SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 0-22345
Shore Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-1974638
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
109 North Commerce Street
Centreville, Maryland 21617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code: (410) 758-1600
Securities registered under Section 12(b) of the Act: None
Securities registered
under Section 12(g) of the Act: Common Stock, Par Value $0.01
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___x__
The aggregate market value of Shore Bancshares, Inc. voting stock held by
non-affiliates as of January 31, 1998 was $42,170,086, based on the sales price
as of that date.
As of January 31, 1998, Shore Bancshares, Inc. had 1,007,424 shares of Common
Stock $.01 Par Value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV: Portions of the Annual Shareholders Report for the
year ended December 31, 1997 (the "Annual Report".)
Part III: Portions of the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April
22, 1998 (the "Proxy Statement".)
1
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PART I
ITEM I
BUSINESS
GENERAL
Shore Bancshares, Inc. (the "Company"), a Maryland corporation
incorporated on March 15, 1996, became a registered bank holding company on July
1, 1996 under the Bank Holding Company Act of 1956, as amended. The Company
engages in its business through its sole subsidiary, The Centreville National
Bank of Maryland (the "Bank"), a national banking association. The Company
acquired the Bank through the merger of the Bank into an interim national
banking association formed as a Company subsidiary for the purpose of the
merger, pursuant to a Plan of Reorganization and Agreement to Merge (the "Plan")
proposed by Bank management and approved by the Bank's stockholders on April 16,
1996. Pursuant to the Plan, each outstanding share of Bank common stock was
exchanged for two shares of the Company's common stock. The Bank's charter was
not affected by the merger. Currently, the Company has issued and outstanding
1,007,424 shares of common stock, par value $0.01 per share ("Shares"), held by
963 holders of record on March 7, 1998.
The Company's and the Bank's main office is located at 109 North
Commerce Street, Centreville, Queen Anne's County, Maryland. The Bank has five
full service branch offices located in Centreville, Chestertown, Stevensville
and Hillsboro, Maryland.
As of December 31, 1997, the Company had assets of approximately $175.1
million, net loans of approximately $107.8 million, and deposits of $145.8
million. Stockholders' equity has continued to grow over the last five years and
has increased $5.4 million (30.0%) over the preceding five years.
BANKING PRODUCTS AND SERVICES
The Bank has been doing business in Maryland since 1876 and is engaged
in both the commercial and consumer banking business. The Bank serves its
customers through a network of five banking offices. The Bank provides a wide
range of personal banking services designed to meet the needs of local
consumers. Among the services provided are checking accounts, savings and time
accounts, safe deposit boxes, and installment and other personal loans,
especially residential mortgages, as well as home equity loans, automobile and
other consumer financing. As a convenience to its customers, the Bank offers
Saturday banking hours, drive-thru teller windows, "Direct Dial," a telephone
banking service, debit cards, and 24-hour automated teller machines at four of
our branch locations.
The Bank is also engaged in the financing of commerce and industry by
providing credit and deposit services for small to medium sized businesses and
for the agricultural community in the Bank's market area. The Bank offers many
forms of commercial lending, including lines of credit, revolving credit, term
loans, accounts receivable financing, and commercial real estate mortgage
lending and other forms of secured financing. A full range of commercial banking
services is offered, including the acceptance of checking and savings deposits.
Additional types of real estate loans, discount brokerage services,
credit cards and related services are also offered through affiliates or
correspondent banks. The Bank does not offer trust services and does not engage
in municipal trading services.
BANK SERVICE CORPORATIONS
The Bank owns one-third of the outstanding common stock of two service
corporations: The Delmarva Bank Data Processing Center, Inc. and The Eastern
Shore Mortgage Corporation, both Maryland corporations. The Eastern Shore
Mortgage Corporation, located in Easton, Maryland, is engaged in mortgage
banking activities, including the origination of residential mortgage loans and
the subsequent sale of the loans to permanent investors. Its primary customers
are residents who live on Maryland's Eastern Shore. The Delmarva Bank Data
Processing Center, Inc., also located in Easton, Maryland, provides data
processing services to banks located in Maryland, Delaware, Virginia and the
District of Columbia.
EXPANSION ACTIVITIES
On December 5, 1996, the Bank entered into a merger agreement with Kent
Savings & Loan Association, F.A.
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("Kent Savings"), a federal savings and loan association located in Chestertown,
Maryland, with the Bank as the surviving financial institution. Under the terms
of the agreement, the Bank paid approximately $5.1 million in cash for all of
the 140,305 shares of outstanding common stock of Kent Savings. At March 31,
1997, total assets of Kent Savings were $24.1 million and total stockholders'
equity was approximately $2.9 million. The merger was approved by the
appropriate federal regulators. The merger required the approval of stockholders
of Kent Savings, which approval was given at their annual meeting on March 17,
1997. The merger was consummated on April 1, 1997.
SEASONALITY
The management of the Bank does not believe that the deposits or the
business of the Bank in general are seasonal in nature. The deposits may,
however, vary with local and national economic conditions but not enough to have
a material effect on planning and policy making.
EMPLOYEES
As of December 31, 1997, the Bank employed 71 individuals, 11 of whom
worked part-time.
DEPOSITS
No material portion of the Bank's deposits has been obtained from an
individual or a few individuals (including federal, state and local governments
and agencies) the loss of any one or more of which would have a materially
adverse effect on the Bank, nor is a material portion of the Bank's loans
concentrated within a single industry or group of related industries. On
December 31, 1997, the Bank had approximately 1,400 deposit customers
representing $145.8 million in deposits.
COMMITMENTS
As of the end of the last two fiscal years the Bank had the following
commitments to lend:
<TABLE>
<CAPTION>
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% of % of
12/31/97 Total 12/31/96 Total
- -------------------------------------------------------------------------------------------
(in thousands) (in thousands)
<S> <C>
Standby Letters of Credit $ 1,770 12.59% $ 1,786 13.45%
Commitments to Grant Loans 12,293 87.41 11,491 86.55
- -------------------------------------------------------------------------------------------
Total $14,063 100.00% $13,277 100.00%
</TABLE>
The above commitments are firm. The Bank expects approximately
$4,000,000 of the commitments to lend described above to be funded within the
current year.
COMPETITION
The Bank offers many personalized services and attracts customers by
being responsive and sensitive to the needs of the community. The Bank relies on
goodwill and referrals from satisfied customers as well as traditional media
advertising to attract new customers. To enhance a positive image in the
community, the Bank supports and participates in many local events. Employees,
officers, and Directors represent the Bank on many boards and local civic and
charitable organizations.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries.
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Recent changes in federal banking laws facilitate interstate branching
and merger activity among banks. Since September, 1995, certain bank holding
companies are authorized to acquire banks throughout the United States. In
addition, as of June 1, 1997, certain banks are permitted to merge with banks
organized under the laws of different states. These changes may result in an
even greater degree of competition in the banking industry and the Company and
the Bank may be brought into competition with institutions with which it does
not presently compete.
Regional and local banks dominate the banking industry in Centreville,
Chestertown, Stevensville, and the Hillsboro areas where the Bank maintains
offices. The Bank competes for deposits and loans with these institutions and
with credit unions, savings institutions, insurance companies, and mortgage
companies, as well as other companies that offer financial services. To attract
new business and retain existing customers, the Bank offers a wide range of
banking products and services and relies on local promotional activity, personal
contact by its officers, staff, and Directors, referrals by current customers,
extended banking hours, and personalized service.
As of June 30, 1997, the most recent date for which comparative data is
available, bank deposits in Queen Anne's County (where the Bank's main office,
Centreville branch and Stevensville branch are located), Caroline County,
Maryland (where the Bank's Hillsboro branch is located), and Kent County (where
the Bank's Kent branch is located) ranked as follows:
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% of
Queen Anne's County Deposits Total
- ------------------------------------------------------------------------------
(in thousands)
The Queenstown Bank of Maryland $124,494 34.99%
THE CENTREVILLE NATIONAL BANK OF MARYLAND 113,373 31.87
The Chestertown Bank of Maryland 34,721 9.76
NationsBank, N.A. 31,217 8.77
The First National Bank of Maryland 21,551 6.06
Farmers Bank of Maryland 16,907 4.75
Annapolis National Bank 13,517 3.80
- ------------------------------------------------------------------------------
Total $355,780 100.00%
- ------------------------------------------------------------------------------
SOURCE: FDIC DATA BOOK
- ------------------------------------------------------------------------------
% of
Caroline County Deposits Total
- ------------------------------------------------------------------------------
(in thousands)
The Peoples Bank of Maryland $ 72,104 29.94%
Provident State Bank of Preston 58,259 24.19
The First National Bank of Maryland 40,663 16.88
The Caroline County Bank 26,242 10.89
NationsBank, N.A. 16,008 6.65
Bank of Maryland 15,594 6.47
THE CENTREVILLE NATIONAL BANK OF MARYLAND 11,985 4.98
- ------------------------------------------------------------------------------
Total $240,855 100.00%
- ------------------------------------------------------------------------------
SOURCE: FDIC DATA BOOK
4
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- ------------------------------------------------------------------------------
% of
Kent County Deposits Total
- ------------------------------------------------------------------------------
(in thousands)
The Chestertown Bank of Maryland $106,342 34.18%
Peoples Bank of Kent County 95,343 30.64
The Chesapeake Bank and Trust Company 41,574 13.36
Farmers Bank of Maryland 20,765 6.67
THE CENTREVILLE NATIONAL BANK OF MARYLAND 20,158 6.48
Crestar Bank 16,482 5.30
Signet 10,467 3.37
- ------------------------------------------------------------------------------
Total $311,131 100.00%
- ------------------------------------------------------------------------------
SOURCE: FDIC DATA BOOK
SUPERVISION AND REGULATION
GENERAL. The Company and the Bank are extensively regulated under
federal and state law. Generally, these laws and regulations are intended to
protect depositors, not stockholders. The following is a summary description of
certain provisions of certain laws which affect the regulation of bank holding
companies and banks. The discussion is qualified in its entirety by reference to
applicable laws and regulations. Changes in such laws and regulations may have a
material effect on the business and prospects of the Company and the Bank.
FEDERAL BANK HOLDING COMPANY REGULATION AND STRUCTURE. The Company is a
bank holding company within the meaning of the Bank Holding Company Act of 1956,
as amended, and as such, it is subject to regulation, supervision, and
examination by the Federal Reserve Board ("FRB"). The Company is required to
file annual and quarterly reports with the FRB and to provide the FRB with such
additional information as the FRB may require. The FRB may conduct examinations
of the Company and its subsidiaries.
With certain limited exceptions, the Company is required to obtain
prior approval from the FRB before acquiring direct or indirect ownership or
control of more than 5% of any voting securities or substantially all of the
assets of a bank or bank holding company, or before merging or consolidating
with another bank holding company. Additionally, with certain exceptions, any
person proposing to acquire control through direct or indirect ownership of 25%
or more of any voting securities of the Company is required to give 60 days'
written notice of the acquisition to the FRB, which may prohibit the
transaction, and to publish notice to the public.
Generally, a bank holding company may not engage in any activities
other than banking, managing or controlling its bank and other authorized
subsidiaries, and providing services to these subsidiaries. With prior approval
of the FRB, the Company may acquire more than 5% of the assets or outstanding
shares of a company engaging in non-bank activities determined by the FRB to be
closely related to the business of banking or of managing or controlling banks.
The FRB provides expedited procedures for expansion into approved categories of
non-bank activities.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions on extensions of credit to the bank
holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, subject to certain exceptions, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, the Bank may not generally
require a customer to obtain other services from itself or the Company, and may
not require that a customer promise not to obtain other services from a
competitor as a condition to and extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source
of financial strength to its subsidiary banks and to make capital injections
into a troubled subsidiary bank, and the FRB may charge the bank holding company
with engaging in unsafe and unsound practices for failure to commit resources to
a subsidiary bank when required. A required capital injection may be called for
at a time when the holding company does not have the resources to provide it. In
addition,
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depository institutions insured by the Federal Deposit Insurance Corporation
("FDIC") can be held liable for any losses incurred by, or reasonably
anticipated to be incurred by, the FDIC in connection with the default of, or
assistance provided to, a commonly controlled FDIC-insured depository
institution. Accordingly, in the event that any insured subsidiary of the
Company causes a loss to the FDIC, other insured subsidiaries of the Company
could be required to compensate the FDIC by reimbursing it for the estimated
amount of such loss. Such cross guaranty liabilities generally are superior in
priority to the obligations of the depository institution to its stockholders
due solely to their status as stockholders and obligations to other affiliates.
FEDERAL BANK REGULATION. The Company's banking subsidiary is a
federally-chartered national bank regulated by the Office of Comptroller of the
Currency ("OCC"). The OCC may prohibit the institutions over which it has
supervisory authority from engaging in activities or investments that the agency
believes constitutes unsafe or unsound banking practices. Federal banking
regulators have extensive enforcement authority over the institutions they
regulate to prohibit or correct activities which violate law, regulation or a
regulatory agreement or which are deemed to constitute unsafe or unsound
practices. Enforcement actions may include the appointment of a conservator or
receiver, the issuance of a cease and desist order, the termination of deposit
insurance, the imposition of civil money penalties on the institution, its
directors, officers, employees and institution-affiliated parties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the removal of or restrictions on directors, officers, employees and
institution-affiliated parties, and the enforcement of any such mechanisms
through restraining orders or other court actions.
The Bank is subject to certain restrictions on extensions of credit to
executive officers, directors, principal stockholders or any related interest of
such persons which generally require that such credit extensions be made on
substantially the same terms as are available to third persons dealing with the
Bank and not involve more than the normal risk of repayment. Other laws tie the
maximum amount which may be loaned to any one customer and its related interests
to capital levels.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the OCC, have adopted standards covering
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. An institution which fails to meet those
standards may be required by the agency to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. The Company, on behalf of the Bank,
believes that it meets substantially all standards which have been adopted.
FDICIA also imposed new capital standards on insured depository institutions.
See "Capital Requirements."
Before establishing new branch offices, the Bank must meet certain
minimum capital stock and surplus requirements and the Bank must obtain OCC
approval.
DEPOSIT INSURANCE. As a FDIC member institution, the Bank's deposits
are insured to a maximum of $100,000 per depositor through the Bank Insurance
Fund ("BIF"), administered by the FDIC, and each institution is required to pay
semi-annual deposit insurance premium assessments to the FDIC. The BIF
assessment rates have a range of 0 cents to 27 cents for every $100 in
assessable deposits. The federal Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "1996 Act"), included provisions that, among other
things, recapitalized the Savings Association Insurance Fund ("SAIF") through a
special assessment on savings association deposits and bank deposits that had
been acquired from savings associations. As a result of the merger of Kent
Savings into the Bank, approximately $20.8 million of the Bank's deposits are
assessed at SAIF rates. The SAIF assessment rates are determined quarterly and
the SAIF is also administered by the FDIC.
CAPITAL REQUIREMENTS. The federal banking regulators have adopted
certain risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent amounts
of off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as business loans. For bank holding
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companies with less than $150,000,000 in consolidated assets, the guidelines are
applied on a bank-only basis.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. "Tier 1," or core capital,
includes common equity, perpetual preferred stock (excluding auction rate
issues) and minority interest in equity accounts of consolidated subsidiaries,
less goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes, among other things, limited-life preferred
stock, hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less required deductions. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. As of
December 31, 1997, the Bank's ratio of Tier 1 to risk-weighted assets stood at
22.66% and its ratio of total capital to risk-weighted assets stood at 23.91%.
In addition to risk-based capital, banks and bank holding companies are required
to maintain a minimum amount of Tier 1 capital to total assets, referred to as
the leverage capital ratio, of at least 3%. As of December 31, 1997, the Bank's
leverage capital ratio was 12.16%.
In August, 1995 and May, 1996, the federal banking agencies adopted
final regulations specifying that the agencies will include, in their
evaluations of a bank's capital adequacy, an assessment of the Bank's interest
rate risk ("IRR") exposure. The standards for measuring the adequacy and
effectiveness of a banking organization's interest rate risk management includes
a measurement of board of director and senior management oversight, and a
determination of whether a banking organization's procedures for comprehensive
risk management are appropriate to the circumstances of the specific banking
organization. The Bank has internal IRR models that are used to measure and
monitor IRR. Additionally, the regulatory agencies have been assessing IRR on an
informal basis for several years. For these reasons, the Company does not expect
the addition of IRR evaluation to the agencies' capital guidelines to result in
significant changes in capital requirements for the Bank.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "--Federal Deposit Insurance Corporation
Improvement Act of 1991" below, as applicable to undercapitalized institutions.
In addition, future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends to the Company.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In
December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things, (i) publicly available annual financial condition and
management reports for financial institutions, including audits by independent
accountants, (ii) the establishment of uniform accounting standards by federal
banking agencies, (iii) the establishment of a "prompt corrective action" system
of regulatory supervision and intervention, based on capitalization levels, with
more scrutiny and restrictions placed on depository institutions with lower
levels of capital, (iv) additional grounds for the appointment of a conservator
or receiver, and (v) restrictions or prohibitions on accepting brokered
deposits, except for institutions which significantly exceed minimum capital
requirements. FDICIA also provides for increased funding of the FDIC insurance
funds and the implementation of risked-based premiums. See "Deposit
Insurance."
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." The Bank is currently classified as
"well-capitalized." An institution may be deemed by the
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regulators to be in a capitalization category that is lower than is indicated by
its actual capital position if, among other things, it receives an
unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a cash dividend) or paying any
management fees to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to growth limitations and are required to submit capital restoration
plans. If a depository institution fails to submit an acceptable plan, it is
treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of other
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and stop
accepting deposits from correspondent banks. Critically undercapitalized
institutions are subject to the appointment of a receiver or conservator,
generally within 90 days of the date such institution is determined to be
critically undercapitalized.
FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution. FDICIA also limits the circumstances under which the FDIC
is permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
INTERSTATE BANKING LEGISLATION. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 was enacted into law on September 29, 1994. The
law provides that, among other things, substantially all state law barriers to
the acquisition of banks by out-of-state bank holding companies were eliminated
effective on September 29, 1995. The law also permits interstate branching by
banks effective as of June 1, 1997, subject to the ability of states to opt-out
completely or to set an earlier effective date. Maryland generally established
an earlier effective date of September 29, 1995.
MONETARY POLICY. The earnings of a bank holding company are affected by
the policies of regulatory authorities, including the FRB, in connection with
the FRB's regulation of the money supply. Various methods employed by the FRB
are open market operations in United States Government securities, changes in
the discount rate on member bank borrowing and changes in reserve requirements
against member bank deposits. These methods used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. The money policies of the FRB have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future.
Statistical Information:
The following supplementary information required under Guide 3 for the
respective periods and at the indicated respective dates is set forth on the
pages indicated below. The information should be read in conjuction with the
related Consolidated Financial Statements and Notes thereto for the year ended
December 31, 1997.
Table of Contents: Page
Average Balances, Yields, and Rates 9
Rate and Volume Variance Analysis 10
Interest Rate Sensitivity Analysis 11
Investment Securities 12
Investment Securities Portfolio Analysis 12
Summary of Loan Portfolio 13
Maturities of Loan Portfolio 13
Risk Elements of Loan Portfolio 14
Analysis of the Allowance for Credit Losses 14
Allocation of the Allowance for Credit Losses 14
Maturity of Time Certificates of Deposit $100,000 or More 15
Summary of Significant Ratios 15
8
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AVERAGE BALANCES, YIELDS, AND RATES
(UNAUDITED)
<TABLE>
<CAPTION>
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FOR THE YEAR ENDED DECEMBER 31, 1997 For the Year Ended December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
- -------------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Interest earning assets:
Money market investments:
Federal funds sold $ 6,493,959 $ 354,331 5.46% $ 7,095,343 $ 378,246 5.33%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies 32,996,468 2,102,149 6.37 27,640,017 1,703,420 6.16
Obligations of States and
political subdivisions(1) 8,858,428 673,659 7.60 8,896,963 683,213 7.68
All other investment securities 2,396,970 143,558 5.99 1,387,606 91,075 6.56
- -------------------------------------------------------------------------------------------------------------------------
Total investment securities 44,251,866 2,919,366 6.60 37,924,586 2,477,708 6.53
Loans, net of unearned income(2)(3)
Commercial loans 9,293,896 982,599 10.57 10,263,061 1,074,769 10.47
Installment loans 5,264,677 536,637 10.19 5,097,131 512,414 10.05
Mortgage loans 89,183,164 7,827,395 8.78 73,406,929 6,516,800 8.88
- -------------------------------------------------------------------------------------------------------------------------
Total loans 103,741,737 9,346,631 9.01 88,767,121 8,103,983 9.13
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 154,487,562 $ 12,620,328 8.17% 133,787,050 $ 10,959,937 8.19%
Cash and due from banks 4,012,120 3,589,220
Other assets 8,641,143 5,503,965
Allowance for loan and lease losses (1,445,147) (1,469,856)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $165,695,678 $141,410,379
=========================================================================================================================
LIABILITIES
Interest-bearing liabilities
Super NOW accounts $ 17,214,551 $ 510,209 2.96% $ 16,022,439 $ 489,828 3.06%
Money market deposit account 21,027,750 702,261 3.34 19,112,185 639,654 3.35
Time, $100,000 or more 13,297,892 704,290 5.30 11,632,139 633,460 5.45
Other time deposits 41,023,454 2,135,522 5.21 30,099,425 1,582,081 5.26
IRA deposits 14,732,561 796,760 5.41 14,451,599 738,622 5.11
Savings deposits 16,636,078 521,015 3.13 12,324,479 392,334 3.18
Other borrowed funds 1,356,164 77,825 5.74 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 125,288,450 5,447,882 4.35% 103,642,266 4,475,979 4.32%
Demand deposits 16,216,396 15,303,365
Other liabilities 1,401,009 838,440
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 142,905,855 119,784,071
Stockholders' equity 22,789,823 21,626,308
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $165,695,678 $141,410,379
=========================================================================================================================
Net interest income and interest
rate spread $ 7,172,446 3.82% $ 6,483,958 3.87%
Net interest income as a percent of
earning assets 4.64% 4.85%
=========================================================================================================================
<CAPTION>
For the Year Ended December 31, 1995
- -----------------------------------------------------------------------------
Average Income/ Yield/
Balance Expense Rate
- -----------------------------------------------------------------------------
<S><C>
ASSETS
Interest earning assets:
Money market investments:
Federal funds sold $ 2,354,943 $ 137,734 5.85%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies 34,441,007 2,063,641 5.99
Obligations of States and
political subdivisions(1) 10,025,129 822,951 8.21
All other investment securities 1,288,757 92,872 7.21
- -----------------------------------------------------------------------------
Total investment securities 45,754,893 2,979,464 6.51
Loans, net of unearned income(2)(3)
Commercial loans 11,031,642 1,156,962 10.49
Installment loans 4,217,507 437,422 10.37
Mortgage loans 69,008,142 6,077,576 8.81
- -----------------------------------------------------------------------------
Total loans 84,257,291 7,671,960 9.11
- -----------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 132,367,127 $ 10,789,158 8.15%
Cash and due from banks 3,431,939
Other assets 4,984,475
Allowance for loan and lease losses (1,470,381)
- -----------------------------------------------------------------------------
TOTAL ASSETS $139,313,160
=============================================================================
LIABILITIES
Interest-bearing liabilities
Super NOW accounts $ 14,763,485 $ 458,095 3.10%
Money market deposit account 20,708,692 704,005 3.40
Time, $100,000 or more 13,801,000 650,745 4.72
Other time deposits 26,826,207 1,370,902 5.11
IRA deposits 14,038,374 804,030 5.73
Savings deposits 13,868,563 456,851 3.29
Other borrowed funds 817,945 52,236 6.39
- -----------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 104,824,266 4,496,864 4.29%
Demand deposits 13,400,204
Other liabilities 770,078
- -----------------------------------------------------------------------------
Total liabilities 118,994,548
Stockholders' equity 20,318,612
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $139,313,160
=============================================================================
Net interest income and interest
rate spread $ 6,292,294 3.86%
Net interest income as a percent of
earning assets 4.75%
</TABLE>
=============================================================================
1. All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate exclusinve of the alternative minimum tax
rate of 34% and nondeductible interest expense.
2. Loan fee income is included in interest income for each loan category and
yields are stated to include all. Fees approximated $84,000, $88,000, and
$72,000 for 1997, 1996, and 1995, respectively.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
9
<PAGE>
RATE AND VOLUME VARIANCE ANALYSIS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 compared to 1995
- -----------------------------------------------------------------------------------------------------------------------------
CHANGE DUE TO Change due to
INCREASE Increase
INTEREST INCOME (DECREASE) RATE(2) VOLUME (Decrease) Rate(2) Volume
- -----------------------------------------------------------------------------------------------------------------------------
<S><C>
Federal funds sold $ (23,915) $ 8,144 $ (32,059) $ 240,512 $(36,741) $ 277,253
- -----------------------------------------------------------------------------------------------------------------------------
Total money market investments (23,915) 8,144 (32,059) 240,512 (36,741) 277,253
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. government agencies 398,729 68,618 330,111 (360,221) 47,282 (407,503)
Tax-exempt obligations of State and
political subdivisions(1) (9,554) (6,595) (2,959) (139,738) (47,128) (92,610)
All other investment securities 52,483 (13,766) 66,249 (1,797) (8,920) 7,123
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities 441,658 48,257 393,401 (501,756) (8,766) (492,990)
- -----------------------------------------------------------------------------------------------------------------------------
Commercial loans (92,170) 9,323 (101,493) (82,193) (1,587) (80,606)
Installment loans 24,223 7,380 16,843 74,992 (16,239) 91,231
Mortgage loans 1,310,595 (89,962) 1,400,557 439,224 51,821 387,403
- -----------------------------------------------------------------------------------------------------------------------------
Total loans(3) 1,242,648 (73,259) 1,315,907 432,023 33,995 398,028
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income $1,660,391 $(16,858) $1,677,249 $ 170,779 $(11,512) $ 182,291
=============================================================================================================================
INTEREST EXPENSE
Super NOW accounts $ 20,381 $(16,064) $ 36,445 $ 31,733 $ (7,331) $ 39,064
Money market deposit accounts 62,607 (1,504) 64,111 (64,351) (10,077) (54,274)
Time deposits of $100,000 or more 70,830 (19,883) 90,713 (17,285) 84,981 (102,266)
Other time deposits 553,441 (20,746) 574,187 211,179 43,907 167,272
IRA deposits 58,138 43,778 14,360 (65,408) (89,075) 23,667
Savings deposits 128,681 (8,573) 137,254 (64,517) (13,653) (50,864)
Other borrowed funds 77,825 -- 77,825 (52,236) -- (52,236)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 971,903 $(22,992) $ 994,895 $ (20,885) $ 8,752 $ (29,637)
=============================================================================================================================
Net interest margin/income $ 688,488 $ 6,134 $ 682,354 $ 191,664 $(20,264) $ 211,928
=============================================================================================================================
</TABLE>
1. Income and yields are computed on a tax equivalent basis using the statutory
federal income tax rate of 34%, exclusive of the alternative minimum tax and
nondeductible interest expense.
2. Variances caused by the change in yield/rate times the average balance are
allocated to rate.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
10
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1997
(ALL DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AFTER 3 AFTER 1 NON - TOTAL
MONTHS - YEAR - INTEREST ALL
WITHIN WITHIN WITHIN AFTER SENSITIVE CATEGORIES
3 MONTHS 1 YEAR 5 YEARS 5 YEARS FUNDS
---------- ---------- ----------- ----------- ----------- ----------
<S><C>
ASSETS
- ----------------------------------------
Loans $17,347 $7,101 $45,879 $39,004 ($1,567) $107,764
Taxable Investment Securities 4,342 6,691 19,198 6,849 37,080
Non-taxable Investment Securities 110 1,117 4,443 4,037 9,707
Investments in Equity Securities 887 1,068 1,955
Federal Funds Sold 3,504 3,504
Non-interest earning assets 15,105 15,105
-------- -------- -------- ------- -------- --------
TOTAL ASSETS 26,190 14,909 69,520 49,890 14,606 175,115
-------- -------- -------- ------- -------- --------
LIABILITIES
- ----------------------------------------
Time Certificates of Deposit over $100,000 2,360 5,613 5,501 13,474
All Other Time Deposits 14,440 19,621 23,800 57,861
Savings and Money Market Deposits 37,575 37,575
Interest-bearing Transaction 19,176 19,176
Other borrowed funds 5,000 5,000
Noninterest-bearing Liabilities 18,514 18,514
-------- -------- -------- ------- -------- --------
TOTAL LIABILITIES 73,551 25,234 34,301 0 18,514 $151,600
-------- -------- -------- ------- -------- --------
NET (ASSETS LESS LIABILITIES) ($47,361) ($10,325) $35,219 $49,890 ($3,908)
======== ======== ======== ======= ========
NET (CUMULATIVE) ($47,361) ($57,686) ($22,467) $27,423 $23,515
======== ======== ======== ======= ========
RSA-RSL (CUMULATIVE) /
TOTAL ASSETS -27.05% -32.94% -12.83% 15.66% 13.43%
======== ======== ======== ======= ========
</TABLE>
Interest Rate Sensitivity Analysis
Assumptions
Fixed rate loans are grouped in the appropriate category based on scheduled
amortization. Variable rate loans are classified based on the next available
repricing opportunity. Noninterest sensitive loans consists of the net of
nonaccrual loans, allowance for credit losses and deferred fees and costs.
Taxable and nontaxable investment securities are categorized by final maturity
date or, if applicable, a definite call date.
Investment in equity securities within three months consists of a U.S.
Government Securities Mutual Fund. Noninterest sensitive funds combines Federal
Reserve Bank and Federal Home Loan Bank of Atlanta stocks.
Time deposits with contractual maturities are categorized based on the effective
maturity of the deposit.
Savings, money market and interest-bearing transaction accounts are assumed to
be subject to repricing within a year, and generally within three months of a
rate change, based on the Company's historical experience.
11
<PAGE>
Investment Securities
(In Thousands)
Fair Value
December 31,
1997 1996
--------------------
Available for Sale
U.S. Treasury Securities $7,014 $9,458
Obligations of U.S. Government agencies and
corporations 475 -
U.S. Government Securities Mutual Funds 887 870
Federal Reserve Bank and Federal Home Loan
Bank of Atlanta stock 1,068 863
--------------------
Total Available for Sale 9,444 11,191
--------------------
Amortized Cost
December 31,
1997 1996
--------------------
Held to Maturity
Obligations of U.S. Government and other
government agencies and corporations 29,088 23,065
Obligations of states and political subdivisions 10,210 9,397
--------------------
Total Held to Maturity 39,298 32,462
--------------------
Total Investment Securities $48,742 $43,653
====================
Investment Securities Portfolio Analysis
December 31, 1997
(In Thousands)
AVAILABLE FOR SALE
<TABLE>
<CAPTION>
========================
============================================ U.S. Govt. Agencies ===================== ==========
U.S. Treasury U.S. Govt. Agencies Securities Mutual Fund Other Securities
Book Avg.T.E. Book Avg.T.E. Book Avg.T.E. Book Avg.T.E. Total
Description & Term Value Yield Value Yield Value Yield Value Yield Value
- ------------------ ===================== ===================== ======================== ===================== ==========
<S><C>
0 - 3 Months $1,992 6.04 99 6.22 0 N/A 0 N/A $2,091
3 - 6 Months 0 N/A 0 N/A 0 N/A 0 N/A 0
6 - 12 Months 0 N/A 0 N/A 0 N/A 0 N/A 0
1 - 3 Years 4,974 6.32 0 N/A 0 N/A 0 N/A 4,974
3 - 4 Years 0 N/A 47 6.75 0 N/A 0 N/A 47
4 - 5 Years 0 N/A 0 N/A 0 N/A 0 N/A 0
5 - 10 Years 0 N/A 70 7.34 0 N/A 0 N/A 70
10 - 30 Years 0 N/A 249 7.50 1,010 7.33 1,068 6.88 2,327
---------------------- --------------------- ------------------------ --------------------- ----------
Total $6,966 6.09 $465 7.38 $1,010 7.33 $1,068 6.88 9,509
====================== ===================== ======================== ===================== ==========
</TABLE>
HELD TO MATURITY
<TABLE>
<CAPTION>
====================== ======================== ===================== ==========
U.S. Govt. Agencies Municipals Municipals - In State
Book Avg.T.E. Book Avg.T.E. Book Avg.T.E. Total
Description & Term Value Yield Value Yield Value Yield Value
- ------------------ ====================== ======================== ====================== ==========
<S><C>
0 - 3 Months $2,244 5.69 $110 5.76 $0 N/A $2,354
3 - 6 Months 2,199 5.67 250 5.68 85 8.11 2,534
6 - 12 Months 3,990 5.65 1,234 7.34 50 11.45 5,274
1 - 3 Years 3,495 6.18 2,239 7.82 1,085 7.98 6,819
3 - 4 Years 4,980 6.36 0 N/A 202 6.60 5,182
4 - 5 Years 5,661 6.45 0 N/A 917 7.50 6,578
5 - 10 Years 6,519 6.73 2,230 6.87 1,146 8.20 9,895
10 - 30 Years 0 N/A 662 7.22 0 N/A 662
---------------------- ------------------------ --------------------- ----------
Total $29,088 6.23 $6,725 7.16 $3,485 7.90 39,298
====================== ======================== ===================== ==========
</TABLE>
The above yields have been adjusted to reflect a tax equivalent basis assuming a
federal tax rate of 34% and a state tax rate of 7%.
12
<PAGE>
Summary Of Loan Portfolio
(In Thousands)
Loans Outstanding as of December 31,
------------------------------------------
1997 1996
----------- -----------
Amount Amount
----------- -----------
Real Estate:
Construction and land development $2,946 $3,264
Commercial 12,973 10,935
Residential 78,273 60,490
Commercial 8,353 7,739
Consumer 6,622 6,465
----------- -----------
TOTAL $109,167 $88,893
=========== ===========
Maturities Of Loan Portfolio
December 31, 1997
(In Thousands)
Maturing
Maturing After One Maturing
Within But Within After Five
One Year Five Years Years Total
-------------------------------------------
Real Estate:
Construction and land development $ 2,867 $ 79 $ - $ 2,946
Commercial 6,605 3,242 2,953 12,800
Residential 7,595 34,631 36,220 78,446
Commercial 4,401 3,259 693 8,353
Consumer 1,449 4,582 591 6,622
-------------------------------------------
TOTAL $ 22,917 $ 45,793 $ 40,457 $ 109,167
===========================================
Classified by Sensitivities of Loans to Changes in Interest Rates
Fixed - Interest Rate Loans $ 3,144 $ 15,490 $ 33,754 $ 52,388
Adjustable - Interest Rate Loans 21,481 30,303 4,995 56,779
-------------------------------------------
TOTAL $ 24,625 $ 45,793 $ 38,749 $ 109,167
===========================================
13
<PAGE>
Risk Elements Of Loan Portfolio
(In Thousands)
December 31,
1997 1996
-------------------
Non-accrual loans $199 $872
Accruing loans past due 90 Days or more 251 590
Restructured loans 209 0
Information with respect to non-accrual loans at December 31, 1997:
Non-accrual loans $199
Interest income that would have been recorded under original terms: 33
Interest income recorded during the period 27
<PAGE>
Analysis of the Allowance for Credit Losses
(In Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996
---------------------
<S><C>
Balance at beginning of period $1,503 $1,479
Charge-offs:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 22 10
Commercial 37 5
Consumer installment 99 63
---------------------
158 78
---------------------
Recoveries:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 0 10
Commercial 4 67
Consumer installment 40 25
---------------------
44 102
---------------------
Net charge-offs (recoveries) 114 (24)
Provision for credit losses 0 0
Allowance aquired 15 0
---------------------
Balance at end of period $1,404 $1,503
=====================
Average daily balance of loans $103,742 $88,767
Ratio of net charge-offs to average loans outstanding 0.11% (0.03%)
</TABLE>
Allocation of the Allowance for Credit Losses
(In Thousands)
<TABLE>
<CAPTION>
Percent of loans Percent of loans
December 31, in each category December 31, in each category
1997 to total loans 1996 to total loans
----------------------------------------------------------------------------
<S><C>
Real Estate:
Construction and land development $38 2.70% $41 3.67%
Commercial 518 11.88% 137 12.30%
Residential 47 71.70% 36 68.05%
Commercial 194 7.65% 502 8.71%
Consumer 112 6.07% 95 7.27%
Unallocated 495 N/A 692 N/A
----------------------------------------------------------------------------
TOTAL $1,404 100.00% $1,503 100.00%
============================================================================
</TABLE>
14
<PAGE>
Maturity of Time Certificates of Deposit $100,000 or More
(In Thousands)
December 31, December 31,
1997 1996
-----------------------------------
Three months or less $2,360 $7,769
Three months through six months 2,245 2,776
Six months through twelve months 3,368 2,196
Over twelve months 5,501 3,939
-----------------------------------
TOTAL $13,474 $16,680
===================================
Summary of Signifcant Ratios
1997 1996
---------------------
Return on average total assets 1.43% 1.63%
Return on average total equity 10.40% 10.67%
Dividend payout ratio 41.28% 40.17%
Total average equity to total average assets ratio 13.75% 15.29%
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------------------------------------------------
<S><C>
Allowance for credit losses to non-performing loans 311.94% 102.82% 83.72% 77.44% 55.85%
</TABLE>
ITEM 2
PROPERTIES
The Bank owns real property at the location of its main office at 109
North Commerce Street, Centreville, Maryland 21617, and at its four branch
locations at 2609 Centreville Road, Centreville, Maryland 21617 ("Route 213
South Branch Office"), 408 Thompson Creek Road, Stevensville, Maryland 21666
("Stevensville Branch Office"), at 21913 Shore Highway, Hillsboro, Maryland
21614 ("Hillsboro Branch Office") and 305 East High Street, Chestertown,
Maryland("Kent Branch Office".) There are no encumbrances on any of these
properties. The Company owns no real property.
ITEM 3
LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business to which the Company, the Bank, or
its subsidiaries is a party or of which any of their properties is subject.
Management is not aware of any material proceedings to which any Director,
officer, or affiliate of the Company, any person holding beneficially in excess
of five (5) percent of the Company's Shares, or any associate of any such
Director, officer, or securing holder is a party.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 to a vote
of security holders, through the solicitation of proxies.
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The sections entitled "Market Price of and Dividends on Registrant's
Common Equity and Related Stockholder Matters" and "Market Information" on page
36 of the Annual Report is hereby incorporated by reference.
For information regarding regulatory restrictions on the Bank's and,
therefore, the Company's payment of dividends, see Note 16 "Regulatory Matters"
on page 30 of the Annual Report, which is hereby incorporated by reference.
ITEM 6
SELECTED FINANCIAL DATA
The table entitled "Selected Financial Data" on page 1 of the Annual
Report is hereby incorporated by reference.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION
AND FINANCIAL CONDITION
Pages 5 through 11 of the Annual Report are hereby incorporated by
reference.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Management Discussion and Analysis
15
<PAGE>
of Results of Operation and Financial Condition - Market Risk Management" on
page 10 of the Annual Report and hereby incorporated by reference. The Company's
principal market risk exposure is to interest rates.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 12 through 33 of the Annual Report are hereby incorporated by
reference.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Board of Directors of the Company, upon recommendation of the
Bank's Audit/Compliance Committee, proposed and recommended the election of
Stegman & Company as independent certified public accountants to make an
examination of the accounts of the Company and the Bank for the year ending
December 31, 1997. Stegman and Company served as the Company's and the Bank's
independent public auditor for 1996.
Trice and Geary served as the Bank's independent public auditor for
1995, before the formation of the Company. In 1995, Trice and Geary performed
various professional services for the Bank, including completion of the audit of
financial statements for 1995 and preparation of corporate tax returns.
On October 31, 1995, the Bank's Board of Directors, upon the
recommendation of the Audit/Compliance Committee, selected Stegman and Company
effective April 16, 1996 to audit the books of the Company and its subsidiaries
for the year ending December 31, 1996, to report on the consolidated statements
of financial position and related statements of earnings of the Company and its
subsidiaries, and to perform such other accounting services as may be required
by the Board of Directors. The Company has been advised by Stegman and Company
that the firm did not have any direct financial interest or any material
indirect financial interest in the Company and its subsidiaries in 1996 or
currently.
There were no disagreements with Trice and Geary on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement. For the year ended December 31, 1995, its
audit report did not contain any adverse opinion or disclaimer of opinion, nor
was it qualified or modified as to uncertainty, audit scope, or accounting
principles.
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference in the section entitled "Election of
Directors" on pages 3 and 4 and section entitled "Executive Officers" on page 6
in the Proxy Statement as filed with the Securities and Exchange Commission
March 23, 1998.
ITEM 11
EXECUTIVE COMPENSATION
Incorporated by reference in the section entitled "Executive
Compensation" on pages 6 and 7 in the Proxy Statement as filed with the
Securities and Exchange Commission March 23, 1998.
16
<PAGE>
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference in the section entitled "Beneficial
Ownership of Common Stock" on pages 1 and 2 in the Proxy Statement as filed
with the Securities and Exchange Commission March 23, 1998.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference in the section entitled "Election of
Directors" on page 4 in the Proxy Statement as filed with the Securities and
Exchange Commission March 23, 1998.
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1), (2) Financial Statements
The following consolidated financial statements included in the Annual
Report to Shareholders for the year ended December 31, 1997, are incorporated
herein by reference in Item 8 of this Report.
The following financial statements are filed as a part of this report:
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Notes to the Consolidated Financial Statements
Independent Auditors' Report
All financial statement schedules have been omitted as the required
information is either inapplicable or included in the consolidated financial
statements or related notes.
(a) Exhibits Required to be Filed by Item 601 of Regulation S-K
EXHIBIT INDEX
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession
(2.1) Plan of Reorganization and Agreement to Merge dated
March 15, 1996, is incorporated by reference from the Company's Form 10, filed
with the Commission on April 3, 1997, and Form 10/A, filed with the Commission
on May 30, 1997 (Registration No. 0-22345).
(2.2) Merger Agreement dated December 5, 1996 among Kent
Savings and Loan Association, F.A., The Centreville National Bank of Maryland,
and the Company is incorporated by reference from the Company's Form 10, filed
with the Commission on April 3, 1997, and Form 10/A, filed with the Commission
on May 30, 1997 (Registration No. 0-22345).
(3) Charter and Bylaws
(3.1) Articles of Incorporation of the Company are
incorporated by reference from the Company's Form 10, filed with the Commission
on April 3, 1997, and Form 10/A, filed with the Commission on May 30, 1997
(Registration No. 0-22345).
17
<PAGE>
(3.2) Bylaws of the Company is incorporated by reference from
the Company's Form 10, filed with the Commission on April 3, 1997, and Form
10/A, filed with the Commission on May 30, 1997 (Registration No. 0-22345)
(13) 1997 Annual Report filed herewith.
(16) Letter re: Change in Certifying Accountants is incorporated by
reference from the Company's Form 10, filed with the Commission on April 3,
1997, and Form 10/A, filed with the Commission on May 30, 1997 (Registration No.
0-22345)
(21) List of Subsidiaries is incorporated by reference from the
Company's Form 10, filed with the Commission on April 3, 1997, and Form 10/A,
filed with the Commission on May 30, 1997 (Registration No. 0-22523)
(27) Financial Data Schedule is filed electronically herewith via
EDGAR.
(b) Reports on Form 8-K
None
(c) Exhibits to Item 601 to Regulation S-K
See the Exhibits described in Item 14(a)(3) above.
18
<PAGE>
SIGNATURES
Pursuant to the requirements in Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf on March 17, 1998 by the undersigned, thereunto duly authorized.
SHORE BANCSHARES, INC.
/s/ Daniel T. Cannon
_____________________
Daniel T. Cannon
President
/s/ Carol I. Brownawell
_____________________
Carol I. Brownawell
Treasurer
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 indicated on March 17, 1998.
/s/ Sydney G. Ashley Director
_________________________
/s/ J. Robert Barton Director
_________________________
/s/ David C. Bryan Director
_________________________
/s/ Daniel T. Cannon Director
_________________________
/s/ B. Vance Carmean, Jr. Director
_________________________
/s/ Mark M. Freestate Director
_________________________
/s/ Neil R. LeCompte Director
_________________________
/s/ Jerry F. Pierson Director
_________________________
/s/ Wm. Maurice Sanger Director
_________________________
/s/ Walter E. Schmidt Director
_________________________
19
[GRAPHIC LOGO GOES HERE]
1997
Annual Report
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
For the Year 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S><C>
Net interest income $ 6,957,167 $ 6,265,431 $ 6,012,491 $ 6,097,626
Provision for credit losses -- -- -- 274,000
Net interest income after provision for credit losses 6,957,167 6,265,431 6,012,491 5,823,626
Non-interest income 909,049 999,423 877,386 856,585
Net income 2,370,198 2,307,742 2,138,500 2,030,864
- ------------------------------------------------------------------------------------------------------------------------
Per Share Data:*
- ------------------------------------------------------------------------------------------------------------------------
Diluted net income $ 2.35 $ 2.29 $ 2.12 $ 2.02
Cash dividends declared 0.97 0.92 0.85 0.60
Book value 23.34 21.93 20.70 19.19
Number of common shares 1,007,424 1,007,424 1,007,424 1,007,424
- ------------------------------------------------------------------------------------------------------------------------
At Year End
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 175,115,011 $146,899,477 $138,100,669 $144,942,996
Loans, net of unearned income 109,167,283 88,892,757 87,049,483 79,329,222
Allowance for credit losses 1,403,747 1,503,268 1,478,555 1,481,501
Investment securities 48,742,568 43,652,747 37,131,443 53,209,881
Deposits 145,813,270 124,166,248 116,479,753 124,984,593
Long-term debt 5,000,000 -- -- --
Stockholders' equity 23,514,810 22,095,951 20,849,348 19,332,344
- ------------------------------------------------------------------------------------------------------------------------
Average Balances
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 165,695,678 $141,410,379 $139,313,160 $143,919,722
Total deposits and borrowings 141,504,846 118,945,631 118,224,470 124,027,077
Stockholders' equity 22,789,823 21,626,308 20,318,612 19,027,257
Return on average total assets 1.43% 1.63% 1.54% 1.41%
Return on average stockholders' equity 10.40% 10.67% 10.52% 10.67%
========================================================================================================================
<CAPTION>
For the Year 1993
<S><C>
- ------------------------------------------------------------------------
Net interest income $ 5,841,071
Provision for credit losses 1,000,000
Net interest income after provision for credit losses 4,841,071
Non-interest income 855,619
Net income 1,759,683
- ------------------------------------------------------------------------
Per Share Data:*
- ------------------------------------------------------------------------
Diluted net income $ 1.75
Cash dividends declared 0.53
Book value 17.95
Number of common shares 1,007,424
- ------------------------------------------------------------------------
At Year End
- ------------------------------------------------------------------------
Total Assets $144,079,772
Loans, net of unearned income 86,247,915
Allowance for credit losses 1,851,369
Investment securities 36,663,520
Deposits 125,249,716
Long-term debt --
Stockholders' equity 18,085,400
- ------------------------------------------------------------------------
Average Balances
- ------------------------------------------------------------------------
Total assets $140,857,647
Total deposits and borrowings 122,441,750
Stockholders' equity 17,858,590
Return on average total assets 1.25%
Return on average stockholders' equity 9.85%
========================================================================
</TABLE>
* Per share data for 1992 through 1995 is restated to reflect the 100% stock
dividend paid May 20, 1994 and the July 1, 1996 2 for 1 stock split effected
upon conversion to Shore Bancshares, Inc.
The year ended December 31, 1997 reflects the merger of Kent Savings and Loan
Association, Inc. on April 1, 1997 and accounted as a purchase transaction.
1
<PAGE>
- ------------------------------------------------------------------
CONTENTS
- ------------------------------------------------------------------
Letter to Stockholders 4
Management's Discussion and Analysis of
Results of Operations and Financial Condition 5-11
Consolidated Financial Statements 12-32
Independent Auditiors' Report 33
Average Balances, Yields, and Rates 34
Rate and Volume Variance Analysis 35
Market Price of and Dividends on
Registrant's Common Equity and Related
Stockholder Matters 36
Board of Directors 37
Officers 38
Employees and Offices 39
- ------------------------------------------------------------------
2
<PAGE>
BUSINESS PROFILE
Shore Bancshares Inc. (the Company), a Maryland corporation, incorporated on
March 15, 1996, became a registered bank holding company on July 1, 1996 under
the Bank Holding Company Act of 1956, as amended. The Company engages in its
business through its sole subsidiary, The Centreville National Bank of Maryland
(the Bank), a national banking association.
The Company's and Bank's main office is located at 109 North Commerce Street,
Centreville, Queen Anne's County, Maryland. Banking business is conducted at 5
full service branch offices, all in Maryland with two located in Centreville,
Queen Anne's County, a branch in Stevensville, Queen Anne's County, a Hillsboro
location, serving Queen Anne's and Caroline Counties, and our most recent
addition in Chestertown, Kent County.
The Bank has been doing business in Centreville since 1876 and is engaged in
both the commercial and consumer banking business. The Bank provides a wide
range of personal banking services designed to meet the need of local consumers.
The Bank engages in the financing of commerce and industry by providing credit
and deposit services for small to medium sized businesses, local governments,
and for the agricultural community in the Bank's market area.
The Company's and the Bank's management are committed to providing personal,
friendly, quality service to our customers while earning a reasonable return for
our shareholders. Our commitment to the communities in which we operate and
their economic vitality is a crucial element of our focus. We believe in giving
back to the community we serve. We have grown and changed along with our local
region. Shore Bancshares Inc. will continue to respond to the changing business
environment through our investment in technology and products and services
developed to meet the needs of our customers, while remaining true to our
principle of excellent customer service.
3
<PAGE>
TO OUR STOCKHOLDERS:
The Board of Directors and management of Shore Bancshares, Inc. are pleased
to present the Annual Report for the year ended December 31, 1997.
It has truly been another eventful year for Shore Bancshares and The
Centreville National Bank of Maryland. The acquisition and merger of Kent
Savings and Loan Association, F.A. was completed as of the close of business
March 31, 1997, resulting in the Bank's fifth branch, its first in Kent County.
Several new products were introduced during 1997 including a Silver Certificate
for depositors 62 and over and a Prime Rate Home Equity Line of Credit. The
Company's and Bank's administrative offices moved into the newly renovated space
on Commerce Street and the project was almost complete as of year end. The
Annual Meeting will be held in the new facility this year, located at 109 North
Commerce Street in Centreville.
Among the projects facing us, is preparing our systems for the year 2000.
As you may know, there is the potential for problems with computers and other
types of electronic equipment as the date changes to January 1, 2000. We have
assembled a team to assess our exposure and analyze and implement solutions to
make the transition a smooth one. We fully expect to be prepared to provide our
customary level of service into the next century.
We attained record earnings for the year ended December 31, 1997 of $2.37
million, or $2.35 diluted earnings per common share, in net income after taxes
compared to $2.31 million, or $2.29 diluted earnings per common share, in 1996.
Total assets grew by 19.2% to $175.1 million, and deposits increased to $145.8
million or 17.4%, largely as a result of the Kent Savings merger.
Cash dividends totaling $0.97 per share were paid to stockholders during
1997, an increase of $0.05 per share, or 5.4%, over the prior year.
Stockholders' equity increased by 6.4% over the year ended December 31, 1996.
The book value of your stock increased by the same percentage to $23.34 per
share. Total capital remains well above regulatory requirements as discussed in
the Notes to Consolidated Financial Statements.
On behalf of the Board of Directors and the entire staff, we thank you for
your continued support. We encourage your comments and suggestions. We look
forward to another exciting year of change and challenge. However, our
commitment to service in our communities will never change.
/s/ Walter E. Schmidt /s/ Daniel T. Cannon
_____________________ ____________________
Walter E. Schmidt Daniel T. Cannon
Chairman of the Board President and CEO
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following discussion is designed to provide a better understanding of the
financial position of Shore Bancshares, Inc. (the Company), and should be read
in conjunction with the Audited Consolidated Financial Statements and Notes.
ORGANIZATIONAL BACKGROUND
On July 1, 1996, 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
comprised 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 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. Comparative financial data
for 1995 is that of the Bank restated to reflect the exchange of shares of Bank
common stock for Company shares.
Effective April 1, 1997, The Centreville National Bank of Maryland completed
its merger with Kent Savings and Loan Association, F.A. (Kent Savings) of
Chestertown Maryland. The transaction was accounted for as a purchase and,
therefore, results of operations for Kent Savings subsequent to March 31, 1997
are included in the consolidated statements of income and cash flows from date
of acquisition. Under the terms of the agreement the Bank paid approximately
$5.1 million for all of the outstanding shares of Kent Savings resulting in $2.1
million in goodwill to be amortized over 15 years. Kent Savings has one office
located on High Street in downtown Chestertown.
RESULTS OF OPERATIONS OVERVIEW
The Company reported $2.4 million in net income for 1997 or $2.35 diluted
earnings per share compared to 1996 net income of $2.3 million or $2.29 diluted
earnings per share and 1995 net income of $2,139,000 or $2.12 per share diluted
earnings. Excluding the gain on the sale of investment securities of $9 thousand
in 1997 and $204 thousand in 1996, net income before taxes in 1997 actually
increased $266 thousand or 11.5% over the same period in 1996. Earnings for the
year represent a record level of performance for the Company. The improvement
was attributable to the 11% growth in net interest income, the Company's major
income component. Non-interest income grew 13.2%, excluding the securities
gains. Non-interest expenses increased 15.4% over the prior year. The increase
was primarily attributable to expenses associated with the merger of Kent
Savings, including goodwill amortization, and higher depreciation expense in the
third and fourth quarters resulting from the renovation of the Centreville
office. Return on average assets was 1.43%, 1.63% and 1.54% in 1997, 1996, and
1995, respectively, which reflects the Company's growth in assets in 1997, as a
result of the Kent Savings merger, at a faster rate than the growth in earnings.
Earnings growth reflects a lower net interest margin and the additional costs of
the Kent Savings merger. The return on average stockholders' equity for 1997 was
10.40% compared to 10.67% and 10.52% in 1996 and 1995, respectively.
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 and borrowings.
The year ended December 31, 1997 was characterized by relatively stable interest
rates whereas the years ended December 31, 1996 and 1995 have been represented
by generally declining interest rates. For the Company, 1997 rate activity
reflected slightly increasing loan rates in the first quarter and a reduction of
rates in the fourth quarter. Deposit rates followed the same trends although
rate reductions began in the third quarter. The years 1996 and 1995 reflect
increasing loan rates and generally declining deposit rates until the second
half of 1996 when deposit rates increased slightly.
Net interest income (on a tax equivalent basis) for 1997 increased by $688
thousand or 10.6% compared to the year ended December 31, 1996, while 1996
increased by $192 thousand or 3.0% from the previous year ended December 31,
1995. Interest rate spread is the difference between the average yield on
interest earning assets and the average rate paid
5
<PAGE>
on interest bearing liabilities. Despite a decrease in interest rate spread,
1997 reflects an increase in net interest income due primarily to an increase in
volume associated with the Kent Savings merger. The 1996 variances are largely
the result of the effect of increased interest rate spread as of December 31,
1996 versus 1995. Interest rate spread for the years ended December 31, 1997,
1996 and 1995 was 3.82%, 3.87%, and 3.86%, respectively. The 1997 interest rate
spread decreased compared to 1996 by .05%. The rate spread variance reflects a
decrease in yield on earning assets of .02% as a result of a lower yielding loan
portfolio and growth in the investment securities portfolio, a lower yielding
asset when compared to loans. The yield on the loan portfolio was impacted by
the introduction of the Kent Savings loans which yield slightly less than the
loans originated by the Company prior to the acquisition. Federal funds and
securities portfolio yields actually increased over 1996 by .13% and .07%,
respectively. Interest-bearing liabilities' yield increased .03% over 1996,
reflecting the higher cost of the $5,000,000 Federal Home Loan Bank of Atlanta
(FHLB) long-term borrowing and IRA deposits. Other deposit accounts actually
reflected a reduced yield compared to the previous year. Interest rate spread in
1996 increased by .01% over 1995 as a result of a modest increase in yield on
earning assets of .04% and an increase in expense of interest-bearing
liabilities of .03%. Overall, when compared to 1995, loan rates showed an
increase during 1996, as did the average balance in loans, providing a higher
return compared to investment securities. Total interest expense actually
decreased in 1996 compared to 1995 by $21 thousand, or less than 1%, as a result
of decreasing deposit rates in the first 6 months of 1996 and 1.1% decrease in
average balance of interest bearing deposits as of December 31, 1996. See the
table titled "Average Balances, Yields and Rates" on page 34 for additional
information.
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. For 1997, the net interest margin decreased to 4.64% from 4.85%
in 1996. This decrease is the result of earning assets growing 15.5% while net
interest income grew at a rate of 10.6%. The net interest margin for 1996
increased to 4.85% from 4.75% the previous year. These changes are the result of
repricing as previously discussed and are illustrated in the table titled "Tax
Equivalent Net Interest Income and Rate/Volume Analysis" on pages 34 and 35.
Comparing 1997 and 1996 shows that changes in rates increased net interest
margin $6 thousand, while changes in volume provided $682 thousand for a net
increase of $688 thousand. Volume increases accounted for the growth in net
interest margin and is attributed to the Kent Savings merger. Excluding the
$20.3 million in total loans from Kent Savings, loan growth was actually flat.
The majority of the $7 million growth in average investment securities is
attributed to the purchase of bonds to leverage the FHLB borrowing. When
comparing 1996 vs. 1995, repricing actually reduced the net interest margin $20
thousand in net interest income and volume changes provided $212 thousand for a
net increase of $192 thousand. The 1.1% 1996 increase in average earning assets
was assisted by a $4.5 million increase in average total loans and was tempered
by a 17% or $7.8 million reduction in average total investment securities. The
funds made available as a result of a declining investment portfolio and
increased deposits which were not invested in the loan portfolio were invested
federal funds. The balance of outstanding mortgage loans increased by
approximately $4.4 million. This increase is attributed to an increase in
commercial real estate loans and the addition of a 10 year draw home equity line
of credit product as well as a significant increase in the outstanding balance
of the first time home buyer product.
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.
For additional analysis see the Notes to the Consolidated Financial
Statements.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
For the year ended December 31, 1997, the Bank recorded net charge off of
$115 thousand compared to net recoveries of $25 thousand in 1996 and net charge
offs of $3 thousand in 1995. 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 relatively
small amount of net charge offs in 1997 and 1995 and net recoveries in 1996.
6
<PAGE>
Gross charge offs amounted to $159 thousand, $78 thousand and $105 thousand
in 1997, 1996, and 1995, respectively, the majority of which were installment
loans. Efforts to collect charged off loans continue and are evidenced by the
amount of recoveries, totaling $44 thousand in 1997, $103 thousand in 1996 and
$102 thousand in 1995.
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, 1996, or 1995. $15 thousand was added to the allowance upon the merger
with Kent Savings. 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 December 31,1997 represented 1.29% of gross
loans. The allowance for credit losses of $1.5 million as of December 31, 1996
amounted to 1.69% of the outstanding loan portfolio. The decrease in the
percentage of allowance to outstanding loans, despite the increasing outstanding
gross loans, is justified by lower levels of past due and classified loans.
Analysis by loan review and internal audit supports the adequacy of the
allowance. This 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 evidenced by
lower past due loan totals. In management's opinion, the allowance for credit
losses is adequate as of December 31, 1997.
See Note 5 in the Notes to the Consolidated Financial Statements.
NON-INTEREST INCOME
Non-interest income decreased $90 thousand or 9.04% as of December 31, 1997
compared to the year ended December 31, 1996. However, excluding the securities
gains, non-interest income increased $105 thousand or 13.2%. Increased service
charges from increased levels of checks drawn against insufficient funds
accounted for $46 thousand of the increase. Gain on life insurance of $31
thousand and $47 thousand increase in earnings from unconsolidated subsidiaries
also contributed to the improvement in non-interest income.
As of December 31, 1996, non-interest income increased $122 thousand or
13.9% over 1995. The increase was due primarily to a $204 thousand gain on the
sale of Sallie Mae Stock. Service charges on deposit accounts increased $45
thousand reflecting increased levels of checks drawn against insufficient funds.
Income of unconsolidated subsidiaries declined in 1996 to $25 thousand; a $92
thousand reduction from the prior year. See details in Note 7 in the Notes to
Consolidated Financial Statements.
For the year ended December 31, 1995, non-interest income increased $21
thousand or 2.4% compared to the prior year. The increase was due largely to an
increase of $43 thousand in service charges on deposit accounts which were the
result of increased levels of checks drawn against insufficient funds and was
offset by a $51 thousand decrease in income of unconsolidated subsidiaries.
NON-INTEREST EXPENSES
The year ended December 31, 1997 reflected a $583 thousand increase or 15.4%
when compared to the year ended December 31, 1996. A significant portion, or
$248 thousand, of the increase is related to employee salaries and benefits. The
number of full time equivalent employees increased by four when comparing the
year ended December 31, 1997 to the same period in 1996. The Company added 3
full time staff positions as well as a branch manager position with the addition
of the Kent Branch. Salaries and benefits also include cost of living increases
and benefit cost increases.
FDIC insurance premiums increased in 1997 with the inclusion of SAIF
deposits from Kent Savings. Premises and fixed assets expenses continued to
increase. Facility improvements and equipment upgrades resulted in increased
depreciation expense, maintenance costs and equipment service contracts. This
trend is expected to continue in 1998 when a
7
<PAGE>
full year of depreciation expense will be recorded for the Commerce Street
renovation. Renovations and expansions at three branch locations were completed
in 1995 and increased the Bank's investment in premises. The Company began the
Commerce Street renovation in January 1997, and anticipates completion of this
office in 1998. Larger buildings require more maintenance and the additional
investment will be depreciated over the estimated useful life of the asset. The
impact of this additional expense is not expected to have a material effect on
the Company's net income.
Increases were noted in marketing and stationery and supplies. These areas
of increased expense include costs associated with the promotion and
establishment of the Kent Branch. In addition, the Company has adopted a full
scale marketing program including direct mail, cable television commercial and
product promotion. Marketing plays a significant role in banking today, more so
than in the past. As the banking industry continues to consolidate, both banking
and non-banking companies are competing much more aggressively. Direct
competition for deposits comes from other commercial banks, savings banks,
savings and loan associations, and credit unions as well as brokerage houses,
mutual funds and the securities market. The Bank also competes with the same
banking entities for loans, as well as with mortgage banking companies and
institutional lenders. Significant growth was also noted in "Other expenses"
primarily due to $106 thousand of goodwill amortization produced from the Kent
Savings merger.
Non-interest expenses increased slightly by $1 thousand or less than 1% for
the year ended December 31, 1996 from the previous year. The minimal fluctuation
in other non-interest expense is primarily the result of reduced FDIC premiums
offsetting the increase in other costs. FDIC deposit insurance premiums were
reduced in 1996 to unusually low levels since the fund surpassed it
recapitalization goal. Increases in costs were noted for salaries and benefits
as the result of the reflection of a full year of salaries for the employees who
were added in 1995, increased benefit costs and cost of living adjustments. The
number of full time equivalent staff as of December 31, 1996 did not change from
the previous year.
Non-interest expenses for the year ended December 31, 1995 reflected a
slight increase of less than 1% over the prior year end as well. This increase
was slowed as a result of a 50% reduction in FDIC premiums for 1995. The Company
added one full-time and eight part-time employees to the staff during 1995.
Part-time employees were hired to provide a consistent level of service to our
customers during peak times. The increase in salaries and benefit costs, which
includes cost of living adjustments for current staff, amounted to $71 thousand
or 3.9%. Increases were also noted in postage expense, marketing expense and
mortgage appraisal fees. Postage rate and volume increases accounted for a 27.2%
increase in postage expense.
INCOME TAXES
For 1997, the effective tax rate for the Company decreased to 32.3% compared
to 33.7% for 1996 and 31.1% for 1995. The reduction in effective tax rate in
1997 resulted from a $51 thousand rehabilitation tax credit. The Company's
income tax expense differs from the amount computed at statutory rates primarily
due to tax-exempt interest from certain loans and investment securities and, in
1997, the rehabilitation tax credit. Note 13 to the Consolidated Financial
Statements includes a reconciliation of the Federal tax expense computed using
the Federal Statutory rate of 34% and provides additional detail. The Company
noted a decrease in State income taxes beginning in 1996 as the Maryland
legislature exempted a portion of the interest from securities issued by the
United States Treasury, bank-qualified Maryland Municipals, and some United
States Government Agencies. This change in State income taxes has not had a
material impact on liquidity, financial condition or operations.
Deferred tax assets and liabilities are based on the differences between
financial statement and tax bases of assets and liabilities. The tax effect of
these differences is calculated using current statutory rates. Management
believes more likely than not that all deferred taxes will be realized and
therefore no valuation allowance is deemed necessary.
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
8
<PAGE>
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 $48.7 million and $43.7 million as
of December 31, 1997 and 1996, respectively. The higher level of investments in
securities resulted primarily from the investment of $5 million in funds
borrowed from the FHLB. 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 shareholders' equity. Note 4 to the
Consolidated Financial Statements provides detail by type and contractual
maturity for the years ended December 31, 1997 and 1996.
LOAN PORTFOLIO
The Company is actively engaged in originating loans to customers in Queen
Anne's, Caroline, Kent, and Talbot Counties in the State of Maryland. 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 5 to the Consolidated Financial Statements 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 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 December 31, 1997.
It is the policy of the Company 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, 1997 and 1996, $199 thousand
and $872 thousand, respectively, of non-accrual loans were secured by collateral
with an estimated value of $1.1 million as of December 31, 1997 and $1.8 million
as of December 31, 1996. At December 31, 1997, the Company had $3.3 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 grew $21.6 million or 17.4% to 145.8 million compared to
$124.2 million in 1996. The Kent Savings merger provided $20.8 million in time,
savings and IRA deposits at April 1, 1997. In addition, deposit growth of 8.2%
and 18.6% in non-interest bearing demand deposits and interest-bearing
transaction accounts, respectively, have exhibited strong growth compared to the
year ended December 31, 1996. 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.
9
<PAGE>
LIQUIDITY MANAGEMENT
Liquidity describes the ability of the Company to meet financial obligations
that arise out of the ordinary course of business. Liquidity is primarily needed
to meet borrower and depositer withdrawal requirements 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. As
indicated in the Consolidated Statement of Cash Flows a primary source of cash
is maturity of investment securities. A substantial portion of the investment
portfolio contains readily marketable securities that could be converted to cash
immediately. Refer to Note 4 in the Consolidated Financial Statements for a
table showing the maturity distribution of the Company's securities portfolio
and the related 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 FHLB and from lines of credit approved at correspondent banks. As of
December 31, 1997 the Company had outstanding loan commitments and unused lines
of credit of $12.0 million. Of this total, management expects to fund $ 4
million within one year. Loan growth of $19.9 million or 22.4% and deposit
growth of $21.6 million or 17.4% in 1997 primarily resulted from the Kent
merger. Investment security growth was funded by the long-term borrowing from
the Federal Home Loan Bank of Atlanta. Deposit growth of $7.7 million or 6.6%
during the later part of 1996, was used primarily to fund the $1.8 million or
2.1% increase in loans and $6.6 million or 18.2% increase in amortized cost of
securities. Management knows of no trend or event which will have a material
impact on the Company's ability to maintain liquidity at satisfactory levels.
MARKET RISK MANAGEMENT
Market risk is the risk of loss that arises from changes in interest rates,
foreign currency exchange prices, commodity prices, equity prices, and other
market changes that affect market sensitive financial instruments. The Company's
subsidiary's, The Centreville National Bank of Maryland, risk is composed
primarily of interest rate risk, which is the exposure of the Bank's earnings
and capital arising from future interest rate changes. This risk is a normal
part of the banking business because assets and liabilities do not reprice at
the same rate, nor do they move to the same degree as rates change. In addition,
the maturity distribution of the Bank's assets and liabilities do not match for
given periods of time. The Bank's Board of Directors has adopted an Asset
Liability Management Policy, which is administered by the Asset Liability
Committee of the Board of Directors. The Committee is responsible for monitoring
the Bank's interest rate sensitivity position and recommending policies to the
Board of Directors to limit exposure to interest rate risk while maximizing net
interest income.
The Bank uses earnings simulation modeling to measure the effect specific
rate changes would have on one year of net interest income. Key assumptions
include calls and maturities of investment securities, depositors' rate
sensitivity, maturity dates of fixed rate loans and investment securities and
repricing date of variable rate loans. As with any method of gauging risk, there
are inherent shortcomings and actual results may deviate significantly from
assumptions used in the model. Actual results will differ from simulated results
due to timing , magnitude and frequency of interest-rate changes as well as
changes in market conditions and management strategies. At December 31, 1997 the
Bank's estimated earnings sensitivity profile reflected a modest sensitivity to
interest rate changes. Based on an assumed 100 basis point immediate change in
interest rates the Bank's net interest income would decrease by $142 thousand if
rates were to increase by that amount and would increase $199 thousand if rates
would decline a similar amount.
CAPITAL RESOURCES AND ADEQUACY
Total stockholders' equity increased $1.4 million or 6.4% in 1997 to $23.5
million at the end of the year from $22.1 million at December 31, 1996. Earnings
of $2.4 million was the primary contributor to this increase. The change in
unrealized gain (loss) on investments classified as available for sale accounted
for a $26 thousand improvement and dividends paid reduced stockholders' equity
$977 thousand. Total stockholders' equity as of December 31, 1996 increased $1.2
million compared to the prior year where $2.3 million in earnings provided the
majority of the increase. The change
10
<PAGE>
in unrealized gain on investments classified as available for sale accounted for
a $134 thousand reduction and dividends paid also decreased stockholders' equity
$927 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 4%. The leverage
capital ratio as of December 31, 1997 was 12.23% for the Company, and as of
December 31, 1996 was 14.86% for the Bank.
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%. As of December 31, 1997,
the Company's ratio was 23.61%. The Bank's ratio at December 31, 1996 was
28.25%. According to FDIC capital guidelines, the Bank is considered to be "Well
Capitalized."
Building and technological improvements continued in 1997. Renovations at
the Commerce street location were started and substantially complete during
1997. Costs were approximately $1.2 million which includes improvements,
furniture and equipment. The Kent Branch was updated with equipment and
technology during the second quarter of 1997. During 1995, the Company rebuilt
the branch located on Route 213, south of Centreville, converting it to a full
service facility with a lender and customer service representative on staff,
safe deposit facilities, and an automated teller machine ("ATM".) In 1995, the
Company also completed an addition to the Stevensville branch. Approximately
1,500 square feet of office space and a third drive-thru lane were built. A new
drive up ATM was installed in the new addition. The funding sources for these
projects are primarily cash, federal funds and maturities of investment
securities.
The Hillsboro office was purchased from Signet Bank on January 31, 1992, and
the Branch operated in a leased building on Maryland Route 404 until December
1993, when the building was purchased by the Company. A thorough renovation of
the site has since been completed. This project included the addition of an ATM,
a drive thru window, additional office space and a new roof and heating plant.
On December 5, 1996 the Company entered into an agreement to acquire Kent
Savings and Loan Association, F.A.(Kent Savings) of Chestertown, Maryland. The
effective date of the merger was April 1, 1997 and was accounted for as a
purchase transaction. Under the terms of the agreement, the Company paid
approximately $5.1 million for all of the outstanding shares of Kent Savings. As
of March 31, 1997, total assets of Kent Savings were approximately $24.0 million
and total stockholders' equity was approximately $2.9 million.
Management knows of no other trend or event which will have a material
impact on capital. Please also refer to Note 16 in the Consolidated Financial
Statements for additional discussion of regulatory matters.
FUTURE TRENDS
The Year 2000 issue is a potential problem that is facing all users of
automated information systems and equipment. The concern is that many computers
and equipment are based on two digits for the year of the transaction (for
example "97") rather than a full four digits. These systems may not operate
effectively when the last two digits become "00", as occurs on January 1, 2000.
This could result in a systems failure or miscalculations, causing disruptions
in operations and the inability to process transactions or engage in similar
normal business activity. This is not just a banking problem, as corporations
and business around the world are similarly impacted.
To mitigate the effects of the Year 2000 issue, the Company's subsidiary,
The Centreville National Bank of Maryland, adopted a plan and formed an internal
task force to identify and assess impact of the Year 2000 issues, test the
systems, and determine and implement the needed changes. The Bank is
coordinating its efforts with other entities with which it interacts including
suppliers, customers, creditors, borrowers and financial service organizations.
The Bank's primary supplier of data processing services also has adopted a Year
2000 plan and timetable. Based on assessments made to date, the total cost of
the project is estimated to be approximately $170 thousand which is being funded
through operating cash flows. The majority of the cost is attributable to
purchase of equipment and software to replace those systems which cannot be made
Year 2000 compliant. The equipment and software will be capitalized. Additional
costs including staff time will be expensed in the normal course of business and
will not have a material impact on the Company's results of operations,
liquidity, capital resources or financial condition.
11
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Cash and due from banks $ 5,091,798 $ 4,872,866
Federal funds sold 3,503,900 5,389,874
Investment securities available for sale, at fair value 9,444,463 11,190,591
Investment securities held to maturity, fair value of $39,498,436 (1997) and
$32,647,262 (1996) 39,298,105 32,462,156
Loans, less allowance for credit losses of $1,403,747 (1997) and $1,503,268 (1996) 107,763,536 87,389,489
Premises and equipment, net 3,258,876 2,153,126
Accrued interest receivable 1,475,994 1,385,474
Investment in unconsolidated subsidiaries 1,187,206 1,114,228
Goodwill 2,087,803 97,516
Other assets 2,003,330 844,157
- -----------------------------------------------------------------------------------------------------------------------
Total assets $175,115,011 $146,899,477
=======================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 17,727,129 $ 16,380,740
Interest-bearing transaction 19,176,281 16,172,211
Savings and money market 37,575,341 31,799,398
Time, $100,000 or more 13,473,763 16,679,534
Other time 57,860,756 43,134,365
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 145,813,270 124,166,248
Long-term debt 5,000,000 --
Accrued interest payable 189,276 158,000
Other liabilities 597,655 479,278
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 151,600,201 124,803,526
- -----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000 shares; issued 1,007,424
shares 10,074 10,074
Surplus 10,064,166 10,064,166
Retained earnings 13,480,311 12,087,317
Unrealized loss on investment securities available for sale, net of income tax (39,741) (65,606)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 23,514,810 22,095,951
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $175,115,011 $146,899,477
=======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S><C>
INTEREST INCOME
Interest and fees on loans $ 9,346,631 $ 8,103,983 $ 7,671,960
Interest and dividends on investment securities
Taxable 2,286,192 1,834,979 2,156,513
Tax-exempt 417,895 424,202 543,148
Interest on federal funds sold 354,331 378,246 137,734
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 12,405,049 10,741,410 10,509,355
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 5,370,057 4,475,979 4,444,628
Interest on short-term borrowings -- -- 52,236
Interest on long-term debt 77,825 -- --
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 5,447,882 4,475,979 4,496,864
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 6,957,167 6,265,431 6,012,491
PROVISION FOR CREDIT LOSSES -- -- --
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 6,957,167 6,265,431 6,012,491
- -------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 664,708 639,631 594,201
Gains on sales of investment securities, net 8,568 203,997 37,808
Equity in net income of unconsolidated subsidiaries 72,978 25,884 118,120
Other income 162,795 129,911 127,257
- -------------------------------------------------------------------------------------------------------------------------
Total non-interest income 909,049 999,423 877,386
- -------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,238,125 1,990,238 1,891,327
Premises and equipment expenses 577,544 552,368 466,572
Federal deposit insurance premiums 21,410 2,000 143,723
Marketing and promotion 142,101 92,450 66,909
Stationery, printing and supplies 160,037 120,105 129,983
Professional fees 114,601 175,957 130,030
Director and committee fees 195,007 178,054 189,132
Outside data processing 283,164 248,579 221,610
Other expenses 634,046 423,683 545,437
- -------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 4,366,035 3,783,434 3,784,723
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 3,500,181 3,481,420 3,105,154
FEDERAL AND STATE INCOME TAXES 1,129,983 1,173,678 966,654
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,370,198 $ 2,307,742 $ 2,138,500
=========================================================================================================================
Basic earnings per common share $ 2.35 $ 2.29 $ 2.12
=========================================================================================================================
Diluted earnings per common share $ 2.35 $ 2.29 $ 2.12
=========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Unrealized
Gain
(Loss) on
Investment
Securities Total
Common Retained Available Stockholders'
Stock Surplus Earnings for Sale Equity
- -----------------------------------------------------------------------------------------------------------------------
<S><C>
Balances, January 1, 1995 $10,074 $ 10,064,166 $ 9,437,570 $(179,466 ) $19,332,344
Premium paid on stock redemption of
unconsolidated subsidiary -- -- (13,353) -- (13,353)
Net income -- -- 2,138,500 -- 2,138,500
Cash dividends, $.85 per share -- -- (856,310) -- (856,310)
Change in unrealized gain (loss) on investment
securities available for sale, net of income
tax -- -- -- 248,167 248,167
- -----------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 10,074 10,064,166 10,706,407 68,701 20,849,348
Net income -- -- 2,307,742 -- 2,307,742
Cash dividends, $.92 per share -- -- (926,832) -- (926,832)
Change in unrealized gain (loss) on investment
securities available for sale, net of income
tax -- -- -- (134,307 ) (134,307)
- -----------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 10,074 10,064,166 12,087,317 (65,606 ) 22,095,951
Net income -- -- 2,370,198 -- 2,370,198
Cash dividends, $.97 per share -- -- (977,204) -- (977,204)
Change in unrealized gain (loss) on investment
securities available for sale, net of income
tax -- -- -- 25,865 25,865
- -----------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 $10,074 $ 10,064,166 $13,480,311 $ (39,741 ) $23,514,810
=======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,370,198 $ 2,307,742 $ 2,138,500
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 424,302 296,599 217,869
Equity in net income of unconsolidated subsidiaries (72,978) (25,844) (118,120)
Provision for credit losses, net (114,521) 24,713 (2,946)
Deferred income taxes 265,591 59,892 77,473
Net gains on sales of assets 37,920 (205,286) (32,882)
Decrease (increase) in accrued interest receivable 10,317 (48,626) 114,543
(Increase) decrease in other assets (1,346,040) 34,117 (90,209)
Increase (decrease) in accrued interest payable (118,486) 7,162 15,625
(Decrease) increase in other liabilities (88,744) (141,452) 129,884
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,367,559 2,309,017 2,449,737
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held to maturity 16,220,939 752,344 3,241,328
Proceeds from maturities of investment securities available for sale 1,081,113 10,776,721 9,829,678
Proceeds from sale of investment securities available for sale 3,373,351 957,127 4,024,922
Purchase of investment securities held to maturity (22,899,682) (11,034,144) (582,784)
Purchase of investment securities available for sale (1,693,125) (7,988,166) --
Decrease (increase) in loans, net 46,114 (1,963,160) (7,720,261)
Purchase of premises and equipment (1,276,182) (210,521) (1,362,801)
Proceeds from sale of premises and equipment 301 7,200 --
Investment in unconsolidated subsidiary -- (15,000) --
Purchase of other real estate owned -- -- (155,305)
Proceeds from sale of other real estate owned -- 118,070 518,417
Acquisition, net of cash acquired (2,799,492) -- --
- -------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (7,946,663) (8,599,529) 7,793,194
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in demand, transaction, savings, and money market
deposits 6,923,212 2,928,474 (7,688,139)
(Decrease) increase in time deposits (6,033,946) 4,758,021 (816,701)
Proceeds from long-term debt 5,000,000 -- --
Cash dividends paid (977,204) (926,832) (856,310)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 4,912,062 6,759,663 (9,361,150)
- -------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,667,042) 469,151 881,781
Cash and cash equivalents at beginning of year 10,262,740 9,793,589 8,911,808
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,595,698 $ 10,262,740 $ 9,793,589
=========================================================================================================================
Supplementary cash flow information:
Interest paid $ 5,416,606 $ 4,468,817 $ 4,481,239
=========================================================================================================================
Income taxes paid $ 1,120,005 $ 1,099,707 $ 788,076
=========================================================================================================================
Noncash investing activities:
Transfers from loans to other real estate owned $ -- $ (119,886) $ --
=========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of
Shore Bancshares, Inc. (the "Company") and its subsidiary, The
Centreville National Bank of Maryland (the "Bank") with all
significant intercompany transactions eliminated. The
investment in subsidiary is recorded on the Company's books on
the basis of its equity in the net assets of the subsidiary.
The accounting and reporting policies of the Company conform
to generally accepted accounting principles and to general
practices in the banking industry. Certain reclassifications
have been made to amounts previously reported to conform with
the classifications made in 1997.
NATURE OF OPERATIONS
The Company, through its bank subsidiary, provides domestic
financial services primarily in the Maryland counties of
Queen Anne's, Kent and Caroline. The primary financial
services include real estate, commercial and consumer
lending, as well as traditional demand deposits and savings
products.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
INVESTMENT SECURITIES
Investment securities that management has the ability and
intent to hold to maturity are classified as held to
maturity and carried at cost, adjusted for amortization of
premium and accretion of discounts. Other investment
securities are classified as available for sale and are
carried at estimated fair value. Unrealized gains and losses
on investment securities available for sale, net of related
deferred income taxes, are recognized as direct increases or
decreases in stockholders' equity. The cost of investment
securities sold is determined using the specific
identification method.
LOANS
Loans are stated at the principal amount outstanding, net of
unearned income. Interest income on loans is accrued at the
contractual rate on the principal amount outstanding. It is
the Company's policy to discontinue the accrual of interest
when circumstances indicate that collection is doubtful.
Fees charged and costs capitalized for originating mortgage
loans are being amortized on the interest method over the
term of the loan.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established through a
provision for credit losses charged to expense. Loans are
charged against the allowance for credit losses when
management believes that the collectibility of the principal
is unlikely. The allowance, based on evaluations of the
collectibility of loans and prior loan loss experience, is
an amount that management believes will be adequate to
absorb possible losses on existing loans that may become
uncollectible. The evaluations take into consideration such
factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality,
16
<PAGE>
review of specific problem loans, and current economic
conditions and trends that may affect the borrowers' ability
to pay.
While management believes it has established the allowance
for credit losses in accordance with generally accepted
accounting principles and has taken into account the views
of its regulators and the current economic environment,
there can be no assurance that in the future the Company's
and Bank's regulators or its economic environment will not
require further increases in the allowance.
LONG-LIVED ASSETS
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation of physical properties is
computed on the straight-line method over the estimated
useful lives of the properties. Expenditures for
maintenance, repairs, and minor renewals are charged to
operating expenses; expenditures for betterments are charged
to the property accounts. Upon retirement or other
disposition of properties, the carrying value and the
related accumulated depreciation are removed from the
accounts.
Long-lived assets are evaluated regularly for
other-than-temporary impairment. If circumstances suggest
that their value may be impaired and the write-down would be
material, an assessment of recoverability is performed prior
to any write-down of the assets. Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF, was adopted on January 1, 1996. Implementation
of this standard did not have a significant impact on the
Company's financial condition or results of operations.
OTHER REAL ESTATE OWNED
Real estate acquired in foreclosure of loans is carried at
cost or fair value, less estimated costs of disposal,
whichever is lower. Fair value is based on independent
appraisals and other relevant factors. At the time of
acquisition, any excess of loan balance over fair value is
charged to the allowance for credit losses. Any subsequent
reduction in value, as well as any operating expenses, are
included in other operating expenses.
INCOME TAXES
Income tax expense is based on the results of operations,
adjusted for permanent differences between items of income
or expense reported in the financial statements and those
reported for tax purposes. Under the liability method,
deferred income taxes are determined based on the
differences between the financial statement carrying amounts
and the income tax bases of assets and liabilities and are
measured at the enacted tax rates that will be in effect
when these differences reverse.
NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 125,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENTS OF LIABILITIES (FASB 125), which
provides new accounting and reporting standards for sales,
securitizations, and servicing of receivables and other
financial assets and extinguishments of liabilities. FASB
125 is effective for transactions occurring after December
31, 1996, except for the provisions relating to repurchase
agreements, securities lending and other similar
transactions and pledged collateral, which have been delayed
until after December 31, 1997 by FASB 127, DEFERRAL OF THE
EFFECTIVE DATE OF CERTAIN PROVISIONS OF FASB STATEMENT NO.
125, AN AMENDMENT OF FASB 125. Adoption of FASB 125 was not
material; FASB 127 will be adopted as required in 1998 and
is not expected to be material.
17
<PAGE>
In February 1997, Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE (FASB 128), was issued
and establishes new standards for computing and presenting
earnings per share. FASB 128 is effective for the Company's
December 31, 1997 financial statements, including
restatement of interim periods; earlier application was not
permitted. The effect of the new standard did not have a
material impact on previously reported earnings per share.
For the three years ended December 31, 1997, the Company had
no common stock equivalents outstanding.
In June 1997, Statement of Financial Accounting Standards
No. 130 REPORTING COMPREHENSIVE INCOME (FASB 130), was
issued and establishes standards for reporting and
displaying comprehensive income and its components. FASB 130
requires comprehensive income and its components, as
recognized under the accounting standard, to be displayed in
a financial statement with the same prominence as other
financial statements. The Company plans to adopt the
standard, as required, beginning in 1998; adoption of this
disclosure requirement will not have a material impact on
the Company.
Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION (FASB 131), also issued in June 1997,
establishes new standards for reporting information about
operating segments in annual and interim financial
statements. The standard also requires descriptive
information about the way the operating segments are
determined, the products and services provided by the
segments, and the nature of differences between reportable
segment measurements and those used for the consolidated
enterprise. This standard is effective for years beginning
after December 15, 1997. Adoption in interim financial
statements is not required until the year after initial
adoption, however, comparative prior period information is
required. The Company is evaluating the standard and plans
adoption as required in 1998; adoption of this disclosure
requirement will not have a material financial impact on the
Company.
CASH AND CASH EQUIVALENTS
The Company has included cash and due from banks and federal
funds sold as cash and cash equivalents for the purpose of
reporting cash flows.
NOTE 2 ACQUISITIONS
On April 1, 1997 the Company completed the acquisition of Kent
Savings and Loan Association for a purchase price of
$5,111,000 in cash. The transaction was accounted for as a
purchase and, therefore, results of operations subsequent to
March 31, 1997 are included in the consolidated statements of
income and cash flows from the date of acquisition.
The excess cost over the estimated fair value of the tangible
net assets acquired was approximately $2,107,000 and is being
amortized on a straight-line basis over 15 years.
In accordance with the accounting and disclosure requirements
governed by Accounting Principles Board Opinion No. 16,
BUSINESS COMBINATIONS, the following supplemental data is
presented for the years ended December 31, 1997 and 1996. This
pro forma combined information reflects the results of
operations for the current and prior periods as though Shore
Bancshares, Inc. and Kent Savings and Loan Association had
been combined at the beginning of each respective period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S><C>
Interest income $ 12,875,319 $ 12,611,196
Net income 2,455,125 2,457,843
Diluted earnings per share 2.44 2.44
===================================================================================================================
</TABLE>
18
<PAGE>
NOTE 3 FORMATION OF HOLDING COMPANY
Shore Bancshares, Inc., a one-bank holding company, commenced
operations on July 1, 1996 pursuant to a Plan of
Reorganization and Agreement to Merge proposed by management
and approved by the stockholders on April 16, 1996. Under the
Plan, each outstanding share of Bank common stock was
exchanged for two shares of holding company common stock. The
Bank continues its banking business under its same name as a
wholly owned subsidiary of the holding company.
Comparative data in the accompanying consolidated financial
statements for 1995 are those of the Bank, the sole subsidiary
and predecessor of the Company, restated to reflect the
exchange of shares.
NOTE 4 INVESTMENT SECURITIES
The amortized cost and fair value of investment securities at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
<S><C>
AVAILABLE FOR SALE
U.S. Treasury securities $ 6,965,733 $ 48,176 $ -- $ 7,013,909
Obligations of U.S. Government
agencies and corporations 465,328 9,448 (6) 474,770
U.S. Government Securities Mutual
Fund 1,010,001 -- (122,367) 887,634
Federal Reserve Bank stock 302,250 -- -- 302,250
Federal Home Loan Bank of Atlanta
stock 765,900 -- -- 765,900
- -------------------------------------------------------------------------------------------------------------
$ 9,509,212 $ 57,624 $(122,373) $ 9,444,463
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------
<S><C>
HELD TO MATURITY
Obligations of U.S. Government
agencies and corporations $ 29,088,534 $ 47,182 $(22,780) $ 29,112,936
Obligations of states and
political subdivisions 10,209,571 185,246 (9,317) 10,385,500
- ------------------------------------------------------------------------------------------------------------
$ 39,298,105 $232,428 $(32,097) $ 39,498,436
============================================================================================================
</TABLE>
19
<PAGE>
The amortized cost and fair value of investment securities at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
<S><C>
AVAILABLE FOR SALE
U.S. Treasury securities $ 9,434,329 $ 29,394 $ (5,892) $ 9,457,831
U.S. Government Securities Mutual
Fund 1,000,001 -- (130,391) 869,610
Federal Reserve Bank stock 302,250 -- -- 302,250
Federal Home Loan Bank of Atlanta
stock 560,900 -- -- 560,900
- ---------------------------------------------------------------------------------------------------------------------
$ 11,297,480 $ 29,394 $(136,283) $ 11,190,591
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
<S><C>
HELD TO MATURITY
Obligations of U.S. Government and
other government agencies and
corporations $ 23,065,234 $104,548 $ (79,012) $ 23,090,770
Obligations of states and political
subdivisions 9,396,922 182,088 (22,518) 9,556,492
- ---------------------------------------------------------------------------------------------------------------------
$ 32,462,156 $286,636 $(101,530) $ 32,647,262
=====================================================================================================================
</TABLE>
Gross realized gains and gross realized losses on sales of
investment securities available for sale are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C>
Gross realized gains:
U.S. Treasury securities $ 8,103 $ -- $ 22,496
Obligations of U.S. Government agencies and corporations -- 7 540
Obligations of states and political subdivisions -- -- 26,218
Sallie Mae stock 2,313 203,990 --
- --------------------------------------------------------------------------------------------------------------------
10,416 203,997 49,254
Gross realized losses:
U.S. Treasury securities 325 -- 11,446
Obligations of U.S. Government agencies and corporations 1,524 -- --
- --------------------------------------------------------------------------------------------------------------------
Net realized gains $ 8,567 $ 203,997 $ 37,808
====================================================================================================================
</TABLE>
Proceeds from the sale of investment securities were
$3,373,351, $957,127 and $7,266,250 for the years ended
December 31, 1997, 1996 and 1995, respectively.
20
<PAGE>
The amortized cost and fair value of investment securities by
contractual maturity is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY
- -----------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- -----------------------------------------------------------------------------------------------------------------
<S><C>
Amounts maturing:
One year or less $ 2,091,729 $ 2,098,345 $ 10,161,118 $ 10,173,623
After one year through five
years 5,020,609 5,062,859 21,296,112 21,378,018
After five years through ten
years 124,421 127,032 7,840,875 7,946,795
After ten years 194,302 200,443 -- --
- -----------------------------------------------------------------------------------------------------------------
7,431,061 7,488,679 39,298,105 39,498,436
Investments in equity
securities and mutual funds 2,078,151 1,955,784 -- --
- -----------------------------------------------------------------------------------------------------------------
$ 9,509,212 $ 9,444,463 $ 39,298,105 $ 39,498,436
=================================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
- ---------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------------
<S><C>
Amounts maturing:
One year or less $ 1,995,501 $ 1,999,376 $ 7,938,425 $ 7,994,151
After one year through five
years 7,438,828 7,458,455 21,151,094 21,239,667
After five years through ten
years -- -- 3,372,637 3,413,444
- ---------------------------------------------------------------------------------------------------------------------
9,434,329 9,457,831 32,462,156 32,647,262
Investments in equity securities
and mutual funds 1,863,151 1,732,760 -- --
- ---------------------------------------------------------------------------------------------------------------------
$ 11,297,480 $ 11,190,591 $ 32,462,156 $ 32,647,262
=====================================================================================================================
</TABLE>
The Company has pledged certain investment securities as
collateral for deposits of certain government agencies and
municipalities at December 31 as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Amortized cost $ 17,415,482 $ 19,554,281
Fair value 17,337,504 19,619,056
==================================================================================================================
</TABLE>
21
<PAGE>
NOTE 5 LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Company makes loans to customers primarily in the Maryland
counties of Queen Anne's, Kent and Caroline, in an economy
closely tied to the agricultural industry. A substantial
portion of the Company's loan portfolio consists of
residential and commercial real estate mortgages.
The Company's loan portfolio at December 31 is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------
<S><C>
Real estate:
Construction and land development $ 2,945,617 $ 3,263,710
Commercial 12,973,142 10,934,757
Residential 78,273,549 60,489,725
Commercial 8,352,569 7,739,069
Consumer 6,622,406 6,465,496
- -----------------------------------------------------------------------------------------------------------
109,167,283 88,892,757
Less: Allowance for credit losses (1,403,747) (1,503,268)
- -----------------------------------------------------------------------------------------------------------
Loans -- net $107,763,536 $87,389,489
===========================================================================================================
</TABLE>
Loans on which the accrual of interest has been discontinued
amounted to approximately $199,000, $872,000, and $1,277,000
at December 31, 1997, 1996, and 1995, respectively. If
interest on those loans had been accrued, such income would
have approximated $33,000, $58,000 and $32,000 for 1997, 1996
and 1995, respectively.
In the normal course of banking business, loans are made to
officers and directors and their affiliated interests. In the
opinion of management, these loans are consistent with sound
banking practices, are within regulatory lending limitations,
and do not involve more than the normal risk of
collectibility. Loans outstanding to such parties totaled
$1,673,000 and $2,023,000 at December 31, 1997 and 1996,
respectively. During 1997, $206,000 of new loans were made and
repayments totaled $555,000.
22
<PAGE>
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S><C>
Balance at beginning of year $1,503,268 $1,478,555 $1,481,501
- -------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate loans -- 10,421 51,164
Consumer loans 40,080 25,599 37,338
Commercial and other loans 4,330 66,791 13,998
- -------------------------------------------------------------------------------------------------------------
44,410 102,811 102,500
- -------------------------------------------------------------------------------------------------------------
Allowance applicable to loans of acquired
institution 15,000 -- --
- -------------------------------------------------------------------------------------------------------------
Provision for credit losses -- -- --
- -------------------------------------------------------------------------------------------------------------
Loans charged-off:
Real estate loans (22,288) (10,421) (14,209)
Consumer loans (99,441) (62,699) (70,687)
Commercial and other loans (37,202) (4,978) (20,550)
- -------------------------------------------------------------------------------------------------------------
(158,931) (78,098) (105,446)
- -------------------------------------------------------------------------------------------------------------
Balance at end of year $1,403,747 $1,503,268 $1,478,555
=============================================================================================================
</TABLE>
Impaired loans are accounted for in accordance with Statement
of Financial Accounting Standards No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, as amended by Statement
No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN -- INCOME RECOGNITION AND DISCLOSURES. Statement No. 114
requires that impaired loans, within its scope, be measured
based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that
as a practical expedient, a creditor may measure impairment
based on a loan's observable market price or the fair value of
the collateral, if the loan is collateral dependent. The
statement excludes smaller balance and homogeneous loans such
as consumer and residential mortgage loans from impairment
reporting.
Information with respect to impaired loans at December 31 is
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S><C> <C> <C>
Impaired loans with a valuation allowance $ -- $ --
Impaired loans without a valuation allowance 199,070 872,136
- -------------------------------------------------------------------------------------------------------------
Total impaired loans $ 199,070 $ 872,136
=============================================================================================================
Allowance for credit losses related to impaired loans $ -- $ --
Allowance for credit losses related to other than impaired
loans 1,403,747 1,503,268
- -------------------------------------------------------------------------------------------------------------
Total allowance for credit losses $ 1,403,747 $ 1,503,268
=============================================================================================================
Average impaired loans for the year $ 631,749 $ 1,116,933
=============================================================================================================
Interest income on impaired loans recognized on the cash
basis $ 26,740 $ 33,949
=============================================================================================================
</TABLE>
23
<PAGE>
NOTE 6 PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of the
following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1997
- -----------------------------------------------------------------------------------------------------------
ACCUMULATED
COST DEPRECIATION NET
- -----------------------------------------------------------------------------------------------------------
<S><C>
Land $ 265,914 $ -- $ 265,914
Buildings and land improvements 2,785,789 553,128 2,232,661
Furniture and equipment 1,695,669 935,368 760,301
- -----------------------------------------------------------------------------------------------------------
$ 4,747,372 $1,488,496 $ 3,258,876
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1996
- ----------------------------------------------------------------------------------------------------------------
Accumulated
Cost Depreciation Net
- ----------------------------------------------------------------------------------------------------------------
<S><C>
Land $ 206,514 $ -- $ 206,514
Buildings and land improvements 1,732,651 455,325 1,277,326
Furniture and equipment 1,479,717 810,431 669,286
- ----------------------------------------------------------------------------------------------------------------
$ 3,418,882 $1,265,756 $ 2,153,126
================================================================================================================
</TABLE>
NOTE 7 INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The Company owns 33 1/3% of the outstanding common stock of
the Delmarva Bank Data Processing Center, Inc. (DBDPC). The
investment is carried at cost, adjusted for the Company's
equity in the DBDPC's undistributed net income. The excess of
cost over the Company's equity in the DBDPC's underlying net
assets at dates of acquisition, amounting to $20,099, has been
classified as goodwill and is being amortized on the
straight-line method over 15 years.
24
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S><C>
Balance at beginning of year $ 934,831 $ 876,889 $ 748,776
Equity in net income 72,978 57,942 128,113
- -------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,007,809 $ 934,831 $ 876,889
=============================================================================================================
</TABLE>
Data processing expense paid to this company totaled
approximately $248,000, $211,000 and $197,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company owns 33 1/3% of the outstanding common stock of
Eastern Shore Mortgage Corporation (ESMC). The investment is
carried at cost, adjusted for the Company's equity in ESMC's
undistributed net earnings. The excess of cost over the
Company's equity in ESMC's underlying net assets at dates of
acquisition, amounting to $48,085, has been classified as
goodwill and is being amortized over 15 years. In June of
1995, ESMC redeemed another owner bank's interest. The
transaction was treated as if ESMC was a consolidated
subsidiary.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S><C>
Balance at beginning of year $ 179,397 $196,495 $219,841
Premium paid on stock redemption -- -- (13,353)
Equity in net (loss) income -- (32,098) (9,993)
Capital contribution -- 15,000 --
- ------------------------------------------------------------------------------------------------------------
Balance at end of year $ 179,397 $179,397 $196,495
============================================================================================================
</TABLE>
Interest income from this affiliate totaled approximately
$39,000, $21,000 and $3,000 for the years ended December 31,
1997, 1996 and 1995, respectively. Outstanding loans to this
affiliate at December 31, 1997 totaled $859,400.
NOTE 8 DEPOSITS
Certificates of deposit in amounts of $100,000 or more and
their remaining maturities at December 31 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S><C>
Three months or less $ 2,359,614 $ 7,769,309
Three months through twelve months 5,613,156 4,971,491
Over twelve months 5,500,993 3,938,734
- ------------------------------------------------------------------------------------------------------------
$ 13,473,763 $ 16,679,534
============================================================================================================
</TABLE>
Interest expense on deposits for each of the years ended
December 31 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S><C>
Interest bearing transaction $ 510,209 $ 489,827 $ 458,095
Savings and money market 1,223,276 1,027,146 1,156,768
Time, $100,000 or more 786,304 705,707 727,049
Other time 2,850,268 2,253,299 2,102,716
- --------------------------------------------------------------------------------------------------------------
$ 5,370,057 $ 4,475,979 $ 4,444,628
==============================================================================================================
</TABLE>
25
<PAGE>
At December 31, 1997 and 1996, the Company had deposits of
approximately $4,500,000 and $9,000,000, respectively, from a
local County government.
NOTE 9 SHORT-TERM BORROWINGS
The Company has commitments from correspondent banks under
which it can purchase up to $7,000,000 in federal funds and
secured reverse repurchase agreements on a short-term basis.
No borrowings were outstanding under these arrangements during
1997 or 1996.
NOTE 10 LONG-TERM DEBT
As of December 31, 1997, the Company had received a
convertible advance from the Federal Home Loan Bank of Atlanta
in the amount of $5,000,000 at an interest rate of 5.66%. The
advance is callable September 24, 1999 and is due September
24, 2002. The Bank has pledged its wholly owned residential
first mortgage loan portfolio under a blanket floating lien as
collateral for this advance.
NOTE 11 RETIREMENT PLAN
The Company has a 401(k) profit sharing plan covering
substantially all full-time employees. The plan requires the
Company to match 50% of employee contributions of up to 6% of
compensation as defined under the plan and permits additional
contributions at the discretion of management. Expense under
this plan totaled $130,000, $137,330, and $125,100 for the
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 12 DEFERRED COMPENSATION
The Company has agreements with certain directors under which
they have agreed to defer part of their fees and compensation.
The amounts deferred are invested in insurance policies, owned
by the Company, on the lives of the respective individuals.
Amounts to be available under the policies are to be paid to
the individuals as retirement benefits over future years. Cash
surrender values and the accrued benefit obligation included
in other assets and other liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Cash surrender value $ 1,654,838 $ 466,682
Accrued benefit obligations 529,106 466,682
==================================================================================================================
</TABLE>
26
<PAGE>
NOTE 13 INCOME TAXES
Components of income tax expense for each of the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S><C>
Currently payable:
Federal $ 773,337 $ 929,996 $ 698,011
State 171,201 183,790 191,170
- --------------------------------------------------------------------------------------------------------------
944,538 1,113,786 889,181
- --------------------------------------------------------------------------------------------------------------
Deferred income taxes:
Federal 151,833 49,036 63,431
State 33,612 10,856 14,042
- --------------------------------------------------------------------------------------------------------------
185,445 59,892 77,473
- --------------------------------------------------------------------------------------------------------------
$ 1,129,983 $ 1,173,678 $ 966,654
==============================================================================================================
</TABLE>
Components of the Company's deferred tax assets and
liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S><C> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 161,513 $ 247,710
Deferred compensation 132,213 144,207
Interest income 2,525 --
Unrealized loss on investment securities available for sale 25,009 41,283
- ------------------------------------------------------------------------------------------------------------
Total deferred tax assets 321,260 433,200
- ------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Cash to accrual conversion 53,356 --
Discount accretion 44,517 51,330
Depreciation 54,639 19,979
Federal Home Loan Bank dividends 27,613 --
Undistributed income of unconsolidated subsidiaries 59,824 57,228
Unearned income -- 23,386
Loan origination fees and costs 14,058 12,305
- ------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 254,007 164,228
- ------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 67,253 $ 268,972
============================================================================================================
</TABLE>
27
<PAGE>
A reconciliation between income tax expense and taxes computed
at the maximum statutory federal rate for 1997, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
PERCENT Percent Percent
OF of of
PRETAX Pretax Pretax
AMOUNT INCOME Amount Income Amount Income
- --------------------------------------------------------------------------------------------------------------
<S><C>
Computed at statutory
rate $1,190,178 34.0% $1,183,683 34.0% $1,055,752 34.0%
Increases (decreases)
in tax resulting
from:
Tax-exempt interest
income (130,930) (3.7) (138,947) (4.0) (165,491) (5.3)
State income taxes,
net of federal
income tax
benefit 101,760 2.9 128,157 3.7 135,440 4.4
Earnings of
unconsolidated
subsidiaries (9,139) (.3) (7,030) (.2) (40,160) (1.3)
Goodwill
amortization 37,211 1.1 -- .0 -- .0
Rehabilitation tax
credit (51,245) (1.5) -- .0 -- .0
Other -- net (7,852) (.2) 7,815 .2 (18,887) (.7)
- --------------------------------------------------------------------------------------------------------------
Actual tax
expense $1,129,983 32.3% $1,173,678 33.7% $ 966,654 31.1%
==============================================================================================================
</TABLE>
NOTE 14 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with
off-balance sheet risk in the normal course of business. These
financial instruments may include commitments to extend
credit, standby letters of credit and purchase commitments.
The Company uses these financial instruments to meet the
financing needs of its customers. Financial instruments
involve, to varying degrees, elements of credit, interest
rate, and liquidity risk. These do not represent unusual risks
and management does not anticipate any losses which would have
a material effect on the accompanying financial statements.
Outstanding loan commitments and lines and letters of credit
at December 31 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S><C>
Loan commitments $ 1,440,050 $ 1,312,155
============================================================================================================
Unused lines of credit $ 10,853,207 $ 10,178,434
============================================================================================================
Letters of credit $ 1,769,618 $ 1,786,024
============================================================================================================
</TABLE>
28
<PAGE>
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. The Company generally requires
collateral to support financial instruments with credit risk
on the same basis as it does for on-balance sheet instruments.
The collateral is based on management's credit evaluation of
the counterparty. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of
a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Each
customer's credit-worthiness is evaluated on a case-by-case
basis.
Standby letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan
facilities to customers.
NOTE 15 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the carrying values and the related
estimated fair value of the Bank's financial instruments at
December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------------------------------------
<S><C>
Financial assets:
Cash and due from banks $ 8,595,698 $ 8,595,698 $ 4,872,866 $ 4,872,866
Federal funds sold 3,503,900 3,503,900 5,389,874 5,389,874
Investment securities
available for sale 9,444,463 9,444,463 11,190,591 11,190,591
Investment securities
held to maturity 39,298,105 39,498,436 32,462,156 32,647,262
Loans, net of allowance
for credit losses 107,763,536 110,420,000 87,389,489 88,637,000
Accrued interest
receivable 1,475,994 1,475,994 1,385,474 1,385,474
Financial liabilities:
Deposits 145,813,270 145,907,000 124,166,248 124,185,000
Accrued interest payable 189,276 189,276 158,000 158,000
Long-term debt 5,000,000 4,921,000 -- --
Unrecognized financial
instruments:
Commitments to extend
credit 12,293,257 12,293,257 11,490,589 11,490,589
Standby letters of credit 1,769,618 1,769,618 1,786,024 1,786,024
============================================================================================================
</TABLE>
For purposes of the above disclosures of estimated fair value,
the following assumptions were used. The estimated fair value
for cash and due from banks and federal funds sold is
considered to approximate cost. The estimated fair value for
securities available for sale and securities held to maturity
are based on quoted market values from the individual
securities or for equivalent securities. The estimated fair
value of loans is determined by discounting future cash flows
using current rates at which similar loans would be made to
29
<PAGE>
borrowers with similar credit ratings and for the same
remaining maturities. The estimated fair value of demand
deposits, savings accounts, and certain money market deposits
is the amount payable on demand at the reporting date. The
estimated fair value of fixed maturity certificates of
deposits is estimated using the rates currently offered for
deposits of similar remaining maturities.
In cases where quoted market prices are not available, fair
values are based on estimates using present value or other
valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument.
Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the company.
Other assets, such as property and equipment, and certain
liabilities of the Company that are not defined as financial
instruments are not included in the above disclosures. Also,
nonfinancial instruments typically not recognized in the
financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other
items, the estimated earnings power of core deposit accounts,
the trained work force, customer goodwill, and similar items.
NOTE 16 REGULATORY MATTERS
The Company is required to maintain noninterest-bearing
deposits with the Federal Reserve Bank. During 1997 and 1996,
the daily average balances were approximately $2,247,000 and
$2,095,000, respectively.
The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the Company's and the
Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve
quantitive measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other
factors.
Quantitive measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
amounts and ratios (set forth in the table below) 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). Management believes,
as of December 31, 1997, that the Company and the Bank meet
all capital adequacy requirements to which it is subject.
30
<PAGE>
As of December 31, 1997, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank
as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that
notification that management believes have changed the Bank's
category. Because total assets of the Company exceeded $150
million during 1997, amounts and ratios are presented for both
the Bank and the consolidated Company.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
- ----------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
<S><C>
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Company $22,633,000 23.61% $7,669,000 8.00% $9,586,000 10.00%
Bank $22,482,000 23.91% $7,523,000 8.00% $9,403,000 10.00%
Tier I Capital (to Risk
Weighted Assets):
Company $21,432,000 22.35% $3,836,000 4.00% $5,754,000 6.00%
Bank $21,304,000 22.66% $3,761,000 4.00% $5,641,000 6.00%
Tier I Capital (to Average
Assets):
Company $21,432,000 12.23% $7,010,000 4.00% $8,762,000 5.00%
Bank $21,304,000 12.16% $7,008,000 4.00% $8,760,000 5.00%
As of December 31, 1996:
(Bank only)
Total Capital (to Risk
Weighted Assets) $21,793,000 28.25% $6,171,000 8.00% $7,713,000 10.00%
Tier I Capital (to Risk
Weighted Assets) $21,936,000 28.44% $3,085,000 4.00% $4,628,000 6.00%
Tier I Capital (to Average
Assets) $21,936,000 14.86% $5,905,000 4.00% $7,413,000 5.00%
================================================================================================================
</TABLE>
Banking regulations also limit the amount of dividends that
may be paid without prior approval of the Bank's regulatory
agencies. Regulatory approval is required to pay dividends
which exceed the Bank's net profits for the current year plus
its retained net profits for the preceding two years. The
amount of dividends that the Bank could have paid to the
Company without approval from bank regulatory agencies at
December 31, 1997 was $4,017,000.
31
<PAGE>
NOTE 17 PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Shore Bancshares, Inc.
(Parent Company only) is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------
<S><C>
ASSETS
Investment in subsidiary $ 23,475,091 $ 22,099,022
Other assets 39,719 43,454
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $ 23,514,810 $ 22,142,476
===========================================================================================
LIABILITIES -- Accounts payable $ -- $ 46,525
- -------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 10,074 10,074
Surplus 10,064,166 10,064,166
Retained earnings 13,440,570 12,021,711
- -------------------------------------------------------------------------------------------
Total stockholders' equity 23,514,810 22,095,951
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,514,810 $ 22,142,476
===========================================================================================
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------------------
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------
<S><C>
INCOME -- Dividends from subsidiary $ 1,025,855 $ 926,832
OPERATING EXPENSES 9,944 4,652
- -------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARY 1,015,911 922,180
INCOME TAX BENEFIT 3,382 1,582
- -------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 1,019,293 923,762
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 1,350,905 1,383,980
- -------------------------------------------------------------------------------------------
NET INCOME $ 2,370,198 $ 2,307,742
===========================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------------------
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------
<S><C>
NET INCOME $ 2,370,198 $ 2,307,742
- -------------------------------------------------------------------------------------------
ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Equity in undistributed income of subsidiary (1,350,905) (1,383,980)
Net decrease (increase) in other assets 4,435 (43,455)
Net decrease (increase) in accounts payable (46,525) 46,525
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 977,203 926,832
CASH FLOWS FROM FINANCING ACTIVITIES -- Dividends paid (977,203) (926,832)
- -------------------------------------------------------------------------------------------
CASH AT BEGINNING OF YEAR -- --
- -------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ -- $ --
===========================================================================================
</TABLE>
32
<PAGE>
[GRAPHIC LOGO GOES HERE]
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Shore Bancshares, Inc.
Centreville, Maryland
We have audited the accompanying consolidated balance sheets of Shore
Bancshares, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of Shore
Bancshares, Inc. for the year ended December 31, 1995 were audited by other
auditors whose report dated January 18, 1996, expressed an unqualified opinion
on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Shore Bancshares,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Stegman & Company
_____________________
Baltimore, Maryland
January 10, 1998
33
<PAGE>
AVERAGE BALANCES, YIELDS AND RATES
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 For the Year Ended December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
- -------------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Interest earning assets:
Money market investments:
Federal funds sold $ 6,493,959 $ 354,331 5.46% $ 7,095,343 $ 378,246 5.33%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies 32,996,468 2,102,149 6.37 27,640,017 1,703,420 6.16
Obligations of States and
political subdivisions(1) 8,858,428 673,659 7.60 8,896,963 683,213 7.68
All other investment securities 2,396,970 143,558 5.99 1,387,606 91,075 6.56
- -------------------------------------------------------------------------------------------------------------------------
Total investment securities 44,251,866 2,919,366 6.60 37,924,586 2,477,708 6.53
Loans, net of unearned income(2)(3)
Commercial loans 9,293,896 982,599 10.57 10,263,061 1,074,769 10.47
Installment loans 5,264,677 536,637 10.19 5,097,131 512,414 10.05
Mortgage loans 89,183,164 7,827,395 8.78 73,406,929 6,516,800 8.88
- -------------------------------------------------------------------------------------------------------------------------
Total loans 103,741,737 9,346,631 9.01 88,767,121 8,103,983 9.13
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 154,487,562 $ 12,620,328 8.17% 133,787,050 $ 10,959,937 8.19%
Cash and due from banks 4,012,120 3,589,220
Other assets 8,641,143 5,503,965
Allowance for loan and lease losses (1,445,147) (1,469,856)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $165,695,678 $141,410,379
=========================================================================================================================
LIABILITIES
Interest-bearing liabilities
Super NOW accounts $ 17,214,551 $ 510,209 2.96% $ 16,022,439 $ 489,828 3.06%
Money market deposit account 21,027,750 702,261 3.34 19,112,185 639,654 3.35
Time, $100,000 or more 13,297,892 704,290 5.30 11,632,139 633,460 5.45
Other time deposits 41,023,454 2,135,522 5.21 30,099,425 1,582,081 5.26
IRA deposits 14,732,561 796,760 5.41 14,451,599 738,622 5.11
Savings deposits 16,636,078 521,015 3.13 12,324,479 392,334 3.18
Other borrowed funds 1,356,164 77,825 5.74 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 125,288,450 5,447,882 4.35% 103,642,266 4,475,979 4.32%
Demand deposits 16,216,396 15,303,365
Other liabilities 1,401,009 838,440
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 142,905,855 119,784,071
Stockholders' equity 22,789,823 21,626,308
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $165,695,678 $141,410,379
=========================================================================================================================
Net interest income and interest
rate spread $ 7,172,446 3.82% $ 6,483,958 3.87%
Net interest income as a percent of
earning assets 4.64% 4.85%
=========================================================================================================================
<CAPTION>
For the Year Ended December 31, 1995
- -----------------------------------------------------------------------------
Average Income/ Yield/
Balance Expense Rate
- -----------------------------------------------------------------------------
<S><C>
ASSETS
Interest earning assets:
Money market investments:
Federal funds sold $ 2,354,943 $ 137,734 5.85%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies 34,441,007 2,063,641 5.99
Obligations of States and
political subdivisions(1) 10,025,129 822,951 8.21
All other investment securities 1,288,757 92,872 7.21
- -----------------------------------------------------------------------------
Total investment securities 45,754,893 2,979,464 6.51
Loans, net of unearned income(2)(3)
Commercial loans 11,031,642 1,156,962 10.49
Installment loans 4,217,507 437,422 10.37
Mortgage loans 69,008,142 6,077,576 8.81
- -----------------------------------------------------------------------------
Total loans 84,257,291 7,671,960 9.11
- -----------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 132,367,127 $ 10,789,158 8.15%
Cash and due from banks 3,431,939
Other assets 4,984,475
Allowance for loan and lease losses (1,470,381)
- -----------------------------------------------------------------------------
TOTAL ASSETS $139,313,160
=============================================================================
LIABILITIES
Interest-bearing liabilities
Super NOW accounts $ 14,763,485 $ 458,095 3.10%
Money market deposit account 20,708,692 704,005 3.40
Time, $100,000 or more 13,801,000 650,745 4.72
Other time deposits 26,826,207 1,370,902 5.11
IRA deposits 14,038,374 804,030 5.73
Savings deposits 13,868,563 456,851 3.29
Other borrowed funds 817,945 52,236 6.39
- -----------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 104,824,266 4,496,864 4.29%
Demand deposits 13,400,204
Other liabilities 770,078
- -----------------------------------------------------------------------------
Total liabilities 118,994,548
Stockholders' equity 20,318,612
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $139,313,160
=============================================================================
Net interest income and interest
rate spread $ 6,292,294 3.86%
Net interest income as a percent of
earning assets 4.75%
</TABLE>
=============================================================================
1. All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate exclusinve of the alternative minimum tax
rate of 34% and nondeductible interest expense.
2. Loan fee income is included in interest income for each loan category and
yields are stated to include all.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
34
<PAGE>
RATE AND VOLUME VARIANCE ANALYSIS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 compared to 1995
- -----------------------------------------------------------------------------------------------------------------------------
CHANGE DUE TO Change due to
INCREASE Increase
INTEREST INCOME (DECREASE) RATE(2) VOLUME (Decrease) Rate(2) Volume
- -----------------------------------------------------------------------------------------------------------------------------
<S><C>
Federal funds sold $ (23,915) $ 8,144 $ (32,059) $ 240,512 $(36,741) $ 277,253
- -----------------------------------------------------------------------------------------------------------------------------
Total money market investments (23,915) 8,144 (32,059) 240,512 (36,741) 277,253
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. government agencies 398,729 68,618 330,111 (360,221) 47,282 (407,503)
Tax-exempt obligations of State and
political subdivisions(1) (9,554) (6,595) (2,959) (139,738) (47,128) (92,610)
All other investment securities 52,483 (13,766) 66,249 (1,797) (8,920) 7,123
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities 441,658 48,257 393,401 (501,756) (8,766) (492,990)
- -----------------------------------------------------------------------------------------------------------------------------
Commercial loans (92,170) 9,323 (101,493) (82,193) (1,587) (80,606)
Installment loans 24,223 7,380 16,843 74,992 (16,239) 91,231
Mortgage loans 1,310,595 (89,962) 1,400,557 439,224 51,821 387,403
- -----------------------------------------------------------------------------------------------------------------------------
Total loans(3) 1,242,648 (73,259) 1,315,907 432,023 33,995 398,028
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income $1,660,391 $(16,858) $1,677,249 $ 170,779 $(11,512) $ 182,291
=============================================================================================================================
INTEREST EXPENSE
Super NOW accounts $ 20,381 $(16,064) $ 36,445 $ 31,733 $ (7,331) $ 39,064
Money market deposit accounts 62,607 (1,504) 64,111 (64,351) (10,077) (54,274)
Time deposits of $100,000 or more 70,830 (19,883) 90,713 (17,285) 84,981 (102,266)
Other time deposits 553,441 (20,746) 574,187 211,179 43,907 167,272
IRA deposits 58,138 43,778 14,360 (65,408) (89,075) 23,667
Savings deposits 128,681 (8,573) 137,254 (64,517) (13,653) (50,864)
Other borrowed funds 77,825 -- 77,825 (52,236) -- (52,236)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 971,903 $(22,992) $ 994,895 $ (20,885) $ 8,752 $ (29,637)
=============================================================================================================================
Net interest margin/income $ 688,488 $ 6,134 $ 682,354 $ 191,664 $(20,264) $ 211,928
=============================================================================================================================
</TABLE>
1. Income and yields are computed on a tax equivalent basis using the statutory
federal income tax rate of 34%, exclusive of the alternative minimum tax and
nondeductible interest expense.
2. Variances caused by the change in yield/rate times the average balance are
allocated to rate.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
35
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for the Company's Shares.
Accordingly, there is no comprehensive record of trades of the prices of any
such trades. The following table reflects stock prices for Company Shares (and
shares of common stock prior to the Company's formation and acquisition of the
Bank in July, 1996), to the extent such information is available to management
of the Company.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997
- -----------------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- -----------------------------------------------------------------------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
<S><C>
$35.50 $33.00 $36.50 $35.00 $40.00 $33.00 $44.00 $40.50
===================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------------
1st Quarter* 2nd Quarter* 3rd Quarter 4th Quarter
- -----------------------------------------------------------------------------------
High Low High Low High Low High Low
<S><C>
$22.00 $20.50 $26.00 $22.00 $29.00 $26.00 $30.00 $27.50
===================================================================================
</TABLE>
* Prices adjusted for 2 for 1 conversion to Shore Bancshares, Inc. July 1, 1996.
HOLDERS
As of March 7, 1998, a total of 1,007,424 shares of Shore Bancshares, Inc.
common stock was held by approximately 963 registered and beneficial owners.
DIVIDENDS
The Company declared and paid a cash dividend per Share totaling $.97 per share
or $977,201 for the year 1997 and $.92 per share or $926,832 for 1996. On March
11, 1997, the Board of Directors declared a dividend to be paid March 20, 1997,
at the rate of $0.23 per share to stockholders of record as of March 10, 1997.
In the second quarter, a $0.23 per share dividend was declared on June 10, 1997
for holders of record as of June 10, 1997 and the dividend was paid June 20,
1997. On September 2, 1997, a $0.23 per share dividend was announced to be paid
on September 19, 1997 to stockholders of record September 10, 1997. Shareholders
of record on December 10, 1997 were paid a $0.28 per share dividend on December
19, 1997 as declared by the Board of Directors of the Company on December 2,
1997.
The Board of Directors of Shore Bancshares, Inc. declared a dividend on March 5,
1996 of $.35 per share to be paid on March 20, 1996 to holders of record March
11, 1996. On June 11, 1996 a dividend of $0.35 per share was approved to be paid
on June 20, 1996, to stockholders of record as of June 11, 1996. In the third
quarter, an $.18 per share dividend was announced on September 3, 1996, to be
paid September 20, 1996 to stockholders of record September 10, 1996. The final
dividend in 1996 of $.39 per share was declared December 10, 1996 for holders of
record December 10, 1996 and was paid on December 20, 1996.
There are no contractual restrictions that currently limit the Company's ability
to pay dividends or that the Company reasonably believes are likely to limit
materially the future payment of dividends on the Company's Shares.
36
<PAGE>
DIRECTORS
Shore Bancshares, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<S><C>
Sydney G. Ashley Mark M. Freestate
ASSOCIATE, ASHLEY BROTHERS REAL ESTATE COMPANY AND PRESIDENT, W.M. FREESTATE & SON, INC.
GENERAL PARTNER, HUNT-RAY FARMS
Neil R. LeCompte
J. Robert Barton CERTIFIED PUBLIC ACCOUNTANT, OFFICE OF NEIL R.
RETIRED PRESIDENT AND CEO, THE CENTREVILLE NATIONAL LECOMPTE
BANK OF MARYLAND
Jerry F. Pierson
David C. Bryan PRESIDENT, JERRY F. PIERSON, INC.
MEMBER, LAW OFFICES OF FOUNTAIN, BRYAN AND RITTER, LLC
Wm. Maurice Sanger
Daniel T. Cannon PRESIDENT, F.W., INC.
PRESIDENT, SHORE BANCSHARES, INC. PRESIDENT, CLOVERBAY DEVELOPMENT CORPORATION
PRESIDENT AND CEO, THE CENTREVILLE NATIONAL BANK OF
MARYLAND Walter E. Schmidt
VICE PRESIDENT, SCHMIDT VENTURES, INC.
B. Vance Carmean, Jr.
PRESIDENT, CARMEAN GRAIN, INC.
The Centreville National Bank of Maryland
- -----------------------------------------------------------------------------------------------------------------------
Sydney G. Ashley Mark M. Freestate
ASSOCIATE, ASHLEY BROTHERS REAL ESTATE COMPANY PRESIDENT, W.M. FREESTATE & SON, INC.
AND GENERAL PARTNER, HUNT-RAY FARMS
Neil R. LeCompte
J. Robert Barton CERTIFIED PUBLIC ACCOUNTANT, ACCOUNTING OFFICE OF NEIL
RETIRED PRESIDENT AND CEO, THE CENTREVILLE NATIONAL R. LECOMPTE
BANK OF MARYLAND
Susanne K. Nuttle
Paul M. Bowman RETIRED VICE PRESIDENT, THE CENTREVILLE NATIONAL BANK
ATTORNEY, LAW OFFICE OF PAUL M. BOWMAN OF MARYLAND
David C. Bryan Jerry F. Pierson
MEMBER, LAW OFFICES OF FOUNTAIN, BRYAN AND RITTER, LLC PRESIDENT, JERRY F. PIERSON, INC.
Daniel T. Cannon Wm. Maurice Sanger
PRESIDENT, SHORE BANCSHARES, INC. PRESIDENT, F.W., INC.
PRESIDENT AND CEO, THE CENTREVILLE NATIONAL BANK OF PRESIDENT, CLOVERBAY DEVELOPMENT CORPORATION
MARYLAND
Walter E. Schmidt
B. Vance Carmean, Jr. VICE PRESIDENT, SCHMIDT VENTURES, INC.
PRESIDENT, CARMEAN GRAIN, INC.
</TABLE>
DIRECTORS EMERITI
The Centreville National Bank of Maryland
- --------------------------------------------------------------------------------
Madison B. Bordley, Jr.
William H. Harris
James O. Pippin, Jr.
Royden N. Powell, Jr.
William E. Sylvester
William E. Thompson
Howard Wood
37
<PAGE>
OFFICERS
(as of March 1, 1998)
SHORE BANCSHARES, INC.
Walter E. Schmidt..........................................Chairman of the Board
Sydney G. Ashley.....................................Vice President of the Board
Daniel T. Cannon.......................................................President
Carol I. Brownawell....................................................Treasurer
Mary C. Quimby.........................................................Secretary
THE CENTREVILLE NATIONAL BANK OF MARYLAND
Daniel T. Cannon...................................................President/CEO
Carol I. Brownawell.................................Executive Vice President/CFO
Timothy J. Berrigan...............................................Vice President
Thomas E. Beery...................................................Vice President
Rita B. Mielke............................................Vice President/Cashier
Pamela C. Satchell................................................Vice President
Carolyn D. Spicher................................................Vice President
David E. Thompson.................................................Vice President
Ralph F. Twilley..................................................Vice President
Katharine M. Crook......................................Assistant Vice President
William E. Stoops.......................................Assistant Vice President
Kathryn C. Walls........................................Assistant Vice President
Brenda M. Beaver...............................................Assistant Cashier
Elizabeth T. Clough............................................Assistant Cashier
Lorrie S. Greenwood............................................Assistant Cashier
Florance R. Walls..............................................Assistant Cashier
38
<PAGE>
THE CENTREVILLE NATIONAL BANK OF MARYLAND
EMPLOYEES (as of March 1, 1998)
- --------------------------------------------------------------------------------
Maryanne C. Alderson Barri G. Horney
Janice S. Barkley Josephine C. Hutchins
Joyce D. Bradley Constance M. Lee
Laura C. Bradley Edith P. Legg
Gertrude E. Brown Cortney L. Moore
Phyllis B. Carroll Joyce S. Moore
Lois F. Carter Laura E. Nier
Mary Ann Cheezum Gina A. Paul
Susan C. Childress Renee W. Perkins
Vonda K. Collier Kelli C. Phillips
Rochelle L. Corkell Wade L. Pinder
Connie L. Crossman Howard S. Pinder, Sr.
Carrie E. Darling Mary C. Quimby
Alicia E. Dodd Katherine S. Riddel
Robert D. El Shartinese D. Rochester
J. Carol Elliott Robin J. Rust
Lisa S. Fleetwood Donna M. Schaeffer
Virginia Lynn Foster Marquita D. Singleterry
Bonnie J. Freburger Phyllis S. Skinner
Margaret A. Fuller Karen A. Stanavich
Goldie J. Garner Donna J. Stevens
W. Allen Greiner Barbara B. Stoops
R. Sheldon Gunther Deborah H. Thomas
Cassandra A. Guy James W. Thompson, III
Ann M. Haddaway Katherine A. Thompson
Lisa R. Handy Ronald J. Walters
Glorious D. Heath Diane B. Whitby
Gail F. Hickman
THE CENTREVILLE NATIONAL BANK OF MARYLAND
OFFICES
- --------------------------------------------------------------------------------
<TABLE>
<S><C>
MAIN OFFICE STEVENSVILLE OFFICE
- ------------------------------------------- --------------------------------------------------
109 N. Commerce St. -- PO Box 400 408 Thompson Creek Road -- PO Box 279
Centreville, MD 21617 Stevensville, MD 21666
Phone (410) 758-1600 Phone (410) 643-2233
Fax (410) 758-2364 Fax (410) 643-4215
ROUTE 213 SOUTH OFFICE HILLSBORO OFFICE
- ------------------------------------------- --------------------------------------------------
2609 Centreville Road -- PO Box 400 21913 Shore Highway -- PO Box 118
Centreville, MD 21617 Hillsboro, MD 21641
Phone (410) 758-2414 Phone (410) 820-2121
Fax (410) 758-3867 Fax (410) 820-1341
</TABLE>
KENT BRANCH
------------------------------------------
305 East High Street -- PO Box 388
Chestertown, MD 21620
Phone (410) 778-1299
Fax (410) 778-6084
39
<PAGE>
NOTES
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,092
<INT-BEARING-DEPOSITS> 128,086
<FED-FUNDS-SOLD> 3,504
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,444
<INVESTMENTS-CARRYING> 32,298
<INVESTMENTS-MARKET> 39,498
<LOANS> 109,167
<ALLOWANCE> 1,404
<TOTAL-ASSETS> 175,115
<DEPOSITS> 145,813
<SHORT-TERM> 0
<LIABILITIES-OTHER> 787
<LONG-TERM> 5,000
0
0
<COMMON> 10
<OTHER-SE> 23,505
<TOTAL-LIABILITIES-AND-EQUITY> 175,115
<INTEREST-LOAN> 9,347
<INTEREST-INVEST> 2,704
<INTEREST-OTHER> 354
<INTEREST-TOTAL> 12,405
<INTEREST-DEPOSIT> 5,370
<INTEREST-EXPENSE> 5,448
<INTEREST-INCOME-NET> 6,957
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 4,366
<INCOME-PRETAX> 3,500
<INCOME-PRE-EXTRAORDINARY> 3,500
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,370
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.35
<YIELD-ACTUAL> 4.64
<LOANS-NON> 199
<LOANS-PAST> 251
<LOANS-TROUBLED> 209
<LOANS-PROBLEM> 3,300
<ALLOWANCE-OPEN> 1,503
<CHARGE-OFFS> 159
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 1,403
<ALLOWANCE-DOMESTIC> 1,403
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
