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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
x
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1998
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number: 0-23409
HIGH COUNTRY BANCORP, INC.
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(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Colorado 84-1438612
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
130 West 2nd Street, Salida, Colorado 81201
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Issuer's Telephone Number, Including Area Code: (719) 539-2516
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the issuer: (l) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State registrant's revenues for its most recent fiscal year: $7,190,580
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the last sale of which the registrant was aware ($12.00 per
share on September 15, 1998), was approximately $12,659,868. Solely for
purposes of this calculation, the term "affiliate" refers to all directors and
executive officers of the registrant and all stockholders beneficially owning
more than 5% of the registrant's common stock.
As of September 15, 1998, there were issued and outstanding 1,322,500
shares of the registrant's common stock, of which 267,511 shares were held by
affiliates (as defined above).
Transitional Small Business Disclosure Format (check one): YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1998 (Parts I and II)
2. Portions of Proxy Statement for the 1998 Annual Meeting of
Stockholders (Part III)
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PART I
ITEM 1. BUSINESS
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GENERAL
HIGH COUNTRY BANCORP, INC. High Country Bancorp, Inc. (the "Company") was
incorporated under the laws of the State of Colorado in August 1997 for the
purpose of becoming a savings and loan holding company for Salida Building and
Loan Association ("Salida" or the "Association"). On December 9, 1997, the
Association consummated its conversion from mutual to stock form (the
"Conversion") and the Company completed its offering of Common Stock through the
sale and issuance of 1,322,500 shares of Common Stock at a price of $10.00 per
share, realizing gross proceeds of $13.2 million and net proceeds of $12.7
million. The Company purchased all of the capital stock of the Association with
$5.8 million of the offering proceeds.
Prior to the acquisition of all of the outstanding stock of the Association
the Company had no assets or liabilities and engaged in no business activities.
Since its acquisition of the Association, the Company has engaged in no
significant activity other than investing the proceeds of the offering which it
retained, holding the stock of the Association and operating the business of a
savings and loan association through the Association. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to the Association and its subsidiaries.
The Company's executive offices are located at 130 West 2nd Street, Salida,
Colorado. Its telephone number is (719) 539-2516.
SALIDA BUILDING AND LOAN ASSOCIATION. The Association is a federal stock
savings and loan association operating through offices located in Salida,
Colorado, Buena Vista, Colorado and Leadville, Colorado and serving Chaffee,
Lake, Western Fremont and Saguache Counties in Colorado. The Association was
chartered in 1886 as the first state-chartered building and loan association in
Colorado. The Association received federal insurance of its deposit accounts
and became a member of the FHLB in 1937. The Association became a federally-
chartered association on August 16, 1993 under its current name of Salida
Building and Loan Association. Effective December 9, 1997, the Association
became a stock savings and loan association. At June 30, 1998, the Association
had total assets of $94.5 million, loans receivable (net) of $81.4 million,
total deposits of $63.4 million and equity of $12.3 million.
Historically, the Association has operated as a traditional savings
institution by emphasizing the origination of loans secured by one- to four-
family residences. Since fiscal 1996, the Association has significantly
increased its origination of consumer, commercial business and commercial real
estate loans, including loans for the purchase and development of raw land, all
of which loans have been originated in its market area.
The Association is subject to examination and comprehensive regulation by
the Office of Thrift Supervision ("OTS"), and the Association's savings deposits
are insured up to applicable limits by the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"). The Association is a member of and owns capital stock in the Federal
Home Loan Bank ("FHLB") of Topeka, which is one of 12 regional banks in the FHLB
System. The Association is further subject to regulations of the Federal
Reserve Board governing reserves to be maintained and certain other matters.
Regulations significantly affect the operations of the Association. See
"Regulation of the Bank."
The Association's executive offices are located at 130 West 2nd Street,
Salida, Colorado 81201-0309, and its main telephone number is (719) 539-2516.
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MARKET AREA
The Association's market area for gathering deposits and making loans is
Chaffee, Lake, Western Fremont and Saguache Counties in Colorado, which is
located in central Colorado.
Tourism related businesses are the base of the market area's economy. The
primary employers in the market area are the tourism industry and the
government. As of 1990, the market area had a population of approximately
23,000. Major employers in the area include the Colorado Department of
Corrections, the Heart of the Rockies Medical Center, Asarco mines, local school
districts and governments and Wal Mart. In addition, the area is a frequent
destination for retirees, self-employed individuals and telecommuters who wish
to take advantage of the recreation and beauty that the Rocky Mountains offer.
Major towns (population) in the market area include Salida (4,737), Buena Vista
(1,752) and Leadville (2,659).
LENDING ACTIVITIES
GENERAL. The Association's loan portfolio, net, totaled $81.4 million at
June 30, 1998, representing 86.06% of total assets at that date. Substantially
all loans are originated in the market area. At June 30, 1998, $55.3 million,
or 65.46% of the Association's gross loan portfolio consisted of one- to four-
family, residential mortgage loans. Other loans secured by real estate include
commercial real estate loans which amounted to $4.9 million or 5.81% of the
gross loan portfolio and land development loans, which amounted to $2.8 million
or 3.31% of the gross loan portfolio at June 30, 1998. The Association also
originates consumer loans, most of which are automobile loans, and commercial
business loans. At June 30, 1998, consumer loans totaled $8.4 million, or 9.89%
of the gross loan portfolio, and commercial business loans totaled $6.6 million
or 7.79% of the gross loan portfolio.
ANALYSIS OF LOAN PORTFOLIO
Set forth below is selected data relating to the composition of the
Association's loan portfolio by type of loan at the dates indicated. At
June 30, 1998, the Association had no concentrations of loans exceeding 10% of
total loans other than as disclosed below.
<TABLE>
<CAPTION>
At June 30,
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1998 1997
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Amount % Amount %
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family........... $55,330 68.01% $42,979 68.08%
Commercial.................... 4,913 6.04 4,058 6.43
Construction.................. 5,229 6.43 4,216 6.68
Land development.............. 2,795 3.43 2,401 3.80
------- ------ ------- ------
Total mortgage loans....... 68,267 83.91 53,654 84.99
------- ------ ------- ------
Consumer loans.................. 8,360 10.28 5,857 9.28
Loans on savings accounts....... 1,213 1.49 781 1.24
Commercial loans................ 6,580 8.09 4,872 7.72
Other loans..................... 101 .12 98 .15
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Total loans..................... 84,521 103.89 65,262 103.38
------- ------ ------- ------
Less:
Undisbursed loans in process.. 1,938 2.38 1,123 1.78
Deferred fees and discounts.. 473 .58 408 .64
Allowance for losses.......... 751 .93 604 .96
------- ------ ------- ------
Loan portfolio, net............. $81,359 100.00% $63,127 100.00%
======= ====== ======= ======
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LOAN MATURITY SCHEDULE
The following table sets forth certain information at June 30, 1998
regarding the dollar amount of loans maturing in the Association's portfolio
based on their contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less.
<TABLE>
<CAPTION>
Three Three to One to Three to Five to Over
Months Twelve Months Three Years Five Years Ten Years Ten Years Total
------ ------------- ----------- ---------- --------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.. $ 203 $2,254 $ 655 $1,720 $6,810 $43,688 $55,330
Commercial........... 97 739 375 1,355 923 1,424 4,913
Construction......... 2,111 3,118 -- -- -- -- 5,229
Land development..... 679 1,043 327 589 157 -- 2,795
------ ------ ------ ------ ------ ------- -------
Total............. $3,090 $7,154 $1,357 $3,664 $7,890 $45,112 $68,267
====== ====== ====== ====== ====== ======= =======
</TABLE>
The next table sets forth at June 30, 1998, the dollar amount of all loans
which have predetermined interest rates and have floating or adjustable interest
rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
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(In thousands)
<S> <C> <C>
Mortgage loans
One- to four-family.. $50,560 $4,770
Commercial........... 4,313 600
Construction......... 5,229 --
Land development.... 2,795 --
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Total........... $62,897 $5,370
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</TABLE>
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Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Association the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when current mortgage loan market rates are substantially
lower than rates on existing mortgage loans.
ONE- TO FOUR-FAMILY REAL ESTATE LOANS. The Association's primary lending
activity consists of the origination of loans secured by owner-occupied, one- to
four-family residential properties located in its primary market area. At
June 30, 1998, $55.3 million, or 68.01%, of the Association's loan portfolio
consisted of loans secured by one-to four-family residential properties, of
which $4.7 million, or 5.78%, carried adjustable interest rates. The
Association estimates that the average size of the residential mortgages
that it currently originates is $85,000.
The Association originates both fixed-rate mortgage loans and adjustable-
rate mortgage loans ("ARMs"). Due to customer preferences for fixed-rate loans,
the Association has had difficulty originating a large volume of ARMs in recent
years. Most fixed-rate mortgage loans are originated for terms of 15 or
30 years. ARMs are originated for terms of up to 30 years. The Association's
ARMs have interest rates that adjust every year, with a maximum adjustment of
two percentage points for any adjustment period and up to six percentage points
over the life of the loan. These loans are indexed to the rate on one-year U.S.
Treasury securities, adjusted to a constant maturity. The current margin is two
and one-half percentage points. Historically, all loans originated by the
Association have been retained in the Association's loan portfolio. However, in
June 1997 and June, 1996, the Association sold two large blocks of fixed-rate
loans of $3.9 million and $5.8 million, respectively, in order to manage
interest rate risk. Although the Association did not sell any loans in the year
ended June 30, 1998, the Association may sell loans in the future.
The Association's lending policies generally limit the maximum loan-to-
value ratio on residential mortgage loans to a maximum of 80% of the lesser of
the appraised value of the underlying property or its purchase price. For those
few loans where the loan-to-value ratio exceeds 80%, the Association requires
private mortgage insurance. Originated loans in the Association's portfolio
include due-on-sale clauses which provide the Association with the contractual
right to deem the loan immediately due and payable in the event that the
borrower transfers ownership of the property without the Association's consent.
The retention of ARMs in portfolio helps reduce the Association's exposure
to increases in interest rates. There are, however, unquantifiable credit risks
resulting from potential increased costs to the borrower as a result of upward
repricing of ARMs. It is possible that during periods of rising interest rates,
the risk of default on ARMs may increase due to the upward adjustment of
interest costs to the borrower. The Association does not originate ARM loans
which provide for negative amortization. Although ARMs allow the Association to
increase the sensitivity of its asset base to changes in interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate ceilings contained in ARM contracts. In addition, since ARM
interest rates can be adjusted no more frequently than annually, the yield on
the Association's ARM portfolio does not adjust as rapidly as market interest
rates. Accordingly, there can be no assurance that yields on the Association's
ARMs will adjust sufficiently to compensate for increases in its cost of funds.
The Association also originates second mortgage loans primarily for its
existing one- to four-family first mortgage customers. At June 30, 1998,
$5.2 million or 6.4% of the Association's loan portfolio consisted of second
mortgage loans and home equity lines of credit. Second mortgage loans are
generally underwritten on a fixed-rate basis with terms of up to 15 years and
are fully amortizing over the term of the loan. Second mortgages are generally
subject to an 80% combined loan-to-value limitation, including all other
outstanding mortgages or liens.
CONSTRUCTION LOANS. The Association offers construction financing to
qualified borrowers for construction primarily of single-family residential
properties and to qualified developers for construction of small residential
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developments. The Association provides financing to one builder for the
construction of no more than four homes at a time. Construction loans are
generally limited to a maximum loan-to-value ratio of 75% of the appraised value
of the property on an "as-completed" basis. The Association attempts to
structure its residential construction loans so that they convert to a permanent
loan, although this is not necessarily the case. Loans to finance the
construction of residential property on a speculative basis are offered on a
fixed-rate basis only, with the rate indexed to the prime rate plus a negotiated
increment. The Association limits the origination of construction loans to
borrowers and developers with whom the Association has had substantial prior
experience due to the significant time and other requirements associated with
originating and monitoring construction loans.
Loan proceeds are disbursed during the construction phase (a maximum of
12 months) according to a draw schedule based on the stage of completion.
Construction loans are underwritten on the basis of the estimated value of the
property as completed and loan-to-value ratios must conform to the requirements
for the permanent loan. At June 30, 1998, $4.7 million, or 5.6%, of the
Association's gross loan portfolio consisted of construction loans to fund the
construction of one- to four-family properties. The Association had an
additional $489,000, or .5%, of the Association's gross loan portfolio, in loans
to finance the construction of a commercial property at June 30, 1998. This
loan was the Association's largest outstanding loan at June 30, 1998.
Approximately 75% of all construction loans originated by the Association
convert into permanent loans upon completion of the construction phase.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction cost proves to be inaccurate, the
Association may be required to advance funds beyond the amount originally
committed to permit completion of the development. If the estimate of the value
proves to be inaccurate, the Association may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment. The ability of a developer to sell developed lots or
completed dwelling units will depend on, among other things, demand, pricing,
availability of comparable properties and economic conditions. The Association
has sought to minimize this risk by limiting construction lending to qualified
borrowers in the Association's market area, limiting the aggregate amount of
outstanding construction loans and imposing a stricter loan-to-value ratio
requirement than required for one- to four-family mortgage loans.
LAND DEVELOPMENT LOANS. The Association originates land loans to local
developers for the purpose of developing the land (i.e., roads, sewer and water)
for sale, and loans secured by raw land, such as cattle ranching acreage. Such
loans are secured by a lien on the property, are generally limited to 70% of the
developed value of the secured property and are typically made for a period of
one-year, renewable based on negotiations with the Association. Most land
development loans are expected to be fully paid off five years after the
original date of the loan. The Association generally requires semi-annual
interest payments during the term of the land loan. The amount of funds
available under the Association's land loans usually include an amount from
which the borrower can pay the stated interest due thereon until completion of
the loan term. The principal of the loan is reduced as lots are developed, sold
and released. All of the Association's land loans are secured by property
located in its primary market area. In addition, the Association obtains
personal guarantees from its borrowers and originates such loans to developers
with whom it has established relationships. At June 30, 1998, the Association
had $2.8 million of land development loans, which constituted 3.31% of the gross
loan portfolio at such date. This total includes three loans of $367,000,
$351,000 and $333,000, respectively, which are three of the Association's ten
largest loans. The Association originated $1.6 million and $1.8 million in land
development loans during fiscal 1998 and fiscal 1997, respectively. Land
development loans generally involve a higher degree of risk than residential
mortgage lending in that there are large loan balances to single borrowers, and
the initial estimate of the property value at completion may be inaccurate due
to market variations and the difficulty in selling lots for home building. The
success of such land development projects is sensitive to changes in supply and
demand conditions in the local housing market, as well as regional and economic
conditions generally. Although the Association has attempted to reduce these
risks, as noted above, potential investors should be aware of these factors in
making their investment decision.
5
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COMMERCIAL REAL ESTATE LOANS. At June 30, 1998, loans secured by
commercial real estate properties totaled $4.9 million, and represented 5.81% of
the Association's loan portfolio. Commercial real estate loans are secured by
motels, small office buildings and retail stores and other non-residential
property. Some of the Association's commercial real estate loans are made to
local businesses connected to the tourism and recreational rafting industries,
which predominate in the Association's primary market area. At June 30, 1998,
the Association's largest permanent outstanding commercial real estate loan was
a $433,000 loan secured by a motel in Salida, Colorado. Substantially all of
the Association's commercial real estate loans are secured by property located
within the Association's market area and were current and performing at June 30,
1998.
Commercial real estate loans generally have terms of up to 10 years and are
underwritten on either a fixed or adjustable-rate basis. Commercial real estate
loans have a maximum 20-year amortizing, although the term of the loan may be a
fixed ten-year balloon loan. Adjustable-rate commercial and multi-family
mortgages are indexed to the prime rate and adjust on an annual basis. Loan-to-
value ratios may not exceed 70% of the appraised value of the underlying
property. It is the Association's policy to obtain personal guarantees from all
principals obtaining commercial real estate loans. In assessing the value of
such guarantees, the Association reviews the individuals' personal financial
statements, credit reports, tax returns and other financial information.
Commercial real estate lending entails significant additional risks
compared to residential property lending. These loans typically involve large
loan balances to single borrowers or groups of related borrowers. The payment
experience on such loans typically is dependent on the successful operation of
the real estate project or business. These risks can be significantly affected
by business conditions and by supply and demand conditions in the market for
office and retail space, and, as such, may be subject to a greater extent to
adverse conditions in the economy generally. To minimize these risks, the
Association generally limits this type of lending to its market area and to
borrowers with which it has substantial experience or who are otherwise well
known to management.
With certain limited exceptions, the maximum amount that the Association
may lend to any borrower (including certain related entities of the borrower) at
any one time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by readily marketable collateral. At June 30, 1998, the maximum
amount that the Association could have loaned to any one borrower without prior
OTS approval was approximately $2.0 million. At June 30, 1998, the largest
aggregate amount of loans that the Association had outstanding to any one
borrower and their related interests was $1.1 million and consisted of five
loans, including a $482,000 loan secured by heavy equipment and a $450,000 loan
secured by a cattle ranch property. The largest single loan outstanding was a
$489,000 construction loan secured by a commercial property, which is discussed
above.
COMMERCIAL BUSINESS LOANS. At June 30, 1998, the Association had
$6.6 million in commercial business loans which represented 7.79% of the
Association's gross loan portfolio. The Association is permitted to invest up
to 20% of its assets in commercial loans. The Association's commercial business
lending activities are directed towards small businesses located in its market
area, including those connected to the tourism industry, such as recreational
vehicle ("RV") dealers, rafting companies and other tourist-related businesses.
Generally, the Association's commercial business loans are secured by assets
such as inventory, equipment or other assets and are guaranteed by the
principals of the business. From time to time, the Association has engaged in
dealer floor-plan lending with a limited number of dealerships with which the
Association has had substantial experience. At June 30, 1998, the Association
had a dealer floor-plan loan of $461,000, and a heavy equipment loan of $482,000
mentioned above. Commercial business loans usually carry a fixed rate and
generally are underwritten for a maximum of five years.
The Association underwrites its commercial business loans on the basis of
the borrower's cash flow and ability to service the debt from earnings rather
than on the basis of the underlying collateral value, and seeks to structure
such loans to have more than one source of repayment. The borrower is required
to provide the Association with sufficient information to allow the Association
to make its lending determination. In most instances, this information consists
of
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at least three years of financial statements, a statement of projected cash
flows, current financial information on any guarantor and any additional
information on the collateral.
CONSUMER LOANS. The Association's consumer loans, which totaled
$9.7 million or 11.45% of the gross loan portfolio at June 30, 1998, includes
primarily loans secured by deposit accounts, automobile loans and other personal
loans, which represented 1.49%, 10.28%, and .12% of its total loan portfolio,
respectively, at June 30, 1998. The Association also makes RV and boat loans,
tractor loans and home improvement loans pursuant to its consumer lending
authority. The Association has recently emphasized consumer lending because
of the higher yields and shorter-terms of such loans.
The Association makes deposit account loans up to 95% of the depositor's
account balance. The interest rate is normally 2.0% above the rate paid on the
account and the account must be pledged as collateral to secure the loan.
Savings account loans are secured by demand notes and interest is due on a
quarterly basis. The Association's automobile loans are generally underwritten
in amount up to the purchase price of the automobile or the trade-in value as
published by the National Automobile Dealers Association. The terms of such
loans generally do not exceed 60 months and vary depending on the age of the
vehicle securing the loan. The Association requires the borrower to insure the
automobile under a policy listing the Association as loss payee. The
Association also makes unsecured personal loans of up to $10,000. The terms
of such loans do not exceed 12 months.
Since fiscal 1995, the Association has increased its consumer lending,
especially auto loans, by hiring a consumer loan officer. The Association
intends to continue to emphasize the origination of consumer loans, especially
automobile loans. Consumer loans entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or secured by rapidly depreciable assets such as automobiles, RVs, boats and
tractors. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
The remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Such loans may also give rise to claims
and defenses by a consumer loan borrower against an assignee of such loans such
as the Association, and a borrower may be able to assert against such assignee
claims and defenses which it has against the seller of the underlying
collateral.
LOAN SOLICITATION AND PROCESSING. The Association's mortgage loans have
generally been originated by its loan officers, branch managers and senior
management officials. Loan originations are obtained from a number of sources,
including existing and past customers, members of the local community and
established builders and realtors within the Association's market area. Upon
receipt of a loan application from a prospective borrower, the Association
reviews the information provided and makes an initial determination as to
whether certain basic underwriting standards regarding the type of property,
debt-to-income ratios and other credit concerns are satisfied. A credit report,
employment history and other evidence is obtained to verify certain specific
information relating to the loan applicant's employment, income and credit
standing. For real estate loans, an appraisal of the property intended to
secure the loan is undertaken by an independent appraiser approved by the
Association. It is the Association's policy to obtain appropriate insurance
protection on all real estate first mortgage loans and to obtain a lawyer's
opinion of title which insures that the property is free of prior encumbrances.
The borrower must also obtain paid flood insurance when the property is located
in a flood plain as designated by the Federal Government. It is the
Association's policy to record a lien on the real estate securing the loan.
Borrowers generally are required to advance funds for certain items such as real
estate taxes, flood insurance and private mortgage insurance, when applicable.
Secured loans in amounts of up to $200,000 may be approved by two members
of the Association's loan committee. All loans in excess of $200,000 must be
approved by the Board of Directors. Branch Managers may approve consumer loans
of up to $10,000, or up to $20,000 with the approval of the consumer loan
officer. Consumer
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loans of $20,000 to $100,000 may be approved by two members of the loan
committee, while consumer loans over $100,000 must be approved by the full Board
of Directors. Commercial loans of up to $100,000 may be approved by two members
of the loan committee, while such loans over $100,000 to $200,000 are approved
by two loan committee members and one outside Director and loans of $200,000 or
over go to the full Board.
Loan applicants are promptly notified in writing of the Association's
decision. If the loan is approved, the notification will provide that the
Association's commitment will generally terminate within 30 days of the
approval. It has been the Association's experience that substantially all
approved loans are funded.
LOAN ORIGINATIONS, PURCHASES AND SALES. Most loans originated by the
Association are intended to be held in the Association's portfolio until
maturity. The Association is a qualified seller/servicer for the Federal Home
Loan Mortgage Corporation ("FHLMC"). The Association uses FHLMC documentation
for its residential mortgages, and most of the loans in its portfolio would
generally qualify for sale to FHLMC under standard programs. The Association,
however, has selectively sold blocks of loans when appropriate for
asset/liability management purposes. In June 1997, the Association sold
$3.9 million in fixed-rate loans to FHLMC for this reason. During 1998, the
Association did not sell any loans.
The following table sets forth certain information with respect to the
Association's loan origination activity for the periods indicated. The
Association has not purchased any loans in the periods presented.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------
1998 1997
---------- --------
(In thousands)
<S> <C> <C>
Net loans, beginning of period......................... $63,127 $50,076
Origination by type:
- --------------------
Mortgage loans:
One- to four-family................................. $26,580 $19,174
Commercial.......................................... 1,979 981
Land development.................................... 1,559 1,813
Consumer loans......................................... 10,890 9,179
Loans on savings accounts.............................. 1,007 604
Commercial loans....................................... 7,336 4,669
------- -------
Total loans originated............................ 49,351 36,420
------- -------
Loans sold............................................. -- 3,968
------- -------
Repayments............................................. 30,093 19,636
------- -------
Decrease (increase) in other items, net................ (1,026) 235
------- -------
Net increase (decrease) in loans receivable, net.. 18,232 13,051
------- -------
Net loans, end of period............................... $81,359 $63,127
======= =======
</TABLE>
NONPERFORMING LOANS AND OTHER PROBLEM ASSETS. It is management's policy to
continually monitor its loan portfolio to anticipate and address potential and
actual delinquencies. When a borrower fails to make a payment on a loan, the
Association takes immediate steps to have the delinquency cured and the loan
restored to current status. Loans which are delinquent 15 days incur a late fee
of 5.0% of principal and interest due. As a matter of policy, the
8
<PAGE>
Association will contact the borrower after the loan has been delinquent
30 days. If payment is not promptly received, the borrower is contacted again,
and efforts are made to formulate an affirmative plan to cure the delinquency.
Generally, after any loan is delinquent 90 days or more, formal legal
proceedings are commenced to collect amounts owed. Loans are placed on
nonaccrual status if the loan becomes past due more than 90 days unless such
loans are well-secured and in the process of collection. Loans are charged off
when management concludes that they are uncollectible. See Note 3 of Notes to
Financial Statements.
Real estate acquired by the Association as a result of foreclosure is
classified as real estate acquired through foreclosure until such time as it is
sold. When such property is acquired, it is initially recorded at estimated
fair value and subsequently at the lower of book value or fair value, less
estimated costs to sell. Costs relating to holding such real estate are charged
against income in the current period, while costs relating to improving such
real estate are capitalized until a saleable condition is reached. Any required
write-down of the loan to its fair value less estimated selling costs upon
foreclosure is charged against the allowance for loan losses.
The following table sets forth information with respect to the
Association's nonperforming assets at the dates indicated. Further, no loans
were recorded as restructured loans within the meaning of SFAS No. 15 at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real estate:
One- to four-family.......................... $ 157 $ --
Commercial................................... -- --
Land development............................. -- --
Consumer......................................... 42 137
Commercial....................................... 193 3
Other............................................ -- --
----- -----
Total.................................... 392 140
----- -----
Accruing loans delinquent 90 days or more:
Real estate:
One- to four-family.......................... $ -- $ --
Commercial................................... -- --
Land development............................. -- --
Consumer....................................... -- --
Commercial....................................... -- --
Other............................................ -- --
----- -----
Total.................................... -- --
----- -----
Total nonperforming loans............ 392 140
----- -----
Repossessed assets............................... 22 35
----- -----
Total non-performing assets...................... $ 414 $ 175
===== =====
Total non-performing loans as a
percentage of total net loans.................. 0.48% 0.22%
===== =====
Total non-performing assets as a
percentage of total assets 0.44% 0.23%
===== =====
</TABLE>
9
<PAGE>
At June 30, 1998, the Association had $392,000 in loans outstanding that
were classified as non-accrual, of which $157,000 were one- to four- family
loans, $42,000 were automobile loans and $193,000 were secured commercial loans.
At that date, the Association had no loans outstanding that were not classified
as non-accrual, 90 days past due or restructured, but as to which known
information about possible credit problems of borrowers caused management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as non-accrual, 90 days past
due or restructured.
Federal regulations require savings institutions to classify their assets
on the basis of quality on a regular basis. An asset meeting one of the
classification definitions set forth below may be classified and still be a
performing loan. An asset is classified as substandard if it is determined to
be inadequately protected by the current retained earnings and paying capacity
of the obligor or of the collateral pledged, if any. An asset is classified as
doubtful if full collection is highly questionable or improbable. An asset is
classified as loss if it is considered uncollectible, even if a partial recovery
could be expected in the future. The regulations also provide for a special
mention designation, described as assets which do not currently expose a savings
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Such assets designated as special mention may include nonperforming
loans consistent with the above definition. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings
institution must either establish a specific allowance for loss in the amount of
the portion of the asset classified loss, or charge off such amount. Federal
examiners may disagree with a savings institution's classifications. If a
savings institution does not agree with an examiner's classification of an
asset, it may appeal this determination to the OTS Regional Director. The
Association regularly reviews its assets to determine whether any assets require
classification or re-classification. At June 30, 1998, the Association had
$1.8 million in assets classified as special mention, $350,000 in assets
classified as substandard, $100,000 in assets classified as doubtful and no
assets classified as loss. The special mention classification is primarily used
by management as a "watch list" to monitor loans that exhibit any potential
deviation in performance from the contractual terms of the loan.
ALLOWANCE FOR LOAN LOSSES. In originating loans, the Association
recognizes that credit losses will be experienced and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the security for the loan. It is
management's policy to maintain an adequate allowance for loan losses based on,
among other things, the Association's and the industry's historical loan loss
experience, evaluation of economic conditions, regular reviews of delinquencies
and loan portfolio quality and evolving standards imposed by federal bank
examiners. The Association increases its allowance for loan losses by charging
provisions for loan losses against the Association's income. During fiscal
1998, the Association increased its allowance for loan losses by $147,000 to
$751,000 at June 30, 1998. The Association took this action due to the
continued significant increase in multi-family real estate, commercial real
estate, commercial business and consumer loans and due to the additional risks
inherent in these types of lending.
Management will continue to actively monitor the Association's asset
quality and allowance for loan losses. Management will charge off loans and
properties acquired in settlement of loans against the allowances for losses on
such loans and such properties when appropriate and will provide specific loss
allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses and believes such allowances are adequate, future adjustments may be
necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.
The Association's methodology for establishing the allowance for loan
losses takes into consideration probable losses that have been identified in
connection with specific assets as well as losses that have not been identified
but can be expected to occur. Management conducts regular reviews of the
Association's assets and evaluates the need to establish allowances on the basis
of this review. Allowances are established by the Board of Directors on a
quarterly basis based on an assessment of risk in the Association's assets
taking into consideration the composition and quality of the portfolio,
delinquency trends, current charge-off and loss experience, loan concentrations,
the state of the real
10
<PAGE>
estate market, regulatory reviews conducted in the regulatory examination
process and economic conditions generally. Specific reserves will be provided
for individual assets, or portions of assets, when ultimate collection is
considered improbable by management based on the current payment status of the
assets and the fair value of the security. At the date of foreclosure or other
repossession, the Association would transfer the property to real estate
acquired in settlement of loans initially at the lower of cost or estimated fair
value and subsequently at the lower of book value or fair value less estimated
selling costs. Any portion of the outstanding loan balance in excess of fair
value less estimated selling costs would be charged off against the allowance
for loan losses. If, upon ultimate disposition of the property, net sales
proceeds exceed the net carrying value of the property, a gain on sale of real
estate would be recorded.
Banking regulatory agencies, including the OTS, have adopted a policy
statement regarding maintenance of an adequate allowance for loan and lease
losses and an effective loan review system. The Association's policy includes
an arithmetic formula for determining the reasonableness of the institution's
allowance for loan loss estimate compared to the average loss experience of the
industry as a whole. Management reviews the institution's allowance for loan
losses and compare it against the sum of: (i) 50% of the portfolio that is
classified doubtful; (ii) 15% to 20% of the portfolio that is classified as
substandard; and (iii) for the portions of the portfolio that have not been
classified (including those loans designated as special mention), estimated
credit losses over the upcoming 12 months given the facts and circumstances as
of the evaluation date. This amount is considered neither a "floor" nor a "safe
harbor" of the level of allowance for loan losses an institution should
maintain, but examiners will view a shortfall relative to the amount as an
indication that they should review management's policy on allocating these
allowances to determine whether it is reasonable based on all relevant factors.
The following table sets forth an analysis of the Association's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1998 1997
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period..................... $ 604 $ 411
------- -------
Charge-offs:
One- to four-family............................... -- (32)
Multi-family...................................... -- --
Non-residential................................... -- --
Construction...................................... -- --
Consumer.......................................... (60) (64)
Commercial........................................ (32) --
Other............................................. -- --
------- -------
(92) (96)
------- -------
Recoveries......................................... 19 7
------- -------
Net recoveries (charge-offs)....................... (73) (89)
------- -------
Additions charged to operations.................... 220 282
------- -------
Balance at end of period........................... $ 751 $ 604
======= =======
Allowance for loan losses to total
non-performing loans at end of period............. 191.58% 431.00%
======= =======
Allowance for loan losses to net loans
at end of period.................................. .92% 0.96%
======= =======
</TABLE>
11
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1998 1997
---------------------- ----------------------
Percent of Percent of
Loans to Loans to
Category to Category to
Amount Total Loans Amount Total Loans
-------- ------------ -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential.............. $ 167 22.24% $143 23.68%
Commercial............... 55 7.32 40 6.62
Land..................... 92 12.25 120 19.87
Consumer loans.............. 177 23.57 161 26.65
Commercial loans............ 260 34.62 140 23.18
----- ------ ---- ------
$ 751 100.00% $604 100.00%
===== ====== ==== ======
</TABLE>
INVESTMENT ACTIVITIES
GENERAL. The Association is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of Topeka,
certificates of deposit in federally insured institutions, certain bankers'
acceptances and federal funds. It may also invest, subject to certain
limitations, in commercial paper rated in one of the two highest investment
rating categories of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Association to maintain an investment in FHLB stock and a minimum
amount of liquid assets which may be invested in cash and specified securities.
From time to time, the OTS adjusts the percentage of liquid assets which savings
banks are required to maintain. See "Regulation of the Bank -- Liquidity
Requirements."
The Association makes investments in order to maintain the levels of liquid
assets required by regulatory authorities and manage cash flow, diversify its
assets, obtain yield, for asset/liability management purposes and to satisfy
certain requirements for favorable tax treatment. The investment activities of
the Association consist primarily of investments in mortgage-backed securities
and other investment securities, consisting primarily of interest-bearing
deposits and securities issued by the U.S. Treasury. Typical investments
include federally sponsored agency mortgage pass-through and federally sponsored
agency and mortgage-related securities. Investment and aggregate investment
limitations and credit quality parameters of each class of investment are
prescribed in the Association's investment policy. The Association performs
analyses on mortgage-related securities prior to purchase and on an ongoing
basis to determine the impact on earnings and market value under various
interest rate and prepayment conditions. Under the Association's current
investment policy, securities purchases must be approved by the Association's
Investment Committee. The Board of Directors reviews all securities
transactions on a monthly basis.
Pursuant to SFAS No. 115, the Association had no securities classified as
"available for sale" at June 30, 1997 and 1998. Securities designated as "held
to maturity" are those assets which the Association has the ability and intent
to hold to maturity. Upon acquisition, securities are classified as to the
Association's intent, and a sale would only be effected due to deteriorating
investment quality. The held to maturity investment portfolio is not used for
speculative purposes and is carried at amortized cost. In the event the
Association sells securities from this portfolio for other than credit quality
reasons, all securities within the investment portfolio with matching
characteristics may be reclassified as assets available for sale. Securities
designated as "available for sale" are those assets which the Association may
not
12
<PAGE>
hold to maturity and thus are carried at market value with unrealized gains or
losses, net of tax effect, recognized in retained earnings.
MORTGAGE-BACKED AND RELATED SECURITIES. Mortgage-backed securities
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators through intermediaries that pool and repackage the
participation interest in the form of securities to investors such as the
Association. Such intermediaries include quasi-governmental agencies such as
the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National
Mortgage Association ("FNMA") and the Government National Mortgage Association
("GNMA") which guarantee the payment of principal and interest to investors, and
from all of whom the Association has purchased mortgage-backed securities.
Mortgage-backed securities generally increase the quality of the Association's
assets by virtue of the guarantees that back them, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Association.
Mortgage-related securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable-
rate mortgage loans. Mortgage-backed securities generally are referred to as
mortgage participation certificates or pass-through certificates. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the mortgage-
backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accredited over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the
coupon rate of the underlying mortgage significantly exceeds the prevailing
market interest rates offered for mortgage loans, refinancing generally
increases and accelerates the prepayment of the underlying mortgages.
Prepayment experience is more difficult to estimate for adjustable-rate
mortgage-backed securities.
The Association's mortgage-backed securities portfolio consists solely of
$4.3 million in mortgage-backed securities of which $189,000 had fixed interest
rates and $4.1 million had adjustable interest rates at June 30, 1998. The
Association makes such investments in order to manage cash flow, mitigate
interest rate risk, diversify assets, obtain yield, to satisfy certain
requirements for favorable tax treatment and to satisfy the qualified thrift
lender test. See "Regulation of the Bank -- Qualified Thrift Lender Test."
13
<PAGE>
The following table sets forth the carrying value of the Company's
investment securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
School district securities.............. $ 310 $ --
Interest-bearing deposits............... 6,963 2,381
Mortgage-backed securities.............. 4,327 5,340
Federal Home Loan Bank stock............ 1,066 988
------- -------
Total............................. $12,666 $ 8,709
======= =======
</TABLE>
The following table sets forth information in the scheduled maturities,
amortized cost, market values and average yields for the Company's investment
portfolio at June 30, 1998.
<TABLE>
<CAPTION>
Total Investment
One Year or Less One to Five Years Five to Ten Years Portfolio
----------------------- ----------------------- ----------------------- -----------------------
Weighted Weighted Weighted Weighted
Book Average Book Average Book Average Book Average
Value Yield Value Yield Value Yield Value Yield
--------- ------------ --------- ------------ --------- ------------ --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
School district securities... $ -- -- % $ 310 4.06% $ -- -- % $ 310 4.06%
Interest-bearing deposits.... 6,963 5.99 -- -- -- -- 6,963 5.99
Mortgage-backed securities... 449 7.02 1,051 7.02 2,827 7.02 4,327 7.02
Federal Home Loan Bank
stock....................... -- -- 1,066 7.82 1,066 7.82
------ ------ ------ -------
Total investment securities.. $7,412 $1,361 $3,893 $12,666
====== ====== ====== =======
</TABLE>
The Association is required to maintain average daily balances of liquid
assets (cash, deposits maintained pursuant to Federal Reserve Board
requirements, time and savings deposits in certain institutions, obligations of
state and political subdivisions thereof, shares in mutual funds with certain
restricted investment policies, highly rated corporate debt, and mortgage loans
and mortgage-backed securities with less than one year to maturity or subject to
repurchase within one year) equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable savings deposits
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet liquidity requirements. The average liquidity ratio of the Association for
the month ending June 30, 1998 was 5.73%.
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Association's funds for
lending, investment activities and general operational purposes. In addition to
deposits, the Association derives funds from loan principal and interest
repayments, maturities of investment securities and mortgage-backed securities
and interest payments thereon. Although loan repayments are a relatively stable
source of funds, deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds, or
on a longer term basis for general operational purposes. The Association has
access to borrow from the FHLB of Topeka.
DEPOSITS. The Association attracts deposits principally from within its
market area by offering competitive rates on its deposit instruments, including
money market accounts, passbook savings accounts, Individual Retirement
Accounts, and certificates of deposit which range in maturity from three months
to eight years. Deposit terms vary according to the minimum balance required,
the length of time the funds must remain on deposit and the interest rate.
Maturities, terms, service fees and withdrawal penalties for its deposit
accounts are established by the Association on
14
<PAGE>
a periodic basis. The Association reviews its deposit mix and pricing on a
weekly basis. In determining the characteristics of its deposit accounts, the
Association considers the rates offered by competing institutions, lending and
liquidity requirements, growth goals and federal regulations. The Association
does not accept brokered deposits, but does accept jumbo deposits from its
regular customers.
The Association attempts to compete for deposits with other institutions in
its market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Association seeks to
meet customers' needs by providing convenient customer service to the community,
efficient staff and convenient hours of service. Substantially all of the
Association's depositors are Colorado residents who reside in the Association's
market area.
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Association between the dates
indicated.
<TABLE>
<CAPTION>
Balance at Balance at
June 30, % of Increase June 30, % of
1998 Deposits (Decrease) 1997 Deposits
---------- -------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
NOW accounts............. $14,773 23.29% $4,187 $10,586 18.85%
Money market deposit..... 15,159 23.90 1,121 14,038 25.00
Certificates of deposit.. 24,170 38.11 1,310 22,860 40.71
Jumbo certificates....... 9,323 14.70 655 8,668 15.44
------- ------ ------ ------- ------
$63,425 100.00% $7,273 $56,152 100.00%
======= ====== ====== ======= ======
</TABLE>
The following table sets forth the time deposits in the Association
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
3.00 - 4.00% $ 370 $ 187
4.01 - 5.00%............................... 2,228 3,156
5.01 - 6.00%............................... 25,203 22,629
6.01 - 7.00%............................... 5,056 4,946
Over 7.00%................................. 636 610
------- -------
$33,493 $31,528
======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
at June 30, 1998.
<TABLE>
<CAPTION>
3.00- 4.01- 5.01- Over Percent
4.00% 5.00% 7.00% 7.00% Total of Total
------ ------ ------- ------ ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate maturing in:
One year.................. $ 370 $2,228 $23,726 $ 90 $26,414 78.86%
One to two years.......... -- -- 5,930 225 6,155 18.38
Two to three years........ -- -- 604 196 800 2.39
Over three years.......... -- -- -- 124 124 .37
------ ------ ------- ------ ------- ------
Total................. $ 370 $2,228 $30,260 $ 635 $33,493 100.00%
====== ====== ======= ====== ======= ======
Percent of total........ 1.10% 6.65% 90.35% 1.90% 100.00%
====== ====== ======= ====== =======
</TABLE>
15
<PAGE>
The following table indicates the amount of the Association's certificates
of deposit of $100,000 or more by time remaining until maturity as of June 30,
1998.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
--------------- ------------
(In thousands)
<S> <C>
Three months or less.................. $ 3,008
Over three through six months......... 2,456
Over six through 12 months............ 2,953
Over 12 months........................ 906
-------
Total.............................. $ 9,323
=======
</TABLE>
The following table sets forth the savings activities of the Association
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------
1998 1997
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Opening balance..................................... $56,152 $49,537
Net increase (decrease) before interest credited.... 5,326 4,797
Interest credited................................... 1,947 1.818
------- -------
Ending balance................................... $63,425 $56,152
======= =======
Net increase (decrease)............................. $ 7,273 $ 6,615
======= =======
Percent increase (decrease)......................... 12.95% 13.35%
======= =======
</TABLE>
BORROWINGS. Savings deposits historically have been the primary source of
funds for the Association's lending, investments and general operating
activities. The Association is authorized, however, to use advances from the
FHLB of Topeka to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Topeka functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB System, the Association is required to
own stock in the FHLB of Topeka and is authorized to apply for advances.
Advances are pursuant to several different programs, each of which has its own
interest rate and range of maturities. The Association has a Blanket Agreement
for advances with the FHLB under which at June 30, 1998, allowed borrowings of
$37.0 million subject to normal collateral underwriting requirements. Advances
from the FHLB of Topeka are secured by mortgage-backed securities, investments
and residential first mortgage loans.
At June 30, 1998, the Association had an approved line of credit for
$10.0 million with the FHLB, which the Association had not drawn on at that
date. In addition, as of June 30, 1998, the Association had $17.9 million in
FHLB advances outstanding of which $4.5 million was at interest rates which
range from 5.81% to 5.94% and mature within one year; $3.0 million were at
interest rates which range from 5.94% to 6.79% and mature in 2000; $3.4 million
were at an interest rate of 5.74% to 6.80% and mature in 2001; and $5.0 million
were at an interest rate of 5.81% to 6.56% and mature in 2003; $1.0 million at
an interest rate of 6.18% and mature in 2005; and $1.0 million at an interest
rate of 6.10% and mature in 2008.
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, the Association is permitted to
invest an amount equal to 2% of its assets in subsidiaries, with an additional
investment of 1% of assets where such investment serves primarily community,
inner-
16
<PAGE>
city and community development purposes. Under such limitations, as of June 30,
1998, the Association was authorized to invest up to approximately $1.9 million
in the stock of or loans to subsidiaries, including the additional 1% investment
for community inner-city and community development purposes. Institutions
meeting their applicable minimum regulatory capital requirements may invest
up to 50% of their regulatory capital in conforming first mortgage loans to
subsidiaries in which they own 10% or more of the capital stock. The Association
does not have any subsidiaries.
COMPETITION
The Association faces strong competition both in originating real estate
and consumer loans and in attracting deposits. The Association competes for
real estate and other loans principally on the basis of interest rates, the
types of loans it originates, the deposit products it offers and the quality of
services it provides to borrowers. The Association also competes by offering
products which are tailored to the local community. Its competition in
originating real estate loans comes primarily from other commercial banks
and mortgage bankers making loans secured by real estate located in the
Association's market area. Commercial banks, credit unions and finance
companies provide vigorous competition in consumer lending. Competition may
increase as a result of the continuing reduction of restrictions on the
interstate operations of financial institutions.
The Association attracts its deposits through its offices primarily from
the local communities of the offices. Consequently, competition for deposits is
principally from other savings institutions, commercial banks and brokers in the
local communities as well as from the corporate credit unions sponsored by the
large private employers in the Association's market area. The Association
competes for deposits and loans by offering what it believes to be a variety of
deposit accounts at competitive rates, convenient business hours, a commitment
to outstanding customer service and a well-trained staff. The Association
believes it has developed strong relationships with local realtors and the
community in general.
Management considers its market area for gathering deposits to be Chaffee,
Lake, Western Fremont and Saguache counties in Colorado. The Association
estimates that it competes with five banks, and two credit unions for deposits
and loans. Based on data provided by the FDIC, the Association estimates that
as of June 1997, the latest date for which information was available, it had
23.71% of deposits held by all financial institutions in its market area.
REGULATION OF THE BANK
GENERAL. As a federally-chartered savings association, Salida is subject
to extensive regulation by the OTS. The Association's lending activities and
other investments must comply with various federal regulatory requirements. The
OTS periodically examines the Association for compliance with various regulatory
requirements and the FDIC has the authority to conduct special examinations of
the Association. The Association must file reports with OTS describing its
activities and financial condition, and is subject to certain reserve
requirements promulgated by the Federal Reserve Board. This supervision and
regulation is intended primarily for the protection of depositors. As a savings
and loan holding company, the Company is subject to OTS regulation, examination,
supervision and reporting requirements. Certain of these regulatory
requirements are referred to in the following paragraphs or appear elsewhere
herein.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB
System, which consists of 12 regional Federal Home Loan Banks and which are
subject to supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLB's provide a central credit facility primarily for member
institutions. As a member of the FHLB of Topeka, the Association is required to
acquire and hold shares of capital stock in the FHLB of Topeka in an amount at
least equal to 1% of the aggregate unpaid principal of its home mortgage loans,
home purchase contracts, and similar obligations at the beginning of each year,
or 1/20 of its advances (borrowings) from the FHLB of Topeka, whichever is
greater. The Association was in compliance with this requirement with an
investment in FHLB of Topeka stock at June 30, 1998, of $1.1 million. The FHLB
of Topeka serves as a reserve or central bank for its member institutions within
its assigned region. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It offers advances to members in
accordance with policies and
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procedures established by the FHFB and the Board of Directors of the FHLB of
Topeka. Long-term advances may only be made for the purpose of providing funds
for residential housing finance. As of June 30, 1998, Salida had no advances
outstanding from the FHLB of Topeka. See "Item 1. Business -- Deposit Activity
and Other Sources of Funds -- Borrowings."
LIQUIDITY REQUIREMENTS. The Association is required to maintain average
daily balances of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, securities of
certain mutual funds, and specified United States government, state or federal
agency obligations) equal to the monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable savings deposits plus short-
term borrowings. Monetary penalties may be imposed for failure to meet
liquidity requirements. The average liquidity ratio of the Association for
June 1998 was 5.92%.
QUALIFIED THRIFT LENDER TEST. The Association is currently subject to OTS
regulations which use the concept of a qualified thrift lender ("QTL") to
determine eligibility for Federal Home Loan Bank advances and for certain other
purposes. A savings institution that does not meet the QTL Test must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the institution may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for both a national bank and a savings institution; (ii) the
branching powers of the institution are restricted to those of a national bank
located in the institution's home state; (iii) the institution shall not be
eligible to obtain any advances from its Federal Home Loan Bank; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. In addition, any company that
controls a savings institution that fails to qualify as a QTL will be required
to register as and be deemed a bank holding company subject to all of the
provisions of the Bank Holding Company Act of 1956 and other statutes applicable
to bank holding companies. Upon the expiration of three years from the date the
institution ceases to be a QTL, it must cease any activity, and not retain any
investment not permissible for both a national bank and a savings institution
and immediately repay any outstanding Federal Home Loan Bank advances (subject
to safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets. All of the following may be included as Qualified
Thrift Investments: investments in residential mortgages, home equity loans,
loans made for educational purposes, small business loans, credit card loans and
shares of stock issued by a Federal Home Loan Bank. Subject to a 20% of
portfolio assets limit, savings institutions are also able to treat the
following as Qualified Thrift Investments: (i) 50% of the dollar amount of
residential mortgage loans subject to sale under certain conditions,
(ii) investments, both debt and equity, in the capital stock or obligations of
and any other security issued by a service corporation or operating subsidiary,
provided that such subsidiary derives at least 80% of its annual gross revenues
from activities directly related to purchasing, refinancing, constructing,
improving or repairing domestic residential housing or manufactured housing,
(iii) 200% of their investments in loans to finance "starter homes" and loans
for construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas, (iv) loans
for the purchase, construction, development or improvement of community service
facilities, and (v) loans for personal, family, household or educational
purposes, provided that the dollar amount treated as Qualified Thrift
Investments may not exceed 10% of the savings institution's portfolio assets.
A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months. A savings institution that fails to maintain
QTL status will be permitted to requalify once, and if it fails the QTL Test a
second time, it will become immediately subject to all penalties as if all time
limits on such penalties had expired. At June 30, 1998, approximately 98.60% of
the Association's "portfolio" assets were invested in Qualified Thrift
Investments.
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<PAGE>
REGULATORY CAPITAL REQUIREMENTS. Under the OTS's regulatory capital
requirements, savings associations must maintain "tangible" capital equal to
1.5% of adjusted total assets, "core" capital equal to 3% of adjusted total
assets and "total" capital (a combination of core and "supplementary" capital)
equal to 8% of risk-weighted assets. In addition, the OTS has adopted
regulations which impose certain restrictions on savings associations that have
a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1
capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital
to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated
composite 1 CAMELS under the OTS examination rating system). For purposes of
these regulations, Tier 1 capital has the same definitions as core capital.
See "--Prompt Corrective Regulatory Action."
Core capital is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill. Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights. Both core and tangible capital are further reduced
by an amount equal to a savings association's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). Investments in and extensions of credit to such
subsidiaries are required to be fully netted against tangible and core capital.
At June 30, 1998, the Association had no investments in or extensions of credit
to a subsidiary engaged in activities not permitted to national banks.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles increased by certain
goodwill amounts and by a pro rated portion of the assets of unconsolidated
includable subsidiaries in which the savings association holds a minority
interest. Adjusted total assets are reduced by the amount of assets that have
been deducted from capital, the portion of savings association's investments in
unconsolidated includable subsidiaries, and, for purpose of the core capital
requirement, qualifying supervisory goodwill. At June 30, 1998, the
Association's adjusted total assets for the purposes of the core and tangible
capital requirements were approximately $94.5 million.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to include both core capital and supplementary
capital in its total capital provided the amount of supplementary capital
included does not exceed the savings association's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments and a portion of
the savings association's general loss allowances. Total core and supplementary
capital are reduced by the amount of capital instruments held by other
depository institutions pursuant to reciprocal arrangements and by an increasing
percentage of the savings association's high loan-to-value ratio land loans and
non-residential construction loans and equity investments other than those
deducted from core and tangible capital. As of June 30, 1998, the Association
had no high ratio land or non-residential construction loans and no equity
investments for which OTS regulations require a deduction from total capital.
The risk-based capital requirement is measured against risk-weighted assets
which equals the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight. Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with loan-to-value ratios under 80% are assigned a risk weight of
50%. Consumer and construction loans are assigned a risk weight of 100%.
Mortgage-backed securities issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC are assigned a 20% risk weight. Cash and U.S.
Government securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight.
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The table below presents the Association's capital position relative
to its various minimum statutory and regulatory capital requirements at June 30,
1998.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
-------- -------------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital..................................... $12,288 13.00%
Tangible Capital Requirement......................... 1,418 1.50
------- -----
Excess............................................... $10,870 11.50%
======= =====
Core Capital......................................... $12,288 13.00%
Core Capital Requirement............................. 2,836 3.00
------- -----
Excess............................................... $ 9,452 10.00%
======= =====
Risk-Based Capital................................... $13,036 21.73%
Risk-Based Capital Requirement....................... 4,800 8.00
------- -----
Excess............................................... $ 8,236 13.73%
======= =====
</TABLE>
- -------------------------
(1) Based upon adjusted total assets for purposes of the tangible capital and
core capital requirements and risk-weighted assets for purposes of the
risk-based capital requirement.
The OTS's risk-based capital requirements require savings institutions with
more than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings
institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk is required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets. Management does not believe the
implementation of the interest rate risk requirement will have a material effect
on the Association.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any,
that is deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. The Association has
determined that, on the basis of current financial data, it will not be deemed
to have more than normal level of interest rate risk under the rule and believes
that it will not be required to increase its total capital as a result of the
rule.
In addition to requiring generally applicable capital standards for savings
associations, the Director of OTS is authorized to establish the minimum level
of capital for a savings association at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
association in light of the particular circumstances of the association. Such
circumstances would include a high degree of exposure of interest rate risk,
prepayment risk, credit risk and concentration of credit risk and certain risks
arising from non-traditional activities.
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<PAGE>
The Director may treat the failure of any savings association to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any savings association which fails to maintain capital at
or above the minimum level required by the Director to submit and adhere to a
plan for increasing capital. Such an order may be enforced in the same manner as
an order issued by the FDIC.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators,
including the OTS, are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
All institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator;
(ii) required to submit an acceptable capital restoration plan within 45 days;
(iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of businesses. The
capital restoration plan must include a guarantee by the institution's holding
company that the institution will comply with the plan until it has been
adequately capitalized on average for four consecutive quarters, under which the
holding company would be liable up to the lesser of 5% of the institution's
total assets or the amount necessary to bring the institution into capital
compliance as of the date it failed to comply with its capital restoration plan.
A "significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total
assets falls below a "critical capital level," the institution will be subject
to conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days
after the date it became critically undercapitalized.
Under regulations jointly adopted by the federal banking regulators,
including the OTS, a depository institution's capital adequacy for purposes of
the prompt corrective action rules is determined on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, a savings association
that is not subject to an order or written directive to meet or maintain a
specific capital level is deemed "well capitalized" if it also has: (i) a total
risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital
ratio of 6% or greater; and (iii) a leverage ratio of 5% or greater. An
"adequately capitalized" savings association is a savings association that does
not meet the definition of well capitalized and has: (i) a total risk-based
capital ratio of 8% or greater; (ii) a Tier 1 capital risk-based ratio of 4% or
greater; and (iii) a leverage ratio of 4% or greater (or 3% or greater if the
savings association has a composite 1 CAMELS rating). An "undercapitalized"
institution is a savings association that has (i) a total risk-based capital
ratio less than 8%; or (ii) a Tier 1 risk-based capital ratio of less than 4%;
or (iii) a leverage ratio of less than 4% (or 3% if the association has a
composite 1 CAMELS rating). A "significantly undercapitalized" institution is
defined as a savings association that has: (i) a total risk-based capital ratio
of less than 6%; or (ii) a Tier 1 risk-based capital ratio of less than 3%; or
(iii) a leverage ratio of less than 3%. A "critically undercapitalized" savings
association is defined as a savings association that has a ratio of "tangible
equity" to total assets of less than 2%. Tangible equity is defined as core
capital plus cumulative perpetual preferred stock (and related surplus) less all
intangibles other than qualifying supervisory goodwill
21
<PAGE>
and certain purchased mortgage servicing rights. The OTS may reclassify a well
capitalized savings association as adequately capitalized and may require an
adequately capitalized or undercapitalized association to comply with the
supervisory actions applicable to associations in the next lower capital
category (but may not reclassify a significantly undercapitalized association
as critically undercapitalized) if the OTS determines, after notice and an
opportunity for a hearing, that the savings association is in an unsafe or
unsound condition or that the association has received and not corrected a less-
than-satisfactory rating for any CAMELS rating category. The Association is
classified as "well capitalized" under these regulations.
Dividend Limitations. Under OTS regulations, the Association is not
permitted to pay dividends on its capital stock if its regulatory capital would
thereby be reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of the Association at the time
of its conversion to stock form. In addition, savings institution subsidiaries
of savings and loan holding companies are required to give the OTS 30 days'
prior notice of any proposed declaration of dividends to the holding company.
Federal regulations impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
the Association. Under these regulations, a savings institution that,
immediately prior to, and on a pro forma basis after giving effect to a proposed
capital distribution, has total capital (as defined by OTS regulation) that is
equal to or greater than the amount of its fully phased-in capital requirements
(a "Tier 1 Association"), is generally permitted without OTS approval, after
notice, to make capital distributions during a calendar year in the amount equal
to the greater of (i) 75% of net income for the previous four quarters or
(ii) up to 100% of its net income to date during the calendar year plus an
amount that would reduce by one-half the amount by which its capital-to-assets
ratio exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. Unless the OTS determines
that the Association is an institution requiring more than normal supervision,
the Association is authorized to pay dividends, in accordance with the
provisions of the OTS regulations discussed above, as a Tier 1 Association.
Under the OTS' prompt corrective action regulations, the Association is
also prohibited from making any capital distributions if, after making the
distribution, the Association would have: (i) a total risk-based capital ratio
of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or
(iii) a leverage ratio of less than 4.0%. However, the OTS, after consultation
with the FDIC, may permit an otherwise prohibited stock repurchase if it is made
in connection with the issuance of additional shares in an equivalent amount,
and the repurchase will reduce the institution's financial obligations or
otherwise improve the institution's financial condition.
In addition to the foregoing, earnings of the Association appropriated to
bad debt reserves and deducted for Federal income tax purposes are not available
for payment of cash dividends or other distributions to stockholders without
payment of taxes at the then current tax rate by the Association on the amount
of earnings removed from the reserves for such distributions. See "Taxation."
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines went into effect on August
9, 1995. The guidelines require savings institutions to maintain internal
controls, information systems and audit systems that are appropriate for the
size, nature and scope of the institution's business.
22
<PAGE>
The guidelines also establish certain basic standards for loan documentation,
credit underwriting, interest rate risk exposure, and asset growth. The
guidelines further provide that savings institutions should maintain safeguards
to prevent the payment of compensation, fees and benefits that are excessive or
that could lead to material financial loss, and should take into account factors
such as comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory sanctions. Management believes that the
Association already meets substantially all the standards adopted in the
interagency guidelines, and therefore does not believe that implementation of
these regulatory standards will materially affect the Association's operations.
Additionally, under FDICIA, as amended by the CDRI Act, the Federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets, as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the
Association's operations.
DEPOSIT INSURANCE. The Association is required to pay assessments based on
a percent of its insured deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
raising a significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based assessment system, the assessment rate for an
insured depository institution depends on the assessment risk classification
assigned to the institution by the FDIC, which is determined by the
institution's capital level and supervisory evaluations. Based on the data
reported to regulators for the date closest to the last day of the seventh month
preceding the semi-annual assessment period, institutions are assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A will consist of financially sound institutions with
only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken.
Over the past years, institutions with SAIF-assessable deposits, like the
Association, were required to pay higher deposit insurance premiums than
institutions with deposits insured by the Bank Insurance Fund ("BIF")
administered by the FDIC. In order to recapitalize the SAIF and address the
premium disparity, in November 1996 the FDIC imposed a one-time special
assessment on institutions with SAIF-assessable deposits based on the amount
determined by the FDIC to be necessary to increase the reserve levels of the
SAIF to the designated reserve ratio of 1.25% of insured deposits. Institutions
were assessed at the rate of 65.7 basis points based on the amount of their
SAIF-assessable deposits as of March 31, 1995. As a result of the special
assessment the Association incurred a pre-tax expense of $297,000 during the
fiscal year ended June 30, 1997.
23
<PAGE>
The special assessment recapitalized the SAIF, and as a result, the FDIC
lowered the SAIF deposit insurance assessment rates through the end of 1997 to
zero for well capitalized institutions with the highest supervisory ratings and
0.31% of insured deposits for institutions in the highest risk-based premium
category. Since the BIF is above its designated reserve ratio of 1.25% of
insured deposits, "well-capitalized" institutions in Subgroup A, numbering 95%
of BIF-insured institutions, pay no federal deposit insurance premiums, with the
remaining 5% of institutions paying a graduated range of rates up to 0.27% of
insured deposits for the highest risk-based premium category. Until December
31, 1999, SAIF-insured institutions will be required to pay assessments to the
FDIC at the rate of 6.5 basis points to help fund interest payments on certain
bonds issued by the Financing Corporation ("FICO") an agency of the federal
government established to finance takeovers of insolvent thrifts. During this
period, BIF members will be assessed for these obligations at the rate of
1.3 basis points. After December 31, 1999, both BIF and SAIF members will be
assessed at the same rate for FICO payments, or sooner if the two funds are
merged.
Since the SAIF now meets its designated reserve ratio as a result of the
special assessment, SAIF members are now permitted to convert to the status of
members of the BIF and may merge with or transfer assets to a BIF member.
Although the Association would qualify for insurance of deposits of the BIF,
substantial entrance and exit fees apply to conversions from SAIF to BIF
insurance and such fees may make a SAIF to BIF conversion prohibitively
expensive. In the past, the substantial disparity existing between deposit
insurance premiums paid by BIF and SAIF members gave BIF-insured institutions a
competitive advantage over SAIF-insured institutions like the Association. The
reduction of the SAIF deposit insurance premiums effectively eliminated this
disparity and could have the effect of increasing the net income of the
Association and restoring the competitive equality between BIF-insured and SAIF-
insured institutions.
UNIFORM LENDING STANDARDS. Under OTS regulations, savings association must
adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-value limits, that
are clear and measurable, loan administration procedures and documentation,
approval and reporting requirements. The real estate lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators.
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%;
(iv) for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non-owner-occupied, one- to four-family property), the limit
is 85%. Although no supervisory loan-to-value limit has been established for
owner-occupied, one- to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
The Interagency Guidelines state that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits, based on the support provided by other credit
factors. The aggregate amount of loans in excess of the supervisory loan-to-
value limits, however, should not exceed 100% of total capital and the total of
such loans secured by commercial, agricultural, multifamily and other non-one-
to-four family residential properties should not exceed 30% of total capital.
The supervisory loan-to-value limits do not apply to certain categories of loans
including loans insured or guaranteed by the U.S. government and its agencies or
by financially capable state, local or municipal governments or agencies, loans
backed by the full faith and credit of a state government, loans that are to be
sold promptly after origination without recourse to a financially responsible
party, loans that are renewed, refinanced or restructured without the
advancement of new funds, loans that are renewed, refinanced or restructured in
connection with a workout, loans to facilitate sales of real estate acquired by
the institution
24
<PAGE>
in the ordinary course of collecting a debt previously contracted and loans
where the real estate is not the primary collateral.
Management believes that the Association's current lending policies conform
to the Interagency Guidelines and does not anticipate that the Interagency
Guidelines will have a material effect on its lending activities.
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
the first $49.3 million of transaction accounts, plus 10% on the remainder.
This percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets.
REGULATION OF THE COMPANY
GENERAL. The Company is a savings and loan holding company within the
meaning of the Home Owners' Loan Act. As such, the Company is registered with
the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Association is subject to certain restrictions in its dealings with the
Company and affiliates thereof. The Company is also required to file certain
reports with, and otherwise comply with the rules and regulations of the SEC
under federal securities laws.
RESTRICTIONS ON ACQUISITIONS. The Home Owners' Loan Act generally
prohibits a savings and loan holding company, without prior approval of the
Director of OTS, from (i) acquiring control of any other savings institution
or savings and loan holding company or controlling the assets thereof or
(ii) acquiring more than 5% of the voting shares of a savings institution or
holding company thereof which is not a subsidiary. Under certain circumstances
a registered savings and loan holding company is permitted to acquire, with the
approval of the Director of OTS, up to 15% of the voting shares of an under-
capitalized savings association pursuant to a "qualified stock issuance" without
that savings association being deemed controlled by the holding company. In
order for the shares acquired to constitute a "qualified stock issuance," the
shares must consist of previously unissued stock or treasury shares, the shares
must be acquired for cash, the savings institution holding company's other
subsidiaries must have tangible capital of at least 6 1/2% of total assets,
there must not be more than one common director or officer between the savings
institution holding company and the issuing savings institution and transactions
between the savings institution and the savings institution holding company and
any of its affiliates must conform to Sections 23A and 23B of the Federal
Reserve Act. Except with the prior approval of the Director of OTS, no director
or officer of a savings institution holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
OTS regulations permit federal savings institutions to branch in any state
or states of the United States and its territories. Except in supervisory cases
or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal savings institution may not establish an out-of-
state branch unless (i) the federal institution qualifies as a QTL or as a
"domestic building and loan association" under (S)7701(a)(19) of the Internal
Revenue Code and the total assets attributable to all branches of the
institution in the state would qualify such branches taken as a whole for
treatment as a QTL or as a domestic building and loan association and (ii) such
branch would not result in (a) formation of a prohibited multi-state multiple
savings and loan holding company or (b) a violation of certain statutory
restrictions on branching by savings institution subsidiaries of banking holding
companies. Federal savings institutions generally may not establish new
branches unless the institution meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the institution's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.
TRANSACTIONS WITH AFFILIATES. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the
25
<PAGE>
parent holding company of a savings association (such as the Company) and any
companies which are controlled by such parent holding company are affiliates of
the savings association. Generally, Sections 23A and 23B (i) limit the extent to
which the savings association or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, OTS regulations provide that no savings association may
(i) loan or otherwise extend credit to an affiliate, except for any affiliate
which engages only in activities which are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes
or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association. Section 106 of the Bank Holding Company
Act which also applies to the Association, prohibits the Association from
extending credit to or offering any other services, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution, subject to
certain exceptions.
LOANS TO OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS. Savings
associations are also subject to the restrictions contained in Section 22(h)
and Section 22(g) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to a director,
executive officer or greater than 10% stockholder of a savings association and
certain affiliated entities of the foregoing, may not exceed, together with
all other outstanding loans to such person and affiliated entities, the
association's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral) and all loans to such persons may not exceed the institution's
unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans,
above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% stockholders of a savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve
Board has prescribed the loan amount (which includes all other outstanding loans
to such person), as to which such prior board of director approval is required,
as being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans
to directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(h) also prohibits a depository institution from paying the overdrafts
of any of its executive officers or directors.
Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval for such extensions of
credit by the board of directors of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. In addition, Section 106 of the Bank Holding Company
Act prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company. However, if the director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings institution, the Director of
OTS may impose such restrictions as deemed necessary to address such risk and
limiting (i) payment of dividends by the savings institution, (ii) transactions
between the savings institution and its affiliates, and (iii) any activities of
the savings institution that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institution.
26
<PAGE>
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings institution
subsidiary of such a holding company fails to meet the QTL Test, then within one
year after the institution ceased to be a QTL, such unitary savings and loan
holding company shall register as and be deemed to be a bank holding company and
will become subject to the activities restrictions applicable to bank holding
companies. See "Regulation of the Bank -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Association,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
acquisitions and where each subsidiary savings institution meets the QTL Test,
the activities of the Company and any of its subsidiaries (other than the
Association, or other subsidiary savings institutions) would thereafter be
subject to further restrictions. The Home Owners' Loan Act provides that, among
other things, no multiple savings and loan holding company or subsidiary thereof
which is not a savings institution shall commence or continue for a limited
period of time after becoming a multiple savings and loan holding company or
subsidiary thereof, any business activity, upon prior notice to, and no
objection by the OTS, other than (i) furnishing or performing management
services for a subsidiary savings institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution, or (iv) holding or
managing properties used or occupied by a subsidiary savings institution,
(v) acting as trustee under deeds of trust, (vi) those activities previously
authorized by regulation on March 5, 1987 to be directly engaged in by multiple
savings and loan holding companies; or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
Director of OTS by regulation prohibits or limits such activities for savings
and loan holding companies. Those activities described in (vii) above must also
be approved by the Director of OTS prior to being engaged in by a multiple
savings and loan holding company.
The Director of OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state, if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the laws of the state in which the institution
to be acquired is located specifically permit institutions to be acquired by
state-chartered institutions or savings and loan holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings institutions).
TAXATION
FEDERAL INCOME TAXATION. The Company and the Association file separate
federal income tax returns.
Thrift institutions are subject to the provisions of the Code in the same
general manner as other corporations. Prior to recent legislation, institutions
such as the Association which met certain definitional tests and other
conditions prescribed by the Code benefitted from certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. For purposes of the bad debt reserve deduction, loans were
separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans, which
are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans was based on actual loss experience, however, the amount of
the bad debt reserve deduction with respect to qualifying real property loans
could be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method"). Legislation recently signed by the
President repealed the percentage of taxable income method of calculating the
bad debt reserve. The Association historically has elected to use the
percentage method.
27
<PAGE>
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Association, will be treated the same as
commercial banks. Institutions with $500 million or more in assets will only be
able to take a tax deduction when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
In 1996 the Association's federal corporate income tax returns for 1995
were audited with no significant correction. The Association's tax returns have
not been otherwise audited in the last five years.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted
on August 10, 1993, the maximum federal corporate income tax rate was increased
from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed
on taxable income over $15.0 million. Also under provisions of RRA, a separate
depreciation calculation requirement has been eliminated in the determination of
adjusted current earnings for purposes of determining alternative minimum
taxable income, rules relating to payment of estimated corporate income taxes
were revised, and certain acquired intangible assets such as goodwill and
customer-based intangibles were allowed a 15-year amortization period.
Beginning with tax years ending on or after January 1, 1993, RRA also provides
that securities dealers must use mark-to-market accounting and generally reflect
changes in value during the year or upon sale as taxable gains or losses. The
IRS has indicated that financial institutions which originate and sell loans
will be subject to the rule.
STATE INCOME TAXATION. The State of Colorado imposes no income or
franchise taxes on savings institutions. The State of Colorado taxes the
Association's federal taxable income, adjusted for interest income received
directly from federal agencies, at a 5% rate.
EMPLOYEES
As of June 30, 1998, the Association had 41 full-time and two part-time
employees, none of whom were represented by a collective bargaining agreement.
Management considers the Association's relationships with its employees to be
good.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company.
<TABLE>
<CAPTION>
Ages at
June 30,
Name 1998 Title
------------------------------ -------- -----------------------
<S> <C> <C>
Larry D. Smith 40 President
Scott G. Erchul 36 Vice President
Frank L. DeLay 34 Chief Financial Officer
</TABLE>
LARRY D. SMITH has been President of the Association since 1991 and a
Director of the Association since 1987. He serves as the President and Chief
Executive Officer of the Company and the Association. From 1978 to 1991, he
served as Controller of the Association. He is active in the Salida school
system and youth sports by serving as a coach for various sports teams and by
serving on the High School Building Accountability and Business Advisory
Committees.
28
<PAGE>
He is also involved with several organizations which promote the academic and
athletic development of the youth of Salida.
SCOTT G. ERCHUL has been a member of the Board of Directors of the
Association since 1997. He has served as Vice President of the Association
since 1991 and serves as Vice President of the Company and the Association. His
past and current community involvement include the Rotary Club, Academic Booster
Club committee member and youth sports coach for football, baseball and soccer.
FRANK L. DELAY has served as the Chief Financial Officer of the Association
since 1992 and he serves in a similar capacity for the Company. He is a member
of the Kiwanis Club and serves on the Board of Directors of the Heart of the
Rockies Chamber of Commerce.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The following table sets forth information regarding the Association's
offices at June 30, 1998.
<TABLE>
<CAPTION>
Book Value at
Year Owned or June 30, Approximate
Opened Leased 1998 (1) Square Footage
-------------- -------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
MAIN OFFICE
130 West 2/nd/
Salida, Colorado 1886 (2) Owned $778 10,750
BRANCH OFFICES
600 Harrison (3)
Leadville, Colorado 1978 Owned 793 3,800
713 East Main (3)
Buena Vista, Colorado 1996 Owned 464 2,400
- -------------------------
</TABLE>
(1) Cost less accumulated depreciation and amortization.
(2) The current location and building in Salida, Colorado was occupied in 1974.
(3) The Association constructed new building facilities at each of these
locations in 1996.
The book value of the Association's investment in premises and equipment
totaled approximately $2.5 million at June 30, 1998. See Note 6 of Notes to
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
From time to time, the Association is a party to various legal proceedings
incident to its business. At June 30, 1998, there were no legal proceedings to
which the Company or the Association was a party, or to which any of their
property was subject, which were expected by management to result in a material
loss to the Company or the Association. There are no pending regulatory
proceedings to which the Company, the Association or its subsidiaries is a party
or to which any of their properties is subject which are currently expected to
result in a material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1998.
29
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The information contained under the section captioned "Market Price and
Dividend Information" in the Annual Report is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The financial statements contained in the Annual Report which are listed
under Item 13 herein are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- -------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference. Information required by Item 405 of Regulation S-B is incorporated
by reference from the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
For certain information regarding the executive officers of the Company,
see "Item 1. Business --Executive Officers" herein.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
The information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
30
<PAGE>
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the
sections captioned "Proposal I -- Election of Directors" and "Voting Securities
and Principal Holders Thereof" in the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of which may at
a subsequent date result in a change of control of the registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) List of Documents Filed as Part of This Report
----------------------------------------------
(1) Consolidated Financial Statements. The following financial
statements of the registrant are included herein under Item 7. The
remaining information appearing in the Annual Report is not deemed
to be filed as part of this Annual Report on Form 10-KSB, except as
expressly provided herein.
1. Independent Auditor's Report
(a) Statements of Financial Condition as of June 30, 1998
and 1997
(b) Statements of Income for the Years Ended June 30, 1998
and 1997
(c) Statements of Equity for the Years Ended
June 30, 1998 and 1997
(d) Statements of Cash Flows for the Years Ended
June 30, 1998 and 1997
(e) Notes to Financial Statements
(2) Financial Statement Schedules. None
-----------------------------
(3) Exhibits. The following exhibits are either filed as part of this
--------
Annual Report on Form 10-KSB or incorporated herein by reference:
Exhibit No.
* 3.1 Articles of Incorporation of High Country Bancorp, Inc.
* 3.2 Bylaws of High Country Bancorp, Inc.
* 10.1 Employment Agreement between Salida Building and Loan
Association and Larry D. Smith
* 10.2 Guaranty Agreement between High Country Bancorp, Inc. and Larry
D. Smith
* 10.3 High Country Bancorp, Inc. 1997 Stock Option and Incentive Plan
31
<PAGE>
* 10.4 High Country Bancorp, Inc. Management Recognition Plan and
Trust
* 10.5 Salida Building and Loan Association Long-Term Incentive Plan
* 10.6 Salida Building and Loan Association Incentive Compensation
Plan
* 10.7 Employment Agreement between Salida Building and Loan
Association and Scott G. Erchul
* 10.8 Guaranty Agreement between High Country Bancorp, Inc. and
Scott G. Erchul
10.9 Change-in-Control Protective Agreement between Salida Building
and Loan Association and Francis L. Delay
10.10 Change-in-Control Guaranty Agreement between High Country
Bancorp, Inc. and Francis L. DeLay
13 Annual Report to Stockholders for the year ended June 30, 1998
21 Subsidiaries
23 Consent of Grimsley, White & Company
27 Financial Data Schedule
_____________
* Incorporated by reference from Registration Statement on Form SB-2 filed
January 27, 1997 (File No. 333-34153).
(b) Reports on Form 8-K. No current reports on Form 8-K have been filed
-------------------
during the last quarter of the fiscal year covered by this report.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HIGH COUNTRY BANCORP, INC.
Date: September 24, 1998 By: /s/ Larry D. Smith
-------------------------------------
Larry D. Smith
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Larry D. Smith Date: September 24, 1998
--------------------------------------
Larry D. Smith
President and Chief Executive Officer
(Principal Executive and Officer)
By: /s/ Frank L. DeLay Date: September 24, 1998
--------------------------------------
Frank L. DeLay
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Scott G. Erchusl Date: September 24, 1998
--------------------------------------
Scott G. Erchul
Vice President and Director
By: /s/ Robert B.Mitchell Date: September 24, 1998
---------------------------------------
Robert B. Mitchell
Chairman of the Board
By: /s/ Timothy R. Glenn Date: September 24, 1998
--------------------------------------
Timothy R. Glenn
Director
By: /s/ Richard A. Young Date: September 24, 1998
--------------------------------------
Richard A. Young
Director
By: /s/ Philip W. Harsh Date: September 24, 1998
--------------------------------------
Philip W. Harsh
Director
33
<PAGE>
EXHIBIT 10.9
SALIDA BUILDING & LOAN ASSOCIATION
---------------------------------------
Change-in-Control
Protective Agreement with
Francis L. DeLay
---------------------------------------
THIS AGREEMENT entered into this 30/th/ day of April, 1998, by and between
Salida Building & Loan Association (the "Association") and Francis L. DeLay (the
"Employee"), effective on the closing date of the Association's conversion from
mutual to stock form (the "Effective Date").
WHEREAS, the Employee has heretofore been employed by the Association as an
executive officer, and the Association deems it to be in its best interest to
enter into this Agreement as additional incentive to the Employee to continue as
an executive employee of the Association; and
WHEREAS, the parties desire by this writing to set forth their
understanding as to their respective rights and obligations in the event a
change of control occurs with respect to the Association or High Country
Bancorp, Inc. (the "Company").
NOW, THEREFORE, the undersigned parties AGREE as follows:
1. Defined Terms
-------------
When used anywhere in the Agreement, the following terms shall have
the meaning set forth herein.
(a) "Change in Control" shall mean any one of the following events:
(i) the acquisition of ownership, holding or power to vote more than 25% of the
voting stock of the Association or the Holding Company thereof, (ii) the
acquisition of the ability to control the election of a majority of the
Association's or the Company's Directors, (iii) the acquisition of a controlling
influence over the management or policies of the Association or of the Company
by any person or by persons acting as a "group" (within the meaning of Section
13(d) of the Securities Exchange Act of 1934), or (iv) during any period of two
consecutive years, individuals (the "Continuing Directors") who at the beginning
of such period constitute the Board of Directors of the Association or of the
Company (the "Existing Board") cease for any reason to constitute at least two-
thirds thereof, provided that any individual whose election or nomination for
election as a member of the Existing Board was approved by a vote of at least
two-thirds of the Continuing Directors then in office shall be considered a
Continuing Director. Notwithstanding the foregoing, the Company's ownership of
the Association shall not of itself constitute a Change in Control for purposes
of the Agreement. For purposes of this paragraph only, the term "person" refers
to an
<PAGE>
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
---
occur solely by reason of a transaction in which the Association converts to the
stock form of organization, or creates an independent holding company in
connection therewith. The decision of the Board as to whether a Change in
Control has occurred shall be conclusive and binding.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and as interpreted through applicable rulings and regulations
in effect from time to time.
(c) "Code (S)280G Maximum" shall mean product of 2.99 and his "base
amount" as defined in Code (S)280G(b)(3).
(d) "Good Reason" shall mean any of the following events, which has
not been consented to in advance by the Employee in writing: (i) the requirement
that the Employee move his personal residence, or perform his principal
executive functions, more than thirty (30) miles from his primary office as of
the date of the Change in Control; (ii) a material reduction in the Employee's
base compensation as in effect on the date of the Change in Control or as the
same may be increased from time to time; (iii) the failure by the Association or
the Company to continue to provide the Employee with compensation and benefits
provided for on the date of the Change in Control, as the same may be increased
from time to time, or with benefits substantially similar to those provided to
him under any of the employee benefit plans in which the Employee now or
hereafter becomes a participant, or the taking of any action by the Association
or the Company which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by him at the time
of the Change in Control; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with his
position; (v) a failure to elect or reelect the Employee to the Board of
Directors of the Association or the Company, if the Employee is serving on such
Board on the date of the Change in Control; (vi) a material diminution or
reduction in the Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Association or the
Company; or (vii) a material reduction in the secretarial or other
administrative support of the Employee.
(e) "Just Cause" shall mean, in the good faith determination of the
Association's Board of Directors, the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause. No act, or failure to
act, on the Employee's part shall be considered
-2-
<PAGE>
"willful" unless he has acted, or failed to act, with an absence of good faith
and without a reasonable belief that his action or failure to act was in the
best interest of the Association and the Company.
(f) "Protected Period" shall mean the period that begins on the date
six months before a Change in Control and ends on the later of the first annual
anniversary of the Change in Control or the expiration date of this Agreement.
(g) "Trust" shall mean a grantor trust designed in accordance with
Revenue Procedure 92-64 and having a trustee independent of the Association and
the Company,
2. Trigger Events
--------------
The Employee shall be entitled to collect the severance benefits set forth
in Section 3 of this Agreement in the event that (i) the Employee voluntarily
terminates employment either for any reason within the 30-day period beginning
on the date of a Change in Control, (ii) the Employee voluntarily terminates
employment within 90 days of an event that both occurs during the Protected
Period and constitutes Good Reason, or (iii) the Association, the Company, or
their successor(s) in interest terminate the Employee's employment for any
reason other than Just Cause during the Protected Period.
3. Amount of Severance Benefit
---------------------------
If the Employee becomes entitled to collect severance benefits pursuant to
Section 2 hereof, the Association shall pay the Employee a severance benefit
equal to the Employee's annual salary then in effect, provided that no amount
shall be paid in excess of the difference between the Code (S)280G Maximum and
the sum of any other "parachute payments" as defined under Code (S)280G(b)(2)
that the Employee receives on account of the Change in Control. Said sum shall
be paid in one lump sum within ten (10) days of the later of the date of the
Change in Control and the Employee's last day of employment with the Association
or the Company.
In the event that the Employee and the Association agree that the Employee
has collected an amount exceeding the Code (S)280G Maximum, the parties may
jointly agree in writing that such excess shall be treated as a loan ab initio
-- ------
which the Employee shall repay to the Association, on terms and conditions
mutually agreeable to the parties, together with interest at the applicable
federal rate provided for in Section 7872(f)(2)(B) of the Code.
4. Funding of Grantor Trust upon Change in Control
-----------------------------------------------
Not later than ten business days after a Change in Control, the Association
shall (i) deposit in a Trust an amount equal to the Code (S)280G Maximum, unless
the Employee has previously provided a written release of any claims under this
Agreement, and (ii) provide the trustee of the Trust with a written direction to
hold said amount and any investment return thereon in a
-3-
<PAGE>
segregated account for the benefit of the Employee, and to follow the procedures
set forth in the next paragraph as to the payment of such amounts from the
Trust. Upon the earlier of the Trust's final payment of all amounts due under
the following paragraph or the date 15 months after the Change in Control, the
trustee of the Trust shall pay to the Association the entire balance remaining
in the segregated account maintained for the benefit of the Employee. The
Employee shall thereafter have no further interest in the Trust.
During the 12-consecutive month period after a Change in Control, the
Employee may provide the trustee of the Trust with a written notice requesting
that the trustee pay to the Employee an amount designated in the notice as being
payable pursuant to this Agreement. Within three business days after receiving
said notice, the trustee of the Trust shall send a copy of the notice to the
Association via overnight and registered mail return receipt requested. On the
tenth (10th) business day after mailing said notice to the Association, the
trustee of the Trust shall pay the Employee the amount designated therein in
immediately available funds, unless prior thereto the Association provides the
trustee with a written notice directing the trustee to withhold such payment.
In the latter event, the trustee shall submit the dispute to non-appealable
binding arbitration for a determination of the amount payable to the Employee
pursuant to this Agreement, and the costs of such arbitration shall be paid by
the Association. The trustee shall choose the arbitrator to settle the dispute,
and such arbitrator shall be bound by the rules of the American Arbitration
Association in making his determination. The parties and the trustee shall be
bound by the results of the arbitration and, within three days of the
determination by the arbitrator, the trustee shall pay from the Trust the
amounts required to be paid to the Employee and/or the Association, and in no
event shall the trustee be liable to either party for making the payments as
determined by the arbitrator.
5. Term of the Agreement. This Agreement shall remain in effect for the
---------------------
period commencing on the Effective Date and ending on the earlier of (i) the
date 36 months after the Effective Date, and (ii) the date on which the Employee
terminates employment with the Association; provided that the Employee's rights
hereunder shall continue following the termination of this employment with the
Association under any of the circumstances described in Section 2 hereof.
Additionally, on each annual anniversary date from the Effective Date, the term
of this Agreement shall be extended for an additional one-year period beyond the
then effective expiration date provided the Board of Directors of the
Association determines in a duly adopted resolution that the performance of the
Employee has met the requirements and standards of the respective Boards, and
that this Agreement shall be extended.
6. Termination or Suspension Under Federal Law.
-------------------------------------------
(a) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with both 12
----
U.S.C. Section 1828(k) and any regulations promulgated thereunder, and
---
Regulatory Bulletin 27A, but only to the extent required thereunder on the date
any payment is required pursuant to this Agreement.
-4-
<PAGE>
(b) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Association under this
Agreement shall terminate, as of the effective date of the order, but the vested
rights of the parties shall not be affected.
(c) If the Association is in default (as defined in Section 3(x)(1) of
FDIA), all obligations under this Agreement shall terminate as of the date of
default; however, this Paragraph shall not affect the vested rights of the
parties.
(d) All obligations under this Agreement shall terminate, except to
the extent that continuation of this Agreement is necessary for the continued
operation of the Association: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Association under the authority contained in Section 13(c) of FDIA; or (ii)
by the Director of the OTS, or his or her designee, at the time that the
Director of the OTS, or his or her designee approves a supervisory merger to
resolve problems related to operation of the Association or when the Association
is determined by the Director of the OTS to be in an unsafe or unsound
condition. Such action shall not affect any vested rights of the parties.
(e) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12
U.S.C. 1818(e)(3) and (g)(1)) suspends and/or temporarily prohibits the Employee
from participating in the conduct of the Association's affairs, the
Association's obligations under this Agreement shall be suspended as of the date
of such service, unless stayed by appropriate proceedings. If the charges in
the notice are dismissed, the Association shall (i) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.
7. Expense Reimbursement.
---------------------
In the event that any dispute arises between the Employee and the
Association as to the terms or interpretation of this Agreement, whether
instituted by formal legal proceedings or otherwise, including any action that
the Employee takes to enforce the terms of this Agreement or to defend against
any action taken by the Association or the Company, the Employee shall be
reimbursed for all costs and expenses, including reasonable attorneys' fees,
arising from such dispute, proceedings or actions, provided that the Employee
shall obtain a final judgement in favor of the Employee in a court of competent
jurisdiction or in binding arbitration under the rules of the American
Arbitration Association. Such reimbursement shall be paid within ten (10) days
of Employee's furnishing to the Association and the Company written evidence,
which may be in the form, among other things, of a cancelled check or receipt,
of any costs or expenses incurred by the Employee.
-5-
<PAGE>
8. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Association or Company which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Association or
Company.
(b) Since the Association is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Association.
9. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
10. Applicable Law. Except to the extent preempted by Federal law, the
--------------
laws of the State of Colorado shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
11. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
12. Entire Agreement. This Agreement, together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: SALIDA BUILDING & LOAN ASSOCIATION
/s/ Richard A. Young By /s/ Larry D. Smith
- --------------------- -----------------------------------
Secretary Its President
WITNESS:
/s/ Scott Erchul /s/ Francis L. DeLay
- ------------------------ -----------------------------------
Francis L. DeLay
-6-
<PAGE>
EXHIBIT 10.10
HIGH COUNTRY BANCORP, INC.
--------------------------
Guaranty Agreement
--------------------------
THIS AGREEMENT is entered into this 30/th/ day of April, 1998 (the
"Effective Date"), by and between High Country Bancorp, Inc. (the "Company") and
Francis L. DeLay (the "Employee").
WHEREAS, the Employee has heretofore been employed by Salida Building &
Loan Association (the "Association"), and has entered into a change-in-control
protective agreement (the "Association Agreement") dated April 30, 1998, with
the Employee; and
WHEREAS, the Board of Directors (the "Board") of the Company believes it is
in the best interests of the Company to enter into this Agreement with the
Employee in order to assure continuity of management of the Association and to
reinforce and encourage the long-term retention of the Employee; and
WHEREAS, the parties desire by this writing to set forth the Company's
commitment to guarantee the Association's obligations under the Association
Agreement with the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Consideration from Company: Joint and Several Liability. The Company
-------------------------------------------------------
hereby agrees that to the extent permitted by law, it shall be jointly and
severally liable with the Association for the payment of all amounts due under
the Association Agreement, provided that Section 6 of the Association Agreement
shall be innaplicable to this Agreement. The Board may in its discretion at any
time during the term of this Agreement agree to pay the Employee a base salary
for the remaining term of this Agreement. If the Board agrees to pay such
salary, the Board shall thereafter review, not less often than annually, the
rate of the Employee's salary, and in its sole discretion may decide to increase
his salary.
2. Discretionary Bonuses; Participation in Retirement, Medical and Other
---------------------------------------------------------------------
Plans. The Employee shall participate in an equitable manner with all other
- -----
senior management employees of the Company in discretionary bonuses that the
Board may award from time to time to the Company's senior management employees,
as well as in (i) any of the following plans or programs that the Company may
now or in the future maintain: group hospitalization, disability, health,
dental, sick leave, life insurance, travel and/or accident insurance, auto
allowance/auto lease, retirement, pension, and/or other present or future
qualified plans provided by the Company, generally which benefits, taken as a
whole, must be at least as favorable as those in effect on the Effective Date;
and (ii) any fringe benefits which are or may become available to
<PAGE>
the Company's senior management employees, including for example: any stock
option or incentive compensation plans, and any other benefits which are
commensurate with the responsibilities and functions to be performed by the
Employee under this Agreement.
3. Indemnification. The Company agrees that its Bylaws shall continue
---------------
to provide for indemnification of directors, officers, employees and agents of
the Company, including the Employee, during the full term of this Agreement, and
to at all times provide adequate insurance for such purposes.
4. Successors and Assigns.
----------------------
(a) Company. This Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Company which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Company.
(b) Attachment. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
5. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
6. Applicable Law. Except to the extent preempted by Federal law, the
--------------
laws of the State of Colorado shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
7. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
8. Entire Agreement. This Agreement, together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: HIGH COUNTRY BANCORP, INC.
/s/ Richard A. Young By /s/ Robert B. Mitchell
- -------------------------------- -------------------------------
Secretary Its Chairman of the Board
WITNESS:
/s/ Scott Erchul /s/ Francis L. DeLay
- -------------------------------- -------------------------------
Francis L. DeLay
-3-
<PAGE>
EXHIBIT 13
[ L O G O ]
HIGH COUNTRY BANCORP, INC.
ANNUAL REPORT FOR
THE YEAR ENDED
JUNE 30, 1998
<PAGE>
[HIGH COUNTRY BANCORP, INC. LETTERHEAD]
To Our Stockholders:
The Board of Directors and Management of High Country Bancorp, Inc., would
like to thank you for your support during the past year. With the successful
completion of the stock conversion of Salida Building and Loan Association, we
are pleased to present this first annual report to the Stockholders.
After serving the local area for 111 years as a mutual institution, the
Company is positioned, with additional capital obtained through the stock
offering, to take advantage of competitive opportunities.
During Fiscal 1998, assets increased $24.30 Million to $100.6 Million.
This growth was primarily a result of the stock conversion and continued strong
loan demand in the local economy. As a result of the conversion and net income,
Stockholder's equity increased 207% to $18.3 Million. Asset quality remains
good, with continued application of good underwriting standards.
We are confident of the Company's sound financial condition and look
forward to future growth within our communities. We are committed to serving
our local customers and meeting the challenges of the financial service
industry. We invite you to review this Annual Report and financial reports for
the past year. We appreciate your support, as we look forward to the future
with great anticipation and enthusiasm.
Sincerely,
/s/ Larry D. Smith
Larry D. Smith, President
and Chief Executive Officer
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT JUNE 30, CHANGE
-------------------- ---------------------
1998 1997 AMOUNT PERCENT
---------- -------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
FINANCIAL POSITION:
Total assets............................ $ 100,589 $76,324 $ 24,265 31.79%
Loans receivable, net................... 81,359 63,127 18,232 28.88
Mortgage-backed and related securities.. 4,637 5,340 (703) 13.16
Investment securities................... 1,066 989 77 7.79
Deposits................................ 63,425 56,152 7,273 12.95
Stockholders' equity.................... 18,279 5,958 12,321 206.80
Number of common shares outstanding..... 1,322,500 -- 1,322,500 100.00
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30, CHANGE
------------------- --------------------
1998 1997 AMOUNT PERCENT
--------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income......................... $ 7,033 $ 5,764 $ 1,269 22.02%
Interest expense........................ 3,266 2,813 453 16.10
Net interest income..................... 3,767 2,951 816 27.65
Provision for loan losses............... 219 282 (63) 22.34
Net interest income after provision
for loan losses........................ 3,548 2,669 879 32.93
Non-interest income..................... 158 142 16 11.27
Non-interest expense.................... 2,625 2,755 (130) 4.72
Net earnings............................ 653 44 609 1384.09
</TABLE>
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
SELECTED FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total assets........................... $100,589 $76,324 $63,185 $54,813 $49,204
Cash................................... 2,999 895 511 1,355 1,463
Interest-earning deposits.............. 6,963 2,381 1,577 513 639
Securities available for sale.......... -- -- 989 1,385 1,454
Securities held to maturity........... 4,637 5,340 6,843 8,368 9,910
Loans receivable, net.................. 81,359 63,127 50,076 41,537 34,456
Savings deposits....................... 63,425 56,152 49,537 45,914 43,965
Stockholders' equity................... 18,279 5,958 5,907 5,379 4,792
- ---------------------------------------
Number of:
Real estate loans outstanding........ 1,185 1,137 1,054 965 890
Savings accounts..................... 10,199 9,126 7,828 7,324 7,217
Full-service offices................. 3 3 2 2 2
</TABLE>
SELECTED OPERATIONS DATA:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income........................ $ 7,033 $ 5,764 $ 4,948 $ 3,911 $ 3,557
Interest expense....................... 3,266 2,813 2,293 1,603 1,401
-------- ------- ------- ------- -------
Net interest income.................. 3,767 2,951 2,655 2,308 2,156
Provision for loan losses.............. 219 282 59 59 60
-------- ------- ------- ------- -------
Net interest income after provision
for loan losses..................... 3,548 2,669 2,596 2,249 2,096
-------- ------- ------- ------- -------
Noninterest income..................... 158 141 146 146 122
-------- ------- ------- ------- -------
Subtotal............................. 3,706 2,810 2,742 2,395 2,218
-------- ------- ------- ------- -------
Noninterest expense:
Compensation and benefits............. 1,506 1,345 868 730 626
Other................................. 1,119 1,410 948 771 661
-------- ------- ------- ------- -------
Total noninterest expense............. 2,625 2,755 1,816 1,501 1,287
-------- ------- ------- ------- -------
Income before taxes.................. 1,081 55 926 894 931
Income tax expense..................... 428 11 407 327 347
-------- ------- ------- ------- -------
Net income........................... $ 653 $ 44 $ 519 $ 567 $ 584
======== ======= ======= ======= =======
</TABLE>
2
<PAGE>
OPERATING RATIOS
<TABLE>
<CAPTION>
At or for the
Year Ended June 30,
-------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
PERFORMANCE RATIOS:
Return on assets (ratio of net earnings
to average total assets)............................... 0.74% 0.06% 0.86%
Return on equity (ratio of net earnings
to average equity)..................................... 5.22% 0.75% 9.15%
Ratio of average interest-earning assets to
average interest-bearing liabilities................... 110.76% 104.64% 106.15%
Ratio of net interest income, after provision
for loan losses, to noninterest expense................ 135.16% 96.88% 142.95%
Net interest rate spread (difference between weighted
average yield on interest-earning assets and weighted
average cost of interest-bearing liabilities).......... 4.10% 4.19% 4.41%
Net yield on average interest-earning assets............ 4.53% 4.38% 4.65%
QUALITY RATIOS:
Non-performing loans to total loans
at end of period....................................... 0.46% 0.21% 0.14%
Non-performing loans to total assets.................... 0.39% 0.18% 0.12%
Non-performing assets to total assets
at end of period....................................... 0.41% 0.23% 0.12%
Allowance for loan losses to non-performing
loans at end of period................................. 192% 431% 563%
Allowance for loan losses to total loans................ 0.89% 0.93% 0.79%
CAPITAL RATIOS:
Equity to total assets at end of period................. 18.17% 7.81% 9.35%
Average equity to average assets........................ 14.14% 8.32% 9.42%
</TABLE>
3
<PAGE>
BUSINESS OF THE COMPANY AND THE ASSOCIATION
HIGH COUNTRY BANCORP, INC.
High Country Bancorp, Inc. (the "Company") was incorporated under the laws
of the State of Colorado in August 1997 for the purpose of becoming a savings
and loan holding company for Salida Building and Loan Association ("Salida" or
the "Association"). On December 9, 1997, the Association consummated its
conversion from mutual to stock form (the "Conversion") and the Company
completed its offering of Common Stock through the sale and issuance of
1,322,500 shares of Common Stock at a price of $10.00 per share, realizing gross
proceeds of $13.21 million and net proceeds of $12.7 million. The Company
purchased all of the capital stock of the Association with $5.8 million of the
offering proceeds.
Prior to the acquisition of all of the outstanding stock of the
Association, the Company had no assets or liabilities and engaged in no business
activities. Since its acquisition of the Association, the Company has engaged
in no significant activity other than holding the stock of the Association,
investing the net proceeds of the offering and operating the business of a
savings and loan association through the Association. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to the Association.
The Company's executive offices are located at 130 West 2nd Street, Salida,
Colorado. Its telephone number is (719) 539-2516.
SALIDA BUILDING AND LOAN ASSOCIATION
The Association is a federal savings and loan association operating through
offices located in Salida, Colorado, Buena Vista, Colorado and Leadville,
Colorado and serving Chaffee, Lake, Western Fremont and Saguache Counties in
Colorado. The Association was chartered in 1886 as the first state-chartered
building and loan association in Colorado. The Association received federal
insurance of its deposit accounts and became a member of the FHLB in 1937. The
Association became a federally-chartered association on August 16, 1993 under
its current name of Salida Building and Loan Association. At June 30, 1998, the
Association had total assets of $94.5 million, loans receivable (net) of $81.4
million, total deposits of $63.4 million and equity of $12.3 million.
Historically, the Association has operated as a traditional savings
institution by emphasizing the origination of loans secured by one- to four-
family residences. Since fiscal 1996, the Association has significantly
increased its origination of consumer (primarily automobile), commercial
business and commercial real estate loans, including loans for the purchase and
development of raw land, all of which loans have been originated in its market
area.
The Association is subject to examination and comprehensive regulation by
the Office of Thrift Supervision ("OTS"), and the Association's savings deposits
are insured up to applicable limits by the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"). The Association is a member of and owns capital stock in the Federal
Home Loan Bank ("FHLB") of Topeka, which is one of 12 regional banks in the FHLB
System. The Association is further subject to regulations of the Federal
Reserve Board governing reserves to be maintained and certain other matters.
Regulations significantly affect the operations of the Association.
The Association's executive offices are located at 130 W. 2nd Street,
Salida, Colorado 81201-0309, and its main telephone number is (719) 539-2516.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Prior to the acquisition of all of the outstanding stock of the
Association, the Company had no assets or liabilities and engaged in no business
activities. Since its acquisition of the Association, the Company has engaged
in no significant activity other than holding the stock of the Association,
investing the net proceeds of the offering and operating the business of a
savings and loan association through the Association. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to the Association.
The principal business of the Association consists of accepting deposits
from the general public and investing these funds primarily in loans and in
investment securities and mortgage-backed securities. The Association's loan
portfolio consists primarily of loans secured by residential real estate located
in its market area, with terms of 15 to 30 years, as well as commercial real
estate, commercial business, land development and consumer loans.
The Association's net income is dependent primarily on its net interest
income, which is the difference between interest income earned on its loan,
investment securities and mortgage-backed securities portfolio and interest paid
on interest-bearing liabilities. Net interest income is determined by (i) the
difference between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Association's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. To a lesser extent, the Association's net income also is affected by the
level of noninterest expenses such as compensation and employee benefits and
FDIC insurance premiums.
The operations of the Association are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of governmental agencies. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Association's market area.
ASSET/LIABILITY MANAGEMENT
The Association's asset/liability management strategy has been to emphasize
shorter term loans and develop a deposit portfolio of transaction accounts. In
fiscal 1996 and fiscal 1997 the Association selectively sold long-term fixed
rate loans in the secondary market, and replaced them with shorter term loans,
some with variable interest rates. The Association's business plan calls for
continued emphasis on shorter term and adjustable rate loans.
As noted above, the Association is seeking to reduce its exposure to
changes in interest rates by originating shorter term consumer and commercial
business loans with maturities of no more than 10 years and by investing in
adjustable-rate mortgage-backed securities. The matching of the Association's
assets and liabilities may be analyzed by examining the extent to which its
assets and liabilities are interest rate sensitive and by monitoring the
expected effects of interest rate changes on the Association's net interest
income.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the
Association's assets mature or reprice more quickly or to a greater extent than
its liabilities, the Association's net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. If the Association's assets mature or
reprice more slowly or to a lesser extent than its liabilities, the
Association's net portfolio value and net interest income would tend to decrease
during periods of rising interest rates but increase during periods of falling
interest rates. As a result of the interest rate risk inherent in the
historical savings institution business of originating long-term loans funded by
short-term deposits, the Association has pursued certain strategies designed to
decrease the vulnerability of its earnings to material and prolonged changes in
interest rates.
2
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets.
Generally, during a period of rising interest rates, a negative gap would
be expected to adversely affect net interest income while a positive gap would
be expected to result in an increase in net interest income, while conversely
during a period of declining interest rates, a negative gap would be expected to
result in an increase in net interest income and a positive gap would be
expected to adversely affect net interest income. As noted above, the
Association is attempting to improve its significant negative gap by emphasizing
the origination of shorter-term consumer and commercial business loans, and by
investing a portion of the net proceeds of the Conversion in adjustable-rate
mortgage-backed securities.
NET PORTFOLIO VALUE. In recent years, the Association has measured its
interest rate sensitivity by computing the "gap" between the assets and
liabilities which were expected to mature or reprice within certain periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of amounts
by which the net present value of an institution's cash flows from assets,
liabilities and off balance sheet items (the institution's net portfolio value,
or "NPV") would change in the event of a range of assumed changes in market
interest rates. These computations estimate the effect on an institution's NPV
from instantaneous and permanent 1% to 4% increases and decreases in market
interest rates. In the Association's interest rate sensitive policy, the Board
of Directors has established a maximum decrease in net interest income and
maximum decreases in NPV given these instantaneous changes in interest rates.
The following table sets forth the interest rate sensitivity of the
Association's net portfolio value as of June 30, 1998 in the event of 1%, 2%, 3%
and 4% instantaneous and permanent increases and decreases in market interest
rates, respectively. These changes are set forth below as basis points, where
100 basis points equals one percentage point.
<TABLE>
<CAPTION>
Net Portfolio Value NPV as % of Portfolio Value of Assets
Change ------------------------------ -------------------------------------
in Rates $ Amount $ Change % Change NPV Ratio Basis Point Change
-------- -------- --------- --------- ---------- -------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp 11,915 (3,972) (25)% 12.98% (321) bp
+ 300 bp 13,117 (2,770) (17) 14.02 (216) bp
+ 200 bp 14,280 (1,607) (10) 14.98 (120) bp
+ 100 bp 15,283 (604) (4) 15.77 (41) bp
0 bp 15,887 16.18
- 100 bp 16,106 220 1 16.25 7 bp
- 200 bp 15,991 105 1 16.04 (15) bp
- 300 bp 16,179 293 2 16.07 (11) bp
- 400 bp 16,548 661 4 16.25 6 bp
</TABLE>
3
<PAGE>
The following table sets forth the interest rate risk capital component for
the Association at June 30, 1998 given a hypothetical 200 basis point rate
change in market interest rates.
June 30, 1998
-------------
Pre-shock NPV Ratio: NPV as % of Portfolio Value of Assets....... 16.18%
Exposure Measure: Post-Shock NPV Ratio........................... 14.98%
Sensitivity Measure: Change in NPV Ratio......................... 120 bp
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates and loan prepayments, and should not be relied upon as indicative of
actual results. Further, the computations do not contemplate any actions the
Association may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
both the computation of NPV and in the analysis presented in prior tables
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. The interest rates on
certain of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other assets and liabilities may lag
behind changes in market rates. Based on the above, net interest income should
decline with instantaneous increases in interest rates while net interest income
should increase with instantaneous declines in interest rates. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in the tables.
The Association originates fixed-rate and variable-rate real estate loans
and holds most loans in portfolio until maturity, except as may be appropriate
for asset/liability management purposes. Because the Association's interest-
bearing liabilities which mature or reprice within short periods substantially
exceed its earning assets with similar characteristics, material and prolonged
increases in interest rates generally would adversely affect net interest
income, while material and prolonged decreases in interest rates generally, but
to a lesser extent because of their historically low levels, would have the
opposite effect.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the
Association's average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods and at the date indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. Management does not
believe that the use of month-end balances instead of daily balances has caused
any material difference in the information presented.
The table also presents information for the periods and at the date
indicated with respect to the difference between the average yield earned on
interest-earning assets and average rate paid on interest-bearing liabilities,
or "interest rate spread," which savings institutions have traditionally used as
an indicator of profitability. Another indicator of an institution's net
interest income is its "net yield on interest-earning assets," which is its net
interest income divided by the average balance of interest-earning assets. Net
interest income is affected by the interest rate spread and by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.
4
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
At June 30, 1998 1997
1998 --------------------------- ----------------------------
---------------- Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------- ------- ------- --------- ------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits................. $ 6,963 5.99% $ 6,502 $ 275 4.23% $ 1,398 $ 84 6.01%
Investments............................... 5,702 7.08 6,030 410 6.80 7,234 431 5.96
Loans..................................... 81,359 8.55 70,706 6,348 8.98 58,752 5,249 8.93
-------- ------- ------- ------- -------
Total interest-earning assets.............. 94,024 8.27 83,238 7,033 8.45 67,384 5,764 8.55
------- -------
Non-interest-earning assets................ 6,565 5,293 3,845
-------- ------- -------
Total assets............................... $100,589 $88,531 $71,229
======== ======= =======
INTEREST-BEARING LIABILITIES:
Savings deposits.......................... $ 63,425 4.00 $61,096 $ 2,394 3.92 $53,890 2,179 4.04
FHLB advances............................. 17,890 6.07 14,055 872 6.20 10,508 634 6.03
-------- ------- ------- ------- -------
Total interest-bearing liabilities......... 81,315 4.46 75,151 3,266 4.35 64,398 2,813 4.37
------- -------
Non-interest bearing liabilities........... 995 863 908
-------- ------- -------
Total liabilities.......................... 82,310 76,014 65,306
Equity..................................... 18,279 12,517 5,923
-------- ------- -------
Total liabilities and equity............... $100,589 $88,531 $71,229
======== ======= =======
Net interest income........................ $ 3,767 $ 2,951
======= =======
Net interest rate spread (1)............... 3.81% 4.10% 4.19%
==== ==== ====
Net interest\dividend earning assets....... $ 8,087 $ 2,986
======= =======
Net interest margin (2).................... 4.53% 4.38%
==== ====
Average interest-earning assets to
average interest-bearing liabilities (3).. 110.76% 104.64%
====== ======
- -------------------------
</TABLE>
(1) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate on interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
(3) Due to the immaterial amount of non-accruing loans, the balances of such
loans have been included as interest-earning assets.
5
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in
interest income and interest expense of the Association for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to: (i) changes in
volume (changes in volume multiplied by old rate); (ii) changes in rate (changes
in rate multiplied by old volume); and (iii) changes in rate/volume (changes in
rate multiplied by changes in volume).
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-------------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------- -------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
-------- ------- ------- --------- --------- ------ ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits.... $ 307 $(25) $ (91) $ 191 $ 66 $ (8) $(13) $ 45
Investments.................. (72) 61 (10) (21) (118) (40) 8 (150)
Loans........................ 1,064 29 6 1,099 1,033 (90) (21) 922
------ ---- ----- ------ ------ ----- ---- -----
Total interest-earning
assets.................... 1,299 65 (95) 1,269 981 (138) (26) 817
------ ---- ----- ------ ------ ----- ---- -----
INTEREST-BEARING LIABILITIES:
Deposits..................... 289 (64) (10) 215 221 (9) (1) 211
FHLB advances................ 214 18 6 238 321 (6) (5) 310
------ ---- ----- ------ ------ ----- ---- -----
Total interest-bearing
liabilities.............. 503 (46) (4) 453 542 (15) (6) 521
------ ---- ----- ------ ------ ----- ---- -----
Increase (decrease) in net
interest
income..................... $ 796 $111 $ (91) $ 816 $ 439 $(123) $(20) $ 296
====== ==== ===== ====== ====== ===== ==== =====
</TABLE>
6
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND JUNE 30, 1997
The Company's total assets increased by $24.3 million or 31.85% from $76.3
million at June 30, 1997 to $100.6 million at June 30, 1998. The increase in
assets was due to net proceeds received from common stock issued in the amount
of $12.7 million and loan growth during fiscal 1998.
The Association's net loan portfolio increased by approximately $18.2
million during the year ended June 30, 1998. Net loans totaled $81.3 million at
June 30, 1998 and $63.1 million at June 30, 1997. The increase included
increases in residential mortgage loans of $12.3 million, consumer (auto) loans
of $2.5 million and commercial loans of $1.7 million. The growth in loans is
due to significant refinancing of residential mortgage loans, special auto loan
rates, and strong commercial loan demand.
The allowance for loan losses totaled $751,000 at June 30, 1998 and
$604,000 at June 30, 1997. As of those dates the non-performing loans in the
Association's portfolio totaled $392,000 and $140,000, respectively. There were
$92,000 of loans charged off and $19,000 of recoveries of previous loan losses
during the year ended June 30, 1998. The determination of the allowance for
loan losses is based on management's analysis, performed on a quarterly basis,
of various factors, including the market value of the underlying collateral,
growth and composition of the loan portfolio, the relationship of the allowance
for loan losses to outstanding loans, historical loss experience, delinquency
trends and prevailing economic conditions. Although management believes its
allowance for loan losses is adequate, there can be no assurance that additional
allowances will not be required or that losses on loans will not be incurred.
The Association has had minimal losses on loans in prior years. At June 30,
1998, the ratio of the allowance for loan losses to net loans was .92% as
compared to .96% at June 30, 1997.
At June 30, 1998, the Association's investment portfolio included
mortgage-backed securities and local municipal bonds classified as "held to
maturity" carried at amortized cost of $4.6 million and an estimated fair value
of $4.7 million. The balance of the Association's investment portfolio at June
30, 1998 consisted of interest-earning deposits with various financial
institutions totaling $7.0 million.
At June 30, 1998 deposits increased to $63.4 million from $56.2 million at
June 30, 1997 or a net increase of 12.81%. Management is continually evaluating
the investment alternatives available to the Association's customers, and
adjusts the pricing on its savings products to maintain its existing deposits.
The increase was used to fund loan growth. Advances from the Federal Home Loan
Bank increased from $13.5 million at June 30, 1997 to $17.9 million at June 30,
1998. The increase was used to fund loan growth.
Total equity increased from $6.0 million as of June 30, 1997 to $18.3
million as of June 30, 1998. The increase was due to the net proceeds from the
common stock offering. The Company issued 1,322,500 shares of common stock at
$10.00 per share in December 1997. The proceeds of the issue were used to
purchase all of the common stock of Salida, funding an employee stock ownership
plan ("ESOP") note receivable, and investing in overnight deposits. On April
23, 1998, the Board of Directors of the Company declared a cash dividend of
$.075 per share to stockholders of record as of April 30, 1998, which was paid
on May 11, 1998.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED JUNE 30, 1998 TO THE YEAR
ENDED JUNE 30, 1997
NET INCOME. The Company's net income for the year ended June 30, 1998 was
$653,000 compared to $44,000 for the year ended June 30, 1997. The lower net
income for the year ended June 30, 1997 was attributable to the special SAIF
assessment, the implementation of benefit plans, additional provisions for loan
losses and losses on the sale of loans. The net income for the year ended June
30, 1998 was affected by increased interest income from the proceeds of the
stock sale and from loan growth, less the expenses associated with increased
interest expense, additional employees, ESOP expenses, and the new branch
facility that was opened.
7
<PAGE>
NET INTEREST INCOME. Net interest income for the year ended June 30, 1998
was $3.8 million compared to $3.0 million for the year ended June 30, 1997. The
increase is attributable to interest income earned on interest earning assets
due to the net proceeds of the stock sale and loan growth, offset by the
increase in interest expense due to the increase in deposits from $56.2 million
at June 30, 1997 to $63.4 million at June 30, 1998 and the increase in FHLB
advances from $13.5 million at June 30, 1997 to $17.9 million at June 30, 1998.
The average yield on interest earning assets decreased from 8.55% for the year
ended June 30, 1997 to 8.45% for the year ended June 30, 1998. The decrease was
primarily due to refinancing activity on residential mortgage loans. The
average cost of interest bearing liabilities increased from 4.55% for the year
ended June 30, 1997 to 4.67% for the year ended June 30, 1998. The increase in
average cost was primarily due to an increased reliance on FHLB advances which
generally have a higher cost than deposits. These changes resulted in the
interest rate spread decreasing from 4.19% for the year ended June 30, 1997 to
4.10% for the year ended June 30, 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year
ended June 30, 1998 was $219,000 as compared to $282,000 for the year ended June
30, 1997. The provision for the year ended June 30, 1997 reflects provisions
for large increases in commercial and land loans during that year. The
provision during the year ended June 30, 1998 reflects the mix and amount of
loans being originated and the need to maintain an adequate balance in the
allowance for loan losses.
NON-INTEREST EXPENSES AND SAIF SPECIAL ASSESSMENT. Total non-interest
expense for the year ended June 30, 1998 was $2.6 million compared to $2.8
million for the year ended June 30, 1997. The decrease was attributable to the
SAIF assessment of $297,000, expenses relating to the implementation of benefit
plans during fiscal 1997 of $237,000 and losses on sale of loans of $56,000.
Various expenses increased during the year ended June 30, 1998 including
increases in compensation and benefits of $235,000, ESOP expenses of $163,000,
and the balance attributed to costs of the branch facility opened in Buena
Vista, Colorado, as well as additional Company-related expenses.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED JUNE 30, 1997 TO THE YEAR
ENDED JUNE 30, 1996
NET INCOME. The Association's net income for the year ended June 30, 1997
was $44,000 compared to $519,000 for the year ended June 30, 1996. The decrease
for 1997 is attributed to the special SAIF assessment of $297,000, the adoption
of certain benefit plans resulting in a one-time charge of $237,000, and an
increase in the provision for losses on loans of approximately $223,000, which
was offset by an increase in net interest income of approximately $296,000.
INTEREST INCOME. Interest income increased by $817,000 from $5.0 million
to $5.8 million or by 16.5%, during fiscal 1997. This change resulted in part
from an overall increase of average interest-earning assets by $10.3 million
from $57.1 million to $67.4 million or by 18.1% from fiscal 1996 to fiscal 1997.
The Association experienced a decrease in the average yield on the interest-
earning assets from 8.67% for fiscal 1996 to 8.55% for fiscal 1997. Although
loans were made at lower rates during fiscal 1997, it provided the Association
with a competitive product that lead to growth in residential and other lending
and earned a comparatively higher yield than short-term investments.
INTEREST EXPENSE. Interest expense increased $521,000 or 22.7% to $2.8
million for the year ended June 30 1997 from $2.3 million for the year ended
June 30, 1996. For the year ended June 30, 1997, the average cost of deposits
was 4.04%., compared to 4.06% for the year ended June 30, 1996. The interest
expense for FHLB advances increased from $326,000 for the year ended June 30,
1996, to $634,000 for the year ended June 30, 1997. The increase is
attributable to increased borrowings of $6.4 million.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including, general economic conditions, loan
portfolio composition, prior loss experience, the estimated fair value of the
underlying collateral and other factors that warrant recognition in providing
for an adequate loan loss allowance.
8
<PAGE>
The provision for loan losses increased approximately $223,000 or 378% to
$282,000 for the year ended June 30, 1997 from $59,000 for the year ended June
30, 1996. The increase in the provision for loan losses was the result of the
increase in the Association's loan portfolio, including significant increases
in: one- to four-family loans of $8.4 million; land development loans of
$900,000; consumer loans (primarily auto loans) of $1.7 million; and commercial
business loans of $2.0 million. Consumer, commercial business, and land
development loans are generally considered to involve a higher degree of credit
risk than one- to four-family residential mortgage loans.
NONINTEREST EXPENSE. Noninterest expense increased by $939,000 or 51.7%
to $2.76 million for the year ended June 30, 1997 from $1.82 million for the
year ended June 30, 1996. Compensation and benefits expenses increased by
$476,000 or 54.8% to $1.34 million at June 30, 1997 from $869,000 at June 30,
1996. The increase in compensation and benefits expenses at June 30, 1997 was
primarily the result of newly implemented benefit plans, specifically the Long-
Term Incentive Plan which was effective as of June 10, 1997. Occupancy and
equipment expense increased by $126,000 or 35.3%, to $482,000 at June 30, 1997
from $356,000 at June 30, 1996. The increase in occupancy and equipment expense
was the result of the new branch office facilities in Leadville and Buena Vista.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of October 31, 1996. Based on the
Association's deposits as of March 31, 1995, the date for measuring the amount
of the special assessment pursuant to the Act, the Association's special
assessment was $297,000. The assessment rate for the SAIF special assessment
was 65.7 basis points, compared to 23 basis points for the regular assessment
for the six months ended September 30, 1996, and 6.48 basis points for the
regular assessment for the last two quarters of fiscal 1997.
INCOME TAXES. The Association's effective tax rate for the years ended
June 30, 1997 and 1996 was 20% and 44%, respectively. The change was due to
rates used for the higher income level and State credits that were available.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds consists of deposits, repayment
of loans and mortgage-backed securities, maturities of investments and interest-
bearing deposits, and funds provided form operations. While scheduled
repayments of loans and mortgage-backed securities and maturities of investment
securities are predicable sources of funds, deposit flows and loan prepayments
are greatly influenced by the general level of interest rates, economic
conditions and competition. The Association uses its liquidity resources
principally to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other
interest-earning assets, to maintain liquidity, and to meet operating expenses.
Management believes that proceeds from the stock sale, loan repayments and other
sources of funds will be adequate to meet the Association's liquidity needs for
the immediate future.
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
minimum ratio was 5% until November 24, 1997 when the requirement was lowered to
4%. The Association has historically maintained a level of liquid assets in
excess of regulatory requirements. The Association liquidity ratios at June 30,
1998 and 1997 were 5.92% and 5.51%, respectively.
YEAR 2000 ISSUE
The Company is evaluating the potential effect of the year 2000 on its
information processing systems. Because critical computer systems and software
are vendor maintained, the Company is not directly involved with programming
changes or application upgrades. The Company expects the providers to be
compliant on a timely basis and is testing the compliance efforts. The
Association's primary data processor has indicated that renovations to their
system for year 2000 compliance are complete. The data processor has tested
this system and the Association will test it in September 1998, and continue
into 1999. The primary data processor is also testing the interfaces they have
with
9
<PAGE>
other systems for year 2000 compliance. Besides the primary data processor, the
Association has reviewed other critical systems and many of these systems are
year 2000 compliant. Testing has already begun on these systems and will
continue into 1999. It is management's opinion that the modifications will not
have a material effect on the Company's financial position. All costs
associated with modifications will be expensed as incurred.
The Association has developed a contingency and business resumption plan in
case critical systems are not expected to be year 2000 ready or fail in the year
2000. The Plan has identified alternative means of operation in case a system
is not expected to be year 2000 ready by a certain date or malfunctions in the
year 2000. The Plan is reviewed on an ongoing basis.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in terms
of historical dollars without considering changes in the relative purchasing
power of money over time because of inflation. Unlike most industrial
companies, virtually all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a more significant impact
on the Company's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the extent as
the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR ESOP. The Accounting Standards Division of the American
Institute of Certified Public Accountants approved Statement of Position ("SOP")
93-6, "Employers' Accounting for Employee Stock Ownership Plans," which is
effective for fiscal years beginning after December 15, 1993. SOP 93-6 changed,
among other things, the measure of compensation recorded by employers from the
cost of ESOP shares to the fair value of ESOP shares. To the extent that the
fair value of the common stock held by the ESOP that are committed to be
released directly to compensate employees, differs from the cost of such shares,
compensation expenses and a related charge or credit to additional paid-in
capital will be reported in the Association's financial statements. The
adoption of the ESOP by the Association and the application of SOP 93-6 is
likely to result in fluctuations in compensation expense as a result of changes
in the fair value of the common stock. However, any such compensation expense
fluctuations will result in an offsetting adjustment to paid-in capital, and
therefore, total capital will not be affected.
ACCOUNTING FOR STOCK-BASED COMPENSATION. In October, 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation to Employees." This statement encourages entities to adopt the
fair value based method of accounting for employee stock options or other stock
compensation plans. However, it allows an entity to measure compensation cost
for those plans using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the
fair value based method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period, which is
usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess of the quoted market price of the stock at the
grant date over the amount an employee must pay to acquire the stock. Most
fixed stock option plans - the most common type of stock compensation plan -
have no intrinsic value at grant date and under Opinion No. 25 no compensation
cost is recognized for them.
Compensation cost is recognized for other types of stock based compensation
plans under Opinion No. 25, including plans with variable, usually performance-
based features. This Statement requires that an employer's financial statements
include certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. This Statement is effective
for transactions entered into in fiscal years that begin after December 15,
1995. The Association adopted the Statement on the date the Association
converted from a federal mutual to a federal stock savings and loan association.
The Association has not determined which method it will use to account for the
options at this time and has not estimated the effect of adoption on the
Association's financial statements.
10
<PAGE>
EARNINGS PER SHARE. In March 1997, the Financial Accounting Standards
Board ("FASB") issued Statement No. 128. The Statement establishes standards
for computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. This Statement simplifies
the standards for computing earnings per share and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentations of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. This
statement supersedes Opinion 15 and AICPA Accounting Interpretation 1-102 of
Opinion 15. This statement is effective for financial statements issued for
periods ending after December 15, 1997. This statement was adopted in December
1997, the impact of adopting this statement was not material.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. In February 1997, the
Financial Accounting Standards Board issued Statement No. 129. The Statement
incorporates the disclosure requirements of APB Opinion No. 15, Earnings Per
Share and makes them applicable to all public and nonpublic entities that have
issued securities addressed by the Statement. APB Opinion No. 15 requires
disclosure of descriptive information about securities that is not necessarily
related to the computation of earnings per share.
This statement continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions No. 10,
Omnibus Opinion - 1966, and No. 15, Earnings Per Share, and FASB Statement No.
47, Disclosure of Long-Term Obligations, for entities that were subject to the
requirements of those standards. This Statement eliminates the exemption of
nonpublic entities from certain disclosure requirements of Opinion No. 15 as
provided by FASB Statement No. 21, Suspension of the Reporting of Earnings per
Share and Segment Information by Nonpublic Enterprises. It supersedes specific
disclosure requirements of Opinions 10 and 15 and Statement 47 and consolidates
them in this statement for ease of retrieval and for greater visibility to
nonpublic entities. The Statement is effective for financial statements for
periods ending after December 15, 1997. SFAS No. 129 will be adopted by the
Association in July 1998, the impact of adopting the Statement will not be
material to the financial statements.
REPORTING COMPREHENSIVE INCOME. In June 1997, the Financial Accounting
Standards board issued Statement No. 130. The Statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income to
be reported in a financial statement that is displayed with the same prominence
as other financial statements. This Statement does not require a specific
format for that financial statement but requires that an enterprise display an
amount representing total comprehensive income for the period in that financial
statement.
This Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
This Statement is effective for fiscal years beginning after December 15,
1997. FASB Statement No. 130 will be adopted by the Association in July 1998,
the impact of adopting the Statement will not be material to the financial
statements.
11
<PAGE>
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
June 1997 the Financial Accounting Standards board issued Statement No. 131.
The Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes FASB Statement
No. 14, Financial reporting for segments of Business Enterprise, but retains the
requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of all Majority-owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
The Statement requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
The Statement requires that a public business enterprise report a measure
of segment profit or loss, certain specific revenue and expense items, and
segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions.
The Statement also requires that a public business enterprise report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
This Statement is effective for fiscal years beginning after December 15,
1997. FASB Statement No. 131 will be adopted by the Association after December
15, 1997, the impact of adopting the Statement will not be material to the
financial statements.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POST RETIREMENT BENEFITS.
In February 1998, the Financial Accounting Standards Board issued Statement No.
132, "Employers' Disclosure About Pensions and Other Postretirement Benefits."
The Statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable. This Statement is effective
for fiscal years beginning after December 15, 1997, and will be adopted by the
Association in July 1998, the impact of adopting the Statement will not be
material to the financial statements.
ACCOUNTING FOR DERIVATIVES AND SIMILAR FINANCIAL INSTRUMENTS AND FOR
HEDGING ACTIVITIES. In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, "Accounting for Derivatives and Similar Financial
Instruments and For Hedging Activities. The Statement requires all derivatives
to be measured at fair value and to be recognized as either assets or
liabilities in the statement of financial condition, and is effective for fiscal
years beginning after June 15, 1999. Management, at this time, has not
determined the impact of adopting this statement on July 1, 1999.
12
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
HIGH COUNTRY BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report 14
Statements of Financial Condition as of June 30, 1998 and 1997 15
Statements of Income for the Years Ended June 30, 1998 and 1997 16
Statements of Equity for the Years Ended June 30, 1998 and 1997 17
Statement of Cash Flows for the Years Ended June 30, 1998 and 1997 18
Notes to Financial Statements 19
</TABLE>
13
<PAGE>
LETTERHEAD OF
GRIMSLEY, WHITE & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
AND MANAGEMENT CONSULTANTS
INDEPENDENT AUDITORS' REPORT
Board of Directors
High Country Bancorp, Inc.
Salida, Colorado
We have audited the accompanying consolidated statements of financial condition
of High Country Bancorp, Inc. as of June 30, 1998 and 1997, and the related
consolidated statements of income, equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of High Country
Bancorp, Inc. as of June 30, 1998 and 1997 and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Grimsley, White & Company
GRIMSLEY, WHITE & COMPANY
La Junta, Colorado
July 31, 1998
14
<PAGE>
HIGH COUNTRY BANCORP, INC
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------------------------------
<S> <C> <C>
Cash and amounts due from banks $ 2,999,284 $ 894,995
Interest-bearing deposits at other institutions 6,963,130 2,381,315
Mortgage-backed securities, held to maturity 4,326,603 5,339,762
Securities held to maturity 310,000 -
Loans receivable - net 81,359,296 63,126,864
Federal Home Loan Bank stock, at cost 1,065,500 988,500
Accrued interest receivable 699,982 595,007
Property and equipment, net 2,475,773 2,507,398
Mortgage servicing rights 29,856 35,352
Prepaid expenses and other assets 359,231 454,909
------------ -----------
TOTAL ASSETS $100,588,655 $76,324,102
============ ===========
LIABILITIES AND EQUITY
LIABILITIES
Deposits $ 63,424,713 $56,152,178
Advances by borrowers for taxes and insurance 92,954 127,175
Accounts payable and other liabilities 566,641 491,929
Advances from Federal Home Loan Bank 17,890,000 13,520,000
Accrued income taxes payable 288,140 -
Deferred income taxes 47,300 74,600
------------ -----------
TOTAL LIABILITIES 82,309,748 70,365,882
------------ -----------
Commitments and contingencies
EQUITY
Preferred stock- $.01 par value; authorized
1,000,000 shares; no shares issued or outstanding - -
Common stock-$.01 par value; authorized 3,000,000 shares;
issued and outstanding 1,322,500 shares 13,225 -
Paid-in capital 12,690,438 -
Retained earnings - substantially restricted 6,519,509 5,958,220
Note receivable from ESOP Trust (944,265) -
------------ -----------
TOTAL EQUITY 18,278,907 5,958,220
------------ -----------
TOTAL LIABILITIES AND EQUITY $100,588,655 $76,324,102
============ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
<PAGE>
HIGH COUNTRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION> 1998 1997
---------- ----------
<S> <C> <C>
Interest Income
Interest on loans $6,348,304 $5,249,291
Interest on securities available-for-sale - 18,171
Interest on securities held-to-maturity 332,951 412,386
Interest on other interest-bearing assets 351,549 84,302
---------- ----------
Total interest income 7,032,804 5,764,150
---------- ----------
Interest Expense
Deposits 2,393,811 2,179,408
Federal Home Loan Bank advances 872,049 633,923
---------- ----------
Total interest expense 3,265,860 2,813,331
---------- ----------
Net interest income 3,766,944 2,950,819
Provision for losses on loans 219,360 282,000
Net income after provision ---------- ----------
for loan losses 3,547,584 2,668,819
----------- ----------
Noninterest Income
Service charges on deposits 139,215 123,955
Other 18,561 17,980
----------- ----------
-
Total noninterest income 157,776 141,935
----------- ----------
Noninterest Expense
Compensation and benefits 1,505,658 1,345,030
Occupancy and equipment 562,198 482,360
Insurance and professional fees 131,732 169,937
Other 425,021 405,163
SAIF special assessment - 296,578
Loss on sale of loans - 56,185
----------- ----------
Total noninterest expense 2,624,609 2,755,253
----------- ----------
Income before income taxes 1,080,751 55,501
Income tax expense 428,208 11,085
----------- ----------
Net income $ 652,543 $ 44,416
=========== ==========
Basic Earnings Per Common Share
Based on income allocated from December 9, 1997 $ 0.32
===========
Diluted Earning Per Common Share $ 0.32
===========
Weighted Average Common Shares Outstanding
Basic 1,272,280
Diluted 1,272,280
Dividends Paid Per Share $ 0.075
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
<PAGE>
HIGH COUNTRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
NOTE
COMMON PAID-IN RETAINED RECEIVABLE
STOCK CAPITAL EARNINGS ESOP
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCES JUNE 30, 1996 $ - $ - $ 5,906,988 $ -
Net income 44,416
Change in net unrealized gain on securities
available-for-sale 6,816
-------------- -------------- -------------- --------------
BALANCES, JUNE 30, 1997 - - 5,958,220 -
Net income 652,543
Proceeds from issuance of stock on
December 9, 1997 net of conversion costs
of $570,716 13,225 11,583,059
Purchase of common stock by ESOP 1,058,000 1,058,000
ESOP contribution 49,379
ESOP note payment (105,800)
Dividends paid (91,254) (7,935)
-------------- -------------- -------------- --------------
BALANCES JUNE 30, 1998 $ 13,225 $ 12,690,438 $ 6,519,509 $ 944,265
============== ============== ============== ==============
</TABLE>
SEENOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
<PAGE>
HIGH COUNTRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ------------------
<S> <C> <C>
Operating Activities
Net income $ 652,543 $ 44,416
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of:
Deferred loan origination fees (131,269) (109,739)
Discounts on investments 18,814 10,349
Net loss on sale of loans - 56,185
Stock dividend received from FHLB (77,000) (42,200)
ESOP market value expense 163,114 -
Provision for losses on loans 219,900 282,000
Net loss on assets disposition - 4,226
Deferred income taxes (27,300) (162,500)
Depreciation 182,594 158,415
Income taxes 288,140 -
Net change in miscellaneous assets (3,801) (460,107)
Net change in miscellaneous liabilities 74,712 277,291
------------ ------------
Net cash provided (used) by operating activities 1,360,447 58,336
------------ ------------
Investing Activities
Net change in loans receivable (18,321,063) (17,192,492)
Proceeds from sale of loans - 3,878,889
Proceeds from sale of securities-available-for-sale - 1,000,000
Purchase of securities-held-to-maturity (310,000) -
Principal repayments of mortgage-backed securities-held-to-maturity 994,345 1,482,590
Purchase of Federal Home Loan Bank stock - (382,800)
Purchases of property and equipment (150,969) (609,119)
------------ ------------
Net cash used by investing activities (17,787,687) (11,822,932)
------------ ------------
Financing Activities
Issuance of common stock 11,596,284 -
Net change in deposits 7,272,535 6,614,809
Net change in mortgage escrow funds (34,221) (6,900)
Conversion costs incurred - (25,000)
Cash dividends paid (91,254) -
Proceeds (payment) on FHLB advances 4,370,000 6,370,000
------------ ------------
Net cash provided by financing activities 23,113,344 12,952,909
------------ ------------
Net increase in cash and cash equivalents 6,686,104 1,188,313
Cash and cash equivalents, beginning 3,276,310 2,087,997
------------ ------------
Cash and cash equivalents, ending $ 9,962,414 $ 3,276,310
============ ============
Supplemental disclosure of cash flow information
Cash paid for:
Taxes $ 167,368 $ 208,624
Interest 3,261,885 2,813,211
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting
policies which High Country Bancorp, Inc. ( the Company and its wholly
owned subsidiary Salida Building and Loan Association (the Association)
follow in preparing and presenting the consolidated financial
statements.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary Salida Building and Loan
Association. All significant intercompany accounts and transactions
have been eliminated.
Organization
Salida Building and Loan Association (the Association) is a federally
chartered association with its main office in Salida, Colorado and
branch offices in Leadville and Buena Vista, Colorado. The Association
provides a variety of financial services to the area it serves. Its
primary deposit products are interest-bearing checking accounts and
certificates of deposit, and its primary lending products are real
estate mortgages, consumer and commercial loans.
The Company's purpose is to act as a holding company with the
Association as its sole subsidiary. The Company's principal business is
the business of the Association and holding investments.
Savings deposits of the Association are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to certain limitations. The
Association pays a premium to FDIC for the insurance of such savings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Investment Securities and Mortgage-Backed Securities
Securities Held to Maturity. Bonds and notes for which the Company has
the positive intent and ability to hold to maturity are reported at
cost, adjusted for premiums and discounts that are recognized in
interest income using the interest method over the period to maturity.
19
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities Available for Sale. Available-for-sale securities consist of
bonds and notes not classified as trading securities nor as held-to-
maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of
shareholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary would result in write-downs of the individual securities to
their fair value. Should the Company incur write-downs they will be
included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
Federal Home Loan Bank Stock
The stock is an equity interest in the Federal Home Loan Bank of
Topeka. The Association, as a member of the FHLB, is required to
maintain an investment in capital stock of the FHLB. The stock is
carried at cost, as its cost is assumed to equal its market value. FHLB
stock can only be sold at par value to the FHLB or to another member
institution. The FHLB declares cash and stock dividends. The stock
dividends are recognized as income due to the fact they are redeemable
at par value ($100 per share) from the FHLBs or another member
institution.
Loans
Loans are stated at unpaid principal balances, less the allowance for
loan losses, net of deferred loan fees and loans in process.
Loan origination and commitment fees, as well as certain direct
origination costs, are deferred and amortized as a yield adjustment
over the lives of the related loans using the interest method.
Amortization of deferred loan fees is discontinued when a loan is
placed on nonaccrual status.
Loans are placed on nonaccrual status when principal and interest is
delinquent for 90 days or more. Uncollectible interest on these loans
is charged off, or an allowance is established, based on management's
periodic evaluation, by a charge to interest income equal to all
interest previously
20
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (continued)
accrued. Income is subsequently recognized only to the extent
that cash payments are received.
Management has determined that first mortgage loans on one-to-four
family properties, home equity, second mortgage loans, and all consumer
loans are large groups of smaller-balance homogenous loans that are
collectively evaluated. Accordingly, such loans are outside the scope
of Statement Nos. 114 and 118.
Management considers an insignificant delay, which is determined as 90
days by the Association, will not cause a loan to be classified as
impaired. A loan is not impaired during a period of delay in payment if
the Association expects to collect all amounts due including interest
accrued at the contractual interest rate for the period of delay. All
loans identified as impaired are evaluated independently by management.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, specific impaired
loans, and economic conditions. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries. Such provisions are based on
management's estimate of net realizable value or fair value of the
collateral, as applicable. These estimates are susceptible to economic
changes that could result in a material adjustment to results of
operations in the near term. Recovery of the carrying value of such
loans is dependent to a great extent on economic, operational, and
other conditions that may be beyond the Association's control.
Loan Servicing
The cost of mortgage servicing rights is amortized in proportion to,
and over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on
a current market interest rate.
21
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using primarily the straight-
line method over the estimated useful lives of the related assets.
Estimated useful lives of furniture, fixtures, and equipment range from
two to ten years; buildings and improvements range from five to forty
years.
Income Taxes
Income taxes are provided in accordance with SFAS No. 109, Accounting
for Income Taxes. Under the provisions of SFAS No. 109, deferred tax
assets and liabilities are recorded based on the differences between
the financial statement and tax bases of assets and liabilities and the
tax rates which will be in effect when these differences are expected
to reverse. If appropriate, deferred tax assets are reduced by a
valuation allowance which reflects expectations of the extent to which
such assets will be realized. The Company and its subsidiary file
individual income tax returns.
Financial Instruments
Off-balance sheet instruments. In the ordinary course of business the
Association has entered into off-balance sheet financial instruments
consisting of commitments to extend credit, and standby letters of
credit. Such financial instruments are recorded in the financial
statements when they are funded.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
Cash and short-term instruments. The carrying amounts of cash and
short-term instruments approximate fair values.
Available-for-sale and held-to-maturity securities. Fair values for
securities, excluding restricted equity securities, are based on quoted
market prices. The carrying values of restricted equity securities
approximate fair values.
Loans receivable. For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying-values. Fair values for mortgage loans, consumer loans,
commercial real estate and commercial loans are estimated using
discounted cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values, where applicable.
22
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deposit Liabilities. The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the reporting
date. The carrying amounts of variable-rate, fixed-term money-market
accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Advances from Federal Home Loan Bank. The fair values are based on the
borrowing rates and remaining maturities.
Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and interest-bearing
deposits at other institutions. The Company considers all highly liquid
debt instruments with original maturities of three months or less to be
cash equivalents.
Earnings Per Share
The Company adopted Financial Accounting Standards Board Statement No.
128 relating to earnings per share, effective for the quarter ended
December 31, 1997. The statement requires dual presentations of basic
and diluted earnings per share on the face of the income statement.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shares in the
earnings of the entity.
Reclassifications
Certain amounts in 1997 have been reclassified to conform with the 1998
presentation.
Advertising Costs
Advertising costs are charged to expense as incurred.
NOTE -2 SECURITIES
Securities are classified in categories and accounted for as follows:
23
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -2 SECURITIES (Continued)
Mortgage-Backed Securities Held-to-Maturity
The amortized cost and estimated fair value of mortgage-backed held-to-
maturity securities at June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Mortgage-backed securities
GNMA certificates $1,325,924 $ 21,024 $ 0 $1,346,947
FHLMC certificates 1,046,346 23,616 (5,053) 1,064,910
FNMA certificates 1,954,333 31,532 (619) 1,985,246
---------- -------- ---------- ----------
$4,326,603 $ 76,172 $ (5,672) $4,397,103
========== ======== ========== ==========
Gross Gross
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
- ------ ---------- ----------- ----------- ----------
Mortgage-backed securities
GNMA certificates $1,708,760 $ 22,801 $ 0 $1,731,561
FHLMC certificates 1,305,265 32,939 (12,170) 1,326,034
FNMA certificates 2,325,737 33,659 (4,855) 2,354,541
---------- -------- ---------- ----------
$5,339,762 $ 89,399 $ (17,025) $5,412,136
========== ======== ========== ==========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Held-to-Maturity Securities
The amortized cost and estimated fair value of held-to-maturity
securities at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Chaffee County School
District Bonds $ 310,000 $ 0 $ (1,747) $ 308,253
========== =========== =========== ==========
</TABLE>
The amortized cost and fair value of debt securities held-to-maturity
as of June 30, 1998, by contractual maturity, is as follows:
<TABLE>
<CAPTION>
Amortized Fair
Held-to-Maturity Debt Securities Cost Value
- -------------------------------- -------- --------
<S> <C> <C>
Due after one year through five years $310,000 $308,253
======== ========
</TABLE>
At June 30, investments with a carrying value of $2,604,157 (1998) and
$1,744,847 (1997) were pledged as collateral for deposits of public
funds.
24
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -3 LOANS RECEIVABLE
Loans receivable at June 30, are summarized as follows
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Loans secured by real estate:
One-to-four family residences $55,330,494 $42,978,396
Commercial real estate 4,913,427 4,058,271
Construction 5,228,459 4,215,750
Land 2,794,717 2,401,100
----------- -----------
Total Loans Secured by Real Estate 68,267,097 53,653,517
Consumer loans, net of discounts 8,359,810 5,857,354
Loans collateralized by savings accounts 1,213,290 781,174
Commercial loans 6,580,299 4,872,121
Other loans 100,951 98,427
----------- -----------
Total Loans 84,521,447 65,262,593
Less:
Undisbursed portion of loans in process 1,937,636 1,123,281
Deferred loan origination fees 473,392 408,043
Allowance for loan losses 751,123 604,405
----------- -----------
Loans Receivable, Net $81,359,296 $63,126,864
=========== ===========
The changes in the allowance for loan losses were as follows:
1998 1997
----------- -----------
Balance, beginning of year $ 604,405 $ 411,125
Provision for losses 219,900 282,000
Recoveries 18,529 7,450
Losses incurred (91,711) (96,170)
----------- -----------
Balance, end of year $ 751,123 $ 604,405
=========== ===========
</TABLE>
At June 30, the Association had adjustable interest rate loans of
approximately $5,380,000 (1998) and $6,266,000 (1997). The adjustable
rate loans have interest rate adjustment limitations and are generally
indexed to the 1-year U.S. Treasury Note rate. Future market factors
may affect the correlation of the interest rate adjustment with the
rates the Association pays on the short-term deposits that have been
primarily utilized to fund these loans.
Loans for which interest accruals had been discontinued at June 30 were
approximately $392,000 (1998) and $140,000 (1997). If interest on these
loans had been accrued, such interest would have increased income by
immaterial amounts.
Loans receivable at June 30 include loans to officers and directors of
approximately $1,034,000 (1998) and $839,000 (1997). For the year ended
June 30, 1998, $855,000 of new loans were made and payments of $660,000
were received.
25
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -4 LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of
these loans at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Mortgage loan portfolios serviced for:
FHLMC $7,158,554 $9,353,814
Other investors 11,984 27,868
---------- ----------
$7,170,538 $9,381,682
========== ==========
</TABLE>
In connection with these loans serviced for others at June 30, the
Association held borrowers' escrow balances of $14,747 (1998) and
$23,837 (1997).
NOTE -5 ACCRUED INTEREST RECEIVABLE
Interest receivable at June 30, relates to the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Loans $ 667,985 $ 556,692
Mortgage-backed securities 30,947 38,315
Other investments 1,050 0
---------- ----------
$ 699,982 $ 595,007
========== ==========
</TABLE>
NOTE -6 PROPERTY AND EQUIPMENT
Property and equipment and the related accumulated depreciation at June
30, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and improvements $ 325,235 $ 316,035
Buildings and improvements 2,099,544 2,043,519
Furniture, fixtures and equipment 869,184 783,742
---------- ----------
3,293,963 3,143,296
Less accumulated depreciation (818,190) (635,898)
---------- ----------
$2,475,773 $2,507,398
========== ==========
</TABLE>
Depreciation expense for the years ended June 30, totaled $182,594
(1998) and $158,415 (1997).
26
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -7 DEPOSIT ACCOUNTS
Deposit accounts at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
NOW accounts, including
non-interest bearing
deposits of $3,973,002
(1998) and $2,275,661
(1997) $14,773,320 1.19% $10,586,504 1.30%
Money market and
savings accounts 15,158,899 3.00% 14,037,595 2.96%
Certificate accounts 33,492,494 5.65% 31,528,079 5.58%
----------- -----------
$63,424,713 $56,152,178
=========== ===========
</TABLE>
At June 30, 1998, scheduled maturities of the above certificate
accounts are summarized as follows:
<TABLE>
<CAPTION>
Year ending June 30,
-----------------------------------------------------------
2003 and
1999 2000 2001 2002 thereafter
----------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
3.01-4.00 $ 369,959
4.01-5.00 2,228,331
5.01-6.00 19,464,984 $ 4,471,845 $ 762,540 $503,842
6.01-7.00 4,259,667 440,615 255,247 100,000
7.01-8.00 90,000 225,197 196,000 $ 124,267
----------- ----------- ----------- -------- ---------
$26,412,941 $ 5,137,657 $ 1,017,787 $799,842 $ 124,267
=========== =========== =========== ======== =========
</TABLE>
The aggregate amount of certificates of deposits with a minimum
denomination of $100,000 at June 30, was $9,323,122 (1998) and
$8,668,062 (1997).
Deposits in excess of $100,000 are not insured by the Savings
Association Insurance Fund (SAIF).
Interest expense on deposits for the years ended June 30 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
NOW accounts $ 126,212 $ 157,946
Money market and savings accounts 448,634 375,400
Certificate accounts 1,818,965 1,646,062
---------- ----------
$2,393,811 $2,179,408
========== ==========
</TABLE>
27
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -8 ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank (FHLB) at June 30 are
summarized as follows:
<TABLE>
<CAPTION>
Interest
Rate 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Maturing within one year 5.81-5.94% $ 4,500,000 $9,500,000
Maturing in 2000 5.94-6.79% 3,000,000 3,000,000
Maturing in 2001 5.74-6.80% 3,390,000 500,000
Maturing in 2003 5.81-6.56% 5,000,000 520,000
Maturing in 2005 6.18% 1,000,000
Maturing in 2008 6.10% 1,000,000
----------- -----------
$17,890,000 $13,520,000
=========== ===========
</TABLE>
Pursuant to collateral agreements with the FHLB, advances are secured
by a blanket pledge agreement with the FHLB which includes real estate
loans and other non-pledged securities.
At June 30, 1997, the Association had an approved line of credit of
$10,000,000 with the FHLB which expired May 1, 1998. At June 30, 1998,
the Association has an approved line of credit for $10,000,000 with the
FHLB with an expiration date of April 30, 1999. No amount was drawn on
the line of credit at June 30, 1998. As of June 30, 1997, the
Association had drawn $1,000,000 on the line of credit, with a current
interest rate of 6.40%.
NOTE -9 INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current $455,508 $ 182,085
Deferred (27,300) (171,000)
-------- ---------
$428,208 $ 11,085
======== =========
</TABLE>
The effective tax rate on income before the provisions for income taxes
differs from the federal statutory income tax rate of 34% for the
following reasons:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Provision for income taxes at statutory rate $367,500 $ 18,900
Nondeductible expenses for tax purposes 19,900 0
State income taxes, net of federal income
tax benefit 27,600 7,200
Other, net 13,208 (15,015)
-------- --------
$428,208 $ 11,085
======== ========
Effective tax rates 40% 22%
</TABLE>
28
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -9 INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The net deferred tax liabilities as of June 30, are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Difference between tax basis and
carrying basis of FHLB stock $155,600 $127,100
Tax depreciation in excess of
financial statement amounts 83,700 76,700
Difference between tax basis and carrying
basis of long term incentive plan (99,900) (87,700)
Loan loss allowance (92,100) (41,500)
-------- --------
$ 47,300 $ 74,600
======== ========
</TABLE>
The deferred tax expense (benefit) results from timing differences in
the recognition of income and expense for tax and financial purposes.
The sources and tax effects of these temporary timing differences are
as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
FHLB stock dividends $ 28,500 $ 15,500
Accumulated depreciation 7,000 1,400
Allowance for loan losses - net (50,600) (91,300)
Long-term incentive plan (12,200) (87,700)
Other 0 (8,900)
-------- ---------
$(27,300) $(171,000)
======== =========
</TABLE>
The Association was in prior years permitted under the Internal Revenue
Code to deduct an annual addition to reserve for bad debts in
determining taxable income, subject to certain limitations. This
deduction differed from the bad debt provision used for financial
accounting purposes. Bad debt deductions for income tax purposes are
included in taxable income of later years only if the bad debt reserve
is used subsequently for purposes other than to absorb bad debt losses.
Because the Association does not intend to use the reserve for purposes
other than to absorb losses, no deferred income taxes have been
provided. Retained earnings at June 30, 1998, includes approximately
$1,169,000, representing such bad debt deductions for which no income
taxes have been provided.
29
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -10 REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain actions by regulators that,
if undertaken, could have a direct material effect on the Association's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must
meet specific guidelines that involve quantitative measures of the
Association's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios
as outlined below. Management believes, as of June 30, 1998. The
Association meet all capital adequacy requirements to which it is
subject.
As of October 8, 1997, the most recent notification from Office of
Thrift Supervision categorized the Association as well capitalized
under the regulatory framework for prompt corrective action. To be well
capitalized the Association must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios. There are no conditions
or events since that notification that management believes have changed
the institution's category.
The following is a reconciliation of capital computed under generally
accepted accounting principles (GAAP) to regulatory capital. OTS
regulations specify minimum capital requirements for the Association.
The following reconciliation also compares the capital requirements as
computed to the minimum capital requirements for the Association, as of
June 30.
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Equity Per GAAP $12,291,128 $5,958,220
Less Servicing Rights Plus Valuations (2,986) (3,535)
----------- ----------
Equity Per GAAP- Tier I Capital 12,288,142 5,954,685
Valuation Allowance 748,000 604,405
----------- ----------
Regulatory Capital $13,036,142 $6,559,090
=========== ==========
</TABLE>
30
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -10 REGULATORY CAPITAL REQUIREMENTS (Continued)
<TABLE>
<CAPTION>
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ---------- ---------- ----------- ------------
1998
- ----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk
Weighted
Assets) $13,036,142 21.73% $4,799,760 8.00% $5,999,700 10.00%
Tier I Capital
(to Risk
Weighted
Assets) 12,288,142 20.48 1,799,910 3.00 3,599,820 6.00
Tier I Capital
(to Average
Assets) 12,288,142 13.89 1,326,698 1.50 4,422,328 5.00
Tangible Capital
(to Tangible
Assets) 12,288,142 13.00 1,082,820 1.50 N/A
1997
- ----
Total Capital
(to Risk
Weighted
Assets) $ 6,559,090 13.76% $3,814,320 8.00% $ 4,767,900 10.00%
Tier I Capital
(to Risk
Weighted
Assets) 5,954,685 12.49 1,430,370 3.00 2,860,740 6.00
Tier I Capital
(to Average
Assets) 5,954,685 8.25 1,082,820 1.50 3,609,400 5.00
Tangible Capital
(to Tangible
Assets) 5,954,685 8.25 1,082,820 1.50 N/A
</TABLE>
31
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -10 REGULATORY CAPITAL REQUIREMENTS (Continued)
The Association's management believes that, under the current
regulations, the Association will continue to meet its minimum capital
requirements in the coming year. However, events beyond the control of
the Association, such as increased interest rates or a downturn in the
economy in the Association's operating area, could adversely affect
future earnings and, consequently, the ability of the Association to
meet its future minimum capital requirements.
NOTE -11 BENEFIT PLANS
The Association has a defined contribution plan (the Plan) for
employees who have completed one year of service. The Association
matched until December 31, 1997 covered employee's contributions up to
5% of their compensation. In addition, the Association's Board of
Directors may elect to contribute an additional amount based upon the
Association's profit. Contributions to the Plan were $19,241 (1998) and
$54,100 (1997).
The Association adopted a Long-Term Incentive Plan in June, 1997
covering the directors and key employees of the Association. On June 30
of each year following 1997 the participants will have a contribution
made to their account providing the participant continues to be an
employee or director of the Association. Prior to distribution under
the terms of the Plan, each participant's account shall be credited
with a rate of return, on any amounts previously credited, equal to the
highest rate of interest paid by the Association on one-year
certificates of deposit, or after conversion the rate of return will
equal the dividend-adjusted rate of return on the common stock.
Amounts credited to Participant's Accounts on the effective date and
thereafter shall be fully vested. Account balances shall be paid, in
cash, in ten equal annual installments beginning during the first
quarter of the calendar year which next follows the calendar year in
which the participant ceases to be a director or employee for any
reason, with subsequent payments being made by the last day of the
first quarter of each subsequent calendar year until the participant
has received the entire amount of his account. Notwithstanding the
foregoing a participant may elect to have his account paid in lump sum
distribution or in annual payments over a period less than ten years.
Any benefits accrued under the plan will be paid from the Association's
general assets. The Association has established a trust in order to
hold assets with which to pay benefits. Trust assets, which are
included in the consolidated statement of financial condition will be
subject to the claims of the Association's general creditors. The
Association recognized an expense of $237,031 in the year ended June
30, 1997, which represented the funding of the plan for past services.
The expense for the plan recognized for the year ended June 30, 1998
was $33,053.
32
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -11 BENEFIT PLANS (Continued)
As part of the conversion to stock, the Association established an ESOP
to benefit substantially all employees. The ESOP purchased 105,800
shares of common stock in the conversion with proceeds received from a
loan from the Company. The note is to be repaid in ten annual principal
installments of $105,800, starting June 30, 1998. Interest is based on
the Wall Street Journal Prime plus one percent, and is adjusted
annually on July 1. The unallocated shares of stock held by the ESOP
are pledged as collateral on the debt. The ESOP is funded by
contributions made by the Association in amounts sufficient to retire
the debt. At June 30, 1998, the outstanding balance of the note
receivable is $944,265 and is presented as a reduction of stockholders'
equity. ESOP compensation expense was $163,114 for the year ended June
30, 1998.
In November 1993, the AICPA issued Statement of Position 93-6
"Employers' Accounting for Employee Stock Ownership Plans." The
statement was adopted December 9, 1997, the effective date of the
Association's conversion to a stock company. The Statement requires,
among other things, that: (1) for ESOP shares committed to be released
in a period to compensate employees directly, employers should
recognize compensation cost equal to the average fair value ( as
determined on a monthly basis) of the shares committed to be released,
(2) dividends on unallocated shares used to repay ESOP loans are not
considered dividends for financial reporting purposes, dividends on
allocated or committed shares are credited to the accounts of the
participants and reported as dividends in the financial statements, (3)
for an internally leveraged ESOP, the Company's loan receivable and the
ESOP note payable as well as the interest income/expense is not
reflected in the consolidated financial statements and (4) for earnings
per share computations, ESOP shares that have been committed to be
released should be considered outstanding. ESOP shares that have not
been committed to be released should not be considered outstanding.
The ESOP shares as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Shares committed to be released for allocation 10,580
Unreleased shares 95,220
----------
Total ESOP shares 105,800
==========
Fair value of unreleased shares $1,356,885
==========
</TABLE>
33
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -12 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Association is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs
of its customers. At June 30, 1998, the Association has commitments to
fund fixed rate mortgage loans of $2,790,300, with interest rates from
5.50% to 10.50%, unfunded lines of credit of $1,655,000, and letters of
credit of $57,000. The Association makes contractual commitments to
extend credit, which are legally binding agreements to lend money to
customers at prevailing interest rates for specified periods of time.
The credit risk involved in issuing these commitments is essentially
the same as that involved in extending loan facilities to customers.
As such, the Association's exposure to credit loss, in the event of
non-performance by the counterparty to the financial instrument, is
represented by the contractual amount of those instruments. However,
the Association applies the same credit standards used in the lending
process when extending these commitments, and periodically reassesses
the customers' credit worthiness. Additional risks associated with
these commitments arise when they are drawn upon, such as the demands
on liquidity that the Association could experience if a significant
portion were drawn down at once. This is considered unlikely, however,
as commitments may expire without having been drawn upon.
The Association originates loans primarily in Chaffee and Lake
Counties, Colorado. Although the Association has a diversified loan
portfolio, a substantial portion of its borrower's ability to repay
their loans is dependent upon economic conditions in the Association's
market area.
NOTE -13 FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Association's financial instruments,
as of June 30, 1998, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Financial Assets:
Cash and amounts due from banks $ 2,999,284 $ 2,999,284
Interest bearing deposits 6,963,130 6,963,130
Mortgage-backed securities 4,326,603 4,397,103
Securities held-to-maturity 310,000 308,253
FHLB stock 1,065,500 1,065,500
Loans receivable - net 81,359,296 83,496,000
Financial liabilities:
Deposits 63,424,713 63,613,000
Advances from FHLB 17,890,000 17,920,000
</TABLE>
34
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -14 OTHER NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Advertising $ 67,918 $ 74,292
Stationery Supplies 72,926 90,893
Postage 70,745 66,675
Telephone 22,659 17,990
Dues and Subscriptions 26,063 22,102
Other 164,710 133,211
-------- --------
$425,021 $405,163
======== ========
</TABLE>
NOTE -15 PLAN OF CONVERSION
On May 15, 1997, the Board of Directors of Salida Building and Loan
Association adopted a Plan of Conversion (the Plan) under which the
Association would convert from a mutual savings institution to a stock
savings and loan and become a wholly-owned subsidiary of the Company
formed in connection with the conversion. The Plan was approved by the
Office of Thrift Supervision (OTS) and included the filing of a
registration statement with the Securities and Exchange Commission. The
Plan was approved by the members of the Association. In accordance with
the Plan, the Company issued common stock which was sold in the
Conversion. The closing of the offering occurred on December 9, 1997
and resulted in a stock subscription of $13,225,000 (including
$1,058,000 in shares subscribed by the ESOP). The Company transferred
fifty percent of the net proceeds for the purchase of all of the
capital stock of the Association.
The cost of issuing the common stock were deducted from the proceeds of
the stock sale, and amounted to $570,716.
For the purpose of granting eligible members of the Association a
priority in the event of future liquidation, the Association, at the
time of conversion, established a liquidation account equal to its
regulatory capital as of the date of the latest balance sheet used in
the final conversion offering circular. In the event (and only in such
event) of future liquidation of the converted Association, an eligible
savings account holder who continues to maintain a savings account
shall be entitled to receive a distribution from the liquidation
account, in the proportionate amount of the then current adjusted
balance of the savings deposits then held, before any distributions may
be made with respect to capital stock. The Association may not declare
or pay a cash dividend on its common stock if its net worth would
thereby be reduced below either the aggregate amount then required for
the liquidation account or the minimum regulatory capita requirements
imposed by federal regulations.
35
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -16 IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for ESOP. The Accounting Standards Division of the American
Institute of Certified Public Accountants approved Statement of
Position ("SOP") 93-6, "Employers' Accounting for Employee Stock
Ownership Plans," which is effective for fiscal years beginning after
December 15, 1993. SOP 93-6 changed, among other things, the measure of
compensation recorded by employers from the cost of ESOP shares to the
fair value of ESOP shares. To the extent that the fair value of the
common stock held by the ESOP that are committed to be released
directly to compensate employees, differs from the cost of such shares,
compensation expenses and a related charge or credit to additional
paid-in capital will be reported in the Association's financial
statements. The adoption of the ESOP by the Association and the
application of SOP 93-6 is likely to result in fluctuations in
compensation expense as a result of changes in the fair value of the
common stock. However, any such compensation expense fluctuations will
result in an offsetting adjustment to paid-in capital, and therefore,
total capital will not be affected.
Accounting for Stock-Based Compensation. In October, 1995, the
Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation to Employees." This statement encourages
entities to adopt the fair value based method of accounting for
employee stock options or other stock compensation plans. However, it
allows an entity to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Under the fair
value based method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service
period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess of the quoted market
price of the stock at the grant date over the amount an employee must
pay to acquire the stock.
Most fixed stock option plans - the most common type of stock
compensation plan - have no intrinsic value at grant date and under
Opinion No. 25 no compensation cost is recognized for them.
Compensation cost is recognized for other types of stock based
compensation plans under Opinion No. 25, including plans with variable,
usually performance-based features. This Statement requires that an
employer's financial statements include certain disclosures about
stock-based employee compensation arrangements regardless of the method
used to account for them. This Statement is effective for transactions
entered into in fiscal years that begin after December 15, 1995. The
Association adopted the Statement on the date the Association converted
from a federal mutual to a federal stock savings and loan association.
The Association has not determined which method it will use to account
for the options at this time and has not estimated the effect of
adoption on the Association's financial statements.
36
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -16 IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
Earnings Per Share. In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement No. 128. The Statement
establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the standards for computing
earnings per share and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a
presentation of basic EPS.
It also requires dual presentations of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This
statement supersedes Opinion 15 and AICPA Accounting Interpretation 1-
102 of Opinion 15. This statement was adopted in December 1997, the
impact of adopting SFAS No. 128 was not material to the financial
statements.
Disclosure of Information about Capital Structure. In February 1997,
the Financial Accounting Standards Board issued Statement No. 129. The
Statement incorporates the disclosure requirements of APB Opinion No.
15, Earnings Per Share and makes them applicable to all public and
nonpublic entities that have issued securities addressed by the
Statement. APB Opinion No. 15 requires disclosure of descriptive
information about securities that is not necessarily related to the
computation of earnings per share.
This statement continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions
No. 10, Omnibus Opinion - 1966, and No. 15, Earnings Per Share, and
FASB Statement No. 47, Disclosure of Long-Term Obligations, for
entities that were subject to the requirements of those standards. This
Statement eliminates the exemption of nonpublic entities from certain
disclosure requirements of Opinion No. 15 as provided by FASB Statement
No. 21, Suspension of the Reporting of Earnings per Share and Segment
Information by Nonpublic Enterprises. It supersedes specific disclosure
requirements of Opinions 10 and 15 and Statement 47 and consolidates
them in this statement for ease of retrieval and for greater visibility
to nonpublic entities. The Statement is effective for financial
statements for periods ending after December 15, 1997. SFAS No. 129
will be adopted by the Association in July 1998, the impact of adopting
the Statement will not be material to the financial statements.
37
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -16 IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
Reporting Comprehensive Income. In June 1997, the Financial Accounting
Standards board issued Statement No. 130. The Statement establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that
financial statement.
This Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
This Statement is effective for fiscal years beginning after December
15, 1997. FASB Statement No. 130 will be adopted by the Association in
July 1998, the impact of adopting the Statement will not be material to
the financial statements.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997 the Financial Accounting Standards board issued Statement No.
131. The Statement establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. This Statement supersedes FASB Statement No. 14,
Financial reporting for segments of Business Enterprise, but retains
the requirement to report information about major customers. It amends
FASB Statement No. 94, Consolidation of all Majority-owned
Subsidiaries, to remove the special disclosure requirements for
previously unconsolidated subsidiaries.
The Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
38
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -16 IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
Generally, financial information is required to be reported on the
basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments.
The Statement requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense
items, and segment assets. It requires reconciliations of total segment
revenues, total segment profit or loss, total segment assets and other
amounts disclosed for segments to corresponding amounts in the
enterprise's general-purpose financial statements. It requires that all
public business enterprises report information about the revenues
derived from the enterprise's products or services (or groups of
similar products and services), about the countries in which the
enterprise earns revenues and holds assets, and about major customers
regardless of whether that information is used in making operating
decisions.
The Statement also requires that a public business enterprise report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating
segments, differences between the measurements used in reporting
segment information and those used in the enterprise's general-purpose
financial statements, and changes in the measurement of segment amounts
from period to period. This Statement is effective for fiscal years
beginning after December 15, 1997. FASB Statement No. 131 will be
adopted by the Association in July 1998, the impact of adopting the
Statement will not be material to the financial statements.
Employers' Disclosures About Pensions and Other Post Retirement
Benefits. In February 1998, the Financial Accounting Standards Board
issued Statement No. 132, "Employers' Disclosure About Pensions and
Other Postretirement Benefits". The Statement standardizes the
disclosure requirements for pensions and other postretirement benefits
to the extent practicable. This Statement is effective for fiscal years
beginning after December 15, 1997, and will be adopted by the
Association in July 1998, the impact of adopting the Statement will not
be material to the financial statements.
Accounting For Derivatives and Similar Financial Instruments and For
Hedging Activities. In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, "Accounting For Derivatives and Similar
Financial Instruments and For Hedging Activities. The Statement
requires all derivatives to be measured at fair value and to be
recognized as either assets or liabilities in the statement of
financial condition, and is effective for fiscal years beginning after
June 15, 1999. Management, at this time, has not determined the impact
of adopting this statement on July 1, 1999.
39
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -17 EARNINGS PER SHARE
The conversion from a mutual savings association to a stock institution
and the formation of the holding company was completed on December 9,
1997. The computation of earnings per share is based on the net income
earned from the date of the conversion to the end of the fiscal year
divided by the weighted-average number of shares issued from the date
of conversion until the end of the fiscal year.
NOTE -18 DIVIDENDS PAID
On April 23, 1998, the Board of Directors declared a cash dividend of
$0.075 per share to stockholders of record as of April 30, 1998 and
paid on May 11, 1998.
NOTE -19 YEAR 2000 ISSUE
The Company has an ongoing program of evaluating the effect of the year
2000 on its information processing systems. The Company's core data
processing is performed by an outside vendor. As of May 15, 1998, all
of the vendors clients were running on Year 2000-ready software, with
the validation phase of the change being implemented. It is
management's position that the cost of modifications will not have a
material effect on the Company's operations. Depending upon the nature
of the expenditure, the Company will follow its accounting practices
for capitalization.
NOTE -21 CONTINGENCIES
In the normal course of business, the Association is involved in
various legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a
material adverse effect on the financial position of the Association.
NOTE -22 CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The following condensed statements summarize the financial position,
operating results and cash flows of High Country Bancorp, Inc., as of
June 30, 1998 and for the approximate seven months then ended.
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and equivalents $ 6,045,845
Investment in subsidiary 6,332,908
ESOP note receivable 944,265
Other 7,935
-----------
$13,330,953
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued income taxes $ 66,000
Stockholders' equity 13,264,953
-----------
$13,330,953
===========
</TABLE>
40
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE-22 CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)(Continued)
<TABLE>
<CAPTION>
<S> <C>
CONDENSED STATEMENT OF INCOME
For the Period December 9, 1997 to June 30, 1998
Equity in undistributed net income of subsidiary $ 584,766
Other net 67,777
-----------
$ 652,543
===========
CONDENSED STATEMENT OF CASH FLOWS
For the Period December 9, 1997 to June 30, 1998
Operating Activities:
Net income $ 652,543
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of
subsidiary (584,766)
Other 115,378
-----------
Net cash provided by operations 183,155
-----------
Investing Activities:
Investment in subsidiary (5,798,142)
ESOP note payment 105,800
Dividends received 50,000
-----------
Net cash used in investing activities (5,642,342)
-----------
Financing Activities:
Proceeds from stock sale net of expenses 11,596,284
Dividends paid (91,252)
-----------
Net cash provided by financing activities 11,505,032
-----------
Net increase in cash 6,045,845
Cash beginning 0
-----------
Cash ending $ 6,045,845
===========
</TABLE>
41
<PAGE>
MARKET AND DIVIDEND INFORMATION
TRADING IN THE COMMON STOCK AND DIVIDENDS PAID
The Company's Common Stock is traded on the Nasdaq SmallCap Market under
the symbol "HCBC." There are currently 1,322,500 shares of the Common Stock
outstanding and approximately 359 holders of record of the Common Stock (not
including shares held in "street name") as of September 15, 1998.
The following table sets forth certain information as to the range of the high
and low bid prices for the Company's common stock for the calendar quarters
since the Common Stock's issuance on December 11, 1997.
<TABLE>
<CAPTION>
HIGH BID (1) LOW BID (1) DIVIDENDS PAID
------------ ----------- --------------
<S> <C> <C> <C>
FISCAL 1998:
Second Quarter (from
December 11, 1997) 15.50 14.75 $ --
Third Quarter 15.50 14.44 --
Fourth Quarter 15.25 14.25 .075
- -------------------------
</TABLE>
(1) Quotations reflect inter-dealer price, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.
DIVIDEND RESTRICTIONS
For a period of one year following the completion of the Conversion, the
Company may not pay any special dividends or dividends that would be construed
as a return of capital nor take any actions to pursue or propose such dividends.
The payment of dividends, will be subject to the requirements of applicable law
and the determination by the Board of Directors of the Company that the net
income, capital and financial condition of the Company and the Association,
thrift industry trends and general economic conditions justify the payment of
dividends, and there can be no assurance that dividends will be paid or, if
paid, will continue to be paid in the future.
Since the Company initially has no significant source of income other than
dividends from the Association, principal and interest payments on the note
payable from the ESOP and earnings from investment of the cash proceeds of the
Conversion retained by the Company, the payment of dividends by the Company will
depend in large part upon the proceeds from the Conversion retained by the
Company and the Company's earnings thereon and the receipt of dividends from the
Association, which is subject to various tax and regulatory restrictions on the
payment of dividends. Unlike the Converted Association, the Company is not
subject to regulatory restrictions on the payment of dividends to stockholders.
Under the Colorado General Corporation Law, dividends may be paid either out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year.
42
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C> <C>
LARRY D. SMITH PHILIP W. HARSH TIMOTHY R. GLENN
President and Chief Executive Owner and Agent of Fredrickson Owner and Funeral Director of
Officer of the Company and Brown Insurance Agency Lewis & Glenn Funeral Home
the Association
SCOTT G. ERCHUL ROBERT B. MITCHELL RICHARD A. YOUNG
Vice President of the Company Retired Partner of Swartz & Young, P.C.
and the Association
EXECUTIVE OFFICERS
LARRY D. SMITH SCOTT G. ERCHUL FRANK L. DELAY
President and Chief Executive Officer Vice President of the Company and Chief Financial Officer of the
of the Company and the Association the Association Company and the Association
OFFICE LOCATIONS
MAIN OFFICE: BRANCH OFFICE: BRANCH OFFICE:
130 West 2nd 600 Harrison 713 East Main
Salida, Colorado Leadville, Colorado Buena Vista, Colorado
GENERAL INFORMATION
INDEPENDENT PUBLIC ACCOUNTANTS ANNUAL MEETING ANNUAL REPORT ON FORM 10-KSB
Grimsley, White & Company, The 1998 Annual Meeting of A copy of the Company's Annual
Certified Public Accountants Stockholders will be held on Report on Form 10-KSB for the fiscal
La Junta, Colorado December 15, 1998 at 5:00 p.m. at year ended June 30, 1998 as filed
The Senior Citizens Center, 305 F with the Securities and Exchange
GENERAL COUNSEL Street, Salida, Colorado 81210 Commission will be furnished
without charge to stockholders as of
TRANSFER AGENT AND REGISTRAR the record date for the 1998 Annual
Illinois Stock Transfer Meeting upon written request to
233 West Jackson Boulevard Richard A. Young, Secretary, High
SPECIAL COUNSEL Suite 1210 Country Bancorp, Inc., 130 West 2nd
Housley Kantarian & Bronstein, P.C. Chicago, Illinois 60606 Street, Salida, Colorado 81201.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES
State or Other
Jurisdiction of
Parent Incorporation
- ------ ---------------
High Country Bancorp, Inc. Colorado
Subsidiaries (1)
- ----------------
Salida Building and Loan Association United States
- -------------------------
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in Item 7 hereof.
<PAGE>
[LETTERHEAD OF GRIMSLEY, WHITE & COMPANY APPEARS HERE]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As the independent certified public accountant of High Country Bancorp, Inc., we
hereby consent to the use of our report, made part of the Form 10-KSB filing for
the year ended June 30, 1998.
September 22, 1998
/s/ Grimsley, White & Company
Grimsley, White & Company
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,999,284
<INT-BEARING-DEPOSITS> 6,963,130
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 4,636,603
<INVESTMENTS-MARKET> 4,703,356
<LOANS> 81,359,296
<ALLOWANCE> 751,123
<TOTAL-ASSETS> 100,588,655
<DEPOSITS> 63,424,713
<SHORT-TERM> 4,500,000
<LIABILITIES-OTHER> 995,035
<LONG-TERM> 13,390,000
0
0
<COMMON> 13,225
<OTHER-SE> 18,265,682
<TOTAL-LIABILITIES-AND-EQUITY> 100,588,655
<INTEREST-LOAN> 6,348,304
<INTEREST-INVEST> 332,951
<INTEREST-OTHER> 351,549
<INTEREST-TOTAL> 7,032,804
<INTEREST-DEPOSIT> 2,393,811
<INTEREST-EXPENSE> 3,265,860
<INTEREST-INCOME-NET> 3,766,944
<LOAN-LOSSES> 219,360
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,624,609
<INCOME-PRETAX> 1,080,751
<INCOME-PRE-EXTRAORDINARY> 652,543
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 652,543
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<YIELD-ACTUAL> 7.48
<LOANS-NON> 392,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 604,405
<CHARGE-OFFS> 91,711
<RECOVERIES> 18,529
<ALLOWANCE-CLOSE> 751,123
<ALLOWANCE-DOMESTIC> 751,123
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
