U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ------ ACT OF 1934
For the quarterly period ended March 31, 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 May 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 March 31, 1999 and
December 31, 1998
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the Three
Months Ended March 31, 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
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
<S> <C>
Cash (including interest - earning deposits of
approximately $3,549,000 and $1,442,000, respectively) $ 5,406,008 $ 3,900,861
Investment securities:
Held to maturity (fair value of $1,184,000 and
$3,702,000, respectively) 1,183,676 3,696,685
Available for sale (amortized cost of $28,513,000 and
$27,836,000, respectively) 28,723,006 28,352,312
Investment in Federal Home Loan Bank stock,
at cost 580,500 580,500
Investment in Federal Reserve Bank stock, at cost 124,800 124,800
Loans receivable, net 84,388,432 79,659,005
Premises and equipment, net 2,458,667 2,308,181
Real estate owned 71,178 49,177
Accrued interest receivable 1,008,394 1,023,522
Prepaid expenses and other assets 334,446 252,805
----------------------------------------------------------------------
$124,279,107 $119,947,848
----------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $108,590,736 $104,308,906
Advances from Federal Home Loan Bank 1,072,635 1,073,853
Advance payments by borrowers for taxes
and insurance 332,100 205,815
Accrued interest payable 47,871 37,292
Accrued expenses and other liabilities 436,340 533,195
----------------------------------------------------------------------
Total liabilities 110,479,682 106,159,061
----------------------------------------------------------------------
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 9,487,905 9,265,567
Accumulated other comprehensive income 129,300 341,000
----------------------------------------------------------------------
Total stockholders' equity 13,799,425 13,788,787
----------------------------------------------------------------------
$124,279,107 $119,947,848
======================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C>
Interest income
Loans $ 1,725,532 $ 1,673,162
Investments 440,889 424,536
---------------------------------------
Total interest income 2,166,421 2,097,698
---------------------------------------
Interest expense
Deposits 1,090,514 1,072,596
FHLB advances 18,420 546
---------------------------------------
Total interest expense 1,108,934 1,073,142
---------------------------------------
Net interest income 1,057,487 1,024,556
Provision for loan losses 58,300 36,300
---------------------------------------
Net interest income after
provision for loan losses 999,187 988,256
---------------------------------------
Noninterest income
Deposit account fees 158,635 117,268
Loan fees 41,603 32,185
Other 48,614 56,510
---------------------------------------
Total noninterest income 248,852 205,963
---------------------------------------
Noninterest expense
Compensation and employee
benefits 310,088 324,532
Occupancy and equipment 168,974 159,237
Advertising 13,027 15,664
Data processing 120,445 110,984
Federal insurance premium 15,345 15,212
Other 91,265 82,180
---------------------------------------
Total noninterest expense 719,144 707,809
---------------------------------------
Income before income taxes 528,895 486,410
Income taxes 179,800 180,000
---------------------------------------
Net income $ 349,095 $ 306,410
=======================================
Earnings Per Common Share:
Basic $ 0.19 $ 0.17
=======================================
Diluted $ 0.19 $ 0.17
=======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Additional Retained Comprehensive
Stock Capital Earnings Income Total
--------------- -------------- -------------- ------------------ ----------------
<S> <C>
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 - - 349,095 (211,700) 137,395
------------------------------------------------------------------------------------
Balance, March 31, 1999 $ 597,568 $ 3,584,652 $ 9,487,905 $ 129,300 $ 13,799,425
====================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------- ----------------
<S> <C>
Cash flows from operating activities
Net income $ 349,095 $ 306,410
Adjustments to reconcile to net cash
provided by operating activities:
Provision for loan losses 58,300 36,300
Depreciation and amortization 65,729 68,966
Amortization of premium and accretion
of discount on securities, net (1,081) (669)
Gain on sale of securities (16,243) (27,676)
Loss on sale of premises and
equipment - 1,146
Change in net deferred loan fees (26,939) (32,753)
Loss on sale of repossessed assets - 2,450
(Increase) decrease in other assets (68,622) 36,012
Increase in other liabilities 149,109 200,572
------------------------------------
Net cash provided by operating activities 509,348 590,758
------------------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (3,467,654) (5,182,609)
Proceeds from maturities and sales of
available-for-sale securities 2,785,000 3,885,502
Purchase of held-to-maturity securities - -
Proceeds from maturities of held-to-maturity
securities 2,521,493 500,000
Loan origination, net of repayments (4,782,789) (1,476,575)
Proceeds from sale of premises and equipment - 1,844
Purchase of premises and equipment (214,106) (121,056)
Proceeds from sale of real estate owned - 1,331
------------------------------------
Net cash used by investing activities (3,158,056) (2,391,563)
------------------------------------
Cash flows from financing activities
Net increase in demand deposits 3,065,762 3,161,691
Net increase in time deposits 1,216,068 276,562
Proceeds from FHLB advances 1,800,000 -
Repayments of FHLB advances (1,801,218) (1,147)
Payment of dividend on common stock (126,757) -
------------------------------------
Net cash provided by financing activities 4,153,855 3,437,106
------------------------------------
Increase (decrease) in cash and cash equivalents 1,505,147 1,636,301
Cash and cash equivalents, beginning of period 3,900,861 4,190,551
------------------------------------
Cash and cash equivalents, end of period $ 5,406,008 $ 5,826,852
====================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 1,098,355 $ 1,038,867
Cash paid for income taxes $ 142,000 $ 190,114
Supplemental schedule of non-cash investing and
financing activities
Transfers from loans to real estate acquired
through foreclosure $ 22,001 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of Shore Financial
Corporation and Subsidiary (the "Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP") and with the instructions to
Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the consolidated
financial statements have been included.
In preparing the consolidated financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. The consolidated results of
operations and other data for the three month period ended March 31, 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.
<PAGE>
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.
<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
March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1999 1998
------------ --------------
<S> <C>
Net income (numerator, basic and diluted) $ 349,095 $ 306,410
Weighted average shares outstanding
(denominator) 1,810,812 1,804,812
------------ --------------
Earnings per common share - basic $ 0.19 $ 0.17
============ ==============
Effect of dilutive securities:
Weighted average shares outstanding 1,810,812 1,804,812
Effect of stock options 15,585 20,640
------------ --------------
Diluted average shares outstanding
(denominator) 1,826,397 1,825,452
------------ --------------
Earnings per common share -
assuming dilution $ 0.19 $ 0.17
============ ==============
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income consists of the following for the three months ended
March 31, 1999 and 1998:
Shore Financial Corporation
Comprehensive Income
Three Months Ended March 31,
---------------------------------
1999 1998
--------------- ----------------
Net income $ 349,095 $ 306,410
Other comprehensive income (211,700) 11,200
------------ -------------
Total comprehensive income $ 137,395 $ 317,610
============ =============
<PAGE>
The following is an unaudited reconciliation of the related tax effects
allocated to each component of other comprehensive income at March 31, 1999 and
1998.
Three Months Ended March 31,
--------------------------------
1999 1998
-------------- ----------------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $ (304,600) $ 45,500
Less: reclassification adjustment
for gains (losses) included in income 16,200 27,700
-------------- -------------
Total other comprehensice income (loss)
before income tax expense (320,800) 17,800
Income tax (expense) benefit 109,100 (6,600)
-------------- -------------
Net unrealized gains (losses) $ (211,700) $ 11,200
============== =============
NOTE 5 - STOCKHOLDERS' EQUITY
During the period ended March 31, 1999, the Company declared a $0.07 per share
cash dividend paid on March 21, 1999 to all shareholders of record on March 1,
1999. The dividend totaled approximately $127,000, or 10% of 1998 annual
earnings.
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
During the three months ended March 31, 1999, 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 repayment terms of the borrowing call for quarterly principal
and interest payments for fifteen years at a 5.55% annual rate of interest. The
borrowing will be collateralized by specific fifteen year fixed rate loans and
the Bank is subject to a penalty if it prepays the borrowing.
<PAGE>
Item 2 - Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations
Results of Operations
General
Net income for the three months ended March 31, 1999 increased $43,000, or
14.0%, to $349,100, compared to net income of $306,400 for the same period in
the prior year. Earnings were positively impacted during the March 1999 quarter
by a 20.8% increase in noninterest income and a 3.3% increase in net interest
income as compared to the March 1998 period. Additionally, noninterest expense
remained relatively flat with an increase of 1.6% over the March 1998 period.
Earnings for the March 1998 quarter include approximately $60,000 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 the three months ended March 31, 1999.
Net Interest Income
Net interest income increased $33,000 for the three months ended March 31, 1999
as compared to the same period in 1998. This increase occurred despite a
decrease in net interest margin to 3.88% during the March 1999 quarter as
compared to 3.96% for the March 1998 period. The interest rate spread decreased
to 3.24% for the three months ended March 31, 1999, as compared to 3.36% for the
1998 three 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 $8.5
million at March 31, 1999 as compared $6.5 million at March 31, 1998. Including
average noninterest-bearing deposits in calculating the cost of funds results in
an interest rate spread of 3.55% for the three months ended March 31, 1999 as
compared to 3.66% for the same period in 1998. This comparison more accurately
reflects how management evaluates the Bank's cost of funds and makes decisions
regarding deposit pricing. Decreases in net interest margin and net interest
spread for the three months ended March 31, 1999 reflect the lower interest rate
environment in existence during the March 1999 quarter as compared to the same
period of 1998.
Interest income increased $69,000 for the three months ended March 31, 1999 as
compared to the same period in 1998. The increase resulted from the average
balance of loans increasing by $8.1 during the period, primarily in commercial
and consumer lending and home equity lines. Additionally, the average balance of
securities increased by $1.8 million. Although outstanding loans increased
significantly during the period, lower interest rates caused a decrease in the
yield on loans to 8.33% for the three months ended March 31, 1999 as compared to
8.94% for the 1998 period.
Interest expense increased $36,000 for the three months ended March 31, 1999 as
compared to the same period in 1998. This is due average interest-bearing
liabilities increasing by $9.3 million during the quarter ended March 31, 1999
as compared to the same period of 1998. This increase was offset by a decrease
in the average rate on interest-bearing liabilities from 4.76% in 1998 to 4.46%
for the March 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.
<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.
Average Balances, Income and Expenses, Yields and Rates
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------------
1999 1998
----------------------------------- ---------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- ----------- ---------- ---------- ---------- ----------
<S> <C>
Assets:
Securities (1) $30,873 $483 6.26% $25,661 $386 6.02%
Loans (net of unearned income):
Real Estate Mortgage 44,505 887 7.97% 47,829 1,038 8.68%
Real Estate Construction 1,536 31 8.00% 1,119 23 8.22%
Commercial 23,641 519 8.78% 15,410 358 9.29%
Home Equity Lines 5,633 121 8.62% 5,449 130 9.54%
Consumer 7,530 167 8.84% 4,974 123 9.89%
---------- ----------- ---------- ----------
Total loans 82,845 1,725 8.33% 74,781 1,672 8.94%
---------- ----------- ---------- ----------
Federal funds sold 0 0 0.00% 0 0 0.00%
Interest-bearing deposits
in other banks 2,482 28 4.51% 2,874 39 5.43%
---------- ----------- ---------- ----------
Total earning assets 116,200 2,236 7.70% 103,316 2,097 8.12%
---------- ----------- ---------- ----------
Less: allowance for loan losses (923) (765)
Total nonearning assets 6,620 6,980
---------- ----------
Total assets $121,897 $109,531
========== ==========
Liabilities
Interest-bearing deposits:
Checking and savings $29,701 $190 2.56% $20,832 $122 2.34%
Time deposits 68,292 901 5.28% 69,188 950 5.49%
---------- ----------- ---------- ----------
Total interest-bearing
deposits 97,993 1,091 4.45% 90,020 1,072 4.76%
FHLB advances 1,436 18 5.01% 74 1 3.00%
---------- ----------- ---------- ----------
Total interest-bearing
liabilities 99,429 1,109 4.46% 90,094 1,073 4.76%
----------- ----------
Non-interest bearing liabilities:
Demand deposits 7,515 6,200
Other liabilities 1,128 719
---------- ----------
Total liabilities 108,072 97,013
Stockholders' equity 13,825 12,518
---------- ----------
Total liabilities and stockholders'
equity $121,897 $109,531
========== ==========
Net interest income $1,127 $1,024
=========== ==========
Interest rate spread (1) 3.24% 3.36%
Net interest margin (1) 3.88% 3.96%
(1) Tax equivalent basis.
</TABLE>
Noninterest Income
Noninterest income was $249,000 during the three months ended March 31, 1999 as
compared to $206,000 for the same period in 1998, an increase of $43,000 or
20.8%. 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.
Noninterest Expense
Noninterest expense was $719,000 during the three months ended March 31, 1999 as
compared to $708,000 for the same period in 1998, an increase of $11,000 or
1.6%. This relatively nominal increase was primarily due to cost control
measures implemented during the later part of 1998 and a significant increase in
loan activity during the March 1999 period that caused an increase in expenses
deferred and amortized over the life of the loans.
<PAGE>
Financial Condition
During the three months ended March 31, 1999, the Company increased its assets
$4.4 million from $119.9 million at December 31, 1998, to $124.3 million at
March 31, 1999. This increase was due primarily to increases in net loans of
$4.7 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 quarter of 1999. Additionally, continued growth in
the Bank's Maryland market has improved lending activity. Increased loan demand
more than offset the $4.3 million in deposit growth during the period.
Securities and interest-earning deposits were flat during the period.
Deposits increased $4.3 million during the three months ended March 31, 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. Approximately $1.0 million
of short-term Federal Home Loan Bank advances outstanding at December 31, 1998
were paid during the period.
Stockholders' equity remained relatively flat at $13.8 million for the three
months ended March 31, 1999. Net income of $349,000 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 $685,000 at March 31, 1999, compared to
$717,000 at December 31, 1998. As to nonaccrual loans existing at March 31,
1999, approximately $20,000 of interest income would have been recognized during
the three months then ended if interest thereon had accrued.
At March 31, 1999, all loans 60 days or more delinquent, including nonperforming
loans, totaled $971,000. Performing loans totaling $595,000 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.
<PAGE>
The following table details information concerning nonaccrual and past due
loans, as well as foreclosed assets.
Nonperforming Assets
March 31, December 31,
1999 1998
--------------- -----------------
Nonaccrual loans:
Commercial $ 0 $ 0
Real Estate Construction 0 0
Real Estate Mortgage 590 555
Home equity lines of credit 0 0
Consumer 24 113
--------------- -----------------
Total nonaccrual loans 614 668
Other real estate owned 71 49
--------------- -----------------
Total nonperforming assets $ 685 $ 717
=============== =================
Loans past due 90 or more days
accruing interest $0 $0
Allowance for loan losses to
nonaccrual loans 154.89% 137.72%
Nonperforming assets to period end
loans and other real estate owned 0.80% 0.89%
<PAGE>
Set forth below is a table detailing the allowance for loan losses for the
periods indicated.
Allowance for Loan Losses
Three Months Ended March 31,
-------------------------------------
1999 1998
--------------- -----------------
Balance, beginning of period $ 920 $ 770
Loans charged off:
Commercial 0 26
Real estate construction 0 0
Real estate mortgage 14 0
Home equity lines of credit 0 0
Consumer 21 8
--------------- -----------------
Total loans charged-off 35 34
--------------- -----------------
Recoveries:
Commercial 0 0
Real estate construction 0 0
Real estate mortgage 0 0
Home equity lines of credit 0 0
Consumer 8 3
--------------- -----------------
Total recoveries 8 3
--------------- -----------------
Net charge-offs (27) (31)
Provision for loan losses 58 36
--------------- -----------------
Balance, end of period $ 951 $ 775
=============== =================
Allowance for loan losses to loans
outstanding at end of period 1.11% 1.03%
Allowance for loan losses to nonaccrual
loans outstanding at end of period 154.89% 119.97%
Net charge-offs to average loans
outstanding during period -0.03% -0.04%
<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 March 31, 1999, the Bank had outstanding loan and line of credit commitments
of $10.7 million. Scheduled maturities of certificate of deposits during the
twelve months following March 31, 1999 amounted to $45.3 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 $1.5 million for the three months
ended March 31, 1999, compared to a increase of $1.6 million for the three
months ended March 31, 1998. Net cash provided by operating activities was
$509,000 for the three months ended March 31, 1999, compared to $591,000 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 $3.2 million during the three months
ended March 31, 1999, compared to $2.4 million for the three months ended March
31, 1998. The fluctuations in amounts during these periods were primarily the
result of increased loan growth offset by maturities of investment securities
during the three months ended March 31, 1999, as compared to the same period of
1998.
Net cash provided by financing activities was $4.2 million for the three months
ended March 31, 1999, compared to $3.4 million for the three months ended March
31, 1998. The fluctuations in amounts during these periods were primarily the
result of increased deposit growth during the March 1999 quarter as compared to
the March 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 March 31, 1999, that the Company meets all capital
adequacy requirements to which it is subject.
<PAGE>
The following table details the components of Tier 1 and Tier 2 capital and
related ratios at March 31, 1999.
Analysis of Capital
March 31, December 31,
1999 1998
-------------- -----------------
Tier 1 Capital:
Common stock $ 598 $ 598
Additional paid-in capital 3,585 3,585
Retained earnings 9,487 9,265
Comprehensive income 129 341
----------- -------------
Total capital (GAAP) 13,799 13,789
Less:Intangibles (40) (41)
Unrealized (gains) losses (129) (341)
----------- -------------
Total Tier 1 capital $ 13,630 $ 13,407
----------- -------------
Tier 2 Capital:
Allowances for loan losses 951 801
Other required deductions 0 246
----------- -------------
Total Tier 2 capital $ 14,581 $ 14,454
----------- -------------
Risk-weighted assets $ 80,880 $ 74,400
Capital Ratios (1):
Tier 1 risk-based capital ratio 16.85% 18.02%
Total risk-based capital ratio 18.03% 19.43%
Tier 1 capital to average adjusted
total assets 11.18% 11.80%
Interest Sensitivity
An important element of both earnings performance and the maintenance of
sufficient liquidity is proper management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
interest sensitive liabilities at a specific time interval. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets during a given period. Generally, during a period of rising
interest rates, a negative gap within shorter maturities would adversely affect
the net interest income, while a positive gap within shorter maturities would
result in an increase in net interest income. Conversely, during a period of
falling interest rates, a negative gap within shorter maturities would result in
an increase in net interest income while a positive gap within shorter
maturities would have the opposite effect. This gap can be managed by repricing
assets or liabilities, by selling investments available for sale, by replacing
assets or liability at maturity, or by adjusting the interest rate during the
life of an asset or liability. Matching amounts of assets and liabilities
maturing in the same time interval helps hedge the risk and minimize the impact
on net interest income in periods of rising or falling interest rates.
The Bank determines the overall magnitude of interest sensitivity risk and then
formulates policies governing asset generation and pricing, funding sources and
pricing, and off-balance-sheet commitments in order to reduce sensitivity risk.
These decisions are based on management's outlook regarding future interest rate
movements, the state of the local and national economy, and other financial and
business risk factors.
<PAGE>
The following table presents the Bank's interest sensitivity position at March
31, 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>
March 31, 1999
----------------------------------------------------------------------------
With-in 91-365 1 to 5 Over
90 Days Days Years 5 Years Total
--------------- ---------- ------------- ---------- -------------
<S> <C>
Interest-Earning Assets:
Loans $ 15,214 $ 22,822 $ 30,472 $ 16,831 $ 85,339
Securities 1,000 2,385 16,032 10,298 29,715
Money market and other
short term securities 3,549 0 0 0 3,549
---------------------------------------------- ------------- -------------
Total earning assets $ 19,763 $ 25,207 $ 46,504 $ 27,129 $118,603
============================================== ============= =============
Cummulative earning assets $ 19,763 $ 44,970 $ 91,474 $118,603 $118,603
============================================== ============= =============
Interest-Bearing Liabilities:
Money market savings 7,397 0 0 0 7,397
Interest checking 0 0 10,254 0 10,254
Savings 0 0 13,183 0 13,183
Certificates of deposit 11,705 33,635 19,206 4,700 69,246
FHLB advances 0 0 0 1,073 1,073
---------------------------------------------- ------------- -------------
Total interest-bearing liabilities $ 19,102 $ 33,635 $ 42,643 $ 5,773 $101,153
============================================== ============= =============
Cummulative interest-bearing liabilities 19,102 52,737 95,380 101,153 101,153
============================================== ============= =============
Period gap $ 661 $ (8,428) $ 3,861 $ 21,356 $ 17,450
Cummulative gap $ 661 $ (7,767) $ (3,906) $ 17,450 $ 17,450
Ratio of cummulative interest-earning
assets to interest-bearing liabilities 103.46% 85.27% 95.90% 117.25% 117.25%
Ratio of cummulative gap to total
earning assets 0.56% -6.55% -3.29% 14.71% 14.71%
</TABLE>
<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 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'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 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. Phase four, validation,
involves 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.
<PAGE>
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 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 that possess significant 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 $30,000 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 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. Although
the Company has faith in its ability to develop adequate contingency plans 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 through 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 compiled 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>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In the ordinary course of its operations, the Bank is a party to various legal
proceedings. Based upon information currently available, management believes
that such legal proceedings, in the aggregate, will not have a material adverse
effect on the business, financial condition, or results of operations of the
Bank.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Stockholders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
None.
<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.
/s/ Scott C. Harvard May 13, 1999
- --------------------------
Scott C. Harvard
President and
Chief Executive Officer
/s/ Steven M. Belote May 13, 1999
- --------------------------
Steven M. Belote
Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,857,000
<INT-BEARING-DEPOSITS> 3,549,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,723,000
<INVESTMENTS-CARRYING> 1,184,000
<INVESTMENTS-MARKET> 1,184,000
<LOANS> 85,339,000
<ALLOWANCE> 951,000
<TOTAL-ASSETS> 124,279,000
<DEPOSITS> 108,591,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 816,000
<LONG-TERM> 1,073,000
0
0
<COMMON> 598,000
<OTHER-SE> 13,201,000
<TOTAL-LIABILITIES-AND-EQUITY> 124,279,000
<INTEREST-LOAN> 1,726,000
<INTEREST-INVEST> 441,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,167,000
<INTEREST-DEPOSIT> 1,091,000
<INTEREST-EXPENSE> 1,109,000
<INTEREST-INCOME-NET> 1,058,000
<LOAN-LOSSES> 58,000
<SECURITIES-GAINS> 16,000
<EXPENSE-OTHER> 91,000
<INCOME-PRETAX> 529,000
<INCOME-PRE-EXTRAORDINARY> 529,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 349,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 7.70
<LOANS-NON> 614,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 318,000
<ALLOWANCE-OPEN> 775,000
<CHARGE-OFFS> (110,000)
<RECOVERIES> 8,000
<ALLOWANCE-CLOSE> 951,000
<ALLOWANCE-DOMESTIC> 951,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
