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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 0-22345
Shore Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-1974638
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
109 North Commerce Street
Centreville, Maryland 21617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code: (410) 758-1600
Securities registered under Section 12(b) of the Act: None
Securities registered
under Section 12(g) of the Act: Common Stock, Par Value $0.01
(Title of Class)
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 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 Shore Bancshares, Inc. voting stock held by
non-affiliates as of January 31, 1998 was $42,170,086, based on the sales price
as of that date.
As of January 31, 1998, Shore Bancshares, Inc. had 1,007,424 shares of Common
Stock $.01 Par Value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV: Portions of the Annual Shareholders Report for the
year ended December 31, 1997 (the "Annual Report".)
Part III: Portions of the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April
22, 1998 (the "Proxy Statement".)
1
PART I
ITEM I
BUSINESS
GENERAL
Shore Bancshares, Inc. (the "Company"), a Maryland corporation
incorporated on March 15, 1996, became a registered bank holding company on July
1, 1996 under the Bank Holding Company Act of 1956, as amended. The Company
engages in its business through its sole subsidiary, The Centreville National
Bank of Maryland (the "Bank"), a national banking association. The Company
acquired the Bank through the merger of the Bank into an interim national
banking association formed as a Company subsidiary for the purpose of the
merger, pursuant to a Plan of Reorganization and Agreement to Merge (the "Plan")
proposed by Bank management and approved by the Bank's stockholders on April 16,
1996. Pursuant to the Plan, each outstanding share of Bank common stock was
exchanged for two shares of the Company's common stock. The Bank's charter was
not affected by the merger. Currently, the Company has issued and outstanding
1,007,424 shares of common stock, par value $0.01 per share ("Shares"), held by
963 holders of record on March 7, 1998.
The Company's and the Bank's main office is located at 109 North
Commerce Street, Centreville, Queen Anne's County, Maryland. The Bank has five
full service branch offices located in Centreville, Chestertown, Stevensville
and Hillsboro, Maryland.
As of December 31, 1997, the Company had assets of approximately $175.1
million, net loans of approximately $107.8 million, and deposits of $145.8
million. Stockholders' equity has continued to grow over the last five years and
has increased $5.4 million (30.0%) over the preceding five years.
BANKING PRODUCTS AND SERVICES
The Bank has been doing business in Maryland since 1876 and is engaged
in both the commercial and consumer banking business. The Bank serves its
customers through a network of five banking offices. The Bank provides a wide
range of personal banking services designed to meet the needs of local
consumers. Among the services provided are checking accounts, savings and time
accounts, safe deposit boxes, and installment and other personal loans,
especially residential mortgages, as well as home equity loans, automobile and
other consumer financing. As a convenience to its customers, the Bank offers
Saturday banking hours, drive-thru teller windows, "Direct Dial," a telephone
banking service, debit cards, and 24-hour automated teller machines at four of
our branch locations.
The Bank is also engaged in the financing of commerce and industry by
providing credit and deposit services for small to medium sized businesses and
for the agricultural community in the Bank's market area. The Bank offers many
forms of commercial lending, including lines of credit, revolving credit, term
loans, accounts receivable financing, and commercial real estate mortgage
lending and other forms of secured financing. A full range of commercial banking
services is offered, including the acceptance of checking and savings deposits.
Additional types of real estate loans, discount brokerage services,
credit cards and related services are also offered through affiliates or
correspondent banks. The Bank does not offer trust services and does not engage
in municipal trading services.
BANK SERVICE CORPORATIONS
The Bank owns one-third of the outstanding common stock of two service
corporations: The Delmarva Bank Data Processing Center, Inc. and The Eastern
Shore Mortgage Corporation, both Maryland corporations. The Eastern Shore
Mortgage Corporation, located in Easton, Maryland, is engaged in mortgage
banking activities, including the origination of residential mortgage loans and
the subsequent sale of the loans to permanent investors. Its primary customers
are residents who live on Maryland's Eastern Shore. The Delmarva Bank Data
Processing Center, Inc., also located in Easton, Maryland, provides data
processing services to banks located in Maryland, Delaware, Virginia and the
District of Columbia.
EXPANSION ACTIVITIES
On December 5, 1996, the Bank entered into a merger agreement with Kent
Savings & Loan Association, F.A.
2
("Kent Savings"), a federal savings and loan association located in Chestertown,
Maryland, with the Bank as the surviving financial institution. Under the terms
of the agreement, the Bank paid approximately $5.1 million in cash for all of
the 140,305 shares of outstanding common stock of Kent Savings. At March 31,
1997, total assets of Kent Savings were $24.1 million and total stockholders'
equity was approximately $2.9 million. The merger was approved by the
appropriate federal regulators. The merger required the approval of stockholders
of Kent Savings, which approval was given at their annual meeting on March 17,
1997. The merger was consummated on April 1, 1997.
SEASONALITY
The management of the Bank does not believe that the deposits or the
business of the Bank in general are seasonal in nature. The deposits may,
however, vary with local and national economic conditions but not enough to have
a material effect on planning and policy making.
EMPLOYEES
As of December 31, 1997, the Bank employed 71 individuals, 11 of whom
worked part-time.
DEPOSITS
No material portion of the Bank's deposits has been obtained from an
individual or a few individuals (including federal, state and local governments
and agencies) the loss of any one or more of which would have a materially
adverse effect on the Bank, nor is a material portion of the Bank's loans
concentrated within a single industry or group of related industries. On
December 31, 1997, the Bank had approximately 1,400 deposit customers
representing $145.8 million in deposits.
COMMITMENTS
As of the end of the last two fiscal years the Bank had the following
commitments to lend:
- -------------------------------------------------------------------------------------------
% of % of
12/31/97 Total 12/31/96 Total
- -------------------------------------------------------------------------------------------
(in thousands) (in thousands)
Standby Letters of Credit $ 1,770 12.59% $ 1,786 13.45%
Commitments to Grant Loans 12,293 87.41 11,491 86.55
- -------------------------------------------------------------------------------------------
Total $14,063 100.00% $13,277 100.00%
The above commitments are firm. The Bank expects approximately
$4,000,000 of the commitments to lend described above to be funded within the
current year.
COMPETITION
The Bank offers many personalized services and attracts customers by
being responsive and sensitive to the needs of the community. The Bank relies on
goodwill and referrals from satisfied customers as well as traditional media
advertising to attract new customers. To enhance a positive image in the
community, the Bank supports and participates in many local events. Employees,
officers, and Directors represent the Bank on many boards and local civic and
charitable organizations.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries.
3
Recent changes in federal banking laws facilitate interstate branching
and merger activity among banks. Since September, 1995, certain bank holding
companies are authorized to acquire banks throughout the United States. In
addition, as of June 1, 1997, certain banks are permitted to merge with banks
organized under the laws of different states. These changes may result in an
even greater degree of competition in the banking industry and the Company and
the Bank may be brought into competition with institutions with which it does
not presently compete.
Regional and local banks dominate the banking industry in Centreville,
Chestertown, Stevensville, and the Hillsboro areas where the Bank maintains
offices. The Bank competes for deposits and loans with these institutions and
with credit unions, savings institutions, insurance companies, and mortgage
companies, as well as other companies that offer financial services. To attract
new business and retain existing customers, the Bank offers a wide range of
banking products and services and relies on local promotional activity, personal
contact by its officers, staff, and Directors, referrals by current customers,
extended banking hours, and personalized service.
As of June 30, 1997, the most recent date for which comparative data is
available, bank deposits in Queen Anne's County (where the Bank's main office,
Centreville branch and Stevensville branch are located), Caroline County,
Maryland (where the Bank's Hillsboro branch is located), and Kent County (where
the Bank's Kent branch is located) ranked as follows:
- ------------------------------------------------------------------------------
% of
Queen Anne's County Deposits Total
- ------------------------------------------------------------------------------
(in thousands)
The Queenstown Bank of Maryland $124,494 34.99%
THE CENTREVILLE NATIONAL BANK OF MARYLAND 113,373 31.87
The Chestertown Bank of Maryland 34,721 9.76
NationsBank, N.A. 31,217 8.77
The First National Bank of Maryland 21,551 6.06
Farmers Bank of Maryland 16,907 4.75
Annapolis National Bank 13,517 3.80
- ------------------------------------------------------------------------------
Total $355,780 100.00%
- ------------------------------------------------------------------------------
SOURCE: FDIC DATA BOOK
- ------------------------------------------------------------------------------
% of
Caroline County Deposits Total
- ------------------------------------------------------------------------------
(in thousands)
The Peoples Bank of Maryland $ 72,104 29.94%
Provident State Bank of Preston 58,259 24.19
The First National Bank of Maryland 40,663 16.88
The Caroline County Bank 26,242 10.89
NationsBank, N.A. 16,008 6.65
Bank of Maryland 15,594 6.47
THE CENTREVILLE NATIONAL BANK OF MARYLAND 11,985 4.98
- ------------------------------------------------------------------------------
Total $240,855 100.00%
- ------------------------------------------------------------------------------
SOURCE: FDIC DATA BOOK
4
- ------------------------------------------------------------------------------
% of
Kent County Deposits Total
- ------------------------------------------------------------------------------
(in thousands)
The Chestertown Bank of Maryland $106,342 34.18%
Peoples Bank of Kent County 95,343 30.64
The Chesapeake Bank and Trust Company 41,574 13.36
Farmers Bank of Maryland 20,765 6.67
THE CENTREVILLE NATIONAL BANK OF MARYLAND 20,158 6.48
Crestar Bank 16,482 5.30
Signet 10,467 3.37
- ------------------------------------------------------------------------------
Total $311,131 100.00%
- ------------------------------------------------------------------------------
SOURCE: FDIC DATA BOOK
SUPERVISION AND REGULATION
GENERAL. The Company and the Bank are extensively regulated under
federal and state law. Generally, these laws and regulations are intended to
protect depositors, not stockholders. The following is a summary description of
certain provisions of certain laws which affect the regulation of bank holding
companies and banks. The discussion is qualified in its entirety by reference to
applicable laws and regulations. Changes in such laws and regulations may have a
material effect on the business and prospects of the Company and the Bank.
FEDERAL BANK HOLDING COMPANY REGULATION AND STRUCTURE. The Company is a
bank holding company within the meaning of the Bank Holding Company Act of 1956,
as amended, and as such, it is subject to regulation, supervision, and
examination by the Federal Reserve Board ("FRB"). The Company is required to
file annual and quarterly reports with the FRB and to provide the FRB with such
additional information as the FRB may require. The FRB may conduct examinations
of the Company and its subsidiaries.
With certain limited exceptions, the Company is required to obtain
prior approval from the FRB before acquiring direct or indirect ownership or
control of more than 5% of any voting securities or substantially all of the
assets of a bank or bank holding company, or before merging or consolidating
with another bank holding company. Additionally, with certain exceptions, any
person proposing to acquire control through direct or indirect ownership of 25%
or more of any voting securities of the Company is required to give 60 days'
written notice of the acquisition to the FRB, which may prohibit the
transaction, and to publish notice to the public.
Generally, a bank holding company may not engage in any activities
other than banking, managing or controlling its bank and other authorized
subsidiaries, and providing services to these subsidiaries. With prior approval
of the FRB, the Company may acquire more than 5% of the assets or outstanding
shares of a company engaging in non-bank activities determined by the FRB to be
closely related to the business of banking or of managing or controlling banks.
The FRB provides expedited procedures for expansion into approved categories of
non-bank activities.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions on extensions of credit to the bank
holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, subject to certain exceptions, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, the Bank may not generally
require a customer to obtain other services from itself or the Company, and may
not require that a customer promise not to obtain other services from a
competitor as a condition to and extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source
of financial strength to its subsidiary banks and to make capital injections
into a troubled subsidiary bank, and the FRB may charge the bank holding company
with engaging in unsafe and unsound practices for failure to commit resources to
a subsidiary bank when required. A required capital injection may be called for
at a time when the holding company does not have the resources to provide it. In
addition,
5
depository institutions insured by the Federal Deposit Insurance Corporation
("FDIC") can be held liable for any losses incurred by, or reasonably
anticipated to be incurred by, the FDIC in connection with the default of, or
assistance provided to, a commonly controlled FDIC-insured depository
institution. Accordingly, in the event that any insured subsidiary of the
Company causes a loss to the FDIC, other insured subsidiaries of the Company
could be required to compensate the FDIC by reimbursing it for the estimated
amount of such loss. Such cross guaranty liabilities generally are superior in
priority to the obligations of the depository institution to its stockholders
due solely to their status as stockholders and obligations to other affiliates.
FEDERAL BANK REGULATION. The Company's banking subsidiary is a
federally-chartered national bank regulated by the Office of Comptroller of the
Currency ("OCC"). The OCC may prohibit the institutions over which it has
supervisory authority from engaging in activities or investments that the agency
believes constitutes unsafe or unsound banking practices. Federal banking
regulators have extensive enforcement authority over the institutions they
regulate to prohibit or correct activities which violate law, regulation or a
regulatory agreement or which are deemed to constitute unsafe or unsound
practices. Enforcement actions may include the appointment of a conservator or
receiver, the issuance of a cease and desist order, the termination of deposit
insurance, the imposition of civil money penalties on the institution, its
directors, officers, employees and institution-affiliated parties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the removal of or restrictions on directors, officers, employees and
institution-affiliated parties, and the enforcement of any such mechanisms
through restraining orders or other court actions.
The Bank is subject to certain restrictions on extensions of credit to
executive officers, directors, principal stockholders or any related interest of
such persons which generally require that such credit extensions be made on
substantially the same terms as are available to third persons dealing with the
Bank and not involve more than the normal risk of repayment. Other laws tie the
maximum amount which may be loaned to any one customer and its related interests
to capital levels.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the OCC, have adopted standards covering
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. An institution which fails to meet those
standards may be required by the agency to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. The Company, on behalf of the Bank,
believes that it meets substantially all standards which have been adopted.
FDICIA also imposed new capital standards on insured depository institutions.
See "Capital Requirements."
Before establishing new branch offices, the Bank must meet certain
minimum capital stock and surplus requirements and the Bank must obtain OCC
approval.
DEPOSIT INSURANCE. As a FDIC member institution, the Bank's deposits
are insured to a maximum of $100,000 per depositor through the Bank Insurance
Fund ("BIF"), administered by the FDIC, and each institution is required to pay
semi-annual deposit insurance premium assessments to the FDIC. The BIF
assessment rates have a range of 0 cents to 27 cents for every $100 in
assessable deposits. 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. As a result of the merger of Kent
Savings into the Bank, approximately $20.8 million of the Bank's deposits are
assessed at SAIF rates. The SAIF assessment rates are determined quarterly and
the SAIF is also administered by the FDIC.
CAPITAL REQUIREMENTS. The federal banking regulators have adopted
certain risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent amounts
of off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as business loans. For bank holding
6
companies with less than $150,000,000 in consolidated assets, the guidelines are
applied on a bank-only basis.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. "Tier 1," or core capital,
includes common equity, perpetual preferred stock (excluding auction rate
issues) and minority interest in equity accounts of consolidated subsidiaries,
less goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes, among other things, limited-life preferred
stock, hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less required deductions. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. As of
December 31, 1997, the Bank's ratio of Tier 1 to risk-weighted assets stood at
22.66% and its ratio of total capital to risk-weighted assets stood at 23.91%.
In addition to risk-based capital, banks and bank holding companies are required
to maintain a minimum amount of Tier 1 capital to total assets, referred to as
the leverage capital ratio, of at least 3%. As of December 31, 1997, the Bank's
leverage capital ratio was 12.16%.
In August, 1995 and May, 1996, the federal banking agencies adopted
final regulations specifying that the agencies will include, in their
evaluations of a bank's capital adequacy, an assessment of the Bank's interest
rate risk ("IRR") exposure. The standards for measuring the adequacy and
effectiveness of a banking organization's interest rate risk management includes
a measurement of board of director and senior management oversight, and a
determination of whether a banking organization's procedures for comprehensive
risk management are appropriate to the circumstances of the specific banking
organization. The Bank has internal IRR models that are used to measure and
monitor IRR. Additionally, the regulatory agencies have been assessing IRR on an
informal basis for several years. For these reasons, the Company does not expect
the addition of IRR evaluation to the agencies' capital guidelines to result in
significant changes in capital requirements for the Bank.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "--Federal Deposit Insurance Corporation
Improvement Act of 1991" below, as applicable to undercapitalized institutions.
In addition, future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends to the Company.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In
December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things, (i) publicly available annual financial condition and
management reports for financial institutions, including audits by independent
accountants, (ii) the establishment of uniform accounting standards by federal
banking agencies, (iii) the establishment of a "prompt corrective action" system
of regulatory supervision and intervention, based on capitalization levels, with
more scrutiny and restrictions placed on depository institutions with lower
levels of capital, (iv) additional grounds for the appointment of a conservator
or receiver, and (v) restrictions or prohibitions on accepting brokered
deposits, except for institutions which significantly exceed minimum capital
requirements. FDICIA also provides for increased funding of the FDIC insurance
funds and the implementation of risked-based premiums. See "Deposit
Insurance."
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." The Bank is currently classified as
"well-capitalized." An institution may be deemed by the
7
regulators to be in a capitalization category that is lower than is indicated by
its actual capital position if, among other things, it receives an
unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a cash dividend) or paying any
management fees to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to growth limitations and are required to submit capital restoration
plans. If a depository institution fails to submit an acceptable plan, it is
treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of other
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and stop
accepting deposits from correspondent banks. Critically undercapitalized
institutions are subject to the appointment of a receiver or conservator,
generally within 90 days of the date such institution is determined to be
critically undercapitalized.
FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution. FDICIA also limits the circumstances under which the FDIC
is permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
INTERSTATE BANKING LEGISLATION. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 was enacted into law on September 29, 1994. The
law provides that, among other things, substantially all state law barriers to
the acquisition of banks by out-of-state bank holding companies were eliminated
effective on September 29, 1995. The law also permits interstate branching by
banks effective as of June 1, 1997, subject to the ability of states to opt-out
completely or to set an earlier effective date. Maryland generally established
an earlier effective date of September 29, 1995.
MONETARY POLICY. The earnings of a bank holding company are affected by
the policies of regulatory authorities, including the FRB, in connection with
the FRB's regulation of the money supply. Various methods employed by the FRB
are open market operations in United States Government securities, changes in
the discount rate on member bank borrowing and changes in reserve requirements
against member bank deposits. These methods used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. The money policies of the FRB have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future.
Statistical Information:
The following supplementary information required under 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 conjuction with the
related Consolidated Financial Statements and Notes thereto for the year ended
December 31, 1997.
Table of Contents: Page
Average Balances, Yields, and Rates 9
Rate and Volume Variance Analysis 10
Interest Rate Sensitivity Analysis 11
Investment Securities 12
Investment Securities Portfolio Analysis 12
Summary of Loan Portfolio 13
Maturities of Loan Portfolio 13
Risk Elements of Loan Portfolio 14
Analysis of the Allowance for Credit Losses 14
Allocation of the Allowance for Credit Losses 14
Maturity of Time Certificates of Deposit $100,000 or More 15
Summary of Significant Ratios 15
8
AVERAGE BALANCES, YIELDS, AND RATES
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 For the Year Ended December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest earning assets:
Money market investments:
Federal funds sold $ 6,493,959 $ 354,331 5.46% $ 7,095,343 $ 378,246 5.33%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies 32,996,468 2,102,149 6.37 27,640,017 1,703,420 6.16
Obligations of States and
political subdivisions(1) 8,858,428 673,659 7.60 8,896,963 683,213 7.68
All other investment securities 2,396,970 143,558 5.99 1,387,606 91,075 6.56
- -------------------------------------------------------------------------------------------------------------------------
Total investment securities 44,251,866 2,919,366 6.60 37,924,586 2,477,708 6.53
Loans, net of unearned income(2)(3)
Commercial loans 9,293,896 982,599 10.57 10,263,061 1,074,769 10.47
Installment loans 5,264,677 536,637 10.19 5,097,131 512,414 10.05
Mortgage loans 89,183,164 7,827,395 8.78 73,406,929 6,516,800 8.88
- -------------------------------------------------------------------------------------------------------------------------
Total loans 103,741,737 9,346,631 9.01 88,767,121 8,103,983 9.13
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 154,487,562 $ 12,620,328 8.17% 133,787,050 $ 10,959,937 8.19%
Cash and due from banks 4,012,120 3,589,220
Other assets 8,641,143 5,503,965
Allowance for loan and lease losses (1,445,147) (1,469,856)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $165,695,678 $141,410,379
=========================================================================================================================
LIABILITIES
Interest-bearing liabilities
Super NOW accounts $ 17,214,551 $ 510,209 2.96% $ 16,022,439 $ 489,828 3.06%
Money market deposit account 21,027,750 702,261 3.34 19,112,185 639,654 3.35
Time, $100,000 or more 13,297,892 704,290 5.30 11,632,139 633,460 5.45
Other time deposits 41,023,454 2,135,522 5.21 30,099,425 1,582,081 5.26
IRA deposits 14,732,561 796,760 5.41 14,451,599 738,622 5.11
Savings deposits 16,636,078 521,015 3.13 12,324,479 392,334 3.18
Other borrowed funds 1,356,164 77,825 5.74 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 125,288,450 5,447,882 4.35% 103,642,266 4,475,979 4.32%
Demand deposits 16,216,396 15,303,365
Other liabilities 1,401,009 838,440
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 142,905,855 119,784,071
Stockholders' equity 22,789,823 21,626,308
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $165,695,678 $141,410,379
=========================================================================================================================
Net interest income and interest
rate spread $ 7,172,446 3.82% $ 6,483,958 3.87%
Net interest income as a percent of
earning assets 4.64% 4.85%
=========================================================================================================================
For the Year Ended December 31, 1995
- -----------------------------------------------------------------------------
Average Income/ Yield/
Balance Expense Rate
- -----------------------------------------------------------------------------
ASSETS
Interest earning assets:
Money market investments:
Federal funds sold $ 2,354,943 $ 137,734 5.85%
Investment securities:
U.S. Treasury securities and
obligations of U.S. government
agencies 34,441,007 2,063,641 5.99
Obligations of States and
political subdivisions(1) 10,025,129 822,951 8.21
All other investment securities 1,288,757 92,872 7.21
- -----------------------------------------------------------------------------
Total investment securities 45,754,893 2,979,464 6.51
Loans, net of unearned income(2)(3)
Commercial loans 11,031,642 1,156,962 10.49
Installment loans 4,217,507 437,422 10.37
Mortgage loans 69,008,142 6,077,576 8.81
- -----------------------------------------------------------------------------
Total loans 84,257,291 7,671,960 9.11
- -----------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 132,367,127 $ 10,789,158 8.15%
Cash and due from banks 3,431,939
Other assets 4,984,475
Allowance for loan and lease losses (1,470,381)
- -----------------------------------------------------------------------------
TOTAL ASSETS $139,313,160
=============================================================================
LIABILITIES
Interest-bearing liabilities
Super NOW accounts $ 14,763,485 $ 458,095 3.10%
Money market deposit account 20,708,692 704,005 3.40
Time, $100,000 or more 13,801,000 650,745 4.72
Other time deposits 26,826,207 1,370,902 5.11
IRA deposits 14,038,374 804,030 5.73
Savings deposits 13,868,563 456,851 3.29
Other borrowed funds 817,945 52,236 6.39
- -----------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 104,824,266 4,496,864 4.29%
Demand deposits 13,400,204
Other liabilities 770,078
- -----------------------------------------------------------------------------
Total liabilities 118,994,548
Stockholders' equity 20,318,612
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $139,313,160
=============================================================================
Net interest income and interest
rate spread $ 6,292,294 3.86%
Net interest income as a percent of
earning assets 4.75%
=============================================================================
1. All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate exclusinve of the alternative minimum tax
rate of 34% and nondeductible interest expense.
2. Loan fee income is included in interest income for each loan category and
yields are stated to include all. Fees approximated $84,000, $88,000, and
$72,000 for 1997, 1996, and 1995, respectively.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
9
RATE AND VOLUME VARIANCE ANALYSIS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 compared to 1995
- -----------------------------------------------------------------------------------------------------------------------------
CHANGE DUE TO Change due to
INCREASE Increase
INTEREST INCOME (DECREASE) RATE(2) VOLUME (Decrease) Rate(2) Volume
- -----------------------------------------------------------------------------------------------------------------------------
Federal funds sold $ (23,915) $ 8,144 $ (32,059) $ 240,512 $(36,741) $ 277,253
- -----------------------------------------------------------------------------------------------------------------------------
Total money market investments (23,915) 8,144 (32,059) 240,512 (36,741) 277,253
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. government agencies 398,729 68,618 330,111 (360,221) 47,282 (407,503)
Tax-exempt obligations of State and
political subdivisions(1) (9,554) (6,595) (2,959) (139,738) (47,128) (92,610)
All other investment securities 52,483 (13,766) 66,249 (1,797) (8,920) 7,123
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities 441,658 48,257 393,401 (501,756) (8,766) (492,990)
- -----------------------------------------------------------------------------------------------------------------------------
Commercial loans (92,170) 9,323 (101,493) (82,193) (1,587) (80,606)
Installment loans 24,223 7,380 16,843 74,992 (16,239) 91,231
Mortgage loans 1,310,595 (89,962) 1,400,557 439,224 51,821 387,403
- -----------------------------------------------------------------------------------------------------------------------------
Total loans(3) 1,242,648 (73,259) 1,315,907 432,023 33,995 398,028
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income $1,660,391 $(16,858) $1,677,249 $ 170,779 $(11,512) $ 182,291
=============================================================================================================================
INTEREST EXPENSE
Super NOW accounts $ 20,381 $(16,064) $ 36,445 $ 31,733 $ (7,331) $ 39,064
Money market deposit accounts 62,607 (1,504) 64,111 (64,351) (10,077) (54,274)
Time deposits of $100,000 or more 70,830 (19,883) 90,713 (17,285) 84,981 (102,266)
Other time deposits 553,441 (20,746) 574,187 211,179 43,907 167,272
IRA deposits 58,138 43,778 14,360 (65,408) (89,075) 23,667
Savings deposits 128,681 (8,573) 137,254 (64,517) (13,653) (50,864)
Other borrowed funds 77,825 -- 77,825 (52,236) -- (52,236)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 971,903 $(22,992) $ 994,895 $ (20,885) $ 8,752 $ (29,637)
=============================================================================================================================
Net interest margin/income $ 688,488 $ 6,134 $ 682,354 $ 191,664 $(20,264) $ 211,928
=============================================================================================================================
1. Income and yields are computed on a tax equivalent basis using the statutory
federal income tax rate of 34%, exclusive of the alternative minimum tax and
nondeductible interest expense.
2. Variances caused by the change in yield/rate times the average balance are
allocated to rate.
3. Balances of nonaccrual loans and related income have been included for
computational purposes.
10
INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1997
(ALL DOLLAR AMOUNTS IN THOUSANDS)
AFTER 3 AFTER 1 NON - TOTAL
MONTHS - YEAR - INTEREST ALL
WITHIN WITHIN WITHIN AFTER SENSITIVE CATEGORIES
3 MONTHS 1 YEAR 5 YEARS 5 YEARS FUNDS
---------- ---------- ----------- ----------- ----------- ----------
ASSETS
- ----------------------------------------
Loans $17,347 $7,101 $45,879 $39,004 ($1,567) $107,764
Taxable Investment Securities 4,342 6,691 19,198 6,849 37,080
Non-taxable Investment Securities 110 1,117 4,443 4,037 9,707
Investments in Equity Securities 887 1,068 1,955
Federal Funds Sold 3,504 3,504
Non-interest earning assets 15,105 15,105
-------- -------- -------- ------- -------- --------
TOTAL ASSETS 26,190 14,909 69,520 49,890 14,606 175,115
-------- -------- -------- ------- -------- --------
LIABILITIES
- ----------------------------------------
Time Certificates of Deposit over $100,000 2,360 5,613 5,501 13,474
All Other Time Deposits 14,440 19,621 23,800 57,861
Savings and Money Market Deposits 37,575 37,575
Interest-bearing Transaction 19,176 19,176
Other borrowed funds 5,000 5,000
Noninterest-bearing Liabilities 18,514 18,514
-------- -------- -------- ------- -------- --------
TOTAL LIABILITIES 73,551 25,234 34,301 0 18,514 $151,600
-------- -------- -------- ------- -------- --------
NET (ASSETS LESS LIABILITIES) ($47,361) ($10,325) $35,219 $49,890 ($3,908)
======== ======== ======== ======= ========
NET (CUMULATIVE) ($47,361) ($57,686) ($22,467) $27,423 $23,515
======== ======== ======== ======= ========
RSA-RSL (CUMULATIVE) /
TOTAL ASSETS -27.05% -32.94% -12.83% 15.66% 13.43%
======== ======== ======== ======= ========
Interest Rate Sensitivity Analysis
Assumptions
Fixed rate loans are grouped in the appropriate category based on scheduled
amortization. Variable rate loans are classified based on the next available
repricing opportunity. Noninterest sensitive loans consists of the net of
nonaccrual loans, allowance for credit losses and deferred fees and costs.
Taxable and nontaxable investment securities are categorized by final maturity
date or, if applicable, a definite call date.
Investment in equity securities within three months consists of a U.S.
Government Securities Mutual Fund. Noninterest sensitive funds combines Federal
Reserve Bank and Federal Home Loan Bank of Atlanta stocks.
Time deposits with contractual maturities are categorized based on the effective
maturity of the deposit.
Savings, money market and interest-bearing transaction accounts are assumed to
be subject to repricing within a year, and generally within three months of a
rate change, based on the Company's historical experience.
11
Investment Securities
(In Thousands)
Fair Value
December 31,
1997 1996
--------------------
Available for Sale
U.S. Treasury Securities $7,014 $9,458
Obligations of U.S. Government agencies and
corporations 475 -
U.S. Government Securities Mutual Funds 887 870
Federal Reserve Bank and Federal Home Loan
Bank of Atlanta stock 1,068 863
--------------------
Total Available for Sale 9,444 11,191
--------------------
Amortized Cost
December 31,
1997 1996
--------------------
Held to Maturity
Obligations of U.S. Government and other
government agencies and corporations 29,088 23,065
Obligations of states and political subdivisions 10,210 9,397
--------------------
Total Held to Maturity 39,298 32,462
--------------------
Total Investment Securities $48,742 $43,653
====================
Investment Securities Portfolio Analysis
December 31, 1997
(In Thousands)
AVAILABLE FOR SALE
========================
============================================ U.S. Govt. Agencies ===================== ==========
U.S. Treasury U.S. Govt. Agencies Securities Mutual Fund Other Securities
Book Avg.T.E. Book Avg.T.E. Book Avg.T.E. Book Avg.T.E. Total
Description & Term Value Yield Value Yield Value Yield Value Yield Value
- ------------------ ===================== ===================== ======================== ===================== ==========
0 - 3 Months $1,992 6.04 99 6.22 0 N/A 0 N/A $2,091
3 - 6 Months 0 N/A 0 N/A 0 N/A 0 N/A 0
6 - 12 Months 0 N/A 0 N/A 0 N/A 0 N/A 0
1 - 3 Years 4,974 6.32 0 N/A 0 N/A 0 N/A 4,974
3 - 4 Years 0 N/A 47 6.75 0 N/A 0 N/A 47
4 - 5 Years 0 N/A 0 N/A 0 N/A 0 N/A 0
5 - 10 Years 0 N/A 70 7.34 0 N/A 0 N/A 70
10 - 30 Years 0 N/A 249 7.50 1,010 7.33 1,068 6.88 2,327
---------------------- --------------------- ------------------------ --------------------- ----------
Total $6,966 6.09 $465 7.38 $1,010 7.33 $1,068 6.88 9,509
====================== ===================== ======================== ===================== ==========
HELD TO MATURITY
====================== ======================== ===================== ==========
U.S. Govt. Agencies Municipals Municipals - In State
Book Avg.T.E. Book Avg.T.E. Book Avg.T.E. Total
Description & Term Value Yield Value Yield Value Yield Value
- ------------------ ====================== ======================== ====================== ==========
0 - 3 Months $2,244 5.69 $110 5.76 $0 N/A $2,354
3 - 6 Months 2,199 5.67 250 5.68 85 8.11 2,534
6 - 12 Months 3,990 5.65 1,234 7.34 50 11.45 5,274
1 - 3 Years 3,495 6.18 2,239 7.82 1,085 7.98 6,819
3 - 4 Years 4,980 6.36 0 N/A 202 6.60 5,182
4 - 5 Years 5,661 6.45 0 N/A 917 7.50 6,578
5 - 10 Years 6,519 6.73 2,230 6.87 1,146 8.20 9,895
10 - 30 Years 0 N/A 662 7.22 0 N/A 662
---------------------- ------------------------ --------------------- ----------
Total $29,088 6.23 $6,725 7.16 $3,485 7.90 39,298
====================== ======================== ===================== ==========
The above yields have been adjusted to reflect a tax equivalent basis assuming a
federal tax rate of 34% and a state tax rate of 7%.
12
Summary Of Loan Portfolio
(In Thousands)
Loans Outstanding as of December 31,
------------------------------------------
1997 1996
----------- -----------
Amount Amount
----------- -----------
Real Estate:
Construction and land development $2,946 $3,264
Commercial 12,973 10,935
Residential 78,273 60,490
Commercial 8,353 7,739
Consumer 6,622 6,465
----------- -----------
TOTAL $109,167 $88,893
=========== ===========
Maturities Of Loan Portfolio
December 31, 1997
(In Thousands)
Maturing
Maturing After One Maturing
Within But Within After Five
One Year Five Years Years Total
-------------------------------------------
Real Estate:
Construction and land development $ 2,867 $ 79 $ - $ 2,946
Commercial 6,605 3,242 2,953 12,800
Residential 7,595 34,631 36,220 78,446
Commercial 4,401 3,259 693 8,353
Consumer 1,449 4,582 591 6,622
-------------------------------------------
TOTAL $ 22,917 $ 45,793 $ 40,457 $ 109,167
===========================================
Classified by Sensitivities of Loans to Changes in Interest Rates
Fixed - Interest Rate Loans $ 3,144 $ 15,490 $ 33,754 $ 52,388
Adjustable - Interest Rate Loans 21,481 30,303 4,995 56,779
-------------------------------------------
TOTAL $ 24,625 $ 45,793 $ 38,749 $ 109,167
===========================================
13
Risk Elements Of Loan Portfolio
(In Thousands)
December 31,
1997 1996
-------------------
Non-accrual loans $199 $872
Accruing loans past due 90 Days or more 251 590
Restructured loans 209 0
Information with respect to non-accrual loans at December 31, 1997:
Non-accrual loans $199
Interest income that would have been recorded under original terms: 33
Interest income recorded during the period 27
Analysis of the Allowance for Credit Losses
(In Thousands)
For the Years Ended December 31,
1997 1996
---------------------
Balance at beginning of period $1,503 $1,479
Charge-offs:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 22 10
Commercial 37 5
Consumer installment 99 63
---------------------
158 78
---------------------
Recoveries:
Real Estate:
Construction and land development 0 0
Commercial 0 0
Residential 0 10
Commercial 4 67
Consumer installment 40 25
---------------------
44 102
---------------------
Net charge-offs (recoveries) 114 (24)
Provision for credit losses 0 0
Allowance aquired 15 0
---------------------
Balance at end of period $1,404 $1,503
=====================
Average daily balance of loans $103,742 $88,767
Ratio of net charge-offs to average loans outstanding 0.11% (0.03%)
Allocation of the Allowance for Credit Losses
(In Thousands)
Percent of loans Percent of loans
December 31, in each category December 31, in each category
1997 to total loans 1996 to total loans
----------------------------------------------------------------------------
Real Estate:
Construction and land development $38 2.70% $41 3.67%
Commercial 518 11.88% 137 12.30%
Residential 47 71.70% 36 68.05%
Commercial 194 7.65% 502 8.71%
Consumer 112 6.07% 95 7.27%
Unallocated 495 N/A 692 N/A
----------------------------------------------------------------------------
TOTAL $1,404 100.00% $1,503 100.00%
============================================================================
14
Maturity of Time Certificates of Deposit $100,000 or More
(In Thousands)
December 31, December 31,
1997 1996
-----------------------------------
Three months or less $2,360 $7,769
Three months through six months 2,245 2,776
Six months through twelve months 3,368 2,196
Over twelve months 5,501 3,939
-----------------------------------
TOTAL $13,474 $16,680
===================================
Summary of Signifcant Ratios
1997 1996
---------------------
Return on average total assets 1.43% 1.63%
Return on average total equity 10.40% 10.67%
Dividend payout ratio 41.28% 40.17%
Total average equity to total average assets ratio 13.75% 15.29%
1997 1996 1995 1994 1993
----------------------------------------------------
Allowance for credit losses to non-performing loans 311.94% 102.82% 83.72% 77.44% 55.85%
ITEM 2
PROPERTIES
The Bank owns real property at the location of its main office at 109
North Commerce Street, Centreville, Maryland 21617, and at its four branch
locations at 2609 Centreville Road, Centreville, Maryland 21617 ("Route 213
South Branch Office"), 408 Thompson Creek Road, Stevensville, Maryland 21666
("Stevensville Branch Office"), at 21913 Shore Highway, Hillsboro, Maryland
21614 ("Hillsboro Branch Office") and 305 East High Street, Chestertown,
Maryland("Kent Branch Office".) There are no encumbrances on any of these
properties. The Company owns no real property.
ITEM 3
LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business to which the Company, the Bank, or
its subsidiaries is a party or of which any of their properties is subject.
Management is not aware of any material proceedings to which any Director,
officer, or affiliate of the Company, any person holding beneficially in excess
of five (5) percent of the Company's Shares, or any associate of any such
Director, officer, or securing holder is a party.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 to a vote
of security holders, through the solicitation of proxies.
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The sections entitled "Market Price of and Dividends on Registrant's
Common Equity and Related Stockholder Matters" and "Market Information" on page
36 of the Annual Report is hereby incorporated by reference.
For information regarding regulatory restrictions on the Bank's and,
therefore, the Company's payment of dividends, see Note 16 "Regulatory Matters"
on page 30 of the Annual Report, which is hereby incorporated by reference.
ITEM 6
SELECTED FINANCIAL DATA
The table entitled "Selected Financial Data" on page 1 of the Annual
Report is hereby incorporated by reference.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION
AND FINANCIAL CONDITION
Pages 5 through 11 of the Annual Report are hereby incorporated by
reference.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Management Discussion and Analysis
15
of Results of Operation and Financial Condition - Market Risk Management" on
page 10 of the Annual Report and hereby incorporated by reference. The Company's
principal market risk exposure is to interest rates.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 12 through 33 of the Annual Report are hereby incorporated by
reference.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Board of Directors of the Company, upon recommendation of the
Bank's Audit/Compliance Committee, proposed and recommended the election of
Stegman & Company as independent certified public accountants to make an
examination of the accounts of the Company and the Bank for the year ending
December 31, 1997. Stegman and Company served as the Company's and the Bank's
independent public auditor for 1996.
Trice and Geary served as the Bank's independent public auditor for
1995, before the formation of the Company. In 1995, Trice and Geary performed
various professional services for the Bank, including completion of the audit of
financial statements for 1995 and preparation of corporate tax returns.
On October 31, 1995, the Bank's Board of Directors, upon the
recommendation of the Audit/Compliance Committee, selected Stegman and Company
effective April 16, 1996 to audit the books of the Company and its subsidiaries
for the year ending December 31, 1996, to report on the consolidated statements
of financial position and related statements of earnings of the Company and its
subsidiaries, and to perform such other accounting services as may be required
by the Board of Directors. The Company has been advised by Stegman and Company
that the firm did not have any direct financial interest or any material
indirect financial interest in the Company and its subsidiaries in 1996 or
currently.
There were no disagreements with Trice and Geary on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement. For the year ended December 31, 1995, its
audit report did not contain any adverse opinion or disclaimer of opinion, nor
was it qualified or modified as to uncertainty, audit scope, or accounting
principles.
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference in the section entitled "Election of
Directors" on pages 3 and 4 and section entitled "Executive Officers" on page 6
in the Proxy Statement as filed with the Securities and Exchange Commission
March 23, 1998.
ITEM 11
EXECUTIVE COMPENSATION
Incorporated by reference in the section entitled "Executive
Compensation" on pages 6 and 7 in the Proxy Statement as filed with the
Securities and Exchange Commission March 23, 1998.
16
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference in the section entitled "Beneficial
Ownership of Common Stock" on pages 1 and 2 in the Proxy Statement as filed
with the Securities and Exchange Commission March 23, 1998.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference in the section entitled "Election of
Directors" on page 4 in the Proxy Statement as filed with the Securities and
Exchange Commission March 23, 1998.
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1), (2) Financial Statements
The following consolidated financial statements included in the Annual
Report to Shareholders for the year ended December 31, 1997, are incorporated
herein by reference in Item 8 of this Report.
The following financial statements are filed as a part of this report:
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Notes to the Consolidated Financial Statements
Independent Auditors' Report
All financial statement schedules have been omitted as the required
information is either inapplicable or included in the consolidated financial
statements or related notes.
(a) Exhibits Required to be Filed by Item 601 of Regulation S-K
EXHIBIT INDEX
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession
(2.1) Plan of Reorganization and Agreement to Merge dated
March 15, 1996, 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. 0-22345).
(2.2) Merger Agreement dated December 5, 1996 among Kent
Savings and Loan Association, F.A., The Centreville National Bank of Maryland,
and the Company 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. 0-22345).
(3) Charter and Bylaws
(3.1) Articles of Incorporation of the Company are
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. 0-22345).
17
(3.2) Bylaws of the Company 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. 0-22345)
(13) 1997 Annual Report filed herewith.
(16) Letter re: Change in Certifying Accountants 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.
0-22345)
(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 is filed electronically herewith via
EDGAR.
(b) Reports on Form 8-K
None
(c) Exhibits to Item 601 to Regulation S-K
See the Exhibits described in Item 14(a)(3) above.
18
SIGNATURES
Pursuant to the requirements in Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf on March 17, 1998 by the undersigned, thereunto duly authorized.
SHORE BANCSHARES, INC.
/s/ Daniel T. Cannon
_____________________
Daniel T. Cannon
President
/s/ Carol I. Brownawell
_____________________
Carol I. Brownawell
Treasurer
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 indicated on March 17, 1998.
/s/ Sydney G. Ashley Director
_________________________
/s/ J. Robert Barton Director
_________________________
/s/ David C. Bryan Director
_________________________
/s/ Daniel T. Cannon Director
_________________________
/s/ B. Vance Carmean, Jr. Director
_________________________
/s/ Mark M. Freestate Director
_________________________
/s/ Neil R. LeCompte Director
_________________________
/s/ Jerry F. Pierson Director
_________________________
/s/ Wm. Maurice Sanger Director
_________________________
/s/ Walter E. Schmidt Director
_________________________
19