U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the quarterly period ended September 30, 2000
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the transition period from _________ to _________
Commission file number 000-23847
SHORE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1873994
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
25253 Lankford Highway
Onley, Virginia 23418
--------------- -----
(Address of Principal (Zip Code)
Executive Offices)
Issuer's telephone number: (757) 787-1335
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the
Exchange Act after the distribution of securities under a plan confirmed by a
court. Yes ___ No ___
Number of shares of Common Stock outstanding as of November 10, 2000: 1,834,812
Transitional Small Business Disclosure Format: Yes No X.
--- ---
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Index - Form 10-QSB
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2000 and December
31, 1999
Consolidated Statements of Income for the Three Months and Nine
Months Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 2000
Notes to Unaudited Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Financial Condition
Asset Quality
Liquidity and Capital Resources
Interest Sensitivity
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash (including interest - earning deposits of
approximately $2,005,000 and $2,172,000, respectively) $ 6,075,900 $ 6,821,400
Investment securities:
Held to maturity (fair value of $12,810,000 and
$1,827,000, respectively) 12,807,400 1,838,700
Available for sale (amortized cost of $26,341,000 and
$27,418,000, respectively) 25,293,800 26,179,900
Federal Home Loan Bank stock, at cost 491,800 491,800
Federal Reserve Bank stock, at cost 124,800 124,800
Loans receivable, net 88,214,700 87,063,400
Premises and equipment, net 2,860,000 3,007,400
Real estate owned - 188,300
Accrued interest receivable 1,167,700 1,029,600
Prepaid expenses and other assets 808,600 847,300
---------------------------------------
$ 137,844,700 $ 127,592,600
---------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 120,569,500 $ 107,148,300
Advances from Federal Home Loan Bank 1,771,300 6,002,600
Advance payments by borrowers for taxes
and insurance 303,500 204,700
Accrued interest payable 97,500 92,800
Accrued expenses and other liabilities 232,800 246,200
---------------------------------------
Total liabilities 122,974,600 113,694,600
---------------------------------------
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; 1,834,812 and 1,822,812 shares
issued and outstanding, respectively 605,500 601,500
Additional capital 3,686,600 3,632,400
Retained earnings, substantially restricted 11,256,600 10,473,800
Accumulated other comprehensive income (loss) (678,600) (809,700)
---------------------------------------
Total stockholders' equity 14,870,100 13,898,000
---------------------------------------
$ 137,844,700 $ 127,592,600
=======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- ------------------------------------
(Unaudited) 2000 1999 2000 1999
----------------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Interest income
Loans $ 1,925,700 $ 1,806,500 $ 5,643,700 $ 5,285,800
Investments
Taxable 573,400 366,900 1,463,100 1,115,700
Tax-exempt 45,000 59,900 155,700 199,900
--------------------------------------- --------------------------------------
Total interest income 2,544,100 2,233,300 7,262,500 6,601,400
--------------------------------------- --------------------------------------
Interest expense
Deposits 1,308,100 1,048,900 3,600,700 3,202,400
FHLB advances 14,200 25,200 78,500 72,600
--------------------------------------- --------------------------------------
Total interest expense 1,322,300 1,074,100 3,679,200 3,275,000
--------------------------------------- --------------------------------------
Net interest income 1,221,800 1,159,200 3,583,300 3,326,400
Provision for loan losses 53,100 42,300 159,300 367,900
--------------------------------------- --------------------------------------
Net interest income after
provision for loan losses 1,168,700 1,116,900 3,424,000 2,958,500
--------------------------------------- --------------------------------------
Noninterest income
Deposit account fees 192,900 172,200 545,100 506,400
Loan fees 36,600 35,200 104,300 118,000
Gains on sales of securities 8,500 - 8,500 242,200
Other 23,800 20,600 76,200 54,300
--------------------------------------- --------------------------------------
Total noninterest income 261,800 228,000 734,100 920,900
--------------------------------------- --------------------------------------
Noninterest expense
Compensation and employee
benefits 455,700 372,300 1,301,400 1,031,000
Occupancy and equipment 244,300 229,200 735,000 603,700
Advertising 13,600 15,600 41,800 45,100
Data processing 106,800 147,600 314,400 412,200
Federal insurance premium 5,900 15,600 17,200 46,300
Other 113,400 99,200 351,300 275,500
--------------------------------------- --------------------------------------
Total noninterest expense 939,700 879,500 2,761,100 2,413,800
--------------------------------------- --------------------------------------
Income before income taxes 490,800 465,400 1,397,000 1,465,600
Income taxes 159,900 158,200 468,400 498,300
--------------------------------------- --------------------------------------
Net income $ 330,900 $ 307,200 $ 928,600 $ 967,300
======================================= ======================================
Cash dividend declared per common share $ - $ - $ 0.08 $ 0.07
======================================= ======================================
Earnings Per Common Share:
Basic $ 0.18 $ 0.17 $ 0.51 $ 0.53
======================================= ======================================
Diluted $ 0.18 $ 0.17 $ 0.51 $ 0.53
======================================= ======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 (Unaudited)
------------------------------------------------
Accumulated
Other
Common Additional Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $ 601,500 $ 3,632,400 $ 10,473,800 $ (809,700) $ 13,898,000
Common stock dividend declared - - (145,800) - (145,800)
Proceeds from exercise of 4,000 54,200 - - 58,200
stock options
Comprehensive income - - 928,600 131,100 1,059,700
-------------------------------------------------------------------------------
Balance, September 30, 2000 $ 605,500 $ 3,686,600 $ 11,256,600 $ (678,600) $ 14,870,100
===============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
(Unaudited) 2000 1999
-------------------------------------------------------------------------------------------------------- ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 928,600 $ 967,300
Adjustments to reconcile to net cash
provided by operating activities:
Provision for loan losses 159,300 367,900
Depreciation and amortization 257,800 211,300
Amortization of premium and accretion
of discount on securities, net (102,200) 7,600
Gain on sale of securities (8,500) (242,200)
Change in net deferred loan fees 4,800 (24,400)
Loss on sale of repossessed assets 28,500 -
Increase in other assets (150,100) 83,300
Increase (decrease) in other liabilities 78,100 (150,500)
---------------------------------
Net cash provided by operating activities 1,196,300 1,220,300
---------------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (1,581,000) (4,780,400)
Proceeds from maturities and sales of
available-for-sale securities 2,650,000 6,400,100
Purchase of held-to-maturity securities (13,701,000) (1,300,000)
Proceeds from maturities of held-to-maturity
securities 2,849,100 2,627,300
Redemption of Federal Home Loan Bank stock - 88,700
Loan originations, net of repayments (1,315,400) (8,718,000)
Purchase of premises and equipment (105,600) (839,000)
Proceeds from sale of real estate owned 159,800 49,200
Improvements to real estate owned - (9,600)
---------------------------------
Net cash used by investing activities (11,044,100) (6,481,700)
---------------------------------
Cash flows from financing activities
Net increase in demand deposits 8,363,900 3,393,400
Net increase in time deposits 5,057,300 1,216,100
Proceeds from FHLB advances 3,700,000 9,800,000
Repayments of FHLB advances (7,931,300) (8,534,600)
Proceeds from exercise of stock options 58,200 51,700
Payment of dividend on common stock (145,800) (126,800)
---------------------------------
Net cash provided by financing activities 9,102,300 5,799,800
---------------------------------
Increase (decrease) in cash and cash equivalents (745,500) 538,400
Cash and cash equivalents, beginning of period 6,821,400 3,900,800
---------------------------------
Cash and cash equivalents, end of period $ 6,075,900 $ 4,439,200
=================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 3,674,500 $ 3,248,500
Cash paid for income taxes $ 523,000 $ 777,000
Supplemental schedule of non-cash investing and
financing activities
Transfers from loans to real estate acquired
through foreclosure $ - $ 172,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of Shore Financial
Corporation and Subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles ("GAAP") and with the instructions
to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
consolidated financial statements have been included.
In preparing the consolidated financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. The consolidated results of
operations and other data for the nine month period ended September 30, 2000 are
not necessarily indicative of the results that may be expected for any other
interim period or the entire year ending December 31, 2000. The unaudited
consolidated financial statements presented herein should be read in conjunction
with the audited consolidated financial statements and related notes thereto in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
Principles of Consolidation
The consolidated financial statements of the Company include and primarily
consist of the accounts of its wholly-owned subsidiary Shore Bank (the "Bank")
and the Bank's wholly-owned subsidiary Shore Investments, Inc.. All significant
intercompany balances and transactions have been eliminated in consolidation.
NOTE 2 - ORGANIZATION
The Company is a Virginia corporation organized in September 1997 by the Bank
for the purpose of becoming a unitary holding company of the Bank. The Company
became a unitary holding company of the Bank on March 16, 1998. The business and
management of the Company consists of the business and management of the Bank.
The Bank became a Virginia chartered, Federal Reserve member, commercial bank on
March 31, 1998. Prior to that the Bank was a federally chartered savings bank.
The Company and the Bank are headquartered on the Eastern Shore in Onley,
Virginia. During March, 1999, the Bank activated its subsidiary, Shore
Investments, Inc., to engage in financial activities supporting the Bank's
operations. These activities include the selling of investment and insurance
products.
6
<PAGE>
NOTE 3 - EARNINGS PER SHARE
The following is an unaudited reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the periods ended
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- --------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Net income (numerator, basic and diluted) $ 330,900 $ 307,200 $928,600 $967,300
Weighted average shares outstanding
(denominator) 1,826,700 1,813,600 1,824,100 1,811,700
------------ -------------- -------------- --------------
Earnings per common share - basic $ 0.18 $ 0.17 $0.51 $0.53
============ ============== ============== ==============
Effect of dilutive securities:
Weighted average shares outstanding 1,826,700 1,813,600 1,824,100 1,811,700
Effect of stock options - 5,100 - 8,200
------------ -------------- -------------- --------------
Diluted average shares outstanding
(denominator) 1,826,700 1,818,700 1,824,100 1,819,900
------------ -------------- -------------- --------------
Earnings per common share -
assuming dilution $ 0.18 $ 0.17 $0.51 $0.53
============ ============== ============== ==============
</TABLE>
The effect of dilutive securities was not used to compute dilutive earnings per
share at September 30, 2000 because the effect would have been anti-dilutive.
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income consists of the following for the nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------
2000 1999
-----------------------------------------
(Unaudited)
<S> <C> <C>
Net income $ 928,600 $ 967,300
Other comprehensive income (loss) 131,100 (953,500)
-------------- -----------
Total comprehensive income $ 1,059,700 $ 13,800
============== ===========
</TABLE>
7
<PAGE>
The following is an unaudited reconciliation of the related tax effects
allocated to each component of other comprehensive income at September 30, 2000
and 1999.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------
2000 1999
--------------------------------------------
<S> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $ 197,500 $ (1,202,600)
Less: reclassification adjustment
for gains included in income 8,500 242,200
----------------- ---------------
Total other comprehensice income (loss)
before income tax expense 189,000 (1,444,800)
Income tax (expense) benefit (57,900) 491,300
----------------- ---------------
Net unrealized gains (losses) $ 131,100 $ (953,500)
================= ===============
</TABLE>
NOTE 5 - SEGMENT INFORMATION
Segment information consists of the following for the nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(In thousands) Virginia Maryland Other Total
-----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Interest Income:
Nine months ended September 30, 2000 $ 2,418 $ 488 $ 677 $ 3,583
Nine months ended September 30, 1999 $ 2,244 $ 481 $ 601 $ 3,326
Assets:
September 30, 2000 $ 124,103 $ 16,854 $ (3,112) $ 137,845
December 31, 1999 $ 108,776 $ 18,983 $ (166) $ 127,593
</TABLE>
8
<PAGE>
Item 2 - Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations
Results of Operations
General
Net income for the three months ended September 30, 2000 was $329,100, compared
to net income of $307,200 for the same period in the prior year. Net income for
the nine months ended September 30, 2000 was $926,800, compared to net income of
$967,300 for the 1999 period. Earnings were positively impacted by a 38.0%
decrease in nonperforming assets, while operating expenses increased due to
several expansion projects undertaken by the Company during the second half of
1999. In October of 1999, the Bank opened its seventh branch office in Parksley,
Virginia. In August of 1999, the Bank began handling its item processing and
check imaging in-house in an effort to deliver a higher level of service to its
customers, particularly its business customers. Its check imaging system has
been completely integrated into 100% of its checking accounts and the Bank no
longer mails paper checks. In addition, the Bank successfully introduced its
VISA Check Card in November 1999, with a 90% activation rate on over 3,000 check
cards, and is currently processing over 10,000 transactions per month at ATM and
point of sale terminals. Profits generated through fee income on the VISA Check
Card have enabled the Bank to recover its initial investment on this product as
of September 2000. In February 2000, the Bank, through its investment subsidiary
Shore Investments, Inc., began offering non-deposit products throughout its
branch network. While not yet profitable, this new product line is generating
revenues for the company.
Net Interest Income
Net interest income increased $62,600, or 5.4%, for the three months ended
September 30, 2000, as compared to the same period in 1999, while net interest
income increased $256,900, or 7.7%, for the nine months ended September 30,
2000, as compared to the 1999 nine month period. The net interest margin
remained flat at 3.89% for the nine months ended September 30, 2000, as compared
to the 1999 period, while the interest rate spread decreased to 3.19% from 3.24%
for the same period. Asset growth of $12.2 million since September 1999,
reductions in nonperforming assets and growth in noninterest-bearing deposits
positively impacted net interest income. The interest rate spread does not
reflect the impact of noninterest-bearing deposits on the Bank's cost of funds
and the corresponding net interest spread. Noninterest-bearing demand deposits
increased to $12.4 million at September 30, 2000, as compared to $8.9 million at
September 30, 1999. Including average noninterest-bearing deposits in
calculating the cost of funds results in an additional 40 basis points and 33
basis points increase in interest rate spread for the nine months ended
September 30, 2000 and 1999, respectively.
Interest income increased $310,800, or 13.9%, for the three months ended
September 30, 2000, as compared to the same period in 1999, while interest
income increased $661,100, or 10.0%, for the nine months ended September 30,
2000, as compared to the 1999 nine month period. The increase resulted from the
average balance of loans increasing by $2.6 million during the period, primarily
in commercial and consumer lending. Additionally, yields on loans increased by
27 basis points during the September 2000 period, as compared to the 1999
period. A $3.8 million increase in the average balance of securities and an 18
basis point increase in yield on securities positively impacted interest income.
Increased yields on earning assets primarily resulted from the rising rate
environment in effect during the period.
9
<PAGE>
Interest expense increased $248,200, or 23.1%, for the three months ended
September 30, 2000, as compared to the same period in 1999, while interest
expense increased $404,200, or 12.3%, for the nine months ended September 30,
2000, as compared to the 1999 nine month period. This is due to the rising
interest rate environment, efforts by management to generate business
relationships through various deposit specials, and increased borrowings from
the Federal Home Loan Bank to fund potential liquidity requirements resulting
from the year 2000 date change. Average interest-bearing deposits increased by
$5.9 million during the nine months ended September 30, 2000, as compared to the
same period of 1999. Additionally, the average rate on interest-bearing
liabilities increased from 4.34% in 1999 to 4.60% for the September 2000 period.
Average borrowings from the Federal Home Loan Bank were flat for the September
2000 period, as compared to the same period in 1999.
The following table illustrates average balances of total interest-earning
assets and total interest-bearing liabilities for the periods indicated, showing
the average distribution of assets, liabilities, stockholders' equity and the
related income, expense and corresponding weighted average yields and costs. The
average balances used in these tables and other statistical data were calculated
using daily averages.
10
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Income and Expenses, Yields and Rates
Nine Months Ended September 30,
-----------------------------------------------------------------------
2000 1999
----------------------------------- -----------------------------------
Average Income/ Yield/ Average Income/ Yield/
(In Thousands) Balance Expense Rate Balance Expense Rate
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Securities (1) $34,008 $1,571 6.16% $30,166 $1,354 5.98%
Loans (net of unearned income):
Real estate mortgage 43,979 2,581 7.82% 44,357 2,512 7.55%
Real estate construction 679 38 7.46% 1,557 92 7.88%
Commercial 28,015 1,875 8.93% 25,824 1,661 8.58%
Home equity lines 5,631 414 9.80% 5,665 391 9.20%
Consumer 10,564 736 9.29% 8,824 649 9.81%
----------- ---------- ---------- ----------
Total loans 88,868 5,644 8.47% 86,227 5,305 8.20%
----------- ---------- ---------- ----------
Federal funds sold - - - - - -
Interest-bearing deposits
in other banks 2,721 129 6.32% 1,867 65 4.64%
----------- ---------- ---------- ----------
Total earning assets 125,597 7,344 7.80% 118,260 6,724 7.58%
----------- ---------- ---------- ----------
Less: allowance for loan losses (1,306) (1,042)
Total nonearning assets 6,711 6,416
----------- ----------
Total assets $131,002 $123,634
=========== ==========
Liabilities
Interest-bearing deposits:
Checking and savings $33,432 $629 2.51% $32,070 $606 2.52%
Time deposits 71,215 2,971 5.56% 66,717 2,597 5.19%
----------- ---------- ---------- ----------
Total interest-bearing
deposits 104,647 3,600 4.59% 98,787 3,203 4.32%
FHLB advances 1,865 78 5.58% 1,853 73 5.25%
----------- ---------- ---------- ----------
Total interest-bearing
liabilities 106,512 3,678 4.60% 100,640 3,276 4.34%
---------- ----------
Non-interest bearing liabilities:
Demand deposits 10,039 8,189
Other liabilities 232 867
----------- ----------
Total liabilities 116,783 109,696
Stockholders' equity 14,219 13,938
----------- ----------
Total liabilities and stockholders'
equity $131,002 $123,634
=========== ==========
Net interest income (1) $3,666 $3,448
========== ==========
Interest rate spread (1) 3.19% 3.24%
Net interest margin (1) 3.89% 3.89%
</TABLE>
(1) Tax equivalent basis. The tax equivalent adjustment to net interest income
was $80,000 and $103,000 for the nine months ended September 30, 2000 and
1999, respectively.
(2) Yield and rate percentages are all computed through the annualization of
interest income and expense divided by average daily balances based on
amortized costs.
11
<PAGE>
Noninterest Income
Noninterest income was $261,800 during the three months ended September 30,
2000, as compared to $228,000 for the same period in 1999, while noninterest
income was $734,100 during the nine months ended September 30, 2000, as compared
to $920,900 for the 1999 period. Excluding gains on sales of investment
securities of $8,500 and $242,200 during 2000 and 1999, respectively,
noninterest income increased $46,900, or 6.9%, during the nine months ended
September 30, 2000. Increases in deposit account fees, revenue generated by ATM
and VISA Check Card transactions, and commissions from brokerage sales through
the Bank's subsidiary, Shore Investment's, Inc., contributed to this increase in
income.
Provision for Loan Losses
Provision for loan losses was $53,100 for the three months ended September 30,
2000, as compared to $42,300 for the same period in 1999, while provision for
loan losses was $159,300 for the nine months ended September 30, 2000, as
compared to $367,900 for the 1999 period. See Asset Quality for additional
discussion of the allowance for loan losses.
Noninterest Expense
Noninterest expense was $941,500 during the three months ended September 30,
2000, as compared to $879,500 for the same period in 1999, an increase of
$62,000, or 7.1%. Noninterest expense was $2.76 million during the nine months
ended September 30, 2000, as compared to $2.41 million for the same period in
1999, an increase of $350,000, or 14.5%. This increase is primarily due to
several expansion projects undertaken by the Company during the second half of
1999. These projects include: the Bank bringing its item processing and check
imaging processes in-house during August, 1999; the Bank opening its seventh
branch office in Parksley, Virginia during October, 1999; the Bank introducing
its VISA Check Card in November, 1999; and the Bank, through its investment
subsidiary Shore Investments, Inc., beginning to offer non-deposit products
throughout its branch network during February, 2000. Although these projects
increased noninterest expenses during 2000, they have improved the Bank's
customer service, provided additional sources of fee income, and allowed the
Bank to become more competitive in the current environment.
Financial Condition
During the nine months ended September 30, 2000, the Company increased its
assets $10.2 million from $127.6 million at December 31, 1999, to $137.8 million
at September 30, 2000. This increase was due primarily to increases in net loans
of $1.2 million and increases in cash and investments of $9.3 million.
Deposits increased $13.4 million during the nine months ended September 30,
2000. Time deposits and demand deposit accounts increased by approximately $7.8
million and $5.6 million, respectively, during the period due to aggressive
efforts by the Company to increase deposit account relationships. During the
period, the Company used approximately $4.2 million of this growth to pay down
Federal Home Loan Bank advances that were used to meet liquidity needs for the
year 2000 rollover. The remaining deposit growth funded loan demand and
investment activities.
Stockholders' equity was $14.9 million at September 30, 2000, compared to $13.9
million at December 31, 1999. Net income of $926,800, proceeds from the exercise
of 12,000 stock options of $58,200, and
12
<PAGE>
decreases in unrealized losses on available-for-sale securities were offset by
the payment of $146,000 ($.08 per share) in common stock dividends.
Asset Quality
Loans are placed on nonaccrual status when, in the judgment of management, the
probability of interest collection is deemed to be insufficient to warrant
further accrual or the loan reaches 90 days delinquent whereby the loan no
longer accrues interest.
Total nonperforming assets, which consist of nonaccrual loans and foreclosed
properties, adjusted for estimated losses upon sale and the related selling
expenses and holding costs, were $866,000 at September 30, 2000, compared to
$1.4 million at December 31, 1999. As to nonaccrual loans existing at September
30, 2000, approximately $58,000 of interest income would have been recognized
during the nine months then ended if interest thereon had accrued. At September
30, 2000, the Company identified loans totaling $267,000 that qualify as
impaired under the guidelines established by SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures. Amounts
identified were to the same borrower and management has been attempting to
obtain full repayment. Management has specifically provided an allowance of
$150,000 towards these loans, representing possible principal repayment
shortfalls and miscellaneous costs to collect. The Company continues to maintain
all loans classified as impaired in nonaccrual status, even as payments are
made. Payments are currently being applied to reduce the outstanding principal
balance.
At September 30, 2000, all loans 60 days or more delinquent, including
nonperforming loans, totaled $1.4 million. In addition, other performing loans
totaling $1.4 million existed that have documentation deficiencies or other
potential weaknesses that management considers to warrant additional monitoring.
Loans in this category, along with the delinquent loans, are subject to constant
management attention, and their status is reviewed on a regular basis.
13
<PAGE>
The following table details information concerning nonaccrual and past due
loans, as well as foreclosed assets.
<TABLE>
<CAPTION>
Nonperforming Assets
September 30, December 31,
(In Thousands) 2000 1999
------------------- ----------------------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 277 $ 242
Real estate mortgage 528 907
Home equity lines of credit 12 -
Consumer 49 43
------------------- ----------------------
Total nonaccrual loans 866 1,192
Other real estate owned - 188
------------------- ----------------------
Total nonperforming assets $ 866 $ 1,380
=================== ======================
Loans past due 90 or more days
accruing interest - -
Allowance for loan losses to
nonaccrual loans 155.08% 97.57%
Nonperforming assets to period end
loans and other real estate owned 0.97% 1.54%
</TABLE>
14
<PAGE>
Set forth below is a table detailing the allowance for loan losses for the
periods indicated.
<TABLE>
<CAPTION>
Allowance for Loan Losses
Nine Months Ended September 30,
---------------------------------
(In Thousands) 2000 1999
-------------- -------------
<S> <C> <C>
Balance, beginning of period $ 1,163 $ 920
Loans charged off:
Commercial 7 -
Real estate mortgage - 14
Consumer 24 63
---------------- ------------
Total loans charged-off 31 77
---------------- ------------
Recoveries:
Commercial 38 -
Real estate mortgage - -
Consumer 14 19
---------------- ------------
Total recoveries 52 19
---------------- ------------
Net recoveries (charge-offs) 21 (58)
Provision for loan losses 159 368
---------------- ------------
Balance, end of period $ 1,343 $ 1,230
================ ============
Allowance for loan losses to loans
outstanding at end of period 1.50% 1.38%
Allowance for loan losses to nonaccrual
loans outstanding at end of period 155.08% 87.98%
Net charge-offs to average loans
outstanding during period 0.02% -0.07%
</TABLE>
15
<PAGE>
Liquidity and Capital Resources
Liquidity represents the Company's ability to meet present and future
obligations through the sale and maturity of existing assets or the acquisition
of additional funds through liability management. Liquid assets include cash,
interest-bearing deposits with banks, federal funds sold, available-for-sale
investments and investments and loans maturing within one year. The Company's
ability to obtain deposits and purchase funds at favorable rates determines its
liability liquidity.
At September 30, 2000, the Company had outstanding loan and line of credit
commitments of $16.4 million. Scheduled maturities of certificate of deposits
during the twelve months following September 30, 2000 amounted to $38.4 million.
Historically, the Company has been able to retain a significant amount of its
deposits as they mature. As a result of the Company's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that the Company maintains overall liquidity that is
sufficient to satisfy its depositors' requirements and meet its customers'
credit needs.
Total cash and cash equivalents decreased $745,500 for the nine months ended
September 30, 2000, compared to an increase of $538,400 for the nine months
ended September 30, 1999. Net cash provided by operating activities was $1.20
million for the nine months ended September 30, 2000, compared to $1.22 million
the same period in 1999. The fluctuations in amounts during these periods were
primarily the result of normal operating activities.
Net cash used in investing activities was $11.04 million during the nine months
ended September 30, 2000, compared to $6.48 million for the nine months ended
September 30, 1999. The fluctuations in amounts during these periods were
primarily the result of changes in loan growth, investments and capital
expenditures during the nine months ended September 30, 2000, as compared to the
same period of 1999.
Net cash provided by financing activities was $9.10 million for the nine months
ended September 30, 2000, compared to $5.80 million for the nine months ended
September 30, 1999. The fluctuations in amounts during these periods were
primarily the result of increased deposit growth offset by repayments of
borrowings with the Federal Home Loan Bank during the September 2000 period, as
compared to the September 1999 period.
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and its banking
subsidiary must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its banking subsidiary to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). At September 30, 2000, the Company meets all capital
adequacy requirements to which it is subject.
16
<PAGE>
The following table details the components of Tier 1 and Tier 2 capital and
related ratios at September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
Analysis of Capital
September 30, December 31,
(In Thousands) 2000 1999
---------------- ---------------
<S> <C> <C>
Tier 1 Capital:
Common stock $ 605 $ 602
Additional paid-in capital 3,687 3,632
Retained earnings 11,257 10,474
Comprehensive income (loss) (679) (810)
----------------- ----------------
Total capital (GAAP) 14,870 13,898
Less: Intangibles (35) (38)
Unrealized (gains) losses 388 555
----------------- ----------------
Total Tier 1 capital $ 15,223 $ 14,415
----------------- ----------------
Tier 2 Capital:
Allowable allowances for loan losses 1,077 1,039
----------------- ----------------
Total Tier 2 capital $ 16,300 $ 15,454
----------------- ----------------
Risk-weighted assets $ 88,683 $ 85,631
Capital Ratios (1):
Tier 1 risk-based capital ratio 17.17% 16.83%
Total risk-based capital ratio 16.77% 16.23%
Tier 1 capital to average adjusted
total assets 11.62% 11.59%
</TABLE>
Interest Sensitivity
An important element of both earnings performance and the maintenance of
sufficient liquidity is proper management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
interest sensitive liabilities at a specific time interval. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets during a given period. Generally, during a period of rising
interest rates, a negative gap within shorter maturities would adversely affect
the net interest income, while a positive gap within shorter maturities would
result in an increase in net interest income. Conversely, during a period of
falling interest rates, a negative gap within shorter maturities would result in
an increase in net interest income, while a positive gap within shorter
maturities would have the opposite effect. This gap can be managed by repricing
assets or liabilities, by selling investments available for sale, by replacing
assets or liabilities at maturity, or by adjusting the interest rate during the
life of an asset or liability. Matching amounts of assets and liabilities
maturing in the same time interval helps hedge the risk and minimize the impact
on net interest income in periods of rising or falling interest rates.
17
<PAGE>
The Company determines the overall magnitude of interest sensitivity risk and
then formulates policies governing asset generation and pricing, funding sources
and pricing, and off-balance-sheet commitments in order to reduce sensitivity
risk. These decisions are based on management's outlook regarding future
interest rate movements, the state of the local and national economy, and other
financial and business risk factors.
The following table presents the Company's interest sensitivity position at
September 30, 2000 based on the repricing or maturity of interest sensitive
assets and liabilities, whichever is shorter. This one-day position, which
continually is changing, is not necessarily indicative of the Company's position
at any other time.
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
September 30, 2000
-----------------------------------------------------------------------------
With-in 91-365 1 to 5 Over
(In Thousands) 90 Days Days Years 5 Years Total
----------- -------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans $ 12,734 $ 21,769 $ 32,052 $ 23,004 $ 89,559
Securities 1,554 9,606 21,841 5,717 38,718
Money market and other
short term securities 2,005 - - - 2,005
----------- -------------- ------------ ---------- ----------
Total earning assets $ 16,293 $ 31,375 $ 53,893 $ 28,721 $ 130,282
=========== ============== ============ ========== ==========
Cummulative earning assets $ 16,293 $ 47,668 $ 101,561 $ 130,282 $ 130,282
=========== ============== ============ ========== ==========
Interest-Bearing Liabilities:
Money market savings 7,207 - - - 7,207
Interest checking - - 13,937 - 13,937
Savings - - 12,337 - 12,337
Certificates of deposit 17,417 20,943 25,842 9,305 73,507
FHLB advances 800 - - 971 1,771
----------- -------------- ------------ ---------- ----------
Total interest-bearing liabilities $ 25,424 $ 20,943 $ 52,116 $ 10,276 $ 108,759
=========== ============== ============ ========== ==========
Cummulative interest-bearing liabilities 25,424 46,367 98,483 108,759 108,759
=========== ============== ============ ========== ==========
Period gap $ (9,131) $ 10,432 $ 1,777 $ 18,445 $ 21,523
Cummulative gap $ (9,131) $ 1,301 $ 3,078 $ 21,523 $ 21,523
Ratio of cummulative interest-earning
assets to interest-bearing liabilities 64.09% 102.81% 103.13% 119.79% 119.79%
Ratio of cummulative gap to total
earning assets -7.01% 1.00% 2.36% 16.52% 16.52%
</TABLE>
(1) Includes nonaccrual loans of $866,000, which are included in the 1 to 5
years category.
(2) Management has determined that interest checking and savings accounts are
not sensitive to changes in related market rates and, therefore, they are
placed in the 1 to 5 years category.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1 - 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 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Stockholders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Scott C. Harvard November 10, 2000
---------------------------
Scott C. Harvard
President and
Chief Executive Officer
Steven M. Belote November 10, 2000
---------------------------
Steven M. Belote
Treasurer and
Chief Financial Officer
20
