-----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, Qppc5+J7VcN48UuA3gVW7MB+xijUOFYRMnkErI/y+/kF+aQeFxm3Rdl0cax2cDWF Al6W/zieOaKcBq0Pc6y83A== 0001014100-04-000144.txt : 20040507 0001014100-04-000144.hdr.sgml : 20040507 20040507114147 ACCESSION NUMBER: 0001014100-04-000144 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040507 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: 04787549 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 cor2558.txt QUARTERLY REPORT FOR PERIOD ENDING MARCH 31, 2004 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 March 31, 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 --------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days, Yes X No ___ Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No___. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 5,495,834 issued and outstanding shares of common stock as of May 1, 2004. INDEX Part I. Item 1. Financial Statements Page Condensed Consolidated Balance Sheets - March 31, 2004 (unaudited) and December 31, 2003 2 Condensed Consolidated Statements of Income - For the three months ended March 31, 2004 and 2003 (unaudited) 3 Condensed Consolidated Statements of Changes in Stockholders' Equity - For the three months ended March 31, 2004 and 2003 (unaudited) 4 Condensed Consolidated Statements of Cash Flows - For the three months ended March 31, 2004 and 2003(unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 Item 4. Controls and Procedures 14 Part II. Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 PART I Item 1. Financial Statements SHORE BANCSHARES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
March 31, December 31, ASSETS: 2004 2003 - ------- --------------- ---------------- (unaudited) Cash and due from banks $19,606 $ 19,391 Interest bearing deposits with other banks 9,873 9,897 Federal funds sold 27,587 17,443 Investment securities: Held-to-maturity, at amortized cost (fair value of $16,576, $15,585, respectively) 16,193 15,313 Available for sale, at fair value 120,630 144,368 Loans, less allowance for credit losses ($3,940, $4,060, respectively) 488,856 470,895 Insurance premiums receivable 646 845 Bank premise and equipment, net 11,229 11,302 Accrued interest receivable on loans and investment securities 2,972 3,042 Investment in unconsolidated subsidiary 1,203 1,203 Goodwill 5,990 5,990 Other intangible assets 1,527 1,581 Other assets 5,152 4,109 -------- -------- TOTAL ASSETS $711,464 $705,379 ======== ======== LIABILITIES: Deposits: Noninterest bearing demand $ 73,270 $ 91,669 NOW and Super NOW 109,586 103,415 Certificates of deposit $100,000 or more 88,454 71,385 Other time and savings 317,872 325,940 -------- -------- Total Deposits 589,182 592,409 Short term borrowings 27,254 20,957 Long term debt 5,000 5,000 Other liabilities 4,443 3,486 -------- -------- TOTAL LIABILITIES 625,879 621,852 -------- -------- STOCKHOLDERS' EQUITY: Common Stock, Par Value $.01; authorized 35,000,000 shares; issued and outstanding: March 31, 2004 5,409,967 December 31, 2003 5,400,793 54 54 Additional paid in capital 24,420 24,231 Retained earnings 60,474 58,932 Accumulated other comprehensive income 637 310 -------- ------- TOTAL STOCKHOLDERS' EQUITY 85,585 83,527 -------- ------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $711,464 $705,379 ======== ========
See accompanying notes to Condensed Consolidated Financial Statements. -2- SHORE BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts)
For the three Months Ended March 31, 2004 2003 ---------------- ---------------- INTEREST INCOME Loans, including fees $7,149 $ 7,230 Interest and dividends on investment securities: Taxable 1,193 1,133 Tax-exempt 154 147 Other interest income 54 118 ------ ------- Total interest income 8,550 8,628 ------ ------- INTEREST EXPENSE Certificates of deposit, $100,000 or more 557 690 Other deposits 1,471 1,856 Other interest 100 110 ------ ------- Total interest expense 2,128 2,656 ------ ------- NET INTEREST INCOME 6,422 5,972 PROVISION FOR CREDIT LOSSES 105 90 ------ ------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 6,317 5,882 ------ ------- NONINTEREST INCOME Service charges on deposit accounts 495 460 Gain on sale of securities 16 276 Insurance agency commissions 1,909 1,810 Other noninterest income 458 393 ------ ------- Total noninterest income 2,878 2,939 ------ ------- NONINTEREST EXPENSE Salaries and employee benefits 3,118 3,050 Expenses of premises and equipment 589 493 Other noninterest expense 1,506 1,279 ------ ------- Total noninterest expense 5,213 4,822 ------ ------- INCOME BEFORE TAXES ON INCOME 3,982 3,999 Federal and State income taxes 1,466 1,478 ------ ------- NET INCOME $2,516 $ 2,521 ====== ======== Basic earnings per common share $ .47 $ .47 Diluted earnings per common share $ .46 $ .46
See accompanying notes to Condensed Consolidated Financial Statements. -3- 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 - - 2,516 - 2,516 Other comprehensive income, net of tax: Unrealized loss on available for sale securities - - - 327 327 -------- Total comprehensive income 2,843 Shares issued - 189 - - 189 Cash dividends paid $0.18 per share - - (974) - (974) ------ -------- -------- ------ -------- Balances, March 31, 2004 $ 54 $24,420 $60,474 $ 637 $85,585 ====== ======== ======== ====== ======== Balances, January 1, 2003 $ 54 $23,837 $52,985 $1,152 $78,028 Comprehensive income: Net income - - 2,521 - 2,521 Other comprehensive income, net of tax: Unrealized loss on available for sale securities - - - (345) (345) -------- Total comprehensive income 2,176 Shares issued - 11 - - 11 Cash dividends paid $0.15 per share - - (806) - (806) ------ -------- -------- ------ -------- Balances, March 31, 2003 $ 54 $23,848 $54,700 $ 807 $79,409 ====== ======== ======== ====== ========
See accompanying Notes to Condensed Consolidated Financial Statements. -4- SHORE BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
For the Three Months Ended March 31, 2004 2003 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 2,516 $ 2,521 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 334 403 Discount accretion on debt securities (30) (11) Provision for credit losses, net (120) 29 Gain on sale of securities (16) (276) Loss on other real estate owned - 8 Net changes in: Insurance premiums receivable 199 168 Accrued interest receivable 70 (56) Other assets (1,189) (1,042) Accrued interest payable on deposits 12 (77) Accrued expenses 947 714 --------- --------- Net cash provided by operating activities 2,723 2,381 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities and principal payments of securities available for sale 21,906 27,247 Proceeds from sale of investment securities available for sale 7,867 4,325 Purchase of securities available for sale (5,521) (35,796) Proceeds from maturities and principal payments of securities held to maturity 453 553 Purchase of securities held to maturity (1,340) (819) Net increase in loans (17,841) (15,832) Purchase of bank premises and equipment (137) (309) Proceeds from sale of other real estate owned - 37 Purchase of other real estate owned (60) - --------- --------- Net cash provided (used) in investing activities 5,327 (20,594) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in demand, NOW, money market and savings deposits (18,432) 18,219 Net increase (decrease) in certificates of deposit 15,206 (12,709) Net increase in securities sold under agreement to repurchase 6,296 2,056 Proceeds from issuance of common stock 189 11 Dividends paid (974) (806) --------- --------- Net cash provided by financing activities 2,285 6,771 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,335 (11,442) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 46,731 69,468 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 57,066 $ 58,026 ========= ========= See accompanying notes to Condensed Consolidated Financial Statements.
-5- 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 March 31, 2004, the results of operations for the three-month periods ended March 31, 2004 and 2003, and cash flows for the three-month periods ended March 31, 2004 and 2003, have been included. The amounts as of December 31, 2003 are derived from audited financial statements. All such adjustments are of a normal and recurring nature. There have been no significant changes to the Company's accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K 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 5,407,991 for the first quarter of 2004 and 5,372,429 for the year ended December 31, 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 three months ended March 31, 2004 and 2003 were 5,474,082 and 5,461,513, 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:
March 31, December 31, (Dollars in thousands) 2004 2003 --------- ------------ Impaired loans with valuation allowance $ 677 $ 729 Impaired loans with no valuation allowance 761 273 -------- ------- Total impaired loans $ 1,438 $ 1,002 ======= ======= Allowance for credit losses applicable to impaired loans $ 403 $ 349 Allowance for credit losses applicable to other than impaired loans 3,537 3,711 ------- ------- Total allowance for credit losses $ 3,940 $ 4,060 ======== ======= Interest income on impaired loans recorded on the cash basis $ 1 $ 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 March 31, 2004, total commitments to extend credit were approximately $136,846,000. Outstanding letters of credit were approximately $9,266,000 at March 31, 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 -6- interpretations in accounting for its equity compensation plans. No compensation expense related to these plans was recorded during the three-month periods ended March 31, 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: Three-month period Ended March 31, 2004 2003 ---- ---- Net income: As reported $2,516 $2,521 Less pro forma stock-based compensation expense determined under the fair value method, net of related tax effects (32) (30) ------- ------- Pro forma net income $2,484 $2,491 ======= ======= Basic net income per share: As reported $0.47 $0.47 Pro forma 0.46 0.46 Diluted earnings per share As reported $0.46 $0.46 Pro forma 0.45 0.46 The pro forma amounts are not representative of the effects on reported net income for future periods. 6) Shore Bancshares operates two primary businesses: Community Banking and Insurance Products and Services. The Community Banking business covered by this report provides services to consumers and small businesses on the Eastern Shore of Maryland through its twelve-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. A full range of insurance products and services are available to businesses and consumers in the Company's market areas. Products include property and casualty, life, marine, individual health and long-term care insurance. Pension and profit sharing plans and retirement plans for executives and employees are available to suit the needs of individual businesses. -7- Selected financial information by line of business for the three months ended March 31, 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 $ 6,421 $ - $ 1 - $ 6,422 Provision for credit losses 105 - - - 105 ------------------------------------------------------------------------------------- Net interest income after provision 6,316 - 1 - 6,317 Noninterest income 856 1,998 514 (490) 2,878 Noninterest expense 3,817 1,335 551 490 5,213 ------------------------------------------------------------------------------------- Income before taxes 3,355 663 (36) - 3,982 Income tax expense 1,224 256 (14) - 1,466 ------------------------------------------------------------------------------------ Net income $ 2,131 $ 407 $ (22) - $ 2,516 ------------------------------------------------------------------------------------- Intersegment revenue(expense) $ (440) $ (50) $ 490 - $ - Average assets $692,476 $7,492 $3,392 - $703,360 2003 Net Interest income $ 5,983 $ (11) $ - - $ 5,972 Provision for credit losses 90 - - - 90 ------------------------------------------------------------------------------------- Net interest income after provision 5,893 (11) - - 5,882 Noninterest income 1,108 1,831 - - 2,939 Noninterest expense 3,556 1,266 - - 4,822 ------------------------------------------------------------------------------------- Income before taxes 3,445 554 - - 3,999 Income tax expense 1,264 214 - - 1,478 ------------------------------------------------------------------------------------- Net income $ 2,181 $340 - - $ 2,521 ------------------------------------------------------------------------------------- Intersegment revenue(expense) $ 11 $ (11) $ - - $ - Average assets $643,785 $7,111 $ - - $651,452
(a) Amount included in Parent Company in 2004 relate to services provided to subsidiaries by the holding company and rental income. 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"), and, as of April 1, 2004, of The Felton Bank, a Delaware bank. 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 Small Cap 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 Report on Form 10-Q, Current Reports on From 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 March 31, 2004 Consolidated Financial Statements and Notes thereto included elsewhere in this report, and in conjunction with the December 31, 2003 audited Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. -8- 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 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. Recent Developments On April 1, 2004 the Company completed its merger with Midstate Bancorp, Inc. As a result of the merger, The Felton Bank became a wholly-owned subsidiary of Shore Bancshares. Felton Bank has a branch in each of Felton, Delaware and Milford, Delaware. In the aggregate, the Company paid cash in the amount of $2,953,710 and issued 82,786 shares of common stock to the stockholders of Midstate Bancorp, Inc. 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: (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 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 -9- 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 first quarter of 2004 was $2,516,000, compared to $2,521,000 for the first quarter of 2003. On a per share basis, diluted earnings were $0.46 for the first quarters of 2004 and 2003. Return on average assets was 1.43% for the first quarter of 2004, compared to 1.55% for the same period in 2003. Return on average stockholders' equity was 11.87% and 12.77% for the three months ended March 31, 2004 and 2003, respectively. RESULTS OF OPERATIONS Net Interest Income Net interest income totaled $6,422,000 for the first quarter of 2004, representing a $450,000 increase over the same period last year. Total interest income was $8,550,000 for the first quarter of 2004, representing a decrease of $78,000 when compared to the same period last year. Total interest expense for the quarter ended March 31, 2004 was $2,128,000, a decrease of $528,000 or 19.9% over last year. The Company's net interest margin remained stable during the three-month period ended March 31, 2004 when compared to the year ended December 31, 2003 and the same period last year. The yield on earning assets declined to 5.24%, compared to 5.70% for the three months ended March 31,2003, however an offsetting reduction in the rate paid for interest bearing liabilities resulted in a net interest margin of 3.95%. The rate paid for interest bearing liabilities declined 53 basis points to 1.59%, compared to 2.12% for the same period last year. On a tax equivalent basis, interest and fees on loans declined $91,000 for the three-month period ended March 31, 2004 when compared to March 31, 2003. The decline is the direct result of lower loan yields, despite continued growth in the portfolio. Compared to the first quarter of 2003, the overall yield on loans fell 58 basis points to 5.90% for the first quarter of 2004. The average balance of loans increased $38,179,000, totaling $485,430,000 for the three months ended March 31, 2004 when compared to the same period in 2003. The yield on investment securities declined to 3.77% for the period ended March 31, 2004 from 4.35% for the same period in 2003. Proceeds from called or matured bonds were reinvested in bonds with lower overall returns. The average balance of investment securities for the three-month periods ended March 31, 2004 and 2003 was $151,381,000 and $125,175,000, respectively. The overall rate earned on federal funds sold was 0.98% for the three months ended March 31, 2004, compared to 1.21% for the same period last year. Interest bearing deposits earned 0.88% for the first quarter of 2004, compared to 1.13% for the first quarter of 2003. Interest expense continued to decline as deposits shifted from higher yielding certificates of deposit into other lower yielding deposit and savings vehicles. The average balance of interest bearing deposits increased $31,623,000, with $32,270,000 of that increase occurring in Money Management account balances. The average balance of Certificates of Deposit $100,000 or more decreased $10,731,000, while other certificates of deposit balances decreased by $3,094,000. The average balance of NOW and SuperNOW deposits increased $5,616,000 and Regular savings balances increased $7,562,000. See the Analysis of Interest Rates and Interest Differentials below for further details. Loans comprised 73.6% and 72.9% of total average earning assets at March 31, 2004 and 2003, respectively. - 10- Analysis of Interest Rates and Interest Differentials. The following table presents the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid through the first three months of the year.
March 31, 2004 March 31, 2003 -------------- -------------- Average Income/ Yield Average Income/ Yield (Dollars in thousands) Balance Expense(1) Rate Balance Expense(1) Rate - ----------------------------------------------------------------------------------------------------------------------------- Earning Assets Investment securities $151,381 $1,427 3.77% $125,175 $1,362 4.35% Loans (2) (3) 485,430 7,157 5.90% 447,251 7,248 6.48% Interest bearing deposits 9,375 21 0.88% 18,761 53 1.13% Federal funds sold 13,743 34 0.98% 21,700 65 1.21% -------- ------- ----- ------- ------- ----- Total earning assets 659,929 8,639 5.24% 612,887 8,728 5.70% ------- ------- Noninterest earning assets 43,431 38,565 -------- ------- Total Assets 703,360 651,452 ======== ======= Interest bearing liabilities Interest bearing deposits 507,600 2,027 1.60% 475,977 2,546 2.14% Short term borrowing 22,445 38 0.67% 21,180 48 0.89% Long term debt 5,000 63 5.03% 5,000 62 4.97% -------- ------- ----- ------- ------- ----- Total interest bearing liabilities 535,045 2,128 1.59% 502,157 2,656 2.12% ------- ------- Noninterest bearing liabilities 83,518 70,307 Stockholders' equity 84,797 78,988 -------- ------- Total liabilities and stockholders' equity $703,360 $651,452 ======== ======== Net interest spread $6,511 3.65% $6,072 3.58% ======= ======= Net interest margin 3.95% 3.96%
(1) All amounts are reported on a tax equivalent basis computed using the statutory federal income tax rate exclusive of the alternative minimum tax rate of 35% and nondeductible interest expense. (2) Average loan balances include nonaccrual loans. (3) Interest income on loans includes amortized loan fees, net of costs, for each loan category and yield calculations are stated to include all. Non-interest Income Total non-interest income for the three-month period ended March 31, 2004 decreased $61,000 when compared to the same period in 2003. The decline is primarily attributable to gains on sales of securities that occurred in 2003. Excluding these gains, noninterest income increased $199,000 for the first quarter of 2004 when compared to the same period last year. The increase is primarily the result of increased service charges on deposit accounts of $35,000, increased Insurance Agency commissions of $99,000 and other income associated with the Insurance Agency of $68,000. Non-interest Expense Total non-interest expense increased $391,000 for the three-month period ended March 31, 2004 from the comparable period in 2003. The increase is attributable to increases in salaries and benefits of $68,000, premises and equipment expense of $96,000, increased data processing costs of $69,000 and other operating expense increases of $158,000. During the first quarter of 2004, the Company moved its operations department and consolidated its accounting departments, which resulted in some duplicate costs for occupancy which are nonrecurring. Other operating expense increases relate to increased advertising costs and costs associated with new products and services, as well as a general increase in overhead resulting from growth of the Company. Income Taxes The effective tax rates for the three-month periods ended March 31, 2004 and 2003 were 36.8% and 37.0%, respectively. Management is not aware of any significant changes in applicable tax law or to the Company's tax structure that are likely to materially impact the Company's effective tax rate. Analysis of Financial Condition Loans Loans, net of unearned income, totaled $492,796,000 at March 31, 2004, an increase of $17,841,000 or 3.8% since December 31, 2003. The increase is primarily attributable to an increase in loans secured by real estate. On average, loans net of unearned income, increased $38,179,000 or 8.5%, totaling $485,430,000 for the three-month period ended March 31, 2004, compared to $447,251,000 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 balance of the allowance 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" above for an overview of the underlying methodology Management employs on a -11- 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 provisions for credit losses for the three-month periods ended March 31, 2004 and 2003 were $105,000 and $90,000, respectively. The Company had net charge-offs of $225,000 for the first quarter of 2004, compared to net charge-offs of $61,000 for the same period last year. An increase in nonperforming loans and loan delinquencies was the primary reason for the increase in the provision for loan losses for the quarter ended March 31, 2004 when compared to the same period last year. Nonaccrual loans increased $436,000 since December 31, 2003, totaling $1,438,000 as of March 31, 2004. The increase relates to the addition of several real estate secured loans for which inherent losses have been determined at March 31, 2004. The allowance for credit losses as a percentage of average loans declined as a result of continued loan growth and a decline in the balance of the allowance as of March 31, 2004 when compared to March 31, 2003. The majority of this growth has been in real estate secured loans, which present lower overall risk to the Company and, therefore, require a smaller allowance. Expressed as a percentage of average loans, the allowances totaled .81% and .93% as of March 31, 2004 and 2003, respectively. 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 March 31, 2004. The following table presents a summary of the activity in the allowance for credit losses: Three Months Ended March 31, (Dollars in thousands) 2004 2003 - ------------------------------------------------------------------------------- Allowance balance - beginning of period $4,060 $ 4,117 Charge-offs: Commercial and other 271 2 Real estate 0 45 Consumer 14 46 ------ -------- Totals 285 93 ------ -------- Recoveries: Commercial 9 1 Real estate 19 7 Consumer 32 24 ------ -------- Totals 60 32 ------ -------- Net charge-offs: 225 61 Provision for credit losses 105 90 ------ -------- Allowance balance - end of period $3,940 $ 4,146 ====== ======== Average loans outstanding during period $485,430 $447,251 ======== ======== Net charge-offs (annualized) as a percentage of average loans outstanding during period .19% .05% ====== ======== Allowance for credit losses at period end as a percentage of average loans .81% 93% ====== ======== Because the Company's loans are predominately real estate secured, weaknesses in the local real estate market may have an adverse effect on collateral values. The Company does not have any concentrations of loans in any particular industry, nor does it engage in foreign lending activities Nonperforming Assets The following table summarizes past due and nonperforming assets of the Company (in thousands): March 31, December 31, Nonperforming Assets: 2004 2003 ------------ ------------ Nonaccrual loans 1,438 1,002 Other real estate owned 60 - --------- -------- Total nonperforming assets 1,498 1,002 Past due loans 1,047 1,128 --------- -------- Total nonperforming and past due loans $2,545 $2,130 ========= ======== -12- Investment Securities Investment securities declined $22,858,000 during the first quarter of 2004 when compared to December 31, 2003. The overall yield on investment securities also declined as a result of the reinvestment of the proceeds from maturing and called bonds in securities with much lower yields. The average balance of investment securities was $151,381,000 for the first quarter of 2004, compared to $125,175,000 for the same period in 2003. The tax equivalent yields on investment securities were 3.77% and 4.35% for the three months ended March 31, 2004 and 2003, respectively. Deposits Total deposits at March 31, 2004 were $589,182,000, compared to $592,409,000 at December 31, 2003. Certificates of deposit of $100,000 or more increased $17,069,000 during the three-month period ended March 31, 2004 when compared to December 31, 2003. The change was primarily a result of increased balances of a municipal depositor. Other time and savings accounts declined $8,068,000 during the three-month period ended March 31, 2004 when compared to December 31, 2003. Borrowed Funds Short-term borrowings at March 31, 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 $5,000,000 at March 31, 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 its correspondent banks. The Banks 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 $85,585,000 at March 31, 2004, a 2.5% increase over December 31, 2003. Accumulated other comprehensive income, which consists solely of net unrealized gains on investment securities available for sale, increased $327,000 during the three-month period ended March 31, 2004, resulting in an accumulated other comprehensive gain of $637,000 at March 31, 2004. 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 March 31, 2004 for the Company with the minimum requirements is presented below. Minimum Actual Requirements ------ ------------ Tier 1 risk-based capital 15.21% 4.00% Total risk-based capital 16.01% 8.00% Leverage ratio 11.08% 4.00% -13- Item 3. Quantitative and Qualitative Disclosures about Market Risk. The Company's principal market risk exposure is to interest rates. The Company utilizes a simulation model to quantify the effect 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 March 31, 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 15.19% 5.62% (7.86)% (15.54)% + 25% - % Change in Fair Value of Capital 5.29% 3.36% (6.33)% (10.35)% + 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 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. An evaluation of the effectiveness of these disclosure controls as of March 31, 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 first 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 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). -14- 10.2 Form of Employment Agreement with Daniel T. Cannon (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). 10.3 Form of Employment Agreement between Avon Dixon Agency, LLC and Kevin P. LaTulip (incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 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 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 January 15, 2004, the Company filed a Current Report on Form 8-K in which it announced in Item 5 that it had amended its definitive merger agreement with Midstate Bancorp, Inc. On February 19, 2004, the Company filed a Current Report on Form 8-K in which it furnished under Item 12 the results of operations for the year ended December 31, 2003. 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: May 7, 2004 By: /s/ W. Moorhead Vermilye -------------------------------------------- W. Moorhead Vermilye President and Chief Executive Officer Date: May 7, 2004 By: /s/ Susan E. Leaverton ----------------------------------------- Susan E. Leaverton, CPA Treasurer and Principal Accounting Officer -15- EXHIBIT INDEX Exhibit No. Description 3.1 Shore Bancshares, Inc. Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 on Form 8-K filed by Shore Bancshares, Inc. on December 14, 2000). 3.2 Shore Bancshares, Inc. Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 on Form 8-K filed by Shore Bancshares, Inc. on December 14, 2000). 10.1 Form of Employment Agreement with W. Moorhead Vermilye (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). 10.2 Form of Employment Agreement with Daniel T. Cannon (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). 10.3 Form of Employment Agreement between Avon Dixon Agency, LLC and Kevin P. LaTulip (incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10K for the year ended December 31, 2002). 10.4 Form of 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)). EX-31 2 cor2558ex31_1.txt CERTIFICATION 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: May 7, 2004 By: /s/ W. Moorhead Vermilye ----------------------------------------- W. Moorhead Vermilye President and Chief Executive Officer EX-31 3 cor2558ex31_2.txt CERTIFICATIONS EXHIBIT 31.2 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: May 7, 2004 By: /s/ Susan E. Leaverton --------------------------------------- Susan E. Leaverton, CPA Treasurer and Principal Accounting Officer EX-32 4 cor2558ex32_1.txt CERTIFICATE 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 March 31, 2004 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: May 7, 2004 /s/ W. Moorhead Vermilye ------------------------------------ W. Moorhead Vermilye President/Chief Executive Officer Date May 7, 2004 /s/ Susan E. Leaverton ------------------------------------ Susan E. Leaverton Treasurer/Principal Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----