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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005

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  ¨

Indicate by check mark 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.

PART I - Financial Information

PART II - Other Information

MOUNTAIN BANK HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED CONDENSED BALANCE SHEETS

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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 March 31, 2004, As Restated

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 2004 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2005.

(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 (the 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 - New Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision of Statement No. 123. Statement No. 123(R), Share-Based Payment, is broader in scope than the original statement, which was more narrowly focused on stock-based compensation, and makes significant changes to accounting for “payments” involving employee compensation and “shares” or securities, in the form of stock options, restricted stock or other arrangements settled in the reporting entity’s securities. Most significant in the standard is the requirement that all stock options be measured at estimated fair value at the grant date and recorded as compensation expense over the requisite service period associated with the option, usually the vesting period. The revised standard was to become effective for interim periods beginning after June 30, 2005 and be applied prospectively to stock options granted after the effective date and any unvested stock options at that date; however, the SEC superseded the FASB’s implementation timetable in April 2005, changing the effective date to the beginning of 2006 for calendar-year public companies. Although management has not completed its analysis of the revised standard, the effect of the revised standard’s implementation will be recognition of compensation expense associated with stock options.

FASB’s Emerging Issues Task Force (“EITF”), reached consensus on “The Meaning of Other-Than-Temporary and Its Application to Certain Investments” in EITF Issue No. 03-1. The guidance included

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in the EITF largely consists of expanded disclosures and the guidance was intended to be fully effective in 2003, except for loss-recognition guidance which had a delayed effective date into 2004. In 2004, the FASB has further delayed the loss recognition provisions of Issue No. 03-1, pending additional deliberation in the future. Because of the inconclusive status of the EITF’s current position on the loss recognition aspects of Issue No. 03-1, management is unable to speculate on the potential impact of this matter on the Company’s consolidated financial statements.

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s consolidated financial statements.

Note 3 – 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 4 – Stock Based Compensation

At March 31, 2005 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. No options were granted for the three months ended March 31, 2005 and 2004. The following table illustrates the effect on net income and earnings per share for the three months ended March 31, 2005 and 2004 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 5 – Securities Available for Sale

The amortized cost of securities and their approximate fair values are as follows:

The following shows the unrealized gross losses and fair value of securities in the available for sale portfolio at March 31, 2005 and December 31, 2004, by the length of time that individual securities in each category have been in a continuous loss position:

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The Company has evaluated these securities and has determined that the decline in the value is temporary. This assessment was based on the following factors: i) the length of time and the extent to which the market value has been less than cost; ii) the financial condition and near-term prospects of the issuer; iii) the intent and the ability of the Company to retain its investment in a security for a period of time sufficient to allow for any anticipated recovery in market value; and iv) general market conditions which reflect prospects for the economy as a whole, including interest rates and sector credit spreads.

Note 6 – Securities Sold Under Agreements to Repurchase

At March 31, 2005, $982 of securities were pledged as collateral for securities sold under repurchase agreements. The securities purchased and sold are for one-day periods and bore interest at 2.00% on March 31, 2005.

Note 7 – 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 $286 at March 31, 2005 and December 31, 2004.

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Forward Looking Statements

This discussion should be read in conjunction with the unaudited consolidated condensed financial statements of 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 ended March 31, 2005. 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 March 31, 2005 and December 31, 2004

Total assets only grew nominally during the first quarter. This was due to slower loan demand and increased loan payoffs. Funds from the decrease in loans along with the $2.3 increase in non-interest bearing deposit accounts and the maturing securities were invested in short term interest bearing deposits at other financial institutions. We expect to use these deposits to fund loans in future quarters.

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The following table presents the composition and carrying value of the Company’s investment portfolio at March 31, 2005 and December 31, 2004 and the dollar and percentage changes of each investment category.

Loans: Net loans receivable, including loans held for sale, decreased by $780 thousand to $119.6 million at March 31, 2005. Though loan volumes remained consistent, the decrease in the loan portfolio was significantly influenced by decreases in Commercial and Construction financing wherein construction and commercial loan payoffs outpaced new construction and commercial lending. On the other hand, a revitalized second mortgage market affected Residential Real Estate growth. Likewise, Consumer loans decreased $116 thousand, as new loan originations remained sluggish.

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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The Company had no loans 90 days past due still accruing interest at March 31, 2005, and only $8 at December 31, 2004.

Activity in the Allowance for Credit Losses: Activity in the allowance for credit losses in the three months ended March 31, 2005 and 2004 is as follows:

Premises and Equipment: The Company is in the process of remodeling the new Auburn, Washington branch site. The South Auburn location will be relocated when completed. The final bid to remodel the facility is $637 thousand, with an additional estimate of $306 thousand for furniture and equipment. The Company has an offer to purchase on a site in Federal Way, Washington for $360 thousand, contingent on the completion of a lot line adjustment. The Company intends to build a full service branch on the site and relocate it’s loan production office in Federal Way to the new branch.

Deposits: From December 31, 2004, deposits increased $2.2 million or 1.43% to March 31, 2005. Savings increased $1.4 million and interest-bearing deposits, which include money market accounts and NOW accounts decreased $1.6 million. Demand deposits increased $2.4 million for the three-month period. The recent rate increases attributed to the deposit growth in the first quarter.

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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: The Company paid a cash dividend in the amount of $.15 per share to shareholders of record on March 15, 2005. The total amount of the dividend was $341,000.

Comparison of Operating Results for the Three Months Ended March 31, 2005 and 2004

Net Income: Net income for the three months ended March 31, 2005 was $421,000 or $.18 per diluted share ($.19 per basic share) compared to $223,000 or $.10 per diluted share and basic shares for the three months ended March 31, 2004. The higher earnings for the current quarter were primarily a result of increased net interest income. Net interest income was higher due to a higher percentage of our earning assets being in loans, which earns more than securities and interest bearing deposits.

Net Interest Income: Net interest income increased $209,000 to $1,891,000 for the quarter ended March 31, 2005 compared to $1,682,000 for the same period in 2004. The increase was attributed primarily to the increased volume in loans from 2004 compared to 2005.

Provision for Credit Losses: The provision for loan losses for the quarter ended March 31, 2005 decreased $15,000 to $54,000 from $69,000 for the quarter ended March 31, 2004. 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 $1.4 million at March 31, 2005 (1.20% 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 $1.2 million (1.15% of outstanding loans) at March 31, 2004. The Company had no net charge-offs for the three months ended March 31, 2005 compared to $3,000 in net charge-offs for the three months ended March 31, 2004.

Non-interest Income: Total non-interest income increased $34,000 to $338,000 for the quarter ended March 31, 2005 from $304,000 for the quarter ended March 31, 2004, primarily due to a $63,000 increase in income from mortgage loan sales. The Bank has added three additional mortgage loan officers in the first quarter of 2005 which resulted in more mortgage loan volume.

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Non-interest Expense: Total non-interest expense decreased $39,000 to $1,562,000 for the quarter ended March 31, 2005 from $1,601,000 at March 31, 2004. The Company continues its efforts to keep expenses down.

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 three months ended March 31, 2005. 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 $7.7 million. Those funds will be used to fund future loan growth.

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, 2005, the Bank’s liquidity ratio was 13%. The Bank also maintains borrowing lines at the Federal Home Loan Bank of Seattle and other correspondents with available advances up to $27.6 million. As of March 31, 2005, 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, 2005, the Bank had loan commitments and undisbursed loans in process totaling $20.7 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, 2005 totaled $35.4 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, 2005, 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, 2005 and December 31, 2004 to the minimum regulatory capital requirements: