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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the year ended December 31, 1999.
Commission file number 000-23847
SHORE FINANCIAL CORPORATION
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Virginia 54-1873994
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
25253 Lankford Highway, Onley, VA 23418
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (757) 787-1335
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock ($0.33 par value)
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(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State Issuer's Revenues for its most recent fiscal year $8,843,000.
On March 1, 2000, the aggregate market value of the 1,822,812 shares of Common
Stock of the Registrant outstanding on such date, excluding shares held by
affiliates of the Registrant, was approximately $14.4 million. This figure is
based on the closing price of $7.88 per share of the Registrant's Common Stock
on March 1, 2000.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 1, 2000:
Class Outstanding at March 1, 2000
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Common Stock, $0.33 par value 1,822,812
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's 1999 Annual Report to the Shareholders are
incorporated by reference in Part II hereof.
(2) Portions of Registrant's 2000 Proxy Statement are incorporated by
reference in Part III hereof.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT YES [ ] NO [X]
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PART I
THIS FORM 10-KSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR THIS
PURPOSE ANY STATEMENTS CONTAINED IN THIS FORM 10-KSB THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A
VARIETY OF FACTORS.
ITEM 1.
DESCRIPTION OF BUSINESS
GENERAL
Shore Financial Corporation (the "Company") is a Virginia corporation
organized in September 1997 by Shore Bank (the "Bank") for the purpose of
becoming the holding company of the Bank. The Company's assets consist of its
investment in the Bank and approximately $3.1 million in cash and other
investments. The business and management of the Company consists of the business
and management of the Bank. The Bank is a Virginia chartered, Federal Reserve
member commercial bank whose predecessor began business in 1961. The Company and
the Bank are headquartered in Onley, Virginia. The Bank operates seven banking
offices on the Eastern Shore of Virginia and Maryland, including the counties of
Accomack and Northampton in Virginia and the Salisbury/Wicomico County area in
Maryland. At December 31, 1999, the Company had assets of $127.6 million, Bank
deposits of $107.1 million and stockholders' equity of $13.9 million.
In August 1997, the Bank completed both a public and a subscription
rights offering, issuing 431,250 new shares of common stock that netted the Bank
approximately $3.1 million in new capital. It was in August 1997 that the Bank
became publicly traded on the Nasdaq National Market under the symbol "SHBK". In
November 1997, the Bank's shareholders approved the reorganization of the Bank
into the holding company form of organization, and in December 1997, the Bank
changed its year end from fiscal June 30 to calendar year December 31 for
financial and income tax reporting purposes. On March 31, 1998, the Bank
converted from a federally chartered savings bank to a Virginia chartered
commercial bank.
The Bank offers a full menu of banking products and services in the
communities it serves. For business customers, the Bank offers checking, cash
management, credit card merchant services, sweep accounts, and a variety of loan
options including operating lines of credit, equipment loans, and real estate
loans. For consumers, the Bank has the only totally free checking account
available in its Virginia market, along with telephone banking services, safe
deposit boxes, a check card and the largest network of ATMs on the Eastern Shore
of Virginia. The Bank delivers its banking services through seven branch
offices, including the main office, that are staffed by 64 dedicated employees.
The Company also offers other services that complement the core
financial services offered by the Bank. The Company has an investment in a
Virginia registered trust company that provides a vehicle to offer trust and
asset management services within the Bank's markets. In March 1999, the Bank
activated its subsidiary, Shore Investments, Inc. (the "Subsidiary"), to provide
financial services supporting the Bank's operations. These services include, but
are not limited to, offering insurance and investment products within the Bank's
markets. Also during March 1999, the Subsidiary invested in a Virginia title
insurance company that enabled it to offer title insurance policies within the
Bank's markets. During September 1999, the Subsidiary entered into an agreement
with a third party registered broker-dealer to begin offering investment
products. Currently, the Subsidiary has one fully licensed employee that began
selling investment products in February 2000.
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MARKET AREA
The Bank's main office and four additional banking offices are located
in Accomack and Northampton Counties, which together comprise the Eastern Shore
of Virginia. Poultry and seafood processing are major industries in the area,
with Perdue Farms and Tyson Foods being the area's two largest employers.
Agriculture and tourism are also integral parts of the area's economy. Recently,
the Virginia legislature created a Space Port Authority to serve northern
Accomack County by promoting commercial space launches from existing space
flight facilities and infrastructure at Wallops Island, Virginia. In Northampton
County, there is a recently completed Eco-Industrial Park which is committed to
environmentally friendly job creation. The park is a model for others nationally
and has signed its first tenant.
During October 1999, the Bank opened its fifth Virginia branch and
seventh overall in Parksley, Virginia. The full service facility provides a
banking alternative for a community that management considers under-served. This
branch also provides transaction volume support for the Bank's Onley, Virginia
office, which currently serves customers from that area.
During April 1999, the Company opened an operations center in Accomac,
Virginia. The facility houses the Bank's administrative function and, as of
August 1999, provides item processing and check imaging. The operations center
has enabled the Company to better serve the Bank's branch network and provide
improved customer service.
In 1995, the Bank expanded into the Salisbury/Wicomico County area of
Maryland, which is approximately 60 miles north of the Bank's main office. The
Salisbury/Wicomico County area is the economic hub of the Delmarva Peninsula and
is centrally located as a crossroads on the peninsula. The area has a
diversified economy. Leading industries in the area include poultry processing,
electronics and medical services. Salisbury is also home to Salisbury State
University, a member of the Maryland university system. During late 1997, the
Bank opened its second Maryland branch in the financial district of downtown
Salisbury.
COMPETITION
In its market area, the Bank competes with regional commercial banks
and independent community banks with multiple offices on the Eastern Shore.
These and certain other non-bank competitors may have much greater financial
resources, diversified markets, and branch networks than the Bank and may be
able to offer similar services at varying costs with higher lending limits. With
nationwide banking, the Bank also faces the prospect of additional competitors
entering its market area.
The Bank faces strong competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from
commercial banks and mortgage lenders and to a lesser extent consumer finance
companies, credit unions, and savings institutions. The Bank competes for loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it originates and the quality of service it provides to
borrowers.
The Bank faces substantial competition in attracting deposits from
other banks, money market and mutual funds, credit unions and other investment
vehicles. The ability of the Bank to attract and retain deposits depends on its
ability to provide an investment opportunity that satisfies the requirements of
investors as to rate of return, liquidity, risk, convenience and other factors.
The Bank competes for these deposits by offering a variety of deposit accounts
at competitive rates, having convenient business hours, and by marketing its
position as the only locally-owned independent bank on the Eastern Shore of
Virginia.
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CREDIT POLICIES
The principal risk associated with each of the categories of loans in
the Bank's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased, depending on prevailing economic
conditions. The Bank employs extensive written policies and procedures to
enhance management of credit risk. The loan portfolio is managed under a
specifically defined credit process. This process includes formulation of
portfolio management strategy, guidelines for underwriting standards and risk
assessment, procedures for ongoing identification and management of credit
deterioration, and regular portfolio reviews to estimate loss exposure and to
ascertain compliance with the Bank's policies. The largest unsecured and secured
individual lending authority currently granted by the Bank is $50,000 and
$100,000, respectively. The President and the Chief Lending Officer may
individually approve unsecured loans up to $50,000 and secured loans up to
$100,000. The President and the Chief Lending Officer may together approve
unsecured loans between $50,000 and $100,000 and secured loans between $100,000
and $200,000. Loan applications in excess of $200,000 secured and $100,000
unsecured are approved by the Loan Committee on a weekly basis. The Loan
Committee consists of the President and one additional director, with the
directors rotating their service on this committee on a monthly basis. All loan
applications in excess of $300,000 must be approved by the Board of Directors.
In the normal course of business, the Bank makes various commitments
and incurs certain contingent liabilities which are disclosed but not reflected
in its annual financial statements, including commitments to extend credit. At
December 31, 1999, commitments to extend credit totaled $9.8 million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The Bank's primary
lending program has been the origination of loans secured by one- to four-family
residences, virtually all of which have been located in its market area. The
Bank evaluates both the borrower's ability to make principal and interest
payments and the value of the property that will secure the loan. Federal law
permits the Bank to make loans in amounts of up to 100% of the appraised value
of the underlying real estate. Loans are made with a loan to value up to 90% for
conventional mortgage loans on primary residences. The Bank generally originates
mortgage loans that have an adjustable rate feature in which the rate changes
every one, three or five years. Most of these loans are tied to comparable
maturity U.S. Treasury Bills. Where loans are not indexed, they generally have a
balloon feature. There are unquantifiable risks resulting from potential
increased costs to the borrower as a result of repricing. It is possible,
therefore, that during periods of rising interest rates, the risk of defaults on
adjustable rate mortgages ("ARMs") may increase due to the upward adjustment of
interest costs to borrowers.
CONSTRUCTION LENDING. The Bank makes local construction loans,
primarily residential and small commercial loans. The construction loans are
secured by the property for which the loan was obtained. At December 31, 1999,
construction and land loans outstanding were $2.3 million, or 2.6%, of gross
loans. The average life of a construction loan is less than 12 months and they
reprice daily based on the prime rate or are fixed for a 12-month period.
Construction lending entails significant additional risks, compared with
residential mortgage lending. Construction loans involve risks attributable to
the fact that loan funds are advanced upon the security of the home under
construction, which is of uncertain value prior to the completion of
construction. Thus, it is more difficult to evaluate accurately the total loan
funds required to complete a project and related loan-to-value ratios. To
minimize the risks associated with construction lending, the Bank limits loan
amounts to 80% of appraised value, in addition to its usual credit analysis of
its borrowers. Additionally, the Bank's officers make regular inspections of
construction projects prior to disbursement of loan funds. The Bank also obtains
a first lien on the property as security for its construction loans.
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COMMERCIAL REAL ESTATE LENDING. The Bank also originates commercial
real estate loans. These loans are secured by various types of commercial real
estate, including multifamily residential buildings, commercial buildings and
offices. At December 31, 1999, commercial real estate loans aggregated $22.5
million or 25.6% of the Bank's gross loans. The interest rates on commercial
real estate loans is usually fixed for 1 to 3 years, with either a balloon
feature or an additional rate increase feature. Commercial real estate loans
made by the Bank generally amortize over 5 to 15 years and may have a call
provision of 3 or 5 years. The Bank's commercial real estate loans are secured
by properties in its market area.
In its underwriting of commercial real estate, the Bank may lend, under
federal regulation, up to 100% of the security property's appraised value,
although the Bank's loan to original appraised value ratio on such properties is
80% or less in most cases. Commercial real estate lending entails significant
additional risk, compared with residential mortgage lending. Commercial real
estate loans typically involve larger loan balances concentrated with single
borrowers or groups of related borrowers. Additionally, the payment experience
on loans secured by income producing properties is typically dependent on the
successful operation of a business or a real estate project and thus may be
subject to adverse conditions in the real estate market or in the economy
generally. The Bank's commercial real estate loan underwriting criteria require
an examination of debt service coverage ratios, the borrower's creditworthiness
and prior credit history and reputation, and the Bank generally requires
personal guarantees or endorsements of borrowers.
COMMERCIAL LOANS. Beginning in fiscal year 1993, the Bank began to
focus on developing its commercial loan portfolio to qualified small businesses
in its market area. At December 31, 1999, commercial loans aggregated $4.9
million or 5.5% of the Bank's gross loans. Commercial business loans generally
have a higher degree of risk than residential mortgage loans, but have
commensurably higher yields. To manage these risks, the Bank generally secures
appropriate collateral and carefully monitors the financial condition of its
business borrowers. Commercial business loans typically are made on the basis of
the borrower's ability to make repayment from the cash flow from its business
and are often secured by business assets, such as accounts receivable, equipment
and inventory. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself. Further, the collateral for commercial business loans may
depreciate over time and cannot be appraised with as much precision as
residential real estate. The Bank has a credit review and monitoring system to
regularly review the cash flow and collateral of commercial borrowers.
CONSUMER LENDING. The Bank offers various secured and unsecured
consumer loans, including unsecured personal loans and lines of credit, home
equity lines of credit, automobile loans, deposit account loans, installment and
demand loans, and letters of credit. At December 31, 1999, the Bank had consumer
loans of $15.6 million or 17.7% of gross loans. Such loans are generally made to
customers with whom the Bank has a preexisting relationship and are generally in
amounts of under $75,000. The Bank originates all of its consumer loans in its
market area and intends to continue its consumer lending in this geographic
area.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
lines of credit, or secured by rapidly depreciable assets such as automobiles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans.
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EMPLOYEES
At December 31, 1999, the Bank had 53 full-time and 12 part-time
employees. The Bank considers relations with its employees to be good.
REGULATION AND SUPERVISION
Set forth below is a brief description of certain laws and regulations
that relate to the regulation of the Company and the Bank. The descriptions of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, do not purport to be complete and are qualified in
their entirety by reference to applicable laws and regulations.
THE COMPANY
GENERAL. The Company, as a bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956 (the "BHCA") and the
regulation, supervision and examination requirements of the Board of Governors
of the Federal Reserve System. Bank holding companies are subject to extensive
regulation by the Federal Reserve as set forth in Regulation Y, 12 C.F.R.
Regulation Y establishes the registration, reporting, examination, applications,
acquisitions, control and divestiture, change in bank control, appraisals, and
change in director and senior executive officers requirements applicable to bank
holding companies. Regulation Y and the interpretations and rulings issued by
the Federal Reserve thereunder identify various prohibited non-banking
activities in which bank holding companies and their subsidiaries may not engage
as well as various exempt activities in which a bank holding company and its
subsidiaries may engage either with or, in some cases, without prior Federal
Reserve approval. Regulation Y further confirms the authority of the Federal
Reserve under the BHCA to impose criminal and civil penalties for violations of
the BHCA and the regulations and orders issued thereunder and to issue cease and
desist orders when necessary in connection therewith.
ACTIVITIES OBLIGATIONS AND RESTRICTIONS. There are a number of
obligations and restrictions imposed on bank holding companies and their
depository institution subsidiaries that are designed to reduce potential loss
exposure to the depositors of the depository institutions and to the FDIC
insurance funds. For example, under a policy of the Federal Reserve with respect
to bank holding company operations, a bank holding company is required to serve
as a source of financial strength to its subsidiary depository institutions and
to commit resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross-guarantee" provisions of
federal law require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund (the "SAIF") or the Bank Insurance Fund (the
"BIF") as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
Banking laws also provide that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the asset of any bank or savings bank subsidiaries.
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The restriction on interstate acquisitions by bank holding companies
was abolished effective September 1995, and bank holding companies from any
state are able to acquire banks and bank holding companies located in any other
state, subject to certain conditions, including nationwide and state imposed
concentration limits. Banks are able to branch across state lines by
acquisition, merger or de novo (unless state law would permit such interstate
branching at an earlier date), provided certain conditions are met, including
that applicable state law must expressly permit such interstate branching.
THE BANK
GENERAL. As a state chartered commercial bank, the Bank is subject to
regulation, supervision and examination requirements of the Virginia State
Corporation Commission's Bureau of Financial Institutions. The Bank is also
subject to the regulation, supervision and examination requirements of the
Federal Reserve Board and the Federal Deposit Insurance Corporation. State and
federal laws also govern the activities in which the Bank may engage, the
investments it may make and the aggregate amount of loans that may be granted to
one borrower. Various consumer and compliance laws and regulations also affect
the Bank's operations. The Federal Reserve and the SCC conduct periodic
examinations to test the Bank's compliance with various regulatory requirements.
The SCC completed its most recent examination in March, 1999. In November 1998,
the Federal Reserve completed a compliance examination of the Bank. Both
examinations yielded results that exceeded regulatory requirements.
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured by the FDIC
up to the limits set forth under applicable law. A majority of the deposits of
the Bank are subject to the deposit insurance assessments of the SAIF. However,
a portion of the Bank's deposits are subject to assessments imposed by BIF. The
FDIC equalized the assessment rates for BIF-insured and SAIF-insured deposits
effective January 1, 1998. The assessments imposed on all FDIC deposits for
deposit insurance have an effective rate ranging from 0 to 27 basis points for
$100 of insured deposits, depending on the institutions capital position and
other supervisory factors. Legislation was enacted in 1997 requiring both
SAIF-insured and BIF-insured deposits to pay a pro rata portion of the interest
due on the obligations issued by the Financing Corporation ("FICO"). The FICO
currently assesses BIF-insured and SAIF-insured deposits an additional 2.12
basis points per $100 of deposits to cover those obligations.
REGULATORY CAPITAL REQUIREMENTS. The Company and the Bank are subject
to various regulatory capital requirements administered by the federal banking
agencies. Generally, the Company and the Bank are required to maintain a minimum
ratio of total capital to risk-weighted assets of 8%. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its the Bank to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that the
Company meets all capital adequacy requirements to which it is subject. In fact,
at December 31, 1999, the Bank exceeded all of its regulatory capital
requirements, with total capital to risk-weighted assets, tier 1 capital to
risk-weighted assets and tier 1 capital to average assets ratios of 12.84%,
13.44% and 9.01%, respectively.
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CAPITAL DISTRIBUTIONS. The Bank is subject to legal limitations on
capital distributions including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
used in the statute). For all state member banks of the Federal Reserve seeking
to pay dividends, the prior approval of the applicable Federal Reserve Bank is
required if the total of all dividends declared in any calendar year will exceed
the sum of the bank's net profits for that year and its retained net profits for
the preceding two calendar years. Federal law also generally prohibits a
depository institution from making any capital distribution (including payment
of a dividend or payment of a management fee to its holding company) if the
depository institution would thereafter fail to maintain capital above
regulatory minimums. Federal Reserve Banks are also authorized to limit the
payment of dividends by any state member bank if such payment may be deemed to
constitute an unsafe or unsound practice. In addition, under Virginia law, no
dividend may be declared or paid that would impair a Virginia chartered bank's
paid-in capital. The SCC has general authority to prohibit payment of dividends
by a Virginia chartered bank if it determines that the limitation is in the
public interest and is necessary to ensure the bank's financial soundness.
FINANCIAL MODERNIZATION LEGISLATION. The Gramm-Leach-Bliley Act of 1999
("GLBA") was signed into law on November 12, 1999. The main purpose of GLBA is
to permit greater affiliations within the financial services industry, primarily
banking, securities and insurance. While certain portions of GLBA became
effective upon enactment and on March 11, 2000, many other provisions do not
become effective until May 2001 and most of the regulations implementing the law
have not yet been issued. As a result, the overall impact of GLBA on the Company
cannot be predicted at this time. The provisions of GLBA that are believed to be
of most significance to the Company are discussed below.
GLBA repeals sections 20 and 32 of the Glass-Steagall Act, which
separated commercial banking from investment banking, and substantially amends
the BHCA, which limited the ability of bank holding companies to engage in the
securities and insurance businesses. To achieve this purpose, GLBA creates a new
type of company, the "financial holding company." A financial holding company
may engage in or acquire companies that engage in a broad range of financial
services, including
o securities activities such as underwriting, dealing,
brokerage, investment and merchant banking; and
o insurance underwriting, sales and brokerage activities.
A bank holding company may elect to become a financial holding company only if
all of its depository institution subsidiaries are well-capitalized,
well-managed and have at least a satisfactory Community Reinvestment Act rating.
GLBA establishes a system of functional regulation under which the
federal banking agencies will regulate the banking activities of financial
holding companies and their financial subsidiaries, the Securities and Exchange
Commission ("SEC") will regulate their securities activities and state insurance
regulators will regulate their insurance activities.
With regard to Federal securities laws, GLBA removes the blanket
exemption for banks from being considered brokers or dealers under the
Securities Exchange Act of 1934, and sets out a number of limited activities,
including trust and fiduciary activities, in which a bank may engage without
being considered a broker, and a set of activities in which a bank may engage
without being considered a dealer. The Investment Advisers Act of 1940 also will
be amended to eliminate certain provisions exempting banks from the registration
requirements of that statute, and the Investment Company Act of 1940 will be
amended to provide the SEC with regulatory authority over various bank mutual
fund activities.
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GLBA also provides new protections against the transfer and use by
financial institutions of consumer's nonpublic personal information. A financial
institution must provide to its customers, at the beginning of the customer
relationship and annually thereafter, the institution's policies and procedures
regarding the handling of customers' nonpublic personal financial information.
The new privacy provisions will generally prohibit a financial institution from
providing a customer's personal financial information to unaffiliated third
parties unless the institution discloses to the customer that the information
may be so provided and the customer is given the opportunity to opt out of such
disclosure.
At this time, the Company is unable to predict the impact GLBA may have
upon its or its subsidiaries' financial condition or results of operations. The
Company is currently reviewing the new law and at this time has not elected to
be treated as a financial holding company under GLBA.
FEDERAL TAXATION
GENERAL. The Company and the Bank are subject to the applicable
corporate tax provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), as well as certain additional provisions of the Code that apply to
banks and other types of financial institutions. The following discussion of tax
matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company and the Bank.
Under the applicable statutes of limitation, the Bank's federal income
tax returns for 1995 through 1998 are open to examination by the Internal
Revenue Service (the "Service"). During February 2000, the Service notified the
Bank that its December 1997 tax return is scheduled for examination which will
begin during April 2000.
Historically, the Bank has reported its income and expenses on the
accrual method of accounting and filed its federal income tax returns on a June
30 fiscal year basis. Effective December 29, 1997, the Bank changed its year end
to a calendar year basis for financial and income tax reporting purposes. The
Company's fiscal year end is also December 31.
BAD DEBT RESERVES. Prior to 1996, savings institutions such as the Bank
that met certain definitional tests primarily relating to their assets and the
nature of their business ("Qualifying Thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions
could, within specified formula limits, be deducted by the savings institutions
in arriving at their taxable income. For purposes of the bad debt deduction,
loans were separated into "qualifying real property loans" (which are, in
general, loans secured by interests in improved real property or real property
which is to be improved out of the proceeds of the loan) and "nonqualifying
loans" (which are all other loans).
During 1996, new tax legislation was enacted that repealed the reserve
method of accounting for bad debts of qualified thrift institutions and, for
years after 1995, the Bank will only be eligible to claim tax deductions for bad
debts under the rules for banks. Because the Bank was a small thrift institution
(one with an adjusted basis of assets of less than $500 million) at that time it
is permitted to compute its bad debt deduction using the experience method in
lieu of deducting bad debts only as they occur. Additionally, the new
legislation requires a thrift institution to recapture over a six-year period
its reserve as of December 31, 1995, to the extent it exceeds its reserve
balance at December 31, 1987. As a result of such legislation, the Bank is
recapturing into taxable income approximately $497,000 ratably over six fiscal
years. The income is includable over the third through eighth years following
the fiscal year ending June 30, 1997, since the Bank meets the residential loan
requirement exception in the legislation. See Note 2 of the notes to the
financial statements.
The Bank's retained earnings at December 31, 1999 included
approximately $783,000 representing that portion of the Bank's reserve for bad
debts for which no provision for income taxes has
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been made. Under legislation passed in 1996, this amount was not subject to
federal income taxes upon the Bank converting from a federal savings bank to a
state chartered commercial bank. However, the Bank is subject to the same
recapture provisions it was subject to as a savings association.
CORPORATE MINIMUM TAX. The Bank could be subject to an alternative
minimum tax ("AMT") which is imposed to the extent that it exceeds the Bank's
regular tax liability for a year. The alternative minimum tax generally will
apply at a rate of 20% to a base of regular taxable income plus certain tax
preferences and adjustments ("alternative minimum taxable income" or "AMTI"),
less an exemption amount. Currently no more than 90% of the AMTI may be offset
by net operating losses (as determined for AMTI purposes). Payment of the AMT
may be used as a credit against a portion of the regular tax liabilities in
future years. The Code provisions relating to the AMT also: (i) treat as a
preference item interest on certain tax-exempt private activity bonds issued on
or after August 8, 1986; and (ii) include in AMTI (for tax years beginning after
1989) an amount equal to 75% of the amount by which a corporation's adjusted
current earnings exceed its AMTI (determined without regard to this preference
and before reduction for the alternative tax net operating losses). The Bank was
not subject to the AMT in 1997, and does not expect to be subject to AMT in the
foreseeable future.
STATE AND LOCAL TAXATION
The Bank, as a Virginia chartered bank, is subject to Virginia's Bank
Franchise Tax. Under this system, the Bank's net capital is subject to tax at a
rate of one percent. Net capital is composed generally of the equity accounts
(common stock, additional paid-in capital, and retained earnings) adjusted for
investments in real and personal property, certain reserves, and certain
securities exempt from state taxation.
The Company is subject to Virginia corporate income taxes. The Virginia
corporate income tax is imposed at a rate of six percent on a combined net
income of a Virginia corporation and its subsidiaries as reported for federal
income tax purposes, with certain modifications.
ITEM 2.
DESCRIPTION OF PROPERTY
The main office of the Bank is located at 25253 Lankford Highway,
Onley, Virginia, a two story colonial brick building built in 1988. The Bank
owns the building free of any encumbrances, but leases the land under an
agreement expiring in 2000, with four five-year renewals. During February 1999,
the Company entered into a five year lease agreement (with two five-year
renewals) to lease commercial office space that will accommodate the Company's
administrative operations and enable it to bring the Bank's item processing
function in house. The Bank operates six other banking offices (4 in Virginia
and 2 in Salisbury, Maryland), with all but the downtown Salisbury branch being
owned free of any encumbrances. The Bank leases the downtown Salisbury branch
location under an agreement expiring in 2002, with three five-year renewals.
9
<PAGE>
ITEM 3.
LEGAL PROCEEDINGS
In the ordinary course of its operations, the Company is a party to
various legal proceedings. Based upon information currently available,
management believes that such legal proceedings, in the aggregate, will not have
a material adverse effect on the business, financial condition, or results of
operations of the Company.
ITEM 4.
SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information included under "Market for Registrant's Common Stock
and Related Stockholder Matters" appearing on page 48 of the Annual Report to
Shareholders ("Annual Report") is incorporated herein by reference.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The information included under "Selected Financial Highlights"
appearing on page 3 of the Annual Report and under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 6 through 22
of the Annual Report are incorporated herein by reference.
ITEM 7.
FINANCIAL STATEMENTS
The Consolidated Financial Statements and the notes thereto on pages 23
through 47 of the Annual Report are incorporated herein by reference.
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
10
<PAGE>
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following provides information on Executive Officers who are not
directors of the Company and are not included in the Proxy Statement:
Name Age Position
---- --- --------
Steven M. Belote 34 Vice President and Secretary
ITEM 10.
EXECUTIVE COMPENSATION
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as specified above, and pursuant to General Instructions E
(3), the information called for by Part III, Items 9. through 12., is
incorporated herein by reference from the Company's definitive proxy statement
("proxy statement") for the Company's Annual Meeting of Shareholders to be held
on April 18, 2000, which definitive proxy statement was filed with the
Commission pursuant to Rule 14a-6 on March 22, 2000.
11
<PAGE>
PART IV
ITEM 13.
EXHIBITS AND FORM 8-K
(a) The following exhibits are filed as part of this Form 10-KSB and this list
includes the Exhibit Index.
NO. DESCRIPTION
--- -----------
3.1 Articles of Incorporation of Registrant.*
3.2 Bylaws of Registrant.*
10.1 Company's Incentive Stock Option Plan.*
10.2 Amended and Restated Employment Agreement between the Company
and Scott C. Harvard.
10.3 Management Continuity Agreement between the Company and Scott C.
Harvard.
11.0 Earnings Per Share Computation. **
13.0 1999 Annual Report to Shareholders.
21.0 Subsidiaries of the Registrant -- Reference is made to "Item 1.
Description of Business" for the required information.
27.0 Financial Data Schedule.
- ---------------------
* Incorporated herein by reference from the Company's Registration
Statement on Form S-4 (Registration No. 333-35389) filed by the Company
with the Commission on September 15, 1997.
** Information required herein is incorporated by reference from Note 15
on page 44 of the financial statements attached hereto to this Form
10-KSB.
(b) Reports on Form 8-K. No reports were filed by the registrant during the
quarter ended December 31, 1999.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHORE FINANCIAL CORPORATION
By: /s/ Scott C. Harvard
---------------------------------
Scott C. Harvard
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Henry P. Custis, Jr. Chairman of the Board and March 29, 2000
- ------------------------------ Director
Henry P Custis, Jr.
/s/ Scott C. Harvard President (Principal Executive March 29, 2000
- ------------------------------ Officer) and Director
Scott C. Harvard
/s/ Steven M. Belote Treasurer (Principal Financial March 29, 2000
- ------------------------------ Officer and Accounting Officer)
Steven M. Belote
/s/ Terrell E. Boothe Director March 29, 2000
- ------------------------------
Terrell E. Boothe
/s/ D. Page Elmore Director March 29, 2000
- ------------------------------
D. Page Elmore
/s/ Richard F. Hall, III Director March 29, 2000
- ------------------------------
Richard F. Hall, III
/s/ Lloyd J. Kellam, III Director March 29, 2000
- ------------------------------
Lloyd J. Kellam, III
/s/ L. Dixon Leatherbury Director March 29, 2000
- ------------------------------
L. Dixon Leatherbury
/s/ A. Jackson Mason Director March 29, 2000
- ------------------------------
A. Jackson Mason
</TABLE>
13
<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is entered into as of
December 14, 1999, between Shore Financial Corporation, a Virginia corporation
having its principal place of business at Onley, Virginia (hereinafter
"Employer"), and Scott C. Harvard, residing in Pungoteague, Virginia
(hereinafter "Executive").
RECITALS:
A. The Executive has heretofore been employed, and currently is rendering
services to the Employer as President and Chief Executive Officer;
B. The Employer considers the continued availability of the Executive's
services to be important to the management and conduct of the Employer's
business and desires to secure for it the continued availability of the
Executive's services; and
C. The parties hereto desire to enter into this Amended and Restated
Employment Agreement whereby the Executive's services will continue to be made
available to the Employer on the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter contained, it is agreed as follows:
1. Term:
-----
The Employer shall employ Executive as its President and Chief Executive
Officer for a period that begins on December 14, 1999 and expires on December
31, 2002; provided that on December 31, 2001 and on each December 31st
thereafter (each such December 31st is referred to as the "Renewal Date"), this
Agreement will be automatically extended for an additional calendar year so as
to terminate two years from such Renewal Date. This Agreement will not,
however, be extended if the Company gives written notice of such non-renewal to
the Executive no later than September 30 before the Renewal Date (the original
and any extended term of this Agreement is referred to as the "Employment
Period").
2. Exclusive Employment:
---------------------
Subject to normal and reasonable absences for reasons of illness, accident
and/or other incapacity, the Executive shall devote all of his attention and
energies to the business of the Employer and shall not, during the term of this
Agreement, be engaged in any other business activity whether or not such
business activity is pursued for gain, profit or other pecuniary advantage that
will significantly interfere with his duties as an executive officer of
Employer. With prior approval of the Board of Directors of the Employer,
Executive may serve on the boards of directors of other companies.
<PAGE>
3. Titles and Duties:
-----------------
Subject at all times to the supervision and direction of the Employer's
Board of Directors, Executive will be employed as the President and Chief
Executive Officer of Employer and its banking subsidiary, Shore Bank, to
conduct, operate, manage and promote the business of the Employer and its
affiliated companies and act generally in a supervisory capacity.
4. Compensation:
-------------
A. Base Salary. During the Employment Period, the Executive will be paid
an annual base salary of One Hundred Twenty Thousand Dollars ($120,000.00)
(hereinafter "Base Salary"). During the term of this Agreement, the Base Salary
will be reviewed and revised annually by the Board of Directors of the Employer
on or before each March 1st to reflect external conditions, Executive's
performance, and the changing size and nature of the Employer's operations.
B. Annual Bonus. During the term of this Agreement, the Executive may be
entitled to receive annual cash bonus payments in such amounts and at such times
as may be determined by the Board of Directors of the Employer.
C. Additional Compensation. In addition to the Base Salary and Annual
Bonus, if any, Executive shall receive, except as specifically modified or
stated hereinafter, the following:
(i) the use of a company-owned automobile;
(ii) coverage in the Employer's group health and life insurance plans;
(iii) officers' liability insurance;
(iv) payment by the Employer for all existing club memberships and
dues, plus any other memberships duly approved by the Board of Directors; and
(v) four (4) weeks vacation each year during the term hereof.
The provisions of this Section 4C shall not serve to exclude Executive from
any other incentive or compensation plans adopted by the Board of Directors for
senior management.
<PAGE>
5. Non-Disclosure:
--------------
The Executive recognizes and acknowledges that the Employer has secret
business practices and trade secrets, lists of customers and other matters which
are special and unique assets of the Employer's business. The Executive agrees
that he will not, during or after the term of his employment, disclose such
information or any part thereof to any person, firm or corporation, association
or other entity for any reason or purpose whatsoever. In the event of a breach
or threat to breach by the Executive of any of the provisions of this paragraph,
the Employer shall be entitled to an injunction restraining the Executive from
disclosing, in whole or in part, such information or from rendering any services
to any firm, corporation, association or other entity to whom such information,
in whole or in part, has been disclosed or is threatened to be disclosed.
Nothing herein contained shall be construed as prohibiting the Employer from
pursuing any other remedies available to the Employer for such breach or
threatened breach, including and not limited to the recovery of damages from the
Executive.
6. Disability or Death:
-------------------
In the event of Executive's permanent disability, the Base Salary and any
bonuses that would have otherwise been earned will continue to be paid for at
least six (6) months. All payments will be reduced by the amount of any
disability income benefits for which the Executive is eligible under the
Employees disability benefit plan. For purposes of this Employment Contract,
the phrase "permanently disabled" shall mean the inability of Executive to
perform his duties hereunder for a continuous period of more than four (4)
months. Such permanent disability shall be determined by the insurance provider
under the terms and provisions set forth in the policy. In the event of death
of the Executive, his estate will receive any bonuses that would have been
earned by him for that calendar year.
7. Discharge or Resignation:
-------------------------
A. The Employer's Board of Directors may terminate the Executive's
employment at any time, but any termination by the Employer's Board of Directors
other than termination for cause, shall not prejudice the Employee's right to
compensation or other benefits under this Agreement. The Executive shall have no
right to receive compensation or other benefits for any period after termination
for cause. Termination for cause shall include termination because of the
Executive's personal dishonesty, incompetence, willful misconduct breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement.
<PAGE>
B. If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of Shore Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of (the) Federal Deposit Insurance Act (12 U.S.C.
1818(e)(3) and (g)(1) the Employer's obligations under this Agreement shall be
suspended as of the date of service unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Employer may in its discretion
(i) pay Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
C. If the Executive is removed and/or permanently prohibited from
participating in the conduct of Shore Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1818(e)(4) or (g)(1), all obligations of the Employer under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
D. If Shore Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations under the contract shall
terminate as of the date of default, but this paragraph (b)(4) shall not affect
any vested rights of the contracting parties.
E. All obligations under this Agreement shall be terminated, except to the
extent determined that continuation of this Agreement is necessary for the
continued operation of the Employer:
(1) by the Director or his or her designee at the time the Federal
Deposit Insurance Corporation enters into an agreement to provide assistance to
or on behalf of Shore Bank under the authority contained in Section 13(c) of the
Federal Deposit Insurance Act; or
(2) by the Director or his or her designee at the time the Director or
his or her designee approves a supervisory merger to resolve problems related to
operation of Shore Bank or when Shore Bank is determined by the Director to be
in an unsafe or unsound condition.
F. In the event that Executive is terminated without cause, then the
payment of Base Salary and all benefits in Section 4, with exception of the
automobile, shall continue until the expiration of twelve (12) months from the
date of termination. For purposes of this Agreement, the definition of
termination without cause shall include (i) the voluntary resignation of
Executive due to any material curtailment of his responsibilities or duties;
(ii) Executive's termination due solely to the Chairman of the Board's decision
to personally handle Executive's responsibilities; and (iii) termination for any
ground which is not enumerated above as termination for cause.
8. Change in Control of the Employer:
---------------------------------
This Agreement will terminate in the event there is a change in control of
the Employer, and the Management Continuity Agreement, dated as of December 14,
1999 and as it may hereafter be amended, between the Employer and the Executive
will become effective and any termination benefits will be determined and paid
solely pursuant to such Management Continuity Agreement.
<PAGE>
9. Place of Performance:
---------------------
It is contemplated that Executive will perform his principal duties in
Onley, Virginia, except for temporary or emergency assignments.
10. Notices:
-------
Any notice required or permitted to be given under this Agreement shall be
sufficient, if in writing, and if sent by registered and certified mail, to his
residence in the am of the Executive, and to its principal office in the case of
the Employer.
11. Waivers:
-------
The waiver by the Employer or the Executive of any breach of any provision
of this Agreement by the other party shall not operate or be construed as a
waiver of any subsequent breach by the other party.
12. Binding Effect:
--------------
The rights and obligations of the Employer under this Agreement shall inure
to the benefit of and shall be binding upon the successors and assigns of the
Employer and the rights, to the extent vested, and obligations of Executive
hereunder shall inure to the benefit of his heirs, executors and assigns.
13. Construction:
-------------
Agreement shall be construed and interpreted under the laws of the State of
Virginia.
14. Entire Agreement:
-----------------
This Agreement, together with the Management Continuity Agreement, dated
December 14, 1999 and as it may hereafter be amended, entered into between the
parties hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and no agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement or
in the Management Continuity Agreement. For purposes of this Agreement, the
term "Employer" includes any subsidiaries of the Employer. This instrument
contains the entire Agreement of the parties and may not be altered, modified or
amended except in writing executed by both parties. The unenforceability of any
provision of this Agreement shall not be construed to, nor shall it, cause any
other provision of this Agreement to be unenforceable by reason thereof.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year above written.
Employer:
SHORE FINANCIAL CORPORATION
By /s/ Henry P. Custis, Jr.
_________________________________
Henry P. Custis, Jr.
Chairman of the Board
Executive:
/s/ Scott C. Harvard
____________________________________
Scott C. Harvard
<PAGE>
EXHIBIT 10.3
MANAGEMENT CONTINUITY AGREEMENT
-------------------------------
This Agreement ("Agreement"), dated as of December 14, 1999, is between Shore
Financial Corporation, a Virginia corporation (the "Company"), and Scott C.
Harvard (the "Executive") and provides as follows.
1. Purpose
-------
The Company recognizes that the possibility of a Change in Control exists,
and the uncertainty and questions that it may raise among management may result
in the departure or distraction of management personnel to the detriment of the
Company and its shareholders. Accordingly, the purpose of this Agreement is to
encourage the Executive to continue employment after a Change in Control by
providing reasonable employment security to the Executive and to recognize the
prior service of the Executive in the event of a termination of employment under
certain circumstances after a Change in Control.
2. Term of the Agreement
---------------------
This Agreement is effective December 14, 1999 and will expire on December 31,
2002; provided that on December 31, 2000 and on each December 31st thereafter
(each such December 31st is referred to as the "Renewal Date"), this Agreement
will be automatically extended for an additional calendar year so as to
terminate three years from such Renewal Date. This Agreement will not, however,
be extended if the Company gives written notice of such non-renewal to the
Executive no later than September 30 before the Renewal Date (the original and
any extended term of this Agreement is referred to as the "Change in Control
Period").
3. Employment after a Change in Control
------------------------------------
If a Change in Control of the Company (as defined in Section 13) occurs
during the Change in Control Period and the Executive is employed by the Company
on the date the Change in Control occurs (the "Change in Control Date"), the
Company will continue to employ the Executive in accordance with the terms and
conditions of this Agreement for the period beginning on the Change in Control
Date and ending on the third anniversary of such date (the "Employment Period").
If a Change in Control occurs on account of a series of transactions, the Change
in Control Date is the date of the last of such transactions.
<PAGE>
4. Terms of Employment
-------------------
(a) Position and Duties. During the Employment Period, (i) the Executive's
position, authority, duties and responsibilities will be at least commensurate
in all material respects with the most significant of those held, exercised and
assigned at any time during the 90-day period immediately preceding the Change
in Control Date and (ii) the Executive's services will be performed at the
location where the Executive was employed immediately preceding the Change in
Control Date or any office that is the headquarters of the Company and is less
than 35 miles from such location.
(b) Compensation.
------------
(i) Base Salary. During the Employment Period, the Executive will
receive an annual base salary (the "Annual Base Salary") at least equal to the
base salary paid or payable to the Executive by the Company and its affiliated
companies for the twelve-month period immediately preceding the Change of
Control Date. During the Employment Period, the Annual Base Salary will be
reviewed at least annually and will be increased at any time and from time to
time as will be substantially consistent with increases in base salary generally
awarded in the ordinary course of business to other peer executives of the
Company and its affiliated companies. Any increase in the Annual Base Salary
will not serve to limit or reduce any other obligation to the Executive under
this Agreement. The Annual Base Salary will not be reduced after any such
increase, and the term Annual Base Salary as used in this Agreement will refer
to the Annual Base Salary as so increased. The term "affiliated companies"
includes any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to the Annual Base Salary, the
Executive will be awarded for each year ending during the Employment Period an
annual bonus (the "Annual Bonus") in cash at least equal to the highest annual
bonus paid or payable, including by reason of any deferral, for the two years
immediately preceding the year in which the Change in Control Date occurs. Each
such Annual Bonus will be paid no later than the end of the third month of the
year next following the year for which the Annual Bonus is awarded.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive will be entitled to participate in all incentive
(including stock incentive), savings and retirement, insurance plans, policies
and programs applicable generally to other peer executives of the Company and
its affiliated companies, but in no event will such plans, policies and programs
provide the Executive with incentive opportunities, savings opportunities and
retirement benefit opportunities, in each case, less favorable, in the
aggregate, than those provided by the Company and its affiliated companies for
the Executive under such plans, policies and programs as in effect at any time
during the six months immediately preceding the Change in Control Date.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, will be eligible
for participation in and will receive all benefits under welfare benefit plans,
policies and programs provided by the Company and its affiliated companies to
the extent applicable generally to other peer executives of the Company and its
affiliated companies, but in no event will such plans, policies and programs
provide the Executive with benefits that are less favorable, in the aggregate,
than the most favorable of such plans, policies and programs in effect at any
time during the six months immediately preceding the Change in Control Date.
-2-
<PAGE>
(v) Fringe Benefits. During the Employment Period, the Executive will
be entitled to fringe benefits in accordance with the most favorable plans,
policies and programs of the Company and its affiliated companies in effect for
the Executive at any time during the six months immediately preceding the Change
in Control Date or, if more favorable to the Executive, as in effect generally
from time to time after the Change in Control Date with respect to other peer
executives of the Company and its affiliated companies.
(vi) Vacation. During the Employment Period, the Executive will be
entitled to paid vacation in accordance with the most favorable plans, policies
and programs of the Company and its affiliated companies in effect for the
Executive at any time during the six months immediately preceding the Change in
Control Date or, if more favorable to the Executive, as in effect generally from
time to time after the Change in Control Date with respect to other peer
executives of the Company and its affiliated companies.
5. Termination of Employment Following Change in Control
-----------------------------------------------------
(a) Death or Disability. The Executive's employment will terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period, it may terminate the Executive's
employment. For purposes of this Agreement, "Disability" means the Executive's
inability to perform his duties with the Company on a full time basis for 180
consecutive days or a total of at least 240 days in any twelve month period as a
result of the Executive's incapacity due to physical or mental illness (as
determined by an independent physician selected by the Board).
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. For purposes of this Agreement, "Cause" means (i)
gross incompetence, gross negligence, willful misconduct in office or breach of
a material fiduciary duty owed to the Company or any affiliated company; (ii)
conviction of a felony or a crime of moral turpitude (or a plea of nolo
contendere thereto) or commission of an act of embezzlement or fraud against the
Company or any affiliated company; (iii) any material breach by the Executive of
a material term of this Agreement, including, without limitation, material
failure to perform a substantial portion of his duties and responsibilities
hereunder; or (iv) deliberate dishonesty of the Executive with respect to the
Company or any affiliated company.
-3-
<PAGE>
(c) Good Reason; Window Periods. The Executive's employment may be
terminated (i) during the Employment Period by the Executive for Good Reason or
(ii) during the Window Periods by the Executive without any reason. For
purposes of this Agreement, the "Window Periods" mean the 90-day periods
beginning on (i) the Change in Control Date (the "First Window Period"), or (ii)
if the Executive has not exercised his right to terminate his employment during
the First Window Period, the one-year anniversary of the Change in Control Date
(the "Second Window Period"). For purposes of this Agreement, "Good Reason"
means:
(i) a material reduction in the Executive's duties or authority;
(ii) a material adverse change in the Executive's overall working
environment;
(iii) a failure by the Company to comply with any of the
provisions of Section 4(b);
(iv) the Company's requiring the Executive to be based at any office
or location other than that described in Section 4(a)(ii);
(v) the failure by the Company to comply with and satisfy Section
7(b);
(vi) the Executive is directed by the Board of Directors or an officer
of the Company or any affiliated company to engage in conduct that is unethical,
illegal or contrary to the Company's good business practices; or
(vii) the Company fails to honor any term or provision of this
Agreement;
Any good faith determination of Good Reason made by the Executive shall be
conclusive.
(d) Notice of Termination. Any termination during the Employment Period by
the Company or by the Executive for Good Reason or during the Window Period
shall be communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon.
-4-
<PAGE>
(e) Date of Termination. "Date of Termination" means (i) if the Executive's
employment is terminated by the Company for Cause, or by the Executive during
the Window Period or for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be, (ii) if the
Executive's employment is terminated by the Company other than for Cause or
Disability, the date specified in the Notice of Termination (which shall not be
less than 30 nor more than 60 days from the date such Notice of Termination is
given), and (iii) if the Executive's employment is terminated for Disability, 30
days after Notice of Termination is given, provided that the Executive shall not
have returned to the full-time performance of his duties during such 30-day
period.
6. Compensation Upon Termination
-----------------------------
(a) Termination Without Cause or for Good Reason or During Window Periods.
The Executive will be entitled to the following benefits if, during the
Employment Period, the Company terminates his employment without Cause or the
Executive terminates his employment with the Company or any affiliated company
for Good Reason or during either the First or Second Window Period.
(i) Accrued Obligations. The Accrued Obligations are the sum of: (1)
the Executive's Annual Base Salary through the Date of Termination at the rate
in effect just prior to the time a Notice of Termination is given; (2) the
amount, if any, of any incentive or bonus compensation theretofore earned which
has not yet been paid; (3) the product of the Annual Bonus paid or payable,
including by reason of deferral, for the most recently completed year and a
fraction, the numerator of which is the number of days in the current year
through the Date of Termination and the denominator of which is 365; and (4) any
benefits or awards (including both the cash and stock components) which pursuant
to the terms of any plans, policies or programs have been earned or become
payable, but which have not yet been paid to the Executive (but not including
amounts that previously had been deferred at the Executive's request, which
amounts will be paid in accordance with the Executive's existing directions).
The Accrued Obligations will be paid to the Executive in a lump sum cash payment
within ten days after the Date of Termination;
(ii) Salary Continuance Benefit. The Salary Continuance Benefit is an
amount equal to 2.99 times the Executive's Final Compensation. For purposes of
this Agreement, "Final Compensation" means the Annual Base Salary in effect at
the Date of Termination, plus the highest Annual Bonus paid or payable for the
two most recently completed years and any amount contributed by the Executive
during the most recently completed year pursuant to a salary reduction agreement
or any other program that provides for pre-tax salary reductions or compensation
deferrals. The Salary Continuance Benefit will be paid to the Executive in a
lump sum cash payment not later than the 45th day following the Date of
Termination;
-5-
<PAGE>
(iii) Welfare Continuance Benefit. For 36 months following the Date
of Termination, the Executive and his dependents will continue to be covered
under all health and dental plans, disability plans, life insurance plans and
all other welfare benefit plans (as defined in Section 3(1) of ERISA) ("Welfare
Plans") in which the Executive or his dependents were participating immediately
prior to the Date of Termination (the "Welfare Continuance Benefit"). The
Company will pay all or a portion of the cost of the Welfare Continuance Benefit
for the Executive and his dependents under the Welfare Plans on the same basis
as applicable, from time to time, to active employees covered under the Welfare
Plans and the Executive will pay any additional costs. If participation in any
one or more of the Welfare Plans included in the Welfare Continuance Benefit is
not possible under the terms of the Welfare Plan or any provision of law would
create an adverse tax effect for the Executive or the Company due to such
participation, the Company will provide substantially identical benefits
directly or through an insurance arrangement. The Welfare Continuance Benefit
as to any Welfare Plan will cease if and when the Executive has obtained
coverage under one or more welfare benefit plans of a subsequent employer that
provides for equal or greater benefits to the Executive and his dependents with
respect to the specific type of benefit. The Executive or his dependents will
become eligible for COBRA continuation coverage as of the date the Welfare
Continuance Benefit ceases for all health and dental benefits.
(b) Death. If the Executive dies during the Employment Period, this
Agreement will terminate without any further obligation on the part of the
Company under this Agreement, other than for (i) payment of the Accrued
Obligations and three months of the Executive's Base Salary (which shall be paid
to the Executive's beneficiary designated in writing or his estate, as
applicable, in a lump sum cash payment within 30 days of the date of death);
(ii) the timely payment or provision of the Welfare Continuance Benefit to the
Executive's spouse and other dependents for 36 months following the date of
death; and (iii) the timely payment of all death and retirement benefits
pursuant to the terms of any plan, policy or arrangement of the Company and its
affiliated companies.
(c) Disability. If the Executive's employment is terminated because of the
Executive's Disability during the Employment Period, this Agreement will
terminate without any further obligation on the part of the Company under this
Agreement, other than for (i) payment of the Accrued Obligations and three
months of the Executive's Base Salary (which shall be paid to the Executive in a
lump sum cash payment within 30 days of the Date of Termination); (ii) the
timely payment or provision of the Welfare Continuance Benefit for 36 months
following the Date of Termination; and (iii) the timely payment of all
disability and retirement benefits pursuant to the terms of any plan, policy or
arrangement of the Company and its affiliated companies.
-6-
<PAGE>
(d) Cause; Other than for Good Reason. If the Executive's employment is
terminated for Cause during the Employment Period, this Agreement will terminate
without further obligation to the Executive other than the payment to the
Executive of the Annual Base Salary through the Date of Termination, plus the
amount of any compensation previously deferred by the Executive. If the
Executive terminates employment during the Employment Period, excluding a
termination either for Good Reason or during the Window Period, this Agreement
will terminate without further obligation to the Executive other than for the
Accrued Obligations (which will be paid in a lump sum in cash within 30 days of
the Date of Termination) and any other benefits to which the Executive may be
entitled pursuant to the terms of any plan, program or arrangement of the
Company and its affiliated companies.
(e) Gross-Up Payment. In the event any payment or distribution by the
Company to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 6(e)) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code") or any
interest or penalties are incurred by the Executive with respect to such excise
tax (collectively, the "Excise Tax"), then the Executive will be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes (including any income taxes and
interest or penalties imposed with respect to such taxes) and the Excise Tax
imposed on the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed on the Payments. All determinations
required to be made under this Section 6(e), including whether and when a Gross-
Up Payment is required and the amount of such Gross-Up Payment, will be made by
the independent accounting firm of the Company immediately prior to the
Executive's termination of employment (the "Accounting Firm"). All fees and
expenses of the Accounting Firm will be borne solely by the Company, and any
determination by the Accounting Firm will be binding upon the Company and the
Executive. Any Gross-Up Payment, as determined pursuant to this Section 6(e),
will be paid by the Company to the Executive within ten days of the receipt of
the Accounting Firm's determination.
(i) If the Accounting Firm determines that no Excise Tax is payable by
the Executive, it shall so indicate to the Executive in writing.
(ii) In the event there is an under-payment of the Gross-Up Payment
due to the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
will determine the amount of any such under-payment that has occurred and such
amount will be promptly paid by the Company to or for the benefit of the
Executive.
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<PAGE>
7. Binding Agreement; Successors
-----------------------------
(a) This Agreement will be binding upon and inure to the benefit of the
Executive (and his personal representative), the Company and any successor
organization or organizations which shall succeed to substantially all of the
business and property of the Company, whether by means of merger, consolidation,
acquisition of all or substantially of all of the assets of the Company or
otherwise, including by operation of law.
(b) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
(c) For purposes of this Agreement, the term "Company" includes any
subsidiaries of the Company and any corporation or other entity which is the
surviving or continuing entity in respect of any merger, consolidation or form
of business combination in which the Company ceases to exist; provided, however,
that for purposes of determining whether a Change in Control has occurred
herein, the term "Company" refers to Shore Financial Corporation or its
successors.
8. Fees and Expenses; Mitigation
-----------------------------
(a) The Company will pay or reimburse the Executive, on a current basis, for
all costs and expenses, including without limitation court costs and reasonable
attorneys' fees, incurred by the Executive (i) in contesting or disputing any
termination of the Executive's employment or (ii) in seeking to obtain or
enforce any right or benefit provided by this Agreement, in each case regardless
of whether or not the Executive's claim is upheld by a court of competent
jurisdiction; provided, however, the Executive will be required to repay any
such amounts to the Company to the extent that a court issues a final and non-
appealable order setting forth the determination that the position taken by the
Executive was frivolous or advanced by him or her in bad faith.
(b) The Executive shall not be required to mitigate the amount of any payment
the Company becomes obligated to make to the Executive in connection with this
Agreement, by seeking other employment or otherwise. Except as specifically
provided above with respect to the Wefare Continuance Benefit, the amount of any
payment provided for in Section 6 shall not be reduced, offset or subject to
recovery by the Company by reason of any compensation earned by the Executive as
the result of employment by another employer after the Date of Termination, or
otherwise.
9. No Employment Contract
----------------------
Nothing in this Agreement will be construed as creating an employment
contract between the Executive and the Company prior to Change in Control.
-8-
<PAGE>
10. Outplacement Services
---------------------
If the Executive is entitled to the severance benefits under Section 6(a),
the Executive will be entitled to receive complete outplacement services,
including job search services, paid by the Company up to a total of $25,000.
The services will be provided by a recognized outplacement organization selected
by the Executive with the approval of the Company (which approval will not be
unreasonably withheld). The services will be provided for up to two years after
the Date of Termination.
11. Continuance of Welfare Benefits Upon Death
------------------------------------------
If the Executive dies while receiving a Welfare Continuation Benefit, the
Executive's spouse and other dependents will continue to be covered under all
applicable Welfare Plans during the remainder of the 36-month coverage period.
The Executive's spouse and other dependents will become eligible for COBRA
continuation coverage for health and dental benefits at the end of such 36-month
period.
12. Notice
------
Any notices and other communications provided for by this Agreement will be
sufficient if in writing and delivered in person or sent by registered or
certified mail, postage prepaid (in which case notice will be deemed to have
been given on the third day after mailing), or by overnight delivery by a
reliable overnight courier service (in which case notice will be deemed to have
been given on the day after delivery to such courier service). Notices to the
Company shall be directed to the Secretary of the Company, with a copy directed
to the Chairman of the Board of the Company. Notices to the Executive shall be
directed to his last known address.
13. Definition of a Change in Control
---------------------------------
For purposes of this Agreement, a "Change in Control" means:
(a) The acquisition by any Person of beneficial ownership of 20% or more of
the then outstanding shares of common stock of the Company;
(b) Individuals who constitute the Board on the date of this Agreement (the
"Incumbent Board") cease to constitute a majority of the Board, provided that
any director whose nomination was approved by a vote of at least two-thirds of
the directors then comprising the Incumbent Board will be considered a member of
the Incumbent Board, but excluding any such individual whose initial assumption
of office is in connection with an actual or threatened election contest
relating to the election of the directors of the Company (as such terms are used
in Rule 14a-11 promulgated under the Securities Exchange Act of 1934 (the
"Exchange Act"));
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<PAGE>
(c) Approval by the shareholders of the Company of a reorganization, merger,
share exchange or consolidation (a "Reorganization"), provided that shareholder
approval of a Reorganization will not constitute a Change in Control if, upon
consummation of the Reorganization, each of the following conditions is
satisfied:
(i) more than 60% of the then outstanding shares of common stock of
the corporation resulting from the Reorganization is beneficially owned by all
or substantially all of the former shareholders of the Company in substantially
the same proportions as their ownership existed in the Company immediately prior
to the Reorganization;
(ii) no Person beneficially owns 20% or more of either (1) the then
outstanding shares of common stock of the corporation resulting from the
transaction or (2) the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors; and
(iii) at least a majority of the members of the board of directors of
the corporation resulting from the Reorganization were members of the Incumbent
Board at the time of the execution of the initial agreement providing for the
Reorganization.
(d) Approval by the shareholders of the Company of a complete liquidation or
dissolution of the Company, or of the sale or other disposition of all or
substantially all of the assets of the Company.
(e) For purposes of this Agreement, "Person" means any individual, entity or
group (within the meaning of Section 13(d)(3) of the Exchange Act, other than
any employee benefit plan (or related trust) sponsored or maintained by the
Company or any affiliated company, and "beneficial ownership" has the meaning
given the term in Rule 13d-3 under the Exchange Act.
14. Confidentiality
---------------
The Executive will hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies and their respective businesses,
which was obtained by the Executive during the Executive's employment by the
Company or any of its affiliated companies and which will not be or become
public knowledge. After termination of the Executive's employment with the
Company, the Executive will not, without the prior written consent of the
Company or except as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it. In no event shall an asserted
violation of the provisions of this Section 14 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive under this
Agreement.
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15. Miscellaneous
-------------
No provision of this Agreement may be amended, modified, waived or discharged
unless such amendment, modification, waiver or discharge is agreed to in a
writing signed by the Executive and the Chairman of the Board or President of
the Company. No waiver by either party hereto at any time of any breach by the
other party hereto of, or of compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement.
16. Governing Law
-------------
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the Commonwealth of Virginia.
17. Validity
--------
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by Shore Financial Corporation by its duly authorized officer, and by the
Executive, as of the date first above written.
SHORE FINANCIAL CORPORATION
By: /s/ Henry P. Custis, Jr.
________________________________
Henry P. Custis, Jr.
Chairman of the Board
EXECUTIVE:
/s/ Scott C. Harvard
______________________________
Scott C. Harvard
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SHORE FINANCIAL CORPORATION
Report to Shareholders
In 1999, the technological revolution continued to come into its own, and was
officially annointed the "driving force" in our economy. Companies with .com
attached to the end of their names became the darlings of Wall Street and saw
their stockholders richly rewarded. The banking business, while not perceived
as part of the technology industry, is also driven by the abundant opportuni-
ties and efficiencies created by the Internet.
At Shore Financial Corporation, we have felt the impact of the technology
stock wave. Increased market-wide interest in the obvious appreciation of equi-
ties in technology and Internet-related sectors has negatively impacted the
value of our common stock. While we expect this loss in market value to be
short-lived, it has nonetheless made 1999 a somewhat painful year for our
stockholders, including your Board of Directors and management team.
The year 2000 has begun with the same lack of enthusiasm for banking company
stocks. However, both our Board and our management remain undeterred. We are
committed to building the underlying value of your banking company, and are
confident that an investment in Shore Financial Corporation is a sound one for
the long-term investor.
In spite of the market, we don't view technology as a dirty word at Shore Fi-
nancial Corporation. As a matter of fact, our entire employee team has embraced
technology for the advantages and efficiencies it creates for our company.
Shore Bank, our banking subsidiary, has been operating in an online, real-time
environment for over a decade, providing our customers with up-to-the-second
data on their entire account relationship. The bank made an early commitment to
ATMs as an alternative delivery system, and boasts one of the largest ATM net-
works of any community bank on the Delmarva Peninsula. During the last year,
use of our telephone banking system set new volume records, averaging over 400
calls per day. These calls are no longer delivered to the front-line employees
on the busiest days of the year, but rather, handled by the strategic use of
technology.
Technology has proven cost efficient in other ways as well. Last year we com-
pleted the installation of a wide area network, and acquired a check imaging
system enabling the bank to bring the item processing function in house. The
expected benefits of this activity include reduced postage costs, improved
statement turnaround, and an enhanced digital image retrieval system. Another
example is the introduction of VISA Check Card in the fall of last year, which
met with resounding success. Over 85% of all cards issued are actively used by
our customers. We expect this product to reduce paper check volume; in fact,
we're already seeing a positive impact on the bottom line.
While technology drives much of what we do and how we do it, we continue to
listen to our customers and to expand the menu of financial products available.
Last year, Shore Bank activated its subsidiary, Shore Investments, Inc., to de-
liver non-deposit investment products to both bank and non-bank customers
through our branch network. In February of this year, we began offering these
products and actually executed our first trades. Through this same subsidiary,
the bank invested in a title insurance agency that has already begun paying
dividends. And, of course, the bank continues to offer trust services through
its affiliation with an independent trust company in Eastern Virginia.
Shore Bank continued to expand its branch network during the year. We de-
signed, built and opened our seventh branch office, and are developing plans
for expansion of our Chincoteague branch, which is experiencing excellent de-
posit growth.
While it is true Shore Financial Corporation is a banking company, and not a
technology company, it is equally true that we're enthusiastic about the uses
and benefits of technology to our banking organization. However, our commitment
to growth doesn't fool us into giving up solid earnings just to look and act
like a high tech company. We are optimistic that an appropriate balance of sta-
ble core earnings and aggressive efforts to grow and change will create added
value to our shareholders in the future. We understand that to survive, we must
be completely engaged in the process of change sweeping our industry. At Shore
Financial Corporation, we don't just plan on surviving; we fully intend to
thrive in this new economy.
As you review our Annual Report, please feel free to share your thoughts and
comments with me by email at [email protected].
Scott C. Harvard
President & Chief Executive Officer
2
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SHORE FINANCIAL CORPORATION
Selected Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
-----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
Income Statement Data:
Interest income $ 8,843 $ 8,489
Interest expense 4,381 4,367
Net interest income 4,462 4,122
Provision for loan losses 485 280
Noninterest income 1,245 945
Noninterest expense 3,374 2,850
Income taxes 513 672
-----------------
Net income $ 1,335 $ 1,265
-----------------
Per Share Data:
Net income -- basic $ 0.74 $ 0.70
Net income -- dilutive 0.73 0.69
Cash dividends 0.07 0.00
Book value at period end 7.62 7.61
Tangible book value at period end 7.60 7.59
Average shares outstanding (000's) 1,815 1,809
Balance Sheet Data (period end):
Assets $127,593 $119,948
Loans, net of unearned income 87,063 80,579
Securities 28,019 32,049
Deposits 107,148 104,309
Shareholders' equity 13,898 13,789
Performance Ratios:
Return on average assets 1.07% 1.11%
Return on average equity 9.57% 9.66%
Net interest margin 3.88% 3.91%
Efficiency (1) 61.74% 57.75%
Asset Quality Ratios:
Allowance for loan losses to period end loans 1.32% 1.14%
Allowance for loan losses to nonaccrual loans 97.57% 137.72%
Nonperforming assets to period end loans and foreclosed
properties 1.54% 0.89%
Net charge-offs (recoveries) to average loans 0.28% 0.17%
Capital and Liquidity Ratios:
Leverage (2) 10.89% 11.50%
Risk-based:
Tier 1 capital 16.83% 18.02%
Total capital 16.23% 18.53%
Average loans to average deposits 80.68% 77.16%
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</TABLE>
(1) Computed by dividing noninterest expenses by the sum of net interest income
and noninterest income, net of security gains and losses.
(2) Computed as a percentage of stockholders' equity to period end assets.
3
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SHORE FINANCIAL CORPORATION
Corporate Profile
General
Shore Financial Corporation (the "Company") is a Virginia corporation orga-
nized in September 1997 by Shore Bank (the "Bank") for the purpose of becoming
a unitary holding company of the Bank. The Company's assets consist of its in-
vestment in the Bank and approximately $3.1 million in cash and other invest-
ments. The business and management of the Company consists of the business and
management of the Bank. The Bank is a Virginia chartered, Federal Reserve mem-
ber commercial bank whose predecessor began business in 1961. The Company and
the Bank are headquartered in Onley, Virginia. The Bank operates seven banking
offices on the Eastern Shore of Virginia and Maryland, including the counties
of Accomack and Northampton in Virginia and the Salisbury/Wicomico County area
in Maryland. At December 31, 1999, the Company had assets of $127.6 million,
Bank deposits of $107.1 million and stockholders' equity of $13.9 million.
In August 1997, the Bank completed both a public and a subscription rights of-
fering, issuing 431,250 new shares of common stock that netted the Bank approx-
imately $3.1 million in new capital. It was in August 1997 that the Bank became
publicly traded on the Nasdaq National Market under the symbol "SHBK". In No-
vember 1997, the Bank's shareholders approved the reorganization of the Bank
into the holding company form of organization, and in December 1997, the Bank
changed its year end from fiscal June 30 to calendar year December 31 for fi-
nancial and income tax reporting purposes. On March 31, 1998, the Bank was con-
verted from a federally chartered savings bank to a Virginia chartered commer-
cial bank.
The Bank offers a full menu of banking products and services in the communi-
ties it serves. For business customers, the Bank offers checking, cash manage-
ment, credit card merchant services, sweep accounts, and a variety of loan op-
tions including operating lines of credit, equipment loans, and real estate
loans. For consumers, the Bank has the only totally free checking account
available in its Virginia market, along with telephone banking services, safe
deposit boxes, a check card and the largest network of ATMs on the Eastern
Shore of Virginia. The Bank delivers its banking services through seven branch
offices, including the main office, that are staffed by 64 dedicated employees.
The Company also offers other services that complement the core financial
services offered by the Bank. The Company has an investment in a Virginia reg-
istered trust company that provides a vehicle to offer trust and asset manage-
ment services within the Bank's markets. In March 1999, the Bank activated its
subsidiary, Shore Investments, Inc. (the "Subsidiary"), to provide financial
services supporting the Bank's operations. These services include, but are not
limited to, offering insurance and investment products within the Bank's mar-
kets. Also during March 1999, the Subsidiary invested in a Virginia title in-
surance company that enabled it to offer title insurance policies within the
Bank's markets. During September 1999, the Subsidiary entered into an agreement
with a third party registered broker-dealer to begin offering investment prod-
ucts. Currently, the Subsidiary has one fully licensed employee that will begin
selling investment products during February 2000.
Market Area
The Bank's main office and four additional banking offices are located in
Accomack and Northampton Counties, which together comprise the Eastern Shore of
Virginia. Poultry and seafood processing are major industries in the area, with
Perdue Farms and Tyson Foods being the area's two largest employers. Agricul-
ture and tourism are also integral parts of the area's economy. Recently, the
Virginia legislature created a Space Port Authority to serve northern Accomack
County by promoting commercial space launches from existing space flight facil-
ities and infrastructure at Wallops Island, Virginia. In Northampton County,
there is a recently completed Eco-Industrial Park which is committed to envi-
ronmentally friendly job creation. The park is a model for others nationally
and has signed its first tenant.
During October 1999, the Bank opened its fifth Virginia branch and seventh
overall in Parksley, Virginia. The full service facility provides a banking al-
ternative for a community that management considers under-served. This branch
also provides transaction volume support for the Bank's Onley, Virginia office,
which currently serves customers from that area.
4
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SHORE FINANCIAL CORPORATION
Corporate Profile (continued)
During April 1999, the Company opened an operations center in Accomac, Virgin-
ia. The facility houses the Bank's administrative function and, as of August
1999, provides item processing and check imaging. The operations center has en-
abled the Company to better serve the Bank's branch network and provide im-
proved customer service.
In 1995, the Bank expanded into the Salisbury/Wicomico County area of Mary-
land, which is approximately 60 miles north of the Bank's main office. The
Salisbury/Wicomico County area is the economic hub of the Delmarva Peninsula
and is centrally located as a crossroads on the peninsula. Approximately
215,000 people live within a 20 mile radius of the City of Salisbury. The area
has a diversified economy and leading employers in the area include Perdue
Farms (poultry processing), Dresser Industries (electronic controls), Bayliner
Marine (yachts), PRMC (medical services), and Salisbury State University. Dur-
ing November 1997, the Bank opened its second Maryland branch in the financial
district of downtown Salisbury.
Competition
In its market area, the Bank competes with regional commercial banks and inde-
pendent community banks with multiple offices on the Eastern Shore. These and
certain other non-bank competitors may have much greater financial resources,
diversified markets, and branch networks than the Bank and may be able to offer
similar services at varying costs with higher lending limits. With nationwide
banking, the Bank also faces the prospect of additional competitors entering
its market area.
The Bank faces strong competition both in originating loans and in attracting
deposits. Competition in originating loans comes primarily from commercial
banks and mortgage lenders and to a lesser extent consumer finance companies,
credit unions, and savings institutions. The Bank competes for loans princi-
pally on the basis of the interest rates and loan fees it charges, the types of
loans it originates and the quality of service it provides to borrowers.
The Bank faces substantial competition in attracting deposits from other
banks, money market and mutual funds, credit unions and other investment vehi-
cles. The ability of the Bank to attract and retain deposits depends on its
ability to provide an investment opportunity that satisfies the requirements of
investors as to rate of return, liquidity, risk, convenience and other factors.
The Bank competes for these deposits by offering a variety of deposit accounts
at competitive rates, having convenient business hours, and by marketing its
position as the only locally-owned independent bank on the Eastern Shore of
Virginia.
5
<PAGE>
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SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW
The Company's performance for the year ended December 31, 1999 improved over
the year ended December 31, 1998. Net income for the year ended December 31,
1999 increased $70,200, or 5.6%, to $1.34 million, compared to net income of
$1.26 million for the same period in the prior year. Earnings were positively
impacted by loan growth of $7.6 million, or 9.5%, during 1999 and a 21.5% in-
crease in noninterest income, excluding gains on sales of securities of
$242,200 and $131,900 during the years ended December 31, 1999 and 1998, re-
spectively. Conversely, earnings were negatively impacted by several expansion
projects undertaken by the Company. During the second quarter, the Company
opened an operations center in Accomac, Virginia. This facility houses the
Bank's administrative function and, as of August 1999, provides item processing
and check imaging. Previously, the Bank outsourced the item processing function
to an independent provider. The cost of continuing to outsource the item
processing function during the conversion to an in-house system accounted for
approximately $85,000 in noninterest expense during 1999. During October 1999,
the Bank opened its seventh branch office. This full-service banking facility
is located in Parksley, Virginia, a market that management considers under-
served. Earnings for the December 1999 period include approximately $42,000 in
pretax losses associated with operating the Parksley branch. Additionally, the
Bank incurred approximately $57,000 and $165,000 in pretax losses associated
with operating the newest Salisbury location during year ended December 31,
1999 and 1998, respectively. Although the costs associated with running the op-
erations center and opening these new branch facilities negatively impacted
earnings during 1999, the changes should result in long term benefits in opera-
tional efficiencies and customer service.
Return on assets (ROA) was 1.07% for the year ended December 31, 1999 compared
to 1.11% for the year ended December 31, 1998. Return on average equity (ROE)
was 9.57% for 1999 compared to 9.66% for 1998.
For the year ended December 31, 1999, total loans increased to $88.2 million,
a 9.5% increase over the $80.6 million outstanding at December 31, 1998. Growth
in commercial and consumer loans (including home equity lines) constituted the
majority of this increase, consistent with management's plans of shifting to-
wards a typical commercial bank's loan portfolio mix. Commercial loans in-
creased by 29.8% over December 31, 1998, while consumer loans increased by
31.0% over the same period. Residential real estate mortgage loans (including
real estate construction loans) decreased by 5.0% when compared to December 31,
1998. Securities were $28.0 million at December 31, 1999, a decrease of 12.5%
when compared to December 31, 1998.
Deposits were $107.1 million at December 31, 1999, an increase of 2.7% over
December 31, 1998. Growth in lower cost interest-bearing and noninterest-bear-
ing demand deposits constituted the majority of this increase, consistent with
management's concerted efforts in growing the Bank's commercial and consumer
deposit portfolio and being less aggressive in pricing time deposits. Demand
deposits were $41.4 million at December 31, 1999, an increase of 14.3% over
amounts existing at December 31, 1998, while time deposits decreased by 3.4%
during the same period.
The Bank's net interest margin was 3.88% during the year ended December 31,
1999, compared to 3.91% during the year ended December 31, 1998. The Bank bene-
fited from the increase in noninterest-bearing deposits over the prior periods
and an increase in interest-earning assets. However, a lower interest rate en-
vironment and an increase in nonperforming assets during the year ended Decem-
ber 31, 1999 as compared to 1998 negatively impacted the net interest margin.
At December 31, 1999, the allowance for loan losses to period end loans was
1.32%, and the level of nonperforming assets to period end loans and foreclosed
properties was 1.54%.
6
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
RESULTS OF OPERATION
General
Net interest income is the major component of the Company's earnings and is
equal to the amount by which interest income exceeds interest expense. Interest
income is derived from interest-earning assets which are composed primarily of
loans and securities. Interest expense results from interest-bearing liabili-
ties, the major portion of which consists of deposits and short-term
borrowings. Changes in the volume and mix of these assets and liabilities, as
well as changes in the yields earned and rates paid, determine changes in net
interest income. Net interest margin is calculated by dividing net interest in-
come by average earning assets and represents the Company's net yield on its
earning assets.
Interest Income
During the year ended December 31, 1999, the Company earned $8.8 million in
interest income, or an increase of 4.2% as compared to the $8.5 million earned
for the year ended December 31, 1998. The improvement in interest income was
primarily due to volume increases in the loan portfolio. Average securities in-
creased to $29.8 million during the year ended December 31, 1999, an increase
of 8.3% over an average balance of $27.5 million for the year ended December
31, 1998. Average total loans increased 13.0% to $86.8 million during the year
ended December 31, 1999 from $76.8 million for the year ended December 31,
1998. Increases in average securities primarily resulted from deposit growth
during 1998 that resulted in higher invested balances during most of 1999. Loan
growth experienced during the period occurred primarily in commercial and con-
sumer loans. Commercial loans were $27.4 million at December 31, 1999, an in-
crease of 29.8% over the $21.1 million outstanding at December 31, 1998, while
consumer loans were $15.6 million at December 31, 1999, an increase of 31.0%
over the $11.9 million outstanding at December 31, 1998. The Bank aggressively
targeted these customers during the period and incorporated pricing and market-
ing strategies necessary to attract quality commercial and consumer customers.
Residential real estate mortgage loans (including real estate construction
loans) decreased by 5.0% during 1999 when compared to December 31, 1998. This
decrease primarily resulted from increased competition from mortgage lenders
offering low, long-term fixed rate mortgages during a period of falling
interest rates.
Interest Expense
Interest expense was $4.4 million during the year ended December 31, 1999,
flat when compared to the year ended December 31, 1998. While average interest-
bearing liabilities increased 9.1% to $101.3 million during the year ended De-
cember 31, 1999 from $92.9 million at December 31, 1998, the cost of interest-
bearing liabilities decreased 38 basis points from 4.70% during the year ended
December 31, 1998 to 4.32% during the year ended December 31, 1999. Total aver-
age deposits, including noninterest-bearing, increased 10.1% to $109.7 million
during the year ended December 31, 1999, from $99.7 million during the year
ended December 31, 1998. Including noninterest-bearing deposits in the mix low-
ers the Company's cost of funds to 3.99% for the year ended December 31, 1999,
compared to 4.38% for the year ended December 31, 1998. The increase in total
deposits and the decrease in the cost of funds primarily resulted from growth
in lower costing commercial and consumer deposit relationships, consistent with
management's concerted efforts in growing these areas and being less aggressive
in pricing time deposits. A lower interest rate environment also contributed to
a lower cost of funds.
7
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
Net Interest Income
Net interest income was $4.5 million during the year ended December 31, 1999,
8.2% greater than the $4.1 million reported during the year ended December 31,
1998. This increase occurred despite a decrease in net interest margin to 3.88%
during the December 1999 period as compared to 3.91% for the December 1998 pe-
riod. Decreases in net interest margin and net interest spread for the year
ended December 31, 1999 reflect the lower interest rate environment in exist-
ence during 1999 period as compared to the same period of 1998. However, the
interest rate environment's impact on the Company's net interest margin and net
interest spread was minimized by an increase in lending activities, a 22.9% in-
crease in average noninterest-bearing deposits and a change in the interest-
bearing deposit mix from higher costing time deposits to lower costing demand
deposit accounts. As discussed above, the increase in lower costing and nonin-
terest-bearing demand deposit accounts has a significant impact on the Bank's
cost of funds. Management intends to continue this trend in deposit mix in
hopes of further improving the Bank's net interest margin.
8
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
The following tables illustrate average balances of total interest-earning as-
sets 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 cal-
culated using daily average balances.
<TABLE>
<CAPTION>
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS
AND RATES
------------------------------------------------
YEARS ENDED DECEMBER 31
------------------------------------------------
1999 1998
------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Securities (1) $ 29,767 $1,771 5.95% $ 27,486 $1,641 5.97%
Loans (net of unearned
income):
Real Estate Mortgage 44,424 3,384 7.62% 46,455 3,998 8.61%
Real Estate
Construction 1,400 109 7.79% 1,370 103 7.52%
Commercial 26,258 2,258 8.60% 17,824 1,604 9.00%
Home Equity Lines 5,582 496 8.89% 5,515 511 9.27%
Consumer 9,158 872 9.52% 5,668 548 9.67%
---------------- ----------------
Total loans 86,822 7,119 8.20% 76,832 6,764 8.80%
---------------- ----------------
Interest-bearing
deposits in other banks 1,968 88 4.47% 3,238 162 5.00%
---------------- ----------------
Total earning assets 118,557 8,978 7.57% 107,556 8,567 7.97%
---------------- ----------------
Less: allowance for loan
losses (1,067) (782)
Total nonearning assets 6,914 6,822
-------- --------
Total assets $124,404 $113,596
-------- --------
Liabilities
Interest-bearing
deposits:
Checking and savings $ 32,795 $ 826 2.52% $ 25,059 $ 635 2.53%
Time deposits 66,450 3,443 5.18% 67,711 3,729 5.51%
---------------- ----------------
Total interest-bearing
deposits 99,245 4,269 4.30% 92,770 4,364 4.70%
FHLB advances 2,102 112 5.33% 85 3 3.53%
---------------- ----------------
Total interest-bearing
liabilities 101,347 4,381 4.32% 92,855 4,367 4.70%
------ ------ -------
Non-interest bearing
liabilities:
Demand deposits 8,362 6,802
Other liabilities 749 848
-------- --------
Total liabilities 110,458 100,505
Stockholders' equity 13,946 13,091
-------- --------
Total liabilities and
stockholders' equity $124,404 $113,596
-------- --------
Net interest income (1) $4,597 $4,200
------ ------
Interest rate spread (1) 3.25% 3.27%
Net interest margin (1) 3.88% 3.91%
</TABLE>
(1) Tax equivalent basis. The tax equivalent adjustment to net interest income
was $135,000 and $78,000 for the years ended December 31, 1999 and 1998,
respectively.
9
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
The following table describes the impact on the interest income of the Company
resulting from changes in average balances and average rates for the periods
indicated. The change in interest due to the mixture of volume and rate has
been allocated solely to rate changes.
<TABLE>
<CAPTION>
VOLUME AND RATE ANALYSIS
----------------------------------------------
YEARS ENDED
----------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
COMPARED TO DECEMBER COMPARED TO
31, 1998 JUNE 30, 1997
----------------------------------------------
CHANGE DUE TO: CHANGE DUE TO:
----------------------------------------------
INCREASE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
----------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Securities $ 137 $ (7) $ 130 $ 372 $ (34) $ 338
Loans (net of unearned
income):
Real Estate Mortgage (175) (439) (614) (360) 150 (210)
Real Estate Construction 2 4 6 23 (27) (4)
Commercial 759 (105) 654 496 (164) 332
Home Equity Lines 6 (21) (15) 111 (12) 99
Consumer 337 (13) 324 176 (33) 143
----------------------------------------------
Total loans 929 (574) 355 446 (86) 360
----------------------------------------------
Interest-bearing deposits
in other
banks (64) (10) (74) 130 (13) 117
----------------------------------------------
Total earning assets 1,002 (591) 411 948 (133) 815
----------------------------------------------
Liabilities
Interest-bearing deposits:
Checking and savings $ 196 $ (5) $ 191 $ 126 $ 18 $ 144
Time deposits (69) (217) (286) 92 (26) 66
----------------------------------------------
Total interest-bearing
deposits 127 (222) (95) 218 (8) 210
FHLB advances 71 38 109 (82) (1) (83)
----------------------------------------------
Total interest-bearing
liabilities 198 (184) 14 136 (9) 127
----------------------------------------------
Change in net interest
income 804 (407) 397 812 (124) 688
----------------------------------------------
</TABLE>
Interest Sensitivity
An important element of both earnings performance and the maintenance of suf-
ficient liquidity is proper management of the interest sensitivity gap. The in-
terest 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 ris-
ing interest rates, a negative gap within shorter maturities would adversely
affect net interest income, while a positive gap within shorter maturities
would result in an increase in net interest income. Conversely, during a period
of falling interest rates, a negative gap within shorter maturities would re-
sult in an increase in net interest income while a positive gap within shorter
maturities would have the opposite effect. This gap can be managed by repricing
assets or liabilities, by selling investments available for sale, by replacing
an asset or liability at maturity, or by adjusting the interest rate during the
life of an asset or liability. Matching the amounts of assets and liabilities
maturing in the same time interval helps to hedge the risk and minimize the im-
pact on net interest income in periods of rising or falling interest rates.
10
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
The Company determines the overall magnitude of interest sensitivity risk and
then formulates policies governing asset generation and pricing, funding
sources and pricing, and off-balance-sheet commitments in order to reduce sen-
sitivity risk. These decisions are based on management's outlook regarding fu-
ture interest rate movements, the state of the local and national economy, and
other financial and business risk factors.
The following table presents the Company's interest sensitivity position at
December 31, 1999. This one-day position, which continually is changing, is not
necessarily indicative of the Bank's position at any other time.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
-----------------------------------------------
DECEMBER 31, 1999
-----------------------------------------------
WITH-IN 91-365 1 TO 5 OVER
90 DAYS DAYS YEARS 5 YEARS TOTAL
-----------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans $ 14,992 $ 19,901 $ 30,633 $ 22,700 $ 88,226
Securities 500 3,112 15,509 8,898 28,019
Money market and other short
term securities 2,172 -- -- -- 2,172
-----------------------------------------------
Total earning assets $ 17,664 $ 23,013 $ 46,142 $ 31,598 $118,417
-----------------------------------------------
Cumulative earning assets $ 17,664 $ 40,677 $ 86,819 $118,417 $118,417
-----------------------------------------------
Interest-Bearing Liabilities:
Money market savings 8,207 -- -- -- 8,207
Interest checking -- -- 11,900 -- 11,900
Savings -- -- 13,066 -- 13,066
Certificates of deposit 12,407 32,638 15,840 4,815 65,700
FHLB advances 4,980 -- -- 1,023 6,003
-----------------------------------------------
Total interest-bearing
liabilities $ 25,594 $ 32,638 $ 40,806 $ 5,838 $104,876
-----------------------------------------------
Cumulative interest-bearing
liabilities $ 25,594 $ 58,232 $ 97,038 $104,876 $104,876
Period gap $ (7,930) $ (9,625) $ 5,336 $ 25,760 $ 13,541
Cumulative gap $ (7,930) $(17,555) $(12,219) $ 13,541 $ 13,541
Ratio of cumulative interest-
earning assets to interest-
bearing liabilities 69.02% 69.85% 87.66% 112.91% 112.91%
Ratio of cumulative gap to
total earning assets -6.70% -14.82% -10.32% 11.44% 11.44%
</TABLE>
(1) Includes nonaccrual loans of $1.2 million, which are included in the 1 to 5
years category.
(2) Management has determined that interest checking and savings accounts are
not sensitive to changes in related market rates and, therefore, they are
placed in the 1 to 5 years category.
Noninterest Income
During the year ended December 31, 1999, noninterest income increased 30.1% to
$1.2 million, compared to $957,000 for the year ended December 31, 1998. In-
cluded in these amounts are gains on sales of securities of $242,000 and
$132,000 for 1999 and 1998, respectively. Excluding these amounts noninterest
income increased $178,000 or 21.5% during the December 1999 period as compared
to the 1998 period. The increase is primarily attributable to increases in the
numbers of consumer and commercial checking accounts and the deposit fees that
they generate. Checking accounts generate fees including insufficient funds,
check order mark-ups, cashiers checks, service charges, ATM and others. These
fees are core earnings that are not interest sensitive and have provided a sta-
ble source of income for the Bank. Deposit account fees for the year ended De-
cember 31, 1999 increased 15.6% to $681,000, compared to $587,000 for the year
ended December 31, 1998. Also affecting noninterest income during the periods
presented is $48,000 in net gains on donation of investment real estate during
the year ended December 31, 1999.
11
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
Noninterest Expense
For the year ended December 31, 1999, noninterest expense increased 17.9% to
$3.4 million, compared to $2.9 million for the year ended December 31, 1998.
Noninterest expense was impacted by several expansion projects undertaken by
the Company during 1999. During the second quarter, the Bank opened an opera-
tions center in Accomac, Virginia. This facility houses the Bank's data
processing and accounting departments, along with other administrative servic-
es, and, as of August 1999, provides item processing and check imaging. Previ-
ously, the Bank outsourced the item processing function to an independent pro-
vider. The cost of continuing to outsource the item processing function during
the conversion to an in house system accounted for approximately $85,000 in non
interest expense during 1999. During October 1999, the Bank opened its seventh
branch office. This full-service banking facility is located in Parksley, Vir-
ginia, a market that management considers under-served. Noninterest expense for
the December 1999 period includes approximately $72,000 in expenses associated
with operating the new Parksley branch. The Company also incurred additional
costs to develop its contingency plans for the Year 2000 rollover.
Compensation and benefits increased by 14.1% to $1.46 million during the year
ended December 31, 1999 when compared to $1.28 million for the year ended De-
cember 31, 1998, primarily resulting from the increased personnel required to
provide item processing and other services at the new operations center, the
addition of the Parksley branch, and normal annual salary adjustments. Occu-
pancy and equipment increased 40.5% to $909,000 during the year ended December
31, 1999, compared to $647,000 for the year ended December 31, 1998. Data
processing increased 12.2% to $519,000 during the year ended December 31, 1999,
compared to $463,000 for the year ended December 31, 1998. The addition of the
operations center and the Parksley branch, the cost of continuing to outsource
the item processing function during the conversion to an in house system and
costs associated with developing a contingency plan for the Year 2000 rollover
contributed significantly to the increases in these expense categories. Adver-
tising, deposit insurance premiums and other expenses were relatively flat for
the year ended December 31, 1999 as compared to 1998.
FINANCIAL CONDITION
Loan Portfolio
The Bank's loan portfolio is comprised of commercial loans, construction
loans, real estate mortgage loans, home equity loans, and consumer loans. The
primary market areas in which the Bank makes loans are the counties of Accomack
and Northampton, Virginia and Salisbury/Wicomico County, Maryland.
Total loans (net of deferred fees and costs) increased to $88.2 million at De-
cember 31, 1999, a 9.5% increase over the $80.6 million outstanding at December
31, 1998. Growth in commercial and consumer loans (including home equity lines)
constituted the majority of this increase, consistent with management's plans
of shifting towards a typical commercial bank loan portfolio mix. Commercial
loans increased by 29.8% over December 31, 1998, while consumer loans increased
by 31.0% over the same period. Residential real estate mortgage loans (includ-
ing real estate construction loans) decreased by 5.0% during 1999 due to con-
tinuing competition from mortgage corporations within the Bank's markets. In-
creases in total loans also is attributable to opportunities resulting from
bank mergers occurring within the Bank's markets over the past several years
and continued loan growth in the Salisbury/Wicomico County, Maryland market ar-
ea. This market accounted for approximately $18.1 million, or 20.5%, of total
loans at December 31, 1999.
12
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
The following table summarizes the composition of the Bank's loan portfolio at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
<S> <C> <C>
----------------
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998
<S> <C> <C>
----------------
Residential Mortgage $44,618 $45,765
Commercial Mortgage 22,540 17,467
Commercial -- other 4,851 3,635
Real Estate Construction (1) 532 1,736
Home Equity Lines of Credit 5,233 5,582
Consumer 10,319 6,288
----------------
Total loans 88,093 80,473
Less:
Deferred loan (fees) cost, net 133 106
Allowance for loan losses (1,163) (920)
----------------
Net loans $87,063 $79,659
----------------
</TABLE>
(1) Amounts are disclosed net of loans in process of approximately $340,000 and
$1.8 million for 1999 and 1998, respectively.
The following table sets forth the composition of the Bank's loan portfolio by
percentage at the dates indicated.
<TABLE>
<CAPTION>
LOAN PORTFOLIO BY PERCENTAGE
-----------------------------
DECEMBER 31
-----------------------------
-----------------------------
<S> <C> <C>
Residential Mortgage 50.65% 56.87%
Commercial Mortgage 25.59% 21.70%
Commercial -- other 5.51% 4.52%
Real Estate Construction 0.60% 2.16%
Home Equity Lines of Credit 5.94% 6.94%
Consumer 11.71% 7.81%
-----------------------------
Total loans 100.00% 100.00%
-----------------------------
</TABLE>
The following table presents the maturities of selected loans outstanding at
December 31, 1999.
<TABLE>
<CAPTION>
MATURITY SCHEDULE OF PERIOD END LOANS
----------------------------------------------------------
DECEMBER 31, 1999
----------------------------------------------------------
1 YEAR OR LESS 1 TO 5 YEARS AFTER 5 YEARS
-------------------------------------------------
FIXED VARIABLE FIXED VARIABLE FIXED VARIABLE
RATE RATE RATE RATE RATE RATE TOTAL
----------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential and
Commercial
Mortgages (1) $ 6,138 $2,811 $22,050 $6,857 $11,011 $18,424 $67,291
Commercial -- other 1,132 1,700 1,714 92 172 41 4,851
Real estate construction 532 -- -- -- -- -- 532
Home Equity Lines of
Credit 274 4,959 -- -- -- -- 5,233
Consumer 2,010 43 4,017 -- 4,249 -- 10,319
----------------------------------------------------------
Total $10,086 $9,513 $27,781 $6,949 $15,432 $18,465 $88,226
----------------------------------------------------------
</TABLE>
(1) Includes mortgages with terms that include 3-year, 5-year and 7-year bal-
loon payment features in the 1 to 5 years and after 5 years fixed rate cat-
egory.
13
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
Securities
In accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, when securities are purchased, they are classified as
securities held to maturity when management has the positive intent and the
Company has the ability to hold them until maturity. These investment securi-
ties are carried at cost adjusted for amortization of premium and accretion of
discounts. Unrealized losses in the portfolio are not recognized unless manage-
ment of the Company believes that an other than temporary decline has occurred.
Securities held for indefinite periods of time and not intended to be held to
maturity are classified as available for sale at the time of purchase. Securi-
ties available for sale are recorded at fair value. The net unrealized holding
gain or loss on securities available for sale, net of deferred income taxes, is
included as a separate component of stockholders' equity. A decline in the fair
value of any securities available for sale below cost, that is deemed other
than temporary, is charged to earnings and results in a new cost basis for the
security. Cost of securities sold are determined on the basis of specific iden-
tification. The Company holds no securities classified as trading.
Investment Securities. The carrying value of investment securities (effected
for all applicable SFAS No. 115 adjustments) amounted to $28.0 million at De-
cember 31, 1999, compared to $32.0 million at December 31, 1998. The comparison
of amortized cost to fair value is shown in Note 3 of the notes to the finan-
cial statements. Note 3 also provides an analysis of gross unrealized gains and
losses of investment securities. Investment securities consist of the follow-
ing:
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO
---------------------
DECEMBER 31
---------------------
1999 1998
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Amortized Cost:
U.S. Treasury and other
U.S. government agencies $14,427 $16,814
Tax-exempt municipal bonds 5,729 7,429
State agency bonds 1,000 1,000
Mortgage-backed securities 124 205
Adjustable Rate Loan Funds 1,665 1,579
FHLMC stock 232 4
Preferred stock 2,156 2,156
Corporate bonds 3,545 2,022
Other equity securities 378 324
---------------------
Total securities $29,256 $31,533
---------------------
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
Securities Available for Sale. Securities available for sale are used as part
of the Company's interest rate risk management strategy and may be sold in re-
sponse to changes in interest rates, changes in prepayment risk, liquidity
needs, the need to increase regulatory capital and other factors. The fair
value of securities available for sale totaled $26.2 million at December 31,
1999, compared to $28.3 million at December 31, 1998. The comparison of fair
market value to amortized cost is shown in Note 3 of the notes to the financial
statements. Note 3 also provides an analysis of gross unrealized gains and
losses of securities available for sale. The following summarizes available for
sale securities for the respective periods.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
-------------------------------
DECEMBER 31
-------------------------------
1999 1998
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fair Value:
U.S. Treasury and other
U.S. government agencies $13,463 $14,435
Tax-exempt municipal bonds 4,368 6,488
State agency bonds 1,002 1,020
Adjustable Rate Loan Funds 1,642 1,573
FHLMC stock 198 271
Preferred stock 1,855 2,167
Corporate bonds 3,303 2,031
Other equity securities 349 334
-------------------------------
Total Securities $26,180 $28,319
-------------------------------
</TABLE>
The following table sets forth the maturity distribution and weighted average
yields of the securities portfolio at December 31, 1999. The weighted average
yields are calculated on the basis of book value of the investment portfolio
and on the interest income of investments adjusted for amortization of premium
and accretion of discount.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------------------------------------
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government
agencies
Within one year $ 480 $ 479 5.55% $ 999 $ 998 5.91%
After one year to five
years -- -- -- 6,952 6,756 6.37%
After five years -- -- -- 5,996 5,709 6.29%
---------------- -----------------
Total $ 480 $ 479 $13,947 $13,463
---------------- -----------------
Other Securities:
Within one year 624 614 5.34% 1,633 1,642 6.60%
After one year to five
years 735 734 5.95% 3,970 3,841 6.16%
After five years -- -- -- 3,437 3,190 6.27%
---------------- -----------------
Total 1,359 1,348 9,040 8,673
---------------- -----------------
Total Securities $1,839 $1,827 $22,987 $22,136
---------------- -----------------
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
Deposits
The Bank depends on deposits to fund its lending activities, generate fee in-
come opportunities, and create a captive market for loan products. The table
below presents a history of average deposits and the rates paid on interest-
bearing deposit accounts for the periods indicated.
<TABLE>
<CAPTION>
AVERAGE DEPOSITS AND AVERAGE
RATES PAID
-----------------------------
1999 1998
-----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
-----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-bearing deposits:
Checking and savings $ 32,795 2.52% $25,059 2.53%
Certificates of deposits
Less than $100,000 56,525 5.59% 59,105 5.55%
$100,000 and over 9,925 5.75% 8,606 5.92%
-----------------------------
Total interest-bearing deposits 99,245 4.30% 92,770 4.70%
Noninterest-bearing deposits 8,362 6,802
-------- -------
Total average deposits $107,607 $99,572
-------- -------
</TABLE>
Deposits averaged $107.6 million during the year ended December 31, 1999, an
increase of 8.1% over the $99.6 million during the year ended December 31,
1998. Categories accounting for the largest portion of the increase include in-
terest-bearing checking and savings accounts and noninterest-bearing accounts.
This is attributable to management's efforts to increase consumer and commer-
cial deposit relationships which tend to be lower costing.
The following table is a summary of the maturity distribution of certificates
of deposit in amounts of $100,000 or more as December 31, 1999.
<TABLE>
<CAPTION>
MATURITIES OF CD's OF
$100,000 OR MORE
--------------------------------------
DECEMBER 31, 1999
--------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENT
<S> <C> <C>
--------------------------------------
Three months or less $1,586 15.97%
Over three months to one year 5,672 57.12%
Over one year to five years 1,756 17.68%
Over five years 916 9.23%
--------------------------------------
Total $9,930 100.00%
--------------------------------------
</TABLE>
Capital Resources
Capital represents funds, earned or obtained, over which banks can exercise
greater control in comparison with deposits and borrowed funds. The adequacy of
the Company's capital is reviewed by management on an ongoing basis with refer-
ence to the size, composition, and quality of the Company's resources and con-
sistent with regulatory requirements and industry standards. Management seeks
to maintain a capital structure that will support anticipated asset growth and
absorb potential losses.
Banking regulations established to ensure capital adequacy require the Company
and the Bank to maintain minimum amounts and ratios of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management be-
lieves, as of December 31, 1999, that the Company meets all capital adequacy
requirements to which it is subject.
16
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
The following table details the components of Tier 1 and Tier 2 capital and
related ratios for the periods indicated.
<TABLE>
<CAPTION>
ANALYSIS OF CAPITAL
--------------------
DECEMBER 31
--------------------
1999 1998
--------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tier 1 Capital:
Common stock $ 602 $ 598
Additional paid-in capital 3,632 3,585
Retained earnings 10,474 9,265
Accumulated other comprehensive income (810) 341
--------------------
Total capital (GAAP) 13,898 13,789
Less: Intangibles (38) (41)
Unrealized (gains) losses 555 (341)
--------------------
Total Tier 1 capital $ 14,415 $ 13,407
--------------------
Tier 2 Capital:
Allowances for loan losses 1,039 1,013
Other required deductions -- 34
--------------------
Total Tier 2 capital $ 15,454 $ 14,454
--------------------
Risk-weighted assets $ 85,631 $ 74,400
Capital Ratios (1):
Tier 1 risk-based capital ratio 16.83% 18.02%
Total risk-based capital ratio 16.23% 18.53%
Tier 1 capital to average adjusted total assets 11.59% 11.80%
</TABLE>
(1) The required minimum capital ratios for capital adequacy purposes, as de-
fined collectively by the federal banking agencies, for Tier 1 risk-based
capital, total risk-based capital, and Tier 1 capital to average adjusted
assets was 4.0%, 8.0% and 4.0%, respectively. To be considered "well capi-
talized" under federal prompt corrective action regulation, these same re-
quired ratios are 6.0%, 10.0% and 5.0%, respectively.
Asset Quality
Allowance for loan losses. The allowance for loan losses represents an amount
management believes is adequate to provide for probable loan losses inherent in
the loan portfolio. In recent years, the Bank has begun to focus on diversify-
ing its loan portfolio by emphasizing and expanding its commercial and consumer
lending programs, which generally involve greater risk than residential mort-
gage lending. Considering this shift in lending emphasis, together with the
Bank's expansion into the new Salisbury/ Wicomico County market, management in
recent years has provided for probable loan losses which may result from the
greater inherent risk present in these loan products by increasing its allow-
ance for loan losses in accordance with SFAS No. 5, Accounting for Contingen-
cies. However, risks of future losses cannot be quantified precisely or attrib-
uted to particular loans or classes of loans. Because those risks are influ-
enced by general economic trends as well as conditions affecting individual
borrowers, management's judgment of the allowance is necessarily approximate
and imprecise. The allowance is also subject to regulatory examinations and de-
terminations as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and the size of the allowance in
comparison to peer banks identified by regulatory agencies.
17
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
Set forth below is a table detailing the allowance for loan losses for the pe-
riods indicated.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
---------------------------
YEARS ENDED DECEMBER 31
---------------------------
(DOLLARS IN THOUSANDS) 1999 1998
---------------------------
<S> <C> <C>
Balance, beginning of period $ 920 $ 770
Loans charged off:
Commercial 146 26
Real estate construction -- --
Real estate mortgage 14 32
Home equity lines of credit -- --
Consumer 101 88
---------------------------
Total loans charged-off 261 146
---------------------------
Recoveries:
Commercial -- --
Real estate construction -- --
Real estate mortgage -- 11
Home equity lines of credit -- --
Consumer 19 5
---------------------------
Total recoveries 19 16
---------------------------
Net charge-offs (242) (130)
Provision for loan losses 485 280
---------------------------
Balance, end of period $ 1,163 $ 920
---------------------------
Allowance for loan losses to loans
outstanding at end of period 1.32% 1.14%
Allowance for loan losses to nonaccrual
loans outstanding at end of period 97.57% 137.72%
Net charge-offs to average loans
outstanding during period (0.28%) (0.17%)
</TABLE>
For the year ended December 31, 1999, the Bank experienced net charge-offs of
$242,000, compared to net charge-offs of $130,000 for the year ended December
31, 1998. Also included in the table above is the ratio of net charge-offs to
average loans outstanding during the period, which was a negative 0.28% during
the year ended December 31, 1999 compared to a negative 0.17% during the year
ended December 31, 1998. Approximately $150,000 of the net charge-offs incurred
during the year ended December 31, 1999 relate to one commercial loan; however,
collection efforts continue on this loan. The remaining charge-offs for 1999
and those incurred during the year ended December 31, 1998 primarily related to
various consumer and real estate loans that were either deemed uncollectible or
foreclosed on.
At December 31, 1999 and 1998, the Bank identified loans totaling $287,000 and
$318,000, respectively that qualify as impaired under the guidelines estab-
lished by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures. Amounts identified at each period end were
to the same borrower and management has been attempting to obtain full repay-
ment, although partial repayment was received during 1999 through collateral
sales. During April 1998, the loans to this particular borrower were restruc-
tured, combining two of the loans, terming them out over an extended period and
taking additional collateral to further secure the outstanding loans. However,
the loan customer did not make payments as agreed towards the loans during
1999. Management does not expect to collect the entire contractual principal
and interest due and has estimated that the total loss on the two loans may ap-
proach $150,000. Accordingly, management has specifically reserved $150,000 to-
wards these loans, representing possible principal repayment shortfalls and
miscellaneous costs to collect. The Bank continues to maintain all loans clas-
sified as impaired in nonaccrual status, even as payments are made.
18
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
The allowance for loan losses at December 31, 1999 was $1.16 million, compared
to $920,000 at December 31, 1998, representing an increase of 26.4%. In fiscal
1995, the Bank expanded into the Salisbury/Wicomico County market in Maryland
by establishing a de novo branch office. In view of the business and population
growth in that market area, the Bank focused on expanding its commercial and
consumer lending, both secured and unsecured. The Bank also has changed its fo-
cus in its Virginia markets with an increased emphasis on commercial and con-
sumer lending. Due to the Bank's relative inexperience with both this type of
lending and the Salisbury/Wicomico County market, and its corresponding lack of
loan loss history with respect to commercial and consumer lending, the Bank de-
termined the prudent course was to increase the allowance for loan losses at a
more rapid rate than in past years. The Bank also considered its write-off his-
tory and the historical allowance levels maintained by peer community banks en-
gaged in commercial lending. The allowance for loan losses as a percentage to
period end loans equaled 1.32% at December 31, 1999, compared to 1.14% at De-
cember 31, 1998. The ratio of the allowance for loan losses as a percentage of
nonaccrual loans outstanding decreased at December 31, 1999 to 97.57%, compared
to 137.72% at December 31, 1998. This decrease primarily was attributable to
the $287,000 of impaired loans and an increase in delinquent loans existing at
December 31, 1999 being classified as nonaccrual. Management believes that al-
lowances for losses existing at December 31, 1999 are sufficient to cover any
anticipated or unanticipated losses on loans outstanding in accordance with
SFAS No. 5, Accounting for Contingencies.
An allocation of the allowance for loan losses in dollars and as a percent of
the total allowance is provided in the following tables. Because all of these
factors are subject to change, the allocation is not necessarily predictive of
future loan losses in the indicated categories.
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
-------------------------------------------------------
COMMERCIAL REAL ESTATE CONSUMER
-------------------------------------------------------
RESERVE PERCENTAGE RESERVE PERCENTAGE RESERVE PERCENTAGE
FOR LOAN OF LOAN FOR LOAN OF LOAN FOR LOAN OF LOAN
LOSSES ALLOWANCES LOSSES ALLOWANCE LOSSES ALLOWANCE
-------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
December 31,
1999 $660 56.75% $214 18.40% $289 24.85%
1998 485 52.72% 208 22.61% 227 24.67%
</TABLE>
The following table details information concerning nonaccrual and past due
loans, as well as foreclosed assets.
<TABLE>
<CAPTION>
NONPERFORMING
ASSETS
---------------
DECEMBER 31
---------------
1999 1998
---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans:
Commercial $ 242 $ --
Real Estate Construction -- --
Real Estate Mortgage 907 555
Home equity lines of credit -- --
Consumer 43 113
---------------
Total nonaccrual loans 1,192 668
Other real estate owned 188 49
---------------
Total nonperforming assets $ 1,380 $ 717
---------------
Loans past due 90 or more days accruing interest -- --
Allowance for loan losses to nonaccrual loans 97.57% 137.72%
Nonperforming assets to period end loans and
other real estate owned 1.54% 0.89%
</TABLE>
19
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
Total nonperforming assets, which consist of nonaccrual loans and foreclosed
properties, net of allowance for other real estate losses, were $1.38 million
at December 31, 1999, compared to $717,000 at December 31, 1998. The table
above indicates that as of December 31, 1999, the Bank had no loans past due
more than 90 days that were still accruing interest. The Bank's policy is that
whenever a loan reaches 90 days delinquent the loan no longer accrues interest.
As discussed above, approximately $287,000 in impaired loans were included in
nonperforming assets at December 31, 1999.
As to the nonaccrual loans at December 31, 1999 and 1998 referred to above,
approximately $71,000 and $22,000, respectively, of interest income would have
been recognized during the year then ended, if interest thereon had been ac-
crued.
The ratio of nonperforming assets to period end loans and foreclosed proper-
ties is also detailed within the table above. This ratio was 1.54% at December
31, 1999, compared to .89% at December 31, 1998. The primary reason for this
increase stems from the increase in commercial and consumer loans in recent
years and the $287,000 of impaired loans at December 31, 1999 referred to
above.
Approximately $150,000 of other real estate owned at December 31, 1999 relates
to loans to one borrower foreclosed on during 1999. Upon foreclosure of this
property, the loans was written down to their estimated fair market value plus
estimated selling costs. Other real estate owned at December 31, 1998 consisted
of two parcels of real estate that were sold by the Bank during 1999 with net
proceeds from the sale covering the remaining carrying value.
The Bank closely monitors loans that are deemed to be potential problem loans.
Loans are viewed as potential problem loans when possible credit problems of
borrowers or industry trends cause management to have doubts as to the ability
of such borrowers to comply with current repayment terms. Those loans are sub-
ject to regular management attention, and their status is reviewed on a regular
basis. In instances where management determines that specific reserves should
be set, the Bank takes such action as is deemed appropriate.
As of December 31, 1999, all loans 60 days or more delinquent, including
nonperforming loans, totaled $1.9 million. Additionally, performing loans to-
taling $1.6 million exist that are current, but demonstrate certain weaknesses
that cause management to monitor them closely. All loans in these categories
are subject to constant management attention, and their status is reviewed on a
regular basis. With the exception of $52,000 of consumer loans, these loans are
generally secured by residential and commercial real estate with appraised val-
ues that exceed the remaining principal balances on such loans.
Liquidity; Asset Management
Liquidity represents the Company's ability to meet present and future obliga-
tions through the sale or maturity of existing assets or the acquisition of ad-
ditional funds through liability management. Liquid assets include cash, inter-
est-bearing deposits with banks, federal funds sold, and investments maturing
within one year. The Company's ability to obtain deposits and purchase funds at
favorable rates determines its liability liquidity. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains over-
all liquidity that is sufficient to satisfy its depositor's requirements and
meet its customers' credit needs.
<TABLE>
<CAPTION>
SUMMARY OF LIQUID
ASSETS
-----------------
DECEMBER 31
-----------------
(DOLLARS IN THOUSANDS) 1999 1998
-----------------
<S> <C> <C>
Cash and due from banks $ 6,821 $ 3,901
Federal funds sold -- --
Investment securities 480 1,491
Available-for-sale securities 26,180 28,319
-----------------
Total liquid assets $ 33,481 $ 33,711
-----------------
Deposits and other liabilities $113,695 $106,159
-----------------
Ratio of liquid assets to deposits and
other liabilities 29.45% 31.76%
-----------------
</TABLE>
20
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
The summary above indicates sufficient liquidity to meet anticipated needs.
Additional sources of liquidity available to the Company include the capacity
to borrow additional funds when the need arises. The Bank has an available line
of credit with the FHLB for up to 13% of bank assets, or approximately $16.4
million, at December 31, 1999, and had $6.0 million in outstanding FHLB advanc-
es. The borrowing capacity is subject to certain collateral requirements as
stipulated in the FHLB borrowing agreement. At December 31, 1999 the Bank had
sufficient collateral pledged to borrow a total of approximately $9.0 million
from the FHLB.
Total cash and cash equivalents were $6.8 million at December 31, 1999, com-
pared to $3.9 million at December 31, 1998. Net cash provided by operating ac-
tivities was $1.6 million for the year ended December 31, 1999, compared to
$1.8 million for the year ended December 31, 1998. This decrease primarily is
attributable to the timing of tax and other liability payments during the peri-
ods.
Net cash flows used in investing activities were $6.4 million during the year
ended December 31, 1999, compared to $12.2 million during the year ended Decem-
ber 31, 1998. The majority of this decrease resulted from decreased investing
activities stemming from reduced deposit growth and increased loan growth dur-
ing the year ended December 31, 1999 as compared to the year ended December 31,
1998.
Net cash flows provided by financing activities were $7.7 million for the year
ended December 31, 1999, compared to $10.1 million for the year ended December
31, 1998. This decrease primarily resulted from slower deposit growth during
1999 when compared to 1998.
The Bank occasionally finds it necessary to borrow funds on a short term basis
due to fluctuations in loan and deposit levels. The Bank has several arrange-
ments whereby it may borrow funds overnight and on terms. As discussed above,
the Bank currently has borrowing capacity of $16.4 million, with the ability to
substantially increase this capacity by providing additional collateral (mort-
gage loans and investments) and meeting other guidelines with the FHLB. At De-
cember 31, 1999, the Bank had $6.0 million in outstanding FHLB advances.
The following table details information concerning the Bank's short term
borrowings for the periods presented.
<TABLE>
<CAPTION>
SUMMARY OF
BORROWED FUNDS
---------------
DECEMBER 31
---------------
(DOLLARS IN THOUSANDS) 1999 1998
--------------- ---
<S> <C> <C> <C>
Monthly average balance of short-term borrowings
outstanding during the period $ 1,029 $ 11
Weighted-average interest rate on monthly average short-
term borrowings 5.50% 5.30%
Maximum month-end balance of short-term borrowings
outstanding during the period $ 4,980 $ 1,000
</TABLE>
Return on Equity and Assets
The following table summarizes ratios considered to be significant indicators
of the Bank's profitability and financial condition during the periods indicat-
ed.
<TABLE>
<CAPTION>
RETURN ON
EQUITY AND
ASSETS
-------------
YEARS ENDED
DECEMBER 31
-------------
1999 1998
-------------
<S> <C> <C>
Return on average assets 1.07% 1.11%
Return on average equity 9.57% 9.66%
Average equity to average asset ratio 11.21% 11.52%
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Management's Discussion and Analysis (continued)
Effects of Inflation
The Company believes that its net interest income and results of operations
have not been significantly affected by inflation during the years ended Decem-
ber 31, 1999 and 1998.
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 compari-
sons. 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 distin-
guish the year 2000 from 1900, and therefore may shut down or perform miscalcu-
lations and comparisons as much as 100 years off. Management was fully aware
this presented a potential business disruption, and successfully completed a
program of due diligence in addressing the impact of the Year 2000 on the Com-
pany 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 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 pro-
gress. 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. In addition to collaborating with out-
side service providers, the Company worked with its banking customers to ensure
a smooth transition into the new millennium. The Company contacted all signifi-
cant commercial deposit customers to assess their Year 2000 readiness and each
quarter reviewed its list of new commercial deposit customers so that they
could be contacted and assessed also. The Company assessed the risk of all its
commercial loan customers and monitored those risk. Loan officers assessed the
risk of new commercial loan customers when they applied for the loan and moni-
tored them accordingly.
The final phase was the actual implementation of the new systems at the turn
of the century, with the readiness to execute contingency plans if needed. Dur-
ing the quarter ended June 30, 1999, contingency plans were drafted. Subsequent
to June 1999, the contingency plans were tested, independently approved by the
Board and senior management, and all employees were trained on implementing the
contingency policies and procedures into branch operations if conditions war-
ranted. On January 1, 2000, all critical systems of the Company were tested
with no significant Year 2000 problems detected. The Company has continued to
monitor these systems throughout early 2000 to be certain that no problems ex-
ist. To date, no significant problems have been detected.
The Company spent approximately $100,000 in expenses directly related to Year
2000. New hardware, new software, upgrades for the automated teller machines,
seminar training for the staff, and sophisticated testing services comprised
the bulk of the Year 2000 expense. These costs are based on the best estimates
of management. The Company did not separately track the internal costs incurred
for the Year 2000 project; however, such costs principally related to payroll
costs for information systems employees. It was impossible to accurately pre-
dict every expense that may result from the Year 2000 issue, and actual ex-
penses could differ from the estimated expenses.
22
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Report of Independent Accountants
The Board of Directors and Stockholders
Shore Financial Corporation and Subsidiary
Onley, Virginia
We have audited the accompanying consolidated statements of financial condi-
tion of Shore Financial Corporation and Subsidiary as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders' equity,
and cash flows for the years then ended. These consolidated financial state-
ments are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall fi-
nancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above pres-
ent fairly, in all material respects, the financial position of Shore Financial
Corporation and Subsidiary as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Goodman & Company, L.L.P.
Norfolk, Virginia
January 27, 2000
23
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31, 1999 and 1998
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents (including interest-
earning deposits of approximately $2,172,000 and
$1,442,000, respectively) $ 6,821,395 $ 3,900,861
Investment securities:
Held to maturity (fair value of $1,827,000 and
$3,702,000, respectively) 1,838,675 3,696,685
Available for sale (amortized cost of $27,418,000
and $27,836,000, respectively) 26,179,905 28,319,199
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 87,063,434 79,659,005
Premises and equipment, net 3,007,436 2,308,181
Real estate owned 188,273 49,177
Accrued interest receivable 1,029,551 1,056,634
Prepaid expenses and other assets 847,325 252,806
--------------------------
$127,592,594 $119,947,848
--------------------------
Liabilities and Stockholders' Equity
Deposits $107,148,318 $104,308,906
Advances from Federal Home Loan Bank 6,002,635 1,073,853
Advance payments by borrowers for taxes and
insurance 204,686 205,815
Accrued interest payable 92,763 37,292
Accrued expenses and other liabilities 246,124 533,195
--------------------------
Total liabilities 113,694,526 106,159,061
--------------------------
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; 1,822,812 and 1,810,812 shares
issued and outstanding, respectively 601,528 597,568
Additional paid-in capital 3,632,392 3,584,652
Retained earnings, substantially restricted 10,473,848 9,265,567
Accumulated other comprehensive income (loss) (809,700) 341,000
--------------------------
Total stockholders' equity 13,898,068 13,788,787
--------------------------
$127,592,594 $119,947,848
--------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31, 1999 and 1998
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income
Loans $7,118,291 $6,764,041
Investments
Taxable 1,464,716 1,572,666
Tax-exempt 259,526 152,078
---------------------
Total interest income 8,842,533 8,488,785
---------------------
Interest expense
Deposits 4,269,305 4,364,212
FHLB advances 111,712 2,809
---------------------
Total interest expense 4,381,017 4,367,021
---------------------
Net interest income 4,461,516 4,121,764
Provision for loan losses 485,200 280,200
---------------------
Net interest income after provision for loan losses 3,976,316 3,841,564
---------------------
Noninterest income
Deposit account fees 681,237 587,353
Loan fees 156,900 131,927
Gains on sales of securities 242,199 131,878
Other 164,836 106,233
---------------------
Total noninterest income 1,245,172 957,391
---------------------
Noninterest expense
Compensation and employee benefits 1,455,490 1,275,634
Occupancy and equipment 908,660 646,588
Data processing 519,166 462,916
Advertising 58,625 54,235
Federal insurance premium 62,102 58,931
Other 369,407 363,813
---------------------
Total noninterest expense 3,373,450 2,862,117
---------------------
Income before income taxes 1,848,038 1,936,838
Income taxes 513,000 672,000
---------------------
Net income $1,335,038 $1,264,838
---------------------
Earnings Per Common Share:
Basic $ 0.74 $ 0.70
---------------------
Diluted $ 0.73 $ 0.69
---------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1997 $595,588 $3,563,592 $ 8,000,729 $ 170,118 $12,330,027
Proceeds from exercise
of stock options 1,980 21,060 -- -- 23,040
Comprehensive income -- -- 1,264,838 170,882 1,435,720
----------------------------------------------------------
Balance, December 31,
1998 597,568 3,584,652 9,265,567 341,000 13,788,787
Common stock cash
dividends declared -- -- (126,757) -- (126,757)
Proceeds from exercise
of stock options 3,960 47,740 -- -- 51,700
Comprehensive income
(loss) -- -- 1,335,038 (1,150,700) 184,338
----------------------------------------------------------
Balance, December 31,
1999 $601,528 $3,632,392 $10,473,848 $ (809,700) $13,898,068
----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities
Net income $1,335,038 $ 1,264,838
Adjustment to reconcile to
net cash
provided by operating
activities:
Provision for loan
losses 485,200 280,200
Depreciation and
amortization 296,387 266,518
Amortization of premium
and accretion
of discount on
securities, net (1,125) 11,434
Gain on sale of
securities (242,199) (131,878)
Loss on sale of premises
and
equipment -- 3,450
Non-cash donation 77,500
Gain on non-cash
donation (48,003) --
Change in net deferred
loan fees (27,356) (118,192)
(Gain) loss on sale of
repossessed assets (2,895) 11,494
(Increase) decrease in
other assets (9,728) 17,870
Increase (decrease) in
other liabilities (223,414) 226,127
------------------------ ---
Net cash provided by
operating activities 1,639,405 1,831,861
------------------------ ---
Cash flows from investing
activities
Purchase of available-for-
sale securities (5,853,114) (17,444,630)
Proceeds from maturities
and sales of
available-for-sale
securities 6,460,067 11,631,629
Purchase of held-to-
maturity securities (1,765,791) (1,487,529)
Proceeds from maturities
of held-to-maturity
securities 3,646,667 1,881,525
Redemption of Federal Home
Loan Bank stock 88,700 --
Purchase of Federal
Reserve Bank stock -- (124,800)
Loan origination, net of
repayments (8,044,745) (7,043,875)
Proceeds from sale of
premises and
equipment -- 1,900
Purchase of premises and
equipment (990,062) (151,141)
Proceeds from sale of real
estate owned 52,071 498,011
Improvements to real
estate owned (5,800) --
------------------------ -------
Net cash used by
investing activities (6,412,007) (12,238,910)
------------------------ -------
</TABLE>
(continued)
27
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 and 1998 (continued)
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from financing
activities
Net increase in demand
deposits 5,169,068 8,818,504
Net increase (decrease)
in time deposits (2,329,657) 276,562
Proceeds from FHLB
advances 16,080,000 1,200,000
Repayments of FHLB
advances (11,151,218) (201,147)
Payment of dividend on
common stock (126,757) --
Proceeds from exercise
of stock options 51,700 23,040
----------------------- -------
Net cash provided by
financing activities 7,693,136 10,117,359
----------------------- -------
Increase in cash and cash
equivalents 2,920,534 (289,690)
Cash and cash
equivalents, beginning
of period 3,900,861 4,190,551
----------------------- -------
Cash and cash
equivalents, end of
period $ 6,821,395 $3,900,861
-----------------------
Supplemental disclosure
of cash flow
information
Cash paid during the
period
for interest $ 4,325,546 $4,365,484
Cash paid for income
taxes $ 650,000 $ 537,169
Supplemental schedule of
non-cash
investing and financing
activities
Transfers from loans to
real estate
acquired through
foreclosure $ 182,473 $ 112,769
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
NOTE 1
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
ORGANIZATION AND BUSINESS
Shore Financial Corporation (the "Company") is a Virginia corporation orga-
nized in September 1997 by Shore Bank (the "Bank") for the purpose of becoming
a unitary holding company of the Bank. The Company became a unitary holding
company of the Bank on March 16, 1998. The business and management of the Com-
pany consists of the business and management of the Bank. The Bank became a
Virginia chartered, Federal Reserve member, commercial bank on March 31, 1998.
Previously, the Bank was a federally chartered savings bank. The Company and
the Bank are headquartered on the Eastern Shore in Onley, Virginia.
The Company's assets primarily consist of approximately $3.3 million in cash
and investments and its investment in the Bank. Currently, the Company does not
participate in any other activities outside of controlling the Bank. The Bank
provides a full range of banking services to individual and corporate customers
through its seven banking offices located on the Eastern Shore of Virginia and
Maryland, including the counties of Accomack and Northampton, Virginia, and the
Salisbury/Wicomico County area in Maryland. The Bank's, and subsequently the
Company's, common stock became publicly traded in August 1997, upon completing
its subscription rights and initial public offerings, which included the sale
of 431,250 shares of common stock.
During March 1999, the Bank activated its subsidiary, Shore Investments, Inc.,
to engage in financial activities supporting the Bank's operations. These ac-
tivities will include, but are not limited to, the selling of investment and
insurance products. During 1999, Shore Investments, Inc. invested approximately
$13,500 in a Virginia title insurance company and hired an employee to sell in-
vestments through an agreement with a third party broker-dealer.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Mate-
rial estimates that are particularly susceptible to significant change in the
near term relate to the determination of the allowance for loan losses and the
valuation of real estate owned.
Investment Securities
Investments in debt securities classified as held-to-maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts using
the interest method. Management has a positive intent and ability to hold these
securities to maturity and, accordingly, adjustments are not made for temporary
declines in their market value below amortized cost. Investments in debt and
equity securities classified as trading, if any, are stated at fair value.
Unrealized holding gains and losses for trading securities are included in the
statement of income. The Company had no such securities during the periods re-
ported in the financial statements. All other investment securities with read-
ily determinable fair values are classified as available-for-sale. Unrealized
holding gains and losses on available-for-sale securities are excluded from
earnings and reported, net of tax effect, in other comprehensive income until
realized.
Investments in Federal Home Loan Bank and Federal Reserve Bank stock are
stated at cost, as these securities are restricted and do not have readily de-
terminable fair values.
Gains and losses on the sale of securities are determined using the specific
identification method. Other-than-temporary declines in the fair value of indi-
vidual held-to-maturity and available-for-sale securities below their cost, if
any, are included in earnings as realized losses.
29
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Loans Receivable
Loans receivable consist of long-term real estate loans secured by first deeds
of trust on single family residences, other residential property, commercial
property and land located primarily in an area known as the Eastern Shore of
Virginia and Maryland, and secured and unsecured consumer and commercial loans.
Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses and net deferred loan fees (costs) and discounts.
The Bank defers loan origination and commitment fees, net of certain direct
loan origination costs, and the net deferred fees (costs) are amortized into
interest income over the lives of the related loans as yield adjustments. Any
unamortized fees (costs) on loans fully repaid or sold are recognized as income
(expense) in the year of repayment or sale. Deferred fees (costs) on permanent
adjustable-rate loans are amortized into income over the period necessary to
adjust the yield on the loans to market rates using the interest method.
The Bank places loans on nonaccrual status after being delinquent greater than
90 days, or earlier, if the Bank becomes aware that the borrower has entered
bankruptcy proceedings, or if the loans have developed inherent problems prior
to being 90 days delinquent that indicate payments of principal or interest
will not be made in full. Whenever the accrual of interest is stopped, a spe-
cific allowance is established through a charge to expense for previously ac-
crued but uncollected interest income. Thereafter, interest is recognized only
as cash is received until the loan is brought current.
Valuation allowances for estimated losses on loans are provided on a specific
and nonspecific basis. Specific allowances are provided when an identified sig-
nificant decline in value of a loan occurs. The nonspecific valuation allowance
incorporates a number of factors including historical loss experience, economic
conditions, prevailing market conditions, management's assessment of credit
risk considering loan classification categories and management's judgment. This
nonspecific allowance has been established to provide reserves for estimated
inherent losses resulting from lending activities. In the opinion of manage-
ment, the present allowance is adequate to absorb reasonably foreseeable loan
losses. Additions to the allowance are reflected in current operations. Charge-
offs to the allowance are made when the loan is considered uncollectible or is
transferred to real estate acquired in settlement of loans.
Management determines loan impairment using guidelines established by State-
ment of Financial Accounting Standards No. 114 (SFAS 114), Accounting by Credi-
tors for Impairment of a Loan (as amended by SFAS No. 118, Accounting by Credi-
tors for Impairment of a Loan -- Income Recognition and Disclosures). Under
this accounting standard, a loan is considered to be impaired when it is proba-
ble that the Bank will be unable to collect all principal and interest amounts
according to the contractual terms of the loan agreement. A performing loan may
be considered impaired. The allowance for loan losses related to loans identi-
fied as impaired is primarily based on the excess of the loan's current out-
standing principal balance over the estimated fair value of the related collat-
eral. For a loan that is not collateral- dependent, the allowance is recorded
at the amount by which the outstanding principal balance exceeds the current
best estimate of the future cash flows on the loan discounted at the loan's
original effective interest rate.
For impaired loans that are on nonaccrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or
a portion of a cash payment received on a nonaccrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
Real Estate Owned
Real estate acquired through foreclosure is initially recorded at the lower of
fair value or the loan balance at date of foreclosure. Subsequently, property
that is held for resale is carried at the lower of cost or fair value minus es-
timated selling costs. Costs relating to the development and improvement of
property are capitalized, whereas those relating to holding the property are
charged to expense.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its fair value minus estimated selling costs.
30
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. De-
preciation is computed using declining balance and straight-line methods over
the estimated useful lives of the respective assets. Estimated useful lives are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings 25 to 40 years
Furniture and equipment 5 to 15 years
Automobiles 5 years
</TABLE>
Income Taxes
Deferred income taxes payable represent the cumulative tax effect from tempo-
rary differences in the recognition of taxable or deductible amounts for income
tax and financial reporting purposes.
Prior to July 1, 1996, in computing Federal income taxes, savings banks that
met certain definitional tests and other conditions prescribed by the Internal
Revenue Code were allowed, within limitations, to deduct from taxable income an
allowance for bad debts based on actual loss experience, a percentage of tax-
able income before such deduction or an amount based on a percentage of eligi-
ble loans. The applicable percentage of taxable income used for the bad debt
deduction was 8%. Effective July 1, 1996, the percentage of taxable income
method and the percentage of eligible loan method for determining the bad debt
deduction are no longer available. At December 31, 1999, the cumulative bad
debt reserve, upon which no taxes have been paid on tax returns, was approxi-
mately $1.2 million. Of this amount, $783,000 represents that portion of the
cumulative bad debt reserve for which financial statement income taxes have not
been provided, in accordance with SFAS No. 109, Accounting for Income Taxes.
The Small Business Job Protection Act of 1996 (the "Act") repealed the per-
centage of taxable income method of computing bad debt reserves, and required
the recapture into taxable income of "excess reserves," on a taxable basis over
six years. Excess reserves are defined in general, as the excess of the balance
of the tax bad debt reserve (using the percentage of taxable income method) as
of the close of the last tax year beginning before January 1, 1996 over the
balance of the reserve as of the close of the last tax year beginning before
January 1, 1988. For the Bank, the applicable tax years for measuring excess
reserves were June 30, 1996 and June 30, 1988, respectively. As a result of the
Act, the Bank is recapturing into taxable income, for tax return purposes only,
approximately $497,000 ratably over six years.
Earnings Per Common Share
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, establishes standards for computing and presenting earnings per share
(EPS). This Statement supersedes standards previously set in APB Opinion No.
15, Earnings Per Share. SFAS No. 128 requires dual presentation of basic and
diluted EPS on the face of the income statement, and it requires a reconcilia-
tion of the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if se-
curities or other contracts to issue common stock were exercised, converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and displaying compre-
hensive income and its components. The adoption of SFAS No. 130 did not have a
material impact on the Company. All of the Company's other comprehensive income
relates to net unrealized gains (losses) on available-for-sale securities.
31
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Segment Reporting
During the year ended December 31, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise ("SFAS 131"), which establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements, and requires that those en-
terprises report selected information about operating segments in financial re-
ports issued to shareholders. Operating segments are components of an enter-
prise about which separate financial information is available, and evaluated
regularly by management in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and decid-
ing how to allocate resources to segments.
Derivative Instruments and Hedging Transactions
During the year ended December 31, 1999, the Company adopted SFAS No. 133, Ac-
counting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including cer-
tain derivative instruments embedded in other contracts, (collectively referred
to as derivatives) and for hedging activities. It requires that an entity rec-
ognize all derivatives as either assets or liabilities in the statement of fi-
nancial position and measure those instruments at fair value. This Statement
was effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company's adoption of this Statement on July 1, 1999 did not materi-
ally impact the Company's consolidated financial condition or consolidated re-
sults of operations.
Computer Software
During the year ended December 31, 1999, the Company adopted Statement of Po-
sition (SOP) 98-1, Accounting for Costs of Computer Software Developed or Ob-
tained for Internal Use. This SOP was 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 cap-
italized. 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 consoli-
dated financial condition or consolidated results of operations.
Start-up Activities
During the year ended December 31, 1999, the Company adopted SOP 98-5, Report-
ing on the Costs of Startup Activities. 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 for both development stage and es-
tablished operating activities, and it changes existing practice for some in-
dustries. The SOP broadly defines startup activities as those one-time activi-
ties that relate to the opening of a new facility, introduction of a new prod-
uct 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 beneficia-
ry, or commencing some new operation. The SOP was effective for financial
statements for fiscal years beginning after December 15, 1998. Consistent with
banking industry practice, the Company's policy is to expense such costs.
Therefore, its adoption, on January 1, 1999, did not materially affect the
Company's financial position or results of operations.
Cash and Cash Equivalents
Cash equivalents include currency, balances due from banks, interest-earning
deposits with maturities of ninety days or less and federal funds sold.
The Company is required to maintain reserves with the Federal Reserve Bank.
The aggregate daily average reserves for the final reporting period in the
years ended December 31, 1999 and 1998 were $25,000 and $25,000, respectively.
Reclassifications
Certain reclassifications of the prior year information have been made to con-
form to the December 31, 1999 presentation.
32
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
NOTE 3
INVESTMENT SECURITIES
A summary of the amortized cost and estimated fair values of investment secu-
rities is as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999
Held to Maturity
United States government and
agency obligations $ 479,802 $ -- $ (337) $ 479,465
Tax-exempt municipal bonds 1,235,000 -- (4,444) 1,230,556
Mortgage-backed securities 123,873 -- (7,084) 116,789
-----------------------------------------------
1,838,675 -- (11,865) 1,826,810
-----------------------------------------------
Available for Sale
Debt securities:
United States government and
agency obligations 13,947,520 -- (484,331) 13,463,189
Tax-exempt municipal bonds 4,493,703 6,746 (132,763) 4,367,686
Corporate bonds 3,545,599 -- (242,139) 3,303,460
Va. State Housing Authority
bonds 1,000,000 2,050 -- 1,002,050
Adjustable Rate Mortgage
Fund 1,310,718 -- (16,307) 1,294,411
Adjustable Rate Commercial
Loan Fund 353,916 -- (6,782) 347,134
-----------------------------------------------
Total debt securities 24,651,456 8,796 (882,322) 23,777,930
-----------------------------------------------
Marketable equity securities:
Federal Home Loan Mortgage
Corporation common stock 232,350 -- (34,685) 197,665
Citigroup preferred stock 1,032,856 -- (132,856) 900,000
MBNA preferred stock 579,969 -- (28,719) 551,250
Consolidated Edison
preferred stock 543,000 -- (138,750) 404,250
Other equity securities 378,091 -- (29,281) 348,810
-----------------------------------------------
Total marketable equity
securities 2,766,266 -- (364,291) 2,401,975
-----------------------------------------------
27,417,722 8,796 (1,246,613) 26,179,905
-----------------------------------------------
$29,256,397 $ 8,796 $(1,258,478) $28,006,715
-----------------------------------------------
December 31, 1998
Held to Maturity
United States government and
agency obligations $ 2,491,639 $ 5,115 $ (79) $ 2,496,675
Tax-exempt municipal bonds 1,000,000 -- -- 1,000,000
Mortgage-backed securities 205,046 41 -- 205,087
-----------------------------------------------
3,696,685 5,156 (79) 3,701,762
-----------------------------------------------
Available for Sale
Debt securities:
United States government and
agency obligations 14,322,042 121,327 (8,714) 14,434,655
Tax-exempt municipal bonds 6,429,225 64,351 (5,700) 6,487,876
Corporate bonds 2,021,644 8,856 -- 2,030,500
Va. State Housing Authority
bonds 1,000,000 20,000 -- 1,020,000
Adjustable Rate Mortgage
Fund 1,243,041 -- (6,001) 1,237,040
Adjustable Rate Commercial
Loan Fund 336,258 239 -- 336,497
-----------------------------------------------
Total debt securities 25,352,210 214,773 (20,415) 25,546,568
-----------------------------------------------
Marketable equity securities:
Federal Home Loan Mortgage
Corporation common stock 4,112 266,788 -- 270,900
Citigroup preferred stock 1,032,856 40,894 -- 1,073,750
MBNA preferred stock 579,969 -- (20,281) 559,688
Consolidated Edison
preferred stock 543,000 -- (9,000) 534,000
Other equity securities 324,345 12,429 (2,481) 334,293
-----------------------------------------------
Total marketable equity
securities 2,484,282 320,111 (31,762) 2,772,631
-----------------------------------------------
27,836,492 534,884 (52,177) 28,319,199
-----------------------------------------------
$31,533,177 $540,040 $ (52,256) $32,020,961
-----------------------------------------------
</TABLE>
33
<PAGE>
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SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
The amortized cost and estimated fair value of securities at December 31, 1999
by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-----------------------
<S> <C> <C>
Held to Maturity
Due in one year or less $ 979,802 $ 976,410
Due after one year through five years 735,000 733,611
Due after five years through ten years -- --
Due after ten years -- --
Mortgage-backed securities 123,873 116,789
-----------------------
1,838,675 1,826,810
-----------------------
Available for Sale
Due in one year or less 2,632,124 2,639,571
Due after one year through five years 10,921,218 10,599,028
Due after five years through ten years 9,433,480 8,897,786
Due after ten years -- --
Adjustable Rate Mortgage Fund 1,310,718 1,294,411
Adjustable Rate Commercial Loan Fund 353,916 347,134
-----------------------
24,651,456 23,777,930
-----------------------
$26,490,131 $25,604,740
-----------------------
</TABLE>
At December 31, 1999 and 1998, investment securities with a carrying value of
approximately $3,000,000 were pledged as collateral for public deposits.
NOTE 4
LOANS RECEIVABLE
Loans receivable are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
------------------------
<S> <C> <C>
Real Estate Loans:
Conventional mortgage:
Secured by one-to-four family residences $42,046,182 $42,953,978
Secured by multi-family residences 818,237 837,801
Commercial mortgages 22,539,507 17,466,618
Land 1,754,676 1,973,499
Short-term construction 871,776 3,526,716
Home equity lines of credit 5,232,768 5,581,987
Consumer loans 10,318,542 6,287,825
Commercial loans:
Secured 3,203,480 1,933,360
Unsecured 1,648,237 1,702,108
------------------------
Total loans 88,433,405 82,263,892
Less:
Loans in process 340,111 1,790,986
Deferred loan fees (costs), net (133,450) (106,093)
Allowance for loan losses 1,163,310 919,994
------------------------
$87,063,434 $79,659,005
------------------------
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
The allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Balance at beginning of period $ 919,994 $ 770,491
Provision charged to expense 485,200 280,200
Recoveries (losses) charged to the allowance, net (241,884) (130,697)
-------------------------
Balance at end of the period $ 1,163,310 $ 919,994
-------------------------
</TABLE>
Impaired loans as determined in accordance with Statement of Financial Ac-
counting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of
a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures, were $287,000 and $318,000 at De-
cember 31, 1999 and 1998, respectively. A specific allowance of approximately
$150,000 was provided with respect to impaired loans at December 31, 1999. A
specific allowance for impaired loans did not exist at December 31, 1998. For
the years ended December 31, 1999 and 1998, the average recorded investment in
impaired loans was $303,000 and $318,000, respectively, and interest income
recognized on impaired loans, all on the cash basis, was $1,000 and $32,000,
respectively.
NOTE 5
PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1999 1998
---------------------
<S> <C> <C>
Land $ 448,596 $ 415,596
Buildings 2,148,573 1,777,106
Furniture and fixtures 1,381,415 887,041
Computer equipment 616,704 516,683
Automobiles 79,791 79,791
Construction in process -- 8,800
---------------------
4,675,079 3,685,017
Less accumulated depreciation 1,667,643 1,376,836
---------------------
$3,007,436 $2,308,181
---------------------
</TABLE>
NOTE 6
DEPOSITS
Deposits accounts are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31
<S> <C> <C>
-------------------------
<CAPTION>
1999 1998
<S> <C> <C>
-------------------------
Demand deposits:
Savings accounts $ 13,065,154 $ 11,474,394
Checking accounts 20,175,862 17,356,474
Money market deposit accounts 8,207,435 7,448,514
-------------------------
Total 41,448,451 36,279,382
Time deposits 65,699,867 68,029,524
-------------------------
$107,148,318 $104,308,906
-------------------------
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $9.9 million and $10.0 million at December 31, 1999
and 1998, respectively.
35
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Time deposits outstanding at December 31, 1999 mature as follows:
<TABLE>
<S> <C>
Within one year $45,044,811
One to two years 4,290,250
Two to three years 6,997,663
Three to four years 3,415,133
Four to five years 1,136,875
Thereafter 4,815,135
-----------
$65,699,867
-----------
</TABLE>
NOTE 7
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments as of December
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE
- ----------------------------------------------------------
<S> <C> <C>
December 31, 1999
Financial assets
Cash and cash equivalents $ 6,821 $ 6,821
Securities $ 28,019 $ 28,007
Loans, net of allowance for loan losses $ 87,063 $ 86,700
Accrued interest receivable $ 1,030 $ 1,030
Financial liabilities
Deposits $107,148 $107,471
Advances from Federal Home Loan Bank $ 6,003 $ 5,963
Accrued interest payable $ 93 $ 93
Unrecognized financial instruments
Commitments to extend credit N/A N/A
December 31, 1998
Financial assets
Cash and cash equivalents $ 3,901 $ 3,901
Securities $ 32,049 $ 32,021
Loans, net of allowance for loan losses $ 79,659 $ 80,127
Accrued interest receivable $ 1,057 $ 1,057
Financial liabilities
Deposits $104,309 $105,154
Advances from Federal Home Loan Bank $ 1,074 $ 1,074
Accrued interest payable $ 37 $ 37
Unrecognized financial instruments
Commitments to extend credit N/A N/A
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
Cash and cash equivalents
For cash and cash equivalents, the carrying amount is a reasonable estimate of
fair value.
Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
36
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Loans receivable
The fair value of loans is estimated by discounting future cash flows, using
the current rates at which similar loans would be made to borrowers with simi-
lar remaining maturities. This calculation ignores loan fees and certain fac-
tors affecting the interest rates charged on various loans, such as the borrow-
er's creditworthiness and compensating balances, and dissimilar types of real
estate held as collateral.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the balance sheet date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Accrued interest receivable and payable
The carrying amounts of accrued interest receivable and payable approximate
their fair values.
Advances from Federal Home Loan Bank
Primarily all advances from Federal Home Loan Bank are due within approxi-
mately ninety days from the balance sheet date. Therefore, the carrying amount
approximates fair value. For those borrowings that mature beyond ninety days,
the fair value of the borrowing is estimated by discounting future cash flows,
using the current rates at which similar borrowings would be obtained from the
Federal Home Loan Bank with similar remaining maturities.
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current lev-
els of interest rates and the committed rates. Because of the competitive na-
ture of the marketplace, loan fees vary greatly with no fees charged in many
cases. Therefore, management has concluded no value should be assigned.
NOTE 8
ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings ("advances") from the Federal Home Loan Bank ("FHLB") are scheduled
to mature as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1999 1998
---------------------
<S> <C> <C>
Within one year $4,980,000 $1,000,000
One to two years -- --
More than two years 1,022,635 73,853
---------------------
$6,002,635 $1,073,853
---------------------
</TABLE>
37
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Information regarding FHLB advances is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Monthly average balance of borrowings outstanding $ 2,102,000 $ 85,000
Maximum month-end balance of borrowings outstanding $ 6,054,000 $ 1,074,000
</TABLE>
The weighted average interest rate on advances was 5.33% and 3.53% for the pe-
riods ended December 31, 1999 and 1998, respectively. These advances are col-
lateralized by the Bank's investment in FHLB stock and qualifying real estate
loans with a principal balance of approximately $900,000, and government agency
securities with a fair market value of approximately $9.6 million held under a
specific collateral agreement. As a member of the FHLB, the Bank has total bor-
rowing capacity to $16.4 million.
NOTE 9
OTHER NONINTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Other noninterest income
FHLB stock dividend $ 38,575 $ 43,288
Federal Reserve Bank
stock dividend 7,488 5,616
Credit life commissions 13,213 13,529
Income from real estate
held for investment 8,082 10,902
Safe deposit box rental 14,042 8,903
Gain (loss) on sale of
fixed assets -- (3,450)
Gain (loss) on sale of
real estate owned 2,895 (11,494)
Gain on disposition of
real estate held for
investment 48,003 --
Miscellaneous fees and
commissions 32,538 38,939
-----------------------
$ 164,836 $106,233
-----------------------
Other noninterest
expense
Education and seminars $ 11,248 $ 15,722
Personnel costs 32,077 37,632
Travel 11,674 18,323
Courier cost 16,803 11,680
Legal and professional
fees 84,577 88,841
Supervisory fees 34,800 34,818
Loan costs 56,377 44,671
ATM fees 24,407 18,941
Insurance 27,701 22,786
Bank service charges 33,521 32,806
Deposit account write-
offs 18,633 20,594
REO property expense 12,576 11,975
Miscellaneous 5,013 5,024
-----------------------
$369,407 $363,813
-----------------------
</TABLE>
38
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
NOTE 10
INCOME TAXES
The provision for income taxes is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Current
Federal $ 635,000 $ 611,000
State -- 33,000
--------------------------
635,000 644,000
--------------------------
Deferred
Federal (122,000) 37,000
State -- (9,000)
--------------------------
(122,000) 28,000
--------------------------
Total
Federal 513,000 648,000
State -- 24,000
--------------------------
$513,000 672,000
--------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1999 1998
------------------
<S> <C> <C>
Deferred tax asset
Bad debts and other provisions $357,000 $224,000
Unrealized loss on securities available for sale 421,000 --
Other -- 3,000
------------------
Total deferred tax asset 778,000 227,000
------------------
Deferred tax liability
FHLB stock 70,000 70,000
Depreciation 125,000 128,000
Unrealized gain on securities available for sale -- 175,000
Other 11,000 --
------------------
Total deferred tax liability 206,000 373,000
------------------
Net deferred tax asset (liability) $572,000 $(146,000)
------------------
</TABLE>
39
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
The differences between expected federal and state income taxes at statutory
rates to actual income tax expense are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
------------------
1999 1998
------------------
<S> <C> <C>
Federal income tax expense -- at statutory rate $628,000 $659,000
State income tax expense -- at statutory rates,
net of federal tax effect -- 116,000
Tax effect of:
Tax exempt interest income (70,000) (52,000)
Dividends received deduction (32,000) (27,000)
U.S. obligation interest income -- (14,000)
Other, net (13,000) (10,000)
------------------
$513,000 $672,000
------------------
</TABLE>
In conjunction with the Bank's charter change on March 31, 1998, the Bank is
no longer subject to income taxation in Virginia.
NOTE 11
STOCKHOLDERS' EQUITY
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the regu-
latory framework for prompt corrective action, the Company and its Banking Sub-
sidiary must meet specific capital guidelines that involve quantitative mea-
sures 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 re-
quire the Company and its Banking Subsidiary to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of Decem-
ber 31, 1999, that the Company meets all capital adequacy requirements to which
it is subject.
As of December 31, 1999, the most recent notification, the Federal Deposit In-
surance Corporation categorized the Bank as well capitalized under the regula-
tory framework for prompt corrective action. To be categorized as well capital-
ized, the Bank must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category. The Company and the Bank's actual capital amounts and ratios are pre-
sented in the table.
40
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
-----------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk-
Weighted Assets):
Consolidated $13,898 16.23% $ 6,850 8.00% $ N/A N/A
Shore Bank 10,674 12.84% 6,652 8.00% 8,315 10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Consolidated $14,415 16.83% $ 3,425 4.00% $ N/A N/A
Shore Bank 11,179 13.44% 3,326 4.00% 4,989 6.00%
Tier 1 Capital (to Average
Assets):
Consolidated $14,415 11.59% $ 4,976 4.00% $ N/A N/A
Shore Bank 11,179 9.01% 4,962 4.00% 6,202 5.00%
As of December 31, 1998:
Total Capital (to Risk-
Weighted Assets):
Consolidated $13,789 18.53% $ 5,952 8.00% $ N/A N/A
Shore Bank 12,527 16.97% 5,904 8.00% 7,380 10.00%
Tier 1 Capital (to Risk-
Weighted Assets):
Consolidated $13,407 18.02% $ 2,976 4.00% $ N/A N/A
Shore Bank 11,480 15.56% 2,952 4.00% 4,428 6.00%
Tier 1 Capital (to Average
Assets):
Consolidated $13,407 11.80% $ 4,544 4.00% $ N/A N/A
Shore Bank 11,480 10.11% 4,541 4.00% 5,676 5.00%
</TABLE>
The Company may not declare or pay a cash dividend, or repurchase any of its
capital stock, if the effect thereof would cause the net worth of the Company
to be reduced below the net worth requirement imposed by federal regulations.
On February 9, 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% or current years earnings.
Profit Sharing Plan
The Bank's Profit Sharing Plan Trust (the "Plan") was implemented effective
July 1, 1991. The Plan provides for retirement, death and disability benefits.
An employee becomes eligible for participation after completion of one year of
service, and becomes a member of the Plan on the earliest of January 1 or July
1 occurring on or after qualification.
Employees may elect to defer 2%-10% of their compensation, with the Bank mak-
ing matching contributions equal to 100% of the first 3% of compensation de-
ferred, and 50% of the next 3%. Matching contributions made by the Bank under
the Plan totaled approximately $32,300 and $33,700 for the years ended December
31, 1999 and 1998, respectively. The Bank may also elect to make discretionary
contributions to the Plan; accordingly, $52,200 and $52,000 of such contribu-
tions were made during the years ended December 31, 1999 and 1998, respective-
ly.
41
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Stock Option Plan
Under the Company's Stock Option Plan, 90,000 shares of the common stock may
be used as options and awards to employees. Options granted under the Stock Op-
tion Plan may be incentive, as defined by the Internal Revenue Code and related
rules and regulations, or non-incentive stock options. In the case of an incen-
tive stock option, the exercise price for the purchase of shares at the date of
grant must be at least equal to the market value of the shares covered by the
incentive stock option on the date of grant. The exercise price per share sub-
ject to a non-incentive stock option shall be at a price as determined by the
Board of Directors, provided that such price shall not be less than 50% of the
fair market value of the shares covered by the non-incentive stock option on
the date of grant. The term of all options and the period in which options are
exercisable are determined at the discretion of the Board of Directors. The
following table represents options outstanding under the Stock Option Plan:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1999 1998
----------------- -----------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year 50,000 $7.01 40,000 $5.38
Granted -- -- 16,000 10.00
Exercised 12,000 4.30 6,000 3.84
Forfeited -- -- -- --
-------------------------------
Outstanding -- end of year 38,000 $7.91 50,000 $7.01
-------------------------------
Exercisable -- end of year 38,000 $7.91 50,000 $7.01
-------------------------------
</TABLE>
The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related Interpretations in accounting for the stock option plan. According-
ly, no compensation cost has been recognized. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant dates for the awards under the plan consistent with the method prescribed
by FASB Statement No. 123, Accounting for Stock-Based Compensation, the
Company's net income and earnings per share would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31
---------------------
1999 1998
---------------------
<S> <C> <C>
Net income
As reported $1,335,038 $1,264,838
Pro forma 1,335,038 1,188,818
Earnings per share -- basic
As reported 0.74 0.70
Pro forma 0.74 0.66
Earnings per share -- disputed
As reported 0.73 0.69
Pro forma 0.73 0.65
</TABLE>
The weighted-average fair value of options granted during the year ended De-
cember 31, 1998 was $4.75 per share. The fair value of each option grant is es-
timated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
-----------
1999 1998
-----------
<S> <C> <C>
Dividend yield -- 0.70%
Expected life -- 5
Expected volatility -- 50.00%
Risk-free interest rate -- 5.50%
</TABLE>
42
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Other information pertaining to options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE OUTSTANDING PRICE
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.30-$4.84 12,000 1 $4.84 12,000 $4.84
$8.25-$10.00 26,000 5 $9.33 26,000 $9.33
------ ------
Outstanding at end of
year 38,000 38,000
------ ------
</TABLE>
NOTE 13
RELATED PARTY TRANSACTIONS
In the normal course of business, the Bank makes loans to directors, officers
and other related parties. Loans to employees are made on substantially the
same terms as those prevailing at the time for comparable transactions with
other borrowers, except that the interest rate is reduced by a stated amount
for primary residence loans, as long as such person remains employed by the
Bank. A summary of related party loan activity for the periods indicated is as
follows:
<TABLE>
<S> <C>
Balance, December 31, 1997 $1,510,000
Originations 1,101,000
Repayments (707,000)
----------
Balance, December 31, 1998 1,904,000
Originations 1,139,000
Repayments (730,000)
----------
Balance, December 31, 1999 $2,313,000
----------
</TABLE>
Related party deposit balances outstanding at December 31, 1999 and 1998 were
$1.0 million and $800,000, respectively.
NOTE 14
COMMITMENTS AND CONTINGENCIES AND OTHER RELATED PARTY TRANSACTIONS
The Bank has a lease agreement with the Chairman of the Board of Directors of
the Bank to lease a lot at Four Corners Plaza, Onley, Virginia, for $1,200 per
month for twelve years with four five-year renewals. Each renewal will be at
the option of the Bank and the leases will be based on the previous lease rate,
after being adjusted for changes in the consumer price index. The proper regu-
latory authorities have reviewed and approved this lease agreement.
In August 1997, the Bank entered into a lease agreement with a Maryland gen-
eral partnership, of which a related party is a general partner, providing for
the use of commercial office space to facilitate the Bank's downtown Salisbury,
Maryland bank location. The lease term began in September, 1997 and expires in
August, 2002. The agreement provides for three five year renewal periods at the
Bank's option. Monthly lease amounts during the term of the lease are $2,250
and range from $2,643 to $3,650 monthly during the renewal periods, if execut-
ed.
On February 1, 1999, the Company entered into a non-related party lease agree-
ment providing for the use of commercial office space to facilitate the
Company's administrative operations and the Bank's plans to bring its item
processing function in-house. The lease term began in March, 1999 and expires
in February, 2004. The agreement provides for two five year renewals with the
same terms and conditions of the original lease agreement. Lease amounts for
the renewals can be increased by fifty percent of the US Consumer Price Index
increase during the previous five years of the lease term. Initial monthly
lease amounts during the term of the lease are approximately $2,500.
43
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Minimum future rental payments for these operating leases are as follows:
<TABLE>
<CAPTION>
Period
Ending
December
31,
<S> <C>
2000 $71,900
2001 $71,900
2002 $62,900
2003 $44,900
2004 $19,500
</TABLE>
Rental expense under operating leases was $66,800 and $41,400 for the years
ended December 31, 1999 and 1998, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may re-
quire payment of a fee. The Bank evaluates each customer's credit worthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include single family resi-
dences, other residential property, commercial property and land. At December
31, 1999 and 1998, the Bank had outstanding commitments to originate loans with
variable interest rates of approximately $2.0 million and $5.8 million, respec-
tively. In addition, unused lines of credit, primarily at variable rates,
amounted to approximately $7.8 million and $8.6 million at December 31, 1999
and 1998, respectively. The distribution of commitments to extend credit ap-
proximates the distribution of loans outstanding.
In the normal course of business, the Bank has entered into an employment
agreements with its five Executive Officers ("Officer"). The employment agree-
ment may be terminated by the Board of Directors at any time. If the Officer is
terminated without cause (as defined in the agreement), the Officer is entitled
to base salary and benefits for a period six months to one year from the date
of termination, depending on the agreement.
During January 1997, the Bank renewed its agreement with a service company,
whereby, the latter would furnish data processing services to the Bank for an
additional 60 months. The arrangement is similar to the previous agreement, and
to those entered into by other entities in the financial institution industry,
and the costs represent normal operating costs to the Bank.
During September 1999, Shore Investments Inc. entered into an agreement with a
registered broker-dealer to sell investment products. The agreement has an ini-
tial term of two years and automatically renews for subsequent one year terms,
subject to certain termination clauses within the agreement.
NOTE 15
EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------
1999 1998
---------------------
<S> <C> <C>
Net income (numerator,
basic and diluted) $1,335,038 $1,264,838
Weighted average shares
outstanding
(denominator) 1,814,527 1,809,333
---------------------
Earnings per common
share -- basic $ 0.74 $ 0.70
---------------------
Effect of dilutive
securities:
Weighted-average shares
outstanding 1,814,527 1,809,333
Effect of stock options 10,496 18,206
---------------------
Diluted average shares
outstanding
(denominator) 1,825,023 1,827,539
---------------------
Earnings per common
share -- assuming
dilution $ 0.73 $ 0.69
-----------------------------
</TABLE>
44
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
NOTE 16
PARENT COMPANY
Since its inception, the Company's business activities have been limited to
investment activities related to the Bank and its excess cash. Dividends from
the Bank and investment income represent the only sources of funds for the Com-
pany. Certain restrictions exist that limit the amount of dividends the Bank
may declare without obtaining regulatory approval. At December 31, 1999, the
Bank had approximately $200,000 available to declare in dividends under exist-
ing regulatory guidelines.
The Company requires very little administrative support. However, the Company
does incur costs associated with supporting its board of directors, its build-
ing lease, and public reporting requirements and annual fees associated with
being a public company. Accordingly, the Bank began paying an overhead alloca-
tion fee to the Company during 1999. The fee was approximately $120,000 during
1999 and is based on expenses incurred by the Company to support the Bank's op-
erations.
The Company's condensed balance sheets as of December 31, 1999 and 1998, and
the related condensed statements of income and cash flows for years ended De-
cember 31, 1999 and 1998 are provided below. For comparative purposes, the fi-
nancial statements are presented as if the parent company was in existence for
all periods presented.
Condensed Balance Sheet
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Assets
Cash and due from banks $ 650,000 $ 1,328,000
Securities available for sale 2,479,000 597,000
Investment in Shore Bank 10,674,000 11,862,000
Other assets 95,000 2,000
-----------------------
Total Assets $13,898,000 $13,789,000
-----------------------
Liabilities and Stockholders' Equity
Liabilities $ -- $ --
Stockholders' equity 13,898,000 13,789,000
-----------------------
Total Liabilities and Stockholders' Equity $13,898,000 $13,789,000
-----------------------
</TABLE>
Condensed Statement of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1999 1998
------------------------
<S> <C> <C>
Income
Dividends from Shore Bank $ 1,576,000 $ 2,000,000
Management fee income 120,000 --
Investment income 36,000 5,000
------------------------
Total Income 1,732,000 2,005,000
------------------------
Expenses
Directors' fees 48,000 48,000
Accounting and professional fees 59,000 53,000
Other 40,000 1,000
------------------------
Total Expenses 147,000 102,000
------------------------
Income Before Income Taxes and Equity in
Undistributed Net Income of Subsidiary 1,585,000 1,903,000
Income Tax Expense -- --
Income Before Equity in Undistributed
Net Income of Subsidiary 1,585,000 1,903,000
Equity in Undistributed Net Income
of Subsidiary (1) (250,000) (638,000)
------------------------
Net Income $ 1,335,000 $ 1,265,000
------------------------
</TABLE>
(1) Amount in parenthesis represents the excess of dividends declared over net
income of subsidiary.
45
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1999 1998
------------------------
<S> <C> <C>
Operating Activities
Net income $ 1,335,000 $1,265,000
Equity in undistributed net income of subsidiary 250,000 638,000
Dividends/distribution of investment securities from
Shore Bank (1,576,000)
Change in other assets (93,000) (2,000)
Change in other liabilities -- --
------------------------
Cash Flows Provided (Used) by Operating Activities (84,000) 1,901,000
------------------------
Investing Activities
Purchase of available-for-sale securities (646,000) (635,000)
Sale of available-for-sale securities -- 38,000
------------------------
Cash Flows Used by Investing Activities (646,000) (597,000)
------------------------
Financing Activities
Proceeds from exercise of common stock options 52,000 23,000
Proceeds from subsidiary advances -- 85,000
Repayments of subsidiary advances -- (85,000)
------------------------
Cash Flows Provided by Financing Activities 52,000 23,000
------------------------
Net Increase in Cash and Cash Equivalents (678,000) 1,327,000
Cash and Cash Equivalents, beginning of period 1,328,000 1,000
------------------------
Cash and Cash Equivalents, end of period $ 650,000 $1,328,000
------------------------
</TABLE>
NOTE 17
SEGMENT INFORMATION
Management determines the Company's operating segments and evaluates their
performance by the markets in which the Bank operates. Currently, the Bank op-
erates in two different geographical markets: Virginia and Maryland. Generally,
each market possesses a different customer base and occasionally requires that
management approach product pricing and promotion in different manners. Howev-
er, products offered in each market are similar. Additionally, the Maryland
market represents a newer market to the Bank than does the Virginia market.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on net interest income from operations and asset growth within the seg-
ments.
46
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (continued)
Since the Company derives a significant portion of its revenues from interest
income and interest expense is the most significant expense, the segments are
reported below using net interest income for the periods indicated. The "Other"
column primarily represents the Company's investment activities resulting from
excess cash available within the individual segments. The "Elimination" column
represents intersegment activities and reconciles the segments to the Company's
consolidated financial statements.
<TABLE>
<CAPTION>
ELIMINATION
OF INTERSEGMENT
(IN THOUSANDS) VIRGINIA MARYLAND OTHER TRANSACTIONS TOTAL
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Income:
Year ended December 31,
1999 $ 3,004 $ 672 $ 2,497 $ (1,711) $ 4,462
Year ended December 31,
1998 $ 3,007 $ 448 $ 1,692 $ (1,025) $ 4,122
Assets:
December 31, 1999 $107,567 $13,348 $40,840 $(34,162) $127,593
December 31, 1998 $ 94,192 $15,750 $36,995 $(26,989) $119,948
</TABLE>
NOTE 18
COMPREHENSIVE INCOME
Total comprehensive income consists of the following for the periods indicat-
ed:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Net income $ 1,335,038 $1,264,838
Other comprehensive income (loss) (1,150,700) 170,882
-------------------------
Total comprehensive income $ 184,338 $ 1,435,720
-------------------------
</TABLE>
The components of other comprehensive income are as follows for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31
---------------------
1999 1998
---------------------
<S> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the
period $(1,510,601) $378,887
Less: reclassification adjustment for gains (losses)
included in income 242,199 131,878
---------------------
Total other comprehension income (loss) before income
taxes (1,752,800) 247,009
Income tax (expense) benefits 602,100 (76,127)
---------------------
Net unrealized gains (losses) $(1,150,700) $170,882
---------------------
</TABLE>
NOTE 19
SUBSEQUENT EVENTS
On January 11, 2000, the Company declared a $0.08 per share cash dividend,
payable on March 17, 2000, to all shareholders of record on March 1, 2000. The
dividend totals approximately $146,000, or 11% of current year earnings.
47
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Market for Registrant's Common Stock
and Related Stockholder Matters
Market Information
The Company's common stock is listed on the Nasdaq National Market under the
symbol "SHBK." The following table sets forth the per share high and low sales
prices for the common stock as reported on the Nasdaq National Market for the
periods indicated:
<TABLE>
<CAPTION>
PRICE RANGE
----------------------------------
HIGH LOW
----------------------------------------------------
<S> <C> <C> <C> <C>
1998
First Quarter $14.63 $11.00
Second Quarter 12.75 11.75
Third Quarter 12.63 9.50
Fourth Quarter 11.88 9.50
1999
First Quarter $11.13 $ 9.50
Second Quarter 10.00 8.81
Third Quarter 9.13 8.63
Fourth Quarter 8.69 7.00
</TABLE>
At March 1, 2000, there were 1,822,812 shares of common stock outstanding held
by 788 stockholders of record.
Dividend Policy
The Bank declared and paid the Company a $2.0 million dividend on September 1,
1998 and a $1.59 million dividend on December 14, 1999. Prior to that the Bank
had not declared or paid any cash dividends during the previous five fiscal
years. On March 21, 1999, the Company paid a $0.07 per share annual cash divi-
dend to shareholders of record on March 1, 1999. On January 11, 2000, the Com-
pany declared a $.08 per share annual cash dividend payable on March 17, 2000
to shareholders of record on March 1, 2000. The Company anticipates paying a
similar annual cash dividend on its common stock in the foreseeable future.
However, any future determination as to payment of cash dividends will be at
the discretion of the Company's Board of Directors and will depend on the
Company's earnings, financial condition, capital requirements and other factors
deemed relevant by the Board of Directors.
48
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Directors and Officers
SHORE FINANCIAL
CORPORATION
BOARD OF DIRECTORS
Henry P. Custis, Jr.
Chairman of the Board, Partner
Law firm of Custis, Lewis & Dix,
L.L.P.
Terrell E. Boothe
President Terrell E. Boothe, Inc.
D. Page Elmore
Consultant
Waste Management Inc.
Scott C. Harvard
President and Chief Executive Officer
Shore Financial Corporation and
Shore Bank
Richard F. Hall, III
Owner
Loblolly Farms
Owner
Seaside Produce
Dr. Lloyd J. Kellam, III
Physician
Eastern Shore Physicians and
Surgeons
L. Dixon Leatherbury
President and Central Manager
Leatherbury Equipment Co.
President
Wakefield Equipment Co.
A. Jackson Mason
Treasurer
Mason-Davis Co., Inc.
ADVISORY BOARD OF DIRECTORS
John J. Evans, CPA
Certified Public Accountant
Chairman of the Advisory Board
Holloway & Marval, P.A.
Edward E. Henry
Financial Services Manager
E.I. Dupont, Inc.
Russ Morgan, M.S., D.D.S.
Dentist
Milford Professional Center
Billye Lee Sarbanes
Dr. Donald Wood
Cardiologist
Peninsula Cardiology Associates, P.A.
EXECUTIVE OFFICERS
Scott C. Harvard
President and Chief Executive Officer
Steven M. Belote
Vice President and Secretary
Vonda M. Smith
Assistant Secretary
SHORE BANK
EXECUTIVE OFFICERS
Scott C. Harvard
President and Chief Executive Officer
Steven M. Belote
Vice President and Chief Financial Officer
J. Anderson Duer, Jr.
Vice President and Chief Lending Officer
Arthur C. Miles, Jr.
Vice President and Chief Banking Officer
Brenda P. Wallace
Vice President and Chief Operating Officer
OFFICERS
Tammy V. Mason
Vice President
Natalie N. Binder
Assistant Vice President
Anne H. J. Dize
Assistant Vice President
Martha H. James
Assistant Vice President
Kathryn M. Warren
Assistant Vice President
Robert W. Lockwood, Jr.
Vice President of Maryland Division
Vonda M. Smith
Corporate Secretary
49
<PAGE>
- --------------------------------------------------------------------------------
SHORE FINANCIAL CORPORATION
Corporate Information
CORPORATE HEADQUARTERS
AND MAIN OFFICE
25253 Lankford Highway
Onley, Virginia 23418
Phone: (757) 787-1335
Fax: (757) 789-3645
BRANCH OFFICES
18426 Dunne Avenue
Parksley, VA 23421
6350 Maddox Boulevard
Chincoteague, Virginia 23336
21220 North Bayside Drive
Cheriton, Virginia 23316
4017 Lankford Highway
Exmore, Virginia 23350
1503 South Salisbury Boulevard
Salisbury, Maryland 21801
100 West Main Street
Salisbury, Maryland 21801
OPERATIONS CENTER
23378 Commerce Drive
Accomac, VA 23301
TRANSFER AGENT
Fulton Bank
One Penn Square
Lancaster, PA 17604
SPECIAL COUNSEL
LeClair Ryan
707 East Main Street, 11th Floor
Richmond, VA 23219
INVESTOR INFORMATION
Analysts, stockholders, and others seeking information about Shore Financial
Corporation are invited to contact Mychelle L. Holloway, Investor Relations by
phone at (757) 787-1335, by mail at
Shore Financial Corporation,
P.O. Box 920,
Onley, Virginia, 23418,
or by e-mail at
[email protected].
MEMBER
Federal Deposit Insurance
Corporation
Federal Reserve System
INDEPENDENT AUDITORS
Goodman & Company, LLP
1 Commercial Place, Suite 800
Norfolk, VA 23514
INTERNET
Web site: www.shorebank.com
Address: shorebank.com
ANNUAL MEETING
The Annual Meeting of the stockholders of Shore Financial Corporation will be
held at theChamber of Commerce in Melfa, Virginia on Tuesday, April 18, 2000,
2:00 P.M.
SECURITIES LISTING
The Company's shares are traded on The NASDAQ Stock Market under ticker symbol
"SHBK".
MARKET MAKERS
Anderson & Strudwick, Inc. Branch, Cabell & Company Ferris Baker Watts, Inc.
Knight Securities, L.P. McKinnon & Company, Inc. Ryan Hartley & Lee, Inc. Scott
& Stringfellow
50
<TABLE> <S> <C>
<PAGE>
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