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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
0-22345
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Commission File No.
SHORE BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 52-1974638
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
18 EAST DOVER STREET, EASTON, MARYLAND 21601
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(Address of Principal Executive Offices) (Zip Code)
(410) 822-1400
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Registrant's Telephone Number, Including Area Code
Securities Registered pursuant to Section 12(b) of the Act:
None.
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock Par Value $.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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
The aggregate market value of the Corporation's voting stock held
by non-affiliates of the registrant as of March 23, 2001
was $76,263,844
The number of shares outstanding of the registrant's common stock, as of
March 23, 2001 was 5,324,380.
Documents Incorporated by Reference
Portions of the Shore Bancshares, Inc. definitive Proxy Statement for its
2001 Annual Stockholders' Meeting, as filed with the Securities and Exchange
Commission on March 27, 2001 are incorporated by reference into Part III of this
report. Portions of the Annual Report to Stockholders for the year ended
December 31, 2000 are incorporated by reference into Parts I and II of this
report. Except for parts of the Shore Bancshares, Inc. Annual Report expressly
incorporated herein by reference, the Annual Report is not to be deemed filed
with the Securities and Exchange Commission.
FORM 10-K INDEX
Page(s)
Part I
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 13
Part III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners and Management 14
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 14
2
PART I
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 "BHC Act"). The Company
engages in the business of banking through its two subsidiaries, The Centreville
National Bank of Maryland ("Centreville National Bank") and The Talbot Bank of
Easton, Maryland ("Talbot Bank"), collectively referred to as the "Banks".
Centreville National Bank commenced operations in 1876 and is a national banking
organization. Talbot Bank commenced operations in 1885 and is a commercial bank
chartered under the laws of the State of Maryland. The Banks operate ten full
service branches and fourteen Automated Teller Machines ("ATM's"), providing a
full range of commercial and consumer banking products and services to
individuals, businesses, and other organizations in Kent, Queen Anne's,
Caroline, Talbot and Dorchester counties in Maryland. Deposits are insured by
the Federal Deposit Insurance Corporation (the "FDIC").
On November 30, 2000, the Company completed its merger with Talbot Bancshares,
Inc. ("Talbot"), whereby Talbot was merged into the Company in a tax-free
exchange of stock accounted for as a pooling of interests. Shareholders of
Talbot received 2.85 newly issued shares of the Company common stock, or a total
of 3,407,098 shares, for all 1,195,534 outstanding shares of Talbot and cash in
lieu of each fractional share at the rate of $14.65 per share.
The Company currently has 5,324,380 shares of common stock, par value $0.01 per
share ("shares") held by 1,463 holders of record March 1, 2001.
The Company's and Talbot Bank's main office is located in Talbot County,
Maryland, at 18 East Dover Street, Easton, Maryland 21601. Centreville National
Bank's main office is located at 109 North Commerce Street, Centreville,
Maryland 21617. As of December 31, 2000 the Company had assets of approximately
$553 million, net loans of approximately $378 million, and deposits of
approximately $464 million. Stockholders' equity at December 31, 2000 was
approximately $65 million.
BANKING PRODUCTS AND SERVICES
The Banks are independent community banks providing service to businesses and
individuals in their respective market areas. Services offered are essentially
the same as those offered by larger regional institutions that compete with the
Banks. Services provided to businesses include commercial checking, savings,
certificate of deposit and overnight investment sweep accounts. The Banks offer
all forms of commercial lending including secured and unsecured loans, working
capital loans, lines of credit, term loans, accounts receivable financing, real
estate acquisition development, construction loans and letters of credit.
Merchant credit card clearing services are available as well as direct deposit
of payroll, PC and internet banking and telephone banking services.
3
Services to individuals include checking accounts, various savings programs,
mortgage loans, home improvement loans, installment and other personal loans,
credit cards, personal lines of credit, automobile and other consumer financing,
safe deposit boxes, debit cards, 24 hour telephone banking, PC and internet
banking, and 24-hour automatic teller machine services. The Banks also offer
nondeposit products such as mutual funds and annuities, and discount brokerage
services to their customers. Additionally, the Banks have Saturday hours and
extended hours on certain evenings during the week as an added customer
convenience.
LENDING ACTIVITIES
The Company originates secured and unsecured loans for business purposes. It is
typical for commercial loans to be secured by real estate, accounts receivable,
inventory equipment or other assets of the business. Commercial loans generally
involve a greater degree of credit risk than one to four family residential
mortgage loans. Repayment is often dependent on the successful operation of the
business and may be affected by adverse conditions in the local economy or real
estate market. The financial condition and cash flow of commercial borrowers is
therefore, carefully analyzed during the loan approval process, and continues to
be monitored by obtaining business financial statements, personal financial
statements and income tax returns. The frequency of this ongoing analysis
depends upon the size and complexity of the credit and collateral that secures
the loan. It is also the Company's general policy to obtain personal guarantees
from the principals of the commercial loan borrowers.
The Company provides residential real estate construction loans to builders and
individuals for single family dwellings. Residential construction loans are
usually granted based upon "as completed" appraisals and are secured by the
property under construction. Additional collateral may be taken if loan to value
ratios exceed 75%. Site inspections are performed to determine pre-specified
stages of completion before loan proceeds are disbursed. These loans typically
have maturities of six to twelve months and may be fixed or variable rate.
Permanent financing for individuals offered by the Company includes fixed and
variable rate loans with three-year or five-year balloons, and one, three or
five year Adjustable Rate Mortgages. Third party lenders often provide permanent
financing for borrowers seeking longer term fixed rate loans.
The risk of loss associated with real estate construction lending is controlled
through conservative underwriting procedures such as loan to value ratios of 75%
or less, obtaining additional collateral when prudent, and closely monitoring
construction projects to control disbursement of funds on loans.
The Company originates fixed and variable rate residential mortgage loans. As
with any consumer loan, repayment is dependent on the borrower's continuing
financial stability, which can be adversely impacted by job loss, divorce,
illness, or personal bankruptcy. Underwriting standards recommend loan to value
ratios of 75% based on appraisals performed by approved appraisers of the
Company. Title insurance protecting the Company's lien priority as well as fire,
and casualty insurance is required.
Commercial real estate loans are primarily those secured by office condominiums,
retail buildings, warehouses and general purpose business space. Low loan to
value ratio standards as well as the thorough financial analysis performed and
the Company's knowledge of the local economy in which it lends can reduce the
risk associated with these loans.
A variety of consumer loans are offered to customers including home equity
loans, credit cards and other secured and unsecured lines of credit and term
loans. Careful analysis of an applicant's creditworthiness is performed before
granting credit and on going monitoring of loans outstanding is performed in an
effort to minimize risk of loss by identifying problem loans early.
BANKING SERVICE CORPORATION
Centreville National Bank, the Company's subsidiary, owns one-third of the
outstanding common stock of The Delmarva Bank Data Processing Center, Inc.
("Delmarva"). Delmarva is a Maryland corporation located in Easton, Maryland,
which provides data processing services to banks located in Maryland, Delaware,
Virginia and the District of Columbia. Delmarva provides these services to
Centreville National Bank and Talbot Bank.
COMPETITIVE CONDITIONS
The Company is subject to substantial competition in all aspects of its
business. Recent changes in federal banking laws have resulted in an even
greater degree of competition in the banking industry. The Company competes with
larger regional banks and other locally owned banks within its market area. The
regional banks have resources substantially greater than the Company which can
often give them a competitive advantage. The Company competes for loans and
deposits against these institutions, as well as credit unions, savings
institutions, brokerage firms, insurance companies and mortgage companies.
The Company engages in traditional marketing activities such as advertising in
local newspapers, trade journals and other publications, and radio advertising
to attract new customers. In addition, personal contact by officers, directors
and employees, their involvement on boards of nonprofit organizations and other
community organizations, as well as their participation in community events
often results in new business. The Banks also rely on referrals from satisfied
customers.
The following table sets forth deposit data for Kent, Queen Anne's, Caroline,
Talbot and Dorchester Counties as of June 30, 2000, the most recent date for
which comparative information is available.
4
% of
Kent County Deposits Total
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(in thousands)
Peoples Bank of Kent County, Maryland $106,559 32.53%
The Chestertown Bank of Maryland 98,384 30.03
Chesapeake Bank and Trust Co. 46,801 14.29
Farmers Bank of Maryland 30,450 9.30
SunTrust Bank 25,706 7.85
THE CENTREVILLE NATIONAL BANK OF MARYLAND 19,646 6.00
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Total $327,546 100.00%
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SOURCE: FDIC DATABOOK
% of
Queen Anne's County Deposits Total
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(in thousands)
The Queenstown Bank of Maryland $156,595 37.72%
THE CENTREVILLE NATIONAL BANK OF MARYLAND 129,349 31.15
The Chestertown Bank of Maryland 37,240 8.97
Bank of America, National Association 37,128 8.94
Allfirst Bank 25,380 6.11
Farmers Bank 15,197 3.66
The Annapolis National Bank 14,313 3.45
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Total $415,202 100.00%
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SOURCE: FDIC DATABOOK
% of
Caroline County Deposits Total
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(in thousands)
Peoples Bank of Maryland $78,978 30.26%
Provident State Bank of Preston, Maryland 71,803 27.51
Allfirst Bank 34,226 13.11
Farmers Bank of Maryland 25,925 9.93
THE CENTREVILLE NATIONAL BANK OF MARYLAND 17,325 6.64
Bank of America, National Association 15,770 6.04
Atlantic Bank 13,897 5.32
Easton Bank & Trust 3,097 1.19
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Total $261,021 100.00%
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SOURCE: FDIC DATABOOK
% of
Talbot County Deposits Total
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(in thousands)
THE TALBOT BANK OF EASTON, MARYLAND $258,146 41.32%
St. Michaels Bank 113,057 18.10
Bank of America, National Association 76,298 12.21
SunTrust Bank 58,449 9.36
Easton Bank & Trust 52,085 8.34
Allfirst Bank 28,956 4.63
Farmers Bank 26,840 4.30
First Mariner Bank 10,523 1.68
The Queenstown Bank of Maryland 396 .06
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Total $624,750 100.00%
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SOURCE: FDIC DATABOOK
5
% of
Dorchester County Deposits Total
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(in thousands)
The National Bank of Cambridge $136,344 33.99%
Bank of the Eastern Shore 98,549 24.57
Hebron Savings Bank 35,690 8.90
Bank of America, National Association 32,472 8.10
Allfirst Bank 28,146 7.02
Atlantic Bank 27,292 6.80
SunTrust Bank 19,204 4.79
Provident State Bank of Preston, Maryland 16,987 4.24
THE TALBOT BANK OF EASTON, MARYLAND 6,386 1.59
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Total $401,070 100.00%
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SOURCE: FDIC DATABOOK
SUPERVISION AND REGULATION
The following is a summary of the material regulations and policies applicable
to the Company and its subsidiaries and is not intended to be a comprehensive
discussion. Changes in applicable laws and regulations may have a material
effect on the business of the Company and Banks.
GENERAL
The Company is a bank holding company, registered with the Federal Reserve under
the BHC Act and as such is subject to the supervision, examination and reporting
requirements of the BHC Act and the regulations of the Federal Reserve Board
(the "FRB").
Talbot Bank is a state chartered bank in Maryland and is a member of the FDIC.
Talbot Bank is subject to the regulation, supervision, and reporting
requirements of the FDIC, as well as the Maryland Commissioner of Financial
Regulation. Centreville National Bank is a federally chartered national bank and
member of the FDIC. Centreville National Bank is subject to the regulation,
supervision, and reporting requirements of the Office of the Comptroller of the
Currency ("OCC"). The Banks are also subject to numerous state and federal
statutes and regulations that affect the business of banking.
REGULATION OF BANK HOLDING COMPANIES
Under the BHC Act, the Company generally may not directly or indirectly acquire
the ownership or control of five percent or more of the voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the FRB. The BHC Act also restricts the types of businesses
and activities in which a bank holding company and its subsidiaries may engage.
Activities are generally limited to those which the FRB finds to be closely
related to, or incidental to, the business of banking.
Pursuant to the Gramm-Leach-Bliley Act, the Company has elected to become a
"financial holding company" and, as such, may engage in activities that are in
addition to the business of banking. A financial holding company may engage in a
full range of financial activities, including, insurance and securities sales
and underwriting activities, and real estate development, with new expedited
notice procedures. The Gramm-Leach-Bliley Act is described in more detail below.
Subsidiary banks of bank holding companies are subject to certain statutory
limits of the transfer of funds to the holding company or any of its nonbank
subsidiaries, whether in the form of loans or other extensions of credit,
investments in their securities and on the use of their securities as collateral
for loans to any borrower. Such transfers of a subsidiary bank to a holding
company or one of its nonbanking subsidiaries is limited in amount, and such
loans and extensions of credit are required to be collateralized in specified
amounts.
6
Under FRB policy, the Company is expected to act as a source of strength to its
subsidiary banks 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. In addition, under the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), depository institutions insured
by the FDIC can be held liable for any losses incurred by, or reasonably
anticipated to be incurred by, the FDIC in connection with (i) the default of a
commonly controlled FDIC-insured depository institution or (ii) any assistance
provided by the FDIC to a commonly controlled FDIC-insured depository
institution in danger of default. 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 obligations of a financial institution to its
stockholders and obligations to other affiliates.
FEDERAL BANKING REGULATION
Federal Banking regulators, such as the OCC and the FDIC, may prohibit the
institutions over which they have supervisory authority from engaging in
activities or investments that the agency believes are 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 be 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 Banks are subject to certain restriction 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 parties dealing with the
Banks 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 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 meet the standards. Failure to submit
or implement such a plan may subject the institution to regulatory sanctions.
The Company, on behalf of the Banks, believes that it meets substantially all
standards which have been adopted. FDICIA also imposes new capital standards on
insured depository institutions. See "Capital Requirements."
DEPOSIT INSURANCE
As FDIC member institutions, the Banks 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 to
27 cents for every $100 in assessable deposits. In addition, as a result of the
April 1997 merger of Kent Savings and Loan Association, F.A. into Centreville
National Bank, approximately $25.2 million of the Centreville National Bank's
deposits are assessed at SAIF rates. The SAIF assessment rates are determined
quarterly and the SAIF is also administered by the FDIC. The federal Economic
Growth and Regulatory Paperwork Reduction Act of 1996 (the"1996 Act"), included
provisions that, among other things, recapitalized the Savings Association
Insurance Fund ("SAIF") through a special assessment on savings association
deposits and bank deposits that had been acquired from savings associations.
CAPITAL REQUIREMENTS
The Company 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
Company's financial statements. Under capital adequacy guidelines there are two
basic measures: a risk-based measure and a leverage measure.
7
The risk-based capital guidelines are established to make regulatory capital
requirements more sensitive to risk profiles of banks and bank holding companies
and to account for off balance sheet exposure. Assets and off balance sheet
items are assigned to broad risk categories, each with appropriate weights.
A banking organization's capital is divided into two tiers. "Tier 1", or core
capital, includes common equity, retained earnings, minority interest in the
equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock, and a limited amount of cumulative perpetual preferred stock, less
goodwill and certain other intangible assets. "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. "Total Capital" is the sum of Tier 1
and Tier 2 capital. The Tier 1 component must comprise at least 50% of
qualifying total capital. Regulatory guidelines require a minimum of total
capital to risk-adjusted assets ratio of 8 percent and a minimum Tier 1 capital
to risk weighted assets ratio of 4 percent. Institutions which meet or exceed a
Tier 1 ratio of 6 percent, a total capital ratio of 10 percent and a Tier 1
leverage ratio of 5 percent are considered well capitalized by regulatory
standards.
Before establishing new branch offices, the Banks must meet certain minimum
capital stock and surplus requirements and obtain regulatory approval.
At December 31, 2000 both Banks had the necessary capital levels to be
considered "well capitalized."
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) a recapitalization of the Bank Insurance Fund of
the FDIC (the "BIF") by increasing the FDIC's borrowing authority and providing
for adjustments in its assessment rates; (ii) annual on-site examinations of
federally-insured depository institutions by banking regulators; (iii) publicly
available annual financial condition and management reports for financial
institutions, including audits by independent accountants; (iv) the
establishment of uniform accounting standards by federal banking agencies; and
(v) the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with more scrutiny
and restrictions placed on institutions with lower levels of capital.
FDICIA establishes a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system the federal banking
regulators are required to rate supervised institutions on the basis of five
capital categories: "well -capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized;" and to take certain mandatory actions, and are authorized to
take other discretionary actions, with respect to institutions in the three
undercapitalized categories. The severity of the actions will depend upon the
category in which the institution is placed. A depository institution is "well
capitalized" if it has a total risk based capital ratio of 10% of greater, a
Tier 1 risk based capital ratio of 6% of greater, and a leverage ratio of 5% or
greater and is not subject to any order, regulatory agreement, or written
directive to meet and maintain a specific capital level for any capital measure.
An "adequately capitalized" institution is defined as one that has a total risk
based capital ratio of 8% of greater, a Tier 1 risk based capital ratio of 4% or
greater and a leverage ratio of 4% or greater (or 3% or greater in the case of a
bank with a composite CAMEL rating of 1).
FDICIA generally prohibits a depository institution from making any capital
distribution, including the payment of cash dividends, or paying a management
fee 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. For a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee (subject to certain limitations) that the institution
will comply with such capital restoration plan.
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 and requirements to
reduce total assets and stop accepting deposits from correspondent banks.
Critically undercapitalized depository 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.
8
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 are eliminated effective September 29, 1995. The
law also permitted interstate branching by banks effective 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.
GRAMM-LEACH-BLILEY ACT
In November, 1999 the Gramm-Leach-Bliley Act ("GLBA") was signed into law.
Effective in pertinent part on March 11, 2000, GLBA revises the Bank Holding
Company Act of 1956 and repeals the affiliation provisions of the Glass-Steagall
Act of 1933, which, taken together, limited the securities, insurance and other
non-banking activities of any company that controls an FDIC insured financial
institution. Under GLBA, bank holding companies can elect, subject to certain
qualifications, to become a "financial holding company." GLBA provides that a
financial holding company may engage in a full range of financial activities,
including insurance and securities sales and underwriting activities, and real
estate development, with new expedited notice procedures.
Maryland law generally permits Maryland State chartered banks, including Talbot
Bank, to engage in the same activities, directly or through an affiliate, as
national banking associations. GLBA permits certain qualified national banking
associations, including Centreville National Bank, to form financial
subsidiaries, which have broad authority to engage in all financial activities
except insurance underwriting, insurance investments, real estate investment or
development, or merchant banking. Thus, the GLBA has the effect of broadening
the permitted activities of both banks.
EFFECTS OF MONETARY POLICY
The Company and its bank subsidiaries are effected by the ongoing and changing
monetary policies set forth by regulatory authorities including the FRB. Through
its powers the FRB can influence the supply of bank credit and affect the level
of economic activity. Changes in the discount rate and reserve requirements are
among the instruments used to influence the market. These influences can impact
the overall growth and distribution of bank loans, investments, and deposits,
and can also, affect the rates charged on loans and paid for deposits.
The monetary policies of the FRB have in the past and will continue to affect
the operating results of all financial institutions including the Company and
its subsidiaries.
FEDERAL SECURITIES LAW
The Company's common stock is registered with the SEC under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
EMPLOYEES
At March 23, 2001 the Company had no employees and the Banks had 146 full-time
employees and 19 part-time employees.
SEASONALITY
Management of the Company does not believe that the deposits or business of the
Company are seasonal in nature. Deposits may vary depending on local and
national economic conditions, however, not enough to have a material impact on
the Company's planning or policy making.
9
RISK FACTORS
REGULATORY RISKS. The banking industry is subject to many laws and regulations.
Regulations protect depositors, not stockholders. Regulators such as the
Maryland Division of Financial Regulation, Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency, and the Board of
Governors of the Federal Reserve System regulate the Company and the Banks.
Regulations and laws increase the Company's operating expenses, affect the
Company's earnings, and put the Company at a disadvantage with less regulated
competitors, such as finance companies, mortgage banking companies, and leasing
companies.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS. Most of the loans made by the Banks are
made to Maryland borrowers. A decline in local economic conditions would affect
the Company's earnings.
CREDIT RISKS AND INADEQUACY OF LOAN LOSS RESERVE. When borrowers default and do
not repay the loans made to them by the Banks, the Company loses money.
Experience shows that some borrowers either will not pay on time or will not pay
at all. In these cases, the Banks will cancel, or "write off," the defaulted
loan or loans. A "write off" reduces the Company's assets and affects the
Company's earnings. The Company anticipates losses by reserving what it believes
to be an adequate cushion so that it does not have to take a large loss at any
one time. However, actual loan losses cannot be predicted, and the Company's
loan loss reserve may not be sufficient.
INTEREST RATE RISK. The Company's earnings depend greatly on its net interest
income, the difference between the interest earned on loans and investments and
the interest paid on deposits. If the interest rate paid on deposits is high and
the interest rate earned on loans and investments is low, net interest income is
small and the Company earns less. Because interest rates are established by
competition, the Company cannot completely control its net interest income.
RISKS ASSOCIATED WITH REAL ESTATE LENDING. The Banks make many real estate
secured loans. Real estate loans are in greater demand when interest rates are
low and economic conditions are good. Even when economic conditions are good and
interest rates are low, these conditions may not continue. The Company may lose
money if the borrower does not pay a real estate loan. If real estate values
decrease, then the Company may lose more money when borrowers default.
NO ASSURANCE OF GROWTH. The Company's ability to increase assets and earnings
depends upon many factors, including competition for deposits and loans, the
Company's branch and office locations, avoidance of credit losses, and hiring
and training of personnel. Many of these factors are beyond the Company's
control.
COMPETITION. Other banks and non-banks, including savings and loan associations,
credit unions, insurance companies, leasing companies, small loan companies,
finance companies, and mortgage companies, compete with the Company. Some of the
Company's competitors offer services and products that the Company does not
offer. Larger banks and non-bank lenders can make larger loans and service
larger customers. Law changes now permit interstate banks which may increase
competition. Increased competition may decrease the Company's earnings.
NO ASSURANCE OF CASH OR STOCK DIVIDENDS. Whether dividends may be paid to
stockholders depends on the Company's earnings, its capital needs, law and
regulations, and other factors. The Company's payment of dividends in the past
does not mean that the Company will be able to pay dividends in the future.
STOCK NOT INSURED. Investments in the shares of the Company's common stock are
not deposits that are insured against loss by the government.
RISK INVOLVED IN ACQUISITIONS. Part of the Company's growth may come from buying
other banks and companies. A newly purchased bank or company may not be
profitable after the Company buys it and may lose money, particularly at first.
The new bank or company may bring with it unexpected liabilities or bad loans,
bad employee relations, or the new bank or company may lose customers.
10
RISK OF CLAIMS. Customers may sue the Company for losses due to the Company's
alleged breach of fiduciary duties, errors and omissions of employees, officers
and agents, incomplete documentation, the Company's failure to comply with
applicable laws and regulations, or many other reasons. Also, employees of the
Company conduct all of the Company's business. The employees may knowingly or
unknowingly violate laws and regulations. Company management may not be aware of
any violations until after their occurrence. This lack of knowledge may not
insulate the Company from liability. Claims and legal actions may result in
legal expenses and liabilities that may reduce the Company's profitability and
hurt its financial condition.
DEVELOPMENTS IN TECHNOLOGY. Financial services use technology, including
telecommunications, data processing, computers, automation, Internet-based
banking, debit cards, and "smart" cards. Technology changes rapidly. The
Company's ability to compete successfully with other banks and non-banks may
depend on whether it can exploit technological changes. The Company may not be
able to exploit technological changes and expensive new technology may not make
the Company more profitable.
MARKET FOR COMMON STOCK. The Company's shares of common stock are not listed on
any exchange, and there is currently no organized trading market. Prices for the
Company's common stock may not be the actual value or the trading price in a
liquid trading market.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS. The Company's
Articles of Incorporation and Bylaws divide the Company's Board of Directors
into three classes and each class serves for a staggered three-year term. No
director may be removed except for cause and then only by a vote of at least
two-thirds of the total eligible stockholder votes. In addition, Maryland law
contains anti-takeover provisions that apply to the Company. These provisions
may discourage or make it more difficult for another company to buy the Company
or may reduce the market price of the Company's common stock.
STATISTICAL INFORMATION
The following statistical information required under the SEC's Guide 3 for the
respective periods and at the indicated respective dates is set forth on the
pages indicated below. The information should be read in conjunction with the
related Consolidated Financial Statements and Notes thereto for the year ended
December 31, 2000.
MATURITIES OF LOAN PORTFOLIO
December 31, 2000
(In Thousands)
Maturing
Maturing After one Maturing
Within But Within After Five
One Year Five Years Years Total
Real Estate Construction
and land development $ 9,188 $9,399 $ - $ 18,587
Commercial, financial and agricultural 31,190 19,873 3,579 54,642
Mortgage 49,624 148,522 92,990 291,136
Consumer 5,684 11,327 1,130 18,141
-------- ------- -------- --------
Total $95,686 $189,121 $97,699 $382,506
======= ======== ======= ========
CLASSIFIED BY SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
Fixed-Interest Rate Loans $64,546 $172,547 $43,657 $280,750
Adjustable-Interest Rate Loans 31,140 16,574 54,042 101,756
------- ------- -------- ---------
Total $95,686 $189,121 $97,699 $382,506
======= ======== ======= ========
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
(In Thousands)
December 31,
2000 1999 1998 1997 1996
--------------------------------------------------------------
Commercial Financial and Agricultural $1,694 $1,437 $947 $1,074 $1,385
Real Estate-Construction 126 108 148 138 112
Real Estate-Mortgage 1,807 1,991 1,628 1,508 1,109
Consumer 412 438 296 350 250
Unallocated 160 17 912 871 1,375
-------- --------- -------- -------- -------
$4,199 $3,991 $3,931 $3,942 $4,231
====== ====== ====== ====== ======
11
Other statistical information required in this Item 1 is incorporated by
reference from the information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 2000, as follows:
DISCLOSURE REQUIRED BY GUIDE 3 REFERENCE TO 2000 ANNUAL REPORT
- ------------------------------ -------------------------------
(I) Distribution of Assets, Liabilities and Average Balances; Yields and Rates (page 4)
Stockholders' Equity; Interest Rates and Rate/Volume Analysis (page 5)
Interest Differential Non-performing Assets (page 8)
(II) Investment Portfolio Weighted Average Maturities and
Weighted Average
Yields (page 11) Notes
to Financial
Statements, Note 4 -
Investment in Debt
Securities - (pages 25
and 26)
(III) Loan Portfolio Year End Loan Composition (page 11)
Non-performing Assets (page 8)
(IV) Summary of Loan Loss Experience Provision and Allowance for Credit Losses (pages 6,7 and 8)
(V) Deposits Deposits (page 12)
(VI) Return on Equity and Assets Return on Equity and Assets (page 17)
(VII) Short Term Borrowings Short Term Borrowings (page 13) Notes to Financial Statements,
Note 9 -Short Term Borrowings (page 29) Notes to Financial
Statements, Note 16 - Line of Credit (page 34)
Item 2. PROPERTIES
The Company owns no real property. Talbot Bank owns real property at the
location of its main office at 18 East Dover Street, Easton, Maryland, and at
two of its four branch locations at 210 Marlboro Road, Easton, Maryland 21601
("Tred Avon Square Branch"), 8275 Elliott Road, Easton, Maryland 21601 ("Elliott
Road Branch") and 21 E. Dover Street, Easton, Maryland 21601 where certain
administrative offices of the bank are located. Two additional banking offices
are leased under operating leases. The Saint Michaels Branch is located at 1013
S. Talbot Street, St. Michaels, Maryland 21663 and the Cambridge Branch is
located at 2745 Dorchester Square, Cambridge, Maryland 21613. The St. Michaels
Branch operating lease expires in July 2006 and calls for annual rental payments
from $38,850 to $42,000 over the term of the lease. The Cambridge Branch lease
expires in July 2001 and calls for annual rental payments of $42,360. The
bookkeeping department of the Talbot Bank is located at 118 N. Dover Street.
This space is leased under an operating lease expiring in January 2004 for an
annual rent of $47,500.
Centreville National Bank owns real property at the location of its main office
at 109 North Commerce Street, Centreville, Maryland 21617, and at its five
branch locations at 2609 Centreville Road, Centreville Maryland 21617("Route 213
South Branch Office"), at 408 Thompson Creek Road, Stevensville, Maryland 21666
("Stevensville Branch Office"), at 21913 Shore Highway, Hillsboro, Maryland
21641 ("Hillsboro Branch Office"), at 305 East High Street, Chestertown,
Maryland 21620("Kent Office"), and at 850 S. 5th Avenue, Denton, Maryland 21629
("Denton Office").
Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings other than the ordinary routine
litigation incidental to the business to which the Company, the Bank, or its
subsidiaries is a party or to which any of their properties is subject. There
are also no material proceedings known to management 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 security holder is a party.
12
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company called a Special Meeting of Stockholders' on November 21, 2000 for
the purpose of approving the Plan and Agreement to Merge dated July 25, 2000,
between Shore Bancshares, Inc. and Talbot Bancshares, Inc. and the merger of
Talbot Bancshares, Inc. into the Company.
The agreement and merger were approved by the Company's stockholders by a vote
of 1,441,067 in favor, 17,099 against, and 1,045 abstain/broker non-votes. The
agreement and merger was approved by the stockholders of Talbot Bancshares, Inc.
by a vote of 937,307 in favor, 3,505 against, and 1,648 abstaining/broker
non-votes.
The approval of the merger agreement and the merger included approval of certain
amendments to the Company's charter and bylaws and the election of persons to
serve as directors of the Company after the merger.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Annual Report to Stockholders for the year ended
December 31, 2000 under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Stock Prices and Dividends," page
16, and "Notes to Financial Statements - Regulatory Capital Requirements" on
pages 33 and 34. The Company has issued and outstanding 5,324,380 shares of
common stock, par value $0.01 per share held by 1,463 holders of record March 1,
2001.
Item 6. SELECTED FINANCIAL DATA
Incorporated by reference from Annual Report to Stockholders for the year ended
December 31, 2000, page 17.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated by reference from Annual Report to Stockholders for the year ended
December 31, 2000 under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," pages 3 through 16. Reference is also made
to the information provided under the heading "Statistical Information" in Part
I, Item I, incorporated by reference herein.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the Market Risk of the Company's financial instruments
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations, Market Risk and Interest Rate Sensitivity" on pages 13 through 15 of
the Annual Report to Stockholders for the year ended December 31, 2000. The
Company's principal market risk exposure is to interest rates.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from the Annual Report to Stockholders for the year
ended December 31, 2000 under "Consolidated Financial Statements and Independent
Auditors' Report" on pages 18 through 37.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosure.
13
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A listing of Directors of the Registrant is incorporated by reference from
Definitive Proxy Statement to Stockholders for the 2001 Annual Meeting under
"Election of Directors," pages 1 through 5.
A listing of Executive Officers of the Registrant is incorporated by reference
from the Definitive Proxy Statement to Stockholders for the 2001 Annual Meeting
under "Executive Officers, " page 13.
A description of compliance with reporting requirements under Section 16(a) of
the Securities and Exchange Act is incorporated by reference from the Definitive
Proxy Statement to Stockholders for the 2001 Annual Meeting under "Section 16(a)
Beneficial Ownership Reporting Compliance," page 12.
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Definitive Proxy Statement to Stockholders
for the 2001 Annual Meeting under "Executive Compensation," " Benefit Plans" and
"Executive Compensation Committee Report," pages 6 through 11, under
"Performance Graph," page 14, and the Director compensation discussion on page
5.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Definitive Proxy Statement to Stockholders
for the 2001 Annual Meeting under "Beneficial Ownership of Common Stock," pages
5 and 6.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Definitive Proxy Statement to Stockholders
for the 2001 Annual Meeting under "Election of Directors" pages 1 through 5.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1),(2) FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Income -- Years Ended December 31, 2000,
1999, and 1998
Consolidated Statements of Changes in Stockholders' Equity -- Years
Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows -- Years Ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements as of December 31, 2000,
1999 and 1998
Report of Independent Auditors
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K
2.1 Plan and Agreement to Merge, dated July 25, 2000, by
and between Shore Bancshares, Inc. and Talbot
Bancshares, Inc. (incorporated by reference to
Exhibit 2.1 on Form 8-K filed by Shore Bancshares,
Inc. on July 31, 2000).
2.2 Amendment to Plan and Agreement to Merge, dated
November 30, 2000, by and between Shore Bancshares,
Inc. and Talbot Bancshares, Inc. (incorporated by
reference to Exhibit 2.2 on Form 8-K filed by Shore
Bancshares, Inc. on December 14, 2000).
3.1 Shore Bancshares, Inc. Amended and Restated Articles
of Incorporation (incorporated by reference to
Exhibit 3.1 on Form 8-K filed by Shore Bancshares,
Inc. on December 14, 2000).
3.2 Shore Bancshares, Inc. Amended and Restated By-Laws
(incorporated by reference to Exhibit 3.2 on Form 8-K
filed by Shore Bancshares, Inc. on December 14,
2000).
10.1 Form of Employment Agreement with W. Moorhead
Vermilye (incorporated by reference to Appendix XIII
of Exhibit 2.1 on Form 8-K filed by Shore Bancshares,
Inc. on July 31, 2000).
10.2 Form of Employment Agreement with Daniel T. Cannon
(incorporated by reference to Appendix XIII of
Exhibit 2.1 on Form 8-K filed by Shore Bancshares,
Inc. on July 31, 2000).
14
13 2000 Annual Report of Shore Bancshares, Inc., filed
herewith.
21 Subsidiaries of Shore Bancshares, Inc., filed
herewith.
23 Consent of Stegman & Company, filed herewith.
99.1 1998 Employee Stock Purchase Plan (incorporated by
reference from the Shore Bancshares, Inc.
Registration Statement on Form S-8 filed with the
Commission on September 25, 1998 Registration No.
333-64317).
99.2 1998 Stock Option Plan (incorporated by reference
from the Shore Bancshares, Inc. Registration
Statement on Form S-8 filed with the Commission on
September 25, 1998 (Registration No. 333-64319)).
99.3 Talbot Bancshares, Inc. Employee Stock Option Plan,
filed herewith.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on December 14, 2000, as amended
on Form 8-K/A on February 9, 2001, pursuant to Item 1 (Change in Control of
Registrant), Item 2 (Acquisition or Disposition of Assets), and Item 7
(Financial Statements, Pro Forma Financial Information and Exhibits).
(c) Exhibits required by Item 601 of Regulation S-K
See the Exhibits described in Item 14 (a)(3) above.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 28, 2001.
Shore Bancshares, Inc.
Date: March 29, 2001 By: /S/W. MOORHEAD VERMILYE
------------------------------
W. Moorhead Vermilye, President
and CEO
Date: March 29, 2001 By: /S/SUSAN E. LEAVERTON
---------------------------------
Susan E. Leaverton, Treasurer
(Principal Accounting and
Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/Herbert L. Andrew, III Director March 29, 2001
- -------------------------
Herbert L. Andrew, III
/s/ Lloyd L. Beatty, Jr. Director March 29, 2001
- ------------------------
Lloyd L. Beatty, Jr.
/s/Paul M. Bowman Director March 29, 2001
- -----------------
Paul M. Bowman
/s/David C. Bryan Director March 29, 2001
- -----------------
David C. Bryan
/s/ Daniel T. Cannon Director March 29, 2001
- --------------------
Daniel T. Cannon
/s/B. Vance Carmean Director March 29, 2001
- -------------------
B. Vance Carmean
Director March 29, 2001
- ------------------
Ronald N. Fox
/s/Richard C. Granville Director March 29, 2001
- -----------------------
Richard C. Granville
/s/Neil R. LeCompte Director March 29, 2001
- -------------------
Neil R. Le Compte
/s/David L. Pyles Director March 29, 2001
- -----------------
David L. Pyles
/s/W. Moorhead Vermilye Director March 29, 2001
- -----------------------
W. Moorhead Vermilye
16