================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
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(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-12430
HIGH POINT FINANCIAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2426221
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Branchville Square, Branchville, New Jersey 07826
- - ------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(973) 948-3300
----------------------------------------------------
(Registrant's telephone number, including area code)
- - --------------------------------------------------------------------------------
(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 September 30, 1998 there were 3,811,480 shares outstanding of Common
Stock, no par value.
<PAGE>
<TABLE>
HIGH POINT FINANCIAL CORP.
Form 10-Q Index
<S> <C>
PAGE
Part I Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1998 (unaudited) and
December 31, 1997 1
Consolidated Income Statements - Unaudited Three Months and Nine
Months Ended September 30, 1998 and 1997 2
Consolidated Statements of Changes in Shareholders' Equity - Unaudited
Nine Months Ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows - Unaudited Nine Months Ended
September 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 7
Item 3. Quantitative and Qualitiative Disclosures About Market Risk 20
Part II Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
</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>
ITEM 1. FINANCIAL INFORMATION
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
September 30, 1998 December 31,
ASSETS (unaudited) 1997
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 9,622 $ 9,789
Federal funds sold 14,950 11,200
- - -------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 24,572 20,989
Securities:
Available for sale, at fair value 52,384 52,854
Held to maturity, at cost (market value of $24,007 in 1998 and
$24,923 in 1997) 23,724 24,766
- - -------------------------------------------------------------------------------------------------------------------
Total securities 76,108 77,620
Loans held for sale 40 88
Loans 137,830 126,687
Add: Deferred expenses 157 35
Less: Allowance for possible loan losses (3,963) (4,120)
- - -------------------------------------------------------------------------------------------------------------------
Net loans 134,024 122,602
Land held for sale 1,865 1,865
Premises and equipment - net 6,205 3,135
Accrued interest receivable 1,325 1,315
Other real estate 950 989
Cash surrender value of life insurance policies 5,340 5,147
Other assets 2,317 2,578
- - -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $252,746 $236,328
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - -------------------------------------------------------------------------------------------------------------------
Deposits:
Transaction accounts:
Interest bearing $ 36,114 $ 31,447
Non-interest bearing 45,210 40,366
Savings accounts 62,004 61,498
Time accounts (includes CDs $100 or over of $10,018 and $7,623
on September 30, 1998 and December 31, 1997, respectively) 71,182 65,119
- - -------------------------------------------------------------------------------------------------------------------
Total deposits 214,510 198,430
Securities sold under agreements to repurchase 6,537 8,201
Long-term debt 5,000 5,000
Accrued expenses and other liabilities 2,533 2,354
- - -------------------------------------------------------------------------------------------------------------------
Total liabilities 228,580 213,985
===================================================================================================================
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 September 30, 1998 and
December 31, 1997, respectively; outstanding 3,811,480 and 3,786,480
shares on September 30, 1998 and December 31, 1997, respectively 19,057 18,932
Additional Paid-in-Capital 5,792 5,767
Accumulated Deficit (1,021) (2,517)
Accumulated other comprehensive income 506 161
Options exercised under debt agreement (168) --
- - -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 24,166 22,343
- - -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $252,746 236,328
===================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
1
<PAGE>
<TABLE>
CONSOLIDATED INCOME STATEMENTS - (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
1998 1997 1998 1997
- - ------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest income and fees on loans $2,911 $3,050 $8,650 $8,250
Interest on securities - taxable 1,101 1,333 3,392 3,723
Interest on securities -non-taxable 33 -- 45 --
Interest on federal funds sold and
deposits with other banks 236 131 615 275
- - ------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 4,281 4,514 12,702 12,248
============================================================================================================
INTEREST EXPENSE
Interest on deposits 1,604 1,495 4,639 4,291
Interest on other borrowed money 71 163 277 283
Interest on note payable and other
long-term debt 77 -- 227 32
- - ------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 1,752 1,658 5,143 4,606
============================================================================================================
NET INTEREST INCOME 2,529 2,856 7,559 7,642
Less: Provision for possible loan losses -- -- -- --
- - ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 2,529 2,856 7,559 7,642
============================================================================================================
NON-INTEREST INCOME
Service charges on deposit accounts 331 367 982 1,073
Commissions and fees 190 262 650 660
Loss on sale of securities (24) -- (24) (9)
Gain on sale of loans 8 -- 41 --
Gain on sale of bank premises and equipment (2) 36 60 97
Other income 75 83 242 350
- - ------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 578 748 1,951 2,171
============================================================================================================
NON-INTEREST EXPENSE
Salaries and employee benefits 1,170 1,227 3,680 3,749
Net occupancy expense 168 229 623 696
Equipment expense 198 238 599 655
Legal expense 68 57 199 152
Net cost of operation of other real estate (1) 106 11 107
Other expenses 505 536 1,756 1,657
- - ------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 2,108 2,393 6,868 7,016
============================================================================================================
Income before provision for income taxes 999 1,211 2,642 2,797
Provision for income taxes 390 496 1,069 1,136
- - ------------------------------------------------------------------------------------------------------------
NET INCOME $609 $715 $1,573 $1,661
============================================================================================================
BASIC EARNINGS PER COMMON SHARE $0.16 $0.19 $0.41 $0.44
============================================================================================================
DILUTED EARNINGS PER COMMON SHARE $0.16 $0.19 $0.41 $0.43
============================================================================================================
WEIGHTED AVERAGE COMMON SHARE
AND COMMON SHARE EQUIVALENTS 3,809 3,786 3,794 3,786
============================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
2
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - (UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
Options
Accumulated exercised
Other Additional under
Comprehensive Accumulated Comprehensive Common Paid- Treasury Debt
TOTAL Income Deficit Income Stock in-Capital Stock Agreement
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 nine months 1997 1,661 $1,661 1,661 -- -- -- --
Other comprehensive income, net of tax
Unrealized losses on securities available
for sale, net of $37 in tax 61 61 -- -- -- --
------
Other comprehensive income 61 61
------
Comprehensive income $1,722
======
Purchase of treasury stock (46) -- -- -- -- (46)
Exercise of stock options 23 -- -- -- (23) 46 --
- - ---------------------------------------------------------- ----------------------------------------------------------
BALANCE SEPTEMBER 30, 1997 $21,676 ($3,161) $137 $18,932 $5,768 $-- $ --
========================================================== ==========================================================
BALANCE DECEMBER 31, 1997 22,343 (2,517) 161 18,932 5,767 -- --
Comprehensive income
Net Income - first nine months 1998 1,573 1,573 1,573
Cash dividend (77) (77)
Other comprehensive income, net of tax
Unrealized gains on securities available
for sale, net of $175 in tax 345 345 -- -- -- --
------
Other comprehensive income 345 345
------
Comprehensive income $1,918
======
Options exercised by debt (168) -- -- -- -- (168)
Purchase of Treasury Stock (38) -- -- -- -- (38)
Exercise of stock options 188 -- -- 125 25 38 --
- - ---------------------------------------------------------- ----------------------------------------------------------
BALANCE SEPTEMBER 30, 1998 $24,166 ($1,021) $506 $19,057 $5,792 $-- $(168)
========================================================== ==========================================================
</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) Nine Months Ended September 30,
-------------------------------
1998 1997
- - ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $1,573 $1,661
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 471 433
Amortization of securities discount, net 263 18
Net cash paid related to discount (premium) on matured securities 187 15
Loan fees amortized, net (122) (18)
Deferred income tax provision 213 408
Loss on sale of securities 24 9
Gain on sale of premises and equipment (60) (97)
Increase in accrued interest receivable and other assets (291) (190)
Increase in accrued expenses and other liabilities 77 463
- - ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,335 2,702
======================================================================================================
INVESTING ACTIVITIES
Proceeds from sales of available for sale securities 3,709 1,991
Proceeds from maturity of securities:
Available for sale 9,540 12,721
Held for maturity 9,078 3,321
Purchase of securities:
Available for sale (12,643) (15,997)
Held for maturity (8,126) (7,302)
Net decrease of interest bearing deposits with banks -- 123
Net increase in loans (11,252) (9,817)
Capital expenditures (3,549) (770)
Proceeds from sale of premises and equipment 2 13
- - ------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (13,241) (15,717)
======================================================================================================
FINANCING ACTIVITIES
Net increase in deposits 16,080 8,343
Increase in federal funds purchased and
securities sold under agreements to repurchase (1,664) 9,214
Repayments of long-term debt principal -- (973)
Purchase of treasury stock (39) (46)
Exercise of stock options 189 23
Dividends paid (77) --
- - ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,489 16,561
======================================================================================================
Net increase in cash and cash equivalents 3,583 3,546
Cash and cash equivalents, beginning of period 20,989 14,528
- - -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $24,572 $18,074
======================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $5,015 $4,455
INCOME TAXES PAID 839 728
======================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
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 three 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 $800,000 at September 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 $253,000 to FMI, Inc. for the first
nine months of 1998, and $278,000 for the first nine months of 1997.
In July 1998, the Company repurchased properties from FMI, Inc. that it had sold
to them in a sale/leaseback transaction in 1988. The Company purchased the
properties for a price of $3,240,000, the fair market value of the properties at
the time of purchase.
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.
5
<PAGE>
The following table shows NBSC's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 as of September 30,
1998 and 1997, and the average recorded investment in impaired loans during the
nine months preceding those dates:
AVERAGE RECORDED
INVESTMENT (OVER
DATE INVESTMENT VALUATION ALLOWANCE PRECEDING NINE MONTHS)
- - --------------------------------------------------------------------------------
September 30, 1998 $2.90 million $378,000 $2.99 million
September 30, 1997 $3.80 million $599,000 $3.82 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 $121,000 in the first nine months
of 1998 and $123,000 in the first nine months of 1997.
At September 30, 1998, NBSC had $403,000 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 nine 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 September 30,
1998 and 1997.
(dollars in thousands) September 30, 1998 September 30, 1997
--------------------------------------
Unrealized gain on securities:
Unrealized holding gains arising during
period $496 $89
Less: reclassification adjustment for
losses included in net income 24 9
--------------------------------------
Net unrealized gains 520 98
Tax expense 175 37
--------------------------------------
Other comprehensive income $345 $61
======================================
6
<PAGE>
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.
SUMMARY
This quarterly report explains the following trends in the Company's financial
condition and operating results:
o NET INCOME decreased by 5.3% from September 30, 1997 to September 30, 1998.
See " - Results of Operations (Third quarter 1998 compared to third quarter
1997) - Net Income."
o ASSETS increased by 6.9% from December 31, 1997 to September 30, 1998. See
" - Financial Condition - Loans," "- Securities," and " - Liquidity."
o DEPOSITS increased by 8.1% from December 31, 1997 to September 30, 1998.
See " - Financial Condition - Deposits."
o TOTAL LOANS increased by 8.8% from December 31, 1997 to September 30, 1998.
See " - Financial Condition - Loans."
RESULT OF OPERATIONS
(FIRST NINE MONTHS OF 1998 COMPARED TO FIRST NINE MONTHS OF 1997)
NET INCOME.
Net income for the first nine months of 1998 was $1,573,000, compared to
$1,661,000 for the same period last year, a decrease of $88,000. Net income
decreased from the first nine months of 1997 to the first nine months of 1998
primarily due to a third quarter 1997 receipt of $354,000 in interest income on
a troubled loan.
The decrease in net income had the following effect on three other measurements
of the Company's financial condition:
o BASIC EARNINGS PER SHARE were $0.41 for the first nine months of 1998,
compared to $0.44 for the first nine 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 0.85% for the first nine months of 1998, compared to
0.98% for the same period in 1997. This ratio declined because the average
asset percentage increase was more than the net income percentage increase.
o RETURN ON AVERAGE EQUITY, which is annualized net income as a percent of
average equity, was 9.03% for the first nine months of 1998, compared to
10.66% 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 nine months of 1998 was $7.60 million, compared to $7.64 million for
the same period last year because the Company recorded a third quarter 1997
payoff of $354,000 in interest on a troubled loan.
TOTAL INTEREST INCOME. Total interest income increased from $12.24 million in
the first nine months of 1997 to $12.70 million in the first nine months of
1998, an increase of $454,000. An increase in average earning assets caused
total interest income to increase by $1,087,000, but that increase was offset by
a decline in the average yield on earning assets, which reduced interest income
by $289,000. Finally, interest income declined as a result of the third quarter
1997 $354,000 payoff of troubled debt interest.
Interest earned on loans. NBSC earned $400,000 more interest from loans,
primarily because average loans outstanding increased from $116.6 million in the
first nine months of 1997 to $131.0 million in the first nine months of 1998. In
addition,
7
<PAGE>
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 $3.7 million in the first
nine months of 1997 to $2.9 million during the same period of 1998. If all of
those non-accrual loans had been current, the Company would have earned $230,000
more interest in the first nine months of 1998, compared to $290,000 more
interest in the first nine months of 1997.
Interest earned on securities. Total interest income on securities was $3.4
million for the first nine months of 1998, compared to $3.7 million for the
first nine 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 from $79.1 million in the first nine months of 1997 to
$76.2 million in the first nine months of 1998. However, average balances of
federal funds sold increased from $6.7 million in the first nine months of 1997
to $14.7 million in the first nine months of 1998. As a result, interest on
federal funds sold increased from $275,000 to $615,000.
TOTAL INTEREST EXPENSE. Total interest expense increased from $4.61 million in
the first nine months of 1997 to $5.14 million in the first nine months of 1998,
an increase of $537,000. Most of this 11.7% increase was caused by an increase
in average interest-bearing liabilities- from $173.6 million in the first nine
months of 1997 to $178.9 million in the first nine months of 1998 resulting in
$444,000 in increased interest expense for the first nine months of 1998. An
increase in average rates paid for deposits also contributed $93,000 to the
increase in interest expense.
NON-INTEREST INCOME.
Non-interest income for the first nine months of 1998 was $1.95 million,
compared to $2.17 million for the same period in 1997. Non-interest income
declined because of declines in service charge and other income.
Service charges on demand accounts declined from $1.07 million in the first nine
months of 1997 to $982,000 in the first nine months of 1998, primarily because
fewer customers overdrew their accounts, so NBSC imposed fewer overdraft
charges. "Other income" declined from $350,000 in the first nine months of 1997
to $242,000 in the first nine months of 1998 because the Company recorded two
non-recurring items of "other income" in the first nine months of 1997: $60,000
in insurance proceeds and $51,000 in forgiven debt.
Commissions and fees decreased from $660,000 in first nine months of 1997 to
$650,000 for the first nine months of 1998, primarily because of a decline in
fees received from full service brokerage services. NBSC changed its method of
providing these services in second quarter 1998 from providing the services
through an in-house broker to contracting with an outside party to provide the
services. The fees recorded are now recorded net of commissions paid, whereas
the fees recorded second quarter and prior to that were recorded gross of
commissions paid to the in-house broker. Commissions paid were recorded in
salary and benefit expense. Offsetting the impact of the decline in brokerage
commissions is an increase in service charges related to an imposition of fees
for non-customer ATM transactions. These fees were initiated in third quarter
1997.
NON-INTEREST EXPENSE.
Non-interest expense for the first nine months of 1998 was $6.87 million,
compared to $7.02 million for the first nine months of 1997. This decrease came
from four sources:
o Salary and benefit expense decreased from $3.75 million to $3.68 million, a
decline of $69,000 related to staff reductions resulting from the change in
the Company's financial services delivery system.
o Equipment expense declined from $655,000 to $599,000 as a result of lower
software licensing fees and lower service contract expense.
o Net occupancy expense declined from $696,000 to $623,000, a decrease of
$73,000 related to the 1998 third quarter repurchase of branches sold in a
sale/leaseback agreement in 1988. The decline in monthly rental expense was
$33,000 compared to an increase in depreciation expense of $7,000.
o Net cost of operation of other real estate decreased from $107,000 to
$11,000 because the Company recorded fewer provisions to the allowance for
losses on other real estate during the first nine months of 1998 than
during the same period in 1997.
8
<PAGE>
Offsetting these expense decreases are the following increases in non-interest
expense:
o Legal expense increased from $152,000 to $199,000 because of expenses
arising from a reorganization of the Company's financial services delivery
system.
o Other expenses increased from $1.66 million to $1.76 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
(THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997)
NET INCOME.
Net income for third quarter 1998 was $609,000, compared to $715,000 for the
same period last year, a decrease of $106,000. Net income decreased primarily
because of the third quarter 1997 receipt of $354,000 in interest on a troubled
loan.
The decrease in net income caused three other measures to decline as well:
o BASIC EARNINGS PER SHARE were $0.16 for third quarter 1998, compared to
$0.19 for third quarter 1997.
o RETURN ON AVERAGE ASSETS was 0.96% for third quarter 1998, compared to 1.2%
for the same period in 1997.
o RETURN ON AVERAGE EQUITY was 10.21% for third quarter 1998, compared to
13.25% for the same period in 1997.
NET INTEREST INCOME.
Net interest income for third quarter 1998 was $2.53 million, compared to $2.86
million for the same period last year. The principal source of this decrease was
the payoff of $354,000 in interest received on the troubled loan in third
quarter 1997.
TOTAL INTEREST INCOME. Total interest income decreased from $4.51 million in
third quarter 1997 to $4.28 million in third quarter 1998, a decrease of
$233,000. Total interest income decreased by $131,000 because of a decrease in
the yield on average earning assets. Total interest income also decreased due to
the $354,000 in interest income recovered on the troubled loan payoff in 1997.
These decreases in interest income were reduced by $252,000 because of an
increase in average earning assets.
Interest earned on loans. Interest income on loans decreased by $139,000,
primarily because of the interest recovery in the quarter 1997, but also because
of the overall reduction in interest rates during third quarter 1998. Average
non-accrual loans declined from $3.65 million in third quarter 1997 to $3.01
million during third quarter 1998. If all of those non-accrual loans had been
current, the Company would have earned $89,000 more interest in the third
quarter of 1998, compared to $95,000 more interest in the third quarter of 1997.
Interest earned on securities. Interest income on securities decreased from
$1.33 million in third quarter 1997 to $1.13 million in third quarter 1998
because the two items that determine interest income declined: average
securities outstanding declined from $84.4 million to $77.2 million, and yields
on securities also declined. Interest income on federal funds sold increased
from $131,000 in third quarter 1997 to $236,000 in third quarter 1998 because
average federal funds sold increased from $9.4 million to $16.5 million.
TOTAL INTEREST EXPENSE. Total interest expense increased from $1.66 million in
third quarter 1997 to $1.75 million in third quarter 1998, an increase of
$94,000. An increase in deposit volume caused all of this increase in interest
expense. Average rates paid on interest bearing liabilities remained
substantially the same.
NON-INTEREST INCOME.
Non-interest income for third quarter 1998 was $578,000, compared to $748,000
for the same period in 1997. Several components of non-interest income
decreased. "Commissions and fees" decreased $72,000 because NBSC changed its
method of providing full service brokerage services as described under "First
Nine Months of 1998 Compared to First Nine Months of 1997--Non-interest Income."
Service charges from deposit accounts declined from $367,000 to $331,000 because
9
<PAGE>
fewer customers overdrew their checking accounts in third quarter 1998 compared
to third quarter 1997. Losses on sales of securities were $24,000 in third
quarter 1998 compared to no gains or losses on sales of securities in third
quarter 1997. Gains on sales of bank premises and equipment declined $38,000
because we no longer are recording deferred gains on the sale/leaseback
transaction which occurred in 1988. Because NBSC repurchased the branches in
that transactions, all remaining deferred gains were used to reduce the amount
capitalized on the properties. See Note 3 for more details.
NON-INTEREST EXPENSE.
Non-interest expense for third quarter 1998 was $2.11 million, compared to $2.39
million for third quarter 1997. The decrease in non-interest expense from 3rd
quarter 1997 to third quarter 1998 came from the following four sources:
o Salary and benefit expense declined from $1.23 million in third quarter
1997 to $1.17 million in third quarter 1998 due to a reduction in staff.
o Net occupancy expense declined from $229,000 in third quarter 1997 to
$168,000 in third quarter 1998 as a result of the third quarter 1998
repurchase of the properties discussed above.
o Equipment expense declined from $238,000 to $198,000 as a result of
decreased costs of licensing software and decreased costs on service
contracts.
o Net cost of operation of other real estate decreased $107,000 as a result
of provisions for losses on other real estate made in third quarter 1997.
FINANCIAL CONDITION
At September 30, 1998, the consolidated assets of the Company were $252.7
million, an increase of $16.4 million or 6.9% from the $236.3 million reported
at year-end 1997.
DEPOSITS.
Total deposits increased from $198.4 million on December 31, 1997 to $214.5
million on September 30, 1998, an increase of $16.1 million or 8.1%. The level
of deposits in NBSC's four types of accounts changed as follows during that nine
month period:
o NON-INTEREST BEARING TRANSACTION ACCOUNTS increased from $40.4 million to
$45.2 million, an increase of $4.8 million (11.9%), primarily as a result
of seasonal increases.
o INTEREST BEARING TRANSACTION ACCOUNTS increased from $31.4 million to $36.1
million, an increase of $4.7 million (15.0%).
o SAVINGS ACCOUNTS increased from $61.5 million to $62.0 million, an increase
of $500,000 (0.8%).
o TIME DEPOSITS increased from $65.1 million to $71.2 million, an increase of
$6.1 million (9.4%). 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 $10.0 million on September 30, 1998,
primarily because of an increase in municipal deposits.
LOANS.
Total loans increased from $126.7 million at December 31, 1997 to $137.8 million
on September 30, 1998, an increase of $11.1 million. The composition of the loan
portfolio during that nine month period changed as follows:
o COMMERCIAL LOANS decreased from $46.1 million to $42 million, a decrease of
$4.1 million (8.9%).
o REAL ESTATE CONSTRUCTION LOANS increased from $7.0 million to $7.2 million,
an increase of $248,000 (3.5%).
o REAL ESTATE MORTGAGE LOANS increased from $45.0 million to $59.6 million,
an increase of $14.6 million (32.4%).
o INSTALLMENT LOANS increased from $28.6 million to $29.0 million, an
increase of $413,000 (1.4%).
10
<PAGE>
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 commercial
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" below).
NBSC sold $1.1 million in mortgages during third quarter 1998. The Company had
$40,000 in student loans designated "held for sale" as of September 30, 1998.
NON-PERFORMING ASSETS.
Non-performing assets remained flat from $4.4 million at year-end 1997 to $4.4
million on September 30, 1998 because of a slight increase in non-performing
loans which was partially offset by a slight decrease in other real estate
owned.
The following table itemizes non-performing assets at each quarter end from
September 30, 1997 to September 30, 1998:
<TABLE>
<CAPTION>
Non-performing assets at 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97
- - -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans past due over 90 days $ 109 $ 201 $ 183 $ 4 $ 115
Loans on non-accrual 2,940 2,909 2,845 2,843 3,696
Troubled debt restructurings* 403 406 411 413 424
-------------------------------------------------------------------------------------
Total non-performing loans 3,452 3,516 3,439 3,260 4,235
Other real estate 954 1,050 1,110 1,110 1,071
-------------------------------------------------------------------------------------
Total non-performing assets $4,406 $4,566 $4,549 $4,370 $5,306
=====================================================================================
</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.
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
$109,000 at September 30, 1998, an increase of $105,000. 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
$2.94 million on September 30, 1998. The level of renegotiated loans remained
virtually unchanged.
At September 30, 1998, NBSC had $1.8 million in performing loans classified as
"other assets especially mentioned," and $4.7 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 September 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
$156,000 from the $1.1 million reported at year-end 1997 because NBSC sold one
property and wrote down the carrying value of one property by $96,000 which was
reserved for in prior periods. NBSC did not record any new "other real estate"
in the first nine 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.
11
<PAGE>
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 nine 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 nine months ended September 30,
1998 and 1997.
September 30, September 30,
(dollars in thousands) 1998 1997
- - ------------------------------------------------------------------------------
Beginning balance, January 1 $121 $50
Provisions -- 75
Charge-offs (117) --
---------------- -------------------
Ending balance $4 $125
================ ===================
THE ALLOWANCE FOR POSSIBLE LOAN LOSSES.
The allowance for possible loan losses decreased from $4.12 million on December
31, 1997 to $3.96 million on September 30, 1998. The allowance includes
charge-offs and recoveries of previously charged off loans, and the Company
charged off a net amount of $157,000 during the first nine 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.
<TABLE>
<CAPTION>
For the quarter ended
-------------------------------------------------------------------------------------
(dollars in thousands) 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $4,132 $4,156 $4,120 $4,100 $4,113
Loans charged-off (218) (88) (82) (41) (58)
Loans recovered 49 64 118 61 45
-------------------------------------------------------------------------------------
Net (charge-offs) recoveries (169) (24) 36 20 (13)
Provision -- -- -- -- --
-------------------------------------------------------------------------------------
Ending balance $3,963 $4,132 $4,156 $4,120 $4,100
=====================================================================================
Ratio of allowance for
possible loan losses to
non-performing loans 114.8% 117.5% 120.8% 126.4% 96.8%
=====================================================================================
</TABLE>
The Company did not record a provision for possible loan losses during the first
nine months of 1998. NBSC's ratio of the allowance for possible loan losses to
non-performing loans has increased from 96.8% as of September 30, 1997 to 114.8%
as of September 30, 1998 because non-performing loans decreased.
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
12
<PAGE>
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 September 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.
SECURITIES PORTFOLIO.
Investment securities and securities available for sale consist of the
following:
13
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $23,210 $538 $ 0 $23,748
States and other political
subdivisions 3,970 79 - 4,049
Mortgage backed securities:
U.S. agency issued 16,180 157 (19) 16,318
Other investments:
Federal Reserve Bank Stock 516 -- -- 516
Vanguard money market
fund 6,553 -- -- 6,553
Federal Home Loan Bank 1,128 -- -- 1,128
Marketable equity securities 60 12 -- 72
- - ------------------------------------------------------------------------------------------------------
Securities available for sale $51,617 $786 $(19) $52,384
- - ------------------------------------------------------------------------------------------------------
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $1,996 $49 $ -- $2,045
Mortgage backed securities:
U.S. agency issued 21,728 234 -- 21,962
- - ------------------------------------------------------------------------------------------------------
Securities held to maturity $23,724 $283 $ -- $24,007
- - ------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
- - ------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- - ------------------------------------------------------------------------------------------------------
<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 September 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
(in thousands) Cost Value Cost Value
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,386 $ 1,391 $ 8,313 $ 8,375
Due after one year through
five years 9,978 10,130 19,190 19,664
Due after five years but within 10
years 11,990 12,105 6,120 6,217
Due after 10 years 370 381 9,737 9,859
Federal Reserve Bank stock --- --- 516 516
Equity Securities --- --- 1,188 1,200
Vanguard money market fund --- --- 6,553 6,553
- - ------------------------------------------------------------------------------------------------------
Securities held to maturity $23,724 $24,007 $51,617 $52,384
- - ------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
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 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 $37.9 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 September 30, 1998, NBSC had a portfolio of $52.4 million in securities
available for sale and $15.0 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 September 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 September 30,
1998, High Point had $84,000 in cash, and $295,000 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
16
<PAGE>
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 nine months of 1998,
plus the retained earnings from the prior two years, are $8.5 million. However,
NBSC cannot pay dividends in excess of its aggregate retained earnings of $4.39
million as of September 30, 1998.
At September 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 risk
management model.
TRADITIONAL GAP ANALYSIS. Traditional gap analysis involves three steps. First,
NBSC's interest-earning assets and interest-bearing liabilities are grouped into
four 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 September 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.
17
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
-----------------------------------------------------------------------------------------------
(in thousands)
- - ----------- After 3
Within three months but Total After 1 but
September 30, 1998 months within 1 Year Within 1 Year within 5 years After 5 Years Total
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $33,899 $8,777 $42,676 $27,482 $64,889 $135,047
Loans held for sale 40 -- 40 -- -- 40
Investment securities -- 1,386 1,386 9,978 12,360 23,724
Federal funds sold 14,950 -- 14,950 -- -- 14,950
Securities available for sale 9,056 7,785 16,841 18,186 16,590 51,617
----------------------------------------------------------------------------------------------
Total earning assets 57,945 17,948 75,893 55,646 93,839 225,378
Non-earning assets -- -- -- -- 27,368 27,368
----------------------------------------------------------------------------------------------
Total Assets 57,945 17,948 75,893 55,646 121,207 252,746
-----------------------------------------------------------------------------------------------
Interest bearing liabilities:
Deposits:
Interest bearing demand 1,806 5,417 7,223 28,891 --- 36,114
Savings accounts 3,875 11,626 15,501 46,503 --- 62,004
Jumbo certificates 6,563 3,020 9,583 695 364 10,642
Other time deposits 18,298 29,164 47,462 11,847 1,231 60,540
-----------------------------------------------------------------------------------------------
Total interest bearing deposits 30,542 49,227 79,769 87,936 1,595 169,300
-----------------------------------------------------------------------------------------------
Borrowings:
Repurchase agreements 6,537 -- 6,537 -- -- 6,537
Long-term debt -- -- -- 5,000 -- 5,000
----------------------------------------------------------------------------------------------
Total borrowings 6,537 -- 6,537 5,000 -- 11,537
----------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits -- -- -- -- 45,210 45,210
Other liabilities -- -- -- -- 2,533 2,533
Stockholders' equity -- -- -- -- 24,166 24,166
-----------------------------------------------------------------------------------------------
Total liabilities and equity 37,079 49,227 86,306 92,936 73,504 252,746
-----------------------------------------------------------------------------------------------
Interest rate sensitivity gap $20,866 ($31,279) ($10,413) ($37,290) $47,703 $ --
===============================================================================================
Cumulative rate sensitivity gap $20,866 ($10,413) ($10,413) ($47,703) $ -- $ --
===============================================================================================
Interest rate sensitivity gap ratio 156.27% 36.46% 87.93% 59.88% 164.90% --%
Cumulative interest rate sensitivity
gap ratio 156.27% 76.75% 87.93% 73.39% 100.00% --%
</TABLE>
INTEREST RATE RISK MANAGEMENT MODEL. With the interest rate risk management
model, management projects future net interest income based on the interest
earning assets and interest bearing liabilities it currently has on its balance
sheet and then estimates the effect of various changes in interest rates and
balance sheet growth rates on those assets and liabilities. Based on
management's analysis of the Company's interest rate sensitivity, if rates were
to increase 200 basis points, net interest income would increase by $200,000 as
of September 30, 1998; if interest rates were to decline by 200 basis points,
net interest income would decrease by $800,000.
CAPITAL RESOURCES.
STOCKHOLDERS' EQUITY. Stockholders' equity increased to $24.2 million during the
first nine 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 $6.34 on September 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' equity during the first nine months of 1998 resulted from net
income and from increases in the market values of securities
18
<PAGE>
available for sale. Unrealized gains on securities available for sale increased
from $161,000 at year-end 1997 to $506,000 at September 30, 1998.
Included in stockholders' equity are options exercised under a debt agreement of
$168,000. A former officer of the Company exercised his option to purchase
25,000 shares of High Point Financial Corp. stock by borrowing the amount
required to purchase the stock from NBSC. This is recorded as a liability and as
a reduction of capital on the Company's balance sheet.
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 September 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:
<TABLE>
<CAPTION>
Minimum
Required to be
Minimum Well Capitalized
Required for Under Prompt The
Capital Adequacy Corrective Action NBSC Company
Purposes Provisions 9/30/98 9/30/98
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage Ratio 4.00% 5.00% 8.15% 9.01%
Risk Based:
Tier I 4.00% 6.00% 15.73% 17.26%
Tier I plus Tier II 8.00% 10.00% 17.00% 18.54%
</TABLE>
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.
19
<PAGE>
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.
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.
At this time, management estimates that Y2K costs will be $366,000. That amount
includes approximately $158,000 in human resources costs (half in 1998 and half
in 1999) to reallocate the time of current personnel to the Y2K project. Also
included in management's estimation of Y2K costs are $165,000 in 1999 for
replacements of hardware and software that will be capitalized because the
benefit of the hardware and software will go beyond the year 2000. 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 has begun testing of its mission critical systems in third quarter
1998 and will continue testing through first quarter 1999. 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."
EXHIBIT 11. Statement of Computation of Per Share Income
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) applicable to common stock $609,000 $715,000 $1,573,000 $1,661,000
Weighted average number of common
shares outstanding 3,808,763 3,786,480 3,793,989 3,786,480
Options issued to executive and officers 71,101 64,843 82,382 60,951
--------------------------------------------------------------------
Weighted average number of common
shares and common share equivalents 3,879,864 3,851,323 3,876,371 3,847,431
Basic earnings per share $0.16 $0.19 $0.41 $0.44
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $0.16 $0.19 $0.41 $0.43
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11. Computation of net income per share is filed with part I of
this report.
(b) Reports on Form 8-K.
None.
21
<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: November 6, 1998
- - ---------------------------------------
/s/ Rita A. Myers /s/ Robert A. Vandenbergh
- - --------------------------------------- -----------------------------
Rita A. Myers Robert A. Vandenbergh
Comptroller and Principal Accounting Officer Vice President and Treasurer
22
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
High Point Financial Corp.
Financial Data schedule
EDGAR Only
Form 10Q & 10K
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,622
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,384
<INVESTMENTS-CARRYING> 23,724
<INVESTMENTS-MARKET> 24,007
<LOANS> 137,830
<ALLOWANCE> 3,963
<TOTAL-ASSETS> 252,746
<DEPOSITS> 214,510
<SHORT-TERM> 6,537
<LIABILITIES-OTHER> 2,533
<LONG-TERM> 5,000
0
0
<COMMON> 19,057
<OTHER-SE> 5,109
<TOTAL-LIABILITIES-AND-EQUITY> 252,746
<INTEREST-LOAN> 8,650
<INTEREST-INVEST> 3,437
<INTEREST-OTHER> 615
<INTEREST-TOTAL> 12,702
<INTEREST-DEPOSIT> 4,639
<INTEREST-EXPENSE> 5,143
<INTEREST-INCOME-NET> 7,559
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,868
<INCOME-PRETAX> 2,642
<INCOME-PRE-EXTRAORDINARY> 2,642
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,573
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 4.54
<LOANS-NON> 2,940
<LOANS-PAST> 109
<LOANS-TROUBLED> 403
<LOANS-PROBLEM> 7,201
<ALLOWANCE-OPEN> 4,120
<CHARGE-OFFS> (388)
<RECOVERIES> 231
<ALLOWANCE-CLOSE> 3,963
<ALLOWANCE-DOMESTIC> 3,963
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
