<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-12430
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HIGH POINT FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2426221
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Branchville Square, Branchville, New Jersey 07826
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(Address of principal executive offices) (Zip Code)
(201) 948-3300
--------------
(Registrant's telephone number, including area code)
------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of September 30, 1995 there were 3,745,760 shares outstanding of Common
Stock, no par value.
<PAGE>
HIGH POINT FINANCIAL CORP.
Form 10-Q Index
PAGE
Part I Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1995 (unaudited)
and December 31, 1994 3
Consolidated Statements of Operations - Unaudited Three Months
Ended September 30, 1995 and 1994 and Nine Months Ended
September 30, 1995 and 1994 4
Consolidated Statements of Cash Flow - Unaudited Nine Months
Ended September 30, 1995 and 1994 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Part II Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
2
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<TABLE>
<CAPTION>
Item 1. Financial Information
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
September 30, 1995 December 31,
ASSETS (unaudited) 1994
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<S> <C> <C>
Cash and due from banks $8,004 $9,818
Federal funds sold 13,500 7,300
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Total cash and cash equivalents 21,504 17,118
Interest bearing deposits with banks 125 124
Securities:
Available for sale, at fair value 31,601 31,670
Held to maturity, at cost (market value of $31,612 in 1995 and
$21,593 in 1994) 31,536 22,561
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Total securities 63,137 54,231
Loans held for sale at fair value 228 427
Loans 102,558 105,608
Less: Unearned income 36 52
Allowance for possible loan losses 4,801 5,234
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Net loans 97,721 100,322
Land held for sale 2,534 2,534
Premises and equipment - net 2,715 2,865
Accrued interest receivable 1,352 1,217
Other real estate (Note 2) 3,938 3,946
Other assets 1,992 1,857
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TOTAL ASSETS $195,246 $184,641
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Deposits:
Transaction accounts:
Interest bearing $24,588 $25,197
Non-interest bearing 34,777 34,778
Savings accounts 55,018 53,672
Time accounts (includes CDs $100 or over of $10,008 and $6,995 on
September 30, 1995 and December 31, 1994, respectively) 59,309 51,925
- --------------------------------------------------------------------------------------------------------
Total deposits 173,692 165,572
Federal funds purchased and securities sold under agreements to repurchase 3,340 2,621
Accrued expenses and other liabilities (Note 3) 2,679 2,343
Note payable 1,288 1,482
Redeemable subordinated debentures, 8.5% due March 1, 1997 510 510
Employee Stock Ownership Plan (ESOP) debt --- 150
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Total liabilities 181,509 172,678
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Commitments and Contingencies
Stockholders' equity
Preferred stock, authorized 1,000,000 shares, no shares issued ---- ----
Common stock, no par value; stated value $5 per share; authorized 5,000,000
shares, issued 3,745,760 shares in 1995 and 3,745,760 shares in 1994 18,729 18,729
Additional Paid-in-Capital 5,214 5,214
Accumulated Deficit (9,930) (10,334)
Common stock acquired by ESOP ---- (150)
Unrealized losses on securities available for sale (276) (1,496)
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Total stockholders' equity 13,737 11,963
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $195,246 $184,641
========================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
3
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS - (UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
1995 1994 1995 1994
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<S> <C> <C> <C> <C>
INTEREST INCOME
Interest income and fees on loans $2,360 $2,293 $7,005 $6,833
Interest on securities:
Taxable interest income 953 664 2,622 1,711
Non-taxable interest income ---- ---- ---- ----
Interest on deposits with banks 1 (2) 2 2
Interest on federal funds sold 195 98 501 240
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TOTAL INTEREST INCOME 3,509 3,053 10,130 8,786
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INTEREST EXPENSE
Interest on deposits 1,370 1,031 3,858 3,110
Interest on other borrowed money 31 17 92 38
Interest on debentures 11 11 33 33
Interest on note payable 33 55 105 165
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TOTAL INTEREST EXPENSE 1,445 1,114 4,088 3,346
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NET INTEREST INCOME 2,064 1,939 6,042 5,440
Less: Provision for possible loan losses ---- ---- 225 ----
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NET INTEREST INCOME AFTER PROVISION FOR 2,064 1,939 5,817 5,440
POSSIBLE LOAN LOSSES
NON-INTEREST INCOME
Service charges on deposit accounts 334 356 999 1093
Other service charges, commissions and fees 201 178 493 626
Gain (loss) on the sales of securities --- (118) 6 (256)
Gain (loss) on the sales of loans 5 3 19 (26)
Gain on sale of bank premises 29 37 103 109
Other income 41 38 121 113
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TOTAL NON-INTEREST INCOME 610 494 1,741 1,659
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NON-INTEREST EXPENSE
Salaries and employee benefits 1,101 1,169 3,411 3,444
Net occupancy expense 248 229 731 703
Equipment expense 129 140 400 423
Legal expense 93 128 208 420
Net cost of operation of other real estate 252 33 494 146
Other expenses 511 625 1,898 1,838
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TOTAL NON-INTEREST EXPENSE 2,334 2,324 7,142 6,974
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Income before provision (benefit) from income taxes 340 109 416 125
Provision (benefit) for income taxes 4 6 13 (105)
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NET INCOME $336 $103 $403 $230
==========================================================================================================================
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $0.09 $0.03 $0.11 $0.08
==========================================================================================================================
WEIGHTED AVERAGE COMMON SHARE
AND COMMON SHARE EQUIVALENTS 3,746 2,474 3,746 2,837
==========================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
4
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars in thousands) Nine Months Ended September 30,
--------------------------------------
1995 1994
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<S> <C> <C>
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net $403 $230
cash provided by operating activities:
Depreciation and amortization 320 301
Amortization of securities discount, net 82 236
Loan fees amortized, net (16) (33)
Provision for possible loan losses 225 ----
Deferred income tax benefit ---- (126)
(Gain) Loss on sale of securities (6) 256
Gain on sale of premises and equipment (103) (109)
Increase in accrued interest receivable and other assets (262) 846
Increase (decrease) in accrued expenses and other liabilities 447 117
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,090 1,718
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INVESTING ACTIVITIES
Proceeds from sale of securities:
Available for sale 2,222 8,174
Proceeds from maturity of securities:
Available for sale 2,755 3,537
Held for maturity 893 2,408
Purchase of securities:
Available for sale (3,717) (10,682)
Held for maturity (9,915) (11,321)
Net (increase) decrease in interest bearing deposits (1) 200
Net decrease in loans 2,591 4,037
Capital expenditures (198) (197)
Proceeds from sale of premises and equipment 21 ----
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NET CASH USED IN INVESTING ACTIVITIES (5,349) (3,844)
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FINANCING ACTIVITIES
Net increase (decrease) in deposits 8,120 (3,846)
Increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 719 (318)
Repayments of long-term debt principal (194) (76)
Proceeds from sale of common stock, net of expenses ---- 4,422
Proceeds from conversion of equity contracts ---- 100
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NET CASH PROVIDED BY FINANCING ACTIVITIES 8,645 282
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Net increase (decrease) in cash and cash equivalents 4,386 (1,844)
Cash and cash equivalents, beginning of year 17,118 15,353
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CASH AND CASH EQUIVALENTS, END OF YEAR $21,504 $13,509
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $3,864 $3,360
INCOME TAXES PAID (REFUNDED) 4 (109)
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</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
5
<PAGE>
Notes to Consolidated Financial Statements - (Unaudited)
Note 1. Basis of Presentation:
The accompanying consolidated financial statements of High Point Financial
Corp.("High Point") and its subsidiary, The National Bank of Sussex County
("NBSC"), reflect all adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation of interim results. All references
in this document to the "Company" refer to the consolidated company which
includes High Point and NBSC. The financial information has been prepared in
accordance with the Company's customary accounting practices and has not been
audited.
Certain information and footnote disclosures required under generally accepted
accounting principles have been condensed or omitted pursuant to the SEC rules
and regulations. These interim financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the High Point Financial Corp. Annual Report on Form 10-K for the
year ended December 31, 1994.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the year.
Note 2. Specific Reserves on Other Real Estate:
It is the Company's policy to establish specific reserves on properties included
in other real estate when the appraised fair value of the property does not
include certain estimated costs of disposition. When the disposition costs are
actually incurred, a charge-off is made to the specific reserve. The following
chart shows a comparative analysis of the year-to-date charge-offs and
provisions made to the specific reserves for the nine months ended September 30,
1994 and 1995.
September 30, September 30,
(dollars in thousands) 1995 1994
- -------------------------------------------------------------------------------
Beginning balance, January 1* $660 $91
Provisions 114 100
Charge-offs (500) (10)
-------------- --------------
Ending balance $274 $181
============== ==============
*Prior years balances adjusted for restatement of insubstance foreclosure
reserves to the allowance for possible loan losses per the requirements of
Statement of Financial Accounting Standards No. 114 - "Accounting by Creditors
for Impairment of a Loan."
Note 3. Interest:
Accrued expenses and other liabilities includes accrued interest expense of
$613,000 at September 30, 1995 and $386,000 at December 31, 1994.
Note 4. Related Party Transactions:
Net occupancy expense includes rent on certain properties leased from FMI, Inc.,
a wholly owned subsidiary of Franklin Mutual Insurance Company. Franklin Mutual
Insurance Company owns 6.7% of the outstanding Common Stock of High Point. Rent
paid to FMI, Inc. was $278,000 for both the first nine months of 1994 and 1995.
Note 5. Net Income Per Share:
Net income per share is calculated based on the weighted average number of
common share and common share equivalents outstanding during each period,
adjusted for the effects of stock dividends if any. Shares issuable under the
cancelable mandatory stock purchase contracts have been excluded from the
computations for 1994 and 1995 since their effect is immaterial. The net income
per share calculation has been computed using the modified treasury stock
method.
Fully diluted net income per share is not presented because it approximates
primary net income per share.
Note 6. Impaired Loans
NBSC adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and
SFAS No. 118, Accounting by Creditors for Impairment of a Loan, Income
Recognition and Disclosures, as of January 1, 1995. SFAS No. 114 requires that
certain impaired loans be measured based on the present value of
6
<PAGE>
expected future cash flows discounted at the loan's original effective interest
rate. As a practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance.
NBSC had previously measured the allowance for credit losses using methods
similar to those prescribed in SFAS No. 114. Adoption of these statements did
not require any additional allowance for possible loan losses as of January 1,
1995.
As of September 30, 1995, NBSC's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 are as follows:
September 30, 1995
-----------------------------
Recorded Valuation
(in thousands) Investment Allowance
---------- ---------
Impaired loans:
Valuation allowance required $3,810 $1,008
No valuation allowance required --- ---
-----------------------------
Total impaired Loans $3,810 $1,008
-----------------------------
This valuation allowance is included in the allowance for loan losses on the
balance sheet.
The average recorded investment in impaired loans for the nine months ended
September 30, 1995 was $5,795,000.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining investment is doubtful in which case payments
received are recorded as reductions of principal. NBSC recognized interest
income on impaired loans of $104,000 for the nine months ended September 30,
1995. These loans are on non-accrual and are classified as impaired because
doubt exists regarding the borrowers' ability to pay both principal and interest
as originally agreed. Interest payments are recorded on a cash basis because the
loans are sufficiently collateralized to ultimately repay the outstanding
principal balance should the property collateralizing the debt be taken in
foreclosure proceedings.
In accordance with SFAS No. 114, a loan is classified as foreclosed property
when the bank has taken possession of the collateral, regardless of whether
formal proceedings take place. This is a change from previous accounting for
insubstance foreclosed property under provisions of SFAS No. 15. SFAS No. 114
requires classification as foreclosed property based on actual possession
whereas previous practice classified certain loans as insubstance foreclosures
prior to possession based on characteristics of the borrower and underlying
collateral. As a result of adopting SFAS No. 114, loans of approximately
$1,048,000 no longer qualify as insubstance foreclosures based on possession
criteria, and therefore have been reclassified from other assets to loans as of
January 1, 1995. Prior periods also were restated since the amounts were
material.
At September 30, 1995, NBSC had $1.5 million of loans that resulted from
troubled debt restructurings that occurred prior to the adoption of SFAS No.
114. The effect on income if interest on such troubled debt restructurings had
been recognized at original contractual rates during the year was not material.
At September 30, 1995, NBSC was not committed to lend any additional funds to
any borrower with loans whose terms have been modified in troubled debt
restructurings.
Item 2. Managements' Discussion and Analysis of Financial Condition and Results
of Operations
Summary
See Managements' Discussion and Analysis of Financial Condition and Results of
Operations included in High Point Financial Corp.'s Annual Report on Form 10-K
for the period ended December 31, 1994.
For the nine months ended September 30,1995, the Company's net income was
$403,000 compared to net income of $230,000 for the same period in 1994, an
increase of $173,000 or 75.2%. Net income per share for the first nine months in
1995 was $0.11 compared to net income per share of $0.08 for the same period
last year. There were notable differences in the components of net income from
the first nine months of 1994 to the same period in 1995. In the first nine
months of 1994, the Company recorded no provision for possible loan losses in
comparison to a $225,000 provision for 1995. For the first nine months of 1994,
the Company recorded a tax refund of $126,000 attributable to the 1993 net
operating loss carryback. In comparison, the Company recorded a state tax
provision for the first nine months of 1995. For the nine months ended September
30, 1995, net income before taxes was $416,000 compared to $125,000 in net
income before taxes for the same period in 1994. The major reason why net income
before taxes increased in 1995 was a $602,000 increase in net interest income.
This increase is discussed in further detail under "Results of Operations" on
page 8.
7
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At September 30, 1995, the consolidated assets of the Company were approximately
$195.2 million, an increase of $10.6 million or 5.7% from the $184.6 million
reported December 31,1994. Return on average assets was 0.28% for the first nine
months of 1995 compared to the 0.13% reported for the first nine months of 1994.
Return on average equity was 4.08% for the first nine months of 1995 compared to
2.13% for the same period in 1994.
Results of Operations
Total interest income increased from $8,786,000 reported on September 30, 1994
to $10,130,000 for September 30, 1995, an increase of $1,344,000 or 15.3%.
Average earning assets net of non-accrual loans increased from $151.9 million in
the first nine months of 1994 to $166.6 million in the first nine months of
1995, an increase of $14.7 million or 9.7%. Interest income increased $879,000
as a result of an increase in the volume of earning assets. Interest income
increased $465,000 due to an increase in rates.
While the amount of loans on non-accrual continues to impact interest income and
fees on loans, average non-accruals continued to decline from $11,940,000 in the
first nine months of 1994 to $6,943,000 for the first nine months of 1995, a
decline of 41.9%. Interest lost on non-accrual loans was approximately $879,000
for the first nine months of 1994 compared to $458,000 for the first nine months
of 1995.
Total interest expense increased from $3,346,000 in the first nine months of
1994, to $4,088,000 in the first nine months of 1995, an increase of $742,000 or
22.2%. The major contributing factor of the increase in interest expense was an
increase in the average rates paid on interest bearing liabilities from 3.32% in
the first nine months of 1994 to 3.91% in the first nine months of 1995.
Interest expense increased $124,000 due to an increase in volume and $618,000
due to this increase in the cost of funds. Also contributing to the increase in
interest expense was a shift from short-term transaction deposits to long-term
higher paying certificates of deposit.
Net interest income for the first nine months of 1995 was $6,042,000 compared to
$5,440,000 for the same period in 1994, an increase of $602,000 or 11.1%. A
$225,000 provision for loan losses was recorded for the first nine months of
1995 compared to no provision for the same period in 1994. For further
information, see discussion under "Financial Condition" on Page 9.
Total non-interest income increased from $1,659,000 for the first nine months of
1994 to $1,741,000 for the first nine months of 1995, an increase of $82,000 or
4.9%. Service charges on deposit accounts declined $94,000 as a result of
management's decision to reduce service charges assessed on deposit accounts in
order to attract additional deposits. Other service charges, commissions and
fees declined $133,000 as a result of a decline in commissions on annuities and
brokerage services. Offsetting these reductions in service charges were gains in
sales of securities and loans totaling $25,000 year-to-date 1995 compared to
losses totaling $282,000 for the first nine months of 1994.
Total non-interest expense increased from $6,974,000 reported in the first nine
months of 1994 to $7,142,000 in the first nine months 1995, an increase of
$168,000 or 2.4%. Salaries and employee benefit expense decreased $33,000 or
0.9% from the first nine months of 1994 to the first nine months of 1995 as a
result of a decline in staffing levels partially offset by merit increases.
Included in the increase in non-interest expense was an increase in other real
estate expense of $494,000, because gains on sales of property were not recorded
in 1995 to the same extent as in 1994. Partially offsetting the increase in ORE
expenses was a decrease in legal expenses resulting from a decline in non-
performing loans. Other expenses increased from $1,838,000 to $1,898,000, an
increase of $60,000 or 3.3%. Included in the increase in other expenses was an
increase in marketing expenses to promote NBSC's products, offset by reductions
in FDIC expense and other expenses.
Quarter to Quarter Analysis
Net income for third quarter 1995 was $336,000 compared to $103,000 for the same
quarter last year, an increase of $233,000. Net income per share was $0.09 per
share for third quarter 1995 compared to $0.03 for the same period last year.
Return on average assets and return on average equity for third quarter 1995 was
0.69% and 10.03%, respectively compared to the third quarter 1994 when return on
average assets and return on average equity were 0.22% and 3.19%, respectively.
Total interest income increased $456,000 or 14.9% from the third quarter of 1994
to the third quarter of 1995. Interest income on average earning assets
increased $342,000 due to an increase in volume and $114,000 due to an increase
in rates of earning assets. The average amount of loans on non-accrual for third
quarter 1995 and third quarter 1994 were $5,365,000 and $10,406,000
respectively. Interest lost on loans on non-accrual for third quarter 1995 and
third quarter 1994 were $131,000 and $259,000, respectively.
8
<PAGE>
Total interest expense increased $331,000 or 29.7% for the third quarter of 1995
when compared to the same period in 1994. Interest expense increased $80,000 due
to an increase in the volume of interest bearing liabilities and $251,000 due to
increases in rates.
Net interest income for the third quarter of 1995 increased $125,000 from the
same period last year. There was no provision for possible loan losses recorded
in third quarter 1995 or third quarter 1994.
Total non-interest income increased $116,000 or 23.5% from third quarter 1994 to
third quarter 1995. This increase primarily consists of recording net gains on
the sales of securities and loans of $5,000 in third quarter 1995 compared to
recording net losses on sales of securities and loans of $115,000 during the
same period last year. Service charges on deposit accounts declined $22,000 from
third quarter 1994 to third quarter 1995. Other service charges, commissions and
fees increased $23,000 resulting from an increase in commissions received on
brokerage services from third quarter 1994.
Total non-interest expense increased from $2,324,000 reported in the third
quarter 1994 to $2,334,000 for the third quarter in 1995, an increase of $10,000
or 0.4%. Significant increases occurred in net cost of operation of other real
estate owned and other expenses. Net cost of operation of other real estate was
$252,000 for the third quarter of 1995 compared to $33,000 for the same period
in 1994, an increase of $219,000. Offsetting this increase was a decrease in
salaries and employee benefit expense of $68,000 or 5.8%. Legal expenses also
decreased $35,000 or 27.3%. Other expenses decreased $114,000 in the third
quarter of 1995 compared to the same period in 1994. Decreases in other expenses
included a $45,000 decrease in FDIC assessment fees due to the rebate received
at the end of third quarter 1995. Because of the reduction in FDIC fees, the
Company expects to pay $30,000 less per quarter and $120,000 less annually in
FDIC fees assuming deposit levels remain the same. Marketing expense also
decreased by $29,000.
Financial Condition
At September 30, 1995, loans, net of unearned income, were $102.6 million
compared to $105.6 million reported December 31, 1994, a decrease of $3.0
million, or 2.8%. There were $228,000 in loans held for sale as of September 30,
1995, compared to $427,000 at year-end 1994. Mortgage loans, including those
held for sale, decreased $100,000, from $22.0 million at December 31, 1994 to
$21.9 million at September 30, 1995. During the first nine months of 1995, $2.9
million in mortgages have been sold in the secondary market offset by $2.8
million in new mortgages net of repayments. Commercial loans declined from $66.8
million on December 31, 1994 to $59.9 million on September 30, 1995, a decrease
of $6.9 million or 10.3%. Real estate construction loans increased from $3.2
million on December 31, 1994 to $3.8 million on September 30, 1995. Installment
loans increased during this period from $13.8 million to $17.1 million, an
increase of $3.3 million or 23.9%. The overall decrease of $3.0 million in total
loans results from repayments and sales exceeding new loan demand.
Since December 31, 1994, the Company's total securities portfolio increased $8.9
million. Purchases of securities in the held to maturity portfolio totaled $9.9
million. Maturities of securities in the held to maturity portfolio were
$893,000. Purchases in the available for sale portfolio totaled $3.7 million. In
the first nine months of 1995, sales of securities totaled $2.2 million from the
available for sale portfolio with losses on sales of securities of $6,000.
Maturities of available for sale securities totaled $2.8 million. As of
September 30,1995, the Company had an unrealized loss of $192,000 on securities
in the available for sale portfolio and $84,000 on certain securities that were
previously available for sale but were transferred to held to maturity. On March
31, 1994, in response to a revised policy by the Federal Financial Institutions
Examination Council (FFIEC), NBSC transferred approximately $6.0 million of its
collateralized mortgage obligations from an available for sale classification
into held to maturity at their aggregate market value. The unrealized loss of
$138,000 on these securities as of March 31, 1994 is included as a reduction to
shareholders' equity and is being amortized over the life of the securities. At
September 30, 1995, there were $31.6 million in securities classified as
available for sale. Securities available for sale are those which are held for
an indefinite period of time which management may use as part of its operating
strategy or which may be sold as part of responses to changes in interest rates,
changes in prepayment risk or other similar factors. Securities available for
sale are recorded on the balance sheet at their fair value.
Total deposits increased from approximately $165.6 million on December 31, 1994
to approximately $173.7 million on September 30, 1995, an increase of $8.1
million or 4.9%. During this period, time deposits increased $7.4 million or
14.3%. Balances in non-interest bearing transaction accounts stayed
approximately the same and interest bearing transaction accounts declined
$609,000 as many depositors began to invest in long term CDs rather than short-
term transaction accounts.
9
<PAGE>
Non-performing loans, as the schedule below indicates, were $6.7 million at
September 30, 1995, a decrease of $6.2 million or 48.1% from the $12.9 million
reported year-end 1994. In addition, non-performing loans decreased $8.5 million
or 55.9% from September 30, 1994.
<TABLE>
<CAPTION>
Non-performing assets at
(dollars in thousands) 9/30/95 6/30/95 3/31/95 12/31/94 9/30/94
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Loans past due over 90 days $ 188 $ 363 $ 129 $ 289 $ 275
Loans on non-accrual(1) 4,993 6,319 7,581 8,435 11,380
Troubled debt restructurings(2) 1,522 1,579 4,007 4,164 3,547
-----------------------------------------------------------
Total non-performing loans 6,703 8,261 11,717 12,888 15,202
Other real estate(3) 3,939 4,661 4,273 3,946 4,996
----------------------------------------------------------
Total non-performing assets $10,642 $12,922 $15,990 $16,834 $20,198
============================================================
</TABLE>
(1)Includes loans previously accounted for as in-substance foreclosure now
accounted for as non-accrual loans according to SFAS No. 114.
(2)Troubled debt restructurings as defined in SFAS No. 15 "Accounting by Debtors
and Creditors for Troubled Debt Restructurings" which occurred prior to the
adoption of SFAS No. 114; excludes loans classified as past due over 90 days
or non-accrual.
(3)Other real estate is net of specific reserves of $660,000 at December 31,1994
and $274,000 at September 30, 1995. In the first nine months of 1995,
$500,000 was charged to the specific reserve offset by a provision of
$114,000.
Non-accrual loans have decreased from $11.4 million reported September 30, 1994
to $8.4 million at year-end 1994 to $5.0 million at September 30, 1995. Other
real estate decreased from $5.0 million on September 30, 1994 to $3.9 million on
December 31, 1994. Other real estate decreased $7,000 in the first nine months
of 1995. Generally, other real estate is appraised when title is taken on the
property unless there is a contract of sale or there is a current appraisal on
file which conforms to regulatory guidelines. Upon transfer of the property or
receipt of a new appraisal, the property's carrying value is adjusted to its
appraised value less estimated costs of disposition if such value is lower than
its existing carrying value. Any reduction of the carrying value of the
underlying collateral is charged to the allowance for possible loan losses when
the property is recorded as other real estate. Appraisals thereafter are
received in accordance with regulatory guidelines. Throughout the year,
properties are generally inspected and marketing efforts reviewed to determine
any potential deterioration in value. Based on this continuing review and
results of updated appraisals as required, any further deterioration to the
market value is expensed to the net cost of operation of other real estate.
During the first nine months of 1995, NBSC classified $1,545,000 in new
properties as other real estate. Properties that were sold totaled $1,332,000.
There was $220,000 in direct writedowns and provisions to reserve for other real
estate in the first nine months of 1995.
Loans classified by management but not included above as non-performing assets
at September 30, 1995 include $5.2 million classified as "special mentioned" and
$11.2 million classified as "substandard." These loans as of September 30, 1995
were not past due over 90 days. As part of management's evaluation for the
allowance for possible loan losses, it has provided specific reserves for these
loans as deemed necessary.
The allowance for possible loan losses decreased from $5.2 million on December
31, 1994 to $4.8 million on September 30, 1995. The following chart indicates
the quarterly levels of loans charged off, recoveries of previously charged off
loans, provisions made to the allowance, quarterly ending balances of the
allowance, and the ratio of the allowance to non-performing loans.
<TABLE>
<CAPTION>
For the quarter ended
-------------------------------------------------------------
(dollars in thousands) 9/30/95 6/30/95 3/31/95 12/31/94 9/30/94
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance* $4,954 $5,117 $5,234 $5,198 $5,129
Loans charged-off (254) (308) (403) (1653) (68)
Loans recovered 101 95 111 424 87
-------------------------------------------------------------
Net (charge-offs) recoveries (153) (213) (292) (1229) (19)
Provision 0 50 175 1265 50
-------------------------------------------------------------
Ending balance $4,801 $4,954 $5,117 $5,234 $5,198
=============================================================
Ratio of allowance for possible
loan losses to non-performing loans 71.6% 60.0% 43.7% 40.6% 34.2%
=============================================================
</TABLE>
*Prior years balances and provisions adjusted for restatement of insubstance
foreclosure reserves to the allowance for possible loan losses per the
requirements of SFAS No. 114.
10
<PAGE>
A provision for possible loan losses of $225,000 was recorded for the first nine
months of 1995. NBSC's ratio of the allowance for possible loan losses to non-
performing loans is lower than regional and national peer statistics but has
increased substantially from the 34.2% reported September 30, 1994 to 71.6% on
September 30, 1995 as a result of provisions made in December 31, 1994 and
during 1995 and as a result of declines in non-performing loans. NBSC's
management believes that its allowance for possible loan losses is adequate
because of the nature of its methodology to monitor the allowance for possible
loan losses. NBSC performs the following procedures in order to evaluate the
adequacy of the allowance for possible loan losses. First, NBSC conducts a loan
specific review each quarter. This review assesses the estimated future losses
for every loan classified as non-performing, as well as performing loans which
have been criticized (either internally or by NBSC's regulators) which do not
meet the requirements for non-performing loan status. Second, management
monitors on a periodic basis the status of larger non-criticized credits for
changes and developments which could affect future collectibility. Third, NBSC
assesses the potential for loan losses in performing loans and off balance sheet
credit commitments, which are not specifically reviewed, by estimating general
reserve requirements based on historical and anticipated collection statistics.
The aggregate of specific credit review and general reserve requirements are
monitored at least quarterly to ensure that the level of NBSC's allowance for
possible loan losses is adequate. Management also evaluates the adequacy of the
allowance for possible loan losses based on trends in non-performing loans and
charge-offs, the Company's loan loss experience and present and anticipated
economic conditions within the market area. Included in the economic analysis is
a review of appraisals received in accordance with regulatory guidelines.
Management incorporates any trends in the fair value of the collateral
underlying loans in its analysis of the adequacy of the allowance for possible
loan losses. As a result of this ongoing analysis, management believes at this
time that the allowance for possible loan losses is adequate to absorb any
additional losses that may arise in the loan portfolio, although no assurances
can be given that the Company will not sustain losses in any given period which
could be substantial in relation to the size of the Company's allowance.
Capital Resources
Stockholders' equity increased $1.7 million during the first nine months of 1995
to $13.7 million. The increase in stockholders' equity resulted not only from
recording net income in the first nine months of 1995, but also from a $1.2
million decline in unrealized losses on securities available for sale and the
payment in full of the ESOP debt. The book value (total of stockholders' equity
divided by the number of common shares issued and outstanding) of the Company's
common stock was $3.67 at September 30, 1995 compared to the $3.19 reported at
December 31,1994.
The following chart represents the capital ratios of the Company and its
subsidiary, NBSC, on September 30, 1995, compared to minimum regulatory
requirements:
The Company NBSC
----------- ----
Minimum Minimum
Required (2) 9/30/95 Required (1) 9/30/95
- --------------------------------------------------------------------------------
Leverage Ratio 3.00% 7.17% 6.00% 6.28%(1)
Risk Based:
Tier I 4.00% 13.14% 4.00% 11.76%
Tier I plus Tier II 8.00% 14.91% 8.00% 13.05%
(1) Pursuant to its consent order with the OCC, NBSC must maintain a 6% leverage
ratio.
(2) The Federal Reserve Bank requires bank holding companies that are considered
to be strong banking organizations to maintain a minimum ratio of 3%. Bank
holding companies that do not meet the applicable regulatory standards are
required to maintain higher capital ratios. To date, the Federal Reserve Bank
has not stipulated any definitive ratio for High Point.
Liquidity
At NBSC, liquidity is typically provided by funds received through customer
deposits, investment sales and maturities, borrowings and net income. NBSC's
management believes the portfolio of securities available for sale, cash and due
from banks and federal funds sold currently provide sufficient liquidity to meet
anticipated operational liquidity requirements at NBSC. In addition, the sale of
loans is an alternative method for meeting liquidity requirements.
At High Point, liquidity is provided by funds received from NBSC in the form of
dividends and by sale of High Point assets. As stipulated in the Consent Order
that NBSC has with the Office of the Comptroller of the Currency (the "OCC"),
NBSC is precluded from paying dividends to High Point, and NBSC cannot
anticipate when it will resume dividend payments to High Point. High Point under
the terms of its written agreement with
11
<PAGE>
the Federal Reserve Bank (FRB), is prohibited from paying dividends to its
shareholders without prior approval by the FRB. High Point cannot anticipate
when it will resume dividend payments.
High Point's major cash flow requirements are to meet the monthly principal,
interest and fee payments totaling approximately $24,000 on its note payable and
to pay the quarterly interest payments of $11,000 to its Redeemable Subordinated
Debenture holders. High Point also incurs legal fees, printing expenses,
external auditing fees and other miscellaneous fees to be paid throughout the
year. The remaining obligation of $1.1 million to the lending bank on the note
secured by land is due in a final balloon payment on January 2, 1998. High Point
plans to meet this obligation through the disposition of the land held for sale
although no assurance can be given that such a transaction or series of
transactions will result to meet this obligation. The land held for sale has
generated some limited interest during 1995. The levels of interest and/or time
frames requested for closure by interested parties have not provided High Point
with any indication that a sale will be consummated in the near future.
Under the loan agreement that the note secures, High Point is required to
maintain Consolidated Tangible Net Worth (defined as (A) shareholders' equity
(including the value of common stock and debentures) less (B) intangible assets)
of $10.0 million. At December 31, 1994 and at September 30, 1995, High Point had
Consolidated Tangible Net Worth of $12,473,000 and $14,247,000, respectively.
At September 30, 1995, High Point had $5,000 in cash and $575,000 in federal
funds sold available to meet its liquidity needs. High Point has $125,000 in an
escrow account to service the note payable. Also, High Point has securities
available for sale, which at September 30, 1995, had a market value of $233,000.
Effect Of Interest Rates
Interest rate changes potentially could affect NBSC's ability to earn net
interest income in the future. One tool that NBSC uses to measure the potential
impact from interest rate changes is the static gap report. The static gap
report shows when certain interest-earning assets and interest-bearing
liabilities could potentially reprice. Traditional gap theory holds that when a
bank is asset-sensitive (meaning that it has more interest rate-sensitive assets
repricing within a given time frame than interest rate-sensitive liabilities)
and interest rates increase, the bank's net interest margin should increase. If
a bank is liability-sensitive (meaning that it has more liabilities repricing in
a given time frame than assets), and interest rates increase, the net interest
margin should decrease. As of September 30, 1995, the Company's interest rate-
sensitive liabilities exceeded its interest rate-sensitive assets by $16.9
million, excluding non-interest bearing demand deposits (which are not affected
by interest rate changes). What gap theory does not take into account is that
when interest rate changes occur they do not always affect rate-sensitive assets
at the same time or proportionately. In addition to gap analysis, management
uses simulation modeling under a variety of scenarios to estimate NBSC's
interest rate sensitivity. Based on management's analysis of NBSC's interest
rate sensitivity, NBSC appears to be asset sensitive due to the high amount of
savings and interest bearing demand balances whose rates do not tend to
fluctuate at the same time or to the same extent as prime rate. If interest
rates were to increase by 100 basis points, NBSC's net interest income would
increase approximately $75,000 annually. Conversely, if interest rates were to
decrease 100 basis points, NBSC's net interest income would decrease by $75,000
annually.
12
<PAGE>
HIGH POINT FINANCIAL CORP. Computation of Net Income Per Share - (Unaudited)
Nine months ended September 30,
-------------------------------
Net Income Per Share (Primary) 1995 1994
----------------------------------------------------------------------------
Net income $403,000 $230,000
After-tax interest expense related to the assumed
reduction of outstanding debt* - -
----------------------------------------------------------------------------
(1) Income applicable to common stock $403,000 $230,000
============================================================================
Shares used in this computation:
Weighted average number of common shares
outstanding 3,745,760 2,836,637
Number of shares issuable on conversion of
mandatory stock purchase contracts and exercise
of stock options classified as common share
equivalents* - -
----------------------------------------------------------------------------
(2) Adjusted weighted average number of common
shares and common share equivalents * 3,745,760 2,836,637
============================================================================
Net income per common share and common share
equivalents (primary) (1 divided by 2) * $0.11 $0.08
============================================================================
The after-tax interest expense related to the assumed reduction of
outstanding debt, the number of shares issuable on conversion of mandatory
stock purchase contracts classified as common share equivalents are excluded
from the 1994 and 1995 computation since their effect is immaterial.
13
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11. Computation of net income per share is filed with Part I
of this report.
(b) Reports on Form 8-K.
None.
14
<PAGE>
SIGNATURE
Pursuant to the requirements 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 Point Financial Corp.
(Registrant)
Dated: November 13, 1995
- ---------------------------------
By /s/ Rita A. Myers By /s/ Gregory W. A. Meehan
- --------------------------------- ----------------------------------
Rita A. Myers Gregory W. A. Meehan
Comptroller Vice President and Treasurer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 8004
<INT-BEARING-DEPOSITS> 125
<FED-FUNDS-SOLD> 13500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31601
<INVESTMENTS-CARRYING> 31536
<INVESTMENTS-MARKET> 0
<LOANS> 102750
<ALLOWANCE> 4801
<TOTAL-ASSETS> 195246
<DEPOSITS> 173692
<SHORT-TERM> 3340
<LIABILITIES-OTHER> 2679
<LONG-TERM> 1798
<COMMON> 18729
0
0
<OTHER-SE> (4992)
<TOTAL-LIABILITIES-AND-EQUITY> 195246
<INTEREST-LOAN> 7005
<INTEREST-INVEST> 2622
<INTEREST-OTHER> 503
<INTEREST-TOTAL> 10130
<INTEREST-DEPOSIT> 3858
<INTEREST-EXPENSE> 230
<INTEREST-INCOME-NET> 6042
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 7142
<INCOME-PRETAX> 416
<INCOME-PRE-EXTRAORDINARY> 416
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 403
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
<YIELD-ACTUAL> 8.11
<LOANS-NON> 4993
<LOANS-PAST> 188
<LOANS-TROUBLED> 1522
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4954
<CHARGE-OFFS> 254
<RECOVERIES> 101
<ALLOWANCE-CLOSE> 4801
<ALLOWANCE-DOMESTIC> 4801
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
