SHORE BANCSHARES, INC.
LOGO
2001 ANNUAL REPORT
CONTENTS
1. Letter to Shareholders
3. Financial Highlights
4. Management's Discussion and
Analysis of Financial Condition
and Results of Operations
17. Selected Financial Data
18. Consolidated Financial Statements
37. Independent Auditors' Report
38. Directors and Officers
41. Branch Locations and Information
Dear Shareholders and Friends,
We are pleased to report that 2001 was another successful year for Shore
Bancshares, Inc. Growth in loans, core deposits and fee income during the year,
resulted in record earnings of $7,994,000, compared to $7,957,000 for 2000. On a
per share basis, diluted earnings were $1.49 and $1.48 for the years ended
December 31, 2001 and 2000, respectively. Shore Bancshares, Inc. remains the
largest independently owned financial institution on the Eastern Shore. Through
its subsidiaries, the Talbot Bank and The Centreville National Bank, the Company
provides banking services to customers in five Eastern Shore Counties. With
eleven full service branches, sixteen ATM's, telephone and internet banking,
customers can easily access their accounts from anywhere.
FINANCIAL RESULTS
The interest rate environment in 2001 was challenging. The Federal Reserve
lowered short-term interest rates eleven times during the year, resulting in a
475 basis point decline in the federal funds rate from 6.50% to 1.75%. A
corresponding reduction in the New York Prime rate followed each of the federal
funds rate cuts. This trend in interest rates resulted in a decline in the
overall yield on earning assets for 2001. Net interest income increased
$285,000, totaling $21,877,000 for the year ended December 31, 2001, an increase
of 1.3% when compared to 2000. Increased interest income associated with loan
growth and a decline in interest expense were the reasons for the increase.
The average balance of loans, the primary earning asset of the Company, grew
5.2% totaling $386,161,000 for the year ended December 31, 2001, compared to
$367,075,000 for 2000. Average deposits increased 7.5%, totaling $466,772,000
for the year ended December 31, 2001, compared to $434,296,000 for 2000.
Noninterest income, which had continued to grow in each of the previous four
years, declined in 2001. Absent the effect of securities gains and losses and a
one-time gain on life insurance policies in 2000, noninterest income would have
increased 9.7% or $234,000 for 2001. It is one of the Company's goals to focus
on value added services for retail and commercial customers, which will
contribute to growth in noninterest income.
Return on average assets and shareholders' equity were 1.42% and 11.70%,
respectively, for 2001, compared to 1.52% and 12.98%, respectively for 2000.
Growth in the average balances of assets and stockholder's equity exceeded
earnings growth resulting in decline in these ratios. Total average assets of
the Company grew 7.1% totaling $562,026,000 for the year ended December 31,
2001, compared to $524,721,000 one year ago. Average Stockholders' equity was
$68,332,000 for 2001, compared to $61,285,000 for 2000.
The Company continues to maintain capital ratios well in excess of the required
regulatory minimums, with a tier 1 capital ratio of 11.85% and a risk based
capital ratio of 17.64% at December 31, 2001. Total stockholders' equity was
$70,971,000, an increase of $5,947,000 when compared to December 31, 2000.
Dividends paid to shareholders were $0.60 per share compared to $0.52 in 2000.
In an effort to enhance the liquidity of the Company's stock, we became listed
on the NASDAQ Small Cap Market in April of 2001, and are quoted under the symbol
SHBI.
OUR PEOPLE
J. Robert Barton retired from the Centreville National Bank Board of Directors
in 2001 after 33 Years of service. He served as Senior Vice President from 1979
to 1992, President and CEO from 1992 until he retired in 1995, and as a member
of the Board of Directors since 1981. Mr. Barton remains an active civic leader
in Queen Anne's County. We wish to thank Mr. Barton for the many contributions
he made to the success of Shore Bancshares, Inc. and The Centreville National
Bank.
We were also saddened in 2001 by the loss of two long time members of the Talbot
Bank Board of Directors. William H. Myers, Chairman of the Board of The Talbot
Bank, passed away in February after 53 years of service to the Bank. Mr. Myers
brought many years of wisdom to our organization and his contributions to local
organizations in Talbot County and Oxford were numerous. Ronald N. Fox, a
prominent local businessman and community leader who served on the Board of The
Talbot Bank for 20 years and on the Shore Bancshares Board since December 2000,
passed away in October 2001. The contributions of both of these individuals will
be greatly missed.
-1-
GROWTH STRATEGIES
On December 21, 2001, the Company entered into an agreement to acquire certain
assets of the Avon-Dixon Agency, Inc. and its subsidiaries, a full service
insurance agency. All necessary regulatory approvals have been received and it
is anticipated that the purchase will be completed in April 2002. This
acquisition plays an important role in the strategic vision of Shore Bancshares,
Inc. to expand the range of financial products and services offered to our
customers. Avon-Dixon is a well-known agency serving the Mid-Atlantic region,
and is the 2001 recipient of the "Best Practices" award from the Independent
Insurance Agents of America. We are very excited about this addition to our
Company. The history and reputation of Avon-Dixon resembles in many ways that of
our financial institutions, making it a natural addition to our organization.
Achieving excellence in customer service remains a primary goal of the Company.
We do this through the talented staff we employ, and by providing valuable
products and convenience to our customers. With that in mind, a new branch of
The Centreville National Bank was opened in Denton this year with another branch
in Chester planned in 2002. Also during 2001, the Company enhanced the
convenience of banking by making Talbot Bank and Centreville National Bank ATM's
and check cashing services available to customers of either institution free of
charge. Internet banking is now available to customers of both Banks, further
enhancing our delivery channels. In the second quarter of 2002, customers of
either Bank, will be able to make deposits or loan payments at any branch of The
Centreville National Bank or the Talbot Bank.
IN CONCLUSION
We feel confident about the Company's ability to enhance profitability and
shareholder value in 2002. We will do this by building on our reputation of
excellent customer service, through growth and an expansion of our products and
services. We are proud of the quality individuals working for Shore Bancshares,
Inc. and recognize that they are the key to our continued success. And, as
always, would like to take this opportunity to thank you for your continued
support.
Sincerely,
W. Moorhead Vermilye
President and CEO, Shore Bancshares, Inc.
President and CEO, The Talbot Bank
Daniel T. Cannon
Executive Vice President and COO, Shore Bancshares, Inc.
President and CEO, The Centreville National Bank
B. Vance Carmean, Jr.
Chairman of the Board, Shore Bancshares, Inc.
-2-
FINANCIAL HIGHLIGHTS
Percent
Increase
Years ended December 31, 2001 2000 (Decrease)
- ------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
FOR THE YEAR
Interest income $ 38,938 $ 39,480 (1.4%)
Interest expense 17,061 17,888 (4.6%)
Net interest income 21,877 21,592 1.3%
Net income 7,994 7,957 .5%
Cash dividends 3,198 2,783 14.9%
- ------------------------------------------------------------------------------------
AVERAGE
Total assets $562,026 $524,721 7.1%
Total loans 386,161 367,075 5.2%
Total deposits 466,772 434,296 7.5%
Stockholders' equity 68,332 61,285 11.5%
- ------------------------------------------------------------------------------------
AT YEAR END
Total assets $582,403 $553,097 5.3%
Total loans, net of unearned income 392,706 382,506 2.7%
Total deposits 487,470 464,485 4.9%
Stockholders' equity 70,971 65,024 9.1%
- ------------------------------------------------------------------------------------
PER SHARE Net income per common share:
Basic $ 1.50 $ 1.50 --%
Diluted $ 1.49 $ 1.48 0.7%
Cash dividends $ .60 $ .52 15.4%
Book value at year-end $ 13.31 $ 12.21 9.0%
- ------------------------------------------------------------------------------------
-3-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Shore Bancshares, Inc. (the "Company") is a financial holding company, which was
formed on March 15, 1996. The Company is based in Easton, Maryland and is the
sole shareholder of The Talbot Bank of Easton, Maryland ("Talbot Bank") and The
Centreville National Bank of Maryland ("Centreville National Bank"),
collectively referred to as the "Banks". Talbot Bank commenced operation in 1885
and is a Maryland chartered commercial bank. The Centreville National Bank
commenced operations in 1876 and is a national banking association. The Banks
operate eleven full service branches and sixteen Automated Teller Machines
("ATM's"), providing a full range of commercial and consumer banking products
and services to individuals, businesses, and other organizations in Kent, Queen
Anne's, Caroline, Talbot and Dorchester counties in Maryland. Deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC").
Services provided to businesses include commercial checking, savings and related
depository services, including telephone and internet banking. The Banks offer
all forms of commercial lending including lines of credit, term loans, accounts
receivable financing, commercial and construction real estate, and other forms
of secured financing.
Services provided to individuals include checking accounts, various savings
programs, mortgage loans, home improvement loans, installment and other personal
loans, credit cards, personal lines of credit, automobile and other consumer
financing, safe deposit services, debit cards, 24 hour ATM's, telephone banking
and internet banking.
In December 2001, the Company entered into an agreement to purchase certain
assets of the Avon-Dixon Agency, Inc., a full service insurance agency, and its
subsidiaries, all located in Easton, Maryland. The transaction is expected to be
complete in the second quarter of 2002, after which time the Company will be
able to offer a full range of insurance products to its customers.
FORWARD LOOKING STATEMENTS
Portions of this Annual Report contain forward-looking statements within the
meaning of The Private Securities Litigation and Reform Act of 1995. Such
statements are not historical facts and include expressions about the Company's
confidence, policies, and strategies, the adequacy of the allowance for credit
losses, realization of deferred taxes, interest rate risk, capital levels and
liquidity. Such forward-looking statements involve certain risks and
uncertainties, including general economic conditions, competition in the
geographic and business areas in which the Company and its affiliates operate,
inflation, fluctuations in interest rates, legislation, and governmental
regulation. These risks and uncertainties are described in more detail in the
Company's Form 10-K, under the heading "Risk Factors". Actual results may differ
materially from such forward-looking statements, and the Company assumes no
obligation to update forward-looking statements at any time.
OVERVIEW
Net income for the year ended December 31, 2001 was $7.99 million, compared to
$7.96 million for December 31, 2000. On a per share basis, fully diluted net
income was $1.49, compared to $1.48 for 2000. Return on average assets and
return on shareholders' equity for 2001 were 1.42% and 11.70%, respectively.
Total assets of the Company increased 5.3% in 2001, totaling $582.4 million.
Deposits increased $23.0 million totaling $487.5 million at December 31, 2001.
This increase in deposits along with an increase in stockholders' equity funded
asset growth. Interest bearing deposits with other banks, investment securities
and loans all increased during the year. Total loans were $392.7 million at
December 31, 2001, an increase of $10.2 million when compared to 2000. Interest
bearing deposits with other banks and federal funds sold totaled $34.2 million
at December 31, 2001, compared to $19.7 million one year ago. Investment
securities increased $8.2 million, totaling $125.8 million at the end of the
year.
-4-
REVIEW OF FINANCIAL CONDITION
Asset and liability composition, asset quality, capital resources, liquidity,
market risk and interest sensitivity are all factors which are used to measure
the Company's financial condition.
ASSETS
Total assets increased 5.3% to $582,403,000 at December 31, 2001, compared to an
increase of 6.7% for 2000. Average total assets were $562,026,000, an increase
of 7.1% in 2001. Average total assets increased 5.4% in 2000, totaling
$524,721,000 for the year. The loan portfolio represents 72.3% of average
earning assets and is the primary source of income for the Company.
Funding for loans is primarily provided by core deposits and short-term
borrowings. Total deposits increased 4.9% to $487,470,000 at December 31, 2001,
compared to a 6.5% increase for 2000.
The following table sets forth the average balance of the components of average
earning assets as a percentage of total average earning assets as of December
31.
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Investment securities 21.42% 24.25% 27.23% 25.88% 26.35%
Loans 72.28 73.66 68.62 68.80 69.63
Interest bearing deposits
with other Banks 2.00 - - - -
Federal funds sold 4.30 2.09 4.15 5.32 4.02
------ ------- ------- ------- -------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
INVESTMENT SECURITIES
The average balance of investment securities decreased $6,397,000 or 5.3% in
2001. As interest rates continued to decline in 2001, many bonds with call
features were called and the proceeds were not immediately reinvested. A portion
of the proceeds from callable bonds were shifted into interest bearing deposits
and federal funds sold, which have lower yields than investment securities. The
average balance of investment securities decreased $7,954,000 or 6.2% in 2000.
Investment purchases in 2001 were concentrated in U.S. Government Agency bonds
and mortgage backed securities. Earnings on certain U.S. Government Agency Bonds
are exempt from state income tax and provide higher returns without affecting
the overall safety and liquidity of the portfolio. The Company does not
generally invest in structured notes or other derivative securities.
The investment portfolio is structured to provide liquidity for the Company and
also plays an important role in the overall management of interest rate risk.
The securities in the investment portfolio are classified as either held to
maturity or available for sale. Investment securities held to maturity are
stated at cost adjusted for amortization of premiums and accretion of discounts.
The Company has the intent and ability to hold such securities until maturity.
Investment securities available for sale are stated at estimated fair value
based on quoted market prices. They represent securities which may be sold as
part of the Company's asset/liability strategy or which may be sold in response
to changing interest rates. Net unrealized holding gains and losses on these
securities are reported net of related income taxes as accumulated other
comprehensive income, a separate component of stockholders' equity. At December
31, 2001, the Company had classified 91% of the portfolio as available for sale
and 9% as held to maturity, compared to 81% and 19%, one year ago. The
percentage of securities designated as available for sale has continued to
increase since 1996 to support the anticipated growth and liquidity needs of the
Company. With the exception of municipal securities, it is the general practice
of the Company to place all newly purchased securities in the available for sale
portfolio.
-5-
The following table sets forth the maturities and weighted average yields of the
investment portfolio based upon the earliest possible repricing date as of
December 31, 2001.
1 YEAR OR LESS 1-5 YEARS 5-10 YEARS OVER 10 YEARS
-------------- --------- ---------- -------------
Carrying Average Carrying Average Carrying Average Carrying Average
(Dollars in thousand) Amount Yield Amount Yield Amount Yield Amount Yield
Held to Maturity:
U.S. Treasury securities and
obligations of U.S. government agencies $ 500 5.87 % $1,077 3.59% $ -- -- % $ -- -- %
- %
Obligations of states and
political subdivisions (1) 1,066 7.02 5,537 6.54 2,705 6.80 -- --
Mortgage backed securities -- -- 8 9.56 3 8.00 -- --
-------- ------------------- ----------------- ------- ------------------
Total Held to Maturity $ 1,566 6.65 % $ 6,622 6.06% $2,708 6.81% $ -- --
======= ======= ======= ===== ======= ======== ===================
1 YEAR OR LESS 1-5 YEARS 5-10 YEARS OVER 10 YEARS
-------------- --------- ---------- -------------
Carrying Average Carrying AverageCarrying Average Carrying Average
(DOLLARS IN THOUSAND) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. Treasury securities and
obligations of U.S. government agencies $13,013 5.82 % $55,898 5.07% $2,567 5.39% $ -- --%
Obligations of states and
political subdivisions (1) 100 6.08 110 6.23 -- -- -- --
Mortgage backed securities 2 9.91 8,660 5.20 9,949 5.73 14,415 6.16
Other securities -- -- -- -- -- -- 9,459 4.76
------- ------ ------- ---- ------ ----- --------- -----
Total Available for Sale $13,115 5.83 % $64,668 5.09% $12,516 5.41% $23,874 4.98%
======= ===== ======= ==== ======= ==== ======= ====
<FN>
(1) Yields adjusted to reflect a tax equivalent basis assuming a federal
tax rate of 34%.
</FN>
LOANS
Average loans increased $19,086,000 or 5.2% in 2001, totaling $386,161,000,
compared to an increase in average loans of 13.1% in 2000. Growth in loans for
the year 2001 was more difficult than in 2000 due to borrowers seeking long-term
fixed rate financing for mortgage loans. The Company does not invest in
long-term fixed rate mortgage loans because of the increased interest rate risk
associated with them. Total loans, net of unearned income totaled $392,706,000
on December 31, 2001, an increase of $10,200,000 or 2.7% when compared to 2000.
The local economy remained strong throughout 2001, however loans refinanced with
other lenders offset a portion of the new loan growth. Loan growth occurred in
all components of the loan portfolio during 2001. Commercial loans increased
$4,311,000 or 7.9%, construction loans increased $1,668,000 or 9%, mortgage
loans increased $2,785,000 or 1%, and consumer loans increased $1,436,000 or
7.9% for the year ended December 31, 2001.
The table below sets forth the composition of the loan portfolio at December 31.
(Dollars in thousands) 2001 2000 1999 1998 1997
Commercial, financial and agricultural $ 58,953 $ 54,642 $ 55,468 $ 42,109 $ 35,721
Real estate - construction 20,255 18,587 15,643 13,228 12,483
Real estate - mortgage 293,921 291,136 258,443 235,830 232,419
Consumer 19,577 18,141 16,237 14,393 13,837
---------- ---------- --------- --------- ---------
Total Loans $392,706 $382,506 $345,791 $305,560 $294,460
======== ======== ======== ======== ========
-6-
INTEREST BEARING DEPOSITS WITH OTHER BANKS AND FEDERAL FUNDS SOLD
The Company invests excess cash balances in interest bearing accounts or federal
funds sold, with its correspondent banks. These liquid investments in cash are
maintained at a level necessary to meet the immediate liquidity needs of the
Company. The average balance of interest bearing deposits with other banks and
federal funds sold increased $23,277,000 to $33,674,000 during 2001. In 2000,
the average balance of federal funds sold declined $9,206,000 to $10,397,000, a
47% decrease when compared to 1999.
DEPOSITS The Company primarily utilizes core deposits to fund its earning
assets. At December 31, 2001 and 2000 deposits provided funding for 87% and 77%
of average earning assets, respectively. Average deposits increased 7.5% in
2001, compared to 4.7% in 2000. The average rate paid on interest bearing
deposits decreased 34 basis points to 3.95% for 2001, compared to 4.29% for
2000. Increased deposit growth in 2001 is attributable in part to depositors
looking for principal protection that they could not achieve in the stock
markets. Deposit growth is primarily in certificates of deposit, whose average
balance increased $19,930,000 or 9.7%. The average balances of certificates of
deposit $100,000 or more increased $5,469,000 or 7.7%, compared to an increase
of $9,149,000 or 14.8% in 2000 and $11,374,000 or 22.5% in 1999. Many depositors
locked in high certificate of deposit rates late in 2000 and, although rates
offered for certificates of deposit decreased throughout 2001, the overall rate
paid declined only 9 basis points to 5.47%. The rate paid for certificates of
deposit of $100,000 or more, which represent 34% of the total time deposits,
declined 46 basis points to 5.26%. The majority of these jumbo certificates
mature in less than 12 months, which accounts for the significant reduction in
the rate paid. The average balance of noninterest-bearing demand deposits
increased $6,069,000 and the average balance of NOW and SuperNOW deposits
increased $9,868,000 in 2001. In 2000, the rate paid for deposits increased in
all categories. The most significant increase was in certificates of deposit
$100,000 or more, again because of the short -term maturities associated with
thesedeposits. The growth in jumbo certificates of deposit in 1999 and 2000 was
primarily attributable to growth in deposits of counties and municipalities in
the Company's market area. The Company has maintained a long-term relationship
with these local governments and therefore does not consider the deposits to be
volatile. The average balance of other time deposits increased $1,890,000 or
1.9% in 2000, with an additional $9,953,000 of deposit growth in the average
balance of noninterest bearing demand, NOW and SuperNOW accounts. The average
balance of money management and savings accounts decreased by a $2,183,000 in
2000 as a result of depositors shifting money into investment vehicles with
higher returns.
The Company does not accept brokered deposits, nor does it rely on purchased
deposits as a funding source for loans.
The following table sets forth the average balances of deposits and the
percentage of each category to total deposits for the years ended December 31.
(Dollars in thousands) Average Balances
2001 2000 1999
Noninterest-bearing demand $56,127 12.02% $50,058 11.53% $46,137 11.10%
Interest bearing deposits
NOW and Super NOW 86,100 18.45% 76,232 17.55% 70,200 16.90%
Savings 30,380 6.51% 30,863 7.11% 31,565 7.60%
Money Management 68,879 14.76% 71,788 16.53% 73,269 17.63%
CD's and other time deposits
less than $100,000 148,706 31.86% 134,245 30.91% 132,355 31.86%
CD's $100,000 or more 76,580 16.40% 71,111 16.37% 61,962 14.91%
-------- ------ -------- ------- -------- -------
$466,772 100.00% $434,297 100.00% $415,488 100.00%
======== ======= ======== ======= ======== =======
The following table sets forth the maturity ranges of certificates of deposit
with balances of $100,000 or more on December 31, 2001 (in thousands).
Three months or less $35,447
Over three through twelve month 19,794
Over twelve months 19,855
--------
$75,096
-7-
SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of securities sold under agreement to
repurchase. These short-term obligations are issued in conjunction with cash
management services for deposit customers. The average balance of these
borrowings decreased $2,207,000 or 10.3% in 2001, compared to an increase of
$3,709,000 or 20.8% in 2000. From time to time in order to meet short-term
liquidity needs, the Company may borrow from a correspondent bank under a
federal funds line of credit arrangement.
The following table sets forth the Company's position with respect to short-term
borrowings.
(Dollars in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
BALANCE RATE Balance Rate Balance Rate
- --------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD
UNDER AGREEMENTS TO REPURCHASE:
Average outstanding for the year $19,315 2.87% $21,522 5.09% $17,813 3.86%
Outstanding at year end 17,054 1.15% 16,252 4.96 16,933 3.95
Maximum outstanding at any month end 25,175 -- 32,498 -- 23,297 --
CAPITAL RESOURCES AND ADEQUACY
The Company continues to maintain capital at levels in excess of those required
by the federal banking agencies. Total stockholders' equity was $70,971,000 at
December 31, 2001, 9.1% higher than the previous year. Average stockholders'
equity was $68,332,000 for 2001, an increase of 11.5% when compared to 2000. The
increase in stockholders' equity is primarily due to earnings of the Company for
the year of $7,994,000, reduced by dividends paid on common stock of $3,198,000
and a $1,020,000 increase in other accumulated comprehensive income, consisting
solely of unrealized gains from the Company's investment securities available
for sale.
The Company records unrealized holding gains (losses), net of tax, on investment
securities available for sale as accumulated other comprehensive income (loss),
a separate component of stockholder's equity. As of December 31, 2001, the
portion of the Banks' investment portfolio designated as "available for sale"
had unrealized holding gains, net of tax, of $466,000, compared to net
unrealized holding losses of $554,000 at December 31, 2000.
The following table compares the Company's capital ratios as of December 31 to
the regulatory requirements.
Regulatory
(Dollars in thousands) 2001 2000 Requirements
- --------------------------------------------------------------------------------------
Tier 1 capital $ 68,657 $ 63,611
Tier 2 capital 2,313 4,199
- --------------------------------------------------------------------------------------
Total capital, less deductions $70,970 $ 67,810
Risk-adjusted assets 402,436 $ 373,335
Risk-based capital ratios:
Tier 1 17.06% 17.04% 4.0%
Total capital 17.64% 18.16% 8.0%
- --------------------------------------------------------------------------------------
Total capital $68,657 $ 63,611
Total adjusted assets $579,349 $ 544,854
Leverage capital ratio 11.85% 11.67% 4.0%
- --------------------------------------------------------------------------------------
During the second quarter of 2002, the Company expects to issue shares of stock
representing a market value of $800,000 to complete the purchase of certain
assets of the Avon-Dixon Agency, Inc. and its subsidiaries in accordance with
the asset purchase agreement. The remainder of the purchase price will be paid
in cash. Management knows of no other trends or demands, commitments, events or
uncertainties, which will materially affect capital.
-8-
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income remains the most significant component of the Company's
earnings. It is the excess of interest and fees earned on loans, federal funds
sold, and investment securities, over interest paid on deposits and borrowings.
Although interest income decreased in 2001, net interest income increased as a
result of a decline in interest expense. The Federal Reserve cut short-term
interest rates eleven times during 2001, reducing the federal funds rate from
6.50% at the beginning of the year to 1.75% at December 31, 2001. New York
Prime, which is the index most commonly used to price loans, fell a
corresponding 4.75% from 9.50% at January 1, 2001 to 4.75% at December 31, 2001.
The rate paid for interest bearing liabilities decreased 44 basis points from
4.36% to 3.92%. The average balance of earning assets increased during the year,
totaling $534,224,000, compared to $498,308,000 for 2000; however, the yield on
earning assets declined 64 basis points to 7.35%. During 2000, the yield on
earning assets increased 42 basis points from 7.57% to 7.99%. Net interest
income for 2001 was $21,877,000, compared to $21,592,000 for 2000 and
$19,395,000 for 1999. This represents an increase of 1.3% and 11.3% for 2001 and
2000, respectively.
The following table sets forth the major components of net interest income, on a
tax equivalent basis, as of December 31, 2001, 2000 and 1999.
(Dollars in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1) Balance Interest Rate (1)
- -------------------------------------------------------------------------------------------------------------------
Earning Assets:
Investment securities:
Taxable $104,547 $5,977 5.72% $109,687 $ 6,688 6.10% $115,577 $ 6,773 5.86%
Non-taxable 9,892 673 6.80 11,149 756 6.78 13,213 894 6.77
Loans (2)(3) 386,161 31,320 8.11 367,075 31,700 8.64 324,507 27,148 8.37
Interest Bearing Deposits 10,701 370 3.46 - - - - - -
Federal funds sold 22,923 912 3.98 10,397 670 6.44 19,603 987 5.04
------- ----- ---- --------- -------- --- --------- ------ ----
Total earning assets 534,224 39,252 7.35% 498,308 39,814 7.99% 472,900 35,802 7.57%
------- -------
Cash and due from banks 14,815 12,292 11,636
Other assets 17,240 18,243 17,174
Allowance for credit losses (4,253) (4,122) (3,898)
------- ---------- ----------
Total assets $562,026 $524,721 $497,812
======== ======== ========
Interest bearing liabilities:
Demand $ 86,100 $1,494 1.74% $ 76,232 $ 1,990 2.61% $ 70,200 $ 1,807 2.57%
Savings 99,259 2,409 2.43 102,651 3,065 2.99 104,834 3,139 2.99
Certificates of deposit
$100,000 or more 76,580 4,026 5.26 71,111 4,071 5.72 61,962 3,147 5.08
Other time 148,706 8,307 5.59 134,245 7,351 5.48 132,355 6,985 5.28
------- ----- ---- --------- ------- ---- ---------- ------- ----
Interest bearing deposits 410,645 16,236 3.95 384,239 16,477 4.29 369,351 15,078 4.08
Short-term borrowings 19,315 554 2.87 21,522 1,096 5.09 17,813 687 3.86
Long-term debt 5,000 271 5.42 5,000 315 6.30 4,959 274 5.52
----------- ---------------- -------- ------- --- ---------- ------- ----
Total interest bearing
liabilities 434,960 17,061 3.92% 410,761 17,888 4.36% 392,123 16,039 4.09%
------- ------ ----- ------ -----
Noninterest bearing deposits 56,127 50,058 46,137
Other liabilities 2,607 2,617 2,175
Stockholders' equity 68,332 61,285 57,377
------ -------- --------
Total liabilities and
stockholders' equity $562,026 $524,721 $497,812
======== ======== ========
Net interest spread $22,191 3.43% $21,926 3.63% $19,763 3.48%
======= ======= =======
Net interest margin 4.15% 4.40% 4.18%
<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 nondeductible interest expense.
(2) Average loan balances include nonaccrual loans.
(3) (3) Interest income on loans includes amortized loan fees, net of costs,
for each category and yields are stated to include all.
</FN>
-9-
Net interest income on a tax equivalent basis increased $265,000 or 1.2% in
2001. The Company's tax equivalent yield on loans declined in 2001 as new loans
and loans refinanced with the Company were recorded at rates which were much
lower than 2000. Interest income generated by the increased volume of loans was
not enough to exceed the affect of the declining interest rates in 2001. The tax
equivalent yield on earning assets was 7.35% for 2001, compared to 7.99% and
7.57% for 2000 and 1999, respectively. Interest rates, which began to rise in
the middle of 1999 and continued to increase during 2000, declined throughout
2001. With the exception of nontaxable investment securities, all categories of
earning assets experienced a decline in yields. The opposite was true in 2000,
when all categories of earning assets experienced some increase in yield. The
impact of a 27 basis point increase in loan yields in 2000 generated $888,000 in
increased interest income for the Company. Even more significant than the impact
of increased loan yields in 2000, was the effect of increased loan volume that
contributed $3,665,000 to loan interest for the year.
Growth in the average balance of earning assets was $35.9 million or 7.2% for
the year ended December 31, 2001. Average loans increased $19.1 million or 5.2%,
totaling $386.2 million, compared to an increase of $42.6 million during 2000.
The average balance of investment securities increased $6.4 million and federal
funds sold and interest bearing deposits in other banks increased $23.3 million.
The growth in earning assets in investment securities, federal funds sold and
interest bearing deposits in other banks generated lower overall yields than
growth in the loan portfolio would have produced. This contributed to the
overall decline in yield on earning assets. In 2000, the composition of earning
assets shifted to loans which contributed to the growth in interest income for
the year. Average loans increased $42.6 million in 2000, while the average
balance of investment securities decreased $8 million and the average balance of
federal funds sold decreased $9.2 million. As a percentage of total average
earning assets, loans and investment securities totaled 72.3% and 21.4%,
respectively, for 2001, compared to 73.7% and 24.3%, respectively for 2000.
The following Rate/Volume Variance Analysis identifies the portion of the
changes in net interest income, which are attributable to changes in volume of
average balances or to changes in the yield on earning assets and rates paid on
interest bearing liabilities.
2001 OVER (UNDER) 2000 2000 OVER (UNDER) 1999
---------------------- ------------------
TOTAL CAUSED BY Total CAUSED BY
--------- ---------
(Dollars in thousands) VARIANCE RATE VOLUME Variance Rate Volume
Interest income from earning assets:
Interest Bearing Deposits $370 $ - $370 $ - $ - $ -
Federal funds sold 242 (113) 355 (318) 227 (545)
Taxable investment securities (711) (411) (300) (85) 266 (351)
Non-taxable investment securities (83) 2 (85) (138) 2 (140)
Loans (380) (1,949) 1,569 4,553 888 3,665
Total interest income (562) (2,471) 1,909 4,012 1,383 2,629
Interest expense on deposits and borrowed funds:
Interest bearing demand (496) (808) 312 183 26 157
Savings deposits (656) (557) (99) (74) (9) (65)
Time deposits 911 (608) 1,519 1,290 694 596
Short term borrowings (542) (494) (48) 409 197 212
Long term debt (44) (44) - 41 39 2
Total interest expense (827) (2,511) 1,684 1,849 947 902
Net interest income $ 265 $ 40 $ 225 $ 2,163 $ 436 $1,727
THE RATE AND VOLUME VARIANCE FOR EACH CATEGORY HAS BEEN ALLOCATED ON A
CONSISTENT BASIS BETWEEN RATE AND VOLUME VARIANCES, BASED ON A PERCENTAGE OF
RATE, OR VOLUME, VARIANCE TO THE SUM OF THE ABSOLUTE TWO VARIANCES.
-10-
The Company's net interest margin (its tax equivalent net interest income
divided by average earning assets), represents the net yield on earning assets.
The net interest margin is managed through loan and deposit pricing and assets
liability strategies. Even though short-term rates declined 475 basis points in
2001, the Company's net interest margin declined only 25 basis points from 4.40%
for 2000 to 4.15% for 2001. The decrease was the result of lower yields on
interest earning assets. The Company's net interest spread, which is the
difference between the average yield on earning assets and the rate paid for
interest bearing liabilities, also decreased from 3.63% to 3.43%.
Declining interest rates throughout 2001 resulted in a reduction in the average
rate paid for interest bearing liabilities of 44 basis points for the year.
Interest expense for 2001 decreased $827,000. Lower rates accounted for a
$2,511,000 reduction in interest expense, while the increased volume of deposits
and other interest bearing liabilities generated additional interest expense of
$1,684,000 for 2001. The average rate paid for interest bearing demand deposits
in 2001 was 1.74%, compared to 2.61% in 2000, and the average rate paid for
savings deposits was 2.43% for 2001, compared to 2.99% one year ago. Other time
deposits, which consist primarily of certificates of deposit, paid an average
rate of 5.59% for 2001, compared to 5.48% one year ago, while the average rate
paid for certificates of deposit over $100,000 decreased 46 basis points from
5.72% to 5.26% for 2000 and 2001, respectively. The rate paid for short-term
borrowings, which consist primarily of securities sold under agreements to
repurchase, decreased 222 basis points to 2.87%, compared to 5.09% in 2000. The
rate paid on the Company's long-term debt, which was converted to a variable
rate instrument in 2000, was 5.42% for 2001, compared to 6.30% and 5.52% for
2000 and 1999, respectively. Interest expense increased $1,849,000 during 2000,
with approximately half of the increase attributable to rate increases and half
attributable to increased volume of deposits. The average rate paid for
certificates of deposit $100,000 or more increased 64 basis points, and for all
other time deposits the increase was 20 basis points. Average interest bearing
demand deposits increased $6,032,000 during the year; however, the rate paid for
those deposits remained relatively unchanged at 2.61%, compared to 2.57% for
1999.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The Company recorded a provision for credit losses of $226,000 in 2001 compared
to $437,000 in 2000 and $240,000 in 1999. Provisions for credit losses are
adjusted to bring the allowance for credit losses within the range of balances
that are considered adequate to absorb inherent losses in the loan portfolio.
Net charge-offs increased slightly in 2001 as a result of a reduction in
recoveries for the year. The local economy did not seem to experience the level
of weakness or "recession" that many regions of the United States felt in 2001.
Loan demand remained strong as evidenced by continued loan growth during the
year. During 2000, an increasing trend in net charge offs, growth in loans, as
well as concerns over deteriorating national economic indicators and industry
wide trends in loan delinquencies and nonperforming loan statistics had an
effect on the amount of the provision for the year. The allowance for credit
losses is increased by provisions charged against earnings and recoveries of
previously charged off loans. The allowance is decreased by current period
charge off of uncollectible loans.
The adequacy of the allowance for credit losses is determined based upon
management's estimate of the inherent risks associated with lending activities,
estimated fair value of collateral, past experience and present indicators such
as loan delinquency trends, nonaccrual loans and current market conditions. The
allowance for credit losses is comprised of two parts: the allocated allowance
and the unallocated allowance. The allocated allowance is the portion of the
allowance which results from management's evaluation of specific loss
allocations for problem loans and pooled reserves based on historical loss
experience for each loan category. The unallocated allowance is determined based
on management's assessment of industry trends and economic factors in the
markets in which the Company operates. The determination of the unallocated
reserve involves a higher risk of uncertainty and considers current risk factors
that may not have yet manifested themselves in the Company's historical loss
factors.
The Banks maintain separate allowances for credit losses, which are only
available to absorb losses from their own loan portfolios. Each Bank's allowance
is subject to regulatory examinations and determinations as to its adequacy.
The allocated allowance is based on quarterly analysis of the loan portfolio by
each Bank and is determined based upon the analysis of collateral values, cash
flows and guarantor's financial capacity, whichever are applicable. In addition,
allowance factors are applied to internally classified loans for which specific
allowances have not been determined and historical loss factors are applied to
homogenous pools of unclassified loans. Historical loss factors may be adjusted
by management in situations where no historical losses have occurred or where
current conditions are not reflective of the specific history of the Company.
-11-
The unallocated allowance is based upon management's evaluation of external
conditions, the effects of which are not directly measured in the determination
of the allocated allowance. The conditions evaluated in connection with the
unallocated allowance include: general economic and business conditions
affecting the Company's primary lending area; credit quality trends; collateral
values; loan values; loan volumes and concentrations; seasoning of the loan
portfolio; specific industry conditions within the portfolio segments; recent
loss experience; duration of the current business cycle; bank regulatory
examination results; and findings of internal loan review personnel. Management
reviews the conditions which impact the unallocated allowance quarterly and to
the extent any of these conditions relate to specifically identifiable loans may
reflect the adjustment in the allocated allowance.
Where any of these conditions is not related to a specific loan, management's
evaluation of the probable loss related to the condition is reflected in the
unallocated allowance.
The methodology used to calculate the adequacy of the allowance for credit
losses incorporates assumptions necessary to reflect trends in the industry that
may not be evidenced by true historical factors. Management's decision regarding
the amount of the loan loss provision is also influenced by growth in commercial
and real estate loan balances because the losses inherent in those loans can be
more difficult to assess. In 2001, past due and nonaccrual loans increased,
however they represented primarily well-secured loans with limited exposure to
the Company. In 2000, nonaccrual loans declined and net charge offs increased
due to a reduction in recoveries of $100,000.
At December 31, 2001, the allowance for credit losses was $4,189,000, or 1.08%
of outstanding loans, and 444% of total nonaccrual loans. This compares to an
allowance of $4,199,000, or 1.14% of outstanding loans and 674% of nonaccrual
loans, at December 31, 2000, and an allowance for credit losses of $3,991,000,
or 1.23% of outstanding loans and 220% of nonaccrual loans, at December 31,
1999.
The following table sets forth a summary of the Company's loan loss experience
for the years ended December 31.
(Dollars in thousands) 2001 2000 1999 1998 1997
Balance, beginning of year $ 4,199 $ 3,991 $ 3,931 $ 3,942 $ 4,232
--------- -------- -------- -------- --------
Loans charged off:
Real estate loans (5) (61) (121) (69) (159)
Installment loans (155) (73) (146) (122) (169)
Commercial and other (175) (244) (162) (193) (305)
------ ------- ------ ------ -------
(335) (378) (429) (384) (633)
------ ------- ------ ------ -------
Recoveries:
Real estate loans 2 18 50 26 4
Installment loans 60 50 43 57 74
Commercial and other 37 81 156 50 25
-------- ------- --------- -------- ------
99 149 249 133 103
------ -------- -------- --------- -------
Net losses charged off (236) (229) (180) (251) (530)
Allowance applicable to loans of
acquired institution - - - - 15
Provision for credit losses 226 437 240 240 225
------- -------- ------- ------- -------
Balance, end of year $ 4,189 $ 4,199 $ 3,991 $ 3,931 $ 3,942
------- ------- ------- ------- -------
Average loans outstanding $386,161 $367,075 $324,507 $297,786 $278,607
======== ======== ======== ======== ========
Percentage of net charge-offs to average
loans outstanding during the year .06% .06% .06% .08% .19%
Percentage of allowance for loan losses
at year-end to average loans 1.08% 1.14% 1.23% 1.32% 1.41%
-12-
Total non-accrual loans of the Company increased during 2001 and represented
.24% of total loans, net of unearned income at December 31, 2001, compared to
.16% one year earlier. Loan delinquencies increased to $1,532,000 for 2001,
compared to $1,333,000 for 2000.
The following table summarizes the past due and non-performing assets of the
Company as of December 31.
(Dollars in thousands) 2001 2000 1999 1998 1997
Non-performing assets:
Non-accrual loans $943 $ 623 $ 1,812 $ 873 $1,481
Other real estate and other assets owned 56 14 137 164 114
------ ----- ------ ------ -------
Total non-performing assets 999 637 1,949 1,037 1,595
Past due loans 1,532 1,333 1,333 1,436 1,673
------ ------ -------- ------- -------
Total non-performing assets and past due loans $2,531 $1,970 $3,282 $2,473 $3,268
====== ====== ====== ====== ======
Non-accrual loans to total loans,
net of unearned income, at period end .24% .16% .52% .29% .50%
Non-accrual loans and past due loans,
to total loans, net of unearned income, at period end .64% .51% .91% .76% 1.07%
NONINTEREST INCOME
Noninterest income decreased $458,000 or 14.8% in 2001, compared to an increase
of $966,000 or 45.2% in 2000. Excluding the effect of securities gains and
losses and the one-time gain on life insurance policies in 2000, noninterest
income increased $234,000 or 9.7%. During 2001, service charges on deposit
accounts increased $126,000 or 7.2%, while gains on sales of securities
increased $58,000. Other noninterest income increased 38.1% in 2001, primarily
as a result of increased fees earned on credit card programs offered to
commercial customers. The primary sources of increased noninterest income in
2000 were service charges on deposit accounts of $182,000 and a one-time gain
from the proceeds of life insurance policies held by the Company of $750,000.
The Company realized losses on investment securities available for sale of
$48,000 during 2000 in order to take advantage of higher investment yields
available in the market.
The following table summarizes noninterest income of the Company as of December
31:
YEARS ENDED CHANGE FROM PRIOR YEAR
2001/00 2000/99
(Dollars in thousands) 2001 2000 1999 AMOUNT PERCENT Amount Percent
Service charges on deposit accounts $1,877 $1,751 $1,569 $126 7.2% $182 11.6%
Other service charges and fees 371 376 375 (5) (1.3%) 1 0.3%
Gain (loss) on sale of securities 10 (48) 34 58 120.8% (82) (242.5)%
Gain on life insurance policies -- 750 -- (750) (100.0%) 750 100.0%
Earnings (loss) from
unconsolidated subsidiaries 29 15 (24) 14 93.3% 39 162.4%
Other noninterest income 359 260 184 99 38.1% 76 41.1%
Total $2,646 $3,104 $2,138 $(458) (14.8 %) $966 45.2%
- --------------------------------------------------------------------------------------------------------------------
-13-
NONINTEREST EXPENSES
Total noninterest expense increased $122,000 or 1.0% in 2001, compared to an
increase of $944,000 or 8.6% in 2000. Salaries and employee benefits increased
$253,000 or 3.9% and occupancy and equipment expense increased $139,000 or
10.2%. The Company opened a new branch of The Centreville National Bank in April
of 2001, which accounts for some of the increase in salaries and benefits and
occupancy and equipment costs for the year. Salaries and employee benefits
increased $430,000 in 2000 as a result of increases in health insurance and
costs associated with the termination of the Company's frozen defined benefit
plan. During 2001, the Banks began using image technology, which combined with
growth in customer bases and other enhanced services contributed to the overall
increase in data processing costs of $94,000. The Company had 163 full-time
equivalent employees at December 31, 2001, compared to 154 at December 31, 2000
and 152 at December 31, 1999. Other operating expenses decreased $364,000 in
2001 due to non-recurring merger related expenses of $376,000, which were
incurred in 2000.
The following table summarizes noninterest expense of the Company as of December
31:
YEARS ENDED CHANGE FROM PRIOR YEAR
2001/00 2000/99
------- -------
(Dollars in thousands) 2001 2000 1999 AMOUNT PERCENT Amount Percent
Salaries and employee benefits $6,725 $6,472 $6,042 $253 3.9% $430 7.1%
Occupancy and equipment 1,512 1,373 1,373 139 10.2% - -%
Data processing 859 764 748 94 12.3% 16 2.2%
Amortization of goodwill and
and other intangible assets 147 147 147 - - % - -%
Other operating expenses 2,783 3,148 2,650 (364) (11.6%) 498 18.8%
Total $12,026 $11,904 $10,960 $122 1.0 % $944 8.6%
INCOME TAXES
Income tax expense was approximately $4,277,000 for 2001, compared to $4,398,000
for 2000 and $3,528,000 for 1999. The effective tax rates on earnings were
34.9%, 35.6% and 34.1%, respectively. The decrease in the Company's overall
effective tax rate in 2001 is primarily attributable to a reduction in
non-deductible expenses which were incurred in 2000 as a result of the merger of
Talbot Bancshares, Inc. into the Company.
Deferred tax assets and liabilities are recognized based on the differences
between financial statement and tax bases of assets and liabilities measured
using current tax rates. If it is likely that deferred tax assets will not be
fully realized a valuation allowance is provided against deferred tax assets.
Management feels that no such valuation allowance is necessary at December 31,
2001 and 2000. Deferred tax expense is measured by the change in net deferred
tax assets or liabilities for the period.
LIQUIDITY
Liquidity describes the ability of the Company to meet financial obligations
that arise during the normal course of business. Liquidity is primarily needed
to meet the borrowing and deposit withdrawal requirements of customers and to
fund current and planned expenditures. Liquidity is derived through increased
customer deposits, maturities in the investment portfolio, loan repayments and
income from earning assets. To the extent that deposits are not adequate to fund
customer loan demand, liquidity needs can be met in the short-term funds
markets. The Company has arrangements with correspondent banks whereby it has
$17,000,000 available in federal funds lines of credit and a reverse repurchase
agreement available to meet any short-term needs which may not otherwise be
funded by its portfolio of readily marketable investments that can be converted
to cash. The Banks are also members of the Federal Home Loan Bank of Atlanta,
which provides another source of liquidity.
At December 31, 2001, the Company's loan to deposit ratio was 81%, compared to
82% one year ago. Investment securities available for sale totaling $114,932,000
were available for the management of liquidity and interest rate risk. Cash and
cash equivalents at December 31, 2001 were $51,638,000, up $11,923,000 from one
year ago. Management is not aware of any demands, commitments, events or
uncertainties that will materially affect the Company's ability to maintain
liquidity at satisfactory levels.
-14-
MARKET RISK AND INTEREST RATE SENSITIVITY
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates or
equity pricing. The Company's principal market risk is interest rate risk that
arises from its lending, investing and deposit taking activities. The Company's
profitability is dependent on the Banks' net interest income. Interest rate risk
can significantly affect net interest income to the degree that interest bearing
liabilities mature or reprice at different intervals than interest earning
assets. The Asset/Liability Committee of the Board of Directors (the "ALCO") of
both Banks oversees the management of interest rate risk. The ALCO's primary
purpose is to manage the exposure of net interest margins to unexpected changes
due to interest rate fluctuations. These efforts affect the loan pricing and
deposit rate policies of the Company as well as the asset mix, volume
guidelines, and liquidity and capital planning.
The Company does not utilize derivative financial or commodity instruments or
hedging strategies in its management of interest rate risk. Since the Company is
not exposed to market risk from trading activities and does not utilize hedging
strategies or off-balance sheet management strategies, the ALCO relies on "gap"
analysis as its primary tool in managing interest rate risk. Gap analysis
summarizes the amount of interest sensitive assets and liabilities which will
reprice over various time intervals. The difference between the volume of assets
and liabilities repricing in each interval is the interest sensitivity "gap".
"Positive gap" occurs when more assets reprice in a given time interval, while
"negative gap" occurs when more liabilities reprice. As of December 31, 2001,
the Company had a negative gap position within the one-year repricing interval.
The following table summarizes the Company's interest sensitivity at December
31, 2001. Loans, federal funds sold, time deposits and short term borrowings are
classified based upon contractual maturities if fixed-rate or earliest repricing
date if variable rate. Investment securities are classified by contractual
maturities or, if they have call provisions, by the most likely repricing date.
Management has classified money market, savings and NOW accounts primarily in
the over 1 year interval because they have not historically repriced in
accordance with general changes in interest rates.
3 Months 1 Year Non-
Within through through After Sensitive
December 31, 2001 3 Months 12 Months 5 Years 5 Years Funds Total
(Dollars in Thousands)
ASSETS:
Loans - net of unearned income $117,237 $54,318 $185,981 $34,936 $ 234 $392,706
Investment securities 4,047 11,803 67,604 34,227 8,148 125,829
Interest bearing deposits with other banks 14,179 - - - - 14,179
Federal funds sold 20,035 - - - - 20,035
OTHER ASSETS - - - - 29,654 29,654
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $155,498 $66,121 $253,585 $69,163 $38,036 $582,403
LIABILITIES:
Certificates of deposit $100,000 and over $35,447 $19,794 $19,855 $ - $ - $75,096
Other time deposits 31,355 54,255 62,076 - - 147,686
Savings and money market 39,002 11,129 55,315 2,649 - 108,095
NOW and SuperNOW 25,557 2,222 52,584 10,925 - 91,288
Noninterest bearing demand - - - - 65,305 65,305
Short term borrowings 17,054 - - - - 17,054
Long-term debt - - 5,000 - - 5,000
Other liabilities - - - - 1,909 1,909
STOCKHOLDERS' EQUITY - - - - 70,970 70,970
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $148,415 $87,400 $194,830 $13,574 $138,184 $582,403
- ---------------------------------------------------------------------------------------------------------------------------
Excess $7,083 $(21,279) $58,755 $55,589 $(100,148)
Cumulative Excess $7,083 $(14,196) $44,559 $100,148$ -
Cumulative Excess as percent of total 1.22% (2.44)% 7.66% 17.20% -
-15-
In addition to gap analysis, the Banks utilize simulation models to quantify the
effect a hypothetical immediate plus or minus 200 basis point change in rates
would have on net interest income and the fair value of capital. The model takes
into consideration the effect of call features of investments as well as
prepayments of loans in periods of declining rates. When actual changes in
interest rates occur, the changes in interest earning assets and interest
bearing liabilities may differ from the assumptions used in the model.
As of December 31, 2001, the model produced the following sensitivity profile
for net interest income and the fair value of capital.
Immediate Change in Rates Policy
+200 Basis Points -200 Basis Points Limit
% Change in Net Interest Income (.43)% (2.79)% + 25%
--
% Change in Fair Value of Capital (.16)% (4.40)% + 15%
RECENT STOCK PRICES AND DIVIDENDS
The Company's stock is traded over-the-counter and is quoted on the NASDAQ Small
Cap Market under the symbol SHBI. Prior to April 2001, the Company's stock was
quoted on the OTC Bulletin Board under the
symbol SHBI, and was traded infrequently. Price information prior to April 2001
is based upon the participation of market makers for the Company's stock and
actual transfers recorded by the transfer agent.
As of March 1, 2002, the Company had 1,437 holders of record of its common
stock. The Board of Directors establishes the amount of the dividend to be paid
each quarter based upon such factors as operating results, financial condition,
capital adequacy, regulatory requirements, and shareholder return.
The following table indicates cash dividends paid per share for each quarter of
2001, 2000 and 1999 and the ranges of representative sales prices for the stated
periods.
2001 2000 1999
Price Range Dividends Price Range Dividends Price Range Dividends
High Low Paid High Low Paid High Low Paid
First Quarter $17.50 - 13.50 $ .15 $ 21.00 - 18.00 $ .12 $ 33.50 - 27.00 $.10
Second Quarter 20.00 - 14.75 .15 19.00 - 12.00 .12 32.00 - 28.00 .10
Third Quarter 20.45 - 18.88 .15 22.00 - 13.00 .12 30.00 - 20.00 .10
Fourth Quarter 19.25 - 17.10 .15 18.25 - 11.00 .16 21.00 - 18.00 .15
----- ----- ----
$ .60 $ .52 $.45
===== ===== ====
-16-
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for the five
years ended December 31, 2001 and is qualified in its entirety by the detailed
information and financial statements, including notes thereto, included
elsewhere or incorporated by reference in this annual report. This data should
be read in conjunction with the financial statements and related notes thereto,
included elsewhere in this annual report and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Years Ended December 31,
(Dollars in thousands, except per shares data) 2001 2000 1999 1998 1997
SUMMARY OF OPERATING RESULTS:
Total interest income $38,938 $39,480 $35,435 $34,058 $32,077
Total interest expense 17,061 17,888 16,039 15,386 14,044
------- ------ ------ ------ ------
Net interest income 21,877 21,592 19,396 18,672 18,033
Provision for credit losses 226 437 240 240 225
--------- ------ -------- -------- --------
Net interest income after provision for credit losses 21,651 21,155 19,156 18,432 17,808
Noninterest income 2,646 3,104 2,138 1,660 1,622
Noninterest expense 12,026 11,904 10,961 10,634 10,194
------ ------ ------ ------ -------
Income before income taxes 12,271 12,355 10,333 9,458 9,236
Provision for income taxes 4,277 4,398 3,528 3,224 3,192
------ ------- ------- ------- ------
NET INCOME $7,994 $ 7,957 $ 6,805 $ 6,234 $6,044
======= ======= ======= ======= ======
PER SHARE DATA:
Diluted net income $1.49 $ 1.48 $ 1.27 $ 1.15 $ 1.11
Dividends paid .60 .52 .45 .40 .37
Book value 13.31 12.21 11.00 10.58 10.08
Tangible book value 13.03 11.91 10.67 10.22 9.69
Weighted average common shares (1) 5,382,398 5,388,486 5,376,200 5,425,172 5,432,369
OTHER DATA (AT YEAR END):
Total assets $582,403 $553,097 $518,217 $483,308 $442,144
Total deposits 487,470 464,485 436,021 403,237 370,727
Total loans, net of unearned income
and allowance for credit losses 388,516 378,307 341,800 301,629 290,519
Total stockholders' equity 70,971 65,024 58,485 56,188 54,487
RETURN ON EQUITY AND ASSETS:
Return on average total assets 1.42% 1.52% 1.37% 1.37% 1.43%
Return on average stockholders' equity 11.70% 12.98% 11.85% 11.16% 11.59%
Dividend payout ratio 40.00% 34.97% 35.34% 34.39% 32.88%
Average stockholders' equity to average total assets 12.16% 11.68% 11.53% 12.25% 12.37%
<FN>
(1) The weighted average common shares include the effect of dilution of stock
options outstanding during the period.
</FN>
-17-
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
- ------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 17,424,346 $ 20,039,249
Interest bearing deposits with other banks 14,178,789 --
Federal funds sold 20,035,061 19,676,215
Investment securities:
Available for sale - at fair value 114,932,289 95,034,215
Held to maturity - at amortized cost - fair value of
(2001) $11,041,923 and (2000) $22,576,492 10,896,293 22,565,750
Loans, less allowance for credit losses (2001) $4,189,368
(2000) $4,199,008 388,516,236 378,307,130
Premises and equipment, net 7,224,093 7,039,100
Accrued interest receivable on loans and investment securities 3,320,923 4,333,567
Investment in unconsolidated subsidiary 1,125,567 1,082,128
Goodwill and other intangible assets 1,474,841
1,622,229Deferred income taxes 681,441 1,183,746
Other real estate 56,116 14,116
Other assets 2,537,486 2,199,267
------------- -------------
Total assets $ 582,403,481 $ 553,096,712
============= =============
LIABILITIES
Deposits:
Noninterest bearing demand $ 65,305,024 $ 55,930,929
NOW and Super NOW 91,287,765 89,488,635
Certificates of deposit, $100,000 or more 75,096,165 78,272,816
Other time and savings 255,780,674 240,792,606
------------- -------------
487,469,628 464,484,986
Accrued interest payable 784,994 1,005,878
Short term borrowings 17,053,864 16,252,182
Long term debt 5,000,000 5,000,000
Other liabilities 1,124,362 1,329,413
------------- -------------
Total liabilities 511,432,848 488,072,459
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01, authorized 35,000,000 shares;
issued and outstanding (2001) 5,332,947 shares;
(2000) 5,324,157 shares 53,330 53,242
Surplus 23,039,084 22,923,707
Retained earnings 47,411,873 42,601,248
Accumulated other comprehensive income (loss) 466,346 (553,944)
------------- -------------
Total stockholders' equity 70,970,633 65,024,253
------------- -------------
Total liabilities and stockholders' equity $ 582,403,481 $ 553,096,712
============= =============
The notes to consolidated financial statements are an integral part of these
statements.
-18-
CONSOLIDATED STATEMENTS OF INCOME For
the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
- -----------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $ 31,256,323 $ 31,619,234 $ 27,084,423
Interest and dividends on investment securities:
Taxable 5,955,160 6,691,678 6,772,876
Tax-exempt 443,986 499,215 589,996
Federal funds sold 912,517 669,823 987,303
Other interest 369,903 -- --
------------ ------------
Total interest income 38,937,889 39,479,950 35,434,598
------------ ------------ ------------
INTEREST EXPENSE
NOW and Super NOW accounts 1,483,160 1,989,954 1,806,684
Certificates of deposit, $100,000 or more 4,025,784 4,071,479 3,147,589
Other time and savings 10,727,057 10,414,939 10,123,976
Interest on short term borrowings 554,585 1,096,149 687,250
Interest on long term debt 270,602 315,467 273,889
------------ ------------ ------------
Total interest expense 17,061,188 17,887,988 16,039,388
------------ ------------ ------------
NET INTEREST INCOME 21,876,701 21,591,962 19,395,210
PROVISION FOR CREDIT LOSSES 226,000 437,045 240,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 21,650,701 21,154,917 19,155,210
NONINTEREST INCOME
Service charges on deposit accounts 1,876,591 1,750,652 1,568,995
Gain (loss) on sale of securities 9,631 (47,839) 33,582
Gain on life insurance policies -- 750,004 --
Other operating income, net 759,906 650,739 535,251
------------ ------------ ------------
2,646,128 3,103,556 2,137,828
------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and wages 5,046,246 4,783,091 4,586,511
Employee benefits 1,678,466 1,688,893 1,455,819
Occupancy expense 824,164 714,775 722,286
Furniture and equipment expense 687,548 657,696 650,686
Data processing 858,635 764,413 747,857
Amortization of goodwill and other intangible assets 147,388 147,388 147,392
Other operating expenses 2,783,430 3,147,429 2,649,884
------------ ------------ ------------
12,025,877 11,903,685 10,960,435
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 12,270,952 12,354,788 10,332,603
Federal and State income taxes 4,276,857 4,397,824 3,527,915
------------ ------------ ------------
NET INCOME $ 7,994,095 $ 7,956,964 $ 6,804,688
============ ============ ============
Basic earnings per common share $ 1.50 $ 1.50 $ 1.28
============ ============ ============
Diluted earnings per common share $ 1.49 $ 1.48 $ 1.27
============ ============ ============
The notes to consolidated financial statements are an integral part of these
statements.
-19-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY For the Years Ended December 31, 2001, 2000 and 1999
ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME (LOSS) EQUITY
------------ ------------ ------------ ---------------- ---------------
Balances, January 1, 1999 $ 53,113 $ 22,705,251 $ 33,029,549 $ 400,052 $ 56,187,965
Comprehensive income:
Net income -- -- 6,804,688 -- 6,804,688
Other comprehensive income, net of tax:
Unrealized loss on available for
sale securities, net of reclassification
adjustment of $(141,636) -- -- -- (2,173,748) (2,173,748)
------------
Total comprehensive income -- -- -- -- 4,630,940
------------
Stock repurchased and retired (29) (58,709) -- -- (58,738)
6,070 shares issued under 401(k) plan 60 119,230 -- -- 119,290
Exercise of stock options 4 10,665 -- -- 10,669
Cash dividends paid, $.45 per share -- -- (2,404,754) -- (2,404,754)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1999 53,148 22,776,437 37,429,483 (1,773,696) 58,485,372
Comprehensive income:
Net income -- -- 7,956,964
-- 7,956,964
Other comprehensive income, net of tax:
Unrealized gain on available for
sale securities, net of reclassification
adjustment of $(7,148) -- -- -- 1,219,752 1,219,752
------------
Total comprehensive income -- -- -- -- 9,176,716
------------
Stock repurchased and retired (1) (1,461) -- -- (1,462)
9,191 shares issued under 401(k) plan 92 143,044 -- -- 143,136
Exercise of stock options 5 5,687 -- -- 5,692
Fractional shares redeemed (2) -- (2,546) -- (2,548)
Cash dividend paid $.52 per share -- -- (2,782,653) -- (2,782,653)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 2000 53,242 22,923,707 42,601,248 (553,944) 65,024,253
COMPREHENSIVE INCOME:
NET INCOME -- -- 7,994,095
-- 7,994,095
OTHER COMPREHENSIVE INCOME, NET OF TAX:
UNREALIZED GAIN ON AVAILABLE FOR
SALE SECURITIES, NET OF RECLASSIFICATION
ADJUSTMENT OF $(7,110) -- -- -- 1,020,290 1,020,290
------------
TOTAL COMPREHENSIVE INCOME -- -- -- -- 9,014,385
------------
STOCK REPURCHASED AND RETIRED -- (1,020) -- -- (1,020)
2,722 SHARES ISSUED UNDER 401(K) PLAN 27 41,143 -- -- 41,170
EXERCISE OF STOCK OPTIONS 61 75,254 -- -- 75,315
PREMIUM RECEIVED ON ISSUANCE OF
SHARES IN UNCONSOLIDATED SUBSIDIARY -- -- 14,170 -- 14,170
CASH DIVIDEND PAID $.60 PER SHARE -- -- (3,197,640) -- (3,197,640)
------------ ------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 2001 $ 53,330 $ 23,039,084 $ 47,411,873 $ 466,346 $ 70,970,633
============ ============ ============ ============ ============
The notes to consolidated financial statements are an integral part of these
statements.
-20-
CONSOLIDATED STATEMENTS OF CASH FLOWS For
the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,994,095 $ 7,956,964 $ 6,804,688
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 995,676 926,318 1,068,935
Discount accretion on debt securities (155,811) (467,105) (152,807)
Discount accretion on matured debt securities 24,751 441,861 98,199
(Gain) loss on sale of securities (9,631) 47,839 (33,582)
Gain on life insurance policies -- (750,004) --
Provision for credit losses, net (9,640) 208,450 59,320
Deferred income taxes (136,433) (89,489) (43,997)
Loss on disposal of premises and equipment 328 2,651 20,253
Loss on other real estate owned 5,000 17,566 7,614
Net changes in:
Accrued interest receivable 1,012,644 (748,988) (60,320)
Other assets (367,486) 304,442 102,190
Accrued interest payable (220,884) 324,618 (10,321)
Other liabilities (205,051) 233,412 15,449
------------- ------------- -------------
Net cash provided by operating activities 8,927,558 8,408,535 7,875,621
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 5,509,843 8,116,313 11,635,919
Proceeds from maturities and principal payments
of securities available for sale 77,482,056 93,159,085 25,800,449
Purchases of securities available for sale (101,367,542) (96,272,930) (45,727,609)
Proceeds from maturities and principal payments
of securities held to maturity 13,274,235 3,580,036 23,819,309
Purchases of securities held to maturity (1,622,415) (311,170) (12,911,397)
Net increase in loans (9,588,339) (36,982,347) (39,761,816)
Purchase of loans (980,837) -- (1,400,000)
Proceeds from sale of loans 322,710 -- 880,837
Purchase of premises and equipment (738,686) (1,256,773) (746,263)
Proceeds from sale of other real estate owned -- 372,494 132,035
Proceeds from life insurance policies -- 1,170,966 --
Proceeds from sale of premises and equipment -- 20,700 450
------------- ------------- -------------
Net cash used in investing activities (17,708,975) (28,403,626) (38,278,086)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW,
money market, and savings deposits 20,424,729 13,849,924 17,199,852
Net increase in certificates of deposit 2,559,913 14,614,017 15,584,351
Net increase (decrease) in short term borrowings 801,682 (681,126) (178,067)
Proceeds from issuance of common stock 116,485 148,828 129,959
Repurchase of common stock (1,020) (4,010) (58,738)
Dividends paid (3,197,640) (2,782,653) (2,404,754)
------------- ------------- -------------
Net cash provided by financing activities 20,704,149 25,144,980 30,272,603
------------- ------------- -------------
-21-
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
- ---------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 11,922,732 5,149,889 (129,862)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 39,715,464 34,565,575 34,695,437
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 51,638,196 $ 39,715,464 $ 34,565,575
============ ============ ============
Supplemental cash flows information:
Interest paid $ 17,282,072 $ 17,563,370 $ 15,765,712
============ ============ ============
Income taxes paid $ 4,439,933 $ 4,108,127 $ 3,475,246
============ ============ ============
Transfers from loans to other real estate $ 47,000 $ 267,060 $ 113,000
============ ============ ============
The notes to consolidated financial statements are an integral part of these
statements.
-22-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001, 2000 and 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Shore Bancshares,
Inc. (the "Company") and it's subsidiaries, The Talbot Bank of Easton, Maryland
("Talbot Bank") and The Centreville National Bank of Maryland ("Centreville
National Bank"), collectively referred to as the "Banks", with all significant
intercompany transactions eliminated. The investments in subsidiaries are
recorded on the Company's books on the basis of its equity in the net assets of
the subsidiaries. The accounting and reporting policies of the Company conform
to accounting principles generally accepted in the United States of America and
to prevailing practices within the banking industry. Certain reclassifications
have been made to amounts previously reported to conform to the classifications
made in 2001.
NATURE OF OPERATIONS
The Company, through its bank subsidiaries, provides commercial banking services
from its locations in Talbot, Queen Anne's, Kent, Caroline, and Dorchester
Counties, Maryland. Its primary source of revenue is from providing commercial,
real estate and consumer loans to customers located on Maryland's Eastern Shore.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The allowance for credit losses is a material estimate that is particularly
susceptible to significant changes in the near-term. Management believes that
the allowance for credit losses is sufficient to address the risks in the
current portfolio. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination processes, periodically review the Bank's
allowance for credit losses. Such agencies may require the Banks to recognize
additions to the allowance based on their judgements about information available
to them at the time of their examination.
INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are stated at estimated fair value
based on quoted market prices. They represent those securities which management
may sell as part of its asset/liability strategy or which may be sold in
response to changing interest rates, changes in prepayment risk or other similar
factors. The cost of securities sold is determined by the specific
identification method. Net unrealized holding gains and losses on these
securities are reported as accumulated other comprehensive income, a separate
component of stockholders' equity, net of related income taxes.
INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. The Company intends and has
the ability to hold such securities until maturity. When securities are
transferred into the held to maturity category from available for sale, they are
accounted for at estimated fair value with any unrealized holding gain or loss
at the date of the transfer reported as accumulated other comprehensive income,
net of income taxes, and amortized over the remaining life of the security as an
adjustment of yield.
LOANS
Loans are stated at their principal amount outstanding net of any deferred fees
and costs. Interest income on loans is accrued at the contractual rate based on
the principal amount outstanding. Fees charged and costs capitalized for
originating loans are being amortized substantially on the interest method over
the term of the loan. A loan is placed on nonaccrual when it is specifically
determined to be impaired or when principal or interest is delinquent for 90
days or more. Any unpaid interest previously accrued on those loans is reversed
from income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is recognized only to the extent of
interest payments received.
-23-
Loans are considered impaired when it is probable that the Banks will not
collect all principal and interest payments according to the loan's contractual
terms. The impairment of a loan is measured at the present value of expected
future cash flows using the loan's effective interest rate, or at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Impaired loans do not include groups of smaller balance
homogeneous loans such as residential mortgage and consumer installment loans
that are evaluated collectively for impairment. Reserves for probable credit
losses related to these loans are based upon historical loss ratios and are
included in the allowance for credit losses.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance when
management believes that the collectibility of the principal is unlikely. The
allowance for credit losses consists of an allocated component and an
unallocated component. The components of allowance for credit losses represent
an estimation done pursuant to either Statement of Financial Accounting
Standards ("SFAS") No. 5 "Accounting for Contingencies" or SFAS No.114
"Accounting by Creditors for Impairment of a Loan". The allocated component of
the allowance for credit losses reflects expected losses resulting from analysis
developed through specific credit allocations for individual loans and
historical loss experience for each loan category. The specific credit
allocations are based on a regular analysis of all loans over a fixed-dollar
amount where the internal credit rating is at or below a predetermined
classification. The historical credit loss element is determined statistically
using a loss migration analysis that examines loss experience and the related
internal grading of loans charged-off. The loss migration analysis is performed
quarterly and loss factors are updated regularly based on actual experience. The
allocated component of the allowance for credit losses also includes
management's determination of the amounts necessary for concentrations and
changes in portfolio mix and volume.
The unallocated portion of the allowance is determined based on management's
assessment of general economic conditions, as well as specific economic factors
in the individual markets in which the Company operates. This determination
inherently involves a higher risk of uncertainty and considers current risk
factors that may not have yet manifested themselves in the Company's historical
loss factors used to determine the allocated component of the allowance and it
recognizes knowledge of the portfolio may be incomplete.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed under the straight-line and accelerated methods over
the estimated useful lives of the assets.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of assets acquired in purchase
business combinations over the fair value of the net assets at the dates of
acquisition and is being amortized on the straight-line method over a period of
15 years. Identifiable intangible assets other than goodwill were fully
amortized as of December 31, 2001. See RECENT ACCOUNTING PRONOUNCEMENTS for
additional discussion regarding goodwill and intangible assets.
OTHER REAL ESTATE
Other real estate represents assets acquired in satisfaction of loans either by
foreclosure or deeds taken in lieu of foreclosure. Properties acquired are
recorded at the lower of cost or fair value less estimated selling costs at the
time of acquisition with any deficiency charged to the allowance for credit
losses. Thereafter, costs incurred to operate or carry the properties as well as
reductions in value as determined by periodic appraisals are charged to
operating expense. Gains and losses resulting from the final disposition of the
properties are included in noninterest expense.
SHORT TERM BORROWINGS
Short term borrowing are comprised primarily of repurchase agreements which are
securities sold to the Banks' customers, at the customers' request, under a
continuing "roll-over" contract that matures in one business day. The underlying
securities sold are U.S. Treasury notes or Government Agency bonds, which are
segregated from the Bank's other investment securities by the Banks' safekeeping
agents.
INCOME TAXES
Income tax expense is based on the results of operations, adjusted for permanent
differences between items of income or expense reported in the financial
statements and those reported for tax purposes. Deferred income taxes are
provided under the liability method based on the difference between the
financial statement and taxes bases of assets and liabilities and are measured
at the current statutory tax rates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers cash and due
from banks, interest bearing deposits with other banks, and federal funds sold
to be cash and cash equivalents.
-24-
STOCK-BASED COMPENSATION
Stock-based compensation is recognized using the intrinsic value method. For
disclosure purposes, pro forma net income and earnings per share effects are
provided as if the fair value method had been applied.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 102, SELECTED LOAN LOSS ALLOWANCE METHODOLOGY
AND DOCUMENTATION ISSUES. SAB 102 summarizes certain SEC views on the
development, documentation, and application of a systematic methodology as
required by Financial Reporting Release No. 28 for determining allowances for
loan losses in accordance with accounting principles generally accepted in the
United States of America. In particular, the guidance focuses on the
documentation the staff normally would expect registrants to prepare and
maintain in support of their allowances for loan losses.
SAB 102 provides parallel guidance to the federal banking agencies guidance
issued through the Federal Financial Institutions Examination Council as
interagency guidance, "Policy Statement on Allowance for Loan and Lease Losses
Methodologies and Documentation for Banks and Savings Institutions". Management
believes the Company is in compliance with the provision of SAB 102.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS and SFAS
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS 141 also specifies criteria that intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values and reviewed for impairment in accordance
with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF.
The provisions of SFAS No. 142 were adopted by the Company as required effective
January 1, 2002. Application of the nonamortization provisions of the statement
is expected to increase net income approximately $140,000 or $.03 per diluted
share in 2002 as compared to 2001.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes
both SFAS No 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE
DISPOSED OF and the accounting and reporting provisions of APB Opinion No. 30,
REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS, for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses in
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with SFAS No.
121. The provisions of SFAS No. 144 are effective for years beginning after
December 15, 2001, and its adoption is not expected to affect the financial
position or results of operations of the Company.
NOTE 2. PENDING ACQUISITION
During December 2001, the Company reached an agreement to acquire certain assets
of The Avon-Dixon Agency, Inc., a full service insurance agency, and its
subsidiaries, all located in Easton, Maryland. The final purchase price has not
yet been determined, however it is expected to be approximately $7 million. The
purchase price is subject to adjustment based upon certain performance criteria.
Consideration is expected to be comprised of approximately 89% cash and 11%
common stock issued by the Company. It is anticipated that the transaction will
be completed early in the second quarter of 2002, pending satisfaction of the
conditions contained in the agreement.
NOTE 3. CASH AND DUE FROM BANKS
The Federal Reserve requires banks to maintain certain minimum cash balances
consisting of vault cash and deposits in the Federal Reserve Bank or in other
commercial banks. Such balances averaged approximately $7,049,000 and $6,066,000
during 2001 and 2000, respectively.
-25-
NOTE 4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities are as
follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
Available for sale securities: COST GAINS LOSSES
VALUE
------------ ------------ ------------ ------------
DECEMBER 31, 2001:
U.S. Treasury securities $ 5,076,925 $ 95,265 $ -- $ 5,172,190
Obligations of U.S. Government agencies
and corporations 66,401,110 1,288,871 42,613 67,647,368
Obligations of states and political subdivisions 210,000 3,246 -- 213,246
Other securities:
Mortgage backed securities 33,025,586 113,745 262,510 32,876,821
Federal Home Loan Bank stock 1,786,100 -- -- 1,786,100
Federal Reserve Bank stock 302,250 -- -- 302,250
Federal Home Loan Mortgage Corporation
Cumulative preferred stock 5,980,513 10,000 310,588 5,679,925
Equity securities 1,390,036 1,765 137,412 1,254,389
------------ ------------ ------------ ------------
$114,172,520 $ 1,512,892 $ 753,123 $114,932,289
============ ============ ============ ============
December 31, 2000:
U.S. Treasury securities $ 10,149,444 $ 24,643 $ 27,517 $ 10,146,570
Obligations of U.S. Government agencies
and corporations 77,047,387 138,302 495,133 76,690,556
Obligations of states and political subdivisions 406,094 -- 355 405,739
Other securities:
Mortgage backed securities 1,434,650 23,066 4 1,457,712
Federal Home Loan Bank stock 1,723,100 -- -- 1,723,100
Federal Reserve Bank stock 302,250 -- -- 302,250
Federal Home Loan Mortgage Corporation
Cumulative preferred stock 3,480,513 -- 418,475 3,062,038
Equity securities 1,390,036 1,651 145,437 1,246,250
------------ ------------ ------------ ------------
$ 95,933,474 $ 187,662 $ 1,086,921 $ 95,034,215
============ ============ ============ ============
Held to Maturity securities:
------------
DECEMBER 31, 2001:
Obligations of U.S. Government agencies
and corporations $ 1,576,772 $ 5,470 $ -- $ 1,582,242
Obligations of states and political subdivisions 9,307,674 154,008 14,876 9,446,806
Other securities:
Mortgage backed securities 11,847 1,028 -- 12,875
------------ ------------ ------------ ------------
$ 10,896,293 $ 160,506 $ 14,876 $ 11,041,923
============ ============ ============ ============
December 31, 2000:
Obligations of U.S. Government agencies
and corporations $ 12,497,724 $ 1,485 $ 37,048 $ 12,462,161
Obligations of states and political subdivisions 10,043,710 74,070 28,469 10,089,311
Other securities:
Mortgage backed securities 24,316 704 -- 25,020
------------ ------------ ------------ ------------
$ 22,565,750 $ 76,259 $ 65,517 $ 22,576,492
============ ============ ============ ============
-26-
The amortized cost and estimated fair values of investment securities by
contractual maturity date at December 31, 2001 are as follows:
AVAILABLE FOR SALE HELD TO MATURITY
-----------------------------------------------------------
Amortized Estimated Amortized Estimated
COST FAIR VALUE COST FAIR VALUE
------------- ----------- -----------------------------
Due in one year or less $ 13,114,913 $ 13,396,549 $1,565,578 $ 1,588,681
Due after one year through five years 64,668,598 65,539,096 6,621,817 6,723,850
Due after five years through ten years 12,515,529 12,539,016 2,708,898 2,729,392
Due after ten years 15,914,581 15,904,364 -- --
---------- ---------------------------- ------------
106,213,621 107,379,025 10,896,293 11,041,923
Investments in equity securities 7,958,899 7,553,264 -- --
------------- --------------------------------------------
$114,172,520 $114,932,289 $10,896,293 $11,041,923
============ ============ =========== ===========
The following table sets forth the amortized cost and estimated fair values of
securities which have been pledged as collateral for obligations to federal,
state and local government agencies and other purposes as required or permitted
by law.
DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------- -----------------------------
AMORTIZED ESTIMATED Amortized Estimated
COST FAIR VALUE COST FAIR VALUE
----------- -------------- ------------- --------------
Available for sale $68,120,674 $69,492,758 $70,464,535 $70,185,252
Held to maturity 3,316,387 3,369,126 15,484,161 15,507,605
--------- --------- ------------ ------------
$71,437,061 $72,861,884 $85,948,696 $85,692,857
=========== =========== =========== ===========
There were no obligations of states and political subdivisions whose carrying
value, as to any issuer, exceeded 10% of stockholders' equity at December 31,
2001 or 2000.
Proceeds from sales of investment securities were $5,509,843, $8,116,313, and
$11,635,919 for the years ended December 31, 2001, 2000, and 1999, respectively.
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Company grants residential mortgage, consumer and commercial loans to
customers primarily in Talbot, Queen Anne's, Kent, Caroline and Dorchester
Counties in Maryland. The principal categories of the loan portfolio at December
31 are summarized as follows:
2001 2000
-------------- --------------
Real estate loans:
Construction and land development $20,255,290 $ 18,586,702
Secured by farmland 14,705,994 19,187,868
Secured by residential properties 184,949,866 176,759,825
Secured by non farm, nonresidential properties 94,214,420 95,111,154
Loans to farmers (loans to finance agricultural production and other loans) 3,100,465 2,869,986
Commercial and industrial loans 51,744,215 49,430,302
Loans to individuals for household, family, and other personal expenditures 19,291,850 17,988,688
Obligations of States and political subdivisions in the United States, tax-exempt 4,070,462 2,303,982
All other loans 272,617 140,452
-------------- ---------------
392,605,179 382,378,959
Net deferred loan costs 100,425 127,179
-------------- ---------------
392,705,604 382,506,138
Allowance for credit losses (4,189,368) (4,199,008)
------------- --------------
$388,516,236 $378,307,130
============= ===============
In the normal course of banking business, loans are made to officers and
directors and their affiliated interests. These loans are made on substantially
the same terms and conditions as those prevailing at the time for comparable
transactions with outsiders and are not considered to involve more than the
normal risk of collectibility. As of December 31, 2001 and 2000, such loans
outstanding, both direct and indirect (including guarantees), to directors,
their associates and policy-making officers, totaled approximately $5,942,000
and $7,411,000, respectively. During 2001 and 2000, loan additions were
approximately $1,295,000 and $543,000, and loan repayments were approximately
$2,764,000 and $879,000, respectively.
-27-
Activity in the allowance for credit losses is summarized as follows:
2001 2000 1999
-------- ----------- ----------
Balance, beginning of year $ 4,199,008 $ 3,990,558 $ 3,931,238
----------- ----------- -----------
Loans charged off:
Real estate loans (5,338) (60,752) (121,659)
Installment loans (154,631) (72,650) (145,681)
Commercial and other (175,225) (244,170) (161,793)
----------- ----------- -----------
(335,194) (377,572) (429,133)
----------- ----------- -----------
Recoveries:
Real estate loans 1,847 18,047 49,556
Installment loans 60,694 50,339 43,046
Commercial and other 37,013 80,591 155,851
----------- ----------- -----------
99,554 148,977 248,453
----------- ----------- -----------
Net losses charged off (235,640) (228,595) (180,680)
Provision 226,000 437,045 240,000
----------- ----------- -----------
Balance, end of year $ 4,189,368 $ 4,199,008 $ 3,990,558
=========== =========== ===========
Information with respect to impaired loans and the related valuation allowance
as of December 31 is as follows:
2001 2000
----------- ------------
Impaired loans with valuation allowance $ 560,539 $ --
Impaired loans with no valuation allowance 382,537 640,092
---------- -------------
Total impaired loans $ 943,076 $ 640,092
========== =============
Allowance for loan losses related to impaired loans $ 76,935 $ --
Allowance for loan losses related to other than impaired loans 4,112,433 4,199,008
---------- -------------
$4,189,368 $4,199,008
Total allowance for loan losses
Interest income on impaired loans recorded on the cash basis $ 19,467 $ 22,304
========== =============
Average recorded investment in impaired loans for the year $ 644,549 $1,230,048
========== =============
NOTE 6. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 is as follows:
2001 2000
-------- ---------
Land $1,768,393 $ 1,753,447
Buildings and land improvements 6,317,658 6,012,123
Furniture and equipment 4,321,221 3,985,649
----------- -----------
12,407,272 11,751,219
Accumulated depreciation (5,183,179) (4,712,119)
------------ -----------
$ 7,224,093 $ 7,039,100
=========== ===========
Depreciation expense totaled $553,000, $556,000 and $606,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
The Company leases facilities under operating leases. Rental expense for the
years ended December 31, 2001, 2000, and 1999 was $147,198, $91,701 and $89,373,
respectively. Future minimum annual rental payments are approximately as
follows:
2002 $144,319
2003 136,841
2004 71,042
2005 48,257
2006 30,490
Thereafter 17,417
-28-
NOTE 7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
The Company owns 29.25% of the outstanding common stock of the Delmarva Bank
Data Processing Center, Inc. ("DBDPC"). The investment is carried at cost,
adjusted for the Company's equity in DBDPC's undistributed income.
DECEMBER 31
--------------------------------------------
2001 2000 1999
---- ---- ----
Balance, beginning of year $1,082,128 $1,057,331 $ 1,049,409
Premium received on issuance of stock 14,170 - -
Equity in net income 29,269 24,797 7,922
---------- --------------- -------------
Balance, end of year $1,125,567 $ 1,082,128 $ 1,057,331
=========== =========== ===========
Data processing and other expenses paid to DBDPC totaled approximately $954,000,
$893,000, and $734,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
NOTE 8. SIGNIFICANT DEPOSITS
The approximate maturities of certificates of deposit of $100,000 or more at
December 31 are as follows:
2001 2000
-------------------------------
Three months or less $35,447,000 $39,881,000
Over three through twelve months 19,794,000 11,777,000
Over twelve months 19,855,000 26,615,000
----------- -----------
$ 75,096,000 $ 78,273,000
============ ============
NOTE 9. SHORT TERM BORROWINGS
Short-term borrowings, at December 31, 2001, consisted of securities sold under
agreements to repurchase. These short term obligations represent securities sold
to customers, at the customers' request, under a "roll-over" contract that
matures in one business day. The underlying securities sold are U.S. Treasury
Notes or Government agency securities, which are segregated, in the Bank's
custodial accounts from other investment securities. From time to time in order
to meet short term liquidity needs the Company may borrow from a correspondent
federal funds line of credit arrangement or a secured reverse repurchase
agreement. The following table summarizes certain information for short term
borrowings:
2001 2000
---- ----
Average amount outstanding during the year $19,315,474 $21,521,979
Weighted average interest rate during the year 2.87% 5.08%
Amount outstanding at year end $17,053,864 $16,252,182
Weighted average rate at year end 1.15% 4.96%
Maximum amount at any month end $25,174,790 $32,498,121
NOTE 10. LONG TERM DEBT
As of December 31, 2001, 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
4.97%. The advance is due March 29, 2006 and has a one time call provision in
2004 . The Company has pledged its wholly owned residential real estate mortgage
loan portfolio under a blanket floating lien as collateral for this advance.
NOTE 11. BENEFIT PLANS
401(K) AND PROFIT SHARING PLANS
The Company has 401(k) and profit sharing plans covering substantially all
full-time employees of the Banks. The 401(k) plans call for matching
contributions by the Company in cash and common stock of the Company. The
Company makes discretionary contributions to the profit sharing plans based on
profits. Company contributions to these plans included in expense totaled
$387,764 (2001), $407,384 (2000), and $341,944 (1999).
-29-
DEFINED BENEFIT PENSION PLAN
During 2000, the Company terminated its defined benefit pension plan, which had
been frozen since 1995. All benefits were distributed to plan participants in
2000. The Plan covered substantially all full-time employees of the Talbot Bank
with more than six months of service. Expense associated with the plan totaled
$89,760 (2000) and $7,915 (1999).
NOTE 12. STOCK OPTION PLANS
The Company has three active stock option plans whereby incentive or
nonqualified stock options may be granted periodically to directors, executive
officers, and key employees at the discretion of the Company's Compensation
Committee. The plans provide for both immediate and graduated vesting schedules.
The plans allow for up to 123,860 options of common stock to be granted. The
plans were adopted in 1999, 1998, and 1995 and the options granted have a life
not to exceed ten years.
The Company also has an Employee Stock Purchase Plan that was adopted in 1998
and allows employees to receive options to purchase common stock at an amount
equivalent to 85% of the fair market value of the common stock. The Company has
reserved 20,000 shares of common stock for issuance under the plan, however,
options to purchase no more than 4,000 shares may be granted in any calendar
year.
Following is a summary of changes in shares under option for all Plans for the
years indicated:
YEAR ENDED DECEMBER 31,
2001 2001
-------------------------------------------------------------------
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
------------------------------- -------------------------------
Outstanding at beginning of year 120,414 $9.82 140,897 $ 11.21
Granted - - 8,243 20.34
Exercised (6,853) (10.39) (763) (19.96)
Expired/Cancelled (1,015) (26.44) (27,963) (19.65)
------- -------
Outstanding at end of year 112,546 $9.67 120,414 $9.82
======== =======
Weighted average fair value of options
granted during the year $ - $ 12.88
=========== ========
The following summarizes information about options outstanding at December 31,
2001:
OPTIONS OUTSTANDING AND EXERCISABLE
OPTIONS OUTSTANDING WEIGHTED AVERAGE
-------------------
REMAINING
EXERCISE PRICE NUMBER NUMBER CONTRACT LIFE
---------------- ------ ------ -------------------
$ 6.85 52,739 52,739 3.61
8.78 47,880 47,780 4.95
17.85 927 927 .29
32.00 5,500 2,200 7.05
21.00 5,500 1,100 8.05
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
options that vest during the years ended December 31, 2000 and 1999. No options
were granted during the year ended December 31, 2001.
2000 1999
---- ----
Dividend yield 1.68% 2.9%
Expected volatility 15.0% 15.0%
Risk free interest 5.68% 6.55%
Expected lives (in years) 10 10
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS
123), but applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plan. No compensation expense related to
the Plan was recorded during the years ended December 31, 2001 or December 31,
2000. If the Company had elected to recognize compensation cost based on fair
value at the vesting dates for awards under the Plan consistent with the method
prescribed by SFAS 123, net income and earnings per share would have been
changed to the pro forma amounts as follows for the years ended December 31:
-30-
2001 2000 1999
---- ---- ----
Net income:
As reported $7,994,095 $7,956,964 $6,804,688
Pro forma 7,975,861 7,935,586 6,533,950
Basic net income per share:
As reported $1.50 $1.50 $1.28
Pro forma 1.50 1.49 1.23
Diluted earnings per share
As reported $1.49 $1.48 $1.27
Pro forma 1.48 1.47 1.22
The pro forma amounts are not representative of the effects on reported net
income for future years.
NOTE 13. DEFERRED COMPENSATION
The Company has a supplemental deferred compensation plan to provide retirement
benefits to its President and Chief Executive Officer. The plan calls for fixed
annual payments of $20,000 to be credited to the participant's account. The
participant is 100% vested in amounts credited to his account. Contributions to
the plan were $20,000 in 2001, 2000 and 1999.
The Company also has agreements with certain directors under which they have
deferred part of their fees and compensation. The amounts deferred are invested
in insurance policies, owned by the Company, on the lives of the respective
individuals. Amounts to be available under the policies are to be paid to the
individuals as retirement benefits over future years. Cash surrender values and
the accrued benefit obligation included in other assets and other liabilities at
December 31, are as follows:
2001 2000
---- ----
Cash surrender value $1,828,724 $ 1,784,437
Accrued benefit obligations 519,743 531,330
NOTE 14. INCOME TAXES
Income taxes included in the balance sheets as of December 31 are as follows:
2001 2000
-------- -----------
Federal income taxes currently (receivable) payable $(35,026) $ 14,273
State income taxes currently payable 4,255 136,487
Deferred income tax benefits 681,441 1,183,746
Components of income tax expense for each of the three years ended December 31
are as follows:
2001 2000 1999
--------- ----------- --------
Currently payable:
Federal $ 3,897,184 $ 4,036,794 $ 3,285,627
State 521,055 450,519 286,285
----------- ----------- -----------
4,418,239 4,487,313 3,571,912
----------- ----------- -----------
Deferred income tax benefits:
Federal (115,756) (73,267) (35,367)
State (25,626) (16,222) (8,630)
----------- ----------- -----------
(141,382) (89,489) (43,997)
----------- ----------- -----------
$ 4,276,857 $ 4,397,824 $ 3,527,915
=========== =========== ===========
A reconciliation of tax computed at the statutory federal tax rates of 34% to
the actual tax expense for the three years ended December 31 follows:
2001 2000 1999
-------- -------- -------
Tax at federal statutory rate 35.0% 34.0% 34.0%
Tax effect of:
Tax-exempt income (1.8) (1.9) (2.1)
Non-deductible expenses .5 1.5 .5
State income taxes, net of federal benefit 2.4 2.3 1.7
Other (1.2) (.3) -
----- ------ -------
Income tax expense 34.9% 35.6% 34.1%
===== ==== ====
-31-
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
2001 2000
-------- --------
Deferred tax assets:
Allowance for credit losses $1,221,480 $1,137,233
Provision for off balance sheet liabilities 18,538 13,903
Loan interest 6,106 2,525
Provision for loss on other real estate 1,931 --
Loan fees 23,264 49,541
Deferred compensation 186,816 184,293
Unrealized losses on available for sale securities -- 353,955
---------- ----------
Total deferred tax assets 1,458,135 1,741,450
---------- ----------
Deferred tax liabilities:
Depreciation 159,719 173,722
Cash to accrual conversion -- 12,370
Federal Home Loan Bank stock dividend 27,613 27,613
Undistributed income of unconsolidated subsidiary 60,585 62,845
Loan origination fees and costs 184,630 177,344
Unrealized gains on available for sale securities 293,423 --
Other 50,724 103,810
---------- ----------
Total deferred tax liabilities 776,694 557,704
---------- ----------
Net deferred tax assets $ 681,441 $1,183,746
========== ==========
NOTE 15. EARNINGS PER COMMON SHARE
Basic earnings per share is derived by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding and
does not include the effect of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation method is derived by
dividing net income by the weighted-average number of shares outstanding,
adjusted for the dilutive effect of outstanding stock options and warrants.
2001 2000 1999
------------- ------------- ------------
Basic:
Net income (applicable to common stock) $7,994,095 $7,956,964 $6,804,688
Average common shares outstanding 5,330,022 5,318,377 5,312,243
Basic earnings per share $1.50 $1.50 $1.28
Diluted:
Net income (applicable to common stock) $7,994,095 $7,956,964 $6,804,688
Average common shares outstanding 5,330,022 5,318,377 5,312,243
Diluted effect of stock options 52,376 70,109 63,957
----------- ----------- ----------
Average common shares outstanding - diluted 5,382,398 5,388,486 5,376,200
Diluted earnings per share $1.49 $1.48 $1.27
NOTE 16. REGULATORY CAPITAL REQUIREMENTS
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators, that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative measures of the
Banks' assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets.
Management believes as of December 31, 2001, that the Company and the Banks meet
all capital adequacy requirements to which they are subject.
As of December 31, 2001, the most recent notification from the Federal Deposit
Insurance Corporation and the Office of the Comptroller of the Currency
categorized the Banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Banks must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Banks' category.
-32-
A comparison of the Company's and Banks' capital as of December 31, 2001 and
2000 with the minimum requirements is presented below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ---------- ------ -------- -------
AS OF DECEMBER 31, 2001:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
COMPANY $70,970,000 17.64% $32,195,000 8.00%
THE TALBOT BANK $44,570,000 16.28% $21,896,000 8.00% $27,370,000 10.00%
THE CENTREVILLE NATIONAL BANK $25,957,000 20.22% $10,272,000 8.00% $12,840,000 10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
COMPANY $68,657,000 17.06% $16,097,000 4.00%
THE TALBOT BANK $43,730,000 15.98% $10,948,000 4.00% $16,422,000 6.00%
THE CENTREVILLE NATIONAL BANK $24,484,000 19.07% $5,136,000 4.00% $7,704,000 6.00%
TIER 1 CAPITAL (TO AVERAGE ASSETS):
COMPANY $68,657,000 11.85% $23,174,000 4.00%
THE TALBOT BANK $43,730,000 12.38% $14,128,000 4.00% $17,659,000 5.00%
THE CENTREVILLE NATIONAL BANK $24,484,000 10.85% $9,029,000 4.00% $11,287,000 5.00%
As of December 31, 2000:
Total Capital (to Risk Weighted Assets):
Company $67,810,000 18.16% $29,867,000 8.00%
The Talbot Bank $43,087,000 17.52% $19,673,000 8.00% $24,591,000 10.00%
The Centreville National Bank $24,372,000 19.30% $10,099,000 8.00% $12,623,000 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Company $63,611,000 17.04% $14,933,000 4.00%
The Talbot Bank $40,288,000 16.38% $9,836,000 4.00% $14,755,000 6.00%
The Centreville National Bank $22,972,000 18.20% $5,049,000 4.00% $7,574,000 6.00%
Tier 1 Capital (to Average Assets):
Company $63,611,000 11.67% $21,794,000 4.00%
The Talbot Bank $40,288,000 11.84% $13,608,000 4.00% $17,010,000 5.00%
The Centreville National Bank $22,972,000 11.37% $8,083,000 4.00% $10,103,000 5.00%
Bank and holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Banks, as well as restricting
extensions of credit and transfers of assets between the Banks and the Company.
At December 31, 2001, the Banks could have paid dividends to the parent company
of approximately $10,027,000 without the prior consent and approval of the
regulatory agencies. The Company had outstanding net receivables from the Banks
of $17,906 at December 31, 2001.
NOTE 17. LINE OF CREDIT
The Banks had $17,000,000 in unsecured federal funds lines of credit and a
reverse repurchase agreement available on a short term basis from correspondent
banks. In addition, the Banks have credit availability of approximately
$80,937,000 from the Federal Home Loan Bank of Atlanta. The Banks have pledged,
under blanket lien, all qualifying residential loans as collateral under the
borrowing agreements with the Federal Home Loan Bank. At December 31, 2001, the
Federal Home Loan Bank had issued a letter of credit for $15,000,000 on behalf
of the Talbot Bank to a local government entity as collateral for its deposits.
NOTE 18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
INVESTMENT SECURITIES
For all investments in debt securities, fair values are based on quoted
market prices. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
-33-
LOAN RECEIVABLES
The fair value of categories of fixed rate loans, such as commercial loans,
residential mortgage, and other consumer loans is estimated by discounting
the future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same remaining
maturities. Other loans, including variable rates loans, are adjusted for
differences in loan characteristics.
FINANCIAL LIABILITIES
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities. These
estimates do not take into consideration the value of core deposit
intangibles. The fair value of securities sold under agreements to
repurchase and long-term debt is estimated using the rates offered for
similar borrowings.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms
of the agreements and the present creditworthiness of the counter parties.
The estimated fair values of the Company's financial instruments, excluding
goodwill, as of December 31 are as follows:
2001 2000
------------------------------------------------------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
AMOUNT VALUE AMOUNT VALUE
-------- ------------ ------- ---------------
Financial assets:
Cash and cash equivalents $ 51,638,196 $ 51,638,000 $ 39,715,464 $ 39,715,000
Investment securities 125,828,582 125,974,000 117,599,965 117,610,000
Loans 392,705,604 395,561,000 382,506,138 381,788,000
Less: allowance for loan losses (4,189,368) - (4,199,008) -
------------------------------------------------------------------
$565,983,014 $573,173,000 $535,622,559 $539,113,000
============ ============ ============ ============
Financial liabilities:
Deposits $487,469,628 $490,970,000 $464,484,986 $465,261,000
Short term borrowings 17,053,864 17,054,000 16,252,035 16,252,000
Long-term debt 5,000,000 5,133,000 5,000,000 5,002,000
------------ --------------- --------------- ---------------
$509,523,492 $513,157,000 $485,737,021 $486,515,000
============ ============ ============ ============
Unrecognized financial instruments:
Commitments to extend credit $108,652,000 $108,652,000 $ 82,760,000 $ 82,760,000
Standby letters of credit 7,628,000 7,628,000 9,267,000 9,267,000
------------ --------------- -------------- ---------------
$116,280,000 $116,280,000 $ 92,027,000 $ 92,027,000
============= ============= ============= =============
NOTE 19. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, to meet the financing needs of its customers,
the Company is a party to financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and standby
letters of credit. The Company's exposure to credit loss in the event of
nonperformance by the other party to these financial instruments is represented
by the contractual amount of the instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. The Company generally requires collateral or other
security to support the financial instruments with credit risk. The amount of
collateral or other security is determined based on management's credit
evaluation of the counterparty. The Company evaluates each customer's
creditworthiness on a case-by-case basis.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Letters of
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Letters of credit and other
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the letters of credit and
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements.
-34-
Commitments outstanding as of December 31 are as follows:
2001 2000
------------ -------------
Commitments to extend credit $108,652,000 $82,760,000
Letters of credit 7,628,000 9,267,000
------------ ------------
$116,280,000 $92,027,000
============ ===========
NOTE 20. COMMITMENTS
In the normal course of business, the Company may become involved in litigation
arising from banking, financial, and other activities of the Company.
Management, after consultation with legal counsel, does not anticipate that the
future liability, if any, arising out of these matters will have a material
effect on the Company's financial condition, operating results, or liquidity.
NOTE 21. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Shore Bancshares, Inc. (Parent Company Only)
is as follows:
Condensed Balance Sheets
December 31, 2001 and 2000
2001 2000
---- ----
Assets:
Cash $ 26,441 $ 91,516
Investment in subsidiaries 70,527,357 64,890,249
Investment in equity securities 380,035 380,035
Other assets 163,837 6,227
------------ ------------
Total assets $ 71,097,670 $ 65,368,027
============ ============
Liabilities:
Accounts payable $ 119,210 $ 25,150
Due to subsidiaries 7,827 318,624
------------ ------------
127,037 343,774
Stockholders' equity:
Common stock 53,330 53,242
Surplus 23,039,084 22,923,707
Retained earnings 47,411,873 42,601,248
Accumulated other comprehensive income (loss) 466,346 (553,944)
------------ ------------
Total stockholders' equity 70,970,633 65,024,253
------------ ------------
Total liabilities and stockholders' equity $ 71,097,670 $ 65,368,027
============ ============
Condensed Statements of Income
For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
------ ------ ------
Dividends from subsidiaries $3,489,328 $2,782,653 $2,489,755
Other investment income 11,000 10,000 --
Interest income 963 2,382 1,074
---------- ---------- ----------
3,501,291 2,795,035 2,490,829
Operating expenses 161,012 396,816 72,314
---------- ---------- ----------
Income before income tax benefit and
equity in undistributed income of subsidiary 3,340,279 2,398,219 2,418,515
Income tax benefit 51,167 6,227 14,379
---------- ---------- ----------
Income before equity in undistributed income of subsidiary 3,391,446 2,404,446 2,432,894
Equity in undistributed income of subsidiary 4,602,649 5,552,518 4,371,794
---------- ---------- ----------
Net income $7,994,095 $7,956,964 $6,804,688
========== ========== ==========
-35-
Condensed Statements of Cash Flows For
the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ----- ----
Cash flows from operating activities:
Net income $ 7,994,095 $ 7,956,964 $ 6,804,688
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed income of subsidiaries (4,602,649) (5,552,518) (4,371,794)
Net (increase) decrease in other assets (157,610) 8,153 46,217
Net (decrease) increase in other liabilities (216,736) 343,774 --
----------- ----------- -----------
Net cash provided by operating activities 3,017,100 2,756,373 2,479,111
----------- ----------- -----------
Cash flows from investing activities:
Sale of securities under agreement to resell -- 18,140 158,238
Purchase of other equity securities -- (100,035) (280,000)
----------- ----------- -----------
Net cash used by investing activities -- (81,895) (121,762)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 116,485 148,828 129,959
Purchase of common stock (1,020) (4,010) (58,738)
Dividends paid (3,197,640) (2,782,653) (2,404,755)
----------- ----------- -----------
Net cash used by financing activities (3,082,175) (2,637,835) (2,333,534)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (65,075) 36,643 23,815
Cash and cash equivalents at beginning of year 91,516 54,873 31,058
----------- ----------- -----------
Cash and cash equivalents at end of year $ 26,441 $ 91,516 $ 54,873
=========== =========== ===========
NOTE 22. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
A summary of selected consolidated quarterly financial data for the two years
ended December 31, 2001 is reported as follows:
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------------
2001
Interest income 10,141 $ 9,781 $9,687 $ 9,329
Net interest income 5,456 5,369 5,472 5,580
Provision for credit losses 57 55 56 58
Income before income taxes 2,816 3,027 3,129 3,299
Net Income 1,801 2,011 2,018 2,164
Basic earnings per common share $.34 $.38 $.37 $.41
Diluted earnings per common share $.34 $.39 $.37 $.39
2000
Interest income $ 9,335 $ 9,778 $ 9,977 $10,390
Net interest income 5,181 5,432 5,409 5,570
Provision for credit losses 58 90 151 138
Income before income taxes 2,620 3,164 3,702 2,869
Net Income 1,668 2,086 2,358 1,845
Basic earnings per common share $0.32 $0.39 $0.44 $0.35
Diluted earnings per common share $0.31 $0.39 $0.44 $0.34
-36-
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Shore Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Shore
Bancshares, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Shore
Bancshares, Inc. as of December 31, 2001 and 2000, and the consolidated results
of its operations and cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
Baltimore, Maryland
January 25, 2002
-37-
Shore Bancshares, Inc. Board of Directors
HERBERT L. ANDREW, III B. VANCE CARMEAN, JR.
FARMER CHAIRMAN OF THE BOARD, SHORE BANCSHARES, INC.
PRESIDENT, CARMEAN GRAIN, INC.
BLENDA W. ARMISTEAD
INVESTOR
RICHARD C. GRANVILLE
LLOYD L. BEATTY, JR. INVESTOR
CERTIFIED PUBLIC ACCOUNTANT
PRESIDENT, DARBY ADVISORS, INC. NEIL R. LECOMPTE
CERTIFIED PUBLIC ACCOUNTANT
PAUL M. BOWMAN OFFICE OF NEIL R. LECOMPTE
ATTORNEY, LAW OFFICE OF PAUL M. BOWMAN
DAVID C. BRYAN DAVID L. PYLES
OF COUNSEL, LAW OFFICES OF FOUNTAIN INVESTOR
BRYAN AND RITTER, LLC
DANIEL T. CANNON W. MOORHEAD VERMILYE
EXECUTIVE VICE PRESIDENT &COO, SHORE BANCSHARES, INC. PRESIDENT & CEO, SHORE BANCSHARES, INC.
PRESIDENT & CEO, THE CENTREVILLE NATIONAL BANK OF MARYLAND PRESIDENT & CEO, THE TALBOT BANK OF EASTON, MARYLAND
- --------------------------------------------------------------------------------
SHORE BANCSHARES, INC.
W. Moorhead Vermilye ....................President & CEO
Daniel T. Cannon ........................Executive Vice President & COO
Susan E. Leaverton ......................Treasurer
Carol I. Brownawell .....................Secretary
SHAREHOLDER RECORDS
Inquiries relating to shareholder records, stock transfers, change of ownership
or address and dividend payments should be directed to the Company's
transfer agent, The Centreville National Bank of Maryland
at (410) 758-1600 or (877) 758-1600. Or visit their website at www.cnbmd.com.
-38-
THE CENTREVILLE NATIONAL BANK OF MARYLAND BOARD OF DIRECTORS
PAUL M. BOWMAN THOMAS K. HELFENBEIN
ATTORNEY, LAW OFFICE OF FUNERAL DIRECTOR AND PARTNER
PAUL M. BOWMAN FELLOWS, HELFENBEIN & NEWNAM FUNERAL HOME
DAVID C. BRYAN NEIL R. LeCOMPTE
OF COUNSEL, LAW OFFICES OF FOUNTAIN CERTIFIED PUBLIC ACCOUNTANT, OFFICE OF
BRYAN AND RITTER, LLC NEIL R. LECOMPTE
DANIEL T. CANNON SUSANNE K. NUTTLE
EXECUTIVE VICE PRESIDENT & COO, SHORE BANCSHARES, INC. RETIRED VICE PRESIDENT,
PRESIDENT & CEO, THE CENTREVILLE NATIONAL BANK THE CENTREVILLE NATIONAL BANK OF MARYLAND
B. VANCE CARMEAN JERRY F. PIERSON
CHAIRMAN OF THE BOARD, SHORE BANCSHARES, INC. PRESIDENT, JERRY F. PIERSON, INC.
PRESIDENT, CARMEAN GRAIN, INC. CHAIRMAN OF THE BOARD,
THE CENTREVILLE NATIONAL BANK
MARK M. FREESTATE
President, W.M. Freestate & Son, Inc. WM. MAURICE SANGER
VICE CHAIRMAN OF THE BOARD, PRESIDENT, F.W., INC.
THE CENTREVILLE NATIONAL BANK PRESIDENT CLOVERBAY DEVELOPMENT CORPORATION
- --------------------------------------------------------------------------------
OFFICERS
THE CENTREVILLE NATIONAL BANK OF MARYLAND
Daniel T. Cannon ...................................... President & CEO
Carol I. Brownawell .......................Executive Vice President&CFO
Thomas E. Beery .....................................Vice President&SLO
Timothy J. Berrigan .................................... Vice President
Rita B. Mielke ..................................... Vice President&COO
Pamela C. Satchell ..................................... Vice President
Carolyn D. Spicher ..................................... Vice President
William E. Stoops ...................................... Vice President
David E. Thompson ...................................... Vice President
Ralph F. Twilley ....................................... Vice President
Kathryn C. Walls ....................................... Vice President
Katherine M. Crook ........................... Assistant Vice President
Cassandra A. Guy ............................. Assistant Vice President
Elizabeth T. Clough ........................................... Cashier
Brenda M. Beaver .................................... Assistant Cashier
Lorrie S. Twilley ................................... Assistant Cashier
Florence R. Morris .................................. Assistant Cashier
C. Wayne Gibson ...................................... Internal Auditor
-39-
THE TALBOT BANK OF EASTON, MARYLAND BOARD OF DIRECTORS
HERBERT L. ANDREW, III RICHARD C. GRANVILLE
FARMER INVESTOR
BLENDA W. ARMISTEAD JEROME M.MCCONNELL
INVESTOR EXECUTIVE VICE PRESIDENT, THE TALBOT BANK
LLOYD L. BEATTY, JR. SHARI L. MCCORD
CERTIFIED PUBLIC ACCOUNTANT OWNER, CHESAPEAKE TRAVEL SERVICES, INC.
PRESIDENT, DARBY ADVISORS, INC.
DAVID L. PYLES
DONALD D. CASSON INVESTOR
CERTIFIED PUBLIC ACCOUNTANT AND
REAL ESTATE BROKER CHRISTOPHER F. SPURRY
CHAIRMAN OF THE BOARD, THE TALBOT BANK PRESIDENT, SPURRY & ASSOCIATES, INC.
GARY L. FAIRBANK W. MOORHEAD VERMILYE
OWNER, FAIRBANK TACKLE PRESIDENT & CEO, SHORE BANCSHARES, INC
PRESIDENT & CEO, THE TALBOT BANK
OFFICERS
THE TALBOT BANK OF EASTON, MARYLAND
W. Moorhead Vermilye .................................. President & CEO
Jerome M. McConnell ...................... Executive Vice President&SLO
Matthew I. Werner ........................... Senior Vice President&COO
Susan E. Leaverton ................................. Vice President&CFO
Robert J. Meade ....................................... Vice President
Mildred C. Bullock .................................... Vice President
Bruce M. Burkhardt ..................................... Vice President
Linda S. Cheezum ....................................... Vice President
Robyn K. Gannon ....................................... Vice President
W. David Morse ......................................... Vice President
Deborah L. Danenmann ..........................Assistant Vice President
Laura P. Heikes. ............................. Assistant Vice President
Dawn D. Henckel. ............................. Assistant Vice President
Wanda W. Hutchison. ...........................Assistant Vice President
J. Michael Lawrence. ..........................Assistant Vice President
Jennifer W. Lister ............................Assistant Vice President
Bonnie R. Meade ...............................Assistant Vice President
Donald E. Morris. .......................... Commercial Banking Officer
Robin B. O'Brien ..............................Assistant Vice President
Donna Parks .................................. Assistant Vice President
Valerie C. Pelkey ............................ Assistant Vice President
Charles J. Selby ............................. Assistant Vice President
Parker K. Spurry ............................. Assistant Vice President
Samuel J. Townsend ......................... Commercial Banking Officer
C. Wayne Gibson .......................................Internal Auditor
-40-
THE TALBOT BANK OF EASTON, MARYLAND OFFICES
MAIN OFFICE TRED AVON SQUARE BRANCH ST. MICHAELS BRANCH
18 East Dover Street 210 Marlboro Road 1013 S. Talbot Street
Easton, MD 21601 Easton, Maryland 21601 St. Michaels, MD 21663
ELLIOTT ROAD BRANCH CAMBRIDGE BRANCH
8275 Elliott Road 2745 Dorchester Square
Easton, MD 21601 Cambridge, MD 21613
ATM LOCATIONS
MEMORIAL HOSPITAL AT EASTON SAILWINDS AMOCO TALBOTTOWN CHESAPEAKE BAY OUTFITTERS
219 S. Washington Street 511 Maryland Avenue 218 N. Washington Street 100 N Talbot St.
Easton, MD 21601 Cambridge, Maryland 21613 Easton, Maryland 21601 St. Michaels, MD 21663
Phone (410) 822-1400 Fax (410) 820-4238 E-Mail: INFO@TALBOT-BANK.COM website:
HTTP://WWW.TALBOT-BANK.COM
THE CENTREVILLE NATIONAL BANK OF MARYLAND OFFICES
MAIN OFFICE ROUTE 213 SOUTH OFFICE STEVENSVILLE OFFICE
109 N. Commerce Street 2609 Centreville Road 408 Thompson Creek Road
Centreville, MD 21617 Centreville, MD 21617 Stevensville, MD 21666
HILLSBORO OFFICE DENTON OFFICE KENT OFFICE
21913 Shore Highway 850 S. 5th Avenue 305 East High Street
Hillsboro, MD 21641 Denton, MD 21629 Chestertown, MD 21620
ATM LOCATION
Queenstown Harbor Golf Links
Queenstown, MD 21658
Phone (410) 758-1600 Fax (410) 758-2364 E-Mail: DIRECTIONS@CNB.MD.COM website: HTTP://WWW.CNBMD.COM
-41-