U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006.

¨	Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 *(No fee required)*

Commission File Number: 0 - 28394

MOUNTAIN BANK HOLDING COMPANY

(exact name of registrant as specified in its charter)


WASHINGTON		91-1602736
(State or other jurisdiction of incorporation or organization)		(IRS Employer 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)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, or a non-accelerated filer.


Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

As of June 30, 2006, the aggregate market value of the 1,872,395 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes the 432,394 shares held by all directors and executive officers of the Registrant as a group, was $40,256,493. This figure is based on the last sale price of $21.50 per share of the Registrant’s Common Stock on June 30, 2006.

Number of shares of common stock outstanding as of February 28, 2007: 2,322,939

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2007 Annual Meeting of Shareholders to be held on April 24, 2007 is incorporated by reference into Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS


		Page #
Part I

ITEM 1.	Business	1
	General	1
	Mt. Rainier Bank	1
	History	2
	Business	2
	Service Area	2
	Employees	3
	Competition	3
	Products and Services	3
	Marketing	3
	Forward Looking Statement Disclosure	4
	Statistical Information About Mountain Bank Holding	4
	Distribution of Average Assets, Liabilities and Shareholders’ Equity & Interest Yields	5
	Rate Volume Analysis	6
	Investment Portfolio	6
	Lending Activities	8
	Risk Elements—Non-Accrual, Past Due and Restructured Loans	12
	Credit Risk Management and Allowance for Credit Losses	13
	Allocation of Loan Loss By Loan Classification	15
	Deposits	17
	Return on Equity and Assets	19
	Supervision and Regulation	19
	Mountain Bank Holding Company	20
	Bank Holding Company Regulation	20
	Transactions with Affiliates	20
	Tying Arrangements	20
	State Law Restrictions	21
	Mt. Rainier National Bank	21
	Interstate Banking and Branching	21
	Deposit Insurance	22
	Dividends	22
	Capital Adequacy	22
	Other Significant Federal Laws and Regulations	23
	Regulatory Oversignt and Examination	24
	Effects of Government Monetary Policy	24

ITEM 1A	Risk Factors	25

ITEM 1B	Unresolved Staff Comments	27

ITEM 2.	Properties	27

ITEM 3.	Legal Proceedings	28

ITEM 4.	Submission of Matters to a Vote of Security Holders	28


		Page #
Part II

ITEM 5.	Market for Registrant’s Common Equity; Related Stockholder Matters and Issuer Purchases pf Equity Securities	29
	Market Information	29
	Stock Performance Graph	30
	Number of Equity Holders	30
	Stock Dividends	31
	Payment of Dividends	31
	Equity Compensation Plan Information	31

ITEM 6.	Selected Financial Data	32

ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	47

ITEM 8.	Consolidated Financial Statements and Supplementary Data	48

ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	48

ITEM 9A.	Controls and Procedures	48

ITEM 9B.	Other Information	48

Part III

ITEM 10.	Directors and Executive Officers of the Registrant and Corporate Governance	49

ITEM 11.	Executive Compensation	49

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	49

ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	49

ITEM 14.	Principal Accountant Fees and Services	49

Part IV

ITEM 15.	Exhibits and Financial Statement Schedules	E-1

Signatures

FORM 10-K

Available Information

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, and beneficial ownership reports on Forms 3, 4, and 5 as soon as practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission can be found on the SEC’s Edgar database at www.sec.gov, free of charge.

PART I

(ITEMS 1-4)

ITEM 1. BUSINESS

General

Mountain Bank Holding Company (“Mountain Bank Holding”) is a Washington corporation formed in 1993 primarily to hold all of the Common Stock of Mt. Rainier National Bank (“Mt. Rainier Bank”), a National Banking Association organized under the laws of the United States. Mt. Rainier Bank provides personal and commercial banking and related financial services at its main office located in Enumclaw, Washington, and from five branch offices located in Buckley, Black Diamond, Auburn, Maple Valley, and Sumner, Washington. Mt. Rainier Bank also provides loan services at a loan production office located in Federal Way, Washington. 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 defined as a company that has direct or indirect control of a bank. Mountain Bank Holding qualifies as a bank holding company because it owns one hundred percent (100%) of the outstanding securities of Mt. Rainier National Bank (Mt. Rainier Bank). At December 31, 2006, Mountain Bank Holding reported on a consolidated basis total assets of $229,910,000, total deposits of $204,296,000, and shareholders’ equity of $22,283,000.

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

•

Monitoring carefully the credit quality of Mt. Rainier Bank’s existing asset base;

•

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

•

Emphasizing close working relationships between Mt. Rainier Bank’s senior management, directors, loan officers and commercial customers; and

•

Focusing on training programs to ensure that management and staff has knowledge necessary to serve customers and remain in compliance with all legal and regulatory obligations.

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

DESCRIPTION OF MT. RAINIER NATIONAL BANK

Mt. Rainier Bank

Mt. Rainier National Bank is a wholly owned subsidiary of Mountain Bank Holding. While Mountain Bank Holding and Mt. Rainier Bank are distinctly different entities regulated by different regulatory bodies, the cash flow of Mountain Bank Holding presently is entirely derived from dividends upstreamed from Mt. Rainier Bank to Mountain Bank Holding. Therefore, the value of the securities of Mountain Bank Holding is, to a large extent, dependent upon the success of Mt. Rainier Bank.

History

Mt. Rainier Bank opened on July 2, 1990, in Enumclaw, Washington, and has been operating since that date.

Business

Mt. Rainier Bank, through its main office, five branches and one loan production office, offers a full line of commercial banking services.

The principal sources 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 sold to the secondary market; (v) interest on investments, and (vi) fees from sales of non-deposit investment products. Loans include short-to-medium-term commercial and consumer loans, including real estate loans, construction loans, operating loans and lines, equipment loans, automobile loans, recreational vehicle and truck loans, personal loans and lines of credit, home improvement and rehabilitation loans, and residential mortgage lending. Mt. Rainier Bank also offers safe deposit boxes, direct deposit of payroll and social security checks, automated teller machine access, debit cards, automatic drafts for various accounts, telephone banking, Internet banking and bill payment services. Mt. Rainier Bank has a night depository and an ATM, as well as drive-up services, at each of its branch offices.

Mt. Rainier Bank’s core deposit base generally has been enhanced through advertising and deposit promotions, and focusing on securing the entire banking relationship of each of its customers. Deposit products include checking accounts, savings programs, NOW accounts and certificates of deposit. Mt. Rainier Bank has not used brokered deposits as a source of funds.

Mt. Rainier Bank’s commercial banking activities target high net worth individuals and their businesses with an emphasis on small to medium size businesses. Mt. Rainier Bank’s operating strategy is to offer personal service, flexibility and timely responsiveness to the needs of its customers. Senior management of Mt. Rainier Bank and Mountain Bank Holding maintain close personal contact and close working relationships with Mt. Rainier Bank’s commercial customers and their businesses, and Mt. Rainier Bank’s and the Company’s Boards of Directors primarily include local business people from Mt. Rainier Bank’s primary service area. Most of Mt. Rainier Bank’s new commercial 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 prime or higher.

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

Service Area

Mt. Rainier Bank’s primary service area is South King County and East Pierce County, including Enumclaw, Buckley, Black Diamond, Auburn, Maple Valley, Sumner, and Federal Way and surrounding communities. Enumclaw’s population is 11,220, having experienced 48% growth since 1990. Enumclaw is primarily considered a residential community, with most growth in single-family residences. The local economy is dependent upon the forest products industry, farming, and tourism. Buckley has experienced less growth with a population of 4,515. Buckley is a residential community with very little business growth in the past few years. Black Diamond has a current population of 4,080, up from 1,760 in 1990. Auburn is a larger community with a population of 48,955, up from 35,230 in 1990. Auburn has led the region in economic growth. Auburn leads

King County in job creation. Maple Valley has current population of 19,140, up from 10,500 in 1997 when it became a city. Sumner’s population has increased approximately 44% to 9,025. Federal Way has a growing population of approximately 85,800 people within the city limits. The city is home to world-class companies, as well as small businesses of all kinds, with the city boasting the second highest number of businesses in South King County.

Employees

As of December 31, 2006, Mountain Bank Holding employed a full-time President and CEO and a half-time Chief Financial Officer. As of the same date, Mt. Rainier Bank had 72 full-time-equivalent employees, including three Executive Officers. None of Mt. Rainier Bank’s employees is presently represented by a union or covered by a collective bargaining agreement. Mt. Rainier Bank considers its relationships with its employees to be good.

Competition

The banking business in Mt. Rainier Bank’s primary service area is highly competitive with respect to both loans and deposits. All the major out-of-state commercial banks that operate in Washington (including Bank of America, Key Bank, Wells Fargo and U.S. Bank) have a branch or branches within Mt. Rainier Bank’s primary service area. Among the advantages such major banks have are their ability to finance wide-ranging advertising campaigns and to allocate their investment assets to geographic regions of higher yield and demand. Such banks offer certain services which are not offered directly by Mt. Rainier Bank (but are offered indirectly through correspondent institutions); and, by virtue of their greater total capitalization (legal lending limits to an individual customer are based upon a percentage of a bank’s shareholder’s equity accounts) such banks have substantially higher lending limits than Mt. Rainier Bank.

Mt. Rainier Bank also competes with a number of non-bank competitors such as insurance companies, small loan companies, finance companies, mortgage companies, credit unions, brokerage houses, and other financial institutions. Many of Mountain Bank Holding’s non-bank competitors are not subject to the extensive federal and state regulations which govern Mountain Bank Holding and, as a result, have a competitive advantage over Mountain Bank Holding in providing certain services.

Mt. Rainier Bank believes its competitive position has been strengthened by the consolidation in the banking industry, which has resulted in a focus by the larger banks on their larger accounts, with less direct contact between the officers and their customers. 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

In conjunction with the growth of its asset base, Mt. Rainier Bank has introduced new products and services to position it to better compete in its highly competitive market. Mt. Rainier Bank’s customers demand not only a wide range of financial products but also efficient and convenient service. In response to these demands, Mt. Rainier Bank has developed a mix of products and services utilizing technology available to the banking industry such as telephone banking, internet banking, bill payment services and automated teller machines. Additionally, Mt. Rainier Bank offers a wide range of commercial and retail banking products and services to its customers. Deposit accounts include certificates of deposit, individual retirement accounts and other time deposits, checking and other demand deposit accounts, interest-bearing checking accounts, savings accounts and money market accounts. Loans include residential real estate, commercial, real estate construction and development, installment and consumer loans. Other products and services include: credit related insurance, ATMs, safe deposit boxes and non-deposit investment products.

Marketing

Mt. Rainier Bank uses, to the fullest extent possible the flexibility accorded by its independent status to improve its market share. This includes an emphasis on specialized services, local promotional activity, and

personal contacts by Mt. Rainier Bank’s officers, directors and employees. Mt. Rainier Bank also seeks to provide special services and programs for individuals in its primary service area who are employed in the business and professional fields. In the event there are customers whose loan demands exceed Mt. Rainier Bank’s lending limits, Mt. Rainier Bank arranges for such loans on a participation basis with other financial institutions.

Forward Looking Statement Disclosure

In addition to historical information, this report may contain certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). This statement is included for the express purpose of availing Mountain Bank Holding of the protections of the safe harbor provisions of the PSLRA. The forward-looking statements contained in this report are subject to factors, risks, and uncertainties that may cause actual results to differ materially from those projected. Important factors that might cause such a material difference include, but are not limited to, those discussed in this report. Such items that could cause actual results to differ materially from the forward looking statements in this report are: general economic conditions, world and national events that could impact the economy and interest rates, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; new legislation; vendor quality and efficiency; employee retention factors; rapidly changing technology and evolving banking industry standards; competitive standards; competitive factors, including increased competition with community, regional, and national financial institutions; fluctuating interest rate environments; and similar matters. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of the statement. Mountain Bank Holding undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in this and other documents we file from time to time with the Securities and Exchange Commission.

Statistical Information about Mountain Bank Holding

The following statistical information should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere herein.

DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY

AND INTEREST YIELDS

The following table sets forth the average balance sheets of Mountain Bank Holding for the past three years along with an analysis of interest income and expenses for each major category of interest earning assets and interest bearing liabilities, the average rate paid in each category, and net yield on earning assets. Average non-accrual loans were $39,000 in 2006, $24,000 in 2005 and $62,000 in 2004 and are included in average total loans. Loan fees of $986,000 in 2006, $728,000 in 2005 and $894,000 in 2004 are included in interest income.


	Year ended Dec. 31,
	2006							2005							2004
	Average Balance			Int Earned/ Expense		Annualized Yield/ Rate		Average Balance			Int Earned/ Expense		Annualized Yield/ Rate		Average Balance			Int Earned/ Expense		Annualized Yield/ Rate
	*(dollars in thousands)*
Assets
Interest and dividend earning assets:
Loans*	$	148,410		$	12,260	8.3	%	$	122,251		$	9,309	7.6	%	$	109,439		$	8,139	7.4	%
Taxable Investments		40,808			1,583	3.9	%		36,683			1,238	3.4	%		36,323			1,130	3.1	%
Non-taxable investments		3,260			111	3.4	%		1,248			41	3.3	%		235			8	3.4	%
Federal funds sold		995			37	3.7	%		1,841			91	4.9	%		—			—	0.0	%
Deposits in banks		2,476			100	4.0	%		9,613			199	2.1	%		11,465			127	1.1	%

Total interest earning assets		195,949			14,091	7.2	%		171,636			10,878	6.3	%		157,462			9,404	6.0	%

Non-interest earning assets:
Cash and due from banks		5,222							3,428							1,842
Premises and equipment		7,288							6,797							5,712
Other assets		6,215							5,163							4,831
Reserve for possible loan losses		(1,706	)						(1,476	)						(1,234	)

Total assets	$	212,968						$	185,548						$	168,613

Liabilities and shareholders’ equity
Interest bearing liabilities:
Interest bearing demand deposits	$	53,554			808	1.5	%	$	57,753			658	1.1	%	$	53,980			568	1.1	%
Savings		18,942			141	0.7	%		18,235			136	0.7	%		16,724			125	0.7	%
Certificates of deposit		40,799			1,594	3.9	%		33,285			929	2.8	%		32,159			701	2.2	%
Certificates of deposit over $100,000		33,346			1,470	4.4	%		22,492			735	3.3	%		20,848			535	2.6	%

Total interest bearing deposits		146,641			4,013	2.7	%		131,765			2,458	1.9	%		123,711			1,929	1.6	%
Federal funds purchased		9,226			507	5.5	%		2			—	0.0	%		—			—
Other borrowings		535			9	1.7	%		416			7	1.7	%		33			3	8.0	%

Total interest bearing liabilities		156,402			4,529	2.9	%		132,183			2,465	1.9	%		123,744			1,932	1.6	%

Non-interest bearing liabilities:
Demand deposits		33,189							32,480							26,200
Other liabilities		2,330							1,538							1,173
Shareholders’ equity		21,047							19,347							17,518

	$	212,968						$	185,548						$	168,635

Net interest income				$	9,562						$	8,413						$	7,472

Net interest margin						4.88	%						4.90	%						4.75	%

*	Non-accrual loan interest is not included.

RATE/VOLUME ANALYSIS

The table below sets forth certain information regarding changes in interest income and interest expense of Mountain Bank Holding for the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume (changes in volume multiplied by old rate) and (2) changes in rate (changes in rate multiplied by old average volume). The change in interest income and interest expense attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.


	Year ended December 31,
	2006 Increase(Decease) Due to								2005 Increase(Decease) Due to
	Total			Volume			Yield		Total		Volume			Yield
	*(in thousands)*								*(in thousands)*
Interest and dividend income:
Loan portfolio	$	2,951		$	2,272		$	679	$	1,170	$	981		$	189
Taxable Investments		345		$	76		$	269		108		11			97
Non-taxable investments		70		$	69		$	1		33		33			—
Federal funds sold		(54	)	$	(54	)	$	—		91		91			—
Deposits in banks		(99	)	$	(209	)	$	110		72		(23	)		95

All interest-earning assets	$	3,213		$	2,154		$	1,059	$	1,474	$	1,093		$	381

Interest expense:
Interest bearing demand		150			(51	)		201		90		22			68
Savings		5			5			—		11		11			—
Certificates of deposit under $100,000		665			2			663		228		24			204
Certificates of deposit over $100,000		735			668			67		200		38			162

Total deposit accounts	$	1,555		$	624		$	931	$	529	$	95		$	434

Federal funds purchased		507			507			—		—		—			—
Other borrowings		2			2			—		4		8			(4	)

Total interest bearing liabilities	$	2,064		$	1,133		$	931	$	533	$	103		$	430

Change in net interest income	$	1,149		$	1,021		$	128	$	941	$	990		$	(49	)

Investment Portfolio

The investment policy of Mt. Rainier Bank is an integral part of the overall asset/liability management of Mt. Rainier Bank. Mt. Rainier Bank’s investment policy is to establish a portfolio, which will provide liquidity necessary to facilitate making loans and to cover deposit fluctuations while at the same time achieving a satisfactory investment return on the funds invested. The investment policy is reviewed annually by Mt. Rainier Bank’s Board of Directors. Mt. Rainier Bank stresses the following attributes for its investments: capital protection, liquidity, yield, risk management and pledge ability. Under Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, Mt. Rainier Bank is required to classify its portfolio into three categories: Held to Maturity, Trading Securities, and Available for Sale.

Held to Maturity securities include debt securities that Mt. Rainier Bank has positive intent and ability to hold to maturity; these securities are reported at amortized cost. As of December 31, 2006, Mt. Rainier Bank held no securities as Held to Maturity.

Trading Securities include debt and equity securities that are purchased and held solely for the purpose of selling them in the short-term future for trading profits. Trading Securities are reported at fair market value with

unrealized gains and losses included in earnings. As of December 31, 2006, Mt. Rainier Bank held no securities as Trading Securities.

Available for Sale securities include those that may be sold to implement Mt. Rainier Bank’s asset/liability management strategies, including responses to changes in interest rates, prepayment rates and similar factors. These securities are reported at fair market value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity. All of Mt. Rainier Bank’s investment securities at December 31, 2006 were classified as Available for Sale.

As a national bank and member of the Federal Reserve System, Mt. Rainier Bank is required to have $310,000 invested in Federal Reserve Bank Stock. As a requirement of being a member of the Federal Home Loan Bank of Seattle, Mt. Rainier Bank is required to keep $550,000 in stock. This portion of Mt. Rainier Bank’s investment portfolio is not liquid.

The following table sets forth the composition of the Mountain Bank Holding’s investment portfolio as of December 31 for the years indicated.


	2006				2005				2004
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	*(in thousands)*
US Treasury securities	$	2,985	$	2,968	$	4,005	$	3,976	$	3,094	$	3,087
US Government and agency securities		18,351		18,246		25,809		25,480		16,835		16,742
Mortgage Backed Securities		11,454		11,095		14,533		14,237		15,106		15,029
Municipal bonds		3,285		3,272		2,647		2,635		295		297
Corporate Bonds		—		—		186		185		2,268		2,287
Equity securities		60		60		60		60		60		60

Total	$	36,135	$	35,641	$	47,240	$	46,573	$	37,658	$	37,502

The investment portfolio at December 31, 2006, excluding equity securities was categorized by maturity as follows:


	*(in thousands)*

	December 31, 2006
	One Year or Less				One to Five Years				Five to Ten Years				Over Ten Years
	Carrying Value		Annualized Weighted Average Yield		Carrying Value		Annualized Weighted Average Yield		Carrying Value		Annualized Weighted Average Yield		Carrying Value		Annualized Weighted Average Yield
	*(Dollars in Thousands)*
Investment securities:
U.S. Treasury Securities	$	1,001	6.25	%	$	1,967	3.56	%	$	—	—		$	—	—
US Government and agency securities		14,771	3.38	%		3,475	4.56	%		—	—			—	—
Mortgage-backed securities		637	4.75	%		10,458	4.58	%		—	—			—	—
Municipal bonds*		—				737	3.87	%		2,535	3.96	%		—	—

	$	16,409	3.61	%	$	16,637	4.42	%	$	2,535	3.96	%	$	—	—

*	tax equivalent yield

Mortgage-Backed Securities. Mountain Bank Holding’s mortgage-backed securities portfolio consists of securities issued under government-sponsored agency programs, including those of Fannie Mae and Freddie

Mac. These certificates are modified pass-through mortgage-backed securities that represent undivided interests in underlying pools of fixed-rate, predominately single-family and, to a lesser extent, multi-family residential mortgages issued by these government-sponsored entities. Fannie Mae and Freddie Mac generally provide the certificate holder a guarantee of timely payments of interest, whether or not collected.

Mortgage-backed securities generally increase the quality of Mountain Bank Holding’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of Mountain Bank Holding. At December 31, 2006, there were no mortgage-backed securities pledged to secure obligations of Mountain Bank Holding.

While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. The prepayment risk associated with mortgage-backed securities is monitored periodically, and prepayment rate assumptions adjusted as appropriate to update Mountain Bank Holding’s mortgage-backed securities accounting and asset/liability reports. Classification of Mountain Bank Holding’s mortgage-backed securities portfolio as available for sale is designed to minimize that risk.

Lending Activities

The two main areas in which Mt. Rainier Bank has directed its lendable funds are real estate and commercial loans. At December 31, 2006, these categories accounted for approximately 80% and 18%, respectively, of Mt. Rainier Bank’s total loan portfolio. Mt. Rainier Bank’s major source of income is interest and fees charged on loans. Accordingly Mt. Rainier Bank has a significant concentration in real estate loans and is subject to any potential downturn in the real estate market.

In general, Mt. Rainier Bank is permitted by law to make loans to single borrowers in aggregate amounts of up to fifteen percent (15%) of Mt. Rainier Bank’s unimpaired capital and unimpaired surplus. Mt. Rainier Bank, on occasion, sells participations in loans when necessary to stay within lending limits or to otherwise limit Mt. Rainier Bank’s exposure. Mt. Rainier Bank’s goal is to reduce the risk of undue concentrations of loans to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2006, no such concentration exceeded 15% of Mt. Rainier Bank’s loan portfolio. Mt. Rainier Bank has no loans to customers in foreign countries. Its policy generally is to lend within Washington State, however Mt. Rainier Bank does have some loans to out-of-state borrowers.

In the normal course of business there are various commitments outstanding and commitments to extend credit, which are not reflected in the financial statements. These commitments generally require the customers to maintain certain credit standards and have fixed expiration dates or other termination clauses. Mt. Rainier Bank uses the same credit policies in making commitments as it does for loans. Management does not expect that all such commitments will be fully utilized.

Lending activities are conducted pursuant to a written Loan Policy, which has been adopted by the Board of Directors of Mt. Rainier Bank. Each loan officer has a defined lending authority. Regardless of lending authority, aggregate loans over $1,000,000 are approved by Mt. Rainier Bank’s Loan Committee, made up of the President and Credit Administrator of Mt. Rainier Bank and three directors and aggregate loans over $500,000 are reviewed by that committee.

The bank’s secondary mortgage activity consists of originating residential loans wherein the closing of each loan is preceded by its negotiated sale. Primarily, these loans are funded by the bank and promptly sold. The bank also makes residential construction loans wherein a “take-out” is negotiated on the secondary market. Bank guidelines for loan-to-value ratios are closely adhered to.

The following table sets forth the composition of the Company’s gross loan portfolio, including loans held for sale, by loan type, as of December 31 for the years indicated.


	2006					2005					2004				2003				2002
	Amounts			Percent		Amounts			Percent		Amounts		Percent		Amounts		Percent		Amounts		Percent
	*(In thousands)*
Commercial and Agricultural	$	29,591		17.70	%	$	24,025		19.32	%	$	26,918	22.26	%	$	21,526	21.80	%	$	20,510	24.93	%
Real Estate:
Residential 1-4 family		17,305		10.35	%		12,024		9.67	%		9,833	8.13	%		12,243	12.40	%		13,516	16.43	%
Commercial		91,991		55.04	%		71,264		57.31	%		67,077	55.47	%		48,266	48.88	%		36,875	44.83	%
Construction and land development		23,999		14.36	%		12,671		10.18	%		11,696	9.67	%		10,833	10.97	%		5,602	6.81	%
Consumer		4,262		2.55	%		4,375		3.52	%		5,408	4.47	%		5,876	5.95	%		5,758	7.00	%

Total gross loans	$	167,148		100.00	%	$	124,359		100.00	%	$	120,932	100.00	%	$	98,744	100.00	%	$	82,261	100.00	%
Net deferred loan fees	$	(361	)			$	(134	)			$	—			$	—			$	—

Total net loans	$	166,787				$	124,225				$	120,932			$	98,744			$	82,261

The following table summarizes the scheduled contractual gross loan maturities for the Company’s total loan portfolio due for the periods indicated as of December 31, 2006. Adjustable rate loans are shown in the period in which loan principal payments are contractually due.


	Total		Less than one year				One to five years				Over 5 years
	Total		Fixed		Variable		Fixed		Variable		Fixed		Variable
	*(in thousands)*
Commercial and Agricultural	$	29,591	$	1,937	$	10,591	$	15,076	$	203	$	1,784	$	—
Real Estate:
Residential 1-4 family		17,305		430		2,976		4,958		1,151		7,790		—
Commercial		91,991		3,829		16,057		15,747		51,412		4,897		49
Construction and land development		23,999		4,455		19,504		40		—		—		—
Consumer		4,262		640		43		2,880		48		604		47

Total loans	$	167,148	$	11,291	$	49,171	$	38,701	$	52,814	$	15,075	$	96

One- to Four-Family Residential Mortgage Lending. One- to four-family residential mortgage loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals from real estate agents and builders. At December 31, 2006, the Company’s one- to four-family residential mortgage loan portfolio totaled $17 million, or 10.16% of the Company’s total gross loan portfolio.

The Company originates one- to four-family residential mortgage loans with terms up to a maximum of 5-years, with the exception of the home equity program, which has a maximum maturity of 15-years, and with loan-to-value ratios up to 80% of the appraised value of the secured property. Residential loans generally do not include prepayment penalties.

In underwriting one to four-family residential real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan. Independent fee appraisers approved by the Board of Directors appraise most properties securing real estate loans made by the Company. The Company generally requires borrowers to obtain title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.

Commercial and Multi-Family Real Estate Lending. The Company engages in commercial and multi-family real estate lending in its primary market area and surrounding areas. At December 31, 2006, the Company’s commercial and multi-family real estate loan portfolio totaled $92 million, or 55.1% of the Company’s total

gross loan portfolio. The loans are generally secured by properties located in the Company’s primary market area and surrounding areas.

Primarily apartment buildings, warehouse buildings, assisted living/retirement facilities, and office buildings secure the Company’s commercial and multi-family real estate loan portfolio. Commercial and multi-family real estate loans generally have terms that do not exceed 25 years, with 10 year call dates, 5 year rate adjustments, have loan-to-value ratios of up to 80% of the appraised value of the secured property, and are typically secured by personal guarantees of the borrowers. The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio. Commercial and multi-family real estate loans provide for a margin over a number of different indices. In underwriting these loans, the Company currently analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Independent appraisers perform appraisals on properties securing commercial real estate loans originated by the Company.

Multi-family and commercial real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.

Construction, Land, and Land Development Lending. The Company makes construction, land and land development loans to individuals for the construction of their residences as well as to builders for the construction of one- to four-family residences and commercial and multi-family real estate. At December 31, 2006, the Company’s construction, land and land development loan portfolio totaled $24 million, or 14.4% of the Company’s total gross loan portfolio. Of the $24 million, approximately $3.7 million consists of land loans that may or may not be in development stages.

Construction loans to individuals for one to four family residences are structured to be converted to permanent loans at the end of the construction phase, which typically runs up to twelve months. These construction loans have rates and terms, which generally match the one- to four-family loan rates then offered by the Company, except that during the construction phase the borrower pays interest only. Generally, the maximum loan-to-value ratio of owner occupied single-family construction loans is 80% of the appraised value. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans.

Generally, construction loans to builders of one- to four-family residences require the payment of interest only for up to 12 months and have terms of up to 12 months. These loans may provide for the payment of interest and loan fees from loan proceeds and carry adjustable rates of interest. Loan fees charged in connection with the origination of such loans are generally 1%.

Construction loans on commercial and multi-family real estate projects may be secured by apartments, agricultural facilities, small office buildings, medical facilities, assisted living facilities, or other property, and are generally structured to be converted to permanent loans at the end of the construction phase, which generally runs up to 18 months. During the construction phase the borrower pays interest only. These loans generally provide for the payment of interest and loan fees from loan proceeds. All of these loans were performing in accordance with their terms at December 31, 2006.

Construction loans are obtained principally through continued business from builders who have previously borrowed from the Company and from existing customers who are building new facilities. The application

process includes a submission to the Company of accurate plans, specifications, costs of the project to be constructed and projected revenues from the project. These items are also used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of the appraised value of the property or the cost of construction (land plus building).

Construction loans to borrowers other than owner-occupants involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. Also, the funding of loan fees and interest during the construction phase makes the monitoring of the progress of the project particularly important, as customary early warning signals of project difficulties may not be present.

Commercial and Agricultural Lending. The Company also originates commercial business loans and agricultural loans. Most of the Company’s commercial business loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable. Commercial loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies. The Company also originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, other farm related products and farm production loans. At December 31, 2006, $29.6 million, or 17.8% of the Company’s total gross loan portfolio was comprised of commercial business and agricultural loans.

The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Generally, the maximum term on non-mortgage lines of credit is one year. The loan-to-value ratio on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan. The Company’s commercial business lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s current credit analysis. Nonetheless, such loans are believed to carry higher credit risk than more traditional investments.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment). Business assets and personal guarantees usually, but not always, secure the Company’s commercial business loans. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. At December 31, 2006, none of the Company’s commercial business loan portfolio was non-performing.

Consumer Lending. The Company offers a variety of secured consumer loans, including home equity, home improvement, automobile, boat and loans secured by savings deposits. In addition, the Company offers other secured and unsecured consumer loans. The Company currently originates substantially all of its consumer loans in its primary market area and surrounding areas. At December 31, 2006, the Company’s consumer loan portfolio totaled $4.3 million, or 2.6% of its total gross loan portfolio.

The largest component of the Company’s consumer loan portfolio consists of home equity loans and lines of credit. The Company offers fixed-rate equity loans and adjustable rate home equity lines of credit. Substantially all of the Company’s home equity loans and lines of credit are secured by second mortgages on principal residences. The Company will lend amounts, which, together with all prior liens, may be up to 80% of the appraised value of the property securing the loan. Home equity loans and lines of credit generally have maximum terms of fifteen years.

The Company primarily originates automobile loans on a direct basis. Direct loans are loans made when the Company extends credit directly to the borrower, as opposed to indirect loans, which are made when the Company purchases loan contracts, often at a discount, from automobile dealers, which have extended credit to their customers. The Company’s automobile loans typically are originated at fixed interest rates with terms up to 60 months for new and used vehicles. Loans secured by automobiles are generally originated for up to 80% of the N.A.D.A. book value of the automobile securing the loan.

Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards employed by the Company for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.

Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans, which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount, which can be recovered on such loans.

RISK ELEMENTS—NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS

The following table sets forth information regarding non-performing loans of Mt. Rainier Bank on the dates indicated. Accrual of interest is discontinued when there is reasonable doubt as to the full, timely collection of interest or principal. When a loan becomes 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 on non-accrual status. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to principal and interest and when, in the judgment of management, the loans are estimated to be fully collectible as to principal and interest. At December 31, 2006, the Mt. Rainier Bank had no loans on non-accrual status.

At December 31, 2006, the company had $1,892,000 of loans that were internally classified as substandard for one or more reasons. None of these loans were past due 30 days or more at December 31, 2006. If these loans were deemed non-performing, the Company’s ratio of non-performing assets and restructured loans as a percent of total assets would have been .82% at December 31, 2006.


	2006			2005			2004			2003			2002
	*(Dollars in thousands)*
Restructured loans	$	—		$	—		$	—		$	—		$	—

Nonaccrual loans:
Commercial	$	—		$	—		$	—		$	88		$	88
Consumer	$	—		$	20		$	—		$	16		$	—
Total nonaccrual loans	$	—		$	20		$	—		$	104		$	88

Total foreclosed real estate loans(1)	$	—		$	—		$	—		$	140		$	151

Accruing loans 90 days or more past due	$	—		$	—		$	8		$	—		$	—

Total nonperforming assets and restructured loans	$	—		$	20		$	8		$	244		$	239

Total nonperforming assets and restructured loans as a percent of total assets		0.00	%		0.01	%		0.00	%		0.16	%		0.17	%

The following table sets forth the Company’s loan delinquencies by type, before the allowance for credit losses, by amount and by percentage of type at December 31, 2006.


	Loans Delinquent For:
	30-59 days				60-89 days				90 days and over
	Amount		Percent		Amount		Percent		Amount		Percent
	*(Dollars in thousands)*
Commercial and agriculture	$	—			$	—			$	—
Real Estate:
Residential 1-4 family	$	—			$	—			$	—
Commercial	$	—			$	—			$	—
Construction and land development	$	402	1.68	%	$	—			$	—
Consumer	$	—			$	—			$	—

Total	$	402	0.24	%	$	—	0.00	%	$	—	0.00	%

Interest income on loans is recognized based on principal amounts outstanding, at applicable interest rates. Accrual of interest on impaired loans is discontinued when reasonable doubt exists as to the full, and timely collection of interest or principal or when payment of principal or interest is contractually past due 90 days, unless the loan is well secured and in the process of collection. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and when the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought current with respect to principal and interest and when, in the opinion of management, the loans are estimated to be fully collectible as to both principal and interest.

CREDIT RISK MANAGEMENT AND ALLOWANCE FOR CREDIT LOSSES

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

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

Applicable regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, regulatory examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectable and of such little value that continuance as an asset of the institution is not warranted. When an insured institution classifies problem assets as either substandard or doubtful, it is required to establish general allowances for loan losses in an amount deemed prudent by management. These allowances represent loss allowances, which have been established to recognize the inherent risk associated with lending activities and the risks associated with particular problem assets. When Mountain Bank Holding classifies problem assets as loss, it charges off the balance of the asset against the allowance for credit losses. Assets, which do not currently expose

the bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses, are required to be designated as special mention. Mountain Bank Holding’s determination as to the classification of its assets is subject to review by the OCC during periodic examinations.

The loan portfolio is regularly reviewed and management determines the amount of loans to be charged off. In addition, such factors as Mt. Rainier Bank’s previous loan loss experience, prevailing economic conditions, industry concentrations and the overall quality of the loan portfolio are considered. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowance may be necessary based on changes in economic conditions. In addition, the OCC, as part of its examination process, periodically reviews the allowances for credit losses and foreclosed real estate. The OCC may require Mt. Rainier Bank to recognize additions to the allowance based on its judgments about information available at the time of examination. In addition, any loan or portion of a loan that is classified as a ‘loss’ by regulatory examiners is charged-off.

The allowance for credit losses is maintained at a level management considers adequate to provide for probable losses based on evaluating known and inherent risks in the loan portfolio. The allowance is reduced by loans charged off and increased by provisions charged to earnings and recoveries on loans previously charged off. The allowance is based on management’s periodic evaluation of factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectibility may not be assured. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

When information confirms that specific loans or portions of loans are uncollectible, these amounts are charged off against the allowance for credit losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not evidenced the ability or intent to bring the loan current; Mt. Rainier Bank has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; the estimated fair value of the collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement.

Real estate properties acquired through foreclosure are recorded at the lower of cost or fair value. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance for credit losses at the time of transfer. Management periodically updates valuations and if the value declines, a specific provision for losses on such property is established by a charge to operations. Mt. Rainier Bank had no foreclosed real estate at December 31, 2006.

The allowance for credit losses is estimated by management based on historical loss experience and known changes within the loan portfolio at the measurement date. The provision that is charged to income is the amount needed to maintain an adequate allowance for credit losses. The allowance for credit losses at December 31, 2006 was $1,846,000 or 1.11% of loans outstanding. The allowance for credit losses at year-end 2005 was $1,569,000 or 1.28% of loans outstanding. The following table presents data related to Mt. Rainier Bank’s allowance for credit losses as of December 31 for the years indicated.


	2006			2005			2004			2003			2002
	*(Dollars in thousands)*
Allowance for loan losses
(beginning of period)	$	1,569		$	1,376		$	1,101		$	852		$	753

Loans charged off:
Commercial and agricultural		—			—			9			101			10
Real estate construction		—			—			—			—			—
Real estate mortgage		—			—			—			—			221
Consumer		—			6			10			41			47

Total		—			6			19			142			278

Recoveries of loans previously charged off:
Commercial and agricultural		0			0			16			3			10
Real estate construction		0			0			0			0			0
Real estate mortgage		0			0			0			0			0
Consumer		1			0			2			3			7

Total		1			0			18			6			17

Net loans charged off		(1	)		6			1			136			261

Provision for possible loan losses		276			199			276			385			360

Allowance for possible loan losses

(end of period)	$	1,846		$	1,569		$	1,376		$	1,101		$	852

Loans outstanding:
Average	$	148,410		$	122,251		$	109,439		$	91,351		$	74,940
End of period		166,431			122,435			120,403			98,744			82,261
Ratio of allowance for loan loss to total loans outstanding
Average		1.24	%		1.28	%		1.26	%		1.21	%		1.14	%
End of period		1.11	%		1.28	%		1.14	%		1.12	%		1.04	%
Ratio of net charge-offs to average loans outstanding		0.00	%		0.00	%		0.00	%		0.15	%		0.35	%

Allocation of Loan Loss By Loan Classification


	12/31/2006				12/31/2005				12/31/2004				12/31/2003				12/31/2002
	Amount		Percent of loans in each category to total loans		Amount		Percent of loans in each category to total loans		Amount		Percent of loans in each category to total loans		Amount		Percent of loans in each category to total loans		Amount		Percent of loans in each category to total loans
Commercial and agricultural	$	352	17.70	%	$	367	19.32	%	$	370	22.26	%	$	294	21.80	%	$	246	24.93	%
Real estate construction		202	14.36	%		94	10.18	%		80	9.67	%		74	10.97	%		30	6.81	%
Real estate mortgage		1,178	65.39	%		1,003	66.98	%		816	63.60	%		622	61.28	%		459	61.26	%
Consumer		114	2.55	%		105	3.52	%		110	4.47	%		111	5.95	%		117	7.00	%
Unallocated		—	0.00	%		—	0.00	%		—	0.00	%		—	0.00	%		0	0.00	%

Total loans	$	1,846	100.00	%	$	1,569	100.00	%	$	1,376	100.00	%	$	1,101	100.00	%	$	852	100.00	%

The foregoing conditions and adjustments reflect management’s best estimate of items recognized when adjusting the loss percentage for each pool of loans, and adjustments to historical experience. These factors affect our assessment of low and high estimates of losses in our portfolio. The determination of the amounts of the provisions for credit losses is based on management’s current judgment and the quality of the loan portfolio, and considers all known, relevant internal and external factors that affect loan collectibility. These include regional economic indicators such as employment; retail sales; real estate trends and specific areas of concentration for our market including the forest and dairy/agricultural industries.

During 2006, the loan loss allocations by category were adjusted to reflect the overall changes as they affect percentages in each pool of loans categorized by the bank’s Loan Loss Reserve Analysis. By this method, the allowance for consumer loans, as a percentage of overall loans decreased from 3.52% to 2.55% and the allowance for commercial and agriculture loans decreased from 19.32% to 17.70% as of December 31, 2006. During this same period, the allowance for real estate secured loans increased from 77.16% to 79.75% of the bank’s allowance. The fundamental process for calculating the bank’s loan loss allocation requirements remained unchanged during this accounting period.

Mountain Bank Holding utilizes an internal asset classification system as a means of reporting problem and potential problem assets. At each scheduled Bank Board of Directors meeting, a watch list is presented, showing significant loan relationships listed as Special Mention, Substandard, and Doubtful. Set forth below is a discussion of each of these classifications.

Special Mention: A special mention extension of credit is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Special mention credits are not considered as part of the classified extensions of credit category and do not expose an institution to sufficient risk to warrant classification. They are currently protected but are potentially weak. They constitute an undue and unwarranted credit risk.

Loans in this category have some identifiable problem, most notably slowness in payments, but, in management’s opinion, offer no immediate risk of loss. An extension of credit that is not delinquent also may be identified as special mention. These loans are classified due to Mt. Rainer Bank’s management’s actions or the servicing of the loan. The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement. There may be questions regarding the condition of and/or control over collateral. Economic or market conditions may unfavorably affect the obligor in the future. A declining trend in the obligor’s operations or an imbalanced position in the balance sheet may exist, although it is not to the point that repayment is jeopardized. Another example of a special mention credit is one that has other deviations from prudent lending practices.

If Mt. Rainier Bank may have to consider relying on a secondary or alternative source of repayment, then collection may not yet be in jeopardy, but the loan may be considered special mention. Other trends that indicate that the loan may deteriorate further include such “red flags” as continuous overdrafts, negative trends on a financial statement, such as a deficit net worth, a delay in the receipt of financial statements, accounts receivable aging, etc. These loans on a regular basis can be 30 days or more past due. Judgments, tax liens, delinquent real estate taxes, cancellation of insurance policies and exceptions to bank policies are other “red flags”.

Substandard: A substandard extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Mt. Rainier Bank will sustain some loss if the deficiencies are not corrected. In other words, there is more than normal risk of loss. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard.

The likelihood that a substandard loan will be paid from the primary source of repayment is uncertain. Financial deterioration is underway and very close attention is warranted to insure that the loan is collected without a loss. Mt. Rainier Bank may be relying on a secondary source of repayment, such as liquidating collateral, or collecting on guarantees. The borrower cannot keep up with either the interest or principal payments. If Mt. Rainier Bank is forced into a subordinated or unsecured position due to flaws in documentation, the loan may be substandard. If the loan must be restructured, or interest rate concessions made, it should be classified as such. If Mt. Rainier Bank is contemplating foreclosure or legal action, the credit is likely substandard.

Doubtful: An extension of credit classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral, or refinancing plans.

If the primary source of repayment is gone, and there is doubt as to the quality of the secondary source, then the loan will be considered doubtful. If a court suit is pending, and is the only means of collection, a loan is generally doubtful. As stated above, the loss amount in this category is often undeterminable, and the loan is classified doubtful until said loss can be determined.

Potential problem loans are loans included on the watch list presented to the Board of Directors but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms. At December 31, 2006, 2005, 2004, 2003 and 2002, special mention, substandard, and doubtful classifications were as follows:


	2006		2005		2004		2003		2002
	*(in thousands)*
Special mention	$	505	$	1,162	$	2,000	$	978	$	763
Substandard		1,892		580		923		759		532
Doubtful		—		—		—		—		—

Total Classified	$	2,397	$	1,742	$	2,923	$	1,737	$	1,295

Total classifications include those loans that have been adversely classified by bank regulators and the Company’s internal loan review department. These amounts include non-accrual and impaired loans. Mountain Bank Holding continues to monitor its loan portfolio for adverse changes in specific types of loans and overall.

Mountain Bank Holding’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Mt. Rainier Bank’s primary regulators in the course of its regulatory examinations, which can order the establishment of additional general or specific loss allowances. There can be no assurance that regulators, in reviewing Mt. Rainier Bank’s loan portfolio, will not request the bank to materially increase its allowance for credit losses. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.

DEPOSITS

Mt. Rainier Bank’s primary sources of funds are deposits, borrowings, amortization and repayment of loan principal, interest earned on or maturation of investment securities and short-term investments, and funds provided from operations.

The following tables set forth the average amounts of and average rates paid on Mt. Rainier Bank’s deposit accounts for December 31 of the years indicated, as well as the actual amounts and percentage of total deposits as of December 31 of the years indicated.


	2006				2005				2004
	Average Amount		Average Rate Paid		Average Amount		Average Rate Paid		Average Amount		Average Rate Paid
	*(Dollars in thousands)*
Non-interest bearing demand deposits	$	33,189	0	%	$	32,480	0	%	$	26,200	0	%
Interest-bearing demand deposits		53,554	1.5	%		57,753	1.1	%		53,980	1.1	%
Savings deposits		18,942	0.7	%		18,235	0.7	%		16,724	0.7	%
Time deposits under $100,000		40,799	3.9	%		33,285	2.8	%		32,159	2.2	%
Time deposits over $100,000		33,346	4.4	%		22,492	3.3	%		20,848	2.6	%

Total	$	179,830	2.7	%	$	164,245	1.9	%	$	149,911	1.6	%


	2006				2005				2004
	Actual Amounts		Percentage Total Deposits		Actual Amounts		Percentage Total Deposits		Actual Amounts		Percentage Total Deposits
	*(Dollars in thousands)*
Non-interest bearing demand deposits	$	33,926	16.61	%	$	33,298	19.38	%	$	28,984	18.39	%
Interest-bearing demand deposits		55,764	27.29	%		57,866	33.68	%		58,059	36.84	%
Savings deposits		17,133	8.39	%		19,654	11.44	%		16,241	10.31	%
Time deposits under $100,000		47,239	23.12	%		35,244	20.51	%		30,830	19.56	%
Time deposits over $100,000		50,234	24.59	%		25,751	14.99	%		23,486	14.90	%

Total	$	204,296	100.00	%	$	171,813	100.00	%	$	157,600	100.00	%

At December 31, 2006 the scheduled maturities of certificates of deposits were:


	$100,000 or more		Less than $100,000
Three months or less	$	5,679	$	7,681
Three months through six months		10,423		11,721
Six months though twelve months		29,192		22,077
Over twelve months		4,940		5,760

Total	$	50,234	$	47,239

Deposits. The Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company’s deposits consist of regular savings accounts, money market savings accounts, NOW and regular checking accounts, and certificate accounts currently ranging in terms from seven days to 60 months. The Company only solicits deposits from its primary market area and does not currently use brokers to obtain deposits. The Company relies primarily on competitive pricing policies, advertising and high-quality customer service to attract and retain these deposits.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition.

The variety of deposit accounts offered by the Company has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Company endeavors to manage the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Company believes that its regular savings, money market savings accounts, NOW and regular checking

accounts are relatively stable sources of deposits. However, the ability of the Company to attract and maintain certificates of deposit and the rates paid on these deposits has been and will continue to be significantly affected by market conditions.

Borrowings. Although deposits are the Company’s primary source of funds, the Company’s policy has been to utilize borrowings when they are a less costly source of funds, can be invested at a positive interest rate spread, or when the Company desires additional capacity to fund loan demand.

RETURN ON EQUITY AND ASSETS

The following table sets forth certain ratios related to the Company for the periods indicated.


	Year ended December 31
	2006		2005		2004
					(As Restated)
Return on assets (1)	1.02	%	1.12	%	0.84	%
Return on equity (2)	10.32	%	10.79	%	8.09	%
Dividend payout ratio (3)	19.15	%	16.48	%	14.49	%
Average equity to average assets	9.88	%	10.43	%	10.63	%

(1)	Net income divided by average total assets

(2)	Net income divided by average equity

(3)	Dividends declared per share divided by net income per share

The following table represents short term borrowings for the years ended,


	2006					2005					2004
	Amount Outstanding		Maximum Amounts			Amount Outstanding		Maximum Amounts			Amount Outstanding		Maximum Amounts
	*(Dollars in thousands)*
Repurchase agreements	$	516	$	963		$	470	$	1,086		$	—	$	—

	2006					2005					2004
	Average Outstanding		Weighted Rate			Average Outstanding		Weighted Rate			Average Outstanding		Weighted Rate
	*(Dollars in thousands)*
Repurchase agreements	$	523		1.45	%	$	386		1.05	%	$	—		—

SUPERVISION AND REGULATION

The following discussion describes elements of the extensive regulatory framework applicable to Mountain Bank Holding Company (the “Company”) and Mt. Rainier Bank (the “Bank”). This regulatory framework is primarily designed for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than specifically for the protection of shareholders. Due to the breadth of this regulatory framework, our costs of compliance continue to increase in order to monitor and satisfy these requirements.

To the extent that this section describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. These statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to us, including interpretation or implementation thereof, could have a material effect on our business or operations.

Mountain Bank Holding Company

General

The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), and is therefore subject to regulation, supervision and examination by the Federal Reserve. The Company must file reports with and provide the Federal Reserve such additional information as it may require.

Bank Holding Company Regulation

In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. Bank holding companies must obtain the Federal Reserve Board’s approval before they (i) acquire direct or indirect ownership or control of any voting shares of any bank that results in total ownership or control, directly or indirectly, of more than 5% of the voting shares of such bank; (ii) merge or consolidate with another bank holding company; or (iii) acquire substantially all of the assets of any additional banks.

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

Control of Nonbanks. With some exceptions, the BHCA prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.

Control Transactions. The Change in Bank Control Act of 1978 requires a person (or group of persons acting in concert) acquiring “control” of a bank holding company to provide the Federal Reserve Board with prior written notice of the proposed acquisition. Following receipt of this notice, the Federal Reserve Board will issue a notice approving or disapproving the proposed acquisition.

Support of Subsidiary Banks. Under Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to the Bank. This means that the Company is required to commit, as necessary, resources to support the Bank. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.

Transactions with Affiliates

The Company and the Bank are deemed affiliates within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Subsidiary banks of a bank holding company are subject to certain regulations on extensions of credit to the holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for payment of dividends, interest and operational expenses.

Tying Arrangements

We are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor

its subsidiaries may condition an extension of credit to a customer on either (i) a requirement that the customer obtain additional services provided by us; or (ii) an agreement by the customer to refrain from obtaining other services from a competitor.

State Law Restrictions

As a Washington corporation, we may be subject to certain limitations and restrictions under applicable Washington corporate law. For example, state law restrictions in Washington include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records and minutes, and observance of certain corporate formalities.

Mt. Rainier National Bank

General

Mt. Rainier Bank, as a national banking association, is subject to regulation and examination by the Office of the Comptroller of the Currency (“OCC”). The federal laws that apply to Mt. Rainier Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds and the nature, amount of, and collateral for loans. In addition, although Mt. Rainier Bank is primarily regulated by the OCC, Washington law may affect certain activities of the Bank.

Community Reinvestment Act. The Community Reinvestment Act of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the OCC evaluate the record of the Bank in meeting the credit needs of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of the Bank. A bank’s community reinvestment record is also considered by the OCC in evaluating mergers, acquisitions, and applications to open a branch or facility.

Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are at least as stringent, as those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, the imposition of a cease and desist order, and other regulatory sanctions.

Safety and Soundness Standards. Federal law imposes certain non-capital safety and soundness standards upon banks. These standards cover internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to its regulators, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.

Interstate Banking and Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) relaxed prior interstate branching restrictions under federal law by permitting nationwide interstate banking and branching under certain circumstances. Generally, bank holding companies may purchase banks in any state and states may not prohibit such purchases. Additionally, banks are permitted to merge with banks in other states as long as the home state of neither merging bank has “opted out.” The Interstate Act requires regulators to consult with

community organizations before permitting an interstate institution to close a branch in a low-income area. Federal banking agency regulations prohibit banks from using their interstate branches primarily for deposit production and the federal banking agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

Washington has “opted in” to the Interstate Act and allows in-state banks to merge with out-of-state banks subject to certain aging requirements. Washington law generally authorizes the acquisition of an in-state bank by an out-of-state bank by merger with a Washington financial institution that has been in existence for at least 5 years prior to the acquisition. Under Washington law, an out-of-state bank may, subject to the Department of Financial Institutions’ approval, open de novo branches in Washington or acquire an in-state branch so long as the home state of the out-of-state bank has reciprocal laws with respect to de novo branching or branch acquisitions.

Deposit Insurance

In February 2006, the President signed federal deposit insurance reform legislation. The legislation (i) required the FDIC to merge the Bank Insurance Fund and the Savings Association Insurance Fund into a newly created Deposit Insurance Fund, which was completed in 2006; (ii) increases the amount of deposit insurance coverage for retirement accounts; (iii) allows for deposit insurance coverage on individual accounts to be indexed for inflation starting in 2010; (iv) provides the FDIC more flexibility in setting and imposing deposit insurance assessments; and (v) provides eligible institutions credits on future assessments.

The Bank’s deposits are currently insured to a maximum of $100,000 per depositor through the Deposit Insurance Fund. The Bank is required to pay deposit insurance premiums, which are assessed and paid regularly. The premium amount is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern.

Dividends

The principal source of Mountain Bank Holding’s cash is dividends received from Mt. Rainier Bank, which are subject to government regulation and limitations. The Financial Services Regulatory Relief Act of 2006 simplified dividend calculations for national banks. Generally, a national bank can pay dividends out of its undivided profits, except that the payment of dividends during any calendar year in excess of an amount equal to the sum of the total of the net income of the bank for that year and the retained net income of the bank for the preceding two years, less any required transfers, must be approved by the OCC.

Capital Adequacy

Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.

Tier I and Tier II Capital. Under the guidelines, an institution’s capital is divided into two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common stockholders’ equity, surplus and undivided profits. Tier II capital generally consists of the allowance for loan losses, hybrid capital instruments, and subordinated debt. The sum of Tier I capital and Tier II capital represents an institution’s total capital. The guidelines require that at least 50% of an institution’s total capital consist of Tier I capital.

Risk-based Capital Ratios. The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An

institution’s risk-weighted assets are then compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8%.

Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of average total assets, less intangibles. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, regulators expect an additional cushion of at least 1% to 2%.

Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from “well capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory supervisory corrective actions.

In 2006, the federal bank regulatory agencies provided notice of proposed rulemaking that would change the existing risk-based capital framework by enhancing its risk sensitivity. Whether such revisions are implemented or what effect they might have on the Company or the Bank cannot be predicted at this time, but we do not expect our operations to be significantly impacted.

Other Significant Federal Laws and Regulations

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Act”) addresses, among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally, the Act (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (the “SEC”); (ii) imposes specific and enhanced corporate disclosure requirements; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; (iv) requires companies to adopt and disclose information about corporate governance practices, including whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert;” and (v) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.

To deter wrongdoing, the Act: (i) subjects bonuses issued to top executives to disgorgement if a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer or director misleading or coercing an auditor; (iii) prohibits insider trades during pension fund “blackout periods”; (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v) extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.

As a publicly reporting company, we are subject to the requirements of the Act and related rules and regulations issued by the SEC. After enactment, we updated our policies and procedures to comply with the Act’s requirements and have found that such compliance, including compliance with Section 404 of the Act relating to management control over financial reporting, has resulted in significant additional expense for the Company. We anticipate that we will continue to incur such additional expense in our ongoing compliance.

USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (the “Patriot Act”). Certain provisions of the Patriot Act were made permanent and other sections are now subject to extended “sunset” provisions. The Patriot Act, in relevant part, (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (iii) requires financial institutions to establish an anti-money-laundering compliance program; and (iv) eliminates

civil liability for persons who file suspicious activity reports. The Act also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank account records. While the Patriot Act has had minimal affect on our record keeping and reporting expenses, we do not believe that the renewal and amendment will have a material adverse effect on our business or operations.

Financial Services Modernization. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 brought about significant changes to the laws affecting banks and bank holding companies. Generally, the Act (i) repeals the historical restrictions on preventing banks from affiliating with securities firms; (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies; (iii) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; (iv) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and (v) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. Bank holding companies that qualify and elect to become financial holding companies can engage in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities underwriting activities.

Financial Services Regulator Relief Act of 2006. In October 2006, the President signed the Financial Services Regulatory Relief Act of 2006 into law (the “ Relief Act”). The Relief Act amends several existing banking laws and regulations, eliminates some unnecessary and overly burdensome regulations of depository institutions and clarifies several existing regulations. The Relief Act, among other things, (i) authorizes the Federal Reserve Board to set reserve ratios; (ii) amends national bank regulations relating to shareholder voting and granting of dividends; (iii) amends several provisions relating to loans to insiders, regulatory applications, privacy notices, and golden parachute payments; and (iv) expands and clarifies the enforcement authority of federal banking regulators. While it is too soon to predict the impact this legislation may have on us, we do not expect that our business, expenses, or operations will be significantly impacted.

Regulatory Oversight and Examination

The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both onsite and offsite. The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a holding company or its non-banking subsidiaries and its subsidiary banks. For holding companies under $10 billion in assets, the inspection type and frequency varies depending on asset size, complexity of the organization, and the holding company’s rating at its last inspection.

Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.

Effects of Government Monetary Policy

Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal

Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. We cannot predict with certainty the nature and impact of future changes in monetary policies on Mountain Bank Holding and Mt. Rainier Bank.

ITEM 1A. RISK FACTORS

Fluctuating interest rates can adversely affect our profitability

Our profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread, and, in turn, our profitability. We cannot assure you that we can minimize our interest rate risk. In addition, interest rates also affect the amount of money we can lend. When interest rates rise, the cost of borrowing also increases. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume, business and prospects. Most recently, rising rates have increased the interest rate margins for many financial institutions as interest rates have risen. In a falling rate environment, interest rate margins will decrease and competition for loans and deposits will increase. Mt. Rainier Bank will continue to be affected by changes in interest rates and other economic factors beyond its control. We are asset sensitive, meaning that our assets reprice more quickly than our liabilities. This has an adverse effect in the short term on our interest margins, in a falling interest rate environment.

Our allowance for loan losses may not be adequate to cover actual loan losses, which could adversely affect our earnings

We maintain an allowance for loan losses in an amount that we believe is adequate to provide for losses inherent in the portfolio. While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that are identified. As a result, future additions to the allowance may be necessary. Additionally, future additions to the allowance may be required based on changes in the loans comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions, or as a result of incorrect assumptions by management in determining the allowance. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses could have a negative effect on our financial condition and results of operation.

Some of our loan concentrations present a business risk if segments of the economy suffer a downturn

Our loan portfolio contains a high percentage of commercial and commercial real estate loans in relation to our total loans and total assets. Commercial and commercial real estate loans generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. These types of loans also typically are larger than residential real estate loans and other commercial loans. Because the loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in: a loss of earnings from these loans; an increase in the provision for loan losses; or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition. Dairy and agriculture loans could present additional risk if continued pressure concerning environmental issues results in increased costs and lower margins for farmers.

An economic downturn in the market area we serve may cause us to have lower earnings and could increase our credit risk associated with our loan portfolio

The inability of borrowers to repay loans can erode our earnings. Substantially all of our loans are to businesses and individuals in south King and East Pierce counties, and any decline in the economy of this market area could impact us adversely. As a lender, we are exposed to the risk that our customers will be unable to repay their loans in accordance with their terms, and that any collateral securing the payment of their loans may not be sufficient to assure repayment.

Competition in our market area may limit our future success

Commercial banking is a highly competitive business. We compete with other commercial banks, savings and loan associations, credit unions and finance companies operating in our market area. We are subject to substantial competition for loans and deposits from other financial institutions. Some of our competitors are not subject to the same degree of regulation and restriction as we are. Some of our competitors have greater financial resources than we do. We compete for funds with other financial institutions that, in most cases, are significantly larger and able to provide a greater variety of services than we do and thus may obtain deposits at lower rates of interest. If we are unable to effectively compete in our market area, our business and results of operations could be adversely affected.

There is little trading activity in our outstanding shares

There is no active market for our outstanding shares, and it is unlikely that an established market for our shares will develop in the near future. We presently do not intend to seek listing of the shares on any securities exchange, or quotation on the Nasdaq interdealer quotation system. It is not known whether significant trading activity will take place for several years, if at all. Accordingly, our shares should be considered as a long-term investment.

Our business could be harmed if we lost the services of our senior management team

We believe that our success to date and our prospects for success in the future are substantially dependent on our senior management team, which includes Roy T. Brooks, Chairman of the Board and CEO of Mountain Bank Holding, Steve W. Moergeli. President and CEO of Mt. Rainier Bank, Sheila M. Brumley, Chief Financial Officer of Mountain Bank Holding and Senior Vice President and Cashier of Mt. Rainier Bank, and the experienced management team they have assembled. The loss of the services of any of these persons, could have an adverse effect on our business. In light of the relatively small number of persons involved in the south King and east Pierce area banking industry, we could have difficulty replacing any of our senior management team with equally competent persons who are also familiar with our market area.

There are restrictions on changes in control of the Company that could decrease our shareholders’ chance to realize a premium on their shares

As a Washington corporation, we are subject to various provisions of the Washington Business Corporation Act that impose restrictions on certain takeover offers and business combinations, such as combinations with interested shareholders and share repurchases from certain shareholders. Provisions in our Articles of Incorporation [requiring a staggered Board and/or containing fairness provisions] could have the effect of hindering, delaying or preventing a takeover bid. These provisions may inhibit takeover bids and could decrease the chance of shareholders realizing a premium over market price for their shares as a result of the takeover bid.

Government Regulation and Monetary Policy

The Company and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which the Company conducts its banking business, undertakes new investments and activities and obtains financing.

These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit holders of the Company’s securities. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Company. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company, and any unfavorable change in these conditions could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity. See “Supervision and Regulation” above.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Mountain Bank Holding has no unresolved staff comments.

ITEM 2. DESCRIPTION OF PROPERTY

Mt. Rainier Bank’s main office is in Enumclaw, Washington, at 501 Roosevelt Avenue, in an office building owned by Mt. Rainier Bank. The facility has 10,275 square feet.

On February 6, 1995, Mt. Rainier Bank opened its Buckley Branch located at 29290 Highway 410, Buckley, Washington. The facility has 3,100 square feet.

On January 26, 1998, Mt. Rainier Bank opened its Black Diamond Branch located at 31329 Third Avenue, Black Diamond, Washington. The facility has 3,100 square feet.

On November 16, 1998, Mt. Rainier Bank opened its Auburn Branch located at 1436 Auburn Way So, Auburn, Washington. This branch was relocated on September 17, 2005 to 2041 Auburn Way No, Auburn, Washington. The facility has approximately 4,850 square feet. The Company sold the property located at 1436 Auburn Way So, in Auburn, Washington in 2006 and received a gain on the sale in the amount of $133,000.

On April 5, 2002, Mt. Rainier Bank opened its Maple Valley Branch located at 23924 225^th Way SE in Maple Valley, Washington. The facility has approximately 3,287 square feet.

On March 26, 2003, Mt. Rainier Bank opened its Sumner Branch located at 15104 E. Main St. in Sumner, Washington. The facility has approximately 3,768 square feet.

On March 15, 2004, Mt. Rainier Bank opened a loan production office in Federal Way, Washington. The office is a leased facility with approximately 1,000 square feet. On July 6, 2005, Mt. Rainier Bank purchased property at 33515 9^th Avenue South in Federal Way, Washington. The property is approximately 40,000 square feet. The Company is in the process of constructing a full service facility and intends to close the loan production office and relocate the staff to the full service branch upon completion. Estimated completion of the new facility is April 15, 2007.

Mt. Rainier Bank owns all of the facilities described above. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company.

On March 27, 2003, Mountain Bank Holding purchased a vacant lot located at 1409 3^rd Street along with a building located at 1445 3^rd Street, Enumclaw, Washington. The building is approximately 2,880 square feet. The mortgage department of Mt. Rainier Bank is currently leasing approximately 1,440 square feet of the building with the remainder being used as a storage facility. The vacant lot will be used for future expansion.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which we or Mt. Rainier Bank are a party or of which any of our properties are subject; nor are there material proceedings known to us to be contemplated by any governmental authority; nor are there material proceedings known to us, pending or contemplated, in which any director, officer or affiliate or any principal security holder, or any associate of any of the foregoing, is a party or has an interest adverse to us or Mt. Rainier Bank.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of the year ended December 31, 2006, no matters were submitted to the security holders through the solicitation of proxies or otherwise.

PART II

(Items 5-9)

ITEM 5.

MARKET FOR REGISTERANT’S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

No broker makes a market in Mountain Bank Holding’s common stock, and trading has not been extensive. Trades that have occurred cannot be characterized as amounting to an active market. The stock is traded by individuals on a personal basis and is not listed on any exchange or traded on the over-the-counter market. Due to the limited information available, the following price information may not accurately reflect the actual market value of the shares. The following data includes trades between individual investors. It does not include new issuances of stock, the exercise of stock options or shares issued under the Employee Stock Purchase Plan.


Period	# of Shares Traded	Price Range
2005
1^st Quarter	6,170	$	15.50 to $16.50
2^nd Quarter	8,993	$	15.00 to $17.00
3^rd Quarter	15,276	$	16.50 to $18.00
4^th Quarter	7,196	$	17.50 to $19.00

2006
1^st Quarter	5,665	$	19.00 to $20.00
2^nd Quarter	3,535	$	20.00 to $21.50
3^rd Quarter	10,400	$	21.50 to $24.00
4^th Quarter	13,901	$	24.00 to $25.00

The price information was obtained from Mt. Rainier Bank acting as transfer agent for Mountain Bank Holding.

The information contained in the following chart entitled “Stock Performance Graph” is not considered to be “soliciting material”, or “filed”, or incorporated by reference in any past or future filing by Mountain Bank Holding under the Securities and Exchange Act of 1934 or the Securities Act of 1933 unless and only to the extent that Mountain Bank Holding specifically incorporates it by reference.

Mountain Bank Holding Company

Stock Performance Graph

LOGO

As of December 31, 2006, there were 2,307,389 shares of Mountain Bank Holding Company common stock issued and outstanding.

At December 31, 2006, stock options for 155,875 shares of Mountain Bank Holding Company common stock were outstanding. See Note 10 of the audited financial statements for additional information.

Number of Equity Holders

As of January 31, 2007, there were 1,183 shareholders of record of Mountain Bank Holding’s common stock.

Stock Dividends

Dividends, when and if paid, will be subject to determination and declaration by the Board of Directors, which will take into account the financial condition of Mt. Rainier Bank and Mountain Bank Holding, results of operations, tax considerations, industry standards, economic conditions and other relevant factors. The ability of Mountain Bank Holding to pay dividends in the future will depend primarily upon the earnings of Mt. Rainier Bank and its ability to pay dividends to Mountain Bank Holding.

Payment of Dividends

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

On March 15, 2005, the Company paid a cash dividend in the amount of $.15 per share to be paid to shareholders of record as of March 15, 2005.

On March 1, 2006, the Company paid a cash dividend in the amount of $.18 per share to be paid to shareholders of record as of February 1, 2006.

On January 16, 2007, the Board of Directors approved a cash dividend in the amount of $.20 per share to be paid to shareholders of record as of February 1, 2007.

EQUITY COMPENSATION PLAN INFORMATION


	Year Ended December 31, 2006
Plan Category	Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (excluding shares reflected in Column (a))
	(a)	(b)		(c)⁽¹⁾
Equity compensation plans approved by security holders (2)	155,875	$	10.68	35,422
Equity compensation plans not approved by security holders	-0-	$	0	-0-

Total	155,875	$	10.68	35,422

1)	Includes 18,797 shares available for issuance under the company’s employee stock purchase plan as of December 31, 2006.

2)	The material terms of the equity compensation plans are described in footnote 10 to the Company’s Audited Financial Statements filed as a part of this report.

ITEM 6. SELECTED FINANCIAL DATA


	December 31,
	2006			2005			2004			2003			2002
	*(Dollars in thousands)*
Income Statement Data
Interest income	$	14,091		$	10,878		$	9,404		$	8,457		$	8,169
Interest expense	$	4,529		$	2,465		$	1,932		$	1,921		$	2,563
Net interest income	$	9,562		$	8,413		$	7,472		$	6,536		$	5,606
Provision for credit losses	$	276		$	199		$	276		$	385		$	360
Net interest income after provision	$	9,286		$	8,214		$	7,196		$	6,151		$	5,246
Non-interest income	$	1,476		$	1,559		$	1,245		$	1,615		$	1,351
Non-interest expense	$	7,585		$	6,705		$	6,398		$	6,000		$	5,156
Income before income taxes	$	3,177		$	3,068		$	2,043		$	1,766		$	1,441
Income taxes	$	1,005		$	981		$	625		$	544		$	426
Net income	$	2,172		$	2,087		$	1,418		$	1,222		$	1,015

Per Share Data
Net income—basic	$	0.94		$	0.91		$	0.64		$	0.57		$	0.48
Net income—diluted	$	0.91		$	0.88		$	0.62		$	0.55		$	0.46
Cash dividends declared	$	0.18		$	0.15		$	0.10		$	0.00		$	0.00
Book value per share	$	9.66		$	8.82		$	8.21		$	7.63		$	7.18

Balance Sheet Data
Assets	$	229,910		$	194,524		$	177,645		$	156,425		$	143,174
Loans, net	$	164,585		$	120,866		$	119,027		$	97,643		$	81,409
Securities	$	35,641		$	46,573		$	37,502		$	32,290		$	29,562
Deposits	$	204,296		$	171,813		$	157,600		$	138,775		$	127,011
Shareholders’ equity	$	22,283		$	20,299		$	18,568		$	16,604		$	15,404
Shares outstanding		2,307,389			2,302,741			2,260,968			2,176,677			2,146,813

Performance Ratios
Return on average assets		1.02	%		1.12	%		0.84	%		0.82	%		0.78	%
Return on average equity		10.32	%		10.79	%		8.09	%		7.67	%		7.14	%
Equity to assets		9.88	%		10.44	%		10.45	%		10.61	%		10.76	%
Net interest margin		4.88	%		4.90	%		4.75	%		4.70	%		4.60	%
Efficiency ratio		68.35	%		67.10	%		73.48	%		73.54	%		74.32	%
Allowance for credit losses to loans		1.11	%		1.28	%		1.14	%		1.12	%		1.04	%

Asset Quality Ratios
Net charge-offs to average loans outstanding		0.00	%		0.00	%		0.00	%		0.15	%		0.35	%
Non-performing loans to period-end loans		0.00	%		0.02	%		0.00	%		0.11	%		0.11	%
Non-performing assets to total assets		0.00	%		0.01	%		0.00	%		0.16	%		0.17	%

Capital and Liquidity Ratios
Risk-based:
Tier 1 capital		12.36	%		14.70	%		13.70	%		14.08	%		12.97	%
Total capital		13.37	%		15.81	%		14.71	%		15.02	%		13.70	%
Average loans to average deposits		82.53	%		74.43	%		73.01	%		69.52	%		64.61	%
Average shares outstanding:
Basic		2,304,347			2,288,320			2,229,061			2,155,914			2,111,819
Diluted		2,378,836			2,338,440			2,298,897			2,240,437			2,195,058

	2006			% of Change			2005			% of Change			2004
Total Assets	$	229,910			18.19	%	$	194,524			9.50	%	$	177,645

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Mountain Bank Holding focuses on establishing and maintaining long-term relationships with customers, and is committed to serving the financial service needs of the communities in its market area. The Company’s primary market area includes Pierce and South King counties. The Company attracts retail deposits from the general public and uses those deposits, together with other borrowed funds, to originate and purchase residential and commercial mortgage loans, to make consumer loans, and to provide financing for agricultural and other commercial business purposes.

Mountain Bank Holding’s basic mission is to maintain and enhance core earnings while serving its primary market area. As such, the Board of Directors has adopted a business strategy designed to (i) maintain Mountain Bank Holding’s tangible capital in excess of regulatory requirements, (ii) maintain the quality of Mountain Bank Holding’s assets, (iii) control operating expenses, (iv) maintain and, as possible, increase Mountain Bank Holding’s interest rate spread, and (v) manage Mountain Bank Holding’s exposure to changes in interest rates.

Financial Information Regarding Segment Reporting

We currently operate our business in three reportable segments, Community Banking, Mt. Rainier Mortgage and Other. Please refer to Note 22 of our consolidated financial statement for financial information.

Corporate Developments in Fiscal 2006

On March 1, 2006, Mountain Bank Holding paid a cash dividend of $.18 per share to shareholders of record on February 1, 2006. The total amount of the dividend was $414,000.

In October, 2006, Mt. Rainier Bank began construction of a full service facility on the property located at 33515 9^th Avenue South in Federal Way, Washington.

The purpose of this discussion and analysis is to provide the reader with a concise description of the financial condition and changes therein and results of operations for Mountain Bank Holding and Mt. Rainier Bank for the years ended December 31, 2006, 2005 and 2004.

This discussion and analysis is intended to complement the audited consolidated financial statements and footnotes and the supplemental financial data and charts appearing elsewhere in this report, and should be read in conjunction with them. This discussion and analysis will focus on the following major areas: Financial Condition, Operating Results, Capital Requirements, Liquidity Resources, Asset Liability Management and Asset Quality.

Forward Looking Statement Disclosure

In addition to historical information, this report contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). This statement is included for the express purpose of availing the Company of the protections of the safe harbor provisions of the PSLRA. The forward-looking statements contained in this report are subject to factors, risks, and uncertainties that may cause actual results to differ materially from those projected. Important factors that might cause such a material difference include, but are not limited to, those discussed in this section of the report. In addition, the following items are among the factors that could cause actual results to differ materially from the forward looking statements in this report: general economic conditions, including their impact on capital expenditures; business

conditions in the banking industry; the regulatory environment; new legislation; vendor quality and efficiency; employee retention factors; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with community, regional, and national financial institutions; fluctuating interest rate environments; and similar matters. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of the statement. Mountain Bank Holding undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in this and other documents we file from time to time with the Securities and Exchange Commission.

Critical Accounting Policy

Mountain Bank Holding maintains a reserve to absorb probable loan losses inherent in the portfolio. The reserve is maintained at a level Mountain Bank Holding considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectibility and historical loss experience of loans. Credit losses are charged and recoveries are credited to the reserve. Provisions for credit losses are based on Mountain Bank Holding’s review of the historical credit loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses. In determining the appropriate level of reserves, Mountain Bank Holding estimates losses using a range derived from “low” and “high” estimates. Mountain Bank Holding’s methodology for assessing the appropriate reserve level consists of several key elements. Mountain Bank Holding’s strategy for credit risk management includes a combination of conservative exposure limits significantly below legal lending limits and conservative underwriting, documentation and collections standards. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.

Loans subject to individual evaluation generally consist of commercial, commercial real estate and agricultural loans mainly because of their size and complexity. These loans are analyzed and assigned to risk categories according to Mountain Bank Holding’s internal risk rating system. Loans with a greater risk of loss are identified and placed on the “watch list” for regular management review. Those loans judged to reflect the highest risk profiles are evaluated individually for the impairment of repayment potential and collateral adequacy, and in conjunction with current economic conditions and loss experience, allowances are estimated. The review of individual loans includes those loans that are impaired as provided in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Any reserves for impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or fair value of the underlying collateral.

Other loans identified on Mountain Bank Holding’s “watch list” but not judged to be individually impaired from a repayment or collateral adequacy perspective are aggregated and reserves are recorded using models that track historical loan losses by loan type. In the case of other more homogeneous loan portfolios, including auto loans, residential mortgages, home equity loans and credit card loans, the determination of the allocated reserve is computed on a pooled basis. For these loan pools, historical loss ratios by loan type, current loss and past due experience, and management’s judgment of recent and forecasted economic effects on portfolio performance are factors utilized to determine the appropriate reserve amounts. Also, examination results from bank regulatory agencies and Mountain Bank Holding’s internal credit examinations are considered.

An unallocated reserve is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or pools of loans. Reserves on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

Mountain Bank Holding’s primary market areas for lending are south King County and Pierce County. When evaluating the adequacy of reserves, consideration is given to this regional geographic concentration and the closely associated effect changing economic conditions have on the Company’s customers.

Mountain Bank Holding has not substantively changed any aspect to its overall approach in the determination of the reserve for loan and lease losses. There have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period reserve for loan losses.

Comparison of Financial Condition at December 31, 2006, 2005 and 2004


	December 31,
	2006			Amount of Change			Percent of Change		2005			Amount of Change			Percent of Change		2004
	*(Dollars in thousands)*
Cash and deposits in other banks	$	9,374		$	2,000		27.12	%	$	7,374		$	(1,175	)	-13.74	%	$	8,549
Fed funds sold		5,292			1,645		45.11	%		3,647		$	3,647		100.00	%		—
Investments:
US Treasury		2,968			(1,008	)	-25.35	%		3,976			889		28.80	%		3,087
U.S. Government and agency securities		18,246			(7,234	)	-28.39	%		25,480			8,738		52.19	%		16,742
Mortgage backed securities		11,095			(3,142	)	-22.07	%		14,237			(792	)	-5.27	%		15,029
Corporate, municipal and equity securities		3,332			452		15.69	%		2,880			236		8.93	%		2,644
Loans:
Loans held for sale		356			(1,434	)	-80.11	%		1,790			1,261		238.37	%		529
Commercial and agriculture		29,591			5,566		23.17	%		24,025			(2,893	)	-10.75	%		26,918
Real estate		132,939			38,770		41.17	%		94,169			6,092		6.92	%		88,077
Consumer		4,262			(113	)	-2.58	%		4,375			(1,033	)	-19.10	%		5,408
Net deferred loan fees		(361	)		(227	)	169.40	%		(134	)		(134	)	100.00	%		—
Provision for credit losses		(1,846	)		(277	)	17.65	%		(1,569	)		(193	)	14.03	%		(1,376	)
Premises and equipment		7,088			(487	)	-6.43	%		7,575			1,381		22.30	%		6,194
Other assets		7,574			875		13.06	%		6,699			855		14.63	%		5,844

Total Assets	$	229,910		$	35,386		18.19	%	$	194,524		$	16,879		9.50	%	$	177,645

Deposits:
Non-interest bearing deposits	$	33,926		$	628		1.89	%	$	33,298		$	4,314		14.88	%	$	28,984
Interest bearing deposits		170,370			31,855		23.00	%		138,515			9,899		7.70	%		128,616
Other liabilities		3,331			919		38.10	%		2,412			936		63.41	%		1,476
Shareholders Equity		22,283			1,984		9.77	%		20,299			1,730		9.32	%		18,569

Total liabilities and shareholders equity	$	229,910		$	35,386		18.19	%	$	194,524		$	16,879		9.50	%	$	177,645

Total Assets: The increase in total assets in 2006 was attributed to an increase in cash, deposits in banks and federal funds sold of $3,645,000 and an increase in net loans receivable of $42,285,000, which was funded with maturing securities and an increase in total deposits of $32,483,000. The increase in total assets in 2005 was due primarily to an increase in securities available for sale of $9,071,000, an increase in cash, deposits in banks and federal funds sold of $2,472,000 and an increase in net loans receivable of $3,100,000, which was funded primarily by an increase in total deposits of $14,213,000 from current and new banking customers.

Cash and deposits in other banks: The increase of $2,000,000 in 2006 was attributed to maturing securities and an increase in total deposits. The increase in 2005 of $2,472,000 was funded by an increase in total deposits.

Investment Portfolio: The decrease in the investment portfolio in 2006 was attributed to maturities that were used to fund loan growth which provides a higher yield. In 2005 securities available for sale increased by $9,071,000. $8,738,000 of the increase was invested in US government sponsored agencies. Corporate maturities were redeployed into municipal securities.

Loans Receivable and Loans Held For Sale, net of allowance for credit losses: In 2006, loans increased $42,285,000. Though loan totals in all major lending areas improved, growth was primarily attributed to increases in demand for commercial and other real estate loans along with commercial business loans. Loan demand and growth rebounded in 2006 and was especially robust for the bank’s Maple Valley, Federal Way, Auburn and Enumclaw branches.

In 2005, loans increased by $3,427,000. The increase in loans was primarily due to growth in residential, construction and land development and commercial loans. The Bank’s Maple Valley, Sumner, Federal Way and Buckley branches contributed the largest increases. Commercial real estate loans and residential construction loans dominated growth. Overall, loan volume diminished in 2005 as demand for refinancing and purchasing of commercial income properties declined.

Deposits: In 2006, interest bearing deposits increased $31,855,000 and non-interest bearing deposits increased $628,000. The Federal Reserve rate increases in 2006 moved deposit rates upward which helped spur interest bearing deposit growth. The bank promoted certificate of deposits programs throughout the year in an effort to increase deposits. As illustrated in the above table, interest bearing deposits increased $9,899,000 and non-interest bearing increased $4,314,000 in 2005. The Buckley location increased deposits by $3,000,000 and the Black Diamond branch increased by approximately $5,800,000. The Bank opened over 3,000 accounts each year, from existing and new customers, which contributed to the deposit growth.

Shareholders’ Equity: Total shareholders equity of $22,283,000 increased $1,984,000. The increase was attributed to net income of $2,172,000, an increase in other comprehensive income of $115,000, the exercise of stock options and the purchase of stock under the employee stock purchase plan totaling $51,000, SFAS 123(R) stock option compensation expense offset of $60,000 and offset by the dividend payment of $414,000. In 2005, total shareholders equity increased by $1,730,000 to a total of $20,299,000. The increase reflected net income of $2,087,000 and the exercise of stock options, offset by the payment of dividends and a decrease in other comprehensive income.

Comparison of Operating Results for Years Ended December 31, 2006, 2005 and 2004


	December 31,
	2006		Amount of Change			Percent of Change		2005		Amount of Change			Percent of Change		2004
	*(Dollars in thousands)*
Net interest income	$	9,562	$	1,149		13.66	%	$	8,413	$	941		12.59	%	$	7,472
Provision for credit losses		276		77		38.69	%		199		(77	)	-27.90	%		276
Net interest income after provision for credit losses		9,286		1,072		13.05	%		8,214		1,018		14.15	%		7,196

Non-interest income:
Service charges		492		(70	)	-12.46	%		562		(19	)	-3.27	%		581
Gains on mortgage loans sold		412		(73	)	-15.05	%		485		234		93.23	%		251
Gains on sales of securities available for sale, net		—		—		0.00	%		—		(14	)	-100.00	%		14
Gains on sales of premises and equipment		137		137		100.00	%		—		—		0.00	%		—
Income on bank owned life insurance		164		13		8.61	%		151		(2	)	-1.31	%		153
Other		271		(90	)	-24.93	%		361		115		46.75	%		246

Non-interest expense:
Salaries and employee benefits		4,839		687		16.55	%		4,152		122		3.03	%		4,030
Occupancy and equipment expense		1,027		130		14.49	%		897		(4	)	-0.44	%		901
Other expense		1,719		63		3.80	%		1,656		189		12.88	%		1,467

Income before taxes		3,177		109		3.55	%		3,068		1,025		50.17	%		2,043

Income taxes		1,005		24		2.45	%		981		356		56.96	%		625

Net income	$	2,172	$	85		4.07	%	$	2,087	$	669		47.18	%	$	1,418

Net Income: Net income for 2006 was $2,172,000 or $.91 per diluted share ($.94 per basic share). This reflected an increase of $85,000 or 4.07%. The increase was attributed to net interest income offset by non-interest expense. Net income for 2005 was $2,087,000 or $.88 per diluted share ($.91 per basic share) compared to $1,418,000 or $.62 per diluted share ($.64 per basic share) in 2004. This reflected an increase of $47.2% over 2004. The higher income was attributed to the increase in the bank’s net interest margin from 4.8% in 2004 to 4.9% in 2005, and an increase in gains on mortgage loans sold.

Net Interest Income: Net interest income increased $1,149,000 primarily due to an increase in the yield on earning assets by .9%. Net interest margin decreased slightly by .02%. Loans increased at a higher rate than deposits increasing the loan to deposit ratio from 72% at year end 2005 to 82% at year end 2006. In 2005 average-earning assets increased to $171,636,000 from $157,462,000, which represented a 9.00% increase and the yield on average earning assets increased from 6.0% to 6.3% or 30 basis points. Based on the bank’s asset liability model, we are asset sensitive, which means that our assets re-price faster than our liabilities. In periods of rising interest rates, such as we have experienced in 2005 our net interest margin increases until we re-price our liabilities. Average interest bearing liabilities increased only $8,054,000 or 6.51% with the yield on interest bearing liabilities increasing from 1.6% to 1.9%. Mt. Rainier Bank’s net interest margin increased from 4.8% in 2004 to 4.9% in 2005.

Provision for Credit Losses: For the years ended December 31, 2006, 2005 and 2004, net charge-offs/(recoveries) were $(1,000), $6,000 and $1,000 respectively. The provision for credit losses is determined by management based on the factors and processes described above under “BUSINESS—Credit Risk Management and Allowance for Credit Losses.” The total allowance for credit losses increased $277,000 to $1,846,000 at

December 31, 2006 from $1,569,000 at December 31, 2005. The increased level of allowance for credit losses was primarily due to the growth in the loan portfolio and changes in the local economic expectations.

Non-Interest Income: In 2006, non interest income decreased $83,000. Service charges were down by $70,000 and gains on mortgage loans sold decreased $73,000. The rise in interest rates on mortgage loans slowed the refinance demand which accounted for a substantial portion of the loans in 2005. Non-interest income for 2005 increased by $314,000 to $1,559,000 from $1,245,000. The gain on mortgage loans sold accounted for $234,000 of the increase. In 2005, Mt. Rainier Bank sold the credit card portfolio for a gain of $66,000 that also accounted for a portion of the increase.

Non-Interest Expense: In 2006, non interest expense increased $880,000. Salaries and employee benefits accounted for $687,000 of the increase. The increase was attributed primarily to an increase of two full time equivalent positions, an increase in the incentive bonus plans of $204,000, an increase in benefit plans of $130,000, a decrease in deferred employee costs of $84,000 and the addition of SFAS 123 (R) stock option expense totaling $60,000. Occupancy and equipment expense increased by $130,000 related to the relocation of the Auburn branch to a larger facility. Other expense increased only slightly at $63,000. In 2005, salary and benefit increases were primarily due to the addition of three full time equivalent staff positions, an increase in commissions on mortgage loans and an increase in employee benefit costs, offset by the deferral of compensation expense with regards to FAS 91.


	2006				2005				2004
	Amount		% of Average Assets		Amount		% of Average Assets		Amount		% of Average Assets
Salaries and employee benefits	$	4,839	2.27	%	$	4,152	2.24	%	$	4,030	2.39	%
Occupancy expenses		458	0.22	%		414	0.22	%		373	0.22	%
Furniture and equipment		569	0.27	%		483	0.26	%		528	0.31	%
Advertising		45	0.02	%		55	0.03	%		42	0.02	%
Professional fees		108	0.05	%		118	0.06	%		35	0.02	%
Business and occupation taxes		166	0.08	%		147	0.08	%		122	0.07	%
Customer check expense		32	0.02	%		32	0.02	%		37	0.02	%
Data processing expense		424	0.20	%		434	0.23	%		416	0.25	%
Director fees		131	0.06	%		125	0.07	%		119	0.07	%
FDIC assessment		21	0.01	%		21	0.01	%		21	0.01	%
OCC assessment		52	0.02	%		64	0.03	%		58	0.03	%
Office and stationary expense		119	0.06	%		110	0.06	%		90	0.05	%
Postage		43	0.02	%		41	0.02	%		46	0.03	%
Telephone		105	0.05	%		101	0.05	%		92	0.05	%
Other		473	0.22	%		408	0.22	%		389	0.23	%

Total	$	7,585	3.56	%	$	6,705	3.61	%	$	6,398	3.79	%

Provision for Income Taxes: The provision for income taxes increased in 2006 from 2005, primarily as a result of increased taxable income. The effective tax rate was 31.6% for 2006, compared to 31.98% in 2005 and 30.59% in 2004. Income from the Company’s life insurance policies is the primary reason the effective tax rate is lower than the statutory rate.

Capital Adequacy

Capital adequacy refers to the level of capital required to sustain asset growth over time and to absorb losses. Our objective is to maintain a level of capitalization that is sufficient to take advantage of profitable growth opportunities while meeting regulatory requirements. This is achieved by improving profitability through effectively allocating resources to more profitable businesses, improving asset quality, strengthening service

quality, and streamlining costs. The primary measures used by management to monitor the results of these efforts are the ratios of average equity to average assets, average tangible equity to average tangible assets, and average equity to net loans.

The Federal Reserve Board has adopted capital guidelines governing the activities of bank holding companies. These guidelines require the maintenance of an amount of capital based on risk-adjusted assets so that categories of assets with potentially higher credit risk will require more capital backing than assets with lower risk. In addition, banks and bank holding companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as loan commitments.

The capital guidelines classify capital into two tiers, referred to as Tier I and Tier II. Under risk-based capital requirements, total capital consists of Tier I capital which is generally common shareholders’ equity less goodwill and Tier II capital which is primarily a portion of the allowance for credit losses and certain qualifying debt instruments. In determining risk-based capital requirements, assets are assigned risk-weights of 0% to 100%, depending primarily on the regulatory assigned levels of credit risk associated with such assets. Off-balance sheet items are considered in the calculation of risk-adjusted assets through conversion factors established by the regulators. The framework for calculating risk-based capital requires banks and bank holding companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based capital. In 1990 regulators added a leveraged computation to the capital requirements, comparing Tier I capital to total average assets less goodwill.

At December 31, 2006, Mt. Rainier Bank exceeded the regulatory minimums and qualified as a well-capitalized institution under the regulations.

The Federal Deposit Insurance Corporation Improvement Act of 1992 established five capital categories for banks and bank holding companies. The bank regulators adopted regulations defining these five capital categories in September 1992. Under these new regulations each bank is classified into one of the five categories based on its level of risk-based capital as measured by Tier I capital, total risk-based capital, and Tier I leverage ratios and its supervisory ratings.

Mountain Bank Holding’s equity was $22,283,000 at year-end 2006 compared to $20,299,000 at year-end 2005. The increase of $1,984,000 was attributed to net income of $2,172,000, the exercise of stock options and the purchase of stock through the employee stock purchase plan totaling $51,000, SFAS 123(R) stock option compensation expense offset of $60,000 and an increase in other comprehensive income of $115,000, less the dividend payment of $414,000. Mountain Bank Holding’s equity capital was $20,299,000 at year-end 2005 compared to $18,568,000 at year-end 2004. The increase of $1,731,000 was attributed to the exercise of stock options, net income of $2,087,000, less the payment of cash dividends in the amount of $341,000 and a decrease in other comprehensive income.

At December 31, 2006, Mountain Bank Holding’s Tier 1 Capital to Average Assets was 10.62%, Tier 1 Capital to Risk Weighted Assets was 12.36% and Total Capital to Risk Weighted Assets was 13.37%. See Note 14 to Mountain Bank Holding’s Consolidated Financial Statements contained in this document for a table that shows the requirements for being considered “well capitalized” under such guidelines.

At December 31, 2005, Mountain Bank Holding’s Tier 1 Capital to Average Assets was 10.71%, Tier 1 Capital to Risk Weighted Assets was 14.70% and Total Capital to Risk Weighted Assets was 15.81%. See Note 14 to Mountain Bank Holding’s Consolidated Financial Statements contained in this document for a table that shows the requirements for being considered “well capitalized” under such guidelines.

It has been the practice of Mountain Bank Holding to fund our growth and expansion through periodic stock offerings. Since its inception in 1993, we have had seven stock offerings. The most recent offering commenced in April 2004, pursuant to a prospectus dated April 1, 2004, in which we offered and sold 60,000 shares at $15.00 per share.

Liquidity Resources

Liquidity. The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators. Mt. Rainier Bank’s liquidity, represented by cash and cash due from banks, federal funds sold and interest-bearing deposits in other banks, is a result of its operating, investing and financing activities. In order to ensure funds are available at all times, Mt. Rainier Bank devotes resources to projecting on a monthly basis the amount of funds that will be required and maintains relationships with a diversified customer base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets that are generally matched to correspond to the maturity of liabilities. Mt Rainier Bank has borrowing lines at three correspondent banks in the aggregate amount of $20,000,000 and a borrowing line at Federal Home Loan Bank of Seattle in the approximate amount of $55,870,000 for a total available of $75,870,000 for short term funding.

Although Mt. Rainier Bank has no formal liquidity policy, in the opinion of management, its liquidity levels are considered adequate. Neither Mountain Bank Holding nor Mt. Rainier Bank is subject to any specific liquidity requirements imposed by regulatory orders. Mt. Rainier Bank is subject to general FDIC guidelines that do not require a minimum level of liquidity. Management believes its liquidity ratios meet or exceed these guidelines. Management does not know of any trends or demands that are reasonably likely to result in liquidity increasing or decreasing in any material manner.

The Bank’s primary investing activity is the origination of real estate, commercial and consumer loans. During the years ended December 31, 2006, 2005 and 2004, the Bank originated $132 million, $88 million and $104.9 million in loans, respectively. At December 31, 2006 the Bank had outstanding loan commitments of $29 million and outstanding letters of credit of $317 thousand. The Bank anticipates that it will have sufficient funds available to meet current loan commitments.

The volume of mortgage loans sold also impacts the Bank’s liquidity. During the years ended December 31, 2006, 2005 and 2004, the Bank sold $36.2 million, $44.4 million, and $22.4 million of residential mortgage loans. The fluctuation in loan sales is due in large part to the fluctuation of mortgage interest rates.

The Bank’s liquidity has been impacted by increases in deposit levels. During the years ended December 31, 2006, 2005 and 2004 deposits increased by $32.5 million, $14.2 million and $18.8 million.

Investment securities and interest bearing deposits, which include Federal Funds sold, decreased to $43.6 million at December 31, 2006 from $53.8 million at December 31, 2005.

Impact of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented in this Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time and due to inflation. The impact of inflation on operations of Mountain Bank Holding is reflected in increased operating costs. Unlike most industrial companies, virtually all of Mountain Bank Holding’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.

Asset and Liability Management

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset

or liability is said to be interest rate sensitive within a specific time period if it will mature or re-price within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or re-pricing within a specific time period and the amount of interest-bearing liabilities maturing or re-pricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap, as we have recently experienced, would tend to adversely affect net interest income, at least in the short term.

The asset/liability committee, which consists of Mt. Rainier Bank’s Chief Executive Officer, the Senior Vice President/Cashier, the Credit Administrator and other officers, is charged with monitoring the liquidity and funds position of Mt. Rainier Bank. The Committee regularly reviews:

•

Information on current economic conditions and the outlook for interest rates;

•

The asset/liability position of Mt. Rainier Bank;

•

Mt. Rainier Bank’s current and projected liquidity position;

•

Maturity/average life of the portfolio as a whole;

•

Composition of the portfolio; and

•

The tax position of the institution

Mt. Rainier Bank uses the “ALX” asset liability management model, a proprietary system. At December 31, 2006, we had a negative cumulative re-pricing gap within one year of approximately $75,177,000, or approximately 38.37% of total average earning assets. This negative re-pricing gap indicates that our future earnings may be materially adversely impacted by a rise in market interest rates, and such impact would primarily be felt in the twelve-month period after such a rise in rates.

The following table represents interest sensitivity profiles for Mt. Rainier Bank as of December 31, 2006. The table represents a static point in time and does not consider other variables, such as changing spread relationships or interest rate levels. “Interest sensitive gap” is the difference between total earning assets and total interest-bearing liabilities re-pricing in any given period.


	Total Within One Year			One Year To Five Years			Over Five Years
	(Dollars in thousands)
Rate Sensitive Assets:

Loans	$	60,463		$	90,570		$	16,115
Investments (amortized cost)		16,905			16,141			2,535
Interest Bearing Deposits and Federal Funds Sold		7,126			—			—

TOTAL	$	84,494		$	106,711		$	18,650

Rate Sensitive Liabilities:

Savings, Now and Interest Checking		72,897
Time Deposits		86,773			10,700			—

TOTAL	$	159,670		$	10,700		$	0

Interest Sensitive Gap	$	(75,176	)	$	96,011		$	18,650

Cumulative Gap	$	(75,176	)	$	20,835		$	39,485
Cumulative Gap as a % of Average Earning Assets		-38.37	%		10.63	%		20.15	%

Currently, Mt. Rainier Bank’s interest sensitivity gap is negative within one year. Assuming that general market interest rate changes affected the re-pricing of assets and liabilities in equal magnitudes, this indicates that the effect of rising interest rates on Mountain Bank Holding would be a decrease in the net interest margin, whereas falling interest rates would cause a corresponding increase in margin. The bank’s asset liability model assumes assets and liabilities re-price at different times, therefore the net interest margin change could vary from these scenarios as evidenced in the chart below.

Based on the “ALX” asset liability model as of December 31, 2006, Mt. Rainier Bank’s sensitivity to gains or losses in future earnings due to hypothetical increases or decreases in the Fed Funds rate are as follows:


Increase in Interest Rates	Net Interest Margin Change	Decrease in Interest Rates	Net Interest Margin Change
+1.00%	+$140,000	-1.00%	-$454,000
+2.00%	+$279,000	-2.00%	-$227,000

Rate increases will generally increase the Company’s equity, while rate decreases will generally reduce equity.

Asset Quality

Non-performing assets include accruing loans past due ninety days or more, non-accrual loans, loans which have been restructured to provide a reduction or deferral of interest or principal for reasons related to the debtors financial difficulties, potential problem loans and loan concentrations, and foreclosed real estate.

Generally the accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due or when they are past due 90 days as to either principal or interest, unless they are well secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued interest is reversed against current income. If management determines that the ultimate collectibility of principal is in doubt, cash receipts on non-accrual loans are applied to reduce the principal balance on a cash-basis method, until the loans qualify for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following table summarizes the Bank’s non-accrual, past due, foreclosed real estate and restructured assets for the years ended December 31:


	2006	2005
	*(in thousands)*
Loans accounted for on a Non-accrual basis
Commercial	-0-		-0-
Consumer	-0-	$	20
Accruing loans which are past due 90 days or more
Commercial	-0-		-0-
Real Estate	-0-		-0-
Consumer	-0-		-0-
Foreclosed real estate	-0-		-0-

Non-accrual loans as a percentage of net loans before the allowance for credit losses was 0% at year-end 2006 and .2% at year end 2005. Non performing loans as a percentage of the allowance for credit losses was 0% at year-end 2006 and 1.3% at year-end 2005, which is a measure of Mt. Rainier Bank’s ability to cover problem assets with existing reserves.

Mountain Bank Holding had no material restructured loans in 2006 or 2005. The asset quality of Mountain Bank Holding continues to be good, which is a result of good underwriting standards coupled with aggressive collection efforts and a stable local economy.

There are certain amounts of interest that have not been accrued and certain amounts that have been collected on the above loans and included in income, which are indicated in the table below:


	2006		2005		2004
	*(in thousands)*
Total interest income which would have been recorded during the period under original terms of loans on non-accrual	$	3	$	2	$	1
Interest income included in net income for the period	$	0	$	0	$	1

There were no commitments for additional funds related to loans above.

The provision for losses on loans was $276,000 for 2006, which is an increase of $77,000 over the provision of $199,000 for 2005. The provision for credit losses is based on ongoing, quarterly analyses of the loan portfolio as well as general economic conditions, historic loan loss experience and loan mix.

IMPACT OF NEW ACCOUNTING STANDARDS

Statements of Financial Accounting Standards

SFAS No. 123, “Share-Based Payment (Revised 2004).” SFAS 123R establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods or services, or (ii) incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is generally the date of the grant. The Corporation adopted the provisions of SFAS 123R on January 1, 2006. Details related to the adoption of SFAS 123R and the impact to the Corporation’s financial statements are more fully discussed in Note 10—Stock Option Plans.

SFAS No. 154, “Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. Previously, most changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. SFAS 154 carries forward the guidance in APB Opinion 20 “Accounting Changes,” requiring justification of a change in accounting principle on the basis of preferability. SFAS 154 also carries forward without change the guidance contained in APB Opinion 20, for reporting the correction of an error in previously issued financial statements and for a change in an accounting estimate. The adoption of SFAS 154 on January 1, 2006 did not significantly impact the Corporation’s financial statements.

SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” SFAS 155 amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 (i) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (ii) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133, (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (v) amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for the Corporation on January 1, 2007 and is not expected to have a significant impact on the Corporation’s financial statements.

SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” SFAS 156 amends SFAS 140. “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125,” by requiring, in certain situations, an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. All separately recognized servicing assets and servicing liabilities are required to be initially measured at fair value. Subsequent measurement methods include the amortization method, whereby servicing assets or servicing liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss or the fair value method, whereby servicing assets or servicing liabilities are measured at fair value at each reporting date and changes in fair value are reported in earnings in the period in which they occur. If the amortization method is used, an entity must assess servicing assets or servicing liabilities for impairment or increased obligation based on the fair value at each reporting date. SFAS 156 is effective for the Corporation on January 1, 2007 and is not expected to have a significant impact on the Corporation’s financial statements.

SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the Corporation on January 1, 2008 and is not expected to have a significant impact on the Corporation’s financial statements.

SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R).” SFAS 158 requires an employer to recognize the overfunded or underfunded status of defined benefit post-retirement benefit plans as an asset or a liability in its statement of financial position. The funded status is measured as the difference between plan assets at fair value and the benefit obligation (the projected benefit obligation for pension plans or the accumulated benefit obligation for other post-retirement benefit plans). An employer is also required to measure the funded status of a plan as of the date of its year-end statement of financial position with changes in the funded status recognized through comprehensive income. SFAS 158 also requires certain disclosures regarding the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits, and the transition asset or obligation. The Company has no defined benefit plans as of December 31, 2006.

Financial Accounting Standards Board Staff Positions and Interpretations

FASB Staff Position (FSP) No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” FSP 115-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. FSP 115-1 nullifies certain provisions of Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” while retaining the disclosure requirements of EITF 03-1 which were adopted in 2003. The adoption of FSP 115-1 on January 1, 2006 did not significantly impact the Corporation’s financial statements.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109.” Interpretation 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be

recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Interpretation 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. Interpretation 48 is effective for the Corporation on January 1, 2007 and is not expected to have a significant impact on the Corporation’s financial statements.

American Institute of Certified Public Accountants Statements of Position

SOP No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP 03-3 addresses accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to loans and debt securities acquired individually, in pools or as part of a business combination and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 does not allow the excess of contractual cash flows over cash flows expected to be collected to be recognized as an adjustment of yield, loss accrual or valuation allowance, such as the allowance for possible loan losses. SOP 03-3 requires that increases in expected cash flows subsequent to the initial investment be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. In the case of loans acquired in a business combination where the loans show signs of credit deterioration, SOP 03-3 represents a significant change from prior purchase accounting practice whereby the acquiree’s allowance for loan losses was typically added to the acquirer’s allowance for loan losses. The adoption of SOP 03-3 on January 1, 2005 did not have a material impact on the Corporation’s financial statements.

SEC Staff Accounting Bulletins

Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of a Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” SAB 108 addresses how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. The effects of prior year uncorrected errors include the potential accumulation of improper amounts that may result in a material misstatement on the balance sheet or the reversal of prior period errors in the current period that result in a material misstatement of the current period income statement amounts. Adjustments to current or prior period financial statements would be required in the event that after application of various approaches for assessing materiality of a misstatement in current period financial statements and consideration of all relevant quantitative and qualitative factors, a misstatement is determined to be material. SAB 108 is applicable to all financial statements issued by the Corporation after November 15, 2006.

Mortgage Banking Activities

Mortgage loans originated and intended for sale in the secondary market are reported as loans held for sale and are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income.

Servicing rights are recognized as assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment charge or recovery is reported in a valuation allowance by charges or credits to income.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for credit losses, and any deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method.

Because some loans may not be repaid in full, an allowance for credit losses is recorded. An allowance for credit losses is a valuation allowance for probable incurred credit losses. The allowance for credit losses is increased by a provision for credit losses charged to expense and decreased by charge-offs (net of recoveries). The allowance is based on ongoing, quarterly assessments of the probable and estimable losses inherent in the loan portfolio. The Company’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and specific allowances.

The formula portion of the general credit loss allowance is established by applying a loss percentage factor to the different loan types. The allowances are provided based on Management’s continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, geographic concentrations, seasoning of the loan portfolio, specific industry conditions, and the duration of the current business cycle. The recovery of the carrying value of loans is susceptible to future market conditions beyond the Company’s control, which may result in losses or recoveries differing from those provided.

Specific allowances are established in cases where Management has identified significant conditions or circumstances related to a loan that Management believes indicate the probability that a loss has been incurred. Impaired loans consist of loans receivable that are not expected to be repaid in accordance with their contractual terms and are measured using the fair value of the collateral. Smaller balance loans are excluded from this analysis.

Interest income on loans is accrued over the term of the loans based upon the principal outstanding. The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower has the ability to make contractual interest and principal payments, in which case the loan is returned to accrual status.

Derivative Instruments

The Company regularly enters into commitments to originate and sell loans held for sale. Such commitments are considered derivative instruments under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138. These statements require the Bank to recognize all derivative instruments as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value. As of December 31, 2006 and 2005, the fair value of loan related commitments were immaterial to the stated value.

Interest Rate Lock Commitments

Commitments to originate loans (interest rate lock commitments), which primarily consist of commitments to originate fixed-rate residential mortgage loans, are recorded at fair value. Changes in the fair value of interest rate lock commitments are recognized in non-interest income on a quarterly basis. At December 31, 2006 and 2005 the fair value of the interest rate lock commitments were immaterial to the stated value.

Contractual Obligations

The following table presents, as of December 31, 2006, the Company’s significant fixed and determinable contractual obligations, within the categories described below, by payment date or contractual maturity. These contractual obligations are included in the Consolidated Balance Sheets.


Contractual Obligations	Total		Less than 1 Year		1 to 5 Years		Over 5 Years
Long-term Debt Obligations
Executive Retirement		1,838		645		1,193		—
Deferred Compensation		64						64
Total Long-term Obligation		1,902		645		1,193		64

Short Term Debt Obligations
Securities sold with agreements to repurchase		516		516

Total Contractual Obligations	$	2,418	$	1,161	$	1,193	$	64

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risk through our lending and deposit gathering activities. For a discussion of how this exposure is managed, see “Asset and Liability Management” under Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Neither the Company nor the Bank maintains a trading account for any class of financial instrument, nor do we engage in hedging activities or purchase high-risk derivative instruments. Moreover, neither the Company nor the Bank is subject to foreign currency exchange rate risk or commodity price risk.

The table below provides information about our financial instruments that are sensitive to changes in interest rates as of December 31, 2006. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. The data in this table may not be consistent with the amounts in the “Gap Analysis” table, which represents amounts by the re-pricing date or maturity date (whichever occurs sooner).


	By Expected Maturity
	Year Ended December 31,
	2007			2008			2009			2010			2011			After 2011			Total			Fair Value
	*(Dollars in thousands)*
Investment Securities
Amounts maturing:
Fixed rate	$	16,511		$	7,221		$	3,001		$	5,215		$	1,089		$	2,538		$	35,575		$	35,085
Weighted average interest rate		3.62	%		4.06	%		4.69	%		4.41	%		5.00	%		3.96	%		3.98	%
Adjustable rate							$	500											$	500		$	496
Weighted average interest rate								4.00	%											4.00	%
Totals	$	16,511		$	7,221		$	3,501		$	5,215		$	1,089		$	2,538		$	36,075		$	35,581

Loans
Amounts maturing:
Fixed rate	$	16,174		$	14,086		$	7,652		$	7,344		$	9,008		$	8,698		$	62,962		$	62,921
Weighted average interest rate		7.50	%		7.47	%		7.51	%		7.56	%		7.52	%		6.84	%		7.41	%
Adjustable rate	$	52,085		$	9,348		$	12,551		$	8,777		$	20,989		$	80		$	103,830		$	103,830
Weighted average interest rate		8.84	%		6.71	%		7.03	%		7.39	%		7.56	%		7.79	%		8.05	%
Totals	$	68,259		$	23,434		$	20,203		$	16,121		$	29,997		$	8,778		$	166,792		$	166,751

Certificates of Deposit
Amounts maturing:
Fixed rate	$	86,773		$	4,196		$	3,448		$	2,437		$	619		$	—		$	97,473		$	97,845
Weighted average interest rate		4.87	%		4.16	%		4.01	%		4.38	%		4.99	%					4.80	%

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required herein is incorporated by reference to Financial Statements following page 49 of this Form 10-K.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

In 2006, the Company approved a change in accountants. However, such change was not as a result of any disagreements with such accountants.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13(a)-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this annual report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (1) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (2) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Controls: There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the evaluation date, nor any significant deficiencies or material weaknesses in such controls requiring corrective actions. As a result, no corrective actions were taken.

ITEM 9B. OTHER INFORMATION

None

PART III

(Items 10-14)

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Information regarding “Directors and Executive Officers” of Mountain Bank Holding is incorporated by reference from Mountain Bank Holding’s 2007 Annual Proxy Statement (“Proxy Statement”) under the captions “BUSINESS OF THE MEETING”, “CORPORATE GOVERNANCE” and “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.”

Information regarding our code of ethics applicable to our principal executive officer and our principal financial officer appears under “CORPORATE GOVERNANCE” section of our Proxy Statement and is incorporated by reference. Our Code of Ethics is also filed as an Exhibit to our Report. Information regarding Mountain Bank Holding’s audit committee financial expert appears under the “INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS COMMITTEES” section of our Proxy Statement and is incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding “Executive Compensation” of Mountain Bank Holding is incorporated by reference from Mountain Bank Holding’s Proxy Statement under the captions “DIRECTOR COMPENSATION” and “EXECUTIVE COMPENSATION.”

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of Mountain Bank Holding is incorporated by reference from Mountain Bank Holding’s Proxy Statement under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.”

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information regarding Director Independence and Certain Relationships and Related Transactions of Mountain Bank Holding is incorporated by reference from Mountain Bank Holding’s Proxy Statement under the captions “CORPORATE GOVERNANCE, DIRECTOR INDEPENDENCE AND TRANSACTIONS WITH MANAGEMENT.”

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding “Principal Accountant Fees and Services” is incorporated by reference from Mountain Bank Holding’s Proxy Statement under the caption “AUDITORS-FEES PAID TO INDEPENDENT AUDITORS”.

PART IV

(Item 15)

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)

The following documents are filed as part of this report:

Audited Financial Statements

(a)(2)

Schedules: None

(a)(3)

Exhibits:


Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation of the Registrant (1)
3.2		Amended and Restated By-laws of the Registrant (2)
10.1		Mt. Rainier National Bank 1990 Employee Stock Option Plan (3)
10.2		Mt. Rainier National Bank 1990 Director Stock Option Plan (4)
10.3		Mountain Bank Holding Company 1999 Employee Stock Purchase Plan (3)
10.4		Mountain Bank Holding Company 1995 Employee Stock Option Plan (3)
10.5		Form of 1999 Employee Stock Option Agreements (6.6)
10.6		Form of Mountain Bank Holding Company 1999 Director Stock Option Plan (6.7)
10.7		Form of 1999 Director Stock Option Agreement (6.8)
10.8		Form of 2002 Executive Supplemental Compensation Agreements dated January 1, 2002, as amended on March 3, 2005 for Messrs. Moergeli and Franks and Ms. Brumley (6.8)
10.9		Split Dollar Life Insurance Agreements for Messrs. Moergeli and Franks and Ms. Brumley (6.9)
10.10		Form of Change in Control Severance Agreement for Steve Moergeli and Sheila Brumley (6.10)
10.11		Salary Continuation Agreement for Sterlin Franks (6.11)
10.12		Form of Participant Long Term Care Agreement for directors and Sterlin Franks and Sheila Brumley (6.12)
10.13		Form of Amendment to the Supplemental Compensation Agreements for Messrs. Moergeli and Franks and Ms. Brumley (7)
14.		Code of Ethics (8)
23.1		Consent of McGladrey & Pullen LLP
23.2		Consent of Stovall, Grandey and Allen LLP
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

(1)	Incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10Q-SB for the quarter ended June 30, 2000.

(2)	Incorporated by reference to exhibit 3.2 of the Registrant’s Annual Report on Form 10K-SB for the fiscal year ended December 31, 2000.

(3)	Incorporated by reference to exhibits 99.1, 99.2 and 99.3, respectively, included in the Registrant’s Registration Statement on Form S-8, Registration No. 333-61782

(4)	Incorporated by reference to exhibits included in the Registrant’s Registration Statement on Form 10-SB, Registration No. 000-28394

(5)	Incorporated by reference to exhibits 6.5, 6.6, 6.7 and 6.8, respectively, of the Registrant’s Annual Report on Form 10KSB for the fiscal year ended December 31, 1999.

(6)	Incorporated by reference to exhibits 6.8, 6.9, 6.10, 6.11 and 6.12, respectively, of the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002.

(7)	Incorporated by reference to the Form 8-K filed by the registrant on March 8, 2005

(8)	Incorporated by reference to Exhibit 12.2 of the Registrants annual report on Form 10KSB for the fiscal year-end December 31, 2003.

E-1

Contents


Report of Independent Registered Public Accounting Firm		F-2

Consolidated Financial Statements		F-4

Consolidated Balance Sheets		F-4

Consolidated Statements of Income		F-5

Consolidated Statements of Shareholders’ Equity		F-6

Consolidated Statements of Cash Flows		F-7

Notes to Consolidated Financial Statements		F-8-34

F-1

LOGO

Report of Independent Registered Public Accounting Firm

The Board of Directors

Mountain Bank Holding Company

Enumclaw, Washington

We have audited the consolidated balance sheets of Mountain Bank Holding Company and Subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mountain Bank Holding Company and Subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

/S/ MCGLADREY & PULLEN, LLP

Seattle, Washington

February 27, 2006

F-2

Report of Stovall, Grandey & Allen, L.L.P.

Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

of Mountain Bank Holding Company

Enumclaw, Washington

We have audited the accompanying consolidated balance sheet of Mountain Bank Holding Company and Subsidiary as of December 31, 2006 and the related statements of income, changes in shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements for December 31, 2005 were examined by other auditors, whose report dated February 27, 2006 expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mountain Bank Holding Company and Subsidiary as of December 31, 2006 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ STOVALL, GRANDEY & ALLEN, LLP

Fort Worth, Texas

March 16, 2007

F-3

Mountain Bank Holding Company and Subsidiary

Consolidated Financial Statements

Consolidated Balance Sheets

December 31, 2006 and 2005

(Dollars in Thousands)


	2006			2005
Assets
Cash and due from banks	$	7,540		$	4,578
Interest bearing deposits at other financial institutions		1,834			2,796
Federal funds sold		5,292			3,647
Total cash and cash equivalents		14,666			11,021

Securities available for sale		35,641			46,573
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		860			735
Loans held for sale		356			1,790

Loans		166,431			122,435
Allowance for credit losses		1,846			1,569
Net loans		164,585			120,866

Premises and equipment		7,088			7,058
Land held for sale		—			517
Accrued interest receivable		1,083			863
Bank owned life insurance		4,083			3,922
Other assets		1,548			1,179

Total assets	$	229,910		$	194,524

Liabilities
Deposits:
Demand, non-interest bearing	$	33,926		$	33,298
Savings and interest bearing demand		72,897			77,520
Time		97,473			60,995
Total deposits		204,296			171,813

Securities sold with agreements to repurchase		516			470
Accrued interest payable		573			265
Note payable		—			29
Executive retirement		1,838			1,381
Deferred compensation		64			63
Other liabilities		340			204

Total liabilities		207,627			174,225

Commitments and Contingencies		—			—

Shareholders’ Equity
Common stock (no par value); authorized 10,500,000 shares; issued and outstanding: 2006—2,307,389; 2005—2,302,741		1,153			1,151
Additional paid-in capital		11,042			10,933
Retained earnings		10,414			8,656
Accumulated other comprehensive loss		(326	)		(441	)
Total shareholders’ equity		22,283			20,299

Total liabilities and shareholders’ equity	$	229,910		$	194,524

See notes to consolidated financial statements.

F-4

Mountain Bank Holding Company and Subsidiary

Consolidated Statements of Income

Years Ended December 31, 2006, 2005 and 2004

(Dollars in Thousands, Except Per Share Amounts)


	2006		2005		2004
Interest and Dividend Income
Loans	$	12,260	$	9,309	$	8,139
Deposits in banks and federal funds sold		137		290		127
Investment income:
Taxable		1,552		1,225		1,096
Tax-exempt		111		41		8
Dividends on stock		31		13		34
Total interest and dividend income		14,091		10,878		9,404

Interest Expense
Deposits		4,013		2,458		1,929
Note payable		1		3		3
Repurchase agreements		8		4		—
Federal funds purchased and other borrowed money		507		—		—
Total interest expense		4,529		2,465		1,932

Net interest income		9,562		8,413		7,472

Provision for Credit Losses		276		199		276
Net interest income after provision for credit losses		9,286		8,214		7,196

Non-Interest Income
Service charges and other fees on deposit accounts		492		562		581
Gains on mortgage loans sold		412		485		251
Gains on sales of securities available for sale—net		—		—		14
Gains on sales of premises and equipment		137		—		—
Bank owned life insurance income		164		151		153
Other		271		361		246
Total non-interest income		1,476		1,559		1,245

Non-Interest Expenses
Salaries and employee benefits		4,839		4,152		4,030
Occupancy		458		414		373
Equipment		569		483		528
Other		1,719		1,656		1,467
Total non-interest expenses		7,585		6,705		6,398

Income before income taxes		3,177		3,068		2,043

Income Taxes		1,005		981		625

Net income	$	2,172	$	2,087	$	1,418

Earnings Per Share
Basic	$	0.94	$	0.91	$	0.64
Diluted	$	0.91	$	0.88	$	0.62

Average Shares
Basic		2,304,347		2,288,320		2,229,061
Diluted		2,378,836		2,338,440		2,298,897

See notes to consolidated financial statements.

F-5

Mountain Bank Holding Company and Subsidiary

Consolidated Statements of Shareholders’ Equity

Years Ended December 31, 2006, 2005 and 2004

(Dollars in Thousands)


	Shares of Common Stock	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2003	2,176,677	$	1,088	$	9,655	$	5,711		$	150		$	16,604

Comprehensive income:
Net income							1,418						1,418
Other comprehensive income, net of tax
Change in fair value of securities available for sale										(253	)		(253	)
Comprehensive income													1,165

Payment of cash dividend ($.10 per share)							(219	)					(219	)

Sale of common stock	60,000		30		816								846
Sale of common stock under employee stock purchase plan	1,641		1		22								23
Exercise of stock options	22,650		11		61								72
Tax benefit from exercise of stock options					78								78

Balance at December 31, 2004	2,260,968		1,130		10,632		6,910			(103	)		18,569

Comprehensive income:
Net income							2,087						2,087
Other comprehensive income, net of tax
Change in fair value of securities available for sale										(338	)		(338	)
Comprehensive income													1,749

Payment of cash dividend ($.15 per share)							(341	)					(341	)

Sale of common stock under employee stock purchase plan	1,673		1		24								25
Exercise of stock options	40,100		20		116								136
Tax benefit from exercise of stock options					161								161

Balance at December 31, 2005	2,302,741	$	1,151	$	10,933	$	8,656		$	(441	)	$	20,299

Comprehensive income:
Net income							2,172						2,172
Other comprehensive income, net of tax
Change in fair value of securities available for sale										115			115
Comprehensive income													2,287

Payment of cash dividend ($.18 per share)							(414	)					(414	)

Sale of common stock under employee stock purchase plan	1,748		1		27								28
Exercise of stock options	2,900		1		20								21
Tax benefit from exercise of stock options					2								2
Stock Option Expense					60								60

Balance at December 31, 2006	2,307,389	$	1,153	$	11,042	$	10,414		$	(326	)	$	22,283

See notes to consolidated financial statement.

F-6

Mountain Bank Holding Company and Subsidiary

Consolidated Statements of Cash Flows

Years Ended December 31, 2006, 2005 and 2004

(Dollars in Thousands)


	2006			2005			2004
Cash Flows from Operating Activities
Net Income	$	2,172		$	2,087		$	1,418
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses		276			199			276
Depreciation and amortization		520			427			534
Deferred federal income tax benefit		(479	)		(183	)		(182	)
Net amortization and accretion of bond premiums and discounts		46			178			355
Gains on sales of securities available for sale		—			—			(14	)
Stock dividends received		—			(2	)		(15	)
Gains on loans sold		(412	)		(551	)		(251	)
Gains on sales of premises and equipment		(137	)		—			—
Originations of loans held for sale		(36,185	)		(45,179	)		(23,143	)
Proceeds from sales of loans		38,031			44,918			22,685
Amortization of deferred loan origination fees		226			134			—
Stock option compensation expense		60			—			—
Gain on sale of foreclosed real estate		—			—			(18	)
Bank owned life insurance income		(164	)		(151	)		(153	)
Executive retirement and deferred compensation		458			406			379
Increase in accrued interest receivable		(220	)		(182	)		(25	)
Increase in accrued interest payable		308			85			21
Other—net		193			(160	)		483
Net cash provided by operating activities		4,693			2,026			2,350

Cash Flows from Investing Activities
Activity in securities available for sale and Federal Reserve Bank and FHLB stock
Purchases		(935	)		(21,199	)		(23,486	)
Maturities, prepayments and calls		11,869			11,440			16,523
Sales		—			—			1,000
Increase in loans made to customers, net of principal collections		(44,221	)		(2,487	)		(21,660	)
Additions to premises and equipment		(550	)		(1,808	)		(1,142	)
Proceeds from sales of premises and equipment		654			—			—
Proceeds from sale of other real estate owned		—			—			158
Purchase of bank owned life insurance		—			—			(300	)
Net cash used in investing activities		(33,183	)		(14,054	)		(28,907	)

Cash Flows from financing Activities
Net increase in deposits		32,483			14,213			18,825
Net proceeds from issuance of stock		49			161			941
Repayment of note payable		(29	)		(3	)		(2	)
Increase in securities sold with agreements to repurchase		46			470			—
Payment of dividends		(414	)		(341	)		(219	)
Net cash provided by financing activities		32,135			14,500			19,545

Net change in cash and cash equivalents		3,645			2,472			(7,012	)

Cash and Cash Equivalents
Beginning of year		11,021			8,549			15,561

End of year	$	14,666		$	11,021		$	8,549

Supplemental Disclosures of Cash Flow Information
Interest paid	$	4,221		$	2,380		$	1,908
Income taxes paid		1,440			1,095			625

Supplemental Disclosures of Non-Cash Investing and Financing Activities
Unrealized loss on securities available for sale, net of tax	$	115		$	(338	)	$	(253	)

See notes to consolidated financial statements.

F-7

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2006, 2005 and 2004

Note 1—Summary of Significant Accounting Policies

Basis of Consolidation and Operations

The consolidated financial statements include the accounts of Mountain Bank Holding Company (the Company) and its wholly owned subsidiary, Mt. Rainier National Bank (the Bank). All significant inter company transactions and balances have been eliminated. The Company is a holding company, which operates primarily through its major subsidiary, the Bank.

The Bank operates a main office and five branches, and has a customer base centered in and around southeastern King County and northeastern Pierce County, Washington. The Bank provides loan and deposit services to customers, who are predominantly small- and middle-market businesses and middle-income individuals in Western Washington. Its primary funding source is deposits from businesses and individuals in its market area. The Bank operates under a National Bank charter and provides full banking services. As a National Bank the bank is subject to regulations by the Office of the Comptroller of the Currency.

Consolidated Financial Statement Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry. The preparation of consolidated 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, as of the date of the consolidated balance sheet, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for credit losses.

Certain prior year amounts have been reclassified to conform to the 2006 presentation with no change to previously reported net income or shareholders’ equity. All dollar amounts, except per share information, are stated in thousands.

Securities Available for Sale

Securities available for sale consist of debt securities that the Bank intends to hold for an indefinite period, but not necessarily to maturity, and certain equity securities. Such securities may be sold to implement the Bank’s asset/liability management strategies 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 related deferred tax effect, are reported as a net amount in a separate component of shareholders’ equity titled “accumulated other comprehensive income (loss).” Realized gains and losses on securities available for sale, determined using the specific identification method, are included in earnings. Accretion of discounts is recognized in interest income over the period to maturity. Amortization of premiums is recognized in interest income over the period to the call date.

Management evaluates debt and equity securities for other than temporary impairment on a quarterly basis based on the securities’ current credit quality, interest rates, term to maturity, and management’s intent and ability to hold the securities until the net book value is recovered. Any other than temporary declines in value are recognized on the statements of income as loss from securities.

F-8

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

Federal Home Loan Bank and Federal Reserve Bank Stocks

The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of 1% of its outstanding home loans or 5% of advances from the FHLB. The recorded amount of FHLB stock equals its fair value because the shares can only be redeemed by the FHLB at the $100 per share par value.

As a national bank, the Bank is required to own stock in the Federal Reserve Bank (FRB) in an amount based on its capital. The recorded amount of the FRB stock equals its fair value because the shares can only be redeemed by the FRB at their par value.

Loans Held for Sale

Mortgage loans originated for sale in the foreseeable future in the secondary market are carried at the lower of aggregate cost or estimated market value. Gains and losses on sales of loans are recognized at settlement date and are determined by the difference between the sales proceeds and the carrying value of the loans. All sales are made without recourse. Net unrealized losses are recognized through a valuation allowance established by charges to income. All such loans are sold on a servicing released basis.

The Bank issues various representations and warranties associated with the sale of loans. The Bank has not experienced any significant losses during the years ended December 31, 2006, 2005 and 2004 regarding these representations and warranties.

Premises and Equipment

Premises and equipment are stated at cost less depreciation, which is computed on the straight-line method over the estimated useful lives of the assets, which range from two to five years for furniture and equipment, and thirty years for buildings and improvements. Gains or losses on dispositions are reflected in earnings. These assets are reviewed for impairment when events indicate their carrying value may not be recoverable. If management determines an impairment exists, the asset is reduced with an offsetting charge to expense.

Foreclosed Real Estate

Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are initially recorded at the lower of cost or fair value of the properties less estimated costs of disposal. Any write-down to fair value at the time of transfer to foreclosed real estate is charged to the allowance for credit losses. Properties are evaluated regularly to ensure that the recorded amounts are supported by their current fair values. Any subsequent reductions in carrying values and revenue and expense from the operations of properties are charged to non-interest income. There is no foreclosed real estate as of December 31, 2006 and 2005.

Income Taxes

Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax bases of assets and liabilities, and are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. The deferred tax provision represents the difference between the net 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 for income taxes.

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

F-9

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

Cash and Cash Equivalents

For purposes of presentation on the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption Cash and due from banks, Interest bearing deposits at other financial institutions and Federal funds sold. The Bank maintains its cash in depository institution accounts which, at times, may exceed federally insured limits. The Bank has not experienced any losses in such accounts.

Stock-Based Compensation

In 1990 and 1999, the Company adopted qualified and non-qualified stock option plans that allow for grants of stock options to certain key employees and directors. The plans authorized a total of 378,000 shares for options. For each stock option grant, the Board of Directors determines and approves option exercise prices, numbers of options granted, vesting periods and expiration dates. Cash was not used to settle any equity instruments previously granted. The Company issues shares from authorized but unissued shares upon the exercise of stock options. The Company does not currently expect to repurchase shares from any source to satisfy such obligations under its stock option plans.

On January 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004) that requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors.

SFAS No. 123(R) supersedes the Company’s previous accounting under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. As permitted by SFAS No. 123, the Company measured compensation cost for options in accordance with Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, no accounting recognition was given to these prior stock options granted at fair market value until they were exercised. Upon exercise, net proceeds, including tax benefits realized, were credited to equity.

SFAS 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of income. The Company has adopted the straight-line method for graded vested options which recognizes compensation expense for each vesting tranche over its vesting period.

F-10

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

The following table presents the pro forma effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123(R) in the prior periods.


	2005			2004
Net income, as reported	$	2,087		$	1,418
Less total stock-based compensation expense determined under fair value method for all qualifying awards, net of related tax effects		(81	)		(97	)

Pro forma net income	$	2,006		$	1,321

Earnings per share
Basic:
As reported	$	0.91		$	0.64
Pro forma		0.88			0.59
Diluted:
As reported		0.89			0.62
Pro forma		0.86			0.58

See Note 10 for the option activity for the years ended December 31, 2006, 2005 and 2004.

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the fair values of financial instruments disclosed in these financial statements.

Cash and Cash Equivalents

The carrying amounts of cash and due from banks, interest bearing deposits at other financial institutions, and federal funds sold approximate their fair values.

Securities Available for Sale

Fair value for securities is based on quoted market prices.

Federal Home Loan Bank and Federal Reserve Bank Stock

The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates their fair values.

Loans

For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of loans held for sale are based on their estimated market prices. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

F-11

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

Deposit Liabilities

The fair value of deposits with no stated maturity date is included at the amount payable on demand. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation based on interest rates currently offered on similar certificates.

Note Payable

The fair value of the note payable is estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Repurchase Agreements

The carrying amount of repurchase agreements approximate their fair values.

Accrued Interest

The carrying amounts of accrued interest approximate their fair values.

Off-Balance-Sheet Instruments

The fair value of commitments to extend credit and standby letters of credit was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the customers. Since the majority of the Bank’s off-balance-sheet instruments consist of non-fee producing, variable-rate commitments, the Bank has determined they do not have a distinguishable fair value.

Earnings Per Share

Basic earnings per share exclude dilution and are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options under the Company’s stock option plans.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes the net change in net unrealized gains and losses on securities available for sale, net of reclassification adjustment and tax effects, and is also recognized as a separate component of shareholders’ equity.

Securities Sold Under Agreements to Repurchase

Securities sold under repurchase agreements generally represent borrowings with maturities ranging from one to thirty days. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company is required to pledge collateral in amounts specified in each agreement.

F-12

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

Compensated Absences

Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. It is impracticable to estimate the amount of compensation for future absences, and accordingly, no liability has been recorded in the accompanying financial statements. The Company’s policy is to recognize the costs of compensated absences when actually paid to employees.

New Accounting Standards

Statements of Financial Accounting Standards

F-13

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. All separately recognized servicing assets and servicing liabilities are required to be initially measured at fair value. Subsequent measurement methods include the amortization method, whereby servicing assets or servicing liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss or the fair value method, whereby servicing assets or servicing liabilities are measured at fair value at each reporting date and changes in fair value are reported in earnings in the period in which they occur. If the amortization method is used, an entity must assess servicing assets or servicing liabilities for impairment or increased obligation based on the fair value at each reporting date. SFAS 156 is effective for the Corporation on January 1, 2007 and is not expected to have a significant impact on the Corporation’s financial statements.

SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R).” SFAS 158 requires an employer to recognize the overfunded or underfunded status of defined benefit post-retirement benefit plans as an asset or a liability in its statement of financial position. The funded status is measured as the difference between plan assets at fair value and the benefit obligation (the projected benefit obligation for pension plans or the accumulated benefit obligation for other post-retirement benefit plans). An employer is also required to measure the funded status of a plan as of the date of its year-end statement of financial position with changes in the funded status recognized through comprehensive income. SFAS 158 also requires certain disclosures regarding the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits, and the transition asset or obligation. The Company had no defined benefit plans as of December 31, 2006.

Financial Accounting Standards Board Staff Positions and Interpretations

F-14

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Interpretation 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. Interpretation 48 is effective for the Corporation on January 1, 2007 and is not expected to have a significant impact on the Corporation’s financial statements.

American Institute of Certified Public Accountants Statements of Position

SEC Staff Accounting Bulletins

Loans Receivable

F-15

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

Specific allowances are established in cases where Management has identified significant conditions or circumstances related to a loan that Management believes indicate the probability that a loss has been incurred. Impaired loans consist of loans receivable that are not expected to be repaid in accordance with their contractual terms and are generally measured using the fair value of the collateral.

Derivative Instruments

The Bank regularly enters into commitments to originate and sell loans held for sale. Such commitments are considered derivative instruments under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138. These statements require the Bank to recognize all derivative instruments as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value.

F-16

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

As of December 31, 2006 and 2005, the fair values of the derivatives have been determined to be insignificant.

Note 2—Restricted Assets

Federal Reserve Board regulations require maintenance of minimum reserve balances either in cash on hand or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The amounts of such balances for the years ended December 31, 2006 and 2005 were $3,122 and $1,316, respectively.

Note 3—Securities Available for Sale

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

The carrying amounts of securities and their approximated fair values are as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale

December 31, 2006
U.S. Treasury securities	$	2,985	$	—	$	17	$	2,968
U.S. Government and agency securities		18,351		—		105		18,246
Mortgage-backed securities		11,454		—		359		11,095
Obligations of states and political subdivisions		3,285		—		13		3,272
Equity securities		60		—		—		60

	$	36,135	$	—	$	494	$	35,641

December 31, 2005
U.S. Treasury securities	$	4,005	$	—	$	29	$	3,976
U.S. Government and agency securities		25,809		—		329		25,480
Mortgage-backed securities		14,533		1		297		14,237
Obligations of states and political subdivisions		2,647		—		12		2,635
Corporate securities		186		—		1		185
Equity securities		60		—		—		60

	$	47,240	$	1	$	668	$	46,573

There were no sales of investment securities in 2006 and 2005. Proceeds from sales of investment securities in 2004 were $1,000 resulting in gross gains of $14. There were no gross losses on the sales of securities in 2004.

F-17

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

The carrying amount and approximate market value of debt securities at December 31, 2006 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have a right to call or prepay obligations, with or without call or prepayment penalties.


	Amortized Cost		Fair Value
Due in one year or less	$	16,511	$	16,409
Due in one to five years		17,026		16,637
Due in five years or more		2,538		2,535

	$	36,075	$	35,581

Securities with a carrying value of $15,234 and $2,310 at December 31, 2006 and 2005, respectively, were assigned or pledged to secure public deposits, provide collateral for borrowing lines, and for other purposes as required by law.

The following tables shows the unrealized gross losses and fair value of securities in the available for sale portfolio at December 31, 2006 and 2005, by the length of time that individual securities in each category have been in a continuous loss position:


2006	Less Than 12 Months					More Than 12 Months					Total
2006	Unrealized Gross Loss			Fair Value		Unrealized Gross Loss			Fair Value		Unrealized Gross Loss			Fair Value
U.S. Treasury securities	$	(7	)	$	984	$	(10	)	$	1,984	$	(17	)	$	2,968
U.S. Government and agency securities		—			—		(105	)		18,246		(105	)		18,246
Mortgage-backed securities		(5	)		465		(354	)		10,560		(359	)		11,025
Obligations of states and political subdivisions		(1	)		596		(12	)		895		(13	)		1,491

	$	(13	)	$	2,045	$	(481	)	$	31,685	$	(494	)	$	33,730

	Less Than 12 Months					More Than 12 Months					Total
2005	Unrealized Gross Loss			Fair Value		Unrealized Gross Loss			Fair Value		Unrealized Gross Loss			Fair Value
U.S. Treasury securities	$	(1	)	$	979	$	(28	)	$	2,011	$	(29	)	$	2,990
U.S. Government and agency securities		(74	)		12,390		(255	)		13,090		(329	)		25,480
Mortgage-backed securities		(79	)		5,350		(218	)		7,939		(297	)		13,289
Obligations of states and political subdivisions		(12	)		899		—			—		(12	)		899
Corporate securities		(1	)		185		—			—		(1	)		185

	$	(167	)	$	19,803	$	(501	)	$	23,040	$	(668	)	$	42,843

At December 31, 2006, the 67 debt securities with unrealized losses have depreciated 1.53% from the company’s amortized cost basis.

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.

F-18

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

Note 4—Loans

Loans at December 31 consist of the following:


	2006			2005
Commercial and agricultural	$	29,591		$	24,025
Real estate:
Residential 1-4 family		16,949			10,234
Commercial		91,991			71,264
Construction		23,999			12,671
Consumer		4,262			4,375

Gross loans		166,792			122,569
Net deferred fees		(361	)		(134	)

Total net loans	$	166,431		$	122,435

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


	2006		2005			2004
Balance at beginning of year	$	1,569	$	1,376		$	1,101
Provision for credit losses		276		199			276

Charge-offs		0		(6	)		(19	)
Recoveries		1		0			18
Net charge-offs		1		(6	)		(1	)

Balance at end of year	$	1,846	$	1,569		$	1,376

Following is a summary of information pertaining to impaired loans:


	2006		2005		2004
December 31
Impaired loans without a valuation allowance	$	—	$	—	$	—
Impaired loans with a valuation allowance		—		20		—

Total impaired loans	$	—	$	20	$	—

Valuation allowance related to impaired loans	$	—	$	2	$	—

Years Ended December 31
Average investment in impaired loans	$	39	$	24	$	62
Interest income recognized on a cash basis on impaired loans		—		—		—

At December 31, 2006 and 2005, non-accrual loans totaled $0 and $20, respectively.

At December 31, 2006, there were no commitments to lend additional funds to borrowers whose loans have been modified. There were no loans past due over 90 days and still accruing at December 31, 2006 and 2005.

At December 31, 2006 and 2005 certain officers and directors, or companies in which they have a 10% or more beneficial interest, were indebted to the Bank in the aggregate amount of $208 and $1,666, respectively. During 2006 advances of $462 were made, and repayments totaled $1,920.

F-19

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

Note 5—Premises and Equipment

The components of premises and equipment at December 31 are as follows:


	2006		2005
Land	$	2,590	$	2,590
Buildings		4,869		4,745
Equipment, furniture and fixtures		3,352		3,208
Construction in process		351		133

		11,162		10,676
Less accumulated depreciation		4,074		3,618

Total premises and equipment	$	7,088	$	7,058

Depreciation and amortization on premises and equipment totaled $520 and $427 for 2006 and 2005, respectively.

Note 6—Deposits

The composition of deposits at December 31 is as follows:


	2006		2005
Demand deposits, non-interest bearing	$	33,926	$	33,298
NOW and money market accounts		55,764		57,866
Savings deposits		17,133		19,654
Time certificates, $100 or more		50,234		25,751
Other time certificates		47,239		35,244

Total	$	204,296	$	171,813

Scheduled maturities of certificates of deposit for future years ending December 31 are as follows:


2007	$	86,773
2008		4,196
2009		3,448
2010		2,437
2011		619

	$	97,473

Note 7—Income Taxes

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


	2006			2005			2004
Current	$	1,484		$	1,164		$	807
Deferred expense (benefit)		(479	)		(183	)		(182	)

Income taxes	$	1,005		$	981		$	625

F-20

Mountain Bank Holding Company and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

December 31, 2006, 2005 and 2004

The effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31 follows:


	2006		2005
Deferred Tax Assets
Allowance for credit losses	$	592	$	499
Deferred compensation		647		491
Accumulated depreciation		29		24
Other		1		11
Unrealized loss on securities available for sale		168		226
Total deferred tax assets		1,437		1,251

Deferred Tax Liabilities
Deferred income		149		501
Other		117		—
Total deferred tax liabilities		266		501

Net deferred tax assets	$	1,171	$	750

The following is a reconciliation between statutory and effective federal income tax rates for the years ended December 31:


	2006				2005				2004
	Amount		Percent of Pre-tax Income		Amount		Percent of Pre-tax Income		Amount		Percent of Pre-tax Income
Income tax at statutory rate	$	1,112	35	%	$	1,074	35	%	$	715	35	%
Increase (decrease) resulting from:

MOUNTAIN BANK HOLDING CO 10-K