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, 2002
_____ 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 11, 2002: 1,695,817
Transitional Small Business Disclosure Format: Yes____ No__X__
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Index - Form 10-QSB
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of September 30, 2002
and December 31, 2001
Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 2002
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
Item 3 - Controls and Procedures
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
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, December 31,
2002 2001
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash (including interest - earning deposits of
approximately $6,764,300 and $4,890,000, respectively) $ 11,880,900 $ 6,605,900
Investment securities:
Held to maturity (fair value of $6,077,600 and
$2,007,500, respectively) 6,004,600 1,999,700
Available for sale (amortized cost of $27,804,100 and
$25,175,200, respectively) 28,495,100 25,422,300
Federal Home Loan Bank stock, at cost 542,700 510,500
Federal Reserve Bank stock, at cost 124,800 124,800
Community Bankers' Bank stock, at cost 21,100 -
Loans receivable, net 113,223,700 104,095,800
Premises and equipment, net 3,528,600 2,778,500
Accrued interest receivable 978,100 981,400
Prepaid expenses and other assets 354,400 332,300
----------------------------------------
$ 165,154,000 $ 142,851,200
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 146,104,200 $ 125,313,700
Advances from Federal Home Loan Bank 766,700 816,700
Advance payments by borrowers for taxes
and insurance 251,100 198,400
Accrued interest payable 32,500 27,000
Accrued expenses and other liabilities 314,000 234,600
----------------------------------------
Total liabilities 147,468,500 126,590,400
----------------------------------------
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; 1,695,817 and 1,697,667 shares
issued and outstanding, respectively 559,600 560,200
Additional capital 2,654,500 2,677,200
Retained earnings, substantially restricted 14,020,800 12,859,600
Accumulated other comprehensive income 450,600 163,800
----------------------------------------
Total stockholders' equity 17,685,500 16,260,800
----------------------------------------
$ 165,154,000 $ 142,851,200
========================================
The accompanying notes are an integral part of these financial
statements.
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Interest and dividend income
Loans $ 1,965,200 $ 1,993,300 $ 5,843,900 $ 5,956,100
Investments
Taxable interest 348,400 427,800 1,010,000 1,409,000
Tax-exempt interest 28,900 35,500 97,300 75,800
Dividends 34,400 33,400 102,400 100,600
----------------------------------- ---------------------------------
Total interest and dividend income 2,376,900 2,490,000 7,053,600 7,541,500
----------------------------------- ---------------------------------
Interest expense
Deposits 916,100 1,211,300 2,768,200 3,787,100
FHLB advances 10,800 12,100 42,300 75,800
----------------------------------- ---------------------------------
Total interest expense 926,900 1,223,400 2,810,500 3,862,900
----------------------------------- ---------------------------------
Net interest income 1,450,000 1,266,600 4,243,100 3,678,600
Provision for loan losses 84,000 58,500 241,700 163,500
----------------------------------- ---------------------------------
Net interest income after
provision for loan losses 1,366,000 1,208,100 4,001,400 3,515,100
----------------------------------- ---------------------------------
Noninterest income
Deposit account fees 267,600 217,000 747,300 631,200
Loan fees 41,300 29,300 104,600 99,900
Commissions on investment brokerage sales 9,900 9,600 37,500 36,300
Gains (losses) on sales of securities (2,800) 10,900 (2,800) 23,200
Other 19,400 18,200 96,500 73,000
----------------------------------- ---------------------------------
Total noninterest income 335,400 285,000 983,100 863,600
----------------------------------- ---------------------------------
Noninterest expense
Compensation and employee
benefits 478,500 463,500 1,369,700 1,370,500
Occupancy and equipment 287,700 182,700 813,100 661,200
Data processing 121,900 111,800 366,300 336,500
Advertising 25,800 16,100 60,700 43,700
Federal insurance premium 5,700 5,600 17,200 16,900
Other 124,700 207,600 397,600 462,800
----------- ----------
----- ------------------- ---------------------------------
Total noninterest expense 1,044,300 987,300 3,024,600 2,891,600
----------------------------------- ---------------------------------
Income before income taxes 657,100 505,800 1,959,900 1,487,100
Income taxes 212,300 161,900 629,300 475,900
----------------------------------- ---------------------------------
Net income $ 444,800 $ 343,900 $ 1,330,600 $ 1,011,200
=================================== =================================
Cash Dividends Declared Per Share $ 0.04 $ 0.00 $ 0.10 $ 0.09
=================================== =================================
Earnings Per Common Share:
Basic $ 0.26 $ 0.20 $ 0.78 $ 0.58
=================================== =================================
Diluted $ 0.26 $ 0.20 $ 0.78 $ 0.58
=================================== =================================
The accompanying notes are an integral part of these
financial statements.
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Number of Common Additional Retained Comprehensive
Shares Stock Capital Earnings Income Total
---------- ----------- ------------- ------------- ------------- -------------
Balance, December 31, 2001 1,697,667 $ 560,200 $ 2,677,200 $12,859,600 $ 163,800 $16,260,800
Common stock cash dividend
declared - - - (169,400) - (169,400)
Exercise of stock options 3,150 1,000 24,000 - - 25,000
Repurchase of common stock (5,000) (1,600) (46,700) - - (48,300)
Comprehensive income - - - 1,330,600 286,800 1,617,400
---------------------------------------------------------------------------------------------------
Balance, September 30, 2002 1,695,817 $ 559,600 $ 2,654,500 $14,020,800 $ 450,600 $17,685,500
===================================================================================================
The accompanying notes are an integral part of these financial statements.
SHORE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
--------------------------------
2002 2001
- --------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 1,330,600 $ 1,011,200
Adjustments to reconcile to net cash
provided by operating activities:
Provision for loan losses 241,700 163,500
Depreciation and amortization 257,100 244,200
Amortization of premium and accretion
of discount on securities, net 45,600 (163,700)
(Gain) loss on sale of investment securities 2,800 (23,200)
(Gain) loss on disposal of fixed assets (5,800) 7,700
Gain on sale of repossessed assets (3,200) (300)
Change in net deferred loan fees (42,000) 3,500
Increase in other assets (179,000) (43,600)
Increase in other liabilities 137,600 309,600
--------------------------------
Net cash provided by operating activities 1,785,400 1,508,900
--------------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (7,889,100) (9,530,300)
Proceeds from maturities, sales and calls of
available-for-sale securities 5,198,300 9,861,300
Purchase of held-to-maturity securities (5,990,300) (4,260,800)
Proceeds from maturities, prepayments and calls
of held-to-maturity securities 2,000,000 9,000,000
Purchase of Federal Home Loan Bank stock (32,200) (18,700)
Purchase of Community Bankers' Bank stock (21,100) -
Loan originations, net of repayments (9,413,600) (6,408,300)
Purchase of premises and equipment (999,300) (111,800)
Proceeds from sale of real estate owned, net of costs 89,100 69,500
--------------------------------
Net cash used by investing activities (17,058,200) (1,399,100)
--------------------------------
Cash flows from financing activities
Net increase in demand deposits 14,952,600 11,012,700
Net increase in time deposits 5,837,900 2,530,700
Proceeds from FHLB advances 8,600,000 8,300,000
Repayments of FHLB advances (8,650,000) (15,521,400)
Repurchase of common stock (48,300) (834,700)
Proceeds from exercise of stock options 25,000 -
Payment of dividend on common stock (169,400) (160,900)
--------------------------------
Net cash provided by financing activities 20,547,800 5,326,400
--------------------------------
Increase in cash and cash equivalents 5,275,000 5,436,200
Cash and cash equivalents, beginning of period 6,605,900 5,096,300
--------------------------------
Cash and cash equivalents, end of period $ 11,880,900 $ 10,532,500
================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 2,805,000 $ 3,888,200
Cash paid during the period for income taxes $ 725,000 $ 355,000
Supplemental schedule of non-cash investing and
financing activities
Transfers from loans to real estate acquired
through foreclosure $ 86,000 $ 319,200
The accompanying notes are an integral part of these financial statements.
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 United States of America. 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 in
the United States of America, 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, 2002 are not necessarily indicative of the
results that may be expected for any other interim period or the entire year
ending December 31, 2002. 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, 2001.
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 products, title
insurance and trust services.
NOTE 3 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the periods ended
September 30, 2002 and 2001.
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- ----------------------------------------
2002 2001 2002 2001
----------------- ----------------- ---------------- ------------------
Net income (numerator, basic and diluted) $ 444,800 $ 343,900 $ 1,330,600 $ 1,011,200
Weighted average shares outstanding
(denominator) 1,694,800 1,706,400 1,694,900 1,747,800
----------------- ----------------- ---------------- ------------------
Earnings per common share - basic $ 0.26 $ 0.20 $ 0.78 $ 0.58
================= ================= ================ ==================
Effect of dilutive securities:
Weighted average shares outstanding 1,694,800 1,706,400 1,694,900 1,747,800
Effect of stock options 18,300 4,700 14,200 -
---------------- ----------------- ---------------- ------------------
Diluted average shares outstanding
(denominator) 1,713,100 1,711,100 1,709,100 1,747,800
---------------- ----------------- ---------------- ------------------
Earnings per common share -
assuming dilution $ 0.26 $ 0.20 $ 0.78 $ 0.58
================ ================= ================ ==================
The effect of potentially dilutive securities was not used to compute dilutive
earnings per share for the nine months ended September 30, 2001 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, 2002 and 2001:
Nine Months Ended September 30,
----------------------------------------------
2002 2001
--------------------- -----------------------
Net income $ 1,330,600 $ 1,011,200
Other comprehensive income 286,800 596,500
--------------- -----------------
Total comprehensive income $ 1,617,400 $ 1,607,700
=============== =================
The following is a reconciliation of the related tax effects allocated to each
component of other comprehensive income at September 30, 2002 and 2001.
Nine Months Ended September 30,
----------------------------------------------
2002 2001
--------------------- -----------------------
Unrealized gains on securities:
Unrealized holding gains
arising during the period $ 442,200 $ 935,200
Less: reclassification adjustment
for gains included in income 2,800 (23,200)
----------------- -----------------
Total other comprehensive income
before income tax expense 445,000 912,000
Income tax expense (158,200) (315,500)
----------------- -----------------
Net unrealized gain $ 286,800 $ 596,500
================= =================
NOTE 5 - SEGMENT INFORMATION
Segment information consists of the following for the nine months ended
September 30, 2002 and 2001:
Elimination of
Intersegment
(In thousands) Virginia Maryland Other Transactions Total
---------- ---------- ---------- ---------------- ----------
Net Interest Income:
Nine months ended September 30, 2002 $ 3,080 $ 549 $ 1,168 $ (554) $ 4,243
Nine months ended September 30, 2001 $ 2,563 $ 479 $ 1,512 $ (875) $ 3,679
Assets:
September 30, 2002 $ 144,124 $ 20,268 $ 45,035 $ (44,273) $ 165,154
December 31, 2001 $ 130,426 $ 19,060 $ 33,641 $ (40,276) $ 142,851
NOTE 6 - PURCHASES AND AQUISITIONS
On September 13, 2002, Shore Bank, a wholly-owned subsidiary of Shore Financial
Corporation, entered into a definitive purchase and assumption agreement to
acquire the deposits of the Salisbury, Maryland branch of Susquehanna Bank, a
wholly-owned subsidiary of Susquehanna Bankshares Inc. The proposed transaction
is to include approximately $18.0 million in deposits. The purchase, which has
received regulatory approval, will enhance the Bank's position in the Salisbury,
Maryland market. The acquisition is expected to be completed by December 31,
2002.
NOTE 7 - SUBSEQUENT EVENT
During October 2002, the Company declared a $0.04 per share quarterly cash
dividend on its common stock payable on November 15, 2002 to shareholders of
record on November 1, 2002.
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, 2002 was $444,800,
compared to net income of $343,900 for the same period of the prior year. Net
income for the nine months ended September 30, 2002 was $1.33 million, compared
to net income of $1.01 million for the same period of the prior year. Quarterly
and nine month earnings were positively impacted by loan growth of 16.6% as
compared to the September 2001 period and the reduction in the Bank's cost of
funds. Loan production remained strong during the period, fueled by low interest
rates and improved marketing efforts by loan production personnel. Additionally,
the Bank's trend of maintaining credit quality continued in its loan portfolio.
Net Interest Income
Net interest income increased 14.5% to $1.45 million for the three months ended
September 30, 2002, compared to $1.27 million for the same period in 2001, while
net interest income increased 15.4% to $4.24 million for the nine months ended
September 30, 2002, compared to $3.68 million during the September 2001 nine
month period. The net interest margin increased to 3.88% for the nine months
ended September 30, 2002, as compared to 3.73% during the 2001 period, while the
interest rate spread increased to 3.39% from 3.05% for the same period in 2001.
Average earning assets increased $14.3 million during the September 2002 period
as compared to the September 2001 period, reductions in nonperforming assets and
a decrease in funding costs positively impacted net interest income. Average
noninterest-bearing demand deposits increased 30.9% to $13.8 million during the
nine months ended September 30, 2002, as compared to $10.5 million during the
September 2001 period, while average interest-bearing liabilities increased 9.5%
to $124.1 million during the September 2002 period as compared to 2001.
Interest and dividend income decreased 4.5% to $2.38 million for the three
months ended September 30, 2002, compared to $2.49 million for the same period
in 2001, while interest and dividend income decreased 6.5% to $7.05 million for
the nine months ended September 30, 2002, compared to $7.54 million during the
September 2001 nine month period. The market-driven 134 basis point decline in
loan yields more than offset a $15.9 million increase in the average loan
balance. The increase in the average loan balance occurred primarily in
residential and commercial real estate and consumer lending categories.
Additionally, the yield on securities decreased 87 basis points, while the
average balance of securities decreased by $2.9 million during the period ended
September 30, 2002 as compared to September 30, 2001.
Interest expense decreased 24.2% to $926,900 for the three months ended
September 30, 2002, compared to $1.22 million for the same period in 2001, while
interest expense decreased 27.2% to $2.81 million for the nine months ended
September 30, 2002, compared to $3.86 million during the September 2001 nine
month period. As with yields on earning assets, the Company experienced a
reduction in funding costs during the past year with the average rate on
interest-bearing liabilities decreasing from 4.55% in 2001 to 3.02% for the
September 2002 period. Time deposits provided most of the impact with a 168
basis point decline. This decrease more than offset a $11.1 million increase in
average interest-bearing deposits during the nine months ended September 30,
2002, as compared to the same period of 2001.
The following table illustrates average balances of total interest-earning
assets and total interest-bearing liabilities for the periods indicated, showing
the average distribution of assets, liabilities, stockholders' equity and the
related income, expense and corresponding weighted average yields and costs. The
average balances used in these tables and other statistical data were calculated
using daily averages.
Average Balances, Income and Expenses, Yields and Rates
Nine Months September 30,
--------------------------------------------------------------------------------------
2002 2001
----------------------------------------- ---------------------------------------
Average Income/ Yield/ Average Income/ Yield/
(In Thousands) Balance Expense Rate (2) Balance Expense Rate (2)
----------- ----------- ----------- ----------- ----------- -----------
Assets:
Securities (1) $ 32,872 $ 1,212 4.92% $ 35,737 $ 1,551 5.79%
Loans (net of unearned income):
Real estate mortgage 49,911 2,723 7.28% 45,259 2,752 8.11%
Real estate construction 1,961 87 5.92% 1,374 92 8.93%
Commercial 37,704 1,994 7.05% 29,916 1,933 8.62%
Home equity lines 10,401 384 4.92% 6,955 422 8.09%
Consumer 10,818 656 8.09% 11,418 757 8.84%
----------- ----------- ----------- -----------
Total loans 110,795 5,844 7.03% 94,922 5,956 8.37%
Interest-bearing deposits
in other banks 4,023 47 1.56% 2,714 91 4.47%
----------- ----------- ----------- -----------
Total earning assets 147,690 7,103 6.41% 133,373 7,598 7.60%
----------- ----------- ----------- -----------
Less: allowance for loan losses (1,421) (1,201)
Total nonearning assets 9,075 7,866
----------- -----------
Total assets $ 155,344 $ 140,038
=========== ===========
Liabilities
Interest-bearing deposits:
Checking and savings $ 45,973 $ 386 1.12% $ 36,338 $ 506 1.86%
Time deposits 76,675 2,382 4.14% 75,202 3,281 5.82%
----------- ----------- ----------- -----------
Total interest-bearing
deposits 122,648 2,768 3.01% 111,540 3,787 4.53%
FHLB advances 1,435 42 3.90% 1,766 76 5.74%
----------- ----------- ----------- -----------
Total interest-bearing
liabilities 124,083 2,810 3.02% 113,306 3,863 4.55%
----------- -----------
Non-interest bearing liabilities:
Demand deposits 13,798 10,540
Other liabilities 613 621
----------- -----------
Total liabilities 138,494 124,467
Stockholders' equity 16,850 15,571
----------- -----------
Total liabilities and stockholders'
equity $ 155,344 $ 140,038
=========== ===========
Net interest income (1) $ 4,293 $ 3,735
=========== ===========
Interest rate spread (1)(3) 3.39% 3.05%
Net interest margin (1)(4) 3.88% 3.73%
(1) Tax equivalent basis. The tax equivalent adjustment to net interest income was $50,000 and $56,000 for the nine months
ended September 30, 2002 and 2001, 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.
(3) Interest rate spread is the average yield earned on earning assets less the average rate incurred on interest-bearing
liabilities.
(4) Net interest margin is derived by dividing net interest income by average total earning assets.
Noninterest Income
Noninterest income was $335,400 during the three months ended September 30,
2002, as compared to $285,000 for the same period in 2001, representing a 17.7%
increase over the prior period. During the nine months ended September 30, 2002,
noninterest income was $983,100, representing an 13.8% increase over the
$863,600 earned during the same period in 2001. The improvement in noninterest
income resulted from increases in deposit account and check card fees associated
with growth in deposit accounts and use of the Bank's check card product.
Provision for Loan Losses
Provision for loan losses was $84,000 for the three months ended September 30,
2002, as compared to $58,500 for the same period of 2001, while the provision
for loan losses was $241,700 for the nine months ended September 30, 2002, as
compared to $163,500 for the same 2001 period. See Asset Quality for additional
discussion relating to the allowance for loan losses.
Noninterest Expense
Noninterest expense was $1.04 million during the three months ended September
30, 2002, an increase of 5.8% over the $987,300 incurred during the same period
of 2001, while noninterest expense increased 4.6% to $3.02 million during the
nine months ended September 30, 2002, as compared to $2.89 million for the same
period of 2001. This increase resulted from normal operating activities related
to Company growth since September 2001.
Financial Condition
During the nine months ended September 30, 2002, the Company's assets increased
by $22.3 million from $142.9 million at December 31, 2001 to $165.2 million at
September 30, 2002. Net loans grew $9.1 million and cash and investments
increased $12.3 million during the period. Continued expansion of commercial
banking relationships, increased loan officer production and the low interest
rate environment contributed to loan growth, while excess liquidity generated by
deposit growth drove investment security growth.
Deposits increased $20.8 million during the nine months ended September 30,
2002. Interest-bearing demand and savings deposit account balances and
noninterest-bearing demand deposit account balance grew $12.5 million and $2.4
million, respectively, during the period, while time deposits increased $5.8
million during the period. Federal Home Loan Bank advances decreased slightly
during the period from $817,000 at December 31, 2001 to $766,700 at September
30, 2002.
Stockholders' equity was $17.7 million at September 30, 2002, compared to $16.3
million at December 31, 2001. Net income of $1.33 million offset the payment of
$169,400 ($0.10 per share) in common stock dividends and the repurchase of 5,000
shares of the Company's common stock at an average price of $9.66.
During April 2002, the Company declared a $0.03 per share quarterly cash
dividend on its common stock paid on May 1, 2002 to shareholders of record on
April 15, 2002. During July 2002, the Company declared a $0.04 per share
quarterly cash dividend on its common stock paid on August 1, 2002 to
shareholders of record on July 15, 2002. During October 2002, the Company
declared a $0.04 per share quarterly cash dividend on its common stock payable
on November 15, 2002 to shareholders of
record on November 1, 2002.
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 $201,000 at September 30, 2002, compared to
$533,000 at December 31, 2001. As to nonaccrual loans existing at September 30,
2002, approximately $7,600 of interest income would have been recognized during
the nine months then ended if interest thereon had accrued. During the nine
months ended September 30, 2002, the Company foreclosed on collateral relating
to loans totaling approximately $300,000 to one borrower that were previously in
nonaccrual status. The sale of the existing collateral upon and subsequent to
the foreclosure date resulted in the full recovery of nonaccrual interest, late
charges and selling costs. At September 30, 2002 and December 31, 2001, no
significant loans exist that management has identified 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.
At September 30, 2002, all loans 60 days or more delinquent, including
nonperforming loans, totaled $648,000. In addition, other performing loans,
totaling $967,000, existed that have 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.
The following table details information concerning nonaccrual and past due
loans, as well as foreclosed assets.
Nonperforming Assets
September 30, December 31,
(In Thousands) 2002 2001
--------------- -----------------
Nonaccrual loans:
Commercial $ 15 $ -
Real estate mortgage 152 453
Home equity lines of credit 9 22
Consumer 25 58
--------------- -----------------
Total nonaccrual loans 201 533
Other real estate owned - -
--------------- -----------------
Total nonperforming assets $ 201 $ 533
=============== =================
Loans past due 90 or more days
accruing interest - -
Allowance for loan losses to
nonaccrual loans 771.64% 248.78%
Nonperforming assets to period end
loans and other real estate owned 0.18% 0.51%
Set forth below is a table detailing the allowance for loan losses for the
periods indicated.
Allowance for Loan Losses
Nine Months Ended September 30,
-------------------------------------
(In Thousands) 2002 2001
--------------- -----------------
Balance, beginning of period $ 1,326 $ 1,336
Loans charged off:
Commercial - -
Real estate mortgage - (282)
Consumer (40) (45)
--------------- -----------------
Total loans charged-off (40) (327)
--------------- -----------------
Recoveries:
Commercial - -
Real estate mortgage - -
Consumer 23 6
--------------- -----------------
Total recoveries 23 6
--------------- -----------------
Net recoveries (charge-offs) (17) (321)
Provision for loan losses 242 163
--------------- -----------------
Balance, end of period $ 1,551 $ 1,178
=============== =================
Allowance for loan losses to loans
outstanding at end of period 1.35% 1.20%
Allowance for loan losses to nonaccrual
loans outstanding at end of period 771.64% 189.39%
Net charge-offs to average loans
outstanding during period -0.02% -0.34%
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, 2002, the Company had outstanding loan and line of credit
commitments of $27.9 million. Scheduled maturities of certificate of deposits
during the twelve months following September 30, 2002 amounted to $52.4 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 increased $5.3 million for the nine months ended
September 30, 2002, compared to an increase of $5.4 million for the nine months
ended September 30, 2001. Net cash provided by operating activities was $1.8
million for the nine months ended September 30, 2002, compared to $1.5 million
during the same period of 2001. This improvement reflects the increase in net
income over the prior period.
Net cash used by investing activities was $17.1 million during the nine months
ended September 30, 2002, compared to net cash used by investing activities of
$1.4 million for the nine months ended September 30, 2001. The fluctuation in
these amounts resulted primarily from increased loan growth and an increase in
liquidity available for investment purposes created by deposit growth during
2002.
Net cash provided by financing activities was $20.5 million for the nine months
ended September 30, 2002, compared to net cash provided by financing activities
of $5.3 million for the nine months ended September 30, 2001. The fluctuations
in amounts during these periods were primarily the result of stronger deposit
growth during 2002 versus 2001, and greater repayments of borrowings with the
Federal Home Loan Bank and in stock repurchase activity during the 2001 period
versus 2002.
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. Additionally, certain
restrictions exist on dividends paid and loans or advances made by the Bank to
the Company. The total amount of dividends that may be paid at any date is
generally limited to the retained earnings for the Bank, and loans and advances
are limited to 10 percent of the Bank's capital and surplus on a secured basis.
During the nine months ended September 30, 2002, the Bank paid $500,000 in
dividends to the Company to fund operations, pay shareholder dividends and to
purchase real estate for the Company's planned operations center. At September
30, 2002, the Bank's retained earnings available for the payment of dividends
was $1.86 million. 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, 2002, the Company meets all capital
adequacy requirements to which it is subject.
The following table details the components of Tier 1 and Tier 2 capital and
related ratios at September 30, 2002 and December 31, 2001.
Analysis of Capital
September 30, December 31,
(In Thousands) 2002 2001
------------------ -------------------
Tier 1 Capital:
Common stock $ 560 $ 560
Additional paid-in capital 2,654 2,677
Retained earnings 14,021 12,860
Comprehensive income 451 164
------------------ -------------------
Total capital (GAAP) 17,686 16,261
Less: Intangibles (30) (30)
Net unrealized gain on debt and equity securities (451) (164)
Net unrealized losses on equity securities (109) (137)
------------------ -------------------
Total Tier 1 capital 17,096 15,930
Tier 2 Capital:
Allowable allowances for loan losses 1,284 1,232
================== ===================
Total Tier 2 capital $ 18,380 $ 17,162
================== ===================
Risk-weighted assets $ 106,165 $ 101,638
Capital Ratios (1):
Tier 1 risk-based capital ratio 16.10% 15.67%
Total risk-based capital ratio 17.31% 16.89%
Tier 1 capital to average adjusted
total assets 11.01% 11.30%
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.
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 interest
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, 2002 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.
Interest Sensitivity Analysis
September 30, 2002
---------------------------------------------------------------------------------
Within 91-365 1 to 5 Over
(In Thousands) 90 Days Days Years 5 Years Total
------------- ------------- ------------- ------------- -------------
Interest-Earning Assets:
Loans (1) $ 22,875 $ 12,766 $ 54,729 $ 24,405 $ 114,775
Securities 2,996 4,070 27,040 1,082 35,188
Money market and other
short term securities 6,764 - - - 6,764
------------- ------------- ------------- ------------- -------------
Total earning assets $ 32,635 $ 16,836 $ 81,769 $ 25,487 $ 156,727
============= ============= ============= ============= =============
Cumulative earning assets $ 32,635 $ 49,471 $ 131,240 $ 156,727 $ 156,727
============= ============= ============= ============= =============
Interest-Bearing Liabilities:
Money market savings $ 15,142 $ - $ - $ - $ 15,142
Interest checking (2) - - 19,098 - 19,098
Savings (2) - - 15,961 - 15,961
Certificates of deposit 17,145 35,243 24,475 2,737 79,600
FHLB advances - - - 767 767
-------------- ------------- ------------- ------------- -------------
Total interest-bearing liabilities $ 32,287 $ 35,243 $ 59,534 $ 3,504 $ 130,568
============== ============== ============= ============= =============
Cumulative interest-bearing
liabilities $ 32,287 $ 67,530 $ 127,064 $ 130,568 $ 130,568
============== ============== ============= ============= =============
Period gap $ 348 $ (18,407) $ 22,235 $ 21,983 $ 26,159
Cumulative gap $ 348 $ (18,059) $ 4,176 $ 26,159 $ 26,159
Ratio of cumulative interest-
earning assets to interest-
bearing liabilities 101.08% 73.26% 103.29% 120.03% 120.03%
Ratio of cumulative gap to total
earning assets 0.22% (11.52%) 2.66% 16.69% 16.69%
(1) Includes nonaccrual loans of $201,000, 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.
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 147, Acquisitions of Certain Financial
Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9 (SFAS 147), in October 2002. SFAS 147 removes the
acquisition of financial institutions from the scope of both SFAS 72 and
Interpretation 9, and requires that those transactions be accounted for in
accordance with SFAS 141, Business Combinations and SFAS 142, Goodwill and Other
Intangible Assets. Thus the requirement in paragraph 5 of SFAS 72 to recognize
(and subsequently amortize) any excess of the fair value of liabilities assumed
over the fair value of tangible and identifiable intangible assets acquired as
an unidentifiable intangible asset no longer applies to acquisitions within the
scope of this statement. Additionally, this statement amends SFAS 144,
Accounting for Impairment or Disposal of Long-Lived Assets, to include in its
scope long-term customer-relationship intangible assets of financial
institutions. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS 144 requires for other long-lived assets that
are held and used. The provisions of this Statement are effective for
transactions dated on or after October 1, 2002.
Item 3 - Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report. Based on that evaluation, our principal executive officer and principal
financial officer have concluded that these controls and procedures are
effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
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
(a) Certifications pursuant to subsections 302 and 906 of the Sarbanes-
Oxley Act of 2002.
(b) Form 8-K was filed during the most recent quarter relative to our
purchase of a Susquehanna Bank branch in Salisbury, Maryland.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Scott C. Harvard November 13, 2002
- ---------------------------------------------------------------
Scott C. Harvard
President and
Chief Executive Officer
/s/ Steven M. Belote November 13, 2002
- ---------------------------------------------------------------
Steven M. Belote
Vice President and
Chief Financial Officer