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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
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(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-12430
HIGH POINT FINANCIAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2426221
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Branchville Square, Branchville, New Jersey 07826
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(973) 948-3300
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of March 31, 1999 there were 3,811,480 shares outstanding of Common Stock, no
par value.
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<PAGE>
<TABLE>
<CAPTION>
HIGH POINT FINANCIAL CORP.
Form 10-Q Index
<S> <C>
Part I Financial Information
PAGE
----
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 1999 (unaudited) and
December 31, 1998 ...................................................... 1
Consolidated Income Statements - Unaudited Three Months Ended
March 31, 1999 and 1998 ................................................ 2
Consolidated Statements of Changes in Shareholders' Equity -
Unaudited Three Months Ended March 31, 1999 and 1998 ................... 3
Consolidated Statements of Cash Flows - Unaudited Three Months
Ended March 31, 1999 and 1998 .......................................... 4
Notes to Consolidated Financial Statements (unaudited) ................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............... 19
Part II Other Information
Item 1. Legal Proceedings ........................................................ 21
Item 2. Changes in Securities and Use of Proceeds ................................ 21
Item 3. Defaults Upon Senior Securities .......................................... 21
Item 4. Submission of Matters to a Vote of Security Holders ...................... 21
Item 5. Other Information ........................................................ 21
Item 6. Exhibits and Reports on Form 8-K ......................................... 21
</TABLE>
The Securities and Exchange Commission maintains a web site which
contains reports, proxy and information statements and other
information relating to registrants that file electronically at the
address: http:// www.sec.gov.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
March 31, 1999 December 31,
(unaudited) 1998
-------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks ............................................. $ 9,569 $ 10,911
Federal funds sold .................................................. 19,605 17,825
-------- --------
Total cash and cash equivalents ............................... 29,174 28,736
Securities:
Available for sale, at fair value ................................. 60,857 54,028
Held to maturity, at cost (market value of $25,942 in 1999 and
$23,575 in 1998) ................................................ 25,781 23,355
-------- --------
Total securities .............................................. 86,638 77,383
Loans held for sale ................................................. 1,105 648
Loans ............................................................... 137,716 137,737
Add: Deferred expenses ............................................ 183 173
Less: Allowance for possible loan losses .......................... (4,071) (4,087)
-------- --------
Net loans ....................................................... 133,828 133,823
Land held for sale ................................................... 1,865 1,865
Premises and equipment - net ......................................... 6,665 6,495
Accrued interest receivable .......................................... 1,429 1,289
Other real estate .................................................... 655 929
Cash surrender value of life insurance policies ...................... 5,477 5,412
Other assets ......................................................... 2,317 2,421
-------- --------
TOTAL ASSETS .................................................. $269,153 $259,001
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Transaction accounts:
Interest bearing .................................................. $ 39,196 $ 38,308
Non-interest bearing .............................................. 44,464 46,014
Savings accounts .................................................... 64,101 63,320
Time accounts (includes CDs $100 or over of $10,605 and $10,286
on March 31, 1999 and December 31, 1998, respectively) ............ 81,079 75,288
-------- --------
Total deposits ................................................ 228,840 222,930
Securities sold under agreements to repurchase ...................... 8,145 4,315
Long-term debt ...................................................... 5,000 5,000
Accrued expenses and other liabilities .............................. 2,697 2,476
-------- --------
Total liabilities ............................................. 244,682 234,721
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred stock, authorized 1,000,000 shares, no shares issued ...... -- --
Common stock, no par value; stated value $5 per share; authorized
10,000,000, issued 3,811,480 shares in 1999 and 1998 .............. 19,057 19,057
Additional Paid-in-Capital .......................................... 5,385 5,448
Accumulated Deficit ................................................. (1) (425)
Options exercised under debt agreement .............................. (169) (169)
Accumulated other comprehensive income .............................. 199 369
-------- --------
Total stockholders' equity .................................... 24,471 24,280
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $269,153 $259,001
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENTS - (UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended
March 31,
-------------------
1999 1998
------ ------
<S> <C> <C>
INTEREST INCOME
Interest income and fees on loans ..................... $2,888 $2,831
Interest on securities - taxable ...................... 1,053 1,196
Interest on securities - non-taxable .................. 62 1
Interest on federal funds sold and
deposits with other banks ........................... 206 177
------ ------
TOTAL INTEREST INCOME ............................. 4,209 4,205
------ ------
INTEREST EXPENSE
Interest on deposits .................................. 1,591 1,506
Interest on other borrowed money ...................... 38 103
Interest on note payable and other
long-term debt ...................................... 75 79
------ ------
TOTAL INTEREST EXPENSE ............................ 1,704 1,688
------ ------
NET INTEREST INCOME ................................... 2,505 2,517
Less: Provision for possible loan losses .............. -- --
------ ------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES ................................ 2,505 2,517
====== ======
NON-INTEREST INCOME
Service charges on deposit accounts ................... 303 327
Commissions and fees .................................. 194 248
Gain on sale of securities ............................ 11 -
Gain on sale of loans ................................. 82 -
Gain (loss) on sale of bank premises and equipment .... (1) 35
Other income .......................................... 80 84
------ ------
TOTAL NON-INTEREST INCOME ......................... 669 694
------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits ........................ 1,392 1,221
Net occupancy expense ................................. 152 226
Equipment expense ..................................... 220 196
Net cost of operation of other real estate ............ -- 8
Other expenses ........................................ 731 699
------ ------
TOTAL NON-INTEREST EXPENSE ........................ 2,495 2,350
------ ------
Income before provision for income taxes .............. 679 861
Provision for income taxes ............................ 255 347
------ ------
NET INCOME ............................................ $ 424 $ 514
====== ======
BASIC EARNINGS PER COMMON SHARE ....................... $0.11 $0.14
===== =====
DILUTED EARNINGS PER COMMON SHARE ..................... $0.11 $0.13
===== =====
WEIGHTED AVERAGE COMMON SHARE
Basic ............................................... 3,811 3,786
Diluted ............................................. 3,873 3,871
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY-(Unaudited)
Options
Accumulated exercised
Compre- Other Additional under
hensive Accumulated Comprehensive Common Paid- Treasury Debt
TOTAL Income Deficit Income Stock in-Capital Stock Agreement
------- --------- ----------- ------------- ------ ---------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1997 .............. $22,343 ($2,517) $161 $18,932 $5,767 $ -- --
Comprehensive income
Net Income - first three
months 1998 ........................ 514 $514 514 -- -- -- --
Other comprehensive income,
net of tax
Unrealized gains on securities
available for sale, net of
$26 in tax ..................... 58 58 -- -- -- --
----
Other comprehensive income ........... 58 58
----
Comprehensive income ................... $572
====
Purchase of treasury stock ............. (18) -- -- -- -- (18)
Exercise of stock options .............. 10 -- -- -- (8) 18 --
- -------------------------------------------------- -------------------------------------------------------------------------
BALANCE MARCH 31, 1998 ................. $22,907 ($2,003) $219 $18,932 $5,759 $ -- $ --
================================================== =========================================================================
BALANCE DECEMBER 31, 1998 .............. 24,280 (425) 369 19,057 5,448 -- (169)
Comprehensive income
Net Income - first three
months 1999 ........................ 424 424 424
Other comprehensive income,
net of tax
Unrealized losses on securities
available for sale, net of
$(88) in tax ................... (170) (170) -- -- -- --
----
Other comprehensive income (losses) .. (170) -- (170)
----
Comprehensive income ................... $254
====
Purchase of treasury stock ............. (101) -- -- -- -- (101)
Exercise of stock options .............. 38 -- -- 0 (63) 101 --
- -------------------------------------------------- -------------------------------------------------------------------------
BALANCE MARCH 31, 1999 ................. $24,471 ($ 1) $199 $19,057 $5,385 $ -- $(169)
================================================== =========================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars in thousands) Three Months Ended March 31,
----------------------------
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................... $ 424 $ 514
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............................. 184 152
Amortization of securities discount, net ................... 97 71
Net cash paid related to discount on matured securities .... 13 74
Loan fees amortized, net ................................... (10) (6)
Deferred income tax provision .............................. 276 286
Gain on sale of securities ................................. (11) --
(Gain) loss on sale of premises and equipment .............. 1 (35)
Increase in accrued interest receivable and other assets ... (15) (125)
Increase in accrued expenses and other liabilities ......... 221 401
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... 1,180 1,332
------- -------
INVESTING ACTIVITIES
Proceeds from sales of available for sale securities ......... 2,028 --
Proceeds from maturity of securities:
Available for sale ......................................... 3,274 3,000
Held for maturity .......................................... 2,981 2,866
Purchase of securities:
Available for sale ......................................... (12,456) (619)
Held for maturity .......................................... (5,439) --
Net increase in loans ........................................ (452) (5,957)
Capital expenditures ......................................... (358) (87)
Proceeds from sale of premises and equipment ................. 3 --
------- -------
NET CASH USED IN INVESTING ACTIVITIES ........................ (10,419) (797)
------- -------
FINANCING ACTIVITIES
Net increase in deposits ..................................... 5,910 2,969
Increase(decrease) in federal funds purchased and
securities sold under agreements to repurchase ............. 3,830 (233)
Repayments of long-term debt principal
Purchase of treasury stock ................................... (101) (18)
Exercise of stock options .................................... 38 10
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 9,677 2,728
------- -------
Net increase in cash and cash equivalents .................... 438 3,263
Cash and cash equivalents, beginning of period ............... 28,736 20,989
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................... $29,174 $24,252
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST PAID .............................................. $ 1,600 $ 1,639
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION.
This quarterly report presents the consolidated financial statements of High
Point Financial Corp. ("High Point") and its subsidiary, The National Bank of
Sussex County ("NBSC"). The term "Company" refers to High Point and NBSC as a
consolidated entity.
The Company's financial statements reflect all adjustments and disclosures which
management believes are necessary for a fair presentation of interim results.
The results of operations for the first quarter presented does not necessarily
indicate the results that the Company will achieve for all of 1999. You should
read these interim financial statements in conjunction with the consolidated
financial statements and accompanying notes that are presented in the High Point
Financial Corp. Annual Report on Form 10-K for the year ended December 31, 1998.
The financial information in this quarterly report has been prepared in
accordance with the Company's customary accounting practices; these financial
statements have not been audited. Certain information and footnote disclosures
required under generally accepted accounting principles have been condensed or
omitted, as permitted by rules and regulations of the Securities and Exchange
Commission.
NOTE 2. INTEREST.
The line item for "Accrued expenses and other liabilities" includes accrued
interest expense of $800,000 at March 31, 1999 and $696,000 at December 31,
1998.
NOTE 3. RELATED PARTY TRANSACTIONS.
The line item for "Net occupancy expense" includes rent on certain properties
that the Company leases from FMI, Inc. FMI, Inc. is a wholly-owned subsidiary of
Franklin Mutual Insurance Company, which owns 6.6% of High Point's outstanding
common stock. The President of FMI, Inc. is a member of High Point's Board of
Directors. The Company repurchased these locations in the third quarter of 1998.
Therefore, the Company paid no rent to FMI, Inc. for the first three months of
1999, and paid rent of $93,000 for the first three months of 1998.
NOTE 4. EARNINGS PER SHARE.
BASIC EARNINGS PER SHARE for a particular period of time is calculated by
dividing net income by the weighted average number of common shares outstanding
during that period.
DILUTED EARNINGS PER SHARE is calculated by dividing net income by the weighted
average number of outstanding common shares and common share equivalents. High
Point's only outstanding "common share equivalents" are options to purchase its
common stock.
NOTE 5. IMPAIRED LOANS.
NBSC adopted Statement of Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" (known as "SFAS No. 114"), and Statement of Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan, Income
Recognition and Disclosures," as of January 1, 1995. SFAS No. 114 requires that
certain impaired loans be measured based on the present value of expected future
cash flows, discounted at the loan's original effective interest rate.
The following table shows NBSC's recorded investment in impaired loans and the
related valuation allowance calculated under SFAS No. 114 as of March 31, 1999
and 1998, and the average recorded investment in impaired loans during the three
months preceding those dates:
5
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AVERAGE RECORDED
VALUATION INVESTMENT (OVER
DATE INVESTMENT ALLOWANCE PRECEDING THREE MONTHS)
- -------------------- ------------------ ---------------- -----------------------
March 31, 1999 $1.8 million $241,000 $1.9 million
March 31, 1998 $3.0 million $392,000 $3.0 million
Interest received on impaired loans ordinarily is recorded as interest income.
However, if management is not reasonably certain that an impaired loan will be
repaid in full, all payments received are recorded as reductions of principal.
NBSC recognized interest on impaired loans of $104,000 in the first three months
of 1999 and $71,000 in the first three months of 1998.
At March 31, 1999, NBSC had $398,000 of loans that resulted from troubled debt
restructurings that occurred prior to the date that NBSC adopted SFAS No. 114.
NBSC continues to account for these loans under the requirements of Statement of
Financial Accounting Standards No. 15, "Troubled Debt Restructurings," which
preceded SFAS No. 114. If NBSC had recognized interest on these troubled loans
at original contractual rates as required by SFAS No. 114, rather than at
renegotiated rates as required by SFAS No. 15, the effect on income for the
first three months of 1999 would not have been material.
NOTE 6. COMPREHENSIVE INCOME.
During the first quarter of 1998, the Company implemented Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
The objective of SFAS No. 130 is to show "comprehensive income" and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements.
"Comprehensive income" is the total of net income and all other "non-stockholder
changes in equity." There are several types of "non-stockholder changes in
equity," but the only one that is relevant for the Company is unrealized holding
gains/losses on securities classified as available for sale. Transactions with
stockholders, such as proceeds from the sale of stock and the payment of
dividends, are not part of comprehensive income.
The following chart shows the Company's other comprehensive income (loss) as of
March 31, 1999 and 1998.
March 31, 1999 March 31, 1998
-------------- --------------
(dollars in thousands)
Unrealized gain (loss) on securities:
Unrealized holding gains (losses) arising
during period .............................. $(247) $84
Less: reclassification adjustment for
gains included in net income ............... (11) --
----- ---
Net unrealized gains (losses) .............. (258) 84
Tax expense (benefit) ........................ (88) 26
----- ---
Other comprehensive income (losses) .......... $(170) $58
===== ===
NOTE 7. ACQUISITION
On December 7, 1998, High Point and Lakeland Bancorp, Inc. announced the signing
of an agreement under which Lakeland will acquire the Company in an exchange of
stock. Under the terms of the agreement, each common share of High Point will be
exchanged for 1.2 shares of Lakeland stock. Lakeland and High Point have also
signed a stock option agreement under which Lakeland will have the right to
purchase an additional 772,243 shares of High Point stock under certain
conditions.
The acquisition is conditioned upon necessary regulatory and shareholder
approvals, satisfactory due diligence review and other customary conditions. On
March 17, 1999, the Federal Reserve Bank of New York approved the application by
Lakeland to acquire 100 percent of the outstanding voting shares of High Point.
The acquisition is currently expected to close during third quarter of 1999. It
is anticipated that the transaction will be accounted for as a pooling of
interests.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
You should read this section in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in High
Point's Annual Report on Form 10-K for the period ended December 31, 1998
because that section contains more detailed information about certain accounting
concepts and the Company's policies than this quarterly report does.
SUMMARY
This quarterly report explains the following trends in the Company's financial
condition and operating results:
o NET INCOME decreased by 17.5% from March 31, 1998 to March 31, 1999. See
" - Results of Operations-Net Income."
o ASSETS increased by 3.9% from December 31, 1998 to March 31, 1999. See
" - Financial Condition-Loans," "- Securities," and " - Liquidity."
o DEPOSITS increased by 2.7% from December 31, 1998 to March 31, 1999. See
" - Financial Condition-Deposits."
RESULT OF OPERATIONS
(FIRST THREE MONTHS OF 1999 COMPARED TO FIRST THREE MONTHS OF 1998)
NET INCOME.
Net income for the first three months of 1999 was $424,000, compared to $514,000
for the same period last year, a decrease of $90,000. Net income decreased from
the first three months of 1998 to the first three months of 1999 primarily due
to additional accruals to executive retirement plans based on changes in certain
executive's retirement dates.
The decrease in net income had the following effect on three other measurements
of the Company's financial condition:
o BASIC EARNINGS PER SHARE were $0.11 for the first three months of 1999,
compared to $0.14 for the first three months of 1998. The calculation of
"basic earnings per share" is explained in Note 4 of the Notes to
Consolidated Financial Statements.
o RETURN ON AVERAGE ASSETS, which is annualized net income as a percent of
average assets, was 0.65% for the first three months of 1999, compared to
0.86% for the same period in 1998. This ratio declined because average
assets increased while net income decreased.
o RETURN ON AVERAGE EQUITY, which is annualized net income as a percent of
average equity, was 6.92% for the first three months of 1999, compared to
9.0% for the same period in 1998. This ratio declined because equity
increased and net income decreased.
NET INTEREST INCOME.
Net interest income is the difference between interest income on earning assets
and the interest cost of funds supporting those assets. Net interest income at
$2.5 million remained substantially the same for the first quarter 1999 as for
first quarter 1998.
TOTAL INTEREST INCOME. During first quarter 1999, total interest income remained
relatively flat at $4.21 million. An increase in average earning assets caused
total interest income to increase by $728,000, but that increase was offset by a
decline in the average yield on earning assets, which reduced interest income by
$787,000. Finally, the decline in net-interest income was partially offset by a
$63,000 payment of troubled debt interest during the first quarter 1999.
INTEREST EARNED ON LOANS. NBSC earned $57,000 more interest from loans in the
first quarter of 1999, primarily because average loans outstanding increased
from $126.8 million in the first three months of 1998 to $136.1 million in the
first three months of 1999. In addition, non-performing loans continue to
decline, so those loans are having a progressively smaller impact on interest
income. Average non-accrual loans (the largest subset of non-performing loans)
declined from $2.8 million in the first three months of 1998 to $2.0 million
during the same period of 1999. If all of those non-accrual loans had
7
<PAGE>
been current, the Company would have earned $41,000 more interest in the first
three months of 1999, compared to $74,000 more interest in the first three
months of 1998.
INTEREST EARNED ON SECURITIES. Total interest income on securities decreased
from $1.2 million for the first three months of 1998 to $1.1 million for the
first three months of 1999. A decline in the yields on new investments caused
most of the decline in interest income. In general, average investments
outstanding increased from $76.4 million in the first three months of 1998 to
$81.1 million in the first three months of 1999. However, average balances of
federal funds sold increased from $13.2 million in the first three months of
1998 to $17.6 million in the first three months of 1999. As a result, interest
on federal funds sold increased from $177,000 to $206,000.
TOTAL INTEREST EXPENSE. Total interest expense increased from $1.69 million in
the first three months of 1998 to $1.70 million in the first three months of
1999, an increase of $16,000. An increase in average interest-bearing
liabilities from $174.9 million for first quarter 1998 to $191.6 million for
first quarter 1999 caused interest expense to increase by $83,000. This increase
was partially offset by a decrease of $67,000 caused by a reduction in average
rates paid on interest bearing liabilities.
NON-INTEREST INCOME.
Non-interest income for the first three months of 1999 was $669,000, compared to
$694,000 for the same period in 1998. Non-interest income declined because of
declines in service charges and commissions and fees.
Service charges on demand accounts declined from $327,000 in the first three
months of 1998 to $303,000 in the first three months of 1999, primarily because
fewer customers overdrew their accounts, so NBSC imposed fewer overdraft
charges. Commissions and fees declined from $248,000 in the first three months
of 1998 to $194,000 in the first three months of 1999 because of a decline in
fees received from full service brokerage services. NBSC changed its method of
providing these services in second quarter 1998 from providing the services
through an in-house broker to contracting with an outside party to provide the
services. The fees recorded are now recorded net of commissions paid, whereas
the fees recorded second quarter and prior to that were recorded gross of
commissions paid to the in-house broker. Commissions paid during first quarter
1998 were recorded in salary and benefit expense. Gains on property declined
$35,000 from first quarter 1998 because NBSC repurchased certain branch
locations in third quarter 1998 and is no longer recording gains on the
sale/leaseback transaction. Gains on sales of securities increased $11,000 from
first quarter 1998 due to the sale of securities in 1999. No securities were
sold during the first quarter 1998. Gains on sales of loans increased to $82,000
compared to first quarter 1998 due in part to the recording of $66,000 in
originated mortgage servicing rights and $16,000 in net gains on the sale of
loans. No loans were sold during the first quarter of 1998.
NON-INTEREST EXPENSE.
Non-interest expense for the first three months of 1999 was $2.50 million,
compared to $2.35 million for the first three months of 1998. This increase came
from several sources:
o Salary and benefit expense increased from $1.22 million to $1.39 million, an
increase of $171,000 related to the increase in accruals resulting from
additional accruals to executive retirement plans based on changes in
certain executive's retirement dates.
o Other expenses increased from $699,000 to $731,000, an increase of $32,000.
Approximately $20,000 of this increase can be attributed to Y2K compliance
testing.
o Equipment expense increased from $196,000 to $220,000 an increase of
$24,000. This increase is due to increased service contract costs and
maintenance expenses.
o Offsetting these expense increases were decreases in occupancy which
declined from $226,000 to $152,000, a decrease of $74,000 which is related
to the 1998 third quarter repurchase of branches sold in a sale/leaseback
agreement in 1988. Lease expense declined $104,000 while depreciation
expense increased $24,000.
8
<PAGE>
FINANCIAL CONDITION
At March 31, 1999, the consolidated assets of the Company were $269.2 million,
an increase of $10.2 million or 3.9% from the $259.0 million reported at
year-end 1998.
DEPOSITS.
Total deposits increased from $222.9 million on December 31, 1998 to $228.8
million on March 31, 1999, an increase of $5.9 million or 2.7%. The level of
deposits in NBSC's four types of accounts changed as follows during that three
month period:
o NON-INTEREST BEARING TRANSACTION ACCOUNTS decreased from $46.0 million to
$44.5 million, a decrease of $1.5 million (3.4%), primarily as a result of
seasonal decreases.
o INTEREST BEARING TRANSACTION ACCOUNTS increased from $38.3 million to $39.2
million, an increase of $888,000 (2.3%).
o SAVINGS ACCOUNTS increased from $63.3 million to $64.1 million, an increase
of $781,000 (1.2%).
o TIME DEPOSITS increased from $75.3 million to $81.1 million, an increase of
$5.8 million (7.7%). A significant amount of this increase was due to a
promotional product offered during the first quarter 1999.
LOANS.
At March 31, 1999 total loans were $137.7 million. They remained relatively
unchanged from December 31, 1998 balances. The composition of the loan portfolio
during the first three months of 1999 changed as follows:
o COMMERCIAL LOANS increased from $44.3 million to $45.7 million, an increase
of $1.4 million (3.2%).
o REAL ESTATE CONSTRUCTION LOANS decreased from $7.3 million to $5.8 million,
a decrease of $1.5 million (20.2%).
o REAL ESTATE MORTGAGE LOANS decreased from $58.0 million to $57.7 million, a
decrease of $382,000 (.06%).
o INSTALLMENT LOANS increased from $28.1 million to $28.5 million, an increase
of $424,000 (1.5%).
NBSC continued selling 30-year mortgages in the secondary market during first
quarter 1999 because those loans are in demand and management can reduce NBSC's
interest rate risk by reducing its portfolio of long term, fixed rate assets.
(For an explanation of "interest rate risk," see "Securities Portfolio" below).
NBSC sold $3.3 million in mortgages during first quarter 1999. At March 31, 1999
NBSC had loans held for sale with both a face amount and an aggregate market
value of approximately $1,105,000 of which $942,000 were mortgages and $163,000
were student loans.
NON-PERFORMING ASSETS.
Non-performing assets declined from $3.4 million at year-end 1998 to $2.8
million on March 31, 1999 because of a decrease in non-accrual loans and a net
reduction of $274,000 in other real estate owned.
The following table itemizes non-performing assets at each quarter end from
March 31, 1998 to March 31, 1999:
9
<PAGE>
<TABLE>
<CAPTION>
Non-performing assets at 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
- ------------------------ -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans past due over 90 days .... $ 143 $ 17 $ 109 $ 201 $ 183
Loans on non-accrual ........... 1,577 2,024 2,940 2,909 2,845
Troubled debt restructurings* .. 398 399 403 406 411
------ ------ ------ ------ ------
Total non-performing loans ..... 2,118 2,440 3,452 3,516 3,439
Other real estate .............. 655 929 954 1,050 1,110
------ ------ ------ ------ ------
Total non-performing assets .... $2,773 $3,369 $4,406 $4,566 $4,549
====== ====== ====== ====== ======
</TABLE>
- ----------
*Troubled debt restructurings as defined in SFAS No. 15 "Accounting by Debtors
and Creditors for Troubled Debt Restructurings"; excludes loans classified as
past due over 90 days or non-accrual.
NON-PERFORMING LOANS. There are three types of non-performing loans: loans that
are past due 90 days or more but still accruing interest, non-accrual loans, and
renegotiated loans. Federal banking regulators have created other designations,
such as "other assets especially mentioned" and "substandard," for certain loans
that appear to warrant particular attention. Every non-performing loan is in one
of these categories, and so are some performing loans.
Loans past due 90 days or more increased from $17,000 at year-end 1998 to
$143,000 at March 31, 1999, an increase of $126,000. Every loan that is past due
90 days or more and still accruing interest is considered to be "in process of
collection," which means that there is sufficient collateral to cover the
defaulted principal and interest payments, and management is confident that the
loan will be satisfied through foreclosure or a third party payment in the near
future.
Non-accrual loans decreased from $2.0 million at year-end 1998 to $1.6 million
on March 31, 1999. The level of renegotiated loans remained virtually unchanged.
At March 31, 1999, NBSC had $1.7 million in performing loans classified as
"other assets especially mentioned," and $4.3 million in performing loans
classified as "substandard." NBSC did not have any loans that fit within the
regulators' other "adverse" categories. The Company is not aware of any loans
outstanding as of March 31, 1999, other than those that already have adverse
classifications, that are likely to become non-performing in the future.
OTHER REAL ESTATE. Other real estate is property that the NBSC acquires when it
forecloses on the collateral for a defaulted loan. Other real estate declined by
$274,000 from the $929,000 reported at year-end 1998 because NBSC sold one
property with a carrying value of $475,000 and acquired $201,000 in property
designated as other real estate.
Management obtains an appraisal on other real estate when the Company takes
title to the property unless the Company already has a contract of sale, or an
appraisal that conforms to regulatory guidelines. Thereafter, the Company
obtains and reviews appraisals as often as required by regulators, generally
every two years.
When the Company acquires other real estate, or obtains a new appraisal on other
real estate that it already owns, management records the carrying value of the
property as the appraised value less estimated costs of disposition. If a new
parcel of other real estate is appraised at less than the outstanding balance of
the loan it secured, the difference is charged to the allowance for possible
loan losses when the property is recorded as other real estate. Based on
management's continuing review of market conditions and updated appraisals, the
Company will charge any subsequent decline in market value to the net cost of
operation of other real estate. For the first three months of 1999, there were
$4,000 in charge-offs in other real estate.
When the appraised fair value of a parcel of other real estate does not include
certain costs of disposition, the Company establishes a specific reserve or
allowance for other real estate. Management will make a charge-off to that
reserve when the Company actually incurs disposition costs. The following table
shows the level of provisions to the allowance for other real estate and
charge-offs against specific reserves for the three months ended March 31, 1999
and 1998.
10
<PAGE>
March 31, 1999 March 31, 1998
-------------- --------------
(dollars in thousands)
Beginning balance, January 1 ......... $4 $121
Provisions ......................... -- --
Charge-offs ........................ (4) (21)
---- ----
Ending balance ....................... $0 $100
==== ====
THE ALLOWANCE FOR POSSIBLE LOAN LOSSES.
The allowance for possible loan losses decreased from $4.09 million on December
31, 1998 to $4.07 million on March 31, 1999. The allowance includes charge-offs
and recoveries of previously charged off loans, and the Company charged off a
net amount of $16,000 during the first three months of the year. The following
chart shows the quarterly levels of loans charged off, recoveries of previously
charged off loans, provisions made to the allowance, quarterly ending balances
of the allowance, and the ratio of the allowance to non-performing loans.
<TABLE>
<CAPTION>
For the quarter ended
-------------------------------------------------------------
3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance ............. $4,087 $3,963 $4,132 $4,156 $4,120
Loans charged-off ........... (89) (19) (218) (88) (82)
Loans recovered ............. 73 143 49 64 118
------ ------ ------ ------ ------
Net (charge-offs) recoveries .. (16) 124 (169) (24) 36
Provision ..................... -- -- -- -- --
------ ------ ------ ------ ------
Ending balance ................ $4,071 $4,087 $3,963 $4,132 $4,156
====== ====== ====== ====== ======
Ratio of allowance for
possible loan losses to
non-performing loans ........ 192.2% 167.5% 114.8% 117.5% 120.8%
===== ===== ===== ===== =====
</TABLE>
The Company did not record a provision for possible loan losses during the first
three months of 1999. NBSC's ratio of the allowance for possible loan losses to
non-performing loans has increased from 120.8% as of March 31, 1998 to 192.2% as
of March 31, 1999 because non-performing loans decreased.
Each quarter management makes a recommendation to the Board of Directors
regarding the appropriate level of the allowance for possible loan losses.
Management considers a variety of issues when making this recommendation,
including present and expected economic conditions within NBSC's market area,
delinquency trends, trends in NBSC's loan portfolio versus trends experienced by
NBSC's peers, historical loss experience, and results of an independent
quarterly review of certain loans by unaffiliated experts.
NBSC has several portfolios, some of which are commercial in nature while others
consist entirely of consumer loans. Each sub-segment of NBSC's portfolio has
specific characteristics and therefore specific reserve methodology is used for
each segment. Further, by breaking up the portfolio into these segments,
management can focus on the establishment of an adequate reserve for each type
of lending activity, and is also able to focus on individual areas of weakness
within the portfolio. The commercial segment has historically had the highest
level of risk and therefore its analysis is the most comprehensive.
11
<PAGE>
Management's quarterly evaluation takes place in several steps.
First, management reviews each troubled commercial loan. This review enables
management to estimate future losses for every loan that is classified as "other
assets especially mentioned" or "substandard." 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
loss.
Second, management uses the information generated by the independent loan review
by unaffiliated experts to verify the accuracy of its risk rating system and to
monitor the status of larger non-criticized loans for changes and developments
that could affect future collectibility.
With this information, the Bank calculates its primary reserve analysis
("calculated reserve") by assigning a predetermined required reserve percentage
to commercial loans pooled by risk rating excluding loans for which a specific
reserve has been established. The reserve percentages for criticized loans are
reflective of industry averages and the percentages for loans that are not
criticized have been established by management based on a subjective analysis of
the risks inherent in the portfolio. The "calculated reserve" is further
validated by the evaluation by two alternative methods. A nine quarter migration
trend analysis is completed for criticized loans and 120% of the resulting
percentages are utilized. The second analysis used to verify the "calculated
reserve" is the traditional regulatory method. In cases where the "calculated
reserve" is more than the actual reserve, a provision to the loan loss account
is made by a charge against current earnings.
Consumer loans including Home Equity Loans and Residential Mortgages are
generally not evaluated individually. These loans are reserved for utilizing the
historical charge-off method whereby a weighted average of annualized net
charge-offs for the past three years is applied to the total loan pool. The
greatest reliance is placed on the most current years. In the case of net
recoveries, management will establish a percentage based on their evaluation of
potential losses.
Lastly, management makes a general assessment of the potential for loan losses
in off balance sheet credit commitments based on historical and projected
collection statistics. This review does not focus on specific commitments, but
instead considers groups of commitments with similar characteristics.
Based on its recent analysis, management believes that it has identified the
risk in the loan portfolio and that the allowance for possible loan losses is
adequate on March 31, 1999. Management also believes that the allowance is
adequate to absorb additional or unanticipated losses. Nevertheless, the Company
could sustain losses that could be substantial in relation to the size of the
loan loss reserve.
12
<PAGE>
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO.
Investment securities and securities available for sale consist of the
following:
March 31, 1999
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ................. $29,928 $265 $(19) $30,174
States and other political subdivisions ..... 7,231 69 (12) 7,288
Mortgage backed securities:
U.S. agency issued ........................ 12,998 55 (68) 12,985
Other investments:
Corporate bonds ........................... 509 -- -- 509
Federal Reserve Bank Stock ................ 516 -- -- 516
Vanguard money market fund ................ 8,112 -- -- 8,112
Federal Home Loan Bank ...................... 1,202 -- -- 1,202
Marketable equity securities ................ 60 11 -- 71
------- ---- ---- -------
Securities available for sale ............... $60,556 $400 $(99) $60,857
======= ==== ==== =======
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ................. $ 3,497 $ 19 $(11) $ 3,505
Mortgage backed securities:
U.S. agency issued ........................ 22,284 199 (46) 22,437
------- ---- ---- -------
Securities held to maturity ................. $25,781 $218 $(57) $25,942
======= ==== ==== =======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ................. $26,817 $443 $ (8) $27,252
States and other political subdivisions ..... 5,765 59 (21) 5,803
Mortgage backed securities:
U.S. agency issued ........................ 14,743 108 (34) 14,817
Other investments:
Federal Reserve Bank Stock ................ 516 -- -- 516
Vanguard money market fund ................ 4,440 -- -- 4,440
Federal Home Loan Bank .................... 1,128 -- -- 1,128
Marketable equity securities .............. 60 12 -- 72
------- ---- ---- -------
Securities available for sale ............... $53,469 $622 $(63) $54,028
======= ==== ==== ========
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ................. $ 2,497 $ 35 $ 0 $ 2,532
Mortgage backed securities:
U.S. agency issued ........................ 20,858 190 (5) 21,043
------- ---- ---- -------
Securities held to maturity ................. $23,355 $225 $ (5) $23,575
======= ==== ==== ========
</TABLE>
As of March 31, 1999, the contractual maturities of the investment securities
and the securities available for sale are as follows:
<TABLE>
<CAPTION>
Securities
Investment Securities Available for Sale
----------------------- ----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Due in one year or less ..................... $ 890 $ 899 $ 8,706 $ 8,771
Due after one year but within five years .... 10,666 10,774 25,120 25,313
Due after five years but within 10 years .... 14,004 14,039 7,501 7,560
Due after 10 years .......................... 221 230 9,339 9,312
Federal Reserve Bank stock .................. -- -- 516 516
Equity Securities ........................... -- -- 1,262 1,273
Vanguard money market fund .................. -- -- 8,112 8,112
------- ------- ------- -------
Securities held to maturity ................. $25,781 $25,942 $60,556 $60,857
======= ======= ======= =======
</TABLE>
14
<PAGE>
There is little credit risk in the Company's securities portfolio because over
90% of the securities are issued by the U.S. Treasury or by a U.S. government
agency. The Company also owns a portfolio of tax exempt securities issued by
state and local governments. These also have limited credit risk because most of
the securities are either insured or carry the highest credit rating given by
independent credit agencies. The Company also owns a small portfolio of
corporate bonds. These securities are limited to large corporations and are
evaluated on criteria similar to new loans. These corporate bonds are less than
1% of the Company's total security portfolio.
However, several types of risk that are triggered by changes in market interest
rates may impact the Company's portfolio. The most prevalent of these risks is
interest rate risk: if the Company holds a fixed rate security while interest
rates are rising, the investment will earn less than a market rate. The Company
attempts to mitigate interest rate risk by restricting most of its purchases of
fixed rate instruments to securities that will mature in seven years or less.
The Company purchases tax-exempt securities with longer maturities.
Some of the Company's securities, such as agency callables and mortgage-backed
securities, have variable payment features. These investments present added
risks known as "option risk," "prepayment risk," and "extension risk."
"Agency callables," which are government securities that can be redeemed by the
issuing agency before maturity, are subject to interest rate risk if interest
rates rise, and option risk if interest rates decline. "Option risk" means that
if interest rates decline, the issuer will probably exercise its right to redeem
the security before maturity, which will give the Company a return on its
investment that is less than originally expected. The Company mitigates these
risks by buying only callables with maturities of seven years or less.
The Company also owns $35.4 million in mortgage-backed securities issued by
government agencies. When interest rates are fairly constant, borrowers prepay
their mortgages, and issuers of mortgage-backed securities prepay their holders,
at a predictable rate. When interest rates decline, borrowers may choose to
prepay their mortgages at a faster pace so that they can refinance. These
prepayments reduce the yield on the related mortgage-backed securities.
Conversely, when interest rates increase, borrowers may refrain from prepaying
at the expected rate, which will slow the flow of cash to holders of the related
securities. The Company manages "prepayment risk" by buying mortgage-backed
securities with a variety of coupon rates, and minimizes its "extension risk" by
purchasing primarily mortgage-backed securities with balloon payments and
original maturities no greater than seven years.
LIQUIDITY.
"Liquidity" measures whether an entity has sufficient cash flow to meet its
financial obligations as they come due. Management believes that both High Point
and NBSC have sufficient liquidity to meet their current and anticipated
operational needs.
LIQUIDITY AT NBSC. At NBSC, cash to fund loan demand and operational expenses
comes from five sources:
o net income
o deposits
o sales of loans, securities, and overnight funds
o borrowing overnight funds
o overnight repurchase agreements
At March 31, 1999, NBSC had a portfolio of $60.9 million in securities available
for sale and $19.6 million in overnight funds. As a member of the Federal Home
Loan Bank, NBSC can borrow up to $12.5 million in overnight funds as of March
31, 1999. In addition, NBSC can effect overnight pledges of securities with a
brokerage firm in exchange for overnight loans equal to 97% of the value of the
securities pledged.
LIQUIDITY AT HIGH POINT. High Point's liquidity requirements include printing
expenses and fees for legal, auditing, and other services. At March 31, 1999,
High Point had $106,000 in cash available. High Point anticipates dividends
declared by NBSC will be sufficient to enable High Point to meet its
obligations.
15
<PAGE>
High Point's cash flow comes from three sources:
o dividends from NBSC
o sales of securities
o land available for sale
Like all national banks, NBSC is subject to restrictions on the dividends that
it can declare. In particular, NBSC may not declare dividends in excess of the
current year's earnings, plus the retained earnings from the prior two years,
without prior approval from the Office of the Comptroller of the Currency. In
addition, NBSC may not pay dividends while it has losses that exceed its
aggregate retained earnings. NBSC's earnings for the first three months of 1999,
plus the retained earnings from the prior two years, are $3.9 million.
At March 31, 1999, High Point had equity securities with a market value of
$17,000 that management can sell to generate cash. High Point also owns land
that is available for sale that could generate cash in the future.
MARKET RISK.
NBSC originates and invests in interest-earning assets and solicits
interest-bearing deposit accounts, so interest rate fluctuations could have a
dramatic effect on NBSC's operations. When interest rates change, the rates on
NBSC's interest-bearing assets and liabilities also may change, although not
necessarily by the same amounts or in the same proportions. Furthermore,
fluctuations in interest rates may cause borrowers to prepay loans or depositors
to withdraw deposited funds. Either of these reactions will alter the Company's
mix of interest-bearing assets and liabilities. NBSC monitors and controls
interest rate risk through a variety of techniques, including traditional rate
sensitivity analysis (also known as "gap" analysis) and an interest rate risk
management model.
TRADITIONAL GAP ANALYSIS. Traditional gap analysis involves three steps. First,
NBSC's interest-earning assets and interest-bearing liabilities are grouped into
four repricing periods that range from "within three months" to "after five
years." Second management computes the difference (or "interest rate sensitivity
gap") between the assets and liabilities that are expected to reprice during
each time period. Third, management computes the cumulative difference between
all of the assets and liabilities that will reprice as of the end of each time
period.
The following table sets forth, as of March 31, 1999, certain information
regarding the Company's interest-earning assets and interest-bearing
liabilities, interest rate sensitivity gap, and interest rate sensitivity gap
ratio. An asset or liability is shown as "rate-sensitive" during a particular
period if it will mature or if it could be repriced during that period.
Investment securities and securities available for sale (including
mortgage-backed securities and callable securities) are shown by maturity date.
Management assumes that most of NBSC's interest-bearing demand deposits and
savings deposits are "core" deposits, which means they will remain with NBSC
regardless of market interest rates. Therefore, 80% of the interest-bearing
demand deposits and 75% of the savings deposits are shown to be maturing or
repricing in the "after 1 but within 5 years" column.
16
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
-----------------------------------------------------------------------------------
After 3
Within Three Months but Total After 1 but
March 31, 1999 Months Within 1 Year Within 1 Year Within 5 Years After 5 Years Total
- ----------------------------------------------- ------------ ------------- ------------- -------------- ------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans ....................................... $30,150 $ 6,314 $36,464 $32,289 $67,569 $136,322
Loans held for sale ......................... 1,105 -- 1,105 -- -- 1,105
Investment securities ....................... 9 882 891 10,666 14,224 25,781
Federal funds sold .......................... 19,605 -- 19,605 -- -- 19,605
Securities available for sale ............... 11,185 7,547 18,732 25,313 16,812 60,857
------- ------- ------- ------- ------- --------
Total earning assets .................... 62,054 14,743 76,797 68,268 98,605 243,670
Non-earning assets ............................ -- -- -- -- 25,483 25,483
------- ------- ------- ------- ------- --------
Total Assets ............................ 62,054 14,743 76,797 68,268 124,088 269,153
------- ------- ------- ------- ------- --------
Interest bearing liabilities:
Deposits:
Interest bearing demand ................... 1,960 5,879 7,839 31,357 -- 39,196
Savings accounts .......................... 4,006 12,019 16,025 48,076 -- 64,101
Jumbo certificates ........................ 4,492 4,039 8,531 1,697 377 10,605
Other time deposits ....................... 22,211 32,378 54,589 14,628 1,257 70,474
------- ------- ------- ------- ------- --------
Total interest bearing deposits ......... 32,669 54,315 86,984 95,758 1,634 184,376
------- ------- ------- ------- ------- --------
Borrowings:
Repurchase agreements ....................... 8,145 -- 8,145 -- -- 8,145
Long-term debt .............................. -- -- -- 5,000 -- 5,000
------- ------- ------- ------- ------- --------
Total borrowings ........................ 8,145 -- 8,145 5,000 -- 13,145
------- ------- ------- ------- ------- --------
Non-interest bearing demand deposits .......... -- -- -- -- 44,464 44,464
Other liabilities ............................. -- -- -- -- 2,697 2,697
Stockholders' equity .......................... -- -- -- -- 24,471 24,471
------- ------- ------- ------- ------- --------
Total liabilities and equity ............ 40,814 54,315 95,129 100,758 73,266 269,153
------- ------- ------- ------- ------- --------
Interest rate sensitivity gap ................. $21,240 ($39,572) ($18,332) ($32,490) $50,822 $ --
======= ======= ======= ======= ======= ========
Cumulative rate sensitivity gap ............... $21,240 ($18,332) ($18,332) ($50,822) $ -- $ --
======= ======= ======= ======= ======= ========
Interest rate sensitivity gap ratio ........... 152.04% 27.14% 80.73% 67.75% 169.37% --%
Cumulative interest rate sensitivity gap ratio 152.04% 76.20% 80.73% 74.06% 100.00% --%
</TABLE>
INTEREST RATE RISK MANAGEMENT MODEL. With the interest rate risk management
model, management projects future net interest income based on the interest
earning assets and interest bearing liabilities it currently has on its balance
sheet and then estimates the effect of various changes in interest rates and
balance sheet growth rates on those assets and liabilities. Based on
management's analysis of the Company's interest rate sensitivity, if rates were
to increase 200 basis points, net interest income would increase by $23,000 as
of March 31, 1999; if interest rates were to decline by 200 basis points, net
interest income would decrease by $589,000.
CAPITAL RESOURCES.
STOCKHOLDERS' EQUITY. Stockholders' equity increased to $24.5 million during the
first three months of 1999 from $24.3 million at year-end 1998. Book value per
common share of stock (total stockholders' equity divided by the number of
outstanding common shares) increased to $6.42 on March 31, 1999 from $6.37 on
December 31, 1998.
Stockholders' equity is a mix of several components: net income or net loss,
issuance of new common stock, net unrealized gains or losses in securities
available for sale, and the acquisition or sale of treasury stock. The increase
in stockholders' equity during the first three months of 1999 resulted from a
combination of net income and from decreases in the market
17
<PAGE>
values of securities available for sale. Unrealized gains on securities
available for sale decreased from $369,000 at year-end 1998 to $199,000 at March
31, 1999.
REGULATORY STATUS. High Point and NBSC are subject to various regulatory capital
requirements that are monitored by federal banking agencies. Failure to meet
minimum capital requirements can lead to certain supervisory actions by
regulators; any supervisory action could have a direct material effect on the
Company or NBSC's financial statements. Management believes, as of March 31,
1999, that the Company and NBSC meet all capital adequacy requirements to which
they are subject.
As of March 31, 1999, the most recent notification from the Office of the
Comptroller of the Currency (NBSC's primary regulator) categorized NBSC as "well
capitalized." The most recent notification from the Federal Reserve Bank of New
York (the Company's primary regulator) placed the Company in the same category.
Management is not aware of any conditions or events that have occurred since the
Company received those notifications that would adversely affect the capital
adequacy rating of either the Company or NBSC.
The following chart represents the capital ratios of the Company and NBSC on
March 31, 1999 compared to minimum regulatory requirements:
Minimum
Required to be
Minimum Well Capitalized
Required for Under Prompt The
Capital Adequacy Corrective Actio NBSC Company
Purposes Provisions 3/31/99 3/31/99
- --------------------------------------------------------------------------------
Leverage Ratio 4.00% 5.00% 8.51% 9.26%
Risk Based:
Tier I 4.00% 6.00% 16.16% 17.39%
Tier I plus Tier II 8.00% 10.00% 17.43% 18.66%
YEAR 2000 ISSUES.
Management has evaluated its information technology infrastructure to determine
whether it will have a problem servicing its customers in the year 2000. The
Year 2000 ("Y2K") Steering Committee at NBSC has reviewed all of the Company's
computer programs and equipment, its venders, and facility related issues. That
review enabled management to develop a Y2K strategic plan and testing strategy.
The committee is now working on business resumption contingency planning which
should be complete by June 30, 1999. Business resumption contingency planning
allows management to plan for worst case scenarios in order to prevent any lapse
in service when the year 2000 arrives.
The Company believes the most likely Y2K risk will be in areas external to the
organization. Management does not anticipate any prolonged business interruption
as a result of Y2K. Management anticipates that there could be short-term power
interruptions. Management is also anticipating increasing its liquidity to match
any unusual cash demands at this time.
At this time, management estimates total Y2K costs to be $441,000. That amount
includes approximately $158,000 in human resources costs (half expensed in 1998
and half in 1999) to reallocate the time of current personnel to the Y2K
project. Also included in management's estimation of Y2K costs are $240,000 in
1999 for purchases or replacements of hardware and software that will be
capitalized because of additional enhancements in products that will benefit the
bank in years subsequent to the year 2000. The remainder of the cost is for
replacement systems, primarily communications related, that were not Y2K
compliant and to pay potential consulting fees.
The software vendor that produces NBSC's core deposit, loan, and financial
information systems has informed NBSC that it is Y2K compliant because the
software is designed to process transactions into the next century and beyond.
The Company
18
<PAGE>
began testing its mission critical systems in third quarter 1998 and completed
testing in first quarter 1999. Management has not uncovered any problems in its
year 2000 testing at this time.
Management has evaluated the Y2K risk in its commercial borrowers with balances
over $100,000. This evaluation included the borrowers' Y2K risk related to their
computer systems as well as risk related to embedded computer chips and risk
related to the borrowers' suppliers. Those customers who were judged to have a
high amount of Y2K risk will be contacted periodically. Based on management's
evaluation, the majority of NBSC's borrowers do not have a high degree of Y2K
risk. Management believes its allowance for possible loan losses to be adequate
both for Y2K related risk and non-Y2K related risk in the loan portfolio.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For information about market risk, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk."
19
<PAGE>
EXHIBIT 11. Statement of Computation of Per Share Income
March 31,
1999 1998
--------------------------
Income (loss) applicable to common stock $ 424,000 $ 514,000
Weighted average number of common
shares outstanding 3,811,480 3,786,480
Options issued to executive and officers 61,969 84,843
---------- ----------
Weighted average number of common
shares and common share equivalents 3,873,449 3,871,323
Basic earnings per share $ 0.11 $ 0.14
---------- ----------
Diluted earnings per share $ 0.11 $ 0.13
---------- ----------
20
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11. Computation of net income per share is filed with part I of
this report.
(b) Reports on Form 8-K.
None.
21
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
High Point Financial Corp.
--------------------------
(Registrant)
Dated: May 14, 1999
- ----------------------------------
/s/ Rita A. Myers /s/ Robert A. Vandenbergh
- ---------------------------------- ----------------------------------
Rita A. Myers Robert A. Vandenbergh
Comptroller and Principal Vice President and Treasurer
Accounting Officer
22
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
High Point Financial Corp.
Financial Data schedule
EDGAR Only
Form 10Q & 10K
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,569
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,605
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,857
<INVESTMENTS-CARRYING> 25,781
<INVESTMENTS-MARKET> 25,942
<LOANS> 137,716
<ALLOWANCE> 4,071
<TOTAL-ASSETS> 269,153
<DEPOSITS> 228,840
<SHORT-TERM> 8,145
<LIABILITIES-OTHER> 2,697
<LONG-TERM> 5,000
0
0
<COMMON> 19,057
<OTHER-SE> 5,414
<TOTAL-LIABILITIES-AND-EQUITY> 269,153
<INTEREST-LOAN> 2,888
<INTEREST-INVEST> 1,115
<INTEREST-OTHER> 206
<INTEREST-TOTAL> 4,209
<INTEREST-DEPOSIT> 1,591
<INTEREST-EXPENSE> 1,704
<INTEREST-INCOME-NET> 2,505
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 2,495
<INCOME-PRETAX> 679
<INCOME-PRE-EXTRAORDINARY> 679
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 424
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
<YIELD-ACTUAL> 4.29
<LOANS-NON> 1,577
<LOANS-PAST> 143
<LOANS-TROUBLED> 398
<LOANS-PROBLEM> 5,847
<ALLOWANCE-OPEN> 4,087
<CHARGE-OFFS> (89)
<RECOVERIES> 73
<ALLOWANCE-CLOSE> 4,071
<ALLOWANCE-DOMESTIC> 4,071
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
