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 June 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-22345
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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 July 31, 2001, registrant had outstanding 5,332,982 shares of
common stock.
INDEX
Part I.
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
June 30, 2001 (unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Income -
For the three and six months ended June 30, 2001
and 2000 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
For the six months ended June 30, 2001 and 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
For the six months ended June 30, 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 8-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II.
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
-2-
Part I
Item 1. Financial Statements
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
ASSETS: 2001 2000
--------------- --------------
(unaudited)
Cash and due from banks $ 17,870 $ 20,039
Interest-bearing deposits with other banks 14,071 -
Federal funds sold 13,637 19,676
Investment securities:
Held-to-maturity, at amortized cost (fair value of $11,211,
$22,576, respectively) 11,032 22,566
Available for sale, at fair value 101,362 95,034
Loans, less allowance for credit losses ($4,236,
$4,199, respectively) 382,471 378,307
Premises and equipment, net 7,426 7,039
Accrued interest receivable on loans and investment securities 4,044 4,334
Investment in unconsolidated subsidiary 1,104 1,082
Goodwill 1,549 1,622
Deferred income taxes 637 1,184
Other real estate owned 14 14
Other assets 2,638 2,200
--------- --------
TOTAL ASSETS $ 557,855 $ 553,097
=========== =========
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 57,042 $ 55,931
NOW and Super NOW 84,942 89,489
Certificates of deposit $100,000 or more 69,131 78,273
Other time and savings 247,194 240,792
--------- ---------
Total Deposits 458,309 464,485
Short-term borrowings 24,503 16,252
Long-term debt 5,000 5,000
Other liabilities 1,847 2,336
---------- ----------
TOTAL LIABILITIES 489,659 488,073
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $.01; authorized 35,000,000 shares; issued and
outstanding:
June 30, 2001 5,332,982
December 31, 2000 5,324,157 53 53
Surplus 23,013 22,924
Retained earnings 44,816 42,601
Accumulated other comprehensive income (loss) 314 (554)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 68,196 65,024
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $557,855 $553,097
======== ========
See accompanying notes to Condensed Consolidated Financial Statements.
-3-
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
For the three months ended June 30, For the six months ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME:
Loans, including fees $ 7,882 $ 7,848 $15,945 $15,218
Interest and dividends on investment securities:
Taxable 1,427 1,642 2,976 3,349
Tax-exempt 112 129 227 259
Other interest income 360 159 774 287
------- -------- ------- -------
Total interest income 9,781 9,778 19,922 19,113
------- -------- ------- -------
INTEREST EXPENSE:
Certificates of deposit, $100,000 or more 1,014 925 2,164 1,833
Other deposits 3,173 2,996 6,447 5,941
Other interest 225 426 486 726
------- -------- ------ ------
Total interest expense 4,412 4,347 9,097 8,500
------- -------- ------ -----
NET INTEREST INCOME 5,369 5,431 10,825 10,613
PROVISION FOR CREDIT LOSSES 55 90 112 148
------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 5,314 5,341 10,713 10,465
------- -------- ------- -------
NONINTEREST INCOME:
Service charges on deposit accounts 456 467 916 888
Gain(Loss) on sale of securities - 1 (1) (48)
Other noninterest income 205 134 350 246
------- -------- ------ ------
Total noninterest income 661 602 1,265 1,086
------- -------- ------- ------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,788 1,527 3,533 3,202
Expenses of premises and fixed assets 402 307 756 680
Other noninterest expense 758 946 1,846 1,885
------- -------- -------- --------
Total noninterest expense 2,948 2,780 6,135 5,767
------- -------- -------- --------
INCOME BEFORE TAXES ON INCOME 3,027 3,163 5,843 5,784
Federal and State income taxes 1,016 1,078 2,031 2,030
-------- ------- -------- -------
NET INCOME $ 2,011 $ 2,085 $ 3,812 $ 3,754
======== ======= ======= =======
Basic earnings per common share $ .38 $ .40 $ .72 $ .71
Diluted earnings per common share $ .37 $ .39 $ .71 $ .70
See accompanying notes to Condensed Consolidated Financial Statements.
-4-
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 - - 3,812 - 3,812
Other comprehensive income, net of tax:
Unrealized gain on available for sale
securities - - - 868 868
--------
Total comprehensive income 4,680
--------
Shares issued - 89 - - 89
Cash dividends paid $0.30 per share - - (1,597) - (1,597)
---- -------- ------- ------ ---------
Balances, June 30, 2001 $ 53 $ 23,013 $ 44,816 $ 314 $ 68,196
==== ======== ======== ====== =========
Balances, January 1, 2000 $ 53 $ 22,776 $ 37,430 $(1,774) $ 58,485
Comprehensive income:
Net income - - 3,754 - 3,754
Other comprehensive income, net of tax:
Unrealized (loss) on available for sale
securities - - - (175) (175)
--------
Total comprehensive income 3,578
--------
Shares issued - 72 - - 72
Shares repurchased and retired - (2) - - (2)
Cash dividends paid $0.24 per share - - (1,252) - (1,252)
----- -------- --------- ------- --------
Balances, June 30, 2000 $ 53 $ 22,846 $ 39,932 $(1,949) $ 60,882
===== ======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
-5-
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Six Months Ended June 30,
2001 2000
--------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,812 $ 3,754
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 466 480
Discount accretion on debt securities (93) 16
Provision for credit losses, net 38 95
Deferred income taxes - (1)
Loss on sale of securities 1 50
Loss on disposal of premises and equipment - 2
Loss on other real estate owned - 8
Net changes in:
Accrued interest receivable 290 (242)
Other assets (460) 316
Accrued interest payable on deposits (212) 76
Accrued expenses (277) 89
--------- --------
Net cash provided by operating activities 3,565 4,643
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities
available for sale 46,524 40,882
Proceeds from sale of investment securities available for sale 3,999 3,950
Purchase of securities available for sale (55,455) (41,937)
Proceeds from maturities and principal payments of securities
held to maturity 11,526 2,775
Purchase of securities held to maturity - (311)
Net decrease (increase) in loans (3,220) (18,057)
Purchase of loans (1,016) (680)
Purchase of premises and equipment (661) (845)
Proceeds from sale of loans 34 -
Proceeds from sale of premises and equipment - 20
Purchase other real estate owned - (200)
Proceeds from sale of other real estate owned - 52
--------- --------
Net cash provided (used) in investing activities 1,731 (14,351)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and
savings deposits (4,059) 1,557
Net increase (decrease) in certificates of deposit (2,117) (6,880)
Net increase in securities sold under agreement to repurchase 8,251 (444)
Net increase in short-term borrowings - 11,000
Proceeds from issuance of common stock 89 72
Repurchase of common stock - (2)
Dividends paid (1,597) (1,252)
----------- ----------
Net cash provided by financing activities 567 4,051
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,863 (5,657)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 39,715 34,565
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,578 $ 28,908
=========== ==========
-6-
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 June 30, 2001, the results of
operations for the three- and six-month periods ended June 30, 2001 and
2000, and cash flows for the six-month periods ended June 30, 2001 and 2000
have been included. All such adjustments are of a normal recurring nature.
The results of operations for the six months ended June 30, 2001 are not
necessarily indicative of the results to be expected for the full year.
This quarterly report on Form 10-Q should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
2) Effective December 1, 2000, Talbot Bancshares, Inc. ("Talbot"),
headquartered in Easton, Maryland, merged into the Company in a tax free
exchange of stock, which merger was accounted for as a pooling of
interests.
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 5,327,021 shares for 2001 and
5,316,237 shares for 2000. The diluted earnings per share calculation is
arrived at by dividing net income by the weighted average number of shares
outstanding. 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 June 30, 2001 and 2000 were
5,377,965 and 5,370,792, 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 loans' principal balances. 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:
June 30, December 31,
(Dollars in thousands) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowance $ - $ -
Impaired loans with no valuation allowance 659 640
-------- -------
Total impaired loans $ 659 $ 640
======== =======
Allowance for credit losses applicable to impaired loans $ - $ -
Allowance for credit losses applicable to other than impaired loans 4,236 4,199
-------- -------
Total allowance for credit losses $ 4,236 $ 4,199
======== =======
Interest income on impaired loans recorded on the cash basis $ 10 $ 22
======== =======
-7-
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 June 30, 2001, total commitments
to extend credit were approximately $83,939,000. Outstanding letters of
credit were approximately $ 9,472,000 at June 30, 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., which was effective December 1, 2000,
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
Company's Annual Report on Form 10-K for the year ended December 31, 2000, along
with the audited Consolidated Financial Statements and Notes included therein.
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 Annual
Report on Form 10-K for the year ended December 31, 2000, 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 six months ended June 30, 2001 was $3,812,000, compared to
$3,754,000 for the same period in 2000. On a per share basis, diluted earnings
were $ .71, compared to $ .70 for the same period last year. Return on average
assets was 1.39% for the first six months of 2001, compared to 1.46% for the
first six months of 2000. Return on average stockholders' equity declined from
12.63% at June 30, 2000 to 11.43% for the first six months of 2001.
Net interest income declined during the second quarter of 2001 compared to the
same period in 2000, resulting in quarterly earnings of $2,011,000, compared to
$2,085,000 for the second quarter of 2000. On a per share basis diluted earnings
were $0.37, compared to $0.39 for the same period in 2000. Interest rates
continued to decline during the second quarter of 2001, resulting in lower
overall yields on earning assets. The overall rate paid for interest-bearing
deposits increased to 4.29% at June 30, 2001, compared to 4.14% one year ago.
Higher overall rates paid for time deposits are the cause of this increase. The
interest rate paid for all other categories of interest-bearing deposits has
declined and the rates paid for time deposits should decline as those deposits
mature and reprice in the current rate environment.
The average balance of loans increased $22,704,000 to $380,952,000 at June 30,
2001 when compared to June 30, 2000. The average balance of federal funds sold
increased $13,475,000 for the six month period ended June 30, 2001 when compared
to the same period last year. The average balance of investment securities was
$110,938,000 at June 30, 2001, a decline of $10,448,000 when compared to the
same period last year. Average deposits increased $28,078,000 to $404,986,000 at
June 30, 2001 compared to one year ago.
Net Interest Income
Net interest income totaled $10,825,000 for the six months ended June 30, 2001,
representing an increase of $212,000 or 2% over the same period last year. Total
interest income increased $809,000 or 4.2%, totaling $19,922,000 for the six
months ended June 30, 2001 compared to the same period last year. Total interest
expense for the six months ended June 30, 2001 was $9,097,000, an increase of
$597,000 or 7% over last year.
-8-
Interest rates continued to decline during the second quarter of 2001. An
additional 125 basis point reduction in short term rates occurred during the
second quarter of 2001, bringing the total rate cuts for the six months ended
June 30, 2001 to 275 basis points. During the first six months of 2000, the
short-term interest rates were increased 100 basis points. The Company continues
to manage interest rates on deposits 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 $727,000 due to increased volume of loans
for the six-month period ended June 30, 2001 when compared to the same period in
2000. The average yield on loans declined from 8.54% to 8.46% for the six-month
period when compared to the same period last year. Interest on investment
securities declined $405,000 due to a decline in the average balance for the
six-month period ended June 30, 2001, while interest on federal funds sold and
interest-bearing deposits increased $487,000 due to increased volume. The
overall rate earned on federal funds sold was 5.15% for the six months ended
June 30, 2001, compared to 6.11% for the same period last year. The average rate
earned on interest-bearing deposits was 4.47% for the six months ended June 30,
2001.
Interest expense increased as a result of an increase in the overall rate paid
for certificates of deposit as well as an increase in the volume of deposits for
the six month period ended June 30, 2001 when compared to 2000. The average rate
paid for certificates of deposit increased 34 basis points from 5.35% for the
six months ended June 30, 2000 to 5.69% for the six months ended June 30, 2001.
Average interest-bearing deposits at June 30, 2001 were $404,986,000, an
increase of $28,076,000 when compared to the same period in 2000. The average
rate paid for NOW, savings and money market accounts declined 30 basis points
for the six-month period ended June 30, 2001 compared to the same period in
2000.
On a tax equivalent basis, net interest income for the six months ended June 30,
2001 was $195,000 higher than the same period last year due primarily to an
increase in average loans. The net interest margin decreased 19 basis points to
4.23% when compared to one year ago. The overall yield on earning assets
declined 15 basis points to 7.74%, while the overall rate paid for interest
bearing liabilities increased 8 basis points to 4.28% for the six-month period
ended June 30, 2001 when compared to the same period last year. See the Analysis
of Interest Rates and Interest Differentials below for further details.
Loans comprised 72.9% and 73.3% of total average earning assets at June 30, 2001
and 2000, respectively.
-9-
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 six months of the year.
June 30, 2001 June 30, 2000
---------------------------- ------------------------------
Average Income Yield Average Income Yield
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------
Earning Assets
Investment securities $110,938 $ 3,329 6.05% $121,386 $ 3,742 6.18%
Loans 380,952 15,974 8.46% 358,248 15,257 8.54%
Interest-bearing deposits 8,313 184 4.47% - - -
Federal funds sold 22,747 590 5.15% 9,272 287 6.11%
-------- ------- ----- -------- ------- --------
Total earning assets $522,950 $20,077 7.74% $488,906 $19,286 7.89%
Noninterest-earning assets 27,475 $ 25,725
-------- --------
Total Assets $550,425 $514,631
========= ========
Interest-bearing liabilities
Interest-bearing deposits $404,986 $8,611 4.29% $376,910 $7,774 4.14%
Short-term borrowing 18,584 342 4.27% 23,142 582 5.03%
Long-term debt 5,000 144 5.79% 5,000 144 5.77%
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities $428,570 $9,097 4.28% $405,052 $8,500 4.20%
Noninterest-bearing liabilities $ 55,166 $ 50,119
Stockholders' equity $ 66,689 $ 59,460
-------- --------
Total liabilities and stockholders' equity $550,425 $514,631
======== ========
Net interest spread $10,980 3.46% $10,786 3.70%
======= =======
Net interest margin 4.23% 4.42%
(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 nonaccrual loans.
(3) Loan fee income is included in interest income for each loan category, and
yield calculations are based on the total.
Noninterest Income
Total noninterest income increased 16.5% during the first six months of 2001
when compared to the same period in 2000. This increase is due to increased
Automated Teller Machine surcharges, increased earnings from an unconsolidated
subsidiary, and increased fee income from credit and debit card programs. A
decline in losses on the sale of investment securities also contributed to the
increase.
Noninterest Expense
Total noninterest expense, excluding taxes and the provision for loan losses,
increased 6.4% for the six months ended June 30, 2001 from the comparable period
in 2000. This increase is due to increased salaries and employee benefit costs
and general overhead expenses. A portion of the increased salaries and benefits
cost related to the hiring of employees to staff a new branch that was opened in
April of 2001.
Income Taxes
The effective tax rate for the six months ended June 30, 2001 was 34.8%,
compared to 35.1% for the same period last year. There have been no significant
changes in tax law or to the Company's tax structure that would materially
impact the effective tax rate.
Analysis of Financial Condition
Loans
Loans, net of allowance for credit losses and unearned income, totaled
$382,471,000 at June 30, 2001, an increase of $4,164,000 or 1.1% from December
31, 2000. The increase is attributable to increased real estate lending during
the second quarter. Average loans, net of unearned income, for the quarter ended
June 30, 2001 totaled $380,952,000, compared to $358,248,000 for the same period
last year.
-10-
Allowance for Credit 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 six-month periods ended June 30, 2001
and 2000 was $112,000 and $148,000, respectively. The Company had net
charge-offs of $75,000 for the six month period ended June 30, 2001, compared to
net charge-offs of $53,000 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 1.14% as of June 30, 2001 and 2000, respectively. Based on
Management's quarterly evaluation of the adequacy of the allowance for credit
losses, it believes that the allowance for credit losses is adequate at June 30,
2001.
The following table presents a summary of the activity in the allowance for
credit losses.
Six Months Ended June 30,
(Dollars in thousands) 2001 2000
-------------------------
Allowance balance - beginning of year $ 4,199 $ 3,991
Charge-offs:
Commercial and other 65 22
Real estate 6 34
Consumer 48 50
------- --------
Totals 119 106
------- --------
Recoveries:
Commercial 6 15
Real estate 1 19
Consumer 37 19
------- --------
Totals 44 53
------- --------
Net charge-offs: 75 53
Provision for credit losses 112 148
-------- --------
Allowance balance-ending $ 4,236 $ 4,086
======== ========
Average loans outstanding during period $380,784 $358,248
======== ========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .04% .03%
========= ========
Allowance for credit losses at period end as a
percentage of average loans 1.11% 1.14%
========= ========
Because the Company's loans are predominately real estate secured, weaknesses in
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.
-11-
Nonperforming Assets
The following table summarizes past due and non-performing assets of the
Company.
June 30, December 31,
Non-performing Assets: 2001 2000
------------ ------------
Non-accrual loans 628 640
Other real estate owned 14 14
------- -------
642 654
Past due loans 934 1,333
------- -------
Total non-performing and past due loans $1,576 $1,987
======= =======
Investment Securities
Investment securities decreased $11,534,000 during the six-month period ended
June 30, 2001 when compared to December 31, 2000. Declining bond yields caused
many U.S. Government Agency bonds to be called during the first six months of
the year. Yields on bonds purchased during that time 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
$110,938,000 for the six-month period ended June 30, 2001, compared to
$121,386,000 for the same period in 2000. At June 30, 2001 the overall yield on
investment securities was 6.05%, a 13 basis point decrease from 6.18% at June
30, 2000, on a tax equivalent basis.
Deposits
Total deposits at June 30, 2001 were $458,309,000, compared to $464,485,000 at
December 31, 2000. Certificate of deposit rates, which increased during 2000,
began to decline during the first half of 2001 as a result of overall interest
rate declines in the market. The Company experienced a shifting of deposits into
certificates of deposit as a result of customers trying to lock in higher
interest rates before further interest rate cuts were made. Certificates of
deposit greater than $100,000 decreased $9,142,000 during the six-month period
ended June 30, 2001 as a result of a decline in municipal deposits. Other time
and savings accounts increased $6,402,000 during the six-month period ended June
30, 2001, and noninterest- and interest-bearing transaction accounts decreased
$3,436,000 during the same period.
Borrowed Funds
Short-term borrowings, which consist of securities sold under agreements to
repurchase, increased $8,251,000, totaling $24,503,000 at June 30, 2001 when
compared to December 31, 2000. The average rate paid for short-term borrowings
was 4.27% and 5.03% at June 30, 2001 and 2000, respectively. The Company also
has an advance from the Federal Home Loan Bank of Atlanta in the amount of
$5,000,000 outstanding at June 30, 2001 and 2000. As of June 30, 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 the
Company's 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 that will materially affect the Company's ability to maintain liquidity
at satisfactory levels.
Total stockholders' equity was $68,196,000 at June 30, 2001, which is 4.88%
higher than December 31, 2000. Accumulated other comprehensive income(loss),
which consists solely of net unrealized gains and losses on investment
securities available for sale, increased $868,000 since December 31, 2000,
resulting in accumulated other comprehensive income at June 30, 2001 of
$314,000.
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.
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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 June 30, 2001 with the minimum requirements is presented
below.
Minimum
Actual Requirements
------ ------------
Tier 1 risk-based capital 17.34% 4.00%
Total risk-based capital 18.47% 8.00%
Leverage ratio 11.96% 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 over a 12-month period. 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 June 30, 2001, 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 9.7% (12.4%) + 15%
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% Change fair value of capital (7.0%) 2.3% + 25%
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Part II
Item 4. Submission of Matters to Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on April 25, 2001, the
stockholders elected three individuals to serve as Directors until the 2004
Annual Meeting of Stockholders, and until their successors are duly elected and
qualify. The Company submitted the matter to a vote through the solicitation of
proxies. The results of the election are as follows:
Class I Nominees (Term expires 2004)
For Against Abstain
--- ------- -------
Daniel T. Cannon 4,005,423 10,836 0
Richard C. Granville 4,006,519 9,740 0
David L. Pyles 4,001,674 14,585 0
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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 reference 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.'s 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 From S-8 filed on
September 25, 1998 (Registration No. 333-64317)).
99.2 1998 Sock Option Plan (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)).
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.
/s/ W. Moorhead Vermilye
August 14, 2001 By: --------------------------------------
W. Moorhead Vermilye
President
/s/ Susan E. Leaverton
August 14, 2001 By: --------------------------------------
Susan E. Leaverton, CPA
Treasurer/Principal Accounting Officer
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