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
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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%
======================================== ========================================
<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 category and
yields are stated to include all fees.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
</FN>
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