Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
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(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
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Commission File Number 000-1177182
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High Country Financial Corporation
----------------------------------
(Exact name of bank as specified in its charter)
North Carolina 01-0731354
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
149 Jefferson Road
Boone, North Carolina 28607
--------------------- -----
(Address of principal office) (Zip code)
Bank's telephone number, including area code (828) 265-4333
--------------
Check whether the issuer (1) filed all reports required to be filed under
section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
As of August 12, 2002, there were issued and outstanding 1,416,822 shares of the
Company's common stock outstanding with a par value of $5.00 per share.
Transitional Small Business Disclosure Format (Check one) Yes [ ] No [X]
High Country Financial Corporation
Index
Part I. Financial Information
Item 1. Financial Statements Page
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 1
Consolidated Statements of Income for the six months ended June 30, 2002 and 2
2001
Consolidated Statements of Income for the three months ended June 30, 2002 and 3
2001
Consolidated Statements of Changes in Stockholders' Equity for the six months 4
ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows for the six months ended June 30, 2002 5
and 2001
Notes to the Consolidated Financial Statements 6-17
Item 2. Management's Discussion and Analysis of Financial Condition and 18-23
Results of Operations
Part II. Other Information
Item 6b. Exhibits and Reports on Form 8-K 23
Signatures 24
High Country Financial Corporation
Consolidated Balance Sheets
(Unaudited) (Audited)
June 30, December 31,
2002 2001
--------------------- ----------------------
ASSETS
Cash and due from banks $ 4,827,468 $4,827,479
Interest-bearing deposits with banks 2,000,000 4,000,000
Federal funds sold 10,666,000 6,729,000
Investment securities available for sale 11,470,870 4,059,737
Restricted equity 271,463 203,763
securities
Loans, net of allowance for loan losses of $1,474,082 in
2002 and $1,329,496 in 2001 118,775,282 111,914,137
Property and equipment, net 4,283,578 4,410,024
Foreclosed Assets, net 0 10,007
Accrued interest income 646,842 562,971
Other assets 675,432 543,535
--------- ---------
Total assets $153,616,935 $137,260,653
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits $ 12,105,347 $13,735,991
Interest bearing demand deposits 20,257,046 12,705,262
Savings 1,917,906 1,429,432
Money market accounts 24,354,193 24,972,167
Certificates of deposit, $100,000 or more 28,878,426 23,857,853
Other time deposits 46,131,823 39,512,779
---------- ----------
Total deposits 133,644,741 116,213,484
Securities sold under agreements to repurchase 2,712,733 2,006,583
Notes Payable 2,000,000 4,000,000
Accrued interest payable 148,058 143,495
Other liabilities 99,636 354,234
---------- --------
Total liabilities 138,605,168 122,717,796
----------- -----------
Stockholders' Equity:
Common stock, $5.00 par value, 20,000,000 shares
authorized; issued and outstanding 1,416,822 shares for
2002 and 2001 7,084,110 7,084,110
Surplus 7,328,934 7,328,934
Retained earnings
397,712 54,593
Accumulated comprehensive income 201,011 75,220
-------- -------
Total stockholders' equity 15,011,767 14,542,857
---------- ----------
Total liabilities and stockholders' equity $153,616,935 $137,260,653
============ ============
See Notes to Consolidated Financial Statements
1
High Country Financial Corporation
Consolidated Statements of Income
For the six months ended June 30,
(Unaudited)
2002 2001
---- ----
Interest income:
Interest and fees on loans $ 4,084,950 $ 3,531,971
Interest on securities available for sale 170,762 171,785
Federal funds sold 119,089 198,202
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Total interest income 4,374,801 3,901,958
--------- ---------
Interest expense:
Certificates of deposit, $100,000 or more 584,515 757,198
Other deposits 1,407,727 1,450,101
Other borrowings 70,994 16,573
-------- --------
Total interest expense 2,063,236 2,223,872
--------- ---------
Net interest income 2,311,565 1,678,086
Less: Provision for loan losses 224,000 153,000
------ -------
Net interest income after provision for loan losses 2,087,565 1,525,086
--------- ---------
Noninterest income:
Service charges on deposit accounts 273,269 150,617
Mortgage origination income 545,536 307,383
Brokerage commissions and fees 112,379 70,999
Other noninterest income 102,521 93,259
------- -------
Total noninterest income 1,033,705 622,258
--------- -------
Noninterest expense:
Salaries and employee benefits 1,412,138 1,093,279
Expenses of premises and fixed assets 303,862 205,634
Outside services 419,331 338,611
Other noninterest expense 459,820 492,104
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Total noninterest expense 2,595,151 2,129,628
--------- ---------
Income before income taxes 526,119 17,716
Less: Income tax provision 183,000 6,500
------- -----
Net income $ 343,119 $ 11,216
========= ========
Basic earnings per share $ .24 $ .01
====== ======
Diluted earnings per share $ .23 $ .01
====== ======
See Notes to Consolidated Financial Statements
2
High Country Financial Corporation
Consolidated Statements of Income
For the three months ended June 30,
(Unaudited)
2002 2001
---- ----
Interest income:
Interest and fees on loans $ 2,084,245 $ 1,855,798
Interest on securities available for sale 108,641 84,377
Federal funds sold 67,852 74,755
------ ------
Total interest income 2,260,738 2,014,930
--------- ---------
Interest expense:
Certificates of deposit, $100,000 or more 299,947 387,220
Other deposits 709,949 750,627
Other borrowings 35,104 7,345
---------- -----
Total interest expense 1,045,000 1,145,192
--------- ---------
Net interest income 1,215,738 869,738
Less: Provision for loan losses 128,000 72,000
--------- --------
Net interest income after provision for loan losses 1,087,738 797,738
--------- -------
Noninterest income:
Service charges on deposit accounts 141,036 88,518
Mortgage origination income 211,054 188,178
Brokerage commissions and fees 64,974 34,819
Other noninterest income 55,210 34,510
------ ------
Total noninterest income 472,274 346,025
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Noninterest expense:
Salaries and employee benefits 675,787 564,294
Expenses of premises and fixed assets 145,354 99,682
Outside services 197,774 170,678
Other noninterest expense 213,562 250,772
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Total noninterest expense 1,232,477 1,085,426
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Income before income taxes 327,535 58,337
Less: Income tax provision 108,000 6,500
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Net income $ 219,535 $ 51,837
========== =========
Basic earnings per share $ .15 $ .04
====== ======
Diluted earnings per share $ .15 $ .04
====== ======
See Notes to Consolidated Financial Statements
3
High Country Financial Corporation
Consolidated Statements of Changes in Stockholders' Equity
For the six months ended June 30,
(Unaudited)
Accumulated Total
Common Stock Retained Comprehensive Stockholders'
2002 Shares Amount Surplus Earnings Income Equity
---- ------ ------ ------- -------- ------ ------
Balance at beginning of period 1,416,822 $ 7,084,110 $ 7,328,934 $ 54,593 $ 75,220 $14,542,857
343,119 343,119
Net income
Change in unrealized gain on
securities available for sale,
net of tax effect
125,791 125,791
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of period 1,416,822 $ 7,084,110 $ 7,328,934 $ 397,712 $ 201,011 $15,011,767
=========== =========== =========== =========== =========== ===========
Accumulated Total
Common Stock Retained Comprehensive Stockholders'
2001 Shares Amount Surplus Earnings Income Equity
---- ------ ------ ------- -------- ------ ------
Balance at beginning of period 1,140,000 $ 5,700,000 $ 4,571,742 $(131,845) $ 16,725 $10,156,622
Net income 11,216 11,216
Change in unrealized gain on
securities available for sale,
net of tax effect
78,287 78,287
Shares issued
276,822 1,384,110 2,757,192 -- -- 4,141,302
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of period 1,416,822 $ 7,084,110 $ 7,328,934 $(120,629) $ 95,012 $14,387,427
=========== =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements
4
High Country Financial Corporation
Consolidated Statements of Cash Flows
For the six months ended June 30,
(Unaudited)
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 343,119 $ 11,216
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization, net of accretion on
investments securities available for sale 148,808 98,628
Provision for loan losses 224,000 153,000
Changes in other assets and liabilities:
Accrued interest income and other assets (110,567)
(205,761)
Accrued interest payable and other liabilities (250,035) (43,537)
----------- -----------
Net cash provided by (used in) operating activities 260,131 108,740
----------- -----------
Cash flows from investing activities:
Net (increase) decrease in int bearing dep with banks 2,000,000 0
Net (increase) decrease in federal funds sold (3,937,000) (1,230,000)
Loan (originations) principal repayments, net (7,085,145) (26,758,434)
Purchases of investment securities (8,173,096) (990,260)
Maturities, paydowns, and calls of securities 889,689 1,532,393
Purchase restricted equity securities (67,700) (81,300)
Capital expenditures for premises and equipment (24,297) (691,068)
----------- -----------
Net cash provided by (used in) investment activities (16,397,549) (28,218,669)
----------- -----------
Cash flows from financing activities:
Increase in deposits 17,431,257 24,866,487
Increase (decrease) in other borrowings (1,293,850) (2,873)
Proceeds from sale of common stock
0 4,141,302
----------- -----------
Net cash provided by (used in) financing activities 16,137,407 29,004,916
----------- -----------
Net increase (decrease) in cash and cash equivalents 894,987
(11)
Beginning cash and cash equivalents 4,827,479 2,429,086
Ending cash and cash equivalents $ 4,827,468 $ 3,324,073
============ ============
Supplemental cash flow disclosures:
Cash paid during period for interest $ 2,058,673 $ 2,214,625
============ ============
Cash paid during period for income taxes $ 237,541 $ 0
============ ============
5
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies
Organization
High Country Financial Corporation was incorporated under the laws of the State
of North Carolina for the purpose of becoming the bank holding company of High
Country Bank (the "Bank"). The Company was organized to acquire and hold all of
the outstanding common stock of the Bank. Articles of Share Exchange were filed
on and the Bank's reorganization to holding company form was effective as of
July 1, 2002. High Country Financial Corporation has no operations and conducts
no business of its own other than owning the Bank. The Company became the
holding company of the Bank on July 1, 2002, therefore, prior periods reflect
the balance of the single bank, High Country Bank, and its wholly-owned
subsidiary.
The Bank was organized and incorporated under the laws of the State of North
Carolina on November 13, 1998 and commenced operations on November 30, 1998. The
Bank currently serves Watauga and Ashe Counties, North Carolina and surrounding
areas through five banking offices. As a state chartered bank that is not a
member of the Federal Reserve, the Bank is subject to regulation by the State of
North Carolina Banking Commission and the Federal Deposit Insurance Corporation.
High Country Securities, Inc. was organized and incorporated under the laws of
the State of North Carolina on December 9, 1998. High Country Securities
operates as a wholly owned subsidiary of High Country Bank and provides
securities brokerage services to customers in the Bank's market area. High
Country Securities was capitalized with $25,000 and commenced operation on
February 8, 1999. Therefore these financial statements of the Company are
presented on a consolidated basis.
It is the opinion of management that all adjustments of a recurring nature which
are necessary for a fair presentation of the financial statements have been
included. The accounting and reporting policies of the Bank follow generally
accepted accounting principles and general practices within the financial
services industry. The following is a summary of the more significant policies.
Pre-opening expenses
In accordance with applicable banking regulations, the Bank charged its results
of operations prior to opening date, November 30, 1998, to surplus. Generally
accepted accounting principles require such operating results to be charged to
retained earnings. Cumulative revenues and expenses prior to opening amounted to
$78,322 and $256,580, respectively. The classification of net-operating expenses
of $178,258 in surplus as opposed to retained earnings is not material to the
Bank's total stockholders' equity.
6
High Country Financial Corporation
Notes to Consolidated Financial Statements
Business Segments
The Bank reports its activities as a single business segment. In determining the
appropriateness of segment definition, the Bank considers components of the
business about which financial information is available and regularly evaluated
relative to resource allocation and performance assessment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan and
foreclosed real estate losses, management obtains independent appraisals for
significant properties.
Substantially all of the Bank's loan portfolio consists of loans in its market
area. Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local market
conditions. The regional economy is diverse, but influenced by the tourism and
retirement segments and to an extent by the manufacturing and agricultural
segments.
While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Bank's
allowances for loan and foreclosed real estate losses. Such agencies may require
the Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examinations. Because of
these factors, it is reasonably possible that the allowances for loan and
foreclosed real estate losses may change materially in the near term.
Cash and cash equivalents
For the purpose of presentation in the statement of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption
"cash and due from banks."
7
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies,
continued
Trading Securities
The Bank does not hold securities for short-term resale and therefore does not
maintain a trading securities portfolio.
Securities held to maturity
Bonds, notes, and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates. The Bank held no held-to-maturity
securities at June 30, 2002 or December 31, 2001.
Securities available for sale
Available-for-sale securities are reported at fair value and consist of bonds,
notes, and debentures, and certain equity securities not classified as trading
or as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of stockholders'
equity. Realized gains and losses on the sale of available-for-sale securities
are determined using the specific identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity or to call dates.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below cost that are other than temporary are reflected as write-downs
of the individual securities to fair value. Related write-downs are included in
earnings as realized losses.
All securities held by the Bank at June 30, 2002 and December 31, 2001 were
classified as available-for-sale.
Loans receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
principal amount adjusted for any charge-offs, the allowance for loan losses,
and any deferred fees or costs on originated loans and unamortized premiums or
discounts on purchased loans.
8
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies,
continued
Loans receivable, continued
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using methods
that approximate the interest method.
Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired 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 cash
payments are received.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectability
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows
9
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 1. Organization and Summary
of Significant Accounting Policies, continued
Allowance for Loan Losses, continued
discounted at the loan's effective interest rate, the loan's obtainable market
price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.
Property and equipment
Bank premises, furniture and equipment, and leasehold improvements are carried
at cost, less accumulated depreciation and amortization computed principally by
the straight-line method over the following estimated useful lives:
Years
Buildings and improvements 5-40
Furniture and equipment 3-7
Foreclosed Properties
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell. Revenue
and expenses from operations and changes in the valuation allowance are included
in loss on foreclosed real estate. The anticipated average holding period for
such properties is less than 12 months.
Stock-based compensation
The Bank accounts for its stock-based compensation using the accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Bank is not required to adopt the fair value based
recognition provisions prescribed under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (issued in October
1995), but complies with the disclosure requirements set forth in the Statement,
which include disclosing pro forma net income as if the fair value based method
of accounting had been applied.
10
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies,
continued
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
Income Taxes
Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and consists of taxes currently due plus deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements 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. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Deferred income tax liability relating to unrealized appreciation (or the
deferred tax asset in the case of unrealized depreciation) on investment
securities available for sale is recorded in other liabilities (assets). Such
unrealized appreciation or depreciation is recorded as an adjustment to equity
in the financial statements and not included in income determination until
realized. Accordingly, the resulting deferred income tax liability or asset is
also recorded as an adjustment to equity.
Basic Earnings per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and dividends.
Diluted Earnings per Share
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares.
11
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies,
continued
Comprehensive income
Annual comprehensive income reflects the change in the Bank's equity during the
year arising from transactions and events other than investment by and
distributions to stockholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
stockholders' equity rather than as income or expense.
Financial instruments
Any derivative financial instruments held or issued by the Bank are held or
issued for purposes other than trading.
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
The Bank does not utilize interest-rate exchange agreements or interest-rate
futures contracts.
Note 2. Loans Receivable
The major components of loans in the balance sheet at June 30, 2002 and December
31, 2001 are as follows (in thousands):
2002 2001
---- ----
Commercial $31,475 $30,344
Real estate:
Construction and land development 43,180 41,314
Residential, 1-4 families 22,596 19,479
Residential, 5 or more families 3,810 3,734
Farmland 1,293 908
Non-farm, nonresidential 2,104 1,461
Agricultural 2,592 2,168
Consumer 13,376 13,737
Obligations of states and political subdivisions 32 58
Other 37 247
Unearned loan origination fees, net of costs (246) (207)
Less : Allowance for loan losses (1,474) (1,329)
------- -------
$118,775 $111,914
======== ========
12
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 2. Loans Receivable, continued
At June 30, 2002 and December 31, 2001 the Bank had nonaccrual loans totaling
$1,492,972 and $453,723 respectively. Foreclosed, repossessed or idled
properties amounted to $0 and $10,007 at June 30, 2002 and December 31, 2001
respectively.
Note 3. Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses for the six months
ended June 30, 2002 and 2001 is as follows:
2002 2001
---- ----
Balance, beginning of period $ 1,329,496 $ 1,005,000
Provision charged to operations 224,000 153,000
Recoveries of amounts charged off 27 0
Amounts charged off (79,441) (14,654)
-------- --------
Balance, end of period $1,474,082 $1,143,346
========== ==========
Note 4. Property and Equipment
Components of Property and Equipment
Components of property and equipment and total accumulated depreciation at June
30, 2002 and December 31, 2001 are as follows:
2002 2001
---- ----
Land and improvements $ 495,168 $ 495,168
Buildings and improvements 2,956,255 2,951,268
Furniture and equipment 1,436,393 1,417,082
------------- --------------
Property and equipment, total 4,887,816 4,863,518
Less accumulated depreciation (604,238) (453,494)
------------- --------------
Property and equipment, net of depreciation $ 4,283,578 $ 4,410,024
============= ==============
13
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 4. Property and Equipment, continued
Leases
The Bank leases its operations center, one branch facility, and the land for
another branch under operating leases that commenced during 2000. The branch
facility is leased from a related party with minimum monthly payments of $1,000.
An additional branch facility is leased under a month to month arrangement
accounted for as an operating lease at a rental of $1,500 per month. Future
minimum lease payments under non-cancelable agreements are as follows:
2002 $ 65,400
2003 42,000
2004 42,000
2005 27,000
2006 9,000
--------------
$ 185,400
==============
Rental expense was $49,450 and $41,290 for the first two quarters of 2002 and
2001, respectively.
Note 5. Stock Options
On January 12, 1999, the Bank adopted a stock option plan that reserved up to
228,000 shares for the benefit of certain of the Bank's employees and directors.
On May 15, 2001 the stockholders approved an amendment to the plan that reserves
an additional 55,000 shares for a total of 283,000 shares. Shares reserved under
the plan are 50% attributable each to employees and directors and options
granted to those groups are expected to be qualified incentive stock options and
non-qualified options, respectively. Options granted under the plan are
exercisable at no less than the fair market value of the Bank's common stock at
the date of grant, vesting according to the terms of each particular grant and
expire in no more than ten years.
Note 6. Defined Contribution Plan
The Bank maintains a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees who are 21
years of age and have completed one year of service. Participants may contribute
a percentage of compensation, subject to a maximum allowed under the Code. In
addition, the Bank may make additional contributions at the discretion of the
Board of Directors.
14
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 7. Commitments and Contingencies
Litigation
In the normal course of business the Bank may be involved in various legal
proceedings. After consultation with legal counsel, management believes that any
liability resulting from such proceedings will not be material to the financial
statements.
Financial instruments with off-balance-sheet risk
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitments do not necessarily represent
future cash requirements. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate and income-producing
commercial properties.
Standby letters of credit are conditional commitments by the Bank to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral held varies as specified
above and is required in instances that the Bank deems necessary.
15
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 7. Commitments and Contingencies, continued
Concentrations of credit risk
Substantially all of the Bank's loans, commitments to extend credit and standby
letters of credit have been granted to customers in the Bank's market area and
such customers are generally depositors of the Bank. The concentrations of
credit by type of loan are set forth in Note 2. The distribution of commitments
to extend credit approximates the distribution of loans outstanding.
The Bank's primary focus is toward consumer and smaller business transactions,
and accordingly, it does not have a significant number of credits to any single
borrower or group of related borrowers in excess of $1,000,000.
The Bank from time to time has cash and equivalents on deposit with financial
institutions which exceed federally insured limits.
Other commitments
The Bank has entered into employment agreements with certain of its key officers
covering duties, salary, benefits, provisions for termination and Bank
obligations in the event of merger or acquisition.
Note 8. Regulatory Restrictions
Dividends
The Bank, as a North Carolina banking corporation, may pay dividends only out of
undivided profits (retained earnings) as determined pursuant to North Carolina
General Statutes Section 53-87. However, regulatory authorities may limit
payment of dividends by any bank when it is determined that such a limitation is
in the public interest and is necessary to ensure financial soundness of the
Bank. Additionally, the North Carolina Banking Commission and the Federal
Deposit Insurance Corporation explicitly prohibit dividends for the first three
years of operations of new banks unless special exceptions are made.
16
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 8. Regulatory Restrictions, continued
Capital requirements
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets, as all
those terms are defined in the regulations. Management believes, as of June 30,
2002, that the Bank meets and exceeds all capital adequacy requirements to which
it is subject.
Note 9. Transactions with Related Parties
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.
The Bank also leases a branch facility from a related party. See Note 4 for more
information.
Note 10. Subsequent Events
On July 1, 2002, the Bank was acquired by High Country Financial Corporation
(the Company) which was formed by the Bank on February 18, 2002, for the purpose
of becoming the Bank's parent holding Company. Each outstanding share of the
Bank's common stock was exchanged for one share of the Company's common stock
with the Bank becoming a wholly-owned subsidiary of the Company. The Company's
primary purpose is to serve as the parent of the Bank. This transaction was
accounted for in a manner similar to a pooling-of-interests whereby the
historical book values of the Bank's accounts were combined with the Company's
accounts on the date of the merger.
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Explanatory Note
High Country Financial Corporation became the holding company of High
Country Bank on July 1, 2002. On August 14, 2002, the Bank timely filed
a quarterly report on Form 10-QSB for the quarter ended June 30, 2002
with the Federal Deposit Insurance Corporation ("FDIC") pursuant to
Section 13 of the Securities Exchange Act of 1934 and Section 335.211
of the Federal Deposit Insurance Corporation's rules and regulations.
The Company has since been notified by the FDIC that a Form 10-QSB
should have been filed with the Securities and Exchange Commission
rather than the FDIC. Due to the fact that the holding company
reorganization did not become effective until after the quarter ended
June 30, 2002, the Company mistakenly thought that the quarterly report
for that quarter needed to be filed with the Bank's primary federal
regulator. This quarterly report on Form 10-QSB is being filed with the
SEC to comply with the Company's reporting obligations under the
requirements of Section 13 of the Securities Exchange Act of 1934.
Overview
The Bank earned $343,119 or $0.24 basic net income per share for the
six months ended June 30, 2002. Total interest income amounted to
$4,374,801 while interest expense of $2,063,236 resulted in net
interest income of $2,311,565 for the year to date period. Provisions
for loan losses charged to operations were $224,000 for the six months
ending June 30, 2002. Noninterest income and expenses amounted to
$1,033,705 and $2,595,151, respectively for the period.
Total assets at June 30, 2002 were $153,616,935, an increase of
$16,356,282 or 11.9% over the total at December 31, 2001. The increase
in assets was primarily due to the $6,861,145 growth in net loans and
$9,415,822 increase in cash and investments funded by deposit increases
of $17,431,257.
Loans
At June 30, 2002 the loan portfolio totaled $118,775,282 and
represented 77.3% of total assets compared to $111,914,137 or 81.5% of
total assets at December 31, 2001. The loan-to-deposit ratios for June
30, 2002 and December 31, 2001 were 90.0% and 97.4%, respectively.
17
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Investment Securities
Securities available for sale totaled $11,470,870 at June 30, 2002 and
$4,059,737 at December 31, 2001. At June 30, 2002 there were unrealized
gains included in the carrying value of the available for sale
securities of $210,367 compared to
$113,970 at December 31, 2001. There were no sales of securities during
the six months ended June 30, 2002, gains on securities sales for the
six months ended June 30, 2001 were $1,250.
Deposits
Total deposits increased from $116,213,484 at December 31, 2001 to
$133,644,741 at June 30, 2002, an increase of $17,431,257 or 15.0%. The
growth is attributable to the Bank's overall ability to attract and
retain local customers. As of June 30, 2002, the Bank had $28,878,426
in time deposits of $100,000 or more compared to $23,857,853 for
December 31, 2001, an increase of $5,020,573.
Stockholders' Equity and Capital Adequacy
Total stockholders' equity was $15,011,767 at June 30, 2002, compared
to $14,542,857 at December 31, 2001, an increase of $468,910. The
increase is attributed to net earnings for the first two quarters of
$343,119 and the change in the unrealized loss on available for sale
securities of $125,791.
The Bank's regulators define risk-based capital guidelines as "core,"
or Tier 1 capital, and "supplementary," or Tier 2 capital. Core capital
consists of common stockholders' equity while "supplementary," or Tier
2 capital, consists of the allowance for loan losses, subject to
certain limitations. These amounts are referred to collectively as
total qualifying capital. Banks are expected to meet a minimum ratio of
total qualifying capital to risk adjusted assets of 8.0%. The Bank's
risk-based capital ratio exceeded 11% at June 30, 2002.
In addition to the risk-based capital guidelines mentioned above,
banking regulatory agencies have adopted leverage capital ratio
requirements. The leverage ratio, or core capital to assets ratio,
works in tandem with the risk-based capital guidelines. The minimum
leverage ratios range from three to five percent. At June 30, 2002, the
Bank's leverage capital ratio was in excess of 9%.
Management is not presently aware of any current recommendations to the
Bank by regulatory authorities which, if they were to be implemented,
would have a material effect on the Bank's liquidity, capital
resources, or operations.
18
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Asset Quality and Allowance for Loan Losses
Nonperforming assets include loans delinquent 90 days or more and still
accruing, nonaccrual loans, restructured loans, other real estate
owned, and other nonperforming assets. Nonaccrual loans of
approximately $1,493,000 are the Bank's only nonperforming assets at
June 30, 2002. The bank had nonperforming
assets of $463,730 at December 31, 2001. The Bank had no loans
outstanding that were delinquent 90 days or more and still accruing
interest at June 30, 2002 and at December 31, 2001.
The allowance for loan losses was $1,474,082 or 1.23% of outstanding
loans at June 30, 2002 compared to $1,329,496 or 1.17% of outstanding
loans at December 31, 2001.
Asset Quality and Allowance for Loan Losses, continued
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan
portfolio. The adequacy for loan losses and the related provision are
based upon management's evaluation of the risk characteristics of the
loan portfolio under current economic conditions with consideration to
such factors as financial condition of the borrowers, collateral
values, growth and composition of the loan portfolio, the relationship
of the allowance for loan losses to outstanding loans, and delinquency
trends. Management believes that the allowance for loan losses is
adequate.
While management uses all available information to recognize losses on
loans, future additions to the allowance may be necessary based on
changes in economic conditions. Various regulatory agencies, as an
integral part of their examination process, periodically review the
Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Interest Rate Risk Management
Interest rate risk is the sensitivity of interest income and interest
expense to changes in interest rates. Management continues to structure
its assets and liabilities in an attempt to protect net interest income
from large fluctuations associated with changes in interest rates.
Forward-Looking Statements
This document contains forward-looking statements. These statements are
subject to certain risks and uncertainties that could cause actual
results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, changes in the interest rate
19
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
environment, management's business strategy, national, regional, and
local market conditions and legislative and regulatory conditions.
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as to the date hereof. The Bank
undertakes no
obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances.
Liquidity
The liquidity of a bank measures its access to or ability to raise
funds. Sustaining adequate liquidity requires a bank to ensure the
availability of funds to satisfy reserve requirements, loan demand,
deposit withdrawals, and maturing liabilities while funding asset
growth and producing appropriate earnings. Liquidity is provided
through maturities and repayments of loans and investments, deposit
growth, and access to sources of funds other than deposits, such as the
federal funds market or other borrowing sources. The Bank's primary
liquid assets are cash and due from banks, federal funds sold and
Investment securities available for sale. At June 30, 2002, the ratio
of liquid assets to total deposits was 21.7% compared to a ratio of
16.9% at December 31, 2001.
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of the Six Months Ended June 30, 2002 to June 30, 2001
- -----------------------------------------------------------------
Overview
The Bank earned $343,119 or $0.24 basic net income per share for the
six months ended June 30, 2002 compared to $11,216 or $0.01 basic net
income per share for the six months ended June 30, 2001.
The loan loss provision for the six-month period ending June 30, 2002
was $224,000 compared to $153,000 for the same period ended June 30,
2001. The Bank's management has set aside reserves to ensure that the
allowance for loan losses as a percentage of total loans was at least
as high as other banks in its peer group. The current provision
reflects management's current analysis of the loan portfolio.
Net Interest Income
Net interest income for the first six months of 2002 increased by
$633,479 over the same period in 2001. Interest income increased by
$472,843 while interest
20
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
expense decreased by $160,636. Interest paid on
certificates of deposit greater than $100,000 decreased by $172,683
from the same period a year ago.
Comparison of the Six Months Ended June 30, 2002 to June 30, 2001, continued
- ----------------------------------------------------------------------------
Non-interest Income
Non-interest income was $1,033,705 at June 30, 2002 compared to
$622,258 at June 30, 2001. Service charges on deposit accounts amounted
to $273,269 for the first six months of 2002 and $150,617 for the same
period of 2001. This increase is related to the increased number of
customer accounts. For the current year to date period mortgage
origination fees and brokerage commission income contributed $545,536,
and $112,379, compared to $307,383 and $70,999 in the period a year
earlier.
Non-interest Expense
Non-interest expense was $2,595,151 for the six-month period ended June
30, 2002. Salaries and employee benefits increased by $318,859 over the
same period in 2001. Occupancy and equipment expense increased by
$98,228. Data processing costs and advertising and marketing costs
amounted to $324,636 and $59,880, respectively for 2002 and $184,231
and $124,529 in 2001.
Income Taxes
A provision for income taxes in the amount of $183,000 was made for the
six months ended June 30, 2002. The provision for the first six months
of 2001 was $6,500.
Comparison of the Three Months Ended June 30, 2002 and June 30, 2001
- --------------------------------------------------------------------
Overview
The Bank's net income for the three months ended June 30, 2002 was
$219,535 or $0.15 basic net income per share compared to $51,837 or
$0.04 basic net income per share for the same period of 2001.
The loan loss provision for the second quarter of 2002 was $128,000
compared to $72,000 for the second quarter of 2001. Management has set
aside reserves to ensure that the allowance for loan losses as a
percentage of total loans was at least
21
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
as high as other banks in its
peer group. The current provision reflects management's current
analysis of the loan portfolio.
Comparison of the Three Months Ended June 30, 2002 and June 30, 2001, continued
- -------------------------------------------------------------------------------
Net Interest Income
Net interest income amounted to $1,215,738 for the second quarter of
2002. Interest income for the three-month period ending June 30, 2002
was $2,260,738. Interest and fees on loans amounted to $2,084,245 while
interest income on federal funds sold totaled $67,852. Interest expense
was $1,045,000 for the three-month period ending June 30, 2002.
Interest expense on certificates of deposit greater than $100,000 was
$299,947 for the quarter.
Non-interest Income
Non-interest income was $472,274 for the three months ending June 30,
2002. Service charge income amounted to $141,036 as increased deposit
accounts increasingly generate fee income. Mortgage origination income
accounted for $211,054 during the quarter. Brokerage income from the
Bank's subsidiary amounted to $64,974 for the second quarter compared
to $34,819 for the same period in the prior year. Other non-interest
income totaled $55,210.
Non-interest Expense
Non-interest expense was $1,232,477 for the quarter ended June 30,
2002. Salaries and employee benefits totaled $675,787. Expenses of
premises and fixed assets amounted to $145,354. Data processing fees
amounted to $158,864 for the quarter. Additionally, advertising and
marketing expenses totaled $25,635.
Income Taxes
A provision for income taxes in the amount of $108,000 was made for the
three months ended June 30, 2002. The provision for income taxes for
the same period in 2001 was $6,500.
22
High Country FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security
holders of the Bank on May 14, 2002 and were approved by
majority vote:
1. To elect four persons who will serve as directors of the
Bank until the 2005 Annual Meeting of Stockholders or
until their successors are duly elected and qualify.
2. To ratify the selection of Larrowe & Company, LLC, as the independent
auditor for the Bank for the fiscal year ending December 31, 2002.
3. To consider and vote upon a proposed Agreement and Plan of Share
Exchange (the "Share Exchange Agreement").
Item 6b. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the quarter.
23
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
High Country Financial Corporation
- ----------------------------------
(Registrant)
August 12, 2002
- --------------- ---------------------------
Date David H. Harman
Chief Financial Officer
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
High Country Financial Corporation
- ----------------------------------
(Registrant)
August 12, 2002 S/ David H. Harman
- --------------- ---------------------------
Date David H. Harman
Chief Financial Officer