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-Q and Rule 10-01 of Regulation S-X. 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, 2007 are not necessarily indicative of the
results that may be expected for any other interim period or the entire year
ending December 31, 2007. 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-K for the year ended December 31, 2006.
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.
Certain reclassifications of the prior period's information have been made to
conform to the September 30, 2007 presentation.
During the quarter ended September 30, 2007, the Bank sold a branch facility and
an adjoining investment property for $375,000, resulting in a net gain of
$289,000. The Bank accounted for the sale using the installment method in
accordance with FASB Statement No. 66.
NOTE 6 - SUBSEQUENT EVENT
During October 2007, the Company declared a $0.08 per share quarterly cash
dividend on its common stock payable on November 1, 2007 to shareholders of
record on October 23, 2007.
Item 2 - Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations
Results of Operations
General
The Company's net income for the three months ended September 30, 2007 was
$730,400, or $0.29 per diluted share, representing an 8.9% increase over
earnings of $670,900, or $0.27 per diluted share, for the same period of 2006.
Earnings for the nine months ended September 30, 2007 were $1.94 million, or
$0.77 per diluted share, compared to $2.10 million, or $.83 per diluted share,
for the 2006 nine month period.
During the third quarter, the financial markets experienced significant turmoil,
primarily resulting from fallout caused by the subprime mortgage market. This
turmoil contributed to the Federal Reserve's decision to lower the fed funds
target rate by 50 basis points during September. Although the Company has not
realized the full impact of the rate cut, it continued to benefit from upward
rate adjustments on adjustable rate mortgages and lower costing wholesale
funding opportunities during the quarter.
Despite a continuing soft residential real estate market, the Bank was able to
generate loan growth during the quarter. Outstanding loan balances on September
30, 2007 were $216.8 million, compared to $213.7 million and $209.7 million at
June 30, 2007 and September 30, 2006 respectively. The Bank's asset quality
remained strong during the quarter with a non current loan to total loan ratio
of 0.75% at September 30, 2007, while the Bank's allowance for loan losses to
period end loans ratio was 1.32%, representing levels management considers
manageable and commensurate with the risk existing in the Bank's loan portfolio.
The Company is progressing on several strategic initiatives it has undertaken to
position itself for future growth and to capitalize on the changing environment
in its banking markets. During September, the Bank opened its eighth branch
location in Pocomoke City, Maryland. This market offers a great opportunity for
the Bank to expand its footprint while complimenting the Bank's existing
markets. In Salisbury, Maryland, the Bank has begun the site work for a new full
service banking facility on an existing branch site. Finally, the Bank has
completed the design phase and has begun the bidding process for a new full
service banking facility in its Cheriton, Virginia market that will be located
near the entrance to the Bay Creek Community in Cape Charles, Virginia and will
provide a better facility to serve Northampton County.
Net Interest Income
Net interest margin improvement continued during the third quarter as
anticipation of the Federal Reserve's actions heightened, adjustable rate
mortgage loans adjusted upward and lower-costing wholesale funding opportunities
became available. Accordingly, the Company's net interest margin was 3.74% and
3.62% for the three and nine months ended September 30, 2007, respectively. The
quarterly margin represents a 28 basis point increase since the first quarter of
2007. Also contributing to the improved margin was the successful introduction
of several new products and promotions initiated by the bank to attract new
lower costing checking accounts. As a result, net interest income was $2.29
million and $6.57 million, respectively, during the three and nine month periods
ended September 30, 2007, compared to $2.08 million and $6.37 million,
respectively, during the same periods of 2006.
Average earning assets for the nine months ended September 2007 increased $5.1
million over the September 2006 period. Growth of $7.3 million occurred in
average loans while average investments declined $2.2 million. The Bank
continues to experience the majority of its loan growth in the residential real
estate and commercial sectors, in spite of a decline in the number of
residential properties being sold. Although the investment markets have improved
during 2007, liquidity demands generated by the loan growth resulted in the
decline in investment balances during the period.
Average total deposits increased to $202.1 million during the period, compared
to $196.5 million during the 2006 period. Growing demand deposit accounts
continues to be a challenge in the current banking environment as competition
for core deposits has intensified. Average interest-bearing checking and savings
demand deposits declined $3.3 million when compared to the September 2006 nine
month period, while noninterest-bearing demand deposits experienced nominal
growth of just under $1.0 million during the period. The Bank used retail and
brokered time deposits to offset liquidity shortfalls, resulting in an increase
of $8.0 million in these average balances during the comparable periods.
Although pricing considerations made brokered time deposits more appealing than
Federal Home Loan Bank ("FHLB") advances during most of 2006 and early 2007,
recent FHLB pricing has improved and the Bank is again using them as a viable
funding alternative. Average FHLB advances declined $2.0 million during the
September 2007 nine month period as compared to the September 2006 period.
Interest and dividend income improved to $4.16 million and $12.14 million for
the three and nine month periods ended September 30, 2007, representing
increases of 8.1% and 9.2%, respectively, over the comparable 2006 amounts. A
$7.3 million increase in average loans outstanding and repricing of adjustable
rate mortgage loans contributed to the increase in interest and dividend income.
Yields on earning assets increased 45 basis points to 6.66% during the September
2007 period which was comprised of 28 and 45 basis points increases in yields on
investment securities and loans, respectively.
Interest expense for the three and nine months ended September 30, 2007 was
$1.87 million and $5.58 million, respectively, representing an increase of 5.7%
and 17.2%, respectively, over comparable 2006 amounts. The June 2007 quarterly
and six month comparisons had increases of 13.1% and 24.1%, respectively, over
the comparable 2006 periods. Therefore, growth in interest expense slowed during
the September 2007 quarter when compared to the June 2007 period. The costs of
total interest-bearing liabilities increased 49 basis points during the nine
months ended September 30, 2007 as compared to the 2006 comparable period.
Although the 45 basis point increase in yields on earnings assets did not fully
offset the increase in funding costs, the gap has significantly improved from 22
basis points reflected in the June 2007 to June 2006 six month comparison to the
4 basis points existing in the September 2007 to September 2006 nine month
comparison. This improvement reflects a leveling of funding costs during the
2007 third quarter. The interest rate environment improved during the third
quarter with the slope of the yield curve taking a more positive direction.
Additionally, the Bank continues to generate more growth in several new products
and promotions initiated during 2007 to attract new lower costing checking
accounts.
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, and 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 Ended September 30,
--------------------------------------------------------------------------
2007 2006
------------------------------------ ------------------------------------
Average Income/ Yield/ Average Income/ Yield/
(Dollars In Thousands) Balance Expense Rate Balance Expense Rate
----------- ----------- ----------- ----------- ----------- -----------
Assets:
Securities (1) $ 29,619 $ 1,104 4.97% $ 31,830 $ 1,119 4.69%
Loans (net of unearned income):
Real estate mortgage 120,468 5,700 6.31% 114,076 5,024 5.87%
Commercial 75,648 4,262 7.51% 73,078 3,827 6.98%
Home equity lines 13,796 879 8.50% 15,584 932 7.97%
Consumer 3,042 209 9.16% 2,950 201 9.08%
--------- --------- ---------- ---------
Total loans 212,954 11,050 6.92% 205,688 9,984 6.47%
Interest-bearing deposits
in other banks 2,494 80 4.28% 2,433 76 4.16%
--------- ----------
--------- ---------
Total earning assets 245,067 12,234 6.66% 239,951 11,179 6.21%
--------- ---------
Less: allowance for loan losses (2,866) (2,874)
Total nonearning assets 20,122 18,830
--------- ----------
Total assets $ 262,323 $ 255,907
========= ==========
Liabilities
Interest-bearing deposits:
Checking and savings $ 65,643 $ 708 1.44% $ 68,988 $ 449 0.87%
Time deposits 108,597 3,651 4.48% 100,557 3,051 4.05%
--------- --------- ---------- ---------
Total interest-bearing
deposits 174,240 4,359 3.34% 169,545 3,500 2.75%
FHLB advances 32,424 1,216 5.00% 34,423 1,255 4.86%
--------- --------- ---------- ---------
Total interest-bearing
liabilities 206,664 5,575 3.60% 203,968 4,755 3.11%
--------- ---------
Non-interest bearing liabilities:
Demand deposits 27,889 26,957
Other liabilities 846 392
--------- ----------
Total liabilities 235,399 231,317
Stockholders' equity 26,924 24,590
--------- ----------
Total liabilities and stockholders'
equity $ 262,323 $ 255,907
========= ==========
Net interest income (1) $ 6,659 $ 6,424
========= =========
Interest rate spread (1)(2)(3) 3.06% 3.10%
Net interest margin (1)(4) 3.62% 3.57%
(1) Tax equivalent basis. The tax equivalent adjustment to net interest income was $94,000 and $57,000 for the nine months
ended September 30, 2007 and 2006, 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.
|
Interest Sensitivity
Management evaluates interest rate sensitivity periodically through the use of
an asset/liability management reporting model. Using this model, management
determines the overall magnitude of interest sensitivity risk and then
formulates strategies 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 interest rate trends, the state of the local
and national economy, and other financial and business risk factors.
An important element of the Company's asset/liability management process is
monitoring its 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 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 an asset or liability at
maturity, or by adjusting the interest rate during the life of an asset or
liability. Matching the amounts of assets and liabilities maturing in the same
time interval helps to hedge the risk and minimize the impact on net interest
income in periods of rising or falling interest rates.
The following table presents the Company's interest sensitivity position at
September 30, 2007. 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, 2007
--------------------------------------------------------------------------------
Within 91-365 1 to 5 Over
(Dollars In Thousands) 90 Days Days Years 5 Years Total
-------------- --------------- ---------------- ------------- -------------
Interest-Earning Assets:
Loans (1) $ 53,364 $ 70,474 $ 86,206 $ 6,756 $ 216,800
Securities (2) 2,995 1,998 14,377 7,487 26,857
Money market and other
short term securities 5,179 - - - 5,179
Other earning assets - - - 3,679 3,679
-------------- --------------- ---------------- ------------- --------------
Total earning assets $ 61,538 $ 72,472 $ 100,583 $ 17,922 $ 252,515
============== =============== ================ ============= ==============
Cumulative earning assets $ 61,538 $ 134,010 $ 234,593 $ 252,515 $ 252,515
============== =============== ================ ============= ==============
Interest-Bearing Liabilities:
Money market savings $ 16,688 $ - $ - $ - $ 16,688
Interest checking (3) - - 30,294 - 30,294
Savings (3) 2,508 926 16,062 - 19,496
Certificates of deposit 37,766 42,229 23,539 881 104,415
FHLB advances 15,200 18,000 7,000 433 40,633
-------------- --------------- ---------------- ------------- --------------
Total interest-bearing liabilities $ 72,162 $ 61,155 $ 76,895 $ 1,314 $ 211,526
============== =============== ================ ============= ==============
Cumulative interest-bearing
liabilities $ 72,162 $ 133,317 $ 210,212 $ 211,526 $ 211,526
============== =============== ================ ============= ==============
Period gap $ (10,624) $ 11,317 $ 23,688 $ 16,608 $ 40,989
Cumulative gap $ (10,624) $ 693 $ 24,381 $ 40,989 $ 40,989
Ratio of cumulative interest-earning
assets to interest-bearing
liabilities 85.28% 100.52% 111.60% 119.38% 119.38%
Ratio of cumulative gap to total
earning assets (4.21%) 0.27% 9.66% 16.23% 16.23%
(1) Includes nonaccrual loans of $709,000, which are spread throughout the categories.
(2) Management has determined that interest checking and savings accounts are not as sensitive to changes in related market rates
and, therefore, they are placed in the 1 to 5 years category.
|
Noninterest Income
The Company's noninterest income was $811,900 for the September 2007 quarter,
compared to $818,200 for the September 2006 quarter end, while non interest
income was $2.45 million and $2.40 million for the nine months ended September
30, 2007 and 2006, respectively. The Bank's mortgage banking division has posted
significant gains in fee income during 2007 with an increase from $78,700 during
the 2006 nine month period to $159,300 during the 2007 comparable period. While
fees levied on insufficient funds continues to be down from the 2006 period,
other deposit fee categories have experienced substantial growth as the Bank
increases the number of retail and commercial deposit relationships.
Provision for Loan Losses
With asset quality remaining strong during the last several quarters, the
Company has not been required to make significant contributions to the provision
for loan loss. The $24,100 and $50,200 contributed during the September 2007 and
2006 nine month periods, respectively, primarily related to overdraft deposit
accounts. Management considers the allowance for loan loss to be commensurate
with the risk existing in the Bank's loan portfolio. See Asset Quality for
additional discussion relating to the allowance for loan losses and related risk
in the loan portfolio.
Noninterest Expense
The Company's noninterest expense was $2.06 million during the September 2007
quarter, compared to $1.91 million during the 2006 three month period. Excluding
the 2007 second quarter branch property write off of $148,000, noninterest
expense for the nine months ended September 30, 2007 was $6.13 million, compared
to $5.67 million during the 2006 nine month period. The expense for the first
nine months of 2007 included additional personnel employed to enhance the
Company's loan administration, operations, mortgage banking and internet banking
divisions, as well as, normal annual salary and benefit adjustments. These
additional personnel and enhancements should enable the Company to further
capitalize on the growth opportunities existing in its markets. Fluctuations in
other expense categories were fairly nominal when compared to the 2006 period.
Financial Condition
The Company's total assets were $269.1 million at September 30, 2007, compared
to $260.7 million at December 31, 2006. The Company experienced 2.1% growth in
assets during the third quarter, spearheaded by a $3.1 million increase in net
loans from June 2007 to September 2007. Although the real estate market
continues to be weak the Bank is still experiencing activity in the residential
real estate and commercial lending sectors as a result of opportunities created
by recent bank mergers and bank consolidation.
Deposits were $199.7 million at September 30, 2007, compared to $198.1 million
at December 31, 2006. Noninterest-bearing deposits grew $3.2 million, or 12.6%,
during the first nine months of 2007, while interest-bearing deposits were down
$1.7 million. $2.9 million in brokered deposits matured during the second
quarter which contributed to the decline in interest-bearing deposits.
Stockholders' equity was $27.5 million at September 30, 2007, representing an
increase of $1.33 million since December 31, 2006. This increase is made up of
comprehensive income of $1.83 million, consisting primarily of $1.94 million of
net income, offset by common stock dividends of $524,700 ($0.21 per share)
during the period.
During October 2007, the Company declared a $0.08 per share quarterly cash
dividend on its common stock payable on November 1, 2007 to shareholders of
record on October 23, 2007.
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 until it has remained current for six months.
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 $709,000 at September 30, 2007, compared to
$931,000 at December 31, 2006. As to nonaccrual loans existing at September 30,
2007, approximately $11,000 of interest income would have been recognized during
the nine months then ended if interest thereon had accrued. Included in
nonaccrual loans are two loans totaling $146,000 to the same borrower that the
Bank 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. The Bank has determined that its total exposure on these loans is
approximately $139,000 and, accordingly, has allocated a specific reserve in
that amount. Although these loans were current at September 30, 2007, the Bank
will recognize interest income on a cash basis going forward.
At September 30, 2007, all loans 60 days or more delinquent, including
nonperforming loans, totaled $1.1 million. In addition, other performing loans,
totaling $7.7 million, existed that were current, but had other potential
weaknesses that management considers to warrant additional monitoring. Loans in
this category, along with the delinquent loans, are subject to 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,
(Dollars In Thousands) 2007 2006
---------------------- ------------------------
Nonaccrual loans:
Commercial $ 60 $ 73
Real estate mortgage 501 832
Home equity lines of credit 143 24
Consumer 5 2
------------------ -------------------
Total nonaccrual loans 709 931
Other real estate owned - -
------------------ -------------------
Total nonperforming assets $ 709 $ 931
================== ===================
Loans past due 90 or more days
accruing interest - -
Allowance for loan losses to
nonaccrual loans 402.54% 308.59%
Nonperforming assets to period end
loans and other real estate owned 0.33% 0.44%
|
Set forth below is a table detailing the allowance for loan losses for the
periods indicated.
Allowance for Loan Losses
September 30,
------------------------------------------------
(Dollars In Thousands) 2007 2006
---------------------- ------------------------
Balance, beginning of period $ 2,873 $ 2,851
Loans charged off:
Commercial - -
Real estate mortgage - -
Consumer (119) (120)
---------------------- ------------------------
Total loans charged-off (119) (120)
---------------------- ------------------------
Recoveries:
Commercial - 19
Real estate mortgage - -
Consumer 76 74
---------------------- ------------------------
Total recoveries 76 93
---------------------- ------------------------
Net recoveries (charge-offs) (43) (27)
Provision for loan losses 24 50
---------------------- ------------------------
Balance, end of period $ 2,854 $ 2,874
====================== ========================
Allowance for loan losses to loans
outstanding at end of period 1.32% 1.37%
Allowance for loan losses to nonaccrual
loans outstanding at end of period 402.54% 414.12%
Net charge-offs (recoveries) to average loans
outstanding during period 0.020% 0.050%
|
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. In addition to
liquid assets, the Company maintains several lines of credit with other
institutions, the largest of which is with the Federal Home Loan Bank of
Atlanta, and is able to draw on other wholesale funding sources, such as the
brokered certificate of deposit market, to support liquidity. The Company's
ability to obtain deposits and purchase funds at favorable rates determines its
liability liquidity.
At September 30, 2007, the Company had outstanding loan, line of credit and
letter of credit commitments of $53.3 million. Scheduled maturities of
certificate of deposits during the twelve months following September 30, 2007
amounted to $80.0 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 $5.07 million for the nine months
ended September 30, 2007, compared to an increase of $2.80 million for the nine
months ended September 30, 2006. Net cash from operating activities was $2.33
million for the 2007 nine month period, compared to $2.55 million during the
same period of 2006. The changes reflect fluctuations in normal operating
activities.
Net cash used in investing activities was $3.73 million during the nine months
ended September 30, 2007, compared to net cash used in investing activities of
$13.07 million for the 2006 nine month period. Stronger loan growth and more
investing activity during the first nine months of 2006 than what occurred
during 2007 accounted for the majority of the difference.
Net cash from financing activities was $6.47 million for the nine months ended
September 30, 2007, compared to net cash from financing activities of $13.33
million for the 2006 nine month period. The Bank was steadily growing time
deposits during the first nine months of 2006 to meet liquidity needs whereas
the Bank has been less aggressive in this area in 2007 and more active in
growing demand deposits.
The Company is subject to various capital requirements administered by the
regulatory 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.
The Bank paid $700,000 of dividends to the Company during the first nine months
of 2007, while it paid $1.0 million in dividends to the Company during the nine
months ended September 30, 2006. At September 30, 2007, the Bank's retained
earnings available for the payment of dividends was $4.0 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, 2007, 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, 2007 and December 31, 2006.
Analysis of Capital
September 30, December 31,
(Dollars In Thousands) 2007 2006
------------------- ------------------
Tier 1 Capital:
Common stock $ 688 $ 687
Additional paid-in capital 8,400 8,373
Retained earnings 18,371 16,953
Accumulated other comprehensive income 2 113
---------------- ---------------
Total capital (GAAP) 27,461 26,126
Less: Intangibles (355) (402)
Net unrealized gain on debt and equity securities (2) (113)
---------------- ---------------
Total Tier 1 capital 27,104 25,611
Tier 2 Capital:
Allowable allowances for loan losses 2,307 2,269
Net unrealized gains on equity securities 33 180
---------------- ---------------
Total Tier 2 capital $ 29,444 $ 28,060
================ ===============
Risk-weighted assets $ 188,908 $ 185,991
Capital Ratios (1):
Tier 1 risk-based capital ratio 14.35% 13.77%
Total risk-based capital ratio 15.59% 15.09%
Tier 1 capital to average adjusted
total assets 10.35% 9.93%
|
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The Company uses a third party provider to perform computer modeling
methodologies that assist in determining the overall magnitude of interest
sensitivity risk. Based on these methodologies, management formulates policies
governing asset generation and pricing, funding sources and pricing, and
off-balance-sheet commitments in order to reduce sensitivity risk. Management
considers the current interest rate environment, the state of the local and
national economy and other financial and business risk factors when making these
decisions.
The modeling methodologies used measure interest rate sensitivity by analyzing
the potential impact on net interest income under various interest rate
scenarios. One such scenario would assume a hypothetical 200 basis point
instantaneous and parallel shift in the interest rate yield curve. Accordingly,
management modeled the impact of a 200 basis point decline in interest rates and
a 200 basis point increase in interest rates at September 30, 2007. In the
model, a 200 basis point instantaneous and parallel decrease in the yield curve
in interest rates would cause net interest income to decrease by $167,000 while
a 200 basis point instantaneous and parallel increase in the yield curve in
interest rates would cause net interest income to decrease by $43,000.
The computer model uses a standard algebraic formula for calculating present
value. The calculation discounts the future cash flows of the Company's
portfolio of interest rate sensitive instruments to present value utilizing
techniques designed to approximate current market rates for securities, current
offering rates for loans, and the cost of alternative funding for the given
maturity of deposits and then assumes an instantaneous and parallel shift in
these rates. The difference between these numbers represents the resulting
hypothetical change in the fair value of interest rate sensitive instruments.
As with any modeling techniques, certain limitations and shortcomings are
inherent in the Company's methodology. Significant assumptions must be made in
the calculation including: (1) growth in volume or balance sheet mix; (2)
constant market interest rates reflecting the average rate from the last month
of the given quarter; and (3) pricing spreads to market rates derived from an
historical analysis, or from assumptions by instrument type. Additionally, the
computations do not contemplate certain actions management could undertake in
response to changes in interest rates.
Item 4 - 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 as of the end of the quarter. 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.
Controls and other procedures 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 1A - Risk Factors
There has been no material changes in the risk factors as previously disclosed
in response to Item 1A. Part I of the Company's December 31, 2006 Form 10-K.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
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
(a) Certifications pursuant to subsections 302 and 906 of the
Sarbanes-Oxley Act of 2002.
(b) Form 8-K was filed during July 2007 relative to the Company's June 30, 2007
earnings release dated July 17, 2007. (c) Form 8-K was filed during July 2007
relative to the Bank's plans to open a new banking location in Pocomoke,
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, 2007
-------------------------------------------------------------
Scott C. Harvard
President and
Chief Executive Officer
/s/ Steven M. Belote November 13, 2007
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Steven M. Belote
Senior Vice President and
Chief Financial Officer
|
Exhibit 31.1