U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission file number 000-23847
SHORE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1873994
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
25253 Lankford Highway 23418
Onley, Virginia (Zip Code)
(Address of Principal
Executive Offices)
Issuer's telephone number: (757) 787-1335
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
Number of shares of Common Stock outstanding as of May 14, 1998: 1,810,812
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Index - Form 10-QSB
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997
Consolidated Statements of Income for the Three Months Ended
March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the Three Months
Ended March 31, 1998
Notes to Unaudited Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Financial Condition
Asset Quality
Liquidity and Capital Resources
Interest Sensitivity
Year 2000 Project
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
ASSETS
Cash (including interest - earning deposits of
approximately $3,643,000 and $1,841,000, respectively) $ 5,826,852 $ 4,190,551
Investment securities:
Held to maturity (fair value of 3,990,588 5,232,587
$3,979,000 and $5,219,000, respectively)
Available for sale (amortized cost 23,115,242 21,029,952
of $22,828,000 and $20,761,000,
respectively)
Investment in Federal Home Loan Bank 580,500 580,500
stock at, cost
Loans receivable, net 74,362,935 72,889,907
Premises and equipment, net 2,471,685 2,420,457
Real estate owned 442,131 445,912
Accrued interest receivable 861,973 915,271
Prepaid expenses and other assets 402,535 387,377
----------------------------
$112,054,441 $108,092,514
============================
</TABLE>
<PAGE>
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 98,651,693 $ 95,213,440
Advances from Federal Home Loan Bank 73,853 75,000
Advance payments by borrowers for taxes
and insurance 350,291 215,029
Accrued expenses and other liabilities 330,929 259,018
----------------------------
Total liabilities 99,406,766 95,762,487
----------------------------
Stockholders' equity
Preferred stock, par value $1 per - -
share, 500,000 shares authorized;
none issued and outstanding
Common stock, par value $.33 per 595,588 595,588
share, 5,000,000 shares authorized;
1,804,812 shares issued and outstanding
Additional capital 3,563,592 3,563,592
Retained earnings, substantially restricted 8,307,139 8,000,729
Accumulated other 181,356 170,118
comprehensive income ----------------------------
Total stockholders' equity 12,647,675 12,330,027
----------------------------
$112,054,441 $108,092,514
============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income
Loans $ 1,673,161 $ 1,600,715
Investments 424,536 363,923
--------------------------------------------
Total interest income 2,097,697 1,964,638
--------------------------------------------
Interest expense
Deposits 1,072,595 1,038,839
FHLB advances 546 28,038
--------------------------------------------
Total interest expense 1,073,141 1,066,877
--------------------------------------------
Net interest income 1,024,556 897,761
Provision for loan losses 36,300 36,000
--------------------------------------------
Net interest income after
provision for loan losses 988,256 861,761
--------------------------------------------
Noninterest income
Deposit account fees 117,268 108,251
Loan fees 32,185 20,314
Other 56,510 32,117
--------------------------------------------
Total noninterest income 205,963 160,682
--------------------------------------------
Noninterest expense
Compensation and employee benefits 324,532 266,323
Occupancy and equipment 159,237 129,424
Advertising 15,664 11,304
Data processing 139,068 90,477
Federal insurance premium 15,212 14,158
Other 54,142 62,654
--------------------------------------------
Total noninterest expense 707,855 574,340
--------------------------------------------
Income before income taxes 486,364 448,103
Income taxes 179,954 170,279
--------------------------------------------
Net income $ 306,410 $ 277,824
============================================
Earnings per common share - basic and diluted $ 0.17 $ 0.20
============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(UNAUDITED)
Three Months Ended
March 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional Retained Accumulated Total
Capital Earnings Other
Comprehensive
Income
------------- ---------------- --------------- ------------------ -----------------
<S> <C>
Balance, December 31, 1997 $ 595,588 $ 3,563,592 $ 8,000,729 $ 170,118 $ 12,330,027
Comprehensive income - - 306,410 11,238 317,648
-----------------------------------------------------------------------------------
Balance, March 31, 1998 $ 595,588 $ 3,563,592 $ 8,307,139 $ 181,356 $ 12,647,675
===================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities
Net income $ 306,410 $ 277,824
Adjustments to reconcile to net cash provided by operating
activities:
Provision for loan losses 36,300 36,000
Depreciation and amortization 68,966 50,280
Amortization of premium and accretion of discount on (669) (1,610)
securities, net
(Gain) loss on sale of securities (27,676) -
(Gain) loss on sale of premises and equipment 1,146 -
Change in net deferred loan fees (32,753) 13,298
(Gain) loss on sale of real estate owned 2,450 -
Decrease in other assets 36,012 86,014
Increase in other liabilities 200,572 299,278
----------------------------------------
Net cash provided by operating activities 590,758 761,084
----------------------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (5,182,609) (2,023,247)
Proceeds from maturities and sales of available-for-sale 3,885,502 2,200,000
securities
Proceeds from maturities of held-to-maturity securities 500,000 -
Loan origination, net of repayments (1,476,575) (926,331)
Proceeds from sale of premises and equipment 1,844 -
Purchase of premises and equipment (121,056) (63,700)
Proceeds from sale of real estate owned 1,331 60,000
Improvements on foreclosed real estate - (1,747)
----------------------------------------
Net cash used by investing activities (2,391,563) (755,025)
----------------------------------------
Cash flows from financing activities
Net increase (decrease) in demand deposits 3,161,691 (11,781)
Net increase in time deposits 276,562 2,614,892
Proceeds from FHLB advances - 4,800,000
Repayments of FHLB advances (1,147) (7,800,000)
----------------------------------------
Net cash provided by financing activities 3,437,106 (396,889)
----------------------------------------
Increase (decrease) in cash and cash equivalents 1,636,301 (390,830)
Cash and cash equivalents, beginning of period 4,190,551 4,927,683
----------------------------------------
Cash and cash equivalents, end of period $ 5,826,852 $ 4,536,853
========================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 1,038,867 $ 1,066,137
Cash paid for income taxes $ 190,114 $ 47,444
Supplemental schedule of non-cash investing and financing
activities
Transfers from loans to real estate acquired through $ - $ 60,098
foreclosure
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of Shore Financial
Corporation and Subsidiary (the "Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP") and with the instructions to
Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the consolidated
financial statements have been included.
In preparing the consolidated financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. The consolidated results of
operations and other data for the three month period ended March 31, 1998 are
not necessarily indicative of the results that may be expected for any other
interim period or the entire year ending December 31, 1998. The unaudited
consolidated financial statements presented herein should be read in conjunction
with the audited consolidated financial statements and related notes thereto in
the Company's Annual Report on Form 10-KTSB for the year ended December 31,
1997.
Principles of Consolidation
The consolidated financial statements of the Company include and primarily
consist of the accounts of its wholly-owned subsidiary Shore Bank (the "Bank").
All significant intercompany balances and transactions have been eliminated in
consolidation.
NOTE 2 - ORGANIZATION
The Company is a Virginia corporation organized in September 1997 by the Bank
for the purpose of becoming a unitary holding company of the Bank. In February
and March 1998, the Bank received all necessary federal and state regulatory
approvals to consummate the reorganization of the Bank into the holding company
form of organization (the "Reorganization") and, in connection therewith, the
subsequent conversion of the Bank from a federally chartered savings bank to a
Virginia chartered, Federal Reserve member, commercial bank. On March 16, 1998,
the Bank effected the Reorganization and on April 1, 1998 the Bank completed the
charter conversion.
<PAGE>
NOTE 3 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the three months March 31,
1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---------------- ----------
<S> <C>
Net income (numerator, basic and diluted) $ 306,410 $ 277,824
Weighted average shares outstanding
(denominator) 1,804,812 1,373,561
--------- ----------
Earnings per common share - basic $ 0.17 $ 0.20
========== ==========
Effect of dilutive securities:
Weighted average shares outstanding 1,804,812 1,373,561
Effect of stock options 20,640 6,951
---------- -----------
Diluted average shares outstanding
(denominator) 1,825,452 1,380,512
--------- -----------
Earnings per common share - $ 0.17 $ 0.20
assuming dilution ========== ===========
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 130, Reporting Comprehensive Income. FASB No. 130
establishes standards for reporting and displaying comprehensive income and
its components. The adoption of FASB No. 130 did not have a material impact on
the Company. All of the Company's other comprehensive income relates to net
unrealized gains (losses) on available-for-sale securities.
Total comprehensive income consists of the following for the three months ended
March 31, 1998:
Net income $ 306,410
Net unrealized gains on available-
for-sale securities 11,238
---------
Total comprehensive income $ 317,648
=========
<PAGE>
The following is a reconciliation of the related tax effects allocated to each
component of other comprehensive income for the three months ended March 31,
1998.
<TABLE>
<CAPTION>
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------- ---------- ----------
<S> <C>
Unrealized gains on available-
for-sale securities:
Unrealized holding gains
arising during the period $ 45,516 $ (16,842) $ 28,674
Less: reclassification adjustment
for gains included in income (27,676) 10,240 (17,436)
---------------- ---------- ---------
Net unrealized gains $ 17,840 $ (6,602) $ 11,238
========== =========== =========
</TABLE>
Item 2 - Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations
Results of Operations
General
Net income for the three months ended March 31, 1998 increased $28,000, or
10.1%, to $306,000, compared to net income of $278,000 for the same period in
the prior year. Earnings for the March 1998 quarter include approximately
$60,000 in cost associated with the operation of the newest branch office,
located in Salisbury, Maryland, which opened in November 1997. Earnings were
positively impacted during the 1998 quarter by the $3.2 million in additional
available capital raised during August 1997, gains on sale of securities of
$28,000 and increased deposit account and loan fees.
Net Interest Income
Net interest income increased $127,000 for the three months ended March 31, 1998
as compared to the same period in 1997. The net interest margin increased to
3.97% from 3.71% for the three month period. The interest rate spread increased
to 3.36% from 3.30% for the same period.
Interest income increased $133,000 for the three months ended March 31, 1998 as
compared to the same period in 1997. The increase resulted from an increase in
yields on loans from 8.65% to 8.95% due to increased commercial and consumer
lending, especially in home equity lines. Additionally, the average balance of
securities increased by $3.6 million resulting from approximately $3.2 million
in additional capital raised in the Bank's public and subscription offerings of
common stock (the "Offering") during August 1997 and deposit growth during the
period.
Interest expense remained relatively flat for the three months ended March 31,
1998 as compared to the same period in 1997. This is due to the average rate on
deposits decreasing from 4.83% in 1997 to 4.76% for the March 1998 period while
average interest-bearing liabilities outstanding during the period only
increased $1.6 million. An increased emphasis on commercial and consumer
relationships has resulted in an increase in lower costing interest-bearing and
noninterest-bearing checking and savings accounts.
The following table illustrates average balances of total interest-earning
assets and total interest-bearing liabilities for the periods indicated, showing
the average distribution of assets, liabilities, stockholders' equity and the
related income, expense and corresponding weighted average yields and costs. The
average balances used in these tables and other statistical data were calculated
using daily averages.
Average Balances, Income and
Expenses, Yields and Rates
Three Months Ended March 31,
1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- --------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------ ------------- ---------- ------------ ------------ ----------
<S> <C>
Assets:
Securities $25,661 $386 6.02% $22,084 $355 6.44%
Loans (net of unearned income):
Real Estate Mortgage 47,829 1,038 8.69% 50,639 1,041 8.22%
Real Estate Construction 1,119 23 8.20% 1,044 23 8.75%
Commercial 15,410 358 9.30% 13,718 326 9.50%
Home Equity Lines 5,449 130 9.57% 4,446 108 9.75%
Consumer 4,974 123 9.89% 4,175 103 9.86%
------------ ------------- ------------ ------------
Total loans 74,781 1,673 8.95% 74,022 1,601 8.65%
------------ ------------- ------------ ------------
Interest-bearing deposits in 2,874 39 5.40% 649 9 5.25%
other banks
------------ ------------- ------------ ------------
Total earning assets 103,316 2,098 8.12% 96,755 1,965 8.12%
------------ ------------- ------------ ------------
Less: allowance for loan (765) (715)
losses
Total nonearning assets 6,980 5,701
------------ ------------
Total assets $109,531 $101,741
============ ============
Liabilities
Interest-bearing deposits:
Checking and savings $20,832 $122 2.34% $19,132 $120 2.51%
Time deposits 69,188 950 5.49% 67,176 919 5.47%
-------------------------------------------------------------------------------
Total interest-bearing deposits 90,020 1,072 4.76% 86,308 1,039 4.82%
FHLB advances 74 1 3.00% 2,141 28 5.23%
------------ ------------- ------------ ------------
Total interest-bearing 90,094 1,073 4.76% 88,449 1,067 4.83%
liabilities
------------- ------------
Non-interest bearing
liabilities:
Demand deposits 6,200 4,400
Other liabilities 719 793
------------ ------------
Total liabilities 97,013 93,642
Stockholders' equity 12,518 8,099
------------ ------------
Total liabilities and
stockholders' equity $109,531 $101,741
============ ============
Net interest income $1,025 $898
============= ============
Interest rate spread 3.36% 3.30%
Net interest margin 3.97% 3.71%
</TABLE>
<PAGE>
Noninterest Income
Noninterest income increased $45,000 during the three months ended March 31,
1998 as compared to the same period in 1997. The increase was due primarily to
an increase in deposit account and loan fees resulting from the additional
commercial and consumer relationships obtained during the period. Additionally,
the Bank realized gains on sales of investments totaling $28,000 during the
March 1998 quarter.
Noninterest Expense
Noninterest expense increased $134,000 during the three months ended March 31,
1998 as compared to the same period in 1997. The increase was due primarily to
additional expenses associated with operating the new Salisbury branch location.
Compensation and benefits expense increased as a result of normal salary
adjustments and the addition of personnel to accommodate the Bank's growth and
the new branch. Occupancy and equipment expenses increased as a result of normal
growth and the new branch location while data processing expenses increased due
to planned technological and other bank equipment upgrades.
Financial Condition
During the three months ended March 31, 1998, the Bank increased its assets $4.0
million from $108.1 million at December 31, 1997, to $112.1 million at March 31,
1998. This increase was due primarily to increases in investments and loans
during the period.
Interest-earning deposits increased $1.8 million while total securities
increased $843,000 during the period, primarily as a result of $3.4 million in
deposit growth that was not fully offset by loan demand. Loans increased $1.5
million primarily due to consumer and home equity loan growth and commercial
lines of credit usage.
Deposits increased $3.4 million during the three months ended March 31, 1998.
The increase was due primarily to growth in demand deposit accounts. FHLB
advances remained flat during the period due to liquidity needs being met by
other sources.
Stockholders' equity increased $318,000 during the three months ended March 31,
1998. The increase was due primarily to net income of $306,000 during the
period.
Asset Quality
Loans are placed on nonaccrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. However, the Bank's policy stipulates that whenever a loan
reaches 90 days delinquent the loan no longer accrues interest.
Total nonperforming assets, which consist of nonaccrual loans and foreclosed
properties, adjusted for estimated losses upon sale and the related selling
expenses and holding costs, were $1.1 million at March 31, 1998, compared to
$823,000 at December 31, 1997. As to nonaccrual loans existing at March 31,
1998, approximately $26,000 of interest income would have been recognized during
the three months then ended if interest thereon had accrued. A significant
portion of the total nonperforming assets at March 31, 1998 was composed of a
$600,000 real estate loan that was foreclosed on in June 1997. Since the
foreclosure, the Bank has sold property obtained, resulting in the current
carrying value of these assets being approximately $372,000. The Bank is
currently negotiating with a large organization for the sale of the commercial
real estate obtained through the foreclosure. The sale of this property will
eliminate the majority of the current carrying value and will leave only one
residential lot remaining to be sold. Management anticipates that net proceeds
from the sale of the remaining collateral will cover the carrying value of these
properties.
As of March 31, 1998, all loans 60 days or more delinquent totaled $994,000,
which includes nonperforming loans that have possible credit problems and cause
management to have concerns about the borrowers continuing ability to comply
with existing repayment terms. All loans in this category are subject to
constant management attention, and their status is reviewed on a regular basis.
The following table details information concerning nonaccrual and past due
loans, as well as foreclosed assets.
<TABLE>
<CAPTION>
Nonperforming Assets
March 31, December 31,
1998 1997
------------------- ---------------------
<S> <C>
Nonaccrual loans:
Commercial - -
Real Estate Construction - -
Real Estate Mortgage $605 $306
Home equity lines of credit - -
Consumer 41 71
------------------- ---------------------
Total nonaccrual loans 646 377
Other real estate owned 442 446
------------------- ---------------------
Total nonperforming assets $1,088 $823
=================== =====================
Loans past due 90 or more days accruing interest - -
Allowance for loan losses to nonaccrual loans 119.97% 204.24%
Nonperforming assets to period end loans and other real 1.44% 1.11%
estate owned
Set forth below is a table detailing the allowance for loan losses for the
periods indicated.
Allowance for Loan Losses
Three Months Ended March 31, 1998 and 1997
------------------------------------------
1998 1997
------------------- ---------------------
Balance, beginning of period $770 $702
Loans charged off:
Commercial 26 -
Real estate construction - -
Real estate mortgage - -
Home equity lines of credit - -
Consumer 8 1
------------------- ---------------------
Total loans charged-off 34 1
------------------- ---------------------
Recoveries:
Commercial - -
Real estate construction - -
Real estate mortgage - -
Home equity lines of credit - -
Consumer 3 1
------------------- ---------------------
Total recoveries 3 1
------------------- ---------------------
Net charge-offs (31) -
Provision for loan losses 36 36
------------------- ---------------------
Balance, end of period $775 $738
=================== =====================
Allowance for loan losses to loans outstanding at end of period 1.03% 0.99%
Allowance for loan losses to nonaccrual loans outstanding at 119.97% 271.32%
end of period
Net charge-offs to average loans outstanding during period -0.04% -
</TABLE>
<PAGE>
Liquidity and Capital Resources
Liquidity represents the Bank's ability to meet present and future obligations
through the sale and maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest-bearing deposits with banks, federal funds sold and investments and
loans maturing within one year. The Bank's ability to obtain deposits and
purchase funds at favorable rates determines its liability liquidity.
At March 31, 1998, the Bank had outstanding loan and line of credit commitments
of $8.4 million. Scheduled maturities of certificate of deposits during the
twelve months following March 31, 1998 amount to $45.2 million. Historically,
the Bank has been able to retain a significant amount of their deposits as they
mature. As a result of the Bank's management of liquid assets and the ability to
generate liquidity through liability funding, management believes that the Bank
maintains overall liquidity that is sufficient to satisfy its depositor's
requirements and meet its customers' credit needs.
Total cash and cash equivalents increased to $1.6 million for the three months
ended December 31, 1998, compared to a decrease of $391,000 for the three months
ended March 31, 1997. Net cash provided by operating activities was $591,000 for
the three months ended March 31, 1998, compared to $761,000 during the same
period in 1997. The fluctuations in amounts during the period from March 31,
1997 to March 31, 1998 were primarily the result of an overall increase in
earnings offset by fluctuations in assets and liabilities and the impact of
noncash transactions during the period.
Net cash flows used in investing activities increased to $2.4 million during the
three months ended March 31, 1998, compared to $755,000 for the three months
ended March 31, 1997. The fluctuations in amounts during these periods were
primarily the result of increased purchases of securities and loan growth during
the three months ended March 31, 1998, as compared to the same period of 1997.
Net cash flows from financing activities increased to $3.4 million for the three
months ended March 31, 1998, compared to a negative $397,000 for the three
months ended March 31, 1997. The fluctuations in amounts during these periods
were primarily the result of the approximately $3.2 million increase in deposits
during 1998 and approximately $3.0 million in net repayments of FHLB advances
during 1997.
The Office of Thrift Supervision ("OTS"), the Bank's primary federal regulator
through March 31, 1998, has defined various tests for assessing the capital
strength and adequacy of savings institutions, based on various definitions of
capital. "Tier 1 capital" is a combination of common and qualifying preferred
stockholders' equity less goodwill and available-for-sale security adjustments.
"Tier 2 capital" is defined as qualifying subordinated debt and a portion of
allowances for loan losses. "Total capital" is defined as Tier 1 capital plus
Tier 2 capital. Certain risk-based capital ratios are computed using the above
capital definitions, total assets and risk-weighted assets and are measured
against regulatory minimums to ascertain adequacy. All assets and off-balance
sheet risk items are grouped into categories according to degree of risk and
assigned a risk weighting and the resulting total is risk-weighted assets. "Tier
1 risk-based capital" is Tier 1 capital divided by risk-weighted assets. "Total
risk-based capital" is total capital divided by risk-weighted assets.
The required minimum capital ratios for capital adequacy purposes, as defined
collectively by the federal banking agencies, for Tier 1 risk-based capital,
total risk-based capital, and Tier 1 capital are 4.0%, 8.0% and 4.0%,
respectively. To be considered "well capitalized" under federal regulation,
these same required ratios are 6.0%, 10.0% and 5.0%, respectively.
<PAGE>
Core and tangible capital, as defined by OTS regulations, are substantially
equivalent to Tier 1 capital, as disclosed above. The OTS' core and tangible
capital requirements were 3.0% and 1.5%, respectively, during the indicated
periods.
The following table details the components of Tier 1 and Tier 2 capital and
related ratios at March 31, 1998.
Analysis of Capital
<TABLE>
<CAPTION>
March 31 December 31,
1998 1997
--------------------- ---------------------
<S> <C>
Tier 1 Capital:
Common stock $596 $596
Additional paid-in capital 3,564 3,564
Retained earnings 8,488 8,170
--------------------- ---------------------
Total capital (GAAP) 12,648 12,330
Less: Intangibles (44) (45)
Unrealized (gains) losses (181) (170)
--------------------- ---------------------
Total Tier 1 capital $12,423 $12,115
--------------------- ---------------------
Tier 2 Capital:
Allowances for loan losses 768 732
Less: Other required deductions (151) (155)
--------------------- ---------------------
Total Tier 2 capital 13,040 12,692
--------------------- ---------------------
Risk-weighted assets $61,581 $58,521
Capital Ratios:
Tier 1 risk-based capital ratio 20.17% 20.70%
Total risk-based capital ratio 21.18% 21.69%
Tier 1 capital to average
adjusted total assets 11.34% 11.91%
</TABLE>
<PAGE>
Interest Sensitivity
An important element of both earnings performance and the maintenance of
sufficient liquidity is proper management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
interest sensitive liabilities at a specific time interval. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets during a given period. Generally, during a period of rising
interest rates, a negative gap within shorter maturities would adversely affect
the net interest income, while a positive gap within shorter maturities would
result in an increase in net interest income. Conversely, during a period of
falling interest rates, a negative gap within shorter maturities would result in
an increase in net interest income while a positive gap within shorter
maturities would have the opposite effect. This gap can be managed by repricing
assets or liabilities, by selling investments available for sale, by replacing
assets or liability at maturity, or by adjusting the interest rate during the
life of an asset or liability. Matching amounts of assets and liabilities
maturing in the same time interval helps hedge the risk and minimize the impact
on net interest income in periods of rising or falling interest rates.
The Bank determines the overall magnitude of interest sensitivity risk and then
formulates policies governing asset generation and pricing, funding sources and
pricing, and off-balance-sheet commitments in order to reduce sensitivity risk.
These decisions are based on management's outlook regarding future interest rate
movements, the state of the local and national economy, and other financial and
business risk factors.
The following table presents the Bank's interest sensitivity position at March
31, 1998. This one-day position, which continually is changing, is not
necessarily indicative of the Bank's position at any other time.
Interest Sensitivity Analysis
March 31, 1998
<TABLE>
<CAPTION>
With-in 91-365 1 to 5 Over
90 Days Days Years 5 Years Total
--------------- -------------- ------------- -------------- -------------
<S> <C>
Interest-Earning Assets:
Loans $9,742 $30,620 $27,392 $7,363 $75,117
Securities 3,900 4,744 12,686 5,776 27,106
Money market and other
short term securities 3,643 - - - 3,643
--------------- -------------- ------------- -------------- -------------
Total earning assets $17,285 $35,364 $40,078 $13,139 $105,866
=============== ============== ============= ============== =============
Cummulative earning assets $17,285 $52,649 $92,727 $105,866 $105,866
=============== ============== ============= ============== =============
Interest-Bearing Liabilities:
Money market savings $3,856 - - - $3,856
Interest checking (1) - - 8,766 - 8,766
Savings (1) - - 10,073 - 10,073
Certificates of deposit 14,257 30,972 20,992 3,277 69,497
FHLB advances - - - 74 74
--------------- -------------- ------------- -------------- -------------
Total interest-bearing $18,113 $30,972 $39,831 $3,351 $92,266
liabilities
=============== ============== ============= ============== =============
Cummulative $18,113 $49,085 $88,916 $92,267 $92,267
interest-bearing liabilities
=============== ============== ============= ============== =============
Period gap ($828) $4,392 $247 $9,788 $13,599
Cummulative gap ($828) $3,564 $3,811 $13,599 $13,599
Ratio of cummulative 95.43% 107.26% 104.29% 114.74% 114.74%
interest-earning assets to
interest-bearing liabilities
Ratio of cummulative gap to total -4.79% 10.08% 9.51% 103.51% 12.85%
earning assets
</TABLE>
(1)Management has determined that interest checking and savings accounts are not
sensitive to changes in related market rates and, therefore, the Bank has placed
them in the 1 to 5 years category.
<PAGE>
Year 2000 Project
The Year 2000 presents problems for businesses that are dependent on
computer hardware and software to perform date dependent calculations and logic
comparisons. A great deal of software and microchip technology was developed
utilizing two digit years rather than four digit years (example: 97 instead of
1997). Technology utilizing two digit years most likely will not be able to
distinguish the year 2000 from 1900, and therefore may shut down or perform
miscalculations and comparisons as much as 100 years off.
Management is fully aware this presents a potential business
disruption, and has begun a program of due diligence in addressing the impact of
the Year 2000 on the Company and the Bank. The Company and the Bank, in
conjunction with its outside service bureau, have developed a plan to address
Year 2000 exposure surrounding the Company and the Bank's computer and data
processing systems. Since early 1997, the Bank has been updating its systems
hardware to be Year 2000 compliant. The next step involves testing system
software which is scheduled to begin in mid to late 1998 and is estimated that
the process will cost approximately $25,000 to complete. In conjunction with
this testing, the Company and the Bank plan to test its other systems that are
not related to the service bureau. Presently, the Company and the Bank are still
in the discovery stage of identifying all other areas and processes rendering
exposure to the Year 2000 problem. However, management anticipates the Company
and the Bank will be Year 2000 compliant, thus satisfying all regulatory
requirements.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In the ordinary course of its operations, the Bank is a party to various legal
proceedings. Based upon information currently available, management believes
that such legal proceedings, in the aggregate, will not have a material adverse
effect on the business, financial condition, or results of operations of the
Bank.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Stockholders
None.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
On March 19, 1998, the registrant filed a current report on Form 8-K ("Form
8-K") for the event occurring on March 16, 1998. No financial statements were
filed on the Form 8-K, and Items 1 and 7 were reported on the Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Scott C. Harvard May 14, 1998
- --------------------
Scott C. Harvard
President and
Chief Executive Officer
/s/ Steven M. Belote May 14, 1998
- --------------------
Steven M. Belote
Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,184,000
<INT-BEARING-DEPOSITS> 3,643,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,115,000
<INVESTMENTS-CARRYING> 3,991,000
<INVESTMENTS-MARKET> 3,979,000
<LOANS> 75,845,000
<ALLOWANCE> 775,000
<TOTAL-ASSETS> 112,054,000
<DEPOSITS> 98,652,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 681,000
<LONG-TERM> 74,000
0
0
<COMMON> 596,000
<OTHER-SE> 12,052,000
<TOTAL-LIABILITIES-AND-EQUITY> 12,648,000
<INTEREST-LOAN> 1,673,000
<INTEREST-INVEST> 425,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,098,000
<INTEREST-DEPOSIT> 1,073,000
<INTEREST-EXPENSE> 1,073,000
<INTEREST-INCOME-NET> 1,025,000
<LOAN-LOSSES> 36,000
<SECURITIES-GAINS> 28,000
<EXPENSE-OTHER> 54,000
<INCOME-PRETAX> 486,000
<INCOME-PRE-EXTRAORDINARY> 486,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 306,000
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
<YIELD-ACTUAL> 8.12
<LOANS-NON> 646,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 327,000
<ALLOWANCE-OPEN> 770,000
<CHARGE-OFFS> 34,000
<RECOVERIES> 3,000
<ALLOWANCE-CLOSE> 775,000
<ALLOWANCE-DOMESTIC> 775,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
