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, 2003
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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
18 East Dover Street, Easton, Maryland 21601
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(Address of Principal Executive Offices) (Zip Code)
(410) 822-1400
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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
-- --
Indicate by check mark whether the registrant is an accelerated filer (As
defined in Rule 12b-2 of the Exchange Act). 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, 2003, registrant had outstanding 5,378,813 of common stock.
INDEX
Part I.
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
September 30, 2003 (unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Income -
For the three and nine months ended September 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
For the nine months ended September 30, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
For the nine months ended September 30, 2003 and 2002 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-9
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
Item 4. Controls and Procedures 16
Part II.
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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Part I
Item 1. Financial Statements
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
ASSETS: 2003 2002
- ------- --------------- ----------------
(unaudited)
Cash and due from banks $21,242 $ 22,321
Interest bearing deposits with other banks 14,893 20,006
Federal funds sold 50,665 27,141
Investment securities:
Held-to-maturity, at amortized cost (fair value of $16,215,
$13,379, respectively) 16,060 13,124
Available for sale, at fair value 124,504 110,864
Loans, less allowance for credit losses ($4,148,
$4,117, respectively) 454,577 435,422
Insurance premiums receivable 1,907 1,619
Premise and equipment, net 11,423 8,534
Accrued interest receivable on loans and investment securities 2,841 2,959
Investment in unconsolidated subsidiary 1,166 1,166
Goodwill 5,990 5,990
Other intangible assets 1,635 1,797
Other assets 3,949 3,124
----------- -----------
TOTAL ASSETS $710,852 $654,067
=========== ===========
LIABILITIES:
Deposits:
Noninterest bearing demand $83,328 $ 70,110
NOW and Super NOW 116,045 99,434
Certificates of deposit $100,000 or more 92,462 99,644
Other time and savings 299,927 276,004
----------- -----------
Total Deposits 591,762 545,192
Short term borrowings 28,752 22,008
Long term debt 5,000 5,000
Other liabilities 3,787 3,839
----------- -----------
TOTAL LIABILITIES 629,301 576,039
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; authorized 35,000,000 shares;
issued and outstanding:
September 30, 2003 5,378,203
December 31, 2002 5,372,064 54 54
Additional paid in capital 23,966 23,837
Retained earnings 57,523 52,985
Accumulated other comprehensive income 8 1,152
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 81,551 78,028
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $710,852 $654,067
=========== ===========
See accompanying notes to Condensed Consolidated Financial Statements.
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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,
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 7,072 $ 7,687 $21,663 $22,158
Interest and dividends on investment securities:
Taxable 960 1,374 3,107 4,378
Tax-exempt 159 124 448 344
Other interest income 148 150 390 434
------- -------- -------- -------
Total interest income 8,339 9,335 25,608 27,314
------- -------- -------- -------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 621 756 1,939 2,287
Other deposits 1,621 2,143 5,264 6,909
Other interest 109 131 332 371
------- -------- -------- -------
Total interest expense 2,351 3,030 7,535 9,567
------- -------- -------- -------
NET INTEREST INCOME 5,988 6,305 18,073 17,747
PROVISION FOR CREDIT LOSSES 75 66 235 277
------- -------- -------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 5,913 6,239 17,838 17,470
------- -------- -------- -------
NONINTEREST INCOME
Service charges on deposit accounts 466 477 1,421 1,421
Gain on sale of securities 91 18 449 23
Insurance agency commissions 1,354 1,078 4,683 1,738
Other noninterest income 379 241 1,160 713
------- -------- -------- -------
Total noninterest income 2,290 1,814 7,713 3,895
------- -------- -------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 3,046 2,596 9,120 6,761
Expenses of premises and equipment 515 454 1,490 1,306
Other noninterest expense 1,200 1,177 3,706 3,413
------- -------- -------- -------
Total noninterest expense 4,761 4,227 14,316 11,480
------- -------- -------- -------
INCOME BEFORE TAXES ON INCOME 3,442 3,826 11,235 9,885
Federal and State income taxes 1,247 1,338 4,063 3,500
------- -------- -------- -------
NET INCOME $2,195 $2,488 $7,172 $6,385
======= ======== ======== =======
Basic earnings per common share $ .40 $ .46 $ 1.33 $ 1.19
Diluted earnings per common share $ .40 $ .46 $ 1.31 $ 1.18
See accompanying notes to Condensed Consolidated Financial Statements.
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SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Dollars in thousands)
Accumulated
Additional other Total
Common Paid in Retained Comprehensive Stockholders'
Stock Capital Earnings Income(loss) Equity
------- ------------ ---------- --------------- --------------
Balances, January 1, 2003 $ 54 $ 23,837 $ 52,985 $1,152 $78,028
Comprehensive income:
Net income - - 7,172 - 7,172
Other comprehensive income, net of tax:
Unrealized loss on available for sale
securities - - - (1,144) (1,144)
----------
Total comprehensive income 6,028
----------
Shares issued - 129 - - 129
Cash dividends paid $0.49 per share - - (2,634) - (2,634)
------ ---------- ---------- --------- ----------
Balances, September 30, 2003 $ 54 $ 23,966 $ 57,523 $ 8 $ 81,551
====== ========== ========== ========= ==========
Balances, January 1, 2002 $ 53 $ 23,039 $ 47,412 $ 466 $70,970
Comprehensive income:
Net income - - 6,385 - 6,385
Other comprehensive income, net of tax:
Unrealized gain on available for sale
securities - - - 762 762
----------
Total comprehensive income 7,147
----------
Shares issued for employee benefit plans - 15 - - 15
Shares issued for acquisition of insurance agency 1 800 - - 801
Shares repurchased and retired - (21) - - (21)
Cash dividends paid $0.45 per share - - (2,412) - (2,412)
------ ---------- --------- ----------- -----------
Balances, September 30, 2002 $ 54 $ 23,833 $ 51,385 $ 1,228 $76,500
====== ========== ========= =========== ===========
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,
2003 2002
--------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,172 $ 6,385
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,152 923
Discount accretion on debt securities (42) (92)
Provision for credit losses, net (31) (102)
Deferred income taxes 52 (13)
Gain on sale of securities (449) (23)
Loss on disposal of premises and equipment - 2
Loss on other real estate owned 2 4
Equity in earnings of unconsolidated subsidiary - (21)
Net changes in:
Accrued interest receivable 117 (43)
Other assets (502) (1,240)
Accrued interest payable on deposits (160) (129)
Accrued expenses 108 1,676
---------- ----------
Net cash provided by operating activities 7,419 7,327
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities
available for sale 88,398 63,390
Proceeds from sale of investment securities available for sale 8,771 3,017
Purchase of securities available for sale (112,663) (57,864)
Proceeds from maturities and principal payments of securities
held to maturity 1,516 1,754
Purchase of securities held to maturity (4,468) (4,367)
Net increase in loans (19,500) (44,144)
Purchase of loans (291) -
Proceeds from sale of loans 668 -
Purchase of premises and equipment (3,379) (753)
Proceeds from sale of premises and equipment - 19
Proceeds from sale of other real estate owned 52 43
Acquisition, net of stock issued - (5,103)
---------- ----------
Net cash used in investing activities ( 40,896) (44,008)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and
savings deposits 51,492 24,262
Net (decrease) increase in certificates of deposit (4,922) 15,607
Net increase in short term borrowings 6,744 7,274
Proceeds from issuance of common stock 129 16
Repurchase of common stock - (21)
Dividends paid (2,634) (2,412)
---------- ----------
Net cash provided by financing activities 50,809 44,726
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,332 8,045
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 69,468 51,638
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 86,800 $ 59,683
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
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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 September 30, 2003, the results of operations for the
three- and nine-month periods ended September 30, 2003 and 2002, and cash
flows for the nine-month periods ended September 30, 2003 and 2002, have
been included. The amounts as of December 31, 2002 are derived from audited
financial statements. All such adjustments are of a normal recurring
nature. There have been no significant changes to the Company's accounting
policies as disclosed in the 2002 Annual Report. The results of operations
for the nine months ended September 30, 2003 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, as amended by Form 10-K/A, for the year ended December 31, 2002.
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 5,374,805 shares for 2003 and
5,354,573 shares for 2002. 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, 2003 and
2002 were 5,463,640 and 5,415,176, 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:
September 30, December 31,
(Dollars in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Impaired loans with a specific allowance $ 786 $ 414
Impaired loans with a general allowance 749 377
-------- --------
Total impaired loans $ 1,535 $ 791
======== ========
Allowance for credit losses applicable to impaired loans $ 530 $ 116
Allowance for credit losses applicable to other than impaired loans 3,618 4,001
-------- --------
Total allowance for credit losses $ 4,148 $ 4,117
======== ========
Interest income on impaired loans recorded on the cash basis $ 21 $ 78
======== ========
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 Company's bank subsidiaries 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, 2003, total commitments to extend credit were approximately
$133,470,000. Outstanding letters of credit were approximately $ 9,518,000
at September 30, 2003.
-7-
5) The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-based Compensation" and SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure", but applies APB
Opinion No. 25 and related interpretations in accounting for its plans. No
compensation expense related to the plans was recorded during the
three-month periods ended September 30, 2003 and 2002. No options vested
during the three-month period ended September 30, 2003. If the Company had
elected to recognize compensation cost based on fair value at the vesting
dates for awards under the plans consistent with the method prescribed by
SFAS No. 123, net income and earnings per share would have been changed to
the pro forma amounts as follows:
Nine-month period Ended September 30,
2003 2002
---- ----
Net income:
As reported $7,172 $6,385
Less pro forma stock-based compensation
expense determined under the fair value
method, net of related tax effects (39) (18)
-------- --------
Pro forma net income $7,133 $6,367
======== ========
Basic net income per share:
As reported $ 1.33 $1.19
Pro forma 1.33 1.19
Diluted earnings per share
As reported $ 1.31 $1.18
Pro forma 1.31 1.18
Three-month Period Ended September 30,
2003 2002
---- ----
Net income:
As reported $2,195 $2,488
Less pro forma stock-based compensation
expense determined under the fair value
method, net of related tax effects - -
-------- --------
Pro forma net income $2,195 $2,488
======== ========
Basic net income per share:
As reported $ 0.40 $ 0.46
Pro forma 0.40 0.46
Diluted earnings per share
As reported $0.40 $ 0.46
Pro forma 0.40 0.46
The pro forma amounts are not representative of the effects on reported net
income for future periods.
6) In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities".
The requirements of SFAS No. 146 are effective prospectively for qualifying
activities initiated after December 31, 2002. SFAS No. 146 applies to costs
associated with an exit activity, including restructuring, or with a
disposal of long-lived assets. The Statement has had no effect on the
Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("Interpretation No. 45"). Beginning in 2003,
Interpretation No. 45 requires recognition of liabilities at their fair value
for newly issued guarantees. The adoption of Interpretation No. 45 did not have
a material effect on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based compensation and required disclosure in
both annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Company has adopted the disclosure provisions of SFAS No. 148. The
-8-
Company has not changed to the fair value-based method of accounting for
stock-based compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation No. 46"), which explains
identification of variable interest entities and the assessment of whether to
consolidate those entities. Interpretation No. 46 requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among the
involved parties. The provisions of Interpretation No. 46 are effective for all
financial statements issued after January 1, 2003. The Company holds no
significant variable interest entities that would require disclosure or
consolidation.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities
under Statement 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, with some exceptions. The implementation of SFAS
No. 149 did not have a material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"), effective for financial instruments entered into or modified after May
31, 2003. This statement established standards for classifying and measuring
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within the scope of the statement as a liability rather than as an equity, such
as obligations that a reporting entity can or must settle by issuing its own
equity shares. SFAS No. 150 did not have an impact on the Company's earnings,
financial condition or equity.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 12 full service branches in Kent, Queen Anne's, Talbot, Caroline
and Dorchester Counties. The Company offers a full range of insurance products
and services to its customers through The Avon-Dixon Agency, LLC, Elliott Wilson
Insurance, LLC, and Mubell Finance, LLC (collectively, the "Insurance Agency")
and investment advisory services through Wye Financial Services, LLC, all of
which are wholly owned subsidiaries of the Company. The shares of the Company's
common stock are listed on the NASDAQ SmallCap Market, trading under the symbol
"SHBI."
The Company maintains an Internet site at www.shbi.net on which it makes
available free of charge its Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as
soon as reasonably practicable after these reports are electronically filed
with, or furnished to, the Securities and Exchange Commission.
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, 2002 audited Consolidated Financial Statements and Notes, which
were included in the Company's Annual Report on Form 10-K, as amended by Form
10-K/A, for the year ended December 31, 2002.
Forward-Looking Information
Portions of this Quarterly Report on Form 10-Q contain forward-looking
statements within the meaning of The Private Securities Litigation Reform Act of
1995. Such statements are not historical facts and include expressions about the
Company's confidence, policies, and strategies, the adequacy of capital levels,
and liquidity. Such forward-looking statements involve certain risks and
uncertainties, including economic conditions, competition in the geographic and
business areas in which the Company and its affiliates operate, inflation,
fluctuations in interest rates, legislation, and governmental regulation. These
risks and uncertainties are described in more detail in the Company's Annual
Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31,
2002, 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.
Recent Developments
On November 12, 2003, the Company entered into a definitive merger agreement
with Midstate Bancorp, Inc., a Delaware bank holding company, pursuant to which
Midstate Bancorp, Inc. will merge with and into the Company. Midstate Bancorp,
Inc.'s Delaware bank subsidiary, The Felton Bank, will become a separate
Delaware bank subsidiary of the Company as a result of the merger. The merger is
subject to the approval of regulatory agencies and the stockholders of Midstate
Bancorp, Inc. and is expected to close during the first quarter of 2004.
-9-
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 income, recognizing an expense, recovering an asset 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 as of the balance sheet
date. The allowance is based on two basic principles of accounting: (i) SFAS No.
5, "Accounting for Contingencies", which requires that losses be accrued when
they are probable of occurring and estimable, and (ii) SFAS No. 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.
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.
Three basic components comprise the Company's allowance for credit losses: a
specific allowance, a formula allowance and a nonspecific allowance. Each
component is determined based on estimates that can and do change when the
actual events occur. The specific allowance is used to individually allocate an
allowance to loans identified as impaired. An impaired loan may show
deficiencies in the borrower's overall financial condition, payment history,
support available from financial guarantors and/or the fair market value of
collateral. When a loan is identified as impaired, a specific reserve is
established based on the Company's assessment of the loss that may be associated
with the individual loan. The formula allowance is used to estimate the loss on
internally risk rated loans, exclusive of those identified as impaired. Loans
identified as special mention, substandard, doubtful and loss, as well as
impaired, are segregated from performing loans. Remaining loans are then grouped
by type (commercial, commercial real estate, construction, home equity or
consumer). Each loan type is assigned an allowance factor based on Management's
estimate of the risk, complexity and size of individual loans within a
particular category. Classified loans are assigned higher allowance factors than
non-rated loans due to management's concerns regarding collectibility or
management's knowledge of particular elements regarding the borrower. Allowance
factors grow with the worsening of the internal risk rating. The nonspecific
formula is used to estimate the loss of non-classified loans stemming from more
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. The nonspecific allowance captures
losses whose impact on the portfolio have occurred but have yet to be recognized
in either the formula or specific allowance.
Overview
Net income for the nine months ended September 30, 2003 was $7,172,000, an
increase of 12.3% when compared to $6,385,000 for the same period in 2002. On a
per share basis, diluted earnings were $1.31, compared to $1.18 for the same
period last year. Return on average assets was 1.43% for the first nine months
of 2003 compared to 1.39% for the first nine months of 2002. Return on average
stockholders' equity increased from 11.63% at September 30, 2002 to 11.97% at
September 30, 2003.
-10-
Net income totaled $2,195,000 for the third quarter of 2003, a decrease of 11.8%
when compared to $2,488,000 for the same period in 2002. On a per share basis,
diluted earnings were $0.40 for the quarter, compared to $0.46 for the same
period in 2002. A reduction in interest income was the primary reason for the
decline. The overall yield on earning assets continued to decline during the
third quarter, resulting in an average yield on earning assets was 5.50% for the
nine-month period ending September 30, 2003 compared to 6.36% for the same
period last year. A reduction in the rate paid for interest bearing deposits
from 2.75% one year ago to 1.98% at September 30, 2003 enabled the Company to
increase net interest income over the comparable nine month period of one year
ago. The reduction in rates paid for deposits is largely attributable to the
maturity and repricing of existing deposits in the current low interest rate
environment.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the quarter ended September 30, 2003 was $5,988,000
compared to $6,305,000 for the same period last year. Net interest income for
the nine months ended September 30, 2003 totaled $18,073,000, a $326,000
increase over the same period last year. The increase in net interest income for
the nine-month period ended September 30, 2003 is primarily the result of a
reduction in interest expense. Interest income declined in both the three- and
nine-month periods ended September 30, 2003 when compared to 2002, as a result
of lower yields on earning assets.
The Company's net interest margin was 3.90% for the nine months ended September
30, 2003. A 25 basis point reduction in short-term rates at the end of the
second quarter of 2003 had an impact on the three and nine month results.
Deposit growth continued to outpace loan demand, resulting in an increase in
interest bearing deposits with other banks and federal funds sold. Earning
assets averaged $627,556,000 for the nine months ended September 30, 2003, as
compared to $580,045,000 at September 30, 2002. Loans accounted for the most
significant portion of this growth, increasing $33,943,000 to $453,443,000 at
September 30, 2003. The yield on earning assets declined 86 basis points to
5.50% for the nine-month period ended September 30, 2003, when compared to the
same period in 2002.
The overall yield on loans for the nine months ended September 30, 2003 was
6.39%, compared to 7.09% for the corresponding period in 2002. The yield on
investment securities declined from 5.10% for the first nine months of 2002 to
4.02% for the same period in 2003 and the average balance of investment
securities declined $1,027,000 to $126,086,000 for the nine months ended
September 30, 2003 when compared to September 30, 2002.
Total interest expense for the three and nine months ended September 30, 2003
was $2,351,000 and $7,535,000, respectively. This represents a decrease of
$679,000 and $2,032,000 or 22.4% and 21.2%, respectively, when compared to the
same periods last year. Lower rates paid for certificates of deposit were the
primary cause for the decline in interest expense for the three- and nine-month
periods ended September 30, 2003. The average balance of all categories of
deposits increased during the nine-month period ended September 30, 2003. The
average balance of interest bearing deposits increased $37,346,000, while the
average rate paid for those deposits declined 77 basis points for the nine
months ended September 30, 2003 compared to the same period in 2002. The average
balance of certificates of deposits increased $8,216,000, while the average rate
paid for certificates of deposit decreased 98 basis points to 3.20% for the nine
months ended September 30, 2003 when compared to the same period last year. See
the Analysis of Interest Rates and Interest Differentials below for further
details.
Loans comprised 72.3% of total average earning assets at September 30, 2003 and
2002.
-11-
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, 2003 September 30, 2002
------------------ ------------------
Average Income Yield Average Income Yield
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------
Earning Assets
Investment securities $126,086 $ 3,801 4.02% $127,113 $ 4,918 5.10%
Loans 453,443 21,719 6.39% 419,500 22,231 7.09%
Interest bearing deposits
with other banks 19,271 155 1.07% 7,736 96 1.67%
Federal funds sold 28,756 235 1.09% 25,696 337 1.76%
---------- --------- ----- ------------ -------- --------
Total earning assets $627,556 $25,910 5.50% $580,045 $27,582 6.36%
Non-interest earning assets 39,945 32,132
---------- ----------
Total Assets $667,501 $612,177
========= ========
Interest bearing liabilities
Interest bearing deposits $484,154 $7,203 1.98% $446,808 $9,196 2.75%
Short term borrowing 23,520 144 0.82% 29,311 183 1.20%
Long term debt 5,000 188 5.03% 5,000 188 5.04%
---------- --------- ----- ------------ -------- -----
Total interest bearing liabilities $512,674 $7,535 1.95% $472,119 $9,567 2.71%
Non-interest bearing liabilities 74,939 66,848
Stockholders' equity 79,888 73,210
---------- ----------
Total liabilities and stockholders' equity $667,501 $612,177
======== ========
Net interest spread $18,375 3.55% $18,015 3.65%
======= =======
Net interest margin 3.90% 4.15%
(1) Interest Income includes the effects of taxable-equivalent adjustments
(reduced by the nondeductible potion of interest expense) using the appropriate
marginal federal income tax rate of 35% to increase tax-exempt interest income
to a taxable equivalent basis. The taxable-equivalent adjustment amounts
utilized in the above table to compute yields aggregated to $302,000 in 2003 and
$268,000 in 2002.
(2) Average loan balances include non-accrual loans.
(3) Loan fee income is included in interest income for each loan category and
yield calculations are based on the total.
Non-interest Income
Total non-interest income for the three and nine-month periods ended September
30, 2003 increased $476,000 and $3,818,000, respectively, when compared to the
same periods in 2002. Commissions attributable to the Insurance Agency, which
began operations on May 1, 2002, represented $276,000 and $2,945,000 of that
increase, respectively, totaling $1,354,000 and $4,683,000 for the three and
nine-month periods ended September 30, 2003, respectively. In addition, the
Company had gains on the sale of securities totaling $91,000 and $449,000 for
the three and nine-month periods ended September 30, 2003, respectively,
compared to $18,000 and $23,000 for the same periods last year. Income from the
origination of mortgage loans for the secondary market totaling $390,000 for the
nine-months ended September 30, 2003, also contributed to the growth in
non-interest income. Mortgage loans originated for the secondary market are not
generally funded by the Company.
Non-interest Expense
Total non-interest expense, excluding income taxes and the provision for credit
losses, increased $534,000 and $2,836,000 for the three and nine-month periods
ended September 30, 2003, respectively, from the comparable periods in 2002.
Operation of the Insurance Agency accounted for $246,000 and $2,175,000 of the
increase during the three and nine-month periods ended September 30, 2003,
respectively, when compared to the same periods in 2002. Other increases relate
to the start up cost of a new branch location as well as general increases in
overhead resulting from the growth of the Company.
Income Taxes
The effective tax rate for the three- and nine-month periods ended September 30,
2003 was 36.2% compared to 35% and 35.4%, respectively, for the same periods
last year. There have been no significant changes in tax law or to the Company's
tax structure that would materially impact the effective tax rate.
-12-
Analysis of Financial Condition
Loans
Loans, net of allowance for credit losses and unearned income, totaled
$454,577,000 at September 30, 2003, an increase of $19,155,000 or 4.4% from
December 31, 2002. The demand for real estate loans remained strong and was the
primarily reason for this growth, although the Company continued to experience
loan runoff as some borrowers sought long-term fixed rate financing in the
secondary market. Average loans, net of unearned income, for the nine-month
period ended September 30, 2003 totaled $453,443,000, compared to $419,500,000
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. Please refer to the discussion under
the caption, "Critical Accounting policies" for an overview of the underlying
methodology Management employs on a quarterly basis to maintain the allowance.
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. The provision for credit losses for the three- and nine-month
periods ended September 30, 2003 was $75,000 and $235,000, respectively,
compared to $66,000 and $277,000 for the same periods in 2002. The overall
quality of the Company's loan portfolio remains strong despite an increase in
nonperforming loans, resulting in a decline in the provision for the nine-month
period ended September 30, 2003. Strong underwriting guidelines, a stable local
economy and increased collateral value resulting from the strength of the local
real estate economy have each had a positive effect on the quality of the loan
portfolio. The Company's charge-off ratios remain much lower than those of
similar sized institutions according to the most recent FDIC quarterly banking
profile. Net charge-offs were $204,000 for the nine-month period ended September
30, 2003, compared to $380,000 for the same period last year. Nonaccrual loans
increased $764,000, totaling $1,535,000 at September 30, 2003, when compared to
December 31, 2002. A specific allowance hs been established to cover the
estimated loss associated with these nonaccrual loans. Loans past due 90 days
and still accruing increased $615,000 since December 31, 2002, however they
consist primarily of real estate secured loans with, in management's opinion,
minimal loss potential to the Company. The Company's ratio of nonperforming
assets, including other real estate owned, is also much lower than that of
similar sized institutions. The allowance for credit losses as a percentage of
average loans was .91% and .97% as of September 30, 2003 and 2002, respectively.
The decline is primarily the result of growth in loans secured by real estate,
which present less risk of loss to the Company than other types of loans. 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 September 30, 2003.
-13-
The following table presents a summary of the activity in the allowance for
credit losses.
Nine Months Ended September 30,
(Dollars in thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------
Allowance balance - beginning of year $ 4,117 $ 4,189
Charge-offs:
Commercial and other 189 273
Real estate 2 64
Consumer 99 128
-------- -------
Totals 290 465
-------- -------
Recoveries:
Commercial 32 14
Real estate 4 14
Consumer 50 57
-------- -------
Totals 86 85
-------- -------
Net charge-offs: 204 380
Provision for credit losses 235 277
-------- -------
Allowance balance-ending $ 4,148 $ 4,086
======== ========
Average loans outstanding during period $453,443 $419,500
======== ========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .06% .12%
======== ========
Allowance for credit losses at period end as a
percentage of average loans .91% .97%
======== ========
The general economic conditions in the Company's market area remain strong;
because the Company's loans are predominately real estate secured, however,
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 non-performing assets of the Company.
September 30, December 31,
Non-performing Assets: 2003 2002
------------ ------------
Non-accrual loans $ 1,535 $ 771
Other real estate owned - 54
-------- --------
1,535 825
Loans past due 90 days and still accruing 989 374
-------- ---------
Total non-performing $ 2,524 $ 1,199
======= =======
Investment Securities
Investment securities increased $16,576,000 during the nine-month period ended
September 30, 2003 when compared to December 31, 2002. The average balance of
investment securities was $126,086,000 for the nine-month period ended September
30, 2003, compared to $127,113,000 for the same period in 2002. The yield on
investment securities continued to decline during the quarter as a result of
bonds being called or maturing at rates higher than those available for
reinvestment. At September 30, 2003, the overall yield on investment securities
was 4.02%, a 108 basis point decrease from 5.10% at September 30, 2002, on a tax
equivalent basis.
Deposits
Total deposits at September 30, 2003 were $591,762,000, compared to $545,192,000
at December 31, 2002. The majority of the growth was in money market and savings
categories, which increased $21,906,000 over the nine-month period ended
September 30, 2003. Certificate of deposit rates continued to decline during
2003, resulting in many depositors leaving money in short-term certificates of
deposit, interest bearing transaction accounts or money management accounts
waiting for rates to increase. Certificates of deposit greater than $100,000
-14-
decreased $7,182,000 during the nine-month period ended September 30, 2003.
Other time deposits increased $2,016,000 during the nine-month period ended
September 30, 2003, and noninterest and interest bearing transaction accounts
increased $29,829,000 during the same period.
Borrowed Funds
Short term borrowings, which consist of securities sold under agreements to
repurchase, increased $6,744,000, totaling $28,752,000 at September 30, 2003
when compared to December 31, 2002. The average rate paid for short-term
borrowings was .82% and 1.20% at September 30, 2003 and 2002, 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, 2003 and 2002. The advance is due
March 29, 2006 and has a one-time call provision in 2004. As of September 30,
2003, 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 $81,551,000 at September 30, 2003, an increase of
4.5% when compared to December 31, 2002. Accumulated other comprehensive income,
which consists solely of net unrealized gains and losses on investment
securities available for sale, declined $1,144,000 since December 31, 2002,
resulting in accumulated other comprehensive income at September 30, 2003 of
$8,000.
Bank regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutions' assets and off-balance sheet
items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a financial institution to maintain capital at higher levels. A comparison of
the capital as of September 30, 2003 with the minimum requirements is presented
below.
Minimum
Actual Requirements
------ ------------
Tier 1 risk-based capital 15.25% 4.00%
Total risk-based capital 16.13% 8.00%
Leverage ratio 10.72% 4.00%
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates or
equity pricing. The Company's principal market risk is interest rate risk that
arises from its lending, investing and deposit taking activities. The Company's
profitability is dependent on the Banks' net interest income. Interest rate risk
can significantly affect net interest income to the degree that interest bearing
liabilities mature or reprice at different intervals than interest earning
assets. The Asset/Liability Committee of the Board of Directors (the "ALCO") of
both Banks oversees the management of interest rate risk. The ALCO's primary
purpose is to manage the exposure of net interest margins to unexpected changes
due to interest rate fluctuations. These efforts affect the loan pricing and
deposit rate policies of the Company as well as the asset mix, volume
guidelines, and liquidity and capital planning.
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, 2003, the model produced the
following sensitivity profile for net interest income and the fair value
capital:
-15-
Immediate Change in Rates
+200 Basis Points -200 Basis Points Policy Limit
- ----------------------------------------------------------------------------------------------------------------------
% Change in net interest income 11.00% (14.5)% + 25%
-
% Change in fair value of capital 5.89% (7.8)% + 15%
-
For more information regarding market risk and the Company's objectives and
strategies in managing market risk, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports filed
under the Securities Exchange Act of 1934 with the SEC, such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
specified in those rules and forms, and that such information is accumulated and
communicated to the Company's management, including the Chief Executive Officer
("CEO") and the Principal Accounting Officer ("PAO"), as appropriate, to allow
for timely decisions regarding required disclosure. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate.
An evaluation of the effectiveness of these disclosure controls, as of September
30, 2003, was carried out under the supervision and with the participation of
the Company's management, including the CEO and the PAO. Based on that
evaluation, the Company's management, including the CEO and the PAO, has
concluded that the Company's disclosure controls and procedures are effective.
During the third quarter of 2003, there was no change in the Company's internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
-16-
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).
10.3 Form of Employment Agreement between The Avon-Dixon Agency,
LLC and Kevin P. LaTulip (incorporated by reference to
Exhibit 10.3 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002).
10.4 Form of Supplemental Retirement Plan Agreement and Life
Insurance Endorsement Method Split Dollar Plan Agreement
between The Centreville National Bank of Maryland and Daniel
T. Cannon (incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2003).
10.5 Form of Life Insurance Endorsement Method Split Dollar Plan
Agreement between The Centreville National Bank of Maryland
and Daniel T. Cannon (incorporated by reference to Exhibit
10.5 of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2003).
31.1 Certifications of the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith).
31.2 Certifications of the PAO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith).
32.1 Certifications of the CEO and the Principal Accounting Officer
pursuant to 18 U.S.C.ss.1350 (furnished herewith).
99.1 Shore Bancshares, Inc. 1998 Employee Stock Purchase Plan, as
amended and restated (incorporated by reference to Appendix A
of the Company's Definitive Proxy Statement on Schedule 14A
for the 2003 Annual Meeting of Stockholders, filed on March
31, 2003).
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)).
b) Reports on Form 8-K.
On August 6, 2003, the Company filed a Current Report on Form 8-K in which
it furnished under Item 12 the results of operations for the three- and
six-month periods ended June 30, 2003.
-17-
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, 2003 By: /s/ W. Moorhead Vermilye
-------------------------------------
W. Moorhead Vermilye
President and Chief Executive Officer
Date: November 14, 2003 By: /s/ Susan E. Leaverton
-------------------------------------
Susan E. Leaverton, CPA
Treasurer and Principal Accounting
Officer
-18-
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
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).
10.3 Form of Employment Agreement between The Avon-Dixon Agency, LLC
and Kevin P. LaTulip (incorporated by reference to Exhibit 10.3 of
the Company's Annual Report on Form 10K for the year ended
December 31, 2002).
10.4 Form of Executive Supplemental Retirement Plan Agreement between The
Centreville National Bank of Maryland and Daniel T. Cannon
(incorporated by reference to Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2003).
10.5 Form of Life Insurance Endorsement Method Split Dollar Plan
Agreement between The Centreville National Bank of Maryland and
Daniel T. Cannon (incorporated by reference to Exhibit 10.5 of the
Company's Quarterly Report on Form 10-Q for the period ended June
30, 2003).
31.1 Certifications of the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith).
31.2 Certifications of the PAO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith).
32.1 Certifications of the CEO and the PAO pursuant to 18 U.S.C.ss.1350
(furnished herewith).
99.1 Shore Bancshares, Inc. 1998 Employee Stock Purchase Plan, as amended
and restated (incorporated by reference to Appendix A of the
Company's Definitive Proxy Statement on Schedule 14A for the 2003
Annual Meeting of Stockholders, filed on March 31, 2003).
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)).
-19-