<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, 1996
-------------------
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
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
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(Registrant's telephone number, including area code)
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(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, 1996 there were 3,786,480 shares outstanding of Common
Stock, no par value.
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HIGH POINT FINANCIAL CORP.
Form 10-Q Index
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PAGE
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Part I Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1996 (unaudited) and December 31, 1995 1
Consolidated Statements of Operations - Unaudited Three Months Ended September 30,
1996 and 1995 and Nine Months Ended September 30, 1996 and 1995 2
Consolidated Statements of Cash Flow - Unaudited Nine Months Ended September 30,
1996 and 1995 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 5
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
</TABLE>
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Item 1. Financial Information
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
September 30, 1996 December 31,
ASSETS (unaudited) 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $10,844 $11,290
Federal funds sold 9,750 11,150
- ---------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 20,594 22,440
Interest bearing deposits with banks 124 125
Securities:
Available for sale, at fair value 54,640 49,304
Held to maturity, at cost (market value of $22,610 in 1996 and
$15,483 in 1995) 22,723 15,392
- ---------------------------------------------------------------------------------------------------------------------
Total securities 77,363 64,696
Loans held for sale 104 628
Loans 110,970 104,863
Less: Unearned income (4) 30
Allowance for possible loan losses 3,961 4,609
- ---------------------------------------------------------------------------------------------------------------------
Net loans 107,013 100,224
Land held for sale 1,885 2,135
Premises and equipment - net 2,757 2,692
Accrued interest receivable 1,306 1,388
Other real estate (Note 2) 1,000 2,741
Other assets 5,919 3,115
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TOTAL ASSETS $218,065 $200,184
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------
Deposits:
Transaction accounts:
Interest bearing $27,419 $25,092
Non-interest bearing 40,331 38,334
Savings accounts 58,766 55,832
Time accounts (includes CDs $100 or over of $9,476 and $9,372 on September 30, 1996
and December 31, 1995, respectively) 62,524 59,067
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 189,040 178,325
Securities sold under agreements to repurchase 5,189 2,959
Accrued expenses and other liabilities (Note 3) 3,190 2,561
Note payable 1,214 1,270
Redeemable subordinated debentures, 8.5% due March 1, 1997 127 511
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 198,760 185,626
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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 3,786,480 shares in 1996 and 3,745,760 shares in 1995 18,932 18,729
Additional Paid-in-Capital 5,791 5,214
Accumulated Deficit (5,328) (9,629)
Unrealized gain (loss) on securities available for sale, net of taxes (90) 244
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 19,305 14,558
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $218,065 $200,184
=====================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
1
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CONSOLIDATED STATEMENTS OF OPERATIONS - (UNAUDITED)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
- -------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest income and fees on loans $2,337 $2,360 $6,906 $7,005
Interest on securities:
Taxable interest income 1,171 953 3,228 2,622
Interest on deposits with banks - 1 1 2
Interest on federal funds sold 156 195 471 501
- -------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 3,664 3,509 10,606 10,130
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INTEREST EXPENSE
Interest on deposits 1,386 1,370 4,067 3,858
Interest on other borrowed money 39 31 114 92
Interest on debentures 3 11 14 33
Interest on note payable 28 33 87 105
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TOTAL INTEREST EXPENSE 1,456 1,445 4,282 4,088
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NET INTEREST INCOME 2,208 2,064 6,324 6,042
Less: Provision for possible loan losses - - - 225
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NET INTEREST INCOME AFTER PROVISION FOR 2,208 2,064 6,324 5,817
POSSIBLE LOAN LOSSES
NON-INTEREST INCOME
Service charges on deposit accounts 339 334 1,032 999
Other service charges, commissions and fees 220 201 659 493
Gain (loss) on the sales of securities (18) - (28) 6
Gain on the sales of loans - 5 9 19
Gain on sale of bank premises 32 29 99 103
Other income 48 41 154 121
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TOTAL NON-INTEREST INCOME 621 610 1,925 1,741
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NON-INTEREST EXPENSE
Salaries and employee benefits 1,140 1,101 3,401 3,411
Net occupancy expense 236 248 712 731
Equipment expense 141 129 408 400
Legal expense 53 93 241 208
Unrealized loss on land held for sale 250 - 250 -
Net cost of operation of other real estate 179 252 314 494
Other expenses 534 511 1,708 1,898
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TOTAL NON-INTEREST EXPENSE 2,533 2,334 7,034 7,142
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Income before provision (benefit) for
income taxes and cumulative effect
for change in accounting principle 296 340 1,215 416
Provision (benefit) for income taxes (2,472) 4 (3,086) 13
- -------------------------------------------------------------------------------------
Net income before cumulative effect for
change in accounting principle 2,768 336 4,301 403
Cumulative effect of change in accounting
principle - - - (370)
- -------------------------------------------------------------------------------------
NET INCOME $2,768 $336 $4,301 $33
=====================================================================================
Net income per common share and common
share equivalent before cumulative
effect for change in accounting
principle $0.73 $0.09 $1.14 $0.11
Cumulative effect for change in
accounting principle - - - (0.10)
- -------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $0.73 $0.09 $1.14 $0.01
=====================================================================================
WEIGHTED AVERAGE COMMON SHARE
AND COMMON SHARE EQUIVALENTS 3,786 3,746 3,777 3,746
=====================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
2
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars in thousands) Nine Months Ended September 30,
-------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $4,301 $33
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 312 320
Amortization of securities discount, net 118 82
Cash received related to discount on matured investment securities (97) ----
Loan fees amortized, net (33) (16)
Provision for possible loan losses ---- 225
Deferred income tax benefit (3,541) ----
(Gain) loss on sale of securities 28 (6)
Unrealized loss on land held for sale 250 370
Gain on sale of premises and equipment (99) (103)
(Increase) decrease in accrued interest receivable and other assets 3,247 (262)
Increase (decrease) in accrued expenses and other liabilities 97 447
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,583 1,090
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of securities:
Available for sale 4,259 2,222
Proceeds from maturity of securities:
Available for sale 7,880 2,755
Held for maturity 3,429 893
Purchase of securities:
Available for sale (17,885) (3,717)
Held for maturity (10,781) (9,915)
Net increase of interest bearing deposits with banks - (1)
Net (increase) decrease in loans (6,231) 2,591
Capital expenditures (391) (198)
Proceeds from sale of premises and equipment 5 21
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NET CASH USED IN INVESTING ACTIVITIES (19,715) (5,349)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 10,715 8,120
Increase in federal funds purchased and
securities sold under agreements to repurchase 2,230 719
Repayments of long-term debt principal (55) (194)
Proceeds from conversion of equity contracts 396 ----
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NET CASH PROVIDED BY FINANCING ACTIVITIES 13,286 8,645
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,846) 4,386
Cash and cash equivalents, beginning of period 22,440 17,118
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $20,594 $21,504
==========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $4,255 $3,864
INCOME TAXES REFUNDED 3 4
==========================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<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, 1995.
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 costs that are
estimated are actually incurred, a charge-off is made to the specific reserve.
The following chart shows a comparative analysis of the quarterly level of
charge-offs and provisions made to the specific reserves for the nine months
ended September 30, 1995 and 1996.
September 30, September 30,
(dollars in thousands) 1996 1995
- -----------------------------------------------------------
Beginning balance, January 1 $0 $660
Provisions 50 114
Charge-offs - (500)
-------- --------
Ending balance $50 $274
======= =======
Note 3. Interest:
Accrued expenses and other liabilities includes accrued interest expense of
$602,000 at September 30, 1996 and $575,000 at December 31, 1995.
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 6.6% of the outstanding Common Stock of High Point. Rent
paid to FMI, Inc. year-to-date 1995 and year-to-date 1996 was $278,000 for each
nine month period.
Note 5. Net Income (Loss) Per Share:
Net income (loss) 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
computation for 1995 since their effect is immaterial. Options granted under the
Company's stock option plans have also been excluded from the 1996 computation
since their effect is immaterial.
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 expected future
cash flows discounted at the loans' original effective interest rate. As a
practical expedient, impairment may be measured based on a 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.
4
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NBSC had previously measured the allowance for credit losses using methods
similar to those prescribed in SFAS No. 114. Therefore, the adoption of these
statements did not require an additional allowance for loan losses.
As of September 30, 1996, NBSC's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 are as follows:
September 30, 1996 September 30, 1995
----------------------------------------------
Recorded Valuation Recorded Valuation
(in thousands) Investment Allowance Investment Allowance
Impaired loans:
Valuation allowance required $4,546 $969 $3,810 $1,008
No valuation allowance required --- --- --- ---
----------------------------------------------
Total impaired Loans $4,546 $969 $3,810 $1,008
----------------------------------------------
This valuation allowance is included in the allowance for loan losses on the
balance sheet.
The average recorded investments in impaired loans for the nine months ended
September 30, 1996 and September 30, 1995 were $4,613,000 and $5,795,000,
respectively.
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 $132,000 and $104,000 for the nine months
ended September 30, 1996 and September 30, 1995, respectively.
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
criterion, and therefore have been reclassified from other assets to loans on
January 1, 1995.
At September 30, 1996, NBSC had $512,000 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, 1996, NBSC was committed to lend no additional funds to
borrowers with loans with terms that have been modified in troubled debt
restructurings.
Note 7. Capitalized Mortgage Service Rights
Statement of Financial Accounting Standards No. 122 - "Accounting For Mortgage
Servicing Rights" was adopted by the Company effective January 1, 1996. This
statement requires that an institution recognize as a separate asset its right
to service mortgage loans for others and to evaluate its mortgage servicing
rights for impairment based on the fair value of those rights. During the first
nine months of 1996, the Company capitalized $6,000 in mortgage servicing
rights. The capitalized amount of the mortgage servicing rights shall be
amortized over the estimated average life of the mortgages using the interest
method. The amount amortized during first nine months was $1,000.
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, 1995.
For the nine months ended September 30, 1996, the Company's net income was
$4,301,000 or $1.14 per share compared to net income of $33,000 or $0.01 per
share for the same period in 1995. Net income for the first nine months of 1996
included a $3,095,000 benefit for income taxes representing the partial
recognition of net operating loss carryforwards through the reversal of a
previously established deferred tax valuation allowance. The recognition of the
tax benefit is based on the Company's evaluation of income earned in 1995 and in
first nine months of 1996 and based on pretax income estimated to be earned for
future periods. This estimate will be impacted favorably or unfavorably by
future results of operations.
The increase in net income before provision (benefit) for income taxes and
cumulative effect for change in accounting principle from $416,000 in the first
nine months of 1995 to $1,215,000 for the first nine months in
5
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1996 was due to an increase in income from continuing operations. Included in
results of operations for the first nine months of 1995 was a $225,000 provision
for possible loan losses compared to no provision for possible loan losses
recorded for the first nine months of 1996. Included in results of operations
for the first nine months of 1996 was an unrealized loss on the Company's land
held for sale of $250,000 which was recorded to reflect estimated costs for
improvements necessary to enhance the marketability of the land and to reflect
an additional impairment on the land resulting from the fact that a prior
contact of sale was terminated.
Net income for the first nine months of 1996 also compares favorably with the
net income in 1995, due to the Company's 1995 adoption of SFAS No. 121
"Accounting for Impairment of Long-lived Assets and for Long-lived Assets to be
disposed of" ("SFAS No. 121"). In accordance with SFAS No. 121, in December
1995, High Point evaluated its land held for sale for impairment and determined
that a valuation reserve of $370,000 was required. The $370,000 provision was
retroactively reflected in the results of operations for first nine months of
1995 as a cumulative effect of a change in accounting principle.
At September 30, 1996, the consolidated assets of the Company were approximately
$218.0 million, an increase of $17.8 million or 8.9% from the $200.2 million
reported December 31, 1995. Return on average assets for the first nine months
of 1996 was 2.81% compared to the 0.02% reported for the same period last year.
Return on average equity was 36.20% year-to-date 1996 compared to 0.33% for the
first nine months of 1995. Annualized income before provision (benefit) for
income taxes and cumulative effect for change in accounting principal as a
percent of average assets for the first nine months of 1996 and 1995 was 0.79%
and 0.29%, respectively. Annualized income before provision (benefit) for income
taxes and cumulative effect for change in accounting principal as a percent of
average equity for the first nine months of 1996 and 1995 was 10.23% and 4.02%,
respectively.
RESULTS OF OPERATIONS
Total interest income increased from $10,130,000 reported on September 30, 1995
to $10,606,000 for September 30, 1996, an increase of $476,000 or 4.7%. Average
earning assets net of non-accrual loans increased from $166.6 million in the
first nine months of 1995 to $184.4 million in the first nine months of 1996, an
increase of $17.8 million or 10.7%. Interest income increased $965,000 as a
result of an increase in the volume of earning assets, offset by a decrease of
$489,000 due to a decline in the average yield on earning assets. The decline in
yield is due to the declining rate environment but is also due to a shift in
composition in earning assets. Average loans have increased $2.5 million from
the first nine months of 1995 to the first nine months of 1996 while average
investments have increased $13.8 million from the first nine months of 1995 to
the first nine months of 1996. Because investments generally earn a lesser yield
than loans, the increased percentage of investments as compared to loans
effectively reduced the overall yield on earning assets.
While the amount of loans on non-accrual continues to impact interest income and
fees on loans, average non-accruals continued to decline from $6,943,000 for the
first nine months of 1995 to $5,340,000 for the first nine months of 1996, a
decline of 23.1%. Interest lost on non-accrual loans was approximately $458,000
for the first nine months of 1995 compared to $394,000 for the first nine months
of 1996.
Total interest expense increased from $4,088,000 in the first nine months of
1995, to $4,282,000 in the first nine months of 1996, an increase of $194,000 or
4.7%. The major contributing factor of the increase in interest expense was an
increase in the average volume of interest bearing liabilities from $139.4
million for the first nine months of 1995 to $149.4 million for the first nine
months of 1996. Interest expense increased $285,000 due to an increase in volume
offset by a decline of $91,000 due to a decrease in the cost of funds.
Net interest income for the first nine months of 1996 was $6,324,000 compared to
$6,042,000 for the same period in 1995, an increase of $282,000 or 4.7%. No
provision for possible loan losses was recorded for the first nine months of
1996 compared to a provision of $225,000 for the same period in 1995. As a
result of its evaluation of the allowance for possible loan losses and as a
result of continued declines in its non-performing loans and classified loans,
NBSC's management believes its allowance for loan losses is adequate at this
time. For further information, see discussion under "Financial Condition" below.
Total non-interest income increased from $1,741,000 for the first nine months of
1995 to $1,925,000 for the first nine months of 1996, an increase of $184,000 or
10.6%. Service charges on deposit accounts increased $33,000 as a result of
increased volume of demand deposit accounts. Other service charges, commissions
and fees increased $166,000 primarily as a result of an increase in commissions
on annuities and brokerage services.
Total non-interest expense decreased from $7,142,000 reported in the first nine
months of 1995 to $7,034,000 in the first nine months of 1996, a decrease of
$108,000 or 1.5%. Salaries and employee benefit expense decreased from
$3,411,000 in the first nine months of 1995 to $3,401,000 in the first nine
months of 1996, a decrease of $10,000 or 0.3%. The reduction in salary and
employee benefit expense is related both to the decline in part-time salary
expense and to a reduction in hospital and medical benefit costs. Net cost of
operation of other real estate decreased substantially from $494,000 reported in
the first nine months of 1995 to $314,000 in the first nine months of 1996, a
decrease of $180,000 or 36.4%. Other expenses
6
<PAGE>
decreased from $1,898,000 to $1,708,000, a decrease of $190,000 or 10.0%.
Included in this decrease was a $142,000 decrease in FDIC insurance expense from
$298,000 in 1995 to $156,000 in 1996 resulting from a reduction in deposit
premiums. Marketing expense also declined from $263,000 for the first nine
months of 1995 to $170,000 for the first nine months of 1996, a decline of
$93,000. Offsetting these declines in fees was an increase in consulting fees of
$40,000 related to strategic planning and administration of employee benefit
plans.
QUARTER TO QUARTER ANALYSIS
Total interest income increased from $3,509,000 for third quarter 1995 to
$3,664,000 for the same period in 1996, an increase of $155,000 or 4.4%.
Interest income on average earning assets increased $311,000 due to an increase
in volume offset by a decline of $156,000 due to a decrease in rates of earning
assets. The average amount of loans on non-accrual for third quarter 1996 and
third quarter 1995 were $4,683,000 and $5,365,000 respectively. Interest lost on
loans on non-accrual for third quarter 1996 and third quarter 1995 were $113,000
and $131,000, respectively.
Total interest expense increased from $1,445,000 in third quarter 1995 to
$1,456,000 in third quarter 1996, an increase of $11,000 or 0.8%. Interest
expense increased $62,000 due to the increase in the volume of interest bearing
liabliities offset by a decline of $51,000 due to the decrease in rates.
Net interest income for the third quarter of 1996 increased from $2,064,000 in
1995 to $2,208,000 in 1996, an increase of $144,000 or 7.0%. There was no
provision for possible loan losses in the third quarter of 1996 or in the third
quarter of 1995.
Total non-interest income increased from $610,000 in third quarter 1995 to
$621,000 in third quarter 1996, an increase of $11,000 or 1.8%. The increase
consists of recording an increase of $19,000 in other service charges,
commissions and fees which resulted from increases in full brokerage service
fees and commissions on annuity sales as well as increases in other
miscellaneous service charges. Service charges on deposit accounts and
miscellaneous other income also increased. The increase in fee income was offset
by recording $18,000 in losses on sales of securities and loans in third quarter
1996 compared to $5,000 in gains recorded during the same period in 1995.
Total non-interest expense increased from $2,334,000 reported in third quarter
1995 to $2,533,000 for the third quarter in 1996, an increase of $199,000 or
8.5%. The increase is largely due to recording a $250,000 unrealized loss on
land held for sale. Salaries and other expenses also increased from $1,101,000
in third quarter 1995 to $1,140,000 in third quarter 1996, an increase of
$39,000 resulting from merit increases. Net cost of operation of other real
estate declined from $252,000 for the third quarter of 1995 to $179,000 for the
same period in 1996, a decrease of $73,000. Legal expense also declined $40,000
from $93,000 in the third quarter of 1995 to $53,000 in the third quarter of
1996.
FINANCIAL CONDITION
At September 30, 1996, loans were $111.0 million compared to $104.9 million
reported December 31, 1995, an increase of approximately $6.1 million or 5.8%.
The Company had an aggregate of $104,000 in loans held for sale as of September
30, 1996, compared to $628,000 at year-end 1995. Mortgage loans, including those
held for sale, increased $6.4 million, from $24.7 million at December 31, 1995
to $31.1 million at September 30, 1996. During the first nine months of 1996,
$518,000 in mortgages have been sold in the secondary market offset by $6.9
million in new mortgages net of repayments. Commercial loans declined from $58.3
million on December 31, 1995 to $51.5 million on September 30, 1996, a decrease
of $6.8 million or 11.7%. Real estate construction loans have increased from
their year-end 1995 levels of $4.3 million to $6.3 million on September 30,
1996, an increase of $2.0 million or 46.5%. Installment loans increased during
this period from $18.1 million to $22.1 million, an increase of $4.0 million or
22.1%.
7
<PAGE>
Investment securities and securities available for sale consist of the
following:
September 30, 1996
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $32,753 $165 $(68) $32,850
Mortgage backed securities:
U.S. agency issued 15,962 25 (262) 15,725
Other investments:
Federal Reserve Bank Stock 516 --- --- 516
Vanguard money market
fund 5,511 --- --- 5,511
Marketable equity securities 35 3 0 38
- -------------------------------------------------------------------------------
Securities available for sale $54,777 $193 $(330) $54,640
===============================================================================
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $3,504 $21 $(13) 3,512
Mortgage backed securities:
U.S. agency issued 19,219 38 (159) 19,098
- -------------------------------------------------------------------------------
Securities held to maturity $22,723 $59 $(172) $22,610
===============================================================================
December 31, 1995
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $26,126 $352 $(29) $26,449
Mortgage backed securities:
U.S. agency issued 19,094 53 (136) 19,011
Other investments:
Federal Reserve Bank Stock 516 --- --- 516
Vanguard money market
fund 3,289 --- --- 3,289
Marketable equity securities 35 4 --- 39
- -------------------------------------------------------------------------------
Securities available for sale $49,060 $409 $(165) $49,304
===============================================================================
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $3,514 $35 $(7) $3,542
Mortgage backed securities:
U.S. agency issued 11,878 85 (22) 11,941
- -------------------------------------------------------------------------------
Securities held to maturity $15,392 $120 $(29) $15,483
===============================================================================
8
<PAGE>
At September 30, 1996 the contractual maturities of investment securities and
securities available for sale are as follows:
Securities
Investment securities Available for Sale
- ------------------------------------------------------------------------------
Estimated Estimated
Amort Market Amortized Market
(in thousands) Cost Value Cost Value
- ------------------------------------------------------------------------------
Due in one year or less $ --- $ --- $12,333 $12,375
Due after one year through
five years 9,172 9,184 27,177 27,195
Due after five years but within 10
years 12,919 12,789 1,926 1,869
Due after 10 years 632 637 7,279 7,136
Federal Reserve Bank stock --- --- 516 516
Equity Securities --- --- 35 38
Vanguard money market fund --- --- 5,511 5,511
- ------------------------------------------------------------------------------
Securities held to maturity $22,723 $22,610 $54,777 $54,640
==============================================================================
All securities in the Company's investment portfolio with the exception of
$35,000 in equity securities are either obligations of the U.S. Treasury or
backed by U.S. government agencies. Therefore, little credit risk exists in the
portfolio. The Company's available for sale securities 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.
Mortgage-backed securities are subject to prepayment risk in a declining rate
environment and to extension risk in an increasing rate environment. Prepayments
can lower the yield on securities that were purchased at a premium. The Company
manages the prepayment risk in its portfolio by purchasing its mortgage-backed
securities with a variety of coupon rates. Extension risk, on the other hand
increases the average life on a mortgage-backed, without a corresponding
increase in yield. The Company minimizes its extension risk by maintaining the
majority of its mortgage-backed securities in balloon mortgage-backed securities
with original maturities no greater than seven years.
Total deposits increased from approximately $178.3 million on December 31, 1995
to approximately $189.0 million on September 30, 1996, an increase of $10.7
million or 6.0%. During this period, all types of deposits increased. Savings
deposits increased from $55.8 million to $58.8 million, an increase of $3.0
million or 5.3%. Balances in non-interest bearing transaction accounts increased
from $38.3 million at year-end 1995 to $40.3 million on September 30, 1996, an
increase of $2.0 million, or 5.2%. Interest-bearing transaction accounts
increased from $25.1 million on December 31, 1995 to $27.4 million on September
30, 1996, an increase of $2.3 million or 9.2%. Time accounts increased from
$59.1 million to $62.5 million, an increase of $3.4 million or 5.8%.
Non-performing loans, as the schedule below indicates, were $5.2 million at
September 30, 1996, a decrease of $2.2 million or 29.7% from the $7.4 million
reported year-end 1995.
Non-performing assets at 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95
- -----------------------------------------------------------------------------
(dollars in thousands)
Loans past due over 90 days $ 120 $ 361 $ 126 $ 156 $ 188
Loans on non-accrual 4,577 4,789 5,923 5,744 4,993
Troubled debt restructurings* 512 517 654 1,532 1,522
---------------------------------------------
Total non-performing loans 5,209 5,667 6,703 7,432 6,703
Other real estate 1,050 2,195 2,558 2,741 4,213
---------------------------------------------
Total non-performing assets $6,259 $7,862 $9,261 $10,173 $10,916
=============================================
*Troubled debt restructurings as defined in SFAS No. 15 "Accounting by Debtors
and Creditors for Troubled Debt Restructurings"; excludes loans classified as
past due over 90 days or non-accrual.
Non-accrual loans decreased from $5.7 million reported at year-end 1995 to $4.6
million at September 30, 1996, a decrease of $1.1 million or 19.3%. Other real
estate decreased $1.7 million in the first nine months of 1996 and decreased
$3.2 million from September 30, 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 valid appraisal on file which conforms to regulatory guidelines. Upon
transfer 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
9
<PAGE>
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 1996, NBSC classified
$317,000 in new properties as other real estate. Properties that were sold
totaled $1,828,000. There were $180,000 in direct writedowns of other real
estate in the first nine months of 1996.
Loans classified by management but not included above as non-performing assets
at September 30, 1996 include $3.7 million classified as "special mentioned" and
$9.0 million classified as "substandard". These loans as of September 30, 1996
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. There were no loans as of September 30, 1996 other
than those classified as set forth in this paragraph or those included in the
non-performing loan table where the Company was aware of any credit conditions
of the borrower which would indicate a strong possibility that the borrower
could not comply with the present terms and conditions of repayment and which
would result in such loan being included as a non-accrual, past due or
restructured loan at some future time.
The allowance for possible loan losses decreased from $4.6 million on December
31, 1995 to $4.0 million on September 30, 1996. 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.
For the quarter ended
---------------------------------------------------
(dollars in thousands) 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95
- --------------------------------------------------------------------------------
Beginning balance $4,121 $4,428 $4,609 $4,801 $4,954
Loans charged-off (239) (442) (309) (506) (254)
Loans recovered 79 135 128 314 101
-----------------------------------------------
Net (charge-offs) recoveries (160) (307) (181) (192) (153)
Provision - - - - -
-----------------------------------------------
Ending balance $3,961 $4,121 $4,428 $4,609 $4,801
===============================================
Ratio of allowance for
possible loan losses to
non-performing loans 76.0% 72.7% 66.1% 62.0% 71.6%
===============================================
No provision for possible loan losses was recorded for the first nine months of
1996. NBSC's ratio of the allowance for possible loan losses to non-performing
loans is lower than regional and national peer statistics and has increased from
the 71.6% reported September 30, 1995 to 76.0% on September 30, 1996 because of
declines in non-performing loans resulting from payments in connection with
those loans, charge-offs and foreclosures. 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 prospective 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.
10
<PAGE>
Capital Resources
Stockholders' equity increased $4,747,000 during the first nine months of 1996
to $19.3 million. The increase in stockholders' equity resulted not only from
recording net income in the first nine months of 1996, but also from the
conversion of $780,000 of equity contracts to Common Stock on March 1, 1996.
This included the conversion of $396,000 of equity contracts paid by cash and
$384,000 paid by tendering outstanding debentures of the Company for
cancellation. The equity contracts were due to convert March 1, 1996 at a
conversion rate of $19.167 per share. Partially offsetting the positive impact
of net income and the equity contract conversion on capital was a decline in the
market value of the Company's available for sale security portfolio. The Company
recorded an unrealized loss on securities available for sale of $90,000 (net of
taxes) at September 30, 1996 compared to an unrealized gain of $244,000 at year-
end 1995. The book value (total of stockholders' equity divided by the number of
common shares issued and outstanding) of the Company's common stock was $5.10 at
September 30, 1996 compared to the $3.89 reported at December 31,1995.
The following chart represents the capital ratios of the Company and its
subsidiary, NBSC, on September 30, 1996, compared to minimum regulatory
requirements:
The Company NBSC
------------------- -------------------
Minimum Minimum
Required 9/30/96 Required 9/30/96
- --------------------------------------------------------------------------------
Leverage Ratio 3.00%(2) 7.99%(2) 3.00% (1) 7.36%(1)
Risk Based:
Tier I 4.00% 15.52% 4.00% 14.39%
Tier I plus Tier 8.00% 16.91% 8.00% 15.67%
(1) The OCC requires banks that are considered to be strong to maintain a
minimum ratio of 3%. Banks that do not meet the applicable regulatory standards
are required to maintain higher ratios. Management believes its current capital
levels are adequate.
(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 the subsidiary bank
in the form of dividends and by sale of High Point assets. NBSC, as a national
bank, is subject to dividend restrictions. Under such restrictions, NBSC may
not, without the prior approval of the Office of the Comptroller of the Currency
(the "OCC"), declare dividends in excess of the current year's earnings plus the
retained earnings from the prior two years. NBSC also is restricted from paying
dividends if at any time losses have been sustained by the bank that exceed its
retained earnings. At this time, NBSC's earnings for the current year plus the
retained earnings from the prior two years are $5,698,000. NBSC has total
retained earnings of $626,000 and cannot pay dividends in excess of its retained
earnings.
High Point's major cash flow requirements are to meet the monthly principal and
interest payments totaling approximately $16,000 on its note payable and to pay
the quarterly interest payments of $3,000 to its remaining Redeemable
Subordinated Debenture holders. High Point is also obligated to pay in cash the
remaining $127,000 of Redeemable Subordinated Debentures on March 1, 1997. High
Point also has legal fees, printing expenses, external auditing fees and other
miscellaneous fees to be paid throughout the year. The remaining obligation of
$1,122,000 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 occur to meet this
obligation. High Point continues to evaluate alternatives to repay the note
payable. There are no contracts for sale at this time. Management is, however,
in process of negotiations with interested parties on small parcels of the land.
Under the loan agreement, 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, 1995 and at September 30, 1996, High Point had Consolidated
Tangible Net Worth of $15,069,000 and $19,432,000, respectively.
11
<PAGE>
<JPAGE>
At September 30, 1996, High Point had $9,000 in cash and $650,000 in federal
funds sold available to meet its liquidity needs. High Point has $124,000 in an
escrow account to service the note payable. Also, High Point has securities
available for sale, which at September 30, 1996, had a market value of $210,000.
Effect of Interest Rates
In 1996, interest rates began to increase, which 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 is 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,
1996, in a one year time frame, the Company's interest rate-sensitive
liabilities exceeded its interest rate-sensitive assets by $19.2 million. 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 its interest rate sensitivity.
Based on management's analysis of its interest rate sensitivity, if interest
rates were to increase by 100 basis points, net interest income would increase
approximately $153,000 in a one year time frame. Conversely, if interest rates
were to decrease by 100 basis points, net interest income would decrease by the
same amount.
12
<PAGE>
HIGH POINT FINANCIAL CORP. Computation of Net Income Per Share - (Unaudited)
Nine months ended September 30,
- --------------------------------------------------------------------------------
Net Income Per Share (Primary) 1996 1995
- --------------------------------------------------------------------------------
Net income $4,301,000 $33,000
After-tax interest expense related to the
assumed reduction of outstanding debt --- ---
- --------------------------------------------------------------------------------
(1) Income applicable to common stock $4,301,000 $33,000
================================================================================
Shares used in this computation:
Weighted average number of common shares
outstanding 3,776,974 3,745,760
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 * 3,776,974 3,745,760
================================================================================
Net income per common share and common share
equivalents (primary) (1 divided by 2) * $1.14 $0.01
================================================================================
* 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 1995 and
1996 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.
A Report on Form 8-K was filed on July 23, 1996 respecting the
termination of High Point Financial Corp's written agreement with the
Federal Reserve Bank of New York
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:
- ------------------------
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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,844
<INT-BEARING-DEPOSITS> 124
<FED-FUNDS-SOLD> 9,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,640
<INVESTMENTS-CARRYING> 22,723
<INVESTMENTS-MARKET> 22,610
<LOANS> 110,978
<ALLOWANCE> 3,961
<TOTAL-ASSETS> 218,065
<DEPOSITS> 189,040
<SHORT-TERM> 5,189
<LIABILITIES-OTHER> 3,190
<LONG-TERM> 1,341
0
0
<COMMON> 18,932
<OTHER-SE> 373
<TOTAL-LIABILITIES-AND-EQUITY> 19,305
<INTEREST-LOAN> 2,337
<INTEREST-INVEST> 1,171
<INTEREST-OTHER> 156
<INTEREST-TOTAL> 3,664
<INTEREST-DEPOSIT> 1,386
<INTEREST-EXPENSE> 1,456
<INTEREST-INCOME-NET> 2,208
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (18)
<EXPENSE-OTHER> 2,533
<INCOME-PRETAX> 296
<INCOME-PRE-EXTRAORDINARY> 296
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,768
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 4.63
<LOANS-NON> 4,577
<LOANS-PAST> 120
<LOANS-TROUBLED> 512
<LOANS-PROBLEM> 13,168
<ALLOWANCE-OPEN> 4,121
<CHARGE-OFFS> 239
<RECOVERIES> 79
<ALLOWANCE-CLOSE> 3,961
<ALLOWANCE-DOMESTIC> 3,961
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
