U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the year ended December 31, 1998.
Commission file number 000-23847
SHORE FINANCIAL CORPORATION
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Virginia 54-1873994
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
25253 Lankford Highway, Onley, VA 23418
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (757) 787-1335
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock ($0.33 par value)
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(Title of Class)
Check whether the Issuer (1) has 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State Issuer's Revenues for its most recent fiscal year $8,489,000.
On March 1, 1999, the aggregate market value of the 1,810,812 shares of Common
Stock of the Registrant outstanding on such date, which excludes shares held by
affiliates of the Registrant, was approximately $17.3 million. This figure is
based on the closing price of $9.56 per share of the Registrant's Common Stock
on March 1, 1999.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 1, 1999:
Class Outstanding at March 1, 1999
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Common Stock, $0.33 par value [1,810,812]
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's 1998 Annual Report to the Shareholders are
incorporated by reference in Part II hereof.
(2) Portions of Registrant's 1999 Proxy Statement are incorporated by reference
in Part III hereof.
Transitional Small Business Disclosure Format Yes No X
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PART I
This Form 10-KSB contains certain forward-looking statements. For this
purpose any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors.
Item 1.
BUSINESS
General
Shore Financial Corporation ( the "Company") is a Virginia corporation
organized in September 1997 by Shore Bank (the "Bank") for the purpose of
becoming a unitary holding company of the Bank. The Company's assets consist of
its investment in the Bank and approximately $2.0 million in cash and
investments. The business and management of the Company consists of the business
and management of the Bank. The Bank is a Virginia chartered, Federal Reserve
member, commercial bank whose predecessor began business in 1961 and whose
headquarters are in Onley, Virginia. The Bank operates six banking offices on
the Eastern Shore of Virginia and Maryland, including the counties of Accomack
and Northampton in Virginia and the Salisbury/Wicomico County area in Maryland.
At December 31, 1998, the Company had assets of $119.9 million, Bank deposits of
$104.3 million and stockholders' equity of $13.8 million.
In the summer of 1997, the Bank completed both a public and subscription
rights offering, issuing 431,250 new shares of common stock that netted the Bank
approximately $3.1 million in new capital. It was in August 1997 that the Bank
became publicly traded on the Nasdaq Stock Market under the symbol "SHBK". In
November 1997, the Bank's shareholders approved the reorganization of the bank
into the holding company form of organization (the "Reorganization"), and in
December 1997, the bank changed its year end from fiscal June 30, to calendar
year December 31 for financial and income tax reporting purposes. Finally on
March 31, 1998 the Bank was converted from a federally chartered savings bank to
a Virginia chartered, Federal Reserve member, commercial bank.
The Bank offers a full menu of banking products and services in the
communities it serves. For the business customers the Bank offers checking, cash
management, credit card merchant services, sweep accounts, and a variety of loan
options including operating lines of credit, equipment loans, and real estate
loans. For the consumer, the Bank has the only totally free checking account
available in its Virginia market, along with telephone banking services, safe
deposit boxes, and the largest network of ATM's on the Eastern Shore of
Virginia. The bank delivers its banking services through six branch offices,
including the main office, that are served by 51 dedicated employees.
Market Area
The Bank's Main Office and three additional banking offices are located in
Accomack and Northampton Counties, which comprise the Eastern Shore of Virginia.
Poultry and seafood processing are major industries in the area, with Perdue
Farms, Inc. and Tyson Foods, Inc. being two of the area's largest employers.
Agriculture and tourism are also integral parts of the area's economy. Recently,
the legislature of the Commonwealth of Virginia created a Space Port Authority
to serve northern Accomack County by promoting commercial space launches from
existing space flight facilities and infra structure at Wallops Island,
Virginia. In Northampton County there is a recently completed Eco-Industrial
Park which is committed to environmentally friendly job creation. The park is a
model for others nationally and has signed its first tenant.
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During 1999, management expects to open the Bank's fifth Virginia branch
and seventh overall in Parksley, Virginia. The planned full service facility
will provide a banking alternative for a community that management considers
under-served and will provide transaction volume support for the Bank's Onley,
Virginia office which currently serves customers from that area. The Bank plans
to purchase land currently owned by the town of Parksley to build the facility.
During February 1999, the Company entered into an agreement to lease
commercial office space that will accommodate the Company's administrative
operations and will enable the Company to better serve the Bank's branch network
and provide improved item processing service to the Bank's customers. The
Company expects to move operations into the facility in April 1999.
In 1995, the Bank expanded into the Salisbury/Wicomico County area of
Maryland, which is approximately 60 miles north of the Bank's main office. The
Salisbury/Wicomico County area is the economic hub of the Delmarva Peninsula and
is centrally located as a crossroads on the peninsula. Approximately 215,000
people live within a 20 mile radius of the City of Salisbury. The area has a
diversified economy and leading employers in the area include Perdue Farms, Inc.
(poultry processing), Dresser Industries (electronic controls), Bayliner Marine
(yachts), PRMC (medical services), and Salisbury State University. During
November 1997, the Bank opened its second Maryland branch in the financial
district of downtown Salisbury. The branch has an automated teller machine (ATM)
and safe deposit boxes and management believes that its location will attract
more commercial and consumer customers and will complement the existing
Salisbury location.
Competition
In its market area, the Bank competes with regional commercial banks and
independent community banks with multiple offices on the Eastern Shore. These
and certain other non-bank competitors may have much greater financial
resources, diversified markets, and branch networks than the Bank and may be
able to offer similar services at varying costs with higher lending limits. With
nationwide banking, the Bank also faces the prospect of additional competitors
entering its market area.
The Bank faces strong competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from
commercial banks and mortgage lenders and to a lesser extent consumer finance
companies, credit unions, and savings and loans. The Bank competes for loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it originates and the quality of service it provides to
borrowers.
The Bank faces substantial competition in attracting deposits from other
banks, money market and mutual funds, credit unions and other investment
vehicles. The ability of the Bank to attract and retain deposits depends on its
ability to provide an investment opportunity that satisfies the requirements of
investors as to rate of return, liquidity, risk, convenience and other factors.
The Bank competes for these deposits by offering a variety of deposit accounts
at competitive rates, convenient business hours, and being the only
locally-owned independent bank on the Eastern Shore of Virginia.
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Credit Policies
The principal risk associated with each of the categories of loans in the
Bank's portfolio is the creditworthiness of its borrowers. Within each category,
such risk is increased or decreased, depending on prevailing economic
conditions. The Bank employs extensive written policies and procedures to
enhance management of credit risk. The loan portfolio is managed under a
specifically defined credit process. This process includes formulation of
portfolio management strategy, guidelines for underwriting standards and risk
assessment, procedures for ongoing identification and management of credit
deterioration, and regular portfolio reviews to estimate loss exposure and to
ascertain compliance with the Bank's policies. The largest unsecured and secured
individual lending authority currently granted by the Bank is $50,000 and
$100,000, respectively. The President, the Chief Lending Officer and the
President of the Maryland Division may individually approve unsecured loans up
to $50,000 and secured loans up to $100,000. The President and the Chief Lending
Officer may together approve unsecured loans between $50,000 and $100,000 and
secured loans between $100,000 and $200,000. Loan applications in excess of
$200,000 secured and $100,000 unsecured are approved by the Loan Committee on a
weekly basis. The Loan Committee consists of the President and one additional
director, with the directors rotating their service on this committee on a
monthly basis. All loan applications in excess of $300,000 must be approved by
the Board of Directors.
In the normal course of business, the Bank makes various commitments and
incurs certain contingent liabilities which are disclosed but not reflected in
its annual financial statements, including commitments to extend credit. At
December 31, 1998, commitments to extend credit totaled $14.4 million.
One- to Four-Family Residential Real Estate Lending. The Bank's
primary lending program has been the origination of loans secured by one- to
four-family residences, virtually all of which have been located in its market
area. The Bank evaluates both the borrower's ability to make principal and
interest payments and the value of the property that will secure the loan.
Federal law permits the Bank to make loans in amounts of up to 100% of the
appraised value of the underlying real estate. Loans are made with a loan to
value up to 90% for conventional mortgage loans on primary residences. The Bank
generally originates mortgage loans that have an adjustable rate feature in
which the rate changes every one, three or five years. Most of these loans are
tied to comparable maturity U.S. Treasury Bills. Where loans are not indexed,
they generally have a balloon feature. There are unquantifiable risks resulting
from potential increased costs to the borrower as a result of repricing. It is
possible, therefore, that during periods of rising interest rates, the risk of
defaults on adjustable rate mortgages ("ARMs") may increase due to the upward
adjustment of interest costs to borrowers.
Construction Lending. The Bank makes local construction loans, primarily
residential and small commercial loans. The construction loans are secured by
the property for which the loan was obtained. At December 31, 1998, construction
and land loans outstanding were $3.7 million, or 4.6%, of gross loans. The
average life of a construction loan is less than 12 months and they reprice
daily based on the prime rate or are fixed for a 12-month period. Construction
lending entails significant additional risks, compared with residential mortgage
lending. Construction loans involve risks attributable to the fact that loan
funds are advanced upon the security of the home under construction, which is of
uncertain value prior to the completion of construction. Thus, it is more
difficult to evaluate accurately the total loan funds required to complete a
project and related loan-to-value ratios. To minimize the risks associated with
construction lending, the Bank limits loan amounts to 80% of appraised value, in
addition to its usual credit analysis of its borrowers. Additionally, the Bank's
officers make regular inspections of construction projects prior to disbursement
of loan funds. The Bank also obtains a first lien on the security property as
security for its construction loans.
Commercial Real Estate Lending. The Bank also originates commercial real
estate loans. These loans are secured by various types of commercial real
estate, including multifamily residential
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buildings, commercial buildings and offices. At December 31, 1998, commercial
real estate loans aggregated $17.5 million or 21.7% of the Bank's gross loans.
The interest rates on commercial real estate loans is usually fixed for 1 to 3
years, with either a balloon feature or an additional rate increase feature.
Commercial real estate loans made by the Bank generally amortize over 5 to 15
years and may have a call provision of 3 or 5 years. The Bank's commercial real
estate loans are secured by properties in its market area.
In its underwriting of commercial real estate, the Bank may lend, under
federal regulation, up to 100% of the security property's appraised value,
although the Bank's loan to original appraised value ratio on such properties is
80% or less in most cases. Commercial real estate lending entails significant
additional risk, compared with residential mortgage lending. Commercial real
estate loans typically involve larger loan balances concentrated with single
borrowers or groups of related borrowers. Additionally, the payment experience
on loans secured by income producing properties is typically dependent on the
successful operation of a business or a real estate project and thus may be
subject, to a greater extent, to adverse conditions in the real estate market or
in the economy generally. The Bank's commercial real estate loan underwriting
criteria require an examination of debt service coverage ratios, the borrower's
creditworthiness and prior credit history and reputation, and the Bank generally
requires personal guarantees or endorsements of borrowers.
Commercial Loans. Beginning in fiscal year 1993, the Bank began to focus
on developing its commercial loan portfolio to qualified small businesses in its
market area. At December 31, 1998, commercial loans aggregated $3.6 million or
4.5% of the Bank's gross loans. Commercial business loans generally have a
higher degree of risk than residential mortgage loans, but have commensurably
higher yields. To manage these risks, the Bank generally secures appropriate
collateral and carefully monitors the financial condition of its business
borrowers. Commercial business loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow from its business and
are often secured by business assets, such as accounts receivable, equipment and
inventory. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself. Further, the collateral for commercial business loans may
depreciate over time and cannot be appraised with as much precision as
residential real estate. The Bank has a credit review and monitoring system to
regularly review the cash flow and collateral of commercial borrowers.
Consumer Lending. The Bank offers various secured and unsecured consumer
loans, including unsecured personal loans and lines of credit, home equity lines
of credit, automobile loans, deposit account loans, installment and demand
loans, and letters of credit. At December 31, 1998, the Bank had consumer loans
of $11.9 million or 14.8% of gross loans. Such loans are generally made to
customers with whom the Bank has a preexisting relationship and are generally in
amounts of under $75,000. The Bank originates all of its consumer loans in its
market area and intends to continue its consumer lending in this geographic
area.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, such as lines of
credit, or secured by rapidly depreciable assets such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.
Employees
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At December 31, 1998, the Bank had 39 full-time and 16 part-time
employees. The Bank considers relations with its employees to be good.
Regulation and Supervision
Set forth below is a brief description of certain laws and regulations
that relate to the regulation of the Company and the Bank. The descriptions of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, do not purport to be complete and are qualified in
their entirety by reference to applicable laws and regulations.
The Company
General. The Company, as a bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956 (as amended, the "BHCA") and the
regulation, supervision and examination requirements of the Board of Governors
of the Federal Reserve System. Bank holding companies are subject to extensive
regulation by the Federal Reserve as set forth in Regulation Y, 12 C.F.R. Part
225, as amended. Regulation Y establishes the registration, reporting,
examination, applications, acquisitions, control and divestiture, change in bank
control, appraisals, and change in director and senior executive officers
requirements applicable to bank holding companies. Regulation Y and the
interpretations and rulings issued by the Federal Reserve thereunder identify
various prohibited non-banking activities in which bank holding companies and
their subsidiaries may not engage as well as various exempt activities in which
a bank holding company and its subsidiaries may engage either with or, in some
cases, without prior Federal Reserve approval. Regulation Y further confirms the
authority of the Federal Reserve under the BHCA to impose criminal and civil
penalties for violations of the BHCA and the regulations and orders issued
thereunder and to issue cease and desist orders when necessary in connection
therewith.
Activities Obligations and Restrictions. There are a number of obligations
and restrictions imposed on bank holding companies and their depository
institution subsidiaries that are designed to reduce potential loss exposure to
the depositors of the depository institutions and to the FDIC insurance funds.
For example, under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. In addition, the "cross-guarantee" provisions of federal law
require insured depository institutions under common control to reimburse the
FDIC for any loss suffered or reasonably anticipated by either the SAIF or BIF
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
Banking laws also provide that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the asset of any bank or savings bank subsidiaries.
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The restriction on interstate acquisitions by bank holding companies was
abolished effective September 1995, and bank holding companies from any state
are able to acquire banks and bank holding companies located in any other state,
subject to certain conditions, including nationwide and state imposed
concentration limits. Banks are able to branch across state lines by
acquisition, merger or de novo (unless state law would permit such interstate
branching at an earlier date), provided certain conditions are met, including
that applicable state law must expressly permit such interstate branching.
Limitations on Transactions with Affiliates. Transactions between
financial institutions such as the Bank and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An affiliate of an
institution is any company or entity that controls, is controlled by or is under
common control with the institution. In a holding company context, the parent
holding company of an institution (such as the Company) and any companies that
are controlled by such parent holding company are affiliates of the institution.
Generally, Sections 23A and 23B of the FRA (i) limit the extent to which the
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B of
the FRA, no institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities that are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
that are subsidiaries of the institution.
The restrictions contained in Section 22(h) of the FRA on loans to
executive officers, directors and principal stockholders also apply to the Bank.
Under Section 22(h), loans to a director, an executive officer and to a greater
than 10% stockholder of a financial institution, and certain affiliated
interests of either, may not exceed, together with all other outstanding loans
to such person and affiliated interests, the institution's loans to one borrower
limit (generally equal to 15% of the institution's unimpaired capital and
surplus). Section 22(h) also prohibits loans above prescribed amounts to
directors, executive officers and greater than 10% stockholders of an
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution, with any
"interested" director not participating in the voting. The prescribed loan
amount (which includes all other outstanding loans to such person) as to which
such prior board of director approval is required generally is the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Section 22(h) also
requires that loans to directors, executive officers and principal stockholders
be made on terms substantially the same as offered in comparable transactions to
other persons.
Restrictions on Acquisitions. Under the BHCA, a bank holding company may
not directly or indirectly acquire ownership or control of more than 5% of the
voting shares or substantially all of the assets of any additional bank or merge
or consolidate with another bank holding company without the prior approval of
the Federal Reserve Board. The BHCA also generally limits the activities of a
bank holding company to that of banking, managing or controlling banks, or any
other activity which is determined to be closely related to banking or to
managing or controlling banks that an exception is allowed for those activities.
The Bank
General. As a state chartered commercial bank, the Bank is subject to
regulation, supervision and examination requirements of the Virginia State
Corporation Commission's Bureau of Financial
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Institutions. The Bank is also subject to the regulation, supervision and
examination requirements of the Federal Reserve Board and the Federal Deposit
Insurance Corporation. State and federal laws also govern the activities in
which the Bank may engage, the investments it may make and the aggregate amount
of loans that may be granted to one borrower. Various consumer and compliance
laws and regulations also affect the Bank's operations. The Federal Reserve and
the SCC conduct periodic examinations to test the Bank's compliance with various
regulatory requirements. The Federal Reserve completed its most recent
examination in September, 1997. In November 1998, the Federal Reserve completed
a compliance examination of the Bank.
Insurance of Accounts. The Bank's deposits are insured to the maximum
extent permitted by the SAIF and BIF, which is administered by the FDIC, and are
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against banking institutions, after giving the SCC and
Federal Reserve an opportunity to take such action.
On September 30, 1996, the Omnibus Appropriations Act (the "Act") was
signed into law. The legislation authorized a one-time charge of SAIF insured
institutions at a rate of 65.7 basis points per $100.00 of March 31, 1995
deposits. As a result, the Bank's assessment amounted to $447,000. Additional
provisions of the Act include new BIF and SAIF premiums and the merger of BIF
and SAIF. The new BIF and SAIF premiums include a premium for repayment of the
Financing Corporation ("FICO") bonds plus any regular insurance assessment.
Until full pro-rata FICO sharing is in effect, the FICO premiums for BIF and
SAIF are 1.3 and 6.4 basis points, respectively, which began January 1, 1997.
Full pro-rata FICO sharing is to begin no later than January 1, 2000. It is the
intention of the Act that the BIF and SAIF are merged once the bank and savings
association charters are merged. The Act designated the original date for this
occurrence to be January 1, 1999, but it had not materialized as of the date of
this report.
Under the current risk classification system, institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital --"well capitalized", "adequately capitalized" and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the Federal
Deposit Insurance Act ("FDIA"). These three groups are then divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from zero basis points for well capitalized,
healthy institutions to 27 basis points for under capitalized institutions with
substantial supervisory concerns.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals,
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Regulatory Capital Requirements. The Company and the Bank are subject to
various regulatory capital requirements administered by the federal banking
agencies. Generally, the Company and the Bank are required to maintain a minimum
ratio of total capital to risk-weighted assets of 8%. Failure to
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meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its the Bank to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998, that the Company meets all capital
adequacy requirements to which it is subject. In fact, at December 31, 1998, the
Bank exceeded all of its regulatory capital requirements, with total capital to
risk-weighted assets, tier 1 capital to risk-weighted assets and tier 1 capital
to average assets ratios of 19.43%, 18.02% and 11.80%, respectively.
Liquidity Requirements. The Bank is required to maintain adequate reserves
related to the demand deposits and time deposits held by the Bank. Such reserve
requirements may be imposed by the Federal Reserve and by the SCC under the
Virginia Banking Act. At December 31, 1998, the Bank was maintaining appropriate
reserves as required by law with respect to its demand deposits and time
deposits.
Capital Distributions. The Bank is subject to legal limitations on capital
distributions including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
used in the statute). For all state member banks of the Federal Reserve seeking
to pay dividends, the prior approval of the applicable Federal Reserve Bank is
required if the total of all dividends declared in any calendar year will exceed
the sum of the bank's net profits for that year and its retained net profits for
the preceding two calendar years. Federal law also generally prohibits a
depository institution from making any capital distribution (including payment
of a dividend or payment of a management fee to its holding company) if the
depository institution would thereafter fail to maintain capital above
regulatory minimums. Federal Reserve Banks are also authorized to limit the
payment of dividends by any state member bank if such payment may be deemed to
constitute an unsafe or unsound practice. In addition, under Virginia law, no
dividend may be declared or paid that would impair a Virginia chartered bank's
paid-in capital. The SCC has general authority to prohibit payment of dividends
by a Virginia chartered bank if it determines that the limitation is in the
public interest and is necessary to ensure the bank's financial soundness.
Federal Home Loan Bank System. The Bank is members of the FHLB-Atlanta,
which is one of twelve regional FHLBs that administers the home financing credit
functions of banking institutions. As a member of the FHLB system, the Bank is
required to purchase and maintain stock in the FHLB-Atlanta in an amount equal
to the greater of 1% of its aggregate unpaid residential mortgage loans and
mortgage-backed securities, 0.3% of its assets or 5% (or such greater fraction
as established by the FHLB) of its outstanding FHLB advances. The Bank is
required to purchase and maintain stock in the FHLB-Atlanta in an amount equal
to the greater of 1% of its aggregate unpaid residential mortgage loans and
mortgage-backed securities, 0.3% of its assets or 10% (or such greater fraction
as established by the FHLB) of its outstanding FHLB advances. At December 31,
1998, the Bank held $580,500 in FHLB stock, which was in compliance with these
requirements. The FHLB pays quarterly cash dividends on its stock. For the year
ended December 31, 1998, the Bank received FHLB cash dividends totaling $42,000.
Each FHLB serves as a reserve or central bank for its members within its
assigned region. The FHLBs are funded primarily from proceeds derived from the
sale of consolidated obligations of the
9
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FHLB system. Each FHLB makes loans (i.e., advances) to members in accordance
with policies and procedures established by the board of directors of the FHLB.
These polices and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board.
Federal Reserve System. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. At December
31, 1998, the Bank is in compliance with such requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy applicable liquidity requirements. However, because required
reserves must be maintained in the form of either vault cash, a
noninterest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve, the effect of this reserve requirement is to
reduce the Company's interest-earning assets.
As a member of the Federal Reserve System, the Bank is required to
purchase shares of Federal Reserve Bank stock with a par value of $100 equal to
6.0% of the bank's capital and surplus. One-half of the amount of the bank's
subscription shall be paid to the Federal Reserve Bank and the remaining half
will be subject to call when deemed necessary by the Board of Governors of the
Federal Reserve System. At December 31, 1998, the Bank owned $124,800 in Federal
Reserve Stock which was in compliance with these requirements.
Federal Taxation
General. The Company and the Bank are subject to the applicable corporate
tax provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as certain additional provisions of the Code that apply to banks and other
types of financial institutions. The following discussion of tax matters is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company and the Bank.
Under the applicable statutes of limitation, the Bank's federal income tax
returns for 1994 through 1997 are open to examination by the Internal Revenue
Service (the "Service"). The Bank is unaware, however, of any current or pending
Service examinations of the Bank's returns for any of those open years.
Historically, the Bank has reported its income and expenses on the accrual
method of accounting and filed its federal income tax returns on a June 30
fiscal year basis. Effective December 29, 1997, the Bank changed its year end to
a calendar year basis for financial and income tax reporting purposes. The
Company's fiscal year end is also December 31.
Bad Debt Reserves. Prior to 1996, savings institutions such as the Bank
that met certain definitional tests primarily relating to their assets and the
nature of their business ("Qualifying Thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions
could, within specified formula limits, be deducted by the savings institutions
in arriving at their taxable income. For purposes of the bad debt deduction,
loans were separated into "qualifying real property loans" (which are, in
general, loans secured by interests in improved real property or real property
which is to be improved out of the proceeds of the loan) and "nonqualifying
loans" (which are all other loans).
During 1996, new tax legislation was enacted that repealed the reserve
method of accounting for bad debts of qualified thrift institutions and, for
years after 1995, the Bank will only be eligible to claim tax deductions for bad
debts under the rules for banks. Because the Bank was a small thrift institution
(one with an adjusted basis of assets of less than $500 million) at that time it
is permitted to compute its bad debt deduction using the experience method in
lieu of deducting bad debts only as they occur.
10
<PAGE>
Additionally, the new legislation requires a thrift institution to
recapture over a six-year period its reserve as of December 31, 1995, to the
extent it exceeds its reserve balance at December 31, 1987. As a result of such
legislation, the Bank is recapturing into taxable income approximately $497,000
ratably over six fiscal years. The income is includable over the third through
eighth years following the fiscal year ending June 30, 1997, since the Bank
meets the residential loan requirement exception in the legislation. See Note 2
of the notes to the financial statements.
The Bank's retained earnings at December 31, 1998 included approximately
$783,000 representing that portion of the Bank's reserve for bad debts for which
no provision for income taxes has been made. Under legislation passed in 1996,
this amount was not subject to federal income taxes upon the Bank converting
from a federal savings bank to a state chartered commercial bank. However, the
Bank is subject to the same recapture provisions it was subject to as a savings
association.
Corporate Minimum Tax. The Bank could be subject to an alternative minimum
tax ("AMT") which is imposed to the extent that it exceeds the Bank's regular
tax liability for a year. The alternative minimum tax generally will apply at a
rate of 20% to a base of regular taxable income plus certain tax preferences and
adjustments ("alternative minimum taxable income" or "AMTI"), less an exemption
amount. Currently no more than 90% of the AMTI may be offset by net operating
losses (as determined for AMTI purposes). Payment of the AMT may be used as a
credit against a portion of the regular tax liabilities in future years. The
Code provisions relating to the AMT also: (i) treat as a preference item
interest on certain tax-exempt private activity bonds issued on or after August
8, 1986; and (ii) include in AMTI (for tax years beginning after 1989) an amount
equal to 75% of the amount by which a corporation's adjusted current earnings
exceed its AMTI (determined without regard to this preference and before
reduction for the alternative tax net operating losses). The Bank was not
subject to the AMT in 1997, and does not expect to be subject to AMT in the
foreseeable future.
State and Local Taxation
The Bank, as a Virginia chartered bank, is subject to Virginia's Bank
Franchise Tax. Under this system, the Bank's net capital is subject to tax at a
rate of one percent. Net capital is composed generally of the equity accounts
(common stock, additional paid-in capital, and retained earnings) adjusted for
investments in real and personal property, certain reserves, and certain
securities exempt from state taxation.
The Company is subject to Virginia corporate income taxes. The Virginia
corporate income tax is imposed at a rate of six percent on a combined net
income of a Virginia corporation and its subsidiaries as reported for federal
income tax purposes, with certain modifications.
Item 2.
- ------
PROPERTIES
The Main Office of the Bank is located at 25253 Lankford Highway, Onley,
Virginia, a two story colonial brick building built in 1988. The Bank owns the
building free of any encumbrances, but leases
11
<PAGE>
the land under an agreement expiring in 2000, with four five-year renewals.
During February 1999, the Company entered into a five year lease agreement (with
two five-year renewals) to lease commercial office space that will accommodate
the Company's administrative operations and enable it to bring the Bank's item
processing function in house. The Bank operates five other banking offices (3 in
Virginia and 2 in Salisbury, Maryland), with all but the downtown Salisbury
branch being owned free of any encumbrances. The Bank leases the downtown
Salisbury branch location under an agreement expiring in 2002, with three
five-year renewals.
Item 3.
- ------
LEGAL PROCEEDINGS
In the ordinary course of its operations, the Company 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 Company.
Item 4.
- ------
SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1998.
12
<PAGE>
PART II
Item 5.
- ------
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information included under "Market Price for Common Stock" appearing
on page 50 of the Annual Report is incorporated herein by reference.
Item 6.
- ------
SELECTED CONSOLIDATED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information included under "Selected Financial Highlights" appearing
on page 3 of the Annual Report and under "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 5 through 23 of the
Annual Report are incorporated herein by reference.
Item 7.
- ------
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the notes thereto on pages 24
through 49 of the Annual Report are incorporated herein by reference.
Item 8.
- ------
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
13
<PAGE>
PART III
Item 9.
- ------
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
Item 10.
- -------
EXECUTIVE COMPENSATION
Item 11.
- -------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12.
- -------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instructions E (3), the information called for by Part
III, Items 9. through 12., is incorporated herein by reference from the
Company's definitive proxy statement for the Company's Annual Meeting of
Shareholders to be held on April 20, 1999, which definitive proxy statement was
filed with the Commission pursuant to Rule 14a-6 on or prior to March 18, 1999.
14
<PAGE>
PART IV
Item 13.
- --------
EXHIBITS AND FORM 8-K
(a) The following exhibits are filed as part of this Form 10-KSB and this list
includes the Exhibit Index.
No. Description
--- -----------
11.0 Earnings Per Share Computation. *
13.0 1998 Annual Report to Shareholders.
21.0 Subsidiaries of the Registrant -- Reference is made to "Item 1.
Business" for the required information.
27.0 Financial Data Schedule.
- ---------------------
* Information required herein is incorporated by reference from Note 15 on page
46 of the financial statements attached hereto to this Form 10-KSB.
(b) Reports on Form 8-K. No reports were filed by the registrant during the
quarter ended December 31, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHORE FINANCIAL CORPORATION
By: /s/ Scott C. Harvard
--- --------------------
Scott C. Harvard
President and Chief
Executive Officer
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Signature Capacity Date
--------- -------- ----
/s/ Henry P. Custis, Jr. Chairman of the Board and March 26, 1999
- ----------------------- Director
Henry P Custis, Jr.
/s/ Scott C. Harvard President (Principal Executive March 26, 1999
- --------------------- Officer) and Director
Scott C. Harvard
/s/ Steven M. Belote Treasurer (Principal Financial March 26, 1999
- -------------------- Officer and Accounting Officer)
Steven M. Belote
/s/ Terrell E. Boothe Director March 26,1999
- ---------------------
Terrell E. Boothe
/s/ D. Page Elmore Director March 26,1999
- ---------------------
D. Page Elmore
/s/ Richard F. Hall, III Director March 26, 1999
- -----------------------
Richard F. Hall, III
/s/ Lloyd J. Kellam, III Director March 26, 1999
- ------------------------
Lloyd J. Kellam, III
/s/ L. Dixon Leatherbury Director March 26,1999
- ------------------------
L. Dixon Leatherbury
/s/ A. Jackson Mason Director March 26,1999
- ------------------------
A. Jackson Mason
16
</TABLE>
SHORE FINANCIAL CORPORATION
1
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report To Shareholders 2
Selected Financial Highlights 3
Corporate Profile 4
Management's Discussion and Analysis 5
Report of Independent Accountants 24
Consolidated Statements of Condition 25
Consolidated Statements of Income 26
Consolidated Statements of Stockholders' Equity 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 30
Market for Registrant's Common Stock 50
Directors and Officers 51
Corporate Information 52
</TABLE>
[MAP APPEARS HERE]
MAIN OFFICE
25253 Lankford Highway
Onley, Virginia 23418
BRANCH OFFICES
6350 Maddox Boulevard
Chincoteague, Virginia 23336
21220 North Bayside Drive
Cheriton, Virginia 23316
4017 Lankford Highway
Exmore, Virginia 23350
1503 South Salisbury Boulevard
Salisbury, Maryland 21801
100 West Main Street
Salisbury, Maryland 21801
OUR PEOPLE:
Susan M. Anderson
Victoria B. Bagwell
Steven M. Belote
Natalie N. Binder
Dana C. Bonney
Pamela L. Bromley
Linda C. Burnell
Jacqueline L. Carpenter
Pamela C. Clark
Marilyn J. Cooper
April V. Davis
Kara E. Decarlo
William H. Deckert III
Sandra L. D. Derrickson
Anne H. J. Dize
J. Anderson Duer, Jr.
Alma Elliott
Robin S. Faust
Amy D. Ferringer
Patricia A. Fries
Scott C. Harvard
William T. Hill
Claire I. Hoff
Mychelle L. Holloway
Kimberly M. Holston
Martha H. James
Michelle A. Lilliston
Kristin P. Linton
Carol Sue Madison
Jessica L. Mason
Tammy V. Mason
Cheryl A. Massey
Susan E. McAllister
Arthur C. Miles, Jr.
Samantha A. Morris
Charles W. Payne
Jennifer L. Pearson
Carrie S. Potts
Vonda K. Pruitt
Joy E. Saunders
Richard B. Seidel
Jennifer L. Skaggs
Vonda M. Smith
Denise W. Stadler
Dawn M. Steelman
Mary N. M. Trower
Brenda P. Wallace
Kathryn M. Warren
Nancy L. White
Delilah A. Wilson
Jane O. Wyatt
. . . OUR MOST
VALUABLE ASSETS
<PAGE>
SHORE FINANCIAL CORPORATION
2
- --------------------------------------------------------------------------------
REPORT TO SHAREHOLDERS
We are pleased to provide this Annual Report for 1998 summarizing the
growth and financial condition of Shore Financial Corporation. Over the past
year, we have continued our transition into a multi-state community banking
organization. Toward that goal, we have worked to expand our financial
services, increase the value of our franchise, and to provide you, our
shareholder, with a superior long-term investment.
In February 1999, the Board of Directors declared a cash dividend of $0.07
per share payable on March 21, 1999. This is the first dividend declared this
decade, and represents about 10% of 1998 Company earnings. The Board determined
that earnings and capital levels justified a dividend at this time, and that a
dividend may broaden the pool of potential investors in Shore Financial
Corporation shares.
Since going public, 1998 was our first fiscal year to end on a
calendar-year December 31. Net income for 1998 was $1.265 million compared to
$946,000 for the fiscal year ending June 30, 1997, and $1.190 million for
calendar year 1997. Total assets grew to $120 million at December 31, 1998 from
$108 million one year earlier. Deposits grew to $104.3 million from $95.2
million at December 31, 1997.
Last year was our first full year of operating our second start-up branch
in Salisbury, Maryland, at a cost of almost $0.06 per share. That branch has
now reached the break-even point, and should contribute to earnings in 1999.
Located in the downtown district of Salisbury, this branch has grown as
projected, further enhancing the reputation of Shore Bank as a community bank
committed to the Salisbury market and the Delmarva Peninsula.
During the last year, the bank continued to transition its balance sheet
from a dependence on time deposits and residential real estate to one more
dependent on core deposits (such as checking and transaction accounts) and
commercial and consumer loan assets. For instance, while total deposits grew by
almost $10 million, total time deposits dropped by over $1 million. On the
asset side, residential real estate loans dropped by almost $5 million while
commercial loans increased by over $8 million. Additional increases in other
types of loans resulted in a net loan increase of almost $8 million, or 10%.
As we begin 1999, Shore Bank will break ground on its seventh branch in
Parksley, Virginia. The new facility will be a full-service banking branch,
serving the northwest quadrant of Accomack County, Virginia. Also in early
1999, the bank will break ground on an expansion in Chincoteague to double the
size of the current banking facility serving that market.
With respect to technology, the bank is ahead of regulatory schedules for
testing systems for Year 2000 compliance. We have recently invested in a wide
area network for the company, and an optical retrieval system for all reports
and checking account records. We have also taken the appropriate steps to bring
all checking account item processing functions in-house in an effort to reduce
costs and improve service to our commercial customers.
We have spent a lot of time in the last year discussing the year 2,000
bug, what the company is doing to prepare, and what our contingency plans are
under worst case scenarios. It is a shame that the most important asset we
have, our people.... not technology, is not often discussed. This year we
proudly listed our entire employee team on the first page of this report. It is
this group of 51 employees who have made our company and our bank successful.
It is this group that will shepherd the company and the bank through the
challenges of century date changes, the burdens of banking regulations, and the
pressures of competition in the financial services business in the next
century. Being prepared requires having a team that is up to the task ahead and
Shore Financial Company has that team.
<PAGE>
SHORE FINANCIAL CORPORATION
3
- --------------------------------------------------------------------------------
Selected Financial Highlights
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED DECEMBER 31,
----------------------------- -----------------------------
DECEMBER 31, JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $ 8,489 $ 7,855 $ 4,288 $ 4,200
Interest expense 4,367 4,240 2,207 2,213
Net interest income 4,122 3,615 2,081 1,987
Provision for loan losses 280 244 205 66
Noninterest income 945 737 559 325
Noninterest expense 2,850 2,786 1,445 1,359
Income taxes 672 376 317 327
-----------------------------------------------------
Net income $ 1,265 $ 946 $ 673 $ 560
=====================================================
PER SHARE DATA:
Net income -- basic $ 0.70 $ 0.69 $ 0.37 $ 0.33
Net income -- dilutive 0.69 0.69 0.37 0.33
Cash dividends 0.00 0.00 0.00 0.00
Book value at period end 7.61 6.24 7.61 6.83
Tangible book value at period end 7.59 6.20 7.59 6.80
Average shares outstanding (000's) 1,809 1,370 1,811 1,688
BALANCE SHEET DATA (PERIOD END):
Assets $119,948 $104,637 $119,948 $108,093
Loans, net of unearned income 80,579 74,135 80,579 73,660
Securities 32,049 23,420 32,049 26,263
Deposits 104,309 94,556 104,309 95,213
Shareholders' equity 13,789 8,569 13,789 12,330
PERFORMANCE RATIOS:
Return on average assets 1.11% 0.95% 1.16% 1.03%
Return on average equity 9.66% 12.00% 9.93% 9.42%
Net interest margin 4.00% 3.78% 3.98% 3.89%
Efficiency (1) 57.75% 63.71% 56.91% 58.78%
ASSET QUALITY RATIOS:
Allowance for loan losses to period end loans 1.14% 1.00% 1.14% 1.05%
Allowance for loan losses to nonaccrual loans 137.72% 181.46% 137.72% 204.24%
Nonperforming assets to period end loans and foreclosed
properties 0.89% 1.38% 0.89% 1.11%
Net charge-offs (recoveries) to average loans 0.17% 0.24% 0.06% 0.05%
CAPITAL AND LIQUIDITY RATIOS:
Leverage (2) 11.50% 8.19% 11.50% 11.41%
Risk-based:
Tier 1 capital 18.02% 14.56% 18.02% 20.70%
Total capital 19.43% 15.53% 19.43% 21.69%
Average loans to average deposits 77.16% 82.05% 76.97% 78.28%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) COMPUTED BY DIVIDING NONINTEREST EXPENSE BY THE SUM OF NET INTEREST INCOME
AND NONINTEREST INCOME, NET OF SECURITY GAINS AND LOSSES.
(2) COMPUTED AS A PERCENTAGE OF STOCKHOLDERS' EQUITY TO PERIOD END ASSETS.
<PAGE>
SHORE FINANCIAL CORPORATION
4
- --------------------------------------------------------------------------------
CORPORATE PROFILE
GENERAL
Shore Financial Corporation (the "Company") is a Virginia corporation
organized in September 1997 by Shore Bank (the "Bank") for the purpose of
becoming a unitary holding company of the Bank. The Company's assets consist of
its investment in the Bank and approximately $2.0 million in cash and
investments. The business and management of the Company consists of the business
and management of the Bank. The Bank is a Virginia chartered, Federal Reserve
member, commercial bank whose predecessor began business in 1961 and whose
headquarters are in Onley, Virginia. The Bank operates six banking offices on
the Eastern Shore of Virginia and Maryland, including the counties of Accomack
and Northampton in Virginia and the Salisbury/ Wicomico County area in Maryland.
At December 31, 1998, the Company had assets of $119.9 million, Bank deposits of
$104.3 million and stockholders' equity of $13.8 million.
In the summer of 1997, the Bank completed both a public and subscription
rights offering, issuing 431,250 new shares of common stock that netted the
Bank approximately $3.1 million in new capital. It was in August 1997 that the
Bank became publicly traded on the Nasdaq Stock Market under the symbol "SHBK".
In November 1997, the Bank's shareholders approved the reorganization of the
bank into the holding company form of organization (the "Reorganization"), and
in December 1997, the bank changed its year end from fiscal June 30, to
calendar year December 31 for financial and income tax reporting purposes.
Finally on March 31, 1998 the Bank was converted from a federally chartered
savings bank to a Virginia chartered, Federal Reserve member, commercial bank.
The Bank offers a full menu of banking products and services in the
communities it serves. For the business customers the Bank offers checking,
cash management, credit card merchant services, sweep accounts, and a variety
of loan options including operating lines of credit, equipment loans, and real
estate loans. For the consumer, the Bank has the only totally free checking
account available in its Virginia market, along with telephone banking
services, safe deposit boxes, and the largest network of ATM's on the Eastern
Shore of Virginia. The bank delivers its banking services through six branch
offices, including the main office, that are served by 51 dedicated employees.
MARKET AREA
The Bank's Main Office and three additional banking offices are located in
Accomack and Northampton Counties, which comprise the Eastern Shore of
Virginia. Poultry and seafood processing are major industries in the area, with
Perdue Farms, Inc. and Tyson Foods, Inc. being two of the area's largest
employers. Agriculture and tourism are also integral parts of the area's
economy. Recently, the legislature of the Commonwealth of Virginia created a
Space Port Authority to serve northern Accomack County by promoting commercial
space launches from existing space flight facilities and infra structure at
Wallops Island, Virginia. In Northampton County there is a recently completed
Eco-Industrial Park which is committed to environmentally friendly job
creation. The park is a model for others nationally and has signed its first
tenant.
During 1999, management plans to open the Bank's fifth Virginia branch and
seventh overall in Parksley, Virginia. The planned full service facility will
provide a banking alternative for a community that management considers
under-served and will provide transaction volume support for the Bank's Onley,
Virginia office which currently serves customers from that area. The Bank plans
to purchase land currently owned by the town of Parksley to build the facility.
During February 1999, the Company entered into an agreement to lease
commercial office space that will accommodate the Company's administrative
operations and will enable the Company to better serve the Bank's branch
network and provide improved item processing service to the Bank's customers.
The Company plans to move operations into the facility in April 1999.
In 1995, the Bank expanded into the Salisbury/Wicomico County area of
Maryland, which is approximately 60 miles north of the Bank's main office. The
Salisbury/Wicomico County area is the economic hub of the Delmarva Peninsula
and is centrally located as a crossroads on the peninsula. Approximately
215,000 people live within a 20 mile radius of the City of Salisbury. The area
has a diversified economy and leading employers in the area include Perdue
Farms, Inc. (poultry processing), Dresser Industries (electronic controls),
Bayliner Marine (yachts), PRMC (medical services), and Salisbury State
University. During November 1997, the Bank opened its second Maryland branch in
the financial district of downtown Salisbury. The branch has an automated
teller machine (ATM) and safe deposit boxes and management believes that its
location will attract more commercial and consumer customers and will
complement the existing Salisbury location.
<PAGE>
SHORE FINANCIAL CORPORATION
5
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's performance for the year ended December 31, 1998 improved
over the year ended June 30, 1997. Net income for the year ended December 31,
1998 increased to $1.27 million, compared to $945,000 for the year ended June
30, 1997. Earnings per share were $0.70 per share for the year ended December
31, 1998, compared to $0.69 per share for the year ended June 30, 1997. The
relatively flat earnings per share was due to increased weighted average shares
outstanding during 1998 when compared to June 1997, primarily resulting from
the August 1997 public offering. The year ended June 30, 1997 was impacted by
the one-time SAIF assessment of $447,000 ($286,000 after tax). Excluding this
nonrecurring charge, net income and earnings per share would have $1.23 million
and $.90 per share, respectively. However, in November 1997, the Company opened
its second branch in Salisbury, Maryland (the Bank's sixth branch office).
During 1998, the Company incurred approximately $165,000 of pretax losses
associated with operating this branch. Excluding these losses, 1998 net income
and earnings per share would have been $1.36 million and $.75 share,
respectively. By the end of 1998, the new Salisbury branch was operating at
break-even levels and management anticipates that it will contribute to
earnings in late 1999.
Return on assets (ROA) was 1.11% for the year ended December 31, 1998
compared to .95% for the comparable year ended June 30, 1997. Return on average
equity (ROE) was 9.66% compared to 12.00% for the year ended June 30, 1997.
Net income for the six months ended December 31, 1998 increased by 20.2%
to $673,000, compared to $560,000 during the same period of 1997, with earnings
per share increasing to $0.37 per share from $0.33 per share. This increase in
earnings was primarily due to higher net interest income and deposit fee
income. Return on average equity during the six months ended December 31, 1998
increased to 9.93%, up from 9.42% for the same period in 1997, and the return
on average assets during this period increased to 1.16%, compared to 1.03% in
1997.
For the year ended December 31, 1998, total loans increased to $80.6
million, a 9.2% increase over the $73.7 million outstanding at December 31,
1997 and a 8.5% increase over the $74.1 million outstanding at June 30, 1997.
Growth in commercial and consumer loans (including home equity lines)
constituted the majority of this increase, consistent with management's plans
of shifting towards a typical commercial bank's loan portfolio mix. Commercial
loans increased by 46.0% and 49.8% over the December 31, 1997 and June 30, 1997
periods, respectively, while consumer loans increased by 26.1% and 34.7% over
the same periods, respectively. Real estate mortgage loans (including real
estate construction loans) decreased by 4.6% and 7.3% during 1998 when compared
to December 31, 1997 and June 30, 1997, respectively. Securities were $32.1
million at December 31, 1998, an increase of 22.0% and 36.9% over amounts
invested at December 31, 1997 and June 30, 1997, respectively.
Deposits were $104.3 million at December 31, 1998, an increase of 9.6% and
10.3% over levels existing at December 31, 1997 and June 30, 1997,
respectively. Growth in lower cost interest-bearing and noninterest-bearing
demand deposits constituted the majority of this increase, consistent with
management's concerted efforts in growing the Bank's commercial and consumer
deposit portfolio and being less aggressive in pricing time deposits. Demand
deposits were $36.3 million at December 31, 1998, an increase of 39.6% and
45.3% over amounts existing at December 31, 1997 and June 30, 1997,
respectively, while time deposits decreased by 1.7% and 2.2% during the same
periods, respectively.
The Bank's net interest margin was 4.00% during the year ended December
31, 1998, compared to 3.78% during the year ended June 30, 1997 and 3.98% and
3.89% during the six month periods ended December 31, 1998 and 1997,
respectively. The Bank benefited from the increase in noninterest-bearing
deposits over the prior periods and an increase in interest-earning assets that
resulted from the investment of proceeds of the public offering in August 1997.
Nonperforming assets also decreased during the year ended December 31, 1998 as
compared to the year ended June 30, 1997 and the six months ended December 31,
1997, which helped improve the net interest margin. At December 31, 1998, the
allowance for loan losses to period end loans was 1.14%, and the level of
nonperforming assets to period end loans and foreclosed properties was .89%.
<PAGE>
SHORE FINANCIAL CORPORATION
6
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
RESULTS OF OPERATION
GENERAL
Net interest income is the major component of the Company's earnings and
is equal to the amount by which interest income exceeds interest expense.
Interest income is derived from interest-earning assets which are composed
primarily of loans and securities. Interest expense results from
interest-bearing liabilities, the major portion of which consists of deposits
and short-term borrowings. Changes in the volume and mix of these assets and
liabilities, as well as changes in the yields earned and rates paid, determine
changes in net interest income. Net interest margin is calculated by dividing
net interest income by average earning assets and represents the Company's net
yield on its earning assets.
INTEREST INCOME
During the year ended December 31, 1998, the Company earned $8.5 million
in interest income, or an increase of 8.1% as compared to the $7.9 million
earned for the year ended June 30, 1997. The improvement in net interest income
was primarily due to volume increases in the securities and loan portfolios.
Average securities increased to $27.5 million during the year ended December
31, 1998, an increase of 26.4% over an average balance of $21.7 million for the
year ended June 30, 1997. Average total loans increased 5.2% to $76.8 million
during the year ended December 31, 1998 from $73.1 million for the year ended
June 30, 1997. Increases in securities resulted from investing of proceeds from
the Company's public offering and deposit growth during the period that
exceeded corresponding loan growth. Loan growth experienced during the period
occurred primarily in commercial and consumer loans. Commercial loans were
$21.1 million at December 31, 1998, an increase of 46.0% and 49.8% over the
$14.5 million and $14.1 million outstanding at December 31, 1997 and June 30,
1997, respectively, while consumer loans were $11.9 million at December 31,
1998, an increase of 26.1% and 34.7% over the $9.4 million and $8.8 million
outstanding at December 31, 1997 and June 30, 1997, respectively. The Bank
aggressively targeted these customers during the period and incorporated
pricing and marketing strategies necessary to attract quality commercial and
consumer customers. Real estate mortgage loans (including real estate
construction loans) decreased by 4.6% and 7.3% during 1998 when compared to
December 31, 1997 and June 30, 1997, respectively. This decrease primarily
resulted from increased competition from mortgage lenders offering low,
long-term fixed rate mortgages during a period of falling interest rates.
During the six months ended December 31, 1998, the Company earned $4.3
million in interest income, or an increase of 2.1% as compared to the $4.2
million earned during the six months ended December 31, 1997. Again, the
improvement in net interest income was primarily due to volume increases in the
securities and loan portfolios. Average earning assets during the six months
ended December 31, 1998 increased $8.3 million, or 8.1%, over the same period
of 1997. The yield on average earning assets during the six months ended
December 31, 1998 was 7.98%, 25 basis points lower than the 8.23% for the same
period of 1997, while yields on average loans decreased 30 basis points to
8.71%, and yields on average securities increased 22 basis points to 6.35%,
when compared to the same period of 1997.
INTEREST EXPENSE
Interest expense was $4.4 million during the year ended December 31, 1998,
a 3.0% increase over the $4.2 million during the year ended June 30, 1997. The
increase was primarily due to average interest-bearing liabilities increasing
5.6% to $92.9 million during the year ended December 31, 1998 from $87.9
million at June 30, 1997. The cost of interest-bearing liabilities was 4.70%
during the year ended December 31, 1998, 12 basis points less than the 4.82%
during the year ended June 30, 1997. Total average deposits, including
noninterest-bearing, increased 9.5% to $99.7 million during the year ended
December 31, 1998, from $89.0 million during the year ended June 30, 1997.
Including noninterest-bearing deposits in the mix lowers the Company's cost of
funds to 4.38% for the year ended December 31, 1998, compared to 4.66% for the
year ended June 30, 1997. The increase in total deposits and the decrease in
the cost of funds primarily resulted from growth in lower costing commercial
and consumer deposit relationships, consistent with management's concerted
efforts in growing these areas and being less aggressive in pricing time
deposits. A lower interest rate environment also contributed to a lower cost of
funds.
<PAGE>
SHORE FINANCIAL CORPORATION
7
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Interest expense was $2.2 million during the six months ended December 31,
1998, relatively flat when compared to the same period of 1997. Average
interest-bearing liabilities increased 2.7% to $94.4 million during the six
months ended December 31, 1998 from $91.8 million in the same period of 1997.
The cost of interest-bearing liabilities was 4.68% during the year ended
December 31, 1998, 14 basis points less than the 4.82% in the same period of
1997. Including noninterest-bearing deposits lowers the December 1998 period's
cost of funds to 4.34%, compared to 4.63% for the June 1997 period. Again, the
increase in average deposits and decrease in cost of funds primarily results
from growth in lower costing commercial and consumer deposit relationships.
NET INTEREST INCOME
Net interest income was $4.1 million during the year ended December 31,
1998, 14.0% greater than the $3.6 million reported during the year ended June
30, 1997. The Bank benefited from an increase in net interest margin, 4.00%
during the year ended December 31, 1998 compared to 3.78% during the year ended
June 30, 1997. This increase primarily resulted from the increased investment
and lending activities, a 124.0% increase in average noninterest-bearing
deposits and a change in the interest-bearing deposit mix from higher costing
time deposits to lower costing demand deposit accounts. As discussed above, the
increase in lower costing and noninterest-bearing demand deposit accounts has a
significant impact on the Bank's cost of funds. Management intends to continue
this trend in deposit mix in hopes of further improving the Bank's net interest
margin.
Net interest income was $2.1 million during the six months ended December
31, 1998, 4.7% greater than the $2.0 million reported during the same period of
1997. This trend resulted from the same reasons mentioned above; improved
lending and investing activities, increases in noninterest-bearing deposits and
changes in the interest-bearing deposit mix. The net interest margin was 3.98%
during the six months ended December 31, 1998, compared to 3.89% during the
same period of 1997.
<PAGE>
SHORE FINANCIAL CORPORATION
8
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The following tables illustrate 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 average balances for periods ended December 31,
1998 and 1997 and monthly averages for the year ended June 30, 1997.
<TABLE>
<CAPTION>
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
-----------------------------------------------------------------
YEARS ENDED
-----------------------------------------------------------------
DECEMBER 31, JUNE 30,
1998 1997
-------------------------------- --------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities (1) $ 27,486 $1,744 6.34% $21,740 $1,406 6.47%
Loans (net of unearned
income):
Real Estate Mortgage 46,455 3,998 8.61% 50,797 4,207 8.28%
Real Estate
Construction 1,370 103 7.52% 1,130 107 9.47%
Commercial 17,824 1,604 9.00% 12,823 1,272 9.92%
Home Equity Lines 5,515 511 9.26% 4,341 412 9.49%
Consumer 5,668 548 9.68% 3,960 406 10.25%
-------- ------ ------- ------
Total loans 76,832 6,764 8.80% 73,051 6,404 8.77%
-------- ------ ------- ------
Federal funds sold 0 0 0.00% 0 0 0.00%
Interest-bearing deposits
in other banks 3,238 162 5.00% 835 45 5.39%
-------- ------ ------- ------
Total earning assets 107,556 8,670 8.06% 95,626 7,855 8.21%
-------- ------ ------- ------
Less: allowance for loan
losses (782) (604)
Total nonearning assets 6,822 4,864
-------- -------
Total assets $113,596 $99,886
======== =======
LIABILITIES
Interest-bearing
deposits:
Checking and savings $ 25,059 $ 635 2.53% $19,936 $ 491 2.46%
Time deposits 67,711 3,729 5.51% 66,059 3,663 5.55%
-------- ------ ------- ------
Total interest-
bearing deposits 92,770 4,364 4.70% 85,995 4,154 4.83%
FHLB advances 85 3 3.53% 1,952 86 4.41%
-------- ------ ------- ------
Total interest-
bearing liabilities 92,855 4,367 4.70% 87,947 4,240 4.82%
------ ------
Non-interest bearing
liabilities:
Demand deposits 6,802 3,036
Other liabilities 848 1,017
-------- -------
Total liabilities 100,505 92,000
Stockholders' equity 13,091 7,886
-------- -------
Total liabilities and
stockholders' equity $113,596 $99,886
======== =======
Net interest income $4,303 $3,615
====== ======
Interest rate spread (1) 3.36% 3.39%
Net interest margin (1) 4.00% 3.78%
<CAPTION>
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
-----------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities (1) $ 28,560 $ 906 6.35% $ 25,664 $ 786 6.13%
Loans (net of unearned
income):
Real Estate Mortgage 48,815 2,056 8.42% 49,912 2,152 8.62%
Real Estate
Construction 1,370 56 8.18% 1,502 71 9.45%
Commercial 16,889 768 9.10% 14,276 709 9.93%
Home Equity Lines 5,526 255 9.25% 4,738 225 9.50%
Consumer 5,668 274 9.67% 4,342 213 9.81%
-------- ------ -------- ------
Total loans 78,268 3,410 8.71% 74,770 3,370 9.01%
-------- ------ -------- ------
Federal funds sold 0 0 0.00% 0 0 0.00%
Interest-bearing deposits
in other banks 3,579 89 4.97% 1,664 44 5.29%
-------- ------ -------- ------
Total earning assets 110,407 4,405 7.98% 102,098 4,200 8.23%
-------- ------ -------- ------
Less: allowance for loan
losses (795) (771)
Total nonearning assets 6,643 7,119
-------- --------
Total assets $116,255 $108,446
======== ========
LIABILITIES
Interest-bearing
deposits:
Checking and savings $ 27,254 $ 362 2.66% $ 22,208 $ 263 2.37%
Time deposits 67,014 1,843 5.50% 69,495 1,947 5.60%
-------- ------ -------- ------
Total interest-
bearing deposits 94,268 2,205 4.68% 91,703 2,210 4.82%
FHLB advances 95 2 4.21% 141 3 4.26%
-------- ------ -------- ------
Total interest-
bearing liabilities 94,363 2,207 4.68% 91,844 2,213 4.82%
------ ------
Non-interest bearing
liabilities:
Demand deposits 7,424 3,813
Other liabilities 915 904
-------- --------
Total liabilities 102,702 96,561
Stockholders' equity 13,553 11,885
-------- --------
Total liabilities and
stockholders' equity $116,255 $108,446
======== ========
Net interest income $2,198 $1,987
====== ======
Interest rate spread (1) 3.30% 3.41%
Net interest margin (1) 3.98% 3.89%
</TABLE>
(1) TAX EQUIVALENT BASIS.
<PAGE>
SHORE FINANCIAL CORPORATION
9
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The following table describes the impact on the interest income of the
Company resulting from changes in average balances and average rates for the
periods indicated. The change in interest due to the mixture of volume and rate
has been allocated solely to rate changes.
<TABLE>
<CAPTION>
VOLUME AND RATE ANALYSIS
-------------------------------------------------------------------
YEARS ENDED
-------------------------------------------------------------------
DECEMBER 31, 1998 COMPARED TO JUNE 30, 1997 COMPARED TO
JUNE 30, 1997 JUNE 30, 1996
---------------------------------- --------------------------------
CHANGE DUE TO: CHANGE DUE TO:
---------------------------------- --------------------------------
INCREASE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
--------- ----------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities $ 372 $ (34) $ 338 $ 586 $ 48 $ 634
Loans (net of unearned income):
Real Estate Mortgage (360) 150 (210) (45) (40) (85)
Real Estate Construction 23 (27) (4) (28) (3) (31)
Commercial 496 (164) 332 343 (45) 298
Home Equity Lines 111 (12) 99 43 (11) 32
Consumer 176 (33) 143 83 0 83
------- ----- -------- ------ -------- -------
Total loans 446 (86) 360 396 (99) 297
------- ----- -------- ------ -------- -------
Federal funds sold 0 0 0 (37) 0 (37)
Interest-bearing deposits in
other banks 130 (13) 117 (107) 0 (107)
------- ----- -------- ------ -------- -------
Total earning assets 948 (133) 815 838 (51) 787
======= ===== ======== ====== ======== =======
LIABILITIES
Interest-bearing deposits:
Checking and savings $ 126 $ 18 $ 144 $ (25) $ 69 $ 44
Time deposits 92 (26) 66 448 (140) 308
------- ----- -------- ------ -------- -------
Total interest-bearing
deposits 218 (8) 210 423 (71) 352
FHLB advances (82) (1) (83) 109 (58) 51
------- -------- -------- ------ -------- -------
Total interest-bearing
liabilities 136 (9) 127 532 (129) 403
------- -------- -------- ------ -------- -------
Change in net interest income 812 (124) 688 306 78 384
======= ======= ======== ====== ======== =======
<CAPTION>
VOLUME AND RATE ANALYSIS
-----------------------------------
SIX MONTHS ENDED DECEMBER 31,
-----------------------------------
1998 COMPARED TO
1997
-----------------------------------
CHANGE DUE TO:
-----------------------------------
INCREASE
VOLUME RATE (DECREASE)
---------- ------------ -----------
<S> <C> <C> <C>
ASSETS:
Securities $ 88 $ 32 $ 120
Loans (net of unearned income):
Real Estate Mortgage (47) (49) (96)
Real Estate Construction (6) (9) (15)
Commercial 130 (70) 60
Home Equity Lines 37 (7) 30
Consumer 65 (4) 61
------ -------- -----
Total loans 179 (139) 40
------ ------- -----
Federal funds sold 0 0 0
Interest-bearing deposits in
other banks 51 (6) 45
------ -------- -----
Total earning assets 318 (113) 205
====== ======= =====
LIABILITIES
Interest-bearing deposits:
Checking and savings $ 60 $ 39 $ 99
Time deposits $(70) $ (34) $(104)
------ ------- -----
Total interest-bearing
deposits (10) 15 (5)
FHLB advances $ (1) $ (0) $ (1)
------ ------- -------
Total interest-bearing
liabilities (11) 5 (6)
------ ------- --------
Change in net interest income 329 (118) 211
====== ======= =======
</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 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 an asset or liability at maturity, or by adjusting the
interest rate during the life of an asset or liability. Matching the amounts of
assets and liabilities maturing in the same time interval helps to hedge the
risk and minimize the impact on net interest income in periods of rising or
falling interest rates.
<PAGE>
SHORE FINANCIAL CORPORATION
10
- --------------------------------------------------------------------------------
Management's Discussion and Analysis (CONTINUED)
The Company 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 Company's interest sensitivity position
at December 31, 1998. This one-day position, which continually is changing, is
not necessarily indicative of the Bank's position at any other time.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
--------------------------------------------------------------------------
DECEMBER 31, 1998
--------------------------------------------------------------------------
WITH-IN 91-365 1 TO 5 OVER
90 DAYS DAYS YEARS 5 YEARS TOTAL
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans $ 17,419 $ 20,419 $ 29,888 $ 12,853 $ 80,579
Securities 2,746 2,885 17,269 9,149 32,049
Money market and other short term securities 1,442 -- -- -- 1,442
--------- -------- -------- --------- ---------
Total earning assets $ 21,607 $ 23,304 $ 47,157 $ 22,002 $ 114,070
========= ======== ======== ========= =========
Cummulative earning assets $ 21,607 $ 44,911 $ 92,068 $ 114,070 $ 114,070
========= ======== ======== ========= =========
Interest-Bearing Liabilities:
Money market savings $ 7,449 $ -- $ -- $ -- $ 7,449
Interest checking -- -- 10,595 -- 10,595
Savings -- -- 10,923 -- 10,923
Certificates of deposit 9,715 32,955 20,655 4,705 68,030
FHLB advances 1,000 -- -- 74 1,074
--------- -------- -------- --------- ---------
Total interest-bearing liabilities $ 18,164 $ 32,955 $ 42,173 $ 4,779 $ 98,071
========= ======== ======== ========= =========
Cummulative interest-bearing liabilities $ 18,164 $ 51,119 $ 93,292 $ 98,071 $ 98,071
Period gap $ 3,443 $ (9,651) $ 4,984 $ 17,223 $ 15,999
Cummulative gap $ 3,443 $ (6,208) $ (1,224) $ 15,999 $ 15,999
Ratio of cummulative interest-earning assets to
interest-bearing liabilities 118.96% 87.86% 98.69% 116.31% 116.31%
Ratio of cummulative gap to total earning assets 3.02% -5.44% -1.07% 14.03% 14.03%
</TABLE>
(1) INCLUDES NONACCRUAL LOANS OF $668,000, WHICH ARE INCLUDED IN THE 1 TO 5
YEARS CATEGORY.
(2) MANAGEMENT HAS DETERMINED THAT INTEREST CHECKING AND SAVINGS ACCOUNTS ARE
NOT SENSITIVE TO CHANGES IN RELATED MARKET RATES AND, THEREFORE, THEY ARE
PLACED IN THE 1 TO 5 YEARS CATEGORY.
NONINTEREST INCOME
During the year ended December 31, 1998, noninterest income increased
28.2% to $945,000, compared to $737,000 for the year ended June 30, 1997. The
increase is primarily attributable to increases in the numbers of consumer and
commercial checking accounts and the deposit fees that they generate. Checking
accounts generate fees including insufficient funds, check order mark-ups,
cashiers checks, service charges, ATM and others. These fees are core earnings
that are not interest sensitive and have provided a stable source of income for
the Bank. Deposit account fees for the year ended December 31, 1998 increased
32.1% to $587,000, compared to $445,000 for the year ended June 30, 1997. Other
factors affecting noninterest income during the periods presented include
$132,000 in net gains on sales of investments during the year ended December
31, 1998, compared to $21,000 in net losses on sales of investments for the
year ended June 30, 1997, and $15,000 in net losses on sales of various real
estate during the year ended December 31, 1998, compared to $107,000 in net
gains on sales of real estate during the year ended June 30, 1997.
During the six months ended December 31, 1998, noninterest income
increased 72.0% to $559,000, compared to $325,000 for the same period of 1997.
The increase is attributable to increases in the numbers of checking accounts
and the deposit fees that they generate and gains on sales of investments.
Deposit account fees for the six months ended December 31, 1998 increased 38.3%
to $331,000, compared to $239,000 for the same period in 1997. Net gains on
sales of investments were $101,000 for the 1998 period compared to none in
1997.
<PAGE>
SHORE FINANCIAL CORPORATION
11
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
NONINTEREST EXPENSE
For the year ended December 31, 1998, noninterest expense increased 2.3%
to $2.9 million, compared to $2.8 million for the year ended June 30, 1997. The
June 1997 period includes approximately $447,000 in expense related to the
nonrecurring SAIF assessment that occurred in September 1996. Excluding this
assessment, noninterest expense increased 21.8%, primarily resulting from the
addition of the new Salisbury branch and expenses incurred relating to planned
technological and other corporate equipment upgrades implemented for improved
operating efficiencies and in preparation for the Year 2000. Compensation and
benefits increased by 20.1% to $1.3 million during the year ended December 31,
1998 when compared to $1.1 million for the year ended June 30, 1997, primarily
resulting from the additional Salisbury branch and annual salary adjustments.
Occupancy and equipment increased 29.8% to $644,000 during the year ended
December 31, 1998, compared to $496,000 for the year ended June 30, 1997. The
technological and other bank equipment upgrades and the additional Salisbury
branch contributed significantly to this increase. Excluding the SAIF
assessment of $447,000, deposit insurance premiums decreased 49.0% to $59,000
for the year ended December 31, 1998, compared to $115,000 for the year ended
June 30, 1997. Other noninterest expense increased 37.9% to $355,000 for the
year ended December 31, 1998, compared to $257,000 for the year ended June 30,
1997. This increase primarily resulted from higher legal and professional fees
associated with operating as a public company, increased loan costs resulting
from the increased loan volume during 1998, and a fluctuations in deposit
account bad debts and recoveries.
For the six months ended December 31, 1998, noninterest expense increased
to $1.45 million, or 6.3%, compared to $1.36 million during the same period in
1997. This increase primarily resulted from compensation increases occurring in
September 1998 and the downtown Salisbury branch. The other expense categories
making up total noninterest expense remained relatively flat during the six
months ended December 31, 1998 when compared to the same period in 1997.
Management put added emphasis on reducing expenses during 1998 which helped
control expense levels, especially when compared to 1997.
FINANCIAL CONDITION
LOAN PORTFOLIO
The Bank's loan portfolio is comprised of commercial loans, construction
loans, real estate mortgage loans, home equity loans, and consumer loans. The
primary market areas in which the Bank makes loans are the counties of Accomack
and Northampton, Virginia and Salisbury/Wicomico County, Maryland.
Total loans (net of deferred fees and costs) increased to $80.6 million, a
9.2% increase over the $73.7 million outstanding at December 31, 1997 and a
8.5% increase over the $74.1 million outstanding at June 30, 1997. Growth in
commercial and consumer loans (including home equity lines) constituted the
majority of this increase, consistent with management's plans of shifting
towards a typical commercial bank's loan portfolio mix. Commercial loans
increased by 46.0% and 49.8% over the December 31, 1997 and June 30, 1997
periods, respectively, while consumer loans increased by 26.1% and 34.7% over
the same periods, respectively. Real estate mortgage loans (including real
estate construction loans) decreased by 4.6% and 7.3% during 1998 when compared
to December 31, 1997 and June 30, 1997, respectively. Increases in loans also
is attributable to the Bank's continued growth in the Salisbury/Wicomico
County, Maryland market area. This market accounted for approximately $14.7
million, or 18.2%, of total loans at December 31, 1998.
<PAGE>
SHORE FINANCIAL CORPORATION
12
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The following table summarizes the composition of the Bank's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
LOAN PORTFOLIO
---------------------------------------
DECEMBER 31,
----------------------- JUNE 30,
1998 1997 1997
---------- ---------- -------------
<S> <C> <C> <C>
Commercial (1) $21,102 $14,450 $14,087
Real Estate Construction (2) 1,736 958 1,696
Real Estate Mortgage 45,765 48,850 49,546
Home Equity Lines of Credit 5,582 5,283 4,547
Consumer 6,288 4,131 4,266
------- ------- -------
Total loans 80,473 73,672 74,142
Less:
Deferred loan (fees) cost, net 106 (12) (7)
Allowance for loan losses (920) (770) (744)
------- ------- --------
Net loans $79,659 $72,890 $73,391
======= ======= ========
</TABLE>
(1) INCLUDES COMMERCIAL REAL ESTATE LOANS OF APPROXIMATELY $17.5 MILLION, $11.3
MILLION AND $10.9 MILLION FOR THE RESPECTIVE PERIODS INDICATED ABOVE.
(2) AMOUNTS ARE DISCLOSED NET OF LOANS IN PROCESS OF APPROXIMATELY $1.8
MILLION, $660,000 AND $1.2 MILLION FOR THE RESPECTIVE PERIODS INDICATED
ABOVE.
The following table sets forth the composition of the Bank's loan
portfolio by percentage at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Commercial 26.22% 19.61% 19.00%
Real Estate Construction 2.16% 1.30% 2.29%
Real Estate Mortgage 56.87% 66.31% 66.83%
Home Equity Lines of Credit 6.94% 7.17% 6.13%
Consumer 7.81% 5.61% 5.75%
------ ------ ------
Total loans 100.00% 100.00% 100.00%
====== ====== ======
</TABLE>
The following table presents the maturities of selected loans outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
MATURITY SCHEDULE OF PERIOD END LOANS
-------------------------------------------------------------------------------------
DECEMBER 31, 1998
-------------------------------------------------------------------------------------
1 YEAR OR LESS 1 TO 5 YEARS AFTER 5 YEARS
---------------------- ----------------------- ---------------------
FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE
RATE RATE RATE RATE RATE RATE TOTAL
--------- ---------- ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Residential and Commercial Mortgages (1) $ 6,062 $4,523 $20,881 $6,338 $7,593 $21,470 $66,867
Real estate construction 1,736 -- -- -- -- -- 1,736
Home Equity Lines of Credit 451 5,044 -- 27 -- 60 5,582
Consumer 2,280 34 3,167 -- 807 -- 6,288
------- ------ ------- ------ ------ ------- -------
Total $10,529 $9,601 $24,048 $6,365 $8,400 $21,530 $80,473
======= ====== ======= ====== ====== ======= =======
</TABLE>
(1) INCLUDES MORTGAGES WITH TERMS THAT INCLUDE 3 AND 5-YEAR BALLOON PAYMENT
FEATURES IN THE 1 TO 5 YEARS AND AFTER 5 YEARS FIXED RATE CATEGORY.
<PAGE>
SHORE FINANCIAL CORPORATION
13
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
SECURITIES
Effective June 30, 1995, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115,
when securities are purchased, they are classified as securities held to
maturity when management has the positive intent and the Company has the
ability to hold them until maturity. These investment securities are carried at
cost adjusted for amortization of premium and accretion of discounts.
Unrealized losses in the portfolio are not recognized unless management of the
Company believes that an other than temporary decline has occurred. Securities
held for indefinite periods of time and not intended to be held to maturity are
classified as available for sale at the time of purchase. Securities available
for sale are recorded at fair value. The net unrealized holding gain or loss on
securities available for sale, net of deferred income taxes, is included as a
separate component of stockholders' equity. A decline in the fair value of any
securities available for sale below cost, that is deemed other than temporary,
is charged to earnings and results in a new cost basis for the security. Cost
of securities sold are determined on the basis of specific identification. The
Company holds no securities classified as trading.
INVESTMENT SECURITIES. The carrying value of investment securities
(effected for all applicable SFAS No. 115 adjustments) amounted to $32.0
million at December 31, 1998, compared to $26.3 million and $23.4 million at
December 31, 1997 and June 30, 1997, respectively. The comparison of amortized
cost to fair value is shown in Note 3 of the notes to the financial statements.
Note 3 also provides an analysis of gross unrealized gains and losses of
investment securities. Investment securities consist of the following:
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO
-----------------------------------
DECEMBER 31,
----------------------- JUNE 30,
1998 1997 1997
---------- ---------- ---------
<S> <C> <C> <C>
Amortized Cost:
U.S. Treasury and other
U.S. government agencies $16,814 $21,733 $17,734
Tax-exempt municipal bonds 7,429 851 3,039
State agency bonds 1,000 1,000 --
Mortgage-backed securities 205 595 684
Adjustable Rate Loan Funds 1,579 1,175 1,140
FHLMC stock 4 4 573
Preferred stock 2,156 500 --
Corporate bonds 2,022 -- --
Other equity securities 324 136 136
------- ------- -------
Total Securities $31,533 $25,994 $23,306
======= ======= =======
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
14
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
SECURITIES AVAILABLE FOR SALE. Securities available for sale are used as
part of the Company's interest rate risk management strategy and may be sold in
response to changes in interest rates, changes in prepayment risk, liquidity
needs, the need to increase regulatory capital and other factors. The fair
value of securities available for sale totaled $28.4 million at December 31,
1998, compared to $21.0 million and $15.4 million at December 31, 1997 and June
30, 1997, respectively. The comparison of fair market value to amortized cost
is shown in Note 3 of the notes to the financial statements. Note 3 also
provides an analysis of gross unrealized gains and losses of securities
available for sale. The following summarizes available for sale securities for
the respective periods.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
-----------------------------------
DECEMBER 31,
----------------------- JUNE 30,
1998 1997 1997
---------- ---------- ---------
<S> <C> <C> <C>
Fair Value:
U.S. Treasury and other
U.S. government agencies $14,467 $17,576 $12,094
Tax-exempt municipal bonds 6,488 126 1,000
State agency bonds 1,020 1,021 --
Mortgage-backed securities -- 285 345
Adjustable Rate Loan Funds 1,573 1,176 1,141
FHLMC stock 271 176 716
Preferred stock 2,168 513 --
Corporate bonds 2,031 -- --
Other equity securities 334 157 149
------- ------- -------
Total Securities $28,352 $21,030 $15,445
======= ======= =======
</TABLE>
The following table sets forth the maturity distribution and weighted
average yields of the securities portfolio at December 31, 1998. The weighted
average yields are calculated on the basis of book value of the investment
portfolio and on the interest income of investments adjusted for amortization
of premium and accretion of discount.
<TABLE>
<CAPTION>
MATURITIES OF INVESTMENTS
--------------------------------------------------------------------------
DECEMBER 31, 1998
--------------------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------------------------ -----------------------------------
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
----------- --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies
Within one year $1,491 $1,494 5.50% $ 3,800 $ 3,822 6.18%
After one year to five years 1,000 1,003 6.34% 5,491 5,557 5.99%
After five years -- -- -- 5,032 5,088 6.42%
------ ------ ------- -------
Total $2,491 $2,497 $14,323 $14,467
------ ------ ------- -------
Other Securities:
Within one year -- -- -- 125 126 7.86%
After one year to five years 1,205 1,205 6.17% 9,203 9,559 7.04%
After five years -- -- -- 4,186 4,201 6.20%
------ ------ ------- -------
Total 1,205 1,205 13,514 13,886
------ ------ ------- -------
Total Securities $3,696 $3,702 $27,837 $28,353
====== ====== ======= =======
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
15
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
DEPOSITS
The Bank depends on deposits to fund its lending activities, generate fee
income opportunities, and create a captive market for loan products. The table
below presents a history of average deposits and the rates paid on
interest-bearing deposit accounts for the periods indicated.
<TABLE>
<CAPTION>
AVERAGE DEPOSITS AND AVERAGE RATES PAID
----------------------------------------------------------------------------------
YEARS ENDED SIX MONTHS ENDED DECEMBER 31,
--------------------------------------- ------------------------------------------
DECEMBER 31, JUNE 30,
1998 1997 1998 1997
------------------- ------------------- --------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
--------- --------- --------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Checking and savings $25,059 2.53% $19,936 2.46% $ 27,254 2.66% $22,208 2.37%
Certificates of deposit:
Less than $100,000 57,760 5.47% 57,453 5.55% 57,145 5.44% 60,232 5.60%
$100,000 and over 9,951 5.74% 8,606 5.92% 9,869 5.68% 9,263 5.78%
------- ------- -------- -------
Total interest-bearing deposits 92,770 4.70% 85,995 4.83% 94,268 4.68% 91,703 4.82%
Noninterest-bearing deposits 6,802 3,036 7,424 3,813
------- ------- -------- -------
Total average deposits $99,572 $89,031 $101,692 $95,516
======= ======= ======== =======
</TABLE>
Deposits averaged $99.6 million during the year ended December 31, 1998,
an increase of 11.9% over the $89.0 million during the year ended June 30,
1997. Deposits averaged $101.7 million during the six months ended December 31,
1998, an increase of 6.5% over the $95.5 million during the same period in
1997. Categories accounting for the largest portion of the increase include
interest-bearing checking and savings accounts and noninterest-bearing
accounts. This is attributable to management's efforts in increasing consumer
and commercial deposit relationships which tend to be lower costing.
The following table is a summary of the maturity distribution of
certificates of deposit in amounts of $100,000 or more as December 31, 1998.
<TABLE>
<CAPTION>
MATURITIES OF CD'S OF
$100,000 OR MORE
----------------------
DECEMBER 31, 1998
----------------------
AMOUNT PERCENT
-------- -----------
<S> <C> <C>
Three months or less $1,693 16.96%
Over three months to one year 4,932 49.40%
Over one year to five years 2,380 23.84%
Over five years 978 9.80%
------ ------
Total $9,983 100.00%
====== ======
</TABLE>
CAPITAL RESOURCES
Capital represents funds, earned or obtained, over which banks can
exercise greater control in comparison with deposits and borrowed funds. The
adequacy of the Company's capital is reviewed by management on an ongoing basis
with reference to the size, composition, and quality of the Company's resources
and consistent with regulatory requirements and industry standards. Management
seeks to maintain a capital structure that will support anticipated asset
growth and absorb potential losses.
Banking regulations established to ensure capital adequacy require the
Company and its Banking Subsidiary to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1998, that the Company meets
all capital adequacy requirements to which it is subject.
<PAGE>
SHORE FINANCIAL CORPORATION
16
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The following table details the components of Tier 1 and Tier 2 capital
and related ratios for the periods indicated.
<TABLE>
<CAPTION>
ANALYSIS OF CAPITAL
---------------------------------------
DECEMBER 31,
------------------------- JUNE 30,
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Tier 1 Capital:
Common stock $ 598 $ 596 $ 453
Additional paid-in capital 3,585 3,564 602
Retained earnings 9,265 8,000 7,441
Comprehensive income 341 170 73
------- ------- -------
Total capital (GAAP) 13,789 12,330 8,569
Less: Intangibles (41) (45) (47)
Unrealized (gains) losses (341) (170) (73)
------- ------- -------
Total Tier 1 capital $13,407 $12,115 $ 8,449
======= ======= =======
Tier 2 Capital:
Allowances for loan losses 920 732 726
Other required deductions 127 (155) (163)
------- ------- -------
Total Tier 2 capital 14,454 12,692 9,012
======= ======= =======
Risk-weighted assets $74,400 $58,521 $58,036
Capital Ratios (1):
Tier 1 risk-based capital ratio 18.02% 20.70% 14.56%
Total risk-based capital ratio 19.43% 21.69% 15.53%
Tier 1 capital to average adjusted total assets 11.80% 11.39% 8.46%
</TABLE>
(1) 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 TO AVERAGE ADJUSTED
ASSETS WAS 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.
ASSET QUALITY
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses represents an
amount management believes is adequate to provide for probable loan losses
inherent in the loan portfolio. In recent years, the Bank has begun to focus on
diversifying its loan portfolio by emphasizing and expanding its commercial and
consumer lending programs, which generally involve greater risk than
residential mortgage lending. Considering this shift in lending emphasis,
together with the Bank's expansion into the new Salisbury/Wicomico County
market, management in recent years has provided for probable loan losses which
may result from the greater inherent risk present in these loan products by
increasing its allowance for loan losses in accordance with SFAS No. 5,
Accounting for Contingencies. However, risks of future losses cannot be
quantified precisely or attributed to particular loans or classes of loans.
Because those risks are influenced by general economic trends as well as
conditions affecting individual borrowers, management's judgment of the
allowance is necessarily approximate and imprecise. The allowance is also
subject to regulatory examinations and determinations as to adequacy, which may
take into account such factors as the methodology used to calculate the
allowance and the size of the allowance in comparison to peer banks identified
by regulatory agencies.
<PAGE>
SHORE FINANCIAL CORPORATION
17
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Set forth below is a table detailing the allowance for loan losses for the
periods indicated.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
--------------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31,
---------------------------- -------------------------
DECEMBER 31, JUNE 30,
1998 1997 1998 1997
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 770 $ 674 $ 764 $ 744
Loans charged off:
Commercial 26 135 0 26
Real estate construction 0 0 0 0
Real estate mortgage 32 14 8 0
Home equity lines of credit 0 0 0 0
Consumer 88 28 53 16
--------- --------- --------- ---------
Total loans charged-off 146 177 61 42
--------- --------- --------- ---------
Recoveries:
Commercial 0 1 0 1
Real estate construction 0 0 0 0
Real estate mortgage 11 0 11 0
Home equity lines of credit 0 0 0 0
Consumer 5 2 2 1
--------- --------- --------- ---------
Total recoveries 16 3 13 2
--------- --------- --------- ---------
Net charge-offs (130) (174) (48) (40)
Provision for loan losses 280 244 204 66
--------- --------- --------- ---------
Balance, end of period $ 920 $ 744 $ 920 $ 770
========= ========= ========= =========
Allowance for loan losses to loans
outstanding at end of period 1.14% 1.00% 1.14% 1.05%
Allowance for loan losses to nonaccrual
loans outstanding at end of period 137.72% 181.46% 137.72% 204.24%
Net charge-offs to average loans
outstanding during period -0.17% -0.24% -0.06% -0.05%
</TABLE>
For the year ended December 31, 1998, the Bank experienced net charge-offs
of $130,000, compared to net charge-offs of $174,000 for the year ended June
30, 1997. Also included in the table above is the ratio of net charge-offs to
average loans outstanding during the period, which was a negative 0.17% during
the year ended December 31, 1998 compared to a negative 0.24% during the year
ended June 30, 1997. A significant amount of net charge-offs incurred during
the year ended June 30, 1997 related to 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. Write-offs
incurred during the year ended December 31, 1998 primarily related to various
consumer and real estate loans that were either deemed uncollectible or
foreclosed on.
For the six months ended December 31, 1998, the Bank experienced net
charge-offs of $48,000 compared to $40,000 for the same period in 1997. Net
charge-offs to average loans outstanding during the periods remained relatively
stable at a negative 0.06% in 1998 compared to a negative 0.05% in 1997.
At December 31, 1998 and 1997, the Bank identified loans to one borrower
totaling $318,000 and $313,000, respectively, that qualify as impaired under
the guidelines established by SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures. Amounts identified
at each period end were to the same borrower and management has been working
with this individual to obtain full repayment. The Bank restructured these
loans during April 1998, combining two of the loans, terming them out over an
extended period and taking additional collateral to further secure the
outstanding loans. However, the loan customer
<PAGE>
SHORE FINANCIAL CORPORATION
18
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
continues to be behind in payments and management still considers the loans
impaired in accordance with SFAS No. 114 (as amended). Accordingly, the Bank
continues to maintain the loans in nonaccrual status, even as payments are
made.
The allowance for loan losses at December 31, 1998 was $920,000, compared
to $770,000 and $744,000 at December 31, 1997 and June 30, 1997, respectively,
representing an increase of 19.5% and 23.7 in the allowance compared to the
respective periods.
In fiscal 1995, the Bank expanded into the Salisbury/Wicomico County
market in Maryland by establishing a de novo branch office. In view of the
business and population growth in that market area, the Bank focused on
expanding its commercial and consumer lending, both secured and unsecured. Due
to the Bank's relative inexperience with both this type of lending and the
Salisbury/Wicomico County market, and its corresponding lack of loan loss
history with respect to commercial and consumer lending, the Bank determined
the prudent course was to increase the allowance for loan losses at a more
rapid rate than in past years. The Bank also considered the historical
allowance levels maintained by peer community banks and thrifts engaged in
commercial lending. The allowance for loan losses as a percentage to period end
loans equaled 1.14% at December 31, 1998, compared to 1.05% and 1.00% at
December 31, 1997 and June 30, 1997, respectively. The ratio of the allowance
for loan losses as a percentage of nonaccrual loans outstanding decreased at
December 31, 1998 to 137.72%, compared to 204.24% and 181.46% at December 31,
1997 and June 30, 1997, respectively. This decrease primarily was attributable
to the $318,000 impaired loan existing at December 31, 1998 being classified as
nonaccrual. Management believes that allowances for losses existing at December
31, 1998 are sufficient to cover any anticipated or unanticipated losses on
loans outstanding in accordance with SFAS No. 5, Accounting for Contingencies.
An allocation of the allowance for loan losses in dollars and as a percent
of the total allowance is provided in the following tables. Because all of
these factors are subject to change, the allocation is not necessarily
predictive of future loan losses in the indicated categories.
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
--------------------------------------------------------------------------------
COMMERCIAL REAL ESTATE CONSUMER
------------------------- ------------------------- ------------------------
RESRVE PERCENTAGE RESERVE PERCENTAGE RESERVE PERCENTAGE
FOR LOAN OF LOAN FOR LOAN OF LOAN FOR LOAN OF LOAN
LOSSES ALLOWANCE LOSSES ALLOWANCE LOSSES ALLOWANCE
---------- ------------ ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
December 31,
1998 $485 52.72% $208 22.61% $227 24.67%
1997 356 46.23% 234 30.39% 180 23.38%
June 30,
1997 $392 52.69% $184 24.73% $168 22.58%
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
19
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The following table details information concerning nonaccrual and past due
loans, as well as foreclosed assets.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Nonaccrual loans:
Commercial 0 0 0
Real Estate Construction 0 0 0
Real Estate Mortgage 555 306 399
Home equity lines of credit 0 0 0
Consumer 113 71 11
--- --- ---
Total nonaccrual loans 668 377 410
Other real estate owned 49 446 620
--- --- ---
Total nonperforming assets $ 717 $ 823 $ 1,030
========= ========= =========
Loans past due 90 or more days accruing interest $ 0 $ 0 $ 0
Allowance for loan losses to nonaccrual loans 137.72% 204.24% 181.46%
Nonperforming assets to period end loans and
other real estate owned 0.89% 1.11% 1.38%
</TABLE>
Total nonperforming assets, which consist of nonaccrual loans and
foreclosed properties, net of allowance for other real estate losses, were
$717,000 at December 31, 1998, compared to $823,000 and $1.03 million at
December 31, 1997 and June 30, 1997, respectively. The table above indicates
that as of December 31, 1998, the Bank had no loans past due more than 90 days
that were still accruing interest. The Bank's policy is that whenever a loan
reaches 90 days delinquent the loan no longer accrues interest. As discussed
above, approximately $318,000 in impaired loans were included in nonperforming
assets at December 31, 1998.
As to the nonaccrual loans at December 31, 1998 referred to above,
approximately $22,000 of interest income would have been recognized during the
year then ended, if interest thereon had been accrued.
The ratio of nonperforming assets to period end loans and foreclosed
properties is also detailed within the table above. This ratio was 0.89% at
December 31, 1998, compared to 1.11% and 1.38% at December 31, 1997 and June
30, 1997, respectively. The primary reason for this decrease stems from the
increase in commercial and consumer loans in recent years and the ability of
the Bank to grow these loans without jeopardizing internal credit risk
guidelines.
A significant portion of the total nonperforming assets at December 31,
1997 and June 30, 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 December 31, 1998 consisted of two parcels of real estate of
which management anticipates that net proceeds from the sale of the collateral
will cover the remaining carrying value.
The Bank closely monitors loans that are deemed to be potential problem
loans. Loans are viewed as potential problem loans when possible credit
problems of borrowers or industry trends cause management to have doubts as to
the ability of such borrowers to comply with current repayment terms. Those
loans are subject to regular management attention, and their status is reviewed
on a regular basis. In instances where management determines that specific
reserves should be set, the Bank takes such action as is deemed appropriate.
As of December 31, 1998, all loans 60 days or more delinquent, including
nonperforming loans, totaled $1.1 million. Additionally, performing loans
totaling $627,000 exist 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 these categories are subject to constant
management attention, and their status is reviewed on a regular basis. With the
exception of $141,000 of consumer loans, these loans are generally secured by
residential and commercial real estate with appraised values that exceed the
remaining principal balances on such loans.
<PAGE>
SHORE FINANCIAL CORPORATION
20
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
LIQUIDITY; ASSET MANAGEMENT
Liquidity represents the Company's ability to meet present and future
obligations through the sale or 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
maturing within one year. The Company's ability to obtain deposits and purchase
funds at favorable rates determines its liability liquidity. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains
overall liquidity that is sufficient to satisfy its depositor's requirements
and meet its customers' credit needs.
<TABLE>
<CAPTION>
SUMMARY OF LIQUID ASSETS
-------------------------------------------
DECEMBER 31,
---------------------------- JUNE 30,
1998 1997 1997
------------- ------------ ------------
<S> <C> <C> <C>
Cash and due from banks $ 3,901 $ 4,191 $ 3,334
Federal funds sold 0 0 0
Investment securities 1,491 699 400
Available-for-sale securities 28,352 21,030 15,445
--------- -------- --------
Total liquid assets $ 33,744 $ 25,920 $ 19,179
========= ======== ========
Deposits and other liabilities $ 106,159 95,762 $ 96,069
========= ======== ========
Ratio of liquid assets to deposits and
other liabilities 31.79% 27.07% 19.96%
========= ======== ========
</TABLE>
The summary above indicates sufficient liquidity to meet anticipated
needs. Additional sources of liquidity available to the Company include the
capacity to borrow additional funds when the need arises. The Bank has obtained
an available line of credit with the FHLB for up to $9.0 million and, at
December 31, 1998, had $1,074,000 in outstanding FHLB advances.
Total cash and cash equivalents were $3.9 million at December 31, 1998,
compared to $4.2 million and $3.3 million at December 31, 1997 and June 30,
1997, respectively. Net cash provided by operating activities was $1.8 million
for the year ended December 31, 1998, compared to $955,000 for the year ended
June 30, 1997. This increase primarily is attributable to the $447,000 one-time
SAIF assessment that occurred during the year ended June 30, 1997, the timing
of tax payments and refunds received during the periods. Net cash provided by
operating activities was $1.1 million for the six months ended December 31,
1998, compared to $289,000 for the same period in 1997. This increase primarily
resulted from increased earnings before loan loss reserves, the receipt of
approximately $100,000 in Enterprise Zone tax credits recorded in June 1997 and
the timing of income tax payments.
Net cash flows used in investing activities were $12.2 million during the
year ended December 31, 1998, compared to $11.2 million during the year ended
June 30, 1997. The majority of this increase resulted from increased net loan
originations during the year ended December 31, 1998 as compared to the year
ended June 30, 1997. Net cash flows used in investing activities were $9.3
million for the six months ended December 31, 1998, compared to $2.5 million
for the same period of 1997. The increase primarily resulted from increased
loan originations during the 1998 period and increased investment purchases
during the 1997 associated with proceeds generated from the August 1997 public
offering.
Net cash flows provided by financing activities were $10.1 million for the
year ended December 31, 1998, compared to $8.7 million for the year ended June
30, 1997. This increase primarily resulted from increased deposit growth during
1998 when compared to the year ended June 30, 1997. Net cash flows provided by
financing activities were $7.3 million for the six months ended December 31,
1998, compared to $3.1 million for the same period in 1997. A significant
portion of the 1998 deposit growth occurred during the last six months of the
year, while deposit growth was relatively flat during the last half of 1997.
The Bank occasionally finds it necessary to borrow funds on a short term
basis due to fluctuations in loan and deposit levels. The Bank has several
arrangements whereby it may borrow funds overnight and on terms.
<PAGE>
SHORE FINANCIAL CORPORATION
21
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
As a member of the FHLB, the Bank currently has borrowing capacity of $9.0
million, with the ability to substantially increase this capacity by providing
additional collateral (mortgage loans and investments) to the FHLB. At December
31, 1998, the Bank had $1,074,000 in outstanding FHLB advances.
The following table details information concerning the Bank's short term
borrowings for the periods presented.
<TABLE>
<CAPTION>
SUMMARY OF BORROWED FUNDS
-------------------------------------
DECEMBER 31,
----------------------- JUNE 30,
(DOLLARS IN THOUSANDS) 1998 1997 1997
- --------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Monthly average balance of short-term borrowings
outstanding during the period $ 11 $ 67 $ 1,750
Weighted-average interest rate on monthly average
short-term borrowings 5.30% 5.75% 5.50%
Maximum month-end balance of short-term borrowings
outstanding during the period $1,000 $ 800 $ 4,075
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table summarizes ratios considered to be significant
indicators of the Bank's profitability and financial condition during the
periods indicated.
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
----------------------------------------------------
SIX MONTHS ENDED
DECEMBER
YEAR ENDED 31,
-------------------------- -----------------------
DECEMBER 31, JUNE 30,
1998 1997 1998 1997
-------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Return on average assets 1.11% 0.95% 1.16% 1.03%
Return on average equity 9.66% 12.00% 9.93% 9.42%
Average equity to average asset ratio 11.52% 7.90% 11.66% 10.96%
</TABLE>
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, 1999. Management will assess the
impact, if any, on the Company's financial statements.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. This SOP is effective for financial statements for
fiscal years beginning after December 31, 1998. The SOP requires entities to
capitalize certain internal-use software costs once certain criteria are met.
Generally, internal costs with respect to software configuration and interface,
coding, installation to hardware, testing (including parallel processing), and
data conversion costs allowing access of old data by new systems should be
capitalized. All other data conversion costs, training, application
maintenance, and ongoing support activities should be expensed. The Company
will adopt this SOP in 1999 and does not expect it to have a material effect on
the Company's consolidated financial condition or consolidated 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
<PAGE>
SHORE FINANCIAL CORPORATION
22
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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.
EFFECTS OF INFLATION
The Company believes that its net interest income and results of
operations have not been significantly affected by inflation during the years
ended December 31, 1998 and June 30, 1997, and the six months ended December
31, 1997.
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 (collectively the Company) have adopted the five
phase plan of action developed by the Federal Financial Institutions
Examination Council to address Year 2000 issues. During phase one, awareness,
the Company developed an overall strategy and timetable for the completion of
all Year 2000 requirements by mid 1999. Phase two, assessment, involved
analyzing, prioritizing and putting each computer driven system on track for
Year 2000 compliance according to the timetable establish in the awareness
phase. During the third phase, renovation, necessary upgrades were ordered for
hardware and software. In addition, each vendor was contacted regarding their
Year 2000 progress. Phases one through three have been completed. Currently,
the Company is heavily involved with the fourth phase, validation. This phase
is the actual real life testing of all the new upgrades and components.
Furthermore, the Company is testing with its third party service providers to
make sure all new or updated year 2000 compliant systems work with its business
partners. Due to the complexity and enormity of this phase, it is anticipated
that it will take until June 30, 1999 for exhaustive testing to be completed.
The final phase is the actual implementation of the new systems at the turn of
the century, with the readiness to execute contingency plans if needed.
The number one priority is to minimize or eliminate the impact the Year
2000 date change will have on the Company's customers and shareholders. The
Company has been working with due diligence on this challenge since 1996. The
Company is in the enviable position of having a technologically advanced
computer system already in place. The Manager of Information Systems has tested
all the in house hardware and software for Year 2000 compliance. Management is
working in conjunction with the Company's major service provider to perform
Year 2000 application testing for its day-to-day bank operations. Using a
simulated customer base, the Company will be testing virtually every type of
banking transaction it performs for Year 2000 compatibility. Management has
analyzed infrastructure components, like ATMs, security systems, telephones,
vaults, and has acquired necessary upgrades and installations when necessary.
It is anticipated that company-wide systems will be deemed Year 2000 compliant
with testing which will occur through mid-1999.
In addition to collaborating with outside service providers, the Company
is working with its banking customers to ensure a smooth transition into the
new millennium. The Company is a resource for commercial loan customers and
depositors that need guidance in preparing their own businesses for Year 2000.
The Company sponsored a seminar and has provided handouts and phone
consultations to assist its commercial customers and depositors in this
challenge.
The Company has 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 insurance
risk surrounding the Year 2000.
To date, the Company has spent approximately $25,000 in expenses directly
relating to Year 2000. An estimated $25,000 more will be spent throughout 1999.
New hardware, new software, upgrades for the automated teller machines, seminar
training for the staff, and sophisticated testing services have comprised the
bulk of the Year 2000 expense. These costs are based on the best estimates of
management. It is impossible to
<PAGE>
SHORE FINANCIAL CORPORATION
23
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
accurately predict every expense that may result from the Year 2000 issue;
actual expenses could differ from the estimated expenses.
At this time, the Company anticipates that even the worst case Year 2000
scenario would not have a long lasting, significant adverse effect on the
Company's financial condition and results of operations for the year ending
December 31, 2000 and beyond. The Company has been developing contingency plans
throughout each remediation phase, but it will not finalize these plans until
all testing is complete; most likely during the second quarter of 1999. These
plans will include provisions for potential runs on cash reserves as December
31, 1999 approaches. The Company will build up vault cash reserves by ordering
additional cash from the Federal Reserve throughout the fourth quarter of 1999.
Additionally, the Company will have it's borrowing capacity at the FHLB to fund
immediate liquidity needs and may enter into a similar relationship with the
Federal Reserve Bank if deemed necessary. Although the Company has faith in the
contingency plans being developed and the success of the testing being
conducted, it is the opinion of management that no one can exactly predict all
the possible ramifications of the Year 2000 issue.
To summarize, the Company has completed phases one though three
(awareness, assessment, and renovation) and will continue to be deeply involved
with the validation phase through mid 1999. All vendors and suppliers have been
contacted and have provided comprehensive and reassuring Year 2000 progress
reports. Presently, the Company sees no need to replace any vendor, although,
alternative vendors have been complied for contingency planning. In addition,
all commercial loan and deposit customers have been contacted regarding their
Year 2000 progress. The Company expects the adverse effect of Year 2000 on its
commercial customers to be immaterial.
<PAGE>
SHORE FINANCIAL CORPORATION
24
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REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Shore Financial Corporation and Subsidiary
Onley, Virginia
We have audited the accompanying consolidated statements of financial
condition of SHORE FINANCIAL CORPORATION AND SUBSIDIARY as of December 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for the years ended December 31, 1998 and June 30, 1997,
and the six months ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SHORE
FINANCIAL CORPORATION AND SUBSIDIARY as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998 and June 30, 1997, and the six months ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Goodman & Company, L.L.P.
One Commercial Place
Norfolk, Virginia
January 29, 1999, except for Note 19,
as to which the date is February 9, 1999
<PAGE>
SHORE FINANCIAL CORPORATION
25
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash (including interest-earning deposits of
approximately $1,442,000 and $1,841,000,
respectively) $ 3,900,861 $ 4,190,551
Investment securities:
Held to maturity (fair value of $3,702,000 and
$5,219,000, respectively) 3,696,685 5,232,587
Available for sale (amortized cost of $27,836,000 and
$20,761,000, respectively) 28,352,312 21,029,952
Investment in Federal Home Loan Bank stock, at cost 580,500 580,500
Investment in Federal Reserve Bank stock, at cost 124,800 --
Loans receivable, net 79,659,005 72,889,907
Premises and equipment, net 2,308,181 2,420,457
Real estate owned 49,177 445,912
Accrued interest receivable 1,023,522 915,271
Prepaid expenses and other assets 252,805 387,377
------------- ------------
$ 119,947,848 $108,092,514
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 104,308,906 95,213,440
Advances from Federal Home Loan Bank 1,073,853 75,000
Advance payments by borrowers for taxes and insurance 205,815 215,029
Accrued interest payable 37,292 35,755
Accrued expenses and other liabilities 533,195 223,263
------------- ------------
Total liabilities 106,159,061 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 9,265,567 8,000,729
Accumulated other comprehensive income 341,000 170,118
------------- ------------
Total stockholders' equity 13,788,787 12,330,027
------------- ------------
$ 119,947,848 $108,092,514
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SHORE FINANCIAL CORPORATION
26
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CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND JUNE 30, 1997 AND
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31
DECEMBER 31, JUNE 30,
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income
Loans $ 6,764,041 $ 6,405,440 $ 3,409,632 $ 3,370,342
Investments 1,724,744 1,449,549 878,794 829,837
------------ ------------ ------------ ------------
Total interest income 8,488,785 7,854,989 4,288,426 4,200,179
------------ ------------ ------------ ------------
Interest expense
Deposits 4,364,212 4,154,296 2,205,710 2,209,943
FHLB advances 2,809 85,785 1,675 3,088
------------ ------------ ------------ ------------
Total interest expense 4,367,021 4,240,081 2,207,385 2,213,031
------------ ------------ ------------ ------------
Net interest income 4,121,764 3,614,908 2,081,041 1,987,148
Provision for loan losses 280,200 244,000 204,600 66,000
------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 3,841,564 3,370,908 1,876,441 1,921,148
------------ ------------ ------------ ------------
Noninterest income
Deposit account fees 587,353 444,606 331,198 239,454
Loan fees 131,927 100,244 72,220 53,200
Other 226,136 192,323 155,038 31,891
------------ ------------ ------------ ------------
Total noninterest income 945,416 737,173 558,456 324,545
------------ ------------ ------------ ------------
Noninterest expense
Compensation and employee benefits 1,275,634 1,061,843 654,483 595,795
Occupancy and equipment 643,588 495,640 321,934 306,748
Advertising 54,235 54,183 22,157 27,288
Data processing 462,916 355,097 231,634 195,672
Federal insurance premium 58,931 562,459 28,955 29,631
Other 354,838 257,408 185,706 203,288
------------ ------------ ------------ ------------
Total noninterest expense 2,850,142 2,786,630 1,444,869 1,358,422
------------ ------------ ------------ ------------
Income before income taxes 1,936,838 1,321,451 990,028 887,271
Income taxes 672,000 376,000 317,000 327,000
------------ ------------ ------------ ------------
Net income $ 1,264,838 $ 945,451 $ 673,028 $ 560,271
============ ============ ============ ============
Earnings Per Common Share:
Basic $ 0.70 $ 0.69 $ 0.37 $ 0.33
============ ============ ============ ============
Diluted $ 0.69 $ 0.69 $ 0.37 $ 0.33
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SHORE FINANCIAL CORPORATION
27
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND JUNE 30, 1997, AND
SIX MONTHS ENDED DECEMBER 31, 1997
-
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON ADDITIONAL RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $ 450,117 $ 560,257 $ 6,495,007 $ (50,028) $ 7,455,353
Common stock issued under
Employee Stock Option Plan 3,158 42,108 -- -- 45,266
Comprehensive income -- -- 945,451 122,757 1,068,208
--------- ----------- ----------- ---------- ------------
Balance, June 30, 1997 453,275 602,365 7,440,458 72,729 8,568,827
Common stock issued under
Shareholder Rights Offering, net
of offering expenses of $35,000 33,929 702,184 -- -- 736,113
Common stock issued under
Initial Public Offering, net
of offering expenses of $343,000 108,384 2,259,043 -- -- 2,367,427
Comprehensive income -- -- 560,271 97,389 657,660
--------- ----------- ----------- ---------- ------------
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 -- -- 1,264,838 170,882 1,435,720
--------- ----------- ----------- ---------- ------------
Balance, December 31, 1998 $ 597,568 $ 3,584,652 $ 9,265,567 $ 341,000 $ 13,788,787
========= =========== =========== ========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SHORE FINANCIAL CORPORATION
28
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CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND JUNE 30, 1997 AND
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31
DECEMBER 31, JUNE 30,
1998 1997 1998 1997
---------------- --------------- --------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,264,838 $ 945,451 $ 673,028 $ 560,271
Adjustments to reconcile to net cash
provided by operating activities:
Provision for loan losses 280,200 244,000 204,600 66,000
Depreciation and amortization 266,518 195,743 130,873 113,685
Amortization of premium and
accretion of discount on securities,
net 11,434 (17,860) 10,269 (4,290)
(Gain) loss on sale of securities (131,878) 21,444 (101,232) --
(Gain) loss on sale of premises
and equipment 3,450 (19,665) -- 11,723
Change in net deferred loan fees (118,192) 25,007 (50,528) 5,463
Loss (gain) on sale of repossessed
assets 11,494 (9,062) 9,044 --
(Increase) decrease in other assets 17,870 (194,198) 105,403 (143,899)
Increase (decrease) in other liabilities 226,127 (236,003) 97,881 (320,448)
------------- ------------- ------------ -------------
Net cash provided by
operating activities 1,831,861 954,857 1,079,338 288,505
------------- ------------- ------------ -------------
Cash flows from investing activities
Purchase of available-for-sale securities (17,444,630) (9,969,009) (7,887,140) (10,523,357)
Proceeds from maturities and sales of
available-for-sale securities 11,631,629 5,061,933 3,405,003 5,090,106
Purchase of held-to-maturity securities (1,487,529) (465,000) (1,487,529) --
Proceeds from maturities of held-to-maturity
securities 1,881,525 450,837 881,525 2,749,493
Purchase of Federal Reserve Bank stock (124,800) -- -- --
Loan origination, net of repayments (7,043,875) (6,095,156) (4,207,556) 419,171
Proceeds from sale of premises and
equipment 1,900 19,665 461 15,500
Purchase of premises and equipment (151,141) (245,327) (23,747) (428,270)
Proceeds from sale of real estate owned 498,011 42,417 67,400 184,746
------------- ------------- ------------ -------------
Net cash used by
investing activities (12,238,910) (11,199,640) (9,251,583) (2,492,611)
------------- ------------- ------------ -------------
(CONTINUED)
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
29
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CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND JUNE 30, 1997 AND
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31
DECEMBER 31, JUNE 30,
1998 1997 1998 1997
-------------- ---------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from financing activities
Net increase in demand deposits $ 8,818,904 $ 1,999,637 $ 6,492,480 $ 1,018,257
Net increase in time deposits 276,562 6,403,061 -- (361,157)
Proceeds from FHLB advances 1,200,000 22,000,000 1,000,000 --
Repayments of FHLB advances (201,147) (21,700,000) (200,000) (700,000)
Proceeds from common stock transactions 23,040 45,266 -- 3,103,540
----------- ------------- ----------- -----------
Net cash provided by
financing activities 10,117,359 8,747,964 7,292,480 3,060,640
----------- ------------- ----------- -----------
Increase (decrease) in cash and cash equivalents (289,690) (1,496,819) (879,765) 856,534
Cash and cash equivalents, beginning of period 4,190,551 4,830,836 4,780,626 3,334,017
----------- ------------- ----------- -----------
Cash and cash equivalents, end of period $ 3,900,861 $ 3,334,017 $ 3,900,861 $ 4,190,551
=========== ============= =========== ===========
Supplemental disclosure of cash flow
information
Cash paid during the period
for interest $ 4,365,484 $ 4,289,966 $ 2,216,990 $ 2,226,774
Cash paid for income taxes $ 537,169 $ 510,644 $ 149,455 $ 442,700
Supplemental schedule of non-cash
investing and financing activities
Transfers from loans to real estate
acquired through foreclosure $ 112,769 $ 582,400 $ 9,000 $ 10,811
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SHORE FINANCIAL CORPORATION
30
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1
ORGANIZATION AND BUSINESS
Shore Financial Corporation (the "Company") is a Virginia corporation
organized in September 1997 by Shore Bank (the "Bank") for the purpose of
becoming a unitary holding company of the Bank. The Company became a unitary
holding company of the Bank on March 16, 1998. The business and management of
the Company consists of the business and management of the Bank. The Bank
became a Virginia chartered, Federal Reserve member, commercial bank on March
31, 1998. Prior to that the Bank was a federally chartered savings bank. The
Company and the Bank are headquartered on the Eastern Shore in Onley, Virginia.
The Company's assets primarily consist of approximately $2.0 million in
cash and investments and its investment in the Bank. Currently, the Company
does not participate in any other activities outside of controlling the Bank.
The Bank provides a full range of banking services to individual and corporate
customers through its six banking offices located on the Eastern Shore of
Virginia and Maryland, including the counties of Accomack and Northampton,
Virginia, and the Salisbury/Wicomico County area in Maryland. The Bank's, and
subsequently the Company's, common stock became publicly traded during August
1997 upon completing its subscription rights and initial public offerings which
included the sale of 431,250 shares of common stock.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN FISCAL YEAR
In conjunction with the Bank's conversion to a Virginia chartered, Federal
Reserve member, commercial bank, the Company changed its fiscal year from June
30th to December 31st during 1997.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses and the valuation of real estate owned.
INVESTMENT SECURITIES
Investments in debt securities classified as held-to-maturity are stated
at cost, adjusted for amortization of premiums and accretion of discounts using
the interest method. Management has a positive intent and ability to hold these
securities to maturity and, accordingly, adjustments are not made for temporary
declines in their market value below amortized cost. Investments in debt and
equity securities classified as trading, if any, are stated at fair value.
Unrealized holding gains and losses for trading securities are included in the
statement of income. The Company had no such securities during the periods
reported in the financial statements. All other investment securities with
readily determinable fair values are classified as available-for-sale.
Unrealized holding gains and losses on available-for-sale securities are
excluded from earnings and reported, net of tax effect, in other comprehensive
income until realized.
Investments in Federal Home Loan Bank and Federal Reserve Bank stock are
stated at cost, as these securities are restricted and do not have readily
determinable fair values.
Gains and losses on the sale of securities are determined using the
specific identification method. Other-than-temporary declines in the fair value
of individual held-to-maturity and available-for-sale securities below their
cost, if any, are included in earnings as realized losses.
LOANS RECEIVABLE
Loans receivable consist of long-term real estate loans secured by first
deeds of trust on single family residences, other residential property,
commercial property and land located primarily in an area known as the Eastern
Shore of Virginia and Maryland, and secured and unsecured consumer and
commercial loans. Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses and net deferred loan fees (costs) and
discounts.
<PAGE>
SHORE FINANCIAL CORPORATION
31
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
The Bank defers loan origination and commitment fees, net of certain
direct loan origination costs, and the net deferred fees (costs) are amortized
into interest income over the lives of the related loans as yield adjustments.
Any unamortized fees (costs) on loans fully repaid or sold are recognized as
income (expense) in the year of repayment or sale. Deferred fees (costs) on
permanent adjustable-rate loans are amortized into income over the period
necessary to adjust the yield on the loans to market rates using the interest
method.
The Bank places loans on nonaccrual status after being delinquent greater
than 90 days or earlier if the Bank becomes aware that the borrower has entered
bankruptcy proceedings, or in situations in which the loans have developed
inherent problems prior to being 90 days delinquent that indicate payments of
principal or interest will not be made in full. Whenever the accrual of
interest is stopped, a specific allowance is established through a charge to
expense for previously accrued but uncollected interest income. Thereafter,
interest is recognized only as cash is received until the loan is brought
current.
Valuation allowances for estimated losses on loans are provided on a
specific and nonspecific basis. Specific allowances are provided when an
identified significant decline in value of a loan occurs. The nonspecific
valuation allowance incorporates a number of factors including historical loss
experience, economic conditions, prevailing market conditions, management's
assessment of credit risk considering loan classification categories and
management's judgment. This general allowance has been established to provide
reserves for estimated inherent losses resulting from lending activities. In
the opinion of management, the present allowance is adequate to absorb
reasonably foreseeable loan losses. Additions to the allowance are reflected in
current operations. Charge-offs to the allowance are made when the loan is
considered uncollectible or is transferred to real estate acquired in
settlement of loans.
Management determines loan impairment using guidelines established by
Statement of Financial Accounting Standards No. 114 (SFAS 114), Accounting by
Creditors for Impairment of a Loan (as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures).
Under this accounting standard, a loan is considered to be impaired when it is
probable that the Bank will be unable to collect all principal and interest
amounts according to the contractual terms of the loan agreement. A performing
loan may be considered impaired. The allowance for loan losses related to loans
identified as impaired is primarily based on the excess of the loan's current
outstanding principal balance over the estimated fair value of the related
collateral. For a loan that is not collateral-dependent, the allowance is
recorded at the amount by which the outstanding principal balance exceeds the
current best estimate of the future cash flows on the loan discounted at the
loan's original effective interest rate.
For impaired loans that are on nonaccrual status, cash payments received
are generally applied to reduce the outstanding principal balance. However, all
or a portion of a cash payment received on a nonaccrual loan may be recognized
as interest income to the extent allowed by the loan contract, assuming
management expects to fully collect the remaining principal balance on the
loan.
REAL ESTATE OWNED
Real estate acquired through foreclosure is initially recorded at the
lower of fair value or the loan balance at date of foreclosure. Subsequently,
property that is held for resale is carried at the lower of cost or fair value
minus estimated selling costs. Costs relating to the development and
improvement of property are capitalized, whereas those relating to holding the
property are charged to expense.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its fair value minus estimated selling costs.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using declining balance and straight-line methods over
the estimated useful lives of the respective assets. Estimated useful lives are
as follows:
<TABLE>
<S> <C>
Buildings 25 to 40 years
Furniture and equipment 5 to 15 years
Automobiles 5 years
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
32
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
SAIF PREMIUM DISPARITY ASSESSMENT
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the
"Act"), the FDIC imposed a special assessment on Savings Association Insurance
Fund ("SAIF") members to capitalize the SAIF at the designated reserve level of
1.25% as of September 30, 1996. Based on the Bank's deposits as of March 31,
1995, the date for measuring the amount of the special assessment pursuant to
the Act, the Bank paid a special assessment of $447,000 in November, 1996 to
capitalize the SAIF. The FDIC is expected to lower the premium for deposit
insurance to a level necessary to maintain the SAIF at its required reserve
level; however, the range of premiums has not been determined.
INCOME TAXES
Deferred income taxes payable represent the cumulative tax effect from
temporary differences in the recognition of taxable or deductible amounts for
income tax and financial reporting purposes.
Prior to July 1, 1996, in computing Federal income taxes, savings banks
that met certain definitional tests and other conditions prescribed by the
Internal Revenue Code were allowed, within limitations, to deduct from taxable
income an allowance for bad debts based on actual loss experience, a percentage
of taxable income before such deduction or an amount based on a percentage of
eligible loans. The applicable percentage of taxable income used for the bad
debt deduction was 8%. Effective July 1, 1996, the percentage of taxable income
method and the percentage of eligible loan method for determining the bad debt
deduction are no longer available. At December 31, 1998, the cumulative bad
debt reserve, upon which no taxes have been paid on tax returns, was
approximately $1.2 million. Of this amount, $783,000 represents that portion of
the cumulative bad debt reserve for which financial statement income taxes have
not been provided, in accordance with FASB Statement No. 109, Accounting for
Income Taxes.
The Small Business Job Protection Act of 1996 (the "Act") repealed the
percentage of taxable income method of computing bad debt reserves, and
required the recapture into taxable income of "excess reserves," on a taxable
basis over the next six years. Excess reserves are defined in general, as the
excess of the balance of the tax bad debt reserve (using the percentage of
taxable income method) as of the close of the last tax year beginning before
January 1, 1996 over the balance of the reserve as of the close of the last tax
year beginning before January 1, 1988. As a result of the Act, the Bank is
recapturing into taxable income, for tax return purposes only, approximately
$497,000 ratably over the next six years.
EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, Earnings Per Share, on December 31, 1997. This Statement establishes
standards for computing and presenting earnings per share (EPS). This Statement
supersedes standards previously set in APB Opinion No. 15, Earnings Per Share.
SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statement, and it requires a reconciliation of the numerator and
denominator of the diluted EPS computation. This Statement was effective for
financial statements issued for periods ending after December 15, 1997. In
accordance with the requirements of this Statement, all prior period EPS data
have been restated to reflect the change in reporting requirements.
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted-average number of shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised, converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
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.
<PAGE>
SHORE FINANCIAL CORPORATION
33
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
SEGMENT REPORTING
During the year ended December 31, 1998, the Company adopted FASB
Statement No. 131, Disclosures about Segments of an Enterprise ("SFAS 131"),
which establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in financial reports issued to shareholders. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by management in deciding how to allocate
resources and in assessing performance. Generally, financial information is
required to be reported on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to segments.
STATEMENT OF STOCKHOLDERS' EQUITY
All financial and per share information presented in the financial
statements has been adjusted to reflect the three-for-one stock split effected
on June 10, 1997, and the two-for-one stock split effected in the form of a
dividend on October 15, 1996.
CASH AND CASH EQUIVALENTS
Cash equivalents include currency, balances due from banks,
interest-bearing deposits and federal funds sold.
RECLASSIFICATIONS
Certain reclassifications of prior years information have been made to
conform to the December 31, 1998 presentation.
<PAGE>
SHORE FINANCIAL CORPORATION
34
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
NOTE 3
INVESTMENT SECURITIES
A summary of the amortized cost and estimated fair values of investment
securities is as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
December 31, 1998
Held to Maturity
United States government and agency
obligations $ 2,491,639 $ 5,115 $ (79) $ 2,496,675
Tax-exempt municipal bonds 1,000,000 -- -- 1,000,000
Mortgage-backed securities 205,046 41 -- 205,087
------------ --------- ---------- ------------
3,696,685 5,156 (79) 3,701,762
------------ --------- ---------- ------------
Available for Sale
United States government and agency
obligations 14,322,042 154,440 (8,714) 14,467,768
Tax-exempt municipal bonds 6,429,225 64,351 (5,700) 6,487,876
Corporate Bonds 2,021,644 8,856 -- 2,030,500
Va. State Housing Authority bonds 1,000,000 20,000 -- 1,020,000
Adjustable Rate Mortgage Fund 1,243,041 -- (6,001) 1,237,040
Adjustable Rate Commercial Loan Fund 336,258 239 -- 336,497
Mortgage-backed securities -- -- -- --
Marketable equity securities:
Federal Home Loan Mortgage
Corporation common stock 4,112 266,788 -- 270,900
Citigroup preferred stock 1,032,856 40,894 -- 1,073,750
MBNA preferred stock 579,969 -- (20,281) 559,688
Consolidated Edison preferred stock 543,000 -- (9,000) 534,000
Other equity securities 324,345 12,429 (2,481) 334,293
------------ --------- ---------- ------------
27,836,492 567,997 (52,177) 28,352,312
------------ --------- ---------- ------------
$ 31,533,177 $ 573,153 $ (52,256) $ 32,054,074
============ ========= ========== ============
December 31, 1997
Held to Maturity
United States government and agency
obligations $ 4,197,613 $ 8,283 $ (14,073) $ 4,191,823
Tax-exempt municipal bonds 725,000 -- -- 725,000
Mortgage-backed securities 309,974 -- (7,752) 302,222
------------ --------- ---------- ------------
5,232,587 8,283 (21,825) 5,219,045
------------ --------- ---------- ------------
Available for Sale
United States government and agency
obligations 17,535,266 47,288 (5,579) 17,576,975
Tax-exempt municipal bonds 126,177 -- (114) 126,063
Va. State Housing Authority bonds 1,000,000 20,600 -- 1,020,600
Adjustable Rate Mortgage Fund 1,174,858 1,282 -- 1,176,140
Mortgage-backed securities 284,827 -- (302) 284,525
Marketable equity securities:
Federal Home Loan Mortgage
Corporation common stock 4,112 172,037 -- 176,149
Citigroup preferred stock 500,000 12,500 -- 512,500
Other equity securities 135,919 21,081 -- 157,000
------------ --------- ---------- ------------
20,761,159 274,788 (5,995) 21,029,952
------------ --------- ---------- ------------
$ 25,993,746 $ 283,071 $ (27,820) $ 26,248,997
============ ========= ========== ============
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
35
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
The amortized cost and estimated fair value of securities at December 31,
1998 by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
Held to Maturity
Due in one year or less $ 1,491,639 $ 1,494,175
Due after one year through five years 2,000,000 2,002,500
Due after five years through ten years -- --
Due after ten years -- --
Mortgage-backed securities 205,046 205,087
------------ ------------
3,696,685 3,701,762
------------ ------------
Available for Sale
Due in one year or less 3,925,050 3,947,726
Due after one year through five years 10,663,886 10,801,068
Due after five years through ten years 8,938,975 9,012,350
Due after ten years 245,000 245,000
Adjustable Rate Mortgage Fund 1,243,041 1,237,040
Adjustable Rate Commercial Loan Fund 336,258 336,497
Marketable equity securities:
Federal Home Loan Mortgage
Corporation common stock 4,112 270,900
Citigroup preferred stock 1,032,856 1,073,750
MBNA preferred stock 579,969 559,688
Consolidated Edison preferred stock 543,000 534,000
Other equity securities 324,345 334,293
------------ ------------
27,836,492 28,352,312
------------ ------------
$ 31,533,177 $ 32,054,074
============ ============
</TABLE>
At December 31, 1998 and 1997, investment securities with a carrying value
of approximately $3,000,000 and $299,000, respectively were pledged as
collateral for public deposits.
NOTE 4
LOANS RECEIVABLE
Loans receivable are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Real Estate Loans:
Coventional mortgage:
Secured by one-to-four family residences $ 42,953,978 $ 47,266,498
Secured by multi-family residences 837,801 1,166,011
Commercial mortgages 17,466,618 10,976,623
Land 1,973,499 723,135
Short-term construction 3,526,716 1,617,587
Home equity lines of credit 5,581,987 5,282,846
Consumer loans 6,287,825 4,130,757
Commercial loans:
Secured 1,933,360 1,851,003
Unsecured 1,702,108 1,318,036
------------ ------------
Total loans 82,263,892 74,332,496
Less:
Loans in process 1,790,986 660,000
Deferred loan fees (costs), net (106,093) 12,098
Allowance for loan losses 919,994 770,491
------------ ------------
$ 79,659,005 $ 72,889,907
============ ============
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
36
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
The allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
-------------- ------------ -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 770,491 $ 673,851 $ 763,501 $ 743,518
Provision charged to expense 280,200 244,000 204,600 66,000
Recoveries (losses) charged to the allowance, net (130,697) (174,333) (48,107) (39,027)
---------- ---------- --------- ---------
Balance at end of the period $ 919,994 $ 743,518 $ 919,994 $ 770,491
========== ========== ========= =========
</TABLE>
Impaired loans as determined in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment
of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment
of a Loan -- Income Recognition and Disclosures, were $318,000 and $313,000 at
December 31, 1998 and 1997, respectively. There was no specific allowance
provided with respect to these impaired loans. For the year ended December 31,
1998 and the six months ended December 31, 1997, the average recorded
investment in impaired loans was $318,000 and $261,000, respectively, and
interest income recognized on impaired loans, all on the cash basis, was
$32,000 and $13,000, respectively.
NOTE 5
PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Land $ 415,596 $ 415,596
Buildings 1,777,106 1,772,848
Furniture and fixtures 887,041 825,493
Computer equipment 516,683 474,879
Automobiles 79,791 79,791
Construction in process 8,800 959
----------- -----------
3,685,017 3,569,566
Less accumulated depreciation 1,376,836 1,149,109
----------- -----------
$ 2,308,181 $ 2,420,457
=========== ===========
</TABLE>
NOTE 6
DEPOSITS
Deposits accounts are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Demand deposits:
Savings accounts $ 11,474,394 $ 8,908,242
Checking accounts 17,356,474 13,971,888
Money market deposit accounts 7,448,514 3,112,747
------------- ------------
Total 36,279,382 25,992,877
Time deposits 68,029,524 69,220,563
------------- ------------
$ 104,308,906 $ 95,213,440
============= ============
</TABLE>
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $10.0 million and $9.9 million at
December 31, 1998 and 1997, respectively.
<PAGE>
SHORE FINANCIAL CORPORATION
37
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
Time deposits outstanding at December 31, 1998 mature as follows:
<TABLE>
<S> <C>
Within one year $ 42,714,253
One to two years 7,946,125
Two to three years 2,877,804
Three to four years 6,222,375
Four to five years 3,611,236
Thereafter 4,657,731
------------
$ 68,029,524
============
</TABLE>
NOTE 7
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments as of
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
December 31, 1998
Financial assets
Cash and short-term investments $ 3,901 $ 3,901
Securities $ 32,049 $ 32,054
Loans, net of allowance for loan losses $ 79,659 $ 80,127
Financial liabilities
Deposits $ 104,309 $ 105,154
Advances from Federal Home Loan Bank $ 1,074 $ 1,074
Unrecognized financial instruments
Commitments to extend credit N/A N/A
December 31, 1997
Financial assets
Cash and short-term investments $ 4,191 $ 4,191
Securities $ 26,263 $ 26,249
Loans, net of allowance for loan losses $ 72,890 $ 74,440
Financial liabilities
Deposits $ 95,213 $ 95,758
Advances from Federal Home Loan Bank $ 75 $ 75
Unrecognized financial instruments
Commitments to extend credit N/A N/A
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH AND SHORT-TERM INVESTMENTS
For cash and short-term investments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES
Fair values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
LOAN RECEIVABLES
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar remaining maturities. This calculation ignores loan fees and certain
factors affecting the interest rates charged on various loans, such as the
borrower's creditworthiness and compensating balances, and dissimilar types of
real estate held as collateral.
<PAGE>
SHORE FINANCIAL CORPORATION
38
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the balance sheet date. The
fair value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK
Primarily all advances from Federal Home Loan Bank are due within
approximately ninety days from the balance sheet date. Therefore, the carrying
amount approximates fair value.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the borrowers. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. Because of the
competitive nature of the marketplace, loan fees vary greatly with no fees
charged in many cases. Therefore, management has concluded no value should be
assigned.
NOTE 8
ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings ("advances") from the Federal Home Loan Bank ("FHLB") are
scheduled to mature as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Within one year $1,000,000 $ --
One to two years -- --
More than two years 73,853 75,000
-------------------------
$1,073,853 $75,000
========== =======
</TABLE>
The weighted average interest rate on advances was 5.00% and 3.00% at
December 31, 1998 and 1997, respectively. These advances are collateralized by
the Bank's investment in FHLB stock and qualifying real estate loans with a
principal balance of approximately $1,300,000, and government agency securities
with a fair market value of approximately $1,000,000 held under a specific
collateral agreement. As a member of the FHLB, the Bank has borrowing capacity
to $9,000,000.
<PAGE>
SHORE FINANCIAL CORPORATION
39
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
NOTE 9
OTHER NONINTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31,
----------------------------- ---------------------------
DECEMBER 31, JUNE 30,
1998 1997 1998 1997
-------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Other noninterest income
FHLB stock dividend $ 43,288 $ 42,000 $ 22,302 $ 21,101
Federal Reserve Bank stock dividend 5,616 -- -- --
Credit life commissions 13,529 14,644 7,362 4,242
Income from real estate held for investment 10,902 11,648 4,966 2,434
Safe deposit box rental 8,903 7,078 5,663 4,376
REO property expense (11,975) (13,693) (2,988) (3,977)
Gain (loss) on sale of fixed assets (3,450) 19,665 -- (11,723)
Gain (loss) on sale of real estate owned (11,494) 9,062 (9,043) --
Gain (loss) on sale of real estate held for investment -- 77,865 -- --
Gain (loss) on sale of investments 131,878 (21,445) 101,232 --
Miscellaneous fees and commissions 38,939 45,499 25,542 15,438
--------- --------- -------- ---------
$ 226,136 $ 192,323 $155,038 $ 31,891
========= ========= ======== =========
Other noninterest expense
Education and seminars $ 15,722 $ 17,584 $ 2,092 $ 6,064
Personnel costs 37,632 32,422 23,900 15,442
Travel 18,323 20,834 1,860 6,663
Courier cost 11,680 11,440 6,369 5,526
Legal and professional fees 88,841 53,137 54,201 92,863
Supervisory fees 34,818 30,869 17,403 16,360
Loan costs 44,671 29,899 18,581 22,083
ATM fees 18,941 17,482 9,008 6,294
Insurance 22,786 15,602 13,396 7,979
Bank service charges 32,806 28,586 17,927 14,501
Deposit account write-offs (recoveries) 20,594 (7,303) 15,606 8,486
Miscellaneous 8,024 6,856 5,242 1,027
--------- --------- -------- ---------
$ 354,838 $ 257,408 $185,583 $ 203,288
========= ========= ======== =========
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
40
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
NOTE 10
INCOME TAXES
The provision for income taxes is summarized below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31,
---------------------------- ----------------------------
DECEMBER 31, JUNE 30,
1998 1997 1998 1997
-------------- ----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current
Federal $ 611,000 $ 448,000 $ 321,000 $ 349,000
State 33,000 (59,000) (18,000) 29,000
--------- --------- --------- ---------
644,000 389,000 303,000 378,000
--------- --------- --------- ---------
Deferred
Federal 37,000 (52,000) 19,000 (67,000)
State (9,000) 39,000 (5,000) 16,000
--------- --------- --------- ---------
28,000 (13,000) 14,000 (51,000)
--------- --------- --------- ---------
Total
Federal 648,000 396,000 340,000 282,000
State 24,000 (20,000) (23,000) 45,000
--------- --------- --------- ---------
$ 672,000 $ 376,000 $ 317,000 $ 327,000
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax liability
FHLB stock $ 70,000 $ 70,000
Depreciation 128,000 135,000
Unrealized gain on securities available for sale 175,000 99,000
Other 10,000 8,000
-------- --------
Total deferred tax liability 383,000 312,000
-------- --------
Deferred tax asset
Bad debts and other provisions 176,000 195,000
Contribution carryover -- 14,000
-------- --------
Total deferred tax asset 176,000 209,000
-------- --------
Net deferred tax liability $207,000 $103,000
======== ========
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
41
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
The differences between expected federal and state income taxes at
statutory rates to actual income tax expense are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31,
---------------------------- --------------------------
DECEMBER 31, JUNE 30,
1998 1997 1998 1997
-------------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal income tax expense -- at statutory rate $ 659,000 $ 449,000 $ 337,000 $ 302,000
State income tax expense -- at statutory rates,
net of federal tax effect 116,000 52,000 8,000 35,000
Tax effect of:
Tax exempt interest income (52,000) (21,000) (26,000) (20,000)
Dividends received deduction (27,000) (12,000) (14,000) (4,000)
U.S. obligation interest income (14,000) (41,000) -- (33,000)
Nondeductible reorganization expense -- -- -- 23,000
Other, net (10,000) (51,000) 12,000 24,000
--------- --------- --------- ---------
$ 672,000 $ 376,000 $ 317,000 $ 327,000
========= ========= ========= =========
</TABLE>
NOTE 11
STOCKHOLDERS' EQUITY
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and its Banking Subsidiary must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its Banking Subsidiary to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1998, that the Company meets all capital adequacy requirements to
which it is subject.
As of September 30, 1997, the most recent notification, the Federal
Reserve Bank of Richmond categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
Bank's category. The Bank's actual capital amounts and ratios are presented in
the table.
<PAGE>
SHORE FINANCIAL CORPORATION
42
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ --------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets):
Consolidated $ 14,454 19.43% $5,952 8.00% $ N/A N/A
Shore Bank 12,527 16.97% 5,904 8.00% 7,380 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $ 13,407 18.02% $2,976 4.00% $ N/A N/A
Shore Bank 11,480 15.56% 2,952 4.00% 4,428 6.00%
Tier 1 Capital (to Average Assets):
Consolidated $ 13,407 11.80% $4,544 4.00% $ N/A N/A
Shore Bank 11,480 10.11% 4,541 4.00% 5,679 5.00%
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Consolidated $ 12,694 21.60% $4,682 8.00% $ N/A N/A
Shore Bank 12,694 21.60% 4,682 8.00% 5,852 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $ 12,117 20.70% $2,341 4.00% $ N/A N/A
Shore Bank 12,117 20.70% 2,341 4.00% 3,511 6.00%
Tier 1 Capital (to Average Assets):
Consolidated $ 12,117 11.39% $4,255 4.00% $ N/A N/A
Shore Bank 12,117 11.39% 4,255 4.00% 5,318 5.00%
</TABLE>
Prior to March 31, 1998, the Company was a federal savings bank regulated
by the Office of Thrift Supervision (OTS). Savings institutions also must
maintain specific capital standards that are no less stringent than the capital
standards applicable to national banks. The OTS regulations currently have
three capital standards including (I) a tangible capital requirement, (ii) a
core capital requirement, and (iii) a risk-based capital requirement. The
tangible capital standard requires savings institutions to maintain tangible
capital of not less than 1.5% of adjusted total assets. The core capital
standard requires a savings institution to maintain core capital of not less
than 3.0% of adjusted total assets. The risk-based capital standard requires
risk-based capital of not less than 8.0% of risk-weighted assets. Regulatory
capital as of December 31, 1997, as defined by OTS regulation, does not
significantly differ from stockholders' equity, as presented in the financial
statements.
The following table presents the Bank's regulatory capital levels relative
to the OTS requirements applicable at that date:
<TABLE>
<CAPTION>
AMOUNT PERCENT ACTUAL ACTUAL EXCESS
REQUIRED REQUIRED AMOUNT PERCENT AMOUNT
------------- ---------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
Tangible capital $1,627,000 1.50% $ 12,117,000 11.10% $10,490,000
Core capital 3,256,000 3.00% 12,117,000 11.10% 8,861,000
Risk-based capital 4,682,000 8.00% 12,694,000 21.60% 8,012,000
</TABLE>
The Company may not declare or pay a cash dividend, or repurchase any of
its capital stock if the effect thereof would cause the net worth of the
Company to be reduced below the net worth requirement imposed by federal
regulations.
<PAGE>
SHORE FINANCIAL CORPORATION
43
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
NOTE 12
EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN
The Bank's Profit Sharing Plan Trust (the "Plan") was implemented
effective July 1, 1991. The Plan provides for retirement, death and disability
benefits. An employee becomes eligible for participation after completion of
one year of service, and becomes a member of the Plan on the earliest of
January 1 or July 1 occurring on or after qualification.
Employees may elect to defer 2%-10% of their compensation, with the Bank
making matching contributions equal to 100% of the first 3% of compensation
deferred, and 50% of the next 3%. Matching contributions made by the Bank under
the Plan totaled approximately $33,700 and $23,900 for the years ended December
31, 1998 and June 30, 1997, respectively, and $16,700 (unaudited) and $14,300
for the six months ended December 31, 1998 and 1997, respectively. The Bank may
also elect to make discretionary contributions to the Plan; $52,000 and $40,000
of such contributions were made during the years ended December 31, 1998 and
June 30, 1997, respectively.
STOCK OPTION PLAN
Under the Company's Stock Option Plan, 90,000 shares of the common stock
may be used as options and awards to employees. Options granted under the Stock
Option Plan may be incentive, as defined by the Internal Revenue Code and
related rules and regulations, or non-incentive stock options. In the case of
an incentive stock option, the exercise price for the purchase of shares at the
date of grant must be at least equal to the market value of the shares covered
by the incentive stock option on the date of grant. The exercise price per
share subject to a non-incentive stock option shall be at a price as determined
by the Board of Directors, provided that such price shall not be less than 50%
of the fair market value of the shares covered by the non-incentive stock
option on the date of grant. The term of all options and the period in which
options are exercisable is determined at the discretion of the Board of
Directors. The following table represents options outstanding under the Stock
Option Plan.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
------------------------------------------------- DECEMBER 31,
DECEMBER 31, JUNE 30,
1998 1997 1997
----------------------- ----------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year 40,000 $ 5.38 30,000 $ 4.42 30,000 $ 4.42
Granted 16,000 10.00 9,570 4.73 10,000 8.25
Exercised 6,000 3.84 9,570 4.73 -- --
Forfeited -- -- -- -- -- --
------ ------ ------ ------- ------ -------
Outstanding -- end of year 50,000 $ 7.01 30,000 $ 4.51 40,000 $ 5.38
====== ====== ====== ======= ====== =======
Exercisable -- end of year 50,000 $ 7.01 30,000 $ 4.51 40,000 $ 5.38
====== ====== ====== ======= ====== =======
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
44
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
The Company applies APB Opinion 25 and related Interpretations in
accounting for the stock option plan. Accordingly, no compensation cost has
been recognized. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates for the awards under the
plan consistent with the method prescribed by FASB Statement No. 123, the
Company's net income and earnings per share would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------- SIX MONTHS
ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1997 1997
--------------- ------------- -------------
<S> <C> <C> <C>
Net Income
As reported $ 1,264,838 $ 945,451 $ 560,271
Pro forma 1,188,818 925,252 526,481
Earnings per share -- basic
As reported 0.70 0.69 0.33
Pro forma 0.66 0.67 0.31
Earnings per share -- diluted
As reported 0.69 0.69 0.33
Pro forma 0.65 0.67 0.31
</TABLE>
The weighted-average fair value of options granted during the years ended
December 31, 1998 and June 30, 1997, and the six months ended December 31,
1997, were $4.75 per share, $2.11 per share, and $3.38 per share, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------- SIX MONTHS
ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1997 1997
------------- ---------- -------------
<S> <C> <C> <C>
Dividend yield 0.70% -- 0.70%
Expected life 5 1 5
Expected volatility 50.00% 3.00% 40.00%
Risk-free interest rate 5.50% 5.75% 5.50%
</TABLE>
Other information pertaining to options oustanding at December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING PRICE
- ----------------------------- ------------- -------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.30-$4.84 24,000 2 $ 4.57 24,000 4.57
$ 8.25-$10.00 26,000 6 9.33 26,000 9.33
------ ------
Outstanding at end of year 50,000 50,000
====== ======
</TABLE>
<PAGE>
SHORE FINANCIAL CORPORATION
45
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
NOTE 13
RELATED PARTY TRANSACTIONS
In the normal course of business, the Bank makes loans to directors,
officers and other related parties. Loans to employees are made on
substantially the same terms as those prevailing at the time for comparable
transactions with other borrowers, except that the interest rate is reduced by
a stated amount for primary residence loans, as long as such person remains
employed by the Bank. A summary of related party loan activity for the periods
indicated is as follows:
<TABLE>
<S> <C>
Balance, June 30, 1997 $1,641,000
Originations 312,000
Repayments (443,000)
----------
Balance, December 31, 1997 1,510,000
Originations 1,101,000
Repayments (707,000)
----------
Balance, December 31, 1998 $1,904,000
==========
</TABLE>
NOTE 14
COMMITMENTS AND CONTINGENCIES AND OTHER RELATED PARTY TRANSACTIONS
The Bank has a lease agreement with the Chairman of the Board of Directors
of the Bank to lease a lot at Four Corners Plaza, Onley, Virginia, for $1,200
per month for twelve years with four five-year renewals. Each renewal will be
at the option of the Bank and the leases will be based on the previous lease
rate, after being adjusted for changes in the consumer price index. The proper
regulatory authorities have reviewed and approved this lease agreement.
In August 1997, the Bank entered into a lease agreement with a Maryland
general partnership, of which a related party is a general partner, providing
for the use of commercial office space to facilitate the Bank's downtown
Salisbury, Maryland bank location. The lease term began in September, 1997 and
expires in August, 2002. The agreement provides for three five year renewal
periods at the Bank's option. Monthly lease amounts during the term of the
lease are $2,250 and range from $2,643 to $3,650 monthly during the renewal
periods, if executed.
Minimum future rental payments for this operating lease are as follows:
<TABLE>
<S> <C>
Period Ending December 31,
1999 $71,900
2000 $71,900
2001 $71,900
2002 $62,900
2003 $44,900
</TABLE>
Rental expense under operating leases was $41,400 and $14,400 for the
years ended December 31, 1998 and June 30, 1997, respectively, and $20,700
(unaudited) and $16,200 for the six months ended December 31, 1998 and 1997,
respectively.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
single family residences, other residential property, commercial property and
land. At December 31, 1998 and 1997, the Bank had outstanding commitments to
originate loans with variable interest rates of approximately $5.8 million and
$3.1 million, respectively. In addition, unused lines of credit amounted to
approximately $8.6 million and $6.4 million at December 31, 1998 and 1997,
respectively. The distribution of commitments to extend credit approximates the
distribution of loans outstanding.
<PAGE>
SHORE FINANCIAL CORPORATION
46
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
In the normal course of business, the Bank has entered into an employment
agreement with its President and Chief Executive Officer ("CEO"). The
employment agreement may be terminated by the Board of Directors at any time.
If the CEO is terminated without cause (as defined in the agreement), the CEO
is entitled to base salary and benefits for a period of one year from the date
of termination.
During January 1997, the Bank renewed its agreement with a service company
whereby the latter would furnish data processing services to the Bank for an
additional 60 months. The arrangement is similar to the previous agreement and
to those entered into by other entities in the financial institution industry
and the costs represent normal operating costs to the Bank.
NOTE 15
EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31,
------------------------------- -------------------------------
DECEMBER 31, JUNE 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (numerator, basic and diluted) $ 1,264,838 $ 945,451 $ 673,028 $ 560,271
Weighted average shares outstanding (denominator) 1,809,333 1,370,861 1,810,812 1,687,625
----------- ----------- ----------- -----------
Earnings per common share -- basic $ 0.70 $ 0.69 $ 0.37 $ 0.33
=========== =========== =========== ===========
Effect of dilutive securities:
Weighted average shares outstanding 1,809,333 1,370,861 1,810,812 1,687,625
Effect of stock options 16,171 6,892 16,695 18,150
----------- ----------- ----------- -----------
Diluted average shares outstanding (denominator) 1,825,504 1,377,753 1,827,507 1,705,775
----------- ----------- ----------- -----------
Earnings per common share -- assuming dilution $ 0.69 $ 0.69 $ 0.37 $ 0.33
=========== =========== =========== ===========
</TABLE>
NOTE 16
PARENT COMPANY
Since its inception, the Company's business activities have been limited
to investment in nature. Dividends from the Bank and investment income
represent the only sources of funds for the Company. Certain restrictions exist
that limit the amount of dividends the Bank may declare without obtaining
regulatory approval. At December 31, 1998, the Bank had approximately $1.26
million available to declare in dividends under existing regulatory guidelines.
The Company requires very little administrative support so indirect cost
allocations have not been recorded to date. The Company has funded various
direct costs associated with supporting its board of directors, public
reporting requirements and annual fees associated with being a public company.
As the Company's activities increase, management intends to allocate a certain
percentage of its overhead to the Bank.
The Company's condensed balance sheets as of December 31, 1998 and 1997,
and the related condensed statements of income and cash flows for years ended
December 31, 1998 and June 30, 1997 and the six months ended December 31, 1998
and 1997 are provided below. For comparative purposes, the financial statements
are presented as if the parent company were in existence for all periods
presented.
<PAGE>
SHORE FINANCIAL CORPORATION
47
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,328,000 $ 1,000
Securities available-for-sale 597,000 --
Investment in Shore Bank 11,862,000 12,329,000
Other assets 2,000 --
------------ -----------
Total Assets $ 13,789,000 $12,330,000
============ ===========
Liabilities and Stockholders' Equity
Liabilities $ -- $ --
Stockholders' equity 13,789,000 12,330,000
------------ -----------
Total Liabilities and Stockholders' Equity $ 13,789,000 $12,330,000
============ ===========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------
SIX MONTHS ENDED DECEMBER 31,
DECEMBER 31, JUNE 30, -----------------------------
1998 1997 1998 1997
-------------- ----------- --------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income
Dividends from Shore Bank $2,000,000 $ -- $ 2,000,000 $ --
Investment Income 5,000 -- 5,000 --
---------- -------- ------------ --------
Total Income 2,005,000 -- 2,005,000 --
---------- -------- ------------ --------
Expenses
Directors' fees 48,000 -- 24,000 --
Accounting and professional fees 53,000 -- 26,500 --
Other 1,000 -- 500 --
---------- -------- ------------ --------
Total Expenses 102,000 -- 51,000 --
---------- -------- ------------ --------
Income Before Income Taxes and Equity in
Undistributed Net Income of Subsidiary 1,903,000 -- 1,954,000 --
Income Tax Expense -- -- -- --
---------- -------- ------------ --------
Income Before Equity in Undistributed
Net Income of Subsidiary 1,903,000 -- 1,954,000 --
Equity in Undistributed Net Income
of Subsidiary (1) (638,000) 945,000 (1,281,000) 560,000
---------- -------- ------------ --------
Net Income $1,265,000 $945,000 $ 673,000 $560,000
========== ======== ============ ========
</TABLE>
(1) AMOUNT IN PARENTHESES REPRESENTS THE EXCESS OF DIVIDENDS DECLARED OVER NET
INCOME OF SUBSIDIARIES.
<PAGE>
SHORE FINANCIAL CORPORATION
48
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------
SIX MONTHS ENDED DECEMBER 31,
DECEMBER 31, JUNE 30, -------------------------------
1998 1997 1998 1997
-------------- ------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating Activities
Net Income $1,265,000 $ 945,000 $ 673,000 $ 560,000
Equity in Undistributed Net Income of Subsidiary 638,000 (945,000) 1,281,000 (560,000)
Change in other assets (2,000) -- (2,000) --
Change in other liabilities -- -- (51,000) --
---------- ---------- ---------- ------------
Cash Flows Provided by Operating Activities 1,901,000 -- 1,901,000 --
---------- ---------- ---------- ------------
Investing Activities
Purchase of available-for-sale securities (635,000) -- (610,000) --
Sale of available-for-sale securities 38,000 -- 38,000 --
Capitalization of subsidiary -- (45,000) -- (3,104,000)
---------- ---------- ---------- ------------
Cash Flows Used by Investing Activities (597,000) (45,000) (572,000) (3,104,000)
---------- ---------- ---------- ------------
Financing Activities
Proceeds from Exercise of Common Stock Options 23,000 45,000 -- --
Proceeds from the sale of common stock -- -- -- 3,104,000
Proceeds from subsidiary advances 85,000 -- 83,000 --
Repayments of subsidiary advances (85,000) -- (85,000) --
Capialization of parent company -- -- -- 1,000
---------- ---------- ---------- ------------
Cash Flows Provided by Financing Activities 23,000 45,000 (2,000) 3,105,000
---------- ---------- ---------- ------------
Net Increase in Cash and Cash Equivalents 1,327,000 -- 1,327,000 1,000
Cash and Cash Equivalents, beginning of period 1,000 -- 1,000 --
---------- ---------- ---------- ------------
Cash and Cash Equivalents, end of period $1,328,000 $ -- $1,328,000 $ 1,000
========== ========== ========== ============
</TABLE>
NOTE 17
SEGMENT INFORMATION
Management determines the Company's operating segments and evaluates their
performance by the markets in which the Bank operates. Currently, the Bank
operates in two different geographical markets: Virginia and Maryland.
Generally, each market possesses a different customer base and occasionally
requires that management approach product pricing and promotion in different
manners. However, products offered in each market are similar. Additionally,
the Maryland market represents a newer market to the Bank than does the
Virginia market.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes not
including nonrecurring gains and losses.
Since the Company derives a significant portion of its revenues from
interest income and interest expense is the most significant expense, the
segments are reported below using net interest income for the periods
indicated. The "Other" column primarily represents the Company's investment
activities resulting from excess cash available within the individual segments.
The "Elimination" column represents intersegment activities and reconciles the
segments to the Company's consolidated financial statements.
<PAGE>
SHORE FINANCIAL CORPORATION
49
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONTINUED)
<TABLE>
<CAPTION>
ELIMINATION
OF INTERSEGMENT
(IN THOUSANDS) VIRGINIA MARYLAND OTHER TRANSACTIONS TOTAL
- --------------------------------------- ---------- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Net Interest Income:
Year ended December 31, 1998 $ 3,007 $ 448 $ 1,692 $ (1,025) $ 4,122
Year ended June 30, 1997 2,785 278 1,375 (823) 3,615
Six months ended December 31, 1998
(Unaudited) 1,488 247 880 (534) 2,081
Six months ended December 31, 1997 1,468 170 833 (484) 1,987
Assets:
December 31, 1998 $94,192 $15,750 $36,995 $ (26,989) $ 119,948
December 31, 1997 90,753 11,126 29,791 (23,577) 108,093
</TABLE>
NOTE 18
COMPREHENSIVE INCOME
Total comprehensive income consists of the following for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------ SIX MONTHS
ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1997 1997
------------- -------------- -------------
<S> <C> <C> <C>
Net income $1,264,838 $ 945,451 $560,271
Other comprehensive income 170,882 122,757 97,389
---------- ----------- --------
Total comprehensive income $1,435,720 $ 1,068,208 $657,660
========== =========== ========
</TABLE>
The components of other comprehensive income are as follows for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------- SIX MONTHS
ENDED
DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1997 1997
------------- ------------ -------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising
during the period $ 378,887 $ 173,408 $ 154,586
Less: reclassification adjustment for
gains (losses) included in income 131,878 (21,444) --
--------- --------- ---------
Total other comprehensice income
before income tax expense 247,009 194,852 154,586
Income tax expense (76,127) (72,095) (57,197)
--------- --------- ---------
Net unrealized gains $ 170,882 $ 122,757 $ 97,389
========= ========= =========
</TABLE>
NOTE 19
SUBSEQUENT EVENTS
On February 9, 1999, the Company declared a $0.07 per share cash dividend
payable on March 21, 1999 to all shareholders of record on March 1, 1999. The
dividend totals approximately $127,000, or 10% of current years earnings.
On February 1, 1999, the Bank entered into a non-related party lease
agreement providing for the use of commercial office space to facilitate the
Company's administrative operations and the Bank's plans to bring its item
processing function in-house. The lease term began in March, 1999 and expires
in February, 2004. The agreement provides for two five year renewals with the
same terms and conditions of the original lease agreement. Lease amounts for
the renewals can be increased by fifty percent of the US Consumer Price Index
increase during the previous five years of the lease term. Initial monthly
lease amounts during the term of the lease are approximately $2,500. These
lease payments have been incorporated into the schedule of future minimum lease
payments disclosed above.
<PAGE>
SHORE FINANCIAL CORPORATION
50
- --------------------------------------------------------------------------------
MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Effective August 20, 1997, the Bank's common stock became listed on The
Nasdaq Stock Market under the symbol "SHBK." Prior to that time, there was no
established public trading market for the common stock and trades in the common
stock occurred infrequently on a local basis and generally involved a
relatively small number of shares. Based on information made available to the
Bank, it believes that the selling price per share for the common stock ranged
from $5.50 to $6.16 during fiscal 1996 and from $6.16 to $7.00 during fiscal
1997. All of these amounts have been adjusted to reflect the three-for-one
stock split effected June 10, 1997, and the two-for-one stock split effected in
the form of a dividend on October 15, 1996. Such transactions may not be
representative of all transactions during the indicated periods or the actual
fair market of the common stock at the time of such transaction due to the
infrequency of trades and the limited market for the common stock.
The following table sets forth the per share high and low sale prices for
the Bank's common stock as reported on the The Nasdaq Stock Market for the
period indicated:
<TABLE>
<CAPTION>
PRICE RANGE
-------------------------
HIGH LOW
----------- -----------
<S> <C> <C>
1997
Third Quarter $ 11.75 $ 9.13
Fourth Quarter $ 14.75 $ 11.00
1998
First Quarter $ 14.63 $ 11.00
Second Quarter $ 12.75 $ 11.75
Third Quarter $ 12.63 $ 9.50
Fourth Quarter $ 11.88 $ 9.50
</TABLE>
At March 1, 1999, there were 1,810,812 shares of common stock outstanding
held by 922 stockholders of record.
DIVIDEND POLICY
The Bank declared and paid the Company a $2.0 million dividend on
September 1, 1998. Prior to that the Bank had not declared or paid any cash
dividends during the past five fiscal years. On February 10, 1999, the Company
announced a $0.07 per share annual cash dividend payable on March 21, 1999 to
shareholders of record on March 1, 1999. The Company anticipates paying a
similar annual cash dividend on its common stock in the foreseeable future.
However, any future determination as to payment of cash dividends will be at
the discretion of the Company's Board of Directors and will depend on the
Company's earnings, financial condition, capital requirements and other factors
relevant to the Board of Directors.
<PAGE>
SHORE FINANCIAL CORPORATION
51
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
SHORE FINANCIAL CORPORATION
BOARD OF DIRECTORS
Henry P. Custis, Jr.
CHAIRMAN OF THE BOARD, PARTNER
Law firm of Custis, Lewis & Dix, L.L.P.
Terrell E. Boothe
PRESIDENT
Terrell E. Boothe, Inc.
D. Page Elmore
PRESIDENT AND CHIEF OPERATING OFFICER
James H. Hartman & Sons, Inc.
Scott C. Harvard
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Shore Financial Corporation and Shore Bank
Richard F. Hall, III
OWNER
Loblolly Farms
OWNER
Seaside Produce
Dr. Lloyd J. Kellam, III
PHYSICIAN
Eastern Shore Physicians and Surgeons
L. Dixon Leatherbury
PRESIDENT AND GENERAL MANAGER
Leatherbury Equipment Co.
PRESIDENT
Wakefield Equipment Co.
A. Jackson Mason
DIRECTOR
Mason-Davis Co., Inc.
ADVISORY BOARD OF DIRECTORS
John J. Evans, CPA
CERTIFIED PUBLIC ACCOUNTANT
Holloway & Marval, P.A.
Russ Morgan, M.S., D.D.S.
DENTIST
Milford Professional Center
Dr. Donald Wood
CARDIOLOGIST
Peninsula Cardiology Associates, P.A.
Billye Lee Sarbanes
PRESIDENT
Billye Lee Sarbanes, Co., Inc.
EXECUTIVE OFFICERS
Scott C. Harvard
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Steven M. Belote
VICE PRESIDENT AND SECRETARY
Vonda M. Smith
ASSISTANT SECRETARY
SHORE BANK
EXECUTIVE OFFICERS
Scott C. Harvard
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Steven M. Belote
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
J. Anderson Duer, Jr.
VICE PRESIDENT AND CHIEF LENDING OFFICER
William T. Hill
PRESIDENT OF MARYLAND DIVISION
Arthur C. Miles, Jr.
VICE PRESIDENT AND CHIEF BANKING OFFICER
Brenda P. Wallace
VICE PRESIDENT AND CHIEF OPERATING OFFICER
OFFICERS
Tammy V. Mason
VICE PRESIDENT
Natalie N. Binder
ASSISTANT VICE PRESIDENT
Pamela L. Bromley
ASSISTANT VICE PRESIDENT
Vonda M. Smith
CORPORATE SECRETARY
<PAGE>
SHORE FINANCIAL CORPORATION
52
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
CORPORATE HEADQUARTERS AND MAIN OFFICE
25253 Lankford Highway
Onley, Virginia 23418
Phone: (757) 787-1335
Fax: (757) 789-3645
BRANCH OFFICES
6350 Maddox Boulevard
Chincoteague, Virginia 23336
21220 North Bayside Drive
Cheriton, Virginia 23316
4017 Lankford Highway
Exmore, Virginia 23350
1503 South Salisbury Boulevard
Salisbury, Maryland 21801
100 West Main Street
Salisbury, Maryland 21801
TRANSFER AGENT
Fulton Bank
One Penn Square
Lancaster, PA 17604
SPECIAL COUNSEL
LeClair Ryan
11th Floor, 707 East Main Street
Richmond, VA 23219
INVESTOR INFORMATION
Analysts, stockholders, and others seeking information about Shore Financial
Corporation are invited to contact Mychelle L. Holloway, Investor Relations by
phone at
(757) 787-1335, by mail at
Shore Financial Corporation,
P.O. Box 920,
Onley, Virginia, 23418,
or by e-mail at [email protected].
MEMBER
Federal Deposit Insurance Corporation
Federal Reserve System
INDEPENDENT AUDITORS
Goodman & Company, LLP
1 Commercial Place, Suite 800
Norfolk, VA 23514
ANNUAL MEETING
The Annual Meeting of the stockholders of Shore Financial Corporation will be
held at the Chamber of Commerce in Melfa, Virginia on Tuesday, April 20, 1999,
10:00 A.M.
SECURITIES LISTING
The Company's shares are traded on The NASDAQ Stock Market under ticker symbol
"SHBK".
INTERNET
Web site: www.shorebank.com
Address: shorebank.com
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,459,000
<INT-BEARING-DEPOSITS> 1,442,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,352,000
<INVESTMENTS-CARRYING> 3,697,000
<INVESTMENTS-MARKET> 3,702,000
<LOANS> 80,579,000
<ALLOWANCE> 920,000
<TOTAL-ASSETS> 119,948,000
<DEPOSITS> 104,309,000
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 776,000
<LONG-TERM> 74,000
0
0
<COMMON> 598,000
<OTHER-SE> 13,191,000
<TOTAL-LIABILITIES-AND-EQUITY> 119,948,000
<INTEREST-LOAN> 6,764,000
<INTEREST-INVEST> 1,725,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,489,000
<INTEREST-DEPOSIT> 4,364,000
<INTEREST-EXPENSE> 4,367,000
<INTEREST-INCOME-NET> 4,122,000
<LOAN-LOSSES> 280,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 355,000
<INCOME-PRETAX> 1,937,000
<INCOME-PRE-EXTRAORDINARY> 1,937,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,265,000
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.69
<YIELD-ACTUAL> 8.06
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<ALLOWANCE-OPEN> 770,000
<CHARGE-OFFS> 146,000
<RECOVERIES> 16,000
<ALLOWANCE-CLOSE> 920,000
<ALLOWANCE-DOMESTIC> 920,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
