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National Bankshares Inc.7G)5"q\l5" .^a^^""'^^^ SHORE BANCSHARES, INC. Banking. Insurance. Investments. 2007 A N N U AL R E P O RT Filings Services APR 18 2008 SNL Financial, LC 1-800-969-4121 S E L E C T ED F I N A N C I AL DATA (Dollars in thousands, except per share data) 2007 Years Ended December 31, 2005 2006 2004 RESULTS OF OPERATIONS: Interest income Interest expense Net interest income Provision for credit losses Net interest income after provision for credit losses Noninterest income Noninterest expense Income before income taxes Income tax expense NETINCOME PER SHARE DATA: Net income - basic Net income - diluted Dividends paid Book value (at year end) Tangible book value (at year end) (1) FINANCIAL CONDITION (at year end): Assets Deposits Total loans, net of unearned income and allowance for credit losses Long-term debt Stockholders' equity $65,141 24,105 41,036 1.724 39,312 14,679 32.539 21,452 8,002 $13,450 $1.61 1.60 0.64 14.35 11.68 $57,971 19,074 38,897 1,493 37,404 12,839 28,535 21,708 8,154 $13,554 $1.62 1.61 0.59 13.28 11.67 $47,384 11,899 35,485 810 34,675 11,498 25,431 20,742 7,854 $12,888 $1.55 1.54 0.54 12.17 10.51 2003 $34,339 9,743 24,596 335 24,261 9,845 19,344 14,762 5,266 • 9,496 $38,291 9,010 29,281 931 28,350 10,224 22,535 16,039 5,841 $ 10,198 $1.24 1.23 0.48 11.24 9.53 $1.18 1.16 0.44 10.31 9.37 $956,911 765,895 $945,649 774,182 $851,638 704,958 $790,598 658,672 $705,379 592,409 768,799 12,485 120,235 693,419 25,000 111,327 622,227 4,000 101,448 590,766 5,000 92,976 470,895 5,000 83,527 PERFORMANCE RATIOS (for the year): Return on average assets Return on average stockholders' equity Net interest margin Efficiency ratio (2) Dividend payout ratio Average stockholders' equity to average total assets 1.42% 1.52% 1.51% 1.32% 11.79 4.64 58.40 39.75 12.04 12.66 4.70 55.15 36.42 11.98 13.20 4.69 54.13 34.84 11.86 11.17 4.10 57.04 38.71 11.79 1.40% 11.70 3.91 56.17 37.29 11.96 (1) Total stocldiolders' equity, net of goodwill and other intangible assets, divided by the number of shares of common stock outstanding at year end. (2) Noninterest expense as a percentage of lotal revenue (net interest income plus total noninterest income). Lower ratios indicate improved productivity. LOANS, DEPOSITS & TOTAL ASSETS 946 DILUTED EARNINGS PER SHARE 1.60 1.61 DIVIDENDS PAID PER SHARE $0.70 0.59 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Hloans Hl^eposits |Total Assets L E T T ER TO S T O C K H O L D E RS To Our Stockholders, 2007 was a good year for Shore Bancshares, Inc. As many financial insti tutions struggled with declining margins, deteriorating credit quality, a crippling national mortgage crisis and generally weak local and national economies; we were pleased to report very sound earn ings and we continued to develop a very strong foundation to weather the chal lenges ahead in 2008. As evidence of our financial S T R E N G T H, the Company continues to maintain a very strong capital position. Capital ratios are well in excess of regula tory minimums for each of our bank sub sidiaries, and the Company overall. Although we will not rule out possibilities for capital deployment such as stock buy backs, we feel very comfortable with con serving our capital resources to permit execution of longer-term strategic initia tives focused on growing the organization organically and through acquisitions. We have emerged as a dominant force in community banking in the Delmarva marketplace, and we want to sustain and increase our momentum. Net income for 2007 was $13.45 mil lion or diluted net income per share of $1.60, compared to $13.55 million or diluted net income per share of $1.61 for 2006. Our return on average assets was 1.42% for 2007, compared to 1.52% for 2006, and return on stockholders' equity was 11.79% for 2007, compared to 12.66% for 2006. Our high capital levels have been a primary reason for the decline in our return on stockholders' equity. The Company's total assets increased 1.2% to $956.9 million at December 31, 2007 from $945.6 million at December 31, 2006. We produced solid loan growth dur ing 2007, as total loans grew by $76.6 mil lion from December 31, 2006 to December 31, 2007. This growth was funded primarily by utilization of liquid assets such as cash balances and maturing investment securities. Deposits at December 31, 2007 and 2006 totaled $765.9 million and $774.2 million, respectively. The decline was in large part due to a strategic decision by our banks to allow our highest cost deposits to run off while interest margins were under pres sure during the second half of 2007. Nonetheless, the Company's net inter est margin for 2007 held up well at 4.64% versus 4.70% for 2006, which is quite favorable in compari son to the overall industry. W. Moorhead Vermilye President and CEO Christopher F. Spurry Chairman of the Board Our investment advisory and trust opera tions continued to experience steady growth in 2007. Our strategy of attracting high cal iber experienced individuals and bringing a very high level of K N O W L E D GE to the program has been achieved in part through our partnerships with organizations like Brown Advisory and Trust. We expect the wealth management and trust portion of our business to continue growing in 2008 and well into the future. In June 2007, we accomplished another goal that was critical to the future success of the Company and Centreville National Bank—filling the President and CEO posi tion at Centreville National Bank by adding F. Winfield Trice, Jr. Prior to joining the Company and since 1997, Mr. Trice served as the Executive Vice President and Senior Lending Officer for Mercantile Peninsula Bank of Salisbury, Maryland. We are very pleased to have Win on board, and we are impressed with the progress he has made at The Company's nonperforming assets declined from $8.1 million at December 31, 2006 to $3.7 million at December 31, 2007. While our ratios are not at historic lows, we are very pleased with the levels of past due and nonperforming assets at year end. The overall level of the allowance for loan losses increased $1.25 million to $7.55 million, or 1.04% of average loans outstanding during 2007. We also took action in 2007 to further strengthen our underwriting standards and to enhance monitoring tools to ensure early identification of problem credits. During 2007, we continued to focus on our core business activities: generating quality loans; attracting stable deposits; and producing a growing stream of fee-based revenue. In a time when we are inundated with bad news in the financial markets and within the banking industry, we think it is important to discuss a few things we have not done. We have not engaged in any sub- prime, alternative, or option lending activi ties through our banking subsidiaries or mortgage division. Our investment portfo lios are concentrated in very high quality government-backed agency bonds and do not include higher risk types of invest ments. We do not intend to change this model in 2008. financial and liquidity requirements, and is home to about one-third of NASDAQ-listed companies. Moving to The Global Select Market reflects our continued growth and is significant for our stockholders because it should give us increased visibility and liquidi ty, especially with institutional investors. The Board ofDirectors, management, and employees remain dedicated to the success of Shore Bancshares, Inc. As we work through what is sure to be a challenging environment in 2008, we remain enthusiastic and optimistic about our future. Sincerely, / / ^ . . ^ ^ ^ ^ ^ ^ -^ W. Moorhead Vermilye, President and CEO Christopher F. Spurry, Chairman of the Board the Centreville National Bank during his seven months of service in 2007. We are proud to offer the insurance products that complement our banking products and add STABILITY to the lives of our customers. Our insurance sub sidiaries are ready to serve our very broad customer base, whether a customer's insur ance needs involve individual property, lia bility, auto, luxury yacht, life or long-term care coverage, or commercial business cov erage such as property and casualty, or group benefit plans. During 2007, the insurance sub sidiaries continued to deal with the chal lenges of a "soft" insurance market. Very strong new-business premium growth was largely offset by lower premium levels, a reduction in profit sharing from the com panies we represent, and competition from other agencies. However, we believe that the level of new business growth and reten tion are such that our insurance operations will be positioned to produce at a higher profitability level for the Company when the market returns to its normal condition. During the fourth quarter of 2007, we expanded our market P R E S E N CE through the acquisition of two new insur ance entities: Jack Martin & Associates, Inc. and Tri-State General Insurance Agency, Inc. Jack Martin is a marine insur ance agency located in Annapolis, Maryland. The addition of Jack Martin solidified and expanded an existing marine insurance niche, and also extends our geographic market reach to beyond the Delmarva Peninsula. The addition of Tri-State, a wholesale insurance firm located in Salisbury, Maryland, expand ed the southern boundaries of our geo graphic market. Both Jack Martin and Tri-State focus on market areas that are essentially contiguous to our existing markets and were logical additions to the organization. The Felton Bank expanded its Delaware presence with the opening of its third banking office in Camden dur ing the first quarter of 2007. The new branch is located within the Camden Wal-Mart store and has enjoyed a very successful first year of operations. Of note to investors is the upgrading of our slock exchange listing to The NASDAQ Global Select Market from The NASDAQ Global Market. We are the only financial services company headquartered on the Delmarva Peninsula that is listed on the Global Select Market. The Company's shares began trading under this new designa tion on January 1,2008. The Global Select Market is NASDAQ's top tier, has the highest initial listing standards of any exchange in the world based on BOARD OF D I R E C TO SHORE BANCSHARES, INC. HERBERT L. ANDREW, III Farmer BLENDA W. ARMISTEAD Investor LLOYD L.BEATTY, JR. Executive Vice President &C00, Shore Bancshares, Inc. PAUL M. BOWMAN Attorney, Law Office of Paul M. Bowman WILLIAM W. "BUCK" DUNCAN President and CEO, The Talbot Bank of Easton, Maryland THOMAS H. EVANS President and CEO, The Felton Bank MARK M. FREESTATE Vice President, The Avon-Dixon Agency, LLC RICHARD C. GRANVILLE Investor W EDWIN KEE, JR. Professor, University of Delaware and President of Kee's Creek Farm NEIL R. LeCOMPTE Certified Public Accountant, Office of Neil R. LeCompte JERRY E PIERSON President, Jerry E Pierson, Inc. CHRISTOPHER E SPURRY, CHAIRMAN President, Spurry and Associates, Inc. E WINFIELD TRICE, JR. President and CEO, The Centreville National Bank of Maryland W MOORHEAD VERMILYE President and CEO, Shore Bancshares, Inc. Officers W Moorhead Vermilye Lloyd L. Beatty, Jr Susan E. Leaverton Carol I. Brownawell Timothy J. Berrigan Laurie H. Yorkilous Pamela C. Hunt President & CEO Executive Vice President & COO Treasurer Secretary Vice President, Information Technology Director of Marketing Vice President, Human Resources THE TALBOT BANK OF EASTON, MARYLAND HERBERT L. ANDREW, III BLENDA W. ARMISTEAD LLOYD L. BEATTY, JR. DONALD D. CASSON, CHAIRMAN JOHN W. DILLON WILLIAJM W "BUCK" DUNCAN GARY L. FAIRBANK DUANE F MARSHALL JEROME M. McCONNELL DAVID L. PYLES STEPHEN M. SHEARER CHRISTOPHER E SPURRY DAVID ?. VALLLWT W. MOORHEAD VERMILYE Officers William W. "Buck" Duncan Jerome M. McConnell Susan E. Leaverton Laura P Heikes President & CEO Executive Vice President & SLO Vice President & CFO Vice President & COO THE CENTREVILLE NATIONAL BANK OF MARYLAND PAUL M. BOWMAN ANN B. COLLIER MARK M. FREESTATE, CHAIRMAN THOMAS K. HELFENBEIN JAMES A. JUDGE CLYDE V KELLY, III NEIL R. LeCOMPTE JERRY F. PIERSON WM. MAURICE SANGER WM. E. SYLVESTOR, JR. JEFFREY E. THOMPSON E WINFIELD TRICE, JR. MARY ELLEN VALLIANT T HE FELTON BANK FREDRICK A. DUFFY THOMAS H. EVANS W. EDWIN KEE, JR., CHAIRMAN HARVEY R. KENTON, JR. THOMAS E. MELVIN DAVID W MOORE, VICE CHAIRMAN JAMES W TORBERT W MOORHEAD VERMILYE Officers Thomas H. Evans Susan E. Leaverton Robin M. Deputy Dianne L. Webb President Vice President & CFO Vice President & COO Vice President WYE FINANCIAL & T R U ST A DRTSION OF THE CENTREVILLE NATIONAL BANK OF MARYLAND Officers Elizabeth Spurry Keller James M. Vermilye Henry Brandt Senior Vice President, Business Development Senior Vice President, Trust Officer Vice President, Trust Officer Officers F Winfield Trice, Jr. Carol I. Brownawell Thomas E. Beery Rita B. Mielke President & CEO Executive Vice President & CFO Senior Vice President & SLO Vice President & COO WYE MORTGAGE GROUP, LLC Officers Rick Rider Laurie Schnaitman President Vice President JACK MARTIN & ASSOCIATES, INC. Officers Terry M. Mead Damon Hostetter CEO Secretary/Treasurer TRI-STATE GENERAL INSURANCE AGENCY, LTD. Officers Edward A. Dickerson, III Lloyd L. Beatty, Jr. Brenda Church President Vice President Secretary/Treasurer THE AVON-DIXON AGENCY, LLC LLOYD L. BEATTY, JR. JACK BROOKS LEONARD "JAY" DAYTON, JR. JOHN DETWILER MARK M. FREESTATE DIANA H. JOHNSON WILLIAM L. LANE, JR., CHAIRMAN DAVID C. LEE EDWARD "NED" MCDONALD TERRY M. MEAD JOHN WILSON Officers Terry M. Mead CEO ELLIOTT WILSON INSURANCE, LLC EDWARD "NED" MCDONALD TERRY M. MEAD ERIKA S. WILSON Officers Terry M, Mead CEO ELLIOTT WILSON INSURANCE, LLC 106 N. Harrison Street Easton, MD 21601 410/820-7797 800/235-9885 JACK MARTIN & ASSOCIATES, INC. 326 First Street #26 Annapolis, MD 21403 410/626-1000 800/497-8101 TRI-STATE GENERAL INSURANCE AGENCY, LTD. One Plaza East, 4th Floor Salisbury, MD 21802 410/546-1255 800/556-7894 THE FELTON BANK Main Office 120 W Main Street Felton, DE 19943 302/284-4600 800/989-4383 Milford Branch 698AN. DuPont Blvd. Milford, DE 19963 302/424-4600 Camden Branch 263 Wal-Mart Drive Camden, DE 19934 302/698-1432 WYE FINANCIAL & TRUST Main Office 17E. Dover Street, Suite 101 Easton, MD 21601 410/763-8543 Centreville Office 109 N. Commerce Street Centreville, MD 21617 410/758-1600 WYE MORTGAGE GROUI! LLC Easton Office 17E. Dover Street, Suite 102 Easton, MD 21601 410/770-8786 Centreville Office 109 N. Commerce Street Centreville, MD 21617 410/758-1600 888/204-8908 Felton Office 120 W Main Street Felton, DE 19943 302/284-4600 888/204-8908 THE CENTREVILLE NATIONAL BANK OF MARYLAND Main Office 109 N. Commerce Street Centreville, MD 21617 410/758-1600 877/758-1600 Route 213 Branch 2609 Centreville Road Centreville, MD 21617 410/758-2414 Chester Branch 300 Castle Marina Road Chester, MD 21619 410/604-6270 Chestertown Branch 305 High Street Chestertown, MD 21620 410/778-1299 Denton Branch 850 South 5th Avenue Denton, MD 21629 410/820-4007 Grasonville Branch 202 Pullman Crossing Grasonville, MD 21638 410/827-4636 Hillsboro Branch 21913 Shore Highway Hillsboro, MD 21641 410/820-2121 Stevensville Branch 408 Thompson Creek Road Stevensville, MD 21666 410/643-2233 Washington Square Branch 899 Washington Avenue Chestertown, MD 21620 410/810-0591 THE AVON-DIXON AGENCY, LLC Headquarters 28969 Information Lane Easton, MD 21601 410/822-0506 800/242-8758 Easton Office 106 N. Harrison Street Easton, MD 21601 410/822-0506 800/242-8758 Chestertown Office 899 Washington Avenue Chestertown, MD 21620 410/758-0757 Grasonville Office 202 Pullman Crossing Grasonville, MD 21638 410/822-0506 800/734-4176 The Avon-Dixon Agency t/a WM. Freestate & Son 105 Lawyers Row Centreville, MD 21617 410/758-0757 800/462-0658 NASDAQ: SHBI LOCATIONS THE TALBOT BANK OF EASTON, MARYLAND Main Office 18 East Dover Street Easton, MD 21601 410/822-1400 800/673-8258 Tred Avon Square Branch 212 Marlboro Avenue Easton, MD 21601 410/819-3015 St. Michaels Branch 1013 S. Talbot Street St. Michaels, MD 21663 410/745-9166 Elliott Road Branch 8275 Elliott Road Easton, MD 21601 410/819-0181 Sunburst Branch 424 Dorchester Avenue Cambridge, MD 21613 410/476-4407 410/228-8402 Shore Bancshares Family of Companies CORPORATE OFFICES SHORE BANCSHARES, INC. 18 East Dover Street Easton, MD 21601 Phone (410) 822-1400 Fax (410) 820-4238 www.shbi.com WYE FINANCIAL & TRUST 17 E. Dover Street, Suite 101 Easton, MD 21601 Phone (410) 763-8543 Fax (410) 763-8557 www.wyefinancialandtrust.com THE TALBOT BANK OF EASTON, MARYLAND 18 East Dover Street Easton, MD 21601 Phone (410) 822-1400 Fax (410) 820-4238 www.talbot-bank.com WYE MORTGAGE GROUR LLC 17 E. Dover Street, Suite 102 Easton, MD 21601 Phone (410)770-8786 Fax (410) 819-3048 www.wyemortgagegroup.com JACK MARTIN & ASSOCIATES, INC. 326 First Street #26 Annapolis, MD 21403 Phone (410) 626-1000 Fax (410) 626-9966 www.jackmartin.com TRI-STATE GENERAL INSURANCE AGENCY, LTD. One Plaza East, 4th Floor Salisbury, MD 21802 Phone (410)546-1255 Fax (800)518-1904 www.tsgia.com TRANSFER AGENT Registrar & Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 Investor Relations: 1-800-368-5948 E-mail for investor inquiries: info@rtco.com THE CENTREVILLE NATIONAL BANK OF MARYLAND 109 N. Commerce Street Centreville, MD 21617 Phone (410) 758-1600 Fax (410) 758-2364 www.cnbmd.com THE AVON DIXON AGENCY, LLC 28969 Information Lane Easton, MD 21601 Phone (410) 822-0506 Fax (410) 820-5629 www.avondixon.com ELLIOTT WILSON INSURANCE, LLC 106 N. Harrison Street Easton, MD 21601 Phone (410) 820-7797 Fax (410) 820-7754 www.avondixon.com THE FELTON BANK 120 West Main Street Felton, DE 19943 Phone (302) 284-4600 Fax (302) 284-9791 www.feltonbank.com NASDAQ: SHBI
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