UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
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 per share
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
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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 ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
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The aggregate market value of the Corporation's voting stock held by
non-affiliates of the registrant as of June 30, 2003 was $153,083,156.
The number of shares outstanding of the registrant's common stock as of
May 31, 2004 was 5,496,634.
Documents Incorporated by Reference
Certain information required by Part III of this annual report is
incorporated herein by reference to the definitive Proxy Statement for the 2004
Annual Stockholders' Meeting.
Explanatory Note
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This Amendment No. 1 on Form 10-K/A amends the Form 10-K to include the
Company's Risk Factors in Item 1 of Part I, which were inadvertently omitted.
Except for the addition of these Risk Factors, all other portions of Item 1 of
Part I remain unchanged. Pursuant to Exchange Act Rule 12b-15, new
certifications are supplied as Exhibits 31.1, 31.2, 32.1 and 32.2.
INDEX
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Part I
Item 1. Business.............................................................2
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....13
SIGNATURES...................................................................16
EXHIBIT LIST.................................................................17
PART I
Item 1. Business.
General
The Company was incorporated under the laws of Maryland on March 15, 1996
and is a bank holding company and a financial holding company registered under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company
engages in the business of acting as the parent company to two bank
subsidiaries, The Centreville National Bank of Maryland ("Centreville National
Bank") and The Talbot Bank of Easton, Maryland ("Talbot Bank") (together with
Centreville National Bank, the "Banks"), two insurance producers, The Avon-Dixon
Agency, LLC and Elliott Wilson Insurance, LLC, one insurance premium finance
company, Mubell Finance, LLC (together with The Avon-Dixon Agency, LLC and
Elliot Wilson Insurance, LLC, the "Insurance Subsidiaries"), and an investment
adviser firm, Wye Financial Services, LLC ("Wye Financial"). The Company also
has a non-active subsidiary, Shore Pension Services, LLC.
On November 12, 2003, the Company announced that it had executed a
definitive merger agreement to merge with Midstate Bancorp, Inc., a Delaware
bank holding company ("Midstate Bancorp"). If this merger is consummated, the
Company will acquire all of the issued and outstanding capital securities of The
Felton Bank, a Delaware commercial bank ("Felton Bank"), which will operate in
as an independent bank subsidiary. For more information about this transaction,
see Item 7 of Part II of this report under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Recent
Developments".
Talbot Bank owns all of the issued and outstanding securities of Dover
Street Realty, Inc., a Maryland corporation that engages in the business of
holding and managing real property acquired by Talbot Bank as a result of loan
foreclosures. Centreville National Bank owns 29.25% of the issued and
outstanding common stock of Delmarva Data. Delmarva Data 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 Data provides these services to Centreville National Bank and Talbot
Bank.
Banking Products and Services
Centreville National Bank is a national banking association that commenced
operations in 1876. Talbot Bank is a Maryland commercial bank and commenced
operations in 1885. The Banks operate twelve full service branches and sixteen
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. The Banks'
deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC").
The Banks are independent community banks and serve 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, internet banking and telephone banking services.
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 for added customer
convenience.
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Lending Activities
The Company's lending operations are conducted through the Banks.
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 80%. 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.
The risk of loss associated with real estate construction lending is
controlled through conservative underwriting procedures such as loan to value
ratios of 80% 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 not to exceed 80% 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.
The Company also originates and sells long term fixed rate residential
mortgage loans on the secondary market. These loans are not typically funded by
the Company, however the Company receives a commission upon settlement.
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.
Insurance Activities
The Insurance Subsidiaries were formed as a result of the Company's
acquisition of the assets of The Avon-Dixon Agency, Inc., Elliott Wilson
Insurance, Inc., Avon-Dixon Financial Services, Inc., Joseph M. George & Son,
Inc. and 59th Street Finance Company on May 1, 2002. On November 1, 2002, The
Avon-Dixon Agency, LLC completed its acquisition of certain assets of W. M.
Freestate & Son, Inc., a full-service insurance producer firm owned by Mark M.
Freestate, who serves on the Board of Directors of Centreville National Bank.
Through these entities, the Company offers a full range of insurance products
and services to customers, including insurance premium financing.
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Investment Adviser Activities
Through Wye Financial, which was formed in 2002, the Company offers a
variety of financial planning products and services to customers within its
market areas.
Seasonality
Management does not believe that the business activities of the Company are
seasonal in nature. Deposits may vary depending on local and national economic
conditions, but management believes that any variation will not have a material
impact on the Company's planning or policy-making strategies.
Employees
At March 1, 2004, the Company and its subsidiaries employed 250 persons, of
which 217 were employed on a full-time basis.
COMPETITION
The banking business, in all of its phases, is highly competitive. Within
their market areas, the Company and its subsidiaries compete with commercial
banks (including local banks and branches or affiliates of other larger banks),
savings and loan associations and credit unions for loans and deposits, with
money market and mutual funds and other investment alternatives for deposits,
with consumer finance companies for loans, with insurance companies, agents and
brokers for insurance products, and with other financial institutions for
various types of products and services. There is also competition for commercial
and retail banking business from banks and financial institutions located
outside our market areas.
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. The primary factors in competing for loans
are interest rates, loan origination fees, the quality and range of lending
services and personalized services.
To compete with other financial services providers, the Company relies
principally upon local promotional activities, including advertisements in local
newspapers, trade journals and other publications and on the radio, personal
relationships established by officers, directors and employees with customers,
and specialized services tailored to meet its customers' needs. In those
instances in which the Company is unable to accommodate a customers' needs, the
Company will arrange for those services to be provided by other financial
services providers with which it has a relationship. The Company additional
relies on referrals from satisfied customers.
Current 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, on and
after June 1, 1997, certain banks are permitted to merge with banks organized
under the laws of different states. As a result, interstate banking is now an
accepted element of competition in the banking industry and the Company may be
brought into competition with institutions with which it does not presently
compete.
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The following table sets forth deposit data for Kent, Queen Anne's,
Caroline, Talbot and Dorchester Counties as of June 30, 2003, the most recent
date for which comparative information is available.
% of
Kent County Deposits Total
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(in thousands)
Peoples Bank of Kent County, Maryland $142,813 35.61%
The Chestertown Bank of Maryland 123,972 30.91
Chesapeake Bank and Trust Co. 55,045 13.72
Farmers Bank of Maryland 33,927 8.46
The Centreville National Bank 24,325 6.07
SunTrust Bank 20,981 5.23
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Total $401,063 100.00%
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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 $229,423 40.93%
The Centreville National Bank of Maryland 167,514 29.89
Bank of America, National Association 50,009 8.92
The Chestertown Bank of Maryland 41,326 7.37
M&T 34,772 6.20
BankAnnapolis 21,397 3.82
Farmers Bank 16,065 2.87
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Total $560,506 100.00%
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Source: FDIC DataBook
% of
Caroline County Deposits Total
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(in thousands)
Provident State Bank of Preston, Maryland $103,323 32.11%
Peoples Bank of Maryland 88,954 27.64
Allfirst Bank 33,676 10.47
The Centreville National Bank of Maryland 29,822 9.27
Farmers Bank of Maryland 28,919 8.99
Bank of America, National Association 15,727 4.89
Atlantic Bank 13,786 4.28
Easton Bank & Trust 7,571 2.35
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Total $321,778 100.00%
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Source: FDIC DataBook
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% of
Talbot County Deposits Total
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(in thousands)
The Talbot Bank of Easton, Maryland $321,870 41.56%
St. Michaels Bank 157,173 20.29
Bank of America, National Association 79,684 10.29
Easton Bank & Trust 74,250 9.59
SunTrust Bank 43,834 5.66
Allfirst Bank 33,522 4.33
Farmers Bank 26,414 3.41
First Mariner Bank 19,554 2.52
The Queenstown Bank of Maryland 14,470 1.87
Chevy Chase Bank 3,746 0.48
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Total $774,517 100.00%
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Source: FDIC DataBook
% of
Dorchester County Deposits Total
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(in thousands)
The National Bank of Cambridge $161,282 33.90%
Bank of the Eastern Shore 131,370 27.62
Hebron Savings Bank 44,254 9.30
Provident State Bank of Preston, Maryland 29,993 6.31
Bank of America, National Association 28,038 5.89
Atlantic Bank 26,687 5.61
M&T 26,234 5.51
SunTrust Bank 14,608 3.07
The Talbot Bank of Easton, Maryland 13,271 2.79
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Total $475,737 100.00%
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Source: FDIC DataBook
CAPITAL REQUIREMENTS
The Federal Deposit Insurance Company Improvement Act of 1991 ("FDICIA")
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, 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% or greater, a Tier 1 risk based capital
ratio of 6% or 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% or
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
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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.
As of December 31, 2003, each of the Banks was deemed to be "well
capitalized". For more information regarding the capital condition of the
Company, see Note 17 to the Notes to Consolidated Financial Statements contained
elsewhere in this Report.
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.
General
The Company is a bank holding company and a financial holding company
registered with the Board of Governors of the Board of Governors of the Federal
Reserve System (the "FRB") 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 FRB.
Talbot Bank is a Maryland commercial bank subject to the banking laws of
Maryland and to regulation by the Commissioner of Financial Regulation of
Maryland, who is required by statute to make at least one examination in each
calendar year (or at 18-month intervals if the Commissioner determines that an
examination is unnecessary in a particular calendar year). Centreville National
Bank is a national banking association subject to federal banking laws and
regulations enforced and/or promulgated by the Office of the Comptroller of the
Currency (the "OCC"), which is required by statute to make at least one
examination in each calendar year (or at 18-month intervals if the association
has assets of $250 million or less and meets certain other conditions). The
deposits of the Banks are insured by the FDIC, and certain laws and regulations
administered by the FDIC also govern their operations. The Banks are also
subject to numerous state and federal statutes and regulations that affect the
business of banking.
Nonbank affiliates of the Company are subject to examination by the FRB,
and, as affiliates of the Banks, are subject to examination by the FDIC, the
Commissioner of Financial Regulation of Maryland, and, in certain cases, the
OCC. In addition, The Avon-Dixon Agency, LLC, Elliott Wilson Insurance, LLC, and
Mubell Finance, LLC are each subject to licensing and regulation by state
insurance authorities. Retail sales of insurance products by these insurance
affiliates are also subject to the requirements of the Interagency Statement on
Retail Sales of Nondeposit Investment Products promulgated in 1994, as amended,
by the FDIC, the FRB, the OCC, and the Office of Thrift Supervision. Wye
Financial Services, LLC is subject to the registration and examination
requirements of federal and state laws governing investment advisers.
Regulation of Financial Holding Companies
In November 1999, the federal Gramm-Leach-Bliley Act (the "GLBA") was
signed into law. Effective in pertinent part on March 11, 2000, GLBA revises the
BHC Act 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, a bank holding company 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 the Bank, to engage in the
same activities, directly or through an affiliate, as national banking
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associations. GLBA permits certain qualified national banking associations 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, GLBA has the effect
of broadening the permitted activities of the Bank.
The Company and its affiliates are subject to the provisions of Section 23A
and Section 23B of the Federal Reserve Act. Section 23A limits the amount of
loans or extensions of credit to, and investments in, the Company and its
nonbank affiliates by the Bank. Section 23B requires that transactions between
the Bank and the Company and its nonbank affiliates be on terms and under
circumstances that are substantially the same as with non-affiliates.
Under FRB policy, the Company is expected to act as a source of strength to
its subsidiary banks, and the FRB may charge the 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 FRB, the FDIC, and the OCC, may
prohibit the institutions over which they have supervisory authority from
engaging in activities or investments that the agencies believes are unsafe or
unsound banking practices. Federal banking regulators have extensive enforcement
authority over the institutions they regulate to prohibit or correct activities
that 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 restrictions on extensions of credit to
executive officers, directors, and 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 that may be loaned to any one customer and its
related interests to capital levels.
As part of FDICIA, each federal banking regulator adopted non-capital
safety and soundness standards for institutions under its authority. These
standards include internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, and compensation, fees and benefits. An institution that 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 the Banks meet substantially all standards that have been adopted.
FDICIA also imposes new capital standards on insured depository institutions.
The Community Reinvestment Act ("CRA") requires that, in connection with
the examination of financial institutions within their jurisdictions, the
federal banking regulators evaluate the record of the financial institution in
meeting the credit needs of their communities including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered by all regulatory agencies in evaluating
mergers, acquisitions and applications to open a branch or facility. As of the
date of its most recent examination report, each of the Banks has a CRA rating
of "Satisfactory."
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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 $33.2 million of the Centreville
National Bank's deposits are insured through the Savings Association Insurance
Fund ("SAIF"), also administered by the FDIC, which are determined quarterly.
The federal Economic Growth and Regulatory Paperwork Reduction Act of 1996
included provisions that, among other things, recapitalized the SAIF through a
special assessment on savings association deposits and bank deposits that had
been acquired from savings associations.
USA PATRIOT Act
Congress adopted the USA PATRIOT Act (the "Patriot Act") on October 26,
2001 in response to the terrorist attacks that occurred on September 11, 2001.
Under the Patriot Act, certain financial institutions, including banks, are
required to maintain and prepare additional records and reports that are
designed to assist the government's efforts to combat terrorism. The Patriot Act
includes sweeping anti-money laundering and financial transparency laws and
required additional regulations, including, among other things, standards for
verifying client identification when opening an account and rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering.
Federal Securities Laws
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 reporting, proxy solicitation, insider trading
restrictions and other requirements of the Exchange Act. The federal
Sarbanes-Oxley Act of 2002 and the new regulations adopted in furtherance
thereof made several changes to the Exchange Act and the listing standards of
The Nasdaq Stock Market, Inc. to which the Company is subject. These changes
impose additional requirements and restrictions on the Company, including, among
other things, restrictions on loans to and other transactions with insiders,
additional disclosure requirements in the reports and other documents that the
Company files with the SEC, new director independence requirements, certain
Board of Director committee requirements, and other corporate governance
requirements.
Governmental Monetary and Credit Policies and Economic Controls
The earnings and growth of the banking industry and ultimately of the Bank
are affected by the monetary and credit policies of governmental authorities,
including the FRB. An important function of the FRB is to regulate the national
supply of bank credit in order to control recessionary and inflationary
pressures. Among the instruments of monetary policy used by the FRB to implement
these objectives are open market operations in U.S. Government securities,
changes in the federal funds rate, changes in the discount rate of member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth of bank
loans, investments and deposits and may also affect interest rates charged on
loans or paid for deposits. The monetary policies of the FRB authorities have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to have such an effect in the future. In view
of changing conditions in the national economy and in the money markets, as well
as the effect of actions by monetary and fiscal authorities, including the FRB,
no prediction can be made as to possible future changes in interest rates,
deposit levels, loan demand or their effect on the business and earnings of the
Company and its subsidiaries.
AVAILABLE INFORMATION
The Company maintains an Internet site at www.shbi.net on which it makes
available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as
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soon as reasonably practicable after these reports are electronically filed
with, or furnished to, the SEC. In addition, stockholders may access these
reports and documents on the SEC's web site at www.sec.gov.
RISK FACTORS
The following factors may impact the Company's business and should be
considered carefully in evaluating an investment in shares of the Company's
common stock:
The Company's Future Depends on the Successful Growth of its Subsidiaries
The Company's primary business activity for the foreseeable future will be
to act as the holding company of Talbot Bank, Centreville National Bank, and its
other subsidiaries. Therefore, the Company's future profitability will depend on
the success and growth of these subsidiaries. In the future, part of the
Company's growth may come from buying other banks and buying or establishing
other companies. Such entities may not be profitable after they are purchased or
established, and they may lose money, particularly at first. A new bank or
company may bring with it unexpected liabilities, bad loans, or bad employee
relations, or the new bank or company may lose customers.
A Majority of the Company's Business is Concentrated in Maryland; A
Significant Amount of the Company's Business is Concentrated in Real Estate
Lending
A majority of the Company's customers, including most of the loan customers
of the Banks, are Maryland residents. Therefore, a decline in local economic
conditions may have a greater effect on the Company's earnings and capital than
on the earnings and capital of larger financial institutions whose loan
portfolios are geographically diverse. Further, the Banks make many real estate
secured loans, which 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. Additionally, the
market values of the real estate securing these loans may deteriorate, and the
Company may lose money if a borrower fails to repay a real estate loan.
The Banks May Experience Loan Losses in Excess of Their Allowances
The risk of credit losses on loans varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the value and marketability of the collateral for the loan. Management bases the
allowance for loan losses upon, among other things, historical experience, an
evaluation of economic conditions and regular reviews of delinquencies and loan
portfolio quality. Based upon such factors, management makes various assumptions
and judgments about the ultimate collectability of the loan portfolio and
provides an allowance for loan losses based upon a percentage of the outstanding
balances and for specific loans when their ultimate collectability is considered
questionable. If management's assumptions and judgments prove to be incorrect
and the allowance for loan losses is inadequate to absorb future losses, or if
the bank regulatory authorities require the Company or the Banks to increase
their respective allowance for loan losses as a part of their examination
process, our earnings and capital could be significantly and adversely affected.
Although management uses the best information available to make determinations
with respect to the allowance for loan losses, future adjustments may be
necessary if economic conditions differ substantially from the assumptions used
or adverse developments arise with respect to our non-performing or performing
loans. Material additions to the allowance for loan losses of one of the Banks
would result in a decrease in that bank's net income and capital, and could have
a material adverse effect on the Company.
Interest Rates and Other Economic Conditions Will Impact Results of Operation
Results of operations for financial institutions, including the Company and
its subsidiaries, may be materially and adversely affected by changes in
prevailing economic conditions, including declines in real estate values, rapid
changes in interest rates and the monetary and fiscal policies of the federal
government. The Company's profitability is in part a function of the spread
between the interest rates earned on assets and the interest rates paid on
deposits and other interest-bearing liabilities (i.e., net interest income),
including advances from the Federal Home Loan Bank of Atlanta. Interest rate
risk arises from mismatches (i.e., the interest sensitivity gap) between the
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dollar amount of repricing or maturing assets and liabilities and is measured in
terms of the ratio of the interest rate sensitivity gap to total assets. More
assets repricing or maturing than liabilities over a given time period is
considered asset-sensitive and is reflected as a positive gap, and more
liabilities repricing or maturing than assets over a given time period is
considered liability-sensitive and is reflected as negative gap. An
asset-sensitive position (i.e., a positive gap) could enhance earnings in a
rising interest rate environment and could negatively impact earnings in a
falling interest rate environment, while a liability-sensitive position (i.e., a
negative gap) could enhance earnings in a falling interest rate environment and
negatively impact earnings in a rising interest rate environment. Fluctuations
in interest rates are not predictable or controllable. The Company has attempted
to structure its asset and liability management strategies to mitigate the
impact on net interest income of changes in market interest rates, but there can
be no assurance that these attempts will be successful in the event of such
changes.
The Company's Ability to Pay Dividends is Limited
Holders of shares of the Company's common stock are entitled to dividends
if, when, and as declared by the Company's Board of Directors out of funds
legally available for that purpose. The Company's current ability to pay
dividends to stockholders is largely dependent upon the receipt of dividends
from the Banks. Both federal and state laws impose restrictions on the ability
of the Banks to pay dividends. Federal law prohibits the payment of a dividend
by an insured depository institution if the depository institution is considered
"undercapitalized" or if the payment of the dividend would make the institution
"undercapitalized". For a Maryland state-chartered bank, dividends may be paid
out of undivided profits or, with the prior approval of the Maryland
Commissioner of Financial Regulation, from surplus in excess of 100% of required
capital stock. If however, the surplus of a Maryland bank is less than 100% of
its required capital stock, cash dividends may not be paid in excess of 90% of
net earnings. In addition to these specific restrictions, bank regulatory
agencies also have the ability to prohibit proposed dividends by a financial
institution that would otherwise be permitted under applicable regulations if
the regulatory body determines that such distribution would constitute an unsafe
or unsound practice. National banking associations are generally limited,
subject to certain exceptions, to paying dividends out of undivided profits.
Because of these limitations, there can be no guarantee that the Company will
declare dividends in any fiscal quarter.
The Market Value of the Company's Investments Could Decline
As of December 31, 2003, the Company had classified 90% of its investment
securities as available-for-sale pursuant to Statement of Financial Accounting
Standards No. 115 ("SFAS 115") relating to accounting for investments. SFAS 115
requires that unrealized gains and losses in the estimated value of the
available-for-sale portfolio be "marked to market" and reflected as a separate
item in stockholders' equity (net of tax) as accumulated other comprehensive
income. The remaining investment securities are classified as held-to-maturity
in accordance with SFAS 115, and are stated at amortized cost.
In the past, gains on sales of investment securities have not been a
significant source of income for the Company. There can be no assurance that
future market performance of the Company's investment portfolio will enable the
Company to realize income from sales of securities. Stockholders' equity will
continue to reflect the unrealized gains and losses (net of tax) of these
investments. There can be no assurance that the market value of the Company's
investment portfolio will not decline, causing a corresponding decline in
stockholders' equity.
Management believes that several factors will affect the market values of
the Company's investment portfolio. These include, but are not limited to,
changes in interest rates or expectations of changes, the degree of volatility
in the securities markets, inflation rates or expectations of inflation and the
slope of the interest rate yield curve (the yield curve refers to the
differences between shorter-term and longer-term interest rates; a positively
sloped yield curve means shorter-term rates are lower than longer-term rates).
Also, the passage of time will affect the market values of our investment
securities, in that the closer they are to maturing, the closer the market price
should be to par value. These and other factors may impact specific categories
of the portfolio differently, and management cannot predict the effect these
factors may have on any specific category.
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The Banking Industry is Heavily Regulated; Significant Regulatory Changes Could
Adversely Affect the Company's Operations
The Company's operations and those of its subsidiaries are and will be
affected by current and future legislation and by the policies established from
time to time by various federal and state regulatory authorities. The Company is
subject to supervision by the FRB; Talbot Bank is subject to supervision and
periodic examination by the Maryland Commissioner and the FDIC; and Centreville
National Bank is subject to supervision and periodic examination by the OCC and
the FDIC. Banking regulations, designed primarily for the safety of depositors,
may limit a financial institution's growth and the return to its investors by
restricting such activities as the payment of dividends, mergers with or
acquisitions by other institutions, investments, loans and interest rates,
interest rates paid on deposits, expansion of branch offices, and the offering
of securities or trust services. The Company's bank subsidiaries are also
subject to capitalization guidelines established by federal law and could be
subject to enforcement actions to the extent that those banks are found by
regulatory examiners to be undercapitalized. It is not possible to predict what
changes, if any, will be made to existing federal and state legislation and
regulations or the effect that such changes may have on the Company's future
business and earnings prospects, as well as those of its bank subsidiaries.
Management also cannot predict the nature or the extent of the effect on the
Company's business and earnings of future fiscal or monetary policies, economic
controls, or new federal or state legislation. Further, the cost of compliance
with regulatory requirements may adversely affect the Company's ability to
operate profitably.
The Company Operates in a Competitive Market
The Company and its subsidiaries operate in a competitive environment,
competing for loans, deposits, and customers with commercial banks, savings
associations and other financial entities. Competition for deposits comes
primarily from other commercial banks, savings associations, credit unions,
money market and mutual funds and other investment alternatives. Competition for
loans comes primarily from other commercial banks, savings associations,
mortgage banking firms, credit unions and other financial intermediaries.
Competition for other products, such as insurance and securities products, comes
from other banks, securities and brokerage companies, insurance companies,
insurance agents and brokers, and other nonbank financial service providers in
the Company's market areas. Many of these competitors are much larger in terms
of total assets and capitalization, have greater access to capital markets,
and/or offer a broader range of financial services than those offered by the
Company and its subsidiaries. In addition, banks with a larger capitalization
and financial intermediaries not subject to bank regulatory restrictions have
larger lending limits and are thereby able to serve the needs of larger
customers. Finally, the Company's growth and profitability will depend upon its
ability to attract and retain skilled managerial, marketing and technical
personnel. Competition for qualified personnel in the financial services
industry is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel.
The Company May be Subject to Claims
The Company may from time to time be subject to claims from its customers
for losses due to alleged breaches of fiduciary duties, errors and omissions of
employees, officers and agents, incomplete documentation, their failure, or the
failure of their subsidiaries, to comply with applicable laws and regulations,
or many other reasons. Also, the employees of the Company and/or its
subsidiaries may knowingly or unknowingly violate laws and regulations.
Management may not be aware of any violations until after their occurrence. This
lack of knowledge may not insulate the Company or its subsidiaries 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.
The Shares of the Company's Stock are Not Heavily Traded
The shares of the Company's common stock are listed on the Nasdaq Small Cap
Market and are not heavily traded. Stock that is not heavily traded can be more
volatile than stock trading in an active public market. Factors such as the
Company's financial results, the introduction of new products and services by
the Company or its competitors, and various factors affecting the banking
industry generally may have a significant impact on the market price of the
Company's common stock. Management cannot predict the extent to which an active
public market for the Company's common stock will develop or be sustained in the
future. In recent years, the stock market has experienced a high level of price
and volume volatility, and market prices for the stock of many companies have
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experienced wide price fluctuations that have not necessarily been related to
their operating performance. Therefore, the Company's stockholders may not be
able to sell their shares at the volumes, prices, or times that they desire.
The Shares of the Company's Common Stock are Not Insured
Investments in the shares of the Company's common stock are not deposits
and are not insured against loss by the government.
The Company May be Adversely Affected by Recent Legislation
GLBA was signed into law on November 12, 1999. Among other things, this law
repeals restrictions on banks affiliating with securities firms. It also permits
bank holding companies that become financial holding companies to engage in
additional financial activities, including insurance and securities underwriting
and agency activities, merchant banking, and insurance company portfolio
investment activities that are currently not permitted for bank holding
companies. GLBA may have the result of increasing the competition that the
Company faces from larger banks and other companies. It is not possible to
predict the full effect that GLBA will have on the Company. In addition, recent
changes in other federal banking laws facilitate interstate branching and merger
activity among banks. Such changes may result in an even greater degree of
competition in the banking industry, and the Company may be brought into
competition with institutions with which it does not presently compete. From
time to time other changes are proposed to laws affecting the banking industry,
and these changes could have a material effect on the Company's business and
prospects. The Company's future profitability may be adversely affected by
increased competition resulting from this legislation.
The Company May Not be Able to Keep Pace with Developments in Technology
The Company and its subsidiaries use various technologies in their
respective businesses, including telecommunication, data processing, computers,
automation, internet-based banking, and debit cards. Technology changes rapidly.
The Company's ability to compete successfully with other banks and non-bank
entities may depend on whether it can exploit technological changes. The Company
may not be able to exploit technological changes, and any investment it does
make may not make it more profitable.
The Company's Articles of Incorporation and Bylaws and Maryland Law May
Discourage a Corporate Takeover
The Company's Amended and Restated Articles of Incorporation and Amended
and Restated Bylaws contain certain provisions designed to enhance the ability
of the Board of Directors to deal with attempts to acquire control of the
Company. These provisions provide for the classification of the Board into three
classes; directors of each class generally serve for staggered three-year
periods. 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.
Although these provisions do not preclude a takeover, they may have the effect
of discouraging a future takeover attempt which would not be approved by the
board of directors, but pursuant to which stockholders might receive a
substantial premium for their shares over then-current market prices. As a
result, stockholders who might desire to participate in such a transaction might
not have the opportunity to do so. Such provisions will also render the removal
of the board of directors and of management more difficult and, therefore, may
serve to perpetuate current management. As a result of the foregoing, such
provisions could potentially adversely affect the market price of the Company's
common stock.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1),(2) Financial Statements*
Independent Auditors' Report
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Consolidated Balance Sheets at December 31, 2003 and 2002
Consolidated Statements of Income -- Years Ended December 31, 2003,
2002, and 2001
Consolidated Statements of Stockholders' Equity -- Years Ended December
31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows -- Years Ended December 31, 2003,
2002 and 2001
Notes to Consolidated Financial Statements as of December 31, 2003,
2002 and 2001
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K
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).
10.3 Form of Employment Agreement between The Avon-Dixon
Agency, LLC and Kevin P. LaTulip, (incorporated by
reference to Exhibit 10.3 on Form 10-K filed by Shore
Bancshares, Inc. on March 31, 2003).
10.4 Form of Executive Supplemental Retirement Plan
Agreement between The Centreville National Bank of
Maryland and Daniel T. Cannon (incorporated by
reference to Exhibit 10.4 of the Company's Quarterly
Report on Form 10-Q for the period ended June 30,
2003).
10.5 Form of Life Insurance Endorsement Method Split
Dollar Plan Agreement between The Centreville
National Bank of Maryland and Daniel T. Cannon
(incorporated by reference to Exhibit 10.5 of the
Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2003).
21 Subsidiaries of Shore Bancshares, Inc.*
23 Consent of Stegman & Company.*
31.1 Certifications of the CEO pursuant to Section 302 of
the Sarbanes-Oxley Act (filed herewith).
31.2 Certifications of the PAO pursuant to Section 302 of
the Sarbanes-Oxley Act (filed herewith).
32.1 Certifications of the CEO pursuant to 18
U.S.C.ss.1350 (furnished herewith).
32.2 Certifications of the PAO pursuant to 18
U.S.C.ss.1350 (furnished herewith).
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99.1 1998 Employee Stock Purchase Plan, as amended
(incorporated by reference to Appendix A of the
Company's definitive Proxy Statement on Schedule 14A
for the 2003 Annual Meeting of Stockholders filed on
March 31, 2003).
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
(incorporated by reference to Exhibit 10 of the
Company's Registration Statement on Form S-8 filed
May 4, 2001 (Registration No. 333-60214)).
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* Previously filed with the Form 10-K to which this Amendment No. 1 on Form
10-K/A relates.
(b) Reports on Form 8-K.
On November 12, 2003, the Company filed a Current Report on Form 8-K to
report in Item 5 that it had entered into a definitive merger agreement with
Midstate Bancorp.
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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.
Shore Bancshares, Inc.
Date: June 30, 2004 By: /s/ W. Moorhead Vermilye
-------------------------------------
W. Moorhead Vermilye
President and CEO
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EXHIBIT LIST
Exhibit No. Description
- ----------- -----------
Exhibit 3.1 Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 of the Company's
Form 8-K filed on December 14, 2000).
Exhibit 3.2 Amended and Restated By-Laws (incorporated by reference to
Exhibit 3.2 of the Company's Form 8-K filed on December 14,
2000).
Exhibit 10.1 Form of Employment Agreement with W. Moorhead Vermilye
(incorporated by reference to Appendix XIII of Exhibit 2.1 of
the Company's Form 8-K filed on July 31, 2000).
Exhibit 10.2 Form of Employment Agreement with Daniel T. Cannon
(incorporated by reference to Appendix XIII of Exhibit 2.1 of
the Company's Form 8-K filed on July 31, 2000).
Exhibit 10.3 Form of Employment Agreement between The Avon-Dixon Agency,
LLC and Kevin P. LaTulip (incorporated by reference to
Exhibit 10.3 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002).
Exhibit 10.4 Form of Executive Supplemental Retirement Plan Agreement
between The Centreville National Bank of Maryland and Daniel
T. Cannon (incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2003).
Exhibit 10.5 Form of Life Insurance Endorsement Method Split Dollar Plan
Agreement between The Centreville National Bank of Maryland
and Daniel T. Cannon (incorporated by reference to Exhibit
10.5 of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2003).
Exhibit 21 Subsidiaries of the Company.*
Exhibit 23 Consent of Stegman & Company.*
Exhibit 31.1 Certifications of the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith).
Exhibit 31.2 Certifications of the PAO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith).
Exhibit 32.1 Certification of the CEO pursuant to 18 U.S.C.ss.1350
(furnished herewith).
Exhibit 32.2 Certification of the PAO pursuant to 18 U.S.C.ss.1350
(furnished herewith).
Exhibit 99.1 1998 Employee Stock Purchase Plan, as amended (incorporated
by reference to Appendix A of the Company's definitive Proxy
Statement on Schedule 14A for the 2003 Annual Meeting of
Stockholders filed on March 31, 2003).
Exhibit 99.2 1998 Stock Option Plan (incorporated by reference to Exhibit
10 of the Company's Registration Statement on Form S-8 filed
with the SEC on September 25, 1998 (Registration No.
333-64319)).
Exhibit 99.3 Talbot Bancshares, Inc. Employee Stock Option Plan
(incorporated by reference to Exhibit 10 of the Company's
Registration Statement on Form S-8 filed May 4, 2001
(Registration No. 333-60214)).
- -------------------------------------
* Previously filed with the Form 10-K to which this Amendment No. 1 on Form
10-K/A relates.
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