<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
OR -------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
-------------------------------------
Commission file number: 0-12430
-------------------------------------
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)
Registrant's telephone number, including area code: (973) 948-3300
----------------
Securities registered pursuant to Section 12(b) of the Act: None
------------------
Securities registered pursuant to Section 12 (g) of the
Act:
Common Stock, no par value
-------------------------------------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the voting stock of the registrant held by non-
affiliates (for this purpose, persons or entities other than executive officers,
directors, or 5% or more shareholders) of the registrant, as of March 16, 1998
is estimated to have been approximately $33,912,000.
The number of outstanding shares of the registrant's Common Stock, as of March
16, 1998, was 3,786,480 shares of Common Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE:
High Point Financial Corp. Proxy Statement dated April 9, 1998 (Part III)
<PAGE>
High Point Financial Corp.
Form 10-K Index
Part I
PAGE
Item 1. Business.........................................................1
Item 2. Properties.......................................................5
Item 3. Legal Proceedings................................................6
Item 4. Submission of Matters to a Vote of Security Holders..............6
Item 4A. Executive Officers of the Registrant.............................6
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters..............................................7
Item 6. Selected Consolidated Financial Data.............................9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................10
Item 8. Financial Statements and Supplementary Data.....................33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..........................57
PART III
Item 10. Directors and Executive Officers of the Registrant..............57
Item 11. Executive Compensation..........................................58
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................................58
Item 13. Certain Relationships and Related Transactions..................58
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.....................................................59
Signatures......................................................64
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>
PART I
ITEM I. BUSINESS.
DESCRIPTION OF BUSINESS.
High Point Financial Corp. is a bank holding company with one
subsidiary, The National Bank of Sussex County. We use three terms in this
Annual Report when discussing these companies:
- "HIGH POINT" refers solely to High Point Financial Corp., a New
Jersey corporation.
- "NBSC" refers solely to The National Bank of Sussex County, High
Point's wholly owned subsidiary.
- "THE COMPANY" refers to High Point and NBSC as a consolidated
entity.
High Point commenced operations on April 1, 1983. High Point's primary
business is managing and supervising NBSC.
NBSC was organized as The Branchville National Bank in 1933, and became The
National Bank of Sussex County in 1957. It is a federally chartered national
banking association and a member of the Federal Reserve System, and its deposits
are insured by the Federal Deposit Insurance Corporation. NBSC is a full
service commercial bank with nine branches, an operations center, and an
administration center -- all within Sussex County, New Jersey. Its customers
primarily are individuals who reside in, and small to medium-sized businesses
that are located in, northwestern New Jersey.
NBSC accepts deposits, makes loans, and offers annuities and life
insurance. NBSC also provides full securities brokerage services, including
mutual funds and variable annuities, in cooperation with Linsco/Private Ledger.
At December 31, 1997, the Company had total assets of approximately $236.3
million, deposits of approximately $198.4 million, and stockholders' equity of
approximately $22.3 million.
SUPERVISION AND REGULATION.
TERMINOLOGY. Several government agencies supervise and regulate the
activities of banks and bank holding companies. These agencies derive their
authority from a variety of federal statutes and regulations. For your
convenience, we are providing a list of some of the agencies and legislation
that are discussed in this Annual Report:
- "THE FEDERAL RESERVE BOARD" is the Board of Governors of the Federal
Reserve System, a federal agency that regulates bank holding companies,
including High Point.
- "THE FRB" is the Federal Reserve Bank of New York, the regional arm of
the Federal Reserve Board.
- "THE FDIC" is the Federal Deposit Insurance Corporation, an entity that
insures a portion of the deposits of its member banks.
- "THE OCC" is the Office of the Comptroller of the Currency, a federal
agency that regulates national banks, including NBSC.
- "THE BANK HOLDING COMPANY ACT" is a federal statute that provides for
the formation of bank holding companies, authorizes the Federal Reserve
Board to regulate bank holding companies, and prescribes the activities
in which bank holding companies may engage.
- "THE FICO" is the Financing Corporation, an entity chartered in 1987 for
the purpose of financing the recapitalization of the Federal Savings and
Loan Insurance Corporation.
The discussions of statutes and regulations that follow are brief
summaries. We cannot offer a complete explanation of each piece of banking
legislation, and suggest that readers who need more information refer directly
to the statutes and
1
<PAGE>
regulations themselves. Readers also should understand that
there are statutes and regulations that apply to, and regulate the operation of,
banking institutions that we do not discuss in this Annual Report.
HIGH POINT FINANCIAL CORP. High Point was organized in October 1982 under
the Bank Holding Company Act. High Point is supervised by the Federal Reserve
Board.
Authority of the Federal Reserve Board. The Federal Reserve Board has
broad authority over the operations of bank holding companies. For example, the
Federal Reserve Board requires High Point to file information (such as annual
reports) periodically, and may regularly inspect High Point's books, records,
and operations. The Federal Reserve Board also regulates the expansion of bank
holding companies. Federal Reserve Board approval is required before a bank
holding company can acquire an additional bank or bank holding company or extend
its existing operations.
The Bank Holding Company Act permits bank holding companies to engage in
four categories of activities:
- banking;
- owning and acquiring assets and securities of banking organizations;
- managing banking organizations; and
- "non-banking" activities that the Federal Reserve Board determines are
so closely related to banking or managing or controlling banks as to be
a "proper incident" thereto.
Under its authority to define appropriate "non-banking activities," the Federal
Reserve Board has issued regulations to permit bank holding companies to engage
in several businesses, including:
- operating mortgage companies, finance companies, credit card companies,
and factoring companies;
- performing certain data processing operations;
- providing investment and financial advice;
- acting as an agent for certain types of credit-related insurance;
- leasing personal property on a full-payout, non-operating basis; and
- providing limited discount brokerage services.
Currently, High Point does not engage directly in any of the permitted non-
banking activities. Through its bank subsidiary, NBSC, High Point offers
brokerage services and certain insurance products.
Supervisory Action. In the early 1990's, High Point had several years of
disappointing financial performance and became the subject of regulatory
concern. As a result, in 1992, High Point was required to enter into an
agreement with the FRB. The agreement imposed three types of restrictions,
which were designed to help the Company improve its earnings and to help the
Company and NBSC achieve and maintain adequate capital positions. First, High
Point was required to submit and adhere to a capital plan, an operating plan,
and a debt-servicing plan. Second, High Point was prohibited from incurring any
new debt, or renewing or changing the terms of any existing debt, without
authorization from the FRB. Third, High Point could not pay dividends, or make
any cash expenditures (other than for routine expenses) in excess of $10,000 to
any one entity in any one month, without prior approval from the FRB. High
Point complied with the terms of this agreement until the FRB terminated it in
June 1996.
Restrictions on High Point's Ability to Pay Dividends. Under the New Jersey
Business Corporation Act, High Point may not pay a dividend if, after the
payment, High Point would be unable to pay its debts as they come due in the
normal course of business, or High Point's total liabilities would exceed total
assets. There are three sources that a New Jersey corporation may look at to
calculate "total assets" and "total liabilities" for this purpose. One source
is financial statements prepared on the basis of generally accepted accounting
principles, as High Point's are. As of December 31, 1997, High Point does not
have any debt obligations and total assets exceed total liabilities by $22.3
million.
THE NATIONAL BANK OF SUSSEX COUNTY. Almost every aspect of NBSC's
operations is regulated or supervised by either the OCC, the Federal Reserve
Board, or the FDIC. These agencies regulate loans, investments, mergers and
acquisitions, borrowings, dividends, location of branch offices, and reserves
against deposits. NBSC also must comply with federal banking
2
<PAGE>
laws. Among other things, these laws restrict the amount that NBSC may lend to a
single borrower at one time, prohibit NBSC from investing in stock or other
securities of High Point or any other subsidiary of High Point, and restrict
NBSC from taking such stock or securities as collateral for a loan.
Deposit Insurance. As an FDIC insured bank, NBSC is required to pay
premiums. The FDIC currently requires insured institutions to pay anywhere from
$0.00 to $0.27 per $100 of insured deposits. A bank's premium rate is based on
the FDIC's assessment of the bank's capitalization and the amount of concern
that the bank generates among regulators. From January 1, 1996 until June 30,
1996, NBSC's FDIC insurance rate was $0.17 per $100 of deposits. From June 30,
1996 until December 31, 1996, NBSC's FDIC insurance rate dropped to $0.03 per
$100 of deposits. Because NBSC's risk rating improved, the FDIC effectively
eliminated NBSC's insurance premiums as of January 1, 1997. The FDIC reviews
its insurance premium rates approximately once every six months, and could
adjust NBSC's premium rate during one of those reviews if NBSC's capitalization
or financial condition changes for the worse.
Although NBSC was not liable for FDIC premiums in 1997, NBSC and all other
members of the Bank Insurance Fund are required to help fund interest payment
obligations that the FICO has assumed in connection with the recapitalization of
the Federal Savings and Loan Insurance Corporation. The FICO premium is $0.0128
per $100 of deposits.
Supervisory Action. From November 12, 1991, until March 27, 1996, NBSC was
party to a Consent Order with the OCC to resolve concerns about NBSC's
performance and financial condition. The Consent Order imposed restrictions,
operational mandates, and performance standards. First, NBSC was prohibited
from paying dividends to High Point. Second, NBSC was directed to submit a
capital plan, to enhance its policies and procedures for lending and for
asset/liability management, and to revise the methods it used to determine
whether its allowance for possible loan losses was adequate. Third, NBSC was
required to increase its leverage capital ratio to 6%, and to maintain an
adequate allowance for possible loan losses. For a discussion of NBSC's
allowance for possible loan losses, see "Management's Discussion and Analysis --
Financial Condition -- Allowance for Possible Loan Losses" on page 24. For a
discussion of leverage ratios, see "Management's Discussion and Analysis --
Financial Condition -- Capital Resources -- Regulatory status" on page 31.
The OCC and NBSC modified the Consent Order several times as NBSC worked to
achieve its mandate. While the Consent Order was in effect, management
instituted several initiatives, including a plan to reduce NBSC's asset size and
increase its earnings performance. At the same time, High Point commenced a
public offering of its common stock, which enabled it to contribute $2.4 million
to NBSC's capital.
By June 1994, NBSC had satisfied all of the requirements in the Consent
Order, including attaining a leverage ratio in excess of the required 6%. The
OCC terminated the Consent Order in March 1996.
Restrictions on NBSC's Ability to Provide Dividends and Other Funds to High
Point. High Point's primary source of revenue is dividends from NBSC. Like all
national banks, NBSC is subject to dividend restrictions. Presently, there are
four types of restrictions on NBSC's ability to make dividend payments.
First, 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 OCC. In addition, if NBSC sustains losses that exceed its
aggregate retained earnings, NBSC may not pay dividends until such losses are
recovered. NBSC's earnings for 1997, plus the retained earnings from the prior
two years, are $8.75 million. NBSC has aggregate retained earnings of $2.96
million as of December 31, 1997, and cannot pay dividends in excess of that
amount.
Second, each of the FDIC and the OCC has authority under federal law to
prohibit an insured bank from engaging in conduct that the agency believes would
constitute an unsafe or unsound banking practice. Under certain circumstances,
those agencies might determine that paying dividends or making other payments
constitutes an "unsafe or unsound" practice.
Third, banks and bank holding companies are required to maintain prescribed
levels of capital. Capital adequacy standards may inhibit the amount of
dividends that NBSC and High Point may pay in the future. For additional
information on capital adequacy guidelines, see "-- Capital Adequacy
Guidelines," "Management's Discussion and Analysis -- Financial Condition --
Capital Resources -- Regulatory status" on page 31, and Note 16 to the
Consolidated Financial Statements on page 51.
3
<PAGE>
Fourth, because the FDIC insures NBSC's deposits, NBSC may not pay
dividends or distribute any of its capital assets to High Point if it is in
default on any assessment due to the FDIC. NBSC has never been in default under
any of its obligations to the FDIC.
In addition to restricting dividend payments, federal law restricts NBSC's
ability to extend credit to High Point, in part by designating the type and
amount of collateral that High Point must tender to secure a loan from NBSC.
High Point has never been indebted to NBSC.
EFFECT OF GOVERNMENT MONETARY AND FISCAL POLICIES.
The Company's earnings are and will continue to be affected by domestic
economic conditions and the monetary and fiscal policies of the United States
government. In particular, the Federal Reserve Board has, and likely will
continue to have, an important impact on the operating results of commercial
banks. The Federal Reserve Board implements national monetary policy, engages
in open market operations in U.S. government securities, and regulates issues
such as the discount rate on borrowings of member banks and reserve requirements
against member bank deposits. These activities can have a major effect on
levels of bank loans, investments, and deposits, but it is not possible to make
specific predictions about how future changes in monetary and fiscal policies
will affect the Company.
RECENT AND PROPOSED LEGISLATION.
From time to time, the U.S. Congress, the New Jersey legislature, and bank
regulatory authorities consider proposals to reduce or expand the powers or
activities of different types of banking organizations. Among current
legislative and regulatory trends that are laws that expand or contract the
powers of banks, thrift institutions, and credit unions to sell certain types
of insurance products, and laws that relax restrictions on the activities of
bank holding companies and those activities closely related to banking. Until
these trends become concrete legislation or regulation, it is not possible to
predict how they will affect the business of High Point and NBSC. Management is
not aware of any pending legislative or regulatory proposals that would
dramatically help or harm High Point or NBSC.
CAPITAL ADEQUACY GUIDELINES.
The Federal Reserve Board, the OCC, and the FDIC each assess capital
adequacy with the same two tests. One test, a ratio of capital to risk adjusted
assets, accounts for the fact that different assets involve different degrees of
risk. For example, a U.S. government bond is a less risky asset than a real
estate development loan. The second test, a leverage ratio of capital to
tangible assets, does not distinguish among assets. These tests are described
in more detail in "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition -- Capital Resources --
Regulatory status" on page 31.
Federal regulators require banks and bank holding companies to have a core
or Tier 1 ratio of capital to risk adjusted assets of at least 4%, and a total
ratio of capital to risk adjusted assets of at least 8%. In addition,
regulations mandate a 3% minimum Tier 1 leverage ratio for banks and bank
holding companies that are considered to be strong banking organizations.
Factors that make an institution a "strong banking organization" include well-
diversified risk, no undue interest rate exposure, high liquidity, good
earnings, and excellent asset quality. Banks and bank holding companies that
are not considered "strong" must maintain higher capital ratios.
The Company and NBSC are in compliance with all applicable capital adequacy
standards. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Capital Resources -- Regulatory
status" on page 31, and Note 16 to the Consolidated Financial Statements on page
51.
LOCAL ECONOMY.
The Company operates in Sussex County in Northwestern New Jersey. Most of
the employed adults living in Sussex County work outside the county. The
industries within the county include tourism, retail sales, and real estate
construction and sales. The county's economy relies heavily on commercial and
residential real estate. There has been very little commercial real
4
<PAGE>
estate growth in Sussex County since the early 1990's. Residential real estate
growth has been moderate. Unemployment and job growth have been at favorable
levels.
In the early 1990's, NBSC had a significant number of borrowers in the
commercial real estate business. When values on real estate declined and demand
for real estate dwindled, many of those borrowers suffered setbacks. NBSC has
since focused on changing the composition of its loan portfolio from a high
concentration of commercial real estate loans to a high concentration of
consumer installment and residential real estate loans. In an added effort to
protect NBSC from potential deterioration in the real estate market, NBSC also
has imposed lower loan-to-value ratios, meaning that NBSC will advance a lower
percentage of a property's appraised value.
COMPETITION.
NBSC operates in a highly competitive market environment. Three major
interstate multi-bank holding companies and two large multi-state thrift holding
companies operate within Sussex County. These larger institutions have
substantially larger lending capacities than NBSC, and typically offer services
that NBSC does not offer. There are also three other community banks in the
county. Finally, banks now compete not only with other banks and traditional
financial institutions, but also with other business corporations that deliver
financial services.
One way that NBSC challenges its local competition is by offering
convenience. NBSC has more branches in Sussex County than any other financial
institution. As of the most recent data published by the FDIC (June 1997), NBSC
ranked second in the county in deposits, with a market share of 14.87%.
CONCENTRATION.
NBSC is not dependent on any single customer or small group of customers
for its deposit or loan business. No single customer or small group of
customers could trigger a material adverse change in the financial condition of
High Point or NBSC by withdrawing its deposits, paying off its outstanding loans
before maturity, or defaulting on its outstanding loans.
EMPLOYEES.
At December 31, 1997, the Company employed 135 people, including 21 part
time personnel. Management believes that it has a satisfactory relationship
with its employees.
STATISTICAL INFORMATION.
Statistical information is incorporated by reference to "Selected
Consolidated Financial Information" on page 9, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 10.
ITEM 2. PROPERTIES.
BRANCHES AND OFFICES.
NBSC operates nine banking locations, an administration center, and an
operations center, all in Sussex County, New Jersey. High Point and NBSC both
have their principal offices in shared space at Branchville Square in
Branchville, New Jersey. NBSC owns this administrative office building, as well
as the operations center.
NBSC owns its branch offices in Augusta and Franklin, and leases its Vernon
branch from an unaffiliated third party. The lease for the Vernon branch will
expire in September 2001, but NBSC has options to renew for two additional five-
year periods.
In 1988, NBSC sold the buildings that house NBSC's six other branches to
FMI, Inc., and then leased those facilities back. Each lease will expire
between 1998 and 2003, but NBSC has options to renew for periods ranging from 10
to 15 years. FMI, Inc. is a wholly owned subsidiary of Franklin Mutual
Insurance Co., which owns 6.6% of High Point's outstanding common stock. George
Guptill, Jr., President of FMI, Inc., is a member of High Point's Board of
Directors.
5
<PAGE>
In the first half of 1998, NBSC anticipates repurchasing the six branches
from FMI, Inc. at fair market value which will be determined at the time
of closing.
For additional information regarding NBSC's banking and office locations,
see Note 10 to the Consolidated Financial Statements, under the heading "Non-
cancelable lease obligations," on page 49.
LAND HELD FOR SALE.
High Point owns 66 acres of undeveloped land in Frankford Township, New
Jersey. This land, known as land "held for sale," had a net recorded carrying
value of $2.53 million at December 31, 1994.
In 1995, based on the requirements of Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-
lived Assets to be disposed of," management recorded an impairment of $370,000
on the land held for sale, meaning that management did not believe that High
Point would recover more than $2.16 million when it sold the land. This
impairment was based on management's estimate that it would take five years to
sell all of the land, and incorporates a discount rate of 16%.
Management recorded an additional $29,000 impairment in 1995 based on the
price fixed in a contract to sell 32 of the 66 acres. Later, when that contract
was terminated in 1996, High Point recorded a third impairment of $250,000. The
amount of this impairment reflected both the termination of the sale contract
and management's revised estimate of the net realizable value of the land.
The Company has contracts to sell most of the land held for sale but
disputes have arisen that remain unresolved with respect to the rights under an
earlier expired contract to purchase a small portion of the land held for sale.
For more information on the land held for sale and the requirements of
Statement of Financial Accounting Standards No. 121, see Note 6 to the
Consolidated Financial Statements on page 44.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, High Point and NBSC are defendants in legal proceedings
relating to their respective businesses. Management does not believe that the
outcome of any legal proceeding that was pending as of December 31, 1997 will
materially affect the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
High Point did not submit any matters to its security holders for a vote
during the fourth quarter of 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following individuals are the current principal executive officers of
High Point and NBSC. The Boards of Directors of High Point and NBSC elect the
executive officers to one-year terms (subject to removal by the respective
Boards) at their respective annual meetings.
MICHAEL A. DICKERSON, 61 Positions with High Point
-------------------------
- President, Chief Executive Officer, and a
Director (since 1988)
Positions with NBSC
-------------------
- President (since 1992)
- Vice Chairman of the Board (1991 to 1996)
- Chief Executive Officer (since 1991)
- Director (since 1988)
6
<PAGE>
GREGORY W.A. MEEHAN, 50 Positions with High Point
-------------------------
- Vice President (since 1987)
- Treasurer and Assistant Secretary (since 1983)
Positions with NBSC
-------------------
- Director (since 1994)
- Chief Operating Officer (since 1991)
- Executive Vice President (since 1990)
- Chief Financial Officer (since 1988)
ROBERT A. VANDENBERGH, 46 Position with High Point
------------------------
- Secretary (since 1992)
Positions with NBSC
-------------------
- Executive Vice President (since 1997)
- Director (since 1994)
- Chief Lending Officer (since 1991)
RITA A. MYERS, 39 Position with High Point
------------------------
- Comptroller (since 1993)
Positions with NBSC
-------------------
- Vice President (since 1990)
- Comptroller (since 1989)
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters.
High Point's common stock has been trading on the NASDAQ National Stock
Market under the symbol HPFC since February 3, 1997. Prior to that date, High
Point's common stock was traded in the over-the-counter market. As of December
31, 1997, High Point had 1,686 shareholders of record.
The table below sets forth, for each calendar quarter in the past two
years, the high and low bid prices per share of High Point common stock. The
information in this table for periods prior to February 1997 is derived from
reports provided by the National Quotation Bureau, Inc. Information for periods
after that date is from NASDAQ.
The prices shown do not include mark-ups, markdowns, or commissions. In
addition, the prices may reflect offers to buy or to sell that did not culminate
in actual transactions.
High Point has not declared or paid cash dividends since June 1990.
7
<PAGE>
Bid
High Low
---- ---
Year ended December 31, 1996
First quarter............ $6.50 $6.13
Second quarter........... 6.50 6.13
Third quarter............ 7.00 6.13
Fourth quarter........... 8.50 7.00
Year ended December 31, 1997
First quarter............ $10.88 $8.63
Second quarter........... 10.63 9.63
Third quarter............ 11.38 9.63
Fourth quarter........... 13.13 10.88
8
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Not covered by Report of Independent Public Accountants)
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS (in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income $16,519 $14,429 $13,653 $12,017 $12,491
Total interest expense 6,325 5,758 5,550 4,492 4,952
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 10,194 8,671 8,103 7,525 7,539
Provision for possible loan losses* --- --- 225 1,327 336
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses10,194 8,671 7,878 6,198 7,203
Non-interest income 2,808 2,439 2,219 2,368 2,589
Non-interest expenses* 9,241 8,847 9,443 9,630 10,573
Unrealized loss on land held for sale --- 250 29 --- ---
Gain on sale of bank premises 139 141 148 141 79
Gain on sale of land held for sale --- --- --- --- 306
Loans and securities gains (losses) (9) (28) 53 (289) 519
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before benefit for income taxes and
cumulative effect for change in accounting principle 3,891 2,126 826 (1,212) 123
Provision (benefit) for income taxes 1,586 (2,681) (249) (97) (31)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect for change in
accounting principle 2,305 4,807 1,075 (1,115) 154
Cumulative effect of change in accounting principle --- --- (370) --- ---
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $2,305 $4,807 $705 $(1,115) $154
============================================================================================================================
PER SHARE INFORMATION:
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) before cumulative effect for change in
accounting principle $0.61 $1.27 $0.29 ($0.36) $0.06
Cumulative effect of change in accounting principle --- --- (0.10) --- ---
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $0.61 $1.27 $0.19 ($0.36) $0.06
============================================================================================================================
Diluted earnings (loss) per share $0.60 $1.27 $0.19 ($0.36) $0.06
============================================================================================================================
Stockholders' equity (book value) $5.90 $5.28 $3.89 $3.19 $4.06
Number of shares outstanding, December 31 3,786,480 3,786,480 3,745,760 3,745,760 2,439,009
Average number of shares outstanding 3,786,480 3,779,364 3,745,760 3,065,786 2,437,908
YEAR END BALANCE SHEET INFORMATION (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $236,328 $217,182 $200,184 $184,641 $181,263
Total deposits 198,430 188,854 178,325 165,572 162,788
Loans held for sale 88 178 628 427 5,708
Loans, net of unearned income* 126,722 114,641 104,833 105,556 110,933
Allowance for possible loan losses* 4,120 3,973 4,609 5,234 5,419
Securities, including those available for sale 77,620 76,242 64,696 54,231 41,930
Note payable --- 846 1,270 1,482 2,373
Redeemable subordinated debentures --- 127 511 510 510
Employee Stock Ownership Plan debt --- --- --- 150 321
Stockholders' equity 22,343 19,977 14,558 11,963 9,892
CONSOLIDATED RATIOS
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) to average stockholders' equity 10.91% 28.52% 5.26% (9.72%) 1.60%
Net income (loss) to average total assets 1.00 2.31 0.37 (0.61) 0.08
Stockholders' equity to total assets at year end 9.45 9.20 7.28 6.48 5.46
Net charge-offs (recoveries) to average loans outstanding (0.12) 0.59 0.82 1.37 0.80
Net interest spread (tax equivalent basis) 4.07 3.66 3.82 3.92 4.01
Net interest margin (tax equivalent basis) 4.85 4.49 4.61 4.55 4.52
Loans to deposits 63.84 60.70 58.79 63.75 68.15
Non-performing loans to loans 2.57 3.80 6.47 12.20 17.39
Allowance for possible loan losses to loans 3.25 3.47 4.40 4.96 4.88
Allowance for possible loan losses to non-performing loans 126.38 91.23 67.94 40.61 28.07
Average stockholders' equity to average total assets 9.17 8.09 7.02 6.32 5.19
OTHER SELECTED DATA
- ----------------------------------------------------------------------------------------------------------------------------
Number of full time equivalent employees 123 122 123 126 124
Number of common stockholders at year end 1,686 1,750 1,718 1,713 1,553
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*The information for 1994 and prior years has been restated per the requirements
of SFAS No. 114. See Note 3 on page 41 for further information.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This section presents a review of the Company's consolidated results of
operations and financial condition. You should read this section in conjunction
with the consolidated financial data that are presented in Item 8 of this Annual
Report, as well as the accompanying Notes to Consolidated Financial Statements.
SUMMARY OF FINANCIAL HIGHLIGHTS
This Management's Discussion and Analysis shows in detail the following:
- Income before taxes increased by 83.0% from December 31, 1996 to
December 31, 1997. See " -- Results of Operations -- Net Income."
- Deposits increased by 5.1% from December 31, 1996 to December 31, 1997.
See " -- Financial Condition -- Deposits."
- Loans increased by 10.5% from December 31, 1996 to December 31, 1997.
See "-- Financial Condition -- Loans."
- Non-performing assets decreased by 20.4% from December 31, 1996 to
December 31, 1997. See " -- Financial Condition -- Non-Performing
Assets."
- Stockholders' equity increased by 11.8% from December 31, 1996 to
December 31, 1997. See " -- Financial Condition -- Capital Resources --
Stockholders' equity."
RESULTS OF OPERATIONS
NET INCOME.
BEFORE TAXES. Net income before taxes and before cumulative effect for
change in accounting principle was $3.89 million in 1997, compared to $2.13
million in 1996. Net income before taxes increased by more than $1.76 million
in 1997 for several reasons. First, assets increased by 8.8% -- from $217.2
million on December 31, 1996 to $236.3 million on December 31, 1997. Second,
non-performing assets declined by 20.4% -- from $5.5 million on December 31,
1996 to $4.4 million on December 31, 1997. Third, because assets increased and
non-performing assets decreased, net interest income increased by 17.5% -- from
$8.67 million at December 31, 1996 to $10.19 million at December 31, 1997.
This Management's Discussion and Analysis contains additional information
on each of the three factors that contributed to net income before taxes in
1997:
- For information regarding assets generally, see " -- Financial
Condition --Loans" and " -- Financial Condition -- Securities
Portfolio."
- For information regarding non-performing assets, see " -- Financial
Condition-- Non-Performing Assets."
- For information regarding net interest income, see " -- Results of
Operations-- Net Interest Income."
Net income before taxes and before cumulative effect for change in
accounting principle improved from $826,000 in 1995 to $2.13 million in 1996 for
many of the same reasons: assets increased, non-performing assets declined, net
interest income increased, and non-interest expense declined. The Company did
not record a provision for possible loan losses in 1996, but did take a
provision of $225,000 in 1995. See "--Results of Operations--Provision for
Possible Loan Losses" and "--Financial Condition--Allowance for Possible Loan
Losses."
AFTER TAXES. For the year ended December 31, 1997, the Company's
consolidated net income was $2.31 million, representing a decrease of $2.5
million from 1996 net income of $4.81 million. In contrast, net income
increased in 1996 by $4.1 million from the 1995 level of $705,000. Basic
earnings per common share for 1997 were $0.61, compared to $1.27 in 1996, and
$0.19 in 1995.
10
<PAGE>
The Company's net income declined significantly from 1996 to 1997, even
though before tax income steadily increased during that period, because the
Company realized certain tax benefits during 1996 which were not available in
1997. From 1990 until 1994, the Company had net operating losses. Some of
those losses were "carried back" to prior profitable years and generated refunds
of federal taxes paid in those years. The remainder of the Company's combined
net operating losses were "carried forward," with the intent that the losses
would be used to offset profits and reduce the Company's tax liability in the
future.
Accounting rules do not permit a company to record a tax benefit on losses
carried forward until management determines that it is more likely than not that
income levels in future periods will be sufficient to offset the losses. In
1996, after the Company became profitable again, management determined that it
was more likely than not that High Point would continue to generate sufficient
levels of income in future periods to realize the net operating loss carry
forward. As a result, High Point recognized a tax benefit totaling $3.09
million in 1996. Ultimately, the recorded benefit exceeded the Company's
combined state and federal tax liability for 1996, and the excess amount of
$2.68 million was treated as income. As a result, the Company's "net" or "after
tax" income for 1996 was actually higher than "before tax" income for that year.
In comparison, the Company recorded a tax expense of $1.59 million in 1997.
However, as of December 31, 1996 and 1997, there is still some uncertainty
whether certain subsidiaries of High Point will generate sufficient income in
future periods to fully realize net operating losses carried forward for state
income tax purposes. As a result, management has created a "valuation
allowance" of approximately $573,000 at December 31, 1996 and $539,000 at
December 31, 1997. Management will periodically reevaluate the amount of this
allowance.
For more information on the Company's income taxes, see Note 7 on page 45.
NET INTEREST INCOME.
Net interest income is the difference between interest income on earning
assets and the interest cost of funds supporting those assets. For example, if
a bank's only asset was an interest-bearing bond, and its only liability was a
certificate of deposit, that bank's net interest income would be the difference
between the interest that it earned on the bond and the interest that it paid on
the CD.
The Company's net interest income is determined by: one, the volume of
interest-earning assets that it holds and the yield that it earns on those
assets, and two, the volume of interest-bearing liabilities that it has assumed
and the rates that it pays on those liabilities. Net interest income increases
when the Company can use non-interest-bearing deposits to fund or support
interest-earning assets.
Net interest income for 1997 was $10.19 million, representing an increase
of $1.52 million (17.5%) from the $8.67 million earned in 1996. In comparison,
net interest income for 1995 was $8.10 million. Net interest income improved
from 1996 to 1997 because earning assets increased by $17.2 million. Similarly,
the improvement in net interest income from 1995 to 1996 was the result of a
$17.0 million increase in average earning assets.
INTEREST INCOME AND EXPENSE VOLUME/RATE ANALYSIS. The following table
------------------------------------------------
shows the impact that changes in average balances of the Company's assets and
liabilities and changes in average interest rates have had on the Company's net
interest income over the past three years. This information is presented on a
tax equivalent basis (assuming a 34% tax rate). If a change in interest income
or expense is attributable to a change in volume and a change in rate, the
amount of the change is allocated proportionately.
11
<PAGE>
<TABLE>
<CAPTION>
INTEREST INCOME AND EXPENSE VOLUME/RATE ANALYSIS
(tax-equivalent basis, in thousands)
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
---------------------------------------------------------------------------------
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest bearing deposits at banks $ ---- $1 $1 $ ---- $(1) $(1)
Federal funds sold (192) 19 (173) (7) (57) (64)
Securities including securities available for sale:
U.S. Government and agencies 265 212 477 777 56 833
State and political subdivisions --- --- --- --- --- ---
Other securities 148 (45) 103 35 (22) 13
---------------------------------------------------------------------------------
Total securities 413 167 580 812 34 846
---------------------------------------------------------------------------------
Loans, including loans held for sale,
net of unearned income:
Commercial and construction (271) 557 286 (676) (306) (982)
Mortgage 958 (74) 884 614 (81) 533
Installment 508 4 512 397 47 444
---------------------------------------------------------------------------------
Total loans 1,195 487 1,682 335 (340) (5)
---------------------------------------------------------------------------------
TOTAL INTEREST INCOME 1,416 674 2,090 1,140 (364) 776
---------------------------------------------------------------------------------
INTEREST EXPENSE
Savings deposits 81 4 85 91 (31) 60
Interest bearing transaction accounts 59 (3) 56 37 0 37
Time deposits 211 (6) 205 194 (72) 122
Short-term borrowings 183 27 210 51 (13) 38
Long-term borrowings 25 (14) 11 (43) (6) (49)
---------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 559 8 567 330 (122) 208
---------------------------------------------------------------------------------
Net interest income (tax equivalent basis) 857 666 1,523 810 (242) 568
Tax-equivalent basis adjustment --- --- --- --- --- ---
---------------------------------------------------------------------------------
NET INTEREST INCOME $857 $ 666 $1,523 $810 $ (242) $568
=================================================================================
</TABLE>
CONSOLIDATED STATISTICS ON A TAXABLE EQUIVALENT BASIS. The following table
shows, for the past three years:
- the Company's consolidated average balances of assets, liabilities, and
stockholders' equity;
- the average amount of interest-earning assets that the Company held and
interest-bearing liabilities for which the Company was obligated during
each period; and
- the Company's net interest spread and net interest income as a
percentage of average interest-earning assets.
The information in this table has been adjusted in two respects. First,
the figures for "Loans" include non-accruing loans, which are loans that are not
earning interest. As a result, the yield shown for the loan portfolio is less
than it would be if it
12
<PAGE>
reflected only earning assets. See " -- Interest earned on loans." Second, non-
taxable income from investment securities is presented on a tax-equivalent
basis. This means that tax-exempt income is adjusted upward by an amount
equivalent to the prevailing federal income taxes that the Company would have
been required to pay if the income had been fully taxable (assuming a 34% tax
rate).
<TABLE>
<CAPTION>
CONSOLIDATED STATISTICS ON A TAXABLE EQUIVALENT BASIS
(in thousands)
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, including loans held for sale, net of
unearned income:
Commercial and construction $52,250 $5,084 9.73% $55,892 $4,798 8.58% $63,647 $5,780 9.08%
Mortgage 43,082 3,572 8.29% 31,504 2,688 8.53% 24,257 2,155 8.88%
Installment 26,421 2,375 8.99% 20,774 1,863 8.97% 16,329 1,419 8.69%
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 121,753 11,031 9.06% 108,170 9,349 8.64% 104,233 9,354 8.97%
- -----------------------------------------------------------------------------------------------------------------------------------
Securities including securities available for sale:*
U.S. government and agencies 64,882 4,264 6.57% 60,760 3,787 6.23% 48,288 2,954 6.12%
State and political subdivisions ---- ---- ---- % ---- ---- ---- % ---- ---- ---- %
Other securities 15,321 782 5.10% 12,321 679 5.51% 11,647 666 5.72%
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities 80,203 5,046 6.29% 73,081 4,466 6.11% 59,935 3,620 6.04%
- -----------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits at banks 68 2 2.94% 111 1 0.90% 113 2 1.77%
Federal funds sold 8,060 440 5.46% 11,556 613 5.30% 11,669 677 5.80%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 210,084 16,519 7.86% 192,918 14,429 7.48% 175,950 13,653 7.76%
- ----------------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets:
Cash and due from banks 8,610 8,389 7,886
Unrealized gains (losses) on securities
available for sale 124 1 (577)
Allowance for possible loan losses (4,078) (4,229) (5,042)
Premises and equipment--net 5,085 4,838 5,321
Other assets 10,550 6,367 7,397
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $230,375 $208,284 $190,935
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits $59,805 $1,728 2.89% $56,984 $1,643 2.88% $53,764 $1,583 2.94%
Interest bearing transaction accounts 29,376 581 1.98% 26,373 525 1.99% 24,550 488 1.99%
Time deposits 64,598 3,496 5.41% 60,693 3,291 5.42% 57,087 3,169 5.55%
Short-term borrowings 10,833 377 3.48% 5,478 167 3.05% 3,735 129 3.45%
Long-term borrowings 2,171 143 6.59% 1,413 132 9.34% 1,875 181 9.65%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 166,783 6,325 3.79% 150,941 5,758 3.81% 141,011 5,550 3.94%
- ----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing liabilities:
Demand deposits 39,917 38,079 34,128
Other liabilities 2,548 2,407 2,396
- ----------------------------------------------------------------------------------------------------------------------------------
Total non-interest bearing liabilities 42,465 40,486 36,524
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 21,127 16,857 13,400
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $230,375 $208,284 $190,935
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income (tax-equivalent basis) 10,194 4.07% 8,671 3.66% 8,103 3.82%
Tax-equivalent basis adjustment --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $10,194 $8,671 $8,103
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest margin (tax-equivalent basis) 4.85% 4.49% 4.61%
- ----------------------------------------------------------------------------------------------------------------------------------
*Securities are reported at amortized cost without including the impact of any unrealized gains or losses on securities available
for sale.
</TABLE>
PAGE 13
13
<PAGE>
TOTAL INTEREST INCOME. Total interest income increased from $14.43 million
----------------------
in 1996 to $16.52 million in 1997, an increase of $2.09 million. An increase in
average assets caused $1.42 million of this increase. The remainder of the
increase, or $674,000, is attributable to an increase in yield. Total average
interest-earning assets increased from $192.9 million in 1996 to $210.1 million
in 1997, representing an increase of $17.2 million resulting from growth in the
loan and investment portfolios.
In 1996, total interest income increased by $776,000 from the $13.65
million reported in 1995. Total average interest-earning assets increased by
$16.9 million in 1996 from the $176.0 million reported in 1995. The increase in
earning assets in 1996 came from a combination of an increase in total assets
and a decline in non-performing assets. The composition of average assets also
changed. Average loans outstanding increased by $4.0 million from 1995 to 1996,
and average securities increased by $13.2 million in the same time period.
INTEREST EARNED ON LOANS. Interest income on total loans increased from
-------------------------
$9.35 million in 1996 to $11.03 million in 1997, an increase of $1.68 million.
Most of this increase, or $1.12 million, is attributable to an increase in loan
volume. Average loans increased by 12.6%, from $108.2 million in 1996 to $121.8
million in 1997. The remainder of the increase, or $487,000, was caused by an
increase in average yield, due in large part to the collection of $354,000 in
interest received on a troubled loan that was paid off in third quarter.
Interest income on total loans fell slightly from $9,354,000 in 1995 to
$9,349,000 in 1996. This decrease in interest income was the net result of a
$340,000 decline caused by a decrease in rate, and a $335,000 increase caused by
an increase in volume. From 1995 to 1996, the average yield on all loans
decreased from 8.97% to 8.64%. Average yields on commercial loans declined 50
basis points, and average yields on mortgage loans declined 35 basis points.
(One basis point is equal to one hundredth of one percent.)
As the volume of the Company's non-performing loans continues to fall, the
negative impact of non-performing loans on the Company's interest income is also
decreasing. In 1997, the Company had average non-accrual loans of $3.5 million,
compared to $5.1 million for 1996, and $6.5 million for 1995. If all of those
loans had been current, the Company would have earned $360,000 more interest in
1997, $497,000 more in 1996, and $627,000 more in 1995. Non-accruing loans
reduced the yields on total loans presented by 30 basis points in 1997, by 42
basis points in 1996, and by 59 basis points in 1995. If the non-accrual loans
were excluded from interest-earning assets, the yield on total earning assets
and the net interest spread would increase by 8 basis points for 1997, 20 basis
points for 1996, and 29 basis points for 1995.
INTEREST EARNED ON SECURITIES. Total interest income on securities
------------------------------
increased from $4.47 million in 1996 to $5.05 million in 1997, an increase of
$580,000. Most of this increase--$413,000--was due to an increase in volume.
The Company purchased $24.4 million in additional securities in 1997, bringing
the amount of average securities from $73.1 million in 1996 to $80.2 million in
1997. The rest of the increase--$167,000--was due to an increase in rates.
In 1996, interest income on securities increased by $846,000 from 1995.
This increase also had two components: $812,000 due to an increase in volume,
and $34,000 due to an increase in rates.
TOTAL INTEREST EXPENSE. Total interest expense increased from $5.76
-----------------------
million in 1996 to $6.33 million in 1997, an increase of $567,000. An increase
in the volume of the Company's interest-bearing liabilities -- from an average
of $150.9 million in 1996 to an average of $166.8 million in 1997 -- caused a
$559,000 increase in interest expense. The rest of the increase was due to an
increase in rates.
There were three components to the $15.9 million increase in interest-
bearing liabilities from 1996 to 1997. First, average interest-bearing deposits
increased from $144.1 million to $153.8 million. Second, average short-term
borrowings increased from $5.5 million to $10.8 million. Third, the Company's
average long-term borrowings increased from $1.4 million to $2.2 million.
Total interest expense increased by $208,000 from 1995 to 1996. There was
an increase of $333,000 due to an increase in volume, but that increase was
offset by a decline of $125,000 due to a decrease in rates.
14
<PAGE>
INTEREST PAID ON DEPOSITS. Average savings accounts increased from $57
million in 1996 to $59.8 million in 1997, an increase of $2.8 million. Interest
expense on savings deposits increased from $1.64 million in 1996 to $1.73
million in 1997. The increase in deposit volume caused $81,000 of the increase
in interest expense, and an increase in rates caused the remaining $4,000. In
comparison, interest expense on savings deposits increased by $60,000 from 1995
to 1996 -- $91,000 from an increase in volume offset by a decrease of $31,000
due to a decrease in rates.
Average time deposits increased from $60.7 million in 1996 to $64.6 million
in 1997, an increase of $3.9 million. Interest expense on time deposits
increased from $3.29 million in 1996 to $3.5 million in 1997. An increase in
volume caused interest expense to increase by $211,000, but a decline in rate
offset that increase by $6,000. In comparison, interest expense on time
deposits increased by $122,000 from 1995 to 1996 -- $194,000 due to an increase
in volume, offset by a $72,000 decline due to a decline in rate.
INTEREST PAID ON BORROWINGS. Average long-term borrowings, comprising a
repurchase agreement with a five year maturity, a note payable, and High Point's
8.5% Redeemable Subordinated Debentures, were $2.2 million in 1997, an increase
of $800,000 from 1996. The composition of the long-term borrowings changed
substantially in 1997. In 1996 and 1995, long-term borrowings consisted of a
note payable and the Debentures both of which were fully satisfied in 1997. In
the latter half of 1997, NBSC borrowed $5 million, using a 5 year repurchase
agreement with a 3 year call. See Note 14 on page 51, regarding the note
payable, and Note 15 on page 51, regarding the debentures.
Interest expense on long-term borrowings increased by $11,000 -- $25,000
due to an increase in volume offset by a decrease of $14,000 due to a decrease
in rate. In comparison, interest expense on long-term borrowings decreased by
$49,000 from 1995 to 1996 -- $43,000 due to a reduction in volume and $6,000 due
to a decrease in rate.
NET INTEREST SPREAD. Net interest spread is the difference between the
yield on earning assets and the average cost of funds acquired (interest-bearing
liabilities). In 1997, net interest spread was 4.07%, compared to 3.66% in
1996, and 3.82% in 1995. The gross yield on interest-earning assets for 1997
was 7.86%, compared to 7.48% for 1996, and 7.76% for 1995. The cost of
interest-bearing liabilities in 1997 was 3.79%, compared to 3.81% for 1996, and
3.94% for 1995.
The yield on interest-earning assets changed in 1997 primarily because NBSC
collected $354,000 of interest owed but not accrued on a troubled loan. A 25
basis point increase in the prime rate early in 1997 also contributed to the
increase in yield on earning assets.
The tax-equivalent net interest margin (net interest income divided by
average earnings assets) increased from 4.49% in 1996 to 4.85% in 1997, an
increase of 36 basis points. From 1996 to 1995, the tax-equivalent net interest
margin decreased by 12 basis points.
For additional information on yields, see the table entitled "Consolidated
Statistics on a Taxable Equivalent Basis" that appears on page 13, particularly
the line items for "Total interest earning assets," "Net interest income (tax
equivalent basis)," and "Net interest margin (tax equivalent basis)."
PROVISION FOR POSSIBLE LOAN LOSSES.
The Company has not made a provision for possible loan losses since 1995,
when management recorded a provision of $225,000. Net loans recovered in 1997
amounted to $147,000, compared to net loans charged off of $636,000 in 1996 and
$850,000 in 1995. NBSC's management has evaluated its allowance for possible
loan losses, particularly in light of continued declines in non-performing loans
and classified loans, and believes the allowance is adequate at this time. If
the Sussex County economy suffers a downturn for any reason, management may add
to the allowance for possible loan losses in future periods. For additional
information, see Note 5 on page 44, " -- Financial Condition -- Non-performing
Assets," and " -- Financial Condition -- The Allowance for Possible Loan
Losses."
15
<PAGE>
NON-INTEREST INCOME.
"Non-interest income" primarily comprises fees, service charges (such as
service charges on deposit accounts), and commissions (such as commissions for
brokerage and investment planning services). In 1997 High Point also earned
non-interest income from insurance policies.
Non-interest income for 1997 was $2.94 million, an increase of $390,000
(15.3%) over the $2.55 million earned in 1996. A significant source of this
increase was insurance. High Point received a total of $256,000 from the
proceeds of a life insurance policy covering a former director and from income
earned on other insurance policies that the Company purchased as part of its new
Executive Supplemental Retirement Plan. For information regarding this benefit
plan, see " -- Non-interest Expense -- Salary and employee benefits," and Note 8
on page 46. Non-interest income in 1995 was $2.42 million.
Service charges on deposit accounts increased by $25,000 in 1997 -- rising
from $1.4 million in 1996 to $1.42 million in 1997. In 1996, service charges on
deposit accounts increased by $54,000 from the $1.34 million reported in 1995.
In both 1996 and 1997, the Company had higher service fee income because NBSC
maintained more deposit accounts than in the previous year.
Other service charges, commissions, and fees increased from $853,000 in
1996 to $954,000 in 1997, an increase of $101,000. The primary source of this
increase was NBSC's commissions on annuity sales and investment planning
services. These commissions increased from $415,000 in 1996 to $478,000 in
1997. In 1996, other service charges, commissions, and fees increased by
$145,000, primarily due to increased commissions from annuity sales and
investment planning services.
In 1997, the Company recorded a loss of $9,000 on the sale of securities
and loans. In comparison, such sales resulted in a loss of $19,000 in 1996, and
a gain of $53,000 in 1995.
NON-INTEREST EXPENSE.
Non-interest expense includes salary and employee benefits, facility and
equipment expense, operation of other real estate, and miscellaneous fees.
Total non-interest expense increased from $9.1 million in 1996 to $9.24 million
in 1997, an increase of $144,000 or 1.5%. In comparison, non-interest expense
decreased by $375,000 in 1996 from the $9.47 million recorded in 1995. The
increase in non-interest expense from 1996 to 1997 was due to increases in
salary and employee benefits and equipment expense (see "-- Salary and employee
benefits" and "-- Net occupancy expense"), offset somewhat by declines in rental
expenses and cost of operation of other real estate (see "-- Net occupancy
expense" and "-- Operation of other real estate").
SALARY AND EMPLOYEE BENEFITS. Salary and employee benefits combined
-----------------------------
constitute the Company's largest non-interest expense. In 1997, the Company
paid a total of $4.95 million in salary and employee benefits, which was
$370,000 more than the $4.58 million paid in 1996. Salary and employee benefits
expense for 1996 was $48,000 less than the $4.62 million reported in 1995.
Salary expense increased from $3.59 million in 1996 to $3.76 million in
1997, an increase of $170,000, because the Company gave most of its employees
merit-based raises. Benefits expense increased from $990,000 in 1996 to $1.19
million in 1997, an increase of $200,000, for three reasons. First, in the
fourth quarter of 1996, the Company adopted an Executive Supplemental Retirement
Plan. Accruals for benefit obligations for that plan accounted for $104,000 of
the increase in benefits expense, but those costs are offset by the income that
the Company earned on the underlying insurance policies. See "-- Non-interest
Income." Second, in the first quarter of 1997, the Company made several awards,
including stock grants, as part of an employee incentive program. These gifts
accounted for $27,000 of the increase in benefits expense. Third, the Company's
matching contributions to the 401(k) plan increased from $58,000 in 1996 to
$85,000 in 1997 because more employees chose to participate in the plan.
NET OCCUPANCY EXPENSE. Net occupancy expense decreased from $952,000 in
----------------------
1996 to $915,000 in 1997, primarily because the Company paid $14,000 less rent
for office space in 1997 than it did in 1996 and incurred fewer maintenance
expenses. However, expenses for equipment, such as leased phones, computers,
and copying machines, increased from
16
<PAGE>
$552,000 in 1996 to $886,000 in 1997, primarily because the Company upgraded its
computer system and software and its telecommunications lines.
In 1996, net occupancy expense decreased by $14,000 from 1995 levels
because of a decrease in rental expense for office space.
OPERATION OF OTHER REAL ESTATE. "Other real estate" is property that the
Company acquires when it forecloses on the collateral for a defaulted loan. See
Note 4 on page 43, and " -- Financial Condition -- Non-Performing Assets --
Other real estate." The net cost of operation of other real estate has three
components: net gains or losses from the sale of property for an amount that
differs from its carrying value; provisions to the allowance for other real
estate or direct writedowns to properties; and operating expenses, such as
maintenance of properties and costs incurred on foreclosure. Operating expenses
on other real estate are offset by any rental income that the properties
generate.
The Company's net cost of other real estate was $141,000 in 1997, $305,000
in 1996, and $663,000 in 1995. Broken down into its three components, net cost
of other real estate changed as follows:
- Net gains on the sale of other real estate were $48,000 in 1997,
compared to $78,000 in 1996, and a net loss of $20,000 in 1995.
- Provisions to the allowance for other real estate or direct writedowns
were $121,000 in 1997, compared to $310,000 for 1996, and $331,000 for
1995.
- Net operating expenses on other real estate were $68,000 in 1997,
$73,000 in 1996, and $312,000 in 1995.
In each year, the net cost of operation declined by more than 50% because
the Company commenced fewer proceedings and had fewer properties to maintain.
OTHER EXPENSES. "Other expenses," such as legal fees, FDIC insurance, and
marketing, decreased from $2.71 million in 1996 to $2.35 million in 1997, a
decrease of $359,000. In 1996, other expenses increased by $32,000, most of
which was in legal fees. See Note 18 on page 53 for itemized detail.
Legal fees declined from $276,000 in 1996 to $186,000 in 1997, a decrease
of $90,000. This decline was because of the decline in non-performing assets;
the Company needed less legal help with loan workouts, foreclosures, and related
matters in 1997 than it did in 1996. In 1996, legal fees increased by $29,000
from the $247,000 reported in 1995.
The Company's FDIC insurance assessment has decreased steadily, moving from
$383,000 in 1995, to $170,000 in 1996, to $23,000 in 1997. Like all FDIC
insured banks, NBSC pays a premium based on its level of capitalization and the
degree of concern that it generates among regulators. Premiums range from $0.00
to $0.27 per $100 of insured deposits. Because NBSC has been in sound financial
condition over the past few years, NBSC's FDIC premium was effectively
eliminated as of January 1, 1997 by being reduced to $0.00 per $100 in deposits.
In 1996, NBSC's FDIC insurance premium was reduced from $0.17 to $0.03 per $100
of deposits, which reduced the Company's FDIC insurance expense by 55.6% from
1995 levels. NBSC remains obligated to pay a premium of $0.0128 per $100 in
deposits to a federal entity known as the Financing Corporation, which is
refinancing the capitalization of the Federal Savings and Loan Insurance
Corporation.
Marketing expense increased from $216,000 in 1996 to $238,000 in 1997, an
increase of $22,000. The Company devoted most of its marketing efforts in 1997
to promoting new mortgage products and insurance products. In 1996, marketing
expense declined from 1995 levels of $315,000 because management contracted for
less advertising than it had in prior years.
Training expenses and telephone expenses both increased in 1997 as a result
of the upgrade of the Company's computer system, software, and telecommunication
lines.
Printing and supply expense increased from $239,000 in 1996 to $249,000 in
1997 because the Company revised and reprinted certain of its forms and
brochures to comply with changing regulations. Printing and supply expense in
1995 was $196,000.
17
<PAGE>
FINANCIAL CONDITION
DEPOSITS.
Total deposits increased by $9.5 million during 1997 -- from $188.9 million
on December 31, 1996 to $198.4 million on December 31, 1997. In comparison,
total deposits increased by $10.6 million during 1996 from 1995 levels of $178.3
million.
NBSC offers four different types of deposit accounts. From December 31,
1996 to December 31, 1997, these accounts changed as follows:
- NON-INTEREST BEARING DEMAND ACCOUNTS decreased from $43.1 million to
$40.4 million, a decrease of $2.7 million, or 6.3%. Average non-interest bearing
deposits increased from $38.1 million to $39.9 million. These deposits as a
percent of total deposits decreased from 20.9% in 1996 to 20.6% in 1997. In
comparison, non-interest bearing demand accounts increased by $4.8 million from
year-end 1995 to year-end 1996.
- INTEREST-BEARING DEMAND ACCOUNTS increased from $26.6 million to $31.4
million, an increase of $4.8 million, or 18%. In comparison, interest-bearing
demand accounts increased by $1.5 million from year-end 1995 to year-end 1996.
- SAVINGS ACCOUNTS increased from $58.2 million to $61.5 million, an
increase of $3.3 million, or 5.7%. Average savings deposits increased from $57.0
million to $59.8 million. In comparison, savings accounts increased by $2.4
million from year-end 1995 to year-end 1996.
- TIME DEPOSITS increased from $60.8 million to $65.1 million, an increase
of $4.3 million, or 7.1%. Time deposits include jumbo CDs, which increased from
$6.7 million to $7.6 million. Average time deposits increased from $60.7 million
to $64.6 million. In comparison, time deposits increased by $1.7 million from
year-end 1995 to year-end 1996.
For additional information on deposits, see the Consolidated Balance Sheet on
page 34, and the table entitled "Consolidated Statistics on a Taxable Equivalent
Basis" that appears on page 13.
The average amounts of deposits and the average rates paid on deposits
during 1997, 1996, and 1995 are summarized in the following table:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
-----------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
deposits $ 39,917 ---- $ 38,079 ---- $ 34,128 ----
Savings deposits 59,805 2.89% 56,984 2.88% 53,764 2.94%
Interest bearing transaction
accounts 29,376 1.98% 26,373 1.99% 24,550 1.99%
Time deposits 64,598 5.41% 60,693 5.42% 57,087 5.55%
-----------------------------------------------------------------------------------
Total $ 193,696 3.00% $ 182,129 3.00% $ 169,529 3.09%
===================================================================================
</TABLE>
18
<PAGE>
On December 31, 1997, the Company had outstanding $7.6 million in time
certificates of deposit in amounts of $100,000 or more. The following table
summarizes the maturity distribution of these CDs.
<TABLE>
<CAPTION>
Amount
Maturity (in thousands)
--------------- --------------
<S> <C>
Within 3 months $3,066
Over 3 through 6 months 1,152
Over 6 through 12 months 2,269
Over 12 months 1,136
--------------
Total $7,623
==============
</TABLE>
Short-Term Borrowings
Short-term borrowings primarily are securities sold under agreements to
repurchase. These repurchase agreements typically have terms of 30 days, 60
days, 90 days or overnight. The following table provides information regarding
securities sold under agreements to repurchase in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ----------------------------- -----------------------------------------
<S> <C> <C> <C>
Balance at December 31 $ 8,201 $ 5,054 $ 2,959
Interest rate at December 31 4.75% 2.89% 3.52%
Maximum amount outstanding at any month-end during the year $ 18,101 $ 8,580 $ 5,189
Average amount outstanding during the year $ 10,805 $ 5,479 $ 3,735
Weighted average interest rate during the year 3.48% 3.04% 3.46%
</TABLE>
LOANS.
TOTAL LOANS AND LOANS BY CATEGORY. NBSC primarily serves Sussex County,
New Jersey and the surrounding area. Most of NBSC's borrowers use their loans
to acquire and/or develop real estate. When NBSC permits borrowers to use loan
proceeds for other purposes, the loans generally are secured by real estate.
All of NBSC's borrowers are U.S. residents or entities.
Total loans increased from $114.6 million on December 31, 1996 to $126.7
million on December 31, 1997, an increase of $12.1 million. During 1996, total
loans increased by $9.7 million from 1995 levels of $104.9 million. Demand in
consumer and residential real estate lending accounted for most of the increase
in the loan portfolio in 1996 and 1997.
NBSC makes four different types of loans. From December 31, 1996 to
December 31, 1997, these loans changed as follows:
- COMMERCIAL LOANS decreased from $51.1 million to $46.1 million, a
decline of $5.0 million, or 9.8%. During 1996, commercial loans
decreased by $7.2 million.
- REAL ESTATE CONSTRUCTION LOANS remained unchanged at $7.0 million.
During 1996, real estate construction loans increased by $2.7 million.
- REAL ESTATE MORTGAGE LOANS increased from $33.4 million to $45.0
million, an increase of $11.6 million, or 34.7%. During 1996, real
estate mortgage loans increased by $9.2 million.
- INSTALLMENT LOANS increased from $23.2 million to $28.6 million, an
increase of $5.4 million, or 23.3%. During 1996, installment loans
increased by $5.1 million.
For further information regarding the distribution of loans by collateral type
and purpose, see Note 3 on page 41.
The following table shows the composition of the Company's loan portfolio
as of December 31 for each of the last five years.
19
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- -------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial* $46,102 $51,065 $58,274 $66,848 $80,829
Real estate--construction 7,016 6,951 4,300 3,171 4,743
Real estate--mortgage 44,973 33,401 24,216 21,795 13,658
Installment 28,596 23,214 18,073 13,794 11,796
---------------------------------------------------------------------
Total $126,687 $114,631 $104,863 $105,608 $111,026
=====================================================================
</TABLE>
*includes loans previously accounted for as insubstance foreclosures now
included in non-accrual loans according to SFAS No. 114.
The following table shows the percentage distribution of loans by category
as of December 31 for each of the last five years.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial 36.39% 44.55% 55.57% 63.30% 72.80%
Real estate--construction 5.54% 6.06% 4.10% 3.00% 4.27%
Real estate--mortgage 35.50% 29.14% 23.09% 20.64% 12.30%
Installment 22.57% 20.25% 17.24% 13.06% 10.63%
---------------------------------------------------------------------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
=====================================================================
</TABLE>
A lender has a "loan concentration" when it has loans outstanding to a
number of borrowers that are engaged in similar activities. When several
borrowers are in the same industry, they are likely to be affected by economic
or other related influences in the same way. For example, if the real estate
market in a region deteriorates, all real estate developers in that region are
likely to suffer. At December 31, 1997, NBSC had concentrations of loans
exceeding 10% of total loans outstanding in two categories: loans secured by 1-
4 family residential properties, and loans secured by nonfarm residential
properties. For additional information, see Note 3 on page 41.
MATURITIES AND INTEREST RATES. The following table shows the maturity
rates of the Company's commercial and real estate construction loans based on
loan terms in effect at December 31, 1997. The Company may extend the maturity
of any particular loan after considering whether the borrower remains
creditworthy. The table also shows the volume of commercial and real estate
construction loans that have predetermined fixed rates and the volume that have
floating or adjustable rates.
<TABLE>
<CAPTION>
After one
Within but within After five
(in thousands) one year five years years Total
--------------- -------------------------------------------------------
<S> <C> <C> <C> <C>
Types of Loans:
Commercial $15,969 $19,952 $10,181 $ 46,102
Real Estate--construction 5,338 375 1,303 7,016
-------------------------------------------------------
Total $21,307 $20,327 $11,484 $53,118
=======================================================
Amount of such loans with:
Predetermined rates $10,698 $15,130 $ 5,162 $ 30,990
Floating or adjustable rates 10,609 5,197 6,322 22,128
-------------------------------------------------------
Total $21,307 $20,327 $11,484 $53,118
=======================================================
</TABLE>
LOAN TO DEPOSIT RATIO. The loan to deposit ratio at year-end 1997 was
63.8%, compared to the 1996 level of 60.7% and the 1995 level of 58.8%.
Management reviews this ratio frequently in an effort to maintain an optimal
balance between loans (which generate income) and deposits (which provide
liquidity).
20
<PAGE>
LOANS SOLD OR HELD FOR SALE. From time to time in the ordinary course of
----------------------------
business, management identifies certain loans that it may sell rather than hold
to maturity. These loans are referred to as "loans held for sale." The Company
sells loans in the secondary market for two reasons. First, the sale of loans
generates cash to support operations and to fund new loan demand. See "--
Financial Condition -- Liquidity." Second, the sale of loans helps to manage
interest rate risk. If NBSC is holding long-term mortgages and interest rates
begin to increase steadily, management may choose to sell some of those
mortgages so that NBSC can replace them with assets that earn the new higher
market rate.
The Company generally designates real estate mortgage loans as loans held
for sale, although all of the loans designated "held for sale" at December 31,
1996 and December 31, 1997 were student loans. At December 31, 1997, the Company
had loans held for sale with both a face amount and an aggregate market value of
approximately $88,000. At December 31, 1996, loans held for sale had a face
amount and aggregate market value of approximately $178,000. At year-end 1995,
the Company had loans held for sale with a face amount of $621,000 and an
aggregate market value of $628,000. The Company's balance sheet shows loans
held for sale at their market value.
The Company did not sell any mortgage loans during 1997, compared to sales
of $500,000 during 1996, and $3.6 million during 1995. The Company maintains
the servicing rights on the mortgage loans (but not the student loans) that it
sells. At December 31, 1997, the Company was servicing $40.2 million in
mortgage loans previously sold, compared to $46.2 million in mortgage loans
serviced at December 31, 1996, and $53.7 million at year-end 1995.
NEW LOANS. New commercial and real estate construction loans totaled $19.5
----------
million in 1997, compared to $20.5 million during 1996, and $16.5 million during
1995. As of year-end 1997, commercial and real estate construction loans
constituted 42% of total loans outstanding, compared to 51% in 1996, and 60% in
1995.
The Company recorded $11.6 million in new residential mortgage loans (net
of repayments) during 1997, compared to $9.7 million in net new residential
mortgages in 1996 and $6.3 million in 1995. By year-end 1997, mortgage loans
constituted 35.5% of total loans outstanding, compared to 29.1% in 1996, and
23.1% at year-end 1995.
Installment loans comprise second mortgages, home equity loans, automobile
loans, and other consumer debt. NBSC recorded $5.4 million new installment
loans (including draws on home equity lines of credit) during 1997, compared to
$5.1 million new installment loans in 1996, and $4.3 million in 1995. Most of
the new loans recorded in 1997 were second mortgages.
RISKS. Each type of loan that NBSC makes presents one or more unique
------
risks. For example, NBSC's ability to recover commercial and real estate
construction loans is affected by the strength of the real estate market. In a
weak real estate market, borrowers may be unable to complete projects and repay
their loans. If the Company forecloses in that weak market, it may not fully
recover its investment when it sells the collateral.
Real estate mortgages present two types of risk. First, in an economic
downturn with high unemployment and low real estate values, borrowers may have
difficulty repaying their loans. If the Company forecloses, it may not be able
to recover its entire investment. The Company tries to mitigate this risk by
requiring a certain loan-to-value ratio (generally between 75% and 80%) before
extending a mortgage loan. The second type of risk relates to changes in market
interest rates. When interest rates decline, a borrower may refinance a high
interest mortgage and repay the original loan ahead of schedule. When a
borrower pays off a loan early, the lender recovers its principal investment,
but does not earn the expected net interest margin. The Company manages this
risk by changing the volume of mortgage loans that it sells in response to
changes in interest rates. See "-- Loans sold or held for sale."
Each type of installment loan presents a unique risk. Home equity loans
generally are secured either by first or second liens on residential property.
A loan that is secured by a second lien inherently has more risk than a loan
secured by a first lien; in the event of a foreclosure, the first lienholder
will be repaid in full before the second lienholder can begin to recover on its
claim. Other consumer debt that is secured by movable property (such as a car)
or is unsecured presents the risk that the lender will have trouble recovering
any of the loan if the borrower does not make payments. Only 2.9% of the
Company's total loans outstanding at year-end 1997 are unsecured or are secured
by collateral that a borrower can move or hide easily. The Company mitigates
the risk of such loans by following strict approval standards during the lending
process.
21
<PAGE>
LOANS FOR REAL ESTATE CONSTRUCTION AND LAND DEVELOPMENT. Total loans
outstanding at year-end 1997 to finance real estate construction and land
development were $8.24 million, compared to $8.17 million at year-end 1996, and
$7.47 million at year-end 1995. As of December 31, 1997, the Company has $8.5
million in commitments outstanding to fund real estate construction and land
development loans. The Company does not normally finance, or participate in the
financing of, large commercial real estate projects beyond Sussex County and the
immediately surrounding areas.
Based on its continuing review of real estate construction loans,
management expects that some borrowers will be unable to repay their loans in
accordance with the terms of their loan agreements. Management has provided
specific reserves for these loans as deemed necessary.
During 1997, 1996, and 1995, the Company recorded the following charge-offs
in connection with real estate-related loans:
<TABLE>
<CAPTION>
Type of loan charged off (in thousands) 1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Land development/construction - residential $ --- $ --- $16
Land development/construction - commercial --- --- 70
Permanent commercial real estate loans 25 764 721
-----------------------------------------
$25 $764 $807
=========================================
</TABLE>
CHARGE-OFFS AND RECOVERIES. In 1997, net loans recovered amounted to
$147,000, compared to net charge-offs of $636,000 in 1996, and $850,000 in 1995.
"Net loans charged off (recovered)" comprises gross loans charged off, less
amounts collected on loans charged off in prior periods. Net charge-offs
(recoveries) as a percent of average loans outstanding were (0.12%) for 1997,
0.59% for 1996, and 0.82% for 1995. For additional information on charge-offs
and recoveries, see Note 5 on page 44.
NON-PERFORMING ASSETS.
Total non-performing assets were $4.4 million in 1997, a decrease of $1.1
million from 1996, because non-performing loans decreased from $4.4 million at
year-end 1996 to $3.3 million at year-end 1997. During 1996, total non-
performing assets decreased by $4.0 million -- $2.4 million from a decline in
non-performing loans, and $1.6 million from a decline in other real estate.
The following table itemizes non-performing assets as of December 31 of
each of the past five years:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- -------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Renegotiated loans* $413 $505 $884 $4,164 $2,894
Loans past due over 90 days 4 --- 156 289 184
Loans on non-accrual 2,843 3,850 5,744 8,435 16,229
---------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS 3,260 4,355 6,784 12,888 19,307
Other real estate 1,110 1,136 2,741 4,606 3,967
---------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $4,370 $5,491 $9,525 $17,494 $23,274
=====================================================================
Allowance for possible loan losses $4,120 $3,973 $4,609 $5,234 $5,419
=====================================================================
Allowance for possible loan losses
as a percent of:
Total loans 3.25% 3.47% 4.40% 4.96% 4.88%
Non-performing loans 126.38% 91.23% 67.94% 40.61% 28.07%
Non-performing loans as a percent
of total loans 2.57% 3.80% 6.47% 12.20% 17.39%
*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.
</TABLE>
22
<PAGE>
NON-PERFORMING LOANS. Non-performing loans as a percent of total loans
--------------------
outstanding was 2.6% at year-end 1997, compared to 3.8% at year-end 1996, and
6.5% at year-end 1995. There are three types of non-performing loans: loans
that are past due 90 days or more, 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, as well as certain performing loans. At December 31, 1997, NBSC had
$1.5 million in performing loans classified as "other assets especially
mentioned," and $6.6 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 loan outstanding as of December 31,
1997, other than those loans already designated "other assets especially
mentioned" or "substandard," that is likely to become non-performing in the
future.
Note 3 on page 41 compares the interest that would have accrued if all of
NBSC's non-performing loans had been current to the interest income that NBSC
actually realized.
Past due loans. If a commercial or real estate mortgage loan is in default
--------------
for 90 days or more because the borrower failed to pay either principal or
interest, NBSC will stop accruing interest on the loan unless the loan meets two
criteria. First, there must be sufficient collateral to cover the defaulted
principal and interest payments. Second, management must be confident that the
loan will be satisfied in the near future -- either because NBSC intends to
foreclose or because the borrower has arranged to pay off the loan with funds
from a third party. NBSC generally charges off installment loans entirely when
principal and interest payments are four months in arrears.
Non-accrual loans. If NBSC stops accruing interest on a past due loan,
-----------------
that loan is then classified as "non-accrual." Loans on non-accrual declined
from $3.8 million in 1996 to $2.8 million in 1997, a decrease of $1.0 million.
In 1995, NBSC had loans totaling $5.7 million designated "non-accrual." At
December 31, 1997, NBSC did not have any individual loans outstanding of more
than $500,000 that were classified as non-accrual.
All of NBSC's outstanding non-accrual loans are secured. Commercial
property secures 75%, or $2.1 million, of these loans, and residential first
mortgages secure 18%, or $513,000 of these loans. The remaining 7%, or
$187,000, in non-accrual loans are secured by miscellaneous assets such as
second mortgages on residential and commercial property.
Once a loan is charged off or deemed "non-accrual," management generally
reverses interest which was previously accrued but not paid on the loan and
takes a charge against earnings for the period in which the loan is placed in
non-accrual status. Management will refrain from reversing and charging off
interest only if it determines that the loan is adequately secured as to
principal and interest. Once management has charged off interest on a loan,
NBSC will record interest income on that loan only as payments are received;
NBSC will not record interest that is owed but is not actually paid.
Renegotiated loans. NBSC accounts for its renegotiated loans in one of two
------------------
ways, depending upon the date the loans were restructured. All loans that were
renegotiated prior to January 1, 1995 are accounted for as described in
Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings," also known as SFAS No. 15. Loans
renegotiated from and after January 1, 1995 are accounted for as described in
Statement of Financial Accounting Standards No. 114, "Accounting for Impairment
of Loans"("SFAS No. 114"). SFAS No. 114 superceded SFAS No. 15, but did not
require lenders to change accounting practices for renegotiated loans already on
their books.
As of December 31, 1997, NBSC accounts for $413,000 in renegotiated loans
under SFAS No. 15, compared to $505,000 as of December 31, 1996, and $884,000 as
of December 31, 1995. The volume of these loans declined because borrowers have
been making payments under the renegotiated terms. No loan accounted for under
SFAS No. 15 is past due as of December 31, 1997.
As of December 31, 1997, NBSC accounts for its remaining $667,000 in
renegotiated loans under SFAS No. 114, compared to $583,000 as of December 31,
1996, and $648,000 as of December 31, 1995. All of NBSC's loans accounted for
under SFAS No. 114 are current (based on their renegotiated terms) as of
December 31, 1997.
23
<PAGE>
If a loan is renegotiated, management will record interest that accrues as
current income, but only at the renegotiated rate and only to the extent that
management believes that such interest is collectible.
OTHER REAL ESTATE. "Other real estate" is property that the Company
-----------------
acquires when it forecloses on the collateral for a defaulted loan. At December
31, 1997, other real estate was $1.11 million, which is only slightly less than
the amount recorded at year-end 1996. Most of this property was commercial real
estate. During 1997, the Company sold $107,000 in other real estate, and
acquired $81,000 in property designated as other real estate.
Management obtains an appraisal on other real estate when the Company takes
title to the property unless it 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 regulatory guidelines, 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. If
other real estate is reappraised and the new carrying value is less than the
carrying value on the Company's books, management makes an appropriate downward
adjustment. Based on management's continuing review of market conditions and
updated appraisals of other real estate, the Company will charge any further
deterioration of market value to the net cost of operation of other real estate.
For 1997, 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. In 1997, provisions
to the allowance for other real estate were $121,000, and charge-offs against
the allowance were $50,000. See Note 1 on page 39, under the heading "Other
real estate."
None of the Company's other real estate at December 31, 1997 was valued in
excess of $1,000,000, but two properties are valued at more than $500,000.
These properties had an aggregate carrying value of $1.05 million, and comprise
95% of other real estate.
THE ALLOWANCE FOR POSSIBLE LOAN LOSSES.
The allowance for possible loan losses at year-end 1997 was $4.1 million,
an increase of $147,000 from the year-end 1996 allowance of $4.0 million. The
allowance includes recoveries on previously charged off loans, and the Company
recovered a net amount of $147,000 in 1997. At year-end 1995, the allowance for
possible loan losses was $4.6 million.
The allowance for possible loan losses represents 3.25% of total loans
outstanding at December 31, 1997, and 126.4% of outstanding non-performing
loans. In comparison, the allowance for possible loan losses was 3.47% of total
loans outstanding and 91.2% of non-performing loans at year-end 1996, and 4.4%
of total loans outstanding and 67.9% of non-performing loans at year-end 1995.
The amount of the allowance relative to non-performing loans increased during
1997 because non-performing loans declined while the allowance increased
slightly.
SETTING AND EVALUATING THE ALLOWANCE FOR POSSIBLE LOAN LOSSES. Each
-------------------------------------------------------------
quarter, management makes a recommendation to NBSC's Board of Directors about
the appropriate level of the allowance for possible loan losses. Management
considers a variety of risk characteristics and economic factors when it
formulates its recommendation, including:
- local, state, and national economic conditions;
- trends in NBSC's loan portfolio compared to trends experienced by
national peers and local competition;
- the experience level of NBSC's lending officers and the quality of
NBSC's loan monitoring systems;
- whether the level of the allowance conforms to internal and regulatory
policies and procedures;
- whether NBSC has a concentration of loans in a particular industry or
secured by a particular type of collateral;
- delinquency trends;
- adequacy of the existing allowance in light of historical loss
experience; and
24
<PAGE>
- results of a quarterly review of certain loans by unaffiliated experts.
Management's quarterly evaluation takes place in three steps.
First, management reviews each troubled loan. This review enables
management to estimate future losses for every loan that is classified as "other
assets especially mentioned" or "substandard." (These terms are explained under
the heading "-- Non-Performing Assets -- Non-performing loans.") This review
assesses the potential loss on each credit in excess of $100,000 after
considering the value of the underlying collateral, present and prospective
conditions that could affect performance, and recent payment history. When
management identifies a probable loss, it charges off the related loan to the
extent of the estimated losses. Management also may establish specific reserves
for troubled loans.
Second, management uses the information generated by the independent loan
review to monitor the status of larger non-criticized loans for changes and
developments that could affect future collectibility.
Third, management makes a general assessment of the potential for loan
losses in performing loans and off balance sheet credit commitments based on
historical and projected collection statistics. This review does not focus on
specific loans, but instead considers groups of loans with similar
characteristics.
Management believes that it has identified the risk in the loan portfolio
and that the loan loss reserve is adequate on December 31, 1997. 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 allowance for possible loan
losses.
CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES. The following table
shows the changes in the allowance for possible loan losses over the past five
years.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- -------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses:
Beginning balance* $3,973 $4,609 $5,234 $5,419 $6,066
---------------------------------------------------------------------
Loans charged off:
Commercial* 95 933 1,153 1,677 1,803
Real estate--construction --- --- 86 254 17
Real estate--mortgage 15 91 143 189 40
Installment 69 74 89 135 260
---------------------------------------------------------------------
Total loans charged off 179 1,098 1,471 2,255 2,120
---------------------------------------------------------------------
Recoveries:
Commercial 242 328 560 636 886
Real estate--construction --- 13 9 16 84
Real estate--mortgage 4 2 3 27 1
Installment 80 119 49 64 166
---------------------------------------------------------------------
Total Recoveries 326 462 621 743 1,137
---------------------------------------------------------------------
Net charge-offs: (147) 636 850 1,512 983
Provision for possible loan losses
charged to operations* --- --- 225 1,327 336
---------------------------------------------------------------------
Ending balance $4,120 $3,973 $4,609 $5,234 $5,419
=====================================================================
</TABLE>
*Prior years balances, charge-offs and provisions adjusted for restatement of
insubstance foreclosure reserves to the allowance for possible loan losses per
the requirements of SFAS No 114.
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES. The following table
shows how the allowance for possible loan losses is allocated among the various
types of loans that NBSC has outstanding. This allocation is based upon
management's specific review of the credit risk of the outstanding loans in each
category, as well as historical trends.
25
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- ------------- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $3,861 $3,714 $4,318 $4,947 $4,832
Real estate--construction 17 17 4 81 319
Real estate--mortgage 92 103 192 129 107
Installment 150 139 95 77 161
--------------------------------------------------------------------------
Total $4,120 $3,973 $4,609 $5,234 $5,419
==========================================================================
</TABLE>
USE OF ESTIMATES. Some items in the Company's financial statements are
based on informed estimates. The most significant of these estimates is the
allowance for possible loan losses. Although management uses the most complete
and current information available when it evaluates whether borrowers will be
able to repay their loans, dramatic changes in the economy, and the related
changes in things like market values and borrowers' financial prospects, can, in
hindsight, make management's assumptions unreliable. If the real estate market
deteriorates, the allowance for possible loan losses may not be sufficient to
absorb the losses that NBSC will suffer. Conversely, if the economy booms and
NBSC's borrowers are successful, the allowance for possible loan losses may be
unnecessarily high.
SECURITIES PORTFOLIO.
The following table shows the carrying value of the Company's securities
portfolio as of the end of each of the last three years. Some securities are
designated as "held to maturity." Since the Company intends to keep those
securities, their value is stated at cost, adjusted for amortization of premium
and accretion of discounts. Securities designated "available for sale" are
stated at their fair value.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
<S> <C> <C> <C>
(in thousands) 1997 1996 1995
--------------- -----------------------------------------
U.S. treasury securities and obligations of
U.S. government corporations and
agencies:
Held to Maturity $3,492 $3,004 $3,514
Available for sale 26,475 31,011 26,449
Obligations of states and political subdivisions:
Held to Maturity --- --- ---
Available for sale --- --- ---
Mortgage-backed securities, agency issued:
Held to Maturity 21,274 19,663 11,878
Available for sale 21,124 15,367 19,011
Vanguard money market fund:
Held to Maturity --- --- ---
Available for sale 3,790 5,855 3,289
Other investments:
Held to Maturity --- --- ---
Available for sale 1,465 1,342 555
-----------------------------------------
Total securities $77,620 $76,242 $64,696
=========================================
</TABLE>
There is little credit risk in the Company's securities portfolio because
all of the securities are issued by the U.S. Treasury or by a U.S. government
agency except for $60,000 in common stock of a publicly traded company.
However, the Company's portfolio is subject to several types of risk that are
triggered by changes in market interest rates.
First, the Company owns U.S. Treasury Notes and debentures issued by
various government agencies. These instruments bear a fixed rate of interest,
which causes "interest rate risk." If the Company holds fixed rate debt while
interest
26
<PAGE>
rates are rising, the Company will be earning less than a market rate
on its investment. To mitigate this risk, the Company has a policy of not
acquiring fixed rate instruments with a maturity of more than five years except
for tax-exempt securities of which we have none.
Second, the Company owns a limited number of "Agency callables," which are
securities issued by government agencies redeemable by the issuer before
maturity. These instruments present both "interest rate risk" and "option
risk." Interest rate risk is triggered by rising interest rates. If rates
increase after the Company purchases a fixed rate callable, the Company will
have an investment that earns less than market rates. Declining interest rates
trigger option risk. If market rates fall, issuers of callable fixed rate
instruments may redeem them before maturity, which will give the Company a
return on its investment that is less than originally expected. Again, the
Company mitigates these risks by buying only callables with maturities of seven
years or less.
Third, the Company owns a $42.4 million portfolio of mortgage-backed
securities issued by government agencies. This portfolio consists of $4.2
million in collateralized mortgage obligations and $38.2 million in mortgage-
backed pass-through securities. These securities are also subject to risk when
interest rates rise or fall. When interest rates are fairly constant, borrowers
prepay mortgages, and issuers of mortgage-backed securities prepay their
holders, at a predictable rate. Dramatic changes in interest rates will alter
the projected pace of mortgage prepayments and the related payments to the
holders of mortgage-backed securities. 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 securities.
Conversely, when interest rates increase, borrowers may refrain from prepaying
at the expected rate, which slows 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 the majority of its mortgage-backed securities with balloon payments
and original maturities no greater than seven years.
The following table shows the maturity and the weighted average yields for
the Company's securities portfolio at December 31, 1997. Securities appear in
their respective maturity categories based on contractual maturities, although
mortgage-backed securities are shown in the one-year category. The Company has
not attempted to anticipate prepayments, "calls," or refinancings, which would
reduce or extend scheduled maturities. All securities are shown at their
amortized cost.
<TABLE>
<CAPTION>
After one After five
Within but within but within After ten
(dollars in thousands) one year five years ten years years Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. treasury securities and obligations of
U.S. government corporations and
agencies, available for sale
Amount $6,471 $19,737 --- --- $26,208
Yield 6.26% 6.39% --- --- 6.36%
U.S. treasury securities and obligations of
U.S. government corporations and
agencies, held to maturity
Amount 500 1,994 998 --- 3,492
Yield 7.90% 6.73% 7.03% --- 6.98%
Mortgage-backed securities, available for sale
Amount 21,155 --- --- --- 21,155
Yield 7.02% --- --- --- 7.02%
Mortgage-backed securities, held to
maturity
Amount 21,274 --- --- --- 21,274
Yield 6.79% --- --- --- 6.79%
Vanguard money market fund, available for sale
Amount 3,790 --- --- --- 3,790
Yield 5.02% --- --- --- 5.02%
Other investments, available for sale
Amount 1,454 --- --- --- 1,454
Yield 2.12% --- --- --- 2.12%
---------------------------------------------------------------------
Total securities
Amount $54,644 $21,731 $998 $ --- $77,373
Yield 6.64% 6.42% 7.03% 6.54%
=====================================================================
</TABLE>
27
<PAGE>
LIQUIDITY.
"Liquidity" measures whether an entity has sufficient cash flow to meet its
financial obligations and commitments on a timely basis. The Company is liquid
when NBSC has the cash available to meet the borrowing and cash withdrawal
requirements of customers and the Company can pay for current and planned
expenditures and satisfy its debt obligations.
LIQUIDITY AT NBSC. NBSC funds loan demand and operational expenses from
five sources:
- Net income.
- Deposits.
- Sales of loans, securities, and overnight funds. At year-end 1997, NBSC
had $52.9 million of securities designated "available for sale," $88,000
in loans designated "held for sale," and $11.2 million in overnight
funds.
- Overnight pledges. NBSC has an arrangement with a brokerage firm that
enables NBSC to pledge securities in exchange for an overnight loan
equal to 97% of the value of securities pledged.
- Borrowing overnight funds. NBSC is a member of the Federal Home Loan
Bank of New York. One membership benefit is that NBSC can borrow
overnight funds -- up to $11.7 million as of December 31, 1997.
Management believes that NBSC's current level of liquidity is sufficient to meet
its current and anticipated operational needs.
LIQUIDITY AT HIGH POINT. At December 31, 1997, High Point had $25,000 in
cash and $115,000 in overnight funds available to meet its general liquidity
needs. High Point needs cash to fund its debt obligations and to pay printing
expenses and fees for legal, auditing and other services.
In the first half of 1997, High Point's major cash flow requirements were
to meet the monthly principal and interest payments on its outstanding note
payable, which was scheduled to mature on January 2, 1998, and to satisfy its
outstanding 8.5% Redeemable Subordinated Debentures, which were scheduled to
mature on March 1, 1997. High Point satisfied its obligations under the
debentures when they matured, and paid off the note payable during the second
quarter of 1997, which effectively eliminated all of High Point's long-term
debt. For more information, see Note 15 on page 51 regarding the debentures,
and Note 14 on page 51 regarding the note payable.
High Point's cash flow comes from three sources. First, High Point
receives dividends from its subsidiary, NBSC. For example, in the second
quarter of 1997, NBSC paid a dividend of $500,000 to High Point to enable High
Point to satisfy its outstanding debt, and paid dividends of $200,000 to satisfy
legal, audit, and miscellaneous fees and printing expenses. Second, High Point
can generate cash by selling securities. As of December 31, 1997, High Point
had equity securities with a market value of $17,000 designated "available for
sale." Third, High Point owns land that is available for sale. For more
information on this land, see Note 6 on page 44. Management believes that High
Point's current level of liquidity is sufficient to meet its current and
anticipated operational needs.
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 proportion. In addition,
interest rate fluctuations may cause borrowers to prepay loans or depositors to
withdraw deposited funds, which will alter the Company's mix of interest-bearing
assets and liabilities.
For NBSC, interest rate risk is the risk that earnings and/or net portfolio
value will change when interest rates change. As further discussed below, "net
portfolio value" is the present value of expected future cash flows from assets,
less the present value of expected cash flows of liabilities. The principle
objective of NBSC's asset/liability management activities is to provide maximum
levels of net interest income while maintaining acceptable levels of interest
rate and liquidity risk.
NBSC monitors and controls interest rate risk through a variety of
techniques, including use of traditional interest rate sensitivity analysis
(also known as "gap analysis") and an interest rate risk sensitivity model.
With the interest rate risk
28
<PAGE>
sensitivity model, NBSC projects future net interest income, and then estimates
the effect of various changes in interest rates and balance sheet growth rates
on that projected net interest income. NBSC also uses the risk sensitivity model
to calculate the change in net portfolio value over a range of interest rate
change scenarios. Traditional gap analysis involves arranging NBSC's interest-
earning assets and interest-bearing liabilities by repricing periods and then
computing the difference (or "interest rate sensitivity gap") between the assets
and liabilities that are estimated to reprice during each time period and
cumulatively through the end of each time period.
Both interest rate sensitivity modeling and gap analysis are done at a
specific point in time and involve a variety of significant estimates and
assumptions. Interest rate sensitivity modeling requires, among other things,
estimates of:
- how much and when yields and costs on individual categories of interest-
earning assets and interest-bearing liabilities will respond to general changes
in market rates;
- future cash flows; and
- discount rates.
Gap analysis requires estimates as to when individual categories of
interest-sensitive assets and liabilities will reprice, and assumes that assets
and liabilities assigned to the same repricing period will reprice at the same
time and in the same amount. Like sensitivity modeling, gap analysis does not
account for the fact that repricing of assets and liabilities is discretionary
and subject to competitive and other pressures.
Changes in the estimates and assumptions made for interest rate sensitivity
modeling and gap analysis could have a significant impact on projected results
and conclusions. Therefore, these techniques may not accurately reflect the
impact of general interest rate movements on NBSC's net interest income or net
portfolio value.
The starting point (or "base case") for the following table is an estimate
of NBSC's net portfolio value at December 31, 1997 using current discount rates,
and an estimate of net interest income for 1998 assuming that both interest
rates and NBSC's interest-sensitive assets and liabilities remain at December
31, 1997 levels. The "rate shock" information in the table shows estimates of
net portfolio value at December 31, 1997 and net interest income for 1998
assuming fluctuations (or "rate shocks") of plus 100 and 200 basis points and
minus 100 and 200 basis points. Rate shocks assume that current interest rates
change immediately, and that a particular change in interest rates has a uniform
impact on all interest-sensitive assets and liabilities, without regard to when
particular assets and liabilities will mature or reprice. The information set
forth in the following table is based on significant estimates and assumptions,
and constitutes a forward looking statement within the meaning of that term as
set forth in Rule 173 of the Securities Act of 1933 and Rule 3-6 of the
Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
Net Portfolio Value at December 31, 1997 Net Interest Income for 1998
---------------------------------------------------------------------------------------
Percent Percent
Change Change
From From
Rate Scenario Amount Base Case Amount Base Case
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(dollars in thousands)
+200 basis point rate shock $14,015 (34.4)% $10,629 8.2%
+100 basis point rate shock $17,716 (17.1)% $10,224 4.1%
Base case $21,377 $ 9,819
- -100 basis point rate shock $23,020 7.7% $ 9,414 (4.1)%
- -200 basis point rate shock $25,258 18.2% $ 8,924 (9.1)%
</TABLE>
The following table sets forth, as of December 31, 1997, 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. The
majority of interest-bearing demand deposits and savings deposits are assumed to
be "core" deposits, or deposits that will remain at NBSC regardless of market
interest rates. Therefore, 80% of the interest-bearing demand deposits and 75%
of the savings deposits are shown as maturing or repricing in the "after 1 but
within 5 years" column.
29
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
---------------------------------------------------------------------------------------
(in thousands)
- -------------- After 3 After 6
Within three months but months but Total After 1 but
December 31, 1997 months within 6 within 1 Within 1 within After 5 Total
months Year Year 5 years Years
- ----------------------------- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans 31,233 5,201 10,679 $47,113 $31,373 $45,358 $123,844
Loans held for sale 88 -- -- 88 --- --- 88
Investment securities 500 -- -- 500 10,532 13,734 24,766
Federal funds sold 11,200 -- -- 11,200 --- --- 11,200
Securities available for sale 7,569 4,983 -- 12,552 23,839 16,463 52,854
----------------------------------------------------------------------------------------------
Total earning assets 50,590 10,184 10,679 71,453 65,744 75,555 212,752
Non-earning assets 23,576 23,576
----------------------------------------------------------------------------------------------
Total Assets 50,590 10,184 10,679 71,453 65,744 99,131 236,328
----------------------------------------------------------------------------------------------
Interest bearing liabilities:
Deposits:
Interest bearing demand 1,572 1,572 3,144 6,288 25,159 --- 31,447
Savings accounts 3,843 3,843 7,686 15,372 46,126 --- 61,498
Jumbo certificates 3,174 1,152 2,161 6,487 791 345 7,623
Other time deposits 16,040 14,291 14,066 44,397 11,606 1,493 57,496
----------------------------------------------------------------------------------------------
Total interest bearing deposits 24,629 20,858 27,057 72,544 83,682 1,838 158,064
----------------------------------------------------------------------------------------------
Borrowings:
Repurchase agreements 8,201 --- --- 8,201 --- --- 8,201
Long-term debt --- --- --- --- 5,000 --- 5,000
----------------------------------------------------------------------------------------------
Total borrowings 8,201 --- --- 8,201 5,000 --- 13,201
----------------------------------------------------------------------------------------------
Non-interest bearing
demand deposits --- --- --- --- --- 40,366 40,366
Other Liabilities --- --- --- --- --- 2,354 2,354
Stockholders' equity --- --- --- --- --- 22,343 22,343
----------------------------------------------------------------------------------------------
Total liabilities and equity 32,830 20,858 27,057 80,745 88,682 66,901 236,328
==============================================================================================
Interest rate sensitivity gap $17,760 ($10,674) ($16,378) ($9,292) ($22,938) $32,230 $ -%
==============================================================================================
Cumulative rate sensitivity gap $17,760 $7,086 ($9,292) ($9,292) ($32,230) $ - $ -%
==============================================================================================
Interest rate sensitivity
gap ratio 154.10% 48.83% 39.47% 88.49% 74.13% 148.18% ---%
Cumulative interest rate
sensitivity gap ratio 154.10% 113.20% 88.49% 88.49% 80.98% 100.00% ---%
</TABLE>
In the third quarter of 1997, NBSC engaged in a set of transactions
designed to increase the Company's net interest income. First, NBSC borrowed
$10 million with two repurchase agreements. One agreement gave NBSC $5 million
for 30 days at 5.63%, and the other agreement gave NBSC $5 million for five
years (although the lender has a call after three years) at 5.98%. Second, NBSC
invested the proceeds of these repurchase agreements in a fixed rate mortgage-
backed security earning approximately 7.75%. The thirty day repurchase
agreement renews at a market rate. By obtaining funds through a combination of
short-term and long-term arrangements, NBSC insulated itself (at least in part)
from the effect of changes in interest rates.
CAPITAL RESOURCES.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $2.3 million
during 1997, changing from $20 million at December 31, 1996 to $22.3 million at
December 31, 1997. In comparison, stockholders' equity increased by $5.4
million in 1996, and by $2.6 million in 1995.
The Company's 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.
In prior years, conversion by holders of the Company's Cancelable Mandatory
Stock Purchase Contracts (known as "Equity Contracts") and
30
<PAGE>
payments by the Company's Employee Stock Ownership Plan (the "ESOP") on its debt
also affected stockholders' equity. However, the Equity Contracts all matured
and the holders satisfied their obligations during 1996, and the ESOP satisfied
its debt in 1995. See Note 15 on page 51 regarding the Equity Contracts.
Unrealized gains on securities available for sale net of related taxes
totaled $161,000 on December 31, 1997, compared to $76,000 of unrealized gains
on December 31, 1996. For more information, see Note 2 on page 40.
High Point has not paid a dividend on its common stock since 1990, and
cannot anticipate when it will resume making dividend payments.
REGULATORY STATUS. Regulators for the Company and NBSC have divided bank
holding company capital into two classes: Tier I capital, which includes
tangible stockholders' equity for common stock, certain perpetual preferred
stock, and certain mandatory convertible securities; and Tier II capital, which
includes a portion of the allowance for possible loan losses, certain qualifying
long-term debt and preferred stock, and mandatory convertible securities which
do not qualify for Tier I capital status. These two classes of capital serve as
the basis for two measures of capital adequacy: risk-based capital adequacy and
leverage ratios.
Risk-based capital guidelines require banks and bank holding companies to
maintain certain minimum capital as a percent of "risk-adjusted assets," which
is total assets plus certain off-balance sheet items that are adjusted for
predefined credit risk factors. Specifically, banks and bank holding companies
must maintain, at a minimum, Tier I capital as a percent of risk-adjusted assets
of 4.0%, and combined Tier I and Tier II capital as a percent of risk-adjusted
assets of 8.0%. As of December 31, 1997, the Company's Tier I capital ratio was
16.94%, and its combined Tier I and Tier II capital ratio was 18.21%. As of
December 31, 1997, NBSC's Tier I capital ratio was 15.52%, and its combined Tier
I and Tier II capital ratio was 16.8%.
Leverage ratio is Tier I capital as a percent of tangible assets. Leverage
ratio requirements vary with the condition of the financial institution.
Regulators for the Company and NBSC require banks and bank holding companies
that meet the regulators' highest performance and operational standards to
maintain a minimum leverage ratio of 3.0%. Banks and bank holding companies
with higher levels of risk, and those that are experiencing or anticipating
significant growth, must maintain higher minimum leverage ratios that regulators
prescribe and adjust during the ongoing regulatory examination process. The
Federal Reserve Board, which is the High Point's regulator, and the OCC, which
is NBSC's regulator, have not prescribed specific minimum ratio requirements for
the Company or NBSC. As of December 31, 1997, the Company has a leverage ratio
of 8.84%, and NBSC has a leverage ratio of 8.02%.
For more information on capital adequacy guidelines and the Company's
compliance with those guidelines, see Note 16 on page 51.
EFFECTS OF INFLATION.
Inflation affects banks and bank holding companies differently than it
affects non-financial institutions. As financial intermediaries, banks have
assets which are primarily monetary in nature and which tend to fluctuate as
inflation fluctuates. This is especially true for a bank with a high percentage
of rate-sensitive interest-earning assets and interest-bearing liabilities. A
bank can reduce the impact of inflation if it can manage its rate sensitivity
gap. (Rate sensitivity is explained under the heading "--Market Risk.")
Management of the Company attempts to minimize the effects of inflation by
matching the maturities of interest-earning assets and interest-bearing
liabilities, which reduces the Company's interest rate sensitivity.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS.
In June 1997, the Financial Accounting Standards Board issued two new
statements, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), and Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). Each of these new statements is effective for
fiscal years beginning after December 15, 1997; earlier application for both
statements is permitted.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. Management has elected
not to adopt this
31
<PAGE>
Statement prior to its effective date and has not yet determined which financial
statement the Company will use to display comprehensive income.
SFAS No. 131 requires that a company report financial and descriptive
information about its "reportable operating segments." Management has elected
not to adopt this Statement prior to its effective date and has not determined
if it has any reportable segments.
YEAR 2000 ISSUES
Management is currently evaluating its information technology
infrastructure to determine whether the Company has a so-called "Year 2000
problem." Management does not believe that the cost to modify its computer
systems to recognize the year 2000 will be material to the Company's financial
condition or results of operations. Management also does not anticipate that
the advent of the year 2000 will cause any material disruption in the Company's
operations.
The Company does not yet know whether any of its customers has a Year
2000 problem. If any significant borrowers have, and are unable to remedy
problems with their computer systems, they may suffer business disruptions and
incur substantial unexpected remediation costs. If repercussions from Year 2000
problems make those borrowers unable to repay their loans on schedule, the
Company's business or operations could suffer.
32
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of High Point Financial Corp.:
We have audited the accompanying consolidated balance sheets of High Point
Financial Corp. (a New Jersey corporation) and its subsidiary, The National Bank
of Sussex County (collectively, the "Company"), as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Roseland, New Jersey
January 22, 1998
33
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
December 31,
<S> <C> <C>
ASSETS 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks (Notes 1 and 10) $9,789 $10,503
Federal funds sold (Note 1) 11,200 4,025
- ----------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 20,989 14,528
Interest bearing deposits with banks ---- 123
Securities (Notes 1 and 2):
Available for sale, at fair value 52,854 53,575
Held to maturity, at cost (market value of $24,923 in 1997 and
$22,698 in 1996) 24,766 22,667
- ----------------------------------------------------------------------------------------------------------------------------
Total securities 77,620 76,242
Loans held for sale 88 178
Loans (Notes 1, 3 and 5) 126,687 114,631
Less: Deferred expense (35) (10)
Allowance for possible loan losses (Notes 1 and 5) 4,120 3,973
- ----------------------------------------------------------------------------------------------------------------------------
Net loans 122,602 110,668
Land held for sale (Notes 1, 6 and 14) 1,865 1,885
Premises and equipment - net (Notes 1 and 6) 3,135 2,910
Accrued interest receivable 1,315 1,260
Other real estate, net (Notes 1 and 4) 989 1,086
Cash surrender value of life insurance policies (Note 1) 5,147 4,939
Other assets (Note 7) 2,578 3,363
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $236,328 $217,182
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Deposits (Note 12):
Transaction accounts:
Interest bearing $31,447 $26,627
Non-interest bearing 40,366 43,149
Savings accounts 61,498 58,235
Time accounts (includes CDs $100 or over of $7,623 and $6,675
in 1997 and 1996, respectively) 65,119 60,843
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 198,430 188,854
Securities sold under agreements to repurchase (Note 13) 8,201 5,054
Long-term debt (Note 14) 5,000 ----
Accrued expenses and other liabilities 2,354 2,324
Note payable (Note 14) ---- 846
Redeemable subordinated debentures, 8.5% due March 1, 1997 (Note 15) ---- 127
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 213,985 197,205
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 8, 10 and 16)
Stockholders' equity (Notes 1, 9, 11 and 16):
Preferred stock, authorized 1,000,000 shares, no shares issued ---- ----
Common stock, no par value; stated value $5 per share; authorized
5,000,000 shares, issued 3,786,480 shares in 1997 and 1996 18,932 18,932
Additional Paid-in-Capital 5,767 5,791
Accumulated Deficit (2,517) (4,822)
Unrealized gain on securities available for sale, net of taxes (Notes 1 and 2) 161 76
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 22,343 19,977
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $236,328 $217,182
============================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
Year Ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <CAPTION>
INTEREST INCOME
Interest income and fees on loans (Note 1) $11,031 $9,349 $9,354
Interest on securities, all taxable 5,046 4,466 3,620
Interest on federal funds sold and deposits with banks 442 614 679
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 16,519 14,429 13,653
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 5,805 5,459 5,240
Interest on other borrowed money 377 167 129
Interest on note payable and other long-term debt (Notes 14 and 15) 143 132 181
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 6,325 5,758 5,550
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 10,194 8,671 8,103
Less: Provision for possible loan losses (Notes 1 and 5) ---- ---- 225
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 10,194 8,671 7,878
NON-INTEREST INCOME
Service charges on deposit accounts 1,420 1,395 1,341
Commissions and fees 954 853 708
Gain (loss) on the sales of securities available for sale (Note 2) (9) (28) 14
Gain on the sales of loans --- 9 39
Gain on sale of bank premises (Note 6) 139 141 148
Other income 434 182 170
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 2,938 2,552 2,420
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits (Note 8) 4,945 4,575 4,623
Net occupancy expense (Notes 6 and 10) 915 952 966
Equipment expense (Note 6) 886 552 539
Net cost of operation of other real estate (Notes 1 and 4) 141 305 663
Other expenses (Notes 6 and 18) 2,354 2,713 2,681
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 9,241 9,097 9,472
- ----------------------------------------------------------------------------------------------------------------------------
Income before provision (benefit) for income taxes and
cumulative effect for change in accounting principle 3,891 2,126 826
Provision (benefit) for income taxes (Notes 1 and 7) 1,586 (2,681) (249)
- ----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect for change in accounting principle 2,305 4,807 1,075
Cumulative effect of change in accounting principle --- --- (370)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $2,305 $4,807 $705
============================================================================================================================
Net income per common share and common share equivalents
before cumulative effect for change in accounting principle $0.61 $1.27 $0.29
Cumulative effect per share for change in accounting principle (Note 6) --- --- (0.10)
- ----------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE (NOTES 1 AND 21) $0.61 $1.27 $0.19
============================================================================================================================
DILUTED EARNINGS PER COMMON SHARE (NOTES 1 AND 21) $0.60 $1.27 $0.19
============================================================================================================================
WEIGHTED AVERAGE COMMON SHARE AND COMMON
SHARE EQUIVALENTS (NOTES 1 AND 21) 3,786 3,779 3,746
============================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
35
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands) Unrealized
Gains
(Losses) on
Common Stock Securities
Common Additional Accumulated Treasury Acquired by Available for
Stock Paid-in-Capital Deficit Stock ESOP Sale TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1994 $18,729 $5,214 ($10,334) $ ---- ($150) ($1,496) $11,963
Net Income - 1995 --- --- 705 --- --- --- 705
Principal payment on ESOP debt --- --- --- --- 150 --- 150
Unrealized gains on
securities available for sale --- --- --- --- --- 1,740 1,740
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 18,729 5,214 (9,629) --- --- 244 14,558
Net Income - 1996 --- --- 4,807 --- --- --- 4,807
Conversion of Equity Contracts 203 577 --- --- --- --- 780
Unrealized losses on
securities available for sale --- --- --- --- --- (168) (168)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 18,932 5,791 (4,822) --- --- 76 19,977
Net Income - 1997 --- --- 2,305 --- --- --- 2,305
Purchase of treasury stock --- --- --- (64) --- --- (64)
Exercise of stock options --- (24) --- 64 --- --- 40
Unrealized gains on
securities available for sale --- --- --- --- --- 85 85
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $18,932 $5,767 ($2,517) $--- $--- $161 $22,343
====================================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
36
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $2,305 $4,807 $705
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 588 419 422
Amortization of securities premium, net 57 129 113
Net cash paid related to discount (premium) on matured securities 71 (107) 46
Loan fees amortized, net (25) (39) (22)
Provision for possible loan losses --- --- 225
Provision for allowance for other real estate 121 50 137
Deferred tax provision (benefit) 871 (2,782) (265)
(Gain) loss on sale of securities 9 28 (14)
Unrealized loss on land held for sale --- 250 399
Gain on sale of premises and equipment (139) (141) (148)
Increase in accrued interest receivable and other assets (420) (899) (96)
Increase in accrued expenses and other liabilities 176 98 363
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,614 1,813 1,865
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of available for sale securities 1,991 4,259 2,244
Proceeds from maturity of securities:
Available for sale 15,885 10,334 5,620
Held for maturity 5,146 4,480 2,019
Purchase of securities:
Available for sale (17,101) (19,015) (5,305)
Held for maturity (7,303) (11,785) (13,448)
Net (increase) decrease of interest bearing deposits with banks 123 2 (1)
Net increase in loans (11,819) (9,953) (306)
Cash received on option on land held for sale 20 --- ---
Capital expenditures (847) (656) (260)
Proceeds from sale of premises and equipment 26 13 15
- ----------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (13,879) (22,321) (9,422)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 9,576 10,529 12,753
Increase in securities sold under agreements to
repurchase 3,147 2,095 338
Proceeds from long term repurchase agreements 5,000 --- ---
Purchase of treasury stock (64) --- ---
Exercise of stock options 40 --- ---
Repayments of long-term debt principal (973) (424) (212)
Proceeds from conversion of equity contracts --- 396 ---
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,726 12,596 12,879
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,461 (7,912) 5,322
Cash and cash equivalents, beginning of year 14,528 22,440 17,118
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $20,989 $14,528 $22,440
================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $6,198 $5,791 $5,391
INCOME TAXES PAID $889 $3 $5
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
The following are the significant accounting policies of High Point
Financial Corp. ("High Point") and its subsidiary, The National Bank of Sussex
County ("NBSC"). High Point and NBSC together are called "the Company" in these
Notes.
NATURE OF OPERATIONS. NBSC is a federally chartered national banking
association and a member of the Federal Reserve System, and its deposits are
insured by the Federal Deposit Insurance Corporation. NBSC is a full service
commercial bank with nine branches, an operations center, and an administration
center -- all within Sussex County, New Jersey. NBSC accepts deposits, makes
loans, and offers annuities and life insurance. NBSC also provides full
securities brokerage services, including mutual funds and variable annuities, in
cooperation with Linsco/Private Ledger.
USE OF ESTIMATES. The accompanying consolidated financial statements,
which management prepares in accordance with generally accepted accounting
principles, incorporate estimates out of necessity. In particular, management
relies on estimates to derive the allowance for possible loan losses (as
discussed in Note 1 on page 38 and Note 5 on page 44), the deferred tax
valuation allowance (as discussed in Note 7 on page 45), and the fair value of
financial instruments (as discussed in Note 1 on page 39 and Note 17 on page
52). Actual results may differ from management's estimates.
PRINCIPLES OF CONSOLIDATION. The Company's consolidated financial
statements include all of the accounts of High Point and NBSC. All intercompany
transactions and balances have been eliminated.
SECURITIES. The Company classifies its investment securities into three
categories:
- Held for investment purposes, or held to maturity. These are securities
that the Company will not need to sell for liquidity purposes and intends to
hold until maturity. These securities are carried at cost, adjusted for
amortization of premium and accretion of discounts on a straight-line basis,
which is not materially different from the interest method.
- Available for sale. These securities are held for an indefinite period
of time so that management can sell them in response to changes in interest
rates, prepayment risk, or liquidity requirements. Securities designated
"available for sale" are carried at fair value. Any difference between the
amortized cost and the fair value of an investment is charged or credited
directly to stockholders' equity. Actual gain or loss on the sale of each
security is recognized in the income statement for the period in which the sale
occurs.
- Held for trading purposes. The Company did not hold any securities for
trading purposes at December 31, 1997 or 1996.
For information regarding the Company's investment securities, see Note 2 on
page 40.
LOANS. Loans are stated at the principal amount outstanding. Interest
income on loans is credited to income as earned. The Company stops accruing
interest on a loan (i.e., designate the loan "non-accrual") if the loan is past
due 90 days or more as to interest or principal unless management believes that
all principal and interest are collectible. The net amounts of all loan
origination fees, direct loan origination costs, and loan commitment fees are
deferred and recognized over the estimated life of the related loans as an
adjustment of yield. Loans held for sale are carried at the lower of aggregate
cost and fair market value. See Note 3 on page 41.
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan losses
represents management's estimate of the amount needed to offset potential losses
from outstanding loans. The size of the allowance increases when management
makes a provision for possible loan losses or when NBSC collects a loan that had
previously been charged off. The size of the allowance is reduced when a loan
is charged off. Any provision for possible loan losses is charged to
operations. Management determines the adequacy of the allowance periodically
based upon appraised collateral values, financial condition of borrowers,
industry experience, current and anticipated economic conditions, changes in the
composition of the loan portfolio, and other factors that may affect
collectibility. See Note 5 on page 44.
38
<PAGE>
PREMISES AND EQUIPMENT. The Company's financial statements reflect four
different types of property that together constitute "premises and equipment":
land, furniture and equipment, buildings and leasehold improvements (also known
as "premises"), and construction in process. Each class is treated differently.
Land is carried at cost. Land held for sale is carried at the lower of its
actual purchase price and net realizable value. Premises and furniture and
equipment are stated at cost less accumulated depreciation based upon estimated
useful life (ten to forty years for premises and three to thirty years for
furniture and equipment), calculated using the straight-line method. A
leasehold improvement is amortized over the term of the related lease.
Construction in process is transferred to "premises" when construction is
complete. In addition, the Company has land held for sale, which is carried at
the lower of its historic cost or net realizable value. See Note 6 on page 44.
OTHER REAL ESTATE. "Other real estate" is property that the Company
acquires when it forecloses on the collateral for a defaulted loan. Other real
estate is recorded at either carrying value, or fair market value less estimated
costs to sell, whichever is less. When the Company acquires property through
foreclosure, if the carrying value exceeds fair value and estimated selling
costs, the excess is charged to the allowance for possible loan losses because
the Company likely will be unable to recover the full amount of the loan.
Subsequently, adjustments to the allowance for other real estate owned are made
through a direct charge to expenses to maintain these properties at the lower of
cost or fair value less estimated costs to sell. When the costs that are
estimated are actually incurred, a charge-off is made to the specific reserve.
INCOME TAXES. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"), which requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and the tax basis of assets and liabilities,
using tax rates in effect for the year in which the differences are expected to
reverse. See Note 7 on page 45.
RETIREMENT PLAN. The Company had a non-contributory retirement plan
covering substantially all of its employees. That plan was amended at the end
of 1993 so that employees could not accumulate any more benefits. In the third
quarter of 1996, the Company terminated and liquidated the plan. See Note 8 on
page 46, under the heading "-- Retirement Income Plan."
EARNINGS PER SHARE. Basic earnings per share is calculated by dividing
earnings available to common shareholders by the weighted average number of
common shares outstanding during each year. Diluted earnings per share is
calculated by dividing earnings available to common shareholders by the average
number of common shares and common share equivalents outstanding during the
year. Common share equivalents consist of options outstanding. The Company
adopted SFAS No. 128, "Earnings Per Share" effective December 31, 1997. All
prior periods reported earnings per share have been restated to reflect SFAS No.
128. For more information, see Note 21 on page 56.
STATEMENT OF CASH FLOWS. For the purpose of reporting cash flows, "cash
and cash equivalents" includes cash on hand, non-interest bearing amounts due
from banks, and federal funds sold. Generally, federal funds sold have a one-
day maturity.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company follows Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ( "SFAS No. 107"), which requires disclosure of estimated
fair values of financial instruments. The amounts shown in the Company's
financial statements for "cash and due from banks," "federal funds sold and
purchased," "interest bearing deposits with banks," and "securities sold under
agreements to repurchase," all approximate fair value because those items mature
in less than one year and do not present unanticipated credit risks. The fair
value and the method of estimating fair value of the Company's other financial
instruments (such as securities, loans, and deposits) are discussed in the
related Notes: Note 2 on page 40 discusses Securities, Note 3 on page 41
discusses Loans, Note 12 on page 50 discusses Deposits, Note 13 on page 50
discusses instruments bought and sold under agreements to repurchase, Note 14 on
page 51 discusses long term debt and Note 15 on page 51 discusses High Point's
Redeemable Subordinated Debentures. Note 17 on page 52 gives a summary of
carrying values and fair values of financial instruments.
A fair value estimate is made at a discrete point in time based on relevant
market information and information about the particular financial instrument.
Because there is no market for a significant portion of NBSC's financial
instruments, management estimates fair value primarily by considering future
expected loan loss, current economic conditions, and the risk characteristics of
each financial instrument. Management derives its estimates using assumptions
that it considers reasonable at the time, but the estimates still are subjective
involving uncertainties and matters of significant judgment, and by nature are
imprecise.
39
<PAGE>
CASH SURRENDER VALUE OF LIFE INSURANCE CONTRACTS. The Company maintains
life insurance contracts on certain of High Point's and NBSC's officers and
directors. The Company is the beneficiary under each of these policies. The
cash surrender value of these policies is recorded as an asset on the Company's
balance sheet. Increases and decreases in the cash surrender value, net of
premiums paid, are recorded as "other income" or "other expense" in the
Company's statement of operations.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial
Accounting Standards Board issued two new statements, Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
and Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). Each of
these new statements is effective for fiscal years beginning after December 15,
1997; earlier application for both statements is permitted.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. Management has elected
not to adopt this statement prior to its effective date and has not yet
determined which financial statement the Company will use to display
comprehensive income.
SFAS No. 131 requires that a company report financial and descriptive
information about its "reportable operating segments." Management has elected
not to adopt this statement prior to its effective date and has not determined
if it has any reportable segments.
2 SECURITIES.
The following tables give itemized information about the Company's
securities portfolio as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies: $26,208 $278 $(11) $26,475 $30,763 $275 $(27) $31,011
Mortgage-backed securities:
U.S. agency issued 21,155 63 (94) 21,124 15,507 40 (180) 15,367
Other investments:
Federal Reserve Bank Stock 516 --- --- 516 516 --- --- 516
Vanguard money market
fund 3,790 --- --- 3,790 5,855 --- --- 5,855
Federal Home Loan
Bank stock 878 --- --- 878 786 --- --- 786
Marketable equity securities 60 11 --- 71 35 5 --- 40
- -----------------------------------------------------------------------------------------------------------------------------------
Securities available for sale $52,607 $352 $(105) $52,854 $53,462 $320 $(207) $53,575
===================================================================================================================================
HELD TO MATURITY December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies: $3,492 $30 $(1) $3,521 $3,004 $29 $(1) $3,032
Mortgage-backed securities:
U.S. agency issued 21,274 149 (21) 21,402 19,663 92 (89) 19,666
- -----------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity $24,766 $179 $(22) $24,923 $22,667 $121 $(90) $22,698
===================================================================================================================================
</TABLE>
The following tables show the amortized cost and estimated market value of
the securities that the Company owns at December 31, 1997 broken down by
contractual maturity. The Vanguard money market fund, which is backed by U.S.
Treasury
40
<PAGE>
Notes, has a one-business day maturity, so its carrying value approximates
market value. The expected maturities of the Company's mortgage-backed
securities may differ from actual maturities because borrowers have the right to
prepay obligations without penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE December 31, 1997
- ------------------------------------------------------------------------------------
Estimated
Amortized Market
(in thousands) Cost Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $6,471 $6,482
Due after one year through
five years 19,737 19,993
- ------------------------------------------------------------------------------------
26,208 26,475
Mortgage-backed securities 21,155 21,124
Other investments 5,244 5,255
- ------------------------------------------------------------------------------------
Securities available for sale $52,607 $52,854
====================================================================================
HELD TO MATURITY December 31, 1997
- ------------------------------------------------------------------------------------
Estimated
Amortized Market
(in thousands) Cost Value
- ------------------------------------------------------------------------------------
Due in one year or less $500 $501
Due after one year through
five years 1,994 2,009
Due after five years through ten
years 998 1,011
- ------------------------------------------------------------------------------------
3,492 3,521
Mortgage-backed securities 21,274 21,402
- ------------------------------------------------------------------------------------
Securities held to maturity $24,766 $24,923
====================================================================================
</TABLE>
Proceeds from sales of securities available for sale during 1997 were $2.0
million. That amount includes gross losses of $9,000 and no gross gains. In
1996, proceeds from sales of securities were $4.3 million. In 1996 the Company
had gross losses of $28,000, and no gross gains, from sales of securities.
The Company has pledged securities with a book value of $20.7 million at
December 31, 1997 for purposes such as securing public funds on deposit at NBSC
and securing repurchase agreements. At December 31, 1996, the book value of
securities pledged for such purposes was $12.8 million.
3 LOANS
Loans by category. The following table itemizes the four different types
of loans that NBSC offers and shows the loan amounts outstanding as of December
31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $46,102 $51,065
Real estate-construction 7,016 6,951
Real estate-mortgage 44,973 33,401
Installment 28,596 23,214
- ----------------------------------------------------------------------------------------------------------------
Total loans $126,687 $114,631
================================================================================================================
</TABLE>
41
<PAGE>
The following table presents the percentage distribution of loans in
particular categories:
<TABLE>
<CAPTION>
December 31,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Construction and land development loans 6.50% 7.13%
Loans secured by 1-4 family residential properties 58.85% 50.58%
Loans secured by nonfarm nonresidential properties 27.17% 33.74%
Commercial and industrial loans 4.37% 5.06%
Loans to individuals for household, family and
other personal expenditures 2.90% 3.28%
Other loans 0.21% 0.21%
- ----------------------------------------------------------------------------------------------------------------
Total loan distribution 100.00% 100.00%
================================================================================================================
</TABLE>
LOANS TO AFFILIATES. NBSC extends credit in the ordinary course of
business to certain directors and principal officers of the Company and their
associates. At December 31, 1997, NBSC had outstanding an aggregate of $1.5
million in loans to such individuals and their associates. At December 31,
1996, credit to such individuals amounted to $1.8 million. During 1997, NBSC
made $434,000 of new loans to affiliates, and $748,000 of outstanding loans to
affiliates were repaid in the normal course of business. As of December 31,
1997, no loans to directors, principal officers, or their associates are
renegotiated, past due, or on non-accrual status.
NON-PERFORMING LOANS. The following table gives information about the
components of non-performing loans as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(in thousands) December 31,
- --------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-performing loans:
Renegotiated loans $413 $505
Loans past due over 90 days 4 ---
Loans on non-accrual 2,843 3,850
- ----------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS $3,260 $4,355
================================================================================================================
</TABLE>
If all of NBSC's non-performing loans had been current, the Company would
have accrued interest income of $436,000 in 1997, $577,000 in 1996, and $847,000
in 1995. In contrast, the amount of interest income that the Company actually
earned from non-performing loans was $568,000 in 1997, $182,000 in 1996, and
$365,000 in 1995. At December 31, 1997, NBSC did not have any commitments to
lend more money to customers with outstanding non-performing loans.
IMPAIRED LOANS. NBSC adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan, Income Recognition and Disclosures," as of January 1, 1995. SFAS No.
114 requires that certain impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's original effective
interest rate. As a practical expedient, impairment may be measured based on
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. When the measure of the impaired loan is less
than the recorded investment in the loan, the impairment is recorded through a
valuation allowance.
The following chart shows NBSC's recorded investment in impaired loans, and
the related valuation allowance calculated under SFAS No. 114, at the end of
1997 and 1996, and the average recorded investment in impaired loans during each
of those years:
1997 - Investment of $3.1 million at year end.
- Valuation allowance of $466,000 at year end.
- Average recorded investment of $3.7 million during 1997.
1996 - Investment of $3.9 million at year end.
- Valuation allowance of $740,000 at year end.
- Average recorded investment of $4.5 million during 1996.
42
<PAGE>
Interest received on impaired loans is recorded as interest income unless
collection of the remaining investment is doubtful, in which case payments
received are recorded as reductions of principal. NBSC recognized interest
income on impaired loans of $478,000 in 1997 and $97,000 in 1996. Impaired loans
are on non-accrual and are classified as "impaired" because doubt exists
regarding the borrowers' ability to pay both principal and interest as
originally agreed. Interest payments are recorded on a cash basis because the
impaired loans on NBSC's books are sufficiently collateralized to ultimately
repay the outstanding principal balance should the property collateralizing the
debt be taken in foreclosure proceedings.
At December 31, 1997, NBSC had $413,000 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 in accordance with 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, rather than at
renegotiated rates as required by SFAS No. 15, the effect on income for 1997
would not have been material.
FAIR VALUE. The fair value of NBSC's loan portfolio has been estimated
primarily using a discounted cash flow approach. NBSC used a discount rate that
was equivalent to a rate it would obtain on new loans, adjusted for prepayment
and credit risk factors. When available, management uses market quotes obtained
from an independent broker to determine fair value. As of December 31, 1997,
the Company estimates the fair value of its loan portfolio to be approximately
$127.0 million, compared to its gross recorded value of $126.7 million. As of
December 31, 1996, the Company estimated the fair value of its loan portfolio to
be approximately $114 million, compared to its gross recorded value of $114.6
million.
Changes in assumptions and methodologies may have a material effect on
these estimated fair values. In addition, management is concerned that
reasonable comparability between financial institutions may not be likely due to
the wide range of permitted valuation techniques and numerous estimates which
must be made given the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation methodologies also
introduces a greater degree of subjectivity to these estimated fair values.
4 OTHER REAL ESTATE.
"Other real estate" is property that the Company acquires when it
forecloses on the collateral for a defaulted loan. The following table shows
the changes in various components of other real estate from 1996 to 1997:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $1,136 $2,741
New foreclosed properties 81 403
Capital Improvements --- ---
Properties sold (107) (1,736)
Payments received on properties not sold --- (12)
Charge-offs against reserve --- ---
Direct writedowns on ORE properties --- (260)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $1,110 $1,136
================================================================================================================
</TABLE>
The following table summarizes the activity in the allowance for other real
estate at December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance, January 1 $50 $- $660
Provisions 121 50 137
Charge-offs (50) - (797)
- ------------------------------------------------------------------------------------------------------------------------
Ending balance $121 $50 $-
========================================================================================================================
</TABLE>
43
<PAGE>
The following table summarizes the expenses in the net cost of operations
of other real estate:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provisions to the allowance/direct writedowns $121 $310 $331
Rental income (112) (148) (362)
Operating expenses 180 221 674
Net (gains) losses on sales of other real estate (48) (78) 20
- ----------------------------------------------------------------------------------------------------------------------------
Total net cost of operations of other real estate $141 $305 $663
============================================================================================================================
</TABLE>
5 ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is based on estimates; ultimate
losses may may be different. Management reviews these estimates each quarter.
As adjustments become necessary, they are reflected in operations in the current
period.
The following table summarizes the activity in the allowance for possible
loan losses at December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $3,973 $4,609 $5,234
Provision charged to operations --- --- 225
Loans charged off (179) (1,098) (1,471)
Recoveries of charged off loans 326 462 621
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31 $4,120 $3,973 $4,609
================================================================================================================
</TABLE>
6 PREMISES AND EQUIPMENT AND LAND HELD FOR SALE
The following table summaries the activity in the various components of
premises and equipment:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $360 $360
Buildings and leasehold improvements 2,443 2,321
Furniture and equipment 4,026 3,483
Construction in process 5 256
- ----------------------------------------------------------------------------------------------------------------
Total Premises and equipment 6,834 6,420
Less accumulated depreciation and amortization 3,699 3,510
- ----------------------------------------------------------------------------------------------------------------
Premises and equipment, net $3,135 $2,910
================================================================================================================
</TABLE>
Depreciation and amortization expense for premises and equipment was
$588,000 for 1997, $419,000 for 1996, and $421,000 for 1995.
High Point owns 66 acres of undeveloped land in Frankford Township, New
Jersey classified on the balance sheet as land "held for sale."
In December 1995, High Point adopted Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-
lived Assets to be disposed of" ("SFAS No. 121"). This set of accounting
standards provides that if certain events or changes in circumstances indicate
that the reporting entity may be unable to recover the carrying amount of an
asset, the entity must record an impairment equal to the excess of carrying
value over fair value. In the case of an asset to be disposed of, the asset
must be reported at the lesser of its carrying amount or its fair value less
costs to sell. When determining "fair value," the reporting entity must
estimate the future cash flows that will result from the use or sale of an
asset. In the case of an asset to be sold, those proceeds are discounted over
the estimated period of time required to effect a sale.
44
<PAGE>
High Point evaluated its land held for sale for impairment under SFAS No.
121, and recorded an impairment of $370,000. In accordance with the
requirements of SFAS No. 121, the $370,000 provision was retroactively reflected
in the results of operations in the first quarter of 1995 as a cumulative effect
of a change in accounting principle.
In late 1995, High Point entered into a contract to sell 32 acres of the
land held for sale for $2 million. Based on the price fixed in this contract,
management recorded an additional impairment loss of $29,000. When the sale
contract was terminated in 1996, High Point recorded an additional impairment of
$250,000. The amount of this allowance reflected the termination of the sale
contract and management's revised estimate of the net realizable value of the
land. These impairments were included in "other operating expenses." As of
December 31, 1997, management believes that the net carrying value of the land
held for sale of $1.9 million is fully realizable.
7 INCOME TAXES.
The current and deferred amounts of the benefit for income taxes are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $342 $ --- $ ----
Deferred 871 (2,782) (265)
State 373 101 16
- ----------------------------------------------------------------------------------------------------------------
Total provision (benefit) for income taxes $1,586 $(2,681) $(249)
================================================================================================================
Temporary differences and carryforwards at December 31, 1997 and 1996 are as follows:
For the year ended December 31,
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------
Federal and State operating loss carryforwards $736 $1,657
Allowance for possible loan losses 551 456
Valuation reserves for land held for sale and other real estate 745 717
Loan and investment income recognition 394 352
Deferred compensation 262 230
AMT credit carryforward 0 155
Other, net 275 306
-------------- --------------
2,963 3,873
Less valuation allowance (539) (573)
-------------- --------------
Net deferred tax asset $2,424 $3,300
============== ==============
</TABLE>
During 1996, the Company recorded a net benefit of $2.68 million primarily
representing net operating loss ("NOL") carryforwards through the reversal of a
previously established deferred tax valuation allowance. The recognition of the
deferred tax asset is based on the Company's evaluation of income earned in
1995, 1996 and 1997 and management's estimate of the Company's continued ability
to remain profitable in future periods such that realization of its net
operating loss carryforwards can be reasonably expected. This estimate will be
impacted favorably or unfavorably by future results of operations. As of
December 31, 1997 and 1996, the Company has recorded a valuation allowance of
approximately $539,000 and $573,000, respectively, which represents an estimated
reserve for state NOLs at High Point and certain of the subsidiaries of the Bank
that may expire prior to the Company's ability to utilize such credits. The
Company periodically evaluates the realizability of its deferred tax asset and
will adjust the level of the valuation allowance when necessary.
At December 31, 1997, the Company has net operating loss carryforwards for
state tax purposes of approximately $12.2 million. These tax benefits expire in
varying amounts through 2010.
45
<PAGE>
A reconciliation of the provision (benefit) for income taxes in 1997, 1996,
and 1995, with the federal income tax at the statutory rate of 34%, is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $1,323 $ 726 $ 160
Increase (decrease) in taxes resulting from:
Change in valuation allowance (34) (3,861) (425)
State taxes on income, net of federal
income tax effect 246 66 10
Other-net 51 388 6
- ----------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $1,586 $(2,681) $(249)
- ----------------------------------------------------------------------------------------------------------------
Effective tax rate 40.8% (126.1%) (54.6%)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
8 BENEFIT PLANS.
Retirement Income Plan. In 1995, the Company elected to liquidate its
pension plan. On December 31, 1995, the Company reduced its pension asset to
the level that it expected to recover upon termination, less the excise taxes
that management expected would be due at that time. Specifically, the Company
wrote down its prepaid pension asset from $207,000 to $44,000, resulting in a
$163,000 expense in the fourth quarter of 1995. Upon termination of the plan in
the third quarter of 1996, and after payments to plan participants and payments
for service charges and excise taxes, the remaining plan assets that reverted to
the Company were $167,000. Since the amount recovered exceeded the $44,000
recorded value of the plan asset, the Company recorded a gain of $123,000.
RETIREMENT SAVINGS PLAN (401K). The Company has a retirement savings plan
(commonly known as a "401K") covering qualified employees. The Company's
contributions to the 401K totaled $85,000 in 1997, $58,000 in 1996, and $62,000
in 1995.
EMPLOYEE STOCK OWNERSHIP PLAN. The Company has an Employee Stock Ownership
Plan ("ESOP"). The Company's contributions to the ESOP totaled $200,000 in
1997, $200,000 in 1996, and $200,000 in 1995. These amounts are included in
"salaries and employee benefits."
POSTRETIREMENT HEALTH CARE BENEFITS. The Company provides postretirement
health care benefits and life insurance coverage to its employees who meet
certain predefined criteria. The expected cost of these benefits is charged to
expense during the years that eligible employees render service. The Company is
amortizing its estimated accumulated postretirement benefit obligation (known as
"APBO") of $435,000 over a 20-year period.
The accumulated postretirement benefit obligations as of December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Retirees $211 $268
Fully eligible, active participants 88 118
Other active participants 91 78
- --------------------------------------------------------------------------------------------------
Total accumulated post retirement benefit obligation 390 464
Unrecognized net gain (loss) due to past experience different from
that assumed and effects of changes in assumptions made 172 97
Unamortized transition obligation (325) (347)
- --------------------------------------------------------------------------------------------------
Accrued accumulated post retirement benefit obligation $237 $214
==================================================================================================
</TABLE>
46
<PAGE>
The net periodic postretirement benefit cost -- or the amount recognized by
the Company as the cost of its postretirement benefit plans -- for 1997 was
$35,000, although required cash payments were approximately $13,000. The
components of net periodic post retirement benefit cost are as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
(in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost, benefits attributed to employee service during the year $20 $21
Interest cost on APBO 25 29
Amortization of transition obligation 22 22
Amortization of (gains) losses (32) (13)
- --------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $35 $59
==================================================================================================
</TABLE>
The discount rate used to determine the Company's APBO for 1997 and 1996
was 7.0%. The rate of increase projected for future compensation levels was 4%.
The Company projected that the cost of medical benefits would increase at the
following rates: 8.5% in 1997, 7.5% in 1998, 7.0% in 1999, 6.5% in 2000, 6.0% in
2001, 5.5% in 2002, and 5% in 2003 and each year thereafter. If the projected
health care cost trend were increased by one percent, that change would have
increased the Company's APBO as of January 1, 1997 by 9.9%, and as of January 1,
1996 by 8.1%. A one percent increase in the assumed health care cost trend also
would have increased the aggregate of the service and interest components of net
periodic postretirement benefit expense by 12.5% for 1997 and by 11.7% for 1996.
DEFERRED COMPENSATION ARRANGEMENTS. The Company has established deferred
compensation arrangements for certain directors and executives of High Point and
NBSC. The deferred compensation plans differ, but generally provide for annual
payments for ten to fifteen years following retirement. The Company's
liabilities under these arrangements are being accrued from the commencement of
the plans over the participants' remaining periods of service. The Company
intends to fund its obligations under the deferred compensation arrangements
with the proceeds of life insurance policies that it has purchased on the
respective participants. The deferred compensation plans do not hold any
assets.
9 STOCK OPTION PLANS.
EMPLOYEE INCENTIVE STOCK OPTION PLANS. The Company maintains three
employee stock option plans established in 1987, 1990, and 1996 so that key
employees of High Point and NBSC could benefit from increases in the price of
High Point's common stock and would therefore have an incentive to contribute to
the Company's success. Each of the plans permits the Incentive Committee of
High Point's Board of Directors to grant options to purchase shares of High
Point's common stock. The 1996 plan covers options to purchase up to 135,000
shares; the 1990 plan covers options to purchase up to 50,000 shares; and the
1987 plan covers options to purchase up to 50,054 shares.
In November 1995, the Company granted options to purchase an aggregate
95,000 shares of stock under the 1987 and 1990 stock option plans. Each option
had an exercise price of $6.75, which was the fair value of High Point's common
stock on the date of grant. All of these options vested within three months
after the date of grant. As of December 31, 1997, options to purchase 3,000
shares have been exercised, and no options have been forfeited.
In October 1997, the Company granted options to purchase an aggregate 5,000
shares of stock under the 1990 stock option plan. Each option had an exercise
price of $12.625, which was the fair value of High Point's common stock on the
date of grant. All of these options vested on the date of grant. As of
December 31, 1997, none of these options have been exercised or forfeited.
As of December 31, 1997, a total of 135,000 shares remain available for
issuance under the Company's 1996 stock option plan.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. The Company maintains the 1996
Non-employee Director Stock Option Plan, which permits the Incentive Committee
of High Point's Board of Directors to issue up to 105,000 shares of High Point's
common stock to non-employee directors of High Point and NBSC. On February 20,
1996, the Incentive Committee granted options under this plan to purchase a
total of 97,500 shares at an exercise price of $6.75 per share, the fair market
value as of the date of grant. These options will vest at a rate of 20% a year
for five years.
47
<PAGE>
The following table shows the activity in the Company's various stock
option plans for the last three years.
<TABLE>
<CAPTION>
Options outstanding
Price per
Shares share
---------------------------
<S> <C> <C>
Balance, December 31, 1994 - $ -
Granted 95,000 $6.75
---------------------------
Balance, December 31, 1995 95,000 $6.75
Granted 97,500 $6.75
---------------------------
Balance, December 31, 1996 192,500 $6.75
Granted 5,000 $12.63
Exercised -6,000 $6.75
Forfeited -13,500 $6.75
---------------------------
Balance, December 31, 1997 178,000 $6.91
===========================
</TABLE>
ACCOUNTING FOR STOCK OPTIONS. The Company follows APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations when
accounting for its stock option plans. Accordingly, the Company has not
recognized a compensation cost for its stock option plans. Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," requires determination of compensation cost for stock option
plans based on the fair value of the options awarded at the respective grant
dates. If the Company calculated compensation cost in that manner, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
(Dollars in thousands except per share numbers) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $2,305 $4,807 $705
Pro forma $2,270 $4,730 $627
Basic earnings per share As reported $0.61 $1.27 $0.19
Pro forma $0.60 $1.22 $0.17
Diluted earnings per share As reported $0.60 $1.27 $0.19
Pro forma $0.59 $1.22 $0.17
</TABLE>
In the preceding table, the fair value of each option award is estimated as
of the date of grant using a binomial option-pricing model with the following
weighted average assumptions:
- Expected volatility of 61% for 1995, 59% for 1996 and 31% for 1997.
- A dividend rate of $0.10 per share beginning three years after the date
of the grant.
- A risk-free interest rate of 5.80% for 1995, 5.30% for 1996 and 5.50%
for 1997.
- Expected option life of seven years.
The following table summarizes information about the Company's stock
options at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average
Range of Number Remaining Number
Exercise Outstanding Contractual Exercisable
Prices at 12/31/97 Life at 12/31/97
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
$6.75 173,000 8.0 years 123,500
$12.63 5,000 9.75 years 5,000
</TABLE>
48
<PAGE>
10 COMMITMENTS AND CONTINGENCIES.
CASH AND DUE FROM BANKS. Based on its level of deposits, NBSC is required
-----------------------
to maintain an average reserve balance with the Federal Reserve Bank of New
York. The amount of this reserve balance at December 31, 1997 was approximately
$763,000.
LITIGATION. From time to time, High Point and NBSC are defendants in legal
----------
proceedings relating to their respective businesses. Management does not
believe that the outcome of any legal proceeding that was pending as of December
31, 1997, or any other contingent liability or commitment, will materially
affect the Company's consolidated financial position or results of operations.
COMMITMENTS WITH OFF-BALANCE SHEET RISK. The consolidated balance sheets
---------------------------------------
do not reflect various commitments, such as commitments to extend credit and
letters of credit, which the Company makes in the normal course of business.
Management does not anticipate that the settlement of its outstanding off-
balance sheet commitments will have a material adverse effect on the Company's
financial position. However, as with typical loans, these commitments carry
various degrees of credit risk.
Commitments to extend credit are legally binding obligations with set
expiration dates. When NBSC makes a loan commitment, management intends
ultimately to make the loan. NBSC was committed to advance $23.0 million to
borrowers as of December 31, 1997, compared to $16.6 million as of December 31,
1996. The majority of these commitments expire within one year. A total of
$9.6 million of the 1997 commitments were for fixed rate loans; in 1996, fixed
rate commitments totaled $6.6 million.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. NBSC has entered into
agreements to provide standby letters of credit totaling $779,000 as of December
31, 1997, compared to $832,000 as of December 31, 1996. An agreement to provide
a standby letter of credit generally expires within one year.
The Company estimates the fair value of a commitment to extend credit or of
a standby letter of credit by using the fee currently charged to enter into such
agreements, taking into account the remaining term of the agreement and the
creditworthiness of the prospective borrower(s). The following table shows the
contract amount and the estimated fair value of NBSC's outstanding standby
letters of credit and commitments to extend credit at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------------------------------------------
Contract Estimated Contract Estimated
(in thousands) Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commitments to extend credit $39,046 $ - $32,544 $-
Standby letters of credit 779 $3 $832 $7
</TABLE>
NON-CANCELABLE LEASE OBLIGATIONS. In 1988, NBSC sold certain banking and
--------------------------------
other premises to FMI, Inc. The banking premises were leased back to NBSC for
periods ranging from 10 to 15 years. NBSC realized a gain on this transaction,
which has been deferred and is being amortized into income over the applicable
lease terms. As of December 31, 1997, the unamortized deferred gain was
approximately $216,000, compared to an unamortized deferred gain of
approximately $363,000 as of December 31, 1996. FMI, Inc. is a wholly-owned
subsidiary of Franklin Mutual Insurance Co., which owns 6.6% of High Point's
outstanding common stock. The president of FMI, Inc. is a member of High
Point's Board of Directors.
NBSC's minimum rental commitments for all of its branches, based on lease
terms in effect as of December 31, 1997 (and without regard to renewals) are as
follows: $320,000 for 1998, $212,000 for 1999, $212,000 for 2000, $198,000 for
2001, $98,000 for 2002, and a total of $235,000 thereafter. These amounts
include rent that NBSC will pay to FMI Inc. for the six NBSC branches that FMI
owns. Specifically, NBSC's minimum rental commitments to FMI are $261,000 for
1998 and $152,000 for each year from 1999 to 2003. The Company's rental
expenses amounted to $421,000 for 1997, $434,000 for 1996, and $457,000 for
1995, including rental payments to FMI, Inc. of $370,000 each year.
49
<PAGE>
In the first half of 1998, NBSC anticipates repurchasing the six branches
from FMI at fair market value which will be determined at the time of closing.
11 COMMON STOCK TRANSACTIONS.
As of December 31, 1997, 60,928 shares of common stock are reserved for
issuance under High Point's Dividend Reinvestment and Common Stock Purchase
Plan.
In 1996 High Point issued shares in connection with its Cancelable
Mandatory Stock Purchase Contracts. See Note 15 on page 51.
12 DEPOSITS.
SFAS No. 107 requires disclosure of the carrying amount and estimated fair
value of deposits. In the table below, the fair value of deposits with no
stated maturity, such as demand deposits, savings accounts, and money market
accounts, is recorded as the amount payable on demand as of the date shown. The
fair value of certificates of deposit due after one year is based on the
discounted value of contractual cash flows. The Company estimates the discount
rate using the rates currently offered for deposits of similar remaining
maturities.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------------------------------
Carrying Estimated Carrying Estimated
(in thousands) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-interest bearing demand $ 40,366 $ 40,366 $ 43,149 $ 43,149
Interest bearing demand 31,447 31,447 26,627 26,627
Savings and Money Market deposit accounts 61,498 61,498 58,235 58,235
Certificates of deposit under $100,000:
Maturing or repricing within three months 16,040 16,040 14,100 14,100
Maturing or repricing between three months and one year 28,357 28,357 22,160 22,160
Maturing or repricing between one and three years 8,743 8,843 12,222 12,393
Maturing or repricing between three and five years 2,863 2,933 4,002 4,111
Maturing or repricing beyond five years 1,493 2,388 1,683 2,418
--------------------------------------------------------
57,496 58,561 54,167 55,182
--------------------------------------------------------
Certificates of deposit $100,000 and over:
Maturing or repricing within three months 3,174 3,174 3,745 3,745
Maturing or repricing between three months and one year 3,313 3,313 2,084 2,084
Maturing or repricing between one and three years 307 307 140 143
Maturing or repricing between three and five years 484 484 268 268
Maturing or repricing beyond five years 345 656 439 664
--------------------------------------------------------
7,623 7,934 6,676 6,904
--------------------------------------------------------
Total deposits $198,430 $199,806 $188,854 $190,097
========================================================
</TABLE>
[CAPTION]
13 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE.
The Company uses portions of its interest in the Vanguard money market fund
when it sells securities under agreements to repurchase. The table below
summarizes information relating to those securities sold for 1997, 1996, and
1995. For purposes of the table, the average amount outstanding was calculated
based on a daily average. Because the agreements to repurchase securities sold
generally mature in ninety days or less, the "balance" in the table approximates
market value on the dates presented.
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ----------------------------- -----------------------------------------
<S> <C> <C> <C>
Balance at December 31 $ 8,201 $ 5,054 $ 2,959
Interest rate at December 31 4.75% 2.89% 3.52%
Maximum amount outstanding at any month-end during the year $ 18,101 $ 8,580 $ 5,189
Average amount outstanding during the year $ 10,805 $ 5,479 $ 3,735
Weighted average interest rate during the year 3.48% 3.04% 3.46%
</TABLE>
50
<PAGE>
14 LONG TERM DEBT AND NOTE PAYABLE
In August 1997, NBSC sold $5 million in securities under an agreement to
repurchase to the Federal Home Loan Bank of New York. The securities bear an
interest rate of 5.98% and have a maturity date of August 20, 2002, subject to
an early call at the option of the Federal Home Loan Bank on August 20, 2000 and
quarterly thereafter. The fair value of the securities under an agreement to
repurchase is based on the discounted value of contractual cash flows The
Company estimates the discount rate using the rates currently offered for
securities under agreements to repurchase of similar remaining maturities.
Until recently, High Point was obligated under a note payable to an
unaffiliated bank. That note, which was scheduled to mature on January 2, 1998,
was secured by the land held for sale discussed in Note 6 on page 44. In May
1997, High Point satisfied the note payable using the proceeds of a $500,000
dividend from NBSC and other funds. Although the outstanding balance on the
note was $821,000 at the time of repayment, High Point's lender agreed to cancel
the note in exchange for the early payment of $770,000 plus outstanding
interest, effectively, forgiving $51,000 on the debt. That $51,000 is included
on the Company's income statement in "other income."
15 REDEEMABLE SUBORDINATED DEBENTURES AND CANCELABLE MANDATORY STOCK PURCHASE
CONTRACTS.
High Point satisfied all of its remaining 8.5% Redeemable Subordinated
Debentures due March 1, 1997 (the "Debentures") by making the final interest
payment of $3,000 and repaying the remaining $127,000 in principal. Before they
were retired, certain of the Debentures secured Cancelable Mandatory Stock
Purchase Contracts ("Equity Contracts"), which required the holders to purchase
$401,000 of High Point's common stock for $19.17 per share (after adjustment for
stock dividends and certain other events) no later than March 1, 1996. An
Equity Contract holder could purchase High Point stock by paying cash or by
surrendering Debentures with a corresponding principal amount. On March 1,
1996, $384,000 in Debentures were surrendered to satisfy stock purchase
obligations under Equity Contracts. The remaining Equity Contract obligations
were satisfied by the payment of cash.
16 REGULATORY CAPITAL REQUIREMENTS.
High Point and NBSC are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can lead to certain supervisory actions by regulators that could
have a direct material effect on the Company's or NBSC's financial statements.
Management believes, as of December 31, 1997, that the Company and NBSC meet all
capital adequacy requirements to which they are subject.
Applicable capital adequacy guidelines involve quantitative measures of the
assets, liabilities, and certain off-balance sheet items of banks and bank
holding companies, calculated in accordance with regulatory accounting
practices. In addition, regulators are authorized to make qualitative judgments
about issues such as components and risk weightings that can affect the overall
evaluation of a financial institution's capital adequacy.
In order to be considered "well-capitalized," the Company and NBSC must
maintain minimum amounts of total and Tier I capital, and minimum ratios of
capital to risk-adjusted assets. "Tier I capital" is defined in the applicable
regulations to include tangible stockholders' equity for common stock, certain
perpetual preferred stock, and certain mandatory convertible securities. "Risk-
adjusted assets" are defined in the applicable regulations as total assets, plus
certain off-balance sheet items that are adjusted for predefined credit risk
factors.
As of December 31, 1997, the most recent notification from the Office of
the Comptroller of the Currency categorized NBSC as "well-capitalized," and the
most recent notification from the Federal Reserve Bank of New York 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 affect the capital adequacy rating of either the Company or NBSC.
The following table summarizes NBSC's capital position:
51
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
(dollars in thousands) Actual Adequacy Purposes: Action Provisions:
---------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets) $20,763 16.80% >=$9,886 >=8.0% >=$12,359 >=10.0%
Tier I Capital
(to Risk Weighted Assets) $19,187 15.52% >=$4,943 >=4.0% >=$7,415 >=6.0%
Tier I Capital
(to Average Assets) $19,187 8.02% >=$9,563 >=4.0% >=$11,955 >=5.0%
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets) $18,159 15.87% >=$9,154 >=8.0% >=$11,443 >=10.0%
Tier I Capital
(to Risk Weighted Assets) $16,697 14.59% >=$4,577 >=4.0% >=$6,865 >=6.0%
Tier I Capital
(to Average Assets) $16,697 7.75% >=$8,620 >=4.0% >=$10,776 >=5.0%
</TABLE>
The following table summarizes the Company's capital position:
<TABLE>
<CAPTION> To Be Well
Capitalized Under
For Capital Prompt Corrective
(dollars in thousands) Actual Adequacy Purposes: Action Provisions:
---------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets) $22,864 18.21% >=$10,044 >=8.0% >=$12,556 >=10.0%
Tier I Capital
(to Risk Weighted Assets) $21,262 16.94% >=$5,022 >=4.0% >=$7,533 >=6.0%
Tier I Capital
(to Average Assets) $21,262 8.84% >=$9,623 >=4.0% >=$12,029 >=5.0%
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets) $19,787 17.00% >=$9,310 >=8.0% >=$11,638 >=10.0%
Tier I Capital
(to Risk Weighted Assets) $18,175 15.62% >=$4,655 >=4.0% >=$6,982 >=6.0%
Tier I Capital
(to Average Assets) $18,175 8.35% >=$8,709 >=4.0% >=$10,886 >=5.0%
</TABLE>
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 1997, plus the
retained earnings from the prior two years, are $8.7 million. NBSC has
aggregate retained earnings of $2.96 million as of December 31, 1997.
17 FAIR VALUE OF FINANCIAL INSTRUMENTS.
The following table presents the fair value and the carrying value of the
Company's financial instruments. The recorded carrying values for cash and cash
equivalents, federal funds purchased, interest bearing deposits with banks, and
securities sold under agreements to repurchase approximate fair value because
those instruments mature within one year and do not present unanticipated credit
risks.
52
<PAGE>
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1997 December 31, 1996
Carrying Fair Carrying Fair
(in thousands) Value Value Value Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $20,989 $20,989 $14,528 $14,528
Interest bearing deposits with banks - - 123 123
Securities available for sale, at fair value (Note 2) 52,854 52,854 53,575 53,575
Securities held to maturity (Note 2) 24,766 24,923 22,667 22,698
Loans held for sale, at fair value 88 88 178 178
Loans (Note 3) 126,687 127,000 114,631 114,000
- ----------------------------------------------------------------------------------------------------------------
Total financial assets $225,384 $225,854 $205,702 $205,102
- ----------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Deposits (Note 12) $198,430 $199,806 $188,854 $190,097
Federal funds purchased and securities sold under
agreements to repurchase (Note 13) 8,201 8,201 5,054 5,054
Note payable (Note 14) --- --- 846 846
Redeemable subordinated debentures (Note 15) --- --- 127 127
Long-term repurchase agreement (Note 15) 5,000 5,057 --- ---
Standby letters of credit --- 3 --- 7
- ----------------------------------------------------------------------------------------------------------------
Total financial liabilities $211,631 $213,067 $194,881 $196,131
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
For the methods that management uses to estimate the fair value of other
financial instruments, see the Notes cited in the table. For the Company's
policy regarding presentation of fair value of financial instruments, see Note 1
on page 39, under the heading "Fair value of financial instruments."
18 OTHER EXPENSES.
Certain components of non-interest expense are discussed in Notes 8 and 9
(regarding various employee benefits), Note 10 under "Non-cancelable lease
obligations" (regarding rent), and Note 4 (regarding other real estate). "Other
non-interest expense" for the years ended December 31, 1997, 1996, and 1995
consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Legal fees $186 $276 $247
FDIC insurance assessment 23 170 383
Impairment on land held for sale --- 250 29
Marketing 238 216 315
Printing and supply 249 239 196
Other 1,658 1,562 1,511
-----------------------------------------
$2,354 $2,713 $2,681
-----------------------------------------
</TABLE>
19 HIGH POINT FINANCIAL CORP. (PARENT COMPANY ONLY).
High Point has one wholly-owned subsidiary, NBSC. High Point recognizes
NBSC's net income using the equity method of accounting. Accordingly, income or
loss for NBSC is recorded as an adjustment in High Point's investment in the
subsidiary. Condensed financial statements of the parent company only follow:
53
<PAGE>
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
(in thousands)
December 31,
ASSETS 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $25 $6
Federal funds sold 115 240
Interest bearing deposits with banks (escrow with lending bank) --- 123
Securities available for sale 17 212
Investment in bank subsidiary 20,317 18,493
Land held for sale (Note 14) 1,865 1,885
Other assets 18 12
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $22,357 $20,971
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $14 $21
Note payable (Note 14) --- 846
Redeemable subordinated debentures --- 127
Stockholders' equity 22,343 19,977
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,357 $20,971
================================================================================================================
CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
INCOME 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Gain on sale of securities available for sale $--- $--- $19
Dividends from subsidiary 700 --- ---
Other income 61 62 54
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCOME 761 62 73
- ----------------------------------------------------------------------------------------------------------------
EXPENSE
Interest expense 32 131 180
Non-interest expenses 233 439 283
- ----------------------------------------------------------------------------------------------------------------
TOTAL EXPENSE 265 570 463
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before benefit for income taxes and
cumulative effect for change in accounting principle 496 (508) (390)
Benefit for income taxes (69) --- ---
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect for change in accounting principle 565 (508) (390)
Cumulative effect of change in accounting principle --- --- (370)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed
income (loss) of subsidiaries 565 (508) (760)
Equity in undistributed income of subsidiaries 1,740 5,315 1,465
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $2,305 $4,807 $705
================================================================================================================
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $2,305 $4,807 $705
Adjustments to reconcile net income to net
cash provided by operating activities:
Accretion on securities --- (1) (1)
Gain on sale of securities --- --- (19)
Discount received on matured investment 3 --- ---
Unrealized loss on land held for sale --- 250 399
(Increase) decrease in other assets (9) 46 140
Decrease in other liabilities (9) (28) (58)
Equity in undistributed income of subsidiaries (1,740) (5,315) (1,465)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 550 (241) (299)
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale and maturity of securities available for sale 198 --- 263
Purchase of securities --- --- (13)
(Increase) decrease in interest bearing deposits 123 2 (1)
Proceeds received from option on land held for sale 20 --- ---
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 341 2 249
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of long-term debt (973) (424) (212)
Purchase of treasury stock (64) --- ---
Exercise of stock options 40 --- ---
Proceeds from equity contract conversion --- 396 ---
- ----------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (997) (28) (212)
- ----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (106) (267) (262)
Cash and cash equivalents, beginning of year 246 513 775
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $140 $246 $513
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID $41 $131 $180
</TABLE>
20 SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED).
(dollars in thousands, except per share amounts)
The following quarterly financial information for the two years ended
December 31, 1997 is unaudited. However, in the opinion of management, this
information reflects all adjustments necessary to present fairly the results of
operations for the covered periods. Results of operations for a particular
period is not necessarily indicative of the results for the entire year or for
any other interim period.
55
<PAGE>
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
1997 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $3,794 $3,940 $4,514 $4,271
Net interest income 2,347 2,439 2,856 2,552
Provision for possible loan losses --- --- --- ---
Net income before provision (benefit) for
income taxes 708 878 1,211 1,094
Provision for income taxes 286 354 496 450
Net income 422 524 715 644
Basic earnings per share 0.11 0.14 0.19 0.17
Diluted earnings per share 0.11 0.14 0.18 0.17
1996 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------
Total interest income $3,480 $3,462 $3,664 $3,823
Net interest income 2,050 2,066 2,208 2,347
Provision for possible loan losses --- --- --- ---
Net income before provision (benefit) for
income taxes 511 408 296 911
Provision (benefit) for income taxes (246) (368) (2,472) 405
Net income 757 776 2,768 506
Basic earnings per share 0.20 0.21 0.73 0.13
Diluted earnings per share 0.20 0.21 0.73 0.13
</TABLE>
21 EARNINGS PER SHARE
The following table shows the Company's earnings per share calculation:
56
<PAGE>
<TABLE>
<CAPTION>
Average
Common
share and
Common Earnings
Net Share Per-share
Income Equivalents Amount
-----------------------------------------
<S> <C> <C> <C>
(Dollars in thousands) For the year ended 1997
Net income $2,305
Basic earnings per share:
-------------
Income available to common shareholders 2,305 3,786,480 $0.61
--------------
Options issued to Executives and directors 65,897
---------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $2,305 3,852,377 $0.60
-----------------------------------------
For the year ended 1996
Net income $4,807
Basic earnings per share:
-------------
Income available to common shareholders 4,807 3,779,364 $1.27
--------------
Options issued to Executives and directors 7,543
---------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $4,807 3,786,907 $1.27
-----------------------------------------
For the year ended 1995
Net income $705
Basic earnings per share:
-------------
Income available to common shareholders 705 3,745,760 $0.19
--------------
Options issued to Executives and directors -
---------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $705 3,745,760 $0.19
-----------------------------------------
</TABLE>
Basic earnings per common share were computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. In 1997, the Company adopted SFAS No. 128, "Earnings per Share," effective
December 15, 1997. As a result, the Company's reported earnings per share for
1996 and 1995 were restated. The restatement had no impact on the Company's
reported earnings per share for 1996 and 1995.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to the
information contained in the following places:
- Under the heading "Election of Directors" on pages 1 through and
including 2 in the Company's definitive Proxy Statement for the 1998
Annual Meeting of Shareholders (the "1998 proxy Statement").
- Under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" on page 10 of the 1998 Proxy Statement.
- In Item 4A on page 6, of this annual report.
57
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
information contained under the following headings in the 1998 Proxy Statement:
. "Executive Compensation and Other Information" on page 5.
. "Stock Option Plans" on pages 7 through and including 8.
. "Change of Control Agreements" on page 8.
. "Compensation of Directors" on page 10.
This incorporation by reference shall not be deemed to specifically incorporate
by reference the information referred to in Item 402(a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information contained under the heading "Security Ownership of Certain
Beneficial Owners, Directors and Management" on pages 3 through and including
4 of the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
information contained under the heading "Transactions with Directors and
Management" on page 10 of the 1998 Proxy Statement and under the heading
"Compensation Committee Interlocks and Insider Participation" on page 6 of the
1998 Proxy Statement.
58
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 3. Exhibits Required by Item 601 of Regulation S-K
3(a) Restated Certificate of Incorporation of High Point Financial Corp.
incorporated by reference to Exhibit 4(a) to the Registration Statement
on Form S-3 filed by the Company on October 30, 1987 (No.33-18226) and
Amendment No.2 thereto, filed by the Company on March 24, 1988.
3(b) By-laws of High Point Financial Corp., as amended, February 20, 1996
incorporated by reference to Exhibit 3(b) in the Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
4(a) Indenture (including the forms of Debentures), dated as of March 1,
1987, between High Point Financial Corp. and New Jersey National Bank,
Trustee--incorporated by reference to Exhibit 4(c) to the Registration
Statement on Form S-2 filed by the Company on February 26, 1987 (No.33-
12243), and Amendment No.1 thereto, filed by the Company on March 13,
1987.
4(b) Equity Contract Agency Agreement (including form of Cancellable
Mandatory Stock Purchase Contracts), dated as of March 1, 1987 between
High Point Financial Corp. and the United Jersey Bank/Commercial
Trust--incorporated by reference to Exhibit 4(d) to the Registration
Statement on Form S-2 filed by the Company on February 26, 1987
(No. 33-12243), and Amendment No. 1 thereto, filed by the Company on
March 13, 1987.
10(a) Executive Supplemental Income Agreement, between The National Bank of
Sussex County and Gregory W. A. Meehan, incorporated by reference to
Exhibit 10(e) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1986.**
10(b) Directors Deferred Income Agreement, between High Point Financial Corp.
and C. Edward McCracken, incorporated by reference to Exhibit 10(f) to
the Annual Report on Form 10-K for the fiscal year ended December 31,
1986.**
10(c) Directors Deferred Income Agreement, between High Point Financial Corp.
and Richard M. Roy, incorporated by reference to Exhibit 10(g) to the
Annual Report on Form 10-K for the fiscal year ended December 31,
1986.**
____________
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
** Indicates a management contract or compensatory plan or arrangement.
59
<PAGE>
10(d) Directors Deferred Income Agreement, between The National Bank of
Sussex County and Larry R. Condit, incorporated by reference to Exhibit
10(j) to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.**
10(e) Directors Deferred Income Agreement, between The National Bank of
Sussex County and C. Edward McCracken, incorporated by reference to
Exhibit 10(i) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1986.**
10(f) Directors Deferred Income Agreement, between The National Bank of
Sussex County and Richard M. Roy, incorporated by reference to Exhibit
10(k) to Annual Report on Form 10-K for the fiscal year ended December
31, 1986.**
10(g) Directors Deferred Income Agreement, between The National Bank of
Sussex County and William A. Dolan, II, incorporated by reference to
Exhibit 10(m) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1986.**
10(h) Loan and Pledge Agreement, dated September 20, 1985, between the Trust
for The National Bank of Sussex County Employee Stock Ownership Plan
and First National Bank of Central Jersey, incorporated by reference to
Exhibit 10(o) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1986.
10(i) 1987 Incentive Stock Option Plan of High Point Financial Corp.,
incorporated by reference to Exhibit 10(r) to the Annual Report on Form
10-K for the fiscal year ended December 31, 1987.**
10(j) Executive Supplemental Income Agreement, between High Point Financial
Corp. and Michael A. Dickerson, incorporated by reference to Exhibit
10(q) to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.**
10(k) Lease Agreement, dated June 23, 1988, between The National Bank of
Sussex County and FMI, Inc., incorporated by reference to Exhibit 10(s)
to the Annual Report on Form 10-K for the fiscal year ended December
31, 1988.
10(l) Change of Control Agreement, dated October 1, 1996 between the National
Bank of Sussex County and High Point Financial Corp., and Michael A.
Dickerson incorporated by Reference to Exhibit 10(l) to the Annual
Report on Form 10-K For the fiscal year ended December 31, 1996.**
___________
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is
incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement
60
<PAGE>
10(m) Change of Control Agreement, dated October 1, 1996
between the National Bank of Sussex County and High Point
Financial Corp., and Gregory W. A. Meehan incorporated by
Reference to Exhibit 10(m) to the Annual Report on Form 10-K
For the fiscal year ended December 31, 1996.**
10(n) Change of Control Agreement, dated October 1, 1996
between the National Bank of Sussex County and High Point
Financial Corp., and Robert A. Vandenbergh incorporated by
Reference to Exhibit 10(n) to the Annual Report on Form 10-K
For the fiscal year ended December 31, 1996.**
10(o) The High Point Financial Corp. 1990 Employee Stock Option
Incentive Plan, incorporated by reference to Exhibit 28(a) to the
Registration Statement on Form S-8 filed by High Point on
November 6, 1990 (No. 33-37621).**
10(p) Amendment to the Executive Supplemental Income Agreement, between The
National Bank of Sussex County and Gregory W. A. Meehan, effective July
1, 1991, incorporated by reference to Exhibit 10(x) to the Annual
Report on Form 10-K for the fiscal year ended December 31, 1991.**
10(q) Amendment to the Executive Supplemental Income Agreement, between High
Point Financial Corp. and Michael A. Dickerson, effective July 1, 1991,
incorporated by reference to Exhibit 10(y) to the Annual Report on Form
10-K for the fiscal year ended December 31, 1991.**
10(r) Consolidated Loan and Security Agreement dated December 31, 1991,
between High Point Financial Corp. and National Westminster Bank NJ,
incorporated by reference to Exhibit 10(z) to the Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
10(s) Amendment to the Executive Supplemental Income Agreement, between High
Point Financial Corp. and Michael A. Dickerson, effective January 1,
1993, incorporated by reference to Exhibit 10(s) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1992.**
10(t) February, 1993 Modification to Consolidated Loan and Security Agreement
between High Point Financial Corp. and National Westminster Bank, New
Jersey, dated February 26, 1993., incorporated by reference to Exhibit
10(v) to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.
__________
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is
incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement.
61
<PAGE>
10(u) Amendment to the Directors Deferred Income Agreement, between The
National Bank of Sussex County and Larry R. Condit, dated April 1,
1993, incorporated by reference to Exhibit 10(w) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1993.**
10(v) Amendment to the Directors Deferred Income Agreement, between The
National Bank of Sussex County and C. Edward McCracken, dated April 1,
1993, incorporated by reference to Exhibit 10(x) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1993.**
10(w) Amendment to the Directors Deferred Income Agreement, between High
Point Financial Corp. and C. Edward McCracken, dated April 1, 1993,
incorporated by reference to Exhibit 10(y) to the Annual Report on Form
10-K for the fiscal year ended December 31, 1993.**
10(x) Amendment to the Directors Deferred Income Agreement, between The
National Bank of Sussex County and Richard M. Roy, dated April 1, 1993,
incorporated by reference to Exhibit 10(z) to the Annual Report on Form
10-K for the fiscal year ended December 31, 1993.**
10(y) Amendment to the Directors Deferred Income Agreement, between High
Point Financial Corp. and Richard M. Roy, dated April 1, 1993,
incorporated by reference to Exhibit 10(aa) to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.**
10(z) Amendment to the Directors Deferred Income Agreement, between The
National Bank of Sussex County and William A. Dolan, II, dated April 1,
1993, incorporated by reference to Exhibit 10(ab) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1993.**
10(aa) Modified Term Note dated December 28, 1994 between High Point Financial
Corp. and National Westminster Bank, NJ., incorporated by reference to
Exhibit 10(ac) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
10(ab) 1996 Non-employee Director Stock Option Plan is incorporated by
reference to Exhibit 10(ab) to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 .**
10(ac) 1996 Employee Incentive Stock Option Plan is incorporated
by reference to Exhibit 10(ac) to the Annual Report on Form
10-K for the fiscal year ended December 31, 1996.**
__________
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is
incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement.
62
<PAGE>
10(ad) Salary Continuation Agreement dated December 17, 1996 between the
National Bank of Sussex County and Michael A. Dickerson is incorporated
by reference to Exhibit 10(ad) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.**
10(ae) Salary Continuation Agreement dated December 17, 1996 between the
National Bank of Sussex County and Gregory W.A. Meehan is incorporated
by reference to Exhibit 10(ae) to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.**
10(af) Salary Continuation Agreement dated December 17, 1996 between the
National Bank of Sussex County and Robert A. Vandenbergh is
incorporated by reference to Exhibit 10(af) to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.**
10(ag) Amendment No. 1 to Salary Continuation Agreement dated
April 15, 1997 between the National Bank of Sussex County
and Michael A. Dickerson.**
10(ah) Amendment No. 1 to Salary Continuation Agreement dated
April 15, 1997 between the National Bank of Sussex County
and Gregory W. A. Meehan.**
10(ai) Amendment No. 1 to Salary Continuation Agreement dated
April 15, 1997 between the National Bank of Sussex County
and Robert A. Vandenbergh.**
11 Statement of computation of per share earnings
21 List of subsidiaries
23 Consent of Arthur Andersen LLP
* Exhibit has been heretofore filed with the Securities & Exchange
Commission and is incorporated herein as exhibit by reference.
** Indicates a management contract or compensatory plan
or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HIGH POINT FINANCIAL CORP.
Dated: March 17, 1998
By /s/Gregory W. A. Meehan By /s/ Rita A. Myers
---------------------------- ---------------------------
Gregory W. A. Meehan, Rita A. Myers
Vice President and Treasurer Comptroller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Capacity Date
/s/ Charles L. Tice Chairman of the Board March 17, 1998
-----------------------------
(Charles L. Tice)
/s/ Michael A. Dickerson President, Chief Executive March 17, 1998
-----------------------------
(Michael A. Dickerson) Officer and Director
/s/Gregory W. A. Meehan Vice President and Treasurer March 17, 1998
-----------------------------
(Gregory W. A. Meehan) (Principal Financial Officer)
/s/ Rita A. Myers Comptroller March 17, 1998
-----------------------------
(Rita A. Myers) (Principal Accounting Officer)
/s/ William A. Dolan Director March 17, 1998
-----------------------------
(William A. Dolan, II)
Director
-----------------------------
(Larry R. Condit)
/s/ Rhea C. Fountain, III Director March 17, 1998
-----------------------------
(Rhea C. Fountain, III)
/s/ George H. Guptill, Jr. Director March 17, 1998
-----------------------------
(George H. Guptill, Jr.)
/s/ Stanley A. Koza Director March 17, 1998
-----------------------------
(Stanley A. Koza)
/s/ Charles L. Lain Director March 17, 1998
-----------------------------
(Charles L. Lain)
/s/ Richard M. Roy Vice Chairman and Director March 17, 1998
-----------------------------
(Richard M. Roy)
</TABLE>
64
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1997
HIGH POINT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
65
<PAGE>
INDEX TO THE EXHIBITS
<TABLE>
<S> <C> <C>
3(a) Restated Certificate of Incorporation of High Point *
Financial Corp. incorporated by reference to Exhibit 4(a)
to the Registration Statement on Form S-3 filed by the
Company on October 30, 1987 (No.33-18226) and Amendment
No.2 thereto, filed by the Company on March 24, 1988.
3(b) By-laws of High Point Financial Corp., as amended, February *
20, 1996 incorporated by reference to Exhibit 3(b) in the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
4(a) Indenture (including the forms of Debentures), dated as of *
March 1, 1987, between High Point Financial Corp. and New
Jersey National Bank, Trustee--incorporated by reference to
Exhibit 4(c) to the Registration Statement on Form S-2
filed by the Company on February 26, 1987 (No.33-12243),
and Amendment No.1 thereto, filed by the Company on March
13, 1987.
4(b) Equity Contract Agency Agreement (including form of *
Cancellable Mandatory Stock Purchase Contracts), dated as
of March 1, 1987 between High Point Financial Corp. and the
United Jersey Bank/Commercial Trust--incorporated by
reference to Exhibit 4(d) to the Registration Statement on
Form S-2 filed by the Company on February 26, 1987
(No. 33-12243), and Amendment No. 1 thereto, filed by the
Company on March 13, 1987.
10(a) Executive Supplemental Income Agreement, between The *
National Bank of Sussex County and Gregory W. A. Meehan,
incorporated by reference to Exhibit 10(e) to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1986.**
10(b) Directors Deferred Income Agreement, between High Point *
Financial Corp. and C. Edward McCracken, incorporated by
reference to Exhibit 10(f) to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1986.**
10(c) Directors Deferred Income Agreement, between High Point *
Financial Corp. and Richard M. Roy, incorporated by
reference to Exhibit 10(g) to the Annual Report on Form
10-K for the fiscal year ended December 31, 1986.**
10(d) Directors Deferred Income Agreement, between The *
National Bank of Sussex County and Larry R. Condit,
incorporated by reference to Exhibit 10(j) to the Annual
Report on Form 10-K for the fiscal
year ended December 31, 1986.**
10(e) Directors Deferred Income Agreement, between The *
National Bank of Sussex County and C. Edward McCracken,
incorporated by reference to Exhibit 10(i) to the Annual
Report on Form 10-K for the fiscal year ended
December 31, 1986.**
</TABLE>
- ------------
* Exhibit has been heretofore filed with the Securities & Exchange
Commission and is incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement.
66
<PAGE>
<TABLE>
<S> <C> <C>
10(e) Directors Deferred Income Agreement, between The *
National Bank of Sussex County and C. Edward McCracken,
incorporated by reference to Exhibit 10(i) to the Annual
Report on Form 10-K for the fiscal year ended
December 31, 1986.**
10(f) Directors Deferred Income Agreement, between The *
National Bank of Sussex County and Richard M. Roy,
incorporated by reference to Exhibit 10(k) to Annual Report
on Form 10-K for the fiscal year ended December 31, 1986.**
10(g) Directors Deferred Income Agreement, between The *
National Bank of Sussex County and William A. Dolan, II,
incorporated by reference to Exhibit 10(m) to the Annual
Report on Form 10-K for the fiscal year ended
December 31, 1986.**
10(h) Loan and Pledge Agreement, dated September 20, 1985, *
between the Trust for The National Bank of Sussex County
Employee Stock Ownership Plan and First National Bank of
Central Jersey, incorporated by reference to Exhibit 10(o)
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
10(i) 1987 Incentive Stock Option Plan of High Point Financial *
Corp., incorporated by reference to Exhibit 10(r) to the
Annual Report on Form 10-K for the fiscal year ended
December 31, 1987.**
10(j) Executive Supplemental Income Agreement, between High Point *
Financial Corp. and Michael A. Dickerson, incorporated by
reference to Exhibit 10(q) to the Annual Report on Form 10-
K for the fiscal year ended December 31, 1988.**
10(k) Lease Agreement, dated June 23, 1988, between The National *
Bank of Sussex County and FMI, Inc., incorporated by
reference to Exhibit 10(s) to the Annual Report on Form 10-
K for the fiscal year ended December 31, 1988.
10(l) Change of Control Agreement, dated October 1, 1996 between *
the National Bank of Sussex County and High Point Financial
Corp., and Michael A. Dickerson incorporated by reference
to Exhibit 10(l) to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.**
10(m) Change of Control Agreement, dated October 1, 1996 between *
the National Bank of Sussex County and High Point Financial
Corp., and Gregory W. A. Meehan incorporated by reference
to Exhibit 10(m) to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.**
10(n) Change of Control Agreement, dated October 1, 1996 between *
the National Bank of Sussex County and High Point Financial
Corp., and Robert A. Vandenbergh incorporated by reference
to Exhibit 10(n) to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.**
</TABLE>
- -----------
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement
67
<PAGE>
<TABLE>
<S> <C> <C>
10(o) The High Point Financial Corp. 1990 Employee Stock Option *
Incentive Plan, incorporated by reference to Exhibit 28(a) to
the Registration Statement on Form S-8 filed by High Point on
November 6, 1990 (No. 33-37621).**
10(p) Amendment to the Executive Supplemental Income Agreement, *
between The National Bank of Sussex County and Gregory W. A.
Meehan, effective July 1, 1991, incorporated by reference to
Exhibit 10(x) to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1991.**
10(q) Amendment to the Executive Supplemental Income Agreement, *
between High Point Financial Corp. and Michael A. Dickerson,
effective July 1, 1991, incorporated by reference to Exhibit
10(y) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.**
10(r) Consolidated Loan and Security Agreement dated December 31, *
1991, between High Point Financial Corp. and National
Westminster Bank NJ, incorporated by reference to Exhibit 10(z)
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10(s) Amendment to the Executive Supplemental Income Agreement, *
between High Point Financial Corp. and Michael A. Dickerson,
effective January 1, 1993, incorporated by reference to Exhibit
10(s) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.**
10(t) February, 1993 Modification to Consolidated Loan and Security *
Agreement between High Point Financial Corp. and National
Westminster Bank, New Jersey, dated February 26, 1993.,
incorporated by reference to Exhibit 10(v) to the Annual Report
on Form 10-K for the fiscal year ended December 31, 1992.
10(u) Amendment to the Directors Deferred Income Agreement, between *
The National Bank of Sussex County and Larry R. Condit, dated
April 1, 1993, incorporated by reference to Exhibit 10(w) to
the Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.**
10(v) Amendment to the Directors Deferred Income Agreement, between *
The National Bank of Sussex County and C. Edward McCracken,
dated April 1, 1993, incorporated by reference to Exhibit 10(x)
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.**
</TABLE>
- ----------
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement.
68
<PAGE>
<TABLE>
<S> <C> <C>
10(w) Amendment to the Directors Deferred Income Agreement, between *
High Point Financial Corp. and C. Edward McCracken, dated April
1, 1993, incorporated by reference to Exhibit 10(y) to the
Annual Report on Form 10-K for the fiscal year ended December
31, 1993.**
10(x) Amendment to the Directors Deferred Income Agreement, between *
The National Bank of Sussex County and Richard M. Roy, dated
April 1, 1993, incorporated by reference to Exhibit 10(z) to
the Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.**
10(y) Amendment to the Directors Deferred Income Agreement, between *
High Point Financial Corp. and Richard M. Roy, dated April 1,
1993, incorporated by reference to Exhibit 10(aa) to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1993.**
10(z) Amendment to the Directors Deferred Income Agreement, between *
The National Bank of Sussex County and William A. Dolan, II,
dated April 1, 1993, incorporated by reference to Exhibit
10(ab) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.**
10(aa) Modified Term Note dated December 28, 1994 between High Point *
Financial Corp. and National Westminster Bank, NJ.,
incorporated by reference to Exhibit 10(ac) to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1994.
10(ab) 1996 Non-employee Director Stock Option Plan is incorporated by *
reference to Exhibit 10(ab) to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 .**
10(ac) 1996 Employee Incentive Stock Option Plan is incorporated by *
reference to Exhibit 10(ac) to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.**
10(ad) Salary Continuation Agreement dated December 17, 1996 between *
the National Bank of Sussex County and Michael A. Dickerson is
incorporated by reference to Exhibit 10(ad) to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1996.**
10(ae) Salary Continuation Agreement dated December 17, 1996 between *
the National Bank of Sussex County and Gregory W. A. Meehan is
incorporated by reference to Exhibit 10(ae) to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1996.**
</TABLE>
- ----------
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement.
69
<PAGE>
<TABLE>
<S> <C> <C>
10(af) Salary Continuation Agreement dated December 17, 1996 between *
the National Bank of Sussex County and Robert A. Vandenbergh is
incorporated by reference to Exhibit 10(af) to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1996.**
10(ag) Amendment No. 1 to Salary Continuation Agreement dated April
15, 1997 between the National Bank of Sussex County and Michael
A. Dickerson.** 71
10(ah) Amendment No. 1 to Salary Continuation Agreement dated April
15, 1997 between the National Bank of Sussex County and Gregory
W. A. Meehan.** 74
10(ai) Amendment No. 1 to Salary Continuation Agreement dated April
15, 1997 between the National Bank of Sussex County and Robert
A. Vandenbergh.** 77
11 Statement of computation of per share earnings 80
21 List of subsidiaries 81
23 Consent of Arthur Andersen LLP 82
</TABLE>
- ----------------
* Exhibit has been heretofore filed with the Securities & Exchange Commission
and is incorporated herein as exhibit by reference.
**Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
70
<PAGE>
EXHIBIT 10 (ag)
AMENDMENT NO. 1
TO
SALARY CONTINUATION AGREEMENT
This AMENDMENT NO. 1 ("Amendment No. 1") is between THE NATIONAL BANK
OF SUSSEX COUNTY (the "Bank"), and Michael A. Dickerson (the "Executive").
--------------------
WHEREAS, The Bank and the Executive have entered into The National
Bank of Sussex County Salary Continuation Agreement dated as of December 17,
1996 (the "Agreement"), the terms defined therein, being used herein, as therein
defined unless the context requires otherwise; and
WHEREAS, the Bank and the Executive desire to amend the Agreement as
hereinafter provided for the purpose of making adjustments to certain provisions
contained therein.
The parties hereto agree that the Agreement is, effective as of the
date hereof, hereby amended as follows:
1. Article 1 of the Agreement is amended by deleting the provision
contained in Section 1.1.7, entitled "Early Retirement Date," and substituting
for such provision the following:
"'Early Retirement Date' means the date in which the Executive
attains age 62 and completes 11 years of service."
2. Article 1 of the Agreement is amended by deleting Section 1.1.13,
entitled "Change of Control."
3. Article 2 of the Agreement is amended by deleting the provision
contained in Section 2.1.1.1., entitled "Social Security Benefits," and
substituting for such provision the
71
<PAGE>
following:
"Section 2.1.1.1. Social Security Benefits. The monthly
unreduced primary (not family) retirement benefits under the United
States Social Security Act that the Executive would be eligible for if
an application for such benefits were made as of the Executive's
65/th/ birthday, assuming the Executive had earnings at or above the
maximum contribution and benefit base under Section 230 of the United
States Social Security Act for his working career (For purposes of
this Section 2.1.1.1, if Executive's Termination of Employment under
this Agreement occurs prior to Executive's attainment of age 65 the
calculation of the Social Security benefit under this Section 2.1.1.1
shall be based on the maximum social security benefit payable to an
age 65 fully insured individual as of the date of the Executive's
Termination of Employment, increased by 3% per year to the date the
Executive would have attained age 65)."
4. Article 2 of the Agreement is further amended by deleting Sections
2.1.3, 2.2.3, 2.3.3, and 2.5.3, respectively.
5. Article 2 of the Agreement is further amended by deleting
Sections, 2.4, 2.4.1, 2.4.2, and 2.4.3 and replacing them with the following:
"2.4-Intentionally Deleted."
6. Article 3 of the Agreement is amended by deleting Section 3.1.3.
7. Except as specifically amended above, the Agreement shall remain
in full force and effect and is hereby ratified and confirmed.
8. This amendment No. 1 shall be governed by, and construed in
accordance with the laws of the State of New Jersey, except to the extent
preempted by the laws of the United States of Amercia.
IN WITNESS WHEREOF, the Executive and a duly authorized officer of the
Bank and the Company have caused this Amendment No. 1 to be executed as of the
15/th/ day of April, 1997 in several counterparts (each of which is an original
and all of which are identical).
72
<PAGE>
Each of the counterparts of this Amendment No. 1 so executed shall, for all
purposes, be deemed to be an original, and all such counterparts together shall
constitute but one in the same instrument.
EXECUTIVE BANK
THE NATIONAL BANK OF SUSSEX COUNTY
\MICHAEL A. DICKERSON BY: \CHARLES L. LAIN
- --------------------- ------------------
NAME: CHARLES L. LAIN
TITLE: CHAIRMAN OF THE BOARD
AGREED AND CONSENTED TO:
HIGH POINT FINANCIAL CORP.
BY:\CHARLES L. TICE
------------------
NAME: CHARLES L. TICE
TITLE: CHAIRMAN OF THE BOARD
73
<PAGE>
Exhibit 10(ah)
AMENDMENT NO. 1
TO
SALARY CONTINUATION AGREEMENT
This AMENDMENT NO. 1 ("Amendment No. 1") is between THE NATIONAL BANK
OF SUSSEX COUNTY (the "Bank"), and Gregory W. A. Meehan (the "Executive").
--------------------
WHEREAS, The Bank and the Executive have entered into The National
Bank of Sussex County Salary Continuation Agreement dated as of December 17,
1996 (the "Agreement"), the terms defined therein, being used herein, as therein
defined unless the context requires otherwise; and
WHEREAS, the Bank and the Executive desire to amend the Agreement as
hereinafter provided for the purpose of making adjustments to certain provisions
contained therein.
The parties hereto agree that the Agreement is, effective as of the
date hereof, hereby amended as follows:
1. Article 1 of the Agreement is amended by deleting the provision
contained in Section 1.1.7, entitled "Early Retirement Date," and substituting
for such provision the following:
"'Early Retirement Date' means the date in which the Executive
attains age 62 and completes 11 years of service."
2. Article 1 of the Agreement is amended by deleting Section
1.1.13, entitled "Change of Control."
3. Article 2 of the Agreement is amended by deleting the provision
contained in Section 2.1.1.1., entitled "Social Security Benefits," and
substituting for such provision the
74
<PAGE>
following:
"Section 2.1.1.1. Social Security Benefits. The monthly
unreduced primary (not family) retirement benefits under the United
States Social Security Act that the Executive would be eligible for if
an application for such benefits were made as of the Executive's
65/th/ birthday, assuming the Executive had earnings at or above the
maximum contribution and benefit base under Section 230 of the United
States Social Security Act for his working career (For purposes of
this Section 2.1.1.1, if Executive's Termination of Employment under
this Agreement occurs prior to Executive's attainment of age 65 the
calculation of the Social Security benefit under this Section 2.1.1.1
shall be based on the maximum social security benefit payable to an
age 65 fully insured individual as of the date of the Executive's
Termination of Employment, increased by 3% per year to the date the
Executive would have attained age 65)."
4. Article 2 of the Agreement is further amended by deleting Sections
2.1.3, 2.2.3, 2.3.3, and 2.5.3, respectively.
5. Article 2 of the Agreement is further amended by deleting
Sections, 2.4, 2.4.1, 2.4.2, and 2.4.3 and replacing them with the following:
"2.4-Intentionally Deleted."
6. Article 3 of the Agreement is amended by deleting Section 3.1.3.
7. Except as specifically amended above, the Agreement shall remain
in full force and effect and is hereby ratified and confirmed.
8. This amendment No. 1 shall be governed by, and construed in
accordance with the laws of the State of New Jersey, except to the extent
preempted by the laws of the United States of Amercia.
IN WITNESS WHEREOF, the Executive and a duly authorized officer of the
Bank and the Company have caused this Amendment No. 1 to be executed as of the
15/th/ day of April, 1997 in several counterparts (each of which is an original
and all of which are identical).
75
<PAGE>
Each of the counterparts of this Amendment No. 1 so executed shall, for all
purposes, be deemed to be an original, and all such counterparts together shall
constitute but one in the same instrument.
EXECUTIVE BANK
THE NATIONAL BANK OF SUSSEX COUNTY
\GREGORY W. A. MEEHAN BY: \CHARLES L. LAIN
- --------------------- ------------------
NAME: CHARLES L. LAIN
TITLE: CHAIRMAN OF THE BOARD
AGREED AND CONSENTED TO:
HIGH POINT FINANCIAL CORP.
BY:\CHARLES L. TICE
------------------
NAME: CHARLES L. TICE
TITLE: CHAIRMAN OF THE BOARD
76
<PAGE>
Exhibit 10(ai)
AMENDMENT NO. 1
TO
SALARY CONTINUATION AGREEMENT
This AMENDMENT NO. 1 ("Amendment No. 1") is between THE NATIONAL BANK
OF SUSSEX COUNTY (the "Bank"), and Robert A. Vandenbergh (the "Executive").
---------------------
WHEREAS, The Bank and the Executive have entered into The National
Bank of Sussex County Salary Continuation Agreement dated as of December 17,
1996 (the "Agreement"), the terms defined therein, being used herein, as therein
defined unless the context requires otherwise; and
WHEREAS, the Bank and the Executive desire to amend the Agreement as
hereinafter provided for the purpose of making adjustments to certain provisions
contained therein.
The parties hereto agree that the Agreement is, effective as of the
date hereof, hereby amended as follows:
1. Article 1 of the Agreement is amended by deleting the provision
contained in Section 1.1.7, entitled "Early Retirement Date," and substituting
for such provision the
77
<PAGE>
following:
"'Early Retirement Date' means the date in which the Executive
attains age 62 and completes 11 years of service."
2. Article 1 of the Agreement is amended by deleting Section 1.1.13,
entitled "Change of Control."
3. Article 2 of the Agreement is amended by deleting the provision
contained in Section 2.1.1.1., entitled "Social Security Benefits," and
substituting for such provision the following:
"Section 2.1.1.1. Social Security Benefits. The monthly
unreduced primary (not family) retirement benefits under the United
States Social Security Act that the Executive would be eligible for if
an application for such benefits were made as of the Executive's
65/th/ birthday, assuming the Executive had earnings at or above the
maximum contribution and benefit base under Section 230 of the United
States Social Security Act for his working career (For purposes of
this Section 2.1.1.1, if Executive's Termination of Employment under
this Agreement occurs prior to Executive's attainment of age 65 the
calculation of the Social Security benefit under this Section 2.1.1.1
shall be based on the maximum social security benefit payable to an
age 65 fully insured individual as of the date of the Executive's
Termination of Employment, increased by 3% per year to the date the
Executive would have attained age 65)."
4. Article 2 of the Agreement is further amended by deleting
Sections 2.1.3, 2.2.3, 2.3.3, and 2.5.3, respectively.
5. Article 2 of the Agreement is further amended by deleting
Sections, 2.4, 2.4.1, 2.4.2, and 2.4.3 and replacing them with the following:
"2.4-Intentionally Deleted."
6. Article 3 of the Agreement is amended by deleting Section 3.1.3.
7. Except as specifically amended above, the Agreement shall remain
in full force and effect and is hereby ratified and confirmed.
8. This amendment No. 1 shall be governed by, and construed in
accordance with the laws of the State of New Jersey, except to the extent
preempted by the laws of the United States of Amercia.
IN WITNESS WHEREOF, the Executive and a duly authorized officer of the
Bank and the Company have caused this Amendment No. 1 to be executed as of the
15/th/ day of April, 1997 in several counterparts (each of which is an original
and all of which are identical).
78
<PAGE>
Each of the counterparts of this Amendment No. 1 so executed shall, for all
purposes, be deemed to be an original, and all such counterparts together shall
constitute but one in the same instrument.
EXECUTIVE BANK
THE NATIONAL BANK OF SUSSEX COUNTY
\ROBERT A. VANDENBERGH BY: \CHARLES L. LAIN
- ---------------------- ------------------
NAME: CHARLES L. LAIN
TITLE: CHAIRMAN OF THE BOARD
AGREED AND CONSENTED TO:
HIGH POINT FINANCIAL CORP.
BY:\CHARLES L. TICE
------------------
NAME: CHARLES L. TICE
TITLE: CHAIRMAN OF THE BOARD
79
<PAGE>
EXHIBIT 11
Exhibit 11. Statement of Computation of Per Share Income (Loss)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income (loss) applicable to common stock $2,305,000 $4,807,000 $705,000
Weighted average number of common
shares outstanding 3,786,480 3,779,364 3,745,760
Options issued to executive and officers 65,897 7,543 -
-----------------------------------------
Weighted average number of common
shares and common share equivalents 3,852,377 3,786,907 3,745,760
Basic earnings per share $0.61 $1.27 $0.19
--------------------------------------------------------------------------------------------------
Diluted earnings per share $0.60 $1.27 $0.19
--------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 21
List of Subsidiaries
Name of Subsidiary Jurisdiction of Incorporation
The National Bank of Sussex County New Jersey
<PAGE>
Exhibit 23
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 22, 1998 included in this Form 10-K, unto
High Point Financial Corp.'s previously filed Registration Statement No. 2-97635
on Form S-3, Registration Statement No. 33-12243 on Form S-2, Registration
Statement No. 33-18227 on Form S-8, Registration Statement No. 33-18226 on Form
S-3, Registration Statement No. 33-22288 on Form S-3, Registration Statement No.
33-37621 on Form S-8 and Registration Statement No. 33-76296 on Form S-2.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Roseland, NJ
March 30, 1998
82
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,789
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,854
<INVESTMENTS-CARRYING> 24,766
<INVESTMENTS-MARKET> 24,923
<LOANS> 126,687
<ALLOWANCE> 4,120
<TOTAL-ASSETS> 236,328
<DEPOSITS> 198,430
<SHORT-TERM> 8,201
<LIABILITIES-OTHER> 2,354
<LONG-TERM> 5,000
0
0
<COMMON> 18,932
<OTHER-SE> 3,411
<TOTAL-LIABILITIES-AND-EQUITY> 236,328
<INTEREST-LOAN> 11,031
<INTEREST-INVEST> 5,046
<INTEREST-OTHER> 442
<INTEREST-TOTAL> 16,519
<INTEREST-DEPOSIT> 5,805
<INTEREST-EXPENSE> 6,325
<INTEREST-INCOME-NET> 10,194
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 9,241
<INCOME-PRETAX> 3,891
<INCOME-PRE-EXTRAORDINARY> 3,891
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,305
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 4.85
<LOANS-NON> 2,843
<LOANS-PAST> 4
<LOANS-TROUBLED> 413
<LOANS-PROBLEM> 8,959
<ALLOWANCE-OPEN> 3,973
<CHARGE-OFFS> (179)
<RECOVERIES> 326
<ALLOWANCE-CLOSE> 4,120
<ALLOWANCE-DOMESTIC> 4,120
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
