-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EnUMyAEbA3HOuVGn2qEFxv3efLjVSHNjXKZ0qlTM0r2gcVAbc0LhJixv7fzdpisD GfmAS3oXZvHKR6zifLTtlw== 0001014100-03-000284.txt : 20031114 0001014100-03-000284.hdr.sgml : 20031114 20031114151736 ACCESSION NUMBER: 0001014100-03-000284 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHORE BANCSHARES INC CENTRAL INDEX KEY: 0001035092 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 521974638 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22345 FILM NUMBER: 031003880 BUSINESS ADDRESS: STREET 1: 18 EAST DOVER STREET CITY: EASTON STATE: MD ZIP: 21601-3013 BUSINESS PHONE: 4108221400 MAIL ADDRESS: STREET 1: 18 EAST DOVER STREET CITY: EASTON STATE: MD ZIP: 21601-3013 10-Q 1 cor2288.txt TRANSITION REPORT PURSUANT TO SECTION 13 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 0-22345 ------- 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 Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No -- -- Indicate by check mark whether the registrant is an accelerated filer (As defined in Rule 12b-2 of the Exchange Act). Yes X No -- -- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of October 31, 2003, registrant had outstanding 5,378,813 of common stock.
INDEX Part I. Item 1. Financial Statements Page Condensed Consolidated Balance Sheets - September 30, 2003 (unaudited) and December 31, 2002 3 Condensed Consolidated Statements of Income - For the three and nine months ended September 30, 2003 and 2002 (unaudited) 4 Condensed Consolidated Statements of Changes in Stockholders' Equity - For the nine months ended September 30, 2003 and 2002 (unaudited) 5 Condensed Consolidated Statements of Cash Flows - For the nine months ended September 30, 2003 and 2002 (unaudited) 6 Notes to Condensed Consolidated Financial Statements (unaudited) 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 Item 4. Controls and Procedures 16 Part II. Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18
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Part I Item 1. Financial Statements SHORE BANCSHARES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) September 30, December 31, ASSETS: 2003 2002 - ------- --------------- ---------------- (unaudited) Cash and due from banks $21,242 $ 22,321 Interest bearing deposits with other banks 14,893 20,006 Federal funds sold 50,665 27,141 Investment securities: Held-to-maturity, at amortized cost (fair value of $16,215, $13,379, respectively) 16,060 13,124 Available for sale, at fair value 124,504 110,864 Loans, less allowance for credit losses ($4,148, $4,117, respectively) 454,577 435,422 Insurance premiums receivable 1,907 1,619 Premise and equipment, net 11,423 8,534 Accrued interest receivable on loans and investment securities 2,841 2,959 Investment in unconsolidated subsidiary 1,166 1,166 Goodwill 5,990 5,990 Other intangible assets 1,635 1,797 Other assets 3,949 3,124 ----------- ----------- TOTAL ASSETS $710,852 $654,067 =========== =========== LIABILITIES: Deposits: Noninterest bearing demand $83,328 $ 70,110 NOW and Super NOW 116,045 99,434 Certificates of deposit $100,000 or more 92,462 99,644 Other time and savings 299,927 276,004 ----------- ----------- Total Deposits 591,762 545,192 Short term borrowings 28,752 22,008 Long term debt 5,000 5,000 Other liabilities 3,787 3,839 ----------- ----------- TOTAL LIABILITIES 629,301 576,039 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, par value $.01; authorized 35,000,000 shares; issued and outstanding: September 30, 2003 5,378,203 December 31, 2002 5,372,064 54 54 Additional paid in capital 23,966 23,837 Retained earnings 57,523 52,985 Accumulated other comprehensive income 8 1,152 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 81,551 78,028 ----------- ----------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $710,852 $654,067 =========== =========== See accompanying notes to Condensed Consolidated Financial Statements.
-3- SHORE BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts)
For the three months ended September 30, For the nine months ended September 30, 2003 2002 2003 2002 ---- ---- ---- ---- INTEREST INCOME Loans, including fees $ 7,072 $ 7,687 $21,663 $22,158 Interest and dividends on investment securities: Taxable 960 1,374 3,107 4,378 Tax-exempt 159 124 448 344 Other interest income 148 150 390 434 ------- -------- -------- ------- Total interest income 8,339 9,335 25,608 27,314 ------- -------- -------- ------- INTEREST EXPENSE Certificates of deposit, $100,000 or more 621 756 1,939 2,287 Other deposits 1,621 2,143 5,264 6,909 Other interest 109 131 332 371 ------- -------- -------- ------- Total interest expense 2,351 3,030 7,535 9,567 ------- -------- -------- ------- NET INTEREST INCOME 5,988 6,305 18,073 17,747 PROVISION FOR CREDIT LOSSES 75 66 235 277 ------- -------- -------- ------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 5,913 6,239 17,838 17,470 ------- -------- -------- ------- NONINTEREST INCOME Service charges on deposit accounts 466 477 1,421 1,421 Gain on sale of securities 91 18 449 23 Insurance agency commissions 1,354 1,078 4,683 1,738 Other noninterest income 379 241 1,160 713 ------- -------- -------- ------- Total noninterest income 2,290 1,814 7,713 3,895 ------- -------- -------- ------- NONINTEREST EXPENSE Salaries and employee benefits 3,046 2,596 9,120 6,761 Expenses of premises and equipment 515 454 1,490 1,306 Other noninterest expense 1,200 1,177 3,706 3,413 ------- -------- -------- ------- Total noninterest expense 4,761 4,227 14,316 11,480 ------- -------- -------- ------- INCOME BEFORE TAXES ON INCOME 3,442 3,826 11,235 9,885 Federal and State income taxes 1,247 1,338 4,063 3,500 ------- -------- -------- ------- NET INCOME $2,195 $2,488 $7,172 $6,385 ======= ======== ======== ======= Basic earnings per common share $ .40 $ .46 $ 1.33 $ 1.19 Diluted earnings per common share $ .40 $ .46 $ 1.31 $ 1.18 See accompanying notes to Condensed Consolidated Financial Statements.
-4- SHORE BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (Dollars in thousands)
Accumulated Additional other Total Common Paid in Retained Comprehensive Stockholders' Stock Capital Earnings Income(loss) Equity ------- ------------ ---------- --------------- -------------- Balances, January 1, 2003 $ 54 $ 23,837 $ 52,985 $1,152 $78,028 Comprehensive income: Net income - - 7,172 - 7,172 Other comprehensive income, net of tax: Unrealized loss on available for sale securities - - - (1,144) (1,144) ---------- Total comprehensive income 6,028 ---------- Shares issued - 129 - - 129 Cash dividends paid $0.49 per share - - (2,634) - (2,634) ------ ---------- ---------- --------- ---------- Balances, September 30, 2003 $ 54 $ 23,966 $ 57,523 $ 8 $ 81,551 ====== ========== ========== ========= ========== Balances, January 1, 2002 $ 53 $ 23,039 $ 47,412 $ 466 $70,970 Comprehensive income: Net income - - 6,385 - 6,385 Other comprehensive income, net of tax: Unrealized gain on available for sale securities - - - 762 762 ---------- Total comprehensive income 7,147 ---------- Shares issued for employee benefit plans - 15 - - 15 Shares issued for acquisition of insurance agency 1 800 - - 801 Shares repurchased and retired - (21) - - (21) Cash dividends paid $0.45 per share - - (2,412) - (2,412) ------ ---------- --------- ----------- ----------- Balances, September 30, 2002 $ 54 $ 23,833 $ 51,385 $ 1,228 $76,500 ====== ========== ========= =========== =========== See accompanying Notes to Condensed Consolidated Financial Statements
-5- SHORE BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
For the Nine Months Ended September 30, 2003 2002 --------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 7,172 $ 6,385 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,152 923 Discount accretion on debt securities (42) (92) Provision for credit losses, net (31) (102) Deferred income taxes 52 (13) Gain on sale of securities (449) (23) Loss on disposal of premises and equipment - 2 Loss on other real estate owned 2 4 Equity in earnings of unconsolidated subsidiary - (21) Net changes in: Accrued interest receivable 117 (43) Other assets (502) (1,240) Accrued interest payable on deposits (160) (129) Accrued expenses 108 1,676 ---------- ---------- Net cash provided by operating activities 7,419 7,327 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities and principal payments of securities available for sale 88,398 63,390 Proceeds from sale of investment securities available for sale 8,771 3,017 Purchase of securities available for sale (112,663) (57,864) Proceeds from maturities and principal payments of securities held to maturity 1,516 1,754 Purchase of securities held to maturity (4,468) (4,367) Net increase in loans (19,500) (44,144) Purchase of loans (291) - Proceeds from sale of loans 668 - Purchase of premises and equipment (3,379) (753) Proceeds from sale of premises and equipment - 19 Proceeds from sale of other real estate owned 52 43 Acquisition, net of stock issued - (5,103) ---------- ---------- Net cash used in investing activities ( 40,896) (44,008) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand, NOW, money market and savings deposits 51,492 24,262 Net (decrease) increase in certificates of deposit (4,922) 15,607 Net increase in short term borrowings 6,744 7,274 Proceeds from issuance of common stock 129 16 Repurchase of common stock - (21) Dividends paid (2,634) (2,412) ---------- ---------- Net cash provided by financing activities 50,809 44,726 ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 17,332 8,045 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 69,468 51,638 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 86,800 $ 59,683 ========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements. -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, 2003, the results of operations for the three- and nine-month periods ended September 30, 2003 and 2002, and cash flows for the nine-month periods ended September 30, 2003 and 2002, have been included. The amounts as of December 31, 2002 are derived from audited financial statements. All such adjustments are of a normal recurring nature. There have been no significant changes to the Company's accounting policies as disclosed in the 2002 Annual Report. The results of operations for the nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year. This quarterly report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2002. 2) Year to date basic earnings per share is derived by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period of 5,374,805 shares for 2003 and 5,354,573 shares for 2002. The diluted earnings per share calculation is derived by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of outstanding options and warrants. Considering the effect of these common stock equivalents, the adjusted average shares for the nine months ended September 30, 2003 and 2002 were 5,463,640 and 5,415,176, respectively. 3) Under the provisions of Statements of Financial Accounting Standards (SFAS) Nos. 114 and 118, "Accounting by Creditors for Impairment of a Loan," a loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan's contracted terms. The impairment of a loan is measured at the present value of expected future cash flows using the loan's effective interest rate, or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loans principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Information with respect to impaired loans and the related valuation allowance is shown below:
September 30, December 31, (Dollars in thousands) 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------- Impaired loans with a specific allowance $ 786 $ 414 Impaired loans with a general allowance 749 377 -------- -------- Total impaired loans $ 1,535 $ 791 ======== ======== Allowance for credit losses applicable to impaired loans $ 530 $ 116 Allowance for credit losses applicable to other than impaired loans 3,618 4,001 -------- -------- Total allowance for credit losses $ 4,148 $ 4,117 ======== ======== Interest income on impaired loans recorded on the cash basis $ 21 $ 78 ======== ========
Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for probable credit losses related to these loans are based upon historical loss ratios and are included in the allowance for credit losses. 4) In the normal course of business, to meet the financial needs of its customers, the Company's bank subsidiaries are parties to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. At September 30, 2003, total commitments to extend credit were approximately $133,470,000. Outstanding letters of credit were approximately $ 9,518,000 at September 30, 2003. -7- 5) The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-based Compensation" and SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure", but applies APB Opinion No. 25 and related interpretations in accounting for its plans. No compensation expense related to the plans was recorded during the three-month periods ended September 30, 2003 and 2002. No options vested during the three-month period ended September 30, 2003. If the Company had elected to recognize compensation cost based on fair value at the vesting dates for awards under the plans consistent with the method prescribed by SFAS No. 123, net income and earnings per share would have been changed to the pro forma amounts as follows:
Nine-month period Ended September 30, 2003 2002 ---- ---- Net income: As reported $7,172 $6,385 Less pro forma stock-based compensation expense determined under the fair value method, net of related tax effects (39) (18) -------- -------- Pro forma net income $7,133 $6,367 ======== ======== Basic net income per share: As reported $ 1.33 $1.19 Pro forma 1.33 1.19 Diluted earnings per share As reported $ 1.31 $1.18 Pro forma 1.31 1.18
Three-month Period Ended September 30, 2003 2002 ---- ---- Net income: As reported $2,195 $2,488 Less pro forma stock-based compensation expense determined under the fair value method, net of related tax effects - - -------- -------- Pro forma net income $2,195 $2,488 ======== ======== Basic net income per share: As reported $ 0.40 $ 0.46 Pro forma 0.40 0.46 Diluted earnings per share As reported $0.40 $ 0.46 Pro forma 0.40 0.46
The pro forma amounts are not representative of the effects on reported net income for future periods. 6) In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". The requirements of SFAS No. 146 are effective prospectively for qualifying activities initiated after December 31, 2002. SFAS No. 146 applies to costs associated with an exit activity, including restructuring, or with a disposal of long-lived assets. The Statement has had no effect on the Company's financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation No. 45"). Beginning in 2003, Interpretation No. 45 requires recognition of liabilities at their fair value for newly issued guarantees. The adoption of Interpretation No. 45 did not have a material effect on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based compensation and required disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company has adopted the disclosure provisions of SFAS No. 148. The -8- Company has not changed to the fair value-based method of accounting for stock-based compensation. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("Interpretation No. 46"), which explains identification of variable interest entities and the assessment of whether to consolidate those entities. Interpretation No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the involved parties. The provisions of Interpretation No. 46 are effective for all financial statements issued after January 1, 2003. The Company holds no significant variable interest entities that would require disclosure or consolidation. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities under Statement 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with some exceptions. The implementation of SFAS No. 149 did not have a material impact on the Company's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No. 150"), effective for financial instruments entered into or modified after May 31, 2003. This statement established standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of the statement as a liability rather than as an equity, such as obligations that a reporting entity can or must settle by issuing its own equity shares. SFAS No. 150 did not have an impact on the Company's earnings, financial condition or equity. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company is the largest independent financial holding company located on the Eastern Shore of Maryland. It is the parent company of The Talbot Bank of Easton, Maryland located in Easton, Maryland and The Centreville National Bank of Maryland located in Centreville, Maryland (collectively, the "Banks"). The Banks operate 12 full service branches in Kent, Queen Anne's, Talbot, Caroline and Dorchester Counties. The Company offers a full range of insurance products and services to its customers through The Avon-Dixon Agency, LLC, Elliott Wilson Insurance, LLC, and Mubell Finance, LLC (collectively, the "Insurance Agency") and investment advisory services through Wye Financial Services, LLC, all of which are wholly owned subsidiaries of the Company. The shares of the Company's common stock are listed on the NASDAQ SmallCap Market, trading under the symbol "SHBI." The Company maintains an Internet site at www.shbi.net on which it makes available free of charge its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the Securities and Exchange Commission. The following discussion is designed to provide a better understanding of the financial position of the Company and should be read in conjunction with the December 31, 2002 audited Consolidated Financial Statements and Notes, which were included in the Company's Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2002. Forward-Looking Information Portions of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about the Company's confidence, policies, and strategies, the adequacy of capital levels, and liquidity. Such forward-looking statements involve certain risks and uncertainties, including economic conditions, competition in the geographic and business areas in which the Company and its affiliates operate, inflation, fluctuations in interest rates, legislation, and governmental regulation. These risks and uncertainties are described in more detail in the Company's Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2002, under the heading "Risk Factors." Actual results may differ materially from such forward-looking statements, and the Company assumes no obligation to update forward-looking statements at any time. Recent Developments On November 12, 2003, the Company entered into a definitive merger agreement with Midstate Bancorp, Inc., a Delaware bank holding company, pursuant to which Midstate Bancorp, Inc. will merge with and into the Company. Midstate Bancorp, Inc.'s Delaware bank subsidiary, The Felton Bank, will become a separate Delaware bank subsidiary of the Company as a result of the merger. The merger is subject to the approval of regulatory agencies and the stockholders of Midstate Bancorp, Inc. and is expected to close during the first quarter of 2004. -9- Critical Accounting Policies The Company's financial statements are prepared in accordance with accounting principals generally accepted in the United States of America (GAAP). The financial information contained within the financial statements is, to a significant extent, financial information contained that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company believes its most critical accounting policy relates to the allowance for credit losses. The allowance for credit losses is an estimate of the losses that may be sustained in the loan portfolio as of the balance sheet date. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, "Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and estimable, and (ii) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires that losses be accrued based on the differences between the loan balance and the value of collateral, present value of future cash flows or values that are observable in the secondary market. Management uses many factors, including economic conditions and trends, the value and adequacy of collateral, the volume and mix of the loan portfolio, and internal loan processes of the Company, in determining the inherent loss that may be present in the Company's loan portfolio. Actual losses could differ significantly from Management's estimates. In addition, GAAP itself may change from one previously acceptable method to another. Although the economics of transactions would be the same, the timing of events that would impact the transactions could change. Management has significant discretion in making the adjustments inherent in the determination of the provision and allowance for credit losses, including in connection with the valuation of collateral, the borrower's prospects of repayment, and in establishing allowance factors on the formula allowance and unallocated allowance components of the allowance. The establishment of allowance factors is a continuing exercise, based on Management's continuing assessment of the global factors such as delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of Management, national and local economic trends, concentrations of credit, quality of loan review system and the effect of external factors such as competition and regulatory requirements, and their impact on the portfolio. Allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based upon the same volume and classification of loans. Changes in allowance factors will have a direct impact on the amount of the provision, and a corresponding effect on net income. Errors in Management's perception and assessment of the global factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs. Three basic components comprise the Company's allowance for credit losses: a specific allowance, a formula allowance and a nonspecific allowance. Each component is determined based on estimates that can and do change when the actual events occur. The specific allowance is used to individually allocate an allowance to loans identified as impaired. An impaired loan may show deficiencies in the borrower's overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. When a loan is identified as impaired, a specific reserve is established based on the Company's assessment of the loss that may be associated with the individual loan. The formula allowance is used to estimate the loss on internally risk rated loans, exclusive of those identified as impaired. Loans identified as special mention, substandard, doubtful and loss, as well as impaired, are segregated from performing loans. Remaining loans are then grouped by type (commercial, commercial real estate, construction, home equity or consumer). Each loan type is assigned an allowance factor based on Management's estimate of the risk, complexity and size of individual loans within a particular category. Classified loans are assigned higher allowance factors than non-rated loans due to management's concerns regarding collectibility or management's knowledge of particular elements regarding the borrower. Allowance factors grow with the worsening of the internal risk rating. The nonspecific formula is used to estimate the loss of non-classified loans stemming from more global factors such as delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of Management, national and local economic trends, concentrations of credit, quality of loan review system and the effect of external factors such as competition and regulatory requirements. The nonspecific allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance. Overview Net income for the nine months ended September 30, 2003 was $7,172,000, an increase of 12.3% when compared to $6,385,000 for the same period in 2002. On a per share basis, diluted earnings were $1.31, compared to $1.18 for the same period last year. Return on average assets was 1.43% for the first nine months of 2003 compared to 1.39% for the first nine months of 2002. Return on average stockholders' equity increased from 11.63% at September 30, 2002 to 11.97% at September 30, 2003. -10- Net income totaled $2,195,000 for the third quarter of 2003, a decrease of 11.8% when compared to $2,488,000 for the same period in 2002. On a per share basis, diluted earnings were $0.40 for the quarter, compared to $0.46 for the same period in 2002. A reduction in interest income was the primary reason for the decline. The overall yield on earning assets continued to decline during the third quarter, resulting in an average yield on earning assets was 5.50% for the nine-month period ending September 30, 2003 compared to 6.36% for the same period last year. A reduction in the rate paid for interest bearing deposits from 2.75% one year ago to 1.98% at September 30, 2003 enabled the Company to increase net interest income over the comparable nine month period of one year ago. The reduction in rates paid for deposits is largely attributable to the maturity and repricing of existing deposits in the current low interest rate environment. RESULTS OF OPERATIONS Net Interest Income Net interest income for the quarter ended September 30, 2003 was $5,988,000 compared to $6,305,000 for the same period last year. Net interest income for the nine months ended September 30, 2003 totaled $18,073,000, a $326,000 increase over the same period last year. The increase in net interest income for the nine-month period ended September 30, 2003 is primarily the result of a reduction in interest expense. Interest income declined in both the three- and nine-month periods ended September 30, 2003 when compared to 2002, as a result of lower yields on earning assets. The Company's net interest margin was 3.90% for the nine months ended September 30, 2003. A 25 basis point reduction in short-term rates at the end of the second quarter of 2003 had an impact on the three and nine month results. Deposit growth continued to outpace loan demand, resulting in an increase in interest bearing deposits with other banks and federal funds sold. Earning assets averaged $627,556,000 for the nine months ended September 30, 2003, as compared to $580,045,000 at September 30, 2002. Loans accounted for the most significant portion of this growth, increasing $33,943,000 to $453,443,000 at September 30, 2003. The yield on earning assets declined 86 basis points to 5.50% for the nine-month period ended September 30, 2003, when compared to the same period in 2002. The overall yield on loans for the nine months ended September 30, 2003 was 6.39%, compared to 7.09% for the corresponding period in 2002. The yield on investment securities declined from 5.10% for the first nine months of 2002 to 4.02% for the same period in 2003 and the average balance of investment securities declined $1,027,000 to $126,086,000 for the nine months ended September 30, 2003 when compared to September 30, 2002. Total interest expense for the three and nine months ended September 30, 2003 was $2,351,000 and $7,535,000, respectively. This represents a decrease of $679,000 and $2,032,000 or 22.4% and 21.2%, respectively, when compared to the same periods last year. Lower rates paid for certificates of deposit were the primary cause for the decline in interest expense for the three- and nine-month periods ended September 30, 2003. The average balance of all categories of deposits increased during the nine-month period ended September 30, 2003. The average balance of interest bearing deposits increased $37,346,000, while the average rate paid for those deposits declined 77 basis points for the nine months ended September 30, 2003 compared to the same period in 2002. The average balance of certificates of deposits increased $8,216,000, while the average rate paid for certificates of deposit decreased 98 basis points to 3.20% for the nine months ended September 30, 2003 when compared to the same period last year. See the Analysis of Interest Rates and Interest Differentials below for further details. Loans comprised 72.3% of total average earning assets at September 30, 2003 and 2002. -11- Analysis of Interest Rates and Interest Differentials. The following table presents the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid through the first nine months of the year.
September 30, 2003 September 30, 2002 ------------------ ------------------ Average Income Yield Average Income Yield (Dollars in thousands) Balance Expense Rate Balance Expense Rate - ----------------------------------------------------------------------------------------------------------------------------- Earning Assets Investment securities $126,086 $ 3,801 4.02% $127,113 $ 4,918 5.10% Loans 453,443 21,719 6.39% 419,500 22,231 7.09% Interest bearing deposits with other banks 19,271 155 1.07% 7,736 96 1.67% Federal funds sold 28,756 235 1.09% 25,696 337 1.76% ---------- --------- ----- ------------ -------- -------- Total earning assets $627,556 $25,910 5.50% $580,045 $27,582 6.36% Non-interest earning assets 39,945 32,132 ---------- ---------- Total Assets $667,501 $612,177 ========= ======== Interest bearing liabilities Interest bearing deposits $484,154 $7,203 1.98% $446,808 $9,196 2.75% Short term borrowing 23,520 144 0.82% 29,311 183 1.20% Long term debt 5,000 188 5.03% 5,000 188 5.04% ---------- --------- ----- ------------ -------- ----- Total interest bearing liabilities $512,674 $7,535 1.95% $472,119 $9,567 2.71% Non-interest bearing liabilities 74,939 66,848 Stockholders' equity 79,888 73,210 ---------- ---------- Total liabilities and stockholders' equity $667,501 $612,177 ======== ======== Net interest spread $18,375 3.55% $18,015 3.65% ======= ======= Net interest margin 3.90% 4.15%
(1) Interest Income includes the effects of taxable-equivalent adjustments (reduced by the nondeductible potion of interest expense) using the appropriate marginal federal income tax rate of 35% to increase tax-exempt interest income to a taxable equivalent basis. The taxable-equivalent adjustment amounts utilized in the above table to compute yields aggregated to $302,000 in 2003 and $268,000 in 2002. (2) Average loan balances include non-accrual loans. (3) Loan fee income is included in interest income for each loan category and yield calculations are based on the total. Non-interest Income Total non-interest income for the three and nine-month periods ended September 30, 2003 increased $476,000 and $3,818,000, respectively, when compared to the same periods in 2002. Commissions attributable to the Insurance Agency, which began operations on May 1, 2002, represented $276,000 and $2,945,000 of that increase, respectively, totaling $1,354,000 and $4,683,000 for the three and nine-month periods ended September 30, 2003, respectively. In addition, the Company had gains on the sale of securities totaling $91,000 and $449,000 for the three and nine-month periods ended September 30, 2003, respectively, compared to $18,000 and $23,000 for the same periods last year. Income from the origination of mortgage loans for the secondary market totaling $390,000 for the nine-months ended September 30, 2003, also contributed to the growth in non-interest income. Mortgage loans originated for the secondary market are not generally funded by the Company. Non-interest Expense Total non-interest expense, excluding income taxes and the provision for credit losses, increased $534,000 and $2,836,000 for the three and nine-month periods ended September 30, 2003, respectively, from the comparable periods in 2002. Operation of the Insurance Agency accounted for $246,000 and $2,175,000 of the increase during the three and nine-month periods ended September 30, 2003, respectively, when compared to the same periods in 2002. Other increases relate to the start up cost of a new branch location as well as general increases in overhead resulting from the growth of the Company. Income Taxes The effective tax rate for the three- and nine-month periods ended September 30, 2003 was 36.2% compared to 35% and 35.4%, respectively, for the same periods last year. There have been no significant changes in tax law or to the Company's tax structure that would materially impact the effective tax rate. -12- Analysis of Financial Condition Loans Loans, net of allowance for credit losses and unearned income, totaled $454,577,000 at September 30, 2003, an increase of $19,155,000 or 4.4% from December 31, 2002. The demand for real estate loans remained strong and was the primarily reason for this growth, although the Company continued to experience loan runoff as some borrowers sought long-term fixed rate financing in the secondary market. Average loans, net of unearned income, for the nine-month period ended September 30, 2003 totaled $453,443,000, compared to $419,500,000 for the same period last year. Allowance for Credit Losses The Company has established an allowance for credit losses, which is increased by provisions charged against earnings and recoveries of previously charged-off debts. The allowance is decreased by current period charge-off of uncollectible debts. Management evaluates the adequacy of the allowance for credit losses on a quarterly basis and adjusts the provision for credit losses based upon this analysis. The evaluation of the adequacy of the allowance for credit losses is based on a risk rating system of individual loans, as well as on a collective evaluation of smaller balance homogenous loans based on factors such as past credit loss experience, local economic trends, nonperforming and problem loans, and other factors which may impact collectibility. A loan is placed on nonaccrual when it is specifically determined to be impaired and principal and interest is delinquent for 90 days or more. Please refer to the discussion under the caption, "Critical Accounting policies" for an overview of the underlying methodology Management employs on a quarterly basis to maintain the allowance. Management adjusts the allowance for credit losses through the provision based on its evaluation and analysis of the adequacy of the allowance, including consideration of general economic conditions, growth of the loan portfolio, current trends in delinquencies and nonperforming assets, as well as past credit loss experience. The provision for credit losses for the three- and nine-month periods ended September 30, 2003 was $75,000 and $235,000, respectively, compared to $66,000 and $277,000 for the same periods in 2002. The overall quality of the Company's loan portfolio remains strong despite an increase in nonperforming loans, resulting in a decline in the provision for the nine-month period ended September 30, 2003. Strong underwriting guidelines, a stable local economy and increased collateral value resulting from the strength of the local real estate economy have each had a positive effect on the quality of the loan portfolio. The Company's charge-off ratios remain much lower than those of similar sized institutions according to the most recent FDIC quarterly banking profile. Net charge-offs were $204,000 for the nine-month period ended September 30, 2003, compared to $380,000 for the same period last year. Nonaccrual loans increased $764,000, totaling $1,535,000 at September 30, 2003, when compared to December 31, 2002. A specific allowance hs been established to cover the estimated loss associated with these nonaccrual loans. Loans past due 90 days and still accruing increased $615,000 since December 31, 2002, however they consist primarily of real estate secured loans with, in management's opinion, minimal loss potential to the Company. The Company's ratio of nonperforming assets, including other real estate owned, is also much lower than that of similar sized institutions. The allowance for credit losses as a percentage of average loans was .91% and .97% as of September 30, 2003 and 2002, respectively. The decline is primarily the result of growth in loans secured by real estate, which present less risk of loss to the Company than other types of loans. Based on Management's quarterly evaluation of the adequacy of the allowance for credit losses, it believes that the allowance for credit losses and the related provision are adequate at September 30, 2003. -13- The following table presents a summary of the activity in the allowance for credit losses.
Nine Months Ended September 30, (Dollars in thousands) 2003 2002 - ------------------------------------------------------------------------------------------------------------ Allowance balance - beginning of year $ 4,117 $ 4,189 Charge-offs: Commercial and other 189 273 Real estate 2 64 Consumer 99 128 -------- ------- Totals 290 465 -------- ------- Recoveries: Commercial 32 14 Real estate 4 14 Consumer 50 57 -------- ------- Totals 86 85 -------- ------- Net charge-offs: 204 380 Provision for credit losses 235 277 -------- ------- Allowance balance-ending $ 4,148 $ 4,086 ======== ======== Average loans outstanding during period $453,443 $419,500 ======== ======== Net charge-offs (annualized) as a percentage of average loans outstanding during period .06% .12% ======== ======== Allowance for credit losses at period end as a percentage of average loans .91% .97% ======== ========
The general economic conditions in the Company's market area remain strong; because the Company's loans are predominately real estate secured, however, weaknesses in the local real estate market may have an adverse effect on collateral values. The Company does not have any concentrations of loans in any particular industry, nor does it engage in foreign lending activities. Nonperforming Assets The following table summarizes non-performing assets of the Company.
September 30, December 31, Non-performing Assets: 2003 2002 ------------ ------------ Non-accrual loans $ 1,535 $ 771 Other real estate owned - 54 -------- -------- 1,535 825 Loans past due 90 days and still accruing 989 374 -------- --------- Total non-performing $ 2,524 $ 1,199 ======= =======
Investment Securities Investment securities increased $16,576,000 during the nine-month period ended September 30, 2003 when compared to December 31, 2002. The average balance of investment securities was $126,086,000 for the nine-month period ended September 30, 2003, compared to $127,113,000 for the same period in 2002. The yield on investment securities continued to decline during the quarter as a result of bonds being called or maturing at rates higher than those available for reinvestment. At September 30, 2003, the overall yield on investment securities was 4.02%, a 108 basis point decrease from 5.10% at September 30, 2002, on a tax equivalent basis. Deposits Total deposits at September 30, 2003 were $591,762,000, compared to $545,192,000 at December 31, 2002. The majority of the growth was in money market and savings categories, which increased $21,906,000 over the nine-month period ended September 30, 2003. Certificate of deposit rates continued to decline during 2003, resulting in many depositors leaving money in short-term certificates of deposit, interest bearing transaction accounts or money management accounts waiting for rates to increase. Certificates of deposit greater than $100,000 -14- decreased $7,182,000 during the nine-month period ended September 30, 2003. Other time deposits increased $2,016,000 during the nine-month period ended September 30, 2003, and noninterest and interest bearing transaction accounts increased $29,829,000 during the same period. Borrowed Funds Short term borrowings, which consist of securities sold under agreements to repurchase, increased $6,744,000, totaling $28,752,000 at September 30, 2003 when compared to December 31, 2002. The average rate paid for short-term borrowings was .82% and 1.20% at September 30, 2003 and 2002, respectively. The Company also has an advance from the Federal Home Loan Bank of Atlanta in the amount $5,000,000 outstanding at September 30, 2003 and 2002. The advance is due March 29, 2006 and has a one-time call provision in 2004. As of September 30, 2003, the interest rate on the advance was 4.97%. Liquidity and Capital Resources The Company derives liquidity through increased customer deposits, maturities in the investment portfolio, loan repayments and income from earning assets. To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets through arrangements with its correspondent banks. The Banks are also members of the Federal Home Loan Bank of Atlanta, which provides another source of liquidity. There are no known trends or demands, commitments, events or uncertainties that Management is aware of which will materially affect the Company's ability to maintain liquidity at satisfactory levels. Total stockholders' equity was $81,551,000 at September 30, 2003, an increase of 4.5% when compared to December 31, 2002. Accumulated other comprehensive income, which consists solely of net unrealized gains and losses on investment securities available for sale, declined $1,144,000 since December 31, 2002, resulting in accumulated other comprehensive income at September 30, 2003 of $8,000. Bank regulatory agencies have adopted various capital standards for financial institutions, including risk-based capital standards. The primary objectives of the risk-based capital framework are to provide a more consistent system for comparing capital positions of financial institutions and to take into account the different risks among financial institutions' assets and off-balance sheet items. Risk-based capital standards have been supplemented with requirements for a minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory agencies consider the published capital levels as minimum levels and may require a financial institution to maintain capital at higher levels. A comparison of the capital as of September 30, 2003 with the minimum requirements is presented below. Minimum Actual Requirements ------ ------------ Tier 1 risk-based capital 15.25% 4.00% Total risk-based capital 16.13% 8.00% Leverage ratio 10.72% 4.00% Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates or equity pricing. The Company's principal market risk is interest rate risk that arises from its lending, investing and deposit taking activities. The Company's profitability is dependent on the Banks' net interest income. Interest rate risk can significantly affect net interest income to the degree that interest bearing liabilities mature or reprice at different intervals than interest earning assets. The Asset/Liability Committee of the Board of Directors (the "ALCO") of both Banks oversees the management of interest rate risk. The ALCO's primary purpose is to manage the exposure of net interest margins to unexpected changes due to interest rate fluctuations. These efforts affect the loan pricing and deposit rate policies of the Company as well as the asset mix, volume guidelines, and liquidity and capital planning. The Company utilizes a simulation model to quantify the effect a hypothetical plus or minus 200 basis point change in rates would have on net interest income and the fair value of capital. The model takes into consideration the effect of call features of investments as well as repayments of loans in periods of declining rates. When actual changes in interest rates occur, the changes in interest earning assets and interest bearing liabilities may differ from the assumptions used in the model. As of September 30, 2003, the model produced the following sensitivity profile for net interest income and the fair value capital: -15-
Immediate Change in Rates +200 Basis Points -200 Basis Points Policy Limit - ---------------------------------------------------------------------------------------------------------------------- % Change in net interest income 11.00% (14.5)% + 25% - % Change in fair value of capital 5.89% (7.8)% + 15% - For more information regarding market risk and the Company's objectives and strategies in managing market risk, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Item 4. Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports filed under the Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer ("CEO") and the Principal Accounting Officer ("PAO"), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. An evaluation of the effectiveness of these disclosure controls, as of September 30, 2003, was carried out under the supervision and with the participation of the Company's management, including the CEO and the PAO. Based on that evaluation, the Company's management, including the CEO and the PAO, has concluded that the Company's disclosure controls and procedures are effective. During the third quarter of 2003, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. -16- Part II Item 6. Exhibits and Reports on Form 8-K. a) Exhibits 3.1 Shore Bancshares, Inc. Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 on Form 8-K filed by Shore Bancshares, Inc. on December 14, 2000). 3.2 Shore Bancshares, Inc. Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 on Form 8-K filed by Shore Bancshares, Inc. on December 14, 2000). 10.1 Form of Employment Agreement with W. Moorhead Vermilye (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). 10.2 Form of Employment Agreement with Daniel T. Cannon (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). 10.3 Form of Employment Agreement between The Avon-Dixon Agency, LLC and Kevin P. LaTulip (incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002). 10.4 Form of Supplemental Retirement Plan Agreement and Life Insurance Endorsement Method Split Dollar Plan Agreement between The Centreville National Bank of Maryland and Daniel T. Cannon (incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003). 10.5 Form of Life Insurance Endorsement Method Split Dollar Plan Agreement between The Centreville National Bank of Maryland and Daniel T. Cannon (incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003). 31.1 Certifications of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith). 31.2 Certifications of the PAO pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith). 32.1 Certifications of the CEO and the Principal Accounting Officer pursuant to 18 U.S.C.ss.1350 (furnished herewith). 99.1 Shore Bancshares, Inc. 1998 Employee Stock Purchase Plan, as amended and restated (incorporated by reference to Appendix A of the Company's Definitive Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Stockholders, filed on March 31, 2003). 99.2 1998 Stock Option Plan (incorporated by reference from the Shore Bancshares, Inc. Registration Statement on Form S-8 filed on September 25, 1998 (Registration No. 333-64319)). 99.3 Talbot Bancshares, Inc. Employee Stock Option Plan (incorporated by reference from the Shore Bancshares, Inc. Registration Statement on Form S-8 filed on May 4, 2001 (Registration No. 333-60214)). b) Reports on Form 8-K. On August 6, 2003, the Company filed a Current Report on Form 8-K in which it furnished under Item 12 the results of operations for the three- and six-month periods ended June 30, 2003. -17- Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Shore Bancshares, Inc. Date: November 14, 2003 By: /s/ W. Moorhead Vermilye ------------------------------------- W. Moorhead Vermilye President and Chief Executive Officer Date: November 14, 2003 By: /s/ Susan E. Leaverton ------------------------------------- Susan E. Leaverton, CPA Treasurer and Principal Accounting Officer -18- EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3.1 Shore Bancshares, Inc. Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 on Form 8-K filed by Shore Bancshares, Inc. on December 14, 2000). 3.2 Shore Bancshares, Inc. Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 on Form 8-K filed by Shore Bancshares, Inc. on December 14, 2000). 10.1 Form of Employment Agreement with W. Moorhead Vermilye (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). 10.2 Form of Employment Agreement with Daniel T. Cannon (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). 10.3 Form of Employment Agreement between The Avon-Dixon Agency, LLC and Kevin P. LaTulip (incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10K for the year ended December 31, 2002). 10.4 Form of Executive Supplemental Retirement Plan Agreement between The Centreville National Bank of Maryland and Daniel T. Cannon (incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003). 10.5 Form of Life Insurance Endorsement Method Split Dollar Plan Agreement between The Centreville National Bank of Maryland and Daniel T. Cannon (incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003). 31.1 Certifications of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith). 31.2 Certifications of the PAO pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith). 32.1 Certifications of the CEO and the PAO pursuant to 18 U.S.C.ss.1350 (furnished herewith). 99.1 Shore Bancshares, Inc. 1998 Employee Stock Purchase Plan, as amended and restated (incorporated by reference to Appendix A of the Company's Definitive Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Stockholders, filed on March 31, 2003). 99.2 1998 Stock Option Plan (incorporated by reference from the Shore Bancshares, Inc. Registration Statement on Form S-8 filed on September 25, 1998 (Registration No. 333-64319)). 99.3 Talbot Bancshares, Inc. Employee Stock Option Plan (incorporated by reference from the Shore Bancshares, Inc. Registration Statement on Form S-8 filed on May 4, 2001 (Registration No. 333- 60214)). -19- EX-31 3 cor2288ex311.txt CERTIFICATIONS-W. MOORHEAD VERMILYE EXHIBIT 31.1 CERTIFICATIONS Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, W. Moorhead Vermilye, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Shore Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 By: /s/ W. Moorhead Vermilye ----------------------------------------- W. Moorhead Vermilye President and Chief Executive Officer EX-31 4 cor2288ex312.txt CERTIFICATIONS - SUSAN LEAVERTON CERTIFICATIONS Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Susan E. Leaverton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Shore Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 By: /s/ Susan E. Leaverton ---------------------------------------- Susan E. Leaverton, CPA Treasurer and Principal Accounting Officer EX-32 5 cor2288ex321.txt CERTIFICATION OF PERIODIC REPORT Exhibit 32.1 CERTIFICATION OF PERIODIC REPORT Pursuant to 18 U.S.C. ss. 1350 Pursuant to, and for purposes only of, 18 U.S.C. ss. 1350, each of the undersigned hereby certifies that (i) the Quarterly Report of Shore Bancshares, Inc. on Form 10-Q for the quarter ended September 30, 2003 filed with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Shore Bancshares, Inc. Date: November 14, 2003 By: /s/ W. Moorhead Vermilye ---------------------------------------- W. Moorhead Vermilye President/Chief Executive Officer Date: November 14, 2003 By: /s/ Susan E. Leaverton ---------------------------------------- Susan E. Leaverton, CPA Treasurer/Principal Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----