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, 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 August 1, 2002, registrant had 5,371,846 issued and outstanding shares of
common stock.
INDEX
Part I.
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
June 30, 2002 (unaudited) and December 31, 2001 3
Condensed Consolidated Statements of Income -
For the three and six months ended June 30, 2002 and 2001
(unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
For the six months ended June 30, 2002 and 2001 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
For the six months ended June 30, 2002 and 2001 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II.
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 14
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: 2002 2001
- ------- ------------ --------------
(unaudited)
Cash and due from banks $16,712 $ 17,424
Interest bearing deposits with other banks 1,933 14,179
Federal funds sold 31,582 20,035
Investment securities:
Held-to-maturity, at amortized cost (fair value of $12,509,
$11,211, respectively) 12,279 10,896
Available for sale, at fair value 114,853 114,932
Loans, less allowance for credit losses ($4,308,
$4,189, respectively) 425,449 388,516
Premise and equipment, net 7,564 7,224
Accrued interest receivable on loans and investment securities 3,518 3,321
Investment in unconsolidated subsidiary 1,143 1,126
Goodwill 5,521 1,440
Other intangible assets 1,544 35
Deferred income taxes 390 681
Other real estate owned 381 56
Other assets 4,608 2,538
---------- ----------
TOTAL ASSETS $627,477 $ 582,403
========== ==========
LIABILITIES:
Deposits:
Noninterest bearing demand $65,685 $ 65,305
NOW and Super NOW 89,253 91,288
Certificates of deposit $100,000 or more 87,398 75,096
Other time and savings 274,975 255,781
-------- ---------
Total Deposits 517,311 487,470
Accrued interest payable 650 785
Short term borrowings 27,494 17,054
Long term debt 5,000 5,000
Other liabilities 2,503 1,124
--------- ---------
TOTAL LIABILITIES 552,958 511,433
--------- ---------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $.01; authorized 35,000,000 shares;
issued and outstanding:
June 30, 2002 5,371,615
December 31, 2001 5,332,982 54 53
Surplus 23,828 23,039
Retained earnings 49,703 47,412
Accumulated other comprehensive income 934 466
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 74,519 70,970
---------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $627,477 $582,403
========== =========
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,
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $7,441 $7,882 $14,471 $15,945
Interest and dividends on investment securities:
Taxable 1,488 1,427 3,004 2,976
Tax-exempt 114 112 220 227
Other interest income 131 360 284 774
------ ------ ------- ----
Total interest income 9,174 9,781 17,979 19,922
------ ------ ------- ------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 770 1,014 1,531 2,164
Other deposits 2,337 3,173 4,766 6,447
Other interest 126 225 240 486
------ ------ ------- -------
Total interest expense 3,233 4,412 6,537 9,097
------ ------ ------- -----
NET INTEREST INCOME 5,941 5,369 11,442 10,825
PROVISION FOR CREDIT LOSSES 79 55 211 112
------ ------ ------- --------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 5,862 5,314 11,231 10,713
------ ------ ------- ------
NONINTEREST INCOME
Service charges on deposit accounts 479 456 944 916
Gain(Loss) on sale of securities 5 - 5 (1)
Insurance agency commissions 660 - 660 -
Other noninterest income 254 205 472 350
------ ------ ------- ------
Total noninterest income 1,398 661 2,081 1,265
------ ------ ------- -----
NONINTEREST EXPENSE
Salaries and employee benefits 2,325 1,788 4,165 3,533
Expenses of premises and fixed assets 483 402 852 756
Other noninterest expense 1,158 758 2,236 1,846
------ ------ ------- -------
Total noninterest expense 3,966 2,948 7,253 6,135
------ ------ ------- -------
INCOME BEFORE TAXES ON INCOME 3,294 3,027 6,059 5,843
Federal and State income taxes 1,137 1,016 2,162 2,031
------ ------ ------- -----
NET INCOME $2,157 $2,011 $3,897 $3,812
====== ====== ======= ======
Basic earnings per common share $.40 $.38 $.73 $ .72
Diluted earnings per common share $.40 $.37 $.72 $ .71
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, 2002 $ 53 $ 23,039 $ 47,412 $ 466 $70,970
Comprehensive income:
Net income - - 3,897 - 3,897
Other comprehensive income, net of tax:
Unrealized gain on available for sale
securities - - - 468 468
--------
Total comprehensive income 4,365
--------
Shares issued 1 810 - - 811
Shares repurchased and retired - (21) - (21)
Cash dividends paid $0.30 per share - - (1,606) - (1,606)
---------- -------- -------- ----------- --------
Balances, June 30, 2002 $ 54 $ 23,828 $ 49,703 $ 934 $ 74,519
========== ======== ======== =========== ========
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
========== ======== ======== ========== ========
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,
2002 2001
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,897 $ 3,812
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 554 466
Discount accretion on debt securities (46) (93)
Provision for credit losses, net 119 38
(Gain)Loss on sale of securities (5) 1
Loss on disposal of premises and equipment 2 -
Equity in earnings of unconsolidated subsidiary (17) (22)
Net changes in:
Accrued interest receivable (197) 290
Other assets (2,070) (438)
Accrued interest payable on deposits (135) (212)
Accrued expenses 1,379 (277)
------- --------
Net cash provided by operating activities 3,481 3,565
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities
available for sale 33,206 46,524
Proceeds from sale of investment securities available for sale 275 3,999
Purchase of securities available for sale (32,830) (55,455)
Proceeds from maturities and principal payments of securities
held to maturity 1,491 11,526
Purchase of securities held to maturity (2,878) -
Net increase in loans (37,052) (3,220)
Purchase of loans - (1,016)
Purchase of premises and equipment (360) (661)
Purchase of other real estate owned (325) -
Proceeds from sale of loans - 34
Proceeds from sale of premises and equipment 19 -
Acquisition, net of stock issued (5,103) -
-------- ---------
Net cash (used) provided in investing activities (43,557) 1,731
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and
savings deposits 20,150 (4,059)
Net increase (decrease) in certificates of deposit 9,691 (2,117)
Net increase in securities sold under agreement to repurchase 10,440 8,251
Proceeds from issuance of common stock 11 89
Repurchase of common stock (21) -
Dividends paid (1,606) (1,597)
------- --------
Net cash provided by financing activities 38,665 567
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (1,411) 5,863
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 51,638 39,715
------ --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $50,227 $ 45,578
======= ========
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 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 June 30, 2002, the results of operations for the
three and six month periods ended June 30, 2002 and 2001, and cash flows
for the six month period ended June 30, 2002 and 2001 have been included.
All such adjustments are of a normal recurring nature. The results of
operations for the three and six month periods ended June 30, 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 for the year ended December 31, 2001.
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 period of 5,345,824 shares for 2002 and
5,327,021 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 six months ended June 30, 2002 and 2001 were 5,406,220 and 5,377,965,
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:
June 30, December 31,
(Dollars in thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowance $ 614 $ 561
Impaired loans with no valuation allowance 536 382
------- -------
Total impaired loans $ 1,150 $ 943
======= =======
Allowance for credit losses applicable to impaired loans $ 129 $ 76
Allowance for credit losses applicable to other than impaired loans 4,179 4,113
------- -------
Total allowance for credit losses $ 4,308 $ 4,189
======= =======
Interest income on impaired loans recorded on the cash basis $ 18 $ 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.
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 June 30, 2002, total commitments
to extend credit were approximately $109,334,000. Outstanding letters of
credit were approximately $7,044,000 at June 30, 2002.
5) In July 2001, the Financial Accounting Standards Board (FASB) 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
- 7 -
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 six months ended June 30,
2002.
The Company's other intangible assets at June 30, 2002 primarily represent
unamortized intangibles related to the acquisition of The Avon Dixon
Agency, Inc. on May 1, 2002. At June 30, 2002, the carrying amount of these
intangibles was $1,544,000, and they are being amortized on a straight-line
basis over 5 or 15 years, depending on their estimated useful lives.
Amortization expense related to other intangible assets was approximately
$33,000 for the six month period ended June 30, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("Statement 143"), which addresses financial
accounting and reporting for legal obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. Statement 143 is effective for fiscal years beginning
after June 15, 2002. This Statement is not expected to have a material
impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets" ("Statement 144") which supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("Statement 121") and the accounting
and reporting provisions of APB No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. While Statement
144 retains many of the fundamental provisions of Statement 121, it
establishes a single accounting model for long-lived assets to be disposed
of by sale, and resolves certain implementation issues not previously
addressed by Statement 121. Statement 144 is effective for fiscal years
beginning after December 15, 2002. This Statement did not have a material
impact on the Company's financial statements.
6) On May 1, 2002, the Company completed its acquisition of certain assets of
The Avon-Dixon Agency, Inc., a full service insurance agency, and its
subsidiaries, all located in Easton, Maryland. The initial purchase price
was $5,600,000 which was paid in the form of $4,800,000 cash and 39,037
shares of the Company's common stock, par value $.01 per share, valued at
$800,000. An additional $1,400,000 may be payable if specific performance
criteria set forth in the purchase agreement are realized. The Company
recorded approximately $4,082,000 of goodwill and $1,542,000 of other
intangible assets as a result of the acquisition. The Company is now
offering a full range of insurance products and services to its customers.
- 8 -
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 (collectively, the "Banks") located in
Centreville, Maryland. The Banks operate 11 full service branches in Kent, Queen
Anne's, Talbot, Caroline and Dorchester Counties. The Company is listed on 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 is
now offering 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 ( collectively, the "Insurance
Agency"). In addition, during May 2002 the Company formed Shore Pension
Services, LLC, which offers retirement planning services to businesses.
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.
Critical Accounting Policies
The Company's financial statements are prepared in accordance with accounting
principals generally accepted in the United States of America (GAAP). The
financial information contained within the financial statements is, to a
significant extent, financial information contained that is based on measures of
the financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning of income, recognizing an expense, recovering an asst or relieving a
liability.
The Company believes its most critical accounting policy relates to the
allowance for credit losses. The allowance for credit losses is an estimate of
the losses that may be sustained in the loan portfolio. The allowance is based
on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies,
which requires that losses be accrued when they are probable of occurring and
estimable, and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan,
which requires that losses be accrued based on the differences between the loan
balance and the value of collateral, present value of future cash flows or
values that are observable in the secondary market. Management uses many
factors, including economic conditions and trends, the value and adequacy of
collateral, the volume and mix of the loan portfolio, and internal loan
processes of the Company in determining the inherent loss that may be present in
the Company's loan portfolio. Actual losses could differ significantly from
Management's estimates. In addition, GAAP itself may change from one previously
acceptable method to another. Although the economics of transactions would be
the same, the timing of events that would impact the transactions could change.
Management has significant discretion in making the adjustments inherent in the
determination of the provision and allowance for credit losses, including in
connection with the valuation of collateral, the borrower's prospects of
repayment, and in establishing allowance factors on the formula allowance and
unallocated allowance components of the allowance. The establishment of
allowance factors is a continuing exercise, based on Management's continuing
assessment of the global factors such as delinquencies, loss history, trends in
volume and terms of loans, effects of changes in lending policy, the experience
and depth of Management, national and local economic trends, concentrations of
credit, quality of loan review system and the effect of external factors such as
competition and regulatory requirements, and their impact on the portfolio, and
allowance factors may change from period to period, resulting in an increase or
decrease in the amount of the provision or allowance, based upon the same volume
and classification of loans. Changes in allowance factors will have a direct
impact on the amount of the provision, and a corresponding effect on net income.
Errors in Management's perception and assessment of the global factors and their
impact on the portfolio could result in the allowance not being adequate to
cover losses in the portfolio, and may result in additional provisions or
charge-offs.
- 9 -
RESULTS OF OPERATIONS
Overview
Net income for the quarter ended June 30, 2002 was $2,157,000 or diluted
earnings per share of $.40, compared to $2,011,000 for the second quarter of
2001, or diluted earnings per share of $.37. Net income for the six months ended
June 30, 2002 was $3,897,000, compared to $3,812,000 for the same period in
2001. On a per share basis, diluted earnings for the six months ended June 30,
2002 were $ .73, compared to $ .72 for the same period last year. Return on
average assets was 1.29% for the first six months of 2002, compared to 1.39% for
the same period in 2001. Return on average stockholders' equity was 10.78% and
11.43% for the six months ended June 30, 2002 and 2001, respectively.
Net Interest Income
Net interest income for the quarter ended June 30, 2002 was $5,941,000 compared
to $5,369,000 for the same period last year. Net interest income for the six
months ended June 30, 2002 totaled $11,442,000, a $617,000 increase over the
same period last year. The increase in net interest income is the result of a
decline in the cost of deposits. Interest income declined in both the three and
six month periods ended June 30, 2002 when compared to 2001, as a result of
lower yields on earning assets. Total interest income decreased $607,000 and
$1,943,000 for the three and six month periods ended June 30, 2002,
respectively, when compared to the same period last year. Total interest expense
for the three and six months ended June 30, 2002 was $3,233,000 and $6,537,000,
respectively. This represents a decrease of $1,179,000 and $2,560,000 or 26.7%
and 28.1%, respectively, when compared to the same periods last year.
The Company's net interest margin was 4.08% at June 30, 2002, 15 basis points
lower than one year ago. The Company continued to increase its volume of earning
assets, which averaged $571,691,000 for the six months ended June 30, 2002.
Loans accounted for the most significant portion of this growth, increasing
$31,078,000 to $412,030,000. The yield on earning assets declined 137 basis
points to 6.37% for the six month period ended June 30, 2002, when compared to
the same period in 2001.
The overall yield on loans for the six months ended June 30, 2002 was 7.07%,
compared to 8.46% for the corresponding period in 2001. The average balance of
loans increased $31,078,000 totaling $412,030,000 for the six months ended June
30, 2002. The yield on investment securities declined from 6.05% for the first
six months of 2001 to 5.22% for the same period in 2002, while the average
balance of investment securities grew from $110,938,000 to $126,990,000 for the
six months ended June 30, 2001 and 2002, respectively.
Interest expense decreased primarily as a result of lower rates paid for
interest bearing deposits. The average balance of interest bearing deposits
increased $65,649,000, while the average rate paid for those deposits declined
142 basis points for the six months ended June 30, 2002 compared to the same
period in 2001. See the Analysis of Interest Rates and Interest Differentials
below for further details.
Loans comprised 72.1% and 72.9% of total average earning assets at June 30, 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.
June 30, 2002 June 30, 2001
------------- -------------
Average Income Yield Average Income Yield
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------
Earning Assets
Investment securities $126,990 $3,351 5.22% $110,938 $3,329 6.05%
Loans 412,030 14,522 7.07% 380,952 15,974 8.46%
Interest bearing deposits 8,176 68 1.66% 8,313 184 4.47%
Federal funds sold 24,495 216 1.77% 22,747 590 5.15%
-------- ------- ----- -------- ------- -----
Total earning assets 571,691 18,157 6.37% 522,950 20,077 7.74%
Noninterest earning assets 30,774 27,475
-------- --------
Total Assets 602,465 550,425
======== ========
- 10 -
Interest bearing liabilities
Interest bearing deposits 439,557 6,297 2.87% 404,986 8,611 4.29%
Short term borrowing 19,094 115 1.21% 18,584 342 4.27%
Long term debt 5,000 125 5.01% 5,000 144 5.79%
-------- ------- ----- -------- ------- ----
Total interest bearing liabilities 463,651 6,537 2.83% 428,570 9,097 4.28%
Noninterest bearing liabilities 66,515 55,166
Stockholders' equity 72,299 66,689
-------- ------
Total liabilities and stockholders' equity $602,465 $550,425
======== ========
Net interest spread $11,620 3.54% $10,980 3.46%
======= =======
Net interest margin 4.08% 4.23%
<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 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.
</FN>
Noninterest Income
Total noninterest income increased $816,000 or 64.5% for the six month period
ended June 30, 2002 when compared to the same period in 2001. This increase is
primarily due to the purchase of the assets of The Avon-Dixon Agency, Inc.
Insurance commission income totaled $660,000 for both the three and six month
periods ended June 30, 2002. Other increases relate to increased income from 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 $1,118,000 or 18.2% for the six month period ended June
30, 2002 from the comparable period in 2001. $632,000 of the increase is
attributable to the operation of the Insurance Agency. An additional $129,000 is
attributable to start up and operating costs of Shore Pension Services, LLC, and
the balance is the result of increased operating expenses due to the growth of
the Company.
Income Taxes
The effective tax rate for the six month period ended June 30, 2002 was 35.7%,
compared to 34.8% for the same period last year. There have been no significant
changes in tax law or to the Company's tax structure that would impact the
effective tax rate.
Analysis of Financial Condition
Loans
Loans, net of unearned income, totaled $429,757,000 at June 30, 2002, an
increase of $37,052,000 or 9.4% since December 31, 2001. The increase is
primarily attributable to an increase in real estate lending for the first six
months of the year. Average loans, net of unearned income, increased $31,078,000
or 5.5% for the quarter ended June 30, 2002 totaling $412,030,000, compared to
$380,952,000 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 and six month periods ended June
30, 2002 and 2001 was $79,000 and $211,000, respectively, compared to $55,000
and $112,000 for the same periods in 2001. The Company had net charge-offs of
$92 thousand for the six month period ended June 30, 2002, compared to net
charge-offs of $75 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 $207,000, totaling $1,150,000 at June 30, 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 1.05% and 1.11% as of June 30, 2002 and 2001,
respectively. Based on Management's quarterly evaluation of the adequacy of the
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allowance for credit losses, it believes that the allowance for credit losses
and the related provision are adequate at June 30, 2002.
The following table presents a summary of the activity in the allowance for
credit losses:
Six months Ended June 30,
(Dollars in thousands) 2002 2001
Allowance balance - beginning of year $ 4,189 $ 4,199
Charge-offs:
Commercial and other 3 65
Real estate 64 6
Consumer 88 48
-------- --------
Totals 155 119
-------- --------
Recoveries:
Commercial 9 6
Real estate 13 1
Consumer 41 37
-------- --------
Totals 63 44
-------- --------
Net charge-offs: 92 75
Provision for credit losses 211 112
-------- --------
Allowance balance-ending $4,308 $ 4,236
======== ========
Average loans outstanding during period $412,030 $380,784
======== ========
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 1.05% 1.11%
======== ========
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):
June 30, December 31,
Nonperforming Assets: 2002 2001
------- ----------
Nonaccrual loans 1,150 943
Other real estate owned 381 56
------- ----------
1,531 999
Past due loans 614 1,532
------- ----------
Total nonperforming and past due loans $2,145 $2,531
======= ==========
Investment Securities
Investment securities increased $1,304,000 during the six month period ended
June 30, 2002 when compared to December 31, 2001. The yields on bonds purchased
during 2002 are much lower than the yields on similar bonds which matured or
were called during the first six months of the year. The average balance of
investment securities was $126,990,000 for the six months ended June 30, 2002,
compared to $110,938,000 for the same period in 2001. The tax equivalent yield
on investment securities was 5.22% and 6.05% for the six month period ended June
30, 2002 and 2001, respectively.
Deposits
Total deposits at June 30, 2002 were $517,311,000, 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 interest bearing demand and savings account
balances which increased $19,770,000 during the six month period ended June 30,
2002. Certificates of deposit of $100,000 or more increased $12,302,000, while
other certificates of deposit declined $2,611,000.
Borrowed Funds
Short term borrowings at June 30, 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 June 30, 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
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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 $74.5 million at June 30, 2002, which is 9.3%
higher than one year ago. Accumulated other comprehensive income, which consists
solely of net unrealized gains on investment securities available for sale,
increased $420,000, resulting in an accumulated other comprehensive loss of
$934,000 at June 30, 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 June 30, 2002 for the Company with the minimum
requirements is presented below:
Minimum
Actual Requirements
------ ------------
Tier 1 risk-based capital 15.47% 4.00%
Total risk-based capital 16.49% 8.00%
Leverage ratio 10.86% 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 immediate 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%
-
For more information about market risk, see "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
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Part II
Item 2. Changes in Securities and Use of Proceeds
On May 1, 2002, the Company issued 39,037 shares of common stock, par value
$.01 per share, to The Avon Dixon Agency, Inc. in payment of $800,000 due in
consideration for the purchase of certain assets of The Avon Dixon Agency, Inc.
and its subsidiaries pursuant to the purchase agreement by and between the
parties. The Avon Dixon Agency, Inc. is an accredited investor that represented
that it acquired the securities for its own account. The issuance of the
securities is exempt from registration under Section 4(2) of The Securities Act
of 1933 and Regulation D promulgated thereunder.
Item 4. Submission of Matters to Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on April 24, 2002, the
stockholders elected three individuals to serve as Directors until the 2005
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 II Nominees (Term expires 2005) For Against Abstain
--- ------- -------
Herbert L. Andrew, III 4,115,099 25,773 0
Blenda W. Armistead 4,123,045 17,827 0
David C. Bryan 4,106,671 34,201 0
Neil R. LeCompte 4,110,013 30,859 0
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).
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.
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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: August 14, 2002 By: /s/ W. Moorhead Vermilye
--------------------------------------------
W. Moorhead Vermilye
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ Susan E. Leaverton
-------------------------------------------
Susan E. Leaverton, CPA
Treasurer and Principal Accounting Officer
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