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 June 30, 1995
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-12430
---------
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 June 30, 1995 there were 3,745,760 shares outstanding of Common Stock, no
par value.
HIGH POINT FINANCIAL CORP.
Form 10-Q Index
PAGE
Part I Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1995 (unaudited) and
December 31, 1994 3
Consolidated Statements of Operations - Unaudited Six Months
Ended June 30, 1995 and 1994 4
Consolidated Statements of Cash Flow - Unaudited Six Months
Ended June 30, 1995 and 1994 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Part II Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
2
Item 1. Financial Information
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
June 30, 1995 December 31,
ASSETS (unaudited) 1994
------------- ------------
Cash and due from banks $ 7,765 $ 9,818
Federal funds sold 11,200 7,300
-------- --------
Total cash and cash equivalents 18,965 17,118
Interest bearing deposits with banks 127 124
Securities:
Available for sale, at fair value 29,431 31,670
Held to maturity, at cost (market value of $29,168 in 1995 and
$21,593 in 1994) 29,093 22,561
-------- --------
Total securities 58,524 54,231
Loans held for sale at fair value 373 427
Loans 102,221 105,608
Less: Unearned income 44 52
Allowance for possible loan losses 4,954 5,234
-------- --------
Net loans 97,223 100,322
Land held for sale 2,534 2,534
Premises and equipment - net 2,787 2,865
Accrued interest receivable 1,043 1,217
Other real estate (Note 2) 4,661 3,946
Other assets 2,084 1,857
-------- --------
TOTAL ASSETS $188,321 $184,641
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts:
Interest bearing $24,409 $25,197
Non-interest bearing 33,183 34,778
Savings accounts 55,038 53,672
Time accounts (includes CDs $100 or over of $6,798 and $6,995 on June 30, 1995 and
December 31, 1994, respectively) 54,860 51,925
-------- --------
Total deposits 167,490 165,572
Federal funds purchased and securities sold under agreements to repurchase 3,144 2,621
Accrued expenses and other liabilities (Note 3) 2,494 2,343
Note payable 1,307 1,482
Redeemable subordinated debentures, 8.5% due March 1, 1997 510 510
Employee Stock Ownership Plan (ESOP) debt --- 150
-------- --------
Total liabilities 174,945 172,678
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred stock, authorized 1,000,000 shares, no shares issued ---- ----
Common stock, no par value; stated value $5 per share; authorized 5,000,000
shares, issued 3,745,760 shares in 1995 and 3,745,760 shares in 1994 18,729 18,729
Additional Paid-in-Capital 5,214 5,214
Accumulated Deficit (10,266) (10,334)
Common stock acquired by ESOP ---- (150)
Unrealized losses on securities available for sale (301) (1,496)
-------- --------
Total stockholders' equity 13,376 11,963
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $188,321 $184,641
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS - (UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1995 1994 1995 1994
------ ------ ------ ------
INTEREST INCOME
Interest income and fees on loans $2,306 $2,307 $4,645 $4,540
Interest on securities:
Taxable interest income 859 528 1,669 1,047
Non-taxable interest income - - - -
Interest on deposits with banks - 2 1 4
Interest on federal funds sold 183 89 306 142
------ ------ ------ ------
TOTAL INTEREST INCOME 3,348 2,926 6,621 5,733
------ ------ ------ ------
INTEREST EXPENSE
Interest on deposits 1,284 1,026 2,488 2,079
Interest on other borrowed money 31 14 61 21
Interest on debentures 11 11 22 22
Interest on note payable 35 55 72 110
------ ------ ------ ------
TOTAL INTEREST EXPENSE 1,361 1,106 2,643 2,232
------ ------ ------ ------
NET INTEREST INCOME 1,987 1,820 3,978 3,501
Less: Provision for possible loan losses 50 - 225 -
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR 1,937 1,820 3,753 3,501
POSSIBLE LOAN LOSSES
NON-INTEREST INCOME
Service charges on deposit accounts 340 369 665 737
Other service charges, commissions and fees 136 237 292 448
Gain (loss) on the sales of securities 30 (91) 6 (138)
Gain (loss) on the sales of loans 10 19 14 (29)
Gain on sale of bank premises 36 36 74 72
Other income 43 51 80 75
------ ------ ------ ------
TOTAL NON-INTEREST INCOME 595 621 1,131 1,165
------ ------ ------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,128 1,147 2,310 2,275
Net occupancy expense 234 235 483 474
Equipment expense 134 147 271 283
Legal expense 74 153 115 292
Net cost of operation of other real estate 193 39 242 113
Other expenses 729 640 1,387 1,213
------ ------ ------ ------
TOTAL NON-INTEREST EXPENSE 2,492 2,361 4,808 4,650
------ ------ ------ ------
Income (loss) before provision (benefit) for income
taxes 40 80 76 16
Provision (benefit) for income taxes 4 (13) 9 (111)
------ ------ ------ ------
NET INCOME (LOSS) $36 $93 $67 $127
====== ====== ====== ======
NET INCOME (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $0.01 $0.04 $0.02 $0.05
====== ====== ====== ======
WEIGHTED AVERAGE COMMON SHARE
AND COMMON SHARE EQUIVALENTS 3,746 2,474 3,746 2,474
====== ====== ====== ======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars in thousands) Six Months Ended June 30,
-------------------------
1995 1994
---------- ---------
OPERATING ACTIVITIES
Net income $67 $127
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 220 199
Amortization of securities discount, net 53 181
Loan fees amortized, net (8) (24)
Provision for possible loan losses 225 -
Deferred income tax benefit - (126)
(Gain) Loss on sale of securities (7) 134
Gain on sale of premises and equipment (74) (72)
Increase in accrued interest receivable and other assets (767) (538)
Increase (decrease) in accrued expenses and other liabilities 224 12
---------- ---------
NET CASH USED IN OPERATING ACTIVITIES (67) (107)
---------- ---------
INVESTING ACTIVITIES
Proceeds from sale of securities:
Available for sale 2,223 5,038
Proceeds from maturity of securities:
Available for sale 2,806 1,765
Held for maturity 362 2,093
Purchase of securities:
Available for sale (1,604) (4,019)
Held for maturity (6,931) (7,242)
Proceeds from sales and maturities of interest bearing deposits (3) 140
Net decrease in loans 2,936 1,886
Capital expenditures (145) (108)
Proceeds from sale of premises and equipment 4 -
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (352) (447)
---------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 1,918 (596)
Increase in federal funds purchased and
securities sold under agreements to repurchase 523 2,250
Repayments of long-term debt principal (175) (51)
Proceeds from sale of common stock, net of expenses - 3,673
Proceeds from conversion of equity contracts - 100
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,266 5,376
---------- ---------
Net increase (decrease) in cash and cash equivalents 1,847 4,822
Cash and cash equivalents, beginning of year 17,118 15,353
---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $18,965 $20,175
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $2,470 $2,244
INCOME TAXES REFUNDED 6 (15)
---------- ---------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
Notes to Consolidated Financial Statements - (Unaudited)
Note 1. Basis of Presentation:
The accompanying consolidated financial statements of High Point Financial
Corp. ("High Point") and its subsidiary, The National Bank of Sussex County
("NBSC"), reflect all adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation of interim results. All references
in this document to the "Company" refer to the consolidated company which
includes High Point and NBSC. The financial information has been prepared in
accordance with the Company's customary accounting practices and has not been
audited.
Certain information and footnote disclosures required under generally accepted
accounting principles have been condensed or omitted pursuant to the SEC rules
and regulations. These interim financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the High Point Financial Corp. Annual Report on Form 10-K for the
year ended December 31, 1994.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the year.
Note 2. Specific Reserves on Other Real Estate:
It is the Company's policy to establish specific reserves on properties included
in other real estate when the appraised fair value of the property does not
include certain estimated costs of disposition. When the disposition costs are
actually incurred, a charge-off is made to the specific reserve. The following
chart shows a comparative analysis of the year-to-date charge-offs and
provisions made to the specific reserves for the six months ended June 30, 1994
and 1995.
June 30, June 30,
(dollars in thousands) 1995 1994
---------------------- ------- -------
Beginning balance,
January 1 $ 660 $ 91
Provisions 39 45
Charge-offs (450) (10)
----- ----
Ending balance $ 249 $ 126
===== =====
*Prior years balances adjusted for restatement of insubstance foreclosure
reserves to the allowance for possible loan losses per the requirements of
Statement of Financial Accounting Standards No. 114 - "Accounting by Creditors
for Impairment of a Loan."
Note 3. Interest:
Accrued expenses and other liabilities includes accrued interest expense of
$557,000 at June 30, 1995 and $386,000 at December 31, 1994.
Note 4. Related Party Transactions:
Net occupancy expense includes rent on certain properties leased from FMI, Inc.,
a wholly owned subsidiary of Franklin Mutual Insurance Company. Franklin Mutual
Insurance Company owns 6.7% of the outstanding Common Stock of High Point. Rent
paid to FMI, Inc. year-to-date 1994 and year-to-date 1995 was $186,000 and
$187,000, respectively.
Note 5. Net Income Per Share:
Net income per share is calculated based on the weighted average number of
common share and common share equivalents outstanding during each period,
adjusted for the effects of stock dividends if any. Shares issuable under the
cancelable mandatory stock purchase contracts have been excluded from the
computations for 1994 and 1995 since their effect is immaterial. The net income
per share calculation has been computed using the modified treasury stock
method.
Fully diluted net income per share is not presented because it approximates
primary net income per share.
Note 6. Impaired Loans
NBSC adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and
SFAS No. 118, Accounting by Creditors for Impairment of a Loan, Income
Recognition and Disclosures, as of January 1, 1995. SFAS No. 114 requires that
certain impaired loans be measured based on the present value of
6
expected future cash flows discounted at the loan's original effective interest
rate. As a practical expedient, impairment may be measured back on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance.
NBSC had previously measured the allowance for credit losses using methods
similar to those prescribed in SFAS No. 114. Adoption of these statements did
not require any additional allowance for possible loan losses as of January 1,
1995.
As of June 30, 1995, NBSC's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 are as follows:
June 30, 1995
-----------------------
Recorded Valuation
(in thousands) Investment Allowance
-------------- ---------- ---------
Impaired loans:
Valuation allowance required $5,204 $1,374
No valuation allowance required --- ---
------ ------
Total impaired Loans $5,204 $1,374
------ ------
This valuation allowance is included in the allowance for loan losses on the
balance sheet.
The average recorded investment in impaired loans for the six months ended June
30, 1995 was $6,489,000.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining investment is doubtful at which time payments
received are recorded as reductions of principal. NBSC recognized interest
income on impaired loans of $73,000 for the six months ended June 30, 1995.
In accordance with SFAS No. 114, a loan is classified as foreclosed property
when the bank has taken possession of the collateral, regardless of whether
formal proceedings take place. This is a change from previous accounting for
insubstance foreclosed property under provisions of SFAS No. 15. SFAS No. 114
requires classification as foreclosed property based on actual possession
whereas previous practice classified certain loans as insubstance foreclosures
prior to possession based on characteristics of the borrower and underlying
collateral. As a result of adopting SFAS No. 114, loans of approximately
$1,048,000 no longer qualify as insubstance foreclosures based on possession
criteria, and therefore have been reclassified from other assets to loans as of
January 1, 1995. Prior periods also were restated since the amounts were
material.
At June 30, 1995, NBSC had $1.6 million of loans that resulted from troubled
debt restructurings that occurred prior to the adoption of SFAS No. 114. The
effect on income if interest on such troubled debt restructurings had been
recognized at original contractual rates during the year was not material.
At June 30, 1995, NBSC was committed to lend $70,000 additional funds to one
borrower with loans whose terms have been modified in troubled debt
restructurings.
Item 2. Managements' Discussion and Analysis of Financial Condition and Results
of Operations
Summary
See Managements' Discussion and Analysis of Financial Condition and Results of
Operations included in High Point Financial Corp.'s Annual Report on Form 10-K
for the period ended December 31, 1994.
For the six months ended June 30,1995, the Company's net income was $67,000 or
$0.02 per share compared to net income of $127,000 or $0.05 per share for the
same period in 1994. Although net income for the first six months in 1995 was
nearly half of the first six months in 1994, there were notable differences in
the components of net income. In the first six months of 1994, the Company
recorded no provision for possible loan losses in comparison to a $225,000
provision for 1995. For the first six months of 1994, the Company recorded a tax
refund of $126,000 attributable to the 1993 net operating loss carryback. In
comparison, the Company recorded a state tax provision for the first six months
of 1995. For the six months ended June 30, 1995, net income before taxes was
$76,000 compared to $16,000 in net income before taxes for the same period in
1994. The major reason why net income before taxes increased in 1995 was a
$477,000 increase in net interest income. This increase is discussed in further
detail below. See the discussion under "Results of Operations" on Page 8.
At June 30, 1995, the consolidated assets of the Company were approximately
$188.3 million, an increase of $3.7 million or 2.0% from the $184.6 million
reported December 31,1994. Return on average assets was
7
0.07% for the first six months of 1995 compared to the 0.14% reported for the
first six months last year. Return on average equity was 1.03% for the first
half of 1995 compared to 2.65% for the same period in 1994.
Results of Operations
Total interest income increased from $5,733,000 reported on June 30, 1994 to
$6,621,000 for June 30,1995, an increase of $888,000 or 15.5%. Average earning
assets net of non-accrual loans increased from $150.0 million in the first six
months of 1994 to $163.2 million in the first six months of 1995, an increase of
$13.2 million or 8.8%. Interest income increased $522,000 as a result of an
increase in the volume of earning assets. Interest income increased $366,000 due
to the increase in rates.
While the amount of loans on non-accrual continues to impact interest income and
fees on loans, average non-accruals continue to decline from $12,720,000 in the
first six months of 1994 to $7,744,000 for the first six months of 1995, a
decline of 39.1%. Interest lost on non-accrual loans was approximately $573,000
for the first six months of 1994 compared to $338,000 for the first six months
of 1995.
Total interest expense increased from $2,232,000 in the first half of 1994, to
$2,643,000 in the first half of 1995, an increase of $411,000 or 18.4%. The
major contributing factor of the increase in interest expense results from an
increase in the average rates paid on interest bearing liabilities from 3.32% in
the first six months of 1994 to 3.85% in the first half of 1995. Interest
expense increased $45,000 due to an increase in volume and $366,000 due to an
increase in the cost of funds. Also contributing to the increase in interest
expense is a shift from short-term transaction and savings deposits to long-term
higher paying certificates of deposit.
Net interest income for the first six months of 1995 was $3,978,000 compared to
$3,501,000 for the same period in 1994, an increase of $477,000 or 13.6%. A
$225,000 provision for loan losses was recorded for the first six months of 1995
compared to no provision for the same period in 1994. For further information,
see discussion under "Financial Condition" on Page 9.
Total non-interest income decreased from $1,165,000 for the first six months of
1994 to $1,131,000 for the first six months of 1995, a decrease of $34,000 or
2.9%. Service charges on deposit accounts declined $72,000 as a result of
management's decision to lower service charges assessed on deposit accounts in
order to attract additional deposits. Other service charges, commissions and
fees declined $156,000 a result of a decline in commissions on annuities and
brokerage services. Offsetting these declines in service charges were gains in
sales of securities and loans totaling $20,000 year-to-date 1995 compared to
losses totaling $167,000 for the first six months of 1994.
Total non-interest expense increased from $4,650,000 reported in the first half
of 1994 to $4,808,000 in the first half 1995, an increase of $158,000 or 3.4%.
Salaries and employee benefit expense increased $35,000 or 1.5% from first half
1994 to first half 1995 as a result of merit increases. Also included in the
increase in non-interest expense was an increase in other real estate expense of
$129,000, because gains on sales of property were not recorded in 1995 to the
same extent as in 1994. Offsetting the increase in ORE expenses was a decrease
in legal expenses resulting from a decline in non-performing loans. Other
expenses increased from $1,213,000 to $1,387,000, an increase of $174,000 or
14.3%. Included in this increase was a $122,000 increase in marketing expense as
a result of an effort to grow deposits and to advertise loan products more
extensively than the Company had in 1994.
Quarter to Quarter Analysis
Total interest income increased $422,000 or 14.4% from the second quarter of
1994 to the second quarter of 1995. Interest income on average earning assets
increased $247,000 due to an increase in volume and $175,000 due to an increase
in rates of earning assets. The average amount of loans on non-accrual for
second quarter 1995 and second quarter 1994 were $7,298,000 and $11,994,000
respectively. Interest lost on loans on non-accrual for second quarter 1995 and
second quarter 1994 were $155,000 and $256,000, respectively.
Total interest expense increased $255,000 or 23.1% for the second three months
of 1995 when compared to the same period in 1994. Interest expense increased
$30,000 due to the increase in the volume of interest bearing liabilities and
$225,000 due to the increase in rates.
Net interest income for the second three months of 1995 increased $167,000 from
the same period last year. There was a $50,000 provision for losses for the
second quarter of 1995, compared to no provision reported for the same period in
1994.
Total non-interest income decreased $25,000 or 4.0% from second quarter 1994 to
second quarter 1995. The decrease consists of recording a decline of $29,000 in
deposit service charges and a $101,000 decrease in other service charges,
commissions and fees. Other service charges, commissions and fees
8
include full service brokerage fees and commissions on annuity sales. Full
service brokerage fees declined from $49,000 for the second quarter of 1994 to
$42,000 for the second quarter of 1995, a decrease of $7,000 or 14.3%.
Commissions on annuity sales decreased from $105,000 for the second quarter of
1994 to $23,000 for the same period in 1995, a decrease of $82,000 or 78.1%.
Total non-interest expense increased from $2,361,000 reported in the second
quarter 1994 to $2,492,000 for the second quarter in 1995 an increase of
$131,000 or 5.6%. Significant increases occurred in net cost of operation of
other real estate owned and other expenses. Net cost of operation of other real
estate was $193,000 for the second quarter of 1995 compared to $39,000 for the
same period in 1994, an increase of $154,000. Other expenses increased $89,000
in the second quarter of 1995 compared to the same period in 1994. Increases in
other expenses included a $52,000 increase in marketing expense.
Financial Condition
At June 30, 1995, loans, net of unearned income, were $102.2 million compared to
$105.6 million reported December 31, 1994, a decrease of $3.4 million, or 3.2%.
There were $373,000 in loans held for sale as of June 30, 1995, compared to
$427,000 at year-end 1994. Mortgage loans, including those held for sale,
decreased $500,000, from $22.0 million at December 31, 1994 to $21.5 million at
June 30, 1995. During the first six months of 1995, $1,775,000 in mortgages have
been sold in the secondary market offset by $1,250,000 in new mortgages net of
repayments. Commercial loans declined from $66.8 million on December 31, 1994 to
$61.5 million on June 30, 1995, a decrease of $5.3 million or 7.9%. Installment
loans increased during this period from $13.8 million to $16.5 million, an
increase of $2.7 million or 19.6%. The overall decrease of $3.4 million in total
loans results from repayments and sales exceeding new loan demand.
Since December 31, 1994, the Company's total security portfolio increased $4.3
million. Purchases of securities in the held to maturity portfolio totaled $6.9
million. Maturities of securities in the held to maturity portfolio were
$362,000. Purchases in the available for sale portfolio totaled $1.6 million. In
the first six months of 1995, sales of securities totaled $2.2 million from the
available for sale portfolio with gains on sales of securities of $7,000.
Maturities of available for sale securities totaled $2.8 million. As of June
30,1995, the Company had an unrealized loss of $201,000 on securities in the
available for sale portfolio and $100,000 on certain securities that were
previously available for sale which were transferred to held to maturity. On
March 31, 1994, in response to a revised policy by the Federal Financial
Institutions Examination Council (FFIEC), NBSC transferred approximately $6.0
million of its collateralized mortgage obligations from an available for sale
classification into held to maturity at their aggregate market value. The
unrealized loss of $138,000 of these securities as of March 31, 1994 is included
as a reduction to shareholders' equity and is being amortized over the life of
the securities. At June 30,1995, there were $29.4 million in securities
classified as available for sale. These 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.
Total deposits increased from approximately $165.6 million on December 31, 1994
to approximately $167.5 million on June 30, 1995, an increase of $1.9 million or
1.1%. During this period, time deposits increased $2.9 million or 5.6%. Balances
in interest bearing and non-interest bearing transaction accounts declined
$788,000 and $1.6 million, respectively, as many depositors began to invest in
long term CDs rather than short-term transaction accounts.
Non-performing loans, as the schedule below indicates, were $8.3 million at June
30, 1995, a decrease of $4.6 million or 35.7% from the $12.9 million reported
year-end 1994. In addition, non-performing loans decreased $8.3 million or 50%
from June 30, 1994.
Non-performing assets at
(dollars in thousands) 6/30/95 3/31/95 12/31/94 9/30/94 6/30/94
------------------------ ------- ------- -------- ------- -------
Loans past due over 90 days $ 363 $ 129 $ 289 $ 275 $ 755
Loans on non-accrual(1) 6,319 7,581 8,435 11,380 12,738
Troubled debt restructurings(2) 1,579 4,007 4,164 3,547 3,104
------- ------- ------- ------- -------
Total non-performing loans 8,261 11,717 12,888 15,202 16,597
Other real estate(3) 4,661 4,273 3,946 4,996 4,713
------- ------- ------- ------- -------
Total non-performing assets $12,922 $15,990 $16,834 $20,198 $21,310
======= ======= ======= ======= =======
(1) Includes loans previously accounted for as in-substance foreclosure now
accounted for as non-accrual loans according to SFAS No. 114.
(2) Troubled debt restructurings as defined in SFAS No. 15 "Accounting by
Debtors and Creditors for Troubled Debt Restructurings" which occurred prior
to the adoption of SFAS No. 114; excludes loans classified as past due over
90 days or non-accrual.
(3) Other real estate is net of specific reserves of $660,000 at December
31,1994 and $249,000 at June 30, 1995. In the first six months of 1995,
$450,000 was charged to the specific reserve offset by a provision of
$39,000.
9
Non-accrual loans have decreased from $12.7 million reported June 30, 1994 to
$8.4 million at year-end 1994 to $6.3 million at June 30, 1995. Other real
estate increased $715,000 in the first six months of 1995. Generally, other real
estate is appraised when title is taken on the property unless there is a
contract of sale or there is an 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 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 six months of 1995, NBSC classified
$1,545,000 in new properties as other real estate. Properties that were sold
totaled $711,000. There was $119,000 in direct writedowns and provisions to
reserve for other real estate in the first half of 1995.
Loans classified by management but not included above as non-performing assets
at June 30, 1995 include $5.9 million classified as "special mentioned," $10.8
million classified as "substandard" and $114,000 classified as "doubtful." These
loans as of June 30, 1995 were not past due over 90 days. As part of
management's evaluation for the allowance for possible loan losses, it has
provided specific reserves for these loans as deemed necessary.
The allowance for possible loan losses decreased from $5.2 million on December
31, 1994 to $5.0 million on June 30, 1995. The following chart indicates the
quarterly levels of loans charged off, recoveries of previously charged off
loans, provisions made to the allowance, quarterly ending balances of the
allowance, and the ratio of the allowance to non-performing loans.
For the quarter ended
--------------------------------------------------
(dollars in thousands) 6/30/95 3/31/95 12/31/94 9/30/94 6/30/94
---------------------- ------- ------- -------- ------- -------
Beginning balance* $5,117 $5,234 $5,198 $5,129 $5,305
Loans charged-off (308) (403) (1,653) (68) (312)
Loans recovered 95 111 424 87 111
------ ------ ------ ------ ------
Net (charge-offs) recoveries (213) (292) (1,229) (19) (201)
Provision 50 175 1,265 50 25
------ ------ ------ ------ ------
Ending balance $4,954 $5,117 $5,234 $5,198 $5,129
====== ====== ====== ====== ======
Ratio of allowance for possible
loan losses to non-performing loans 60.0% 43.7% 40.6% 34.2% 30.9%
====== ====== ====== ====== ======
* Prior years balances and provisions adjusted for restatement of insubstance
foreclosure reserves to the allowance for possible loan losses per the
requirements of SFAS No. 114.
A provision for possible loan losses of $225,000 was recorded for the first six
months of 1995. NBSC's ratio of the allowance for possible loan losses to non-
performing loans is lower than regional and national peer statistics but has
increased substantially from the 30.9% reported June 30, 1994 to 60.0% on June
30,1995 as a result of provisions made in December 31, 1994 and during 1995.
NBSC's management believes that its allowance for possible loan losses is
adequate because of the nature of its methodology to monitor the allowance for
possible loan losses. NBSC performs the following procedures in order to
evaluate the adequacy of the allowance for possible loan losses. First, NBSC
conducts a loan specific review each quarter. This review assesses the estimated
future losses for every loan classified as non-performing, as well as performing
loans which have been criticized (either internally or by NBSC's regulators)
which do not meet the requirements for non-performing loan status. Second,
management monitors on a periodic basis the status of larger non-criticized
credits for changes and developments which could affect future collectibility.
Third, NBSC assesses the potential for loan losses in performing loans and off
balance sheet credit commitments, which are not specifically reviewed, by
estimating general reserve requirements based on historical and anticipated
collection statistics. The aggregate of specific credit review and general
reserve requirements are monitored at least quarterly to ensure that the level
of NBSC's allowance for possible loan losses is adequate. Management also
evaluates the adequacy of the allowance for possible loan losses based on trends
in non-performing loans and charge-offs, the Company's loan loss experience and
present and anticipated economic conditions within the market area. Included in
the economic analysis is a review of appraisals received in accordance with
regulatory guidelines. Management incorporates any trends in the fair value of
the collateral underlying loans in its analysis of the adequacy of the allowance
for possible loan losses. As a result of this ongoing analysis, management
believes at this time that the allowance for possible loan losses is
10
adequate to absorb any additional losses that may arise in the loan portfolio,
although no assurances can be given that the Company will not sustain losses in
any given period which could be substantial in relation to the size of the
Company's allowance.
Capital Resources
Stockholders' equity increased $1.4 million during the first six months of 1995
to $13.4 million. The increase in stockholders' equity resulted not only from
recording net income in the first half of 1995, but also from a $1.2 million
decline in unrealized losses on securities available for sale and the payment in
full of the ESOP debt. The book value (total of stockholders' equity divided by
the number of common shares issued and outstanding) of the Company's common
stock was $3.57 at June 30, 1995 compared to the $3.19 reported at December
31,1994.
The following chart represents the capital ratios of the Company and its
subsidiary, NBSC, on June 30, 1995, compared to minimum regulatory requirements:
The Company NBSC
---------------------- ---------------------
Minimum Minimum
Required(2) 6/30/95 Required(1) 6/30/95
-------- ---------- ----------- -------
Leverage Ratio 3.00% 7.18% 6.00% 6.30%(1)
Risk Based:
Tier I 4.00% 12.88% 4.00% 11.43%
Tier I plus Tier II 8.00% 14.66% 8.00% 12.72%
(1) Pursuant to its consent order with the OCC, NBSC must maintain a 6% leverage
ratio.
(2) The Federal Reserve Bank requires bank holding companies that are considered
to be strong banking organizations to maintain a minimum ratio of 3%. Bank
holding companies that do not meet the applicable regulatory standards are
required to maintain higher capital ratios. To date, the Federal Reserve
Bank has not stipulated any definitive ratio for High Point.
Liquidity
At NBSC, liquidity is typically provided by funds received through customer
deposits, investment sales and maturities, borrowings and net income. NBSC's
management believes the portfolio of securities available for sale, cash and due
from banks and federal funds sold currently provide sufficient liquidity to meet
anticipated operational liquidity requirements at NBSC. In addition, the sale of
loans is an alternative method for meeting liquidity requirements.
At High Point, liquidity is provided by funds received from the subsidiary bank
in the form of dividends and by sale of High Point assets. As stipulated in the
Consent Order that NBSC has with the Office of the Comptroller of the Currency
(the "OCC"), NBSC is precluded from paying dividends to High Point, and NBSC
cannot anticipate when it will resume dividend payments to High Point. High
Point under the terms of its written agreement with the Federal Reserve Bank
(FRB), is prohibited from paying dividends to its shareholders without prior
approval by the FRB. High Point cannot anticipate when it will resume dividend
payments.
High Point's major cash flow requirements are to meet the monthly principal,
interest and fee payments totaling approximately $24,000 on its note payable and
to pay the quarterly interest payments of $11,000 to its Redeemable Subordinated
Debenture holders. High Point also has legal fees, printing expenses, external
auditing fees and other miscellaneous fees to be paid throughout the year. The
remaining obligation of $1.1 million to the lending bank on the note secured by
land is due in a final balloon payment on January 2, 1998. High Point plans to
meet this obligation through the disposition of the land held for sale although
no assurance can be given in this regard. The land held for sale is generating
significant interest including a letter of intent to purchase 32 acres, although
there is no assurance that the purchase will be consumated. If the purchase is
to take place, it will not be completed in 1995.
Under the loan agreement that the note secures, High Point is required to
maintain Consolidated Tangible Net Worth (defined as (A) shareholders' equity
(including the value of common stock and debentures) less (B) intangible assets)
of $10.0 million. At December 31, 1994 and at June 30, 1995, High Point had
Consolidated Tangible Net Worth of $12,473,000 and $13,886,000, respectively.
At June 30, 1995, High Point had $52,000 in cash and $635,000 in federal funds
sold available to meet its liquidity needs. High Point has $127,000 in an escrow
account to service the note payable. Also, High Point has securities available
for sale, which at June 30, 1995, had a market value of $212,000.
11
Effect of Interest Rates
In 1994, 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 it has
more liabilities repricing in a given time frame than assets), and interest
rates increase, the net interest margin should decrease. As of June 30, 1995,
the Company's interest rate-sensitive liabilities exceeded its interest rate-
sensitive assets by $22.2 million, excluding non-interest bearing demand
deposits (which are not affected by interest rate changes). What gap theory does
not take into account is that when interest rate changes occur they do not
always affect rate-sensitive assets at the same time or proportionately. In
addition to gap analysis, management uses simulation modeling under a variety of
scenarios to estimate NBSC's interest rate sensitivity. Based on management's
analysis of NBSC's interest rate sensitivity, if interest rates were to increase
by 100 basis points, NBSC's net interest income would decline approximately
$92,000 annually.
12
HIGH POINT FINANCIAL CORP. Computation of Net Income Per Share - (Unaudited)
Six months ended June 30,
--------------------------
Net Income Per Share (Primary) 1995 1994
------------------------------ ---------- ----------
Net income $ 67,000 $ 127,000
After-tax interest expense related to the assumed reduction of outstanding debt* --- ---
---------- ----------
(1) Income applicable to common stock $ 67,000 $ 127,000
========== ==========
Shares used in this computation:
Weighted average number of common shares outstanding 3,745,760 2,474,329
Number of shares issuable on conversion of mandatory stock purchase contracts and
exercise of stock options classified as common share equivalents* --- ---
---------- ----------
(2) Adjusted weighted average number of common shares and common share
equivalents * 3,745,760 2,474,329
========== ==========
Net income per common share and common share equivalents (primary)
(1 divided by 2) * $0.02 $0.05
========== ==========
* 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 1993 and 1994 computation since their effect is immaterial.
13
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
On May 9, 1995, at the annual meeting, George H. Guptill, Jr., Charles
L. Lain and Harold E. Pellow were re-elected, by the common shareholders, as
directors of High Point. The votes were as follows:
For Against Abstain
-----------------------------------
Goerge H. Guptill, Jr. 3,113,540 19,077 20,706
Charles L. Lain 3,108,395 24,222 20,706
Harold E. Pellow 3,084,150 48,467 20,706
The total number of shares of High Point Financial Corp. common stock
outstanding as of March 15, 1995, the record date for the annual meeting, was
3,153,323.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11. Computation of net income per share is filed with Part I
of this report.
(b) Reports on Form 8-K.
None.
14
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: August 4, 1995
------------------------
By /s/ Rita A. Myers By /s/ Gregory W. A. Meehan
------------------------ -------------------------------
Rita A. Myers Gregory W. A. Meehan
Comptroller Vice President and Treasurer
15