SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED June 30, 1997
------------------------------
SHORE BANCSHARES, INC.
109 North Commerce Street
Post Office Box 400
Centreville, Maryland 21617-0400
Telephone: (410) 758-1600
IRS Employer Identification Number: 52-1974638
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
Indicate the number of shares of outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
As of August 8, 1997, there were 1,007,424
<PAGE>
SHORE BANCSHARES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets -- June 30, 1997 and December 31, 1996
Statements of Income -- Three months ended June 30, 1997 and 1996 and
the six months ended June 30, 1997 and 1996.
Statements of Cash Flows -- Six months ended June 30, 1997 and 1996 and
the twelve months ended December 31, 1996
Notes to Financial Statements -- June 30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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<PAGE>
PART 1
FINANCIAL INFORMATION
<PAGE>
Item 1. Financial Information
CONSOLIDATED BALANCE SHEETS
SHORE BANCSHARES, INC.
<TABLE>
<CAPTION>
June 30, December 31,
Dollars in thousands 1997 1996
(Unaudited)
----------------- -----------------
<S><C>
ASSETS
Cash and due from banks $ 6,463 $ 4,873
Federal funds sold 4,754 5,390
Securities (Note 2)
Held to Maturity 32,712 32,462
Available for Sale 8,715 11,191
Loans, less allowance for credit losses (Note 3) 107,093 87,389
Premises and fixed assets 2,895 2,153
Other real estate owned 63 -
Investments in unconsolidated subsidiaries 1,118 1,114
Accrued interest receivable 1,376 1,385
Net deferred tax assets and other assets 4,058 942
TOTAL ASSETS $ 169,247 $ 146,899
================= =================
LIABILITIES
Deposits
Non-interest bearing demand $ 16,856 $ 16,381
Interest bearing transaction 16,872 16,172
Savings and money market 40,682 31,799
Time, $100,000 or more 14,111 16,680
Other time 56,995 43,134
----------------- -----------------
Total deposits 145,516 124,166
----------------- -----------------
Accrued interest payable 180 158
Other liabilities 949 479
----------------- -----------------
1,129 637
----------------- -----------------
Total liabilities 146,645 124,803
----------------- -----------------
COMMITMENTS
EQUITY CAPITAL
Common stock, par value $.01; authorized
10,000,000 shares, issued and outstanding
1,007,424 shares 10 10
Surplus 10,064 10,064
Retained earnings 12,609 12,087
Net unrealized holding gains (losses) on available
for sale securities (81) (65)
----------------- -----------------
Total stockholders' equity 22,602 22,096
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 169,247 $ 146,899
================= =================
</TABLE>
See Notes to Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SHORE BANCSHARES, INC.
<TABLE>
<CAPTION>
(UNAUDITED) Quarter Six Months Quarter Six Months
Dollars in thousands except per share data Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1997 1996 1996
----------------------------------------------------------------------
<S><C>
INTEREST INCOME
Interest and fee income on loans $ 2,439 $ 4,400 $ 2,065 $ 4,025
Interest and dividends on investment securities
Taxable securities 556 1,083 445 845
Tax-exempt securities 105 212 106 217
Interest on federal funds sold 45 136 74 173
----------------------------------------------------------------------
Total interest income 3,145 5,831 2,690 5,260
----------------------------------------------------------------------
INTEREST EXPENSE
Interest on certificates of deposit
of $100,000 or more 200 410 162 330
Interest on other deposits 1,187 2,124 922 1,851
Interest on federal funds purchased - - - -
----------------------------------------------------------------------
Total interest expense 1,387 2,534 1,084 2,181
----------------------------------------------------------------------
NET INTEREST INCOME 1,758 3,297 1,606 3,079
Provision for credit losses (Note 7) - - - -
----------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,758 3,297 1,606 3,079
----------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 168 329 169 314
Other noninterest income 33 61 30 64
Gains (losses) on securities 4 8 204 204
----------------------------------------------------------------------
Total noninterest income 205 398 403 582
----------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 546 1,058 465 933
Expenses of premises and fixed assets 114 265 127 270
Other noninterest expense 466 852 300 701
----------------------------------------------------------------------
Total noninterest expense 1,126 2,175 892 1,904
----------------------------------------------------------------------
INCOME BEFORE TAXES 838 1,521 1,117 1,757
Applicable income taxes 295 536 344 570
----------------------------------------------------------------------
NET INCOME $ 543 $ 985 $ 773 $ 1,187
======================================================================
Net Income Per Share $ 0.54 $ 0.98 $ 0.77 $ 1.18
Number of Shares Outstanding 1,007,424 1,007,424 1,007,424 1,007,424
</TABLE>
See Notes to the Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
SHORE BANCSHARES, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Year Six Months
Ended Ended Ended
June 30, December 31, June 30,
1997 1996 1996
------------------------------------------------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 985 $ 2,308 $ 1,187
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 102 296 130
Equity in net earnings of unconsolidated subsidiaries (26)
Provision for credit losses, net (91) 25 (17)
Deferred income tax benefits 60 -
Net (gains) losses on disposal of assets (8) (205) (204)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 9 (49) (56)
(Increase) decrease in other assets (853) 34 113
Increase (decrease) in interest payable 22 7 (10)
Increase (decrease) in other liabilities 82 (141) (38)
---------------------------------------------------------
Net cash provided by operating activities 248 2,309 1,105
---------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale or maturities of held-to-maturity
securities 3,055 11,529 7,215
Proceeds from sale or maturities of available-for-sale
securities 9,257 957 751
(Purchases) of held-to-maturity securities (3,294) (11,034) (4,882)
(Purchases) of available-for-securities (5,645) (7,988) (2,960)
Net (increase) decrease in loans 693 (1,963) (2,122)
Purchase of premises and equipment (690) (211) (127)
Proceeds from sale of premises and equipment 7
Investment in unconsolidated subsidary - (15)
Purchase of Kent S&L Assoc, net of cash acquired (2,799)
Acquire other real estate - - -
Proceeds from sales of other real estate 118
---------------------------------------------------------
Net cash provided by (used in) investing activities 577 (8,600) (2,125)
---------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, interest-
bearing transaction, and savings deposits 2,772 2,928 3,560
Net increase (decrease) in time deposits (2,180) 4,758 (1,169)
Cash dividends paid (463) (926) (353)
---------------------------------------------------------
Net cash provided by (used in) financing activities 129 6,760 2,038
---------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 954 469 1,018
Cash and cash equivalents, beginning 10,263 9,794 9,794
---------------------------------------------------------
Cash and cash equivalents, ending $ 11,217 $ 10,263 $ 10,812
=========================================================
Supplementary cash flow information:
Interest paid $ 2,511 $ 4,469 $ 2,197
Income taxes paid $ 282 $ 1,100 473
</TABLE>
All dollar amounts in thousands
<PAGE>
Note 1 - Financial Information
The unaudited interium consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interium financial
information and with the instructions to Form 10Q. In the opinion of management,
all necessary adjustments have been made for a fair presentation of financial
position and results of operations for the periods presented. Operating results
for the six month period ended June 30, 1997 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1997. For
further information, refer to the audited consolidated financial statements and
footnotes included in the 1996 Annual Report to Shareholders and Form 10.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SECURITIES
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
---------------------------------------------- -------------------------------------------
Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
---------------------------------------------- -------------------------------------------
<S><C>
U.S. Treasury securities $ 5,960 $ 5,955 $ 9,434 $ 9,458
U.S. Government agency and
corporation obligations issued by
U.S. Government sponsored
agencies $ 23,892 $ 23,872 99 100 $ 23,035 $ 23,057
Securities issued by states and
political subdivisions in the U.S.
a. General obligations 8,288 8,380 8,892 9,030
b. Revenue obligations 505 521 505 527
Mortgage-backed securities 27 30 423 429 30 34
Equity Securities
a. Investments in Mutual Funds 1,291 1,163 1,000 870
b. Other equity securites with
readily determinable fair values
c. All other equity securities 1,068 1,068 863 863
--------------------------------------------- --------------------------------------------
TOTAL SECURITIES $ 32,712 $ 32,803 $ 8,841 $ 8,715 $ 32,462 $ 32,648 $ 11,297 $ 11,191
============================================= ============================================
PLEDGED SECURITIES $ 13,784 $ 19,566
========= ========
</TABLE>
All dollar amounts in thousands
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 3 LOANS AND LEASE FINANCING RECEIVABLES
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31
1997 1996
------------------- -----------------
<S><C>
Loans secured by real estate
a. Construction and land development $ 3,052 $ 3,264
b. Secured by farmland (including farm
residential and other improvements) 4,559 3,877
c. Secured by 1-4 family residential properties
1. Revolving, open end loans 1,223 984
2. All others
(a) Secured by first liens 70,098 52,793
(b) Secured by junior liens 3,474 2,836
d. Secured by multi-family (5 or more)
residential properties
e. Secured by nonfarm nonresidential
properties 11,199 10,908
Loans to depository institutions
a. In commercial banks in the U. S.
b. To other depository institutions in the U. S.
c. To banks in foreign countries
Loans to finance agricultural production and
other loans to farmers 1,645 1,410
Commercial and industrial loans
a. To U. S. addressees (domicile) 6,785 6,329
Acceptances of other banks
Loans to individuals for household, family,
and other personal expenditures (includes
purchased paper)
a. Credit card and related plans 68 75
b. Other 6,560 6,555
Loans to foreign governments and official
institutions (including foreign central banks)
Obligations (other than securities) of states and
political subdivisions in the U. S. 20 27
Other loans
a. Loans for purchasing or carrying securities
(secured and unsecured)
b. All other loans 28 48
Less any unearned income on loans 191 212
---------------- ----------------
Total loans and leases, net of unearned income 108,520 88,892
Less allowance for loan and lease losses 1,427 1,503
---------------- ----------------
Total loans and leases, net of unearned income and
allowance for loan and lease losses $ 107,093 $ 87,389
================ ================
</TABLE>
All dollar amounts in thousands
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 4 CHARGE OFFS AND RECOVERIES AND CHANGE IN
ALLOWANCE FOR LOAN AND LEASE LOSSES
(UNAUDITED)
<TABLE>
<CAPTION>
I. CHARGE-OFFS AND RECOVERIES ON LOANS AND LEASES
June 30, 1997 December 31, 1996
Charge-offs Recoveries Charge-offs Recoveries
------------------------------- ---------------------------------
<S><C>
1. Real estate loans $ 22 $ - $ 10 $ 10
2. Installment loans 70 16 63 26
3. Credit cards and
related plans
4. Commercial (time and
demand) and all other
loans 17 2 5 67
------------------------------- --------------------------------
6. Total $ 109 $ 18 $ 78 $ 103
=============================== ================================
II. CHANGES IN ALLOWANCE FOR LOAN AND LEASE LOSSES
1. Balance at end of previous period $ 1,503 $ 1,478
2. Recoveries 18 103
3. Charge-offs (109) (78)
4. Provision for loan and lease losses - -
5. Adjustments 15
----------------- ---------------
6. Balance at end of current period $ 1,427 $ 1,503
================= ===============
7. Net charge-offs $ 91 $ 25
8. Average daily loan balance 98,925 87,803
9. Ratio-net of charge-offs to
average loans outstanding 0.09% 0.03%
</TABLE>
All dollar amounts in thousands
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Yields and Rates YTD 6/30/97 YTD 6/30/96
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S><C>
ASSETS
Interest Earning assets:
Money market investments:
Federal funds sold 5,158,390 136,148 5.32% 6,477,367 172,558 5.36%
Investment Securities:
U.S. Treasury securities
and obligations of U.S.
government agencies 32,007,965 1,017,137 6.41% 25,978,694 788,304 6.10%
Obligations of States and
political subdivisions 8,400,276 321,106 7.71% 8,574,774 329,216 7.72%
Taxable Municipals 512,815 20,242 7.96% 512,815 20,242 7.94%
All other investment securities 2,417,445 36,685 3.06% 1,089,602 27,728 5.12%
Federal Reserve Bank stock 302,250 9,068 6.05% 302,250 9,068 6.03%
-------------------------------------------- -------------------------------------
Total investment securities 43,640,751 1,404,238 6.49% 36,458,135 1,174,558 6.48%
Loans - net of unearned income
Commercial loans 9,271,536 485,915 10.57% 10,767,525 562,730 10.51%
Installment loans 5,209,275 260,686 10.09% 4,921,390 245,842 10.05%
Mortgage loans 84,443,987 3,653,432 8.72% 72,114,153 3,216,006 8.97%
-------------------------------------------- -------------------------------------
Total loans 98,924,798 4,400,033 8.97% 87,803,068 4,024,578 9.22%
-------------------------------------------- -------------------------------------
TOTAL INTEREST EARNING ASSETS 147,723,939 5,940,419 8.11% 130,738,570 5,371,694 8.26%
Cash and due from banks 3,897,486 3,465,795
Other assets 7,520,827 5,404,000
Allowance for loan and lease losses (1,469,286) (1,463,392)
-------------------------------------------- -------------------------------------
TOTAL ASSETS 157,672,966 138,144,973
============================================ =====================================
LIABILITIES
Interest-bearing liabilities
Federal funds purchased - - 0.00% - - 0.00%
Super NOW accounts 16,371,886 243,319 3.00% 15,650,592 239,506 3.08%
Money market deposit accounts 20,225,294 334,063 3.33% 18,325,032 308,410 3.38%
Time, $100,000 or more 14,231,866 374,028 5.30% 10,848,770 294,022 5.45%
Other time deposits 37,439,886 965,186 5.20% 29,596,587 781,212 5.31%
IRA deposits 14,440,251 380,247 5.31% 14,566,547 361,833 5.00%
Savings deposits 15,349,455 236,788 3.11% 12,354,343 196,684 3.20%
-------------------------------------------- -------------------------------------
TOTAL INT-BEARING LIABILITIES 118,058,638 2,533,631 4.33% 101,341,871 2,181,667 4.33%
Demand deposits 15,491,419 14,814,783
Other liabilities 1,703,749 729,056
-------------------------------------------- -------------------------------------
Total liabilities 135,253,806 116,885,710
Stockholders' equity 22,419,160 21,259,263
-------------------------------------------- -------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 157,672,966 138,144,973
============================================ =====================================
Net interest income & interest rate spread 3,406,788 3.78% 3,190,027 3.93%
Net interest income as a % of earning assets 4.63% 4.89%
============================================ =====================================
</TABLE>
1. All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate of 34%, exclusive of the alternative
minimum tax rate and non deductible interest expense.
2. Loan fee income is included in interest income for each loan catagory and
yields are stated to include all.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion is designed to provide a better understanding of the
financial position of Shore Bancshares, Inc., and should be read in conjunction
with the December 31, 1996 audited consolidated financial statements and notes.
ORGANIZATIONAL BACKGROUND
On July 1, 1996, Shore Bancshares, Inc. (the Company) commenced
operations as the parent company of its sole subsidiary, The Centreville
National Bank of Maryland (the Bank) which has conducted the business of banking
since 1876. Since the Bank is the primary possession of the Company, the assets
and liabilites of the Company are made up almost entirely of the assets and
liabilites of the Bank. The same is true for the income and expense of the
Company. All data for the periods on and after July 1996 is presented in this
analysis in consolidated form and is compared to like data for the Bank for
prior years, restated to reflect the exchange of shares of Bank common stock for
Company shares.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported $985 thousand in net income for the six months
ended June 30, 1997 or $.98 per share compared to the six months ended June 30,
1996 net income of $1,187 thousand or $1.18 per share. Net interest income for
June 30, 1997 increased $218 thousand over the prior year. Net income as June
30, 1996 includes non-interest income of $204 thousand which was a gain on sale
of investment securities. In addition the current period absorbed additional
non-interest expense associated with the merger of Kent Savings and Loan
Association (Kent.)
NET INTEREST INCOME and NET INTEREST MARGIN
Net interest income is the principal source of earnings for a banking
company. It represents the difference between interest and fees earned on the
loan and investment portfolios and the interest paid on deposits. The quarter
ended June 30, 1997 has been characterized by stable interest rates. Because
deposits and loans and other investments reprice at different rates and as a
result of changes in volume and balance sheet growth resulting from the Kent
purchase, the Bank's net interest income, on a fully tax-equivalent basis,
increased in the first six months of 1997 compared to the same period in 1996.
Net interest income (on a tax equivalent basis) for June 30, 1997
increased by $218 thousand or 7.0% compared to the six months ended June 30,
1996. Interest rate spread is the difference between the average yield on
interest earning assets and the average rate paid on interest bearing
liabilities (deposits). Interest rate spread for the six months ended June 30,
1997, 1997 and 1996 was 3.78%, and 3.93%, respectively. Interest rate spread in
1997 decreased by .15% as a result of decreased in yield on earning assets of
.15% and no change in yield of interest bearing liabilities. Yield on deposits
remained at the same level in the first six months of 1997 compared to the same
period in 1996. The decrease in asset yield is attributed to mortgage
Page 1
<PAGE>
loan yield decreasing as a result of rate decreases on some loan products and a
lower yielding portfolio purchased from Kent. A decrease in net interest margin
was also reflected. Net interest margin is calculated as tax equivalent net
interest income divided by average earning assets and represents the Company's
net yield on its earning assets. As of June 30, 1997, the net interest margin
decreased to 4.63% from 4.89% as of June 30, 1996. See the table 1 titled
"Average Balances, Yields and Rates" for additional information.
Management and the Board of Directors monitor interest rates on a
regular basis to assess the Company's competitive position and to maintain a
reasonable and profitable interest rate spread. The Company also considers the
maturity distribution of loans, investments, and deposits and its effect on net
interest income as interest rates rise and fall over time.
PROVISION and ALLOWANCE FOR CREDIT LOSSES
For the quarter ended June 30, 1997 and 1996, the Bank recorded net
charge offs of $91 thousand and $17 thousand, respectively compared to net
recoveries of $25 thousand for the year ended December 31, 1996. Internal loan
review, in particular, has been effective in identifying problem credits and in
achieving timely recognition of potential and actual losses within the loan
portfolio. Improved overall credit quality and increased collection efforts have
also contributed to the immaterial amount of net charge offs in the first half
of 1997 and net recoveries in 1996.
Gross charge offs as of June 30, 1997 amounted to $109 thousand, $30
thousand for the same period in 1996 and $78 thousand for the year ended 1996,
the majority of which were installment loans. Efforts to collect charged off
loans continue, but successes are rare as evidenced by the relatively low amount
of recoveries, totaling only $18 thousand in 1997 $30 thousand for the same six
months in 1996 and $103 thousand for the year ended 1996.
The provision for credit losses has followed the same general trend as
the amount of charge offs. No provision for credit losses was charged to expense
in 1997 or 1996. The allowance for credit losses is maintained at a level
believed adequate by management to absorb estimated probable credit losses.
Management's quarterly evaluation of the adequacy of the allowance is based on
analysis of the loan portfolio and its known and inherent risks, assessment of
current economic conditions, diversification and size of the portfolio, adequacy
of the collateral, past and anticipated loss experience and the amount of
non-performing loans. The allowance for credit losses has remained relatively
unchanged despite the increase in outstanding loan balances. The allowance for
credit losses of $1.4 million as of June 30, 1997 represents 1.3% of gross
loans. As of December 31, 1996 and June 30, 1996, the $1.5 million allowance for
credit losses reflected 1.7% and 1.6%, respectively, of gross loans. The
reduction in percentage of allowance to outstanding loans reflects improvements
in credit quality achieved through better credit underwriting and more
aggressive collection efforts and is futher evidenced by lower past due loan
totals. In management's opinion, the allowance for credit losses is adequate as
of June 30, 1997.
See Notes 3 and 4 in the Notes to Financial Statements.
Page 2
<PAGE>
NON-INTEREST INCOME AND EXPENSE
As of June 30, 1997 non-interest income reflects $184 thousand decrease compared
to June 30, 1996 as a result of $204 thousand the gain on sale of investment
securities reflected as of June 30, 1996. Non-interest expense increased $271
thousand or 14.2% as of the same period last year. The increase reflects the
cost of additional staff and overhead of the Kent Branch aquired in the purchase
of Kent Savings and Loan Association. In addition, the second quarter of 1997
includes the costs of the merger. Amortization of intangibles also increased as
goodwill from the merger is amortized over 15 years. In the first six months of
1997 costs have been added as the Company has invested in additional marketing
programs and staff training programs.
INVESTMENT SECURITIES
Investment securities classified as available-for-sale are held for an
indefinite period of time and may be sold in response to changing market and
interest rate conditions as part of the asset/liability management strategy.
Available-for-sale securities are carried at market value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity net of income taxes. Investment securities classified as
held-to-maturity are those that management has both the positive intent and
ability to hold to maturity, and are reported at amortized cost. The Company
does not currently follow a strategy of making securities purchases with a view
to near-term sales, and, therefore, does not own trading securities. The Company
manages the investment portfolios within policies which seek to achieve desired
levels of liquidity, manage interest rate sensitivity risk, meet earnings
objectives, and provide required collateral support for deposit activities.
Total investment securities amounted to $41.4 million and $43.6 million
as of June 30 1997 and December 31, 1996, respectively. The decreased level of
investments in securities resulted primarily from the use of funds from matured
or called securities for the purchase of Kent Savings and Loan Association.
The Company manages its investment portfolios within policies which
seek to achieve desired levels of liquidity, manage interest rate sensitivity
risk, meet earnings objectives and provide required collateral support for
deposit activities. Excluding the U.S. Government and U.S. Government sponsored
agencies, the Company had no concentrations of investment securities from any
single issues that exceeded 10% of stockholders' equity.
LOAN PORTFOLIO
The Bank is actively engaged in originating loans to customers in Queen
Anne's, Caroline and Talbot Counties. The Company has policies and procedures
designed to mitigate credit risk and to maintain the quality of the loan
portfolio. These policies include underwriting standards for new credits as well
as the continuous monitoring and reporting of asset quality and the adequacy of
the allowance for credit losses. These policies, coupled with continuous
training efforts, have provided effective checks and balances for the risk
associated with the lending process. Lending authority is based on the level of
risk, size of the loan and the experience of the
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<PAGE>
lending officer. Note 3 "Summary of Loan Portfolio" presents the composition of
the Company's loan portfolio by significant concentration. The Company had no
loan concentrations exceeding 10% of total loans which are not otherwise
disclosed.
The Company's policy is to make the majority of its loan commitments in
the market area it serves. This tends to reduce risk because management is
familiar with the credit histories of loan applicants and has an in-depth
knowledge of the risk to which a given credit is subject. The Company had no
foreign loans in its portfolio as of June 30, 1997.
It is the policy of the Bank to place a loan in non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on any outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan and
the overall economic situation of the borrower when making a non-accrual
decision. Non-accrual loans are closely monitored by management . A non-accruing
loan is restored to current status when the prospects of future contractual
payments are no longer in doubt. At December 31, 1996 and June 30, 1997, $872
thousand and $826 million, respectively, of non-accrual loans were secured by
collateral with an estimated value of $1.8 million as of December 31, 1996 and
$1.8 million as of June 30, 1997. At June 30, 1997, the Bank had $3.1 million in
loans on the watch list for which payments were current, but the borrowers have
the potential for experiencing financial difficulties. These loans are subject
to on going management attention and their classifications are reviewed
regularly.
DEPOSITS
Deposit liabilities reflected 1% growth in the first half of 1997 in
addition to the increase attributed to the Kent Savings and Loan Association
aquisition. Savings, money market and NOW account deposits continue to be the
main source of deposit growth, although non-interest bearing demand deposits
have exhibited growth. The Company continues to experience strong competition
from other commercial banks, credit unions, the stock market and mutual funds.
The Company has no foreign banking offices.
LIQUIDITY MANAGEMENT
Liquidity describes the ability of Shore Bancshares, Inc. and its
subsidiary, The Centreville National Bank of Maryland to meet financial
obligations that arise out of the ordinary course of business. Liquidity is
primarily needed to meet borrowing and deposit withdrawal requirements of the
customers of the Bank and to fund current and planned expenditures. The Company
maintains its asset liquidity position internally through short term
investments, the maturity distribution of the investment portfolio, loan
repayments and income from earning assets. A substantial portion of the
investment portfolio contains readily marketable securities that could be
converted to cash immediately. Refer to Note 2 in the Consolidated Financial
Statements for a table refelecting the Bank's security portfolio's estimated
fair value. On the liability side of the balance sheet, liquidity is affected by
the timing of maturing liabilities and the ability to generate new deposits or
borrowings as needed. Other sources, not currently in use, are available through
borrowings from the Federal Reserve Bank, the Federal Home Loan Bank and from
lines of credit approved at correspondent banks. The purchase of Kent on April
1, 1997 reflects the use of
Page 4
<PAGE>
funds primarily from Federal Funds which had been accumulated through investment
security maturities and calls. During 1997, the Bank has met liquidity needs for
daily operations and to fund increased loan demand through the use of funds from
matured investment securities and by selling $2.9 million in U.S. Treasury and
Government Securities. Management knows of no trend or event which will have a
material impact on the Bank's ability to maintain liquidity at satisfactory
levels.
CAPITAL RESOURCES AND ADEQUACY
Total stockholders' equity increased $506 thousand or 2.3% in 1997 to
$22.6 million at the end of the June 1997 from $22.1 million at December 31,
1996. Earnings of $985 thousand was the primary contributor to this increase.
The change in unrealized gain (loss) on investments classified as available for
sale accounted for a $16 thousand reduction and dividends paid reduced
stockholders' equity $463 thousand.
One measure of capital adequacy is the leverage capital ratio which is
calculated by dividing average total assets for the most recent quarter into
Tier 1 capital. The regulatory minimum for this ratio is 3%. The primary capital
ratio for the year ended December 31, 1996 was 14.9% and the six months ended
June 30, 1997 and 1996 of 12.1% and 15.4% respectively.
Another measure of capital adequacy is the risk based capital ratio or
the ratio of total capital to risk adjusted assets. Total capital is composed of
both core capital (Tier 1) and supplemental capital (Tier 2) including
adjustments for off balance sheet items such as letters of credit and taking
into account the different degrees of risk among various assets. Regulators
require a minimum total risk based capital ratio of 8%. The Bank's ratio at
December 31, 1996 of 28.2%, and the six months ended June 30, 1997 and 1996 of
23.5% and 27.5% respectively. According to FDIC capital guidelines, the Bank is
considered to be "Well Capitalized."
Building and technological improvements are expected to continue in
1997. Intentions are to begin renovations at the Commerce street location during
1997, cost estimates available at this time anticipate a cost of close to $1
million which includes improvements, furniture and equipment.
On December 5, 1996 the Bank entered into an agreement to acquire Kent
Savings and Loan Association, F.A.(Kent Savings) of Chestertown, Maryland. The
merger transaction was accounted for as a purchase. Under the terms of the
agreement, the Bank will pay approximately $5,100,000 for all of the outstanding
shares of Kent Savings resulting in 2.1 million in goodwill to be amortized over
15 years. The Kent Savings shareholders met on March 17, 1997 and approved the
merger. The effective date of the merger was April 1, 1997.
Management knows of no other trend or event which will have a material
impact on capital.
Page 5
<PAGE>
PART 2
OTHER INFORMATION
<PAGE>
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to and approved by stockholders,
through the solicitation of proxies or otherwise, at the Annual Meeting
of Stockholders held on April 15, 1997:
a) The following persons were elected to serve as directors of the
Company for one year terms:
For Against Abstain
--- ------- -------
Sydney G. Ashley 726,155 3,760 0
J. Robert Barton 727,915 2,000 0
David C. Bryan 727,915 2,000 0
Daniel T. Cannon 727,915 2,000 0
B. Vance Carmean, Jr. 727,915 2,000 0
Mark M. Freestate 727,915 2,000 0
Neil R. LeCompte 727,595 2,320 0
Jerry F. Pierson 727,915 2,000 0
William Maurice Sanger 726,187 3,728 0
Walter E. Schmidt 727,915 2,000 0
b) Ratification of the Board of Directors' selection of Stegman and
Company, P.A. to serve as the independent public accountants to
examine the financial statements of the Company and its subsidiary
for the year ending December 31, 1997. Votes cast were 729,915 for
ratification, 0 against ratification and 0 abstaining.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8K was filed during the second quarter
of 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Bank has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 12, 1997
SHORE BANCSHARES, INC.
------------------------------
CAROL I. BROWNAWELL
Executive Vice President
and Chief Financial Officer
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