SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-22345
------------------------------
SHORE BANCSHARES, INC.
109 North Commerce Street
Post Office Box 400
Centreville, Maryland 21617-0400
Telephone: (410) 758-1600
IRS Employer Identification Number: 52-1974638
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, Par Value $0.01
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES __X___ NO_____
Indicate the number of shares of outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
As of November 8, 2000, there were
1,914,237 shares of Common Stock
$0.01 Par Value outstanding.
This is the only class of
outstanding shares.
<PAGE>
SHORE BANCSHARES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
------ ---------------------
Item 1. Consolidated Financial Statements
Balance Sheets -September 30, 2000 and December 31, 1999
Statements of Income -Three months and nine months ended
September 30, 2000 and 1999.
Statements of Changes in Stockholders' Equity - Nine months ended
September 30, 2000 and 1999
Statements of Cash Flows -- Nine months ended September 30, 2000 and
1999.
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
----------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SHORE BANCSHARES, INC.
September 30, December 31,
Dollars in thousands 2000 1999
(Unaudited)
-----------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 8,023 $ 3,345
Federal funds sold 1,449 971
Securities:
Held to maturity, at amortized cost 16,958 17,552
(fair value of $16,718 and $17,221 respectively)
Available for sale 32,081 33,385
Loans, less allowance for credit losses of 133,450 125,767
$1,311 and $1,248 respectively
Premises and fixed assets, net 3,958 3,465
Investments in unconsolidated subsidiary 1,057 1,067
Accrued interest receivable 1,713 1,463
Goodwill 1,659 1,770
Other assets 2,212 2,363
----------- -----------
TOTAL ASSETS $ 202,560 $ 191,148
=========== ===========
LIABILITIES
Deposits:
Noninterest bearing demand $ 21,564 $ 21,485
Interest bearing transaction 26,371 21,989
Savings and money market 36,265 38,342
Time, $100,000 or more 20,030 15,773
Other time 68,286 64,484
----------- -----------
Total deposits 172,516 162,073
----------- -----------
Securities sold under agreements to repurchase 281 590
Long-term borrowings 5,000 5,000
Accrued interest payable 231 207
Other liabilities 711 675
----------- -----------
6,223 6,472
----------- -----------
Total liabilities 178,739 168,545
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; authorized
10,000,000 shares, issued and outstanding:
9/30/00 1,914,164
12/31/99 1,913,891 19 19
Surplus 10,078 10,074
Retained earnings 14,209 13,117
Accumulated other comprehensive income (loss) (485) (607)
----------- -----------
Total stockholders' equity 23,821 22,603
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 202,560 $ 191,148
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
SHORE BANCSHARES, INC.
(UNAUDITED) Three Months Nine Months Three Months Nine Months
Dollars in thousands Ending Ending Ending Ending
except per share data September 30, September 30, September 30, September 30,
2000 2000 1999 1999
-----------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Interest and fee income on loans $ 2,886 $ 8,503 $ 2,454 $ 7,178
Interest and dividends on securities:
Taxable securities 635 1,910 623 1,820
Tax-exempt securities 95 297 108 332
Interest on federal funds sold 52 71 137 349
------------------------------------------------------------
Total interest income 3,668 10,781 3,322 9,679
------------------------------------------------------------
INTEREST EXPENSE:
Interest on certificates of deposit
of $100,000 or more 283 730 201 616
Interest on other deposits 1,325 3,799 1,289 3,760
Interest on short-term borrowings 8 154 6 7
Interest on long-term borrowings 152 301 67 209
------------------------------------------------------------
Total interest expense 1,768 4,984 1,563 4,592
------------------------------------------------------------
NET INTEREST INCOME 1,900 5,797 1,759 5,087
Provision for credit losses 41 75 -- --
------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,859 5,722 1,759 5,087
------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 228 657 191 591
Gains (losses) on securities -- (49) 5 47
Other noninterest income 69 188 80 224
------------------------------------------------------------
Total noninterest income 297 796 276 862
------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 650 1,893 629 1,832
Expenses of premises and fixed assets 165 437 173 457
Other noninterest expense 372 1,216 426 1,260
------------------------------------------------------------
Total noninterest expense 1,187 3,546 1,228 3,549
------------------------------------------------------------
INCOME BEFORE TAXES 969 2,972 807 2,400
Applicable income taxes 355 1,057 271 797
------------------------------------------------------------
NET INCOME $ 614 $ 1,915 $ 536 $ 1,603
============================================================
Basic Earnings Per Common Share $ 0.32 $ 1.00 $ 0.28 $ 0.84
Diluted Earnings Per Common Share 0.32 1.00 0.28 0.84
Dividends Declared Per Common Share 0.15 0.43 0.13 0.39
</TABLE>
See Notes to the Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SHORE BANCSHARES, INC.
(Unaudited)
Accumulated
Other
Common Retained Comprehensive
Dollars in thousands Stock Surplus Earnings Income (Loss) Total
--------- -------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 2000 $ 19 $ 10,074 $ 13,117 $ (607) $ 22,603
Comprehensive income:
Net income 1,915 1,915
Other comprehensive income, net of tax:
Unrealized gain on available for sale
securities, net of reclassification adjustment 122 122
--------
Total comprehensive income 2,037
--------
Issuance of common stock upon
exercise of stock options 4 4
Cash dividends declared ($.43 per
common share) (823) (823)
-------- -------- --------- -------- --------
Balances at September 30, 2000 $ 19 $ 10,078 $ 14,209 $ (485) $ 23,821
======== ======== ========= ======== ========
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income (Loss) Total
--------- -------- ----------- --------------- ------------
Balances at January 1, 1999 $ 19 $ 10,064 $ 11,866 $ (45) $ 21,904
Comprehensive income:
Net income 1,603 1,603
Other comprehensive income, net of tax:
Unrealized loss on available for sale
securities, net of reclassification adjustment (414) (414)
--------
Total comprehensive income 1,189
--------
Issuance of common stock upon
exercise of stock options 10 10
Cash dividends declared ($.39 per
common share) (746) (746)
-------- -------- --------- -------- --------
Balances at September 30, 1999 $ 19 $ 10,074 $ 12,723 $ (459) $ 22,357
======== ======== ========= ======== ========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SHORE BANCSHARES, INC.
(UNAUDITED)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
--------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,915 $ 1,603
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 324 331
Provision for credit losses, net 63 (146)
Deferred income taxes (2) 6
Net (gains) losses on sale of securities 49 (47)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (250) (255)
(Increase) decrease in other assets 84 (212)
Increase (decrease) in accrued interest payable 24 (9)
Increase in other liabilities 36 16
-------- --------
Net cash provided by operating activities 2,243 1,287
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 586 7,222
Proceeds from maturities of investment securities available for sale 1,619 3,563
Proceeds from sale of investment securities available for sale 2,950 3,588
Purchases of held to maturity securities -- (1,565)
Purchases of available for sale securities (3,112) (18,228)
Net increase in loans (7,746) (6,643)
Purchase of premises and equipment (699) (369)
-------- --------
Net cash used in investing activities (6,402) (12,432)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in demand, interest-bearing
transaction, and savings deposits 2,384 5,580
Increase in time deposits 8,059 3,505
Increase (decrease) in securities sold under agreement to repurchase (309) 498
Proceeds from issuance of common stock 4 10
Cash dividends paid (823) (746)
-------- --------
Net cash provided by financing activities 9,315 8,847
-------- --------
Net increase (decrease) in cash and
cash equivalents 5,156 (2,298)
Cash and cash equivalents, beginning of period 4,316 14,288
-------- --------
Cash and cash equivalents, end of period $ 9,472 $ 11,990
======== ========
Supplementary cash flow information:
Interest paid $ 4,506 $ 4,387
Income taxes paid $ 763 $ 665
Transfer from loans to other real estate owned $ -- $ --
All dollar amounts in thousands
</TABLE>
6
<PAGE>
Note 1 - Financial Information
The unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. In the opinion of
management, all necessary adjustments have been made for a fair presentation of
financial position and results of operations for the periods presented.
Operating results for the nine month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. For further information, refer to the audited consolidated
financial statements and footnotes included in the 1999 Annual Report to
Shareholders and Form 10-K.
Consolidation has resulted in the elimination of all significant
intercompany accounts and transactions.
NOTE -2 Analysis of the Allowance for Credit Losses
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------------
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 1,248 $ 1,349
CHARGE-OFFS:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 0 4
Commercial 18 110
Credit card and related plans 1 0
Consumer installment 26 115
--------------------
45 229
--------------------
RECOVERIES:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 10 0
Commercial 10 103
Consumer installment 13 25
--------------------
33 128
--------------------
NET CHARGE-OFFS (RECOVERIES) 12 101
PROVISION FOR CREDIT LOSSES 75 0
--------------------
BALANCE AT END OF PERIOD $ 1,311 $ 1,248
====================
Average daily balance of loans $132,177 $116,597
Ratio of net charge-offs to average loans outstanding 0.00% 0.09%
</TABLE>
7
<PAGE>
Note 3 - Long-Term Borrowings
As of December 31, 1999, the Company had a convertible advance from
the Federal Home Loan Bank of Atlanta (FHLB) in the amount of $5,000,000 at an
interest rate of 5.07%. The advance was called on March 30, 2000. The interest
on the repriced advance is adjustable quarterly.
The Bank has pledged its wholly owned residential first mortgage loan
portfolio under a blanket floating lien as collateral for this advance.
Note 4 - Computation of Earnings Per Share
Basic earnings per share is calculated by dividing net income
available to common stockholders by the weighted-average number of common shares
outstanding and does not include the impact of any potentially dilutive common
stock equivalents. The diluted earnings per share calculation method is arrived
at by dividing net income by the weighted-average number of shares outstanding,
adjusted for the dilutive effect of outstanding stock options and warrants.
<TABLE>
<CAPTION>
Three Months Nine Months
Ending Ending
September 30, 2000 September 30, 2000
---------------------------------------
Basic:
<S> <C> <C>
Net Income (applicable to common stock) $ 614,000 $1,915,000
Average common shares outstanding 1,914,154 1,914,042
Basic net income per share $ .32 $ 1.00
Diluted
Net income (applicable to common stock) $ 614,000 $1,915,000
Average common shares outstanding 1,914,154 1,914,042
Dilutive effect of stock options 0 0
---------- ----------
Average common shares outstanding 1,914,042 1,914,154
Diluted net income per share $ .32 $ 1.00
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ending Ending
September 30, 1999 September 30, 1999
--------------------------------------
Basic:
<S> <C> <C>
Net Income (applicable to common stock) $ 536,000 $1,603,000
Average common shares outstanding 1,913,852 1,913,691
Basic net income per share $ .28 $ .84
Diluted
Net income (applicable to common stock) $ 536,000 $1,603,000
Average common shares outstanding 1,913,852 1,913,691
Dilutive effect of stock options 0 0
---------- ----------
Average common shares outstanding 1,913,852 1,913,691
Diluted net income per share $ .28 $ .84
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, YIELDS AND RATES
Nine Months Ending Nine Months Ending
September 30, 2000 September 30, 1999
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
Interest Earning assets:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 1,368,316 $ 70,651 6.90% $ 9,534,229 $ 349,032 4.89%
Investment Securities:
U.S. Treasury securities
and obligations of U.S.
government agencies 38,886,523 1,809,993 6.22% 38,615,369 1,720,773 5.96%
Obligations of States and
political subdivisions 8,791,367 449,520 6.83% 9,707,519 502,993 6.93%
All other investment securities 1,624,267 86,308 7.10% 1,633,043 85,770 7.02%
Federal Reserve Bank stock 302,250 13,601 6.01% 302,250 13,601 6.02%
------------------------------------------- ---------------------------------------
Total investment securities 49,604,407 2,359,422 6.35% 50,258,181 2,323,137 6.18%
Loans - net of unearned income
Commercial loans 13,240,959 982,351 9.91% 10,825,370 743,069 9.18%
Installment loans 7,136,298 490,946 9.19% 6,300,837 444,055 9.42%
Mortgage loans 111,799,415 6,946,087 8.30% 97,408,542 5,916,896 8.12%
------------------------------------------- ---------------------------------------
Total loans 132,176,672 8,419,384 8.51% 114,534,749 7,104,020 8.29%
------------------------------------------- ---------------------------------------
TOTAL INTEREST EARNING ASSETS 183,149,395 $ 10,849,457 7.91% 174,327,159 $ 9,776,189 7.50%
Cash and due from banks 3,711,221 3,992,844
Other assets 10,389,921 9,861,126
Allowance for loan and lease losses (1,250,718) (1,259,590)
------------------------------------------- ----------------------------------------
TOTAL ASSETS $ 195,999,819 $ 186,921,539
=========================================== ========================================
LIABILITIES
Interest-bearing liabilities
Other Borrowed Funds $ 6,703,378 $ 317,851 6.33% 4,945,055 209,106 5.65%
Repurchase agreements 2,993,871 136,677 6.10% 321,617 7,113 2.96%
Interest bearing checking 21,437,336 397,335 2.48% 20,213,283 393,367 2.60%
Money market deposit accounts 18,658,988 443,023 3.17% 19,568,854 466,595 3.19%
Time, $100,000 or more 15,339,657 641,622 5.59% 13,581,871 542,894 5.34%
Other time deposits 51,407,010 2,019,186 5.25% 51,436,216 2,010,737 5.23%
IRA deposits 15,629,861 615,648 5.26% 15,436,952 555,854 4.81%
Savings deposits 18,874,399 412,205 2.92% 18,359,876 407,320 2.97%
------------------------------------------- ---------------------------------------
TOTAL INTEREST BEARING LIABILITIES 151,044,500 $ 4,983,547 4.41% 143,863,724 $ 4,592,986 4.27%
Demand deposits 20,700,969 20,002,122
Other liabilities 1,139,316 998,547
------------------------------------------- ---------------------------------------
Total liabilities 172,884,785 164,864,393
Stockholders' equity 23,115,034 22,057,146
------------------------------------------- ---------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 195,999,819 $ 186,921,539
=========================================== ========================================
Net interest income & interest rate spread $ 5,865,910 3.51% $ 5,183,203 3.23%
Net interest income as a % of earning assets 4.28% 3.99%
<FN>
1. All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate of 34%, exclusive of the alternative
minimum tax rate and non deductible interest expense.
2. Loan fee income is included in interest income for each loan catagory and
yields are stated to include all fees.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
</FN>
</TABLE>
9
<PAGE>
ITEM 2
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., and should be
read in conjunction with the December 31, 1999 audited consolidated financial
statements and notes thereto.
Portions of this quarterly report on Form 10-Q contain
forward-looking statements (as defined in the Private Securities Litigation
Reform Act of 1995) with respect to the adequacy of the allowance for credit
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 1999 Form 10-K, under the
heading "Risk Factors." The Company believes that the expectations reflected in
such forward-looking statements are reasonable. However, because these
uncertainties and the assumptions on which statements in this report are based,
the actual future results may differ materially from those indicated in this
report.
ORGANIZATIONAL BACKGROUND
On July 1, 1996, Shore Bancshares, Inc. (the Company) commenced
operations as the parent company of its sole subsidiary, The Centreville
National Bank of Maryland (the Bank), which has conducted the business of
banking since 1876. Since the Bank is the primary 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.
RESULTS OF OPERATIONS
OVERVIEW
Net income increased 19.46% as of September 30, 2000 compared to the
same nine months in 1999. The Company reported $1.9 million in net income for
the nine months ended September 30, 2000 or $1.00 diluted earnings per share
compared to the nine months ended September 30, 1999 net income of $1.6 million
or $.84 diluted earnings per share. A $710 thousand increase in net interest
income is the result of increasing interest rate spread and significant loan
growth in the fourth quarter of 1999 and through the first nine months of 2000.
The effects of the increasing interest rate environment continue to have a
positive impact on net interest income. The Company experienced growth in total
assets of $11.4 million or 5.97% and total loans of $7.7 million or 6.10% since
December 31, 1999. Loan growth was funded through deposit growth and borrowed
funds. Average earning assets continue to grow and reflect an increase of 5.06%
as of September 30, 2000 compared to the prior year. The growth in earning
assets contributed to an improved net interest income and reflects a 29 basis
point increase in net interest margin compared to the end of the third quarter
of 1999. The average balance of loans increased $17.6 million or 10.12% to
$132.2 million as of September 30, 2000 compared to one year ago. Average demand
deposits and interest bearing liabilities increased $7.9 million or 4.81% to
$171.7 million as of September 30, 2000 compared to one year ago.
Page 1
<PAGE>
NET INTEREST INCOME and NET INTEREST MARGIN
Net interest income is the principal source of earnings for a banking
company. It represents the difference between interest and fees earned on the
loan and investment portfolios and the interest paid on deposits and borrowings.
As a result of the balance sheet growth, primarily from loan growth, the Bank's
net interest income, on a fully tax-equivalent basis, increased $683 thousand or
13.17% in the nine months ended September 30, 2000 compared to the same period
in 1999. The table titled "Average Balances, Yields and Rates" sets forth the
major components of net interest income, on a tax equivalent basis, for
September 30, 2000 and 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). Interest rate spread for the nine months ended September
30, 2000 and 1999 was 3.51%, and 3.23%, respectively. The rising interest rate
environment improved yield on average earning assets 41 basis points as
reflected in increased yields on variable rate assets, such as federal funds
sold and commercial prime rate loans, and the reinvestment, at a higher rate, of
the proceeds from investment securities sold in January 2000. Deposit rate
increases were slower to impact the rate spread as noted by a yield on average
interest bearing liabilities that remained unchanged as of June 30, 2000
compared to June 30, 1999. However, third quarter certificate of deposit
promotions at premium rates and the use of borrowed funds increased the rate on
average interest bearing liabilities to 4.41% as of September 30, 2000, a 14
basis point increase over the same period in 1999. The overall impact was a 28
basis point increase in interest rate spread. The 3.51% interest rate spread as
of September 30, 2000 is also an increase from the December 31, 1999 interest
rate spread of 3.30%.
The balance sheet mix has changed slightly since year end. As a
result of an increasing interest rate environment, the Company has experienced
no calls of investment securities in 2000. Because deposits have grown at a more
moderate rate than loans, the Company has reduced its federal funds sold and
relied on federal funds borrowed, repurchase agreements and a Federal Home Loan
Bank advance to fund loan growth. The cost of borrowed funds has been higher
than the cost of core deposits. Loan rate increases late in 1999 and the first
six months of 2000 as well as loan growth of $16.9 million since September 30,
1999 at these higher rates, improved loan yield to 8.51%, compared to 8.29% as
of September 30, 1999 and 8.33% as of December 31, 1999, and improved total
interest revenue (on a tax equivalent basis) $1.3 million or 18.52%. The average
balances in each loan category have increased and total average loans
outstanding have grown $17.6 million since September 30, 1999. Volume increases
have improved interest income and prime rate increases in the third quarter of
1999 and first six months of 2000 have had a positive impact on earnings by
repricing approximately $17 million of floating rate loans tied to prime. The
interest rate environment has stabilized but the higher rates may continue to
improve the Bank's interest rate spread and interest income.
Average interest bearing transaction accounts increased as a result
of adding the benefit of paying interest on the existing club accounts.
Certificate of deposit specials for 15 and 23 months at premium rates and the
Company's use of repurchase agreements and borrowed funds account for the
majority of the increase in interest expense. The increased use of repurchase
agreements and borrowed funds in 2000 accounted for $239 thousand of the $392
thousand additional interest expense as of September 30, 2000 compared to the
same period in 1999. An increase in yield on interest bearing liabilities was
limited to 14 basis points as a result of reduced yield in interest bearing
checking, money market and savings deposit categories which offset the increased
rate in certificates of deposit, borrowed funds, and repurchase agreements.
Page 2
<PAGE>
Net interest margin improved to 4.28% from 3.99% when comparing
September 30, 2000 to September 30, 1999. Net interest margin is calculated as
tax equivalent net interest income divided by average earning assets and
represents the net yield on its earning assets. The net interest margin increase
is the result of repricing as previously discussed.
Management and the Board of Directors monitor interest rates on a
regular basis to assess the Company's competitive position and to maintain a
reasonable and profitable interest rate spread. The Company also considers the
maturity distribution of loans, investments, and deposits and its effect on net
interest income as interest rates rise and fall over time.
PROVISION and ALLOWANCE FOR CREDIT LOSSES
Through September 30, 2000, the Company recorded net charge offs of
$12 thousand and through September 30, 1999, net charge offs of $114 thousand
compared to net charge offs of $101 thousand for the year ended December 31,
1999. Internal loan review, in particular, is effective in identifying problem
credits and in achieving timely recognition of potential and actual losses
within the loan portfolio. Improved overall credit quality and increased
collection efforts have also contributed to the low amount of net charge offs.
Gross charge offs for the nine months ended September 30, 2000
amounted to $45 thousand, $164 thousand for the same period in 1999 and $229
thousand for the year ended 1999. Fifteen thousand of the charge off dollars
recorded resulted from one commercial loan and $27 thousand were consumer
installment loans. Efforts to collect charged off loans continue to be
successful. Recoveries totaled $33 thousand and $18 thousand, respectively, in
the nine months of 2000 and 1999 and $128 thousand for the year ended December
31, 1999.
A $41 thousand provision for credit losses was recorded in the third
quarter of 2000 increasing the total provision for the 2000 to $75 thousand. No
provision for credit losses was charged to expense in 1999. The allowance for
credit losses is maintained at a level believed adequate by management to absorb
estimated probable credit losses. Management's quarterly evaluation of the
adequacy of the allowance is based on analysis of the loan portfolio and its
known and inherent risks, assessment of current economic conditions,
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 of $1.3 million as of September 30, 2000 and
December 31, 1999 represents .97% and .98%, respectively, of gross loans. The
percentage of allowance to gross loans outstanding is essentially unchanged from
year end despite the increasing outstanding gross loans and is justified by low
levels of classified loans. Past due loan levels (loans past due 30 days or
more) have increased slightly as of December 31, 2000 from 1.03% of gross loans
outstanding to 1.23% as of September 30, 2000. Past due loans consist primarily
of loans secured by real estate. The loan portfolio consists of 56.2% loans
secured by residential mortgage, 28.2% secured by commercial real estate, 9.0%
commercial loans and 6.6% installment loans. Analysis by loan review supports
adequacy of the allowance. In management's opinion, the allowance for credit
losses is adequate as of September 30, 2000.
See Note 2 in the Notes to Financial Statements.
Page 3
<PAGE>
NONINTEREST INCOME AND EXPENSE
As of September 30, 2000, noninterest income reflects a $66 thousand
decrease compared to September 30, 1999 primarily from a $49 thousand loss on
the sale of available for sale investment securities compared to a $47 thousand
gain as of September 30, 1999. The proceeds from the sold securities were
invested in higher yielding government agency securities. The rise in service
fees reflects higher return check charges and volume as well as the
reinstatement of Super Now fees which were waived in 1998 and 1999.
Noninterest expense, excluding taxes and provision for loan losses as
of September 30, 2000 decreased $3 thousand compared to the same period last
year. Salaries and benefits increased 3.33% compared to the same nine months of
1999 and reflects increased pay rates and insurance premiums. Premise and fixed
asset expenses decreased $20 thousand as of September 30, 2000 compared to the
same period in 1999 and was offset by a $36 thousand increase in other overhead
expenses.
INVESTMENT SECURITIES
Investment securities classified as available for sale are held for
an indefinite period of time and may be sold in response to changing market and
interest rate conditions as part of the asset/liability management strategy.
Available for sale securities are carried at market value, with unrealized gains
and losses excluded from earnings and reported as accumulated other
comprehensive income, a separate component of stockholders' equity net of income
taxes. Investment securities classified as held to maturity are those that
management has both the positive intent and ability to hold to maturity, and are
reported at amortized cost. The Company does not currently follow a strategy of
making securities purchases with a view to near-term sales, and, therefore, does
not own trading securities, nor are derivatives used as investments. The Company
manages the investment portfolios within policies which seek to achieve desired
levels of liquidity, manage interest rate sensitivity risk, meet earnings
objectives, and provide required collateral support for deposit activities.
Total investment securities amounted to $49.0 million and $50.9
million as of September 30, 2000 and December 31, 1999, respectively. The
relatively stable level of investments in securities resulted primarily from
limited maturities and calls and the investment of funds from deposit growth and
federal funds sold to support loan growth. Excluding the U.S. Government and
U.S. Government sponsored agencies, the Company had no concentrations of
investment securities from any single issuers that exceeded 10% of stockholders'
equity.
LOAN PORTFOLIO
The Bank is actively engaged in originating loans to customers in
Queen Anne's, Caroline, Kent and Talbot Counties. The Company has policies and
procedures designed to mitigate credit risk and to maintain the quality of the
loan portfolio. These policies include underwriting standards for new credits as
well as the continuous monitoring and reporting of asset quality and the
adequacy of the allowance for credit losses. These policies, coupled with
continuous training efforts, have provided effective checks and balances for the
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risk associated with the lending process. Total gross loans as of September 30,
2000 have grown approximately $7.7 million since December 31, 1999. Residential
and commercial mortgage loans, accounted for approximately $5.6 million of the
increase. Loan growth is attributed to new product development and growth in the
local economy. In addition, an active officer calling program supported by
increased marketing efforts are showing signs of success. The Company had no
loan concentrations exceeding 10% of total loans which are not otherwise
disclosed.
The Company policy is to make the majority of its loan commitments in
the market area it serves. The Company attempts to reduce risk through its
management's familiarity with the credit histories of loan applicants and
in-depth knowledge of the risk to which a given credit is subject. Lending in a
limited market area does subject the Company to economic conditions of that
market area. The Company had no foreign loans in its portfolio as of September
30, 2000.
It is the policy of the Bank to place a loan in non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on any outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan and
the overall economic situation of the borrower when making a non-accrual
decision. Non-accrual loans are closely monitored by management . A non-accruing
loan is restored to current status when the prospects of future contractual
payments are no longer in doubt. The following table summarizes past due and
non-performing assets of the Company.
September 30, December 31,
2000 1999
------------- ------------
Non-accrual loans $ 190 $ 1,047
Loans past due 90 days or more
And still accruing interest 204 187
Other real estate owned -- 63
----- -------
Total non-performing assets $ 394 $ 1,297
===== =======
DEPOSITS
Deposit liabilities as of September 30, 2000 increased 6.44% compared
to December 31, 1999. The increases were noted in business escrow deposits and
consumer deposits. Interest bearing transaction accounts reflect approximately
$1.3 million in Club checking accounts which were transferred from noninterest
bearing demand deposits as a result of a product feature change. Time deposits
increased $8.1 million primarily as a result of third quarter certificate of
deposit promotions at premium rates. The Company continues to experience strong
competition from other commercial banks, credit unions, the stock market and
mutual funds. The Company has no foreign banking offices.
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LONG-TERM BORROWINGS
Long-term borrowings consists of an advance from the Federal Home
Loan Bank of Atlanta of $5,000,000. See Note 3 in the Notes to Financial
Statements.
LIQUIDITY MANAGEMENT
Liquidity describes the ability of Shore Bancshares, Inc. and its
subsidiary, The Centreville National Bank of Maryland to meet financial
obligations that arise out of the ordinary course of business. Liquidity is
primarily needed to meet borrowing and deposit withdrawal requirements of the
customers of the Bank and to fund current and planned expenditures. The Company
maintains its asset liquidity position internally through short term
investments, the maturity distribution of the investment portfolio, loan
repayments and income from earning assets. As indicated by the Consolidated
Statements of Cash Flows, the primary sources of cash flow through the end of
the third quarter of 2000 was the maturity of investment securities and deposit
growth and proceeds from borrowed funds. A substantial portion of the investment
portfolio contains readily marketable securities that could be converted to cash
immediately. On the liability side of the balance sheet, liquidity is affected
by the timing of maturing deposits and the ability to generate new deposits or
borrowings as needed. Other sources are available through borrowings from the
Federal Reserve Bank and from lines of credit approved at correspondent banks.
Management knows of no trend or event which will have a material impact on the
Bank's ability to maintain liquidity at satisfactory levels.
MARKET RISK MANAGEMENT
Market risk is the risk of loss that arises from changes in interest
rates, foreign currency exchange prices, commodity prices, equity prices, and
other market changes that affect market sensitive financial instruments. The
market risk for the Company is composed primarily of interest rate risk, which
is the exposure of the Bank's earnings and capital arising from future interest
rate changes. This risk is a normal part of the banking business because assets
and liabilities do not reprice at the same rate, nor do they move to the same
degree when interest rates change. In addition, the maturity distribution of the
Bank's assets and liabilities do not match for given periods of time. The Bank's
interest rate sensitivity position is managed to maintain an appropriate balance
between the maturity and repricing characteristics of assets and liabilities
that is consistent with the Bank's liquidity, growth, earnings and capital
adequacy goals. The Board of Directors has adopted an Asset / Liability
Management Policy, which is administered by the Asset / Liability Committee. The
Committee is responsible for monitoring the Bank's interest rate sensitivity
position and recommending policies to the Board of Directors to limit exposure
to interest rate risk while maximizing net interest income.
The Bank uses earnings simulation modeling to measure the effect
specific rate changes would have on one year of net interest income. Key
assumptions include calls and maturities of investment securities, depositors'
rate sensitivity, maturity dates of fixed rate loans and investment securities
and repricing date of variable rate loans. As with any method of gauging risk,
there are inherent shortcomings and actual results may deviate significantly
from assumptions used in the model. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest-rate changes as well
as changes in market conditions and management strategies. At September 30, 2000
the Bank's estimated earnings sensitivity profile reflected a modest sensitivity
to interest rate changes. Based on an assumed 200 basis point immediate change
in interest rates the Bank's net interest income would decrease by $235 thousand
if rates were to increase by that amount and net interest income would increase
$260 thousand if rates would decline a similar amount.
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CAPITAL RESOURCES AND ADEQUACY
Total stockholders' equity increased $1.2 million to $23.8 million as
of September 30, 2000 compared to $22.6 million as of December 31,1999. Earnings
of $1.9 million added to shareholders' equity. Dividends paid reduced
stockholders' equity $823 thousand offset by the decrease in unrealized loss in
available for sale securities of $122 thousand which is included in accumulated
other comprehensive income.
One measure of capital adequacy is the leverage capital ratio which
is calculated by dividing average total assets for the most recent quarter into
Tier 1 capital. The regulatory minimum for this ratio is 4%. The leverage
capital ratio at the Company level at September 30, 2000 was 11.38% and at
December 31, 1999 was 11.05%.
Another measure of capital adequacy is the risk based capital ratio
or the ratio of total capital to risk adjusted assets. Total capital is composed
of both core capital (Tier 1) and supplemental capital (Tier 2) including
adjustments for off balance sheet items such as letters of credit and taking
into account the different degrees of risk among various assets. Regulators
require a minimum total risk based capital ratio of 8%. The Company's ratio at
September 30, 2000 was 19.34% and at December 31, 1999 was 19.78%. According to
FDIC capital guidelines, the Company is considered to be "Well Capitalized."
In the first quarter of 1999 the Office of the Comptroller of the
Currency approved two new branches for The Centreville National Bank of
Maryland. One branch site is at the corner of Sharp Road and Route 404 in
Denton, Maryland, Caroline County. The second location, at the corner of Route
18 / Piney Creek Road and Castle Marina Road in Chester, Maryland, is an
additional Queen Anne's County site. Increased building cost caused the
reevaluation of construction timetables and the Board of Directors has reviewed
the expansion plans. Branch completion dates are estimated to be the first
quarter of 2001. Upon completion of the branches, the opportunity cost of the
funds invested in the branches, operating costs and depreciation expense is
expected to have a negative impact on earnings in the short term until the long
term growth of the branch improves profitability.
Management knows of no other trend or event, which will
have a material impact on capital.
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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 use only two digits to identify the year in
the date field of a program. These programs could experience serious
malfunctions when the last two digits of the year change to "00" as a result of
identifying a year designated "00" as the year 1900 rather than the Year 2000.
The Company completed contingency plans to provide operating
alternatives for continuation of services to the Company's customers for systems
that did not process information reliably and accurately after December 31,
1999. Management has successfully managed the transition to the new century and
considers problems unlikely. However, problems with noncompliant third party
vendors could appear, but none are expected. Therefore Management continues to
monitor all business processes to ensure they continue to operate properly.
RECENT DEVELOPMENTS
On July 25,2000 the Company entered into a Plan and Agreement to
Merge with Talbot Bancshares, Inc., a Maryland corporation ("Talbot
Bancshares"), which provides for Talbot Bancshares to merge with and into the
Company (the "Merger") in a pooling-of-interests transaction. Upon completion of
the Merger, the Company will be the surviving entity. The Merger is conditioned
upon, among other things, the approvals of stockholders of the Company and of
Talbot Bancshares and receipt of certain bank regulatory approvals. A
shareholder meeting is scheduled for November 21, 2000. Approval has been
obtained from the Securities and Exchange Commission and the Federal Reserve.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Management Discussion and Analysis of Results of Operation and
Financial Condition - Market Risk Management." The Company's principal market
risk exposure is to interest rates.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits Required by Item 601 of Regulation S-K are set forth below:
(2.1) Plan and Agreement to Merge, dated July 25, 2000, by and between
Shore Bancshares Inc., and Talbot Bancshares, Inc. is
incorporated by reference from the Company's Current Report on
Form 8-K, filed with the Commission on July 31, 2000.
(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 on April 20, 1999
and amended on July 25, 2000, are incorporated by reference from
the Company's Registration Statement on Form S-4 filed with the
Commission September 29, 2000 (Registration No. 333-46890).
(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 with the Commission on March 30, 2000
(Registration No.0- 22345).
(21) List of Subsidiaries is incorporated by reference from the
Company's Form 10, filed with the Commission on April 3, 1997,
and Form 10/A, filed with the Commission on May 30, 1997
(Registration No. 0-22523)
<PAGE>
(27) Financial Data Schedule for September 30, 2000 is filed
electronically here within via EDGAR.
B. Reports on Form 8-K
On July 31, 2000, a Current Report on Form 8-K was filed pursuant
to Items 5 and 7 announcing that Shore Bancshares, Inc. entered
into a Plan and Agreement to Merge (the "Merger Agreement") with
Talbot Bancshares, Inc, dated July 25, 2000, under which Talbot
Bancshares, Inc. will merge with and into Shore Bancshares, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Bank has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 8, 2000
SHORE BANCSHARES, INC.
/S/ DANIEL T. CANNON
--------------------
DANIEL T. CANNON
President
/S/ CAROL I. BROWNAWELL
-----------------------
CAROL I. BROWNAWELL, CPA
Treasurer
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