In short, 2002 was a terrific year! Community development investments exceeded $207 million in 2002, and conservation lending reached a new high of $56 million. At the same time, net income soared to $6.7 million, more than twice our previous earnings record.

While achieving these impressive results, we also refined our strategic focus and began implementing significant changes that will further increase earnings and our community development and conservation impact. The groundwork is laid for even more impressive results in future years.


2002 PERFORMANCE

As a "triple bottom line" company, ShoreBank evaluates its performance not only on earnings, but also on our investments to revitalize priority communities and create a healthier environment.

Community Development Bottom Line
ShoreBank is committed to concentrating its financial and information services in our priority communities to create lasting economic change.

Our internal standard is to invest at least two times our average capital each year in designated priority communities. In 2002, we exceeded this goal by investing $207 million in priority communities, 2.40 times consolidated average capital. Community development loans represented 66 percent of total loan originations.

More than half of the community development investment made in 2002 was loans for the purchase and renovation of residential real estate. Our 30-year experience has shown that redeveloping real estate - as long as rents and property values remain affordable - is key to strengthening communities and building wealth for current residents.

Although the weak economy made business lending difficult, ShoreBank invested $50 million in community development loans to small businesses during the year. In addition, we loaned $21 million to faith-based and other nonprofit organizations who created community centers, redeveloped properties, or provided educational, advocacy, or social services.

Our development impact is not limited to the United States. ShoreBank Advisory Services continues to provide unique and highly effective international consulting services, working in 17 countries during 2002. In partnership with local financial institutions, it applies the knowledge developed within ShoreBank to help create successful small business lending programs in emerging economies. In 2002, ShoreBank Advisory Services' local partners issued loans totaling $60.5 million to new and expanding businesses, allowing people in these fragile economies to support their families and create jobs for others.

More information is available in the Mission Performance Report.

Conservation Bottom Line
ShoreBank believes that over the long term, community prosperity is closely linked to environmental well-being, no matter where a community is located.

In the Pacific Northwest, where historically the economy was based on the logging and fishing industries, ShoreBank is creating new economic opportunities that also protect the environment. For example, our Pacific companies focus on organic farming, environmentally-responsible fishing, non-timber forest products, redeveloping contaminated sites and financing "green" buildings (structures designed to minimize energy consumption and maximize use of recycled materials).

In our urban Midwest locations, ShoreBank places greater emphasis on renovating existing structures - most of which are near public transportation routes - to preserve them for long-term use (rather than allowing them to become rubble in landfills), and to reduce their energy consumption. We also finance the redevelopment of contaminated sites - a critical need in our urban locations - as well as "green" buildings and "green" companies.

In 2002, conservation lending increased by 33 percent over 2001, and represented 18 percent of total loan originations. In the future, ShoreBank's conservation impact should increase as we further integrate conservation into our advantaged businesses of real estate, faith-based and small business lending.

More information is available in the Mission Performance Report.

Financial Bottom Line
ShoreBank's lending is heavily weighted towards financing borrowers who buy and rehab real estate. The very low interest rates during 2002 kept the real estate market strong, which significantly contributed to our outstanding financial performance.

We are very pleased that the Chicago/Detroit bank - by far the largest organization in the ShoreBank constellation of companies - performed better than peer banks, operating at a 56.76 percent efficiency ratio and earning $13.6 million during the year, which is a 16.84 percent Return on Equity.

The Cleveland bank also generated significantly higher earnings than planned during its third year of profitable operations. ShoreBank Pacific, the last of the three startup banks, began posting positive earnings in the third quarter.

ShoreBank's consolidated earnings equate to a 7.8 percent Return on Equity, a marked improvement over past years, but still short of our 11 percent goal. Now that the startup banks are operating profitably and we are shifting to a lower-risk approach to real estate development, ShoreBank is in a much stronger position to reach this goal.

More detailed information is available in the Financial Overview.


FUTURE DIRECTIONS

During 2002 we began implementing changes to significantly increase our effectiveness and impact. We will be focusing our resources more closely on business lines that unite the triple bottom line of profitability, community development and conservation, and will be integrating activities more strategically among the companies to multiply the impact of our work.

Key to our ongoing strategy is the commitment to remain a leader in developing innovative approaches to creating economic opportunity and environmental sustainability. Current examples of innovation include:

• MetroEdge, a business of ShoreBank Advisory Services, provides cutting edge analytical techniques and specialized data for retailers and financial service providers considering investments in urban areas.
  
  
• Retail Financial Services Initiative, a National Community Investment Fund collaboration of 12 financial institutions staffed by ShoreBank Advisory Services, is expanding access to financial services and wealth-building opportunities for lower-income households, many of whom do not use banks.
  
  
• Individual Development Accounts (matched savings accounts) has been a successful pilot project managed by ShoreBank Neighborhood Institute, the Chicago nonprofit. Based upon this success, the nonprofit will soon be providing financial fluency classes and the matched savings accounts to members of the Chicago/Detroit bank's faith-based customers.
  
  
• Expanding contractors' capacity to grow their businesses is one of several strategies being implemented by ShoreBank Enterprise in Cleveland.
  
  
• Increasing sales and profit margins for people who harvest natural resources in sustainable ways, such as fishing and non-timber forest products, is a major emphasis at ShoreBank Enterprise Pacific.
  
  
• Developing products and markets for wood waste - previously believed to have little value - is being coordinated in Michigan's Upper Peninsula by Northern Initiatives, the nonprofit created through a partnership between ShoreBank and Northern Michigan University.
  
  
  THANK YOU
  
  We know that ShoreBank's success depends on our investors, customers and employees. At a local level, ShoreBank's employees wisely invest depositors' and investors' money in projects undertaken by customers who have the vision and skills to change their world by expanding businesses, rehabbing buildings and making sustainable choices.
  
  We thank all of you, and we look forward to continuing to work together to change the world in even more significant ways!
  
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