UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
0-22345
---------
SHORE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1974638
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
18 East Dover Street, Easton, Maryland 21601
- ---------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
(410) 822-1400
--------------------------------------------------
Registrant's Telephone Number, Including Area Code
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X . No .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of April 30, 2001, registrant had outstanding 5,327,282 shares
of common stock.
INDEX
Part I.
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
March 31, 2001 (unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Income -
For the three months ended March 31, 2001 and 2000 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
For the three months ended March 31, 2001 and 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
For the three months ended March 31, 2001 and 2000 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Part II.
Item 6. Exhibits and Reports on Form 8-K 12
Part I
Item 1. Financial Statements
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
ASSETS: 2001 2000
---------- ------------
(unaudited)
Cash and due from banks $ 16,790 $ 20,039
Interest bearing deposits with other banks 8,948 -
Federal funds sold 34,460 19,676
Investment securities:
Held-to-maturity, at amortized cost (fair value of $15,341,
$22,576, respectively) 15,156 22,566
Available for sale, at fair value 92,400 95,034
Loans, less allowance for credit losses ($4,217,
$4,199, respectively) 372,689 378,307
Bank premise and equipment, net 7,289 7,039
Accrued interest receivable on loans and investment securities 4,363 4,334
Investment in unconsolidated subsidiary 1,090 1,082
Goodwill 1,585 1,622
Deferred income taxes 678 1,184
Other real estate owned 110 14
Other assets 2,738 2,200
-------- --------
TOTAL ASSETS $558,296 $553,097
LIABILITIES:
Deposits:
Non-interest bearing demand $ 54,806 $ 55,931
NOW and Super NOW 86,409 89,489
Certificates of deposit $100,000 or more 80,857 78,273
Other time and savings 243,486 240,792
-------- -------
Total Deposits 465,558 $464,485
Short term borrowings 17,950 16,252
Long term debt 5,000 5,000
Other liabilities 2,912 2,336
-------- --------
TOTAL LIABILITIES 491,420 488,073
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $.01; authorized 35,000,000 shares;
issued and outstanding:
March 31, 2001 5,327,212
December 31, 2000 5,324,157 53 53
Surplus 22,968 22,924
Retained earnings 43,603 42,601
Accumulated other comprehensive income (loss) 252 (554)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 66,876 65,024
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $558,296 $553,097
======== ========
See accompanying notes to Condensed Consolidated Financial Statements.
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
For the three Months Ended March 31,
2001 2000
-------------------- ---------------
INTEREST INCOME
Loans, including fees $ 8,063 $ 7,370
Interest and dividends on investment securities
Taxable 1,549 1,707
Tax-exempt 115 130
Other interest income 414 128
------- -------
Total interest income 10,141 9,335
------- -------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 1,150 908
Other deposits 3,274 2,945
Other interest 261 300
------- -------
Total interest expense 4,685 4,153
------- -------
NET INTEREST INCOME 5,456 5,182
PROVISION FOR CREDIT LOSSES 57 58
------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 5,399 5,124
------- -------
NONINTEREST INCOME
Service charges on deposit accounts 460 421
Loss on sale of securities (1) (49)
Other noninterest income 146 112
------- -------
Total noninterest income 605 484
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 1,745 1,675
Expenses of premises and fixed assets 354 373
Other noninterest expense 1,089 939
------- -------
Total noninterest expense 3,188 2,987
------- -------
INCOME BEFORE TAXES ON INCOME 2,816 2,620
Federal and State income taxes 1,015 952
------- -------
NET INCOME $ 1,801 $ 1,668
------- -------
Diluted earnings per common share $ .34 $ .31
Basic earnings per common share $ .34 $ .31
See accompanying notes to Condensed Consolidated Financial Statements.
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
Accumulated
other Total
Common Retained Comprehensive Stockholders'
Stock Surplus Earnings Income (loss) Equity
----- ------- -------- ------------ ------
Balances, January 1, 2001 $ 53 $ 22,924 $ 42,601 $ (554) $65,024
Comprehensive income:
Net income - - 1,801 - 1,801
Other comprehensive income, net of tax:
Unrealized gain on available for sale
securities - - - 806 806
-------
Total comprehensive income 2,607
-------
Shares issued - 44 - - 44
Cash dividends paid $0.15 per share - - (799) - (799)
------- -------- -------- ------- -------
Balances, March 31, 2001 $ 53 $ 22,968 $ 43,603 $ 252 $66,876
======= ======== ======== ======= =======
Balances, January 1, 2000 $ 53 $ 22,776 $ 37,430 $(1,774) $58,485
Comprehensive income:
Net income - - 1,668 - 1,668
Other comprehensive income, net of tax:
Unrealized (loss) on available for sale
securities - - - (303) (303)
-------
Total comprehensive income 1,365
-------
Shares issued - 36 - - 36
Cash dividends paid $0.12 per share - - (627) - (627)
------- -------- -------- ------- -------
Balances, March 31, 2000 $ 53 $ 22,812 $ 38,471 $(2,077) $59,259
======= ======== ======== ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Three Months Ended March 31,
2001 2000
------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,801 $ 1,668
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 221 245
Discount accretion on debt securities (88) (95)
Discount accretion on matured debt securities 18 2
Provision for credit losses, net 18 50
Loss on sale of securities 1 49
Net changes in:
Accrued interest receivable (29) (410)
Other assets (546) 230
Accrued interest payable on deposits (12) 46
Accrued expenses 588 702
---------- --------
Net cash provided by operating activities 1,972 2,487
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities
available for sale 26,494 16,998
Proceeds from sale of investment securities available for sale 1,999 2,950
Purchase of securities available for sale (24,527) (24,029)
Proceeds from maturities and principal payments of securities
held to maturity 7,408 3,183
Purchase of securities held to maturity - (311)
Net decrease (increase) in loans 5,600 (13,559)
Purchase of bank premises and equipment (383) (117)
Proceeds from sale of premises and equipment (96) 20
---------- --------
Net cash provided (used) in investing activities 16,495 (14,865)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand, NOW, money market and
savings deposits (8,152) (5,469)
Net increase (decrease) in certificates of deposit 9,225 (3,162)
Net increase in securities sold under agreement to repurchase 1,698 6,189
Proceeds from issuance of common stock 44 36
Dividends paid (799) (627)
---------- ---------
Net cash provided (used) by financing activities 2,016 (3,033)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,483 (15,411)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 39,715 34,565
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 60,198 $ 19,154
========== =========
Shore Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) 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
consolidated financial statements conform to accounting principles
generally accepted in the United States and to prevailing practices within
the banking industry. The accompanying interim financial statements are
unaudited; however, in the opinion of management all adjustments necessary
to present fairly the financial position at March 31, 2001, the results of
operations for the three month period ended March 31, 2001 and 2000, and
cash flows for the three month period ended March 31, 2001 and 2000 have
been included. All such adjustments are of a normal recurring nature. The
results of operations for the three month ended March 31, 2001 are not
necessarily indicative of the results to be expected for the full year.
This quarterly report on From 10-Q should be read in conjunction with the
Company's annual report on Form 10-K.
2) The Company merged with Talbot Bancshares, Inc. ("Talbot"), headquartered
in Easton, Maryland, whereby Talbot was merged into the Company in a tax
free exchange of stock, accounted for as a pooling of interests which was
effective December 1, 2000.
3) Year to date basic earnings per share is derived by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding during the period of 5,324,373 shares for 2001 and
5,314,920 shares for 2000. The diluted earnings per share calculation is
derived by dividing net income by the weighted average number of shares
outstanding, adjusted for the dilutive effect of outstanding options and
warrants. Considering the effect of these common stock equivalents, the
adjusted average shares for the three months ended March 31, 2001 and 2000
were 5,366,485 and 5,373,713, respectively.
4) Under the provisions of Statements of Financial Accounting Standards (SFAS)
Nos. 114 and 118, "Accounting by Creditors for Impairment of a Loan," a
loan is considered impaired if it is probable that the Company will not
collect all principal and interest payments according to the loan's
contracted 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. 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's principal balance. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments
received.
Information with respect to impaired loans and the related valuation allowance
is shown below:
March 31, December 31,
(Dollars in thousands) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowance $ - $ -
Impaired loans with no valuation allowance 697 640
-------- ------
Total impaired loans $ 697 $ 640
Allowance for credit losses applicable to impaired loans $ - $ -
Allowance for credit losses applicable to other than impaired loans 4,217 4,199
-------- -------
Total allowance for credit losses $ 4,217 $ 4,199
======== =======
Interest income on impaired loans recorded on the cash basis $ 17 $ 22
======== =======
Impaired loans do not include groups of smaller balance homogenous 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.
5) In the normal course of business, to meet the financial needs of its
customers, the Banks are parties to financial instruments with off-balance
sheet risk. These financial instruments include commitments to extend
credit and standby letters of credit. At March 31, 2001, total commitments
to extend credit were approximately $87,183,000. Outstanding letters of
credit were approximately $10,779,000 at March 31, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Shore Bancshares, Inc. (the "Company") is the largest independent bank holding
company located on the Eastern Shore of Maryland. It is the parent company of
The Talbot Bank of Easton, Maryland located in Easton, Maryland, and The
Centreville National Bank of Maryland located in Centreville, Maryland
(collectively, the "Banks"). The Banks operate 11 full service branches in Kent,
Queen Anne's, Talbot, Caroline and Dorchester Counties. The merger between the
Company and Talbot Bancshares, Inc. created a natural market extension for each
of the banks with no primary market overlap, while providing opportunities for
cost savings in the future. During April, 2001, the Company obtained a listing
under the NASDAQ Small Cap Market, trading under the symbol "SHBI".
The following discussion is designed to provide a better understanding of the
financial position of the Company and should be read in conjunction with the
December 31, 2000 audited Consolidated Financial Statements and Notes.
Forward-Looking Information
Portions of this Quarterly Report on Form 10-Q contain forward-looking
statements within the meaning of The Private Securities Litigation Reform Act of
1995. Such statements are not historical facts and include expressions about the
Company's confidence, policies, and strategies, the adequacy of capital levels,
and liquidity. Such forward-looking statements involve certain risks and
uncertainties, including 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.
RESULTS OF OPERATIONS
Overview
Net income for the first quarter of 2001 was $1,801,000, an increase of 8% over
the $1,668,000 for the first quarter of 2000. On a per share basis, diluted
earnings were $ .34, compared to $ .31 for the same period last year. Return on
average assets was unchanged at 1.31% for the first quarter of 2001 and 2000.
Return on average stockholders' equity was 10.9%, compared to 11.35% for the
first three months of 2001 and 2000, respectively.
Increased volume of loans and federal funds sold are the primary sources of
earnings growth, which were funded by an increase in deposits and a decrease in
investment securities. The average balance of loans increased $27 million to
$379 million at March 31, 2001 when compared to March 31, 2000. The average
balance of federal funds sold increased $18 million during the quarter ended
March 31, 2001 when compared to the same period last year. The average balance
of investment securities was $112 million at March 31, 2001, a decline of $12
million when compared to the same period last year. Average deposits increased
$31 million to $480 million at March 31, 2001 compared to one year ago.
Net Interest Income
Net interest income totaled $5,456,000 for the first quarter of 2001,
representing a $275,000 or 5.3% increase over the same period last year. Total
interest income increased $806,000 or 8.6%, totaling $10,141,000 for the first
quarter of 2001 compared to the same period last year. Total interest expense
for the quarter ended March 31, 2001 was $4,685,000, an increase of $531,000 or
12.8% over last year.
The interest rate environment during the first quarter of 2001 and 2000 was
volatile. During the first quarter of 2000 the Federal Reserve Board increased
short term rates 50 basis points, and, during the first quarter of 2001, they
decreased rates 150 basis points. The Company has managed interest rates on
deposits during this period to offset the declining yields on variable rate
loans, as well as the reinvestment rates available on investment securities and
new loan rates.
Interest and fees on loans increased $693,000 due to a higher overall yield and
increased volume of loans for the three month period ended March 31, 2001 when
compared to the same period in 2000. The average yield on loans increased from
8.41% to 8.64% for the quarter when compared to the same period last year.
Interest on investment securities declined $179,000 due to a decline in the
average balance for the quarter, while interest on federal funds sold increased
$249,000 due to increased volume. The overall rate earned on federal funds sold
was 5.58% for the three months ended March 31, 2001, compared to 5.76% for the
same period last year.
Interest expense increased as a result of increased rates paid for certificates
of deposit as well as an increase in the volume of deposits for the three month
period ended March 31, 2001 compared to 2000. The average rate paid for
certificates of deposit increased 51 basis points from 5.25% for the quarter
ended March 31, 2000 to 5.76% for the quarter ended March 31, 2001. Average
interest bearing deposits at March 31, 2001 were $406,556,000, an increase of
$30,135,000 when compared to the same period in 2000. The average rate paid for
NOW, savings and money market accounts declined 15 basis points for the period
ended March 31, 2001 compared to the same period in 2000.
On a tax equivalent basis, net interest income for the three months ended March
31, 2001 was $264,000 higher than the same period last year due primarily to an
increase in average loans. The net interest margin decreased 6 basis points to
4.30% compared to one year ago. A 15 basis point increase in the overall yield
on earning assets was offset by a 29 basis point increase in the overall rate
paid for interest bearing liabilities for the three month period ended March 31,
2001 when compared to the same period last year. See the Analysis of Interest
Rates and Interest Differentials below for further details.
Loans comprised 72.7% of total average earning assets at March 31, 2001 and
2000.
Analysis of Interest Rates and Interest Differentials.
The following table presents the distribution of the average consolidated
balance sheets, interest income/expense and annualized yields earned and rates
paid through the first three months of the year.
March 31, 2001 March 31, 2000
Average Income Yield Average Income Yield
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------
Earning Assets
Investment securities $112,148 $1,725 6.24% $123,783 $1,904 6.17%
Loans 379,306 8,077 8.64% 352,214 7,389 8.41%
Interest bearing deposits 2,978 37 4.97% - - -
Federal funds sold 27,012 377 5.58% 8,782 128 5.76%
-------- ------- ---- -------- ------ ----
Total earning assets $521,444 $10,216 7.94% $484,779 $9,421 7.79%
Non-interest earning assets 27,392 $ 25,155
-------- --------
Total Assets $548,836 $509,934
======== ========
Interest bearing liabilities
Interest bearing deposits $406,556 $4,424 4.41% $376,421 $3,854 4.11%
Short term borrowing 17,349 180 4.22% 20,230 230 4.55%
Long term debt 5,000 81 6.55% 5,361 70 5.24%
-------- ------ ---- -------- ------ ----
Total interest bearing liabilities $428,905 $4,685 4.43% $402,012 $4,154 4.14%
Non-interest bearing liabilities $ 53,849 $ 49,106
Stockholders' equity $ 66,082 $ 58,816
-------- --------
Total liabilities and stockholders' equity $548,836 $509,934
======== ========
Net interest spread $5,531 3.51% $5,267 3.65%
Net interest margin 4.30% 4.36%
(1) All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate exclusive of the alternative minimum tax rate
of 34% and nondeductible interest expense.
(2) Average loan balances include non-accrual loans.
(3) Loan fee income is included in interest income for each loan category and
yield calculations are based on the total.
Non-interest Income
Total non-interest income increased 25% in the first quarter of 2001 when
compared to the same period in 2000. This increase is due to increased service
charges assessed on deposit accounts, income from an unconsolidated subsidiary
and a decline in losses on investment securities.
Non-interest Expense
Total non-interest expense, excluding taxes and the provision for loan losses,
increased 6.8% for the quarter ended March 31, 2001 from the comparable period
in 2000. This increase is due to increases in salaries and employee benefit
costs, and general overhead expenses for the quarter. A portion of the increased
salaries and benefits cost related to the hiring of employees to staff a new
branch which was opened in April of 2001.
Income Taxes
The effective tax rate for the quarter ended March 31, 2001 was 36.0%, compared
to 36.3% for the same period last year. There have been no significant changes
in tax law or to the Company's tax structure which would impact the effective
tax rate.
Analysis of Financial Condition
Loans
Loans, net of unearned income, totaled $376,906,000 at March 31, 2001, a
decrease of $5,600,000 or 1.5% from December 31, 2000. The decline is
attributable to a reduction in loans secured by real estate during the quarter.
Average loans, net of unearned income, for the quarter ended March 31, 2001
totaled $379,306,000, compared to $352,214,000 for the same period last year.
Allowance for Loan Losses
The Company has established an allowance for credit losses, which is increased
by provisions charged against earnings and recoveries of previously charged-off
debts. The allowance is decreased by current period charge-off of uncollectible
debts. Management evaluates the adequacy of the allowance for credit losses on a
quarterly basis and adjusts the provision for credit losses based upon this
analysis. The evaluation of the adequacy of the allowance for credit losses is
based on a risk rating system of individual loans as well as collective
evaluation of smaller balance homogenous loans based on factors such as past
credit loss experience, local economic trends, non-performing and problem loans,
and other factors which may impact collectibility. A loan is placed on
nonaccrual when it is specifically determined to be impaired and principal and
interest is delinquent for 90 days or more.
The provision for credit losses for the three month periods ended March 31, 2001
and 2000 was $57,000 and $58,000, respectively. The Company had net charge-offs
of $39 thousand for the first quarter of 2001, compared to net charge-offs of $8
thousand for the same period last year. Management adjusts the allowance for
credit losses through the provision based on its evaluation and analysis of the
adequacy of the allowance, including consideration of general economic
conditions, growth of the loan portfolio and past credit loss experience. The
allowance for credit losses as a percentage of average loans was 1.11% and 1.15%
as of March 31, 2001 and 2000, respectively. Based on Management's quarterly
evaluation of the adequacy of the allowance for credit losses, it believes that
the allowance credit losses and the related provision are adequate at March 31,
2001.
The following table presents a summary of the activity in the allowance for
credit losses.
Three Months Ended March 31,
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------
Allowance balance - beginning of year $ 4,199 $ 3,991
Charge-offs:
Commercial and other 3 -
Real estate 16 15
Consumer 34 15
-------- --------
Totals 53 30
-------- --------
Recoveries:
Commercial - 4
Real estate 3 6
Consumer 11 12
-------- --------
Totals 14 22
-------- --------
Net charge-offs: 39 8
Provision for credit losses 57 58
-------- --------
Allowance balance-ending $ 4,217 $ 4,041
======== ========
Average loans outstanding during period $379,306 $352,214
Net charge-offs (annualized) as a percentage of ======== ========
average loans outstanding during period .04% .01%
Allowance for credit losses at period end as a ======== ========
percentage of average loans 1.11% 1.15%
======== ========
Because the Company's loans are predominately real estate secured, weaknesses in
the local real estate market may have an adverse effect on collateral values.
The Company does not have any concentrations of loans in any particular
industry, nor does it engage in foreign lending activities
Nonperforming Assets
The following table summarizes past due and non-performing assets of the
Company.
March 31, December 31,
Non-performing Assets: 2001 2000
--------- ------------
Non-accrual loans 697 640
Other real estate owned 110 14
------ ------
807 654
Past due loans 581 1,333
------ ------
Total non-performing and past due loans $1,388 $1,987
====== ======
Investment Securities
Investment securities decreased $10,044,000 during the first quarter of 2001
when compared to December 31, 2000. Bond yields declined dramatically during the
first quarter of 2001, causing many U.S. Government Agency bonds to be called.
Yields on bonds purchased during the quarter were much lower than those of the
bonds which matured or were called. A portion of the proceeds from called or
matured securities were not reinvested and remained in federal funds sold at the
end of the quarter. The average balance of investment securities was
$112,148,000 for the first quarter of 2001, compared to $123,783,000 for the
same period in 2000. The overall yield on investment securities increased
slightly to 6.24% on a tax equivalent basis.
Deposits
Total deposits at March 31, 2001 were 465,558,000, compared to $464,485,000 at
December 31, 2000. Certificate of deposit rates, which increased during 2000,
began to decline in the first quarter of 2001 as the result of overall interest
rate declines in the market. The Company experienced a shifting of deposits into
certificates of deposit during the first quarter as a result of customers trying
to lock in higher interest rates before further rate cuts were experienced.
Certificates of deposit increased $9,225,000 during the first quarter of 2001
when compared to December 31, 2000. Conversely, demand, NOW, money market and
savings accounts declined $8,152,000.
Borrowed Funds
Short term borrowings at March 31, 2001 consisted of securities sold under
agreements to repurchase. The Company has a convertible advance from the Federal
Home Loan Bank of Atlanta in the amount $5,000,000 outstanding at March 31, 2001
and 2000. As of March 31, 2001, the interest rate on the advance was 4.97%.
Liquidity and Capital Resources
The Company derives liquidity 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 through arrangements with its
correspondent banks. The Banks are also members of the Federal Home Loan Bank of
Atlanta, which provides another source of liquidity. There are no known trends
or demands, commitments, events or uncertainties that Management is aware of
which will materially affect the Company's ability to maintain liquidity at
satisfactory levels.
Total stockholders' equity was $66.9 million at March 31, 2001, which is 12.9%
higher than one year ago. Accumulated other comprehensive losses, which consists
solely of net unrealized losses on investment securities available for sale,
decreased $2,329,000, resulting in accumulated other comprehensive income at
March 31, 2001 of $252,000.
Bank regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutions' assets and off-balance sheet
items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a financial institution to maintain capital at higher levels.
A comparison of the capital as of March 31, 2001 with the minimum requirements
is presented below.
Minimum
Actual Requirements
------ ------------
Tier 1 risk-based capital 17.22% 4.00%
Total risk-based capital 18.34% 8.00%
Leverage ratio 11.84% 4.00%
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company utilizes a simulation model to quantify the effect a hypothetical
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 repayments 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, 2000, the model produced the
following sensitivity profile for net interest income and the fair value
capital:
Immediate Change in Rates
-------------------------
+200 Basis Points -200 Basis Points Policy Limit
------------------------------------------------
% Change in net interest income 7.2% (8.6%) + 15%
-
% Change in fair value of capital (3.1%) (.5%) + 25%
-
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
3 Charter and Bylaws
3.1 Shore Bancshares, Inc. Amended and Restated Articles of
Incorporation (incorporated by refernece to Exhibit 3.1 on Form
8-K filed by Shore Bancshares, Inc. on December 14, 2000).
3.2 Shore Bancshares, Inc. Amended and Restated By-Laws (incorporated
by reference to Exhibit 3.2 on Form 8-K filed by Shore
Bancshares, Inc. on December 14, 2000).
10.1 Form of Employment Agreement with W. Moorhead Vermilye
(incorporated by reference to Appendix XIII of Exhibit 2.1 on
Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000).
10.2 Form of Employment Agreement with Daniel T. Cannon (incorporated
by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by
Shore Bancshares, Inc. on July 31, 2000).
21 Subsidiaries of Shore Bancshares, Inc. (incorporated by reference
to Exhibit 21 of Shore Bancshares, Inc. Annual Report on Form
10-K filed on April 2, 2001).
99.1 1998 Employee Stock Purchase Plan (incorporated by reference from
the Shore Bancshares, Inc. Registration Statement on Form S-8
filed on September 25, 1998 (Registration No. 333-64317)).
99.2 1998 Stock Plan Option (incorporated by reference from the Shore
Bancshares, Inc. Registration Statement on Form S-8 filed on
September 25, 1998 (Registration No. 333-64319)).
99.3 Talbot Bancshares, Inc. Employee Stock Option Plan (incorporated
by reference from the Shore Bancshares, Inc. Registration
Statement on Form S-8 filed on May 4, 2001 (Registration No.
333-60214)).
b) Reports on Form 8-K.
On February 9, 2001, the Company filed a Current Report on Form
8-K/A, amending Current Report on Form 8-K filed with the
Commission on December 14, 2000, to include Item 7 (Financial
Statements, Pro Forma Financial Information and Exhibits).
Signatures
Under the requirements of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Shore Bancshares, Inc.
Date: May 14, 2001 By: /s/ W. Moorhead Vermilye
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W. Moorhead Vermilye
President
Date: May 14, 2001 By: /s/ Susan E. Leaverton
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Susan E. Leaverton, CPA
Treasurer/Principal Accounting
Officer