U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission file number 000-23847
SHORE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1873994
- ------------------------------------ -------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
25253 Lankford Highway
Onley, Virginia 23418
- --------------------------- ------------------
(Address of Principal (Zip Code)
Executive Offices)
Issuer's telephone number: (757) 787-1335
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ___ No ___
Number of shares of Common Stock outstanding as of August 13, 1999: 1,810,812
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Index - Form 10-QSB
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998
Consolidated Statements of Income for the Three Months and
Six Months Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the Six
Months Ended June 30, 1999
Notes to Unaudited Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Financial Condition
Asset Quality
Liquidity and Capital Resources
Interest Sensitivity
Impact of Accounting Pronouncements
Year 2000 Project
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES
1
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
ASSETS
Cash (including interest - earning deposits of
approximately $1,775,000 and $1,442,000, respectively) $ 5,169,218 $ 3,900,861
Investment securities:
Held to maturity (fair value of $1,379,000 and
$3,702,000, respectively) 1,391,166 3,696,685
Available for sale (amortized cost of $27,767,000 and
$27,836,000, respectively) 27,208,911 28,352,312
Investment in Federal Home Loan Bank stock,
at cost 491,800 580,500
Investment in Federal Reserve Bank stock, at cost 124,800 124,800
Loans receivable, net 87,019,656 79,659,005
Premises and equipment, net 2,520,849 2,308,181
Real estate owned 78,307 49,177
Accrued interest receivable 1,073,816 1,023,522
Prepaid expenses and other assets 520,584 252,805
------------------------------
$ 125,599,107 $ 119,947,848
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 107,505,455 $ 104,308,906
Advances from Federal Home Loan Bank 3,955,968 1,073,853
Advance payments by borrowers for taxes
and insurance 287,721 205,815
Accrued interest payable 37,984 37,292
Accrued expenses and other liabilities 210,996 533,195
------------------------------
Total liabilities 111,998,124 106,159,061
------------------------------
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 shares issued and
outstanding 597,568 597,568
Additional capital 3,584,652 3,584,652
Retained earnings, substantially restricted 9,798,963 9,265,567
Accumulated other comprehensive income (380,200) 341,000
------------------------------
Total stockholders' equity 13,600,983 13,788,787
------------------------------
$ 125,599,107 $ 119,947,848
==============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Six Months Ended
Three Months Ended June 30, June 30,
--------------------------------------------------- ---------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------- ---------------------------------------------
<S> <C>
Interest income
Loans $ 1,753,712 $ 1,681,247 $ 3,479,244 $ 3,354,409
Investments 426,338 421,414 867,227 845,950
--------------------------------------------- ------------------------------------------------
Total interest income 2,180,050 2,102,661 4,346,471 4,200,359
--------------------------------------------- ------------------------------------------------
Interest expense
Deposits 1,063,010 1,085,907 2,153,524 2,158,502
FHLB advances 28,986 588 47,406 1,134
--------------------------------------------- ------------------------------------------------
Total interest expense 1,091,996 1,086,495 2,200,930 2,159,636
--------------------------------------------- ------------------------------------------------
Net interest income 1,088,054 1,016,166 2,145,541 2,040,723
Provision for loan losses 267,300 39,300 325,600 75,600
--------------------------------------------- ------------------------------------------------
Net interest income after
provision for loan losses 820,754 976,866 1,819,941 1,965,123
--------------------------------------------- ------------------------------------------------
Noninterest income
Deposit account fees 175,578 138,886 334,213 256,155
Loan fees 41,163 27,522 82,767 59,707
Gains on sales of securities 225,956 2,970 242,199 30,646
Other 22,923 32,483 55,292 61,318
--------------------------------------------- ------------------------------------------------
Total noninterest income 465,620 201,861 714,471 407,826
--------------------------------------------- ------------------------------------------------
Noninterest expense
Compensation and employee
benefits 348,541 296,619 658,629 621,151
Occupancy and equipment 205,516 162,417 374,490 321,654
Advertising 16,461 16,413 29,488 32,078
Data processing 144,172 92,214 264,618 231,282
Federal insurance premium 15,269 14,764 30,614 29,976
Other 85,093 136,001 176,320 190,098
--------------------------------------------- ------------------------------------------------
Total noninterest expense 815,052 718,428 1,534,159 1,426,239
--------------------------------------------- ------------------------------------------------
Income before income taxes 471,322 460,299 1,000,253 946,710
Income taxes 160,300 174,900 340,100 354,900
--------------------------------------------- ------------------------------------------------
Net income $ 311,022 $ 285,399 $ 660,153 $ 591,810
============================================= ================================================
Earnings Per Common Share:
Basic $ 0.17 $ 0.16 $ 0.36 $ 0.33
============================================= ================================================
Diluted $ 0.17 $ 0.16 $ 0.36 $ 0.32
============================================= ================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulated
Other
Common Additional Retained Comprehensive
Stock Capital Earnings Income Total
------------------ ------------------ ----------------- ----------------------- --------------
Balance, December 31, 1998 $ 597,568 $ 3,584,652 $ 9,265,567 $ 341,000 $ 13,788,787
Common stock dividend declared - - (126,757) - (126,757)
Comprehensive income - - 660,153 (721,200) (61,047)
-------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ 597,568 $ 3,584,652 $ 9,798,963 $ (380,200) $ 13,600,983
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------- --------------------
<S> <C>
Cash flows from operating activities
Net income $ 660,153 $ 591,810
Adjustments to reconcile to net cash
provided by operating activities:
Provision for loan losses 325,600 75,600
Depreciation and amortization 135,313 135,645
Amortization of premium and accretion
of discount on securities, net 5,767 1,165
Gain on sale of securities (242,199) (30,646)
Loss on sale of premises and
equipment - 3,450
Change in net deferred loan fees (51,484) (67,664)
Loss on sale of repossessed assets - 2,450
(Increase) decrease in other assets (113,689) (212,333)
Increase in other liabilities (76,600) 128,246
--------------------------------------------
Net cash provided by operating activities 642,861 627,723
--------------------------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (3,736,643) (9,557,490)
Proceeds from maturities and sales of
available-for-sale securities 4,015,068 8,226,626
Purchase of held-to-maturity securities (300,000) -
Proceeds from maturities of held-to-maturity
securities 2,614,127 1,000,000
Redemption of Federal Home Loan Bank stock 88,700 -
Loan origination, net of repayments (7,656,769) (2,836,319)
Proceeds from sale of premises and equipment - 1,439
Purchase of premises and equipment (343,766) (127,394)
Proceeds from sale of real estate owned 2,500 430,611
Improvements to real estate owned (9,628) -
--------------------------------------------
Net cash used by investing activities (5,326,411) (2,862,527)
--------------------------------------------
Cash flows from financing activities
Net increase in demand deposits 1,980,481 2,326,424
Net increase in time deposits 1,216,068 276,562
Proceeds from FHLB advances 6,300,000 200,000
Repayments of FHLB advances (3,417,885) (1,147)
Payment of dividend on common stock (126,757) 23,040
--------------------------------------------
Net cash provided by financing activities 5,951,907 2,824,879
--------------------------------------------
Increase (decrease) in cash and cash equivalents 1,268,357 590,075
Cash and cash equivalents, beginning of period 3,900,861 4,190,551
--------------------------------------------
Cash and cash equivalents, end of period $ 5,169,218 $ 4,780,626
============================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 2,200,238 $ 2,148,494
Cash paid for income taxes $ 492,000 $ 387,714
Supplemental schedule of non-cash investing and
financing activities
Transfers from loans to real estate acquired
through foreclosure $ 22,002 $ 103,769
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of Shore Financial
Corporation and Subsidiary (the "Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP") and with the instructions to
Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the consolidated
financial statements have been included.
In preparing the consolidated financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. The consolidated results of
operations and other data for the six month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for any other interim
period or the entire year ending December 31, 1999. The unaudited consolidated
financial statements presented herein should be read in conjunction with the
audited consolidated financial statements and related notes thereto in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.
Principles of Consolidation
The consolidated financial statements of the Company include and primarily
consist of the accounts of its wholly-owned subsidiary Shore Bank (the "Bank").
All significant intercompany balances and transactions have been eliminated in
consolidation.
NOTE 2 - ORGANIZATION
The Company is a Virginia corporation organized in September 1997 by the Bank
for the purpose of becoming a unitary holding company of the Bank. 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.
6
<PAGE>
NOTE 3 - EARNINGS PER SHARE
The following is an unaudited reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the periods ended
June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Six Months Ended
Three Months Ended June 30, June 30,
------------------------------------- -----------------------------
1999 1998 1999 1998
------------ -------------- ------------- -------------
<S> <C>
Net income (numerator, basic and diluted) $ 311,022 $ 285,399 $ 660,153 591,810
Weighted average shares outstanding
(denominator) 1,810,812 1,810,812 1,810,812 1,807,829
------------ -------------- ------------- -------------
Earnings per common share - basic $ 0.17 $ 0.16 $ 0.36 0.33
============ ============== ============= =============
Effect of dilutive securities:
Weighted average shares outstanding 1,810,812 1,810,812 1,810,812 1,807,829
Effect of stock options 11,837 18,206 13,778 20,373
------------ -------------- ------------- -------------
Diluted average shares outstanding
(denominator) 1,822,649 1,829,018 1,824,590 1,828,202
------------ -------------- ------------- -------------
Earnings per common share -
assuming dilution $ 0.17 $ 0.16 $ 0.36 0.32
============ ============== ============= =============
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income consists of the following for the three months ended
June 30, 1999 and 1998:
Six Months Ended June 30,
---------------------------------
1999 1998
--------------- ----------------
Net income $ 660,153 $ 591,810
Other comprehensive income (721,200) 48,656
------------ -------------
Total comprehensive income $ (61,047) $ 640,466
============ =============
7
<PAGE>
The following is an unaudited reconciliation of the related tax effects
allocated to each component of other comprehensive income at June 30, 1999 and
1998
Six Months Ended June 30,
---------------------------------
1999 1998
--------------- ----------------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $ (850,600) $ 107,900
Less: reclassification adjustment
for gains (losses) included in income 242,200 30,600
------------ -------------
Total other comprehensice income (loss)
before income tax expense (1,092,800) 77,300
Income tax (expense) benefit 371,600 (28,644)
------------ -------------
Net unrealized gains (losses) $ (721,200) $ 48,656
============ =============
8
<PAGE>
Item 2 - Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations
Results of Operations
General
Net income for the six months ended June 30, 1999 increased $68,400, or 11.6%,
to $660,200, compared to net income of $591,800 for the same period in the prior
year. Earnings were positively impacted by loan growth of $7.7 million, or 9.6%,
during the 1999 six month period and a 25.2% increase in noninterest income,
excluding gains on sales of securities of $242,200 and $30,600 during the six
months ended June 30, 1999 and 1998, respectively. Conversely, earnings were
negatively impacted by additional noninterest expense resulting from the new
operations center that was opened during April, 1999. The operations center is
home to the accounting and data processing departments of the Bank and will
begin providing item processing for the Bank in mid August. During the second
quarter, the Bank incurred expenses related to running these systems internally
while continuing to pay the outside vendor until the item processing in brought
in house. These additional expenses were approximately $40,000 during the
quarter. Earnings for the June 1998 period include approximately $113,000 in
cost associated with operating the newest branch office, located in Salisbury,
Maryland, which opened in November 1997. This branch operated at break-even
during most of the six months ended June 30, 1999 and is expected to be
accretive to earnings during the remainder of 1999.
Net Interest Income
Net interest income increased $104,900 for the six months ended June 30, 1999 as
compared to the same period in 1998. This increase occurred despite a decrease
in net interest margin to 3.86% during the June 1999 period as compared to 4.07%
for the June 1998 period. The interest rate spread decreased to 3.22% for the
six months ended June 30, 1999, as compared to 3.47% for the 1998 six month
period. The interest rate spread does not reflect the impact of
noninterest-bearing deposits on the Bank's cost of funds and the corresponding
net interest spread. Noninterest-bearing demand deposits increased to $9.1
million at June 30, 1999 as compared $6.0 million at June 30, 1998. Including
average noninterest-bearing deposits in calculating the cost of funds results in
an interest rate spread of 3.54% for the six months ended June 30, 1999 as
compared to 3.77% for the same period in 1998. Decreases in net interest margin
and net interest spread for the six months ended June 30, 1999 reflect the lower
interest rate environment in existence during the June 1999 period as compared
to the same period of 1998.
Interest income increased $146,100 for the six months ended June 30, 1999 as
compared to the same period in 1998. The increase resulted from the average
balance of loans increasing by $9.6 million during the period, primarily in
commercial and consumer lending and home equity lines. Additionally, the average
balance of securities increased by $3.9 million. Although outstanding loans
increased significantly during the period, lower interest rates caused a
decrease in the yield on loans to 8.19% for the six months ended June 30, 1999
as compared to 8.90% for the 1998 period.
Interest expense increased $41,300 for the six months ended June 30, 1999 as
compared to the same period in 1998. This is due to increased borrowings from
the Federal Home Loan Bank to fund the significant loan growth that occurred
during the 1999 period. Average interest-bearing deposits increased by $7.1
million during the six months ended June 30, 1999 as compared to the same period
of 1998, but this increase was not sufficient to fund loan growth. This increase
was offset by a decrease in the average rate on interest-bearing liabilities
from 4.73% in 1998 to 4.39% for the June 1999 period. An increased emphasis on
attracting lower costing interest-bearing and noninterest-bearing commercial and
consumer deposit relationships and a lower interest rate environment have
contributed to the lower deposit rates.
9
<PAGE>
The following table illustrates average balances of total interest-earning
assets and total interest-bearing liabilities for the periods indicated, showing
the average distribution of assets, liabilities, stockholders' equity and the
related income, expense and corresponding weighted average yields and costs. The
average balances used in these tables and other statistical data were calculated
using daily averages.
10
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------
1999 1998
----------------------------------- ---------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- ----------- ---------- ---------- ---------- ----------
<S> <C>
Assets:
Securities (1) $30,250 $937 6.19% $26,395 $864 6.55%
Loans (net of unearned income):
Real Estate Mortgage 44,410 1,743 7.85% 43,436 1,859 8.56%
Real Estate Construction 1,719 67 7.74% 1,494 62 8.30%
Commercial 24,730 1,057 8.55% 19,789 920 9.30%
Home Equity Lines 5,718 245 8.57% 5,307 251 9.46%
Consumer 8,374 367 8.77% 5,345 262 9.80%
---------- ----------- ---------- ----------
Total loans 84,951 3,479 8.19% 75,371 3,354 8.90%
---------- ----------- ---------- ----------
Federal funds sold 0 0 0.00% 0 0 0.00%
Interest-bearing deposits
in other banks 1,987 45 4.53% 2,891 73 5.05%
---------- ----------- ---------- ----------
Total earning assets 117,188 4,461 7.61% 104,657 4,291 8.20%
---------- ----------- ---------- ----------
Less: allowance for loan losses (951) (770)
Total nonearning assets 6,874 7,110
---------- ----------
Total assets $123,111 $110,997
========== ==========
Liabilities
Interest-bearing deposits:
Checking and savings $30,680 $385 2.51% $22,828 $273 2.39%
Time deposits 67,646 1,768 5.23% 68,420 1,886 5.51%
---------- ----------- ---------- ----------
Total interest-bearing
deposits 98,326 2,153 4.38% 91,248 2,159 4.73%
FHLB advances 1,845 47 5.09% 75 1 2.67%
---------- ----------- ---------- ----------
Total interest-bearing
liabilities 100,171 2,200 4.39% 91,323 2,160 4.73%
----------- ----------
Non-interest bearing liabilities:
Demand deposits 7,835 6,169
Other liabilities 1,128 780
---------- ----------
Total liabilities 109,134 98,272
Stockholders' equity 13,977 12,725
---------- ----------
Total liabilities and stockholders'
equity $123,111 $110,997
========== ==========
Net interest income $2,261 $2,131
=========== ==========
Interest rate spread (1) 3.22% 3.47%
Net interest margin (1) 3.86% 4.07%
</TABLE>
(1) Tax equivalent basis.
11
<PAGE>
Noninterest Income
Noninterest income was $714,500 during the six months ended June 30, 1999 as
compared to $407,800 for the same period in 1998, an increase of $306,700 or
75.2%. Included in these amounts are gains on sales of securities of $242,200
and $30,600 for the six months ended June 30, 1999 and 1998, respectively.
Excluding these amounts noninterest income increased $95,100 or 25.2% during the
June 1999 period as compared to the 1998 period. Increases in deposit account
and loan fees resulting from the additional commercial and consumer
relationships obtained during the period contributed significantly to this
increase in income.
Provision for Loan Losses
Provision for loan losses was $325,600 for the six months ended June 30, 1999 as
compared to $75,600 for the same period in 1998, an increase of $250,000. This
increase primarily relates to provisions established for two specific loan
customers in the bank's commercial loan portfolio that management has concluded
the risk of loss to be probable. General loan loss reserves maintained by the
Bank normally would be sufficient to absorb losses incurred on impaired loans.
However, with the bank's significant loan growth over the past twelve months and
the need to reserve for these two loans, management decided an increase in loan
loss reserves was warranted. See Asset Quality for additional discussions of
these loans.
Noninterest Expense
Noninterest expense was $1.53 million during the six months ended June 30, 1999
as compared to $1.43 million for the same period in 1998, an increase of
$100,000 or 7.0%. This increase is primarily due to additional noninterest
expense resulting from the new operations center that was opened during April,
1999. The operations center is home to the accounting and data processing
departments of the Bank and will begin providing item processing for the Bank in
mid August. During the second quarter, the Bank incurred expenses related to
operating these systems internally while continuing to pay an outside vendor
until the item processing is brought in house. These additional expenses were
approximately $40,000 during the quarter. Additionally, the Bank incurred added
telecommunication expense while converting the bank's data processing system to
a network environment. The bank's old system and its new network system ran
concurrently with the Bank's data processing provider for approximately
forty-five days during the second quarter of 1999.
Financial Condition
During the six months ended June 30, 1999, the Company increased its assets $5.7
million from $119.9 million at December 31, 1998, to $125.6 million at June 30,
1999. This increase was due primarily to increases in net loans of $7.4 million.
Consolidation and other changes in the local banking market during 1998 created
increased lending opportunities for the Bank. These opportunities along with a
lower interest rate environment have continued to positively affect loan demand
through the first second of 1999. Additionally, continued growth in the Bank's
Maryland market has improved lending activity. Increased loan demand more than
offset the $3.2 million in deposit growth during the period. Securities and
interest-earning deposits decreased $3.1 million during the period due to
funding requirements resulting from the significant loan growth incurred and
fair market value adjustments to available-for-sale securities within the
portfolio.
12
<PAGE>
Deposits increased $3.2 million during the six months ended June 30, 1999. The
increase was due primarily to growth in demand deposit accounts. During the
period, the Bank borrowed $1.0 million from the Federal Home Loan Bank to fund
fixed rate loans with terms of up to fifteen years. The Bank also had
outstanding at June 1999 approximately $1.9 million of additional short-term
Federal Home Loan Bank advances used to meet loan funding requirements during
the period.
Stockholders' equity was $13.6 million at June 30, 1999, compared to $13.8
million at December 31, 1998. Net income of $660,200 for the period was offset
by the $127,000 common stock dividend declared and reductions in unrealized
gains on available-for-sale securities.
Asset Quality
Loans are placed on nonaccrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual or the loan reaches 90 days delinquent whereby the loan no
longer accrues interest.
Total nonperforming assets, which consist of nonaccrual loans and foreclosed
properties, adjusted for estimated losses upon sale and the related selling
expenses and holding costs, were $1.27 million at June 30, 1999, compared to
$717,000 at December 31, 1998. As to nonaccrual loans existing at June 30, 1999,
approximately $50,000 of interest income would have been recognized during the
six months then ended if interest thereon had accrued. Included in nonperforming
assets are two loan relationships totaling $457,000 that management has
categorized as impaired under the guidelines established by SFAS No. 114,
Accounting for Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. The loan relationships are secured by real estate, vehicles and/or
accounts receivable. Approximately $15,000 has been recovered subsequent to June
30, 1999 from the sale of collateral securing these loans. The Bank has
specifically reserved approximately $300,000 towards these loans representing
the amount that management anticipates will not be collected due to deficiencies
in the collateral and costs associated with any collection proceedings.
At June 30, 1999, all loans 60 days or more delinquent, including nonperforming
loans, totaled $1.8 million. Performing loans totaling $561,000 existed that
have possible credit problems and cause management to have concerns about the
borrowers continuing ability to comply with existing repayment terms. Loans in
this category, along with the delinquent loans, are subject to constant
management attention, and their status is reviewed on a regular basis.
13
<PAGE>
The following table details information concerning nonaccrual and past due
loans, as well as foreclosed assets.
Nonperforming Assets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- -----------------
<S> <C>
Nonaccrual loans:
Commercial $ 215 $ 0
Real Estate Construction 0 0
Real Estate Mortgage 908 555
Home equity lines of credit 0 0
Consumer 72 113
--------------- -----------------
Total nonaccrual loans 1,195 668
Other real estate owned 78 49
--------------- -----------------
Total nonperforming assets $ 1,273 $ 717
=============== =================
Loans past due 90 or more days
accruing interest $0 $0
Allowance for loan losses to
nonaccrual loans 101.92% 137.72%
Nonperforming assets to period end
loans and other real estate owned 1.42% 0.89%
</TABLE>
14
<PAGE>
Set forth below is a table detailing the allowance for loan losses for the
periods indicated.
Allowance for Loan Losses
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------
1999 1998
--------------- -----------------
<S> <C>
Balance, beginning of period $ 920 $ 770
Loans charged off:
Commercial 0 26
Real estate construction 0 0
Real estate mortgage 14 24
Home equity lines of credit 0 0
Consumer 23 35
--------------- -----------------
Total loans charged-off 37 85
--------------- -----------------
Recoveries:
Commercial 0 0
Real estate construction 0 0
Real estate mortgage 0 0
Home equity lines of credit 0 0
Consumer 9 3
--------------- -----------------
Total recoveries 9 3
--------------- -----------------
Net charge-offs (28) (82)
Provision for loan losses 326 76
--------------- -----------------
Balance, end of period $ 1,218 $ 764
=============== =================
Allowance for loan losses to loans
outstanding at end of period 1.38% 1.00%
Allowance for loan losses to nonaccrual
loans outstanding at end of period 101.92% 132.64%
Net charge-offs to average loans
outstanding during period -0.03% -0.11%
</TABLE>
15
<PAGE>
Liquidity and Capital Resources
Liquidity represents the Bank's ability to meet present and future obligations
through the sale and maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest-bearing deposits with banks, federal funds sold, available-for-sale
investments and investments and loans maturing within one year. The Bank's
ability to obtain deposits and purchase funds at favorable rates determines its
liability liquidity.
At June 30, 1999, the Bank had outstanding loan and line of credit commitments
of $11.8 million. Scheduled maturities of certificate of deposits during the
twelve months following June 30, 1999 amounted to $43.4 million. Historically,
the Bank has been able to retain a significant amount of their deposits as they
mature. As a result of the Bank's management of liquid assets and the ability to
generate liquidity through liability funding, management believes that the Bank
maintains overall liquidity that is sufficient to satisfy its depositor's
requirements and meet its customers' credit needs.
Total cash and cash equivalents increased $1.3 million for the six months ended
June 30, 1999, compared to a increase of $590,000 for the six months ended June
30, 1998. Net cash provided by operating activities was $643,000 for the six
months ended June 30, 1999, compared to $628,000 during the same period in 1998.
The fluctuations in amounts during these periods were primarily the result of
normal operating activities.
Net cash used in investing activities was $5.3 million during the six months
ended June 30, 1999, compared to $2.9 million for the six months ended June 30,
1998. The fluctuations in amounts during these periods were primarily the result
of increased loan growth offset by maturities of investment securities during
the six months ended June 30, 1999, as compared to the same period of 1998.
Net cash provided by financing activities was $6.0 million for the six months
ended June 30, 1999, compared to $2.8 million for the six months ended June 30,
1998. The fluctuations in amounts during these periods were primarily the result
of increased deposit growth and increased borrowings from the Federal Home Loan
Bank during June 1999 period as compared to the June 1998 period.
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 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). At June 30, 1999, the Company meets all capital adequacy
requirements to which it is subject.
16
<PAGE>
The following table details the components of Tier 1 and Tier 2 capital and
related ratios at June 30, 1999.
Analysis of Capital
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------- --------------------
<S> <C>
Tier 1 Capital:
Common stock $ 598 $ 598
Additional paid-in capital 3,585 3,585
Retained earnings 9,798 9,265
Comprehensive income (380) 341
-------------------- --------------------
Total capital (GAAP) 13,601 13,789
Less: Intangibles (39) (41)
Unrealized (gains) losses 255 (341)
-------------------- --------------------
Total Tier 1 capital $ 13,817 $ 13,407
-------------------- --------------------
Tier 2 Capital:
Allowances for loan losses 1,218 1,068
Other required deductions 0 (21)
-------------------- --------------------
Total Tier 2 capital $ 15,035 $ 14,454
-------------------- --------------------
Risk-weighted assets $ 83,995 $ 74,400
Capital Ratios (1):
Tier 1 risk-based capital ratio 16.45% 18.02%
Total risk-based capital ratio 17.90% 19.43%
Tier 1 capital to average adjusted
total assets 11.22% 11.80%
</TABLE>
Interest Sensitivity
An important element of both earnings performance and the maintenance of
sufficient liquidity is proper management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
interest sensitive liabilities at a specific time interval. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets during a given period. Generally, during a period of rising
interest rates, a negative gap within shorter maturities would adversely affect
the net interest income, while a positive gap within shorter maturities would
result in an increase in net interest income. Conversely, during a period of
falling interest rates, a negative gap within shorter maturities would result in
an increase in net interest income while a positive gap within shorter
maturities would have the opposite effect. This gap can be managed by repricing
assets or liabilities, by selling investments available for sale, by replacing
assets or liability at maturity, or by adjusting the interest rate during the
life of an asset or liability. Matching amounts of assets and liabilities
maturing in the same time interval helps hedge the risk and minimize the impact
on net interest income in periods of rising or falling interest rates.
17
<PAGE>
The Bank determines the overall magnitude of interest sensitivity risk and then
formulates policies governing asset generation and pricing, funding sources and
pricing, and off-balance-sheet commitments in order to reduce sensitivity risk.
These decisions are based on management's outlook regarding future interest rate
movements, the state of the local and national economy, and other financial and
business risk factors.
The following table presents the Bank's interest sensitivity position at June
30, 1999. This one-day position, which continually is changing, is not
necessarily indicative of the Bank's position at any other time.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------------------------------------------------------
With-in 91-365 1 to 5 Over
90 Days Days Years 5 Years Total
--------------- ----------------- --------------- ------------- -------------
<S> <C>
Interest-Earning Assets:
Loans $ 15,439 $ 23,159 $ 30,415 $ 19,225 $ 88,238
Securities 1,887 857 16,219 9,637 28,600
Money market and other
short term securities 1,775 0 0 0 1,775
---------------- ------------ ------------ ------------- -------------
Total earning assets $ 19,101 $ 24,016 $ 46,634 $ 28,862 $ 118,613
================ ============ ============ ============= =============
Cummulative earning assets $ 19,101 $ 43,117 $ 89,751 $ 118,613 $ 118,613
================ ============ ============ ============= =============
Interest-Bearing Liabilities:
Money market savings 8,166 0 0 0 8,166
Interest checking 0 0 11,157 0 11,157
Savings 0 0 13,973 0 13,973
Certificates of deposit 10,123 33,316 16,743 4,936 65,118
FHLB advances 2,900 0 0 1,056 3,956
---------------- ------------ ------------ ------------- -------------
Total interest-bearing liabilities $ 21,189 $ 33,316 $ 41,873 $ 5,992 $ 102,370
================ ============ ============ ============= =============
Cummulative interest-bearing
liabilities 21,189 54,505 96,378 102,370 102,370
================ ============ ============ ============= =============
Period gap $ (2,088) $ (9,300) $ 4,761 $ 22,870 $ 16,243
Cummulative gap $ (2,088) $ (11,388) $ (6,627) $ 16,243 $ 16,243
Ratio of cummulative interest-earning
assets to interest-bearing liabilities 90.15% 79.11% 93.12% 115.87% 115.87%
Ratio of cummulative gap to total
earning assets -1.76% -9.60% -5.59% 13.69% 13.69%
-10.93% -38.72% 10.21% 79.24%
</TABLE>
18
<PAGE>
Impact of Accounting Pronouncements
Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management has determined that applying the
pronouncement's will not have a material impact 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's adoption of
this SOP on January 1, 1999 did not materially impact 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
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, its adoption on January 1,
1999 did not materially affect the Company's financial position or results of
operations.
Year 2000 Project
The Year 2000 presents problems for businesses that are dependent on computer
hardware and software to perform date dependent calculations and logic
comparisons. A great deal of software and microchip technology was developed
utilizing two digit years rather than four digit years (example: 97 instead of
1997). Technology utilizing two digit years most likely will not be able to
distinguish the year 2000 from 1900, and therefore may shut down or perform
miscalculations and comparisons as much as 100 years off. Management is fully
aware this presents a potential business disruption, and is successfully
completing 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) 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
19
<PAGE>
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. Phase four, validation,
involved the actual real life testing of all the new upgrades and components.
Furthermore, the Company tested with its third party service providers to make
sure all new or updated year 2000 compliant systems worked with business
partners. Due to the complexity and enormity of this phase, it took until June
30, 1999 for the exhaustive testing to be completed. Phases one through four of
the Company's Y2K Project have been 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. During the quarter ended June 30, 1999,
contingency plans were drafted. During the third quarter of 1999, the
contingency plans will be tested, independently approved by the Board and senior
management, and all employees will be trained on implementing the contingency
policies and procedures into branch operations if conditions warrant.
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 has contacted all significant commercial deposit
customers to assess their Year 2000 readiness and each quarter reviews its list
of new commercial deposit customers so that they may be contacted and assessed
also. The Company has assessed the risk of all its commercial loan customers and
monitors those risk. Loan officers assess the risk of new commercial loan
customers when they apply for the loan and monitor them accordingly.
To date, the Company has spent approximately $50,000 to $75,000 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. The Company does not separately track the internal
costs incurred for the Y2K project; however, such costs are principally related
to payroll costs for information systems employees. It is impossible to
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. Although the Company has faith in the adequacy of
its contingency plans and the success of the testing, 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 through four (awareness,
assessment, renovation, and validation) and will continue to be deeply involved
with customer awareness projects throughout the remainder of 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 compiled for contingency
planning. In addition, all commercial loan and deposit customers have been
contacted regarding their Year 2000 progress. The Company expects any adverse
effect of Year 2000 on its commercial customers to be immaterial.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In the ordinary course of its operations, the Bank is a party to various legal
proceedings. Based upon information currently available, management believes
that such legal proceedings, in the aggregate, will not have a material adverse
effect on the business, financial condition, or results of operations of the
Bank.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Stockholders
The annual meeting of the stockholders of Shore Financial Corporation was held
on April 20, 1999. Matters voted on included the election of Lloyd J. Kellam,
III, Henry P. Custis, Jr., and L. Dixon Leatherbury for three-year terms
expiring in 2002. Another matter voted on during the meeting consisted of the
appointment of Goodman & Company, L.L.P. as the Company's independent auditors
for the fiscal year ending December 31, 1999. No other matters were voted on
during the meeting or by proxy or other means during the period.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Scott C. Harvard August 13, 1999
- -----------------------
Scott C. Harvard
President and
Chief Executive Officer
Steven M. Belote August 13, 1999
- -----------------------
Steven M. Belote
Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,394,000
<INT-BEARING-DEPOSITS> 1,775,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,209,000
<INVESTMENTS-CARRYING> 1,391,000
<INVESTMENTS-MARKET> 1,379,000
<LOANS> 88,238,000
<ALLOWANCE> 1,218,000
<TOTAL-ASSETS> 125,599,000
<DEPOSITS> 107,505,000
<SHORT-TERM> 2,900,000
<LIABILITIES-OTHER> 537,000
<LONG-TERM> 1,056,000
0
0
<COMMON> 598,000
<OTHER-SE> 13,003,000
<TOTAL-LIABILITIES-AND-EQUITY> 125,599,000
<INTEREST-LOAN> 1,754,000
<INTEREST-INVEST> 426,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,180,000
<INTEREST-DEPOSIT> 1,063,000
<INTEREST-EXPENSE> 1,092,000
<INTEREST-INCOME-NET> 1,088,000
<LOAN-LOSSES> 267,000
<SECURITIES-GAINS> 226,000
<EXPENSE-OTHER> 85,000
<INCOME-PRETAX> 471,000
<INCOME-PRE-EXTRAORDINARY> 471,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 311,000
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
<YIELD-ACTUAL> 7.65
<LOANS-NON> 1,195,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 318,000
<ALLOWANCE-OPEN> 951,000
<CHARGE-OFFS> 1,000
<RECOVERIES> 1,000
<ALLOWANCE-CLOSE> 1,218,000
<ALLOWANCE-DOMESTIC> 1,218,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
