SHORE BANCSHARES, INC.
Banking. Insurancr. Imcstmcnts.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
2009
2008
2007
2006
2005
Years Ended December 31,
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
Net income
Preferred stock dividends and discount accretion
Net income available to common shareholders
PER C O M M ON SHARE DATA:
Net income - basic
Net income - diluted
Dividends paid
Book value (at year end)
Tangible book value (at year end)'
FINANCIAL C O N D I T I ON (at year end):
Loans
Assets
Deposits
Long-term debt
Stockholders' equity
PERFORMANCE RATIOS (for the year):
Return on average total assets
Return on average stockholders' equity
Net interest margin
Efficiency ratio'
Dividend payout ratio
Average stocI $2
$1
0
2005 2006
2007 2008 2009
B Loans
HDeposits
I Diluted Earnings Per Share HDivir^ends Paid Per Share
' Provision for Credit Losses H N et Loans Charged Off
LETTER TO STOCKHOLDERS
The second significant expense increase
we realized in 2009 was the provision for
credit losses. The Company recorded a
provision for credit losses of $8,986 million
compared to $8,837 million in 2008. The
increased provision was in response to credit
quality issues identified in the Company's
ongoing credit review and monitoring policies.
The Company recognized elevated losses and
higher levels of problem loans in both the
secured real estate and the commercial loan
categories, as many individual borrowers and
small businesses struggled with the receding
economy and weak housing market.
Clearly, the underlying factors driving
our need to significantly increase reserves
for possible credit losses are all tied to the
deterioration of regional economic conditions
that began in 2008 and continued throughout
2009. However, our home markets on the
Delmarva Peninsula have not been as hard
hit as many other areas on the East Coast
and we are cautiously optimistic that the
strength and vitality of the areas covered by
our footprint will continue to trend relatively
favorably. Also on a more positive note,
despite the overall declining yield on earning
assets, the Company sequentially improved
net interest income during the second, third
and fourth quarters of 2009. Our net interest
income for the year increased 3.7% totaling
$41.4 million, producing a very respectable
net mterest margin for the year of 3.90%.
In addition, excluding FDIC insurance, the
Company held the growth of nomnterest
expenses to a modest increase of just $156
thousand. The Company produced strong
balance sheet growth in 2009. Total assets
increased 10.7%, totaling $1,157 billion.
Total loans increased $28 million or 8.2% to
$916.6 million, total deposits grew 17.2% to
$990.9 million, and borrowings declined
$89.1 million or 64.2% as we were able to
principally fund the balance sheet growth
via increased deposits.
Notably, in addition to strong retail
deposit growth, one significant deposit
relationship with the Promontory
Interfinancial Network's IND program
brought approximately $85 million in fuUy
insured deposits to the Company. The
liquidity provided by overall deposit growth
of $145.6 million enabled the Company to
pay down short and long term borrowings
by $39.1 million, increase investment securi
ties by $20.2 million and fed funds sold by
$50.6 million, in addition to funding the
aforementioned $28 million in loan growth.
To Our Stockholders,
We are pleased to report that our
Company produced favorable financial
results for 2009 when compared to the
banking industry and our Mid-Atlantic
peer group. Many of our peers and other
competitors reported unprecedented losses
in 2009, while we continued to produce
sustained profitability and decent growth,
despite the most difficult ongoing operating
environment our Board of Directors and
Management team has seen.
Financicil Results
Net income available to common
stockholders for 2009 was $5,897 million
compared to $11,470 million in 2008.
Diluted earnings per common share were
$0.64 for 2009 compared to $1.37 for 2008.
The Company's participation in the TARP
program in 2009 resulted in lower net
income available to common stockholders
of $1,876 million or $0.22 per share. Our
return on average assets was 0.48% and
return on average stockholder's equity was
4.0% compared to 1.13% and 9.22%,
respectively, for 2008.
The primary reasons for our net
income decline in 2009 can be explained
by examining two line items in the
Company's income statement. Those two
lines are: FDIC Insurance Premium expense
and Provision for Credit Losses.
During 2009, the FDIC imposed a
one-time special assessment on banks and
increased overall premium rates. For Shore
Bancshares, this special assessment and rate
restructure, compounded by our continued
deposit growth, resulted in an increase in
FDIC insurance expense of $1,722 million
for 2009. At the end of 2009, the FDIC
decided to collect three years of insurance
premiums in advance, rather than impose a
second special assessment. This decision
required us to re-characterize $5,424 million
in liquid earning assets as prepaid expenses.
W Moorhead Vermilye
President and CEO
Christopher F. Slurry
Chairman ofthe Board
reduced customer sales volumes, employee
payrolls, business downsizing and closures.
We believe that our efforts to expand our
customer base and strengthen existing
relationships will contribute to significant
increases in insurance revenues when the
market returns to more normal operating
conditions. The insurance division also
continued to work on new producer
development in 2009 as a foundation
for sustainable future gro^vth.
Strategic Initiatives
We continue to evaluate selected
opportunities to expand our footprint on
the Delmarva Peninsula and to grow our
banking and insurance operations in order
to further enhance stockholder value.
Given the current economic and regulatory
environments, it is a difficult challenge,
but we believe the attractiveness of our
franchise gives us a competitive advantage
as a potential aggregator
2010 expectations
We expect 2010 to be another
challenging year, especially if the speed of
our national and local economic recovery
does not accelerate. Managing asset quality
and increasing capital will remain our top
priorities. Beyond that, we will strive to
achieve modest loan growth, to improve
our net interest margin, and to optimize the
resulting returns to stockholders during 2010. We
are committed to providing the very best products
and exceptional levels of customer service in our
markets, not only in our community banks, but
also in our wealth management and insurance
divisions. We expect to continue to demonstrate
that we are the premier financial institution on
the Delmarva Peninsula, and to continue to out
perform our local competitors and regional peers.
Our Board of Directors, management team
and employees thank you for your ongoing
support and confidence.
Sincerely,
W Moorhead Vermilye
Christopher E Spurry
" " " ^y ' ' ^ .. J '•?-'•"'•-,,
Banking and related services
During 2009, the Company completed
the conversion of its core processing system
to a new vendor. This was a complex process
that began in 2008. The magnitude of this
project cannot be overstated as it has required
a company-wide effort that has touched
every employee in some way. Retraining all
bank employees consumed a huge amount of
time and will be an ongoing process as we
begin to utilize the full capabilities of the new
system. As a result of the new processing
platform, we should be substantially better
equipped to compete with larger regional
banks on more sophisticated product offerings.
During 2009, the Talbot Bank opened
a new branch in Trappe, Maryland. The
location had not been previously banked and
was selected as it bridges the bank's existing
Talbot County branches with the Dorchester
County branch in Cambridge. We see growth
potential for the Trappe area in the future,
and in the meantime this service location is
being operated at very low cost to the bank.
At the end of 2009, our banking
subsidiary The CentrevUle National Bank
of Maryland converted from a national bank
charter to a Maryland state bank charter
This change was prompted by management's
desire to have the same charters at each of
our Maryland bank subsidiaries. In conjunc
tion with this change, the bank was required
to eliminate "National" from its name, and
on December 81, 2009 its name officially
became simply CNB. Management believes
"CNB" allows the bank to retain local
recognition while having a more marketable
name as it expands into new locations and
communities on the Delmarva Peninsula.
Insurance activities
Our insurance division continues to
work through "soft" market conditions and
experienced a decline in commission income
of $959 thousand for the year. However,
new business growth was strong during
2009; although premiums and resultant
commissions were greatly affected by
L O C A T I O NS
SHORE BANCSHARES, INC.
Executive Office
18 East Dover Street
Easton, MD 21601
Phone (410) 763-7800
Headquarters
28969 Information Lane
Easton, MD 21601
Phone (410) 763-7800
www.shbi.com
BANKING
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 EUiott Road
Easton, MD 21601
(410) 819-0181
Sunburst Branch
424 Dorchester Avenue
Cambridge, MD 21613
(410) 476-4407
(410) 228-8402
Tilghman Branch
5804 Tilghman Island Road
Tilghman, MD 21671
(410) 886-9802
Trappe Branch
29349 Maple Avenue, Suite 1
Trappe, MD 21673
(410) 476-3181
CNB
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 Marma 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) 8274636
Hillsboro Branch
22151 Wes Street
Ridgely, MD 21660
(410) 820-2121
Stevensvilie Branch
408 Thompson Creek Road
Stevensvilie, MD 21666
(410) 643-2233
Washington Square Branch
899 Washington Avenue
Chestertown, MD 21620
(410) 810-0591
THE FELTON BANK
Main Office
120 W Main Street
Felton, DE 19943
(302) 2844600
(800) 9894383
Milford Branch
698A N. DuPont Blvd.
Milford, DE 19963
(302) 4244600
Camden Branch
263 Wal-Mart Drive
Camden, DE 19934
(302) 698-1432
WYE MORTGAGE GROUP, LLC
17E. Dover Street, Suite 101
Easton, MD 21601
(410) 770-8786
(888) 204-8908
INSURANCE
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) 7344176
The Avon-Dixon Agency
t/a W M. Freestate & Son
105 Lawyers Row
Centreville, MD 21617
(410) 758-0757
(800) 462-0658
ELLIOTT WILSON
INSURANCE, LLC
106 N. Harrison Street
Easton, MD 21601
(410) 820-7797
(800) 235-9885
JACK MARTIN &
ASSOCLYTES, INC.
135 Old Solomon's Island Road
Annapolis, MD 21401
(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
INVESTMENTS
WYE FINANCL\L & TRUST
Main Office
16 N. Washington Street, Suite 1
Easton, MD 21601
(410) 763-8543
Centreville Office
109 N. Commerce Street
Centreville, MD 21617
(410) 763-8543
NASDAQ: SHBI
(410) 763-7800
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Seated, left to right:
Herbert L. Andrew, III, James A. Judge,
Blenda W. Armistead, W. Moorhead Vermilye,
Lloyd L "Scott" Beatty
Standing left to right:
Jerry F. Pierson, John H. Wilson, F Winfield Trice, Jr.,
Christopher F Spurry Richard C. Granville,
WiUiam W "Buck" Duncan
(Not pictured) Neil R. LeCompte
2 0 09 S H O RE B A N C S H A R E S, I N C. B O A RD OF D I R E C T O RS
HERBERT L. ANDRE^^5 III, Farmer
BLENDA W ARMISTEAD, Investor
LLOYD L. "SCOTT" BEATTY, JR., Executive Vice President d^ COO, Shore Bancshares, Inc.
W1LLL\M W "BUCK" DUNCAN, President and CEO, The Talbot Bank of Easton, Maryland
RICHARD C. GRANVILLE, Investor
JAMES A. JUDGE, Certified Public Accountant, Anthony, Judge di Ware, LLC
NEIL R. LECOMPTE, Certified Public Accountant, Office of Neil R. LeCompte
JERRY E PIERSON, President, Jerry F Pierson, Inc.
CHRISTOPHER E SPURRY, CHAIRMAN, President, Spurry and Associates, Inc.
E WINFIELD TRICE, JR., President and CEO, CNB
W MOORHEAD VERMILYE, President and CEO, Shore Bancshares, Inc.
JOHN H. WILSON, President, Coastal South ofMD, Inc.
INSURANCE
THE AVON-DIXON AGENCY, LLC
LLOYD L "SCOTT" BEATTY, JR.
JACK BROOKS
LEONARD "JAY" DAYTON, JR.
JOHN DETWILER
MARK M. FREESTATE
DIAHK H. JOHNSON
WILLL^M L LANE, JR., CHAIRMAN
DAVID C. LEE
EDWARD "NED" McDONALD
TERRY M. MEAD
JOHN H, WILSON
Officers
Terry M. Mead
CEO
ELUOTT WILSON INSURANCE, LLC
EDWARD "NED" McDONALD
TERRY M. MEAD
ERIKA S. WILSON
Officers
Teriy M. Mead
CEO
JACK MARTIN & ASSOCLVTES, INC.
Officers
Terry M. Mead
CEO
TRI-STATE GENERAL INSURANCE
AGENCY, LTD.
Officers
Edward A. Dickerson, III
Lloyd L. "Scott" Beatty, Jr. Vice President
Brenda Dickerson
President
Secretary/Treasurer
INVESTMENTS
WYE FINANCLVL & TRUST
A DIVISION OF CNB
Officers
Elizabeth Spurry
James M. Vermilye
Richard B. Grieves
Senior Vice President,
Business Develofment
Senior Vice President,
Trust Officer
Vice President
B O A RD OF D I R E C T O RS
BANKING
THE TALBOT BANK OF EASTON,
MARYLAND
HERBERT L ANDRE\^ III
BLENDA W ARMISTEAD
LLOYD L. "SCOTT" BEATTY, JR.
DONALD D. CASSON, CHAIRMAN
JOHN W DILLON
WILLIAM W "BUCK" DUNCAN
DUANE E MARSFLALL
JEROME M. McCONNELL
DAVID L FYLES
STEPHEN M. SHEARER
CHRISTOPHER E SPURRY
DAVID E VALLL^NT
W MOORHEAD VERMILYE
Officers
William W "Buck" Duncan
Jerome M. McConnell
Susan E. Leaverton
Laura P Heikes
President i> CEO
Executive Vice
Presideni CFO
Senior Vice President (S
SIO
Senior Vice President