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, 2004
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
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
--- ---
Indicate by checkmark 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: 5,513,725 issued and
outstanding shares of common stock as of October 31, 2004.
INDEX
Part I.
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
September 30, 2004 (unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Income -
For the three and nine months ended September 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity - For the nine months ended September 30, 2004 and 2003
(unaudited) 5
Condensed Consolidated Statements of Cash Flows -
For the nine months ended September 30, 2004 and 2003 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 17
Part II.
Item 6. Exhibits 18
Signatures 19
-2-
Part I
Item 1. Financial Statements
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
ASSETS: 2004 2003
- ------- --------------- --------------------
(unaudited)
Cash and due from banks $ 28,237 $ 19,391
Interest bearing deposits with other banks 137 9,897
Federal funds sold 13,593 17,443
Investment securities:
Held-to-maturity, at amortized cost (fair value of $15,595,
$15,585, respectively) 15,437 15,313
Available for sale, at fair value 118,359 144,368
Loans, less allowance for credit losses ($4,402,
$4,060, respectively) 571,667 470,895
Insurance premiums receivable 195 845
Premises and equipment, net 12,631 11,302
Accrued interest receivable on loans and investment securities 3,295 3,042
Investment in unconsolidated subsidiary 843 1,203
Goodwill 8,626 5,990
Other intangible assets 2,327 1,581
Other assets 4,607 4,109
----------- -----------
TOTAL ASSETS $779,954 $705,379
=========== ===========
LIABILITIES:
Deposits:
Noninterest bearing demand $ 96,081 $ 91,669
NOW and Super NOW 120,822 103,415
Certificates of deposit $100,000 or more 78,814 71,385
Other time and savings 352,662 325,940
----------- -----------
Total Deposits 648,379 592,409
Short term borrowings 30,825 20,957
Long term debt 5,000 5,000
Other liabilities 3,821 3,486
----------- -----------
TOTAL LIABILITIES 688,025 621,852
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; authorized 35,000,000 shares; issued and
outstanding:
September 30, 2004 5,513,619
December 31, 2003 5,400,793 55 54
Additional paid in capital 27,971 24,231
Retained earnings 64,028 58,932
Accumulated other comprehensive (loss) income (125) 310
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 91,929 83,527
------------ -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $779,954 $705,379
============ ===========
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)
Three months ended September 30, Nine months ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $8,657 $ 7,072 $23,819 $21,663
Interest and dividends on investment securities:
Taxable 1,088 960 3,380 3,107
Tax-exempt 146 159 450 448
Other interest income 90 148 227 390
----- ------- -------- --------
Total interest income 9,981 8,339 27,876 25,608
-------- ------- ------- --------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 589 621 1,730 1,939
Other deposits 1,568 1,621 4,608 5,264
Other interest 120 109 325 332
-------- ------- ------- --------
Total interest expense 2,277 2,351 6,663 7,535
-------- ------ ------ --------
NET INTEREST INCOME 7,704 5,988 21,213 18,073
PROVISION FOR CREDIT LOSSES 165 75 370 235
-------- ------- ------- --------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 7,539 5,913 20,843 17,838
-------- ------- ------- --------
NONINTEREST INCOME
Service charges on deposit accounts 658 466 1,811 1,421
Gain (loss) on sale of securities (13) 91 1 449
Insurance agency commissions 1,577 1,354 4,985 4,683
Other noninterest income 492 379 1,447 1,160
-------- ------- ------- --------
Total noninterest income 2,714 2,290 8,244 7,713
-------- ------- ------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 3,519 3,046 10,167 9,120
Expenses of premises and equipment 594 515 1,757 1,490
Other noninterest expense 1,571 1,200 4,559 3,706
-------- ------- ------- --------
Total noninterest expense 5,684 4,761 16,483 14,316
-------- ------- ------- --------
INCOME BEFORE TAXES ON INCOME 4,569 3,442 12,604 11,235
Federal and State income taxes 1,634 1,247 4,553 4,063
-------- ------- ------- --------
NET INCOME $2,935 $2,195 $8,051 $7,172
======== ======= ======= ========
Basic earnings per common share $.53 $.40 $1.47 $1.33
Diluted earnings per common share $.53 $.40 $1.46 $1.31
Dividends declared per common share $.18 $.18 $.54 $.49
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
Additional other Total
Common Paid in Retained Comprehensive Stockholders'
Stock Capital Earnings Income(loss) Equity
------------------- -----------------------------------------------
Balances, January 1, 2004 $ 54 $ 24,231 $ 58,932 $310 $83,527
Comprehensive income:
Net income - - 8,051 - 8,051
Other comprehensive income, net of tax:
Unrealized loss on available for sale
securities - - - (435) (435)
----------
Total comprehensive income 7,616
----------
Shares issued 1 3,740 - - 3,741
Cash dividends paid $0.54 per share - - (2,955) - (2,955)
------------ ------------ ------------ ------------ ------------
Balances, September 30, 2004 $ 55 $ 27,971 $ 64,028 $ (125) $ 91,929
========== ======== ======== ======== ========
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
========== ======== ======== ===== ========
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,
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,051 $ 7,172
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,092 1,152
Discount accretion on debt securities (90) (42)
Provision for credit losses, net 342 (31)
Deferred Income Taxes - 52
Gain on sale of securities (1) (449)
Loss on other real estate owned - 2
Equity in earnings of unconsolidated subsidiary (20) -
Net changes in:
Insurance premiums receivable 649 (288)
Accrued interest receivable (21) 117
Other assets (23) (214)
Accrued interest payable on deposits (47) (160)
Accrued expenses 69 108
-------------- --------------
Net cash provided by operating activities 10,001 7,419
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities
available for sale 52,607 88,398
Proceeds from sale of investment securities available for sale 13,931 8,771
Purchase of securities available for sale (31,224) (112,663)
Proceeds from maturities and principal payments of securities
held to maturity 1,911 1,516
Purchase of securities held to maturity (2,056) (4,468)
Net increase in loans (63,267) (19,500)
Purchase of Loans (291)
Proceeds from sale of loans - 668
Purchase of premises and equipment (1,113) (3,379)
Purchase of other real estate owned (117) -
Proceeds from sale of other real estate owned - 52
Proceeds from sale of investment in unconsolidated subsidiary 380 -
Acquisition, net of stock issued (235) -
-------------- --------------
Net cash used in investing activities (29,183) (40,896)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and
savings deposits 9,887 51,492
Net decrease in certificates of deposit (2,914) (4,922)
Net increase in securities sold under agreement to repurchase 9,867 6,744
Proceeds from issuance of common stock 533 129
Dividends paid (2,955) (2,634)
-------------- --------------
Net cash provided by financing activities 14,418 50,809
-------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,764) 17,332
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 46,731 69,468
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,967 $ 86,800
============== ==============
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 September 30, 2004, the results of operations for the
three- and nine-month periods ended September 30, 2004 and 2003, and cash
flows for the nine-month periods ended September 30, 2004 and 2003, have
been included. The amounts as of December 31, 2003 were derived from
audited financial statements. All such adjustments are of a normal
recurring nature. The results of operations for the three- and nine-month
periods ended September 30, 2004 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 Amendment No. 1 on Form 10-K/A, for the year ended
December 31, 2003.
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. The diluted earnings per share
calculation is derived by dividing net income by the weighted average
number of shares outstanding during the period, adjusted for the
dilutive effect of outstanding options and warrants. Information
relating to the calculation of earnings per share is summarized as follows:
Three Months Ended September 30,
--------------------------------
2004 2003
---- ----
Basic Diluted Basic Diluted
-----------------------------------
(in thousands)
Net Income $2,935 $2,935 $2,195 $2,195
----- ----- ----- -----
Weighted Average Shares Outstanding 5,513 5,513 5,377 5,377
Dilutive securities - 44 - 91
----- ----- ----- -----
Adjusted weighted average shares 5,513 5,557 5,377 5,468
===== ===== ===== =====
Net income per common share $ 0.53 $ 0.53 $ 0.40 $ 0.40
===== ===== ===== =====
Nine Months Ended September 30,
--------------------------------
2004 2003
---- ----
Basic Diluted Basic Diluted
-----------------------------------
(in thousands)
Net Income $8,051 $8,051 $7,172 $7,172
----- ----- ----- -----
Weighted Average Shares Outstanding 5,472 5,472 5,375 5,375
Dilutive securities - 44 - 91
----- ----- ----- -----
Adjusted weighted average shares 5,472 5,517 5,375 5,464
===== ===== ===== =====
Net income per common share $ 1.47 $ 1.46 $ 1.33 $ 1.31
===== ===== ===== =====
-7-
Antidilutive stock options excluded from the computation of earnings per share
were 4,000 for the three and nine-months ended September 30, 2004. There were no
antidilutive stock options excluded from the calculation of earnings per share
for the three months or nine months ended September 30, 2003.
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:
Sept 30, December 31,
(Dollars in thousands) 2004 2003
- ------------------------------------------------------------------------------------------------------------
Impaired loans with valuation allowance $ 432 $ 729
Impaired loans with no valuation allowance 641 273
----- -------
Total impaired loans $1,073 $ 1,002
====== =========
Allowance for credit losses applicable to impaired loans $ 287 $ 349
Allowance for credit losses applicable to other than impaired loans 4,115 3,711
------- -------
Total allowance for credit losses $4,402 $4,060
====== ======
Interest income on impaired loans recorded on the cash basis $ 9 $ 26
====== ========
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
-8-
instruments with off-balance sheet risk. These financial instruments
include commitments to extend credit and standby letters of credit. At
September 30, 2004, total commitments to extend credit were approximately
$117,391,000. Outstanding letters of credit were approximately $6,504,000
at September 30, 2004.
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, 2004 and 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,
2004 2003
--------- ---------
Net income:
As reported $8,051 $7,172
Less pro forma stock-based compensation
expense determined under the fair value
method, net of related tax effects (29) (39)
--------- ---------
Pro forma net income $8,022 $7,133
--------- ---------
Basic net income per share:
As reported $1.47 $1.33
Pro forma 1.47 1.33
Diluted earnings per share
As reported 1.46 $1.31
Pro forma 1.45 1.31
Three-month Period Ended September 30,
2004 2003
--------- ---------
Net income:
As reported 2,935 $2,195
Less pro forma stock-based compensation
expense determined under the fair value
method, net of related tax effects - -
--------- ---------
Pro forma net income $2,935 $2,195
========= =========
Basic net income per share:
As reported $0.53 $0.40
Pro forma 0.53 0.40
Diluted earnings per share
As reported 0.53 $0.40
Pro forma 0.53 0.40
The pro forma amounts are not representative of the effects on reported net
income for future periods.
6) Shore Bancshares operates two primary businesses: Community Banking and
Insurance Products and Services. Through the Community Banking business,
the Company provides services to consumers and small businesses on the
Eastern Shore of Maryland and Delaware through its 14-branch network.
Community banking activities include small business services, retail
brokerage, and consumer banking products and services. Loan products
available to consumers include mortgage, home equity, automobile, marine,
and installment loans, credit cards and other secured and unsecured
personal lines of credit. Small business lending includes commercial
mortgages, real estate development loans, equipment and operating loans, as
well as secured and unsecured lines of credit, credit cards, accounts
receivable financing arrangements, and merchant card services.
Through the Insurance Products and Services business, the Company provides
a full range of insurance products and services are available to businesses
and consumers in the Company's market areas. Products include property and
casualty, life, marine, individual health and long-term care insurance.
Pension and profit sharing plans and retirement plans for executives and
employees are available to suit the needs of individual businesses.
-9-
Selected financial information by line of business for the nine months ended
September 30 is included in the following table:
Community Insurance products Parent Intersegment Consolidated
(In thousands) banking and services Company(a) Transactions Total
- -----------------------------------------------------------------------------------------------------------------------------------
2004
Net Interest income $ 21,212 $ - $ 1 - $ 21,213
Provision for credit losses 370 - - - 370
-------------------------------------------------------------------------------------
Net interest income after provision 20,842 - 1 - 20,843
Noninterest income 3,055 5,148 1,679 (1,638) 8,244
Noninterest expense 12,254 4,182 1,685 (1,638) 16,483
-------------------------------------------------------------------------------------
Income before taxes 11,643 966 (5) - 12,604
Income tax expense 4,173 382 (2) - 4,553
-------------------------------------------------------------------------------------
Net income $ 7,470 $584 $ (3) - $ 8,051
-------------------------------------------------------------------------------------
Intersegment revenue(expense) $ (1,461) $ (138) $ 1,599 - $ -
Average assets $ 761,981 $ 6,527 $ 3,273 - $ 771,781
2003
Net Interest income $ 18,074 $ (14) $ 13 - $ 18,073
Provision for credit losses 235 - - - 235
-------------------------------------------------------------------------------------
Net interest income after provision 17,839 (14) 13 - 17,838
Noninterest income 2,879 4,745 1,072 (983) 7,713
Noninterest expense 10,593 3,750 956 (983) 14,316
-------------------------------------------------------------------------------------
Income before taxes 10,125 981 129 - 11,235
Income tax expense 3,624 388 51 - 4,063
-------------------------------------------------------------------------------------
Net income $ 6,501 $ $593 78 - $ 7,172
-------------------------------------------------------------------------------------
Intersegment revenue(expense) $ (969) $ (14) $ 983 - $ -
Average assets $ 660,503 $ 6,393 $ 605 - $ 667,501
(a) Amount included in Parent Company in 2004 relates to services provided to
subsidiaries by the Company and rental income.
7) On April 1, 2004, the Company completed its merger with Midstate Bancorp,
Inc., a Delaware bank holding company ("Midstate Bancorp"). Pursuant to the
merger agreement, each share of common stock of Midstate Bancorp was
converted into the right to receive (i) $31.00 in cash, plus (ii) 0.8732
shares of the common stock of the Corporation, with cash being paid in lieu
of fractional shares at the rate of $33.83 per share. The Company paid
$2,953,710 in cash and issued 82,786 shares of common stock to stockholders
of Midstate Bancorp in connection with the Merger. The Company recorded
approximately $2,636,000 of Goodwill and $968,000 of other intangible
assets as a result of the acquisition.
-10-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
The following discussion and analysis is intended as a review of significant
factors affecting the financial condition and results of operations of Shore
Bancshares, Inc. and its consolidated subsidiaries for the periods indicated.
This discussion and analysis should be read in conjunction with the unaudited
consensed consolidated financial statements and related notes presented in this
report, as well as the audited consolidated financial statements and related
notes included in the Annual Report of Shore Bancshares, Inc. on Form 10-K, as
amended by Amendment No. 1 on Form 10-K/A, for the year ended December 31, 2003.
Unless the context clearly suggests otherwise, references to the Company in this
report are to Shore Bancshares, Inc. and its consolidated subsidiaries.
Shore Bancshares, Inc. 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 ("Talbot Bank"), The
Centreville National Bank of Maryland located in Centreville, Maryland
("Centreville National Bank") and The Felton Bank, located in Felton, Delaware
("Felton Bank") (collectively, the "Banks"). The Banks operate 14 full service
branches in Kent, Queen Anne's, Talbot, Caroline and Dorchester Counties in
Maryland and Kent and Sussex Counties in Delaware. 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 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.
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. Statements that are not historical in nature, including statements that
include the words "anticipate," "estimate," "should," expect," "believe,"
"intend," and similar expressions, are expressions about the Company's
confidence, policies, and strategies, the adequacy of capital levels, and
liquidity and are not guarantees of future performance. Such forward-looking
statements involve certain risks and uncertainties, including economic
conditions, competition in the geographic and business areas in which the
Company operates, inflation, fluctuations in interest rates, legislation, and
governmental regulation. These risks and uncertainties are described in more
detail in Item 1 of Part I of the Company's Annual Report on Form 10-K, as
amended by Amendment No. 1 on Form 10-K/A, for the year ended December 31, 2003,
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
principles 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 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. 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 totality of all factors, including, but not limited to,
-11-
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 these 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: (i) a
specific allowance; (ii) a formula allowance; and (iii) 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 allowance 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 quarter ended September 30, 2004 was $2,935,000, or diluted
earnings per share of $.53, compared to $2,195,000, or diluted earnings per
share of $.40, for the third quarter of 2003. Net income for the nine months
ended September 30, 2004 was $8,051,000, compared to $7,172,000 for the same
period in 2003. On a per share basis, diluted earnings for the nine months ended
September 30, 2004 were $1.46, compared to $1.31 for the same period last year.
Return on average assets was 1.39% for the first nine months of 2004, compared
to 1.43% for the same period in 2003. Return on average stockholders' equity was
11.85% and 11.97% for the nine months ended September 30, 2004 and 2003,
respectively.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the quarter ended September 30, 2004 increased 28.7%
totaling $7,704,000, compared to $5,988,000 for the same period last year. Net
interest income for the nine months ended September 30, 2004 increased 17.4%
totaling $21,213,000, a $3,140,000 increase over the same period last year.
These increases are attributable primarily to increases in earning assets,
mostly loans, and increases in interest rates for the periods, which
collectively resulted in increased interest income. Total interest income
increased $1,642,000 and $2,268,000 for the three- and nine-month periods ended
September 30, 2004, respectively, when compared to the same periods last year.
Approximately $844,000 and $1,628,000 of the increases in the Company's total
interest income for the three and nine months ended September 30, 2004,
respectively, relate to the interest income of Felton Bank for these periods.
The Company's net interest margin was 3.98% for the nine months ended September
30, 2004, which is 8 basis points higher than one year ago. The Company
continued to increase its volume of earning assets, which averaged $719,922,000
for the nine months ended September 30, 2004, as compared to $627,556,000 at
September 30, 2003. Approximately 58% of the growth resulted from the
acquisition of Felton Bank, while the balance was the result of loan growth.
Average loans increased $90,702,000, totaling $544,145,000, for the nine-month
period ended September 30, 2004. The yield on earning assets declined 29 basis
points to 5.21% for the nine-month period ended September 30, 2004 when compared
to the same period in 2003.
The overall yield on loans for the nine months ended September 30, 2004 was
5.84%, compared to 6.39% for the same period of 2003. The yield on investment
securities declined from 4.02% for the first nine months of 2003 to 3.67% for
the same period in 2004, and the average balance of investment securities
increased $21,498,000 to $147,584,000 for the nine months ended September 30,
2004 when compared to September 30, 2003.
-12-
Total interest expense for the three and nine months ended September 30, 2004
was $2,277,000 and $6,663,000, respectively. This represents a decrease of
$74,000 and $872,000 or 3.15% and 11.6%, respectively, when compared to the same
periods last year. Interest expense attributable to the acquisition of Felton
Bank totaled $186,000 and $361,000 for the three and nine-month periods ended
September 30, 2004, respectively. Lower rates paid for certificates of deposit
were the primary cause for the overall decline in interest expense for these
periods. The average balance of all categories of deposits increased during the
nine-month period ended September 30, 2004, except for Certificates of Deposit
$100,000 or more, which declined $5,036,000. The decline was the result of a
single municipal depositor moving certificates of deposit outside of Talbot
Bank. The average balance of interest bearing demand deposits increased
$9,155,000, while the average rate paid for those deposits declined 19 basis
points for the nine months ended September 30, 2004 when compared to the same
period in 2003. The average balance of all certificates of deposits, including
those $100,000 or more, increased $9,645,000 for the nine months ended September
30, 2004 when compared to the same period last year, while the average rate paid
for certificates of deposit decreased 53 basis points to 2.67%. As short-term
interest rates started to increase during the third quarter so did the customer
demand for more competitive deposit rates. The payment of higher interest rates
on certificates of deposit will cause the average rate paid for those deposits
to increase in the future.
Loans comprised 75.6% and 72.3% of total average earning assets at September 30,
2004 and 2003, respectively.
Analysis of Interest Rates and Interest Differentials.
The following table presents the distribution of the average consolidated
balance sheets, interest income/expense, and annualized yields earned and rates
paid through the first nine months of the year.
September 30, 2004 September 30, 2003
------------------ ------------------
Average Income Yield Average Income Yield
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------
Earning Assets
Investment securities $147,584 $4,065 3.67% $126,086 $3,801 4.02%
Loans 544,145 23,842 5.84% 453,443 21,719 6.39%
Interest bearing deposits 6,229 46 .98% 19,271 155 1.07%
Federal funds sold 21,964 182 1.11% 28,756 235 1.09%
---------- -------- ----- ------------ -------- -----
Total earning assets 719,922 28,135 5.21% 627,556 25,910 5.50%
Noninterest earning assets 51,859 39,945
---------- ------------
Total Assets 771,781 667,501
========== ============
Interest bearing liabilities
Interest bearing deposits 553,409 6,338 1.53% 484,154 7,203 1.98%
Short term borrowing 25,251 137 .72% 23,520 144 0.82%
Long term debt 5,000 188 5.04% 5,000 188 5.03%
---------- -------- ----- ------------ -------- -----
Total interest bearing liabilities 583,660 6,663 1.52% 512,674 7,535 1.95%
Noninterest bearing liabilities 97,522 74,939
Stockholders' equity 90,599 79,888
---------- ------------
Total liabilities and stockholders' equity $771,781 $667,501
========== ============
Net interest spread $21,472 3.69% $18,375 3.55%
======== ========
Net interest margin 3.98% 3.90%
<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 35% 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
Excluding gains and losses on sales of securities for the three- and nine-month
periods ended September 30, 2004, noninterest income increased $528,000 and
$979,000, respectively, when compared to the same periods last year.
Approximately $88,000 and $159,000 of the increase for the three- and nine-month
periods ended September 30, 2004 is related to noninterest income of Felton
Bank. Excluding amounts attributable to Felton Bank, $146,000 and $297,000 of
these increases, respectively, relate to increased service charges on deposit
accounts resulting from enhanced services offered to
-13-
customers as well as to certain fee increases implemented during the first
quarter of 2004. Insurance to agency commissions increased 16.5% or $223,000
during the third quarter, resulting in a nine-month increase of 6.4% or $302,000
at September 30, 2004. Other noninterest income of the Company increased
$113,000 and $287,000 for the three and nine-month periods, respectively.
Noninterest Expense
Total noninterest expense increased $923,000 and $2,167,000 for the three- and
nine-month periods ended September 30, 2004, respectively, from the comparable
periods in 2003. Operation of Felton Bank represented $462,000 and $923,000 of
these increases, respectively. For the nine months ended September 30, 2004,
Salaries and Benefits expense increased $1,047,000, occupancy expense increased
$267,000 and other noninterest expense increased $853,000, when compared to the
same period in 2003. These increases are due to overall growth of the Company.
Income Taxes
The effective tax rates for the three- and nine-month periods ended September
30, 2004 were 35.7% and 36.2%, respectively, which compare to 36.1% and 36.2%
for the same periods last year. Management believes that there have been no
changes in tax law or to the Company's tax structure that are likely to have a
material impact on the Company's effective tax rate.
ANALYSIS OF FINANCIAL CONDITION
Loans
Loans, net of unearned income, totaled $576,069,000 at September 30, 2004, an
increase of $101,114,000 or 21.3% since December 31, 2003. Approximately
$47,906,000 of the increase is attributable to the acquisition of Felton Bank,
with the remaining growth concentrated in real estate lending. Average loans,
net of unearned income, increased $90,702,000 or 20.0% for the nine-months ended
September 30, 2004 totaling $544,145,000, compared to an increase of $33,943,000
or 8.1% for the same period last year, with a total of $453,443,000 at September
30, 2003.
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 above
under the caption "Critical Accounting Policies" for an overview of the
underlying methodology Management employs on a quarterly basis to maintain the
allowance.
The provision for credit losses for the three- and nine-month periods ended
September 30, 2004 was $165,000 and $370,000, respectively, compared to $75,000
and $235,000 for the same periods in 2003. Despite an increase in nonaccrual
loans, the specific allowance associated with those loans has declined, based on
Management's evaluation of each borrower's ability to repay and the value of the
underlying loan collateral. The increased provision is the result of increases
in both the formula allowance and nonspecific allowance components. Growth of
the loan portfolio and Management's assessment of factors used in calculating
the nonspecific allowance contributed to the increased provision. The Company
continues to maintain strong underwriting guidelines, and Management believes
that the local economy remains stable and that collateral values have increased
as a result of the strength of the local real estate economy. Each of these
factors has had a positive effect on the quality of the Company's loan
portfolio. The Company's historical charge-off ratios are much lower than those
of similarly sized institutions according to the most recent FDIC quarterly
banking profile. During the first nine months of 2004, however, charge-offs have
increased. Net charge-offs were $454,000 for the nine-month period ended
September 30, 2004, compared to $204,000 for the same period last year.
Nonaccrual loans increased $71,000, totaling $1,073,000 at September 30, 2004,
when compared to December 31, 2003. Loans past due 90 days and still accruing
decreased $285,000 since December 31, 2003, totaling $843,000 at September 30,
2004. The Company's ratio of nonperforming assets, including other real estate
owned remains low. The allowance for credit losses as a percentage of average
loans declined from .91% as of September 30, 2003 to .81% as of September 30,
2004. The decline is primarily the result of growth in loans secured by real
estate, which Management believes 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, 2004.
-14-
The following table presents a summary of the activity in the allowance for
credit losses:
Nine months Ended September 30,
(Dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------
Allowance balance - beginning of year $ 4,060 $ 4,117
Charge-offs:
Commercial and other 448 189
Real estate 50 2
Consumer 92 99
-------- ---------
Totals 590 290
-------- ---------
Recoveries:
Commercial 64 32
Real estate 19 4
Consumer 53 50
-------- ---------
Totals 136 86
-------- ---------
Net charge-offs: 454 204
Allowance of acquired institution 426 -
Provision for credit losses 370 235
-------- ---------
Allowance balance-ending $4,402 $ 4,148
======== =========
Average loans outstanding during period $544,145 $453,443
======== =========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .11% .06%
======== =========
Allowance for credit losses at period end as a
percentage of average loans .81% .91%
======== =========
Because the Company's loans are predominately secured by real estate, weaknesses
in the local real estate market may have a material adverse effect on collateral
values. The Company has a concentration of contruction and land development
loans. As of September 30, 2004, the balance of such loans was $91,208,000 or
15.8% of total outstanding loans, compared to $36,639,000 or 7.7% at December
31, 2003. The Company does not engage in foreign lending activities.
Nonperforming Assets
The following table summarizes past due and nonperforming assets of the Company
(in thousands):
September 30, December 31,
Nonperforming Assets: 2004 2003
----------- ----------
Nonaccrual loans 1,073 1,002
Other real estate owned 117 -
----------- ----------
1,190 1,002
Past due loans still accruing 843 1,128
----------- ----------
Total nonperforming and past due loans $2,033 $2,130
=========== ==========
Investment Securities
Investment securities declined $25,885,000 during the nine-month period ended
September 30, 2004 when compared to December 31, 2003. The yields on bonds
purchased during 2004 are much lower than the yields on similar bonds that
either matured or were called during the first nine months of the year. The
average balance of investment securities was $147,584,000 for the nine-months
ended September 30, 2004, compared to $126,086,000 for the same period in 2003.
The tax equivalent yields on investment securities were 3.67% and 4.02% for the
nine-month periods ended September 30, 2004 and 2003, respectively.
Deposits
Total deposits at September 30, 2004 were $648,379,000, compared to $592,409,000
at December 31, 2003. Certificates of deposit of $100,000 or more declined
$11,418,000 during the third quarter as a result of the loss of a substantial
portion of the accounts of one municipal depositor. Since December 31, 2003,
however, certificates of deposit $100,000 or more have increased $7,429,000 or
10.4% totaling $78,814,000. Other certificates of deposit increased $11,136,000
since December 31, 2003. A substantial amount of this growth is attributable to
the acquisition of Felton Bank.
Borrowed Funds
Short-term borrowings at September 30, 2004 and 2003 consisted of securities
sold under agreements to repurchase. The Company also had a convertible advance
from the Federal Home Loan Bank of Atlanta in the amount of $5,000,000 at
September 30, 2004 and 2003. The advance is due in March 2006 and has a one-time
call provision in 2004.
-15-
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
correspondent banks. Talbot Bank and Centreville National Bank are also members
of the Federal Home Loan Bank of Atlanta to which they have pledged collateral
sufficient to permit additonal borrowings of up to approximately $59 million at
September 30, 2004. Management is not aware of any trends or demands,
commitments, events or uncertainties that are likely to materially affect the
Company's ability to maintain liquidity at satisfactory levels.
Total stockholders' equity was $91.9 million at September 30, 2004, a 10.1%
increase since December 31, 2003. Accumulated other comprehensive income, which
consists solely of net unrealized losses on investment securities available for
sale, decreased $435,000 during this period, resulting in accumulated other
comprehensive loss of $125,000 at September 30, 2004 when compared to December
31, 2003.
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 Company's capital ratios as of September 30, 2004 to the
minimum regulatory requirements is presented below:
Minimum
Actual Requirements
------ ------------
Tier 1 risk-based capital 13.59% 4.00%
Total risk-based capital 14.36% 8.00%
Leverage ratio 10.47% 4.00%
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk exposure is to fluctuating interest rates.
The Company utilizes a simulation model to quantify the effect that hypothetical
plus or minus 200 and 100 basis point changes 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, 2004, the
model produced the following sensitivity profile for net interest income and the
fair value capital:
Immediate Change in Rates
+200 +100 -100 -200 Policy
Basis Points Basis Points Basis Points Basis Points Limit
--------------------------------------------------------------------
% Change in Net Interest Income 9.54% 5.70% (7.10)% (15.67)% + 25%
-
% Change in Fair Value of Capital 3.58% 2.59% (4.77)% (11.86)% + 15%
-
Further information regarding market risk and the Company's objectives and
strategies in managing market risk is set forth in the Company's Annual Report
on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, for the year ended
December 31, 2003, under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Market Risk Management".
-16-
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 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, 2004 was carried out under the supervision and with the participation of
Management, including the CEO and the PAO. Based on that evaluation, Management,
including the CEO and the PAO, has concluded that the Company's disclosure
controls and procedures are effective.
During the third quarter of 2004, 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.
-17-
Part II
Item 6. 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 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 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).
10.6 Employment Agreement between The Avon-Dixon Agency, LLC and
Steven Fulwood (incorporated by reference to Exhibit 10.6 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2004).
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)).
-18-
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 9, 2004 By: /s/ W. Moorhead Vermilye
-----------------------------------------
W. Moorhead Vermilye
President and Chief Executive Officer
Date: November 9, 2004 By: /s/ Susan E. Leaverton
----------------------------------------
Susan E. Leaverton, CPA
Treasurer and Principal Accounting Officer
-19-
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 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 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).
10.6 Employment Agreement between The Avon-Dixon Agency, LLC and
Steven Fulwood (incorporated by reference to Exhibit 10.6 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2004).
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)).