-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FGxg2O86bTcWRR9YzMionG4e+sY+dk//4zfwe87lEIy+nGKE/ScOtzx5vvdOSQZy SLyHFySkp0W7YAG9G+heHw== 0000909012-00-000364.txt : 20000515 0000909012-00-000364.hdr.sgml : 20000515 ACCESSION NUMBER: 0000909012-00-000364 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHORE BANCSHARES INC CENTRAL INDEX KEY: 0001035092 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 521974638 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22345 FILM NUMBER: 629556 BUSINESS ADDRESS: STREET 1: 109 NORTH COMMERCE ST CITY: CENTREVILLE STATE: MD ZIP: 21617-0400 BUSINESS PHONE: 4107581600 MAIL ADDRESS: STREET 1: P O BOX 400 CITY: CENTREVILLE STATE: MD ZIP: 21617-0400 10-Q 1 QUARTERLY REPORT 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 MARCH 31, 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 May 8, 2000, there were 1,914,132 shares of Common Stock $0.01 Par Value outstanding. This is the only class of outstanding shares. SHORE BANCSHARES, INC. FORM 10-Q INDEX PART I FINANCIAL INFORMATION - ------ --------------------- Item 1. Consolidated Financial Statements Balance Sheets -March 31, 2000 and December 31, 1999 Statements of Income -- Three months ended March 31, 2000 and 1999. Statements of Changes in Stockholders Equity - Three months ended March 31, 2000 and 1999 Statements of Cash Flows -- Three months ended March 31, 2000 and 1999 and the twelve months ended December 31, 1999. Notes to Financial Statements - March 31, 2000 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 - ---------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS SHORE BANCSHARES, INC. March 31, December 31, Dollars in thousands 2000 1999 (Unaudited) ----------- ----------- ASSETS Cash and due from banks $ 4,170 $ 3,345 Federal funds sold 461 971 Securities Held to Maturity at amortized cost 17,549 17,552 (fair value of $17,126 and $17,221 respectively) Available for Sale 32,410 33,385 Loans, less allowance for credit losses 129,757 125,767 ($1,233 and $1,248 respectively) Premises and fixed assets 3,419 3,465 Investments in unconsolidated subsidiaries 1,067 1,067 Accrued interest receivable 1,544 1,463 Goodwill 1,733 1,770 Other assets 2,206 2,363 ----------- ----------- TOTAL ASSETS $ 194,316 $ 191,148 =========== =========== LIABILITIES Deposits Non-interest bearing demand $ 18,409 $ 21,485 Interest bearing transaction 22,120 21,989 Savings and money market 38,004 38,342 Time, $100,000 or more 17,049 15,773 Other time 64,447 64,484 ----------- ----------- Total deposits 160,029 162,073 ----------- ----------- Securities sold under agreements to repurchase 5,367 590 Long term debt 5,000 5,000 Accrued interest payable 205 207 Other liabilities 942 675 ----------- ----------- 11,514 6,472 ----------- ----------- Total liabilities 171,543 168,545 ----------- ----------- COMMITMENTS EQUITY CAPITAL Common stock, par value $.01; authorized 10,000,000 shares, issued and outstanding: 3/31/00 1,913,910 12/31/99 1,913,891 19 19 Surplus 10,074 10,074 Retained earnings 13,326 13,117 Accumulated other comprehensive income (loss) (646) (607) ----------- ----------- Total stockholders' equity 22,773 22,603 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 194,316 $ 191,148 =========== =========== See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME SHORE BANCSHARES, INC. (UNAUDITED) Three Months Three Months Dollars in thousands except per share data Ended Ended March 31, March 31, 2000 1999 ------------------------------- INTEREST INCOME Interest and fees on loans $ 2,693 $ 2,323 Interest and dividends on investment securities Taxable securities 602 553 Tax-exempt securities 102 111 Other securities (debt and equity) 32 34 Interest on federal funds sold 11 114 ------------------------------- Total interest income 3,440 3,135 ------------------------------- INTEREST EXPENSE Interest on certificates of deposit of $100,000 or more 206 211 Interest on other deposits 1,232 1,219 Interest on securities sold under agreements to repurchase 58 -- Interest on long term debt 64 71 ------------------------------- Total interest expense 1,560 1,501 ------------------------------- NET INTEREST INCOME 1,880 1,634 Provision for credit losses -- -- ------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,880 1,634 ------------------------------- NONINTEREST INCOME Service charges on deposit accounts 203 190 Other noninterest income 60 66 Gains (losses) on securities (49) 42 ------------------------------- Total noninterest income 214 298 ------------------------------- NONINTEREST EXPENSE Salaries and employee benefits 681 656 Expenses of premises and fixed assets 168 139 Other noninterest expense 455 498 ------------------------------- Total noninterest expense 1,304 1,293 ------------------------------- INCOME BEFORE TAXES 790 639 Applicable income taxes 313 224 ------------------------------- NET INCOME $ 477 $ 415 =============================== Basic Earnings Per Common Share $ 0.25 $ 0.22 Diluted Earnings Per Common Share 0.25 0.22 Dividends Declared Per Common Share 0.14 0.13 See Notes to the Financial Statements
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 -------------------- ----- ------- -------- ------------- ----- Balance at January 1, 2000 $ 19 $ 10,074 $ 13,117 $ (607) $ 22,603 Comprehensive income: Net income -- -- 477 -- 477 Other comprehensive income, net of tax: Unrealized loss on available for sale securities, net of reclassification adjustment -- -- -- (39) (39) -------- Total comprehensive income 438 -------- Issuance of common stock upon exercise of stock options -- -- -- -- 0 Cash dividends declared ($.14 per common share) -- -- (268) -- (268) -------- -------- -------- -------- -------- Balance at March 31, 2000 $ 19 $ 10,074 $ 13,326 $ (646) $ 22,773 ======== ======== ======== ======== ======== Accumulated Other Common Retained Comprehensive Stock Surplus Earnings Income (Loss) Total ----- ------- -------- ------------- ----- Balance at January 1, 1999 $ 19 $ 10,064 $ 11,866 $ (45) $ 21,904 Comprehensive income: Net income -- -- 415 -- 415 Other comprehensive income, net of tax: Unrealized loss on available for sale securities, net of reclassification adjustment -- -- -- (131) (131) -------- Total comprehensive income 284 -------- Cash dividends declared ($.13 per common share) -- -- (249) -- (249) -------- -------- -------- -------- -------- Balance at March 31, 1999 $ 19 $ 10,064 $ 12,032 $ (176) $ 21,939 ======== ======== ======== ======== ======== See Notes to Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOW SHORE BANCSHARES, INC. (UNAUDITED) Three Months Three Months Ended Ended March 31, March 31, 2000 1999 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 477 $ 415 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 109 104 Equity in net earnings of unconsolidated subsidiaries -- -- Provision for credit losses, net (15) (88) Deferred income taxes -- (1) Net (gains) losses on sale of assets 49 (42) Changes in assets and liabilities: Increase in accrued interest receivable (81) (159) Decrease in other assets 182 25 Decrease in accrued interest payable (2) -- Increase in other liabilities 267 111 -------- -------- Net cash provided by operating activities 986 365 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities held to maturity -- 5,066 Proceeds from maturities of investment securities available for sale 1,021 3,023 Proceeds from sale of investment securities available-for-sale 2,950 2,032 Purchases of held-to-maturity securities -- (1,563) Purchases of available-for-sale securities (3,109) (13,246) Net increase in loans (3,975) (2,015) Purchase of premises and equipment (23) (80) -------- -------- Net cash used in investing activities (3,136) (6,783) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in demand, interest-bearing transaction, and savings deposits (3,283) 2,461 Increase in time deposits 1,239 2,082 Increase in securities repurchased 4,777 -- Common stock repurchased and retired -- -- Proceeds from issuance of common stock -- -- Cash dividends paid (268) (249) -------- -------- Net cash provided by financing activities 2,465 4,294 -------- -------- Net increase (decrease) in cash and cash equivalents 315 (2,124) Cash and cash equivalents, beginning of period 4,316 14,288 -------- -------- Cash and cash equivalents, end of period $ 4,631 $ 12,164 ======== ======== Supplementary cash flow information: Interest paid $ 1,440 $ 1,431 Income taxes paid $ 55 $ 185 Transfer from loans to other real estate owned $ -- $ -- All dollar amounts in thousands
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 three month period ended March 31, 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)
March 31, December 31, 2000 1999 ------------------------- 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 4 115 -------------------- 19 229 -------------------- RECOVERIES: Real Estate: Construction and land development 0 0 Commercial 0 0 Residential 0 0 Commercial 1 103 Consumer installment 3 25 -------------------- 4 128 -------------------- NET CHARGE-OFFS (RECOVERIES) 15 101 PROVISION FOR CREDIT LOSSES 0 0 -------------------- BALANCE AT END OF PERIOD $ 1,233 $ 1,248 ==================== Average daily balance of loans $128,960 $116,597 Ratio of net charge-offs to average loans outstanding 0.01% 0.09%
Note 3 - Long Term Debt As of December 31, 1999, the Company had a convertible advance from the Federal Home Loan Bank of Atlanta in the amount of $5,000,000 at an interest rate of 5.07%. The advance was called on March 30, 2000 . The interest at March 31, 2000 on the repriced advance was 6.29%, and 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 In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share, which became effective for the Company for reporting periods ending after December 31, 1998. Under the provisions of SFAS No. 128, primary and fully diluted earnings per share were replaced with basic diluted earnings per share in an effort to simplify the computation of these measures and align them more closely with the methodology used internationally. Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. The diluted earnings per share calculation method is arrived at by dividing net income by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding stock options and warrants. For purposes of comparability, the prior-period earnings per share data has been restated. Three Months Three Months Ending Ending March 31, 2000 March 31, 1999 ----------------------------- Basic: Net Income (applicable to common stock) $ 477,000 $ 415,000 Average common shares outstanding 1,913,904 1,913,516 Basic net income per share $ .25 $ .22 Diluted: Net income (applicable to common stock) $ 477,000 $ 415,000 Average common shares outstanding 1,913,904 1,913,516 Dilutive effect of stock options 0 228 ---------- ---------- Average common shares outstanding 1,913,904 1,913,744 Diluted net income per share $ .25 $ .22
AVERAGE BALANCES, YIELDS AND RATES YTD 3/31/00 YTD 3/31/99 Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ASSETS Interest Earning assets: Money market investments: Federal funds sold $ 751,165 $ 11,137 5.96% $ 9,612,944 $ 114,089 4.81% Investment Securities: U.S. Treasury securities and obligations of U.S. government agencies 38,953,913 601,838 6.21% 36,785,798 552,806 6.09% Obligations of States and political subdivisions 9,041,933 154,272 6.86% 9,719,450 167,804 7.00% All other investment securities 1,578,962 27,942 7.12% 1,682,452 29,311 7.07% Federal Reserve Bank stock 302,250 4,534 6.03% 302,250 4,534 6.08% ---------------------------------------- ---------------------------------------- Total investment securities 49,877,058 788,586 6.36% 48,489,950 754,455 6.31% Loans - net of unearned income Commercial loans 12,772,751 304,306 9.58% 9,844,620 225,210 9.28% Installment loans 6,887,559 157,997 9.23% 6,135,617 144,298 9.54% Mortgage loans 109,300,042 2,213,833 8.15% 95,835,591 1,933,737 8.18% ---------------------------------------- ---------------------------------------- Total loans 128,960,352 2,676,136 8.35% 111,815,828 2,303,245 8.35% ---------------------------------------- ---------------------------------------- TOTAL INTEREST EARNING ASSETS 179,588,575 $3,475,859 7.78% 169,918,722 $3,171,789 7.57% Cash and due from banks 3,259,841 3,762,271 Other assets 10,100,437 9,684,405 Allowance for loan and lease losses (1,234,565) (1,302,045) ---------------------------------------- ---------------------------------------- TOTAL ASSETS $191,714,288 $182,063,353 ======================================== ======================================== LIABILITIES Interest-bearing liabilities Other Borrowed Funds $ 5,361,270 $ 69,974 5.25% 5,000,000 70,750 5.74% Repurchase agreements 3,572,883 52,019 5.86% - - 0.00% Interest bearing checking 20,921,485 131,868 2.54% 19,044,017 126,285 2.69% Money market deposit accounts 18,848,836 148,691 3.17% 19,360,385 153,095 3.21% Time, $100,000 or more 13,828,172 180,074 5.24% 13,726,397 186,118 5.50% Other time deposits 50,975,420 646,058 5.10% 49,839,353 653,460 5.32% IRA deposits 15,563,055 195,085 5.04% 15,283,747 180,660 4.79% Savings deposits 18,843,599 136,455 2.91% 17,703,085 130,967 3.00% ---------------------------------------- ---------------------------------------- TOTAL INTEREST BEARING LIABILITIES 147,914,720 $1,560,224 4.24% 139,956,984 $1,501,335 4.35% Demand deposits 19,998,172 19,283,700 Other liabilities 1,162,568 963,728 ---------------------------------------- ---------------------------------------- Total liabilities 169,075,460 160,204,412 Stockholders' equity 22,638,828 21,858,941 ---------------------------------------- ---------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $191,714,288 $182,063,353 ======================================== ======================================== Net interest income & interest rate spread $1,915,635 3.54% $1,670,454 3.22% Net interest income as a % of earning assets 4.17% 3.85% ======================================== ======================================== 1. All amounts are reported on a tax equivalent basis computed using the statutory federal income tax rate of 34%, exclusive of the alternative minimum tax rate and non deductible interest expense. 2. Loan fee income is included in interest income for each loan category and yields are stated to include all fees. 3. Balances of nonaccrual loans and related income have been included for computational purposes.
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. 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 The Company reported $477 thousand in net income for the three months ended March 31, 2000 or $.25 diluted earnings per share compared to the three months ended March 31, 1999 net income of $415 thousand or $.22 diluted earnings per share. A $246 thousand increase in net interest income is the result an increasing interest rate spread and significant loan growth in the fourth quarter of 1999 which continued in the first quarter of 2000. The effects of the increasing interest rate environment continue to impact net income. The Company experienced growth in total assets of $3.2 million or 1.66% and total loans of $4.0 million or 3.13% since December 31, 1999. Average earning assets continue to grow and reflect an increase of 5.69% as of March 31, 2000 compared to the prior year. The growth in earning assets improved net interest income and reflects a 32 basis point increase in net interest margin compared to the end of the first quarter of 1999. Page 1 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 in the first three months of 2000 compared to the same period in 1999. Net interest income (on a tax equivalent basis) for March 31, 2000 increased $245 thousand or 14.68% compared to the three months ended March 31, 1999. The table titled "Average Balances, Yields and Rates" sets forth the major components of net interest income, on a tax equivalent basis, for March 31, 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 three months ended March 31, 2000 and 1999 was 3.54%, and 3.22%, respectively. The rising interest rate environment improved yield on average earning assets 21 basis points as reflected in increased yield variable rate assets, such federal funds sold and commercial prime rate loans, and the reinvestment, at an higher rate, the proceeds from investment securities sold. The yield of average interest bearing liabilities decreased 11 basis points as the impact of lower rates in 1999 is reflected in time deposits. The impact was a 32 basis point increase in interest rate spread. The 3.54% interest rate spread as of March 31, 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 of minimal deposit growth, the Company has used federal funds sold and relied on some federal funds borrowed and repurchase agreements to fund loan growth. The cost of borrowed funds is higher than core deposits. Loan rate increases late in 1999 and the first quarter of 2000 as well as loan growth of $13.1 million since September 30, 1999 at these improved rates, returned loan yield to 8.35%, (the same yield as March 31, 1999) compared to 8.29% as of September 30, 1999 and 8.33% as of December 31, 1999, and improved interest income (on a tax equivalent basis) $304 thousand or 9.59%. The average balances in each loan category have increased. Total average loans outstanding have grown $17.1 million since March 31, 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 quarter 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 repurchase agreements, at the end of the second quarter of 1999, is the primary reason for the increase in interest expense. Repurchase agreements accounted for the $52 of the $58 thousand additional interest expense as of March 31, 2000 compared to the same period in 1999, despite an 11 basis point reduced yield on interest bearing liabilities and a reduced yield in each deposit category. The effects of lowering deposit rates during 1998 and 1999 have reflected a lower yield on deposits of 4.24% as of March 31, 2000 compared to 4.35% for the same period in the prior year. Page 2 Net interest margin improved to 4.17% from 3.85% when comparing March 31, 2000 to March 31, 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 first quarter 2000 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 March 31, 2000 and 1999, the Company recorded net charge offs of $15 thousand and $88 thousand, respectively, 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 immaterial amount of net charge offs in 2000 and for the year ended December 31,1999. Gross charge offs as of March 31, 2000 amounted to $19 thousand, $92 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 $4 thousand were consumer installment loans. Efforts to collect charged off loans continue and of the $15 thousand charged off for commercial loans, the majority is expected to be recovered. Recoveries totaled $4 thousand in the first three months of 2000 and 1999 and $128 thousand for the year ended December 31, 1999. No provision for credit losses was charged to expense in 1999 nor to date in 2000. The allowance for credit losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's quarterly evaluation of the adequacy of the allowance is based on analysis of the loan portfolio and its known and inherent risks, assessment of current economic conditions, diversification and size of the portfolio, adequacy of the collateral, past and anticipated loss experience and the amount of non-performing loans. The allowance for credit losses has remained relatively unchanged despite the increase in outstanding loan balances. The allowance for credit losses of $1.2 million as of March 31, 2000 and December 31, 1999 represents .94% and .98%, respectively, of gross loans. The decrease in percentage of allowance to outstanding, despite the increasing outstanding gross loans, is justified by low levels of classified loans. Past due loan levels have increased slightly from year end but consist primarily of loans secured by real estate. Analysis by loan review supports adequacy of the allowance. In management's opinion, the allowance for credit losses is adequate as of March 31, 2000. See Note 2 in the Notes to Financial Statements. Page 3 NONINTEREST INCOME AND EXPENSE As of March 31, 2000 noninterest income reflects $84 thousand decrease compared to March 31, 1999 primarily from a $49 thousand loss on the sale of available for sale investment securities. 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 as of March 31, 2000 increased $11 thousand or .85% compared to the same period last year. Salaries and benefits increased as a result of the addition of 3 full time equivalent employees compared to the first quarter of 1999. Also increased pay rates and insurance premiums are reflected when comparing March 31, 2000 to March 31, 1999. Premise and fixed asset expenses increased $29 thousand as of March 31, 2000 compared to the same period in 1999 primarily as a result of the timing of payments on service contracts. 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 $50.0 million and $50.9 million as of March 31, 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 adequacy of the allowance for credit losses. These policies, coupled with continuous training efforts, have provided effective checks and balances for the Page 4 risk associated with the lending process. Total gross loans as of March 31, 2000 have grown approximately $4.0 million since December 31, 1999. Mortgage loans, primarily consumer mortgages, accounted for $2.8 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 March 31, 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 March 31, 2000 and December 31, 1999, $783 thousand and $1.0 million, respectively, of non-accrual loans were secured by collateral with an estimated value of $1.3 million as of March 31, 2000 and December 31, 1999. At March 31, 2000 the Bank had $394 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 March 31, 2000. DEPOSITS Deposit liabilities as of March 31, 2000 decreased 1.3% compared to December 31, 1999. The majority of the decrease or $2.8 million is in state and political 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 DEBT Long term debt 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. Page 5 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 first quarter of 2000 was the maturity of investment securities and deposit growth. A substantial portion of the investment portfolio contains readily marketable securities that could be converted to cash immediately. On the liability side of the balance sheet, liquidity is affected by the timing of maturing deposits and the ability to generate new deposits or borrowings as needed. Other sources 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 March 31, 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 $550 thousand if rates were to increase by that amount and net interest income would increase $504 thousand if rates would decline a similar amount. Page 6 CAPITAL RESOURCES AND ADEQUACY Total stockholders' equity increased $170 thousand to $22.8 million as of March 31, 2000 compared to $22.6 million as of December 31,1999. Earnings of $477 thousand added to shareholders' equity. Dividends paid reduced stockholders' equity $268 thousand as did the increase in unrealized loss in available for sale securities of $39 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 March 31, 2000 was 11.36% 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 March 31, 2000 was 19.52% 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 is currently reviewing the expansion plans. Branch completion dates are undecided. Upon completion of the branches, the opportunity cost of the funds invested in the branches, operating costs and depreciation expense would have an impact on earnings in the short term until the long term growth of the branch improves profitability. Management knows of no other trend or event, which will have a material impact on capital. FUTURE TRENDS This is a Year 2000 Readiness Disclosure under the Year 2000 Information and Readiness Disclosure Act of 1998. The "Year 2000 Issue," which 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. Page 7 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. Therefore Management continues to monitor all business processes to ensure they continue to operate properly. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding the market risk of the Company's financial instruments, see "Management Discussion and Analysis of Results of Operation and Financial Condition - Market Risk Management." The Company's principal market risk exposure is to interest rates. Page 8 PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K A. Exhibits Required by Item 601 of Regulation S-K are set forth below: (3) Charter and Bylaws (3.1) Articles of Amendment and Restatement of the Company are incorporated by reference from the Company's June 30, 1998 Form 10-Q, filed with the Commission on August 13, 1998. (3.2) Bylaws of the Company as amended and restated are incorporated by reference from the Company's June 30, 1998 Form 10Q filed with the commission August 13, 1998. (10.1) 1998 Employee Stock Purchase Plan is incorporated by reference from the Company's Registration Statement on Form S-8 filed with the Commission on September 25, 1998 (Registration No. 333-64317). (10.2) 1998 Stock Option Plan is incorporated by reference from the Company's Registration Statement on Form S-8 filed with the Commission on September 25, 1998 (Registration No. 333-64319). (13) 1999 Annual Report filed 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 March 31, 2000 is filed electronically here within via EDGAR. B. Reports on Form 8-K None 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: May 11, 2000 SHORE BANCSHARES, INC. /S/ DANIEL T. CANNON -------------------- DANIEL T. CANNON President /S/ CAROL I. BROWNAWELL ----------------------- CAROL I. BROWNAWELL Treasurer EX-27 2 FINANCIAL DATA SCHEDULE
9 DEC-31-2000 DEC-31-2000 3-MOS 4,170 0 461 0 32,410 17,549 17,126 130,990 1,233 194,316 160,029 5,367 1,147 5,000 19 0 0 22,754 194,316 2,693 736 11 3,440 1,438 1,560 1,880 0 0 1,304 790 790 0 0 477 .25 .25 4.17 783 394 274 2,942 1,248 19 4 1,233 1,233 0 17
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