U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 12, 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 March 31, 2000 and
December 31, 1999
Consolidated Statements of Income for the Three Months Ended
March 31, 2000 and 1999
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999
Consolidated Statement of Stockholders' Equity for the Three Months
Ended March 31, 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>
March 31, December31,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash (including interest - earning deposits of
approximately $4,040,000 and $2,172,000, respectively) $ 8,465,300 $ 6,821,395
Investment securities:
Held to maturity (fair value of $3,417,000 and
$1,827,000, respectively) 3,396,609 1,838,675
Available for sale (amortized cost of $27,386,000 and
$27,418,000, respectively) 26,078,019 26,179,905
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 87,911,313 87,063,434
Premises and equipment, net 2,952,068 3,007,436
Real estate owned 161,154 188,273
Accrued interest receivable 987,442 1,029,551
Prepaid expenses and other assets 872,493 847,325
------------------------------------------------
$ 131,440,998 $ 127,592,594
------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 115,730,608 $ 107,148,318
Advances from Federal Home Loan Bank 1,004,676 6,002,635
Advance payments by borrowers for taxes
and insurance 316,170 204,686
Accrued interest payable 88,532 92,763
Accrued expenses and other liabilities 325,913 246,124
------------------------------------------------
Total liabilities 117,465,899 113,694,526
------------------------------------------------
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 601,528 601,528
Additional capital 3,632,392 3,632,392
Retained earnings, substantially restricted 10,616,679 10,473,848
Accumulated other comprehensive income (loss) (875,500) (809,700)
------------------------------------------------
Total stockholders' equity 13,975,099 13,898,068
------------------------------------------------
$ 131,440,998 $ 127,592,594
================================================
</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 March 31,
------------------------------------------------
2000 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income
Loans $ 1,820,433 $ 1,725,532
Investments
Taxable 396,121 361,739
Tax-exempt 55,931 79,150
------------------------------------------------
Total interest income 2,272,485 2,166,421
------------------------------------------------
Interest expense
Deposits 1,077,600 1,090,514
FHLB advances 50,646 18,420
------------------------------------------------
Total interest expense 1,128,246 1,108,934
------------------------------------------------
Net interest income 1,144,239 1,057,487
Provision for loan losses 53,100 58,300
------------------------------------------------
Net interest income after
provision for loan losses 1,091,139 999,187
------------------------------------------------
Noninterest income
Deposit account fees 160,944 158,635
Loan fees 35,711 41,603
Gains on sales of securities - 16,244
Other 40,533 32,370
------------------------------------------------
Total noninterest income 237,188 248,852
------------------------------------------------
Noninterest expense
Compensation and employee
benefits 409,338 310,088
Occupancy and equipment 264,033 168,974
Advertising 12,652 13,027
Data processing 101,888 120,445
Federal insurance premium 5,778 15,345
Other 96,882 91,265
------------------------------------------------
Total noninterest expense 890,571 719,144
------------------------------------------------
Income before income taxes 437,756 528,895
Income taxes 149,100 179,800
------------------------------------------------
Net income $ 288,656 $ 349,095
================================================
Cash dividend declared per common share $ 0.08 $ 0.07
================================================
Earnings Per Common Share:
Basic $ 0.16 $ 0.19
================================================
Diluted $ 0.16 $ 0.19
================================================
</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>
Three Months Ended March 31, 2000
- --------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Additional Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
---------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $ 601,528 $ 3,632,392 $ 10,473,848 $ (809,700) $ 13,898,068
Common stock dividend declared - - (145,825) - (145,825)
Comprehensive income - - 288,656 (65,800) 222,856
----------------------------------------------------------------------------------
Balance, March 31, 2000 $ 601,528 $ 3,632,392 $ 10,616,679 $ (875,500) $ 13,975,099
==================================================================================
</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>
Three Months Ended March 31,
----------------------------------------
2000 1999
- ---------------------------------------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 288,656 $ 349,095
Adjustments to reconcile to net cash
provided by operating activities:
Provision for loan losses 53,100 58,300
Depreciation and amortization 88,185 65,729
Amortization of premium and accretion
of discount on securities, net (11,792) (1,081)
Gain on sale of securities - (16,243)
Change in net deferred loan fees 1,209 (26,939)
Loss on sale of repossessed assets 2,703 -
(Increase) decrease in other assets 35,434 (68,622)
Increase in other liabilities 204,127 149,109
---------------------------------------
Net cash provided by operating activities 661,622 509,348
---------------------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (27,876) (3,467,654)
Proceeds from maturities and sales of
available-for-sale securities 25,000 2,785,000
Purchase of held-to-maturity securities (1,989,204) -
Proceeds from maturities of held-to-maturity
securities 444,824 2,521,493
Loan originations, net of repayments (902,188) (4,782,789)
Purchase of premises and equipment (31,194) (214,106)
Proceeds from sale of real estate owned 24,417 -
---------------------------------------
Net cash used by investing activities (2,456,221) (3,158,056)
---------------------------------------
Cash flows from financing activities
Net increase in demand deposits 3,524,972 3,065,762
Net increase in time deposits 5,057,318 1,216,068
Proceeds from FHLB advances 1,500,000 1,800,000
Repayments of FHLB advances (6,497,961) (1,801,218)
Payment of dividend on common stock (145,825) (126,757)
---------------------------------------
Net cash provided by financing activities 3,438,504 4,153,855
---------------------------------------
Increase in cash and cash equivalents 1,643,905 1,505,147
Cash and cash equivalents, beginning of period 6,821,395 3,900,861
---------------------------------------
Cash and cash equivalents, end of period $ 8,465,300 $ 5,406,008
=======================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 1,132,477 $ 1,098,355
Cash paid for income taxes $ - $ 142,000
Supplemental schedule of non-cash investing and
financing activities
Transfers from loans to real estate acquired
through foreclosure $ - $ 22,001
</TABLE>
The accompanying notes are an integral part of these financial statements.
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 three month period ended March 31, 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
March 31, 2000 and 1999.
Three Months Ended March 31,
----------------------------
2000 1999
----------- -----------
Net income (numerator, basic and diluted) $ 288,656 $ 349,095
Weighted average shares outstanding
(denominator) 1,822,812 1,810,812
----------- -----------
Earnings per common share - basic $ 0.16 $ 0.19
=========== ===========
Effect of dilutive securities:
Weighted average shares outstanding 1,822,812 1,810,812
Effect of stock options - 15,585
----------- -----------
Diluted average shares outstanding
(denominator) 1,822,812 1,826,397
----------- -----------
Earnings per common share -
assuming dilution $ 0.16 $ 0.19
=========== ===========
The effect of dilutive securities was not used to compute dilutive earnings per
share at March 31, 2000 because the effect would have been anti-dilutive.
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income consists of the following for the three months ended
March 31, 2000 and 1999:
Three Months Ended March 31,
----------------------------
2000 1999
--------- ---------
Net income $ 288,656 $ 349,095
Other comprehensive income (loss) (65,800) (211,700)
--------- ---------
Total comprehensive income $ 222,856 $ 137,395
========= =========
7
<PAGE>
The following is an unaudited reconciliation of the related tax effects
allocated to each component of other comprehensive income at March 31, 2000 and
1999.
Three Months Ended March 31,
----------------------------
2000 1999
---------- ---------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $(103,000) $(304,600)
Less: reclassification adjustment
for gains (losses) included in income - 16,200
---------- ---------
Total other comprehensice income (loss)
before income tax expense (103,000) (320,800)
Income tax (expense) benefit 37,200 109,100
---------- ---------
Net unrealized gains (losses) $ (65,800) $(211,700)
========== =========
NOTE 5 - STOCKHOLDERS' EQUITY
During the period ended March 31, 2000, the Company declared a $0.08 per share
cash dividend paid on March 17, 2000 to all shareholders of record on March 1,
2000. The dividend totaled approximately $146,000, or 11% of 1999 annual
earnings. On March 1, 2000, the Company granted 14,000 stock options with an
exercise price of $7.88 per share to several of its executive officers.
NOTE 6 - SEGMENT INFORMATION
Segment information consists of the following for the three months ended March
31, 2000 and 1999:
(in thousands) Virginia Maryland Other Total
-------- -------- ----- -----
Net Interest Income:
Three months ended March 31, 2000 $ 796 $ 163 $ 185 $ 1,144
Three months ended March 31, 1999 $ 732 $ 146 $ 179 $ 1,057
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 March 31, 2000 was $288,700, compared to
net income of $349,100 for the same period in the prior year. Earnings for the
quarter were impacted by several expansion projects undertaken by the Company
during the second half of 1999, which have resulted in higher operating
expenses. In August of last year, the company began providing item processing
and check imaging for its 10,000 plus demand deposit accounts. Also in August,
the company began hiring for its subsidiary, Shore Investments, Incorporated,
which started offering non-deposit products through the bank branches in
February of 2000. In October 1999 the Company opened its seventh branch office
in Parksley, Virginia. The new branch has new deposits of over $3 million and
total deposits in excess of $12 million.
Net Interest Income
Net interest income increased $86,800 for the three months ended March 31, 2000,
as compared to the same period in 1999. An increase in net interest margin from
3.77% in 1999 to 3.90% in 2000 positively impacted net interest income. The
interest rate spread increased to 3.26% for the three months ended March 31,
2000, as compared to 3.11% for the 1999 three month period. The interest rate
spread does not reflect the impact of noninterest-bearing deposits on the Bank's
cost of funds and the corresponding net interest spread. Noninterest-bearing
demand deposits increased to $10.5 million at March 31, 2000, as compared $8.5
million at March 31, 1999. Including average noninterest-bearing deposits in
calculating the cost of funds results in an additional 36 basis points and 31
basis points in interest rate spread for the three months ended March 31, 2000
and 1999, respectively. Increases in net interest margin and net interest spread
for the three months ended March 31, 2000 reflect the higher interest rate
environment in existence during the March 2000 period as compared to the same
period of 1999.
Interest income increased $106,100 for the three months ended March 31, 2000, as
compared to the same period in 1999. The increase resulted from the average
balance of loans increasing by $5.6 million during the period, primarily in
commercial and consumer lending. Although the average balance of securities
decreased by $1.2 million, a 22 basis point increase in yield on securities
positively impacted interest income. Lower yields on loans during the March 2000
period, as compared to 1999, negatively impacted interest income. However, the
current rising rate environment should positively impact loan yields and
interest income as rates within the Company's existing loan portfolio increase
and rates on new loans increase within the market.
Interest expense increased $19,300 for the three months ended March 31, 2000, as
compared to the same period in 1999. This is due to increased borrowings from
the Federal Home Loan Bank to fund potential liquidity requirements resulting
from the year 2000 date change. Average borrowings from the Federal Home Loan
Bank increased $2.1 million for the March 2000 period, as compared to the same
period in 1999. Average interest-bearing deposits increased by $1.2 million
during the three months ended March 31, 2000, as compared to the same period of
1999. This increase was offset by a decrease in the average rate on
interest-bearing liabilities from 4.46% in 1999 to 4.39% for the March 2000
period. An increased emphasis on attracting lower costing interest-bearing and
noninterest-bearing commercial and consumer deposit relationships has
contributed to the lower deposit rates.
9
<PAGE>
The following table illustrates average balances of total interest-earning
assets and total interest-bearing liabilities for the periods indicated, showing
the average distribution of assets, liabilities, stockholders' equity and the
related income, expense and corresponding weighted average yields and costs. The
average balances used in these tables and other statistical data were calculated
using daily averages.
10
<PAGE>
Average Balances, Income and Expenses, Yields and Rates
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------------------
2000 1999
--------------------------------- ------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ---- --------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Securities (1) $ 30,037 $ 453 6.03% $ 31,230 $ 454 5.81%
Loans (net of unearned income):
Real estate mortgage 44,095 840 7.62% 44,505 887 7.97%
Real estate construction 634 13 8.21% 1,536 31 8.07%
Commercial 28,198 618 8.77% 23,641 519 8.78%
Home equity lines 5,158 122 9.46% 5,633 121 8.59%
Consumer 10,320 227 8.80% 7,530 167 8.87%
--------- --------- --------- ---------
Total loans 88,405 1,820 8.23% 82,845 1,725 8.33%
--------- --------- --------- ---------
Federal funds sold - - - - - -
Interest-bearing deposits
in other banks 1,871 28 5.99% 2,482 28 4.51%
--------- --------- --------- ---------
Total earning assets 120,313 2,301 7.65% 116,557 2,207 7.57%
--------- ---------
Less: allowance for loan losses (1,179) (923)
Total nonearning assets 7,104 6,263
--------- ---------
Total assets $ 126,238 $ 121,897
========= =========
Liabilities
Interest-bearing deposits:
Checking and savings $ 32,522 $ 203 2.50% $ 29,701 $ 190 2.56%
Time deposits 66,669 874 5.24% 68,292 901 5.28%
--------- --------- --------- ---------
Total interest-bearing
deposits 99,191 1,077 4.34% 97,993 1,091 4.45%
FHLB advances 3,563 51 5.73% 1,436 18 5.01%
--------- --------- --------- ---------
Total interest-bearing
liabilities 102,754 1,128 4.39% 99,429 1,109 4.46%
--------- ---------
Non-interest bearing liabilities:
Demand deposits 9,308 7,515
Other liabilities 236 1,128
--------- ---------
Total liabilities 112,298 108,072
Stockholders' equity 13,940 13,825
--------- ---------
Total liabilities and stockholders'
equity $ 126,238 $121,897
========= ========
Net interest income (1) $ 1,173 $ 1,098
========= =========
Interest rate spread (1) 3.26% 3.11%
Net interest margin (1) 3.90% 3.77%
</TABLE>
(1) Tax equivalent basis. The tax equivalent adjustment to net interest
income was $29,000 and $41,000 for the three months ended March 31, 2000 and
1999, respectively.
11
<PAGE>
Noninterest Income
Noninterest income was $237,200 during the three months ended March 31, 2000, as
compared to $248,900 for the same period in 1999, a decrease of $11,700 or 4.7%.
Excluding gains on sales of securities of $16,200 during 1999, noninterest
income increased $4,500 during the March 2000 period. Increases in deposit
account and other fees resulting from additional deposit relationships during
the period contributed to this increase in income.
Provision for Loan Losses
Provision for loan losses was $53,100 for the three months ended March 31, 2000
as compared to $58,300 for the same period in 1999. See Asset Quality for
additional discussions of these loans.
Noninterest Expense
Noninterest expense was $890,600 during the three months ended March 31, 2000,
as compared to $719,100 for the same period in 1999, an increase of $171,500 or
23.8%. This increase is primarily due to additional noninterest expense
associated with the October 1999 opening of the bank's seventh branch office in
Parksley, Virginia, and the additional cost of the bank's new operations center
in Accomac, Virginia. The Parksley branch incurred approximately $70,100 in
noninterest expense during the three months ended March 31, 2000. The operations
center provides item processing and check imaging for the Bank, a service that
through August 1999 was outsourced to an independent provider. Added costs
associated with operating this facility during the March 2000 period were
significantly offset by the savings resulting from terminating the relationship
with the independent provider that previously performed these services for the
Company. Additionally, performing these functions in house enables the Company
to provide better service to its customers.
Financial Condition
During the three months ended March 31, 2000, the Company increased its assets
$3.8 million from $127.6 million at December 31, 1999, to $131.4 million at
March 31, 2000. This increase was due primarily to increases in net loans of
$847,900 and increases in cash and investments of $3.1 million.
Deposits increased $8.6 million during the three months ended March 31, 2000.
Time deposits and demand deposit accounts increased by approximately $5.1
million and $3.5 million, respectively, during the period due to aggressive
efforts by the Company to increase deposit account relationships. During the
period, the Company used approximately $5.0 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.
Stockholders' equity was $14.0 million at March 31, 2000, compared to $13.9
million at December 31, 1999. Net income of $288,700 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.
12
<PAGE>
Asset Quality
Loans are placed on nonaccrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual or the loan reaches 90 days delinquent whereby the loan no
longer accrues interest.
Total nonperforming assets, which consist of nonaccrual loans and foreclosed
properties, adjusted for estimated losses upon sale and the related selling
expenses and holding costs, were $1.5 million at March 31, 2000, compared to
$1.4 million at December 31, 1999. As to nonaccrual loans existing at March 31,
2000, approximately $30,000 of interest income would have been recognized during
the three months then ended if interest thereon had accrued. At March 31, 2000,
the Company identified loans totaling $285,000 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 has a sales contact on property collateralizing one of
the loans that will result in approximately $135,000 of net proceeds toward the
total outstanding amount. 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 March 31, 2000, all loans 60 days or more delinquent, including nonperforming
loans, totaled $2.1 million. In addition, other performing loans totaling $1.3
million existed that have documentation deficiencies or other potential problems
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.
Nonperforming Assets
March 31, December 31,
2000 1999
--------- -----------
Nonaccrual loans:
Commercial $ 667 $ 242
Real estate construction - -
Real estate mortgage 632 907
Home equity lines of credit - -
Consumer 42 43
--------- --------
Total nonaccrual loans 1,341 1,192
Other real estate owned 161 188
--------- --------
Total nonperforming assets $ 1,502 $1,380
======= ======
Loans past due 90 or more days
accruing interest - -
Allowance for loan losses to
nonaccrual loans 90.68% 97.57%
Nonperforming assets to period end
loans and other real estate owned 1.68% 1.54%
14
<PAGE>
Set forth below is a table detailing the allowance for loan losses for the
periods indicated.
Allowance for Loan Losses
Three Months Ended March 31,
----------------------------
2000 1999
--------- -------
Balance, beginning of period $1,163 $ 920
Loans charged off:
Commercial 4 -
Real estate construction - -
Real estate mortgage - 14
Home equity lines of credit - -
Consumer 11 21
--------- -------
Total loans charged-off 15 35
--------- -------
Recoveries:
Commercial 14 -
Real estate construction - -
Real estate mortgage - -
Home equity lines of credit - -
Consumer 1 8
--------- -------
Total recoveries 15 8
--------- -------
Net charge-offs - (27)
Provision for loan losses 53 58
--------- -------
Balance, end of period $1,216 $ 951
========= =======
Allowance for loan losses to loans
outstanding at end of period 1 .36% 1.11%
Allowance for loan losses to nonaccrual
loans outstanding at end of period 90.68% 154.89%
Net charge-offs to average loans
outstanding during period - -0.03%
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 March 31, 2000, the Company had outstanding loan and line of credit
commitments of $10.4 million. Scheduled maturities of certificate of deposits
during the twelve months following March 31, 2000 amounted to $47.8 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 $1.6 million for the three months
ended March 31, 2000, compared to an increase of $1.5 million for the three
months ended March 31, 1999. Net cash provided by operating activities was
$661,600 for the three months ended March 31, 2000, compared to $509,300 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 $2.5 million during the three months
ended March 31, 2000, compared to $3.2 million for the three months ended March
31, 1999. The fluctuations in amounts during these periods were primarily the
result of changes in loan growth, investments and capital expenditures during
the three months ended March 31, 2000, as compared to the same period of 1999.
Net cash provided by financing activities was $3.4 million for the three months
ended March 31, 2000, compared to $4.2 million for the three months ended March
31, 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 March 2000 period, as compared to the March
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 March 31, 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 March 31, 2000 and December 31, 1999.
Analysis of Capital
March 31, December 31,
2000 1999
-------- -----------
Tier 1 Capital:
Common stock $ 602 $ 602
Additional paid-in capital 3,632 3,632
Retained earnings 10,617 10,474
Comprehensive income (loss) (876) (810)
-------- --------
Total capital (GAAP) 13,975 13,898
Less: Intangibles (37) (38)
Unrealized (gains) losses 588 555
-------- --------
Total Tier 1 capital $ 14,526 $ 14,415
-------- --------
Tier 2 Capital:
Allowable allowances for loan losses 1,059 1,039
-------- --------
Total Tier 2 capital $ 15,585 $ 15,454
-------- --------
Risk-weighted assets $ 86,983 $ 85,631
Capital Ratios (1):
Tier 1 risk-based capital ratio 16.70% 16.83%
Total risk-based capital ratio 16.07% 16.23%
Tier 1 capital to average adjusted
total assets 11.51% 11.59%
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 interest-rate 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
March 31, 2000. This one-day position, which continually is changing, is not
necessarily indicative of the Company's position at any other time.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
March 31, 2000
----------------------------------------------------------------
With-in 91-365 1 to 5 Over
90 Days Days Years 5 Years Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans $ 13,926 $ 20,779 $ 31,237 $ 23,185 $ 89,127
Securities 686 4,891 16,919 6,979 29,475
Money market and other
short term securities 4,040 - - - 4,040
--------- --------- --------- --------- ---------
Total earning assets $ 18,652 $ 25,670 $ 48,156 $ 30,164 $ 122,642
========= ========= ========= ========= =========
Cummulative earning assets $ 18,652 $ 44,322 $ 92,478 $ 122,642 $ 122,642
========= ========= ========= ========= =========
Interest-Bearing Liabilities:
Money market savings 7,311 - - - 7,311
Interest checking - - 13,048 - 13,048
Savings - - 14,126 - 14,126
Certificates of deposit 12,980 34,784 18,341 4,652 70,757
FHLB advances - - - 1,005 1,005
--------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 20,291 $ 34,784 $ 45,515 $ 5,657 $ 106,247
========= ========= ========= ========= =========
Cummulative interest-bearing liabilities 20,291 55,075 100,590 106,247 106,247
========= ========= ========= ========= =========
Period gap $ (1,639) $ (9,114) $ 2,641 $ 24,507 $ 16,395
Cummulative gap $ (1,639) $ (10,753) $ (8,112) $ 16,395 $ 16,395
Ratio of cummulative interest-earning
assets to interest-bearing liabilities 91.92% 80.48% 91.94% 115.43% 115.43%
Ratio of cummulative gap to total
earning assets -1.34% -8.77% -6.61% 13.37% 13.37%
</TABLE>
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 May 12, 2000
- ------------------------
Scott C. Harvard
President and
Chief Executive Officer
Steven M. Belote May 12, 2000
- ------------------------
Steven M. Belote
Treasurer and
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,425,000
<INT-BEARING-DEPOSITS> 4,040,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,078,000
<INVESTMENTS-CARRYING> 3,397,000
<INVESTMENTS-MARKET> 3,417,000
<LOANS> 89,127,000
<ALLOWANCE> 1,216,000
<TOTAL-ASSETS> 131,441,000
<DEPOSITS> 115,731,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 730,000
<LONG-TERM> 1,005,000
0
0
<COMMON> 602,000
<OTHER-SE> 13,373,000
<TOTAL-LIABILITIES-AND-EQUITY> 131,441,000
<INTEREST-LOAN> 1,820,000
<INTEREST-INVEST> 452,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,272,000
<INTEREST-DEPOSIT> 1,078,000
<INTEREST-EXPENSE> 1,128,000
<INTEREST-INCOME-NET> 1,144,000
<LOAN-LOSSES> 53,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 97,000
<INCOME-PRETAX> 438,000
<INCOME-PRE-EXTRAORDINARY> 438,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 289,000
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
<YIELD-ACTUAL> 7.65
<LOANS-NON> 1,341,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 285,000
<ALLOWANCE-OPEN> 1,163,000
<CHARGE-OFFS> 15,000
<RECOVERIES> 15,000
<ALLOWANCE-CLOSE> 1,216,000
<ALLOWANCE-DOMESTIC> 1,216,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
