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 30-Jun-96
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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 June 30, 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 - June 30, 1996 (unaudited) and December 31, 1995 3
Consolidated Statements of Operations - Unaudited Six Months Ended June 30, 1996
and 1995 4
Consolidated Statements of Cash Flow - Unaudited Six Months Ended June 30, 1996
and 1995 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, 1996 December 31,
ASSETS (unaudited) 1995
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Cash and due from banks $8,778 $11,290
Federal funds sold 11,400 11,150
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Total cash and cash equivalents 20,178 22,440
Interest bearing deposits with banks 125 125
Securities:
Available for sale, at fair value 51,077 49,304
Held to maturity, at cost (market value of $19,329 in 1996 and
$15,483 in 1995) 19,576 15,392
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Total securities 70,653 64,696
Loans held for sale 11 628
Loans 106,515 104,863
Less: Unearned income 14 30
Allowance for possible loan losses 4,121 4,609
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Net loans 102,380 100,224
Land held for sale 2,135 2,135
Premises and equipment - net 2,744 2,692
Accrued interest receivable 1,403 1,388
Other real estate (Note 2) 2,145 2,741
Other assets 3,840 3,115
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TOTAL ASSETS $205,614 $200,184
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Deposits:
Transaction accounts:
Interest bearing $25,224 $25,092
Non-interest bearing 39,657 38,334
Savings accounts 57,697 55,832
Time accounts (includes CDs $100 or over of $7,516 and $9,372 on
June 30, 1996 and December 31, 1995, respectively) 59,277 59,067
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Total deposits 181,855 178,325
Securities sold under agreements to repurchase 3,694 2,959
Accrued expenses and other liabilities (Note 3) 2,444 2,561
Note payable 1,233 1,270
Redeemable subordinated debentures, 8.5% due March 1, 1997 127 511
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Total liabilities 189,353 185,626
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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 (8,096) (9,629)
Unrealized gain (loss) on securities available for sale (366) 244
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Total stockholders' equity 16,261 14,558
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $205,614 $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 June 30, Six Months Ended June 30,
1996 1995 1996 1995
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INTEREST INCOME
Interest income and fees on loans $2,255 $2,306 $4,569 $4,645
Interest on securities:
Taxable interest income 1,048 859 2,057 1,669
Interest on deposits with banks 1 - 1 1
Interest on federal funds sold 158 183 315 306
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TOTAL INTEREST INCOME 3,462 3,348 6,942 6,621
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INTEREST EXPENSE
Interest on deposits 1,328 1,284 2,681 2,488
Interest on other borrowed money 37 31 75 61
Interest on debentures 2 11 11 22
Interest on note payable 29 35 59 72
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TOTAL INTEREST EXPENSE 1,396 1,361 2,826 2,643
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NET INTEREST INCOME 2,066 1,987 4,116 3,978
Less: Provision for possible loan losses- 50 - 225
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NET INTEREST INCOME AFTER PROVISION FOR 2,066 1,937 4,116 3,753
POSSIBLE LOAN LOSSES
NON-INTEREST INCOME
Service charges on deposit accounts 347 340 693 665
Other service charges, commissions and fees 242 136 439 292
Gain (loss) on the sales of securities (10) 30 (10) 6
Gain (loss) on the sales of loans (1) 10 9 14
Gain on sale of bank premises 31 36 67 74
Other income 46 43 106 80
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TOTAL NON-INTEREST INCOME 655 595 1,304 1,131
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NON-INTEREST EXPENSE
Salaries and employee benefits 1,136 1,128 2,261 2,310
Net occupancy expense 238 234 476 483
Equipment expense 134 134 267 271
Legal expense 115 74 188 115
Net cost of operation of other real estate 78 193 135 242
Other expenses 612 729 1,174 1,387
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TOTAL NON-INTEREST EXPENSE 2,313 2,492 4,501 4,808
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Income before provision (benefit) for income taxes and
cumulative
effect for change in accounting principle 408 40 919 76
Provision (benefit) for income taxes (368) 4 (614) 9
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Net income before cumulative effect for change in
accounting principle 776 36 1,533 67
Cumulative effect of change in accounting principle - - - (370)
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NET INCOME (LOSS) $776 $36 $1,533 ($303)
===============================================================================================================================
Net income (loss) per common share and common share
equivalent before cumulative effect for change in accounting
principle $0.20 $0.01 $0.41 $0.02
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 $0.01 $0.41 ($0.08)
===============================================================================================================================
WEIGHTED AVERAGE COMMON SHARE
AND COMMON SHARE EQUIVALENTS 3,786 3,746 3,772 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) Six Months Ended June 30,
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1996 1995
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OPERATING ACTIVITIES
Net income (loss) $1,533 $(303)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 205 220
Amortization of securities discount, net 105 53
Cash received related to discount on matured investment
securities (81) ----
Loan fees amortized, net (15) (8)
Provision for possible loan losses ---- 225
Deferred income tax benefit (620) ----
(Gain) loss on sale of securities 10 (6)
Unrealized loss on land held for sale ---- 370
Gain on sale of premises and equipment (67) (74)
(Increase) decrease in accrued interest receivable and other
assets 476 (767)
Increase (decrease) in accrued expenses and other liabilities (45) 224
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,501 (66)
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INVESTING ACTIVITIES
Proceeds from sale of securities:
Available for sale 2,007 2,223
Proceeds from maturity of securities:
Available for sale 5,842 2,806
Held for maturity 2,351 362
Purchase of securities:
Available for sale (10,256) (1,604)
Held for maturity (6,545) (6,932)
Net decrease of interest bearing deposits with banks ---- (3)
Net (increase) decrease in loans (1,524) 2,936
Capital expenditures (267) (145)
Proceeds from sale of premises and equipment 5 4
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NET CASH USED IN INVESTING ACTIVITIES (8,387) (353)
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FINANCING ACTIVITIES
Net increase in deposits 3,530 1,918
Increase in federal funds purchased and
securities sold under agreements to repurchase 735 523
Repayments of long-term debt principal (37) (175)
Proceeds from conversion of equity contracts 396 ----
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NET CASH PROVIDED BY FINANCING ACTIVITIES 4,624 2,266
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Net increase (decrease) in cash and cash equivalents (2,262) 1,847
Cash and cash equivalents, beginning of period 22,440 17,118
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CASH AND CASH EQUIVALENTS, END OF PERIOD $20,178 $18,965
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $2,851 $2,470
INCOME TAXES REFUNDED (3) 6
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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 six months
ended June 30, 1995 and 1996.
June 30, June 30,
(dollars in thousands) 1996 1995
- ---------------------------------------------------
Beginning balance, January 1 $0 $660
Provisions 50 39
Charge-offs - (450)
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Ending balance $50 $249
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Note 3. Interest:
Accrued expenses and other liabilities includes accrued interest expense of
$550,000 at June 30, 1996 and $575,000 at December 31, 1995.
Note 4. Related Party Transactions:
Net occupancy expense includes rent on certain properties leased from FMI, Inc.,
a wholly owned subsidiary of Franklin Mutual Insurance Company. Franklin Mutual
Insurance Company owns 6.6% of the outstanding Common Stock of High Point. Rent
paid to FMI, Inc. year-to-date 1995 and year-to-date 1996 was $185,000 for each
six month period.
Note 5. Net Income (Loss) Per Share:
Net income (loss) per share is calculated based on the weighted average number
of common share and common share equivalents outstanding during each period,
adjusted for the effects of stock dividends if any. Shares issuable under the
cancelable mandatory stock purchase contracts have been excluded from the
computation for 1995 since their effect is immaterial. Options granted under the
Company's stock option plans have also been excluded from the 1996 computation
since their effect is immaterial.
Fully diluted net income per share is not presented because it approximates
primary net income per share.
Note 6. Impaired Loans
NBSC adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and
SFAS No. 118, Accounting by Creditors for Impairment of a Loan, Income
Recognition and Disclosures, as of January 1, 1995. SFAS No. 114 requires that
certain impaired loans be measured based on the present value of expected future
cash flows discounted at the loans' original effective interest rate. As a
practical expedient, impairment may be measured based on a loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation
allowance.
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 June 30, 1996, NBSC's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 are as follows:
30-Jun-96 30-Jun-95
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Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
(in thousands)
Impaired loans:
Valuation allowance required $4,462 $1,061 $5,204 $1,374
No valuation allowance required --- --- --- ---
-----------------------------------------
Total impaired Loans $4,462 $1,061 $5,204 $1,374
-----------------------------------------
This valuation allowance is included in the allowance for loan losses on the
balance sheet.
The average recorded investments in impaired loans for the six months ended June
30, 1996 and June 30, 1995 were $4,641,000 and $6,489,000, 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 $77,000 and $73,000 for the six months
ended June 30, 1996 and June 30, 1995, respectively.
In accordance with SFAS No. 114, a loan is classified as foreclosed property
when the bank has taken possession of the collateral, regardless of whether
formal proceedings take place. This is a change from previous accounting for
insubstance foreclosed property under provisions of SFAS No. 15. SFAS No. 114
requires classification as foreclosed property based on actual possession
whereas previous practice classified certain loans as insubstance foreclosures
prior to possession based on characteristics of the borrower and underlying
collateral. As a result of adopting SFAS No. 114, loans of approximately
$1,048,000 no longer qualify as insubstance foreclosures based on possession
criterion, and therefore have been reclassified from other assets to loans on
January 1, 1995.
At June 30, 1996, NBSC had $517,000 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 June 30, 1996, NBSC was committed to lend $28,000 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 the first
six months of 1996, the Company capitalized $6,000 in mortgage servicing rights.
The capitalized amount of the mortgage servicing rights shall be amortized over
the estimated average life of the mortgages using the interest method. The
amount amortized during first six months was $500.
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 six months ended June 30, 1996, the Company's net income was $1,533,000
or $0.41 per share compared to net loss of $303,000 or $0.08 per share for the
same period in 1995. Net income for first six months of 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 six months of 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 the first six months of 1995 to the first six
months in 1996 was due to an increase in income from continuing operations which
will be discussed in greater detail below. However, net income for the first six
months of 1996 also compares favorably with the net loss in 1995, due to the
7
Company's 1995 adoption of SFAS No. 121 "Accounting for Impairment of Long-lived
Assets and for Long-lived Assets to be disposed of" ("SFAS No. 121"). In
accordance with SFAS No. 121, in December 1995, High Point evaluated its land
held for sale for impairment and determined that a valuation reserve of $370,000
was required. The $370,000 provision was retroactively reflected in the results
of operations for first six months of 1995 as a cumulative effect of a change in
accounting principle. Also included in the net loss for the first six months of
1995 was a provision for possible loan losses totaling $225,000. No provision
for possible loan losses was recorded in first six months of 1996.
At June 30, 1996, the consolidated assets of the Company were approximately
$205.6 million, an increase of $5.4 million or 2.7% from the $200.2 million
reported December 31, 1995. Return on average assets for the first six months of
1996 was 1.52% compared to the (0.33%) reported for the same period last year.
Return on average equity was 19.85% year-to-date 1996 compared to (4.64%) for
the first six months of 1995.
Results of Operations
Total interest income increased from $6,621,000 reported on June 30, 1995 to
$6,942,000 for June 30, 1996, an increase of $321,000 or 4.8%. Average earning
assets net of non-accrual loans increased from $163.4 million in the first six
months of 1995 to $181.1 million in the first six months of 1996, an increase of
$17.7 million or 10.8%. Interest income increased $637,000 as a result of an
increase in the volume of earning assets, offset by a decrease of $316,000 due
to a decline in the average yield on earning assets. The decline in yield is due
to the declining rate environment but is also due to a shift in composition in
earning assets. Average loans have increased $290,000 from first half 1995 to
first half 1996 while average investments have increased $14.1 million from the
first six months of 1995 to the first six months of 1996. Because investments
generally earn a lesser yield than loans, the increased percentage of
investments as compared to loans effectively reduced the overall yield on
earning assets.
While the amount of loans on non-accrual continues to impact interest income and
fees on loans, average non-accruals continued to decline from $7,744,000 for the
first half of 1995 to $5,672,000 for the first half of 1996, a decline of 26.8%.
Interest lost on non-accrual loans was approximately $338,000 for the first six
months of 1995 compared to $281,000 for the first six months of 1996.
Total interest expense increased from $2,643,000 in the first six months of
1995, to $2,826,000 in the first six months of 1996, an increase of $183,000 or
6.9%. The major contributing factor of the increase in interest expense was an
increase in the average volume of interest bearing liabilities from $137.2
million for the first six months of 1995 to $147.5 million for the first six
months of 1996. Interest expense increased $197,000 due to an increase in volume
offset by a decline of $14,000 due to a decrease in the cost of funds.
Net interest income for the first six months of 1996 was $4,116,000 compared to
$3,978,000 for the same period in 1995, an increase of $138,000 or 3.5%. No
provision for possible loan losses was recorded for the first six months of 1996
compared to a provision of $225,000 for the same period in 1995. For further
information, see discussion under "Financial Condition" below.
Total non-interest income increased from $1,131,000 for the first six months of
1995 to $1,304,000 for the first six months of 1996, an increase of $173,000 or
15.3%. Service charges on deposit accounts increased $28,000 as a result of
increased volume of demand deposit accounts. Other service charges, commissions
and fees increased $147,000 primarily as a result of an increase in commissions
on annuities and brokerage services.
Total non-interest expense decreased from $4,808,000 reported in the first six
months of 1995 to $4,501,000 in the first six months of 1996, a decrease of
$307,000 or 6.4%. Salaries and employee benefit expense decreased from
$2,310,000 in the first six months of 1995 to $2,261,000 in the first six months
of 1996, a decrease of $49,000 or 2.1%. The reduction in salary and employee
benefit expense is related both to the decline in part-time salary expense and
to a reduction in hospital and medical benefit costs. Net cost of operation of
other real estate decreased substantially from $242,000 reported in the first
half of 1995 to $135,000 in the first half of 1996, a decrease of $107,000 or
44.2%. Other expenses decreased from $1,387,000 to $1,174,000, a decrease of
$213,000 or 15.4%. Included in this decrease was an $82,000 decrease in FDIC
insurance expense resulting from a reduction in deposit premiums. Marketing
expense also declined from $215,000 for the first six months of 1995 to $122,000
for the first six months of 1996, a decline of $93,000. Appraisal fees declined
from $86,000 for the first six months of 1995 to $41,000 in 1996, a decline of
$45,000 due to high costs incurred in 1995 from the implementation of SFAS No.
114, Accounting by Creditors for Impairment of a Loan.
Quarter to Quarter Analysis
Total interest income increased from $3,348,000 for second quarter 1995 to
$3,462,000 for the same period in 1996, an increase of $114,000 or 3.4%.
Interest income on average earning assets increased $298,000 due to an increase
in volume offset by a decline of $184,000 due to a decrease in rates of earning
assets. The average amount of loans on non-accrual for second quarter 1996 and
second quarter 1995 were $5,623,000 and $7,298,000 respectively. Interest lost
on loans on non-accrual for second quarter 1996 and second quarter 1995 were
$132,000 and $155,000, respectively.
8
Total interest expense increased from $1,361,000 in second quarter 1995 to
$1,396,000 in second quarter 1996, an increase of $35,000 or 2.5%. Interest
expense increased $88,000 due to the increase in the volume of interest bearing
liabliities offset by a decline of $53,000 due to the decrease in rates.
Net interest income for the second quarter of 1996 increased from $1,987,000 in
1995 to $2,066,000 in 1996, an increase of $79,000. There was no provision for
possible loan losses in the second quarter of 1996 compared to a $50,000
provision for possible loan losses in second quarter 1995.
Total non-interest income increased from $595,000 in second quarter 1995 to
$655,000 in second quarter 1996, an increase of $60,000 or 10.1%. The increase
consists of recording an increase of $106,000 in other service charges,
commissions and fees which resulted from increases in full brokerage service
fees and commissions on annuity sales as well as increases in other
miscellaneous service charges. The increase in other service charges,
commissions and fees was offset by recording $11,000 in losses on sales of
securities and loans in second quarter 1996 compared to $40,000 in gains
recorded during the same period in 1995.
Total non-interest expense decreased from $2,492,000 reported in second quarter
1995 to $2,313,000 for the second quarter in 1996, a decrease of $179,000 or
7.2%. Net cost of operation of other real estate declined from $193,000 for the
second quarter of 1995 to $78,000 for the same period in 1996, a decrease of
$115,000. Other expenses declined from $729,000 in second quarter 1995 to
$612,000 in second quarter 1996, a decrease of $117,000. Decreases in other
expenses included a $52,000 decrease in marketing expense and a $40,000 decrease
in FDIC fee expense.
Financial Condition
At June 30, 1996, loans were $106.5 million compared to $104.9 million reported
December 31, 1995, an increase of approximately $1.6 million or 1.5%. The
Company had an aggregate of $11,000 in loans held for sale as of June 30, 1996,
compared to $628,000 at year-end 1995. Mortgage loans, including those held for
sale, increased $4.0 million, from $24.7 million at December 31, 1995 to $28.7
million at June 30, 1996. During the first six months of 1996, $518,000 in
mortgages have been sold in the secondary market offset by $4.5 million in new
mortgages net of repayments. Commercial loans declined from $58.3 million on
December 31, 1995 to $52.1 million on June 30, 1996, a decrease of $6.2 million
or 10.6%. Real estate construction loans have increased from their year-end 1995
levels of $4.3 million to $5.3 million on June 30, 1996, an increase of $1.0
million or 23.2%. Installment loans increased during this period from $18.1
million to $20.4 million, an increase of $2.3 million or 12.7%.
Since December 31, 1995, the Company's total security portfolio increased $6.0
million. Purchases of securities in the held to maturity portfolio totaled $6.5
million. Purchases in the available for sale portfolio totaled $10.3 million.
There were $2.0 million in sales of securities during the first half of 1996.
There were maturities of $5.8 million and $2.4 million in the available for sale
and held to maturity portfolios, respectively. As of June 30, 1996, the Company
had an unrealized loss of $366,000 on securities in the available for sale
portfolio compared to an unrealized gain on securities available for sale as of
December 31, 1995. At June 30, 1996, there were $51.4 million in securities
classified as available for sale, including $26.4 million in US Treasury Notes
with an average maturity of less than three years. The 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.
Total deposits increased from approximately $178.3 million on December 31, 1995
to approximately $181.9 million on June 30, 1996, an increase of $3.6 million or
2.0%. During this period, savings deposits increased from $55.8 million to $57.7
million, an increase of $1.9 million or 3.4%. Balances in non-interest bearing
transaction accounts increased from $38.3 million at year-end 1995 to $39.7
million on June 30, 1995, an increase of $1.4 million, or 3.7%.
9
Non-performing loans, as the schedule below indicates, were $5.7 million at June
30, 1996, a decrease of $1.7 million or 23.0% from the $7.4 million reported
year-end 1995. In addition, non-performing loans decreased $2.6 million or 31.3%
from June 30, 1995.
Non-performing assets at 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95
- -------------------------------------------------------------------------------------
(dollars in thousands)
Loans past due over 90 days $ 361 $ 126 $ 156 $ 188 $ 363
Loans on non-accrual 4,789 5,923 5,744 4,993 6,319
Troubled debt restructurings* 517 654 1,532 1,522 1,579
-------------------------------------------------
Total non-performing loans 5,667 6,703 7,432 6,703 8,261
Other real estate 2,195 2,558 2,741 4,213 4,910
-------------------------------------------------
Total non-performing assets $7,862 $9,261 $10,173 $10,916 $13,171
=================================================
*Troubled debt restructurings as defined in SFAS No. 15 "Accounting by Debtors
and Creditors for Troubled Debt Restructurings"; excludes loans classified as
past due over 90 days or non-accrual.
Non-accrual loans decreased from $5.7 million reported at year-end 1995 to $4.8
million at June 30, 1996, a decrease of $900,000 or 15.8%. Non-accruals
decreased by $1.5 million or 23.8% from their June 30, 1995 levels. Other real
estate decreased $546,000 in the first six months of 1996 and decreased $2.7
million from June 30, 1995. Generally, other real estate is appraised when title
is taken on the property unless there is a contract of sale or there is a valid
appraisal on file which conforms to regulatory guidelines. Upon transfer or
receipt of a new appraisal, the property's carrying value is adjusted to its
appraised value less estimated costs of disposition if such value is lower than
its existing carrying value. Any reduction of the carrying value of the
underlying collateral is charged to the allowance for 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 1996, NBSC classified $241,000 in new properties
as other real estate. Properties that were sold totaled $742,000. There were
$45,000 in direct writedowns of other real estate in the first six months of
1996.
Loans classified by management but not included above as non-performing assets
at June 30, 1996 include $5.5 million classified as "special mentioned" and
$12.4 million classified as "substandard". These loans as of June 30, 1996 were
not past due over 90 days. As part of management's evaluation for the allowance
for possible loan losses, it has provided specific reserves for these loans as
deemed necessary.
The allowance for possible loan losses decreased from $4.6 million on December
31, 1995 to $4.1 million on June 30, 1996. The following chart indicates the
quarterly levels of loans charged off, recoveries of previously charged off
loans, provisions made to the allowance, quarterly ending balances of the
allowance, and the ratio of the allowance to non-performing loans.
For the quarter ended
-------------------------------------------------------
(dollars in thousands) 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95
- -----------------------------------------------------------------------------------------
Beginning balance $4,428 $4,609 $4,801 $4,954 $5,117
Loans charged-off (442) (309) (506) (254) (308)
Loans recovered 135 128 314 101 95
------------------------------------------------------
Net (charge-offs) recoveries (307) (181) (192) (153) (213)
Provision - - - - 50
------------------------------------------------------
Ending balance $4,121 $4,428 $4,609 $4,801 $4,954
======================================================
Ratio of allowance for possible
loan losses to non-performing loans 72.7% 66.1% 62.0% 71.6% 60.0%
======================================================
No provision for possible loan losses was recorded for the first six 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 from
the 60.0% reported June 30, 1995 to 72.7% on June 30, 1996 because of declines
in non-performing loans resulting from payments in connection with those loans,
charge-offs and foreclosures. NBSC's management believes that its allowance for
possible loan losses is adequate because of the nature of its methodology to
monitor the allowance for possible loan losses. NBSC performs the following
procedures in order to evaluate the adequacy of the allowance for possible loan
losses: First, NBSC conducts a loan specific review each quarter. This review
assesses the estimated future losses for every loan classified as non-
performing, as well as performing loans which have been criticized (either
10
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 $1,703,000 during the first six months of 1996 to
$16.4 million. The increase in stockholders' equity resulted not only from
recording net income in first six months of 1996, but also from the conversion
of $780,000 of equity contracts to Common Stock on March 1, 1996. This included
the conversion of $396,000 of equity contracts paid by cash and $384,000 paid by
tendering outstanding debentures of the Company for cancellation. The equity
contracts were due to convert March 1, 1996 at a conversion rate of $19.167 per
share. Partially offsetting the positive impact of net income and the equity
contract conversion on capital was a decline in the market value of the
Company's available for sale security portfolio. The Company recorded an
unrealized loss on securities available for sale of $366,000 at June 30, 1996
compared to an unrealized gain of $244,000 at year-end 1995. The book value
(total of stockholders' equity divided by the number of common shares issued and
outstanding) of the Company's common stock was $4.29 at June 30, 1996 compared
to the $3.89 reported at December 31,1995.
On June 19, 1996, High Point received notification from its regulator, the
Federal Reserve Bank of New York (the "FRB"), that High Point's existing Written
Agreement had been terminated. The Written Agreement, among other things,
prohibited High Point from paying dividends and from paying operating expenses
in excess of $10,000 without prior approval of the FRB. The Written Agreement
also prohibited High Point from incurring any additional debt or modifying
existing debt without approval from the FRB.
The following chart represents the capital ratios of the Company and its
subsidiary, NBSC, on June 30, 1996, compared to minimum regulatory
requirements:
The Company NBSC
---------------------- ----------------------
Minimum Minimum
Required 6/30/96 Required 6/30/96
- ----------------------------------------------------------------------------------------
Leverage Ratio 3.00%(2) 8.05% (2) 3.00% (1) 7.24%(1)
Risk Based:
Tier I 4.00% 15.47% 4.00% 14.04%
Tier I plus Tier II 8.00% 16.87% 8.00% 15.32%
(1) The OCC requires banks that are considered to be strong to maintain a
minimum ratio of 3%. Banks that do not meet the applicable regulatory standards
are required to maintain higher ratios. Management believes its current capital
levels are adequate.
(2) The Federal Reserve Bank requires bank holding companies that are considered
to be strong banking organizations to maintain a minimum ratio of 3%. Bank
holding companies that do not meet the applicable regulatory standards are
required to maintain higher capital ratios. To date, the Federal Reserve Bank
has not stipulated any definitive ratio for High Point.
11
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. Under such restrictions, NBSC may
not, without the prior approval of the Office of the Comptroller of the Currency
(the "OCC"), declare dividends in excess of the current year's earnings plus the
retained earnings from the prior two years. NBSC also is restricted from paying
dividends if at any time losses have been sustained by the bank that exceed its
retained earnings. At this time, NBSC's earnings for the current year plus the
retained earnings from the prior two years are $2,575,000. However, NBSC has a
remaining accumulated deficit of $2,497,000. 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 will be unable to make dividend payments to
the shareholders until NBSC is able to resume dividend payments to High Point.
High Point's major cash flow requirements are to meet the monthly principal and
interest payments totaling approximately $16,000 on its note payable and to pay
the quarterly interest payments of $3,000 to its remaining Redeemable
Subordinated Debenture holders. High Point is also obligated to pay in cash the
remaining $127,000 of Redeemable Subordinated Debentures on March 1, 1997. High
Point also has legal fees, printing expenses, external auditing fees and other
miscellaneous fees to be paid throughout the year. The remaining obligation of
$1,122,000 to the lending bank on the note secured by land is due in a final
balloon payment on January 2, 1998. High Point plans to meet this obligation
through the disposition of the land held for sale although no assurance can be
given that such a transaction or series of transactions will occur to meet this
obligation. High Point continues to evaluate alternatives to repay the note
payable. Although the land continues to generate interest among potential
buyers, there are no contracts for sale at this time. High Point previously had
a contract to sell 32 acres of the land held for sale, but that contract was
terminated due to the inability of the proposed purchaser to meet certain
conditions of the contract.
Under the loan agreement, High Point is required to maintain Consolidated
Tangible Net Worth (defined as (A) shareholders' equity (including the value of
common stock and debentures) less (B) intangible assets) of $10.0 million. At
December 31, 1995 and at June 30, 1996, High Point had Consolidated Tangible Net
Worth of $15,069,000 and $16,388,000, respectively.
At June 30, 1996, High Point had $12,000 in cash and $690,000 in federal funds
sold available to meet its liquidity needs. High Point has $125,000 in an escrow
account to service the note payable. Also, High Point has securities available
for sale, which at June 30, 1996, had a market value of $212,000.
Effect of Interest Rates
In 1996, interest rates began to increase, which potentially could affect NBSC's
ability to earn net interest income in the future. One tool that NBSC uses to
measure the potential impact from interest rate changes is the static gap
report. The static gap report shows when certain interest-earning assets and
interest-bearing liabilities could potentially reprice. Traditional gap theory
holds that when a bank is asset-sensitive (meaning that it has more interest
rate-sensitive assets repricing within a given time frame than interest rate-
sensitive liabilities) and interest rates increase, the bank's net interest
margin should increase. If a bank is liability-sensitive (meaning that is has
more liabilities repricing in a given time frame than assets), and interest
rates increase, the net interest margin should decrease. As of June 30, 1996, in
a one year time frame, the Company's interest rate-sensitive liabilities
exceeded its interest rate-sensitive assets by $15.4 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 $125,000.
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)
Six months ended June 30,
----------------------------
Net Income Per Share (Primary) 1996 1995
--------------------------------------------------------------------------------------------------------------
Net income $1,533,000 ($303,000)
After-tax interest expense related to the assumed reduction of outstanding debt --- ---
--------------------------------------------------------------------------------------------------------------
(1) Income applicable to common stock $1,533,000 ($303,000)
==============================================================================================================
Shares used in this computation:
Weighted average number of common shares outstanding 3,772,168 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 * 3,772,168 3,745,760
=============================================================================================================
Net income per common share and common share equivalents (primary)
(1 divided by 2) * $0.41 ($0.08)
=============================================================================================================
* The after-tax interest expense related to the assumed reduction of
outstanding debt, the number of shares issuable on conversion of mandatory
stock purchase contracts classified as common share equivalents are
excluded from the 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
On April 30, 1996, at the annual meeting, William A. Dolan, II and
Charles L. Tice were re-elected, by the common shareholders, as
directors of High Point. The votes were as follows:
For Against Abstain
-----------------------------------
William A. Dolan, II 2,676,782 17,154 27,416
Charles L. Tice 2,688,903 5,033 27,416
The votes on the second proposal to approve the 1996 Non-Employee
Director Stock Option Plan were as follows:
For Against Abstain
-----------------------------------
1,948,154 234,233 232,980
The votes on the third proposal to approve the 1996 Employee Incentive
Stock Option Plan were as follows:
For Against Abstain
-----------------------------------
2,248,838 123,182 43,347
The total number of shares of High Point Financial Corp. common stock
outstanding as of March 15, 1996, the record date for the annual
meeting, was 3,786,480.
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 1, 1996 respecting the
termination of the National Bank of Sussex County's Consent Order with
the Office of the Comptroller of the Currency.
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 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