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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1999
[_] 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)
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)
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
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NO ___
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.
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State registrant's revenues for its most recent fiscal year: $8,725,030
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 ($12.25 per
share on September 15, 1999), was approximately $9,882,198. 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
10% of the registrant's common stock.
As of September 15, 1999, there were issued and outstanding 1,284,719
shares of the registrant's common stock, of which 478,009 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, 1999 (Parts I and II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of
Stockholders (Part III)
<PAGE>
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. On May 24, 1999, the Company announced
that it was commencing a stock repurchase program to acquire up to 10% of the
Company's outstanding shares of Common Stock, or up to 132,250 shares, over a
12-month period. As of September 15, 1999 the Company had repurchased 37,781
shares of its Common Stock under this program.
The Company engages in no significant activity other than investing the
proceeds of the offering of Common Stock 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, 1999, the Association
had total assets of $114.0 million, loans receivable (net) of $98.4 million,
total deposits of $72.6 million and equity of $18.0 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
Association."
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, 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).
Proposed Legislative and Regulatory Changes
Separate legislation has been adopted by each of the House of Representatives
("House") and Senate in the U.S. Congress which calls for the modernization of
the banking system and which would significantly affect the operations and
regulatory structure of the financial services industry, including savings
institutions like the Association. A joint House-Senate Committee is working to
draft a final bill for final legislative action. At this time, management does
not know what form the final legislation might take, or if enacted into law, how
the legislation would affect the Company's and Association's business and
operations and competitive environment. For additional information on the
provisions of this legislation, see "Regulation of the Association -- Proposed
Legislative and Regulatory Changes."
Lending Activities
General. The Association's loan portfolio, net, totaled $98.4 million at June
30, 1999, representing 86.3% of total assets at that date. Substantially all
loans are originated in the market area. At June 30, 1999, $64.0 million, or
62.8% 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 $8.5 million or 8.4% of the gross
loan portfolio and land development loans, which amounted to $3.2 million or
3.2% of the gross loan portfolio at June 30, 1999. The Association also
originates consumer loans, most of which are automobile loans, and commercial
business loans. At June 30, 1999, consumer loans totaled $11.9 million, or 11.7%
of the gross loan portfolio, and commercial business loans totaled $9.1 million
or 8.9% of the gross loan portfolio.
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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,
1999, the Association had no concentrations of loans exceeding 10% of total
loans other than as disclosed below.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
1999 1998
---------------------- -----------------------
Amount % Amount %
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family....................... $ 63,965 64.98% $ 55,330 68.01%
Commercial................................ 8,504 8.64 4,913 6.04
Construction.............................. 4,468 4.54 5,229 6.43
Land development.......................... 3,209 3.26 2,795 3.43
-------- ------- -------- -------
Total mortgage loans................... 80,146 81.42 68,267 83.91
-------- ------- -------- -------
Consumer loans.............................. 11,921 12.11 8,360 10.28
Loans on savings accounts................... 691 0.70 1,213 1.49
Commercial loans............................ 9,058 9.20 6,580 8.09
Other loans................................. 15 0.02 101 .12
-------- ------- -------- -------
Total loans................................. 101,831 103.45 84,521 103.89
-------- ------- -------- -------
Less:
Undisbursed loans in process.............. 1,954 1.99 1,938 2.38
Deferred fees and discounts.............. 534 0.54 473 .58
Allowance for losses...................... 910 0.92 751 .93
-------- ------- -------- -------
Loan portfolio, net......................... $ 98,433 100.00% $ 81,359 100.00%
======== ======= ======== =======
</TABLE>
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Loan Maturity Schedule
The following table sets forth certain information at June 30, 1999 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........ $ 273 $1,098 $ 671 $2,857 $ 8,276 $50,790 $63,965
Commercial................. 2 1,043 809 3,048 2,601 1,001 8,504
Construction............... 921 3,547 -- -- -- -- 4,468
Land development........... 197 1,651 1,218 13 130 -- 3,209
------ ------ ------ ------ ------- ------- -------
Total................... $1,393 $7,339 $2,698 $5,918 $11,007 $51,791 $80,146
====== ====== ====== ====== ======= ======= =======
</TABLE>
The next table sets forth at June 30, 1999, 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
------------- ----------------
(In thousands)
<S> <C> <C>
Mortgage loans
One- to four-family............. $59,702 $4,263
Commercial...................... 8,054 450
Construction.................... 4,468 0
Land development............... 3,209 0
------- ------
Total.......................... $75,433 $4,713
======= ======
</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, 1999, $64.0 million, or 64.98%, of the Association's loan portfolio
consisted of loans secured by one- to four-family residential properties, of
which $4.3 million, or 4.33%, carried adjustable interest rates. The Association
estimates that the average size of the residential mortgages that it currently
originates is $78,000.
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 began selling new loans the Federal Home
Loan Mortgage Corporation ("FHLMC") in April 1999. For the year ended June 30,
1999, the Association sold fixed rate loans of $5.7 million.
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 and home equity lines of
credit primarily for its existing one- to four-family first mortgage customers.
At June 30, 1999, $5.7 million or 5.83% 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. Home equity
loans are underwritten with terms of 20 years with an adjustable rate. Second
mortgages and home equity loans are generally subject to an 80% combined
loan-to-value limitation, including all other outstanding mortgages or liens.
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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 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, 1999, $4.1 million, or 4.01%, 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 $385,000, or 0.38%, of the Association's gross loan portfolio, in
loans to finance the construction of a commercial property at June 30, 1999.
Approximately 80% 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, 1999, the Association
had $3.2 million of land development loans, which constituted 3.15% of the gross
loan portfolio at such date. This total includes one loan of $350,000, which is
one of the Association's ten largest loans. The Association originated $1.8
million and $1.6 million in land development loans during fiscal 1999 and fiscal
1998, 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
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attempted to reduce these risks, as noted above, potential investors should be
aware of these factors in making their investment decision.
Commercial Real Estate Loans. At June 30, 1999, loans secured by commercial
real estate properties totaled $8.5 million, and represented 8.64% of the
Association's loan portfolio. Commercial real estate loans are secured by
ranches, 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, 1999, the Association's two largest loans were a $1.3 million loan secured
by a cattle ranch and $980,000 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, 1999.
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, 1999, 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, 1999, the largest
aggregate amount of loans that the Association had outstanding to any one
borrower and their related interests was $1.5 million and consisted of six
loans, including a $1.3 million loan secured by a cattle ranch near Salida,
Colorado. The largest single loan outstanding was a $1.3 million loan secured by
a cattle ranch property, which is discussed above.
Commercial Business Loans. At June 30, 1999, the Association had $9.1 million
in commercial business loans which represented 8.90% 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, 1999, the Association had dealer floor-plan loans of
$660,000 and $578,000, and a heavy equipment loan of $455,000. 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
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information to allow the Association to make its lending determination. In most
instances, this information consists of 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 $12.6
million or 12.40% of the gross loan portfolio at June 30, 1999, includes
primarily loans secured by deposit accounts, automobile loans and other personal
loans, which represented 0.70%, 12.11%, and 0.01% of its total loan portfolio,
respectively, at June 30, 1999. 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 $240,000 may be approved by two
members of the Association's loan committee. All loans in excess of $500,000
must be approved by the Board of Directors. Branch Managers may
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approve consumer loans of up to $10,000, or up to $30,000 with the approval of
the consumer loan officer. Consumer loans of up to $100,000 may be approved by
two members of the loan committee, while consumer loans over $100,000 must be
approved by four members of the loan Committee. Commercial loans of up to
$100,000 may be approved by two members of the loan committee, while such loans
over $100,000 to $500,000 are approved by three loan committee members and one
outside Director and loans of $500,000 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. Historically, most loans
originated by the Association have been held in the Association's portfolio
until maturity. Beginning in April 1999, the Association began ongoing sales of
new fixed rate single family residential terms to the FHLMC. The sales to the
FHLMC were done to increase fee income, lower interest rate risk and compete
with mortgage bankers. 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,
--------------------
1999 1998
--------- --------
(In thousands)
<S> <C> <C>
Net loans, beginning of period......................... $81,359 $63,127
Origination by type:
- --------------------
Mortgage loans:
One- to four-family................................. $41,451 $26,580
Commercial.......................................... 3,560 1,979
Land development.................................... 1,814 1,559
Consumer loans......................................... 9,455 10,890
Loans on savings accounts.............................. 325 1,007
Commercial loans....................................... 5,570 7,336
------- -------
Total loans originated............................ 62,175 49,351
------- -------
Loans sold............................................. 5,666 --
------- -------
Repayments............................................. 39,671 30,093
------- -------
Decrease (increase) in other items, net................ 236 (1,026)
------- -------
Net increase (decrease) in loans receivable, net.. 17,074 18,232
------- -------
Net loans, end of period............................... $98,433 $81,359
======= =======
</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
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-
9
<PAGE>
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,
--------------------
1999 1998
------ ------
(In thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real estate:
One- to four-family.......................... $ 55 $ 157
Commercial................................... 34 --
Land development............................. -- --
Consumer......................................... 34 42
Commercial....................................... 152 193
Other............................................ -- --
----- -----
Total.................................... 275 392
----- -----
Accruing loans delinquent 90 days or more:
Real estate:
One- to four-family.......................... $ -- $ --
Commercial................................... -- --
Land development............................. -- --
Consumer....................................... -- --
Commercial....................................... -- --
Other............................................ -- --
----- -----
Total.................................... -- --
----- -----
Total nonperforming loans............ 275 392
----- -----
Repossessed assets............................... 18 22
----- -----
Total non-performing assets...................... $ 293 $ 414
===== =====
Total non-performing loans as a
percentage of total net loans.................. 0.28% 0.48%
===== =====
Total non-performing assets as a
percentage of total assets..................... 0.26% 0.44%
===== =====
</TABLE>
10
<PAGE>
At June 30, 1999, the Association had $275,000 in loans outstanding
that were classified as non-accrual, of which $55,000 were one-to four-family
loans, $34,000 were commercial real estate loans, $34,000 were automobile loans
and $152,000 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, 1999, the Association had
$978,000 in assets classified as special mention, $294,000 in assets classified
as substandard, $75,000 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
1999, the Association increased its allowance for loan losses by $158,000 to
$909,000 at June 30, 1999. 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
11
<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,
------------------------
1999 1998
------------ ----------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period.......... $ 751 $ 604
------- -------
Charge-offs:
One- to four-family.................... -- --
Multi-family........................... -- --
Non-residential........................ -- --
Construction........................... -- --
Consumer............................... (25) (60)
Commercial............................. (61) (32)
Other.................................. -- --
------- -------
(86) (92)
------- -------
Recoveries.............................. 14 19
------- -------
Net recoveries (charge-offs)............ (72) (73)
------- -------
Additions charged to operations......... 230 220
------- -------
Balance at end of period................ $ 909 $ 751
======= =======
Allowance for loan losses to total
non-performing loans at end of period.. 330.55% 191.58%
======= =======
Allowance for loan losses to net loans
at end of period....................... .92% .92%
======= =======
</TABLE>
12
<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,
-----------------------------------------
1999 1998
----------------- -------------------
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............... $ 207 22.77% $ 167 22.24%
Commercial................ 65 7.15 55 7.32
Land...................... 63 6.93 92 12.25
Consumer loans............. 270 29.70 177 23.57
Commercial loans........... 304 33.45 260 34.62
------- ------ ------- ------
$ 909 100.00% $ 751 100.00%
======= ====== ======= ======
</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, 1998 and 1999. 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
13
<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 $3.3 million in mortgage-backed securities of which $92,000 had fixed
interest rates and $3.2 million had adjustable interest rates at June 30, 1999.
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."
14
<PAGE>
The following table sets forth the carrying value of the Company's
investment securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------
1999 1998
----- ----
(In thousands)
<S> <C> <C>
School district securities....... $ 310 $ 310
Interest-bearing deposits........ 4,410 6,963
Mortgage-backed securities....... 3,329 4,327
Federal Home Loan Bank stock..... 1,201 1,066
------- --------
Total...................... $ 9,250 $ 12,666
======= ========
</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, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years Total Investment 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..... $ 110 4.00% $200 4.10% $ -- --% $ 310 4.06%
Interest-bearing deposits...... 4,410 4.55 -- -- -- -- 4,410 4.55
Mortgage-backed securities..... 85 5.31 -- -- 3,244 6.28 3,329 6.26
Federal Home Loan Bank stock... -- -- -- -- 1,201 7.00 1,201 7.00
------ ----- ------ ------
Total investment securities.... $4,605 $200 $4,445 $9,250
====== ===== ====== ======
</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, 1999 was 4.93%.
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
15
<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
1999 Deposits (Decrease) 1998 Deposits
----------- --------- ---------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
NOW accounts............. $18,197 25.06% $ 3,424 $14,773 23.29%
Money market deposit..... 16,941 23.33 1,782 15,159 23.90
Certificates of deposit.. 27,364 37.69 3,194 24,170 38.11
Jumbo certificates....... 10,102 13.92 779 9,323 14.70
------- ------ ------- ------- ------
$72,604 100.00% $9,179 $63,425 100.00%
======= ====== ======= ======= ======
</TABLE>
The following table sets forth the time deposits in the Association
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
3.00 - 4.00%....... $ 423 $ 370
4.01 - 5.00%....... 7,974 2,228
5.01 - 6.00%....... 26,733 25,203
6.01 - 7.00%....... 1,787 5,056
Over 7.00%......... 549 636
-------- ---------
$ 37,466 $ 33,493
======== =========
</TABLE>
The following table sets forth the amount and maturities of time deposits
at June 30, 1999.
<TABLE>
<CAPTION>
3.00 - 4.01- 5.01- Over Percent
4.00% 5.00% 6.00% 6.00% Total of Total
----- ----- ----- ----- ----- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate maturing in:
One year............................ $ 423 $7,345 $20,845 $1,466 $30,079 80.28%
One to two years.................... -- 629 4,040 256 4,925 13.15
Two to three years.................. -- -- 858 296 1,154 3.08
Over three years.................... -- -- 990 318 1,308 3.49
------ ------ ------- ------ ------- ------
Total............................. $ 423 $7,974 $26,733 $2,336 $37,466 100.00%
====== ====== ======= ====== ======= ======
Percent of total................... 1.13% 21.28% 71.35% 6.24% 100.00%
====== ====== ======= ====== =======
</TABLE>
16
<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,
1999.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
--------------- ------------
(In thousands)
<S> <C>
Three months or less....................... $ 3,493
Over three through six months.............. 1,750
Over six through 12 months................. 3,425
Over 12 months............................. 1,434
-------
Total..................................... $10,102
=======
</TABLE>
The following table sets forth the savings activities of the Association
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1999 1998
----- -----
(Dollars in thousands)
<S> <C> <C>
Opening balance...................................... $63,425 $56,152
Net increase (decrease) before interest credited..... 7,042 5,326
Interest credited.................................... 2,137 1,947
------- -------
Ending balance...................................... $72,604 $63,425
======= =======
Net increase (decrease).............................. $ 9,179 $ 7,273
======= =======
Percent increase (decrease).......................... 14.47% 12.95%
======= =======
</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, 1999, allowed borrowings of $47.0
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, 1999, 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, 1999, the Association had $22.7 million in FHLB
advances outstanding of which $6.0 million were at interest rates which range
from 5.14% to 6.79% and mature within one year; $3.8 million were at interest
rates which range from 5.46% to 6.00% and mature in 2001; $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; $1.5 million were at an interest rate
of 5.54% to 5.58% and mature in 2006; $1.0 million were at an interest rate of
6.10% and mature in 2008; and $4.4 million were at an interest rate of 5.42% to
5.65% and mature in 2009.
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-
17
<PAGE>
city and community development purposes. Under such limitations, as of June 30,
1999, the Association was authorized to invest up to approximately $3.3 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 only
subsidiary of the Company is the Association. The Association does not have any
subsidiaries.
Competition
The Company has no significant business, except the business of the
Association. 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 1998, the latest date for which information was available, it had 25.87%
of deposits held by all financial institutions in its market area.
Regulation of the Association
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.
Proposed Legislative and Regulatory Changes. The U.S. Congress is in the
process of drafting legislation which may have a profound effect on the
financial services industry. In January 1999 legislation restructuring the
activities and regulations oversight of the financial services industry was
reintroduced in both houses of the U.S. Congress. The stated purposes of the
House bill ("H.R. 10") are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition. H.R. 10 would permit affiliations between commercial
banks, securities firms, insurance companies and, subject to certain
limitations, other commercial enterprises allowing holding companies to offer
new services and products. In particular, H.R. 10 repeals the Glass-Steagall Act
prohibitions on bank affiliating with securities firms and thereby allow holding
companies
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to engage in securities underwriting and dealing without limits and to sponsor
and act as distributor for mutual funds and also removes the Bank Holding
Company Act's prohibitions on insurance underwriting allowing holding companies
to underwrite and broker any type of insurance product. H.R. 10 also calls for a
new regulatory framework for financial institutions and their holding companies.
The legislation preserves the thrift charter and all existing thrift powers, but
would restrict the activities of new unitary thrift holding companies. The
legislation was passed by the House in July 1999, and a joint House-Senate
Committee has been formed to reconcile the House bill with the Senate version.
This is likely to take place during the Fall and Winter of 1999. The Senate
passed its version of financial services modernization, which differs from H.R.
10, in May 1999. At this time, it is unknown how the legislation will be
modified, or if enacted, what form the final version of the legislation might
take and how it will affect the Association's business and operations and
competitive environment.
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, 1999, of $1.2 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 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, 1999,
Salida had advances of $22.7 million 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 1999 was
4.93%.
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
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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, 1999, approximately 86.62% of
the Association's "portfolio" assets were invested in Qualified Thrift
Investments.
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,
1999, 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, 1999, the
Association's adjusted total assets for the purposes of the core and tangible
capital requirements were approximately $111.2 million.
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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, 1999, 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.
The table below presents the Association's capital position relative to its
various minimum statutory and regulatory capital requirements at June 30, 1999.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
-------- -------------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital................ $12,586 11.31%
Tangible Capital Requirement.... 1,669 1.50
------- -----
Excess.......................... $10,917 9.81%
======= =====
Core Capital.................... $12,586 11.31%
Core Capital Requirement........ 3,337 3.00
------- -----
Excess.......................... $ 9,249 8.31%
======= =====
Risk-Based Capital.............. $13,495 18.03%
Risk-Based Capital Requirement.. 5,989 8.00
------- -----
Excess.......................... $ 7,506 10.03%
======= =====
</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,
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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. 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
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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 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.
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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. 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
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<PAGE>
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.
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
25
<PAGE>
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 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
26
<PAGE>
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 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
27
<PAGE>
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.
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
28
<PAGE>
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.
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction are 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, were 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 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, 1999, the Association had 47 full-time and three 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 1999 Title
---- -------- -----
<S> <C> <C>
Larry D. Smith 41 President
Scott G. Erchul 37 Vice President
Frank L. DeLay 35 Chief Financial Officer
</TABLE>
29
<PAGE>
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. 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, 1999.
<TABLE>
<CAPTION>
Book Value at
Year Owned or June 30, Approximate
Opened Leased 1999 (1) Square Footage
------ ------ --------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Main Office
130 West 2ND
Salida, Colorado 1886 (2) Owned $ 745 10,750
Branch Offices
600 Harrison (3)
Leadville, Colorado 1978 Owned 764 3,800
713 East Main (3)
Buena Vista, Colorado 1996 Owned 448 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 Association is building a new main office in Salida, Colorado. The
building is expected to be completed in early 2000. The building has an
estimated cost of $2.5 million with an approximate square footage of 12,000
square feet, not including a full basement. At June 30, 1999, construction costs
totaled $232,000. The Association will retain both Salida offices with the
majority of personnel moving to the new office.
The book value of the Association's investment in premises and equipment
totaled approximately $2.9 million at June 30, 1999. 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, 1999, there were no legal proceedings to
which the Company or the Association was a party, or to which any of their
30
<PAGE>
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, 1999.
31
<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.
Pursuant to regulations promulgated under the Securities Exchange Act
of 1934, the Company's officers, directors and persons who own more than ten
percent of the Company's outstanding shares of common stock are required to
file reports detailing their ownership and changes of ownership in such Common
Stock, and to furnish the Company with copies of all such reports. Based
solely on the Company's review of such reports which the Company received
during the last fiscal year, or written representations from such persons that
no annual report of change in beneficial ownership was required, the Company
believes that, during the last fiscal year, all persons subject to such
reporting requirements have complied with the reporting requirements, except
for Director Mitchell who filed one Form 4 reporting two transactions late,
due to an oversight by the Company.
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.
32
<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,
1999 and 1998
(b) Statements of Income for the Years Ended June 30,
1999 and 1998
(c) Statements of Equity for the Years Ended June 30,
1999 and 1998
(d) Statements of Cash Flows for the Years Ended June
30, 1999 and 1998
(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
* 10.4 High Country Bancorp, Inc. Management Recognition Plan and
Trust
33
<PAGE>
* 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,
1999
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. During the last quarter of this report, the
-------------------
Registrant filed one current report on form 8-K. In the Current
Report on form 8-K, dated May 24, 1999, the Company reported under
item 5 the commencement of a stock repurchase program to acquire
up to 10% of the Company's outstanding common stock over a
twelve-month period.
34
<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 23, 1999 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 23, 1999
-------------------------------------------
Larry D. Smith
President and Chief Executive Officer
(Principal Executive and Officer)
By: /s/ Frank L. Delay Date: September 23, 1999
-------------------------------------------
Frank L. DeLay
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Scott G. Erchul Date: September 23, 1999
-------------------------------------------
Scott G. Erchul
Vice President and Director
By: /s/ Robert B.Mitchell Date: September 23, 1999
-------------------------------------------
Robert B. Mitchell
Chairman of the Board
By: /s/ Timothy R. Glenn Date: September 23, 1999
-------------------------------------------
Timothy R. Glenn
Director
By: /s/ Richard A. Young Date: September 23, 1999
-------------------------------------------
Richard A. Young
Director
By: /s/ Philip W. Harsh Date: September 23, 1999
-------------------------------------------
Philip W. Harsh
Director
<PAGE>
EXHIBIT 13
[LOGO OF HIGH COUNTRY BANCORP, INC. APPEARS HERE]
ANNUAL REPORT FOR
THE YEAR ENDED
JUNE 30, 1999
<PAGE>
[LETTERHEAD OF HIGH COUNTRY BANCORP, INC. APPEARS HERE]
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 another year, we are pleased to present this annual report to the
Stockholders.
During Fiscal 1999, assets increased $13.4 million to $114 million. This
growth was primarily the result of continued strong loan demand and lending
diversification in the local economy. As a result of the 28.64% increase in net
income, Stockholder's equity is $18 million. Asset quality remains good, with
continued application of good underwriting standards.
Several major events in 1999 included the announcement of a stock
repurchase program. Believing that our stock is undervalued, we have repurchased
37,781 shares to date. We also began operating a secondary mortgage department
in order for us to offer a very competitive mortgage loan product and improve
fee income and interest rate risk. Our new building project was started and
should be completed by early spring, 2000. This building is being built with
the future in mind, on our West Highway 50 location in Salida. We plan on
continuing our downtown Salida location as a branch office.
After serving the local area for 113 years, we are confident of the
Company's sound financial condition and look forward to supporting the future
growth within our communities. The Company is positioned to take advantage of
competitive opportunities. We are committed to serving our local customers and
meeting the challenges of the financial services industry.
We invite you to review this Annual Report for the past year. We
appreciate your support, as well as look forward to the future with great
confidence and enthusiasm.
Sincerely,
/s/ Larry D. Smith
- ---------------------------
Larry D. Smith, President
and Chief Executive Officer
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At June 30, Change
------------------------------ ----------------------------
1999 1998 Amount Percent
----------- ---------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Position:
Total assets............................ $ 114,014 $ 100,589 $ 13,425 13.35%
Loans receivable, net................... 98,433 81,359 17,074 20.99
Mortgage-backed and related securities.. 3,639 4,637 (998) 21.52
Investment securities................... 1,201 1,066 135 12.66
Deposits................................ 72,604 63,425 9,179 14.47
Stockholders' equity.................... 18,028 18,279 (251) 1.37
Number of common shares outstanding..... 1,298,719 1,322,500 (23,781) 1.80
For the Year Ended
June 30, Change
------------------------------ ---------------------------
1999 1998 Amount Percent
---------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Results of Operations:
Interest income......................... $ 8,536 $ 7,033 $ 1,503 21.37%
Interest expense........................ 3,920 3,266 654 20.02
Net interest income..................... 4,616 3,767 849 22.53
Provision for loan losses............... 230 219 11 5.02
Net interest income after provision
for loan losses........................ 4,386 3,548 838 23.62
Non-interest income..................... 189 158 31 19.62
Non-interest expense.................... 3,228 2,625 603 22.97
Net earnings............................ 840 653 187 28.64
</TABLE>
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Selected Financial Condition Data:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total assets........................... $114,014 $100,589 $76,324 $63,185 $54,813
Cash................................... 2,249 2,999 895 511 1,355
Interest-earning deposits.............. 4,410 6,963 2,381 1,577 513
Securities available for sale.......... -- -- -- 989 1,385
Securities held to maturity........... 3,639 4,637 5,340 6,843 8,368
Loans receivable, net.................. 98,433 81,359 63,127 50,076 41,537
Savings deposits....................... 72,604 63,425 56,152 49,537 45,914
Stockholders' equity................... 18,028 18,279 5,958 5,907 5,379
- ----------------------------------------------
Number of:
Real estate loans outstanding........ 1,231 1,185 1,137 1,054 965
Savings accounts..................... 11,064 10,199 9,126 7,828 7,324
Full-service offices................. 3 3 3 2 2
</TABLE>
<TABLE>
<CAPTION>
Selected Operations Data:
Year Ended June 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income........................ $ 8,536 $ 7,033 $ 5,764 $ 4,948 $ 3,911
Interest expense....................... 3,920 3,266 2,813 2,293 1,603
-------- -------- ------- ------- -------
Net interest income.................. 4,616 3,767 2,951 2,655 2,308
Provision for loan losses.............. 230 219 282 59 59
-------- -------- ------- ------- -------
Net interest income after provision
for loan losses..................... 4,386 3,548 2,669 2,596 2,249
-------- -------- ------- ------- -------
Noninterest income..................... 189 158 141 146 146
-------- -------- ------- ------- -------
Subtotal............................. 4,575 3,706 2,810 2,742 2,395
-------- -------- ------- ------- -------
Noninterest expense:
Compensation and benefits............. 1,866 1,506 1,345 868 730
Other................................. 1,362 1,119 1,410 948 771
-------- -------- ------- ------- -------
Total noninterest expense............. 3,228 2,625 2,755 1,816 1,501
-------- -------- ------- ------- -------
Income before taxes.................. 1,347 1,081 55 926 894
Income tax expense..................... 507 428 11 407 327
-------- -------- ------- ------- -------
Net income........................... $ 840 $ 653 $ 44 $ 519 $ 567
======== ======== ======= ======= =======
</TABLE>
2
<PAGE>
Operating Ratios
- ----------------
<TABLE>
<CAPTION>
At or for the Year
Ended June 30,
------------------------
1999 1998
------- -------
<S> <C> <C>
Performance Ratios:
Return on assets (ratio of net earnings
to average total assets)............................... 0.77% 0.74%
Return on equity (ratio of net earnings
to average equity)..................................... 4.61% 5.22%
Ratio of average interest-earning assets to
average interest-bearing liabilities................... 115.52% 110.76%
Ratio of net interest income, after provision
for loan losses, to noninterest expense................ 135.87% 135.16%
Net interest rate spread (difference between weighted
average yield on interest-earning assets and weighted
average cost of interest-bearing liabilities).......... 3.88% 4.10%
Net yield on average interest-earning assets............. 4.47% 4.53%
Quality Ratios:
Non-performing loans to total loans
at end of period....................................... 0.28% 0.46%
Non-performing loans to total assets..................... 0.24% 0.39%
Non-performing assets to total assets
at end of period....................................... 0.26% 0.41%
Allowance for loan losses to non-performing
loans at end of period................................. 331% 192%
Allowance for loan losses to total loans................. 0.89% 0.89%
Capital Ratios:
Equity to total assets at end of period.................. 15.81% 18.17%
Average equity to average assets......................... 16.86% 14.14%
</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, 1999, the
Association had total assets of $111.2 million, loans receivable (net) of $98.4
million, total deposits of $72.6 million and stockholders' equity of $12.6
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.
4
<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.
Beginning in late fiscal 1999 the Association began selling long-term fixed rate
loans in the secondary market. The Association's business plan calls for
continued emphasis on shorter term, adjustable rate loans and sales of long-term
fixed 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 selling long-term
fixed rate loans. 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.
5
<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 3% 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, 1999 in the event of 1%, 2% and
3% 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>
+ 300 bp $ 12,940 (3,558) (22)% 11.92% (246) bp
+ 200 bp 14,314 (2,184) (13) 12.93 (146) bp
+ 100 bp 15,572 (926) (6) 13.80 (59) bp
0 bp 16,498 14.38
- 100 bp 16,882 384 2 14.55 16 bp
- 200 bp 17,017 518 3 14.52 13 bp
- 300 bp 17,163 665 4 14.49 10 bp
</TABLE>
6
<PAGE>
The following table sets forth the interest rate risk capital component for
the Association at June 30, 1999 given a hypothetical 200 basis point rate
change in market interest rates.
June 30, 1999
-------------
Pre-shock NPV Ratio: NPV as % of Portfolio Value of Assets........ 14.38%
Exposure Measure: Post-Shock NPV Ratio............................ 12.93%
Sensitivity Measure: Change in NPV Ratio.......................... 146 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 has historically held most loans in portfolio until maturity. 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.
7
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1999 1998
At June 30, ---------------------------- ----------------------------
1999
----------------- 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................. $ 4,410 4.55% $ 6,596 $ 305 4.62% $ 6,502 $ 275 4.23%
Investments............................... 4,840 6.30 5,386 336 6.24 6,030 410 6.80
Loans..................................... 98,433 8.55 91,363 7,895 8.64 70,706 6,348 8.98
-------- -------- ------- ------- -------
Total interest-earning assets.............. 107,683 8.28 103,345 8,536 8.26 83,238 7,033 8.45
------- -------
Non-interest-earning assets................ 6,331 4,702 5,293
-------- -------- -------
Total assets............................... $114,014 $108,047 $88,531
======== ======== =======
Interest-bearing liabilities:
Savings deposits.......................... $ 72,604 3.82 $ 68,888 $ 2,686 3.90 $61,096 $ 2,394 3.92
FHLB advances............................. 22,685 5.97 20,573 1,234 6.00 14,055 872 6.20
-------- -------- ------- ------- -------
Total interest-bearing liabilities......... 95,289 4.33 89,461 3,920 4.38 75,151 3,266 4.35
------- -------
Non-interest bearing liabilities........... 697 364 863
-------- -------- -------
Total liabilities.......................... 95,986 89,825 76,014
Equity..................................... 18,028 18,222 12,517
-------- -------- -------
Total liabilities and equity............... $114,614 $108,047 $88,531
======== ======== =======
Net interest income........................ $ 4,616 $ 3,767
======= =======
Net interest rate spread (1)............... 4.47% 3.88% 4.10%
==== ===== =====
Net interest\dividend earning assets....... $ 13,884 $ 8,087
======== =======
Net interest margin (2).................... 4.47% 4.53%
===== =====
Average interest-earning assets to
average interest-bearing liabilities (3).. 115.52% 110.76%
======= =======
</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.
8
<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,
-----------------------------------------
1999 vs. 1998
-----------------------------------------
Increase (Decrease) Due to
-----------------------------------------
Rate/
Volume Rate Volume Total
------ ----- ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits............. $ 4 $ 25 $ 1 $ 30
Investments........................... (44) (34) 4 (74)
Loans................................. 1,855 (240) (68) 1,547
------ ----- ---- ------
Total interest-earning assets........ 1,815 (249) (63) 1,503
------ ----- ---- ------
Interest-bearing liabilities:
Deposits.............................. 305 (12) (1) 292
FHLB advances......................... 404 (28) (14) 362
------ ----- ---- ------
Total interest-bearing liabilities.. 709 (40) (15) 654
------ ----- ---- ------
Increase (decrease) in net interest
income............................... $1,106 $(209) $(48) $ 849
====== ===== ==== ======
</TABLE>
Comparison of Financial Condition at June 30, 1999 and June 30, 1998
The Company's total assets increased by $13.4 million or 13.32% from $100.6
million at June 30, 1998 to $114.0 million at June 30, 1999. The increase in
assets was due to loan growth of $17.1 million. The loan growth was partially
offset by decreases in cash and amounts due from banks, interest-bearing
deposits and mortgage-backed securities.
Net loans totaled $98.4 million at June 30, 1999 and $81.4 million at June
30, 1998. The majority of the increase occurred in residential mortgage loans,
which increased $8.6 million. In addition to the growth in residential loans,
auto loans increased $3.6 million, commercial loans increased $2.5 million, and
commercial real estate loans increased $3.6 million. The growth in loans is due
to significant refinancing of residential mortgage loans due to low mortgage
interest rates, seasonal commercial borrowing, and a strong local economy. The
increase would have been greater without residential loan sales of $5.7 million.
The loan sales occurred during the last quarter of the year. The Association
began a new program of ongoing sales of new fixed rate residential loans to the
Federal Home Loan Mortgage Corporation ("FHLMC"). The sales began in order to
manage interest rate risk, compete with mortgage companies and increase fee
income.
The allowance for loan losses totaled $909,000 at June 30, 1999 and
$751,000 at June 30, 1998. As of those dates the non-performing loans in the
Association's portfolio were $275,000 and $392,000, respectively. The total non-
9
<PAGE>
performing loans at June 30, 1999 included 20 loans secured by single family
residences, business equipment and autos. The largest non-performing loan
balance was $74,000. There were $86,000 of loans charged off and $14,000 of
recoveries of previous loan losses during the year ended June 30, 1999. 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 alllowances will not be
required or that losses on loans will not be incurred. The Company has had
minimal losses on loans in prior years. At June 30, 1998 and 1999, the ratio of
the allowance for loan losses to net loans was .92%.
At June 30, 1999, the Company's investment portfolio included mortgage-
backed securities and local municipal bonds classified as "held to maturity"
carried an amortized cost of $3.6 million and an estimated fair value of $3.7
million. The balance of the Company's investment portfolio at June 30, 1999
consists of interest bearing deposits with various financial institutions
totaling $4.4 million, a decrease of $2.6 million since June 30, 1998. The
decrease was used to fund loan growth.
During the year ended June 30, 1999 deposits increased by 14.47% to $72.6
million at June 30, 1999 from $63.4 million at June 30, 1998. The increase was
used to fund loan growth. Management is continually evaluating the investment
alternatives available to the Company's customers, and adjusts the pricing on
its savings products to maintain its existing deposits.
Advances from the Federal Home Loan Bank increased to $22.7 million at June
30, 1999, from $17.9 million at June 30, 1998. The increase was used to fund
loan growth.
The Company announced the commencement of a stock repurchase program on May
24, 1999. The program will acquire up to 10% of the Company's outstanding common
stock. At June 30, 1999 the Company had repurchased 23,781 shares at a total
cost of $285,000. The Company repurchased an additional 14,000 shares in July
1999 at a cost of $172,000.
Comparison of Operating Results for the Year Ended June 30, 1999 and 1998
Net Income. The Company's net income for the year ended June 30, 1999 was
$840,000 compared to $653,000 for the year ended June 30, 1998. The increase in
net income resulted primarily from increased interest income. The increase in
interest income offset increases in compensation and benefit expenses, Company
legal and accounting expenses, and other expenses due to growth.
Net Interest Income. Net interest income for the year ended June 30, 1999
was $4.6 million compared to $3.8 million for the year ended June 30, 1998. The
increase is attributed to increased interest earned on interest earning assets
due to loan growth, less the increase in interest expense due to the increase in
interest bearing liabilities. The increase in interest earning assets offset a
decrease in the interest rate spread from 4.10% for the year ended June 30, 1998
to 3.88% for the year ended June 30, 1999. The decrease in the interest rate
spread was caused by a decrease in the average yield on interest earning assets
from 8.45% for the year ended June 30, 1998 to 8.26% for the year ended June 30,
1999. The decrease in yields reflects the significant refinancing activity of
residential mortgage loans to lower rates. The interest rate spread was also
affected by a slight increase in the average cost of interest bearing
liabilities from 4.35% for the year ended June 30, 1998 to 4.38% for the year
ended June 30, 1999. This increase reflects an increased reliance on FHLB
advances which have higher rates than deposits.
Allowance for Loan Losses. The provision for loan losses for the year ended
June 30, 1999 was $230,000 as compared to $219,000 for the year ended June 30,
1998. The provision during the years ended June 30, 1998 and 1999 reflect the
mix of loans being made and the need to maintain an adequate balance in the
allowance for loan losses.
10
<PAGE>
Non-Interest Expenses. The non-interest expenses for the year ended June
30, 1999 were $3.2 million compared to $2.6 million for the year ended June 30,
1998. The increase was due to higher compensation and benefit expenses
associated with the adoption of a Management Recognition Plan, additional
employees, Company legal and accounting expenses, higher data processing, and
other expenses associated with growth and with becoming a publicly-owned
company.
Dividends Paid. The Company paid a $0.40 per share dividend during the year
ended June 30, 1999 compared to $0.075 per share during the year ended June 30,
1998.
Liquidity and Capital Resources
The Company'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 Company 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 loan repayments and other sources of funds will be adequate to
meet the Company'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's liquidity ratios at June
30, 1999 and 1998 were 4.93% and 5.92%, respectively.
Year 2000 Readiness Disclosure
The Company is continually 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 Association tested the system
in September 1998 in a year 2000 environment and did not encounter any problems.
The Association will continue to test this system as well as other critical
systems during 1999. The primary data processor has substantially completed
testing the interfaces they have with other systems for year 2000 compliance.
The data processor has not encountered Year 2000 problems with these tests. 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 year 2000 ready or fail in the year 2000. The plan
has identified alternative means of operations in case a system is not expected
to be year 2000 ready by a certain date or malfunctions in the year 2000. The
disaster plan for the majority of the systems includes pre-year 2000 procedures
as well as post-year 2000 procedures. The pre-year 2000 procedures include
having customer information, forms and software available for critical systems.
The post-year 2000 procedures have been developed to identify alternatives if
critical systems fail in the year 2000. Depending on the problems encountered in
the post-year 2000 environment, the contingency and business resumption plan
includes working from a manual basis to a fully functioning basis. The plan is
reviewed on an ongoing basis.
11
<PAGE>
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 asset 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 in the same magnitude as
the prices of goods and services.
Impact of New Accounting Standards
Accounting For Derivatives and Similar Financial Instruments and For
Hedging Activities. In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, which was subsequently amended by Statement No. 137
regarding the effective date. 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, 2000. Management, at this time, has not determined the
impact of adopting this statement on July 1, 2000.
Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. In October
1998, the Financial Accounting Standards Board issued Statement No. 134. The
Statement amends Financial Accounting Standards No. 65. Requiring the
classification of any retained mortgage-backed securities as trading securities
if the entity commits to sell the securities before or during the securitization
process. The Company adopted this pronouncement effective January 1, 1999, and
it did not have an effect on the Company.
12
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
HIGH COUNTRY BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report 14
Consolidated Statements of Financial Condition as of June 30, 1999 and 1998 15
Consolidated Statements of Income for the Years Ended June 30, 1999 and 1998 16
Consolidated Statements of Equity for the Years Ended June 30, 1999 and 1998 17
Consolidated Statements of Cash Flows for the Years Ended June 30, 1999 and 1998 18
Notes to Consolidated Financial Statements 19
</TABLE>
13
<PAGE>
[LETTERHEAD OF GRIMSLEY, WHITE & COMPANY APPEARS HERE]
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, 1999 and 1998, 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, 1999 and 1998 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
August 12, 1999
14
<PAGE>
HIGH COUNTRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
-------------- --------------
<S> <C> <C>
Cash and amounts due from banks $ 2,248,971 $ 2,999,284
Interest- bearing deposits at other institutions 4,409,949 6,963,130
Mortgage-backed securities, held to maturity 3,328,789 4,326,603
Securities held to maturity 310,000 310,000
Loans receivable - net 98,433,182 81,359,296
Federal Home Loan Bank stock, at cost 1,201,300 1,065,500
Accrued interest receivable 801,223 699,982
Property and equipment, net 2,863,725 2,475,773
Mortgage servicing rights 22,496 29,856
Prepaid expenses and other assets 386,664 359,231
Deferred income taxes 7,400 -
-------------- --------------
TOTAL ASSETS $ 114,013,699 $ 100,588,655
============== ==============
LIABILITIES AND EQUITY
LIABILITIES
Deposits $ 72,604,408 $ 63,424,713
Advances by borrowers for taxes and insurance 18,015 92,954
Accounts payable and other liabilities 656,030 566,641
Advances from Federal Home Loan Bank 22,685,000 17,890,000
Accrued income taxes payable 22,014 288,140
Deferred income taxes - 47,300
-------------- --------------
TOTAL LIABILITIES 95,985,467 82,309,748
-------------- --------------
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 1,298,719 (1999)and 1,322,500 shares (1998) 12,987 13,225
Paid-in capital 12,426,953 12,690,438
Retained earnings - substantially restricted 6,868,120 6,519,509
Note receivable from ESOP Trust (838,465) (944,265)
Deferred MRP stock awards (441,363) -
-------------- --------------
TOTAL EQUITY 18,028,232 18,278,907
-------------- --------------
TOTAL LIABILITIES AND EQUITY $ 114,013,699 $ 100,588,655
============== ==============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
<PAGE>
HIGH COUNTRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Interest Income
Interest on loans $ 7,895,000 $ 6,348,304
Interest on securities held-to-maturity 254,651 332,951
Interest on other interest- bearing assets 385,997 351,549
------------ ------------
Total interest income 8,535,648 7,032,804
------------ ------------
Interest Expense
Deposits 2,686,082 2,393,811
Federal Home Loan Bank advances 1,234,111 872,049
------------ ------------
Total interest expense 3,920,193 3,265,860
------------ ------------
Net interest income 4,615,455 3,766,944
Provision for losses on loans 229,781 219,360
------------ ------------
Net income after provision
for loan losses 4,385,674 3,547,584
------------ ------------
Noninterest Income
Service charges on deposits 142,878 139,215
Other 46,504 18,561
------------ ------------
Total noninterest income 189,382 157,776
------------ ------------
Noninterest Expense
Compensation and benefits 1,865,538 1,505,658
Occupancy and equipment 643,524 562,198
Insurance and professional fees 237,383 131,732
Other 481,784 425,021
------------ ------------
Total noninterest expense 3,228,229 2,624,609
------------ ------------
Income before income taxes 1,346,827 1,080,751
Income tax expense 507,304 428,208
------------ ------------
Net income $ 839,523 $ 652,543
============ ============
Basic Earnings Per Common Share (1998 earnings
based on income allocated from December 9, 1997) $ 0.69 $ 0.32
============ ============
Diluted Earning Per Common Share $ 0.69 $ 0.32
============ ============
Weighted Average Common Shares Outstanding
Basic 1,220,410 1,272,280
Diluted 1,220,410 1,272,280
Dividends Paid Per Share $ 0.400 $ 0.075
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
<PAGE>
HIGH COUNTRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
NOTE DEFERRED
COMMON PAID-IN RETAINED RECEIVABLE STOCK
STOCK CAPITAL EARNINGS ESOP AWARDS
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES JUNE 30, 1997 $ - $ - $ 5,958,220 $ - $ -
Net income 652,543
Proceeds from issuance of
stock 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 -
Net income 839,523
Management recognition
plan stock purchase 551,721
MRP stock awards (110,358)
ESOP contribution 21,596
ESOP note payment (105,800)
Stock purchased and
retired (238) (285,081)
Dividends paid (490,912)
----------- ----------- ----------- ----------- -----------
BALANCES JUNE 30, 1999 $ 12,987 $12,426,953 $ 6,868,120 $ 838,465 $ 441,363
=========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
<PAGE>
HIGH COUNTRY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Operating Activities
Net income $ 839,523 $ 652,543
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of:
Deferred loan origination fees (102,655) (131,269)
Premiums on investments 13,955 18,814
Compensation expense on ESOP share 105,800 -
Compensation expense on Management Recognition Plan 110,358 -
Stock dividend received from FHLB (80,100) (77,000)
ESOP market value expense 21,596 163,114
Provision for losses on loans 230,000 219,900
Deferred income taxes (54,700) (27,300)
Depreciation 189,212 182,594
Income taxes (266,126) 288,140
Net change in miscellaneous assets (121,314) (3,801)
Net change in miscellaneous liabilities 89,389 74,712
-------------- -------------
Net cash provided by operating activities 974,938 1,360,447
-------------- -------------
Investing Activities
Net change in loans receivable (17,201,231) (18,321,063)
Purchase of securities-held-to-maturity - (310,000)
Principal repayments of mortgage-backed securities-held-to-maturity 983,859 994,345
Purchase of Federal Home Loan Bank stock (55,700) -
Purchases of property and equipment (577,164) (150,969)
Purchase of Management Recognition Plan Stock (551,721) -
-------------- -------------
Net cash used by investing activities (17,401,957) (17,787,687)
-------------- -------------
Financing Activities
Issuance of common stock - 11,596,284
Net change in deposits 9,179,695 7,272,535
Net change in mortgage escrow funds (74,939) (34,221)
Purchase of common stock (285,319) -
Cash dividends paid (490,912) (91,254)
Proceeds (payment) on FHLB advances 4,795,000 4,370,000
-------------- -------------
Net cash provided by financing activities 13,123,525 23,113,344
-------------- -------------
Net increase (decrease) in cash and cash equivalents (3,303,494) 6,686,104
Cash and cash equivalents, beginning 9,962,414 3,276,310
-------------- -------------
Cash and cash equivalents, ending $ 6,658,920 $ 9,962,414
============== =============
Supplemental disclosure of cash flow information
Cash paid for:
Taxes $ 828,130 $ 167,368
Interest 3,909,387 3,261,885
</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.
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.
19
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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.
20
<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
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.
21
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Advertising Costs
Advertising costs are charged to expense as incurred.
NOTE -2 SECURITIES
Securities are classified in categories and accounted for as follows:
Mortgage-Backed Securities Held-to-Maturity
The amortized cost and estimated fair value of mortgage-backed
held-to-maturity securities at June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
--------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Mortgage-backed securities
GNMA certificates $ 981,640 $ 9,970 $ 0 $ 991,610
FHLMC certificates 772,886 15,151 (7,703) 780,334
FNMA certificates 1,574,263 16,282 (6,890) 1,583,655
---------- ---------- --------- ----------
$3,328,789 $ 41,403 $ (14,593) $3,355,599
========== ========== ========= ==========
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
========== ========== ========= ==========
</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.
Securities Held-to-Maturity
The amortized cost and estimated fair value of held-to-maturity
securities are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
--------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Chaffee County School
District Bonds $ 310,000 $ 308 $ 0 $ 310,308
========== ========== ========= ==========
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>
22
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -2 SECURITIES (Continued)
The amortized cost and fair value of debt securities held-to-maturity
as of June 30, 1999, by contractual maturity, is as follows:
Amortized Fair
Held-to-Maturity Debt Securities Cost Value
-------------------------------- --------- ---------
Due after one year through five years $ 310,000 $ 310,308
========= =========
At June 30, investments with a carrying value of $2,662,732 (1999) and
$2,604,157 (1998) were pledged as collateral for deposits of public
funds.
NOTE -3 LOANS RECEIVABLE
Loans receivable at June 30, are summarized as follows
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Loans secured by real estate:
One-to-four family residences $ 63,964,498 $ 55,330,494
Commercial real estate 8,504,406 4,913,427
Construction 4,468,486 5,228,459
Land 3,208,715 2,794,717
------------ ------------
Total Loans Secured by Real Estate 80,146,105 68,267,097
Consumer loans, net of discounts 11,920,807 8,359,810
Loans collateralized by savings accounts 691,448 1,213,290
Commercial loans 9,057,554 6,580,299
Other loans 14,763 100,951
------------ ------------
Total Loans 101,830,677 84,521,447
Less:
Undisbursed portion of loans in process 1,953,837 1,937,636
Deferred loan origination fees 534,187 473,392
Allowance for loan losses 909,471 751,123
------------ ------------
Loans Receivable, Net $ 98,433,182 $ 81,359,296
============ ============
</TABLE>
The changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Balance, beginning of year $ 751,123 $ 604,405
Provision for losses 230,000 219,900
Recoveries 14,176 18,529
Losses incurred (85,828) (91,711)
------------ ------------
Balance, end of year $ 909,471 $ 751,123
============ ============
</TABLE>
At June 30, the Association had adjustable interest rate loans of
approximately $4,713,000 (1999) and $5,380,000 (1998). The adjustable
rate loans have interest rate adjustment limitations and are generally
indexed to the 1-year U.S. Treasury Note rate or prime 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 $275,000 (1999) and $392,000 (1998). If interest on
these loans had been accrued, such interest would have increased
income by immaterial amounts.
As of June 30, 1999, $1,349,368 of loans had been pledged as
collateral for deposits of public funds.
Loans receivable at June 30 include loans to officers and directors of
approximately $1,575,000 (1999) and $1,034,000 (1998). For the year
ended June 30, 1999, $685,000 of new loans were made and payments of
$194,000 were received.
23
<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>
1999 1998
----------- -----------
<S> <C> <C>
Mortgage loan portfolios serviced for:
FHLMC $ 5,184,915 $ 7,158,554
Other investors 0 11,984
----------- -----------
$ 5,184,915 $ 7,170,538
=========== ===========
</TABLE>
In connection with these loans serviced for others at June 30, the
Association held borrowers' escrow balances of $1,709 (1999) and
$14,747 (1998).
NOTE -5 ACCRUED INTEREST RECEIVABLE
Interest receivable at June 30, relates to the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Loans $ 778,010 $ 667,985
Mortgage-backed securities 22,163 30,947
Other investments 1,050 1,050
----------- -----------
$ 801,223 $ 699,982
=========== ===========
</TABLE>
NOTE - 6 PROPERTY AND EQUIPMENT
Property and equipment and the related accumulated depreciation at
June 30, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land and improvements $ 526,942 $ 325,235
Buildings and improvements 2,111,487 2,099,544
Furniture, fixtures and equipment 990,247 869,184
Construction in progress 231,863 0
----------- -----------
3,860,539 3,293,963
Less accumulated depreciation (996,814) (818,190)
----------- -----------
$ 2,863,725 $ 2,475,773
=========== ===========
</TABLE>
Depreciation expense for the years ended June 30, totaled $189,212
(1999) and $182,594 (1998).
NOTE -7 DEPOSIT ACCOUNTS
Deposit accounts at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NOW accounts, including
non-interest bearing
deposits of $4,206,450 (1999)
and $3,973,002 (1999) $18,197,360 1.35% $14,773,320 1.19%
Money market and
savings accounts 16,941,441 3.03% 15,158,899 3.00%
Certificate accounts 37,465,607 5.38% 33,492,494 5.65%
----------- -----------
$72,604,408 $63,424,713
=========== ===========
</TABLE>
24
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -7 DEPOSIT ACCOUNTS (Continued)
At June 30, 1999, scheduled maturities of the above certificate
accounts are summarized as follows:
<TABLE>
<CAPTION>
Year ending June 30,
-----------------------------------------------------------------
2004 and
2000 2001 2002 2003 thereafter
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
3.01-4.00 $ 423,080
4.01-5.00 7,345,368 $ 628,884
5.01-6.00 20,844,838 4,040,589 $ 857,637 $ 990,033
6.01-7.00 1,240,614 255,600 100,000 $ 190,000
7.01-8.00 225,197 196,000 98,052 29,715
----------- ----------- ----------- ----------- -----------
$30,079,097 $ 4,925,073 $ 1,153,637 $ 1,088,085 $ 219,715
=========== =========== =========== =========== ===========
</TABLE>
The aggregate amount of certificates of deposits with a minimum
denomination of $100,000 at June 30, was $10,102,283 (1999) and
$9,323,122 (1998).
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>
1999 1998
----------- -----------
<S> <C> <C>
NOW accounts $ 182,585 $ 126,212
Money market and savings accounts 480,998 448,634
Certificate accounts 2,022,499 1,818,965
----------- -----------
$ 2,686,082 $ 2,393,811
=========== ===========
</TABLE>
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 1999 1998
---------- ----------- -----------
<S> <C> <C> <C>
Maturing within one year 5.14-6.79% $ 6,000,000 $ 4,500,000
Maturing in 2001 5.46-6.% 3,760,000 3,000,000
Maturing in 2002 5.74-6.80% 0 3,390,000
Maturing in 2003 5.81-6.56% 5,000,000 5,000,000
Maturing in 2004 6.18% 0 1,000,000
Maturing after 2004 5.42-6.18% 7,925,000 1,000,000
----------- -----------
$22,685,000 $17,890,000
=========== ===========
</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, 1998, the Association had an approved line of credit of
$10,000,000 with the FHLB which expired May 1, 1999. At June 30, 1999,
the Association has an approved line of credit for $10,000,000 with
the FHLB with an expiration date of April 28, 2000. No amount was
drawn on the line of credit at June 30, 1999.
25
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE -9 INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current $ 562,004 $ 455,508
Deferred (54,700) (27,300)
----------- -----------
$ 507,304 $ 428,208
=========== ===========
</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>
1999 1998
----------- -----------
<S> <C> <C>
Provision for income taxes at statutory rate $ 457,900 $ 367,500
Nondeductible expenses for tax purposes 23,300 19,900
State income taxes, net of federal income
tax benefit 34,500 27,600
Other, net (8,396) 13,208
----------- -----------
$ 507,304 $ 428,208
=========== ===========
Effective tax rates 38% 40%
</TABLE>
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 assets (liabilities) as of June 30, are
as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Difference between tax basis and
carrying basis of FHLB stock $ (185,300) $ (155,600)
Tax depreciation in excess of
financial statement amounts (83,900) (83,700)
Difference between tax basis and carrying
basis of long term incentive plan 117,500 99,900
Loan loss allowance 159,100 92,100
----------- -----------
$ 7,400 $ (47,300)
=========== ===========
</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>
1999 1998
----------- -----------
<S> <C> <C>
FHLB stock dividends $ 29,700 $ 28,500
Accumulated depreciation 200 7,000
Allowance for loan losses - net (67,000) (50,600)
Long-term incentive plan (17,500) (12,200)
----------- -----------
$ (54,700) $ (27,300)
=========== ===========
</TABLE>
26
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 9 INCOME TAXES (Continued)
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, 1999, includes
approximately $1,169,000, representing such bad debt deductions for
which no income taxes have been provided.
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, 1999.
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>
1999 1998
----------- -----------
<S> <C> <C>
Equity Per GAAP $12,588,013 $12,291,128
Less Servicing Rights Plus Valuations (2,250) (2,986)
----------- -----------
Equity Per GAAP- Tier I Capital 12,585,763 12,288,142
Valuation Allowance 909,471 748,000
----------- -----------
Regulatory Capital $13,495,234 $13,036,142
=========== ===========
</TABLE>
27
<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
------------ ------- ---------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
1999
----
Total Capital
(to Risk
Weighted
Assets) $13,495,234 18.03% $5,988,960 8.00% $7,486,200 10.00%
Tier I Capital
(to Risk
Weighted
Assets) 12,585,763 16.81 2,245,860 3.00 4,491,720 6.00
Tier I Capital
(to Average
Assets) 12,585,763 12.18 1,550,532 1.50 5,168,440 5.00
Tangible Capital
(to Tangible
Assets) 12,585,763 11.31 1,668,638 1.50 N/A
1998
----
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
</TABLE>
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.
28
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 11 BENEFIT PLANS
The Association had a defined contribution plan (the Plan) for
employees who have completed one year of service. The Association
terminated the plan in December, 1997. Contributions to the Plan were
$19,241 in 1998.
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 years
ended June 30, 1999 and 1998 was $31,727 and $33,053.
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, 1999 and June 30, 1998, the
outstanding balance of the note receivable was $838,465 and $944,265
and is presented as a reduction of stockholders' equity. ESOP
compensation expense for the years ended June 30, 1999 and 1998 was
$158,663 and $163,114.
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.
29
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 11 BENEFIT PLANS (Continued
The ESOP shares as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Shares released 10,580
Shares committed to be released for allocation 10,580
Unreleased shares 84,640
----------
Total ESOP shares 105,800
==========
Fair value of unreleased shares $1,015,680
==========
</TABLE>
The board of directors of the Company approved a Management
Recognition Plan ("MRP") for directors and employees. The MRP was
approved by the stockholders at the annual meeting in December, 1998.
The Company purchased in the open market 39,675 shares of it's common
stock, at a cost of $551,721, to fund the MRP. Under the terms of the
plan 31,736 shares of common stock were awarded to directors and
employees on December 15, 1998. The shares awarded pursuant to the MRP
have a vesting schedule which provides that 25% of the shares awarded
will automatically vest on the effective date of the award and 25%
will vest on each subsequent anniversary date. Compensation expense
related to the MRP was $165,537 for the year ended June 30, 1999.
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, 1999, the Association has
commitments to fund fixed rate mortgage loans of $1,047,000, with
interest rates from 6.75% to 10.00%, unfunded lines of credit of
$2,462,000, and letters of credit of $156,000. 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.
30
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 13 FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Association's financial instruments
are as follows:
<TABLE>
<CAPTION>
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 2,248,971 $ 2,248,971 $ 2,999,284 $ 2,999,284
Interest-bearing deposits 4,409,949 4,409,949 6,963,130 6,963,130
Mortgage backed securities 3,328,789 3,356,000 4,326,603 4,397,103
Securities held to maturity 310,000 310,308 310,000 308,253
FHLB stock 1,201,300 1,201,300 1,065,500 1,065,500
Loans receivable - net 98,433,182 100,396,000 81,359,296 83,496,000
Financial liabilities
Deposits 72,604,408 72,851,000 63,424,713 63,613,000
Advances from FHLB 22,685,000 22,214,000 17,890,000 17,920,000
</TABLE>
NOTE - 14 OTHER NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Advertising $ 65,210 $ 67,918
Stationery Supplies 97,047 72,926
Postage 74,431 70,745
Telephone 25,203 22,659
Dues and Subscriptions 31,103 26,063
Community Support 29,171 23,963
Bank Charges 33,222 35,272
Other 126,397 105,475
------------ ------------
$ 481,784 $ 425,021
============ ============
</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.
31
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 16 STOCKHOLDERS' EQUITY
In the year ended June 30, 1999, the Company purchased 23,781 shares
of its common stock, at a cost of $285,319, and retired the stock in
accordance with Colorado Revised Statutes
For the years ended June 30, 1999 and 1998, the Company paid a cash
dividend of $.60 and $.075 per share respectively.
NOTE - 17 IMPACT OF NEW ACCOUNTING STANDARDS
Accounting For Derivatives and Similar Financial Instruments and For
Hedging Activities. In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, which was subsequently amended by
Statement No. 137 regarding the effective date. 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, 2000.
Management, at this time, has not determined the impact of adopting
this statement on July 1, 2000.
Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise. In October 1998, the Financial Accounting Standards Board
issue Statement No. 134. The Statement amends Financial Accounting
Standards No. 65. Requiring the classification of any retained
mortgage-backed securities as trading securities if the entity commits
to sell the securities before or during the securitization process.
The Company adopted this pronouncement effective January 1, 1999, and
it did not have an effect on the Company.
NOTE - 18 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 - 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 such the Company
is not directly involved with programming changes or application
upgrades. The processor has indicated that renovations to their system
for year 2000 are complete. The Company will continue to test this
system as well as other systems for year 2000 compliance. 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. It is not possible to be certain that all aspects
of the year 2000 issue affecting the Company, including those related
to the efforts of customers, other financial institutions, suppliers,
or other third parties, will be fully resolved.
NOTE - 20 CONTINGENCIES AND COMMITMENTS
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.
The Association is building a new main office in Salida, Colorado. The
building has an estimated total cost of $2.5 million and is expected
to be completed in 2000. As of June 30, 1999, construction costs
totaled $231,863
32
<PAGE>
HIGH COUNTRY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 21 CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The following condensed statements summarize the financial position,
operating results and cash flows of High Country Bancorp, Inc.,
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and equivalents $ 3,391,725 $ 6,045,845
Investment in subsidiary 6,629,793 6,332,908
Note due from subsidiary 2,500,000 0
ESOP note receivable 838,465 944,265
Other 7,579 7,935
----------- -----------
$13,367,562 $13,330,953
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accruals $ 17,722 $ 66,000
Stockholders' equity 13,349,840 13,264,953
----------- -----------
$13,367,562 $13,330,953
=========== ===========
CONDENSED STATEMENT OF INCOME
For the year ended June 30, 1999 and
For the period December 9, 1997 to June 30, 1998
Equity in undistributed net income of subsidiary $ 746,886 $ 584,766
Other net 92,637 67,777
----------- -----------
$ 839,523 $ 652,543
=========== ===========
CONDENSED STATEMENT OF CASH FLOWS
For the year ended June 30, 1999 and
For the period December 9, 1997 to June 30, 1998
Operating Activities:
Net income $ 839,523 $ 652,543
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of
subsidiary (746,886) (584,766)
Other (26,326) 115,378
----------- -----------
Net cash provided by operations 66,311 183,155
----------- -----------
Investing Activities:
Investment in subsidiary 0 (5,798,142)
ESOP note payment 105,800 105,800
Loan to subsidiary (2,500,000) 0
Dividends received 450,000 50,000
----------- -----------
Net cash used in investing activities (1,944,200) (5,642,342)
----------- -----------
Financing Activities:
Proceeds from stock sale net of expenses 0 11,596,284
Purchase of common stock (285,319) 0
Dividends paid (490,912) (91,252)
----------- -----------
Net cash provided (used)by financing activities (776,231) 11,505,032
----------- -----------
Net increase (decrease) in cash (2,654,120) 6,045,845
Cash beginning 6,045,845 0
----------- -----------
Cash ending $ 3,391,725 $ 6,045,845
=========== ===========
</TABLE>
33
<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." As of September 15, 1999, there were1,284,719 shares of the
Common Stock issued and outstanding and approximately 357 holders of record of
the Common Stock (not including shares held in "street name").
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.
High Bid (1) Low Bid (1) Dividends Paid
------------ ----------- --------------
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
Fiscal 1999:
First Quarter 14.88 11.88 --
Second Quarter 14.13 10.25 0.20
Third Quarter 13.50 11.25 --
Fourth Quarter 12.06 10.00 0.20
- -------------------------
(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.
34
<PAGE>
HIGH COUNTRY BANCORP, INC.
BOARD OF DIRECTORS
<TABLE>
<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 1999 Annual Meeting of A copy of the Company's Annual
Certified Public Accountants Stockholders will be held on October Report on Form 10-KSB for the
La Junta, Colorado 21, 1999 at 5:00 p.m. at The Senior fiscal year ended June 30, 1999 as
Citizens Center, 305 F Street, Salida, filed with the Securities and
General Counsel Colorado 81210 Exchange Commission will be
Rush and Rush, P.C. furnished without charge to
Salida, Colorado Transfer Agent and Registrar stockholders as of the record date for
Illinois Stock Transfer the 1999 Annual Meeting upon
Special Counsel 233 West Jackson Boulevard written request to Richard A. Young,
Housley Kantarian & Bronstein, P.C. Suite 1210 Secretary, High Country Bancorp,
1220 19th Street, N.W., Suite 700 Chicago, Illinois 60606 Inc., 130 West 2nd Street, Salida,
Washington, D.C. 20036 Colorado 81201.
</TABLE>
<PAGE>
EXHIBIT 21.1
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>
Exhibit 23
[LETTERHEAD OF GRIMSLEY, WHITE & COMPANY
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As the independent certified public accountants 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, 1999.
September 15, 1999
/s/ Grimsley, White & Company
Grimsley, White & Company
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,248,971
<INT-BEARING-DEPOSITS> 4,409,949
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 3,638,789
<INVESTMENTS-MARKET> 3,665,907
<LOANS> 98,433,182
<ALLOWANCE> 909,471
<TOTAL-ASSETS> 114,013,699
<DEPOSITS> 72,604,408
<SHORT-TERM> 6,000,000
<LIABILITIES-OTHER> 696,059
<LONG-TERM> 16,685,000
0
0
<COMMON> 12,987
<OTHER-SE> 18,015,245
<TOTAL-LIABILITIES-AND-EQUITY> 114,013,699
<INTEREST-LOAN> 7,895,000
<INTEREST-INVEST> 254,651
<INTEREST-OTHER> 385,997
<INTEREST-TOTAL> 8,535,648
<INTEREST-DEPOSIT> 2,686,082
<INTEREST-EXPENSE> 3,920,193
<INTEREST-INCOME-NET> 4,615,455
<LOAN-LOSSES> 229,781
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,228,229
<INCOME-PRETAX> 1,346,829
<INCOME-PRE-EXTRAORDINARY> 1,346,827
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 839,523
<EPS-BASIC> .69
<EPS-DILUTED> .69
<YIELD-ACTUAL> 8.28
<LOANS-NON> 275,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 751,123
<CHARGE-OFFS> 85,828
<RECOVERIES> 14,176
<ALLOWANCE-CLOSE> 909,471
<ALLOWANCE-DOMESTIC> 909,471
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
