SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 0-12430
High Point Financial Corp.
(Exact name of registrant as specified in its charter)
_________
New Jersey 22-2426221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Branchville Square,
Branchville, New Jersey
07826
(Address of principal executive offices)
Registrant's telephone number, including area code: (201) 948-3300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
_________
Common Stock, no par value
Title of Class
_________
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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock of the registrant held by
non-affiliates (for this purpose, persons or entities other than executive
officers, directors, or 5% or more shareholders) of the registrant, as of March
14, 1997 is estimated to have been approximately $27,143,900.
The number of outstanding shares of the registrant's Common Stock, as of
March 14, 1997, was 3,786,480 shares of Common Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE:
High Point Financial Corp. Proxy Statement dated March 28, 1997 (Part III)
================================================================================
High Point Financial Corp.
Form 10-K Index
PART I
PAGE
----
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 5
Item 3. Legal Proceedings......................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders....................... 6
Item 4A. Executive Officers of the Registrant...................................... 6
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters....................................................... 7
Item 6. Selected Consolidated Financial Data...................................... 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 9
Item 8. Financial Statements and Supplementary Data............................... 31
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................................... 55
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 55
Item 11. Executive Compensation.................................................... 55
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................................ 56
Item 13. Certain Relationships and Related Transactions............................ 56
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................................... 56
Signatures................................................................ 59
The Securities and Exchange Commission maintains a web site which contains
reports, proxy and information statements and other information relating to
registrants that file electronically at the address: http://www.sec.gov.
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
High Point Financial Corp. ("High Point"), a New Jersey corporation, is a
bank holding company, registered with and supervised by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board"). High Point was
organized in October 1982 under the Bank Holding Company Act (the "Holding
Company Act") and commenced operations on April 1, 1983 upon consummation of the
acquisition of all of the outstanding stock of The National Bank of Sussex
County ("NBSC"). Throughout this document all references to "High Point" refer
only to the parent holding company and do not include the subsidiary, NBSC. All
references in this document to the "Company" refer to the consolidated company
which includes High Point and NBSC.
High Point's primary business consists of managing and supervising NBSC. At
December 31, 1996, the Company had total assets, deposits and stockholders'
equity of approximately $217.2 million, $188.9 million and $20.0 million,
respectively.
NBSC was organized as The Branchville National Bank in 1933. Upon opening
its first branch office in 1957, The Branchville National Bank changed its name
to The National Bank of Sussex County. NBSC is a national banking association
that is a member of the Federal Reserve System. NBSC's deposits are insured by
the Federal Deposit Insurance Corporation (the "FDIC"). NBSC has nine branches,
an operations center, a human resources office and an administration center, all
within Sussex County, New Jersey. NBSC is a full service commercial bank
providing a wide range of services to individuals and small to medium-sized
businesses in its northwestern New Jersey market area, including accepting time,
demand, and savings deposits and making secured and unsecured commercial, real
estate and consumer loans. NBSC offers annuities and life insurance to its
customers and through a third party lease arrangement with Link Investment
Services, Inc. provides full securities brokerage services including mutual
funds and variable annuities.
On April 24, 1992, High Point completed the sale of its Pennsylvania
banking subsidiary, The Pocono Bank ("Pocono"), to the First National Bank of
Lake Ariel, a subsidiary of Lake Ariel Bancorp. All results of the Company shown
for years prior to 1993 include the impact of Pocono. With the sale of Pocono,
High Point is now a one bank holding company.
SUPERVISION AND REGULATION
High Point Financial Corp. High Point is a registered bank holding
company under the Holding Company Act and is required to file with the Federal
Reserve Board an annual report and such additional information as the Federal
Reserve Board may require pursuant to the Holding Company Act. High Point is
subject to inspection by the Federal Reserve Board.
As a bank holding company, High Point is required to obtain the prior
approval of the Federal Reserve Board before it may, by merger, purchase or
otherwise, directly or indirectly acquire all or substantially all of the assets
of any bank or bank holding company, if, after such acquisition, High Point
would own or control 5% or more of the voting shares of such bank or bank
holding company. The Holding Company Act does not permit the Federal Reserve
Board to approve the acquisition by High Point, or any subsidiary, of any voting
shares of, or interest in, all or substantially all of the assets of any bank
located outside the State of New Jersey unless such acquisition is specifically
authorized by the laws of the state in which such bank is located. Certain
states have enacted reciprocal legislation to allow interstate acquisitions of
and by banking organizations within the same geographic region. For a discussion
of certain of such legislation, see "--Recent and Proposed Legislation." As a
result of the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), bank holding companies also may acquire savings institutions.
1
The Holding Company Act limits the activities in which High Point may be
engaged to banking, the ownership and acquisition of assets and securities of
banking organizations, the management of banking organizations, and certain non-
banking activities which the Federal Reserve Board finds, by order or
regulation, to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Federal Reserve Board has, by
regulation, determined that the following non-banking activities, among others,
are closely related to banking within the meaning of the Holding Company Act:
operating a mortgage company, finance company, credit card company or factoring
company; performing certain data processing operations; providing investment and
financial advice; acting as an insurance agent for certain types of credit-
related insurance; leasing personal property on a full-payout, non-operating
basis; and, subject to certain limitations, providing discount brokerage
services for customers.
On October 20, 1992, High Point entered into a written agreement with the
Federal Reserve Bank of New York ("FRB") which provided, among other things, for
the submission of a capital plan, an operating plan and a debt servicing plan
designed to improve the earnings of the Company and to achieve and maintain an
adequate capital position at the Company and NBSC. The agreement precluded High
Point from incurring any debt, including the renewal or change in terms of any
existing debt, without prior approval of the FRB. The agreement also restricted
the payment of dividends and the payment of cash expenditures (other than for
routine expenses) in excess of $10,000, to any one entity in any one month,
without prior approval from the FRB. After submitting an operating plan, a
capital plan and a debt servicing plan to the FRB, High Point was in compliance
with the terms of the written agreement. Effective June 19, 1996, High Point's
written agreement was terminated.
The National Bank of Sussex County. NBSC is a federally chartered national
banking association subject to regulation and examination by the Office of the
Comptroller of the Currency ("the OCC"). As a member of the Federal Reserve
System, NBSC is also subject to regulation and examination by the Federal
Reserve Board. In addition, NBSC's deposits are insured by the FDIC.
The regulations of federal agencies govern most aspects of NBSC's business,
including reserves against deposits, loans, investments, mergers and
acquisitions, borrowings, dividends and location of branch offices. NBSC is
subject to certain restrictions imposed by federal law on, among other things,
(i) the maximum amount of obligations of any one person or entity which may be
outstanding at any one time, (ii) investments in stock or other securities of
High Point or any other subsidiary of High Point, and (iii) the taking of such
stock or securities as collateral for loans to any borrower.
Dividend Limitations and Certain Other Restrictions on the Provision of
Funds to High Point by NBSC. The primary source of revenue available to High
Point for the payment of dividends on its capital stock and the payment of
principal and interest on its debt is dividends paid to High Point by NBSC.
NBSC, as a national bank, is subject to dividend restrictions. Under such
restrictions, NBSC may not, without the prior approval of the Office of the
Comptroller of the Currency (the "OCC"), declare dividends in excess of the
current year's earnings plus the retained earnings from the prior two years.
NBSC also is restricted from paying dividends if at any time losses have been
sustained by the bank that exceed its retained earnings. At this time, NBSC's
earnings for the current year plus the retained earnings from the prior two
years are $6,296,000. NBSC has total retained earnings of $1,224,000 as of
December 31, 1996 and cannot pay dividends in excess of its retained earnings.
The FDIC and the OCC have authority under federal law to prohibit an
insured bank from engaging in conduct which, in their respective opinions, would
constitute an unsafe or unsound banking practice. The payment of dividends or
other payments might, under certain circumstances, be deemed to be an unsafe or
unsound banking practice. In addition, the applicable federal regulatory
agencies have established guidelines with respect to the maintenance of
appropriate levels of capital by registered bank holding companies, by national
banks and by state banks. Compliance with such standards, as presently in effect
or as they may be amended from time to time, could possibly limit the amount of
dividends which High Point may pay in the future. In addition, as a bank whose
deposits are insured by the FDIC, NBSC may not pay dividends to High Point or
distribute any of its capital assets to High Point if it is in default on any
assessment due to the FDIC. NBSC has never been in default under any of its
obligations to the FDIC.
2
FIRREA allows the FDIC to limit unsafe or unsound banking practices by
authorizing the FDIC to issue cease and desist orders, to make restitution
against losses, to dispose of any loans, to rescind agreements and to take other
actions. FIRREA also authorizes the FDIC to impose civil monetary penalties
against insured depository institutions and certain of their affiliates that
violate any laws, regulations, or orders or that commit unsafe banking practices
or breach any fiduciary duties.
The FDIC insurance rates payable by banks are assessed based on a bank's
capitalization and the degree of supervisory concern over the institution.
Effective November 1995, the FDIC Board of Directors reduced the range of
premiums to $0.00 to $0.27 per $100 of deposits for 1996. NBSC's rate dropped
from $0.17 per $100 of deposits effective January 1, 1996 to $0.03 per $100 of
deposits effective June 30, 1996. Because of the improvement in NBSC's risk
rating, NBSC's insurance premium has been reduced to $0.00 per $100 of deposits
effective January 1, 1997. NBSC will have to pay $0.0128 per $100 of deposits in
1997 to help fund the Financing Corporation ("FICO") interest payments. The FICO
was chartered in 1987 for the purpose of financing the recapitalization of the
Federal Savings and Loan Insurance Corporation. The FICO has assessment
authority against the Savings Association Insurance Fund ("SAIF") members. The
size of the FICO assessment to pay FICO interest and debt has kept the SAIF at
low levels. Therefore, the FDIC board has assessed Bank Insurance Fund members
the $0.0128 per $100 of deposits to help fund the interest payments. NBSC's
total FDIC expense in 1997 will drop 85% from its 1996 levels assuming NBSC's
deposit levels remain the same and assuming no further FDIC premium changes in
1997.
NBSC is subject to certain restrictions imposed by federal law on any
extension of credit to High Point. High Point is thus precluded from borrowing
from NBSC unless such loan is secured by certain designated types of collateral
in designated amounts. High Point is not indebted to NBSC for any borrowings.
The foregoing references to statutes and regulations are brief summaries,
are not intended to be complete and are qualified in their entirety by
references to the statutes and regulations themselves. In addition, there are
other statutes and regulations that apply to, and regulate the operation of,
banking institutions.
On November 12, 1991, NBSC entered into a Stipulation and Consent in the
form of a Formal Agreement (the "Consent Order") with the OCC. The Consent Order
restricted NBSC from paying dividends to High Point and required NBSC to
increase the level of its capital, submit a capital plan, enhance its lending
policies and procedures, make certain revisions to its methodology for analyzing
the adequacy of the allowance for possible loan losses, and enhance its
asset/liability management policies and procedures. Initially, the Consent Order
required NBSC to increase its leverage capital ratio to 6% by March 31, 1992 and
to maintain a minimum ratio of 5% through that date and an adequate allowance
for possible loan losses. Subsequently, the Consent Order was modified to give
NBSC until June 30, 1992, and later until September 1993, to meet a 6% leverage
capital ratio. NBSC submitted an updated capital plan to the OCC in August 1993,
outlining its proposed course of action, which included, among other things, a
planned reduction in asset size and an increase in earnings performance to allow
NBSC to maintain a leverage ratio above 5.25%, and a capital infusion to NBSC by
High Point through a proposed acquisition of equity capital during 1994 to
enable NBSC to attain a 6% leverage ratio. This amended capital plan was
accepted by the OCC on August 30, 1993, and the Consent Order was modified to
give NBSC an extension until June 30, 1994 to meet the 6% leverage ratio,
contingent upon NBSC's maintaining a capital ratio of 5.25% and continuing to
maintain an adequate allowance for possible loan losses. In June, 1994, as a
result of a public stock offering, High Point funded $2.4 million to NBSC as an
additional capital contribution. This capital contribution allowed NBSC to
attain a leverage ratio in excess of 6%. On March 27, 1996, NBSC's Consent Order
with the OCC was terminated.
EFFECT OF GOVERNMENT MONETARY AND FISCAL POLICIES
The earnings of the Company are and will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies.
3
The monetary policies of the Federal Reserve Board have had, and will
likely continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The Federal
Reserve Board has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States government
securities and through its regulation of, among other things, the discount rate
on borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature and impact of future changes
in monetary and fiscal policies.
RECENT AND PROPOSED LEGISLATION
From time to time proposals are made in the United States Congress, the New
Jersey Legislature, and before various bank regulatory authorities which would
alter the powers of, and place restrictions on, different types of banking
organizations. Among current legislative trends of significance to High Point
and NBSC are the expansion of the powers of banks, thrift institutions and
credit unions and the relaxation of restrictions upon the activities in which
bank holding companies may engage. It is impossible to predict the impact, if
any, of these trends on the business of High Point and NBSC.
In accordance with federal law providing for deregulation of interest on
all deposits, banks and thrift organizations are now unrestricted by law or
regulation from paying interest at any rate on most time deposits. Commercial
banks had initially experienced an effective increase in their cost of funds
when deregulation was first imposed. However, recently, in a lower interest rate
environment, banks have experienced a reduction in their cost of funds. It is
not clear whether deregulation and other pending changes in certain aspects of
the banking industry will result in further changes in the cost of funds in
relation to prevailing lending rates.
CAPITAL ADEQUACY GUIDELINES
The Federal Reserve Board follows Risk-Based Capital Guidelines, which
operate in conjunction with regulations relating to capital adequacy of bank
holding companies. Currently, the Federal Reserve Board has specified a minimum
leverage ratio of Tier 1 capital to total assets as a means of assessing a bank
holding company's capital adequacy.
The risk-based capital requirements establish minimum levels of capital and
require a method of capital adequacy analysis which takes into consideration the
degree of risk of certain assets. The regulators require all banks and bank
holding companies to have a core or Tier 1 capital-to-assets risk-based ratio of
at least 4% and a total capital-to-assets risk-based ratio of at least 8%. At
December 31, 1996 the Company's Tier I and total capital-to-assets risk-based
ratios determined under the required method were 15.62% and 17.00%,
respectively. The federal regulatory agencies have submitted a proposed rule
integrating interest rate risk into the risk-based capital measurement.
The Federal Reserve Board has also issued regulations establishing a 3%
minimum Tier 1 leverage ratio for bank holding companies that are considered to
have well-diversified risk, no undue interest rate exposure, high liquidity,
good earnings, excellent asset quality and in general are considered strong
banking organizations. Bank holding companies that do not meet these standards
are required to maintain higher capital ratios. At December 31, 1996, the
Company had a Tier 1 leverage ratio of 8.35%. For more information see Note 16
to the Financial Statements included in Item 8 of this 10-K.
Additional information regarding capital requirements is discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources" in Item 7 of this 10-K.
LOCAL ECONOMY
The Company operates in Sussex County in Northwestern New Jersey. The
majority of residents that live in Sussex County work outside the county. The
industries within the county include tourism, retail sales and real estate
construction and sales. The economy is heavily reliant on commercial and
residential real estate.
4
In the early 1990's, when values on real estate declined and demand for
real estate dwindled, many of NBSC's borrowers were adversely impacted. Since
that period of time, NBSC's loan portfolio concentrations have changed from a
high concentration of commercial real estate to a high concentration of consumer
installment and residential real estate loans. Lower loan to value ratios have
been implemented to help protect NBSC from potential deterioration in the
current real estate market.
In Sussex County, there has been very little commercial real estate growth
since the early 1990s. Residential real estate growth has been moderate.
Unemployment and job growth have been at favorable levels. There appears to be
signs of improvement in the New Jersey economy, although that improvement
appears to be centered more around urban areas than rural residential areas such
as Sussex County.
COMPETITION
NBSC operates in a highly competitive market environment within Sussex
County, New Jersey. Three major interstate multi-bank holding companies and two
large multi-state thrift holding companies operate within NBSC's market area.
These larger institutions have substantially larger lending capacities and
typically offer services which NBSC does not offer. There are also three other
community banks in the county. Among the financial institutions that operate
within Sussex County, NBSC has the greatest number of branches within Sussex
County. As of the most recent data published by the FDIC (June, 1996), NBSC
ranked second in the county in deposits with a market share of 15.48%.
In recent years, the financial services industry has expanded rapidly as
barriers to competition within the industry have become less significant. Within
the banking field, banks must compete not only with other banks and traditional
financial institutions, but also with other business corporations that deliver
financial services.
CONCENTRATION
NBSC is not dependent for deposits on, nor exposed by loan concentrations
to, a single customer or a small group of customers, the loss of any one or more
of which would have a materially adverse effect on the financial condition of
High Point or NBSC.
EMPLOYEES
At December 31, 1996, there were 134 persons, including 25 part time
personnel, employed by the Company. Management believes that it has a
satisfactory relationship with its employees.
STATISTICAL INFORMATION
Statistical information is incorporated by reference to Item 7 hereof.
ITEM 2. PROPERTIES
High Point's principal offices are located at Branchville Square,
Branchville, New Jersey. High Point shares administrative space at this location
with NBSC.
At December 31, 1994, High Point held for sale 66 acres of undeveloped land
at a net recorded carrying value of $2,534,000. In 1995, based on the
requirements of Statement of Accounting Standards ("SFAS") No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-lived Assets to be disposed
of," management recorded an impairment of $370,000 on the land held for sale
based on an estimated five year selling period using a discount rate of 16%.
Management also recorded an additional $29,000 impairment based on a contract to
sell 32 acres. As a result of the termination of the contract on the 32 acres in
1996 and other factors, High Point recorded an additional valuation allowance on
the land held for sale to reflect management's current estimate of the net
realizable value of the land. For more information, see the discussion in Note 6
on page 43 in Notes to Consolidated Financial Statements contained in Item 8 of
this 10-K.
5
NBSC operates nine banking locations, in addition to an administration
center and an operations center, all in Sussex County, New Jersey. NBSC has
owned its administrative office located in Branchville, New Jersey since 1992.
NBSC's Vernon branch is leased under a non-cancelable long-term lease with the
current term ending in September 2001 with options to renew the lease for two
additional 5 year periods.
During 1988, NBSC sold certain banking and other premises to FMI Inc., a
wholly owned subsidiary of Franklin Mutual Insurance Co., a 6.6% shareholder of
High Point. The banking premises were leased back to NBSC for periods ranging
between 10 and 15 years. George Guptill, Jr., President of FMI, Inc., is also a
member of the Board of Directors of High Point. Further information is
incorporated by reference to information contained in Notes 6 and 10 to the
Consolidated Financial Statements set forth in Item 8 of this 10-K.
ITEM 3. LEGAL PROCEEDINGS
The information required by this item is incorporated by reference to
information contained in the second paragraph of Note 10 to the Consolidated
Financial Statements on page 47 in Item 8 of this 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report,
no matter was submitted to a vote of security holders of High Point.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the current principal executive officers of High Point
and NBSC. The Boards of Directors of High Point and NBSC elect the executive
officers to one year terms (subject to removal by the respective Boards) at
their respective annual meetings. Unless otherwise indicated, the persons below
have held the position indicated for more than 5 years.
NAME EMPLOYMENT DURING THE LAST 5 YEARS AGE
---- ---------------------------------- ---
Michael A. Dickerson............ President Chief Executive Officer and Director of High Point 60
Financial Corp. since 1988; President (since February 1992), Vice
Chairman of the Board (1991 to 1996) and Chief Executive Officer
(since November 1991), and Director (since 1988) of NBSC; Director,
President and Chief Executive Officer (1988 to April 1992, except
from May 9 through December 26, 1990), and Vice Chairman (May 1990 to
April 1992) of Pocono.
Gregory W. A. Meehan............ Vice President (since 1987), Treasurer and Assistant Secretary (since 49
1983) of High Point Financial Corp.; Director (since 1994), Chief
Operating Officer (since November 1991), Executive Vice President (since
1990) and Chief Financial Officer (since 1988), of NBSC.
Robert A. Vandenbergh........... Secretary of High Point Financial Corp. (since February 1992); Director 45
(since 1994), Senior Vice President and Chief Lending Officer, NBSC
(since October 1991).
Rita A. Myers................... Comptroller of High Point Financial Corp., (since May, 1993); Vice 38
President (Since May 1990) and Comptroller (since May 1989), NBSC.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
As of February 3, 1997, High Point's common stock, no par value (the
"Common Stock") is traded on the NASDAQ Stock Market under the symbol HPFC.
Prior to February 3, 1997, High Point's Common Stock was traded in the over-the-
counter market. As of December 31, 1996, there were 1,750 shareholders of record
of Common Stock.
The following table sets forth, for the calendar periods indicated the high
and low bid/ask prices per share of the Common Stock prepared from reports
provided by the National Quotation Bureau, Inc. The prices shown do not include
mark-ups, mark-downs or commissions, and may not reflect actual transactions.
There were no cash dividends declared for the periods indicated.
BID ASKED
-------------- --------------
HIGH LOW HIGH LOW
------ ----- ------ -----
Year ended December 31, 1995
First quarter.............................................. $ 5.13 $ 4.00 $ 5.50 $ 4.25
Second quarter............................................. 5.00 4.88 5.50 5.13
Third quarter.............................................. 6.00 4.75 6.13 5.00
Fourth quarter............................................. 6.50 5.88 6.75 6.00
Year ended December 31, 1996
First quarter.............................................. $ 6.50 $ 6.13 $ 6.75 $ 6.50
Second quarter............................................. 6.50 6.13 6.88 6.50
Third quarter.............................................. 7.00 6.13 7.38 6.38
Fourth quarter............................................. 8.50 7.00 9.63 7.75
High Point has not paid dividends since June 1990.
7
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Not covered by Report of Independent Public Accountants)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
SUMMARY OF OPERATIONS (IN THOUSANDS) 1996 1995 1994 1993 1992 (2)
- ------------------------------------ ----------- ---------- ---------- ---------- ----------
Total interest income...................................... $ 14,429 $ 13,653 $ 12,017 $ 12,491 $ 16,866
Total interest expense...................................... 5,758 5,550 4,492 4,952 8,744
----------- ---------- ---------- ---------- ----------
Net interest income......................................... 8,671 8,103 7,525 7,539 8,122
Provision for possible loan losses(1)....................... --- 225 1,327 336 1,857
----------- ---------- ---------- ---------- ----------
Net interest income after provision for possible loan losses 8,671 7,878 6,198 7,203 6,265
Non-interest income......................................... 2,439 2,219 2,368 2,589 2,593
Non-interest expenses(1).................................... 8,847 9,472 9,630 10,573 14,291
Unrealized loss on land held for sale....................... 250 --- --- --- ---
Gain on sale of bank premises............................... 141 148 141 79 118
Gain on sale of land held for sale.......................... --- --- --- 306 ---
Loans and securities gains (losses)......................... (28) 53 (289) 519 198
----------- ---------- ---------- ---------- ----------
Income (loss) before benefit for income taxes and
cumulative effect for change in accounting principle....... 2,126 826 (1,212) 123 (5,117)
Benefit for income taxes.................................... (2,681) (249) (97) (31) 558
----------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect for change in
accounting principle....................................... 4,807 1,075 (1,115) 154 (5,675)
Cumulative effect of change in accounting principle......... --- (370) --- --- ---
----------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)........................................... $ 4,807 $ 705 $ (1,115) $ 154 $ (5,675)
=========== ========== ========== ========== ==========
PER SHARE INFORMATION:
- ----------------------
Net income (loss) before cumulative effect for change in
accounting principle....................................... $ 1.27 $ 0.29 $ ($0.36) $ 0.06 ($3.31)
Cumulative effect of change in accounting principle......... --- (0.10) --- --- ---
----------- ---------- ---------- ---------- ----------
Net income (loss)........................................... $ 1.27 $ 0.19 $ ($0.36) $ 0.06 ($3.31)
=========== ========== ========== ========== ==========
Stockholders' equity (book value)........................... $ 5.28 $ 3.89 $ 3.19 $ 4.06 $ 3.93
Number of shares outstanding, December 31................... 3,786,480 3,745,760 3,745,760 2,439,009 2,436,924
Average number of shares outstanding........................ 3,779,364 3,745,760 3,065,786 2,437,908 1,711,935
YEAR END BALANCE SHEET INFORMATION (IN THOUSANDS)
- -------------------------------------------------
Total assets................................................ $ 217,182 $ 200,184 $ 184,641 $ 181,263 $ 200,870
Total deposits.............................................. 188,854 178,325 165,572 162,788 183,942
Loans held for sale......................................... 178 628 427 5,708 6,136
Loans, net of unearned income(1)............................ 114,641 104,833 105,556 110,933 135,471
Allowance for possible loan losses(1)....................... 3,973 4,609 5,234 5,419 6,066
Securities, including those available for sale.............. 76,242 64,696 54,231 41,930 35,521
Note payable................................................ 846 1,270 1,482 2,373 3,130
Redeemable subordinated debentures.......................... 127 511 510 510 544
Employee Stock Ownership Plan debt.......................... --- --- 150 321 461
Stockholders' equity........................................ 19,977 14,558 11,963 9,892 9,582
CONSOLIDATED RATIOS
- -------------------
Net income (loss) to average stockholders' equity........... 28.52% 5.26% (9.72)% 1.60% (64.22)%
Net income (loss) to average total assets................... 2.31 0.37 (0.61) 0.08 (2.46)
Stockholders' equity to total assets at year end............ 9.20 7.28 6.48 5.46 4.77
Net charge-offs to average loans outstanding................ 0.59 0.82 1.37 0.80 3.32
Net interest spread (tax equivalent basis).................. 3.66 3.82 3.92 4.01 3.42
Net interest margin (tax equivalent basis).................. 4.49 4.61 4.55 4.52 3.87
Loans to deposits........................................... 60.70 58.79 63.75 68.15 73.65
Non-performing loans to loans............................... 3.80 6.47 12.20 17.39 20.57
Allowance for possible loan losses to loans................. 3.47 4.40 4.96 4.88 4.47
Allowance for possible loan losses to non-performing loans.. 91.23 67.94 40.61 28.07 21.73
Average stockholders' equity to average total assets........ 8.09 7.02 6.32 5.19 3.82
OTHER SELECTED DATA
- -------------------
Number of full time equivalent employees.................... 122 123 126 124 133
Number of common stockholders at year end................... 1,750 1,718 1,713 1,553 1,413
____________
(1) The information for 1994 and prior years has been restated per the
requirements of SFAS No. 114. See Note 3 on page 39 for further information.
(2) The information for 1992 and prior years includes the results of High
Point's former subsidiary, the Pocono Bank, which was sold on April 24,
1992.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section presents a review of the Company's consolidated results of
operations and financial condition. It should be read in conjunction with the
consolidated financial data presented elsewhere in this report. All references
to "notes" refer to Notes to Consolidated Financial Statements of the Company
appearing on pages 36 through 55 in Item 8 of this 10-K.
RESULTS OF OPERATIONS
NET INCOME (LOSS)
For the year ended December 31, 1996, the Company's consolidated net income
was $4,807,000, representing an increase of $4,102,000 over the net income of
$705,000 reported in 1995 and an improvement of $5,922,000 over the $1,115,000
in net losses reported in 1994. The net income per common share for 1996 was
$1.27 compared to the reported net income per common share of $0.19 in 1995 and
the reported net loss per common share of $0.36 for 1994.
The results for 1996 were favorably affected by the recognition of a net
income tax benefit of $2,681,000 representing net operating loss ("NOL")
carryforwards through the reversal of a previously established deferred tax
valuation allowance. The recognition of the deferred tax asset at December 31,
1996 is based on the Company's evaluation of income earned in 1996 and
management's estimate of the Company's continued ability to remain profitable in
future periods such that realization of its NOL carryforwards can be reasonably
expected. This estimate will be impacted favorably or unfavorably by future
results of operations. The Company has recorded a valuation allowance of
approximately $573,000 which represents an estimated reserve for state NOLS
which may expire prior to the Company's ability to utilize such NOLs. The
Company will periodically evaluate the realizability of its deferred tax asset
and will adjust the valuation allowance when necessary. For more information,
see Note 7 on page 44.
Net income before taxes and before cumulative effect for change in
accounting principle was $2,126,000 in 1996 compared to $826,000 in 1995, a $1.3
million increase. Various improvements in the Company's financial condition
during 1996 contributed to recording net income in 1996. These improvements
included an increase of assets from $200.2 million on December 31, 1995 to
$217.2 million on December 31, 1996, an increase of $17.0 million or 8.5%. Non-
performing assets also improved, declining from $9.5 million to $5.5 million, a
42.1% decrease. Because of the decline in non-performing assets and the
improvement in asset quality, no provision for possible loan losses was recorded
in 1996 compared to provisions of $225,000 and $1,327,000 for 1995 and 1994,
respectively. As a result of the increase in assets and decrease in non-
performing assets, net interest income increased $568,000, or 7.0% to
$8,671,000. Reductions in non-interest expense also helped to improve earnings
in 1996. For more information, see the discussion entitled "--Non-interest
Expense" on page 15.
Net income for 1996 also compares favorably with the net income of 1995 due
to the Company's 1995 adoption of SFAS No. 121 "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121").
In accordance with SFAS No. 121, in December 1995, High Point evaluated its land
held for sale for impairment and determined that a valuation reserve of $370,000
was required. The $370,000 provision was retroactively recorded in the results
of operations of first quarter 1995 as a cumulative effect of a change in
accounting principle. In 1996, as a result of the termination of a contract for
sale on 32 acres, the Company recorded an additional valuation reserve on its
land held for sale to reflect management's current estimate of the net
realizable value of the land. For more information see Note 6 on page 43.
NET INTEREST INCOME
Net interest income is the difference between interest income on earning
assets and the interest cost of funds supporting those assets. The amount of net
interest income for any given period is affected in part by the volume
9
of interest earning assets and the yield provided by those earning assets, and
by interest bearing liabilities and the rates paid on those liabilities. The
ability of a financial institution to fund its interest earning assets with non-
interest bearing deposits also positively impacts interest income.
The following table, Interest Income and Expense Volume/Rate Analysis,
describes the impact on net interest income resulting from changes in average
balances and average rates over the past three years on a tax equivalent basis
(assuming a 34% tax rate). Any change in interest income or expense attributable
to both changes in volume and changes in rate has been allocated in proportion
to the relationship of the absolute dollar amount of the change in each
category.
INTEREST INCOME AND EXPENSE VOLUME/RATE ANALYSIS
1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
------------------------------- ------------------------------
TOTAL TOTAL
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
-------- ------- ---------- ------- ------- ----------
(TAX-EQUIVALENT BASIS, IN THOUSANDS)
INTEREST INCOME
Interest bearing deposits at banks.................... $ --- $ (1) $ (1) $ --- $ --- $ ---
Federal funds sold.................................... (7) (57) (64) 157 163 320
Securities including securities available for sale:
U.S. Government and agencies..................... 777 56 833 969 240 1,209
State and political subdivisions................. --- --- --- (20) --- (20)
Other securities................................. 35 (22) 13 (124) 87 (37)
-------- ------- ---------- ------- ------- ---------
Total securities...................................... 812 34 846 825 327 1,152
-------- ------- ---------- ------- ------- ---------
Loans, including loans held for sale,
net of unearned income:
Commercial and construction...................... (676) (306) (982) (1,061) 864 (197)
Mortgage......................................... 614 (81) 533 206 (98) 108
Installment...................................... 397 47 444 310 (57) 253
-------- ------- ---------- ------- ------- ---------
Total loans........................................... 335 (340) (5) (545) 709 164
-------- ------- ---------- ------- ------- ---------
TOTAL INTEREST INCOME................................. 1,140 (364) 776 437 1,199 1,636
-------- ------- ---------- ------- ------- ---------
INTEREST EXPENSE
Savings deposits................................. 167 7 174 16 202 218
Money market accounts............................ (36) (41) (77) (20) 37 17
Time deposits.................................... 194 (72) 122 401 438 839
Short-term borrowings............................ 51 (13) 38 3 66 69
Long-term borrowings............................. (43) (6) (49) (92) 7 (85)
-------- ------- ---------- ------- ------- ---------
TOTAL INTEREST EXPENSE................................ 333 (125) 208 308 750 1,058
-------- ------- ---------- ------- ------- ---------
Net interest income (tax equivalent basis)............ 807 (239) 568 129 449 578
Tax-equivalent basis adjustment....................... --- --- --- --- --- ---
-------- ------- ---------- ------- ------- ---------
NET INTEREST INCOME................................... $ 807 $ (239) $ 568 $ 129 $ 449 $ 578
======== ======= ========== ======= ======= =========
The table on page 12 (Consolidated Statistics on a Taxable Equivalent
Basis) shows the Company's consolidated average balances of assets, liabilities
and stockholders' equity, the amount of average interest earning assets and
interest bearing liabilities, net interest spread and net interest income as a
percentage of average interest earning assets. Non-accruing loans are included
in average loans, thereby lowering the yield on the loan portfolio in the
respective areas. Non-taxable income from investment securities is presented on
a tax-
10
equivalent basis whereby tax-exempt income is adjusted upward by an amount
equivalent to the prevailing federal income taxes that would have been paid if
the income had been fully taxable (assuming a 34% tax rate). Although the
Company, through NBSC, must reduce the amount of interest expense deductible for
federal income tax purposes by an amount related to the average balance of tax-
exempt securities purchased after August 1986, this adjustment is not material
to the presentation and is not included in the table. The indebtedness of the
High Point Financial Corp. Employee Stock Ownership Plan (the "ESOP") in 1994 is
shown under "Other Liabilities" and not in "Long-term Borrowings" (see Note 14).
11
CONSOLIDATED STATISTICS ON A TAXABLE EQUIVALENT BASIS
1996 1995 1994
----------------------------- ----------------------------- ----------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- --------- -------- --------- --------- ------- --------- --------- -------
(IN THOUSANDS)
ASSETS
- ------
Interest earning assets:
Loans, including loans held for
sale, net of unearned income:
Commercial and construction.......... $ 55,892 $ 4,798 8.58% $ 63,647 $ 5,780 9.08% $ 76,165 $ 5,977 7.85%
Mortgage............................. 31,504 2,688 8.53% 24,257 2,155 8.88% 21,852 2,047 9.37%
Installment.......................... 20,774 1,863 8.97% 16,329 1,419 8.69% 12,722 1,166 9.17%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total loans.............................. 108,170 9,349 8.64% 104,233 9,354 8.97% 110,739 9,190 8.30%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Securities including securities
available for sale:*
U.S. government and agencies......... 60,760 3,787 6.23% 48,288 2,954 6.12% 32,068 1,745 5.44%
State and political subdivisions..... -- -- --% -- -- --% 510 20 3.92%
Other securities..................... 12,321 679 5.51% 11,647 666 5.72% 13,447 703 5.23%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total securities....................... 73,081 4,466 6.11% 59,935 3,620 6.04% 46,025 2,468 5.36%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Interest bearing deposits at banks..... 111 1 0.90% 113 2 1.77% 145 2 1.38%
Federal funds sold..................... 11,556 613 5.30% 11,669 677 5.80% 8,514 357 4.19%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest earning assets.......... 192,918 14,429 7.48% 175,950 13,653 7.76% 165,423 12,017 7.26%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Non-interest earning assets:
Cash and due from banks.............. 8,389 7,886 7,458
Unrealized losses on securities
available for sale.................. 1 (577) (760)
Allowance for possible loan losses... (4,229) (5,042) (5,075)
Premises and equipment--net.......... 4,838 5,321 5,479
Other assets......................... 6,367 7,397 8,892
-------- -------- --------
TOTAL ASSETS............................. $208,284 $190,935 $181,417
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest bearing liabilities:
Savings deposits..................... $ 73,004 $ 1,912 2.62% $ 66,646 $ 1,738 2.61% $ 65,950 $ 1,520 2.30%
Money market accounts................ 10,353 256 2.47% 11,668 333 2.85% 12,651 316 2.50%
Time deposits........................ 60,693 3,291 5.42% 57,087 3,169 5.55% 49,286 2,330 4.73%
Short-term borrowings................ 5,478 167 3.05% 3,735 129 3.45% 3,542 60 1.69%
Long-term borrowings................. 1,413 132 9.34% 1,875 181 9.65% 2,826 266 9.41%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing
liabilities........................... 150,941 5,758 3.81% 141,011 5,550 3.94% 134,255 4,492 3.34%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Non-interest bearing liabilities:
Demand deposits...................... 38,079 34,128 33,308
Other liabilities.................... 2,407 2,396 2,379
-------- -------- --------
Total non-interest bearing
liabilities........................ 40,486 36,524 35,687
-------- -------- --------
Stockholders' equity................... 16,857 13,400 11,475
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY................... $208,284 $190,935 $181,417
======== ======== ========
Net interest income
(tax-equivalent basis).................. 8,671 3.66% 8,103 3.82% 7,525 3.92%
Tax-equivalent basis adjustment.......... --- --- ---
------- ---- ------- ---- ------- ----
NET INTEREST INCOME...................... $ 8,671 $ 8,103 $ 7,525
======= ======= =======
Net interest margin (tax-equivalent
basis).................................. 4.49% 4.61% 4.55%
==== ==== ====
________________
*Securities are reported at amortized cost without including the impact of any
unrealized gains or losses on securities available for sale.
12
Net interest income for 1996 was $8,671,000, representing an increase of
$568,000 or 7.0% compared to the $8,103,000 reported for 1995; net interest
income increased in 1995 by $578,000, or 7.7% from 1994. The improvement in net
interest income from 1995 to 1996 resulted from a $17.0 million increase in
average earning assets offset in part by a decline in interest income due to a
decline in rates that occurred early in 1996. In 1995, on the other hand, net
interest income improved from 1994 as a result of increases in both volume and
rates.
Total interest income increased $776,000 from $13,653,000 in 1995 to
$14,429,000 in 1996, a 5.6 % increase. Of the increase, $1,140,000 is related to
the increase in volume offset by a decline of $364,000 resulting from a decline
in rate. Total average interest earning assets increased from $175,950,000 in
1995 to $192,918,000 in 1996, representing an increase of $16,968,000 or 9.6%
from 1995. Total average interest earning assets increased $10,527,000 in 1995,
or 6.4% over the 1994 level of $165,423,000. The increase in earning assets from
1996 came from a combination of asset growth and a decline in non-performing
assets. The composition of average assets also changed. Average loans
outstanding increased $4.0 million from 1995 to 1996 and average securities
increased $13.2 million in the same time period. The increase in average loans
outstanding resulted from increased volume in mortgages and installment loans
which increased $7.2 million and $4.5 million, respectively, offset by a decline
in average commercial loans outstanding of $7.7 million.
Interest income on total loans decreased from $9,354,000 in 1995 to
$9,349,000 in 1996, a decrease of $5,000. This decrease was comprised of a
$340,000 decrease in interest income resulting from a decrease in rate offset by
a $335,000 increase resulting from an increase in volume. The average yield on
loans decreased from 8.97% in 1995 to 8.64% in 1996. Average yields on
commercial and mortgage loans declined 50 basis points and 35 basis points,
respectively, from 1995 to 1996. The decrease in loan yield results from a 25
basis point decline in prime rate which occurred at the beginning of 1996. In
1996, mortgage rates declined and some borrowers refinanced at lower rates
causing the overall yield to decline. Interest income on total loans increased
from $9,190,000 in 1994 to $9,354,000 in 1995, an increase of $164,000. Of the
increase $709,000 was due to increases in rate offset by a decline of $545,000
due to declines in volume.
Although the volume of non-performing loans contributed negatively to the
level of interest income earned in the last five years, that impact was lower in
1996 than it has been in prior years. The Company had average non-accrual loans
of $5,063,000 and $6,471,000 for 1996 and 1995, respectively. Interest that
would have been earned had the loans been current was $497,000 and $627,000 in
1996 and 1995, respectively. The negative impact of the non-accruing loans on
the yields on total loans presented for 1996 and 1995 would be 42 and 59 basis
points, respectively. Excluding the non-accrual loans from interest earning
assets would increase the yield on total earning assets and the net interest
spread by 20 and 29 basis points for 1996 and 1995, respectively. One basis
point is equal to one hundredth of one percent.
Total interest income on securities increased from $3,620,000 in 1995 to
$4,466,000 in 1996, an increase of $846,000 or 23.4%. Average securities
increased from $59.9 million in 1995 to $73.1 million in 1996, an increase of
$13.2 million as a result of the purchase of securities. Total interest income
on securities increased $812,000 as a result of an increase in volume and
$34,000 as result of an increase in rates. In 1995, interest income on
securities increased $1,152,000 from 1994--$825,000 as a result of an increase
in volume and $327,000 as a result of an increase in rates.
Total interest expense increased from $5,550,000 in 1995 to $5,758,000 in
1996, an increase of $208,000 or 3.7%. Of the increase in interest expense,
$333,000 resulted from an increase in volume offset by a decline of $125,000
resulting from a decrease in rate. Average interest bearing liabilities
increased from $141.0 million in 1995 to $150.9 million in 1996, an increase of
$9.9 million resulting from a $8.6 million increase in average interest bearing
deposits and a $1.8 million increase in short-term borrowings offset by a
$462,000 decline in long-term borrowings. Total interest expense increased
$1,058,000 from 1994 to 1995--$308,000 of the increase was due to an increase in
volume and $750,000 was due to an increase in rate.
Average savings accounts increased to $73.0 million in 1996, an increase of
$6.4 million or 9.6% from 1995. Interest expense on savings deposits increased
$174,000 from 1995 to 1996, $167,000 of which was due
13
to an increase in volume and $7,000 of which was due to an increase in rate.
Average time deposits increased to $60.7 million, an increase of $3.6 million or
6.3% from 1995 to 1996. Interest expense on time deposits increased a total of
$122,000--$194,000 resulting from an increase in volume offset by a decline of
$72,000 resulting from a decline in rate. Average long-term borrowings,
comprising the Note Payable and the Debentures, declined to $1,413,000 in 1996,
a decline of $462,000, resulting from the conversion of Equity contracts
collateralized by debentures totaling $384,000 on March 1, 1996. Also impacting
the decline in average long-term borrowings were the principal payments made on
the Note Payable. Interest expense on long-term borrowings decreased $49,000--
$43,000 due to a reduction in volume and $6,000 due to a decrease in rate.
The net interest spread, or the difference between the yield on earning
assets and the average cost of funds acquired (interest bearing liabilities),
was 3.66% in 1996, 3.82% in 1995 and 3.92% in 1994. As shown in the table on
page 2 (Consolidated Statistics on a Taxable Equivalent Basis), the gross yield
on interest earning assets for 1996 was 7.48%, an decrease of 28 basis points
compared to the 7.76% reported for 1995 and an increase of 22 basis points from
the 7.26% reported for 1994. The cost of interest bearing liabilities was 3.81%
for 1996, a decrease of 13 basis points from the 3.94% reported for 1995 and 47
basis points above the 3.34% reported for 1994. The yield on interest earning
assets in 1996 was impacted by the decline in prime rate and in the federal
funds rate that occurred early in 1996. This same type of drop did not occur in
deposits because banks in NBSC's market area were reluctant to lower the rates
of their customers' deposits. The yield on average assets was also impacted by a
change in composition of average earning assets. Average loans outstanding
declined from 59.2% of average earning assets in 1995 to 56.1% in 1996.
Securities as a percent of average assets increased from 34.1% in 1995 to 37.8%
in 1996. Because loans traditionally earn more than investments, this change in
composition has a detrimental impact on the yield on interest earning assets as
well as on the net interest spread and net interest margin.
The tax-equivalent net interest margin (see "Net interest margin (tax
equivalent basis)" in the table "Consolidated Statistics on a Taxable Equivalent
Basis") decreased from 4.61% in 1995 to 4.49% in 1996, a decrease of 12 basis
points compared to a 6 basis point increase from 1994 to 1995.
PROVISION FOR POSSIBLE LOAN LOSSES
There was no provision for possible loan losses in 1996 compared to
provisions of $225,000 and $1,327,000 in 1995 and 1994, respectively. Net loans
charged off in 1996 amounted to $636,000, compared to $850,000 and $1,512,000
reported for 1995 and 1994, respectively. As a result of its evaluation of its
allowance for possible loan losses and as a result of continued declines in non-
performing loans and classified loans, NBSC's management believes its allowance
for possible loan losses is adequate at this time (See Note 5 and the discussion
of "Non-performing Assets" and "The Allowance for Possible Loan Losses" below).
Management deems the allowance for possible loan losses adequate as of December
31, 1996, but any further deterioration in the local real estate market or
changes in the economy affecting the region in which NBSC operates may require
additions to the allowance for possible loan losses in future periods.
NON-INTEREST INCOME
The Company generates non-interest income through the variety of services
it offers in its market area through NBSC. These services range from deposit
services to full service brokerage and investment planning services. Non-
interest income for 1996 was $2,552,000, an increase of $132,000, or 5.5%,
compared to $2,420,000 in 1995 which was an increase of $200,000 or 9.0% from
the $2,220,000 reported in 1994.
Service charges on deposit accounts increased $54,000 from $1,341,000 to
$1,395,000, or 4.0% from 1995 to 1996, compared to the $115,000 or 7.9% decrease
recorded in 1995 over 1994. The increase in service charge revenue on deposit
accounts from 1995 to 1996 resulted from a higher volume of deposits in 1996.
The decrease in revenue generated by service charges on deposit accounts from
1994 to 1995 resulted from management's decision to reduce service charge rates
assessed on deposit accounts in order to attract additional deposits. Other
14
service charges, commissions, and fees increased from $708,000 in 1995 to
$853,000 in 1996, an increase of $145,000 or 20.5% resulting from increases in
fee income on annuity sales and investment planning services from $345,000 in
1995 to $415,000 in 1996. Correspondent banking fees also contributed to the
increase in other service charges, commissions and fees. A primary area in non-
interest income that decreased was gains (losses) on sales of securities and
loans which decreased from a combined gain of $53,000 in 1995 to a combined loss
of $19,000 in 1996.
NON-INTEREST EXPENSE
Total non-interest expense decreased from $9,472,000 in 1995 to $9,097,000
in 1996, a decrease of $375,000 or 4.0% compared to the $158,000 or 1.7%
decrease recorded in 1995 over 1994. The decrease in non-interest expense from
1995 to 1996 reflects a decline in expenses related to non-performing assets and
a decline in FDIC insurance fees assessed.
Salary and employee benefits expense decreased from $4,623,000 in 1995 to
$4,575,000 in 1996, a decrease of $48,000, or 1.0%. Salary expense increased
from $3,492,000 in 1995 to $3,585,000 in 1996, an increase of $93,000, or 2.7%
as a result of merit increases. Employee benefits expense decreased from
$1,131,000 in 1995 to $990,000 in 1996, a decrease of $141,000 or 12.5%.
Employee benefits decreased from 1995 to 1996 because employee benefit expense
in 1995 included a $135,000 provision to reduce the net carrying value of the
excess assets of the Company's defined benefit pension plan to estimated net
realizable value in anticipation of the 1996 liquidation of such plan. This
defined benefit plan was liquidated in 1996. After payment of funds due to
employees covered under the plan and after payment of excise taxes upon
liquidation, the remaining funds reverting to the Company totaled $123,000 in
excess of the net expected amount to be returned to the Company. Offsetting the
impact of the $123,000 pension benefit was the funding of $120,000 to establish
an executive supplemental retirement plan. Salaries and employee benefits
expense increased from $4,518,000 in 1994 to $4,623,000 in 1995, an increase of
$105,000. Salary expense declined from $3,528,000 in 1994 to $3,492,000 in 1995,
a decline of $36,000 or 1.0% as a result of a reduction in staffing levels from
1994 to 1995. Employee benefit expense increased from $990,000 in 1994 to
$1,131,000 as a result of the $135,000 pension provision discussed above.
Net occupancy expense decreased to $952,000 in 1996, a $14,000 or 1.4%
decrease as a result of decreased rental expense for office space. Equipment
expenses increased $13,000 or 2.4% to $552,000 in 1996 from the $539,000
reported in 1995, which in turn decreased from $570,000 in 1994.
The net cost of operation of other real estate declined to $305,000 in 1996
compared to $663,000 for both 1995 and 1994. The net cost of operation of other
real estate includes net gains or losses recorded on properties that were sold
for amounts that differed from their carrying value. Such net gains of $78,000
were recorded in 1996 compared to net losses of $20,000 and net gains of
$578,000 recorded in 1995 and 1994, respectively. The changes in composition in
the net cost of operation of other real estate from 1995 to 1996 include a
decrease of rental income from $362,000 in 1995 to $148,000 in 1996 as a result
of sales of rental properties in late 1995. Provisions made to the allowance for
other real estate were $50,000 in 1996 compared to $137,000 in 1995 and $680,000
in 1994. Operating expenses on other real estate declined to $221,000 in 1996,
down from $674,000 and $765,000 in 1995 and 1994, respectively. Net cost of
operation of other real estate includes costs incurred on foreclosure,
subsequent writedowns of properties to their net realizable value and costs of
maintaining the properties. These costs are net of any rental income received on
such properties. For more information, see Note 4 on page 42.
Other expenses increased from $2,681,000 in 1995 to $2,713,000 in 1996, an
increase of $32,000, or 1.2%. See Note 18 on page 52 for detail on other
expenses. Included in other expenses are legal fees, which increased to $276,000
in 1996 from $247,000 in 1995, an increase of $29,000, or 11.7%. Legal fees
declined $322,000 or 56.6% from 1994 to 1995. The level of high legal fees in
1994 can be attributed to legal costs incurred in working out problem loans and
foreclosing costs related to defaulted loans.
15
The Company's FDIC insurance assessment decreased from $383,000 in 1995 to
$170,000 in 1996, a decline of $213,000 or 55.6%. Like all FDIC insured banks,
NBSC's assessment fee as a percent of deposits is based on a tiered structure
based on a bank's level of capitalization and the degree of supervisory concern.
The range of premiums to be paid by banks is $0.00 to $0.27 per $100 of
deposits. Because of a reduced level of supervisory concern regarding NBSC as a
result of NBSC's improved financial condition, NBSC's premium was reduced from
$0.17 per $100 of deposits to $0.03 per $100 of deposits. Effective January 1,
1997, NBSC's insurance rate will drop to $0.00 per $100 of deposits with an
additional $0.0128 per $100 in deposits to help fund the FICO interest
obligation. Assuming NBSC's deposit levels remain the same, NBSC's FDIC expense
will drop approximately 85% in 1997 from 1996 levels. FDIC fees had decreased
$81,000 from 1994 to 1995 resulting from a reduction in deposit premium levels
by the FDIC Board of Governors.
Marketing expense declined from $315,000 in 1995 to $216,000 in 1996, a
decline of $99,000 or 31.4% as a result of management's reduced emphasis on
advertising in 1996. Marketing expense had increased in 1995 from $209,000 in
1994 as a result of increased advertising expenditures to promote investment
products and to increase deposits. Printing and supply expense increased from
$196,000 in 1995 to $239,000 in 1996, an increase of $43,000 or 21.9% as a
result of costs to reprint forms and brochures to comply with changing
regulations.
Included in other expenses was an unrealized loss on the Company's land
held for sale of $250,000 which was recorded to reflect estimated costs for
improvements necessary to enhance the marketability of the land and to reflect
an additional impairment on the land resulting from the fact that a prior
contract of sale was terminated.
FINANCIAL CONDITION
DEPOSITS
As shown on the balance sheet on page 32, total deposits increased $10.6
million from $178.3 million on year-end 1995 to $188.9 million on year-end 1996,
a 5.9% increase. The largest deposit increase was in non-interest bearing
accounts, which increased to $43.1 million, an increase of $4.8 million or 12.5%
from year-end 1995 to year-end 1996. Interest bearing demand accounts increased
from $25.1 million on December 31, 1995 to $26.6 million on December 31, 1996,
an increase of $1.5 million or 6.0%. Savings accounts increased from $55.8
million to $58.2 million, an increase of $2.4 million, or 4.3%. Time deposits
increased from $59.1 million to $60.8 million, a $1.7 million or 2.9% increase.
Included in time deposits are jumbo CDs which declined from $9.4 million on
year-end 1995 to $6.7 million on year-end 1996, a decline of $2.7 million or
28.7%.
Comparing average balances on non-interest bearing demand deposits shows
that average demand deposits increased from $33.3 million in 1994 to $34.1
million in 1995 to $38.1 million in 1996. Average non-interest demand deposits
as a percent of total deposits decreased from 20.7% in 1994 to 20.1% in 1995,
and increased to 20.9% in 1996. Average savings deposits increased to $73.0
million in 1996 from $66.6 million in 1995 and $65.9 million in 1994. Average
money market accounts declined to $10.4 million in 1996 from $11.7 million in
1995 and $12.7 million in 1994. Average time deposits increased from $49.3
million in 1994 to $57.1 million in 1995 and increased to $60.7 million in 1996.
Because market interest rates for time deposits increased in 1995, rates on time
deposits have declined.
16
The average amounts of deposits and the average rates paid on deposits for
the years indicated are summarized in the following table:
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
-------------------- -------------------- --------------------
Average Average Average Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
--------- -------- --------- -------- --------- --------
Non-interest bearing demand deposits........... $ 38,079 --- $ 34,128 --- $ 33,308 ---
Savings deposits............................... 73,004 2.62% 66,646 2.61% 65,950 2.30%
Money market accounts.......................... 10,353 2.47% 11,668 2.85% 12,651 2.50%
Time deposits.................................. 60,693 5.42% 57,087 5.55% 49,286 4.73%
-------- ----- -------- ----- -------- -----
Total.................................... $182,129 3.00% $169,529 3.09% $161,195 2.58%
======== ===== ======== ===== ======== =====
The following table summarizes the maturity distribution of time
certificates of deposit in amounts of $100,000 or more as of December 31, 1996.
There were no other time deposits in amounts of $100,000 or more as of that
date.
Amount
--------------
Maturity (in thousands)
--------
Within 3 months............................................ $ 3,745
Over 3 through 6 months.................................... 1,128
Over 6 through 12 months................................... 956
Over 12 months............................................. 846
--------
Total................................................. $ 6,675
========
SHORT-TERM BORROWINGS
Short-term borrowings include securities sold under agreements to
repurchase. Information relating to securities sold under agreements to
repurchase for 1996, 1995, and 1994 is summarized below:
1996 1995 1994
------ ------ ------
(in thousands)
Balance at December 31.......................................................... $5,054 $2,959 $2,621
Interest rate at December 31.................................................... 2.89% 3.52% 3.08%
Maximum amount outstanding at any month-end during the year..................... $8,580 $5,189 $5,325
Average amount outstanding during the year...................................... $5,479 $3,735 $3,542
Weighted average interest rate during the year.................................. 3.04% 3.46% 1.69%
Securities sold under agreements to repurchase generally mature within 90
days. The table includes securities sold under agreements to repurchase which
mature on a daily basis.
LOANS
Total loans increased from $104.9 million on December 31, 1995 to $114.6
million on December 31, 1996, an increase of $9.7 million. Total loans decreased
by $745,000 or 0.7% from 1994 to 1995. Commercial loans decreased from $58.3
million at year-end 1995 to $51.1 million at year-end 1996, a decline of $7.2
million or 12.3% compared to a decrease of $8.5 million or 12.7% during 1995.
Real estate construction loans increased to $7.0 million on December 31, 1996,
an increase of $2.7 million or 62.8% during 1996 compared to the $1.1 million or
34.4% increase in the previous year. These changes in balances outstanding are
net of charge-offs and principal reductions made during each respective year.
Real estate mortgage loans increased from $24.2 million at the end of 1995 to
$33.4 million at the end of 1996 an increase of $9.2 million or 38.0%, because
the Company sold a lower volume of mortgages in 1996 than it did in 1995.
Because a major portion of the Company's loan
17
demand came from residential mortgages and because the sale of the mortgages was
not necessary for liquidity purposes, management decided not to sell new 15 year
fixed rate mortgages, biweekly mortgages and adjustable rate mortgages.
Installment loans increased as a result of increased demand in consumer
installment loans.
The following table sets forth the composition of the Company's loan portfolio
as of the dates indicated:
December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands)
Commercial*................................................. $ 51,065 $ 58,274 $ 66,848 $ 80,829 $ 98,260
Real estate--construction................................... 6,951 4,300 3,171 4,743 8,274
Real estate--mortgage....................................... 33,401 24,216 21,795 13,658 14,400
Installment................................................. 23,214 18,073 13,794 11,796 14,765
-------- -------- -------- -------- --------
Total.................................................. $114,631 $104,863 $105,608 $111,026 $135,699
======== ======== ======== ======== ========
__________
*includes loans previously accounted for as insubstance foreclosures now
included in non-accrual loans according to SFAS No. 114.
The Company has not made loans to borrowers outside the United States. All
references to loans of the Company are loans of NBSC (or Pocono, prior to April
1992). High Point is not a lender. The following table presents the percentage
distribution of loans by category as of the dates indicated.
December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
Commercial................................................ 44.55% 55.57% 63.30% 72.81% 72.41%
Real estate--construction................................. 6.06% 4.10% 3.00% 4.27% 6.10%
Real estate--mortgage..................................... 29.14% 23.09% 20.64% 12.30% 10.61%
Installment............................................... 20.25% 17.24% 13.06% 10.62% 10.88%
------- ------ ------ ------ ------
Total................................................ 100.00% 100.00% 100.00% 100.00% 100.00%
======= ====== ====== ====== ======
The following table shows the maturity of loans in the specified categories
of the Company's loan portfolio at December 31, 1996, and the amount of such
loans with predetermined fixed rates or with floating or adjustable rates.
After one
Within but within After five
one year five years years Total
-------- ---------- ---------- -------
(in thousands)
Types of Loans:
Commercial.............................................. $ 15,957 $ 25,450 $ 9,658 $ 51,065
Real Estate--construction............................... 6,253 323 375 6,951
-------- -------- -------- --------
Total................................................ $ 22,210 $ 25,773 $ 10,033 $ 58,016
======== ======== ======== ========
Amount of such loans with:
Predetermined rates..................................... $ 13,652 $ 15,220 $ 4,089 $ 32,961
Floating or adjustable rates............................ 8,558 10,553 5,944 25,055
-------- -------- -------- --------
Total................................................ $ 22,210 $ 25,773 $ 10,033 $ 58,016
======== ======== ======== ========
The Company's policy concerning rollovers of loans at maturity is to review
each particular case and consider a rollover based upon the continued
creditworthiness of the borrower. The table above shows maturities based upon
the contractual terms at year-end 1996 of loans in the categories indicated and
does not reflect rollovers which may occur subsequently.
18
The loan to deposit ratio at year-end 1996 was 60.7%, up from the 58.8%
level at year-end 1995, but down from 63.8% at year-end 1994. This ratio is
reviewed in relation to credit demand, deposit activity, local economic factors
and the perceived credit risk within the loan portfolio.
From time to time in the ordinary course of business, management may
identify certain loans which it may sell to meet liquidity or other operational
needs. At December 31, 1996 and 1995, management had designated loans with a
face amount of approximately $178,000 and $621,000, respectively, as loans held
for sale. The loans held for sale at year-end 1996 and 1995 had market values of
$178,000 and $628,000, respectively. These were recorded at their aggregate
market values, and there was no unrealized gain recorded on December 31, 1996
and an unrealized gain of $7,000 was recorded on December 31, 1995.
Based on the Company's market area and the communities it serves, the
majority of loans approved are for the purpose of acquiring and/or developing
real estate. When proceeds may be used for other purposes, the loans primarily
are secured by real estate. New commercial and real estate construction loans
totaled $20.5 million during 1996 compared to levels of $16.5 million and $4.3
million in 1995 and 1994, respectively. As of year-end 1996, the percent of
commercial and real estate construction loans was 51% of loans outstanding
compared to 60% and 66% in 1995 and 1994, respectively. The risks related to
commercial and real estate construction loans relate to the real estate market.
If real estate values decline and borrowers are unable to repay, the Company's
investment in the loans may not be fully recoverable. For further information
regarding the percentage distribution of loans by collateral type and purpose,
see Note 3 on page 39.
The Company recorded $9.7 million in new real estate mortgage loans
(residential mortgages) net of repayments during 1996 compared to $6.3 million
in 1995. During the course of 1996, $500,000 in mortgage loans were sold
compared to $3.6 million of mortgage loan sales in 1995. By year-end 1996
mortgage loans increased to 29.1% of total loans compared to the levels of 23.1%
and 20.6% at year-end 1995 and 1994, respectively. The risks related to new real
estate mortgages are twofold: first, in an economic downturn with high
unemployment and low real estate values, borrowers may have difficulty repaying
their loan. If the Company forecloses, it may not be able to recover the entire
investment. The Company tries to mitigate this risk by requiring a certain loan-
to-value ratio before issuing the mortgage. The second type of risk involved
with residential mortgages is option risk--the customer can repay the loan ahead
of schedule. Therefore, in a period of low interest rates, a customer may
refinance their mortgage at a lower rate. As a result the Company's net interest
margin will decline. The Company manages this risk by increasing or decreasing
the level of mortgage sales as the need arises.
The Company continues to maintain the servicing rights on mortgages that
were sold in 1996. In any given year the level of loans sold into the secondary
market may increase or decrease. The decision to increase or decrease the level
of loans sold is a function of liquidity needs, interest rate risk management
and demand in the market area for new mortgage loans. In order to support a
level of demand greater than resources available, mortgage loans may be sold in
order to generate funds to meet new mortgage demand. As of December 31, 1996,
there were no mortgage loans held for sale. At December 31, 1996, $46.2 million
in mortgage loans previously sold were being serviced compared to $53.7 million
and $56.6 million at year-end 1995 and 1994, respectively. Although there were
no mortgages held for sale at year-end 1996, there were approximately $178,000
in student loans held for sale as of December 31, 1996, which the Company
expects to sell in 1997 at their book value.
Installment loans, which include second mortgages, home equity loans,
automobile loans and other consumer debt have increased from $18.1 million in
1995 to $23.2 million at year-end 1996, a $5.1 million or 28.2% increase
compared to a $4.3 million or 31.2% increase from year-end 1994 to year-end
1995. The growth in the installment loan portfolio was primarily in second
mortgages and home equities. Home equity loans are generally secured either by
first or second liens on residential property. Loans that are secured by second
liens inherently have more risk than loans secured by first liens. If a
foreclosure occurs, the first lienholder must be completely paid before the
second lienholder's claim is addressed. Other consumer debt that is secured by
vehicles or is unsecured has increased risk; in the event of a default, the
lender may have a difficult time
19
recovering payment on any of the loan. Only 3.28% of the total loans outstanding
at year-end 1996 would fall into this category. The Company mitigates its risk
by its underwriting standards.
The allowance for possible loan losses at year-end 1996 was $3,973,000, a
decrease of $636,000 compared to the previous year-end. The allowance for
possible loan losses represents 3.47% of total loans outstanding compared to the
4.40% and 4.96% levels at year-end 1995 and 1994, respectively. The level in the
allowance at December 31, 1996 is based on management's evaluation of the
underlying credit risk inherent in the total loan portfolio. Management reviews
the loan portfolio and evaluates credit risk throughout the year.
The following table provides a five-year analysis of changes in the
allowance for possible loan losses:
December 31,
---------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ -------
(in thousands)
Allowance for possible loan losses:
Beginning balance*............................................ $4,609 $5,234 $5,419 $6,066 $10,118
Loans charged off:
Commercial*................................................ 933 1,153 1,677 1,803 5,398
Real estate--construction.................................. --- 86 254 17 250
Real estate--mortgage...................................... 91 143 189 40 211
Installment................................................ 74 89 135 260 461
------ ------ ------ ------ -------
Total loans charged off............................... 1,098 1,471 2,255 2,120 6,320
------ ------ ------ ------ -------
Recoveries:
Commercial................................................. 328 560 636 886 602
Real estate--construction.................................. 13 9 16 84 ---
Real estate--mortgage...................................... 2 3 27 1 56
Installment................................................ 119 49 64 166 96
------ ------ ------ ------ -------
Total Recoveries...................................... 462 621 743 1,137 754
------ ------ ------ ------ -------
Net charge-offs:...................................... 636 850 1,512 983 5,566
Provision for possible loan losses charged to operations*....... --- 225 1,327 336 1,857
Less: Reduction of allowance through sale of Pocono Bank....... --- --- --- --- 343
------ ------ ------ ------ -------
Ending balance.................................................. $3,973 $4,609 $5,234 $5,419 $ 6,066
====== ====== ====== ====== =======
__________
*Prior years balances, charge-offs and provisions adjusted for restatement of
insubstance foreclosure reserves to the allowance for possible loan losses per
the requirements of SFAS No 114.
The following table presents an allocation of the allowance for possible
loan losses as to indicated categories. The allocation is based upon
management's review of the credit risk of the loans in the specific category as
well as historical trends.
December 31,
---------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(in thousands)
Commercial................................................ $3,714 $4,318 $4,947 $4,832 $ 5,413
Real estate--construction................................. 17 4 81 319 252
Real estate--mortgage..................................... 103 192 129 107 146
Installment............................................... 139 95 77 161 255
------ ------ ------ ------ -------
Total................................................ $3,973 $4,609 $5,234 $5,419 $ 6,066
====== ====== ====== ====== =======
20
The determination of the appropriate level of the allowance for possible
loan losses is based on management's evaluation of the risk characteristics of
the loan portfolio under current economic conditions in the market area. In
addition to analyzing the financial condition of each borrower, management also
analyzes fair market value of collateral; industry trends; trends in loan
losses, past due and delinquency levels, and other considerations which deserve
recognition in estimating possible loan losses. Management also reviews the
impact of the changing local economy as it pertains to the loan portfolio.
Conditions such as the demand for residential construction and the changes in
the employment rate in the Company's market area are considered, as are changes
in national retail sales, leading economic indicators, predictions of growth and
changes in unemployment levels.
Total loans outstanding at year-end 1996 to finance real estate
construction and land development were $8,170,000 compared to $7,468,000 a year
ago. The Company does not normally finance, or participate in the financing of,
large commercial real estate projects beyond the fringes of its market. There
are currently $4,937,000 in commitments outstanding to finance real estate
construction and land development loans. During 1996, 1995 and 1994 the
following charge-offs were made that were directly related to real estate
activities:
1996 1995 1994
------ ------ ------
(in thousands)
Type of loan charged off
Land development/construction - residential........... $--- $ 16 $ 254
Land development/construction - commercial............ --- 70 ---
Permanent commercial real estate loans................ 764 721 1,139
---- ---- ------
$764 $807 $1,393
==== ==== ======
Based on the continuing review of real estate construction loans,
management expects some deterioration in the ability of some of the borrowers to
repay these loans under existing loan agreements. As part of management's
evaluation for the allowance for possible loan losses, it has provided specific
reserves for these loans as deemed necessary.
In 1996, net loans charged off (gross loans charged off less recoveries
received on loans charged off in prior periods) amounted to $636,000, as
compared with net charge-offs of $850,000 and $1,512,000 for the years 1995 and
1994, respectively (see Note 5). Net charge-offs as a percent of average loans
outstanding were 0.59% for 1996 compared to the 0.82% and the 1.37% levels
reported for 1995 and 1994, respectively.
NON-PERFORMING ASSETS
Non-performing loans consist of (i) renegotiated loans, (ii) non-accrual
loans, and (iii) loans which are contractually past due 90 days or more as to
interest or principal but are well secured and in the process of collection or
renewal in the normal course of business.
NBSC ceases to accrue interest on commercial loans and real estate mortgage
loans when principal or interest is in default for a period of 90 days or more,
except where there exists sufficient collateral to cover the defaulted principal
and interest payments and the loan is in the process of collection. Installment
loans are generally charged off when principal and interest payments are four
months in arrears. Interest which was previously accrued on non-accrual loans
but not yet paid is then reversed and charged against earnings during the period
in which the loan is placed in the non-accrual status, except where management
has determined that such loans are adequately secured as to principal and
interest. Interest earned thereafter is included in income only to the extent
that it is received on a cash basis. Interest on renegotiated loans is only
recognized in current income at the renegotiated rate and then only to the
extent that such interest is deemed to be collectible.
21
The following table details information concerning non-performing assets as
of December 31 for all of the periods indicated.
DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- --------- --------- ---------
(IN THOUSANDS)
Non-performing loans:
Renegotiated loans*................................ $ 505 $ 884 $ 4,164 $ 2,894 $ 6,809
Loans past due over 90
days.............................................. --- 156 289 184 355
Loans on non-accrual**............................. 3,850 5,744 8,435 16,229 20,750
------ ----- ------- ------- -------
TOTAL NON-PERFORMING LOANS.......................... 4,355 6,784 12,888 19,307 27,914
Other real estate................................... 1,136 2,741 4,606 3,967 2,371
------ ------ ------- ------- -------
TOTAL NON-PERFORMING ASSETS......................... $5,491 $9,525 $17,494 $23,274 $30,285
====== ====== ======= ======= =======
Allowance for possible
loan losses........................................ $3,973 $4,609 $ 5,234 $ 5,419 $ 6,066
====== ====== ======= ======= =======
Allowance for possible
loan losses as a percent of:
Total loans...................................... 3.47% 4.40% 4.96% 4.88% 4.47%
Non-performing loans............................. 91.23% 67.94% 40.61% 28.07% 21.73%
Non-performing loans as a
percent of total loans............................. 3.80% 6.47% 12.20% 17.39% 20.57%
____________________
* 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.
** Loans previously accounted for as insubstance foreclosure now accounted for
as non-accrual loans according to SFAS No. 114. See Note 3 on page 39 for
more information.
As the above table indicates, total non-performing loans decreased
$2,429,000 or 35.8% in 1996. In addition to the decrease in non-performing
loans, other real estate has decreased $1,605,000 or 58.6% during 1996 due to
sales of properties, writedowns and charge-offs on other real estate in excess
of foreclosures on real estate provided as collateral to secure loans.
Thus, non-performing assets decreased $4,034,000 or 42.4% during 1996. Non-
performing loans as a percent of total loans outstanding decreased from 6.5% to
3.8% from year end 1995 to year-end 1996.
Loans on non-accrual declined from $5,744,000 in 1995 to $3,850,000 in
1996, a decrease of $1,894,000, or 33.0%. At December 31, 1996, there were four
credits in excess of $500,000 classified as non-accrual. In the aggregate, these
four loans totaled $2,257,000 or 58.6% of total non-accrual loans. Of total non-
accrual loans, $2,997,000 or 77.8% were primarily secured by commercial property
and $571,000 or 14.8% were secured by residential first mortgages. The remaining
$282,000 in non-accrual loans were secured by miscellaneous assets including but
not limited to second mortgages on residential and commercial property and other
assets.
Renegotiated loans include those loans that are classified as "troubled
debt restructurings" as defined by Statement of Accounting Standards Number 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings." Loans
renegotiated under the requirements of SFAS No. 15 decreased from $884,000 at
year-end 1995 to $505,000 at year-end 1996, a decrease of $379,000 or 42.9%. The
majority of the decrease in renegotiated loans resulted from payments of loans.
One renegotiated loan totaling $433,000 was past due 34 days as of December 31,
1996.
SFAS No. 114, "Accounting for Impairment of Loans," which supercedes SFAS
No. 15, was implemented effective January 1, 1995. All loans renegotiated after
December 31, 1994 are accounted for under the requirements of SFAS No. 114. As
of December 31, 1996, there were $583,000 in renegotiated loans accounted for
under the requirements of SFAS No. 114 compared to $648,000 at December 31,
1995. All of the loans renegotiated under the requirements of SFAS No. 114 were
contractually current as of December 31, 1996.
Generally, other real estate is appraised when title is taken on the
property unless there is a contract of sale or there is a valid appraisal on
file which conforms to regulatory guidelines. Upon transfer or receipt of a new
22
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 in 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 and reviewed in
accordance with regulatory guidelines. Based on this continuing review and
results of updated appraisals as required, any further deterioration to market
value is expensed to the net cost of operation of other real estate. For 1996,
there were no charge-offs on other real estate; writedowns to expense were
$260,000. Sales of other real estate were $1,748,000 while new additions were
$403,000. Of the $1,136,000 in other real estate at December 31, 1996, there
were no properties of which the value exceeded $1,000,000. The value of two
properties exceeded $500,000. These properties had an aggregate carrying value
of $1,050,000 and comprised 92.4% of other real estate. Commercial real estate
comprises approximately 92.4% of other real estate.
THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
Non-performing loans declined $2,429,000 from year-end 1995 to year-end
1996, which included charge-offs of $636,000 and loans reclassified to other
real estate of $403,000. The allowance for possible loan losses as a percent of
non-performing loans increased from 67.9% at year-end 1995 to 91.2% at year-end
1996.
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) but 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 that could affect future collectibility. Third, NBSC assesses the
potential for loan losses in general reserve requirements based on historical
and anticipated collection statistics. Incorporated into this loan review is the
potential loan loss exposure on each significant credit considering the value of
the underlying collateral and present and prospective economic conditions within
the market area. This evaluation is an ongoing process which is performed at
least on a quarterly basis. Part of management's evaluation includes identifying
those loans where a probable loss exists and charging off the loans to the
extent of the estimated losses. Trends in the industry, in the Company's non-
performing loans and in the rate of charge-offs are also examined.
Based on its evaluation, management believes that it has identified the
risk in the loan portfolio and that the loan loss reserve is adequate on
December 31, 1996. Based on this evaluation, management also believes that the
allowance is adequate to absorb such additional losses as may arise in the loan
portfolio, although no assurances can be given that the Company will not sustain
losses in any given year which could be substantial in relation to the size of
the Company's allowance.
Loans classified for regulatory purposes but not included as non-performing
assets at December 31, 1996 include loans classified as "other assets especially
mentioned" of $2,979,000 and "substandard" of $8,024,000. These loans as of
December 31, 1996 are not past due in excess of 90 days. As part of management's
evaluation of the allowance for possible loan losses, it has provided specific
reserves for these loans as deemed necessary.
The risks and uncertainties in the financial industry are compounded by the
dependence of the Company's financial statements on estimates of future
circumstances, appraisals of collateral values in a soft real estate market, and
evaluations of borrowers' ability to repay loans according to their terms. The
possibility exists that changes in such estimates, appraisals and evaluations
might be required quickly because of changing economic conditions and the
economic prospects of NBSC's borrowers. These future changes could either
positively or adversely impact the financial condition of the Company.
Information with respect to the interest that would have accrued had the
loans discussed above been current versus the interest income that was realized
is discussed in Note 3 on page 39 in Notes to Consolidated Financial Statements
contained in Item 8 of this 10-K.
23
There were no loans at December 31, 1996, other than those included in the
table on page 22 or which were classified as set forth above, where the Company
was aware of any credit conditions of any borrower that would indicate a strong
possibility that the borrower could not comply with the present terms and
conditions of repayment and which would result in such loans being included as a
non-accrual, past due or restructured loan at some future time.
At December 31, 1996, there were no concentrations of loans exceeding 10%
of total loans outstanding except as disclosed in Note 3 on page 39 in Notes to
Consolidated Financial Statements contained in Item 8 of this 10-K. Loan
concentrations are considered to exist when there are amounts loaned to a number
of borrowers engaged in similar activities which would cause them to be
similarly affected by economic or other related influences.
SECURITIES PORTFOLIO
The following table shows the carrying value of the Company's security
portfolio as of the dates indicated. Securities held to maturity are stated at
cost, adjusted for amortization of premium and accretion of discounts.
Securities available for sale are stated at their fair value.
December 31,
--------------------------
1996 1995 1994
-------- --------- -------
(in thousands)
U.S. treasury securities and obligations of
U.S. government corporations and agencies:
Held to Maturity.......................................................... $ 3,004 $ 3,514 $13,168
Available for sale........................................................ 31,011 26,449 10,956
Obligations of states and political subdivisions:
Held to Maturity.......................................................... --- --- ---
Available for sale........................................................ --- --- ---
Mortgage-backed securities, agency issued:
Held to Maturity.......................................................... 19,663 11,878 9,393
Available for sale........................................................ 15,367 19,011 14,899
Vanguard money market fund:
Held to Maturity.......................................................... --- --- ---
Available for sale........................................................ 5,855 3,289 5,009
Other investments:
Held to Maturity.......................................................... --- --- ---
Available for sale........................................................ 1,342 555 806
------- ------- -------
Total securities............................................................ $76,242 $64,696 $54,231
======= ======= =======
All of the above securities with the exception of $35,000 in equities are
issued by the U.S. Treasury or by a U.S. Government Agency. Therefore, little
credit risk exists in the portfolio. The risk inherent in the Company's security
portfolio is interest rate risk and option risk. The U.S. Treasury Note and
Agency debentures are purchased with a final maturity of no greater than four
years. The Company owns a limited number of Agency callables. It is the
Company's policy not to buy callables with a final maturity of greater than five
years. The Company owns a $35.0 million portfolio of Agency issued mortgage-
backed securities. These are comprised of $5 million in Collateralized Mortgage
Obligations with the remainder of the portfolio in mortgage-backed pass-through
securities. These securities are subject to prepayment risk when rates decline,
and to extension risk when rates increase. Prepayments can lower the yield on
securities that were purchased at a premium. The Company manages prepayment risk
by buying its mortgage-backeds with a variety of coupon rates and at a variety
of price levels. Extension risk, on the other hand, increases the average life
of the security without a corresponding increase in yield. The Company minimizes
its extension risk by maintaining the majority of its mortgage-backed securities
in balloon mortgage-backed securities with original maturities no greater than
seven years. Other
24
investments include Federal Home Loan Bank stock, Federal Reserve Bank Stock and
other equity securities that are held for pledging purposes.
The following table shows the maturity and the weighted average yields for
the Company's security portfolio at December 31, 1996. The securities are shown
in their respective maturity categories based on contractual maturities rather
than anticipated paydowns. The securities are shown at their amortized cost.
Mortgage backed securities are shown within the one year category. Maturities
could differ based on calls or prepayments.
After one After five
Within but within but within After ten
one year five years ten years years Total
-------- ----------- ---------- -------- -----
(dollars in thousands)
U.S. treasury securities and obligations of
U.S. government corporations and
agencies, available for sale
Amount........................................... $10,685 $20,078 $ --- $ --- $30,763
Yield............................................ 6.41% 6.35% --- --- 6.37%
U.S. treasury securities and obligations of
U.S. government corporations and
agencies, held to maturity
Amount........................................... --- 3,004 --- --- 3,004
Yield............................................ --- 6.74% --- --- 6.74%
Mortgage-backed securities, available for sale
Amount........................................... 15,507 --- --- --- 15,507
Yield............................................ 6.15% --- --- --- 6.15%
Mortgage-backed securities, held to maturity
Amount........................................... 19,663 --- --- --- 19,663
Yield............................................ 6.86% --- --- --- 6.86%
Vanguard money market fund, available for sale
Amount........................................... 5,855 --- --- --- 5,855
Yield............................................ 4.96% --- --- --- 4.96%
Other investments, available for sale
Amount........................................... 1,337 --- --- --- 1,337
Yield............................................ 2.32% --- --- --- 2.32%
------- ------- --------- --------- -------
Total securities
Amount........................................... $53,047 $23,082 $ --- $ --- $76,129
Yield............................................ 6.24% 6.40% --- --- 6.29%
======= ======= ========= ========= =======
In November 1995, the Financial Accounting Standards Board issued a special
report - "A Guide to Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities." This special report allowed
a company to make a one time reclassification of securities within investment
categories without tainting other securities remaining within the categories. In
December 1995, the Company reclassified $18.7 million of securities previously
classified as held to maturity to available for sale resulting in a mark to
market adjustment of $168,000 which increased stockholders' equity of the
Company.
LIQUIDITY
Liquidity is a measure of the Company's ability to provide sufficient cash
flow for current and future financial obligations and commitments on a timely
basis. For the Company, liquidity could be defined as having the cash available
at the subsidiary bank level to meet the borrowing and cash withdrawal
requirements of customers, as well as for meeting the needs of current and
planned expenditures. At the subsidiary bank level liquidity is typically
provided by the funds received through customer deposits, investment sales and
maturities,
25
loan repayments, borrowings and from net income. The sale of loans also provides
liquidity to NBSC. For the Company, liquidity goes beyond that typically related
to banking operations. High Point's liquidity needs include sufficient cash flow
to meet debt repayment requirements, debt interest payments and planned capital
expenditures.
During 1996, NBSC sold $600,000 in new mortgage loans and $4.3 million of
securities. At NBSC it is management's intent to fund loan demand with deposit
growth, sales of securities and sales of mortgages. The sales of mortgages and
securities in 1996 were to respond to changes in interest rate risk and
prepayment risk. In 1996, deposits increased $10.5 million from year-end 1995
levels.
To meet future operational needs, NBSC held at year-end 1996 $53.6 million
of securities available for sale, $178,000 in loans available to be sold
subsequent to year-end at a price approximately equal to book value, and $4.0
million in overnight funds. In 1995, NBSC established two lines of credit--one
for $1.5 million and one for $2.0 million-- with correspondent banks in
consideration of which NBSC has agreed to pledge U.S. Treasury securities. NBSC
also has an overnight repurchase agreement arrangement with a brokerage firm
pursuant to which NBSC can pledge up to the amount of its remaining securities
and borrow up to 97% of the amount pledged overnight. NBSC did not borrow
against any of its lines of credit during 1996, 1995 or 1994. NBSC also did not
have any brokered deposits during 1996, 1995, or 1994. In December, 1996, NBSC
became a member of the Federal Home Loan Bank of New York. One of the benefits
of membership is the ability for NBSC to borrow up to $9.0 million which could
be used for short-term liquidity as well as for managing interest rate risk. The
Company believes that the current level of liquidity at NBSC is sufficient to
meet that bank's current and anticipated operational needs.
At December 31, 1996, High Point had $6,000 in cash and $240,000 in
overnight funds sold available to meet its liquidity needs. Additionally, High
Point maintains an interest bearing escrow account at another bank with a
balance of $123,000 at December 31, 1996. High Point's major cash flow
requirements for 1997 are to meet the monthly principal and interest payments
totaling approximately $15,000 on the note payable secured by land. High Point
also must pay the remaining quarterly interest payment of $3,000 to the
remaining holders of High Point's debentures as well as paying the $127,000 in
principal on the debentures due on March 1, 1997. In addition to the debt
requirements, High Point has legal fees, printing expenses, auditing fees and
other miscellaneous fees to be paid throughout the year. The residual
obligation, after scheduled principal payments, to the lending bank on High
Point's note payable secured by the land held for sale of $772,000 is due in a
final balloon payment on January 2, 1998. High Point plans to meet this
obligation primarily through the disposition of land held for sale, although no
assurance can be given in this regard. High Point continues to evaluate other
alternatives to repay the note payable. For further information, see Notes 14
and 19 on pages 49 and 53, respectively.
Liquidity at the parent company level in the normal course of business is
provided by dividend payments from its subsidiaries. High Point's only
subsidiary is NBSC. NBSC, as a national bank, is subject to dividend
restrictions. Under such restrictions, NBSC may not, without the prior approval
of the Office of the Comptroller of the Currency (the "OCC"), declare dividends
in excess of the current year's earnings plus the retained earnings from the
prior two years. NBSC also is restricted from paying dividends if at any time
losses have been sustained by the bank that exceed its retained earnings. At
this time, NBSC's earnings for the current year plus the retained earnings from
the prior two years are $6,296,000. NBSC has total retained earnings of
$1,224,000 and cannot pay dividends in excess of its retained earnings.
High Point currently has two additional sources available to increase its
liquidity. First, High Point can generate cash through its security portfolio.
As of December 31, 1996, High Point has equity securities with a market value of
$11,000 and a U.S. Treasury security with a market value of $201,000. These
securities are available for sale with the intent to continue to fund High
Point's note payable escrow account as needed. Second, there is a contract for
sale on 2.8 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 be after December 1997. The remaining land continues to generate
interest among potential buyers.
26
High Point and NBSC are not dependent on any one customer segment to
provide a source of deposits or dependent on any one customer or industry
segment for loan production.
INTEREST RATE SENSITIVITY
Closely related to the concept of liquidity is the management of interest
earning assets and interest bearing liabilities, which focuses on maintaining
stability in the net interest spread, an important factor in earnings growth and
stability. Emphasis is placed on maintaining a controlled rate sensitivity
position to avoid wide swings in spreads and minimize risk due to changes in
interest rates.
The following table sets forth the cumulative maturity distribution of the
Company's interest earning assets and interest bearing liabilities as of
December 31, 1996, the Company's interest rate sensitivity gap (i.e., interest
rate sensitive assets less interest rate sensitive liabilities), the Company's
cumulative interest rate sensitivity gap, the Company's interest rate
sensitivity gap ratio (i.e., interest rate sensitive assets divided by interest
rate sensitive liabilities) and the Company's cumulative interest rate
sensitivity gap ratio. For the purpose of the following table, an asset or
liability is considered rate sensitive within a specified period when it matures
or could be repriced within such period in accordance with its contractual
terms.
27
Interest bearing and non-interest bearing demand accounts as well as
savings accounts are reflected as maturing immediately. Loans held for sale and
securities available for sale are reported within the one year time frame. Non-
accrual loans are considered non-earning assets and are included in the "After 5
Years" column.
Maturing or Repricing
----------------------------------------------------------------
After 1 but
December 31,1996 Within 1 Year Within 5 Years After 5 Years Total
- ---------------- ------------- --------------- -------------- -----------
(in thousands)
Interest earning assets:
Loans................................................ $ 52,072 $29,609 $29,100 $110,781
Loans held for sale.................................. 178 --- ---- 178
Investment securities................................ --- 8,413 14,254 22,667
Federal funds sold................................... 4,025 --- --- 4,025
Interest bearing deposit's........................... 123 --- --- 123
Securities available for sale........................ 53,575 --- --- 53,575
-------- ------- ------- --------
Total earning assets................................... 109,973 38,022 43,354 191,349
Non-earning assets..................................... --- --- 25,833 25,833
-------- ------- -------- --------
Total Assets........................................... 109,973 38,022 69,187 217,182
-------- ------- -------- --------
Interest bearing liabilities:
Deposits:
Interest bearing demand.............................. 26,627 --- --- 26,627
Savings accounts..................................... 58,235 --- --- 58,235
Jumbo certificates................................... 5,828 408 439 6,675
Other time deposits.................................. 36,260 16,224 1,684 54,168
-------- -------- -------- --------
Total interest bearing deposits................... 126,950 16,632 2,123 145,705
-------- -------- -------- --------
Borrowings:
Repurchase agreements................................ 5,054 --- --- 5,054
Mortgage payable..................................... 846 --- --- 846
Subordinated debentures.............................. 127 --- --- 127
-------- -------- -------- --------
Total borrowings.................................. 6,027 --- --- 6,027
-------- -------- -------- --------
Non-interest bearing demand deposits................... --- --- 43,149 43,149
Other liabilities...................................... --- --- 2,324 2,324
Stockholders' equity................................... --- --- 19,977 19,977
-------- -------- -------- --------
Total liabilities and equity........................... 132,977 16,632 67,573 217,182
--------- -------- -------- --------
Interest rate sensitivity gap.......................... $(23,004) $ 21,390 $ 1,614 $ ---
========= ======== ======== ========
Cumulative rate sensitivity gap........................ $(23,004) $ (1,614) $ --- $ ---
========= ======== ======== ========
Interest rate sensitivity gap ratio.................... 82.70% 228.61% 102.39% ---
Cumulative interest rate sensitivity gap ratio......... 82.70% 98.92% 100.00% ---
As of December 31, 1996, the Company's rate sensitive liabilities exceed
its rate sensitive assets by $23.0 million in the one year time frame.
Traditional gap theory holds that when a bank is asset-sensitive (meaning that
it has more rate sensitive assets repricing within a given time frame than 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. What traditional gap theory
does not measure is that rates on various instruments do not always change by
the same amounts. In addition, gap theory does not reflect the impact of changes
in interest rates on loan prepayments or early withdrawals of CDs. Management
carefully monitors interest rate risk by using simulation modeling under a
variety of different scenarios to estimate interest rate sensitivity. Based on
28
management's analysis of its interest rate sensitivity, if interest rates were
to increase 1%, net interest income would increase $83,000. Conversely, if
interest rates were to decrease, net interest income would decrease by the same
amount.
CAPITAL RESOURCES
Stockholders' equity increased $5.4 million or 37.2% during 1996 to
$19,977,000 at December 31, 1996 compared to the increase in 1995 of $2.6
million or 21.7%, and the increase in 1994 of $2.1 million or 20.9%. The change
in stockholders' equity in each of the years is a function of the net income or
net loss, conversion of Equity Contracts, the issuance of new shares, the impact
of any net unrealized gains or losses in securities available for sale, the
reduction of ESOP debt and the acquisition or sale of treasury stock (see Notes
11 and 15). In 1996, $780,000 in Equity Contracts converted to Common Stock.
This included a $396,000 conversion of Equity Contracts paid by cash and
$384,000 paid by tendering outstanding Debentures of the Company for
cancellation. In 1994, $100,000 of collateralized Equity Contracts were
converted to stock at a price of $4.75 per share. For more information see Note
15 on page 50. During 1994, High Point completed a successful offering to its
shareholders and the public of 1,285,700 shares of its common stock for total
proceeds of $4.5 million net of $109,000 in expenses. Unrealized gains on
securities available for sale net of related taxes totaled $76,000 on December
31, 1996 compared to $244,000 of unrealized gains on December 31, 1995. For more
information, see Note 2 on page 38. During 1995, a final principal payment of
$150,000 was made on the ESOP debt compared to payments totaling $171,000 for
1994. For accounting purposes, the loan to the ESOP is reflected as a liability
of the Company and a reduction of the Company's stockholders' equity. As
principal is paid on the ESOP loan, corresponding amounts are credited to
stockholders' equity (see Note 11).
High Point has not paid a dividend on its Common Stock since 1990, and
cannot anticipate when it will resume making dividend payments.
The Company's and NBSC's regulators have classified and defined bank
holding company capital into the following components: (1) Tier I capital, which
includes tangible stockholders' equity for common stock, certain perpetual
preferred stock and certain mandatory convertible securities, and (2) Tier II
capital, which includes a portion of the allowance for possible loan losses,
certain qualifying long-term debt and preferred stock, and mandatory convertible
securities which do not qualify for Tier I capital.
The Company's and NBSC's regulators have implemented risk-based capital
guidelines which require banks and bank holding companies to maintain certain
minimum capital as a percent of such bank's and bank holding company's assets
and certain off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). Banks and bank holding companies are required to
maintain, at a minimum, Tier I capital as a percent of risk-adjusted assets of
4.0% and combined Tier I and Tier II capital as a percent of risk-adjusted
assets of 8.0%. As of December 31, 1996, the Company's Tier I and combined Tier
I and Tier II capital ratios were 15.62% and 17.00%, respectively, and NBSC's
Tier I and combined Tier I and Tier II capital ratios were 14.59% and 15.87%,
respectively.
In addition to the risk-based guidelines discussed above, the Company's and
NBSC's regulators require that banks and bank holding companies which meet the
regulators' highest performance and operational standards maintain a minimum
leverage ratio (Tier I capital as a percent of tangible assets) of 3.0%. For
those banks and bank holding companies with higher levels of risk or that are
experiencing or anticipating significant growth, the minimum leverage ratio is
proportionately increased. Minimum leverage ratios for each bank and bank
holding company are established and updated through the ongoing regulatory
examination process. NBSC's regulator requires a minimum ratio of 6.0%. As of
December 31, 1996, the Company has a leverage ratio of 8.35% and NBSC has a
leverage ratio of 7.75%. For more information and information regarding the
capital of NBSC, see Note 16 on page 50.
29
EFFECTS OF INFLATION
The impact of inflation on banks and bank holding companies differs from
its impact on non-financial institutions. Banks, as financial intermediaries,
have assets which are primarily monetary in nature and which tend to fluctuate
in connection with inflation. This is especially true for banks with a high
percentage of rate-sensitive interest earning assets and interest bearing
liabilities. A bank can reduce the impact of inflation if it can manage the rate
sensitivity gap. Management of the Company monitors and seeks to mitigate the
impact of interest rate changes by attempting to match the maturities of assets
and liabilities to manage its gap, thus seeking to minimize the potential
effects of inflation.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of High Point Financial Corp.:
We have audited the accompanying consolidated balance sheets of High Point
Financial Corp.(a New Jersey corporation) and subsidiary (collectively the
"Company") as of December 31, 1996 and 1995, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of High Point
Financial Corp. and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 6, effective January 1, 1995, the Company changed its
method for accounting for long lived assets to be disposed of.
/s/ Arthur Andersen LLP
Roseland, New Jersey
January 20, 1997
31
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------------------
ASSETS 1996 1995
- ------ ------------ ------------
Cash and due from banks (Notes 1 and 10)............................................. $ 10,503 $ 11,290
Federal funds sold (Note 1).......................................................... 4,025 11,150
-------- --------
Total cash and cash equivalents................................................ 14,528 22,440
Interest bearing deposits with banks................................................. 123 125
Securities (Notes 1 and 2):
Available for sale, at fair value.................................................. 53,575 49,304
Held to maturity, at cost (market value of
$22,698 in 1996 and $15,483 in 1995).............................................. 22,667 15,392
-------- --------
Total securities.............................................................. 76,242 64,696
Loans held for sale.................................................................. 178 628
Loans (Notes 1, 3 and 5)............................................................. 114,631 104,863
Less: Deferred income (expense)................................................... (10) 30
Allowance for possible loan losses (Notes 1 and 6).......................... 3,973 4,609
-------- --------
Net loans.................................................................... 110,668 100,224
Land held for sale (Notes 1, 6 and 13)............................................... 1,885 2,135
Premises and equipment - net (Notes 1 and 6)......................................... 2,910 2,692
Accrued interest receivable.......................................................... 1,260 1,388
Other real estate, net (Notes 1 and 4)............................................... 1,086 2,741
Cash surrender value of life insurance policies (Note 1)............................. 4,939 1,106
Other assets (Note 7)............................................................... 3,363 2,009
--------- --------
TOTAL ASSETS.................................................................... $217,182 $200,184
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits (Note 12):
Transaction accounts:
Interest bearing................................................................. $ 26,627 $ 25,092
Non-interest bearing............................................................. 43,149 38,334
Savings accounts................................................................... 58,235 55,832
Time accounts (includes CDs $100 or over of
$6,675 and $9,372 in 1996 and 1995, respectively)................................. 60,843 59,067
-------- --------
Total deposits................................................................. 188,854 178,325
Securities sold under agreements to repurchase (Note 13)............................ 5,054 2,959
Accrued expenses and other liabilities.............................................. 2,324 2,561
Note payable (Note 14).............................................................. 846 1,270
Redeemable subordinated debentures, 8.5% due March 1, 1997 (Note 15)................ 127 511
-------- --------
Total liabilities.............................................................. 197,205 185,626
-------- --------
Commitments and contingencies (Notes 8, 10 and 16)
Stockholders' equity (Notes 1, 9, 11 and 14):
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................................................................. (4,822) (9,629)
Unrealized gain on securities available for sale, net of taxes in 1996
(Notes 1 and 2).................................................................... 76 244
-------- ---------
Total stockholders' equity....................................................... 19,977 14,558
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................... $217,182 $200,184
======== =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
32
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
-----------------------------------
1996 1995 1994
-------- ------- --------
INTEREST INCOME
Interest income and fees on loans (Note 1)........................................ $ 9,349 $ 9,354 $ 9,190
Interest on securities:
Taxable interest income...................................................... 4,466 3,620 2,448
Non-taxable interest income.................................................. --- --- 20
Interest on federal funds sold and deposits with banks............................ 614 679 359
-------- ------- --------
TOTAL INTEREST INCOME..................................................... 14,429 13,653 12,017
-------- ------- --------
INTEREST EXPENSE
Interest on deposits.............................................................. 5,460 5,240 4,166
Interest on other borrowed money.................................................. 166 129 60
Interest on note payable and other long-term debt (Notes 14 and 15)............... 132 181 266
-------- ------- --------
TOTAL INTEREST EXPENSE.................................................... 5,758 5,550 4,492
-------- ------- --------
NET INTEREST INCOME............................................................... 8,671 8,103 7,525
Less: Provision for possible loan losses (Notes 1 and 5).......................... --- 225 1,327
-------- ------- --------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES...................... 8,671 7,878 6,198
NON-INTEREST INCOME
Service charges on deposit accounts............................................... 1,395 1,341 1,456
Commissions and fees.............................................................. 853 708 757
Gain (loss) on the sales of securities available for sale (Note 2)................ (28) 14 (262)
Gain (loss) on the sales of loans................................................. 9 39 (27)
Gain on sale of bank premises (Note 6)............................................ 141 148 141
Other income...................................................................... 182 170 155
-------- ------- --------
TOTAL NON-INTEREST INCOME................................................. 2,552 2,420 2,220
-------- ------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits (Notes 8 and 11)................................... 4,575 4,623 4,518
Net occupancy expense (Notes 6 and 10)............................................ 952 966 917
Equipment expense (Note 6)........................................................ 552 539 570
Net cost of operation of other real estate (Notes 1 and 4)........................ 305 663 663
Other expenses (Notes 6 and 18)................................................... 2,713 2,681 2,962
-------- -------- --------
TOTAL NON-INTEREST EXPENSE................................................ 9,097 9,472 9,630
-------- -------- --------
Income (loss) before benefit for income taxes and
cumulative effect for change in accounting principle............................ 2,126 826 (1,212)
Benefit for income taxes (Notes 1 and 7).......................................... (2,681) (249) (97)
-------- -------- --------
Income (loss) before cumulative effect for change in accounting principle......... 4,807 1,075 (1,115)
Cumulative effect of change in accounting principle............................... --- (370) ---
-------- -------- --------
NET INCOME (LOSS)................................................................. $ 4,807 $ 705 ($1,115)
======== ======== ========
Net income (loss) per common share and common share equivalents
before cumulative effect for change in accounting principle..................... $1.27 $0.29 ($0.36)
Cumulative Effect per share for change in accounting principle (Note 6)........... --- (0.10) ---
-------- -------- --------
NET INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENTS (Note 1).......... $1.27 $0.19 $(0.36)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARE AND COMMON SHARE EQUIVALENTS (Note 1)............... 3,779 3,746 3,066
======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
33
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
Unrealized
Gains
Common (Losses) On
Additional Stock Securities
Common Paid-in- Accumulated Acquired Available
Stock Capital Deficit By ESOP For Sale Total
------- ---------- ----------- -------- --------- --------
BALANCE DECEMBER 31, 1993....................................... $12,195 $ 7,257 $ (9,219) ($321) $ (20) $ 9,892
Net Loss - 1994.............................................. --- --- (1,115) --- --- (1,115)
Proceeds from stock offering, net of expenses of $109........ 6,429 (2,038) --- --- --- 4,391
Principal payment on ESOP debt............................... --- --- --- 171 --- 171
Exercise of equity contracts................................. 105 (5) --- --- --- 100
Unrealized losses on securities available for sale........... --- --- --- --- (1,476) (1,476)
------- --------- ----------- -------- --------- -------
BALANCE DECEMBER 31, 1994....................................... 18,729 5,214 (10,334) (150) (1,496) 11,963
Net Income - 1995............................................ --- --- 705 --- --- 705
Principal payment on ESOP debt............................... --- --- --- 150 --- 150
Unrealized gains on securities available for sale........... --- --- --- --- 1,740 1,740
------- --------- ----------- -------- --------- -------
BALANCE DECEMBER 31, 1995....................................... 18,729 5,214 (9,629) --- 244 14,558
Net Income - 1996............................................ --- --- 4,807 --- --- 4,807
Conversion of Equity Contracts............................... 203 577 --- --- --- 780
Unrealized losses on securities available for sale........... --- --- --- --- (168) (168)
------- --------- ----------- -------- --------- -------
BALANCE DECEMBER 31, 1996....................................... $18,932 $ 5,791 $ (4,822) $--- $ 76 $19,977
======= ========= =========== ======== ========= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss)........................................................................ $ 4,807 $ 705 $ (1,115)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................................................... 419 422 403
Amortization of securities premium, net................................................ 129 113 274
Net cash paid related to discount (premium) on matured securities...................... (107) 46 ---
Loan fees amortized, net............................................................... (39) (22) (41)
Provision for possible loan losses..................................................... --- 225 1,327
Provision for allowance for other real estate.......................................... 50 137 680
Deferred tax benefit................................................................... (2,782) (265) ---
(Gain) loss on sale of securities...................................................... 28 (14) 262
Unrealized loss on land held for sale.................................................. 250 399 ---
Gain on sale of premises and equipment................................................. (141) (148) (141)
(Increase) decrease in accrued interest receivable and other assets.................... (899) (96) 529
Increase in accrued expenses and other liabilities..................................... 98 363 186
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................................ 1,813 1,865 2,364
-------- -------- --------
INVESTING ACTIVITIES
Proceeds from sale of available for sale securities.................................... 4,259 2,244 8,710
Proceeds from maturity of securities:
Available for sale................................................................... 10,334 5,620 4,812
Held for maturity.................................................................... 4,480 2,019 1,723
Purchase of securities:
Available for sale................................................................... (19,015) (5,305) (15,806)
Held for maturity.................................................................... (11,785) (13,448) (13,750)
Net (increase) decrease of interest bearing deposits with banks........................ 2 (1) 141
Net (increase) decrease in loans....................................................... (9,953) (306) 7,898
Capital expenditures................................................................... (656) (260) (258)
Proceeds from sale of premises and equipment........................................... 13 15 1
------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES.................................................... (22,321) (9,422) (6,529)
------- -------- --------
FINANCING ACTIVITIES
Net increase in deposits............................................................... 10,529 12,753 2,784
Increase (decrease) in securities sold under agreements to repurchase.................. 2,095 338 (454)
Net proceeds from stock offering....................................................... --- --- 4,391
Repayments of long-term debt principal................................................. (424) (212) (891)
Proceeds from conversion of equity contracts........................................... 396 --- 100
------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES................................................ 12,596 12,879 5,930
------- -------- --------
Net increase (decrease) in cash and cash equivalents..................................... (7,912) 5,322 1,765
Cash and cash equivalents, beginning of year............................................. 22,440 17,118 15,353
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR................................................... $14,528 $ 22,440 $ 17,118
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID.......................................................................... $ 5,791 $ 5,391 $ 4,627
INCOME TAXES PAID (REFUNDED)........................................................... $ 3 $ 5 $ (108)
The accompanying notes to consolidated financial statements are an integral
part of these statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies of High Point
Financial Corp. ("High Point") and its subsidiary (collectively the "Company").
NATURE OF OPERATIONS High Point is the parent company of The National Bank
of Sussex County ("NBSC"). NBSC's deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC"). NBSC has nine branches, an operations
center, and an administration center, all within Sussex County, New Jersey. NBSC
is a full service commercial bank providing a wide range of services to
individuals and small to medium-sized businesses in its northwestern New Jersey
market area, including accepting time, demand, and savings deposits and making
secured and unsecured commercial, real estate and consumer loans. NBSC offers
annuities and life insurance to its customers, and through a third party lease
arrangement with Link Investment Services, Inc. provides full securities
brokerage services including mutual funds and variable annuities.
USE OF ESTIMATES The accompanying consolidated financial statements, which
are prepared in accordance with generally accepted accounting principles,
require the use of management estimates. The most significant estimates with
regard to these financial statements relate to the allowance for possible loan
losses as discussed in Notes 1 and 5, the deferred tax valuation allowance as
discussed in Note 7 and the fair value of financial instruments discussed in
Notes 1 and 17. Actual results may differ from those assumed in management's
estimates.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements of High
Point include all of the accounts of the parent company and its subsidiary,
NBSC. All intercompany transactions and balances have been eliminated.
SECURITIES The Company classifies its investment securities into three
categories, as follows: (1) held for investment purposes (held to maturity), (2)
available for sale, and (3) held for trading purposes.
Securities which the Company has the ability and intent to hold until
maturity are classified as held to maturity. These securities are carried at
cost adjusted for amortization of premiums and accretion of discounts on a
straight line basis which is not materially different from the interest method.
Securities which are held for an indefinite period of time which management
intends to use as part of its asset/liability strategy, or that may be sold in
response to changes in interest rates, changes in prepayment risk, increased
capital requirements or other similar factors, are classified as available for
sale and are carried at fair value. Differences between an investment's
amortized cost and fair value is charged/credited directly to stockholders'
equity. The cost of securities sold is determined on a specific identification
basis. Gains and losses on sales of securities are recognized in the income
statement upon sales.
The Company had no securities held for trading purposes at December 31,
1996 or 1995.
LOANS Loans are stated at the principal amount outstanding. Interest income
on loans is credited to income as earned. Loans are placed on a non-accrual
basis generally when they become past due 90 days or more and doubt exists as to
the ultimate collection of principal or interest. The net amount of all loan
origination fees, direct loan origination costs and loan commitment fees are
deferred and recognized over the estimated life of the related loans as an
adjustment of yield. Loans held for sale are carried at the lower of their
aggregate cost or fair market value.
ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses
represents management's estimate of the amount adequate to provide for potential
future losses which may be incurred on loans currently outstanding. The
provision for possible loan losses is charged to operations and serves to
increase
36
the allowance to a level which management deems adequate. Management determines
the adequacy of the allowance on a monthly basis based upon appraised collateral
values, financial condition of borrowers, industry experience, current and
anticipated economic conditions, changes in the composition of the loan
portfolio and such other factors which are relevant to the collectibility of the
loans. The region in which NBSC operates had been affected by depressed real
estate values and a general downturn in economic conditions prior to 1993.
Further deterioration or changes in the economy effecting the region in which
NBSC operates may effect the final outcome of collection of certain of NBSC's
loans and non-performing assets.
PREMISES AND EQUIPMENT Land is carried at cost, and premises and equipment
are stated at cost less accumulated depreciation based upon estimated useful
lives (ten to forty years for premises and three to thirty years for equipment),
calculated by using the straight-line method. Leasehold improvements are
amortized over the terms of the leases. In addition, land which is held for sale
is carried at the lower of its historical acquisition cost or net realizable
value.
OTHER REAL ESTATE Other real estate includes loan collateral that has been
formally repossessed. All amounts have been transferred into and carried in
other real estate at the lower of carrying value or fair market value less
estimated costs to sell. When a property is acquired through foreclosure the
excess of the carrying amount over fair value and estimated costs to sell is
charged to the allowance for possible loan losses. Subsequently, an allowance
for other real estate owned is established to maintain these properties at the
lower of cost or fair value less estimated costs to sell. The allowance is
established through charges to net cost of operation of other real estate. When
the costs that are estimated are actually incurred, a charge-off is made to the
specific reserve.
INCOME TAXES The Company accounts for income taxes in accordance with SFAS
No. 109, which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method deferred tax liabilities
and assets are determined based on the difference between the financial
statement and the tax basis of assets and liabilities using tax rates in effect
for the year in which the differences are expected to reverse.
RETIREMENT PLAN The Company had a non-contributory retirement plan covering
substantially all employees. Effective December 31, 1993, the plan was amended
to terminate the accumulation of additional benefits for future service, and
effective May 31, 1995, the Company elected to terminate and liquidate the plan,
which occurred in the third quarter of 1996.
NET INCOME (LOSS) PER SHARE Income (loss) per share is calculated based on
the weighted average number of common shares and common share equivalents
outstanding during each year. Shares issuable under the cancelable mandatory
stock purchase contracts and under stock option plans are considered common
share equivalents for the purpose of per share data but have been excluded from
the computations since their net effect is immaterial.
STATEMENT OF CASH FLOWS For the purpose of reporting cash flows, cash and
cash equivalents include cash on hand, non-interest bearing amounts due from
banks and federal funds sold. Generally, federal funds sold are for a one-day
maturity.
FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
("SFAS No. 107") requires that the Company disclose estimated fair values for
its financial instruments. The recorded value for cash and due from banks,
federal funds sold and purchased, interest bearing deposits with banks and
securities sold under agreements to repurchase approximate fair value because
they mature in less than one year and do not present unanticipated credit risks.
The fair value and the methodology of estimating fair value of the other
financial instruments for the Company is disclosed in the related Notes to the
Consolidated Financial Statements below. A summary of carrying values and fair
values of financial instruments is presented in Note 17 on page 52.
37
Fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instrument. Because no
market exists for a significant portion of NBSC's financial instruments, fair
value estimates are based on judgment regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the assessments.
CASH SURRENDER VALUE OF LIFE INSURANCE CONTRACTS The Company maintains life
insurance contracts on certain of its officers for which the Company is the
beneficiary. The cash surrender value of these policies is recorded as an asset
on the Company's balance sheet. Increases and decreases to the cash surrender
value, net of premiums paid, are recorded as other income or other expense in
the Company's statement of operations.
2 SECURITIES
Information relative to the Company's securities portfolio is as follows:
December 31, 1996 December 31, 1995
------------------------------------------- ------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(in thousands)
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies: $30,763 $ 275 $ (27) $31,011 $26,126 $ 352 $ (29) $26,449
Mortgage-backed securities:
U.S. agency issued................... 15,507 40 (180) 15,367 19,094 53 (136) 19,011
Other investments:
Federal Reserve Bank Stock............ 516 --- --- 516 516 --- --- 516
Vanguard money market fund............ 5,855 --- --- 5,855 3,289 --- --- 3,289
Federal Home Loan Bank stock.......... 786 --- --- 786 --- --- --- ---
Marketable equity securities.......... 35 5 --- 40 35 4 --- 39
------- ------- ----- ------- ------- ------ ------- -------
Securities available for sale.......... $53,462 $ 320 $(207) $53,575 $49,060 $ 409 $ (165) $49,304
======= ======= ===== ======= ======= ====== ======= =======
December 31, 1996 December 31, 1995
------------------------------------------- ------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(in thousands)
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies: $ 3,004 $ 29 $ (1) $ 3,032 $ 3,514 $ 35 $ (7) $ 3,542
Mortgage-backed securities:
U.S. agency issued................. 19,663 92 (89) 19,666 11,878 85 (22) 11,941
------- ------- ----- ------- ------- ------- ------ -------
Securities held to maturity............ $22,667 $ 121 $ (90) $22,698 $15,392 $ 120 $ (29) $15,483
======= ======= ===== ======= ======= ======= ====== =======
The amortized cost and estimated market value of securities at December 31,
1996 are shown below by contractual maturity. The Vanguard money market fund is
backed by U.S. Treasury notes and is used to secure overnight repurchase
agreements. Since it has a one business day maturity, its carrying value
approximates market value. Expected maturities may differ from contractual
maturities because borrowers have the right to call or prepay obligations
without call or prepayment penalties.
38
December 31, 1996
------------------------
Estimated
Amortized Market
Cost Value
--------- ---------
(in thousands)
AVAILABLE FOR SALE
Due in one year or less........................ $10,685 $10,735
Due after one year through five years.......... 20,078 20,276
--------- ---------
30,763 31,011
Mortgage-backed securities..................... 15,507 15,367
Other investments.............................. 7,192 7,197
--------- ---------
Securities available for sale.................. $53,462 $53,575
========= =========
December 31, 1996
------------------------
Estimated
Amortized Market
Cost Value
--------- ---------
(in thousands)
HELD TO MATURITY
Due after one year through five years......... 3,004 3,032
Mortgage-backed securities.................... 19,663 19,666
--------- ---------
Securities held to maturity................... $22,667 $22,698
========= =========
Proceeds from sales of securities available for sale during 1996 were
$4,259,000 resulting in no gross gains and gross losses of $28,000. In 1995,
proceeds from sales in securities were $2,244,000 resulting in gross gains of
$73,000 and gross losses of $59,000.
Securities with a book value of $12,801,000 and $7,708,000 at December 31,
1996 and 1995, respectively, are pledged to secure public funds, repurchase
agreements and for other purposes required by law. Certain of these securities
are available for sale and if sold will be replaced by similar securities
acceptable for pledging purposes.
In November 1995, the Financial Accounting Standards Board issued a special
report - "A Guide to Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities." This special report allowed
a company to make a one time reclassification of securities within investment
categories without tainting other securities remaining within the categories. In
December 1995, the Company reclassified $18.7 million of securities previously
classified as held to maturity to available for sale resulting in a mark to
market adjustment of $168,000 which increased stockholders' equity of the
Company.
3 LOANS
A summary of loans, as reflected in the consolidated balance sheets, is as
follows:
December 31,
-----------------------
1996 1995
-------- --------
(in thousands)
Commercial..................................... $ 51,065 $ 58,274
Real estate-construction....................... 6,951 4,300
Real estate-mortgage........................... 33,401 24,216
Installment.................................... 23,214 18,073
-------- --------
Total loans............................... $114,631 $104,863
======== ========
39
The following table presents the percentage distribution of loans for the
following categories:
December 31,
----------------------
1996 1995
------ ------
Construction and land development loans.................... 7.13% 7.12%
Loans secured by 1-4 family residential properties......... 50.58% 44.88%
Loans secured by nonfarm nonresidential properties......... 33.74% 37.98%
Commercial and industrial loans............................ 5.06% 6.46%
Loans to individuals for household, family and
other personal expenditures.............................. 3.28% 3.39%
Other loans................................................ 0.21% 0.17%
------ ------
Total loan distribution.................................... 100.00% 100.00%
====== ======
The aggregate extension of credit, in the ordinary course of business, to
directors, principal officers and their associates as of December 31, 1996 and
1995, amounted to $1,828,000 and $2,190,000, respectively. During 1996, $904,000
of new loans were made and $1,266,000 were repaid in the normal course of
business. As of December 31, 1996, no loans to directors, principal officers and
their associates are renegotiated, past due or on non-accrual status.
The following table details information concerning non-performing loans as
of December 31 for 1996 and 1995.
December 31,
--------------------
1996 1995
------- -------
(in thousands)
Non-performing loans:
Renegotiated loans....................... $ 505 $ 884
Loans past due over 90 days.............. --- 156
Loans on non-accrual..................... 3,850 5,744
------ ------
TOTAL NON-PERFORMING LOANS........... $4,355 $6,784
====== ======
Interest income that would have accrued had the loans been current totaled
$577,000, $847,000 and $1,450,000, while the actual amount recognized as income
was $182,000, $365,000 and $447,000 for the years ended December 31, 1996, 1995,
and 1994, respectively. At December 31, 1996, there were no commitments to lend
to customers whose loans were renegotiated.
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 loan's original effective interest
rate. As a practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance.
NBSC had previously estimated the allowance for possible loan losses using
methods similar to those prescribed in SFAS No. 114. Adoption of these
statements did not require any additional provision for possible loan losses as
of January 1, 1995.
40
As of December 31, 1996, NBSC's recorded investment in impaired loans and
the related valuation allowance calculated under SFAS No. 114 are as follows:
December 31, 1996 December 31, 1995
----------------------- -----------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
(in thousands)
Impaired loans:
Valuation allowance required................................................. $3,915 $740 $5,195 $1,375
===== ==== ====== ======
This valuation allowance is included in the allowance for loan losses on
the balance sheet.
The average recorded investment in impaired loans for the years ended
December 31, 1996 and 1995 were $4,523,000 and $5,408,000, 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 $97,000 and $128,000 for the years ended
December 31, 1996 and 1995, respectively. These loans are on non-accrual and are
classified as impaired because doubt exists regarding the borrowers' ability to
pay both principal and interest as originally agreed. Interest payments are
recorded on a cash basis because the loans are sufficiently collateralized to
ultimately repay the outstanding principal balance should the property
collateralizing the debt be taken in foreclosure proceedings.
At December 31, 1996, NBSC had $505,000 of loans that resulted from
troubled debt restructurings that occurred prior to the adoption of SFAS No. 114
which continue to be accounted for in accordance with the requirements of SFAS
No. 15, "Troubled Debt Restructurings." The effect on income if interest on such
troubled debt restructurings had been recognized at original contractual rates
during the year was not material.
The fair value of NBSC's loan portfolio has been estimated primarily using
a discounted cash flow approach. NBSC used a discount rate which was equivalent
to a rate it would obtain on new loans adjusted for prepayment and credit risk
factors. When available, market quotes obtained from an independent broker were
used to determine fair value. As of December 31, 1996, the Company estimates the
fair value of its loan portfolio to be approximately $114 million as compared to
its gross recorded value of approximately $115 million. As of December 31, 1995,
the Company estimated the fair value of its loan portfolio to be approximately
$104 million as compared to its gross recorded value of approximately $105
million.
Changes in assumptions and methodologies may have a material effect on
these estimated fair values. In addition, management is concerned that
reasonable comparability between financial institutions may not be likely due to
the wide range of permitted valuation techniques and numerous estimates which
must be made given the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation methodologies also
introduces a greater degree of subjectivity to these estimated fair values.
41
4 OTHER REAL ESTATE
Other real estate ("ORE")includes properties that have been acquired by
NBSC through foreclosure. Upon adoption of SFAS No. 114 by NBSC effective
January 1, 1995, in substance foreclosed assets were reclassified to a non-
performing loan classification.
The following is an analysis of the changes in other real estate during
1996 and 1995:
1996 1995
------- -------
(in thousands)
Balance at beginning of year............................... $ 2,741 $ 4,606
New foreclosed properties................................. 403 1,455
Capital Improvements....................................... --- 260
Properties sold............................................ (1,736) (2,536)
Payments received on properties not sold................... (12) (53)
Charge-offs against reserve................................ --- (797)
Direct writedowns on ORE properties........................ (260) (194)
------- -------
Balance at end of year................................ $ 1,136 $ 2,741
======= =======
A summary of the activity for the allowance for other real estate is
summarized in the following:
December 31,
----------------------
1996 1995 1994
---- ---- ----
(in thousands)
Beginning balance, January 1....................... $ --- $ 660 $ 91
Provisions........................................ 50 137 680
Charge-offs....................................... --- (797) (111)
------- ------ -----
Ending balance..................................... $ 50 $ 0 $ 660
======= ====== =====
A summary of the expenses in the net cost of operations of other real
estate is shown in the following:
December 31,
-----------------------
1996 1995 1994
------ ------ -------
(in thousands)
Provisions to the allowance/direct writedowns $ 310 $ 331 $ 849
Rental income (148) (362) (373)
Operating expenses 221 674 765
Net (gains) losses on sales of other real estate (78) 20 (578)
------- ----- -----
Total net cost of operations of other real estate $ 305 $ 663 $ 663
======= ===== =====
5 ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is based on estimates, and ultimate
losses may vary from the current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are reflected in
operations in the periods in which they become known. Upon adoption of SFAS No.
114 on January 1, 1995, prior years balances, charge-offs and provisions were
adjusted for restatement of in-substance foreclosure reserves.
42
A summary of the activity in the allowance for possible loan losses is as
follows:
1996 1995 1994
-------- --------- ----------
(in thousands)
Balance, January 1................................. $ 4,609 $ 5,234 $ 5,419
Provision charged to operations.................... --- 225 1,327
Loans charged off.................................. (1,098) (1,471) (2,255)
Recoveries of charged off loans.................... 462 621 743
-------- -------- --------
Balance, December 31.......................... $ 3,973 $ 4,609 $ 5,234
======== ======== ========
6 PREMISES AND EQUIPMENT AND LAND HELD FOR SALE
A summary of premises and equipment is as follows:
December 31,
--------------------
1996 1995
-------- --------
(in thousands)
Land............................................................... $ 360 $ 360
Buildings and leasehold improvements............................... 2,321 2,335
Furniture and equipment............................................ 3,483 3,219
Construction in process............................................ 256 10
-------- -------
Total Premises and equipment.................................. 6,420 5,924
Less accumulated depreciation and amortization..................... 3,510 3,232
-------- -------
Premises and equipment, net........................................ $ 2,910 $ 2,692
======== =======
Depreciation and amortization expense for premises and equipment for 1996,
1995 and 1994 amounted to $419,000, $421,000 and $403,000, respectively.
As of December 31, 1994, High Point held for sale 66 acres of land in
Frankford Township, New Jersey, at a net recorded carrying value of $2,534,000.
In December 1995, High Point adopted SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
("SFAS No. 121"). SFAS No. 121 requires that if certain events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, an entity must estimate the future cash flows expected to result
from the use or sale of the asset and record an impairment for the amount by
which the carrying value exceeds the fair value. In the case of assets to be
disposed of, the asset must be reported at the lower of the carrying amount or
fair value less costs to sell. Included in fair value estimates is the
discounting of net proceeds from sale of the asset over the estimated time to
sell the asset.
High Point evaluated its land held for sale for impairment under SFAS No.
121 and determined that a valuation reserve of $370,000 was required. In
accordance with the requirements of SFAS No. 121, the $370,000 provision was
retroactively reflected in the results of operations in the first quarter of
1995 as a cumulative effect of a change in accounting principle.
Subsequent to High Point's adoption of SFAS No. 121, High Point entered
into a contract for sale of 32 acres of the land for approximately $2 million.
High Point recorded an additional impairment loss of $29,000 in December 1995
upon entering into this contract which is included in other operating expenses.
As a result of the termination of this contract in 1996 and other factors, High
Point recorded an additional valuation allowance on the land held for sale in
1996 for approximately $250,000 to reflect management's current estimate of the
net realizable value of the land.
43
7 INCOME TAXES
The current and deferred amounts of the benefit for income taxes are as
follows:
Year Ended December 31,
--------------------------------
1996 1995 1994
--------- ---------- ---------
(in thousands)
Federal
Current............................................................................. $ -- $ -- $ (121)
Deferred............................................................................ (2,782) (265) --
State................................................................................ 101 16 24
------- ------ -------
Total benefit for income taxes....................................................... $(2,681) $ (249) $ (97)
======= ====== =======
Temporary differences and carryforwards at December 31, 1996 and 1995 are
as follows:
For the year ended December 31,
------------------------------------------
1996 1995
------------------ ------------------
Deferred Tax Deferred Tax
------------------ -------------------
Asset Liability Asset Liability
-------- ---------- ------ ----------
(Dollars in thousands)
Federal and State operating loss carryforwards........................................ $ 1,657 $ --- $ 2,129 $ ---
Allowance for possible loan losses.................................................... 456 --- 1,006 ---
Valuation reserves for land held for sale and other real estate....................... 717 --- 948 ---
Loan and investment income recognition................................................ 352 --- 243 ---
Deferred compensation................................................................. 230 --- 175
AMT credit carryforward............................................................... 155 --- 155
Other, net............................................................................ 378 72 151 73
------ ----- ------ -----
3,945 72 4,807 73
Less valuation allowance............................................................. (573) --- (4,434) ---
------ ----- ------ -----
$3,372 $ 72 $ 373 $ 73
====== ===== ====== =====
During 1996, the Company recorded a net benefit of $2,681,000 primarily
representing net operating loss ("NOL") carryforwards through the reversal of a
previously established deferred tax valuation allowance. The recognition of the
deferred tax asset recorded at December 31, 1996 is based on the Company's
evaluation of income earned in 1995 and 1996, management's estimate of the
Company's continued ability to remain profitable in future periods such that
realization of its net operating loss carryforwards can be reasonably expected.
This estimate will be impacted favorably or unfavorably by future results of
operations. The Company has recorded a valuation allowance of approximately
$573,000 which represents an estimated reserve for state NOLs which may expire
prior to the Company's ability to utilize such credits. The Company will
periodically evaluate the realizability of its deferred tax asset and will
adjust the level of the valuation allowance when necessary.
At December 31, 1996, the Company has net operating loss carryforwards for
federal tax purposes of approximately $1.7 million and for state tax purposes of
approximately $17.4 million which expire in varying amounts through 2010. In
addition, the Company has an alternative minimum tax credit carryforward
approximating $155,000.
44
A reconciliation of the provision (benefit) for income taxes, as reported,
with the federal income tax at the statutory rates of 34% in 1996, 1995 and
1994, is as follows:
Year Ended December 31,
----------------------------
1996 1995 1994
------- --------- ---------
(in thousands)
Tax (benefit) at statutory rate.............................. $ 726 $ 160 $(424)
Increase (decrease) in taxes resulting from:
Change in valuation allowance.............................. (3,861) (425) 424
State taxes on income, net of federal income tax effect.... 66 10 16
Realization of tax refund received greater
than receivable recorded................................. --- --- (126)
Other-net.................................................. 388 6 13
--------- ------- ------
Benefit for income taxes.............................. $(2,681) $ (249) $ (97)
--------- ------- ------
Effective tax rate........................................... (126.1)% (54.6)% 8.0%
========= ======= ======
8 BENEFIT PLANS
RETIREMENT INCOME PLAN
In 1995, the Company elected to liquidate the pension plan. The Company
filed notice with its employees, with the Internal Revenue Service and with the
Pension Benefit Guaranty Corp. of the pension plan's termination. On December
31, 1995, the Company reduced its pension asset to the level that it expected to
recover less any excise taxes that would have to be paid at that time. As a
result, the Company wrote down its prepaid pension asset from $207,000 to
$44,000 resulting in a $163,000 expense in the fourth quarter, 1995. Upon
termination of the plan in third quarter 1996, and after payments to plan
participants, and payments for service charges and excise taxes, the remaining
plan assets that reverted to the Company were $167,000 resulting in a gain of
$123,000 recorded by the Company.
RETIREMENT SAVINGS PLAN (401K)
The Company has a retirement savings plan (401K) covering qualified
employees. Employer contributions totaled $58,000 in 1996, $62,000 in 1995 and
$61,000 in 1994.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan in order to enable its
employees to share in the proprietary interest of the Company (see Note 11).
POSTRETIREMENT HEALTH CARE BENEFITS
The Company provides postretirement health care benefits and life insurance
coverage to its employees who meet certain predefined criteria and charges the
expected cost of these benefits to expense during the years that the employees
render service. The Company is amortizing its estimated accumulated
postretirement benefit obligation (APBO) of $435,000 over a 20 year period. The
net periodic postretirement benefit cost for 1996 was $59,000 although required
cash payments were approximately $12,000.
45
The accumulated postretirement benefit obligation as of December 31, 1996 and
1995 is as follows:
1996 1995
-------- --------
(in thousands)
Retirees....................................................................................... $ 268 $ 293
Fully eligible, active participants............................................................ 118 20
Other active participants...................................................................... 78 172
----- ------
Total accumulated post retirement benefit obligation.......................................... 464 485
Unrecognized net gain (loss) due to past experience different from
that assumed and effects of changes in assumptions made....................................... 97 49
Unamortized transition obligation.............................................................. (347) (369)
----- -----
Accrued accumulated post retirement benefit obligation........................................ $ 214 $ 165
===== =====
The components of net periodic post retirement benefit cost is as follows:
For the years ended
December 31,
-------------------
1996 1995
-------- ---------
(in thousands)
Service cost, benefits attributed to employee service during the year.......................... $ 21 $ 17
Interest cost on APBO.......................................................................... 29 31
Amortization of transition obligation.......................................................... 22 22
Amortization of (gains) losses................................................................. (13) (1)
----- -----
Net periodic postretirement benefit cost...................................................... $ 59 $ 69
===== =====
The discount rate used in determining the APBO was 7.0% for both 1995 and
1996. The rate of increase used in future compensation levels was 4%. For
measurement purposes, the cost of medical benefits was projected to increase at
a rate of 9% in 1996 and decreasing at a rate of 1% through 1997 and 0.5%
thereafter until the year 2003 and projected to increase 5% in 2003 and
subsequent years. Increasing the assumed health care cost trend by one percent
in each year would have increased the accumulated post retirement benefit
obligation as of January 1, 1996 and January 1, 1995 by 8.1% and 9.0%,
respectively. Increasing the assumed health care cost trend by one percent would
have increased the aggregate of the service and interest components of net
periodic postretirement benefit expense for 1996 and 1995 by 11.7% and 12.8%,
respectively.
DEFERRED COMPENSATION ARRANGEMENTS
The Company has established deferred compensation arrangements for the
directors and certain management members. The plans provide for annual payments
(10-15 years) upon retirement. The liabilities under these arrangements are
being accrued from the commencement of the plans over the participants'
remaining periods of service. In conjunction with these arrangements, the
Company is the beneficiary under life insurance policies that it has purchased
on the respective participants. These plans do not hold any assets.
9 STOCK OPTION PLANS
The Company maintains three employee stock option plans which were
established in 1987, 1990, and 1996. Under the terms of the 1996, 1990 and 1987
plans, options to purchase 135,000, 50,000 and 50,054 shares, respectively, may
be granted to key employees of the Company or its subsidiary. In November 1995,
95,000 shares of stock were granted under these incentive stock option plans
with an exercise price of $6.75 which was the fair value of the Company's Common
Stock on the date of grant. All options vested within three months from the date
of grant. No options have been exercised or have been forfeited as of December
31, 1996. As of December 31, 1996, 140,054 shares were available for issuance
under the stock option plans. These options may
46
be granted to key employees in such number and at such times during the duration
of the plan as the Incentive Committee determines.
The Company also maintains the 1996 Non-employee Director Stock Option Plan
under which a total of 105,000 shares of Common Stock are available for
issuance. On February 20, 1996, this plan granted non-employee directors of High
Point or NBSC 97,500 shares at an exercise price of $6.75 per share, the fair
market value as of the date of grant. These shares will vest at a rate of 20% a
year for five years. No options were exercised or forfeited during 1996.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations for accounting for its stock option
plans. Accordingly, no compensation cost has been recognized for its stock
option plans described above. Had compensation cost for the Company's four
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
1996 1995
----------- ----------
(Dollars in thousands
except per share numbers)
NET INCOME As reported........................................... $ 4,807 $ 705
Pro forma............................................. $ 4,615 $ 509
EARNINGS PER SHARE As reported........................................... $ 1.27 $ 0.19
Pro forma............................................. $ 1.22 $ 0.17
The fair value of each option grant is estimated on the date of grant using
a binomial option-pricing model with the following weighted average assumptions
used for grants in 1995 and 1996, respectively; expected volatility of 61 and
59 percent, respectively; a dividend rate of $0.10 per share beginning in three
years for options granted in both years; respective risk free interest rates of
5.80% and 5.30% and expected lives of seven years for options granted in both
years.
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
Weighted
Average
Range of Number Remaining Number
Exercise Outstanding Contractual Exercisable
Prices at 12/31/96 Life at 12/31/96
- --------- --------------- ------------- --------------
$6.75 192,500 9.0 years 114,500
10 COMMITMENTS AND CONTINGENCIES
CASH AND DUE FROM BANKS NBSC is required to maintain an average reserve
balance with the FRB. The amount of this reserve balance for the Company at
December 31, 1996 was approximately $300,000.
LITIGATION The Company and its subsidiary bank, from time to time, may be
defendants in legal proceedings relating to their business. In the judgment of
management, the consolidated financial position and the results of operations of
the Company will not be affected materially by the final outcome of any present
legal proceedings or other contingent liabilities and commitments.
COMMITMENTS WITH OFF-BALANCE SHEET RISK The consolidated balance sheets do
not reflect various commitments relating to financial instruments which are used
in the normal course of business. Management does not anticipate that the
settlement of those financial instruments will have a material adverse effect on
the Company's financial position. These instruments include commitments to
extend credit and letters of credit. These financial instruments carry various
degrees of credit risk, which is defined as the possibility that a loss may
occur from the failure of another party to perform according to the terms of the
contract.
47
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. In the normal course of business, the
Company receives a fee for providing a commitment. The Company was committed to
advance $16,642,000 and $14,447,000 to its borrowers as of December 31, 1996 and
1995, respectively, the majority of which expire within one year. Included in
NBSC's commitments to extend credit were fixed rate commitments of $6,546,000
and $2,772,000 for 1996 and 1995, respectively.
The fair value of a commitment to extend credit may be estimated by using
the fee currently charged to enter into similar agreements, taking into account
the remaining term of the agreement and the creditworthiness of the parties. The
contract amount and the estimated fair value for commitments to extend credit
and standby letters of credit follow for December 31, 1996 and December 31,
1995:
December 31, 1996 December 31, 1995
----------------------------- -------------------------
Contract Estimated Contract Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(in thousands)
Commitments to extend credit ................................. $32,544 --- $28,276 ---
Standby letters of credit .................................... $ 832 $ 7 $ 825 $ 9
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. The Company has entered into
standby letter of credit contracts with its customers totaling $832,000 and
$825,000 as of December 31, 1996 and 1995, respectively, which generally expire
within one year.
NON-CANCELABLE LEASE OBLIGATIONS During 1988, NBSC sold certain banking and
other premises to FMI, Inc., a wholly owned subsidiary of Franklin Mutual
Insurance Co., a 6.6% shareholder of High Point. The president of FMI, Inc. is
also a member of the Board of Directors of High Point. The banking premises were
leased back to NBSC for periods ranging between 10 and 15 years. The Bank
realized a gain on this transaction, which has been deferred and is being
amortized into income over the applicable lease terms. As of December 31, 1996
and 1995, the unamortized deferred gain was approximately $363,000 and $509,000,
respectively.
At December 31, 1996, NBSC was obligated under non-cancelable leases for
its Branchville, Stillwater, Wantage, Andover, Lafayette, Sparta, and Vernon
branch offices, and its human resources office for periods ranging from one to
ten years. The minimum rental commitment for 1997 through 2001 and thereafter is
$438,000, $320,000, $212,000, $212,000 , $198,000 and $235,000, respectively.
The Company's minimum rental commitment includes commitments to pay FMI, Inc.
$370,000 in 1997, $261,000 in 1998 and $152,000 from 1999 through 2003. Rental
expenses amounted to $434,000, $457,000 and $454,000 for the years ended
December 31, 1996, 1995 and 1994 respectively. The Company has made rental
payments to FMI, Inc. of $370,000 each year in 1996, 1995 and 1994.
11 COMMON STOCK TRANSACTIONS
The Company has a Dividend Reinvestment and Common Stock Purchase Plan and
has registered 102,113 shares of common stock with the Securities and Exchange
Commission for issuance to participating shareholders. As of December 31, 1996,
60,928 shares of common stock are reserved for issuance under this plan .
High Point has also issued shares in 1994 and 1996 in connection with its
cancelable mandatory stock purchase contracts. See Note 15 on page 50.
In 1985, the Company sold 171,990 shares of its common stock to the
Employee Stock Ownership Plan (ESOP). The ESOP borrowed funds to purchase the
stock which was shown as a liability and a deduction from stockholders' equity.
In the first quarter 1995, the final payment of $150,000 on the ESOP debt was
made.
48
Contributions by the Company to the ESOP in 1996, 1995 and 1994 amounted to
$200,000, $200,000 and $202,000, respectively, and are included in salaries and
employee benefits.
12 DEPOSITS
Pursuant to the requirements of SFAS No. 107, the information regarding the
fair value of deposits is presented below.
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
Non-interest bearing demand........................................................ $ 43,149 $ 43,149 $ 38,334 $ 38,334
Interest bearing demand............................................................ 26,627 26,627 25,092 25,092
Savings and Money Market deposit accounts.......................................... 58,235 58,235 55,832 55,832
Certificates of deposit:
Maturing or repricing within six months........................................... 29,637 29,637 29,967 29,967
Maturing or repricing between six months and one year............................. 12,452 12,452 11,059 11,059
Maturing or repricing between one and five years.................................. 16,632 16,915 15,741 16,145
Maturing or repricing beyond five years........................................... 2,122 3,082 2,300 3,340
----------- --------- --------- ---------
$ 188,854 $ 190,097 $ 178,325 $ 179,769
=========== ========= ========== =========
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, interest bearing demand deposits, savings and money
market accounts, is equal to the amount payable on demand as of December 31,
1996. The fair value of the certificates of deposit due after one year is based
on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
13 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information relating to securities sold under agreements to repurchase for
1996, 1995, and 1994 is summarized below:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Balance at December 31................................................ $5,054 $2,959 $2,621
Interest rate at December 31.......................................... 2.89% 3.52% 3.08%
Maximum amount outstanding at any month-end during the year........... $8,580 $5,189 $5,325
Average amount outstanding during the year............................ $5,479 $3,735 $3,542
Weighted average interest rate during the year........................ 3.04% 3.46% 1.69%
Securities sold under agreements to repurchase generally mature within 90
days and are secured by the Company's investment in the Vanguard money market
fund. All securities underlying the agreements to repurchase were under the
Company's control. The average amount outstanding was calculated based on a
daily average. Because the securities sold under agreements to repurchase
generally mature within 90 days, the carrying value approximates market value on
the dates presented.
14 NOTE PAYABLE
On December 28, 1994, after receiving approval from the FRB, High Point
renegotiated its debt which is collateralized by land held for sale, and in
connection therewith, High Point made an $800,000 principal payment. In February
1995, High Point began making principal payments of $6,000 monthly and interest
payments based on a prime plus 1% floating rate. The remainder of the loan
balance is due in a balloon payment
49
on January 2, 1998. The interest rate on the loan on December 31, 1996 was
9.25%. The net proceeds from any additional sales of land will be used to make
principal payments on the outstanding debt.
High Point is required to maintain an equity level (as defined in the loan
agreement) of $10 million at the end of each quarter. If High Point is unable to
meet such minimum equity level, the lending bank may demand the payment of all
unpaid principal prior to its due date. High Point anticipates that it will be
able to meet such equity levels. High Point's equity, as defined, was
$20,104,000 on December 31, 1996.
Because the 9.25% and 9.50% floating rates of the Note Payable on December
31, 1996 and 1995, respectively, were competitive market rates, the carrying
value approximates the market value of the Note Payable on such dates.
15 REDEEMABLE SUBORDINATED DEBENTURES AND CANCELABLE MANDATORY STOCK
PURCHASE CONTRACTS
At December 31, 1996 and 1995, 8.5% Redeemable Subordinated Debentures (the
"Debentures") due March 1, 1997 with principal balances of $127,000 and
$511,000, respectively, were outstanding. Interest on the Debentures is payable
quarterly, and the Debentures mature on March 1, 1997. Certain of the Debentures
outstanding on December 31, 1995 secured Cancelable Mandatory Stock Purchase
Contracts ("Equity Contracts") requiring the purchase of $401,000 in
common stock at a price of $19.17 (after adjustment for stock dividends and
certain other events) per share no later than March 1, 1996. The purchase price
under the Equity Contracts could be paid by cash or by the surrender of
Debentures with a principal amount equal to the amount of common stock to be
purchased. On March 1, 1996, $384,000 in debentures were surrendered to purchase
common stock under the terms of the Equity Contracts. The remaining Equity
Contract obligations were fulfilled by the payment of cash.
The carrying value of the remaining Debentures approximates their fair
value on December 31, 1996.
16 REGULATORY CAPITAL REQUIREMENTS
High Point and NBSC are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators, that if undertaken could have a direct
material effect on the Company's or NBSC's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and NBSC must meet specific capital guidelines that involve
quantitative measures of their respective assets, liabilities, and certain off-
balance sheet items as calculated under regulatory accounting practices. The
Company's and NBSC's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and NBSC to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined). Management believes, as of December 31,
1996, that the Company and NBSC meet all capital adequacy requirements to which
they are subject.
As of December 31, 1996, the most recent notification from the Office of
the Comptroller of the Currency categorized NBSC as well capitalized under the
regulatory framework for prompt corrective action. Similarly, the most recent
notification from the Federal Reserve Bank of New York categorized the Company
as well capitalized. To be well capitalized, NBSC and the Company must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the institutions' category.
50
NBSC's actual capital amounts and ratios are also presented in the table.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
------------------ ----------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- --------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets)....................... $18,159 15.87% >=$9,154 >=8.0% >=$11,443 >=10.0%
Tier I Capital
(to Risk Weighted Assets)............. $16,697 14.59% >=$4,577 >=4.0% >=$6,865 >=6.0%
Tier I Capital
(to Average Assets)................... $16,697 7.75% >=$8,620 >=4.0% >=$10,776 >=5.0%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets)....................... $14,310 13.63% >=$8,402 >=8.0% >=$10,503 >=10.0%
Tier I Capital
(to Risk Weighted Assets)............. $12,957 12.34% >=$4,201 >=4.0% >=$6,302 >=6.0%
Tier I Capital
(to Average Assets)................... $12,957 6.65% >=$7,791 >=4.0% >=$9,739 >=5.0%
The Company's capital position is shown in the following table:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
------------------ ----------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets)......................... $19,787 17.00% >=$9,310 >=8.0% >=$11,638 >=10.0%
Tier I Capital
(to Risk Weighted
Assets)................................ $18,175 15.62% >=$4,655 >=4.0% >=$6,982 >=6.0%
Tier I Capital
(to Average Assets)..................... $18,175 8.35% >=$8,709 >=4.0% >=$10,886 >=5.0%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets)......................... $16,054 14.96% >=$8,582 >=8.0% >=$10,728 >=10.0%
Tier I Capital
(to Risk Weighted
Assets)................................ $14,161 13.20% >=$4,291 >=4.0% >=$6,436 >=6.0%
Tier I Capital
(to Average Assets)..................... $14,161 7.16% >=$7,912 >=4.0% >=$9,890 >=5.0%
NBSC, as a national bank, is subject to restrictions on dividends that it
may pay to High Point. 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 $6,296,000. NBSC has total retained
earnings of $1,224,000 and cannot pay dividends in excess of its retained
earnings.
51
17 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the fair value versus the carrying value of
the Company's financial instruments. The recorded value for cash and cash
equivalents, federal funds purchased, interest bearing deposits with banks and
securities sold under agreements to repurchase approximate fair value because
they mature within one year and do not present unanticipated credit risks. For
the methodology of estimating the fair value of other financial instruments, see
the notes referred to in the chart below. For the Company's policy regarding
presentation of fair value of financial instruments, see Note 1 on page 36.
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------ ---------- ------------ ----------
(IN THOUSANDS)
FINANCIAL ASSETS:
Cash and cash equivalents............ $ 14,528 $ 14,528 $ 22,440 $ 22,440
Interest bearing deposits
with banks.......................... 123 123 125 125
Securities available for
sale, at fair value
(Note 2)............................ 53,575 53,575 49,304 49,304
Securities held to
maturity (Note 2)................... 22,667 22,698 15,392 15,483
Loans held for sale, at
fair value.......................... 178 178 628 628
Loans (Note 3)........................ 114,631 114,000 104,863 104,000
--------- --------- --------- ---------
Total financial assets.............. $ 205,702 $ 205,102 $ 192,752 $ 191,980
========= ========= ========= =========
FINANCIAL LIABILITIES:
Deposits (Note 12)................... $ 188,854 $ 190,097 $ 178,325 $ 179,769
Federal funds purchased
and securities sold under
agreements to repurchase
(Note 13).......................... 5,054 5,054 2,959 2,959
Note payable (Note 14)............... 846 846 1,270 1,270
Redeemable subordinated debentures
(Note 15).......................... 127 127 511 511
Standby letters of credit............ --- 7 --- 9
--------- --------- --------- ---------
Total financial
liabilities....................... $ 194,881 $ 196,131 $ 183,065 $ 184,518
========= ========= ========= =========
18 OTHER EXPENSES
Other non-interest expense for the years December 31, 1996, 1995 and 1994
consisted of the following:
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Legal fees....................................................................... $ 276 $ 247 $ 569
FDIC insurance assessment........................................................ 170 383 464
Impairment on land held for sale................................................. 250 29 ---
Marketing........................................................................ 216 315 209
Printing and supply.............................................................. 239 196 206
Other............................................................................ 1,562 1,511 1,514
------- ------- --------
$ 2,713 $ 2,681 $ 2,962
======= ======= ========
52
19 HIGH POINT FINANCIAL CORP. (PARENT COMPANY ONLY)
High Point Financial Corp. owns one wholly owned subsidiary, The National
Bank of Sussex County. The net income of NBSC is recognized by High Point using
the equity method of accounting. Accordingly, income or loss of NBSC is recorded
as an adjustment in High Point's investment in the subsidiary. Condensed
financial statements of the parent company only follow:
CONDENSED BALANCE SHEETS
(in thousands)
December 31,
--------------------------
ASSETS 1996 1995
- ------ --------- ----------
Cash................................................................................... $ 6 $ 13
Federal funds sold..................................................................... 240 500
Interest bearing deposits with banks (escrow with lending bank)........................ 123 125
Securities available for sale.......................................................... 212 214
Investment in bank subsidiary.......................................................... 18,493 13,344
Land held for sale (Note 14)........................................................... 1,885 2,135
Other assets........................................................................... 12 57
------- -------
TOTAL ASSETS......................................................................... $20,971 $16,388
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Other liabilities...................................................................... $ 21 $ 49
Note payable (Note 14)................................................................. 846 1,270
Redeemable subordinated debentures..................................................... 127 511
Stockholders' equity................................................................... 19,977 14,558
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $20,971 $16,388
======= =======
CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
----------------------------
INCOME 1996 1995 1994
- ------ ------ ------ ------
Gain (loss) on sale of securities available for sale................................... $ --- $ 19 $ (1)
Other income........................................................................... 62 54 42
------- ------ --------
TOTAL INCOME....................................................................... 62 73 41
------- ------ --------
EXPENSE
- -------
Interest expense...................................................................... 131 180 266
Non-interest expenses................................................................. 439 283 153
------- ------ --------
TOTAL EXPENSE...................................................................... 570 463 419
Income (loss) before benefit for income taxes and cumulative effect for ------- ------ --------
change in accounting principle........................................................ (508) (390) (378)
------- ------ --------
Income (loss) before cumulative effect for change in accounting principle.............. (508) (390) (378)
Cumulative effect of change in accounting principle.................................... --- (370) ---
Income (loss) before equity in undistributed income (loss) of ------- ------ --------
subsidiaries.......................................................................... (508) (760) (378)
Equity in undistributed income (loss) of subsidiaries.................................. 5,315 1,465 (737)
------- ------ --------
NET INCOME (LOSS)...................................................................... $ 4,807 $ 705 $(1,115)
======= ====== =======
53
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
1996 1995 1994
------- ------- --------
OPERATING ACTIVITIES
Net income (loss)...................................................................... $ 4,807 $ 705 $ (1,115)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Accretion on securities.............................................................. (1) (1) ---
(Gain) loss on sale of securities.................................................... --- (19) 1
Unrealized loss on land held for sale................................................ 250 399 ---
(Increase) decrease in other assets.................................................. 46 140 (23)
Increase (decrease) in other liabilities............................................. (28) (58) 32
Equity in undistributed (income) losses of subsidiaries.............................. (5,315) (1,465) 737
------- ------- --------
NET CASH USED IN OPERATING ACTIVITIES.................................................. (241) (299) (368)
------- ------- --------
INVESTING ACTIVITIES
Proceeds from sale and maturity of securities available for sale...................... --- 263 ---
Purchase of securities................................................................ --- (13) (197)
(Increase) decrease in interest bearing deposits...................................... 2 (1) 83
Additional capital contribution to NBSC............................................... --- --- (2,400)
------- ------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................................... 2 249 (2,514)
------- ------- --------
FINANCING ACTIVITIES
Repayments of long-term debt.......................................................... (424) (212) (891)
Net proceeds from stock offering...................................................... --- --- 4,391
Proceeds from equity contract conversion.............................................. 396 --- 100
------- ------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................... (28) (212) 3,600
------- ------- --------
Net increase (decrease) in cash and cash equivalents................................... (267) (262) 718
Cash and cash equivalents, beginning of year........................................... 513 775 57
------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR................................................. $ 246 $ 513 $ 775
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID......................................................................... $ 131 $ 180 $ 265
54
20 SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following quarterly financial information for the two years ended
December 31, 1996 is unaudited. However, in the opinion of management, all
adjustments, which include only normal recurring adjustments necessary to
present fairly the results of operations for the periods, are reflected. Results
of operations for the periods are not necessarily indicative of the results of
the entire year or any other interim period.
1996
---------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in thousands, except per share amounts)
Total interest income............................................ $3,480 $ 3,462 $3,664 $3,823
Net interest income.............................................. 2,050 2,066 2,208 2,347
Provision for possible loan losses............................... --- --- --- ---
Net income before provision (benefit) for income taxes........... 511 408 296 911
Provision (benefit) for income taxes............................. (246) (368) (2,472) 405
Net income....................................................... 757 776 2,768 506
Net income per share............................................. $0.20 $ 0.20 $ 0.73 $ 0.13
1995
---------------------------------------------------
March 31* June 30 September 30 December 31
--------- ------- ------------ -----------
Total interest income............................................ $3,272 $ 3,349 $3,508 $3,524
Net interest income.............................................. 1,990 1,988 2,064 2,061
Provision for possible loan losses............................... 175 50 --- ---
Net income (loss) before cumulative effect for change in
accounting principle............................................. 31 36 336 672
Cumulative effect of change in accounting principle.............. 370 --- --- ---
Net income (loss)................................................ (339) 36 336 672
Net income (loss) per share before cumulative effect for change
in accounting principle........................................ 0.01 0.01 0.09 0.18
Cumulative effect per share for change in accounting principle... 0.10 --- --- ---
Net income (loss) per share...................................... $(0.09) $ 0.01 $ 0.09 $ 0.18
____________________
* The Company adopted SFAS No. 121 in the fourth quarter 1995 and recorded an
unrealized impairment loss of $370,000 on its land held for sale. In
accordance with this new accounting standard, the Company retroactively
restated the impact of adoption to the first quarter, 1995. See Note 6 on
page 43.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information contained under the heading "Election of Directors" on pages 1
through and including 2 and under the heading "Certain Filings" on page 8 of the
Company's definitive Proxy Statement for the 1997 Annual Meeting of Shareholders
and the information set forth in response to Item 4A of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information contained under the headings "Executive Compensation and Other
Information," "Stock Option Plans," "Change of Control
55
Agreements" and "Compensation of Directors" on pages 5 through and including 8
of the Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, provided, however, such incorporation by reference shall not be
deemed to specifically incorporate by reference the information referred to in
Item 402 (a) (8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information contained under the heading "Security Ownership of Certain
Beneficial Owners, Directors and Management" on pages 3 through and including 4
of the Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information contained under the heading "Transactions with Directors and
Management" on pages 8 through and including 9 of the Company's definitive Proxy
Statement for the 1997 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 3. Exhibits Required by Item 601 of Regulation S-K
3(a) Restated Certificate of Incorporation of High Point Financial
Corp. incorporated by reference to Exhibit 4(a) to the
Registration Statement on Form S-3 filed by the Company on
October 30, 1987 (No.33-18226) and Amendment No.2 thereto, filed
by the Company on March 24, 1988.
3(b) By-laws of High Point Financial Corp., as amended, February 20,
1996 incorporated by reference to Exhibit 3(b) in the Annual
Report on Form 10(K) for the fiscal year ended December 31,
1995.
4(a) Indenture (including the forms of Debentures), dated as of March
1, 1987, between High Point Financial Corp. and New Jersey
National Bank, Trustee--incorporated by reference to Exhibit
4(c) to the Registration Statement on Form S-2 filed by the
Company on February 26, 1987 (No.33-12243), and Amendment No.1
thereto, filed by the Company on March 13, 1987.
4(b) Equity Contract Agency Agreement (including form of Cancellable
Mandatory Stock Purchase Contracts), dated as of March 1, 1987
between High Point Financial Corp. and the United Jersey
Bank/Commercial Trust--incorporated by reference to Exhibit 4(d)
to the Registration Statement on Form S-2 filed by the Company
on February 26, 1987 (No. 33-12243), and Amendment No. 1
thereto, filed by the Company on March 13, 1987.
10(a) Executive Supplemental Income Agreement, between The National
Bank of Sussex County and Gregory W. A. Meehan, incorporated by
reference to Exhibit 10(e) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1986.**
10(b) Directors Deferred Income Agreement, between High Point
Financial Corp. and C. Edward McCracken, incorporated by
reference to Exhibit 10(f) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1986.**
10(c) Directors Deferred Income Agreement, between High Point
Financial Corp. and Richard M. Roy, incorporated by reference to
Exhibit 10(g) to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1986.**
________________
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
** Indicates a management contract or compensatory plan or arrangement
56
10(d) Directors Deferred Income Agreement, between The National Bank
of Sussex County and Larry R. Condit, incorporated by reference
to Exhibit 10(j) to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1986.**
10(e) Directors Deferred Income Agreement, between The National Bank
of Sussex County and C. Edward McCracken, incorporated by
reference to Exhibit 10(i) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1986.**
10(f) Directors Deferred Income Agreement, between The National Bank
of Sussex County and Richard M. Roy, incorporated by reference
to Exhibit 10(k) to Annual Report on Form 10-K for the fiscal
year ended December 31, 1986.**
10(g) Directors Deferred Income Agreement, between The National Bank
of Sussex County and William A. Dolan, II, incorporated by
reference to Exhibit 10(m) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1986.**
10(h) Loan and Pledge Agreement, dated September 20, 1985, between the
Trust for The National Bank of Sussex County Employee Stock
Ownership Plan and First National Bank of Central Jersey,
incorporated by reference to Exhibit 10(o) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.
10(i) 1987 Incentive Stock Option Plan of High Point Financial Corp.,
incorporated by reference to Exhibit 10(r) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1987.**
10(j) Executive Supplemental Income Agreement, between High Point
Financial Corp. and Michael A. Dickerson, incorporated by
reference to Exhibit 10(q) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1988.**
10(k) Lease Agreement, dated June 23, 1988, between The National Bank
of Sussex County and FMI, Inc., incorporated by reference to
Exhibit 10(s) to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1988.
10(l) Change of Control Agreement, dated October 1, 1996 between the
National Bank of Sussex County and High Point Financial Corp.,
and Michael A. Dickerson.**
10(m) Change of Control Agreement, dated October 1, 1996 between the
National Bank of Sussex County and High Point Financial Corp.,
and Gregory W. A. Meehan.**
10(n) Change of Control Agreement, dated October 1, 1996 between the
National Bank of Sussex County and High Point Financial Corp.,
and Robert A. Vandenbergh.**
10(o) The High Point Financial Corp. 1990 Employee Stock Option
Incentive Plan, incorporated by reference to Exhibit 28(a) to
the Registration Statement on Form S-8 filed by High Point on
November 6, 1990 (No. 33-37621).**
10(p) Amendment to the Executive Supplemental Income Agreement,
between The National Bank of Sussex County and Gregory W. A.
Meehan, effective July 1, 1991, incorporated by reference to
Exhibit 10(x) to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1991.**
10(q) Amendment to the Executive Supplemental Income Agreement,
between High Point Financial Corp. and Michael A. Dickerson,
effective July 1, 1991, incorporated by reference to Exhibit
10(y) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.**
10(r) Consolidated Loan and Security Agreement dated December 31,
1991, between High Point Financial Corp. and National
Westminster Bank NJ, incorporated by reference to Exhibit 10(z)
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(s) Amendment to the Executive Supplemental Income Agreement,
between High Point Financial Corp. and Michael A. Dickerson,
effective January 1, 1993, incorporated by reference to Exhibit
10(s) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.**
________________
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
** Indicates a management contract or compensatory plan or arrangement
57
10(t) February, 1993 Modification to Consolidated Loan and Security
Agreement between High Point Financial Corp. and National
Westminster Bank, New Jersey, dated February 26, 1993.,
incorporated by reference to Exhibit 10(v) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1992.
10(u) Amendment to the Directors Deferred Income Agreement, between
The National Bank of Sussex County and Larry R. Condit, dated
April 1, 1993, incorporated by reference to Exhibit 10(w) to the
Annual Report on Form 10-K for the fiscal year ended December
31, 1993.**
10(v) Amendment to the Directors Deferred Income Agreement, between
The National Bank of Sussex County and C. Edward McCracken,
dated April 1, 1993, incorporated by reference to Exhibit 10(x)
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.**
10(w) Amendment to the Directors Deferred Income Agreement, between
High Point Financial Corp. and C. Edward McCracken, dated April
1, 1993, incorporated by reference to Exhibit 10(y) to the
Annual Report on Form 10-K for the fiscal year ended December
31, 1993.**
10(x) Amendment to the Directors Deferred Income Agreement, between
The National Bank of Sussex County and Richard M. Roy, dated
April 1, 1993, incorporated by reference to Exhibit 10(z) to the
Annual Report on Form 10-K for the fiscal year ended December
31, 1993.**
10(y) Amendment to the Directors Deferred Income Agreement, between
High Point Financial Corp. and Richard M. Roy, dated April 1,
1993, incorporated by reference to Exhibit 10(aa) to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1993.**
10(z) Amendment to the Directors Deferred Income Agreement, between
The National Bank of Sussex County and William A. Dolan, II,
dated April 1, 1993, incorporated by reference to Exhibit 10(ab)
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.**
10(aa) Modified Term Note dated December 28, 1994 between High Point
Financial Corp. and National Westminster Bank, NJ., incorporated
by reference to Exhibit 10(ac) to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
10(ab) 1996 Non-employee Director Stock Option Plan.**
10(ac) 1996 Employee Incentive Stock Option Plan.**
10(ad) Salary Continuation Agreement dated December 17, 1996 between
the National Bank of Sussex County and Michael A. Dickerson.**
10(ae) Salary Continuation Agreement dated December 17, 1996 between
the National Bank of Sussex County and Gregory W. A. Meehan.**
10(af) Salary Continuation Agreement dated December 17, 1996 between
the National Bank of Sussex County and Robert A. Vandenbergh.**
11 Statement of computation of per share earnings
21 List of subsidiaries
23 Consent of Arthur Andersen LLP
__________________
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
** Indicates a management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth quarter of
the period covered by this report.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 25, 1997
By /s/ Gregory W.A. Meehan By /s/ Rita A. Myers
-------------------------------- --------------------------
Gregory W. A. Meehan, Rita A. Myers
Vice President and Treasurer Comptroller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
---------- -------- ----
/s/ Charles L. Tice Chairman of the Board March 25, 1997
- ---------------------------------
(Charles L. Tice)
/s/ Michael A. Dickerson President, Chief Executive March 25, 1997
- ---------------------------------
(Michael A. Dickerson) Officer and Director
/s/ Gregory W. A. Meehan Vice President and Treasurer March 25, 1997
- ---------------------------------
(Gregory W. A. Meehan) (Principal Financial Officer)
/s/ Rita A. Myers Comptroller (Principal March 25, 1997
- ---------------------------------
Rita A. Myers Accounting Officer)
/s/ William A. Dolan, II Director March 25, 1997
- ---------------------------------
(William A. Dolan, II)
/s/ Larry R. Condit Director March 25, 1997
- ---------------------------------
(Larry R. Condit)
/s/ George H. Guptill, Jr. Director March 25, 1997
- ----------------------------------
(George H. Guptill, Jr.)
/s/ Charles L. Lain Director March 25, 1997
- ----------------------------------
(Charles L. Lain)
Director
- ----------------------------------
(Harold E. Pellow)
/s/ Richard M. Roy Vice Chairman and Director March 25, 1997
- ----------------------------------
(Richard M. Roy)
59
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
EXHIBITS
TO
FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
HIGH POINT FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS Page
----
3(a) Restated Certificate of Incorporation of High Point Financial *
Corp. incorporated by reference to Exhibit 4(a) to the
Registration Statement on Form S-3 filed by the Company
on October 30, 1987 (No.33-18226) and Amendment No.2
thereto, filed by the Company on March 24, 1988.
3(b) By-laws of High Point Financial Corp., as amended, *
February 20, 1996 incorporated by reference to Exhibit 3(b) in
the Annual Report on Form 10(K) for the fiscal year ended
December 31, 1995.
4(a) Indenture (including the forms of Debentures), dated as of *
March 1, 1987, between High Point Financial Corp. and New
Jersey National Bank, Trustee--incorporated by reference to
Exhibit 4(c) to the Registration Statement on Form S-2 filed by
the Company on February 26, 1987 (No.33-12243), and
Amendment No.1 thereto, filed by the Company on March 13,
1987.
4(b) Equity Contract Agency Agreement (including form of *
Cancellable Mandatory Stock Purchase Contracts), dated as
of March 1, 1987 between High Point Financial Corp. and the
United Jersey Bank/Commercial Trust--incorporated by
reference to Exhibit 4(d) to the Registration Statement on Form
S-2 filed by the Company on February 26, 1987 (No. 33-12243),
and Amendment No. 1 thereto, filed by the Company on March
13, 1987.
10(a) Executive Supplemental Income Agreement, between The *
National Bank of Sussex County and Gregory W. A. Meehan,
incorporated by reference to Exhibit 10(e) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.**
10(b) Directors Deferred Income Agreement, between High Point *
Financial Corp. and C. Edward McCracken, incorporated by
reference to Exhibit 10(f) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1986.**
10(c) Directors Deferred Income Agreement, between High Point *
Financial Corp. and Richard M. Roy, incorporated by reference
to Exhibit 10(g) to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1986.**
- ----------------
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement
10(d) Directors Deferred Income Agreement, between The *
National Bank of Sussex County and Larry R. Condit,
incorporated by reference to Exhibit 10(j) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.**
10(e) Directors Deferred Income Agreement, between The *
National Bank of Sussex County and C. Edward McCracken,
incorporated by reference to Exhibit 10(i) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.**
10(f) Directors Deferred Income Agreement, between The *
National Bank of Sussex County and Richard M. Roy,
incorporated by reference to Exhibit 10(k) to Annual Report on
Form 10-K for the fiscal year ended December 31, 1986.**
10(g) Directors Deferred Income Agreement, between The *
National Bank of Sussex County and William A. Dolan, II,
incorporated by reference to Exhibit 10(m) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.**
10(h) Loan and Pledge Agreement, dated September 20, 1985, *
between the Trust for The National Bank of Sussex County
Employee Stock Ownership Plan and First National Bank of
Central Jersey, incorporated by reference to Exhibit 10(o) to the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
10(i) 1987 Incentive Stock Option Plan of High Point Financial *
Corp., incorporated by reference to Exhibit 10(r) to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1987.**
10(j) Executive Supplemental Income Agreement, between High *
Point Financial Corp. and Michael A. Dickerson, incorporated
by reference to Exhibit 10(q) to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1988.**
10(k) Lease Agreement, dated June 23, 1988, between The *
National Bank of Sussex County and FMI, Inc., incorporated by
reference to Exhibit 10(s) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1988.
10(l) Change of Control Agreement, dated October 1, 1996
between the National Bank of Sussex County and High Point
Financial Corp., and Michael A. Dickerson.**
10(m) Change of Control Agreement, dated October 1, 1996
between the National Bank of Sussex County and High Point
Financial Corp., and Gregory W. A. Meehan.**
10(n) Change of Control Agreement, dated October 1, 1996
between the National Bank of Sussex County and High Point
Financial Corp., and Robert A. Vandenbergh.**
10(o) The High Point Financial Corp. 1990 Employee Stock Option *
Incentive Plan, incorporated by reference to Exhibit 28(a) to the
Registration Statement on Form S-8 filed by High Point on
November 6, 1990 (No. 33-37621).**
- ----------------
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement
10(p) Amendment to the Executive Supplemental Income
Agreement, between The National Bank of Sussex County and
Gregory W. A. Meehan, effective July 1, 1991, incorporated by
reference to Exhibit 10(x) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.**
10(q) Amendment to the Executive Supplemental Income *
Agreement, between High Point Financial Corp. and Michael A.
Dickerson, effective July 1, 1991, incorporated by reference to
Exhibit 10(y) to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1991.**
10(r) Consolidated Loan and Security Agreement dated December *
31, 1991, between High Point Financial Corp. and National
Westminster Bank NJ, incorporated by reference to Exhibit
10(z) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
10(s) Amendment to the Executive Supplemental Income *
Agreement, between High Point Financial Corp.
and Michael A. Dickerson, effective January 1, 1993,
incorporated by reference to Exhibit 10(s) to the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.**
10(t) February, 1993 Modification to Consolidated Loan and *
Security Agreement between High Point Financial
Corp. and National Westminster Bank, New Jersey,
dated February 26, 1993., incorporated by reference to
Exhibit 10(v) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
10(u) Amendment to the Directors Deferred Income *
Agreement, between The National Bank of Sussex
County and Larry R. Condit, dated April 1, 1993,
incorporated by reference to Exhibit 10(w) to the Annual
Report on Form 10-K for the fiscal year ended December
31, 1993.**
10(v) Amendment to the Directors Deferred Income *
Agreement, between The National Bank of Sussex
County and C. Edward McCracken, dated April 1, 1993,
incorporated by reference to Exhibit 10(x) to the Annual
Report on Form 10-K for the fiscal year ended December
31, 1993.**
10(w) Amendment to the Directors Deferred Income *
Agreement, between High Point Financial Corp. and
C. Edward McCracken, dated April 1, 1993,
incorporated by reference to Exhibit 10(y) to the Annual
Report on Form 10-K for the fiscal year ended December
31, 1993.**
- ------------
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement
10(x) Amendment to the Directors Deferred Income *
Agreement, between The National Bank of Sussex
County and Richard M. Roy, dated April 1, 1993,
incorporated by reference to Exhibit 10(z) to the Annual
Report on Form 10-K for the fiscal year ended December
31, 1993.**
10(y) Amendment to the Directors Deferred Income *
Agreement, between High Point Financial Corp. and
Richard M. Roy, dated April 1, 1993, incorporated by
reference to Exhibit 10(aa) to the Annual Report on Form
10-K for the fiscal year ended December 31, 1993.**
10(z) Amendment to the Directors Deferred Income *
Agreement, between The National Bank of Sussex
County and William A. Dolan, II, dated April 1, 1993,
incorporated by reference to Exhibit 10(ab) to the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.**
10(aa) Modified Term Note dated December 28, 1994 between *
High Point Financial Corp. and National Westminster
Bank, NJ., incorporated by reference to Exhibit 10(ac) to the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10(ab) 1996 Non-employee Director Stock Option Plan.**
10(ac) 1996 Employee Incentive Stock Option Plan.**
10(af) Salary Continuation Agreement dated December 17, 1996
between the National Bank of Sussex County and Michael A.
Dickerson.**
10(ae) Salary Continuation Agreement dated December 17, 1996
between the National Bank of Sussex County and Gregory W. A.
Meehan.**
10(af) Salary Continuation Agreement dated December 17, 1996
between the National Bank of Sussex County and Robert A.
Vandenbergh.**
11 Statement of computation of per share earnings
21 List of subsidiaries
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
------------------------------------------------------------------------
* Exhibit has been heretofore filed with the Securities & Exchange
Commission and is incorporated herein as exhibit by reference.
** Indicates a management contract or compensatory plan or
arrangement
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth quarter of the
period covered by this report.