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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, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-12430
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HIGH POINT FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2426221
- - ------------------------------- ------------------
(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) (Zip Code)
(973) 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, 1998, there were 3,786,480 shares outstanding of Common Stock, no
par value.
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<CAPTION>
HIGH POINT FINANCIAL CORP.
Form 10-Q Index
PAGE
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Part I Financial Information
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1998 (unaudited) and December 31, 1997 ................. 1
Consolidated Income Statements - Unaudited Three Months and Six Months Ended
June 30, 1998 and 1997 ................................................................... 2
Consolidated Statements of Changes in Shareholders' Equity -Unaudited Six Months
Ended June 30, 1998 and 1997 ............................................................. 3
Consolidated Statements of Cash Flows - Unaudited Six Months Ended June 30,
1998 and 1997 ............................................................................ 4
Notes to Consolidated Financial Statements (unaudited) ........................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ........................................................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................................... 19
Part II Other Information
Item 1. Legal Proceedings ............................................................................. 19
Item 2. Changes in Securities and Use of Proceeds ..................................................... 19
Item 3. Defaults Upon Senior Securities ............................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 19
Item 5. Other Information ............................................................................. 20
Item 6. Exhibits and Reports on Form 8-K .............................................................. 20
</TABLE>
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.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
June 30, 1998 December 31,
(unaudited) 1997
-------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................................................ $ 13,265 $ 9,789
Federal funds sold ............................................................................. 17,705 11,200
-------- --------
Total cash and cash equivalents .......................................................... 30,970 20,989
Securities:
Available for sale, at fair value ............................................................ 55,219 52,854
Held to maturity, at cost (market value of $22,514 in 1998 and
$24,923 in 1997) .......................................................................... 22,373 24,766
-------- --------
Total securities ........................................................................ 77,592 77,620
Loans held for sale ............................................................................ -- 88
Loans .......................................................................................... 135,557 126,687
Add: Deferred expenses ...................................................................... 126 35
Less: Allowance for possible loan losses .................................................... (4,132) (4,120)
-------- --------
Net loans ............................................................................ 131,551 122,602
Land held for sale ............................................................................. 1,865 1,865
Premises and equipment - net ................................................................... 3,094 3,135
Accrued interest receivable .................................................................... 1,273 1,315
Other real estate .............................................................................. 950 989
Cash surrender value of life insurance policies ................................................ 5,275 5,147
Other assets ................................................................................... 2,644 2,578
-------- --------
TOTAL ASSETS .............................................................................. $255,214 $236,328
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts:
Interest bearing ........................................................................... $34,134 $31,447
Non-interest bearing ....................................................................... 46,889 40,366
Savings accounts ............................................................................. 63,402 61,498
Time accounts (includes CDs $100 or over of $8,981 and $7,623
on June 30, 1998 and December 31, 1997, respectively) ..................................... 67,558 65,119
-------- --------
Total deposits ........................................................................... 211,983 198,430
Securities sold under agreements to repurchase ................................................ 12,424 8,201
Long-term debt ................................................................................ 5,000 5,000
Accrued expenses and other liabilities ........................................................ 2,470 2,354
-------- --------
Total liabilities ........................................................................ 231,877 213,985
-------- --------
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
10,000,000 and 5,000,000 shares on June 30, 1998 and
December 31, 1997, respectively, outstanding 3,786,480 shares .............................. 18,932 18,932
Additional Paid-in-Capital .................................................................... 5,749 5,767
Accumulated Deficit ........................................................................... (1,553) (2,517)
Accumulated other comprehensive income ........................................................ 209 161
-------- --------
Total stockholders' equity ................................................................. 23,337 22,343
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................. $255,214 $236,328
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
1
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<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENTS - (UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest income and fees on loans ........................ $2,908 $2,659 $5,739 $5,200
Interest on securities - taxable ......................... 1,095 1,190 2,291 2,390
Interest on securities - non-taxable ..................... 11 -- 12 --
Interest on federal funds sold and
deposits with other banks ............................. 202 91 379 144
------ ------ ------ ------
TOTAL INTEREST INCOME ................................ 4,216 3,940 8,421 7,734
------ ------ ------ ------
INTEREST EXPENSE
Interest on deposits ..................................... 1,529 1,425 3,035 2,796
Interest on other borrowed money ......................... 103 65 206 120
Interest on note payable and other
long-term debt ........................................ 71 11 150 32
------ ------ ------ ------
TOTAL INTEREST EXPENSE ............................... 1,703 1,501 3,391 2,948
------ ------ ------ ------
NET INTEREST INCOME ...................................... 2,513 2,439 5,030 4,786
Less: Provision for possible loan losses ................. -- -- -- --
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES ................................... 2,513 2,439 5,030 4,786
------ ------ ------ ------
NON-INTEREST INCOME
Service charges on deposit accounts ...................... 324 348 651 706
Commissions and fees ..................................... 212 199 460 398
Loss on sale of securities ............................... -- (9) -- (9)
Gain on sale of loans .................................... 33 -- 33 --
Gain on sale of bank premises and equipment .............. 27 38 62 61
Other income ............................................. 83 131 167 267
------ ------ ------ ------
TOTAL NON-INTEREST INCOME ............................ 679 707 1,373 1,423
------ ------ ------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits ........................... 1,289 1,231 2,510 2,522
Net occupancy expense .................................... 229 224 455 467
Equipment expense ........................................ 205 214 401 417
Legal expense ............................................ 63 32 131 95
Net cost of operation of other real estate ............... 4 (10) 12 1
Other expenses ........................................... 620 577 1,251 1,121
------ ------ ------ ------
TOTAL NON-INTEREST EXPENSE ........................... 2,410 2,268 4,760 4,623
------ ------ ------ ------
Income before provision for income taxes ................. 782 878 1,643 1,586
Provision for income taxes ............................... 332 354 679 640
------ ------ ------ ------
NET INCOME ............................................... $450 $524 $964 $946
------ ------ ------ ------
BASIC AND DILUTED EARNINGS PER COMMON SHARE .............. $0.12 $0.14 $0.25 $0.25
====== ====== ====== ======
WEIGHTED AVERAGE COMMON SHARE
AND COMMON SHARE EQUIVALENTS ........................... 3,786 3,786 3,786 3,786
====== ====== ====== ======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY-(Unaudited)
(dollars in thousands)
Accumulated
Other
Comprehensive Accumulated Comprehensive Common Additional Treasury
TOTAL Income Deficit Income Stock Paid-in-Capital Stock
----- ------------- ----------- ------------- ----- --------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 ................. $19,977 ($4,822) $ 76 $18,932 $5,791 $--
Comprehensive income
Net Income - first six months 1997 ..... 946 $946 946 -- -- -- --
Other comprehensive income, net of tax
Unrealized losses on securities
available for sale, net of
($28) in tax ..................... (52) (52) -- -- -- --
----
Other comprehensive income ............. (52) (52)
----
Comprehensive income ...................... $894
====
Purchase of treasury stock ................ (38) -- -- -- -- (38)
Exercise of stock options ................. 19 -- -- -- (19) 38
------- ------- ---- ------- ------ -----
BALANCE JUNE 30, 1997 ..................... $20,852 ($3,876) $ 24 $18,932 $5,772 $--
======= ======= ==== ======= ====== =====
BALANCE DECEMBER 31, 1997 ................. 22,343 (2,517) 161 18,932 5,767 --
Comprehensive income
Net Income - first six months 1998 ..... 964 964 964
Other comprehensive income, net of tax
Unrealized gains on securities
available for sale, net of
$22 in tax ......................... 48 48 -- -- -- --
------
Other comprehensive income ............. 48 48
------
Comprehensive income ...................... $1,012
======
Purchase of treasury stock ................ (38) -- -- -- -- (38)
Exercise of stock options ................. 20 -- -- -- (18) 38
------- ------- ---- ------- ------ -----
BALANCE JUNE 30, 1998 ..................... $23,337 ($1,553) $209 $18,932 $5,749 $--
======= ======= ==== ======= ====== =====
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars in thousands) Six Months Ended June 30,
---------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................................................. $ 964 $ 946
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............................................................ 304 283
Amortization of securities discount, net ................................................. 176 7
Net cash paid related to discount (premium) on matured securities ........................ 148 (27)
Loan fees amortized, net ................................................................. (91) (12)
Deferred income tax provision ............................................................ 135 612
Loss on sale of securities ............................................................... -- 9
Gain on sale of premises and equipment ................................................... (62) (61)
Increase in accrued interest receivable and other assets ................................. (269) (207)
Increase in accrued expenses and other liabilities ....................................... 179 184
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................................................. 1,484 1,734
------- -------
INVESTING ACTIVITIES
Proceeds from sales of available for sale securities ..................................... -- 1,991
Proceeds from maturity of securities:
Available for sale ..................................................................... 6,639 6,110
Held for maturity ...................................................................... 6,420 1,854
Purchase of securities:
Available for sale ..................................................................... (9,196) (10,152)
Held for maturity ...................................................................... (4,089) (2,012)
Net decrease of interest bearing deposits with banks ..................................... -- 123
Net increase in loans .................................................................... (8,770) (7,857)
Capital expenditures ..................................................................... (265) (673)
Proceeds from sale of premises and equipment ............................................. -- 14
------- -------
NET CASH USED IN INVESTING ACTIVITIES ...................................................... (9,261) (10,602)
------- -------
FINANCING ACTIVITIES
Net increase in deposits ................................................................. 13,553 4,550
Increase in federal funds purchased and
securities sold under agreements to repurchase ......................................... 4,223 7,578
Repayments of long-term debt principal ................................................... -- (973)
Purchase of treasury stock ............................................................... (38) (38)
Exercise of stock options ................................................................ 20 19
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................................................. 17,758 11,136
------- -------
Net increase in cash and cash equivalents .................................................. 9,981 2,268
Cash and cash equivalents, beginning of period ............................................. 20,989 14,528
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................... $30,970 $16,796
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID ............................................................................ $ 3,327 $ 2,903
INCOME TAXES PAID ........................................................................ 557 27
======= =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION.
This quarterly report presents the consolidated financial statements of High
Point Financial Corp. ("High Point") and its subsidiary, The National Bank of
Sussex County ("NBSC"). The term "Company" refers to High Point and NBSC as a
consolidated entity.
The Company's financial statements reflect all adjustments and disclosures which
management believes are necessary for a fair presentation of interim results.
The results of operations for the two quarters presented do not necessarily
indicate the results that the Company will achieve for all of 1998. You should
read these interim financial statements in conjunction with the consolidated
financial statements and accompanying notes that are presented in the High Point
Financial Corp. Annual Report on Form 10-K for the year ended December 31, 1997.
The financial information in this quarterly report has been prepared in
accordance with the Company's customary accounting practices; these financial
statements have not been audited. Certain information and footnote disclosures
required under generally accepted accounting principles have been condensed or
omitted, as permitted by rules and regulations of the Securities and Exchange
Commission.
NOTE 2. INTEREST.
The line item for "Accrued expenses and other liabilities" includes accrued
interest expense of $736,000 at June 30, 1998 and $672,000 at December 31, 1997.
NOTE 3. RELATED PARTY TRANSACTIONS.
The line item for "Net occupancy expense" includes rent on certain properties
that the Company leases from FMI, Inc. FMI, Inc. is a wholly-owned subsidiary of
Franklin Mutual Insurance Company, which owns 6.6% of High Point's outstanding
common stock. The Company paid total rent of $189,000 to FMI, Inc. for the first
six months of 1998, and $185,000 for the first six months of 1997.
NOTE 4. EARNINGS PER SHARE.
BASIC EARNINGS PER SHARE for a particular period of time is calculated by
dividing net income by the weighted average number of common shares outstanding
during that period.
DILUTED EARNINGS PER SHARE is calculated by dividing net income by the weighted
average number of outstanding common shares and common share equivalents. High
Point's only outstanding "common share equivalents" are options to purchase its
common stock.
The Company adopted Statement of Accounting Standards No. 128, "Earnings Per
Share," effective December 31, 1997. Earnings per share reported for all prior
periods have been restated to implement the guidelines in that accounting
statement.
NOTE 5. IMPAIRED LOANS.
NBSC adopted Statement of Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" (known as "SFAS No. 114"), and Statement of Accounting
Standards 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.
The following table shows NBSC's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 as of June 30, 1998
and 1997, and the average recorded investment in impaired loans during the six
months preceding those dates:
5
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- - --------------------------------------------------------------------------------
AVERAGE RECORDED
INVESTMENT (OVER
DATE INVESTMENT VALUATION ALLOWANCE PRECEDING SIX MONTHS)
- - --------------------------------------------------------------------------------
June 30, 1998 $2.96 million $394,000 $2.95 million
- - --------------------------------------------------------------------------------
June 30, 1997 $3.88 million $627,000 $3.81 million
- - --------------------------------------------------------------------------------
Interest received on impaired loans ordinarily is recorded as interest income.
However, if management is not reasonably certain that an impaired loan will be
repaid in full, all payments received are recorded as reductions of principal.
NBSC recognized interest on impaired loans of $91,000 in the first six months of
1998 and $97,000 in the first six months of 1997.
At June 30, 1998, NBSC had $406,000 of loans that resulted from troubled debt
restructurings that occurred prior to the date that NBSC adopted SFAS No. 114.
NBSC continues to account for these loans under the requirements of Statement of
Financial Accounting Standards No. 15, "Troubled Debt Restructurings," which
preceded SFAS No. 114. If NBSC had recognized interest on these troubled loans
at original contractual rates as required by SFAS No. 114, rather than at
renegotiated rates as required by SFAS No. 15, the effect on income for the
first six months of 1998 would not have been material.
NOTE 6. COMPREHENSIVE INCOME.
During the first quarter of 1998, the Company implemented Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
The objective of SFAS No. 130 is to show "comprehensive income" and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements.
"Comprehensive income" is the total of net income and all other "non-stockholder
changes in equity." There are several types of "non-stockholder changes in
equity," but the only one that is relevant for the Company is unrealized holding
gains/losses on securities classified as available for sale. Transactions with
stockholders, such as proceeds from the sale of stock and the payment of
dividends, are not part of comprehensive income.
The following chart shows the Company's comprehensive income as of June 30, 1998
and 1997.
(dollars in thousands) June 30, 1998 June 30, 1997
------------- -------------
Unrealized gain/(loss) on securities:
Unrealized holding gains/(losses)
arising during period ....................... $70 $(67)
Less: reclassification adjustment for
gains/(losses) included in net income ....... -- 9
--- ----
Net unrealized gains/(losses) ............... 70 (76)
Tax expense or benefit ........................ 22 (24)
Other comprehensive income .................... $48 $(52)
=== ====
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
You should read this section in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in High
Point's Annual Report on Form 10-K for the period ended December 31, 1997
because that section contains more detailed information about certain accounting
concepts and the Company's policies than this quarterly report does.
6
<PAGE>
SUMMARY
This quarterly report explains the following trends in the Company's financial
condition and operating results:
o NET INCOME increased by 1.9% from June 30, 1997 to June 30, 1998. See " -
Results of Operations (Second quarter 1998 compared to second quarter 1997)
- Net Income."
o ASSETS increased by 8% from December 31, 1997 to June 30, 1998. See " -
Financial Condition - Loans," "Securities," and " - Liquidity."
o DEPOSITS increased by 6.8% from December 31, 1997 to June 30, 1998. See " -
Financial Condition - Deposits."
o TOTAL LOANS increased by 7.0% from December 31, 1997 to June 30, 1998. See
" - Financial Condition - Loans."
RESULT OF OPERATIONS
(FIRST SIX MONTHS OF 1998 COMPARED TO FIRST SIX MONTHS OF 1997)
NET INCOME.
Net income for the first six months of 1998 was $964,000, compared to $946,000
for the same period last year, an increase of $18,000. Net income increased from
the first half of 1997 to the first half of 1998 primarily because of an
increase in the Company's earning assets (i.e., loans and investments). Earnings
on those assets were partially offset by an increase in NBSC's interest expense
and by a decline in the yield on earning assets.
See " - Net Interest Income."
The increase in net income had the following effect on three other measurements
of the Company's financial condition:
o BASIC EARNINGS PER SHARE were $0.25 for the first six months of 1998,
compared to $0.25 for the first six months of 1997. The calculation of
"basic earnings per share" is explained in Note 4 of the Notes to
Consolidated Financial Statements.
o RETURN ON AVERAGE ASSETS, which is annualized net income as a percent of
average assets, was 0.80% for the first six months of 1998, compared to
0.86% for the same period in 1997. This ratio declined because average
assets increased by more than net income.
o RETURN ON AVERAGE EQUITY, which is annualized net income as a percent of
average equity, was 8.38% for the first six months of 1998, compared to
9.26% for the same period in 1997. This ratio declined because equity
increased by more than net income.
NET INTEREST INCOME.
Net interest income is the difference between interest income on earning assets
and the interest cost of funds supporting those assets. Net interest income for
the first six months of 1998 was $5.03 million, compared to $4.79 million for
the same period last year. The 5.0% increase in net interest income was the
result of a $22.1 million increase in average earning assets from the first six
months of 1997 to the first six months of 1998.
TOTAL INTEREST INCOME. Total interest income increased from $7.73 million in the
first six months of 1997 to $8.42 million in the first six months of 1998, an
increase of $687,000. An increase in average earning assets caused total
interest income to increase by $850,000, but that increase was offset by a
decline in the average yield on earning assets, which reduced interest income by
$163,000.
Interest earned on loans. NBSC earned $539,000 more interest from loans,
primarily because average loans outstanding increased from $116.7 million in the
first six months of 1997 to $129.6 million in the first six months of 1998. In
addition, non-performing loans continue to decline, so those loans are having a
progressively smaller impact on interest income. Average non-accrual loans (the
largest subset of non-performing loans) declined from $3.66 million in the first
six months of 1997 to $2.78 million during the same period of 1998. If all of
those non-accrual loans had been current, the Company would have earned $141,000
more interest in the first six months of 1998, compared to $194,000 more
interest in the first six months of 1997.
7
<PAGE>
Interest earned on securities. Total interest income on securities was $2.3
million for the first six months of 1998, compared to $2.39 million for the
first six months of 1997. A decline in the yields on new investments caused most
of the decline in interest income. In general, average investments outstanding
decreased slightly, from $76.4 million in the first half of 1997 to $75.6
million in the first half of 1998. However, average balances of federal funds
sold increased from $6.7 million in the first six months of 1997 to $13.8
million in the first six months of 1998. As a result, interest on federal funds
sold increased from $144,000 to $379,000.
TOTAL INTEREST EXPENSE. Total interest expense increased from $2.95 million in
the first six months of 1997 to $3.39 million in the first six months of 1998,
an increase of $443,000. Most of this 15.0% increase was caused by an increase
in average interest-bearing liabilities- from $158.2 million in the first half
of 1997 to $176.6 million in the first half of 1998 resulting in $353,000 in
increased interest expense for the first half of 1998. An increase in average
rates paid for deposits also contributed $90,000 to the increase in interest
expense.
NON-INTEREST INCOME.
Non-interest income for the first six months of 1998 was $1.37 million, compared
to $1.42 million for the same period in 1997. Two components of non-interest
income (service charges and "other income") declined, while a third component
(the sum of commissions and fees) increased.
Service charges on demand accounts declined from $706,000 in the first six
months of 1997 to $651,000 in the first six months of 1998, primarily because
fewer customers overdrew their accounts, so NBSC imposed fewer overdraft
charges. "Other income" declined from $267,000 in the first six months of 1997
to $167,000 in the first six months of 1998 because the Company recorded two
non-recurring items of "other income" in the first half of 1997: $60,000 in
insurance proceeds and $51,000 in forgiven debt.
Commissions and fees increased from $398,000 in first six months of 1997 to
$460,000 for the first six months of 1998, primarily because NBSC began
collecting fees for non-customer ATM transactions in third quarter 1997.
NON-INTEREST EXPENSE.
Non-interest expense for the first six months of 1998 was $4.76 million,
compared to $4.62 million for the first six months of 1997. This increase came
from three sources:
o Legal expense increased from $95,000 to $131,000 because of expenses
arising from a reorganization of the Company's financial services delivery
system.
o Net cost of operation of other real estate increased from $1,000 to $12,000
because the Company recorded fewer gains on sales of other real estate
during the first half of 1998 than during the first half of 1997.
o Other expenses increased from $1.12 million to $1.25 million because the
Company implemented programs to improve customer service representatives'
sales skills and to outsource sales of non-traditional products. These
initiatives increased expenses for training and for marketing.
RESULTS OF OPERATIONS
(SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997)
NET INCOME.
Net income for second quarter 1998 was $450,000, compared to $524,000 for the
same period last year, a decrease of $74,000. Net income decreased primarily
because non-interest income declined and non-interest expense increased. See " -
Non-interest Income" and " - Non-interest Expense."
8
<PAGE>
The decrease in net income caused three other measures to decline as well:
o BASIC EARNINGS PER SHARE were $0.12 for second quarter 1998, compared to
$0.14 for second quarter 1997.
o RETURN ON AVERAGE ASSETS was 0.73% for second quarter 1998, compared to
0.94% for the same period in 1997.
o RETURN ON AVERAGE EQUITY was 7.76% for second quarter 1998, compared to
10.18% for the same period in 1997.
NET INTEREST INCOME.
Net interest income for second quarter 1998 was $2.51 million, compared to $2.44
million for the same period last year. The principal source of this increase was
an increase in average earning assets from second quarter 1997 to second quarter
1998.
TOTAL INTEREST INCOME. Total interest income increased from $3.94 million in
second quarter 1997 to $4.22 million in second quarter 1998, an increase of
$276,000. Total interest income increased by $413,000 because of an increase in
average earning assets. That increase was reduced by $137,000 because of a
decline in the average yield on earning assets.
Interest earned on loans. Interest income on loans increased by $249,000,
primarily because average loans outstanding increased and the percentage of
those loans that are non-performing decreased. Average non-accrual loans
declined from $3.56 million in second quarter 1997 to $2.8 million during second
quarter 1998. If all of those non-accrual loans had been current, the Company
would have earned $67,000 more interest in the first half of 1998, compared to
$93,000 more interest in the first half of 1997.
Interest earned on securities. Interest income on securities decreased from
$1.19 million in second quarter 1997 to $1.11 million in second quarter 1998
because the two items that determine interest income declined: average
securities outstanding declined from $75.8 million to $74.9 million, and yields
on securities also declined. Interest income on federal funds sold increased
from $91,000 in second quarter 1997 to $202,000 in second quarter 1998 because
average federal funds sold increased from $6.7 million to $14.4 million.
TOTAL INTEREST EXPENSE. Total interest expense increased from $1.5 million in
second quarter 1997 to $1.7 million in second quarter 1998, an increase of
$202,000. An increase in deposit volume caused $165,000 of this added expense;
an increase in average rates paid on deposits contributed to the remaining
$37,000 increase.
NON-INTEREST INCOME.
Non-interest income for second quarter 1998 was $679,000, compared to $707,000
for the same period in 1997. Two components of non-interest income increased.
"Commissions and fees" increased because NBSC was collecting fees for
non-customer ATM transactions in second quarter 1998 but not in second quarter
1997. Gains on sales of loans increased because the Company earned a net amount
of $33,000 in second quarter 1998 from the sale of mortgage loans. However,
those increases were offset by declines in service charges (particularly
overdraft charges) and "other income" (which decreased because the Company
recorded a non-recurring item of other income in second quarter 1997).
NON-INTEREST EXPENSE.
Non-interest expense for second quarter 1998 was $2.41 million, compared to
$2.27 million for second quarter 1997. Most of this increase was in the category
of salary and benefit expense. That item increased by $58,000 from second
quarter 1997 to second quarter 1998, primarily because the Company recorded
severance payments to employees whose positions were terminated in second
quarter 1998. Legal expenses increased from $32,000 in second quarter 1997 to
$63,000 in second quarter 1998 as a result of a reorganization in the Company's
financial services delivery system.
FINANCIAL CONDITION
At June 30, 1998, the consolidated assets of the Company were $255.2 million, an
increase of $18.9 million from the $236.3 million reported at year-end 1997.
9
<PAGE>
DEPOSITS.
Total deposits increased from $198.4 million on December 31, 1997 to $212.0
million on June 30, 1998, an increase of $13.6 million. The level of deposits in
NBSC's four types of accounts changed as follows during that six month period:
o NON-INTEREST BEARING TRANSACTION ACCOUNTS increased from $40.4 million to
$46.9 million, an increase of $6.5 million (16.1%), primarily as a result
of seasonal increases.
o INTEREST BEARING TRANSACTION ACCOUNTS increased from $31.4 million to $34.1
million, an increase of $2.7 million (8.6%).
o SAVINGS ACCOUNTS increased from $61.5 million to $63.4 million, an increase
of $1.9 million (3.1%).
o TIME DEPOSITS increased from $65.1 million to $67.6 million, an increase of
$2.5 million (3.8%). A significant amount of this increase was in time
deposits with balances of $100,000 or more. These accounts increased from
$7.6 million at year-end 1997 to $9.0 million on June 30, 1998, primarily
because of an increase in municipal deposits.
LOANS.
Total loans increased from $126.7 million at December 31, 1997 to $135.6 million
on June 30, 1998, an increase of $8.9 million. The composition of the loan
portfolio during that six month period changed as follows:
o COMMERCIAL LOANS decreased from $46.1 million to $41.7 million, a decrease
of $4.4 million (9.5%).
o REAL ESTATE CONSTRUCTION LOANS decreased from $7.0 million to $6.9 million,
a decline of $133,000 (0.02%).
o REAL ESTATE MORTGAGE LOANS increased from $45.0 million to $57.3 million,
an increase of $12.3 million (27.3%).
o INSTALLMENT LOANS increased from $28.6 million to $29.6 million, an
increase of $1.0 million (3.5%).
Real estate mortgage loans and installment loans have increased because of high
demand for these products in the Sussex County region, which is NBSC's market
area. In contrast, commercial demand has been low. NBSC has not been able to
replace repaid commercial loans with a comparable volume of new loans.
NBSC began selling 30-year mortgages in the secondary market during second
quarter 1998 because those loans are in demand and management can reduce NBSC's
interest rate risk by reducing its portfolio of long term, fixed rate assets.
(For an explanation of "interest rate risk," see " - Securities Portfolio.")
NBSC sold $1.7 million in mortgages during second quarter 1998. The Company did
not have any loans designated "held for sale" as of June 30, 1998.
NON-PERFORMING ASSETS.
Non-performing assets increased from $4.4 million at year-end 1997 to $4.6
million on June 30, 1998 because of a slight increase in non-performing loans.
The following table itemizes non-performing assets at each quarter end from June
30, 1997 to June 30, 1998:
<TABLE>
<CAPTION>
Non-performing assets at 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97
- - ------------------------ ------- ------- -------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans past due over 90 days ................ $ 201 $ 183 $ 4 $ 115 $ 101
Loans on non-accrual ....................... 2,909 2,845 2,843 3,696 3,623
Troubled debt restructurings* .............. 406 411 413 424 443
------ ------ ------ ------ ------
Total non-performing loans ................. 3,516 3,439 3,260 4,235 4,167
Other real estate .......................... 1,050 1,110 1,110 1,071 1,050
------ ------ ------ ------ ------
Total non-performing assets ................ $4,566 $4,549 $4,370 $5,306 $5,217
====== ====== ====== ====== ======
</TABLE>
- - ------------
* 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.
10
<PAGE>
NON-PERFORMING LOANS. There are three types of non-performing loans: loans that
are past due 90 days or more but still accruing interest, non-accrual loans, and
renegotiated loans. Federal banking regulators have created other designations,
such as "other assets especially mentioned" and "substandard," for certain loans
that appear to warrant particular attention. Every non-performing loan is in one
of these categories, and so are some performing loans.
Loans past due 90 days or more increased from $4,000 at year-end 1997 to
$201,000 at June 30, 1998, an increase of $197,000. Every loan that is past due
90 days or more and still accruing interest is considered to be "in process of
collection," which means that there is sufficient collateral to cover the
defaulted principal and interest payments, and management is confident that the
loan will be satisfied through foreclosure or a third party payment in the near
future.
Non-accrual loans increased marginally from $2.84 million at year-end 1997 to
$2.91 million on June 30, 1998 because one additional loan was designated
"non-accrual." The level of renegotiated loans remained virtually unchanged.
At June 30, 1998, NBSC had $1.3 million in performing loans classified as "other
assets especially mentioned," and $4.9 million in performing loans classified as
"substandard." NBSC did not have any loans that fit within the regulators' other
"adverse" categories. The Company is not aware of any loans outstanding as of
June 30, 1998, other than those that already have adverse classifications, that
are likely to become non-performing in the future.
OTHER REAL ESTATE. Other real estate is property that the NBSC acquires when it
forecloses on the collateral for a defaulted loan. Other real estate declined by
$60,000 from the $1.1 million reported at year-end 1997 because NBSC sold one
property. NBSC did not record any new "other real estate" in the first six
months of 1998.
Management obtains an appraisal on other real estate when the Company takes
title to the property unless the Company already has a contract of sale, or an
appraisal that conforms to regulatory guidelines. Thereafter, the Company
obtains and reviews appraisals as often as required by regulators, generally
every two years.
When the Company acquires other real estate, or obtains a new appraisal on other
real estate that it already owns, management records the carrying value of the
property as the appraised value less estimated costs of disposition. If a new
parcel of other real estate is appraised at less than the outstanding balance of
the loan it secured, the difference is charged to the allowance for possible
loan losses when the property is recorded as other real estate. Based on
management's continuing review of market conditions and updated appraisals, the
Company will charge any subsequent decline in market value to the net cost of
operation of other real estate. For the first six months of 1998, there were no
charge-offs on other real estate.
When the appraised fair value of a parcel of other real estate does not include
certain costs of disposition, the Company establishes a specific reserve or
allowance for other real estate. Management will make a charge-off to that
reserve when the Company actually incurs disposition costs. The following table
shows the level of provisions to the allowance for other real estate and
charge-offs against specific reserves for the six months ended June 30, 1998 and
1997.
June 30, June 30,
(dollars in thousands) 1998 1997
- - ---------------------- ------- -------
Beginning balance, January 1 ...... $121 $50
Provisions ................... -- --
Charge-offs .................. (21) --
---- ---
Ending balance .................... $100 $50
---- ---
THE ALLOWANCE FOR POSSIBLE LOAN LOSSES.
The allowance for possible loan losses increased from $4.12 million on December
31, 1997 to $4.13 million on June 30, 1998. The allowance includes recoveries of
previously charged off loans, and the Company recovered a net amount of $12,000
during the first six months of the year. The following chart shows 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.
11
<PAGE>
<TABLE>
<CAPTION>
For the quarter ended
--------------------------------------------------------------
6/30/98 3/31/98 12/31/97 9/30/97 6/30/97
-------- ------- -------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance ..................... $4,156 $4,120 $4,100 $4,113 $4,060
Loans charged-off .................. (88) (82) (41) (58) (28)
Loans recovered .................... 64 118 61 45 81
------ ------ ------ ------ ------
Net (charge-offs) recoveries .......... (24) 36 20 (13) 53
Provision ............................. -- -- -- -- --
------ ------ ------ ------ ------
Ending balance ........................ $4,132 $4,156 $4,120 $4,100 $4,113
====== ====== ====== ====== ======
Ratio of allowance for
possible loan losses to
non-performing loans ................. 117.5% 120.8% 126.4% 96.8% 98.7%
====== ====== ====== ====== ======
</TABLE>
The Company did not record a provision for possible loan losses during the first
six months of 1998. NBSC's ratio of the allowance for possible loan losses to
non-performing loans has increased from 98.7% as of June 30, 1997 to 117.5% as
of June 30, 1998 because non-performing loans decreased while the allowance for
loan losses increased slightly.
Each quarter management makes a recommendation to the Board of Directors
regarding the appropriate level of the allowance for possible loan losses.
Management considers a variety of issues when making this recommendation,
including present and expected economic conditions within NBSC's market area,
delinquency trends, trends in NBSC's loan portfolio versus trends experienced by
NBSC's peers, historical loss experience, and results of an independent
quarterly review of certain loans by unaffiliated experts.
Management's quarterly evaluation takes place in three steps:
First, management reviews each troubled loan and each credit in excess of
$100,000. This review, which focuses on the value of underlying collateral,
recent payment history, and present and prospective conditions that could affect
performance, enables management to estimate potential losses on those loans. If
management identifies a probable loss, it charges off the related loan to the
extent of the estimated loss. Management may also establish specific reserves
for troubled loans.
Second, management uses information from the independent loan review to monitor
the status of larger non-criticized loans for changes that could affect future
collectibility.
Third, management makes a general assessment of the potential for loan losses
from certain performing loans and off balance sheet credit commitments based on
historical and projected collection statistics. This review does not focus on
specific loans or commitments, but instead considers groups of loans and credit
commitments with similar characteristics.
Based on its recent analysis, management believes that it has identified the
risk in the loan portfolio and that the allowance for possible loan losses is
adequate on June 30, 1998. Management also believes that the allowance is
adequate to absorb additional or unanticipated losses. Nevertheless, the Company
could sustain losses that could be substantial in relation to the size of the
loan loss reserve.
12
<PAGE>
SECURITIES PORTFOLIO.
Investment securities and securities available for sale consist of the
following:
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ------------ ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ............... $24,715 $297 $(3) $25,009
States and other political
subdivisions ............................ 1,665 3 (4) 1,664
Mortgage backed securities:
U.S. agency issued .................. 17,746 71 (61) 17,756
Other investments:
Federal Reserve Bank Stock .............. 516 -- -- 516
Vanguard money market
fund ................................. 9,072 -- -- 9,072
Federal Home Loan Bank .................... 1,128 -- -- 1,128
Marketable equity securities .............. 60 14 -- 74
------- ---- ---- -------
Securities available for sale ............. $54,902 $385 $(68) $55,219
======= ==== ==== =======
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ................ $2,494 $26 $ -- $ 2,520
Mortgage backed securities:
U.S. agency issued ................... 19,879 121 (6) 19,994
------- ---- ---- -------
Securities held to maturity ................ $22,373 $147 $(6) $22,514
======= ==== ==== =======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies .................... $26,208 $278 $ (11) $26,475
Mortgage backed securities:
U.S. agency issued ....................... 21,155 63 (94) 21,124
Other investments:
Federal Reserve Bank Stock ................... 516 -- -- 516
Vanguard money market
fund ...................................... 3,790 -- -- 3,790
Federal Home Loan Bank ....................... 878 -- -- 878
Marketable equity securities ................. 60 11 -- 71
------- ---- ----- -------
Securities available for sale .................. $52,607 $352 $(105) $52,854
======= ==== ===== =======
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies .................... $ 3,492 $ 30 $ (1) $ 3,521
Mortgage backed securities:
U.S. agency issued ....................... 21,274 149 (21) 21,402
------- ---- ----- -------
Securities held to maturity .................... $24,766 $179 $(22) $24,923
======= ==== ===== =======
</TABLE>
As of June 30, 1998, the contractual maturities of the investment securities and
the securities available for sale are as follows:
<TABLE>
<CAPTION>
Securities
Investment securities Available for Sale
-------------------------- -------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Due in one year or less ......................... $ 473 $ 474 $ 6,657 $ 6,672
Due after one year through
five years ................................... 9,985 10,048 22,906 23,149
Due after five years but within 10
years ........................................ 11,525 11,590 4,166 4,178
Due after 10 years .............................. 390 402 10,397 10,430
Federal Reserve Bank stock ...................... -- -- 516 516
Equity Securities ............................... -- -- 1,188 1,202
Vanguard money market fund ...................... -- -- 9,072 9,072
------- ------- ------- -------
Securities held to maturity ..................... $22,373 $22,514 $54,902 $55,219
======= ======= ======= =======
</TABLE>
There is little credit risk in the Company's securities portfolio; management
does not expect to lose any of the funds that the Company has invested in
securities. However, all of the Company's securities investments are subject to
risks that could affect the amount the Company earns. The most prevalent of
these risks is interest rate risk: if the Company holds a fixed
14
<PAGE>
rate security while interest rates are rising, the investment will earn less
than a market rate. The Company attempts to mitigate interest rate risk by
restricting most of its purchases of fixed rate instruments to securities that
will mature in seven years or less. The Company purchases tax-exempt securities
with longer maturities.
Some of the Company's securities, such as agency callables and mortgage-backed
securities, have variable payment features. These investments present added
risks known as "option risk," "prepayment risk," and "extension risk."
"Agency callables," which are government securities that can be redeemed by the
issuing agency before maturity, are subject to interest rate risk if interest
rates rise, and option risk if interest rates decline. "Option risk" means that
if interest rates decline, the issuer will probably exercise its right to redeem
the security before maturity, which will give the Company a return on its
investment that is less than originally expected. The Company mitigates these
risks by buying only callables with maturities of seven years or less.
The Company also owns $31.5 million in mortgage-backed securities issued by
government agencies. When interest rates are fairly constant, borrowers prepay
their mortgages, and issuers of mortgage-backed securities prepay their holders,
at a predictable rate. When interest rates decline, borrowers may choose to
prepay their mortgages at a faster pace so that they can refinance. These
prepayments reduce the yield on the related mortgage-backed securities.
Conversely, when interest rates increase, borrowers may refrain from prepaying
at the expected rate, which will slow the flow of cash to holders of the related
securities. The Company manages "prepayment risk" by buying mortgage-backed
securities with a variety of coupon rates, and minimizes its "extension risk" by
purchasing primarily mortgage-backed securities with balloon payments and
original maturities no greater than seven years.
LIQUIDITY.
"Liquidity" measures whether an entity has sufficient cash flow to meet its
financial obligations as they come due. Management believes that both High Point
and NBSC have sufficient liquidity to meet their current and anticipated
operational needs.
LIQUIDITY AT NBSC. At NBSC, cash to fund loan demand and operational expenses
comes from five sources:
o net income
o deposits
o sales of loans, securities, and overnight funds
o borrowing overnight funds
o overnight repurchase agreements
At June 30, 1998, NBSC had a portfolio of $55.2 million in securities available
for sale and $17.7 million in overnight funds. As a member of the Federal Home
Loan Bank, NBSC can borrow up to $11.7 million in overnight funds as of June 30,
1998. In addition, NBSC can effect overnight pledges of securities with a
brokerage firm in exchange for overnight loans equal to 97% of the value of the
securities pledged.
LIQUIDITY AT HIGH POINT. High Point's liquidity requirements include printing
expenses and fees for legal, auditing, and other services. At June 30, 1998,
High Point had $9,000 in cash, and $150,000 in overnight funds available to meet
its obligations.
High Point's cash flow comes from three sources:
o dividends from NBSC
o sales of securities
o land available for sale
Like all national banks, NBSC is subject to restrictions on the dividends that
it can declare. In particular, NBSC may not declare dividends in excess of the
current year's earnings, plus the retained earnings from the prior two years,
without prior approval from the Office of the Comptroller of the Currency. In
addition, NBSC may not pay dividends while it has losses that exceed its
aggregate retained earnings. NBSC's earnings for the first half of 1998, plus
the retained earnings from the
15
<PAGE>
prior two years, are $8.0 million. However, NBSC cannot pay dividends in excess
of its aggregate retained earnings of $3.86 million as of June 30, 1998.
At June 30, 1998, High Point had equity securities with a market value of
$20,000 that management can sell to generate cash. High Point also owns land
that is available for sale that could generate cash in the future.
MARKET RISK.
NBSC originates and invests in interest-earning assets and solicits
interest-bearing deposit accounts, so interest rate fluctuations could have a
dramatic effect on NBSC's operations. When interest rates change, the rates on
NBSC's interest-bearing assets and liabilities also may change, although not
necessarily by the same amounts or in the same proportions. Furthermore,
fluctuations in interest rates may cause borrowers to prepay loans or depositors
to withdraw deposited funds. Either of these reactions will alter the Company's
mix of interest-bearing assets and liabilities. NBSC monitors and controls
interest rate risk through a variety of techniques, including traditional rate
sensitivity analysis (also known as "gap" analysis) and an interest rate
sensitivity model.
TRADITIONAL GAP ANALYSIS. Traditional gap analysis involves three steps. First,
NBSC's interest-earning assets and interest-bearing liabilities are grouped into
five repricing periods that range from "within three months" to "after five
years." Second management computes the difference (or "interest rate sensitivity
gap") between the assets and liabilities that are expected to reprice during
each time period. Third, management computes the cumulative difference between
all of the assets and liabilities that will reprice as of the end of each time
period.
The following table sets forth, as of June 30, 1998, certain information
regarding the Company's interest-earning assets and interest-bearing
liabilities, interest rate sensitivity gap, and interest rate sensitivity gap
ratio. An asset or liability is shown as "rate-sensitive" during a particular
period if it will mature or if it could be repriced during that period.
Investment securities and securities available for sale (including
mortgage-backed securities and callable securities) are shown by maturity date.
Management assumes that most of NBSC's interest-bearing demand deposits and
savings deposits are "core" deposits, which means they will remain with NBSC
regardless of market interest rates. Therefore, 80% of the interest-bearing
demand deposits and 75% of the savings deposits are shown to be maturing or
repricing in the "after 1 but within 5 years" column.
16
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
-------------------------------------------------------------------------------------
After 3 After 6
Within months but months but Total After 1 but
three within 6 within Within 1 within 5 After 5
June 30, 1998 months months 1 Year Year years Years Total
- - ------------- --------- ---------- --------- --------- ------------ ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans ................................ $28,424 $ 6,958 $ 10,135 $ 45,517 $ 34,872 $ 52,383 $132,772
Loans held for sale .................. -- -- -- -- -- -- --
Investment securities ................ -- -- 473 473 9,985 11,915 22,373
Federal funds sold ................... 17,705 -- -- 17,705 -- -- 17,705
Securities available for sale ........ 12,615 1,498 3,674 17,787 22,180 15,252 55,219
------- ------- -------- -------- -------- -------- --------
Total earning assets .................... 58,744 8,456 14,282 81,482 67,037 79,550 228,069
Non-earning assets ...................... -- -- -- -- -- 27,145 27,145
------- ------- -------- -------- -------- -------- --------
Total Assets ............................ 58,744 8,456 14,282 81,482 67,037 106,695 255,214
------- ------- -------- -------- -------- -------- --------
Interest bearing liabilities:
Deposits:
Interest bearing demand .............. 1,707 1,707 3,413 6,827 27,307 -- 34,134
Savings accounts ..................... 3,963 3,963 7,925 15,851 47,551 -- 63,402
Jumbo certificates ................... 4,189 1,685 1,961 7,835 789 357 8,981
Other time deposits .................. 17,009 9,476 19,238 45,723 11,565 1,289 58,577
------- ------- -------- -------- -------- -------- --------
Total interest bearing deposits ... 26,868 16,831 32,537 76,236 87,212 1,646 165,094
------- ------- -------- -------- -------- -------- --------
Borrowings:
Repurchase agreements ................ 12,424 -- -- 12,424 -- -- 12,424
Long-term debt ....................... -- -- -- -- 5,000 -- 5,000
------- ------- -------- -------- -------- -------- --------
Total borrowings .................. 12,424 -- -- 12,424 5,000 -- 17,424
------- ------- -------- -------- -------- -------- --------
Non-interest bearing demand
deposits ............................. -- -- -- -- -- 46,889 46,889
Other liabilities ....................... -- -- -- -- -- 2,470 2,470
Stockholders' equity .................... -- -- -- -- -- 23,337 23,337
------- ------- -------- -------- -------- -------- --------
Total liabilities and equity ............ 39,292 16,831 32,537 88,660 92,212 74,342 255,214
------- ------- -------- -------- -------- -------- --------
Interest rate sensitivity gap ........... $19,452 ($ 8,375) ($18,255) ($ 7,178) ($25,175) $ 32,353 $ --
======= ======= ======= ======== ======== ======== ========
Cumulative rate sensitivity gap ......... $19,452 $11,077 ($ 7,178) ($ 7,178) ($32,353) $ -- $ --
======= ======= ======= ======== ======== ======== ========
Interest rate sensitivity gap ratio ..... 149.51% 50.24% 43.89% 91.90% 72.70% 143.52% -- %
Cumulative interest rate sensitivity
gap ratio ............................. 149.51% 119.74% 91.90% 91.90% 82.11% 100.00% -- %
</TABLE>
INTEREST RATE SENSITIVITY MODEL. With the interest rate risk sensitivity model,
management projects future net interest income, and then estimates the effect of
various changes in interest rates and balance sheet growth rates on that
projected amount. Based on management's analysis of the Company's interest rate
sensitivity, if rates were to increase 200 basis points, net interest income
would decrease by $38,000 as of June 30, 1998; if interest rates were to decline
by 200 basis points, net interest income would increase by the same amount.
CAPITAL RESOURCES.
STOCKHOLDERS' EQUITY. Stockholders' equity increased to $23.3 million during the
first six months of 1998 from $22.3 million at year-end 1997. Book value per
common share of stock (total stockholders' equity divided by the number of
outstanding common shares) increased to $6.16 on June 30, 1998 from $5.90 on
December 31, 1997.
Stockholders' equity is a mix of several components: net income or net loss,
issuance of new common stock, net unrealized gains or losses in securities
available for sale, and the acquisition or sale of treasury stock. The increase
in stockholders'
17
<PAGE>
equity during the first half of 1998 resulted from net income and from increases
in the market values of securities available for sale. Unrealized gains on
securities available for sale increased from $161,000 at year-end 1997 to
$209,000 at June 30, 1998.
REGULATORY STATUS. High Point and NBSC are subject to various regulatory capital
requirements that are monitored by federal banking agencies. Failure to meet
minimum capital requirements can lead to certain supervisory actions by
regulators; any supervisory action could have a direct material effect on the
Company or NBSC's financial statements. Management believes, as of June 30,
1998, that the Company and NBSC meet all capital adequacy requirements to which
they are subject.
As of June 30, 1998, the most recent notification from the Office of the
Comptroller of the Currency (NBSC's primary regulator) categorized NBSC as "well
capitalized." The most recent notification from the Federal Reserve Bank of New
York (the Company's primary regulator) placed the Company in the same category.
Management is not aware of any conditions or events that have occurred since the
Company received those notifications that would adversely affect the capital
adequacy rating of either the Company or NBSC.
The following chart represents the capital ratios of the Company and NBSC on
June 30, 1998 compared to minimum regulatory requirements:
Minimum
Required to be
Minimum Well Capitalized
Required for Under Prompt The
Capital Adequacy Corrective Action NBSC Company
Purposes Provisions 6/30/98 6/30/98
---------------- ----------------- ------- ---------
Leverage Ratio ......... 4.00% 5.00% 8.27% 9.08%
Risk Based:
Tier I ............... 4.00% 6.00% 15.68% 17.08%
Tier I plus Tier II .. 8.00% 10.00% 16.95% 18.35%
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
companies to report financial and descriptive information about "reportable
operating segments" in fiscal years beginning after December 15, 1997.
Management has determined that the Company and NBSC do not have any reportable
segments, so SFAS 131 has not had any effect on the Company's financial
statements.
For information regarding the effect of Statement of Financial Accounting
Standards No. 130, which the Company adopted during first quarter 1998, see Note
6 in the Notes to Consolidated Financial Statements.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, certain derivative
instruments imbedded in other contracts, and hedging activities. In particular,
SFAS No. 133 requires a reporting company to record every covered derivative
instrument on the company's balance sheet as either an asset or liability
measured at fair value. In addition, SFAS No. 133 requires that changes in the
fair value of a derivative be recognized currently in earnings unless specific
hedge accounting criteria are satisfied. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
The Company does not currently have any derivative instruments. Management has
not quantified the effect that SFAS No. 133 will have on the Company's financial
statements, but does not expect implementation of SFAS No. 133 to have a
material impact on earnings or other comprehensive income.
18
<PAGE>
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, but
reporting companies may adopt it on a going-forward basis as of the start of any
fiscal quarter beginning on or after June 16, 1998. SFAS No. 133 cannot be
applied retroactively. It must be applied to (a) derivative financial
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and at the Company's election, before January 1, 1998). Management has not yet
determined how or when the Company will implement SFAS No. 133.
YEAR 2000 ISSUES.
Management has evaluated its information technology infrastructure to determine
whether it will have a problem servicing its customers in the year 2000. The
Year 2000 ("Y2K") Steering Committee at NBSC has reviewed all of the Company's
computer programs and equipment, its venders, and facility related issues. That
review enabled management to develop a Y2K strategic plan and testing strategy.
The Company's major computer programs will undergo testing beginning in third
quarter 1998. At this time, management estimates that Y2K costs will be
$158,000. That amount includes approximately $79,000 in human resources costs to
reallocate the time of current personnel to the Y2K project. The remainder of
the cost is to replace systems, primarily communications related, that are not
Y2K compliant and to pay potential consulting fees.
The software vender that produces NBSC's core deposit, loan, and financial
information systems has informed NBSC that it is Y2K compliant because the
software is designed to process transactions into the next century and beyond.
The Company will test this assertion in the coming months. NBSC's management
expects to be able to certify its Y2K compliance by June 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For information about market risk, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk."
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On May 12, 1998, at the annual meeting, George H. Guptill, Jr., Stanley A.
Koza and Charles L. Lain were elected as directors of High Point for three year
terms by the common shareholders. Rhea C. Fountain was elected as director of
High Point for a one year term. The votes were as follows:
19
<PAGE>
For Abstain
--------- -------
George H. Guptill, Jr. .......... 3,151,804 60,212
Stanley A. Koza ................. 3,148,975 63,041
Charles L. Lain ................. 3,140,385 71,631
Rhea C. Fountain, III ........... 3,139,920 72,096
The votes on the second proposal to approve the amendment of the Restated
Certificate of Incorporation to increase the number of authorized shares from
5,000,000 to 10,000,000 were as follows:
For Against Abstain
--------- ------- --------
3,010,754 173,115 28,146
The votes on the third proposal to approve the amendment of the Restated
Certificate of Incorporation to eliminate a provision that limits the presence
of the Board of Directors of ex-officers of High Point Financial Corp. or any
subsidiary under certain circumstances by deleting subsection (ii) from Article
SIXTH, Paragraph B.
For Against Abstain
--------- ------- --------
2,496,127 194,619 48,058
The third proposal required an affirmative vote of 80% of shares outstanding.
The proposal was not passed because the 80% vote was not attained.
The total number of shares of High Point Financial Corp. common stock
outstanding as of March 16, 1998, 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 3i. Certificate of Amendment of Certificate of Incorporation of
High Point Financial Corp.
Exhibit 11. Computation of net income per share
(b) Reports on Form 8-K.
None.
20
<PAGE>
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 7, 1998
- - ----------------------
/s/ RITA A. MYERS /s/ ROBERT A. VANDENBERGH
- - ---------------------------------------------- ---------------------------
Rita A. Myers Robert A. Vandenbergh
Comptroller and Principal Accounting Officer Vice President and Treasurer
21
<PAGE>
EXHIBITS INDEX PAGE
- - -------------- ----
Exhibit 3i. Certificate of Amendment of Certificate of
Incorporation of High Point Financial Corp. 23
Exhibit 11. Computation of net income per share 24
22
Exhibit 3i.
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
HIGH POINT FINANCIAL CORP.
High Point Financial Corp., a New Jersey corporation, to amend its
Certificate of Incorporation in accordance with Section 14A:9-2(4) of the New
Jersey Business Corporation Act, hereby certifies:
FIRST: The name of the corporation is High Point Financial Corp.
SECOND: Article THIRD, Paragraph A, of the Certificate of Incorporation of
the corporation is amended to read in its entirety, as follows:
"The aggregate number of all shares which the corporation shall have
authority to issue is 11,000,000, divided into 10,000,000 shares of common
stock without par value (hereinafter called "Common Stock") and 1,000,000
shares of preferred stock without par value (hereinafter called "Preferred
Stock")."
THIRD: The amendment to the Certificate of Incorporation set forth in
Paragraph SECOND of this Certificate was adopted by the shareholders of the
corporation on May 12, 1998.
FOURTH: The designation and number of shares of each class or series
entitled to vote on the amendment to the Certificate of Incorporation set forth
in Paragraph SECOND of this Certificate, is as follows:
Class or Series Number of Shares
--------------- ----------------
Common Stock 3,786,480
FIFTH: The number of shares of each class or series voting for or against
the amendment to Article THIRD, Paragraph A, of the Certificate of Incorporation
set forth in Paragraph SECOND of this Certificate is as follows:
Class or Series For Against
--------------- --- -------
Common Stock 3,010,754 173,115
SIXTH: This Certificate of Amendment shall become effective upon filing.
IN WITNESS WHEREOF, High Point Financial Corp. has caused its duly
authorized officer to execute this Certificate on this 28th day of May, 1998.
HIGH POINT FINANCIAL CORP.
By:/s/ MICHAEL A. DICKERSON
-----------------------------
Name: Michael A. Dickerson
Title: President and
Chief Executive Officer
23
Exhibit 11. Statement of Computation of Per Share Income (Loss)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Income (loss) applicable to common stock $ 450,000 $ 524,000 $ 964,000 $ 946,000
Weighted average number of common
shares outstanding 3,786,480 3,786,480 3,786,480 3,786,480
Options issued to executive and officers 91,199 60,188 88,022 59,006
---------- ---------- ---------- ----------
Weighted average number of common
shares and common share equivalents 3,877,679 3,846,668 3,874,502 3,845,486
Basic earnings per share $0.12 $0.14 $0.25 $0.25
----- ----- ----- -----
Diluted earnings per share $0.12 $0.14 $0.25 $0.25
----- ----- ----- -----
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,265
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,705
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,219
<INVESTMENTS-CARRYING> 22,373
<INVESTMENTS-MARKET> 22,514
<LOANS> 135,557
<ALLOWANCE> 4,132
<TOTAL-ASSETS> 255,214
<DEPOSITS> 211,983
<SHORT-TERM> 12,424
<LIABILITIES-OTHER> 2,470
<LONG-TERM> 5,000
0
0
<COMMON> 18,932
<OTHER-SE> 4,405
<TOTAL-LIABILITIES-AND-EQUITY> 255,214
<INTEREST-LOAN> 5,739
<INTEREST-INVEST> 2,303
<INTEREST-OTHER> 379
<INTEREST-TOTAL> 8,421
<INTEREST-DEPOSIT> 3,035
<INTEREST-EXPENSE> 3,391
<INTEREST-INCOME-NET> 5,030
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,760
<INCOME-PRETAX> 1,643
<INCOME-PRE-EXTRAORDINARY> 1,643
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 964
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
<YIELD-ACTUAL> 4.60
<LOANS-NON> 2,909
<LOANS-PAST> 201
<LOANS-TROUBLED> 406
<LOANS-PROBLEM> 7,740
<ALLOWANCE-OPEN> 4,120
<CHARGE-OFFS> (171)
<RECOVERIES> 182
<ALLOWANCE-CLOSE> 4,132
<ALLOWANCE-DOMESTIC> 4,132
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
