-----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, VpPBqezMoYyRLDsKpiqxHkrRubHNC+b5KsaFMWa0VCcZZ5KsJGom5KxR3/ceSpP/ 26unUFplDgBLO1oYJQnhtQ== 0000950169-97-001026.txt : 19971117 0000950169-97-001026.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950169-97-001026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE 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: 97721760 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 SHORE BANCSHARES, INC. 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, 1997 ------------------------------ 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 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 7, 1997, there were 1,007,424 shares of Common Stock outstanding. This is the only class of outstanding shares. SHORE BANCSHARES, INC. FORM 10-Q INDEX PART I FINANCIAL INFORMATION - ----------------------------- Item 1. Financial Statements (Unaudited) Balance Sheets --September 30, 1997 and December 31, 1996 Statements of Income -- Three months ended September 30, 1997 and 1996 and the nine months ended September 30, 1997 and 1996. Statements of Cash Flows -- Nine months ended September 30, 1997 and 1996 and the twelve months ended December 31, 1996 Notes to Financial Statements - September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings Item 2. Changes in Securities 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 1 FINANCIAL INFORMATION Item 1. Financial Information CONSOLIDATED BALANCE SHEETS SHORE BANCSHARES, INC.
September 30, Dollars in thousands 1997 December 31, (Unaudited) 1996 --------- --------- ASSETS Cash and due from banks $ 6,895 $ 4,873 Federal funds sold 9,668 5,390 Securities (Note 2) Held to Maturity 35,836 32,462 Available for Sale 9,533 11,191 Loans, less allowance for credit losses (Note 3 & 4) 107,687 87,389 Premises and fixed assets 3,217 2,153 Other real estate owned -- -- Investments in unconsolidated subsidiaries 1,098 1,114 Accrued interest receivable 1,431 1,385 Net deferred tax assets and other assets 4,120 942 --------- --------- TOTAL ASSETS $ 179,485 $ 146,899 ========= ========= LIABILITIES Deposits Non-interest bearing demand $ 16,808 $ 16,381 Interest bearing transaction 19,636 16,172 Savings and money market 41,591 31,799 Time, $100,000 or more 14,553 16,680 Other time 57,695 43,134 --------- --------- Total deposits 150,283 124,166 --------- --------- Other borrowed funds (Note 5) 5,000 -- Accrued interest payable 182 158 Other liabilities 963 480 --------- --------- 6,145 638 --------- --------- Total liabilities 156,428 124,804 --------- --------- COMMITMENTS EQUITY CAPITAL Common stock, par value $.01; authorized 10,000,000 shares, issued and outstanding 1,007,424 shares 10 10 Surplus 10,064 10,064 Retained earnings 13,031 12,086 Net unrealized holding gains (losses) on available for sale securities (48) (65) --------- --------- Total stockholders' equity 23,057 22,095 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 179,485 $ 146,899 ========= =========
See Notes to Financial Statements CONSOLIDATED STATEMENTS OF INCOME SHORE BANCSHARES, INC.
(UNAUDITED) Quarter Nine Months Quarter Nine Months Dollars in thousands except per share data Ended Ended Ended Ended September 30, September 30, September 30, September 30, 1997 1997 1996 1996 ---------------------------------------------------------------------- INTEREST INCOME Interest and fee income on loans $ 2,503 $ 6,903 $ 2,049 $ 6,074 Interest and dividends on investment securities Taxable securities 584 1,667 443 1,288 Tax-exempt securities 99 311 103 320 Interest on federal funds sold 89 225 87 260 ---------------------------------------------------------------------- Total interest income 3,275 9,106 2,682 7,942 ---------------------------------------------------------------------- INTEREST EXPENSE Interest on certificates of deposit of $100,000 or more 189 599 153 483 Interest on other deposits 1,215 3,339 962 2,813 Interest on borrowed funds - - - - ---------------------------------------------------------------------- Total interest expense 1,404 3,938 1,115 3,296 ---------------------------------------------------------------------- NET INTEREST INCOME 1,871 5,168 1,567 4,646 Provision for credit losses (Note 7) - - - - ---------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,871 5,168 1,567 4,646 ---------------------------------------------------------------------- NONINTEREST INCOME Service charges on deposit accounts 165 494 162 476 Other noninterest income 21 82 48 112 Gains (losses) on securities - 8 - 204 ---------------------------------------------------------------------- Total noninterest income 186 584 210 792 ---------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits 555 1,613 470 1,403 Expenses of premises and fixed assets 178 443 158 428 Other noninterest expense 331 1,182 271 972 ---------------------------------------------------------------------- Total noninterest expense 1,064 3,238 899 2,803 ---------------------------------------------------------------------- INCOME BEFORE TAXES 993 2,514 878 2,635 Applicable income taxes 338 874 310 880 ---------------------------------------------------------------------- NET INCOME $ 655 $ 1,640 $ 568 $ 1,755 ====================================================================== Net Income Per Share $0.65 $ 1.63 $ 0.56 $ 1.74 Number of Shares Outstanding 1,007,424 1,007,424 1,007,424 1,007,424
See Notes to the Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOW SHORE BANCSHARES, INC. (UNAUDITED)
Nine Months Year Nine Months Ended Ended Ended September 30, December 31, September 30, 1997 1996 1996 ----------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES . Net income $ 1,640 $ 2,308 $ 1,755 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 178 296 187 Equity in net earnings of unconsolidated subsidiaries - (26) - Provision for credit losses, net (102) 25 (2) Deferred income tax benefits (4) 60 - Net (gains) losses on disposal of assets (8) (205) (204) Changes in assets and liabilities: (Increase) decrease in accrued interest receivable (46) (49) 84 (Increase) decrease in other assets (915) 34 94 Increase (decrease) in interest payable 24 7 (8) Increase (decrease) in other liabilities 95 (141) (105) ----------------------------------------------------------- Net cash provided by operating activities 862 2,309 1,801 ----------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale or maturities of held-to-maturity securities 8,140 11,529 9,086 Proceeds from sale or maturities of available-for-sale securities 9,458 957 954 (Purchases) of held-to-maturity securities (11,443) (11,034) (5,528) (Purchases) of available-for-securities (6,647) (7,988) (3,457) Net (increase) decrease in loans 110 (1,963) (3,601) Purchase of premises and equipment (1,108) (211) (197) Proceeds from sale of premises and equipment - 7 - Investment in unconsolidated subsidary - (15) - Purchase of Kent S&L Assoc, net of cash acquired (2,799) - - Acquire other real estate - - (109) Proceeds from sales of other real estate 63 118 - ----------------------------------------------------------- Net cash provided by (used in) investing activities (4,226) (8,600) (2,852) ----------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand, interest- bearing transaction, and savings deposits 6,354 2,928 3,377 Net increase (decrease) in time deposits (995) 4,758 1,512 Other borrowed funds 5,000 - - Cash dividends paid (695) (926) (534) ----------------------------------------------------------- Net cash provided by (used in) financing activities 9,664 6,760 4,355 ----------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 6,300 469 3,304 Cash and cash equivalents, beginning 10,263 9,794 9,794 ----------------------------------------------------------- Cash and cash equivalents, ending $ 16,563 $ 10,263 $ 13,098 =========================================================== Supplementary cash flow information: Interest paid $ 3,774 $ 4,469 $ 3,304 Income taxes paid $ 534 $ 1,100 $ 840
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 10Q. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. Operating results for the nine month period ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the audited consolidated financial statements and footnotes included in the 1996 Annual Report to Shareholders and Form 10. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SECURITIES (UNAUDITED)
September 30, 1997 ------------------------------------------------------ Held-to-Maturity Available-for-Sale Amortized Fair Amortized Fair Cost Value Cost Value ------------------------------------------------------ U.S. Treasury securities $ 6,961 $ 6,995 U.S. Government agency and corporation obligations issued by U.S.Government sponsored $ 26,898 $ 26,903 100 100 agencies Securities issued by states and political subdivisions in the U.S. a. General obligations 8,509 8,633 b. Revenue obligations 405 421 Mortgage-backed securities 24 27 393 402 Equity Securities a. Investments in Mutual Funds 1,089 968 b. Other equity securites with readily determinable fair values c. All other equity securities 1,068 1,068 ------------------------------------------------------ TOTAL SECURITIES $ 35,836 $ 35,984 $ 9,611 $ 9,533 ====================================================== PLEDGED SECURITIES $19,520 =============
All dollar amounts in thousands
December 31, 1996 ----------------------------------------------------- Held-to-Maturity Available-for-Sale Amortized Fair Amortized Fair Cost Value Cost Value ----------------------------------------------------- U.S. Treasury securities $ 9,434 $ 9,458 U.S. Government agency and corporation obligations issued by U.S.Government sponsored $ 23,035 $ 23,057 agencies Securities issued by states and political subdivisions in the U.S. a. General obligations 8,892 9,030 b. Revenue obligations 505 527 Mortgage-backed securities 30 34 Equity Securities a. Investments in Mutual Funds 1,000 870 b. Other equity securites with readily determinable fair values c. All other equity securities 863 863 ----------------------------------------------------- TOTAL SECURITIES $ 32,462 $ 32,648 $ 11,297 $ 11,191 ===================================================== PLEDGED SECURITIES $19,566 ==============
All dollar amounts in thousands NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE - 3 LOANS AND LEASE FINANCING RECEIVABLES (UNAUDITED)
September 30, December 31 1997 1996 ------------------- ------------------- Loans secured by real estate a. Construction and land development $ 2,590 $ 3,264 b. Secured by farmland (including farm residential and other improvements) 4,884 3,877 c. Secured by 1-4 family residential properties 1. Revolving, open end loans 1,531 984 2. All others (a) Secured by first liens 69,207 52,793 (b) Secured by junior liens 3,788 2,836 d. Secured by multi-family (5 or more) residential properties e. Secured by nonfarm nonresidential properties 12,566 10,908 Loans to depository institutions a. In commercial banks in the U. S. b. To other depository institutions in the U. S. c. To banks in foreign countries Loans to finance agricultural production and other loans to farmers 1,696 1,410 Commercial and industrial loans a. To U. S. addressees (domicile) 6,492 6,329 Acceptances of other banks Loans to individuals for household, family, and other personal expenditures (includes purchased paper) a. Credit card and related plans 74 75 b. Other 6,384 6,555 Loans to foreign governments and official institutions (including foreign central banks) Obligations (other than securities) of states and political subdivisions in the U. S. 20 27 Other loans a. Loans for purchasing or carrying securities (secured and unsecured) b. All other loans 44 48 Less any unearned income on loans 173 214 ------------------- ------------------- Total loans and leases, net of unearned income 109,103 88,892 Less allowance for loan and lease losses 1,416 1,503 ------------------- ------------------- Total loans and leases, net of unearned income and allowance for loan and lease losses $ 107,687 $ 87,389 =================== ===================
All dollar amounts in thousands NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE - 4 CHARGE OFFS AND RECOVERIES AND CHANGE IN ALLOWANCE FOR LOAN AND LEASE LOSSES (UNAUDITED) I. CHARGE-OFFS AND RECOVERIES ON LOANS AND LEASES
Septemer 30, 1997 December 31, 1996 Charge-offs Recoveries Charge-offs Recoveries ---------------------------------- ---------------------------------- 1. Real estate loans $ 22 $ - $ 10 $ 10 2. Installment loans 83 37 63 26 3. Credit cards and related plans 4. Commercial (time and demand) and all other loans 37 3 5 67 ---------------------------------- ---------------------------------- 6. Total $ 142 $ 40 $ 78 $ 103 ================================== ================================== II. CHANGES IN ALLOWANCE FOR LOAN AND LEASE LOSSES 1. Balance at end of previous period $ 1,503 $ 1,478 2. Recoveries 40 103 3. Charge-offs (142) (78) 4. Provision for loan and lease losses - - 5. Adjustments 15 -------------------- --------------------- 6. Balance at end of current period $ 1,416 $ 1,503 ==================== ===================== 7. Net charge-offs (recoveries) $ 102 ($ 25) 8. Average daily loan balance 102,166 87,803 9. Ratio-net of charge offs to average loans outstanding 0.10% 0.03%
All dollar amounts in thousands Note 5 - Other Borrowed Funds As of September 30, 1997, the Bank had received a convertible advance from the Federal Home Loan Bank in the amount of $5,000,000 at an interest rate of 5.66% which is due September 24, 2002. The Bank has pledged mortgage loans as collateral on this advance.
Average Balances, Yields and Rates YTD 9/30/97 YTD 9/30/96 Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ASSETS Interest Earning assets: Money market investments: Federal funds sold 5,543,708 225,253 5.43% 6,495,735 260,310 5.36% Investment Securities: U.S. Treasury securities and obligations of U.S. government agencies 31,936,248 1,532,394 6.42% 26,206,209 1,205,080 6.15% Obligations of States and political subdivisions 8,235,706 470,786 7.64% 8,431,679 484,846 7.69% Taxable Municipals 512,815 30,363 7.92% 512,815 30,363 7.92% All other investment securities 2,218,478 96,122 5.79% 1,011,725 43,676 5.77% Federal Reserve Bank stock 302,250 9,068 4.01% 302,250 9,068 4.01% ------------------------------------- ------------------------------------- Total investment securities 43,205,497 2,138,733 6.62% 36,464,678 1,773,033 6.50% Loans - net of unearned income Commercial loans 9,382,287 742,286 10.58% 10,578,876 832,067 10.52% Installment loans 5,201,717 395,568 10.17% 5,041,220 378,746 10.04% Mortgage loans 87,582,264 5,765,249 8.80% 72,970,305 4,862,873 8.91% ------------------------------------- ------------------------------------- Total loans 102,166,268 6,903,103 9.03% 88,590,401 6,073,686 9.17% ------------------------------------- ------------------------------------- TOTAL INTEREST EARNING ASSETS 150,915,473 9,267,089 8.21% 131,550,814 8,107,029 8.24% Cash and due from banks 4,075,070 3,541,254 Other assets 8,253,649 5,482,635 Allowance for loan and lease losses (1,456,618) (1,463,281) ------------------------------------- ------------------------------------- TOTAL ASSETS 161,787,574 139,111,422 ===================================== ===================================== LIABILITIES Interest-bearing liabilities Other Borrowed Funds 128,205 - 0.00% - - 0.00% Super NOW accounts 16,803,546 374,322 2.98% 15,808,956 363,157 3.07% Money market deposit accounts 20,479,885 510,500 3.33% 18,821,907 473,213 3.36% Time, $100,000 or more 13,704,210 541,440 5.28% 10,524,368 428,565 5.44% Other time deposits 39,639,524 1,536,725 5.18% 29,852,205 1,182,867 5.30% IRA deposits 14,646,788 591,871 5.40% 14,498,157 551,174 5.08% Savings deposits 16,371,319 382,900 3.13% 12,440,318 297,305 3.20% ------------------------------------- ------------------------------------- TOTAL INT-BEARING LIABILITIES 121,773,477 3,937,758 4.32% 101,945,911 3,296,281 4.32% Demand deposits 15,888,969 14,922,510 Other liabilities 1,525,799 806,638 ------------------------------------- ------------------------------------- Total liabilities 139,188,245 117,675,059 Stockholders' equity 22,599,329 21,436,363 ------------------------------------- ------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 161,787,574 139,111,422 ===================================== ====================================== Net interest income & interest rate spread 5,329,331 3.89% 4,810,748 3.92% Net interest income as a % of earning assets 4.72% 4.89% ===================================== ======================================
1. All amounts are reported on a tax equivalent basis computed using the statutory federal income tax rate of 34%, exclusive of the alternative minimum tax rate and non deductible interest expense. 2. Loan fee income is included in interest income for each loan catagory and yields are stated to include all. 3. Balances of nonaccrual loans and related income have been included for computational purposes. 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, 1996 audited consolidated financial statements and notes. ORGANIZATIONAL BACKGROUND On July 1, 1996, Shore Bancshares, Inc. (the Company) commenced operations as the parent company of its sole subsidiary, The Centreville National Bank of Maryland (the Bank) which has conducted the business of banking since 1876. Since the Bank is the primary possession of the Company, the assets and liabilities of the Company are made up almost entirely of the assets and liabilities of the Bank. The same is true for the income and expense of the Company. All data for the periods on and after July 1996 is presented in this analysis in consolidated form and is compared to like data for the Bank for prior years, restated to reflect the exchange of shares of Bank common stock for Company shares. RESULTS OF OPERATIONS OVERVIEW The Company reported $1,640 thousand in net income for the nine months ended September 30, 1997 or $1.63 per share compared to the nine months ended September 30, 1996 net income of $1,755 thousand or $1.74 per share. Excluding the securities gain on the sale of investment securities of $204 thousand in 1996, net operating income in 1997 actually increased $89 thousand or 5.7% over the same period in 1996. Net interest income for September 30, 1997 increased $522 thousand over the prior year. In addition, year to date net income absorbed additional non-interest expense associated with the merger of Kent Savings and Loan Association (Kent)including goodwill amortization and in the third quarter, depreciation expense for the renovation of the Centreville office. 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. The quarter ended September 30, 1997 has been characterized by relatively stable interest rates at the Bank level. As a result of increased volume in the investment securities and loan portfolios and balance sheet growth resulting from the Kent purchase, the Bank's net interest income, on a fully tax-equivalent basis, increased in the first nine months of 1997 compared to the same period in 1996. Net interest income (on a tax equivalent basis) for September 30, 1997 increased by $519 thousand or 10.8% compared to the nine months ended September 30, 1996. 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, 1997 and 1996 was 3.89%, and 3.92%, respectively. Interest rate spread in 1997 improved in Page 1 the third quarter, however, was still less than the prior year by .03% as a result of a decrease in yield on earning assets of .03% and no change in yield of interest bearing liabilities. Yield on deposits remained at the same level during the nine months ended September 30, 1997 compared to the same period in 1996. The decrease in asset yield is attributed to mortgage loan yield decreasing as a result of rate reductions on some loan products and a lower yielding portfolio purchased from Kent, offset by a higher yielding investment portfolio. A decrease in net interest margin was also reflected, however, this measure continues to improve as of the end of the third quarter. 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. As of September 30, 1997, the net interest margin decreased to 4.72% from 4.89% as of September 30, 1996. See the table titled "Average Balances, Yields and Rates" for additional information. 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 For the quarter ended September 30, 1997 and 1996, the Bank recorded net charge offs of $102 thousand and $2 thousand, respectively compared to net recoveries of $25 thousand for the year ended December 31, 1996. Internal loan review, in particular, has been 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 1997 and net recoveries in 1996. Gross charge offs as of September 30, 1997 amounted to $142 thousand, $41 thousand for the same period in 1996 and $78 thousand for the year ended 1996, the majority of which were installment loans. Efforts to collect charged off loans continue, but successes are rare as evidenced by the relatively low amount of recoveries, totaling only $40 thousand in 1997, $39 thousand for the same nine months in 1996 and $103 thousand for the year ended 1996. The provision for credit losses has followed the same general trend as the amount of charge offs. No provision for credit losses was charged to expense in 1997 or 1996. 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 $1.4 million as of September 30, 1997 represents 1.3% of gross loans. As of December 31, 1996 and September 30, 1996, the $1.5 million allowance for credit losses reflected 1.7% and 1.6%, respectively, of gross loans. The reduction in percentage of allowance to outstanding loans reflects improvements in credit quality achieved through better credit underwriting and more aggressive collection efforts and is further Page 2 evidenced by lower past due loan totals. In management's opinion, the allowance for credit losses is adequate as of September 30, 1997. See Notes 3 and 4 in the Notes to Financial Statements. NON-INTEREST INCOME AND EXPENSE As of September 30, 1997 non-interest income reflects $208 thousand decrease compared to September 30, 1996 as a result of $204 thousand gain on sale of investment securities reflected as of September 30, 1996. Non-interest expense increased $435 thousand or 15.5% as of the same period last year. The increase reflects the cost of additional staff and overhead of the Kent Branch acquired in the purchase of Kent Savings and Loan Association. In addition, the second quarter of 1997 includes the costs of the merger. Amortization of intangibles also increased as goodwill from the merger is amortized over 15 years. In the nine months of 1997 costs have been added as the Company has invested in additional marketing programs and staff training programs. In addition, depreciation expense for the renovated office space in Centreville was recorded. The first phase was completed in September 1997. INVESTMENT SECURITIES Investment securities classified as available-for-sale are held for an indefinite period of time and may be sold in response to changing market and interest rate conditions as part of the asset/liability management strategy. Available-for-sale securities are carried at market value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity net of income taxes. Investment securities classified as held-to-maturity are those that management has both the positive intent and ability to hold to maturity, and are reported at amortized cost. The Company does not currently follow a strategy of making securities purchases with a view to near-term sales, and, therefore, does not own trading securities, nor are derivatives used as investments. The Company manages the investment portfolios within policies which seek to achieve desired levels of liquidity, manage interest rate sensitivity risk, meet earnings objectives, and provide required collateral support for deposit activities. Total investment securities amounted to $45.3 million and $43.6 million as of September 30 1997 and December 31, 1996, respectively. The net increased level of investments in securities resulted primarily from the purchase of agency securities with funds borrowed from the Federal Home Loan Bank offset by the use of funds from matured or called securities for the purchase of Kent Savings and Loan Association. The Company manages its 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. Excluding the U.S. Government and U.S. Government sponsored agencies, the Company had no concentrations of investment securities from any single issues that exceeded 10% of stockholders' equity. See Note 2 in the Notes to Financial Statements Page 3 LOAN PORTFOLIO The Bank is actively engaged in originating loans to customers in Queen Anne's, Caroline, Kent and Talbot Counties. The Company has policies and procedures designed to mitigate credit risk and to maintain the quality of the loan portfolio. These policies include underwriting standards for new credits as well as the continuous monitoring and reporting of asset quality and the adequacy of the allowance for credit losses. These policies, coupled with continuous training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the level of risk, size of the loan and the experience of the lending officer. Note 3 " Summary of Loan Portfolio" presents the composition of the Company's loan portfolio by significant concentration. The Company had no loan concentrations exceeding 10% of total loans which are not otherwise disclosed. The Company's policy is to make the majority of its loan commitments in the market area it serves. This tends to reduce risk because management is familiar with the credit histories of loan applicants and has an in-depth knowledge of the risk to which a given credit is subject. The Company had no foreign loans in its portfolio as of September 30, 1997. It is the policy of the Bank to place a loan in non-accrual status whenever there is substantial doubt about the ability of a borrower to pay principal or interest on any outstanding credit. Management considers such factors as payment history, the nature of the collateral securing the loan and the overall economic situation of the borrower when making a non-accrual decision. Non-accrual loans are closely monitored by management . A non-accruing loan is restored to current status when the prospects of future contractual payments are no longer in doubt. At September 30, 1997 and December 31, 1996, $432 thousand and $872 thousand, respectively, of non-accrual loans were secured by collateral with an estimated value of $1.3 million as of September 30, 1997 and $1.8 million as of December 31, 1996. At September 30, 1997, the Bank had $3.7 million in loans on the watch list for which payments were current, but the borrowers have the potential for experiencing financial difficulties. These loans are subject to on going management attention and their classifications are reviewed regularly. DEPOSITS Deposit liabilities reflected 4% growth in the first nine months of 1997 in addition to the increase attributed to the Kent Savings and Loan Association acquisition. Savings, money market and NOW account deposits continue to be the main source of deposit growth, although non-interest bearing demand deposits have exhibited growth. 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. OTHER BORROWED FUNDS Other borrowed funds consist of an advance from the Federal Home Loan Bank of $5,000,000 at the end of the third quarter of 1997. These funds were utilized for securities purchases. See Note 5 in the Notes to Financial Statements. Page 4 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. A substantial portion of the investment portfolio contains readily marketable securities that could be converted to cash immediately. Refer to Note 2 in the Consolidated Financial Statements for a table reflecting the Bank's security portfolio's estimated fair value. On the liability side of the balance sheet, liquidity is affected by the timing of maturing liabilities and the ability to generate new deposits or borrowings as needed. Other sources, not currently in use, are available through borrowings from the Federal Reserve Bank and from lines of credit approved at correspondent banks. As discussed above, an additional source is the Federal Home Loan Bank from which a $5,000,000 advance was outstanding at September 30, 1997. The purchase of Kent on April 1, 1997 reflects the use of funds primarily from Federal Funds which had been accumulated through investment security maturities and calls. During 1997, the Bank has met liquidity needs for daily operations and to fund increased loan demand through the use of funds from matured investment securities and by selling $2.9 million in U.S. Treasury and Government Securities. Management knows of no trend or event which will have a material impact on the Bank's ability to maintain liquidity at satisfactory levels. CAPITAL RESOURCES AND ADEQUACY Total stockholders' equity increased $962 thousand or 4.3% in 1997 to $23.0 million at the end of the September 1997 from $22.1 million at December 31, 1996. Earnings of $1,640 thousand were the primary contributor to this increase. The change in unrealized gain (loss) on investments classified as available for sale accounted for a $17 thousand increase and dividends paid reduced stockholders' equity $695 thousand. 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 3%. The leverage capital ratio at September 30, 1997 and 1996 was 12.4% and 15.4%, respectively and at December 31, 1996 was 14.9%. 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 Bank's ratio at September 30, 1997 and 1996 was 23.3% and 27.6%, respectively and at December 31, 1996 was 28.2%. According to FDIC capital guidelines, the Bank is considered to be "Well Capitalized." Page 5 Building and technological improvements continued in 1997. Renovations at the Commerce street location are expected to be completed by year end. Cost estimates anticipate a an amount close to $1 million which includes improvements, furniture and equipment. On December 5, 1996 the Bank entered into an agreement to acquire Kent Savings and Loan Association, F.A.(Kent Savings) of Chestertown, Maryland. The merger transaction was accounted for as a purchase. Under the terms of the agreement, the Bank paid approximately $5,100,000 for all of the outstanding shares of Kent Savings resulting in $2.1 million in goodwill to be amortized over 15 years. The Kent Savings shareholders met on March 17, 1997 and approved the merger. The effective date of the merger was April 1, 1997. Management knows of no other trend or event which will have a material impact on capital. Page 6 PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities 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 - None (b) No reports on Form 8K were filed during the third quarter of 1997. 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 12, 1997 SHORE BANCSHARES, INC. /S/ CAROL I. BROWNAWELL ------------------------------- CAROL I. BROWNAWELL Executive Vice President and Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
9 9-MOS DEC-31-1997 SEP-30-1997 6,895 133,475 9,668 0 9,533 35,836 35,984 109,103 1,416 179,485 150,283 0 1,145 5,000 0 0 10 23,047 179,485 6,903 1,978 225 9,106 3,938 3,938 5,168 0 8 3,238 2,514 2,514 0 0 1,640 1.63 1.63 4.72 432 543 209 3,700 1,503 142 40 1,416 1,416 0 0
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