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 JUNE 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 August 8, 2000, there were 1,914,164 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 -June 30, 2000 and December 31, 1999
Statements of Income -Three months and six months ended June 30, 2000
and 1999.
Statements of Changes in Stockholders' Equity - Six months ended June
30, 2000 and 1999
Statements of Cash Flows -- Six months ended June 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
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SHORE BANCSHARES, INC.
June 30, December 31,
Dollars in thousands 2000 1999
(Unaudited)
---------- ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 4,893 $ 3,345
Federal funds sold 5,097 971
Securities:
Held to Maturity, at amortized cost 17,061 17,552
(fair value of $16,669 and $17,221 respectively)
Available for Sale 32,406 33,385
Loans, less allowance for credit losses 131,386 125,767
($1,283 and $1,248 respectively)
Premises and fixed assets 4,013 3,465
Investments in unconsolidated subsidiaries 1,057 1,067
Accrued interest receivable 1,609 1,463
Goodwill 1,696 1,770
Other assets 2,193 2,363
--------- ---------
TOTAL ASSETS $ 201,411 $ 191,148
========= =========
LIABILITIES
Deposits:
Non-interest bearing demand $ 21,171 $ 21,485
Interest bearing transaction 23,814 21,989
Savings and money market 39,378 38,342
Time, $100,000 or more 17,963 15,773
Other time 63,972 64,484
--------- ---------
Total deposits 166,298 162,073
--------- ---------
Securities sold under agreements to repurchase 799 590
Short-term borrowings 5,000 --
Long-term borrowings 5,000 5,000
Accrued interest payable 207 207
Other liabilities 745 675
--------- ---------
11,751 6,472
--------- ---------
Total liabilities 178,049 168,545
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; authorized
10,000,000 shares, issued and outstanding:
6/30/00 1,914,132
12/31/99 1,913,891 19 19
Surplus 10,078 10,074
Retained earnings 13,883 13,117
Accumulated other comprehensive income (loss) (618) (607)
--------- ---------
Total stockholders' equity 23,362 22,603
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 201,411 $ 191,148
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
SHORE BANCSHARES, INC.
(UNAUDITED) Three Months Six Months Three Months Six Months
Dollars in thousands except per share data Ending Ending Ending Ending
June 30, June 30, June 30, June 30,
2000 2000 1999 1999
--------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Interest and fee income on loans $ 2,924 $ 5,617 $ 2,401 $ 4,724
Interest and dividends on securities
Taxable securities 641 1,275 610 1,197
Tax-exempt securities 100 202 113 224
Interest on federal funds sold 8 19 98 212
--------------------------------------------------------------------------
Total interest income 3,673 7,113 3,222 6,357
--------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on certificates of deposit
of $100,000 or more 241 447 204 415
Interest on other deposits 1,242 2,474 1,252 2,471
Interest on short term borrowings 88 146 1 1
Interest on long borrowings 85 149 71 142
--------------------------------------------------------------------------
Total interest expense 1,656 3,216 1,528 3,029
--------------------------------------------------------------------------
NET INTEREST INCOME 2,017 3,897 1,694 3,328
Provision for credit losses 34 34 - -
--------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,983 3,863 1,694 3,328
--------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 226 429 210 400
Gains (losses) on securities - (49) - 42
Other noninterest income 59 119 78 144
--------------------------------------------------------------------------
Total noninterest income 285 499 288 586
--------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 562 1,243 547 1,203
Expenses of premises and fixed assets 104 272 145 284
Other noninterest expense 389 844 336 834
--------------------------------------------------------------------------
Total noninterest expense 1,055 2,359 1,028 2,321
--------------------------------------------------------------------------
INCOME BEFORE TAXES 1,213 2,003 954 1,593
Applicable income taxes 389 702 302 526
--------------------------------------------------------------------------
NET INCOME $ 824 $ 1,301 $ 652 $ 1,067
==========================================================================
Basic Earnings Per Common Share $ 0.43 $ 0.68 $ 0.34 $ 0.58
Diluted Earnings Per Common Share 0.43 0.68 0.34 0.56
Dividends Declared Per Common Share 0.14 0.28 0.13 0.26
</TABLE>
See Notes to the Consolidated Financial Statements
<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> <C>
Balances at January 1, 2000 $ 19 $ 10,074 $ 13,117 $ (607) $ 22,603
Comprehensive income:
Net income 1,301 1,301
Other comprehensive income, net of tax:
Unrealized loss on available for sale
securities, net of reclassification adjustment (11) (11)
-----------
Total comprehensive income 1,290
-----------
Issuance of common stock upon
exercise of stock options 4 4
Cash dividends declared ($.28 per
common share) (535) (535)
------------- ------------- --------------- -------------- -----------
Balances at June 30, 2000 $ 19 $ 10,078 $ 13,883 $ (618) $ 23,362
============= ============= =============== ============== ===========
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 1,067 1,067
Other comprehensive income, net of tax:
Unrealized loss on available for sale
securities, net of reclassification adjustment (367) (367)
-----------
Total comprehensive income 700
-----------
Issuance of common stock upon
exercise of stock options 7 7
Cash dividends declared ($.26 per
common share) (498) (498)
------------- ------------- --------------- -------------- -----------
Balances at June 30, 1999 $ 19 $ 10,071 $ 12,435 $ (412) $ 22,113
============= ============= =============== ============== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SHORE BANCSHARES, INC.
(UNAUDITED)
Six Months Six Months
Ended Ended
June 30, June 30,
2000 1999
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,301 $ 1,067
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 216 217
Provision for credit losses, net 35 (113)
Deferred income taxes (1) 7
Net (gains) losses on sale of securities 49 (42)
Changes in assets and liabilities:
Increase in accrued interest receivable (146) (185)
(Increase) decrease in other assets 189 (225)
Decrease in accrued interest payable - (6)
Increase in other liabilities 70 78
-------------------- --------------------
Net cash provided by operating activities 1,713 798
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 484 6,856
Proceeds from maturities of investment securities available for sale 1,073 3,550
Proceeds from sale of investment securities available for sale 2,950 2,085
Purchases of held to maturity securities - (1,565)
Purchases of available for sale securities (3,109) (15,743)
Net increase in loans (5,654) (4,649)
Purchase of premises and equipment (686) (154)
-------------------- --------------------
Net cash used in investing activities (4,942) (9,620)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in demand, interest-bearing
transaction, and savings deposits 2,547 2,454
Increase in time deposits 1,678 4,135
Increase in securities repurchased 209 1,391
Increase in short-term borrowings 5,000 -
Proceeds from issuance of common stock 4 7
Cash dividends paid (535) (498)
-------------------- --------------------
Net cash provided by financing activities 8,903 7,489
-------------------- --------------------
Net increase (decrease) in cash and
cash equivalents 5,674 (1,333)
Cash and cash equivalents, beginning of period 4,316 14,288
-------------------- --------------------
Cash and cash equivalents, end of period $ 9,990 $ 12,955
==================== ====================
Supplementary cash flow information:
Interest paid $ 2,922 $ 2,892
Income taxes paid $ 383 $ 422
Transfer from loans to other real estate owned $ - $ -
All dollar amounts in thousands
</TABLE>
<PAGE>
Note 1 - Financial Information
The unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 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 six month period ended June 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.
<PAGE>
<TABLE>
<CAPTION>
Note 2 - Analysis of the Allowance for Credit Losses
(In Thousands)
June 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 15 110
Consumer installment 10 115
-------------------------------------
25 229
-------------------------------------
Recoveries:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 10 0
Commercial 9 103
Consumer installment 7 25
-------------------------------------
26 128
-------------------------------------
Net charge-offs (recoveries) (1) 101
Provision for credit losses 34 0
-------------------------------------
Balance at end of period $1,283 $1,248
=====================================
Average daily balance of loans $131,247 $116,597
Ratio of net charge-offs to average loans outstanding 0.00% 0.09%
</TABLE>
<PAGE>
Note 3 - Long and Short-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
at March 31, 2000 on the repriced advance was 6.29%, and is adjustable
quarterly.
On June 26, 2000, the Company borrowed $5,000,000 from the FHLB which
matures June 26, 2001. The interest rate adjusts daily and the advance is
repayable at anytime.
The Bank has pledged its wholly owned residential first mortgage loan
portfolio under a blanket floating lien as collateral for both advances.
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 Six Months
Ending Ending
June 30, 2000 June 30, 2000
-------------------------- ------------------------
Basic:
<S> <C> <C>
Net Income (applicable to common stock) $ 824,000 $ 1,301,000
Average common shares outstanding 1,914,067 1,913,986
Basic net income per share $ .43 $ .68
Diluted
Net income (applicable to common stock) $ 824,000 $ 1,301,000
Average common shares outstanding 1,914,067 1,913,986
Dilutive effect of stock options 0 0
-------------------------- ------------------------
Average common shares outstanding 1,914,067 1,913,986
Diluted net income per share $ .43 $ .68
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ending Ending
June 30, 1999 June 30, 1999
-------------------- ------------------
Basic:
<S> <C> <C>
Net Income (applicable to common stock) $ 652,000 $ 1,067,000
Average common shares outstanding 1,913,703 1,913,610
Basic net income per share $ .34 $ .58
Diluted
Net income (applicable to common stock) $ 652,000 $ 1,067,000
Average common shares outstanding 1,913,703 1,913,610
Dilutive effect of stock options 127 123
-------------------- ------------------
Average common shares outstanding 1,913,830 1,913,733
Diluted net income per share $ .34 $ .56
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, YIELDS AND RATES
Six Months Ending Six Months Ending
June 30, 2000 June 30, 1999
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest Earning assets:
Federal funds sold $ 555,800 $ 18,613 6.73% $ 9,002,283 $ 212,007 4.75%
Investment Securities:
U.S. Treasury securities
and obligations of U.S.
government agencies 38,926,410 1,207,807 6.24% 38,037,573 1,129,954 5.99%
Obligations of States and
political subdivisions 8,960,367 305,817 6.86% 9,793,041 339,027 6.98%
All other investment securities 1,608,188 58,268 7.29% 1,654,386 57,855 7.05%
Federal Reserve Bank stock 302,250 9,068 6.03% 302,250 9,067 6.05%
------------------------------------- -------------------------------------
Total investment securities 49,797,215 1,580,960 6.38% 49,787,250 1,535,903 6.22%
Loans - net of unearned income
Commercial loans 12,907,477 640,830 9.98% 10,464,963 480,003 9.25%
Installment loans 6,998,939 320,060 9.20% 6,227,092 292,235 9.46%
Mortgage loans 111,340,337 4,587,951 8.29% 96,522,721 3,896,270 8.14%
------------------------------------- -------------------------------------
Total loans 131,246,753 5,548,841 8.50% 113,214,776 4,668,508 8.32%
------------------------------------- -------------------------------------
TOTAL INTEREST EARNING ASSETS 181,599,768 $7,148,414 7.92% 172,004,309 $6,416,418 7.52%
Cash and due from banks 3,549,373 3,858,332
Other assets 10,212,439 9,697,312
Allowance for loan and lease losses (1,234,209) (1,274,372)
------------------------------------- -------------------------------------
TOTAL ASSETS $194,127,371 $184,285,581
===================================== ======================================
LIABILITIES
Interest-bearing liabilities
Other Borrowed Funds $ 5,639,289 $ 165,123 5.89% 5,000,000 142,286 5.74%
Repurchase agreements 4,255,016 129,569 6.12% 88,686 1,074 2.44%
Interest bearing checking 21,393,641 265,384 2.49% 19,500,775 253,954 2.63%
Money market deposit accounts 18,398,539 290,013 3.17% 19,303,640 305,631 3.19%
Time, $100,000 or more 14,598,290 392,080 5.40% 13,670,474 366,194 5.40%
Other time deposits 50,742,122 1,298,419 5.15% 50,805,223 1,329,340 5.28%
IRA deposits 15,628,793 401,872 5.17% 15,377,732 365,650 4.79%
Savings deposits 18,922,296 274,137 2.91% 17,908,362 264,821 2.98%
------------------------------------- -------------------------------------
TOTAL INTEREST BEARING LIABILITIES 149,577,986 $3,216,597 4.32% 141,654,892 $3,028,950 4.31%
Demand deposits 20,576,383 19,677,497
Other liabilities 1,137,418 977,873
------------------------------------- -------------------------------------
Total liabilities 171,291,787 162,310,262
Stockholders' equity 22,835,584 21,975,319
------------------------------------- -------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $194,127,371 $184,285,581
===================================== ======================================
Net interest income & interest rate spread $3,931,817 3.60% $3,387,468 3.21%
Net interest income as a % of earning assets 4.35% 3.96%
===================================== ======================================
<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>
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion is designed to provide a better
understanding of the financial position of Shore Bancshares, Inc., and should be
read in conjunction with the December 31, 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 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 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 21.93% in the first six months of 2000 compared
to the same six months in 1999. The Company reported $1.3 million in net income
for the six months ended June 30, 2000 or $.68 diluted earnings per share
compared to the six months ended June 30, 1999 net income of $1.1 million or
$.56 diluted earnings per share. A $569 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 six 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 $10.3
million or 5.37% and total loans of $5.6 million or 4.45% 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 5.58% as of June 30,
2000 compared to the prior year. The growth in earning assets improved net
interest income and reflects a 39 basis point increase in net interest margin
compared to the end of the second quarter of 1999. The average balance of loans
increased $18.0 million or 15.93% to 131.2 million as of June 30, 2000 compared
to one year ago. Average demand deposits and interest bearing liabilities
increased $8.8 million or 5.47% to $170.1 million as of June 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 $544 thousand or
16.07% in the first six months of 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 June 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 six months ended June 30,
2000 and 1999 was 3.60%, and 3.21%, respectively. The rising interest rate
environment improved yield on average earning assets 40 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. Deposit rate increases were slower
to impact the rate spread as noted by a yield on average interest bearing
liabilities that remained unchanged. The overall impact was a 39 basis point
increase in interest rate spread. The 3.60% interest rate spread as of June 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 experienced no
calls of investment securities in 2000. Because deposits have grown at a more
moderate rate as 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 that of core deposits. Loan rate increases late in 1999 and the first six
months of 2000 as well as loan growth of $16.8 million since June 30, 1999 at
these higher rates, improved loan yield to 8.50%, compared to 8.32% as of June
30, 1999 and 8.33% as of December 31, 1999, and improved total interest revenue
(on a tax equivalent basis) $732 thousand or 11.41%. The average balances in
each loan category have increased and total average loans outstanding have grown
$18.0 million since June 30, 1999. Volume increases have improved interest
income when comparing the first quarters of 2000 and 1999. 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 increasing interest rate environment 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. The
addition of customer repurchase agreements, at the end of the second quarter of
1999 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 $151 thousand of
the $187 thousand additional interest expense as of June 30, 2000 compared to
the same period in 1999. However, an increase in yield on interest bearing
liabilities was limited to 1 basis point as a result of reduced yield in most
deposit categories.
Page 2
<PAGE>
Net interest margin improved to 4.35% from 3.96% when comparing June
30, 2000 to June 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
As of June 30, 2000, the Company recorded net recoveries of $1
thousand and as of June 30, 1999 net charge offs of $113 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 in 2000 and for the year
ended December 31,1999.
Gross charge offs as of June 30, 2000 amounted to $25 thousand, $122
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 the remaining $10 thousand were consumer installment loans. Efforts to
collect charged off loans continue to be successful. Recoveries totaled $26
thousand and $9 thousand, respectively, in the first six months of 2000 and 1999
and $128 thousand for the year ended December 31, 1999.
A $34 thousand provision for credit losses was recorded for the six
months ended June 30, 2000. 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 June
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 have decreased
slightly from year end and consist primarily of loans secured by real estate.
The loan portfolio consists of 84.4% loans secured by real estate, 10.1%
commercial loans and 5.5% installment loans. Analysis by loan review supports
adequacy of the allowance. In management's opinion, the allowance for credit
losses is adequate as of June 30, 2000.
See Note 2 in the Notes to Financial Statements.
Page 3
<PAGE>
NONINTEREST INCOME AND EXPENSE
As of June 30, 2000, noninterest income reflects an $87 thousand
decrease compared to June 30, 1999 primarily from a $49 thousand loss on the
sale of available for sale investment securities compared to a $42 thousand gain
as of June 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.
Noninterest expense, excluding taxes and provision for loan losses as
of June 30, 2000 increased $38 thousand or 1.64% compared to the same period
last year. Salaries and benefits increased 3.32% compared to the six months of
1999 which reflects increased pay rates and insurance premiums. Premise and
fixed asset expenses decreased $12 thousand as of June 30, 2000 compared to the
same period in 1999 and was offset by a $10 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 $49.5 million and $50.9
million as of June 30, 2000 and December 31, 2000, 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
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adequacy of the allowance for credit losses. These policies, coupled with
continuous training efforts, have provided effective checks and balances for the
risk associated with the lending process. Total gross loans as of June 30, 2000
have grown approximately $5.6 million since December 31, 1999. Residential and
commercial mortgage loans, accounted for approximately $4.9 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 June 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. At June 30, 2000 and December 31, 1999, $201
thousand and $1.0 million, respectively, of non-accrual loans were secured by
collateral with an estimated value of $241 thousand and $1.3 million,
respectively. At June 30, 2000, the Bank had $276 thousand in loans 90 days or
more past due and still accruing interest and loans classified as impaired were
$274 thousand. These loans are subject to on going management attention and
their classifications are reviewed regularly. The Company had no "other real
estate owned" at June 30, 2000.
DEPOSITS
Deposit liabilities as of June 30, 2000 increased 2.6% compared to
December 31, 1999. The majority of the increase or $6.1 million is business
deposits. Interest bearing transaction accounts reflect approximately $782
thousand in Club checking accounts which were transferred from noninterest
bearing demand deposits as a result of a product feature change. The Company
continues to experience strong competition from other commercial banks, credit
unions, the stock market and mutual funds. The Company has no foreign banking
offices.
LONG-TERM 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.
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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 second 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 June 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 $566 thousand if
rates were to increase by that amount and net interest income would increase
$507 thousand if rates would decline a similar amount.
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CAPITAL RESOURCES AND ADEQUACY
Total stockholders' equity increased $759 thousand to $23.4 million
as of June 30, 2000 compared to $22.6 million as of December 31,1999. Earnings
of $1.3 million added to shareholders' equity. Dividends paid reduced
stockholders' equity $535 thousand as did the increase in unrealized loss in
available for sale securities of $11 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 June 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
June 30, 2000 was 19.27% 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 have 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.
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
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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.
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
The following matters were submitted to and approved by stockholders
through the solicitation of proxies or otherwise, at the Annual
Meeting of Stockholders held on April 18, 2000:
(a) The following persons were elected as Class I Directors of the
Company until the 2003 Annual Meeting. The results were as
follows:
AFFIRMATIVE NEGATIVE
VOTES VOTES
----- -----
Thomas K. Helfenbein 1,478,971 6,154
Susanne K. Nuttle 1,478,451 6,674
William Maurice Sanger 1,475,215 9,910
(b) Stegman and Company, P.A. were appointed to serve as the Company's
independent auditors for the fiscal year ending December 31, 2000.
Affirmative Votes Cast: 1,464,659
Negative Votes Cast: 9,166
Abstained: 12,436
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 are
incorporated by reference from the Company's June 30, 1998
Form 10Q filed with the commission August 13, 1998.
<PAGE>
(10.1) 1998 Employee Stock Purchase Plan is incorporated by
reference from the Company's Registration Statement on Form
S-8 filed with the 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)
(27) Financial Data Schedule for June 30, 2000 is filed
electronically here within via EDGAR.
B. Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Bank has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 8, 2000
SHORE BANCSHARES, INC.
/S/ DANIEL T. CANNON
------------------------
DANIEL T. CANNON
President
/S/ CAROL I. BROWNAWELL
------------------------
CAROL I. BROWNAWELL
Treasurer
