Shore Bancshares Inc.
Annual Report 2010

Plain-text annual report

,HORE BANCSHARES, INC. Banking. Insurance. Investments. mO^ANNUAL REPORT S E L E C T ED F I N A N C I AL D A TA (Dollars in thousands, except per share data) 2010 2009 2008 2007 2006 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 (Loss) income before income taxes Income tax (benefit) expense Net (loss) mcome Preferred stock dividends and discount accretion Net (loss) 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 $55,461 12,822 42,639 21.119 21,520 18,041 41.720 (2,159) (492) (1,667) ^ $(1.667') $(0.20) $(0.20) 0.24 14.51 12.32 $58,789 17,411 41,378 8.986 32,392 19,541 40.248 11,685 4.412 7,273 1.876 $5,397 S0.64 0.64 0.64 15.18 12.64 $61,474 21,555 39,919 3,337 36,582 20,350 38,370 18,562 7.092 11,470 $65,141 24,105 41,036 1,724 39,312 14,679 32,539 21,452 8,002 13,450 $57,971 19.074 38,897 1.493 37,404 12,839 28.535 21,708 8.154 13,554 U 1,470 $13,450 $13.554 11.37 1.37 0.64 15.16 12.55 $1.61 1.60 0.64 14.35 11.68 $1.62 1.61 0.59 13.28 11.67 $ 895,404 1,130,311 979,516 932 122,513 $ 916,557 1,156,516 990,937 1,429 127,810 $ 888,528 1,044,641 845,371 7,947 127,385 $776,350 956,911 765,895 12,485 120,235 $699,719 945,649 774,182 25,000 111,327 PERFORMANCE RATIOS (for t he year): Return on average total assets Return on average stockholders' equity Net interest margin Efficiency ratio- Dividend payout ratio Average stockholders' equity to average total assets (0.15)% (1.33) 4.02 68.75 (120.00) 11.05 0.48 % 4.00 3.90 66.07 100.00 11.96 1.13% 9.22 4.23 63.66 46.72 12.30 1.42% 11.79 4.64 58.40 39.75 12,04 1.52% 12.66 4.70 55.15 36.42 11.98 'Total stockholders' equity, net of goodwill and other intangible assets, divided by the number of shares of common stock outstanding at year end. -Noninterest expense as a percentage of total revenue (net interest income plus total noninterest income). Lower ratios indicate improved productivity. NET INTEREST INCOME NET INTEREST MARGIN LOANS AND DEPOSITS $43 42.6 991 917 980 895 889 845 ALLOWANCE FOR CREDIT LOSSES TO LOANS 774 700 H 2005 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 776 766 1 ^Deposits Loans 2009 2008 2007 2010 2006 2007 2008 2009 2010 LETTER TO S T O C K H O L D E RS To Our Stockholders, Our primary focus during 2010 was on managing credit quality in the most pro longed difficult operating environment any of us have seen during our banking careers. The recession, which began to materially impact our performance in the second half of 2009, continued unabated across our mar kets throughout the past year, resulting in unfavorable increases in our loan losses and an overall net loss for the Company. The Board of Directors and the manage ment team remained determined and consis tent in allocating the correct resources to identify what we believe should be substan tially all of our potential problem credits, and to engage in loan workout solutions that should eventually enable favorable resolution or disposal of these troubled loans. The majority of our commercial loans are real estate related. Either the underlying collateral or the ultimate purpose behind these loans is and always has been the dominant driver of the lending business for Delmarva-based banking companies. As property values and real estate sales have declined markedly over the past eighteen months across the Delmarva Peninsula, a wide range of related businesses - such as developers, brokers, construction trades, title companies, etc. - have slowed to a virtual standstill. Clearly, these circumstances are the root cause of our current credit quality issues. That said, the Delmarva markets in which we are the dominant banking institution still display above-average demographics, outpacing both the State of Maryland and the nation in terms of per capita income and other salient benchmarks. Hundreds of miles of Chesapeake Bay waterfront and open space throughout our valuable footprint are combined with the easy proximity of our geography to the major metro areas of Norfolk, Washington, Baltimore, Annapolis, Wilmington, Philadelphia and New York. We believe that when this unprecedented cycle breaks, we will see timely resolution of our current credit problems along with much improved balance sheet and income statement metrics. In the meantime, we are confident we have the staff talent, the patience, and the foresight to judiciously manage our way through the coming quarters to minimize further credit losses while moving existing problem loans through the resolution pipeline as rapidly as possible. Our capital levels remain solid. Our reputation continues to be quite strong. In terms of customer preference we are the leading banking company in our area and employees regard us as the employer of choice. Our franchise has huge intrinsic value. Financial Highlights The Company reported a net loss of $1.7 million for 2010 compared to net income of $5.4 million in 2009. Diluted net loss per share was $0.20 for the year ended December 31, 2010 compared to diluted net income per share of $0.64 for 2009. The 2010 results were significantly impacted by a $21.1 million provision for credit losses, an increase of $12.1 million over 2009, and a goodwill and other intangible assets impairment charge of $3.1 million, of which approximately half is attributable to the 2004 acquisition of Felton Bank and the other half is attributable to our 2007 purchase of TSGIA, Inc., a wholesale insurance operation. Our return on average assets was (0.15)% and return on average stockholders' equity was (1.33)% compared to 0.48% and 4.00%, respectively for 2009. On a positive note, it is important to point out that despite continued high levels of provisioning for credit losses, the Company earned a profit during the second and fourth •J I » quarters of 2010; and the Company would have been profitable in the third quarter had it not been for the goodwill and other intangible assets impairment charge. This clearly validates the strength and soundness of our core business activities—accumulating deposits, originating profitable loans and generating fees from trust, investment, insurance and mortgage banking activities. Our core businesses are operating as expected and very satisfactorily considering the external operating conditions. This is why we currently are, and should remain, the dominant Delmarva financial institution. Net interest income reached its peak for the year during the fourth quarter, totaling $10.9 million. Net interest income for the year increased 3% to $42.6 million when compared to 2009. The improvement was a result of lower interest expense and resulted in a net interest margin of 4.02% compared to 3.90% for 2009. In these turbulent times, we believe our greater than 4% net interest margin compares very favorably with our mid-Atlantic peers, as well as the larger universe of community banks our size. Excluding the goodwill and other intangi ble assets impairment charge, the Company was able to reduce noninterest expenses by $1.6 million, primarily due to reduced salaries and benefits costs of $1.8 million. Increased collection expense and write-downs of other real estate owned properties offset a portion of the expense reductions. We want you to kno^A' that Management is working diligently to control spending during this period of reduced earnings. WAloorhead Vermilye ChiefExecutive Officer Christopher F. Sfurry Chairman ofthe Board Total assets were $1,130 billion at December 31, 2010, a decline of 2.3% when compared to December 31, 2009. The overall asset decline was primarily a result of a lower level of total loans (down $21.2 million) due to charge-offs. Total deposits also declined (down $11.4 million), primarily in the interest-bearing deposit categories, as many rates were reduced to reflect current market conditions and liquid ity needs of the Company. Credit Quality As previously explained, during 2010, the local economy and real estate markets continued to underperform, putting pressure on the Company's loan portfolio in a variety of ways. For instance, borrowers operating in the housing or real estate sectors of the local economy simply ran out of resources to service loans due to the lack of demand for their prod ucts and services. In addition, other borrowers who needed to liquidate real estate collateral often found no buyers, even at reduced prices, leading to eventual default on their loans and in some cases foreclosures. These conditions, which have been increasing in intensity over the last two years, obviously caused significant loan losses for our Company in 2010 and, in turn, forced us to increase the overall level of the allowance for credit losses and to acceler ate the charge off of substantial unpaid loans. The provision for credit losses in 2010 totaled $21.1 million compared to $9.0 million in 2009. The Company charged off $18.5 million in loan balances, $14.2 million in real estate secured loans, $3.7 million in non real estate secured commercial loans and $589 thousand in consumer loans. As a result of this activity and approximately $751 thousand in recoveries, the Company's allowance for credit losses totaled $14.2 million or 1.59% of total loans at December 31, 2010. Nonperforming assets, including loans 90 days or more past due and still accruing, at December 31, 2010 totaled $44.6 million or 3.95% of total assets, compared to $41.6 million or 3.67% at September 30, 2010 and $26.3 million or 2.27% at December 31, 2009. The Company had other real estate owned of $3.7 million at December 31, 2010 compared to $1.5 million at September 30, 2010 and $2.6 million at December 31, 2009. While we are not pleased by the trend, we are encouraged by the number of sales and restructures we have been able to accomplish thus far, and we expect to work diligently to ramp up efforts to resolve even more of these troubled credits in 2011. Capital Position Looking on to 2011 Our capital position remains strong as we look toward 2011. The action we took in 2010 to reduce the dividend from $0.16 to 10.06 per quarter was necessary to ensure that our capital ratios remained at levels sufficient to meet the risk profile of the Company as well as the expectations of the various regulators. The dividend reduction was a very difficult decision for the Board of Directors, but one we felt was both prudent and necessary given the oper ating environment we are facing. It appears that 2011 will begin as 2010 ended. We anticipate facing continued credit quality issues and earnings pressure. Asset quality man agement and loan workouts will surely remain top priorities. Beyond that, we will continue to manage the Company for capital adequacy, modest growth, a proper net interest margin, and reduced costs—all of which, if executed properly, should produce positive stockholder returns. We want to thank our loyal stockholders for their continued confidence in our management team and the future of the Company. Strategic Initiatives Effective January 1, 2011, The Felton Bank was merged into CNB (formerly The Centreville National Bank of Maryland). Receiving regulatory approval to merge the two banks was an important strategic initiative we accomplished in 2010. This merger should allow us to leverage the strength of CNB in growing our Delaware franchise in the future. Increasingly burdensome regulatory issues made it impractical to operate the Felton Bank as a stand-alone institution with its $81 million in total assets. CNB's contiguous market area made the incorporation of Felton's three branches a logical and natural fit. One of our primary objectives is to grow our business via expanding the scope and profitability of customer relationships with new "touch points" that interconnect people and businesses to our organization in different ways. We offer a comprehen sive suite of insurance services and prod ucts, wealth management, trust, mortgage banking, and all of the mainstay consumer and commercial services expected by our banking customers. We have recently invested heavily in state-of-the-art infor mation technology and data processing systems to upgrade the principal operating platform that we outgrew in 2009, and we are quite confident that we now have the capacity to support strategies for future growth. Strategically, we continue to look to acquire banking and insurance operations on the Delmarva Peninsula that will expand our footprint and result in enhanced stockholder value. We anticipate that as the business cycle persists, there could be worthwhile opportunities to evaluate. Sincerely, W Moorhead Vermilye, Chief Executive Officer Christopher E Spurry Chairman of the Board The Board ofDirectors was f leased to announce that effective fanuary i, Z011 Lloyd L. "Scott" Beatty, fr. was promoted to President and Chief Operating Officer ofthe Company. This was an important strategic succession plan initiative that we are pleased to have accomplished. Scott's understanding of our Company, customers and market were key factors in the decision ofthe board to appoint him to this position. We know Scott will contin ue to be effective in his new role as President. Camden • Kent County • Felton Milford < Sussex County ' " " DELAWARE SHORE BAJNCSHARES, INC. Bankin§. itlmrancs. lavestmmts. ^SHORE BANCSHARES rEXECimVE OFFICES D THE TALBOT BANK Q C NB Q AVON-DIXON INSURANCE H TSGIA INSURANCE cm WYE FINANCIAL & TRUST Wicomico Countv L O C A T I O NS • •• Chestertown . Stevensviller? Chester Gra^onvl o ^T Annapolis Denton . MARYLAND St. Michaels. EastorP.Q a ,'' CaroJin Countv Tilghman • Island Q Trapped Cambridge • D New York itit)^ Pennsylvania /I Philadelphia^/ 'atihnpre* ' W a s h i n g t o n, DC Washingtort, D C^ / •^ West Virginia/ ' 4^Mlj "^V ^ ' ' 9 ' "^ .fKichmond* N o r f o l k ^- North Carolina 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) 820^007 Grasonville Branch 202 Pullman Crossing Grasonville, MD 21638 (410) 827-4636 Tuckahoe Branch 22151 Wes Street Ridgely,MD 21660 (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 Delaware Brandies Felton Branch 120 W Main Street Felton, DE 19943 (302) 284-4600 (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 INSURANCE SHORE BANCSHARES, INC. Executive Office 18 East Dover Street Easton, MD 21601 Phone (410) 763-7800 Headquarters 28969 Information Lane Easton, ^AD 21601 Phone (410) 763-7800 www.shbLcom BANKING THE TALBOT BANK OF EASTON, MARYLAND Mam 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 Cambndge, MD 21613 (410) 228-8402 Tilghman Branch 5804 Tilghman Island Road TUghman.MD 21671 (410) 886-9802 Trappe Branch 29349 Maple Avenue, Suite 1 Trappe, MD 21673 (410) 476-3181 CNB Miirviand Branches Main Office 109 N. Commerce Street Centreville, MD 21617 (410) 758-1600 (877) 758-1600 Route 213 Branch 2609 Centreville Road Centrevme,MD 21617 (410) 758-2414 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) 827-3161 (800) 734-4176 The Avon-Dbfon 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 & ASSOCL\TES, 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 FINANCLAL & TRUST Main Ofhce 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 B O A R DS OF D I R E C T O RS BANKING INSURANCE THE TALBOT BANK OF EASTON, MARYLAND HERBERT L ANDREVy III, Chairman BLENDA W ARMISTEAD LLOYD L "SCOTT" BEATTY, JR. JOHN W DILLON WILLL^M W "BUCK" DUNCAN DUANE E MARSHALL JEROME M. McCONNELL DAVID L PYLES STEPHEN M. SHEARER CHRISTOPHER E SPURRY DAVID P VALLLVNT W MOORHEAD VERMILYE THE AVON-DLXON AGENCY, LLC LLOYD L "SCOTT" BEATTY, JR. LEONARD "JAY" DAYTON, JR. JAMES DEERIN, JR. MARK M. FREESTATE DL\NA H. JOHNSON WILUAM L LANE, JR., CHAIRMAN DAVID C. LEE EDWARD "NED" McDONALD TERRY M. MEAD JOHN H. WILSON Officers Terry M. Mead ChiefExecutive Officer Officers William W "Buck" Duncan Jerome M. McConnell Susan E. Leaverton Laura P. Heil

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