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, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-12430
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HIGH POINT FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2426221
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Branchville Square, Branchville, New Jersey 07826
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(Address of principal executive offices) (Zip Code)
(201) 948-3300
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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 March 31, 1996 there were 3,786,480 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 - March 31, (unaduited) and December 31, 1995 3
Consolidated Statements of Operations - Unaudited Three Months Ended March 31, 1996
and 1995 4
Consolidated Statements of Cash Flow - Unaudited Three Months Ended March 31, 1996
and 1995 5
Notes to Consolidated Financial Statements (unaduited) 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 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)
March 31, 1996 December 31,
ASSETS (unaudited) 1995
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Cash and due from banks $6,666 $11,290
Federal funds sold 11,050 11,150
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Total cash and cash equivalents 17,716 22,440
Interest bearing deposits with banks 124 125
Securities:
Available for sale, at fair value 51,186 49,304
Held to maturity, at cost (market value of $17,676 in 1996 and
$15,483 in 1995) 17,779 15,392
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Total securities 68,965 64,696
Loans held for sale 213 628
Loans 104,802 104,863
Less: Unearned income 22 30
Allowance for possible loan losses 4,428 4,609
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Net loans 100,352 100,224
Land held for sale 2,135 2,135
Premises and equipment - net 2,640 2,692
Accrued interest receivable 1,404 1,388
Other real estate (Note 2) 2,508 2,741
Other assets 2,962 3,115
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TOTAL ASSETS $199,019 $200,184
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Deposits:
Transaction accounts:
Interest bearing $24,750 $25,092
Non-interest bearing 35,036 38,334
Savings accounts 55,892 55,832
Time accounts (includes CDs $100 or over of $8,603 and $9,372 on
March 31, 1996 and December 31, 1995, respectively) 59,361 59,067
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 175,039 178,325
Securities sold under agreements to repurchase 4,463 2,959
Accrued expenses and other liabilities (Note 3) 2,470 2,561
Note payable 1,251 1,270
Redeemable subordinated debentures, 8.5% due March 1996 and 127 511
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Total liabilities 183,350 185,626
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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 (8,872) (9,629)
Unrealized gain (loss) on securities available for sale (182) 244
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Total stockholders' equity 15,669 14,558
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $199,019 $200,184
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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 March 31,
1996 1995
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INTEREST INCOME
Interest income and fees on loans $2,314 $2,339
Interest on securities:
Taxable interest income 1,009 810
Interest on deposits with banks - 1
Interest on federal funds sold 157 122
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TOTAL INTEREST INCOME 3,480 3,272
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INTEREST EXPENSE
Interest on deposits 1,353 1,204
Interest on other borrowed money 38 30
Interest on debentures 9 11
Interest on note payable 30 37
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TOTAL INTEREST EXPENSE 1,430 1,282
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NET INTEREST INCOME 2,050 1,990
Less: Provision for possible loan losses - 175
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NET INTEREST INCOME AFTER PROVISION FOR 2,050 1,815
POSSIBLE LOAN LOSSES
NON-INTEREST INCOME
Service charges on deposit accounts 346 325
Other service charges, commissions and fees 197 157
Gain (loss) on the sales of securities - (23)
Gain (loss) on the sales of loans 10 3
Gain on sale of bank premises 36 38
Other income 60 37
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TOTAL NON-INTEREST INCOME 649 537
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NON-INTEREST EXPENSE
Salaries and employee benefits 1,125 1,182
Net occupancy expense 238 249
Equipment expense 133 137
Legal expense 73 41
Net cost of operation of other real estate 57 50
Other expenses 562 657
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TOTAL NON-INTEREST EXPENSE 2,188 2,316
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Income (loss) before provision (benefit) for income taxes and cumulative
effect for change in accounting principle 511 36
Provision (benefit) for income taxes (246) 5
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Net income before cumulative effect for change in accounting principle 757 31
Cumulative effect of change in accounting principle - (370)
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NET INCOME (LOSS) $757 ($339)
===================================================================================================================================
Net income (loss) per common share and common share equivalent
before cumulative effect for change in accounting principle $0.20 $0.01
Cumulative effect for change in accounting principle - (0.10)
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NET INCOME (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $0.20 ($0.09)
===================================================================================================================================
WEIGHTED AVERAGE COMMON SHARE
AND COMMON SHARE EQUIVALENTS 3,758 3,746
===================================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars in thousands) Three Months Ended March 31,
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1996 1995
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OPERATING ACTIVITIES
Net income $757 $(339)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 102 118
Amortization of securities discount, net 55 30
Cash received related to discount on matured investment securities 32
Loan fees amortized, net (8) (2)
Provision for possible loan losses --- 175
Deferred income tax benefit (250) ----
Loss on sale of securities --- 23
Unrealized loss on land held for sale --- 370
Gain on sale of premises and equipment (36) (38)
(Increase) decrease in accrued interest receivable and other assets 620 (678)
Increase (decrease) in accrued expenses and other liabilities (55) 74
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,217 (267)
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INVESTING ACTIVITIES
Proceeds from sale of securities:
Available for sale --- 1,115
Proceeds from maturity of securities:
Available for sale 2,267 168
Held for maturity 1,146 996
Purchase of securities:
Available for sale (4,641) (1,052)
Held for maturity (3,554) (951)
Net decrease of interest bearing deposits with banks 1 14
Net decrease in loans 295 1,066
Capital expenditures (55) (93)
Proceeds from sale of premises and equipment 5 5
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,536) 1,268
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FINANCING ACTIVITIES
Net decrease in deposits (3,286) (2,415)
Increase in federal funds purchased and
securities sold under agreements to repurchase 1,504 399
Repayments of long-term debt principal (19) (12)
Proceeds from conversion of equity contracts 396 ----
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NET CASH USED IN FINANCING ACTIVITIES (1,405) (2,028)
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Net increase (decrease) in cash and cash equivalents (4,724) (1,027)
Cash and cash equivalents, beginning of year 22,440 17,118
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CASH AND CASH EQUIVALENTS, END OF YEAR $17,716 $16,091
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $1,448 $1,198
INCOME TAXES REFUNDED --- 3
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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, 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 quarters ended
March 31, 1995 and 1996.
March 31, March 31,
(dollars in thousands) 1996 1995
- ---------------------------------------------------------
Beginning balance, January 1* $0 $660
Provisions 50 30
Charge-offs - (300)
-------- --------
Ending balance $50 $390
======== ========
Note 3. Interest:
Accrued expenses and other liabilities includes accrued interest expense of
$557,000 at March 31, 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 6.7% of the outstanding Common Stock of High Point. Rent
paid to FMI, Inc. was $93,000 for each of the first quarters of 1996 and 1995.
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.
6
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 March 31, 1996, NBSC's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 are as follows:
March 31, 1996 March 31, 1995
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Recorded Valuation Recorded Valuation
(in thousands) Investment Allowance Investment Allowance
Impaired loans: ---------- --------- ---------- ---------
Valuation allowance required $4,723 $1,253 $6,073 $1,432
No valuation allowance required -- -- -- --
---------------------------------------------
Total impaired Loans $4,723 $1,253 $6,073 $1,432
---------------------------------------------
This valuation allowance is included in the allowance for loan losses on the
balance sheet.
The average recorded investments in impaired loans for the quarters ended March
31, 1996 and March 31, 1995 were $5,032,000 and $6,654,000, 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 $81,000 and $52,000 for the quarters ended
March 31, 1996 and March 31, 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 March 31, 1996, NBSC had $654,000 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, 1996, NBSC was committed to lend $133,000 in 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 first
quarter 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 quarter was $246.
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 three months ended March 31,1996, the Company's net income was $757,000
or $0.20 per share compared to a net loss of $339,000 or $0.09 per share for the
same period in 1995. Net income for first quarter 1996 included a 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 quarter 1996 and
based on pretax income estimated to be earned for future interim periods in
1996. This estimate will be impacted favorably or unfavorably by future results
of operations.
The increase in net income from first quarter 1995 to first quarter 1996 was due
to an increase in income from continuing operations which will be discussed in
greater detail below. However, net income for first quarter 1996 also compares
favorably with the net loss in 1995, because of the Company's 1995 adoption of
SFAS
7
No. 121 "Accounting for Impairment of Long-lived Assets and for Long-lived
Assets to be disposed of" ("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 quarter 1995 as a cumulative
effect of a change in accounting principle. Also included in first quarter
1995's net loss was a provision for possible loan losses totaling $175,000. No
provision for possible loan losses was recorded in first quarter 1996.
At March 31, 1996, the consolidated assets of the Company were approximately
$199.0 million, a decrease of $1.2 million or 0.60% from the $200.2 million
reported December 31, 1995. Return on average assets was 1.51% compared to the
- -1.18% reported for the first three months last year. Return on average equity
was 20.1% compared to -10.01% for the first three months of 1995.
Results of Operations
Total interest income increased from $3,272,000 reported on March 31, 1995 to
$3,480,000 for March 31,1996, an increase of $208,000 or 6.4%. Average earning
assets net of non-accrual loans increased from $161.1 million in the first three
months of 1995 to $179.4 million in the first three months of 1996, an increase
of $18.3 million or 11.4%. Interest income increased $342,000 as a result of an
increase in the volume of earning assets, offset by a decrease of $134,000 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 declined $1.3 million from first quarter 1995
to first quarter 1996 while average investments have increased $16.3 million
from first quarter 1995 to first quarter 1996. Because investments generally
earn a lesser yield than loans, this lowers 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 $7,874,000 for the
first three months of 1995 to $5,713,000 for the first three months of 1996, a
decline of 27.4%. Interest lost on non-accrual loans was approximately $177,000
for the first three months of 1995 compared to $150,000 for the first three
months of 1996.
Total interest expense increased from $1,282,000 in the first quarter of 1995,
to $1,430,000 in the first quarter of 1996, an increase of $148,000 or 11.5%.
The major contributing factor of the increase in interest expense results from
an increase in the average volume of interest bearing liabilities from $136.2
million for first quarter 1995 to $146.9 million for first quarter 1996.
Interest expense increased $103,000 due to an increase in volume and $45,000 due
to an increase in the cost of funds.
Net interest income for the first three months of 1996 was $2,050,000 compared
to $1,990,000 for the same period in 1995, an increase of $60,000 or 3.0%. No
provision for possible loan losses was recorded for the first three months of
1996 compared to a provision of $175,000 for the same period in 1995. For
further information, see discussion under "Financial Condition" below.
Total non-interest income increased from $537,000 for the first three months of
1995 to $649,000 for the first three months of 1996, an increase of $112,000 or
20.9%. Service charges on deposit accounts increased $21,000 as a result of
increased volume of demand deposit accounts. Other service charges, commissions
and fees increased $40,000 as a result of an increase in commissions on
annuities and brokerage services. Also increasing were aggregate gains (losses)
on the sales of securities and loans, which increased from a net loss of $20,000
in first quarter 1995 to a net gain of $10,000 in the first quarter of 1996.
Total non-interest expense decreased from $2,316,000 reported in the first
quarter of 1995 to $2,188,000 in the first quarter 1996, a decrease of $128,000
or 5.5%. Salaries and employee benefit expense decreased from $1,182,000 in
first quarter 1995 to $1,125,000 in first quarter 1996, a decrease of $57,000 or
4.8%. The decline in salary and benefit expense results from terminations and
attrition which occurred in second quarter 1995. Other expenses decreased from
$657,000 to $562,000, a decrease of $95,000 or 14.5%. Included in this decrease
was a $42,000 decrease in FDIC insurance expense resulting from a reduction in
deposit premiums. Marketing expense also declined from $97,000 for the first
quarter of 1995 to $57,000 for first quarter 1996, a decline of $40,000.
Financial Condition
At March 31, 1996, loans, net of unearned income, were $104.8 million compared
to $104.9 million reported December 31, 1995, an decrease of approximately
$100,000, or 0.1%. There were $213,000 in loans held for sale as of March 31,
1996, compared to $628,000 at year-end 1995. Mortgage loans, including those
held for sale, increased $907,000, from $24.7 million at December 31, 1995 to
$25.6 million at March 31, 1996. During the first three months of 1996, $518,000
in mortgages have been sold in the secondary market offset by $1.4 million in
new mortgages net of repayments. Commercial loans declined from $58.3 million on
December 31, 1995 to $55.7 million on March 31, 1996, a decrease of $2.6 million
or 4.5%. Real estate construction loans have remained approximately at their
year-end levels of $4.3 million. Installment loans increased during this period
from $18.1 million to $19.3 million, an increase of $1.2 million or 6.6%.
8
Since December 31, 1995, the Company's total security portfolio increased $4.3
million. Purchases of securities in the held to maturity portfolio totaled $3.6
million. Purchases in the available for sale portfolio totaled $4.6 million.
There were no sales of securities during the first quarter of 1996. There were
maturities of $2.4 million and $1.1 million in the available for sale and held
to maturity portfolios, respectively. As of March 31, 1996, the Company had an
unrealized loss of $182,000 on securities in the available for sale portfolio.
At March 31,1996, there were $51.2 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 decreased from approximately $178.3 million on December 31, 1995
to approximately $175.0 million on March 31, 1996, a decline of $3.3 million or
1.9%. During this period, time deposits increased from $59.1 million to $59.4
million, an increase of $300,000 or 0.5%. Balances in interest bearing and non-
interest bearing transaction accounts declined $342,000 and $3.3 million,
respectively. The decline in deposits from December 31, 1995 to March 31, 1996
was the result of a cyclical outflow of deposits which generally occurs in first
quarter of every year.
Non-performing loans, as the schedule below indicates, were $6.7 million at
March 31, 1996, a decrease of $700,000 or 9.5% from the $7.4 million reported
year-end 1995. In addition, non-performing loans decreased $5.0 million or 42.7%
from March 31, 1995.
Non-performing assets at
(dollars in thousands) 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
- --------------------------------------------------------------------------------
Loans past due over 90 days $ 126 $ 156 $ 188 $ 363 $ 129
Loans on non-accrual(1) 5,923 5,744 4,993 6,319 7,581
Troubled debt restructurings (2) 654 1,532 1,522 1,579 4,007
----------------------------------------------
Total non-performing loans 6,703 7,432 6,703 8,261 11,717
Other real estate 2,558 2,741 4,213 4,910 4,663
----------------------------------------------
Total non-performing assets $9,261 $10,173 $10,916 $13,171 $16,380
==============================================
(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"; excludes loans classified
as past due over 90 days or non-accrual.
Non-accrual loans decreased from $7.6 million reported March 31, 1995 to $5.7
million at year-end 1995 but increased marginally to $5.9 million at March 31,
1996. Other real estate decreased $183,000 in the first three months of 1996 and
decreased $2.1 million from March 31, 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 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 first quarter 1996, NBSC classified no new properties as other real
estate. Properties that were sold totaled $158,000. There were $25,000 in direct
writedowns of other real estate in the first quarter of 1996.
Loans classified by management but not included above as non-performing assets
at March 31, 1996 include $5.8 million classified as "special mentioned" and
$9.5 million classified as "substandard". These loans as of March 31, 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.
The allowance for possible loan losses decreased from $4.6 million on December
31, 1995 to $4.4 million on March 31, 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.
9
For the quarter ended
----------------------------------------------
(dollars in thousands) 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
- ----------------------------------------------------------------------------
Beginning balance $4,609 $4,801 $4,954 $5,117 $5,234
Loans charged-off (309) (506) (254) (308) (403)
Loans recovered 128 314 101 95 111
----------------------------------------------
Net (charge-offs) recoveries (181) (192) (153) (213) (292)
Provision - - - 50 175
----------------------------------------------
Ending balance $4,428 $4,609 $4,801 $4,954 $5,117
==============================================
Ratio of allowance for possible
loan losses to non-performing
loans 66.1% 62.0% 71.6% 60.0% 43.7%
==============================================
No provision for possible loan losses was recorded for the first three 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 but has increased
substantially from the 43.7% reported March 31, 1995 to 66.1% on March 31, 1996
as a result of provisions made December 31, 1994 and March 31, 1995 and as a
result of declines in non-performing loans. NBSC's management believes that its
allowance for possible loan losses is adequate because of the nature of its
methodology to monitor the allowance for possible loan losses. NBSC performs the
following procedures in order to evaluate the adequacy of the allowance for
possible loan losses: First, NBSC conducts a loan specific review each quarter.
This review assesses the estimated future losses for every loan classified as
non-performing, as well as performing loans which have been criticized (either
internally or by NBSC's regulators) which do not meet the requirements for non-
performing loan status. Second, management monitors on a periodic basis the
status of larger non-criticized credits for changes and developments which could
affect future collectibility. Third, NBSC assesses the potential for loan losses
in performing loans and off balance sheet credit commitments, which are not
specifically reviewed, by estimating general reserve requirements based on
historical and anticipated collection statistics. The aggregate of specific
credit review and general reserve requirements are monitored at least quarterly
to ensure that the level of NBSC's allowance for possible loan losses is
adequate. Management also evaluates the adequacy of the allowance for possible
loan losses based on trends in non-performing loans and charge-offs, the
Company's loan loss experience and present and 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.
Capital Resources
Stockholders' equity increased $1,111,000 during the first three months of 1996
to $15.7 million. The increase in stockholders' equity resulted not only from
recording net income in first quarter 1996, but also from the conversion of
$781,000 of equity contracts to Common Stock on March 1, 1996. This included the
conversion of $397,000 of equity contracts paid by cash and $384,000 paid by
tendering debentures. 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 $182,000
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 $4.14 at March 31, 1996 compared
to the $3.89 reported at December 31,1995.
On April 1, 1996, NBSC received notification from its primary regulator, the
Office of the Comptroller of the Currency (the "OCC"), that NBSC's stipulation
and consent agreement (the "Consent Order") had been terminated as of March 27,
1996. The Consent Order, among other things, required NBSC to maintain a 6%
leveraged capital ratio and prohibited NBSC from paying dividends.
10
The following chart represents the capital ratios of the Company and its
subsidiary, NBSC, on March 31, 1996, compared to minimum regulatory
requirements:
The Company NBSC
------------------- ------------------------
Minimum Minimum
Required 3/31/96 Required 3/31/96
- --------------------------------------------------------------------------------
Leverage Ratio 3.00%(2) 7.91% (2) 3.00% (1) 7.03%(1)
Risk Based:
Tier I 4.00% 14.79% 4.00% 13.26%
Tier I plus Tier II 8.00% 16.20% 8.00% 14.55%
(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. While NBSC does not meet the standards
to be considered a strong bank, management believes its 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 the dividend restrictions set forth by the OCC. Under such
restrictions, NBSC may not, without the prior approval of the OCC, declare
dividends in excess of the current year's earnings plus the retained earnings
from the prior two years. The bank also is restricted from paying dividends if
at anytime 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 $1,678,000. However, NBSC has an
accumulated deficit of $3,395,000. Until NBSC's profits reduce the deficit and
NBSC's retained earnings exceed its losses, it will be unable to pay dividends
to High Point. 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 $17,000 on its note payable and
to pay the quarterly interest payments of $3,000 to its remaining 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 $1,122,000 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 result to meet this obligation. There is a contract
for sale on 32 acres of the land held for sale. There is no assurance that this
land sale will be consummated and if the sale is consummated, it is possible
that it may not close until January 1998. The remainder of the land continues to
generate interest among potential buyers. High Point is also obligated to pay in
cash the remaining $127,000 of Redeemable Subordinated Debentures on March 1,
1997.
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, 1995 and at March 31, 1996, High Point had
Consolidated Tangible Net Worth of $15,069,000 and $15,796,000, respectively.
At March 31, 1996, High Point had $17,000 in cash and $800,000 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 March 31, 1996, had a market value of $213,000.
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
11
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, 1996, the Company's interest rate-sensitive
liabilities exceeded its interest rate-sensitive assets by $11.1 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 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 $112,000. Conversely, if interest rates were to decrease
by 100 basis points, net interest income would decrease by the same amount.
12
HIGH POINT FINANCIAL CORP. Computation of Net Income Per Share - (Unaudited)
Three months ended March 31,
-------------------------------------
Net Income Per Share (Primary) 1996 1995
--------------------------------------------------------------------------------------------------------------------
Net income $757,000 $31,000
After-tax interest expense related to the assumed reduction of
outstanding debt* --- ---
--------------------------------------------------------------------------------------------------------------------
(1) Income applicable to common stock $757,000 $31,000
====================================================================================================================
Shares used in this computation:
Weighted average number of common shares outstanding 3,757,858 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 * 3,757,858 3,745,760
====================================================================================================================
Net income per common share and common share equivalents (primary)
(1 divided by 2) * $0.20 $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
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 April 11, 1996.
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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 9, 1996
- -----------------------------
By/s/ Rita A. Myers By /s/ Gregory W. A. Meehan
- ------------------------ ---------------------------------
Rita A. Myers Gregory W. A. Meehan
Comptroller Vice President and Treasurer
15