UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
(Rule
14a-101)
INFORMATION
REQUIRED IN PROXY STATEMENT
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the Securities
Exchange
Act of 1934 (Amendment No. )
Filed
by
the Registrant:
ý
Filed
by
a Party other than the Registrant:
o
Check
the
appropriate box:
o
Preliminary Proxy Statement
o
Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
ý
Definitive Proxy Statement
¨
Definitive Additional Materials
¨
Soliciting Material Under Rule 14a-12
Shore
Bancshares, Inc.
(Name
of
Registrant as Specified in Its Charter)
N/A
(Name
of
Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
ý
No fee
required.
¨
Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title
of each class of securities to which transaction applies: N/A
(2) Aggregate
number of securities to which transaction applies: N/A
(3) Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined): N/A
(4) Proposed
maximum aggregate value of transaction: N/A
(5) Total
fee paid: N/A
¨
Fee paid
previously with preliminary materials: N/A
¨
Check
box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the form
or
schedule and the date of its filing.
(1) Amount
previously paid:
(2) Form,
Schedule or Registration Statement no.:
(3) Filing
Party:
(4) Date
Filed:
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
To
the Stockholders of SHORE BANCSHARES, INC.
Notice
is
hereby given that the Annual Meeting of Stockholders of Shore Bancshares,
Inc.
(the “Company”) will be held at the Avalon Theatre, 42 East Dover Street,
Easton, Maryland 21601 at 11:00 a.m., local time, on Wednesday, April 26,
2006,
for the following purposes:
|
1.
|
To
elect five Class III director to serve until the 2009 Annual
Meeting.
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|
2.
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To
approve the Shore Bancshares, Inc. 2006 Stock and Incentive Compensation
Plan.
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3.
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To
transact such other business as may properly come before the meeting
or
any adjournment thereof.
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Stockholders
of record at the close of business on March 16, 2006 will be entitled to
notice
of and to vote at the meeting. This proxy statement is accompanied by the
Company’s Annual Report to Stockholders for the year ended December 31,
2005.
All
stockholders are cordially invited to attend the meeting in person. Those
who
cannot attend are urged to sign, date and mail promptly the enclosed proxy
in
the envelope provided for that purpose.
Whether
you own a few or many shares, your proxy is important in fulfilling this
requirement.
To
assist
us with planning the meeting, please mark the appropriate box on your proxy
card
as to whether you plan to attend the meeting in person. Returning your proxy
does not deprive you of your right to attend the meeting and to vote your
shares
in person.
By
Order
of the Board of Directors,
W.
Moorhead Vermilye
President
and CEO
March
27,
2006
18
East Dover Street, Easton, Maryland 21601
410-822-1400
/ Fax 410-820-4238
[THIS
PAGE INTENTIONALLY LEFT BLANK]
SHORE
BANCSHARES, INC.
18
East Dover Street
Easton,
Maryland 21601
PROXY
STATEMENT
FOR
2006
ANNUAL MEETING OF STOCKHOLDERS
This
Proxy Statement is furnished to the stockholders of Shore Bancshares, Inc.
(the
“Company”) in connection with the solicitation of proxies by the Board of
Directors of the Company to be voted at the Annual Meeting of Stockholders.
The
Annual Meeting of Stockholders will be held on Wednesday, April 26, 2006,
at
11:00 a.m., local time, at the Avalon Theatre, 42 East Dover Street, Easton,
Maryland 21601, and at any adjournments thereof. The expense of preparing,
printing, and mailing the proxies and solicitation materials will be borne
by
the Company. In addition to solicitations by mail, the Company may solicit
proxies in person or by telephone, and arrange for brokerage houses and other
custodians, nominees, and fiduciaries to send proxies and proxy material
to
their principals at the expense of the Company. The approximate date on which
this Proxy Statement and attached form of proxy are being mailed to stockholders
is March 27, 2006.
At
the
Annual Meeting, stockholders will be asked to elect five directors to serve
until the 2009 Annual Meeting of Stockholders (Proposal 1) and to approve
the
Shore Bancshares, Inc. Stock and Incentive Compensation Plan (Proposal 2).
Holders of record at the close of business on March 16, 2006 (the “Record Date”)
of outstanding shares of the Company’s common stock, par value $.01 per share
(“Common Stock”), are entitled to notice of and to vote at the meeting. As of
the Record Date, the number of shares of outstanding Common Stock entitled
to
vote is 5,574,410 shares. Each share of stock is entitled to one
vote.
All
properly executed proxies received pursuant to this solicitation will be
voted
as directed by the stockholder on the proxy card. If no direction is given,
the
proxy will be voted
FOR
all
director nominees named in Proposal 1,
FOR
the
approval of the 2006 Stock and Incentive Compensation Plan described in Proposal
2, and in the discretion of the proxies as to any other matters that may
properly come before the meeting.
A
stockholder may revoke the proxy at any time prior to its use by execution
of
another proxy bearing a later date, or by written notice delivered to W.
Moorhead Vermilye, President and CEO of the Company, at the Company’s address or
at the meeting. The Company’s address is 18 East Dover Street, Easton, Maryland
21601 (410-822-1400).
BENEFICIAL
OWNERSHIP OF COMMON STOCK
The
following table sets forth information as of March 1, 2006 relating to the
beneficial ownership of the Common Stock by (i) each person or group known
by
the Company to own beneficially more than five (5%) of the outstanding shares
of
Common Stock; (ii) each of the Company’s directors, director nominees, and named
executive officers; and (iii) all directors and executive officers of the
Company as a group, and includes all shares of Common Stock that may be acquired
within 60 days of March 1, 2006. The address of each of the persons named
below
is the address of the Company except as otherwise indicated.
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Name
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Number
of Shares
Beneficially
Owned
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Percent
of
Class
Beneficially
Owned
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Directors,
Nominees and
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|||
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Named
Executive Officers
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|||
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Herbert
L. Andrew, III
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58,498
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(1)
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1.05%
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Blenda
W. Armistead
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6,229
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(2)
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*
|
|
Lloyd
L. Beatty, Jr.
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7,846
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(3)
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*
|
|
Paul
M. Bowman
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5,450
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(4)
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*
|
|
Daniel
T. Cannon
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6,225
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(5)
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*
|
|
Thomas
H. Evans
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1,746
|
*
|
|
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Mark
M. Freestate
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6,375
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(6)
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*
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Richard
C. Granville
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98,000
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1.76%
|
|
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W.
Edwin Kee, Jr.
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1,870
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(7)
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*
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Susan
E. Leaverton
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13,444
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(8)
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*
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Neil
R. LeCompte
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2,400
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(9)
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*
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Jerry
F. Pierson
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5,803
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(10)
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*
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Christopher
F. Spurry
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10,300
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(11)
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*
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W.
Moorhead Vermilye
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110,826
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(12)
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1.99%
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All
Directors/Executive
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|||
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Officers
as a Group (15
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|||
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Persons)
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336,536
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(13)
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6.05%
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5%
Stockholders
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|||
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Nicholas
F. Brady
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|||
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PO
Box 1410
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285,119
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5.13%
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Easton,
MD 21601
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|||
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Total
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621,655
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11.18%
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*
Amount
constitutes less than 1%.
Notes:
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(1)
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Includes
55,070 shares held as tenants in common by Herbert L. Andrew, III
and
Della M. Andrew.
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(2)
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Includes
870 shares held individually by Bruce C. Armistead; 1,688 shares
held by
Bruce C. Armistead under an Individual Retirement Account arrangement;
and
1,180 shares held by Bruce C. Armistead, as custodian for a minor
child.
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(3)
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Includes
3,220 shares held jointly with Nancy W. Beatty; and 570 shares
held
individually by Nancy W. Beatty.
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(4)
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Includes
50 shares held by Paul M. and Elaine M. Bowman; 120 shares held
individually by David A. Bowman; 634 shares held individually by
Elaine M.
Bowman; 220 shares held individually by Elaine M. Bowman, as Custodian
for
Erin Reynolds Bowman; 245 shares held by Elaine M. Bowman, as
Custodian for Jeffrey P. Bowman; 606 shares held by Paul M.
Bowman, Trustee of the Harry Price Phillips Trust; 975 shares held
jointly
by Thelma B. Gaines and Paul M. Bowman; 325 shares held by Elaine
M.
Bowman under an Individual Retirement Account arrangement; and
exercisable
options to acquire 1,300 shares.
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(5)
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Includes
3,450 shares held jointly by Daniel T. Cannon and Sandra F. Cannon;
and
exercisable options to acquire 1,175
shares.
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(6)
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Includes
exercisable options to acquire 800
shares.
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(7)
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Includes
1,870 shares held jointly by W. Edwin Kee, Jr. and Deborah D.
Kee.
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(8)
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Includes
200 shares held by Susan E. Leaverton, as custodian for two minor
children; 2,405 shares held by Keith R. Leaverton under an Individual
Retirement Account arrangement; and exercisable options to acquire
900
shares.
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(9)
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Includes
exercisable options to acquire 700
shares.
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(10)
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Includes
1,008 shares held jointly by Jerry F. Pierson and Bonnie K. Pierson;
and
exercisable options to acquire 1,300
shares.
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(11)
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Includes
4,605 shares held jointly with Beverly B. Spurry; and 365 shares
held by
Beverly B. Spurry under an Individual Retirement Account arrangement.
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(12)
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Includes
1,972 shares held individually by Sarah W. Vermilye; and exercisable
options to acquire 16,050 shares.
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(13)
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Includes
exercisable options to acquire 511 shares not disclosed
above.
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ELECTION
OF DIRECTORS (Proposal 1)
The
number of directors constituting the Board of Directors is currently set
at 13.
D
irectors
have been divided into three classes with respect to the time for which the
directors may hold office.
Directors
are elected to hold office for a term of three years, and one class of directors
expires each year. In accordance with the Company’s Amended and Restated
Articles of Incorporation and Amended and Restated By-Laws (“By-Laws”), the
terms of directors of Class I expire in 2007, the terms of directors of Class
II
expire in 2008, and the terms of directors of Class III expire this year.
In all
cases, directors are elected until their successors are duly elected and
qualify.
Stockholders
will be asked to vote for a total of five director nominees at this year’s
Annual Meeting. The following nominees for directors, their ages as of the
Record Date, their principal occupations and business experience for the
past
five years, and certain other information are set forth below.
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NOMINEES
FOR CLASS III DIRECTORS
(Terms
will expire in 2009)
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||
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Name
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Age
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Principal
Occupation and Business Experience
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Lloyd
L. Beatty, Jr.
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53
|
Mr.
Beatty has served as a director of the Company since December 2000
and as
a director of The Talbot Bank of Easton, Maryland (“Talbot Bank”), a
wholly-owned subsidiary of the Company, since 1992. He currently
serves as
a Vice President of the Company, a position he has held since October
2004. From October 2004 until October 2005 Mr. Beatty’s employment with
the Company was on a part-time basis. Prior to October 2005, Mr.
Beatty
was the Chief Operating Officer of Darby Overseas Investments,
LP and
President of Darby Advisors, Inc.
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Paul
M. Bowman
|
58
|
Mr.
Bowman has served as a director of the Company since 1998 and as
a
director of The Centreville National Bank of Maryland (“Centreville
National Bank”) a wholly-owned subsidiary of the Company since 1997. He
served as a director of Kent Savings & Loan Association until
Centreville National Bank acquired the financial institution on
April 1,
1997. Mr. Bowman is an attorney in the Law Office of Paul M.
Bowman.
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W.
Edwin Kee, Jr.
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54
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Mr.
Kee has served as a director of the Company since May 2004 and
as the
Chairman of the Board of The Felton Bank (“Felton Bank”), a wholly-owned
subsidiary of the Company, since 1992. Between 1996 and 2004, Mr.
Kee
served as the Chairman of the Board of Midstate Bancorp, Inc. Mr.
Kee is a
professor at the University of Delaware, College of Agriculture,
and the
President of Kee’s Creek Farm.
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Jerry
F. Pierson
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65
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Mr.
Pierson has been a director of the Company since 2003 and previously
as a
director from 1996 to December 2000. He has served as a director
of
Centreville National Bank since 1981 and is President of Jerry
F. Pierson,
Inc., a plumbing and heating contracting company.
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W.
Moorhead Vermilye
|
65
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Mr.
Vermilye has served as a director of the Company since December
2000 and
as a director of Talbot Bank since 1977. He currently serves as
President
and CEO of the Company and of Talbot
Bank.
|
A
quorum
for the Annual Meeting consists of a majority of the issued and outstanding
shares of Common Stock present in person or by proxy and entitled to vote.
Directors are elected by a plurality of the votes cast at the meeting.
Consequently, withholding of votes, abstentions and broker non-votes with
respect to shares of Common Stock otherwise present at the Annual Meeting
in
person or by proxy will have no effect on the outcome of this vote.
The
Board of Directors Recommends that you vote
FOR
the election of the above nominees.
The
following tables contain information regarding directors of other classes
whose
terms do not expire in 2005, including the directors’ ages as of the Record
Date, and their principal occupations and business experience for the past
5
years.
|
CLASS
I DIRECTORS
(Terms
expire in 2007)
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||
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Name
|
Age
|
Principal
Occupation and Business Experience
|
|
Daniel
T. Cannon
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56
|
Mr.
Cannon has served as a director of the Company since 1996 and as
a
director of Centreville National Bank since 1986. He currently
serves as
Executive Vice President and Chief Operating Officer of the Company
and as
President and CEO of Centreville National Bank.
|
|
Thomas
H. Evans
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56
|
Mr.
Evans has served as a director of the Company since November 2004
and as a
director of Felton Bank since July 2004. He currently serves as
President
and Chief Executive Officer of Felton Bank, a position he has held
since
February 2001.
|
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Richard
C. Granville
|
63
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Mr.
Granville
has
served as a director of the Company since December 2000. He also
served as
a director of Talbot Bank from
1994
until 2005. He is an investor and currently serves as Chairman
of the
Board of the Company.
|
|
Christopher
F. Spurry
|
58
|
Mr.
Spurry has served as a director of the Company since April 2004
and as a
director of Talbot Bank since 1995. He is the President of Spurry
&
Associates, Inc.
|
|
CLASS
II DIRECTORS
(Terms
expire in 2008)
|
||
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Name
|
Age
|
Principal
Occupation and Business Experience
|
|
Herbert
L. Andrew, III
|
69
|
Mr.
Andrew has served as a director of the Company since December 2000
and as
a director of Talbot Bank since 1977. He is a farmer and served
on the
Talbot County Council from 1994 to 1998.
|
|
Blenda
W. Armistead
|
54
|
Ms.
Armistead has served as a director of the Company since 2002 and
as a
director of Talbot Bank since 1992. She is an investor and the
former
Manager of Talbot County.
|
|
Mark
M. Freestate
|
53
|
Mr.
Freestate has served as a director of the Company since 1995, and
previously as a director from 1996 to 2000. He has served as a
director of
Centreville National Bank since 1984. He currently serves as Vice
President of The Avon-Dixon Agency, LLC (“Avon-Dixon”), a wholly-owned
subsidiary of the Company.
|
|
Neil
R. LeCompte
|
65
|
Mr.
LeCompte has served as a director of the Company since 1996 and
as a
director of Centreville National Bank since 1995. He is a Certified
Public
Accountant in the Accounting Office of Neil R. LeCompte.
|
Board
Committees
The
Company’s Board of Directors has an Executive Committee, an Audit Committee, a
Nominating and Corporate Governance Committee (the “Nominating Committee”), and
a Compensation Committee, each of which is described below. The Board also
has a
Strategic Planning Committee.
The
Company’s Executive Committee consists of Richard C. Granville,
Chairman
,
Blenda
W. Armistead, Lloyd L. Beatty, Jr., W. Moorhead Vermilye, Daniel T. Cannon,
Mark
M. Freestate and Thomas H. Evans. The Committee has the authority to exercise
the powers of the Board in the management of the business and affairs of
the
Company, subject to subsequent revision or alteration of any such action
by the
Board of Directors of the Company. The Executive Committee did not meet in
2005.
The
Company’s Audit Committee is established pursuant to Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and consists
of Neil R. LeCompte,
Chairman
,
Jerry
F. Pierson, and Paul M. Bowman. The Board has determined that Mr. LeCompte
qualifies as an “audit committee financial expert” as that term is defined by
the Securities and Exchange Commission (“SEC”) in Item 401(h) of Regulation S-K.
The Audit Committee
assists
the Board in monitoring the integrity of the financial statements, the
performance of the Company’s internal audit function, and compliance by the
Company with legal and regulatory requirements, and it oversees the
qualification, performance and independence of the Company’s outside auditors,
including whether
satisfactory
accounting procedures are being followed. During 2005, the Audit Committee
held
six meetings.
The
Board
of Directors has adopted a written charter for the Audit Committee, a copy
of
which was attached as Appendix A to the Company’s 2004 definitive proxy
statement.
The
Company’s Compensation Committee is responsible for determining executive
compensation and promotions and for administering the Company’s equity
compensation plans. The members of the Compensation Committee are Christopher
F.
Spurry,
Chairman
,
Herbert
L. Andrew, III, Paul M. Bowman and W. Edwin Kee, Jr. The Compensation Committee
held five meetings in 2005.
The
Company’s Nominating Committee consists of Blenda W. Armistead,
Chairman
,
Herbert
L. Andrew, III, Jerry F. Pierson and W. Edwin Kee, Jr., and is responsible
for
identifying qualified individuals for nomination to the Board Directors,
considering candidates for nomination proposed by stockholders of the Company,
recommending director nominees to the Board (see “Director Recommendations and
Nominations” below), recommending directors for each Board committee, and
recommending corporate governance guidelines to the Board. During 2005, the
Nominating Committee held two meetings. A copy of the Nominating Committee’s
written charter was attached as Appendix B to the Company’s 2004 definitive
proxy statement.
Director
Independence
Pursuant
to The Nasdaq Stock Market’s listing standards (the “Nasdaq Listing Standards”),
a majority of the Company’s directors must be “independent directors” as that
term is defined by Nasdaq Listing Standards Rule 4200(a)(15). The Company’s
Board of Directors has determined that all of its directors are “independent
directors” except for Messrs. Vermilye, Beatty, Cannon, Evans and Freestate, and
t
hese
independent directors constitute a majority of the Company’s Board of Directors.
Each
member of the Compensation Committee and of the Nominating Committee is an
“independent director” as defined by Nasdaq Listing Standards Rule 4200(a)(15),
and each
member
of
the Audit Committee meets the independence standards of Nasdaq Listing Standards
Rule 4350(d)(2).
Board
Meeting Attendance
The
Board
of Directors held five meetings in 2005. No incumbent director during the
last
full fiscal year attended fewer than 75% of the aggregate of (1) the total
number of meetings of the Board of Directors (held during the period for
which
that person served as a director); and (2) the total number of meetings held
by
all committees of the Board on which that person served (held during the
period
served), except that Mr. Freestate missed one meeting of the Board of Directors
and Mr. Evans missed one meeting of the Board of Directors and one meeting
of
the Strategic Planning Committee.
Director
Compensation
During
2005, each director of the Company received an annual retainer of $3,000
per
year for serving on the Company’s Board of Directors, plus $250 per meeting
(regular and committee) attended. On February 2, 2006, the Board increased
the
annual retainer paid to the Chairman of the Board to $10,000 and the annual
retainer paid to each other director to $5,000. The fees to be paid in 2006
for
attending meetings of the Board and its committees were also increased to
$500
for committee chairpersons and $300 for all other directors.
Directors
of the Company who serve as directors of, and who are not employed by, Talbot
Bank (Messrs. Andrew, Beatty, Granville, and Spurry and Ms. Armistead) also
receive an annual retainer of $5,000 per year for serving on the board of
directors of Talbot Bank, plus $200 per meeting attended. Talbot Bank pays
these
fees. Directors are compensated once for attending joint meetings of the
Company’s Board and the board of directors of Talbot Bank.
Directors
of the Company who serve as directors of, and who are not employed by,
Centreville National Bank (Messrs. Bowman, Freestate, Pierson, and LeCompte)
also receive an annual retainer of $10,000, plus $100 for each meeting attended.
Mr. Freestate, as Chairman of the Centreville National Bank board of directors,
receives an additional retainer of $1,000. These fees are paid by Centreville
National Bank. Directors are compensated once for attending joint meetings
of
the Company’s Board and the board of directors of Centreville National Bank.
Centreville National Bank maintains a voluntary deferred compensation plan
for
its directors. Messrs. Cannon, Freestate and Pierson each elected to defer
compensation they received in previous years for serving on the Centreville
National Bank Board. These amounts were invested in life insurance
policies, owned by the Centreville National Bank, on the lives of the respective
individuals. These directors currently do not defer fees. Death benefits
are payable to the Centreville National Bank and to the death beneficiaries
named by the participating directors. Current death benefits payable under
these
policies to the directors’ named beneficiaries are $397,691 for Mr. Cannon,
$100,325 for Mr. Freestate, and $788,473 for Mr. Pierson.
Directors
of the Company who serve as directors of, and who are not employed by, Felton
Bank (Messrs. Kee and Vermilye) receive an additional $100 for each meeting
of
Felton Bank Board of Directors that they attend. These fees are paid by Felton
Bank.
Director
Recommendations and Nominations
The
Nominating Committee is responsible for assembling and maintaining a list
of
qualified candidates to fill vacancies on the Board, and it periodically
reviews
this list and researches the talent, skills, expertise, and general background
of these candidates. The Nominating Committee will from time to time review
and
consider candidates recommended by stockholders. Stockholder recommendations
should be submitted in writing to: Shore Bancshares, Inc., 18 East Dover
Street,
Easton, Maryland 21601
,
Attn:
Carol
I.
Brownawell
,
Secretary;
and must specify (i) the recommending stockholder’s contact information, (ii)
the class and number of shares of the Company’s common stock beneficially owned
by the recommending stockholder, (iii) the name, address and credentials
of the
candidate for nomination, and (iv) the candidate’s consent to be considered as a
candidate.
Whether
recommended by a stockholder or chosen independently by the Nominating
Committee, a candidate will be selected for nomination based on his or her
talents and the needs of the Board. The Nominating Committee’s goal in selecting
nominees is to identify persons that possess complimentary skills and that
can
work well together with existing Board members at the highest level of integrity
and effectiveness. A candidate, whether recommended by a Company stockholder
or
otherwise, will not be considered for nomination unless he or she is of good
character and is willing to devote adequate time to Board duties. In assessing
the qualifications of potential candidates, the Nominating Committee will
also
consider the candidate’s experience, judgment, and civic and community
relationships, and the diversity of backgrounds and experience among existing
directors. Certain Board positions, such as Audit Committee membership, may
require other special skills, expertise, or independence from the Company.
It
should
be noted that a stockholder recommendation is not a nomination, and there
is no
guarantee that a candidate recommended by a stockholder will be approved
by the
Nominating Committee or nominated by the Board of Directors. A stockholder
who
desires to nominate a candidate for election may do so only in accordance
with
Article II, Section 4 of the By-Laws, which provides that directors may be
nominated by stockholders by written request to the Secretary of the Company
received not less than 120 days nor more than 180 days prior to the date
fixed
for the meeting. Additional time constraints are applicable in the cases
of a
change in stockholder meeting date or a special meeting called for the purpose
of electing directors. As provided in the By-Laws, the notice of nomination
must
specify: (a) the name and address of each proposed nominee; (b) the principal
occupation of each proposed nominee; (c) the number of shares of capital
stock
of the Company owned by each proposed nominee; (d) the name and residence
address of the notifying stockholder; (e) the number of shares of capital
stock
of the Company owned by the notifying stockholder; (f) the consent in writing
of
the proposed nominee as to the proposed nominee’s name being placed in
nomination for director; (g) a description of all arrangements or understandings
between such notifying stockholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by such notifying stockholder, (h) a representation that such
notifying stockholder intends to appear in person or by proxy at the meeting
to
nominate the persons named in its notice; and (i) all information relating
to
such proposed nominee that would be required to be disclosed by Regulation
14A
under the Exchange Act and Rule 14a-11 promulgated thereunder, assuming such
provisions would be applicable to the solicitation of proxies for such proposed
nominee.
Stockholder
Communications with the Board of Directors
Stockholders
may communicate with the Company’s Board of Directors by contacting
Carol
I.
Brownawell
,
Secretary, at Shore Bancshares, Inc., 18 East Dover Street, Easton, Maryland
21601 or (410) 822-1400. All communications will be forwarded directly to
the
Chairman of the Board for consideration.
The
Company believes that the Annual Meeting is an opportunity for stockholders
to
communicate directly with directors and, accordingly, expects that all directors
will attend each Annual Meeting. If you would like an opportunity to discuss
issues directly with our directors, please consider attending this year’s Annual
Meeting. At the 2005 Annual Meeting, all directors except Mr. Beatty (who
were
serving as such) were in attendance.
AUDIT
COMMITTEE REPORT
The
Audit
Committee has (i) reviewed and discussed the Company’s consolidated audited
financial statements for fiscal year ended December 31, 2005 with Company
management; (ii) discussed with Stegman & Company, the Company’s independent
auditors, all matters required to be discussed by SAS 61 (Codification of
Statements on Auditing Standards, AU, § 380), as modified or supplemented; and
(iii) has received the written disclosures and the letter from Stegman &
Company, required by Independence Standards Board Standard No. 1 (Independence
Standards Board Standards No. 1, Independence Discussions with Audit
Committees), as modified or supplemented, and has discussed with the auditors
the auditor’s independence. Based on its review and discussions, the Audit
Committee recommended to the Board of Directors that the consolidated audited
financial statements for year ended December 31, 2005 be included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
AUDIT
COMMITTEE
By:
Neil
R.
LeCompte, Chairman
Jerry
F.
Pierson
Paul
M.
Bowman
EXECUTIVE
OFFICERS
Information
about the Company’s current executive officers is provided below. Except with
respect to Mr. Evans, each executive officer was named to his or her current
position
on
December
1, 2000 as part of the merger of Talbot Bancshares, Inc. with and into the
Company. Mr. Evans was named to his office as part of the Company’s merger with
Midstate Bancorp.
W
.
Moorhead Vermilye, 65, has served as President and Chief Executive Officer
of
the Company since December 2000. Between 1997 and December 2000, Mr. Vermilye
served as President of Talbot Bancshares. Mr. Vermilye has served as President
of Talbot Bank since 1988 and as Chief Executive Officer of Talbot Bank since
1993. Mr. Vermilye serves on the Boards of Directors of the Company, Talbot
Bank, and Felton Bank.
Daniel
T.
Cannon, 56, has served as Executive Vice President and Chief Operating Officer
of the Company since December 2000. Between 1996 and December 2000, Mr. Cannon
served as President of the Company. Mr. Cannon has served as President and
Chief
Executive Officer of Centreville National Bank since July 1995 and in other
management positions at Centreville National Bank prior to that date. Mr.
Cannon
serves on the Boards of Directors of the Company and Centreville National
Bank.
Lloyd
L.
Beatty, Jr., 53, has served as a Vice President of the Company since October
2004. Until January 1, 2006, Mr. Beatty primarily assisted management of
the
Company with certain strategic initiatives, and he worked on a part-time
basis
until October 2005. Starting January 1, 2006, Mr. Beatty’s duties were expanded
to include management authority with respect to certain aspects of the Company’s
strategic initiatives and to provide corporate oversight of the Company’s
non-traditional products and services and the Company’s information technology
(IT) system.
Susan
E.
Leaverton, 42, has served as Treasurer of the Company since December 2000.
Between 1997 and December 2000, Ms. Leaverton served as Secretary/Treasurer
of
Talbot Bancshares. Ms. Leaverton has served as Vice President of Finance
of
Talbot Bank since 1994.
Carol
I.
Brownawell, 41, has served as Secretary of the Company since December 2000.
Between 1996 and December 2000, Ms. Brownawell served as Treasurer of the
Company. Ms. Brownawell has served as Executive Vice President and Chief
Financial Officer of Centreville National Bank since January 1997 and in
other
management positions of Centreville National Bank prior to that date.
Thomas
H.
Evans, 56, has served as the President and Chief Executive Officer of Felton
Bank since February 2001. Prior to February 2001, Mr. Evans was employed
by Bank
of America as a commercial lending manager. Mr. Evans serves on the Boards
of
Directors of the Company and Felton Bank.
EXECUTIVE
COMPENSATION
The
following table summarizes the remuneration earned in 2005 and the prior
two
years by the President and CEO of the Company and the most highly compensated
executive officers of the Company other than the President/CEO who were serving
as executive officers as of December 31, 2005 and received salary and bonus
in
excess of $100,000 during 2005 (the President/CEO and such other officers
are
referred to as the “named executive officers”).
Notes:
|
(1)
|
For
Mr. Vermilye, amounts also include tax “gross ups” for use of a motor
vehicle of $4,265 in 2005, $4,294 for 2004, and $4,314 for 2003,
as well
as a $86,398, $53,438 and $89,633 tax benefit payment for 2005,
2004 and
2003, respectively, paid in connection with the exercise of stock
options.
For Ms. Leaverton, amounts include a $10,309, $9,352 and $15,686
tax
benefit payment paid in 2005, 2004 and 2003, respectively, in connection
with the exercise of stock options.
|
|
(2)
|
Amounts
include imputed income related to the Company’s group term life insurance
program as follows: Mr. Vermilye, $3,200 in 2005, $2,772 in 2004,
and
$2,772 in 2003; Mr. Cannon, $1,703 in 2005 and $1,450 in 2004;
Ms.
Leaverton, $240 in 2005, $163 in 2004, and $143 in 2003; Mr. Evans,
$826
in 2005.
|
|
(3)
|
Amounts
include the following 401(k) and profit sharing plan contributions:
Mr.
Vermilye, matching contributions of $8,400 in 2005, $8,200 in 2004
and
$8,000 in 2003, and discretionary contributions of $10,500 in 2005,
$10,250 in 2004, and $10,000 in 2003; Mr. Cannon, matching contributions
of $8,400 in 2005, $7,400 in 2004, and $6,826 in 2003, and discretionary
contributions of $10,500 in 2005, $9,250 in 2004, and $8,532 in
2003; Ms.
Leaverton, matching contributions of $6,400 in 2005, $4,720 in
2004, and
$4,220 in 2003, and discretionary contributions of $8,000 in 2005,
$5,900
in 2004, and $5,275 in 2003; Mr. Evans, matching contributions
of $4,914
in 2005 and $2,824 in 2004, and discretionary contributions of
$6,143 in
2005.
|
|
(4)
|
For
Mr. Vermilye, amounts also include contributions under a deferred
compensation plan in the amount of $20,000 in each of 2005, 2004,
and
2003. For Mr. Cannon, amount also includes economic value of his
life
insurance coverage for 2005, 2004, and 2003 under a key man life
insurance
policy (see “Deferred and Other Compensation”) of $36,990, $12,843, and
$414, respectively.
|
|
(5)
|
Mr.
Evans was hired on April 1, 2004 as part of the Company’s acquisition of
Felton Bank. The amount shown for 2004 includes compensation paid
to Mr.
Evans for the full year, both before and after Felton Bank became
a
subsidiary of the Company.
|
Total
compensation paid to Mr. Beatty and Ms. Brownawell during 2005 was $194,028
and
$103,682, respectively, and includes
amounts
attributable to salary, bonus, profit sharing payments, matching 401(k)
contributions and imputed income related to the Company’s group term life
insurance program.
The
salaries proposed to be paid in 2006 to the Company’s executive officers are as
follows: Mr. Vermilye, $255,000; Mr. Cannon, $205,000; Mr. Beatty,
$215,000;
Ms.
Leaverton, $137,500; Mr. Evans, $115,000; and Ms. Brownawell, $92,000.
Additional compensation may be earned by these officers in 2006 through the
Company’s incentive compensation plans, imputed life insurance income, matching
401(k) plan contributions and other benefits mentioned in the notes to the
summary compensation table above.
401(k)
Profit Sharing Plan
The
Company adopted the Shore Bancshares, Inc. and Subsidiaries 401(k) Profit
Sharing Plan on January 1, 2002. The plan is administered by six trustees
appointed by the Board of Directors and is available to eligible employees
of
the Company and its subsidiaries who have completed six months of service.
The
Company may make discretionary contributions to the plan each year based
upon
profits of the Company. In addition, employer matching contributions are
made to
each active member’s account each year in an amount equal to 100% of the
member’s pay reduction contributions up to 3% of base salary, plus 50% of
contributions which exceed 3% of base salary, up to 5% of base salary. All
employee contributions are immediately vested. Discretionary and matching
contributions vest incrementally over a six year period. Discretionary, pre-tax
and matching contributions may be withdrawn while a member is employed by
the
Company if the member has reached age 59½ in circumstances of financial hardship
or in certain other circumstances pursuant to plan restrictions. Effective
January 1, 2005, Felton Bank terminated its separate 401(k) plan and all
eligible employees now participate in the Company’s plan.
Shore
Bancshares, Inc. 1998 Stock Option Plan
The
Shore
Bancshares, Inc. 1998 Stock Option Plan was approved by the Company’s Board of
Directors and stockholders and will continue in effect until March 3, 2008,
unless earlier terminated. The plan contemplates the grant of options to
purchase shares of Common Stock to directors and key management employees
of the
Company and its subsidiaries. The total number of shares of Common Stock
that
may be issued under the plan cannot exceed 80,000 shares, as adjusted for
stock
splits and other similar reclassification events. Both incentive stock options
and nonqualified stock options may be granted under the plan. An option granted
under the plan generally expires on the 10th anniversary of the date the
option
was granted. The Company did not grant any options under this plan in
2005.
Shore
Bancshares, Inc.
1998
Employee Stock Purchase Plan
The
Shore
Bancshares, Inc. 1998 Employee Stock Purchase Plan was approved by the Company’s
Board of Directors and stockholders and will continue in effect until March
3,
2008, unless earlier terminated. The plan contemplates the grant of options
to
purchase shares of Common Stock to eligible employees of the Company and
its
subsidiaries. The total number of shares of Common Stock that may be issued
under the plan cannot exceed 45,000 shares, as adjusted for stock splits
and
other similar reclassification events. An option granted under the plan
generally expires 27 months after the date the option was granted. The Company
did not grant any options under this plan in 2005.
Talbot
Bancshares, Inc. Employee Stock Option Plan
In
connection with the December 2000 merger of Talbot Bancshares into the Company,
the Company assumed options previously granted under, and subject to all
terms
of, the Talbot Bancshares, Inc. Employee Stock Option Plan (the “Talbot Plan”).
The Company subsequently registered the Talbot Plan with the
SEC
,
which
authorizes the grant of options to purchase up to 114,000 shares of the
Company’s Common Stock,
as
adjusted for stock splits and other similar reclassification events
.
The
Talbot Plan was approved by both the Board of Directors and the stockholders
of
Talbot Bancshares, but was not approved by the stockholders of the combined
companies. Thus, only non-qualified stock options may be granted under the
Talbot Plan. During 2005, the Company did not grant any options to the named
executive officers under the Talbot Plan.
The
Talbot Plan is administered by the Compensation Committee of the Board and
will
expire on April 9, 2007 unless sooner terminated. Generally, key management
employees of the Company and its subsidiaries are eligible to receive option
grants under the Talbot Plan. An option granted under the Talbot Plan vests
according to the terms of the related stock option agreements and can generally
be exercised for 10 years after grant, unless the Board provides otherwise.
The
option exercise price will generally be the fair market value of the shares
on
the date the option is granted. Upon exercise of options granted under the
Talbot Plan, the Company is obligated to pay the optionee a tax benefit payment
in an amount of U.S. dollars equal to the number of shares as to which the
option is being exercised, multiplied by (i) the “tax rate” and (ii) the
difference between the per share fair market value at the time of exercise
and
the per share option price. The tax rate shall be a percentage designated
by the
Company to result in compensating the optionee for the federal, state and
local
income tax liability incurred by the optionee by virtue of his exercise of
the
option and the payment to him of the tax benefit payment. Options are not
transferable other than by will or the laws of descent and distribution.
All
unexercised options will lapse upon termination of employment other than
because
of death, disability or approved retirement. If employment is terminated
because
of disability or approved retirement, the options will lapse one year or
three
months after termination, respectively. Upon a “change in control” as defined in
the Talbot Plan, all unexercised options will immediately vest and become
exercisable. No options have been granted under the plan since the merger
with
Talbot Bancshares.
The
following table sets forth certain information relating to options (under
all
plans) exercised by the named executive officers in 2005 and the number and
value of underlying unexercised stock options held by the named executives
as of
December 31, 2005.
Aggregated
Option/SAR Exercises in 2005 and 2005 Year End Option/SAR
Values
|
Shares
Acquired
on
Exercise
(#)
|
Value
Realized
($)
|
Number
of Securities
Underlying
Unexercised
Options
at Fiscal Year-End
(#)
|
Value
of Unexercised
In-the-Money
Options at
Fiscal
Year-End ($)(1)
($)
|
|
|
Name
|
Exercisable/Unexercisable
|
Exercisable/Unexercisable
|
||
|
Mr.
Vermilye
President
and CEO
|
14,250
|
287,993
|
16,050
/ 1,200
|
348,441
/ 14,364
|
|
Mr.
Cannon
Executive
Vice
President
and COO
|
425
|
5,110
|
1,375
/ 800
|
9,849
/ 9,576
|
|
Ms.
Leaverton
Treasurer
and PAO
|
1,425
|
29,454
|
2,325
/ 600
|
43,463
/ 7,182
|
|
Mr.
Evans
President
and CEO,
Felton
Bank
|
0
|
0
|
0
/
0
|
0
|
Notes:
(1)
Represents the total gain which would be realized if all in-the-money options
held at December 31, 2005 were exercised, determined by multiplying the number
of shares underlying the options by the difference between the per share
option
exercise price and the fair market value of the shares at December 31, 2005
of
$31.72 per share.
Deferred
and Other Compensation
In
1996,
Talbot Bank adopted a supplemental deferred compensation plan to provide
retirement benefits to its President and Chief Executive Officer. The plan
calls
for fixed annual payments of $20,000 vesting immediately to be credited to
the
participant’s account.
In
1999,
Centreville
National Bank and Mr. Cannon entered into a Executive Supplemental Retirement
Plan Agreement (the “Retirement Agreement”) to provide certain benefits to Mr.
Cannon on and after retirement. Centreville National Bank funds this plan
through a key man life insurance policy on the life of Mr. Cannon that was
purchased in 1994 and carries a $15,000 annual premium for 20 years. Each
year,
Centreville National Bank deposits to or withdraws from a retirement account
an
amount equal to the difference between the annual after-tax earnings or loss,
respectively, generated by the insurance policy and the “Cost of Funds” (as
defined in the Retirement Agreement) for that year. Upon termination of
employment other than for death or “cause” (as defined in the Retirement
Agreement), Mr. Cannon will generally be entitled to receive (i) the balance
of
his retirement account paid in 10 annual installments, commencing at age
65, and
(ii) each year until death, commencing at age 65, the difference between
the
after-tax income generated by the policy and the Cost of Funds for that year.
If
Mr. Cannon’s employment is terminated due to death, his designated beneficiary
will receive the balance in his retirement account in one lump sum payment.
At
December 31, 2005, this balance was $21,773.
Additionally,
Centreville National Bank and Mr. Cannon entered into a Life Insurance
Endorsement Method Split Dollar Plan Agreement (the “Endorsement”) pursuant to
which Centreville National Bank has endorsed to a beneficiary named by Mr.
Cannon 80% of the net-at-risk insurance portion of the death benefits payable
to
Centreville National Bank under the key man life insurance policy discussed
above. The net-at-risk portion of the proceeds is defined as the total proceeds
paid at death less the then cash value of the policy. Centreville National
Bank
is the sole owner of this policy and has all rights with respect to its cash
surrender value. The Endorsement will be terminated if Mr. Cannon’s employment
with Centreville National Bank is terminated for “cause” (as defined in the
Endorsement), in which case Mr. Cannon will be given the option to purchase
the
policy from Centreville National Bank by paying the greater of (i) Centreville
National Bank’s share of the cash value of the policy on the date of assignment
or (ii) the amount of all premiums paid to date by Centreville National Bank
.
Generally, a “change in control” (as defined in the Endorsement) that results in
the termination of Mr. Cannon’s employment will not affect the benefits payable
to Mr. Cannon’s beneficiary. Based on the value of the policy at December 31,
2005, Mr. Cannon’s beneficiary would receive approximately $464,975 upon Mr.
Cannon’s death.
Employment
Agreements
The
Company has entered into employment agreements with Messrs. Vermilye, Cannon
and
Evans. Under Mr. Vermilye’s employment agreement dated December 1, 2000, Mr.
Vermilye serves as President and Chief Executive Officer of the Company and
President and Chief Executive Officer of Talbot Bank. Under Mr. Cannon’s
employment agreement dated December 1, 2000, Mr. Cannon serves as Executive
Vice
President and Chief Operating Officer of the Company and President and Chief
Executive Officer of Centreville National Bank. Under Mr. Evans’ employment
agreement dated November 3, 2005, Mr. Evans serves as President and Chief
Executive Officer of Felton Bank.
Each
agreement provides for continued compensation in the event the employee becomes
disabled, as follows: 100% for the first 6 months of disability; 75% for
the
next 12 months; and 50% thereafter for the remainder of the terms of the
agreements (inclusive of any benefits payable to the employee under the
provisions of any disability insurance). The Company may terminate the
agreements at any time. If the Company terminates the agreements for “cause” (as
defined in the agreements), Messrs. Vermilye, Cannon and Evans generally
will
not be entitled to any further compensation or benefits. If the Company
terminates employment other than for cause (except in connection with a change
in control, as discussed below), Messrs. Vermilye and Cannon will be entitled
to
compensation and benefits for the remainder of the terms of their agreements,
and Mr. Evans will be entitled to severance equal to one year’s salary. Each of
the employment agreements provides that, in the event the employee is terminated
by the Company without cause within 12 months following a “change in control”
(as defined in the employment agreement) or terminates his employment within
12
months following a change in control for certain specified reasons, the employee
will be entitled to receive a lump sum payment equal to 2.99 times his then
current salary.
Messrs.
Vermilye and Cannon have each agreed that, during the terms of their respective
agreements, they will not be a director, an officer, or an employee of, or
a
consultant to, any federal or state financial institution operating in Queen
Anne's, Kent, Caroline, Talbot, or Anne Arundel Counties in the State of
Maryland or Kent County in the State of Delaware, other than Talbot Bank,
Centreville National Bank, or their subsidiaries or affiliates. Mr. Evans’
employment agreement provides that he will not be a director, an officer,
or an
employee of, or a consultant to, any federal or state financial institution
operating within 50 miles of the Company or Felton Bank.
Mr.
Vermilye’s agreement and Mr. Cannon’s agreement expire on December 1, 2010 and
are thereafter subject to automatic renewals for successive one-year terms.
Mr.
Evans’ agreement expires on March 31, 2008 and is thereafter subject to
automatic renewals for successive one-year terms. Compensation received by
Mr.
Vermilye is paid by Talbot Bank; compensation received by Mr. Cannon is paid
by
Centreville National Bank; and compensation received by Mr. Evans is paid
by
Felton Bank.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The
Compensation Committee oversees executive compensation matters.
The
Compensation Committee consists of Christopher F. Spurry,
Chairman
,
Herbert
L. Andrew, III, Paul M. Bowman, and W. Edwin Kee, Jr. Mr. Kee was appointed
to
the committee in December 2005. Each of the foregoing persons is a non-employee
director, has not formerly served as an officer of the Company or its
subsidiaries, and has no interlocking relationship or insider participation
as
defined by the SEC.
COMPENSATION
COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The
Compensation Committee submits the following report addressing the executive
compensation policies of the Company for 2005.
The
Compensation Committee of the Board of Directors structures the compensation
programs for the Chief Executive Officer, the Executive Vice President, and
other executive officers and key employees of the Company. It is the philosophy
of the Compensation Committee to offer competitive compensation that is designed
to provide incentives that reward employees based upon individual performance
and the overall performance of the Company. Executive compensation levels
are
recommended to the Board of Directors by the Compensation Committee and approved
by the non-employee directors. The compensation programs are reviewed annually
or at other times when an individual’s specific performance warrants a special
review.
Executive
compensation consists of three components: (i) base salary; (ii) short term
incentive compensation (bonus); and long term incentive compensation (equity
compensation). Short term incentive compensation is variable and directly
tied
to individual performance and the overall performance of the Company. Long
term
incentive compensation is not awarded every year and is tied to individual
performance as well as the overall performance of the Company. No long term
incentive compensation was granted in 2005. All incentive programs have been
developed to align the interest of management with the strategic objectives
of
the Company. In setting the base compensation levels and developing incentive
compensation programs, careful consideration is given to programs offered
by
other institutions in the Company’s peer group. It has been the intention of the
Compensation Committee and the Board to keep the Company’s compensation packages
above the 50
th
percentile of its peer group. The Compensation Committee believes that
maintaining this level of compensation is an essential element in attracting
and
retaining the top executives in the industry.
The
Compensation Committee considers a variety of factors to determine whether
incentive goals have been met by a particular executive officer. The financial
measures consist of traditional ratios, such as return on assets, earnings
per
share, and efficiency ratios as well as the Company’s actual performance versus
budget. In addition, the Compensation Committee considers subjective factors
like employee moral, employee turnover and customer satisfaction. It is the
view
of the Compensation Committee that these are key elements necessary to maintain
the leadership position we currently enjoy in our primary markets.
During
2005, the Compensation Committee retained a professional executive compensation
consulting firm, Palmer & Cay, now known as Wachovia Employer Solutions
Group, to develop a comparative market analysis for the purpose of comparing
the
Company’s existing executive compensation levels with the 50
th
percentile of a peer group identified by the consultant. The Compensation
Committee also directed the consultant to make recommendations as to future
salary, bonus, and equity compensation for senior executives.
The
Compensation Committee set the Chief Executive Officer’s base salary for fiscal
year 2005 at $220,000, which represents a 10% increase over 2004. In
establishing this base salary, the Compensation Committee considered peer
compensation levels, the Chief Executive Officer’s performance for the prior
year, and
the
increasing scale and complexity of the Company’s operations. The Chief Executive
Officer’s 2005 incentive compensation consisted of a $160,000 cash bonus, which
represents a 14.3% increase over his 2004 cash bonus. This bonus was based
on
recommendations of the consultants report as well as the Company’s continued
robust growth in total assets, loans and deposits in 2005, the Company’s record
earnings in 2005, the growth and success of the Company’s non-banking
operations, and above-budget overall financial performance.
The
Compensation Committee finds that the Chief Executive Officer’s total
compensation package for 2005 was appropriate and justified based on the
overall
performance of the Company, stockholder interests, and competitive data related
to
compensation
packages for top executives in and around the Company’s market areas. The
Compensation Committee further believes that the total compensation awarded
to
the Chief Executive Officer and to the other executive officers of the Company
is consistent in each case with the Compensation
Committee’s
objectives and to each officer’s individual performance.
COMPENSATION COMMITTEE
By:
Christopher
F. Spurry, Chairman
Herbert
L. Andrew, III
Paul
M.
Bowman
W.
Edwin
Kee, Jr.
APPROVAL
OF THE 2006 STOCK AND INCENTIVE COMPENSATION PLAN
(Proposal
No. 2)
At
the
Annual Meeting, stockholders will be asked to approve the Shore Bancshares,
Inc.
2006 Stock and Incentive Compensation Plan (the “2006 Plan”), a copy of which is
attached to this Proxy Statement as Appendix A and incorporated herein by
reference. The following summary of key provisions of the 2006 Plan is qualified
in its entirety by reference to the attached 2006 Plan document. Based upon
the
recommendation of the Board’s Compensation Committee, the Board of Directors
approved the form of the 2006 Plan on March 13, 2006 and recommended that
it be
submitted to the stockholders for approval at this year’s Annual
Meeting.
Purpose.
Although
the Company’s existing
1998
Stock Option Plan
,
its
1998 Employee Stock Purchase Plan, and the Talbot Bancshares, Inc. Employee
Stock Option Plan (the “Old Plans”) have provided the Company with a useful tool
in helping to attract and retain qualified directors and key employees,
management does not believe that the Old Plans provide the Company with the
flexibility it will need in the future to continue to perform this function
to
the fullest extent. Upon approval of the 2006 Plan, the Old Plans will remain
in
force until they expire or are earlier terminated by the Board.
The
2006
Plan is designed to advance the interests of the Company and its stockholders
by
providing key management employees, non-employee directors and other eligible
participants with innovative financial incentives, through stock and performance
based awards, to: (i) align participants’ interests with the interests of the
Company’s stockholders in the long-term success of the Company; (ii) provide
management with an equity ownership in the Company tied to Company performance;
(iii) attract, motivate and retain key employees and non-employee directors;
and
(iv) provide incentive to management for continuous employment with the
Company.
Effective
Date and Term.
The
2006
Plan will be effective on April 26, 2006 if approved by the Company’s
stockholders at the Annual Meeting. The 2006 Plan will terminate on the earlier
of the date that all shares reserved for issuance have been awarded or April
26,
2016.
Administration.
The
Board’s Compensation Committee will administer the 2006 Plan. Among other
powers, the Compensation Committee will have full and exclusive power to:
(i)
establish the terms and conditions upon which an award may be made and exercised
under the 2006 Plan; (ii) interpret the terms and the intent of the 2006
Plan
and any award agreement; (iii) determine eligibility for awards; (iv) determine
award recipients; (v) grant awards; (vi) accelerate the exercisability of
any
award, the end of a performance period applicable to an award, or termination
of
any restriction imposed on an award under the 2006 Plan; (vii) determine
what
leaves of absences do not constitute interruptions of employment or service
or
continuous employment or service; (viii) determine the fair market value
of the
shares of common stock of the Company; and (ix) make all other determinations
relating to the 2006 Plan.
The
Compensation Committee may delegate to one or more of its members, other
directors, and officers of the Company such administrative duties or powers
as
it may deem advisable. The Compensation Committee may authorize one or more
of
the Company’s officers to designate employees to be recipients of awards and/or
determine the size of any such award; provided that (i) the Compensation
Committee may not delegate such authority with respect to awards to be granted
to an officer or other directors of the Company or a person who beneficially
owns more that ten percent of the Company’s common stock, (ii) the
authorizing resolution of the Compensation Committee must state the total
number
of awards that may be so granted; and (iii) the officer must report
periodically to the Compensation Committee about the nature and scope of
the
awards granted.
Eligibility
for Participation.
The 2006
Plan is available to all directors of the Company and its subsidiaries and
all
officers, employees and consultants of the Company and its subsidiaries who,
in
the opinion of the Compensation Committee, can contribute significantly to
the
growth and profitability of, or perform services of major importance to,
the
Company and its subsidiaries. Subject to the provisions of the 2006 Plan,
the
Compensation Committee has the authority to select from all eligible individuals
those to whom awards are granted and to determine the nature and amount of
each
award. As of December 31, 2005, there were 13 directors (of whom three were
executive officers and eight were non-employee directors), five executive
officers, and approximately 300 employees (including officers who are not
executive officers) who would have been eligible to participate in the 2006
Plan.
Types
of Awards.
The 2006
Plan permits the Compensation Committee, in its sole discretion, to grant
various forms of incentive awards. The Compensation Committee has the power
to
grant stock options, stock appreciation rights (“SARs”), restricted stock,
restricted stock units, and performance units. Each award will be reflected
in
an agreement between the Company and the participant, will be subject to
the
applicable terms and conditions of the 2006 Plan and may also be subject
to
other terms and conditions contained in the award agreement consistent with
the
2006 Plan that the Compensation Committee deems appropriate, including
accelerated vesting or settlement in the event of a participant’s death,
disability or termination of employment. The provisions of the various
agreements entered into under the 2006 Plan do not need to be
identical.
Stock
Options.
Stock
options allow the participant to buy a certain number of shares of common
stock
of the Company at an exercise price equal to at least the fair market value
(as
determined by the Compensation Committee) on the date the option is granted.
The
Compensation Committee may grant stock options intended to qualify as incentive
stock options (“ISOs”) within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the “Code”), so-called “nonqualified stock options”
that are not intended to so qualify as incentive stock options (“NQSOs”), or any
combination of ISOs and NQSOs. All persons eligible to participate in the
2006
Plan may receive a grant of NQSOs. Only employees of the Company and its
subsidiaries may receive a grant of ISOs.
The
Compensation Committee fixes the exercise price per share for options on
the
date of grant, provided that the exercise price of any option granted under
the
2006 Plan can never be less than the fair market value of the underlying
shares
of common stock on the date of grant and provided further that, if a participant
who will be granted an ISO is a person who holds more than 10% of the total
combined voting power of all classes of outstanding voting securities of
the
Company, the exercise price per share of an ISO granted to such person must
be
at least 110% of the fair market value of a share of common stock on the
date of
grant. To the extent that the aggregate fair market value of shares of common
stock, determined on the date of grant, with respect to which ISOs (under
all of
the Company’s equity compensation plans) become exercisable for the first time
by a participant during any calendar year exceeds $100,000, such ISOs will
be
treated as NQSOs.
The
Compensation Committee determines the term of each option, provided that
no
option may have a term greater than 10 years from the date of grant and provided
further that, if the recipient of an ISO is a person who holds more than
10% of
the combined voting power of all classes of outstanding stock of the Company,
the term of that person’s ISO may not exceed five years from the date of grant.
The vesting period for options commences on the date of grant and ends on
a date
that is determined by the Compensation Committee, in its sole discretion,
which
is specified in the award agreement. Options may be exercised at such times
and
be subject to such restrictions as the Compensation Committee determines;
provided that ISOs may be exercised only while the participant is employed
by or
providing service to the Company or within a specified period of time after
termination of such employment or service, as determined by the Compensation
Committee. A participant may exercise an option by delivering notice of exercise
to the Company or its designated agent. Payment of the exercise price and
any
withholding taxes for an option may be made (i) in cash, (ii) by delivering
shares of common stock already owned by the participant and having a fair
market
value on the date of exercise equal to the exercise price, (iii) by a
combination of the foregoing, or (iv) to the extent permitted by law and
approved by the Compensation Committee, through a cashless exercise of the
option using a broker. The Compensation Committee may impose in an award
agreement such restrictions on the shares deliverable upon exercise of a
stock
option as it deems appropriate, including that such shares will constitute
“restricted shares” subject to restrictions on transfer.
The
Compensation Committee may specify in an award agreement granting a stock
option
that the participant is eligible to receive a reload stock option (a “Reload
Option”) if the participant pays the exercise price for the stock option
(including a Reload Option), in whole or in part, by tendering
previously-acquired shares of common stock. A Reload Option will be a NQSO
and
will permit the participant to purchase the number of shares surrendered
in the
earlier option exercise. If granted, a Reload Option will be granted on the
date
the original stock option is exercised, will have an exercise price that
cannot
be less than the fair market value of the underlying shares of common stock
on
the date the Reload Option is granted, and will have the same expiration
date as
the original stock option.
Stock
Appreciation Rights.
The
Compensation Committee may grant SARs to anyone eligible to participate in
the
2006 Plan. Awards may involve freestanding SARs, SARs granted with, but
exercisable in lieu of, stock options (“Tandem SARs”), SARs granted with, and in
addition to, stock options (“Additive SARs”), or any combination of the
foregoing. The Compensation Committee will determine the period when SARs
vest
and become exercisable, the fair market value of the shares of common stock
underlying the SARs on the date of grant, and whether SARs will be freestanding
SARs, Tandem SARs, or Additive SARs. SARs may be exercised only while the
participant is alive. The exercise of a SAR does not require the payment
of any
money to the Company. Upon exercise of a freestanding SAR, the participant
will
receive an amount equal to the excess of the fair market value of the common
stock on the date of exercise over the fair market value on the date of grant.
Upon exercise of a Tandem SAR or an Additive SAR, the participant will receive
an amount equal to the excess of the fair market value of the common stock
on
the date of exercise over exercise price of the related stock option. The
exercise of a Tandem SAR will reduce the number of shares available under
the
related stock option by the amount of shares exercised, and vice versa. The
exercise of an Additive SAR will have no effect on the related stock option.
The
award agreement granting a SAR may provide, however, on an elective or
non-elective basis, for payment of the SAR value on a date after exercise,
which
amount will be adjusted (if provided in the award agreement) from the date
of
exercise based on an interest, dividend equivalent, earnings or other basis
(including the deemed investment of the award amount in shares of common
stock)
determined by the Compensation Committee. Payment to the participant of the
SAR
value (or adjusted value, if applicable) will be in cash, in shares of common
stock, or in a combination of cash and shares of common stock, as determined
by
the Compensation Committee.
Restricted
Stock.
The
Compensation Committee may grant restricted stock to anyone eligible to
participate in the 2006 Plan. An award of restricted stock involves the
immediate transfer by the Company to the participant of a specific number
of
shares of common stock which are subject to a risk of forfeiture and a
restriction on transferability. This restriction will lapse following a stated
period of time, upon attainment of specified performance targets or some
combination of the foregoing. The participant does not pay for the restricted
stock and has all of the rights of a holder of a share of common stock of
the
Company (except for the restriction on transferability), including the right
to
vote and receive dividends unless otherwise determined by the Compensation
Committee and set forth in the award agreement. Except as provided otherwise
in
an award agreement, if a participant’s employment with the Company or its
subsidiaries is terminated for any reason at any time during which any portion
of an award of restricted stock remains subject to restrictions, that portion
will automatically be forfeited and returned to the Company.
Restricted
Stock Units
.
The
Compensation Committee may grant restricted stock units to anyone eligible
to
participate in the 2006 Plan. An award of a restricted stock unit is similar
to
a restricted stock award, except that no shares are issued. In addition,
holders
of restricted stock units will have no voting rights, but they may be entitled,
if so determined by the Compensation Committee, to receive dividend equivalents,
which entitle the holder to be credited with an amount equal to all cash
dividends and other distributions paid on the shares underlying restricted
stock
units while the units are outstanding and which will be converted into
additional restricted stock units. Upon the lapse of the restrictions related
to
a restricted stock unit, the participant is entitled to receive, without
any
payment to the Company, an amount equal to the fair market value of the shares
of common stock represented by the restricted stock unit on the date of
exercise. The award agreement granting a SAR may provide, however, on an
elective or non-elective basis, for payment of the restricted stock unit
value
on a date after exercise, which amount will be adjusted (if provided in the
award agreement) from the date of exercise based on an interest, dividend
equivalent, earnings or other basis (including the deemed investment of the
award amount in shares of common stock) determined by the Compensation
Committee. Payment to the participant of the restricted stock unit value
(or
adjusted value, if applicable) will be in cash, in shares of common stock,
or in
a combination of cash and shares of common stock, as determined by the
Compensation Committee. Except as otherwise provided in an award agreement,
if a
participant’s employment with the Company or its subsidiaries terminates for any
reason at any time during which any portion of an award of a restricted stock
unit remains subject to restrictions, that portion will automatically be
forfeited and returned to the Company.
Performance
Units.
The
Compensation Committee may grant performance units to anyone eligible to
participate in the 2006 Plan. Performance units are intended to constitute
performance-based compensation awards and will entitle the participant to
receive, after the performance period for that unit has ended, an amount
based
on the realization of certain performance goals and the satisfaction of certain
other conditions. The terms and conditions of each award, including the
performance period, performance goals, any other terms and conditions of
the
award, will be established by the Compensation Committee in the award agreement
(or in a subplan of the 2006 Plan that may be incorporated by reference into
an
award agreement). Payment to the participant of the performance unit value
will
be in cash, in shares of common stock, or in a combination of cash and shares
of
common stock, as determined by the Compensation Committee. Holders of
performance units will have no voting rights or dividend rights associated
with
those awards.
Performance
Measures.
The
2006
Plan provides that the Compensation Committee may make the degree of payout
and/or vesting of any award dependent upon the attainment of certain performance
goals set forth in the 2006 Plan, measured over certain performance periods.
Performance goals may be specific to a participant, specific to the performance
of the Company generally, or specific to the performance of a subsidiary
of the
Company, a division, a business unit, or a line of business served by a
participant. Performance goals may be based on stock value (and/or increases
therein), earnings per share or growth in earnings per share, net income,
earnings or earnings growth, operating profit, operating cash flow, operating
or
other expenses, operating efficiency, return on equity, assets, capital or
investments, deposits, loan volume or growth, the efficiency ratio, customer
satisfaction, regulatory compliance, operating or other margins, non-performing
assets, productivity, and any other number of qualitative or quantitative
benchmarks as more fully described in the 2006 Plan.
Shares
Available for Awards; Maximum Awards.
Up
to
400,000 shares of the common stock of the Company will be available for issuance
to participants under the 2006 Plan, plus any shares related to stock options
outstanding under the Company’s 1998 Stock Option Plan on the date the 2006 Plan
is approved and that thereafter terminate, expire, or lapse for any reason.
As
of the date of this Proxy Statement, there were 22,580 shares subject to
outstanding options under the 1998 Stock Option Plan. Shares of common stock
related to any unexercised or unvested award granted under the 2006 Plan
that
terminates, expires, or lapses for any reason, and shares of common stock
issued
pursuant to the exercise of an award that are subsequently forfeited for
any
reason, will become available for re-grant under the 2006 Plan.
The
maximum number of shares for which stock option grants may be granted to
any one
participant in any calendar year is 50,000; the maximum number of SARs that
may
be granted to any one participant in any calendar year is 50,000; the maximum
number of shares for restricted stock that may be granted to any participant
in
any calendar year is 30,000; the maximum number of restricted stock units
that
may be granted to any one participant in any calendar year is 30,000; the
maximum dollar value of performance units that may be granted to any one
participant in any calendar year is $1,000,000.
Adjustments
for Changes in Capitalization and Other Corporate Changes.
I
n
the
event that the outstanding shares of common stock are increased or decreased
or
changed into or exchanged for a different number or kind of shares of stock
or
other securities of the Company or of another corporation, without the receipt
of consideration by the Company, through reorganization, merger or
consolidation, recapitalization, reclassification, stock split, reverse stock
split, split-up, combination or exchange of shares or declaration of any
dividends payable in shares, or other distributions to common stockholders
other
than regular cash dividends,
the
Compensation Committee shall make appropriate and proportionate adjustments
in
the number and kind of shares that may be issued under the 2006 Plan, as
well as
other maximum limitations under the 2006 Plan, and the number and kind of
shares
of common stock or other rights and prices under outstanding
awards.
Registration
of Shares
.
As soon
as is practicable after the 2006 Plan is approved by stockholders, the Company
intends to register the shares of its common stock necessary to fund the
2006
Plan on a Registration Statement on Form S-8 under the Securities Act of
1933,
as amended.
Tax
Withholding.
To
the
extent that a participant incurs any tax liability in connection with the
exercise or receipt of an award under the 2006 Plan, the Company has the
right
to deduct or withhold, or to require the participant to pay to the Company,
the
minimum statutory amount to satisfy federal, state and local tax withholding
obligations. In addition, the Compensation Committee may allow the participant
to satisfy the withholding obligation by allowing the Company to withhold
a
portion of the shares to be issued to the participant. Those shares would
be
available for future awards under the 2006 Plan.
Transferability.
Generally,
awards granted under the 2006 Plan may not be transferred other than by will
or
the laws of descent and distribution, provided that, subject to compliance
with
applicable securities laws, a participant may transfer his or her NQSO
(including his or her Reload Option) to his or her spouse, lineal ascendants
and
descendants, or to a trust for the benefit of such persons. Unless otherwise
provided in an award agreement, awards granted under the 2006 Plan may be
exercised only by the participant during the participant’s
lifetime.
Repricings
and Substitutions of Awards
.
Subject
to applicable law and the terms of the 2006 Plan, the Compensation Committee
may: (i) modify, extend and renew awards to modify the terms of an award
agreement, provided that no modification, extension or renewal may have the
effect of lowering the exercise price of any award except in connection with
adjustments related to capitalization and other corporate changes as described
above; and/or (ii) accept the surrender of awards granted under the 2006
Plan or
under any other equity compensation plan of the Company and replace them
with
new awards pursuant to the 2006 Plan, so long as the substituted awards do
not
specify a lower exercise price than the surrendered awards. Substituted awards
may be of a different type than the surrendered awards, may specify a longer
term than the surrendered awards, may provide for more rapid vesting and
exercisability than the surrendered awards, and may contain any other provision
authorized by the 2006 Plan.
Amendment
and Termination.
The
Company’s Board of Directors may, at any time and from time to time and in any
respect, amend or modify the 2006 Plan, including to ensure that the 2006
Plan
and each award granted under the 2006 Plan comply with applicable law,
regulations and stock exchange rules. Without shareholder approval, however,
the
Board may not adopt any amendment that would require the vote of stockholders
of
the Company under the Code or NASDAQ’s approval rules or any amendment affecting
“covered employees” that requires the vote of the Company’s stockholders under
Section 162(m) of the Internal Revenue Code. The Company’s President and Chief
Executive Officer (the “CEO”) and its four most highly compensated executive
officers other than the CEO are “covered employees”. No amendment or
modification of the 2006 Plan or any award agreement may adversely affect
any
outstanding award without the written consent of the participant holding
the
award.
The
Board
may also terminate the 2006 Plan at any time. The termination of the 2006
Plan
will have no effect on awards that were outstanding at the time of
termination.
Change
in Control
.
In the
event of a Change in Control of the Company, the Compensation Committee,
in its
sole discretion, may: (i) provide for the acceleration of any time periods
relating to the exercise or realization of any award so that the award may
be
exercised or realized in full on or before a date initially fixed by the
Compensation Committee; (ii) provide for the purchase or settlement of any
award
by the Company, upon a participant’s request, for an amount of cash equal to the
amount which could have been obtained upon the exercise of the award or
realization of the participant's rights had such award been currently
exercisable or payable; (iii) make such adjustment to any award as the
Compensation Committee deems appropriate to reflect the Change in Control;
or
(iv) cause any award to be assumed, or a new right substituted for such award,
by the acquiring or surviving corporation.
Under
the
2006 Plan, a “Change in Control” will occur upon any of the following events:
(i) any one person, or a group of persons, acquires ownership of securities
of
the Company that, together with securities held by such person or group,
constitutes more than 50% of the total fair market value or total voting
power
of the securities of the Company; (ii) either (A) any one person, or a group
of
persons, acquires (or has acquired during the 12-month period ending on the
date
of the most recent acquisition by such person or group) ownership of securities
of the Company possessing 35% or more of the total voting power of the
securities of the Company, or (B) a majority of members of the Company’s Board
of Directors is replaced during any 12-month period by directors whose
appointment or election is not endorsed by a majority of the members of the
Board prior to the date of the appointment or election; or (iii) any one
person,
or a group of persons, acquires (or has acquired during the 12-month period
ending on the date of the most recent acquisition by such person or group)
assets from the Company that have a total gross fair market value equal to
or
more than 40% of the total gross fair market value of all of the assets of
the
Company immediately prior to such acquisition or acquisitions.
All
obligations of the Company with respect to awards granted under the 2006
Plan
will be binding on any successor to the Company.
Although
the foregoing provisions are included in the 2006 Plan primarily for the
protection of a participant in the event of a Change in Control of the Company,
they may also be regarded as having an anti-takeover effect, which may reduce
the Company’s vulnerability to hostile takeover attempts and certain other
transactions which have not been negotiated with and approved by the
Board.
Certain
Federal Income Tax Consequences.
The
federal income tax consequences arising with respect to awards granted under
the
2006 Plan will depend on the type of the award. The following provides only
a
general description of the application of federal income tax laws to certain
awards under the 2006 Plan, based on current federal income tax laws. This
discussion is intended for the information of stockholders considering how
to
vote at the meeting and not as tax guidance to participants in the Plan,
as the
consequences may vary with the types of awards made, the identity of the
recipients, and the method of payment or settlement. This summary is not
intended to be exhaustive and, among other things, does not address the effects
of other federal taxes (including possible “golden parachute” excise taxes) or
taxes imposed under state, local, or foreign tax laws. Participants should
not
rely on this discussion for individual tax advice, as each participant’s
situation and the tax consequences of exercising awards and disposing of
the
underlying shares of common stock will vary depending upon the specific facts
and circumstances involved. Each participant is advised to consult with his
or
her own tax advisor.
Incentive
Stock Options.
A
participant will not recognize income upon the grant or exercise of an award
that qualifies as an incentive stock option (“ISO”) under the 2006 Plan.
However, the difference between the fair market value of the stock on the
date
of exercise and the exercise price is an item of tax preference which may
cause
the participant to be subject to the alternative minimum tax in the year
in
which the ISO is exercised.
If
a
participant exercises an ISO and does not dispose of the underlying shares
within (i) two years from the date of grant of the ISO, and (ii) one
year from the date of exercise, the participant will generally recognize
capital
gain or loss on a subsequent sale of the stock equal to the difference between
the sales price and the exercise price. If a participant disposes of common
stock acquired upon exercise of an ISO before the expiration of either the
two-year or the one-year holding periods described in the preceding sentence
(each a “disqualifying disposition”), the participant will generally realize
ordinary income in an amount equal to the lesser of (a) the excess of the
fair market value of the shares on the date of exercise over the exercise
price,
or (b) the excess of the fair market value of the shares on the date of
disposition over the exercise price. The remaining gain, if any, will be
taxed
to the participant as long-term or short-term capital gain depending on the
holding period for such shares. The Company will not be allowed any deduction
for federal income tax purposes at either the time of grant or the time of
exercise of an ISO. Upon any disqualifying disposition by a participant,
the
Company will generally be allowed a deduction to the extent the participant
realizes ordinary income.
Nonqualified
Stock Options.
A
participant who is granted an option under the 2006 Plan which does not qualify
as an ISO (including a Reload Option) shall be treated as having been granted
a
nonqualified stock option. Generally, the grant of an NQSO does not result
in a
participant recognizing income. Upon the exercise of an NQSO, the participant
will recognize ordinary income in an amount equal to the excess of the fair
market value of the shares of the common stock at the time of exercise over
the
exercise price of the NQSO. The Company will generally be entitled to a
deduction for federal income tax purposes in an amount equal to the amount
included in income by the participant, provided the Company satisfies its
information reporting obligations with respect to such income.
On
a
subsequent sale of the shares of the common stock, the participant will
recognize capital gain or loss equal to the difference between the amount
realized from the sale of stock and the participant’s adjusted basis in those
shares, which will generally be the sum of the amount paid and the amount
of
income previously recognized by the participant in connection with the exercise
of the NQSO. Such capital gain will be long or short term depending upon
the
holding period for such shares.
Stock
Appreciation Rights.
In
general, a participant will not recognize ordinary income for federal income
tax
purposes upon the grant of a SAR and the Company will not be entitled to
a
deduction at that time. Upon the exercise of a SAR, the participant will
recognize ordinary income equal to the amount by which the fair market value
of
a share on the exercise date exceeds either (i) the fair market value of
a share
on the date of grant in the case of a freestanding SAR or (ii) the exercise
price of the related stock option in the case of a Tandem SAR or an Additive
SAR, multiplied by the number of shares with respect to which the participant
exercises his or her SAR. If, however, a SAR agreement permits the participant
to defer the receipt of the award amount until some date after exercise,
then
the recipient will generally recognize ordinary income at the expiration
of the
deferral period rather than on the date of exercise. In either case, the
Company
will be entitled to a federal income tax deduction equal to the amount of
ordinary income the recipient is required to
recognize in connection with the exercise. The participant’s basis in any shares
of common stock acquired upon the exercise of a SAR will equal their fair
market
value on the date of their acquisition.
Restricted
Stock.
In
general, the grant of restricted stock has no tax effect on the Company or
the
participant. When the shares become vested pursuant to the restricted stock
award, the participant will recognize ordinary income equal to the fair market
value of the shares delivered to him or her under the restricted stock award
and
the Company will generally be allowed a federal income tax deduction in an
amount equal to the amount included in income by the participant, provided
such
amount constitutes an ordinary and necessary business expense, and provided
further that the Company satisfies its information reporting obligations
with
respect to such income. Such deduction will be allowed in the tax year in
which
the participant recognizes such income.
Within
thirty (30) days after the date restricted stock is transferred pursuant
to an
award, a participant may elect under Section 83(b) of the Code to be taxed
on
the fair market value of the restricted stock at the time of the award, rather
than at the time the restricted stock is no longer subject to a substantial
risk
of forfeiture or becomes transferable. In such case, the Company would be
allowed a federal income tax deduction in the year of the award. If such
an
election is made, the participant will not recognize any income at the time
the
restricted stock becomes unrestricted. If the participant subsequently forfeits
the restricted stock, the participant will not be allowed a deduction in
respect
of such forfeiture, and no refund will be available to the participant for
the
taxes previously paid, nor shall the Company have any obligation to reimburse
the participant.
Regardless
of whether a participant makes a Code Section 83(b) election, upon a subsequent
sale or exchange of the restricted stock, the participant will recognize
capital
gain or loss based on the difference between the amount realized from the
sale
of stock and the participant’s adjusted basis in those shares, which will
generally be the sum of the amount paid (if any) and the amount of income
previously recognized by the participant. The capital gain or loss will be
long-term gain or loss if the shares are held by the participant for at least
one year after the restrictions lapse or the shares become transferable,
whichever occurs first. If a Code Section 83(b) election is made, the
participant’s holding period in the shares will begin to run from the date of
the transfer.
Restricted
Stock Units and Performance Units
.
A
participant who is granted a restricted stock unit or a performance unit
under
the 2006 Plan will not recognize taxable income at the time of grant so long
as
the award is nontransferable and is subject to a substantial risk of forfeiture
as a result of performance-based vesting targets, continued services
requirements or other conditions that must be satisfied before delivery of
the
cash and/or shares of common stock payable pursuant to the award. The recipient
will generally recognize ordinary income when the substantial risk of forfeiture
expires or is removed. If, however, an award agreement relating to a restricted
stock unit permits the participant to defer the receipt of the award amount
until some date after the substantial risk of forfeiture expires or is removed,
then the recipient will generally recognize ordinary income at the expiration
of
the deferral period rather than on date the substantial risk of forfeiture
expires or is removed. In either case, the Company will generally be entitled
to
a corresponding deduction equal to the amount of income the recipient
recognizes. Upon a subsequent sale of shares of common stock received as
payment
of an award , the recipient will recognize capital gain or loss equal to
the
difference between the sales price and the participant’s adjusted basis in those
shares, which will generally be the amount of income previously recognized
by
the participant.
Limitation
on Income Tax Deduction.
Under
Section 162(m) of the Code, the Company’s federal income tax deductions may be
limited to the extent that total compensation paid to a “covered employee”
exceeds $1,000,000 in any one year. The Company can, however, preserve the
deductibility of certain compensation in excess of $1,000,000 if it complies
with the conditions imposed by Section 162(m), including the payment of
performance-based compensation pursuant to a plan approved by stockholders.
The
2006 Plan has been designed to enable any award granted by the Compensation
Committee to a “covered employee” to qualify as performance-based compensation
under Section 162(m).
Miscellaneous
Tax Issues
.
Compensation to a participant who is an employee which results from awards
under
the 2006 Plan will constitute wages for purposes of the Federal Insurance
Contributions Act and the Federal Unemployment Tax Act and thus will result
in
additional tax liability to the Company, generally with respect to each award
at
the time that such award is no longer subject to a substantial risk of
forfeiture or becomes transferable.
Compliance
with Section 409A of the Code
.
Section
409A of the Code governs certain types of non-qualified deferred compensation.
The 2006 Plan contemplates both deferred compensation that is subject to
Section
409A and deferred compensation that is not subject to Section 409A. The 2006
Plan requires that it be administered so that neither it nor any award granted
under it violates Section 409A of the Code. Accordingly, the Committee is
required to structure all awards so that they are either exempt from or comply
with Section 409A of the Code, and the Board and the Committee are permitted,
within the bounds of the 2006 Plan and applicable law, including Section
409A of
the Code, to interpret the 2006 Plan and/or any award agreement, and to make
any
and all amendments to the 2006 Plan or any award agreement, to ensure that
all
awards are either exempt from or comply with Section 409A.
Interest
of Certain Persons in the Adoption of the 2006 Plan; Future 2006 Plan Benefits.
The
Company’s current directors and executive officers and the director nominees
have an interest in the proposal to adopt the 2006 Plan, as each is eligible
to
receive awards under the 2006 Plan. The benefits that will be received by
or
allocated to eligible persons under the 2006 Plan, including each of the
current
directors, each of the named executive officers, the current executive officers
as a group, the current directors who are not executive officers as a group,
and
all employees, including all current officers who are not executive officers,
as
a group, are discretionary and are not presently determinable. The Company
did
not grant any stock options in 2005.
Consideration
to be Received by the Company for Awards
.
The
Company will receive no monetary consideration for the granting of awards
under
the 2006 Plan. The Company will receive no monetary consideration other than
the
option price for shares of common stock delivered to participants upon the
exercise of stock options. The Company will receive no monetary consideration
upon the exercise of SARs or the vesting of restricted stock, restricted
stock
units or performance units.
Current
Stock Price
.
On
March 21, 2006, the closing price of the shares of the common stock of the
Company as reported on the NASDAQ Capital Market (NASDAQ: SHBI) was $34.99
per
share.
Vote
Required; Manner of Approval
.
If a
quorum is present, the affirmative vote of a majority of the votes cast at
the
meeting is required to approve the 2006 Plan. Brokers do not have discretion
to
vote on the 2006 Plan without your instruction. If you do not instruct your
broker as to how to vote on this proposal, then your broker will deliver
a
non-vote on this proposal. Broker non-votes and abstentions, if any, will
be
counted for purposes of determining the presence of a quorum but will have
no
effect on the outcome of the vote on this proposal.
Board
Recommendation
.
The
Board of Directors believes that the 2006 Plan will provide a valuable benefit
to the Company by enhancing its ability to attract and retain key management
employees, non-employee directors and other eligible participants. The Board
believes that the approval of the 2006 Plan is in the Company’s and the
stockholders’ best interests.
The
Board of Directors recommends a vote
FOR
the approval of the 2006 Stock and Incentive Compensation
Plan.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Exchange Act requires the Company’s directors and executive
officers and persons who own more than 10% of the outstanding shares of Common
Stock to file with the
SEC
an
initial report of beneficial ownership of the Common Stock, periodic reports
of
changes in beneficial ownership of the Common Stock, and, in certain cases,
annual statements of beneficial ownership of the Common Stock. Based solely
on a
review of copies of such reports furnished to the Company, or on written
representations that no reports were required, the Company believes that
all
directors, executive officers and holders of more than 10% of the Common
Stock
complied in a timely manner with the filing requirements applicable to them
with
respect to transactions during the year ended December 31, 2005, except that
one
initial statement of beneficial ownership on Form 3 was filed late by Mark
A.
Freestate, one current report on Form 4 was filed late by Daniel T. Cannon
(covering one stock option exercise) and one current report on From 4 was
filed
late by W. Edwin Kee, Jr. (covering one stock purchase).
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
During
the past year Talbot Bank, Centreville National Bank, and Felton Bank have
had
banking transactions in the ordinary course of their businesses with their
directors and officers and with the associates of such persons on substantially
the same terms, including interest rates, collateral, and repayment terms
on
loans, as those prevailing at the same time for comparable transactions with
others. The extensions of credit by Talbot Bank, Centreville National Bank,
and
Felton Bank to these persons have not and do not currently involve more than
the
normal risk of collectability or present other unfavorable features.
On
November 1, 2002, Avon-Dixon purchased substantially all of the assets (the
“Freestate Acquisition”) of W.M. Freestate & Son, Inc. (“W.M. Freestate”),
an insurance producer firm that was owned by a director of the Company, Mark
M.
Freestate. Under the terms of the acquisition agreement, Avon-Dixon agreed
to
make a deferred payment (earn-out) to W.M. Freestate of between $0 and $512,500
on or before December 16, 2005, based upon a formula that took into account
the
post-acquisition income generated by the acquired business through December
31,
2004. Based on this formula, W.M. Freestate was entitled to the maximum deferred
payment of $512,500, which was paid on December 14, 2005. Because W.M. Freestate
was dissolved in December 2002, however, the deferred payment was paid directly
to Mr. Freestate. The assets purchased by the Company in consideration for
the
deferred payment are, and have been allocated to, goodwill.
Mr.
Freestate is employed by Avon-Dixon as an insurance producer and his employment
agreement calls for the payment to him of a portion of the insurance commissions
received by Avon-Dixon as follows: (i) 32% of the commissions received on
the
commercial insurance business of W.M. Freestate that existed at the time
of the
Freestate Acquisition; (ii) 50% of commissions received on the life insurance
business placed by Mr. Freestate; (iii) 32% of commissions received on the
commercial insurance business placed by Mr. Freestate; (iv) 50% of the
first-year commissions received on personal lines insurance business placed
by
Mr. Freestate; and (v) 20% of first-year commissions received on all insurance
business that results directly from a referral of such insurance business
by Mr.
Freestate to another employee of Avon-Dixon. Mr. Freestate’s right to receive
these payments generally terminates upon the termination of his employment.
The
agreement is terminable by either party upon 30 days’ prior notice and may be
terminated earlier under certain conditions. If, within three years of the
Freestate Acquisition, Avon-Dixon terminates Mr. Freestate’s employment because
it decides to discontinue its insurance business, then Mr. Freestate will
be
entitled to receive a severance payment of $256,250. For three years after
the
termination of his employment, Mr. Freestate is prohibited from competing
with
Avon-Dixon within the Delmarva Peninsula and he may not serve or solicit,
in
connection with insurance producer or related services, any person who was
a
customer of Avon-Dixon at any time within 18 months of the date his employment
terminated. Mr. Freestate received $244,038 in total remuneration in 2005,
which
amount included commission income, bonus, profit sharing payments, matching
401(k) contributions, and imputed income related to the Company’s group term
life insurance program.
PERFORMANCE
GRAPH
The
following graph compares the performance of an investment in shares of the
Company’s Common Stock for the last five years with the performance of
both
the
NASDAQ Composite index (reflecting overall stock market performance) and
the
NASDAQ Bank Index (reflecting changes in banking industry stocks)
,
assuming in each case an initial $100 investment on December 31, 2000 and
reinvestment of dividends as of the end of the Company’s fiscal years.
Returns
are shown on a total return basis.
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
|
|
Shore
Bancshares, Inc.
|
$100.00
|
$131.63
|
$177.21
|
$295.94
|
$287.28
|
$256.64
|
|
NASDAQ
Composite Index
|
$100.00
|
$ 78.95
|
$ 54.06
|
$ 81.09
|
$ 88.06
|
$ 89.27
|
|
NASDAQ
Bank Index
|
$100.00
|
$110.08
|
$115.05
|
$149.48
|
$165.92
|
$158.73
|
INDEPENDENT
AUDITORS
The
accounting firm of Stegman & Company, Certified Public Accountants, has been
engaged to audit the books and accounts of the Company for the next fiscal
year.
Stegman & Company served as the Company’s independent auditor in 2005.
Stegman & Company has advised the Company that neither the accounting firm
nor any of its members or associates has any direct financial interest in
or any
connection with the Company other than as independent public auditors. A
representative of Stegman & Company is expected to be present at this year’s
Annual Meeting, will have an opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate
questions.
AUDIT
FEES AND SERVICES
The
following table shows the fees paid or accrued by the Company for the audit
and
other services provided by Stegman & Company during fiscal years 2005 and
2004:
|
2005
|
2004
|
|
|
Audit
Fees
|
$127,050
|
$
112,546
|
|
Audit-Related
Fees
|
6,250
|
8,086
|
|
Tax
Fees
|
13,500
|
13,500
|
|
All
Other Fees
|
0
|
0
|
|
Total
|
$
146,800
|
$
134,132
|
Audit
Fees incurred in fiscal years 2005 and 2004 include charges for the examination
of the consolidated financial statements of the Company, quarterly reviews
of
financial statements, and the attestation of management’s report on internal
control over financial reporting. Audit-Related Fees incurred in fiscal year
2005 and 2004 include charges related to the audit of the 401(k) and profit
sharing plan. In 2004, Audit Related Fees also include charges related to
agreed
upon procedures performed in conjunction with borrowing arrangements with
the
Federal Home Loan Bank of Atlanta. Tax Fees incurred in fiscal years 2005
and
2004 include charges primarily related to tax return preparation and tax
consulting services. The Audit Committee has reviewed summaries of the services
provided and the related fees and has determined that the provision of non-audit
services is compatible with maintaining the independence of Stegman &
Company.
The
Audit
Committee’s policy is to pre-approve all audit and permitted non-audit services,
except that
de
minimis
non-audit services, as defined in Section 10A(i)(1) of the Exchange Act,
may be
approved prior to the completion of the independent auditor’s audit.
All
of
the 2005 and 2004 services described above were pre-approved by the Audit
Committee.
FINANCIAL
STATEMENTS
A
copy of
the Company’s Annual Report on Form 10-K for the year ended December 31, 2005,
which contains audited financial statements for the year ended December 31,
2005, accompanies this Proxy Statement.
This
Form 10-K may also be obtained without charge by visiting the Company’s website
(
www.shbi.net
)
or upon written request to Carol I. Brownawell, Secretary, Shore Bancshares,
Inc., 18 East Dover Street, Easton, Maryland 21601.
DATE
FOR SUBMISSION OF STOCKHOLDER PROPOSALS
Any
stockholder desiring to present a proposal pursuant to Rule 14a-8 of the
Exchange Act to be included in the definitive proxy statement and voted on
by
the stockholders at the 2007 Annual Meeting of Stockholders must submit a
written proposal, inclu
ding
all
supporting information, to the Company at its principal executive offices
no
later than November 27, 2006 (120 days before the date of mailing based on
this
year’s proxy statement date), and must meet all other requirements for inclusion
in the proxy statement. As provided in the Company’s By-Laws, if a stockholder
intends to present a proposal for business to be considered at the 2007 Annual
Meeting of Stockholders but does not seek inclusion of the proposal in the
Company’s proxy statement for that meeting, then such proposal, including all
supporting information, must be delivered to and received by the Company’s
Secretary at the Company’s principal executive offices no earlier than January
26, 2007 and no later than February 26, 2007 (not more than 90 days nor less
than 60 days before the first anniversary of the prior year’s annual
meeting)
.
Additional time constraints are applicable where the date of the Annual Meeting
is changed. Proposals received by the Company outside of these timelines
will be
considered untimely. If a stockholder proposal is not timely received, then
the
proxies will be authorized to exercise discretionary authority with respect
to
the proposal.
OTHER
BUSINESS
As
of the
date of this Proxy Statement, management does not know of any other matters
that
will be brought before the meeting requiring action of the stockholders.
However, if any other matters requiring the vote of the stockholders properly
come before the meeting, it is the intention of the persons named in the
enclosed form of proxy to vote the proxies in accordance with the discretion
of
management. The persons designated as proxies will also have the right to
approve any and all adjournments of the meeting for any reason.
By
Order
of the Board of Directors,
W.
Moorhead Vermilye
President
and CEO
March
27,
2006
APPENDIX
A
SHORE
BANCSHARES, INC.
2006
STOCK AND INCENTIVE COMPENSATION PLAN
ARTICLE
I
Establishment,
Purpose and Duration
1.1
Establishment
of the Plan
.
Shore
Bancshares, Inc. (hereinafter referred to as the “Company”), a Maryland
corporation, hereby establishes an incentive compensation plan to be known
as
the “2006 Stock and Incentive Compensation Plan” (hereinafter referred to as the
“Plan”), as set forth in this document. Unless otherwise defined herein, all
capitalized terms shall have the meanings set forth in Section 2.1 herein.
The
Plan permits the grant of Incentive Stock Options, Non-Qualified Stock
Options
(including Reload Options), Stock Appreciation Rights, Restricted Stock,
Restricted Stock Units and/or Performance Units to Key Associates and
Directors.
The
Plan
was adopted by the Board of Directors of the Company on March 13, 2006,
to
become effective (the “Effective Date”) as of April 26, 2006 if approved by the
Company’s shareholders at the 2006 Annual Meeting of Shareholders in accordance
with applicable laws and any applicable rules of any national securities
exchange or system on which the Shares are then listed or reported. Except
for
Performance Unit Awards payable only in cash (with payment also contingent
on
shareholder approval of the 2006 Plan), Awards may not be granted under
the Plan
prior to shareholder approval of the Plan.
1.2
Purpose
of the Plan
.
The
purpose of the Plan is to promote the success of the Company and its
Subsidiaries by providing incentives to Key Associates and Directors that
will
promote the identification of their personal interest with the long term
financial success of the Company and with growth in shareholder value.
The Plan
is designed to provide flexibility to the Company in its ability to motivate,
attract, and retain the services of Key Associates and Directors upon whose
judgment, interest, and special effort the successful conduct of its operation
is largely dependent.
In
addition, the plan permits the grant of a Reload Option in order to restore
an
Option opportunity on the number of Shares surrendered to exercise an Option
to
encourage a Participant to maximize his ownership interest in the
Company.
1.3
Duration
of the Plan
.
The
Plan shall commence on the Effective Date, as described in Section 1.1
herein,
and shall remain in effect, subject to the right of the Board of Directors
to
terminate the Plan at any time pursuant to Article XIII herein, until April
26,
2016, at which time it shall terminate except with respect to Awards (including
any outstanding Reload Option obligation) made prior to, and outstanding
on,
that date which shall remain valid in accordance with their terms.
ARTICLE
II
Definitions
2.1
Definitions
.
Except
as otherwise defined in the Plan, the following terms shall have the meanings
set forth below:
|
(a)
|
“Agreement”
means a written agreement implementing the grant of each Award
signed by
an authorized officer of the Company and by the
Participant.
|
|
(b)
|
“Award”
means, in
dividually
or collectively, a grant under the Plan of Incentive Stock Options,
Non-Qualified Stock Options (including Reload Options), Stock
Appreciation
Rights, Restricted Stock, Restricted Stock Units and/or Performance
Units.
|
|
(c)
|
“Award
Date” or “Grant Date” means the date on which an Award is made by the
Committee under the Plan.
|
|
(d)
|
“Board”
or “Board of Directors” means the Board of Directors of the
Company.
|
|
(e)
|
“Change
in Control” shall be deemed to have occurred if the conditions set forth
in any one of the following p
aragraphs
shall have been satisfied:
|
|
(i)
|
any
one person, or more than one person acting as a group, acquires
ownership
of securities of the Company that, together with securities held
by such
person or group, constitutes more than 50 percent of the total
fair market
value or total voting power of the securities of the Company;
|
|
(ii)
|
either
(a) any one person, or more than one person acting as a group,
acquires
(or has acquired during the 12-month period ending on the date
of the most
recent acquisition by such person or persons) ownership of securities
of
the Company possessing 35 percent or more of the total voting
power of the
securities of the Company; or (b) a majority of members of the
Board is
replaced during any 12-month period by directors whose appointment
or
election is not endorsed by a majority of the members of the
Board prior
to the date of the appointment or election; or
|
|
(iii)
|
any
one person, or more than one person acting as a group, acquires
(or has
acquired during the 12-month period ending on the date of the
most recent
acquisition by such person or persons) assets from the Company
that have a
total gross fair market value equal to or more than 40 percent
of the
total gross fair market value of all of the assets of the Company
immediately prior to such acquisition or acquisitions. For this
purpose,
gross fair market value means the value of the assets of the
Company, or
the value of the assets being disposed of, determined without
regard to
any liabilities associated with such assets.
|
Notwithstanding
the foregoing, ownership or control of the Company’s voting stock, individually
or collectively, by the Company’s bank subsidiaries (the “Banks”) or any benefit
plan sponsored by the Company or the Banks shall not constitute a Change
in
Control. For purposes of this paragraph only, the term “person” refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization of any
other
form of entity not specifically listed herein.
|
(f)
|
“Code”
means the Internal Revenue Code of 1986, as amended from time
to
time.
|
|
(g)
|
“Committee”
means a committee of the Board consisting of not less than two
directors,
which shall be appointed to administer the Plan pursuant to Article
III
hereof, all of the members of which shall be “non-employee directors” as
defined in Rule 16b-3, as amended, under the Exchange Act, or
any similar
or successor rule, and “outside directors” within the meaning of Section
162(m)(4)(C)(i) of the Code. Unless otherwise determined by the
Board, the
Compensation Committee of the Board, or any successor committee
responsible for executive compensation, shall constitute the
Committee.
|
|
(h)
|
“Company”
means Shore Bancshares, Inc., or any successor thereto as provided
in
Article XV herein.
|
|
(i)
|
“Director”
means a director of the Company or any of its Subsidiaries, which
term
shall not include an advisory or honorary
director.
|
|
(j)
|
“Exchange
Act” means the Securities Exchange Act of 1934, as amended from time
to
time.
|
|
(k)
|
“Fair
Market Value” of a Share as of any particular date shall be the mean
between the high and low sales price of a Share on the trading
day
immediately preceding such date, as reported on any established
securities
exchange or national market system on which the Shares are then
listed or
admitted to trading (or the closing bid, if no sales were reported),
or,
if not so reported, the fair market value as determined pursuant
to a
reasonable method adopted by the Committee in good faith for
such purpose.
|
|
(l)
|
“Incentive
Stock Option” or “ISO” means an option to purchase Shares, granted under
Article VI herein, which is designated as an incentive stock
option and is
intended to meet the requirements of Section 422 of the
Code.
|
|
(m)
|
“Key
Associate” means an officer, employee, or consultant of the Company or of
its Subsidiaries (including any corporation which becomes a Subsidiary
after the adoption of the Plan by the Board) who, in the opinion
of the
Committee, can contribute significantly to the growth and profitability
of, or perform services of major importance to, the Company and
its
Subsidiaries. The term includes a Director who is also an officer
or
employee of the Company or its Subsidiaries.
|
|
(n)
|
“Non-Qualified
Stock Option” or “NQSO” means an option to purchase Shares, granted under
Article VI herein, which is not intended to be an Incentive Stock
Option.
|
|
(o)
|
“Option”
means an Incentive Stock Option or a Non-Qualified Stock
Option.
|
|
(p)
|
“Option
Price” means the price at which each Share subject to an Option may
be
purchased from the Company upon exercise of the
Option.
|
|
(q)
|
“Participant”
means a Key Associate or a Director who has been granted an Award
under
the Plan and whose Award remains
outstanding.
|
|
(r)
|
“Performance-Based
Compensation Award” means any Award for which exercise, full enjoyment or
receipt thereof by the Participant is contingent on satisfaction
or
achievement of the Performance Goal applicable thereto. If a
Performance-Based Compensation Award is intended to be “performance-based
compensation” within the meaning of Section 162(m)(4C) of the Code, the
grant of the Award, the establishment of the Performance Goal,
the making
of any modifications or adjustments and the determination of
satisfaction
or achievement of the Performance Goal shall be made during the
period or
periods required under and in conformity with the requirements
of Section
162(m) of the Code therefor. The terms and conditions of each
Performance-Based Compensation Award, including the Performance
Goal and
Performance Period, shall be set forth in an Agreement or in
a subplan of
the Plan which is incorporated by reference into an Agreement.
|
|
(s)
|
“Performance
Goal” means one or more performance measures or goals set by the Committee
in its discretion for each grant of a Performance-Based Compensation
Award. The extent to which such performance measures or goals
are met will
determine the amount or value of the Performance-Based Compensation
Award
to which a Participant is entitled to exercise, receive or retain.
Performance Goals may be particular to a Participant, may relate
to the
performance of the Subsidiary, division, strategic business unit
or line
of business which employs him, or may be based on the performance
of the
Company generally. Performance Goals may be based on Stock value
or
increases therein, earnings per share or earnings per share growth,
net
earnings, earnings or earnings growth (before or after one or
more of
taxes, interest, depreciation and/or amortization), operating
profit,
operating cash flow, operating or other expenses, operating efficiency,
return on equity, assets, capital or investment, sales or revenues
or
growth thereof, deposits, loan and/or equity levels or growth
thereof,
working capital targets or cost control measures, regulatory
compliance,
gross, operating or other margins, efficiency ratio (as generally
recognized and used for bank financial reporting and analysis),
interest
income, non-interest income, credit quality, net charge-offs
and/or
non-performing assets (excluding such loans or classes of loans
as may be
designated for exclusion), productivity, customer satisfaction,
satisfactory internal or external audits, improvement of financial
ratings, achievement of balance sheet or income statement objectives,
quality measures, and any component or components of the foregoing
(including, without limitation, determination thereof with or
without the
effect of discontinued operations and dispositions of business
segments,
non-recurring items, material extraordinary items that are both
unusual
and infrequent, special charges, and/or accounting changes),
or
implementation, management or completion of critical projects
or
processes. Performance Goals may include a threshold level of
performance
below which no payment or vesting may occur, levels of performance
at
which specified payments or specified vesting will occur, and
a maximum
level of performance above which no additional payment or vesting
will
occur. Performance Goals may be absolute in their terms or measured
against or in relationship to a market index, a group of other
companies
comparably, similarly or otherwise situated, or a combination
thereof. The
Committee shall determine the Performance Period during which
the
Performance Goal must be met; and attainment of Performance Goals
shall be
subject to certification by the Committee. Each of the Performance
Goals
shall be determined, where applicable and except as provided
above, in
accordance with generally accepted accounting
principles.
|
|
(t)
|
“Performance
Period” means the time period during which the Performance Goal must
be
met in connection with a Performance-Based Compensation Award.
Such time
period shall be set by the
Committee.
|
|
(u)
|
“Performance
Unit” means an Award, designated as a performance unit, granted to
a
Participant pursuant to Article X herein and valued as a fixed
dollar
amount.
|
|
(v)
|
“Period
of Restriction” means the period during which the transfer of Shares of
Restricted Stock is restricted, pursuant to Article VIII
herein.
|
|
(w)
|
“Plan”
means the Shore Bancshares, Inc. 2006 Stock and Incentive Compensation
Plan, as herein described and as hereafter from time to time
amended.
|
|
(x)
|
“Related
Option” means an Option with respect to which a Stock Appreciation Right
has been granted.
|
|
(y)
|
“Reload
Option” means a Non-Qualified Stock Option granted pursuant to Section
6.9
in the event the Participant exercises all or a part of an Option
by
paying the Option Price pursuant to Section 6.6 with Shares to
restore an
Option opportunity on the number of Shares surrendered to exercise
an
Option.
|
|
(z)
|
“Restricted
Stock” means an Award of Shares granted to a Participant pursuant to
Article VIII herein which is subject to restrictions and forfeiture
until
the designated conditions for the lapse of the restrictions are
satisfied.
|
|
(aa)
|
“Restricted
Stock Unit” or “RSU” means an Award, designated as a Restricted Stock
Unit, granted to a Participant pursuant to Article IX herein
and valued by
reference to Shares, which is subject to restrictions and forfeiture
until
the designated condition for the lapse of the restrictions are
satisfied.
|
|
(bb)
|
“Share”
means a share of Stock.
|
|
(cc)
|
“Stock”
means the common stock of the
Company.
|
|
(dd)
|
“Stock
Appreciation Right” or “SAR” means an Award, designated as a stock
appreciation right, granted to a Participant pursuant to Article
VII
herein.
|
|
(ee)
|
“Subsidiary”
means any subsidiary corporation of the Company within the meaning
of
Se
ction
424(f)
of
the Code.
|
ARTICLE
III
Administration
3.1
Administration
of the Plan by the Committee.
The
Plan
shall be administered by the Committee which shall have all powers necessary
or
desirable for such administration. The express grant in the Plan of any
specific
power to the Committee shall not be construed as limiting any power or
authority
of the Committee. In addition to any other powers and, subject to the provisions
of the Plan, the Committee shall have the following specific powers: (i)
to
determine the terms and conditions upon which the Awards may be made and
exercised; (ii) to determine all terms and conditions of each Agreement,
which
need not be identical; (iii) to construe and interpret the Agreements and
the
Plan; (iv) to establish, amend or waive rules or regulations for the Plan’s
administration; (v) to accelerate the exercisability of any Award, the
end of a
Performance Period or termination of any Period of Restriction or other
restrictions imposed under the Plan; and (vi) to make all other determinations
and take all other actions necessary or advisable for the administration
of the
Plan.
The
Chairman of the Committee and such other directors and officers of the
Company
as shall be designated by the Committee are hereby authorized to execute
Agreements on behalf of the Company and to cause them to be delivered to
the
recipients of Awards.
For
purposes of determining the applicability of Section 422 of the Code (relating
to Incentive Stock Options), or in the event that the terms of any Award
provide
that it may be exercised only during employment or service or within a
specified
period of time after termination of employment or service, the Committee
may
decide to what extent leaves of absence for governmental or military service,
illness, temporary disability, or other reasons shall not be deemed
interruptions of employment or service or continuous employment or service.
Subject
to limitations under applicable law, the Committee is authorized in its
discretion to issue Awards and/or accept notices, elections, consents and/or
other forms or communications by Participants by electronic or similar
means,
including, without limitation, transmissions through e-mail, voice mail,
recorded messages on electronic telephone systems, and other permissible
methods, on such basis and for such purposes as it determines from time
to time.
A
majority of the entire Committee shall constitute a quorum and the action
of a
majority of the members present at any meeting at which a quorum is present
(in
person or as otherwise permitted by applicable law), or acts approved in
writing
by a majority of the Committee without a meeting, shall be deemed the action
of
the Committee.
3.2
Selection
of Participants.
The
Committee shall have the authority to grant Awards under the Plan, from
time to
time, to such Key Associates and/or Directors as may be selected by it.
Each
Award shall be evidenced by an Agreement.
3.3
Decisions
Binding.
All
determinations and decisions made by the Board or the Committee pursuant
to the
provisions of the Plan shall be final, conclusive and binding.
3.4
Requirements
of Rule 16b-3 and Section 162(m) of the Code.
Notwithstanding
any other provision of the Plan, the Board or the Committee may impose
such
conditions on any Award, and amend the Plan in any such respects, as may
be
required to satisfy the requirements of Rule 16b-3, as amended (or any
successor
or similar rule), under the Exchange Act.
Any
provision of the Plan to the contrary notwithstanding, and except to the
extent
that the Committee determines otherwise: (i) transactions by and with respect
to
officers and directors of the Company who are subject to Section 16(b)
of the
Exchange Act (hereafter, “Section 16 Persons”) shall comply with any applicable
conditions of SEC Rule 16b-3; (ii) transactions with respect to persons
whose
remuneration is subject to the provisions of Section) 162(m) of the Code
shall
conform to the requirements of Section 162(m)(4)(C) of the Code; and (iii)
every
provision of the Plan shall be administered, interpreted, and construed
to carry
out the foregoing provisions of this sentence.
Notwithstanding
any provision of the Plan to the contrary, the Plan is intended to give
the
Committee the authority to grant Awards that qualify as performance-based
compensation under Section 162(m)(4)(C) of the Code as well as Awards that
do
not so qualify. Every provision of the Plan shall be administered, interpreted,
and construed to carry out such intention, and any provision that cannot
be so
administered, interpreted. and construed shall to that extent be disregarded;
and any provision of the Plan that would prevent an Award that the Committee
intends to qualify as performance-based compensation under Section 162(m)(4)(C)
of the Code from so qualifying shall be administered, interpreted, and
construed
to carry out such intention, and any provision that cannot be so administered,
interpreted, and construed shall to that extent be disregarded.
3.5
Indemnification
of Committee.
In
addition to such other rights of indemnification as they may have as directors
or as members of the Committee, the members of the Committee shall be
indemnified by the Company against reasonable expenses, including attorneys’
fees actually and reasonably incurred in connection with the defense of
any
action, suit or proceeding, or in connection with any appeal therein, to
which
they or any of them may be a party by reason of any action taken or failure
to
act under or in connection with the Plan or any Award granted or made hereunder,
and against all amounts reasonably paid by them in settlement thereof or
paid by
them in satisfaction of a judgment in any such action, suit or proceeding,
if
such members acted in good faith and in a manner which they believed to
be in,
and not opposed to, the best interests of the Company and its
Subsidiaries.
3.6
Compliance
with Code Section 409A
.
Notwithstanding any provision of this Plan or of an Agreement to the contrary,
to the extent applicable, it is intended that this Plan and Awards granted
hereunder comply with the requirements of Section 409A of the Code and
any
related regulations or other guidance promulgated with respect to such
Section
by the U.S. Department of the Treasury or the Internal Revenue Service
(“Section
409A”), and the Board and the Committee shall administer the Plan in accordance
with such intention. Any provision of this Plan or of an Agreement that
would
cause the Plan or an Award granted hereunder to fail to satisfy any requirement
of Section 409A shall have no force or effect until amended to comply with
Section 409A, which amendment may be retroactive to the extent permitted
by
Section 409A.
ARTICLE
IV
Shares
Subject to the Plan
4.1
Number
of Shares.
Subject
to adjustment as provided in Section 4.4 herein, the maximum aggregate
number of
Shares that may be issued pursuant to Awards made under the Plan shall
not
exceed the sum of (i) 400,000 plus (ii) that number of Shares represented
by
options under the 1998 Stock Option Plan which expires or is otherwise
terminated or forfeited at any time after the Effective Date of the Plan.
Except
as provided in Sections 4.2 and 4.3 herein, the issuance of Shares in connection
with the exercise of, or as other payment for Awards, under the Plan shall
reduce the number of Shares available for future Awards under the Plan.
Shares
that may be issued under the Plan may either be authorized but unissued
Shares
or Shares held in a grantor trust created by the Company.
The
Company, during the term of the Plan and thereafter during the term of
any
outstanding Award which may be settled in Shares, shall reserve and keep
available a number of Shares sufficient to satisfy the requirements of
the Plan.
4.2
Lapsed
Awards or Forfeited Shares.
If
any
Award granted under the Plan terminates, expires, or lapses for any reason
other
than by virtue of exercise of the Award, or if Shares issued pursuant to
Awards
are forfeited, any Shares subject to such Award again shall be available
for the
grant of an Award under the Plan, subject to Section 7.3.
4.3
Delivery
of Shares as Payment.
In the
event a Participant pays the Option Price for Shares pursuant to the exercise
of
an Option with previously acquired Shares, the number of Shares available
for
future Awards under the Plan shall be reduced only by the net number of
new
Shares issued upon the exercise of the Option. In addition, in determining
the
number of Shares available for Awards, if Shares have been delivered or
exchanged by a Participant as full or partial payment to the Company for
payment
of withholding taxes, or if the number of Shares otherwise deliverable
has been
reduced for payment of withholding taxes, the number of Shares exchanged
as
payment in connection with the withholding tax or so reduced shall again
be
available for purpose of Awards under the Plan.
4.4
Capital
Adjustments.
In
the
event that the outstanding Shares shall be increased or decreased or changed
into or exchanged for a different number or kind of shares of stock or
other
securities of the Company or of another corporation, effected without the
receipt of consideration by the Company, through reorganization, merger
or
consolidation, recapitalization, reclassification, stock split, reverse
stock
split, split-up, combination or exchange of Shares or declaration of any
dividends payable in Shares, or other distributions to common shareholders
other
than regular cash dividends, the number or kind of Shares or other securities
issued or reserved for issuance pursuant to the Plan and subject to outstanding
Awards, as well as the exercise price, grant price or purchase price relating
to
any Award shall be adjusted as may be deemed appropriate by the Committee
under
the Plan. The decision of the Committee as to the amount and timing of
any such
adjustment shall be conclusive.
ARTICLE
V
Eligibility
The
Committee shall determine and designate from time to time those Key Associates
and Directors who are eligible to participate in the Plan.
Multiple
grants of Awards under the Plan may be made in any calendar year to a
Participant, provided, however, that Awards of Options and SARs (disregarding
any Tandem SARs as defined in Section 7.1) granted in any calendar year
to any
one Participant shall not provide for the issuance of, and/or cash payment
with
respect to, more than 50,000 Shares in the aggregate, that Awards of Restricted
Stock and Restricted Stock Units granted in any calendar year to any one
Participant shall not provide for the issuance of, and/or cash payment
with
respect to, more than 30,000 Shares in the aggregate, and that Performance
Units
granted in any calendar year to any one Participant shall not provide for
the
payment of more than $1,000,000 in the aggregate.
ARTICLE
VI
Stock
Options
6.1
Grant
of Options.
Subject
to the terms and conditions of the Plan, Options may be granted to Key
Associates and Directors at any time and from time to time as shall be
determined by the Committee. The Committee shall have complete discretion
in
determining the number of Shares subject to Options granted to each Participant,
provided, however, that (i) non-employee Directors may be granted Non-Qualified
Stock Options only, (ii) no Participant may be granted Options in any calendar
year for more than 50,000 Shares (with Options cancelled in the same year
as
granted counted against this limit and with Options for which the Option
Price
is reduced treated as cancelled and reissued for this annual limit) and
(iii)
the aggregate Fair Market Value (determined at the time the Award is made)
of
Shares with respect to which any Participant may first exercise ISOs (granted
under the Plan and all other equity compensation plans of the Company)
during
any calendar year may not exceed $100,000 or such amount as shall be specified
in Section 422 of the Code and rules and regulations thereunder. For purposes
of
this Section, ISOs shall be taken into account in the order in which they
were
granted.
6.2
Option
Agreement.
Each
Option grant shall be evidenced by an Agreement that shall specify: the
type of
Option granted, the Option Price (as hereinafter defined), the duration
of the
Option, the number of Shares to which the Option pertains, any conditions
imposed upon the exercisability of Options in the event of retirement,
death,
disability or other termination of employment or service, and such other
provisions as the Committee shall determine. The Agreement shall specify
whether
the Option is intended to be an Incentive Stock Option within the meaning
of
Section 422 of the Code, or
a
Non-Qualified Stock Option not intended to be within the provisions of
Section
422 of the Code, provided, however, that if an Option is intended to be
an
Incentive Stock Option but fails to be such for
any
reason, it shall continue in full force and effect as a Non-Qualified Stock
Option. If an Option is intended to be a Performance-Based Compensation
Award,
the terms and conditions thereof, including the Performance Goal and Performance
Period, shall be set forth in an Agreement or in a subplan of the Plan
which is
incorporated by reference into an Agreement and the requirements to satisfy
or
achieve the Performance Goal as so provided therein shall be considered
to be
restrictions under the Plan.
6.3
Option
Price.
The
Option Price shall be determined by the Committee subject to the limitations
stated in this Section. The Option Price shall not be less than 100% of
the Fair
Market Value of a Share on the Grant Date. In addition, an ISO granted
to a Key
Associate (including any Director who is a Key Associate) who, at the time
of
grant, owns (within the meaning of Section 424(d) of the Code) securities
possessing more than 10% of the total combined voting power of all classes
of
securities of the Company, shall have an Option Price which is at least
equal to
110% of the Fair Market Value of a Share on the Grant Date.
6.4
Duration
of Options.
Each
Option shall expire at such time as the Committee shall determine, provided,
however, that no Option shall be exercisable after the expiration of ten
years
from its Award Date. In addition, an ISO granted to a Key Associate (including
any Key Associate who is a Director) who, at the time of grant, owns (within
the
meaning of Section 424(d) of the Code) securities possessing more than
10% of
the total combined voting power of all classes of securities of the Company,
shall not be exercisable after the expiration of five years from its Award
Date.
6.5
Exercisability.
Options
granted under the Plan shall be exercisable at such times and be subject
to such
restrictions and conditions as the Committee shall determine, which need
not be
the same for all Participants.
6.6
Method
of Exercise.
Options
shall be exercised by the delivery of a written notice to the Company in
the
form prescribed by the Committee setting forth the number of Shares with
respect
to which the Option is to be exercised, accompanied by full payment for
the
Shares and payment of (or an arrangement satisfactory to the Company for
the
Participant to pay) any tax withholding required in connection with the
Option
exercise. The Option Price shall be payable to the Company in full either
in
cash, by delivery of Shares having a Fair Market Value at the time of exercise
equal to the Option Price, or by a combination of the foregoing.
To
the
extent permitted under the applicable laws and regulations, at the request
of
the Participant and with the consent of the Committee, the Company agrees
to
cooperate in a “cashless exercise” of an Option. The cashless exercise shall be
effected by the Participant delivering to a securities broker instructions
to
exercise all or part of the Option, including instructions to sell a sufficient
number of Shares to cover the costs and expenses associated therewith.
As
soon
as practicable, after receipt of written notice and payment of the Option
Price
and completion of payment of (or an arrangement satisfactory to the Company
for
the Participant to pay) any tax withholding required in connection with
the
Option exercise, the Company shall deliver to the Participant, stock
certificates in an appropriate amount based upon the number of Options
exercised, issued in the Participant’s name.
6.7
Restrictions
on
Shares.
The
Committee may impose such restrictions on any Shares acquired pursuant
to the
exercise of an Option under the Plan as it may deem advisable, including,
without limitation, restrictions under applicable federal securities laws,
under
the requirements of The NASDAQ Stock Market, Inc. or any exchange upon
which
such Shares are then listed or traded and under any state securities laws
applicable to such Shares. The Committee may specify in an Agreement that
Shares
delivered on exercise of an Option are Restricted Stock or Shares subject
to
forfeiture and cancellation or a buyback right in the event that any term
or
condition specified in the Agreement is not satisfied.
6.8
Nontransferability
of Options.
No
Option
granted under the Plan may be sold, transferred, pledged, assigned, or
otherwise
alienated or hypothecated, other than by will or by the laws of descent
and
distribution. Further, all Options granted to a Participant under the Plan
shall
be exercisable during his lifetime only by such Participant or his guardian
or
legal representative.
Notwithstanding
the foregoing or any other provision of the Plan to the contrary, to the
extent
permissible under Rule 16b-3 of the Exchange Act, a Participant who is
granted
Non-Qualified Stock Options pursuant to the Plan may transfer such Non-Qualified
Stock Options to his or her spouse, lineal ascendants, lineal descendants,
or to
trusts for their benefit, provided that the Non-Qualified Stock Options
so
transferred may not again be transferred other than to the Participant
originally receiving the grant of Non-Qualified Stock Options or to an
individual or trust to whom such Participant could have transferred
Non-Qualified Stock Options pursuant to this Section 6.8. Non-Qualified
Stock
Options which are transferred pursuant to this Section 6.8 shall be exercisable
by the transferee subject to the same terms and conditions as would have
applied
to such Non-Qualified Stock Options in the hands of the Participant originally
receiving the grant of such Non-Qualified Stock Options.
6.9
Reload
Options.
The
Committee shall have the authority to specify at the Award Date for an
Option
that a participant receiving the Option shall be granted the right to a
further
Non-Qualified Stock Option (a “Reload Option”) in the event the Participant
exercises all or a part of the Option, including a Reload Option (an “Original
Option”), by surrendering in accordance with Section 6.6 hereof already owned
Shares in full or partial payment of the Option Price under the Original
Option.
Each Reload Option shall be granted on the date of exercise of the Original
Option, shall cover a number of Shares surrendered in payment of the Option
Price under such Original Option, shall have an Option Price equal to the
Fair
Market Value on the Award Date of such Reload Option, shall expire on the
stated
expiration date of the Original Option and shall be subject to such other
terms
and conditions as the Committee may determine.
6.10
Notification
of Disqualifying Disposition of ISO Shares
.
In the
event of a disposition of Shares received upon exercise of an ISO where
the
disposition occurs within two years from the date the ISO was granted or
one
year from the receipt of the underlying Shares (a “disqualifying disposition”),
the Participant shall notify the Company’s Secretary in writing as to the date
of such disposition, the sale price (if any), and the number of Shares
involved.
ARTICLE
VII
Stock
Appreciation Rights
7.1
Grant
of Stock Appreciation Rights.
Subject
to the terms and conditions of the Plan, Stock Appreciation Rights may
be
granted to Key Associates and Directors. at the discretion of the Committee,
in
any of the following forms, provided, however, that no Participant may
be
granted more than 50,000 SARs in any calendar year (with SARs cancelled
in the
same year as granted counted against this limit and with SARs for which
the base
amount on which the SAR payment at exercise is calculated is reduced treated
as
cancelled and reissued for this annual limit):
|
(a)
|
In
connection with the grant, and exercisable in lieu of, Options
(“Tandem
SARs”);
|
|
(b)
|
In
connection with and exercisable in addition to the grant of Options
(“Additive SARs”);
|
|
(c)
|
Independent
of grant of the Options (“Freestanding SARs”);
or
|
|
(d)
|
In
any combination of the foregoing.
|
7.2
SAR
Agreement.
Each
SAR
grant shall be evidenced by an Agreement that shall specify its
type
of
SAR and its terms and conditions. If an SAR grant is intended to be a
Performance-Based Compensation Award, the Performance Goal and Performance
Period shall be set forth in an Agreement or in a subplan of the Plan which
is
incorporated by reference into an Agreement and the requirements to satisfy
or
achieve the Performance Goal as so provided therein shall be considered
to be
restrictions under the Plan.
7.3
Exercise
of Tandem SARs.
Tandem
SARs may be exercised with respect to all or part of the Shares subject
to the
Related Option. The exercise of Tandem SARs shall cause a reduction in
the
number of Shares subject to the Related Option equal to the number of Shares
with respect to which the Tandem SAR is exercised. Conversely, the exercise,
in
whole or part, of a Related Option, shall cause a reduction in the number
of
Shares subject to the Related Option equal to the number of Shares with
respect
to which the Related Option is exercised. Shares with respect to which
the
Tandem SAR shall have been exercised may not be subject again to an Award
under
the Plan.
Notwithstanding
any other provision of the Plan to the contrary, a Tandem SAR shall expire
no
later than the expiration of the Related Option, shall be transferable
only when
and under the same conditions as the Related Option and shall be exercisable
only when the Related Option is eligible to be exercised. In addition,
if the
Related Option is an ISO, a Tandem SAR shall be exercised for no more than
100%
of the difference between the Option Price of the Related Option and the
Fair
Market Value of Shares subject to the Related Option at the time the Tandem
SAR
is exercised.
7.4
Ex
ercise
of Additive SARs.
Additive
SARs shall be deemed to be exercised upon, and in addition to, the exercise
of
the Related Options. The deemed exercise of Additive SARs shall not reduce
the
number of Shares with respect to which the Related Options remains unexercised.
7.5
Exercise
of Freestanding SARs.
Freestanding
SARs may be exercised upon whatever terms and conditions the Committee,
in its
sole discretion imposes upon such SARs.
7.6
Other
Conditions Applicable to SAR.
In
no
event shall the term of any SAR granted under the Plan exceed ten years
from the
Grant Date. A SAR may be exercised only when the Fair Market Value of a
Share
exceeds either (i) the Fair Market Value per Share on the Grant Date in
the case
of a Freestanding
S
AR
or
(ii) the Option Price of the Related Option in the case of either a Tandem
or
Additive SAR. A SAR shall be exercised by delivery to the Committee of
a notice
of exercise in the form prescribed by the Committee.
7.7
Payment
after Exercise of SARs.
Subject
to the provisions of the Agreement, upon the exercise of a SAR, the Participant
is entitled to receive, without any payment to the Company (other than
required
tax withholding amounts), an amount equal (the “SAR Value”) to the product of
multiplying (i) the number of Shares with respect to which the SAR is exercised
by (ii) an amount equal to the excess of (A) the Fair Market Value per
Share on
the date of exercise of the SAR over (B) either (x) the Fair Market Value
per
Share on the Award Date in the case of a Freestanding SAR or (y) the Option
Price of the Related Option in the case of either a Tandem or Additive
SAR. The
Agreement may provide for payment of the SAR Value at the time of exercise
or,
on an elective or non--elective basis, for payment of the SAR Value at
a later
date, adjusted (if so provided in the Agreement) from the date of exercise
based
on an interest, dividend equivalent, earnings, or other basis (including
deemed
investment of the SAR Value in Shares) set out in the Agreement (the “adjusted
SAR Value”). The Committee is expressly authorized to grant SARs which are
deferred compensation covered by Section 409A, as well as SARs which are
not
deferred compensation covered by Section 409A.
Payment
of the SAR Value or adjusted SAR Value to the Participant shall be made
in
Shares, valued at the Fair Market Value on the date of exercise in the
case of
an immediate payment after exercise or at the Fair Market Value on the
date of
settlement in the event of an elective or non-elective delayed payment,
in cash
or a combination thereof as determined by the Committee, either at the
time of
the Award or thereafter, and as provided In the Agreement.
7.8
Nontransferability
of SARs.
No
SAR
granted under the Plan, and no right to receive payment in connection therewith,
may be sold, transferred. pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, all SARs, and rights in connection therewith, granted to a Participant
under the Plan shall be exercisable during his lifetime only by such Participant
or his guardian or legal representative.
ARTICLE
VIII
Restricted
Stock
8.1
Grant
of Restricted Stock.
Subject
to the terms and conditions of the Plan, the Committee, at any time and
from
time to time, may grant Shares of Restricted Stock under the Plan to such
Key
Associates and Directors and in such amounts as it shall determine, provided,
however, that no Participant may be granted more than 30,000 Shares of
Restricted Stock in any calendar year. Participants receiving Restricted
Stock
Awards are not required to pay the Company therefor (except for applicable
tax
withholding) other than the rendering of services. If determined by the
Committee, custody of Shares of Restricted Stock may be retained
by
the
Company until the termination of the Period of Restriction pertaining thereto.
8.2
Restricted
Stock Agreement.
Each
Restricted Stock Award shall be evidenced by an Agreement that shall specify,
the Period of Restriction, the number of Shares of Restricted Stock granted,
and
the applicable restrictions and such other provisions as the Committee
shall
determine. If an Award of Restricted Stock is intended to be a Performance-Based
Compensation Award, the terms and conditions of such Award, including the
Performance Goal and Performance Period, shall be set forth in an Agreement
or
in a subplan of the Plan which is incorporated by reference into an Agreement
and the requirements to satisfy or achieve the Performance Goal as so provided
therein shall be considered to be restrictions under the Plan.
8.3
Nontransferability
of Restricted Stock.
Except
as
provided in this Article VIII and subject to the limitation in the next
sentence, the Shares of Restricted Stock granted hereunder may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated
until the
termination of the applicable Period of Restriction or upon the earlier
satisfaction of other conditions as specified by the Committee in its sole
discretion and set forth in the Agreement. All rights with respect to the
Restricted Stock granted to a Participant under the Plan shall be exercisable
during his lifetime only by such Participant or his guardian or legal
representative.
8.4
Other
Restrictions.
The
Committee may impose such other restrictions on any Shares of Restricted
Stock
granted pursuant to the Plan as it may deem advisable including, without
limitation, restrictions under applicable Federal or state securities laws,
and
may legend the certificates representing Restricted Stock to give appropriate
notice of such restrictions.
8.5
Certificate
Legend.
In
addition to any legends placed on certificates pursuant to Section 8.4
herein
each certificate representing Shares of Restricted Stock granted pursuant
to the
Plan shall bear the following legend:
The
sale
or other transfer of the securities represented by this certificate, whether
voluntary, involuntary, or by operation of law, is subject to certain
restrictions on transfer set forth in the Shore Bancshares, Inc. 2006 Stock
and
Incentive Compensation Plan, in the rules and administrative procedures
adopted
pursuant to such Plan, and in an Agreement dated (date of grant). A copy
of the
Plan, such rules and procedures, and such Restricted Stock Agreement may
be
obtained from the Secretary of Shore Bancshares, Inc.
8.6
Removal
of Restrictions.
Except
as
otherwise provided in this Article, Shares of Restricted Stock covered
by each
Restricted Stock Award made under the Plan shall become freely transferable
by
the Participant after the last day of the Period of Restriction and, where
applicable, after a determination of the satisfaction or achievement on
any
applicable Performance Goal. Once the Shares are released from the restrictions,
the Participant shall be entitled to have the legend required by Section
8.5
herein removed from his or her stock certificate.
8.7
Voting
Rights.
During
the Period of Restriction, Participants holding Shares of Restricted Stock
granted hereunder may exercise full voting rights with respect to those
Shares.
8.8
Dividends
and Other Distributions.
Unless
otherwise provided in the Agreement, during the Period of Restriction,
Participants entitled to or holding Shares of Restricted Stock granted
hereunder
shall be entitled to receive all dividends and other distributions paid
with
respect to those Shares while they are so held. If any such dividends or
distributions are paid in Shares, the Shares shall be subject to the same
restrictions on transferability and the same rules for custody as the Shares
of
Restricted Stock with respect to which they were distributed.
8.9
Termination
of Employment or Service.
Unless
otherwise provided in the Agreement, in the event that a Participant terminates
his employment or service with the Company for any reason during the Period
of
Restriction, then any Shares of Restricted Stock still subject to restrictions
as of the date of such termination shall automatically be forfeited and
returned
to the Company. The Committee may provide for vesting of Restricted Stock
in
connection with the termination of a Participant's employment or service
on such
basis as it deems appropriate.
ARTICLE
IX
Restricted
Stock Units
9.1
Grant
of Restricted Stock Units.
Subject
to the terms and conditions of the Plan, the Committee, at any time and
from
time to time, may grant Restricted Stock Units under the Plan (with one
Unit
representing one Share) to such Key Associates and Directors and in such
amounts
as it shall determine, provided, however, that no Participant may be granted
more than 30,000 Restricted Stock Units in any calendar year. Participants
receiving Restricted Stock Unit Awards are not required to pay the Company
therefor (except for applicable tax withholding) other than the rendering
of
services.
9.2
Restricted
Stock Unit Agreement.
Each
Restricted Stock Unit Award shall be evidenced by an Agreement that shall
specify the Period of Restriction, the number of Restricted Stock Units
granted,
and the applicable restrictions and such other provisions as the Committee
shall
determine. If an Award of Restricted Stock Units is intended to be a
Performance-Based Compensation Award, the terms and conditions of such
Award,
including the Performance Goal and Performance Period, shall be set forth
in an
Agreement or in a subplan of the Plan which is incorporated by reference
into an
Agreement and the requirements to satisfy or achieve the Performance Goal
as so
provided therein shall be considered to be restrictions under the Plan.
Unless
otherwise provided in the Agreement, during the Period of Restriction,
Participants holding Restricted Stock Units shall have added to their rights
all
dividends and other distributions which would have been paid with respect
to the
Shares represented by those Restricted Stock Units if such Shares were
outstanding, and such deemed dividends or distributions shall be subject
to the
same restrictions, vesting and payment as the Restricted Stock Units to
which
they are attributable. Unless otherwise provided in the Agreement, during
the
Period of Restriction, any such deemed dividends and other distributions
shall
be deemed converted to additional Restricted Stock Units based on the Fair
Market Value of a Share on the date of payment or distribution of the deemed
dividend or distribution.
9.3
Payment
after Lapse of Restrictions.
Subject
to the provisions of the Agreement, upon the lapse of restrictions with
respect
to a Restricted Stock Unit, the Participant is entitled to receive, without
any
payment to the Company (other than required tax withholding amounts), an
amount
equal (the “RSU Value”) to the product of multiplying (i) the number of Shares
with respect to which the restrictions lapse by (ii) the Fair Market Value
per
Share on the date the restrictions lapse.
The
Agreement may provide for payment of the RSU Value at the time of exercise
or,
on an elective or non-elective basis, for payment of the RSU Value at a
later
date, adjusted (if so, provided in the Agreement) from the date of exercise
based on an interest, dividend equivalent, earnings, or other basis (including
deemed investment of the RSU Value in Shares) set out in the Agreement
(the
“adjusted RSU Value”). The Committee is expressly authorized to grant Restricted
Stock Units which are deferred compensation covered by Section 409A, as
well as
Restricted, Stock Units which are not deferred compensation covered by
Section
409A.
Payment
of the RSU Value or adjusted RSU Value to the Participant shall be made
in
Shares, valued at the Fair Market Value on the date the restrictions therefor
lapse in the case of an immediate payment after vesting or at the Fair
Market
Value on the date of settlement in the event of an elective or non-elective
delayed payment, in cash or a combination thereof as determined by the
Committee, either at the time of t
he
Award
or thereafter, and as provided in the Agreement.
9.4
Nontransferability
of Restricted Stock Units.
No
Restricted Stock Unit granted under the Plan, and no right to receive payment
in
connection therewith, may be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated, other than by will or by the laws of descent
and
distribution. Further, all Restricted Stock Units, and rights in connection
therewith, granted to a Participant under the Plan shall be exercisable
during
his lifetime only by such Participant or his guardian or legal representative.
9.5
Termination
of Employment or Service.
Unless
otherwise provided in the Agreement, in the event that a Participant terminates
his employment or service with the Company for any reason during the Period
of
Restriction, then any Restricted Stock Units still subject to restriction
as of
the date of such termination shall automatically be forfeited and returned
to
the Company. The Committee may provide for vesting of Restricted Stock
Units in
connection with the termination of a Participant's employment or service
on such
basis as it deems appropriate.
ARTICLE
X
Performance
Units
10.1
Grant
of Performance Units.
Subject
to the terms and conditions of the Plan, Performance Units may be granted
to Key
Associates and Directors at any time and from time to time as shall be
determined by the Committee, provided, however, that no Participant may
be
granted Performance Units with a dollar value in excess of $1,000,000 in
any
calendar year. Otherwise, the Committee shall have complete discretion
in
determining the number of Performance Units granted to each Participant.
Participants receiving such Awards are not required to pay the Company
therefor
(except for applicable tax withholding) other than the rendering of
services.
10.2
Performance
Unit Agreement.
Each
Performance Unit is intended to be a Performance-Based Compensation Award,
and
the terms and conditions of each such Award, including the Performance
Goal and
Performance Period (which may be equal to, less than or more than one year),
shall be set forth in an Agreement or in a subplan of the Plan which is
incorporated by reference into an Agreement. The Committee shall set the
Performance Goal in its discretion for each Participant who is granted
a
Performance Unit.
10.3
Settlement
of Performance Units.
After
a
Performance Period has ended, the holder of a Performance Unit shall be
entitled
to receive the value thereof based on the degree to which the Performance
Goals
and other conditions established by the Committee and set forth in the
Agreement
(or in a subplan of the Plan which is incorporated by reference into an
Agreement) have been satisfied.
10.4
Form
of Payment.
Payment
of the amount to which a Participant shall be entitled upon the settlement
of a
Performance Unit shall be made in cash, Shares or a combination thereof
as
determined by the Committee. Payment may be made in a lump sum or installments
as determined by the Committee.
10.5
Nontransferability
of Performance Units.
No
Performance Unit granted under the Plan may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, otherwise than by will
or by
the laws of descent and distribution. All rights with respect to Performance
Units granted to a Participant under the Plan shall be exercisable during
his
lifetime only by such Participant or his guardian or legal representative.
ARTICLE
XI
Change
in Control
In
the
event of a Change in Control of the Company, the Committee, as constituted
before such Change in Control, in its sole discretion may, as to any outstanding
Award, either at the time the Award is made or any time thereafter, take
any one
or more of the following actions: (i) provide for the acceleration of any
time
periods relating to the exercise or realization of any such Award so that
such
Award may be exercised or realized in full on or before a date initially
fixed
by the Committee; (ii) provide for the purchase or settlement of any such
Award
by the Company, upon a Participant's request, for an amount of cash equal
to the
amount which could have been obtained upon the exercise of such Award or
realization of such Participant's rights had such Award been currently
exercisable or payable; (iii) make such adjustment to any such Award then
outstanding as the Committee deems appropriate to reflect such Change in
Control; or (iv) cause any such Award then outstanding to be assumed, or
new
rights substituted therefor, by the acquiring or surviving corporation
in such
Change in Control.
ARTICLE
XII
Modification,
Extension and Renewal of Awards
Subject
to the terms and conditions and within the limitations of the Plan: (i)
the
Committee may modify, extend or renew outstanding Awards and may modify
the
terms of an outstanding Agreement, provided that the exercise price of
any Award
may not be lowered other than pursuant to Section 4.4 herein; and (ii)
the
Committee may accept the surrender of outstanding Awards (to the extent
not yet
exercised) granted under the Plan or outstanding awards granted under any
other
equity compensation plan of the Company and authorize the granting of new
Awards
pursuant to the Plan in substitution therefor so long as the new or substituted
awards do not specify a lower exercise price than the surrendered Awards,
and
otherwise the new Awards may be of a different type than the surrendered
Awards,
may specify a longer term than the surrendered Awards, may provide for
more
rapid vesting and exercisability than the surrendered Awards, and may contain
any other provisions that are authorized by the Plan. Notwithstanding the
foregoing, however, no modification of an Award, shall, without the consent
of
the Participant, adversely affect the rights or obligations of the Participant.
ARTICLE
XIII
Amendment,
Modification and Termination of the Plan
13.1
Amendment,
Modification and Termination.
At
any
time and from time to time, the Board may terminate, amend, or modify the
Plan.
Such amendment or modification may be without shareholder approval except
to the
extent that such approval is required by the Code, pursuant to the rules
under
Section 16 of the Exchange Act, by any national securities exchange or
system on
which the Shares are then traded, listed or reported, by any regulatory
body
having jurisdiction with respect thereto or under any other applicable
laws,
rules or regulations.
13.2
Awards
Previously Granted
. No termination, amendment or modification of the Plan
other than pursuant to Section 4.4 herein shall in any manner adversely
affect
any Award theretofore granted under the Plan, without the written consent
of the
Participant.
ARTICLE
XIV
Withholding
14.1
Tax
Withholding.
The
Company shall have the power and the right to deduct or withhold, or require
a
Participant to remit to the Company, an amount sufficient to satisfy Federal,
State and local taxes (including the Participant's FICA obligation) required
by
law to be withheld with respect to any grant, exercise, or payment made
under or
as a result of the Plan.
14.2
Withholding
of Shares.
With
respect to withholding required upon the exercise of Non-Qualified Stock
Options, or upon the lapse of restrictions on Restricted Stock, or upon
the
occurrence of any other taxable event with respect to any Award, Participants
may elect, subject to the approval of the Committee, or the Committee may
require Participants to satisfy the withholding requirement, in whole or
in
part, by having the Company withhold Shares having a Fair Market Value
equal to
the amount required to be withheld. The value of the Shares to be withheld
shall
be based on Fair Market Value of the Shares on the date that the amount
of tax
to be withheld is to be determined. All elections by Participants shall
be
irrevocable and be made in writing and in such manner as determined by
the
Committee in advance of the day that the transaction becomes taxable.
ARTICLE
XV
Successors
All
obligations of the Company under the Plan, with respect to Awards granted
hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the
business
and/or assets of the Company.
ARTICLE
XVI
General
16.1
Requirements
of Law.
The
granting of Awards and the issuance of Shares of Stock under the Plan shall
be
subject to all applicable laws, rules, and regulations, and to such approvals
by
any governmental agencies or self regulatory organizations as may be required.
16.2
Effect
of the Plan.
The
establishment of the Plan shall not confer upon any Key Associate or Director
any legal or equitable right against the Company, a Subsidiary or the Committee,
except as expressly provided in the Plan. The Plan does not constitute
an
inducement or consideration for the employment or service of any Key Associate
or Director, nor is it a contract between the Company or any of its Subsidiaries
and any Key Associate or Director. Participation in the Plan shall not
give any
Key Associate or Director any right to be retained in the service of the
Company
or any of its Subsidiaries. No Key Associate or Director who receives an
Award
shall have rights as a shareholder of the Company prior to the date Shares
are
issued to the Participant pursuant to the Plan.
16.3
Creditors.
The
interests of any Participant under the Plan or any Agreement are not subject
to
the claims of creditors and may not, in any way, be assigned, alienated
or
encumbered.
16.4
Governing
Law.
The
Plan,
and all Agreements hereunder, shall be governed, construed and administered
in
accordance with and governed by the laws of the State of Maryland and the
intention of the Company is that ISOs granted under the Plan qualify as
such
under Section 422 of the Code.
16.5
Severability.
In
the
event any provision of the Plan shall be held illegal or invalid for any
reason,
the illegality or invalidity shall not affect the remaining parts of the
Plan
and the Plan shall be construed and enforced as if the illegal or invalid
provision had not been included.
16.6
Unfunded
Status of Plan.
The
Plan
is intended to constitute an “unfunded” plan for incentive and deferred
compensation. With respect to any payments as to which a Participant has
a fixed
and vested interest but which are not yet made to a Participant by the
Company,
nothing contained herein shall give any such Participant any rights that
are
greater than those of a general unsecured creditor of the Company.
APPENDIX
B
Form
of Proxy
SHORE
BANCSHARES, INC.
PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The
undersigned stockholder of Shore Bancshares, Inc. (the “Company”) hereby
appoints W. Moorhead Vermilye and Neil R. LeCompte, or either of them,
the
lawful attorneys and proxies of the undersigned, with full power of
substitution, and hereby authorizes them to represent and to vote, as designated
below, all shares of common stock of the Company held by the undersigned
on
March 16, 2006 at the Annual Meeting of Stockholders called to convene
on
Wednesday, April 26, 2006, and any adjournment or postponement thereof,
for the
purposes identified on this proxy and with discretionary authority as to
any
other matters that may properly come before the Annual Meeting, including
substitute nominees if any of the named nominees for director should be
unavailable to serve for election in accordance with and as described in
the
Notice of Annual Meeting of Shareholders and Proxy Statement.
1.
ELECTION
OF DIRECTOR NOMINEES:
|
Class
III (Terms expire in 2009)
|
o
|
FOR
ALL NOMINEES
|
|
Lloyd
L. Beatty, Jr.
|
||
|
Paul
M. Bowman
|
o
|
WITHHOLD
AUTHORITY
|
|
W.
Edwin Kee, Jr.
|
FOR
ALL NOMINEES
|
|
|
Jerry
F. Pierson
|
||
|
W.
Moorhead Vermilye
|
o
|
FOR
ALL EXCEPT
(See
instruction below)
|
INSTRUCTION
:
To
withhold authority to vote for any individual nominee, mark “FOR ALL EXCEPT” and
strike a line through the nominee’s name in the list above.
The
Board of Directors recommends a vote “FOR ALL NOMINEES” in Proposal
1.
2.
APPROVAL
OF THE 2006 STOCK AND INCENTIVE COMPENSATION PLAN
o
FOR
o
AGAINST
o
ABSTAIN
3.
IN
THEIR DISCRETION AS TO SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE
MEETING.
Shares
represented by all properly executed proxies will be voted in accordance
with
the instructions appearing on this proxy. In the absence of specific
instructions, proxies will be voted “FOR ALL NOMINEES” with respect to Proposal
1, “FOR” the approval of the 2006 Stock and Incentive Plan as described in
Proposal 2, and in the discretion of the proxy holders as to any other
matters
that may properly come before the meeting.
If
you
plan to attend the meeting, please
designate
the number that will attend
[
]
.
|
Dated
_________________________, 2006
|
_____________________________ | |
|
Signature
|
||
| _____________________________ | ||
|
Signature
|
Please
sign as name(s) appear(s) on stock certificate. If jointly held, all
owners must
sign. Executors, administrators, trustees or persons signing in such
capacity
should so indicate.