United States
Securities and Exchange Commission
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-QSB - Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
- --------------------------------------------------------------------------------
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2003
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934 For the transition period from _________________ to
___________________.
Commission File Number 000-1177182
High Country Financial Corporation
(Exact name of bank as specified in its charter)
North Carolina 01-0731354
-------------- ----------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
149 Jefferson Road
Boone, North Carolina 28607
--------------------- -----
(Address of principal office) (Zip code)
Issuer'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 __
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Common Stock, no par value 1,418,809
------------------------------------
Outstanding at April 16, 2003
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 March 31, 2003 and December 31, 2002 1
Consolidated Statements of Income for the three months ended March 31,
2003 and 2002 2
Consolidated Statements of Changes in Stockholders' Equity for the
three months ended March 31, 2003 and 2002 3
Consolidated Statements of Cash Flows for the three months ended March
31, 2003 and 2002 4
Notes to the Consolidated Financial Statements 5-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-15
Item 3. Controls and Procedures 16
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17-18
Signatures 19
Certifications 20-22
High Country Financial Corporation
Consolidated Balance Sheets
(Unaudited) (Audited)
March 31, December 31,
2003 2002
----------------- ----------------
ASSETS
Cash and due from banks $ 3,891,518 $ 5,281,496
Interest-bearing deposits with banks 2,002,015 2,001,742
Federal funds sold 8,779,000 15,154,000
Investment securities available for sale 13,853,019 13,130,236
Restricted equity 409,600 267,700
securities
Loans, net of allowance for loan losses of $1,802,170 in
2003 and $1,712,350 in 2002 136,815,764 134,045,261
Property and equipment, net 5,711,083 5,759,886
Foreclosed assets, net 405,783 243,293
Accrued interest income 691,990 790,284
Other assets 892,661 809,467
------------ ------------
Total assets $173,452,433 $177,483,365
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 14,495,460 $ 19,093,396
Interest bearing demand deposits 33,865,256 31,128,815
Savings 2,565,966 2,530,731
Money market accounts 19,840,271 22,666,627
Certificates of deposit, $100,000 or more 32,215,102 30,467,844
Other time deposits 50,325,776 50,959,215
------------ ------------
Total deposits 153,307,831 156,846,628
Securities sold under agreements to repurchase 1,816,250 2,688,514
Notes Payable 2,000,000 2,000,000
Accrued interest payable 154,912 151,589
Other liabilities 463,487 346,861
------------ ------------
Total liabilities 157,742,480 162,033,592
------------ ------------
Stockholders' Equity:
Preferred stock, no par value, 5,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, no par value, 20,000,000 shares
authorized; 1,418,809 and 1,416,822 shares issued
and outstanding for 2003 and 2002, respectively 14,427,899 14,427,899
Retained Earnings 1,056,689 805,585
Accumulated comprehensive income 225,365 216,289
------------ ------------
Total stockholders' equity 15,709,953 15,449,773
------------ ------------
Total liabilities and stockholders' equity $173,452,433 $177,483,365
============ ============
See Notes to Consolidated Financial Statements
1
High Country Financial Corporation
Consolidated Statements of Income
For the three months ended March 31,
(Unaudited)
2003 2002
---- ----
Interest income:
Interest and fees on loans $ 2,172,144 $ 2,000,705
Interest on securities available for sale 159,024 62,122
Federal funds sold 31,971 51,237
----------- -----------
Total interest income 2,363,139 2,114,064
----------- -----------
Interest expense:
Certificates of deposit, $100,000 or more 295,218 284,569
Other deposits 681,960 697,777
Other borrowings 29,172 35,890
----------- -----------
Total interest expense 1,006,350 1,018,236
----------- -----------
Net interest income 1,356,789 1,095,828
Provision for loan losses (171,500) (96,000)
----------- -----------
Net interest income after provision for loan losses 1,185,289 999,828
----------- -----------
Noninterest income:
Service charges on deposit accounts 265,667 132,233
Mortgage origination income 308,172 334,481
Brokerage commissions and fees 113,370 47,404
Other noninterest income 120,912 47,312
----------- -----------
Total noninterest income 808,121 561,430
----------- -----------
Noninterest expense:
Salaries and employee benefits 866,580 736,351
Expenses of premises and fixed assets 169,377 158,507
Outside services 244,586 204,833
Other noninterest expense 297,276 262,983
----------- -----------
Total noninterest expense 1,577,819 1,362,674
----------- -----------
Income before income taxes 415,591 198,584
Income tax provision 164,487 75,000
----------- -----------
Net income $ 251,104 $ 123,584
=========== ===========
Basic earnings per share $ .18 $ .09
=========== ===========
Diluted earnings per share $ .17 $ .08
=========== ===========
Weighted average shares outstanding:
Basic 1,418,809 1,417,434
=========== ===========
Diluted 1,472,679 1,482,031
=========== ===========
See Notes to Consolidated Financial Statements 2
High Country Financial Corporation
Consolidated Statements of Changes in Stockholders' Equity
For the three months Ended March 31
(unaudited)
Common Stock Accumulated Total
------------ Retained Comprehensive Stockholders
2003 Shares Amount Earnings Income Equity
---- ------ ------ -------- ------ ------
Balance at beginning of period 1,418,809 $14,427,899 % 805,585 $ 216,289 $15,449,773
Net imcome 251,104 251,104
Change in unrealized gain on
securities available for sale,
net of tax effect 9,076 9,076
--------- ----------- ----------- ----------- -----------
Balance at end of period 1,418,809 $14,427,899 $ 1,056,689 $ 225,365 $15,709,953
========= =========== =========== =========== ===========
Common Stock Accumulated Total
------------ Retained Comprehensive Stockholders'
2002 Shares Amount Earnings Income Equity
---- ------ ------ -------- ------ ------
Balance at beginning of period 1,416,822 $14,413,044 $ 54,593 $ 75,220 14,542,857
Net income 123,584 123,584
Change in unrealized gain on
securities available for sale,
Net of tax effect (16,283) (16,283)
--------- ----------- ----------- ----------- -----------
Balance at end of period 1,416,822 $14,413,044 $ 178,177 $ 58,937 $14,650,158
========= =========== =========== =========== ===========
3
High Country Financial Corporation
Consolidated Statements of Cash Flows
For the three months ended March 31,
(Unaudited)
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 251,104 $ 123,584
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization, net of accretion on
investment securities available for sale 84,456 72,232
Provision for loan losses 171,500 96,000
Changes in other assets and liabilities:
Accrued interest income and other assets (147,388) (202,441)
Accrued interest payable and other liabilities 119,922 (47,692)
------------ ------------
Net cash provided by (used in) operating activities 479,594 41,683
------------ ------------
Cash flows from investing activities:
Net increase (decrease) in interest-bearing deposits
with banks (273) 2,000,000
Net (increase) decrease in federal funds sold 6,375,000 (6,706,000)
Loan (originations) principal repayments, net (2,942,003) (4,214,682)
Purchases of investment securities (4,072,150) 0
Maturities, paydowns, and calls of securities 3,343,702 460,725
Purchase of restricted equity securities (141,900) 0
Capital expenditures for premises and equipment (20,887) (18,549)
------------ ------------
Net cash provided by (used in) investment activities 2,541,489 (8,478,506)
------------ ------------
Cash flows from financing activities:
Increase (decrease) in deposits (3,538,797) 10,382,255
Increase (decrease) in Notes Payable 0 (2,000,000)
(Decrease) in other borrowings (872,264) (582,121)
------------ ------------
Net cash provided by (used in) financing activities (4,411,061) 7,800,134
------------ ------------
Net (decrease) in cash and cash equivalents (1,389,978) (636,689)
Beginning cash and cash equivalents 5,281,496 4,827,479
------------ ------------
Ending cash and cash equivalents $ 3,891,518 $ 4,190,790
============ ============
Supplemental cash flow disclosures:
Cash paid during period for interest $ 1,003,027 $ 1,014,408
============ ============
Cash paid during period for income taxes $ 37,163 $ 53,541
============ ============
4
See Notes to Consolidated Financial Statements
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 presently 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. These financial statements of High Country Financial Corporation are
presented on a consolidated basis. Certain prior year amounts have been
reclassified to conform to the current year presentation. These
reclassifications had no impact on net income or stockholders' equity.
High Country 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
North Carolina State 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 and the general public. High Country
Securities was capitalized with $25,000 and commenced operations on February 8,
1999.
The unaudited financial statements of the Company have been prepared in
accordance with instructions from Form 10-QSB. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. 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 Company follow generally accepted accounting
principles and general practices within the financial services industry.
The results of operations for the period ended March 31, 2003 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2003. The financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto for the year
ended December 31, 2002.
5
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies,
continued
Business Segments
The Company reports its activities as a single business segment. In determining
the appropriateness of segment definition, the Company considers components of
the business about which financial information is available and regularly
evaluated relative to resource allocation and performance assessment.
Critical Accounting Policies
The notes to the Company's audited consolidated financial statements for the
year ended December 31, 2002 contain a summary of the Company's significant
accounting policies. Management believes the policies with respect to the
methodology for determination of the allowance for loan losses, and asset
impairment judgments, including the recoverability of intangible assets involve
a higher degree of complexity and require management to make difficult and
subjective judgments which often require assumptions or estimates about highly
uncertain matters. Changes in these judgments, assumptions or estimates could
cause reported results to differ materially. These critical policies and their
application are periodically reviewed with the Audit Committee and the Board of
Directors.
Stock-based Compensation
The Company accounts for its stock-based compensation using the accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Company is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation, but complies with the disclosure requirements set forth in SFAS
No. 148, which include disclosing pro forma net income as if the fair value
based method of accounting had been applied. This information for the quarters
ended March 31, 2003 and 2002 is as follows:
March31,
--------
2003 2002
---- ----
Compensation cost recognized in income for all
stock-based compensation awards $ -- $ --
========== ==========
Pro forma net income(1) $ 228,814 $ 92,684
========== ==========
Pro forma earnings per common share(1) $ 0.16 $ 0.06
========== ==========
Pro forma earnings per diluted share(1) $ 0.16 $ 0.06
========== ==========
(1) As if the fair value based method prescribed by SFAS No. 123 had been
applied
6
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies,
continued
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the
Bank, and the subsidiary, which is wholly owned, herein collectively referred to
as the Company. All significant, intercompany transactions and balances have
been eliminated in consolidation.
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.
Note 2. Loans Receivable
The major components of loans in the balance sheet at March 31, 2003 and
December 31, 2002 are as follows (in thousands):
2003 2002
---- ----
Commercial $ 38,094 $ 37,755
Real estate:
Construction and land development 48,178 48,606
Residential, 1-4 families 26,999 25,262
Residential, 5 or more families 5,310 4,569
Agricultural 3,166 3,003
Non-farm, nonresidential 2,769 2,179
Farmland 1,373 1,506
Consumer 12,699 13,036
Obligations of states and political subdivisions 72 15
Other 189 65
Unearned loan origination fees, net of costs (231) (239)
Less : Allowance for loan losses (1,802) (1,712)
--------- -------
$ 136,816 $134,045
========= ========
7
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 2. Loans Receivable, continued
At March 31, 2003 and December 31, 2002 the Company had nonaccrual loans
totaling $2,183,126 and $668,789, respectively. Foreclosed, repossessed or idled
properties amounted to $405,783 and $243,293 at March 31, 2003 and December 31,
2002, respectively.
Note 3. Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses for the three months
ended March 31, 2003 and 2002 is as follows:
2003 2002
---- ----
Balance, beginning of period $ 1,712,350 $ 1,329,496
Provision charged to operations 171,500 96,000
Recoveries of amounts charged off 1,230 0
Amounts charged off (82,910) (24,441)
--------- ---------
Balance, end of period $1,802,170 $ 1,401,055
========== ===========
Note 4. Property and Equipment
Components of Property and Equipment
Components of property and equipment and total accumulated depreciation at March
31, 2003 and December 31, 2002 are as follows:
2003 2002
------------- -------------
Land and improvements $ 1,456,824 $ 1,456,825
Buildings and improvements 3,608,733 3,603,934
Furniture and equipment 1,474,749 1,458,662
--------- ---------
Property and equipment, total 6,540,306 6,519,421
Less accumulated depreciation (829,223) (759,535)
------------ ------------
Property and equipment, net of depreciation $ 5,711,083 $ 5,759,886
============ ============
8
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 4. Property and Equipment, continued
Leases
The Company 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 $1,750 per month. Future
minimum lease payments under non-cancelable agreements are as follows:
2003 42,000
2004 42,000
2005 27,000
2006 10,000
----------
$ 121,000
==========
Rental expense was $22,925 and $24,365 for the first quarter of 2003 and 2002,
respectively.
Note 5. Stock Options
The Company adopted a stock option plan which reserved up to 228,000 shares for
the benefit of certain of the Company'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 Company'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 Company 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 Company may make additional contributions at the discretion of the
Board of Directors.
9
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 7. Commitments and Contingencies
Litigation
In the normal course of business the Company may be involved in various legal
proceedings. 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 Company 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 Company'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. Because many of the commitments are expected to expire
without being drawn upon, the total commitments do not necessarily represent
future cash requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company 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 Company 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 Company deems
necessary.
10
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 7. Commitments and Contingencies, continued
Concentrations of credit risk
Substantially all of the Company's loans, commitments to extend credit and
standby letters of credit have been granted to customers in the Company's market
area and such customers are generally depositors of the Company. 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 Company'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 $2,000,000.
The Company from time to time has cash and equivalents on deposit with financial
institutions which exceed federally insured limits.
Other commitments
The Company has entered into employment agreements with certain of its key
officers covering duties, salary, benefits, provisions for termination and
Company obligations in the event of merger or acquisition.
Note 8. Transactions with Related Parties
The Company 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 Company also leases a branch facility from a related party. See Note 4 for
more information.
11
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operating Results for the Three Months ended March 31, 2003 and 2002
The Company earned $251,104 or $0.18 basic net income per share for the
three months ended March 31, 2003 compared to $123,584 or $0.09 basic net
income per share for the first quarter of 2002. Total interest income
amounted to $2,363,139 while interest expense of $1,006,350 resulted in net
interest income of $1,356,789 for the quarter. This is an increase of
$260,961 over the first quarter of 2002. Provision for loan losses charged
to operations was $171,500 for the three months ending March 31, 2003
compared to $96,000 in the same period of 2002. Non-interest income and
expenses amounted to $808,121 and $1,577,819, respectively for the first
three months of 2003 and $561,430 and $1,362,674 for the same period in
2002.
Comparison of Financial Condition at March 31, 2003 and December 31, 2002
Total assets at March 31, 2003 were $173,452,433, a decrease of $4,030,932
or 2.27% of the total at December 31, 2002. The decrease in assets was
primarily due to the $7,764,705 decrease in cash and federal funds sold
(which was offset somewhat by the $2,770,503 increase in loans) resulting
from the decline in deposits of $3,538,797. See Deposits below for an
explanation of this decline.
Loans
At March 31, 2003 the loan portfolio totaled $136,815,764 and represented
78.9% of total assets compared to $134,045,261 or 75.5% of total assets at
December 31, 2002. The loan-to-deposit ratios for March 31, 2003 and
December 31, 2002 were 89.2% and 85.5%, respectively.
Investment Securities
Securities available for sale totaled $13,853,019 at March 31, 2003 and
$13,130,236 at December 31, 2002. At March 31, 2003 there were unrealized
gains included in the carrying value of the available for sale securities
of $341,462 compared to $325,211 at December 31, 2002.
Deposits
Total deposits decreased from $156,846,628 at December 31, 2002 to
$153,307,831 at March 31, 2003, a decline of $3,538,797 or 2.26%. The
decline from the year end 2002 balance was due to the transitory nature of
several large deposits made near the end of 2002. These deposits were
related to business sales and other transactions that resulted in large
sums being deposited for a short period of time. Despite this temporary
peak and resulting decline from the peak
12
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Deposits, continued
deposits continue to grow due to the Company's overall ability to attract
and retain local customers.
As of March 31, 2003, the Company had $32,215,102 in time deposits of
$100,000 or more compared to $30,467,844 for December 31, 2002, an increase
of $1,747,258.
Stockholders' Equity and Capital Adequacy
Total stockholders' equity was $15,709,953 at March 31, 2003, compared to
$15,449,773 at December 31, 2002, an increase of $260,180. The increase is
attributed to net earnings for the first quarter of $251,104 and the change
in the unrealized gain on available for sale securities of $9,076
The Company'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 Company's total risk-based
capital ratio exceeded 11% at March 31, 2003.
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 March 31, 2003, the Company's leverage capital ratio
was in excess of 9%.
Management is not presently aware of any current recommendations to the
company by regulatory authorities, which if they were to be implemented,
would have a material effect on the Company's liquidity, capital resources,
or 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
$2,183,000 and foreclosed assets of $405,783 are the Company's only
nonperforming assets at March 31, 2003. The Company had nonperforming
assets of $886,289 at December 31, 2002. The Company had no loans
outstanding that were delinquent
13
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, continued
90 days or more and still accruing interest at March 31, 2003 and at
December 31, 2002.
The allowance for loan losses was $1,802,170 or 1.30% of outstanding loans
at March 31, 2003 compared to $1,712,350 or 1.26% of outstanding loans at
December 31, 2002.
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 Company's allowance for
loan losses. Such agencies may require the Company 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 report contains certain forward-looking statements with respect to the
financial condition, results of operations and business of the Company.
These forward-looking statements involve risks and uncertainties and are
based on the beliefs and assumptions of management of the Company and on
the information available to management at the time that these disclosures
were prepared. These statements can be identified by the use of words like
"expect," "anticipate," "estimate" and "believe," variations of these words
and other similar expressions. Readers should not place undue reliance on
forward-looking statements as a
14
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements, continued
number of important factors could cause actual results to differ materially
from those in the forward-looking statements. Factors that could cause
actual results to differ materially include, but are not limited to, (1)
competition in the Company's markets, (2) changes in the interest rate
environment, (3) general national, regional or local economic conditions
may be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and the possible impairment of
collectibility of loans, (4) legislative or regulatory changes, including
changes in accounting standards, (5) significant changes in the federal and
state legal and regulatory environment and tax laws, (6) the impact of
changes in monetary and fiscal policies, laws, rules and regulations and
(7) other risks and factors identified in the Company's other filings with
the Securities and Exchange Commission. The Company undertakes no
obligation to update any forward-looking statements.
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 Company's primary liquid assets are Cash and due
from banks, Interest-bearing deposits with banks, Federal funds sold and
Investment securities available for sale. At March 31, 2003, the ratio of
liquid assets to total deposits was 18.6% compared to a ratio of 22.7% at
December 31, 2002.
15
High Country Financial Corporation
Item 3. Controls and Procedures
(A) Within the 90-day period prior to the filing of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's Exchange Act
filings.
(B) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
16
High Country FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended March 31, 2003.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3)(i) Articles of Incorporation of High Country Financial Corporation,
incorporated herein by reference to Exhibit 3(i) to the Form 8-A filed with
the SEC on July 31, 2002.
(3)(ii) Bylaws of High Country Financial Corporation, incorporated herein
by reference to Exhibit 3(ii) to the Form 8-A filed with the SEC on July
31, 2002.
4 Specimen Stock Certificate of High Country Financial Corporation,
incorporated herein by reference to Exhibit 4 to the Form 10-QSB filed with
the SEC on November 14, 2002.
(10)(i) Employment Agreement with John M. Brubaker, incorporated herein by
reference to Exhibit 6(i) to the Form 10-SB filed with the FDIC on April
30, 1999.
(10)(ii) Employment Agreement with Robert E. Washburn, incorporated herein
by reference to Exhibit 6(iii) to the Form 10-SB filed with the FDIC on
April 30, 1999.
(10)(iii) High Country Bank Stock Option Plan, as amended May 15, 2001, and
as assumed by High Country Financial Corporation on August 20, 2002,
incorporated herein by reference to Exhibit 10(iii) to the Form 10-QSB
filed on November 14, 2002.
(10)(iv) Lease Agreement between Paul Brown Enterprises, Inc. and High
Country Bank dated July 1, 2000 incorporated herein by reference to Exhibit
10(vi) to the Form 10-KSB filed with the FDIC on March 30, 2001.
(10)(v) Lease Agreement between B&D Associates and High Country Bank dated
August 1, 2000 incorporated herein by reference to Exhibit 10(vii) to the
Form 10-KSB filed with the FDIC on March 30, 2001.
(99) Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350.
17
(b) Reports on Form 8-K
On February 10, 2003 the Company filed with the SEC on Form 8-K the announcement
of an issuance of a newsletter to shareholders containing consolidated financial
information for the fiscal year ended December 31, 2002.
18
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)
May 8, 2003 /s/ David H. Harman
- ----------- -------------------------
Date David H. Harman
Senior Vice President and
Chief Financial Officer
19
CERTIFICATIONS
I, John M. Brubaker, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of High Country
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 8, 2003 /s/ John M.Brubaker
----------- -------------------------------------
John M. Brubaker
President and Chief Executive Officer
20
CERTIFICATIONS
I, David H. Harman, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of High Country
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 8, 2003 /s/ David H. Harman
----------- -------------------
David H. Harman
Senior Vice President &
Chief Financial Officer
21