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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 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.

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PART I - Financial Information

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MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)

See notes to consolidated condensed financial statements

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MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)

See notes to consolidated condensed financial statements

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MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARY

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

Balance Ended June 30

See notes to consolidated condensed financial statements

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MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

See notes to consolidated condensed financial statements

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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 condensed 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 condensed financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited consolidated condensed 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 six months ended June 30, 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 June 30, 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

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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 and six months ended June 30, 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.

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 $368 and $374 at June 30, 2004 and December 31, 2003, respectively.

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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 quarter and six months ended June 30, 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 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 June 30, 2004 and December 31, 2003

Total Assets: Total assets increased $11.9 to $168.2 million at June 30, 2004. This change is due primarily to an increase in loans, including loans held for sale, of $11.4 million, which was funded by an increase in deposits of $10.8 million.

Interest Bearing Deposits At Other Financial Institutions: Interest bearing deposits at other financial institutions decreased by $3.9 million to $10.0 million from $13.9 million at December 31, 2003.

Securities: Securities increased $4.4 million to $36.7 million as of June 30, 2004. The company’s securities portfolio was comprised of US Treasury notes of $3.1 million, US government sponsored agency securities of $15 million, mortgage-backed securities of $15.6 million, corporate and municipal securities of $2.9 million and equity securities of $60 thousand.

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The following table presents the composition and carrying value of the Company’s investment portfolio at June 30, 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 $11.4 million to $110.1 million at June 30, 2004. The increase in the loan portfolio was a result of a $2.2 million increase in commercial and agriculture loans, a $452 thousand increase in construction and residential real estate loans, an $8.9 million increase in commercial real estate loans and a decrease of $103 thousand in consumer loans. The Sumner location contributed $2.4 million of the total increase, which was opened March 26, 2003, while the Federal Way loan production office contributed $1.2 million, which was opened March 15, 2004.

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

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Non-performing assets:

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

Activity in the Allowance for Credit Losses: Activity in the allowance for credit losses in the six months ended June 30, 2004 and 2003 is as follows:

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Real Estate Owned: The Company continues to have one foreclosed property in the amount of $137,000. 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 were hired to staff the facility. The Company is looking for property in the area to open a full service branch.

Deposits: Deposits increased $10.8 million or 7.77% from December 31, 2003. Certificates of deposits increased $6.2 million, savings increased $2.0 million and interest bearing deposits, which include money market accounts and NOW accounts increased $113 thousand. Demand deposits increased $2.5 million for the six month period. Approximately $2.2 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:

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. The prospectus was dated April 1, 2004. The offering was closed on April 8, 2004, fully subscribed. The offering netted $846,000 in proceeds.

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Comparison of Operating Results for the Three Months and Six Months Ended June 30, 2004 and 2003

Net Income: Net income for the three months ended June 30, 2004 was $425,000 or $.19 per diluted share ($.19 per basic share) compared to $364,000 or $.16 per diluted share ($.17 per basic share) for the three months ended June 30, 2003. The higher earnings for the current quarter were primarily a result of increased net interest income.

Net income for the six months ended June 30, 2004 was $692,000 or $.30 per diluted share ($.31 per basic share) compared to $660,000 or $.29 per diluted share ($.31 per basic share) for the six months ended June 30, 2003. The higher earnings for the current quarter were primarily a result of increased net interest income. The increase in net interest income was offset by a decrease in gains on mortgage loans sold and an increase in non-interest expense.

Net Interest Income: Net interest income increased $219,000 to $1,847,000 for the quarter ended June 30, 2004 compared to $1,628,000 for the same period in 2003. The increase was attributed to the increased volume in loans from 2003.

Net interest income increased $375,000 to $3,529,000 for the six months ended June 30, 2004 compared to $3,154,000 for the same period in 2003. Average earning assets increased to $151 million from $132.7 million, which represented a 13.8% increase. However, the yield on average earning assets decreased from 6.2% to 5.9% or .3%. 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 until just recently, our net interest margin is compressed until we can reprice our liabilities. Average interest bearing liabilities increased $13.9 million or 12.4% while the yield on interest bearing liabilities decreased .4% from 1.9% to 1.5%. Mt. Rainier Bank’s net interest margin decreased to 4.7% as of June 30, 2004 from 4.8% as of June 30, 2003.

Provision for Credit Losses: The provision for loan losses for the quarter ended June 30, 2004 decreased $55,000 to $69,000 from $124,000 for the quarter ended June 30, 2003. The provision for loan losses for the six months ended June 30, 2004 was $138,000 compared to $182,000 for the six months ended June 30, 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 $1.2 million at June 30, 2004 (1.12% of outstanding 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 $940 thousand (1.02% of outstanding loans) at June 30, 2003. The company had net charge-offs of $9 thousand for the six months ended June 30, 2004 compared to $94 thousand in net charge-offs for the six months ended June 30, 2003.

Non-interest Income: Total non-interest income decreased $119,000 to $345,000 for the quarter ended June 30, 2004 from $464,000 for the quarter ended June 30, 2003, primarily due to a $104,000 decrease in income from mortgage loan sales. The stabilization of interest rates has decreased the amount of mortgage refinance applications substantially.

For the six months ended June 30, 2004, non-interest income decreased $200,000 to $649,000 from $849,000 for the six months ended June 30, 2004. This decrease is also due to a $201,000 decrease in income from mortgage loan sales.

Non-interest Expense: Total non-interest expense increased $62,000 to $1,495,000 for the quarter ended June 30, 2004 from $1,433,000 at June 30, 2003. Salaries and employee benefits increased $54,000 and occupancy and equipment expense increased $8,000. The salary and benefit expense was primarily attributed to the addition of staff for the loan production office in Federal Way.

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For the six months ended June 30, 2004, non-interest expense increased $167,000 to $3,030,000 from $2,863,000 for the six months ended June 30, 2004. Salaries and employee benefits increased $105,000, occupancy and equipment expense increased $50,000 and other expenses increased $12,000. These increases were a result of the opening of the Sumner location and the addition of the Federal Way loan production office.

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 condensed statement of cash flows for the six months ended June 30, 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 decreased by $3.96 million. Those funds were used to purchase securities.

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 June 30, 2004, the Bank’s liquidity ratio was 14%. The Bank also maintains borrowing lines at the Federal Home Loan Bank of Seattle and other correspondents with available advances up to $25 million. As of June 30, 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 June 30, 2004, the Bank had loan commitments and undisbursed loans in process totaling $21 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 June 30, 2004 totaled $37 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 8% and (c) a ratio of total capital to risk weighted assets of at least 4%. At June 30, 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 June 30, 2004 and December 31, 2003 to the minimum regulatory capital requirements: