amount of its certificates of deposit as they mature.

Federally insured national banks are required to maintain minimum levels of regulatory capital. Under current regulation, nationally chartered banks generally must maintain (a) a ratio of Tier 1 leverage capital of 4%, (b) a Tier 1 capital to risk weighted assets of at least 4% and (c) a ratio of total capital to risk weighted assets of at least 8%. At March 31, 2004, the Bank was in compliance with all applicable capital requirements.

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The following table compares the Company’s regulatory capital ratios as of March 31, 2004 and December 31, 2003 to the minimum regulatory capital requirements:

Key Financial Ratios: The following table represents key financial ratios as of March 31, 2004 and December 31, 2003:

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s results of operations are dependent upon its ability to manage interest rate risk. Management considers interest rate risk to be a significant risk that could have a material effect on the Company’s financial condition and results of operations. The Company does not currently use derivatives to manage market and interest rate risk.

A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the model include repayment speeds on certain assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income.

Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. At March 31, 2004, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company’s interest rate risk since December 31, 2003. For additional information, refer to the Company’s annual report on Form 10-KSB for the year ended December 31, 2003.

Item 4. Controls and Procedures

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PART II - Other Information

Item 1. Legal Proceedings

Neither the Company nor the Bank is a party to any legal proceedings at this time. Further, neither the Company nor the Bank is aware of the threat of any such proceedings. From time to time, the Bank is involved in various claims and legal actions arising in the ordinary course of business.

Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

Change in securities – None to be reported

Use of Proceeds – None to be reported

Issuer Purchases of Equity Securities – None to be reported

Item 3. Defaults Upon Senior Securities

None to be reported

Item 4. Submission of Matters to a Vote of Security Holders

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The following directors are continuing in office:

Directors with terms expiring in 2005:

Michael K. Jones, Sr.

Brian W. Gallagher

Hans Rudy Zurcher

Directors with terms expiring in 2006:

Roy T. Brooks

Sue Bowen-Hahto

Steve W. Moergeli

Item 5. Other Information

None to be reported.

Item 6. Exhibits and Reports on Form 8-K

Exhibit 31.2 – 302 Certification of CFO

Exhibit 32 – Section 906 Certification

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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