U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
. FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
Shore Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-1974638
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
109 North Commerce Street
Centreville, Maryland 21617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code: (410) 758-1600
Securities to be registered under Section 12(b) of the Act:
None
Title of each class Name of Each Exchange on which
to be so registered each class is to be registered
None None
Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $0.01
(Title of Class)
<PAGE>
INDEX
DESCRIPTION PAGE NO.
ITEM 1. BUSINESS 1
ITEM 2. FINANCIAL INFORMATION 8
ITEM 3. PROPERTIES 22
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 22
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS 23
ITEM 6. EXECUTIVE COMPENSATION 24
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
ITEM 8. LEGAL PROCEEDINGS 27
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS 27
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES 28
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED 28
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS 30
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 31
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS 31
<PAGE>
ITEM 1
BUSINESS
General
Shore Bancshares, Inc. (the "Company"), a Maryland corporation
incorporated on March 15, 1996, became a registered bank holding company on July
1, 1996 under the Bank Holding Company Act of 1956, as amended. The Company
engages in its business through its sole subsidiary, The Centreville National
Bank of Maryland (the "Bank"), a national banking association. The Company
acquired the Bank through the merger of the Bank into an interim national
banking association formed as a Company subsidiary for the purpose of the
merger, pursuant to a Plan of Reorganization and Agreement to Merge (the "Plan")
proposed by Bank management and approved by the Bank's stockholders on April 16,
1996. Pursuant to the Plan, each outstanding share of Bank common stock was
exchanged for two shares of the Company's common stock. The Bank's charter was
not affected by the merger. Currently, the Company has issued and outstanding
1,007,424 shares of common stock, par value $0.01 per share ("Shares"), held by
763 holders of record on March 7, 1997.
The Company's and the Bank's main office is located at 109 North
Commerce Street, Centreville, Queen Anne's County, Maryland. The Bank has three
full service branch offices located in Centreville, Stevensville and Hillsboro,
Maryland.
As of December 31, 1996, the Bank had assets of approximately $146.9
million, net loans of approximately $87.4 million, and deposits of $124.2
million. Stockholders' equity has continued to grow over the last five years and
has increased $5.2 million (31.1%) over the preceding five years. For additional
financial information, see the Consolidated Financial Statements and Notes
beginning on Page F-1 of this Form 10.
Banking Products and Services
The Bank has been doing business in Maryland since 1876 and is engaged
in both the commercial and consumer banking business. The Bank provides a wide
range of personal banking services designed to meet the needs of local
consumers. Among the services provided are checking accounts, savings and time
accounts, safe deposit boxes, and installment and other personal loans,
especially residential mortgages, as well as home equity loans, automobile and
other consumer financing. As a convenience to its customers, the Bank offers
Saturday banking hours, drive-thru teller windows, "Direct Dial," a telephone
banking service, and 24-hour automated teller machines.
The Bank is also engaged in the financing of commerce and industry by
providing credit and deposit services for small to medium sized businesses and
for the agricultural community in the Bank's market area. The Bank offers many
forms of commercial lending, including lines of credit, revolving credit, term
loans, accounts receivable financing, and commercial real estate mortgage
lending and other forms of secured financing. A full range of commercial banking
services is offered, including the acceptance of checking and savings deposits.
Additional types of real estate loans, discount brokerage services,
credit cards and related services are also offered through affiliates or
correspondent banks. The Bank does not offer trust services and does not engage
in municipal trading services.
Deposit Activities
Between December 31, 1994 and December 31, 1995, total deposits
decreased by 6.8%, primarily as a result of a single large depositor's reduction
in deposit account balances. Between December 31, 1995 and December 31, 1996,
deposits increased $7.7 million or 6.6% to $124.2 million, which approximates
the December 31, 1994 deposit level.
<PAGE>
Lending Activities
Until 1993, the Bank generally experienced growth in the number and
dollar amount of residential mortgage loans, reflecting the area's growth in
population, particularly in the Kent Island area. The years ended December 31,
1993 and 1994 reflect a decline in the loan portfolio which was primarily the
result of loans that were refinanced with other lenders. The loan portfolio
reflected $7.7 million or 9.9% growth in 1995 and $1.8 million or 2.1% growth in
1996 as a result of interest rate reductions, new loan products and concentrated
marketing efforts.
Bank Service Corporations
The Bank owns one-third of the outstanding common stock of two service
corporations: The Delmarva Bank Data Processing Center, Inc. and The Eastern
Shore Mortgage Corporation, both Maryland corporations. The Eastern Shore
Mortgage Corporation, located in Easton, Maryland, is engaged in mortgage
banking activities, including the origination of residential mortgage loans and
the subsequent sale of the loans to permanent investors. Its primary customers
are residents who live on Maryland's Eastern Shore. The Delmarva Bank Data
Processing Center, Inc., also located in Easton, Maryland, provides data
processing services to banks located in Maryland, Delaware, Virginia and the
District of Columbia.
Expansion Activities
On December 5, 1996, the Bank entered into a merger agreement with Kent
Savings & Loan Association, F.A. ("Kent Savings"), a federal savings and loan
association located in Chestertown, Maryland, with the Bank as the surviving
financial institution. Under the terms of the agreement, the Bank paid
approximately $5.1 million in cash for all of the 140,305 shares of outstanding
common stock of Kent Savings. At December 31, 1996, total assets of Kent Savings
were $23.8 million and total stockholders' equity was approximately $3.0
million. The merger was approved by the appropriate federal regulators. The
merger required the approval of stockholders of Kent Savings, which approval was
given at their annual meeting on March 17, 1997. The merger was consummated on
April 1, 1997.
Seasonality
The management of the Bank does not believe that the deposits or the
business of the Bank in general are seasonal in nature. The deposits may,
however, vary with local and national economic conditions but not enough to have
a material effect on planning and policy making.
Employees
As of December 31, 1996, the Bank employed 66 individuals, 14 of whom
worked part-time.
Deposits
No material portion of the Bank's deposits has been obtained from an
individual or a few individuals (including federal, state and local governments
and agencies) the loss of any one or more of which would have a materially
adverse effect on the Bank, nor is a material portion of the Bank's loans
concentrated within a single industry or group of related industries. On
December 31, 1996, the Bank had approximately 1,400 deposit customers
representing $124.2 million in deposits.
Page 2
<PAGE>
Commitments
As of the end of the last two fiscal years the Bank had the following
commitments to lend:
- -------------------------------------------------------------------------------
% of % of
12/31/96 Total 12/31/95 Total
- -------------------------------------------------------------------------------
(in thousands) (in thousands)
Standby Letters of Credit $ 1,786 13.45% $ 1,150 9.08%
Commitments to Grant Loans 11,491 86.55 11,512 90.92
- -------------------------------------------------------------------------------
Total $13,277 100.00% $12,662 100.00%
- -------------------------------------------------------------------------------
The above commitments are firm. The Bank expects approximately
$2,000,000 of the commitments to lend described above to be funded within the
current year.
Competition
The Bank offers many personalized services and attracts customers by
being responsive and sensitive to the needs of the community. The Bank relies on
goodwill and referrals from satisfied customers as well as traditional media
advertising to attract new customers. To enhance a positive image in the
community, the Bank supports and participates in local events, including the
annual Queen Anne's and Caroline County Fairs. Employees, officers, and
Directors represent the Bank on many boards and local civic and charitable
organizations.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries.
Recent changes in federal banking laws facilitate interstate branching
and merger activity among banks. Since September, 1995, certain bank holding
companies are authorized to acquire banks throughout the United States. In
addition, as of June 1, 1997, certain banks are permitted to merge with banks
organized under the laws of different states. These changes will result in an
even greater degree of competition in the banking industry and the Company and
the Bank may be brought into competition with institutions with which it does
not presently compete. As a result, strong competition in the Bank's market area
may be expected to continue for the foreseeable future.
Regional and local banks dominate the banking industry in Centreville,
Stevensville, and the Hillsboro areas where the Bank maintains offices. These
institutions include: (i) in Queen Anne's County, Maryland, The Queenstown Bank
of Maryland, The Chestertown Bank of Maryland, NationsBank, N.A., The First
National Bank of Maryland, Farmers Bank of Maryland, and Annapolis National
Bank; and (ii) in Caroline County, Maryland, The Peoples Bank of Maryland,
Provident State Bank of Preston, The First National Bank of Maryland, The
Caroline County Bank, NationsBank, N.A., and Bank of Maryland. The Bank competes
for deposits and loans with these institutions and with credit unions, savings
institutions, insurance companies, and mortgage companies, as well as other
companies that offer financial services. To attract new business and retain
existing customers, the Bank offers a wide range of banking products and
services and relies on local promotional activity, personal contact by its
officers, staff, and Directors, referrals by current customers, extended banking
hours, and personalized service.
Page 3
<PAGE>
As of June 30, 1996, the most recent date for which comparative data is
available, bank deposits in Queen Anne's Country (where the Bank's main office,
Centreville branch and Stevensville branch are located) and Caroline County,
Maryland (where the Bank's Hillsboro branch is located), ranked as follows:
- -----------------------------------------------------------------------------
% of
Queen Anne's County Deposits Total
- -----------------------------------------------------------------------------
(in thousands)
The Queenstown Bank of Maryland $119,499 35.18%
THE CENTREVILLE NATIONAL BANK OF MARYLAND 109,517 32.24
The Chestertown Bank of Maryland 34,315 10.10
NationsBank, N.A. 27,397 8.07
The First National Bank of Maryland 20,525 6.04
Farmers Bank of Maryland 16,945 4.99
Annapolis National Bank 11,469 3.38
- -----------------------------------------------------------------------------
Total $339,667 100.00%
- -----------------------------------------------------------------------------
Source: FDIC Data Book
- -----------------------------------------------------------------------------
% of
Caroline County Deposits Total
- -----------------------------------------------------------------------------
(in thousands)
The Peoples Bank of Maryland $ 71,213 30.05%
Provident State Bank of Preston 56,144 23.70
The First National Bank of Maryland 43,100 18.19
The Caroline County Bank 25,661 10.83
NationsBank, N.A. 16,660 7.03
Bank of Maryland 14,803 6.25
THE CENTREVILLE NATIONAL BANK OF MARYLAND 9,354 3.95
- -----------------------------------------------------------------------------
Total $236,935 100.00%
- ------------------------------------------------------------------------------
Source: FDIC Data Book
Supervision and Regulation
General. The Company and the Bank are extensively regulated under
federal and state law. Generally, these laws and regulations are intended to
protect depositors, not stockholders. The following is a summary description of
certain provisions of certain laws which affect the regulation of bank holding
companies and banks. The discussion is qualified in its entirety by reference to
applicable laws and regulations. Changes in such laws and regulations may have a
material effect on the business and prospects of the Company and the Bank.
Federal Bank Holding Company Regulation and Structure. The Company is a
bank holding company within the meaning of the Bank Holding Company Act of 1956,
as amended, and as such, it is subject to regulation, supervision, and
examination by the Federal Reserve Board ("FRB"). The Company is required to
file annual and quarterly reports with the FRB and to provide the FRB with such
additional information as the FRB may require. The FRB may conduct examinations
of the Company and its subsidiaries.
With certain limited exceptions, the Company is required to obtain
prior approval from the FRB before acquiring direct or indirect ownership or
control of more than 5% of any voting securities or substantially all of the
assets of a bank or bank holding company, or before merging or consolidating
with another bank holding company. Additionally, with certain exceptions, any
person proposing to acquire control through direct or indirect ownership of 25%
or more of any voting securities of the Company is required to give 60 days'
written notice of the acquisition to the FRB, which may prohibit the
transaction, and to publish notice to the public.
Page 4
<PAGE>
Generally, a bank holding company may not engage in any activities
other than banking, managing or controlling its bank and other authorized
subsidiaries, and providing services to these subsidiaries. With prior approval
of the FRB, the Company may acquire more than 5% of the assets or outstanding
shares of a company engaging in non-bank activities determined by the FRB to be
closely related to the business of banking or of managing or controlling banks.
The FRB provides expedited procedures for expansion into approved categories of
non-bank activities.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions on extensions of credit to the bank
holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, subject to certain exceptions, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, the Bank may not generally
require a customer to obtain other services from itself or the Company, and may
not require that a customer promise not to obtain other services from a
competitor as a condition to and extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source
of financial strength to its subsidiary banks and to make capital injections
into a troubled subsidiary bank, and the FRB may charge the bank holding company
with engaging in unsafe and unsound practices for failure to commit resources to
a subsidiary bank when required. A required capital injection may be called for
at a time when the holding company does not have the resources to provide it. In
addition, depository institutions insured by the Federal Deposit Insurance
Corporation ("FDIC") can be held liable for any losses incurred by, or
reasonably anticipated to be incurred by, the FDIC in connection with the
default of, or assistance provided to, a commonly controlled FDIC-insured
depository institution. Accordingly, in the event that any insured subsidiary of
the Company causes a loss to the FDIC, other insured subsidiaries of the Company
could be required to compensate the FDIC by reimbursing it for the estimated
amount of such loss. Such cross guaranty liabilities generally are superior in
priority to the obligations of the depository institution to its stockholders
due solely to their status as stockholders and obligations to other affiliates.
Federal Bank Regulation. The Company's banking subsidiary is a
federally-chartered national bank regulated by the Office of Comptroller of the
Currency ("OCC"). The OCC may prohibit the institutions over which it has
supervisory authority from engaging in activities or investments that the agency
believes constitutes unsafe or unsound banking practices. Federal banking
regulators have extensive enforcement authority over the institutions they
regulate to prohibit or correct activities which violate law, regulation or a
regulatory agreement or which are deemed to constitute unsafe or unsound
practices. Enforcement actions may include the appointment of a conservator or
receiver, the issuance of a cease and desist order, the termination of deposit
insurance, the imposition of civil money penalties on the institution, its
directors, officers, employees and institution-affiliated parties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the removal of or restrictions on directors, officers, employees and
institution-affiliated parties, and the enforcement of any such mechanisms
through restraining orders or other court actions.
The Bank is subject to certain restrictions on extensions of credit to
executive officers, directors, principal stockholders or any related interest of
such persons which generally require that such credit extensions be made on
substantially the same terms as are available to third persons dealing with the
Bank and not involve more than the normal risk of repayment. Other laws tie the
maximum amount which may be loaned to any one customer and its related interests
to capital levels.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the OCC, have adopted standards covering
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. An institution which fails to meet those
standards may be required by the agency to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory
Page 5
<PAGE>
sanctions. The Company, on behalf of the Bank, believes that it meets
substantially all standards which have been adopted. FDICIA also imposed new
capital standards on insured depository institutions. See "--Capital
Requirements."
Before establishing new branch offices, the Bank must meet certain
minimum capital stock and surplus requirements and the Bank must obtain OCC
approval.
Deposit Insurance. As a FDIC member institution, the Bank's deposits
are insured to a maximum of $100,000 per depositor through the Bank Insurance
Fund ("BIF"), administered by the FDIC, and each institution is required to pay
semi-annual deposit insurance premium assessments to the FDIC. The BIF
assessment rates have a range of 0 cents to 27 cents for every $100 in
assessable deposits. Banks with no premium are subject to an annual statutory
minimum assessment.
Capital Requirements. The federal banking regulators have adopted
certain risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent amounts
of off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as business loans. For bank holding companies with less than
$150,000,000 in consolidated assets, the guidelines are applied on a bank-only
basis.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. "Tier 1," or core capital,
includes common equity, perpetual preferred stock (excluding auction rate
issues) and minority interest in equity accounts of consolidated subsidiaries,
less goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes, among other things, limited-life preferred
stock, hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less required deductions. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk- weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. As of
December 31, 1996, the Bank's ratio of Tier 1 to risk-weighted assets stood at
28.44% and its ratio of total capital to risk- weighted assets stood at 28.25%.
In addition to risk-based capital, banks and bank holding companies are required
to maintain a minimum amount of Tier 1 capital to total assets, referred to as
the leverage capital ratio, of at least 3%. As of December 31, 1996, the Bank's
leverage capital ratio was 14.86%.
In August, 1995 and May, 1996, the federal banking agencies adopted
final regulations specifying that the agencies will include, in their
evaluations of a bank's capital adequacy, an assessment of the Bank's interest
rate risk ("IRR") exposure. The standards for measuring the adequacy and
effectiveness of a banking organization's interest rate risk management includes
a measurement of board of director and senior management oversight, and a
determination of whether a banking organization's procedures for comprehensive
risk management are appropriate to the circumstances of the specific banking
organization. The Bank has internal IRR models that are used to measure and
monitor IRR. Additionally, the regulatory agencies have been assessing IRR on an
informal basis for several years. For these reasons, the Company does not expect
the addition of IRR evaluation to the agencies' capital guidelines to result in
significant changes in capital requirements for the Bank.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "--Federal Deposit Insurance Corporation
Improvement Act of 1991" below, as applicable to undercapitalized institutions.
In addition, future
Page 6
<PAGE>
changes in regulations or practices could further reduce the amount of capital
recognized for purposes of capital adequacy. Such a change could affect the
ability of the Bank to grow and could restrict the amount of profits, if any,
available for the payment of dividends to the Company.
Federal Deposit Insurance Corporation Improvement Act of 1991. In
December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things, (i) publicly available annual financial condition and
management reports for financial institutions, including audits by independent
accountants, (ii) the establishment of uniform accounting standards by federal
banking agencies, (iii) the establishment of a "prompt corrective action" system
of regulatory supervision and intervention, based on capitalization levels, with
more scrutiny and restrictions placed on depository institutions with lower
levels of capital, (iv) additional grounds for the appointment of a conservator
or receiver, and (v) restrictions or prohibitions on accepting brokered
deposits, except for institutions which significantly exceed minimum capital
requirements. FDICIA also provides for increased funding of the FDIC insurance
funds and the implementation of risked-based premiums. See "- Deposit
Insurance."
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." The Bank is currently classified as
"well-capitalized." An institution may be deemed by the regulators to be in a
capitalization category that is lower than is indicated by its actual capital
position if, among other things, it receives an unsatisfactory examination
rating with respect to asset quality, management, earnings or liquidity.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a cash dividend) or paying any
management fees to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to growth limitations and are required to submit capital restoration
plans. If a depository institution fails to submit an acceptable plan, it is
treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of other
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and stop
accepting deposits from correspondent banks. Critically undercapitalized
institutions are subject to the appointment of a receiver or conservator,
generally within 90 days of the date such institution is determined to be
critically undercapitalized.
FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution. FDICIA also limits the circumstances under which the FDIC
is permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
Interstate Banking Legislation. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 was enacted into law on September 29, 1994. The
law provides that, among other things, substantially all state law barriers to
the acquisition of banks by out-of-state bank holding companies were eliminated
effective on September 29, 1995. The law also permits interstate branching by
banks effective as of June 1, 1997, subject to the ability of states to opt-out
completely or to set an earlier effective date. Maryland generally established
an earlier effective date of September 29, 1995.
Monetary Policy. The earnings of a bank holding company are affected by
the policies of regulatory authorities, including the FRB, in connection with
the FRB's regulation of the money supply. Various methods employed by the FRB
are open market operations in United States Government securities, changes in
the discount rate on member bank borrowing and changes in reserve requirements
against member bank deposits. These methods
Page 7
<PAGE>
are used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits, and their use may also affect interest
rates charged on loans or paid on deposits. The money policies of the FRB have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future.
ITEM 2
FINANCIAL INFORMATION
Selected Financial Data
The following selected financial data should be read in conjunction
with the Company's Consolidated Financial Statements and the related notes and
with the Company's Management's Discussion and Analysis of Financial Condition
and Results of Operations, provided elsewhere herein.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
For the Year 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 6,265,431 $ 6,012,491 $ 6,097,626 $ 5,841,071 $ 5,718,282
Provision for credit losses 0 0 274,000 1,000,000 2,582,278
Net interest income after provision
for credit losses 6,265,431 6,012,491 5,823,626 4,841,071 3,136,004
Other operating income 999,423 877,386 856,585 855,619 956,685
Net income 2,307,742 2,138,500 2,030,864 1,759,683 1,223,329
Per Share Data:*
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 2.29 $ 2.12 $ 2.02 $ 1.75 $ 1.22
Cash dividends declared 0.92 0.85 0.60 0.53 0.50
Book value 21.93 20.70 19.19 17.95 16.73
Number of common shares 1,007,424 1,007,424 1,007,424 1,007,424 1,007,424
At Year End
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $146,899,477 $138,100,669 $144,942,996 $144,079,772 $139,852,892
Loans, net of unearned income 88,892,757 87,049,483 79,329,222 86,247,915 92,153,039
Allowance for credit losses 1,503,268 1,478,555 1,481,501 1,851,369 2,000,000
Investment securities 43,652,747 37,131,443 53,209,881 36,663,520 31,451,735
Deposits 124,166,248 116,479,753 124,984,593 125,249,716 122,499,502
Stockholders' equity 22,095,951 20,849,348 19,332,344 18,085,400 16,854,615
Allowance for credit losses to
non-performing loans 102.82% 83.72% 77.44% 55.85% 56.88%
Average Balances
- -----------------------------------------------------------------------------------------------------------------------
Total assets $141,410,379 $139,313,160 $143,919,722 $140,857,647 $138,972,010
Total deposits 118,945,631 118,224,470 124,027,077 122,441,750 121,291,098
Stockholders' equity 21,626,308 20,318,612 19,027,257 17,858,590 16,930,725
Return on average total assets 1.63% 1.54% 1.41% 1.25% 0.88%
Return on average stockholders' equity 10.67% 10.52% 10.67% 9.85% 7.23%
- -----------------------------------------------------------------------------------------------------------------------
<FN>
*Per share data for 1992 through 1995 is restated to reflect the 100% stock
dividend paid May 20, 1994 and the July 1, 1996 two for one share exchange.
</FN>
</TABLE>
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<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is designed to provide a better understanding
of the financial position of the Company and should be read in conjunction with
the Audited Consolidated Financial Statements and Notes.
Organizational Background
On July 1, 1996, the Company commenced operations as the parent company
of its sole subsidiary, the Bank, which has conducted the business of banking
since 1876. Since the Bank is the primary possession of the Company, the assets
and liabilities of the Company are made up almost entirely of the assets and
liabilities of the Bank. The same is true for the income and expense of the
Company. All data for periods on and after July, 1996 is presented in this
analysis in consolidated form and is compared to like data for the Bank for
prior years. Comparative financial data for 1995 and 1994 are those of the Bank
restated to reflect the exchange of shares of Bank common stock for Company
Shares.
Results of Operations Overview
The Company reported $2,308,000 in net income for 1996 or $2.29 per
share compared to 1995 net income of $2,139,000 or $2.12 per share, and
$2,030,000 or $2.02 for 1994. Earnings for the year represent a record level of
performance for the Company, exceeding the previous record of $2,280,000
achieved in 1989. The improvement was attributable to growth in net interest
income, the Company's major income component. Gain on sale of investment
securities, as well as a relatively unchanged level of non-interest expense also
contributed to the growth in earnings. Return on average assets was 1.63%, 1.54%
and 1.41% in 1996, 1995 and 1994 respectively, which reflects the Company's
growth in earnings at a faster rate than the growth in assets. These results
produced an increase in return on average stockholders' equity. Return on
average stockholders' equity for 1996 returned to the 1994 level of 10.67%
compared to 10.52% in 1995.
The Company has not experienced material changes in its financial
condition or results of operations from December 31, 1996 to the three months
ended March 31, 1997. Additionally, there have been no material changes in the
Company's financial condition or results of operations from the three month
ended March 31, 1996 to the three months ended March 31, 1997.
Net Interest Income and Net Interest Margin
Net interest income is the principal source of earnings for a banking
company. It represents the difference between interest and fees earned on the
loan and investment portfolios and the interest paid on deposits. The years
ended December 31, 1996 and 1995 have been characterized by generally declining
interest rates. For the Bank, 1996 and 1995 reflect increasing loan rates and
generally declining deposit rates until the second half of 1996 when deposit
rates increased slightly. Because deposits and loans and other investments
reprice at different rates and as a result of changes in volume, the Bank's net
interest income, on a fully tax-equivalent basis, increased in 1996 from the
preceding year but declined in 1995 when compared to 1994.
Net interest income (on a tax equivalent basis) for 1996 increased by $192
thousand or 3.0% compared to the year ended December 31, 1995, while 1995
decreased by $103 thousand or 1.6% from the previous year ended December 31,
1994. These variances are largely the result of the effect of increased interest
rate spread for 1996 versus 1995 and decreased interest rate spread for 1995
compared to 1994. Interest rate spread is the difference between the average
yield on interest earning assets and the average rate paid on interest bearing
liabilities (deposits). Interest rate spread for the years ended December 31,
1996, 1995 and 1994 was 3.87%, 3.86%, and 3.96%, respectively. Although interest
income and expense both increased in 1995, the decrease in interest rate spread
for 1995 resulted from interest-bearing liabilities repricing faster than
interest-bearing assets. Interest rate spread in 1996 increased by .01% as a
result of a modest increase in yield on earning assets of .04% and an increase
in expense of interest-bearing liabilities of .03%. Overall, loan rates showed
an increase during 1996 as did the average balance in loans, providing a higher
return compared to investment securities. Total interest expense actually
decreased in 1996 compared to 1995 by $21 thousand, or less than 1%, as a result
of decreasing deposit rates in the first 6 months of 1996 and 1.1% decrease in
average balance of interest bearing deposits as of December 31, 1996. During the
three years ended December 31, 1996, there have not been any material changes in
the volume or quality of the Company's tax exempt securities that would have a
significant effect on tax exempt interest income. See the Table 1 titled
"Average Balances, Yields and Rates" for additional information.
Page 9
<PAGE>
Net interest margin is calculated as tax equivalent net interest income
divided by average earning assets and represents the Company's net yield on its
earning assets. For 1996, the net interest margin increased to 4.85% from 4.75%
in 1995. The net interest margin for 1995 increased to 4.75% from 4.66% the
previous year. These changes are the result of repricing as previously discussed
and are illustrated in Table 2 titled "Rate/Volume Analysis." When comparing
1996 to 1995, repricing actually reduced the net interest margin $20 thousand in
net interest income and volume changes provided $212 thousand for a net increase
of $192 thousand. The 1.1% increase in earning assets was assisted by a $4.5
million increase in average total loans and was tempered by a 17% or $7.8
million reduction in average total investment securities. The remaining decrease
in average investment securities and addition in deposits which was not absorbed
by loan growth was invested in federal funds. The balance of outstanding
mortgage loans increased by approximately $4.4 million. This increase is
attributed to an increase in commercial real estate loans, the addition of a 10
year draw home equity product, as well as a significant increase in the
outstanding balance of the first time home buyer product. Comparing 1995 and
1994 shows that changes in rates reduced net interest margin $302 thousand,
while changes in volume provided $199 thousand for a net decrease of $103
thousand. The increase in earning assets was supported by growth in the
outstanding consumer loan portfolios. The average balance of mortgage loans
outstanding increased by approximately $4.2 million. The Bank introduced a fixed
rate mortgage product and first time home buyers product in 1994 both of which
reflected significant growth during 1995 and 1996. Also in 1994, in response to
competitive demands, 3-year and 5-year adjustable rate mortgages were presented.
These products have had favorable growth since implementation.
Management and the Board of Directors of the Bank monitor interest
rates on a regular basis to assess the Bank's competitive position and to
maintain a reasonable and profitable interest rate spread. The Bank also
considers the maturity distribution of loans, investments, and deposits and its
effect on net interest income as interest rates rise and fall over time.
For additional analysis see Notes 3 and 7 for maturity distributions of
investments and deposits in the Consolidated Financial Statements, Table 3
"Investment Securities," and Table 4 "Investment Security Maturities and
Yields."
Provision and Allowance for Credit Losses
For the year ended December 31, 1996, the Bank recorded net recoveries
of $25 thousand compared to net charge offs of $3 thousand in 1995 and $644
thousand in 1994. Internal loan review, in particular, has been effective in
identifying problem credits and in achieving timely recognition of potential and
actual losses within the loan portfolio. Improved overall credit quality and
increased collection efforts have also contributed to the decrease in net charge
offs in 1995 and net recoveries in 1996.
Gross charge offs in 1996 amounted to $78 thousand and in 1995 totaled
$105 thousand, the majority of which were installment loans. Gross charge offs
in 1994 ($721 thousand) included $375 thousand in loans to a commercial
customer, which accounted for over half of the losses for the year. Recoveries
in 1996 reflect the recovery of $56 thousand of the $375 thousand 1994 charge
off. Efforts to collect charged off loans continue, but successes are rare as
evidenced by the relatively low amount of recoveries, totaling only $103
thousand in 1996 and $102 thousand in 1995.
The provision for credit losses has followed the same general trend as
the amount of charge offs. No provision for credit losses was charged to expense
in 1996 or 1995. For the year ended December 31, 1994, provision totaling $274
thousand was charged to expense. The allowance for credit losses is maintained
at a level believed adequate by management to absorb estimated probable credit
losses. Management's quarterly evaluation of the adequacy of the allowance is
based on analysis of the loan portfolio and its known and inherent risks,
assessment of current economic conditions, diversification and size of the
portfolio, adequacy of the collateral, past and anticipated loss experience and
the amount of non-performing loans. The allowance for credit losses has remained
relatively unchanged despite the increase in outstanding loan balances. The
allowance for credit losses of $1.5 million as of December 31, 1994 represents
1.87% of gross loans, and as of December 31, 1995, the $1.5 million allowance
for credit losses reflected 1.70% of gross loans. The decrease in the percentage
of allowance
Page 10
<PAGE>
to outstanding loans, despite a $7.7 million increase in outstanding loans in
1995, is justified by lower levels of past due and classified loans. This trend
continued in 1996 although gross loans increased $1.8 million. The allowance for
credit losses of $1.5 million as of December 31, 1996 amounted to 1.69% of the
outstanding loan portfolio. Analysis by loan review and audit supports the
adequacy of the allowance. This reduction in percentage of allowance to
outstanding loans reflects improvements in credit quality achieved through
better credit underwriting and more aggressive collection efforts and is further
evidenced by lower past due loan totals. In management's opinion, the allowance
for credit losses is adequate as of December 31, 1996.
See Note 4 in the Consolidated Financial Statements for additional
analysis on the allowance for credit losses, Table 8 "Analysis of the Allowance
for Credit Losses," and Table 9 "Allocation of the Allowance for Credit Losses."
Non-Interest Income
As of December 31, 1996, non-interest income increased $122 thousand or
12.2%. The increase was due primarily to the $204 thousand gain on the sale of
Sallie Mae stock. Service charges on deposit accounts increased $45 thousand
reflecting increased levels of checks drawn against insufficient funds. Income
of unconsolidated subsidiaries continued to decline in 1996 resulting in an
addition to other operating income of $25 thousand; a $92 thousand reduction
from the prior year. See details in Note 6 in the Notes to Consolidated
Financial Statements.
For the year ended December 31, 1995, other non-interest income
increased $21 thousand or 2.4%. The increase was due largely to an increase of
$43 thousand in service charges on deposit accounts which were the result of
increased levels of checks drawn against insufficient funds. A decrease in
income of unconsolidated subsidiaries accounted for a $51 thousand reduction in
non-interest income from the previous year.
Non-Interest Expenses
Non-interest expenses increased slightly by $1.3 thousand or less than
1% for the year ended December 31, 1996 from the previous year. The minimal
fluctuation in other non-interest expense is primarily the result of reduced
FDIC insurance premiums offsetting the increase in other costs. FDIC deposit
insurance premiums were reduced in 1996 to unusually low levels, which are now
expected to continue, since the FDIC deposit insurance fund surpassed it
recapitalization goal. Increases in costs were noted for salaries and benefits
as the result of a full year of salaries for the employees who were added in
1995, increased benefit costs and cost of living adjustments. Similar increases
are expected in 1997 with the addition of a few staff members as well as cost of
living increases and benefit cost increases. The number of full time equivalent
staff the year ended December 31, 1996 did not increase from the previous year
end.
The decrease in FDIC premiums was primarily offset by a 18.4% increase
in expense of premises and fixed assets. Facility improvements and equipment
upgrades resulted in increased depreciation expense, maintenance costs and
equipment service contracts. This trend is expected to continue in 1997. The
renovations and expansions at three branch locations were completed in 1995 and
increased the Bank's investment in premises. The Bank will begin, and
anticipates completion of, the renovations of its main office in 1997. Larger
buildings require more maintenance and the additional investment will be
depreciated over the estimated useful life of the asset. The impact of this
additional expense is not expected to have a significant effect on the Company's
net income.
Non-interest expenses for the year ended December 31, 1995 reflected a
slight increase of less than 1% over the prior year end as well. This increase
was slowed as a result of a 50% reduction in FDIC deposit insurance premiums for
1995. The Bank added one full-time and eight part-time employees to the staff
during 1995. Part-time employees were hired to provide a consistent level of
service to our customers during peak times. The increase in salaries and benefit
costs, which includes cost of living adjustments for current staff, amounted to
$71 thousand or 3.9%. Increases were also noted in postage expense, marketing
expense and mortgage appraisal fees. Postage rate and volume increases accounted
for a 27.2% increase in postage expense.
Page 11
<PAGE>
Income Taxes
For 1996, the effective tax rate for the Company increased to 33.7%
compared to 31.1% for 1995 and 30.0% for 1994. Note 11 to the Consolidated
Financial Statements includes a reconciliation of the Federal tax expense
computed using the Federal statutory rate of 34% and provides additional detail.
The Company noted a decrease in State income tax expense beginning in 1996 as
the Maryland legislature exempted a portion of the interest from securities
issued by the United States Treasury, bank-qualified Maryland Municipals, and
some United States Government Agencies. This change in State income taxes is not
expected to have a material impact on liquidity, financial condition or
operations.
Investment Securities
Investment securities classified as available-for-sale are held for an
indefinite period of time and may be sold in response to changing market and
interest rate conditions as part of the asset/liability management strategy.
Available-for-sale securities are carried at market value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity net of income taxes. Investment securities classified as
held-to-maturity are those that management has both the positive intent and
ability to hold to maturity, and are reported at amortized cost. The Bank does
not currently follow a strategy of making securities purchases with a view to
near-term sales, and, therefore, does not own trading securities. The Bank
manages the investment portfolios within policies which seek to achieve desired
levels of liquidity, manage interest rate sensitivity risk, meet earnings
objectives, and provide required collateral support for deposit activities.
Total investment securities amounted to $43.6 million and $37.1 million
as of December 31, 1996 and 1995, respectively. The higher level of investments
in securities resulted primarily from the increase in available funds derived
from growth in deposits over loans.
The Bank manages its investment portfolios within policies which seek
to achieve desired levels of liquidity, manage interest rate sensitivity risk,
meet earnings objectives and provide required collateral support for deposit
activities. Excluding the U.S. Government and U.S. Government sponsored
agencies, the Bank had no concentrations of investment securities from any
single issuer, that exceeded 10% of stockholders' equity. Table 3 exhibits the
distribution, by type, of the investment portfolio for the years ended December
31, 1996 and 1995.
Loan Portfolio
The Bank is actively engaged in originating loans to customers in Queen
Anne's, Caroline and Talbot counties. The Bank has policies and procedures
designed to mitigate credit risk and to maintain the quality of the loan
portfolio. These policies include underwriting standards for new credits as well
as the continuous monitoring and reporting of asset quality and the adequacy of
the allowance for credit losses. These policies, coupled with continuous
training efforts, have provided effective checks and balances for the risk
associated with the lending process. Lending authority is based on the level of
risk, size of the loan and the experience of the lending officer. Table 5
"Summary of Loan Portfolio" presents the composition of the Bank's loan
portfolio by significant concentration. The Bank had no loan concentrations
exceeding 10% of total loans which are not otherwise disclosed.
The Bank's policy is to make the majority of its loan commitments in
the market area it serves. This tends to reduce risk because management is
familiar with the credit histories of loan applicants and has an in-depth
knowledge of the risk to which a given credit is subject. The Bank had no
foreign loans in its portfolio as of December 31, 1996.
It is the policy of the Bank to place a loan in non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on any outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan and
the overall economic situation of the borrower when making a non-accrual
decision. Non-accrual loans are closely monitored by management. A non-accruing
loan is restored to current status when the prospects of future contractual
payments are no longer in doubt. At December 31, 1996 and 1995, $872 thousand
and $1.3 million, respectively, of non-accrual loans were secured by
Page 12
<PAGE>
collateral with an estimated value of $1.8 million as of December 31, 1996 and
$2.7 million as of December 31, 1995. At December 31, 1996, the Bank had $1.6
million in loans on the watch list for which payments were current, but the
borrowers have the potential for experiencing financial difficulties. These
loans are subject to ongoing management attention and their classifications are
reviewed regularly.
Deposits
Deposit liabilities returned to 1994 levels, increasing to $124.2
million in 1996 from $116.5 at the end of 1995, or 6.6%. The $7.7 million in
deposit growth is a favorable increase from the $8.5 million decrease in
deposits experience in 1995. Time and savings deposits continue to be the main
source of deposit growth, although non-interest bearing demand deposits have
exhibited growth in each of the previous three years. The Bank continues to
experience strong competition from other commercial banks, credit unions, the
stock market and mutual funds. Table 1 displays the average balances and average
rates paid on all major deposit classifications for 1996, 1995 and 1994. The
Bank has no foreign banking offices.
Liquidity Management
Liquidity describes the ability of the Bank to meet financial
obligations that arise out of the ordinary course of business. Liquidity is
primarily needed to meet borrowing and deposit withdrawal requirements of the
customers of the Bank and to fund current and planned expenditures. The Bank
maintains its asset liquidity position internally through short term
investments, the maturity distribution of the investment portfolio, loan
repayments and income from earning assets. A substantial portion of the
investment portfolio contains readily marketable securities that could be
converted to cash immediately. Refer to Note 3 in the Consolidated Financial
Statements for a table showing the maturity distribution of the Bank's
securities portfolio and the related estimated fair value. On the liability side
of the balance sheet, liquidity is affected by the timing of maturing
liabilities and the ability to generate new deposits or borrowings as needed.
Other sources, not currently in use, are available through borrowings from the
Federal Reserve Bank, the Federal Home Loan Bank and from lines of credit
approved at correspondent banks. Deposit growth of $7.7 million or 6.6% during
the later part of 1996, was used primarily to fund the $1.8 million or 2.1%
increase in loans and $6.6 million or 18.2% increase in amortized cost of
securities. As of December 31, 1995 total deposits declined by $8.5 million or
6.8% from the year ended December 31, 1994. During 1995, the Bank met liquidity
needs for daily operations and to fund increased loan demand through the use of
funds from matured investment securities and by selling $4.0 million in U.S.
Treasury Securities. Management knows of no trend or event which will have a
material impact on the Bank's ability to maintain liquidity at satisfactory
levels.
Capital Resources and Adequacy
Total stockholders' equity increased $1.2 million or 6.0% in 1996 to
$22.1 million at the end of the year from $20.8 million at December 31, 1995.
Earnings of $2.3 million were the primary contributor to this increase. The
change in unrealized gain (loss) on investments classified as available-for-sale
accounted for a $134 thousand reduction and dividends paid also decreased
stockholders' equity $927 thousand. Total stockholder's equity as of December
31, 1995 increased $1.5 million compared to the prior year. $2.1 million in
earnings provided the majority of the increase and unrealized gain on securities
available-for-sale added $248 thousand. Dividends paid of $856 thousand in 1995
reduced equity.
One measure of capital adequacy is the leverage capital ratio which is
calculated by dividing average total assets for the most recent quarter into
Tier 1 capital. The regulatory minimum for this ratio is 3%. The primary capital
ratio for the years ended December 31, 1996, 1995, and 1994 was 14.86%, 14.86%,
and 12.98%, respectively.
Another measure of capital adequacy is the risk based capital ratio or
the ratio of total capital to risk adjusted assets. Total capital is composed of
both core capital (Tier 1) and supplemental capital (Tier 2) including
adjustments for off balance sheet items such as letters of credit and taking
into account the different degrees of risk among various assets. Regulators
require a minimum total risk based capital ratio of 8%. The Bank's ratio at
Page 13
<PAGE>
December 31, 1996, and for each of the two preceding years was 28.25%, 27.85%,
and, 28.07%, respectively. According to FDIC capital guidelines, the Bank is
considered to be "Well Capitalized."
Building and technological improvements are expected to continue in
1997. At this time, it is anticipated that renovations at the Bank's main office
will be completed during 1997. Cost estimates anticipate an amount of close to
$1 million which includes improvements, furniture and equipment. During 1995,
the Bank rebuilt its branch located on Route 213, south of Centreville,
converting it to a full service facility with a lender and customer service
representative on staff, safe deposit facilities, and an automated teller
machine ("ATM"). In 1995, the Bank also completed an addition to the
Stevensville branch. Approximately 1,500 square feet of office space and a third
drive-thru lane were built. A new drive up ATM was installed in the new
addition.
The Bank's Hillsboro branch was purchased from Signet Bank on January
31, 1992, and the branch operated in a leased building on Maryland Route 404
until December 1993, when the building was purchased by the Bank. A thorough
renovation of the site has since been completed. This project included the
addition of an ATM, a drive thru window, additional office space and a new roof
and heating plant.
On December 5, 1996 the Bank entered into an agreement to acquire Kent
Savings. The merger transaction will be accounted for as a purchase. Under the
terms of the agreement, the Bank will pay approximately $5,100,000 for all of
the outstanding shares of Kent Savings. At December 31, 1996, total assets of
Kent Savings were $23.9 million and total stockholders' equity was approximately
$3.1 million. The Kent Savings stockholders approved the merger at their annual
meeting on March 17, 1997 and approval has been received from the appropriate
regulators. The anticipated effective date of the merger is April 1, 1997.
Management knows of no other trend or event which will have a material
impact on capital. Please also refer to Note 14 in the Notes to Consolidated
Financial Statements for additional discussion of regulatory matters.
Recent Accounting Pronouncement
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" in October 1995. This Standard established financial accounting
and reporting standards for stock-based employee compensation plans, including
stock option plans, effective with financial statements issued for 1996. While
SFAS 123 defines a fair value based method of accounting for an employee stock
option or similar equity instrument, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company does not have any stock-based
compensation plans and, therefore, SFAS 123 had no impact on the Company's
financial statements.
Page 14
<PAGE>
AVERAGE BALANCES, YIELDS AND RATES
(Unaudited)
<TABLE>
Table 1
<CAPTION>
For the Year Ended For the Year Ended For the Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Average Income/ Yield Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning asets:
Money market investments:
Federal funds sold $ 7,095,343 $ 378,246 5.33% $ 2,354,943 $ 137,734 5.85% $ 12,832,145 $ 518,633 4.04%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies 27,640,017 1,703,420 6.16% 34,441,007 2,063,641 5.99% 31,953,810 1,777,860 5.56%
Tax-exempt obligations of States
and political subdivisions(1) 8,896,963 683,213 7.68% 10,025,129 822,951 8.21% 10,381,462 876,429 8.44%
All other investment securities 1,387,606 91,075 6.56% 1,288,757 92,872 7.21% 1,220,103 82,619 6.77%
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 37,924,586 2,477,708 6.53% 45,754,893 2,979,464 6.51% 43,555,375 2,736,908 6.28%
Loans, net of unearned income(2)(3)
Commercial loans 10,263,061 1,074,769 10.47% 11,031,642 1,156,962 10.49% 12,132,471 1,149,812 9.48%
Installment loans 5,097,131 512,414 10.05% 4,217,507 437,422 10.37% 3,875,868 430,054 11.10%
Mortgage loans 73,406,929 6,516,800 8.88% 69,008,142 6,077,576 8.81% 64,810,238 5,770,384 8.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 88,767,121 8,103,983 9.13% 84,257,291 7,671,960 9.11% 80,818,577 7,350,250 9.09%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 133,787,050 $10,959,937 8.19% 132,367,127 $10,789,158 8.15% 137,206,097 $10,605,791 7.73%
Cash and due from banks 3,589,220 3,431,939 3,857,030
Other assets 5,503,965 4,984,475 4,544,234
Allowance for loan and lease losses (1,469,856) (1,470,381) (1,687,639)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $141,410,379 $139,313,160 $143,919,722
====================================================================================================================================
LIABILITIES
Interest-bearing liabilities
Federal funds purchased 0 0 0.00% $ 817,945 $ 52,236 6.39% 0 0 0.00%
NOW accounts 0 0 0.00% 0 0 0.00% 12,330,172 337,366 2.74%
Super NOW accounts 16,022,439 489,828 3.06% 14,763,485 458,095 3.10% 1,657,999 47,112 2.84%
Money market deposit accounts 19,112,185 639,654 3.35% 20,708,692 704,005 3.40% 25,858,685 787,188 3.04%
Time, $100,000 or more 11,632,139 633,460 5.45% 13,801,000 650,745 4.72% 15,461,000 601,689 3.89%
Other time deposits 30,099,425 1,582,081 5.26% 26,826,207 1,370,902 5.11% 27,788,635 1,204,916 4.34%
IRA deposits 14,451,599 738,622 5.11% 14,038,374 804,030 5.73% 14,137,354 775,030 5.48%
Savings deposits 12,324,479 392,334 3.18% 13,868,563 456,851 3.29% 14,520,187 456,878 3.15%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INT-BEARING DEPOSITS 103,642,266 $ 4,475,979 4.32% 104,824,266 $ 4,496,864 4.29% 111,754,032 $ 4,210,179 3.77%
Demand deposits 15,303,365 13,400,204 12,273,045
Other liabilities 838,440 770,078 865,388
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 119,784,071 118,994,548 124,892,465
Stockholders' equity 21,626,308 20,318,612 19,027,257
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 141,410,379 $139,313,160 $143,919,722
====================================================================================================================================
Net interest income and
interest rate spread $ 6,483,958 3.87% $ 6,292,294 3.86% $ 6,395,612 3.96%
Net interest income as a percent
of earning assets 4.85% 4.75% 4.66%
====================================================================================================================================
<FN>
1. All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate of 34%, exclusive of the alternative minimum
tax rate and nondeductible interest expense.
2. Loan fee income is included in interest income for each loan category and
yields are stated to include all. Fees approximated $88,000, $72,000 and $83,000
for 1996, 1995, and 1994, respectively.
3. Balances of nonaccrual loans and related income have been incuded for
computational purposes.
[/FN]
</TABLE>
Page 15
<PAGE>
RATE AND VOLUME VARIANCE ANALYSIS
(Unaudited)
<TABLE>
Table 2
<CAPTION>
1996 compared to 1995 1995 compared to 1994
- -------------------------------------------------------------------------------------------------------------------------
Increase Change due to Increase Change due to
(Decrease) Rate Volume (Decrease) Rate Volume
<S> <C> <C> <C> <C> <C> <C>
(2) (2)
INTEREST INCOME ----------------------------------------------------------------------------------
Federal funds sold $ 240,512 ($36,741) $277,253 ($380,899) $ 42,555 ($423,454)
- -------------------------------------------------------------------------------------------------------------------------
Total money market investments 240,512 (36,741) 277,253 (380,899) 42,555 (423,454)
- -------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. government agencies (360,221) 47,282 (407,503) 285,781 147,397 138,384
Tax-exempt obligations of State and
political subdivisions(1) (139,738) (47,128) (92,610) (53,478) (23,395) (30,083)
All other investment securities (1,797) (8,920) 7,123 10,253 5,604 4,649
- -------------------------------------------------------------------------------------------------------------------------
Total investment securities (501,756) (8,786) (492,990) 242,556 129,606 112,950
- -------------------------------------------------------------------------------------------------------------------------
Commercial loans (82,193) (1,587) (80,606) 7,150 111,477 (104,327)
Installment loans 74,992 (16,239) 91,231 7,368 (30,539) 37,907
Mortgage loans 439,224 51,821 387,403 307,192 (66,569) 373,761
- -------------------------------------------------------------------------------------------------------------------------
Total loans(3) 432,023 33,995 398,028 321,710 14,369 307,341
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 170,779 (11,512) 182,291 183,367 186,530 (3,163)
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Federal funds purchased ($ 52,236) 0 ($ 52,236) $ 52,236 0 $ 52,236
NOW accounts 0 0 0 (337,366) 0 (337,366)
Super NOW accounts 31,733 (7,331) 39,064 410,983 38,591 372,392
Money market deposit accounts (64,351) (10,077) (54,274) (83,183) 73,593 (156,776)
Time deposits of $100,000 or more (17,285) 84,981 (102,266) 49,056 113,657 (64,601)
Other time deposits 211,179 43,907 167,272 165,986 207,717 (41,731)
IRA deposits (64,408) (89,075) 23,667 29,000 34,426 (5,426)
Savings deposits (64,517) (13,653) (50,864) (27) 20,476 (20,503)
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense ($ 20,885) $ 8,752 ($ 29,637) $286,685 $488,460 ($201,775)
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $191,664 ($20,264) $211,928 ($103,318) ($301,930) $198,612
- -------------------------------------------------------------------------------------------------------------------------
<FN>
1. Income and yields are computed on a tax equivalent basis using the
statutory federal income tax rate of 34%, exclusive of the alternative
minimum tax and nonductible interest expense.
2. Variances caused by the change in yield/rate times the average balance are
allocated to rate.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
</FN>
</TABLE>
Page 16
<PAGE>
Investment Securities
(In Thousands)
Table 3
Fair Value
December 31,
1996 1995
---- ----
Available for Sale
U.S. Treasury Securities $9,458 $2,758
U.S. Government Securities Mutual Fund 870 909
Equity Securities - 184
Federal Reserve Bank and Federal Home Loan
Bank of Atlanta stock 863 302
--- ---
Total Available for Sale 11,191 4,153
------ -----
Amortized Cost
December 31,
1996 1995
---- ----
Held to Maturity
Obligations of U.S. Government and other
government agencies and corporations 23,065 23,551
Obligations of states and political subdivisions 9,397 9,427
----- -----
Total Held to Maturity 32,462 32,978
------ ------
Total Investment Securities $43,653 $37,131
======= =======
Page 17
<PAGE>
<TABLE>
Table 4
<CAPTION>
Investment Securities Portfolio Analysis
December 31, 1996
(In Thousands)
AVAILABLE FOR SALE
U.S. Government
U.S. Treasury Securities Mutual Fund Equity Securities
Amortized Avg. T.E. Amortized Avg. T.E. Amortized Avg. T.E. Total
Description & Term Cost Yield Cost Yield Cost Yield Value
- ------------------ ---- ----- ---- ----- ---- ----- -----
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 3 Months $1,500 5.80 $ 0 0.00 $ 0 0.00 $ 1,500
3 - 6 Months 0 N/A 0 0.00 0 0.00 $ 0
6 - 12 Months 496 7.27 0 0.00 0 0.00 $ 496
1 - 3 Years 5,460 6.32 0 0.00 0 0.00 $ 5,460
3 - 4 Years 1,978 6.36 0 0.00 0 0.00 $ 1,978
4 - 5 Years 0 N/A 0 0.00 0 0.00 $ 0
5 - 30 Years 0 N/A 1,000 6.38 863 6.33 $ 1,863
----- ---- ----- ---- --- ---- ------
TOTAL $9,434 6.30 $1,000 6.38 $863 6.33 $11,297
====== ==== ====== ==== ==== ==== =======
HELD TO MATURITY
U.S. Govt. Agencies Municipals Municipals - In State
Amortized Avg. T.E. Amortized Avg. T.E. Amortized Avg. T.E. Total
Description & Term Cost Yield Cost Yield Cost Yield Value
- ------------------ ---- ----- ---- ----- ---- ----- -----
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 3 Months $1,663 5.15 $540 6.09 $100 10.13 $ 2,303
3 - 6 Months 0 N/A 0 N/A 0 N/A $ 0
6 - 12 Months 4,494 6.79 702 7.58 440 10.42 $ 5,636
1 - 3 Years 11,141 6.05 3,245 7.28 736 8.96 $15,122
3 - 4 Years 2,000 6.64 100 9.39 485 7.25 $ 2,585
4 - 5 Years 2,737 6.72 0 N/A 202 6.73 $ 2,939
5 - 30 Years 1,030 6.25 730 9.09 2,117 8.00 $ 3,877
----- ---- --- ---- ----- ---- ------
TOTAL $23,065 6.27 $5,317 7.32 $4,080 8.33 $32,462
====== ==== ====== ==== ==== ==== =======
</TABLE>
The above yields have been adjusted to reflect a tax equivalent basis assuming
a federal tax rate of 34% and a state tax rate of 7%. Disclosure of 5 - 10 year
maturities by investment category, including tax equivalent yield, was not
available.
Page 18
<PAGE>
Summary of Loan Portfolio
(In Thousands)
Table 5
Loans Outstanding as of December 31,
-------------------------------------------
1996 1995
-------------------------------------------
Amount Amount
Real Estate:
Construction and land development $ 3,264 $ 2,104
Commercial 10,935 10,426
Residential 60,490 59,913
Commercial 7,739 9,064
Consumer 6,465 5,542
----- -----
TOTAL $88,893 $87,049
======= =======
Maturities of Loan Portfolio
December 31, 1996
(In Thousands)
Table 6
<TABLE>
<CAPTION>
Maturing After One Maturing
Within But Within After Five
One Year Five Years Years Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
Construction and land development $ 2,880 $ 384 $ 0 $ 3,264
Commercial 4,592 3,445 2,898 10,935
Residential 7,931 14,150 38,409 60,490
Commercial 3,891 2,688 1,160 7,739
Consumer 1,810 4,151 504 6,465
----------------------------------------------------------------
TOTAL $21,104 $24,818 $42,971 $88,893
================================================================
Classified by Sensitivities of Loans to Changes in interest Rates
Fixed - Interest Rate Loans $ 2,520 $ 5,965 $35,143 $43,628
Adjustable - Interest Rate Loans 18,543 19,018 7,704 45,265
----------------------------------------------------------------
TOTAL $21,063 $24,983 $42,847 $88,893
================================================================
</TABLE>
Page 19
<PAGE>
Risk Elements of Loan Portfolio
(In Thousands)
Table 7
December 31,
1996 1995
---------------------
Non-accrual loans $872 $1,277
Accruing loans past due 90 Days or more 590 489
Restructured loans 0 0
Information with respect to non-accrual loans at December 31, 1996:
Non-accrual loans $872
Interest income that would have been recorded
under original terms: 58
Interest income recorded during the period 33
Analysis of the Allowance for Credit Losses
(In Thousands)
Table 8
For the Years Ended
December 31,
1996 1995
--------------------------
Balance at beginning of period $ 1,479 $ 1,482
Charge-offs:
Real Estate
Construction and land development 0 0
Commercial 0 14
Residential 10 0
Commercial 5 20
Consumer installment 63 71
--------------------------
$ 78 $ 105
==========================
Recoveries:
Real Estate:
Construction and land development 0 0
Commercial 0 51
Residential 10
Commercial 67 14
Consumer installment 25 37
--------------------------
$ 102 $ 102
==========================
Net charge-offs (recoveries) (24) 3
Provision for credit losses 0 0
--------------------------
Balance at end of period $ 1,503 $ 1,479
==========================
Average daily balance of loans $88,767 $84,257
Ratio of net charge-offs to average loans outstanding (0.03%) 0.00%
Page 20
<PAGE>
Allocation of the Allowance for Credit Losses
(In Thousands)
Table 9
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
--------------------------------------------------------------------------------
Percent of loans Percent of loans
in each category in each category
Amount to total loans Amount to total loans
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate:
Construction and land development $41 3.67% $26 2.42%
Commercial 137 12.30% 131 11.98%
Residential 36 68.05% 24 68.82%
Commercial 502 8.71% 618 10.41%
Consumer 95 7.27% 42 6.37%
Unallocated 692 N/A 638 N/A
--------------------------------------------------------------------------------
TOTAL $1,503 100.00% $1,479 100.00%
================================================================================
</TABLE>
Maturity of Time Certificates of Deposit $100,000 or More
(In Thousands)
Table 10
For the Years Ended
December 31,
1996 1995
-------------------------
Three months or less $ 7,769 $ 4,917
Three months through six months 2,776 2,952
Six months through twelve months 2,196 2,439
Over twelve months 3,939 2,017
-------------------------
TOTAL $16,680 $12,325
=========================
Summary of Significant Ratios
Table 11
1996 1995
-----------------------
Return on average total assets 1.63% 1.54%
Return on average total equity 10.67 10.52
Dividend payout ratio 40.17 40.09
Total average equity to total average assets ratio 15.29 14.58
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 1996
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Table 12
AFTER 3 AFTER 1 NON - TOTAL
MONTHS - YEAR - INTEREST ALL
WITHIN WITHIN WITHIN AFTER SENSITIVE CATEGORIES
3 MONTHS 1 YEAR 5 YEARS 5 YEARS FUNDS
-------- ------ ------- ------- ----- ----------
ASSETS
- ------
<S> <C> <C> <C> <C> <C> <C>
Loans $15,269 $5,794 $24,983 $42,847 ($1,503) $87,390
Taxable Investment 3,163 4,989 23,822 1,031 24 33,029
Securities
Non-taxable Investment 640 1,141 4,768 2,342 8,891
Securities
Investments in Equity 870 863 1,733
Securities
Federal Funds Sold 5,390 5,390
Non-interest earning 10,466 10,466
assets
----------- ----------- ----------- ----------- ---------- ------------
TOTAL ASSETS 25,332 11,924 53,573 46,220 9,850 146,899
----------- ----------- ----------- ----------- ---------- ------------
LIABILITES
- ----------
Certificates of Deposit 7,769 2,776 2,196 3,939 16,680
over $100,000
All Other Time Deposits 13,520 16,758 12,856 43,134
Savings and Money 31,800 31,800
Market Deposits
Interest-bearing 16,172 16,172
Transaction
Noninterest-bearing 17,018 17,018
Liabilites
----------- ----------- ----------- ---------- ----------- ------------
TOTAL LIABILITIES 69,261 19,534 15,052 3,939 17,018 $124,804
----------- ----------- ----------- ---------- ----------- ------------
NET(ASSETS LESS ($43,929) ($7,610) $38,521 $42,281 ($7,168)
LIABILITIES) =========== =========== =========== ========== ===========
NET (CUMULATIVE) ($43,929) ($51,539) ($13,018) $29,263 $22,095
=========== =========== =========== ========== ===========
RSA-RSL (CUMULATIVE) /
TOTAL ASSETS -29.90% -35.08% -8.86% 19.92% 15.04%
=========== =========== =========== ========== ===========
</TABLE>
<PAGE>
Interest Rate Sensitivity Analysis
Assumptions:
Fixed rate loans are grouped in the appropriate category based on scheduled
amortization. Variable rate loans are classified based on the next available
repricing opportunity. Noninterest sensitive loans consists of the net of
nonaccrual loans, allowance for credit losses and deferred fees and costs.
Taxable and nontaxable investment securities are categorized by final maturity
date or, if applicable, a definite call date.
Investment in equity securities within three months consists of a U.S.
Government Securities Mutual Fund. Noninterest sensitive funds combines Federal
Reserve Bank and Federal Home Loan Bank of Atlanta stocks.
Time deposits with contractual maturities are categorized based on the effective
maturity of the deposit.
Savings, money market and interest-bearing transaction accounts are assumed to
be subject to repricing within a year, and generally within three months of a
rate change, based on the Company's historical experience.
Page 21
<PAGE>
ITEM 3
PROPERTIES
The Bank owns real property at the location of its main office at 109
North Commerce Street, Centreville, Maryland 21617, and at its three branch
locations at 2609 Centreville Road, Centreville, Maryland 21617 ("Route 213
South Branch Office"), 408 Thompson Creek Road, Stevensville, Maryland 21666
("Stevensville Branch Office"), and at 21913 Shore Highway, Hillsboro, Maryland
21614 ("Hillsboro Branch Office"). There are no encumbrances on any of these
properties. The Company owns no real property.
ITEM 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table reflects the beneficial ownership of the Company's
Shares by Directors, executive officers and by stockholders known to management
to own beneficially 5% or more of the Company's Shares as of March 4, 1997, and
includes all of the Company's Shares that may be acquired by such persons 60
days thereafter. The address of each of the persons named below is the address
of the Company.
- --------------------------------------------------------------------------------
Number of Percent
Shares of Class
Beneficially Beneficially
Title of Class Name Owned Owned
- --------------------------------------------------------------------------------
Par Value $0.01 Director
Common Stock
Sydney G. Ashley 65,323 (1) 6.48
J. Robert Barton 6,616 (2) .66
David C. Bryan 3,304 (3) .33
Daniel T. Cannon 1,500 (4) .15
B. Vance Carmean, Jr. 9,012 (5) .89
Mark M. Freestate 2,552 (6) .25
Neil R. LeCompte 268 .03
Jerry F. Pierson 2,264 (7) .22
Wm. Maurice Sanger 4,664 (8) .46
Walter E. Schmidt 3,276 (9) .33
Total (10 Directors) 98,779 9.81
All Directors and 98,939 9.82
Executive Officers as a
Group (11 Persons)
- --------------------------------------------------------------------------------
(1) Includes 212 Shares held as Tenants by the Entireties by Sydney G. Ashley
and his wife Janie E. Ashley; a one-third interest in 1,324 Shares held in the
name of The Ashley Trust; and 2,200 Shares held by Janie Eby Ashley as an
individual.
(2) Includes 6,516 Shares held by Louise L. Barton as an individual.
(3) Includes 888 Shares held by Barbara C. Bryan as an individual.
(4) Includes 700 Shares held as Tenants by the Entireties by Daniel T. Cannon
and Sandra F. Cannon.
Page 22
<PAGE>
(5) Includes 4,500 Shares held by Kathleen H. Carmean as an individual.
(6) Includes 36 Shares held jointly by Mark M. Freestate and his son, John
Stuart Freestate; 36 Shares held jointly by Mark M. Freestate and his son,
William M. Freestate, II; and 200 Shares held by W. M. Freestate & Son, Inc.
(7) Includes 504 Shares held by Jerry F. Pierson and Bonnie K. Pierson as
Tenants by the Entireties.
(8) Includes 1,380 Shares held by Wm. Maurice Sanger and Ellen S. Sanger as
Tenants by the Entireties.
(9) Includes 1,200 Shares held by Nancy R. Schmidt as an individual.
ITEM 5
DIRECTORS AND EXECUTIVE OFFICERS
Ten Directors serve on the Company's Board of Directors, including
Daniel T. Cannon, the Company's President. Each of the Directors also serve as
Directors of the Bank.
Sydney G. Ashley, 67, has served as a Bank Director continuously since
1966, and as a Company Director since its formation in 1996. He is also
currently and has been during the past five years an associate of Ashley
Brothers Real Estate Company, a real estate brokerage and development company; a
general partner of Hunt-Ray Farms, a general partnership that operates a grain
farm; president of GCF, Inc., a company that owns and operates commercial rental
property; and president of Grove Creek Farms, Inc. a development corporation.
J. Robert Barton, 66, has served as a Bank Director continuously since
1981, and as a Company Director since its formation in 1996, and as a Senior
Vice President of the Bank from 1979 until July 1, 1992 and as President and CEO
of the Bank from July 1, 1992 until June 30, 1995. Mr. Barton is retired from
the daily operations of the Bank.
David C. Bryan, 62, has served as a Bank Director continuously since
1986, and as a Company Director since its formation in 1996. He is an attorney
practicing as a member in the Law Offices of Henry and Price LLC.
Daniel T. Cannon, 47, has served as a Bank Director continuously since
1986, and as a Company Director since its formation in 1996. He was appointed
Comptroller of the Bank in 1978, served as Cashier and Comptroller of the Bank
from 1980 until his appointment as Executive Vice President in July 1, 1992. He
served as Executive Vice President until July 1, 1995 when he was appointed
President, his current position. Mr. Cannon also serves as President of the
Company.
B. Vance Carmean, Jr., 56, has served as a Bank Director continuously
since 1992, and as a Company Director since its formation in 1996. He is
currently and has been for the past five years president of Carmean Grain, Inc.,
a grain company.
Mark M. Freestate, 44, has served as a Bank Director continuously since
1982, and as a Company Director since its formation in 1996. He is currently and
has been for the past five years the president of W.M. Freestate & Son, Inc., an
insurance agency.
Neil R. LeCompte, 56, has served as a Bank Director continuously since
1995, and as a Company Director since its formation in 1996. He is currently and
has been for the past five years a certified public accountant in the accounting
office of Neil R. LeCompte.
Jerry F. Pierson, 56, has served as a Bank Director continuously since
1980, and as a Company Director since its formation in 1996. He is currently and
has been for the past five years the president of Jerry F. Pierson, Inc., a
plumbing and heating contracting company.
Page 23
<PAGE>
Wm. Maurice Sanger, 51, has served as a Bank Director continuously
since 1992, and as a Company Director since its formation in 1996. He has been
for the past five years president of F.W., Inc., T/A Western Auto, a retail
business. He is also currently a sales agent for Champion Realty, a real estate
company. Mr. Sanger is also president of Cloverbay Development Corporation, a
real estate development and residential construction corporation.
Walter E. Schmidt, 67, has served as a Bank Director continuously since
1987, and as a Company Director since its formation in 1996. He has served as
vice president of Schmidt Ventures, Inc., a farming enterprise, since September,
1995. For the four years prior to that date, he served as president of Schmidt
Farms, Inc.
Key Employee
Carol I. Brownawell, 31, has served as the Treasurer of the Company
since its formation in 1996, and as Executive Vice President and Chief Financial
Officer of the Bank since January, 1997. Ms. Brownawell served as Bank Vice
President, Finance from November 1994 until January, 1997, and as Comptroller
from July, 1993, until November, 1994. Prior to joining the Bank, Ms. Brownawell
was employed as a certified public accountant and auditor for CW Amos & Co., a
public accounting firm.
ITEM 6
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation for each of the
Company's most highly compensated executive officers, whose cash compensation
exceeded $100,000, for the three previous fiscal years.
<TABLE>
<CAPTION>
Annual Compensation
- ------------------------------------------------------------------------------------ Other
Principal Other Annual Compensation
Name Position Year Salary Bonus Compensation (2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Robert Barton (1) President 1994 $100,000 $4,500 $ 0 $ 7,315
President 1995 58,333 0 7,525 5,250
- -------------------------------------------------------------------------------------------------
Daniel T. Cannon Exec. VP 1994 $ 90,280 $4,063 $ 0 $ 6,604
President 1995 95,385 5,000 0 9,035
President 1996 100,383 5,000 0 10,245
- -------------------------------------------------------------------------------------------------
<FN>
(1) J. Robert Barton retired as President of the Bank effective June 30, 1995.
Mr. Barton continues to serve as a Director of the Bank and the Company.
(2) Other compensation includes amounts contributed by the Bank pursuant to a
401(k) Profit Sharing Plan and Trust that covers substantially all
employees. Each year, the Bank contributes a matching contribution equal to
50% of the participant's deferral, up to 6% of the employee's salary, and a
discretionary amount determined each year by the Board of Directors. For
1996, the discretionary amount was established at 7% of compensation.
</FN>
</TABLE>
Director Compensation
Directors of the Company do not receive compensation for service in
that capacity. However, as Directors of the Bank, outside Bank Directors receive
$50 for each Board of Directors and committee meeting attended plus an annual
retainer of $8,500. The Chairman of the Board receives an additional $1,000
annually. The Committee Chairman on each of the four Bank committees receives
$500 annually. Directors who are also employees of the Bank receive no
compensation for their capacity as Directors of the Bank.
Page 24
<PAGE>
Under a non-qualified deferred compensation plan, the Bank permits
Directors to defer part of their compensation and fees by investing the deferred
income in insurance policies on the Director's life, with the Bank as owner and
beneficiary. The death benefit of such policies will be used by the Bank to fund
the payments to the Directors. If the Director lives to age 65, the retirement
age defined in the plan, the Bank will begin to pay him an amount which will be
calculated at that time in 15 annual payments, based upon the value of the life
insurance policy and existing market conditions. If the Director lives to age
65, but dies before receiving all of the 15 annual payments, the remaining
annual payments will be paid to the Director's beneficiary. If a Director
retires prior to or after age 65, the annual payments will be discounted or
increased, as the case may be, based on the value of the life insurance policy.
Finally, if the Director dies prior to age 65, the annual payments will be
calculated based on the value of the life insurance policy death benefit and
paid in 15 annual payments to the Director's beneficiary. No Director deferred
any compensation under a non-qualified deferred compensation plan for the year
ended December 31, 1996.
Board of Directors' Executive Compensation Committee Report
Officers of the Company and the Bank receive compensation only for
their service for the Bank. However, as to the Bank, the fundamental philosophy
of the compensation program is to offer competitive compensation opportunities
for all executive officers which are based on both the individual's contribution
and the Bank's performance. The compensation paid is designed to attract, retain
and reward executive officers who are capable of leading the Bank in achieving
its business objectives in an industry characterized by complexity,
competitiveness and constant change. The compensation of key executives is
reviewed and approved annually by the Bank's Board of Directors, which acts as
the Bank's Compensation Committee.
In its consideration of whether to increase salaries from year to year,
and the amounts of increases, the Board of Directors reviews the overall
financial performance of the Bank during the past year and the expectations for
the current year. Specifically, the Board looks to whether total return on
assets is satisfactory and compare total assets and earnings levels with prior
years. Special factors that are considered are whether loan delinquencies are
consistent with expectations, and whether there have been any significant
acquisitions or sales of assets or other extraordinary events. While no specific
financial targets are set, the Board will generally recommend increases to
executives, including the chief executive officer, if the Bank continues to
experience anticipated levels of financial growth.
Salaries are also based on merit, which involves an evaluation by the
Board of how ably an executive performed the duties entailed in his or her
position. Employees generally are reviewed by management, while executive
officers have their performance evaluated by the Board.
All or most executives, including the chief executive officer, receive
approximately the same percentage increase in salary in any given year.
Similarly, so long as the Bank is meeting its budgets expectations, each
executive receives a bonus of a percentage of salary, with most executives
receiving approximately the same percentage amount. In 1996, most bonuses were
in the range of 5%.
The foregoing report has been approved by the Bank's Board of
Directors.
Compensation Committee Interlocks and Insider Participation
The full Bank Board of Directors (which consists of the full Company
Board of Directors) serves as the Bank's Compensation Committee. Daniel T.
Cannon, a member of the Board of Directors of the Bank since 1986 and of the
Company since the Company's formation in 1996, also serves as President of the
Company and as President and CEO of the Bank. While Mr. Cannon specifically
excluded himself from any Board discussion concerning his compensation, he did
participate in Board of Directors discussions concerning other key executives'
compensation.
Page 25
<PAGE>
Performance Graph
The performance graph shown below compares the cumulative total return
to the Company's stockholders over the most recent 5-year period with both the
NASDAQ Combined Composite Index (reflecting overall stock market performance)
and the NASDAQ Combined Bank Index (reflecting changes in banking industry
stocks). Returns are shown on a total return basis, assuming the reinvestment of
dividends based on a $100 investment beginning December 31, 1991. The NASDAQ
Combined Bank Index reflects performance on a straight appreciation basis, as
annual dividend data was not yet available for this index.
Comparison of Five Year Cumulative Total Return
Shore Bancshares, Inc.,
NASDAQ Combined Composite Index &
NASDAQ Combined Bank Index
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shore Bancshares, Inc.** $100.00 $ 82.02* $ 78.91* $ 86.86* $ 92.82* $ 141.93
- --------------------------------------------------------------------------------------------------------------------
NASDAQ Comb. Composite $100.00 $ 115.45 $132.48 $ 128.24 $ 179.43 $ 220.17
- --------------------------------------------------------------------------------------------------------------------
NASDAQ Comb. Bank $100.00 $ 152.02 $ 196.66 $ 198.84 $ 287.94 $ 363.27
- --------------------------------------------------------------------------------------------------------------------
<FN>
* Restated for 100% stock dividend in 1994 and for two for one share exchange
effective July 1, 1996.
** Share performance reflect value of Bank shares for periods before July 1,
1996.
</FN>
</TABLE>
ITEM 7
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past year the Bank has had, and expects to have in the
future, banking transactions in the ordinary course of its business with its
Directors, officers and owners of 5% or more of the Company's outstanding Shares
and with their associates on substantially the same terms, including interest
rates, collateral, and repayment terms on loans, as those prevailing at the same
time for comparable transactions with others. The extensions of credit by the
Bank to these persons have not and do not currently involve more than the normal
risk of collectability or present other unfavorable features. Loans outstanding
to such parties totaled $2,023,000 and $2,761,000 at December 31, 1996 and 1995,
respectively. During 1996, $468,000 of new loans were made and repayments
totaled $1,206,000.
Page 26
<PAGE>
ITEM 8
LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business to which the Company, the Bank, or
its subsidiaries is a party or of which any of their properties is subject.
There are also no material proceedings to which any Director, officer, or
affiliate of the Company, any person holding beneficially in excess of five (5)
percent of the Company's Shares, or any associate of any such Director, officer,
or securing holder is a party.
ITEM 9
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
Market Information
There is no established public trading market for the Company's Shares.
Accordingly, there is no comprehensive record of trades or the prices of any
such trades. The following table reflect stock prices for Company Shares (and
Bank shares of common stock prior to the Company's formation and acquisition of
the Bank in July, 1996), to the extent such information is available to
management of the Company, and the dividends declared with respect thereto
during the preceding two years.
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
1st Quarter* 2nd Quarter* 3rd Quarter 4th Quarter
High Low High Low High Low High Low
- -------------- --------------- --------------- ---------------
$22.00 $20.50 $26.00 $22.00 $29.00 $26.00 $30.00 $27.50
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
1st Quarter* 2nd Quarter* 3rd Quarter* 4th Quarter*
High Low High Low High Low High Low
- -------------- --------------- --------------- ---------------
$20.50 $19.75 $20.50 $19.00 $20.50 $19.00 $20.50 $20.00
- --------------------------------------------------------------------------------
* Prices adjusted for a two-for-one share exchange of Bank shares of common
stock for Company Shares.
Holders
As of March 7, 1997 there were 763 holders of record of the Company's
Shares.
Dividends
The Company declared and paid a cash dividend per Share totaling $0.92
(as restated for the two for one exchange on July 1, 1996) per share or $926,832
for the year 1996, and $0.85 (as restated for the two for one exchange on July
1, 1996) or $856,310 for 1995. In 1996, dividends were paid quarterly for the
first time in the history of the Bank and the Company. The Board of Directors of
the Company declared a dividend on March 5, 1996 of $0.35 per share to be paid
on March 20, 1996 to holders of record March 11, 1996. On June 11, 1996, a
dividend of $0.35 per share was approved to be paid on June 20, 1996, to
stockholders of record as of June 11, 1996. In the third quarter, an $0.18
dividend was announced on September 3, 1996, to be paid September 20, 1996, to
stockholders of record September 10, 1996. The final dividend in 1996 of $0.39
was declared December 10, 1996 for holders of record December 10, 1996, and was
paid on December 20, 1996.
Page 27
<PAGE>
On May 30, 1995 the Board of Directors declared a dividend to be paid
June 20, 1995 at the rate of $0.48 per share to stockholders of record as of
June 9, 1995 and declared a dividend of $1.02 per share, as well as a special
dividend of $0.20 per share on November 28, 1995 to be paid on December 21, 1995
to stockholders of record as of December 8, 1995.
The holders of the Company's Shares will be entitled to dividends,
when, as, and if declared by the Company's Board of Directors, subject to the
restrictions imposed by Maryland law. The only statutory limitation applicable
to the Company is that dividends may not be paid if the Company is insolvent or
if the dividend would cause the Company to become insolvent. However, until the
Company expands its activities, its only source of income is from the dividends
paid by the Bank to the Company. Therefore, the dividend restrictions applicable
to national banks will impact the Company's ability to pay dividends.
Under the National Bank Act, dividends may be paid only out of retained
earnings as defined in the statute. The approval of the OCC is required if the
dividends for any year exceed the net profits, as defined, for that year plus
the retained net profits for the preceding two years. In addition, unless a
national bank's capital surplus equals or exceeds the stated capital for its
common stock, no dividends may be declared unless the bank makes transfers from
retained earnings to capital surplus.
There are no contractual restrictions that currently limit the
Company's ability to pay dividends or that the Company reasonably believes are
likely to limit materially the future payment of dividends on the Company's
Shares.
ITEM 10
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the reorganization of the Bank into a bank holding
company structure, the Company issued 1,007,424 Shares to the stockholders of
the Bank in a tax-free exchange pursuant to the exemption provided under Section
3(a)(12) of the Securities Act of 1933. The reorganization was completed on July
1, 1996.
ITEM 11
DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
General
The Company's Articles of Incorporation provide for an authorized
capitalization consisting of 10,000,000 shares, initially classified as common
stock, par value $0.01 per share, 1,007,424 of which are issued and outstanding.
The Company has approximately 8,992,576 Shares available for issuance. While
there are no present plans to issue any additional Company Shares, such Shares
could be issued for the purpose of acquiring other banks or businesses, for
raising additional capital or for other appropriate purposes. Under Maryland
law, the Board of Directors may issue Shares without stockholder approval.
Voting Rights
Each of the Company's Shares is entitled to one vote per share owned by
the stockholder. Holders of the Company's Shares generally have voting rights in
mergers. In a merger in which the Company is the survivor, no stockholder vote
is required if, in connection with the merger, the Company does not issue shares
of stock of a class amounting to more than 15% of the number of shares of such
class then outstanding and if the merger does not reclassify or change the
outstanding stock of the Company or otherwise amend its charter. Holders of the
Company's Shares have appraisal rights only in mergers where the Company is not
the surviving corporation or in certain cases where their contract rights are
changed, the number of shares to be issued in the merger equals or exceeds 15%
of the shares outstanding prior to the merger, or Company Shares are converted
into something other than stock of the surviving corporation.
Page 28
<PAGE>
With certain exceptions, the Maryland General Corporation Law provides
holders of Company Shares a right to demand and receive payment of the fair
value of the stockholder's Shares from a successor corporation under certain
circumstances. These circumstances include the Company's consolidation or merger
with another corporation, the acquisition of the stockholder's Shares in a share
exchange, the transfer of the Company's assets in a manner requiring special
corporate action, or the amendment of the charter in a way which alters the
stockholder's contract rights, unless otherwise authorized in the charter.
The Company's Articles of Incorporation (its charter) do not grant
preemptive rights to stockholders. As a result, a stockholder's percentage
ownership of Company Shares may be reduced if and when new shares of that class
are issued.
Terms of Directors
The Board of Directors of the Company are comprised of ten members,
each of whom is elected annually to serve for one year. The Board of Directors
of the Company, in the interval between annual meetings of stockholders, may
increase the number of Directors. The charter of the Company, however, limits
the total number of Directors to 25.
Business Combinations
Under the Maryland General Corporation Law, certain "business
combinations" (including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person who beneficially owns
10% or more of the corporation's stock (an "Interested Stockholder") must be:
(a) recommended by the corporation's board of directors; and (b) approved by the
affirmative vote of at least (i) 80% of the corporation's outstanding shares
entitled to vote and (ii) two-thirds of the outstanding shares entitled to vote
which are not held by the Interested Stockholder with whom the business
combination is to be effected, unless, among other things, the corporation's
common stockholders receive a minimum price (as defined in the statute) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for his shares. In addition, an
Interested Stockholder or any affiliate may not engage in a "business
combination" with the corporation for a period of five years following the date
he becomes an Interested Stockholder. These provisions of Maryland law do not
apply, however, to certain business combinations that are specifically exempted
by resolution of the board of directors of a Maryland corporation prior to the
time that an Interested Stockholder becomes an Interested Stockholder. National
banking associations are required to obtain prior written approval to merge or
consolidate with any insured or non-insured bank or institution, to assume
liability to pay any deposits, or to transfer assets to any insured or
non-insured bank or institution.
Control Shares Acquisitions
The Maryland General Corporation Law provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast by stockholders, excluding shares owned by the acquiror or
by officers or directors who are employees of the corporation. "Control shares"
are voting shares which, if aggregated with all other shares previously acquired
by such person, would entitle the acquiror to vote 20% or more of all voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the corporation's board of directors to call a special
meeting of stockholders to be held within 50 days of demand to consider the
voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders' meeting.
Page 29
<PAGE>
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares, except those for which voting
rights have previously been approved, for fair value determined, without regard
to voting rights, as of the date of the last control share acquisition or of any
meeting of stockholders at which the voting rights of such shares are considered
and not approved. If voting rights for control shares are approved at a
stockholders' meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid in the
control share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context of
a control share acquisition.
The control share acquisition statute does not apply to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or to acquisitions approved or excepted by the articles of
incorporation or bylaws of the corporation. Any change in control also triggers
certain regulatory requirements. See "Supervision and Regulation" under Item 1
of this Form 10.
The Bank is subject to a variety of Federal statutes and regulations
applicable to national banking associations, including the National Bank Act,
all of which impact the operations of the Bank. See "Supervision and Regulation"
under Item 1 of this Form 10.
ITEM 12
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Maryland law, a corporation may indemnify a director or
officer against liability, including reasonable expenses, incurred in a
proceeding because the person was a director or officer of a corporation if the
person conducted himself in good faith and reasonably believed, in the case of
conduct in an official capacity with the corporation, that his conduct was in
the corporation's best interests, and, in all other cases, the person had no
reasonable cause to believe that his conduct was at least not opposed to the
corporation's best interests; and in the case of criminal proceedings, the
person had no reasonable cause to believe that his conduct was unlawful. The
corporation may not indemnify a director or officer in connection with a
proceeding in which the person was adjudged liable to the corporation or derived
an improper personal benefit.
In accordance with the provisions of Maryland law, the Company's
Articles of Incorporation provide that no Director or officer of the Company
shall have any liability to the Company or its stockholders for money damages,
except (1) to the extent that it is proved that the person actually receives an
improper benefit or profit in money, property or services, for the amount of the
benefit or profit in money, property or services actually received, and (2) to
the extent that a judgment or other final adjudication adverse to the person is
entered in a proceeding based on a finding in the proceeding that the person's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding. In
addition, the Company's Bylaws requires that the Company indemnify its Directors
and officers to the full extent permitted by Maryland law.
Pursuant to the Bylaws of the Company, each of the officers and
Directors of the Company is entitled to indemnification for actions taken by
them or in the name of the Company to the fullest extent permitted by the laws
of the State of Maryland.
ITEM 13
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements, the report
thereon, the notes thereto commencing at page F-1 of this Form 10, which
financial statements, report, and notes and data are incorporated by reference.
Because the Company was organized in 1996 to become the Bank's holding company,
and because the Company acquired the Bank on July 1, 1996, financial information
for periods before July, 1996, is of the Bank only.
Page 30
<PAGE>
ITEM 14
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Board of Directors of the Company, upon recommendation of the
Bank's Audit/Compliance Committee, proposed and recommended the election of
Stegman & Company, P.A. as independent certified public accountants to make an
examination of the accounts of the Company and the Bank for the year ending
December 31, 1997. Stegman and Company, P.A. served as the Company's and the
Bank's independent public auditor for 1996.
Trice & Geary LLC served as the Bank's independent public auditor from
1994 through 1995, before the formation of the Company. In 1995, Trice & Geary
LLC performed various professional services for the Bank, including completion
of the audit of financial statements for 1995 and preparation of corporate tax
returns.
On October 31, 1995, the Bank's Board of Directors, upon the
recommendation of the Audit/Compliance Committee, dismissed Trice & Geary LLC,
effective April 16, 1996. The Board of Directors selected Stegman and Company,
P.A. effective April 16, 1996 to audit the books of the Company and its
subsidiaries for the year ending December 31, 1996, to report on the
consolidated statements of financial position and related statements of earnings
of the Company and its subsidiaries, and to perform such other accounting
services as may be required by the Board of Directors. The Company has been
advised by Stegman and Company, P.A. that the firm did not have any direct
financial interest or any material indirect financial interest in the Company
and its subsidiaries in 1996 or currently.
During the two years ended December 31, 1995 and the interim period
January 1 through April 16, 1996, there were no disagreements with Trice & Geary
LLC on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not resolved
to their satisfaction would have caused them to make reference in connection
with their opinion to the subject matter of the disagreement. For the years
ended December 31, 1995, and December 31, 1994, its audit report did not contain
any adverse opinion or disclaimer of opinion, nor was it qualified or modified
as to uncertainty, audit scope, or accounting principles.
ITEM 15
FINANCIAL STATEMENTS AND EXHIBITS
Consolidated Financial Statements
Page
Unaudited Consolidated Financial Statements
Balance Sheets F-1
Statements of Income F-2
Statements of Stockholders' Equity F-3
Statements of Cash Flows F-4
Independent Auditors' Report, Stegman & Company F-5
Independent Auditors' Report, Trice & Geary LLC F-6
Audited Consolidated Financial Statements
Balance Sheets F-7
Statements of Income F-8
Statements of Stockholders' Equity F-9
Statements of Cash Flows F-10
Notes to Consolidated Financial Statements F-12
through
F-25
Page 31
<PAGE>
Exhibits
Exhibit
Number Exhibit
2.1 Plan of Reorganization and Agreement to Merge dated March 15, 1996
2.2 Merger Agreement dated December 5, 1996 among Kent Savings and
Loan Association, F.A., The Centreville National Bank of Maryland,
and the Company
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
16 Letter from Trice & Geary LLC
21 Subsidiaries of the Company
SIGNATURES
Pursuant to the requirements in Section 12 of the Securities Exchange
Act of 1934, the registrant has duly cause this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
SHORE BANCSHARES, INC.
Date: May 30, 1997 /s/ Daniel T. Cannon
----------------------------
Daniel T. Cannon
President
F2312.600 J:8
Page 32
<PAGE>
SHORE BANCSHARES, INC.
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
<PAGE>
CONSOLIDATED BALANCE SHEETS
SHORE BANCSHARES, INC.
Unaudited
All dollar amounts in thousands March 31, March 31,
1997 1996
---- ----
ASSETS
Cash and due from banks $4,761 $3,269
Federal funds sold 3,503 8,173
Securities
Held to Maturity, fair value of $31,358 (1997) 31,412 31,964
$32,120 (1996)
Available for Sale 15,217 3,897
Loans, less allowance for credit losses of
$1,493 (1997) and $1,460 (1996) 86,850 85,990
Premises and fixed assets 2,280 2,187
Accrued interest receivable 1,243 1,228
Investments in unconsolidated subsidiaries 1,114 1,073
Other assets 1,601 867
----- ---
TOTAL ASSETS $147,981 $138,648
======== ========
LIABILITIES
Deposits
Non-interest bearing demand $ 15,519 $ 15,146
Interest bearing transaction 16,922 15,709
Savings and money market 33,568 30,656
Time, $100,000 or more 14,935 12,342
Other time 43,948 42,889
------ ------
Total deposits 124,892 116,742
------- -------
Accrued interest payable on deposits 157 150
Other liabilities 682 674
--- ---
839 824
--- ---
Total liabilities 125,731 117,566
------- -------
STOCKHOLDERS' EQUITY
Common stock, par value $.01; authorized
10,000,000 shares, issued and outstanding
1,007,424 shares 10 10
Surplus 10,064 10,064
Retained earnings 12,297 10,944
Net unrealized holding gains (losses) on available
for sale securities (121) 64
---- --
Total stockholders' equity 22,250 21,082
------ ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $147,981 $138,648
======== ========
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SHORE BANCSHARES, INC.
(UNAUDITED) Three Months Three Months
Dollars in thousands except per share data Ended Ended
March 31, March 31,
1997 1996
---- ----
INTEREST INCOME
Interest and fee income on loans $ 1,961 $ 1,960
Interest and dividends on investment
securities
Taxable securities 527 400
Tax-exempt securities 107 111
Interest on federal funds sold 91 99
-- --
Total interest income 2,686 2,570
----- -----
INTEREST EXPENSE
Interest on certificates of deposit
of $100,000 or more 210 168
Interest on other deposits 937 929
Interest on federal funds purchased -- --
Total interest expense 1,147 1,097
----- -----
NET INTEREST INCOME 1,539 1,473
Provision for credit losses -- --
----- -----
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,539 1,473
----- -----
NONINTEREST INCOME
Service charges on deposit accounts 161 145
Other noninterest income 28 34
Gains (losses) on securities 4 -
----- -----
Total noninterest income 193 179
--- ---
NONINTEREST EXPENSE
Salaries and employee benefits 512 468
Expenses of premises and fixed assets 151 143
Federal deposit insurance premiums 7 1
Stationery, printing and supplies 33 27
Professional fees 25 51
Director and committee fees 83 81
Outside data processing 63 58
Other noninterest expense 175 183
--- ---
Total noninterest expense 1,049 1,012
----- -----
INCOME BEFORE TAXES 683 640
Federal and state income taxes 241 226
--- ---
NET INCOME $ 442 $ 414
====== ======
Net Income Per Share $ 0.44 $ 0.41
Number of Shares Outstanding 1,007,424 1,007,424
F-2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHORE BANCSHARES, INC.
(UNAUDITED)
All dollar amounts in thousands Three Months Ended March 31, 1996 And 1997
Unrealized Holding
Gains (Losses)
Common Surplus Retained on Securities
Stock Earnings Available for Sale
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 $10 $10,064 $10,706 $69
Net Income 414
Cash Dividends Paid, $.17
per share (176)
Fair value adjustment for securities
available-for-sale, net of
applicable income tax (5)
--------------------------------------------
Balances, March 31, 1996 $10 $10,064 $10,944 $64
============================================
Balances, January 1, 1997 $10 $10,064 $12,087 ($66)
Net Income 442
Cash Dividends Paid, $.23
per share (232)
Fair value adjustment for securities
available-for-sale, net of
applicable income tax (55)
--------------------------------------------
Balances, March 31, 1997 $10 $10,064 $12,297 ($121)
============================================
</TABLE>
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SHORE BANCSHARES, INC.
(UNAUDITED)
Three Months Three Months
All dollar amounts in thousands Ended Ended
March 31, March 31,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 442 $ 414
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 50 69
Equity in net earnings of unconsolidated
subsidiaries
Provision for credit losses, net (10) (18)
Deferred income tax benefits -
Net (gains) losses on disposal of assets (4) -
Changes in assets and liabilities:
(Increase) decrease in accrued interest
receivable 142 72
(Increase) decrease in other assets (624) 148
Increase (decrease) in accrued interest payable (1) (1)
Increase (decrease) in other liabilities 203 53
--- --
Net cash provided by operating activities 198 737
--- ---
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale or maturities of held-to-maturity
securities 3,054 5,491
Proceeds from sale or maturities of available-for-sale
securities 1,500 250
(Purchases) of held-to-maturity securities (2,000) (4,479)
(Purchases) of available-for-securities (5,601) -
Net (increase) decrease in loans, net 549 (401)
Purchase of premises and equipment (193) (25)
Proceeds from sale of premises and equipment - -
Investment in unconsolidated subsidary - -
Acquire other real estate - (11)
Proceeds from sales of other real estate - -
------ ---
Net cash provided by (used in) investing
activities (2,691) 825
------ ---
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, interest-
bearing transaction, and savings deposits 1,700 67
Net increase (decrease) in time deposits (974) 195
Cash dividends paid (232) (176)
---- ----
Net cash provided by (used in) financing 494 86
--- --
Net increase (decrease) in cash and
cash equivalents (1,999) 1,648
Cash and cash equivalents, beginning 10,263 9,794
------ -----
Cash and cash equivalents, ending $ 8,264 $11,442
------- -------
Supplementary cash flow information:
Interest paid $ 1,148 $ 1,130
Income taxes paid $ 15 $ 38
F-4
<PAGE>
SHORE BANCSHARES , INC.
REPORT ON AUDIT OF
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Shore Bancshares, Inc.
Centreville, Maryland
We have audited the accompanying consolidated balance sheet of Shore
Bancshares, Inc. as of December 31, 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Shore
Bancshares, Inc. as of December 31, 1995, and for the two years then ended, were
audited by other auditors whose report dated January 18, 1996, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Shore
Bancshares, Inc. as of December 31, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ STEGMAN & COMPANY
Towson, Maryland
January 11, 1997
F-5
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
The Centreville National Bank of Maryland
Centreville, Maryland
We have audited the accompanying balance sheets of The Centreville National
Bank of Maryland as of December 31, 1995 and 1994, and the related statements of
income, stockholders' equity, and cash flows for each of the years in the three
year period ended December 31, 1995. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financing statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Centreville National
Bank of Maryland at December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the financial statements, the Bank adopted a new
accounting standard in 1994, changing its method of accounting for investment
securities.
/s/ TRICE & GEARY LLC
Salisbury, Maryland
January 18, 1996
F-6
<PAGE>
SHORE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 4,872,866 4,887,030
Federal funds sold 5,389,874 4,906,559
Investment securities available for sale, at fair value 11,190,591 4,153,512
Investment securities held to maturity, fair value of
$32,647,262 (1996) and $33,403,306 (1995) 32,462,156 32,977,931
Loans, less allowance for credit losses of $1,503,268
(1996) and $1,478,555 (1995) 87,389,489 85,570,928
Premises and equipment 2,153,126 2,231,808
Accrued interest receivable 1,385,474 1,336,848
Investment in unconsolidated subsidiaries 1,114,228 1,073,384
Other assets 941,673 962,669
------------ ------------
Total assets $146,899,477 $138,100,669
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 16,380,740 $ 15,687,043
Interest-bearing transaction 16,172,211 16,135,653
Savings and money market 31,799,398 29,601,179
Time, $100,000 or more 16,679,534 12,325,149
Other time 43,134,365 42,730,729
------------ ------------
Total deposits 124,166,248 116,479,753
Accrued interest payable on deposits 158,000 150,838
Other liabilities 479,278 620,730
------------ ------------
Total liabilities 124,803,526 117,251,321
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 10,000,000
shares; issued 1,007,424 shares 10,074 10,074
Surplus 10,064,166 10,064,166
Retained earnings 12,087,317 10,706,407
Unrealized gain (loss) on investment securities
available for sale, net of income tax (65,606) 68,701
------------ ------------
Total stockholders' equity 22,095,951 20,849,348
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $146,899,477 $138,100,669
============ ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 8,103,983 $ 7,671,960 $ 7,350,250
Investment and dividends on investment securities:
Taxable 1,834,979 2,156,513 1,860,479
Tax-exempt 424,202 543,148 578,443
Interest on federal funds sold 378,246 137,734 518,633
----------- ----------- ------------
Total interest income 10,741,410 10,509,355 10,307,805
----------- ----------- ------------
INTEREST EXPENSE:
Interest on deposits 4,475,979 4,444,628 4,210,179
Interest on federal funds purchased - 52,236 -
----------- ----------- -----------
Total interest expense 4,475,979 4,496,864 4,210,179
----------- ----------- ------------
NET INTEREST INCOME 6,265,431 6,012,491 6,097,626
PROVISION FOR CREDIT LOSSES - - 274,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 6,265,431 6,012,491 5,823,626
----------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts 639,631 594,201 550,768
Other income 129,911 127,257 123,845
Gains on sales of investment securities, net 203,997 37,808 13,241
Equity in net income of unconsolidated subsidiaries 25,884 118,120 168,731
----------- ----------- -----------
Total noninterest income 999,423 877,386 856,585
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,990,238 1,891,327 1,820,101
Premises and equipment expenses 552,368 466,572 358,320
Federal deposit insurance premiums 2,000 143,723 317,636
Stationery, printing and supplies 120,105 129,983 95,631
Professional fees 175,957 130,030 221,908
Director and committee fees 178,054 189,132 172,860
Outside data processing 248,579 221,610 212,405
Other expenses 516,133 612,346 582,027
----------- ----------- -----------
Total noninterest expenses 3,783,434 3,784,723 3,780,888
----------- ----------- -----------
INCOME BEFORE TAXES ON INCOME 3,481,420 3,105,154 2,899,323
FEDERAL AND STATE INCOME TAXES 1,173,678 966,654 868,459
----------- ----------- -----------
NET INCOME $ 2,307,742 $ 2,138,500 $ 2,030,864
=========== =========== ===========
Earnings per common share $2.29 $2.12 2.02
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on
Investment
Securities Total
Common Retained Available Stockholders'
Stock Surplus Earnings for Sale Equity
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $ 5,037 $ 5,032,083 $13,048,280 $ - $18,085,400
Cumulative effect, net of
taxes, of the initial
application of SFAS No. 115 - - - 114,994 114,994
Two-for-one stock split effected
in the form of a 100% stock
dividend 5,037 5,032,083 (5,037,120) - -
Net income - - 2,030,864 - 2,030,864
Cash dividends, $.60 per share - - (604,454) - (604,454)
Change in unrealized gain (loss)
on investment securities avail-
able for sale, net of income tax - - - (294,460) (294,460)
------- ----------- ----------- --------- -----------
Balances, December 31, 1994 10,074 10,064,166 9,437,570 (179,466) 19,332,344
Premium paid on stock redemption
of unconsolidated subsidiary - - (13,353) - (13,353)
Net income - - 2,138,500 - 2,138,500
Cash dividends, $.85 per share - - (856,310) - (856,310)
Change in unrealized gain (loss)
on investment securities avail-
able for sale, net of income tax - - - 248,167 248,167
------- ----------- ----------- --------- -----------
Balances, December 31, 1995 10,074 10,064,166 10,706,407 68,701 20,849,348
Net income - - 2,307,742 - 2,307,742
Cash dividends, $.92 per share - - (926,832) - (926,832)
Change in unrealized gain (loss)
on investment securities avail-
able for sale, net of income tax - - - (134,307) (134,307)
------- ----------- ----------- ---------- -----------
Balances, December 31, 1996 $10,074 $10,064,166 $12,087,317 $ (65,606) $22,095,951
======= =========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,307,742 $2,138,500 $2,030,864
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 296,599 217,869 184,387
Equity in net income of unconsolidated subsidiaries (25,844) (118,120) (168,731)
Provision for credit losses, net 24,713 (2,946) (369,868)
Deferred income taxes 59,892 77,473 257,189
Net (gains) losses on sales of assets (205,286) (32,882) 66,326
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable
on investment securities and loans (48,626) 114,543 (133,673)
Decrease (increase) in other assets 34,117 (90,209) 49,359
Increase (decrease) in accrued interest payable on deposits 7,162 15,625 (21,823)
(Decrease) increase in other liabilities (141,452) 129,884 (96,774)
----------- ---------- ----------
Net cash provided by operating activities 2,309,017 2,449,737 1,797,256
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
held to maturity 11,529,065 9,829,678 6,614,125
Proceeds from sale of investment securities available for sale 957,127 7,266,250 1,477,452
Purchase of investment securities held to maturity (11,034,144) (582,784) (18,877,835)
Purchase of investment securities available for sale (7,988,166) - (5,923,662)
Purchase of Federal Reserve Bank stock - - (151,100)
(Increase) decrease in loans, net (1,963,160) (7,720,261) 6,931,128
Purchase of premises and equipment (210,521) (1,362,801) (324,715)
Proceeds from sale of premises and equipment 7,200 - -
Dividends from unconsolidated subsidiary - - 121,240
Investment in unconsolidated subsidiary (15,000) - -
Purchase of other real estate owned - (155,305) (607,213)
Proceeds from sale of other real estate owned 118,070 518,417 209,062
----------- ---------- ----------
Net cash (used) provided by investing activities (8,599,529) 7,793,194 (10,531,518)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in demand, transaction, savings,
and money market deposits 2,928,474 (7,688,139) 4,897,227
Increase (decrease) in time deposits 4,758,021 (816,701) (5,162,350)
Cash dividends paid (926,832) (856,310) (604,454)
----------- ---------- ----------
Net cash provided (used) by financing activities 6,759,663 (9,361,150) (869,577)
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 469,151 881,781 (9,603,839)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,793,589 8,911,808 18,515,647
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $10,262,740 $9,793,589 $ 8,911,808
=========== ========== ===========
</TABLE>
F-10
<PAGE>
Shore Bancshares, Inc.
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Supplementary cash flow information:
Interest paid $4,468,817 $4,481,239 $4,232,002
========== ========== ==========
Income taxes paid $1,099,707 $ 788,076 $ 621,334
========== ========== ==========
Noncash investing activities:
Transfers from loans to other real estate owned $(119,886) $ - $ -
========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
SHORE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Shore
Bancshares, Inc. (the "Company") and its subsidiary, The Centreville National
Bank of Maryland (the "Bank") with all significant intercompany transactions
eliminated. The investment in subsidiary is recorded on the Company's books on
the basis of its equity in the net assets of the subsidiary. The accounting and
reporting policies of the Company conform to generally accepted accounting
principles and to general practices in the banking industry. Certain
reclassifications have been made to amounts previously reported to conform with
the classifications made in 1996.
Nature of Operations
The Company, through its bank subsidiary, provides domestic
financial services primarily in Queen Anne's County, Maryland. The primary
financial services include real estate, commercial and consumer lending, as well
as traditional demand deposits and savings products.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Securities
Investment securities that management has the ability and
intent to hold to maturity are classified as held to maturity and carried at
cost, adjusted for amortization of premium and accretion of discounts. Other
investment securities are classified as available for sale and are carried at
estimated fair value. Unrealized gains and losses on investment securities
available for sale, net of related deferred income taxes, are recognized as
direct increases or decreases in stockholders' equity. The cost of investment
securities sold is determined using the specific identification method.
Loans
Loans are stated at the principal amount outstanding, net of
unearned income. Interest income on loans is accrued at the contractual rate on
the principal amount outstanding. It is the Bank's policy to discontinue the
accrual of interest when circumstances indicate that collection is doubtful.
Fees charged and costs capitalized for originating loans are being amortized on
the interest method over the term of the loan.
Allowance for Credit Losses
The allowance for credit losses is established through a
provision for credit losses charged to expense. Loans are charged against the
allowance for credit losses when management believes that the collectibility of
the principal is unlikely. The allowance, based on evaluations of the
collectibility of loans and prior loan loss experience, is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions and trends that may affect the borrowers' ability to pay.
F-12
<PAGE>
While management believes it has established the allowance for
credit losses in accordance with generally accepted accounting principles and
has taken into account the views of its regulators and the current economic
environment, there can be no assurance that in the future the Bank's regulators
or its economic environment will not require further increases in the allowance.
Long-Lived Assets
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation of physical properties is computed on the
straight-line method over the estimated useful lives of the properties.
Expenditures for maintenance, repairs, and minor renewals are charged to
operating expenses; expenditures for betterments are charged to the property
accounts. Upon retirement or other disposition of properties, the carrying value
and the related accumulated depreciation are removed from the accounts.
Long-lived assets are evaluated regularly for
other-than-temporary impairment. If circumstances suggest that their value may
be impaired and the write-down would be material, an assessment of
recoverability is performed prior to any write-down of the assets. Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, was adopted on
January 1, 1996. Implementation of this standard did not have a significant
impact on the Company's financial condition or results of operations.
Other Real Estate Owned
Real estate acquired in foreclosure of loans is carried at cost
or fair value, less estimated costs of disposal, whichever is lower. Fair value
is based on independent appraisals and other relevant factors. At the time of
acquisition, any excess of loan balance over fair value is charged to the
allowance for credit losses. Any subsequent reduction in value, as well as any
operating expenses, are included in other operating expenses.
Income Taxes
Income tax expense is based on the results of operations,
adjusted for permanent differences between items of income or expense reported
in the financial statements and those reported for tax purposes. Under the
liability method, deferred income taxes are determined based on the differences
between the financial statement carrying amounts and the income tax bases of
assets and liabilities and are measured at the enacted tax rates that will be in
effect when these differences reverse.
Financial Assets and Liabilities
Effective January 1, 1997, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
adoption of this pronouncement is not expected to have a material impact on the
Company's financial position.
Cash and Cash Equivalents
The Company has included cash and due from banks and federal
funds sold as cash and cash equivalents for the purpose of reporting cash flows.
2. FORMATION OF HOLDING COMPANY
Shore Bancshares, Inc., a one-bank holding company, commenced
operations on July 1, 1996 pursuant to a Plan of Reorganization and Agreement to
Merge proposed by management and approved by the stockholders on April 16, 1996.
Under the Plan, each outstanding share of Bank common stock was exchanged for
two shares of holding company common stock. The Bank continues its banking
business under its same name as a wholly owned subsidiary of the holding
company.
F-13
<PAGE>
Comparative data in the accompanying consolidated financial
statements for 1994 and 1995 are those of the Bank, the sole subsidiary and
predecessor of the Company, restated to reflect the exchange of shares.
3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 9,434,329 $29,394 $ (5,892) $ 9,457,831
U.S. Government Securities Mutual Fund 1,000,001 - (130,391) 869,610
Federal Reserve Bank stock 302,250 - - 302,250
Federal Home Loan Bank of Atlanta stock 560,900 - - 560,900
----------- ------- --------- -----------
$11,297,480 $29,394 $(136,283) $11,190,591
=========== ======= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to Maturity
<S> <C> <C> <C> <C> <C> <C>
Obligations of U.S. Government
and other government agencies
and corporations $23,065,234 $104,548 $ (79,012) $23,090,770
Obligations of states and political
subdivisions 9,396,922 182,088 (22,518) 9,556,492
----------- -------- --------- -----------
$32,462,156 $286,636 $(101,530) $32,647,262
=========== ======== ========= ===========
</TABLE>
The amortized cost and fair value of investment securities at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $2,738,546 $ 25,794 $ (5,904) $2,758,436
U.S. Government Securities
Mutual Fund 1,000,001 - (91,275) 908,726
Student Loan Marketing
Association stock 793 183,307 - 184,100
Federal Reserve Bank stock 302,250 - - 302,250
---------- -------- -------- ----------
$4,041,590 $209,101 $(97,179) $4,153,512
========== ======== ======== ==========
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Held to Maturity
<S> <C> <C> <C> <C> <C> <C>
Obligations of U.S. Government
and other government agencies
and corporations $23,551,305 $268,106 $(53,085) $23,766,326
Obligations of states and political
subdivisions 9,426,626 260,790 (10,436) 9,676,980
----------- -------- -------- -----------
$32,977,931 $528,896 $(63,521) $33,443,306
=========== ======== ======== ===========
</TABLE>
Gross realized gains and gross realized losses on sales of
investment securities available for sale are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Gross realized gains:
U.S. Treasury securities $ - $22,496 $ -
Obligations of U.S. Government agencies
and corporations 7 540 10,241
Obligations of states and political subdivisions - 26,218 3,000
Student Loan Marketing Association stock 203,990 - -
--------- ---------- -------
203,997 49,254 13,241
Gross realized losses:
U.S. Treasury securities - 11,446 -
------------ -------- ------
Net realized gains $203,997 $37,808 $13,241
======== ======= =======
</TABLE>
Proceeds from the sale of investment securities were $957,127,
$7,266,250 and $1,477,452 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The amortized cost and fair value of investment securities by
contractual maturity is as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Amounts maturing:
One year or less $ 1,995,501 $ 1,999,376 $ 7,938,425 $ 7,994,151
After one year through five years 7,438,828 7,458,455 21,151,094 21,239,667
After five years through ten years - - 3,372,637 3,413,444
---------------- --------------- ------------ ------------
9,434,329 9,457,831 32,462,156 32,647,262
Investments in equity securities 1,863,151 1,732,760 - -
------------ ------------ --------------- -----------
$11,297,480 $11,190,591 $32,462,156 $32,647,262
=========== =========== =========== ===========
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Amounts maturing:
One year or less $ 750,116 $ 748,125 $ 7,527,098 $ 7,550,130
After one year through five years 1,988,430 2,010,311 24,098,786 24,455,796
After five years through ten years - - 1,214,166 1,294,585
After ten years - - 137,881 142,795
-------------- -------------- ------------ ------------
2,738,546 2,758,436 32,977,931 33,443,306
Investments in equity securities 1,303,044 1,395,076 - -
----------- ----------- --------------- -----------
$4,041,590 $4,153,512 $32,977,931 $33,443,306
========== ========== =========== ===========
</TABLE>
The Bank has pledged certain investment securities as collateral for
deposits of certain government agencies and municipalities at December 31 as
follows:
1996 1995
---- ----
Amortized cost $19,554,281 $18,410,295
Fair value 19,619,056 18,636,229
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank makes loans to customers primarily in Queen Anne's County,
Maryland, in an economy closely tied to the agricultural industry. A substantial
portion of the Bank's loan portfolio consists of residential and commercial real
estate mortgages.
The Bank's loan portfolio at December 31 is as follows:
1996 1995
------------ ---------
Real estate:
Construction and land development $ 3,263,710 $ 2,103,782
Commercial 10,934,757 10,426,459
Residential 60,489,725 59,912,849
Commercial 7,739,069 9,064,421
Consumer 6,465,496 5,541,972
------------ ------------
88,892,757 87,049,483
Less: Allowance for credit losses (1,503,268) (1,478,555)
---------- ----------
Loans - net $87,389,489 $85,570,928
=========== ===========
Loans on which the accrual of interest has been discontinued
amounted to approximately $872,000, $1,277,000, and $1,364,000 at December 31,
1996, 1995, and 1994, respectively. If interest on those loans had been accrued,
such income would have approximated $58,000, $32,000 and $91,000 for 1996, 1995
and 1994, respectively.
In the normal course of banking business, loans are made to officers
and directors and their affiliated interests. In the opinion of management,
these loans are consistent with sound banking practices, are within regulatory
lending limitations, and do not involve more than the normal risk of
collectibility. Loans outstanding to such parties totaled $2,023,000 and
$2,761,000 at December 31, 1996 and 1995, respectively. During 1996, $468,000 of
new loans were made and repayments totaled $1,206,000.
F-16
<PAGE>
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $1,478,555 $1,481,501 $1,851,369
---------- ---------- ----------
Recoveries:
Real estate loans 10,421 51,164 14,434
Consumer loans 25,599 37,338 51,324
Commercial and other loans 66,791 13,998 11,056
----------- ----------- -----------
102,811 102,500 76,814
----------- ----------- -----------
Provision for credit losses - - 274,000
-------------- -------------- -----------
Loans charged-off:
Real estate loans (10,421) (14,209) (182,416)
Consumer loans (62,699) (70,687) (110,134)
Commercial and other loans (4,978) (20,550) (428,132)
----------- ----------- -----------
(78,098) (105,446) (720,682)
----------- ----------- -----------
Balance at end of year $1,503,268 $1,478,555 $1,481,501
========== ========== ==========
</TABLE>
On January 1, 1995, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by Statement No. 118, Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures. Statement No. 114
requires that impaired loans, within its scope, be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, except that as a practical expedient, a creditor may measure impairment
based on a loan's observable market price or the fair value of the collateral,
if the loan is collateral dependent. The statement excludes smaller balance and
homogeneous loans such as consumer and residential mortgage loans from
impairment reporting. The Company recognizes income on impaired loans on a cash
basis, if the borrower demonstrates the ability to meet the contractual
obligation and collateral is sufficient. If there is doubt regarding the
borrower's ability to make payments or the collateral is not sufficient,
payments received are applied as principal reduction and no income is
recognized.
Information with respect to impaired loans at December 31 is as
follows:
1996 1995
---------- ----------
Impaired loans with a valuation allowance $ -- $ --
Impaired loans without a valuation allowance 872,136 1,276,523
---------- ----------
Total impaired loans $ 872,136 $1,276,523
========== ==========
Allowance for credit losses related to impaired loans $ -- $ --
Allowance for credit losses related to other than
impaired loans 1,503,268 1,478,555
---------- ----------
Total allowance for credit losses $1,503,268 $1,478,555
========== ==========
Average impaired loans for the year $1,116,933 $1,350,125
========== ==========
Interest income on impaired loans recognized on the
cash basis $ 33,949 $ 26,446
========== ==========
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of the following:
F-17
<PAGE>
<TABLE>
<CAPTION>
1996
----
Accumulated
Cost Depreciation Net
---- ------------ ---
<S> <C> <C> <C> <C> <C> <C>
Land $ 206,514 $ - $ 206,514
Buildings and land improvements 1,732,651 455,325 1,277,326
Furniture and equipment 1,479,717 810,431 669,286
----------- ----------- -----------
$3,418,882 $1,265,756 $2,153,126
========== ========== ==========
1995
----
Accumulated
Cost Depreciation Net
---- ------------ ---
Land $ 186,630 $ - $ 186,630
Buildings and land improvements 1,712,204 370,674 1,341,530
Furniture and equipment 1,350,588 646,940 703,648
----------- ----------- -----------
$3,249,422 $1,017,614 $2,231,808
========== ========== ==========
</TABLE>
6. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The Bank owns 33-1/3% of the outstanding common stock of the
Delmarva Bank Data Processing Center, Inc. The investment is carried at cost,
adjusted for the Bank's equity in the company's undistributed net income. The
excess of cost over the Bank's equity in the company's underlying net assets at
dates of acquisition, amounting to $20,099, has been classified as goodwill and
is being amortized on the straight-line method over 15 years.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $876,889 $748,776 $725,642
Equity in net income 57,942 128,113 144,374
Dividends received - - (121,240)
----------- ----------- ---------
Balance at end of year $934,831 $876,889 $748,776
======== ======== ========
</TABLE>
Data processing expense paid to this company totaled approximately
$211,000, $197,000 and $195,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
The Bank owns 33-1/3% of the outstanding common stock of Eastern
Shore Mortgage Corporation. The investment is carried at cost, adjusted for the
Bank's equity in the company's undistributed net earnings. The excess of cost
over the Bank's equity in the company's underlying net assets at dates of
acquisition, amounting to $48,085, has been classified as goodwill and is being
amortized over 15 years. In June of 1995, the company redeemed another owner
bank's interest. The transaction was treated as if the company was a
consolidated subsidiary.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $196,495 $219,841 $195,484
Premium paid on stock redemption - (13,353) -
Equity in net (loss) income (32,098) (9,993) 24,357
Capital contribution 15,000 - -
--------- ----------- -------
Balance at end of year $179,397 $196,495 $219,841
======== ======== ========
</TABLE>
Interest income from this affiliate totaled approximately $21,000,
3,000 and $36,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Outstanding loans to this affiliate at December 31, 1996 totaled
$155,150.
F-18
<PAGE>
7. DEPOSITS
Certificates of deposit in amounts of $100,000 or more and
their remaining maturities at December 31 are as follows:
1996 1995
----------- -----------
Three months or less $ 7,769,309 $ 4,917,132
Three months through six months 2,775,527 2,952,480
Six months through twelve months 2,195,964 2,439,352
Over twelve months 3,938,734 2,016,185
----------- -----------
$16,679,534 $12,325,149
=========== ===========
Interest expense on deposits for each of the years ended December 31
is as follows:
1996 1995 1994
----------- ---------- --------
Interest bearing transaction $ 489,827 $ 458,095 $ 384,478
Savings and money market 1,027,146 1,156,768 1,239,825
Time, $100,000 or more 705,707 727,049 692,386
Other time 2,253,299 2,102,716 1,893,490
----------- --------- ---------
$4,475,979 $4,444,628 $4,210,179
========== ========== ==========
At December 31, 1996 and 1995, the Bank had deposits of
approximately $9,000,000 and $5,000,000, respectively, from a local County
government.
8. SHORT-TERM BORROWINGS
The Bank has commitments from correspondent banks under which it can
purchase up to $7,000,000 in federal funds and secured reverse repurchase
agreements on a short-term basis. No borrowings were outstanding under these
arrangements during 1996 or 1995.
9. RETIREMENT PLAN
The Bank has a 401(k) profit sharing plan covering substantially all
full-time employees. The plan requires the Bank to match 50% of employee
contributions of up to 6% of compensation as defined under the plan and permits
additional contributions at the discretion of management. Expense under this
plan totaled $137,330, $125,100, and $117,497 for the years ended December 31,
1996, 1995 and 1994, respectively.
10. DEFERRED COMPENSATION
The Bank has agreements with certain directors under which they have
agreed to defer part of their fees and compensation. The amounts deferred are
invested in insurance policies, owned by the Bank, on the lives of the
respective individuals. Amounts to be available under the policies are to be
paid to the individuals as retirement benefits over future years. Cash surrender
values and the accrued benefit obligation included in other assets and other
liabilities at December 31 are as follows:
1996 1995
---------- -------
Cash surrender value $466,682 $419,237
Accrued benefit obligations $466,682 $419,237
F-19
<PAGE>
11. INCOME TAXES
Components of income tax expense for each of the years ended
December 31 are as follows:
1996 1995 1994
---------- ---------- -------
Currently payable:
Federal $ 929,996 $698,011 $467,276
State 183,790 191,170 143,994
----------- --------- ---------
1,113,786 889,181 611,270
----------- --------- ---------
Deferred income taxes:
Federal 49,036 63,431 210,573
State 10,856 14,042 46,616
---------- --------- ---------
59,892 77,473 257,189
---------- --------- ---------
$1,173,678 $966,654 $868,459
========== ======== ========
Components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
1996 1995
--------- --------
Deferred tax assets:
Allowance for credit losses $247,710 $235,404
Deferred compensation 144,207 161,909
Loan origination fees and costs - 10,363
Unrealized loss on investment securities
available for sale 41,283 -
--------- --------
Total deferred tax assets 433,200 407,676
--------- --------
1996 1995
-------- --------
Deferred tax liabilities:
Discount accretion $ 51,330 $ 40,221
Depreciation 19,979 24,644
Undistributed income of unconsolidated
subsidiaries 57,228 55,233
Unearned income 23,386 -
Loan origination fees and costs 12,305 -
Unrealized gain on investment securities
available for sale - 43,222
-------- --------
Total deferred tax liabilities 164,228 163,320
-------- --------
Net deferred tax assets $268,972 $244,356
======== ========
A reconciliation between income tax expense and taxes computed at
the maximum statutory federal rate for 1996, 1995 and 1994 is as follows:
F-20
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- --------------------------- -------------------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Computed at statutory rate $1,183,683 34.0% $1,055,752 34.0% $985,770 34.0%
Increases (decreases) in tax
resulting from:
Tax-exempt interest income (138,947) (4.0) (165,491) (5.3) (182,680) (6.3)
State income taxes, net of
federal income tax benefit 128,157 3.7 135,440 4.4 125,803 4.3
Earnings of unconsolidated
subsidiaries (7,030) (.2) (40,160) (1.3) (57,369) (2.0)
Other - net 7,815 .2 (18,887) (.7) (3,065) .0
---------- ---- ---------- ----- --------- ----
Actual tax expense $1,173,678 33.7% $ 966,654 31.1% $868,459 30.0%
========== ==== ========== ==== ======== ====
</TABLE>
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business. These financial instruments may include
commitments to extend credit, standby letters of credit and purchase
commitments. The Bank uses these financial instruments to meet the financing
needs of its customers. Financial instruments involve, to varying degrees,
elements of credit, interest rate, and liquidity risk. These do not represent
unusual risks and management does not anticipate any losses which would have a
material effect on the accompanying financial statements.
Outstanding loan commitments and lines and letters of credit at
December 31 are as follows:
1996 1995
---------- --------
Loan commitments $1,312,155 $845,000
========== ========
Unused lines of credit $10,178,434 $10,667,000
=========== ===========
Letters of credit $1,786,024 $1,150,000
========== ==========
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. The
Bank generally requires collateral to support financial instruments with credit
risk on the same basis as it does for on-balance sheet instruments. The
collateral is based on management's credit evaluation of the counterparty.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Each customer's
credit-worthiness is evaluated on a case-by-case basis.
Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the carrying values and the related
estimated fair value of the Bank's financial instruments at December 31:
F-21
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 4,872,866 $ 4,872,866 $ 4,887,030 $ 4,887,030
Federal funds sold 5,389,874 5,389,874 4,906,559 4,906,559
Investment securities available for sale 11,297,480 11,190,591 4,041,590 4,153,512
Investment securities held to maturity 32,462,156 32,647,262 32,977,931 33,403,306
Loans, net of allowance for credit losses 87,389,489 88,637,000 85,570,928 87,287,000
Accrued interest receivable 1,385,474 1,385,474 1,336,848 1,336,848
Financial liabilities:
Deposits 124,166,248 124,185,000 116,479,753 116,793,000
Accrued interest payable 158,000 158,000 150,838 150,838
Unrecognized financial instruments:
Commitments to extend credit 11,490,589 11,490,589 11,512,000 11,512,000
Standby letters of credit 1,786,024 1,786,024 1,150,000 1,150,000
</TABLE>
For purposes of the above disclosures of estimated fair value, the
following assumptions were used. The estimated fair value for cash and due from
banks and federal funds sold is considered to approximate cost. The estimated
fair value for securities available for sale and securities held to maturity are
based on quoted market values from the individual securities or for equivalent
securities. The estimated fair value of loans is determined by discounting
future cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
estimated fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The
estimated fair value of fixed maturity certificates of deposits is estimated
using the rates currently offered for deposits of similar remaining maturities.
In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the company.
Other assets and liabilities of the Bank that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in the financial statements nevertheless may have value but are not included in
the above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the trained work force, customer goodwill, and
similar items.
14. REGULATORY MATTERS
The Bank is required to maintain noninterest-bearing deposits with
the Federal Reserve Bank. During 1996 and 1995, the daily average balances were
approximately $2,095,000 and $1,230,000, respectively.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitive measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitive measures established by regulation to ensure capital
adequacy require the Bank to maintain amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as
F-22
<PAGE>
defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets) $21,793,000 28.25% $6,171,000 8.00% $7,713,000 10.00%
Tier I Capital (to Risk
Weighted Assets) $21,936,000 28.44% $3,085,000 4.00% $4,628,000 6.00%
Tier I Capital (to Average
Assets) $21,936,000 14.86% $5,905,000 4.00% $7,413,000 5.00%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets) $20,526,000 27.85% $5,896,000 8.00% $7,370,000 10.00%
Tier I Capital (to Risk
Weighted Assets) $20,671,000 28.05% $2,948,000 4.00% $4,422,000 6.00%
Tier I Capital (to Average
Assets) $20,671,000 14.86% $5,564,000 4.00% $6,953,000 5.00%
</TABLE>
Banking regulations also limit the amount of dividends that may be
paid without prior approval of the Bank's regulatory agencies. Regulatory
approval is required to pay dividends which exceed the Bank's net profits for
the current year plus its retained net profits for the preceding two years. The
amount of dividends that the Bank could have paid to the Company without
approval from bank regulatory agencies at December 31, 1996 was $5,802,130.
15. PENDING ACQUISITION
On December 5, 1996, the Bank entered into an agreement to acquire
Kent Savings and Loan Association, F.A. (Kent Savings) of Chestertown, Maryland
in a merger transaction to be accounted for as a purchase. Under the terms of
the agreement, the Bank will pay approximately $5,100,000 for all the
outstanding shares of Kent Savings. At the effective date, Kent Savings will be
merged into the Bank.
At December 31, 1996, total assets of Kent Savings were $23,856,000
and total stockholders' equity was $3,082,000. Net income for the year ended
December 31, 1996 was $236,000, and there were 140,305 common shares
outstanding. The merger transaction, which is subject to approvals of Kent
Savings' stockholders and banking regulatory agencies, is expected to be
completed in the first quarter of 1997.
F-23
<PAGE>
16. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Shore Bancshares, Inc. (Parent
Company only) is as follows:
CONDENSED BALANCE SHEET
DECEMBER 31, 1996
ASSETS:
Investment in subsidiary $22,099,022
Other assets 43,454
-----------
TOTAL ASSETS $22,142,476
===========
LIABILITIES - Accounts payable $ 46,525
-----------
STOCKHOLDERS' EQUITY:
Common stock 10,074
Surplus 10,064,166
Retained earnings 12,021,711
-----------
Total stockholders' equity 22,095,951
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,142,476
===========
F-24
<PAGE>
CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
INCOME - Dividends from subsidiary $ 926,832
OPERATING EXPENSES 4,652
----------
INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARY 922,180
INCOME TAX BENEFIT 1,582
----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARY 923,762
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 1,383,980
----------
NET INCOME $2,307,742
==========
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
NET INCOME $2,307,742
ADJUSTMENT TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Equity in undistributed income of subsidiary (1,383,980)
Net increase in other assets (43,455)
Net increase in accounts payable 46,525
-----------
Net cash provided by operating activities 926,832
CASH FLOWS FROM FINANCING ACTIVITIES - Dividends paid (926,832)
-----------
CASH AT BEGINNING OF YEAR -
CASH AT END OF YEAR $ -
===========
F-25
<PAGE>
EXHIBIT 2.1
PLAN OF REORGANIZATION AND AGREEMENT TO MERGE DATED MARCH 15, 1996
<PAGE>
PLAN OF REORGANIZATION
AND AGREEMENT TO MERGE
THIS PLAN OF REORGANIZATION AND AGREEMENT TO MERGE ("Plan")
made as of March 15, 1996, among Shore Bancshares, Inc., a Maryland corporation
(the "Company"), The Centreville National Bank of Maryland, a national banking
association ("Centreville National"), and Centreville Interim National Bank, a
national banking association ("Interim Bank").
EXPLANATORY NOTE
The Company is a corporation duly incorporated and existing
under the laws of the State of Maryland with its principal office at 109 North
Commerce Street, Centreville, Maryland. The Company has an authorized capital
stock consisting of Ten Million (10,000,000) shares of Common Stock, $.01 par
value per share, of which 1,000 shares are issued and outstanding.
Centreville National is a national banking association duly
organized and existing under the laws of the United States of America with its
principal office at 109 North Commerce Street, Centreville, Maryland.
Centreville National has an authorized capital stock consisting of 528,000
shares of Common Stock, par value $10.00 per share, of which 503,712 shares are
issued and outstanding.
Interim Bank is a national banking association to be organized
under the laws of the United States of America with its principal office at 109
North Commerce Street, Centreville, Maryland. Upon its formation, Interim Bank
will have an authorized capital stock consisting of one million (1,000,000)
shares of Common Stock, $10.00 par value per share. Prior to the effectiveness
of the merger contemplated in this Plan, Interim Bank will have 10,000 shares of
Common Stock issued and outstanding.
The Company intends to file with the Federal Reserve Bank of
Richmond a Notice of Formation of a Bank Holding Company with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") to become
a registered bank holding company under the Bank Holding Company Act of 1956, as
amended. The Company has indicated that it will acquire all of the Common Stock
of the successor by merger of Centreville National and Interim Bank, under the
title "The Centreville National Bank of Maryland".
AGREEMENT
In consideration of the mutual covenants and agreements
contained in this Plan and the mutual benefits to be derived from this Plan, the
parties agree as follows:
1. The Merger. Subject to the terms and conditions herein
--- -------
contained, on the Effective Date (as hereinafter defined), Centreville National
Bank shall be merged (the "Merger") with and into Interim Bank, with Interim
Bank continuing as the surviving corporation under the charter of Centreville
National, and the separate existence of Centreville National shall cease as of
the Effective Date. The Effective Date of the Merger provided for in this Plan
shall be the date designated by the Comptroller of the Currency of the United
States (the "Comptroller") in the Certificate of Merger (or other evidence that
the Merger has been consummated issued pursuant to the provisions of Title 12,
Section 215a of the United States Code), as amended, issued by the Comptroller,
subject to the occurrence of each of the events set forth in Paragraph 2 hereof,
as of the opening of business on such date.
2. Events Preceding Effectiveness. On or before the Effective
-------------------------------
Date the following shall have occurred:
(a) a majority of each of the Board of Directors of
the Company, Centreville National, and Interim Bank shall have
approved this Plan and the Merger;
<PAGE>
(b) this Plan shall have been submitted to the
stockholders of Centreville National and the Merger
contemplated hereby shall have been ratified and confirmed by
the holders of not less than two-thirds of the issued and
outstanding voting stock of Centreville National at a meeting
duly called for that purpose, and by the Company in its
capacity as sole stockholder of Interim Bank;
(c) the Federal Reserve Board shall have received and
accepted the Company's Notice to Become a Registered Bank
Holding Company with respect to Interim Bank (as successor to
the business of Centreville National);
(d) the Comptroller shall have issued to Interim Bank
a certificate to commence business pursuant to Title 12,
Section 27 of the United States Code, as amended; and
(e) the Comptroller shall have approved the
Application of Merger for the Merger pursuant to Title 12,
Sections 215a and 1828(c) of the United States Code, as
amended.
3. The Reorganization. As of the opening of business on the
Effective Date, Centreville National shall be merged with and into Interim Bank
and thereafter common stock of the Company shall be issued to the former
stockholders of Centreville National, in accordance with the terms and
provisions of Paragraph 5.6 hereof.
4. Conditions Precedent to Consummation of the Plan. This Plan
shall not be consummated and the Merger provided for herein shall not become
effective except upon compliance with each of the following conditions (unless
waived by the Board of Directors of each of the parties hereto):
(a) each of the events set forth in Paragraph 2 shall
have occurred;
(b) not more than 5% of the holders of Common Stock
of Centreville National shall not have exercised dissenters
rights with respect to the merger provided for in the Plan;
and
(c) all consents or approvals, governmental or
otherwise which, in the opinion of counsel for Centreville
National, are necessary to permit or enable the receiving
association in the merger of Centreville National and Interim
Bank after the merger becomes effective to conduct all of the
business and activities conducted by Centreville National
prior to the Effective Date, in the manner in which such
business and activities were then conducted, shall have been
granted or issued.
5. Terms of the Merger.
5.1 Charter and Bylaws. As of the Effective Date,
Centreville National shall be merged into Interim Bank, and the charter and
by-laws of Centreville National shall continue as the charter and by- laws of
the surviving entity without any amendment or modification, unless such
amendment or modification is required to consummate the Merger.
5.2 Name of Receiving Association. The name of the
receiving association shall be "The Centreville National Bank of Maryland".
5.3 Business and Offices of Receiving Association.
The business of the receiving association shall be that of a national banking
association. This business shall be conducted by the receiving association at
its main office which shall be located at 109 North Commerce Street,
Centreville, Maryland, and at
<PAGE>
its legally established branch offices.
5.4 Capital Stock of Receiving Association. The
amount of the authorized capital stock of the receiving association shall be One
Million (1,000,000) shares of Common Stock, par value $10.00 per share.
Immediately following the Effective Date the amount of capital stock of the
receiving association outstanding shall be 503,712 shares of Common Stock, par
value $10.00 per share (subject to adjustment in the case of dissenting
stockholders), resulting in an aggregate capital stock value of $5,037,120.
5.5 Transfer of Assets and Liabilities. All assets of
Centreville National, as they exist at the Effective Date, shall pass to and
vest in the receiving association without any conveyance or other transfer; and
the receiving association shall be responsible for all of the liabilities of
every kind and description, including liabilities arising out of the operation
of a trust department, of each of the merging banks, existing as of the
Effective Date or arising out of the consummation of this merger.
5.6. Stock and Exchange. Upon the Merger becoming
effective:
(a) each share of Common Stock of
Centreville National issued and outstanding at the
Effective Date, shall, without any action on the part
of the holder thereof, be converted into the right to
receive 2 share(s) of the Company's Common Stock;
(b) each share of Common Stock of Interim
Bank issued and outstanding at the Effective Date
shall remain issued and outstanding as one share of
Common Stock of the receiving association, as the
surviving corporation, without any action on the part
of the holders thereof.
5.7. Stock Certificates. Certificates representing
such shares of Common Stock of Centreville National shall thereafter represent
the right to receive common stock of the Company in the aforementioned amount
and may at any time thereafter be exchanged by the holder thereof for the
appropriate number of shares of Common Stock of the Company; and the payment of
dividends or other distributions may be withheld on said stock until new
certificates have been so issued. When the new certificates are issued, the
holders thereof shall be entitled to be paid the amount (without any interest
thereon) of all dividends of other distributions which have become payable with
respect to such shares of Common Stock of the Company. No fractional shares
shall be issued. Stockholders will be paid cash in lieu of fractional shares
based on the fair market value of the Company's Common Stock, as determined by
the Company's Board of Directors.
5.8. Rights of Dissenting Stockholders. Each holder
of shares of Common Stock of Centreville National which are voted against the
approval of the merger who perfects his appraisal rights pursuant to the
provisions of Section 215a of Title 12 of the United States Code, as amended,
shall be entitled to receive from the receiving association in cash the value of
such shares of the Common Stock of Centreville National determined in accordance
with the provisions of said section; and the receiving association shall act as
agent for all of the dissenting stockholders of Centreville National and shall
hold all amounts distributable on account of their stock solely for their
benefit.
5.9 Board of Directors of the Receiving Association.
The members of the Board of Directors of Centreville National, as constituted at
the Effective Date, shall serve as members of the Board of Directors of the
receiving association until the next annual meeting of stockholders of the
receiving association and until such time as their successors have been elected
and have qualified.
<PAGE>
6. Amendment of Plan. This Plan may be amended at any time
prior to the Effective Date, provided that any such amendment is in writing and
is approved by the Board of Directors of each of the parties hereto, and
provided further that subsequent to the date on which the merger provided for
herein is approved by the stockholders of Centreville National, no amendment
shall be made in the terms of the exchange of shares of stock of the parties set
forth in Paragraph 5.7 hereof.
7. Abandonment of Plan. At any time prior to the Effective
Date, this Plan may be terminated and the merger provided for herein abandoned
by any party hereto upon the adoption of an appropriate resolution to that
effect by the Board of Directors of such party, and there shall be no liability
by reason of this Plan and the merger provided for herein, or the abandonment
thereof, on the part of any of the parties hereto, or their directors, officers,
employees, agents, or stockholders.
8. Miscellaneous. This Plan shall be governed by and construed
in accordance with the laws of the United States of America. This Plan shall be
binding upon and inure to the benefit of each of the parties hereto and their
respective successors and assigns. This Plan may be executed in one or more
counterparts each of which shall be deemed an original but all of which together
shall be deemed one and the same Plan.
IN WITNESS WHEREOF, each of the parties has caused this Plan
to be executed on its behalf by its duly authorized officers and its corporate
seal to be hereunto affixed, duly attested by its Secretary or Assistant
Secretary, Cashier or Assistant Cashier, and a majority of the Board of
Directors of each of the parties have subscribed their names as of the date
first written above.
ATTEST: SHORE BANCSHARES, INC.
/s/ Mary Catherine Quimby By: /s/ Daniel T. Cannon
Mary Catherine Quimby Daniel T. Cannon
Secretary President
ATTEST: THE CENTREVILLE NATIONAL BANK OF
MARYLAND
/s/ Mary Catherine Quimby By: /s/ Daniel T. Cannon
Mary Catherine Quimby Daniel T. Cannon
Secretary President
<PAGE>
ADDENDUM
TO PLAN OF REORGANIZATION
AND AGREEMENT TO MERGE
This Addendum to Plan of Reorganization and Agreement to Merge
(this "Addendum") is made this 27th day of June, 1996, by and among Shore
Bancshares, Inc. ("Bancorp"), a Maryland corporation, The Centreville National
Bank of Maryland ("Centreville National"), a national banking association
organized and existing under the laws of the United States of America with its
principal office at 109 North Commerce Street, Centreville, Maryland, and
Centreville Interim National Bank ("Interim"), a national banking association
organized and existing under the laws of the United States of America with its
principal office at 109 North Commerce Street, Centreville, Maryland.
Recitals
A. Bancorp and Centreville National executed a Plan of
Reorganization and Agreement to Merge (the "Plan"), dated March 15, 1996.
B. At the time the Plan was executed, Interim was not lawfully
authorized to conduct business as a national bank by the authority of the Office
of the Comptroller of the Currency.
C. Since the date of execution of the Plan, Interim has been
duly and lawfully organized as a national bank by authority of the Office of the
Comptroller of the Currency.
Agreement
NOW, THEREFORE, in consideration of the Recitals and other
good and valuable consideration, and upon execution of this Addendum by all
parties thereto, Interim hereby is made a party to the Plan.
IN WITNESS WHEREOF, the parties have signed this Addendum as
of the date and year first above stated.
ATTEST: SHORE BANCSHARES, INC.
/s/ Mary Catherine Quimby By: /s/ Daniel T. Cannon
Mary Catherine Quimby Daniel T. Cannon, President
ATTEST: THE CENTREVILLE NATIONAL BANK OF
MARYLAND
/s/ Mary Catherine Quimby By: /s/ Daniel T. Cannon
Mary Catherine Quimby Daniel T. Cannon, President
ATTEST: CENTREVILLE INTERIM NATIONAL BANK
/s/ Mary Catherine Quimby By: /s/ Daniel T. Cannon
Mary Catherine Quimby Daniel T. Cannon
<PAGE>
EXHIBIT 2.2
MERGER AGREEMENT DATED DECEMBER 5, 1996 AMONG KENT SAVINGS AND
LOAN ASSOCIATION, F.A., THE CENTREVILLE NATIONAL BANK OF MARYLAND,
AND THE COMPANY
<PAGE>
MERGER AGREEMENT
This AGREEMENT is made as of this 5th day of December, 1996, between
KENT SAVINGS AND LOAN ASSOCIATION, F.A. (KS&LA), a Federal Savings and Loan
Association having its principal office in Chestertown, Maryland (the "Seller"),
The Centreville National Bank of Maryland (CNB), a National Banking Association
having its principal office in Centreville, Maryland (the "Purchaser"), and
Shore Bancshares, Inc., a body corporate of the State of Maryland (the "Holding
Company");
WHEREAS, the parties have determined that it would be desirable and in
their respective best interests, and in the best interests of the stockholders
of Seller, for Seller to be acquired by Purchaser pursuant to a merger (the
"Merger") of Seller with and into Purchaser on the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and for other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
1.1 Time and Place of Closing.
The closing of the transaction contemplated hereby (the "Closing")
shall occur as of the close of business on the last business day of the month
during which 1) the Seller and Purchaser have received all approvals of federal
and/or state regulatory authorities necessary for the Seller and Purchaser to
consummate such transaction, 2) the Seller has received requisite stockholder
approval and 3) all other conditions to the obligations of the parties as set
forth herein have either been satisfied or waived and the Merger is susceptible
of simultaneous completion OR such other time or date as may be mutually agreed
to by the parties (the "Closing Date"). The Closing shall be held at the main
offices of CNB, Centreville, Maryland, on the Closing Date.
1.2 The Merger.
(a) On the Effective Time (as defined in Section 1.3 hereof) Seller
shall be merged with and into Purchaser. The Merger shall be effected in
accordance with any and all applicable provisions of federal law. At the
Effective Time, the separate existence and corporate organization of Seller
shall cease and Purchaser shall thereafter continue as the surviving corporate
entity under the laws of the United States of America.
(b) The name of the national bank resulting from the Merger (sometimes
hereinafter referred to as the "Resulting Bank") shall be "The Centreville
National Bank of Maryland".
(c) The business of the Resulting Bank shall be that of a national
banking association. This business shall be conducted by the Resulting Bank at
its main office, which is located at 109 N. Commerce Street, Centreville,
Maryland 21617, and at its legally established branches.
(d) The amount of capital stock of the Resulting Bank shall be
$5,037,120.00, divided into 503,712 shares of common stock, each of $10.00 par
value, and at the time the Merger shall become effective, the Resulting Bank
shall have a capital surplus of $5,037,120.00.
(e) All assets of Seller as they exist at the Effective Time (as
hereinafter defined) shall pass to and vest in the Resulting Bank without any
conveyance or other transfer. The Resulting Bank shall be responsible for all of
the liabilities of every kind and description of the merging entity exiting as
of the Effective Time. The Liquidation Account of Seller as of the Effective
Time shall be assumed in full by Purchaser. Seller represents and
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warrants that the Merger contemplated by this Agreement will not cause a
liquidation requiring any disbursement from the Liquidation Account.
1.3 Effective Time of the Merger.
The Merger shall become effective as of the time specified in the
Merger approval to be issued by the Comptroller of the Currency (the "Effective
Time"). At the Effective Time, the Articles of Association of the Resulting Bank
shall read in their entirety as set forth in Exhibit A attached hereto.
1.4 Purchase Price/Payment
The manner and basis of the conversion of the outstanding shares of
capital stock of Seller and the consideration which the respective record
holders thereof shall be entitled to receive pursuant to the Merger shall be as
follows:
(a) Each of the issued and outstanding shares of Seller Common Stock
immediately prior to the Effective Time (except shares held by Purchaser (if
any), shall, automatically by virtue of the effectiveness of the Merger and
without necessity of any action on the part of the holder thereof, be canceled
and converted into the right to receive an amount of cash equal to $35.49 per
share (the "Per Share Merger Price") as of the Effective Time (based on 140,305
shares of Seller Common Stock issued and outstanding and 6,221 shares of Seller
Common Stock subject to stock option as of the date hereof). Each treasury share
and each share of Seller Common Stock held by Purchaser (if any) immediately
prior to the Effective Time shall automatically, by virtue of the Merger and
without necessity of any action on the part of the holder thereof, be canceled.
(b) Each share of the common stock of Purchaser issued and outstanding
immediately prior to the Effective Time shall continue following the Effective
Time as an issued and outstanding share of Purchaser common stock.
1.5 Dissenting Shares.
Except for purposes of determining the total number of shares of Common
Stock issued and outstanding immediately prior to the Effective Time, the
provisions of Section 1.4, 1.8 and 1.9 hereof shall not apply to any shares of
Common Stock which shall be held by holders who elect dissenter and appraisal
rights under 12 CFR ss. 552.14 ("Dissenting Shares"). It is intended that any
holder of Dissenting Shares shall have in consideration for the cancellation of
such Dissenting Shares only such rights as may be given to such holder under 12
CFR ss. 552.14, including the right to require that such holder's Dissenting
Shares be purchased at their fair or appraised value, in the manner and subject
to the procedures and conditions therein provided unless and until the holder
shall have failed to perfect, or shall have effectively withdrawn or lost, such
holder's right to appraisal of any payment for such holder's shares of Common
Stock under such regulation, at which time such shares shall be canceled and
converted into the right to receive cash in the amount provided in Section 1.4
above only and no other consideration.
1.6 Stock Options.
At the Effective Time, and subject to the receipt of an agreement from
each holder of an option outstanding as of the Effective Time, satisfactory in
form and substance to Purchaser regarding the cancellation of such options (the
"Optionholder Agreements"), each of the options to acquire Seller Common Stock
outstanding as of the Effective Time shall automatically, and without further
action, be terminated and each such optionholder shall be entitled to receive in
exchange for the termination of such options cash in an amount equal to the
excess of the Per Share Merger Price over the exercise price per share of such
option (the "Option Price"), multiplied by the number of shares of Seller Common
Stock for which such option is exercisable. Such amount shall be payable whether
or not any such option is by its terms exercisable as of the Effective Time.
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1.7 Deposit of Cash.
No later than the Closing Date, Purchaser shall cause cash to be
deposited in escrow with an escrow agent ("Escrow Agent"), to be mutually agreed
upon by the parties, in an amount (the "Purchase Fund") equal to the total of
(i) the Per Share Merger Price multiplied by the then number of outstanding
shares of Seller Common Stock and (ii) the Option Price multiplied by the number
of shares subject to outstanding options canceled pursuant to Section 1.6
herein. The Purchase Fund shall be equal to $5,111,243 for all outstanding
shares of Seller Common Stock and the purchase of outstanding Seller Stock
Options.
1.8 Exchange of Shares for Cash.
Within five (5) days after the Effective Time, the Escrow Agent will
send a notice and transmittal form to each holder of a certificate theretofore
evidencing Seller Common Stock, advising such holder of the procedure for
surrendering to the Escrow Agent such certificate or certificates in exchange
for payment therefore. Except with respect to any Dissenting Shares, each holder
of a certificate theretofore evidencing Seller Common Stock, upon surrender of
the same to the Escrow Agent, together with such letter of transmittal, shall be
entitled promptly to receive from the Purchase Fund in exchange for such
certificate the Per Share Merger Price multiplied by the number of shares of
Seller Common Stock surrendered thereby. As promptly as practicable after each
such holder's certificate has been surrendered (but not more than three (3)
business days thereafter), the Escrow Agent will mail to each holder of Seller
Common Stock whose certificates for shares, which are not Dissenting Shares,
have been surrendered to the Escrow Agent a check in the appropriate amount to
which such holder is entitled pursuant to this Agreement in respect of such
shares. No interest will be paid or accrued on the cash payable upon surrender
of such certificates. If payment for Seller Common Stock is to be made to any
person other than the registered holder of the Seller Common Stock surrendered
as aforesaid, the amount of any stock transfer or similar taxes (whether imposed
on the registered holder or such person) payable on account of the transfer of
the Seller Common Stock will be deducted from the amount to be paid by the
Escrow Agent, or the Escrow Agent may refuse to make such payment, unless
satisfactory evidence of the payment of such taxes, or exemption therefrom, is
submitted to the Escrow Agent. Shares to which dissenters rights have been
properly perfected shall be treated by Purchaser in the manner provided by
Section 1.5.
1.9 Status of Certificates.
At and after the Effective Time, each outstanding certificate which
previously represented shares of Seller Common Stock (except any Dissenting
Shares, which Dissenting Shares shall evidence only the rights specified in
Section 1.5 hereof) shall until surrendered for exchange be deemed for all
purposes to evidence only the right to receive cash in accordance with the
provisions of this Article I and shall not be deemed to confer upon the holder
thereof any voting, dividend or other rights of a stockholder of the Resulting
Bank. After the Effective Time, there shall be no further registration or
transfer on the records of the Resulting Bank of shares of Seller Common Stock.
No interest in any amount payable to any former holder of Seller Common Stock or
of Stock Options shall accrue or be paid to such holders for the period
following the Effective Time.
1.10 Seller Approvals
The Seller's obligations under this agreement and in connection with
the transactions contemplated hereby are subject to approval by the Office of
Thrift Supervision (the "Seller's Government Approval") and by the stockholders
of the Seller (the "Stockholder Approval").
1.11 Purchasers Approval
The Purchasers obligations under this agreement and in connection with
the transactions contemplated hereby are subject to approval by the Office of
Comptroller of the Currency (the "Purchasers Government Approval").
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ARTICLE II
FACILITY OPERATIONS
2.1 Branch Operations
CNB will continue the operation as a branch trading under the facility
name "Kent Bank, a branch of The Centreville National Bank of Maryland."
2.2 Continued Employment of KS&LA Personnel
(a) As of the Closing Date, the Purchaser shall hire all employees of
the Seller, including the part-time employee (the "Employees") without any
initial change in positions, except as may be necessary to accommodate new
services offered by CNB, and with base cash remuneration (i.e., wages and/or
salary) equivalent to their present respective levels. The Purchaser shall grant
to the Employees credit for their respective service with the Seller for
purposes of determining their participation, eligibility and vesting rights, but
not for purposes of benefit accrual, (i.e. Purchaser will not fund such
benefits) in any and all pension, thrift, profit-sharing, medical, life
insurance, disability and other employee benefit plans or programs now or
hereafter maintained by or on behalf of the Purchaser with the understanding
that:
(i) Eligibility for participation in HMO shall begin on the
first of the month following the Closing Date;
(ii) Profit sharing/disability participation shall accrue as
of January 1 following the Closing Date and after one thousand (1,000)
hours of service with CNB;
(iii) Full calendar year vacation/sick leave is granted on the
first day of employment with Purchaser (prior service credit with
Seller being granted less vacation/sick leave taken for current year);
(iv) Employees, Joyce Bradley and Maryanne Alderson, may not
be discharged without cause for a term of one (1) year so long as they
consent to work days and hours consistent with Purchasers other
employees.
(v) Seller's part-time employee, Karlyn Smith, shall not be
required to recognize Purchaser's mandatory retirement age of 70. In
the alternative, such part-time employee will not be required to
retire, due to her age, for a period of five (5) years from the Closing
Date.
(vi) At any time prior to Closing, Seller is authorized, at
its discretion, to declare an employee "Cost of Living Allowance" in
the 3.0 - 3.5% range.
(vii) Seller is authorized, at its discretion, to continue
accruals for the existing SEP-IRA Plan into 1997 and to payout such
accruals immediately prior to Closing.
In all other respects, Purchaser shall act with respect to the
Employees consistent with its existing employment policies and procedures
applicable to employees generally.
(b) As of the Closing Date, Purchaser shall hire Susanne K. Nuttle
("Nuttle") as a Vice-President of CNB and the Branch Manager of Kent Bank.
Nuttle shall be primarily responsible for lending and business development
including loan authority consistent with CNB branch manager limits. Nuttle's
employment shall be governed by the provisions of Section 2.2(a) above relating
to all employees with the following conditions and/or exceptions:
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(i) Nuttle must give written assurance to full time employment
with CNB, limited to Monday through Friday hours only, through December
31, 1997.
(ii) Upon receipt of such written assurance, Purchaser
authorizes and directs Seller to pay Nuttle, immediately prior to
closing, a lump sum payment in conformance with Section 9 of Nuttle's
October 2, 1987 Employment Agreement, as amended, equal to 2.99 times
the "base amount" as defined therein in return for a complete release
of the Employment Agreement, with amendments, between Nuttle and KS&LA,
originally dated October 2, 1987, to the end that said Agreement,
including all amendments thereto, shall be null and void and of no
further force and effect upon payment of said sum. Notwithstanding the
aforegoing, such lump sum payment shall not exceed One Hundred Eighty
Thousand Dollars ($180,000.00).
(iii) Nuttle shall have the option to not participate in CNB
Health Insurance Plan. If Nuttle opts out of such Health Insurance, her
annual salary will be adjusted upward by Three Thousand Dollars
($3,000.00).
2.3 Kent Bank Advisory Board
(a) On the Closing Date, Purchaser will appoint an eight (8) member
Kent Bank Advisory Board (KBAB), which membership will initially consist of the
current members of the KS&LA Board of Directors.
(b) KBAB members shall be subject to annual reappointment by the CNB
Board of Directors immediately following the Holding Company annual meeting.
(c) As compensation for their services, each member, other than
inside/employee members or members also serving on the CNB or Holding Company
Boards, of the KBAB will receive One Hundred Fifty Dollars ($150.00) per meeting
attended. Said board shall meet one (1) time each two (2) weeks.
(d) Notwithstanding CNB's mandatory age 70 retirement, initial members
of the KBAB shall be grandfathered for a period of five (5) years from the
Closing Date subject, as above stated, to annual reappointment.
(e) KBAB members shall be required to purchase not less than Five
Hundred Dollars ($500.00) worth of Holding Company stock (market value on
Closing Date) to qualify for service.
(f) Non-Compete Provision:
(i) The parties to this agreement acknowledge that no other
branch of CNB has heretofore recognized or put into place an advisory
board.
(ii) For and in consideration of the provisions of this
Sub-Section 2.3, the eight (8) current members of the KS&LA Board of
Directors must agree not to compete with Purchaser by serving as
director/officer/agent or employee, directly or indirectly, at another
financial institution in Kent or Queen Anne's Counties for a period of
two (2) years following the date of Closing.
(iii) Contemporaneous with the execution of this Agreement,
each of the eight current members of the KS&LA Board of Directors shall
enter into a Non-competition Agreement in the form of Exhibit B
attached hereto.
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2.4 Indemnification of KS&LA Directors and Officers
KS&LA is authorized to purchase, to be effective on the Closing Date,
tail coverage on its Directors and Officers Errors and Omissions policy to the
extent that the premium for such coverage does not exceed two (2) times current
annual premium.
ARTICLE III
CNB BOARD SEATS
3.1 New CNB Board Members.
Purchaser and Holding Company agree that on the Closing Date Susanne K.
Nuttle and Paul M. Bowman will become Directors of CNB entitling them to
compensation and benefits equivalent to those currently received by other CNB
Board of Director Members.
3.2 Inside Directors.
Inside/employee directors shall receive no fees for sitting on the CNB
Board of Directors.
3.3 Outside Directors.
Outside/non-employee directors of CNB shall receive Eight Thousand Five
Hundred Dollars ($8,500.00) annually and, in addition, Fifty Dollars ($50.00)
per meeting attended (including Kent Advisory Board Meetings).
3.4 Reappointment.
All CNB Board of Director Members, including those contemplated by this
Agreement, are subject to reappointment by the Holding Company at its Annual
Meeting. However, Susanne K. Nuttle and Paul M. Bowman shall occupy seats on the
CNB Board until, at least, the April, 1998 Holding Company Annual Meeting.
3.5 Purchase of Holding Company Stock.
Susanne K. Nuttle and Paul M. Bowman shall be required to purchase not
less than One Thousand Dollars ($1,000.00) worth of Holding Company stock
(market value on Closing Date) to qualify for service.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby represents and warrants to the Purchaser as follows,
which representations and warranties shall survive the Closing Date for a period
of one year.
4.1 Corporate Organization.
The Seller is a Federal Savings and Loan Association duly organized,
validly existing and in good standing under the laws of the United States. The
Seller has the corporate power and authority to own its properties, to carry on
its business as presently conducted, to execute, deliver and perform this
Agreement and to effect the transactions contemplated hereby. The Seller's
deposits are insured by the Savings Association Insurance Fund to the maximum
extent permitted by law.
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4.2 Corporate Authority.
The execution and delivery of this Agreement and all related agreements
by the Seller, and the consummation by the Seller of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action on the part of the Seller, once the Stockholder Approval is
obtained. This Agreement and all related agreements executed and delivered by
the Seller pursuant hereto have been duly executed by the Seller and constitute
the valid and binding obligations of the Seller enforceable against the Seller
in accordance with their respective terms, once the Stockholder Approval is
obtained.
4.3 Title to Property; Encumbrances.
(a) The Seller is the owner of the Assets, identified in the audited
financial statements for the year ended December 31, 1995, dated February 14,
1996 and updated by internally prepared financial statements and reports filed
with the Office of Thrift Supervision for the quarters ended March 31, 1996;
June 30, 1996; and September 30, 1996 which, as a consequence of the Merger
being transferred to the Purchaser pursuant to this Agreement, free and clear of
any mortgage, pledge, lien, security interest, conditional sales agreement,
encumbrance or charge. Seller will not further encumber any of its assets not in
the ordinary course of business without the prior written consent of Purchaser.
(b) The Sellers liabilities are limited to those identified in the
audited financial statements for the year ended December 31, 1995, dated
February 14, 1996 and updated by internally prepared financial statements and
reports filed with the Office of Thrift Supervision for the quarters ended March
31, 1996; June 30, 1996; and September 30, 1996 or incurred in the ordinary
course of business since September 30, 1996. Seller will not incur additional
liabilities not in the ordinary course of business without the prior written
consent of Purchaser.
(c) The Fixed Assets are all of the material tangible assets owned by
the Seller and used by it to conduct the business as of the date hereof, and
are, to the Seller's best knowledge and belief, in good operating condition and
repair, giving consideration to their age and use and subject to ordinary wear
and tear.
(d) The Seller has not received notice of any violation of zoning laws,
building or fire codes or other statutes, ordinances or regulations relating to
the operation of KS&LA.
4.4 No Violation.
Neither the execution and delivery by the Seller of this Agreement or
any related agreements, nor the consummation by the Seller of the transactions
contemplated hereby or thereby, will violate, conflict with or result in a
default under (i) the Articles of Incorporation or Bylaws of the Seller, (ii)
any provision of any agreement or any other restriction to which the Seller is a
party or by which the Seller or any of its properties is bound or (iii) any
statute, law, decree, regulation or order of any governmental authority, once
the Seller's Governmental Approval is obtained.
4.5 No Brokers, Etc.
Except with respect to RP Financial, Inc., in accordance with an
engagement letter dated March 20, 1996, neither the Seller nor any of its
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage, finders' or similar fees, commissions or
expenses in connection with this Agreement or the transactions contemplated
hereby.
4.6 Security for its Loans.
The Seller has a perfected lien and security interest in all material
items of collateral given to secure its Loans and holds a first lien position
unless otherwise stated in a loan portfolio supplied to Purchaser.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Seller as follows,
which representations and warranties shall survive the Closing Date for a period
of one year.
5.1 Corporate Organization.
The Purchaser is a National Banking Association duly organized, validly
existing and in good standing under the laws of the United States. The Purchaser
has the corporate power and authority to purchase the Capital Stock being
acquired hereunder, to assume the liabilities and obligations being assumed
hereunder, including, without limitation, the Deposit Liabilities, to execute,
deliver and perform this Agreement and to effect the transactions contemplated
hereby. The Purchaser's deposits are insured by the Federal Deposit Insurance
Corporation to the maximum extent permitted by law.
5.2 Corporate Authority.
The execution and delivery of this Agreement and all related agreements
by the Purchaser, and the consummation by the Purchaser of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action on the part of the Purchaser. This Agreement and all related
agreements executed and delivered by the Purchaser pursuant hereto have been
duly executed by the Purchaser and constitute the valid and binding obligations
of the Purchaser enforceable against the Purchaser in accordance with their
respective terms. The Holding Company, as the sole shareholder of Purchaser, has
taken all necessary action to approve this Agreement and the Merger in its
capacity as such shareholder. The shareholders of the Holding Company are not
required to approve this Agreement or the Merger.
5.3 No Violation.
Neither the execution and delivery by the Purchaser of this Agreement
or any related agreements, nor the consummation by the Purchaser of the
transactions contemplated hereby or thereby, will violate, conflict with or
result in a default under (i) the Articles of Association or Bylaws of the
Purchaser, (ii) any provision of any agreement or any other restriction to which
the Purchaser is a party or by which the Purchaser or any of its properties is
bound or (iii) any statute, law, decree, regulation or order of any governmental
authority, once the Purchaser's Governmental Approval is obtained.
5.4 No Brokers, Etc.
Neither the Purchaser nor any of its officers, directors or employees
has employed any broker or finder or incurred any liability for any brokerage,
finders' or similar fees, commissions or expenses in connection with this
Agreement or the transactions contemplated hereby.
5.5 Financial Capacity.
There are no facts or circumstances relating to the business or
financial condition of Holding Company or CNB which may prevent, restrict or
impair the ability of CNB to fulfill its obligations and consummate the
transactions contemplated hereby. Not in limitation of the forgoing, CNB has the
financial capacity to fund the Purchase Fund in full on the Closing Date.
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5.6 Regulatory Approvals.
Neither Holding Company nor CNB is aware of any facts or circumstances
relating to the business, operations or financial condition of Holding Company
or CNB or its wholly-owned subsidiaries which would result in the denial of any
of the regulatory approvals required for consummation of the Merger.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE CLOSING DATE
Pending the Closing Date, and except as otherwise consented to by the
Purchaser:
(i) The Seller shall carry on the business substantially in
the same manner as heretofore, and the Seller shall not engage in any
activities or transactions involving substantial capital expenditures
or outside its ordinary course of business as conducted as of the date
hereof except for activities or transactions contemplated by this
Agreement; and
(ii) The Seller shall use its best efforts to preserve the
business, to preserve for the Purchaser the good will of its customers
and others doing business with the Seller and to exercise reasonable
efforts to cooperate with and assist the Purchaser in assuring the
orderly transition of such business from the Seller to the Purchaser.
ARTICLE VII
CERTAIN OBLIGATIONS OF THE PARTIES
PRIOR TO AND AFTER CLOSING DATE
7.1 Full Access.
The Seller shall afford to the officers and authorized representatives
of the Purchaser, upon prior notice, access at reasonable times, to the
properties, books and records (including Loan records) in order that the
Purchaser may have the full opportunity to make reasonable investigations, at
reasonable times without interfering with the Seller's normal business and
operations, of the Assets and the affairs of the Seller and the officers of the
Seller shall furnish the Purchaser with such additional financial and operating
data and other information as to its business and properties and with access to
such personnel as the Purchaser may, from time to time, reasonably request and
as shall be available, including, without limitation, information required for
inclusion in all governmental applications necessary to effect the transactions
contemplated hereby.
7.2 Requirements of Regulatory Authorities.
The Seller shall, as soon as is practicable, notify the proper
regulatory authorities of its intent to terminate the operation and to
consummate the transactions contemplated hereby and thereafter shall (i) comply
with the normal and usual requirements imposed by such authorities applicable to
effectuate such transactions and (ii) use its good faith efforts to obtain any
required permission of such regulatory authorities to consummate the
transactions contemplated.
7.3 Confidentiality.
The Purchaser will, and will cause its officers, directors, employees
and agents to, hold in strict confidence and not disclose to any other person or
entity, without the prior written consent of the Seller, all information
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received by the Purchaser from or with respect to the Seller in connection with
this Agreement and the transactions contemplated hereby, except such information
as may be otherwise publicly available other than through the wrongful
dissemination of such information by the Purchaser or its officers, directors,
employees or agents or such information as may be required to be disclosed by
applicable law.
7.4 Application for Approval to Effect Merger.
(a) The Purchaser shall prepare and file as soon as practicable after
the date of this Agreement (but not later than 45 days from the date of this
Agreement) all applications, known to Purchaser to be required by law, to the
appropriate federal and/or state regulatory authorities for approval to effect
the Merger of Seller into Purchaser, to establish a branch of CNB at the
location of the Seller and to effect in all other respects the transactions
contemplated hereby. The Purchaser agrees to make draft copies of the
applications (except for any confidential portions thereof) available to the
Seller and its counsel on request, to process the applications in a diligent
manner and on a priority basis, to provide the Seller promptly with a copy of
the applications as filed (except for any confidential portions thereof) and all
notices, orders, opinions, correspondence and other documents with respect
thereto and to use its best efforts to obtain the Purchaser's Government
Approval as and/or if required.
(b) The Seller shall prepare and file as soon as practicable after the
date of this Agreement all applications, to the extent required by law, if any,
to the appropriate federal and/or state regulatory authorities for approval to
effect the Merger of Seller into Purchaser, to establish a branch of CNB at the
location of the Seller and to effect in all other respects the transactions
contemplated hereby. The Seller agrees to make draft copies of the applications
(except for any confidential portions thereof) available to the Purchaser and
its counsel on request, to process the applications in a diligent manner and on
a priority basis, to provide the Purchaser promptly with a copy of the
applications as filed (except for any confidential portions thereof) and all
notices, orders, options, correspondence and other documents with respect
thereto and to use its best efforts to obtain the Seller's Government Approval,
as and/or if required.
7.5 Further Assurances.
Each party hereto agrees to execute and deliver such instruments and to
take such other actions as the other party may reasonably require in order to
carry out the intent of this Agreement. Notwithstanding anything in this
Agreement to the contrary, each party shall be responsible for its own
attorneys' fees.
7.6 Right to Intervene.
In the event that any claim, protest, suit or other proceeding is
instituted against the Purchaser or Seller under this Agreement, the Seller or
Purchaser, as the case may be, shall have the right, at its discretion and
expense, to intervene in such litigation, and the other party hereby consents to
such intervention.
7.7 Shareholder Approval.
The Seller shall submit this Agreement and this transaction to its
Shareholders for approval at a special meeting to be held within 60 days of
Purchaser notifying Seller that it has filed for Purchaser's Government
Approvals and Seller shall use its best efforts to obtain Stockholder Approval
subject to its fiduciary responsibilities.
ARTICLE VIII
CONDITIONS TO THE PURCHASER'S OBLIGATIONS
The obligations of the Purchaser to consummate the transactions
contemplated hereby are conditioned upon fulfillment, at or before the Closing
Date, of each of the following conditions:
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8.1 Representations and Warranties True.
The representations and warranties made by the Seller in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as though such representations and warranties were made at and as of such date,
except for any changes permitted by the terms hereof or consented to by the
Purchaser or except to the extent that the failure to be so true and correct
would not be materially adverse to the financial condition of Seller.
8.2 Obligations Performed.
The Seller shall have performed and complied in all material respects
with all obligations and agreements required by this Agreement to be performed
or complied with by it prior to or on the Closing Date.
8.3 Certificate of Compliance.
The Seller shall have delivered to the Purchaser a certificate of its
President or any Executive Vice President, dated the Closing Date, certifying to
the fulfillment of each of the foregoing conditions.
8.4 No Adverse Litigation.
On the Closing Date, no action, suit or proceeding shall be pending or
threatened (i) against the Seller which might reasonably be expected to
materially and adversely affect the transactions contemplated hereby or the
business, properties or assets of the Seller or (ii) against the Seller or the
Purchaser seeking to enjoin the consummation of the transactions contemplated
hereby.
8.5 Regulatory Approvals.
The Seller and Purchaser shall have received from the appropriate
regulatory authorities the governmental approvals required (i) to consummate the
transactions contemplated hereby and (ii) to operate facility as a branch of the
Purchaser.
8.6 Legal Opinion.
The Purchaser shall have received an opinion, dated the Closing Date,
of Housley Kantarian and Bronstein, P.C., counsel to the Seller, to the effect
that:
(i) The Seller is a Federal Savings and Loan Association duly
organized, validly existing and in good standing under the laws of the
United States;
(ii) The execution and delivery of this Agreement and the
consummation by the Seller of the Merger has been duly authorized by
all necessary corporate action on the part of the Seller. This
Agreement has been duly executed by the Seller and constitutes the
valid and binding obligation of the Seller enforceable against the
Seller in accordance with its terms, subject to the provisions of
federal and other applicable bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship or similar laws relating to
or affecting the enforcement of creditors' rights generally, now or
hereafter in effect, and subject to general equity principles, which
may limit enforcement of certain remedies; and
(iii) Neither the execution and delivery by the Seller of this
Agreement nor the consummation by the Seller of the Merger, will
violate, conflict with or result in a default under (A) the Federal
Stock Charter or Bylaws of the Seller or (B) any Federal thrift or
banking statute, law, decree, regulation or order of any governmental
authority known to such counsel, once the Governmental Approval is
obtained.
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8.7 No Material Adverse Change.
From the date of this Agreement until the Closing Date, there shall
have occurred no material adverse change affecting the assets of Seller except
for such changes that result from (i) changes in banking or thrift laws or
regulations of general applicability or interpretations thereof, (ii) changes in
generally accepted accounting principles or regulatory accounting principles or
interpretations thereof, or (iii) changes in general economic conditions
including changes in the general level of interest rates.
8.8 Stockholder Approval.
The Seller shall have obtained the Stockholder Approval as herein
provided.
ARTICLE IX
CONDITIONS TO THE SELLER'S OBLIGATIONS
The obligations of the Seller to consummate the transactions
contemplated hereby are conditioned upon fulfillment, at or before the Closing
Date, of each of the following conditions:
9.1 Representations and Warranties True.
The representations and warranties made by the Purchaser in this
Agreement shall be true and correct in all material respects at and as of the
Closing Date as though such representations and warranties were made at and as
of such date, except for any changes permitted by the terms hereof or consented
to by the Seller or except to the extent that the failure to be so true and
correct would not be materially adverse to the financial condition of Purchaser.
9.2 Obligations Performed.
The Purchaser shall have performed and complied in all material
respects with all obligations and agreements required by this Agreement to be
performed or complied with by it prior to or on the Closing Date.
9.3 Certificate of Compliance.
The Purchaser shall have delivered to the Seller a certificate of its
President or any Executive Vice President, dated the Closing Date, certifying to
the fulfillment of each of the foregoing conditions.
9.4 No Adverse Litigation.
On the Closing Date, no action, suit or proceeding shall be pending or
threatened (i) against the Purchaser which might reasonably be expected to
materially and adversely affect the transactions contemplated hereby or (ii)
against the Seller or the Purchaser seeking to enjoin the consummation of the
transactions contemplated hereby.
9.5 Regulatory Approvals.
The Seller and Purchaser shall have received from the appropriate
regulatory authorities the governmental approvals required (i) to consummate the
transaction contemplated hereby and (ii) to operate the facility as a branch of
the Purchaser. The Seller shall have received from the appropriate regulatory
authorities any approvals necessary to cease operation of the facility.
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9.6 Legal Opinion.
The Seller shall have received an opinion, dated the Closing Date, of
Jeffrey E. Thompson, Esquire, counsel to the Purchaser, to the effect that:
(i) The Purchaser is a National Banking Association duly
organized, validly existing and in good standing under the laws of the
United States;
(ii) The execution and delivery of this Agreement and the
consummation by the Purchaser of the Merger has been duly authorized by
all necessary corporate action on the part of the Purchaser. This
Agreement has been duly executed by the Purchaser and constitutes the
valid and binding obligation of the Purchaser enforceable against the
Purchaser in accordance with its terms, subject to the provisions of
federal and other applicable bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship or similar laws relating to
or affecting the enforcement of creditors' rights generally, now or
hereafter in effect, and subject to general equity principles, which
may limit enforcement of certain remedies; and
(iii) Neither the execution and delivery by the Purchaser of
this Agreement nor the consummation by the Purchaser of the Merger will
violate, conflict with or result in a default under (A) the Articles of
Association or Bylaws of the Purchaser or (B) any National/Federal
banking statute, law, decree, regulation or order of any governmental
authority known to such counsel, once the Governmental Approval is
obtained.
9.7 Stockholder Approval.
The Seller shall have obtained the Stockholder Approval as herein
provided.
9.8 Deposit of Cash.
Seller shall have received from the Escrow Agent written confirmation
of receipt from Purchaser of sufficient cash to fund the Purchaser fund.
ARTICLE X
TERMINATION
10.1 Methods of Termination.
This Agreement may be terminated in any of the following ways:
(a) at any time on or before the Closing Date by the mutual
written consent of the Purchaser and the Seller;
(b) at any time on or before the Closing Date, by the
Purchaser in writing if any of the conditions set forth in Article VIII
of this Agreement shall not have been met by the Seller or waived in
writing by the Purchaser at the time such condition can no longer be
satisfied;
(c) at any time on or before the Closing Date, by the Seller
in writing if any of the conditions set forth in Article IX of this
Agreement shall not have been met by the Purchaser or waived in writing
by the Seller at the time such condition can no longer be satisfied;
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(d) at any time on or before the Closing Date, by the Seller
or the Purchaser in writing if the other shall have breached any
representation and warranty to the extent provided in Sections 8.1 and
9.1, as applicable (as if such representation and warranty had been
made on and as of the date hereof and on and as of the date of the
notice of breach referred to below) or any covenant, undertaking or
obligation contained herein and such breach shall not have been cured
by the earlier of 30 days after the giving of notice to the breaching
party of such breach or the Closing Date;
(e) by the Seller or Purchaser in writing at any time after
any of the regulatory authorities has denied any application of the
Purchaser for approval of the transactions contemplated hereby;
(f) by the Seller or the Purchaser in writing if the
transaction contemplated hereby is not consummated on or before June
30, 1997, unless the failure of the Closing to occur by such date shall
be due to the failure of the party seeking to terminate this Agreement
to perform or observe the covenants and agreements of such party set
forth herein.
10.2 Procedure Upon Termination.
In the event of termination pursuant to Section 10.1 hereof, written
notice thereof shall forthwith be given to the other party, and this Agreement
shall terminate immediately upon receipt of such notice unless an extension is
consented to by the party having the right to terminate. If this Agreement is
terminated as provided herein:
(a) each party will return all documents, work papers and
other materials of the other party relating to the transactions
contemplated hereby, whether obtained before or after the execution
hereof, to the party furnishing the same; and
(b) all information received by either party hereto with
respect to the business of the other party (other than information
which is a matter of public knowledge or which has heretofore been or
is hereafter published in any publication for public distribution or
filed as public information with any governmental authority) shall not
at any time be used for any business purpose by such party or disclosed
by such party to third persons.
10.3 Termination Fee.
(a) In the event that (i) this Merger Agreement shall have been
terminated pursuant to Article X hereof and (ii) prior to or concurrently with
such termination a Trigger Event (as such term is defined below) shall have
occurred, Seller shall pay to Purchaser a Termination Fee of TWO HUNDRED FIFTY
THOUSAND DOLLARS ($250,000.00). Such fee shall be payable in immediately
available funds on or before the second business day following the occurrence of
such termination.
(b) As used herein, a "Trigger Event" shall mean the occurrence of any
of the following events:
(i) Following the making of an Acquisition Proposal (as such
term is defined below) Seller's Board of Directors shall have failed to
recommend this Merger Agreement or the Merger or shall have withdrawn
or modified in a manner adverse to Purchaser its recommendation of this
Merger Agreement or the Merger, or shall have resolved or publicly
announced an intention to do either of the foregoing; or
(ii) Seller's Board of Directors shall have recommended that
the stockholders of Seller approve any Acquisition Proposal or shall
have entered into an agreement with respect to, or authorized,
approved, proposed or publicly announced its intention to enter into,
any Acquisition Proposal; or
(iii) this Merger Agreement or the Merger shall not have been
approved at a meeting of Seller's stockholders which has been held for
that purpose prior to termination of this Merger Agreement; if prior
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thereto it shall have been publicly announced that any financial
institution (other than Purchaser) shall have made, or disclosed an
intention to make, an Acquisition Proposal and within 15 months of
termination Seller has entered into an agreement with respect to an
Acquisition Proposal. In such an event, the termination fee shall be
due and payable in immediately available funds on or before the second
business day following the date of any such agreement; or
(iv) following the making of an Acquisition Proposal, Seller
shall have breached any covenant or agreement contained in this Merger
Agreement such that Purchaser would be entitled to terminate this
Merger Agreement under Section 10.1 (d) hereof (without regard to any
grace period provided for therein) unless such breach is promptly cured
without jeopardizing consummation of the Merger pursuant to the terms
of this Merger Agreement.
(c) As used herein, "Acquisition Proposal" shall mean any (i) publicly
announced proposal, (ii) regulatory application or notice (whether in draft or
final form), (iii) agreement or understanding, (iv) disclosure of an intention
to make a proposal, or (v) amendment to any of the foregoing, made or filed on
or after the date hereof, in each case with respect to any of the following
transactions with a counterparty other than Purchaser: (A) a merger,
consolidation, acquisition, or any similar transaction, involving Seller; (B) a
purchase, lease or other acquisition of all or substantial all of the assets of
Seller, or (C) a purchase or other acquisition of securities representing 15% or
more of the voting power of Seller's stockholders.
(d) Nothing contained herein shall be deemed to authorize Seller or
Purchaser to breach any provision of this Merger Agreement.
(e) Seller shall completely disclose to Purchaser the terms of any
offer or offer to negotiate an Acquisition Proposal within twenty four (24)
hours of the making of any offer or offer to negotiate an Acquisition Proposal
by any counterparty.
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1 Amendment and Modification.
The parties hereto, by mutual consent, may amend, modify and supplement
this Agreement in such manner as may be agreed upon by them in writing. This
Agreement and the exhibits and schedules hereto constitute the entire agreement
of the parties.
11.2 Waiver or Extension.
Either of the parties hereto, by a written instrument signed by a duly
authorized officer, may extend the time for the performance of any of the
obligations or other acts of the other party and may waive (i) any inaccuracies
in the representations or warranties contained herein or in any document
delivered pursuant hereto or (ii) compliance with any of the undertakings,
obligations, covenants or other acts contained herein or in any such document.
11.3 Assignment.
This Agreement shall be binding upon, and shall inure to the benefit
of, the parties hereto and their respective successors and permitted assigns,
but neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned, prior to the Closing Date, by either of the parties
hereto without the prior written consent of the other.
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11.4 Non-Survival of Representations and Warranties.
The representations, warranties, conditions and obligations set forth
in this Agreement shall not survive the Closing Date except as expressly
provided to the contrary herein or unless the context otherwise requires such as
the agreements set forth in Section 1.8 and Articles II and III herein.
11.5 Payment of Expenses.
Except as otherwise specifically provided in this Agreement, each party
hereto shall bear and pay all costs and expenses incurred by it in connection
with this Agreement and the transactions contemplated hereunder. Except as
otherwise expressly provided herein, any expenses, fees and costs necessary for
Seller's or Purchaser's governmental approvals shall be paid, as the case may
be, by the party seeking approval.
11.6 Addresses for Notices, Etc.
All notices, requests, demands, consents and other communications
provided for hereunder and under any related agreements shall be in writing and
mailed (by registered or certified mail) or delivered by any other means to the
applicable party at the addresses indicated below:
If to the Seller to:
Kent Savings and Loan Association, F.A.
305 High Street
P.O. Box 388
Chestertown, Maryland 21620-0388
Attention: Susanne K. Nuttle
With a copy to:
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street, N.W.
Washington, D.C. 20037
Attention: Leonard S. Volin, Esq.
If to the Purchaser to:
Daniel T. Cannon
C/O The Centreville National Bank of Maryland
P.O. Box 400
Centreville, Maryland 21617
With a copy to:
Jeffrey E. Thompson, Esq.
Thompson & Thompson
118 North Commerce Street
P.O. Box 356
Centreville, Maryland 21617
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party complying as to delivery with the terms
of this Section 11.6.
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11.7 Counterparts.
This Agreement may be executed simultaneously in counterparts, each of
which shall be deemed an original, but each of which together shall constitute
one and the same instrument.
11.8 Governing Law.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland except to the extent Federal law controls.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers as of the date first above
written.
KENT SAVINGS AND LOAN
ASSOCIATION, F.A.
By: /s/ Harry W. Willis
Harry W. Willis
Chairman of
The Board of Directors
By: /s/ Susanne K. Nuttle
Susanne K. Nuttle
President
"Seller"
THE CENTREVILLE NATIONAL BANK
OF MARYLAND
By: /s/ Walter E. Schmidt
Walter E. Schmidt
Chairman of
The Board of Directors
By: /s/ Daniel T. Cannon
Daniel T. Cannon
President
"Purchaser"
SHORE BANCSHARES, INC.
By: /s/ Walter E. Schmidt
Walter E. Schmidt
Chairman of
The Board of Directors
By: /s/ Daniel T. Cannon
Daniel T. Cannon
President
"Holding Company"
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION OF THE COMPANY
<PAGE>
SHORE BANCSHARES, INC.
ARTICLES OF INCORPORATION
FIRST: I, Michael A. Refolo, whose post office address is 233
East Redwood Street, Baltimore, Maryland 21202, being at least eighteen (18)
years of age, do hereby form a corporation under and by virtue of the General
Laws of the State of Maryland.
SECOND: The name of the corporation (which is hereinafter
called the "Corporation") is
Shore Bancshares, Inc.
THIRD: The purposes for which the Corporation is formed are to
engage in any lawful act or activities permitted by a corporation organized
under the laws of the State of Maryland.
FOURTH: The post office address of the principal office of the
Corporation in this State is 109 North Commerce Street, Centreville, Maryland
21617. The name and post office address of the resident agent of the Corporation
in this State are Daniel T. Cannon, 109 North Commerce Street, Centreville,
Maryland 21617. Said resident agent is an individual actually residing in this
State.
FIFTH: The total number of shares of stock which the
Corporation has authority to issue is Ten Million (10,000,000) shares of common
stock with a par value of One Cent ($.01) per share.
SIXTH: The number of Directors of the Corporation which shall
constitute the whole Board shall be not less than three directors. The exact
number of Directors shall be fixed from time to time by the Board of Directors
pursuant to a resolution adopted by a majority of the entire Board of Directors.
The names of the Directors who shall act until the first annual meeting and
until their successors are duly elected and qualify are Walter E. Schmidt,
Sydney G. Ashley, J. Robert Barton, David C. Bryan, Daniel T. Cannon, B. Vance
Carmean, Jr., Mark M. Freestate, Neil R. LeCompte, Jerry F. Pierson, and Wm.
Maurice Sanger.
SEVENTH: The following provisions are hereby adopted for the
purposes of describing the rights and powers of the Corporation and of the
Directors and Stockholders:
(a) The Board of Directors of the Corporation is hereby
empowered to authorize the issuance from time to time of shares of stock of any
class, whether now or hereafter authorized, and securities convertible into
shares of its stock of any class, whether now or hereafter authorized, for such
consideration as said Board of Directors may deem advisable subject to such
limitations and restrictions, if any, as may be set forth in the By-laws of the
Corporation.
(b) The Board of Directors of the Corporation may classify or
reclassify any unissued shares by fixing or altering in any one or more
respects, from time to time before issuance of such shares, the preferences,
rights, voting powers, restrictions and qualifications of, the dividends on, the
times and prices of redemption of, and the conversion rights of, such shares.
(c) The Corporation reserves the right to amend its Charter so
that such amendment may alter the contract rights, as expressly set forth in the
Charter, of any outstanding stock, and any objecting stockholder whose rights
may or shall be thereby substantially adversely affected shall not be entitled
to demand and receive payment of the fair value of the stockholder's stock.
The enumeration and definition of a particular power of the
Board of Directors included in the foregoing is for descriptive purposes only
and shall in no way limit or restrict the terms of any other clause of this or
any other Article of these Articles of Incorporation, or in any manner exclude
or limit any powers conferred upon the Board of Directors under the Maryland
General Corporation Law now or hereafter in force.
<PAGE>
EIGHTH: No director or officer of the Corporation shall be
liable to the Corporation or to its Stockholders for money damages except (i) to
the extent that it is proved that such director or officer actually received an
improper benefit or profit in money, property or services, for the amount of the
benefit or profit in money, property or services actually received, or (ii) to
the extent that a judgment or other final adjudication adverse to such director
or officer is entered in a proceeding based on a finding in the proceeding that
such director's or officer's action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding.
IN WITNESS WHEREOF, I have signed these Articles of
Incorporation on this 15th day of March, and I acknowledge the same to be my
act.
/s/ Michael A. Refolo
Michael A. Refolo
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EXHIBIT 3.2
BYLAWS OF THE COMPANY
<PAGE>
SHORE BANCSHARES, INC.
BY-LAWS
ARTICLE I
Stockholders
------------
SECTION 1. Annual Meeting. The annual meeting of the
stockholders of the Corporation shall be held on a day duly designated by the
Board of Directors in the month of April in each year, for the purpose of
electing directors to succeed those whose terms shall have expired as of the
date of such annual meeting, and for the transaction of such other corporate
business as may come before the meeting.
SECTION 2. Special Meetings. Special meetings of the
stockholders may be called at any time for any purpose or purposes by the
Chairman, the President, by a Vice President, or by a majority of the Board of
Directors, and shall be called forthwith by the Chairman, the President, by a
Vice President, or Secretary, or any director of the Corporation upon the
request in writing of the holders of a majority of all the shares outstanding
and entitled to vote on the business to be transacted at such meeting. Such
request shall state the purpose or purposes of the meeting.
If the person to whom such request in writing is made shall
fail to issue a call for such meeting within ten (10) days after receipt of such
request, then a majority of the Board of Directors or the stockholders owning of
record a majority in amount of the stock of the Corporation, issued, outstanding
and entitled to vote, may do so by giving ten (10) days' prior written notice of
the time, place and object of the meeting in the manner set forth in Article I,
Section 4 hereof. Business transacted at all special meetings of stockholders
shall be confined to the purpose or purposes stated in the notice of the
meeting.
SECTION 3. Place of Holding Meetings. All meetings of
stockholders shall be held at the principal office of the Corporation or
elsewhere in the United States as designated by the Board of Directors.
SECTION 4. Notice of Meetings. Written notice of each meeting
of the stockholders shall be mailed, postage pre-paid by the Secretary, to each
stockholder entitled to vote thereat at the stockholder's post office address,
as it appears upon the books of the Corporation, at least ten (10) days but not
more than ninety (90) days before, the meeting. Each such notice shall state the
place, day, and hour at which the meeting is to be held and, in the case of any
special meeting, shall state briefly the purpose or purposes thereof.
SECTION 5. Quorum. The presence in person or by proxy of the
holders of record of a majority of the shares of the capital stock of the
Corporation issued and outstanding and entitled to vote thereat shall constitute
a quorum at all meetings of the stockholders, except as otherwise provided by
law, by the Articles of Incorporation or by these By-laws. If less than a quorum
shall be in attendance at the time for which the meeting shall have been called,
the meeting may be adjourned from time to time by a majority vote of the
stockholders present or represented, without any notice other than by
announcement at the meeting, until a quorum shall attend. At any adjourned
meeting at which a quorum shall attend, any business may be transacted which
might have been transacted if the meeting had been held as originally called.
SECTION 6. Organization. Meetings of stockholders shall be
presided over by the Chairman of the Board of Directors or, if the Chairman is
not present, the President of the Corporation, or if the President is not
present, by a Vice President, or, if none of said officers is present, by a
chairman to be elected at the meeting. The Secretary of the Corporation, or if
the Secretary is not present, any Assistant Secretary shall act as Secretary of
such meetings; in the absence of the Secretary and any Assistant Secretary, the
presiding officer may appoint a person to act as Secretary of the meeting.
<PAGE>
SECTION 7. Voting. At all meetings of stockholders, every
stockholder entitled to vote thereat shall have one (l) vote for each share of
stock standing in the stockholder's name on the books of the Corporation on the
date for the determination of stockholders entitled to vote at such meeting.
Such vote may be either in person or by proxy appointed by an instrument in
writing subscribed by such stockholder or the stockholder's duly authorized
attorney, bearing a date not more than eleven (11) months prior to said meeting,
unless said instrument provides for a longer period. Such proxy shall be dated,
but need not be sealed, witnessed or acknowledged. All elections shall be had
and all questions shall be decided by a majority of the votes cast at a duly
constituted meeting, except as otherwise provided by law, in the Articles of
Incorporation or by these By-laws.
If the chairman of the meeting shall so determine, a vote by
ballot may be taken upon any election or matter, and the vote shall be so taken
upon request of the holders of ten percent (10%) of the stock entitled to vote
on such election or matter. In either of such events, the proxies and ballots
shall be received and be taken in charge and all questions touching the
qualification of voters and the validity of proxies and the acceptance or
rejection of votes, shall be decided by the tellers. Such tellers shall be
appointed by said meeting.
ARTICLE II
Board of Directors
SECTION 1. General Powers. The property and business of the
Corporation shall be managed by the Board of Directors of the Corporation.
SECTION 2. Number and Term of Office. The business and
property of the Corporation shall be conducted and managed by its Board of
Directors which shall consist of not less than three (3) members, the exact
number of which shall be fixed from time to time by the Board of Directors
pursuant to a resolution adopted by a majority of the Board of Directors. The
present number of Directors shall be ten (10). The directors shall be elected
each year at the annual meeting of stockholders, except as hereinafter provided
and each director shall serve until his successor shall be elected and shall
qualify.
SECTION 3. Vacancies. In the case of any vacancy in the Board
of Directors through death, resignation, disqualification, removal or other
cause, the remaining directors, by affirmative vote of the majority thereof, may
elect a successor to hold office for the unexpired portion of the term of a
director whose place shall be vacant, and until the election of his successor,
or until he shall be removed, prior thereto by an affirmative vote of the
holders of a majority of the stock.
Similarly and in the event of the number of directors being
increased as provided in these By-laws, the additional directors so provided for
shall be elected by the directors already in office, and shall hold office until
the next annual meeting of stockholders and thereafter until his or their
successors shall be elected.
Any director may be removed from office with or without cause
by the affirmative vote of the holders of the majority of the stock issued and
outstanding and entitled to vote at any special meeting of stockholders
regularly called for the purpose.
SECTION 4. Place of Meeting. The Board of Directors may hold
their meetings and have one or more offices, and keep the books of the
Corporation, either within or outside the State of Maryland, at such place or
places as they may from time to time determine by resolution or by written
consent of all the
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<PAGE>
directors. The Board of Directors may hold their meetings by conference
telephone or other similar electronic communications equipment in accordance
with the provisions of Maryland Corporate Law.
SECTION 5. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by resolution of the Board, provided that notice of every
resolution of the Board fixing or changing the time or place for the holding of
regular meetings of the Board shall be mailed to each director at least three
(3) days before the first meeting held in pursuance thereof. The annual meeting
of the Board of Directors shall be held immediately following the annual
stockholders' meeting at which a Board of Directors is elected. Any business may
be transacted at any regular meeting of the Board.
SECTION 6. Special Meetings. Special meetings of the Board of
Directors shall be held whenever called by direction of the Chairman, the
President or Vice-President and must be called by the Chairman, the President or
the Secretary upon written request of a majority of the Board of Directors, by
mailing the same at least two (2) days prior to the meeting, or by personal
delivery, facsimile transmission, telegraphing or telephoning the same on the
day before the meeting, to each director; but such notice may be waived by any
director. Unless otherwise indicated in the notice thereof, any and all business
may be transacted at any special meeting. At any meeting at which every director
shall be present, even though without notice, any business may be transacted and
any director may in writing waive notice of the time, place and objects of any
special meeting.
SECTION 7. Quorum. A majority of the whole number of directors
shall constitute a quorum for the transaction of business at all meetings of the
Board of Directors, but, if at any meeting less than a quorum shall be present,
a majority of those present may adjourn the meeting from time to time, and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by law or by the Corporation's Articles of Incorporation
or by these By-laws.
SECTION 8. Compensation of Directors. Directors may receive a
fixed sum and expenses for attendance at regular and special meetings and
committee meetings, or any combination of the foregoing as may be determined
from time to time by the Board of Directors, and nothing contained herein shall
be construed to preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefore.
SECTION 9. Committees. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of two or more of the directors of the
Corporation, which, to the extent provided in the resolution, shall have and may
exercise the powers of the Board of Directors, and may authorize the seal of the
Corporation to be affixed to all papers which may require it. Such committee or
committees shall have such names as may be determined from time to time by
resolution adopted by the Board of Directors.
ARTICLE III
Officers
SECTION 1. Election, Tenure, and Compensation. The officers of
the Corporation shall be a Chairman, a President, one or more Vice-Presidents
(if so elected by the Board of Directors), a Secretary, and a Treasurer, and
such other officers as the Board of Directors from time to time may consider
necessary for the proper conduct of the business of the Corporation. The
officers shall be elected annually by the Board of
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<PAGE>
Directors at its first meeting following the annual meeting of the stockholders.
The Chairman and the President shall be directors and the other officers may,
but need not be, directors. Any two or more of the above officers, except those
of President and Vice President, may be held by the same person, but no officer
shall execute, acknowledge or verify any instrument in more than one capacity if
such instrument is required by law or by these By-laws to be executed,
acknowledged or verified by any two or more officers. The compensation or salary
paid all officers of the Corporation shall be fixed by resolutions adopted by
the Board of Directors.
Except where otherwise expressly provided in a contract duly
authorized by the Board of Directors, all officers and agents of the Corporation
shall be subject to removal at any time by the affirmative vote of a majority of
the whole Board of Directors, and all officers, agents, and employees, other
than officers appointed by the Board of Directors, shall hold office at the
discretion of the Board of Directors or of the officers appointing them.
SECTION 2. Powers and Duties of the Chairman. The Chairman
shall preside at all meetings of the stockholders and of the Board of Directors
unless the Board of Directors shall, by a majority vote of a quorum thereof
elect an individual other than the Chairman to preside at meetings of the Board
of Directors. The Chairman shall be ex-officio a member of all the standing
committees. The Chairman shall do and perform such other duties as may, from
time to time, be assigned to the Chairman by the Board of Directors.
SECTION 3. Powers and Duties of the President. The President
shall be the chief executive officer of the Corporation and shall have general
charge and control of all its business affairs and properties. The President may
sign and execute all authorized bonds, contracts or other obligations in the
name of the Corporation. The President shall have the general powers and duties
of supervision and management usually vested in the office of President of a
corporation. The President shall do and perform such other duties as may, from
time to time, be assigned to the President by the Board of Directors.
SECTION 4. Powers and Duties of the Vice President. The Board
of Directors may elect one or more Vice Presidents. Any Vice President (unless
otherwise provided by resolution of the Board of Directors) may sign and execute
all authorized bonds, contracts, or other obligations in the name of the
Corporation. Each Vice President shall have such other powers and shall perform
such other duties as may be assigned to the Vice President by the Board of
Directors or by the Chairman or the President. In case of the absence or
disability of the President, the duties of that office shall be performed by any
Vice President, and the taking of any action by such Vice President in place of
the President shall be conclusive evidence of the absence or disability of the
President.
SECTION 5. Secretary. The Secretary shall give, or cause to be
given, notice of all meetings of stockholders and directors and all other
notices required by law or by these By-laws, and in case of the Secretary's
absence or refusal or neglect to do so, any such notice may be given by any
person thereunto directed by the Chairman or the President, or by the directors
or stockholders upon whose written requisition the meeting is called as provided
in these By-laws. The Secretary shall record all the proceedings of the meetings
of the stockholders and of the directors in books provided for that purpose, and
shall perform such other duties as may be assigned to him by the directors, the
Chairman, or the President. The Secretary shall have custody of the seal of the
Corporation and shall affix the same to all instruments requiring it, when
authorized by the Board of Directors, the Chairman, or the President, and attest
the same. In general, the Secretary shall perform all the duties generally
incident to the office of Secretary, subject to the control of the Board of
Directors, the Chairman, and the President.
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SECTION 6. Treasurer. The Treasurer shall have custody of all
the funds and securities of the Corporation, and shall keep full and accurate
account of receipts and disbursements in books belonging to the Corporation. The
Treasurer shall deposit all moneys and other valuables in the name and to the
credit of the Corporation in such depository or depositories as may be
designated by the Board of Directors.
The Treasurer shall disburse the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements. The Treasurer shall render to the Chairman, the President and the
Board of Directors, whenever any of them so requests, an account of all
transactions as Treasurer and of the financial condition of the Corporation.
The Treasurer shall give the Corporation a bond, if required
by the Board of Directors, in a sum, and with one or more sureties, satisfactory
to the Board of Directors, for the faithful performance of the duties of the
office and for the restoration to the Corporation in case of the Treasurer's
death, resignation, retirement or removal from office of all books, papers,
vouchers, moneys, and other properties of whatever kind in the Treasurer's
possession or under the Treasurer's control belonging to the Corporation.
The Treasurer shall perform all the duties generally incident
to the office of the Treasurer, subject to the control of the Board of
Directors, the Chairman, and the President.
SECTION 7. Assistant Secretary. The Board of Directors may
appoint an Assistant Secretary or more than one Assistant Secretary. Each
Assistant Secretary shall (except as otherwise provided by resolution of the
Board of Directors) have power to perform all duties of the Secretary in the
absence or disability of the Secretary and shall have such other powers and
shall perform such other duties as may be assigned by the Board of Directors,
the Chairman, or the President. In case of the absence or disability of the
Secretary, the duties of the office shall be performed by any Assistant
Secretary, and the taking of any action by any such Assistant Secretary in place
of the Secretary shall be conclusive evidence of the absence or disability of
the Secretary.
SECTION 8. Assistant Treasurer. The Board of Directors may
appoint an Assistant Treasurer or more than one Assistant Treasurer. Each
Assistant Treasurer shall (except as otherwise provided by resolution of the
Board of Directors) have power to perform all duties of the Treasurer in the
absence or disability of the Treasurer and shall have such other powers and
shall perform such other duties as may be assigned by the Board of Directors,
the Chairman or the President. In case of the absence or disability of the
Treasurer, the duties of the office shall be performed by any Assistant
Treasurer, and the taking of any action by any such Assistant Treasurer in place
of the Treasurer shall be conclusive evidence of the absence or disability of
the Treasurer.
ARTICLE IV
Capital Stock
SECTION 1. Issue of Certificates of Stock. The certificates
for shares of the stock of the Corporation shall be of such form not
inconsistent with the Certificate of Incorporation, or its amendments, as shall
be approved by the Board of Directors. All certificates shall be signed by the
Chairman, the President or by any Vice-President and counter-signed by the
Secretary, an Assistant Secretary, Treasurer or Assistant Treasurer, and sealed
with the seal of the Corporation. All certificates for each class of stock shall
be consecutively numbered. The name of the person owning the shares issued and
the address of the holder, shall be entered in the Corporation's books. All
certificates surrendered to the Corporation for transfer shall be
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canceled and no new certificates representing the same number of shares shall be
issued until the former certificate or certificates for the same number of
shares shall have been so surrendered, and canceled, unless a certificate of
stock be lost or destroyed, in which event another may be issued in its stead
upon proof of such loss or destruction and the giving of a satisfactory bond of
indemnity not exceeding an amount double the value of the stock. Both such proof
and such bond shall be in a form approved by the general counsel of the
Corporation and by the Transfer Agent of the Corporation and by the Registrar of
the stock.
SECTION 2. Transfer of Shares. Shares of the capital stock of
the Corporation shall be transferred on the books of the Corporation only by the
holder thereof in person or by the holder's attorney upon surrender and
cancellation of certificates for a like number of shares as hereinbefore
provided.
SECTION 3. Registered Stockholders. The Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and accordingly shall not be bound to recognize any
equitable or other claim to or interest in such share in the name of any other
person, whether or not it shall have express or other notice thereof, save as
expressly provided by the Laws of Maryland.
SECTION 4. Closing Transfer Books. The Board of Directors may
fix the period, not exceeding twenty (20) days, during which time the books of
the Corporation shall be closed against transfers of stock, or, in lieu thereof,
the directors may fix a date not less than ten (10) days nor more than sixty
(60) days preceding the date of any meeting of stockholders or any dividend
payment date or any date for the allotment of rights, as a record date for the
determination of the stockholders entitled to notice of and to vote at such
meeting or to receive such dividends or rights as the case may be; and only
stockholders of record on such date shall be entitled to notice of and to vote
at such meeting or to receive such dividends or rights as the case may be.
ARTICLE V
Bank Accounts and Loans
SECTION 1. Bank Accounts. Such officers or agents of the
Corporation as from time to time shall be designated by the Board of Directors
shall have authority to deposit any funds of the Corporation in such banks or
trust companies as shall from time to time be designated by the Board of
Directors and such officers or agents as from time to time authorized by the
Board of Directors may withdraw any or all of the funds of the Corporation so
deposited in any bank or trust or trust company, upon checks, drafts or other
instruments or orders for the payment of money, drawn against the account or in
the name or behalf of this Corporation, and made or signed by such officers or
agents; and each bank or trust company with which funds of the Corporation are
so deposited is authorized to accept, honor, cash and pay, without limit as to
amount, all checks, drafts or other instruments or orders for the payment of
money, when drawn, made or signed by officers or agents so designated by the
Board of Directors until written notice of the revocation of the authority of
such officers or agents by the Board of Directors shall have been received by
such bank or trust company. There shall from time to time be certified to the
banks or trust companies in which funds of the Corporation are deposited, the
signature of the officers or agents of the Corporation so authorized to draw
against the same. In the event that the Board of Directors shall fail to
designate the persons by whom checks, drafts and other instruments or orders for
the payment of money shall be signed, as hereinabove provided in this Section,
all of such checks, drafts and other instruments or orders for the payment of
money shall be signed by the Chairman, the President or a Vice President and
counter-signed by the Secretary or Treasurer or an Assistant Secretary or an
Assistant Treasurer of the Corporation.
SECTION 2. Loans. Such officers or agents of the Corporation
as from time to time shall be designated by the Board of Directors shall have
authority to effect loans, advances or other forms of credit at
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any time or times for the Corporation from such banks, trust companies,
institutions, corporations, firms or persons as the Board of Directors shall
from time to time designate, and as security for the repayment of such loans,
advances, or other forms of credit to assign, transfer, endorse, and deliver,
either originally or in addition or substitution, any or all stock, bonds,
rights, and interests of any kind in or to stocks or bonds, certificates of such
rights or interests, deposits, accounts, documents covering merchandise, bills
and accounts receivable and other commercial paper and evidences or debt at any
time held by the Corporation; and for such loans, advances, or other forms of
credit to make, execute and deliver one or more notes, acceptances or written
obligations of the Corporation on such terms, and with such provisions as to the
security or sale or disposition thereof as such officers or agents shall deem
proper; and also to sell to, or discount or rediscount with, such banks, trust
companies, institutions, corporations, firms or persons any and all commercial
paper, bills receivable, acceptances and other instruments and evidences of debt
at any time held by the Corporation, and to that end to endorse, transfer and
deliver the same. There shall from time to time be certified to each bank, trust
company, institution, corporation, firm or person so designated the signature of
the officers or agents so authorized; and each bank, trust company, institution,
corporation, firm or person is authorized to rely upon such certification until
written notice of the revocation by the Board of Directors of the authority of
such officers or agents shall be delivered to such bank, trust company,
institution, corporation, firm or person.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Fiscal Year. The fiscal year of the Corporation
shall begin on the first day of January of each year.
SECTION 2. Notices. Whenever, under the provisions of these
By-laws, notice is required to be given to any director, officer or stockholder,
unless otherwise provided in these By-laws, such notice shall be deemed given if
in writing, and personally delivered, or sent by telefax, or telegram, or by
mail, by depositing the same in a post office or letter box, in a postpaid
sealed wrapper, addressed to each stockholder, officer or director, as the case
may be, at such address as appears on the books of the Corporation, or in
default of any other address, to such director, officer or stockholder, at the
general post office in the Town of Centreville, Maryland, and such notice shall
be deemed to be given at the time the same is so personally delivered,
telefaxed, telegraphed or so mailed. Any stockholder, director or officer may
waive any notice required to be given under these By-laws.
SECTION 3. Voting Upon Stocks. Unless otherwise ordered by the
Board of Directors, the Chairman, the President and the Vice President, or any
of them, shall have full power and authority on behalf of the Corporation to
attend and to vote and to grant proxies to be used at any meetings of
stockholders of any corporation in which the Corporation may hold stock.
ARTICLE VII
Amendment of By-laws
The Board of Directors and the stockholders shall each have
full power to amend, alter or repeal these By-laws, or any provision thereof,
and may from time to time make additional By-Laws. Any amendment to the By-Laws
by the stockholders shall be made at any annual meeting as part of the general
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business of such meeting, or at any special meeting provided there was stated in
the notice of such meeting given to the stockholders the substance of such
proposed alteration or repeal.
ARTICLE VIII
Indemnification
SECTION 1. Definitions. As used in this Article VIII, any word
or words that are defined in Section 2-418 of the Corporations and Associations
Article of the Annotated Code of Maryland (the "Indemnification Section"), as
amended from time to time, shall have the same meaning as provided in the
Indemnification Section.
SECTION 2. Indemnification of Directors and Officers. The
Corporation shall indemnify and advance expenses to a director or officer of the
Corporation in connection with a proceeding to the fullest extent permitted by
and in accordance with the Indemnification Section.
SECTION 3. Indemnification of Other Agents and Employees. With
respect to an employee or agent, other than a director or officer of the
Corporation, the Corporation may, as determined by and in the discretion of the
Board of Directors of the Corporation, indemnify and advance expenses to such
employees or agents in connection with a proceeding to the extent permitted by
and in accordance with the Indemnification Section.
END OF BY-LAWS
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EXHIBIT 16
LETTER FROM TRICE & GEARY LLC
<PAGE>
May 23, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Shore Banschares, Inc.
Ladies and Gentlemen:
In accordance with Item 304 of Regulation S-K, we have been provided by Shore
Bancshares, Inc. (the "Company") a copy of its disclosures (the "Disclosures")
contained in Item 14 of the Company's Form 10 regarding our replacement as
independent auditors of The Centreville National Bank of Maryland, the Company's
wholly-owned subsidiary.
We have reviewed the Disclosures and agree with the statements made therein
regarding us.
Sincerely,
/s/ TRICE & GEARY LLC
TRICE & GEARY LLC
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
The Company is the sole stockholder of The Centreville National Bank of
Maryland (the "Bank"), a national banking association incorporated under the
laws of the United States of America. The Bank owns one-third of the outstanding
common stock of two service corporations: The Delmarva Bank Data Processing
Center, Inc. and The Eastern Shore Mortgage Corporation, both Maryland
corporations. The Eastern Shore Mortgage Corporation, located in Easton,
Maryland, is engaged in mortgage banking activities, including the origination
of residential mortgage loans and the subsequent sale of the loans to permanent
investors. Its primary customers are residents who live on Maryland's Eastern
Shore. The Delmarva Bank Data Processing Center, Inc., also located in Easton,
Maryland, provides data processing services to banks located in Maryland,
Delaware, Virginia and the District of Columbia.
<PAGE>
