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, 1999
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 4, 1999, there were 1,913,891 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, 1999 and December 31, 1998
Statements of Income -- Three months ended September 30, 1999 and 1998
and the nine months ended September 30, 1999 and 1998.
Statements of Cash Flows -- Nine months ended September 30, 1999 and
1998 and the twelve months ended December 31, 1998.
Notes to Financial Statements - September 30, 1999
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
- ----------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
SHORE BANCSHARES, INC.
<TABLE>
<CAPTION>
September 30, December 31,
Dollars in thousands 1999 1998
(Unaudited)
------------- ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 5,159 $ 4,536
Federal funds sold 6,831 9,752
Securities
Held to Maturity at amortized cost 18,257 23,916
(fair value of $18,097 and
$24,253 respectively)
Available for Sale 33,676 23,203
Loans, less allowance for credit losses 116,637 109,848
($1,203 and $1,349 respectively)
Premises and fixed assets 3,439 3,369
Investments in unconsolidated subsidiaries 1,070 1,167
Accrued interest receivable 740 1,355
Goodwill 1,806 1,917
Other assets 3,482 1,991
----------- -----------
TOTAL ASSETS $ 191,097 $ 181,054
=========== ===========
LIABILITIES
Deposits
Non-interest bearing demand $ 19,944 $ 19,774
Interest bearing transaction 20,573 20,467
Savings and money market 40,626 35,322
Time, $100,000 or more 15,375 15,357
Other time 65,875 62,388
----------- -----------
Total deposits 162,393 153,308
----------- -----------
Securities sold under agreements to repurchase 498 --
Long term debt 5,000 5,000
Accrued interest payable 199 208
Other liabilities 650 634
----------- -----------
6,347 5,842
----------- -----------
Total liabilities 168,740 159,150
----------- -----------
COMMITMENTS
EQUITY CAPITAL
Common stock, par value $.01; authorized
10,000,000 shares, issued and outstanding:
9/30/99 1,913,882
12/30/98 1,913,516 19 19
Surplus 10,074 10,064
Retained earnings 12,723 11,866
Accumulated other comprehensive income (459) (45)
----------- -----------
Total stockholders' equity 22,357 21,904
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 191,097 $ 181,054
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SHORE BANCSHARES, INC.
<TABLE>
<CAPTION>
(UNAUDITED) Three Months Nine Months Three Months Nine Months
Dollars in thousands except per share data Ending Ending Ending Ending
September 30, September 30, September 30, September 30,
1999 1999 1998 1998
-------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fee income on loans $ 2,454 $ 7,178 $ 2,492 $ 7,312
Interest and dividends on securities
Taxable securities 591 1,721 546 1,602
Tax-exempt securities 108 332 122 363
Other securities (debt and equity) 32 99 31 102
Interest on federal funds sold 137 349 147 370
----------------------------------------------------------------
Total interest income 3,322 9,679 3,338 9,749
----------------------------------------------------------------
INTEREST EXPENSE
Interest on certificates of deposit
of $100,000 or more 201 616 199 574
Interest on other deposits 1,289 3,760 1,229 3,601
Interest on securities sold under
agreements to repurchase 6 7 - -
Interest on long term debt 67 209 73 215
----------------------------------------------------------------
Total interest expense 1,563 4,592 1,501 4,390
----------------------------------------------------------------
NET INTEREST INCOME 1,759 5,087 1,837 5,359
Provision for credit losses - - - -
----------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,759 5,087 1,837 5,359
----------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 191 591 166 501
Other noninterest income 80 224 49 156
Gains (losses) on securities 5 47 - -
----------------------------------------------------------------
Total noninterest income 276 862 215 657
----------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 629 1,832 592 1,710
Expenses of premises and fixed assets 173 457 174 490
Other noninterest expense 426 1,260 327 1,293
----------------------------------------------------------------
Total noninterest expense 1,228 3,549 1,093 3,493
----------------------------------------------------------------
INCOME BEFORE TAXES 807 2,400 959 2,523
Applicable income taxes 271 797 297 839
----------------------------------------------------------------
NET INCOME $ 536 $ 1,603 $ 662 $ 1,684
================================================================
Basic Earnings Per Common Share $ 0.28 $ 0.84 $ 0.33 $ 0.84
Diluted Earnings Per Common Share 0.28 0.84 0.33 0.84
Dividends Declared Per Common Share 0.13 0.39 0.12 0.36
</TABLE>
See Notes to the Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SHORE BANCSHARES, INC.
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Dollars in thousands Stock Surplus Earnings Income Total
--------- --------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 19 $ 10,064 $ 11,866 $ (45) $ 21,904
Comprehensive income:
Net income 1,603 1,603
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale
securities, net of reclassification
adjustment (414) (414)
--------
Total comprehensive income 1,189
--------
Issuance of common stock upon
exercise of stock options 10 10
Cash dividends declared ($.39 per
common share) (746) (746)
-------- -------- -------- -------- --------
Balance at September 30, 1999 $ 19 $ 10,074 $ 12,723 $ (459) $ 22,357
======== ======== ======== ======== ========
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income Total
--------- --------- ---------- -------------- --------
Balance at December 31, 1997 $ 10 $ 10,064 $ 13,480 $ (39) $ 23,515
Comprehensive income:
Net income 1,684 1,684
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale
securities, net of reclassification
adjustment 60 60
--------
Total 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>
See Notes to Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
SHORE BANCSHARES, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Year Nine Months
Ended Ended Ended
September 30, December 31, September 30,
1999 1998 1998
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 1,603 $ 2,219 $ 1,684
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 331 457 232
Equity in net earnings of unconsolidated subsidiaries -- 20 --
Provision for credit losses, net (146) (55) (27)
Deferred income taxes 6 (31) --
Net (gains) losses on sale of assets (47) (5) --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 615 121 33
(Increase) decrease in other assets (1,082) 47 87
Increase (decrease) in accrued interest payable (9) 19 6
Increase (decrease) in other liabilities 16 36 (39)
-------- -------- --------
Net cash provided by operating activities 1,287 2,828 1,976
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held to maturity 7,222 34,268 24,259
Proceeds from maturities of investment securities available for sale 3,563 2,651 1,125
Proceeds from sale of investment securities available-for-sale 3,588 -- --
Purchases of held-to-maturity securities (1,565) (18,767) (18,759)
Purchases of available-for-sale securities (18,228) (16,499) (3,999)
Net (increase) decrease in loans (6,643) (2,029) (9)
Purchase of premises and equipment (369) (429) (225)
-------- -------- --------
Net cash provided by (used in) investing activities (12,432) (805) 2,392
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in demand, interest-bearing
transaction, and savings deposits 5,580 1,084 3,104
Increase (decrease) in time deposits 3,505 6,410 5,241
Increase (decrease) in securities repurchased 498 -- --
Common stock repurchased and retired -- (1,012) (2,812)
Proceeds from issuance of common stock 10 -- --
Cash dividends paid (746) (2,812) (725)
-------- -------- --------
Net cash provided by (used in) financing activities 8,847 3,670 4,808
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (2,298) 5,693 9,176
Cash and cash equivalents, beginning 14,288 8,596 8,596
-------- -------- --------
Cash and cash equivalents, ending $ 11,990 $ 14,289 $ 17,772
======== ======== ========
Supplementary cash flow information:
Interest paid $ 4,387 $ 5,617 $ 4,168
Income taxes paid $ 665 $ 1,240 $ 938
All dollar amounts in thousands
</TABLE>
<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, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the audited consolidated
financial statements and footnotes included in the 1998 Annual Report to
Shareholders and Form 10.
Consolidation has resulted in the elimination of all significant
intercompany accounts and transactions.
<PAGE>
NOTE -2 Analysis of the Allowance for Credit Losses
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Balance at beginning of period $ 1,349 $ 1,404
CHARGE-OFFS:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 0 14
Commercial 61 0
Consumer installment 103 90
-------- --------
164 104
-------- --------
Recoveries:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 0 0
Commercial 2 26
Consumer installment 16 23
-------- --------
18 49
-------- --------
Net charge-offs (recoveries) 146 55
Provision for credit losses 0 0
Allowance acquired 0 0
-------- --------
Balance at end of period $ 1,203 $ 1,349
======== ========
Average daily balance of loans $114,535 $108,180
Ratio of net charge-offs to average loans outstanding 0.13% 0.05%
</TABLE>
<PAGE>
Note 3 - Other Borrowed Funds
The Bank's September 30, 1997, convertible advance from the Federal
Home Loan Bank of Atlanta in the amount of $5,000,000 was converted and paid by
the Bank on September 24, 1999. On September 30, 1999, the Bank received a new
convertible advance from the Federal Home Loan Bank of Atlanta in the amount of
$5,000,000 at an interest rate of 5.07%, which is due September 30, 2009.
The Bank has pledged mortgage loans as collateral on this advance.
Note 4 - Computation of Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share, which became effective for the Company for
reporting periods ending after December 31, 1998. Under the provisions of SFAS
No. 128, primary and fully diluted earnings per share were replaced with basic
diluted earnings per share in an effort to simplify the computation of these
measures and align them more closely with the methodology used internationally.
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
and does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation method is arrived at by
dividing net income by the weighted-average number of shares outstanding,
adjusted for the dilutive effect of outstanding stock options and warrants. For
purposes of comparability, the prior-period earnings per share data has been
restated
<TABLE>
<CAPTION>
Three Months Nine Months
Ending Ending
September 30, 1999 September 30, 1999
---------------------- ----------------------
Basic:
<S> <C> <C>
Net Income (applicable to common stock) $ 536,000 $ 1,603,000
Average common shares outstanding 1,913,852 1,913,691
Basic net income per share $ .28 $ .84
Diluted
Net income (applicable to common stock) $ 536,000 $ 1,603,000
Average common shares outstanding 1,913,852 1,913,691
Dilutive effect of stock options 0 0
--------- -----------
Average common shares outstanding 1,913,852 1,913,691
Diluted net income per share $ .28 $ .84
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ending Ending
September 30, 1998 September 30, 1998
-------------------- -----------------------
Basic:
<S> <C> <C>
Net Income (applicable to common stock) $ 662,000 $ 1,684,000
Average common shares outstanding 1,998,326 2,009,280
Basic net income per share $ .33 $ .84
Diluted
Net income (applicable to common stock) $ 662,000 $ 1,684,000
Average common shares outstanding 1,998,326 2,009,280
Dilutive effect of stock options 0 0
----------- -----------
Average common shares outstanding 1,998,326 2,009,280
Diluted net income per share $ .33 $ .84
</TABLE>
<PAGE>
AVERAGE BALANCES, YIELDS AND RATES
<TABLE>
<CAPTION>
YTD 9/30/99 YTD 9/30/98
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest Earning assets:
Money market investments:
Federal funds sold $ 9,534,229 $ 349,032 4.89% $ 8,562,080 $ 370,179 5.78%
Investment Securities:
U.S. Treasury securities
and obligations of U.S.
government agencies 38,615,369 1,720,773 5.96% 33,740,982 1,580,030 6.26%
Obligations of States and
political subdivisions 9,707,519 502,993 6.93% 10,378,420 549,447 7.08%
Taxable Municipals - - 0.00% 415,136 21,816 7.03%
All other investment securities 1,633,043 85,769 7.02% 1,698,967 92,532 7.28%
Federal Reserve Bank stock 302,250 13,601 6.02% 302,250 9,068 4.01%
-------------------------------------- --------------------------------------
Total investment securities 50,258,181 2,323,136 6.18% 46,535,755 2,252,893 6.47%
Loans - net of unearned income
Commercial loans 10,825,370 743,069 9.18% 9,532,266 694,820 9.75%
Installment loans 6,300,837 444,055 9.42% 5,665,550 423,820 10.00%
Mortgage loans 97,408,542 5,916,896 8.12% 92,555,109 6,143,340 8.87%
-------------------------------------- --------------------------------------
Total loans 114,534,749 7,104,020 8.29% 107,752,925 7,261,980 9.01%
-------------------------------------- --------------------------------------
TOTAL INTEREST EARNING ASSETS 174,327,159 $9,776,188 7.50% 162,850,760 $9,885,052 8.12%
Cash and due from banks 3,992,844 4,099,142
Other assets 9,861,126 9,684,076
Allowance for loan and lease losses (1,259,590) (1,389,154)
-------------------------------------- --------------------------------------
TOTAL ASSETS $ 186,921,539 $ 175,244,824
====================================== ======================================
LIABILITIES
Interest-bearing liabilities
Other Borrowed Funds $ 4,945,055 $ 209,106 5.65% $ 5,002,473 214,718 5.74%
Repurchase agreements 321,617 7,113 2.96% - - 0.00%
Super NOW accounts 20,213,283 393,367 2.60% 17,848,116 374,528 2.81%
Money market deposit accounts 19,568,854 466,595 3.19% 18,784,796 471,650 3.36%
Time, $100,000 or more 13,581,871 542,894 5.34% 12,336,970 499,905 5.42%
Other time deposits 51,436,216 2,010,737 5.23% 45,695,945 1,832,468 5.36%
IRA deposits 15,436,952 555,854 4.81% 15,463,963 586,447 5.07%
Savings deposits 18,359,877 407,320 2.97% 17,857,218 408,624 3.06%
-------------------------------------- --------------------------------------
TOTAL INTEREST BEARING LIABILITIES 143,863,725 $4,592,986 4.27% 132,989,481 $4,388,340 4.41%
Demand deposits 20,002,122 17,506,666
Other liabilities 998,546 966,357
-------------------------------------- --------------------------------------
Total liabilities 164,864,393 151,462,504
Stockholders' equity 22,057,146 23,782,320
-------------------------------------- --------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 186,921,539 $ 175,244,824
====================================== ======================================
Net interest income & interest rate spread $5,183,202 3.23% $5,496,712 3.70%
Net interest income as a % of earning assets 3.84% 4.36%
====================================== ======================================
<FN>
1. All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate of 34%, exclusive of the alternative minimum
tax rate and non deductible interest expense.
2. Loan fee income is included in interest income for each loan catagory and
yields are stated to include all.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
</FN>
</TABLE>
<PAGE>
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, 1998 audited consolidated financial statements
and notes.
Portions of this Quarterly Report on Form 10Q contain forward-looking
statements (as defined in the Private Securities Litigation Reform Act of 1995)
with respect to the adequacy of the allowance for loan losses, interest rate
risk, realization of deferred taxes, liquidity levels, and the Year 2000 issue,
which, by their nature, are subject to significant uncertainties which are
described in further detail in Item 1 of the Company's 1998 Form 10-K, under the
heading "Risk Factors." The Company believes that the expectations reflected in
such forward-looking statements are reasonable. However, because 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.
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.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported $ 1,603 thousand in net income for the nine months
ended September 30, 1999 or $.84 diluted earnings per share compared to the nine
months ended September 30, 1998 with net income of $1,684 thousand or $.84
diluted earnings per share. Despite a $205 thousand increase in noninterest
income, net income through the third quarter 1999 reflects a decrease as a
result of the declining interest rate environment. Industry rate decreases
resulted in the refinancing of many loans as well as calls of investment
securities in 1998. Loan refinancings continued into early 1999. The effects of
those declines continue to impact net income. The Company experienced growth in
total assets of 5.55% and in total deposits of 5.93% in the first nine months of
1999. Average earning assets continue to grow and reflect an increase of 7.05%
as of September 30, 1999 compared to the prior year. Despite the growth in
earning assets, net interest income declined $272 thousand or 5.08%. Earnings
reflect a shrinking net interest margin compared to the prior year, however, the
decline is stablizing as noted by a margin which essentially has not changed
from March 31, 1999.
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 and borrowings.
Despite balance sheet growth resulting primarily from loan and deposit growth,
the Bank's net interest income, on a fully tax-equivalent basis, decreased in
the first nine months of 1999 compared to the same period in 1998. Net interest
income (on a tax equivalent basis) for September 30, 1999 decreased $314
thousand or 5.70% compared to the nine months ended September 30, 1998. The
table titled "Average Balances, Yields and Rates" sets forth the major
components of net interest income, on a tax equivalent basis, for September 30,
1999 and 1998.
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, 1999 and 1998 was 3.23%, and 3.70%, respectively. Interest rate spread
decreased through the end of the third quarter compared to the same period in
1998 resulting from a decreased yield on average earning assets of 62 basis
points and a decrease in yield of average interest bearing liabilities by only
14 basis points. This is also a decrease from the December 31, 1998 interest
rate spread of 3.65% . The balance sheet mix has not changed significantly since
year end, however, the yields on earning assets decreased at a faster rate than
the decrease in yields on deposits. As a result of a lower interest rate
environment, the Company experienced a large number of calls of investment
securities in 1998. These securities were replaced with lower yielding
investments and the full effects of this are evident in the 29 basis point
reduction in investment yield comparing September 30, 1999 to the same period in
1998. Despite some loan rate increases during 1998 and the first quarter of
1999, overall loan yield decreased 72 basis points in the third quarter compared
to September 30, 1998. Fourth quarter 1998 loan rate decreases and more
significantly, loans refinanced with the Company and new loans at lower rates
are reflected in decreased loan yield as of September 30, 1999. However, the
average balances in each loan category have increased and total average loans
outstanding have increased $6.8 million since September 30, 1998. Although
volume has not improved enough to increase interest income when comparing the
third quarters of 1999 and 1998, two prime rate increases in the third quarter
have had a positive impact on earnings by repricing approximately $17 million of
floating rate loans tied to prime. The interest rate spread, although down from
a year ago, has improved slightly to 3.23% as of September 30, 1999 from 3.21%
as of June 30, 1999. The increasing interest rate environment will continue to
improve the Bank's interest rate spread.
Interest bearing liabilities have grown most notably in Time and Super
NOW deposit average balances. These are more costly deposits which account for
increased deposit interest expense despite a reduced yield on interest bearing
deposits. The addition of repurchase agreements to interest bearing liabilities
at the end of the second quarter, has also increased interest cost. The effects
of lowering deposit rates during 1998 and in 1999 have reflected a lower yield
on deposits of 4.27% as of September 30, 1999 compared to 4.41% for the same
period in the prior year.
Net interest margin decreased comparing September 30, 1998 to September
30, 1999 from 4.36% to 3.84%. 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 third quarter 1999 net interest margin
decrease is the result of repricing as previously discussed.
Page 2
<PAGE>
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
As of September 30, 1999 and 1998, the Company recorded net charge offs
of $146 thousand and $27 thousand, respectively, compared to net charge offs of
$55 thousand for the year ended December 31, 1998. Internal loan review, in
particular, is 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 1999 and for the year ended December
31,1998.
Gross charge offs as of September 30, 1999 amounted to $164 thousand,
$62 thousand for the same period in 1998 and $104 thousand for the year ended
1998. Sixy one thousand of the charge off dollars recorded resulted from two
commercial loans and the remaining $103 thousand were consumer installment
loans. Efforts to collect charged off loans continue and of the $61 thousand
charged off for commercial loans, $38 thousand is expected to be recovered.
Recoveries totaled $18 thousand in the first nine months of 1999, $35 thousand
for the same nine months in 1998 and $49 thousand for the year ended December
31, 1998.
No provision for credit losses was charged to expense in 1998 nor to
date in 1999. 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, the Year 2000 issue, 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 $1.2 million as of September 30, 1999 and $1.3
million as of December 31, 1998 represents 1.02% and 1.22%, respectively, of
gross loans. The decrease in percentage of allowance to outstanding, despite the
increasing outstanding gross loans, is justified by lower levels of classified
loans. Past due loan levels have decreased from year end and they consist
primarily of loans secured by real estate. Analysis by loan review supports
adequacy of the allowance. In management's opinion, the allowance for credit
losses is adequate as of September 30, 1999.
See Note 2 in the Notes to Financial Statements.
NONINTEREST INCOME AND EXPENSE
As of September 30, 1999 noninterest income reflects $205 thousand
increase compared to September 30, 1998 partially from a $47 thousand gain on
the sale of available for sale investment securities. The rise in service fees
reflects higher return check charges and volume. Other noninterest income
increased compared to September 30, 1998 and includes 9 months of ATM surcharges
in 1999 compared 8 months in 1998. ATM surcharges were implemented in February
1998. In addition, the surcharge fee increased in 1999.
Page 3
<PAGE>
Noninterest expense as of September 30, 1999 increased $56 thousand or
1.60% compared to the same period last year. Salaries and benefits increased as
a result of an additional pay period in the first quarter of 1999. A new
biweekly pay schedule was implemented in April 1998. Also increased pay rates
and insurance premiums are reflected when comparing September 30, 1999 to
Sepember 30, 1998. Premise and fixed asset expenses decreased $33 thousand as of
September 30, 1999 compared to the same period in 1998 primarily as a result of
a change in accounting estimates. Also 1998 reflects increased expensed
equipment costs for the renovated Commerce Street office.
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 $51.9 million and $47.1 million
as of September 30, 1999 and December 31, 1998, respectively. The net increased
level of investments in securities resulted primarily from the investment of
funds from deposit growth and the use of federal funds. Funds were invested
primarily in U.S. Government sponsored agency 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.
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. Total gross loans as of September 30,
1999 have grown approximately $6.6 million since December 31, 1998. Mortgage
loans, primarily consumer mortgages, accounted for $5.5 million of the increase.
Loan growth is attributed to new product development and the reduction in loan
rates. In addition, an active officer calling program supported by increased
marketing efforts were implemented and are showing signs of success. The Company
had no loan concentrations exceeding 10% of total loans which are not otherwise
disclosed.
Page 4
<PAGE>
The Company policy is to make the majority of its loan commitments in
the market area it serves. The Company attempts to reduce risk through its
management's familiarity with the credit histories of loan applicants and
in-depth knowledge of the risk to which a given credit is subject. Lending in a
limited market area does subject the Company to economic conditions of that
market area. The Company had no foreign loans in its portfolio as of September
30, 1999.
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, 1999 and December 31, 1998,
$155 thousand and $55 thousand, respectively, of non-accrual loans were secured
by collateral with an estimated value of $132 thousand as of September 30, 1999
and $343 thousand as of December 31, 1998. At September 30, 1999, the Bank had
$969 thousand in loans 90 days or more past due and still accruing interest,
troubled debt restructurings of $865 thousand and $2.6 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. The
Company had no "other real estate owned" at September 30, 1999.
DEPOSITS
Deposit liabilities reflected 5.9% increase in the first nine months of
1999 compared to December 31, 1998. Interest bearing transaction (Super NOW) and
time account deposits were the main sources of deposit growth. 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,
continues to be a popular product. 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.
LONG TERM DEBT
Long term debt consists of an advance from the Federal Home Loan Bank
of Atlanta of $5,000,000 at the end of the third quarter of 1999. See Note 3 in
the Notes to Financial Statements.
Page 5
<PAGE>
LIQUIDITY MANAGEMENT
Liquidity describes the ability of Shore Bancshares, Inc. and its
subsidiary, The Centreville National Bank of Maryland to meet financial
obligations that arise out of the ordinary course of business. Liquidity is
primarily needed to meet borrowing and deposit withdrawal requirements of the
customers of the Bank and to fund current and planned expenditures. The Company
maintains its asset liquidity position internally through short term
investments, the maturity distribution of the investment portfolio, loan
repayments and income from earning assets. As indicated by the Consolidated
Statement of Cash Flows, the primary sources of cash flow through the end of the
third quarter of 1999 was the maturity of investment securities and deposit
growth. A substantial portion of the investment portfolio contains readily
marketable securities that could be converted to cash immediately. On the
liability side of the balance sheet, liquidity is affected by the timing of
maturing deposits 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. 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
market risk for the Company 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 when interest 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
interest rate sensitivity position is managed to maintain an appropriate balance
between the maturity and repricing characteristics of assets and liabilities
that is consistent with the Bank's liquidity, growth, earnings and capital
adequacy goals. The Board of Directors has adopted an Asset / Liability
Management Policy, which is administered by the Asset / Liability Committee. 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 September 30, 1999
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 $238 thousand
if rates were to increase by that amount and net interest income would increase
$146 thousand if rates would decline a similar amount.
CAPITAL RESOURCES AND ADEQUACY
Total stockholders' equity increased $453 thousand to $22.3 million as
of September 30, 1999 compared to $21.9 million as of December 31,1998. Earnings
of $1,603 thousand added to shareholders' equity. Capital also increased $10
thousand as a result of 366 shares of common stock issued under the Employee
Stock Purchase Plan. Dividends paid reduced stockholders' equity $746 thousand
as did the increase in unrealized loss in available for sale securities of $414
thousand.
Page 6
<PAGE>
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, 1999 was 10.99% and at
December 31, 1998 was 11.08%.
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, 1999 was 20.44% and at December 31, 1998 was 21.05%. According to
FDIC capital guidelines, the Company is considered to be "Well Capitalized."
In the first quarter of 1999 the Office of the Comptroller of the
Currency approved two new branches for The Centreville National Bank of
Maryland. One branch site is at the corner of Sharp Road and Route 404 in
Denton, Maryland, Caroline County. The second location, at the corner of Route
18 / Piney Creek Road and Castle Marina Road in Chester, Maryland, is an
additional Queen Anne County site. Increased building cost have caused the
reevaluation of construction timetables and the Board of Directors is currently
reviewing the expansion plans. Branch completion dates are undecided. Upon
completion of the branches, the opportunity cost of the funds invested in the
branches, operating costs and depreciation expense would have an impact on
earnings in the short term until the long term growth of the branch improves
profitability.
Management knows of no other trend or event, which will have a
material impact on capital.
FUTURE TRENDS
This is a Year 2000 Readiness Disclosure under the Year 2000
Information and Readiness Disclosure Act of 1998.
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 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:
Page 7
<PAGE>
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, customers and the community continue to be
updated with respect to the Company's Year 2000 efforts through mailings,
published articles, lobby brochures and a Year 2000 Readiness Disclosure posted
in the branch lobbies. A public seminar was presented in April 1998. The
Company's ongoing outreach efforts include Year 2000 presentations to business
organizations and community groups.
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 all 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 and the
Company expects all of the mission critical and significant vendors to be Year
2000 compliant by December 31, 1999. 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 they provide to the Company for Year 2000 compliance.
The Company's primary service provider has a comprehensive Year 2000 Plan in
place and has successfully completed Year 2000 testing of their mission critical
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
successfully tested their system for Year 2000 compliance. The next step, which
was completed in the second quarters of fiscal 1999, is the 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 has updated or replaced work stations which are not Year 2000 compliant. The
testing of the remainder of the Company's processes was substantially complete
by June 1999.
Page 8
<PAGE>
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 has developed contingency plans for processes that do not
process information reliably and accurately after December 31, 1999. The
contingency plans for all systems were substantially complete by the end of the
second calendar quarter of fiscal 1999.
Senior management completed a contingency plan to provide operating
alternatives for continuation of services to the Company's customers in the
event of systems or communication failures at the beginning of the Year 2000.
Contingency plans will be updated as necessary. Based on preliminary planning
during development of the contingency plan, management expects 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, the Company will generate paper and systems backup
of all customer and general ledger accounts. Due to the size of the Company, the
Company expects that it will 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 the Company ultimately had to change data service providers, the
cost could be material.
The Company is in the process of assessing the Year 2000 readiness of
significant borrowers and depositors. The Company has completed its initial
review of these significant relationships and assessed the risks these
relationships may pose to the Company. The Company will continue to monitor the
risk and expects any potential losses to the Company caused by Year 2000
problems of significant borrowers and depositors not to be material. This step
is not expected to require a significant amount of time or resources.
As of September 30, 1999 the following chart shows the current and
projected status of the Company's Year 2000 compliance efforts:
Phase 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99
- ----- ------- -------- ------- ------- -------
Awareness 100% 100% 100% 100% 100%
Assessment 98 98 100 100 100
Renovation 89 96 100 100 100
Validation 58 78 85 90 100
Implementation 54 67 80 85 100
The Company expensed approximately $8 thousand on Year 2000 costs in
the third quarter of 1999. 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 thousand. These costs do not
include the opportunity costs of the additional cash that will be held in our
vaults to meet anticipated customer demand at year end. Funding of the Year 2000
project costs has come and is expected to 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.
Page 9
<PAGE>
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 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.
Page 10
<PAGE>
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
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:
(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
10-Q, 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, 1999 Form 10Q
filed with the commission August 12, 1999.
(10.1) 1998 Employee Stock Purchase 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.
333-64317).
(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) 1998 Annual Report filed with the Commission on March 31, 1999
(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 for September 30, 1999 is filed electronically
here within via EDGAR.
B. Reports on Form 8-K
None
<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 5, 1999
SHORE BANCSHARES, INC.
/S/ DANIEL T. CANNON
--------------------
DANIEL T. CANNON
President
/S/ CAROL I. BROWNAWELL
-----------------------
CAROL I. BROWNAWELL
Treasurer
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