<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 March 31, 1997
--------------
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2426221
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Branchville Square, Branchville, New Jersey 07826
- --------------------------------------------------------------------------------
(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 March 31, 1997 there were 3,786,480 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 - March 31, 1997 (unaudited) and
December 31, 1996 1
Consolidated Income Statements - Unaudited Three Months Ended
March 31, 1997 and 1996 2
Consolidated Statements of Cash Flow - Unaudited Three Months
Ended March 31, 1997 and 1996 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
The Securities and Exchange Commission maintains a web site which
contains reports, proxy and information statements and other information
relating to registrants that file electronically at the address: http:/ /
www.sec.gov.
<PAGE>
ITEM 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, 1997 December 31,
ASSETS (unaudited) 1996
----------------------------
<S> <C> <C>
Cash and due from banks $ 9,378 $ 10,503
Federal funds sold 4,225 4,025
----------------------------
Total cash and cash equivalents 13,603 14,528
Interest bearing deposits with banks 315 123
Securities:
Available for sale, at fair value 55,369 53,575
Held to maturity, at cost (market value of $21,852 in 1997 and
$22,698 in 1996) 22,062 22,667
----------------------------
Total securities 77,431 76,242
Loans held for sale 67 178
Loans 117,946 114,631
Add: Deferred expenses 15 10
Allowance for possible loan losses (4,060) (3,973)
----------------------------
Net loans 113,901 110,668
Land held for sale 1,885 1,885
Premises and equipment - net 3,190 2,910
Accrued interest receivable 1,254 1,260
Other real estate 1,086 1,086
Cash surrender value of life insurance policies 4,961 4,939
Other assets 3,598 3,363
----------------------------
TOTAL ASSETS $ 221,291 $ 217,182
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------
Deposits:
Transaction accounts:
Interest bearing $ 26,558 $ 26,627
Non-interest bearing 38,958 43,149
Savings accounts 59,214 58,235
Time accounts (includes CDs $100 or over of $8,174 and $6,675
on March 31, 1997 and December 31, 1996, respectively) 62,833 60,843
----------------------------
Total deposits 187,563 188,854
Securities sold under agreements to repurchase 10,421 5,054
Accrued expenses and other liabilities (Note 2) 2,356 2,324
Note payable 827 846
Redeemable subordinated debentures, 8.5% due March 1, 1997 -- 127
----------------------------
Total liabilities 201,167 197,205
----------------------------
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 1997 18,932 18,932
Additional Paid-in-Capital 5,791 5,791
Accumulated Deficit (4,400) (4,822)
Unrealized gain (loss) on securities available for sale, net of taxes (199) 76
----------------------------
Total stockholders' equity 20,124 19,977
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 221,291 $ 217,182
============================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
1
<PAGE>
CONSOLIDATED INCOME STATEMENTS - (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
-----------------
<S> <C> <C>
INTEREST INCOME
Interest income and fees on loans $ 2,541 $ 2,314
Interest on securities - taxable 1,200 1,009
Interest on federal funds sold and
deposits with other banks 53 157
-----------------
TOTAL INTEREST INCOME 3,794 3,480
-----------------
INTEREST EXPENSE
Interest on deposits 1,371 1,353
Interest on other borrowed money 55 38
Interest on note payable and other
long-term debt 21 39
-----------------
TOTAL INTEREST EXPENSE 1,447 1,430
-----------------
NET INTEREST INCOME 2,347 2,050
Less: Provision for possible loan losses -- --
-----------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,347 2,050
-----------------
NON-INTEREST INCOME
Service charges on deposit accounts 358 346
Commissions and fees 199 197
Gain on the sales of loans -- 10
Gain on sale of bank premises and equipment 23 36
Other income 136 60
-----------------
TOTAL NON-INTEREST INCOME 716 649
-----------------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,291 1,125
Net occupancy expense 243 238
Equipment expense 203 133
Legal expense 63 73
Net cost of operation of other real estate 11 57
Other expenses 544 562
-----------------
TOTAL NON-INTEREST EXPENSE 2,355 2,188
-----------------
Income before provision (benefit) for income taxes 708 511
Provision (benefit) for income taxes 286 (246)
-----------------
NET INCOME $ 422 $ 757
=================
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $ 0.11 $ 0.20
=================
WEIGHTED AVERAGE COMMON SHARE
AND COMMON SHARE EQUIVALENTS 3,786 3,758
=================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
--------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 422 $ 757
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 136 102
Amortization of securities discount, net 5 55
Net cash paid related to discount (premium) on matured securities 24 32
Loan fees amortized, net (5) (8)
Deferred income tax provision (benefit) 282 (250)
Gain on sale of premises and equipment (23) (36)
(Increase) decrease in accrued interest receivable and other assets (386) 620
Increase (decrease) in accrued expenses and other liabilities 68 (55)
--------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 523 1,217
--------------------
INVESTING ACTIVITIES
Proceeds from maturity of securities:
Available for sale 2,077 2,267
Held for maturity 596 1,146
Purchase of securities:
Available for sale (4,312) (4,641)
Held for maturity -- (3,554)
Net (increase) decrease of interest bearing deposits with banks (192) 1
Net (increase) decrease in loans (3,117) 295
Capital expenditures (436) (55)
Proceeds from sale of premises and equipment 6 5
--------------------
NET CASH USED IN INVESTING ACTIVITIES (5,378) (4,536)
--------------------
FINANCING ACTIVITIES
Net increase in deposits (1,291) (3,286)
Increase in federal funds purchased and
securities sold under agreements to repurchase 5,367 1,504
Repayments of long-term debt principal (146) (19)
Proceeds from conversion of equity contracts -- 396
--------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,930 (1,405)
--------------------
Net increase (decrease) in cash and cash equivalents (925) (4,724)
Cash and cash equivalents, beginning of period 14,528 22,440
--------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,603 $ 17,716
====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $ 1,432 $ 1,448
INCOME TAXES PAID 26 ---
====================
</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, 1996.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the year.
Note 2. Interest:
Accrued expenses and other liabilities includes accrued interest expense of
$557,000 at March 31, 1997 and $543,000 at December 31, 1996.
Note 3. 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. during the first quarter in 1996 and 1997 was $93,000.
Note 4. 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. Options granted under the
Company's stock option plans have been excluded from the 1997 computation since
their effect is immaterial.
Fully diluted net income per share is not presented because it approximates
primary net income per share.
Note 5. Impaired Loans
As of March 31, 1997, NBSC's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 are as follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
----------------------------------------------------------------------
Recorded Valuation Recorded Valuation
(in thousands) Investment Allowance Investment Allowance
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired loans:
Valuation allowance required $3,845 $ 689 $4,723 $1,253
No valuation allowance required -- -- -- --
----------------------------------------------------------------------
Total impaired Loans $3,845 $ 689 $4,723 $1,253
======================================================================
</TABLE>
This valuation allowance is included in the allowance for loan losses on the
balance sheet.
The average recorded investments in impaired loans for the three months ended
March 31, 1997 and March 31, 1996 were $3,794,000 and $5,032,000, 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 $70,000 and $81,000 for the three months
ended March 31, 1997 and March 31, 1996, respectively.
At March 31, 1997, NBSC had $447,000 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 March 31, 1997, NBSC was not committed to lend additional funds to borrowers
with loans with terms that have been modified in troubled debt restructurings.
4
<PAGE>
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, 1996.
For the three months ended March 31, 1997, the Company's net income was $422,000
or $0.11 per share compared to net income of $757,000 or $0.20 per share for the
same period in 1996. Net income for the first three months of 1996 included a
$246,000 benefit for income taxes representing the partial recognition of net
operating loss carryforwards through the reversal of a previously established
deferred tax valuation allowance. In first quarter 1997, the Company recorded a
tax provision based on prevailing statutory tax rates.
Income before provision (benefit) for income taxes increased from $511,000 in
the first quarter of 1996 to $708,000 in the first quarter of 1997 which
included an increase in net interest income from $2,050,000 in first quarter
1996 to $2,347,000 in the same period in 1997, an increase of $297,000 or 14.5%.
At March 31, 1997, the consolidated assets of the Company were approximately
$221.3 million, an increase of $4.1 million or 1.9% from the $217.2 million
reported December 31, 1996. Return on average assets for the first three months
of 1997 was 0.77% compared to the 1.51% reported for the same period last year.
Return on average equity was 8.3% first quarter 1997 compared to 20.1% for the
first three months of 1996. Annualized income before provision (benefit) for
income taxes as a percent of average assets for the first three months of 1997
and 1996 was 1.30% and 1.02%, respectively. Annualized income before provision
(benefit) for income taxes as a percent of average equity for the first three
months of 1997 and 1996 was 13.96% and 13.58%, respectively.
RESULTS OF OPERATIONS
Total interest income increased from $3,480,000 reported on March 31, 1996 to
$3,794,000 for March 31, 1997, an increase of $314,000 or 9.0%. Average earning
assets net of non-accrual loans increased from $179.4 million in the first three
months of 1996 to $194.3 million in the first three months of 1997, an increase
of $14.9 million or 8.3%. Interest income increased $292,000 as a result of an
increase in the volume of earning assets and $22,000 due to an increase in the
average yield on earning assets. Average loans have increased $11.5 million from
the first quarter of 1996 to the first quarter of 1997 while average investments
have increased $9.0 million from the first quarter of 1996 to the first quarter
of 1997. Average federal funds sold declined from $11.8 million in first quarter
1996 to $4.1 million in first quarter 1997, a decrease of $7.7 million or 65%.
Federal funds sold were permitted to decline as a result of NBSC's membership in
the Federal Home Loan Bank in fourth quarter 1996 giving NBSC greater access to
borrow overnight funds should the need arise. The ability of NBSC to reduce its
federal funds sold gives it the ability to invest more funds in higher earning
investments or loans.
While the amount of loans on non-accrual continues to impact interest income and
fees on loans, average non-accruals continued to decline from $5,713,000 for the
first three months of 1996 to $3,760,000 for the first three months of 1997, a
decline of 34.2%. Interest lost on non-accrual loans was approximately $150,000
for the first three months of 1996 compared to $102,000 for the first three
months of 1997.
Total interest expense increased from $1,430,000 in the first three months of
1996, to $1,447,000 in the first three months of 1997, an increase of $17,000 or
1.2%. The major contributing factor of the increase in interest expense was an
increase in the average volume of interest bearing liabilities from $146.9
million for the first three months of 1996 to $155.5 million for the first three
months of 1997. Interest expense increased $65,000 due to an increase in volume
offset by a decline of $48,000 due to a decrease in the cost of funds.
Net interest income for the first quarter of 1997 was $2,347,000 compared to
$2,050,000 for the same period in 1996, an increase of $297,000 or 14.5%. No
provision for possible loan losses was recorded for the first three months of
1996 or 1997. 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 $649,000 for the first three months of
1996 to $716,000 for the first three months of 1997, an increase of $67,000 or
10.3%. Service charges on deposit accounts increased $12,000 as a result of
increased volume of demand deposit accounts. Other income increased $76,000
primarily due to the income on the death benefit paid on a former director's
insurance policy.
5
<PAGE>
Total non-interest expense increased from $2,188,000 reported in the first three
months of 1996 to $2,355,000 in the first three months of 1997, an increase of
$167,000 or 7.6%. Salaries and employee benefit expense increased from
$1,125,000 in the first three months of 1996 to $1,291,000 in the first three
months of 1997, an increase of $166,000 or 14.8%. The increase in salary and
employee benefit expense is related to several items. First, severance payments
to employees whose positions have been terminated were expensed during the first
quarter. Second, benefit costs have increased due to an Executive Supplemental
Retirement Plan that was put in place in fourth quarter 1996. Third, expense
related to employee incentives in the form of stock grants and other gifts were
made in first quarter 1997. Finally, salary and benefit expense increased due to
merit increases. Equipment expense increased from $133,000 in first quarter 1996
to $203,000 in first quarter 1997, an increase of $70,000 or 52.6% as a result
of an upgrade in the Company's computer system and software which resulted in
increased depreciation and service contract expense. Net cost of operation of
other real estate decreased substantially from $57,000 reported in the first
three months of 1996 to $11,000 in the first three months of 1997, a decrease of
$46,000 or 80.7%. Other expenses decreased from $562,000 to $544,000, a decrease
of $18,000 or 3.2%. Included in this decrease was a $65,000 decrease in FDIC
insurance expense from $71,000 in 1996 to $6,000 in 1997 resulting from a
reduction in deposit premiums. Offsetting this decline was an increase in
marketing expense from $57,000 for the first three months of 1996 to $78,000 for
the first three months of 1997, an increase of $21,000 resulting from the
marketing of insurance products that the Company began selling in first quarter
1997.
FINANCIAL CONDITION
At March 31, 1997, loans were $117.9 million compared to $114.6 million reported
December 31, 1996, an increase of approximately $3.3 million or 2.9%. The
Company had an aggregate of $67,000 in loans held for sale as of March 31, 1997,
compared to $178,000 at year-end 1996. Mortgage loans increased $2.8 million, or
8.4%, from $33.4 million at December 31, 1996 to $36.2 million at March 31,
1997. Commercial loans declined from $51.1 million on December 31, 1996 to $50.6
million on March 31, 1997, a decrease of $600,000 or 1.2%. Real estate
construction loans have decreased from their year-end 1996 levels of $7.0
million to $6.6 million on March 31, 1997, a decrease of $400,000 or 5.7%.
Installment loans increased during this period from $23.1 million to $24.6
million, an increase of $1.5 million or 6.5%.
6
<PAGE>
Investment securities and securities available for sale consist of the
following:
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $29,078 $ 47 $ (104) $29,021
Mortgage backed securities:
U.S. agency issued 15,095 38 (293) 14,840
Other investments:
Federal Reserve Bank Stock 516 -- -- 516
Vanguard money market
fund 10,074 -- -- 10,074
Federal Home Loan Bank 878 -- -- 878
Marketable equity securities 35 5 -- 40
--------------------------------------------------------------
Securities available for sale $55,676 $ 90 $ (397) $55,369
==============================================================
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 3,003 $ 13 $ (15) $ 3,001
Mortgage backed securities:
U.S. agency issued 19,059 13 (221) 18,851
--------------------------------------------------------------
Securities held to maturity $22,062 $ 26 $ (236) $21,852
==============================================================
December 31, 1996
<CAPTION>
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $30,763 $ 275 $ (27) $31,011
Mortgage backed securities:
U.S. agency issued 15,507 40 (180) 15,367
Other investments:
Federal Reserve Bank Stock 516 -- -- 516
Vanguard money market
fund 5,855 -- -- 5,855
Federal Home Loan Bank 786 -- -- 786
Marketable equity securities 35 5 -- 40
--------------------------------------------------------------
Securities available for sale $53,462 $ 320 $ (207) $53,575
==============================================================
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 3,004 $ 29 $ (1) $ 3,032
Mortgage backed securities:
U.S. agency issued 19,663 92 (89) 19,666
--------------------------------------------------------------
Securities held to maturity $22,667 $ 121 $ (90) $22,698
==============================================================
</TABLE>
7
<PAGE>
At March 31, 1997, the contractual maturities of investment securities and
securities available for sale are as follows:
<TABLE>
<CAPTION>
Securities
Investment securities Available for Sale
--------------------------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 503 $ 510 $12,301 $12,331
Due after one year through
five years 7,707 7,672 22,980 22,818
Due after five years but within 10
years 13,263 13,078 1,819 1,761
Due after 10 years 589 592 7,073 6,951
Federal Reserve Bank stock -- -- 516 516
Equity Securities -- -- 913 918
Vanguard money market fund -- -- 10,074 10,074
--------------------------------------------------------------
Securities held to maturity $22,062 $21,852 $55,676 $55,369
==============================================================
</TABLE>
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 security, 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 of seven years or less.
Total deposits decreased from approximately $188.9 million on December 31, 1996
to approximately $187.6 million on March 31, 1997, a decrease of $1.3 million or
0.7%. During this period, transaction accounts decreased and savings and time
accounts increased. Balances in non-interest bearing transaction accounts
decreased from $43.1 million at year-end 1996 to $39.0 million on March 31,
1997, a decrease of $4.1 million, or 9.5% due to a cyclical outflow of deposits
which generally occurs in the first quarter of each year. Interest-bearing
transaction accounts remained unchanged at $26.6 million on both December 31,
1996 and March 31, 1997. Savings deposits increased from $58.2 million to $59.2
million, an increase of $1.0 million or 1.7%. Time accounts increased from $60.8
million to $62.8 million, an increase of $2.0 million or 3.3%.
Non-performing loans, as the schedule below indicates, were $5.4 million at
March 31, 1997, a decrease of 1.8% from the $5.5 million reported year-end 1996.
<TABLE>
<CAPTION>
Non-performing assets at 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
- ------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans past due over 90 days $ 29 $ 0 $ 120 $ 361 $ 126
Loans on non-accrual 3,746 3,850 4,577 4,789 5,923
Troubled debt restructurings* 447 505 512 517 654
---------------------------------------------------------
Total non-performing loans 4,222 4,355 5,209 5,667 6,703
Other real estate 1,136 1,136 1,050 2,195 2,558
---------------------------------------------------------
Total non-performing assets $5,358 $5,491 $6,259 $7,862 $9,261
=========================================================
</TABLE>
*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 $3.8 million reported at year-end 1996 to $3.7
million at March 31, 1997, a decrease of $100,000 or 2.7%. Other real estate
remained unchanged in the first three months of 1997 and decreased $1.4 million
from March 31, 1996. 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 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
8
<PAGE>
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
three months of 1997, NBSC classified no new properties as other real estate.
There were no sales or writedowns of other real estate in first quarter 1997.
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 three months
ended March 31, 1996 and 1997.
March 31, March 31,
(dollars in thousands) 1997 1996
- ----------------------------------------------------------------------
Beginning balance, January 1 $50 $-
Provisions -- 50
Charge-offs -- --
------ ------
Ending balance $50 $50
====== ======
Loans classified by management but not included above as non-performing assets
at March 31, 1997 include $2.7 million classified as "special mentioned" and
$7.8 million classified as "substandard". These loans as of March 31, 1997 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 March 31, 1997 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 increased from $4.0 million on December
31, 1996 to $4.1 million on March 31, 1997. 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) 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 3,973 $ 3,961 $ 4,121 $ 4,428 $ 4,609
Loans charged-off (52) (108) (239) (442) (309)
Loans recovered 139 120 79 135 128
--------------------------------------------------------
Net (charge-offs) recoveries 87 12 (160) (307) (181)
Provision -- -- -- -- --
--------------------------------------------------------
Ending balance $ 4,060 $ 3,973 $ 3,961 $ 4,121 $ 4,428
========================================================
Ratio of allowance for
possible loan losses to
non-performing loans 96.2% 91.2% 76.0% 72.7% 66.1%
========================================================
</TABLE>
No provision for possible loan losses was recorded for the first quarter of
1997. NBSC's ratio of the allowance for possible loan losses to non-performing
loans has increased from the 66.1% reported March 31, 1996 to 96.2% on March 31,
1997 because of declines in non-performing loans resulting from payments in
connection with those loans, charge-offs and foreclosures. Net recoveries of
$87,000 in the first quarter of 1997 increased the allowance for possible loan
losses from December 31, 1996 to March 31, 1997. 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
9
<PAGE>
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.
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. As of March 31, 1997, NBSC's earnings for the current year
plus the retained earnings from the prior two years are $7,476,000. NBSC has
total retained earnings of $1,686,000 and cannot pay dividends in excess of its
retained earnings.
High Point paid in cash the final interest payment of $3,000 and remaining
$127,000 of Redeemable Subordinated Debentures on March 1, 1997. High Point's
major cash flow requirement is to meet its monthly principal and interest
payment totaling approximately $13,000 on its note payable. High Point also has
legal fees, printing expenses, external auditing fees and other miscellaneous
fees to be paid throughout the year.
At March 31, 1997, High Point had $4,000 in cash and $45,000 in federal funds
sold available to meet its liquidity needs. High Point has $315,000 in an escrow
account to service the note payable. Also, High Point has securities available
for sale, which at March 31, 1997, had a market value of $11,000.
As of March 31, 1997, High Point owed $827,000 on its note payable at an
interest rate of prime plus one percent (9.50%). The Note matures on January 2,
1998 at which time a balloon payment is due. On April 15, 1997, NBSC's Board of
Directors declared a $500,000 dividend payable to High Point on April 30, 1997.
High Point's management anticipates using the proceeds of the dividend along
with the escrow account to pay off the note payable secured by the land. The
lending bank has agreed to a settlement of the note payable for a payment of
$770,000 plus all outstanding interest if the payment is made by May 31, 1997.
High Point intends to accept this agreement.
Another source of cash is the sale of the land held for sale. At this time there
are two contracts for sale for approximately six acres. There is no assurance
that these land sales will be consummated.
EFFECT OF INTEREST RATES
In 1997, 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 March 31, 1997,
in a one year time frame, the Company's interest rate-sensitive liabilities
exceeded its interest rate-sensitive assets by $30.1 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 $106,000 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.
CAPITAL RESOURCES
Stockholders' equity increased $147,000 during the first three months of 1997 to
$20.1 million. The increase in stockholders' equity resulted from recording net
income in the first quarter of 1997. Partially offsetting the positive impact of
net income 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 $199,000 (net of taxes) at March 31, 1997
compared to an unrealized gain of $76,000 at year-end 1996. The book value
(total of stockholders' equity divided by the number of common shares issued and
outstanding) of the Company's common stock was $5.31 at March 31, 1997 compared
to the $5.28 reported at December 31,1996.
10
<PAGE>
High Point and NBSC are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators, that if undertaken could have a direct
material effect on the Company or NBSC's financial statements. Quantitative
measures established by regulation to ensure capital adequacy require the
Company and NBSC to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of March 31, 1997,
that the Company and NBSC meet all capital adequacy requirements to which they
are subject.
As of March 31, 1997, the most recent notification from the OCC categorized NBSC
as well capitalized under the regulatory framework for prompt corrective action.
Similarly, the most recent notification from the Federal Reserve Bank of New
York categorized the Company as well capitalized. To be well capitalized NBSC
and the Company must maintain minimum total risk based, Tier I risk-based and
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institutions' category.
The following chart represents the capital ratios of the Company and its
subsidiary, NBSC, on March 31, 1997, compared to minimum regulatory
requirements:
<TABLE>
<CAPTION>
Minimum
Required to be
Minimum Well Capitalized
Required for Under Prompt The
Capital Adequacy Corrective Action Company NBSC
Purposes Provisions 3/31/97 3/31/97
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage Ratio 4.00% 5.00% 8.71% 8.13%
Risk Based:
Tier I 4.00% 6.00% 15.79% 14.84%
Tier I plus Tier II 8.00% 10.00% 17.07% 16.12%
</TABLE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share and SFAS No.
129, Disclosure of Information about Capital Structure. The purpose of SFAS No.
128 is to harmonize the earnings per share ("EPS") calculation with those common
in other countries and to simplify the calculation requirements contained in APB
Opinion No. 15, Earnings per Share. The major change in SFAS No. 128 is that
primary EPS will be replaced by "Basic EPS." Basic EPS is computed by dividing
earnings available to common shareholders by weighted average shares
outstanding. No dilution for any potentially dilutive securities is included.
Fully diluted EPS will now be called diluted EPS. When applying the treasury
stock method for diluted EPS, to compute dilution for options and warrants, a
company uses its average share price for the period, rather than the more
dilutive greater of the average share price or end of period share price
required by APB Opinion No. 15.
SFAS No. 128 is effective for financial statements for interim and annual
periods ending after December 31, 1997 with earlier application prohibited.
Management does not anticipate that the adoption of this statement will have an
impact on the financial condition of the Company because the Company's current
EPS calculation is the same as what the basic EPS calculation will be. Options
granted under the Company's stock option plans have been excluded from the
calculation because their effect is immaterial.
SFAS No. 129 requires the disclosure of the rights and privileges of all
securities other than ordinary common stock. SFAS No. 129 is also effective for
financial statements for periods ending after December 15, 1997. Management does
not expect that the implementation will have any impact on the Company's
financial statements because the only securities the Company has issued and
outstanding is ordinary common stock.
11
<PAGE>
HIGH POINT FINANCIAL CORP. Computation of Net Income Per Share - (Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------
Net Income Per Share (Primary) 1997 1996
----------------------------------
<S> <C> <C>
Net income $422,000 $757,000
After-tax interest expense related to the assumed reduction of outstanding debt* --- ---
----------------------------------
(1)Income applicable to common stock $422,000 $757,000
==================================
Shares used in this computation:
Weighted average number of common shares outstanding 3,786,480 3,757,858
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 * 3,786,480 3,757,858
==================================
Net income per common share and common share equivalents (primary)
(1 divided by 2) * $0.11 $0.20
==================================
</TABLE>
* 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 1996 and 1997 computation since their
effect is immaterial.
12
<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.
13
<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: May 13, 1997
- ------------------------------
By /s/ Rita A. Myers By /s/ Gregory W. A. Meehan
- ------------------------------ ---------------------------------
Rita A. Myers Gregory W. A. Meehan
Comptroller Vice President and Treasurer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 9378
<INT-BEARING-DEPOSITS> 315
<FED-FUNDS-SOLD> 4225
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55369
<INVESTMENTS-CARRYING> 22062
<INVESTMENTS-MARKET> 21852
<LOANS> 117961
<ALLOWANCE> 4060
<TOTAL-ASSETS> 221291
<DEPOSITS> 187563
<SHORT-TERM> 10421
<LIABILITIES-OTHER> 2356
<LONG-TERM> 827
0
0
<COMMON> 18932
<OTHER-SE> 1192
<TOTAL-LIABILITIES-AND-EQUITY> 221291
<INTEREST-LOAN> 2541
<INTEREST-INVEST> 1200
<INTEREST-OTHER> 53
<INTEREST-TOTAL> 3794
<INTEREST-DEPOSIT> 1371
<INTEREST-EXPENSE> 1447
<INTEREST-INCOME-NET> 2347
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2355
<INCOME-PRETAX> 708
<INCOME-PRE-EXTRAORDINARY> 708
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 422
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
<YIELD-ACTUAL> 4.74
<LOANS-NON> 3746
<LOANS-PAST> 29
<LOANS-TROUBLED> 447
<LOANS-PROBLEM> 11778
<ALLOWANCE-OPEN> 3973
<CHARGE-OFFS> 52
<RECOVERIES> 139
<ALLOWANCE-CLOSE> 4060
<ALLOWANCE-DOMESTIC> 4060
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
