Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SHBI > SEC Filings for SHBI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for SHORE BANCSHARES INC

Form 10-Q for SHORE BANCSHARES INC


9-Nov-2012

Quarterly Report


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 the remainder of 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 detail in the section of the periodic reports that Shore Bancshares, Inc. files with the Securities and Exchange Commission (the "SEC") entitled "Risk Factors" (see 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 Company's financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented elsewhere 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, 2011.

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") and CNB located in Centreville, Maryland (together with Talbot Bank, the "Banks"). Until January 1, 2011, the Company also served as the parent company to The Felton Bank located in Felton, Delaware. On January 1, 2011, The Felton Bank merged into CNB, with CNB as the surviving bank. The Banks operate 18 full service branches in Kent County, Queen Anne's County, Talbot County, Caroline County and Dorchester County in Maryland and Kent County, Delaware. The Company engages in the insurance business through three insurance producer firms, The Avon-Dixon Agency, LLC, Elliott Wilson Insurance, LLC and Jack Martin Associates, Inc.; a wholesale insurance company, TSGIA, Inc.; and two insurance premium finance companies, Mubell Finance, LLC and ESFS, Inc. (all of the foregoing are collectively referred to as the "Insurance Subsidiary"). Each of these entities is a wholly-owned subsidiary of Shore Bancshares, Inc. The Company engages in the mortgage brokerage business under the name "Wye Mortgage Group" through a minority series investment in an unrelated Delaware limited liability company.

The shares of common stock of Shore Bancshares, Inc. are listed on the NASDAQ Global Select Market under the symbol "SHBI".

Shore Bancshares, Inc. maintains an Internet site at www.shbi.com 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 SEC.

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 income, recognizing an expense, recovering an asset or relieving a liability.

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) Topic 450, "Contingencies", of the Financial Accounting Standards Board's Accounting Standards Codification ("ASC"), which requires that losses be accrued when they are probable of occurring and estimable; and (ii) ASC Topic 310, "Receivables", 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 to estimate the inherent loss that may be present in our loan portfolio, including economic conditions and trends, the value and adequacy of collateral, the volume and mix of the loan portfolio, and our internal loan processes. 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.

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 established against impaired loans (i.e., nonaccrual loans and troubled debt restructurings) based on our assessment of the losses that may be associated with the individual loans. The specific allowance remains until charge-offs are made. 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. The formula allowance is used to estimate the loss on internally risk-rated loans, exclusive of those identified as impaired. Loans are grouped by type (construction, residential real estate, commercial real estate, commercial 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. Loans identified as special mention, substandard, and doubtful are adversely rated. These loans are assigned higher allowance factors than favorably rated loans due to management's concerns regarding collectability or management's knowledge of particular elements regarding the borrower. As seen in Note 4, "Loans and Allowance for Credit Losses", in the Notes to Consolidated Financial Statements, special mention loans increased $26.7 million from the end of 2011 to the end of the third quarter of 2012. Approximately $6.6 million of these loans are expected to be upgraded by the end of 2012. The nonspecific allowance captures losses that have impacted the portfolio but have yet to be recognized in either the specific or formula allowance.

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 estimation of a borrower's prospects of repayment, and the establishment of the allowance factors in the formula allowance and unallocated allowance components of the allowance. The establishment of allowance factors is a continuing exercise, based on management's ongoing assessment of the totality of all factors, including, but not limited to, 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, the quality of the 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 on 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.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Goodwill and other intangible assets with indefinite lives are tested at least annually for impairment, usually during the third quarter, or on an interim basis if circumstances dictate. Intangible assets that have finite lives are amortized over their estimated useful lives and also are subject to impairment testing.

Impairment testing requires that the fair value of each of the Company's reporting units be compared to the carrying amount of its net assets, including goodwill. The Company's reporting units were identified based on an analysis of each of its individual operating segments. If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill or purchased intangibles to record an impairment loss.

During the third quarter of 2012, goodwill and other intangible assets were subjected to the annual assessment for impairment. As a result of the assessment, it was determined that there was no impairment at the Company's subsidiaries that have these intangible assets on their balance sheets. During the third quarter of 2011, when goodwill and other intangible assets were assessed for impairment, it was determined that goodwill and other intangible assets were impaired in our Insurance Products and Services segment, primarily relating to the Company's retail insurance business. The Company recorded goodwill impairment charges of $1.2 million and other intangible assets impairment charges of $120 thousand reflected in noninterest expense.

Fair Value

The Company measures certain financial assets and liabilities at fair value. Investment securities and interest rate caps are significant financial assets measured at fair value on a recurring basis. Impaired loans and other real estate owned are significant financial assets measured at fair value on a nonrecurring basis. See Note 8, "Fair Value Measurements", in the Notes to Consolidated Financial Statements for a further discussion of fair value.

OVERVIEW

The Company reported a net loss of $1.8 million for the third quarter of 2012, or diluted loss per common share of $(0.22), compared to net income of $94 thousand, or diluted income per common share of $0.01, for the third quarter of 2011. For the second quarter of 2012, the Company reported net income of $293 thousand, or diluted income per common share of $0.03. When comparing the third quarter of 2012 to the third quarter of 2011, the main reasons for the difference in results were an increase in the provision for credit losses of $2.6 million and a decline in net interest income of $1.4 million. When comparing the third quarter of 2012 to the second quarter of 2012, the primary reason for the difference in results was an increase in the provision for credit losses of $2.7 million. Annualized return on average assets was (0.61)% for the three months ended September 30, 2012, compared to 0.03% for the same period in 2011. Annualized return on average stockholders' equity was (6.07)% for the third quarter of 2012, compared to 0.31% for the third quarter of 2011. For the second quarter of 2012, annualized return on average assets was 0.10% and return on average equity was 0.99%.

For the first nine months of 2012, the Company reported a net loss of $4.6 million, or diluted loss per common share of $(0.54), compared to a net loss of $1.2 million, or diluted loss per common share of $(0.14), for the first nine months of 2011. When comparing the first nine months of 2012 to the first nine months of 2011, the principal factors driving the difference were an increase in the provision for credit losses of $2.7 million and a decline in net interest income of $3.0 million. Annualized return on average assets was (0.52)% for the nine months ended September 30, 2012, compared to (0.14)% for the same period in 2011. Annualized return on average stockholders' equity was (5.08)% for the first nine months of 2012, compared to (1.34)% for the first nine months of 2011.

RESULTS OF OPERATIONS

Net Interest Income

Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, tax-equivalent net interest income for the third quarter of 2012 was $8.8 million, compared to $10.2 million for the third quarter of 2011. The decrease was primarily due to lower yields earned on average earning assets and a decline in higher-yielding average loan balances. Net interest margin is tax-equivalent net interest income (annualized) divided by average earning assets. Our net interest margin was 3.15% for the third quarter of 2012 and 3.77% for the third quarter of 2011. Loan charge-offs continued to negatively impact our net interest income and net interest margin. For the second quarter of 2012, tax-equivalent net interest income was $9.1 million and the net interest margin was 3.36%.

On a tax-equivalent basis, interest income was $11.4 million for the third quarter of 2012, declining from the $12.9 million recorded for the third quarter of 2011. The decrease in interest income was due to a 69 basis point decline in yields earned on average earning assets (i.e., loans, investment securities, federal funds sold and interest-bearing deposits with other banks) that was partially offset by a 3.6% increase in average balances of earning assets. Changes in the balances and rates related to loans had the largest impact on interest income. For the third quarter of 2012, average loans decreased 7.0% and the yield earned on loans decreased from 5.49% to 5.23% when compared to the third quarter of 2011, which reduced interest income by $1.4 million. Loans comprised 72.9% of total average earning assets for the third quarter of 2012, compared to 81.2% for the third quarter of 2011. Taxable investment securities grew $25.8 million, or 23.5%, when comparing the third quarter of 2012 with the third quarter of 2011, although yields declined from 2.88% to 2.01%, which reduced interest income $110 thousand. The yields on taxable investment securities decreased because the reinvestment rates on investment securities purchased during 2012 were lower than the yields on the investment securities that matured during the period. Partially offsetting the decrease in interest income from loans and taxable investment securities was a $79.6 million increase in the average balance of interest-bearing deposits and a 5 basis point increase in rates earned on these assets, which increased interest income $50 thousand. The increase in the average balance of interest-bearing deposits reflected higher levels of excess cash to be invested. Tax-equivalent interest income decreased 2.6% when compared to the second quarter of 2012. Average earning assets increased 2.0% during the third quarter of 2012 when compared to the second quarter of 2012, while yields earned declined 25 basis points.

Interest expense decreased $82 thousand, or 3.0%, when comparing the third quarter of 2012 to the third quarter of 2011. The decrease in interest expense was due to a 7 basis point decline in rates paid on interest-bearing liabilities (i.e., deposits and borrowings) that was partially offset by a 3.4% increase in average balances of interest-bearing liabilities. Changes in the balances and rates related to time deposits (i.e., certificates of deposit $100,000 or more and other time deposits) had the largest impact on interest expense. For the three months ended September 30, 2012, the average balances of certificates of deposit $100,000 or more and other time deposits each increased over 1.0% when compared to the same period last year, while the average rates paid on these time deposits decreased 17 and 25 basis points, respectively, which reduced interest expense by $211 thousand. The decline in rates on time deposits reflected current market conditions. Partially offsetting the decrease in interest expense from time deposits was a 4.5% increase in the average balance of money market and savings deposits and a 16 basis point increase in rates paid on these deposits, which increased interest expense $142 thousand. Interest on money market and savings deposits included an adjustment to expense related to interest rate caps and the hedged deposits associated with them. This adjustment increased interest expense by $524 thousand for the third quarter of 2012 and $348 thousand for the third quarter of 2011. See Note 9, "Derivative Instruments and Hedging Activities", in the Notes to Consolidated Financial Statements for additional information. When comparing the third quarter of 2012 to the second quarter of 2012, interest expense stayed relatively unchanged with average balances of total interest-bearing liabilities increasing 1.9% and the interest rate paid on interest-bearing liabilities declining 3 basis points.

The following table presents the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the three months ended September 30, 2012 and 2011.

                                  For the Three Months Ended                      For the Three Months Ended
                                      September 30, 2012                              September 30, 2011
                            Average        Income(1)/        Yield/         Average        Income(1)/        Yield/
(Dollars in thousands)      Balance         Expense           Rate          Balance         Expense           Rate
Earning assets
Loans (2), (3)            $   808,244     $     10,631           5.23 %   $   869,221     $     12,033           5.49 %
Investment securities
Taxable                       135,257              685           2.01         109,498              795           2.88
Tax-exempt                      2,614               34           5.07           4,440               57           5.12
Federal funds sold             11,971                3           0.11          15,905                3           0.07
Interest-bearing
deposits                      150,170               79           0.21          70,572               29           0.16
Total earning assets        1,108,256           11,432           4.10 %     1,069,636           12,917           4.79 %
Cash and due from banks        20,158                                          20,414
Other assets                   69,921                                          69,394
Allowance for credit
losses                        (14,189 )                                       (16,856 )
Total assets              $ 1,184,146                                     $ 1,142,588

Interest-bearing
liabilities
Demand deposits           $   167,423               74           0.18 %   $   154,685               78           0.20 %
Money market and
savings deposits (4)          279,003              832           1.19         266,871              690           1.03
Certificates of deposit
$100,000 or more              238,624              875           1.46         235,362              965           1.63
Other time deposits           207,547              866           1.66         204,836              987           1.91
Interest-bearing
deposits                      892,597            2,647           1.18         861,754            2,720           1.25
Short-term borrowings          14,909               10           0.27          15,640               15           0.37
Long-term debt                    455                6           4.58             932               10           4.46
Total interest-bearing
liabilities                   907,961            2,663           1.17 %       878,326            2,745           1.24 %
Noninterest-bearing
deposits                      148,096                                         133,214
Other liabilities               8,768                                           9,721
Stockholders' equity          119,321                                         121,327
Total liabilities and
stockholders' equity      $ 1,184,146                                     $ 1,142,588

Net interest spread                       $      8,769           2.93 %                   $     10,172           3.55 %
Net interest margin                                              3.15 %                                          3.77 %

Tax-equivalent
adjustment
Loans                                     $         27                                    $         30
Investment securities                               12                                              19
Total                                     $         39                                    $         49

(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 34.0% for 2012 and 2011 exclusive of the alternative minimum tax rate and nondeductible interest expense.

(2) Average loan balances include nonaccrual loans.

(3) Interest income on loans includes amortized loan fees, net of costs, and all are included in the yield calculations.

(4) Interest on money market and savings deposits includes an adjustment to expense related to interest rate caps and the hedged deposits associated with them. This adjustment increased interest expense by $524 thousand for the third quarter of 2012 and $348 thousand for the third quarter of 2011.

Tax-equivalent net interest income for the nine months ended September 30, 2012 was $27.1 million, as seen in the table below. This was a decrease of 10.0% when compared to the same period last year. As with the quarterly results, the decrease was mainly due to lower yields earned on average earning assets and a decline in higher-yielding average loan balances. The net interest margin was 3.31% for the first nine months of 2012 and 3.79% for the first nine months of 2011.

On a tax-equivalent basis, interest income was $35.1 million for the first nine months of 2012, a decrease of 8.9% when compared to the first nine months of 2011. The decrease in interest income was due to a decline of 56 basis points in yields earned on average earning assets that was partially offset by an increase of 3.0% in average balances of earning assets. When comparing the nine-month period ended September 30, 2012 to the same period of last year, the 6.9% decrease in average loans and the 16 basis point decrease in yields earned on average loans was the primary reason for the decline in interest income. Loans comprised 74.8% and 82.8% of total average earning assets for the first nine months of 2012 and 2011, respectively.

Interest expense was $8.0 million for the nine months ended September 30, 2012, a decrease of 4.9% when compared to the same period last year. The decrease in interest expense was due to a decline of 10 basis points in rates paid on average interest-bearing liabilities that was partially offset by an increase of 2.8% in average balances of interest-bearing liabilities. For the nine months ended September 30, 2012, the 1.6% decrease in average time deposits and the 23 basis point decrease in rates paid on average time deposits were the primary reasons for the decline in interest expense when compared to the same period last year. Partially offsetting the decrease in interest expense from time deposits was higher interest expense relating to a 5.7% increase in the average balance of money market and savings deposits and a 19 basis point increase in rates paid on these deposits

The following table presents the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the nine months ended September 30, 2012 and 2011.

                                   For the Nine Months Ended                       For the Nine Months Ended
                                      September 30, 2012                              September 30, 2011
                            Average        Income(1)/        Yield/         Average        Income(1)/        Yield/
(Dollars in thousands)      Balance         Expense           Rate          Balance         Expense           Rate
Earning assets
Loans (2), (3)            $   819,088     $     32,588           5.31 %   $   879,509     $     36,008           5.47 %
Investment securities
Taxable                       131,863            2,149           2.18         105,939            2,234           2.82
Tax-exempt                      3,548              140           5.27           4,543              175           5.16
Federal funds sold             10,992                7           0.09          28,896               24           0.11
Interest-bearing
deposits                      128,756              188           0.19          43,959               47           0.14
Total earning assets        1,094,247           35,072           4.28 %     1,062,846           38,488           4.84 %
Cash and due from banks        19,920                                          19,356
Other assets                   69,514                                          67,588
Allowance for credit
losses                        (14,523 )                                       (16,826 )
Total assets              $ 1,169,158                                     $ 1,132,964

Interest-bearing
liabilities
Demand deposits           $   157,835              216           0.18 %   $   141,447              227           0.21 %
Money market and
savings deposits (4)          278,297            2,423           1.16         263,216            1,918           0.97
Certificates of deposit
$100,000 or more              240,595            2,626           1.46         246,362            3,073           1.67
Other time deposits           204,789            2,666           1.74         206,470            3,104           2.01
Interest-bearing
deposits                      881,516            7,931           1.20         857,495            8,322           1.30
Short-term borrowings          15,448               36           0.31          14,947               41           0.36
Long-term debt                    455               16           4.61             932               31           4.51
Total interest-bearing
liabilities                   897,419            7,983           1.19 %       873,374            8,394           1.29 %
Noninterest-bearing
deposits                      142,874                                         127,238
Other liabilities               8,949                                          10,696
Stockholders' equity          119,916                                         121,656
Total liabilities and
stockholders' equity      $ 1,169,158                                     $ 1,132,964

Net interest spread                       $     27,089           3.09 %                   $     30,094           3.55 %
Net interest margin                                              3.31 %                                          3.79 %

Tax-equivalent
adjustment
Loans                                     $         83                                    $        108
Investment securities                               48                                              59
Total                                     $        131                                    $        167

. . .

  Add SHBI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SHBI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.