SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 0-22345
------------------------------
SHORE BANCSHARES, INC.
109 North Commerce Street
Post Office Box 400
Centreville, Maryland 21617-0400
Telephone: (410) 758-1600
IRS Employer Identification Number: 52-1974638
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, Par Value $0.01
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
Indicate the number of shares of outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
As of August 3, 1999, there were 1,913,882 shares of
Common Stock $0.01 Par Value outstanding.
This is the only class of outstanding shares.
<PAGE>
SHORE BANCSHARES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets -June 30, 1999 and December 31, 1998
Statements of Income -- Three months ended June 30, 1999 and 1998 and
the six months ended June 30, 1999 and 1998.
Statements of Cash Flows -- Six months ended June 30, 1999 and 1998
and the twelve months ended December 31, 1998.
Notes to Financial Statements - June 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
SHORE BANCSHARES, INC.
<TABLE>
<CAPTION>
June 30, December 31,
Dollars in thousands 1999 1998
(Unaudited)
----------- ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 4,077 $ 4,536
Federal funds sold 8,878 9,752
Securities
Held to Maturity at amortized cost 18,625 23,916
(fair value of $18,512 and $24,253 respectively)
Available for Sale 32,778 23,203
Loans, less allowance for credit losses 114,610 109,848
($1,236 and $1,349 respectively)
Premises and fixed assets 3,297 3,369
Investments in unconsolidated subsidiaries 1,170 1,167
Accrued interest receivable 1,540 1,355
Goodwill 1,843 1,917
Other assets 2,497 1,991
----------- -----------
TOTAL ASSETS $ 189,315 $ 181,054
=========== ===========
LIABILITIES
Deposits
Non-interest bearing demand $ 18,951 $ 19,774
Interest bearing transaction 19,738 20,467
Savings and money market 39,328 35,322
Time, $100,000 or more 15,534 15,357
Other time 66,346 62,388
----------- -----------
Total deposits 159,897 153,308
----------- -----------
Securities sold under agreements to repurchase 1,391 --
Long term debt 5,000 5,000
Accrued interest payable 202 208
Other liabilities 712 634
----------- -----------
7,305 5,842
----------- -----------
Total liabilities 167,202 159,150
----------- -----------
COMMITMENTS
EQUITY CAPITAL
Common stock, par value $.01; authorized
10,000,000 shares, issued and outstanding:
6/30/99 1,913,786
12/30/98 1,913,516 19 19
Surplus 10,071 10,064
Retained earnings 12,435 11,866
Accumulated other comprehensive income (412) (45)
----------- -----------
Total stockholders' equity 22,113 21,904
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 189,315 $ 181,054
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
-2-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SHORE BANCSHARES, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Six Months Quarter Six Months
Dollars in thousands except per share data Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1999 1998 1998
--------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fee income on loans $2,401 $4,724 $2,382 $4,820
Interest and dividends on securities
Taxable securities 577 1,130 526 1,056
Tax-exempt securities 113 224 119 241
Other securities (debt and equity) 33 67 39 71
Interest on federal funds sold 98 212 129 223
---------------------------------------------
Total interest income 3,222 6,357 3,195 6,411
---------------------------------------------
INTEREST EXPENSE
Interest on certificates of deposit
of $100,000 or more 204 415 190 375
Interest on other deposits 1,252 2,471 1,190 2,372
Interest on securities sold under
agreements to repurchase 1 1 -- --
Interest on long term debt 71 142 71 142
---------------------------------------------
Total interest expense 1,528 3,029 1,451 2,889
---------------------------------------------
NET INTEREST INCOME 1,694 3,328 1,744 3,522
Provision for credit losses -- -- -- --
---------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 1,694 3,328 1,744 3,522
---------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 210 400 176 335
Other noninterest income 78 144 58 107
Gains (losses) on securities -- 42 -- --
---------------------------------------------
Total noninterest income 288 586 234 442
---------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 547 1,203 526 1,118
Expenses of premises and fixed assets 145 284 144 316
Other noninterest expense 336 834 457 966
---------------------------------------------
Total noninterest expense 1,028 2,321 1,127 2,400
---------------------------------------------
INCOME BEFORE TAXES 954 1,593 851 1,564
Applicable income taxes 302 526 291 542
---------------------------------------------
NET INCOME $ 652 $1,067 $ 560 $1,022
=============================================
Basic Earnings Per Common Share $ 0.34 $ 0.58 $ 0.28 $ 0.51
Diluted Earnings Per Common Share 0.34 0.56 0.28 0.51
Dividends Declared Per Common Share 0.13 0.26 0.12 0.24
</TABLE>
See Notes to the Consolidated Financial Statements
-3-
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SHORE BANCSHARES, INC.
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Dollars in thousands Stock Surplus Earnings Income Total
------ ------- -------- -------------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 19 $ 10,064 $ 11,866 $ (45) $ 21,904
Comprehensive income:
Net income 1,067 1,067
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale
securities, net of reclassification
adjustment (367) (367)
--------
Total comprehensive income 700
--------
Issuance of common stock upon
exercise of stock options 7 7
Cash dividends declared ($.26 per
common share) (498) (498)
-------- -------- -------- -------- --------
Balance at June 30, 1999 $ 19 $ 10,071 $ 12,435 $ (412) $ 22,113
======== ======== ======== ======== ========
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income Total
------ ------- -------- -------------- -------
Balance at December 31, 1997 $ 10 $ 10,064 $ 13,480 $ (39) $ 23,515
Comprehensive income:
Net income 1,022 1,022
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale
securities, net of reclassification adjustment 4 4
--------
Total comprehensive income 1,026
--------
Two-for-one stock split effected in the
form of a 100% stock dividend 10 (10) 0
Cash dividends declared ($.24 per
common share) (483) (483)
-------- -------- -------- -------- --------
Balance at June 30, 1998 $ 20 $ 10,064 $ 14,009 $ (35) $ 24,058
======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements
-4-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
SHORE BANCSHARES, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Year Six Months
Ended Ended Ended
June 30, December 31, June 30,
1999 1998 1998
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 1,067 $ 2,219 $ 1,022
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 217 457 151
Equity in net earnings of unconsolidated subsidiaries -- 20 --
Provision for credit losses, net (113) (55) (18)
Deferred income taxes 7 (31) (7)
Net (gains) losses on sale of assets (42) (5) --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (185) 121 91
(Increase) decrease in other assets (225) 47 (35)
Increase (decrease) in accrued interest payable (6) 19 1
Increase (decrease) in other liabilities 78 36 (30)
-------- -------- --------
Net cash provided by operating activities 798 2,828 1,175
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held to maturity 6,856 34,268 15,944
Proceeds from maturities of investment securities available-for-sale 3,550 2,651 99
Proceeds from sale of investment securities available-for-sale 2,085 -- --
Purchases of held-to-maturity securities (1,565) (18,767) (15,269)
Purchases of available-for-sale securities (15,743) (16,499) --
Net (increase) decrease in loans (4,649) (2,029) 2,544
Purchase of premises and equipment (154) (429) (262)
-------- -------- --------
Net cash provided by (used in) investing activities (9,620) (805) 3,056
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in demand, interest-bearing
transaction, and savings deposits 2,454 1,084 1,412
Increase (decrease) in time deposits 4,135 6,410 1,610
Increase (decrease) in securities repurchased 1,391 -- --
Common stock repurchased and retired -- (1,012) --
Proceeds from issuance of common stock 7 -- --
Cash dividends paid (498) (2,812) (483)
-------- -------- --------
Net cash provided by (used in) financing activities 7,489 3,670 2,539
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (1,333) 5,693 6,770
Cash and cash equivalents, beginning 14,288 8,596 8,596
-------- -------- --------
Cash and cash equivalents, ending $ 12,955 $ 14,289 $ 15,366
======== ======== ========
Supplementary cash flow information:
Interest paid $ 2,892 $ 5,617 $ 2,745
Income taxes paid $ 422 $ 1,240 $ 592
All dollar amounts in thousands
</TABLE>
-5-
<PAGE>
Note 1 - Financial Information
The unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10Q. In the opinion of
management, all necessary adjustments have been made for a fair presentation of
financial position and results of operations for the periods presented.
Operating results for the six month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the audited consolidated
financial statements and footnotes included in the 1998 Annual Report to
Shareholders and Form 10.
Consolidation has resulted in the elimination of all significant
intercompany accounts and transactions.
-6-
<PAGE>
NOTE -2 Analysis of the Allowance for Credit Losses
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 1,349 $ 1,404
CHARGE-OFFS:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 0 14
Commercial 61 0
Consumer installment 61 90
-------- --------
122 104
-------- --------
RECOVERIES:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 0 0
Commercial 2 26
Consumer installment 7 23
-------- --------
9 49
-------- --------
NET CHARGE-OFFS (RECOVERIES) 113 55
PROVISION FOR CREDIT LOSSES 0 0
ALLOWANCE ACQUIRED 0 0
-------- --------
BALANCE AT END OF PERIOD $ 1,236 $ 1,349
======== ========
Average daily balance of loans $113,215 $108,180
Ratio of net charge-offs to average loans outstanding 0.10% 0.05%
</TABLE>
-7-
<PAGE>
Note 3 - Other Borrowed Funds
As of September 30, 1997, the Bank had received a convertible advance
from the Federal Home Loan Bank in the amount of $5,000,000 at an interest rate
of 5.66% which is due September 24, 2002. The Bank has pledged mortgage loans as
collateral on this advance.
Note 4 - Computation of Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share, which became effective for the Company for
reporting periods ending after December 31, 1998. Under the provisions of SFAS
No. 128, primary and fully-diluted earnings per share were replaced with basic
diluted earnings per share in an effort to simplify the computation of these
measures and align them more closely with the methodology used internationally.
Basic earnings per share is arrived at by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
and does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation method is arrived at by
dividing net income by the weighted-average number of shares outstanding,
adjusted for the dilutive effect of outstanding stock options and warrants. For
purposes of comparability, the prior-period earnings per share data has been
restated
<TABLE>
<CAPTION>
Quarter Ending Six Months Ending
06/30/99 06/30/99
-------------- -----------------
Basic:
<S> <C> <C>
Net Income (applicable to common stock) $ 652,000 $1,067,000
Average common shares outstanding 1,913,703 1,913,610
Basic net income per share $ .34 $ .58
Diluted
Net income (applicable to common stock) $ 652,000 $1,067,000
Average common shares outstanding 1,913,703 1,913,610
Dilutive effect of stock options 127 123
---------- ----------
Average common shares outstanding 1,913,830 1,913,733
Diluted net income per share $ .34 $ .56
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Quarter Ending Six Months Ending
06/30/98 06/30/98
--------------- -----------------
Basic:
<S> <C> <C>
Net Income (applicable to common stock) $ 560,000 $1,022,000
Average common shares outstanding 2,014,848 2,014,848
Basic net income per share $ .28 $ .51
Diluted
Net income (applicable to common stock) $ 560,000 $1,022,000
Average common shares outstanding 2,014,848 2,014,848
Dilutive effect of stock options 0 0
---------- ----------
Average common shares outstanding 2,014,848 2,014,848
Diluted net income per share $ .28 $ .51
</TABLE>
-9-
<PAGE>
AVERAGE BALANCES, YIELDS AND RATES
<TABLE>
<CAPTION>
YTD 6/30/99 YTD 6/30/98
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning assets:
Money market investments:
Federal funds sold 9,002,283 212,007 4.75% 7,846,609 222,600 5.72%
Investment Securities:
U.S. Treasury securities
and obligations of U.S.
government agencies 38,037,573 1,129,954 5.99% 33,023,916 1,036,243 6.33%
Obligations of States and
political subdivisions 9,793,041 339,027 6.98% 10,476,219 365,159 7.03%
Taxable Municipals -- -- 0.00% 512,815 20,242 7.96%
All other investment securities 1,654,386 57,855 7.05% 1,703,870 62,273 7.37%
Federal Reserve Bank stock 302,250 9,067 6.05% 302,250 9,068 6.05%
============ =========== ====== =========== =========== ======
Total investment securities 49,787,250 1,535,903 6.22% 46,019,070 1,492,985 6.54%
Loans - net of unearned income
Commercial loans 10,464,963 480,003 9.25% 9,279,504 448,802 9.75%
Installment loans 6,227,092 292,235 9.46% 5,546,947 277,798 10.10%
Mortgage loans 96,522,721 3,896,270 8.14% 92,684,611 4,057,410 8.83%
============ =========== ====== =========== =========== ======
Total loans 113,214,776 4,668,508 8.32% 107,511,062 4,784,010 8.97%
============ =========== ====== =========== =========== ======
TOTAL INTEREST EARNING ASSETS 172,004,309 6,416,418 7.52% 161,376,741 6,499,595 8.12%
Cash and due from banks 3,858,332 4,175,857
Other assets 9,697,312 9,661,600
Allowance for loan and lease losses (1,274,372) (1,392,369)
============ =========== ====== =========== =========== ======
TOTAL ASSETS 184,285,581 173,821,829
============ =========== ====== =========== =========== ======
LIABILITIES
Interest-bearing liabilities
Other Borrowed Funds 5,000,000 142,286 5.74% 5,003,729 142,396 5.74%
Repurchase agreements 88,686 1,074 2.44% -- -- 0.00%
Super NOW accounts 19,500,775 253,954 2.63% 17,216,218 238,767 2.80%
Money market deposit accounts 19,303,640 305,631 3.19% 19,225,171 320,652 3.36%
Time, $100,000 or more 13,670,474 366,194 5.40% 12,157,097 325,789 5.40%
Other time deposits 50,805,223 1,329,340 5.28% 45,186,175 1,200,360 5.36%
IRA deposits 15,377,732 365,650 4.79% 15,567,253 391,076 5.07%
Savings deposits 17,908,362 264,821 2.98% 17,752,436 269,824 3.07%
============ =========== ====== =========== =========== ======
TOTAL INTEREST BEARING LIABILITIES 141,654,892 3,028,950 4.31% 132,108,079 2,888,864 4.41%
Demand deposits 19,677,497 16,994,953
Other liabilities 977,873 994,495
============ =========== ====== =========== =========== ======
Total liabilities 162,310,262 150,097,527
Stockholders' equity 21,975,319 23,724,302
============ =========== ====== =========== =========== ======
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 184,285,581 173,821,829
============ =========== ====== =========== =========== ======
Net interest income & interest rate spread 3,387,468 3.21% 3,610,731 3.71%
Net interest income as a % of earning assets 3.84% 4.36%
============ =========== ====== =========== =========== ======
<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 non deductible interest expense.
2. Loan fee income is included in interest income for each loan catagory and
yields are stated to include all.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
</FN>
</TABLE>
-10-
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion is designed to provide a better understanding
of the financial position of Shore Bancshares, Inc., and should be read in
conjunction with the December 31, 1998 audited consolidated financial statements
and notes.
Portions of this Quarterly Report on Form 10Q contain forward-looking
statements (as defined in the Private Securities Litigation Reform Act of 1995)
with respect to the adequacy of the allowance for loan losses, interest rate
risk, realization of deferred taxes, liquidity levels, and the Year 2000 issue,
which, by their nature, are subject to significant uncertainties which are
described in further detail in Item 1 of the Company's 1998 Form 10-K, under the
heading "Risk Factors." The Company believes that the expectations reflected in
such forward-looking statements are reasonable. However, because these
uncertainties and the assumptions on which statements in this report are based,
the actual future results may differ materially from those indicated in this
report.
ORGANIZATIONAL BACKGROUND
On July 1, 1996, Shore Bancshares, Inc. (the Company) commenced
operations as the parent company of its sole subsidiary, The Centreville
National Bank of Maryland (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.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported $ 1,067 thousand in net income for the six months
ended June 30, 1999 or $.56 diluted earnings per share compared to the six
months ended June 30, 1998 with net income of $1,022 thousand or $.51 diluted
earnings per share. As a result of $144 thousand increase in noninterest income,
net income through the second quarter 1999 reflects an increase despite the
declining interest rate environment. Rate decreases resulted in the refinancing
of many loans as well as calls of investment securities in 1998. Loan
refinancings continued into early 1999. The effects of those declines continue
to impact net income. The Company experienced growth in total assets of 4.56%
and in total deposits of 4.30% in the first six months of 1999. Average earning
assets continue to grow and reflect an increase of 6.58% as of June 30, 1999
compared to the prior year. Despite the growth in earning assets, net interest
income declined $194 thousand or 5.51%. Earnings reflect a shrinking net
interest margin compared to the prior year, however, the decline is stablizing
as noted by a margin which has not changed from March 31, 1999.
Page 1
<PAGE>
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 and borrowings.
Despite balance sheet growth resulting primarily from loan and deposit growth,
the Bank's net interest income, on a fully tax-equivalent basis, decreased in
the first six months of 1999 compared to the same period in 1998. Net interest
income (on a tax equivalent basis) for June 30, 1999 decreased $223 thousand or
6.59% compared to the six months ended June 30, 1998. The table titled
"Average Balances, Yields and Rates" sets forth the major components of net
interest income, on a tax equivalent basis, for June 30, 1999 and 1998.
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 six months ended June 30,
1999 and 1998 was 3.21%, and 3.71%, respectively. Interest rate spread decreased
through the end of the second quarter compared to the same period in 1998
resulting from a decreased yield on average earning assets of 60 basis points
and a decrease in yield of average interest bearing liabilities by only 10 basis
points. This is also a decrease from the December 31, 1998 interest rate spread
of 3.65% . The balance sheet mix has not changed significantly since year end,
however, the yields on earning assets decreased at a faster rate than the
decrease in yields on deposits. As a result of a lower interest rate
environment, the Company experienced a large number of calls of investment
securities in 1998. These securities were replaced with lower yielding
investments and the full effects of this are evident in the 32 basis point
reduction in investment yield comparing June 30, 1999 to the same period in
1998. Despite some loan rate increases during 1998 and the first quarter of
1999, overall loan yield decreased 65 basis points in the second quarter
compared to June 30, 1998. Fourth quarter 1998 loan rate decreases and more
significantly, loans refinanced with the Company and new loans at lower rates
are reflected in decreased loan yield as of June 30, 1999. However, the average
balances in each loan category have increased and total average loans
outstanding have increased $5.7 million since June 30, 1998. The volume has not
improved enough to increase interest income when comparing the first quarters of
1999 and 1998.
Interest bearing liabilities have grown most notably in Time and Super
NOW deposit average balances. These are more costly deposits which account for
increased deposit interest expense despite a reduced yield on interest bearing
deposits. The effects of lowering deposit rates during 1998 and in the first
half of 1999 reflect a slightly lower yield on deposits of 4.31% as of June 30,
1999 compared to 4.41% for the same period in the prior year.
Net interest margin decreased comparing June 30, 1998 to June 30, 1999
from 4.36% to 3.84%. Net interest margin is calculated as tax equivalent net
interest income divided by average earning assets and represents the net yield
on its earning assets. The second quarter 1999 net interest margin decrease is
the result of repricing as previously discussed.
Management and the Board of Directors monitor interest rates on a
regular basis to assess the Company's competitive position and to maintain a
reasonable and profitable interest rate spread. The Company 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.
Page 2
<PAGE>
PROVISION and ALLOWANCE FOR CREDIT LOSSES
For the quarter ended June 30, 1999 and 1998, the Company recorded net
charge offs of $113 thousand and $18 thousand, respectively compared to net
charge offs of $55 thousand for the year ended December 31, 1998. Internal loan
review, in particular, is 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 immaterial amount of net charge offs in 1999 and for the
year ended December 31,1998.
Gross charge offs as of June 30, 1999 amounted to $122 thousand, $50
thousand for the same period in 1998 and $104 thousand for the year ended 1998.
One half of the charge off dollars recorded resulted from two commercial loans
and the remaining $61 thousand were consumer installment loans. Efforts to
collect charged off loans continue and of the $61 thousand charged off for
commercial loans, $38 thousand is expected to be recovered. Recoveries totaled
$9 thousand in the first six months of 1999, $32 thousand for the same six
months in 1998 and $49 thousand for the year ended December 31, 1998.
No provision for credit losses was charged to expense in 1998 nor to
date in 1999. 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, the Year 2000 issue, 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 $1.2 million as of June 30, 1999 and $1.3 million
as of December 31, 1998 represents 1.07% and 1.22%, respectively, of gross
loans. The decrease in percentage of allowance to outstanding, despite the
increasing outstanding gross loans, is justified by lower levels of classified
loans. Past due loan levels have decreased from year end and they consist
primarily of loans secured by real estate. Analysis by loan review supports
adequacy of the allowance. In management's opinion, the allowance for credit
losses is adequate as of June 30, 1999.
See Note 2 in the Notes to Financial Statements.
NONINTEREST INCOME AND EXPENSE
As of June 30, 1999 noninterest income reflects $144 thousand increase
compared to June 30, 1998 partially from a $42 thousand gain on the sale of
available for sale investment securities. The rise in service fees reflects
higher return check charges and volume. Other noninterest income increased
compared to June 30, 1998 and includes 6 months of ATM surcharges in 1999
compared 5 months in 1998. ATM surcharges were implemented in February 1998. In
addition, the surcharge fee increased in 1999.
Page 3
<PAGE>
Noninterest expense as of June 30, 1999 decreased $79 thousand or 3.3%
compared to the same period last year. The decrease is the result of
rescheduling certain expense payments from the beginning of the year to
distribute the expense over the entire year. Salaries and benefits increased as
a result of an additional pay period in the first quarter of 1999. A new
biweekly pay schedule was implemented in April 1998. Also increased pay rates
and insurance premiums are reflected when comparing June 30, 1999 to June 30,
1998. Premise and fixed asset expenses decreased $32 thousand as of June 30,
1999 compared to the same period in 1998 primarily as a result of a change in
accounting estimates. Also 1998 reflects increased expensed equipment costs for
the renovated Commerce Street office.
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 Company
does not currently follow a strategy of making securities purchases with a view
to near-term sales, and, therefore, does not own trading securities, nor are
derivatives used as investments. The Company 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 $51.4 million and $47.1 million
as of June 30, 1999 and December 31, 1998, respectively. The net increased level
of investments in securities resulted primarily from the investment of funds
from deposit growth and the use of federal funds. Funds were invested primarily
in U.S. Government sponsored agency securities. Excluding the U.S. Government
and U.S. Government sponsored agencies, the Company had no concentrations of
investment securities from any single issuers that exceeded 10% of stockholders'
equity.
LOAN PORTFOLIO
The Bank is actively engaged in originating loans to customers in Queen
Anne's, Caroline, Kent and Talbot Counties. The Company 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. Total gross loans as of June 30, 1999
have grown approximately $4.6 million since December 31, 1998. Mortgage loans,
primarily consumer mortgages, accounted for $2.8 million of the increase. Loan
growth is attributed to new product development and the reduction in loan rates.
In addition, an active officer calling program supported by increased marketing
efforts were implemented and are showing signs of success. The Company had no
loan concentrations exceeding 10% of total loans which are not otherwise
disclosed.
Page 4
<PAGE>
The Company policy is to make the majority of its loan commitments in
the market area it serves. The Company attempts to reduce risk through its
management's familiarity with the credit histories of loan applicants and
in-depth knowledge of the risk to which a given credit is subject. Lending in a
limited market area does subject the Company to economic conditions of that
market area. The Company had no foreign loans in its portfolio as of June 30,
1999.
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 June 30, 1999 and December 31, 1998, $3
thousand and $55 thousand, respectively, of non-accrual loans were secured by
collateral with an estimated value of $20 thousand as of June 30, 1999 and $343
thousand as of December 31, 1998. At June 30, 1999, the Bank had $274 thousand
in loans 90 days or more past due and still accruing interest, troubled debt
restructurings of $869 thousand and $2.5 million in loans on the watch list for
which payments were current, but the borrowers have the potential for
experiencing financial difficulties. Expressed as a percentage of total assets ,
nonperforming assets were .61% at June 30, 1999. These loans are subject to on
going management attention and their classifications are reviewed regularly. The
Company had no "other real estate owned" at June 30, 1999.
DEPOSITS
Deposit liabilities reflected 4.3% increase in the first six months of
1999 compared to December 31, 1998. Interest bearing transaction (Super NOW) and
time account deposits were the main sources of deposit growth. Competitive time
deposit rates, NOW account product features, and marketing efforts have
contributed to the growth in these products. In addition, the Company's new
Silver CD product, with limited withdrawal penalties, for consumers over age 62
continues to be a popular product. The Company continues to experience strong
competition from other commercial banks, credit unions, the stock market and
mutual funds. The Company has no foreign banking offices.
LONG TERM DEBT
Long term debt consists of an advance from the Federal Home Loan Bank
of $5,000,000 at the end of the third quarter of 1997. These funds were utilized
for securities purchases. See Note 3 in the Notes to Financial Statements.
Page 5
<PAGE>
LIQUIDITY MANAGEMENT
Liquidity describes the ability of Shore Bancshares, Inc. and its
subsidiary, The Centreville National Bank of Maryland 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 Company
maintains its asset liquidity position internally through short term
investments, the maturity distribution of the investment portfolio, loan
repayments and income from earning assets. As indicated by the Consolidated
Statement of Cash Flows, the primary sources of cash flow in the second quarter
of 1999 was the maturity of investment securities and deposit growth. A
substantial portion of the investment portfolio contains readily marketable
securities that could be converted to cash immediately. On the liability side of
the balance sheet, liquidity is affected by the timing of maturing deposits 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
and from lines of credit approved at correspondent banks. Management knows of no
trend or event which will have a material impact on the Bank's ability to
maintain liquidity at satisfactory levels.
MARKET RISK MANAGEMENT
Market risk is the risk of loss that arises from changes in interest
rates, foreign currency exchange prices, commodity prices, equity prices, and
other market changes that affect market sensitive financial instruments. The
market risk for the Company is composed primarily of interest rate risk, which
is the exposure of the Bank's earnings and capital arising from future interest
rate changes. This risk is a normal part of the banking business because assets
and liabilities do not reprice at the same rate, nor do they move to the same
degree when interest rates change. In addition, the maturity distribution of the
Bank's assets and liabilities do not match for given periods of time. The Bank's
interest rate sensitivity position is managed to maintain an appropriate balance
between the maturity and repricing characteristics of assets and liabilities
that is consistent with the Bank's liquidity, growth, earnings and capital
adequacy goals. The Board of Directors has adopted an Asset / Liability
Management Policy, which is administered by the Asset / Liability Committee. The
Committee is responsible for monitoring the Bank's interest rate sensitivity
position and recommending policies to the Board of Directors to limit exposure
to interest rate risk while maximizing net interest income.
The Bank uses earnings simulation modeling to measure the effect
specific rate changes would have on one year of net interest income. Key
assumptions include calls and maturities of investment securities, depositors'
rate sensitivity, maturity dates of fixed rate loans and investment securities
and repricing date of variable rate loans. As with any method of gauging risk,
there are inherent shortcomings and actual results may deviate significantly
from assumptions used in the model. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest-rate changes as well
as changes in market conditions and management strategies. At June 30, 1999 the
Bank's estimated earnings sensitivity profile reflected a modest sensitivity to
interest rate changes. Based on an assumed 100 basis point immediate change in
interest rates the Bank's net interest income would decrease by $230 thousand if
rates were to increase by that amount and net interest income would increase
$138 thousand if rates would decline a similar amount.
Page 6
<PAGE>
CAPITAL RESOURCES AND ADEQUACY
Total stockholders' equity increased $209 thousand to $22.1 in 1999
compared to $21.9 million as of June 30,1999. Earnings of $1,067 thousand added
to shareholders' equity. Capital also increased $7 thousand as a result of 270
shares of common stock issued under the Employee Stock Purchase Plan. Dividends
paid reduced stockholders' equity $498 thousand as did the increase in
unrealized loss in available for sale securities of $367 thousand.
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 4%. The leverage
capital ratio at the Company level at June 30, 1999 was 11.15% and at December
31, 1998 was 11.08%.
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 Company's ratio at
June 30, 1999 was 20.48% and at December 31, 1998 was 21.05%. According to FDIC
capital guidelines, the Company is considered to be "Well Capitalized."
In the first quarter of 1999 the Office of the Comptroller of the
Currency approved two new branches for The Centreville National Bank of
Maryland. A branch site at the corner of Sharp Road and Route 404 in Denton,
Maryland, Caroline County has been approved and completion is anticipated late
in the first quarter of 2000. The property on the corner of Route 18/Piney Creek
Road and Castle Marina Road in Chester, Maryland is an addional Queen Anne
County site. This branch location is anticipated to be completed in the second
or third quarters of 2000. The total anticipated cost of the land and buildings
for both projects is approximately $2 million dollars. Subsequent to completion
of the branches the opportunity cost of the funds invested in the branches,
operating costs and depreciation expense could have an impact on earnings in the
short term until the long term growth of the branch improves profitability.
Management knows of no other trend or event, which will have a material
impact on capital.
FUTURE TRENDS
This is a Year 2000 Readiness Disclosure under the Year 2000 Information and
Readiness Disclosure Act of 1998.
The "Year 2000 Issue", which is common to most corporations, including banks, is
a general term used to describe the problems that may result from the improper
processing of dates and date-sensitive calculations as the Year 2000 approaches.
This issue is caused by the fact that many of the world's existing computer
programs use only two digits to identify the year in the date field of a
program. These programs could experience serious malfunctions when the last two
digits of the year change to "00" as a result of identifying a year designated
"00" as the year 1900 rather than the Year 2000.
Page 7
<PAGE>
The Company formed a Year 2000 Committee, which is comprised of a
cross-section of the Company's employees, in the fourth quarter of 1997. This
Committee is leading the Company's Year 2000 efforts to ensure that the Company
is properly prepared for the Year 2000. The Company's Board of Directors has
approved a plan submitted by the Year 2000 Committee that was developed in
accordance with guidelines set forth by the Federal Financial Institutions
Examination Council. This plan has five primary phases related to internal Year
2000 compliance:
1. Awareness - this phase is ongoing and is designed to inform the Company's
Board of Directors (the "Board") and Executive management ("Management"),
employees, customers and vendors of the impact of the Year 2000 Issue. Since
January 1998, the Board has been apprised of the Company's efforts at their
regular meetings. In addition, customers and the community continue to be
updated with respect to the Company's Year 2000 efforts through mailings,
published articles, lobby brochures and a Year 2000 Readiness Disclosure posted
in the branch lobbies. A public seminar was presented in April 1998. The
Company's ongoing outreach efforts include Year 2000 presentations to business
organizations and community groups.
2. Assessment - during this phase an inventory was conducted of all
known Company processes that could reasonably be expected to be impacted by the
Year 2000 Issue and their related vendors, if applicable. The identification
process included information technology and communication systems such as
personal computers, local area networks and servers, ATM modems, printers, copy
machines, facsimile machines, telephones and the operating systems and software
for these systems. It also included non-information technology systems, such as
heating, air conditioning and vault controls, alarm systems, surveillance
systems, and postage meters. The Company inventoried all the systems listed
above in the second and third quarters of 1998 and performed an initial
assessment of potential risks from either under or nonperformance arising from
incorrect processing and usage of dates after December 31, 1999. All outside
servicers and major vendors were contacted to ascertain their individual levels
of Year 2000 compliance. From vendor responses and/or certifications of Year
2000 compliance the Company determined that all vendors and service providers
who provide mission critical and significant systems to the Company are
addressing Year 2000 compliance for the products and services they provide to
the Company and the Company expects all of the mission critical and significant
vendors to be Year 2000 compliant by December 31, 1999. The assessment phase is
complete, although it is updated periodically as necessary.
3. Renovation and/or replacement - this phase includes programming code
enhancements, hardware and software upgrades, system replacements, vendor
certification and any other changes necessary to make any hardware, software and
other equipment Year 2000 compliant.
The Company does not perform in-house programming, and thus is
dependent on external vendors to ensure and modify, if needed, the hardware,
software or other services they provide to the Company for Year 2000 compliance.
The Company's primary service provider has a comprehensive Year 2000 Plan in
place and has successfully completed Year 2000 testing of their mission critical
systems.
Page 8
<PAGE>
4. Testing - The next phase for the Company under the plan is to complete a
comprehensive testing of all known processes. As noted in the renovation and/or
replacement phase above, the Company's primary service provider has already
successfully tested their system for Year 2000 compliance. The next step, which
was completed in the second quarters of fiscal 1999, is the testing of the
Company's network mission critical software applications and hardware. The
Company has performed Year 2000 testing of all employee computer work stations,
and has updated or replaced work stations which are not Year 2000 compliant. The
testing of the remainder of the Company's processes was substantially complete
by June 1999.
5. Implementation - this phase will occur when Year 2000 processing commences.
On some applications the Company is already entering dates greater than December
31, 1999 into their systems. In these situations no adverse events have been
noted. The significant part of the implementation phase will occur after
December 31,1999.
The Company has developed contingency plans for processes that do not
process information reliably and accurately after December 31, 1999. The
contingency plans for all systems were substantially complete by the end of the
second calendar quarter of fiscal 1999.
Senior management completed a contingency plan to provide operating
alternatives for continuation of services to the Company's customers in the
event of systems or communication failures at the beginning of the Year 2000.
Contingency plans will be updated as necessary. Based on preliminary planning
during development of the contingency plan, management expects that the Company
will be able to continue to operate in the Year 2000 even if some systems fail.
At the end of December 1999, the Company will generate paper and systems backup
of all customer and general ledger accounts. Due to the size of the Company, the
Company expects that it will be able to operate with all transactions processed
manually until normal operations can be restored. This procedure could require
changing of schedules and hiring of temporary staff, which would increase cost
of operations. If this procedure were to continue for any extended period of
time, or if the Company ultimately had to change data service providers, the
cost could be material.
The Company is in the process of assessing the Year 2000 readiness of
significant borrowers and depositors. The Company has completed its initial
review of these significant relationships and assessed the risks these
relationships may pose to the Company. The Company will continue to monitor the
risk and expects any potential losses to the Company caused by Year 2000
problems of significant borrowers and depositors not to be material. This step
is not expected to require a significant amount of time or resources.
As of June 30, 1999 the following chart shows the current and projected
status of the Company's Year 2000 compliance efforts:
PHASE 9/30/98 12/31/98 3/31/99 6/30/99
- ----- ------- -------- ------- -------
Awareness 100% 100% 100% 100%
Assessment 98 98 100 100
Renovation 89 96 100 100
Validation 58 78 85 90
Implementation 54 67 80 85
Page 9
<PAGE>
The Company expensed approximately $16 thousand on Year 2000 costs in
the second quarter of 1999. Based on an analysis of projected expenses performed
during the first quarter of 1998 and subsequent updates, the total cost of the
Year 2000 project is currently estimated at $110 thousand. These costs do not
include the opportunity costs of the additional cash that will be held in our
vaults to meet anticipated customer demand at year end. Funding of the Year 2000
project costs has come and is expected to come from normal operating cash flow.
Additional costs including staff time will be expensed in the normal course of
business and will not have a material impact on the Company's results of
operations, liquidity, capital resources or financial condition. However, the
expenses associated with the Year 2000 issue will directly reduce otherwise
reported net income for the Company. Should the Company have to resort to
alternative operating procedures due to major systems or communications failures
at the beginning of the Year 2000, the extra cost could be material.
Management of the Company believes that the potential effects on the
Company's internal operations of the Year 2000 Issue can and will be addressed
prior to the Year 2000. However, if required modifications or conversions are
not made or are not completed on a timely basis prior to the Year 2000, the Year
2000 Issue could disrupt normal business operations. The most reasonably likely
worst case Year 2000 scenarios foreseeable at this time would include the
Company temporarily not being able to process, in some combination, various
types of customer transactions. This could affect the ability of the Company to,
among other things, originate new loans, post loan payments, accept deposits or
allow immediate withdrawals, and, depending on the amount of time such a
scenario lasted, could have a material adverse effect on the Company.
Because of the serious implications of these scenarios, the primary
emphasis of the Company's Year 2000 efforts is to correct, with complete
replacement if necessary, any systems or processes whose Year 2000 test results
are not satisfactory prior to the Year 2000. Nevertheless, should one of the
most reasonably likely worst case scenarios occur in the Year 2000, the Company,
as noted above, is in the process of formalizing a contingency plan that would
allow for limited transactions until the Year 2000 problems are fixed.
The costs of the Year 2000 project and the date on which the Company
plans to complete Year 2000 compliance are based on management's best estimates,
which were derived using numerous assumptions of future events such as the
availability of certain resources (including internal and external resources),
third party vendor plans and other factors. However, there can be no guarantee
that these estimates will be achieved at the cost disclosed or within the
timeframe indicated, and actual results could differ materially from these
plans. Factors that might affect the timely and efficient completion of the
Company's Year 2000 project include, but are not limited to, vendor's ability to
adequately correct or convert software and the effect on the Company's ability
to test its systems, the availability and cost of personnel trained in the Year
2000 area, the ability to identify and correct all relevant computer programs
and similar uncertainties.
Bank regulatory agencies have recently issued additional guidance under
which they are assessing Year 2000 readiness. The failure of a financial
institution to take appropriate action to address deficiencies in the Year 2000
project management process may result in enforcement actions which could have a
material adverse effect on such institution, result in the imposition of civil
money penalties or result in the delay (or receipt of an unfavorable or critical
evaluation of management of a financial institution in connection with
regulatory review) of applications seeking to acquire other entities or
otherwise expand the institution's activities.
Page 10
<PAGE>
Ultimately, the success of the Company's efforts to address the Year
2000 issue depends to a large extent not only on the corrective measures that
the Company undertakes, but also on the efforts undertaken by businesses and
other independent entities who provide data to, or receive data from, the
Company such as borrowers, vendors or customers. In particular, the Company's
credit risk associated with its borrowers may increase as a result of problems
such borrowers may have resolving their own Year 2000 issues. Although it is not
possible to evaluate the magnitude of any potential increased credit risk at
this time, the impact of the Year 2000 issue on borrowers could result in
increases in problem loans and credit losses in future years. From now until
2000, the Company will endeavor to monitor the Year 2000 efforts of its
borrowers and will implement a course of action and procedures designed to
reduce any increased potential risk as a result of Year 2000 issues.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Management Discussion and Analysis of Results of Operation and
Financial Condition - Market Risk Management." The Company's principal market
risk exposure is to interest rates.
Page 11
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were subimitted to and approved by stockholders,
through the solicitation of proxies or otherwise, at the Annual Meeting
of Stockholders held on April 20, 1999:
(a) The following persons were elected as Class I Directors of the
Company until the 2000 Annual Meeting. The results were as
follows:
AFFIRMATIVE NEGATIVE VOTES
VOTES VOTES ABSTAINING
----------- -------- ----------
Thomas K. Helfenbein 1,432,493 6,202 0
Susanne K. Nuttle 1,432,493 6,202 0
Wm Maurice Sanger 1,429,037 9,658 0
Walter E. Schmidt 1,432,493 6,202 0
(b) The following person were elected as Class II Directors of the
Company until the 2001 Annual Meeting. The results were as
follows:
AFFIRMATIVE NEGATIVE VOTES
VOTES VOTES ABSTAINING
----------- -------- ----------
J. Robert Barton 1,437,895 0 0
Paul M. Bowman 1,437,895 0 0
Daniel T. Cannon 1,432,565 5,330 0
Mark M. Freestate 1,428,289 9,606 0
(c) The following person were elected as Class III Directors of the
Company until the 2002 Annual Meeting. The results were as
follows:
AFFIRMATIVE NEGATIVE VOTES
VOTES VOTES ABSTAINING
----------- -------- ----------
David C. Bryan 1,433,365 5,330 0
B. Vance Carmean, Jr 1,438,695 0 0
Neil R. LeCompte 1,433,365 5,330 0
Jerry F. Pierson 1,433,365 5,330 0
(d) Stegman and Company, P.A. were appointed to serve as the Company's
independent auditors for the fiscal year ending December 31, 1999.
Affirmative Votes Cast: 1,415,591
Negative Votes Cast: 5,330
Abstained: 19,174
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits Required by Item 601 of Regulation S-K are set forth below:
(3) Charter and Bylaws
(3.1) Articles of Amendment and Restatement of the Company are
incorporated by reference from the Company's June 30, 1998
Form 10-Q, filed with the Commission on August 13, 1998.
(3.2) Bylaws of the Company as amended and restated are filed
electronically here within via Edgar.
(10.1) 1998 Employee Stock Purchase Plan is incorporated by reference
from the Company's Registration Statement on Form S-8 filed
with the Commission on September 25, 1998 (Registration No.
333-64317).
(10.2) 1998 Stock Option Plan is incorporated by reference from the
Company's Registration Statement on Form S-8 filed with the
Commission on September 25, 1998 (Registration No. 333-64319).
(13) 1998 Annual Report filed with the Commission on March 31, 1999
(Registration No.0- 22345).
(21) List of Subsidiaries is incorporated by reference from the
Company's Form 10, filed with the Commission on April 3, 1997,
and Form 10/A, filed with the Commission on May 30, 1997
(Registration No. 0-22523)
(27) Financial Data Schedule for June 30, 1999 is filed
electronically here within via EDGAR.
B Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Bank has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 9, 1999
SHORE BANCSHARES, INC.
/S/ DANIEL T. CANNON
--------------------
DANIEL T. CANNON
President
/S/ CAROL I. BROWNAWELL
-----------------------
CAROL I. BROWNAWELL
Treasurer
SHORE BANCSHARES, INC.
BYLAWS
AS AMENDED AND RESTATED
APRIL 20, 1999
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, or by a majority of the Board of Directors, and shall be called by
the Chairman, the President, or Secretary, or any director of the Corporation
upon the request in writing of 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. The
person to whom such request was made shall provide an estimate of the cost of
the mailing and, upon payment of such cost, the notice of the meeting shall be
mailed by the Corporation.
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.
-1-
<PAGE>
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 Bylaws. 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.
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 Bylaws.
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 a majority 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 the Board of
Directors prior to the 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 OF DIRECTORS. The number of directors shall be three
(3) or such other number, but not less than three (3) nor more than twenty-five
(25), as may be designated from time to time by resolution of a majority of the
entire Board of Directors.
-2-
<PAGE>
SECTION 3. ELECTION AND TERM OF OFFICE. The Board of Directors shall be
divided into classes as described in the Articles of Incorporation. Each
Director shall hold office until the expiration of the term for which the
Director is elected, except as otherwise stated in these Bylaws, and thereafter
until his or her successor has been elected and qualifies. Election of Directors
need not be by written ballot, unless required by these Bylaws.
SECTION 4. NOMINATION OF DIRECTORS. Nomination for election of members
of the Board of Directors may be made by the Board of Directors or by any
stockholder of any outstanding class of capital stock of the Corporation
entitled to vote for the election of Directors. Notice by a stockholder of
intention to make any nominations shall be made in writing and shall be
delivered or mailed to the Chairman of the Board or the President of the
Corporation not less than 120 days nor more than 180 days prior to the date of
the meeting of stockholders called for the election of Directors which, for
purposes of this provision, shall be deemed to be on the same date as the annual
meeting of stockholders for the preceding year. Such notification shall contain
the following information to the extent known by the notifying stockholder (a)
the name and address of each proposed nominee; (b) the principal occupation of
each proposed nominee; (c) the number of shares of capital stock of the
Corporation owned by each proposed nominee; (d) the name and residence address
of the notifying stockholder; (e) the number of shares of capital stock of the
Corporation owned by the notifying stockholder; (f) the consent in writing of
the proposed nominee as to the proposed nominee's name being placed in
nomination for Director; and (g) all information relating to such proposed
nominee that would be required to be disclosed by Regulation 14A under the
Securities Exchange Act of 1934, as amended, and Rule 14a-11 promulgated
thereunder, assuming such provisions would be applicable to the solicitation of
proxies for such proposed nominee. Nominations not made in accordance herewith
shall be disregarded and, upon the chairman's instructions, the teller shall
disregard all votes cast for each such nominee.
SECTION 5. 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 Bylaws, 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.
A director of the Corporation may only be removed during the director's
term of office for cause, which means a final unappealable criminal conviction
of a felony, unsound mind, adjudication of bankruptcy, or action that causes
material injury to the Corporation, by the affirmative vote of a majority of the
entire Board of Directors of the Corporation (exclusive of the director being
considered for removal) or by the affirmative vote of a majority of the
outstanding capital stock of the Corporation entitled to vote for the election
of directors. Stockholders shall not have the right to remove directors without
such cause. Any attempt or special meeting of stockholders to remove a director
for cause shall be permitted only after notice to the director describing the
specific charges constituting cause thereunder, and a hearing at which the
director has a full opportunity to refute the charges.
-3-
<PAGE>
SECTION 6. 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
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 General Corporation Law.
SECTION 7. 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 8. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held whenever called by direction of the Chairman, or the 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 9. 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 Bylaws.
SECTION 10. 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.
-4-
<PAGE>
SECTION 11. 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 Vice 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 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 Bylaws 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 VICE CHAIRMAN. In case of the
absence or disability of the Chairman, the duties of that office shall be
performed by the Vice Chairman. The Vice Chairman shall do and perform such
other duties, as may from time to time be assigned by the Chairman or by the
Board of Directors.
SECTION 4. 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.
-5-
<PAGE>
SECTION 5. 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 6. 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 Bylaws, 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 Bylaws. 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.
SECTION 7. 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.
-6-
<PAGE>
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 8. 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 9. 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 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.
-7-
<PAGE>
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.
-8-
<PAGE>
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 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 Bylaws,
notice is required to be given to any director, officer or stockholder, unless
otherwise provided in these Bylaws, 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 Bylaws.
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.
-9-
<PAGE>
ARTICLE VII
AMENDMENT OF BY-LAWS
--------------------
The Board of Directors and the stockholders shall each have full power
to amend, alter or repeal these Bylaws, or any provision thereof, and may from
time to time make additional Bylaws. Any amendment to the Bylaws by the
stockholders shall be made at any annual meeting as part of the general 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. Notwithstanding the foregoing, the
Corporation shall be required to indemnify a director or officer in connection
with a proceeding commenced by such director or officer against the Corporation
or its directors or officers only if the proceeding was authorized by the Board
of Directors.
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
-10-
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