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, 2002
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
N/A
--------------------------
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 May 1, 2002, registrant had 5,371,615 issued and outstanding shares
of common stock.
INDEX
Part I.
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
March 31, 2002 (unaudited) and December 31, 2001 2
Condensed Consolidated Statements of Income -
For the three months ended March 31, 2002 and 2001 (unaudited) 3
Condensed Consolidated Statements of Changes in Stockholders' Equity -
For the three months ended March 31, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows -
For the three months ended March 31, 2002 and 2001 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-7
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 6. Exhibits and Reports on Form 8-K 14
Part I
Item 1. Financial Statements
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
ASSETS: 2002 2001
- ------- --------------- ----------------
(unaudited)
Cash and due from banks $ 10,040 $ 17,424
Interest bearing deposits with other banks 6,918 14,179
Federal funds sold 36,211 20,035
Investment securities:
Held-to-maturity, at amortized cost (fair value of $11,528,
$11,042, respectively) 11,422 10,896
Available for sale, at fair value 117,099 114,932
Loans, less allowance for credit losses ($4,298,
$4,189, respectively) 404,687 388,516
Bank premise and equipment, net 7,231 7,224
Accrued interest receivable on loans and investment securities 3,652 3,321
Investment in unconsolidated subsidiary 1,126 1,126
Goodwill and other intangible assets 1,473 1,475
Deferred income taxes 988 681
Other real estate owned 56 56
Other assets 3,107 2,538
--------- ---------
TOTAL ASSETS $604,010 $582,403
========= =========
LIABILITIES:
- ------------
Deposits:
Noninterest bearing demand $ 62,741 $ 65,305
NOW and Super NOW 98,470 91,288
Certificates of deposit $100,000 or more 71,895 75,096
Other time and savings 271,331 255,781
--------- ---------
Total Deposits 504,437 487,470
Accrued interest payable 668 785
Short term borrowings 20,485 17,054
Long term debt 5,000 5,000
Other liabilities 2,014 1,124
--------- ---------
TOTAL LIABILITIES 532,604 511,433
--------- ---------
STOCKHOLDERS' EQUITY:
- ---------------------
Common Stock, Par Value $.01; authorized 35,000,000 shares; issued and
outstanding:
March 31, 2002 5,331,995
December 31, 2001 5,332,947 53 53
Surplus 23,020 23,039
Retained earnings 48,352 47,412
Accumulated other comprehensive income (loss) (19) 466
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 71,406 70,970
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $604,010 $582,403
========= =========
See accompanying notes to Condensed Consolidated Financial Statements.
-2-
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
For the three Months Ended March 31,
2002 2001
---------------- ----------------
INTEREST INCOME
Loans, including fees $7,030 $8,063
Interest and dividends on investment securities
Taxable 1,516 1,549
Tax-exempt 106 115
Other interest income 153 414
------ ------
Total interest income 8,805 10,141
------ ------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 761 1,150
Other deposits 2,429 3,274
Other interest 114 261
------ ------
Total interest expense 3,304 4,685
------ ------
NET INTEREST INCOME 5,501 5,456
PROVISION FOR CREDIT LOSSES 132 57
------ ------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 5,369 5,399
------ ------
NONINTEREST INCOME
Service charges on deposit accounts 465 460
Loss on sale of securities - (1)
Other noninterest income 218 146
------ ------
Total noninterest income 683 605
------ ------
NONINTEREST EXPENSE
Salaries and employee benefits 1,840 1,745
Expenses of premises and fixed assets 369 354
Other noninterest expense 1,078 1,089
------ ------
Total noninterest expense 3,287 3,188
------ ------
INCOME BEFORE TAXES ON INCOME 2,765 2,816
Federal and State income taxes 1,025 1,015
------ ------
NET INCOME $1,740 $1,801
====== ======
Diluted earnings per common share $ .32 $ .34
Basic earnings per common share $ .33 $ .34
See accompanying notes to Condensed Consolidated Financial Statements.
-3-
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, 2002 $53 $23,039 $47,412 $466 $70,970
Comprehensive income: - - 1,740 - 1,740
Net income - - -
Other comprehensive income, net of tax:
Unrealized loss on available for sale
securities - - - (485) (485)
-------
Total comprehensive income 1,255
Stock repurchased and retired - (21) - - (21)
Exercise of stock options - 2 - - 2
Cash dividends paid $0.15 per share - - (800) - (800)
---- ------- ------- ----- -------
Balances, March 31, 2002 $53 $23,020 $48,352 $ (19) $71,406
==== ======= ======= ===== =======
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
==== ======= ======= ===== =======
See accompanying Notes to Condensed Consolidated Financial Statements.
-4-
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Three Months Ended March 31,
2002 2001
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,740 $ 1,801
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 263 221
Discount accretion on debt securities (29) (88)
Discount accretion on matured debt securities 8 18
Provision for credit losses, net 109 18
Loss on sale of securities - 1
Net changes in:
Accrued interest receivable (331) (29)
Other assets (569) (546)
Accrued interest payable on deposits (117) (12)
Accrued expenses 890 588
--------- ----------
Net cash provided by operating activities 1,964 1,972
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities
available for sale 14,377 26,494
Proceeds from sale of investment securities available for sale - 1,999
Purchase of securities available for sale (17,438) (24,527)
Proceeds from maturities and principal payments of securities
held to maturity 164 7,408
Purchase of securities held to maturity (693) -
Net (increase) decrease in loans (16,280) 5,600
Purchase of bank premises and equipment (142) (383)
Proceeds from sale of premises and equipment - (96)
--------- ----------
Net cash (used) provided in investing activities (20,012) 16,495
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and
savings deposits 21,051 (8,152)
Net increase (decrease) in certificates of deposit (4,084) 9,225
Net increase in securities sold under agreement to repurchase 3,431 1,698
Proceeds from issuance of common stock 2 44
Repurchase of common stock (21) -
Dividends paid (800) (799)
--------- ----------
Net cash provided by financing activities 19,579 2,016
- --------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,531 20,483
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 51,638 39,715
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 53,169 $ 60,198
========= ==========
See accompanying notes to Condensed Consolidated Financial Statements
-5-
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 of America 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,
2002, the results of operations for the three-month period ended March 31,
2002 and 2001, and cash flows for the three-month period ended March 31,
2002 and 2001 have been included. All such adjustments are of a normal
recurring nature. The results of operations for the three-month period
ended March 31, 2002 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.
2) 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 first quarter of 5,332,941 shares for 2002
and 5,324,373 shares for 2001. 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 three months ended March 31, 2002 and 2001 were 5,390,859 and
5,366,485, respectively.
3) 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.
Information with respect to impaired loans and the related valuation allowance
is shown below:
March 31, December 31,
(Dollars in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowance $ 976 $ 561
Impaired loans with no valuation allowance 530 382
------ ------
Total impaired loans $1,506 $ 943
====== ======
Allowance for credit losses applicable to impaired loans $ 150 $ 76
Allowance for credit losses applicable to other than impaired loans 4,148 4,113
------ ------
Total allowance for credit losses $4,298 $4,189
====== ======
Interest income on impaired loans recorded on the cash basis $ 11 $ 19
====== ======
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.
-6-
4) 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, 2002, total commitments
to extend credit were approximately $111,642,000. Outstanding letters of
credit were approximately $5,674,000 at March 31, 2002.
5) 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 requires 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 also
requires 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." The Company adopted the
provisions of Statement 141 effective July 1, 2001and Statement 142
effective January 1, 2002.
As of the date of adoption, the Company had unamortized goodwill in the
amount of $1,440,000, which was subject to the transition provisions of
Statements 141 and 142. Amortization expense related to goodwill was
approximately $140,000 for the year ended December 31, 2001. There was no
amortization expense related to goodwill for the three months ended March
31, 2002.
6) On December 21, 2001, the Company reached an agreement to acquire certain
assets of The Avon-Dixon Agency, Inc., a full service insurance agency, and
its subsidiaries, all located in Easton, Maryland. The transaction was
completed on May 1, 2002, enabling the Company to offer a full range of
insurance products and services to its customers.
-7-
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 (collectively, the "Banks") located in
Centreville, Maryland. The Banks operate 11 full service branches in Kent, Queen
Anne's, Talbot, Caroline and Dorchester Counties. During April 2001 the Company
obtained a listing under the NASDAQ Small Cap Market, trading under the symbol
"SHBI." On May 1, 2002 the Company completed its acquisition of certain assets
and the assumption of certain liabilities of the Avon-Dixon Agency, Inc., a full
service insurance agency, and its subsidiaries, all located in Easton, Maryland.
The Company will offer a full range of insurance products and services to its
customers through three new wholly-owned subsidiaries, The Avon-Dixon Agency,
LLC, Elliott Wilson Insurance, LLC, and Mubell Finance, LLC, all of which are
Maryland limited liability companies.
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, 2001 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 2002 was $1,740,000, a decrease of 3.4% when
compared to the first quarter of 2001. On a per share basis, diluted earnings
were $ .32, compared to $ .34 for the same period last year. Return on average
assets was 1.18% for the first quarter of 2002, compared to 1.31% for the same
period in 2001. Return on average stockholders' equity was 9.72% and 10.90% for
the three months ended March 31, 2002 and 2001, respectively.
Net Interest Income
Net interest income totaled $5,501,000 for the first quarter of 2002,
representing a $45,000 increase over the same period last year. Total interest
income decreased $1,336,000 or 13.2%, totaling $8,805,000 for the first quarter
of 2002 compared to the same period last year. Total interest expense for the
quarter ended March 31, 2002 was $3,304,000, a decrease of $1,381,000 or 29.5%
over last year.
The interest rate environment during the first quarter of 2002 was stable. In
contrast, during the first quarter of 2001 the Federal Reserve Board decreased
short-term interest rates by 150 basis points. This continued throughout 2001,
with the Federal Reserve Board making a total of eleven rate cuts which resulted
in a decline in short term rates for the year of 475 basis points. The rate paid
for federal funds sold declined from 6.50% on January 1, 2001 to 1.75% on
December 31, 2001. Correspondingly, the New York Prime rate, the index most
commonly used to price loans, fell from 9.50% at January 1, 2001 to 4.75% at
December 31, 2001.
-8-
Although the Company did not experience a decline in net interest income, its
net interest margin declined by 25 basis points. The increased volume of earning
assets was not sufficient to overcome the declining yields earned on those
assets. The overall yield on loans for the three months ended March 31, 2002 was
7.17%, compared to 8.64% for the corresponding period in 2001. The average
balance of loans increased $20,758,000 totaling $400,064,000 for the three
months ended March 31, 2002. The yield on investment securities declined from
6.24% for the first quarter of 2001 to 5.45% for the same period in 2002, while
the average balance of investment securities grew from $112,148,000 to
$125,330,000 for the three months ended March 31, 2001 and 2002, respectively.
Interest and fees on loans decreased $1,033,000 due to a lower overall yield on
loans for the three-month period ended March 31, 2002 when compared to the same
period in 2001. Interest on investment securities declined $42,000 due to a
decline in the average yield on those securities, and interest on federal funds
sold and interest bearing deposits decreased $262,000 due to a decline in the
overall yield earned, despite a $6,056,000 increase in volume. The overall rate
earned on federal funds sold was 1.75% for the three months ended March 31,
2002, compared to 5.58% for the same period last year.
Interest expense decreased primarily as a result of lower rates paid for
interest bearing deposits. The average balance of interest-bearing deposits
increased $23,656,000, with $19,400,000 of that increase occurring in savings
account vehicles. The average rate paid for NOW, savings and money market
accounts declined 134 basis points for the period ended March 31, 2002 compared
to the same period in 2001. The overall rate paid for certificates of deposit
declined 112 basis points for the period ended March 31, 2002 compared to the
same period in 2001. See the Analysis of Interest Rates and Interest
Differentials below for further details.
Loans comprised 71.3% and 72.7% of total average earning assets at March 31,
2002 and 2001, 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 three months of the year.
March 31, 2002 March 31, 2001
-------------- --------------
Average Income Yield Average Income Yield
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------
Earning Assets
Investment securities $125,330 $1,684 5.45% $112,148 $ 1,725 6.24%
Loans 400,064 7,074 7.17% 379,306 8,077 8.64%
Interest bearing deposits 13,119 53 1.65% 2,978 37 4.97%
Federal funds sold 22,927 99 1.75% 27,012 377 5.58%
-------- ------ ----- -------- ------- -----
Total earning assets 561,440 8,910 6.44% 521,444 10,216 7.94%
Noninterest earning assets 27,055 27,392
-------- --------
Total Assets 588,495 548,836
======== ========
Interest bearing liabilities
Interest bearing deposits 429,212 3,190 3.01% 406,556 4,424 4.41%
Short term borrowing 17,377 52 1.21% 17,349 180 4.22%
Long term debt 5,000 62 5.04% 5,000 81 6.55%
-------- ------ ----- -------- ------- -----
Total interest bearing liabilities 451,589 3,304 2.07% 428,905 4,685 4.43%
Noninterest bearing liabilities 65,301 53,849
Stockholders' equity 71,605 66,082
-------- --------
Total liabilities and stockholders' equity $588,495 $548,836
======== ========
Net interest spread $5,606 3.47% $ 5,531 3.51%
====== =======
Net interest margin 4.05% 4.30%
-9-
(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) Interest income on loans includes amortized loan fees, net of costs, for
each loan category and yield calculations are stated to include all.
Noninterest Income
Total noninterest income increased 12.9% in the first quarter of 2002 when
compared to the same period in 2001. This increase is due to increased ATM
service charges and income from the sale of nondeposit products, such as mutual
funds and annuities.
Noninterest Expense
Total noninterest expense, excluding income taxes and the provision for credit
loan losses, increased 3.1% for the quarter ended March 31, 2002 from the
comparable period in 2001. This increase is due to general increases in salaries
and employee benefit costs for the period.
Income Taxes
The effective tax rate for the quarter ended March 31, 2002 was 37.0%, compared
to 36.0% 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 $408,985,000 at March 31, 2002, an
increase of $16,280,000 or 4.1% since December 31, 2001. The increase is
primarily attributable to an increase in loans secured by real estate during the
quarter. Average loans, net of unearned income, increased $20,758,000 or 5.5%
for the quarter ended March 31, 2001 totaling $400,064,000, compared to
$379,306,000 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 on a collective
evaluation of smaller balance homogenous loans based on factors such as past
credit loss experience, local economic trends, nonperforming 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, 2002
and 2001 was $132,000 and $57,000, respectively. The Company had net charge-offs
of $23 thousand for the first quarter of 2002, compared to net charge-offs of
$39 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, current trends in delinquencies and
nonperforming assets, as well as past credit loss experience. Nonaccrual loans
increased $563,000 during the first quarter of 2002. The increase was
attributable to loans secured by real estate for which specific allocations
within the allowance for credit losses have been made or charge-offs taken for
amounts considered uncollectible. The allowance for credit losses as a
percentage of average loans was 1.07% and 1.11% as of March 31, 2002 and 2001,
respectively. Based on Management's quarterly evaluation of the adequacy of the
allowance for credit losses, it believes that the allowance for credit losses
and the related provision are adequate at March 31, 2002.
-10-
The following table presents a summary of the activity in the allowance for
credit losses:
Three Months Ended March 31,
(Dollars in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Allowance balance - beginning of year $ 4,189 $ 4,199
Charge-offs:
Commercial and other - 16
Real estate 25 3
Consumer 23 34
-------- --------
Totals 48 53
-------- --------
Recoveries:
Commercial 3 3
Real estate 2 -
Consumer 20 11
-------- --------
Totals 25 14
-------- --------
Net charge-offs: 23 39
Provision for credit losses 132 57
-------- --------
Allowance balance-ending $ 4,298 $ 4,217
======== ========
Average loans outstanding during period $400,159 $379,306
======== ========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .02% .04%
======== ========
Allowance for credit losses at period end as a
percentage of average loans 1.07% 1.11%
======== ========
-11-
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 nonperforming assets of the Company
(in thousands):
March 31, December 31,
Nonperforming Assets: 2002 2001
-------- ------------
Nonaccrual loans $1,506 $ 943
Other real estate owned 56 56
------ ------
1,562 999
Past due loans 923 1,532
------ ------
Total nonperforming and past due loans $2,485 $2,531
====== ======
Investment Securities
Investment securities increased $2,693,000 during the first quarter of 2002 when
compared to December 31, 2001. Bond yields began to increase during the first
quarter of 2002, but not enough to replace the yields on bonds which matured or
were called during the same period. The average balance of investment securities
was $125,330,000 for the first quarter of 2002, compared to $112,148,000 for the
same period in 2001. The tax equivalent yield on investment securities was 5.45%
and 6.24% for the three months ended March 31, 2002 and 2001, respectively.
Deposits
Total deposits at March 31, 2002 were $504,437,000, compared to $487,470,000 at
December 31, 2001. Due to the lower rates offered for certificates of deposit,
much of the deposit growth was in savings account balances. Certificates of
deposit of $100,000 or more declined slightly during the first quarter as the
result of a temporary shift into NOW and SuperNOW accounts of a municipal
depositor. Other time and savings accounts increased $15,550,000 during the
three-month period ended March 31, 2002 when compared to December 31, 2001.
Borrowed Funds
Short term borrowings at March 31, 2002 and 2001 consisted of securities sold
under agreements to repurchase. The Company also has a convertible advance from
the Federal Home Loan Bank of Atlanta in the amount $5,000,000 at March 31, 2002
and 2001. The advance is due in March 2006 and has a one-time call provision in
2004.
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.
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Total stockholders' equity was $71.4 million at March 31, 2002, which is 6.8%
higher than one year ago. Accumulated other comprehensive losses, which consists
solely of net unrealized losses on investment securities available for sale,
increased $485,000, resulting in an accumulated other comprehensive loss of
$19,000 at March 31, 2002.
Bank and Company 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, 2002 for the Company with the
minimum requirements is presented below:
Minimum
Actual Requirements
------ ------------
Tier 1 risk-based capital 16.78% 4.00%
Total risk-based capital 17.83% 8.00%
Leverage ratio 11.87% 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 December 31, 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 (.43)% (2.8%) +25%
-
% Change in fair value of capital (.16%) (4.4%) +15%
-
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For more information about market risk, see "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
Part II
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
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 1, 2002).
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)).
b) Reports on Form 8-K.
On May 1, 2002, the Company filed a Current Report on Form 8-K to
report the acquisition of certain assets and assumption of certain
liabilities of The Avon Dixon Agency, Inc. and its subsidiaries.
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: May 14, 2002 By: /s/ W. Moorhead Vermilye
--------------------------------------
W. Moorhead Vermilye
President
Date: May 14, 2002 By: /s/ Susan E. Leaverton
--------------------------------------
Susan E. Leaverton, CPA
Treasurer/Principal Accounting Officer
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