SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-12430
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HIGH POINT FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2426221
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Branchville Square, Branchville, New Jersey 07826
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(Address of principal executive offices) (Zip Code)
(201) 948-3300
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of June 30, 1997 there were outstanding 3,786,480 shares of Common Stock, no
par value.
HIGH POINT FINANCIAL CORP.
Form 10-Q Index
PAGE
Part I Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1997 (unaudited) and December 31, 1996 1
Consolidated Income Statements - Unaudited Six Months Ended June 30,
1997 and 1996 2
Consolidated Statements of Cash Flow - Unaudited Six Months Ended June 30,
1997 and 1996 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 5
Part II Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
The Securities and Exchange Commission ( the "SEC") 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.
Item 1. Financial Information
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
June 30, 1997 December 31,
ASSETS (unaudited) 1996
- ------------------------------------------------------------------------------------------------------------
Cash and due from banks $10,346 $10,503
Federal funds sold 6,450 4,025
- ------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 16,796 14,528
Interest bearing deposits with banks - 123
Securities:
Available for sale, at fair value 55,581 53,575
Held to maturity, at cost (market value of $22,843 in 1997 and
$22,698 in 1996) 22,803 22,667
- ------------------------------------------------------------------------------------------------------------
Total securities 78,384 76,242
Loans held for sale - 178
Loans 122,806 114,631
Add: Deferred expenses 22 10
Allowance for possible loan losses (4,113) (3,973)
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Net loans 118,715 110,668
Land held for sale 1,885 1,885
Premises and equipment - net 3,275 2,910
Accrued interest receivable 1,255 1,260
Other real estate 1,000 1,086
Cash surrender value of life insurance policies 5,021 4,939
Other assets 2,991 3,363
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TOTAL ASSETS $229,322 $217,182
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Deposits:
Transaction accounts:
Interest bearing $28,255 $26,627
Non-interest bearing 41,805 43,149
Savings accounts 59,602 58,235
Time accounts (includes CDs $100 or over of $7,914 and $6,675 on June 30, 1997
and December 31, 1996, respectively) 63,742 60,843
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Total deposits 193,404 188,854
Securities sold under agreements to repurchase 12,632 5,054
Accrued expenses and other liabilities (Note 2) 2,434 2,324
Note payable - 846
Redeemable subordinated debentures, 8.5% due March 1, 1997 - 127
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Total liabilities 208,470 197,205
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Commitments and contingencies
Stockholders' equity
Preferred stock, authorized 1,000,000 shares, no shares issued ---- ----
Common stock, no par value; stated value $5 per share; authorized 5,000,000
shares, issued 3,786,480 shares in 1996 and 1997 18,932 18,932
Additional Paid-in-Capital 5,772 5,791
Accumulated Deficit (3,876) (4,822)
Unrealized gain on securities available for sale, net of taxes 24 76
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Total stockholders' equity 20,852 19,977
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $229,322 $217,182
============================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
1
CONSOLIDATED INCOME STATEMENTS - (UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest income and fees on loans $2,659 $2,255 $5,200 $4,569
Interest on securities - taxable $1,190 1,048 2,390 2,057
Interest on federal funds sold and
deposits with other banks 91 159 144 316
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TOTAL INTEREST INCOME $3,940 3,462 7,734 6,942
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INTEREST EXPENSE
Interest on deposits 1,425 1,328 2,796 2,681
Interest on other borrowed money 65 37 120 75
Interest on note payable and other -
long-term debt 11 31 32 70
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TOTAL INTEREST EXPENSE 1,501 1,396 2,948 2,826
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NET INTEREST INCOME 2,439 2,066 4,786 4,116
Less: Provision for possible loan losses - - - -
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NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,439 2,066 4,786 4,116
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NON-INTEREST INCOME
Service charges on deposit accounts 348 347 706 693
Commissions and fees 199 242 398 439
Loss on sales of securities (9) (10) (9) (10)
Gain (loss) on the sales of loans - (1) - 9
Gain on sale of bank premises and equipment 38 31 61 67
Other income 131 46 267 106
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TOTAL NON-INTEREST INCOME 707 655 1,423 1,304
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NON-INTEREST EXPENSE
Salaries and employee benefits 1,231 1,136 2,522 2,261
Net occupancy expense 224 238 467 476
Equipment expense 214 134 417 267
Legal expense 32 115 95 188
Net (income) cost of operation of other real esta (10) 78 1 135
Other expenses 577 612 1,121 1,174
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TOTAL NON-INTEREST EXPENSE 2,268 2,313 4,623 4,501
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Income before provision (benefit) for income taxe 878 408 1,586 919
Provision (benefit) for income taxes 354 (368) 640 (614)
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NET INCOME $524 $776 $946 $1,533
========================================================================================================================
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $0.14 $0.20 $0.25 $0.41
========================================================================================================================
WEIGHTED AVERAGE COMMON SHARE
AND COMMON SHARE EQUIVALENTS 3,786 3,786 3,786 3,772
========================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars in thousands) Six Months Ended June 30,
---------------------------
1997 1996
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OPERATING ACTIVITIES
Net income $946 $1,533
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 283 205
Amortization of securities discount, net 7 105
Net cash paid related to discount (premium) on matured securities (27) (81)
Loan fees amortized, net (12) (15)
Deferred income tax provision (benefit) 612 (620)
Loss on sale of securities 9 10
Gain on sale of premises and equipment (63) (67)
(Increase) decrease in accrued interest receivable and other assets (205) 476
Increase (decrease) in accrued expenses and other liabilities 184 (45)
- ------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,734 1,501
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INVESTING ACTIVITIES
Proceeds from sale of available for sale securities 1,991 2,007
Proceeds from maturity of securities:
Available for sale 6,110 5,842
Held for maturity 1,854 2,351
Purchase of securities:
Available for sale (10,152) (10,256)
Held for maturity (2,012) (6,545)
Net decrease of interest bearing deposits with banks 123 -
Net increase in loans (7,857) (1,524)
Capital expenditures (673) (267)
Proceeds from sale of premises and equipment 14 5
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NET CASH USED IN INVESTING ACTIVITIES (10,602) (8,387)
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FINANCING ACTIVITIES
Net increase in deposits 4,550 3,530
Increase in federal funds purchased and
securities sold under agreements to repurchase 7,578 735
Repayments of long-term debt principal (973) (37)
Net payments for stock options exercised (19) -
Proceeds from conversion of equity contracts - 396
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NET CASH PROVIDED BY FINANCING ACTIVITIES 11,136 4,624
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Net increase (decrease) in cash and cash equivalents 2,268 (2,262)
Cash and cash equivalents, beginning of period 14,528 22,440
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CASH AND CASH EQUIVALENTS, END OF PERIOD $16,796 $20,178
================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $2,903 $2,851
INCOME TAXES PAID (REFUNDED) 27 (3)
================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
Notes to Consolidated Financial Statements - (Unaudited)
Note 1. Basis of Presentation:
The accompanying consolidated financial statements of High Point Financial
Corp.("High Point") and its subsidiary, The National Bank of Sussex County
("NBSC"), reflect all adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation of interim results. All references
in this document to the "Company" refer to the consolidated company which
includes High Point and NBSC. The financial information has been prepared in
accordance with the Company's customary accounting practices and has not been
audited.
Certain information and footnote disclosures required under generally accepted
accounting principles have been condensed or omitted pursuant to the SEC rules
and regulations. These interim financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the High Point Financial Corp. Annual Report on Form 10-K for the
year ended December 31, 1996.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the year.
Note 2. Interest:
Accrued expenses and other liabilities includes accrued interest expense of
$588,000 at June 30, 1997 and $543,000 at December 31, 1996.
Note 3. Related Party Transactions:
Net occupancy expense includes rent on certain properties leased from FMI, Inc.,
a wholly owned subsidiary of Franklin Mutual Insurance Company. Franklin Mutual
Insurance Company owns 6.6% of the outstanding Common Stock of High Point. Rent
paid to FMI, Inc. for the first six months of 1996 and 1997 was $185,000.
Note 4. Net Income Per Share:
Net income per share is calculated based on the weighted average number of
common share and common share equivalents outstanding during each period,
adjusted for the effects of stock dividends if any. Options granted under the
Company's stock option plans have been excluded from the 1997 computation since
their effect is immaterial.
Fully diluted net income per share is not presented because it approximates
primary net income per share.
Note 5. Impaired Loans
As of June 30, 1997, NBSC's recorded investment in impaired loans and the
related valuation allowance calculated under Statement of Financial Accounting
Standards ("SFAS") No. 114 are as follows:
June 30, 1997 June 30, 1996
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Recorded Valuation Recorded Valuation
(in thousands) Investment Allowance Investment Allowance
Impaired loans:
Valuation allowance required $3,883 $627 $4,462 $1,061
No valuation allowance required --- --- --- ---
-------------------------------------------
Total impaired Loans $3,883 $627 $4,462 $1,061
-------------------------------------------
This valuation allowance is included in the allowance for loan losses on the
balance sheet.
The average recorded investments in impaired loans for the six months ended June
30, 1997 and June 30, 1996 were $3,813,000 and $4,641,000, 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 $77,000 for the six months
ended June 30, 1997 and June 30, 1996, respectively.
At June 30, 1997, NBSC had $443,000 of loans that resulted from troubled debt
restructurings that occurred prior to the adoption of SFAS No. 114. The effect
on income if interest on such troubled debt restructurings had been recognized
at original contractual rates during the year was not material.
At June 30, 1997, NBSC was not committed to lend additional funds to borrowers
with loans with terms that have been modified in troubled debt restructurings.
4
Item 2. Managements' Discussion and Analysis of Financial Condition and
Results of Operations
Summary
See Managements' Discussion and Analysis of Financial Condition and Results of
Operations included in High Point Financial Corp.'s Annual Report on Form 10-K
for the period ended December 31, 1996.
For the six months ended June 30, 1997, the Company's net income was $946,000 or
$0.25 per share compared to net income of $1,533,000 or $0.41 per share for the
same period in 1996. Net income for the first six months of 1996 included a
$614,000 benefit for income taxes representing the partial recognition of net
operating loss carryforwards through the reversal of a previously established
deferred tax valuation allowance. In first half of 1997, the Company recorded a
tax provision based on prevailing statutory tax rates.
Income before provision (benefit) for income taxes increased from $919,000 in
the first six months of 1996 to $1,586,000 in the first six months of 1997 which
included an increase in net interest income from $4,116,000 in the first six
months of 1996 to $4,786,000 in the same period in 1997, an increase of $670,000
or 16.3%.
At June 30, 1997, the consolidated assets of the Company were approximately
$229.3 million, an increase of $12.1 million or 5.6% from the $217.2 million
reported December 31, 1996. Return on average assets for the first six months of
1997 was 0.86% compared to the 1.52% reported for the same period last year.
Return on average equity was 9.26% for the first half of 1997 compared to 19.85%
for the same period in 1996. Annualized income before provision (benefit) for
income taxes as a percent of average assets for the first six months of 1997 and
1996 was 1.43% and 0.91%, respectively. Annualized income before provision
(benefit) for income taxes as a percent of average equity for the first six
months of 1997 and 1996 was 15.52% and 11.89%, respectively.
Results of Operations
Total interest income increased from $6,942,000 reported on June 30, 1996 to
$7,734,000 for June 30, 1997, an increase of $792,000 or 11.4%. Average earning
assets net of non-accrual loans increased from $181.1 million in the first six
months of 1996 to $196.9 million in the first six months of 1997, an increase of
$15.8 million or 8.7%. Interest income increased $617,000 as a result of an
increase in the volume of earning assets and $175,000 due to an increase in the
average yield on earning assets. Average loans have increased $13.2 million from
the first half of 1996 to the first half of 1997 while average investments have
increased $7.1 million from the first half of 1996 to the first half of 1997.
Average federal funds sold declined from $11.9 million in first half 1996 to
$5.4 million in first half 1997, a decrease of $6.5 million or 55%. Federal
funds sold were permitted to decline as a result of NBSC's membership in the
Federal Home Loan Bank in fourth quarter 1996 giving NBSC greater access to
borrow overnight funds should the need arise. The ability of NBSC to reduce its
federal funds sold gives it the ability to invest more funds in higher earning
investments or loans.
While the amount of loans on non-accrual continues to impact interest income and
fees on loans, average non-accruals continued to decline from $5,672,000 for the
first six months of 1996 to $3,658,000 for the first six months of 1997, a
decline of 35.5%. Interest lost on non-accrual loans was approximately $281,000
for the first six months of 1996 compared to $194,000 for the first six months
of 1997.
Total interest expense increased from $2,826,000 in the first six months of
1996, to $2,948,000 in the first six months of 1997, an increase of $122,000 or
4.3%. The major contributing factor of the increase in interest expense was an
increase in the average volume of interest bearing liabilities from $147.5
million for the first six months of 1996 to $158.2 million for the first six
months of 1997. Interest expense increased $198,000 due to an increase in volume
offset by a decline of $76,000 due to a decrease in the cost of funds.
Net interest income for the first six months of 1997 was $4,786,000 compared to
$4,116,000 for the same period in 1996, an increase of $670,000 or 16.3%. No
provision for possible loan losses was recorded for the first six months of 1996
or 1997. As a result of its evaluation of the allowance for possible loan losses
and as a result of continued declines in its non-performing loans and classified
loans, NBSC's management believes its allowance for loan losses is adequate at
this time. For further information, see the discussion under "Financial
Condition" below.
Total non-interest income increased from $1,304,000 for the first six months of
1996 to $1,423,000 for the first six months of 1997, an increase of $119,000 or
9.1%. Service charges on deposit accounts increased $13,000 as a result of
increased volume of demand deposit accounts. Other income increased $161,000
primarily due to income earned on life insurance policies and on income
resulting from a death benefit paid with respect to an insurance policy on a
former director.
Total non-interest expense increased from $4,501,000 reported in the first six
months of 1996 to $4,623,000 in the first six months of 1997, an increase of
$122,000 or 2.7%. Salaries and employee benefit expense increased
5
from $2,261,000 in the first six months of 1996 to $2,522,000 in the first six
months of 1997, an increase of $261,000 or 11.5%. The increase in salary and
employee benefit expense is related to several items. First, severance payments
to employees whose positions were terminated were expensed during the first
quarter. Second, benefit costs have increased due to an Executive Supplemental
Retirement Plan that was put in place in fourth quarter 1996. Third, expense
related to employee incentives in the form of stock grants and other gifts were
made in first quarter 1997. Finally, salary and benefit expense increased due to
merit increases.
Equipment expense increased from $267,000 in first half of 1996 to $417,000 in
first half of 1997, an increase of $150,000 or 56.2% as a result of an upgrade
in the Company's computer system and software which resulted in increased
depreciation and service contract expense. Net cost of operation of other real
estate decreased substantially from $135,000 reported in the first six months of
1996 to $1,000 in the first six months of 1997, a decrease of $134,000. The
decline in net cost of operation of other real estate results from a decline in
the number of properties in other real estate resulting in less expenses and
writedowns on properties. Rental income and gains on sales of other real estate
also increased from the first half of 1996 to the first half of 1997. Legal
expense declined from $188,000 for the first six months of 1996 to $95,000 for
the same period in 1997 as a result of less expenses incurred to work out non-
performing assets. Other expenses decreased from $1,174,000 to $1,121,000, a
decrease of $53,000 or 4.5%. Included in this decrease was a $132,000 decrease
in FDIC insurance expense from $144,000 in 1996 to $12,000 in 1997 resulting
from a reduction in deposit premiums. Offsetting this decline was an increase in
marketing expense from $122,000 for the first six months of 1996 to $132,000 for
the first six months of 1997, an increase of $10,000 resulting from the
marketing of insurance products that the Company began selling in first quarter
1997. Other expenses that increased included telephone expense which increased
from $70,000 in the first half of 1996 to $91,000 for the same period in 1997 as
a result of an upgrade in telecommunications lines. Training expenses also
increased as a result of the data processing upgrade.
Quarter to Quarter Analysis
Total interest income increased from $3,462,000 for second quarter 1996 to
$3,940,000 for the same period in 1997, an increase of $478,000 or 13.8%.
Interest income on average earning assets increased $328,000 due to an increase
in volume and $150,000 due to an increase in yields on earning assets. The
average amount of loans on non-accrual for second quarter 1997 and second
quarter 1996 were $3,558,000 and $5,623,000, respectively. Interest lost on
loans on non-accrual for second quarter 1997 and second quarter 1996 were
$93,000 and $132,000, respectively.
Total interest expense increased from $1,396,000 in second quarter 1996 to
$1,501,000 in second quarter 1996, an increase of $105,000 or 7.5%. Interest
expense increased $120,000 due to the increase in the volume of interest bearing
liabliities offset by a decline of $15,000 due to the decrease in average rates
paid on interest bearing liabilities.
Net interest income for the second quarter increased from $2,066,000 in 1996 to
$2,439,000 in 1997, an increase of $373,000. There was no provision for possible
loan losses in the second quarter of 1996 or 1997.
Total non-interest income increased from $655,000 in second quarter 1996 to
$707,000 in second quarter 1997, an increase of $52,000 or 7.9%. The increase
consists of recording an increase of $85,000 in other income which resulted from
income earned on executive life insurance policies. Commissions and fees
declined from $242,000 in second quarter 1996 to $199,000 in second quarter 1997
primarily as a result of a decline in commissions on full service brokerage and
annuity sales from $125,000 in second quarter 1996 to $99,000 in second quarter
1997.
Total non-interest expense decreased from $2,313,000 reported in second quarter
1996 to $2,268,000 for the second quarter in 1997, a decrease of $45,000 or
1.9%. Net (income) cost of operation of other real estate declined from $78,000
in net expenses for the second quarter of 1996 to $10,000 in net revenues for
the same period in 1997, a decrease of $88,000. Legal expense decreased from
$115,000 in second quarter 1996 to $32,000 in the second quarter of 1997, a
decrease of $83,000, and equipment expense increased $80,000 from $134,000 in
second quarter 1996 due to upgrades in computer systems as discussed above.
Other expenses declined from $612,000 in second quarter 1996 to $577,000 in
second quarter 1997, a decrease of $35,000. Decreases in other expenses included
a $12,000 decrease in marketing expense and a $67,000 decrease in FDIC fee
expense. Partially offsetting the impact of these expense declines were
increases in telephone expense and training expense.
Financial Condition
At June 30, 1997, loans were $122.8 million compared to $114.6 million reported
December 31, 1996, an increase of approximately $8.2 million or 7.2%. The
Company had no loans held for sale as of June 30, 1997, compared to $178,000 at
year-end 1996. Mortgage loans increased $6.5 million, or 19.5%, from $33.4
million at December 31, 1996 to $39.9 million at June 30, 1997. Commercial loans
declined from $51.1 million on
6
December 31, 1996 to $50.0 million on June 30, 1997, a decrease of $1.1 million
or 2.2%. Real estate construction loans have decreased from their year-end 1996
levels of $7.0 million to $5.8 million on June 30, 1997, a decrease of
$1,200,000 or 17.1%. Installment loans increased during this period from $23.1
million to $27.2 million, an increase of $4.0 million or 17.2%.
Investment securities and securities available for sale consist of the
following:
June 30, 1997
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $27,597 $163 $(25) $27,735
Mortgage backed securities:
U.S. agency issued 13,610 57 (164) 13,503
Other investments:
Federal Reserve Bank Stock 516 --- --- 516
Vanguard money market
fund 12,908 --- --- 12,908
Federal Home Loan Bank 878 --- --- 878
Marketable equity securities 35 6 --- 41
- -----------------------------------------------------------------------------------------
Securities available for sale $55,544 $226 $(189) $55,581
- -----------------------------------------------------------------------------------------
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $3,495 $22 $(2) $3,515
Mortgage backed securities:
U.S. agency issued 19,308 89 (69) 19,328
- -----------------------------------------------------------------------------------------
Securities held to maturity $22,803 $111 $(71) $22,843
- -----------------------------------------------------------------------------------------
December 31, 1996
- -----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $30,763 $275 $(27) $31,011
Mortgage backed securities:
U.S. agency issued 15,507 40 (180) 15,367
Other investments:
Federal Reserve Bank Stock 516 --- --- 516
Vanguard money market
fund 5,855 --- --- 5,855
Federal Home Loan Bank 786 --- --- 786
Marketable equity securities 35 5 --- 40
- -----------------------------------------------------------------------------------------
Securities available for sale $53,462 $320 $(207) $53,575
- -----------------------------------------------------------------------------------------
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $3,004 $29 $(1) $3,032
Mortgage backed securities:
U.S. agency issued 19,663 92 (89) 19,666
- -----------------------------------------------------------------------------------------
Securities held to maturity $22,667 $121 $(90) $22,698
- -----------------------------------------------------------------------------------------
7
At June 30, 1997, the contractual maturities of investment securities and
securities available for sale are as follows:
Securities
Investment securities Available for Sale
-----------------------------------------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------
Due in one year or less $502 $508 $9,546 $9,591
Due after one year through
five years 8,691 8,717 23,913 23,986
Due after five years but within 10
years 13,038 13,034 1,784 1,753
Due after 10 years 572 584 5,964 5,908
Federal Reserve Bank stock --- --- 516 516
Equity Securities --- --- 913 919
Vanguard money market fund --- --- 12,908 12,908
- ------------------------------------------------------------------------------------------------------
Securities held to maturity $22,803 $22,843 $55,544 $55,581
- ------------------------------------------------------------------------------------------------------
All securities in the Company's investment portfolio with the exception of
$35,000 in equity securities are either obligations of the U.S. Treasury or
backed by U.S. government agencies. Therefore, management's view is that little
credit risk exists in the portfolio. The Company's available for sale securities
are those which are held for an indefinite period of time which management may
use as part of its operating strategy or which may be sold as part of responses
to changes in interest rates, changes in prepayment risk or other similar
factors. Securities available for sale are recorded on the balance sheet at
their fair value.
Mortgage-backed securities are subject to prepayment risk in a declining rate
environment and to extension risk in an increasing rate environment. Prepayments
can lower the yield on securities that were purchased at a premium. The Company
manages the prepayment risk in its portfolio by purchasing its mortgage-backed
securities with a variety of coupon rates. Extension risk, on the other hand
increases the average life on a mortgage-backed security, without a
corresponding increase in yield. The Company minimizes its extension risk by
maintaining the majority of its mortgage-backed securities in balloon mortgage-
backed securities with original maturities of seven years or less.
Total deposits increased from approximately $188.9 million on December 31, 1996
to approximately $193.4 million on June 30, 1997, an increase of $4.5 million or
2.4%. During this period, non-interest bearing transaction accounts decreased
and interest bearing,savings and time accounts increased. Balances in non-
interest bearing transaction accounts decreased from $43.1 million at year-end
1996 to $41.8 million on June 30, 1997, a decrease of $1.3 million, or 3.0%.
Interest-bearing transaction accounts increased from $26.6 million on December
31, 1996 to $28.3 million on June 30, 1997, an increase of $1.7 million, or
6.4%. Savings deposits increased from $58.2 million to $59.6 million, an
increase of $1.4 million or 2.4%. Time accounts increased from $60.8 million to
$63.7 million, an increase of $2.9 million or 4.8%.
Non-performing loans, as the schedule below indicates, were $4.2 million at June
30, 1997, a decrease of 4.5% from the $4.4 million reported year-end 1996.
Non-performing assets at 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
Loans past due over 90 days $ 101 $ 29 $ 0 $ 120 $ 361
Loans on non-accrual 3,623 3,746 3,850 4,577 4,789
Troubled debt restructurings* 443 447 505 512 517
- ----------------------------------------------------------------------------------------------
Total non-performing loans 4,167 4,222 4,355 5,209 5,667
Other real estate 1,050 1,136 1,136 1,050 2,195
- ----------------------------------------------------------------------------------------------
Total non-performing assets $5,217 $5,358 $5,491 $6,259 $7,862
==============================================================================================
*Troubled debt restructurings as defined in SFAS No. 15 "Accounting by Debtors
and Creditors for Troubled Debt Restructurings"; excludes loans classified as
past due over 90 days or non-accrual.
Non-accrual loans decreased from $3.8 million reported at year-end 1996 to $3.6
million at June 30, 1997, a decrease of $200,000 or 5.3%. Other real estate
decreased $86,000 during the first six months of 1997 and decreased $1.1 million
from June 30, 1996. Generally, other real estate is appraised when title is
taken on the property unless there is a contract of sale or there is a valid
appraisal on file which conforms to regulatory guidelines. Upon transfer or
receipt of a new appraisal, the property's carrying value is adjusted to its
appraised
8
value less estimated costs of disposition if such value is lower than its
existing carrying value. Any reduction of the carrying value of the underlying
collateral is charged to the allowance for possible loan losses when the
property is recorded as other real estate. Appraisals thereafter are received in
accordance with regulatory guidelines. Throughout the year, properties are
generally inspected and marketing efforts reviewed to determine any potential
deterioration in value. Based on this continuing review and results of updated
appraisals as required, any further deterioration to the market value is
expensed to the net cost of operation of other real estate. During the first six
months of 1997, NBSC classified no new properties as other real estate. There
was one property sale of $86,000 and no writedowns of other real estate in the
first six months of 1997.
It is the Company's policy to establish specific reserves on properties included
in other real estate when the appraised fair value of the property does not
include certain estimated costs of disposition. When the costs that are
estimated are actually incurred, a charge-off is made to the specific reserve.
The following chart shows a comparative analysis of the quarterly level of
charge-offs and provisions made to the specific reserves for the six months
ended June 30, 1996 and 1997.
June 30, June 30,
(dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------
Beginning balance, January 1 $50 $ -
Provisions - 50
Charge-offs - -
-------- --------
Ending balance $50 $50
======= =======
Loans classified by management but not included above as non-performing assets
at June 30, 1997 include $2.1 million classified as "special mentioned" and $7.1
million classified as "substandard". These loans as of June 30, 1997 were not
past due over 90 days. As part of management's evaluation for the allowance for
possible loan losses, it has provided specific reserves for these loans as
deemed necessary. There were no loans as of June 30, 1997 other than those
classified as set forth in this paragraph or those included in the non-
performing loan table where the Company was aware of any credit conditions of
the borrower which would indicate a strong possibility that the borrower could
not comply with the present terms and conditions of repayment and which would
result in such loan being included as a non-accrual, past due or restructured
loan at some future time.
The allowance for possible loan losses increased from $4.0 million on December
31, 1996 to $4.1 million on June 30, 1997. The following chart indicates the
quarterly levels of loans charged off, recoveries of previously charged off
loans, provisions made to the allowance, quarterly ending balances of the
allowance, and the ratio of the allowance to non-performing loans.
For the quarter ended
----------------------------------------------
(dollars in thousands) 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
- ------------------------------------------------------------------------------
Beginning balance $4,060 $3,973 $3,961 $4,121 $4,428
Loans charged-off (28) (52) (108) (239) (442)
Loans recovered 81 139 120 79 135
----------------------------------------------
Net (charge-offs) recoveries 53 87 12 (160) (307)
Provision - - - - -
----------------------------------------------
Ending balance $4,113 $4,060 $3,973 $3,961 $4,121
==============================================
Ratio of allowance for
possible loan losses to
non-performing loans 98.7% 96.2% 91.2% 76.0% 72.7%
==============================================
No provision for possible loan losses was recorded for the first half of 1997.
NBSC's ratio of the allowance for possible loan losses to non-performing loans
has increased from the 72.7% reported June 30, 1996 to 98.7% on June 30, 1997
because of declines in non-performing loans resulting from payments in
connection with those loans, charge-offs and foreclosures. Net recoveries of
$140,000 in the first half of 1997 increased the allowance for possible loan
losses from December 31, 1996 to June 30, 1997. NBSC's management believes that
its allowance for possible loan losses is adequate because of the nature of its
methodology to monitor the allowance for possible loan losses. NBSC performs the
following procedures in order to evaluate the adequacy of the allowance for
possible loan losses: First, NBSC conducts a loan specific review each quarter.
This review assesses the estimated future losses for every loan classified as
non-performing, as well as performing loans which have been criticized (either
internally or by NBSC's regulators) which do not meet the requirements for non-
performing loan status. Second, management monitors on a periodic basis the
status of larger non-criticized credits for changes and developments which could
affect future collectibility. Third, NBSC assesses the potential for loan losses
in performing loans and off
9
balance sheet credit commitments, which are not specifically reviewed, by
estimating general reserve requirements based on historical and anticipated
collection statistics. The aggregate of specific credit review and general
reserve requirements are monitored at least quarterly to ensure that the level
of NBSC's allowance for possible loan losses is adequate. Management also
evaluates the adequacy of the allowance for possible loan losses based on trends
in non-performing loans and charge-offs, the Company's loan loss experience and
present and prospective economic conditions within the market area. Included in
the economic analysis is a review of appraisals received in accordance with
regulatory guidelines. Management incorporates any trends in the fair value of
the collateral underlying loans in its analysis of the adequacy of the allowance
for possible loan losses. As a result of this ongoing analysis, management
believes at this time that the allowance for possible loan losses is adequate to
absorb any additional losses that may arise in the loan portfolio, although no
assurances can be given that the Company will not sustain losses in any given
period which could be substantial in relation to the size of the Company's
allowance.
Liquidity
At NBSC, liquidity is typically provided by funds received through customer
deposits, investment sales and maturities, borrowings and net income. NBSC's
management believes the portfolio of securities available for sale, cash and due
from banks and federal funds sold currently provide sufficient liquidity to meet
anticipated operational liquidity requirements at NBSC. NBSC's ability to borrow
up to $17.5 million from the Federal Home Loan Bank also is a potential source
for short-term liquidity needs. In addition, the sale of loans is an alternative
method for meeting liquidity requirements.
At High Point, liquidity is provided by funds received from the subsidiary bank
in the form of dividends and by sale of High Point assets. NBSC, as a national
bank, is subject to dividend restrictions. Under such restrictions, NBSC may
not, without the prior approval of the Office of the Comptroller of the Currency
(the "OCC"), declare dividends in excess of the current year's earnings plus the
retained earnings from the prior two years. NBSC also is restricted from paying
dividends if at any time losses have been sustained by the bank that exceed its
retained earnings. As of June 30, 1997, NBSC's earnings for the current year
plus the retained earnings from the prior two years are $7,422,000. NBSC has
total retained earnings of $1,634,000 (net of the dividends discussed below) and
cannot pay dividends in excess of its retained earnings.
High Point paid in cash the final interest payment of $3,000 and remaining
$127,000 of Redeemable Subordinated Debentures on March 1, 1997.
During second quarter, 1997, High Point paid off its Note Payable secured by
land. At the time of payoff, High Point owed $821,000 at an interest rate of
prime plus one percent (9.50%). The lending bank agreed to a settlement on the
note of $770,000 plus outstanding interest. NBSC's Board of Directors declared a
$500,000 dividend to High Point to enable High Point to pay off the note. The
$51,000 of the debt forgiven is included in other income in the income
statement.
At June 30, 1997, High Point had $2,000 in cash and $90,000 in federal funds
sold available to meet its liquidity needs. High Point has securities available
for sale, which at June 30, 1997, had a market value of $11,000.
High Point has periodic expenses including legal fees, printing expenses,
external audit fees and other miscellaneous fees. NBSC's Board of Directors
declared an additional dividend of $100,000 paid to High Point on June 22, 1997
for payment of such expenses in 1997.
Another source of cash is the sale of the land held for sale. There is no
assurance that the land will be sold. The land continues to generate buyer
interest.
Effect of Interest Rates
A change in interest rates could affect NBSC's ability to earn net interest
income in the future. In the beginning of 1997, interest rates began to
increase. Present market indications are that interest rates will either remain
flat or decline. One tool that NBSC uses to measure the potential impact from
interest rate changes is the static gap report. The static gap report shows when
certain interest-earning assets and interest-bearing liabilities could
potentially reprice. Traditional gap theory holds that when a bank is asset-
sensitive (meaning that it has more interest rate-sensitive assets repricing
within a given time frame than interest rate-sensitive liabilities) and interest
rates increase, the bank's net interest margin should increase. If a bank is
liability-sensitive (meaning that is has more liabilities repricing in a given
time frame than assets), and interest rates increase, the net interest margin
should decrease. As of June 30, 1997, in a one year time frame, the Company's
interest rate-sensitive liabilities exceeded its interest rate-sensitive assets
by $36.4 million. What gap theory does not take into account is that when
interest rate changes occur they do not always affect rate-sensitive assets at
the same time or proportionately. In addition to gap analysis, management uses
simulation modeling under a variety of scenarios to estimate its interest rate
sensitivity. Based on management's analysis of its interest rate sensitivity, if
interest rates were to increase by 100 basis points, net interest income would
increase approximately $65,000 in a one year time frame. Conversely, if interest
rates were to decrease by 100 basis points, net interest income would decrease
by the same amount.
10
Capital Resources
Stockholders' equity increased $875,000 during the first six months of 1997 to
$20.9 million. The increase in stockholders' equity resulted from recording net
income in the first quarter of 1997. Partially offsetting the positive impact of
net income on capital was a decline in the market value of the Company's
available for sale security portfolio. The Company recorded an unrealized gain
on securities available for sale of $24,000 (net of taxes) at June 30, 1997
compared to an unrealized gain of $76,000 at year-end 1996. The book value
(total of stockholders' equity divided by the number of common shares issued and
outstanding) of the Company's common stock was $5.51 at June 30, 1997 compared
to the $5.28 reported at December 31, 1996.
High Point and NBSC are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators, that if undertaken could have a direct
material effect on the Company or NBSC's financial statements. Quantitative
measures established by regulation to ensure capital adequacy require the
Company and NBSC to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined). Management believes, as of June 30, 1997, that the
Company and NBSC meet all capital adequacy requirements to which they are
subject.
As of June 30, 1997, the most recent notification from the OCC categorized NBSC
as well capitalized under the regulatory framework for prompt corrective action.
Similarly, the most recent notification from the Federal Reserve Bank of New
York categorized the Company as well capitalized. To be well capitalized NBSC
and the Company must maintain minimum total risk based, Tier I risk-based and
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institutions' category.
The following chart represents the capital ratios of the Company and its
subsidiary, NBSC, on June 30, 1997, compared to minimum regulatory requirements:
Minimum
Required to be
Minimum Well Capitalized
Required for Under Prompt The
Capital Adequacy Corrective Action Company NBSC
Purposes Provisions 6/30/97 6/30/97
- ---------------------------------------------------------------------------------------------------------------
Leverage Ratio 4.00% 5.00% 8.90% 8.08%
Risk Based:
Tier I 4.00% 6.00% 16.06% 14.67%
Tier I plus Tier II 8.00% 10.00% 17.33% 15.95%
Effect of Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share and SFAS No.
129, Disclosure of Information about Capital Structure. The purpose of SFAS No.
128 is to harmonize the earnings per share ("EPS") calculation with those common
in other countries and to simplify the calculation requirements contained in APB
Opinion No. 15, Earnings per Share. The major change to be implemented by SFAS
No. 128 is that primary EPS will be replaced by "Basic EPS." Basic EPS is
computed by dividing earnings available to common shareholders by weighted
average shares outstanding. No dilution for any potentially dilutive securities
is included. Fully diluted EPS will now be called dilutive EPS. When applying
the treasury stock method for diluted EPS, to compute dilution for options and
warrants, a company uses its average share price for the period, rather than the
more dilutive greater of the average share price or end of period share price
required by APB Opinion No. 15.
SFAS No. 128 is effective for financial statements for interim and annual
periods ending after December 31, 1997 with earlier application prohibited.
Management does not anticipate that the adoption of this statement will have an
impact on the financial condition of the Company because the Company's current
EPS calculation is the same as what the basic EPS calculation will be. Options
granted under the Company's stock option plans have been excluded from the
calculation because their effect is immaterial.
SFAS No. 129 requires the disclosure of the rights and privileges of all
securities other than ordinary common stock. SFAS No. 129 is also effective for
financial statements for periods ending after December 15, 1997. Management does
not expect that the implementation will have any impact on the Company's
financial statements because the only securities the Company has issued and
outstanding is ordinary common stock.
11
HIGH POINT FINANCIAL CORP. Computation of Net Income Per Share - (Unaudited)
Six months ended June 30,
----------------------------
Net Income Per Share (Primary) 1997 1996
----------------------------------------------------------------------------------------------------------
Net income $946,000 $1,533,000
After-tax interest expense related to the assumed reduction of outstanding debt* --- ---
----------------------------------------------------------------------------------------------------------
(1)Income applicable to common stock $946,000 $1,533,000
==========================================================================================================
Shares used in this computation:
Weighted average number of common shares outstanding 3,786,480 3,772,168
Number of shares issuable on conversion of mandatory stock purchase contracts and
exercise of stock options classified as common share equivalents* --- ---
----------------------------------------------------------------------------------------------------------
(2)Adjusted weighted average number of common shares and common share
equivalents * 3,786,480 3,772,168
==========================================================================================================
Net income per common share and common share equivalents (primary)
(1 divided by 2) * $0.25 $0.41
==========================================================================================================
* The after-tax interest expense related to the assumed reduction of
outstanding debt, the number of shares issuable on conversion of
mandatory stock purchase contracts classified as common share
equivalents are excluded from the 1996 and 1997 computation since their
effect is immaterial.
12
Part II Other Information
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On April 24, 1997, at the annual meeting, Michael A. Dickerson, Larry R.
Condit and Richard M. Roy were re-elected, by the common shareholders,
as directors of High Point. The votes were as follows:
For Abstain
--------------------
Michael A. Dickerson 2,605,291 21,451
Larry R. Condit 2,603,453 23,289
Richard M. Roy 2,605,559 21,183
The total number of shares of High Point Financial Corp. common stock
outstanding as of March 14, 1997, the record date for the annual
meeting, was 3,786,480.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11. Computation of net income per share is filed with Part I of
this report.
(b) Reports on Form 8-K.
None.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
High Point Financial Corp.
--------------------------
(Registrant)
Dated: August 8, 1997
- ------------------------
By /s/ Rita A. Myers By /s/ Gregory W. A. Meehan
- ------------------------ ----------------------------------
Rita A. Myers Gregory W. A. Meehan
Comptroller Vice President and Treasurer
14