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 June 30, 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
Onley, Virginia 23418
--------------------- ----------
(Address of Principal (Zip Code)
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 August 13, 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 June 30, 1998 and
December 31, 1997
Consolidated Statements of Income for the Three
Months and Six Months Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997
Consolidated Statement of Stockholders' Equity for
the Six Months Ended June 30, 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
Impact of Accounting Pronouncements
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
1
<PAGE>
<TABLE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<CAPTION>
<S> <C>
June 30, December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Cash (including interest - earning deposits of
approximately $2,443,000 and $1,841,000, respectively) $ 4,780,626 $ 4,190,551
Investment securities:
Held to maturity (fair value of $3,455,000 and
$5,219,000, respectively 3,453,277 5,232,587
Available for sale (amortized cost of $22,921,000 and
$20,761,000, respectively) 23,246,840 21,029,952
Investment in Federal Home Loan Bank stock,
at cost 580,500 580,500
Loans receivable, net 75,614,521 72,889,907
Premises and equipment, net 2,411,552 2,420,457
Real estate owned 116,620 445,912
Accrued interest receivable 1,000,700 915,271
Prepaid income taxes 159,213 124,586
Prepaid expenses and other assets 350,833 262,791
--------------------------------------------
$ 111,714,682 $ 108,092,514
--------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 97,816,427 $ 95,213,440
Advances from Federal Home Loan Bank 273,853 75,000
Advance payments by borrowers for taxes
and insurance 296,392 215,029
Income taxes payable:
Current - -
Deferred 131,795 103,218
Accrued interest payable 46,897 35,755
Accrued expenses and other liabilities 155,785 120,045
--------------------------------------------
Total liabilities 98,721,149 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 share, 5,000,000
shares authorized; 1,810,812 and 1,804,812 shares issued and
outstanding, respectively 597,568 595,588
Additional capital 3,584,652 3,563,592
Retained earnings, substantially restricted 8,592,539 8,000,729
Accumulated other comprehensive income 218,774 170,118
--------------------------------------------
Total stockholders' equity 12,993,533 12,330,027
--------------------------------------------
$ 111,714,682 $ 108,092,514
============================================
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended
June 30,
------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------
Interest income
Loans $ 1,681,247 $ 1,671,130
Investments 421,414 365,958
------------------------------------------------
Total interest income 2,102,662 2,037,088
------------------------------------------------
Interest expense
Deposits 1,085,907 1,065,485
FHLB advances 588 21,618
------------------------------------------------
Total interest expense 1,086,494 1,087,103
------------------------------------------------
Net interest income 1,016,167 949,985
Provision for loan losses 39,300 136,000
------------------------------------------------
Net interest income after
provision for loan losses 976,867 813,985
------------------------------------------------
Noninterest income
Deposit account fees 138,886 114,164
Loan fees 27,522 28,111
Other 35,453 102,445
------------------------------------------------
Total noninterest income 201,860 244,719
------------------------------------------------
Noninterest expense
Compensation and employee
benefits 296,619 311,828
Occupancy and equipment 162,417 144,080
Advertising 16,413 14,723
Data processing 92,214 89,470
Federal insurance premium 14,764 14,566
Other 135,978 109,538
------------------------------------------------
Total noninterest expense 718,406 684,205
------------------------------------------------
Income before income taxes 460,321 374,499
Income taxes 174,922 22,387
------------------------------------------------
Net income $ 285,399 $ 352,112
================================================
Earnings Per Common Share:
Basic $ 0.16 $ 0.26
================================================
Diluted $ 0.16 $ 0.26
================================================
<CAPTION>
Six Months Ended
June 30,
-------------------------------------------------
1998 1997
- -------------------------------------------------------------------- ------------------------------------------------
Interest income
Loans $ 3,354,409 $ 3,274,447
Investments 845,950 729,881
------------------------------------------------
Total interest income 4,200,359 4,004,328
------------------------------------------------
Interest expense
Deposits 2,158,502 2,104,325
FHLB advances 1,134 49,656
------------------------------------------------
Total interest expense 2,159,636 2,153,981
------------------------------------------------
Net interest income 2,040,723 1,850,347
Provision for loan losses 75,600 172,000
------------------------------------------------
Net interest income after
provision for loan losses 1,965,123 1,678,347
------------------------------------------------
Noninterest income
Deposit account fees 256,155 222,415
Loan fees 59,707 48,425
Other 91,964 141,103
------------------------------------------------
Total noninterest income 407,825 411,943
------------------------------------------------
Noninterest expense
Compensation and employee
benefits 621,151 578,151
Occupancy and equipment 321,654 273,504
Advertising 32,078 26,028
Data processing 231,282 179,947
Federal insurance premium 29,976 28,724
Other 190,120 181,334
------------------------------------------------
Total noninterest expense 1,426,261 1,267,688
------------------------------------------------
Income before income taxes 946,687 822,601
Income taxes 354,877 192,666
------------------------------------------------
Net income $ 591,810 $ 629,935
================================================
Earnings Per Common Share:
Basic $ 0.33 $ 0.46
================================================
Diluted $ 0.32 $ 0.46
================================================
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(UNAUDITED)
<CAPTION>
Six Months Ended June 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain on
Common Additional Retained Securities
Stock Capital Earnings Available for Sale Total
----------------- ------------------ ------------------ ------------------- --------------
Balance, December 31, 1997 $ 595,588 $ 3,563,592 $ 8,000,729 $ 170,118 $ 12,330,027
Proceeds from sale of common stock
upon exercise of stock options 1,980 21,060 23,040
Comprehensive income - - 591,810 48,656 640,466
------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $ 597,568 $ 3,584,652 $ 8,592,539 $ 218,774 $ 12,993,533
================================================================================================
4
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended June 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 591,810 $ 629,935
Adjustments to reconcile to net cash
provided by operating activities:
Provision for loan losses 75,600 172,000
Depreciation and amortization 135,645 94,576
Amortization of premium and accretion
of discount on securities, net 1,165 (3,080)
(Gain) loss on sale of securities (30,646) 23,000
(Gain) loss on sale of premises and
equipment 3,450 (77,865)
Change in net deferred loan fees (67,664) 13,298
Loss on sale of real estate owned 2,450 -
(Increase) decrease in other assets (212,333) 23,916
Increase in other liabilities 128,245 227,540
-----------------------------------------
Net cash provided by operating activities 627,723 1,103,321
-----------------------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (9,557,490) (3,669,560)
Proceeds from maturities and sales of
available-for-sale securities 8,226,626 3,960,621
Purchase of held-to-maturity securities - -
Proceeds from maturities of held-to-maturity
securities 1,000,000 -
Loan origination, net of repayments (2,836,319) (2,564,876)
Proceeds from sale of premises and equipment 1,439 99,000
Purchase of premises and equipment (127,394) (136,908)
Proceeds from sale of real estate owned 430,611 126,506
-----------------------------------------
Net cash used by investing activities (2,862,527) (2,185,217)
-----------------------------------------
Cash flows from financing activities
Net increase in demand deposits 2,326,424 1,315,631
Net increase in time deposits 276,562 3,829,022
Proceeds from FHLB advances 200,000 12,300,000
Repayments of FHLB advances (1,147) (15,600,000)
Proceeds from the sale of common stock 23,040 0
-----------------------------------------
Net cash provided by financing activities 2,824,879 1,844,653
-----------------------------------------
Increase in cash and cash equivalents 590,075 762,756
Cash and cash equivalents, beginning of period 4,190,551 4,927,683
-----------------------------------------
Cash and cash equivalents, end of period $ 4,780,626 $ 5,690,439
=========================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 2,148,494 $ 2,195,573
Cash paid for income taxes $ 387,714 $ 174,144
Supplemental schedule of non-cash investing and
financing activities
Transfers from loans to real estate acquired
through foreclosure $ 103,769 $ 567,532
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
<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 and six month periods ended June 30,
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-K 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.
6
<PAGE>
<TABLE>
NOTE 3 - EARNINGS PER SHARE
The following is an unaudited reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the periods ended
June 30, 1998 and 1997.
<CAPTION>
<S> <C>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
---------------- --------------- ---------------- ---------------
Net income (numerator, basic and diluted) $285,399 $352,112 $591,810 $629,935
Weighted average shares outstanding
(denominator) 1,810,812 1,373,562 1,807,829 1,373,562
---------------- --------------- ---------------- ---------------
Earnings per common share - basic $0.16 $0.26 $0.33 $0.46
================ =============== ================ ===============
Effect of dilutive securities:
Weighted average shares outstanding 1,810,812 1,373,562 1,807,829 1,373,562
Effect of stock options 18,206 6,716 20,373 6,364
---------------- --------------- ---------------- ---------------
Diluted average shares outstanding
(denominator) 1,829,018 1,380,278 1,828,202 1,379,926
---------------- --------------- ---------------- ---------------
Earnings per common share -
assuming dilution $0.16 $0.26 $0.32 $0.46
================ =============== ================ ===============
</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 six months ended
June 30, 1998:
Net income $591,810
Net unrealized gains on available-
for-sale securities 48,656
------------
Total comprehensive income $640,466
============
7
<PAGE>
<TABLE>
The following is an unaudited reconciliation of the related tax effects
allocated to each component of other comprehensive income at June 30, 1998.
<CAPTION>
<S> <C>
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------------- ---------------- ----------------
Unrealized gains on securities:
Unrealized holding gains
arising during the period $107,879 ($40,222) $67,656
Less: reclassification adjustment
for gains included in income 30,646 (11,645) 19,000
---------------- ---------------- ----------------
Net unrealized gains $77,233 ($28,577) $48,656
================ ================ ================
</TABLE>
NOTE 5 - STOCKHOLDERS' EQUITY
During the period ended June 30, 1998, 6,000 stock options were exercised at
$3.84 per share. At June 30, 1998, 34,000 stock options were outstanding at a
weighted average exercise price of $5.73 per share.
Item 2 - Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations
Results of Operations
General
Net income for the six months ended June 30, 1998 decreased $38,000, or 6.0%, to
$592,000, compared to net income of $630,000 for the same period in the prior
year. Earnings for the 1998 six month period include approximately $70,000 in
losses associated with the operation of the newest branch office, located in
Salisbury, Maryland, which opened in November 1997. Net income for the six
months ended June 30, 1997 includes approximately $50,000 (after-tax) of net
nonrecurring items that positively affected earnings for that period. These
items primarily consist of gains from the sale of real estate, enterprise zone
tax credits, and special charitable contributions. Earnings were positively
impacted during the 1998 period by the $3.2 million in additional available
capital raised during August 1997, net gains on sale of securities of $31,000
and increased deposit account and loan fees.
Net Interest Income
Net interest income increased $190,000 for the six months ended June 30, 1998 as
compared to the same period in 1997. The net interest margin increased to 4.07%
from 3.85% for the six month period. The interest rate spread increased to 3.47%
from 3.43% for the six month period. Non-interest bearing demand deposits
increased to $6.2 million at June 30, 1998 as compared $4.5 million at June 30,
1997. Including these amounts in calculating the cost of funds results in an
interest rate spread of 3.77% for the six months ended June 30, 1998 as compared
to 3.66% for the same period in 1997. This increase more accurately reflects the
impact of management's efforts to reduce the Bank's overall cost of funds.
8
<PAGE>
Interest income increased $80,000 for the six months ended June 30, 1998 as
compared to the same period in 1997. The increase resulted from an increase in
yields on loans from 8.78% to 8.90% due to increased commercial and consumer
lending, especially in home equity lines. Additionally, the average balance of
securities increased by $4.2 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 six months ended June 30, 1998
as compared to the same period in 1997. This is due to the average rate on
deposits decreasing from 4.84% in 1997 to 4.73% for the June 1998 period while
average interest-bearing liabilities outstanding during the period increased
$2.3 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.
9
<PAGE>
<TABLE>
Average Balances, Income and Expenses, Yields and Rates
<CAPTION>
<S> <C>
Six Months Ended June 30,
---------------------------------------------------
1998
---------------------------------------------------
Average Income/ Yield/
Balance Expense Rate
---------------- ---------------- ----------------
Assets:
Securities (1) $26,395 $864 6.55%
Loans (net of unearned income):
Real Estate Mortgage 43,436 1,859 8.56%
Real Estate Construction 1,494 62 8.24%
Commercial 19,789 920 9.30%
Home Equity Lines 5,307 251 9.47%
Consumer 5,345 262 9.80%
---------------- ----------------
Total loans 75,371 3,354 8.90%
---------------- ----------------
Federal funds sold 0 0 0.00%
Interest-bearing deposits
in other banks 2,891 73 5.05%
---------------- ----------------
Total earning assets 104,657 4,291 8.20%
---------------- ----------------
Less: allowance for loan losses (770)
Total nonearning assets 7,110
----------------
Total assets $110,997
================
Liabilities
Interest-bearing deposits:
Checking and savings $22,828 $273 2.39%
Time deposits 68,420 1,886 5.51%
---------------- ---------------- ----------------
Total interest-bearing
deposits 91,248 2,159 4.73%
FHLB advances 75 1 1.48%
---------------- ----------------
Total interest-bearing
liabilities 91,323 2,160 4.73%
----------------
Non-interest bearing liabilities:
Demand deposits 6,169
Other liabilities 780
----------------
Total liabilities 98,272
Stockholders' equity 12,725
----------------
Total liabilities and stockholders'
equity $110,997
================
Net interest income $2,131
================
Interest rate spread (1) 3.47%
Net interest margin (1) 4.07%
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------
1997
---------------------------------------------------
Average Income/ Yield/
Balance Expense Rate
-------------- ---------------- ----------------
Assets:
Securities (1) $22,232 $738 6.64%
Loans (net of unearned income):
Real Estate Mortgage 50,453 2,102 8.33%
Real Estate Construction 1,410 62 8.75%
Commercial 13,996 682 9.75%
Home Equity Lines 4,526 221 9.75%
Consumer 4,212 208 9.86%
-------------- ----------------
Total loans 74,597 3,274 8.78%
-------------- ----------------
Federal funds sold 0 0 0.00%
Interest-bearing deposits
in other banks 655 17 5.25%
-------------- ----------------
Total earning assets 97,484 4,029 8.27%
--------------- ----------------
Less: allowance for loan losses (728)
Total nonearning assets 5,851
---------------
Total assets $102,607
===============
Liabilities
Interest-bearing deposits:
Checking and savings $19,485 $246 2.53%
Time deposits 67,672 1,858 5.49%
--------------- ---------------- ----------------
Total interest-bearing
deposits 87,157 2,104 4.83%
FHLB advances 1,830 50 5.46%
-------------- ----------------
Total interest-bearing
liabilities 88,987 2,154 4.84%
----------------
Non-interest bearing liabilities:
Demand deposits 4,500
Other liabilities 876
---------------
Total liabilities 94,363
Stockholders' equity 8,244
---------------
Total liabilities and stockholders'
equity $102,607
===============
Net interest income $1,875
================
Interest rate spread (1) 3.43%
Net interest margin (1) 3.85%
(1) Tax equivalent basis.
</TABLE>
Noninterest Income
Noninterest income remained relatively flat during the six months ended June 30,
1998 as compared to the same period in 1997. This was due primarily to a $79,000
pretax gain on sale of real estate realized during the six months ended June 30,
1997. Excluding this amount noninterest income increased approximately $76,000
10
<PAGE>
due primarily to increases 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 $36,000
during the June 1998 period.
Noninterest Expense
Noninterest expense increased $158,000 during the six months ended June 30, 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 primarily relating to
Year 2000 requirements.
Financial Condition
During the six months ended June 30, 1998, the Bank increased its assets $3.6
million from $108.1 million at December 31, 1997, to $111.7 million at June 30,
1998. This increase was due primarily to increases in investments and
nonmortgage loans during the period.
Interest-earning deposits increased $602,000 while total securities increased
$437,000 during the period, primarily as a result of $2.6 million in deposit
growth that was not fully offset by loan demand. Loans increased $2.7 million
primarily due to consumer and home equity loan growth and commercial lines of
credit usage.
Deposits increased $2.6 million during the six months ended June 30, 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 $664,000 during the six months ended June 30,
1998. The increase was due primarily to net income of $592,000 during the period
and unrealized gains on available-for-sale securities.
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 or the loan reaches 90 days delinquent whereby 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 $693,000 at June 30, 1998, compared to $823,000
at December 31, 1997. As to nonaccrual loans existing at June 30, 1998,
approximately $22,000 of interest income would have been recognized during the
six months then ended if interest thereon had accrued. A significant portion of
the total nonperforming assets at December 31, 1997 was composed of a $600,000
real estate loan that was foreclosed on in June 1997. Since the foreclosure, the
Bank has sold all property obtained, with the primary remaining piece of real
estate being sold during June 1998. Properties were sold at amounts
approximating their carrying values, resulting in no significant gains or losses
to the Bank. Other real estate owned at June 30, 1998 consisted of four parcels
of real estate of which two with carrying values totaling $13,000 were sold
subsequent to June 30, 1998. Management anticipates that net proceeds from the
sale of the collateral will cover the carrying value of the remaining
properties.
11
<PAGE>
As of June 30, 1998, all loans 60 days or more delinquent totaled $1.4 million,
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.
Nonperforming Assets
June 30, December 31,
1998 1997
------------- ------------
Nonaccrual loans:
Commercial - -
Real Estate Construction - -
Real Estate Mortgage $468 $306
Home equity lines of credit 0 0
Consumer 108 71
---------- ---------
Total nonaccrual loans 576 377
Other real estate owned 117 446
---------- ---------
Total nonperforming assets $693 $823
========== =========
Loans past due 90 or more days
accruing interest - -
Allowance for loan losses to
nonaccrual loans 132.64% 204.24%
Nonperforming assets to period end
loans and other real estate owned 0.91% 1.11%
12
<PAGE>
<TABLE>
Set forth below is a table detailing the allowance for loan losses for the
periods indicated.
Allowance for Loan Losses
<CAPTION>
<S> <C>
Six Months Ended
June 30,
-------------------------------------------
1998 1997
-------------------- ---------------------
Balance, beginning of period $770 $702
Loans charged off:
Commercial 26 115
Real estate construction 0 6
Real estate mortgage 24 0
Home equity lines of credit 0 0
Consumer 35 10
-------------------- ---------------------
Total loans charged-off 85 131
-------------------- ---------------------
Recoveries:
Commercial 0 0
Real estate construction 0 0
Real estate mortgage 0 0
Home equity lines of credit 0 0
Consumer 3 1
-------------------- ---------------------
Total recoveries 3 1
-------------------- ---------------------
Net charge-offs (82) (130)
Provision for loan losses 76 172
-------------------- ---------------------
Balance, end of period $764 $744
==================== =====================
Allowance for loan losses to loans
outstanding at end of period 1.00% 1.00%
Allowance for loan losses to nonaccrual
loans outstanding at end of period 132.64% 197.35%
Net charge-offs to average loans
outstanding during period -0.11% -0.17%
</TABLE>
13
<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 June 30, 1998, the Bank had outstanding loan and line of credit commitments
of $7.7 million. Scheduled maturities of certificate of deposits during the
twelve months following June 30, 1998 amounted to $43.1 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 $590,000 for the six months ended
June 30, 1998, compared to a increase of $763,000 for the six months ended June
30, 1997. Net cash provided by operating activities was $628,000 for the six
months ended June 30, 1998, compared to $1.1 million during the same period in
1997. The fluctuations in amounts during the period from June 30, 1997 to June
30, 1998 were primarily the result of fluctuations in earnings, assets and
liabilities and the impact of noncash transactions during the periods.
Net cash flows used in investing activities increased to $2.9 million during the
six months ended June 30, 1998, compared to $2.2 million for the six months
ended June 30, 1997. The fluctuations in amounts during these periods were
primarily the result of increased security purchases and loan growth offset by
sales of real estate owned during the six months ended June 30, 1998, as
compared to the same period of 1997.
Net cash flows from financing activities increased to $2.8 million for the six
months ended June 30, 1998, compared to $1.8 million for the six months ended
June 30, 1997. The fluctuations in amounts during these periods were primarily
the result of FHLB advance repayments exceeding borrowings by approximately $3.3
million during 1997.
The Federal Reserve, the Bank's primary federal regulator, have defined various
tests for assessing the capital strength and adequacy of financial 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.
14
<PAGE>
Core and tangible capital, as defined by federal regulations, are substantially
equivalent to Tier 1 capital, as disclosed above. The 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 June 30, 1998.
<TABLE>
Analysis of Capital
<CAPTION>
<S> <C>
June 30 December 31,
1998 1997
--------------------- ---------------------
Tier 1 Capital:
Common stock $598 $596
Additional paid-in capital 3,585 3,564
Retained earnings 8,811 8,170
--------------------- ---------------------
Total capital (GAAP) 12,994 12,330
Less: Intangibles (43) (45)
Unrealized (gains) losses (219) (170)
--------------------- ---------------------
Total Tier 1 capital $12,732 $12,115
--------------------- ---------------------
Tier 2 Capital:
Allowances for loan losses 764 732
--------------------- ---------------------
Total Tier 2 capital 13,496 12,847
--------------------- ---------------------
Risk-weighted assets $67,094 $58,521
Capital Ratios:
Tier 1 risk-based capital ratio 18.98% 20.70%
Total risk-based capital ratio 20.12% 21.95%
Tier 1 capital to average adjusted
total assets 11.30% 11.91%
</TABLE>
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
15
<PAGE>
<TABLE>
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 June
30, 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
<CAPTION>
<S> <C>
June 30, 1998
-------------------------------------------------------------
With-in 91-365 1 to 5 Over
90 Days Days Years 5 Years Total
--------- --------- --------- --------- ---------
Interest-Earning Assets:
Loans $10,223 $28,475 $27,945 $9,735 $76,378
Securities 2,400 3,348 14,792 6,160 26,700
Money market and other
short term securities 2,443 - - - 2,443
--------- --------- --------- --------- ---------
Total earning assets $15,066 $31,823 $42,737 $15,895 $105,521
========= ========= ========= ========= =========
Cummulative earning assets $15,066 $46,889 $89,626 $105,521 $105,521
========= ========= ========= ========= =========
Interest-Bearing Liabilities:
Money market savings $5,026 - - - $5,026
Interest checking - - 9,837 - 9,837
Savings - - 9,979 - 9,979
Certificates of deposit 10,764 32,294 20,623 3,287 66,967
FHLB advances 200 - - 74 274
--------- --------- --------- --------- ---------
Total interest-bearing liabilities $15,990 $32,294 $40,439 $3,361 $92,083
========= ========= ========= ========= =========
Cummulative interest-bearing liabilities $15,990 $48,284 $88,723 $92,084 $92,084
========= ========= ========= ========= =========
Period gap ($924) ($471) $2,298 $12,534 $13,437
Cummulative gap ($924) ($1,395) $903 $13,437 $13,437
Ratio of cummulative interest-earning
assets to interest-bearing liabilities 94.22% 97.11% 101.02% 114.59% 114.59%
Ratio of cummulative gap to total
earning assets -6.13% -4.38% 2.11% 84.54% 12.73%
</TABLE>
16
<PAGE>
Impact of Accounting Pronouncements
Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1998. Although management is currently studying
this Statement, the Company does not expect this Statement to materially affect
its financial condition or results of operations.
The American Institute of Certified Public Accountants issued Statement
of Position (SOP) 98-5, Reporting on the Costs of Startup Activities, in April
1998. The SOP requires such costs to be expensed as incurred instead of being
capitalized and amortized. It applies to startup activities and costs of
organization of both development state and established operating activities, and
it changes existing practice for some industries. The SOP broadly defines
startup activities as those one-time activities that relate to the opening of a
new facility, introduction of a new product or service, doing business in a new
territory, initiating a new process in an existing facility, doing business with
a new class of customer or beneficiary, or commencing some new operation. The
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. Consistent with banking industry practice its is the
Company's policy to expense such costs. Therefore, this SOP is not expected to
materially affect the Company's financial position or results of operations.
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 is well into 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 are testing its other systems and
processes that have been identified as rendering exposure to the Year 2000
problem. Management anticipates the Company and the Bank will be Year 2000
compliant, thus satisfying all regulatory requirements.
In conjunction with identifying and addressing internal Year 2000
exposures, the Company and the Bank have been addressing potential external
problems surrounding the issue. The Company's and the Bank's concerns regarding
external exposures revolve primarily around major customers and vendors. In
accordance with federal guidelines, the Bank is taking steps to address
potential exposures with major customers. Additionally, the Bank has contacted a
number of major vendors and is being kept abreast of their Year 2000 readiness
in regards to mission critical systems of the Bank. The Company and the Bank
have also addressed Year 2000 issues with its corporate insurance carrier during
the recent renewal period. Insurance policies have been reviewed and steps have
been taken to minimize the Company's and the Bank's insurance risk surrounding
the Year 2000.
17
<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
The annual meeting of the stockholders of Shore Financial Corporation was held
on May 28, 1998. Matters voted on included the election of Terrell E. Boothe, D.
Page Elmore and A. Jackson Mason as directors for three-year terms expiring in
2001. Scott C. Harvard, Richard F. Hall, III, Lloyd J. Kellam, III, Henry P.
Custis, Jr., and L. Dixon Leatherbury continued their terms as directors after
the meeting. Another matter voted on during the meeting consisted of the
appointment of Goodman & Company, L.L.P. as the Company's independent auditors
for the fiscal year ending December 31, 1998. No other matters were voted on
during the meeting or by proxy or other means during the period.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
None.
18
<PAGE>
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.
Scott C. Harvard August 14, 1998
- -----------------------
Scott C. Harvard
President and
Chief Executive Officer
Steven M. Belote August 14, 1998
- -----------------------
Steven M. Belote
Treasurer and
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,338,000
<INT-BEARING-DEPOSITS> 2,443,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,247,000
<INVESTMENTS-CARRYING> 3,453,000
<INVESTMENTS-MARKET> 3,455,000
<LOANS> 76,379,000
<ALLOWANCE> 764,000
<TOTAL-ASSETS> 111,715,000
<DEPOSITS> 97,816,000
<SHORT-TERM> 200,000
<LIABILITIES-OTHER> 631,000
<LONG-TERM> 74,000
0
0
<COMMON> 598,000
<OTHER-SE> 12,396,000
<TOTAL-LIABILITIES-AND-EQUITY> 111,715,000
<INTEREST-LOAN> 1,681,000
<INTEREST-INVEST> 421,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,102,000
<INTEREST-DEPOSIT> 1,086,000
<INTEREST-EXPENSE> 1,086,000
<INTEREST-INCOME-NET> 1,016,000
<LOAN-LOSSES> 39,000
<SECURITIES-GAINS> 8,000
<EXPENSE-OTHER> 136,000
<INCOME-PRETAX> 460,000
<INCOME-PRE-EXTRAORDINARY> 460,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 285,000
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
<YIELD-ACTUAL> 8.20
<LOANS-NON> 693,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 322,000
<ALLOWANCE-OPEN> 770,000
<CHARGE-OFFS> 85,000
<RECOVERIES> 3,000
<ALLOWANCE-CLOSE> 764,000
<ALLOWANCE-DOMESTIC> 764,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
