SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number: 0-22345
Shore Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-1974638
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
109 North Commerce Street
Centreville, Maryland 21617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code: (410) 758-1600
Securities registered under Section 12(b) of the Act: None
Securities registered
under Section 12(g) of the Act: Common Stock, Par Value $0.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __x__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _____
The aggregate market value of Shore Bancshares, Inc. voting stock held by
non-affiliates as of March 8, 2000 was $34,987,132, based on the sales price as
of that date.
As of March 8, 2000, Shore Bancshares, Inc. had 1,913,910 shares of Common Stock
$.01 Par Value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV: Portions of the Annual Shareholders Report for the year
ended December 31, 1999 (the "Annual Report".)
Part III: Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 18, 2000 (the "Proxy Statement".)
1
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PART I
ITEM I
BUSINESS
GENERAL
Shore Bancshares, Inc. (the "Company"), a Maryland corporation incorporated on
March 15, 1996, became a registered bank holding company on July 1, 1996 under
the Bank Holding Company Act of 1956, as amended. The Company engages in its
business through its sole subsidiary, The Centreville National Bank of Maryland
(the "Bank"), a national banking association. The Company acquired the Bank
through the merger of the Bank into an interim national banking association
formed as a Company subsidiary for the purpose of the merger, pursuant to a Plan
of Reorganization and Agreement to Merge (the "Plan") proposed by Bank
management and approved by the Bank's stockholders on April 16, 1996. Pursuant
to the Plan, each outstanding share of Bank common stock was exchanged for two
shares of the Company's common stock. The Bank's charter was not affected by the
merger. Currently, the Company has issued and outstanding 1,913,910 shares of
common stock, par value $0.01 per share ("Shares"), held by 1,220 holders of
record on March 8, 2000.
The Company's and the Bank's main office is located at 109 North Commerce
Street, Centreville, Queen Anne's County, Maryland. The Bank has five full
service offices located in Centreville, Chestertown, Stevensville and Hillsboro,
Maryland.
As of December 31, 1999, the Company had assets of approximately $191.1 million,
net loans of approximately $125.8 million, and deposits of $162.0 million.
Stockholders' equity has continued to grow over the last five years and has
increased $1.7 million (8.4%) over the preceding five years.
BANKING PRODUCTS AND SERVICES
The Bank has been doing business in Maryland since 1876 and is engaged in both
the commercial and consumer banking business. The Bank serves its customers
through a network of five banking offices. The Bank provides a wide range of
personal banking services designed to meet the needs of local consumers. Among
the services provided are checking accounts, savings and time accounts, safe
deposit boxes, and installment and other personal loans, especially residential
mortgages, as well as home equity loans, automobile and other consumer
financing. As a convenience to its customers, the Bank offers Saturday banking
hours, drive-thru teller windows, "Direct Dial," a telephone banking service,
debit cards, and 24-hour automated teller machines at all of its branch
locations.
The Bank is also engaged in the financing of commerce and industry by providing
credit and deposit services for small to medium sized businesses and for the
agricultural community in the Bank's market area. The Bank offers many forms of
commercial lending, including lines of credit, revolving credit, term loans,
accounts receivable financing, and commercial real estate mortgage lending and
other forms of secured financing. A full range of commercial banking services is
offered, including the acceptance of checking and savings deposits.
Additional types of real estate loans, discount brokerage services, credit cards
and related services are also offered through affiliates or correspondent banks.
The Bank does not offer trust services and does not engage in municipal trading
services.
BANK SERVICE CORPORATIONS
The Bank owns one-third of the outstanding common stock of two service
corporations: The Delmarva Bank Data Processing Center, Inc. and The Eastern
Shore Mortgage Corporation, both Maryland corporations. The Eastern Shore
Mortgage Corporation, located in Easton, Maryland, was engaged in mortgage
banking activities, including the origination of residential mortgage loans and
the subsequent sale of the loans to permanent investors but is currently in the
process of liquidation. Its primary customers were residents who live on
Maryland's Eastern Shore. The Delmarva Bank Data Processing Center, Inc., also
located in Easton, Maryland, provides data processing services to banks located
in Maryland, Delaware, Virginia and the District of Columbia.
SEASONALITY
The management of the Bank does not believe that the deposits or the business of
the Bank in general, are seasonal in nature. The deposits may, however, vary
with local and national economic conditions but not enough to have a material
effect on planning and policy making.
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EMPLOYEES
As of December 31, 1999, the Company had no employees and the Bank employed 74
individuals, 13 of whom worked part-time.
DEPOSITS
No material portion of the Bank's deposits has been obtained from an individual
or a few individuals (including federal, state and local governments and
agencies) the loss of any one or more of which would have a materially adverse
effect on the Bank, nor is a material portion of the Bank's loans concentrated
within a single industry or group of related industries. On December 31, 1999,
the Bank had approximately 14,600 deposit customers representing $162.0 million
in deposits.
COMMITMENTS
As of the end of the last two fiscal years the Bank had the following
commitments to lend:
<TABLE>
<CAPTION>
% OF % OF
12/31/99 TOTAL 12/31/98 TOTAL
-------- ----- -------- -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Standby Letters of Credit $ 1,117 4.41% $ 1,377 7.33%
Commitments to Grant Loans 24,229 95.59 17,402 92.67
------- ------ ------- ------
Total $25,346 100.00% $18,779 100.00%
======= ====== ======= ======
</TABLE>
The above commitments are firm. The Bank estimates approximately $8,000,000 of
the commitments to lend described above to be funded within the current year.
COMPETITION
The Bank offers many personalized services and attracts customers by being
responsive and sensitive to the needs of the community. The Bank relies on
goodwill and referrals from satisfied customers as well as traditional media
advertising to attract new customers. To enhance a positive image in the
community, the Bank supports and participates in many local events. Employees,
officers, and Directors represent the Bank on many boards and local civic and
charitable organizations.
The primary factors in competing for deposits are interest rates, personalized
services, the quality and range of financial services, convenience of office
locations and office hours. Competition for deposits comes primarily from other
commercial banks, savings associations, credit unions, money market funds and
other investment alternatives. The primary factors in competing for loans are
interest rates, loan origination fees, the quality and range of lending services
and personalized services. Competition for loans comes primarily from other
commercial banks, savings associations, mortgage banking firms, credit unions
and other financial intermediaries.
Recent changes in federal banking laws facilitate interstate branching and
merger activity among banks. Since September 1995, certain bank holding
companies are authorized to acquire banks throughout the United States. In
addition, as of June 1, 1997, certain banks are permitted to merge with banks
organized under the laws of different states. These changes have resulted in an
even greater degree of competition in the banking industry and the Company and
the Bank will continue to be brought into competition with institutions with
which it does not presently compete.
Regional and local banks dominate the banking industry in Centreville,
Chestertown, Stevensville, and the Hillsboro areas where the Bank maintains
offices. The Bank competes for deposits and loans with these institutions and
with credit unions, savings institutions, insurance companies, and mortgage
companies, as well as other companies that offer financial services. To attract
new business and retain existing customers, the Bank offers a wide range of
banking products and services and relies on local promotional activity, personal
contact by its officers, staff, and Directors, referrals by current customers,
extended banking hours, and personalized service.
As of June 30, 1999, the most recent date for which comparative data is
available, bank deposits in Queen Anne's County (where the Bank's main office,
Centreville branch and Stevensville branch are located), Caroline County,
Maryland (where the Bank's Hillsboro branch is located), and Kent County (where
the Bank's Kent branch is located) ranked as follows:
3
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<TABLE>
<CAPTION>
% of
QUEEN ANNE'S COUNTY DEPOSITS TOTAL
-------- -----
(in thousands)
<S> <C> <C>
The Queenstown Bank of Maryland $151,404 37.89%
THE CENTREVILLE NATIONAL BANK OF MARYLAND 121,869 30.50
The Chestertown Bank of Maryland 38,589 9.66
NationsBank, N.A 34,769 8.70
Allfirst Bank 22,415 5.61
Annapolis National Bank 15,663 3.92
Farmers Bank of Maryland 14,888 3.72
-------- ------
Total $399,597 100.00%
======== ======
SOURCE: FDIC DATA BOOK
% of
CAROLINE COUNTY DEPOSITS TOTAL
-------- -----
(in thousands)
The Peoples Bank of Maryland $ 75,014 30.21%
Provident State Bank of Preston 65,369 26.33
Allfirst Bank 37,129 14.96
Farmers Bank of Maryland 25,278 10.18
THE CENTREVILLE NATIONAL BANK OF MARYLAND 15,950 6.43
NationsBank, N.A. 15,339 6.18
Atlantic Bank 14,190 5.72
-------- ------
Total $248,269 100.00%
======== =======
SOURCE: FDIC DATA BOOK
% of
KENT COUNTY DEPOSITS TOTAL
-------- -----
(in thousands)
Peoples Bank of Kent County $107,287 32.47%
The Chestertown Bank of Maryland 103,631 31.36
The Chesapeake Bank and Trust Company 45,212 13.68
Farmers Bank of Maryland 30,433 9.21
THE CENTREVILLE NATIONAL BANK OF MARYLAND 22,078 6.68
Crestar Bank 21,792 6.60
-------- ------
Total $330,433 100.00%
======== =======
<FN>
SOURCE: FDIC DATA BOOK
</FN>
</TABLE>
SUPERVISION AND REGULATION
GENERAL. The Company and the Bank are extensively regulated under federal and
state law. Generally, these laws and regulations are intended to protect
depositors, not stockholders. The following is a summary description of certain
provisions of certain laws which affect the regulation of bank holding companies
and banks. The discussion is qualified in its entirety by reference to
applicable laws and regulations. Changes in such laws and regulations may have a
material effect on the business and prospects of the Company and the Bank.
FEDERAL BANK HOLDING COMPANY REGULATION AND STRUCTURE. The Company is a bank
holding company within the meaning of the Bank Holding Company Act of 1956, as
amended, and as such, it is subject to regulation, supervision, and examination
by the Federal Reserve Board ("FRB"). The Company is required to file annual and
quarterly reports with the FRB and to provide the FRB with such additional
information as the FRB may require. The FRB may conduct examinations of the
Company and its subsidiaries.
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With certain limited exceptions, the Company is required to obtain prior
approval from the FRB before acquiring direct or indirect ownership or control
of more than 5% of any voting securities or substantially all of the assets of a
bank or bank holding company, or before merging or consolidating with another
bank holding company. Additionally, with certain exceptions, any person
proposing to acquire control through direct or indirect ownership of 25% or more
of any voting securities of the Company is required to give 60 days' written
notice of the acquisition to the FRB, which may prohibit the transaction, and to
publish notice to the public.
Generally, a bank holding company may not engage in any activities other than
banking, managing or controlling its bank and other authorized subsidiaries, and
providing services to these subsidiaries. With prior approval of the FRB, the
Company may acquire more than 5% of the assets or outstanding shares of a
company engaging in non-bank activities determined by the FRB to be closely
related to the business of banking or of managing or controlling banks. The FRB
provides expedited procedures for expansion into approved categories of non-bank
activities.
Subsidiary banks of a bank holding company are subject to certain quantitative
and qualitative restrictions on extensions of credit to the bank holding company
or its subsidiaries, on investments in their securities and on the use of their
securities as collateral for loans to any borrower. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for the payment of dividends, interest and
operating expenses. Further, subject to certain exceptions, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, the Bank may not generally
require a customer to obtain other services from itself or the Company, and may
not require that a customer promise not to obtain other services from a
competitor as a condition to and extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to make capital injections into a
troubled subsidiary bank, and the FRB may charge the bank holding company with
engaging in unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. A required capital injection may be called for at
a time when the holding company does not have the resources to provide it. In
addition, depository institutions insured by the Federal Deposit Insurance
Corporation ("FDIC") can be held liable for any losses incurred by, or
reasonably anticipated to be incurred by, the FDIC in connection with the
default of, or assistance provided to, a commonly controlled FDIC-insured
depository institution. Accordingly, in the event that any insured subsidiary of
the Company causes a loss to the FDIC, other insured subsidiaries of the Company
could be required to compensate the FDIC by reimbursing it for the estimated
amount of such loss. Such cross guaranty liabilities generally are superior in
priority to the obligations of the depository institution to its stockholders
due solely to their status as stockholders and obligations to other affiliates.
FEDERAL BANK REGULATION. The Company's banking subsidiary is a
federally-chartered national bank regulated by the Office of Comptroller of the
Currency ("OCC"). The OCC may prohibit the institutions over which it has
supervisory authority from engaging in activities or investments that the agency
believes constitutes unsafe or unsound banking practices. Federal banking
regulators have extensive enforcement authority over the institutions they
regulate to prohibit or correct activities which violate law, regulation or a
regulatory agreement or which are deemed to constitute unsafe or unsound
practices. Enforcement actions may include the appointment of a conservator or
receiver, the issuance of a cease and desist order, the termination of deposit
insurance, the imposition of civil money penalties on the institution, its
directors, officers, employees and institution-affiliated parties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the removal of or restrictions on directors, officers, employees and
institution-affiliated parties, and the enforcement of any such mechanisms
through restraining orders or other court actions.
The Bank is subject to certain restrictions on extensions of credit to executive
officers, directors, principal stockholders or any related interest of such
persons which generally require that such credit extensions be made on
substantially the same terms as are available to third persons dealing with the
Bank and not involve more than the normal risk of repayment. Other laws tie the
maximum amount which may be loaned to any one customer and its related interests
to capital levels.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the OCC, have adopted standards covering
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. An institution which fails to meet those
standards may be required by the agency to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. The Company, on behalf of the Bank,
believes that it meets substantially all standards which have been adopted.
FDICIA also imposed new capital standards on insured depository institutions.
See "Capital Requirements."
Before establishing new branch offices, the Bank must meet certain minimum
capital stock and surplus requirements and the Bank must obtain OCC approval.
5
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DEPOSIT INSURANCE. As a FDIC member institution, the Bank's deposits are insured
to a maximum of $100,000 per depositor through the Bank Insurance Fund ("BIF"),
administered by the FDIC, and each institution is required to pay semi-annual
deposit insurance premium assessments to the FDIC. The BIF assessment rates have
a range of 0 cents to 27 cents for every $100 in assessable deposits. The
federal Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"1996 Act"), included provisions that, among other things, recapitalized the
Savings Association Insurance Fund ("SAIF") through a special assessment on
savings association deposits and bank deposits that had been acquired from
savings associations. As a result of the April 1997 merger of Kent Savings and
Loan Association, F.A. into the Bank, approximately $21.8 million of the Bank's
deposits are assessed at SAIF rates. The SAIF assessment rates are determined
quarterly and the SAIF is also administered by the FDIC.
CAPITAL REQUIREMENTS. The federal banking regulators have adopted certain
risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent amounts
of off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. "Tier 1," or core capital, includes common equity,
perpetual preferred stock (excluding auction rate issues) and minority interest
in equity accounts of consolidated subsidiaries, less goodwill and other
intangibles, subject to certain exceptions. "Tier 2," or supplementary capital,
includes, among other things, limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan and lease losses, subject to certain limitations and less
required deductions. The inclusion of elements of Tier 2 capital is subject to
certain other requirements and limitations of the federal banking agencies.
Banks and bank holding companies subject to the risk-based capital guidelines
are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at
least 4% and a ratio of total capital to risk-weighted assets of at least 8%.
The appropriate regulatory authority may set higher capital requirements when
particular circumstances warrant. Institutions which meet or exceed a Tier 1
ratio of 6% and a total capital ratio of 10% are considered well capitalized. As
of December 31, 1999, the Bank's ratio of Tier 1 to risk-weighted assets stood
at 18.57% and its ratio of total capital to risk-weighted assets stood at
19.66%. In addition to risk-based capital, banks and bank holding companies are
required to maintain a minimum amount of Tier 1 capital to total assets,
referred to as the leverage capital ratio, of at least 3% or 5% to be considered
well capitalized. As of December 31, 1999, the Bank's leverage capital ratio was
11.05%.
In August, 1995 and May, 1996, the federal banking agencies adopted final
regulations specifying that the agencies will include, in their evaluations of a
bank's capital adequacy, an assessment of the Bank's interest rate risk ("IRR")
exposure. The standards for measuring the adequacy and effectiveness of a
banking organization's interest rate risk management includes a measurement of
board of director and senior management oversight, and a determination of
whether a banking organization's procedures for comprehensive risk management
are appropriate to the circumstances of the specific banking organization. The
Bank has internal IRR models that are used to measure and monitor IRR.
Additionally, the regulatory agencies have been assessing IRR on an informal
basis for several years. For these reasons, the Company does not expect the
addition of IRR evaluation to the agencies' capital guidelines to result in
significant changes in capital requirements for the Bank.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "--Federal Deposit Insurance Corporation
Improvement Act of 1991" below, as applicable to undercapitalized institutions.
In addition, future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends to the Company.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In December,
1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding
provisions of the Federal Deposit Insurance Act and made significant revisions
to several other federal banking statutes. FDICIA provides for, among other
things, (i) publicly available annual financial condition and management reports
for financial institutions, including audits by independent accountants, (ii)
the establishment of uniform accounting standards by federal banking agencies,
(iii) the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with more scrutiny
and restrictions placed on depository institutions with lower levels of capital,
(iv) additional grounds for the appointment of a conservator or receiver, and
(v) restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements. FDICIA
also provides for increased funding of the FDIC insurance funds and the
implementation of risked-based premiums. See "Deposit Insurance."
6
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A central feature of FDICIA is the requirement that the federal banking agencies
take "prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." The Bank is currently classified as
"well-capitalized." An institution may be deemed by the regulators to be in a
capitalization category that is lower than is indicated by its actual capital
position if, among other things, it receives an unsatisfactory examination
rating with respect to asset quality, management, earnings or liquidity.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized. Significantly undercapitalized depository
institutions may be subject to a number of other requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and stop accepting deposits
from correspondent banks. Critically undercapitalized institutions are subject
to the appointment of a receiver or conservator, generally within 90 days of the
date such institution is determined to be critically undercapitalized.
FDICIA provides the federal banking agencies with significantly expanded powers
to take enforcement action against institutions which fail to comply with
capital or other standards. Such action may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
INTERSTATE BANKING LEGISLATION. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 was enacted into law on September 29, 1994. The law
provides that, among other things, substantially all state law barriers to the
acquisition of banks by out-of-state bank holding companies were eliminated
effective on September 29, 1995. The law also permits interstate branching by
banks effective as of June 1, 1997, subject to the ability of states to opt-out
completely or to set an earlier effective date. Maryland generally established
an earlier effective date of September 29, 1995.
FINANCIAL SERVICES MODERNIZATION. In November, 1999, the Gramm-Leach-Bliley Act
("GLBA") was signed into law. Effective in pertinent part on March 11, 2000,
GLBA revises the Bank Holding Company Act of 1956 and repeals the affiliation
provisions of the Glass-Steagall Act of 1933, which, taken together, limited the
securities, insurance and other non-banking activities of any company that
controls a FDIC insured financial institution. Under GLBA, bank holding
companies, such as Shore Bancshares, Inc., can elect, subject to certain
qualifications, to become a "financial holding company." GLBA provides that a
financial holding company may engage in a full range of financial activities,
including, insurance and securities sales and underwriting activities, and real
estate development, with new expedited notice procedures. GLBA also permits
certain qualified national bank subsidiaries to form financial subsidiaries,
which have broad authority to engage in all financial activities except
insurance underwriting, insurance investments, real estate investment or
development, or merchant banking.
MONETARY POLICY. The earnings of a bank holding company are affected by the
policies of regulatory authorities, including the FRB, in connection with the
FRB's regulation of the money supply. Various methods employed by the FRB are
open market operations in United States Government securities, changes in the
discount rate on member bank borrowing and changes in reserve requirements
against member bank deposits. These methods used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. The money policies of the FRB have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future.
RISK FACTORS
REGULATORY RISKS. The banking industry is subject to many laws and regulations.
Regulations protect depositors, not stockholders. The Office of the Comptroller
of the Currency and the Board of Governors of the Federal Reserve System
regulate the Company and the Bank. Regulations and laws increase the Company's
operating expenses, affect the Company's earnings, and may put the Company at a
disadvantage with less regulated competitors, such as finance companies,
mortgage banking companies, credit unions, and leasing companies.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS. Most of the loans made by the Bank are
made to local borrowers. A decline in local economic conditions would affect the
Company's earnings.
CREDIT RISKS AND INADEQUACY OF LOAN LOSS RESERVE. When borrowers default and do
not repay the loans made to them by the Bank, the Company loses money.
Experience shows that some borrowers either will not pay on time or will not pay
at all. In these cases, the Bank will cancel, or "write off," the defaulted loan
or loans. A "write off" reduces the Company's assets and affects the Company's
earnings. The Company anticipates losses by reserving what it believes to be an
adequate cushion so that it does not have to take a large loss at any one time.
However, actual loan losses cannot be predicted, and the Company's loan loss
reserve may not be sufficient.
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INTEREST RATE RISK. The Company's earnings depend greatly on its net interest
income, the difference between the interest earned on loans and investments and
the interest paid on deposits. If the interest rate paid on deposits is high and
the interest rate earned on loans and investments is low, net interest income is
small and the Company earns less. Because interest rates are influenced by
competition, the Company cannot completely control its net interest income.
RISKS ASSOCIATED WITH REAL ESTATE LENDING. The Bank makes real estate secured
loans. Real estate loans are in greater demand when interest rates are low and
economic conditions are good. Even when economic conditions are good and
interest rates are low, these conditions may not continue. The Company may lose
money if the borrower does not pay a real estate loan. If real estate values
decrease, then the Company may lose more money when borrowers default.
NO ASSURANCE OF GROWTH. The Company's ability to increase assets and earnings
depends upon many factors, including competition for deposits and loans, the
Company's branch and office locations, avoidance of credit losses, and hiring
and training of personnel. Some of these factors are beyond the Company's
control.
COMPETITION. Other banks and non-banks, including savings and loan associations,
credit unions, insurance companies, leasing companies, small loan companies,
finance companies, and mortgage companies, compete with the Company. Some of the
Company's competitors offer services and products that the Company does not
offer. Larger banks and non-bank lenders can make larger loans and service
larger customers. Law changes now permit interstate banks, which may increase
competition. Increased competition may decrease the Company's earnings.
NO ASSURANCE OF CASH OR STOCK DIVIDENDS. Whether dividends may be paid to
stockholders depends on the Company's earnings, its capital needs, law and
regulations, and other factors. The Company's payment of dividends in the past
does not mean that the Company will be able to pay dividends in the future.
STOCK NOT INSURED. Investments in the shares of the Company's common stock are
not deposits that are insured against loss by the government.
RISK INVOLVED IN ACQUISITIONS. Part of the Company's growth may come from buying
other banks and companies. A newly purchased bank or company may not be
profitable after the Company buys it and may lose money, particularly at first.
The new bank or company may bring with it unexpected liabilities or bad loans,
bad employee relations, or the new bank or company may lose customers.
RISK OF CLAIMS. Customers may sue the Company for losses due to the Company's
alleged breach of fiduciary duties, errors and omissions of employees, officers
and agents, incomplete documentation, the Company's failure to comply with
applicable laws and regulations, or many other reasons. Also, employees of the
Company conduct all of the Company's business. The employees may knowingly or
unknowingly violate laws and regulations. Company management may not be aware of
any violations until after their occurrence. This lack of knowledge will not
insulate the Company from liability. Claims and legal actions may result in
legal expenses and liabilities that may reduce the Company's profitability and
hurt its financial condition.
DEVELOPMENTS IN TECHNOLOGY. Financial services use technology, including
telecommunications, data processing, computers, automation, Internet-based
banking, debit cards, and "smart" cards. Technology changes rapidly. The
Company's ability to compete successfully with other banks and non-banks may
depend on whether it can exploit technological changes. The Company may not be
able to exploit technological changes and expensive new technology may not make
the Company more profitable.
MARKET FOR COMMON STOCK. The Company's shares of common stock are not listed on
any exchange, and there is currently no organized trading market. Prices for the
Company's common stock may not be the actual value or the trading price in a
liquid trading market.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS. The Company's
Articles of Incorporation and Bylaws divide the Company's Board of Directors
into three classes and each class serves for a staggered three-year term. No
director may be removed except for cause and then only by a vote of at least
two-thirds of the total eligible stockholder votes. In addition, Maryland law
contains anti-takeover provisions that apply to the Company. These provisions
may discourage or make it more difficult for another company to buy the Company
or may reduce the market price of the Company's common stock.
8
<PAGE>
STATISTICAL INFORMATION:
The following supplementary information required under Guide 3 for the
respective periods and at the indicated respective dates is set forth on the
pages indicated below. The information should be read in conjunction with the
related Consolidated Financial Statements and Notes thereto for the year ended
December 31, 1999.
Table of Contents: Page
Investment Securities Portfolio Analysis 10
Summary of Loan Portfolio 11
Maturities of Loan Portfolio 11
Risk Elements of Loan Portfolio 11
Allocation of the Allowance for Credit Losses 12
Summary of Significant Ratios 12
Other statistical information required in this Item 1 is incorporated by
reference from the information appearing in the Company's Annual Report to
Stockholders as follows:
<TABLE>
<CAPTION>
DISCLOSURE REQUIRED BY GUIDE 3 REFERENCE TO THE 1999 ANNUAL REPORT
- ------------------------------ -----------------------------------
<C> <S> <C>
(I) Distribution of Assets, Liabilities, and Stockholders' Average Balances, Yields and Rates (page 14)
Equity: Interest Rates and Interest Differential Rate and Volume Variance Analysis (page 15)
(II) Investment Portfolio Notes to Financial Statements - Investment Securities
(pages 23 - 25)
(III) Loan Portfolio Management's Discussion and Analysis of Financial
Condition and Results of Operations - Loan Portfolio
(page 8)
(IV) Summary of Credit Loss Experience Management's Discussion and Analysis of Financial
Condition and Results of Operations - Provision and
Allowance for Credit Losses (page 6)
Notes to Financial Statements - Loans and Allowance
for Credit Losses (page 26)
(V) Deposits Average Balances, Yields and Rates (page 14)
Rate and Volume Variance Analysis (page 15)
Notes to Financial Statements - Deposits (page 28)
(VI) Return on Equity and Assets Selected Financial Data (page 1)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Investment Securities Portfolio Analysis
December 31, 1999
(In Thousands)
AVAILABLE FOR SALE
- ------------------
U.S. Govt. Agencies
AMORTIZED AVG.T.E.
DESCRIPTION & TERM COST YIELD
- ------------------ ---- -----
<S> <C> <C>
0 - 3 Months $ 995 4.05%
3 - 6 Months 0 N/A
6 - 12 Months 500 5.48
1 - 3 Years 14,503 5.91
3 - 4 Years 6,998 6.46
4 - 5 Years 6,500 6.33
5 - 10 Years 1,298 6.35
10 - 30 Years 1,555 7.08
------- ----
Total $32,349 6.07%
======= ====
U.S. GOVT. AGENCIES SECURITIES /
MUTUAL FUNDS OTHER SECURITIES
TOTAL
AMORTIZED AVG.T.E. BOOK AVG.T.E. AVAILABLE
DESCRIPTION & TERM COST YIELD VALUE YIELD FOR SALE
- ------------------ ---- ----- ----- ----- --------
0 - 3 Months $ 0 N/A $ 0 N/A $ 995
3 - 6 Months 0 N/A 0 N/A 0
6 - 12 Months 0 N/A 0 N/A 500
1 - 3 Years 0 N/A 0 N/A 14,503
3 - 4 Years 0 N/A 0 N/A 6,998
4 - 5 Years 0 N/A 0 N/A 6,500
5 - 10 Years 0 N/A 0 N/A 1,298
10 - 30 Years 1,010 5.77% 1,015 7.06% 3,580
------- ---- ------- ---- -------
Total $ 1,010 5.77% $ 1,015 7.06% $34,374
======= ==== ======= ==== =======
HELD TO MATURITY
U.S. GOVT. AGENCIES MUNICIPALS
AMORTIZED AVG.T.E. AMORTIZED AVG.T.E.
DESCRIPTION & TERM COST YIELD COST YIELD
- ------------------ ---- ----- ---- -----
0 - 3 Months $ 0 N/A $ 0 N/A
3 - 6 Months 0 N/A 100 9.63%
6 - 12 Months 0 N/A 0 N/A
1 - 3 Years 1,501 6.52% 394 6.32
3 - 4 Years 1,997 6.57 341 6.83
4 - 5 Years 2,499 7.20 1,067 7.34
5 - 10 Years 2,512 7.53 4,407 6.83
10 - 30 Years 0 N/A 0 N/A
------ ---- ------ ----
Total $8,509 7.03% $6,309 6.93%
====== ==== ====== ====
MUNICIPALS - IN STATE
TOTAL
AMORTIZED AVG.T.E. HELD TO
DESCRIPTION & TERM COST YIELD MATURITY
- ------------------ ---- ----- --------
0 - 3 Months $ 0 N/A $ 0
3 - 6 Months 385 6.52% 485
6 - 12 Months 100 10.26 100
1 - 3 Years 1,222 7.44 3,117
3 - 4 Years 599 7.20 2,937
4 - 5 Years 270 9.78 3,836
5 - 10 Years 158 6.73 7,077
10 - 30 Years 0 N/A 0
------- ----- -------
Total $ 2,734 7.55% $17,552
======= ===== =======
</TABLE>
10
<PAGE>
The above yields have been adjusted to reflect a tax equivalent basis assuming a
federal tax rate of 34% and a state tax rate of 7%. Tax equivalent yields have
been weighted by settled par amount and are calculated using amortized cost.
<TABLE>
<CAPTION>
SUMMARY OF LOAN PORTFOLIO
(In Thousands)
LOANS OUTSTANDING AS OF
DECEMBER 31,
1999 1998
AMOUNT AMOUNT
------ ------
Real Estate:
<S> <C> <C>
Construction and land development $ 4,275 $ 4,488
Commercial 17,696 14,459
Residential 85,988 76,483
Commercial 10,834 8,448
Consumer installment 8,222 7,318
-------- --------
TOTAL $127,015 $111,196
======== ========
MATURITIES OF LOAN PORTFOLIO
DECEMBER 31, 1999
(In Thousands)
MATURING
MATURING AFTER ONE MATURING
WITHIN BUT WITHIN AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
-------- ---------- ----- -----
Real estate - Construction and
land development $ 3,029 $ 1,246 $ 0 $ 4,275
Commercial 5,859 3,843 1,132 10,834
------- ------- ------- -------
TOTAL $ 8,888 $ 5,089 $ 1,132 $15,109
======= ======= ======= =======
CLASSIFIED BY SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
DECEMBER 31, 1999
MATURING
MATURING AFTER ONE MATURING
WITHIN BUT WITHIN AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
-------- ---------- ----- -----
Real estate - Construction and land development
Fixed - Interest Rate Loans $ 2,388 $ 1,246 $- $ 3,634
Adjustable - Interest Rate Loans 641 -- -- 641
------- ------- ------- -------
TOTAL $ 3,029 $ 1,246 $- $ 4,275
======= ======= ======= =======
Commercial
Fixed - Interest Rate Loans $ 1,236 $ 3,820 $ 1,132 $ 6,188
Adjustable - Interest Rate Loans 4,623 23 -- 4,646
------- ------- ------- -------
TOTAL $ 5,859 $ 3,843 $ 1,132 $10,834
======= ======= ======= =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
RISK ELEMENTS OF LOAN PORTFOLIO
(In Thousands)
December 31,
1999 1998
---- ----
<S> <C> <C>
Non-accrual loans $1,047 $ 55
Accruing loans past due 90 Days or more 187 765
Restructured loans 278 872
Information with respect to non-accrual loans and restructured loans at
December 31, 1999:
Interest income that would have been
recorded under original terms $ 123
Interest income recorded during
the period $ 61
</TABLE>
At December 31, 1999 the Company had $2.2 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.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
(In Thousands)
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
DECEMBER 31, CATEGORY TO DECEMBER 31, CATEGORY TO
1999 TOTAL LOANS 1998 TOTAL LOANS
---- -------------- ---- --------------
<S> <C> <C> <C> <C>
Real Estate:
Construction and
land development $ 54 3.37% $ 56 4.04%
Commercial 724 13.93% 578 13.00%
Residential 26 67.70% 46 68.78%
Commercial 218 8.53% 180 7.60%
Consumer 209 6.47% 148 6.58%
Unallocated 17 N/A 341 N/A
------ ------ ------ ------
TOTAL $1,248 100.00% $1,349 100.00%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF SIGNIFICANT RATIOS
1999 1998
---- ----
<S> <C> <C>
Return on average total assets 1.21% 1.25%
Return on average total equity 10.30% 9.52%
Dividend payout ratio 45.23% 45.64%
Total average equity to total average assets ratio 11.76% 13.17%
</TABLE>
ITEM 2
PROPERTIES
The Bank owns real property at the location of its main office at 109 North
Commerce Street, Centreville, Maryland 21617, and at its four branch locations
at 2609 Centreville Road, Centreville, Maryland 21617 ("Route 213 South Branch
Office"), 408 Thompson Creek Road, Stevensville, Maryland 21666 ("Stevensville
Branch Office"), at 21913 Shore Highway, Hillsboro, Maryland 21614 ("Hillsboro
Branch Office") and 305 East High Street, Chestertown, Maryland ("Kent Branch
Office".) There are no encumbrances on any of these properties. In addition, the
Bank, in 1999, purchased a lot at the corner of 404 and Sharp Road, in Denton
Maryland (Caroline County) for the construction of a branch location.
12
<PAGE>
ITEM 3
LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary routine
litigation incidental to the business to which the Company, the Bank, or its
subsidiaries is a party or of which any of their properties is subject.
Management is not aware of any material proceedings to which any Director,
officer, or affiliate of the Company, any person holding beneficially in excess
of five (5) percent of the Company's shares of common stock, or any associate of
any such Director, officer, or securing holder is a party.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1999 to a vote of
security holders, through the solicitation of proxies.
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The sections entitled "Market Price of and Dividends on Registrant's Common
Equity and Related Stockholder Matters" and "Market Information" on page 37 of
the Annual Report is incorporated by reference herein.
For information regarding regulatory restrictions on the Bank's and, therefore,
the Company's payment of dividends, see Note 15 "Regulatory Matters" on page 34
of the Annual Report, which is incorporated by reference herein.
ITEM 6
SELECTED FINANCIAL DATA
The table entitled "Selected Financial Data" on page 1 of the Annual Report is
incorporated by reference herein. Reference is also made to the information
described in Part I, Item 1 of this Form 10K under the heading "Statistical
Information."
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pages 4 through 12 of the Annual Report are incorporated by reference herein.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Management Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk Management" on page 10 of the Annual Report
and incorporated by reference herein. The Company's principal market risk
exposure is to interest rates.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 16 through 36 of the Annual Report are incorporated by reference herein.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Board of Directors of the Company, upon recommendation of the Bank's
Audit/Compliance Committee, proposed and recommended the election of Stegman &
Company as independent certified public accountants to make an examination of
the accounts of the Company and the Bank for the year ending December 31, 1999.
Stegman and Company served as the Company's and the Bank's independent public
auditor since 1996.
There were no disagreements with Stegman and Company on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures.
13
<PAGE>
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference in the section entitled "Election of Directors" on
pages 2 - 3 and section entitled "Executive Officers" on page 9 and "Section
16(a) Beneficial Ownership Reporting Compliance" on page 12 in the Proxy
Statement as filed with the Securities and Exchange Commission March 20, 2000.
ITEM 11
EXECUTIVE COMPENSATION
Incorporated by reference in the sections entitled "Executive Compensation," on
page 9, "Director Compensation," on page 5, "Bank's Board of Directors'
Executive Compensation Committee Report" on page 8, "Compensation Committee
Interlocks and Insider Participation," on page 8, "Employment Agreement" on
pages 9-10, "Stock Option Plans," on page 10, and "Performance Graph," on page
11, in the Proxy Statement as filed with the Securities and Exchange Commission
March 20, 2000.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference in the section entitled "Beneficial Ownership of
Common Stock" on pages 6 and 7 in the Proxy Statement as filed with the
Securities and Exchange Commission March 20, 2000.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference in the section entitled "Election of Directors" on
pages 2 and 3 in the Proxy Statement as filed with the Securities and Exchange
Commission March 20, 2000.
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1), (2) Financial Statements
The following consolidated financial statements included in the Annual Report to
Shareholders for the year ended December 31, 1999, are incorporated herein by
reference in Item 8 of this Report.
The following financial statements are filed as a part of this report:
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31, 1999, 1998
and 1997
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
Notes to the Consolidated Financial Statements
Independent Auditors' Report
All financial statement schedules have been omitted, as the required information
is either inapplicable or included in the consolidated financial statements or
related notes.
(a) (3) Exhibits required to be filed by Item 601 of Regulation S-K
14
<PAGE>
EXHIBIT INDEX
(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, 1998 Form 10-Q, filed with the Commission
on August 13, 1998.
(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) 1999 Annual Report filed herewith.
(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)
(23) Consent of Independent Auditors filed herewith.
(27) Financial Data Schedule is filed electronically herewith via EDGAR.
(b) Reports on Form 8-K
None
(c) Exhibits to Item 601 to Regulation S-K
See the Exhibits described in Item 14(a)(3) above.
15
<PAGE>
SHORE BANCSHARES, INC.
1999
ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
Business Profile 2
Letter to Stockholders 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations 4-12
Average Balances, Yields, and Rates 14
Rate and Volume Variance Analysis 15
Consolidated Financial Statements 16-35
Independent Auditors' Report 36
Market Price of and Dividends on Registrant's
Common Equity and Related Stockholder
Matters 37
Board of Directors 38
Officers and Employees 39
Offices 40
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------
For the Year 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 6,909,460 $ 7,087,069 $ 6,957,167 $ 6,265,431 $ 6,012,491
Provision for credit losses -- -- -- -- --
Net interest income after provision
for credit losses 6,909,460 7,087,069 6,957,167 6,265,431 6,012,491
Noninterest income 1,152,943 872,645 909,049 999,423 877,386
Net income 2,284,726 2,218,939 2,370,198 2,307,742 2,138,500
- ---------------------------------------------------------------------------------------------------------
Per Share Data:*
- ---------------------------------------------------------------------------------------------------------
Diluted net income $ 1.19 $ 1.12 $ 1.18 $ 1.14 $ 1.06
Cash dividends declared 0.54 0.51 0.485 0.46 0.43
Book value (shares outstanding) 11.81 11.45 11.67 10.97 10.35
Weighted average common shares 1,913,741 1,985,142 2,014,848 2,014,848 2,014,848
- ---------------------------------------------------------------------------------------------------------
At Year End
- ---------------------------------------------------------------------------------------------------------
Total Assets $191,147,719 $181,054,572 $175,115,011 $146,899,477 $138,100,669
Loans, net of unearned income 127,014,752 111,196,511 109,167,283 88,892,757 87,049,483
Allowance for credit losses 1,247,574 1,348,805 1,403,747 1,503,268 1,478,555
Investment securities 50,937,031 47,118,489 48,742,568 43,652,747 37,131,443
Deposits 162,072,694 153,307,567 145,813,270 124,166,248 116,479,753
Long-term debt 5,000,000 5,000,000 5,000,000 -- --
Stockholders' equity 22,603,215 21,904,235 23,514,810 22,095,951 20,849,348
Allowance for credit losses to
non-performing loans 101.10% 164.59% 311.94% 102.82% 83.72%
- ---------------------------------------------------------------------------------------------------------
Average Balances
- ---------------------------------------------------------------------------------------------------------
Total assets $188,726,977 $176,964,561 $165,695,678 $141,410,379 $139,313,160
Total deposits and borrowings 165,508,361 152,715,842 141,504,846 118,945,631 118,224,470
Stockholders' equity 22,190,348 23,314,674 22,789,823 21,626,308 20,318,612
Return on average total assets 1.21% 1.25% 1.43% 1.63% 1.54%
Return on average stockholders'
equity 10.30% 9.52% 10.40% 10.67% 10.52%
- ---------------------------------------------------------------------------------------------------------
<FN>
* PER SHARE DATA IS RESTATED TO REFLECT THE 2 FOR 1 STOCK SPLIT EFFECTED IN THE
FORM OF A 100% STOCK DIVIDEND UPON THE CONVERSION TO SHORE BANCSHARES, INC. AND
THE 2 FOR 1 STOCK SPLIT EFFECTED IN THE FORM OF A 100% STOCK DIVIDEND ON MARCH
31, 1998.
THE YEAR ENDED DECEMBER 31, 1997 REFLECTS THE MERGER OF KENT SAVINGS AND LOAN
ASSOCIATION, INC. ON APRIL 1, 1997 WHICH WAS ACCOUNTED FOR AS A PURCHASE
TRANSACTION.
</FN>
</TABLE>
1
<PAGE>
BUSINESS PROFILE
Shore Bancshares Inc. (the Company), a Maryland corporation, incorporated on
March 15, 1996, became a registered bank holding company on July 1, 1996 under
the Bank Holding Company Act of 1956, as amended. The Company engages in its
business through its sole subsidiary, The Centreville National Bank of Maryland
(the Bank), a national banking association.
The Company's and Bank's main office is located at 109 North Commerce Street,
Centreville, Queen Anne's County, Maryland. Banking business is conducted at 5
full service branch offices, all in Maryland with two located in Centreville,
Queen Anne's County, a branch in Stevensville, Queen Anne's County, a Hillsboro
location, serving Queen Anne's and Caroline Counties, and Chestertown, Kent
County.
The Bank has been doing business in Centreville since 1876 and is engaged in
both the commercial and consumer banking business. The Bank provides a wide
range of personal banking services designed to meet the need of local consumers.
The Bank engages in the financing of commerce and industry by providing credit
and deposit services for small to medium sized businesses, local governments,
and for the agricultural community in the Bank's market area.
The Company's and the Bank's management are committed to providing personal,
friendly, quality service to our customers while earning a reasonable return for
our shareholders. Our commitment to the communities in which we operate and
their economic vitality is a crucial element of our focus. We believe in giving
back to the community we serve. We have grown and changed along with our local
region. Shore Bancshares Inc. will continue to respond to the changing business
environment through our investment in technology and products and services
developed to meet the needs of our customers, while remaining true to our
principle of excellent customer service.
2
<PAGE>
TO OUR STOCKHOLDERS:
The Board of Directors and management of Shore Bancshares, Inc. are pleased to
present the Annual Report for the year ended December 31, 1999.
The financial results are positive even though the Company and its subsidiary
The Centreville National Bank of Maryland faced several challenges during the
past year.
Although interest rate spreads and net interest margin continued to decline due
to economic pressures, resulting in $178 thousand, or 2.5%, less net interest
income, net income after taxes rose by $66 thousand, or 3.0%, to a total of $2.3
million. Our loan portfolio grew by $15.9 million, or 14.5%, to $125.8 million,
net of allowance for loan losses. Deposits increased by $8.8 million, or 5.7%,
to $162.1 million and total assets ended the year at $191.1 million, an increase
of 5.6%, or just over $10 million.
One of the largest projects we completed last year was preparing for Y2K. We are
happy to report that all our planning and work paid off. There were no outages
or equipment failures as a result of the date rollover. All systems and
processes functioned normally before, during, and after midnight on December 31.
We opened for business on January 3, 2000 without fanfare or problems.
We expect that the new year will bring additional challenges and we are
confident that our management and staff are prepared to successfully respond to
each one and continue to offer the quality service and products that you and our
customers expect. Please accept our thanks for your investment in Shore
Bancshares and for your interest in our progress.
/S/ B. VANCE CARMEAN, JR. /S/ DANIEL T. CANNON
- ------------------------- --------------------
B. Vance Carmean, Jr. Daniel T. Cannon
Chairman of the Board President
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is designed to provide a better understanding
of the financial position of Shore Bancshares, Inc. (the Company), and should be
read in conjunction with the audited Consolidated Financial Statements and
Notes.
Portions of this annual report 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, and liquidity levels which, by their nature, are subject to
significant uncertainties which are described in further detail in Item 1 of the
Company's 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, 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 asset of the Company, the assets and liabilities of the Company are
comprised almost entirely of the assets and liabilities of the Bank. The same is
true for the income and expense of the Company. All data for periods on and
after July 1, 1996 is presented in this analysis in consolidated form and is
compared to like data for the Bank for prior years.
OVERVIEW - RESULTS OF OPERATIONS
The Company's results of operations depend primarily on its level of
net interest income, which is the difference between interest income on
interest-earning assets, primarily loans and investment securities, and the
interest paid on interest-bearing liabilities, primarily deposits and advances
from the Federal Home Loan Bank of Atlanta. Results of operations are also
affected by the amount of noninterest income, including loan fees and service
charges, and levels of noninterest expense, consisting of costs such as:
compensation, employee benefits, occupancy costs, data processing, professional
fees and other operating expenses.
Financial results for 1999 reflect growth in several key areas. The
Company earned $2.28 million in net income for 1999 or $1.19 diluted earnings
per share compared to 1998 net income of $2.22 million or $1.12 diluted earnings
per share and 1997 net income of $2.37 million or $1.18 diluted earnings per
share. Net income for 1999 improved 2.96% over 1998 net income. The increase is
the result of increased interest income from 14.5% growth in net loans, as well
as increases in fee income and maintaining noninterest expense at the same
levels are reported in 1998. Declining interest rates resulted in the
refinancing of many loans, to lower rates in the first half of the year, which
negatively impacted net income. Therefore, despite the loan growth, net interest
income decreased 2.51% as a result of declining yield on the loan portfolio,
increased interest expense from deposit growth and a competitive deposit market
which did not allow us to reduce deposit rates as quickly as the loan market
required loan rates to decline. The Company experienced growth in total assets
of 5.57% and in total deposits of 5.72% in 1999. Return on average assets was
1.21%, 1.25%, and 1.43% in 1999, 1998, and 1997, respectively, which reflects
the Company's growth in assets at a faster rate than the growth in earnings.
Earnings reflect a shrinking net interest margin. The return on average
stockholders' equity for 1999 improved to 10.30% compared to 9.52% and 10.40% in
1998 and 1997, respectively.
NET INTEREST INCOME and NET INTEREST MARGIN
Net interest income is the principal source of earnings for a banking
company. It represents the difference between interest and fees earned on the
loan and investment portfolios over the interest paid on deposits and
borrowings. 1999 is characterized by increasing interest rates. For the Company,
net interest income for 1999 reflects increasing loan rates, mainly in the
second half of the year, and slightly declining deposit rates. Deposit rates
were not reduced at the same rate as loans rates were decreased in 1998 because
of a competitive deposit market which is slower to reduce rates in a declining
rate environment. The year ended December 31, 1998 was characterized by
generally declining interest rates. During 1997, rate activity reflected
slightly increasing loan rates in the first quarter and declining rates in the
fourth quarter. Deposit rates followed the same trends except that rate
reductions began in the third quarter of 1997.
4
<PAGE>
Net interest income (on a tax equivalent basis) for 1999 decreased by
$197 thousand or 2.7% compared to the year ended December 31, 1998, while 1998
increased by $159 thousand or 2.2% from the previous year ended December 31,
1997. During the three years ended December 31, 1999, 1998 and 1997 there have
not been any material changes in the volume or quality of the Company's tax
exempt securities that would have a significant effect on tax exempt interest
income. The table titled "Average Balances, Yields and Rates" on page 14 sets
forth the major components of net interest income, on a tax equivalent basis,
for 1999, 1998 and 1997. The table titled "Rate and Volume Variance Analysis" on
page 15 illustrates the portion of the changes in net interest income which are
attributable to changes in volume of average balances or to changes in yield on
earning assets and rates paid on interest bearing liabilities. The information
revealed by these tables is analyzed below.
Despite a 7.8% increase in average total loans and a 6.9% increase in
average earning assets, total interest income (on a tax equivalent basis)
increased by only $28 thousand, or 0.2%, over the year ended December 31, 1998.
Loan growth provided a $768 thousand increase in interest income. However, loans
refinanced or repriced in the declining rate market of 1998 and early 1999
reduced interest earnings by $752 thousand. Growth in average total interest
bearing liabilities of $10.3 million, or 7.6%, increased interest expense by
$444 thousand. Changes in rates reduced interest expense by $219 thousand,
resulting in an increase in interest expense of $225 thousand, or 3.8%. The net
effect of these changes was a decrease in net interest income (on a tax
equivalent basis) of $197 thousand, or 2.7% for the year ended December 31,
1999.
Interest rate spread is the difference between the average yield on
interest earning assets and the average rate paid on interest bearing
liabilities (deposits and borrowings.) Interest rate spread for the years ended
December 31, 1999, 1998 and 1997 was 3.30%, 3.65%, and 3.82%, respectively.
The 1999 interest rate spread decreased 35 basis points compared to
1998. The rate spread variance reflects a decrease in yield on earning assets of
50 basis points and a decrease of only 16 basis points in the average rate
interest-bearing liabilities, reflecting the slower rate at which the local
deposit pricing moves in comparison to the general market. Steady rate increases
in the later half of 1999 began to improve interest rate spread in the fourth
quarter.
Interest rate spread in 1998 decreased 17 basis points compared to the
prior year as a result of the decreased yield on average interest earning assets
and an increase in the yield on average interest bearing liabilities. A change
in the balance sheet mix also accounted for a decrease in interest rate spread.
The 4.3% increase in total average loans in 1998 was the result of loan growth
and a full year of Kent Savings assets which increased total interest income in
1998 despite a decrease in loan yields. Despite some loan rate increases during
1998, overall loan yield decreased 10 basis points compared to 1997. Fourth
quarter loan rate decreases and more significantly, loans refinanced with the
Company or other lenders are reflected in decreased loan yield. Total loans as a
percentage of total interest earning assets has decreased 2.2%. However, the
average balances in each loan category have increased improving interest income.
As a result of a lower interest rate environment, the Company experienced a
large number of calls of investment securities. These securities were replaced
with lower yielding investments. To maintain as much of the investment yield as
prudent, a portion of the called investments were replaced with municipal bonds.
The average balance in municipal bonds increased $1.6 million or 18.3% providing
a higher tax equivalent yield than U.S. Treasuries and Government agency bonds
in the current market. The composition of deposits changed as well. Other Time
and IRA deposit average balances increased. These are more costly deposits which
account for increased deposit interest expense. Despite lowering deposit rates
in the first and fourth quarters of 1998, the change in deposit mix provided
higher yields on deposits, on average, for 1998 compared to the prior year.
Net interest margin is calculated as tax equivalent net interest income
divided by average earning assets and represents the Company's net yield on its
earning assets. The Company's net interest margin is affected by regulatory,
economic and competitive factors which impact interest rates, loan demand and
availability of funds for deposits. Like other financial institutions, the
Company is subject to interest rate risk to the degree that its interest earning
assets reprice at different times than its interest bearing liabilities. For
1999, the net interest margin decreased to 4.05% from 4.45% in 1998. This
decrease is the result of average earning assets growing $11.4 million or 6.9%
while net interest income declined $197 thousand or at a rate of 2.7%. Comparing
1999 and 1998 shows that changes in rates decreased net interest margin $706
thousand, while changes in volume provided $509 thousand for a net decrease of
$197 thousand. Mortgage loans, mainly residential and some commercial mortgages,
accounted for the majority of the loan growth.
The net interest margin for 1998 decreased to 4.45% from 4.64% the
previous year. When comparing 1998 verses 1997, repricing reduced the net
interest income $104 thousand and volume changes provided $263 thousand for a
net increase of $159 thousand. Average earning assets increased at a rate of
6.6% while net interest income increased at a rate of 2.2% which resulted in a
5
<PAGE>
decline in net interest margin. Loan growth, specifically commercial mortgages,
adjustable rate mortgage loans and home equity loans accounted for the volume
increases.
Management and the Board of Directors monitor interest rates on a
regular basis to assess the Company's competitive position and to maintain a
reasonable and profitable interest rate spread. The Company also considers the
maturity distribution of loans, investments, and deposits and its effect on net
interest income as interest rates rise and fall over time.
For additional analysis see the Notes to the Consolidated Financial
Statements.
PROVISION and ALLOWANCE FOR CREDIT LOSSES
For the year ended December 31, 1999, the Bank recorded net charge-offs
of $101 thousand compared to net charge-offs of $55 thousand in 1998 and net
charge-offs of $115 thousand in 1997. Internal loan review is effective in
identifying problem credits and in achieving timely recognition of potential and
actual losses within the loan portfolio. Overall credit quality and increased
collection efforts have also contributed to the relatively small amount of net
charge-offs in each of the last three years.
Gross charge-offs amounted to $229 thousand, $104 thousand and $159
thousand in 1999, 1998, and 1997, respectively, the majority of which were
installment loans. Efforts to collect charged off loans are continuing and are
evidenced by the amount of recoveries, totaling $128 thousand in 1999, $49
thousand in 1998, and $44 thousand in 1997.
Provision for credit losses is an estimate of the amount necessary to
maintain the allowance for loan losses at a level sufficient to absorb potential
losses in the loan portfolio. 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 1999, 1998, or 1997. $15 thousand was added to the
allowance in 1997 upon the merger with Kent Savings. The allowance for credit
losses is maintained at a level believed adequate by management to absorb
estimated probable credit losses. Management's quarterly evaluation of the
adequacy of the allowance is based on analysis of the loan portfolio and its
known and inherent risks, assessment of current economic conditions,
diversification and size of the portfolio, adequacy of the collateral, past and
anticipated loss experience and the amount of non-performing loans. The
allowance for credit losses has remained relatively unchanged despite the
increase in outstanding loan balances. The allowance for credit losses of $1.2
million as of December 31, 1999 amounted to .98% of the outstanding loan
portfolio. The allowance for credit losses of $1.3 million as of December
31,1998 represented 1.21% of gross loans. The decrease in the percentage of
allowance to outstanding loans, despite the increasing outstanding gross loans,
is justified by lower levels of classified loans. Past due loan levels have
declined and they consist primarily of loans secured by real estate. Analysis by
loan review and internal audit supports the adequacy of the allowance. This
reduction in percentage of allowance to outstanding loans reflects improvements
in credit quality achieved through better credit underwriting and more
aggressive collection efforts and is further evidenced by lower past due loan
totals as a percentage of outstanding loans. In management's opinion, the
allowance for credit losses is adequate as of December 31, 1999. The Board of
Directors and management will continue to review the adequacy of the allowance
for credit losses. If evaluation indicates a provision is necessary, a charge
will be made to current earnings.
See Note 3 in the Notes to the Consolidated Financial Statements.
NONINTEREST INCOME
Noninterest income consists of service charges and fees, gains on sale
of securities, earnings or losses from unconsolidated subsidiaries and various
other income items. Noninterest income increased $280 thousand or 32.1% in 1999
compared to the year ended December 31, 1998. Noninterest income in 1998 was
reduced by an investment writedown as noted below. Increased service charges
from a rise in the number of checks drawn against insufficient funds accounted
for $130 thousand of the increase. Increase in the volume and fee charged to
noncustomers to use the Bank's ATMs and the addition of a fee for loan document
preparation also contributed to the improvement in noninterest income.
For the year ended December 31, 1998, noninterest income decreased $36
thousand or 4.0% compared to the prior year. The decrease was due largely to a
6
<PAGE>
$61 thousand operating loss and writedown of the investment in our
unconsolidated subsidiary, Eastern Shore Mortgage Company. Combined with reduced
earnings of our other unconsolidated subsidiary, Delmarva Data Center, equity
earnings from unconsolidated subsidiaries decreased $93 thousand compared to
1997. This decrease was offset by an increase of $22 thousand in total service
charges on deposit accounts primarily the result of increased levels of checks
drawn against insufficient funds as well as ATM fees.
NONINTEREST EXPENSES
The year ended December 31, 1999 reflected a $4 thousand decrease in
noninterest expense when compared to 1998. Included in noninterest expense is a
$56 thousand increase in employee salaries and benefits. The number of full time
equivalent employees increased by 3 to 68 when comparing the year ended December
31, 1999 to the same period in 1998. Salaries and benefits include limited cost
of living and benefit cost increases.
Premises and fixed assets expenses reflect a slight decrease of $12
thousand. The prior year included $16 thousand in noncapital equipment purchases
as a result of additional offices built with the Commerce Street renovations.
Such expenses were not incurred in 1999, however, facility improvements and
equipment upgrades in the prior years did result in increased depreciation
expense, maintenance costs and equipment service contracts. The Company began
the Commerce Street renovation in January 1997, which was completed in 1999.
Larger buildings are more costly to maintain and the additional investment will
be depreciated over the estimated useful life of the asset. In addition to the
increased depreciation and maintenance expenses, opportunity costs negatively
impact the bottom line. However, the renovations provide a long term benefit for
customers and staff. The impact of this additional maintenance and depreciation
expense is not expected to have a material effect on the Company's net income in
the future. Facility costs are expected to increase with the addition of two new
branch locations; one in Denton, Maryland (Caroline County) and the other in
Chester, Maryland (Queen Anne's County.)
A strong cost reduction emphasis in 1999 helped to keep noninterest
expenses to approximately the same level as 1998. Costs such as marketing and
stationery, postage, legal and professional fees, printing and supplies were
reduced and were offset by cost increases in data processing and donations. As a
result of a change in accounting principle, $25 thousand in unamortized
organizational costs were written off in 1999 rather than the remaining three
year period.
The year ended December 31, 1998 reflected a $297 thousand or 6.8%
increase in noninterest expense compared to December 31, 1997. Salaries and
benefits accounted for $144 thousand of the increase as a result of the
additional salary and benefit costs of 3 full time equivalent staff as well as
cost of living and insurance premium increases. Facility improvements and
equipment upgrades resulted in increased depreciation expense, maintenance costs
and equipment service contracts. Increases were noted in marketing. The Company
adopted a full scale marketing program including direct mail, cable television
commercials and product promotion. Significant growth was also noted in
amortization expense primarily as a result of two items; the recording of a full
year amortization ($140 thousand) of the goodwill produced from the Kent Savings
merger and, after continuing losses, the write off of the remaining $24 thousand
goodwill balance associated with Eastern Shore Mortgage Corporation.
INCOME TAXES
For 1999, the effective tax rate for the Company increased slightly to
32.9% compared to 32.7% for 1998 and 32.3% for 1997. The reduced effective tax
rate in 1998 and 1997 resulted from a $12 thousand and $51 thousand,
respectively, rehabilitation tax credits associated with the renovations of the
main office. The Company's income tax expense differs from the amount computed
at statutory rates primarily due to tax-exempt interest from certain loans and
investment securities and, in 1998 and 1997, the rehabilitation tax credits.
Note 11 to the Consolidated Financial Statements includes a reconciliation of
the Federal tax expense computed using the Federal statutory rate of 34% and
provides additional detail. The Company noted a decrease in state income taxes
beginning in 1996 as the Maryland legislature exempted a portion of the interest
from securities issued by the United States Treasury, bank-qualified Maryland
municipals, and some United States Government agencies. This change in state
income taxes has not had a material impact on liquidity, financial condition or
operations.
Deferred tax assets and liabilities are based on the differences
between financial statement and tax bases of assets and liabilities. The tax
effect of these differences is calculated using current statutory rates.
Management believes it is more likely than not that all deferred tax assets will
be realized and therefore no valuation allowance is deemed necessary.
7
<PAGE>
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 fair 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. At December
31, 1999, the Company had 66% of the portfolio designated as available for sale
and 34% held to maturity compared to 49% and 51%, respectively, as of December
31, 1998. The increase in percentage of securities designated as available for
sale is to cover potential growth and liquidity needs. 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. The Company does not
generally invest in structured notes or other derivative securities.
Total investment securities amounted to $50.9 million and $47.1 million
as of December 31, 1999 and 1998, respectively. The slightly higher level of
investments in securities resulted primarily from the investment of funds with
deposit growth and the investment of funds previously in federal funds sold.
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 shareholders' equity. Note 2 to the Consolidated Financial
Statements provides detail by type and contractual maturity for the years ended
December 31, 1999 and 1998.
LOAN PORTFOLIO
The Company is actively engaged in originating loans to customers in
Queen Anne's, Caroline, Kent, and Talbot Counties in the State of Maryland. The
Company has policies and procedures designed to mitigate credit risk and to
maintain the quality of the loan portfolio. These policies include underwriting
standards for new credits as well as the continuous monitoring and reporting of
asset quality and the adequacy of the allowance for credit losses. These
policies, coupled with continuous training efforts, have provided effective
checks and balances for the risk associated with the lending process. Lending
authority is based on the level of risk, size of the loan and the experience of
the lending officer. Note 3 to the Consolidated Financial Statements presents
the composition of the Company's loan portfolio by significant concentration.
The Company had no loan concentrations exceeding 10% of total loans which are
not otherwise disclosed.
In 1999, gross loans grew $15.8 million or 14.2% with $9.2 million or
58.0% of that growth coming in the fourth quarter. This unprecedented growth is
the result of intensive marketing efforts and very competitive pricing. Loan
growth, specifically commercial mortgages, consumer adjustable rate mortgage
loans and home equity loans accounted for the volume increases.
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 December
31, 1999.
The Company places a loan in non-accrual status whenever there is
substantial doubt about the ability of a borrower to pay principal or interest
on any outstanding credit. Management considers such factors as payment history,
the nature of the collateral securing the loan and the overall economic
situation of the borrower when making a non-accrual decision. Non-accrual loans
are closely monitored by management. A non-accruing loan is restored to current
status when the prospects of future contractual payments are no longer in doubt.
At December 31, 1999 and 1998, $1.0 million and $55 thousand, respectively, of
non-accrual loans were secured by collateral with an estimated value of $1.3
million of December 31, 1999 and $343 thousand as of December 31, 1998.
8
<PAGE>
DEPOSITS
Deposit liabilities grew $8.8 million or 5.7% to $162.1 million
compared to $153.3 million in 1998. Average deposits increased at a rate of
8.5%. The table below presents the average balance of deposits and percentage of
each category to total average deposits. The average balance of Super NOW
(interest bearing demand deposits), other time deposits and noninterest bearing
demand deposits grew 11.1%, 11.3% and 13.9%, respectively, compared to the year
ended December 31, 1998. This is the result of the introduction of new product
features as well as competitive pricing. The Company continues to experience
strong competition from other commercial banks, credit unions, the stock market
and mutual funds. The Company does not accept brokered deposits, nor does it
rely on purchased deposits as a funding source for loans. The Company has no
foreign banking offices.
Average Balance of Deposits and the Percentage of each
Category to Total Average Deposits
(All dollar amounts in thousands)
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Interest-bearing liabilities
Super NOW accounts $ 20,483 12.78% $ 18,433 12.48%
Money market deposit accounts 19,737 12.32% 18,886 12.79%
Time, $100,000 or more 13,647 8.52% 12,698 8.60%
Other time deposits 51,551 32.18% 46,305 31.35%
IRA deposits 15,500 9.67% 15,430 10.45%
Savings deposits 18,637 11.63% 17,819 12.06%
Demand deposits 20,663 12.90% 18,144 12.27%
- --------------------------------------------------------------------------------
$160,218 100.00% $147,715 100.00%
- --------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
Liquidity describes the ability of the Company to meet financial
obligations that arise out of the ordinary course of business. Liquidity is
needed primarily to meet borrower and depositor withdrawal requirements and to
fund current and planned expenditures. The Company maintains its asset liquidity
position internally through short term investments, the maturity distribution of
the investment portfolio, loan repayments and income from earning assets. As
indicated in the Consolidated Statements of Cash Flows, primary sources of cash
are 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. Refer to Note 2 of the Consolidated
Financial Statements for a table showing the maturity distribution of the
Company's securities portfolio and the related estimated fair value. On the
liability side of the balance sheet, liquidity is affected by the timing of
maturing deposits and the ability to generate new deposits or borrowings as
needed. Other sources are available through borrowings from the Federal Reserve
Bank, the Federal Home Loan Bank of Atlanta (FHLB) and from lines of credit
approved at correspondent banks. As of December 31, 1999, the Company had
outstanding loan commitments and unused lines of credit of $24.2 million. Of
this total, management expects to fund approximately $8 million within one year.
During 1999, the $8.8 million decrease in federal funds sold and $8.8
million increase in deposits funded the $15.8 million increase in loans with the
remaining funds invested in investment securities. During 1998, the $1.6 million
or 3.3% decrease in investment securities and $7.4 million or 5.1% increase in
deposits funded the $2.0 million increase in loans with the remaining funds
placed into federal funds sold. Management knows of no trend or event which will
have a material impact on the Company's ability to maintain liquidity at
satisfactory levels.
9
<PAGE>
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 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
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 limit exposure to interest rate risk while
maximizing net interest income.
One of the primary tools for monitoring interest rate sensitivity is
"Gap Analysis." This tool provides a general understanding of maturity and
repricing patterns of interest sensitive assets and liabilities. "Positive gap"
occurs when more assets reprice within a specific interval and "negative gap"
occurs when more liabilities reprice within a specific interval. The following
table summarizes the Company's interest sensitivity at December 31, 1999 based
on contractual maturity if fixed rate or earliest repricing date if variable
rate.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1999
(ALL DOLLAR AMOUNTS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------
AFTER 3 AFTER 1 NON-
MONTHS YEAR- INTEREST TOTAL
WITHIN WITHIN WITHIN AFTER SENSITIVE ALL
3 MONTHS 1 YEAR 5 YEARS 5 YEARS FUNDS CATEGORIES
- ------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Loans $ 21,591 $ 11,654 $ 55,347 $37,291 $ (116) $125,767
Investment Securities 995 1,081 37,167 9,840 49,083
Investments in Equity Securities 839 1,015 1,854
Federal Funds Sold 971 971
Non-interest earning assets 13,473 13,473
-------- -------- -------- ------- -------- --------
TOTAL ASSETS 24,396 12,735 92,514 47,131 14,372 191,148
-------- -------- -------- ------- -------- --------
LIABILITIES
Time Certificates of
Deposit over $100,000 1,571 4,498 9,704 15,773
All Other Time Deposits 11,995 17,195 35,294 64,484
Savings and Money Market Deposits 38,342 38,342
Interest-bearing Transaction 21,989 21,989
Securities sold under
agreements to repurchase 590 590
Long term debt 5,000 5,000
Noninterest-bearing Liabilities 22,366 22,366
-------- -------- -------- ------- -------- --------
TOTAL LIABILITIES 74,487 26,693 44,998 0 22,366 $168,544
-------- -------- -------- ------- -------- --------
NET (ASSETS LESS LIABILITIES) $(50,091) $(13,958) $ 47,517 $47,131 $ (7,995)
======== ======== ======== ======= ========
Interest Sensitivity Gap
Asset Sensitive
(Liability Sensitive) $(50,091) $(64,049) $(16,532) $30,599 $ 22,604
======== ======== ======== ======= ========
Interest Sensitivity GAP /
Total Assets (26.21)% (33.51)% (8.65)% 16.01% 11.83%
======== ======== ======== ======= ========
</TABLE>
10
<PAGE>
The following assumptions were made in preparation of the "Interest
Rate Sensitivity Analysis":
Fixed rate loans are grouped in the appropriate category based on
scheduled amortization. Variable rate loans are classified based on the next
available repricing opportunity. Noninterest sensitive loans consists of the net
of non-accrual loans, allowance for credit losses and deferred fees and costs.
Taxable and nontaxable investment securities are categorized by final
maturity date or, if applicable, a definite call date.
Investment in equity securities within three months consists of a U.S.
Government securities mutual fund. Noninterest sensitive funds combines Federal
Reserve Bank and Federal Home Loan Bank of Atlanta stocks.
Time deposits with contractual maturities are categorized based on the
effective maturity of the deposit.
Savings, money market and interest-bearing transaction accounts are
assumed to be subject to repricing within a year, and generally within three
months of a rate change, based on the Company's historical experience.
The Bank uses earnings simulation modeling to measure the effect
specific rate changes would have on one year of net interest income. Key
assumptions include calls and maturities of investment securities, depositors'
rate sensitivity, maturity dates of fixed rate loans and investment securities
and repricing date of variable rate loans. As with any method of gauging risk,
there are inherent shortcomings and actual results may deviate significantly
from assumptions used in the model. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest rate changes as well
as changes in market conditions and management strategies. At December 31, 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 $259 thousand
if rates were to increase by that amount and would increase $174 thousand if
rates would decline a similar amount.
CAPITAL RESOURCES AND ADEQUACY
Total stockholders' equity increased $699 thousand or 3.2% in 1999 to
$22.6 million from $21.9 million at December 31, 1998. Earnings of $2.3 million
was the primary contributor to this increase. Stockholders' equity was reduced
$562 thousand for the change in accumulated other comprehensive income and $1.0
million for dividends paid.
Total stockholders' equity as of December 31, 1998 decreased $1.6
million or 6.8% compared to the prior year. Earnings of $2.2 million added to
stockholders' equity. The change in accumulated other comprehensive income
accounted for a $5 thousand reduction and dividends paid also decreased
stockholders' equity by $1.0 million. Dividends paid per share increased 5.1%
over the prior year without negatively impacting the Company's capital position.
A stock repurchase of $2.8 million accounted for the majority of the decrease.
On September 16, 1998, the Company repurchased 101,322 shares or approximately
5% of its outstanding common stock at $27.75 per share. The Board of Directors
and management believed it was 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 and
incentive plans approved at the Company's 1998 Annual Meeting. The repurchase of
common shares also increased each remaining shareholder's relative percentage of
ownership in the Company.
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, which for the Company subtracts goodwill from total
stockholders' equity. The regulatory minimum for this ratio is 4%. The leverage
capital ratio as of December 31, 1999 was 11.05% for the Company, and as of
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. Federal banking
regulators require a minimum total risk-based capital ratio of 8%. As of
December 31, 1999, the Company's ratio was 19.78%. The Bank's ratio at December
31, 1998 was 21.05%. According to FDIC capital guidelines, the Bank is
considered to be "Well Capitalized."
Management knows of no other trend or event which will have a material
impact on capital. Please also refer to Note 15 in the Consolidated Financial
Statements for additional discussion of regulatory matters.
11
<PAGE>
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 was applicable 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 for the
Year 2000 date rollover. This issue resulted from the fact that many of the
world's existing computer programs used 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 completed contingency plans to provide operating
alternatives for continuation of services to the Company's customers for systems
that may not process information reliably and accurately after December 31,
1999. Management successfully managed the transition to the new century and
considers future problems unlikely. However, problems with noncompliant third
party vendors could appear. Therefore, management continues to monitor all
business processes to ensure they continue to operate properly.
The Company expensed approximately $40 thousand on Year 2000 costs in
1999. The total cost of the Year 2000 project was $86 thousand. Funding of the
Year 2000 project costs came from normal operating cash flow. Additional costs
including staff time will be expensed in the normal course of business and did
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 directly reduced otherwise reported net income for the
Company. Costs expensed in 2000 to monitor systems and processes are expected to
be immaterial and will be funded from normal operating cash flow.
12
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13
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<TABLE>
<CAPTION>
AVERAGE BALANCES, YIELDS AND RATES
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 For the Year Ended December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 8,766,879 $ 438,631 5.00% $ 10,142,579 $ 565,449 5.58%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies 39,178,072 2,333,863 5.96 33,866,198 2,104,154 6.21
Obligations of states and
political subdivisions(1) 9,573,990 660,390 6.90 10,479,431 739,527 7.06
All other investment securities 1,922,687 131,771 6.85 1,999,592 143,606 7.18
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities 50,674,749 3,126,024 6.17 46,345,221 2,987,287 6.45
Loans, net of unearned income(2)(3)
Commercial loans 10,953,893 1,098,894 10.03 9,482,733 983,333 10.37
Installment loans 6,377,116 598,879 9.39 5,768,858 573,173 9.94
Mortgage loans 99,265,991 8,019,926 8.08 92,928,827 8,145,171 8.76
- ---------------------------------------------------------------------------------------------------------------------
Total loans 116,597,000 9,717,699 8.33 108,180,418 9,701,677 8.97
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 176,038,628 $ 13,282,354 7.55% 164,668,218 $13,254,413 8.05%
Cash and due from banks 4,045,786 4,066,234
Other assets 9,885,443 9,614,821
Allowance for credit losses (1,242,880) (1,384,712)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $188,726,977 $176,964,561
=====================================================================================================================
LIABILITIES
Interest-bearing liabilities
Super NOW accounts $ 20,482,535 $ 534,298 2.61% $ 18,432,796 $ 513,745 2.79%
Money market deposit accounts 19,736,619 628,713 3.19 18,886,098 630,397 3.34
Time, $100,000 or more 13,647,245 723,442 5.30 12,697,789 689,999 5.43
Other time deposits 51,550,909 2,678,136 5.20 46,304,774 2,481,333 5.36
IRA deposits 15,500,588 749,336 4.83 15,429,668 778,695 5.05
Savings deposits 18,637,115 550,495 2.95 17,819,091 542,113 3.04
Securities sold under agreement to
repurchase 330,816 10,051 3.04 -- -- --
Other borrowed funds 4,959,863 273,890 5.52 5,001,849 287,041 5.74
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 144,845,690 6,148,361 4.24 134,572,065 5,923,323 4.40
Demand deposits 20,662,671 18,143,777
Other liabilities 1,028,268 934,045
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 166,536,629 153,649,887
Stockholders' equity 22,190,348 23,314,674
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $188,726,977 $176,964,561
=====================================================================================================================
Net interest income and
interest rate spread $ 7,133,993 3.30% $ 7,331,090 3.65%
Net interest income as a percent
of earning assets 4.05% 4.45%
=====================================================================================================================
- ------------------------------------------------------------------------------
For the Year Ended December 31, 1997
- ------------------------------------------------------------------------------
Average Income/ Yield/
Balance Expense Rate
- ------------------------------------------------------------------------------
ASSETS
Federal funds sold $ 6,493,959 $ 354,331 5.46%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies 32,996,468 2,102,149 6.37
Obligations of states and
political subdivisions(1) 8,858,428 673,659 7.60
All other investment securities 2,396,970 143,558 5.99
- ------------------------------------------------------------------------------
Total investment securities 44,251,866 2,919,366 6.60
Loans, net of unearned income(2)(3)
Commercial loans 9,293,896 982,599 10.57
Installment loans 5,264,677 536,637 10.19
Mortgage loans 89,183,164 7,827,395 8.78
- ------------------------------------------------------------------------------
Total loans 103,741,737 9,346,631 9.01
- ------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 154,487,562 $ 12,620,328 8.17%
Cash and due from banks 4,012,120
Other assets 8,641,143
Allowance for credit losses (1,445,147)
- ------------------------------------------------------------------------------
TOTAL ASSETS $165,695,678
==============================================================================
LIABILITIES
Interest-bearing liabilities
Super NOW accounts $ 17,214,551 $ 510,209 2.96%
Money market deposit accounts 21,027,750 702,261 3.34
Time, $100,000 or more 13,297,892 704,290 5.30
Other time deposits 41,023,454 2,135,522 5.21
IRA deposits 14,732,561 796,760 5.41
Savings deposits 16,636,078 521,015 3.13
Securities sold under agreement to
repurchase -- -- --
Other borrowed funds 1,356,164 77,825 5.74
- ------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 125,288,450 5,447,882 4.35
Demand deposits 16,216,396
Other liabilities 1,401,009
- ------------------------------------------------------------------------------
Total liabilities 142,905,855
Stockholders' equity 22,789,823
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $165,695,678
==============================================================================
Net interest income and
interest rate spread $ 7,172,446 3.82%
Net interest income as a percent
of earning assets 4.64%
==============================================================================
<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 nondeductible interest expense.
2. Loan fee income is included in interest income for each loan category and
yields are stated to include all fees. Fees approximated $104,000, $81,000
and $84,000 for 1999, 1998 and 1997 respectively.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
RATE AND VOLUME VARIANCE ANALYSIS
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
1999 Compared to 1998 1999 Compared to 1997
- --------------------------------------------------------------------------------------------------------------------------
Increase Change Due to Increase Change Due to
(Decrease) Rate(2) Volume (Decrease) Rate(2) Volume
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $(126,818) $ (50,123) $ (76,695) $ 211,118 $ 12,038 $ 199,080
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. government agencies 229,709 (100,325) 330,034 2,005 (53,404) 55,409
Tax-exempt obligations of State and
political subdivisions (1) (79,137) (15,241) (63,896) 65,868 (57,405) 123,273
All other investment securities (11,835) (6,312) (5,523) 48 23,848 (23,800)
- --------------------------------------------------------------------------------------------------------------------------
Total investment securities 138,737 (121,878) 260,615 67,921 (86,961) 154,882
- --------------------------------------------------------------------------------------------------------------------------
Commercial loans 115,561 (36,994) 152,555 734 (19,231) 19,965
Installment loans 25,706 (34,728) 60,434 36,536 (14,856) 51,392
Mortgage loans (125,245) (680,695) 555,450 317,776 (10,972) 328,748
- --------------------------------------------------------------------------------------------------------------------------
Total loans (3) 16,022 (752,417) 768,439 355,046 (45,059) 400,105
- --------------------------------------------------------------------------------------------------------------------------
Total interest income $ 27,941 $(924,418) $ 952,359 $ 634,085 $(119,982) $ 754,067
==========================================================================================================================
INTEREST EXPENSE
Super NOW accounts $ 20,553 $ (36,576) $ 57,129 $ 3,536 $ (32,571) $ 36,107
Money market deposit accounts (1,684) (30,073) 28,389 (71,864) (340) (71,524)
Time deposits of $100,000 or more 33,443 (18,151) 51,594 (14,291) 17,492 (31,783)
Other time deposits 196,748 (84,377) 281,125 345,811 70,886 274,925
IRA deposits (29,359) (32,938) 3,579 (18,065) (55,766) 37,701
Savings deposits 8,382 (16,505) 24,887 21,098 (15,952) 37,050
Securities sold under agreement
to repurchase 10,051 -- 10,051 -- -- --
Other borrowed funds (13,096) -- (13,096) 209,216 -- 209,216
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 225,038 $(218,620) $ 443,658 $ 475,441 $ (16,251) $ 491,692
==========================================================================================================================
Net interest margin / income $(197,097) $(705,798) $ 508,701 $ 158,644 $(103,731) $ 262,375
==========================================================================================================================
<FN>
1. Income and yields are computed on a tax equivalent basis using the
statutory federal income tax rate of 34%, exclusive of the alternative
minimum tax and nondeductible interest expense.
2. Variances caused by the change in yield / rate times the average balance
are allocated to rate.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
</FN>
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
------------ ------------
<S> <C> <C>
Cash and due from banks $ 3,344,815 $ 4,536,510
Federal funds sold 971,094 9,752,503
Investment securities available
for sale, at fair value 33,384,774 23,202,856
Investment securities held to
maturity, fair value of
$17,221,342 (1999) and
$24,253,286 (1998) 17,552,257 23,915,533
Loans, less allowance for credit
losses of $1,247,574 (1999)
and $1,348,805 (1998) 125,767,178 109,847,706
Premises and equipment, net 3,464,638 3,369,014
Accrued interest receivable 1,462,963 1,354,754
Investment in unconsolidated subsidiaries 1,067,228 1,167,306
Goodwill 1,769,617 1,917,009
Other assets 2,363,155 1,991,281
------------ ------------
Total assets $191,147,719 $181,054,572
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 21,484,699 $ 19,773,634
Interest-bearing transaction 21,989,491 20,467,422
Savings and money market 38,341,604 35,321,550
Time, $100,000 or more 15,772,596 15,357,184
Other time 64,484,304 62,387,777
------------ ------------
Total deposits 162,072,694 153,307,567
Securities sold under agreements to repurchase 589,895 --
Long-term debt 5,000,000 5,000,000
Accrued interest payable 207,254 208,433
Other liabilities 674,661 634,337
------------ ------------
Total liabilities 168,544,504 159,150,337
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
authorized 10,000,000
shares; issued and
outstanding: 1,913,891
shares (1999) and 1,913,516
shares (1998) 19,139 19,135
Surplus 10,074,226 10,064,166
Retained earnings 13,117,141 11,865,853
Accumulated other comprehensive income (607,291) (44,919)
------------ ------------
Total stockholders' equity 22,603,215 21,904,235
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $191,147,719 $181,054,572
============ ============
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- -----------
INTEREST INCOME:
<S> <C> <C> <C>
Interest and fees on loans $ 9,717,699 $ 9,701,677 $ 9,346,631
Interest and dividends on
investment securities:
Taxable 2,465,634 2,269,577 2,286,192
Tax-exempt 435,857 473,689 417,895
Interest on federal funds sold 438,631 565,449 354,331
----------- ----------- -----------
Total interest income 13,057,821 13,010,392 12,405,049
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 5,864,420 5,636,282 5,370,057
Interest on repurchase agreements 10,051 -- --
Interest on long-term debt 273,890 287,041 77,825
----------- ----------- -----------
Total interest expense 6,148,361 5,923,323 5,447,882
----------- ----------- -----------
NET INTEREST INCOME 6,909,460 7,087,069 6,957,167
PROVISION FOR CREDIT LOSSES -- -- --
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 6,909,460 7,087,069 6,957,167
----------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts 807,665 686,571 664,708
Gains on sales of investment securities 21,411 6,495 8,568
Equity in net (loss) income of
unconsolidated subsidiaries -- (19,900) 72,978
Other income 323,867 199,479 162,795
----------- ----------- -----------
Total noninterest income 1,152,943 872,645 909,049
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 2,437,457 2,381,839 2,238,125
Premises and equipment expenses 592,245 604,248 577,544
Marketing and promotion 126,393 159,402 142,101
Stationery, printing and supplies 108,614 147,433 160,037
Director and committee fees 177,428 211,734 195,007
Outside data processing 365,685 326,668 283,164
Amortization of goodwill 147,392 170,794 116,383
Other expenses 703,905 660,728 653,674
----------- ----------- -----------
Total noninterest expenses 4,659,119 4,662,846 4,366,035
----------- ----------- -----------
INCOME BEFORE TAXES ON INCOME 3,403,284 3,296,868 3,500,181
FEDERAL AND STATE INCOME TAXES 1,118,558 1,077,929 1,129,983
----------- ----------- -----------
NET INCOME $ 2,284,726 $ 2,218,939 $ 2,370,198
=========== =========== ===========
Basic earnings per common share $1.19 $1.12 $1.18
=========== =========== ===========
Diluted earnings per common share $1.19 $1.12 $1.18
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
Stock Surplus Earnings Income Equity
------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 10,074 $10,064,166 $12,087,317 $ (65,606) $22,095,951
Comprehensive income:
Net income -- -- 2,370,198 -- 2,370,198
Other comprehensive income, net of tax:
Unrealized gain on available
for sale securities -- -- -- 25,865 25,865
-----------
Total comprehensive income -- -- -- -- 2,396,063
Cash dividends declared ($.485
per common share)* -- -- (977,204) -- (977,204)
------- ----------- ----------- --------- -----------
Balances at December 31, 1997 10,074 10,064,166 13,480,311 (39,741) 23,514,810
Comprehensive income:
Net income -- -- 2,218,939 -- 2,218,939
Other comprehensive income, net of tax:
Unrealized loss on available for
sale securities of $7,101, net
of reclassification adjustment
of $1,923 -- -- -- (5,178) (5,178)
----------
Total comprehensive income -- -- -- -- 2,213,761
Two-for-one split effected in the
form of a 100% stock dividend 10,074 -- (10,074) -- --
Stock repurchased and retired (1,013) -- (2,810,950) -- (2,811,963)
Cash dividends declared ($.51
per common share)* -- -- (1,012,373) -- (1,012,373)
------- ----------- ----------- --------- -----------
Balances at December 31, 1998 19,135 10,064,166 11,865,853 (44,919) 21,904,235
Comprehensive income:
Net income -- -- 2,284,726 -- 2,284,726
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale
securities of $602,998 net of
reclassification adjustment of
$40,626 -- -- -- (562,372) (562,372)
-----------
Total comprehensive income -- -- -- -- 1,722,354
Exercise of stock options 4 10,060 -- -- 10,064
Cash dividends declared ($.54 per
common share) -- -- (1,033,438) -- (1,033,438)
------- ----------- ----------- --------- -----------
Balances at December 31, 1999 $19,139 $10,074,226 $13,117,141 $(607,291) $22,603,215
======= =========== =========== ========= ===========
<FN>
*Restated for two-for-one stock split effected in the form of a 100% stock
dividend.
</FN>
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 2,284,726 $ 2,218,939 $ 2,370,198
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortizaton 456,272 457,337 424,302
Equity in net earnings of
unconsolidated subsidiaries -- 19,900 (72,978)
Provision for credit losses, net (101,231) (54,942) (114,521)
Deferred income taxes 35,257 (31,239) 265,591
Net (gains) losses on sales of
assets (19,850) (5,101) 37,920
(Increase) decrease in accrued
interest receivable (108,209) 121,240 10,317
Decrease (increase) in other
assets 46,783 46,725 (1,346,040)
(Decrease) increase in accrued
interest payable (1,179) 19,157 (118,486)
Increase (decrease) in other
liabilities 40,324 36,682 (88,744)
------------ ------------ ------------
Net cash provided by
operating activities 2,632,893 2,828,698 1,367,559
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of
investment securities held
to maturity 7,927,178 34,267,718 16,220,939
Proceeds from maturities of
investment securities
available for sale 3,596,348 2,651,227 1,081,113
Proceeds from sales of investment
securities available for sale 4,562,319 -- 3,373,351
Purchase of investment securities
held to maturity (1,564,750) (18,767,297) (22,899,682)
Purchase of investment securities
available for sale (19,235,370) (16,499,297) (1,693,125)
(Increase) decrease in loans,
net (15,818,241) (2,029,228) 46,114
Purchase of premises and
equipment (405,129) (428,467) (1,276,182)
Proceeds from sale of premises
and equipment -- -- 301
Acquisition, net of cash
acquired -- -- (2,799,492)
------------ ------------ ------------
Net cash used in investing
activities (20,937,645) (805,344) (7,946,663)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in demand, transaction,
savings, and money market
deposits 6,253,188 1,083,855 6,923,212
Increase (decrease) in time
deposits 2,511,939 6,410,442 (6,033,946)
Increase in securities sold under
agreement to repurchase 589,895 -- --
Proceeds from long-term debt -- -- 5,000,000
Cash dividends paid (1,033,438) (1,012,373) (977,204)
Common stock repurchased and
retired -- (2,811,963) --
Proceeds from issuance of common
stock 10,064) -- --
------------ ------------ ------------
Net cash provided by
financing activities 8,331,648 3,669,961 4,912,062
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (9,973,104) 5,693,315 (1,667,042)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 14,289,013 8,595,698 10,262,740
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 4,315,909 $14,289,013 $ 8,595,698
=========== =========== ===========
Supplemental cash flows information:
Interest paid $ 5,865,543 $ 5,617,125 $ 5,416,606
Income taxes paid $ 937,092 $ 1,239,695 $ 1,120,005
Transfers from loans to other
real estate owned $ 63,000 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Shore
Bancshares, Inc. (the "Company") and its subsidiary, The Centreville National
Bank of Maryland (the "Bank") with all significant intercompany transactions
eliminated. The investment in subsidiary is recorded on the Company's books on
the basis of its equity in the net assets of the subsidiary. The accounting and
reporting policies of the Company conform to generally accepted accounting
principles and to general practices in the banking industry. Certain
reclassifications have been made to amounts previously reported to conform with
the classifications made in 1999.
Nature of Operations
--------------------
The Company, through its bank subsidiary, provides domestic financial
services primarily in the Maryland counties of Queen Anne's, Kent and Caroline.
The primary financial services include real estate, commercial and consumer
lending, as well as traditional demand deposits and savings products.
Use of Estimates
----------------
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Securities
---------------------
Investment securities that management has the ability and intent to
hold to maturity are classified as held to maturity and carried at cost,
adjusted for amortization of premium and accretion of discounts. Other
investment securities are classified as available for sale and are carried at
estimated fair value. Unrealized gains and losses on investment securities
available for sale, net of related deferred income taxes, are recognized as
accumulated other comprehensive income, a separate component of stockholders'
equity. The cost of investment securities sold is determined using the specific
identification method.
Loans
-----
Loans are stated at the principal amount outstanding, net of unearned
income. Interest income on loans is accrued at the contractual rate on the
principal amount outstanding. It is the Company's policy to discontinue the
accrual of interest when circumstances indicate that collection is doubtful.
Fees charged and costs capitalized for originating certain loans are being
amortized on the interest method over the term of the loan.
Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, except that
as a practical expedient, the Company may measure impairment based on a loan's
observable market price or the fair value of the collateral, if the loan is
collateral dependent. The Company recognizes interest income on impaired loans
on a cash basis if the borrower demonstrates the ability to meet the contractual
obligation and collateral is sufficient. If there is doubt regarding the
borrowers ability to make payments or the collateral is not sufficient, payments
received are accounted for as a reduction in principal.
20
<PAGE>
Allowance for Credit Losses
---------------------------
The allowance for credit losses is established through a provision for
credit losses charged to expense. Loans are charged against the allowance for
credit losses when management believes that the collectibility of the principal
is unlikely. The allowance, based on evaluations of the collectibility of loans
and prior loan loss experience, is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions and trends
that may affect the borrowers' ability to pay.
While management believes it has established the allowance for credit
losses in accordance with generally accepted accounting principles and has taken
into account the views of its regulators and the current economic environment,
there can be no assurance that in the future the Company's and the Bank's
regulators or its economic environment will not require further increases in the
allowance.
Long-Lived Assets
-----------------
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation of physical properties is computed on the
straight-line method over the estimated useful lives of the properties.
Expenditures for maintenance, repairs, and minor renewals are charged to
operating expenses; expenditures for betterments are charged to the property
accounts. Upon retirement or other disposition of properties, the carrying value
and the related accumulated depreciation are removed from the accounts.
Goodwill represents the excess of the cost of assets acquired in
purchase business combinations over the fair value of the net assets at dates of
acquisition and is being amortized on the straight-line method over periods not
exceeding 15 years.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and the
write-down would be material, an assessment of recoverability is performed prior
to any write-down of the assets.
Other Real Estate Owned
-----------------------
Real estate acquired in foreclosure of loans is carried at cost or fair
value, less estimated costs of disposal, whichever is lower. Fair value is based
on independent appraisals and other relevant factors. At the time of
acquisition, any excess of loan balance over fair value is charged to the
allowance for credit losses. Any subsequent reduction in value, as well as any
operating expenses, are included in other operating expenses.
Income Taxes
------------
Income tax expense is based on the results of operations, adjusted for
permanent differences between items of income or expense reported in the
financial statements and those reported for tax purposes. Under the liability
method, deferred income taxes are determined based on the differences between
the financial statement carrying amounts and the income tax bases of assets and
liabilities and are measured at the enacted tax rates that will be in effect
when these differences reverse.
Earnings Per Share
------------------
Basic earnings per share is calculated based on the weighted average
number of shares outstanding during the period. For the years ended December 31,
1999, 1998 and 1997, the Company had no dilutive common stock equivalents. The
weighted average number of shares outstanding was 1,913,741, 1,985,142 and
2,014,848 for the years ended December 31, 1999, 1998 and 1997, respectively.
21
<PAGE>
New Accounting Standards
------------------------
Statement of Financial Accounting Standards No. 133 (OSFAS No. 133O),
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities -D
Deferral of the Effective Date of FASB Statement No. 133, requires derivative
instruments be carried at fair value on the balance sheet. The statement
continues to allow derivative instruments to be used to hedge various risks and
sets forth specific criteria to be used to determine when hedge accounting can
be used. The statement also provides for offsetting changes in fair value or
cash flows of both the derivative and the hedged asset or liability to be
recognized in earnings in the same period; however, any changes in fair value or
cash flow that represent the ineffective portion of a hedge are required to be
recognized in earnings and cannot be deferred. For derivative instruments not
accounted for as hedges, changes in fair value are required to be recognized in
earnings.
The Company plans to adopt the provisions of this statement, as
amended, for its quarterly and annual reporting beginning January 1, 2001, the
statement's effective date. The impact of adopting the provisions of this
statement on the Company's financial position, results of operations and cash
flow subsequent to the effective date is not currently estimable and will depend
on the financial position of the Company and the nature and purpose of any
derivative instruments in use at that time.
Cash and Cash Equivalents
-------------------------
The Company has included cash and due from banks and federal funds sold
as cash and cash equivalents for the purpose of reporting cash flows.
22
<PAGE>
2. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for Sale
- ------------------
<S> <C> <C> <C> <C>
Obligations of U.S. Government
agencies and corporations $32,349,296 $ -- $(818,289) $31,531,007
U.S. Government Securities Mutual Fund 1,010,001 -- (171,284) 838,717
Federal Reserve Bank stock 302,250 -- -- 302,250
Federal Home Loan Bank of Atlanta stock 712,800 -- -- 712,800
----------- ----- --------- -----------
$34,374,347 $ -- $(989,573) $33,384,774
=========== ===== ========= ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to Maturity ---- ----- ------ -----
- ----------------
Obligations of U.S. Government
agencies and corporations $ 8,509,150 $ 846 $(211,817) $ 8,298,179
Obligations of states and political
subdivisions 9,043,107 16,534 (136,478) 8,923,163
----------- ------- --------- -----------
$17,552,257 $17,380 $(348,295) $17,221,342
=========== ======= ========= ===========
The amortized cost and fair value of investment securities at December
31, 1998 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for Sale
- ------------------
U.S. Treasury securities $ 4,984,665 $75,962 $ -- $ 5,060,627
Obligations of U.S. Government
agencies and corporations 16,213,717 10,766 ( 43,846) 16,180,637
U.S. Government Securities Mutual Fund 1,010,001 -- (116,559) 893,442
Federal Reserve Bank stock 302,250 -- -- 302,250
Federal Home Loan Bank of Atlanta stock 765,900 -- -- 765,900
----------- ------- --------- -----------
$23,276,533 $86,728 $(160,405) $23,202,856
=========== ======= ========= ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Held to Maturity
- ----------------
Obligations of U.S. Government and
other government agencies
and corporations $14,503,181 $ 96,949 $ -- $14,600,130
Obligations of states and political
subdivisions 9,412,452 240,704 -- 9,653,156
----------- -------- ------ -----------
$23,915,633 $337,653 $ -- $24,253,286
=========== ======== ====== ===========
</TABLE>
23
<PAGE>
Gross realized gains and gross realized losses on sales and calls of
investment securities available for sale are as follows:
1999 1998 1997
---- ---- ----
Gross realized gains:
U.S. Treasury securities $46,675 $ -- $ 8,103
Obligations of U.S. Government
agencies and corporations -- -- --
Obligations of states and
political subdivisions 205 6,495 --
Sallie Mae stock -- -- 2,313
------- ------ -------
46,880 6,495 10,416
Gross realized losses:
U.S. Treasury securities -- -- 325
Obligations of U.S. Government
agencies and corporations 25,469 -- 1,524
------- ------ -------
Net realized gains $21,411 $6,495 $ 8,567
======= ====== =======
Proceeds from sales and calls of investment securities were $8,088,948,
$306,495 and $3,373,351, and for the years ended December 31, 1999, 1998 and
1997, respectively.
The amortized cost and fair value of investment securities by
contractual maturity is as follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------
Available for Sale Held to Maturity
------------------------ --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ----------- ----------- -------------
Amounts maturing:
<S> <C> <C> <C> <C>
One year or less $ 1,496,067 $ 1,491,948 $ 584,735 $ 586,969
After one year through five years 28,001,147 27,261,012 9,890,741 9,785,010
After five years through ten years 1,277,520 1,232,565 7,076,781 6,849,363
After ten years 1,574,562 1,545,482 -- --
----------- ----------- ----------- -----------
32,349,296 31,531,007 17,552,257 17,221,342
----------- ----------- ----------- -----------
Investments in equity securities
and mutual funds 2,025,051 1,853,167 -- --
----------- ----------- ----------- -----------
$34,374,347 $33,384,774 $17,552,257 $17,221,342
=========== =========== =========== ===========
December 31, 1998
----------------------------------------------------
Available for Sale Held to Maturity
------------------------ --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ----------- ----------- -------------
Amounts maturing:
One year or less $ 1,499,627 $ 1,506,094 $ 1,921,582 $ 1,936,596
After one year through five years 15,508,696 15,555,229 12,634,696 12,761,980
After five years through ten years 4,075,446 4,060,391 9,198,027 9,391,028
After ten years 114,613 119,550 161,328 163,682
----------- ----------- ----------- -----------
21,198,382 21,241,264 23,915,633 24,253,286
----------- ----------- ----------- -----------
Investments in equity securities
and mutual funds 2,078,151 1,961,592 -- --
----------- ----------- ----------- -----------
$23,276,533 $23,202,856 $23,915,633 $24,253,286
=========== =========== =========== ===========
</TABLE>
24
<PAGE>
The Company has pledged certain investment securities as collateral for
deposits of certain government agencies and municipalities at December 31 as
follows:
1999 1998
---- ----
Amortized cost $16,329,688 $15,783,184
Fair value 15,982,407 15,962,587
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Company makes loans to customers primarily in the Maryland counties
of Queen Anne's, Kent, Caroline and Talbot, in an economy closely tied to the
agricultural industry. A substantial portion of the Company's loan portfolio
consists of residential and commercial real estate mortgages.
The Bank's loan portfolio at December 31 is as follows:
1999 1998
---- ----
Real estate:
Construction and land development $ 4,274,864 $ 4,487,810
Commercial 17,696,516 14,459,230
Residential 85,987,543 76,483,152
Commercial 10,833,566 8,447,857
Consumer 8,222,263 7,318,362
------------ ------------
127,014,752 111,196,511
Less: Allowance for credit losses (1,247,574) (1,348,805)
------------ ------------
Loans - net $125,767,178 $109,847,706
============ ============
Loans on which the accrual of interest has been discontinued amounted
to approximately $1,047,000, $55,000 and $199,000 at December 31, 1999, 1998,
and 1997, respectively. If interest on those loans had been accrued, such income
would have approximated $48,000, $5,000 and for $33,000 at 1999, 1998 and 1997,
respectively.
In the normal course of banking business, loans are made to officers
and directors and their affiliated interests. In the opinion of management,
these loans are consistent with sound banking practices, are within regulatory
lending limitations and do not involve more than the normal risk of
collectibility. Loans outstanding to such parties totaled $1,890,000 and
$2,155,000 at December 31, 1999 and 1998, respectively. During 1999, $1,079,000
of new loans were made and repayments totaled $1,344,000.
25
<PAGE>
Changes in the allowance for credit losses are as follows:
1999 1998 1997
---- ---- ----
Balance at beginning of year $1,348,805 $1,403,747 $ 1,503,268
Charge-offs:
Real estate:
Construction and land development -- -- --
Commercial -- -- --
Residential 3,854 14,239 22,288
Commercial 110,106 317 37,202
Consumer installment 115,120 89,658 99,441
---------- ---------- -----------
229,080 104,214 158,931
---------- ---------- -----------
Recoveries:
Real estate:
Construction and land development -- -- --
Commercial -- -- --
Residential -- -- --
Commercial 103,300 25,641 4,330
Consumer installment 24,549 23,631 40,080
---------- ---------- -----------
127,849 49,272 44,410
---------- ---------- -----------
Net charge-offs 101,231 54,942 114,521
Allowance applicable to loans of
acquired institution -- -- 15,000
Provision for credit losses -- -- --
---------- ---------- -----------
Balance at end of year $1,247,574 $1,348,805 $1,403,747
========== ========== ==========
Average daily balance of loans $116,597,000 $108,180,000 $103,742,000
Ratio of net charge-offs to average
loans outstanding .09% .05% .11%
Information with respect to impaired loans at December 31 is as
follows:
1999 1998
---- ----
Impaired loans with a valuation allowance $ -- $ --
Impaired loans without a valuation allowance 1,047,000 55,000
---------- ----------
Total impaired loans $1,047,000 $ 55,000
========== ==========
Allowance for credit losses related to
impaired loans $ -- $ --
Allowance for credit losses related to
other than impaired loans 1,247,574 1,348,805
---------- ----------
Total allowance for credit losses $1,247,574 $1,348,805
========== ==========
Average impaired loans for the year $ 404,115 $ 583,654
========== ==========
Interest income on impaired loans
recognized on the cash basis $ 5,063 $ 8,815
========== ==========
The Company recognizes interest income on impaired loans on a cash
basis if the borrower demonstrates the ability to meet the contractual
obligation and collateral is sufficient. If there is doubt regarding the
borrower's ability to make payments or the collateral is not sufficient,
payments received are accounted for as a reduction in principal.
26
<PAGE>
4. PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of the following:
1999
----------------------------------------
Accumulated
Cost Depreciation Net
----------------------------------------
Land $ 447,755 $ -- $ 447,755
Buildings and land improvements 3,086,142 729,845 2,356,297
Furniture, equipment and software 1,885,826 1,225,240 660,586
---------- ---------- ----------
$5,419,723 $1,955,085 $3,464,638
========== ========== ==========
1998
----------------------------------------
Accumulated
Cost Depreciation Net
----------------------------------------
Land $ 267,947 $ -- $ 267,947
Buildings and land improvements 2,959,727 632,436 2,327,291
Furniture, equipment and software 1,922,384 1,148,608 773,776
---------- ---------- ----------
$5,150,058 $1,781,044 $3,369,014
========== ========== ==========
Depreciation expense for the years ended December 31, 1999, 1998 and
1997 was $307,944, $316,935 and $307,919, respectively.
5. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The Company owns 33% of the outstanding common stock of the Delmarva
Bank Data Processing Center, Inc. ("DBDPC"). The investment is carried at cost,
adjusted for the Company's equity in the DBDPC's undistributed net income.
1999 1998 1997
---- ---- ----
Balance at beginning of year $1,049,409 $1,007,809 $ 934,831
Equity in net income 7,922 41,600 72,978
---------- ---------- ----------
Balance at end of year $1,057,331 $1,049,409 $1,007,809
========== ========== ==========
Data processing expense paid to DBDPC totaled approximately $297,000,
$266,000, and $248,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The Company owns 33% of the outstanding common stock of Eastern Shore
Mortgage Corporation ("ESMC"). The investment is carried at cost, adjusted for
the Company's equity in the ESMC's undistributed net earnings. The excess of
cost over the Company's equity in ESMC's underlying net assets at dates of
acquisition, amounting to $48,085, has been classified as goodwill and was
amortized over 15 years. As a result of ESMC's history of continuing losses, the
remaining goodwill balance of $24,308 was eliminated during 1998.
27
<PAGE>
1999 1998 1997
---- ---- ----
Balance at beginning of year $117,897 $179,397 $179,397
Equity in net loss (8,000) (61,500) --
Capital distribution (100,000) -- --
-------- -------- --------
Balance at end of year $ 9,897 $117,897 $179,397
======== ======== ========
Interest income from ESMC totaled approximately $-0-, $31,500, and
$39,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
There were no outstanding loans to this affiliate at December 31, 1999 and 1998.
6. DEPOSITS
Certificates of deposit in amounts of $100,000 or more and their
remaining maturities at December 31 are as follows:
1999 1998
---- ----
Three months or less $ 1,570,596 $ 1,191,746
Over three months through six months 2,657,875 3,275,647
Over six months through twelve months 1,840,674 2,373,631
Over twelve months 9,703,451 8,516,160
----------- -----------
$15,772,596 $15,357,184
=========== ===========
Interest expense on deposits for each of the years ended December 31 is
as follows:
1999 1998 1997
---- ---- ----
Interest bearing transaction $ 534,298 $ 513,745 $ 510,209
Savings and money market 1,179,208 1,172,510 1,223,276
Time, $100,000 or more 823,108 789,210 786,304
Other time 3,327,806 3,160,817 2,850,268
---------- ---------- ----------
$5,864,420 $5,636,282 $5,370,057
========== ========== ==========
At December 31, 1999 and 1998, the Bank had deposits of approximately
$3,700,000 and $2,600,000, respectively, from a local County government.
7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are securities sold to
customers, at the customers' request, under a "roll-over" contract that matures
in one business day. The underlying securities sold are U.S. Treasury notes or
notes of federal agencies that are segregated in the Company's custodial
accounts from other investments securities. The following table summarizes
certain information for these transactions:
1999
----
Average amount outstanding during year $ 330,816
Weighted average interest rate during year 3.04%
Amount outstanding at year end $ 589,895
Weighted average interest rate at year end 1.87%
Maximum amount at any month end $1,391,220
28
<PAGE>
The Company also has commitments from correspondent banks under which
it can purchase up to $10,000,000 in federal funds and secured reverse
repurchase agreements on a short-term basis. No borrowings were outstanding
under these arrangements during 1999 or 1998.
8. LONG-TERM DEBT
As of December 31, 1999, the Company had a convertible advance from the
Federal Home Loan Bank of Atlanta in the amount of $5,000,000 at an interest
rate of 5.07%. The advance is callable March 30, 2000 and is due September 30,
2009. The Bank has pledged its wholly owned residential first mortgage loan
portfolio under a blanket floating lien as collateral for this advance.
9. RETIREMENT PLAN
The Company has a 401(k) profit sharing plan covering substantially all
full-time employees. The plan requires the Company to match 50% of employee
contributions of up to 6% of compensation as defined under the plan and permits
additional contributions at the discretion of management. Expense under this
plan totaled $131,000, $133,000 and $130,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
10. DEFERRED COMPENSATION
The Company has agreements with certain directors under which they have
deferred part of their fees and compensation. The amounts deferred are invested
in insurance policies, owned by the Bank, on the lives of the respective
individuals. Amounts to be available under the policies are to be paid to the
individuals as retirement benefits over future years. Cash surrender values and
the accrued benefit obligation included in other assets and other liabilities at
December 31 are as follows:
1999 1998
---- ----
Cash surrender value $1,731,977 $1,705,646
Accrued benefit obligations 523,326 533,601
11. INCOME TAXES
Components of income tax expense for each of the years ended December
31 are as follows:
1999 1998 1997
---- ---- ----
Currently payable:
Federal $1,006,123 $1,014,000 $ 773,337
State 81,778 95,168 171,201
---------- ---------- ----------
1,087,901 1,109,168 944,538
---------- ---------- ----------
Deferred income taxes:
Federal 25,756 (25,577) 151,833
State 4,901 (5,662) 33,612
---------- ---------- ----------
30,657 (31,239) 185,445
---------- ---------- ----------
$1,118,558 $1,077,929 $1,129,983
========== ========== ==========
29
<PAGE>
Components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
1999 1998
---- ----
Deferred tax assets:
Allowance for credit losses $210,885 $196,895
Deferred compensation 123,858 125,317
Interest income 2,525 2,525
Unrealized loss on investment
securities available for sale 382,282 28,333
-------- --------
Total deferred tax assets 719,550 353,070
-------- --------
Deferred tax liabilities:
Cash to accrual conversion $ 24,740 $ 37,109
Discount accretion 6,390 15,477
Depreciation 41,209 38,992
Federal Home Loan Bank dividends 27,613 27,613
Undistributed income of
unconsolidated subsidiaries 61,329 61,329
Loan origination fees and costs 133,166 70,739
-------- --------
Total deferred tax liabilities 294,447 251,259
-------- --------
Net deferred tax assets $425,103 $101,811
======== ========
A reconciliation between income tax expense and taxes computed at the
maximum statutory federal rate for 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
--------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Computed at statutory rate $1,157,117 34.0% $1,120,935 34.0% $1,190,178 34.0%
Increases (decreases) in tax
resulting from:
Tax-exempt interest income (149,531) (4.4) (144,442) (4.4) (130,930) (3.7)
State income taxes, net of
federal income tax benefit 51,310 1.5 65,051 2.0 101,760 2.9
Loss (earnings) of unconsoli-
dated subsidiaries -- .0 5,413 .2 (9,139) (.3)
Goodwill amortization 47,753 1.4 55,709 1.7 37,211 1.1
Rehabilitation tax credit -- .0 (11,616) (.4) (51,245) (1.5)
Other - net 11,909 .4 (13,121) (.4) (7,852) (.2)
---------- ---- ---------- ---- ---------- ----
Actual tax expense $1,118,558 32.9% $1,077,929 32.7% $1,129,983 32.3%
========== ===== ========== ===== ========== =====
</TABLE>
12. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company's 1998 Stock Option Plan was approved by stockholders on
April 21, 1998 and provides for the granting of incentive and nonqualified
options to directors, executive officers and key employees on a periodic basis
at the discretion of the Company's Executive Committee. The Company has reserved
80,000 shares of common stock under the Plan and no more than 16,000 shares may
be granted under the Plan in any calendar year. During 1999, options for 6,520
shares of common stock were granted to employees and directors at an exercise
price of $32.00. These options begin to vest at an annual rate of 20% after the
completion of one year of service from the date of grant.
30
<PAGE>
The Company's 1998 Employee Stock Purchase Plan, which was also
approved by stockholders on April 21, 1998, allows employees to receive options
to purchase common stock at an amount equal to 85% of the fair market value of
the common stock. The Company has reserved 20,000 shares of common stock for
issuance upon the exercise of options under the Plan. Options to purchase no
more than 4,000 shares may be granted under the Plan in any calendar year.
During 1999, options to purchase 1,523 shares of common stock were granted to
employees at an exercise price of $27.20.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grant during the year ended December 31, 1999:
Dividend yield 1.68%
Expected volatility 25%
Risk-free interest rate 5.68%
Expected lives (in years) 3
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123), but applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans. No
compensation expense related to the plans was recorded during the year ended
December 31, 1999. If the Company had elected to recognize compensation cost
based on the fair value at the grant dates for awards under the plan consistent
with the method prescribed by SFAS No. 123, net income and earnings per share
for 1999 would have been changed to the pro forma amounts as follows:
Net income:
As reported $2,284,726
Pro forma $2,268,682
Basic net income per share:
As reported $1.19
Pro forma $1.19
Diluted net income per share:
As reported $1.19
Pro forma $1.19
The pro forma amounts are not representative of the effects on reported
net income for future years.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business. These financial instruments may include
commitments to extend credit, standby letters of credit and purchase
commitments. The Company uses these financial instruments to meet the financing
needs of its customers. Financial instruments involve, to varying degrees,
elements of credit, interest rate, and liquidity risk. These do not represent
unusual risks and management does not anticipate any losses which would have a
material effect on the accompanying financial statements.
31
<PAGE>
Outstanding loan commitments and lines and letters of credit at
December 31 are as follows:
1999 1998
---- ----
Loan commitments $ 4,101,504 $ 3,031,900
=========== ===========
Unused lines of credit $20,127,057 $14,369,978
=========== ===========
Letters of credit $1,116,545 $1,377,434
========== ==========
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. The
Company generally requires collateral to support financial instruments with
credit risk on the same basis as it does for on-balance sheet instruments. The
collateral is based on management's credit evaluation of the counterparty.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Each customer's
credit-worthiness is evaluated on a case-by-case basis.
Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the carrying values and the related estimated
fair value of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 3,344,815 $ 3,344,815 $ 4,536,510 $ 4,536,510
Federal funds 971,094 971,094 9,752,503 9,752,503
Investment securities available
for sale 33,384,774 33,384,774 23,202,856 23,202,856
Investment securities held to
maturity 17,552,257 17,221,342 23,915,633 24,253,286
Loans, net of allowance for
credit losses 125,767,178 124,493,000 109,847,706 114,005,000
Accrued interest receivable 1,462,963 1,462,963 1,354,754 1,354,754
1999 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial liabilities:
Deposits $162,072,694 $161,277,000 $153,307,567 $155,088,000
Accrued interest payable 207,254 207,254 208,433 208,433
Long-term debt 5,000,000 4,426,000 5,000,000 5,156,000
Unrecognized financial instruments:
Commitments to extend credit 24,228,561 20,228,561 17,401,878 17,401,878
Standby letters of credit 1,116,545 1,116,545 1,377,434 1,377,434
</TABLE>
32
<PAGE>
For purposes of the above disclosures of estimated fair value, the
following assumptions were used. The estimated fair value for cash and due from
banks and federal funds sold is considered to approximate cost. The estimated
fair value for securities available for sale and securities held to maturity are
based on quoted market values for the individual securities or for equivalent
securities. The estimated fair value of loans is determined by discounting
future cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
estimated fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The
estimated fair value of fixed maturity certificates of deposits is estimated
using the rates currently offered for deposits of similar remaining maturities.
In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
Other assets, such as property and equipment, and certain liabilities
of the Bank that are not defined as financial instruments are not included in
the above disclosures. Also, nonfinancial instruments typically not recognized
in the financial statements nevertheless may have value but are not included in
the above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the trained work force, customer goodwill and
similar items.
15. REGULATORY MATTERS
The Company is required to maintain noninterest-bearing deposits with
the Federal Reserve Bank. During 1999 and 1998, the daily average balances were
approximately $2,301,000 and $2,263,000, respectively.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
33
<PAGE>
As of December 31, 1999, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capaitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
<S> <C> <C> <C> <C> <C> <C>
Company $22,582,000 19.78% $9,133,000 8.00%
Bank $22,499,000 19.66% $9,156,000 8.00% $11,445,000 10.00%
Tier I Capital (to Risk
Weighted Assets):
Company $21,334,000 18.69% $4,567,000 4.00%
Bank $21,251,000 18.57% $4,578,000 4.00% $ 6,867,000 6.00%
Tier I Capital (to Average
Assets):
Company $21,334,000 11.09% $7,693,000 4.00%
Bank $21,251,000 11.05% $7,693,000 4.00% $ 9,616,000 5.00%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Company $21,220,000 21.05% $8,069,000 8.00%
Bank $21,127,000 21,20% $7,972,000 8.00% $ 9,965,000 10.00%
Tier I Capital (to Risk
Weighted Assets):
Company $19,959,000 17.80% $4,034,000 4.00%
Bank $19,880,000 19.95% $3,986,000 4.00% $ 5,979,000 6.00%
Tier I Capital (to Average
Assets):
Company $19,959,000 11.08% $7,206,000 4.00%
Bank $19,880,000 11.04% $7,206,000 4.00% $ 9,008,000 5.00%
</TABLE>
Banking regulations also limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agencies. Regulatory approval is
required to pay dividends which exceed the Bank's net profits for the current
year plus its retained net profits for the preceding two years. The amount of
dividends that the Bank could have paid to the Company without approval from
bank regulatory agencies at December 31, 1999 was approximately $3,800,000.
34
<PAGE>
16. PARENT COMPANY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Condensed financial information for Shore Bancshares, Inc.
(Parent Company only) is as follows:
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
ASSETS:
<S> <C> <C>
Cash $ 18,336 $ --
Investment in subsidiary 22,584,879 21,870,938
Other assets -- 33,297
----------- -----------
TOTAL ASSETS $22,603,215 $21,904,235
=========== ===========
LIABILITIES $ -- $ --
----------- ------------
STOCKHOLDERS' EQUITY:
Common stock 19,139 19,135
Surplus 10,074,226 10,064,166
Retained earnings 12,509,850 11,820,934
----------- ------------
Total stockholders' equity 22,603,215 21,904,235
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 22,603,215 $21,904,235
=========== ===========
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
INCOME - Dividends from subsidiary $ 1,033,438 $ 3,824,336
OPERATING EXPENSES 25,025 9,731
----------- ------------
INCOME BEFORE INCOME TAX BENEFIT AND EQUITY
IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY 1,008,413 3,814,605
INCOME TAX BENEFIT -- 3,309
----------- ------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY 1,008,413 3,817,914
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY 1,276,312 (1,598,975)
----------- -----------
NET INCOME $ 2,284,725 $ 2,218,939
=========== ===========
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
NET INCOME $ 2,284,725 $ 2,218,939
ADJUSTMENT TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Equity in undistributed earnings of
subsidiary (1,276,312) 1,598,975
Net decrease in other assets 33,297 6,422
----------- -----------
Net cash provided by operating
activities 1,041,710 3,824,336
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,033,438) (1,012,373)
Stock repurchased and retired -- (2,811,963)
Stock issued 10,064 --
----------- -----------
Net cash used in financing activities (1,023,374) (3,824,336)
----------- -----------
CASH AT BEGINNING OF YEAR -- --
----------- -----------
CASH AT END OF YEAR $ 18,336 $ --
=========== ===========
</TABLE>
35
<PAGE>
[LOGO] STEGMAN
& COMPANY
- ----------------
CERTIFIED PUBLIC ACCOUNTANTS AND
MANAGEMENT CONSULTANTS SINCE 1915
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Shore Bancshares, Inc.
Centreville, Maryland
We have audited the accompanying consolidated balance sheets of Shore
Bancshares, Inc. and Subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Shore
Bancshares, Inc. and Subsidiary as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/S/ STEGMAN & COMPANY
---------------------
Baltimore, Maryland
January 7, 2000
36
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION AND DIVIDENDS
There is no established public trading market for the Company's Shares.
Accordingly, there is no comprehensive record of trades or the prices of any
such trades. The following table reflects stock prices for Company shares to the
extent such information is available to management of the Company as well as
dividends paid per share for each quarter. All prices and dividends have been
restated to reflect the effect of the two for one stock split effected in the
form of a 100% stock dividend on March 31, 1998.
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
PRICE RANGE DIVIDENDS PRICE RANGE DIVIENDS
HIGH LOW PAID HIGH LOW PAID
- --------------------------------------------------------------------------------
First Quarter $33.50 $27.00 $0.13 $23.25 $22.50 $0.12
Second Quarter 32.00 28.00 0.13 33.50 24.00 0.12
Third Quarter 30.00 20.00 0.13 34.00 27.75* 0.12
Fourth Quarter 21.00 18.00 0.15 33.00 31.00 0.15
----- -----
$0.54 $.051
===== =====
* Price reflects stock repurchased and retired September 16, 1998
There are no contractual restrictions that currently limit the
Company's ability to pay dividends or that the Company reasonably believes are
likely to limit materially the future payment of dividends on the Company's
Shares. Banking regulators, however, limit under certain circumstances the
amount of dividends that may be paid without prior approval of the Bank's
regulatory agencies.
STOCKHOLDERS
As of February 25, 2000, a total of 1,913,910 shares of Shore
Bancshares, Inc. common stock was held by approximately 1,220 registered and
beneficial owners.
37
<PAGE>
DIRECTORS
Shore Bancshares, Inc.
The Centreville National Bank of Maryland
(as of March 1, 2000)
- --------------------------------------------------------------------------------
J. Robert Barton
Retired President and CEO,
The Centreville National Bank of Maryland
Paul M. Bowman
Attorney, Law Office of Paul M. Bowman
David C. Bryan
Member, Law Offices of Fountain
Bryan and Ritter, LLC
Daniel T. Cannon
President, Shore Bancshares, Inc.
President and CEO,
The Centreville National Bank of Maryland
B. Vance Carmean, Jr.
President, Carmean Grain, Inc.
Mark M. Freestate
President, W.M. Freestate & Son, Inc.
Thomas K. Helfenbein
Funeral Director and Partner
Fellows, Helfenbein & Newman Funeral Home
Neil R. LeCompte
Certified Public Accountant, Office of
Neil R. LeCompte
Susanne K. Nuttle
Retired Vice President, The Centreville National
Bank of Maryland
Jerry F. Pierson
President, Jerry F. Pierson, Inc.
Wm. Maurice Sanger
President, F.W., Inc.
President, Cloverbay Development Corporation
Walter E. Schmidt
Vice President, Schmidt Ventures, Inc.
DIRECTORS EMERITI
Shore Bancshares, Inc.
- --------------------------------------------------------------------------------
Sydney G. Ashley
The Centreville National Bank of Maryland
- --------------------------------------------------------------------------------
Sydney G. Ashley Royden N. Powell, Jr.
Madison B. Bordley, Jr. William E. Sylvester
William H. Harris William E. Thompson
James O. Pippin, Jr. Howard Wood
38
<PAGE>
OFFICERS
(as of March 1, 2000)
- --------------------------------------------------------------------------------
SHORE BANCSHARES INC.
---------------------
B. Vance Carmean, Jr. Daniel T. Cannon Mary C. Quimby
Chairman of the Board President Secretary
Jerry F. Pierson Carol I. Brownawell
Vice President of the Board Treasurer
THE CENTREVILLE NATIONAL BANK OF MARYLAND
-----------------------------------------
Daniel T. Cannon
President/CEO
Carol I. Brownawell
Executive Vice President/CFO
Thomas E. Beery
Vice President/SLO
Timothy J. Berrigan
Vice President
Rita B. Mielke
Vice President/COO
Pamela C. Satchell
Vice President
Carolyn D. Spicher
Vice President
William E. Stoops
Vice President
David E. Thompson
Vice President
Ralph F. Twilley
Vice President
Katharine M. Crook
Assistant Vice President
Cassandra A. Guy
Assistant Vice President
Kathryn C. Walls
Assistant Vice President
Elizabeth T. Clough
Cashier
Brenda M. Beaver
Assistant Cashier
Lorrie S. Greenwood
Assistant Cashier
Florance R. Walls
Assistant Cashier
THE CENTREVILLE NATIONAL BANK OF MARYLAND EMPLOYEES
(as of March 1, 2000)
- --------------------------------------------------------------------------------
Maryanne C. Alderson Goldie J. Garner Gina A. Paul
Janice S. Barkley Heather P. Garner Howard S. Pinder, Sr
Jessica L. Bateman Francis M. Gibson, Jr Mary C. Quimby
Bonnie F. Betton W. Allen Greiner Shartinese D. Rochester
Joyce D. Bradley Christina A. Guy Dawn M. Rose
Gertrude E. Brown Ann M. Haddaway Robin J. Rust
M. Kathleen Callahan Donna J. Hallock Donna M. Schaeffer
Phyllis B. Carroll Tera Y. Henry Teresa M. Schelhouse
Lois F. Carter Gail F. Hickman Wanda L. Shawyer
Susan C. Childress Barbara E. Hill Phyllis S. Skinner
Barry P. Coleman, Jr Barri G. Horney Karen A. Stanavich
Connie L. Crossman Lorraine N. Howell Donna J. Stevens
Maria E. Dickerson Constance M. Lee Barbara B. Stoops
Jeanene L. Earl Andrew D. Mielke Deborah H. Thomas
Lisa S. Fleetwood Joyce S. Moore James W. Thompson, III
Virginia Lynn Foster Mary Ann O'Connell Katherine A. Thompson
Margaret A. Fuller Corinne C. Palmer Ronald J. Walters
Nancy L. Park Diane B. Whitby
39
<PAGE>
THE CENTREVILLE NATIONAL BANK OF MARYLAND
OFFICES
- --------------------------------------------------------------------------------
MAIN OFFICE STEVENSVILLE OFFICE
- ----------------------------------- ------------------------------------
109 N. Commerce Street- PO Box 400 408 Thompson Creek Road - PO Box 279
Centreville, MD 21617 Stevensville, MD 21666
Phone (410) 758-1600 Phone (410) 643-2233
Fax (410) 758-2364 Fax (410) 643-4215
ROUTE 213 SOUTH OFFICE HILLSBORO OFFICE
- ---------------------------------- ---------------------------------
2609 Centreville Road - PO Box 400 21913 Shore Highway - PO Box 118
Centreville, MD 21617 Hillsboro, MD 21641
Phone (410) 758-2414 Phone (410) 820-2121
Fax (410) 758-3867 Fax (410) 820-1341
KENT OFFICE
---------------------------------
305 East High Street - PO Box 388
Chestertown, MD 21620
Phone (410) 778-1299
Fax (410) 778-6084
SHAREHOLDER RECORDS
Inquiries relating to shareholder records, stock transfers, changes of ownership
or address and dividend payments should be directed to Shareholder Services at
(410) 758-1600 or (877) 758-1600 or visit our web site, www.cnbmd.com.
40
<PAGE>
SIGNATURES
Pursuant to the requirements in Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf on March 21, 2000 by the undersigned, thereunto duly authorized.
SHORE BANCSHARES, INC.
/S/ DANIEL T. CANNON
--------------------
Daniel T. Cannon
President
/S/ CAROL I. BROWNAWELL
-----------------------
Carol I. Brownawell
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 21, 2000.
/S/ J. ROBERT BARTON Director
- --------------------
J. Robert Barton
/S/ PAUL M. BOWMAN Director
- ------------------
Paul M. Bowman
/S/ DAVID C. BRYAN Director
- ------------------
David C. Bryan
/S/ DANIEL T. CANNON Director
- --------------------
Daniel T. Cannon
/S/ B. VANCE CARMEAN, JR. Director
- -------------------------
B. Vance Carmean, Jr.
/S/ MARK M. FREESTATE Director
- ---------------------
Mark M. Freestate
/S/ THOMAS K. HELFENBIEN Director
- ------------------------
Thomas K. Helfenbein
/S/ NEIL R. LECOMPTE Director
- --------------------
Neil R. LeCompte
/S/ SUSANNE K. NUTTLE Director
- ---------------------
Susanne K. Nuttle
/S/ JERRY F. PIERSON Director
- --------------------
Jerry F. Pierson
/S/ WM. MAURICE SANGER Director
- ----------------------
Wm. Maurice Sanger
/S/ WALTER E. SCHMIDT Director
- ---------------------
Walter E. Schmidt
16
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statements Nos. 333-64317 and 333-64319 each on Form S-8, and in the Annual
Report on Form 10-K of Shore Bancshares, Inc. for the year ended December 31,
1999, of our report dated January 7, 2000 relating to the consolidated financial
statements of Shore Bancshares, Inc. and Subsidiary.
/S/ STEGMAN AND COMPANY
- -----------------------
STEGMAN AND COMPANY
Baltimore, Maryland
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<PERIOD-TYPE> 12-MOS
<CASH> 3,343
<INT-BEARING-DEPOSITS> 2
<FED-FUNDS-SOLD> 971
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,385
<INVESTMENTS-CARRYING> 17,552
<INVESTMENTS-MARKET> 17,221
<LOANS> 127,015
<ALLOWANCE> 1,248
<TOTAL-ASSETS> 191,148
<DEPOSITS> 162,073
<SHORT-TERM> 590
<LIABILITIES-OTHER> 882
<LONG-TERM> 5,000
<COMMON> 19
0
0
<OTHER-SE> 22,584
<TOTAL-LIABILITIES-AND-EQUITY> 191,148
<INTEREST-LOAN> 9,718
<INTEREST-INVEST> 2,901
<INTEREST-OTHER> 439
<INTEREST-TOTAL> 13,058
<INTEREST-DEPOSIT> 5,864
<INTEREST-EXPENSE> 6,148
<INTEREST-INCOME-NET> 6,909
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 21
<EXPENSE-OTHER> 4,659
<INCOME-PRETAX> 3,403
<INCOME-PRE-EXTRAORDINARY> 3,403
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,285
<EPS-BASIC> 1.19
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 4.05
<LOANS-NON> 1,047
<LOANS-PAST> 187
<LOANS-TROUBLED> 278
<LOANS-PROBLEM> 2,236
<ALLOWANCE-OPEN> 1,349
<CHARGE-OFFS> 229
<RECOVERIES> 128
<ALLOWANCE-CLOSE> 1,248
<ALLOWANCE-DOMESTIC> 1,248
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 17
</TABLE>
