SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-22345
------------------------------
SHORE BANCSHARES, INC.
109 North Commerce Street
Post Office Box 400
Centreville, Maryland 21617-0400
Telephone: (410) 758-1600
IRS Employer Identification Number: 52-1974638
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares of outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
As of November 6, 1998, there were 1,913,516 shares of
Common Stock $0.01 Par Value outstanding.
This is the only class of outstanding shares.
<PAGE>
SHORE BANCSHARES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets -September 30, 1998 and December 31, 1997
Statements of Income -- Three months ended September 30, 1998 and 1997
and the nine months ended September 30, 1998 and 1997.
Statements of Cash Flows -- Nine months ended September 30, 1998 and
1997 and the twelve months ended December 31, 1997
Notes to Financial Statements - September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
FORWARD LOOKING INFORMATION
- ---------------------------
Portions of this Quarterly Report on Form 10Q contain forward-looking
statements with respect to the adequacy of the allowance for loan losses,
interest rate risk, and the Year 2000 issue which, by their nature are subject
to significant uncertainties. Because of these uncertainties and the assumptions
on which statements in this report are based, the actual future results may
differ materially from those indicated in this report
<PAGE>
PART I
FINANCIAL INFORMATION
<PAGE>
ITEM 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
SHORE BANCSHARES, INC.
<TABLE>
<CAPTION>
September 30, December 31,
Dollars in thousands 1998 1997
(Unaudited)
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,350 $ 5,092
Federal funds sold 10,422 3,504
Securities (Note 2)
Held to Maturity 33,948 39,298
Available for Sale 12,352 9,444
Loans, less allowance for credit losses (Note 3 and 4) 107,800 107,764
Premises and fixed assets 3,248 3,259
Investments in unconsolidated subsidiaries 1,195 1,187
Accrued interest receivable 1,443 1,476
Goodwill 1,976 2,088
Net deferred taxes and other assets 1,900 2,003
-------- --------
TOTAL ASSETS $181,634 $175,115
======== ========
LIABILITIES
Deposits
Non-interest bearing demand $ 17,412 $ 17,727
Interest bearing transaction 23,463 19,176
Savings and money market 36,707 37,575
Time, $100,000 or more 15,696 13,474
Other time 60,880 57,861
-------- --------
Total deposits 154,158 145,813
-------- --------
Long term debt (Note 5) 5,000 5,000
Accrued interest payable 195 189
Other liabilities 559 598
-------- --------
5,754 5,787
-------- --------
Total liabilities 159,912 151,600
-------- --------
COMMITMENTS
EQUITY CAPITAL
Common stock, par value $.01; authorized
10,000,000 shares, issued and outstanding
1,913,516 shares 19 10
Surplus 10,064 10,064
Retained earnings 11,618 13,480
Accumulated other comprehensive income 21 (39)
-------- --------
Total stockholders' equity 21,722 23,515
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $181,634 $175,115
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SHORE BANCSHARES, INC.
<TABLE>
<CAPTION>
(UNAUDITED) Quarter Nine Months Quarter Nine Months
Dollars in thousands except per share data Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1998 1997 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fee income on loans $ 2,492 $ 7,312 $ 2,503 $ 6,903
Interest and dividends on securities
Taxable securities 577 1,704 584 1,667
Tax-exempt securities 122 363 99 311
Interest on federal funds sold 147 370 89 225
--------------------------------------------------------------------
Total interest income 3,338 9,749 3,275 9,106
--------------------------------------------------------------------
INTEREST EXPENSE
Interest on certificates of deposit
of $100,000 or more 199 574 189 599
Interest on other deposits 1,229 3,601 1,215 3,339
Interest on long term debt 73 215 - -
--------------------------------------------------------------------
Total interest expense 1,501 4,390 1,404 3,938
--------------------------------------------------------------------
NET INTEREST INCOME 1,837 5,359 1,871 5,168
Provision for credit losses --- --- --- ---
--------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,837 5,359 1,871 5,168
--------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 166 501 165 494
Other noninterest income 49 156 21 82
Gains (losses) on securities - - - 8
--------------------------------------------------------------------
Total noninterest income 215 657 186 584
--------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 592 1,710 555 1,613
Expenses of premises and fixed assets 174 490 178 443
Other noninterest expense 327 1,293 331 1,182
--------------------------------------------------------------------
Total noninterest expense 1,093 3,493 1,064 3,238
--------------------------------------------------------------------
INCOME BEFORE TAXES 959 2,523 993 2,514
Applicable income taxes 297 839 338 874
--------------------------------------------------------------------
NET INCOME $ 662 $ 1,684 $ 655 $ 1,640
====================================================================
Basic earnings per common share $ 0.33 $ 0.84 $ 0.33 $ 0.81
Diluted earnings per common share 0.33 0.84 0.33 0.81
</TABLE>
See Notes to the Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SHORE BANCSHARES, INC. Accumulated
(Unaudited) Other
Common Retained Comprehensive
Dollars in thousands Stock Surplus Earnings Income Total
-------- --------- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $10 $10,064 $13,480 ($39) $23,515
Comprehensive income:
Net income 1,684 1,684
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
securities, net of reclassification adjustment 60 60
-------
Other comprehensive income 60
-------
Comprehensive income 1,744
Two-for-one stock split effected in the
form of a 100% stock dividend 10 (10) 0
Common stock repurchased and retired (1) (2,811) (2,812)
-------
Cash dividends declared ($.36 per
common share)* (725) (725)
--- ------- ------- --- -------
Balance at September 30, 1998 19 10,064 11,618 21 21,722
====== ====== ======== === =======
</TABLE>
*Restated for two-for-one stock split effected in the form of a 100% stock
dividend
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
SHORE BANCSHARES, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Year Nine Months
Ended Ended Ended
September 30, December 31, September 30,
1998 1997 1997
----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,684 $ 2,370 $ 1,640
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 232 424 178
Equity in net earnings of unconsolidated subsidiaries - (73) -
Provision for credit losses, net (27) (115) (102)
Deferred income tax benefits - 265 (4)
Net (gains) losses on disposal of assets - 40 (8)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 33 10 (46)
(Increase) decrease in other assets 87 (1,346) (915)
Increase (decrease) in interest payable 6 (118) 24
Increase (decrease) in other liabilities (39) (89) 95
----------------------------------------------------
Net cash provided by operating activities 1,976 1,368 862
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of held-to-maturity securities 24,259 16,221 8,140
Proceeds from maturities of available-for-sale securities 1,125 1,081 6,085
Proceeds from sale of available-for-sale securities - 3,373 3,373
Purchases of held-to-maturity securities (18,759) (22,899) (11,443)
Purchases of available-for-securities (3,999) (1,693) (6,647)
Net (increase) decrease in loans (9) 46 173
Purchase of premises and equipment (225) (1,276) (1,108)
Aquisition, net of cash aquired - (2,799) (2,799)
----------------------------------------------------
Net cash provided by (used in) investing activities 2,392 (7,946) (4,226)
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in demand, interest-bearing
transaction, and savings deposits 3,104 6,923 6,354
Increase (decrease) in time deposits 5,241 (6,034) (995)
Proceeds from long-term debt - 5,000 5,000
Common stock repurchased and retired (2,812) - -
Cash dividends paid (725) (977) (695)
----------------------------------------------------
Net cash provided by (used in) financing activities 4,808 4,912 9,664
----------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 9,176 (1,667) 6,300
Cash and cash equivalents, beginning 8,596 10,263 10,263
----------------------------------------------------
Cash and cash equivalents, ending $ 17,772 $ 8,596 $ 16,563
====================================================
Supplementary cash flow information:
Interest paid $ 4,168 $ 5,417 $ 3,774
Income taxes paid $ 938 $ 1,120 $ 534
</TABLE>
All dollar amounts in thousands
<PAGE>
Note 1 - Financial Information
The unaudited interim consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10Q. In the opinion of management,
all necessary adjustments have been made for a fair presentation of financial
position and results of operations for the periods presented. Operating results
for the nine month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information, refer to the audited consolidated financial
statements and footnotes included in the 1997 Annual Report to Shareholders and
Form 10.
New Accounting Standards
During the first quarter 1998, Shore Bancshares, Inc. adopted FASB Statement no.
130 Reporting Comprehensive Income. Statement no. 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income discloses certain financial information that historically has not been
recognized in the calculation of net income.
The Company holds securities classified as available-for-sale, which have
unrealized gain of $98 thousand before tax during the third quarter of 1998. The
after tax gain of $60 thousand is reflected in the Consolidated Statement of
Shareholders' Equity.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SECURITIES
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,981 $ 6,088
U.S. Government agency and
corporation obligations issued by
U.S.Government sponsored
agencies $23,984 $24,185 3,999 4,018
Securities issued by states and
political subdivisions in the U.S.
a. General obligations 8,598 8,837
b. Revenue obligations 1,347 1,382
Mortgage-backed securities 19 21 241 251
Equity Securities
a. Investments in Mutual Funds 1,028 927
b. Other equity securites with
readily determinable fair values
c. All other equity securities 1,068 1,068
-----------------------------------------------------
TOTAL SECURITIES $33,948 $34,425 $12,317 $12,352
=====================================================
PLEDGED SECURITIES $18,500
============
<CAPTION>
December 31, 1997
-----------------------------------------------------
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $6,966 $ 7,014
U.S. Government agency and
corporation obligations issued by
U.S.Government sponsored
agencies $29,064 $29,086 100 100
Securities issued by states and
political subdivisions in the U.S.
a. General obligations 9,221 9,378
b. Revenue obligations 989 1,007
Mortgage-backed securities 24 27 365 374
Equity Securities
a. Investments in Mutual Funds 1,010 888
b. Other equity securites with
readily determinable fair values
c. All other equity securities 1,068 1,068
-----------------------------------------------------
TOTAL SECURITIES $39,298 $39,498 $9,509 $ 9,444
=====================================================
PLEDGED SECURITIES $17,338
============
</TABLE>
All dollar amounts in thousands
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 3 LOANS AND LEASE FINANCING RECEIVABLES
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31
1998 1997
--------------- --------------
<S> <C> <C>
Loans secured by real estate
a. Construction and land development $ 4,591 $ 2,866
b. Secured by farmland (including farm
residential and other improvements) 4,468 4,282
c. Secured by 1-4 family residential properties
1. Revolving, open end loans 3,358 1,703
2. All others
(a) Secured by first liens 62,381 68,772
(b) Secured by junior liens 3,805 3,855
d. Secured by multi-family (5 or more)
residential properties 109 -
e. Secured by nonfarm nonresidential
properties 14,652 12,871
Loans to finance agricultural production and
other loans to farmers 2,128 1,322
Commercial and industrial loans 6,420 7,027
Loans to individuals for household, family,
and other personal expenditures (includes
purchased paper)
a. Credit card and related plans 79 81
b. Other 7,107 6,500
Obligations (other than securities) of states and
political subdivisions in the U. S. - 13
Other loans
a. Loans for purchasing or carrying securities
(secured and unsecured) - -
b. All other loans 122 42
Less any unearned income on loans 43 166
-------- --------
Total loans and leases, net of unearned income 109,177 109,168
Less allowance for loan and lease losses 1,377 1,404
-------- --------
Total loans and leases, net of unearned income
and allowance for loan and lease losses $107,800 $107,764
======== ========
</TABLE>
All dollar amounts in thousands
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE - 4 CHARGE OFFS AND RECOVERIES AND CHANGE IN
ALLOWANCE FOR LOAN AND LEASE LOSSES
(UNAUDITED)
I. CHARGE-OFFS AND RECOVERIES ON LOANS AND LEASES
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
Charge-offs Recoveries Charge-offs Recoveries
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
1. Real estate loans $ - $ - $ 22 $ -
2. Installment loans 57 16 99 40
3. Credit cards and
related plans 5 - - -
4. Commercial (time and
demand) and all other
loans - 19 37 4
----------------------------- ----------------------------
6. Total $62 $ 35 $158 $ 44
============================= ============================
</TABLE>
II. CHANGES IN ALLOWANCE FOR LOAN AND LEASE LOSSES
<TABLE>
<S> <C> <C>
1. Balance at end of previous period $ 1,404 $ 1,503
2. Recoveries 35 44
3. Charge-offs (62) (158)
4. Provision for loan and lease losses - -
5. Allowance aquired - 15
-------------- ------------
6. Balance at end of period $ 1,377 $ 1,404
============== ============
7. Net charge-offs $ 27 $ 114
8. Average daily loan balance 107,753 103,742
9. Ratio-net of charge offs to
average loans outstanding 0.03% 0.11%
</TABLE>
All dollar amounts in thousands
<PAGE>
Note 5 - Long Term Debt
As of September 30, 1997, the Bank had received a convertible advance
from the Federal Home Loan Bank in the amount of $5,000,000 at an interest rate
of 5.66% which is due September 24, 2002. The Bank has pledged mortgage loans as
collateral on this advance.
Note 6 - Repurchase of Common Stock
On September 16, 1998 the Company repurchased and retired 101,332
shares, or approximately 5.0% of its outstanding common stock at a price of
$27.75 per share. The excess purchase price over the $.01 par value was
allocated to retained earnings.
<PAGE>
AVERAGE BALANCES, YIELDS AND RATES
<TABLE>
<CAPTION>
YTD 9/30/98 YTD 9/30/97
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning assets:
Money market investments:
Federal funds sold 8,562,080 370,178 5.78% 5,543,708 225,253 5.43%
Investment Securities:
U.S. Treasury securities
and obligations of U.S.
government agencies 33,740,982 1,580,030 6.26% 31,936,248 1,532,394 6.42%
Obligations of States and
political subdivisions 10,378,420 549,447 7.08% 8,235,706 470,786 7.64%
Taxable Municipals 415,136 21,816 7.03% 512,815 30,363 7.92%
All other investment securities 1,698,967 92,532 7.28% 2,218,478 82,127 4.95%
Federal Reserve Bank stock 302,250 9,068 4.01% 302,250 9,068 4.01%
----------------------------------- ----------------------------------
Total investment securities 46,535,755 2,252,893 6.47% 43,205,497 2,124,738 6.58%
Loans - net of unearned income
Commercial loans 9,532,266 694,820 9.75% 9,382,287 685,936 9.77%
Installment loans 5,665,550 423,821 10.00% 5,201,717 395,568 10.17%
Mortgage loans 92,555,109 6,143,340 8.87% 87,582,264 5,754,304 8.78%
----------------------------------- ----------------------------------
Total loans 107,752,925 7,261,981 9.01% 102,166,268 6,835,808 8.95%
----------------------------------- ----------------------------------
TOTAL INTEREST EARNING ASSETS 162,850,760 9,885,052 8.12% 150,915,473 9,185,797 8.14%
Cash and due from banks 4,099,142 4,075,070
Other assets 9,684,076 8,253,649
Allowance for loan and lease losses (1,389,154) (1,456,618)
----------------------------------- ----------------------------------
TOTAL ASSETS 175,244,824 161,787,574
=================================== ==================================
LIABILITIES
Interest-bearing liabilities
Other Borrowed Funds 5,002,473 214,718 5.74% 128,205 -
Super NOW accounts 17,848,116 374,528 2.81% 16,803,546 374,322 2.98%
Money market deposit accounts 18,784,796 471,650 3.36% 20,479,885 510,500 3.33%
Time, $100,000 or more 12,336,970 499,905 5.42% 13,704,210 541,440 5.28%
Other time deposits 45,695,945 1,832,468 5.36% 39,639,524 1,537,725 5.19%
IRA deposits 15,463,963 586,447 5.07% 14,646,788 592,871 5.41%
Savings deposits 17,857,218 408,624 3.06% 16,371,320 382,900 3.13%
---------------------------------------- ---------------------------------------
TOTAL INTEREST BEARING LIABILITIES 132,989,481 4,388,340 4.41% 121,773,478 3,939,758 4.33%
Demand deposits 17,506,666 15,888,969
Other liabilities 966,357 1,525,798
---------------------------------------- ---------------------------------------
Total liabilities 151,462,504 139,188,245
Stockholders' equity 23,782,320 22,599,329
---------------------------------------- ---------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 175,244,824 161,787,574
==================================== =======================================
Net interest income & interest rate spread 5,496,712 3.70% 5,246,039 3.81%
Net interest income as a % of earning assets 4.36% 4.51%
==================================== =======================================
</TABLE>
1. All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate of 34%, exclusive of the alternative
minimum tax rate and non-deductible interest expense.
2. Loan fee income is included in interest income for each loan category and
yields are stated to include all.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
<PAGE>
Page 11
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion is designed to provide a better understanding of the
financial position of Shore Bancshares, Inc., and should be read in conjunction
with the December 31, 1997 audited consolidated financial statements and notes.
ORGANIZATIONAL BACKGROUND
On July 1, 1996, Shore Bancshares, Inc. (the Company) commenced
operations as the parent company of its sole subsidiary, The Centreville
National Bank of Maryland (the Bank) which has conducted the business of banking
since 1876. Since the Bank is the primary possession of the Company, the assets
and liabilities of the Company are made up almost entirely of the assets and
liabilities of the Bank. The same is true for the income and expense of the
Company. All data for the periods on and after July 1996 is presented in this
analysis in consolidated form and is compared to like data for the Bank for
prior years, restated to reflect the exchange of shares of Bank common stock for
Company shares.
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.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported $1,684 thousand in net income for the nine months
ended September 30, 1998 or $.84 per share compared to the nine months ended
September 30, 1997 with net income of $1,640 thousand or $.81 per share. Net
income in 1998 increased $44 thousand or 2.7% over the same period in 1997. The
improvement was attributable to the $191 thousand or 3.7% growth in net interest
income, the Company's major income component. September 30, 1998 net income
includes nine months net interest earnings on assets acquired in the Kent
Savings merger. The September 30, 1997 net interest income includes six months
earnings on assets acquired in the April 1, 1997 merger. Year to date net income
absorbed on going non-interest expense associated with the merger of Kent
Savings including goodwill amortization as well as increased depreciation
expense for the renovation of the Centreville office. As a result of a
decreasing net interest spread, net interest income as a percent of earning
assets decreased .15% as of September 30, 1998 compared to the same period in
1997, which reflects a growth in earning assets at a faster rate than the growth
in interest earnings.
Page 1
<PAGE>
NET INTEREST INCOME and NET INTEREST MARGIN
Net interest income is the principal source of earnings for a banking
company. It represents the difference between interest and fees earned on the
loan and investment portfolios and the interest paid on deposits. The quarter
ended September 30, 1998 has been characterized by relatively stable interest
rates at the Bank level subsequent to decreases in loan and deposit rates
recognized early in the first quarter. As a result of balance sheet growth
resulting primarily from the Kent purchase, the Bank's net interest income, on a
fully tax-equivalent basis, increased in the first nine months of 1998 compared
to the same period in 1997. Net interest income (on a tax equivalent basis) for
September 30, 1998 increased $250 thousand or 4.8% compared to the nine months
ended September 30, 1997.
Interest rate spread is the difference between the average yield on
interest earning assets and the average rate paid on interest bearing
liabilities (deposits). Interest rate spread for the nine months ended September
30, 1998 and 1997 was 3.70%, and 3.81%, respectively. Interest rate spread in
1998 decreased at the end of the third quarter compared to the same period in
1997 resulting from a decreased yield on average earning assets of .02% and an
increase in yield of average interest bearing liabilities by .08%. This is also
a decrease from the March 31 and June 30, 1998 interest rate spread of 3.83% and
3.71% respectively. A change in the mix of the balance sheet accounted for the
decrease in interest rate spread when comparing the third quarters of 1998 and
1997. A review of average earning assets shows 64.3% increase in earnings on
federal funds because of a .35% yield increase and a 54.4% increase in average
balance. The average balance in municipal bonds increased $2.0 million which
provide a higher tax equivalent yield than U.S. Treasuries and government agency
bonds which grew only $1.8 million. Despite loan rate decreases early in 1998
loan yield has grown in comparison to September 30, 1997 by .06%. This third
quarter loan yield increase is a decrease from the .15% increase noted in
comparing the first quarter 1997 and 1998. The reduction in loan rates and loans
refinanced with the Bank or to the secondary market are reflected in earnings.
As of September 30, 1998 total loans as a percentage of total assets decreased
1.5%. Those funds have been shifted to lower yielding federal funds and
investment securities. Average balances in each loan category have also
increased adding to total interest income. Deposits have seen a change in mix as
well. Other Time and IRA deposits average balances have increased. These are
more "costly" deposits that account for increased deposit interest expense.
Despite lowering deposit rates early in 1998 the change in deposit mix provided
higher yields on deposits as of September 30, 1998 than the previous year.
Interest rate spread of 3.70% has decreased comparing September 30,
1998 to a spread of 3.82% at December 31, 1997. Yield on average earning assets
has decreased .02% primarily as a result of a lower yield on investments, loans
and a shift in balance sheet mix from higher yielding loans to lower yielding
investments and federal funds. Deposit yields have also increased primarily as a
result in increased cost of funds for time deposits. The increased yield on
interest bearing liabilities was assisted by additional cost of borrowed funds
at a higher rate than other interest bearing liabilities.
Net interest margin decreased comparing September 30, 1998 to September
30, 1997 from 4.51% to 4.36%. Net interest margin is calculated as tax
equivalent net interest income divided by average earning assets and represents
the net yield on its earning assets. The net interest
Page 2
<PAGE>
margin reflected a growth in earning assets at a faster rate than the growth in
earnings. See the table 1 titled "Average Balances, Yields and Rates" for
additional information.
Management and the Board of Directors monitor interest rates on a
regular basis to assess the Company's competitive position and to maintain a
reasonable and profitable interest rate spread. The Company also considers the
maturity distribution of loans, investments, and deposits and its effect on net
interest income as interest rates rise and fall over time.
PROVISION and ALLOWANCE FOR CREDIT LOSSES
For the quarter ended September 30, 1998 and 1997, the Company recorded
net charge offs of $27 thousand and $114 thousand, respectively compared to net
charge offs of $114 thousand for the year ended December 31, 1997. Internal loan
review, in particular, has been effective in identifying problem credits and in
achieving timely recognition of potential and actual losses within the loan
portfolio. Improved overall credit quality and increased collection efforts have
also contributed to the immaterial amount of net charge offs in 1998 and for the
year ended December 31, 1997.
Gross charge offs as of September 30, 1998 amounted to $62 thousand,
$158 thousand for the same period in 1997 and $158 thousand for the year ended
1997, the majority of which were installment loans. Efforts to collect charged
off loans continue and are evidenced by recoveries totaling $35 thousand in the
third quarter of 1998, $44 thousand for the same nine months in 1997 and $44
thousand for the year ended December 31, 1997.
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 nor to date in 1998. The allowance for credit losses is maintained at a
level believed adequate by management to absorb estimated probable credit
losses. Management's quarterly evaluation of the adequacy of the allowance is
based on analysis of the loan portfolio and its known and inherent risks,
assessment of current economic conditions, diversification and size of the
portfolio, adequacy of the collateral, past and anticipated loss experience and
the amount of non-performing loans. The allowance for credit losses has remained
relatively unchanged despite the increase in outstanding loan balances. The
allowance for credit losses of $1.4 million as of September 30, 1998 and
December 31, 1997 represents 1.29% of gross loans. As of September 30, 1997, the
$1.4 million allowance for credit losses reflected 1.3% of gross loans. Analysis
by loan review supports adequacy of the allowance. The unchanged percentage of
allowance to outstanding loans reflects improvements in credit quality achieved
through better credit underwriting and more aggressive collection efforts. In
management's opinion, the allowance for credit losses is adequate as of
September 30, 1998.
See Notes 3 and 4 in the Notes to Financial Statements.
Page 3
<PAGE>
NON-INTEREST INCOME AND EXPENSE
As of September 30, 1998 non-interest income reflects $73 thousand increase
compared to September 30, 1997 primarily resulting from a $24 thousand gain on
life insurance and $26 thousand in ATM surcharges implemented in February 1998.
Non-interest expense as of September 30, 1998 increased $255 thousand or 7.9%
compared to the same period last year. A portion of the increase reflects $60
thousand increase in salaries and benefits costs associated with the addition of
Kent Branch staff in the second quarter of 1997 verses nine months of 1998 and
increased pay rates and insurance premiums when comparing September 30, 1998 to
September 30, 1997. Premise and fixed asset expenses increased $47 thousand as
of September 30, 1998 compared to the same period in 1997 primarily as a result
of overhead of the Kent Branch acquired in the purchase of Kent Savings and Loan
Association as well as the increased cost of depreciation, property taxes and
facility costs for the renovated Commerce Street office. The $111 thousand
increase in other non-interest expense in the first nine months of 1998 compared
to the same period in 1997 includes the amortization of intangibles which
increased as goodwill from the merger is amortized over 15 years. In the first
nine months of 1998 costs have been added as the Company has invested in
additional marketing programs and staff training programs. Data processing costs
have also increased to as a result of the additional customers acquired in the
Kent Savings merger.
INVESTMENT SECURITIES
Investment securities classified as available-for-sale are held for an
indefinite period of time and may be sold in response to changing market and
interest rate conditions as part of the asset/liability management strategy.
Available-for-sale securities are carried at market value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity net of income taxes. Investment securities classified as
held-to-maturity are those that management has both the positive intent and
ability to hold to maturity, and are reported at amortized cost. The Company
does not currently follow a strategy of making securities purchases with a view
to near-term sales, and, therefore, does not own trading securities, nor are
derivatives used as investments. The Company manages the investment portfolios
within policies which seek to achieve desired levels of liquidity, manage
interest rate sensitivity risk, meet earnings objectives, and provide required
collateral support for deposit activities.
Total investment securities amounted to $46.3 million and $48.7 million
as of September 30, 1998 and December 31, 1997, respectively. The net decreased
level of investments in securities resulted primarily from securities called as
a result of the bond market offering lower interest rates. The funds were
primarily reinvested in federal funds and continue to be reinvested in federal
funds, loans and some investment securities. Excluding the U.S. Government and
U.S. Government sponsored agencies, the Company had no concentrations of
investment securities from any single issuers that exceeded 10% of stockholders'
equity.
See Note 2 in the Notes to Financial Statements.
Page 4
<PAGE>
LOAN PORTFOLIO
The Bank is actively engaged in originating loans to customers in Queen
Anne's, Caroline, Kent and Talbot Counties. The Company has policies and
procedures designed to mitigate credit risk and to maintain the quality of the
loan portfolio. These policies include underwriting standards for new credits as
well as the continuous monitoring and reporting of asset quality and the
adequacy of the allowance for credit losses. These policies, coupled with
continuous training efforts, have provided effective checks and balances for the
risk associated with the lending process. Lending authority is based on the
level of risk, size of the loan and the experience of the lending officer. Total
loans as of September 30, 1998 have returned to December 31, 1997 levels
following a declining trend in the first six months of 1998. The decrease was
attributed to loans refinancing to the secondary market at the lower rates
offered by the market as well as pay downs of a number of lines of credit.
Officer calling programs, new product development, reduction in loan rates, and
increased marketing efforts were implemented to combat the loan runoff and are
showing signs of success. Note 3 "Summary of Loan Portfolio" presents the
composition of the Company's loan portfolio by significant concentration. The
Company had no loan concentrations exceeding 10% of total loans which are not
otherwise disclosed.
The Company's policy is to make the majority of its loan commitments in
the market area it serves. This tends to reduce risk because management is
familiar with the credit histories of loan applicants and has an in-depth
knowledge of the risk to which a given credit is subject. The Company had no
foreign loans in its portfolio as of September 30, 1998.
It is the policy of the Bank to place a loan in non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on any outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan and
the overall economic situation of the borrower when making a non-accrual
decision. Non-accrual loans are closely monitored by management . A non-accruing
loan is restored to current status when the prospects of future contractual
payments are no longer in doubt. At September 30, 1998 and December 31, 1997,
$57 thousand and $199 thousand, respectively, of non-accrual loans were secured
by collateral with an estimated value of $343 thousand as of September 30, 1998
and $1.1 million as of December 31, 1997. At September 30, 1998, the Bank had
troubled debt restructurings of $872 and $3.16 million in loans on the watch
list for which payments were current, but the borrowers have the potential for
experiencing financial difficulties. These loans are subject to on going
management attention and their classifications are reviewed regularly.
DEPOSITS
Deposit liabilities reflected 5.7% increase in the nine months of 1998
compared to December 31, 1997. Interest bearing transactions and time account
deposits were the main sources of deposit growth. The addition of the Kent
branch market, competitive time deposit rates, NOW account product features, and
marketing efforts have contributed to the growth in these products. In addition,
the Company's Silver CD product, with limited withdrawal penalties, for
consumers over age 62 grew significantly in 1998. The Company continues to
Page 5
<PAGE>
experience strong competition from other commercial banks, credit unions, the
stock market and mutual funds. The Company has no foreign banking offices.
LONG TERM DEBT
Long term debt consists of an advance from the Federal Home Loan Bank
of $5,000,000 at the end of the third quarter of 1997. These funds were utilized
for securities purchases. See Note 5 in the Notes to Financial Statements.
LIQUIDITY MANAGEMENT
Liquidity describes the ability of Shore Bancshares, Inc. and its
subsidiary, The Centreville National Bank of Maryland to meet financial
obligations that arise out of the ordinary course of business. Liquidity is
primarily needed to meet borrowing and deposit withdrawal requirements of the
customers of the Bank and to fund current and planned expenditures. The Company
maintains its asset liquidity position internally through short term
investments, the maturity distribution of the investment portfolio, loan
repayments and income from earning assets. A substantial portion of the
investment portfolio contains readily marketable securities that could be
converted to cash immediately. Refer to Note 2 in the Consolidated Financial
Statements for a table reflecting the Bank's security portfolio's estimated fair
value. On the liability side of the balance sheet, liquidity is affected by the
timing of maturing liabilities and the ability to generate new deposits or
borrowings as needed. Other sources, not currently in use, are available through
borrowings from the Federal Reserve Bank and from lines of credit approved at
correspondent banks. As discussed above, an additional source is the Federal
Home Loan Bank from which a $5,000,000 advance was outstanding at September 30,
1998. During the nine months of 1998 calls of investment securities, loan runoff
early in the year and an increase in deposit liabilities have provided for the
Company's higher liquidity position. Management knows of no trend or event which
will have a material impact on the Bank'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.
Page 6
<PAGE>
The Bank uses earnings simulation modeling and internal calculation 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
September 30, 1998 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 $12 thousand if rates were to increase by that amount and would increase $22
thousand if rates would decline a similar amount.
CAPITAL RESOURCES AND ADEQUACY
Total stockholders' equity decreased $1,793 thousand or 7.6% in 1998 to
$21.7 million as of September 30, 1998 from $23.5 million at December 31, 1997.
Earnings of $1.7 million and the change in unrealized gain (loss) on investments
classified as available for sale added $60 thousand to shareholders' equity.
Dividends paid reduced stockholders' equity $725 thousand. A stock repurchase of
$2.8 million dollars, or 101,322 shares accounted for the majority of the
decrease in stockholder's equity.
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 at the Company level at September 30, 1998 was 11.19% and at
December 31, 1997 was 12.23%.
Another measure of capital adequacy is the risk based capital ratio or
the ratio of total capital to risk adjusted assets. Total capital is composed of
both core capital (Tier 1) and supplemental capital (Tier 2) including
adjustments for off balance sheet items such as letters of credit and taking
into account the different degrees of risk among various assets. Regulators
require a minimum total risk based capital ratio of 8%. The Company's ratio at
September 30, 1998 was 20.95% and at December 31, 1997 was 23.61%. According to
FDIC capital guidelines, the Company is considered to be "Well Capitalized."
Building and technological improvements begun in 1997 were completed in
1997. Renovations at the Commerce street location are significantly complete.
The remaining phase is replacing the lighting and flooring and will be completed
by December 1998 with an approximate cost of $65 thousand.
On December 5, 1996 the Bank entered into an agreement to acquire Kent
Savings and Loan Association, F.A.(Kent Savings) of Chestertown, Maryland. The
merger transaction was accounted for as a purchase. Under the terms of the
agreement, the Bank paid approximately $5,100,000 for all of the outstanding
shares of Kent Savings resulting in $2.1 million in goodwill
Page 7
<PAGE>
to be amortized over 15 years. The Kent Savings shareholders met on March 17,
1997 and approved the merger. The effective date of the merger was April 1,
1997.
On March 3, 1998 the Board of Directors also approved a 2 for 1 stock
split in the form of a 100% stock dividend to be distributed on March 31, 1998
to shareholders of record on March 10, 1998. Total capital did not change as a
result of the transaction, nor were the Company's capital ratios impacted in a
negative manner.
On September 3, 1998 the Company announced that it agreed to repurchase
101,332 shares or approximately 5.0% of its outstanding common stock at a price
of $27.75 per share. The Board of Directors and management believe it is in the
best interest of the Company and its shareholders to repurchase the stock
considering the Company's high level of capital and to lessen the dilutive
effect of the stock-based employee incentive plans which were approved at the
Company's Annual meeting in April 1998. The repurchase of common shares also
increases each shareholder's percentage of ownership of the company. The
repurchase of the stock was effective September 16, 1998.
Management knows of no other trend or event, which will have a material
impact on capital.
FUTURE TRENDS
The "Year 2000 Issue", which is common to most corporations, including
banks, is a general term used to describe the problems that may result from the
improper processing of dates and date-sensitive calculations as the Year 2000
approaches. This issue is caused by the fact that many of the world's existing
computer programs use only two digits to identify the year in the date field of
a program. These programs could experience serious malfunctions when the last
two digits of the year change to "00" as a result of identifying a year
designated "00" as the year 1900 rather than the Year 2000.
The Company (for the purposes of this disclosure, hereinafter "the
Company" shall mean Shore Bancshares, Inc. and its subsidiary, The Centreville
National Bank of Maryland) formed a Year 2000 Committee, which is comprised of a
cross-section of the Company's employees, in the fourth quarter of 1997. This
Committee is leading the Company's Year 2000 efforts to ensure that the Company
is properly prepared for the Year 2000. The Company's Board of Directors has
approved a plan submitted by the Year 2000 Committee that was developed in
accordance with guidelines set forth by the Federal Financial Institutions
Examination Council. This plan has five primary phases related to internal Year
2000 compliance:
1. Awareness - this phase is ongoing and is designed to inform the
Company's Board of Directors (the "Board") and Executive management
("Management"), employees, customers and vendors of the impact of the Year 2000
Issue. Since January 1998, the Board has been apprised of the Company's efforts
at their regular meetings. In addition, all customers were updated with respect
to the Company's Year 2000 efforts through a mailing sent in February 1998,
public seminars in April 1998 and through ongoing outreach efforts to community
groups and organizations.
Page 8
<PAGE>
2. Assessment - during this phase an inventory was conducted of all known
Company processes that could reasonably be expected to be impacted by the Year
2000 Issue and their related vendors, if applicable. The identification process
included information technology and communication systems such as personal
computers, local area networks and servers, ATM modems, printers, copy machines,
facsimile machines, telephones and the operating systems and software for these
systems. It also included non-information technology systems, such as heating,
air conditioning and vault controls, alarm systems, surveillance systems, and
postage meters. The Company inventoried all the systems listed above in the
second and third quarters of 1998 and performed an initial assessment of
potential risks from either under or nonperformance arising from incorrect
processing and usage of dates after December 31, 1999. All outside servicers and
major vendors were contacted to ascertain their individual levels of Year 2000
compliance. From vendor responses and/or certifications of Year 2000 compliance
the Company determined that vendors and service providers who provide mission
critical and significant systems to the Company are addressing Year 2000
compliance for the products and services they provide to the Company. The
assessment phase is complete, although it is updated periodically as necessary.
3. Renovation and/or replacement - this phase includes programming code
enhancements, hardware and software upgrades, system replacements, vendor
certification and any other changes necessary to make any hardware, software and
other equipment Year 2000 compliant.
The Company does not perform in-house programming, and thus is
dependent on external vendors to ensure and modify, if needed, the hardware,
software or other services it provides to the Company for Year 2000 compliance.
The Company's primary service provider has a comprehensive Year 2000 Plan in
place and has completed initial testing of their systems.
4. Testing - The next phase for the Company under the plan is to complete
a comprehensive testing of all known processes. As noted in the renovation
and/or replacement phase above, the Company's primary service provider has
already tested their system for Year 2000 compliance. The next step, which is
scheduled for the first and second quarters of fiscal 1999, is to complete
testing of the Company's network mission critical software applications and
hardware. The Company has performed Year 2000 testing of all employee computer
work stations, and is in the process of updating or replacing work stations
which are not Year 2000 compliant. The testing of the remainder of the Company's
processes is expected to be substantially complete by June 1999.
5. Implementation - this phase will occur when Year 2000 processing
commences. On some applications the Company is already entering dates greater
than December 31, 1999 into their systems. In these situations no adverse events
have been noted. The significant part of the implementation phase will occur
after December 31, 1999.
The Company is in the process of developing contingency plans for
processes that do not process information reliably and accurately after December
31, 1999. The contingency plans for all systems should be substantially complete
by the end of the second quarter of fiscal 1999.
Senior management has developed an outline for a contingency plan to
provide operating alternatives for continuation of services to the Bank's
customers in the event of systems or
Page 9
<PAGE>
communication failures at the beginning of the Year 2000. We expect to complete
the contingency plan by December 31, 1998. Based on preliminary planning during
development of the contingency plan, management believes that the Company will
be able to continue to operate in the Year 2000 even if some systems fail. At
the end of December 1999, we will generate paper and systems backup of all
customer and general ledger accounts. Due to the size of the Bank, we believe
that we would be able to operate with all transactions processed manually until
normal operations can be restored. This procedure could require changing of
schedules and hiring of temporary staff, which would increase cost of
operations. If this procedure were to continue for any extended period of time,
or if we ultimately had to change data service providers, the cost could be
material.
The Company is also in the process of assessing the Year 2000 readiness
of significant borrowers. The company has completed its initial review of
significant relationships and assessed the risks these relationships may pose to
the Company. The Company will continue to monitor the risk and expects to absorb
any potential losses during the normal course of business. This step is not
expected to require a significant amount of time or resources.
Based on an analysis of projected expenses performed during the first
quarter of 1998 and subsequent updates, the total cost of the Year 2000 project
is currently estimated at $110,000. Funding of the Year 2000 project costs will
come from normal operating cash flow. 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. However, the expenses associated with the Year 2000 issue
will directly reduce otherwise reported net income for the Company. Should the
Company have to resort to alternative operating procedures due to major systems
or communications failures at the beginning of the Year 2000, the extra cost
could be material.
Management of the Company believes that the potential effects on the
Company's internal operations of the Year 2000 Issue can and will be addressed
prior to the Year 2000. However, if required modifications or conversions are
not made or are not completed on a timely basis prior to the Year 2000, the Year
2000 Issue could disrupt normal business operations. The most reasonably likely
worst case Year 2000 scenarios foreseeable at this time would include the
Company temporarily not being able to process, in some combination, various
types of customer transactions. This could affect the ability of the Company to,
among other things, originate new loans, post loan payments, accept deposits or
allow immediate withdrawals, and, depending on the amount of time such a
scenario lasted, could have a material adverse effect on the Company.
Because of the serious implications of these scenarios, the primary
emphasis of the Company's Year 2000 efforts is to correct, with complete
replacement if necessary, any systems or processes whose Year 2000 test results
are not satisfactory prior to the Year 2000. Nevertheless, should one of the
most reasonably likely worst case scenarios occur in the Year 2000, the Company,
as noted above, is in the process of formalizing a contingency plan that would
allow for limited transactions until the Year 2000 problems are fixed.
The costs of the Year 2000 project and the date on which the Company
plans to complete Year 2000 compliance are based on management's best estimates,
which were derived using numerous assumptions of future events such as the
availability of certain resources (including
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<PAGE>
internal and external resources), third party vendor plans and other factors.
However, there can be no guarantee that these estimates will be achieved at the
cost disclosed or within the timeframe indicated, and actual results could
differ materially from these plans. Factors that might affect the timely and
efficient completion of the Company's Year 2000 project include, but are not
limited to, vendor's ability to adequately correct or convert software and the
effect on the Company's ability to test its systems, the availability and cost
of personnel trained in the Year 2000 area, the ability to identify and correct
all relevant computer programs and similar uncertainties.
Bank regulatory agencies have recently issued additional guidance under
which they are assessing Year 2000 readiness. The failure of a financial
institution to take appropriate action to address deficiencies in the Year 2000
project management process may result in enforcement actions which could have a
material adverse effect on such institution, result in the imposition of civil
money penalties or result in the delay (or receipt of an unfavorable or critical
evaluation of management of a financial institution in connection with
regulatory review) of applications seeking to acquire other entities or
otherwise expand the institution's activities.
Ultimately, the success of the Company's efforts to address the Year
2000 issue depends to a large extent not only on the corrective measures that
the Company undertakes, but also on the efforts undertaken by businesses and
other independent entities who provide data to, or receive data from, the
Company such as borrowers, vendors or customers. In particular, the Company's
credit risk associated with its borrowers may increase as a result of problems
such borrowers may have resolving their own Year 2000 issues. Although it is not
possible to evaluate the magnitude of any potential increased credit risk at
this time, the impact of the Year 2000 issue on borrowers could result in
increases in problem loans and credit losses in future years. From now until
2000, the Company will endeavor to monitor the Year 2000 efforts of its
borrowers and will implement a course of action and procedures designed to
reduce any increased potential risk as a result of Year 2000 issues.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Management Discussion and Analysis of Results of Operation and
Financial Condition - Market Risk Management." The Company's principal market
risk exposure is to interest rates.
Page 11
<PAGE>
PART II
OTHER INFORMATION
<PAGE>
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits Required by Item 601 of Regulation S-K are set forth below:
Exhibit
-------
(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 Amendment and Restatement of the Company are
incorporated by reference from the Company's June 30, 1998 Form 10Q filed with
the Commission on August 13, 1998.
(3.2) Bylaws of the Company as amended and restated are incorporated
by reference from the Company's June 30, 1998 Form 10Q filed with the Commission
on August 13, 1998.
<PAGE>
(10.1) 1998 Employee Stock Purchase Plan is incorporated by reference
from the Company's Registration Statement on Form S-8 filed with the Commisssion
on September 25, 1998 (Registration No. 333-64317).
(10.2) 1998 Stock Option Plan is incorporated by reference from the
Company's Registration Statement on Form S-8 filed with the Commission on
September 25, 1998 (Registration No. 333-64319).
(13) 1997 Annual Report filed with the Commission on March 30, 1998
(Registration No. 0-22345).
(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).
(27.1) Financial Data Schedule (September 30, 1998).
B. REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated September 4, 1998
in which the Company disclosed that it issued a press release entitled "Shore
Bancshares Purchases Stock and Announces Cash Dividend." The press release
stated generally that the Company agreed to repurchase 101,332 shares, or
approximately 5.0% of its outstanding common stock at a price of $27.75 per
share, and that a cash dividend was declared in the amount of $.12 per share,
payable on September 18, 1998 to stockholders of record on September 10, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Bank has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 12, 1998
SHORE BANCSHARES, INC.
/S/ DANIEL T. CANNON
____________________
DANIEL T. CANNON
President
/S/ CAROL I. BROWNAWELL
_______________________
CAROL I. BROWNAWELL
Treasurer
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