United States
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 September 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
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High Country Financial Corporation
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(Exact name of small business issuer as specified in its charter)
North Carolina 01-0731354
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
149 Jefferson Road
Boone, North Carolina 28607
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(Address of principal executive offices) (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 1,420,649
------------------------------------
Outstanding at November 6, 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 September 30, 2003 and December 31, 2002 1
Consolidated Statements of Income for the nine months ended September 30, 2003 and 2002 2
Consolidated Statements of Income for the three months ended September 30, 2003 and 2002 3
Consolidated Statements of Changes in Stockholders' Equity for the nine months ended 4
September 30, 2003 and 2002
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 5
2002
Notes to the Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition and 13-19
Results of Operations
Item 3. Controls and Procedures 20
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21-22
Signatures 23
High Country Financial Corporation
Consolidated Balance Sheets
(Unaudited) (Audited)
September 30, December 31,
2003 2002
------------- --------------
ASSETS
Cash and due from banks $ 5,835,558 $ 5,281,496
Interest-bearing deposits with banks 5,463 2,001,742
Federal funds sold 5,292,000 15,154,000
Investment securities available for sale 9,698,710 13,130,236
Restricted equity 409,600 267,700
securities
Loans, net of allowance for loan losses of $2,026,463 in
2003 and $1,712,350 in 2002 153,388,781 134,045,261
Property and equipment, net 5,656,842 5,759,886
Foreclosed assets, net 430,017 243,293
Accrued interest income 754,675 790,284
Other assets 962,064 809,467
------------ ------------
Total assets $182,433,710 $177,483,365
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 18,894,893 $ 19,093,396
Interest bearing demand deposits 39,519,084 31,128,815
Savings 3,621,034 2,530,731
Money market accounts 18,169,102 22,666,627
Certificates of deposit, $100,000 or more 32,937,325 30,467,844
Other time deposits 49,015,153 50,959,215
------------ ------------
Total deposits 162,156,591 156,846,628
Securities sold under agreements to repurchase 3,457,319 2,688,514
Notes payable 0 2,000,000
Accrued interest payable 132,080 151,589
Other liabilities 473,538 346,861
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Total liabilities 166,219,528 162,033,592
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Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized; no shares issued and 0 0
outstanding
Common stock, no par value, 20,000,000
shares
authorized; issued and outstanding 1,420,649 shares for
2003 and 1,418,809 shares for 2002 14,452,277 14,427,899
Retained earnings 1,654,783 805,585
Accumulated other comprehensive income 107,122 216,289
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Total stockholders' equity 16,214,182 15,449,773
------------ ------------
Total liabilities and stockholders' equity $182,433,710 $177,483,365
============ ============
See Notes to Consolidated Financial Statements
1
High Country Financial Corporation
Consolidated Statements of Income
For the nine months ended September 30,
(Unaudited)
2003 2002
---- ----
Interest income:
Interest and fees on loans $ 6,819,220 $ 6,298,521
Interest on securities available for sale 406,896 367,109
Federal funds sold 74,835 173,583
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Total interest income 7,300,951 6,839,213
Interest expense:
Certificates of deposit, $100,000 or more 895,964 882,358
Other deposits 1,936,187 2,145,670
Other borrowings 74,851 109,600
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Total interest expense 2,907,002 3,137,628
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Net interest income 4,393,949 3,701,585
Provision for loan losses (602,500) (422,000)
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Net interest income after provision for loan losses 3,791,449 3,279,585
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Noninterest income:
Service charges on deposit accounts 803,660 409,192
Mortgage origination income 950,102 825,480
Brokerage commissions and fees 317,966 172,583
Other noninterest income 398,473 187,779
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Total noninterest income 2,470,201 1,595,034
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Noninterest expense:
Salaries and employee benefits 2,650,618 2,149,312
Expenses of premises and fixed assets 531,939 474,468
Outside services 774,948 669,166
Other noninterest expense 920,694 954,363
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Total noninterest expense 4,878,199 4,247,309
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Income before income taxes 1,383,451 627,310
Income tax provision 534,253 237,300
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Net income $ 849,198 $ 390,010
=========== ===========
Basic earnings per share $ .60 $ .28
=========== ===========
Diluted earnings per share $ .56 $ .27
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See Notes to Consolidated Financial Statements 2
High Country Financial Corporation
Consolidated Statements of Income
For the three months ended September 30,
(Unaudited)
2003 2002
---- ----
Interest income:
Interest and fees on loans $ 2,376,904 $ 2,213,572
Interest on securities available for sale 108,534 196,346
Federal funds sold 16,188 54,494
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Total interest income 2,501,626 2,464,412
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Interest expense:
Certificates of deposit, $100,000 or more 301,649 297,843
Other deposits 588,861 737,943
Other borrowings 13,589 38,606
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Total interest expense 904,099 1,074,392
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Net interest income 1,597,527 1,390,020
Provision for loan losses (220,000) (198,000)
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Net interest income after provision for loan losses 1,377,527 1,192,020
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Noninterest income:
Service charges on deposit accounts 262,144 135,923
Mortgage origination income 324,178 279,944
Brokerage commissions and fees 129,285 60,205
Other noninterest income 140,483 85,257
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Total noninterest income 856,090 561,329
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Noninterest expense:
Salaries and employee benefits 898,804 737,174
Expenses of premises and fixed assets 182,584 170,605
Outside services 264,526 249,832
Other noninterest expense 325,547 494,547
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Total noninterest expense 1,671,461 1,652,158
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Income before income taxes 562,156 101,191
Income tax provision 216,594 54,300
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Net income $ 345,562 $ 46,891
=========== ===========
Basic earnings per share $ .24 $ .03
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Diluted earnings per share $ .19 $ .03
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See Notes to Consolidated Financial Statements 3
High Country Financial Corporation
Consolidated Statements of Changes in Stockholders' Equity
For the nine months ended September 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 849,198 849,198
Change in unrealized gain on securities
available for sale, net of tax effect (109,167) (109,167)
Shares issued for options and
warrants exercised
1,840 24,378 0 0 24,378
--------- ------------ ---------- ----------- ------------
Balance at end of period 1,420,649 $ 14,452,277 $1,654,783 $ 107,122 $ 16,214,182
========= ============ ========== =========== ============
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 390,010 390,010
Change in unrealized gain on securities
available for sale, net of tax effect 159,088 159,088
Shares issued for options and
warrants exercised
1,620 14,855 0 0 14,855
--------- ------------ ---------- ----------- ------------
Balance at end of period 1,418,442 $ 14,427,899 $ 444,603 $ 234,308 $ 15,106,810
========= ============ ========== =========== ============
See Notes to Consolidated Financial Statements 4
High Country Financial Corporation
Consolidated Statements of Cash Flows
For the nine months ended September 30,
(Unaudited)
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 849,198 $ 390,010
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 301,477 238,322
Provision for loan losses 602,500 422,000
Changes in other assets and liabilities:
Accrued interest income and other assets (693,348)
(247,474)
Accrued interest payable and other liabilities 107,168 50,665
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Net cash provided by operating activities 1,612,869 407,649
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Cash flows from investing activities:
Net decrease in interest bearing deposits with banks 1,996,279 1,996,476
Net (increase) decrease in federal funds sold 9,862,000 (672,000)
Loan (originations) principal repayments, net (19,946,020) (14,658,043)
Purchases of investment securities (4,072,150) (16,253,096)
Maturities, paydowns, and calls of securities 7,260,918 2,116,368
Purchases of restricted equity securities (63,937)
(141,900)
Capital expenditures for premises and equipment (121,080) (39,256)
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Net cash (used in) investment activities (5,161,953) (27,573,488)
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Cash flows from financing activities:
Increase in deposits 5,309,963 28,095,506
(Decrease) in notes payable (2,000,000) (2,000,000)
Increase in other borrowings 768,805 826,373
Proceeds from sale of common stock 24,378 14,855
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Net cash provided by financing activities 4,103,146 26,936,734
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Net increase (decrease) in cash and cash equivalents 554,062 (229,105)
Beginning cash and cash equivalents 5,281,496 4,827,479
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Ending cash and cash equivalents $ 5,835,558 $ 4,598,374
============ ============
Supplemental cash flow disclosures:
Cash paid during period for interest $ 2,926,511 $ 3,135,127
============ ============
Cash paid during period for income taxes $ 549,198 $ 229,592
============ ============
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 (the "Company) 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,
certain prior period information reflects 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 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 in the Bank's market area. 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 September 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
High Country Financial Corporation
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 the materiality
of a potential segment and 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 nine
months ended September 30, 2003 and 2002 is as follows:
September 30,
-----------------------
2003 2002
------------ -------------
Compensation cost recognized in income for all
stock-based compensation awards $ - $ -
============ =============
Pro forma net income(1) $ 781,709 $ 297,308
============ =============
Pro forma earnings per common share(1) $ 0.55 $ 0.21
============ =============
Pro forma earnings per diluted share(1) $ 0.52 $ 0.20
============ =============
(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 September 30, 2003 and
December 31, 2002 are as follows (in thousands):
2003 2002
---- ----
Commercial $ 17,347 $ 37,755
Real estate:
Construction and land development 40,841 48,606
Residential, 1-4 families 36,197 25,262
Residential, 5 or more families 8,848 4,569
Agricultural 4,314 3,003
Non-farm, nonresidential 35,740 2,179
Farmland 1,065 1,506
Consumer 11,163 13,036
Obligations of states and political subdivisions 171 15
Other 65
0
Unearned loan origination fees, net of costs (271) (239)
Allowance for loan losses (2,026) (1,712)
--------- ---------
$ 153,389 $ 134,045
========= =========
8
High Country Financial Corporation
Notes to Consolidated Financial Statements
Note 2. Loans Receivable, continued
At September 30, 2003 and December 31, 2002, the Company had nonaccrual loans
totaling $2,136,454 and $668,789 respectively. Foreclosed, repossessed or idled
properties amounted to $430,017 and $243,293 at September 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 nine months
ended September 30, 2003 and 2002 is as follows:
2003 2002
---- ----
Balance, beginning of period $ 1,712,350 $ 1,329,496
Provision charged to operations 602,500 422,000
Recoveries of amounts charged off 7,318 927
Amounts charged off (295,705) (155,345)
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Balance, end of period $ 2,026,463 $ 1,597,078
=========== ===========
Note 4. Property and Equipment
Components of Property and Equipment
Components of property and equipment and total accumulated depreciation at
September 30, 2003 and December 31, 2002 are as follows:
2003 2002
---- ----
Land and improvements $ 1,456,825 $ 1,456,825
Buildings and improvements 3,627,987 3,603,934
Furniture and equipment 1,555,687 1,458,662
----------- -----------
Property and equipment, total 6,640,499 6,519,421
Less accumulated depreciation (983,657) (759,535)
----------- -----------
Property and equipment, net of depreciation $ 5,656,842 $ 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, three branch facilities, and the land
for another branch under operating leases. Two branch facilities are leased from
related parties with minimum monthly payments of $1,000 and $3,500. Future
minimum lease payments under non-cancelable agreements are as follows:
2003 $ 36,300
2004 135,200
2005 73,400
2006 52,000
2007 42,000
2008 24,500
----------
$ 363,400
==========
Rental expense was $78,402 and $73,319 for the first three quarters 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 reserved 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
Financial instruments with off-balance-sheet risk, 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 that 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 two branch facilities from related parties. 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 $849,198 or $0.60 basic net income per share for
the nine months ended September 30, 2003. Total interest income
amounted to $7,300,951 while interest expense of $2,907,002 resulted
in net interest income of $4,393,949 for the year to date period.
Provisions for loan losses charged to operations were $602,500 for the
nine months ended September 30, 2003. Noninterest income and expenses
amounted to $2,470,201 and $4,878,199, respectively for the period.
Total assets at September 30, 2003 were $182,433,710, an increase of
$4,950,345 or 2.79% over the total at December 31, 2002. The increase
in assets was primarily due to the $19,343,520 growth in net loans
funded by an increase in deposits of $5,309,963 and decreases in
Federal funds sold and investment securities of $9,862,000 and
$3,431,526 respectively.
Loans
At September 30, 2003 the loan portfolio, net of allowance for loan
losses, totaled $153,388,781 and represented 84.1% of total assets
compared to $134,045,261 or 75.5% of total assets at December 31,
2002. The loan-to-deposit ratios at September 30, 2003 and December
31, 2002 were 94.6% and 85.5%, respectively.
Investment Securities
Securities available for sale totaled $9,698,710 at September 30, 2003
and $13,130,236 at December 31, 2002. The reduction in securities
available for sale is due to principal repayments and calls of the
Company's mortgage backed securities. At September 30, 2003 there were
unrealized gains included in the carrying value of the available for
sale securities of $162,307 compared to $327,711 at December 31, 2002.
There were no sales of securities during the nine months ended
September 30, 2003 and 2002.
Deposits
Total deposits increased from $156,846,628 at December 31, 2002 to
$162,156,591 at September 30, 2003, an increase of $5,309,963 or 3.4%.
The growth is attributable to the Company's overall ability to attract
and retain local customers resulting in additional customer accounts.
As of September 30, 2003, the Company had $32,937,325 in time deposits
of $100,000 or more compared to $30,467,844 at December 31, 2002, an
increase of $2,469,481.
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 $16,214,182 at September 30, 2003,
compared to $15,449,773 at December 31, 2002, an increase of $764,409.
The increase is attributed to proceeds from the issuance of stock of
$24,378, net earnings for the first three quarters of $849,198 and the
negative change in the unrealized loss on available for sale
securities of $109,167.
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. Companys are expected to
meet a minimum ratio of total qualifying capital to risk adjusted
assets of 8.0%. The Company's risk-based capital ratio was 10.93% at
September 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 September 30,
2003, the Company's leverage capital ratio was 8.91%.
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. The Company had
nonaccrual loans of approximately $2,136,000, and other real estate
owned of $430,017 at September 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 September 30, 2003 and at December 31, 2002.
The allowance for loan losses was $2,026,463 or 1.30% of outstanding
loans at September 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 allowance 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
15
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements, continued
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
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. The
Company's primary liquid assets are cash and due from banks, federal
funds sold and Investment securities available for sale. At September
30, 2003, the ratio of liquid assets to total deposits was 12.9%
compared to a ratio of 22.7% at December 31, 2002.
16
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of the Nine Months Ended September 30, 2003 to September 30, 2002
- ----------------------------------------------------------------------------
Overview
The Company earned $849,198 or $0.60 basic net income per share for
the nine months ended September 30, 2003 compared to $390,010 or $0.28
basic net income per share for the nine months ended September 30,
2002.
The loan loss provision for the nine-month period ending September 30,
2003 was $602,500, compared to $422,000 for the nine months ended
September 30, 2002. 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.
Net Interest Income
Net interest income for the first nine months of 2003 increased by
$692,364 over the same period in 2002. Interest income increased by
$461,738 while interest expense decreased by $230,626. Interest paid
on certificates of deposit greater than $100,000 increased by $13,606
from the same period a year ago.
Non-interest Income
Non-interest income was $2,470,201 for the nine months ended September
30, 2003 compared to $1,595,034 for the same period in 2002. Service
charges on deposit accounts amounted to $803,660 for the first nine
months of 2003 and $409,192 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 $950,102 and $317,966,
compared to $825,480 and $172,583 in the same period a year earlier.
Non-interest Expense
Non-interest expense was $4,878,199 for the nine-month period ended
September 30, 2003 compared to $4,247,309 for the same period in 2002.
Salaries and employee benefits increased by $501,306 over the same
period in 2002. Occupancy and equipment expense increased by $57,471.
Data processing costs and advertising and marketing costs amounted to
$531,260 and $95,843,
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High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
respectively for 2003 compared with $669,166 and $100,420,
respectively, in 2002.
Income Taxes
A provision for income taxes in the amount of $534,253 was made for
the nine months ended September 30, 2003. The provision for the first
nine months of 2002 was $237,300. The additional provision for income
taxes was due to the increase in year-to-date earnings in 2003
compared to earnings through the same period in 2002.
Comparison of the Three Months Ended September 30, 2003 and September 30, 2002
- ------------------------------------------------------------------------------
Overview
The Company's net income for the three months ended September 30, 2003
was $345,562 or $0.24 basic net income per share compared to $46,891
or $0.03 basic net income per share for the same period of 2002.
The loan loss provision for the three months ended September 30, 2003
was $220,000, compared to $198,000 for the same three-month period in
2002. 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.
Net Interest Income
Net interest income for the third quarter of 2003 increased by
$207,507 over the same period in 2002. Interest income increased by
$37,214 while interest expense decreased by $170,293. Interest paid on
certificates of deposit greater than $100,000 increased by $3,806 over
the same period a year ago.
Non-interest Income
Non-interest income was $856,090 for the three months ending September
30, 2003 up from $561,329 in 2002. Service charge income amounted to
$262,144, an increase of $126,221 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 $324,178 during the quarter compared
to $279,944 for the same quarter in 2002.
18
High Country Financial Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Non-interest Expense
Non-interest expense was $1,671,461 for the quarter ended September
30, 2003 compared to $1,652,158 for the quarter ended September 30,
2002. Salaries and employee benefits increased by $161,630 over the
same period in 2002. Expenses of premises and fixed assets amounted to
$182,584 for 2003 and $170,605 for 2002. Data processing fees amounted
to $170,676 in 2003 and $176,700 in the same quarter of 2002.
Additionally, advertising and marketing expenses totaled $32,985 and
$34,540 for the third quarter of 2003 and 2002, respectively.
Income Taxes
A provision for income taxes in the amount of $216,594 was made for
the three months ended September 30, 2003 compared to a provision of
$54,300 for the same period in 2002.
19
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.
20
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 September 30, 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.
21
High Country Financial Corporation
Item 6.EXHIBITS AND REPORTS ON FORM 8-K, continued
(10)(vi) Lease Agreement between Howard Street Ventures, LLC and High
Country Financial Corporation dated August 1, 2003, incorporated
herein by reference to Exhibit 10(vi) to the Form 10-QSB filed with
the SEC on August 13, 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 August 6, 2003 the Company filed with the SEC on Form 8-K the
announcement of a news release containing consolidated financial
information for the year to date and quarter ended June 30, 2003.
On August 27, 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 definitive agreement to
merge the two banks.
22
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)
Date: November 13, 2003 /s/ David H. Harman
----------------- ------------------
David H. Harman
Senior Vice President & Chief Financial Officer
23