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 June 30, 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 registrant 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)
Company'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 1,419,809
Outstanding at July 24, 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 June 30, 2003 and
December 31, 2002 1
Consolidated Statements of Income for the six months ended
June 30, 2003 and 2002 2
Consolidated Statements of Income for the three months ended
June 30, 2003 and 2002 3
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 5
Notes to the Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-18
Item 3. Controls and Procedures 19
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20-21
Signatures 22
High Country Financial Corporation
Consolidated Balance Sheets
(Unaudited) (Audited)
June 30, December 31,
2003 2002
------------ ------------
ASSETS
Cash and due from banks $ 6,376,269 $ 5,281,496
Interest-bearing deposits with banks 2,005,601 2,001,742
Federal funds sold 3,979,000 15,154,000
Investment securities available for sale 12,053,724 13,130,236
Restricted equity securities 409,600 267,700
Loans, net of allowance for loan losses of $1,909,889 in
2003 and $1,712,350 in 2002 145,408,631 134,045,261
Property and equipment, net 5,693,771 5,759,886
Foreclosed assets, net 156,553 243,293
Accrued interest income 711,165 790,284
Other assets 915,785 809,467
------------ ------------
Total assets $177,710,099 $177,483,365
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 15,794,526 $ 19,093,396
Interest bearing demand deposits 37,927,105 31,128,815
Savings 2,642,881 2,530,731
Money market accounts 18,962,006 22,666,627
Certificates of deposit, $100,000 or more 32,090,759 30,467,844
Other time deposits 49,357,230 50,959,215
------------ ------------
Total deposits 156,774,507 156,846,628
Securities sold under agreements to repurchase 2,504,157 2,688,514
Notes payable 2,000,000 2,000,000
Accrued interest payable 136,709 151,589
Other liabilities 338,068 346,861
------------ ------------
Total liabilities 161,753,441 162,033,592
------------ ------------
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; 1,419,809 and 1,418,809 shares issued
and outstanding for 2003 and 2002, respectively 14,444,574 14,427,899
Retained earnings 1,309,220 805,585
Accumulated comprehensive income 202,864 216,289
------------ ------------
Total stockholders' equity 15,956,658 15,449,773
------------ ------------
Total liabilities and stockholders' equity $177,710,099 $177,483,365
============ ============
See Notes to Consolidated Financial Statements 1
High Country Financial Corporation
Consolidated Statements of Income
For the six months ended June 30,
(Unaudited)
2003 2002
---- ----
Interest income:
Interest and fees on loans $4,442,316 $4,084,950
Interest on securities available for sale 298,362 170,762
Federal funds sold 58,647 119,089
---------- ----------
Total interest income 4,799,325 4,374,801
---------- ----------
Interest expense:
Certificates of deposit, $100,000 or more 594,314 584,515
Other deposits 1,347,327 1,407,727
Other borrowings 61,262 70,994
---------- ----------
Total interest expense 2,002,903 2,063,236
---------- ----------
Net interest income 2,796,422 2,311,565
Less: Provision for loan losses 382,500 224,000
---------- ----------
Net interest income after provision for loan losses 2,413,922 2,087,565
---------- ----------
Noninterest income:
Service charges on deposit accounts 541,516 273,269
Mortgage origination income 625,925 545,536
Brokerage commissions and fees 188,681 112,379
Other noninterest income 257,989 102,521
---------- ----------
Total noninterest income 1,614,111 1,033,705
---------- ----------
Noninterest expense:
Salaries and employee benefits 1,751,814 1,412,138
Expenses of premises and fixed assets 349,356 303,862
Outside services 510,420 419,331
Other noninterest expense 595,149 459,820
---------- ----------
Total noninterest expense 3,206,739 2,595,151
---------- ----------
Income before income taxes 821,294 526,119
Less: Income tax provision 317,659 183,000
---------- ----------
Net income $ 503,635 $ 343,119
========== ==========
Basic earnings per share $ .36 $ .24
========== ==========
Diluted earnings per share $ .34 $ .23
========== ==========
Weighted average shares outstanding:
Basic 1,418,933 1,416,822
========== ==========
Diluted 1,478,650 1,497,051
========== ==========
See Notes to Consolidated Financial Statements 2
High Country Financial Corporation
Consolidated Statements of Income
For the three months ended June 30,
(Unaudited)
2003 2002
---- ----
Interest income:
Interest and fees on loans $2,270,172 $2,084,245
Interest on securities available for sale 139,338 108,641
Federal funds sold 26,676 67,852
---------- ----------
Total interest income 2,436,186 2,260,738
---------- ----------
Interest expense:
Certificates of deposit, $100,000 or more 299,096 299,947
Other deposits 665,367 709,949
Other borrowings 32,089 35,104
---------- ----------
Total interest expense 996,552 1,045,000
---------- ----------
Net interest income 1,439,634 1,215,738
Less: Provision for loan losses 211,000 128,000
---------- ----------
Net interest income after provision for loan losses 1,228,634 1,087,738
---------- ----------
Noninterest income:
Service charges on deposit accounts 275,849 141,036
Mortgage origination income 317,753 211,054
Brokerage commissions and fees 75,312 64,974
Other noninterest income 137,076 55,210
---------- ----------
Total noninterest income 805,990 472,274
---------- ----------
Noninterest expense:
Salaries and employee benefits 885,234 675,787
Expenses of premises and fixed assets 179,980 145,354
Outside services 265,835 197,774
Other noninterest expense 297,872 213,562
---------- ----------
Total noninterest expense 1,628,921 1,232,477
---------- ----------
Income before income taxes 405,703 327,535
Less: Income tax provision 153,172 108,000
---------- ----------
Net income $ 252,531 $ 219,535
========== ==========
Basic earnings per share $ .18 $ .15
========== ==========
Diluted earnings per share $ .17 $ .15
========== ==========
Weighted average shares outstanding:
Basic 1,419,056 1,416,822
========== ==========
Diluted 1,496,857 1,497,051
========== ==========
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'
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 income 503,635 503,635
Change in unrealized gain on securities
available for sale, net of tax effect (13,425) (13,425)
Shares issued for options and
warrants exercised 1,000 16,675 16,675
---------- ------------ ---------- -------- -----------
Balance at end of period 1,419,809 $ 14,444,574 $1,309,220 $202,864 $15,956,658
========== ============ ========== ======== ===========
Accumulated Total
Common Stock 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 343,119 343,119
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 $ 14,413,044 $ 397,712 $201,011 $15,011,767
========== ============ ========== ======== ===========
See Notes to Consolidated Financial Statements 4
High Country Financial Corporation
Consolidated Statements of Cash Flows
For the six months ended June 30,
(Unaudited)
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 503,635 $ 343,119
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 196,522 148,808
Provision for loan losses 382,500 224,000
Changes in other assets and liabilities:
Accrued interest income and other assets 66,457 (205,761)
Accrued interest payable and other liabilities (23,673) (250,035)
------------ ------------
Net cash provided by (used in) operating activities 1,125,441 260,131
------------ ------------
Cash flows from investing activities:
Net (increase) decrease in int-bearing dep with banks (3,859) 2,000,000
Net (increase) decrease in federal funds sold 11,175,000 (3,937,000)
Loan (originations) principal repayments, net (11,745,871) (7,085,145)
Purchases of investment securities (4,072,150) (8,173,096)
Maturities, paydowns, and calls of investment securities 5,080,890 889,689
Purchase of restricted equity securities (141,900) (67,700)
Capital expenditures for premises and equipment (82,977) (24,297)
------------ ------------
Net cash provided by (used in) investment activities 209,133 (16,397,549)
------------ ------------
Cash flows from financing activities:
Increase (decrease) in deposits (72,120) 17,431,257
Increase (decrease) in other borrowings (184,356) (1,293,850)
Proceeds from sale of common stock 16,675 0
------------ ------------
Net cash provided by (used in) financing activities (239,801) 16,137,407
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,094,773 (11)
Beginning cash and cash equivalents 5,281,496 4,827,479
------------ ------------
Ending cash and cash equivalents $ 6,376,269 $ 4,827,468
============ ============
Supplemental cash flow disclosures:
Cash paid during period for interest $ 2,017,783 $ 2,058,673
============ ============
Cash paid during period for income taxes $ 347,163 $ 237,541
============ ============
See Notes to Consolidated Financial Statements 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.
The financial statements of the Company are presented on a consolidated basis.
All significant, intercompany transactions and balances have been eliminated in
consolidation.
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 June 30, 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.
6
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 six months
ended June 30, 2003 and 2002 is as follows:
June 30,
-------------------------
2003 2002
---------- ----------
Compensation cost recognized in income for all
stock-based compensation awards $ -- $ --
========== ==========
Pro forma net income(1) $ 458,642 $ 281,317
========== ==========
Pro forma earnings per common share(1) $ 0.32 $ 0.20
========== ==========
Pro forma earnings per diluted share(1) $ 0.31 $ 0.19
========== ==========
(1) As if the fair value based method prescribed by SFAS No. 123
had been applied
7
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 June 30, 2003 and December
31, 2002 are as follows (in thousands):
2003 2002
---- ----
Commercial $ 41,587 $ 37,755
Real estate:
Construction and land development 48,976 48,606
Residential, 1-4 families 29,142 25,262
Residential, 5 or more families 6,794 4,569
Agricultural 4,035 3,003
Non-farm, nonresidential 2,891 2,179
Farmland 1,423 1,506
Consumer 12,504 13,036
Obligations of states and political subdivisions 72 15
Other 158 65
Unearned loan origination fees, net of costs (263) (239)
Less : Allowance for loan losses (1,910) (1,712)
--------- ---------
$ 145,409 $ 134,045
========= =========
8
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 2. Loans Receivable, continued
At June 30, 2003 and December 31, 2002 the Company had nonaccrual loans totaling
$3,124,553 and $668,789 respectively. Foreclosed, repossessed or idled
properties amounted to $156,553 and $243,293 at June 30, 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 six months
ended June 30, 2003 and 2002 is as follows:
2003 2002
---- ----
Balance, beginning of period $ 1,712,350 $ 1,329,496
Provision charged to operations 382,500 224,000
Recoveries of amounts charged off 6,314 27
Amounts charged off (191,275) (79,441)
----------- -----------
Balance, end of period $ 1,909,889 $ 1,474,082
=========== ===========
Note 4. Property and Equipment
Components of Property and Equipment
Components of property and equipment and total accumulated depreciation at June
30, 2003 and December 31, 2002 are as follows:
2003 2002
---- ----
Land and improvements $ 1,456,825 $ 1,456,825
Buildings and improvements 3,608,398 3,603,934
Furniture and equipment 1,537,175 1,458,662
----------- -----------
Property and equipment, total 6,602,398 6,519,421
Less accumulated depreciation (908,627) (759,535)
----------- -----------
Property and equipment, net of depreciation $ 5,693,771 $ 5,759,886
=========== ===========
9
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 $1,100 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 $54,832 and $49,450 for the first two quarters of 2003 and
2002, respectively.
Note 5. Stock Options
The Company adopted a stock option plan that 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.
10
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.
11
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.
12
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company earned $503,635 or $0.36 basic net income per share for the
six months ended June 30, 2003. Total interest income amounted to
$4,799,325 while interest expense of $2,002,903 resulted in net interest
income of $2,796,422 for the year to date period. Provisions for loan
losses charged to operations were $382,500 for the six months ending June
30, 2003. Noninterest income and expenses amounted to $1,614,111 and
$3,206,739, respectively for the period.
Total assets at June 30, 2003 were $177,710,099, an increase of $226,734
or .13% over the total at December 31, 2002. While loan growth remained
strong producing an increase in net loans of $11,363,370 over the December
31, 2002 balance, total deposits decreased by $72,121. See Deposits below
for an explanation of this decline. The growth in loans was funded by a
reduction in Federal funds sold and investments.
Loans
At June 30, 2003 the loan portfolio, net of allowance for loan losses,
totaled $145,408,631 and represented 81.8% of total assets compared to
$134,045,261 or 75.5% of total assets at December 31, 2002. The
loan-to-deposit ratios for June 30, 2003 and December 31, 2002 were 92.7%
and 85.5%, respectively.
Investment Securities
Securities available for sale totaled $12,053,724 at June 30, 2003 and
$13,130,236 at December 31, 2002. At June 30, 2003 there were unrealized
gains included in the carrying value of the available for sale securities
of $307,371 compared to $327,711 at December 31, 2002. There were no sales
of securities during the six months ended June 30, 2003 and 2002.
Deposits
Total deposits decreased from $156,846,628 at December 31, 2002 to
$156,774,507 at June 30, 2003, a decrease of $72,121 or .05%. 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, the decrease of $3,538,797 reported at March 31, 2003
from the year-end balance was almost made up in the second quarter due to
the Company's ability to attract and retain local customers. As of June
30, 2003, the Company had $32,090,759 in time deposits of $100,000 or more
compared to $30,467,844 for December 31, 2002, an increase of $1,622,915.
13
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Stockholders' Equity and Capital Adequacy
Total stockholders' equity was $15,956,658 at June 30, 2003, compared to
$15,449,773 at December 31, 2002, an increase of $506,855. The increase is
attributed to net earnings for the first two quarters of $503,635, the
reduction in the unrealized gain on available for sale securities of
$13,425 and the exercise of stock options and warrants for $16,675.
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 was 10.98% at June 30, 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 June 30, 2003, the Company's leverage capital
ratio was 8.95%.
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
$3,124,500 and foreclosed assets of $156,553 are the Company's only
nonperforming assets at June 30, 2003. The Company had nonperforming
assets of $886,289 at December 31, 2002. The Company had no loans
outstanding that were delinquent 90 days or more and still accruing
interest at June 30, 2003 and at December 31, 2002.
The allowance for loan losses was $1,909,889 or 1.30% of outstanding loans
at June 30, 2003 compared to $1,712,350 or 1.26% of outstanding loans at
December 31, 2002.
14
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
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 given 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 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
15
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements, continued
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 recently signed an Agreement for
Advances and Security Agreement with Blanket Floating Lien with The
Federal Home Loan Bank of Atlanta with a current borrowing capacity of
approximately 30 million dollars. The Company's primary liquid assets are
cash and due from banks, federal funds sold and Investment securities
available for sale. At June 30, 2003, the ratio of liquid assets to total
deposits was 15.6% compared to a ratio of 22.7% at December 31, 2002.
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of the Six Months Ended June 30, 2003 to June 30, 2002
Overview
The Company earned $503,635 or $0.36 basic net income per share for the
six months ended June 30, 2003 compared to $343,119 or $0.24 basic net
income per share for the six months ended June 30, 2002.
The loan loss provision for the six-month period ending June 30, 2003 was
$382,500 compared to $224,000 for the same period ended June 30, 2002. The
Company's management has set aside reserves to ensure that the allowance
for loan losses as a percentage of total loans was reasonable in relation
to other banks in its peer group. The current provision reflects
management's current analysis of the loan portfolio.
16
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of the Six Months Ended June 30, 2003 to June 30, 2002, continued
Net Interest Income
Net interest income for the first six months of 2003 increased by $484,857
over the same period in 2002. Interest income increased by $424,524 while
interest expense decreased by $60,333. Interest paid on certificates of
deposit greater than $100,000 increased by $9,799 from the same period a
year ago.
Non-interest Income
Non-interest income was $1,614,111 at June 30, 2003 compared to $1,033,705
at June 30, 2002. Service charges on deposit accounts amounted to $541,516
for the first six months of 2003 and $273,269 for the same period of 2002.
This increase is due to fees from the overdraft protection program for
deposit customers that was implemented late in the fourth quarter of 2002.
For the current year to date period mortgage origination fees and
brokerage commission income contributed $625,925, and $188,681, compared
to $545,536 and $112,379 in the period a year earlier.
Non-interest Expense
Non-interest expense was $3,206,739 for the six-month period ended June
30, 2003. Salaries and employee benefits increased by $339,676 over the
same period in 2002. Occupancy and equipment expense increased by $45,494.
Data processing costs and advertising and marketing costs amounted to
$360,584 and $62,859, respectively for 2003 and $324,636 and $65,880 in
2002.
Income Taxes
A provision for income taxes in the amount of $317,659 was made for the
six months ended June 30, 2003. The provision for the first six months of
2002 was $183,000.
Comparison of the Three Months Ended June 30, 2003 and June 30, 2002
Overview
The Company's net income for the three months ended June 30, 2003 was
$252,531 or $0.18 basic net income per share compared to $219,535 or $0.15
basic net income per share for the same period of 2002.
The loan loss provision for the second quarter of 2003 was $211,000
compared to $128,000 for the second quarter of 2002. Management has set
aside reserves to
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High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of the Three Months Ended June 30, 2003 and June 30, 2002, continued
ensure that the allowance for loan losses as a percentage of total loans
was reasonable in relation to 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 three months of 2003 increased by
$223,896 over the same period in 2002. Interest income increased by
$175,448 while interest expense decreased by $48,448. Interest paid on
certificates of deposit greater than $100,000 decreased by $851 from the
same period a year ago.
Non-interest Income
Non-interest income was $805,990 for the three months ending June 30, 2003
up from $472,274 in 2002. Service charge income amounted to $275,849 an
increase of $134,813 over 2002. This increase is due to fees from the
overdraft protection program for deposit customers that was implemented
late in the fourth quarter of 2002. Mortgage origination income accounted
for $317,753 during the quarter compared to $211,054 in 2002.
Non-interest Expense
Non-interest expense was $1,628,921 for the quarter ended June 30, 2003
compared to $1,232,477 for the quarter ended June 30, 2002. Salaries and
employee benefits increased by $209,447 over the same period in 2002.
Expenses of premises and fixed assets amounted to $179,980 for 2003 and
$145,354 for 2002. Data processing fees amounted to $175,982 in 2003 and
$158,864 in the same quarter of 2002. Additionally, advertising and
marketing expenses totaled $39,059 and $25,635 for the second quarter of
2003 and 2002 respectively.
Income Taxes
A provision for income taxes in the amount of $153,172 was made for the
three months ended June 30, 2003. The provision for income taxes for the
same period in 2002 was $108,000.
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High Country Financial Corporation
Item 3. Controls and Procedures
(A) As of the end of the period covered by this Report, the Company's management
carried out an evaluation, under the supervision and with the participation of
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-15 of the Securities and Exchange Act of
1934 (the "Exchange Act"). Based upon that evaluation, the Company's management,
including its 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 internal control over financial
reporting during the period covered by this Report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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High Country Financial Corporation
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 Company during the annual meeting on May 13, 2003 and were
approved by the votes listed below:
1. To elect four persons who will serve as directors of the
Company until the 2006 Annual Meeting of Stockholders or until
their successors are duly elected and qualify.
Name For Withheld
---- --- --------
John H. Councill 859,314 4,340
Dale L. Greene 860,974 2,680
Reba S. Moretz 860,554 3,100
James C. Furman 858,574 5,080
2. To ratify the selection of Larrowe & Company, LLC, as the
independent auditor for the Company for the fiscal year ending
December 31, 2003.
For Against Abstain
--- ------- -------
862,054 240 1,360
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.
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High Country Financial Corporation
Item 6. EXHIBITS AND REPORTS ON FORM 8-K, continued
(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.
(10)(vi) Lease Agreement between Howard Street Ventures, LLC and High Country
Financial Corporation dated August 1, 2003.
(31.1) Certification of John M. Brubaker
(31.2) Certification of David H. Harman
(32) Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section
1350.
(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.
On April 25, 2003 the Company filed with the SEC on Form 8-K the announcement of
a news release containing consolidated financial information for the first
quarter ended March 31, 2003.
On May 28, 2003 the Company filed with the SEC on Form 8-K the announcement of a
joint press release with Yadkin Valley Bank and Trust Company announcing the
signing of a non-binding letter of intent to merge with Yadkin Valley Bank and
Trust Company.
On June 19, 2003 the Company filed with the SEC on Form 8-K the announcement of
the issuance of a letter to customers and shareholders regarding the tentative
agreement for the proposed merger with Yadkin Valley Bank and Trust Company.
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High Country Financial Corporation
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 11, 2003 /s/ David H. Harman
- --------------- ---------------------------------
Date David H. Harman
Senior Vice President and
Chief Financial Officer
22