SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED September 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 November 7, 1997, there were 1,007,424 shares of
Common Stock outstanding.
This is the only class of outstanding shares.
<PAGE>
SHORE BANCSHARES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets --September 30, 1997 and December 31, 1996
Statements of Income -- Three months ended September 30, 1997 and 1996
and the nine months ended September 30, 1997 and 1996.
Statements of Cash Flows -- Nine months ended September 30, 1997 and
1996 and the twelve months ended December 31, 1996
Notes to Financial Statements - September 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
- ----------
<PAGE>
PART 1
FINANCIAL INFORMATION
<PAGE>
Item 1. Financial Information
CONSOLIDATED BALANCE SHEETS
SHORE BANCSHARES, INC.
<TABLE>
<CAPTION>
September 30,
Dollars in thousands 1997 December 31,
(Unaudited) 1996
--------- ---------
<S> <C>
ASSETS
Cash and due from banks $ 6,895 $ 4,873
Federal funds sold 9,668 5,390
Securities (Note 2)
Held to Maturity 35,836 32,462
Available for Sale 9,533 11,191
Loans, less allowance for credit losses (Note 3 & 4) 107,687 87,389
Premises and fixed assets 3,217 2,153
Other real estate owned -- --
Investments in unconsolidated subsidiaries 1,098 1,114
Accrued interest receivable 1,431 1,385
Net deferred tax assets and other assets 4,120 942
--------- ---------
TOTAL ASSETS $ 179,485 $ 146,899
========= =========
LIABILITIES
Deposits
Non-interest bearing demand $ 16,808 $ 16,381
Interest bearing transaction 19,636 16,172
Savings and money market 41,591 31,799
Time, $100,000 or more 14,553 16,680
Other time 57,695 43,134
--------- ---------
Total deposits 150,283 124,166
--------- ---------
Other borrowed funds (Note 5) 5,000 --
Accrued interest payable 182 158
Other liabilities 963 480
--------- ---------
6,145 638
--------- ---------
Total liabilities 156,428 124,804
--------- ---------
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 13,031 12,086
Net unrealized holding gains (losses) on available
for sale securities (48) (65)
--------- ---------
Total stockholders' equity 23,057 22,095
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 179,485 $ 146,899
========= =========
</TABLE>
See Notes to Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SHORE BANCSHARES, INC.
<TABLE>
<CAPTION>
(UNAUDITED) Quarter Nine Months Quarter Nine Months
Dollars in thousands except per share data Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1997 1996 1996
----------------------------------------------------------------------
<S> <C>
INTEREST INCOME
Interest and fee income on loans $ 2,503 $ 6,903 $ 2,049 $ 6,074
Interest and dividends on investment securities
Taxable securities 584 1,667 443 1,288
Tax-exempt securities 99 311 103 320
Interest on federal funds sold 89 225 87 260
----------------------------------------------------------------------
Total interest income 3,275 9,106 2,682 7,942
----------------------------------------------------------------------
INTEREST EXPENSE
Interest on certificates of deposit
of $100,000 or more 189 599 153 483
Interest on other deposits 1,215 3,339 962 2,813
Interest on borrowed funds - - - -
----------------------------------------------------------------------
Total interest expense 1,404 3,938 1,115 3,296
----------------------------------------------------------------------
NET INTEREST INCOME 1,871 5,168 1,567 4,646
Provision for credit losses (Note 7) - - - -
----------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,871 5,168 1,567 4,646
----------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 165 494 162 476
Other noninterest income 21 82 48 112
Gains (losses) on securities - 8 - 204
----------------------------------------------------------------------
Total noninterest income 186 584 210 792
----------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 555 1,613 470 1,403
Expenses of premises and fixed assets 178 443 158 428
Other noninterest expense 331 1,182 271 972
----------------------------------------------------------------------
Total noninterest expense 1,064 3,238 899 2,803
----------------------------------------------------------------------
INCOME BEFORE TAXES 993 2,514 878 2,635
Applicable income taxes 338 874 310 880
----------------------------------------------------------------------
NET INCOME $ 655 $ 1,640 $ 568 $ 1,755
======================================================================
Net Income Per Share $0.65 $ 1.63 $ 0.56 $ 1.74
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>
Nine Months Year Nine Months
Ended Ended Ended
September 30, December 31, September 30,
1997 1996 1996
-----------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES .
Net income $ 1,640 $ 2,308 $ 1,755
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 178 296 187
Equity in net earnings of unconsolidated subsidiaries - (26) -
Provision for credit losses, net (102) 25 (2)
Deferred income tax benefits (4) 60 -
Net (gains) losses on disposal of assets (8) (205) (204)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (46) (49) 84
(Increase) decrease in other assets (915) 34 94
Increase (decrease) in interest payable 24 7 (8)
Increase (decrease) in other liabilities 95 (141) (105)
-----------------------------------------------------------
Net cash provided by operating activities 862 2,309 1,801
-----------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale or maturities of held-to-maturity
securities 8,140 11,529 9,086
Proceeds from sale or maturities of available-for-sale
securities 9,458 957 954
(Purchases) of held-to-maturity securities (11,443) (11,034) (5,528)
(Purchases) of available-for-securities (6,647) (7,988) (3,457)
Net (increase) decrease in loans 110 (1,963) (3,601)
Purchase of premises and equipment (1,108) (211) (197)
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 - - (109)
Proceeds from sales of other real estate 63 118 -
-----------------------------------------------------------
Net cash provided by (used in) investing activities (4,226) (8,600) (2,852)
-----------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, interest-
bearing transaction, and savings deposits 6,354 2,928 3,377
Net increase (decrease) in time deposits (995) 4,758 1,512
Other borrowed funds 5,000 - -
Cash dividends paid (695) (926) (534)
-----------------------------------------------------------
Net cash provided by (used in) financing activities 9,664 6,760 4,355
-----------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 6,300 469 3,304
Cash and cash equivalents, beginning 10,263 9,794 9,794
-----------------------------------------------------------
Cash and cash equivalents, ending $ 16,563 $ 10,263 $ 13,098
===========================================================
Supplementary cash flow information:
Interest paid $ 3,774 $ 4,469 $ 3,304
Income taxes paid $ 534 $ 1,100 $ 840
</TABLE>
All dollar amounts in thousands
<PAGE>
Note 1 - Financial Information
The unaudited interim consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim 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 nine month period ended September 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>
September 30, 1997
------------------------------------------------------
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------------------------
<S> <C>
U.S. Treasury securities $ 6,961 $ 6,995
U.S. Government agency and
corporation obligations issued by
U.S.Government sponsored $ 26,898 $ 26,903 100 100
agencies
Securities issued by states and
political subdivisions in the U.S.
a. General obligations 8,509 8,633
b. Revenue obligations 405 421
Mortgage-backed securities 24 27 393 402
Equity Securities
a. Investments in Mutual Funds 1,089 968
b. Other equity securites with
readily determinable fair values
c. All other equity securities 1,068 1,068
------------------------------------------------------
TOTAL SECURITIES $ 35,836 $ 35,984 $ 9,611 $ 9,533
======================================================
PLEDGED SECURITIES $19,520
=============
</TABLE>
All dollar amounts in thousands
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------------------
<S> <C>
U.S. Treasury securities $ 9,434 $ 9,458
U.S. Government agency and
corporation obligations issued by
U.S.Government sponsored $ 23,035 $ 23,057
agencies
Securities issued by states and
political subdivisions in the U.S.
a. General obligations 8,892 9,030
b. Revenue obligations 505 527
Mortgage-backed securities 30 34
Equity Securities
a. Investments in Mutual Funds 1,000 870
b. Other equity securites with
readily determinable fair values
c. All other equity securities 863 863
-----------------------------------------------------
TOTAL SECURITIES $ 32,462 $ 32,648 $ 11,297 $ 11,191
=====================================================
PLEDGED SECURITIES $19,566
==============
</TABLE>
All dollar amounts in thousands
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 3 LOANS AND LEASE FINANCING RECEIVABLES
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31
1997 1996
------------------- -------------------
<S> <C>
Loans secured by real estate
a. Construction and land development $ 2,590 $ 3,264
b. Secured by farmland (including farm
residential and other improvements) 4,884 3,877
c. Secured by 1-4 family residential properties
1. Revolving, open end loans 1,531 984
2. All others
(a) Secured by first liens 69,207 52,793
(b) Secured by junior liens 3,788 2,836
d. Secured by multi-family (5 or more)
residential properties
e. Secured by nonfarm nonresidential
properties 12,566 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 1,696 1,410
Commercial and industrial loans
a. To U. S. addressees (domicile) 6,492 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 74 75
b. Other 6,384 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 44 48
Less any unearned income on loans 173 214
------------------- -------------------
Total loans and leases, net of unearned income 109,103 88,892
Less allowance for loan and lease losses 1,416 1,503
------------------- -------------------
Total loans and leases, net of unearned income and
allowance for loan and lease losses $ 107,687 $ 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)
I. CHARGE-OFFS AND RECOVERIES ON LOANS AND LEASES
<TABLE>
<CAPTION>
Septemer 30, 1997 December 31, 1996
Charge-offs Recoveries Charge-offs Recoveries
---------------------------------- ----------------------------------
<S> <C>
1. Real estate loans $ 22 $ - $ 10 $ 10
2. Installment loans 83 37 63 26
3. Credit cards and
related plans
4. Commercial (time and
demand) and all other
loans 37 3 5 67
---------------------------------- ----------------------------------
6. Total $ 142 $ 40 $ 78 $ 103
================================== ==================================
II. CHANGES IN ALLOWANCE FOR LOAN AND LEASE LOSSES
1. Balance at end of previous period $ 1,503 $ 1,478
2. Recoveries 40 103
3. Charge-offs (142) (78)
4. Provision for loan and lease losses - -
5. Adjustments 15
-------------------- ---------------------
6. Balance at end of current period $ 1,416 $ 1,503
==================== =====================
7. Net charge-offs (recoveries) $ 102 ($ 25)
8. Average daily loan balance 102,166 87,803
9. Ratio-net of charge offs to
average loans outstanding 0.10% 0.03%
</TABLE>
All dollar amounts in thousands
<PAGE>
Note 5 - Other Borrowed Funds
As of September 30, 1997, the Bank had received a convertible advance
from the Federal Home Loan Bank in the amount of $5,000,000 at an interest rate
of 5.66% which is due September 24, 2002. The Bank has pledged mortgage loans as
collateral on this advance.
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Yields and Rates YTD 9/30/97 YTD 9/30/96
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C>
ASSETS
Interest Earning assets:
Money market investments:
Federal funds sold 5,543,708 225,253 5.43% 6,495,735 260,310 5.36%
Investment Securities:
U.S. Treasury securities
and obligations of U.S.
government agencies 31,936,248 1,532,394 6.42% 26,206,209 1,205,080 6.15%
Obligations of States and
political subdivisions 8,235,706 470,786 7.64% 8,431,679 484,846 7.69%
Taxable Municipals 512,815 30,363 7.92% 512,815 30,363 7.92%
All other investment securities 2,218,478 96,122 5.79% 1,011,725 43,676 5.77%
Federal Reserve Bank stock 302,250 9,068 4.01% 302,250 9,068 4.01%
------------------------------------- -------------------------------------
Total investment securities 43,205,497 2,138,733 6.62% 36,464,678 1,773,033 6.50%
Loans - net of unearned income
Commercial loans 9,382,287 742,286 10.58% 10,578,876 832,067 10.52%
Installment loans 5,201,717 395,568 10.17% 5,041,220 378,746 10.04%
Mortgage loans 87,582,264 5,765,249 8.80% 72,970,305 4,862,873 8.91%
------------------------------------- -------------------------------------
Total loans 102,166,268 6,903,103 9.03% 88,590,401 6,073,686 9.17%
------------------------------------- -------------------------------------
TOTAL INTEREST EARNING ASSETS 150,915,473 9,267,089 8.21% 131,550,814 8,107,029 8.24%
Cash and due from banks 4,075,070 3,541,254
Other assets 8,253,649 5,482,635
Allowance for loan and lease losses (1,456,618) (1,463,281)
------------------------------------- -------------------------------------
TOTAL ASSETS 161,787,574 139,111,422
===================================== =====================================
LIABILITIES
Interest-bearing liabilities
Other Borrowed Funds 128,205 - 0.00% - - 0.00%
Super NOW accounts 16,803,546 374,322 2.98% 15,808,956 363,157 3.07%
Money market deposit accounts 20,479,885 510,500 3.33% 18,821,907 473,213 3.36%
Time, $100,000 or more 13,704,210 541,440 5.28% 10,524,368 428,565 5.44%
Other time deposits 39,639,524 1,536,725 5.18% 29,852,205 1,182,867 5.30%
IRA deposits 14,646,788 591,871 5.40% 14,498,157 551,174 5.08%
Savings deposits 16,371,319 382,900 3.13% 12,440,318 297,305 3.20%
------------------------------------- -------------------------------------
TOTAL INT-BEARING LIABILITIES 121,773,477 3,937,758 4.32% 101,945,911 3,296,281 4.32%
Demand deposits 15,888,969 14,922,510
Other liabilities 1,525,799 806,638
------------------------------------- -------------------------------------
Total liabilities 139,188,245 117,675,059
Stockholders' equity 22,599,329 21,436,363
------------------------------------- -------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 161,787,574 139,111,422
===================================== ======================================
Net interest income & interest rate spread 5,329,331 3.89% 4,810,748 3.92%
Net interest income as a % of earning assets 4.72% 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 liabilities of the Company are made up almost entirely of the assets and
liabilities 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 $1,640 thousand in net income for the nine months
ended September 30, 1997 or $1.63 per share compared to the nine months ended
September 30, 1996 net income of $1,755 thousand or $1.74 per share. Excluding
the securities gain on the sale of investment securities of $204 thousand in
1996, net operating income in 1997 actually increased $89 thousand or 5.7% over
the same period in 1996. Net interest income for September 30, 1997 increased
$522 thousand over the prior year. In addition, year to date net income absorbed
additional non-interest expense associated with the merger of Kent Savings and
Loan Association (Kent)including goodwill amortization and in the third quarter,
depreciation expense for the renovation of the Centreville office.
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 September 30, 1997 has been characterized by relatively stable interest
rates at the Bank level. As a result of increased volume in the investment
securities and loan portfolios 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 nine months of 1997 compared to the same period in 1996.
Net interest income (on a tax equivalent basis) for September 30, 1997
increased by $519 thousand or 10.8% compared to the nine months ended September
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 nine months ended September
30, 1997 and 1996 was 3.89%, and 3.92%, respectively. Interest rate spread in
1997 improved in
Page 1
<PAGE>
the third quarter, however, was still less than the prior year by .03% as a
result of a decrease in yield on earning assets of .03% and no change in yield
of interest bearing liabilities. Yield on deposits remained at the same level
during the nine months ended September 30, 1997 compared to the same period in
1996. The decrease in asset yield is attributed to mortgage loan yield
decreasing as a result of rate reductions on some loan products and a lower
yielding portfolio purchased from Kent, offset by a higher yielding investment
portfolio. A decrease in net interest margin was also reflected, however, this
measure continues to improve as of the end of the third quarter. Net interest
margin is calculated as tax equivalent net interest income divided by average
earning assets and represents the net yield on its earning assets. As of
September 30, 1997, the net interest margin decreased to 4.72% from 4.89% as of
September 30, 1996. See the table 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 September 30, 1997 and 1996, the Bank recorded
net charge offs of $102 thousand and $2 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 1997 and net
recoveries in 1996.
Gross charge offs as of September 30, 1997 amounted to $142 thousand,
$41 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 $40 thousand in 1997, $39 thousand for the
same nine 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 September 30, 1997 represents 1.3% of gross
loans. As of December 31, 1996 and September 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 further
Page 2
<PAGE>
evidenced by lower past due loan totals. In management's opinion, the allowance
for credit losses is adequate as of September 30, 1997.
See Notes 3 and 4 in the Notes to Financial Statements.
NON-INTEREST INCOME AND EXPENSE
As of September 30, 1997 non-interest income reflects $208 thousand decrease
compared to September 30, 1996 as a result of $204 thousand gain on sale of
investment securities reflected as of September 30, 1996. Non-interest expense
increased $435 thousand or 15.5% as of the same period last year. The increase
reflects the cost of additional staff and overhead of the Kent Branch acquired
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
nine months of 1997 costs have been added as the Company has invested in
additional marketing programs and staff training programs. In addition,
depreciation expense for the renovated office space in Centreville was recorded.
The first phase was completed in September 1997.
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, nor are
derivatives used as investments. 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 $45.3 million and $43.6 million
as of September 30 1997 and December 31, 1996, respectively. The net increased
level of investments in securities resulted primarily from the purchase of
agency securities with funds borrowed from the Federal Home Loan Bank offset by
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.
See Note 2 in the Notes to Financial Statements
Page 3
<PAGE>
LOAN PORTFOLIO
The Bank is actively engaged in originating loans to customers in Queen
Anne's, Caroline, Kent 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 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 September 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 September 30, 1997 and December 31, 1996,
$432 thousand and $872 thousand, respectively, of non-accrual loans were secured
by collateral with an estimated value of $1.3 million as of September 30, 1997
and $1.8 million as of December 31, 1996. At September 30, 1997, the Bank had
$3.7 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 4% growth in the first nine months of
1997 in addition to the increase attributed to the Kent Savings and Loan
Association acquisition. 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.
OTHER BORROWED FUNDS
Other borrowed funds consist of an advance from the Federal Home Loan
Bank of $5,000,000 at the end of the third quarter of 1997. These funds were
utilized for securities purchases. See Note 5 in the Notes to Financial
Statements.
Page 4
<PAGE>
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 reflecting 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 and from lines of credit approved at
correspondent banks. As discussed above, an additional source is the Federal
Home Loan Bank from which a $5,000,000 advance was outstanding at September 30,
1997. The purchase of Kent on April 1, 1997 reflects the use of 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 $962 thousand or 4.3% in 1997 to
$23.0 million at the end of the September 1997 from $22.1 million at December
31, 1996. Earnings of $1,640 thousand were the primary contributor to this
increase. The change in unrealized gain (loss) on investments classified as
available for sale accounted for a $17 thousand increase and dividends paid
reduced stockholders' equity $695 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 leverage
capital ratio at September 30, 1997 and 1996 was 12.4% and 15.4%, respectively
and at December 31, 1996 was 14.9%.
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
September 30, 1997 and 1996 was 23.3% and 27.6%, respectively and at December
31, 1996 was 28.2%. According to FDIC capital guidelines, the Bank is considered
to be "Well Capitalized."
Page 5
<PAGE>
Building and technological improvements continued in 1997. Renovations
at the Commerce street location are expected to be completed by year end. Cost
estimates anticipate a an amount 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 paid 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 6
<PAGE>
PART II
OTHER INFORMATION
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8K were filed during the third 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: November 12, 1997
SHORE BANCSHARES, INC.
/S/ CAROL I. BROWNAWELL
-------------------------------
CAROL I. BROWNAWELL
Executive Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,895
<INT-BEARING-DEPOSITS> 133,475
<FED-FUNDS-SOLD> 9,668
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,533
<INVESTMENTS-CARRYING> 35,836
<INVESTMENTS-MARKET> 35,984
<LOANS> 109,103
<ALLOWANCE> 1,416
<TOTAL-ASSETS> 179,485
<DEPOSITS> 150,283
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,145
<LONG-TERM> 5,000
0
0
<COMMON> 10
<OTHER-SE> 23,047
<TOTAL-LIABILITIES-AND-EQUITY> 179,485
<INTEREST-LOAN> 6,903
<INTEREST-INVEST> 1,978
<INTEREST-OTHER> 225
<INTEREST-TOTAL> 9,106
<INTEREST-DEPOSIT> 3,938
<INTEREST-EXPENSE> 3,938
<INTEREST-INCOME-NET> 5,168
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 3,238
<INCOME-PRETAX> 2,514
<INCOME-PRE-EXTRAORDINARY> 2,514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,640
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.63
<YIELD-ACTUAL> 4.72
<LOANS-NON> 432
<LOANS-PAST> 543
<LOANS-TROUBLED> 209
<LOANS-PROBLEM> 3,700
<ALLOWANCE-OPEN> 1,503
<CHARGE-OFFS> 142
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 1,416
<ALLOWANCE-DOMESTIC> 1,416
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
