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 September 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 ________
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 October 31, 2001, registrant had
outstanding 5,332,947 shares of common stock.
1
INDEX
Part I.
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
September 30, 2001 (unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Income -
For the three and nine months ended September 30, 2001 and 2000 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
For the nine months ended September 30, 2001 and 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
For the nine months ended September 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 9-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II.
Item 6. Exhibits and Reports on Form 8-K 16
2
Part I
Item 1. Financial Statements
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
ASSETS: 2001 2000
- ------- --------------- ----------------
(unaudited)
Cash and due from banks $ 15,517 $ 20,039
Interest bearing deposits with other banks 14,161 -
Federal funds sold 19,463 19,676
Investment securities:
Held-to-maturity, at amortized cost (fair value of $10,648,
$22,576, respectively) 10,409 22,566
Available for sale, at fair value 110,807 95,034
Loans, less allowance for credit losses ($4,246,
$4,199, respectively) 389,684 378,307
Premises and equipment, net 7,357 7,039
Accrued interest receivable on loans and investment securities 4,414 4,334
Investment in unconsolidated subsidiary 1,104 1,082
Goodwill 1,512 1,622
Deferred income taxes 164 1,184
Other real estate owned 61 14
Other assets 2,785 2,200
----------- -----------
TOTAL ASSETS $ 577,438 $ 553,097
=========== ============
LIABILITIES:
Deposits:
Non-interest bearing demand $ 59,066 $ 55,931
NOW and Super NOW 89,000 89,489
Certificates of deposit $100,000 or more 76,576 78,273
Other time and savings 254,043 240,792
--------- ---------
Total Deposits 478,685 464,485
Short term borrowings 20,637 16,252
Long term debt 5,000 5,000
Other liabilities 2,938 2,336
---------- ----------
TOTAL LIABILITIES 507,260 488,073
---------- ----------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $.01; authorized 35,000,000 shares; issued and
outstanding:
September 30, 2001 5,332,985
December 31, 2000 5,324,157 53 53
Surplus 23,013 22,924
Retained earnings 46,034 42,601
Accumulated other comprehensive income (loss) 1,078 (554)
------------ ---------
TOTAL STOCKHOLDERS' EQUITY 70,178 65,024
------------ ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $577,438 $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 September 30, For the nine months ended September 30,
---------------------------------------- ---------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 7,801 $ 8,050 $23,746 $23,268
Interest and dividends on investment securities:
Taxable 1,280 1,643 4,256 4,992
Tax-exempt 191 122 418 381
Other interest income 415 162 1,189 449
------- ------- ------- -------
Total interest income 9,687 9,977 29,609 29,090
------- ------- ------- -------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 958 1,019 3,122 2,852
Other deposits 3,059 3,154 9,506 9,095
Other interest 198 395 684 1,121
------- ------- ------- -------
Total interest expense 4,215 4,568 13,312 13,068
------- ------- ------- -------
NET INTEREST INCOME 5,472 5,409 16,297 16,022
PROVISION FOR CREDIT LOSSES 56 151 168 299
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 5,416 5,258 16,129 15,723
------- ------- ------- -------
NONINTEREST INCOME
Service charges on deposit accounts 454 462 1,370 1,350
Loss on sale of securities - - (1) (48)
Other noninterest income 216 811 566 1,057
------- ------- ------- -------
Total noninterest income 670 1,273 1,935 2,359
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 1,740 1,617 5,273 4,819
Expenses of premises and fixed assets 340 353 1,096 1,033
Other noninterest expense 877 859 2,723 2,744
------- ------- ------- -------
Total noninterest expense 2,957 2,829 9,092 8,596
------- ------- ------- -------
INCOME BEFORE TAXES ON INCOME 3,129 3,702 8,972 9,486
Federal and State income taxes 1,111 1,344 3,142 3,374
------- ------- ------- -------
NET INCOME $2,018 $2,358 $5,830 $6,112
======= ======= ======= =======
Basic earnings per common share $ .37 $ .44 $ 1.09 $ 1.15
Diluted earnings per common share $ .37 $ .44 $ 1.08 $ 1.14
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 - - 5,830 - 5,830
Other comprehensive income, net of tax:
Unrealized gain on available for sale
securities - - - 1,632 1,632
-----------
Total comprehensive income 7,462
-----------
Shares issued - 89 - - 89
Cash dividends paid $0.45 per share - - (2,397) - (2,397)
------------ ------------ ---------- --------- -----------
Balances, September 30, 2001 $ 53 $ 23,013 $ 46,034 $ 1,078 $ 70,178
============ ========== ========= ========== ===========
Balances, January 1, 2000 $ 53 $ 22,776 $ 37,430 $ (1,774) $ 58,485
Comprehensive income:
Net income - - 6,112 - 6,112
Other comprehensive income, net of tax:
Unrealized gain on available for sale
securities - - - 297 297
---------
Total comprehensive income 6,409
---------
Shares issued - 103 - - 103
Shares repurchased and retired - (2) - - (2)
Cash dividends paid $0.36 per share - - (1,899) - (1,899)
------------ ------------ ---------- --------- -----------
Balances, September 30, 2000 $ 53 $ 22,877 $ 41,643 $ (1,477) $ 63,096
============ ============ ========== ========= ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Nine Months Ended September 30,
2001 2000
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,830 $ 6,112
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 718 715
Discount accretion on debt securities (115) (16)
Provision for credit losses, net 47 200
Deferred income taxes - (2)
Loss on sale of securities 1 48
Loss on disposal of premises and equipment - 2
Loss on other real estate owned - 11
Net changes in:
Accrued interest receivable (80) (1,145)
Other assets (607) 559
Accrued interest payable on deposits (146) 183
Accrued expenses 748 369
------------ --------
Net cash provided by operating activities 6,396 7,036
------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities
available for sale 60,526 55,355
Proceeds from sale of investment securities available for sale 3,999 3,950
Purchase of securities available for sale (77,711) (63,754)
Proceeds from maturities and principal payments of securities
held to maturity 12,689 3,567
Purchase of securities held to maturity (546) (311)
Net decrease (increase) in loans (10,950) (28,841)
Purchase of loans (508) (680)
Proceeds from sale of loans 34 -
Purchase of premises and equipment (733) (956)
Proceeds from sale of premises and equipment - 20
Purchase other real estate owned (47) (200)
Proceeds from sale of other real estate owned - 102
------------ ---------
Net cash used in investing activities (13,247) (31,748)
------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and
savings deposits 6,542 2,864
Net increase (decrease) in certificates of deposit 7,658 11,193
Net increase in securities sold under agreement to repurchase 4,385 2,419
Net increase in short-term borrowings - -
Proceeds from issuance of common stock 89 103
Repurchase of common stock - (2)
Dividends paid (2,397) (1,899)
------------ ---------
Net cash provided by financing activities 16,277 14,678
------------ ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,426 (10,034)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 39,715 34,565
------------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 49,141 $ 24,531
============= =========
See accompanying notes to Condensed Consolidated Financial Statements.
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 its 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 September 30, 2001, the results
of operations for the three- and nine-month periods ended September 30,
2001 and 2000, and cash flows for the nine-month periods ended September
30, 2001 and 2000 have been included. All such adjustments are of a normal
recurring nature. The results of operations for the nine months ended
September 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) 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 5,329,030 shares for 2001 and
5,317,416 shares for 2000. The diluted earnings per share calculation is
arrived at by dividing net income by the weighted average number of shares
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 nine months ended September 30, 2001 and 2000 were 5,381,339 and
5,374,539, 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 balance. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments
received.
7
Information with respect to impaired loans and the related valuation allowance
is shown below:
September 30, December 31,
(Dollars in thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Impaired loans with a specific allowance $ - $ -
Impaired loans with a general allowance 594 640
-------- -------
Total impaired loans $ 594 $ 640
=========== ========
Allowance for credit losses applicable to impaired loans
with a general allowance $ 57 $ 64
Allowance for credit losses applicable to other than impaired loans 4,189 4,135
-------- -------
Total allowance for credit losses $ 4,246 $ 4,199
=========== ========
Interest income on impaired loans recorded on the cash basis $ 15 $ 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 September 30, 2001, total
commitments to extend credit were approximately $77,149,000. Outstanding
letters of credit were approximately $ 5,125,000 at September 30, 2001.
6) In July 2001, the Financial Accounting Standards Board issued Statement No.
141(Statement 141), "Business Combinations", and Statement No. 142
(Statement 142), "Goodwill and Other Intangible Assets". Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement 141 also specifies
the criteria for intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill. Statement
142 will require goodwill and intangible assets with indefinite lives to no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also
require intangible assets with definite useful lives to be amortized over
their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with the FASB's Statement No. 121
(Statement 121), "Accounting for the Impairment of Long- Lived Assets and
for Long-Lived Assets to Be Disposed Of."
8
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible assets determined to have an indefinite useful
life that are acquired in a purchase business combination completed after
June 30, 2001 will not be amortized, but will continue to be evaluated for
impairment in accordance with the appropriate pre-Statement 142 accounting
literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized
prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142 that the Company
evaluate its existing intangible assets and goodwill that were acquired in
prior purchase business combinations, and make any necessary
reclassifications in order to conform with the new criteria in Statement
141 for recognition apart from goodwill. Upon adoption on Statement 142,
the Company will be required to reassess the useful lives and residual
values of all intangible assets acquired in purchase business combinations,
and make any necessary amortization period adjustments by the end of the
first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the
Company will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in
the first interim period.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $1,475,000, which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense
related to goodwill was approximately $147,000 and $111,000 for the year
ended December 31, 2000 and the nine months ended September 30, 2001,
respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Shore Bancshares, Inc. (the "Company") is the largest independent financial
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. in December of 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
December 31, 2000 audited Consolidated Financial Statements and Notes and Form
10-K.
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.
9
RESULTS OF OPERATIONS
Overview
Net income for the nine months ended September 30, 2001 was $5,830,000, a
decline of 4.6% when compared to $6,112,000 for the same period in 2000. On a
per share basis, diluted earnings were $1.08, compared to $1.14 for the same
period last year. The decline in net income is due primarily to nonrecurring
life insurance proceeds of $686,000 received in the third quarter of 2000, which
was recorded as noninterest income. Return on average assets was 1.40% for the
first nine months of 2001, compared to 1.57% for the first nine months of 2000.
Return on average stockholders' equity declined from 13.49% at September 30,
2000 to 11.53% for the first nine months of 2001.
Net income declined $340,000, totalling $2,018,000 for the third quarter of
2001, compared to $2,358,000 for the same period in 2000. On a per share basis,
diluted earnings were $0.37 for the quarter, compared to $0.44 for the same
period in 2000. Interest rates continued to decline resulting in lower overall
yields on earning assets. The overall rate paid for interest bearing deposits
declined to 4.14% at September 30, 2001, compared to 4.20% one year ago.
Reductions in rates paid for NOW, Savings, and Money Market accounts are the
cause of the decrease. The interest rate paid for time deposits should decline
as those deposits mature and reprice in the current rate environment.
The average balance of loans increased $21,427,000 to $383,661,000 at September
30, 2001 when compared to September 30, 2000. The average balance of federal
funds sold and interest bearing deposits with other banks increased $22,856,000
for the nine-month period ended September 30, 2001 when compared to the same
period last year. The average balance of investment securities was $111,924,000
at September 30, 2001, a decline of $8,517,000 when compared to the same period
last year. Average deposits increased $34,022,000 to $461,281,000 at September
30, 2001 compared to one year ago.
The Company has no known exposure to customers who were victims of the September
11, 2001 terrorist attacks, nor does it have any known exposure to industries,
that are expected to be directly impacted by the attacks. Changes in general
economic conditions resulting from the attacks could, however, adversely effect
the Company's performance.
Net Interest Income
Net interest income totaled $16,297,000 for the nine months ended September 30,
2001, representing an increase of $275,000 or 1.7% over the same period last
year. Total interest income increased $519,000 or 1.8%, totaling $29,609,000 for
the nine months ended September 30, 2001 compared to the same period last year.
Total interest expense for the nine months ended September 30, 2001 was
$13,312,000, an increase of $244,000 or 1.9% over last year.
The Federal Reserve cut interest rates eight times during the nine-month period
ended September 30, 2001, for a total of 350 basis points decline in short term
rates. During 2000, the federal funds rate increased 100 basis points during the
first six months of the year with no further increases for the year. In an
effort to offset the declining yields on variable rate loans, as well as the
reinvestment rates available on investment securities and new loan rates, the
Company continues to reduce the rates paid for deposits. The ability of the
Company to continue to reduce interest rates on core deposits in response to
further Federal Reserve rate cuts is a concern. For the nine-month period ended
September 30, 2001, the Company's net interest margin declined 22 basis points,
compared to the same period last year. A further decline in the net interest
margin is likely as interest rates continue to decline.
Interest and fees on loans increased $478,000 due to increased volume of loans
for the nine-month period ended September 30, 2001 when compared to the same
period in 2000. The average yield on loans declined from 8.58% to 8.29% for the
nine-month period ended September 30, 2001 when compared to the same period last
year. Interest on investment securities declined $699,000 due to declines in
both the average balance and yield on investment securities for the nine- month
period ended September 30, 2001. Interest on federal funds sold and interest
bearing deposits with other banks increased $635,000 due to increased volume.
The overall rate earned on federal funds sold was 4.65% for the nine months
ended September 30, 2001, compared to 6.24% for the same period last year. The
average rate earned on interest bearing deposits with other banks was 3.99% for
the nine months ended September 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 nine-month period ended September 30, 2001 when compared to the same period
in 2000. The average rate paid for certificates of deposit increased 15 basis
points from 5.45% for the nine months ended September 30, 2000 to 5.60% for the
nine months ended September 30, 2001. Average interest bearing deposits at
September 30, 2001 were $407,379,000, an increase of $28,575,000 when compared
to the same period in 2000. The average rate paid for NOW, savings and money
market accounts declined 48 basis points for the nine-month period ended
September 30, 2001 compared to the same period in 2000.
10
On a tax equivalent basis, net interest income for the nine-months ended
September 30, 2001 was $252,000 higher than the same period last year due
primarily to an increase in average loans. The net interest margin declined 22
basis points to 4.19% when compared to one year ago. The overall yield on
earning assets declined 38 basis points to 7.56% and the overall rate paid for
interest bearing liabilities declined 16 basis points to 4.12% for the nine
month period ended September 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 72.7% and 73.6% of total average earning assets at September 30,
2001 and 2000, respectively.
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 nine months of the year.
September 30, 2001 September 30, 2000
------------------ ------------------
Average Income Yield Average Income Yield
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------
Earning Assets
Investment securities $111,924 $ 4,967 5.93% $120,441 $ 5,569 6.16%
Loans 383,661 23,792 8.29% 362,234 23,329 8.58%
Interest bearing deposits
with other banks 10,277 307 3.99% - - -
Federal funds sold 22,034 777 4.65% 9,455 449 6.24%
---------- --------- ----- ----------- -------- --------
Total earning assets $527,896 $29,843 7.56% $492,130 $29,347 7.94%
Non-interest earning assets 27,724 $ 26,084
Total Assets $555,620 $518,214
========= ========
Interest bearing liabilities
Interest bearing deposits $407,379 $12,628 4.14% $378,804 $11,947 4.20%
Short term borrowing 19,147 477 3.32% 22,976 891 5.16%
Long term debt 5,000 207 5.54% 5,000 230 6.14%
---------- --------- ---- ------------ -------- ----
Total interest bearing liabilities $431,526 $13,312 4.12% $406,780 $13,068 4.28%
Non-interest bearing liabilities $56,668 $51,039
Stockholders' equity $67,426 $60,395
------- -------
Total liabilities and stockholders' equity $555,620 $518,214
======== ========
Net interest spread $16,531 3.43% $16,279 3.66%
======= =======
Net interest margin 4.19% 4.41%
<FN>
(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.
</FN>
Non-interest Income
Total non-interest income for the three- and nine-month periods ended September
30, 2001 declined $603,000 and $424,000, respectively, when compared to the same
period in 2000. This decrease is due to life insurance proceeds of $686,000
during the third quarter of 2000, which is not a recurring item in 2001.
Excluding life insurance proceeds and losses on sales of securities, increases
in service charges, ATM surcharges, earnings of an unconsolidated subsidiary,
and income from credit and debit card programs contributed to an increase in
noninterest income of 12.5% for the nine-month period ended September 30, 2001.
Non-interest Expense
Total non-interest expense, excluding taxes and the provision for credit losses,
increased 5.8% for the nine months ended September 30, 2001 from the comparable
period in 2000. This increase is primarily due to increases in salaries and
employee benefit costs attributable to a new branch opened in the April of 2001
and general increases in salaries and benefits for the year.
11
Income Taxes
The effective tax rate for the nine months ended September 30, 2001 was 35%,
compared to 35.6% for the same period last year. There have been no significant
changes in tax law or to the Company's tax structure which would materially
impact the effective tax rate.
Analysis of Financial Condition
Loans
Loans, net of allowance for credit losses and unearned income, totaled
$389,684,000 at September 30, 2001, an increase of $11,377,000 or 3% from
December 31, 2000. The increase is attributable to increased real estate lending
during the year. Average loans, net of unearned income, for the nine-month
period ended September 30, 2001 totaled $383,661,000, compared to $362,234,000
for the same period last year.
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 nine-month periods ended September 30,
2001 and 2000 was $168,000 and $299,000, respectively. The Company had net
charge-offs of $121,000 for the nine-month period ended September 30, 2001,
compared to net charge-offs of $99,000 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 1.16% as of September 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 credit losses is
adequate at September 30, 2001.
12
The following table presents a summary of the activity in the allowance for
credit losses.
Nine Months Ended September 30,
(Dollars in thousands) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance balance - beginning of year $ 4,199 $ 3,991
Charge-offs:
Commercial and other 110 60
Real estate 6 50
Consumer 85 90
-------- ----------
Totals 201 200
--------- -------
Recoveries:
Commercial 33 17
Real estate 1 52
Consumer 46 32
---------- -------
Totals 80 101
--------- --------
Net charge-offs: 121 99
Provision for credit losses 168 299
---------- ----
Allowance balance-ending $ 4,246 $ 4,191
========= ========
Average loans outstanding during period $383,661 $362,234
========= ========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .04% .04%
==== ==========
Allowance for credit losses at period end as a
percentage of average loans 1.11% 1.16%
===== ========
The general economic conditions in the Company's market area remain strong;
however, 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.
September 30, December 31,
Non-performing Assets: 2001 2000
------------ ------------
Non-accrual loans 594 640
Other real estate owned 61 14
------ ------
655 654
Past due loans 702 1,333
------ ------
Total non-performing and past due loans $1,357 $1,987
====== ======
Investment Securities
Investment securities decreased $3,616,000 during the nine-month period ended
September 30, 2001 when compared to December 31, 2000. Declining bond yields
caused many U.S. Government Agency bonds to be called during the first nine
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 immediately reinvested and were in
federal funds sold or interest bearing deposits with other banks, which have a
lower overall yield. The average balance of investment securities was
$111,924,000 for the nine-month period ended September 30, 2001, compared to
$120,441,000 for the same period in 2000. At September 30, 2001, the overall
yield on investment securities was 5.93%, a 23 basis point decrease from 6.16%
at September 30, 2000, on a tax equivalent basis.
13
Deposits
Total deposits at September 30, 2001 were $478,685,000, compared to $464,485,000
at December 31, 2000. Certificate of deposit rates, which increased during 2000,
declined significantly during 2001 as the 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 $1,697,000 during the nine-month period
ended September 30, 2001 as the result of a decline in municipal deposits. Other
time and savings accounts increased $13,251,000 during the nine-month period
ended September 30, 2001, and noninterest and interest bearing transaction
accounts increased $2,646,000 during the same period.
Borrowed Funds
Short term borrowings, which consist of securities sold under agreements to
repurchase, increased $4,385,000, totaling $20,637,000 at September 30, 2001
when compared to December 31, 2000. The average rate paid for short term
borrowings was 3.32% and 5.16% at September 30, 2001 and 2000, respectively. The
Company also has an advance from the Federal Home Loan Bank of Atlanta in the
amount $5,000,000 outstanding at September 30, 2001 and 2000. As of September
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 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 $70,178,000 at September 30, 2001, an increase of
7.93% when compared to December 31, 2000. Accumulated other comprehensive
income(loss), which consists solely of net unrealized gains and losses on
investment securities available for sale, increased $1,632,000 since December
31, 2000, resulting in accumulated other comprehensive income at September 30,
2001 of $1,078,000.
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.
14
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 September 30, 2001 with the minimum requirements is presented
below.
Minimum
Actual Requirements
------ ------------
Tier 1 risk-based capital 16.65% 4.00%
Total risk-based capital 17.71% 8.00%
Leverage ratio 11.92% 4.00%
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk exposure is to interest rates. 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 September 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 9.3% (11.6%) + 25%
-
% Change in fair value of capital (2.0%) (6.6%) + 15%
-
For more information regarding market risk, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
15
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 files 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 Stock 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)).
16
Signatures
Pursuant to 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: November 14, 2001 By: /s/ W. Moorhead Vermilye
--------------------------
W. Moorhead Vermilye
President
Date: November 14, 2001 By: /s/ Susan E. Leaverton
------------------------
Susan E. Leaverton, CPA
Treasurer/Principal Accounting Officer
17