U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
----- ACT OF 1934
For the quarterly period ended June 30, 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 August 8, 2000: 1,822,812
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 June 30, 2000 and
December 31, 1999
Consolidated Statements of Income for the Three
Months and Six Months Ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999
Consolidated Statement of Stockholders' Equity for
the Six Months Ended June 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
1
<PAGE>
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash (including interest - earning deposits of
approximately $2,064,000 and $2,172,000, respectively) $ 7,209,500 $ 6,821,400
Investment securities:
Held to maturity (fair value of $8,772,000 and
$1,827,000, respectively) 8,787,800 1,838,700
Available for sale (amortized cost of $27,241,000 and
$27,418,000, respectively) 25,898,600 26,179,900
Investment in Federal Home Loan Bank stock,
at cost 491,800 491,800
Investment in Federal Reserve Bank stock, at cost 124,800 124,800
Loans receivable, net 87,990,700 87,063,400
Premises and equipment, net 2,887,400 3,007,400
Real estate owned - 188,300
Accrued interest receivable 1,177,200 1,029,600
Prepaid expenses and other assets 912,400 847,300
---------------------------------------------------
$ 135,480,200 $ 127,592,600
---------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 119,240,000 $ 107,148,300
Advances from Federal Home Loan Bank 1,388,000 6,002,600
Advance payments by borrowers for taxes
and insurance 266,400 204,700
Accrued interest payable 119,200 92,800
Accrued expenses and other liabilities 186,700 246,200
---------------------------------------------------
Total liabilities 121,200,300 113,694,600
---------------------------------------------------
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; 1,822,812 shares issued and
outstanding 601,500 601,500
Additional capital 3,632,400 3,632,400
Retained earnings, substantially restricted 10,925,700 10,473,800
Accumulated other comprehensive income (879,700) (809,700)
---------------------------------------------------
Total stockholders' equity 14,279,900 13,898,000
---------------------------------------------------
$ 135,480,200 $ 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 June 30, Six Months Ended June 30,
-------------------------------------- -------------------------------------
(Unaudited) 2000 1999 2000 1999
------------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Interest income
Loans $ 1,897,500 $ 1,753,800 $ 3,718,000 $ 3,479,200
Investments
Taxable 470,800 342,200 866,900 727,200
Tax-exempt 54,800 84,100 110,700 140,000
-------------------------------------- ----------------------------------------
Total interest income 2,423,100 2,180,100 4,695,600 4,346,400
-------------------------------------- ----------------------------------------
Interest expense
Deposits 1,215,000 1,063,000 2,292,600 2,153,500
FHLB advances 13,700 29,000 64,300 47,400
-------------------------------------- ----------------------------------------
Total interest expense 1,228,700 1,092,000 2,356,900 2,200,900
-------------------------------------- ----------------------------------------
Net interest income 1,194,400 1,088,100 2,338,700 2,145,500
Provision for loan losses 53,100 267,300 106,200 325,600
-------------------------------------- ----------------------------------------
Net interest income after
provision for loan losses 1,141,300 820,800 2,232,500 1,819,900
-------------------------------------- ----------------------------------------
Noninterest income
Deposit account fees 191,300 175,600 352,200 334,200
Loan fees 32,000 41,100 67,700 82,800
Gains on sales of securities - 226,000 - 242,200
Other 34,600 22,900 75,200 55,300
-------------------------------------- ----------------------------------------
Total noninterest income 257,900 465,600 495,100 714,500
-------------------------------------- ----------------------------------------
Noninterest expense
Compensation and employee
benefits 436,400 348,500 845,700 658,600
Occupancy and equipment 226,700 205,500 490,700 374,500
Advertising 15,500 16,500 28,200 29,500
Data processing 105,700 144,200 207,600 264,600
Federal insurance premium 5,500 15,300 11,300 30,600
Other 141,100 85,100 237,900 176,300
-------------------------------------- ----------------------------------------
Total noninterest expense 930,900 815,100 1,821,400 1,534,100
-------------------------------------- ----------------------------------------
Income before income taxes 468,300 471,300 906,200 1,000,300
Income taxes 159,400 160,300 308,500 340,100
-------------------------------------- ----------------------------------------
Net income $ 308,900 $ 311,000 $ 597,700 $ 660,200
====================================== ========================================
Cash dividend declared per common share $ - $ - $ 0.08 $ 0.07
====================================== ========================================
Earnings Per Common Share:
Basic $ 0.17 $ 0.17 $ 0.33 $ 0.36
====================================== ========================================
Diluted $ 0.17 $ 0.17 $ 0.33 $ 0.36
====================================== ========================================
</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>
Six Months Ended June 30, 2000
-----------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Additional Retained Comprehensive
Stock Capital Earnings Income 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)
Comprehensive income - - 597,700 (70,000) 527,700
--------------------------------------------------------------------------------------
Balance, June 30, 2000 $ 601,500 $ 3,632,400 $ 10,925,700 $ (879,700) $ 14,279,900
======================================================================================
</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>
Six Months Ended June 30,
--------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------- --------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 597,700 $ 660,200
Adjustments to reconcile to net cash
provided by operating activities:
Provision for loan losses 106,200 325,600
Depreciation and amortization 175,600 135,300
Amortization of premium and accretion
of discount on securities, net (48,100) 5,800
Gain on sale of securities - (242,200)
Change in net deferred loan fees 3,200 (51,500)
Loss on sale of repossessed assets 28,500 -
Increase in other assets (180,500) (113,700)
Increase (decrease) in other liabilities 28,200 (76,600)
--------------------------------------------
Net cash provided by operating activities 710,800 642,900
--------------------------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (52,300) (3,736,600)
Proceeds from maturities and sales of
available-for-sale securities 225,000 4,015,100
Purchase of held-to-maturity securities (7,946,500) (300,000)
Proceeds from maturities of held-to-maturity
securities 1,049,100 2,614,100
Redemption of Federal Home Loan Bank stock - 88,700
Loan originations, net of repayments (1,036,700) (7,656,800)
Purchase of premises and equipment (52,400) (343,800)
Proceeds from sale of real estate owned 159,800 2,500
Improvements to real estate owned - (9,600)
--------------------------------------------
Net cash used by investing activities (7,654,000) (5,326,400)
--------------------------------------------
Cash flows from financing activities
Net increase in demand deposits 7,034,400 1,980,500
Net increase in time deposits 5,057,300 1,216,100
Proceeds from FHLB advances 2,900,000 6,300,000
Repayments of FHLB advances (7,514,600) (3,417,900)
Payment of dividend on common stock (145,800) (126,800)
--------------------------------------------
Net cash provided by financing activities 7,331,300 5,951,900
--------------------------------------------
Increase in cash and cash equivalents 388,100 1,268,400
Cash and cash equivalents, beginning of period 6,821,400 3,900,800
--------------------------------------------
Cash and cash equivalents, end of period $ 7,209,500 $ 5,169,200
============================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 2,330,500 $ 2,200,200
Cash paid for income taxes $ 337,000 $ 492,000
Supplemental schedule of non-cash investing and
financing activities
Transfers from loans to real estate acquired
through foreclosure $ - $ 22,000
</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 six month period ended June 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
June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- -----------------------------------
2000 1999 2000 1999
---------------------------------- -----------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Net income (numerator, basic and diluted) $ 308,900 $ 311,000 $597,700 $660,200
Weighted average shares outstanding
(denominator) 1,822,800 1,810,800 1,822,800 1,810,800
-------------- --------------- --------------- ----------------
Earnings per common share - basic $ 0.17 $ 0.17 $0.33 $0.36
============== =============== =============== ================
Effect of dilutive securities:
Weighted average shares outstanding 1,822,800 1,810,800 1,822,800 1,810,800
Effect of stock options - 11,800 - 13,800
-------------- --------------- --------------- ----------------
Diluted average shares outstanding
(denominator) 1,822,800 1,822,600 1,822,800 1,824,600
-------------- --------------- --------------- ----------------
Earnings per common share -
assuming dilution $ 0.17 $ 0.17 $0.33 $0.36
============== ================ =============== ================
</TABLE>
The effect of dilutive securities was not used to compute dilutive earnings per
share at June 30, 2000 because the effect would have been anti-dilutive.
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income consists of the following for the six months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------
2000 1999
-------------------------------------------------------
(Unaudited)
<S> <C> <C>
Net income $ 597,700 $ 660,200
Other comprehensive income (70,000) (721,200)
--------------------- ----------------------
Total comprehensive income $ 527,700 $ (61,000)
===================== ======================
</TABLE>
7
<PAGE>
The following is an unaudited reconciliation of the related tax effects
allocated to each component of other comprehensive income at June 30, 2000 and
1999.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------
2000 1999
-------------------------------------------------------
<S> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $ (105,000) $ (850,600)
Less: reclassification adjustment
for gains (losses) included in income - 242,200
----------------------- ----------------------
Total other comprehensice income (loss)
before income tax expense (105,000) (1,092,800)
Income tax (expense) benefit 35,000 371,600
----------------------- ----------------------
Net unrealized gains (losses) $ (70,000) $ (721,200)
======================= ======================
</TABLE>
NOTE 5 - SEGMENT INFORMATION
Segment information consists of the following for the six months ended June 30,
2000 and 1999:
<TABLE>
<CAPTION>
(In thousands) Virginia Maryland Other Total
------------- ------------ ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net Interest Income:
Six months ended June 30, 2000 $ 1,593 $ 344 $ 402 $ 2,339
Six months ended June 30, 1999 $ 1,462 $ 309 $ 375 $ 2,146
</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 June 30, 2000 was $308,900, compared to
net income of $311,000 for the same period in the prior year. Net income for the
six months ended June 30, 2000 was $597,700, compared to net income of $660,200
for the 1999 period. Earnings were positively impacted by a 26.0% 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. That branch had deposits at June 30, exceeding $14.0 million. 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 businesses. The Bank consistently meets its goal of a 2 day
turn around on business checking statements with 100% accuracy since January 1,
2000. 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 will enable the Bank to
recover its initial investment on this product by the end of 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 $106,300, or 9.8%, for the three months ended June
30, 2000, as compared to the same period in 1999, while net interest income
increased $193,200, or 9.0%, for the six months ended June 30, 2000, as compared
to the 1999 six month period. An increase in net interest margin from 3.80% in
1999 to 3.91% in 2000 positively impacted net interest income. The interest rate
spread increased to 3.25% for the six months ended June 30, 2000, as compared to
3.17% for the 1999 six month period. The interest rate spread does not reflect
the impact of noninterest-bearing deposits on the Bank's cost of funds and the
corresponding net interest spread. Noninterest-bearing demand deposits increased
to $10.9 million at June 30, 2000, as compared $9.1 million at June 30, 1999.
Including average noninterest-bearing deposits in calculating the cost of funds
results in an additional 38 basis points and 32 basis points increase in
interest rate spread for the six months ended June 30, 2000 and 1999,
respectively. Increases in net interest margin and net interest spread for the
six months ended June 30, 2000 reflect the higher interest rate environment in
existence, and recoveries of previously reserved interest on nonperforming loans
during the June 2000 period, as compared to the same period of 1999.
Interest income increased $243,000, or 11.1%, for the three months ended June
30, 2000, as compared to the same period in 1999, while interest income
increased $349,200, or 8.0%, for the six months ended June 30, 2000, as compared
to the 1999 six month period. The increase resulted from the average balance of
loans increasing by $3.7 million during the period, primarily in commercial and
consumer lending. Additionally, yields on loans increased by 20 basis points
during the June 2000 period, as compared to the 1999 period. A $1.9 million
increase in the average balance of securities and a 10 basis point increase
9
<PAGE>
in yield on securities positively impacted interest income. Increased yields on
earning assets primarily resulted from the current rising rate environment.
Interest expense increased $136,700, or 12.5%, for the three months ended June
30, 2000, as compared to the same period in 1999, while interest expense
increased $156,000, or 7.1%, for the six months ended June 30, 2000, as compared
to the 1999 six 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 $4.0 million during the
six months ended June 30, 2000, as compared to the same period of 1999.
Additionally, the average rate on interest-bearing liabilities increased from
4.38% in 1999 to 4.48% for the June 2000 period. Average borrowings from the
Federal Home Loan Bank increased $445,000 for the June 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>
Shore Bank
Average Balance and Yield Table
04-Aug-00
02:20:04 PM
<TABLE>
<CAPTION>
Average Balances, Income and Expenses, Yields and Rates
Six Months Ended June 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) $31,763 $966 6.08% $29,902 $894 5.98%
Loans (net of unearned income):
Real estate mortgage 43,859 1,725 7.87% 44,410 1,743 7.85%
Real estate construction 604 25 8.27% 1,719 67 7.80%
Commercial 28,272 1,249 8.83% 24,730 1,057 8.55%
Home equity lines 5,427 261 9.62% 5,718 245 8.57%
Consumer 10,480 458 8.74% 8,374 367 8.77%
------------ ------------ ----------- -----------
Total loans 88,642 3,718 8.39% 84,951 3,479 8.19%
------------ ------------ ----------- -----------
Federal funds sold - - - - - -
Interest-bearing deposits
in other banks 2,225 69 6.20% 1,987 45 4.53%
------------ ------------ ----------- -----------
Total earning assets 122,630 4,753 7.75% 116,840 4,418 7.56%
------------ ------------ ----------- -----------
Less: allowance for loan losses (1,209) (951)
Total nonearning assets 7,239 7,222
------------ -----------
Total assets $128,660 $123,111
============ ===========
Liabilities
Interest-bearing deposits:
Checking and savings $32,847 $411 2.50% $30,680 $385 2.51%
Time deposits 69,528 1,882 5.41% 67,646 1,768 5.23%
------------ ------------ ----------- -----------
Total interest-bearing
deposits 102,375 2,293 4.48% 98,326 2,153 4.38%
FHLB advances 2,290 64 5.59% 1,845 47 5.09%
------------ ------------ ----------- -----------
Total interest-bearing
liabilities 104,665 2,357 4.50% 100,171 2,200 4.39%
------------ -----------
Non-interest bearing liabilities:
Demand deposits 9,651 7,835
Other liabilities 249 1,128
------------ -----------
Total liabilities 114,565 109,134
Stockholders' equity 14,095 13,977
------------ -----------
Total liabilities and stockholders'
equity $128,660 $123,111
============ ===========
Net interest income (1) $2,396 $2,218
============ ===========
Interest rate spread (1) 3.25% 3.17%
Net interest margin (1) 3.91% 3.80%
</TABLE>
(1) Tax equivalent basis. The tax equivalent adjustment to net interest income
was $57,000 and $72,000 for the six months ended June 30, 2000 and 1999,
respectively.
11
<PAGE>
Noninterest Income
Noninterest income was $257,900 during the three months ended June 30, 2000, as
compared to $465,600 for the same period in 1999, while noninterest income was
$495,100 during the six months ended June 30, 2000, as compared to $714,500 for
the 1999 period. Excluding gains on sales of investment securities of $242,200
during 1999, noninterest income increased $22,800, or 4.8%, during the six
months ended June 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 June 30, 2000,
as compared to $267,300 for the same period in 1999, while provision for loan
losses was $106,200 for the six months ended June 30, 2000, as compared to
$325,600 for the 1999 period. See Asset Quality for additional discussions of
loan loss reserves.
Noninterest Expense
Noninterest expense was $930,900 during the three months ended June 30, 2000, as
compared to $815,100 for the same period in 1999, an increase of $115,800, or
14.2%. Noninterest expense was $1.82 million during the six months ended June
30, 2000, as compared to $1.53 million for the same period in 1999, an increase
of $290,000, or 19.0%. This increase is primarily 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. That
branch had deposits at June 30, exceeding $14.0 million. 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
businesses. 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 will enable the Bank to
recover its initial investment on this product by the end of 2000. In February
2000, the Bank, through its investment subsidiary Shore Investments, Inc., began
offering non deposit products throughout its branch network.
Financial Condition
During the six months ended June 30, 2000, the Company increased its assets $7.9
million from $127.6 million at December 31, 1999, to $135.5 million at June 30,
2000. This increase was due primarily to increases in net loans of $927,300 and
increases in cash and investments of $7.1 million.
Deposits increased $12.1 million during the six months ended June 30, 2000. Time
deposits and demand deposit accounts increased by approximately $8.5 million and
$3.6 million, respectively, during the period due to aggressive efforts by the
Company to increase deposit account relationships. During the period, the
Company used approximately $4.6 million of this growth to pay down Federal Home
Loan Bank advances that were outstanding at December 31, 1999 to meet liquidity
needs for the year 2000 rollover. The remaining deposit growth funded loan
demand and investment activities.
12
<PAGE>
Stockholders' equity was $14.3 million at June 30, 2000, compared to $13.9
million at December 31, 1999. Net income of $597,700 was offset by the payment
of $146,000 ($.08 per share) in common stock dividends and increases in
unrealized losses on available-for-sale securities.
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 $1.1 million at June 30, 2000, compared to $1.4
million at December 31, 1999. As to nonaccrual loans existing at June 30, 2000,
approximately $33,000 of interest income would have been recognized during the
six months then ended if interest thereon had accrued. At June 30, 2000, the
Company identified loans totaling $271,000 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. The
Company foreclosed on one property collateralizing one of the loans and has a
sales contract that would result in approximately $135,000 of net proceeds
toward the total outstanding amount. However, it appears that the purchasing
party will not uphold its obligation under the contract and, therefore, another
foreclosure on the property may be necessary. Upon sale of the existing
collateral, management does not expect to collect the remaining contractual
principal and interest due in their entirety and has estimated that the total
loss on the two loans may approach $150,000. Accordingly, management has
specifically reserved $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 June 30, 2000, all loans 60 days or more delinquent, including nonperforming
loans, totaled $1.6 million. In addition, other performing loans totaling $1.8
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
June 30, December 31,
(In Thousands) 2000 1999
------------------- ----------------------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 508 $ 242
Real estate mortgage 513 907
Home equity lines of credit 12 -
Consumer 22 43
------------------- ----------------------
Total nonaccrual loans 1,055 1,192
Other real estate owned - 188
------------------- ----------------------
Total nonperforming assets $ 1,055 $ 1,380
=================== ======================
Loans past due 90 or more days
accruing interest - -
Allowance for loan losses to
nonaccrual loans 122.56% 97.57%
Nonperforming assets to period end
loans and other real estate owned 1.18% 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
Six Months Ended June 30,
----------------------------------------------
(In Thousands) 2000 1999
------------------- ----------------------
<S> <C> <C>
Balance, beginning of period $ 1,163 $ 920
Loans charged off:
Commercial 4 -
Real estate mortgage - 14
Consumer 23 23
------------------- ----------------------
Total loans charged-off 27 37
------------------- ----------------------
Recoveries:
Commercial 38 -
Real estate mortgage - -
Consumer 13 9
------------------- ----------------------
Total recoveries 51 9
------------------- ----------------------
Net charge-offs 24 (28)
Provision for loan losses 106 326
------------------- ----------------------
Balance, end of period $ 1,293 $ 1,218
=================== ======================
Allowance for loan losses to loans
outstanding at end of period 1.45% 1.38%
Allowance for loan losses to nonaccrual
loans outstanding at end of period 122.56% 101.92%
Net charge-offs to average loans
outstanding during period 0.03% -0.03%
</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 June 30, 2000, the Company had outstanding loan and line of credit
commitments of $15.0 million. Scheduled maturities of certificate of deposits
during the twelve months following June 30, 2000 amounted to $45.9 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 increased $388,100 for the six months ended June
30, 2000, compared to an increase of $1.3 million for the six months ended June
30, 1999. Net cash provided by operating activities was $710,800 for the six
months ended June 30, 2000, compared to $642,900 during 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 $7.7 million during the six months
ended June 30, 2000, compared to $5.3 million for the six months ended June 30,
1999. The fluctuations in amounts during these periods were primarily the result
of changes in loan growth, investments and capital expenditures during the six
months ended June 30, 2000, as compared to the same period of 1999.
Net cash provided by financing activities was $7.3 million for the six months
ended June 30, 2000, compared to $6.0 million for the six months ended June 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 June 2000 period, as compared to the June 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 June 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 June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
Analysis of Capital
June 30, December 31,
(In Thousands) 2000 1999
------------------------- -------------------------
<S> <C> <C>
Tier 1 Capital:
Common stock $ 602 $ 602
Additional paid-in capital 3,632 3,632
Retained earnings 10,926 10,474
Comprehensive income (loss) (880) (810)
------------------------- -------------------------
Total capital (GAAP) 14,280 13,898
Less: Intangibles (36) (38)
Unrealized (gains) losses 608 555
------------------------- -------------------------
Total Tier 1 capital $ 14,852 $ 14,415
------------------------- -------------------------
Tier 2 Capital:
Allowable allowances for loan losses 1,068 1,039
------------------------- -------------------------
Total Tier 2 capital $ 15,920 $ 15,454
------------------------- -------------------------
Risk-weighted assets $ 87,993 $ 85,631
Capital Ratios (1):
Tier 1 risk-based capital ratio 16.88% 16.83%
Total risk-based capital ratio 16.23% 16.23%
Tier 1 capital to average adjusted
total assets 11.54% 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 June
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
June 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 $ 14,054 $ 19,879 $ 31,590 $ 23,760 $ 89,283
Securities 3,423 5,651 19,616 5,996 34,686
Money market and other
short term securities 2,064 - - - 2,064
---------- ----------- ----------- ---------- ----------
Total earning assets $ 19,541 $ 25,530 $ 51,206 $ 29,756 $ 126,033
========== =========== =========== ========== ==========
Cummulative earning assets $ 19,541 $ 45,071 $ 96,277 $ 126,033 $ 126,033
========== =========== =========== ========== ==========
Interest-Bearing Liabilities:
Money market savings 7,311 - - - 7,311
Interest checking - - 13,048 - 13,048
Savings - - 14,126 - 14,126
Certificates of deposit 16,568 29,327 24,565 3,754 74,214
FHLB advances 400 - - 988 1,388
---------- ----------- ----------- ---------- ----------
Total interest-bearing liabilities $ 24,279 $ 29,327 $ 51,739 $ 4,742 $ 110,087
========== =========== =========== ========== ==========
Cummulative interest-bearing liabilities 24,279 53,606 105,345 110,087 110,087
========== =========== =========== ========== ==========
Period gap $ (4,738) $ (3,797) $ (533) $ 25,014 $ 15,946
Cummulative gap $ (4,738) $ (8,535) $ (9,068) $ 15,946 $ 15,946
Ratio of cummulative interest-earning
assets to interest-bearing liabilities 80.49% 84.08% 91.39% 114.48% 114.48%
Ratio of cummulative gap to total
earning assets -3.76% -6.77% -7.19% 12.65% 12.65%
</TABLE>
(1) Includes nonaccrual loans of $1.1 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.
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
The annual meeting of the stockholders of Shore Financial Corporation was held
on April 18, 2000. Matters voted on included the election of Richard F. Hall,
III and Scott C. Harvard for three-year terms expiring in 2003. Another matter
voted on during the meeting consisted of the appointment of Goodman & Company,
L.L.P. as the Company's independent auditors for the fiscal year ending December
31, 2000. No other matters were voted on during the meeting or by proxy or other
means during the period.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
None.
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 August 8, 2000
-------------------------
Scott C. Harvard
President and
Chief Executive Officer
Steven M. Belote August 8, 2000
-------------------------
Steven M. Belote
Treasurer and
Chief Financial Officer
20
