UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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: As of July 30, 2004, registrant
had 5,512,828 issued and outstanding shares of common stock.
INDEX
Part I -- Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
June 30, 2004 (unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Income -
For the three and six months ended June 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
For the six months ended June 30, 2004 and 2003 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
For the six months ended June 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 11-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18-19
Part II -- Other Information
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
-2-
Part I
Item 1. Financial Statements
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
ASSETS: 2004 2003
- ------- --------------- -----------------
(unaudited)
Cash and due from banks $ 22,779 $ 19,391
Interest bearing deposits with other banks 5,977 9,897
Federal funds sold 32,429 17,443
Investment securities:
Held-to-maturity, at amortized cost (fair value of $15,229,
$15,585, respectively) 15,351 15,313
Available for sale, at fair value 122,389 144,368
Loans, less allowance for credit losses ($4,331,
$4,060, respectively) 547,165 470,895
Insurance premiums receivable 642 845
Premise and equipment, net 12,430 11,302
Accrued interest receivable on loans and investment securities 3,042 3,042
Investment in unconsolidated subsidiary 843 1,203
Goodwill 8,214 5,990
Other intangible assets 2,411 1,581
Other assets 6,304 4,109
-------- --------
TOTAL ASSETS $779,976 $705,379
======== ========
LIABILITIES:
Deposits:
Noninterest bearing demand $ 94,937 $ 91,669
NOW and Super NOW 113,565 103,415
Certificates of deposit $100,000 or more 90,295 71,385
Other time and savings 354,497 325,940
-------- --------
Total Deposits 653,294 592,409
Short term borrowings 28,726 20,957
Long term debt 5,000 5,000
Other liabilities 4,098 3,486
-------- --------
TOTAL LIABILITIES 691,118 621,852
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; authorized 35,000,000 shares; issued and
outstanding:
June 30, 2004 5,512,309
December 31, 2003 5,400,793 55 54
Additional paid in capital 27,950 24,231
Retained earnings 62,084 58,932
Accumulated other comprehensive income (loss) (1,231) 310
-------- --------
TOTAL STOCKHOLDERS' EQUITY 88,858 83,527
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $779,976 $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 June 30, Six months ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $8,013 $7,362 $15,162 $14,591
Interest and dividends on investment securities:
Taxable 1,099 1,015 2,292 2,147
Tax-exempt 150 142 304 289
Other interest income 83 123 137 242
------ ------ ------ ------
Total interest income 9,345 8,642 17,895 17,269
------ ------ ------ ------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 584 627 1,141 1,318
Other deposits 1,569 1,787 3,040 3,643
Other interest 105 114 205 223
------ ------ ------ ------
Total interest expense 2,258 2,528 4,386 5,184
------ ------ ------ ------
NET INTEREST INCOME 7,087 6,114 13,509 12,085
PROVISION FOR CREDIT LOSSES 100 70 205 160
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 6,987 6,044 13,304 11,925
------ ------ ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 658 495 1,153 955
Gain (loss) on sale of securities (2) 81 14 358
Insurance agency commissions 1,499 1,520 3,408 3,329
Other noninterest income 497 388 955 781
------ ------ ------ ------
Total noninterest income 2,652 2,484 5,530 5,423
------ ------ ------ ------
NONINTEREST EXPENSE
Salaries and employee benefits 3,530 3,025 6,648 6,074
Expenses of premises and equipment 574 482 1,163 975
Other noninterest expense 1,482 1,227 2,988 2,506
------ ------ ------ ------
Total noninterest expense 5,586 4,734 10,799 9,555
------ ------ ------ ------
INCOME BEFORE TAXES ON INCOME 4,053 3,794 8,035 7,793
Federal and State income taxes 1,453 1,338 2,919 2,816
------ ------ ------ ------
NET INCOME $2,600 $2,456 $5,116 $4,977
====== ====== ====== ======
Basic earnings per common share $.47 $.46 $.94 $.93
Diluted earnings per common share $.47 $.45 $.93 $.91
Dividends declared per common share $.18 $.17 $.36 $.32
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 - - 5,116 - 5,116
Other comprehensive income, net of tax:
Unrealized loss on available for sale
securities - - - (1,541) (1,541)
--------
Total comprehensive income 3,575
--------
Shares issued 1 3,719 - - 3,720
Cash dividends paid $0.36 per share - - (1,964) - (1,964)
---------- -------- -------- ---------- --------
Balances, June 30, 2004 $ 55 $ 27,950 $ 62,084 $ (1,231) $ 88,858
========== ======== ======== ========== ========
Balances, January 1, 2003 $ 54 $ 23,837 $ 52,985 $1,152 $78,028
Comprehensive income:
Net income - - 4,977 - 4,977
Other comprehensive income, net of tax:
Unrealized loss on available for sale
securities - - - (614) (614)
--------
Total comprehensive income 4,363
--------
Shares issued - 71 - - 71
Cash dividends paid $0.32 per share - - (1,720) - (1,720)
---------- -------- -------- ------- --------
Balances, June 30, 2003 $ 54 $ 23,908 $ 56,242 $ 538 $ 80,742
========== ======== ======== ======= ========
See accompanying Notes to Condensed Consolidated Financial Statements
-5-
SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Six Months Ended June 30,
2004 2003
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,116 $ 4,977
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 717 772
Discount accretion on debt securities (51) (21)
Provision for credit losses, net (119) 62
Gain on sale of securities (14) (358)
Loss on other real estate owned - 8
Equity in earnings of unconsolidated subsidiary (20) -
Net changes in:
Insurance premiums receivable 202 (418)
Accrued interest receivable 232 149
Other assets (689) (1,026)
Accrued interest payable on deposits 25 (163)
Accrued expenses 274 (99)
--------- ---------
Net cash provided by operating activities 5,673 3,883
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities
available for sale 39,360 58,192
Proceeds from sale of investment securities available for sale 7,867 4,685
Purchase of securities available for sale (17,682) (57,318)
Proceeds from maturities and principal payments of securities
held to maturity 1,287 1,145
Purchase of securities held to maturity (1,340) (2,875)
Net increase in loans (38,303) (17,226)
Proceeds from sale of loans - 621
Purchase of premises and equipment (697) (455)
Purchase of other real estate owned (60) -
Proceeds from sale of other real estate owned - 37
Proceeds from sale of investment in unconsolidated subsidiary 380 -
Acquisition, net of stock issued (235) -
---------- ---------
Net cash used in investing activities (9,423) (13,194)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and
savings deposits 872 23,574
Net increase (decrease) in certificates of deposit 11,017 (9,783)
Net increase in securities sold under agreement to repurchase 7,768 2,800
Proceeds from issuance of common stock 511 71
Dividends paid (1,964) (1,720)
---------- ---------
Net cash provided by financing activities 18,204 14,942
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,454 5,631
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 46,731 69,468
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61,185 $ 75,099
========== =========
See accompanying notes to Condensed Consolidated Financial Statements
-6-
Shore Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) The consolidated financial statements include the accounts of Shore
Bancshares, Inc. (the "Company") and its subsidiaries with all significant
intercompany transactions eliminated. The consolidated financial statements
conform to accounting principles generally accepted in the United States of
America and to prevailing practices within the banking industry. The
accompanying interim financial statements are unaudited; however, in the
opinion of management all adjustments necessary to present fairly the
financial position at June 30, 2004, the results of operations for the
three- and six-month periods ended June 30, 2004 and 2003, and cash flows
for the six-month period ended June 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 six-month periods ended June 30,
2004 are not necessarily indicative of the results to be expected for the
full year. The consolidated financial statements and related notes
contained herein should be read in conjunction with the audited
consolidated financial statements and related notes included 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.
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 5,451,928 shares for 2004 and
5,373,484 shares for 2003. The diluted earnings per share calculation is
derived by dividing net income by the weighted average number of shares
outstanding, adjusted for the dilutive effect of outstanding options and
warrants. Considering the effect of these common stock equivalents, the
adjusted average shares for the six months ended June 30, 2004, and 2003
were 5,497,949 and 5,463,656, respectively. As of June 30, 2004, there were
4,000 shares excluded from the diluted net income per share computation
because the exercise price of related options exceeded the average market
price of those shares and, therefore, their effect would be anti-dilutive.
No shares were excluded from the diluted net income per share computation
as of June 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.
-7-
Information with respect to impaired loans and the related valuation allowance
is shown below:
June 30, December 31,
2004 2003
---------------------------------
Impaired loans with valuation allowance $ 529 $ 729
Impaired loans with no valuation allowance 740 273
------ ------
Total impaired loans $1,269 $1,002
====== ======
Allowance for credit losses applicable to impaired loans $ 318 $ 349
Allowance for credit losses applicable to other than impaired loans 4,013 3,711
------ ------
Total allowance for credit losses $4,331 $4,060
====== ======
Interest income on impaired loans recorded on the cash basis $ 7 $ 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
instruments with off-balance sheet risk. These financial instruments
include commitments to extend credit and standby letters of credit. At June
30, 2004, total commitments to extend credit were approximately
$110,036,000. Outstanding letters of credit were approximately $5,779,000
at June 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 June 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:
-8-
Six-month period
ended June 30,
2004 2003
---- ----
Net income:
As reported $ 5,116 $ 4,977
Less pro forma stock-based compensation
expense determined under the fair value
method, net of related tax effects (11) (63)
--------- --------
Pro forma net income $ 5,105 $ 4,914
========= ========
Basic net income per share:
As reported $0.94 $ 0.93
Pro forma 0.94 0.91
Diluted earnings per share
As reported 0.93 $ 0.91
Pro forma 0.93 0.90
Three-month period
ended June 30,
2004 2003
---- ----
Net income:
As reported 2,600 $ 2,456
Less pro forma stock-based compensation
expense determined under the fair value
method, net of related tax effects (5) (33)
--------- --------
Pro forma net income $2,595 $ 2,423
========= ========
Basic net income per share:
As reported $0.47 $ 0.46
Pro forma 0.47 0.45
Diluted earnings per share
As reported 0.47 $ 0.45
Pro forma 0.47 0.44
The pro forma amounts are not representative of the effects on reported net
income for future periods.
6) The Company 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 the Company's 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 buisness, the Company provides
a full range of insurance products and services 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 six months ended June
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 $ 13,508 $ - $ 1 $ - $ 13,509
Provision for credit losses 205 - - - 205
-------------------------------------------------------------------------------------
Net interest income after provision 13,303 - 1 - 13,304
Noninterest income 1,956 3,537 1,132 (1,095) 5,530
Noninterest expense 8,011 2,766 1,117 (1,095) 10,799
-------------------------------------------------------------------------------------
Income before taxes 7,248 771 16 - 8,035
Income tax expense 2,608 305 6 - 2,919
-------------------------------------------------------------------------------------
Net income $ 4,640 $ 466 $ 10 $ - $5,116
-------------------------------------------------------------------------------------
Intersegment revenue(expense) $ (978) $ (102) $ 1,080 $ - $ -
Average assets $755,625 $ 6,830 $ 3,289 $ - $ 765,744
2003
Net Interest income $ 12,087 $ (14) $ 12 $ - $ 12,085
Provision for credit losses 160 - - - 160
-------------------------------------------------------------------------------------
Net interest income after provision 11,927 (14) 12 - 11,925
Noninterest income 1,966 3,377 736 (656) 5,423
Noninterest expense 7,021 2,540 650 (656) 9,555
-------------------------------------------------------------------------------------
Income before taxes 6,872 823 98 - 7,793
Income tax expense 2,452 325 39 - 2,816
-------------------------------------------------------------------------------------
Net income $ 4,420 $ 498 59 $ - $ 4,977
-------------------------------------------------------------------------------------
Intersegment revenue(expense) $ (642) $ (14) $ 656 $ - $ -
Average assets $647,825 $ 6,387 $ 539 $ - $ 654,751
(a) Amount included in Parent Company in 2004 relate to services provided to
subsidiaries by the holding 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 $2,224,000 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
consolidated financial statements and realted 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, The Centreville National
Bank of Maryland located in Centreville, Maryland and The Felton Bank, located
in Felton, Delaware, (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 and its affiliates operate, 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.
-11-
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 global factors such as delinquencies, loss history, trends in
volume and terms of loans, effects of changes in lending policy, the experience
and depth of Management, national and local economic trends, concentrations of
credit, quality of loan review system and the effect of external factors such as
competition and regulatory requirements, and their impact on the portfolio, and
allowance factors may change from period to period, resulting in an increase or
decrease in the amount of the provision or allowance, based upon the same volume
and classification of loans. Changes in allowance factors will have a direct
impact on the amount of the provision, and a corresponding effect on net income.
Errors in Management's perception and assessment of the global factors and their
impact on the portfolio could result in the allowance not being adequate to
cover losses in the portfolio, and may result in additional provisions or
charge-offs.
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.
-12-
OVERVIEW
Net income for the quarter ended June 30, 2004 was $2,600,000 or diluted
earnings per share of $.47, compared to $2,456,000 or diluted earnings per share
of $.45 for the second quarter of 2003. Net income for the six months ended June
30, 2004 was $5,116,000, compared to $4,977,000 for the same period in 2003. On
a per share basis, diluted earnings for the six months ended June 30, 2004 were
$ .93, compared to $ .91 for the same period last year. Return on average assets
was 1.34% for the first six months of 2004, compared to 1.52% for the same
period in 2003. Return on average stockholders' equity was 11.29% and 12.46% for
the six months ended June 30, 2004 and 2003, respectively.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the quarter ended June 30, 2004 increased 15.9% totaling
$7,087,000, compared to $6,114,000 for the same period last year. Of the
$973,000 increase, $609,000 is attributable to the net interest income of The
Felton Bank, which was acquired on April 1, 2004. The balance of the increase
relates to an overall decline in the cost of deposits. Net interest income for
the six months ended June 30, 2004 increased 11.8% totaling $13,509,000, or
$1,424,000 over the same period last year. The acquisition of The Felton Bank
coupled with a reduction in overall interest expense were the reasons for the
increases.
The Company's net interest margin was 3.83% for the six months ended June 30,
2004, which is 16 basis points lower than one year ago. The Company continued to
increase its volume of earning assets, which averaged $715,285,000 for the six
months ended June 30, 2004, as compared to $615,425,000 at June 30, 2003.
Approximately 52% of the growth is attributable to the acquisition of The Felton
Bank, while the balance was as a result of loan growth during the period.
Average loans increased $82,467,000 totaling $533,997,000 for the six-month
period ended June 30, 2004. The yield on earning assets declined 63 basis points
to 5.05% for the six-month period ended June 30, 2004, when compared to the same
period in 2003.
The overall yield on loans for the six months ended June 30, 2004 was 5.68%,
compared to 6.48% for the corresponding period in 2003. The yield on investment
securities declined to 3.63% for the first six months of 2004 from 4.22% for the
same period of 2003, and the average balance of investment securities increased
$28,567,000 to $151,556,000 for the six months ended June 30, 2004 when compared
to June 30, 2003.
Total interest expense for the three and six months ended June 30, 2004 was
$2,258,000 and $4,386,000, respectively. Interest expense attributable to the
acquisition of The Felton Bank totaled $175,000 for the three- and six-month
periods ended June 30, 2004. Compared to the same periods in 2003, the Company
recognized a decrease in total interest expense of $270,000 and $798,000 or
10.7% and 15.4%, respectively. Lower rates paid for certificates of deposit were
the primary cause for the overall decline in interest expense for the three- and
six-month periods ended June 30, 2004. The average balance of all categories of
deposits increased during the six-month period ended June 30, 2004,
approximately half of which was attributable to the acquisition of The Felton
Bank. The average balance of interest bearing demand deposits increased
$9,237,000, while the average rate paid for those deposits declined 28 basis
points for the six months ended June 30, 2004 compared to the same period in
2003. The average balance of certificates of deposits increased $12,912,000,
while the average rate paid for certificates of deposit decreased 66 basis
points to 2.64% for the six months ended June 30, 2004 when compared to the same
period last year. See the Analysis of Interest Rates and Interest Differentials
below for further details.
Loans comprised 74.7% and 73.4% of total average earning assets at June 30, 2004
and 2003, respectively.
-13-
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 six months of the year.
June 30, 2004 June 30, 2003
------------- -------------
Average Income Yield Average Income Yield
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- -------------------------------------------------------------------------------------------------------------------------------
Earning Assets
Investment securities $151,556 $ 2,752 3.63% $122,989 $ 2,596 4.22%
Loans 533,997 15,178 5.68% 451,530 14,629 6.48%
Interest bearing deposits 7,589 34 .90% 18,574 106 1.15%
Federal funds sold 22,143 103 .93% 22,332 134 1.20%
--------- -------- ------ --------- ------- ------
Total earning assets 715,285 18,067 5.05% 615,425 17,465 5.68%
Noninterest earning assets 50,459 39,326
--------- ---------
Total Assets 765,744 654,751
========= =========
Interest bearing liabilities
Interest bearing deposits 550,606 4,181 1.52% 475,468 4,961 2.09%
Short term borrowing 24,187 80 .66% 22,222 98 .89%
Long term debt 5,000 125 5.03% 5,000 125 5.00%
--------- -------- ------ --------- ------- ------
Total interest bearing liabilities 579,793 4,386 1.51% 502,690 5,184 2.06%
Noninterest bearing liabilities 95,288 72,199
Stockholders' equity 90,663 79,862
--------- ---------
Total liabilities and stockholders' equity $765,744 $654,751
========= =========
Net interest spread $13,681 3.54% $12,281 3.62%
======== =======
Net interest margin 3.83% 3.99%
(1) All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate exclusive of the alternative minimum tax rate
of 34% and nondeductible interest expense.
(2) Average loan balances include nonaccrual loans.
(3) Interest income on loans includes amortized loan fees, net of costs, for
each loan category and yield calculations are stated to include all.
Noninterest Income
Excluding gains and losses on sales of securities for the three- and six-month
periods ended June 30, 2004, noninterest income increased $251,000 and $451,000,
respectively, when compared to the same periods last year. Approximately $71,000
of the increases for these periods relates to noninterest income of The Felton
Bank, of which approximately $47,000 relates to service charges on deposit
accounts. Excluding amounts attributable to the acquisition of The Felton Bank,
$116,000 and $151,000 of the increases for the three- and six-month periods
ended June 30, 2004, respectively, are attributable to service charges related
to new deposit products and certain fee increases implemented during the first
quarter of 2004. Other fees and services offered by the Company increased
$109,000 and $174,000 for the three and six month periods, respectively, when
compared to the same periods in 2003.
-14-
Noninterest Expense
Total noninterest expense increased $852,000 and $1,244,000 for the three- and
six-month periods ended June 30, 2004, respectively, from the comparable periods
in 2003. Expenses realted to the operation of The Felton Bank represented
$462,000 of the increase. For the quarter ended June 30, 2004, an additional
$256,000 in salaries and benefits expense, $36,000 in occupancy expense related
to certain new facilities owned by the Company, and $98,000 in other noninterest
expense were recognized over the amounts for the same period in 2003. For the
six months ended June 30, 2004, salaries and benefits expense increased
$325,000, occupancy expense increased $132,000, and other noninterest expense
increased $325,000 when compared to the same period in 2003. These increases are
due to overall growth of the Company.
Income Taxes
The effective tax rate for the three- and six-month periods ended June 30, 2004
were 35.8% and 36.3%, respectively, compared to 35.3% and 36.1% for the same
periods last year. To the Company's knowledge, no changes have occurred in
applicable tax laws or to the Company's tax structure that are likely to have a
significant impact on the effective tax rate.
FINANCIAL CONDITION
Loans
Loans, net of unearned income, totaled $551,496,000 at June 30, 2004, an
increase of $76,541,000 or 16.1% since December 31, 2003. Approximately
$42,516,000 of this increase is attributable to the acquisition of The Felton
Bank, with the remaining growth concentrated in real estate lending. Average
loans, net of unearned income, increased $82,467,000 or 18.3% for the six months
ended June 30, 2004 totaling $533,997,000, compared to an increase of
$39,500,000 or 9.6% for the same period last year, with a total of $451,530,000
at June 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, among other things, a risk rating system of individual loans, a
collective evaluation of smaller balance homogenous loans based on factors such
as past credit loss experience, and consideration of general economic
conditions, growth of the loan portfolio, problem loans, current trends in
delinquencies and nonperforming assets, past credit loss experience, 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.
The provision for credit losses for the three- and six-month periods ended June
30, 2004 was $100,000 and $205,000, respectively, compared to $70,000 and
$160,000 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 the 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, believes that the local
economy remains stable, and believes that the strong local real estate economy
to date has increased collateral values. Management believes that 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 (March 31, 2004) FDIC
quarterly banking profile. During 2004, however, charge-offs have increased. Net
charge-offs were $360,000 for the six-month period ended June 30, 2004, compared
to $98,000 for the same period last year. Nonaccrual loans increased $267,000
totaling $1,269,000 at June 30, 2004 when compared to December 31, 2003. Loans
past due 90 days and still accruing decreased $331,000 since December 31, 2003
totaling $797,000 at June 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
..93% as of June 30, 2003 to .81% as of June 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 June 30, 2004.
-15-
The following table presents a summary of the activity in the allowance for
credit losses:
Six months ended June 30,
(Dollars in thousands) 2004 2003
- -----------------------------------------------------------------------------
Allowance balance - beginning of year $ 4,060 $ 4,117
Charge-offs:
Commercial and other 404 84
Real estate - 2
Consumer 52 70
-------- --------
Totals 456 156
-------- --------
Recoveries:
Commercial 37 16
Real estate 19 3
Consumer 40 39
-------- --------
Totals 96 58
-------- --------
Net charge-offs: 360 98
Allowance of acquired institution 426 -
Provision for credit losses 205 160
-------- --------
Allowance balance-ending $4,331 $ 4,179
======== ========
Average loans outstanding during period $533,997 $451,530
======== =========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .13% .04%
===== =====
Allowance for credit losses at period end as a
percentage of average loans .81% .93%
===== =====
Because the Company's loans are predominately secured by real estate, 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.
-16-
Nonperforming Assets
The following table summarizes past due and nonperforming assets of the Company
(in thousands):
June 30, December 31,
Nonperforming Assets: 2004 2003
----------- -------------
Nonaccrual loans 1,269 1,002
Other real estate owned 60 -
-------- -------
1,329 1,002
Past due loans still accruing 797 1,128
-------- -------
Total nonperforming and past due loans $ 2,126 $2,130
======== =======
Investment Securities
Investment securities declined $21,941,000 during the six-month period ended
June 30, 2004 when compared to December 31, 2003. The yields on bonds purchased
during 2004 are much lower than the yields on similar bonds which matured or
were called during the first six months of the year. The average balance of
investment securities was $151,556,000 for the six months ended June 30, 2004,
compared to $122,989,000 for the same period in 2003. The tax equivalent yields
on investment securities were 3.63% and 4.22% for the six-month periods ended
June 30, 2004 and 2003, respectively.
Deposits
Total deposits at June 30, 2004 were $653,294,000, compared to $592,409,000 at
December 31, 2003. Since December 31, 2003, certificates of deposit of $100,000
or more increased $18,910,000 and other certificates of deposit increased
$13,587,000, with $5,137,000 and $18,672,000 of those respective increases being
attributable to the acquisition of The Felton Bank.
Borrowed Funds
Short term borrowings at June 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 June 30,
2004 and 2003. The advance is due in March 2006 and has a one-time call
provision in 2004.
Liquidity and Capital Resources
The Company derives liquidity through increased customer deposits, maturities in
the investment portfolio, loan repayments and income from earning assets. To the
extent that deposits are not adequate to fund customer loan demand, liquidity
needs can be met in the short term funds markets through arrangements with
correspondent banks. Talbot Bank and Centreville National Bank are also members
of the Federal Home Loan Bank of Atlanta, which provides another source of
liquidity. Management knows of no 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 $88.9 million at June 30, 2004, a 6.4% increase
since December 31, 2003. Accumulated other comprehensive income, which consists
solely of net unrealized losses on investment securities available for sale,
decreased $1,541,000 during this period, resulting in accumulated other
comprehensive loss of $1,231,000 at June 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 capital as of June 30, 2004 for the Company with the minimum
requirements is presented below:
Minimum
Actual Requirements
------ ------------
Tier 1 risk-based capital 13.99% 4.00%
Total risk-based capital 14.78% 8.00%
Leverage ratio 10.46% 3.00%
-17-
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 June 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 8.44% 5.61% (7.35)% (16.02)% + 25%
-
% Change in Fair Value of Capital 2.46% 1.88% (4.01)% (8.74)% + 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".
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.
-18-
An evaluation of the effectiveness of these disclosure controls as of June 30,
2004 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 second 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.
Part II
Item 4. Submission of Matters to Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on April 28, 2004,
the stockholders elected four individuals to serve as Directors until the 2007
Annual Meeting of Stockholders, and until their successors are duly elected and
qualify. The Company submitted the matter to a vote through solicitation of
proxies. The results of the vote is as follows:
Class III Nominees (Term expires 2007) For Withheld Abstain Broker Non-Votes
--- -------- ------- ----------------
Daniel T. Cannon 3,835,198 6,510 0 0
Richard C. Granville 3,681,381 160,327 0 0
Kevin P. LaTulip 3,831,386 10,322 0 0
Christopher F. Spurry 3,835,322 6,386 0 0
-19-
Item 5. Other Information
On April 1, 2004, The Avon-Dixon Agency, LLC entered into an employment
agreement with Steven Fulwood to serve as the President of the Insurance
Subsidiary. Mr. Fulwood replaces Kevin P. LaTulip, who retired as President
effective April 1, 2004. A copy of Mr. Fulwood's employment agreement is filed
herewith as Exhibit 10.6.
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).
10.6 Employment Agreement between The Avon-Dixon Agency, LLC and Steven
Fulwood (filed herewith).
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)).
b) Reports on Form 8-K.
On April 2, 2004, the Company filed a Current Report on Form 8-K in
which it announced in Item 5 the completion of its merger with
Midstate Bancorp, Inc.
On May 7, 2004, the Company filed a Current Report on Form 8-K in
which it furnished in Item 12 the unaudited results of operations
for the quarter ended March 31, 2004.
-20-
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Shore Bancshares, Inc.
Date: August 9, 2004 By:/s/ W. Moorhead Vermilye
-----------------------------------------
W. Moorhead Vermilye
President and Chief Executive Officer
Date: August 9, 2004 By:/s/ Susan E. Leaverton
-----------------------------------------
Susan E. Leaverton, CPA
Treasurer and Principal Accounting Officer
-21-
EXHIBIT INDEX
-------------
Exhibit 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 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).
10.6 Employment Agreement between The Avon-Dixon Agency, LLC and Steven
Fulwood (filed herewith).
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)).