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EasternShore1[1] - BANK OF THE EASTERN SHORE OFFERING...

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Unformatted text preview: BANK OF THE EASTERN SHORE OFFERING CIRCULAR . B A N K O F T H E Up to 937,500 Units (Common Stock and Warrant) EASTERN SHORE $8.00 per Unit -"—' ' Bank of the Eastern Shore is a Maryland state~chartered, Federal Reserve member commercial bank (“Bank”), headquartered in Cambridge, Maryland, with two full—service branch offices. We are offering for sale 937,500 Units consisting of one share of our common stock and one warrant to purchase one share of our common stock, at $10.00 per Unit. We have the right to increase the total number of Units that we are offering by up to an additional 140,625 Units. The offering period began on August 18, 2010 and will terminate on October 15, 2010, unless extended without notice until no later than December 30, 2010. For existing shareholders, there is no minimum number of Units that must be purchased. New investors are required to purchase at least 2,500 Units in order to participate in the offering. Our Board of Directors reserves the right, in its sole discretion, to accept or reject any subscription, in whole or in part, or to waive the minimum purchase requirement. We have engaged Baxter Fentriss & Company (“Baxter Fentriss” or “Financial Advisor”) to act as our Financial Advisor in connection with addressing the Bank’s capital needs. This is a best efforts offering with no minimum dollar amount to be raised. Subscriptions will be placed in a segregated account at the Bank and we intend to conduct closings earlier or more frequently than the expiration date at our discretion. The net proceeds in this offering will be used to enhance our capital ratios, reduce our ratio of classified assets, support our loan and deposit growth, and for general corporate purposes. These securities are subject to investment risk, including the possible loss of principal. Some of the risks of this investment are described under “Risk Factors,” beginning on Page 12. Neither the Federal Deposit Insurance Corporation (“FDIC”), the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities, or passed upon the adequacy or accuracy of this Offering Circular. Any representation to the contrary is a criminal offense. This table summarizes the offering and the amounts we expect to receive. Total from Sale Per Unit Of 937 00 Units Public offerin_ rice ................................................................... S 8.00 87,500 000 s 0.09 587,500 3 7‘91 m ”’ Includes the Initial Advisory Fee of$12,500 and the Financing Advisory Fee of $75,000. See “Terms ofOffering - Plan of Distribution” on page 22. '2’ We estimate that the expenses ofthe offering payable by us will total approximately $147,500. See "Use of Proceeds" on page 18. Financin_ Adviso ......................................................... Proceeds to us before ex - nses‘ ............................................... These securities are not savings accounts, deposits or other obligations of Bank of the Eastern Shore. These securities are not insured by the FDIC or any other governmental agency, and are subject to investment risk, including the possible loss of your entire investment. The date of this Offering Circular is August 18, 2010 , _... ._..,flnvw.,.%wwm~ummw.wvmw..."-~._mu..~,w~mw.mm~w—.——~ , .. > Submit within, 60 days a written program for the effective grading of the Bank’s loan portfolio; ' J» Submit within 68 days, a written program for the effective, ongoing review of the Bank’s loan portfolio by a qualified independent third part}; or by qnelificd staff independent of the Earth’s lending function and providing for the Board review of those reports; )9 Charge off all assets or portion of assets classified as a loss in the latest Report of Examination by our banking regulators and within 36 days of any such classification in future Reports of Examination; 1* Request and reccire prior written approval of the banking regulators before we may declare or pay any dividends; , ' J» Refrain from, directly or indirectly, extending or renewing any credit to a borrower who’s loans or other extensions of credit have been criticized in the latest or future Reports of Examination, without the prior approvai rife majority of the fell Board of Directors; Submit withinfiifi) days a plan that is designed to improve the Bernie’s position with current loans in excess of $258,000 that are past due, on the Bank’s Problem Loan List, or were adversely classified in the Report of Examination and submit a similar plan within 30 days of any such loan; relationship or other asset, being so classified in subsequent reports of examination; , - - - 3» Review and: revise within 66 days the Bank’s; Allowance for Loan and Lease Losses (“ALLL”) methodoiogy consistent with relevantsopervisory guidance and within 60 days submit a written program for the maintenance ofan adequate ALLL; Submit within 60 days a written plan to maintain sufficient capital at the Bank; Submit Within 60 days a strategic plan for the remainder of 2010 and 201 l to improve the Bank‘s earnings and overallicondition; Comply with restrictions on indemnification and severance payments; and Submit quarterly progress reports to the FRB and the Commissioner, including updates on assets improvement plans. v V V V V In addition to discussions with the FRB and the Commissioner, based upon criticism from those regulators after the most recent examination, we expect that any‘written agreement we may enter would require us to employ a fullitime chief lending officer. In tin effort to bolster management andiaddrcss this criticism, we have hired Gregory J. Olinde as our Senior Vice President and Chief Credit Officer. We believe that the hiring of Mt Olindc satisfies the criticism from the regulators on this issue as well as any requirement that may be contained in a: written agreement concerning this criticism. Our Reasons for the Offering We are conducting this offering principally to raise additional capital-é; to enhance our capital ratios in this difficult economic environment, to reduce our ratio of classified assets, to support our future loan and deposit growth, and for general corporate purposes. 7 While we are currently a party to the Memorandtzm with the FRB and Commissioner, due to our weakening financial condition prompted in part by the slow economic recovery, we intend to enter into a written agreement with the FRB and Commissioner. Based upon discussions with the FRS and Commissioner and the review of written agreements between these regulators and similarly situated banks, we expect the written agreement to contain requirements such as those set out above and specifically requiring the implementation of pious for adequate iriaintenanec of capital and the reduction of classified assets. The capital raised in this offering will help the Bank to reduce its classified assets ratios and to meet any required capital plan which has committed the Bank to remaining “Well Cepitelized” under the regulations of the Federal Deposit insurance Corporation, Although we expect the cepitel raised in this oi‘feriog to be instrumental in meeting the requirements of the current hiemorendtirn and any written agreement, es well as providing necessary capital to rcsoiee oer sssct quality issues and in showing the Bank to inipieinent its besirtess strategy, we ii be on better terms than this offering. Resultsand Capital Condition as ofJnne 30, 2010‘ Boring the first two quartersof 20109 we charged off $21.5 million in loans. Also during that period we recognized additional provisions to the, ALLL of $2.7 million. Net losses through the second quarter of 2010 were 31.? million, or $2.00 per common share which includes the provision. Chargeoffs net of recoveries for the first two quarters were $2.4 million, which is an increase of $500,000 trombeeember 3 l, 2009. Net impaired loans were approximately $26.6 million; an increase of SZG‘miliion from December 31, 2009. Foreclosed assetswere $2 million, an increase ot‘SlJ million from December 3 l, 2009. Other real estate owned totaled $5.3 million at June 30, 2010, a decrease of $800,000 from December 3L2009. Nonperfornqing loans (nonaecrual and past—due 90 days, but still accruing) were $27.3 million, a $2.2 million increase from December 31, 2009. Total assets at the end of the first two quarters were $223.0 million, which is a S? .0 million, or a 3.2% decrease, from December 31, 2009?. Total net loans decreased by, 32.2 million, or a 1.3% decrease from December 31, 2009. Total shareholders’ equity wasSléfi million at June 30, 2010, a decrease of $2.0 million from December 3 l, 2009. At JuneBO; 2010,:rbook value was $9.51 per common share. The following table sets out the regulatory capital ratios for the Bank at June 30, 2010: Banks, Bank’s , Bank’s , minimum , minimum minimum “Well “Adequately “Under , Capitalized” Capitalized” CapitaliZed” Bank’s capital ratios * capital capital ratios Ratios for ratios for for At regulatory regulatory Regulatory A June 30, gurposes gurgoses purposes 2010 Tier ; leverage capital ratio (5.00% , 4.00% 3.00% 6.14% Tier lrrrrisk-based capital ratio 6.00%, 4.00% 3.00% 7.42% -_ Total risk-based capital ratio 10.00% 8.00% __ 16.00% 8.72% Loan Portfolio We have not originated any§'sub-prime loans or “no doe” loans and have had very limited exposure to non—owner occupied commercial real estate and residential real estate loans. Management’s practice has been to do business withgborrowers in our area who we know. During the current recession our earnings, however, have been materially affected by required provisions for loan and lease losses stemming from deterioration in our'agrieultural; construction and development; and commercial real estate portfolios. " ' ‘ L At tune 30,020l0, the, composition of our loan portfolio was as set out in the following table (dollars in thousands): {Remainder of this page intentionally left blank) Jo. You should rely only on the information con— tained in this Offering Circular or information that we have referred to you. Bank of the Eastern Shore has not authorized anyone to provide you with other or different information. information contained in this Offering Circular was, to the best of our knowledge, correct when it was printed. Some of the information will change after the printing date because we continue to engage in our usual and customary business activities. The accidental or improper delivery of this Offering Circular to persons to whom it is uniawfui to make an offer under federal or state securities laws shall not constitute an offer to buy the securities. Wm TABLE OF CONTENTS Cautionary Note Regarding Forward Looking Statements ...................... l Offering Circular Summary ............................ 2 Selected Financial Data .................................... 8 Summary of Offering ....................................... 9 Procedure for Purchasing Shares ................... ll Risk Factors ................................................... 12 Use of Proceeds .............................................. 18 Impact on Book Value ................................... l8 Dividend Policy ............................................. l9 Capitalization ................................................. 19 Market for Common Stock ........................... 20 Terms of Offering .......................................... 20 Terms of the Warrants ................................... 23 Our Business ................................................. 23 Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................ 26 Management and Board of Directors ............. 41 Executive Compensation ............................... 44 Beneficiai Ownership of Securities ............... 47 Supervision and Regulation ........................... 48 Related Party Transactions ............................ 54 Description of Common Stock ....................... 55 Legal Matters ................................................. 55 Financial Information ..................................... 55 Reports to Sharehoiders ................................. 55 Additionai Information .................................. 55 F inanciai Statements ........................ A ppendix A Warrant Form ....................... 7 .......... Appendix B Up to 937,500 Units BANK OF THE EASTERN SHORE AUGUST 18, 2010 FORWARD-LOOKING STATEMENTS This Offering Circular, including information incorporated herein by reference, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “conic,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “is confident that”,and similar expressions are intended to idenrify these forward~looking statements. These forward—looking statements involve risk and uncertainty anti a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward—looking statements. We do not have a policy of updaiing or revising forward—looking statements except as otherwise required by law, and Silence by management over time should not be consirueo to mean that actual eventc are occurring as estimated in such fomard— looking statemenis, Our ability to picnic: results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our operations include, but are not limited to, changes in: the factors described under the heading “Risk Factors” beginning on page 12; general economic conditions; legislativeircgulatory changes; monetary and fincal policies of the US. Government; the quality and composition of our loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in our primary trade area; litigation, tax and other regulatory matters; accounting principles and guidelines; and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing and services. vvvvvvvvvvvv ABOUT THIS OFFERING CIRCULAR In this Oflert’ng C irczzlar, we rely on and refer to information and Statistics regarding the banking industtjy and the Maiylond market. We obtained this market data from independent publications or other publicly available information. Although we believe these sources are reliable, we have not independently verified and do not guarantee theaccuracy and completeness of this information. In this Offering C ircular, wefrequentlv use the terms “we ”, “our”, “as ” and the "Bank " to refer to Bank ofzhe Eastern Shore. Unless’wo indicate otherwise, the informalion in thiS Oflering Circular assumes the sale of 93 7,500 (hails. OTHER AVAILABLE INFORMATION REGARDING THE BANK The Bank is required {0 file gnarzerly Reports of Condition and Income wish rho FDIC { ”Coll Reports’i). Such reporrs are available from the Book and may be obtained onh’rze of mewfilichgov. Although {he Bonk encourages investors to review Such reports and otherfiiings mode by {he Bank, invarlors should not rely on on}: financial projections conformed in any applications rho: may heflleo’ by the Bank. OFFERING CIRCULAR SUMWRSE’ This .rirmmam' higbiiglzts specific informatioo contained» elsewhere is: this Qfieriog Circular. Because this is a summary, it may eat contain all of the iigfbrmaz‘ioo that is isnportarrr to you. Therefore, you Should read earefétiiiv the more detailed information set fort}: in {his Offering Cireolor one? it? our financial stoiemeots before making a decision to invest in our reestritier. Bank of the Eastern Shore Bank of the Eastern Shore is a Maryland-chartered Federal Reserve member commercial bank, which commenced operations on Aogtist‘lél, 0986} The Boole has two foil Service officer loeated in Cambridge, Maryland, the county seat of Dorehester County. Dorohester County is located iotlie middle of what is referred to as the “Eastern Shore”, 1,709 miles of shoreline along the Chesapeake Bay, Choptank River, and other smaller rivers and tribotaries. ' ‘ Since our establishment, our torus has been on being the book ot‘choico for the local community, serving the personal banking needs, as well as the agricultural and light industry business banking needs of the community. Our business philosophy is based upon the premise that good banding is a product of establishing and growing relatioosbies with our customers. We greet ourcuetomers With a smile and do our best to provide a warm, welcoming atmosphere and a cooperative and helpful spirit. As of June 30, 2010, we had total assets of $223.0 million, net loans of $168.2 millioni total deposits of $187 .6 million and total stockholders’ equity of $16.6 million. For the six months ended June 30, 2010, we had a net loss of SI .7 million and for the year ended December 3l, 2009, we had a net loss of $4.9 million. The Bank’s corporate office is located at 301 Crusader Road, Cambridge, Maryland, 21613, its telephone number is (410) 2285800 and its-Internet website address is wwwbankofeseom. Regulatory Matters On August 27, 2009, at the request of the State of Maryland, Department of Labor, Licensing and Regulation, Division of F lnancial Regulation, Office ‘of the Commissioner of Financial Regulation (“Commissioner” , the Bank entered into an informal supervisory agreement through a Memorandum of Understanding (“Memorandum”) among the Bank, the Commissioner and the Board of GoVernors of the Federal Reserve SyStem (“FRB”); The Memorandum represents an informal agreement among the Bank, the Commissibner and the FRB as to areas of'the Bank’s operations that warrant improvement and presents a plan for making those improrements. The Memorandum imposes no fines or penalties on the Bank. Following our most recent examination, the FEB and Commissioner have propOsed that the Bank enter a written agreement, a formal enforcement action. The Bank intends to enter a written agreement subject to final negotiations with the FEB and the Commissioner. By entering into a written agreement, we could, among other things, become subject to reetriotions on our ability to derelop new business lines, as well as restrictions on our existing b’osioeos lines and be required to raise additiooeleapital. Based upon discussions with the i‘RB and Commissioner and the review of written agreements between those regulators and similarly situated books, any written agreement entered into by the Bank would likely contain the following types of substantive requirements, or othero similar to them: ‘9 Provide a written plan within 60 days to strengthen Board oversight of the Bank maoagement and operatioom; it Submit within 60 days, 2: writtert olan to strengthen credit risk menagement practices; > Submit Within 60 days“, a plan to strengthen the Bank‘s; lending and credit administration practices; ’3 > Submit within 60 days a written program for the effective grading of the Bank’s loan portfolio; P Submit within 60 days, a written program for the effective, ongoing review of the Bank’s loan portfolio by a qualified independent third party or by qualified staff independent of the Bank’s lending function and providing for the Board review of those reports; ‘9 Charge off all assets or portion of assets classified as a loss in the latest Report of Examination by our banking regulators and within 30 days of any such classification in future Reports of Examination; Request and receive prior written approval of the banking regulators before we may declare or pay any dividends; Refrain from, directly or indirectly, extending or renewing any credit to a borrower who’s loans or other extensions of credit have been criticized in the latest or future Reports of Examination, without the prior approval ot‘a majority of the full Board of Directors; ...
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