SHORE BANCSHARES INC - Quarter Report: 2006 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________________________
FORM
10-Q
(X) |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|
EXCHANGE
ACT OF 1934
|
For
the
Quarterly Period Ended June 30, 2006
OR
( ) |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|
EXCHANGE
ACT OF 1934
|
For
the
transition period from ________ to ________
Commission
file number 0-22345
SHORE
BANCSHARES, INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
52-1974638
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
Identification
No.)
|
18
East Dover Street, Easton, Maryland
|
21601
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(410)
822-1400
Registrant’s
Telephone Number, Including Area Code
N/A
Former
name, former address and former fiscal year, if changed since last
report.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter periods 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer |_ |
|
Accelerated
filer |X|
|
Non-accelerated
filer |_|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).Yes |_| No |X|
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: 8,376,393 shares of common stock
as of
July 31, 2006.
INDEX
Page
|
|
Part
I. Financial Information
|
2
|
Item
1. Financial Statements
|
2
|
Condensed
Consolidated Balance Sheets -
|
|
June
30, 2006 (unaudited) and December 31, 2005
|
2
|
Condensed
Consolidated Statements of Income -
|
|
For
the three- and six-month periods ended June 30, 2006 and 2005
(unaudited)
|
3
|
Condensed
Consolidated Statements of Changes in Stockholders’ Equity
-
|
|
For
the six months ended June30, 2006 and 2005 (unaudited)
|
4
|
Condensed
Consolidated Statements of Cash Flows -
|
|
For
the six months ended June 30, 2006 and 2005 (unaudited)
|
5
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
6
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
11
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
16
|
Item
4. Controls and Procedures
|
16
|
Part
II. Other Information
|
17
|
Item
1A. Risk Factors
|
17
|
Item
4. Submission of Matters to Vote of Security Holders
|
17
|
Item
6. Exhibits
|
18
|
Signatures
|
19
|
Exhibit
Index and Exhibits
|
20
|
1
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements.
SHORE
BANCSHARES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars
in Thousands)
June
30,
|
December
31,
|
||||||
ASSETS:
|
2006
|
2005
|
|||||
|
(unaudited)
|
||||||
Cash
and due from banks
|
$
|
16,061
|
$
|
28,990
|
|||
Interest
bearing deposits with other banks
|
12,543
|
13,068
|
|||||
Federal
funds sold
|
29,385
|
25,401
|
|||||
Investment
securities:
|
|||||||
Held-to-maturity,
at amortized cost (fair value of, $14,096 and
|
|||||||
$14,826,
respectively)
|
14,359
|
14,911
|
|||||
Available
for sale, at fair value
|
103,440
|
106,160
|
|||||
Loans,
less allowance for credit losses ($5,562,
|
|||||||
$5,236,
respectively)
|
670,210
|
622,227
|
|||||
Insurance
premiums receivable
|
504
|
1,089
|
|||||
Premises
and equipment, net
|
15,946
|
15,187
|
|||||
Accrued
interest receivable on loans and investment securities
|
4,270
|
3,897
|
|||||
Investment
in unconsolidated subsidiary
|
909
|
909
|
|||||
Goodwill
|
11,939
|
11,939
|
|||||
Other
intangible assets
|
1,737
|
1,906
|
|||||
Deferred
income taxes
|
2,286
|
1,991
|
|||||
Other
real estate owned
|
46
|
302
|
|||||
Other
assets
|
3,950
|
3,661
|
|||||
TOTAL
ASSETS
|
$
|
887,585
|
$
|
851,638
|
|||
LIABILITIES:
|
|||||||
Deposits:
|
|||||||
Noninterest
bearing demand
|
$
|
112,659
|
$
|
113,244
|
|||
NOW
and Super NOW
|
98,052
|
111,799
|
|||||
Certificates
of deposit $100,000 or more
|
129,496
|
106,541
|
|||||
Other
time and savings
|
375,355
|
373,374
|
|||||
Total
Deposits
|
715,562
|
704,958
|
|||||
Accrued
interest payable
|
1,478
|
1,214
|
|||||
Short
term borrowings
|
35,426
|
35,848
|
|||||
Long
term debt
|
25,000
|
4,000
|
|||||
Other
liabilities
|
3,888
|
4,170
|
|||||
TOTAL
LIABILITIES
|
781,354
|
750,190
|
|||||
STOCKHOLDERS’
EQUITY:
|
|||||||
Common
stock, par value $.01; authorized 35,000,000 shares;
|
|||||||
issued
and outstanding:
|
|||||||
June
30,
2006
8,367,974
|
|||||||
December
31, 2005
5,556,985
|
84
|
55
|
|||||
Additional
paid in capital
|
29,423
|
29,014
|
|||||
Retained
earnings
|
78,540
|
73,642
|
|||||
Accumulated
other comprehensive loss
|
(1,816
|
)
|
(1,263
|
)
|
|||
TOTAL
STOCKHOLDERS’ EQUITY
|
106,231
|
101,448
|
|||||
TOTAL
LIABILITIES & STOCKHOLDERS’ EQUITY
|
$
|
887,585
|
$
|
851,638
|
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)
Three
months ended June 30,
|
Six
months ended June 30,
|
||||||||||||
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
||||
INTEREST
INCOME
|
|||||||||||||
Loans,
including fees
|
$
|
12,481
|
$
|
10,195
|
$
|
23,936
|
$
|
19,794
|
|||||
Interest
and dividends on investment securities:
|
|||||||||||||
Taxable
|
1,045
|
939
|
2,065
|
1,809
|
|||||||||
Tax-exempt
|
135
|
144
|
278
|
293
|
|||||||||
Other
interest income
|
282
|
212
|
729
|
401
|
|||||||||
Total
interest income
|
13,943
|
11,490
|
27,008
|
22,297
|
|||||||||
INTEREST
EXPENSE
|
|||||||||||||
Certificates
of deposit, $100,000 or more
|
1,215
|
787
|
2,295
|
1,512
|
|||||||||
Other
deposits
|
2,427
|
1,792
|
4,665
|
3,446
|
|||||||||
Other
interest
|
392
|
181
|
725
|
332
|
|||||||||
Total
interest expense
|
4,034
|
2,760
|
7,685
|
5,290
|
|||||||||
NET
INTEREST INCOME
|
9,909
|
8,730
|
19,323
|
17,007
|
|||||||||
PROVISION
FOR CREDIT LOSSES
|
240
|
180
|
551
|
360
|
|||||||||
NET
INTEREST INCOME AFTER PROVISION FOR
|
|||||||||||||
CREDIT
LOSSES
|
9,669
|
8,550
|
18,772
|
16,647
|
|||||||||
NONINTEREST
INCOME
|
|||||||||||||
Service
charges on deposit accounts
|
779
|
727
|
1,523
|
1,289
|
|||||||||
Gain
on sale of securities
|
-
|
-
|
-
|
58
|
|||||||||
Insurance
agency commissions
|
1,661
|
1,704
|
3,992
|
3,788
|
|||||||||
Other
noninterest income
|
879
|
607
|
1,510
|
1,065
|
|||||||||
Total
noninterest income
|
3,319
|
3,038
|
7,025
|
6,200
|
|||||||||
NONINTEREST
EXPENSE
|
|||||||||||||
Salaries
and employee benefits
|
4,395
|
3,736
|
8,863
|
7,715
|
|||||||||
Expenses
of premises and equipment
|
708
|
637
|
1,440
|
1,292
|
|||||||||
Other
noninterest expense
|
1,944
|
1,706
|
3,835
|
3,365
|
|||||||||
|
|||||||||||||
Total
noninterest expense
|
7,047
|
6,079
|
14,138
|
12,372
|
|||||||||
INCOME
BEFORE TAXES ON INCOME
|
5,941
|
5,509
|
11,659
|
10,475
|
|||||||||
Federal
and state income tax expense
|
2,190
|
2,008
|
4,357
|
3,868
|
|||||||||
NET
INCOME
|
$
|
3,751
|
$
|
3,501
|
$
|
7,302
|
$
|
6,607
|
|||||
Basic
earnings per common share
|
$
|
.45
|
$
|
.42
|
$
|
.87
|
$
|
.80
|
|||||
Diluted
earnings per common share
|
$
|
.45
|
$
|
.42
|
$
|
.87
|
$
|
.79
|
|||||
Dividends
declared per common share
|
$
|
.15
|
$
|
.13
|
$
|
.29
|
$
|
.25
|
See
accompanying notes to Condensed Consolidated Financial Statements.
3
SHORE
BANCSHARES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
For
the
Six Month Periods Ended June 30, 2006 and 2005
(Dollars
in thousands, except per share amounts)
|
|
|
|
|
Accumulated
|
|
|
|
||||||||
|
|
|
Additional
|
|
|
other
|
|
Total
|
|
|||||||
|
|
Common
|
|
Paid
in
|
|
Retained
|
|
Comprehensive
|
|
Stockholders’
|
|
|||||
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Loss
|
|
Equity
|
||||||
Balances,
January 1, 2006
|
$ | 55 |
$
|
29,014
|
$
|
73,642
|
$
|
(1,263
|
)
|
$
|
101,448
|
|||||
Comprehensive
income:
|
||||||||||||||||
Net
income
|
-
|
-
|
7,302
|
-
|
7,302
|
|||||||||||
Other
comprehensive income, net of tax:
|
||||||||||||||||
Unrealized
loss on available for sale
|
||||||||||||||||
securities,
net of reclassification
|
||||||||||||||||
adjustment
of $0
|
-
|
-
|
-
|
(553
|
)
|
(553
|
)
|
|||||||||
Total
comprehensive income
|
|
6,749
|
||||||||||||||
Shares
issued
|
1
|
413
|
-
|
-
|
414
|
|||||||||||
Stock-based
compensation expense
|
-
|
24
|
-
|
-
|
24
|
|||||||||||
Stock
dividend paid
|
28
|
(28
|
)
|
(9
|
)
|
-
|
(9
|
)
|
||||||||
|
||||||||||||||||
Cash
dividends paid $0.29 per share
|
-
|
-
|
(2,395
|
)
|
-
|
(2,395
|
)
|
|||||||||
Balances,
June 30, 2006
|
$
|
84
|
$
|
29,423
|
$
|
78,540
|
$
|
(1,816
|
)
|
$
|
106,231
|
|||||
Balances,
January 1, 2005
|
$
|
55 |
$
|
28,017
|
$
|
65,182
|
$
|
(278
|
)
|
$ |
92,976
|
|||||
Comprehensive
income:
|
||||||||||||||||
Net
income
|
-
|
-
|
6,607
|
-
|
6,607
|
|||||||||||
Other
comprehensive income, net of tax:
|
||||||||||||||||
Unrealized
loss on available for sale
|
||||||||||||||||
securities,
net of reclassification
|
||||||||||||||||
adjustment
of $56
|
-
|
-
|
-
|
(228
|
)
|
(228
|
)
|
|||||||||
Total
comprehensive income
|
|
6,379
|
||||||||||||||
|
||||||||||||||||
Shares
issued
|
-
|
672
|
-
|
-
|
672
|
|||||||||||
|
||||||||||||||||
Cash
dividends paid $0.25 per share
|
-
|
-
|
(2,099
|
)
|
-
|
(2,099
|
)
|
|||||||||
Balances,
June 30, 2005
|
$ | 55 |
$
|
28,689
|
$
|
69,690
|
$
|
(506
|
)
|
$
|
97,928
|
See
accompanying notes to Condensed Consolidated Financial Statements.
4
SHORE
BANCSHARES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars
in thousands)
For
the Six Months Ended June 30,
|
|||||||
2006
|
2005
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
Net
Income
|
$
|
7,302
|
$
|
6,607
|
|||
Adjustments
to reconcile net income to net cash provided by
|
|||||||
operating
activities:
|
|||||||
Depreciation
and amortization
|
712
|
729
|
|||||
Stock
based compensation expense
|
24
|
-
|
|||||
Discount
accretion on debt securities
|
(47
|
)
|
(54
|
)
|
|||
Provision
for credit losses
|
551
|
360
|
|||||
Gain
on sale of securities
|
-
|
(58
|
)
|
||||
Gain
on sale of premise and equipment
|
4
|
-
|
|||||
Equity
in earnings of unconsolidated subsidiary
|
-
|
(40
|
)
|
||||
Net
changes in:
|
|||||||
Insurance
premiums receivable
|
586
|
(467
|
)
|
||||
Accrued
interest receivable
|
(373
|
)
|
(324
|
)
|
|||
Other
assets
|
(215
|
)
|
(200
|
)
|
|||
Accrued
interest payable
|
265
|
203
|
|||||
Other
liabilities
|
(282
|
)
|
449
|
||||
Net
cash provided by operating activities
|
8,527
|
7,205
|
|||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
Proceeds
from maturities and principal payments of securities
|
|||||||
available
for sale
|
7,632
|
10,270
|
|||||
Proceeds
from sale of investment securities available for sale
|
52
|
2,010
|
|||||
Purchase
of securities available for sale
|
(5,852
|
)
|
(15,028
|
)
|
|||
Proceeds
from maturities and principal payments of securities
|
|||||||
held
to maturity
|
743
|
778
|
|||||
Purchase
of securities held to maturity
|
(203
|
)
|
-
|
||||
Net
increase in loans
|
(48,533
|
)
|
(20,567
|
)
|
|||
Purchase
of premises and equipment
|
(1,283
|
)
|
(1,705
|
)
|
|||
Proceeds
from sale of other real estate owned
|
255
|
-
|
|||||
Deferred
earn out payment, net of stock issued
|
-
|
(2,400
|
)
|
||||
Net
cash used in investing activities
|
(47,189
|
)
|
(26,642
|
)
|
|||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
Net
(decrease) increase in demand, NOW, money market and
|
|||||||
savings
deposits
|
(24,743
|
)
|
8,004
|
||||
Net
increase in certificates of deposit
|
35,347
|
16,737
|
|||||
Net
(decrease) increase in short term borrowings
|
(422
|
)
|
1,651
|
||||
Net
increase in long-term borrowings
|
21,000
|
-
|
|||||
Proceeds
from issuance of common stock
|
414
|
273
|
|||||
Dividends
paid
|
(2,404
|
)
|
(2,099
|
)
|
|||
Net
cash provided by financing activities
|
29,192
|
24,566
|
|||||
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(9,470
|
)
|
5,129
|
||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
67,459
|
43,551
|
|||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
57,989
|
$
|
48,680
|
See
accompanying notes to Condensed Consolidated Financial Statements
5
Shore
Bancshares, Inc.
Notes
to
Condensed Consolidated Financial Statements
For
the
Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
Note
1
- Basis of Presentation
The
consolidated financial statements include the accounts of Shore Bancshares,
Inc.
(the “Company”) and its subsidiaries with all significant intercompany
transactions eliminated. The
consolidated financial statements conform to accounting principles generally
accepted in the United States of America and to prevailing practices within
the
banking industry. The accompanying interim financial statements are unaudited;
however, in the opinion of management all adjustments necessary to present
fairly the financial position at June 30, 2006, the results of operations for
the three- and six-month periods ended June 30, 2006 and 2005, and cash flows
for the six-month periods ended June 30, 2006 and 2005, have been included.
All
such adjustments are of a normal recurring nature. The amounts as of December
31, 2005 were derived from audited financial statements. The results of
operations for the three- and six-month periods ended June 30, 2006 are not
necessarily indicative of the results to be expected for any other interim
period or 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, 2005.
Note
2
- Earnings Per Share
Year
to
date basic earnings per share is derived by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period. The diluted earnings per share calculation is derived by
dividing
net income by the weighted average number of shares outstanding during the
period, adjusted for the dilutive effect of outstanding options. On June 5,
2006
the Company paid a 50% stock dividend to stockholders of record as of May 22,
2006. All share data and per share amounts have been adjusted to give
retroactive effect to that dividend. Information relating to the calculation
of
earnings per share is summarized as follows:
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
||||||||||||
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
||||
(in
thousands, except per share data)
|
|||||||||||||
Net
Income
|
$
|
3,751
|
$
|
3,501
|
$
|
7,302
|
$
|
6,607
|
|||||
Weighted
Average Shares Outstanding - Basic
|
8,367
|
8,296
|
8,356
|
8,288
|
|||||||||
Dilutive
securities
|
26
|
53
|
34
|
56
|
|||||||||
Weighted
Average Shares Outstanding - Diluted
|
8,393
|
8,349
|
8,390
|
8,344
|
|||||||||
Earnings
per common share - Basic
|
$
|
0.45
|
$
|
0.42
|
$
|
0.87
|
$
|
0.80
|
|||||
Earnings
per common share - Diluted
|
$
|
0.45
|
$
|
0.42
|
$
|
0.87
|
$
|
0.79
|
There
were no antidilutive stock options excluded from the calculation of earnings
per
share for the three- and six-month periods ended June 30, 2006 and
2005.
Note
3
- Significant Accounting Policy
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.
6
Information
with respect to impaired loans and the related valuation allowance is shown
below:
June
30,
|
|
December
31,
|
|
||||
(Dollars
in thousands)
|
|
2006
|
|
2005
|
|||
Impaired
loans with valuation allowance
|
$
|
734
|
$
|
604
|
|||
Impaired
loans with no valuation allowance
|
-
|
242
|
|||||
Total
impaired loans
|
$
|
734
|
$
|
846
|
|||
Allowance
for credit losses applicable to impaired loans
|
$
|
448
|
$
|
555
|
|||
Allowance
for credit losses applicable to other than impaired loans
|
5,114
|
4,681
|
|||||
Total
allowance for credit losses
|
$
|
5,562
|
$
|
5,236
|
|||
Interest
income on impaired loans recorded on the cash basis
|
$
|
-
|
$
|
-
|
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.
Note
4
- Commitments
In
the
normal course of business, to meet the financial needs of its customers, the
Company’s bank subsidiaries are parties to financial instruments with
off-balance sheet risk. These financial instruments include commitments to
extend credit and standby letters of credit. At June 30, 2006, total commitments
to extend credit were approximately $195,728,000. Outstanding letters of credit
were approximately $20,207,000 at June 30, 2006.
Note
5
- Stock-Based Compensation
At
June
30, 2006, the Company had four equity compensation plans: (i) the Shore
Bancshares, Inc. 1998 Stock Option Plan; (ii) the Talbot Bancshares, Inc.
Employee Stock Option Plan; (iii) the Shore Bancshares, Inc. Employee Stock
Purchase Plan (“ESPP”); and (vi) the Shore Bancshares, Inc. 2006 Stock and
Incentive Compensation Plan. The first three plans are described in detail
in
Note 13 to the audited financial statements contained in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2005. The fourth plan,
which
contemplates the grant of stock options, stock appreciation rights, restricted
stock, restricted stock units, and performance units, is described in detail
in
the Company’s 2006 definitive proxy statement. No awards have been granted under
the fourth plan. Stock options granted to date are generally time-based, vesting
20% on each anniversary of the grant date over five years and expiring 10 years
from the grant date. ESPP awards allow employees to purchase shares of common
stock at 85% of the fair market value on the date of grant. ESPP grants are
100%
vested at date of grant and have a 27-month exercise period.
On
January 1, 2006, the Company implemented Statement of Financial Accounting
Standards 123(R), “Share-Based Payments” (“SFAS No. 123R”) which replaced SFAS
No. 123 and supercedes Opinion No. 25 and the related implementation guidance.
SFAS No. 123R addresses accounting for equity-based compensation arrangements,
including employee stock options. The Company adopted the “modified prospective
method” where stock-based compensation expense is recorded beginning on the
adoption date and prior periods are not restated. Under this method,
compensation expense is recognized using the fair-value based method for all
new
awards granted after January 1, 2006. Additionally, compensation expense for
unvested stock options that are outstanding at January 1, 2006 is recognized
over the requisite period based on the fair value of those options as previously
calculated at the grant date under the pro-forma disclosures of SFAS 123. The
fair value of each grant is estimated using the Black-Scholes option pricing
model.
During
the three- and six-month periods ended June 30, 2006, the Company recognized
pre-tax stock-based compensation expense of $12,000 and $24,000, respectively,
as a result of adopting SFAS 123R. Such expense includes compensation expense
for stock-based compensation awards granted prior to, but not yet vested as
of,
January 1, 2006, based on the grant-date fair value estimated in accordance
with
the original provisions of SFAS 123. Stock-based compensation for all stock
based compensation awards granted subsequent to January 1, 2006, was based
on
the grant-date fair value estimated in accordance with the provisions of SFAS
123R. The Company recognized compensation expense for stock option awards on
a
straight-line basis over the requisite service period of the award. Basic and
diluted net income per share for the three and six months ended June 30, 2006,
were not affected as a result of adopting SFAS 123R.
7
Prior
to
adoption of SFAS 123R, the Company applied SFAS 123, amended by SFAS 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure”, which
allowed companies to apply existing accounting rules under APB 25. In general,
as the exercise price of options granted under these plans was equal to the
market price of the underlying common stock on the grant date, no stock-based
compensation expense was recognized in our net income from periods prior to
the
adoption of SFAS 123R. As required by SFAS 123 and 148 prior to the adoption
of
SFAS 123R, the Company provided pro forma net income and pro forma net income
per common share disclosures for stock based awards as if the fair-value method
defined in SFAS 123 had been applied.
SFAS
123R
requires the Company to present pro forma information for the comparative period
to the adoption as if the Company had accounted for all employee stock options
and ESPP awards under the fair-value method of the original SFAS 123. The
following table illustrates the effect on net income after tax and net income
per common share as if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based compensation during the three- and
six-month periods ended June 30, 2005 (in thousands, except per share
amounts).
Three-month
period
|
|
|
Six-month
period
|
|
|||
|
|
|
ended
June 30,
|
|
|
ended
June 30,
|
|
|
|
|
2005
|
|
|
2005
|
|
Net
income:
|
|||||||
As
reported
|
$
|
3,501
|
$
|
6,607
|
|||
Less
pro forma stock-based compensation
|
|||||||
expense
determined under the fair value
|
|||||||
method,
net of related tax effects
|
(7
|
)
|
(36
|
)
|
|||
Pro
forma net income
|
$
|
3,494
|
$
|
6,571
|
|||
Basic
net income per share:
|
|||||||
As
reported
|
$
|
.42
|
$
|
.80
|
|||
Pro
forma
|
.42
|
.79
|
|||||
Diluted
earnings per share
|
|||||||
As
reported
|
$
|
.42
|
$
|
.79
|
|||
Pro
forma
|
.42
|
.79
|
The
Company granted options pursuant to its ESPP on January 31, 2006. The fair
value
of these options was estimated using the Black-Scholes valuation model using
the
following weighted average assumptions:
2006
|
|
Dividend
yield
|
2.40%
|
Expected
volatility
|
23.57%
|
Risk
free interest
|
4.53%
|
Expected
lives (in years)
|
2.25
|
The
risk-free interest rate is based on the Federal Reserve Bank’s constant
maturities daily interest rate in effect at the time of the ESPP grant date.
For
valuation of the ESPP awards, the Company used the risk free interest rate
on
the date of grant. The expected life of the options represents the period of
time that the Company expects the awards will be outstanding based on historical
experience with similar awards. The computation of expected volatility for
the
ESPP awards is based on historical volatility of the underlying securities.
The
expected dividend yield is calculated by taking the total expected annual
dividend payout divided by the average stock price. Stock-based compensation
expense recognized in the consolidated statement of operation in the first
quarter of 2006 reflects forfeitures as they occur.
8
The
following is a summary of changes in shares under option for all plans for
the
six-month period ended June 30, 2006. Pursuant to the anti-dilution provisions
of the Company’s equity compensation plans, all amounts in the following table
have been adjusted to give effect to the 50% stock dividend that was paid on
June 5, 2006 to stockholders of record as of May 22, 2006.
|
|
|
Weighted
|
|
|
Aggregate
|
|
|||
|
|
|
Number
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
of
Shares
|
|
|
Exercise
Price
|
|
|
Value
|
|
Outstanding
at beginning of year
|
77,364
|
$
|
16.03
|
|||||||
Granted
|
11,972
|
18.47
|
||||||||
Exercised
|
(33,112
|
)
|
6.71
|
|||||||
Expired/Cancelled
|
(703
|
)
|
13.31
|
|||||||
Outstanding
at end of period
|
55,521
|
$
|
14.71
|
$
|
689,806
|
|||||
Exercisable
at the end of period
|
49,934
|
$
|
14.88
|
$
|
611,812
|
|||||
Weighted
average fair value of options
|
||||||||||
granted
during the year
|
$
|
5.91
|
The
following summarizes information about options outstanding at June 30,
2006:
Options
Outstanding and Exercisable
|
||||||||||||
Options
Outstanding
|
Weighted
Average
|
|||||||||||
|
|
|
Remaining
|
|||||||||
Exercise
Price
|
Number
|
Number
|
Contract
Life
|
|||||||||
$
|
5.85
|
6,802
|
6,802
|
.43
|
||||||||
21.33
|
6,000
|
6,000
|
2.55
|
|||||||||
14.00
|
5,055
|
5,055
|
3.55
|
|||||||||
13.17
|
20,317
|
14,730
|
5.92
|
|||||||||
16.65
|
5,515
|
5,515
|
.18
|
|||||||||
18.47
|
11,832
|
11,832
|
1.83
|
|||||||||
|
55,521
|
49,934
|
|
The
total
intrinsic value of stock options exercised during the six-month periods ended
June 30, 2006 and 2005 was approximately $537,000 and $243,000, respectively.
Cash received upon exercise of options during the six month periods ended June
30, 2006 and 2005 was approximately $222,000 and $165,000, respectively.
Note
6
- Segment Reporting
The
Company operates two primary businesses: Community Banking and Insurance
Products and Services. Through the Community Banking business, the Company
provides services to consumers and small businesses on the Eastern Shore of
Maryland and Delaware through its 17-branch network. Community banking
activities include small business services, retail brokerage, and consumer
banking products and services. Loan products available to consumers include
mortgage, home equity, automobile, marine, and installment loans, credit cards
and other secured and unsecured personal lines of credit. Small business lending
includes commercial mortgages, real estate development loans, equipment and
operating loans, as well as secured and unsecured lines of credit, credit cards,
accounts receivable financing arrangements, and merchant card services.
Through
the Insurance Products and Services business, the Company provides a full range
of insurance products and services to businesses and consumers in the Company’s
market areas. Products include property and casualty, life, marine, individual
health and long-term care insurance. Pension and profit sharing plans and
retirement plans for executives and employees are available to suit the needs
of
individual businesses.
9
Selected
financial information by line of business for the three months ended June 30
is
included in the following table:
Community
|
Insurance
products
|
Parent
|
|
Intersegment
|
|
Consolidated
|
|
|||||||||
(In
thousands)
|
|
|
banking
|
|
|
and
services
|
|
|
Company(a)
|
|
|
Transactions
|
|
|
Total
|
|
2006
|
||||||||||||||||
Net
Interest income
|
$
|
19,321
|
$
|
-
|
$
|
2
|
$
|
-
|
$
|
19,323
|
||||||
Provision
for credit losses
|
551
|
-
|
-
|
-
|
551
|
|||||||||||
Net
interest income after provision
|
18,770
|
-
|
2
|
-
|
18,772
|
|||||||||||
Noninterest
income
|
2,993
|
4,104
|
2,102
|
(2,174
|
)
|
7,025
|
||||||||||
Noninterest
expense
|
11,096
|
3,062
|
2,154
|
(2,174
|
)
|
14,138
|
||||||||||
Income
before taxes
|
10,667
|
1,042
|
(50
|
)
|
-
|
11,659
|
||||||||||
Income
tax expense
|
3,949
|
427
|
(19
|
)
|
-
|
4,357
|
||||||||||
Net
income
|
$
|
6,718
|
$
|
615
|
$
|
(31
|
)
|
$
|
-
|
$
|
7,302
|
|||||
Intersegment
revenue(expense)
|
$
|
(1,872
|
)
|
$
|
(113
|
)
|
$
|
1,985
|
$
|
-
|
$
|
-
|
||||
Average
assets
|
$
|
843,765
|
$
|
10,240
|
$
|
3,709
|
$
|
-
|
$
|
857,714
|
||||||
2005
|
||||||||||||||||
Net
Interest income
|
$
|
17,005
|
$
|
-
|
$
|
2
|
$
|
-
|
$
|
17,007
|
||||||
Provision
for credit losses
|
360
|
-
|
-
|
-
|
360
|
|||||||||||
Net
interest income after provision
|
16,645
|
-
|
2
|
-
|
16,647
|
|||||||||||
Noninterest
income
|
2,359
|
3,908
|
1,376
|
(1,443
|
)
|
6,200
|
||||||||||
Noninterest
expense
|
9,361
|
3,002
|
1,452
|
(1,443
|
)
|
12,372
|
||||||||||
Income
before taxes
|
9,643
|
906
|
(74
|
)
|
-
|
10,475
|
||||||||||
Income
tax expense
|
3,539
|
358
|
(29
|
)
|
-
|
3,868
|
||||||||||
Net
income
|
$
|
6,104
|
$
|
548
|
$
|
(45
|
)
|
$
|
-
|
$
|
6,607
|
|||||
Intersegment
revenue(expense)
|
$
|
(1,221
|
)
|
$
|
(86
|
)
|
$
|
1,307
|
$
|
-
|
$
|
-
|
||||
Average
assets
|
$
|
792,963
|
$
|
8,892
|
$
|
3,471
|
$
|
-
|
$
|
805,326
|
(a)
Amount included in Parent Company relates to services provided to subsidiaries
by the Company and rental income.
Note
7
- New Accounting Pronouncements
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
155, "Accounting for Certain Hybrid Financial Instruments", an amendment of
SFAS
No. 133 and SFAS No. 140. This statement permits fair value re-measurement
for
any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation. It establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation. In addition, SFAS 155 clarifies
which interest-only strips and principal-only strips are not subject to the
requirements of Statement 133. It also clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives. SFAS 155 amends
Statement 140 to eliminate the prohibition on a qualifying special- purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
Statement is effective for all financial instruments acquired or issued after
the beginning of an entity´s first fiscal year that begins after September 15,
2006. The Company is evaluating the impact, if any, of the adoption of this
Statement on its financial results.
In
March
2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
Assets". This Statement amends SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", and requires
that all separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable and permits the entities to
elect either fair value measurement with changes in fair value reflected in
earnings or the amortization and impairment requirements of SFAS No. 140 for
subsequent measurement. The subsequent measurement of separately recognized
servicing assets and servicing liabilities at fair value eliminates the
necessity for entities that manage the risks inherent in servicing assets and
servicing liabilities with derivatives to qualify for hedge accounting treatment
and eliminates the characterization of declines in fair value as impairments
or
direct write-downs. This Statement is effective as of the beginning of an
entity´s first fiscal year that begins after September 15, 2006. The Company is
evaluating the impact, if any, of the adoption of this Statement on its
financial results.
10
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Unless
the context clearly suggests otherwise, references to “the Company”, “we”,
“our”, and “us” in this report are to Shore Bancshares, Inc. and its
consolidated subsidiaries.
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 our
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 we
operate, inflation, fluctuations in interest rates, legislation, and
governmental regulation. These risks and uncertainties are described in more
detail in the Annual Report of Shore Bancshares, Inc. on Form 10-K for the
year
ended December 31, 2005, as updated in Item 1A of Part II of this report. Actual
results may differ materially from such forward-looking statements, and we
assume no obligation to update forward-looking statements at any time except
as
required by law.
Introduction
The
following discussion and analysis is intended as a review of significant factors
affecting the financial condition and results of operations of Shore Bancshares,
Inc. and its consolidated subsidiaries for the periods indicated. This
discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and related notes presented in
this
report, as well as the audited consolidated financial statements and related
notes included in the Annual Report of Shore Bancshares, Inc. on Form 10-K
for
the year ended December 31, 2005.
Shore
Bancshares, Inc. is the largest independent financial holding company located
on
the Eastern Shore of Maryland. It is the parent company of The Talbot Bank
of
Easton, Maryland located in Easton, Maryland (“Talbot Bank”), The Centreville
National Bank of Maryland located in Centreville, Maryland (“Centreville
National Bank”) and The Felton Bank, located in Felton, Delaware (“Felton Bank”)
(collectively, the “Banks”). The Banks operate 17 full service branches in Kent,
Queen Anne’s, Talbot, Caroline and Dorchester Counties in Maryland and Kent
County, Delaware. The Company offers a full range of insurance products and
services to its customers through The Avon-Dixon Agency, LLC, Elliott Wilson
Insurance, LLC, and Mubell Finance, LLC (collectively, the “Insurance Agency”)
and investment advisory services through Wye Financial Services, LLC, all of
which are wholly-owned subsidiaries of Shore Bancshares, Inc. The shares of
common stock of Shore Bancshares, Inc. are listed on the NASDAQ Capital Market
under the symbol “SHBI”.
The
Company maintains an Internet site at www.shbi.net
on which
it makes available free of charge its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the
foregoing as soon as reasonably practicable after these reports are
electronically filed with, or furnished to, the Securities and Exchange
Commission.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). The financial
information contained within the financial statements is, to a significant
extent, financial information contained that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either
when
earning of income, recognizing an expense, recovering an asset or relieving
a
liability.
We
believe that our most critical accounting policy relates to the allowance for
credit losses. The allowance for credit losses is an estimate of the losses
that
may be sustained in the loan portfolio. The allowance is based on two basic
principles of accounting: (i) SFAS No. 5, Accounting for Contingencies, which
requires that losses be accrued when they are probable of occurring and
estimable, and (ii) SFAS No. 114, Accounting by Creditors for Impairment of
a
Loan, which requires that losses be accrued based on the differences between
the
loan balance and the value of collateral, present value of future cash flows
or
values that are observable in the secondary market. Management uses many
factors, including economic conditions and trends, the value and adequacy of
collateral, the volume and mix of the loan portfolio, and our internal loan
processes in determining the inherent loss that may be present in our 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
11
factors
is a continuing exercise, based on Management’s continuing assessment of the
totality of all factors, including, but not limited to, as delinquencies, loss
history, trends in volume and terms of loans, effects of changes in lending
policy, the experience and depth of Management, national and local economic
trends, concentrations of credit, quality of loan review system and the effect
of external factors such as competition and regulatory requirements, and their
impact on the portfolio, and allowance factors may change from period to period,
resulting in an increase or decrease in the amount of the provision or
allowance, based upon the same volume and classification of loans. Changes
in
allowance factors will have a direct impact on the amount of the provision,
and
a corresponding effect on net income. Errors in Management’s perception and
assessment of these factors and their impact on the portfolio could result
in
the allowance not being adequate to cover losses in the portfolio, and may
result in additional provisions or charge-offs.
Three
basic components comprise our allowance for credit losses: (i) a specific
allowance; (ii) a formula allowance; and (iii) a nonspecific allowance. Each
component is determined based on estimates that can and do change when the
actual events occur. The specific allowance is used to individually allocate
an
allowance to loans identified as impaired. An impaired loan may show
deficiencies in the borrower’s overall financial condition, payment history,
support available from financial guarantors and/or the fair market value of
collateral. When a loan is identified as impaired, a specific allowance is
established based on the Company’s assessment of the loss that may be associated
with the individual loan. The formula allowance is used to estimate the loss
on
internally risk rated loans, exclusive of those identified as impaired. Loans
identified as special mention, substandard, doubtful and loss, as well as
impaired, are segregated from performing loans. Remaining loans are then grouped
by type (commercial, commercial real estate, construction, home equity or
consumer). Each loan type is assigned an allowance factor based on Management’s
estimate of the risk, complexity and size of individual loans within a
particular category. Classified loans are assigned higher allowance factors
than
non-rated loans due to Management’s concerns regarding collectibility or
Management’s knowledge of particular elements regarding the borrower. Allowance
factors grow with the worsening of the internal risk rating. The nonspecific
formula is used to estimate the loss of non-classified loans stemming from
more
global factors such as delinquencies, loss history, trends in volume and terms
of loans, effects of changes in lending policy, the experience and depth of
Management, national and local economic trends, concentrations of credit,
quality of loan review system and the effect of external factors such as
competition and regulatory requirements. The nonspecific allowance captures
losses whose impact on the portfolio have occurred but have yet to be recognized
in either the formula or specific allowance.
OVERVIEW
Net
income for the second quarter of 2006 was $3,751,000, or diluted earnings per
share of $.45, compared to $3,501,000, or diluted earnings per share of $.42,
for the first quarter of 2005. Annualized return on average assets was 1.75%
for
the second quarter of 2006, compared to 1.73% for the same period in 2005.
Annualized return on average stockholders’ equity was 14.57% for the second
quarter of June 30, 2006, compared to 14.86% for the same period in 2005.
Net
income for the six-months ended June 30, 2006 was $7,302,000, or diluted
earnings per share of $.87, compared to $6,607,000, or diluted earnings per
share of $.79, for the six months ended June 30, 2005. Annualized return on
average assets was 1.70% for the six months ended June 30, 2006, compared to
1.64% for the same period in 2005. Annualized return on average stockholder’s
equity was 13.93% for the six months ended June 30, 2006, compared to 13.88%
for
the same period in 2005.
RESULTS
OF OPERATIONS
Net
Interest Income
Net
interest income for the three- and six-month periods ended June 30, 2006 was
$9,909,000 and $19,323,000, respectively, an increase of $1,179,000 or 13.5%
and
$2,316,000 and 13.6%, respectively, when compared to the same periods last
year.
These increases are attributable to increases in earning assets, mostly loans,
and increased yields on earning assets. Total interest income increased by
$2,453,000 and $4,711,000 for the three- and six-month periods ended June 30,
2006, respectively, when compared to the same periods last year.
Our
net
interest margin was 5.00% for the three months ended June 30, 2006, compared
to
4.69% for the same period in 2005. Our net interest margin for the six months
ended June 30, 2006 was 4.90%, compared to 4.60% for the same period in 2005.
We
continued to increase the volume of our earning assets, which averaged
$796,380,000 for the six months ended June 30, 2006, compared to $746,990,000
for the same period in 2005. Average loans totaled $643,335,000 for the
six-month period ended June 30, 2006, a $45,045,000 increase over the same
period in 2005. The yield on earning assets increased 81 basis points from
6.02%
to 6.83% for the six-month period ended June 30, 2006 when compared to the
same
period in 2005.
The
overall yield on loans for the six months ended June 30, 2006 was 7.45%,
compared to 6.62% for the same period in 2005. The yield on investment
securities for the first six months of 2006 increased to 4.09% from 3.77% for
the same period in 2005, and the average balance of investment securities for
the six-months ended June 30, 2006 increased by $2,083,000 to $121,538,000
when
compared to the same period in 2005.
12
Total
interest expense increased $1,274,000 and $2,395,000 for the three and six-month
periods ended June 30, 2006, respectively, when compared to the same periods
last year. An increase in the rate paid for interest bearing deposits is the
primary reason for the increased expense. Rates paid for certificates of deposit
and short-term borrowings increased as a result of higher short-term interest
rates and increased competition for deposits. The average balance of interest
bearing deposits increased by $24,812,000 for the six months ended June 30,
2006
when compared to the same period in 2005. The overall rate paid for interest
bearing deposits increased 60 basis points to 2.34% as a result of higher rates
paid for all deposits. For the six months ended June 30, 2006, the average
balance of certificates of deposits, including those $100,000 or more, increased
by $19,161,000 when compared to the same period last year, and the average
rate
paid for those certificates of deposit increased 84 basis points to 4.01%.
Other
certificates of deposit increased $17,883,000 when compared to the same period
last year, and the average rate paid for those deposits increased 72 basis
points to 3.66%. Comparing the first six months of 2006 to the same period
in
2005, interest bearing demand deposits decreased by approximately $3,154,000
and
money management and savings deposits declined by $9,078,000.
Loans
comprised 80.8% and 80.1% of total average earning assets at June 30, 2006
and
2005, respectively.
Analysis
of Interest Rates and Interest Differentials.
The
following table presents the distribution of the average consolidated balance
sheets, interest income/expense, and annualized yields earned and rates paid
through June 30, 2006 and 2005:
June
30, 2006
|
June
30, 2005
|
||||||||||||||||||
Average
|
|
Income
|
|
Yield
|
|
Average
|
|
Income
|
|
Yield
|
|||||||||
(Dollars
in thousands)
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|||
Earning
Assets
|
|||||||||||||||||||
Investment
securities
|
$
|
121,538
|
$
|
2,488
|
4.09
|
%
|
$
|
119,455
|
$
|
2,253
|
3.77
|
%
|
|||||||
Loans
|
643,335
|
23,962
|
7.45
|
%
|
598,290
|
19,812
|
6.62
|
%
|
|||||||||||
Interest
bearing deposits
|
10,748
|
242
|
4.50
|
%
|
951
|
11
|
2.39
|
%
|
|||||||||||
Federal
funds sold
|
20,759
|
487
|
4.69
|
%
|
28,294
|
390
|
2.75
|
%
|
|||||||||||
Total
earning assets
|
796,380
|
27,179
|
6.83
|
%
|
746,990
|
22,466
|
6.02
|
%
|
|||||||||||
Noninterest
earning assets
|
61,334
|
|
58,336
|
||||||||||||||||
Total
Assets
|
$
|
857,714
|
$
|
805,326
|
|||||||||||||||
Interest
bearing liabilities
|
|||||||||||||||||||
Interest
bearing deposits
|
$
|
595,590
|
6,960
|
2.34
|
%
|
$
|
570,778
|
4,958
|
1.74
|
%
|
|||||||||
Short
term borrowing
|
30,417
|
502
|
3.30
|
%
|
24,416
|
207
|
1.70
|
%
|
|||||||||||
Long
term debt
|
10,684
|
223
|
4.18
|
%
|
5,000
|
125
|
5.00
|
%
|
|||||||||||
Total
interest bearing liabilities
|
636,691
|
7,685
|
2.41
|
%
|
600,194
|
5,290
|
1.76
|
%
|
|||||||||||
Noninterest
bearing liabilities
|
116,202
|
109,949
|
|||||||||||||||||
Stockholders’
equity
|
104,821
|
95,183
|
|||||||||||||||||
Total
liabilities and stockholders’ equity
|
$
|
857,714
|
$
|
805,326
|
|||||||||||||||
Net
interest spread
|
$
|
19,494
|
4.42
|
%
|
$
|
17,176
|
4.26
|
%
|
|||||||||||
Net
interest margin
|
4.90
|
%
|
4.60
|
%
|
(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.
Noninterest
Income
Noninterest
income for the three months ended June 30, 2006 increased by $281,000 to
$3,319,000 when compared to the same period in 2005. Increases in service
charges and other noninterest income all contributed to the growth. Noninterest
income for the six months ended June 30, 2006 totaled $7,025,000, an increase
of
$825,000 or 13.3% when compared to the same period in 2005. Approximately
$204,000 of this increase relates to an increase in insurance agency
commissions, with the balance primarily attributable to increases in income
from
nondeposit product sales and trust services of approximately $108,000, from
the
origination and sale of loans on the secondary market of approximately $45,000,
an increase in letter of credit fees of approximately $61,000, and gains on
life
insurance policies of $174,000 relating to a deferred compensation plan. We
recognized gains on sales of securities of $58,000 during the first three months
of 2005, but there were no gains or losses from sales of securities during
the
first six months of 2006.
13
Noninterest
Expense
Total
noninterest expense for the three and six months ended June 30, 2006 was
$7,047,000 and $14,138,000, respectively, which represents increases of $968,000
and $1,766,000, respectively, when compared to the same periods in 2005. The
increases are primarily attributable to increased salaries and benefits cost
of
$659,000 and $1,148,000 for the three and six-month periods ended June 30,
2006,
respectively, that resulted from higher incentive compensation cost and
increased staffing associated with Centreville National Bank’s trust operations
that began in the third quarter of 2005, as well as a new branch location and
expansion of the secondary market mortgage division during the second quarter
of
2006. For the three and six months ended June 30, 2006, occupancy expense
increased by $71,000 and $148,000, respectively, and other noninterest expense
increased by $238,000 and $470,000, respectively, when compared to the same
periods in 2005. These increases are primarily related to the growth of the
Company and costs associated with new and expanded product
offerings.
Income
Taxes
The
effective tax rate for the six months ended June 30, 2006 was 37.4%, compared
to
36.9% for the same period last year. Management believes that there have been
no
changes in tax laws or to our tax structure that are likely to have a future
material impact on our effective tax rate.
ANALYSIS
OF FINANCIAL CONDITION
Loans
Loans,
net of unearned income, totaled $670,210,000 at June 30, 2006, an increase
of
$47,983,000 since December 31, 2005. Average loans, net of unearned income,
increased by $45,045,000 or 7.5% when compared to the same period last year.
Allowance
for Credit Losses
We
have
established an allowance for credit losses, which is increased by provisions
charged against earnings and recoveries of previously charged-off debts. The
allowance is decreased by current period charge-off of uncollectible debts.
Management evaluates the adequacy of the allowance for credit losses on a
quarterly basis and adjusts the provision for credit losses based upon this
analysis. The evaluation of the adequacy of the allowance for credit losses
is
based on a risk rating system of individual loans, as well as on a collective
evaluation of smaller balance homogenous loans based on factors such as past
credit loss experience, local economic trends, nonperforming and problem loans,
and other factors which may impact collectibility. A loan is placed on
nonaccrual when it is specifically determined to be impaired and principal
and
interest is delinquent for 90 days or more. Please refer to the discussion
above
under the caption “Critical Accounting Policies” for an overview of the
underlying methodology Management employs on a quarterly basis to maintain
the
allowance.
The
provision for credit losses for the three and six-month periods ended June
30,
2006 was $240,000 and $551,000, respectively, compared to $180,000 and $360,000,
respectively, for the same periods in 2005. Despite a decline in nonaccrual
loans, Management did not significantly decrease the specific allowance
associated with those loans, based on its evaluation of each borrower’s ability
to repay and the value of the underlying loan collateral. The increased
provision is the result of increases in both the formula allowance and
nonspecific allowance components. Growth of the loan portfolio and Management’s
assessment of factors used in calculating the nonspecific allowance contributed
to the increased provision. We continue to maintain strong underwriting
guidelines, and Management believes that the local economy remains stable and
that collateral values have increased as a result of the strength of the local
real estate economy. Each of these factors has had a positive effect on the
quality of our loan portfolio. Our historical charge-off ratios are much lower
than those of similarly sized institutions according to the most recent FDIC
quarterly banking profile. Net charge-offs were $225,000 for the six-month
period ended June 30, 2006, compared to $192,000 for the same period last year.
Since December 31, 2005, nonaccrual loans have decreased by $112,000 to
$734,000. Loans past due 90 days and still accruing decreased by $389,000 since
December 31, 2005, totaling $429,000 at June 30, 2006. Our ratio of
nonperforming assets, including other real estate owned, remains low. The
allowance for credit losses as a percentage of average loans was .86% at June
30, 2006, compared to .81% at June 30, 2005. Based on Management’s quarterly
evaluation of the adequacy of the allowance for credit losses, it believes
that
the allowance for credit losses and the related provision are adequate at June
30, 2006.
14
The
following table presents a summary of the activity in the allowance for credit
losses:
Six
months Ended June 30,
|
|||||||
(Dollars
in thousands)
|
2006
|
2005
|
|||||
Allowance
balance - beginning of period
|
$
|
5,236
|
$
|
4,692
|
|||
Charge-offs:
|
|||||||
Commercial
and other
|
162
|
169
|
|||||
Real
estate
|
1
|
-
|
|||||
Consumer
|
144
|
59
|
|||||
Totals
|
307
|
228
|
|||||
Recoveries:
|
|||||||
Commercial
|
34
|
12
|
|||||
Real
estate
|
1
|
1
|
|||||
Consumer
|
47
|
23
|
|||||
Totals
|
82
|
36
|
|||||
Net
charge-offs
|
225
|
192
|
|||||
Provision
for credit losses
|
551
|
360
|
|||||
Allowance
balance-end of period
|
$
|
5,562
|
$
|
4,860
|
|||
Average
loans outstanding during period
|
$
|
643,335
|
$
|
598,290
|
|||
Net
charge-offs (annualized) as a percentage of
|
|||||||
average
loans outstanding during period
|
.07
|
%
|
.02
|
%
|
|||
Allowance
for credit losses at period end as a
|
|||||||
percentage
of average loans
|
.86
|
%
|
.81
|
%
|
Because
our loans are predominately secured by real estate, weaknesses in the local
real
estate market may have a material adverse effect on collateral values. We have
a
concentration of commercial real estate loans. Commercial real estate loans
at
June 30, 2006 were $352,363,000 or 52.1% of total loans, compared to
$317,542,000 or 50.6% of total loans at December 31, 2005. Construction and
land
development loans at June 30, 2006, were $136,785,000 or 20.2% of total
outstanding loans, compared to $134,380,000 or 21.4% of total loans at December
31, 2005. The Company does not engage in foreign lending activities.
Nonperforming
Assets
The
following table summarizes past due and nonperforming assets of the Company
(in
thousands):
June
30,
|
December
31,
|
||||||
Nonperforming
Assets:
|
2006
|
2005
|
|||||
Nonaccrual
loans
|
$
|
734
|
$
|
846
|
|||
Other
real estate owned
|
46
|
302
|
|||||
780
|
1,148
|
||||||
Past
due loans still accruing
|
429
|
818
|
|||||
Total
nonperforming and past due loans
|
$
|
1,209
|
$
|
1,966
|
Investment
Securities
Investment
securities decreased by $3,272,000 to $117,799,000 at June 30, 2006 when
compared to investments at December 31, 2005. The yields on bonds purchased
during the first six months of 2006 are much higher that the yields on bonds
that either matured or were called during this period. The average balance
of
investment securities was $121,534,000 for the six months ended June30, 2006,
compared to $119,455,000 for the same period in 2005. The tax equivalent yields
on investment securities were 4.09% and 3.77% for the six month periods ended
June 30, 2006 and 2005, respectively.
Deposits
Total
deposits at June 30, 2006 were $715,562,000, compared to $704,958,000 at
December 31, 2005. Certificates of deposit of $100,000 or more increased by
$22,955,000 during the first six months of 2006. Since December 31, 2005,
interest bearing and noninterest bearing demand deposits have declined by
$9,658,000 and other time and savings deposits have increased by $1,981,000.
Borrowed
Funds
Short-term
borrowings at June 30, 2006 and December 31, 2005 consisted of securities sold
under agreements to repurchase and short-term borrowing from the Federal Home
Loan Bank. We also had a convertible advance from the Federal Home Loan Bank
of
Atlanta in the amount of $5,000,000 at December 31, 2005 that matured and was
repaid in March 2006.
15
Long
Term Debt
At
June
30, 2006, we had advances from the Federal Home Loan Bank totaling $25,000,000.
Maturities of outstanding advances are as follows:
July
2007
|
$3,000,000
|
October
2007
|
4,000,000
|
November
2007
|
6,000,000
|
February
2008
|
5,000,000
|
June
2008
|
7,000,000
|
Liquidity
and Capital Resources
We
derive
liquidity through increased customer deposits, maturities in the investment
portfolio, loan repayments and income from earning assets. To the extent that
deposits are not adequate to fund customer loan demand, liquidity needs can
be
met in the short-term funds markets through arrangements with correspondent
banks. Talbot Bank and Centreville National Bank are also members of the Federal
Home Loan Bank of Atlanta to which they have pledged collateral sufficient
to
permit additional borrowing of up to approximately $61 million at June 30,
2006.
Management is not aware of any trends or demands, commitments, events or
uncertainties that are likely to materially affect our future ability to
maintain liquidity at satisfactory levels.
Total
stockholders’ equity was $106.2 million at June 30, 2006, an increase of 4.7%
since December 31, 2005. Accumulated other comprehensive loss, which consists
solely of net unrealized losses on investment securities available for sale,
increased by $553,000 during the first six months of 2006, resulting in
accumulated other comprehensive loss of $1,816,000 at June 30,
2006.
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 our capital ratios as of June 30, 2006 to the minimum regulatory
requirements is presented below:
|
Minimum
|
|
|
Actual
|
Requirements
|
Tier
1 risk-based capital
|
12.87%
|
4.00%
|
Total
risk-based capital
|
13.67%
|
8.00%
|
Leverage
ratio
|
11.18%
|
3.00%
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk.
Our
primary market risk is to interest rate fluctuation and Management has
procedures in place to evaluate and mitigate this risk. This risk and these
procedures are discussed in Item 7 of Part II of the Annual Report of Shore
Bancshares, Inc. on Form 10-K for the year ended December 31, 2005 under the
caption “Market Risk Management”. Management believes that there have been no
material changes in our market risks, the procedures used to evaluate and
mitigate these risks, or our actual and simulated sensitivity positions since
December 31, 2005.
Item
4. Controls and Procedures.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded,
processed, summarized and reported within the time periods specified in those
rules and forms, and that such information is accumulated and communicated
to
Management, including the Chief Executive Officer (“CEO”) and the Principal
Accounting Officer (“PAO”), as appropriate, to allow for timely decisions
regarding required disclosure. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures
may
deteriorate.
16
An
evaluation of the effectiveness of these disclosure controls as of June 30,
2006
was carried out under the supervision and with the participation of Management,
including the CEO and the PAO. Based on that evaluation, the Company’s
management, including the CEO and the PAO, has concluded that our disclosure
controls and procedures are effective.
During
the second quarter of 2006, there was no change in our internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1A. Risk Factors.
The
risks
and uncertainties to which our financial condition and operations are subject
are discussed in detail in Item 1A of Part I of the Annual Report of Shore
Bancshares, Inc. on Form 10-K for the year ended December 31, 2005. The
following discussion updates a risk factor that was contained in the Annual
Report on Form 10-K to reflect the recent issuance of proposed regulatory
guidance.
A
majority of our business is concentrated in Maryland and Delaware; a significant
amount of our business is concentrated in real estate
lending.
A
majority of our customers reside in Maryland and Delaware. Therefore, a decline
in local economic conditions may have a greater impact on our earnings and
capital than on the earnings and capital of larger financial institutions whose
customer bases are geographically diverse. Further, we make many real estate
secured loans, including construction and land development loans, all of which
are in greater demand when interest rates are low and economic conditions are
good. There can be no guarantee that good economic conditions or low interest
rates will continue to exist. Moreover, the market values of the real estate
securing our loans may deteriorate due to a number of unpredictable factors,
which could cause us to lose money in the event a borrower failed to repay
a
loan and we were forced to foreclose on the property. Additionally, the Board
of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation and the Office of the Comptroller of the Currency, along with the
other federal banking regulators, issued proposed guidance on January 13, 2006
entitled “Concentrations in Commercial Real Estate Lending, Sound Risk
Management Practices” directed at institutions that have particularly high
concentrations of commercial real estate loans within their lending portfolios.
This guidance suggests that institutions whose commercial real estate loans
exceed certain percentages of capital should implement heightened risk
management practices appropriate to their concentration risk and may be required
to maintain higher capital ratios than institutions with lower concentrations
in
commercial real estate lending. Based on our commercial real estate
concentration as of June 30, 2006, we would be subject to the heightened risk
management requirements of the guidance if it were currently in effect. The
comment period ended on April 13, 2006. Although we are working to implement
the
risk management practices required by the guidance, many of which are already
in
place, and will continue to evaluate our concentration and risk management
strategies, we cannot guarantee that any heightened risk management practices
we
implement will be effective to prevent losses in our commercial real estate
portfolio. In addition, we may be subject to additional regulatory requirements
and scrutiny, including, without limitation, increased capital requirements,
if
and when this proposed guidance becomes final. Management cannot predict the
extent to which this guidance, if it becomes final, will impact our operations
or capital requirements.
Other
than as discussed above, Management does not believe that any material changes
in our risk factors have occurred since December 31, 2005.
Item
4. Submission of Matters to Vote of Security Holders.
At
the
Annual Meeting of Stockholders held on April 26, 2006, the stockholders of
Shore
Bancshares, Inc. elected five individuals to serve as Class III Directors until
the 2009 Annual Meeting of Stockholders and approved the Shore Bancshares,
Inc.
2006 Stock and Incentive Compensation Plan. The Board of Directors submitted
these matters to a vote through the solicitation of proxies. The results of
the
votes were as follows:
|
For
|
Withheld
|
Abstain
|
Broker
Non-Votes
|
Election
of Directors:
|
||||
Lloyd
L. Beatty, Jr.
|
4,362,957
|
37,269
|
-
|
-
|
Paul
M. Bowman
|
4,385,977
|
14,249
|
-
|
-
|
W.
Edwin Kee, Jr.
|
4,385,577
|
14,649
|
-
|
-
|
Jerry
F. Pierson
|
4,385,977
|
14,249
|
-
|
-
|
W.
Mooorhead Vermilye
|
4,384,449
|
15,777
|
-
|
-
|
17
For
|
Against
|
Abstain
|
Broker
Non-Votes
|
|
Approval
of 2006 Stock and Incentive Compensation Plan
|
2,853,801
|
168,053
|
38,326
|
1,340,046
|
Item
6. Exhibits.
Exhibit
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference
to
Exhibit 3.1 of the Company’s Form 8-K filed on December 14,
2000).
|
|
Exhibit
3.2
|
Amended
and Restated By-Laws (incorporated by reference to Exhibit 3.2 of
the
Company’s Form 8-K filed on November 9, 2005).
|
|
Exhibit
10.1
|
Form
of Employment Agreement with W. Moorhead Vermilye (incorporated by
reference to Appendix XIII of Exhibit 2.1 of the Company’s Form 8-K filed
on July 31, 2000).
|
|
Exhibit
10.2
|
Form
of Employment Agreement with Daniel T. Cannon (incorporated by reference
to Appendix XIII of Exhibit 2.1 of the Company’s Form 8-K filed on July
31, 2000).
|
|
Exhibit
10.3
|
Form
of Employment Agreement with Thomas H. Evans, as amended on November
3,
2005 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K
filed on November 9, 2005).
|
|
Exhibit
10.4
|
Summary
of Compensation Arrangement for Lloyd L. Beatty, Jr. (incorporated
by
reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 1,
2006).
|
|
Exhibit
10.5
|
Summary
of Compensation Arrangement for William W. Duncan, Jr. (incorporated
by
reference to Exhibit 10.2 of the Company’s Form 8-K filed on August 1,
2006).
|
|
Exhibit
10.6
|
Separation
Agreement and General Release between The Avon-Dixon Agency, LLC
and
Steven Fulwood (incorporated by reference to exhibit 10.11 of the
Company’s Quarterly Report on Form 10-Q for the period ended March 31,
2005).
|
|
Exhibit
10.7
|
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).
|
|
Exhibit
10.8
|
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).
|
|
Exhibit
10.9
|
Talbot
Bank of Easton, Maryland Supplemental Deferred Compensation Plan
(incorporated by reference to Exhibit 10.7 of the Company’s Quarterly
Report on Form 10-Q for the period ended September 30,
2005).
|
|
Exhibit
10.10
|
Talbot
Bank of Easton, Maryland Supplemental Deferred Compensation Plan
Trust
Agreement ((incorporated by reference to Exhibit 10.7 of the Company’s
Quarterly Report on Form 10-Q for the period ended September 30,
2005).
|
|
Exhibit
10.11
|
1998
Employee Stock Purchase Plan, as amended (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).
|
|
Exhibit
10.12
|
1998
Stock Option Plan (incorporated by reference to Exhibit 10 of the
Company’s Registration Statement on Form S-8 filed with the SEC on
September 25, 1998 (Registration No.
333-64319)).
|
18
Exhibit
10.13
|
Talbot
Bancshares, Inc. Employee Stock Option Plan (incorporated by reference
to
Exhibit 10 of the Company’s Registration Statement on Form S-8 filed May
4, 2001 (Registration No. 333-60214)).
|
|
Exhibit
10.14
|
Shore
Bancshares, Inc. 2006 Stock and Incentive Compensation Plan (incorporated
by reference to Appendix A of the Company’s 2006 definitive proxy
statement filed on March 24, 2006).
|
|
Exhibit
10.15
|
Changes
to Director Compensation Arrangements (incorporated by reference
to
Exhibit 10.1 of the Company’s Form 8-K filed on February 6,
2006).
|
|
Exhibit
31.1
|
Certifications
of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act (filed
herewith).
|
|
Exhibit
31.2
|
Certifications
of the PAO pursuant to Section 302 of the Sarbanes-Oxley Act (filed
herewith).
|
|
Exhibit
32.1
|
Certification
of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act (furnished
herewith).
|
|
Exhibit
32.2
|
Certification
of the PAO pursuant to Section 906 of the Sarbanes-Oxley Act (furnished
herewith).
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Shore
Bancshares, Inc.
|
|
Date:
August 9, 2006
|
By:
/s/ W. Moorhead
Vermilye
|
W. Moorhead Vermilye
|
|
President
and Chief Executive Officer
|
|
Date:
August 9, 2006
|
By:
/s/ Susan E.
Leaverton
|
Susan E. Leaverton, CPA
|
|
Treasurer and Principal Accounting
Officer
|
19
EXHIBIT
INDEX
Exhibit
|
|
Number
|
Description
|
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference
to
Exhibit 3.1 of the Company’s Form 8-K filed on December 14,
2000).
|
3.2
|
Amended
and Restated By-Laws (incorporated by reference to Exhibit 3.2 of
the
Company’s Form 8-K filed on November 9, 2005).
|
10.1
|
Form
of Employment Agreement with W. Moorhead Vermilye (incorporated by
reference to Appendix XIII of Exhibit 2.1 of the Company’s Form 8-K filed
on July 31, 2000).
|
10.2
|
Form
of Employment Agreement with Daniel T. Cannon (incorporated by reference
to Appendix XIII of Exhibit 2.1 of the Company’s Form 8-K filed on July
31, 2000).
|
10.3
|
Form
of Employment Agreement with Thomas H. Evans, as amended on November
3,
2005 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K
filed on November 9, 2005).
|
10.4
|
Summary
of Compensation Arrangement for Lloyd L. Beatty, Jr. (incorporated
by
reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 1,
2006).
|
10.5
|
Summary
of Compensation Arrangement for William W. Duncan, Jr. (incorporated
by
reference to Exhibit 10.2 of the Company’s Form 8-K filed on August 1,
2006).
|
10.6
|
Separation
Agreement and General Release between The Avon-Dixon Agency, LLC
and
Steven Fulwood (incorporated by reference to exhibit 10.11 of the
Company’s Quarterly Report on Form 10-Q for the period ended March 31,
2005).
|
10.7
|
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).
|
10.8
|
Form
of Life Insurance Endorsement Method Split Dollar Plan Agreement
between
The Centreville National Bank of Maryland and Daniel T. Cannon
(incorporated by reference to Exhibit 10.5 of the Company's Quarterly
Report on Form 10-Q for the period ended June 30,
2003).
|
10.9
|
Talbot
Bank of Easton, Maryland Supplemental Deferred Compensation Plan
(incorporated by reference to Exhibit 10.7 of the Company’s Quarterly
Report on Form 10-Q for the period ended September 30,
2005).
|
10.10
|
Talbot
Bank of Easton, Maryland Supplemental Deferred Compensation Plan
Trust
Agreement ((incorporated by reference to Exhibit 10.7 of the Company’s
Quarterly Report on Form 10-Q for the period ended September 30,
2005).
|
10.11
|
1998
Employee Stock Purchase Plan, as amended (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).
|
10.12
|
1998
Stock Option Plan (incorporated by reference to Exhibit 10 of the
Company’s Registration Statement on Form S-8 filed with the SEC on
September 25, 1998 (Registration No. 333-64319)).
|
10.13
|
Talbot
Bancshares, Inc. Employee Stock Option Plan (incorporated by reference
to
Exhibit 10 of the Company’s Registration Statement on Form S-8 filed May
4, 2001 (Registration No. 333-60214)).
|
10.14
|
Shore
Bancshares, Inc. 2006 Stock and Incentive Compensation Plan (incorporated
by reference to Appendix A of the Company’s 2006 definitive proxy
statement filed on March 24, 2006).
|
10.15
|
Changes
to Director Compensation Arrangements (incorporated by reference
to
Exhibit 10.1 of the Company’s Form 8-K filed on February 6,
2006).
|
20
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
|
Certification
of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act (furnished
herewith).
|
32.2
|
Certification
of the PAO pursuant to Section 906 of the Sarbanes-Oxley Act (furnished
herewith).
|
21