As filed with the Securities and Exchange Commission on August 7, 2000
Registration No.333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
PATAPSCO BANCORP, INC.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Maryland 6135 52-1951797
--------------------------------------------------------------------------------
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
1301 MERRITT BOULEVARD
DUNDALK, MARYLAND 21222-2194
(410) 285-1010
--------------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of the Registrant's Principal Executive Offices)
JOSEPH J. BOUFFARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
PATAPSCO BANCORP, INC.
1301 MERRITT BOULEVARD
DUNDALK, MARYLAND 21222-2194
(410) 285-1010
--------------------------------------------------------------------------------
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
COPIES OF ALL COMMUNICATIONS TO:
GARY R. BRONSTEIN, ESQUIRE
JOEL E. RAPPOPORT, ESQUIRE
STRADLEY RONON HOUSLEY KANTARIAN & Bronstein, LLP
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of the registration
statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.[ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]_______
If this form is a post-effective amendment filed pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]______
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==========================================================================================================================
Proposed Maximum Proposed Maximum Amount
Title of each class of Amount To Offering Price Aggregate Offering of
securities to be registered Be Registered (1) Per Share Price (2) Registration Fee(2)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A Noncumulative Convertible
Perpetual Preferred Stock, $.01
par value per share 114,107 (3) $9.11 $1,040,030 $274.57
--------------------------------------------------------------------------------------------------------------------------
Common Stock,
$.01 par value per share 114,107 (3) -- -- --
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(1) Pursuant to Rule 416 under the Securities Act of 1933, this registration
statement also includes an indeterminate number of shares that may be issued
as a result of anti-dilution and other provisions of the preferred stock.
(2) Estimated solely for the purpose of calculating the registration fee. The
registration fee has been computed in accordance with Rule 457(f)(1) and
(f)(3) under the Securities Act of 1933, as amended, based on the average of
the high and low price for the 475,442 outstanding shares of Northfield
Bancorp common stock of $14.6875 on August 2, 2000, as reported on the OTC
Bulletin Board, less the cash to be paid by the registrant, $12.50 per share
of Northfield Bancorp common stock in the exchange ($6,983,055 -
$5,943,025).
(3) Represents the maximum number of shares of common stock, par value $.01 per
share, of Patapsco Bancorp, Inc. expected to be issued upon the conversion
of the 114,107 shares of preferred stock of Patapsco Bancorp, Inc. being
registered hereby. No additional consideration will be received for any
shares of common stock issued upon conversion of the preferred stock.
<PAGE>
PROXY STATEMENT/PROSPECTUS
[NORTHFIELD BANCORP LOGO]
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
Dear Stockholders:
The Boards of Directors of Patapsco Bancorp, Inc. and Northfield
Bancorp, Inc. have approved a merger agreement that provides for Patapsco
Bancorp's acquisition of Northfield Bancorp. Patapsco Bancorp will accomplish
the acquisition by merging Northfield Bancorp into a subsidiary of Patapsco
Bancorp. If we complete the merger, you will receive $12.50 in cash and 0.24
shares of Patapsco Bancorp's Series A Noncumulative Convertible Perpetual
Preferred Stock for each share of Northfield Bancorp common stock that you own,
plus cash in lieu of any fractional share of preferred stock. Generally, the
merger will be a taxable transaction for Northfield Bancorp stockholders.
To complete the merger, Northfield Bancorp needs your approval. This
document is being furnished to you in connection with the solicitation of
proxies by Northfield Bancorp's Board of Directors for its use at a special
meeting of stockholders, which is being held to vote upon the merger.
The place, date and time of the special meeting is ______________,
2000, __:__ p.m., local time, at our executive offices, 8005 Harford Road,
Baltimore, Maryland.
This document contains detailed information about the special meeting
and the proposed merger. You should read this document carefully. You may also
obtain information about Patapsco Bancorp and Northfield Bancorp from documents
each company has filed with the Securities and Exchange Commission.
Northfield Bancorp's financial advisor, Ferguson & Company, has issued
its opinion to Northfield Bancorp's Board of Directors that the consideration to
be received from Patapsco Bancorp is fair from a financial point of view to
Northfield Bancorp stockholders.
No shares of Patapsco Bancorp preferred stock currently are outstanding
and, consequently, the preferred stock is not listed on any national securities
exchange or the Nasdaq stock market. Following the merger, Patapsco Bancorp will
seek to obtain a market maker so that the preferred stock can be listed on the
OTC Bulletin Board. Patapsco Bancorp common stock is listed on the OTC Bulletin
Board.
YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the special
meeting, please take the time to vote by completing and mailing the enclosed
proxy card to us. If you do not return your proxy card, or if you do not
instruct your broker how to vote any shares held for you in "street name," the
effect will be a vote against the merger.
BEFORE CASTING YOUR VOTE, PLEASE CONSIDER CAREFULLY THE "RISK FACTORS"
BEGINNING ON P. 10 OF THIS DOCUMENT.
Sincerely,
G. Ronald Jobson
President and Chief Executive Officer
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES BEING OFFERED THROUGH THIS DOCUMENT ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION, AND THEY ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS
ASSOCIATION INSURANCE FUND, THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY.
--------------------------------------------------------------------------------
Proxy Statement/Prospectus dated _____ __, 2000
and first mailed to stockholders on or about _____ __, 2000
<PAGE>
This document incorporates important business and financial information
about Patapsco Bancorp from documents filed with the Securities and Exchange
Commission that have not been included in or delivered with this document. You
may read and copy these documents at the SEC's public reference facilities.
Please call the SEC at 1-800-SEC-0330 for information about these facilities.
This information is also available at the Internet site the SEC maintains at
http://www.sec.gov. See "Where You Can Find More Information" on page 93.
You also may request copies of these documents from Patapsco Bancorp.
Patapsco Bancorp will provide you with copies of the documents relating to
Patapsco Bancorp, without charge, upon written or oral request to:
Patapsco Bancorp, Inc.
1301 Merritt Boulevard
Dundalk, Maryland 21222-2194
Attn: Michael Dee
Telephone: (410) 285-1010
IN ORDER TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF
NORTHFIELD BANCORP'S SPECIAL MEETING OF STOCKHOLDERS, YOU SHOULD MAKE YOUR
REQUESTS NO LATER THAN _________ __, 2000.
<PAGE>
NORTHFIELD BANCORP, INC.
8005 HARFORD ROAD
BALTIMORE, MARYLAND 21234
(410) 665-7900
--------------------------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________, 2000
--------------------------------------------------------------------------------
A special meeting of stockholders of Northfield Bancorp, Inc. will be held at
our executive offices, 8005 Harford Road, Baltimore, Maryland on _________,
___________, 2000, at __:00 _.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt
the Agreement of Merger, dated as of May 16, 2000, by and among
Patapsco Bancorp, Inc., The Patapsco Bank, PN Financial, Inc.,
Northfield Bancorp, Inc. and Northfield Federal Savings Bank,
pursuant to which, among other things, Northfield Bancorp will
merge with and into PN Financial and each share of common stock,
par value $.01 per share, of Northfield Bancorp will be converted
into the right to receive $12.50 in cash and 0.24 shares of
Patapsco Bancorp Series A Noncumulative Convertible Perpetual
Preferred Stock, par value $.01 per share, plus cash in lieu of
any fractional share of preferred stock, all on and subject to
the terms and conditions contained therein;
2. To consider and vote upon a proposal to adjourn the special
meeting, if necessary, to solicit additional proxies in the
event there are not sufficient votes present, in person or
by proxy, to approve the merger agreement and the merger; and
3. To transact any other business as may properly come before the
special meeting or any adjournment or postponement.
Only stockholders of record at the close of business on _________, 2000 will be
entitled to notice of and to vote at the special meeting and at any adjournment
or postponement.
By Order of the Board of Directors
J. Thomas Hoffman
Secretary
Baltimore, Maryland
__________, 2000
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
PROPOSAL TO APPROVE THE MERGER AGREEMENT AND THE MERGER AND "FOR" THE PROPOSAL
TO ADJOURN THE SPECIAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL PROXIES IN
THE EVENT THERE ARE NOT SUFFICIENT VOTES PRESENT, IN PERSON OR BY PROXY, TO
APPROVE THE MERGER AGREEMENT AND THE MERGER. WHETHER OR NOT YOU PLAN TO ATTEND
THE SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
IN THE ACCOMPANYING PRE-ADDRESSED POSTAGE-PAID ENVELOPE.
<PAGE>
[Table of Contents in two column format]
TABLE OF CONTENTS
Questions and Answers About the Merger........................................1
Summary.......................................................................3
Risk Factors.................................................................10
Limited Trading for Preferred Stock and
Common Stock........................................................10
You Will Have Limited Voting Rights.....................................10
Patapsco Bancorp and Northfield Bancorp May
Not Successfully Integrate Their Respective
Business Operations.................................................11
Selected Historical Financial Data for Patapsco Bancorp, Inc................ 12
Selected Consolidated Financial Condition Data..........................12
Selected Consolidated Income Data.......................................12
Key Operating Ratios....................................................13
Selected Historical Financial Data for Northfield
Bancorp, Inc..............................................................14
Selected Financial Data.................................................14
Selected Operations Data................................................14
Selected Ratios.........................................................15
Pro Forma Condensed Combined Financial Information...........................16
Unaudited Pro Forma Condensed Combined
Statement of Condition at March 31, 2000............................16
Unaudited Pro Forma Condensed Combined Statement of
Income for the Nine Months Ended March
31, 2000............................................................17
Unaudited Pro Forma Condensed Combined
Statement of Income for the Year Ended June
30, 1999............................................................18
Notes to Pro Forma Combined Financial Information.......................18
Comparative Per Share Data...................................................20
Market Price and Dividend Information........................................21
Special Meeting of Northfield Stockholders...................................22
Place, Date and Time....................................................22
Purpose of Meeting......................................................22
Who Can Vote at the Meeting.............................................22
Attending the Meeting...................................................23
Vote Required...........................................................23
Voting by Proxy.........................................................23
Ownership of Northfield Bancorp Common Stock.................................24
Proposal I - The Merger......................................................25
The Parties to the Merger...............................................25
Form of the Merger; Conversion of Northfield
Bancorp Common Stock................................................26
Background of the Merger................................................26
Reasons for the Merger and Recommendation of
Northfield Bancorp Board of Directors...............................28
Opinion of Northfield Bancorp's Financial Advisor.......................29
Description of Preferred Stock..........................................31
Conversion of Northfield Bancorp Common Stock...........................32
Surrender of Stock Certificates.........................................33
Objecting Stockholders' Rights of Appraisal.............................33
Voting Agreement........................................................34
Management of Patapsco Bancorp and Patapsco
Bank After the Merger...............................................35
Representations and Warranties..........................................35
Covenants Pending the Merger............................................36
No Solicitation.........................................................37
Additional Covenants....................................................38
Conditions to the Merger................................................39
Required Regulatory Approvals Needed to
Complete the Merger.................................................41
Termination and Amendment...............................................41
Expenses................................................................43
When the Merger Will be Completed.......................................43
Interests on Northfield Bancorp's Directors and
and Officers in the Merger that Differ From Your
Interests...........................................................43
Federal Income Tax Consequences.........................................45
Accounting Treatment....................................................46
Resale of Patapsco Bancorp Preferred Stock;
Restrictions on Transfer............................................46
Illiquid Trading Market for Patapsco Bancorp
Common Stock and Preferred Stock....................................47
Vote Required...........................................................47
Proposal II - Adjournment of the Special Meeting.............................48
A Warning About Forward-Looking Statements...................................48
Patapsco Bancorp.............................................................49
Recent Developments for Patapsco Bancorp, Inc................................51
Selected Consolidated Financial Condition Data..........................52
Selected Consolidated Income Data.......................................52
Key Operating Ratios....................................................53
Comparison of Financial Condition at June 30, 2000
and 1999............................................................53
Comparison of Operating Results for the Quarters
and Year Ended June 30, 2000 and June 30, 1999.......................54
Northfield Bancorp, Inc......................................................56
Business of Northfield Bancorp, Inc..........................................56
Market Area.............................................................56
Financial Modernization Legislation.....................................56
Lending Activities......................................................57
Nonperforming and Problem Assets........................................61
Investment Activities...................................................65
Sources of Funds........................................................68
Competition.............................................................69
Description of Property.................................................70
Legal Proceedings.......................................................70
Federal Taxation........................................................70
State Taxation..........................................................71
Management's Discussion and Analysis of Financial
Condition and Results of Operations for
Northfield Bancorp..............................................71
Community Reinvestment Act Compliance...................................71
Market Risk Disclosure..................................................72
<PAGE>
Average Balances, Interest and Average Yields...........................74
Rate/Volume Analysis....................................................75
Comparison of Financial Condition at December 31,
1999 and December 31, 1998..........................................75
Comparison of Results of Operations for the Years
Ended December 31, 1999 and 1998....................................75
Liquidity and Capital Resources.........................................76
Impact of Inflation and Changing Prices.................................77
Impact of New Accounting Standards......................................77
Comparison of Financial Condition at March 31,
2000 and December 31, 1999..........................................77
Comparison of Results of Operations for the Three
Months Ended March 31, 2000 and 1999................................78
Regulation of Northfield Bancorp and Northfield Federal......................79
Regulation of Northfield Federal........................................79
Regulation of Northfield Bancorp........................................83
Comparison of Rights of Stockholders.........................................84
Selected Provisions in the Articles of Incorporation
and Bylaws of Patapsco Bancorp......................................87
Classified Board of Directors and Related Provisions....................87
Stockholder Vote Required to Approve Business
Combinations with Principal Stockholders............................87
Limitations on Call of Meetings of Stockholders.........................88
Absence of Cumulative Voting............................................88
Restrictions on Acquisition of Securities...............................88
Board Consideration of Certain Nonmonetary Factors
in the Event of an Offer by Another Party...........................89
Authorization of Preferred Stock........................................90
Procedures for Stockholder Nominations..................................90
Amendment of Bylaws.....................................................90
Amendment of Articles of Incorporation..................................90
The Purpose of and Anti-Takeover Effect of
Patapsco Bancorp's Articles of Incorporation
and Bylaws..........................................................91
Indemnification of Patapsco Bancorp Directors and Officers for
Securities Act Liabilities.................................................92
Where You Can Find More Information..........................................93
Legal Matters................................................................94
Experts......................................................................94
Stockholder Proposals........................................................95
Other Matters................................................................95
Index to Consolidated Financial Statements of Northfield
Bancorp, Inc..............................................................96
Annex A - Agreement of Merger
Annex B - Title 3 Subtitle 2 of the Maryland General Corporation Law
Annex C - Patapsco Bancorp's 1999 Annual Report to Stockholders
Annex D - Patapsco Bancorp's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 2000
Annex E - Opinion of Ferguson & Company
Annex F - Articles of Supplementary
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE PATAPSCO BANCORP AND NORTHFIELD BANCORP PROPOSING TO MERGE?
A: Our companies are proposing the merger because we believe the resulting
combination will provide our stockholders with substantial benefits and will
enable us to better serve our customers. Our products and markets generally are
complementary. The combined company should be in a better position to exploit
opportunities within the marketplace. To review the reasons for the merger in
greater detail, see page 28.
Q: WHAT SHOULD I DO?
A: First, carefully read this document. Then complete, sign and mail your proxy
card in the enclosed postage paid envelope. The instructions on the accompanying
proxy card give you more information on voting. This will enable your shares to
be represented at the Northfield Bancorp special meeting of stockholders. The
Board of Directors of Northfield Bancorp has unanimously recommended that their
stockholders vote "FOR" the approval of the merger agreement and the merger and
"FOR" the proposal to adjourn the special meeting to solicit additional proxies
in the event there are not sufficient votes present at the special meeting, in
person or by proxy, to approve the merger agreement and the merger. Of course,
you may also attend the meeting and vote in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
AUTOMATICALLY VOTE MY SHARES FOR ME?
A: No. Your broker will not be able to vote your shares without instructions
from you. You should instruct your broker to vote your shares, following the
directions your broker provides. Your failure to instruct your broker to vote
your shares will result in your shares not being voted, which will have the same
effect as a vote against the merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE SUBMITTED MY PROXY WITH VOTING
INSTRUCTIONS?
A: Yes. There are three ways you can change your vote. First, you may send a
written notice to the Secretary of Northfield Bancorp stating that you would
like to revoke your proxy. Second, you may complete and submit a new proxy card
by mail and, if received timely, it will revoke any earlier proxy. Third, you
may attend the Northfield Bancorp special meeting and vote in person by written
ballot. Simply attending the special meeting without voting, however, will not
revoke your proxy. If you have instructed a broker to vote your shares, you must
follow the directions you receive from your broker to change or revoke your
proxy.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. Do not send in your stock certificates at this time. Northfield Bancorp
stockholders will exchange their stock certificates for cash and Patapsco
Bancorp preferred stock certificates after we complete the merger. If the merger
is completed, instructions for exchanging Northfield Bancorp common stock
certificates will be sent to you. Patapsco Bancorp stockholders will not
exchange their certificates in the merger. The certificates currently
representing shares of Patapsco Bancorp common stock will continue to represent
the same number of shares of Patapsco Bancorp common stock after the merger.
Holders of Patapsco Bancorp common stock before the merger will not receive any
shares of Patapsco Bancorp preferred stock as a result of the merger.
Q: PLEASE EXPLAIN THE MERGER CONSIDERATION.
A: Northfield Bancorp stockholders will receive $12.50 in cash and 0.24 shares
of Patapsco Bancorp Series A Noncumulative Convertible Perpetual Preferred Stock
in exchange for each share of Northfield Bancorp common stock. We will not issue
fractional shares. Northfield Bancorp stockholders who would otherwise be
entitled to receive a fractional share of preferred stock instead will receive
cash in lieu of the fractional share in an amount based on the liquidation
preference of the preferred stock of $25.00 per share.
1
<PAGE>
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We are working to complete the merger as quickly as possible. In addition to
stockholder approvals, we must obtain regulatory approvals. We hope to complete
the merger in the fourth quarter of 2000.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: Generally, the exchange of shares by Northfield Bancorp stockholders for cash
and preferred stock of Patapsco Bancorp will be taxable to Northfield Bancorp
stockholders for federal income tax purposes. To review the federal tax
consequences in greater detail, see pages 45 through 46.
Q: WHO SHOULD I CALL WITH QUESTIONS?
A: Northfield Bancorp stockholders should call ____________, _________________,
at (___) ___- ____ with any questions about the merger and the related
transactions.
2
<PAGE>
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. For a more complete
understanding of the merger and for a more complete description of the legal
terms of the merger, you should read this entire document carefully, as well as
the additional documents to which we refer you, including the merger agreement.
See "Where You Can Find More Information" (page 93).
THE SPECIAL MEETING OF NORTHFIELD BANCORP STOCKHOLDERS
Place, Date and Time (Page 22)
The special meeting will be held on ___________________, 2000 at our
executive offices, 8005 Harford Road, Baltimore, Maryland at ___ p.m.
Purpose of the Meeting (Page 22)
At the special meeting, stockholders of Northfield Bancorp will
consider and vote upon a proposal to approve the merger and the merger
agreement and a proposal to adjourn the special meeting to solicit
additional proxies if there are not sufficient votes present, in
person or by proxy, to approve the merger and the merger agreement.
Stockholders also will transact any other business that may properly
come before the special meeting.
Stockholders of record at the close of business on __________, 2000
will be entitled to one vote for each share then held.
What Vote is Required for Approval of of the the Merger Agreement; Voting By
Northfield Bancorp's Officers and by Patapsco Bancorp and Its Officers and
Directors (Page 23)
The affirmative vote of the holders of at least two-thirds issued and
outstanding shares of Northfield Bancorp common stock is required to
approve the merger and the merger agreement. The affirmative vote of a
majority of the shares present at the special meeting is required to
approve the adjournment proposal.
We expect the following shares to be voted in favor of the merger and
the merger agreement and the adjournment proposal:
<TABLE>
<CAPTION>
No. of Percent of
Owner Shares Outstanding
----- ------ -----------
<S> <C> <C>
Northfield Bancorp
directors and officers* 66,582 14.0%
Northfield Federal Savings
Grantor Trust 13,465 2.8
Patapso Bancorp 20,224 4.3
Patapsco Bancorp
directors and officers 7,308 1.5
------- ----
Total 107,579 22.6%
======= ====
<FN>
---------
* The individuals have entered into a voting agreement with
Patapsco Bancorp to vote their shares of Northfield Bancorp
common stock in favor of the merger agreement and the merger.
</FN>
</TABLE>
3
<PAGE>
Northfield Bancorp's Board of Directors Unanimously
Recommends that Stockholders Approve the Merger and
Adjournment Proposal adjournment proposal. (Page 28)
Northfield Bancorp's Board of Directors believes that the merger
is in your best interests and unanimously recommends that you
vote "FOR" the proposal to approve the merger agreement and "FOR"
the adjournment proposal.
THE PARTIES
Patapsco Bancorp, Inc.
The Patapsco Bank
PN Financial, Inc.
1301 Merritt Boulevard
Dundalk, Maryland 21222-2194
(410) 285-1010
(Page 49)
Patapsco Bancorp is the holding company for The Patapsco Bank.
Patapsco Bank operates through a single office located in
Dundalk, Maryland and serves eastern Baltimore County. The
principal business of Patapsco Bank consists of attracting
deposits from the general public and investing these deposits in
loans secured by residential and commercial real estate,
construction loans, commercial business loans and consumer loans.
PN Financial is a wholly owned subsidiary of Patapsco Bancorp and
was formed for the sole purpose of facilitating the merger. At
March 31, 2000, Patapsco Bancorp had total assets of $101.3
million, deposits of $75.2 million and stockholders' equity of
$9.3 million.
Northfield Bancorp, Inc.
Northfield Federal Savings Bank
8005 Harford Road
Baltimore Maryland, 21234
(410) 665-7900
(Page 56)
Northfield Bancorp was organized in March 1998 to acquire all of
the capital stock to be issued by Northfield Federal in its
conversion from mutual to stock form. Northfield Bancorp's
principal business is the business of Northfield Federal.
Northfield Federal is a community and customer oriented federal
stock savings bank operating through two offices located in
Baltimore, Maryland. Northfield Federal's business emphasizes
residential construction lending, primarily originating
construction/permanent mortgages on one- to four-family
properties. It also makes commercial real estate loans, home
equity loans and certain types of consumer loans. At March 31,
2000, Northfield Bancorp had total assets of $54.3 million,
deposits of $36.4 million and stockholder's equity of $7.1
million.
THE MERGER
Patapsco Bancorp Will Acquire
Northfield Bancorp
(Page 26)
We propose a business combination in which Northfield Bancorp
will be acquired by Patapsco Bancorp through a merger with PN
Financial, Inc., a subsidiary of Patapsco Bancorp. Northfield
Bancorp will be the surviving corporation. Following the merger,
Northfield Bancorp will be liquidated, and Northfield Federal
will merge with Patapsco Bank.
Shares of Northfield Bancorp
Common Stock Will be Converted into Cash and
Patapsco Bancorp Preferred Stock
(Page 32)
Each of your shares of Northfield Bancorp common stock
outstanding at the effective time of the merger will be canceled
and converted into the right to receive $12.50 in cash and 0.24
shares of Patapsco Bancorp's Series A Noncumulative Convertible
Perpetual Preferred Stock. Patapsco Bancorp will not issue
fractional shares of preferred stock in the merger. If the total
number of shares of Patapsco Bancorp preferred stock you are to
receive in the merger does not equal a whole number, you will
receive cash instead of the fractional share.
Because each share of preferred stock is convertible into one
share of Patapsco Bancorp common stock, based on the most recent
sale price for the Patapsco Bancorp common stock of $_____ per
share on
4
<PAGE>
______________, 2000, the 0.24 shares of preferred stock you will
receive would be valued at $____ per share of Northfield Bancorp
common stock currently owned, which, when added to the cash
payment of $12.50 per share, results in an aggregate value of
$_____ per share of Northfield Bancorp common stock. Based on the
liquidation preference for the preferred stock of $25.00, the
0.24 shares of preferred stock you will receive would be valued
at $6.00 per share of Northfield Bancorp common stock currently
owned, which, when added to the cash payment of $12.50 per share,
results in an aggregate value of $18.50 per share of Northfield
Bancorp common stock.
Description of Preferred Stock
(Page 31)
In addition to $12.50 in cash, you will receive in exchange for
each of your shares of Northfield Bancorp common stock 0.24
shares of Patapsco Bancorp's Series A Noncumulative Convertible
Perpetual Preferred Stock. At any time after issuance, the
preferred stock will be convertible at your election into shares
of Patapsco Bancorp common stock, on a one-for-one basis, subject
to future adjustment in certain circumstances. Each share of
Patapsco Bancorp's outstanding preferred stock will earn
dividends at the annual rate of 7.5% of its liquidation
preference of $25.00 per share, payable when and if declared by
Patapsco Bancorp's Board of Directors. Dividends are
noncumulative, which means that if the Board does not pay
dividends for a quarterly period, it is not obligated to pay a
dividend for that period at a later date. After five years from
the date of issuance of the Patapsco Bancorp preferred stock,
Patapsco Bancorp may redeem some or all of the outstanding
Patapsco Bancorp preferred stock at $25.00 per share plus any
declared but unpaid dividends for the then-current quarter.
The preferred stock generally has no voting rights. However,
holders of preferred stock will be permitted to vote to elect one
director to Patapsco Bancorp's Board of Directors in the event
that Patapsco Bancorp fails to pay dividends on the preferred
stock for a total of eight quarters. Also, holders of preferred
stock are entitled to vote on any amendment to Patapsco Bancorp's
Articles of Incorporation which would adversely affect the rights
and preferences of the preferred stock.
How to Exchange Your Stock Certificates
(Page 33)
Prior to the effective time of the merger, Patapsco Bancorp will
appoint an exchange agent to effect the exchange of stock
certificates in connection with the merger. As soon as
practicable but no later than five days after the effective time,
the exchange agent will send a notice and letter of transmittal
to each Northfield Bancorp stockholder of record at such date
advising such stockholder of the effectiveness of the merger and
the procedure for surrendering to the exchange agent outstanding
certificates formerly evidencing Northfield Bancorp common stock
in exchange for cash and new certificates of Patapsco Bancorp
preferred stock and cash in lieu of fractional shares. Promptly
following receipt of the notice and transmittal form, you should
surrender your Northfield Bancorp certificates in accordance with
the specified procedures. We will cancel each Northfield Bancorp
common stock certificate upon surrender.
Northfield Bancorp Stockholders Have
the Right to Object
(Page 33)
If you hold Northfield Bancorp common stock and do not wish to
receive the merger consideration in exchange for your shares, you
are
5
<PAGE>
entitled to obtain payment of the fair value of your shares. Your
shares will then be known as "objecting shares." In order to
receive payment for objecting shares, you must file a written
objection to the merger with Northfield Bancorp, you must not
vote in favor of the merger and you must comply with certain
other requirements of the Maryland General Corporation Law. We
have attached a copy of the relevant sections of the Maryland
General Corporation Law as Annex B.
After the completion of the merger, holders of objecting shares
will cease to have any rights of a stockholder, including the
right to vote or to receive the merger consideration, and will
only have the right to receive payment of the fair value of their
shares. If you do not properly file a notice with Northfield
Bancorp, vote in favor of the merger or otherwise fail to comply
with the requirements of Maryland law, then you will receive the
merger consideration.
If you object to the merger and demand payment of the fair value
of your shares, the fair value will be determined by a court. We
cannot predict how the court will value shares of Northfield
Bancorp common stock, and the fair value may be more valuable,
less valuable, or equal in value to the merger consideration
being paid by Patapsco Bancorp in the merger.
Conditions to the Merger
(Page 39)
The obligations of Patapsco Bancorp and Northfield Bancorp to
complete the merger are subject to a number of conditions
including, among other things, the receipt of Northfield Bancorp
stockholder approval and regulatory approval of the merger.
Regulatory Approvals Needed to
Complete the Merger
(Page 41)
The merger is subject to the approval of the Board of Governors
of the Federal Reserve System, the Commissioner of Financial
Regulation of the Maryland Department of Labor, Licensing, and
Regulation and the Office of Thrift Supervision. Further, the
U.S. Department of Justice may review the merger and raise
objections on antitrust grounds. Regulatory applications for
approval of the merger have been filed. We cannot guarantee these
applications will be approved or that they will not be approved
on terms or conditions that may require an amendment to the
merger agreement. We do not currently anticipate any such
conditions. Any regulatory approvals obtained should not be
construed as a recommendation or endorsement of the merger or the
merger agreement by any regulatory authority.
Terminating the Merger
(Page 41)
The merger agreement may be terminated at any time before the
merger is completed, whether before or after approval by
Northfield Bancorp stockholders, in a number of circumstances,
including:
o by mutual consent of the parties;
o by either party if an event occurs which makes it impossible to
satisfy one or more of the conditions to the merger;
o by Patapsco Bancorp if the Northfield Bancorp Board of
Directors withdraws or modifies its recommendation of the
merger in a manner materially adverse to Patapsco Bancorp or
announces its intention to do so;
6
<PAGE>
o by Patapsco Bancorp if a tender or exchange offer for 10% or
more of the outstanding shares of Northfield Bancorp is
commenced and Northfield Bancorp's Board of Directors
fails to recommend against or to take a position with respect
to such an offer;
o by either party if Northfield Bancorp enters into a definitive
agreement or letter of intent with respect to an
acquisition of Northfield Bancorp by a party other than
Patapsco Bancorp; or
o by Patapsco Bancorp at any time within 10 days of
receipt of a Phase II Environmental Report regarding
Northfield Bancorp that projects environmental clean-up
expenses to exceed $50,000.
Northfield Bancorp Must Pay Patapsco
Bancorp a Termination Fee Under
Certain Circumstances (Page 41)
Northfield Bancorp will be required to pay Patapsco Bancorp a
termination fee of $500,000 if the merger agreement is terminated
and, before May 16, 2002, a third party acquires 25% or more of
Northfield Bancorp common stock or if Northfield Bancorp enters
into a written definitive agreement or letter of intent with a
third party for a merger or business combination involving
Northfield Bancorp or a subsidiary of Northfield Bancorp or for
the acquisition of a 25% or greater equity interest in Northfield
Bancorp or a subsidiary or the acquisition of a substantial part
of their assets.
Northfield Bancorp's Financial Advisor Believes
the Merger Consideration is Fair to Northfield Bancorp
Stockholders
(Page 29)
Ferguson & Company, Northfield Bancorp's financial advisor, has
delivered to Northfield Bancorp's Board of Directors its opinion
that, as of the date of such opinion, the merger consideration is
fair to the stockholders of Northfield Bancorp from a financial
point of view. A copy of Ferguson & Company's opinion dated
___________, 2000 is attached as Annex E. You should read it
completely to understand the procedures followed, assumptions
made, matters considered and qualifications and limitations on
the review made by Ferguson & Company in providing this opinion.
Northfield Bancorp has agreed to pay Ferguson & Company a fee for
its services in connection with the delivery of its opinion.
Interests of Northfield Bancorp's Directors and Officers
in the Merger that Differ from Your
Interests (Page 43)
Certain members of Northfield Bancorp's management and Board of
Directors have interests in the merger in addition to their
interests as stockholders of Northfield Bancorp generally. Those
interests relate to, among other things, payments to directors in
lieu of adopting certain stock-based benefit plans, an officer's
benefits under an employment agreement, and provisions in the
merger agreement regarding indemnification of directors and
officers and director and officer insurance for events occurring
before the merger.
The Merger Generally Will be Taxable to Northfield Bancorp
Stockholders (Page 45)
Northfield Bancorp stockholders generally will recognize gain or
loss for U.S. federal income tax purposes as a result of the
exchange of all of their shares of Northfield Bancorp common
stock in the merger. The amount of gain will depend on the value
of the merger consideration, which consists of $12.50 in cash,
0.24 shares of Patapsco Bancorp preferred stock and cash in lieu
of any fractional share of preferred stock for each share of
Northfield Bancorp common stock surrendered.
7
<PAGE>
Patapsco Bancorp has hired an appraiser experienced in the
valuation of stocks of financial institutions and their holding
companies to prepare a valuation of the preferred stock as of the
effective date of the merger. This valuation will determine the
value of the Patapsco Bancorp preferred stock that Northfield
Bancorp stockholders will receive in the merger for federal
income tax purposes. Following the completion of the tax year in
which the merger is concluded, Patapsco Bancorp will send a Form
1099 to each Northfield Bancorp stockholder reporting the value
of the cash and preferred stock consideration the stockholder
received in the merger, with the preferred stock consideration to
be determined based on the appraisal.
THIS TAX TREATMENT MAY NOT APPLY TO ALL NORTHFIELD BANCORP
STOCKHOLDERS. DETERMINING THE ACTUAL TAX CONSEQUENCES OF THE
MERGER TO YOU CAN BE COMPLICATED. YOU SHOULD CONSULT YOUR OWN TAX
ADVISOR FOR A FULL UNDERSTANDING OF THE MERGER'S TAX CONSEQUENCES
TO YOU.
We will not be obligated to complete the merger unless we receive
a legal opinion, dated the closing date, that the merger will be
treated as a transaction of a type that is generally tax-free to
the parties, other than Northfield Bancorp stockholders, for U.S.
federal income tax purposes. This opinion, however, will not bind
the Internal Revenue Service, which could take a different view.
Accounting Treatment
(Page 46)
Patapsco Bancorp will account for the merger using the purchase
method of accounting. Under this method of accounting, Patapsco
Bancorp will record the fair market value of Northfield Bancorp's
assets and liabilities on its financial statements as of the date
the merger is completed. The difference between the purchase
price of the merger and the fair market value of Northfield
Bancorp's identifiable assets net of its liabilities will be
recorded on Patapsco Bancorp's books as "goodwill" and will be
amortized over 15 years as charges to Patapsco Bancorp's
earnings.
We May Amend the Terms of the Merger
and Waive Some Conditions
(Page 41)
We can agree to amend the merger agreement, and each of us can
waive our right to require the other party to adhere to the terms
and conditions of the merger agreement, where the law allows.
However, after Northfield Bancorp's stockholders approve the
merger agreement, they must approve any amendment or waiver that
reduces the amount or changes the type of consideration to be
received by them in the merger.
8
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
Northfield Bancorp Stockholders Will
Become Patapsco Bancorp Stockholders
(Pages 26 and 32)
As a result of the merger, holders of Northfield Bancorp common
stock, whose rights are presently governed by the Articles of
Incorporation and Bylaws of Northfield Bancorp, will become
stockholders of the Patapsco Bancorp through their ownership of
Patapsco Bancorp preferred stock. Accordingly, following the
merger, Northfield Bancorp stockholder rights will be governed by
the Articles of Incorporation and Bylaws of Patapsco Bancorp. The
rights of the stockholders of Patapsco Bancorp are governed by
the Articles of Incorporation, which, following the merger, will
include the Articles Supplementary attached hereto as Annex F,
and the Bylaws of Patapsco Bancorp.
Northfield Bancorp Stockholders Will Own
Patapsco Bancorp's Series A Preferred Stock
(Page 31)
After the completion of the merger, those holders of Northfield
Bancorp common stock who do not object to the merger will hold
shares of Patapsco Bancorp preferred stock. The rights and
preferences of holding Patapsco Bancorp preferred stock differ
from the rights and preferences of holding Northfield Bancorp
common stock in significant respects. See " -- Description of
Preferred Stock" above.
Patapsco Bancorp's Officers and Directors and its Employee Stock
Ownership Plan Hold Over ___% of Patapsco Bancorp's Common Stock
Patapsco Bancorp's directors and officers, as a group, (plus
Patapsco Bancorp's employee stock ownership plan) hold and have
the power to vote in excess of ___% of the issued and outstanding
shares of Patapsco Bancorp common stock. As a result, the
directors and officers and Patapsco Bancorp's employee stock
ownership plan possess the voting power to prevent certain
business combinations.
9
<PAGE>
RISK FACTORS
If the merger is consummated, you will receive cash plus shares of
Patapsco Bancorp's preferred stock in exchange for your shares of Northfield
Bancorp common stock unless you object to the merger and receive the "fair
value" of your shares in cash, in accordance with the provisions of the Maryland
General Corporation Law which appear in this proxy statement/prospectus as Annex
B. An investment in Patapsco Bancorp preferred stock is subject to a number of
risks and uncertainties, many of which also apply to your existing investment in
Northfield Bancorp common stock. Risks and uncertainties relating to economic
conditions and other matters that would affect other financial institutions in
similar ways are generally not summarized below. Those risks, among others, are
highlighted on page 48 under the heading "A Warning About Forward-Looking
Statements."
However, there are a number of risks and uncertainties relating to
Patapsco Bancorp and your decision on the merger that you should consider in
addition to the risks and uncertainties associated with financial institutions
generally. Many of these risks and uncertainties could affect Patapsco Bancorp's
future financial results and may cause Patapsco Bancorp's future earnings and
financial condition to be less favorable than Patapsco Bancorp's expectations.
This section summarizes those risks.
LIMITED TRADING FOR PREFERRED STOCK AND COMMON STOCK
Although the Patapsco Bancorp preferred stock to be issued in the
merger will be registered with the Securities and Exchange Commission pursuant
to a registration statement on Form S-4 filed by Patapsco Bancorp, neither the
Patapsco Bancorp preferred stock nor the common stock of Patapsco Bancorp is or
will be listed for trading on any national securities exchange, such as the New
York Stock Exchange. The Patapsco Bancorp preferred stock and Patapsco Bancorp
common stock will also not be listed for trading on any nationally recognized
automated quotation system, such as Nasdaq. Patapsco Bancorp common stock is
traded on the OTC Bulletin Board, and following the merger, Patapsco Bancorp
will seek to obtain a market maker for the preferred stock so that it too may be
traded on the OTC Bulletin Board. However, Patapsco Bancorp cannot guarantee
that it will obtain a market maker for the preferred stock or that, if we do
obtain one, a trading market for the preferred stock will develop. Therefore,
you should consider the potentially illiquid nature of the preferred stock and
the possibility that you may not be able to sell it quickly.
In addition, although Patapsco Bancorp has established a liquidation
preference for the preferred stock of $25.00 per share, the preferred stock may
not trade at a price that equals or exceeds $25.00 per share. The preferred
stock is convertible into Patapsco Bancorp common stock on a one for one basis.
As of _________ __, 2000, the most recent sale price for Patapsco Bancorp common
stock was $__ per share. If you were to convert shares of Patapsco Bancorp
preferred stock you receive in the merger into Patapsco Bancorp common stock,
you would receive common stock that, based on the most recent sale price, was
below the $25.00 liquidation preference for the preferred stock.
YOU WILL HAVE LIMITED VOTING RIGHTS
The holders of Patapsco Bancorp preferred stock generally do not have
any rights to vote their shares. There are, however, two circumstances in which
holders of the preferred stock will have a right to vote:
. First, if Patapsco Bancorp fails to pay eight quarterly dividends
on the Patapsco Bancorp preferred stock (whether or not
consecutive), then the number of directors on Patapsco Bancorp's
Board of Directors shall be increased by one. The additional
director (known as the "representative director") will be elected
by the holders of the Patapsco Bancorp preferred stock, voting
together with the holders of any other class of shares ranking on
parity with the Patapsco Bancorp preferred stock for liquidation
or dividend purposes, at the next annual or special meeting of
shareholders, or at a special meeting of preferred shareholders
called for that purpose. The holders of Patapsco Bancorp
preferred stock, with the holders of any other class of shares
electing the representative director, shall be entitled to vote
to reelect, replace or remove the representative director.
. Second, the affirmative vote of at least a majority of the
outstanding shares of Patapsco Bancorp preferred stock is
required in order for Patapsco Bancorp to (i) change its Articles
of Incorporation
10
<PAGE>
in such a way that would adversely affect the voting rights,
designations, liquidation and other preferences, privileges or
any other special rights afforded to holders of Patapsco Bancorp
preferred stock, or (ii) create or authorize any class or series
of shares ranking prior to or on a parity with the Patapsco
Bancorp preferred stock with respect to dividends, liquidation or
other preferences.
PATAPSCO BANCORP AND NORTHFIELD BANCORP MAY NOT SUCCESSFULLY INTEGRATE THEIR
RESPECTIVE BUSINESS OPERATIONS
Integrating the business operations of Patapsco Bancorp and Northfield
Bancorp after the merger may be difficult and time consuming. If we are unable
to integrate our businesses successfully, this could hurt our business and
operating results. Successful integration of Northfield Bancorp's operations
will depend on Patapsco Bancorp's ability to consolidate operations, systems and
procedures to eliminate redundancies and costs. Patapsco Bancorp may encounter
difficulties in the integration process, such as the loss of key employees and
customers, the disruption of ongoing businesses or possible inconsistencies in
standards, controls, procedures and policies.
11
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA FOR PATAPSCO BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
At At June 30,
March 31, --------------------------
2000 1999 1998
----------- -------- --------
(In thousands)
<S> <C> <C> <C>
Total assets..................................................$ 101,323 $ 95,328 $ 92,371
Loans receivable, net......................................... 87,901 77,777 75,871
Cash, federal funds sold and other interest
bearing deposits........................................... 4,892 9,352 8,538
Investment securities......................................... 447 214 5,119
Mortgage-backed securities.................................... 4,523 4,879 --
Deposits...................................................... 75,187 69,671 70,327
Borrowings.................................................... 14,900 14,056 10,200
Stockholders' equity.......................................... 9,290 9,218 9,123
</TABLE>
SELECTED CONSOLIDATED INCOME DATA
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
-------------------------- --------------------------
2000 1999 1999 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest income.................................... $ 5,795 $ 5,380 $ 7,240 $ 7,038
Interest expense................................... 2,658 2,477 3,306 3,444
--------- --------- --------- ---------
Net interest income before provision
for loan losses.................................. 3,137 2,903 3,934 3,594
Provision for loan losses.......................... 255 170 245 240
--------- --------- --------- ---------
Net interest income after provision
for loan losses.................................. 2,882 2,733 3,689 3,354
Noninterest income................................. 254 181 246 274
Noninterest expense:
Compensation and employee benefits............. 1,381 1,301 1,797 1,597
Insurance...................................... 45 51 67 72
Professional fees.............................. 100 87 94 134
Equipment expenses............................. 124 83 115 117
Net occupancy costs............................ 59 63 81 90
Advertising.................................... 29 31 45 53
Data processing................................ 118 86 122 114
Merger-related expenses........................ -- -- 89 --
Net loss on disposal of fixed assets........... -- -- 23 --
Other.......................................... 338 323 443 372
--------- --------- --------- ---------
Total noninterest expenses................. 2,194 2,025 2,876 2,549
Income before provision for income taxes........... 942 889 1,059 1,079
Income tax provision............................... 366 334 399 401
--------- --------- --------- ---------
Net income......................................... $ 576 $ 555 $ 660 $ 678
========= ========= ========= =========
</TABLE>
12
<PAGE>
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
At or for the Nine Months At or for the
Ended March 31, Year Ended June 30,
---------------------------- ---------------------------
2000 1999 1999 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income divided by
average total assets).......................... 0.80% 0.82% 0.73% 0.76%
Return on average stockholders' equity (net income
divided by average stockholders' equity)....... 8.18 7.97 7.05 7.88
Interest rate spread (combined weighted average
interest rate earned less combined weighted
average interest rate cost).................... 3.98 3.85 3.93 3.54
Net interest margin (net interest income
divided by average interest-earning assets).... 4.47 4.42 4.46 4.10
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 112.95 115.03 114.08 114.12
Ratio of noninterest expense to average total
assets......................................... 3.04 3.01 3.17 2.85
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at
end of period.................................. 0.70 0.69 0.22 0.53
Nonperforming (nonaccrual) loans to loans
receivable, net at end of period............... 0.61 0.73 0.23 0.61
Allowance for loan losses to total loans
at end of period............................... 0.82 0.81 0.80 0.72
Allowance for loan losses to nonperforming
loans at end of period......................... 135.01 111.07 347.19 119.81
Net charge-offs to average loans outstanding...... 0.19 0.12 0.21 0.11
CAPITAL RATIOS:
Stockholders' equity to total assets at end
of period.................................... 9.17 10.08 9.67 9.88
Average stockholders' equity to average assets.... 9.73 10.34 10.33 9.62
</TABLE>
13
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA FOR NORTHFIELD BANCORP, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At At December 31,
March 31, -----------------------------
2000 1999 1998
----------- -------- --------
(In thousands)
<S> <C> <C> <C>
Total assets.................................................. $ 54,301 $ 53,580 $ 44,310
Cash.......................................................... 184 620 166
Interest-bearing deposits in other banks...................... 752 1,039 4,834
Investments available for sale................................ 4,881 4,874 --
Investments held to maturity.................................. -- -- 799
Mortgage-backed securities- available for sale................ 2,433 2,551 --
Mortgage-backed securities - held to maturity................. 518 524 2,123
Loans receivable - net........................................ 44,327 42,856 35,702
Federal Home Loan Bank of Atlanta stock....................... 475 445 273
Deposit accounts.............................................. 36,413 36,603 36,435
Total equity.................................................. 7,126 7,073 7,128
</TABLE>
SELECTED OPERATIONS DATA
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
-------------------------- --------------------------
2000 1999 1999 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest income.................................... $ 955 $ 819 $ 3,472 $ 2,984
Interest expense................................... 559 430 1,935 1,751
--------- --------- --------- ---------
Net interest income................................ 396 389 1,537 1,233
Provision for loan losses.......................... -- -- -- --
--------- --------- --------- ---------
Net interest income after provision
for loan losses................................. 396 389 1,537 1,233
Noninterest income................................. 7 9 29 31
Noninterest expense................................ 348 209 961 761
--------- --------- --------- ---------
Income before taxes and cumulative effect of
change in accounting principle................. 55 189 605 503
Income tax expense................................. 24 72 234 196
--------- --------- --------- ---------
Cumulative effect of change in accounting
principle....................................... -- 9 9 --
--------- --------- --------- ---------
Net income......................................... $ 31 $ 126 $ 380 $ 307
========= ========= ========= =========
</TABLE>
14
<PAGE>
SELECTED RATIOS
<TABLE>
<CAPTION>
At or for the Three At or for the Year Ended
Months Ended March 31, December 31,
-------------------------- --------------------------
2000 1999 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on assets (ratio of net earnings
to average total assets)....................... 0.23% 1.10% 0.77% 0.77%
Return on equity (ratio of net earnings
to average equity)............................. 1.75 6.64 5.25 8.05
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 122.41 123.68 123.70 111.57
Ratio of net interest income, after provision
for loan losses and noninterest expense........ 113.93 186.66 159.94 162.16
Net interest rate spread.......................... 2.04 2.52 2.23 2.63
Net interest margin............................... 3.00 3.44 3.18 3.15
ASSET QUALITY RATIOS:
Nonperforming loans to total loans
at end of period............................... -- -- -- 0.77
Nonperforming loans to total assets............... -- -- -- 0.67
Nonperforming assets to total assets
at end of period............................... -- -- -- 0.67
Allowance for loan losses to nonperforming
loans at end of period......................... n/a n/a n/a 66.55
Allowance for loan losses to total loans, net..... 0.41 0.51 0.43 0.55
CAPITAL RATIOS:
Equity to total assets at end of period........... 13.12 15.75 13.20 16.09
Average equity to average assets.................. 13.25 16.62 14.65 9.58
</TABLE>
15
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF CONDITION AT MARCH 31, 2000
<TABLE>
<CAPTION>
Pro Forma
Patapsco Northfield Adjustments Combined
-------- ---------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C>
Cash.................................... $ 4,892 $ 936 $ (2,144) (A) $ 3,684
Investments............................. 5,921 7,832 (280) (B) 13,473
Loans receivable, net................... 87,901 44,327 (1,433) (C) 130,795
Goodwill................................ 0 2,586 (D) 2,586
Premises and equipment.................. 1,030 90 0 1,120
Other assets............................ 1,579 1,116 543 (E) 3,238
------------- -------------- ---------- -------------
Total assets....................... $ 101,323 $ 54,301 $ (728) $ 154,896
============= ============== ========== =============
Deposits................................ 75,187 36,413 1,209 (F) 112,809
Borrowings.............................. 14,900 9,500 2,744 (G) 27,144
Other liabilities....................... 1,946 1,262 (286) (H) 2,922
------------- -------------- ---------- -------------
Total liabilities.................. 92,033 47,175 3,667 142,875
Preferred stock......................... 0 0 2,731 (I) 2,731
Common equity........................... 9,290 7,126 (7,126) (J) 9,290
------------- -------------- ---------- -------------
Total liabilities and equity....... $ 101,323 $ 54,301 $ (728) $ 154,896
============= ============== ========== =============
</TABLE>
16
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE NINE MONTHS
ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Patapsco Northfield Adjustments Combined
---------- ------------ ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income
Interest on loans..................... $ 5,336 $ 2,328 $ 110 (K) $ 7,774
Interest on investments............... 459 443 (139) (L) 763
--------- ----------- -------- ---------
Total interest income..................... 5,795 2,771 (29) 8,537
Interest expense
Interest on deposits.................. 2,012 1,289 2 (M) 3,303
Interest on borrowed money............ 646 314 96 (N) 1,056
--------- ----------- -------- ---------
Total interest expense.................... 2,658 1,603 98 4,359
Net interest income....................... 3,137 1,168 (127) 4,178
Loan loss provision....................... 255 0 0 255
--------- ----------- -------- ---------
Net interest income after provision....... 2,882 1,168 (127) 3,923
Noninterest income........................ 254 20 0 274
Noninterest expense....................... 2,194 862 129 (0) 3,185
--------- ----------- -------- ---------
Net income before taxes................... 942 326 (256) 1,012
Income taxes.............................. 366 125 (49) 442
--------- ----------- -------- ---------
Net income................................ 576 201 (207) 570
Dividends on preferred stock.............. 0 0 154 154
Net income available to holders of
common stock.......................... $ 576 $ 201 $ (361) $ 416
========= =========== ======== =========
Earnings per common share
Basic................................... $ 1.84 $ 0.47 $ 1.33
Diluted................................. $ 1.75 $ 0.45 $ 1.30
Weighted average shares outstanding
Basic................................... 313,714 429,036 313,714
Diluted................................. 330,228 442,501 439,481 (Q)
</TABLE>
17
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED
JUNE 30, 1999
<TABLE>
<CAPTION>
Patapsco Northfield Adjustments Combined
---------- ---------- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income
Interest on loans..................... $ 6,690 $ 2,760 $ 146 (K) $ 9,596
Interest on investments............... 550 430 (185) (L) 795
--------- ----------- -------- ---------
Total interest income..................... 7,240 3,190 (39) 10,391
Interest expense
Interest on deposits.................. 2,691 1,740 2 (M) 4,433
Interest on borrowed money............ 615 54 128 (N) 797
--------- ----------- -------- ---------
Total interest expense.................... 3,306 1,794 130 5,230
Net interest income....................... 3,934 1,396 (169) 5,161
Loan loss provision....................... 245 0 0 245
--------- ----------- -------- ---------
Net interest income after provision....... 3,689 1,396 (169) 4,916
Noninterest income........................ 246 31 0 277
Noninterest expense....................... 2,876 894 172 (O) 3,942
--------- ----------- -------- ---------
Net income before taxes................... 1,059 533 (341) 1,251
Income taxes.............................. 399 218 (65) 552
--------- ----------- -------- ---------
Income before cumulative effect
of accounting change................... 660 315 (276) 699
Cumulative effect of accounting
change, net of tax..................... 0 9 0 9
--------- ----------- -------- ---------
Net income................................ 660 324 (276) 708
Dividends on preferred stock.............. 0 0 205 205
--------- ----------- -------- ---------
Net income available to holders
of common stock....................... $ 660 $ 324 $ (481) $ 503
========= =========== ======== =========
Earnings per common share
Basic................................... $ 2.03 N/A (P) $ 1.55
Diluted................................. $ 1.87 N/A $ 1.53
Weighted average shares outstanding
Basic................................... 325,300 325,300
Diluted................................. 352,173 461,426 (Q)
</TABLE>
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
The merger will be accounted for by Patapsco Bancorp using the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16 and Statement of Financial Accounting Standards No. 72. Under this method,
the aggregate cost of the merger will be allocated to assets acquired and
liabilities assumed based on their estimated fair values as of the closing date.
For purposes of pro forma presentation,
18
<PAGE>
estimates of the fair values of Northfield Bancorp's assets and liabilities as
of March 31, 2000 have been combined with the book values of Patapsco Bancorp's
assets and liabilities as of March 31, 2000.
(A) As described in the merger agreement, Patapsco will pay a portion of the
consideration to Northfield Bancorp shareholders in cash at $12.50 per
share. The gross amount will be $5,943,000. This amount is reduced by the
cash consideration on the Northfield Bancorp shares already owned by
Patapsco Bancorp or $253,000. Additional cash outflows include combined
merger expenses, primarily to legal and financial advisors of $644,000, the
buyout of Northfield Bancorp's president's employment contract of $100,000
and the payoff of miscellaneous payables of Northfield Bancorp of $10,000.
Cash inflows include a $3,000,000 loan taken out by Patapsco Bancorp and an
increase in the cash balances of Northfield Federal of $1,300,000. This
increase in cash is required to liquidate a demand account of Northfield
Bancorp held at Northfield Federal.
(B) The adjustment to investments includes the book value of Patapsco Bancorp's
current ownership of Northfield Bancorp stock of $226,000 and a $54,000
market value adjustment to Northfield Bancorp's held-to-maturity securities
portfolio.
(C) The adjustment to net loans is the market value adjustment to Northfield
Bancorp's loan portfolio and deferred loan fees.
(D) The purchase price is allocated to identifiable tangible and intangible
assets at their fair values. Any portion of the purchase price that cannot
be assigned to specifically identifiable tangible and intangible assets
acquired less liabilities assumed is considered to be goodwill, that is
expected to be amortized over 15 years.
The following table provides a reconciliation of the excess cost of the
merger to Patapsco Bancorp over the fair value of the net assets acquired
from Northfield Bancorp (in thousands):
Cash consideration to be paid by Patapsco Bancorp ................. $ 5,943
Value of preferred stock to be issued by Patapsco Bank ............ 2,731
Less cash consideration on shares owned by Patapsco Bancorp ....... (253)
Book value of shares owned by Patapsco Bank ....................... 226
Estimated combined merger expenses ................................ 494
Payment in lieu of stock benefit plans............................. 150
-------
Purchase price .................................................... $ 9,291
Less stockholders' equity of Northfield Bancorp ................... (7,126)
Fair value adjustments, net ....................................... 771
Less adjustments for ESOP and deferred compensation
plan termination and employment buyout ......................... (350)
-------
Cost in excess of fair value of net assets acquired ............... $ 2,586
=======
(E) The adjustment to other assets includes a $50,000 fair value adjustment to
an owned office and $493,000 deferred tax asset.
(F) The adjustment to deposits includes an increase in Northfield Federal's
deposits of $1,300,000 to fund the liquidation of Northfield Bancorp's
demand account and the market value adjustment of Northfield Federal's
deposits.
(G) The adjustment to borrowings consists of a $3,000,000 borrowing by Patapsco
Bancorp less a $256,000 market value adjustment to Northfield Bancorp's
borrowings from the Federal Home Loan Bank of Atlanta.
(H) The adjustment to other liabilities includes the liquidation of the
Northfield Bancorp employee stock ownership plan and deferred compensation
plan and the payoff of the Northfield Bancorp employee stock ownership plan
loan.
(I) In the merger, after cancellation of 20,224 shares of Northfield Bancorp
common stock owned by Patapsco Bancorp, Patapsco Bancorp will issue 109,253
shares of Series A Noncumulative Convertible Perpetual Preferred Stock with
a liquidation preference of $25.00 per share to Northfield Bancorp's
shareholders.
(J) As the transaction is being accounted for using the purchase method,
Northfield Bancorp common stock will be eliminated in its entirety.
(K) Interest income on loans receivable in the unaudited pro forma combined
condensed statements of income for the nine months ended March 31, 2000 and
the year ended June 30, 1999, is increased
19
<PAGE>
by $107,000 and $146,000, respectively, reflecting the amortization of the
$1,753,000 discount calculated on loans receivable over the estimated life
of 144 months.
(L) Interest income on investments in the unaudited pro forma combined
condensed statements of income for the nine months ended March 31, 2000 and
the year ended June 30, 1999, is decreased by $139,000 and $185,000,
respectively, reflecting the decrease in federal funds sold due to the use
of $2,900,000 on internally generated cash in the purchase of Northfield
Bancorp.
(M) Interest expense on deposits in the unaudited pro forma combined condensed
statements of income for the nine months ended March 31, 2000 and the year
ended June 30, 1999, represents the amortization of the deposit premium
over 36 months. Interest expense on deposits in the nine and twelve month
periods ended March 31, 2000 and June 30,1999 is increased by $2,000 and
$2,000, respectively.
(N) Interest on borrowed money in the unaudited pro forma combined condensed
statements of income for the nine months ended March 31, 2000 and the year
ended June 30, 1999, reflects the Patapsco Bancorp loan used to finance
approximately half of the cash consideration as well as the amortization of
the discount on Federal Home Loan Bank of Atlanta borrowings over 36
months. The original Patapsco Bancorp loan amount of $3,000,000 will be
decreased shortly after the transaction closes by $1,500,000 by using the
cash of Northfield Bancorp.
(O) Goodwill amortization expense in the unaudited pro forma combined condensed
statements of income for the nine months ended March 31, 2000 and the year
ended June 30, 1999, reflects $129,000 and $172,000, respectively of
goodwill amortization over a 15 year period.
(P) Earnings per share data is not presented for the year ended June 30, 1999,
since Northfield Federal converted to stock form in November 1998, and such
information would not be meaningful.
(Q) Weighted average shares outstanding used in computing fully diluted
earnings per share on a pro forma basis includes the 109,253 shares of
Patapsco Bancorp preferred stock to be issued as part of this proposed
transaction that are convertible into shares of Patapsco Bancorp common
stock on a one-for-one basis.
COMPARATIVE PER SHARE DATA
The following table shows information about our income per common
share, dividends per share and book value per share, and similar information
reflecting the merger. The information in the table assumes that Patapsco
Bancorp will account for the merger using the purchase method of accounting.
The pro forma information, while helpful in illustrating the financial
characteristics of Patapsco Bancorp following the merger under one set of
assumptions, does not attempt to predict or suggest future results. The pro
forma information also does not necessarily reflect what the historical results
of Patapsco Bancorp would have been had our companies been combined during these
periods.
The information in the following table is based on, and should be read
together with, the historical financial information that we have presented in
our prior filing with the Securities and Exchange Commission. Patapsco Bancorp
has incorporated its prior filings into this document by reference. See "Where
You Can Find More Information" on page 93.
AT
MARCH 31,
2000
--------
Book value per share:
Patapsco Bancorp historical .................................. $28.25
Northfield Bancorp historical ................................ 14.99
Pro forma combined (1) ....................................... 36.55
Pro forma combined assuming conversion
of all shares of preferred stock (1) ...................... 27.43
20
<PAGE>
<TABLE>
<CAPTION>
NINE
MONTHS ENDED YEAR ENDED
MARCH 31, JUNE 30,
2000 1999
----------------- ----------------
<S> <C> <C>
CASH DIVIDENDS DECLARED PER SHARE:
Patapsco Bancorp historical......................... $0.42 $0.48
Northfield Bancorp historical (2)................... 0.10 0.10
Pro forma (3)....................................... 0.42 0.48
DILUTED NET INCOME PER SHARE:
Patapsco Bancorp historical......................... $1.75 $1.87
Northfield Bancorp historical (2)................... 0.45 N/A
Pro forma combined (2).............................. 1.30 1.53
<FN>
----------
(1) Pro forma combined book value per share of Patapsco Bancorp common
stock is based upon the historical total combined stockholders' equity
for Patapsco Bancorp and Northfield Bancorp divided by total pro forma
common stock of the combined entities.
(2) Historical cash dividends per share for Northfield Bancorp and
historical diluted net income per share for Northfield Bancorp under
the column labeled "Year Ended June 30, 1999" is for the four
consecutive quarters ended June 30, 1999. Pro forma combined diluted
net income per share for the year ended June 30, 1999 is based on
Patapsco Bancorp's income for its fiscal year ended June 30, 1999 and
Northfield Bancorp's net income for the four consecutive quarters ended
June 30, 1999.
(3) Represents Patapsco Bancorp's historical dividends per share.
</FN>
</TABLE>
MARKET PRICE AND DIVIDEND INFORMATION
Patapsco Bancorp common stock is listed on the OTC Bulletin Board under
the symbol PATD. Northfield Bancorp common stock is listed on the OTC Bulletin
Board under the symbol NFSB. The following table lists the high and low closing
sale prices per share for Patapsco Bancorp common stock and Northfield Bancorp
common stock and the cash dividends declared by Patapsco Bancorp and Northfield
Bancorp for the periods indicated.
<TABLE>
<CAPTION>
Patapsco Bancorp Northfield Bancorp (1)
Common Stock Common Stock
------------------------------- -------------------------------
High Low Dividends High Low Dividends
---- --- --------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
1997
Quarter ended September 30, 1997...... $ 30.00 $ 26.00 $ -- $ -- $ -- $ --
Quarter ended December 31, 1997....... 32.00 27.00 .10 -- -- --
1998
Quarter ended March 31, 1998.......... 32.063 30.00 .10 -- -- --
Quarter ended June 30, 1998........... 33.50 32.00 .10 -- -- --
Quarter ended September 30, 1998...... 34.25 28.125 .12 -- -- --
Quarter ended December 31, 1998....... 30.00 26.50 .12 10.25 10.00 --
1999
Quarter ended March 31, 1999.......... 31.50 28.25 .12 10.75 9.625 --
Quarter ended June 30, 1999........... 30.125 28.75 .12 11.25 10.00 .10
Quarter ended September 30, 1999...... 34.25 28.125 .14 10.625 10.25 --
Quarter ended December 31, 1999....... 30.00 26.50 .14 11.875 10.25 .10
2000
Quarter ended March 31, 2000.......... 26.25 20.50 .14 14.50 10.75 --
<FN>
---------
(1) Northfield Bancorp common stock commenced trading on November 12, 1998.
</FN>
</TABLE>
21
<PAGE>
The following table shows the closing prices of Patapsco Bancorp common
stock and Northfield Bancorp common stock on May 15, 2000, which is the day
before the merger was announced, and _________, 2000.
<TABLE>
<CAPTION>
Patapsco Bancorp Northfield Bancorp
Common Stock Common Stock
---------------- -------------------
<S> <C> <C>
May 15, 2000 $20.00 $14.9375
________, 2000
</TABLE>
You should obtain current market quotations for Patapsco Bancorp common
stock as the market price for Patapsco Bancorp common stock will fluctuate
between the date of this document and the date on which the merger is completed,
and thereafter. You can get quotations on the Internet or by calling your
broker.
As of July 28, 2000, there were approximately 379 holders of record of
Patapsco Bancorp common stock. As of _________, 2000, there were approximately
____ holders of record of Northfield Bancorp common stock. These numbers do not
reflect the number of persons or entities who may hold their stock in nominee or
"street" name through brokerage firms.
Following the merger, the declaration of dividends will be at the
discretion of Patapsco Bancorp's Board of Directors and will be determined after
consideration of various factors, including earnings, cash requirements, the
financial condition of Patapsco Bancorp, applicable state law and government
regulations and other factors deemed relevant by Patapsco Bancorp's Board of
Directors. Federal and Maryland law limit the ability of Patapsco Bank to pay
dividends to Patapsco Bancorp. The merger agreement limits cash dividends
payable on Northfield Bancorp common stock pending consummation of the merger to
a semi-annual dividend of $.10 per share. See "Proposal I -- The Merger --
Covenants Pending the Merger -- Conduct of Northfield Bancorp's Business."
SPECIAL MEETING OF NORTHFIELD STOCKHOLDERS
PLACE, DATE AND TIME
The special meeting will be held at our executive offices, 8005 Harford
Road, Baltimore, Maryland on ____________, __________ __, 2000, at _:00 _.m.,
local time.
PURPOSE OF MEETING
The purposes of the special meeting are to consider and vote on a
proposal to approve and adopt the merger agreement, to consider and vote upon a
proposal to adjourn the special meeting if sufficient votes to approve the
merger agreement are not present at the special meeting and to act on any other
matters brought before the special meeting.
WHO CAN VOTE AT THE MEETING
You are entitled to vote your Northfield Bancorp common stock if the
records of Northfield Bancorp show that you held your shares as of the close of
business on _______ __, 2000. As of the close of business on that date, a total
of 475,442 shares of Northfield Bancorp common stock were issued and
outstanding. Each share of common stock has one vote.
22
<PAGE>
ATTENDING THE MEETING
If you are a beneficial owner of Northfield Bancorp common stock held
by a broker, bank or other nominee (i.e., in "street name"), you will be
admitted to the special meeting. However, if you want to vote your shares of
Northfield Bancorp common stock held in street name in person at the special
meeting, you will have to get a written proxy in your name from the broker, bank
or other nominee who holds your shares.
VOTE REQUIRED
The special meeting will be held if a majority of the outstanding
shares of common stock entitled to vote is represented in person or by proxy at
the special meeting. If you return a properly executed proxy card or attend the
special meeting in person, your shares will be counted for purposes of
determining whether there is a quorum, even if you abstain from voting. Broker
non-votes also will be counted for purposes of determining the existence of a
quorum. A broker non-vote occurs when a broker, bank or other nominee holding
shares for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power with respect to that item and
has not received voting instructions from the beneficial owner. Under applicable
rules, brokers, banks and other nominees may not exercise their voting
discretion on the proposal to approve and adopt the merger agreement and, for
this reason, may not vote shares held for beneficial owners without specific
instructions from the beneficial owners.
Approval and adoption of the merger agreement requires the affirmative
vote of the holders of at least two-thirds of the outstanding shares of
Northfield Bancorp common stock entitled to vote at the special meeting.
Approval of the adjournment of the special meeting requires the affirmative vote
of the holders of at least a majority of the votes cast at the special meeting.
Failure to return a properly executed proxy card or to vote in person will have
the same effect as a vote against the merger agreement. Abstentions and broker
non-votes also will be counted in determining whether a quorum is present, but
have the same effect as a vote against the merger agreement and the merger. Such
votes will not be counted as voted on the adjournment proposal.
As of _______ __, 2000, directors and executive officers of Northfield
Bancorp, and persons closely associated with them, beneficially owned 66,582
shares of Northfield Bancorp common stock. This equals 14.0% of the issued and
outstanding shares of Northfield Bancorp common stock. In connection with the
merger agreement, the directors of Northfield Bancorp entered into agreements
under which they agreed to vote in favor of the merger all shares of Northfield
Bancorp common stock that they beneficially own. Also, the Northfield Federal
Savings Grantor Trust owns 13,465 shares, or 2.8% of the shares of Northfield
Bancorp common stock outstanding as of the record date. As of the same date,
Patapsco Bancorp owned 20,224 shares of Northfield Bancorp common stock, which
equals 4.3% of the outstanding Northfield Bancorp common stock, and directors
and executive officers of Patapsco Bancorp, and persons closely associated with
them, beneficially owned 7,308 shares of Northfield Bancorp common stock, which
equals 1.5% of the outstanding Northfield Bancorp common stock. All of the above
shares are expected to be voted in favor of the merger agreement and the merger
and in favor of the adjournment proposal.
VOTING BY PROXY
This document is being sent to you by the Board of Directors of
Northfield Bancorp for the purpose of requesting that you allow your shares of
Northfield Bancorp common stock to be represented at the special meeting by
persons named in the enclosed proxy card. All shares of Northfield Bancorp
common stock represented at the special meeting by properly executed proxies
will be voted in accordance with the instructions you indicate on the proxy
card. If you sign and return a proxy card without giving voting instructions,
your shares will be voted as recommended by Northfield Bancorp's Board of
Directors. Northfield Bancorp's Board of Directors unanimously recommends a vote
"FOR" approval of the merger agreement and the merger and "FOR" adjournment of
the special meeting if sufficient votes are not present in person or by proxy to
approve the merger agreement.
If any matters not described in this document are properly presented at
the special meeting, the persons named in the proxy card will vote your shares
as directed by Northfield Bancorp's Board of Directors. Northfield Bancorp does
not know of any other matters to be presented at the special meeting.
23
<PAGE>
You may revoke your proxy at any time before the vote is taken at the
special meeting. To revoke your proxy you must either advise the Secretary of
Northfield Bancorp in writing before your common stock has been voted at the
special meeting, deliver a proxy with a later date, or attend the special
meeting and vote your shares in person. Attendance at the special meeting will
not in itself constitute revocation of your proxy.
If your Northfield Bancorp common stock is held in street name, you
will receive instructions from your broker, bank or other nominee that you must
follow in order to have your shares voted. Your broker or bank may allow you to
deliver your voting instructions via the telephone or the Internet.
Northfield Bancorp will pay the cost of this proxy solicitation. In
addition to soliciting proxies by mail, directors, officers and employees of
Northfield Bancorp may solicit proxies personally and by telephone. None of
these persons will receive additional or special compensation for soliciting
proxies. Northfield Bancorp will, upon request, reimburse brokers, banks and
other nominees for their expenses in sending proxy materials to their customers
who are beneficial owners and obtaining their voting instructions.
OWNERSHIP OF NORTHFIELD BANCORP COMMON STOCK
The following table provides information as of June 30, 2000 with
respect to persons known to Northfield Bancorp to be the beneficial owners of
more than 5% of Northfield Bancorp's outstanding common stock. A person may be
considered to beneficially own any shares of common stock over which he or she
had, directly or indirectly, sole or shared voting or investing power.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF COMMON STOCK
NAME AND ADDRESS SHARES OWNED OUTSTANDING
---------------- ------------ -----------------------
<S> <C> <C>
Northfield Bancorp, Inc. 38,035 8.00%
Employee Stock Ownership Plan
8005 Harford Road
Baltimore, Maryland 21234
John W. Spence 36,272 7.63
Spence Limited, L.P.
4712 Clendenin Road
Nashville, Tennessee 37220
<FN>
(1) These shares are held in a suspense account for future allocation among
participating employees as the loan used to purchase the shares is repaid.
The employee stock ownership plan trustees, currently Directors Hoffman,
Lawrence and Rush, vote all allocated shares in accordance with
instructions of the participants. Unallocated shares and shares for which
no instructions have been received are voted by the employee stock
ownership trustees in the same ratio as participants who direct the voting
of allocated shares or, in the absence of such direction, in the employee
stock ownership plan trustees' best judgment. As of June 30, 2000, 5,422
shares of Northfield Bancorp common stock had been allocated to employee
stock ownership plan participants.
(2) Based on a Schedule 13G filed in January 1999, John W. Spence and Spence
Limited, L.P. have shared voting and investment power over the reported
shares.
</FN>
</TABLE>
24
<PAGE>
The following table provides information about the shares of Northfield
Bancorp common stock that may be considered to be owned by each director and by
all directors and executive officers of Northfield Bancorp as a group as of June
30, 2000.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF COMMON STOCK
NAME AND ADDRESS SHARES OWNED (1) OUTSTANDING
---------------- ---------------- -----------------------
<S> <C> <C>
G. Ronald Jobson 13,857 (2) 2.9%
J. Thomas Hoffman 11,140 2.3
Gary R. Bozel 17,300 3.6
William R. Rush 9,285 2.0
E. Thomas Lawrence, Jr. 5,000 1.1
David G. Rittenhouse 10,000 2.1
All executive officers and directors 66,582 (3) 14.0
as a group (6 persons)
<FN>
(1) Includes stock held in joint tenancy; stock owned as tenants in common;
stock owned or held by a spouse or other member of the individual's
household; stock allocated through certain employee benefit plans of
Northfield Bancorp; stock in which the individual either has or shares
voting and/or investment power and shares which the individual has the
right to acquire at any time within 60 days of June 30, 2000. Each person
or relative of such person whose shares are included herein exercises sole
or shared voting and dispositive power as to the shares reported. Does not
include shares with respect to which Directors Hoffman, Lawrence and Rush
have "voting power" by virtue of their positions as trustees of the trust
holding 38,035 shares under the Company's employee stock ownership plan.
The employee stock ownership plan trustees must vote all allocated shares
held in the employee stock ownership plan in accordance with the
instructions of the participants. Unallocated shares and allocated shares
for which no timely direction is received are voted by the employee stock
ownership plan trustees in proportion to the participant-directed voting of
allocated shares or, in the absence of such direction, in the employee
stock ownership plan trustees' best judgment. Excludes 13,465 shares held
by Northfield Federal's deferred compensation plan trust over which shares
Northfield Federal's full Board of Directors has voting power.
(2) Includes 1,332 shares which have been allocated to Mr. Jobson's employee
stock ownership plan account.
(3) Includes 1,332 shares which have been allocated to the accounts of
executive officers in the employee stock ownership plan.
</FN>
</TABLE>
PROPOSAL I -- THE MERGER
The following discussion of the merger and the merger agreement is
qualified by reference to the full text of the merger agreement, which is
attached as Annex A to this proxy statement/prospectus. You should read the
entire merger agreement carefully. It is the legal document that governs the
merger.
THE PARTIES TO THE MERGER AGREEMENT
Patapsco Bancorp, Inc., The Patapsco Bank and PN Financial, Inc.
Patapsco Bancorp is the holding company for The Patapsco Bank. Patapsco Bank
operates through a single office located in Dundalk, Maryland and serves eastern
Baltimore County. The principal business of Patapsco Bank consists of attracting
deposits from the general public and investing these deposits in loans secured
by residential and commercial real estate, construction loans, commercial
business loans and consumer loans. PN Financial is a wholly owned subsidiary of
Patapsco Bancorp and was formed for the sole purpose of facilitating the merger.
At March 31, 2000, Patapsco Bancorp had total assets of $101.3 million, deposits
of $75.2 million and stockholders' equity of $9.3 million.
Patapsco Bancorp's 1999 Annual Report to Stockholders is included in
this document as Annex C, and Patapsco Bancorp's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 2000 in included in this
25
<PAGE>
document as Annex D. For additional information about Patapsco Bancorp, see
"Where You Can Find More Information" on page 93.
Northfield Bancorp, Inc. and Northfield Federal Savings Bank.
Northfield Bancorp was organized in March 1998 to acquire all of the capital
stock to be issued by Northfield Federal in its conversion from mutual to stock
form. Northfield Bancorp's principal business is the business of Northfield
Federal. Northfield Federal is a community and customer oriented federal stock
savings bank operating through two offices located in Baltimore, Maryland.
Northfield Federal's business emphasizes residential construction lending,
primarily originating construction/permanent mortgages on one- to four-family
properties. It also makes commercial real estate loans, home equity loans and
certain types of consumer loans. At March 31, 2000, Northfield Bancorp had total
assets of $54.3 million, deposits of $36.4 million and stockholder's equity of
$7.1 million.
FORM OF THE MERGER; CONVERSION OF NORTHFIELD BANCORP COMMON STOCK
The merger agreement provides for the acquisition of Northfield Bancorp
by Patapsco Bancorp as follows. First, PN Financial, Patapsco Bancorp's wholly
owned subsidiary, will merge with and into Northfield Bancorp with Northfield
Bancorp surviving as a wholly owned subsidiary of Patapsco Bancorp. In the
merger, each outstanding share of Northfield Bancorp common stock, other than
shares held by objecting shareholders, will be automatically converted into the
right to receive $12.50 in cash and 0.24 shares of Patapsco Bancorp's preferred
stock and cash in lieu of any fractional share. Following the merger, Northfield
Bancorp will be liquidated into Patapsco Bancorp, and Northfield Federal will be
merged with and into Patapsco Bank.
BACKGROUND OF THE MERGER
In August 1999, Northfield Bancorp was approached on an unsolicited
basis by a Baltimore area financial institution regarding the possible sale of
Northfield Bancorp to the institution. At that time, Northfield Bancorp advised
the institution that, because of regulatory constraints associated with business
combination transactions within the one year period after conversion from the
mutual to stock form of ownership, it would be inappropriate for Northfield
Bancorp to enter into discussions with the institution less than ten months
after the mutual to stock conversion of Northfield Bancorp's bank subsidiary,
Northfield Federal. Northfield Federal converted to the stock form of ownership,
and Northfield Bancorp became the holding company of Northfield Federal, on
November 12, 1998. Although, at that time, the Northfield Bancorp Board desired
that Northfield Bancorp remain independent, the Board believed that it was in
the best interests of Northfield Bancorp's stockholders to consider all
proposals. Management then advised the soliciting institution that if it was
still interested in late October or November 1999, it could make a proposal to
the Board at that time.
In late October, early November 1999, the same institution again
approached Northfield Bancorp about a possible sale of Northfield Bancorp to the
institution. The parties engaged in preliminary discussions and the institution
made a non-binding verbal offer to purchase Northfield Bancorp common stock in
an all cash transaction. Northfield Bancorp's Board rejected the offer. At this
time, the Board also directed Board Chairman Gary R. Bozel to interview
investment banking firms and to determine whether Northfield Bancorp should
engage such a firm to advise and assist it in connection with its possible sale.
In early November 1999, Patapsco Bancorp approached Northfield
Bancorp on an unsolicited basis regarding the possible sale of Northfield
Bancorp to Patapsco Bancorp, and the parties engaged in preliminary negotiations
through November 1999. In late November 1999, Northfield Bancorp received an
unsolicited verbal offer from a third Baltimore area financial institution
regarding the possible sale of Northfield Bancorp to the institution. After
preliminary discussions with this institution, Northfield Bancorp rejected their
offer as it was below the offer price then being discussed with Patapsco.
During November and early December 1999, the Board considered
whether it should continue to evaluate offers or whether it should make the
decision to remain independent, notwithstanding any unsolicited proposals that
it might receive. The Board determined that in light of the premium over the
market price for Northfield Bancorp common stock which had been offered and
which was being discussed with Patapsco, it was in the stockholders' best
interests for the Board to continue to negotiate with Patapsco and to solicit
other offers. The Board directed Mr. Bozel, Northfield Bancorp's President, G.
Ronald Jobson, and its Secretary, J. Thomas Hoffman,
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to determine whether there existed an interest among other community
banking institutions to acquire Northfield Bancorp.
On December 23, 1999 Patapsco Bancorp made a written non-binding
offer to purchase Northfield Bancorp common stock for $19.00 with the
consideration being a combination of cash and shares of Patapsco Bancorp common
stock. The Board advised Patapsco that $19.00 per share was insufficient and
that the Board preferred an all cash offer.
During December 1999 and January 2000, Messrs. Bozel, Jobson and
Hoffman solicited two Baltimore area financial institutions that they believed
were likely to have an interest in acquiring Northfield Bancorp and whose
management philosophies were compatible with Northfield Bancorp. However,
neither of these institutions made an offer to purchase Northfield Bancorp.
During November and December 1999 and January 2000, Mr. Bozel also
met with three investment banking firms. One of these firms was Trident
Securities, which had served as Northfield Bancorp's financial advisor in
connection with the mutual to stock conversion. Trident advised Mr. Bozel that
Patapsco Bancorp had retained it in connection with Patapsco Bancorp's
acquisition activities and that it would not be able to represent Northfield
Bancorp. In January 2000, Mr. Bozel advised the Board that he did not believe
that either of the other two investment banking firms he had interviewed would
add sufficient value so as justify their being retained by Northfield Bancorp.
The Board agreed with Mr. Bozel's decision based upon, among other things, the
Board's knowledge of the terms of recent business combinations in the local
financial services industry and the Board's knowledge of the entities that would
be interested in acquiring institutions such as Northfield Bancorp.
In lieu of engaging an investment banking firm, the Board directed
Mr. Jobson to retain Ferguson & Company on a fee basis to determine whether the
consideration to be received by Northfield Bancorp's stockholders in any
transaction approved by the Board is fair to such stockholders from a financial
point of view. Ferguson & Company is an independent economic consulting and
appraisal firm with significant experience in appraising the value of financial
institutions.
On February 25, 2000, Patapsco Bancorp made a non-binding verbal
offer to purchase Northfield Bancorp common stock for $19.50 per share in an all
cash transaction. On March 7, 2000 at a special meeting of Northfield Bancorp's
Board of Directors, the Board accepted the offer and authorized the negotiation
of a definitive agreement to sell Northfield Bancorp to Patapsco Bancorp.
After a preliminary draft merger agreement was circulated in
mid-March 2000, Patapsco Bancorp advised Northfield Bancorp that due to concerns
that the proposed all cash transaction would not receive regulatory approval and
would adversely impact Patapsco Bancorp's regulatory capital, Patapsco Bancorp
was not willing to proceed with the all cash transaction. Patapsco indicated
that it would be willing to purchase each share of Northfield Bancorp common
stock for $12.50 in cash and 0.24 shares of a newly created series of Patapsco
Bancorp preferred stock, which would, among other things, be convertible into
shares of Patapsco's common stock on a one-for-one basis. At the time of this
revised offer, Patapsco Bancorp common stock had a market value of approximately
$20.00 per share.
Northfield Bancorp's Board of Directors agreed to the changed terms
and directed legal counsel to proceed with the negotiation of a definitive
agreement. Among other things that the Board considered in making this
determination was the fact that the market price of Patapsco Bancorp common
stock appeared to be undervalued based on its book and liquidation value, and
that upon conversion of the preferred stock at the then market value of
approximately $20.00 per share, Northfield Bancorp stockholders would recognize
a premium over the stock's historical trading prices.
During April and early May 2000, Northfield Bancorp, with the
assistance of Ferguson & Company, conducted due diligence on Patapsco Bancorp.
In part as a result of this due diligence, in early May 2000, Ferguson & Company
advised Northfield Bancorp that the consideration to be received by Northfield
would be fair from a financial point of view and that Ferguson & Company would
deliver Northfield Bancorp an opinion to that effect.
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On May 10, 2000, at a special meeting of the Board of Directors, the
Northfield Bancorp Board unanimously approved the merger agreement and
authorized Mr. Bozel to execute the agreement with such changes as Mr. Bozel
deemed to be appropriate. On May 16, 2000, the parties executed the merger
agreement.
REASONS FOR THE MERGER AND RECOMMENDATION OF NORTHFIELD BANCORP BOARD OF
DIRECTORS
Northfield Bancorp's Board believes that the merger is fair to,
advisable and in the best interests of Northfield Bancorp's stockholders and has
unanimously approved, adopted and declared advisable the merger agreement and
the transactions contemplated by the merger agreement, and unanimously
recommends that Northfield Bancorp's stockholders vote for the approval and
adoption of the merger agreement.
In approving the merger agreement and the related transactions,
Northfield Bancorp's Board took into account a number of factors, including the
following:
o the terms and conditions of the merger agreement, including the
consideration of $12.50 in cash and 0.24 shares of Patapsco Bancorp's
preferred stock to be received by Northfield Bancorp's stockholders in the
merger;
o the terms of the Patapsco Bancorp preferred stock;
o the fact that the consideration to be received in the merger by Northfield
Bancorp's stockholders reflects a premium for Northfield Bancorp common
stock over the value at which it has historically traded in the market
since its conversion from mutual form;
o information concerning the financial condition, results of operations and
prospects of both Patapsco Bancorp and Northfield Bancorp, including the
long-term equity growth potential of Northfield Bancorp as compared to
Patapsco Bancorp;
o the competitive environment for financial institutions generally, and the
ability of the combined entities to compete effectively in the marketplace;
o the compatibility of the respective business management philosophies of
Northfield Bancorp and Patapsco Bancorp, including Patapsco Bancorp's focus
on customer service;
o the ability of Patapsco Bancorp and Patapsco Bank to offer products and
services that Northfield Bancorp and Northfield Federal are not currently
able to offer;
o the economic terms of other recent business combinations in the local
financial services industry; and
o the opinion of Northfield Bancorp's financial advisor, Ferguson & Company,
that the consideration to be received by Northfield Bancorp's stockholders
in the merger is fair to such stockholders from a financial point of view.
The foregoing discussion of the information and factors considered
by Northfield Bancorp's Board of Directors is not intended to be exhaustive but
includes the material factors considered by the Board. Northfield Bancorp's
Board did not assign any relative or specific weights to the foregoing factors.
Rather, the Board viewed its conclusions and recommendations as being based on
the totality of the information presented to and considered by it. In addition,
individual directors may have given different weights to different factors.
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OPINION OF NORTHFIELD BANCORP'S FINANCIAL ADVISOR
Northfield Bancorp has retained Ferguson & Company to render a fairness
opinion with respect to the merger. On May 16, 2000, Ferguson & Company
delivered its opinion, which opinion was subsequently updated in writing as of
the date of this proxy statement/prospectus, that, as of such dates and subject
to the assumptions described in such opinions, the consideration to be received
by the holders of Northfield Bancorp common stock in the merger is fair to such
stockholders from a financial point of view. No limitations were imposed on
Ferguson & Company by Northfield Bancorp's Board of Directors with respect to
the investigations made or the procedures followed by it in rendering its
opinion.
Northfield Bancorp has agreed to pay Ferguson & Company a general
advisory fee of $20,000 for delivery of its fairness opinion, plus all
reasonable out-of-pocket expenses incurred in connection with the services
provided by Ferguson & Company, and to indemnify and hold harmless Ferguson &
Company to the full extent allowed by law from and against certain liabilities,
including certain liabilities under the federal securities laws, in connection
with this engagement.
The summary below is not a complete description of the methodology used
in the analyses performed by Ferguson & Company. It is, however, a summary of
the salient factors taken into consideration, from the perspective of evaluating
the worth of Northfield Bancorp and evaluating the offer received in the
valuation process. The preparation of a fairness opinion is not necessarily
susceptible to partial analysis or summary descriptions. Ferguson & Company
believes that its analysis and the summary set forth below must be considered as
a whole and that selecting portions of its analysis without considering all
analyses, or selecting part of the summary without considering all factors and
analyses, would create an incomplete view of the process underlying the analysis
set forth in Ferguson & Company's presentations and opinion. The ranges of
valuation resulting from any particular analysis described below should not be
taken to be Ferguson & Company's view of the actual value of Northfield Bancorp.
The fact that any specific analysis has been referred to in the summary below is
not meant to indicate that such analysis was given greater weight than any other
analysis.
Major considerations (giving no greater weight to any consideration),
were:
o financial performance and factors impacting earnings;
o discounted cash flow analysis;
o dividend payment history, capacity and earnings potential;
o pricing of similar transactions;
o investment characteristics of the potential acquirer;and
o review of the merger agreement and its terms.
Financial Performance and Factors Impacting Earnings. In connection
with rendering its opinion, Ferguson & Company reviewed publicly available
information and information provided by management regarding Northfield Bancorp
and the potential acquirer. Ferguson & Company's analysis of such methodology
began with the historic measurement of at least four analytic modules that help
develop a projective risk/opportunity profile for each institution. Each module
is potentially (but not always) complex: liquidity, capital adequacy, asset
quality, earnings power and in the case of a holding company, the cash flow
sources available for debt service and stockholder dividends. In reviewing each
area Ferguson & Company was attentive to peer comparisons as well as to
regulatory guidelines and standards. However, each institution was viewed as
situational and strategically unique.
Discounted Cash Flow Analysis. Using discounted cash flow analysis,
Ferguson & Company estimated the future dividend stream that Northfield Bancorp
could produce over a ten-year period, assuming performance met projections
(provided by management, with the assistance of Ferguson & Company) for such
period, taking into consideration regulatory capital levels. The terminal value
of the institution at the end of the period was estimated to be 130% of book
value and 15.7 times earnings. The book value multiple was consistent with the
market value of other thrifts of similar size, asset quality and earnings. The
earnings multiple was also considered to be reasonable when compared to other
thrifts of similar size, asset quality and earnings. The cash flows and terminal
transaction values were then discounted at varying rates ranging from 10.5% to
12.0%, which reflect Ferguson & Company's assumptions of rates of return
required by the bidding institutions.
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Dividend Payment History, Capacity and Earnings Potential. In connection
with its opinion, Ferguson & Company prepared earnings estimates on the
potential acquiror for Northfield Bancorp using publicly available information
with respect to such acquiror. Ferguson & Company also reviewed the "marginal
dilution" ((net income acquired divided by shares issued to acquire) divided by
pre-deal earnings per share of the acquiror) which would result from the
proposed merger. The results were that there was an accretion in earnings
indicated to Northfield Bancorp stockholders.
Pricing of Similar Transactions. Ferguson & Company's analysis assumes that
Patapsco Bancorp's offer is valued at $18.50 per share for each share of
Northfield Bancorp. The consideration of $18.50 per share includes $12.50 per
share in cash plus 0.24 of a share of Patapsco Bancorp Series A Noncumulative
Convertible Perpetual Preferred Stock which is assumed to have a value of $25
per share. In preparing its opinion, Ferguson & Company analyzed four announced
merger and acquisition transactions in Maryland and contiguous states where
thrift institution acquisitions were announced from July 1999 to February 2000.
In addition, Ferguson & Company analyzed 53 transactions in the United States
where thrift institution acquisitions were announced in this same time frame; 26
transactions involving thrifts that were under $100 million in total assets; 10
transactions in the Mid-Atlantic Region of the United States; 15 transactions
with returns on equity between 5% and 8%; and 10 transactions that involved
thrifts that had capital accounts between 12% and 16% of total assets. In the
four transactions that were announced in Maryland and all contiguous states, the
sales resulted in an average price that was 129.1% of tangible book value. In
that group, the median sales price was 114.7% of tangible book. In the 53
announced transactions in the United States involving the purchase of thrifts,
the average was 164.1% of tangible book, and the median sale was 157.3% of
tangible book value. In the 26 announced transactions where the seller had less
than $100 million in assets, the average price was 149.3% of tangible book value
and the median price was 139.7% of tangible book value. In the 10 transactions
that were announced in the Mid-Atlantic Region, the average price was 173.5% of
tangible book value and the median price was 153.9% of tangible book value. In
the 15 transactions that involved thrifts with returns on equity between 5% and
8%, the average price was 150.0% of tangible book value and the median price was
150.8% of tangible book value. In the 10 transactions that involved thrifts with
capital between 12% and 16% of total assets, the sales resulted in an average
price of 157.6% of tangible book value and a median sales price of 157.3% of
tangible book value. The transaction between Northfield Bancorp and Patapsco
Bancorp is priced at 124.4% of tangible book value.
The information revealed that in all the transactions reviewed for all
sales announced in the United States, the average price in relation to earnings
per share was 27.1 times and the median was 25.6 times earnings per share. In
the transactions for Maryland and all contiguous states, the average price times
earnings per share was 30.7 and the median was 31.0 times. In the group of
thrifts with return on equity between 5% and 8%, the average price times
earnings per share was 24.1 and the median was 25.7. In the group of thrifts
with capital between 12% and 16% of assets, the average price times earnings per
share was 32.5 times and the median was 30.7. The purchase of Northfield Bancorp
by Patapsco Bancorp is priced at 21.5 times last twelve months earnings per
share.
Investment Characteristics and Stock Valuation Comparatives. In connection
with preparing its opinion, Ferguson & Company compared
o the effects of the proposed merger on the earnings per share of the
bidding institution;
o post-merger earnings per share enhancement of Northfield Bancorp
common stock, from the standpoint of a Northfield Bancorp stockholder;
o post-merger book value enhancement of Northfield Bancorp common stock,
also from the same standpoint;
o likely share price enhancement of Northfield Bancorp common stock;
o return on equity;
o return on assets; and
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o likely post-merger dividend yield. This method gives the advantage
to the stockholders of Northfield Bancorp in the exchange with
Patapsco Bancorp, due to potentially higher earnings growth, and
stock value appreciation. Dividend yield is likely to be higher
because of the preferred stock feature.
In addition to the liquidity of the stock offered and the analysis of
the investment characteristics and stock valuation comparatives, which are
discussed above, the stock provided additional opportunities for future growth
and profitability to Northfield Bancorp's stockholders.
Ferguson & Company, as a customary part of its consulting business, is
engaged in the valuation of banks, thrifts and holding companies and their
securities in connection with mergers and acquisitions, stock purchase offers
and other purposes.
DESCRIPTION OF PREFERRED STOCK
Of Patapsco Bancorp's 1,000,000 authorized preferred shares, 114,107
shares are designated as Series A Noncumulative, Convertible Perpetual Preferred
Stock. Upon consummation of the merger, there will be up to 114,107 shares of
Series A preferred stock outstanding, held by the current holders of Northfield
Bancorp common stock. At any time after issuance of the preferred stock, all
outstanding shares of preferred stock will be convertible into shares of common
stock, on a one-for-one basis, subject to future adjustment in certain
circumstances. Each share of Patapsco Bancorp's outstanding preferred stock will
earn dividends at the rate of 7.5% of the liquidation preference of $25.00 per
share, payable when declared by the Board of Directors.
A more detailed description of the special rights and preferences given
to holders of Patapsco Bancorp preferred stock is set forth below.
Dividend Preference. The holders of Patapsco Bancorp preferred stock
are entitled to receive, when and if declared by Patapsco Bancorp's Board of
Directors, quarterly dividends at a fixed annual rate per share of 7.5% of the
liquidation preference. The liquidation preference will be $25.00 per share at
the time of the merger, and can be adjusted for stock splits, stock dividends,
recapitalizations, reclassifications and similar events that affect the number
of outstanding shares of Patapsco Bancorp preferred stock. If Patapsco Bancorp
has insufficient funds or otherwise fails to pay a declared dividend in full,
dividends will be paid to the holders of Patapsco Bancorp preferred stock, and
the holders of any other series of capital stock ranking on parity with Patapsco
Bancorp preferred stock for dividend purposes, pro rata based upon the number of
Patapsco Bancorp preferred stock and such other shares outstanding.
Dividends on the Patapsco Bancorp preferred stock will not be
cumulative. This means that, if the Board of Directors of Patapsco Bancorp fails
to declare a dividend on the Patapsco Bancorp preferred stock for any quarter,
Patapsco Bancorp will have no obligation to pay a dividend for that quarter,
whether or not dividends on the Patapsco Bancorp preferred stock or any other
class or series of capital stock of Patapsco Bancorp are declared for any future
quarter. Also, if dividends are not paid to holders of Patapsco Bancorp
preferred stock for a given quarter, then during that quarter Patapsco Bancorp
may not pay any cash dividends on, or make any repurchase or redemption of any
junior stock, including Patapsco Bancorp common stock. If Patapsco Bancorp fails
to pay dividends on the Patapsco Bancorp preferred stock for a total of three
quarters, then it cannot raise the dividend paid on any junior stock, including
Patapsco Bancorp common stock, above the dividend rate paid in the prior
quarter.
Liquidation Preference. If Patapsco Bancorp is either voluntarily or
involuntarily liquidated, dissolved or wound up, then the holders of Patapsco
Bancorp preferred stock will be entitled to be paid in full the liquidation
preference prior to any payment to holders of any junior stock, such as Patapsco
Bancorp common stock, or such lesser amount remaining after the claims of all
creditors have been satisfied. If, upon such a liquidation, dissolution or
winding up, the assets of Patapsco Bancorp are insufficient to pay the
liquidation preference in full to the holders of Patapsco Bancorp preferred
stock and the holders of any other class of capital stock ranking on parity with
Patapsco Bancorp preferred stock with respect to liquidation, then the available
assets of Patapsco Bancorp will be paid pro rata to the holders of Patapsco
Bancorp preferred stock and such other similarly ranked shares. This liquidation
preference will also be payable to holders of Patapsco Bancorp preferred stock
upon the sale of all or substantially all of the assets of Patapsco Bancorp, or
upon a merger or reorganization by Patapsco Bancorp, after
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which the current stockholders will own less than 50% of the voting power of
the surviving entity, or upon a transaction in which 50% of the current
voting power is transferred to others.
Redemption. After five years from the date of issuance of the Patapsco
Bancorp preferred stock, Patapsco Bancorp may redeem some or all of the
outstanding Patapsco Bancorp preferred stock at $25.00 per share plus any
declared but unpaid dividends for the then-current quarter. Patapsco Bancorp may
also redeem the Patapsco Bancorp preferred stock at an earlier date with the
prior approval of the holders of a majority of the outstanding Patapsco Bancorp
preferred stock. Holders of Patapsco Bancorp preferred stock will receive a
notice of any such redemption at least 40 days but not more than 70 days prior
to the date fixed for redemption.
Voting Rights. The holders of Patapsco Bancorp preferred stock
generally do not have any rights to vote their shares. However, if Patapsco
Bancorp fails to pay eight quarterly dividends on the Patapsco Bancorp preferred
stock, whether or not consecutive, then Patapsco Bancorp's Board of Directors
will add one additional member elected by the holders of the Patapsco Bancorp
preferred stock, voting together with the holders of any other class of shares
ranking on parity with the preferred stock for liquidation or dividend purposes.
The holders of Patapsco Bancorp preferred stock, with the holders of any class
of shares electing the additional director, shall be entitled to vote to
reelect, replace or remove the additional director.
Also, the affirmative vote of at least a majority of the outstanding
shares of Patapsco Bancorp preferred stock is required in order for Patapsco
Bancorp to (i) change its Articles of Incorporation in such a way that would
adversely affect the voting rights, designations, liquidation and other
preferences, privileges or any other special rights afforded to holders of
Patapsco Bancorp preferred stock, or (ii) create or authorize any class or
series of shares ranking prior to or on a parity with the Patapsco Bancorp
preferred stock with respect to dividends, liquidation or other preferences.
Conversion. At any time after the issuance of Patapsco Bancorp
preferred stock, the holders thereof may elect to convert their Patapsco Bancorp
preferred stock into shares of Patapsco Bancorp common stock. Initially, one
share of preferred stock will be convertible into one share of common stock.
This conversion rate will be subject to adjustment from time to time if Patapsco
Bancorp splits or combines its shares of common stock, or declares a stock
dividend on its common stock, or otherwise changes the number of outstanding
shares of common stock through a reclassification of its capital stock. In each
of these events, an adjustment will be made to the conversion rate so that a
holder of Patapsco Bancorp preferred stock will be entitled to receive upon
conversion that number of shares of common stock he or she would have received
after such an event, had the conversion been made immediately prior to the
happening of such event. However, the conversion rate will not be adjusted
unless the adjustment would increase or decrease the conversion rate by at least
two percent (2%).
If Patapsco Bancorp merges or reorganizes with or sells all or
substantially all of its assets to another corporation, then the holders of
Patapsco Bancorp preferred stock will be entitled to convert their shares into
the kind and amount of shares or other property which would have been payable to
them upon such merger, reorganization or sale, if the holders of Patapsco
Bancorp preferred stock had converted their Patapsco Bancorp preferred stock to
common shares immediately prior to such event.
Patapsco Bancorp will not issue fractional shares of its common stock
upon conversion of Patapsco Bancorp preferred stock. If the conversion of any
shares would result in the issuance of a fraction of a common share, Patapsco
Bancorp will pay the cash value of such fractional share to the converting
stockholder.
CONVERSION OF NORTHFIELD BANCORP COMMON STOCK
Upon completion of the merger, each share of Northfield Bancorp Common
Stock issued and outstanding immediately prior to the merger, except objecting
shares and shares referred to in the next paragraph, will automatically by
virtue of the merger be canceled and converted into the right to receive the
merger consideration of $12.50 in cash, 0.24 shares of Patapsco Bancorp
preferred stock, plus cash in lieu of any fractional share of preferred stock.
This cancellation and conversion will occur without the need for any action on
your part. After the merger, you will cease to have any rights as a stockholder
of Northfield Bancorp, except the right to receive the merger consideration,
except with respect to rights applicable to objecting shares. See "Proposal I --
The Merger -- Objecting Stockholders' Rights of Appraisal."
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Any shares of Northfield Bancorp common stock which are owned or held
by Northfield Bancorp or any of its subsidiaries or by Patapsco Bancorp or any
of its subsidiaries at the effective time of the merger shall cease to exist,
and the certificates for such shares shall be canceled and no merger
consideration shall be issued or exchanged for those shares. This does not apply
to shares held in any 401(k) plan or employee stock ownership plan of Northfield
Bancorp or any of its subsidiaries or other shares held in a fiduciary or
similar capacity including any shares held in a grantor trust associated with
any of Northfield Bancorp's or Patapsco Bancorp's employee benefit plans.
If the holders of Patapsco Bancorp common stock receive or become
entitled to receive additional shares of common stock or other securities for
their stock by way of a stock split, stock dividend, reclassification,
combination of shares or similar corporate rearrangement, without payment
therefor, between the date of the merger agreement and the effective time of the
merger, then the amount and/or characteristics of the preferred stock to be
exchanged for Patapsco Bancorp common stock will be proportionately adjusted to
take into account such adjustment.
SURRENDER OF STOCK CERTIFICATES
After the completion of the merger, Patapsco Bancorp or its agent will
mail to each Northfield Bancorp stockholder a form of letter of transmittal,
together with instructions on how to surrender certificates representing shares
of Northfield Bancorp common stock.
PLEASE DO NOT SEND IN YOUR NORTHFIELD BANCORP STOCK CERTIFICATES UNTIL
YOU RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM PATAPSCO BANCORP OR
ITS AGENT. DO NOT SEND IN YOUR CERTIFICATES WITH THE ENCLOSED PROXY.
After you mail the letter of transmittal and your Northfield Bancorp
stock certificates to Patapsco Bancorp or its agent, a stock certificate
representing the number of whole shares of Patapsco Bancorp preferred stock that
you are entitled to receive and a check in the amount of the cash you are
entitled to receive, plus cash for any fractional shares, will be mailed to you.
The Northfield Bancorp certificates that you surrender will be canceled.
Until you surrender your Northfield Bancorp stock certificates for
exchange after completion of the merger, you will not be paid dividends or other
distributions declared after the merger with respect to any Patapsco Bancorp
preferred stock into which your Northfield Bancorp shares have been converted.
When you surrender your Northfield Bancorp stock certificates, Patapsco Bancorp
will pay any unpaid dividends or other distributions, without interest. After
the completion of the merger, there will be no further transfers of Northfield
Bancorp common stock. Northfield Bancorp stock certificates presented for
transfer after the completion of the merger will be canceled and exchanged for
the merger consideration.
If your Northfield Bancorp stock certificates have been lost, stolen or
destroyed, you will have to prove your ownership of these certificates and that
they were lost, stolen or destroyed before you receive any consideration for
your shares. Upon request, Patapsco Bancorp or its agent will send you
instructions on how to provide evidence of ownership.
OBJECTING STOCKHOLDERS' RIGHTS OF APPRAISAL
Under Subtitle 2 of Title 3 of the Maryland General Corporation Law, a
copy of which appears as Annex B to this proxy statement/prospectus, you have
the right to demand payment from Patapsco Bancorp of the fair value of your
shares of Northfield Bancorp common stock. To qualify as an objecting
stockholder, you must deliver to G. Ronald Jobson, President and Chief Executive
Officer, Northfield Bancorp, Inc., 8005 Harford Road, Baltimore, Maryland 21234,
at or prior to the special meeting, your written objection to the merger. The
written objection must be separate from and in addition to any proxy or vote
against the merger. A proxy or vote against the merger does not by itself
constitute your written objection or demand for appraisal.
In addition, if you wish to exercise your right to demand payment of
the fair value of your stock, within 20 days following the date the merger is
recorded with the State of Maryland, you must make a written demand on
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Patapsco Bancorp for the payment of your Northfield Bancorp common stock,
stating the number of shares for which you demand payment. In addition to making
a written notice of your demand for payment for your stock, you must not vote in
favor of the merger. Stockholders who return executed but unmarked proxies will
be deemed to have voted in favor of the merger. Stockholders who abstain from
voting on the merger will not be deemed to have voted in favor of the merger.
Once you have filed a demand for payment, you have no right to receive
dividends or distributions payable to Northfield Bancorp stockholders as of a
record date that is after the date of the special meeting. You also cease to
have any rights as a Northfield Bancorp stockholder except the right to receive
payment for the fair value of your shares. Once you make a demand for payment,
you may withdraw that demand only with the consent of Patapsco Bancorp.
Provided that you do not vote in favor of the merger or return an
executed but unmarked proxy, and assuming the Northfield Bancorp stockholders
approve the merger, then, promptly after the merger is effective, Patapsco
Bancorp must notify you of the date the merger is recorded with the State of
Maryland. As part of that notice, Patapsco Bancorp may offer to pay to you a
specified price deemed by Patapsco Bancorp to be the fair value for your shares,
with each offer being accompanied by a balance sheet as of a date not more than
six months prior to the offer date, a profit and loss statement for the 12
months ending on the date of the balance sheet, and any other information
Patapsco Bancorp considers pertinent. Within 50 days after the date the merger
is recorded with the State of Maryland, if you have not received from Patapsco
Bancorp the fair value of your shares, you may file a petition with a court of
equity in the county where the principal office of Patapsco Bancorp is located
for an appraisal to determine the fair value of your shares. After a petition is
filed, the court may require you, as a condition to exercising your appraisal
rights, to submit to the court your stock certificates so the court can place a
notation on them regarding your demand for appraisal and payment.
IF YOU DO NOT COMPLY WITH THE PROCEDURES FULLY, YOU MAY LOSE YOUR RIGHT
TO DEMAND PAYMENT OF THE FAIR VALUE OF YOUR SHARES, AND YOU WILL BE REQUIRED TO
ACCEPT THE MERGER CONSIDERATION.
If the court finds you are entitled to an appraisal of your stock, it
will appoint three disinterested appraisers to determine the fair value. Unless
the court permits a longer period, the appraisers have 60 days to determine the
fair value and file their report with the court, and within 15 days after the
appraisers file their report, any party may object to it and request a hearing.
The court may, among other things, accept the report or set its own
determination of the fair value, and then direct Patapsco Bancorp to pay the
appropriate amount.
We cannot predict how the court will value shares of Northfield Bancorp
common stock, and the fair value may be more valuable, less valuable, or equal
in value to the merger consideration being paid by Patapsco Bancorp in the
merger.
If the court finds that the failure of a stockholder to accept an offer
for the stock was arbitrary, vexatious and not in good faith, the court has the
right to apportion among all or some of the parties any expenses of any
proceeding to demand the fair or appraised value of shares as it deems
equitable.
The above description is a summary of the material provisions of
Subtitle 2 of Title 3 of the Maryland General Corporation Law. You should review
the complete text of Subtitle 2, which appears as Annex B to this document, for
complete information.
VOTING AGREEMENT
As a condition to Patapsco Bancorp entering into the merger agreement,
the directors of Northfield Bancorp have entered into a voting agreement with
Patapsco Bancorp. The voting agreement provides that the individuals will vote
all of their shares of Northfield Bancorp common stock owned, or any stock
acquired prior to the record date for the special meeting, in favor of the
merger agreement and the merger. The individuals are not obligated to vote
shares of Northfield Bancorp common stock in favor of the merger at the special
meeting if prior to the special meeting Northfield Bancorp enters into an
agreement or binding letter of intent to be acquired by another entity for a
higher price. The voting agreement prohibits the sale, assignment, or transfer
of shares subject to the voting agreement. The voting agreement provides that it
will terminate upon the earlier of the effective date of the merger,
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the termination of the merger agreement or the abandonment of the merger by
mutual agreement of Patapsco Bancorp and Northfield Bancorp.
MANAGEMENT OF PATAPSCO BANCORP AND PATAPSCO BANK AFTER THE MERGER
After the merger, two directors of Northfield Bancorp, Gary R. Bozel and J.
Thomas Hoffman, will become directors of Patapsco Bancorp and Patapsco Bank. In
addition, a third Northfield Bancorp director, David G. Rittenhouse, shall be
named as an honorary director to Patapsco Bank to advise and assist Patapsco
Bank with respect to the communities served by Northfield Federal.
Gary R. Bozel is a self-employed certified public accountant practicing in
Towson, Maryland. He has served as Northfield Bancorp's Chairman of the Board
since March 1998 and as Northfield Federal's Chairman of the Board since 1996.
He also served as Northfield Federal's President from 1993 to 1996. He is a
member of the board of directors and finance committee of the Towson Golf and
Country Club.
J. Thomas Hoffman serves as Northfield Bancorp's and Northfield Federal's
Secretary and is a self-employed sales consultant of financial products in
Towson, Maryland. Mr. Hoffman is also a registered representative with John
Hancock Financial Distributors Services, Inc. and is a member of the Parkville
Optimist Club and Towson Business Association.
David G. Rittenhouse is the chief executive officer of the Rittenhouse Fuel
Company, a heating oil, heat and air conditioning services company located in
Baltimore, Maryland.
REPRESENTATIONS AND WARRANTIES
Patapsco Bancorp and Northfield Bancorp, together with each of their
subsidiary banks, have given certain representations and warranties to each
other in the merger agreement relating to, among other things, the following:
the validity of their organization; authorized capital; the ownership of each of
their subsidiaries; the accuracy and completeness of their financial statements,
reports and material relating to them; the absence of any undisclosed
liabilities, or material adverse changes in their business, financial conditions
or results of operations or assets; the accuracy and completeness of information
contained in this proxy statement/prospectus; disclosure of financial advisory,
broker, finders and similar fees; the absence of undisclosed material pending or
threatened litigation; their standing under and compliance with applicable
local, state and federal law and regulations; tax matters; the due authorization
of the merger agreement; their authority to enter into the merger agreement and
to undertake the transactions contemplated by it; the existence of material
agreements or commitments; Year 2000 compliance of computer hardware and
software; satisfaction of the Community Reinvestment Act requirements; the
accuracy of all information provided to each other in connection with the
merger; their property and assets; insurance coverage; and the absence of any
matter that would cause a delay in completion of the merger or obtaining the
required governmental approvals of the merger. Northfield Bancorp and Northfield
Federal have made additional representations as to labor relations and
employment arrangements; their employee benefit plans; material contract
defaults; environmental matters; the quality of loan portfolios and portfolio
management; the value of real estate loans and investments; and the absence of
any investment in derivative securities. Patapsco Bancorp and Patapsco Bank have
made additional representations as to the funding of the merger consideration.
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COVENANTS PENDING THE MERGER
Investigations and Access to Information. Between the date of the merger
agreement and the completion of the merger, each party agreed on behalf of
itself and its subsidiaries to give the other party full access, consistent with
laws, to all of its and its subsidiaries' premises, books, records and employees
upon prior notice. Each party has also agree to furnish the others with copies
of any financial and operating data and certain other documents as may be
reasonably requested. Any such inspection shall not interfere unreasonably with
the operation of the business of the entity inspected.
Conduct of Northfield Bancorp's Business. Between the date of the merger
agreement and completion of the merger Northfield Bancorp and Northfield Federal
agreed:
(a) Northfield Bancorp and its subsidiaries will conduct their business
only in the ordinary course and in accordance with past practices;
(b) Northfield Bancorp will not, without the prior written consent of
Patapsco Bancorp:
o declare, set aside or pay any dividends, except for
semi-annual cash dividends of $0.10 per share; reacquire any
of its outstanding shares of capital stock;
o issue, sell or buy any shares of Northfield Bancorp or
Northfield Federal stock;
o effect any stock split, stock dividend or other
reclassification of Northfield Bancorp common stock; or
o grant any options or issue any warrants exercisable for or
securities convertible or exchangeable into capital stock of
Northfield Bancorp or any Northfield Bancorp subsidiary;
(c) Northfield Bancorp may not, without the prior written consent of
Patapsco Bancorp:
o sell or dispose of any significant assets of Northfield
Bancorp or of any Northfield Bancorp subsidiary, other than
in the ordinary course of business consistent with past
practice;
o merge or consolidate Northfield Bancorp or any Northfield
Bancorp subsidiary with or otherwise acquire any other
entity, or open or plan to open or construct new Northfield
Federal branches or buy real property;
o change the articles of incorporation, charter documents or
other governing instruments of Northfield Bancorp or any
Northfield Bancorp subsidiary;
o grant to any executive officer, director or employee of
Northfield Bancorp or any Northfield Bancorp subsidiary any
increase in annual compensation, any award under any
employee benefit plan or any bonus type payment, except
increases in compensation, bonus or benefits in the ordinary
course of business to non-officer employees;
o adopt any new or amend or terminate any existing employee
benefit plan of any type or contribute to any plan other
than its current plans;
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o authorize severance pay or other benefits for any officer,
director or employee of Northfield Bancorp or any Northfield
Bancorp subsidiary;
o incur any material indebtedness or obligation or enter into
or extend or amend any material agreement or lease, which
cannot be canceled upon one month notice or which involves
annual payments in excess of $5,000, except that Northfield
Federal may obtain Federal Home Loan Bank advances totaling
up to $1.0 million to maintain liquidity or fund loan
demand;
o engage in any lending activities other than in the ordinary
course of business consistent with past practices;
o form any new subsidiary or cause or permit a material change
in the activities presently conducted by any Northfield
Bancorp subsidiary or make additional investments in
subsidiaries;
o purchase any investments or debt securities, except that
Northfield Bancorp or any Northfield Bancorp subsidiary may
purchase federal funds or make overnight deposits with the
Federal Home Loan Bank of Atlanta and may purchase
securities pursuant to any contractual obligation in
existence as of the date of the merger agreement;
o purchase any equity securities other than Federal Home Loan
Bank stock;
o make any investment which would cause Northfield Federal to
fail the qualified thrift lender test or to lose certain tax
bad debt reserves benefits under the Internal Revenue Code;
o make any loan, except that Northfield Bancorp or any
Northfield Bancorp subsidiary may, without the prior written
consent of Patapsco Bancorp, make certain residential and
real estate loans and unsecured loans up to specified
amounts in the ordinary course consistent with past
practices;
o authorize capital expenditures other than in the ordinary
course of business or in excess of $5,000 in the aggregate;
or
o adopt or implement any change in accounting principles,
practices or methods other than as may be required by
generally accepted accounting principles or by a regulatory
authority or adopt or implement any change in its methods of
accounting for Federal income tax purposes.
NO SOLICITATION
Northfield Bancorp has agreed that prior to the completion of the
merger or the termination of the merger agreement, whichever occurs earlier, it
will not initiate, solicit, encourage or otherwise facilitate any inquiries,
enter into or maintain discussions in furtherance of any such inquiries or,
agree to, approve, recommend or endorse any takeover proposal with or from a
third party.
The term "takeover proposal" means any proposal, other than as
contemplated by the merger agreement, for a merger or other business combination
involving Northfield Bancorp or any of its subsidiaries, or for the acquisition
of a twenty-five percent (25%) or greater equity interest in Northfield Bancorp
or any of its subsidiaries, or for the purchase, lease or other acquisition of a
substantial portion of the assets of Northfield Bancorp or any of its
subsidiaries.
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However, if Northfield Bancorp's Board of Directors determines in good
faith that a takeover proposal made by a third party is more favorable to
Northfield Bancorp stockholders than the merger and informs Patapsco Bancorp
immediately of its actions, then Northfield Bancorp may:
o furnish information to, or engage in discussions or
negotiations with, any person in response to an unsolicited
bona fide written takeover proposal;
o recommend such an unsolicited bona fide written takeover
proposal to its stockholders; or
o enter into any agreement or letter of intent with any person
with respect to a takeover proposal.
Northfield Bancorp has agreed to keep Patapsco Bancorp fully and timely
informed of the status of any inquiries, proposals, discussions, negotiations,
furnishing of non-public information, or other activities relating to a takeover
proposal.
ADDITIONAL COVENANTS
Shareholder Approval. Northfield Bancorp has agreed to call the special
meeting, and its Board of Directors has agreed to recommend approval of the
merger, except as its fiduciary duties may otherwise require. Northfield Bancorp
has also agreed to use its best efforts to solicit from its stockholders proxies
in favor of approval of the merger and to take all other action necessary or
helpful to secure a vote of stockholders in favor of the merger, except as the
fiduciary duties of the directors may otherwise require. Notwithstanding the
foregoing, the Board need not take any of these actions if Northfield Bancorp
has entered into a written agreement or binding letter of intent to enter into a
takeover proposal, as described above, on terms the Board considers more
favorable to Northfield Bancorp stockholders than those agreed to with Patapsco
Bancorp.
Consents. Northfield Bancorp and Northfield Federal will use their best
efforts to obtain the consent or approval of each person whose consent or
approval shall be required in order to permit Northfield Bancorp or Northfield
Federal to consummate the merger.
Publicity. The parties have agreed not to issue press releases about the
merger without the other party's consent.
Cooperation. The parties have agreed to use their best efforts, and take
all actions necessary or appropriate, to consummate the merger at the earliest
practicable date. No party may take any action which would adversely affect any
party's ability to obtain required regulatory approvals for the merger or
ability to perform its obligations under the merger agreement.
Additional Financial Statements and Reports. As soon as reasonably
practicable after they become publicly available, each party shall furnish to
the other its statement of financial condition and related statements of
operations, cash flows and stockholders' equity for all periods prior to the
closing of the merger.
Update Disclosure. Northfield Bancorp and Patapsco Bancorp will promptly
notify each other of any material changes to the information required to be
disclosed to the other party under the merger agreement.
Northfield Bancorp's Employee Benefit Plans. Between the date of the merger
agreement and the closing of the merger, Northfield Bancorp and its subsidiaries
may not make any contribution, or agree to contribute any amount to any employee
benefit plan other than as specifically provided for in the merger agreement.
Northfield Bancorp and Northfield Federal are authorized to commence
termination of the Northfield Bancorp employee stock ownership plan in
accordance with certain tax laws and the terms of such employee stock ownership
plan. All shares of Northfield Bancorp common stock held by the trustee of the
Northfield Bancorp employee stock ownership plan at the effective time of the
merger will be exchanged by the trustee for the merger consideration. The cash
proceeds paid to the Northfield Bancorp employee stock ownership plan with
respect to unallocated shares of Northfield Bancorp common stock will be applied
against the current exempt loan between Northfield Bancorp and the Northfield
Bancorp employee stock ownership plan.
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Within 60 days of the date of the Merger Agreement, Northfield Bancorp and
Northfield Federal will develop a written description and timetable for the
termination of Northfield Federal's 401(k) plan, which description and timetable
will be provided to and subject to the approval of Patapsco Bancorp's counsel.
Such description and timetable shall provide that Northfield Federal's 401(k)
plan will be terminated no later than the day prior to the effective time of the
merger. Following the effective time, Patapsco Bancorp will file an application
with the Internal Revenue Service for an advance determination as to whether
Northfield Federal's 401(k) plan meets the qualification requirements of Section
401 of the Internal Revenue Code with respect to such plan's termination. No
distribution may be made from Northfield Federal's 401(k) plan prior to the
receipt of a favorable determination letter from the IRS.
Resale Letter Agreements. Northfield Bancorp shall use its best efforts to
obtain from each person who may be deemed to be an "affiliate" of Northfield
Bancorp within the meaning of Rule 145 under the Securities Act of 1933, as
amended, a written letter agreement regarding restrictions on resale of the
Patapsco Bancorp preferred stock received by such persons in the merger to
ensure compliance with applicable resale restrictions imposed under the Federal
securities laws.
Filing of Applications for the Governmental Approvals. Patapsco Bancorp has
agreed to use its best efforts to promptly prepare, submit and file as soon as
practicable after the date of the merger agreement all applications necessary to
receive the governmental approvals required to complete the merger.
Conduct of Business of Patapsco Bancorp and its subsidiaries. Between the
date of the merger agreement and the earlier of the effective time of the merger
or the date the merger agreement is terminated, Patapsco Bancorp and Patapsco
Bank agreed they would not take any action that would materially adversely
affect the ability to obtain the governmental approvals required or materially
adversely affect Patapsco Bancorp's ability to perform its obligations under the
merger agreement.
CONDITIONS TO THE MERGER
General Conditions. The obligations of the parties to complete the merger
are subject to the following conditions:
o The Northfield Bancorp stockholders must have approved the
merger agreement and the merger.
o No order, decree or injunction shall have been entered and
remain in force restraining or prohibiting the merger and
the related transactions in any legal, administrative,
arbitration, investigatory or other proceedings.
o All approvals of or filings with any governmental regulatory
agencies needed to complete the merger and related
transactions shall have been obtained or made and any
waiting periods shall have expired. All other statutory or
regulatory requirements for the valid consummation of the
merger and related transactions shall have been satisfied.
o Patapsco Bancorp's Registration Statement on Form S-4 shall
have been declared effective and shall not be subject to a
stop order of the Securities and Exchange Commission, and
the issuance of the preferred stock shall not be subject to
a stop order of any state securities commissioner.
o Each party's representations and warranties must be true in
all material respects at the effective time of the merger;
and each party must have performed all its obligations and
complied with each of its covenants, in all material
respects, and satisfied all conditions applicable to it
under the merger agreement; and each party shall have
delivered to the other a certificate signed by its chief
executive officer and chief financial officer to such
effect.
o Neither party may be a party to any pending litigation,
reasonably expected to result in a material adverse outcome.
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o Prior to the closing, neither party shall have suffered any
material adverse change in its financial condition,
business, results of operations or assets.
o Each party shall have obtained all material third party
consents or approvals required in connection with the
merger.
Conditions to Obligations of Patapsco Bancorp, Patapsco Bank and PN
Financial. The obligations of Patapsco Bancorp, Patapsco Bank and PN Financial
to complete the merger and related transactions are subject to the following
additional conditions:
o None of the governmental approvals required to consummate
the merger transactions shall have imposed any conditions
which Patapsco Bancorp, Patapsco Bank and PN Financial
reasonably and in good faith determine to be unduly
burdensome on the conduct of their business or to
substantially diminish the benefits they expect to receive
from the merger.
o Patapsco Bancorp shall have received, to its reasonable
satisfaction, any Phase II Environmental Reports as is
contemplated in the merger agreement.
o No greater than 5% of the outstanding shares of Northfield
Bancorp common stock entitled to vote at the special
meeting, excluding shares owned by Patapsco Bancorp, shall
have delivered the written notice of intent to demand the
fair value of their Northfield Bancorp common stock and
shall have voted against the merger.
o Patapsco Bancorp and Northfield Bancorp shall have received
the opinion of Patapsco Bancorp's tax counsel described
under "-- Federal Income Tax Consequences."
o Each of the persons serving as a director or officer of
Northfield Bancorp and Northfield Federal or any subsidiary
shall, at the closing, submit his/her written resignation,
effective as of the effective time of the merger.
o The legal fees and fees to Northfield Bancorp's legal and
financial advisors payable or paid in connection with the
merger shall not have exceeded $125,000 in the aggregate.
o Patapsco Bancorp shall have received letter agreements
regarding resale of the Patapsco Bancorp preferred stock
from all affiliates of Patapsco Bancorp.
Conditions to Obligations of Northfield Bancorp and Northfield Federal.
The obligations of Northfield Bancorp and Northfield Federal to complete the
merger and related transactions are subject to the following additional
conditions:
o The agent handling the exchange of Northfield Bancorp common
stock, in its fiduciary capacity, shall have certified
receipt of the aggregate merger consideration for all shares
of Northfield Bancorp common stock to be acquired.
o Patapsco Bancorp shall have reserved for issuance the number
of Patapsco Bancorp preferred stock issuable in the merger,
as well as the number of shares of Patapsco Bancorp common
stock into which such Patapsco Bancorp preferred stock may
be converted.
o The average of the highest bid and lowest asked price for
the Patapsco Bancorp common stock during the 30 trading days
ending five business days before the closing shall exceed
$15.00 per share.
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REQUIRED REGULATORY APPROVALS NEEDED TO COMPLETE THE MERGER
Completion of the merger and the merger of Northfield Federal into
Patapsco Bank requires a number of regulatory approvals and consents. The
acquisition of Northfield Federal by Patapsco Bancorp must be approved the Board
of Governors of the Federal Reserve System or the Federal Reserve Bank of
Richmond under the Bank Holding Company Act. The Board of Governors of the
Federal Reserve System or the Federal Reserve Bank of Richmond also must approve
the merger of Northfield Federal into Patapsco Bank under the Bank Merger Act.
In reviewing applications under the Bank Merger Act, the Federal
Reserve must consider, among other factors, the financial and managerial
resources and future prospects of the existing and resulting institutions, and
the convenience and needs of the communities to be served. Under the Community
Reinvestment Act, the Federal Reserve must take into account the record of
performance of Patapsco Bank and Northfield Federal in meeting the credit needs
of the entire community, including low- and moderate-income neighborhoods,
served by each institution. As part of the review process, the banking agencies
frequently receive comments and protests from community groups and others.
Patapsco Bank and Northfield Federal each received at least an overall
"Satisfactory" rating during their last respective federal Community
Reinvestment Act examinations. In addition, the Federal Reserve may not approve
a transaction if it will result in a monopoly or otherwise be anticompetitive.
Patapsco Bancorp and Patapsco Bank filed these applications with the Federal
Reserve on July 11, 2000.
In addition, Patapsco Bancorp filed an application with the Office of
Thrift Supervision because Northfield Federal converted to stock form within the
last three years. Further, Northfield Federal must give notice of the merger to
the Office of Thrift Supervision. The application and the notice were filed on
July 11, 2000.
Under Maryland law, the merger and the bank merger must be approved by
the Maryland Commissioner of Financial Regulation. Patapsco Bancorp filed an
application with the Maryland Commissioner of Financial Regulation on July 11,
2000.
In addition, a period of 15 to 30 days must expire following approval
by the Federal Reserve, within which period the United States Department of
Justice may file objections to the merger under the federal antitrust laws.
While Patapsco Bancorp believes that the likelihood of such action by the
Department of Justice in remote in this case, there can be no assurance that the
Department of Justice will not initiate such proceeding, or that the Attorney
General of the State of Maryland will not challenge the merger, or if such
proceeding is instituted or challenge is made, as to the result of the
challenge.
The merger and the bank merger cannot proceed in the absence of the
requisite regulatory approvals. See "-- Conditions to the Merger" and " -
Termination and Amendment." There can be no assurance that the requisite
regulatory approvals will be obtained, and if obtained, there can be no
assurance as to the date of any such approval. There can also be no assurance
that any such approvals will not contain a condition or requirement that causes
such approvals to fail to satisfy any of the conditions set forth in the merger
agreement and described under " -- Conditions to the Merger."
Patapsco Bancorp is not aware of any other regulatory approvals that
would be required for completion of the merger, except as described above.
Should any other approvals be required, it is presently contemplated that such
approvals would be sought. There can be no assurance that any other approvals,
if required, will be obtained.
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which does not include a review of the merger
from the standpoint of the adequacy of the consideration to be received by
Northfield Bancorp stockholders. Furthermore, regulatory approvals do not
constitute an endorsement or recommendation of the merger by any regulatory
authority.
TERMINATION AND AMENDMENT
Termination. The merger agreement and the merger may be terminated at any
time, whether before or after approval by stockholders of Northfield Bancorp, as
provided below:
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o By mutual written consent of the parties.
o By Patapsco Bancorp upon delivery of written notice of
termination to Northfield Bancorp if any event occurs which makes
it impossible for Northfield Bancorp to satisfy in any material
respect one or more of the conditions to the obligations of
Patapsco Bancorp to complete the merger and noncompliance is not
waived. The notice must include a statement of the grounds for
termination and Northfield Bancorp has 30 days to cure the event
or conditions cited in the notice, and if Northfield Bancorp
cures the events or conditions giving the rise to such grounds to
the reasonable satisfaction of Patapsco Bancorp, then Patapsco
Bancorp shall not have any right to terminate the merger
agreement based upon such specified events or conditions. Also,
this right to terminate shall not be available to Patapsco
Bancorp where its failure to perform an obligation has been the
cause of, or has resulted in, the failure of the closing to
occur. Northfield Bancorp has the identical right to terminate
the merger agreement in the event it becomes impossible for
Patapsco Bancorp to satisfy in any material respect one or more
of the conditions of Northfield Bancorp to complete the merger
and noncompliance is not waived.
o By Northfield Bancorp in connection with entering into a
definitive agreement or letter of intent with any person with
respect to a takeover proposal with a third party. Termination
under these circumstances may entitle Patapsco Bancorp to a
break-up fee. See " -- Expenses."
o By Patapsco Bancorp, if
o the Northfield Bancorp Board of Directors withdraws or
modifies its recommendation of the merger agreement or the
merger in a manner materially adverse to Patapsco Bancorp or
shall have resolved or publicly announced or disclosed to
any third party its intention to do any of the foregoing or
the Northfield Bancorp Board of Directors shall have
recommended to the stockholders of Northfield Bancorp any
takeover proposal with a third party or resolved to do so;
o a tender offer or exchange offer for 10 percent or more of
the outstanding shares of Northfield Bancorp common stock is
commenced or a registration statement with respect to such
an offer shall have been filed and the Northfield Bancorp
Board of Directors, within 10 days after such tender offer
or exchange offer is commenced, either fails to recommend
against or takes no position with respect to acceptance of
such tender or exchange offer by its stockholders; or
o Northfield Bancorp enters into a definitive agreement or
letter of intent with respect to a takeover proposal by a
third party.
o By Patapsco Bancorp at any time within 10 days of receipt of the
last Phase II environmental report if the costs to bring the
properties (either singularly or together with other properties)
which are the subject of such Phase II reports into material
compliance with applicable environmental laws is projected by the
environmental consultant to exceed $50,000.
In the event of the termination of the merger agreement as described
above, the merger agreement will become void and have no effect and no party
shall have any further liability to the other party except as otherwise
expressly provided in the merger agreement and except that the provisions of the
merger agreement regarding termination, brokers and finders, publicity, expenses
and confidentiality shall survive any such termination. In the event the merger
agreement is terminated because of a party's failure to perform its obligations
or satisfy all of the conditions to the merger, and that party has willfully and
materially breached the merger agreement, the other party is entitled to receive
as liquidated damages the sum of $250,000 payable within 30 days of the
effective date of termination.
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Amendment. Subject to applicable law, the merger agreement may be
amended, whether before or after any approval of Northfield Bancorp
stockholders, by an agreement in writing and authorized or ratified by the
Boards of Directors of the parties. However, after stockholder approval, no such
amendment without further stockholder approval may reduce the amount or change
the form of the consideration to be received by the Northfield Bancorp
stockholders in the merger.
EXPENSES
Except as described below or in "--Termination and Amendment," above,
each party to the merger agreement shall bear and pay all costs and expenses
incurred by it or on its behalf in connection with the transactions contemplated
by the merger agreement.
In order to induce Patapsco Bancorp, Patapsco Bank and PN Financial to
enter into the merger agreement and as a means of compensating Patapsco Bancorp,
Patapsco Bank and PN Financial for the substantial direct and indirect monetary
and other costs incurred and to be incurred in connection with the merger
agreement and the related transactions, Northfield Bancorp and Northfield
Federal agreed that if the merger agreement is terminated for any reason, and
prior to or within 24 months from the date of termination a "takeover event"
shall have occurred, Northfield Bancorp or Northfield Federal will upon demand
pay to Patapsco Bancorp or Patapsco Bank in immediately available funds
$500,000, less $250,000 if such amount was paid previously. See "-- Termination
and Amendment." Under the merger agreement, a "takeover event" occurs when
Northfield Bancorp or Northfield Federal enters into a definitive agreement or a
binding letter of intent with a third party for a merger or business combination
involving Northfield Bancorp or a subsidiary for the acquisition of a 25% or
greater equity interest in Northfield Bancorp or any subsidiary or for the
purchase or lease of a substantial portion of the assets of Northfield Bancorp
or a subsidiary. In addition, a takeover event occurs if any third party
acquires 25% or more of Northfield Bancorp common stock.
WHEN THE MERGER WILL BE COMPLETED
The closing of the merger will take place on a date we agree upon that
is no later than 30 days following the date on which all of the conditions to
the merger contained in the merger agreement are satisfied or waived, unless we
agree to a later date. On the closing date, PN Financial and Northfield Bancorp
will file articles of merger with the Maryland Department of Assessments and
Taxation merging PN Financial into Northfield Bancorp. The merger will become
effective at the time stated in the articles of merger.
We expect to complete the merger in the fourth quarter of 2000.
However, we cannot guarantee when or if the required regulatory approvals will
be obtained. See "-- Required Regulatory Approvals Needed to Complete the
Merger."
INTERESTS OF NORTHFIELD BANCORP'S DIRECTORS AND OFFICERS IN THE MERGER THAT
DIFFER FROM YOUR INTERESTS
Some members of Northfield Bancorp's management and Board of Directors
may have interests in the merger that are in addition to or different from the
interests of Northfield Bancorp stockholders. Northfield Bancorp's Board of
Directors was aware of these interests and considered them in approving the
merger agreement.
Severance Payments to an Executive Officer. Northfield Federal and G.
Ronald Jobson, who serves as its and Northfield Bancorp's President, have
entered into an employment agreement. Under the agreement, Mr. Jobson will be
entitled to certain payments and benefits if, following a "change in control" of
Northfield Bancorp or Northfield Federal, Mr. Jobson is involuntarily terminated
or voluntarily terminates employment under specified conditions. For purposes of
the employment agreement, the merger will constitute a "change in control."
If the merger is completed before October 1, 2000, Mr. Jobson will
receive (A) his salary through October 1, 2000 and (B) the product of 0.99 and
his annual salary for a 12 month period, but in no event more than the
difference between the maximum amount permitted under Section 280G of the
Internal Revenue Code and the sum of any other "parachute payments" as defined
under Internal Revenue Code Section 280G(b)(2) that he receives as a result of
the merger.
43
<PAGE>
If the merger is completed after October 1, 2000, Mr. Jobson will
receive his salary through October 1, 2001, but in no event more than the
difference between the maximum amount permitted under Section 280G of the
Internal Revenue Code and the sum of any other "parachute payments" as defined
under Internal Revenue Code Section 280G(b)(2) that he receives as a result of
the merger.
The estimated total value of the payments to be provided to Mr. Jobson
under the employment agreements would be $______ if the merger is completed on
October 31, 2000.
Payments in Lieu of Options or Restricted Stock. Northfield Bancorp
agreed not to approve or implement a stock option plan and restricted stock plan
that were under consideration during the negotiations with Patapsco Bancorp and
at the time the merger agreement was signed. In exchange for not approving these
plans, Patapsco Bancorp agreed that immediately prior to completing the merger,
Northfield Federal would credit the sum of $150,000 under its deferred
compensation plan, with such amount to be allocated equally among the plan
participants. The participants in the deferred compensation plan are Northfield
Bancorp's and Northfield Federal's directors, which include Mr. Jobson, who are
the same individuals who would have benefited from the stock option plan and the
restricted stock plan had those plans been implemented.
Service with Patapsco Bancorp and Patapsco Bank as Directors or
Honorary Directors. Following the merger, two directors of Northfield Bancorp
and Northfield Federal, Gary R. Bozel and J. Thomas Hoffman, will be named as
directors of Patapsco Bancorp and Patapsco Bank. A third director of Northfield
Bancorp and Northfield Federal, David G. Rittenhouse, will be named as an
honorary director of Patapsco Bank to advise and assist Patapsco Bank with
respect to the communities served by Northfield Federal. These individuals will
receive the same Board fees as other Patapsco Bancorp directors or honorary
directors.
Deferred Compensation Plan. As of the effective date of the merger,
Northfield Federal's deferred compensation plan will be merged into Patapsco
Bancorp's deferred compensation plan. Upon the merger of these plans, all
benefits allocated under the Northfield Federal deferred compensation plan to
the three directors other than Messrs. Bozel, Hoffman and Rittenhouse, will be
paid to them immediately prior to the effective time of the merger. Northfield
Federal will also pay out the $150,000 credited to the deferred compensation
plan as described above. The benefits allocated to Messrs. Bozel, Hoffman and
Rittenhouse will become benefits allocated to those same individuals under
Patapsco Bancorp's deferred compensation plan. All of the participants in the
Northfield Federal deferred compensation plan have elected to receive a rate of
return equal to the return on the Northfield Bancorp common stock. Immediately
prior to the effective time of the merger, Northfield Federal's deferred
compensation plan will be amended to provide that the return on Northfield
Bancorp common stock shall be calculated as if the common stock had a value as
of such date of $18.50.
Termination of Northfield Bancorp ESOP. Northfield Bancorp will
terminate its employee stock ownership plan upon completion of the merger. The
plan will repay its existing loan from Northfield Bancorp and will allocate any
surplus cash and Patapsco Bancorp preferred stock to the accounts of the plan
participants, including Mr. Jobson, in proportion to their account balances, to
the extent allowed under applicable law and the governing documents of the plan.
Protection of Northfield Bancorp Directors and Officers Against Claims.
Patapsco Bancorp and Patapsco Bank have agreed to indemnify each present and
former director and officer of Northfield Bancorp for a period of six years from
liability and expenses arising out of matters existing or occurring at or before
the consummation of the merger in accordance with the governing corporate
documents of Patapsco Bancorp and Patapsco Bank and to the same extent Patapsco
Bancorp and Patapsco Bank is obligated to indemnify and advance expenses to its
own directors and officers. This indemnification extends to liability arising
out of the transactions contemplated by the merger agreement. Patapsco Bancorp
and Patapsco Bank have also agreed to advance any costs to each of these persons
as they are incurred. Patapsco Bancorp has also agreed that it will maintain a
policy of directors' and officers' liability insurance coverage for the benefit
of Northfield Bancorp's directors and officers for six years following
consummation of the merger, subject to certain limitations on the amount of
premiums to be paid.
44
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the merger to holders of Northfield Bancorp common stock. The
discussion is based upon the Internal Revenue Code, Treasury Regulations,
Internal Revenue Service rulings, and judicial and administrative decisions in
effect as of the date of this proxy statement/prospectus. This discussion
assumes that the Northfield Bancorp common stock is generally held for
investment. This discussion does not address all of the tax consequences that
may be relevant to you in light of your particular circumstances or to
Northfield Bancorp stockholders subject to special rules, such as foreign
persons, financial institutions, tax-exempt organizations, dealers in securities
or foreign currencies or insurance companies. The opinions of counsel referred
to in this section will be based on facts existing at the completion of the
merger. In rendering its opinion, counsel will require and rely upon
representations contained in certificates of officers of Northfield Bancorp.
Patapsco Bancorp and Northfield Bancorp will rely upon an opinion of
Stradley, Ronon, Stevens & Young, LLP, to the following effect:
o The merger of PN Financial into Northfield Bancorp will be
treated as a purchase of Northfield Bancorp's stock by
Patapsco Bancorp.
o None of PN Financial, Northfield Bancorp, nor Patapsco
Bancorp will recognize gain or loss on Patapsco Bancorp's
deemed purchase of Northfield Bancorp's stock.
o A stockholder of Northfield Bancorp may realize gain or
loss on the exchange of such stockholder's Northfield
Bancorp common stock for the merger consideration
depending on the stockholder's adjusted basis in the
Northfield Bancorp common stock the stockholder
surrenders.
o A Northfield Bancorp stockholder's basis in the shares of
Patapsco Bancorp preferred stock received will equal their
fair market value, on the effective date of the merger.
o The character of any gain or loss a Northfield Bancorp
stockholder recognizes as a result of the merger will be
either capital or ordinary depending on whether the shares
of Northfield Bancorp common stock the Northfield Bancorp
stockholder surrenders are a capital asset in the
Northfield Bancorp stockholder's hands and, if capital,
long-term or short-term depending on the length of time
the Northfield Bancrop stockholder held the Northfield
Bancorp common stock the stockholder surrenders.
o The holding period of the shares of Patapsco Bancorp
preferred stock to be received by a Northfield Bancorp
stockholder will commence on the day immediately following
the date of the merger
o Neither Patapsco Bancorp nor Northfield Bancorp will
recognize gain or loss on the liquidation of Northfield
Bancorp pursuant to sections 332(a) and 337(a) of the
Internal Revenue Code.
o On the date the merger of Northfield Federal into Patapsco
Bank is undertaken, Patapsco Bank and Northfield Federal
will each be a party to a reorganization under section
368(b)(2) of the Internal Revenue Code.
o The merger of Northfield Federal into Patapsco Bank will
qualify as a reorganization under section 368(a)(1)(A) of
the Internal Revenue Code.
o Neither Patapsco Bank nor Northfield will recognize gain
or loss on the merger of Northfield Federal into Patapsco
Bank under section 354(a)(1) of the Internal Revenue Code.
45
<PAGE>
Patapsco Bancorp has hired an appraiser experienced in the valuation of
stocks of financial institutions and their holding companies to prepare a
valuation of the preferred stock as of the effective date of the merger. This
valuation will determine the value of the Patapsco Bancorp preferred stock
Northfield Bancorp stockholders will receive in the merger for federal income
tax purposes. Following the completion of the tax year in which the merger is
concluded, Patapsco Bancorp will send a Form 1099 to each Northfield Bancorp
stockholder reporting the value of the cash and preferred stock consideration
the stockholder received in the merger, with the preferred stock consideration
to be determined based on the appraisal.
The appraisal is being done solely to satisfy the obligations of
Patapsco Bancorp under the Internal Revenue Code and is not intended, and must
not be construed, as a recommendation as to the price at which the preferred
stock should be purchased or sold. The appraisal, when done, will be based on
estimates and projections of a number of matters, as well as market conditions
existing at the time, which are subject to change, and the market price for the
preferred stock could rise or decline in comparison to the valuation established
by the appraiser.
Payments made to the holders of Northfield Bancorp common stock upon
the exchange of those shares in the merger for cash and Patapsco Bancorp
preferred stock, and payments, if any, made to Northfield Bancorp stockholders
who exercise their right to demand the fair value of their shares of Northfield
Bancorp common stock other than certain exempt entities and persons, will be
subject to backup withholding tax under federal income tax law unless certain
requirements are met. Generally, Patapsco Bancorp will be required to deduct and
withhold the tax if (i) the stockholder fails to furnish a taxpayer
identification number ("TIN") or fails to certify under penalty of perjury that
such TIN is correct or (ii) the Internal Revenue Service notifies Patapsco
Bancorp that the TIN furnished by the stockholder is incorrect. The amount of
the backup withholding tax is presently 31.0% of the total value of the payment.
Any amounts withheld in collection of the 31.0% backup withholding tax will
reduce the federal income tax liability of the stockholders from whom such tax
was withheld. The TIN of an individual stockholder is that stockholder's Social
Security number.
The tax opinions to be delivered to us in connection with the merger
are not binding on the Internal Revenue Service or the courts, and we do not
intend to request a ruling from the Internal Revenue Service with respect to the
merger.
THE TAX CONSEQUENCES OF THE MERGER TO YOU MAY VARY DEPENDING UPON YOUR
PARTICULAR CIRCUMSTANCES. THEREFORE, YOU SHOULD CONSULT YOUR TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO YOU, INCLUDING THOSE
RELATING TO STATE AND/OR LOCAL TAXES.
ACCOUNTING TREATMENT
Patapsco Bancorp will account for the merger using the purchase method
of accounting. Under this method of accounting, Patapsco Bancorp will record the
fair market value of Northfield Bancorp's assets and liabilities on its
financial statements as of the date we complete the merger. The difference
between the purchase price of the merger and the fair market value of Northfield
Bancorp's identifiable assets net of its liabilities will be recorded on
Patapsco Bancorp's books as "goodwill" and will be amortized over 15 years as
charges to Patapsco Bancorp's earnings.
RESALE OF PATAPSCO BANCORP PREFERRED STOCK; RESTRICTIONS ON TRANSFER
The Patapsco Bancorp preferred stock to be issued in the merger will be
registered under the Securities Act and will be freely transferable under the
Securities Act, except for shares issued to any stockholder who may be deemed to
be an "affiliate" of Northfield Bancorp or Patapsco Bancorp for purposes of Rule
145 under the Securities Act of 1933, as amended. Affiliates generally are
individuals or entities that control, are controlled by or are under common
control with Northfield Bancorp or Patapsco Bancorp, and may include executive
officers and directors of Northfield Bancorp, as well as certain principal
stockholders of Northfield Bancorp. Affiliates may not sell their Patapsco
Bancorp preferred stock acquired in connection with the merger except pursuant
to an effective registration statement under the Securities Act covering the
shares or in compliance with Rule 145 or another applicable exemption from the
registration requirements of the Securities Act.
46
<PAGE>
Northfield Bancorp and Patapsco Bancorp have agreed to use their best
efforts to cause each director, executive officer and other person who is an
affiliate of Northfield Bancorp to deliver to Patapsco Bancorp a written
agreement intended to ensure compliance with the Securities Act.
ILLIQUID TRADING MARKET FOR PATAPSCO BANCORP COMMON STOCK AND PREFERRED STOCK
No shares of Patapsco Bancorp preferred stock currently are outstanding
and, consequently, the preferred stock is not listed on any national securities
exchange or the Nasdaq stock market. Following the merger, Patapsco Bancorp will
seek to obtain a market maker so that the preferred stock can be listed on the
OTC Bulletin Board. Patapsco Bancorp common stock is listed on the OTC Bulletin
Board.
VOTE REQUIRED
The affirmative vote of at least a two-thirds of the outstanding
Northfield Bancorp common stock is required for Northfield Bancorp's
stockholders to approve the merger agreement and the merger. Each share of
Northfield Bancorp Common Stock outstanding at the close of business on the
record date for the special meeting, _____________, 2000, is entitled to one
vote on each matter to be considered at such special meeting. We expect the
following shares to be voted in favor of the merger agreement and the merger and
the adjournment proposal:
<TABLE>
<CAPTION>
No. of Percent of
Owner Shares Outstanding
----- ------ -----------
<S> <C> <C>
Northfield Bancorp
directors and officers* 66,582 14.0%
Northfield Federal Savings
Grantor Trust 13,465 2.8
Patapso Bancorp 20,224 4.3
Patapsco Bancorp
directors and officers 7,308 1.5
--------- ------
Total 107,579 22.6%
========= ======
<FN>
---------
* The individuals have entered into a voting agreement with Patapsco
Bancorp to vote their shares of Northfield Bancorp common stock in
favor of the merger agreement and the merger.
</FN>
</TABLE>
47
<PAGE>
PROPOSAL II - ADJOURNMENT OF THE SPECIAL MEETING
With this document, we are also requesting that stockholders approve a
proposal to adjourn the special meeting for not more than 29 days in order to
solicit additional votes in favor of the proposal to approve and adopt the
merger agreement and the merger in the event that such proposal has not received
the requisite affirmative vote of stockholders at the special meeting. If
Northfield Bancorp desires to adjourn the special meeting, it will request a
motion that the special meeting be adjourned for up to 29 days, and no vote will
be taken on the proposal to approve and adopt the merger agreement and the
merger at the originally scheduled special meeting. If we adjourn the special
meeting for 29 days or less, we will not set a new voting record date or provide
notice of the new special meeting except that we will announce at the special
meeting the date, time and location of the adjourned special meeting. All shares
of Northfield Bancorp common stock represented at the special meeting by
properly executed proxies will be voted in accordance with the instructions you
indicate on the proxy card. If you sign and return a proxy card without giving
voting instructions, your shares will be voted as recommended by Northfield
Bancorp's Board of Directors. Northfield Bancorp's Board of Directors
unanimously recommends a vote "FOR" approval of the merger agreement and "FOR"
adjournment of the special meeting if sufficient votes are not present in person
or by proxy to approve the merger agreement. Unless revoked prior to its use,
any proxy solicited for the special meeting will continue to be valid for any
adjourned special meeting, and will be voted in accordance with your
instructions and, if no contrary instructions are given, for the proposal to
approve and adopt the merger agreement and the merger.
Any adjournment will permit Northfield Bancorp to solicit additional
proxies and will permit a greater expression of the views of Northfield Bancorp
stockholders with respect to the merger. Such an adjournment would be
disadvantageous to stockholders who are against the proposal to approve and
adopt the merger agreement and the merger because an adjournment will give
Northfield Bancorp additional time to solicit favorable votes and increase the
chances of approving that proposal. Northfield Bancorp has no reason to believe
that an adjournment of the special meeting will be necessary at this time.
If a quorum is not present at the special meeting, no proposal will be
acted upon and the Board of Directors of Northfield Bancorp will adjourn the
special meeting to a later date in order to solicit additional proxies on each
of the proposals being submitted to stockholders.
BECAUSE THE BOARD OF DIRECTORS RECOMMENDS THAT NORTHFIELD BANCORP'S
STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND
THE MERGER, THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
ADJOURNMENT PROPOSAL. THE HOLDERS OF A MAJORITY OF THE SHARES PRESENT IN PERSON
OR BY PROXY AT THE MEETING WILL BE REQUIRED TO APPROVE THE ADJOURNMENT PROPOSAL.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus, including information included or
incorporated by reference in this document, contains certain forward-looking
statements with respect to the financial condition, results of operations,
plans, objectives, future performance and business of each of Patapsco Bancorp
and Northfield Bancorp, as well as certain information relating to the merger,
including, without limitation,
o statements relating to the cost savings and accretion to
reported earnings estimated to result from the merger;
o statements relating to revenues of the combined company
after the merger;
o statements relating to the expenses estimated to be incurred
in connection with the merger; and
o statements preceded by, followed by or that include the
words "believes," "expects," "anticipates," "estimates" or
similar expressions.
48
<PAGE>
These forwarded-looking statements involve certain risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
o expected cost savings from the merger may not be fully
realized or realized within the expected time frame;
o revenues following the merger may be lower than expected;
o competitive pressures among financial services companies may
increase significantly;
o costs or difficulties related to the integration of the
business of Patapsco Bancorp and Northfield Bancorp may be
greater than expected;
o changes in the interest rate environment may reduce interest
margins;
o general economic conditions, either nationally or in
Maryland, may be less favorable than expected;
o legislative or regulatory changes may adversely affect the
business in which Patapsco Bancorp or Northfield Bancorp is
engaged; and
o changes may occur in the securities markets.
Patapsco Bancorp and Northfield Bancorp do not intend to update or
otherwise revise any forward-looking statements to reflect circumstances
existing since their preparation or to reflect the occurrence of unanticipated
events, even in the event that any or all of the underlying assumptions are
shown to be in error. Furthermore, Patapsco Bancorp and Northfield Bancorp do
not intend to update or revise the forward-looking statements to reflect changes
in general economic or industry conditions.
See "Where You Can Find More Information."
PATAPSCO BANCORP
Patapsco Bancorp, Inc. is a Maryland corporation and is the holding
company for The Patapsco Bank. Patapsco Bank is a Maryland-chartered Federal
Reserve member commercial bank operating through a single office located in
Dundalk, Maryland and serving eastern Baltimore County. The principal business
of Patapsco Bank consists of attracting deposits from the general public and
investing these deposits in loans secured by residential and commercial real
estate, construction loans, commercial business loans and consumer loans.
Patapsco Bank derives its income principally from interest earned on loans and,
to a lesser extent, interest earned on mortgage-backed securities and investment
securities and noninterest income. Principally operating revenues, deposits and
repayments of outstanding loans and investment securities and mortgage-backed
securities provide funds for these activities.
Information concerning Patapsco Bancorp's business is contained in its
1999 Annual Report to Stockholders, which appears as Annex C to this document,
and its Quarterly Report on Form 10-QSB for the quarter ended March 31, 2000,
which appears as Annex D to this document. Northfield Bancorp stockholders who
want copies of the other documents concerning Patapsco Bancorp that are
incorporated by reference into this document may contact Patapsco Bancorp at the
address or telephone number indicated under "Where You Can Find Additional
Information."
The following two tables supplement the information concerning Patapsco
Bancorp contained in its 1999 Annual Report to Stockholders and Current Report
on Form 10-Q for the quarter ended March 31, 2000.
49
<PAGE>
The following table sets forth selected data relating to the
composition of Patapsco Bancorp's loan portfolio by type of loan at the dates
indicated. At March 31, 2000, Patapsco Bancorp had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below.
<TABLE>
<CAPTION>
At March 31, 2000 At June 30, 1999
--------------------------- --------------------------------
Amount % Amount %
------ ------- ------ ------
(Dollars In thousands)
<S> <C> <C> <C> <C>
Real estate loans
Residential....................................... $51,005 57.43% $48,549 61.82%
Commercial........................................ 10,477 11.80 7,870 10.02
Construction...................................... 1,779 2.00 2,351 3.00
-------- ------ -------- ------
Total real estate............................ 63,261 71.23 58,770 74.84
Consumer loans
Home improvement.................................. 9,088 10.24 8,770 11.17
Home equity....................................... 1,695 1.91 1,698 2.16
Loans secured by deposits......................... 234 0.26 285 0.36
Other consumer.................................... 978 1.10 668 0.85
------ ------ ------ ------
Total consumer............................... 11,995 13.51 11,421 14.54
Commercial loans..................................
Commercial loans.................................. 8,462 9.53 6,849 8.72
Commercial leases................................. 5,092 5.73 1,495 1.90
------- ------ ------- ------
Total commercial............................. 13,554 15.26 8,344 10.62
Gross loans....................................... 88,810 100.00% 78,535 100.00%
Deferred origination fees......................... 74 73
Unearned interest................................. 110 54
Allowance for loan losses......................... 725 631
------- ------
Net loans......................................... $87,901 $77,777
======= =======
</TABLE>
50
<PAGE>
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by prior year's rate); (ii) changes in rate
(changes in rate multiplied by prior year's volume).
<TABLE>
<CAPTION>
Nine Months Ended March 31,
-----------------------------------
2000 vs. 1999
-----------------------------------
Increase (Decrease)
-----------------------------------
Volume Rate Total
------- ---- -----
(Dollars in thousands)
<S> <C> <C> <C>
Interest income
Loans receivable...................... $301 $ 38 $ 339
Investment securities................. (94) (94) (188)
Mortgage-backed securities............ 124 125 249
Federal funds sold and other
interest-earning assets............ 4 11 15
----- ----- -----
Total interest-earning assets............ 335 80 415
Interest-bearing liabilities:
Deposits.............................. 25 (56) (31)
Borrowings............................ 233 (21) 212
------- ------ ------
Total interest-bearing liabilities....... 258 (77) 181
Change in net interest income............ $ 77 $ 157 $ 234
====== ======= =======
</TABLE>
RECENT DEVELOPMENTS FOR PATAPSCO BANCORP, INC.
The following consolidated financial information is only a summary and
you should read it in conjunction with Patapsco Bancorp's consolidated financial
statements and the notes to Patapsco Bancorp's consolidated financial
statements, which you can find in Patapsco Bancorp's 1999 Annual Report to
Stockholders, which appears as Annex C to this proxy statement/prospectus. The
selected financial condition data at and the selected consolidated income data
for the year ended June 30, 1999 are derived from Patapsco Bancorp's audited
consolidated financial statements. All other data has been derived from
unaudited financial statements. In the opinion of Patapsco Bancorp, the
unaudited information reflects all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation. The operating data for
the three months ended June 30, 2000 does not necessarily predict the results
Patapsco Bancorp may achieve in the future.
51
<PAGE>
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
At At
June 30, June 30,
2000 1999
------------ -------------
(In thousands)
<S> <C> <C>
Total assets............................................. $102,685 $95,328
Loans receivable, net.................................... 91,002 77,777
Cash, federal funds sold and other interest-
bearing deposits.................................... 3,438 9,352
Investment securities.................................... 463 214
Mortgage-backed securities............................... 4,456 4,879
Deposits................................................. 75,652 69,571
Borrowings............................................... 15,216 14,056
Stockholders' equity..................................... 9,577 9,218
.........
</TABLE>
SELECTED CONSOLIDATED INCOME DATA
<TABLE>
<CAPTION>
For the
Three Months Ended For the
June 30, Year Ended June 30,
---------------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income.................................. $2,113 $1,860 $7,908 $7,240
Interest expense................................. 998 828 3,656 3,306
------- ------- ------- -------
Net interest income before provision for
loan losses.................................... 1,115 1,032 4,252 3,934
Provision for loan losses........................ 70 75 325 245
------- ------- ------- -------
Net interest income after provision for
loan losses.................................... 1,045 957 3,927 3,689
Noninterest income............................... 83 65 337 246
------- ------- ------- -------
Noninterest expenses:
Compensation and employee benefits.......... 480 494 1,862 1,797
Insurance................................... 11 16 55 67
Professional fees........................... 29 7 129 94
Equipment expenses.......................... 45 32 170 115
Net occupancy costs......................... 18 19 77 81
Advertising................................. 17 14 46 45
Data processing............................. 38 36 157 122
Merger related expenses..................... -- 89 -- 89
Net loss on disposal of fixed assets........ -- 23 -- 23
Other....................................... 123 120 460 443
------- ------- ------- -------
Total noninterest expenses............. 761 850 2,956 2,876
Income before provision for income taxes......... 367 172 1,308 1,059
Income tax provision............................. 149 66 514 399
------- ------- ------- -------
Net income....................................... $ 218 $ 106 $ 794 $ 660
======= ======= ======= =======
</TABLE>
52
<PAGE>
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
At or For the
Three Months Ended At or For the
June 30, Year Ended June 30,
------------------------ ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income divided by
average total assets).................................. 0.88% 0.45% 0.81% 0.73%
Return on average stockholders' equity (net income
divided by average stockholders' equity)............... 9.47 4.56 8.46 7.05
Interest rate spread (combined weighted average
interest rate earned less combined weighted
average interest rate cost)............................. 4.01 4.02 3.99 3.93
Net interest margin (net interest income divided
by average interest-earning assets).................... 4.51 4.51 4.49 4.46
Ratio of average interest-earning assets to
average interest-bearing liabilities................... 112.39 113.55 112.94 114.08
Ratio of noninterest expense to average total assets...... 2.98 3.61 3.03 3.17
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at
end of period.......................................... 0.37 0.22 0.37 0.22
Nonperforming (nonaccrual) loans to loans
receivable, net at end of period....................... 0.33 0.23 0.33 0.23
Allowance for loan losses to total loans
at end of period....................................... 0.81 0.80 0.81 0.80
Allowance for loan losses to nonperforming loans
at end of period....................................... 241.92 347.19 241.92 347.19
Net charge-offs to average loans outstanding.............. 0.23 0.49 0.25 0.21
CAPITAL RATIOS:
Stockholders' equity to total assets at end
of period.............................................. 9.36 9.69 9.36 9.67
Average stockholders' equity to average
assets................................................. 9.32 9.84 9.63 10.33
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND 1999
Patapsco Bancorp's assets increased by $7.3 million or 7.7% to $102.7
million at June 30, 2000 from $95.3 million at June 30, 1999. The increase in
Patapsco Bancorp's assets during the year ended June 30, 2000 was primarily due
to Patapsco Bancorp utilizing cash, deposit growth and borrowed money to fund
loan growth. Patapsco Bancorp's net loans receivable increased by $13.2 million
or 17.0% to $91.0 million at June 30, 2000 from $77.8 million at June 30, 1999.
The increase in net loans receivable was comprised of $4.8 million in commercial
equipment leases, $3.9 million in commercial real estate loans, $3.0 million in
commercial term loans, $1.4 million in residential real estate and $900,000 in
consumer loans offset in part by a decrease of $780,000 in construction loans.
Patapsco Bancorp's mortgage-backed securities portfolio decreased by $400,000 to
$4.5 million at June 30, 2000 from $4.9 million at June 30, 1999 due to
amortization and prepayments.
Patapsco Bancorp's borrowings increased by $1,160,000 or 8.3% to $15.2
million at June 30, 2000 from $14.1 million at June 30, 1999. Deposits increased
by $6.0 million or by 8.6% to $75.6 million at June 30, 2000 from $69.6 million
at June 30, 1999. The increase in deposits was largely attributable to the
increase of $4.8 million in interest-bearing deposits consisting primarily of
certificate of deposit accounts. In February 2000, Patapsco Bank acquired $1.0
million in retail brokered deposits in denominations less than $100,000.
Noninterest-bearing deposits increased by $415,000 or 14.4% during the year
ended June 30, 2000.
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Patapsco Bancorp's stockholders' equity increased by $359,000 to $9.6
million at June 30, 2000 from $9.2 million at June 30, 1999. In July 1999,
Patapsco Bancorp initiated a 5% (17,221 shares) stock repurchase program. This
was completed in November 1999 at a total cost of $457,788.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS AND YEAR ENDED JUNE 30, 2000
AND JUNE 30, 1999
Net Income. Patapsco Bancorp's net income increased by $112,000 or 107% to
$218,000 for the quarter ended June 30, 2000 from $106,000 for the quarter ended
June 30, 1999. Patapsco Bancorp's net income increased by $134,000 or 20.3% to
$794,000 for the year ended June 30, 2000 from $660,000 for the year ended June
30, 1999. The increase in Patapsco Bancorp's net income during the comparable
three-month period is a result of higher net interest income before the
provision for loan loss and higher noninterest income and lower operating
expenses. Operating expenses are $89,000 or 10.4% lower in the quarter ended
June 30, 2000 than the quarter ended June 30, 1999 due to the $89,000 in
expenses related to the termination of the merger conversion agreement with
Belmar Federal Savings and Loan Association which were recognized in June 1999.
Without this expense in the quarter ended June 30, 1999, earnings would have
been $159,000. After this adjustment, Patapsco Bancorp's earnings increased by
$57,000 or 35% over the comparable quarter in the prior year. The increase in
Patapsco Bancorp's net income in the comparable year period was primarily due to
increases in net interest and noninterest income offsetting higher operating
expenses. Adjusted for the merger termination expenses noted above, earnings for
the year ended June 30, 1999 would have been $715,000. Net income for the year
ended June 30, 2000 increased $79,000 or 11% over the adjusted 1999 figures.
Interest Income. Total interest income increased by $253,000 or 13.6% to
$2.1 million for the quarter ended June 30, 2000 from $1.9 million for the
quarter ended June 30, 1999. Total interest income increased by $668,000 or 9.2%
to $7.9 million for the year ended June 30, 2000 from $7.2 million for the year
ended June 30, 1999. The increases in interest income resulted primarily from
the growth in Patapsco Bancorp's loan portfolio that was funded with deposit
growth, additional borrowings from the Federal Home Loan Bank of Atlanta as well
as cash from lower yielding investments in overnight federal funds. Patapsco
Bancorp's average yield on assets increased by 49 basis points to 8.55% from
8.05% during the three-month period ended June 30, 2000 as compared to the three
month period ended June 30, 1999. For the comparative twelve-month period,
Patapsco Bancorp's average yield on assets increased 14 basis points to 8.34%.
Patapsco Bancorp's average balance of interest-earning assets increased by $3.1
million in the three-month period ended June 30, 2000 and $6.6 million during
the twelve-month period ended June 30, 2000.
Interest Expense Total interest expense increased by $170,000 or 20.5% to
$998,000 for the quarter ended June 30, 2000 from $828,000 for the quarter ended
June 30, 1999. Total interest expense increased by $350,000 or 10.6% to $3.7
million for the twelve months ended June 30, 2000 from $3.3 million for the
twelve months ended June 30, 1999. The increases in interest expense during the
comparable periods were primarily due to increases in the average balances of
Federal Home Loan Bank Advances and deposits used to fund loan growth as well as
the cost of these liabilities. During the quarter ended June 30, 2000 as
compared to the quarter ended June 30, 1999 the average balance of
interest-bearing liabilities increased by $7.5 million to $88.3 million from
$80.7 million of which $5.4 million is attributable to increases in
interest-bearing deposits and $2.1 million is attributable to increases
borrowings from the Federal Home Loan Bank of Atlanta. The average rate on
interest-bearing liabilities increased by 47 basis points to 4.54% from 4.07% in
the quarterly period. During the year ended June 30, 2000 as compared to the
year ended June 30, 1999 the average balance of interest-bearing liabilities in
increased by $6.5 million to $83.9 million from $77.4 million and the average
rate increased 9 basis points to 4.36% from 4.27%.
Net Interest Income. Patapsco Bancorp's net interest income before the
provision for loan losses increased by $83,000 or 8.1% to $1.1 million for the
quarter ended June 30, 2000 from $1.0 million for the quarter ended June 30,
1999. Net interest income before the provision for loan losses increased by
$318,000 or 8.1% to $4.2 million for the year ended June 30, 2000 from $3.9
million during the year ended June 30, 1999. Patapsco Bancorp's net interest
margin decreased 7 basis points to 4.51% in the quarter ended June 30, 2000 as
compared to 4.58% in the quarter ended June 30, 1999. The decrease in the net
interest margin in the comparable quarters is primarily a result of the decrease
in the ratio of interest earning assets to interest bearing liabilities from
113.55% to 112.39% from the quarter ended June 30, 1999 to the quarter ended
June 30, 2000. Patapsco Bancorp's net interest margin increased by 3 basis
points to 4.49% from 4.46% in the year ended June 30, 2000. The increase in the
yield on interest earning assets of 14 basis points offset both the 9 basis
point increase in the cost of interest bearing liabilities and
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<PAGE>
the decrease in the ratio of interest earning assets to interest bearing
liabilities from 114.08% in the year ended June 30, 1999 to 112.94% in the
year ended June 30, 2000.
Provision For Loan Losses. Provisions for loan losses are charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate by management to provide for probable loan losses, based on prior loss
experience, volume and type of collateral by Patapsco Bancorp, industry
standards and past due loans in Patapsco Bancorp's loan portfolio. Patapsco
Bancorp's management periodically monitors and adjusts its allowance for loan
losses based upon its analysis of the loan portfolio. Patapsco Bancorp provided
$70,000 for loan losses during the quarter ended June 30, 2000 and $75,000 in
the quarter ended June 30, 1999. Patapsco Bancorp provided $325,000 and $245,000
for loan losses during each of the years ended June 30, 2000 and June 30, 1999.
The provision for loan losses were made due to Patapsco Bancorp's higher levels
of consumer, construction and commercial loans, which generally entail a greater
risk than single-family residential loans. Additionally, charge-offs for the
year ended June 30, 2000 of $254,000 are 46% higher than the $174,000 of
charge-offs incurred in the year ended June 30, 1999. Patapsco Bancorp's
allowance for loan losses as a percentage of total loans outstanding, net of
unearned origination fees of 0.81% at June 30, 2000 is unchanged from June 30,
1999. Patapsco Bancorp's ratio of net charge-offs to average loans outstanding
was 0.23% and 0.25% for the quarter and twelve-month periods ended June 30, 2000
on an annualized basis.
Noninterest Income. Patapsco Bancorp's noninterest income consists of
deposit fees, service charges, late fees and gains and losses on sales of
securities, loans and repossessed real estate and other assets. Total
noninterest income increased by $18,000 or 27.7% to $83,000 for the quarter
ended June 30, 2000 from $65,000 for the quarter ended June 30, 1999. Total
noninterest income increased by $91,000 or 37.0% to $337,000 during the year
ended June 30, 2000 from $246,000 during the year ended June 30, 1999. The
majority of the increase in noninterest income in the annual period was due to
the recognition of a $53,000 gain on the sale of foreclosed real estate. The
remainder of the increase in noninterest income in the two comparable periods is
primarily due to higher fees on deposit accounts.
Noninterest Expenses. Total noninterest expenses decreased by $89,000 or
10.4% to $761,000 for the quarter ended June 30, 2000 from $850,000 for the
quarter ended June 30, 1999. Total noninterest expense increased by $80,000 to
$2.95 million during the twelve months ended June 30, 2000 from $2.88 million
during the year ended June 30, 1999. During the twelve and three month periods
ended June 30, 1999, Patapsco Bancorp recognized $89,000 in expenses related to
the termination of the merger conversion agreement with Belmar Federal Savings
and Loan Association. After adjusting for this expense, noninterest expenses
were relatively unchanged in the comparative three and twelve month periods.
Liquidity and Capital Resources. An important component of Patapsco
Bancorp's asset/liability structure is the level of liquidity available to meet
the needs of customers and creditors. Patapsco Bancorp's Asset/Liability
Management Committee has established general guidelines for the maintenance of
prudent levels of liquidity. The Committee continually monitors the amount and
source of available liquidity, the time to acquire it and its cost. Management
of Patapsco Bancorp seeks to maintain an adequate level of liquidity in order to
retain flexibility in terms of investment opportunities and deposit pricing.
Because liquid assets generally provide lower rates of return, a high level of
liquidity will, to a certain extent, result in lower net interest margins and
lower net income.
Patapsco Bancorp's most liquid assets are cash on hand, interest-bearing
deposits and Federal funds sold, which are short-term. The levels of these
assets are dependent on Patapsco Bancorp's operating, financing and investing
activities during any given period. At June 30, 2000, Patapsco Bancorp's cash on
hand, interest-bearing deposits and Federal funds sold totaled $3.4 million. In
addition, Patapsco Bancorp has approximately $5.0 million of mortgage-backed and
equity securities classified as available-for-sale.
Patapsco Bancorp anticipates that it will have sufficient funds available
to meet its current loan commitments of $4.3 million. These funds will be
internally generated, raised through deposit operations, or borrowed.
Certificates of deposits that are scheduled to mature in less than one year at
June 30, 2000 totaled $28.5 million. Historically, a high percentage of maturing
deposits have remained with Patapsco Bancorp.
Patapsco Bancorp's primary sources of funds are deposits and proceeds from
maturing investment securities and mortgage-backed securities and principal and
interest payments on loans. While maturities and scheduled
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<PAGE>
amortization of mortgage-backed securities and loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions, competition and other factors.
Patapsco Bancorp's primary uses of cash in investing activities during the
year ended June 30, 2000 were loan principal disbursements, net of repayments,
of $13.5 million. Patapsco Bancorp's primary sources of cash provided from
financing activities during the nine months ended June 30, 2000 were a $6.0
million increase in deposits and the increase of $1.0 million in outstanding
borrowings from the Federal Home Loan Bank of Atlanta.
Patapsco Bancorp's primary use of cash in financing activities during the
nine months ended June 30, 2000 consisted of the repurchase of stock and payment
of cash dividends of $646,000.
NORTHFIELD BANCORP, INC.
Northfield Bancorp was organized under the laws of the State of Maryland in
March 1998 at the direction of the Board of Directors of Northfield Federal to
acquire all of the capital stock to be issued by Northfield Federal in its
conversion from mutual to stock form. The conversion was completed on November
12, 1998, with Northfield Bancorp issuing 475,442 shares of its common stock to
the public, and Northfield Federal becoming a wholly owned subsidiary of
Northfield Bancorp. Prior to the conversion, Northfield Bancorp did not engage
in any material operations. Northfield Bancorp does not have any significant
assets other than the outstanding capital stock of Northfield Federal, cash and
a note receivable from Northfield Federal's employee stock ownership plan.
Northfield Bancorp's principal business is the business of Northfield Federal.
At March 31, 2000, Northfield Bancorp had total assets of $54.3 million,
deposits of $36.4 million and stockholders' equity of $7.1 million.
Northfield Federal is a community and customer oriented federal stock
savings bank operating through two offices located in Baltimore, Maryland.
Northfield Federal's business emphasizes residential construction lending,
primarily originating construction/permanent mortgages on one- to four-family
properties. It also makes commercial real estate loans, home equity loans and
limited types of consumer loans. Northfield Federal's deposits are insured up to
applicable limits by the Federal Deposit Insurance Corporation under the Savings
Association Insurance Fund and Northfield Federal is a member of the Federal
Home Loan Bank of Atlanta.
BUSINESS OF NORTHFIELD BANCORP, INC.
References in this section applicable to Northfield Bancorp and Northfield
Federal (pages 56 to 71) to "we," "us," and "our" refer to Northfield Bancorp or
Northfield Federal. In certain instances where appropriate, "us" or "our" refers
collectively to Northfield Bancorp and Northfield Federal.
MARKET AREA
We consider our primary market area to be Baltimore County, Maryland. In
addition, we focus our lending efforts on Harford and Cecil Counties, Maryland.
The principal sources of employment in Baltimore, Harford and Cecil Counties are
the services, retail trade and manufacturing industries.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed legislation which could have
a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley
Act, known as the G-L-B Act, authorizes affiliations between banking, securities
and insurance firms and authorizes bank holding companies and national banks to
engage in a variety of new financial activities. Among the new activities that
will be permitted to bank holding companies are securities and insurance
brokerage, securities underwriting, insurance underwriting and merchant banking.
The Board of Governors of the Federal Reserve System, known as the Federal
Reserve Board, in consultation with the Secretary of the Treasury, may approve
additional financial activities. The G-L-B Act, however, prohibits future
acquisitions of existing unitary savings and loan holding companies, like
Northfield Bancorp, by firms which are engaged in commercial activities and
limits the permissible activities of unitary holding companies formed after May
4, 1999.
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<PAGE>
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months after that.
The G-L-B Act contains significant revisions to the Federal Home Loan Bank
System. The G-L-B Act imposes new capital requirements on the Federal Home Loan
Banks and authorizes them to issue two classes of stock with differing dividend
rates and redemption requirements. The G-L-B Act deletes the current requirement
that the Federal Home Loan Banks annually contribute $300 million to pay
interest on certain government obligations in favor of a 20% of net earnings
formula. The G-L-B Act expands the permissible uses of Federal Home Loan Bank
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small
agri-businesses. The G-L-B Act makes membership in the Federal Home Loan Bank
voluntary for federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the Savings Association Insurance
Fund special reserve and authorizes a federal savings association that converts
to a national or state bank charter to continue to use the term "federal" in its
name and to retain any interstate branches.
Northfield Bancorp is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
with which Northfield Bancorp may affiliate, it may facilitate affiliations with
companies in the financial services industry.
LENDING ACTIVITIES
Most of our loans are construction/permanent loans on one- to four-family
residences. We also make multi-family real estate mortgage loans as well as
commercial real estate, home equity and savings account loans. We also purchase
commercial leases from a local leasing company.
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The following table sets forth information concerning the types of loans
held by us at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
1999 1998
---------------------- --------------------
AMOUNT % AMOUNT %
------ ----- ------ ----
(DOLLARS IN THOUSANDS)
Real estate loans:
<S> <C> <C> <C> <C>
One- to four-family residential mortgage loans.......... $ 39,464 88.20% $ 31,332 81.51%
Land.................................................... 173 .39 123 .32
Construction loans...................................... 2,208 4.93 3,664 9.53
Commercial real estate loans............................ 1,961 4.38 2,478 6.45
Commercial and auto loans collateralized by lease
finance receivables.................................... 698 1.56 643 1.67
Consumer loans:
Home equity lines of credit............................. 134 .30 125 .33
Loans secured by deposits............................... 108 .24 73 .19
---------- ------ ---------- ------
Total loans....................................... 44,746 100.00% 38,438 100.00%
====== ======
Add:
Premiums................................................ 15 --
Less:
Undisbursed portion of loans in process................. 1,402 2,223
Deferred loan origination fees.......................... 320 316
Allowance for losses.................................... 183 197
---------- ---------
Loan portfolio, net................................ $ 42,856 $ 35,702
========== ==========
</TABLE>
The following table sets forth the estimated maturity of our loan portfolio
at December 31, 1999. The table does not include the effects of possible
prepayments or scheduled repayments. All mortgage loans are shown as maturing
based on the date of the last payment required by the loan agreement.
<TABLE>
<CAPTION>
DUE AFTER
DUE WITHIN 1 THROUGH DUE AFTER
ONE YEAR AFTER 5 YEARS AFTER 5 YEARS AFTER
DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999 TOTAL
----------------- ----------------- ----------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family............ $ 129 $ 312 $ 39,023 $ 39,464
Land........................... -- 123 50 173
Commercial..................... -- 230 1,731 1,961
Construction................... -- -- 2,208 2,208
Home equity...................... 134 -- -- 134
Passbook......................... 108 -- -- 108
Commercial and auto loans
collateralized by lease finance
receivables................... 57 641 -- 698
-------- --------- ----------- ---------
Total....................... $ 428 $ 1,306 $ 43,012 $ 44,746
======== ========= =========== =========
</TABLE>
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<PAGE>
The next table sets forth at December 31, 1999, the dollar amount of all
loans due one year or more after December 31, 1999 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATE ADJUSTABLE RATES
------------- ----------------
(In thousands)
<S> <C> <C>
Real estate loans:
One- to four-family............................ $ 39,335 $ --
Construction................................... 2,208 --
Commercial real estate......................... 1,704 257
Land........................................... 173 --
Commercial and auto loans collateralized by
lease finance receivables...................... 641 --
----------- -----------
Total................................... $ 44,061 $ 257
=========== ===========
</TABLE>
Residential Construction Loans. Our most significant loan product is
lending to finance the construction of one- to four-family residential property
to the individuals who will be the owners and occupants upon completion of
construction. Construction/permanent loans account for a majority of our
single-family loan originations. We have historically emphasized these loans and
have established a reputation in our market areas for this type of lending. We
believe that we can continue to respond to the demand for these loans by
borrowers engaged in building and development of single-family residential
properties in the growing communities of our market areas. Virtually all of
these loans are structured to be converted to permanent loans at the end of the
construction phase. Borrowers are required to pay interest during the
construction period. Loan proceeds are disbursed according to a draw schedule
and we inspect the progress of the construction before additional funds are
disbursed. The interest rate we charge is fixed during the construction phase
(based on the prime rate) and fixed thereafter, and these loans generally have
30 year terms.
While we believe we have substantial experience in construction
lending, this type of lending involves a higher degree of credit risk than long
term financing of residential properties. Our risk of loss on a construction
loan is dependent largely upon the accuracy of the initial estimate of the
property's value at completion of construction and the estimated cost of
construction. If the estimate of construction cost and the marketability of the
property upon completion of the project prove to be inaccurate, we may be
compelled to advance additional funds to complete the construction. Furthermore,
if the final value of the completed property is less than the estimated amount,
the value of the property might not be sufficient to assure the repayment of the
loan.
Our underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. Among other things, we consider the amount of
the borrower's equity in the project, independent valuations and reviews of cost
estimates and pre-construction sale, the builder's financial report and the
reputation of the borrower. In addition, we review the builder's financial
reports and other information. We have longstanding relationships with several
builders in our area and do most of our construction lending with them.
One- to Four-Family Residential Loans. We also originate standard one-
to four-family residential mortgage loans secured by property located in our
primary market area. These are made in amounts up to 80% of the lesser of the
appraised value or purchase price, with private mortgage insurance or additional
collateral required on loans with a loan to-value ratio in excess of 80%.
Although, all of our one- to four-family loans are underwritten to conform with
secondary market standards, we originate such loans with the intention that we
will hold them in our portfolio rather than sell in the secondary mortgage
market.
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property securing the mortgage
loan without our consent.
Commercial Real Estate Loans. Our commercial real estate loans are
secured primarily by office buildings and multi-family residential investment
properties. Some of our commercial real estate loans are participating with
other financial institutions in our market area. Commercial real estate loans
are made in amounts of up to 75% of the appraised value of the property. Our
commercial real estate loans generally have variable rates with terms of
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five years and amortization schedules of up to 30 years. At December 31, 1999
the largest of our commercial real estate loans was a $809,000 loan
participation, of which our interest totaled $304,000. This loan was secured by
an office building.
Commercial real estate lending, which accounted for approximately 4.38%
of our loan portfolio at December 31, 1999, entails significant additional risks
compared to single-family residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The repayment of these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can be significantly
affected by supply and demand conditions in the market for office and retail
space and may also be subject to adverse conditions in the economy. To minimize
these risks, we generally limit this type of lending to our market area and to
borrowers who are otherwise well known to us.
Commercial and Automobile Leases. For over ten years, we have purchased
commercial finance leases from a local leasing company. These leases are
primarily on office equipment. We purchase the lease, but the seller conducts
all servicing. The average length of the individual leases ranges from 3.5 to 4
years and the average size ranges from $1,500 to $5,000. At December 31, 1999,
our portfolio of commercial leases totaled $144,000 or .32%, of total loans. Our
portfolio includes both recourse and non-recourse purchases, but in accordance
with Office of Thrift Supervision comments, we are purchasing on a recourse
basis only.
Commercial leases are subject to the same risk of default as direct
commercial loans. Although these loans provide for higher interest rates and
shorter terms than permanent single-family residential real estate loans, they
involve more credit risk because of the type and nature of the collateral.
Commercial business loans are typically made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business, and
repayment is therefore substantially dependent on the success of the business
itself.
As of December 31, 1999, we invested $554,000 in automobile finance
leases from another local company. These lease purchases, in which we
participate with other local lenders, are structured in the same manner as the
commercial finance leases discussed above. All of our purchases from the
automobile leasing company are with full recourse. Automobile finance leases are
subject to the same risk of default as direct automobile loans. These loans
involve a higher risk of default than loans secured by one- to four-family
residential loans because they are secured by automobiles, which are rapidly
depreciable assets. The repossessed collateral for a defaulted automobile loan
may not provide an adequate source of repayment of the outstanding loan balance
as a result of the greater likelihood of damage, loss or depreciation, and the
remaining deficiency may not warrant further substantial collection efforts
against the borrower. In addition, automobile loan collections depend on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, illness or personal bankruptcy. The application
of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may also limit the amount which can be recovered on such loans.
Consumer Loans. Our consumer loans consist of home equity lines of
credit and savings account loans. We began offering home equity lines of credit
in December 1996. These loans are secured by a real estate mortgage with our
security interest in the borrower's primary residence. These are variable rate
loans indexed to the prime rate with terms of 20 years. Our savings account
loans are made for up to 90% of the balance on deposit in savings accounts or
certificates of deposit. These loans are secured by an interest in the
borrower's account.
Community Reinvestment Act Compliance. We are periodically examined by
the Office of Thrift Supervision for our record of meeting the credit needs of
our local communities pursuant to the Community Reinvestment Act. The Office of
Thrift Supervision rates the performance of a savings institution under
applicable Community Reinvestment Act performance standards and assigns one of
the following ratings: Outstanding, Satisfactory, Needs to Improve, or
Substantial Non-Compliance. In our 1999 Community Reinvestment Act evaluation,
we received a "Satisfactory" Community Reinvestment Act rating. We had a "Needs
to Improve" CRA rating in 1998 and in response to this rating, we adopted a
Community Reinvestment Act action plan in 1998.
In implementing our CRA action plan, we purchased ten loans totaling
$864,000. The security property for all ten purchased loans is located in
moderate-income census tracts in Northfield Federal's assessment area. Seven of
the loans totaling $641,000 are to low or moderate-income borrowers. For the
reasons set forth in purchasing these loans, Northfield Federal was assigned a
CRA rating of "Satisfactory record of meeting community credit
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needs" in its 1999 CRA evaluation. See "Regulation of Northfield Bancorp
and Northfield Federal -- Regulation of Northfield Federal."
Loan Approval Authority and Underwriting. Our president may approve all
commercial leases that we purchase up to $25,000 and all home equity lines of
credit up to that amount. All other loans are approved by our Board of
Directors.
Upon receipt of a completed loan application from a prospective
borrower, we order a credit report. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are prepared by outside
fee appraisers who are approved by the Board of Directors.
Either title insurance or a title opinion is generally required on all
real estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property which is located in a
flood zone.
Loan Originations, Purchases and Sales. All of the loans we originate
are intended to be held in our portfolio rather than sold in the secondary
mortgage market. Our one- to four-family residential loans do, however, conform
to secondary market guidelines. We may, therefore, decide to sell loans in the
secondary market in the future. We occasionally purchase loan participations
from other financial institutions. Generally, the purchase of participation
interests involves the same risks as would the origination of the same types of
loans as well as the additional risk that results from the fact that we have
less control over the origination and subsequent administration of such loans.
Loan Commitments. Written commitments are given to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 10 days of the date of issuance. At December 31, 1999,
commitments to cover originations of mortgage loans were $1.2 million.
Loans to One Borrower. The maximum amount of loans which we may make to
any one borrower may not exceed the greater of $747,000 or 15% of our unimpaired
capital and unimpaired surplus. We may lend an additional 10% of our unimpaired
capital and unimpaired surplus if the loan is fully secured by readily
marketable collateral. Our loan-to-one borrower limit was approximately $747,000
at December 31, 1999. At December 31, 1999, our largest loan outstanding had a
balance of $554,000.
NONPERFORMING AND PROBLEM ASSETS
Loan Delinquencies. Generally when a mortgage loan becomes 30 days past
due, a notice of nonpayment is sent to the borrower. Additional notices and
letters from us are sent if the loan remains delinquent after 45, 60 and 75
days. If the loan continues in a delinquent status for 90 days past due and no
repayment plan is in effect, a notice of right to cure default is sent to the
borrower giving 30 additional days to bring the loan current before foreclosure
is commenced. Our Board meets regularly to determine when foreclosure
proceedings should be initiated. The customer will be notified when foreclosure
is commenced. At December 31, 1999, our loans past due between 30 and 89 days
totaled $316,000.
Loans are reviewed on a monthly basis and are generally placed on a
nonaccrual status when the loan becomes more than 90 days' delinquent or when,
in our opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information
regarding our nonperforming loans. As of the dates indicated, we had no loans
categorized as troubled debt restructurings within the meaning of SFAS 15 and no
real estate owned.
61
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate:
One- to four-family..................................... $ -- $ --
Commercial real estate.................................. -- --
--------- --------
Total real estate loans.............................. -- --
Commercial and auto loans collateralized by lease finance
receivables....................................... -- --
Consumer loans:
Loans secured by deposits............................... -- --
Home improvement........................................ -- --
Automobile.............................................. -- --
Other consumer.......................................... -- --
--------- --------
Total................................................ -- --
--------- --------
Accruing loans delinquent 90 days or more:
Real estate:
One- to four-family..................................... $ -- $ --
Commercial real estate.................................. 8 263
Commercial and auto loans collateralized by lease finance
receivables........................................... -- 33
Consumer loans............................................ -- --
Loan secured by deposits................................. -- --
Home equity lines of credit.............................. -- --
Automobile............................................... -- --
Other consumer........................................... -- --
--------- -------
Total................................................ 8 296
--------- --------
Total nonperforming loans......................... $ 8 $ 296
========= ========
Total non-performing loans as a percentage
of total net loans..................................... .02% .83%
========= =========
Total non-performing assets as a percentage
of total assets........................................ .01% .67%
========= =========
</TABLE>
We had a $90,000 loan which at December 31, 1999 was not classified as
nonaccrual, 90 days past due or restructured, but where known information causes
us to have serious concerns as to the ability of these borrowers to comply with
their current loan terms.
Classified Assets. Office of Thrift Supervision regulations provide for a
classification system for problem assets of savings associations which covers
all problem assets. Under this classification system, problem assets of savings
associations such as ours are classified as "substandard," "doubtful," or
"loss." An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the borrower or of the collateral
pledged, if any. Substandard assets include those characterized by the "distinct
possibility" that the savings association will sustain "some loss" if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that do not
currently warrant classification in one of the aforementioned categories.
62
<PAGE>
When a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings association classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. A savings association's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
Office of Thrift Supervision, which may order the establishment of additional
general or specific loss allowances. A portion of general loss allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining a savings association's regulatory
capital. Specific valuation allowances for loan losses generally do not qualify
as regulatory capital.
At December 31, 1999, $15,000 of our assets were classified as special
mention, and none of our assets were classified as substandard, doubtful or
loss.
Foreclosed Real Estate. Real estate acquired by us as a result of
foreclosure is recorded as "real estate owned" until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less estimated disposal
costs. Any write down of real estate owned is charged to operations. At December
31, 1999, we did not have any real estate owned.
Allowance for Loan Losses. Our policy is to provide for losses on
unidentified loans in our loan portfolio. A provision for loan losses is charged
to operations based on management's evaluation of the losses that may be
incurred in our loan portfolio. The evaluation, including a review of all loans
on which full collectibility of interest and principal may not be reasonably
assured, considers: (i) our past loan loss experience, (ii) known and inherent
risks in our portfolio, (iii) adverse situations that may affect the borrower's
ability to repay, (iv) the estimated value of any underlying collateral, and (v)
current economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance for
loan losses at a level that we consider adequate for the inherent risk of loss
in our loan portfolio, actual losses could exceed the balance of the allowance
for loan losses and additional provisions for loan losses could be required. In
addition, our determination as to the amount of the allowance for loan losses is
subject to review by the Office of Thrift Supervision, as part of its
examination process. After a review of the information available, the Office of
Thrift Supervision might require the establishment of an additional allowance.
63
<PAGE>
The following table sets forth an analysis of our allowance for loan losses
for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period.............................. $ 197 $ 216
Charge-offs:
-----------
Real estate loans:
One- to four-family....................................... -- (16)
Commercial real estate.................................... -- --
--------- --------
Total real estate loans................................ (16)
Commercial loans collateralized by lease
finance receivables.................................... (14) (3)
---------- --------
(14) (3)
---------- --------
Consumer loans:
Loan secured by deposits................................. -- --
Home equity line of credit............................... -- --
Automobile............................................... -- --
Other consumer........................................... -- --
--------- --------
Recoveries.................................................. -- --
--------- --------
Net recoveries (charge-offs)................................ (14) (19)
--------- --------
Additions charged to operations............................. -- --
--------- --------
Balance at end of period.................................... $ 183 $ 197
========= ========
Allowance for loan losses to total
non-performing loans at end of period..................... 2,287.50% 66.55%
========= ========
Allowance for loan losses to net loans
at end of period.......................................... .43% .55%
========= ========
Net loans charge-offs....................................... $ 14 $ 19
========= ========
Provision for loan losses................................... -- --
--------- --------
Ratio of net charge-offs to average
loans outstanding during the period....................... .04% .06%
========= ========
</TABLE>
64
<PAGE>
The following table illustrates the allocation of the allowance for
loan losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1999 1998
-------------------------- --------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------- ------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family.............................. $ 80 88.20% $ 80 81.51%
Construction..................................... -- 4.93 -- 9.53
Land............................................. -- .39 -- .32
Commercial real estate loans..................... 60 4.38 60 6.45
Commercial and auto loans collateralized by
lease finance receivables....................... 43 1.56 57 1.67
Consumer loans..................................... -- .54 -- .52
--------- ------ -------- ------
Total allowance for loan losses................ $ 183 100.00% $ 197 100.00%
========= ====== ======== ======
</TABLE>
INVESTMENT ACTIVITIES
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. For additional information,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The level of liquid assets
varies depending upon several factors, including: (i) the yields on investment
alternatives, (ii) our judgment as to the attractiveness of the yields then
available in relation to other opportunities, (iii) expectation of future yield
levels, and (iv) our projections as to the short-term demand for funds to be
used in loan origination and other activities. We classify our investment
securities as "held to maturity", "available-for-sale" or "trading" in
accordance with SFAS No. 115. At December 31, 1999, our investment portfolio
policy allowed investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) mortgage-backed securities, (iv) certificates of deposit, (v) federal
funds, including Federal Home Loan Bank overnight and term deposits, (vi)
A-rated state and local municipal bonds, and (vii) A-rated corporate bonds.
Mortgage-Backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us. Our
mortgage-backed securities portfolio consists of participations or pass-through
certificates issued by the Federal Home Loan Mortgage Corporation (the "FHLMC"),
the Federal National Mortgage Association ("FNMA") and the Government National
Mortgage Association ("GNMA"). GNMA certificates are guaranteed as to principal
and interest by the full faith and credit of the United States, while FHLMC and
FNMA certificates are guaranteed by those agencies only.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
mortgage loans. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates. The interest
65
<PAGE>
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the
certificate holder. The life of a mortgage-backed pass-through security is equal
to the life of the underlying mortgages.
We have also in the past made investments in real estate mortgage
investment conduits ("REMICs"). REMICs are securities derived by reallocating
the cash flows from mortgage-backed securities or pools of mortgage loans in
order to create multiple classes, or tranches, of securities with coupon rates
and average lives that differ from the underlying collateral as a whole. At
December 31, 1998 and December 31, 1999, we had no investments in REMICs.
The following table sets forth the carrying (i.e., amortized cost) value of
our investment securities and mortgage-backed securities, at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1999 1998
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Held to Maturity:
Interest-bearing deposits in other banks........................... $ 1,039 $ 4,834
Other investments.................................................. -- 799
Mortgage-backed securities......................................... 524 2,123
Federal Home Loan Bank of Atlanta stock............................ 445 273
--------- --------
Total.......................................................... $ 2,008 $ 8,029
========= ========
Available for Sale:
Other investments.................................................. $ 4,874 $ --
Mortgage-backed securities.......................................... 2,551 --
--------- --------
Total............................................................. $ 7,425 $ --
========= ========
</TABLE>
66
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for our investment portfolio at
December 31, 1999.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
--------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Securities held to maturity:
Interest-bearing deposits........... $ 660 6.72% $ 379 5.94% $ -- -- %
Mortgage-backed securities.......... -- -- -- -- -- --
Federal Home Loan Bank stock........ 445 7.25 -- -- -- --
-------- -------- --------
Total.......................... $ 1,105 6.93% $ 379 5.94% $ -- -- %
======== ======== ========
Securities Available for Sale
Other investments................... $ -- -- % $ -- -- % $ 369 5.08%
Mortgage-backed securities.......... -- -- -- -- 95 6.48
-------- -------- --------
Total.......................... $ -- -- % $ -- -- % $ 464 5.37%
======== ======== ========
<CAPTION>
MORE THAN TEN YEARS TOTAL INVESTMENT PORTFOLIO
--------------------- -------------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE VALUE YIELD
-------- -------- --------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Securities held to maturity:
Interest-bearing deposits........... $ -- --% $ 1,039 $ 1,039 6.44%
Mortgage-backed securities.......... 524 5.55 524 469 5.55
Federal Home Loan Bank stock........ -- -- 445 445 7.75
-------- -------- -------
Total.......................... $ 524 5.55% $ 2,008 $ 1,953 6.50
======== ======== =======
Securities Available for Sale
Other investments................... $ 4,505 --% $ 4,874 $ 4,874 7.25
Mortgage-backed securities.......... 2,456 -- 2,551 2,551 6.35
-------- -------- -------
Total.......................... $ 6,961 --% $ 7,425 $ 7,425 6.94
======== ======== =======
</TABLE>
67
<PAGE>
SOURCES OF FUNDS
Deposits and Federal Home Loan Bank borrowings are our major external
source of funds for lending and other investment purposes. Funds are also
derived from the receipt of payments on loans and prepayment of loans and, to a
much lesser extent, maturities of investment securities and mortgage-backed
securities, borrowings and operations. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within our primary market area through the offering of a selection of
deposit instruments including regular savings accounts, money market accounts,
and term certificate accounts. IRA accounts are also offered. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate. The interest rates paid by us on
deposits are set weekly at the direction of our senior management. Interest
rates are determined based on our liquidity requirements, interest rates paid by
our competitors, and our growth goals and applicable regulatory restrictions and
requirements. We do not accept brokered deposits.
The following table sets forth information about our average deposit
balances and interest rates during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998
------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Now accounts..................................... $ 2,554 1.64% $ 1,870 3.08%
Money market deposits............................ 8,129 3.36 8,571 3.76
Passbook savings................................. 2,822 2.71 3,243 2.88
Certificates of deposit.......................... 22,950 5.70 21,380 5.97
--------- --------
Total...................................... $ 36,455 4.66 $ 35,064 4.99
========= ========
</TABLE>
The following table indicates the amount of our certificates of deposit
of $100,000 or more by time remaining until maturity as of December 31, 1999.
CERTIFICATES
MATURITY PERIOD OF DEPOSITS
--------------- -------------
(IN THOUSANDS)
Three months or less ........................................$ 550
Over three through six months ............................... 318
Over six through 12 months .................................. 626
Over 12 months .............................................. 2,196
------
Total .......................................................$3,690
======
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<PAGE>
Borrowings. Advances (borrowings), which includes at December 31, 1999,
a $3.0 million long-term, fixed-rate advance and $5.9 million short-term
advances, may be obtained from the Federal Home Loan Bank of Atlanta to
supplement our supply of lendable funds. Advances from the Federal Home Loan
Bank of Atlanta are typically secured by a pledge of our stock in the Federal
Home Loan Bank of Atlanta, a portion of our first mortgage loans and other
assets. Each Federal Home Loan Bank credit program has its own interest rate,
which may be fixed or adjustable, and range of maturities.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
DECEMBER 31,
-----------------------------
1999 1998
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Amounts outstanding at end of period:
Federal Home Loan Bank advances........................... $ 5,900 $ --
Other short-term borrowings............................... -- --
Weighted average rate paid on:
Other short-term borrowings............................... -- --
Federal Home Loan Bank advances.............................. 4.79% --
Maximum amount of borrowings outstanding at any month end:
Federal Home Loan Bank advances........................... $ 5,900 $ --
Other short-term borrowings............................... -- --
Approximate average short-term borrowings outstanding
with respect to:
Federal Home Loan Bank advances........................... $ 2,471 $ --
Other short-term borrowings............................... -- --
Approximate weighted average rate paid on:
Other short-term borrowings............................... -- --
Federal Home Loan Bank advances........................... 4.95% --
</TABLE>
COMPETITION
We compete for deposits with other insured financial institutions such
as commercial banks, thrift institutions, credit unions, finance companies, and
multi-state regional banks in our market area. Loan competition varies depending
upon market conditions. Our competition in originating real estate loans comes
primarily from commercial banks, thrift institutions, credit unions and mortgage
bankers, many of whom have greater resources than we have.
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<PAGE>
DESCRIPTION OF PROPERTY
The following table sets forth certain information regarding Northfield
Federal's offices and other material property.
<TABLE>
<CAPTION>
BOOK VALUE DEPOSITS
YEAR OWNED OR AT DECEMBER 31, APPROXIMATE AT DECEMBER 31,
OPENED LEASED 1999 (1) SQUARE FOOTAGE 1999
------ ------ ----------- -------------- ---------------
(DEPOSITS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MAIN OFFICE:
1844 E. Joppa Road 1983 Leased (2) $ 13,486 3,150 $ 20,169
Baltimore, Maryland
BRANCH OFFICE:
8705 Harford Road
Baltimore, Maryland 1923 Owned 26,591 750 16,434
EXECUTIVE OFFICES:
8005 Harford Road
Baltimore, Maryland 1998 Leased (3) 57,075 2,915 --
<FN>
____________
(1) Cost less accumulated depreciation and amortization.
(2) Lease has been renewed through 03/31/03.
(3) Lease commenced March 10, 1998 and will expire on June 10, 2001.
</FN>
</TABLE>
The book value of Northfield Federal's investment in premises and
equipment totaled $97,153 at December 31, 1999.
LEGAL PROCEEDINGS
Northfield Federal is, from time to time, a party to legal proceedings
arising in the ordinary course of its business, including legal proceedings to
enforce Northfield Federal's rights against borrowers. At December 31, 1999,
there were no legal proceedings to which Northfield Bancorp or Northfield
Federal was a party, or to which any of their property was subject, which were
expected by management to result in material loss to Northfield Bancorp or
Northfield Federal.
FEDERAL TAXATION
We are subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), in the same general manner as other corporations.
However, prior to August 1996, savings institutions such as us, which met
certain definitional tests and certain other conditions prescribed by the Code
could benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. The amount of the
bad debt deduction that a qualifying savings institution could claim for tax
purposes with respect to additions to its reserve for bad debts for "qualifying
real property loans" could be based upon our actual loss experience (the
"experience method") or as a percentage of our taxable income (the "percentage
of taxable income method"). Historically, we used the method that would allow us
to take the largest deduction.
In August 1996, the Code was revised to equalize the taxation of
savings institutions and banks. Savings institutions, such as us, no longer have
a choice between the percentage of taxable income method and the experience
method in determining additions to bad debt reserves. Thrifts with $500 million
of assets or less may still use the experience method, which is generally
available to small banks currently. Larger thrifts may only take a tax deduction
when a loan is actually charged off. Any reserve amounts added after 1987 will
be taxed over a six year period beginning in 1996; however, bad debt reserves
set aside through 1987 are generally not taxed. A savings institution may delay
recapturing into income its post-1987 bad debt reserves for an additional two
years if it meets a residential-lending test. This law is not expected to have a
material impact on us. At December 31, 1999, we had $577,000 of post-1987 bad
debt reserves.
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<PAGE>
Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution (including distributions
made on dissolution or liquidation), unless we include the amount in income,
along with the amount deemed necessary to pay the resulting federal income tax.
If such amount is used for any purpose other than bad debt losses, including a
dividend distribution or a distribution in liquidation, it will be subject to
federal income tax at the then current rate.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net operating loss
carryovers of which we currently have none. AMTI is also adjusted by determining
the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items. Thus, our AMTI
is increased by an amount equal to 75% of the amount by which our adjusted
current earnings exceeds our AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses). In tax years beginning after
December 31, 1997, a "small" corporation will not be subject to the AMT because
its tentative minimum tax will be treated as zero. For a tax year beginning in
1998, a corporation that has had average annual gross receipts of $5,000,000 or
less for its 1995-1997 tax years will be a small corporation. Once a corporation
is recognized as a small corporation, it will continue to be exempt from AMT as
long as its average annual gross receipts for the prior 3-year period is not in
excess of $7,500,000. If a corporation ceases to be a small corporation, the AMT
will apply prospectively only.
Northfield Bancorp may exclude from its income 100% of dividends
received from Northfield Federal as a member of the same affiliated group of
corporations. A 70% dividends received deduction generally applies with respect
to dividends received from corporations that are not members of such affiliated
group, except that an 80% dividends received deduction applies if Northfield
Bancorp owns more than 20% of the stock of a corporation paying a dividend. The
above exclusion amounts, with the exception of the affiliated group figure, were
reduced in years in which we availed ourselves of the percentage of taxable
income bad debt deduction method.
Our federal income tax returns have not been audited by the IRS in the
last ten years.
STATE TAXATION
Northfield Bancorp is subject to Maryland corporation income tax which
is 7%. Northfield Bancorp is incorporated under Maryland law.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR NORTHFIELD BANCORP
References in this section applicable to Northfield Bancorp and
Northfield Federal (pages 71 to 78) to "we," "us," and "our" refer to Northfield
Bancorp or Northfield Federal. In certain instances where appropriate, "us" or
"our" refers collectively to Northfield Bancorp and Northfield Federal.
Our profitability depends primarily on our net interest income, which
is the difference between interest and dividend income on our interest-earning
assets, principally loans, mortgage-backed securities and investment securities,
and interest expense on our interest-bearing deposits and borrowings. Our net
earnings also are dependent, to a lesser extent, on the level of our noninterest
income, including servicing fees and other fees, and our noninterest expenses,
such as compensation and benefits, occupancy and equipment, insurance premiums,
and miscellaneous other expenses, as well as federal income tax expense.
COMMUNITY REINVESTMENT ACT COMPLIANCE
We are periodically examined by the Office of Thrift Supervision for
our record of meeting the credit needs of our local communities pursuant to the
Community Reinvestment Act. The Office of Thrift Supervision rates the
performance of a savings institution under applicable CRA performance standards
and assigns one of the following
71
<PAGE>
ratings: Outstanding, Satisfactory, Needs to Improve, or Substantial Non-
Compliance. In our 1999 Community Reinvestment Act evaluation, we received a
"Satisfactory" Community Reinvestment Act rating. We had a "Needs to Improve"
Community Reinvestment Act rating in 1998 and in response to this rating, we
adopted a Community Reinvestment Act action plan in 1998.
In implementing our Community Reinvestment Act action plan, we
purchased ten loans totaling $864,000. The security property for all ten
purchased loans is located in moderate-income census tracts in our assessment
area. Seven of the loans totaling $641,000 are to low or moderate-income
borrowers. For the reasons set forth in purchasing these loans, Northfield
Federal was assigned a Community Reinvestment Act rating of "Satisfactory record
of special meeting community credit needs" in its 1999 Community Reinvestment
Act evaluation.
MARKET RISK DISCLOSURE
Asset/Liability Management. Our assets and liabilities may be analyzed
by examining the extent to which our assets and liabilities are interest-rate
sensitive and by monitoring the expected effects of interest rate changes on our
net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by pursuing certain
strategies designed to decrease the vulnerability of our earnings to material
and prolonged changes in interest rates.
To manage the interest rate risk of this type of loan portfolio, we are
attempting to emphasize loans with shorter terms and variable interest rates and
longer term deposits. Most of the loans in our portfolio, however, have fixed
rates. Unlike many other thrift institutions who offer both adjustable and fixed
rates on single family loans and tend to emphasize adjustable rate loans under
rising interest rate conditions, our policy is to originate all of our one- to
four-family residential loans, representing 88.20% of our total loans at
December 31, 1999, with fixed rates. While we plan to emphasize the origination
of home equity loans with shorter terms and variable rates, our primary loan
product will continue to be long-term, fixed-rate construction/permanent loans.
Our interest rate risk is, therefore, significant, and our earnings will
continue to be vulnerable to a rise in prevailing interest rates.
At December 31, 1999, the average weighted term to maturity of our
mortgage loan portfolio was approximately 25 years and the average weighted term
of our fixed maturity deposits was slightly more than 16 months.
Net Portfolio Value. In recent years, we have measured our interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain time periods, based on
assumptions regarding loan prepayment and deposit decay rates formerly provided
by the Office of Thrift Supervision. However, the Office of Thrift Supervision
now measures an institution's interest rate risk by computing the amount by
which the net present value of cash flow from assets, liabilities and off
balance sheet items (the institution's net portfolio value or "NPV") would
change in the event of a range of assumed changes in market interest rates.
These computations estimate the effect on an institution's NPV from
instantaneous and permanent 1% to 3% (100 to 300 basis points) increases and
decreases in market interest rates. The following table presents the interest
rate sensitivity of our NPV at December 31, 1999, as calculated by the Office of
Thrift Supervision, which is based upon quarterly information that we
voluntarily provided to the Office of Thrift Supervision.
72
<PAGE>
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE NPV AS % OF PORTFOLIO VALUE OF ASSETS
CHANGE --------------------------------------- -----------------------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO BASIS POINT CHANGE
-------- -------- -------- -------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+ 300 bp $(1,051) $(5,639) (123)% (2.27)% (1,095) bp
+ 200 bp 736 (3,852) (84) 1.52 (715) bp
+ 100 bp 2,645 (1,943) (42) 5.23 (345) bp
0 bp 4,588 8.68
- 100 bp 6,201 1,613 35 11.30 262 bp
- 200 bp 7,030 2,442 53 12.53 385 bp
- 300 bp 7,424 2,836 62 13.04 436 bp
</TABLE>
While we cannot predict future interest rates or their effects on our
NPV or net interest income, we do not expect current interest rates to have a
material adverse effect on our NPV or net interest income in the near future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit runoff and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in market interest rates. The interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as variable rate loans,
generally have features which restrict changes in interest rates on a short-term
basis and over the life of the loan. In the event of a change in interest rates,
prepayments and early withdrawal levels could deviate significantly from those
assumed in making calculations set forth above. Additionally, an increased
credit risk may result as the ability of many borrowers to service their debt
may decrease in the event of an interest rate increase.
Our Board of Directors reviews our asset and liability policies and
meets regularly to review interest rate risk and trends, as well as liquidity
and capital ratios and requirements. The estimated changes of our NPV set forth
above fell within the targets established by our Board of Directors. Management
administers the policies and determinations of our Board of Directors with
respect to our asset and liability goals and strategies. We expect that our
asset and liability policies and strategies will continue as described so long
as competitive and regulatory conditions in the financial institution industry
and market interest rates continue as they have in recent years.
73
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth certain information relating to our
average statement of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated and the average
yields earned and rates paid at the date and for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
monthly balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. We do not
believe that the use of month-end balances instead of daily balances has caused
any material difference in the information presented. For the purposes of
computing the average yield, nonaccruing loans have been included in the average
balances.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998
--------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................................... $ 39,947 $ 2,979 7.46% $ 32,216 $ 2,566 7.97%
Investment securities available for sale. 3,656 237 6.48 -- -- --
Other investments held to maturity....... -- -- -- 66 2 3.03
Mortgage-backed securities............... 2,882 154 5.34 1,984 150 7.56
Other interest-earning assets (1)........ 1,815 102 5.62 4,915 266 5.41
---------- ------- ---------- --------
Total interest-earning assets ........ 48,300 3,472 7.19 39,181 2,984 7.62
Non-interest-earning assets................ 980 636
---------- ----------
Total assets.......................... $ 49,280 $ 39,817
========== ==========
Interest-bearing liabilities:
Savings deposits......................... $ 34,323 $ 1,699 4.95 $ 35,064 $ 1,748 4.99
Short-term borrowings (2)................ 2,471 124 5.02 53 2 3.77
Long-term borrowings (3)................. 2,250 112 4.98 -- -- --
---------- ------- ---------- --------
Total interest-bearing liabilities.... 39,044 1,935 4.96 35,117 1,750 4.99
------- --------
Non-interest-bearing liabilities........... 3,015 886
---------- ----------
Total liabilities..................... 42,059 36,003
Equity..................................... 7,221 3,814
---------- ----------
Total liabilities and equity.......... $ 49,280 $ 39,817
========== ==========
Net interest income........................ $ 1,537 $ 1,234
======= ========
Net interest rate spread (4)............... 2.23% 2.63%
==== =====
Net interest-earning assets................ $ 9,356 $ 4,064
========== ==========
Net interest margin (5).................... 3.18% 3.15%
===== =====
Ratio of average interest-earning assets
to average interest-bearing
liabilities............................. 123.70% 111.57%
====== ======
<FN>
--------------------
(1)Other interest-earning assets includes interest-bearing deposits and
Federal Home Loan Bank of Atlanta stock.
(2) Short-term borrowings includes Federal Home Loan Bank advances and
advance payments by borrowers for expenses.
(3) Long-term borrowings include a Federal Home Loan Bank advance.
(4) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate on
interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
</FN>
</TABLE>
74
<PAGE>
RATE/VOLUME ANALYSIS
The table shows certain information regarding changes in our interest
income and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to: (i) changes in volume (changes in volume multiplied
by old rate); and (ii) changes in rates (change in rate multiplied by old
volume); and (iii) change in rate-volume (changes in rate multiplied by the
changes in volume).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
---------------------------------------- -----------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------------------------- -----------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------ ---- ------ ----- ------ ---- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans........................... $ 616 $ (164) $ (39) $ 413 $ 399 $ (35) $ (6) $ 358
Investment securities available
for sale..................... 86 3 149 237 (15) -- -- (15)
Investments held to maturity.... (2) -- -- (2) 2 -- -- 2
Mortgage-backed securities...... 68 (44) (20) 4 (14) (2) -- (16)
Other interest-earning assets... (168) 10 (7) (164) 53 (19) (4) 30
------- ------ ------ ------- ------- ------- ------ -----
Total interest-earning
assets...................... 600 (195) 83 488 425 (56) (10) 359
------- ------ ------ ------- ------- ------- ------ -----
Interest-bearing liabilities:
Deposits........................ (36) (13) -- (49) 257 15 3 275
Short-term borrowings (1)....... 81 1 40 (122) (17) (5) 5 (17)
Long-term borrowings (2)........ 112 -- -- 112 -- -- -- --
------- ------ ------ ------- ------- ------- ------ -----
Total interest-bearing
liabilities.............. 157 (12) 40 185 240 10 8 258
------- ------ ------ ------- ------- ------- ------ -----
Increase (decrease) in net
interest income............... $ 443 $ (183) $ 43 $ 303 $ 185 $ (66) $ (18) $ 101
======= ======= ====== ======= ======= ======= ====== =====
<FN>
---------------
(1) Includes Federal Home Loan Bank of Atlanta advances and advance
payments by borrowers for expenses.
(2) Includes a Federal Home Loan Bank of Atlanta advance.
</FN>
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31, 1998
Total assets increased by $9.3 million, or 21%, from $44.3 million at
December 31, 1998 to $53.6 million at December 31, 1999. Total liabilities
increased by $9.3 million, or 25%, from $37.2 million at December 31, 1998 to
$46.5 million at December 31, 1999. The increase in assets was primarily due to
increases in investments of $4.1 million and loans of $7.2 million, partially
offset by a decrease in interest bearing deposits in other banks of $3.8
million. The asset and liability balance increases were the result of investing
the proceeds of Federal Home Loan Bank advances of $8.9 million.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998
Net Income. Our net income increased $72,000 from $307,000 for the
fiscal year ended December 31, 1998 to $379,000 for the fiscal year ended
December 31, 1999. The primary reason for the increase was an increase in net
interest income of $303,000 and a cumulative effect of accounting change of
$9,000, offset by an increase in non-interest expense of $200,000 and in the
provision for income taxes of $38,000.
Net Interest Income. Our net interest income increased from $1.23
million for fiscal 1998 to $1.54 million for fiscal year 1999. The $303,000
increase was primarily due to interest earned on a significantly larger, but a
slightly lower yielding average loan portfolio and a substantially larger and
higher yielding average investment portfolio in fiscal 1999 compared to fiscal
1998. The utilization of an average $4.7 million of Federal Home Loan
75
<PAGE>
Bank advances in fiscal 1999 compared to none in fiscal 1998, slightly offset
by a decline in average deposit balances, resulted in an increase of
$184,000 in interest expense.
Provision for Loan Losses. There were no provisions for loan losses
during fiscal years 1999 and 1998. Future additions to the loan loss allowance
will be based on the analysis of the loan portfolio, and accordingly, are not
predictable.
Non-Interest Income. Non-interest income decreased slightly from
$31,000 for fiscal year 1998 to $29,000 for fiscal year 1999 due to a drop in
all other income.
Non-interest Expense. For fiscal year 1999, total non-interest expenses
were $961,000 as compared to $761,000 for fiscal 1998. Higher compensation
expenses following personnel additions, an increase in employee stock ownership
and deferred compensation expenses, and a decrease in payroll related deferred
loan origination costs contributed $129,000 to the total increase. In addition,
occupancy expense rose $28,000 in fiscal 1999 reflecting a full year's expenses
for the administrative office that opened mid-1998. Northfield Bancorp expects
the level of its non-interest expense to continue to increase in future periods
as a result of expenses associated with the employee stock ownership plan that
Northfield Bancorp implemented in connection with its stock conversion.
Our deposit insurance premium expense increased slightly during 1999 as
the result of a slight increase in deposits.
Income Tax Expense. Our income tax expense for fiscal 1999 was $234,000
compared to $196,000 for the prior year. The increase was principally the result
of an increase in pre-tax earnings. The effective tax rate fell slightly to
38.72% from 39.01%. The higher tax rate in fiscal 1998 was primarily the result
of a net operating loss of the holding company for which no income tax benefit
was recorded.
LIQUIDITY AND CAPITAL RESOURCES
We are required to maintain minimum levels of liquid assets as defined
by Office of Thrift Supervision regulations. This requirement, which varies from
time to time depending upon economic conditions and deposit flows, is based upon
a percentage of our deposits and short-term borrowings. The required ratio at
December 31, 1999 was 4% and our liquidity ratio for the quarter ended December
31, 1999 was 17.58%.
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and advances from the Federal Home Loan
Bank of Atlanta. While scheduled repayments of loans and mortgage-backed
securities and maturities of investment securities are predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by the general
level of interest rates, economic conditions and competition. We use our
liquidity resources principally to fund existing and future loan commitments, to
fund maturing certificates of deposit and demand deposit withdrawals, to invest
in other interest-earning assets, to maintain liquidity, and to meet operating
expenses.
Liquidity may be adversely affected by unexpected deposit outflows,
higher interest rates paid by competitors, adverse publicity relating to the
savings and loan industry, and similar matters. Management monitors projected
liquidity needs and determines the level desirable, based in part on our
commitments to make loans and management's assessment of our ability to generate
funds.
A major portion of our liquidity consists of cash and cash equivalents,
which include cash and interest-bearing deposits in other banks with a maturity
date of less than ninety days. The level of these assets is dependent upon our
operating, investing, lending and financing activities during any given period.
At December 31, 1999, cash and cash equivalents totaled $1.3 million.
Our primary investing activities include origination of loans and
purchase of investment securities and mortgage-backed securities. During the
year ended December 31, 1999, purchases of investment securities totaled $4.5
million, while purchases of mortgage-backed securities totaled $2.9 million, and
loan originations and purchases totaled $13.9 million. These investments were
funded in part by Federal Home Loan Bank advances of
76
<PAGE>
$8.9 million, loan and mortgage-backed security repayments of $7.6 million,
proceeds from the sale of mortgage-backed securities trading of $1.0 million and
an increase in certificates of deposit received of $500,000 for the year ended
December 31, 1999.
At December 31, 1999, we had $1.2 million in outstanding commitments to
originate fixed-rate loans with rates that ranged from 7.25% to 8.5% and had no
non-recourse commercial finance lease commitments outstanding. We anticipate
that we will have sufficient funds available to meet our current loan
origination commitments. Certificates of deposit which are scheduled to mature
in one year or less totaled $12.9 million at December 31, 1999. Based on
historical experience management believes that a significant portion of such
deposits will remain with us.
We are subject to federal regulations that impose certain minimum
capital requirements. At December 31, 1999 we were in compliance with all
applicable capital requirements.
IMPACT OF INFLATION AND CHANGING PRICES
Our financial statements and the accompanying notes, which appear
beginning on page F-1 of this document, have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. As a result, interest rates have a greater impact on our
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
FASB Statement on Accounting for Derivative Instruments and Hedging
Activities. In June 1998, FASB issued SFAS No. 133. This Statement standardizes
the accounting for derivative instruments including certain derivative
instruments embedded in other contracts, by requiring that an entity recognize
these items as assets or liabilities in the statement of financial position and
measure them at fair value. This Statement generally provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of the changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk or the earnings effect of the hedged
forecasted transaction. The Statement is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000.
Northfield Bancorp implemented SFAS No. 133 on January 1, 1999. In
accordance with the pronouncement's provisions, Northfield Bancorp reclassified
approximately $1.07 million of mortgage-backed securities from held to maturity
to trading. On January 11, 1999, Northfield Bancorp sold mortgage-backed
securities with an aggregate net book value of $1,033,399 for $1,048,335 and
realized a gain of $8,980, net of taxes. In addition, Northfield Bancorp
reclassified approximately $1.05 million of mortgage-backed securities and
$800,000 of investments from held to maturity to available for sale.
Accordingly, the net unrealized loss of $1,328 at the date of transfer is
reflected on the consolidated statements of stockholders' equity as the
cumulative effect of a change in accounting principle, net of taxes.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND DECEMBER 31, 1999
Our total assets were $54,301,000 as of March 31, 2000, compared to
$53,580,000 as of December 31, 1999, an increase of $721,000 or 1.35%. The
increase was primarily attributable to an increase in loans receivable of
$1,471,000, partially offset by a decrease in cash of $436,000 and a decrease in
interest bearing deposits in other banks of $287,000.
Our total liabilities were $47,176,000 as of March 31, 2000, compared
to $46,507,000 as of December 31, 1999, an increase of $669,000 or 1.44%. The
increase was primarily due to additional Federal Home Loan Bank of Atlanta
advances of $600,000 following management's plan to take advantage of low rate
Federal Home Loan Bank of Atlanta advances and invest the proceeds in higher
yielding loans.
77
<PAGE>
Stockholders' equity was $7,126,000 as of March 31, 2000, compared to
$7,073,000 as of December 31 1999, an increase of $53,000. The increase was
principally due to net income for the period of $31,000 and a net unrealized
gain on investments available for sale of $13,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND 1999
General. Net income for the three months ended March 31, 2000 was
$31,000 as compared to $126,000 for the same period in 1999. The decrease in net
income of $95,000 was primarily the result of increases in non-interest
expenses, predominantly non-cash deferred compensation expense, and a cumulative
effect of accounting change of $9,000 recognized in the first quarter of fiscal
1999.
Interest Income. Total interest income for the three months ended March
31, 2000 was $956,000 compared to $819,000 for the same period in 1999, an
increase of $137,000 or 16.73%. The increase was principally due to an increase
of $6,126,000 in the average balance of loans outstanding, an increase of
$3,339,000 in the average balance of investments and an increase in rates earned
on investments for the quarter ended March 31, 2000 over the prior year's
respective quarter. The above increases were slightly offset by a decline in
rates on loans.
The weighted average yield on interest-earning assets was 7.24% and
7.29% for the three month period ended March 31, 2000 and 1999, respectively.
Interest Expense. Total interest expense for the three months ended
March 31, 2000 and 1999 was $559,000 and $430,000 respectively, an increase of
$129,000 or 30.00%. The increase resulted primarily from increases in the
average dollar amount of short and long-term borrowings of $4,700,000 and
$3,000,000, respectively. The average rate paid on short-term borrowings
increased to 5.88% in the current year's quarter from 5.76% in the prior year's
quarter.
Provision for Loan Losses. There were no provisions for loan losses for
the three month periods ended March 31, 2000 and 1999. Management monitors and
adjusts its loan loss reserves based upon its analysis of the loan portfolio.
Reserves are increased by a charge to income, the amount of which depends upon
an analysis of the changing risks inherent in the Company's loan portfolio and
the relative status of the real estate market and the economy in general.
Patapsco Bancorp has historically experienced a limited amount of loan
charge-offs and delinquencies. At March 31, 2000, management believes the
allowance for loan losses is sufficient since the loans are adequately secured.
The assessment of the adequacy of the allowance for loan losses involves
subjective judgment regarding future events and there can be no assurance that
additional provisions for loan losses will not be required in future periods.
Other Non-Interest Income. Other income decreased slightly, $2,000 to
$7,000 for the three months ended March 31, from $9,000 for the same period last
year.
Non-Interest Expense. Total non-interest expense increased $139,000 to
$348,000 for the three months ended March 31, 2000 from $209,000 for March 31,
1999. Higher compensation expenses following an increase in stock-based deferred
compensation expenses, personnel additions, and a decrease in payroll related
deferred loan origination costs contributed $90,000 to the increase. In
addition, professional fees expenses rose $36,000 as a result of increased audit
and bookkeeping expenses, legal expenses and consultant fees. We expect the
level of non-interest expense to continue at this higher level in future periods
as a result of expenses associated with the employee stock ownership plan that
we implemented in connection with our stock conversion.
Income Taxes. Our income tax expense for the three months ended March
31, 2000 and 1999 was $24,000 and $72,000, respectively, representing a decrease
of $48,000 or 66.67%. The decrease was primarily the result of the decrease in
pretax income. As a result of non-deductible expenses incurred during the first
quarter of 2000, the effective tax rate increased to 43.81% from 38.24% for the
same period in 1999.
78
<PAGE>
REGULATION OF NORTHFIELD BANCORP AND NORTHFIELD FEDERAL
References in this section to "we," "us," and "our" refer to Northfield
Bancorp or Northfield Federal. In certain instances where appropriate, "us" or
"our" refers collectively to Northfield Bancorp and Northfield Federal.
REGULATION OF NORTHFIELD FEDERAL
General. As a federally chartered, Savings Association Insurance
Fund-insured savings institution, we are subject to extensive regulation by the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Our
lending activities and other investments must comply with various federal and
state statutory and regulatory requirements, and the Office of Thrift
Supervision periodically examines us for compliance with various regulatory
requirements. The Federal Deposit Insurance Corporation also has authority to
conduct periodic examinations of us. We must file reports with the Office of
Thrift Supervision describing our activities and our financial condition and we
must obtain approvals from regulatory authorities before entering into certain
transactions such as the conversion or mergers with other financial
institutions. We are also subject to certain reserve requirements promulgated by
the Board of Governors of the Federal Reserve System. Our relationship with our
depositors and borrowers is also regulated to a great extent by federal and
state law, especially in such matters as the ownership of savings accounts and
the form and content of our mortgage documents. This supervision and regulation
are primarily intended to protect depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in regulations,
whether by the Office of Thrift Supervision, the Federal Deposit Insurance
Corporation or any other government agency, could have a material adverse impact
on our operations.
Insurance of Deposit Accounts. The Federal Deposit Insurance Corporation
maintains two separate funds for the insurance of deposits up to prescribed
statutory limits. The Bank Insurance Fund insures the deposits of commercial
banks and the Savings Association Insurance Fund insures the deposits of savings
institutions. We are a member of the Savings Association Insurance Fund. The
Federal Deposit Insurance Corporation is authorized to establish separate annual
assessment rates for deposit insurance for members of the Bank Insurance Fund
and the Savings Association Insurance Fund. We are required to pay assessments
based on a percent of our insured deposits to the Federal Deposit Insurance
Corporation for insurance of our deposits by the Savings Association Insurance
Fund. The Federal Deposit Insurance Corporation is required to set semi-annual
assessments for Savings Association Insurance Fund-insured institutions at a
rate determined by the Federal Deposit Insurance Corporation to be necessary to
maintain the designated reserve ratio of the Savings Association Insurance Fund
at 1.25% of estimated insured deposits or at a higher percentage of insured
deposits that the Federal Deposit Insurance Corporation determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the Savings Association Insurance Fund.
The assessment rate for an insured depository institution is determined by
the assessment risk classification assigned to the institution by the Federal
Deposit Insurance Corporation based on the institution's capital level and
supervisory evaluations. Based on the data reported to regulators for a date
closest to the last day of the seventh month preceding the semi-annual
assessment period, institutions are assigned to one of three capital groups --
well capitalized, adequately capitalized or undercapitalized -- using the same
percentage criteria as in the prompt corrective action regulations. Within each
capital group, institutions are assigned to one of three subgroups on the basis
of supervisory evaluations by the institution's primary supervisory authority
and such other information as the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance fund.
The Federal Deposit Insurance Corporation's current assessment schedule for
Savings Association Insurance Fund deposit insurance sets the assessment rate
for well-capitalized institutions with the highest supervisory ratings at zero
and institutions in the worst risk assessment classification are assessed at the
rate of 0.27% of insured deposits. In addition, Federal Deposit Insurance
Corporation-insured institutions are required to pay assessments to the Federal
Deposit Insurance Corporation to help fund interest payments on certain bonds
issued by the Financing Corporation, an agency of the federal government
established to finance takeovers of insolvent thrifts. Until December 31, 1999,
Savings Association Insurance Fund-insured institutions were required
79
<PAGE>
to pay Financing Corporation assessments at five times the rate at which Bank
Insurance Fund members were assessed. After December 31, 1999, both Bank
Insurance Fund and Savings Association Insurance Fund members will be assessed
at the same rate for Financing Corporation payments.
Regulatory Capital Requirements. Office of Thrift Supervision capital
regulations require savings institutions to meet three capital standards: (i)
tangible capital equal to at least 1.5 % of total adjusted assets, (ii) core
capital equal to at least 4% (3% if the institution has received the highest
rating on its most recent examination) of total adjusted assets, and (iii)
risk-based capital equal to at least 8% of total risk-weighted assets. In
addition, the Office of Thrift Supervision may require that a savings
institution that has a risk-based capital ratio less than 8%, a ratio of Tier 1
capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to
adjusted total assets of less than 4% (3% if the institution has received the
highest rating on its most recent examination) take certain actions to increase
its capital ratios. If the institution's capital is significantly below the
minimum required levels or if it is unsuccessful in increasing its capital
ratios, the Office of Thrift Supervision may significantly restrict its
activities.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), non-cumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
non-withdrawable accounts and pledged deposits of mutual savings associations
and qualifying supervisory goodwill, less non-qualifying intangible assets,
certain mortgage servicing rights and certain investments. Tier 1 has the same
definition as core capital.
Risk-based capital equals the sum of core capital plus supplementary
capital. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock, the portion of
the allowance for loan losses not designated for specific loan losses and up to
45% of unrealized gains on equity securities. Overall, supplementary capital is
limited to 100% of core capital. A savings institution must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the Office of Thrift Supervision, which
range from 0% for cash to 100% for delinquent loans, property acquired through
foreclosure, commercial loans, and other assets. At December 31, 1999, we were
in compliance with all regulatory capital requirements as is shown on the table
below.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT ASSETS (1)
------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible capital........................................... $5,300 9.83%
Tangible capital requirement .............................. 808 1.50
------ -----
Excess .................................................... $4,492 8.33%
====== =====
Core capital............................................... $5,300 9.83%
Core capital requirement .................................. 2,156 4.00
------ -----
Excess .................................................... $3,144 5.83%
====== =====
Risk-based capital......................................... $5,483 19.20%
Risk-based capital requirement ............................ 2,284 8.00
------ -----
Excess .................................................... $3,199 11.20%
====== =====
</TABLE>
The risk-based capital standards of the Office of Thrift Supervision
generally require savings institutions with more than a "normal" level of
interest rate risk to maintain additional total capital. An institution's
interest rate risk will be measured in terms of the sensitivity of its "net
portfolio value" to changes in interest rates. Net portfolio value is defined,
generally, as the present value of expected cash inflows from existing assets
and off-balance sheet contracts less the present value of expected cash outflows
from existing liabilities. A savings institution will be considered to have a
"normal" level of interest rate risk exposure if the decline in its net
portfolio value after an immediate 200 basis point increase or decrease in
market interest rates (whichever results in the greater decline) is less than
two percent of the current estimated economic value of its assets. An
institution with a greater than normal interest rate risk will be required to
deduct from total capital, for purposes of calculating its risk-based capital
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<PAGE>
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The Office of Thrift Supervision calculates the sensitivity of an
institution's net portfolio value based on data submitted by the institution in
a schedule to its quarterly Thrift Financial Report and using the interest rate
risk measurement model adopted by the Office of Thrift Supervision. The amount
of the interest rate risk component, if any, to be deducted from an
institution's total capital will be based on the institution's Thrift Financial
Report filed two quarters earlier. Savings institutions with less than $300
million in assets and a risk-based capital ratio above 12% are generally exempt
from filing the interest rate risk schedule with their Thrift Financial Reports.
However, the Office of Thrift Supervision may require any exempt institution
that it determines may have a high level of interest rate risk exposure to file
such schedule on a quarterly basis and may be subject to an additional capital
requirement based upon its level of interest rate risk as compared to its peers.
Due to our size and risk-based capital level, we are exempt from the interest
rate risk component.
At December 31, 1999, we were "well-capitalized" under applicable
regulations.
Dividend and Other Capital Distribution Limitations. Under Office of
Thrift Supervision regulations, we are not permitted to pay dividends on our
capital stock if our regulatory capital would thereby be reduced below the
amount then required for the liquidation account established for the benefit of
certain of our depositors at the time of our conversion to stock form.
Savings associations must submit notice to the Office of Thrift
Supervision prior to making a capital distribution (including cash dividends,
stock repurchases and amounts paid to stockholders of another institution in a
cash merger) if (a) they would not be well capitalized after the distribution,
(b) the distribution would result in the retirement of any of the association's
common or preferred stock or debt counted as its regulatory capital, or (c) the
association is a subsidiary of a holding company. A savings association must
make application to the Office of Thrift Supervision to pay a capital
distribution if (x) the association would not be adequately capitalized
following the distribution, (y) the association's total distributions for the
calendar year exceeds the association's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the Office of Thrift Supervision.
At December 31, 1999, we had an aggregate total of approximately $1.7
million that was available for distribution to Northfield Bancorp as dividends
or other capital distributions without application to the Office of Thrift
Supervision under the foregoing regulations.
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender test. We must maintain at least 65% of our portfolio
assets (total assets less intangible assets, property we use in conducting our
business and liquid assets in an amount not exceeding 20% of total assets) in
qualified thrift investments to satisfy the test. Qualified thrift investments
consist primarily of residential mortgage loans and mortgage-backed and other
securities related to domestic, residential real estate or manufactured housing.
The shares of stock we own in the Federal Home Loan Bank of Atlanta also qualify
as qualified thrift investments. Subject to an aggregate limit of 20% of
portfolio assets, we may also count the following as qualified thrift
investments: (i) 50% of the dollar amount of residential mortgage loans
originated for sale, (ii) investments in the capital stock or obligations of any
service corporation or operating subsidiary as long as such subsidiary derives
at least 80% of its revenues from domestic housing related activities, (iii)
200% of the dollar amount of loans and investments to purchase, construct or
develop "starter homes," subject to certain other restrictions, (iv) 200% of the
dollar amount of loans for the purchase, construction or development of domestic
residential housing or community centers in "credit needy" areas or loans for
small businesses located in such areas, (v) loans for the purchase, construction
or development of community centers, (vi) loans for personal, family, household
or educational purposes, subject to a maximum of 10% of portfolio assets, and
(vii) shares of FHLMC or FNMA stock.
If a savings institution does not satisfy the test, the institution
must either convert to a bank charter or comply with the following restrictions
on its operations: (i) the institution may not engage in any new activity or
make any new investment, directly or indirectly, unless such activity or
investment is permissible for a national bank; (ii) the branching powers of the
institution are restricted to those of a national
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<PAGE>
bank; and (iii) payment of dividends by the institution will be subject to the
rules regarding payment of dividends by a national bank. Upon the expiration
of three years from the date the institution ceases to be a qualified thrift
lender, it must cease any activity, and not retain any investment unless the
activity or investment is permissible for a national bank and a savings
association.
Compliance with the Qualified Thrift Lender test is determined on a
monthly basis in nine out of every 12 months. As of December 31, 1999, we were
in compliance with our qualified thrift lender requirement with approximately
91% of our assets invested in qualified thrift investments, as currently
defined.
Community Reinvestment Act. In enacting the Community Reinvestment Act,
Congress required each federal banking regulatory agency to assess an
institution's record of helping to meet the credit needs of the local
communities in which the institution is chartered, consistent with the safe and
sound operation of the institution, and to take this record into account in the
agency's evaluation of an application for a deposit facility by the institution.
Office of Thrift Supervision regulations provide that the Office of Thrift
Supervision will take into account the record of performance under the Community
Reinvestment Act for, among other things, the following applications:
o the establishment of branches or other deposit-accepting facilities of
a savings institution;
o the relocation of a main office or branch of a savings institution;
o the merger or consolidation of a savings institution with another
depository institution; or
o acquisition by a thrift holding company of a savings institution. A
savings institution's record of Community Reinvestment Act performance
may be the basis for denying or conditioning approval of any of these
types of applications.
The Office of Thrift Supervision rates the performance of a savings
institution under the applicable Community Reinvestment Act performance
standards and assigns one of the following ratings: Outstanding, Satisfactory,
Needs to Improve, or Substantial Noncompliance. In our 1999 Community
Reinvestment Act evaluation, we received a rating of "Satisfactory." See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations for Northfield -- Community Reinvestment Act Compliance."
Transactions With Affiliates. Generally, transactions between a savings
institution and its affiliates are subject to certain limitations. Our
affiliates include Northfield Bancorp and any company which would be under
common control with us. Such transactions must be on terms as favorable to the
savings institution as comparable transactions with non-affiliates. In addition,
certain of these transactions are restricted to an aggregate percentage of the
savings institution's capital. Collateral in specified amounts must usually be
provided by affiliates in order to receive loans from the savings institution.
In addition, a savings institution may not extend credit to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The Office of Thrift
Supervision has the discretion to treat subsidiaries of savings institution as
affiliates on a case-by-case basis.
Loans to Directors, Executive Officers and Principal Stockholders.
Loans from us to our directors, executive officers and our principal
stockholders may not be made on terms more favorable than those afforded to
other borrowers. In addition, we cannot make loans in excess of certain levels
to directors, executive officers or 10% or greater stockholders (or any of their
affiliates) unless the loan is approved in advance by a majority of our Board of
Directors with any "interested" director not voting. We are also prohibited from
paying any overdraft of any of our executive officers or directors. We are also
subject to certain other restrictions on the amount and type of loans to
executive officers and directors and must annually report such loans to our
regulators.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At December 31, 1999, our
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<PAGE>
required liquid asset ratio was 4% and our actual ratio was 17.58%. Monetary
penalties may be imposed upon institutions for violations of liquidity
requirements.
Federal Home Loan Bank System. We are a member of the Federal Home Loan
Bank of Atlanta, which is one of 12 regional Federal Home Loan Banks. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
savings institutions and proceeds derived from the sale of consolidated
obligations of the Federal Home Loan Bank System. It makes loans to members
(i.e., advances) in accordance with policies and procedures established by the
Board of Directors of the Federal Home Loan Bank.
As a member, we are required to purchase and maintain stock in the
Federal Home Loan Bank of Atlanta in an amount equal to at least 1% of
mortgage-related assets at the beginning of each year, or 1/20 of our advances
from the Federal Home Loan Bank of Atlanta, whichever is greater. At December
31, 1999, we had $445,000 in Federal Home Loan Bank stock, at cost, which was in
compliance with this requirement.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the Office of Thrift
Supervision. At December 31, 1999, our reserve met the minimum level required by
the Federal Reserve System.
REGULATION OF NORTHFIELD BANCORP
General. Northfield Bancorp is registered as a savings and loan holding
company and files reports with the Office of Thrift Supervision and is subject
to regulation and examination by the Office of Thrift Supervision. In addition,
the Office of Thrift Supervision will have enforcement authority over Northfield
Bancorp and any non-savings institution subsidiaries. This will permit the
Office of Thrift Supervision to restrict or prohibit activities that it
determines to be a serious risk to us. This regulation is intended primarily for
the protection of our depositors and not for the benefit of stockholders of
Northfield Bancorp. Northfield Bancorp is also required to file certain reports
with, and comply with the rules and regulations of the Securities and Exchange
Commission under the federal securities laws.
Activities Restrictions. Since Northfield Bancorp owns only one savings
institution, it is able to diversify its operations into activities not related
to banking, but only so long as we satisfy the qulified thrift lender test. If
Northfield Bancorp controls more than one savings institution, it would lose the
ability to diversify its operations into non-banking related activities, unless
such other savings institutions each also qualify as a qualified thrift lender
and were acquired in a supervised acquisition.
Restrictions on Acquisitions. Northfield Bancorp must obtain approval
from the Office of Thrift Supervision before acquiring control of any other
savings institution or savings and loan holding company, substantially all the
assets thereof or in excess of 5% of the outstanding shares of another savings
institution or savings and loan holding company. Northfield Bancorp's directors
and officers or persons owning or controlling more than 25% of Northfield
Bancorp's stock, must also obtain approval of the Office of Thrift Supervision
before acquiring control of any savings institution or savings and loan holding
company.
The Office of Thrift Supervision may only approve acquisitions that
will result in the formation of a multiple savings and loan holding company
which controls savings institutions in more than one state if: (i) the multiple
savings and loan holding company involved controls a savings institution which
operated a home or branch office in the state of the institution to be acquired
as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
Federal Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
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<PAGE>
COMPARISON OF RIGHTS OF STOCKHOLDERS
The rights of stockholders of Patapsco Bancorp are currently governed
by Patapsco Bancorp's articles of incorporation and bylaws and applicable
provisions of the Maryland General Corporation Law. The rights of stockholders
of Northfield Bancorp are currently governed by Northfield Bancorp's articles of
incorporation and bylaws and the same provisions of the Maryland General
Corporation Law. If we complete the merger, Northfield Bancorp stockholders will
become Patapsco Bancorp stockholders and their rights will likewise be governed
by Patapsco Bancorp's articles of incorporation and bylaws.
Because Patapsco Bancorp and Northfield Bancorp are both organized
under the laws of the State of Maryland, any differences in your rights as a
stockholder of Northfield Bancorp and Patapsco Bancorp will arise from
differences in the articles of incorporation and bylaws of Patapsco Bancorp and
Northfield Bancorp and from the fact that you will hold shares of preferred
stock rather than common stock, and not from differences of law. This summary is
not a complete discussion of the Patapsco Bancorp and Northfield Bancorp
articles of incorporation and bylaws, and it is qualified in its entirety by
reference to those documents. Copies of Patapsco Bancorp's and Northfield
Bancorp's articles of incorporation and bylaws are on file with the Securities
and Exchange Commission. See "Where You Can Find More Information."
For information regarding the rights and preferences of Patapsco Bancorp
preferred stock, see "Proposal I -- The Merger -- Description of Preferred
Stock."
<TABLE>
<CAPTION>
Authorized Stock
-----------------
Patapsco Bancorp Northfield Bancorp
---------------- ------------------
<S> <C>
The Patapsco Bancorp articles of incorporation authorize The Northfield Bancorp articles of incorporation
the issuance of 5,000,000 shares of capital stock, authorize the issuance of 10,000,000 shares of capital
4,000,000 shares of which are Common Stock, $.01 par stock, 8,000,000 shares of which are Northfield
value, and 1,000,000 shares of which are Preferred Stock, Bancorp Common Stock, $.01 par value, and 2,000,000
$.01 par value. shares of serial preferred stock, $.01 par value.
At July 31, 2000, there were 327,390 shares of Patapsco At July 31, 2000, there were 475,442 shares of
Bancorp common stock outstanding, and no shares of Northfield Bancorp common stock outstanding, and no
Patapsco Bancorp preferred stock were outstanding. shares of Northfield Bancorp preferred stock were
Patapsco Bancorp will issue up to 114,107 shares of outstanding.
preferred stock in the merger, leaving 888,893 shares
available for future issuance.
Voting Rights
-------------
Patapsco Bancorp Northfield Bancorp
---------------- ------------------
The holders of the common stock exclusively Same.
possess all voting power, subject to the authority of
the Board of Directors to offer voting rights to the
holders of preferred stock.
Each share of common stock is entitled to one vote. Same.
Beneficial owners of 10% or more of the outstanding stock Same.
are subject to voting limitations.
Holders of common stock may not cumulate their votes for Same.
the election of directors.
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<PAGE>
Required Vote for Authorization of Certain Actions
--------------------------------------------------
Patapsco Bancorp Northfield Bancorp
---------------- ------------------
At least 80% of the outstanding shares of Same.
voting stock must approve certain business combinations
involving a "related person."
In addition, the vote of at least a majority of the Same.
outstanding shares of voting stock, not including shares
held by such "related person," is required to approve
certain business combinations involving a related person.
However, if two-thirds of directors not affiliated with
the related person approve the business combination, the
vote required to approve a business combination would be
as otherwise required under law without regard to this
provision.
Dividends
---------
Patapsco Bancorp Northfield Bancorp
---------------- ------------------
Holders of common stock are entitled to receive dividends Same.
as declared by Patapsco Bancorp's Board of Directors,
subject to the rights of holders of preferred stock.
Stockholders' Meetings
----------------------
Patapsco Bancorp Northfield Bancorp
---------------- ------------------
Patapsco Bancorp must deliver notice of the meeting and a Same.
description of its purpose no fewer than 10 days and no
more than 90 days before the meeting to each stockholder
of record entitled to vote.
A majority of the shares entitled to vote at the meeting, Same.
present in person or by proxy, will constitute a quorum.
The Chairman, the President, a majority of the Board of Same.
Directors, or a committee of the Board of Directors,
if specifically empowered to do so, may call a special
meeting. The Secretary will call a special meeting upon
the written request of the holders of not less than 25%
of the shares entitled to vote at the meeting.
For purposes of determining stockholders Same.
entitled to vote at a meeting, the Board of Directors
may fix a record date that is not less less than 10 days
or more than 90 days before the meeting.
The board of directors or any stockholder entitled to vote Same.
in the election of directors may nominate directors for
election or propose any new business to be taken up at any
annual or special meeting of
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<PAGE>
stockholders. To nominate a director or propose new
business, stockholders must give written notice to
the Secretary of Patapsco Bancorp not less than 30
days nor more than 60 days prior to the meeting.
However, if Patapsco Bancorp gives less than 40
days' notice of the meeting, written notice of the
stockholder proposal or nomination must be delivered to
the Secretary within 10 days of the date notice of the
meeting was mailed to stockholders. Each notice given by a
stockholder with respect to nominations to the Board of
Directors or a proposal for new business must include
certain information regarding the nominee or proposal and
the stockholder making the nomination or proposal.
Action by Stockholders Without a Meeting
----------------------------------------
Patapsco Bancorp Northfield Bancorp
---------------- ------------------
Any action that may be taken at a meeting of stockholders Same.
may be taken without a meeting by the unanimous written
consent of each stockholder entitled to vote on the matter,
and if a written waiver of any right to dissent is signed
by each stockholder entitled to notice of the meeting but
not entitled to vote.
Board of Directors
------------------
Patapsco Bancorp Northfield Bancorp
---------------- ------------------
The articles of incorporation provides that the number of The articles of incorporation provides that the number
directors shall be no fewer than five nor more than eleven. of directors shall be no fewer than five nor more than
fifteen.
There are eight directors. There are six directors.
The Board of Directors is divided into three classes as Same.
equal in number as possible and approximately one-third of
the directors are elected at each annual meeting.
Vacancies on the Board of Directors may be filled by a Same.
majority vote of the stockholders or by the remaining
directors.
Directors may be removed only for cause by the vote of at Same.
least 80% of the outstanding shares entitled to vote for
directors.
Amendment of the Bylaws
-----------------------
Patapsco Bancorp Northfield Bancorp
---------------- ------------------
The bylaws may be amended or repealed by the vote of at Same.
least 80% of the outstanding shares, or by the vote of
two-thirds of the board of directors.
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<PAGE>
Amendment of the Articles of Incorporation
------------------------------------------
Patapsco Bancorp Northfield Bancorp
---------------- ------------------
The articles of incorporation may be amended by the Same.
stockholders. However, the provisions regarding
stockholder meetings, cumulative voting, notice for
nominations and proposals, directors, removal of
directors, acquisition of capital stock, approval of
business combinations, evaluation of business
combinations, limitation of officers' and directors'
liability, indemnification, amendment of bylaws and
amendment of the articles of incorporation requires the
vote of not less than 80% of the outstanding shares,
unless such amendment is first approved by a majority of
directors not affiliated with a related person, in which
case approval by at least a majority of the outstanding
shares is required.
</TABLE>
SELECTED PROVISIONS IN THE ARTICLES OF INCORPORATION
AND BYLAWS OF PATAPSCO BANCORP
CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS
Patapsco Bancorp's Articles of Incorporation provide that the Board of
Directors is to be divided into three classes which shall be as nearly equal in
number as possible. The directors in each class will hold office following their
initial appointment to office for terms of one year, two years and three years,
respectively, and, upon reelection, will serve for terms of three years
thereafter. Each director will serve until his or her successor is elected and
qualified. The Articles of Incorporation provide that a director may be removed
only by the affirmative vote of the holders of at least 80% of the outstanding
shares entitled to vote.
A classified board of directors could make it more difficult for
stockholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the Board of
Directors. Since the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the stockholders to
change a majority, whereas a majority of a non-classified board may be changed
in one year. In the absence of the provisions of the Articles of Incorporation
classifying the Board, all of the directors would be elected each year.
Management of Patapsco Bancorp believes that the staggered election of
directors tends to promote continuity of management because only one-third of
the Board of Directors is subject to election each year. Staggered terms
guarantee that in the ordinary course approximately two-thirds of the directors,
or more, at any one time have had at least one year's experience as directors of
Patapsco Bancorp, and moderate the pace of changes in the Board of Directors by
extending the minimum time required to elect a majority of directors from one to
two years.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS
Patapsco Bancorp's Articles of Incorporation require the approval of
the holders of (i) at least 80% of Patapsco Bancorp's outstanding shares of
voting stock, and (ii) at least a majority of Patapsco Bancorp's outstanding
shares of voting stock, not including shares deemed beneficially owned by a
"related person," to approve certain "business combinations" as defined therein,
and related transactions. Under Maryland law, absent this provision, business
combinations, including mergers, consolidations and sales of substantially all
of the assets of Patapsco Bancorp must, subject to certain exceptions, be
approved by the vote of the holders of at least two thirds of the outstanding
shares of the common stock. The increased voting requirements in Patapsco
Bancorp's Articles of Incorporation apply in connection with business
combinations involving a "related person," except in cases where
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<PAGE>
the proposed transaction has been approved in advance by two-thirds of
those members of Patapsco Bancorp's Board of Directors who are unaffiliated with
the related person and who were directors prior to the time when the related
person became a related person (the "continuing directors"). The term "related
person" is defined to include any individual, corporation, partnership or other
entity or affiliate thereof which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of Patapsco
Bancorp. A "business combination" is defined to include (i) any merger,
consolidation or share exchange of Patapsco Bancorp with or into a related
person; (ii) any sale, lease exchange, mortgage, pledge, transfer, or other
disposition of all or a substantial part of the assets of Patapsco Bancorp or of
a subsidiary to a related person (the term "substantial part" is defined to
include more than 25% of Patapsco Bancorp's total assets); (iii) any merger,
consolidation or share exchange of a related person with or into Patapsco
Bancorp or a subsidiary of Patapsco Bancorp; (iv) any sale, lease, exchange,
mortgage, pledge transfer or other disposition of all or any substantial part of
the assets of a related person to Patapsco Bancorp or a subsidiary of Patapsco
Bancorp; (v) the issuance of any securities of Patapsco Bancorp or a subsidiary
of Patapsco Bancorp to a related person; (vi) the acquisition by Patapsco
Bancorp or a subsidiary of Patapsco Bancorp of any securities of the related
person; (vii) any reclassification of the common stock, or any recapitalization
involving the common stock; and (viii) any agreement, contract or other
arrangement providing for any of the above transactions.
LIMITATIONS ON CALL OF MEETINGS OF STOCKHOLDERS
Patapsco Bancorp's Articles of Incorporation provide that special
meetings of stockholders may be called by the Chairman of the Board or the
President of Patapsco Bancorp, Patapsco Bancorp's Board of Directors, or an
appropriate committee appointed by the Board of Directors. Stockholders may only
call special meetings if at least 25% of the outstanding shares entitled to vote
on the matter call for such a meeting. Stockholder action may not be taken
without a special or annual meeting, unless written consent to such action is
received from all of the stockholders entitled to vote with respect to such
matters and if a written waiver of any right to dissent is signed by each
stockholder entitled to notice of the meeting but not entitled to vote.
ABSENCE OF CUMULATIVE VOTING
Patapsco Bancorp's Articles of Incorporation provide that there shall
not be cumulative voting by stockholders for the election of Patapsco Bancorp's
directors. The absence of cumulative voting rights effectively means that the
holders of a majority of the shares voted at a meeting of stockholders may, if
they so choose, elect all directors of Patapsco Bancorp to be selected at that
meeting, thus precluding minority stockholder representation on Patapsco
Bancorp's Board of Directors.
RESTRICTIONS ON ACQUISITIONS OF SECURITIES
The Articles of Incorporation provide that for a period of five years
from the effective date of the completion of the conversion of Patapsco Federal
Savings and Loan Association from mutual to stock form, no person may directly
or indirectly offer to acquire or acquire the beneficial ownership of more than
10% of any class of the equity security of Patapsco Bancorp, unless such offer
or acquisition shall have been approved in advance by a two-thirds vote of
Patapsco Bancorp's continuing directors. This provision does not apply to any
employee stock benefit plan of Patapsco Bancorp or to an underwriter or member
of an underwriting or selling group involving the public sale or resale of
securities of Patapsco Bancorp or a subsidiary thereof; provided, that upon
completion of the sale or resale, no such underwriter or member of the selling
group is a beneficial owner of more than 10% of any class of equity securities
of Patapsco Bancorp. In addition, during such five-year period, no shares
beneficially owned in violation of the foregoing percentage limitation, as
determined by Patapsco Bancorp's Board of Directors, shall be entitled to vote
in connection with any matter submitted to stockholders for a vote.
Additionally, the Articles of Incorporation provide for further restrictions on
voting rights of shares owned in excess of 10% of any class of equity security
of Patapsco Bancorp beyond five years after the stock conversion. Specifically,
the Articles of Incorporation provide that if, at any time after five years from
the conversion to stock form, any person acquires the beneficial ownership of
more than 10% of any class of equity security of Patapsco Bancorp, then each
vote in excess of 10% of the outstanding common stock is entitled to only one
one-hundredth (1/100) of a vote. An exception from the restriction is provided
if the acquisition of more than 10% of the securities received the prior
approval by a two-thirds vote of Patapsco Bancorp's continuing directors. Under
Patapsco Bancorp's Articles of Incorporation, the restriction on voting shares
beneficially owned in violation of the foregoing limitations is imposed
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<PAGE>
automatically. In order to prevent the imposition of such restrictions, the
Board of Directors must take affirmative action approving in advance a
particular offer to acquire or acquisition. Unless the Board took such
affirmative action, the provision would operate to restrict the voting by
beneficial owners of more than 10% of Patapsco Bancorp common stock in a proxy
contest.
Patapsco Bancorp's Articles of Incorporation provide that, if,
following any acquisition of more than 10% of any class of any equity security
of Patapsco Bancorp or a merger involving Patapsco Bancorp, the board of
directors of Patapsco Bancorp fails to nominate for election as a director, or
the stockholders of Patapsco Bancorp do not elect as a director, a continuing
director, unless a majority of the continuing directors fail to nominate such
continuing director for election as a director, or terminates the service of an
advisory director serving as such prior to such acquisition, then such
continuing director or advisory director will be entitled to serve as an
advisory director of Patapsco Bancorp or any successor thereto. This provision
automatically expires on December 31, 2001.
BOARD CONSIDERATION OF CERTAIN NONMONETARY FACTORS IN THE EVENT OF AN OFFER BY
ANOTHER PARTY
The Articles of Incorporation of Patapsco Bancorp direct the Board of
Directors, in evaluating a business combination or a tender or exchange offer,
to consider, in addition to the adequacy of the amount to be paid in connection
with any such transaction, certain specified factors and any other factors the
Board deems relevant, including
o the social and economic effects of the transaction on Patapsco Bancorp
and its subsidiaries, employees, depositors, loan and other customers,
creditors and other elements of the communities in which Patapsco
Bancorp and its subsidiaries operate or are located;
o the business and financial condition and earnings prospects of the
acquiring person or entity; and
o the competence, experience and integrity of the acquiring person or
entity and its or their management.
By having the standards in the Articles of Incorporation of Patapsco Bancorp,
the Board of Directors may be in a stronger position to oppose any proposed
business combination or tender or exchange offer if the Board concludes that the
transaction would not be in the best interests of Patapsco Bancorp, even if the
price offered is significantly greater than the then market price of any equity
security of Patapsco Bancorp.
The Board of Directors feels a responsibility for maintaining the
financial and business integrity of Patapsco Bancorp. Savings institutions and
savings and loan holding companies occupy positions of special trust in the
communities they serve. They also provide opportunities for abuse by those who
are not of sufficient experience or competence or financial means to act
professionally and responsibly with respect to the management of a financial
institution. It is of concern to Patapsco Bancorp that it be managed in the
interest of the communities that it serves and that it and its' subsidiary bank
maintain its integrity as an institution.
One effect of this provision might be to encourage consultation by an
offeror with the Board of Directors prior to or after commencing a tender offer
in an attempt to prevent a contest from developing. This provision thus may
strengthen the Board of Directors' position in dealing with any potential
offeror which might attempt to effect a takeover of Patapsco Bancorp. The
provision will not make a business combination regarded by the Board of
Directors as being in the interests of Patapsco Bancorp more difficult to
accomplish, but it will permit the Board of Directors to determine whether a
business combination or tender or exchange offer is not in the interests of
Patapsco Bancorp (and thus to oppose it) on the basis of various factors deemed
relevant.
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<PAGE>
AUTHORIZATION OF PREFERRED STOCK
Patapsco Bancorp's Articles of Incorporation authorize the issuance of
up to 1,000,000 shares of preferred stock (of which 114,107 shares will be
designated as the Series A shares), which conceivably could represent an
additional class of stock required to approve any proposed acquisition. Patapsco
Bancorp is authorized to issue preferred stock from time to time in one or more
series subject to applicable provisions of law, and the Board of Directors is
authorized to fix the powers, designations, preferences and relative,
participating, optional and other special rights of such shares, including
voting rights and conversion rights. Issuance of the preferred stock could
adversely affect the relative voting rights of holders of the Common Stock. In
the event of a proposed merger, tender offer or other attempt to gain control of
Patapsco Bancorp that the Board of Directors did not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of preferred stock,
therefore, may be to deter a future takeover attempt. The Board of Directors has
no present plans or understandings for the issuance of any preferred stock and
does not intend to issue any preferred stock, other than the preferred stock in
the merger, except on terms which the Board of Directors deems to be in the best
interests of Patapsco Bancorp and its stockholders. This preferred stock,
together with authorized but unissued shares of common stock, also could
represent additional capital required to be purchased by the acquiror.
PROCEDURES FOR STOCKHOLDER NOMINATIONS
Patapsco Bancorp's Articles of Incorporation provide that any
stockholder desiring to make a nomination for the election of directors or a
proposal for new business at a meeting of stockholders must submit written
notice to the Secretary of Patapsco Bancorp not less than 30 nor more than 60
days in advance of the meeting. However, if Patapsco Bancorp gives less than 40
days' notice of the meeting, written notice of the stockholder proposal or
nomination must be delivered to the Secretary within10 days of the date notice
of the meeting was mailed to stockholders. The Articles of Incorporation further
provide that if a stockholder seeking to make a nomination or a proposal for new
business fails to follow the prescribed procedures, the chairman of the meeting
may disregard the defective nomination or proposal. Management believes that it
is in the best interests of Patapsco Bancorp and its stockholders to provide
sufficient time to enable management to disclose to stockholders information
about a dissident slate of nominations for directors. This advance notice
requirement may also give management time to solicit its own proxies in an
attempt to defeat any dissident slate of nominations should management determine
that doing so is in the best interests of stockholders generally. Similarly,
adequate advance notice of stockholder proposals will give management time to
study such proposals and to determine whether to recommend to the stockholders
that such proposals be adopted.
AMENDMENT OF BYLAWS
Patapsco Bancorp's Articles of Incorporation provide that Patapsco
Bancorp's Bylaws may be amended either by a two-thirds vote of Patapsco
Bancorp's Board of Directors or by the affirmative vote of the holders of not
less than 80% of the outstanding shares of Patapsco Bancorp's stock entitled to
vote generally in the election of directors, after giving effect to any limits
on voting rights. Absent this provision, Maryland law provides that a
corporation's bylaws may be amended by the holders of a majority of the votes
cast at a meeting where a quorum is present. Patapsco Bancorp's Bylaws contain
numerous provisions concerning Patapsco Bancorp's governance, such as fixing the
number of directors and determining the number of directors constituting a
quorum. By reducing the ability of a potential corporate raider to make changes
in Patapsco Bancorp's Bylaws in a way that would reduce the authority of the
Board of Directors or impede its ability to manage Patapsco Bancorp, this
provision could have the effect of discouraging a tender offer or other takeover
attempt where the ability to make fundamental changes through bylaw amendments
is an important element of the takeover strategy of the acquiror.
AMENDMENT OF ARTICLES OF INCORPORATION
Patapsco Bancorp's Articles of Incorporation provide that specified
provisions contained in the Articles of Incorporation may not be repealed or
amended except upon the affirmative vote of not less than 80% of the outstanding
shares of Patapsco Bancorp's stock entitled to vote generally in the election of
directors, after giving effect to any limits on voting rights. This requirement
exceeds the two-thirds vote of the outstanding stock that
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<PAGE>
would otherwise be required by Maryland law for the repeal or amendment of a
provision of the Articles of Incorporation. The specific provisions are those
o governing the calling of special meetings, the absence of cumulative
voting rights and the requirement that stockholder action be taken
only at annual or special meetings,
o requiring written notice to Patapsco Bancorp of nominations for the
election of directors and new business proposals,
o governing the number of Patapsco Bancorp's Board of Directors, the
filling of vacancies on the Board of Directors and classification of
the Board of Directors,
o providing the mechanism for removing directors,
o limiting the acquisition of 10% or more of the capital stock of
Patapsco Bancorp, except with the prior approval of the continuing
directors of Patapsco Bancorp,
o governing the requirement for the approval of certain business
combinations involving a "related person,"
o regarding the consideration of certain nonmonetary factors in the
event of an offer by another party,
o providing for the indemnification of directors, officers, employees
and agents of Patapsco Bancorp,
o pertaining to the elimination of the liability of the directors to
Patapsco Bancorp and its stockholders for monetary damages, with
certain exceptions, for breach of fiduciary duty, and
o governing the required stockholder vote for amending the Articles of
Incorporation or Bylaws of Patapsco Bancorp.
This provision is intended to prevent the holders of less than 80% of the
outstanding stock of Patapsco Bancorp from circumventing any of the foregoing
provisions by amending the Articles of Incorporation to delete or modify any
such provisions. This provision would enable the holders of more than 20% of
Patapsco Bancorp's voting stock to prevent amendments to Patapsco Bancorp's
Articles of Incorporation or Bylaws, even if such amendments were favored by the
holders of a majority of the voting stock.
THE PURPOSE OF AND ANTI-TAKEOVER EFFECT OF PATAPSCO BANCORP'S ARTICLES OF
INCORPORATION AND BYLAWS
The Board of Directors of Patapsco Bancorp believes that the provisions
described above reduce Patapsco Bancorp's vulnerability to takeover attempts and
certain other transactions which have not been negotiated with and approved by
its Board of Directors. The Board of Directors of Patapsco Bancorp believes
these provisions are in the best interests of Patapsco Bancorp and its
stockholders. In the judgment of the Boards of Directors of Patapsco Bancorp,
Patapsco Bancorp's Board of Directors is in the best position to consider all
relevant factors and to negotiate for what is in the best interests of the
stockholders and Patapsco Bancorp's other constituents. Accordingly, the Board
of Directors of Patapsco Bancorp believes that it is in the best interests of
Patapsco Bancorp and its stockholders to encourage potential acquirors to
negotiate directly with Patapsco Bancorp's Board of Directors, and that these
provisions will encourage such negotiations and discourage non-negotiated
takeover attempts. It is also the view of the Board of Directors of Patapsco
Bancorp that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflective of the true value of Patapsco
Bancorp and which is in the best interests of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of
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<PAGE>
Directors present to stockholders the risk of a takeover on terms which may be
less favorable than might otherwise be available. A transaction which is
negotiated and approved by the Board of Directors, on the other hand, can be
carefully planned and undertaken at an opportune time in order to obtain maximum
value for Patapsco Bancorp and its stockholders, with due consideration given to
matters such as the management and business of the acquiring corporation and
maximum strategic development of Patapsco Bancorp's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above then current
market prices, such offers are sometimes made for less than all the outstanding
shares of a target company. As a result, stockholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise which is under
different management and whose objectives may not be similar to those of the
remaining stockholders. The concentration of control that could result from a
tender offer or other takeover attempt could also deprive Patapsco Bancorp's
remaining stockholders of certain protective provisions of the Securities
Exchange Act of 1934.
Despite the belief of Patapsco Bancorp as to the benefits to
stockholders of these provisions of Patapsco Bancorp's Articles of Incorporation
and Bylaws, these provisions may also have the effect of discouraging a future
takeover attempt which would not be approved by Patapsco Bancorp's Board of
Directors, but pursuant to which the stockholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not have
any opportunity to do so. Such provisions will also render the removal of
Patapsco Bancorp's Board of Directors and management more difficult and may tend
to stabilize Patapsco Bancorp's stock price, thus limiting gains which might
otherwise be reflected in price increases due to a potential merger or
acquisition. The Board of Directors, however, has concluded that the potential
benefits of these provisions outweigh the possible disadvantages. Pursuant to
applicable regulations, at any annual or special meeting of its stockholders,
Patapsco Bancorp may adopt additional Articles of Incorporation provisions
regarding the acquisition of its equity securities that would be permitted for a
Maryland corporation. Patapsco Bancorp and Patapsco Bank do not presently intend
to propose the adoption of further restrictions on the acquisition of Patapsco
Bancorp's equity securities.
INDEMNIFICATION OF PATAPSCO BANCORP DIRECTORS AND OFFICERS
FOR SECURITIES ACT LIABILITIES
Under Patapsco Bancorp's Articles of Incorporation, Patapsco Bancorp
will indemnify its directors and officers for judgments, fines, settlements, and
expenses, including attorney fees, incurred in connection with any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, to the fullest extent permitted by the General
Corporation Law of the State of Maryland. Under Maryland law, indemnification of
directors and officers may be provided for judgments, fines, settlements, and
expenses, including attorney's fees, incurred in connection with any threatened,
pending, or completed action, suit, or proceeding other than an action by or in
the right of Patapsco Bancorp. This applies to any civil, criminal,
investigative or administrative action provided that the director or officer
involved acted in good faith, in a manner he or she reasonably believed to be in
or not opposed to the best interests of Patapsco Bancorp and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Patapcso Bancorp may indemnify directors and officers for judgments,
fines, settlements, and expenses, including attorney's fees, incurred in
connection with any threatened, pending, or completed action, or suit by or in
the right of Patapsco Bancorp if the director or officer acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of Patapsco Bancorp. However, no indemnification may be made in
connection with any claim, issue or matter in which the director or officer is
found by a court to be liable for negligence or misconduct in the performance of
his or her duties to Patapsco Bancorp unless the court in which the action is
brought deems indemnity proper.
Indemnification will be provided to any directors and officers for
expenses, including attorney's fees, actually and reasonably incurred in the
defense of any action, suit or proceeding to the extent that he or she has been
successful on the merits.
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<PAGE>
Patapsco Bancorp has purchased director and officer liability insurance
that insures directors and officers against certain liabilities in connection
with the performance of their duties as directors and officers, including
liabilities under the Securities Act of 1933, as amended, and provides for
payment to Patapsco Bancorp of costs incurred by it in indemnifying its
directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Patapsco Bancorp pursuant to the foregoing provisions, or otherwise, Patapsco
Bancorp has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
Patapsco Bancorp has filed with the Securities and Exchange Commission a
registration statement under the Securities Act that registers the distribution
to Northfield Bancorp stockholders of the shares of Patapsco Bancorp preferred
stock to be issued in the merger. The registration statement, including the
exhibits, contains additional relevant information about Patapsco Bancorp and
Patapsco Bancorp preferred stock. The rules and regulations of the SEC allow us
to omit certain information included in the registration statement from this
proxy statement/prospectus.
Patapsco Bancorp and Northfield Bancorp file annual, quarterly and current
reports, proxy statements and other information with the SEC. You may read and
copy any reports, statements or other information that Patapsco Bancorp and
Northfield Bancorp file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further
information on the SEC's public reference rooms. Patapsco Bancorp's and
Northfield Bancorp's public filings are also available to the public from
commercial document retrieval services and at the Internet world wide web site
maintained by the SEC at "http://www.sec.gov."
The SEC allows us to "incorporate by reference" information into this proxy
statement/prospectus. This means that we can disclose important information to
you by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this document,
except for any information superseded by information contained directly in this
document. This document incorporates by reference the other documents that are
listed below that we have previously filed with the SEC. These documents contain
important information about Patapsco Bancorp and its financial condition.
Patapsco Bancorp SEC Filings (File No. 0-28032)
o Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999;
o Quarterly Reports on Form 10-QSB for the quarters ended September 30,
1999, December 31, 1999 and March 31, 2000;
o Current Report on Form 8-K filed on May 19, 2000; and
o Rule 425 prospectuses filed on May 16, 2000, June 5, 2000 and June 14,
2000.
o The following information that is contained in Patapsco Bancorp's Form
10-KSB:
o Description of the business of Patapsco Bancorp as contained in
Item 1 of the Form 10-KSB;
o Description of Market for the Common Equity and Related
Stockholder Matters contained in Item 5 of the Form 10-KSB;
o Management's Discussion and Analysis or Plan of Operation
contained in Item 6 of the Form 10-KSB; and
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<PAGE>
o Description of Changes in Disagreements with Accountants on
Accounting and Financial Disclosure contained in Item 8 of the
Form 10-KSB.
Patapsco Bancorp also incorporates by reference additional documents that
it might file with the SEC between the date of this document and the date of
Northfield Bancorp's stockholder meeting. These include periodic reports, such
as Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB and Current
Reports on Form 8-K, as well as proxy statements.
Documents incorporated by reference are available from Patapsco Bancorp
without charge, except for exhibits to the documents unless the exhibits are
specifically incorporated in this document by reference. You may obtain
documents incorporated by reference in this document by requesting them in
writing or by telephone from Patapsco Bancorp at the following address:
Patapsco Bancorp, Inc.
1301 Merritt Boulevard
Dundalk, Maryland 21222
Attention: Michael Dee
Telephone No. (410) 285-1010
If you would like to request documents, please do so by ___________, 2000
in order to receive them before the special meeting of stockholders. If you
request any incorporated documents from us we will mail them to you by
first-class mail, or other equally prompt means, within one business day of our
receipt of your request.
Patapsco Bancorp has supplied all information contained in this proxy
statement/prospectus relating to Patapsco Bancorp, and Northfield Bancorp has
supplied all information relating to Northfield Bancorp.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. We have not
authorized anyone to provide you with information that is different from what is
contained or incorporated by reference in this document. This document is dated
__________, 2000. You should not assume that the information contained in this
document is accurate as of any date other than that date, and neither the
mailing of this document to stockholders nor the issuance of Patapsco Bancorp's
securities in the merger shall create any implication to the contrary.
LEGAL MATTERS
The legality of Patapsco Bancorp Series A Noncumulative Convertible
Perpetual Preferred Stock to be issued pursuant to the Merger Agreement will be
passed upon for Patapsco Bancorp by Stradley Ronon Stevens & Young, LLP,
Philadelphia, Pennsylvania.
EXPERTS
The consolidated financial statements of Patapsco Bancorp as of June 30,
1999 and 1998 and for each of the two years in the period ended June 30, 1999
incorporated in this proxy statement/prospectus by reference from Patapsco
Bancorp's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999
have been audited by Anderson Associates, LLP, independent auditors, as stated
in their report, which is incorporated by reference herein and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements of Northfield Bancorp as of December 31, 1999 and
1998 and for each of the two years in the period ended December 31, 1999,
included elsewhere in this proxy statement/prospectus have been audited by
Anderson Associates, LLP, independent auditors, as stated in their report
appearing herein and elsewhere in the Registration Statement, and are included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
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<PAGE>
STOCKHOLDER PROPOSALS
It is not anticipated that Northfield Bancorp will hold a 2001 annual
meeting of stockholders unless the merger is not consummated. If the merger is
not consummated, any stockholder proposal intended for inclusion in Northfield
Bancorp's proxy statement and proxy relating to the 2001 annual meeting of
stockholders must be received by Northfield Bancorp's main office at 8005
Harford Road, Baltimore, Maryland 21234, no later than December 13, 2000. Any
such proposal shall be subject to the requirements of the proxy rules adopted
under the Securities and Exchange Act of 1934, as amended.
Stockholder proposals to be considered at a meeting of stockholders, other
than those submitted pursuant to the Securities Exchange Act of 1934, as
amended, must be stated in writing, delivered or mailed to the Secretary of
Northfield Bancorp at the address stated above, not less than 30 days nor more
than 60 days prior to the date of the meeting. If less than 40 days' notice of
the meeting is given to stockholders, such written notice shall be delivered or
mailed to the Secretary of Northfield Bancorp not later than the close of
business on the tenth day following the day on which notice of the meeting was
mailed to stockholders.
OTHER MATTERS
The Northfield Bancorp Board of Directors is not aware of any business to
come before the Special Meeting other than those matters described in this proxy
statement/prospectus. However, if any other matter should properly come before
the special meeting, it is intended that holders of the proxies will act in
accordance with the directions of the Board of Directors of Northfield Bancorp.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF NORTHFIELD BANCORP, INC.
Page
---
Independent Auditor's Report.............................................. F-1
Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998.................. .......................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998............................................. F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999 and 1998 ...................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December
31, 1999 and 1998...................................................... F-6
Notes to Consolidated Financial Statements................................ F-8
Consolidated Statements of Financial Condition as of March 31,
2000 and December 31, 1999............................................. F-27
Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 and 1999................................................ F-28
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 2000 and 1999 .................................. F-29
Consolidated Statements of Cash Flows for the Three Months ended
March 31, 2000 and 1999................................................ F-30
Notes to Consolidated Financial Statements ............................... F-32
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
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<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Northfield Bancorp, Inc.
Baltimore, Maryland
We have audited the consolidated statements of financial condition of
Northfield Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the two year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
F-1
<PAGE>
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Northfield Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and
the consolidated results of its operations and cash flows for each of the two
years in the two year period ended December 31, 1999 in conformity with
generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements, the
Company adopted the Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as of January 1,
1999.
/s/ Anderson Associates, LLP
March 3, 2000
Baltimore, Maryland
F-2
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Assets
------
Cash $ 620,282 $ 166,446
Interest bearing deposits in other banks 1,038,521 4,833,876
Investments available for sale (Note 2) 4,873,550 --
Investments held to maturity (Note 2) -- 799,256
Mortgage backed securities available for sale (Note 3) 2,551,277 --
Mortgage backed securities held to maturity (Note 4) 524,188 2,122,590
Loans receivable, net (Note 5) 42,856,212 35,701,656
Accrued interest receivable - loans 171,294 163,989
- investments 65,508 19,016
- mortgage backed securities 16,086 13,569
Premises and equipment, at cost, less accumulated
depreciation (Note 6) 97,153 128,325
Federal Home Loan Bank of Atlanta stock at cost (Note 7) 445,000 272,900
Deferred income taxes (Note 13) 286,708 57,526
Prepaid and refundable income taxes (Note 13) 410 --
Prepaid expenses and other assets 33,886 30,963
----------- -----------
Total assets $53,580,075 $44,310,112
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposit accounts (Note 8) $36,602,858 $36,434,786
Borrowings (Note 9) 8,900,000 -
Advance payments by borrowers for expenses 553,961 462,726
Income taxes payable (Note 13) 11,237 18,449
Other liabilities 439,377 266,230
----------- -----------
Total liabilities 46,507,433 37,182,191
Commitments and contingencies - Notes 5, 6, 9, 10, 11 and 12
Stockholders' Equity (Notes 11 and 12)
--------------------
Serial Preferred stock $.01 par value; authorized 2,000,000
shares; none issued or outstanding
Common stock $.01 par value; authorized 8,000,000 shares;
issued and outstanding 475,442 shares in 1999 and 1998 4,754 4,754
Additional paid-in capital 4,351,177 4,415,682
Retained earnings (substantially restricted) 3,491,960 3,200,542
----------- -----------
7,847,891 7,620,978
Accumulated other comprehensive income (318,280) -
Stock held by Rabbi Trust (134,650) (134,650)
Employee Stock Ownership Plan (322,319) (358,407)
----------- -----------
Total stockholders' equity 7,072,642 7,127,921
----------- -----------
Total liabilities and stockholders' equity $53,580,075 $44,310,112
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Income
------
Interest and fees on loans (Note 5) $2,978,697 $2,566,734
Interest on investments 338,930 267,728
Interest on mortgage backed securities 154,003 149,753
---------- ----------
Total interest income 3,471,630 2,984,215
Interest Expense
----------------
Interest on deposits (Note 8) 1,699,241 1,748,825
Interest on long-term borrowings 111,775 --
Interest on short-term borrowings 124,025 1,782
---------- ----------
Total interest expense 1,935,041 1,750,607
---------- ----------
Net interest income 1,536,589 1,233,608
Provision for losses on loans (Note 5) -- --
---------- ----------
Net interest income after provision for losses on loans 1,536,589 1,233,608
Non-Interest Income
-------------------
Fees on loans 8,006 7,803
Fees on deposits 14,554 12,201
All other income 6,904 10,613
---------- ----------
Net non-interest income 29,464 30,617
Non-Interest Expenses
---------------------
Compensation and related expenses 481,669 352,880
Occupancy 116,326 87,531
Deposit insurance 22,639 20,485
Service bureau expense 69,392 57,118
Furniture, fixtures and equipment expense 26,468 22,688
Advertising 29,479 26,383
Professional fees 73,826 64,021
Other 141,458 130,096
---------- ----------
Total non-interest expenses 961,257 761,202
---------- ----------
Income before tax provision and cumulative effect
of accounting change 604,796 503,023
Provision for income tax (Note 13) 234,439 196,238
---------- ----------
Income before cumulative effect of accounting change 370,357 306,785
Cumulative effect of accounting change, net of tax (Note 1) 8,980 --
---------- ----------
Net income $ 379,337 $ 306,785
========== ==========
Basic earnings per share (Note 1) $ .89 $ N/A
========== ==========
Diluted earnings per share (Note 1) $ .86 $ N/A
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
-------------------------------------------------------
<TABLE>
<CAPTION>
Additional Accumulated Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income
--------- ---------- -------- -----------------
<S> <C> <C> <C> <C>
Balance - December 31, 1997 $ -- $ -- $2,893,757 $ --
Issuance of common stock 4,754 4,415,290 -- --
Stock purchased by Employee
Stock Ownership Plan -- -- -- --
Stock held by Rabbi Trust -- -- -- --
Compensation under Stock-
Based Benefit Plan -- 392 -- --
Net income -- -- 306,785 --
---------- ---------- ---------- ----------
Balance - December 31, 1998 4,754 4,415,682 3,200,542 --
Comprehensive Income
Net income 379,337
Cumulative effect of change in accounting
principle, net of taxes of $513 (Note 1) (815)
Unrealized holding losses on
available for sale securities net
of taxes of $201,075 (317,465)
Total comprehensive income
Conversion costs paid subsequent
to stock issuance (66,035)
Compensation under Stock-Based
Benefit Plan, net of taxes of $1,062 1,530
Dividends declared ($.20 per share) (87,919)
---------- ---------- ---------- ----------
Balance - December 31, 1999 $ 4,754 $4,351,177 $3,491,960 $(318,280)
========== ========== ========== ==========
<CAPTION>
Employee
Stock Held Stock Total
by Rabbi Ownership Stockholders'
Trust Plan Equity
---------- --------- ------------
<S> <C> <C> <C>
Balance - December 31, 1997 $ -- $ -- $2,893,757
Issuance of common stock -- -- 4,420,044
Stock purchased by Employee
Stock Ownership Plan -- (380,350) (380,350)
Stock held by Rabbi Trust (134,650) -- (134,650)
Compensation under Stock-
Based Benefit Plan -- 21,943 22,335
Net income -- -- 306,785
--------- --------- ----------
Balance - December 31, 1998 (134,650) (358,407) 7,127,921
Comprehensive Income
Net income
Cumulative effect of change in accounting
principle, net of taxes of $513 (Note 1)
Unrealized holding losses on
available for sale securities net
of taxes of $201,075
Total comprehensive income 61,057
Conversion costs paid subsequent
to stock issuance (66,035)
Compensation under Stock-Based
Benefit Plan, net of taxes of $1,062 36,088 37,618
Dividends declared ($.20 per share) (87,919)
--------- --------- ----------
Balance - December 31, 1999 $(134,650) $(322,319) $7,072,642
========= ========= ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
---- ----
<S> <C> <C>
Operating Activities
--------------------
Net income $ 379,337 $ 306,785
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
-----------------------------------------
Net amortization of premiums and accretion of
discounts on certificates of deposit 88 3,172
Gain on sale of mortgage backed securities trading (14,933) --
Proceeds from sale of mortgage backed securities trading 1,048,335 --
Net amortization of premiums and accretion of
discounts on mortgage backed and investment securities 16,853 735
Amortization of premium on mortgage loans purchased 597 --
Loan fees deferred 54,012 99,319
Amortization of deferred loan fees (50,648) (51,630)
Non-cash compensation under Stock-Based Benefit Plans 37,618 22,335
Increase in accrued interest on loans (7,305) (14,453)
(Increase) decrease in accrued interest on investments (46,492) 5,984
Increase in accrued interest on mortgage backed securities (2,517) (876)
Provision for depreciation 46,165 28,640
Increase in deferred income taxes (28,922) (31,247)
Increase in prepaid income taxes (410) --
(Increase) decrease in prepaid expenses and
other assets (2,923) 26,581
(Decrease) increase in accrued interest payable (5,442) 1,139
Decrease in income taxes payable (7,212) (44,515)
Increase in other liabilities 173,147 131,563
------------ ------------
Net cash provided by operating activities 1,589,348 483,532
Cash Flows from Investing Activities
------------------------------------
Proceeds from maturing certificates of deposit 741,000 926,000
Purchases of certificates of deposit (190,000) (981,331)
Purchases of securities available for sale (4,535,874) --
Purchase of securities held to maturity -- (799,250)
Purchases of mortgage backed securities held to maturity (539,642) (1,285,283)
Purchases of mortgage backed securities available for sale (2,371,480) --
Principal collected on mortgage backed securities 859,362 1,116,961
Longer term loans originated (13,034,443) (11,884,678)
Loans purchased (877,919) (302,882)
Principal collected on longer term loans 6,797,992 6,346,139
Net (increase) decrease in short-term loans (44,150) 53,108
Purchases of premises and equipment (14,992) (116,591)
Purchase of Federal Home Loan Bank stock (172,100) (46,500)
------------ ------------
Net cash used by investing activities (13,382,246) (6,974,307)
</TABLE>
F-6
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Financing Activities
------------------------------------
Net increase (decrease) in demand deposits,
money market, passbook accounts and advance
payments by borrowers for taxes and insurance $ (266,251) $ 1,588,186
Net increase in certificates of deposit 531,000 2,315,159
Net increase in Federal Home Loan Bank advances 8,900,000 --
Net proceeds from stock issuance -- 4,420,044
Common shares purchased under ESOP Plan -- (380,350)
Common shares purchased under Rabbi Trust -- (134,650)
Conversion costs paid subsequent to stock issuance (66,035) --
Dividend payment (87,919) --
----------- -----------
Net cash provided by financing activities 9,010,795 7,808,389
----------- -----------
Increase (decrease) in cash and cash equivalents (2,782,103) 1,317,614
Cash and cash equivalents at beginning of year 4,062,056 2,744,442
----------- -----------
Cash and cash equivalents at end of year $ 1,279,953 $ 4,062,056
=========== ===========
Reconciliation of cash and cash equivalents:
Cash $ 620,282 $ 166,446
Interest bearing accounts in other banks 1,038,521 4,833,876
----------- -----------
1,658,803 5,000,322
Less - Certificates of deposit maturing in
90 days or more included in interest
bearing accounts in other banks (378,850) (938,266)
----------- -----------
Cash and cash equivalents $ 1,279,953 $ 4,062,056
=========== ===========
Supplemental disclosures of cash flows information:
Cash paid during year for:
Interest $ 1,880,930 $ 1,749,522
Income taxes $ 278,000 $ 272,000
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts
of Northfield Bancorp, Inc. ("the Company") and its wholly owned
subsidiary, Northfield Federal Savings Bank ("the Bank"). All
intercompany accounts and transactions have been eliminated
in the accompanying consolidated financial statements.
Business
--------
The Bank's primary business activity is the acceptance
of deposits from the general public in its market area,
predominantly the Baltimore metropolitan region, and using
the proceeds for investments and loan originations. The Bank
is subject to competition from other financial institutions.
The Bank is subject to the regulations of certain federal
agencies and undergoes periodic examinations by those
regulatory authorities.
Basis of Financial Statement Presentation
-----------------------------------------
The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles.
In preparing the financial statements, management is required
to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses
for the period. Actual results could differ significantly
from those estimates. Material estimates that are
particularly susceptible to significant change in the
near-term relate to the determination of the allowance for
loan losses. See the discussion below of the determination of
that estimate.
Investments
-----------
Investments classified as available for sale are carried
at fair value. Amortization of premiums and accretion
of discounts are computed using the interest method over the
life of the debt instrument. Gains and losses on available
for sale securities are determined using the specific
identification method.
F-8
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Mortgage Backed Securities
--------------------------
Mortgage backed securities classified as available for sale,
including real estate mortgage conduits, ("REMICs"), are
carried at fair value. Amortization of premiums and accretion
of discounts are computed using the interest method. Gains
and losses on available for sale securities are determined
using the specific identification method. See Note 3 for
discussion of prepayment risk and recoverability of mortgage
backed securities.
At December 31, 1999, mortgage backed securities classified
as held to maturity are carried at amortized cost since
management has the ability and intention to hold them to
maturity. Amortization of premiums and accretion of discounts
on purchases is computed using the interest method.
Loans Receivable
----------------
Loans receivable that management has the intent and ability
to hold for the foreseeable future or until maturity or
pay-off are reported at their outstanding principal balance
adjusted for any charge-offs, the allowance for loan losses,
and any deferred fees or costs on originated loans.
Amortization of premiums and accretion of discounts on loan
purchases is computed using the interest method.
Loan origination fees and certain direct origination costs
are capitalized and recognized as an adjustment of the yield
of the related loan.
An allowance for loan losses is provided through charges to
income in an amount that management believes will be adequate
to absorb losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of
loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions
that may affect the borrowers' ability to pay. Determining the amount
of the allowance for loan losses requires the use of estimates
and assumptions. Management believes the allowance for losses on
loans
F-9
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Loans Receivable - Continued
----------------
is adequate. While management uses available information to
estimate losses on loans, future additions to the allowances may be
necessary based on changes in economic conditions, particularly in
the State of Maryland. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review
the Bank's allowances for losses on loans. Such agencies may
require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of
their examination. Statement of Financial Accounting Standards
("SFAS") No. 114, as amended by SFAS No. 118 addresses the
accounting by creditors for impairment of certain loans. It is
generally applicable for all loans except large groups of smaller
balance homogeneous loans that are collectively evaluated for
impairment, including residential mortgage loans and consumer
installment loans. It also applies to all loans that are
restructured in a troubled debt restructuring involving a
modification of terms. SFAS No. 114 requires that impaired loans be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or at the loan's
observable market price or the fair value of the collateral if the
loan is collateral dependent. A loan is considered impaired when,
based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions
and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful.
When a payment is received on a loan on non-accrual status,
the amount received is allocated to principal and interest in
accordance with the contractual terms of the loan.
Premises and Equipment
----------------------
Land is carried at cost, premises and equipment are carried
at cost less accumulated depreciation. Depreciation is
computed on the straight-line method, based on the useful
lives of the respective assets.
F-10
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Income Taxes
------------
Deferred income taxes are recognized for temporary
differences between the financial reporting basis and income
tax basis of assets and liabilities based on enacted tax
rates expected to be in effect when such amounts are realized
or settled. Deferred tax assets are recognized only to the
extent that it is more likely than not that such amounts will
be realized based on consideration of available evidence. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
Statement of Cash Flows
-----------------------
In the statement of cash flows, cash and equivalents include
cash and interest bearing deposits in other banks with a
maturity date of less than ninety days.
Employee Stock Ownership Plan
-----------------------------
The Company accounts for its Employee Stock Ownership Plan
("ESOP") in accordance with Statement of Position 93-6 of the
Accounting Standards Division of the American Institute of
Certified Public Accountants (See Note 11).
Cumulative Effect of Accounting Change
--------------------------------------
The Company implemented SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No.
133") on January 1, 1999. In accordance with the
Pronouncement's provisions, the Company reclassified
approximately $1,071,000 of mortgage backed securities from
held to maturity to trading. The Company's trading portfolio
consisted of several relatively older and smaller balance
loan pools, which had market values that exceeded carrying
values. Management decided to sell the securities at the
favorable market price and simultaneously reduce the
administrative costs of the smaller pools. On January 11,
1999, the Company sold the entire trading investment that had
a carrying value of $1,033,041 and realized a gain of $8,980
net of tax. Accordingly, the net realized gain of $8,980 is
reflected on the consolidated statements of operations as the
cumulative effect of an accounting change, net of taxes.
F-11
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Cumulative Effect of Accounting Change - Continued
--------------------------------------------------
In addition, the Company reclassified $1,053,760 of mortgage
backed securities and $799,256 of investments from held to
maturity to available for sale.
On January 1, 1999, the amortized costs and fair values were
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investments $ 799,256 $ -- $ 5,029 $ 794,227
Mortgage backed securities 1,053,760 3,701 -- 1,057,461
---------- ---------- ---------- ----------
$1,853,016 $ 3,701 $ 5,029 $1,851,688
========== ========== ========== ==========
</TABLE>
Accordingly, the net unrealized loss of $1,328 at the date of
transfer is reflected on the consolidated statements of
stockholders' equity as the cumulative effect of a change in
accounting principle, net of taxes.
Earnings Per Share
------------------
Basic earnings per share data ("EPS") is computed by dividing
net income by the weighted average number of common shares
outstanding for the appropriate period. Unearned ESOP shares
are not included in outstanding shares. Diluted EPS is
computed by dividing net income by the weighted average
shares outstanding as adjusted for the dilutive effect of
unvested stock awards based on the "treasury stock" method.
Earnings per share data is not presented for the year ended
December 31, 1998, since the Bank converted to stock form in
November, 1998, and such information would not be meaningful.
Information relating to the calculations of net income per
share of common stock, summarized for the twelve months ended
December 31, 1999, is as follows:
December 31, 1999
-----------------
Net income before other comprehensive income $379,337
========
Weighted Average Shares
Outstanding basic EPS 427,664
Dilutive Items
Rabbi Trust shares 13,465
--------
Adjusted weighted average shares used for
dilutive items 441,129
========
F-12
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 2 - Investments
-----------
The amortized cost at and fair values of other investments
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available for Sale
------------------
December 31, 1999
-----------------
Federal Home Loan Mortgage
Corporation bonds $ 748,519 $ -- $ 53,988 $ 694,531
Municipal bonds 449,316 -- 38,925 410,391
Corporate bonds 4,137,946 -- 369,318 3,768,628
---------- ------------- ---------- ----------
$5,335,781 $ -- $ 462,231 $4,873,550
========== ============= ========== ==========
<CAPTION>
Held to Maturity
----------------
December 31, 1998
-----------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation bonds $ 250,000 $ -- $ -- $ 250,000
Municipal bonds 299,256 -- 888 298,368
Corporate bonds 250,000 -- 4,141 245,859
---------- -------------- ---------- ----------
$ 799,256 $ -- $ 5,029 $ 794,227
========== ============== ========== ==========
</TABLE>
On January 1, 1999, the Company implemented the provisions of
SFAS No. 133 and reclassified the entire balance of
investments from held to maturity to available for sale (See
Note 1).
No gains or losses were realized during the years ended
December 31, 1999 and 1998.
The scheduled maturities of other investments at December 31,
1999:
Carrying
Cost
----------
Due after five years through ten years $ 369,125
Due after ten years 4,504,425
-----------
$ 4,873,550
===========
F-13
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 3 - Mortgage Backed Securities Available for Sale
---------------------------------------------
Mortgage backed securities classified as available for sale
at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
GNMA participating certificates $1,861,296 $ -- $ 31,313 $1,829,983
FNMA participating certificates 737,961 -- 16,667 721,294
----------- ---------- ---------- ----------
$ 2,599,257 $ -- $ 47,980 $2,551,277
=========== ========== ========== ==========
</TABLE>
No gains or losses were realized during the years ended
December 31, 1999 and 1998.
Note 4 - Mortgage Backed Securities Held to Maturity
-------------------------------------------
The amortized cost and fair value of mortgage backed
securities held to maturity are as follows as of December 31,
1999 and 1998, respectively.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
December 31, 1999
---------------------------------------------------
<S> <C> <C> <C> <C>
GNMA participating certificates $ 524,188 $ -- $54,866 $ 469,322
========== ======== ======= ==========
December 31, 1998
---------------------------------------------------
GNMA participating certificates $1,125,497 $ 37,469 $ -- $1,162,966
FNMA participating certificates 534,884 12,123 -- 547,007
FHLMC participating certificates 462,209 12,896 -- 475,105
---------- -------- ------- ----------
$2,122,590 $ 62,488 $ -- $2,185,078
========== ======== ======= ==========
</TABLE>
On January 1, 1999, the Company implemented the provisions
of SFAS No. 133 and reclassified $1,053,760 and $1,033,041 of the
mortgage backed securities portfolio to available for sale and
trading, respectively. (See Note 1)
F-14
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 5 - Loans Receivable
----------------
Loans receivable at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
One to four family residential mortgage loans $ 39,464,486 $ 31,332,202
Land 172,698 123,442
Construction loans 2,207,784 3,663,490
Commercial real estate loans 1,960,896 2,477,792
Commercial loan collateralized by lease
finance receivables 698,107 643,217
Home equity line of credit loans 134,281 124,849
Loans secured by deposits 108,044 73,326
Premiums 14,614 --
------------ ------------
44,760,910 38,438,318
Less
Undisbursed portion of loans in process (1,402,261) (2,223,105)
Deferred loan origination fees (319,486) (316,122)
Allowance for losses on loans (182,951) (197,435)
------------ ------------
(1,904,698) (2,736,662)
------------ ------------
$ 42,856,212 $ 35,701,656
============ ============
</TABLE>
Residential lending is generally considered to involve less
risk than other forms of lending, although payment experience on
these loans is dependent to some extent on economic and market
conditions in the Bank's lending area. Commercial and construction
loan repayments are generally dependent on the operations of the
related properties or the financial condition of its borrower
or guarantor. Accordingly, repayment of such loans can be more
susceptible to adverse conditions in the real estate market and
the regional economy.
A substantial portion of the Bank's loans receivable are
mortgage loans secured by residential and commercial real estate
properties located in the State of Maryland. Loans are extended
only after evaluation by management of customers' creditworthiness
and other relevant factors on a case-by-case basis. The Bank
generally does not lend more than 90% of the appraised value of a
property and requires private mortgage insurance on residential
mortgages with loan-to-value ratios in excess of 80%. In
addition, the Bank generally obtains personal guarantees of
repayment from borrowers and/or others for construction,
commercial and multifamily residential loans and disburses the
proceeds of construction and similar loans only as work progresses
on the related projects.
F-15
<PAGE>
NORTHFIELD BANCORP, INC.
-----------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 5 - Loans Receivable - Continued
----------------
The commercial loan collateralized by lease finance
receivables represents a loan to a leasing company collateralized by
leases receivable to individuals and businesses secured by
personal property and is primarily dependent upon the financial
condition of the borrower and lessors for repayment.
The following is a summary of the allowance for loan losses
for the years ended December 31:
Balance at December 31, 1997 $215,500
Provision for losses on loans --
Charge-offs (18,065)
--------
Balance at December 31, 1998 197,435
Provision for losses on loans --
Charge-offs (14,484)
--------
Balance at December 31, 1999 $182,951
========
A loan is considered impaired when it is probable that the
Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The Bank did not have any
impaired loans at December 31, 1999 and 1998.
The Bank had no non-accrual loans that were not subject to
SFAS No. 114.
The following table presents a summary of the activity with
respect to loans to directors and officers for the years ended
December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance outstanding - beginning of year $505,596 $728,439
New loans 148,000 18,546
Principal repayments (152,043) (241,389)
-------- --------
Balance outstanding - end of year $501,553 $505,596
======== ========
</TABLE>
F-16
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 5 - Loans Receivable - Continued
----------------
The Bank is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financial
needs of its customers. Mortgage loan commitments, exclusive of
loans in process not reflected in the accompanying statements at
December 31, 1999, approximate $1,238,800. These commitments are
for mortgage loans with fixed rates between 7.25% and 8.5% at
December 31, 1999. At December 31, 1999, the Bank did not have any
non-recourse leasing loan commitments.
The credit risk involved in these financial instruments is
essentially the same as that involved in extending loan facilities to
customers. No amount has been recognized in the statement of financial
condition at December 31, 1999, as a liability for credit loss.
Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition. The
unpaid principal balances of these loans at December 31, 1999 and 1998,
respectively, were $790,345 and $826,514.
Custodial escrow balances maintained in connection with the
foregoing loan servicing were approximately $22,000 and $18,000 at
December 31, 1999 and 1998, respectively.
Note 6 - Premises and Equipment
----------------------
Premises and equipment at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998 Useful Lives
---- ---- ------------
<S> <C> <C> <C>
Land $ 15,000 $ 15,000 -
Office building and improvements 107,347 109,297 5 to 35 years
Furniture, fixtures and equipment 259,783 285,547 5 to 15 years
-------- --------
382,130 409,844
Less - accumulated depreciation (284,977) (281,519)
-------- --------
$ 97,153 $128,325
======== ========
</TABLE>
F-17
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 6 - Premises and Equipment - Continued
----------------------
The Bank has entered into long-term lease agreements for the
premises of its main and administrative offices. Rental expense under
the agreements for the properties for the years ended December 31,
1999 and 1998 were $57,303 and $48,835, respectively. At December 31,
1999, the minimum rental commitments under noncancellable operating
leases are as follows:
Year Ended December 31,
-----------------------
2000 $ 57,695
2001 48,962
2002 42,000
2003 28,000
--------
$176,657
========
Note 7 - Investment in Federal Home Loan Bank of Atlanta Stock
-----------------------------------------------------
The Bank is required to maintain an investment in the stock
of the Federal Home Loan Bank of Atlanta ("FHLB") in an amount equal
to at least 1% of the unpaid principal balances of the Bank's
residential mortgage loans or 1/20 of its outstanding advances from
the FHLB, whichever is greater. Purchases and sales of stock are made
directly with the FHLB at par value.
Note 8 - Deposit Accounts
----------------
Deposit accounts at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
Amount % Amount %
------ ----- ------ ----
<S> <C> <C> <C> <C>
Demand and NOW accounts including
non-interest bearing deposits of
$570,560 in 1999 and $715,785
in 1998 $ 2,710,885 7.41% $ 2,894,912 7.95%
Money markets 8,191,133 22.38 8,199,757 22.51
Passbook savings 2,736,225 7.47 2,901,060 7.96
Certificates of deposit 22,954,581 62.71 22,423,581 61.54
----------- ------ ----------- ------
36,592,824 99.97 36,419,310 99.96
Accrued interest on deposits 10,034 .03 15,476 .04
----------- ------ ----------- ------
$36,602,858 100.00% $36,434,786 100.00%
=========== ====== =========== ======
</TABLE>
F-18
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 8 - Deposit Accounts - Continued
----------------
Certificates of deposit mature as follows at December 31:
2000 $12,852,856
2001 4,515,131
2002 2,959,889
2003 938,500
2004 1,204,817
2005 & Thereafter 483,388
-----------
Total $22,954,581
===========
Interest expense on deposits is summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NOW accounts $ 41,841 $ 57,696
Money markets 272,789 322,038
Savings 76,571 93,461
Certificates of deposit 1,308,040 1,275,630
---------- ----------
$1,699,241 $1,748,825
========== ==========
</TABLE>
The Bank had deposits of $100,000 or more of approximately
$5,351,995 and $3,451,755 at December 31, 1999 and 1998, respectively.
Deposit Insurance Reform. Currently, there are two deposit
insurance funds maintained by the Federal Deposit Insurance
Corporation ("FDIC"), the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF"). The Bank's deposits are
insured by SAIF.
Note 9 - Borrowings
----------
Federal Home Loan Bank advances at December 31, 1999 consist
of short-term fixed and adjustable rate advances bearing interest at
4.55% to 6.26% per annum and a long-term fixed rate advance bearing
interest at 5.26% per annum.
F-19
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 9 - Borrowings - Continued
----------
The Bank's stock in Federal Home Loan Bank of Atlanta is pledged
as security for the loan and under a blanket floating lien security
agreement with the Federal Home Loan Bank of Atlanta, the Bank is
required to maintain as collateral for its advances, qualified home
mortgage loans in an amount equal to 175% of the advances.
Aggregate maturities required on Federal Home Loan Bank advances
at December 31, 1999 are as follows:
December 31, 2000 $5,900,000
December 31, 2009 3,000,000
----------
$8,900,000
==========
Unused advances on the short-term borrowings above totalled
$5,840,000 at December 31, 1999.
Note 10- Employee Benefit Plan
---------------------
The Bank has a 401(k) Plan which required until March 31, 1998,
under certain conditions, a contribution of up to 5% of eligible
employees' total compensation. The total expense related to this
Plan for the years ended December 31, 1999 and 1998 was $2,600 and
$5,126, respectively.
Note 11- Common Stock and Stock Benefit Plans
------------------------------------
On November 12, 1998, the Bank converted from a federally
chartered mutual savings bank to a federally chartered stock savings
bank. Simultaneously, the Bank consummated the formation of a new
holding company, Northfield Bancorp, Inc., of which the Bank is a
wholly owned subsidiary. In connection with the conversion, the
Company issued 475,442 shares of its common stock, par value $.01
per share (the "Common Stock") for gross proceeds of $4,754,420 and
net proceeds of $4,420,044, of which $2,210,022 was contributed to the
Bank in exchange for all of its outstanding common stock.
F-20
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 11- Common Stock and Stock Benefit Plans - Continued
------------------------------------
At the time of the Conversion, the Bank established a liquidation
account in the amount of $3,086,506, an amount equal to the Bank's
retained earnings as of June 30, 1998. The liquidation account is
maintained for the benefit of eligible savings account holders who
maintained their savings accounts in the Bank after the Conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder would be entitled to receive a
liquidation distribution from the liquidation account in an
amount equal to the account holder's then interest in the
liquidation account before any liquidation distribution may
be made with respect to capital stock.
The Company has no significant source of income other than
dividends from the Bank. As a result, the Company's dividends will
depend primarily upon receipt of dividends from the Bank.
OTS regulations limit the payment of dividends and other
capital distributions by the Bank. The Bank is able to pay
dividends during a calendar year without regulatory approval to the
extent of the greater of (i) an amount which will reduce by
one-half its surplus capital ratio at the beginning of the year
plus all its net income determined on the basis of generally
accepted accounting principles for that calendar year, or (ii) 75%
of net income for the last four calendar quarters.
The Bank is restricted in paying dividends on its stock to
the greater of the restrictions described in the preceding
paragraph, or an amount that would reduce its retained
earnings below its regulatory capital requirement, the
accumulated bad debt deduction, or the liquidation account
described above.
At the time of conversion, the Bank established an Employee
Stock Ownership Plan ("ESOP"), and acquired 38,035 shares of
the common stock. The ESOP borrowed funds used to acquire the
shares from the Company with a direct loan from the Company
requiring annual payments of $29,258.
The ESOP holds the common stock in a Trust for allocation
among participating employees.
All employees of the Bank who have completed one year of
service and attained the age of 21 are eligible to
participate. Participants will become 100% vested in their
accounts after five years of service, commencing after
January 1, 1998, or earlier upon death, disability or
retirement.
F-21
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 11- Common Stock and Stock Benefit Plans - Continued
------------------------------------
The ESOP is funded by contributions made by the Bank in cash
or common stock and dividends on the shares held in the
Trust. The Bank recognizes compensation expense as shares are
committed for release from collateral at their current market
price. Dividends on allocated shares are recorded as a
reduction of retained earnings and dividends on unallocated
shares are recorded as a reduction of debt. Compensation cost
for the year ended December 31, 1999 was $42,380.
The ESOP shares as of December 31, 1999 were as follows:
Allocated shares 5,806
Shares earned, but unallocated -
Unearned shares 32,229
The fair value of the unearned shares was $382,719 at
December 31, 1999.
During the year ended December 31, 1997, the Bank entered
into a non-qualified Deferred Compensation ("Rabbi Trust") agreement
with all of its current directors. The Bank recognized
compensation expense, under this agreement, during the years ended
December 31, 1999 and 1998 of $107,747 and $69,150, respectively.
Liability under this Agreement is being accrued by charges to
operating expense during the term of employment. On November 12, 1998,
the Trustees of the Deferred Compensation Plan acquired 13,465 shares
of the Company's common stock.
Note 12- Retained Earnings
-----------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
F-22
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 12- Retained Earnings - Continued
-----------------
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of
December 31, 1999, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1999, the most recent notification from
the Office of Thrift Supervision has categorized the Bank as
well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the
table. There have been no conditions or events since that
notification that management believes have changed the Bank's
category.
The following table presents the Bank's capital position
based on the financial statements.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- ------------------
Amount % Amount % Amount %
------ - ------- - ------- -
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
-----------------
Tangible (1) $5,300,053 9.8% $ 808,432 1.5% $ N/A N/A%
Tier I capital (2) 5,300,053 18.6% N/A N/A% 1,713,180 6.0%
Core (1) 5,300,053 9.8% 2,155,818 4.0% 2,694,773 5.0%
Risk-weighted (2) 5,483,004 19.2% 2,284,240 8.0% 2,855,300 10.0%
December 31, 1998
-----------------
Tangible (1) $4,918,487 11.0% $ 670,342 1.5% $ N/A N/A%
Tier I capital (2) 4,918,487 22.2% N/A N/A% 1,330,440 6.0%
Core (1) 4,918,487 11.0% 1,340,684 3.0% 2,234,473 5.0%
Risk-weighted (2) 5,115,922 23.1% 1,773,920 8.0% 2,217,400 10.0%
<FN>
(1) To adjusted total assets
(2) To risk-weighted assets.
</FN>
</TABLE>
F-23
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 13- Income Taxes
------------
The income tax provision consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current expense $ 269,317 $ 227,485
Deferred expense (benefit) (28,922) (31,247)
--------- ---------
Total tax expense $ 240,395 $ 196,238
========= =========
</TABLE>
Of the $240,395 income tax provision in 1999, $5,956 is the
tax effect of the expense recorded because of the cumulative
change in accounting principle for the adoption of SFAS No. 133
(See Note 1).
The income tax provision is reconciled to the amount computed
to the statutory federal income tax rate as follows for
December 31:
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
Amount Rate Amount Rate
------ ------ ------ -----
<S> <C> <C> <C> <C>
Statutory federal income tax rate $210,709 34.00% $171,028 34.00%
State tax net of federal income tax benefit 29,189 4.71 23,743 4.72
Other 497 .01 1,467 .29
-------- ----- -------- -----
$240,395 38.72% $196,238 39.01%
======== ====== ======== =====
</TABLE>
The tax effects of temporary differences between financial
reporting basis and income tax basis of assets and
liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred Tax Assets:
Deferred loan origination fees $ -- $ 12,787
Deferred compensation 117,696 73,695
Unrealized loss on investment securities 232,420 32,160
Allowance for loan losses 70,656 76,249
--------- ---------
420,772 194,891
Deferred Tax Liabilities:
Federal Home Loan Bank of Atlanta stock dividend (32,595) (32,595)
Depreciation (2,650) (2,650)
Excess of tax bad debt reserve over base year (26,377) (39,567)
Conversion from accrual to cash method
of accounting (72,442) (62,553)
--------- ---------
(134,064) (137,365)
--------- ---------
Net deferred tax assets $ 286,708 $ 57,526
========= =========
</TABLE>
F-24
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 13- Income Taxes - Continued
------------
The Bank was allowed a special bad debt deduction limited
generally to 8% of otherwise taxable income for the year
beginning December 1, 1987 through December 31, 1995.
Beginning January 1, 1996 the percentage of taxable income
method of computing the Bank's tax bad debt deduction is no
longer allowed and the amount by which the tax reserve for
bad debts exceeds such amount at December 31, 1987 must be
recaptured over a six year period. A tax liability has been
established for the recapture. If the amounts which qualified
as deductions for federal income tax purposes prior to
December 31, 1987 are later used for purposes other than to
absorb loan losses, including distributions in liquidations,
they will be subject to federal income tax at the then
current corporate rate. Retained earnings at December 31,
1999 and 1998 include $577,687, for which no provision for
federal income tax has been provided. The unrecorded deferred
income tax liability on the above amount was approximately
$223,875.
Note 14- Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
The estimated fair values of the Bank's financial instruments
are summarized below. The fair values of a significant
portion of these financial instruments are estimates derived
using present value techniques prescribed by the FASB and may
not be indicative of the net realizable or liquidation
values. Also, the calculation of estimated fair values is
based on market conditions at a specific point in time and
may not reflect current or future fair values.
The carrying amount is a reasonable estimate of fair value
for interest bearing deposits in other banks due to the
short-term nature of that investment. Fair value is based
upon net asset values for investment securities. Bid prices
published in financial newspapers for mortgage backed
securities were used to estimate fair value for these
investments. The carrying amount of Federal Home Loan Bank of
Atlanta stock is a reasonable estimate of fair value. Loans
receivable were discounted using a single discount rate,
comparing the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the
same remaining maturities, except for adjustable rate
mortgages which were considered to be at market rates. These
rates were used for each aggregated category of loans as
reported on the Office of Thrift Supervision Quarterly
Report. The fair value of demand deposits, savings accounts
and money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates
currently offered on deposits of similar remaining
maturities.
F-25
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 14- Disclosures About Fair Value of Financial Instruments - Continued
-----------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Carrying Estimated
Amount Fair Value
------- ----------
(Amounts in Thousands)
<S> <C> <C>
Financial Assets
----------------
Interest bearing deposits
in other banks ..................................... $ 1,039 $ 1,039
Investments ......................................... 4,874 4,874
Mortgage backed securities available for sale ....... 2,551 2,551
Mortgage backed securities held to maturity ......... 524 469
Loans receivable .................................... 42,856 40,137
Federal Home Loan Bank of Atlanta stock ............. 445 445
Financial Liabilities
---------------------
Savings ............................................. $ 2,736 $ 2,736
NOW and money market deposit accounts ............... 10,902 10,902
Certificates of deposit ............................. 22,955 22,980
Advance payment by borrowers for expenses ........... 554 554
Borrowings .......................................... 8,900 8,603
</TABLE>
F-26
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
2000 1999
---- ----
Assets (Unaudited)
------
<S> <C> <C>
Cash $ 184,281 $ 620,282
Interest bearing deposits in other banks 752,207 1,038,521
Investments available for sale 4,880,874 4,873,550
Mortgage backed securities available for sale 2,432,660 2,551,277
Mortgage backed securities held to maturity 518,255 524,188
Loans receivable, net 44,326,571 42,856,212
Accrued interest receivable - loans 189,540 171,294
- investments 94,447 65,508
- mortgage backed securities 15,630 16,086
Premises and equipment, at cost, less accumulated
depreciation 89,869 97,153
Federal Home Loan Bank of Atlanta stock at cost 475,000 445,000
Deferred income taxes 303,229 286,708
Prepaid and refundable income taxes -- 410
Prepaid expenses and other assets 38,764 33,886
------------ ------------
Total assets $ 54,301,327 $ 53,580,075
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposit accounts $ 36,413,396 $ 36,602,858
Borrowings 9,500,000 8,900,000
Advance payments by borrowers for expenses 717,521 553,961
Income taxes payable 35,793 11,237
Other liabilities 508,826 439,377
------------ ------------
Total liabilities 47,175,536 46,507,433
Commitments and contingencies
Stockholders' Equity
--------------------
Serial Preferred stock $.01 par value; authorized 2,000,000
shares; none issued or outstanding
Common stock $.01 par value; authorized 8,000,000 shares;
issued and outstanding 475,442 shares at March 31, 2000
and December 31, 1999 4,754 4,754
Additional paid-in capital 4,353,036 4,351,177
Retained earnings (substantially restricted) 3,523,158 3,491,960
------------ ------------
7,880,948 7,847,891
Accumulated other comprehensive income (305,502) (318,280)
Stock held by Rabbi Trust (134,650) (134,650)
Employee Stock Ownership Plan (315,005) (322,319)
------------ ------------
Total stockholders' equity 7,125,791 7,072,642
------------ ------------
Total liabilities and stockholders' equity $ 54,301,327 $ 53,580,075
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-27
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
---- ----
<S> <C> <C>
Income
------
Interest and fees on loans $801,269 $725,509
Interest on investments 109,260 61,187
Interest on mortgage backed securities 45,115 32,198
-------- --------
Total interest income 955,644 818,894
Interest Expense
----------------
Interest on deposits 428,143 419,303
Interest on short-term borrowings 91,278 10,289
Interest on long-term borrowings 39,888 --
-------- --------
Total interest expense 559,309 429,592
-------- --------
Net interest income 396,335 389,302
Provision for losses on loans -- --
-------- --------
Net interest income after provision for losses on loans 396,335 389,302
Non-Interest Income
-------------------
Fees on loans 1,489 2,400
Fees on deposits 3,606 4,218
All other income 1,980 2,104
-------- --------
Net non-interest income 7,075 8,722
Non-Interest Expenses
---------------------
Compensation and related expenses 182,199 92,178
Occupancy 28,489 26,599
Deposit insurance 2,095 5,555
Service bureau expense 17,334 20,026
Furniture, fixtures and equipment expense 7,245 6,143
Advertising 9,144 7,276
Professional fees 49,648 13,617
Other 51,731 37,163
-------- --------
Total non-interest expenses 347,885 208,557
-------- --------
Income before tax provision and cumulative effect
of accounting change 55,525 189,467
Provision for income tax 24,327 72,456
-------- --------
Income before cumulative effect of accounting change 31,198 117,011
Cumulative effect of accounting change, net of tax -- 8,980
-------- --------
Net income $ 31,198 $125,991
======== ========
Basic earnings per share $ .07 $ .30
======== ========
Diluted earnings per share $ .07 $ .29
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-28
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
-----------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
---- ----
<S> <C> <C>
Net income $ 31,198 $ 125,991
Cumulative effect of change in accounting principle,
net of taxes of $513 -- (815)
Unrealized gain (losses) on available for sale securities,
net of tax of $7,227 March 31, 2000 and $18,271 March 31, 1999 12,778 (29,038)
--------- ---------
Comprehensive income $ 43,976 $ 96,138
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-29
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Operating Activities
--------------------
Net income $ 31,198 $ 125,991
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
-----------------------------------------
Net amortization of premiums and accretion of
discounts on certificates of deposit 23 24
Gain on sale of mortgage backed securities trading -- (14,936)
Proceeds from sale of mortgage backed securities
trading -- 1,048,335
Net amortization of premiums and accretion of
discounts on mortgage backed and investment securities 2,741 2,708
Amortization of premiums on mortgage loans purchased 158 123
Loan fees deferred 5,232 13,039
Amortization of deferred loan fees (5,507) (28,238)
Non-cash compensation under Stock-Based Benefit Plans 9,174 7,456
Increase in accrued interest (46,729) (29,946)
Provision for depreciation 11,431 10,899
(Increase) decrease in deferred income taxes (23,748) 11,835
Decrease in prepaid and refundable income taxes 410 --
Increase in prepaid expenses and other assets (4,878) (13,643)
Increase in accrued interest payable 1,664 3,499
Increase in income taxes payable 24,556 38,577
Increase in other liabilities 69,449 4,494
----------- -----------
Net cash provided by operating activities 75,174 1,180,217
Cash Flows from Investing Activities
------------------------------------
Proceeds from maturing certificates of deposit 99,000 349,000
Purchases of certificates of deposit (96,000) (95,000)
Purchase of securities available for sale -- (1,697,594)
Purchase of mortgage backed securities available for sale -- (1,521,844)
Purchases of mortgage backed securities held to maturity -- (539,642)
Principal collected on mortgage backed securities 126,629 257,678
Longer term loans originated (2,394,840) (4,441,303)
Loans purchased -- (877,919)
Principal collected on longer term loans 939,930 2,657,789
Net (increase) decrease in short-term loans (15,801) 20,433
Purchases of premises and equipment (4,147) (1,794)
Purchase of Federal Home Loan Bank stock (30,000) (58,600)
----------- -----------
Net cash used by investing activities (1,375,229) (5,948,796)
</TABLE>
F-30
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Financing Activities
------------------------------------
Net decrease in demand deposits, money market,
passbook accounts and advance payments by
borrowers for taxes and insurance $ (221,221) $ (696,124)
Net increase (decrease) in certificates of deposit 193,655 (351,149)
Net increase in Federal Home Loan Bank advances 600,000 2,500,000
----------- -----------
Net cash provided by financing activities 572,434 1,452,727
----------- -----------
Decrease in cash and cash equivalents (727,621) (3,315,852)
Cash and cash equivalents at beginning of period 1,279,953 4,062,056
----------- -----------
Cash and cash equivalents at end of period $ 552,332 $ 746,204
=========== ===========
Reconciliation of cash and cash equivalents:
Cash $ 184,281 $ 216,151
Interest bearing accounts in other banks 752,207 1,214,296
----------- -----------
936,488 1,430,447
Less - Certificates of deposit maturing in
90 days or more included in interest
bearing accounts in other banks (384,156) (684,243)
----------- -----------
Cash and cash equivalents $ 552,332 $ 746,204
=========== ===========
Supplemental disclosures of cash flows information:
Cash paid during period for:
Interest $ 552,578 $ 417,045
Income taxes $ 23,110 $ 28,000
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-31
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 1 - Basis of Presentation
---------------------
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and in
accordance with the instructions to Form 10-QSB. Accordingly,
they do not include all of the disclosures required by
generally accepted accounting principles for complete
financial statements. In the opinion of management, all
adjustments necessary for a fair presentation of the results
of operations for the interim periods presented have been
made. Such adjustments were of a normal recurring nature. The
results of operations for the three months ended March 31,
2000 are not necessarily indicative of the results that may
be expected for the fiscal year December 31, 2000 or any
other interim period. The consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes which are incorporated by
reference in the Company's Annual Report on Form 10-KSB for
the year ended December 31,1999.
Note 2 - Cash Flow Presentation
----------------------
For purposes of the statements of cash flows, cash and cash
equivalents include cash and amounts due from depository
institutions and certificates of deposit with original
maturities of 90 days or less.
Note 3 - Earnings Per Share
------------------
Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the
appropriate period. Unearned ESOP shares are not included in
outstanding shares. Diluted EPS is computed by dividing net
income by the weighted average shares outstanding as adjusted
for the dilutive effect of unvested stock awards based on the
"treasury stock" method. Information relating to the
calculations of net income per share of common stock,
summarized for the quarters ended March 31, 2000 and 1999, is
as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net income before other comprehensive income $ 31,198 $125,991
======== ========
Weighted Average Shares
Outstanding basic EPS 429,992 426,380
Dilutive Items
Rabbi Trust shares 13,465 13,465
-------- --------
Adjusted weighted average shares
used for dilutive EPS 443,457 439,845
======== ========
</TABLE>
F-32
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 4 - Cumulative Effect of Accounting Change
--------------------------------------
The Company implemented SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No.
133") on January 1, 1999. In accordance with the
Pronouncement's provisions, the Company reclassified
approximately $1,071,000 of mortgage backed securities from
held to maturity to trading. On January 11, 1999, the Company
sold the entire trading investment that had a carrying value
of $1,033,041 and realized a gain of $8,980, net of tax.
Accordingly, the net realized gain of $8,980 is reflected on
the consolidated statements of operations as the cumulative
effect of an accounting change, net of taxes.
In addition, the Company reclassified $1,053,760 of mortgage
backed securities and $799,256 of investments from held to
maturity to available for sale. Accordingly, the net
unrealized loss of $1,328 at the date of transfer is
reflected on the consolidated statements of comprehensive
income as the cumulative effect of a change in accounting
principle, net of taxes.
F-33
<PAGE>
ANNEX A
_______________________________
AGREEMENT OF MERGER
BY AND AMONG
PATAPSCO BANCORP, INC.,
THE PATAPSCO BANK
AND
PN FINANCIAL, INC.
________________________
AND
________________________
NORTHFIELD BANCORP, INC.
AND
NORTHFIELD FEDERAL SAVINGS BANK
DATED AS OF MAY 16, 2000
_______________________________
<PAGE>
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER ("Agreement") is dated as of May 16, 2000, by
and among PATAPSCO BANCORP, INC., a Maryland corporation ("Patapsco"), THE
PATAPSCO BANK, a Maryland commercial bank and wholly owned subsidiary of
Patapsco ("Bank"), and PN FINANCIAL, INC., a Maryland corporation and wholly
owned subsidiary of Patapsco ("New Sub"); and NORTHFIELD BANCORP, INC., a
Maryland corporation ("Company"), and NORTHFIELD FEDERAL SAVINGS BANK, a
Federally chartered savings bank and wholly owned subsidiary of Company
("Savings").
WHEREAS, Patapsco, a bank holding company, with its principal office in
Dundalk, Maryland, owns all of the issued and outstanding capital stock of
Bank, with its principal office in Dundalk, Maryland, and Bank owns all the
issued and outstanding capital stock of New Sub;
WHEREAS, Company, a non-diversified, unitary savings and loan holding
company, with its principal office in Baltimore, Maryland, owns all of the
issued and outstanding capital stock of Savings, with its principal office in
Baltimore, Maryland;
WHEREAS, Patapsco and Company desire to combine their
respective holding companies and bank subsidiaries;
WHEREAS, the parties have determined that it would be
desirable and in their respective best interests, including the
best interests of their respective shareholders, for (i) New Sub
to merge with and into Company (the "Company Merger"), pursuant to which each
of the issued and outstanding shares of common stock of Company ("Company
Common Stock") shall be automatically by operation of law converted into the
right to receive (a) $12.50 in cash (the "Cash Consideration") and (b) 0.2400
shares of Patapsco's Series A Noncumulative Convertible Perpetual Preferred
Stock, $.01 par value per share, (the "Preferred Stock") (Articles
Supplementary for the Preferred Stock are attached as Exhibit A) (such cash
and the 0.2400 shares of Preferred Stock (the "Preferred Stock Consideration")
are collectively referred to herein as the "Merger Consideration"), and the
issued and outstanding shares of New Sub common stock shall be converted by
operation of law into an equal number of newly issued shares of Company Common
Stock all of which shall be owned by Bank, (ii) immediately following the
Company Merger, the Company shall be liquidated into Patapsco (the
"Liquidation") and (iii) immediately following the Liquidation,
Savings shall be merged with and into the Bank (the "Bank Merger");
WHEREAS, the Boards of Directors of Patapsco and the Company (at meetings
duly called and held) have determined that this Agreement and the transactions
contemplated hereby are in the best interests of Patapsco and the Company,
respectively, and their respective stockholders and have approved this
Agreement; and
1
<PAGE>
WHEREAS, as a condition and inducement to Patapsco's, the
Bank's and New Sub's willingness to enter into this Agreement,
Patapsco has entered into a separate Voting Agreement (attached as Exhibit B)
with each of the directors and executive officers of the Company providing
that each such person shall vote, or cause to be voted, all shares of Company
Common Stock which such person beneficially owns for approval of the Company
Merger as
contemplated herein.
NOW THEREFORE, in consideration of the premises and mutual
promises hereinafter set forth, and of other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound,
do hereby agree as follows:
ARTICLE I
THE COMPANY MERGER AND RELATED MATTERS
1.1 The Company Merger. At the Effective Time (as defined
------------------
in Section 1.2 hereof), New Sub shall be merged with and into
Company pursuant to the provisions herein. The Company Merger
shall be effected in accordance with any and all applicable
provisions of the Maryland General Corporation Law (the "MGCL").
Company shall thereafter continue as the surviving corporation
under the name of "Northfield Bancorp, Inc." Company after the
Effective Time is sometimes referred to in this Agreement as the
"Surviving Corporation." At and after the Effective Time:
(1) The separate existence of New Sub shall
cease.
(2) The Articles of Incorporation and the
Bylaws of Company in effect immediately prior to the
Company Merger shall continue as the Articles of
Incorporation and Bylaws of the Surviving Corporation
after the Company Merger.
(3) The directors and executive officers of
the Company immediately prior to the Effective Time
shall, as of the such Effective Time, submit their
written resignation and the directors and executive
officers of the Company immediately following the
Company Merger, until their successors shall be duly
elected and qualified, shall be such persons as are
appointed by the Bank.
(4) From and after the Effective Time, the
Company Merger shall have the effects as set forth in
Section 3-114 of the MGCL.
1.2 Effective Time of the Company Merger. As soon as
------------------------------------
practicable after each of the conditions set forth in Article V
hereof have been satisfied or waived, New Sub and Company will
file, or cause to be filed, articles of merger with the Maryland
Department of Assessments and Taxation (the "Department"), which
articles of merger shall be in the form required by and executed
in accordance with the applicable provisions of the MGCL and, to
the extent applicable, the
2
<PAGE>
Financial Institutions Article of the Annotated Code of Maryland. The Company
Merger shall become effective at the time the articles of merger are accepted
by the Department or at such time as is set forth in the articles of merger
(the "Effective Time"), which shall be immediately following the Closing (as
defined in Section 1.11) and on the same day as the Closing if practicable.
1.3 Conversion of Shares. The manner and basis of the
--------------------
conversion of the respective outstanding shares of capital stock
of Company and New Sub and the consideration which the respective record
holders thereof shall be entitled to receive pursuant to the Company Merger
shall be as follows:
(a) Company Common Stock.
--------------------
(i) At the Effective Time each share of Company
Common Stock issued and outstanding immediately prior to the
Effective Time (except Objecting Shares (as defined in
Section 1.4) and shares referred to in subparagraph (ii) of
this Section 1.3(a)), shall automatically by virtue of the
effectiveness of the Company Merger and without the
necessity of any action on the part of the holder thereof,
be canceled and converted into the right to receive the
Merger Consideration. After the Effective Time, the holders
of certificates representing shares of Company Common Stock
shall cease to have any rights as stockholders of the
Company, except the right to receive the Merger
Consideration as provided herein and except with respect to
rights applicable to Objecting Shares.
(ii) Any shares of Company Common Stock which
are owned or held by Company or any of its subsidiaries
(except shares held in any 401(k) plan or employee stock
ownership plan of the Company or any of its subsidiaries or
other shares held in a fiduciary or similar capacity
including any shares held in a grantor trust associated with
any of Company's or Savings' Employee Plans or Benefit
Arrangements (as such terms are defined in Section 2.13
hereof)) or by Patapsco or any of Patapsco's subsidiaries
(other than in a fiduciary or similar capacity) at the
Effective Time shall cease to exist, and the certificates
for such shares shall as promptly as practicable be canceled
and no Merger Consideration shall be issued or exchanged
therefor.
(iii) If the holders of Patapsco common stock
shall have received or shall have become entitled to
receive, without payment therefor, during the period
commencing on the date hereof and ending with the Effective
Time, additional shares of common stock or other securities
for their stock by way of a stock split, stock dividend,
reclassification, combination of shares or similar corporate
rearrangement ("Stock Adjustment"), then the amount and/or
characteristics of the Preferred Stock to be exchanged at
the Effective Time for Patapsco common stock shall be
proportionately adjusted to take into account such Stock
Adjustment.
(b) New Sub Common Stock. Each share of common stock
--------------------
of New Sub issued and outstanding immediately prior to the
Effective Time shall, automatically by virtue of the
3
<PAGE>
effectiveness of the Company Merger and without necessity of any action on the
part of the holder thereof, be canceled and converted into an equal number of
newly issued shares of common stock of the Surviving Corporation.
1.4 Objecting Shares. Any shares of Company Common Stock
----------------
held by a holder who files a written objection to the Company
Merger and becomes entitled to obtain payment for the fair value
of such shares of Company Common Stock pursuant to the applicable provisions
of the MGCL shall be herein called "Objecting Shares." Subject to any
contrary provisions of the MGCL, any Objecting Shares shall not, after the
Effective Time, be entitled to vote for any purpose or receive any dividends
or other distributions and shall not be entitled to receive the Merger
Consideration, and the holder thereof ceases to have any rights of a
stockholder with respect to the Objecting Shares except the right to receive
payment of their fair value; provided however, that shares of Company Common
Stock held by an objecting stockholder who subsequently withdraws a demand for
payment, fails to comply fully with the requirements of the MGCL, or otherwise
fails to establish the right of such stockholder to be paid the fair value of
such stockholders'
shares under the MGCL shall be deemed to be converted into the
right to receive the Merger Consideration pursuant to the terms and conditions
referred to above. All negotiations with respect to payment for Objecting
Shares shall be handled by Patapsco. Patapsco shall be obligated to pay the
holders of any Objecting Shares in accordance with the provisions of the MGCL.
1.5 Right to Revise the Structure of the Transaction. With
------------------------------------------------
the prior written consent of the Company, which consent shall not be
unreasonably withheld, Patapsco, Bank and New Sub may revise the structure of
the corporate reorganization contemplated by this Agreement in order to
achieve tax benefits or for any other reason; provided, however, that the
Company shall not have the obligation to consent to any revision to the
structure of the reorganization which (i) changes the form or amount of the
consideration payable hereunder, (ii) would unreasonably impede or delay
consummation of the transactions contemplated herein or (iii) would result in
treatment for Federal income tax purposes of receipt by a shareholder of
Company of the Merger Consideration set forth herein as a taxable dividend.
Patapsco, Bank and New Sub may propose any
revision by giving written notice to Company and Savings in the
manner provided in Section 8.4 of this Agreement, which notice
shall be in the form of an amendment to this Agreement.
1.6 Exchange of Shares for the Merger Consideration
-----------------------------------------------
(a) The parties hereto agree that the Bank will act
as the exchange agent (the "Exchange Agent") for the exchange by
Company stockholders of their shares of Company Common Stock for
the Merger Consideration.
(b) Patapsco has reserved, or will reserve prior to
the Effective Time, for issuance a sufficient number of shares of its
Preferred Stock for the purpose of issuing its shares to the Company's
stockholders in accordance with this Article I. Patapsco also has reserved or
will reserve prior to the Effective Time, for issuance a sufficient number of
shares of its common
4
<PAGE>
stock for the purpose of issuing shares of its common stock to holders of
Preferred Stock who elect to convert their shares of Preferred Stock into
Patapsco common stock. Immediately prior to the Effective Time, Patapsco
shall make available for exchange or conversion, by transferring to the
Exchange Agent for the benefit of the holders of Company Common Stock: (i)
such number of whole shares of Preferred Stock as shall be issuable in
connection with the payment of the aggregate Preferred Stock Consideration,
and (ii) such funds as may be payable in connection with the aggregate Cash
Consideration and as may be payable in lieu of fractional shares of Preferred
Stock as provided in Section 1.7(c) hereof. After the Effective Time, holders
of certificates theretofore evidencing outstanding shares of Company Common
Stock (other than Objecting Shares or as provided in Section 1.3(a)(ii)), upon
surrender of such certificates to the Exchange Agent, shall be entitled to
receive certificates representing the number of whole shares of Preferred
Stock into which shares of Company Common Stock
theretofore represented by the certificates so surrendered shall
have been converted, as provided in Section 1.3 hereof, cash
payable for the Cash Consideration, and cash payments in lieu of
fractional shares as provided in Section 1.7(c) hereof. As soon
as practicable after the Effective Time, but not more than five (5) business
days thereafter, the Exchange Agent will send a notice and transmittal form as
prepared by Patapsco and reasonably satisfactory to the Company, to each
Company shareholder of record at the Effective Time whose Company Common Stock
shall have been converted into the Merger Consideration advising such
shareholder of the effectiveness of the Company Merger and the procedure for
surrendering to the Exchange Agent outstanding certificates formerly
evidencing Company Common Stock in exchange for the Merger Consideration.
Upon surrender, each certificate evidencing Company Common Stock shall be
canceled. The Exchange Agent shall pay for each share of Company Common Stock
to the Company shareholders who submit their stock certificates pursuant to
these instructions (i)
an amount equal to 100% of the Cash Consideration plus any cash in lieu of a
fractional share of Preferred Stock and (ii) the
Preferred Stock Consideration, within five (5) business days
following receipt of the stock certificate(s). Cash consideration shall be
paid by check. Preferred Stock Consideration shall be evidenced by a stock
certificate duly and validly executed and issued in accordance with the
requirements of the MGCL. Such checks and certificates for shares of
Preferred Stock shall be sent by first class mail.
(c) All payments to Company shareholders pursuant to
clause (b) of this Section 1.6 shall be sent to the shareholder's address as
shown on the stock records of the Company, or to such other address as a
shareholder may specify in a written instruction submitted with the
shareholder's stock certificates.
(d) All shares of Preferred Stock and cash for the
Cash Consideration and in lieu of any fractional share of Preferred Stock
issued and paid upon the surrender for exchange of Company Common Stock in
accordance with the above terms and conditions shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Company
Common Stock. No interest will be paid or accrued on the Cash Consideration
payable upon surrender of such certificates.
5
<PAGE>
(e) If payment for Company Common Stock is to be
made, or any new certificate for Preferred Stock is to be issued, in the name
other than that in which the certificate surrendered in exchange thereof is
registered, it shall be a condition of the issuance therefor that the
certificate surrendered in exchange shall be properly endorsed and otherwise
in proper form for transfer and that the person requesting such transfer pay
to the Exchange Agent any transfer or other taxes required by reason of the
issuance of a new certificate for shares of Preferred Stock in any name other
than that of the registered holder of the certificate surrendered, or
establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not payable.
(f) In the event any certificate for Company Common
Stock shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed
certificate, upon the making of an affidavit of that fact by the
holder thereof, the Cash Consideration, the Preferred Stock
Consideration and cash in lieu of a fractional share of Preferred Stock as may
be required pursuant hereto; provided, however, that Patapsco may, in its
reasonable discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate to deliver a
bond in such sum as it may reasonably direct as indemnity against any claim
that may be made against Patapsco, the Company, the Exchange Agent or any
other party with respect to the certificate alleged to have been lost, stolen
or destroyed.
1.7 No Fractional Shares. Notwithstanding any term or
--------------------
provision hereof, no fractional shares of Preferred Stock, and no certificates
or scrip therefor, or other evidence of ownership thereof, will be issued in
exchange for any shares of Company Common Stock; no dividend or distribution
with respect to Preferred Stock shall be payable on or with respect to any
fractional share interests; and no such fractional share interest shall
entitle the owner thereof to vote or to any other rights of a shareholder of
Patapsco. In lieu of such fractional share interest, any holder of Company
Common Stock who would otherwise be entitled to a fractional share of
Preferred Stock will, upon surrender of his certificate or certificates
representing Company Common Stock outstanding immediately prior to the
Effective Time, be paid the applicable cash value of such fractional share
interest, which shall be equal to the product of the fraction multiplied by
$25.00. For the purposes of determining any such fractional share interests,
all shares of Preferred Stock received by each holder of Company Common Stock
shall be combined so as to calculate the maximum number of whole shares of
Preferred Stock issuable to such Company stockholder in the Company Merger.
1.8 Status of Certificates. At and after the Effective
----------------------
Time, until surrendered as provided in this Section 1.6 hereof,
each outstanding certificate which, prior to the Effective Time,
represented Company Common Stock (other than shares cancelled at
the Effective Time pursuant to Section 1.3(a)(ii) hereof and except any
Objecting Shares, which Objecting Shares will evidence only the rights
specified in Section 1.4 hereof) will be deemed for all corporate purposes to
evidence ownership of the number of whole shares of Preferred Stock into which
the shares of Company Common Stock formerly represented thereby were converted
and the right to receive cash payable for the Cash Consideration and in lieu
of any fractional interest and shall not be
6
<PAGE>
deemed to confer upon the holder thereof any voting, dividend or other rights
of a shareholder of the Surviving Corporation. However, until such
outstanding certificates formerly representing Company Common Stock are so
surrendered or the procedures in Section 1.6(f) are complied with, no dividend
or distribution payable to holders of record of Preferred Stock shall be paid
to any holder of such outstanding certificates, but upon surrender of such
outstanding certificates by such holder there shall be paid to such holder any
dividends, without interest, theretofore paid with respect to such whole share
of Preferred Stock, but not paid to such holder, and the amount of any cash,
without interest, payable to such holder for the Cash Consideration and in lieu
of a fractional share pursuant to Section 1.7 hereof. After the Effective Time,
there shall be no further registration or transfer on the records of the
Surviving Corporation of shares of Company Common Stock (except the shares of
common stock of the Surviving Corporation issued pursuant to Section 1.3(b)
hereof), and if a certificate formerly representing such shares is presented to
Patapsco, it shall be forwarded to the Exchange Agent for cancellation and
exchange for the Merger Consideration.
1.9 Shareholders' Meeting. The Company shall, at the
---------------------
earliest practicable date, hold a meeting of its shareholders (the "Company
Shareholders' Meeting") to submit for shareholder approval this Agreement and
the Company Merger and all related matters necessary to the consummation of
the transactions contemplated hereby.
1.10 Registration Statement; Prospectus/Proxy Statement.
--------------------------------------------------
(a) For the purposes (i) of registering the Preferred
Stock to be issued to holders of Company Common Stock in connection with the
Company Merger with the Securities and Exchange Commission ("SEC") and with
applicable state securities authorities, and (ii) of holding the Company
Shareholders' Meeting, the parties hereto shall cooperate in the preparation
of an appropriate registration statement (such registration statement,
together with all and any amendments and supplements thereto, being herein
referred to as the "Registration Statement"), including the prospectus/proxy
statement satisfying all applicable requirements of applicable state laws, and
of the Securities Act of 1933, as amended (the "1933 Act") and the Securities
Exchange Act of 1934, as amended (the "1934 Act") and the rules and regulations
thereunder (such prospectus/proxy statement, together with any and all
amendments or supplements thereto, being herein referred to as the
"Prospectus/ProxyStatement").
(b) Patapsco shall furnish such information concerning Patapsco and
the Patpasco Subsidiaries (as defined in Section 3.1 hereof) as is necessary
in order to cause the Prospectus/ Proxy Statement, insofar as it relates to
such corporations, to comply with Section 1.10(a) hereof. Patapsco agrees
promptly to advise the Company if at any time prior to the Company
Shareholders' Meeting any information provided by Patapsco in the
Prospectus/Proxy Statement becomes incorrect or incomplete in any
material respect and to provide the information needed to correct such
inaccuracy or omission. Patapsco shall promptly file such supplemental
information as may be necessary in order to cause such Prospectus/Proxy
Statement, insofar as it relates to Patapsco and the Patapsco Subsidiaries, to
comply with Section 1.10(a).
7
<PAGE>
(c) The Company shall furnish Patapsco with such information
concerning the Company and the Company Subsidiaries (as defined in Section 2.1
hereof) as is necessary in order to cause the Prospectus/Proxy Statement,
insofar as it relates to such corporations, to comply with Section 1.10(a)
hereof. The Company agrees promptly to advise Patapsco if at any time
prior to the Company Shareholders' Meeting any information provided by the
Company in the Prospectus/Proxy Statement becomes incorrect or incomplete in
any material respect and to provide Patapsco with the information needed to
correct such inaccuracy or omission. The Company shall furnish Patapsco with
such supplemental information as may be necessary in order to cause the
Prospectus/Proxy Statement, insofar as it relates to the Company and the
Company Subsidiaries, to comply with Section 1.10(a).
(d) Patapsco shall prepare and file the Registration
Statement with the SEC and applicable state securities agencies as soon as
practicable but not later than 60 days following the date of this Agreement.
Patapsco shall use all reasonable efforts to cause the Registration Statement
to become effective under the 1933 Act and applicable state securities laws at
the earliest practicable date. The Company authorizes Patapsco to utilize in
the Registration Statement the information concerning the Company and the
Company Subsidiaries provided to Patapsco for the purpose of inclusion in the
Prospectus/Proxy Statement. The Company shall have the right to review and
comment on the Registration Statement and to approve the form of proxy
statement included in the Registration Statement. Patapsco shall advise the
Company promptly when the Registration Statement has become effective and of
any supplements or amendments thereto, and Patapsco shall furnish Company with
copies of all such documents. Prior to the Effective Time or the termination
of this Agreement, each party shall consult with the other with respect to any
material (other than the Prospectus/Proxy Statement) that might constitute a
"prospectus" relating to the Company Merger within the meaning of the 1933 Act.
(e) The Company shall consult with Patapsco in order to determine
whether any directors, officers or shareholders of the Company may be deemed
to be "affiliates" of Company ("affiliated persons") within the meaning of
Rule 145 of the SEC promulgated under the 1933 Act. All shares of
Preferred Stock issued to such Company affiliated persons in connection with
the Company Merger shall bear a legend upon the face thereof stating that
transfer of the securities is or may be restricted by the provisions of the
1933 Act, and notice shall be given to Patapsco's transfer agent of such
restriction, provided that such legend shall be removed by delivery of a
substitute certificate without such legend if such Company affiliated person
shall have delivered to Patapsco a copy of a letter from the staff of the SEC
or an opinion of counsel, in form and substance satisfactory to Patapsco, to
the effect that such legend is not required for purposes of the 1933 Act, and,
in any event, at any time after the expiration of two years from the Effective
Time unless, in the opinion of the counsel for Patapsco, such person was an
"affiliate" of Patapsco within the meaning of Rule 145 within three months
prior to the expiration of such two year period. So long as shares of such
Preferred Stock bear such legend, no transfer of such Preferred Stock shall be
allowed unless and until the transfer agent is provided with such information
as may reasonably be requested by counsel for Patapsco to assure that such
transfer will not violate applicable provisions of the 1933 Act, or rules,
regulations or policies of the SEC.
8
<PAGE>
1.11 Cooperation; Regulatory Approvals. The parties shall
---------------------------------
cooperate and use reasonable best efforts to complete the
transactions contemplated hereunder at the earliest practicable
date. Each party shall cause each of their affiliates and
subsidiaries to cooperate in the preparation and submission by
them, as promptly as reasonably practicable, of such applications, petitions,
and other documents and materials as any of them may reasonably deem necessary
or desirable to the Office of Thrift Supervision ("OTS"), Federal Deposit
Insurance Corporation ("FDIC"), Board of Governors of the Federal Reserve
System ("FRB"), the Commissioner of Financial Regulation of the State of
Maryland ("Commissioner"), Federal Trade Commission ("FTC"), Department of
Justice ("DOJ"), SEC, the Department, other regulatory authorities, holders of
the voting shares of common stock of Patapsco and the Company, and any other
persons for the purpose of obtaining any approvals or consents necessary to
consummate the transactions contemplated by this Agreement. At the date
hereof, none of the parties is aware of any reason that the Governmental
Approvals (as such term is defined in Section 5.1(c) herein) required to be
obtained by it would not be obtained in a timely manner.
1.12 Closing. If (i) Company shareholder approvals have
-------
been received, and (ii) all conditions of this Agreement have been satisfied
or waived, a closing (the "Closing") shall take place as promptly as
practicable thereafter at the principal office of Patapsco or at such other
place as the parties hereto may mutually agree at which the parties hereto
will exchange certificates, opinions, letters and other documents as required
hereby and will make the filings described in Section 1.2 hereof. Such
Closing will take place as soon as practicable as agreed by the parties,
provided, however, that the Closing shall be no more than thirty (30) days
after the satisfaction or waiver of all conditions and/or obligations
contained in Article V of this Agreement.
1.13 Closing of Transfer Books. At the Effective Time, the
-------------------------
transfer books for Company Common Stock shall be closed and no
transfer of shares of Company Common Stock shall thereafter be made on such
books.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY AND SAVINGS
Company and Savings represent and warrant to Patapsco, the
Bank and New Sub that, except as disclosed in Section A or another section of
Schedule I attached hereto and except that Savings does not make any
representation or warranty regarding the Company:
2.1 Organization, Good Standing, Authority, Insurance, Etc.
------------------------------------------------------
The Company is a corporation organized, validly existing and in
good standing under the laws of the State of Maryland. Section 2.1 of
Schedule I lists each "subsidiary" of the Company and Savings within the
meaning of Section 10(a)(1)(G) of Home Owners' Loan Act ("HOLA"),
(individually a "Company Subsidiary" and collectively the "Company
Subsidiaries") (unless otherwise noted herein all references to a "Company
Subsidiary" or to the "Company Subsidiaries" shall include Savings). Each of
the Company Subsidiaries is organized, validly existing, and in good standing
9
<PAGE>
under the laws of the respective jurisdiction under which it is
organized, as set forth in Section 2.1 of Schedule I. The Company and each
Company Subsidiary has all requisite power and authority and is duly qualified
and licensed to own, lease and operate its properties and conduct its business
as it is now being conducted. The Company has delivered to Patapsco a true,
complete and correct copy of the articles of incorporation, charter, or other
organizing document and of the bylaws, as in effect on the date of this
Agreement, of Company and each Company Subsidiary. The Company and each
Company Subsidiary is qualified to do business as a foreign corporation and is
in good standing in each jurisdiction in which qualification is necessary
under applicable law, except to the extent that any failures to so qualify
would not, in the aggregate, have a material adverse effect on the business,
financial condition
or results of operations of the Company and the Company
Subsidiaries, taken as a whole. Savings is a member in good
standing of the Federal Home Loan Bank of Atlanta and all eligible accounts
issued by Savings are insured by the Savings Association Insurance Fund
("SAIF") to the maximum extent permitted under applicable law. Savings is a
"domestic building and loan association" as defined in Section 7701(a)(19) of
the Internal Revenue Code of 1986, as amended (the "Code") and is a "qualified
thrift lender" as defined in Section 10(m) of the HOLA and the rules and
regulations thereunder. The Company is registered as a savings and loan
holding company under the HOLA.
Other than immaterial omissions, the minute books of the
Company and the Company's Subsidiaries contain complete and
accurate records of all meetings and other corporate actions held or taken by
their respective shareholders and Boards of Directors (including the
committees of such Boards).
2.2 Capitalization. The authorized capital stock of the
--------------
Company consists of (i) 8,000,000 shares of common stock, par value $.01 per
share, of which 475,442 shares were issued and outstanding as of the date of
this Agreement, and (ii) 2,000,000 shares of Preferred Stock, par value $.01
per share, of which no shares were outstanding as of the date of this
Agreement. All outstanding shares of Company Common Stock are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Other than with respect to the Employee Plans described in Section
2.13 herein, as of the date of this Agreement, there are no options,
convertible securities, warrants, or other rights (preemptive or otherwise) to
purchase or acquire any of the Company's capital stock from the Company and no
oral or written agreement, contract, arrangement, understanding, plan or
instrument of any kind (collectively, "Stock Contract") to which the Company
or any of its affiliates is subject with respect to the issuance, voting
(other than the Voting Agreement contemplated herein) or sale of issued or
unissued shares of the Company's capital stock.
2.3 Ownership of Subsidiaries. All the outstanding shares
-------------------------
of the capital stock of the Company Subsidiaries are validly
issued, fully paid, nonassessable and owned beneficially and of
record by the Company or a Company Subsidiary free and clear of any lien,
claim, charge, restriction or encumbrance (collectively, "Encumbrance").
There are no options, convertible securities, warrants, or other rights
(preemptive or otherwise) to purchase or acquire any capital stock of any
Company Subsidiary and no contracts to which the Company or any of its
affiliates
10
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is subject with respect to the issuance, voting or sale of issued or unissued
shares of the capital stock of any of the Company Subsidiaries. Neither the
Company nor any Company Subsidiary owns any material investment in any of the
capital stock or other equity securities (including securities convertible or
exchangeable into such securities) of or profit participations in any
"company" (as defined in Section 10(a)(1)(C) of the HOLA) other than the
Federal Home Loan Bank of Atlanta, Savings and NFS Service Corporation.
2.4 Financial Statements and Reports.
--------------------------------
(a) No registration statement, proxy statement,
schedule or report filed by the Company with the SEC under the 1933 Act or the
1934 Act ("SEC Reports"), on the date of effectiveness in the case of such
registration statements, or on the date of filing in the case of such reports
or schedules, or on the date of mailing in the case of such proxy statements,
and except as revised, amended or modified by a subsequently filed document,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Company and the Company Subsidiaries have timely filed
all reports and documents required to be filed by them with the SEC, the OTS,
or the FDIC under various securities and banking laws and regulations for the
last five years (or such shorter period as they may have been subject to such
filing requirements), except to the extent that all failures to so file, in
the aggregate, would not have a material adverse effect on the business,
financial condition or results of operations of the Company and the Company
Subsidiaries, taken as a whole. All such documents, as finally revised,
modified or amended by any subsequently filed amendment, complied in all
material respects with applicable requirements of law and, as of their
respective date or the date as amended, and, with respect to reports and
documents filed with banking regulatory agencies, were accurate in all
material respects. Except to the extent stated therein, all financial
statements (including any notes thereto) and
schedules included in the documents referred to in the preceding
sentences of this Section 2.4(a) (or to be included in similar
documents to be filed after the date hereof) (i) are or will be
(with respect to financial statements in respect of periods ending after
December 31, 1999) in accordance with the Company's books and records and
those of any of the Company Subsidiaries, and (ii) present (and in the case of
financial statements in respect of periods ending after December 31, 1999,
will present) fairly the consolidated statement of financial condition and the
consolidated statements of income, stockholders' equity and cash flows of the
Company and the Company Subsidiaries as of the dates and for the periods
indicated in accordance with generally accepted accounting principles applied
on a basis consistent (except as disclosed in the notes to such financial
statements) with prior periods (except for the omission of notes to unaudited
statements, year end adjustments to interim results and changes to generally
accepted accounting principles). The consolidated financial statements of the
Company at December 31, 1999 and for the three years then ended and the
consolidated financial statements for all periods thereafter up to the Closing
reflect or will reflect, or reserve or will reserve against on the balance
sheet, as the case may be, all liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due or to become due and
regardless of when asserted), as of their respective dates, of the Company and
the Company
11
<PAGE>
Subsidiaries required to be reflected in such financial statements according
to generally accepted accounting principles and in the opinion of Company
management contain or will contain adequate reserves for losses on loans and
properties acquired in settlement of loans, taxes and all other material
accrued liabilities and for all reasonably anticipated material losses, if
any, as of such dates. To the Company's knowledge, there exists no set of
circumstances that could reasonably be expected to result in any liability or
obligation material to the Company or the Company Subsidiaries, taken as a
whole, except as disclosed in such consolidated financial statements at
December 31, 1999 or for transactions effected or actions occurring or omitted
to be taken after December 31, 1999 (i) in the ordinary course of business, or
(ii) as permitted or contemplated by this Agreement.
(b) The Company has delivered to Patapsco each SEC
Report it has ever filed, used or circulated through the date of
this Agreement and will promptly deliver each such SEC Report
filed, used or circulated after the date hereof, each in the form (including
exhibits and any amendments thereto) filed with the SEC (or, if not so filed,
in the form used or circulated), including, without limitation, its Annual
Reports on Form 10-KSB and its Quarterly Reports on Form 10-QSB.
(c) Except (i) as disclosed in Section 2.4 of
Schedule I, (ii) as reflected, noted or adequately reserved against in the
financial statements referred to in this Section 2.4, or (iii) for deposits
incurred in the ordinary course of business consistent with past practice,
Company and the Company Subsidiaries do not have any material liabilities
(whether accrued, absolute, contingent or otherwise).
2.5 Absence of Changes.
------------------
(a) Since December 31, 1999 and through the date
hereof, there has been no material adverse change in the business, properties,
financial condition, results of operations or assets of the Company and the
Company Subsidiaries, taken as a whole. Since December 31, 1999 and through
the date hereof, there has been no occurrence, event or development of any
nature existing or, to the Company's knowledge, threatened, which may
reasonably be expected to have a material adverse effect upon the business,
properties, financial condition, operations or assets of the Company or any
Company Subsidiary, taken as a whole. Without limiting the foregoing, except
as set forth in Section 2.5 of Schedule I and except as contemplated by this
Agreement, since December 31, 1999, to the date hereof:
(i) The Company has not issued, sold, granted,
conferred or awarded any of its equity securities, or options to
acquire its equity securities, or any corporate debt securities
which would be classified under generally accepted accounting
principles as long-term debt on the consolidated balance sheets of the
Company; (ii) the Company has not effected any stock split or adjusted,
combined, reclassified or otherwise changed its capitalization; (iii) neither
the Company nor any Company Subsidiary has discharged or satisfied any material
lien or paid any material obligation or liability (absolute or contingent),
other than in the ordinary course of business; (iv)
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<PAGE>
neither the Company nor any Company Subsidiary has sold, assigned,
transferred, leased, exchanged, or otherwise disposed of any of its material
properties or assets; (v) except as required by contract or law, neither the
Company nor any Company Subsidiary has (A) increased the rate of compensation
of, or paid any bonus to, any of its directors, officers, or other employees,
except that the Company and Savings increased the salaries of employees in
January and February 2000 to the levels set forth in Section 2.5 of Schedule
I, (B) entered into any new, or amended or supplemented any existing
employment, management, consulting, deferred compensation, severance, or other
similar contract, (C) entered into, terminated, or substantially modified any
of the Employee Plans (as defined in Section 2.13 hereafter) or (D) agreed to
do any of the foregoing; (vi) neither the Company nor any Company Subsidiary
has suffered any material damage, destruction, or loss, whether as a result of
fire, explosion, earthquake, accident, casualty, labor trouble, requisition, or
taking of property by any regulatory authority, flood, windstorm, embargo, riot,
act of God, or the enemy, or other casualty or event, and whether or not covered
by insurance; and (vii) neither the Company nor any Company Subsidiary has
canceled or compromised any debt, except for debts of $5,000 or less,
individually or in the aggregate, charged off or compromised in accordance
with the past practice of the Company and Company Subsidiaries.
(b) Since December 31, 1999 to the date hereof, each
of the Company and the Company Subsidiaries has owned and operated their
respective assets, properties and businesses in the ordinary course of
business and consistent with past practice, other than in connection with this
Agreement or the transactions contemplated by this Agreement.
(c) Except as contemplated by Section 4.2(b) herein,
since December 31, 1999 to the date hereof, the Company has not
declared, set aside, made or paid any dividend or other
distribution in respect of Company Common Stock.
2.6 Prospectus/Proxy Statement. At the time the
--------------------------
Prospectus/ Proxy Statement is mailed to the shareholders of the
Company for the solicitation of proxies for the approvals referred to in
Section 1.9 hereof and at all times subsequent to such mailings up to and
including the time of such approval, such Prospectus/Proxy Statement
(including any supplements thereto), with respect to all information set forth
therein relating to the Company (including the Company Subsidiaries), its
shareholders and representatives, Company Common Stock and all other
transactions contemplated hereby, will:
(a) Comply in all material respects with applicable
provisions of the 1933 Act, the 1934 Act and the rules and
regulations under such Acts; and
(b) Not contain any statement which, at the time and
in light of the circumstances under which it is made, is false or misleading
with respect to any material fact or which omits to state any material fact
necessary in order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication with respect
to
13
<PAGE>
the solicitation of a proxy for the Company Shareholders' Meeting which has
become false or misleading.
2.7 No Broker's or Finder's Fees. Except as set forth in
----------------------------
Section 2.7 of Schedule I (which shall also include a copy of any engagement
agreement), no agent, broker, investment banker, person or firm acting on
behalf or under authority of the Company or any of the Company Subsidiaries is
or will be entitled to any broker's or finder's fee or any other commission or
similar fee directly or indirectly in connection with the Company Merger or
any other transaction contemplated hereby.
2.8 Litigation and Other Proceedings. Except as set forth
--------------------------------
in Section 2.8 of Schedule I and except for matters which would not have a
material adverse effect on the business, financial condition or results of
operations of the Company and the Company Subsidiaries taken as a whole,
neither the Company nor any Company Subsidiary is a defendant in, nor is any
of its property subject to, any pending, or, to the knowledge of the Company,
threatened, claim, action, suit, investigation, or proceeding, or subject to
any judicial order, judgment or decree.
2.9 Compliance with Law.
-------------------
(a) The Company and the Company Subsidiaries are in
compliance in all material respects with all laws and regulations applicable
to their respective business or operations or with respect to which compliance
is a condition of engaging in the business thereof, except to the extent that
noncompliance would not have a material adverse effect on the business,
financial condition or results of operations of the Company and the Company
Subsidiaries, taken as a whole, and neither the Company nor any Company
Subsidiary has received notice from any federal, state or local government or
governmental agency of any material violation of, and does not know of any
material violations of, any of the above.
(b) The Company and each of its Subsidiaries have all
material permits, licenses, certificates of authority, orders and approvals
of, and have made all material filings, applications and registrations with,
all federal, state and local governmental or regulatory bodies that are
required in order to permit them to carry on their respective business as they
are presently conducted, except to the extent that failure to have any such
permit, license, certificate of authority, order or approval, or failure to
make any filing, application or registration would not have a material adverse
effect on the business, financial condition or results of operations of the
Company and the Company Subsidiaries, taken as a whole.
2.10 Corporate Actions.
-----------------
(a) The Boards of Directors of the Company and
Savings have duly authorized their respective officers to execute and deliver
this Agreement and to take all action necessary to consummate the Company
Merger and the other transactions contemplated hereby. The Board of Directors
of the Company has by appropriate resolutions made the provisions of Article
XIII of
14
<PAGE>
the Company's Articles of Incorporation inapplicable to this Agreement and the
Company Merger and has authorized and directed the submission for
shareholders' approval of this Agreement, together with the Company Merger and
any other action requiring such approvals.
(b) To the extent permitted by applicable law, the
Company's Board of Directors has taken or will take all necessary action to
exempt this Agreement, the Company Merger, and the transactions contemplated
hereby and thereby from, (i) any applicable state takeover laws, (ii) any
Maryland laws limiting or restricting the voting rights of shareholders, (iii)
any Maryland laws requiring a shareholder approval vote in excess of the vote
normally required in transactions of similar type not involving a "related
person," "interested shareholder" or person or entity of similar type, and
(iv) any provision in its or any of the Company Subsidiaries'
articles/certificate of incorporation, charter or bylaws requiring a
shareholder approval vote in excess of the vote normally required in
transactions of similar type not involving a "related person," interested
shareholder" or person or entity of similar type.
2.11 Authority. Except as set forth in Section 2.11 of
---------
Schedule I, the execution, delivery and, subject to receipt of the
Governmental Approvals (as defined in Section 5.1(c)), and the receipt of the
approval of Company stockholders as contemplated by Section 1.9 herein,
performance of their obligations under this Agreement by the Company and
Savings and the Bank Merger by Savings does not and will not violate or
conflict with any of the provisions of, or constitute a breach or default
under or give any person the right to terminate, cancel or accelerate payment
or performance under or result in the creation of any Encumbrance upon any
property or asset of Company or Savings pursuant to (i) the articles of
incorporation or bylaws of the Company or the articles of incorporation,
charter or bylaws of any Company Subsidiary, (ii) any law, rule, ordinance, or
regulation or judgment, decree, order, award or governmental or
non-governmental permit or license to which it or any of the Company
Subsidiaries is subject, except where the non-compliance or violation of which
would not have a material adverse effect on the business, financial condition
or results of operations of the Company and the Company Subsidiaries
taken as a whole, (iii) any other material agreement, material
lease, material contract, note, mortgage, indenture, arrangement
or other obligation or instrument ("Contract") to which the Company or any of
the Company Subsidiaries is a party or is subject or by which any of their
properties or assets is bound, except where the breach or default would not
have a material adverse effect on the business, financial condition or results
of operations of the Company and the Company Subsidiaries taken as a whole, or
(iv) any note, bond, mortgage, indenture, license agreement or other
instrument or obligation the effect of which would have a material adverse
effect on the business, financial condition or results of operations of the
Company and the Company Subsidiaries taken as a whole. The parties
acknowledge that the consummation of the Company Merger and the other
transactions contemplated hereby is subject to various regulatory approvals.
The Company and Savings, as applicable, have all requisite corporate power and
authority to enter into this Agreement and to perform their respective
obligations hereunder, except, with respect to this Agreement and the Company
Merger, the approval of the Company's shareholders of
this Agreement required under applicable law. Other than the
receipt of Governmental Approvals (as defined in Section 5.1(c)), the approval
of shareholders of this
15
<PAGE>
Agreement, the acceptance by the Department of the Articles of Merger and the
consents specified in Section 2.11 of Schedule I with respect to the
Contracts, no consents or approvals are required on behalf of Company in
connection with the consummation of the transactions contemplated by this
Agreement and the Company Merger. This Agreement constitutes the valid and
binding obligation of the Company and Savings, as applicable, and each is
enforceable in accordance with its terms, except as enforceability may be
limited by applicable laws relating to bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or creditors rights generally and general
principles of equity.
2.12 Labor Relations and Employment Arrangements. Neither
-------------------------------------------
the Company nor any Company Subsidiary is a party to or bound by
any collective bargaining agreement. The Company and each Company Subsidiary
enjoy good working relationships with their employees and there are no labor
disputes pending, or to the knowledge of the President of the Company or
Savings threatened, that might materially and adversely affect the condition
(financial or otherwise), assets, liabilities, business or operations of the
Company and Savings, taken as a whole. Except as disclosed in Section 2.12(1)
of Schedule I, there are no employment, severance, consulting or other
agreements, plans or arrangements with any current or former directors,
officers or employees of Company or any Company Subsidiary which may not be
terminated without penalty (including any augmentation or acceleration of
benefits) on 30 days or less notice to such person. Except as disclosed in
Section 2.12(2) of Schedule I, no payments to directors, officers or employees
of the Company or the Company Subsidiaries resulting from the transactions
contemplated hereby will cause the imposition of excise taxes under Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code") or the
disallowance of a deduction to the Company or any Company Subsidiary pursuant
to Sections 162 or 280G of the Code.
2.13 Employee Benefits.
-----------------
(a) Neither the Company nor any of the Company Subsidiaries maintains
any funded deferred compensation plans (including profit sharing, pension,
savings or stock bonus plans), unfunded deferred compensation arrangements or
employee benefit plans as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), other than any plans
("Employee Plans") set forth in Section 2.13(1) of Schedule I (true and correct
copies of which have been delivered to Patapsco). None of Company or any of
the Company Subsidiaries has incurred or reasonably expects to incur any
liability to the Pension Benefit Guaranty Corporation except for required
premium payments which, to the extent due and payable, have been paid. The
Employee Plans intended to be qualified under Section 401(a) of the Code are
so qualified, and Company is not aware of any fact which would materially
adversely affect the qualified status of such plans. Except as set forth
in Section 2.13(2) of Schedule I, neither the Company nor any of the Company
Subsidiaries (a) provides health, medical, death or survivor benefits to any
former employee or beneficiary thereof, or (b) maintains any form of current
(exclusive of base salary and base wages) or deferred compensation, bonus,
stock option, stock appreciation right, benefit, severance pay, retirement,
incentive, group or individual health insurance, welfare or similar plan or
arrangement for the benefit of any single or class of
16
<PAGE>
directors, officers or employees, whether active or retired (collectively
"Benefit Arrangements"). With respect to each Employee Plan and Benefit
Arrangement of the Company or any Company Subsidiary, Section 2.13(3) of
Schedule I sets forth as of the date of this Agreement any and all payments
more than 30 days past due. Except as set forth in Section 2.13(4) of Schedule
I, no employee of Company or any Company Subsidiary has any accrued but unused
vacation or sick leave, and there is no unused vacation or sick leave carried
over from any year prior to 2000.
(b) Except as set forth in Section 2.13(5) of
Schedule I, all Employee Plans and Benefit Arrangements which
presently are in effect were in effect for substantially all of
calendar year 1999 to date and there has been no material amendment thereof
(other than amendments required to comply with applicable law) or no material
increase in the cost thereof or benefits payable thereunder on or after
January 1, 2000.
(c) Each Company and Company Subsidiary Employee Plan
and Benefit Arrangement has been administered to date, and will be
administered until the Closing in all material respects, in
accordance with their terms and in compliance with the Code, ERISA, and all
other applicable rules and regulations. With respect to each Employee Plan
and Benefit Arrangement, Company and the Company Subsidiary, as applicable (i)
have, in a timely, accurate, and proper manner, both filed all required
government reports and made all required employee communications, and (ii)
between the date of this Agreement and the Closing, will complete and file all
such required reports, except where the failure to file reports or make
communications would not have a material adverse effect on the Company and the
Company Subsidiaries taken as a whole. No condition exists that could
constitute grounds for the termination of any Employee Plan under Section 4042
of ERISA; no "prohibited transaction," as defined in Section 406 of ERISA and
Section 4975 of the Code, has occurred with respect to any Employee Plan, or
any other employee benefit plan maintained by Company or any Company
Subsidiary which is covered by Title I of ERISA, which could
subject any person to liability under Title I of ERISA or to the
imposition of any tax under Section 4975 of the Code nor has any
Employee Plan subject to Part III of Subtitle B of Title I of ERISA or Section
412 of the Code, or both, incurred any "accumulated funding deficiency," as
defined in Section 412 of the Code, whether or not waived; nor has Company or
any Company Subsidiary failed to make any contribution or pay any amount due
and owing as required by the terms of any Employee Plan or Benefit
Arrangement. Neither Company nor any Company Subsidiary has incurred or
expects to incur, directly or indirectly, any liability under Title IV of
ERISA or otherwise arising in connection with the termination of, or a
complete or partial withdrawal from, any plan covered or previously covered by
Title IV of ERISA which could constitute a liability of Patapsco, or any of
its affiliates at or after the Effective Time.
(d) Except as set forth in Section 2.13 of Schedule
I, Savings does not maintain a defined benefit pension plan that
holds equity securities.
(e) The schedule provided pursuant to Section 4.18
sets forth as of the date of this Agreement (i) the actuarial
present value, determined and prepared in accordance with GAAP
17
<PAGE>
(based, where applicable, on the same actuarial assumptions as
those previously used for funding purposes, other than turnover
assumptions, and computed on the basis of a terminated plan), of
any accrued benefits or other obligations under a defined benefit pension plan
not listed elsewhere in this schedule, including without limitation, premiums
and contributions for which the Company or any Company Subsidiary is or may be
directly or indirectly liable to present or former employees, officers,
directors, and their beneficiaries, (ii) the net fair market value of the
assets held in any fund, policy, or other arrangement as of April 30, 2000,
and (iii) the amount of any contribution or other obligation paid, accrued,
or payable, or reasonably expected to be payable, between the date of this
Agreement and the Closing, including but not limited to contributions by
Company or Savings to Company's Employee Stock Ownership Plan (the "Company
ESOP") to repay its loan in accordance with the ESOP loan documents, subject
to applicable tax law limitations.
2.14 Information Furnished. No statement contained in any
---------------------
schedule, certificate or other document furnished (whether prior
to or subsequent to the date of this Agreement) or to be furnished in writing
by or on behalf of the Company or Savings to Patapsco pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
any material omission. No information material to the Company Merger or the
Bank Merger and which is necessary to make the representations and warranties
not misleading has been withheld from Patapsco.
2.15 Property and Assets. The Company and the Company
-------------------
Subsidiaries have marketable title to all of their real property
reflected as being owned by the Company in the Company's
consolidated financial statements at December 31, 1999, referred
to in Section 2.4 hereof or in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1999, or acquired subsequent thereto, free and
clear of all Encumbrances, except for (a) such items shown in such financial
statements or in the notes thereto, (b) liens for current real estate taxes
not yet delinquent, (c) imperfections of title, encumbrances and easements, if
any, as are not substantial in character, amount or extent and do not
materially detract from the value, or interfere with the present or proposed
use of, such property, (d) property sold or transferred in the ordinary course
of business since the date of such financial statements, (e) pledges or liens
incurred in the ordinary course of business, and (f) zoning laws and other
land use restrictions that do not impair the present or anticipated use of the
property subject thereto. Neither the Company nor any Company Subsidiary
leases as either lessor or lessee any interest in real property
except as set forth in Exhibit 2.15 of Schedule I. No consent of the lessor
of any material personal property lease is required for consummation of the
Company Merger except as set forth in Section 2.15 of Schedule I. There has
been no material physical loss, damage or destruction, whether or not covered
by insurance, affecting the real properties of Company and the Company
Subsidiaries since December 31, 1999, except such loss, damage or destruction
which does not have a material adverse effect on the Company and the Company
Subsidiaries, taken as a whole. Except as set forth in Section 2.15 of
Schedule I, all property and assets material to their business and currently
used by Company and the Company Subsidiaries are, in all material respects, in
good operating condition and repair, normal wear and tear excepted.
18
<PAGE>
2.16 Agreements and Instruments. Except as set forth in
--------------------------
Section 2.16 of Schedule I, neither the Company nor any Company
Subsidiary is a party to (a) any material agreement, arrangement
or commitment not made in the ordinary course of business, (b) any agreement
which involves annual payments in excess of $5,000 or has a remaining term of
one year or more, in each case whether or not in the ordinary course, (c) any
agreement, indenture or other instrument relating to the borrowing of money by
the Company or any Company Subsidiary or the guarantee by the Company or any
Company Subsidiary of any such obligation (other than Federal Home Loan Bank
advances with a maturity of one year or less from the date of borrowing), (d)
any agreements to make loans or for the provision, purchase or sale of goods,
services or property between Company or any Company Subsidiary and any
director or officer of Company or Savings, or any member of the immediate
family or affiliate of any of the foregoing, (e) any agreements with or
concerning any labor or employee organization to which Company or any Company
Subsidiary is a party, (f) any agreements between Company or any Company
Subsidiary and any five percent or more shareholder of Company, and (g) any
agreements, directives, orders, or similar arrangements
between or involving the Company or any Company Subsidiary and any state or
federal savings institution regulatory authority.
2.17 Material Contract Defaults. Neither the Company nor
--------------------------
any Company Subsidiary nor, to the knowledge of the Company and
Savings, the other party thereto, is in default in any material
respect under any contract, agreement, commitment, arrangement,
lease, insurance policy, or other instrument to which the Company or a Company
Subsidiary is a party or by which its respective assets, business, or
operations may be bound or affected or under which it or its respective
assets, business, or operations receives benefits, and which default is
reasonably expected to have either individually or in the aggregate a material
adverse effect on the Company and any Company Subsidiary, taken as a whole,
and there has not occurred any event that, with the lapse of time or the
giving of notice or both, would constitute such a default.
2.18 Tax Matters.
-----------
(a) The Company and each of the Company Subsidiaries
have duly and properly filed all federal, state, local and other
tax returns required to be filed by them and have made timely
payments of all taxes due and payable, whether disputed or not; the current
status of audits of such returns by the Internal Revenue Service ("IRS") and
other applicable agencies is as set forth in Section 2.18 of Schedule I; and
there is no agreement by the Company or any Company Subsidiary for the
extension of time or for the assessment or payment of any taxes payable.
Neither the IRS nor any other taxing authority is now asserting or, to the
knowledge of Company, threatening to assert any deficiency or claim for
additional taxes (or interest thereon or penalties in connection therewith),
nor is the Company aware of any basis for any such assertion or claim. The
Company and each of the Company Subsidiaries have complied in all material
respects with applicable IRS backup withholding requirements and have filed
all appropriate information reporting returns for all tax years for which the
statute of limitations has not closed. The Company and each Company
Subsidiary have complied in all material respects with all applicable state
law sales and use tax collection and reporting requirements.
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<PAGE>
(b) Adequate provision for any federal, state or local taxes due or
to become due for the Company or any of the Company Subsidiaries for any period
or periods through and including December 31, 1999, has been made and is
reflected on the December 31, 1999 audited Company consolidated financial
statements and has been or will be made in accordance with generally accepted
accounting principles with respect to periods ending after December 31, 1999.
2.19 Environmental Matters. Except as set forth in Section
---------------------
2.19 of Schedule I, to the Company's knowledge, neither the Company nor any
Company Subsidiary owns or leases any properties affected by toxic waste,
radon gas or other hazardous conditions or constructed in part with the use of
asbestos where such hazardous condition or use of asbestos is not in
compliance in all material respects with all applicable environmental laws.
Neither the Company nor any Company Subsidiary has knowledge of, nor has the
Company or any Company Subsidiary received written notice from any
governmental or regulatory body of, any condition, activity, practice or
incident (i) which is reasonably likely to interfere with or prevent
compliance or continued compliance with hazardous substance laws or any
regulation, order, decree, judgment or injunction, issued, entered,
promulgated or approved thereunder, or (ii) which may give rise to any common
law or legal liability, or otherwise form the basis of any claim, action,
suit, proceeding, hearing or investigation based on or related to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling, or the emission, discharge, release or threatened
release into the environment, of any pollutant, contaminant or chemical, or
industrial, toxic or hazardous substance or waste, the effect of which would
have a material adverse effect on the business, financial condition or results
of operations of the Company and the Company Subsidiaries taken as a whole.
There is no civil, criminal or administrative claim, action, suit, proceeding,
hearing or investigation pending or, to Company's knowledge, threatened against
Company or any Company Subsidiary relating in any way to such hazardous
substance laws or any regulation, order, decree, judgment or injunction
issued, entered, promulgated or approved thereunder.
2.20 Loan Portfolio: Portfolio Management.
------------------------------------
(a) All evidences of indebtedness reflected as assets
in the consolidated statement of financial condition of Company as of December
31, 1999, or acquired since such date, are (except with respect to those
assets which are no longer assets of the Company or any Company Subsidiary)
binding obligations of the respective obligors named therein except as
enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other similar laws affecting the
enforcement of creditors rights generally, and except that the availability of
equitable remedies, including specific performance, is subject to the
discretion of the court before which any proceeding may be brought, and the
payment of no material amount thereof (either individually or in the aggregate
with other evidences of indebtedness) is subject to any defenses which have
been threatened or asserted against the Company or any Company Subsidiary.
All such indebtedness which is secured by an interest in real property is
secured by a valid and perfected mortgage lien having the priority specified
in the loan documents. All loans originated or purchased by Savings were at
the time entered into and
20
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at all times since have been in compliance in all material respects with all
applicable laws (including, without limitation, all consumer protection laws)
and regulations. Savings administers its loan and investment portfolios
(including, but not limited to, adjustments to adjustable mortgage loans) in
all material respects in accordance with all applicable laws and regulations
and the terms of applicable instruments. The records of Savings regarding all
loans outstanding on its books are accurate in all material respects and the
risk classification system has been established in accordance with the
requirements of the OTS.
(b) Section 2.20 of Schedule I sets forth a list,
accurate and complete in all material respects, of the aggregate
amounts of loans, extensions of credit and other assets of Savings and its
subsidiaries that have been adversely designated, criticized or classified by
it as of December 31, 1999, separated by category of classification or
criticism (the "Asset Classification"); and no amounts of loans, extensions of
credit or other assets that have been adversely designated, classified or
criticized as of the date hereof by any representative of any government
entity as "Special Mention," "Substandard," "Doubtful," "Loss" or words of
similar import are excluded from the amounts disclosed in the Asset
Classification, other than amounts of loans, extensions of credit or other
assets that were charged off by it or any of the Company Subsidiaries before
the date hereof.
2.21 Real Estate Loans and Investments. Except as set forth
---------------------------------
in Section 2.21 of Schedule I and for real properties acquired in settlement
of loans, there are no facts, circumstances or
contingencies known to the Company or any Company Subsidiary which exist which
would require a material reduction under generally accepted accounting
principles in the present carrying value of any of the real estate
investments, joint ventures, construction loans, other investments or other
loans of the Company or any Company Subsidiary (either individually or in the
aggregate with other loans and investments).
2.22 Derivatives Contracts. Neither the Company nor any of
---------------------
its Subsidiaries is a party to or has agreed to enter into an
exchange-traded or over-the-counter swap, forward, future, option, cap, floor
or collar financial contract or any other contract not included on its Balance
Sheet which is a derivatives contract (including various combinations thereof)
(each, a "Derivatives Contract") or owns securities that are identified in
Thrift Bulletin No. 65 or otherwise referred to as structured notes (each, a
"Structured Note"), except for those Derivatives Contracts and Structured
Notes set forth in Section 2.22 of Schedule I, including a list, as
applicable, of any of its or any of its Subsidiaries' assets pledged as
security for a Derivatives Contract.
2.23 Insurance. The Company and the Company Subsidiaries
---------
have in effect insurance coverage which, in respect to amounts,
types and risks insured, is reasonably adequate for the business
in which the Company and the Company Subsidiaries are engaged. A schedule of
all insurance policies in effect as to the Company and the Company
Subsidiaries (the "Insurance Policies") is as set forth on Section 2.23(1) of
Schedule I (other than policies pertaining to mortgage loans made in the
ordinary course of business). All Insurance Policies are in full force and
effect, all premiums with respect thereto covering all periods up to and
including the date of
21
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this Agreement have been paid, such premiums covering all periods from the
date hereof up to and including the Effective Date shall have been paid on or
before the Effective Date, to the extent then due and payable (other than
retrospective premiums which may be payable with respect to worker's
compensation insurance policies, adequate reserves for which are reflected in
the Company's financial statements). Neither the Company nor any Company
Subsidiary is in default with respect to any such policy which default would
have a material adverse effect on the business, financial condition or results
of operations of the Company and the Company Subsidiaries taken as a whole.
Except as set forth in Section 2.23(2) of Schedule I, the Insurance Policies
will not in any way be affected by, or terminated or lapsed, at any time prior
to the Effective Time, solely by reason of, the transactions contemplated by
this Agreement. Neither the Company nor any Company Subsidiary has been
refused any insurance with respect to any material properties, assets or
operations, nor has any coverage been limited or terminated by any insurance
carrier to which it has applied for any such insurance or with which it has
carried insurance during the last three years.
2.24 Year 2000. (a) Company and Savings' computer hardware
---------
and software systems used for the storage and processing of data
(as used in this Section 2.24, "Systems") are Millennium Compliant as required
by all FFIEC Year 2000 compliance guidelines; (b) to the Company's knowledge,
none of Company's or any Company Subsidiary's Systems, operations or business
functions will be materially adversely affected by the failure of any third
party with whom Company or Savings has consistent dealings to be Millennium
Compliant; and (c) Company and Savings' have taken all necessary and
appropriate action to address and remedy any known deficiencies in Company's
and Savings' Systems from becoming Millennium Compliant. As used herein
"Millennium Compliant" shall mean the ability of Systems to provide the
following functions, without human intervention, individually and in
combination with other products or systems: (i) consistently handle data
information after January 1, 2000, including but not limited to accepting data
input, providing data output and performing calculations on dates or portions
of dates; (ii) function accurately and without interruption after January 1,
2000 (including leap year computations), without any change in operations
associated with the advent of a new century; (iii) respond to two-digit input
in a way that resolves any ambiguity as to century in a disclosed, defined and
predetermined manner; and (iv) store and provide output of date
information in ways that are unambiguous as to century.
2.25 Community Reinvestment Act. Savings' rating pursuant
--------------------------
to its most recent examination by federal regulatory authorities
pursuant to the provisions of the Community Reinvestment Act was
a "satisfactory" or better. Neither the Company nor Savings has
received any comment letters relating to its Community Reinvestment Act
Statement or is otherwise aware of any adverse reaction to such statement.
2.26 Delays. The Company is not aware of any matter that
------
could cause a delay in receiving the Governmental Approvals
required to consummate the Company Merger and the other
transactions contemplated by this Agreement, including without
limitation, non-compliance with the Truth in Lending Act, capital compliance,
or any provisions of the Community Reinvestment Act.
22
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PATAPSCO, THE BANK AND NEW SUB
Patapsco, the Bank and New Sub represent and warrant to
Company and Savings that, except as disclosed in Schedule II
attached hereto and except that the Bank and New Sub do not make
any representation or warranty regarding Patapsco:
3.1 Organization, Good Standing, Authority, Insurance, Etc.
------------------------------------------------------
Patapsco is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Maryland. Each of the subsidiaries of
Patapsco within the meaning of Section 2(d) of the Bank Holding Company Act of
1956, as amended (the "BHCA") (individually a "Patapsco Subsidiary" and
collectively the "Patapsco Subsidiaries") is duly organized, validly existing,
and in good standing under the laws of the respective jurisdiction under which
it is organized. Patapsco and each Patapsco Subsidiary has all requisite
power and authority and is duly qualified and licensed to own, lease and
operate its properties and conduct its business as it is now being conducted.
Patapsco has delivered to the Company a true, complete and correct copy of the
articles of incorporation, charter, or other organizing document and of the
bylaws, as in effect on the date of this Agreement, of Patapsco and each
Patapsco Subsidiary. Patapsco and each Patapsco Subsidiary is qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which qualification is necessary under applicable law, except to the extent
that any failures to so qualify would not, in the aggregate, have a material
adverse effect on the business, financial condition or results of operations of
Patapsco and the Patapsco Subsidiaries, taken as a whole. The Bank is a member
in good standing of the Federal Home Loan Bank of Atlanta, and all eligible
accounts issued by the Bank are insured by the SAIF to the maximum extent
permitted under applicable law. Patapsco is duly registered as a bank
holding company under the BHCA.
Other than immaterial omissions, the minute books of Patapsco and the
Patapsco Subsidiaries contain complete and accurate records of all meetings
and other corporate actions held or taken by their respective shareholders and
Boards of Directors (including the committees of such Boards).
3.2 Capitalization. The authorized capital stock of
--------------
Patapsco consists of 5,000,000 shares of Patapsco common stock, par value $.01
per share, of which 327,390 shares were issued and outstanding as of the date
of this Agreement, and 1,000,000 shares of preferred stock, par value of $.01
per share, of which no shares were outstanding as of the date of this
Agreement. All outstanding shares of Patapsco common stock are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except for (i) 41,407 shares of Patapsco's common stock under the
Patapsco Bancorp, Inc. 1996 Stock Option and Incentive Plan, (ii) 8,398 shares
of Patapsco's common stock under the Patapsco Bancorp, Inc. Management
Recognition Plan and pursuant to an award of restricted stock to Frank
Duchacek, up to (iii) 114,107 shares of Preferred Stock issuable upon
consummation of the Company Merger as contemplated by this Agreement and (iv)
up to 114,107 shares of Patapsco's common stock issuable upon conversion of
the 114,107 shares of Preferred Stock, as of the date of this Agreement, there
are no options,
23
<PAGE>
convertible securities, warrants, or other rights preemptive or otherwise) to
purchase or acquire any of Patapsco's capital stock from Patapsco and no oral
or written agreement, contract, arrangement, understanding, plan or instrument
of any kind (collectively, "Stock Contract") to which Patapsco or any of
its affiliates is subject with respect to the issuance, voting or sale of
issued or unissued shares of Patapsco's capital stock.
3.3 Ownership of Subsidiaries. All the outstanding shares
-------------------------
of the capital stock of the Patapsco Subsidiaries are validly
issued, fully paid, nonassessable and owned beneficially and of
record by Patapsco or a Patapsco Subsidiary free and clear of any lien, claim,
charge, restriction or encumbrance (collectively, "Encumbrance"). There are
no options, convertible securities, warrants, or other rights (preemptive or
otherwise) to purchase or acquire any capital stock of any Patapsco Subsidiary
and no contracts to which Patapsco or any of its affiliates is subject with
respect to the issuance, voting or sale of issued or unissued shares of the
capital stock of any of the Patapsco Subsidiaries.
3.4 Financial Statements and Reports.
--------------------------------
(a) No registration statement, proxy statement,
schedule or report filed by Patapsco or any Patapsco Subsidiary
with the SEC under the 1933 Act, or the 1934 Act, on the date of
effectiveness in the case of such registration statements, or on
the date of filing in the case of such reports or schedules, or on the date of
mailing in the case of such proxy statements, and except as revised, amended
or modified by a subsequently filed document, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Patapsco and the
Patapsco Subsidiaries have timely filed all documents required to be filed by
them with the SEC, the FRB, the Commissioner, or the FDIC under various
securities and financial institution laws and regulations for the past five
years (or such shorter period as they may have been subject to such filing
requirements), except to the extent that all failures to so file, in the
aggregate, would not have a material adverse effect on the business, financial
condition or results of operations of Patapsco and the Patapsco Subsidiaries,
taken as a whole. All such documents, as finally revised, modified or amended
by any subsequently filed amendment, complied in all material respects with
applicable requirements of law and, as of their respective date or the date as
amended, and, with respect to reports and documents filed with banking
regulatory agencies, were accurate in all material respects. Except to the
extent stated therein, all financial statements (including any notes thereto)
and schedules included in the documents referred to in the preceding sentences
(or to be included in similar documents to be filed after the date hereof) (i)
are or will be (with respect to financial statements in respect of periods
ending after December 31, 1999) in accordance with Patapsco's books and
records and those of any of its Subsidiaries, and (ii) present (and in the
case of financial statements in respect of periods ending after December 31,
1999 will present) fairly the consolidated statement of financial condition
and the consolidated statements of operations, stockholders' equity and cash
flows of Patapsco and the Patapsco Subsidiaries as of the dates and for the
periods indicated in accordance with generally accepted accounting principles
(except for the omission of notes to unaudited statements, year end
24
<PAGE>
adjustments to interim results and changes in generally accepted
accounting principles). The consolidated financial statements of Patapsco as
of June 30, 1999 and for the three years then ended and the consolidated
financial statements for all periods thereafter up to the Closing disclose or
will disclose, as the case may be, all liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due or due to become due and
regardless of when asserted), as of their respective dates, of Patapsco and
the Patapsco Subsidiaries required to be reflected in such financial
statements according to generally accepted accounting principles, other than
liabilities which are not, in the aggregate, material to Patapsco and the
Patapsco Subsidiaries, taken as a whole, and contain or will contain in the
opinion of management adequate reserves for losses on loans and properties
acquired in settlement of loans, taxes and all other material accrued
liabilities and for all reasonably anticipated material losses, if any as of
such date. There exists no set of circumstances that could reasonably be
expected to result in any liability or obligation material to Patapsco or the
Patapsco Subsidiaries, taken as a whole, except as disclosed in such
consolidated financial statements at June 30, 1999, or for transactions
effected or actions occurring or omitted to be taken after June 30, 1999,
(i) in the ordinary course of business, or (ii) as contemplated by
this Agreement.
(b) Patapsco has made available to the Company all periodic reports
filed with the SEC under the 1934 Act for periods since June 30, 1996 through
the date hereof and will through Closing upon written request
promptly deliver copies of 1934 Act reports for future periods.
(c) Except (i) for commitments to fund loans, (ii) as reflected,
noted or adequately reserved against in the financial statements
referred to in this Section 3.4, or (iii) for deposits incurred in the
ordinary course of business consistent with past practice, Patapsco and the
Patapsco Subsidiaries do not have any material liabilities (whether accrued,
absolute, contingent or otherwise).
3.5 Absence of Changes. Since June 30, 1999, there has been
------------------
no material adverse change in the business, properties, financial condition,
results of operations or assets of Patapsco and the Patapsco Subsidiaries,
taken as a whole. Since June 30, 1999 and through the date hereof, there has
been no occurrence, event or development of any nature existing or, to the
knowledge of Patapsco, threatened which may reasonably be expected to have a
material adverse effect upon the business, properties, financial condition,
operations or assets of Patapsco or any Patapsco Subsidiary, taken as a whole.
Since June 30, 1999 to the date hereof, each of Patapsco and the Patapsco
Subsidiaries has owned and operated their respective assets, properties and
businesses in the ordinary course of business and consistent with past
practice, other than in connection with this Agreement or the transactions
contemplated by this Agreement.
3.6 Prospectus/Proxy Statement. At the time the
--------------------------
Registration Statement becomes effective and at the time the
Prospectus/Proxy Statement is mailed to the shareholders of the
Company for the solicitation of proxies for the approval referred to in
Section 1.9 hereof and at all times subsequent to such mailings up to and
including the times of such approval, such
25
<PAGE>
Registration Statement and Prospectus/Proxy Statement (including any
amendments or supplements thereto), with respect to all information set forth
therein relating to Patapsco (including the Patapsco Subsidiaries) and its
shareholders, Patapsco common stock, the Preferred Stock, this Agreement, the
Company Merger and all other transactions contemplated hereby, will:
(a) comply in all material respects with applicable
provisions of the 1933 Act, the 1934 Act and the rules and
regulations under such Acts; and
(b) not contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements contained
therein, in light of the circumstances under which it is made, not misleading.
3.7 No Broker's or Finder's Fees. No agent, broker,
----------------------------
investment banker, person or firm acting on behalf or under
authority of Patapsco or any of the Patapsco Subsidiaries is or
will be entitled to any broker's or finder's fee or any other
commission or similar fee directly or indirectly in connection with the
Company Merger or any other transaction contemplated hereby, except Patapsco
has engaged Trident Securities, Inc., an investment banking firm, to provide
financial advisory services to Patapsco.
3.8 Litigation and Other Proceedings. Except for matters
--------------------------------
which would not have a material adverse effect on the business,
financial condition or results of operations of Patapsco and the
Patapsco Subsidiaries taken as a whole, neither Patapsco nor any
Patapsco Subsidiary is a defendant in, nor is any of its property subject to,
any pending, or, to the knowledge of Patapsco, threatened, claim, action,
suit, investigation, or proceeding, or subject to any judicial order, judgment
or decree.
3.9 Compliance With Law.
-------------------
(a) Patapsco and the Patapsco Subsidiaries are in
compliance in all material respects with all laws and regulations applicable
to their respective business or operations or with respect to which compliance
is a condition of engaging in the business thereof, except to the extent that
noncompliance would not have a material adverse effect on the business,
financial condition or results of operations of Patapsco and the Patapsco
Subsidiaries, taken as a whole, and neither Patapsco nor any Patapsco
Subsidiary has received notice from any federal, state or local government or
governmental agency of any material violation of, and does not know
of any material violations of, any of the above.
(b) Patapsco and each of its Subsidiaries have all
material permits, licenses, certificates of authority, orders and approvals
of, and have made all material filings, applications and registrations with,
all federal, state and local governmental or regulatory bodies that are
required in order to permit them to carry on their respective business as they
are presently conducted, except to the extent that failure to have any such
permit, license, certificate of authority, order or approval, or failure to
make any filing, applications or registration would not
26
<PAGE>
have a material adverse effect on the business, financial condition or results
of operations of Patapsco and the Patapsco Subsidiaries, taken as a whole.
3.10 Corporate Actions. The Boards of Directors of
Patapsco, including two-thirds of the "Continuing Directors" (as
that term is defined in the Articles of Incorporation of Patapsco) at a
meeting of directors at which a "Continuing Director Quorum" (as that term is
defined in the Articles of Incorporation of Patapsco) was present, the Bank
and New Sub have duly authorized their respective officers to execute and
deliver this Agreement and to take all action necessary to consummate the
Company Merger and the other transactions contemplated hereby. All corporate
authorizations by the Board of Directors of Patapsco, the Bank and New Sub
required for the consummation of the Company Merger have been obtained. The
shareholders of Patapsco are not required to approve either the Company Merger
or the other transactions contemplated hereby in accordance with Maryland
corporate law. In its capacity as sole shareholder of New Sub, the Bank will
have approved the Company Merger prior to the Closing.
3.11 Authority. The execution, delivery and, subject to
---------
receipt of the Governmental Approvals (as defined in Section
5.11(c)), performance of this Agreement by Patapsco, the Bank and New Sub and
the Bank Merger by Bank does not violate or conflict with any of the
provisions of, or constitute a breach or default under or give any person the
right to terminate, cancel or accelerate payment or performance under or
result in the creation of any Encumbrance upon any property or asset of
Patapsco, the Bank or New Sub pursuant to (i) the articles of incorporation or
bylaws of Patapsco, the Bank or New Sub or the articles of incorporation or
bylaws of any other Patapsco Subsidiary, (ii) any law, rule, ordinance or
regulation or judgment, decree, order, award or governmental or
non-governmental permit or license to which Patapsco or any of the Patapsco
Subsidiaries is subject, except where the non-compliance or violation of which
would not have a material adverse effect on the business, financial condition
or results of operations of Patapsco and the Patapsco Subsidiaries taken as a
whole, (iii) any material Contract to which Patapsco or any of the Patapsco
Subsidiaries is a party or is subject to or by
which any of their properties or assets is bound, except where the breach or
default would not have a material adverse effect on the business, financial
condition or results of operations of Patapsco and the Patapsco Subsidiaries
taken as a whole, or (iv) any note, bond, mortgage, indenture, license
agreement or other instrument or obligation the effect of which would have a
material adverse effect on the financial condition, business or results of
operations of Patapsco and the Patapsco Subsidiaries, taken as a whole. The
parties acknowledge that the consummation of the Company Merger and the other
transactions contemplated hereby is subject to various regulatory approvals.
Patapsco, New Sub and the Bank have all requisite corporate power and
authority to enter into this Agreement and to perform their obligations
hereunder. Other than the receipt of Governmental Approvals, the adoption by
Patapsco of Articles Supplementary and the filing thereof with and acceptance
thereof by the Department and the acceptance by the Department of the Articles
of Merger, no consents or approvals are required on behalf of Patapsco or any
Patapsco Subsidiary in connection with the consummation of the transactions
contemplated by this Agreement or the Company Merger. This Agreement
constitutes the valid and binding obligation of Patapsco, New Sub and the
Bank, as applicable, and is enforceable in accordance with its terms, except
as
27
<PAGE>
enforceability may be limited by applicable laws relating to bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or creditors'
rights generally and general principles of equity.
3.12 Information Furnished. No statement contained in any
---------------------
schedule, certificate or other document furnished (whether prior
to or subsequent to the date of this Agreement) or to be furnished in writing
by or on behalf of Patapsco, Bank or NewSub to Company pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
any material omission. No information material to the Company Merger and
which is necessary to make the representations and warranties not misleading,
to the knowledge of Patapsco, has been withheld from the Company.
3.13 Agreements and Instruments. As of the date of this
--------------------------
Agreement, there are no agreements, directives, orders or similar arrangements
between or involving Patapsco or any Patapsco Subsidiary and any state or
federal bank regulatory authority.
3.14 Tax Matters. Patapsco and each of the Patapsco
-----------
Subsidiaries have duly and properly filed all federal, state, local and other
tax returns required to be filed by them and have made timely payments of all
taxes due and payable, whether disputed or not; the current status of audits
of such returns by the Internal Revenue Service ("IRS") and other applicable
agencies is as set forth in Section 3.14 of Schedule II; and there is no
agreement by Patapsco or any Patapsco Subsidiary for the extension of time or
for the assessment or payment of any taxes payable. Neither the IRS nor any
other taxing authority is now asserting or, to the knowledge of Patapsco,
threatening to assert any deficiency or claim for additional taxes (or
interest thereon or penalties in connection therewith), nor is Patapsco aware
of any basis for any such assertion or claim. Patapsco and each of the
Patapsco Subsidiaries have complied in all material respects with applicable
IRS backup withholding requirements and have filed all appropriate information
reporting returns for all tax years for which the statute of limitations has
not closed. Patapsco and each Patapsco
Subsidiary have complied in all material respects with all
applicable state law sales and use tax collection and reporting
requirements.
3.15 Year 2000. Patapsco's and the Bank's computer
---------
hardware and software systems used for the storage and processing of data (as
used in this Section 3.15, "Systems") are Millennium Compliant as required by
all FFIEC Year 2000 compliance guidelines; (b) to Patapsco's knowledge, none
of Patapsco's or any Patapsco Subsidiary's Systems, operations or business
functions will be materially adversely affected by the failure of any third
party with whom Patapsco or the Bank has consistent dealings to be Millennium
Compliant; and (c) Patapsco and the Bank have taken all necessary and
appropriate action to address and remedy any known deficiencies in Patapsco's
and the Bank's Systems from becoming Millennium Compliant. As used herein
"Millennium Compliant" shall mean the ability of Patapsco's and the Bank's
Systems to provide the following functions, without human intervention,
individually and in combination with other products or systems: (i)
consistently handle data information after January 1, 2000, including but not
limited to accepting data input, providing data output and performing
calculations
28
<PAGE>
on dates or portions of dates; (ii) function accurately and without
interruption after January 1, 2000 (including leap year computations), without
any change in operations associated with the advent of a new century; (iii)
respond to two-digit input in a way that resolves any ambiguity as to century
in a disclosed, defined and predetermined manner; and (iv) store and provide
output of date information in ways that are unambiguous as to century.
3.16 Community Reinvestment Act. The Bank's rating pursuant
--------------------------
to its most recent examination by federal regulatory authorities
pursuant to the provisions of the Community Reinvestment Act was
a "satisfactory" or better. Neither Patapsco nor the Bank has
received any comment letters relating to its Community Reinvestment Act
Statement or is otherwise aware of any adverse reaction to such statement.
3.17 Funding. The Bank shall have no later than one day
-------
prior to the Effective Time sufficient cash on hand to fund the
aggregate Merger Consideration payable hereunder.
3.18 Delays. Patapsco is not aware of any matter that could
------
cause a delay in receiving the Governmental Approvals required to consummate
the Company Merger and the other transactions
contemplated by this Agreement, including without limitation, non-compliance
with the Truth in Lending Act, capital compliance, or any provisions of the
Community Reinvestment Act.
3.19 Property and Assets. There has been no material
-------------------
physical loss, damage or destruction, whether or not covered by
insurance, affecting the real properties of Patapsco and the
Patapsco Subsidiaries since June 30, 1999, except such loss, damage or
destruction which does not have a material adverse effect on Patapsco and the
Patapsco Subsidiaries, taken as a whole.
3.20 Insurance. Neither Patapsco nor any Patapsco
---------
Subsidiary is in default with respect to any such policy which
default would have a material adverse effect on the business,
financial condition or results of operations of Patapsco and the
Patapsco Subsidiaries taken as a whole. Except as set forth in
Section 3.20 of Schedule II, the Insurance Policies will not in any way be
affected by, or terminated or lapsed solely by reason of, the transactions
contemplated by this Agreement. Neither Patapsco nor any Patapsco Subsidiary
has been refused any insurance with respect to any material properties, assets
or operations, nor has any coverage been limited or terminated by any
insurance carrier to which it has applied for any such insurance or with which
it has carried insurance during the last three years.
3.21 Labor Relations and Employment Arrangements. Neither
-------------------------------------------
Patapsco nor any Patapsco Subsidiary is a party to or bound by any collective
bargaining agreement. Patapsco and each Patapsco
Subsidiary enjoy good working relationships with their employees
and there are no labor disputes pending, or to the knowledge of the President
of Patapsco or the Bank threatened, that might materially and adversely affect
the condition (financial or otherwise), assets, liabilities, business or
operations of Patapsco and the Bank, taken as a whole.
29
<PAGE>
3.22 Tax Matters. Adequate provision for any federal, state
-----------
or local taxes due or to become due for Patapsco or any of the
Patapsco Subsidiaries for any period or periods through and
including June 30, 1999, has been made and is reflected on the June 30, 1999
audited Patapsco consolidated financial statements and has been or will be
made in accordance with generally accepted accounting principles with respect
to periods ending after June 30, 1999.
ARTICLE IV
COVENANTS
4.1 Investigations; Access and Copies. Between the date
---------------------------------
of this Agreement and the Effective Time, each party agrees on
behalf of itself and its subsidiaries to give the other party and its
respective representatives and agents full access (to the extent permitted by
applicable law) to all of the premises, books, records and employees of it and
its subsidiaries at all reasonable times during normal business hours and upon
prior notice, and to furnish and cause its subsidiaries to furnish to the
other party and its respective agents or representatives access to and true
and complete copies of any financial and operating data, all documents with
respect to matters to which reference is made in Article II or Article III, as
the case may be, of this Agreement or on any list, schedule or certificate
delivered or to be delivered in connection herewith, and such other documents,
records, or information with respect to the business and properties of it and
its subsidiaries as the other party or its respective agents or representative
shall from time to time reasonably request; provided, however, that any such
inspection (a) shall be conducted in such manner as not to interfere
unreasonably with the operation of the business of the entity inspected and
(b) shall not affect any of the representations and warranties hereunder.
Each party will also give prompt written notice to the other party of any
event or development (x) which, had it existed or been known on the
date of this Agreement, would have been required to be disclosed
under this Agreement, (y) which would cause any of its
representations and warranties contained herein to be inaccurate
or otherwise materially misleading, or (z) which materially relate to the
satisfaction of the conditions set forth in Article V of this Agreement.
4.2 Conduct of Business of the Company and the Company
--------------------------------------------------
Subsidiaries. Between the date of this Agreement and the
------------
earlier of the Effective Time or the date this Agreement is terminated in
accordance with its terms, the Company and Savings agree:
(a) That the Company and the Company Subsidiaries
shall conduct their business only in the ordinary course, and
maintain their books and records in accordance with past practices and not to
take any action that would materially (i) adversely affect the ability to
obtain the Governmental Approvals or (ii) adversely affect the Company's
ability to perform its obligations under this Agreement;
(b) That the Company shall not, without the prior
written consent of Patapsco: (i) declare, set aside or pay any
dividend or make any other distribution with respect to Company's capital
stock, except for the declaration and payment of regular semi-annual cash
dividends of $0.10 per share in accordance with past practice, provided that
the Company shall not declare or
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pay any dividend following the date on which all Governmental Approvals, other
than the expiration of the 15-day waiting period required under the
regulations of the DOJ, shall have been obtained; (ii) reacquire any of
Company's outstanding shares of capital stock; (iii) issue or sell or buy any
shares of capital stock of the Company or any Company Subsidiary; (iv) effect
any stock split, stock dividend or other reclassification of Company's Common
Stock; or (v) grant any options or issue any warrants exercisable for or
securities convertible or exchangeable into capital stock of Company or any
Company Subsidiary or grant any stock appreciation or other rights with
respect to shares of capital stock of Company or of any Company Subsidiary;
(c) Except as contemplated by this Agreement, as
required by law or as described in Schedule I, that Company and the Company
Subsidiaries shall not, without the prior written consent of Patapsco: (i)
sell or dispose of any significant assets of the Company or of any Company
Subsidiary other than in the ordinary course of business consistent with past
practices; (ii) merge or consolidate the Company or any Company Subsidiary
with or otherwise acquire any other entity, or file any applications or make
any contract with respect to branching by Savings (whether de novo, purchase,
sale or relocation, including the proposed new Harford County branch office
previously under consideration) or acquire or construct, or enter into any
agreement to acquire or construct, any interest in real property (other than
with respect to security interests in properties securing loans and properties
acquired in settlement of loans in the ordinary course) or improvements to
real property except as provided in this Agreement; (iii) change the articles
of incorporation, charter documents or other governing instruments of the
Company or any Company Subsidiary, except as provided in this Agreement; (iv)
grant to any executive officer, director or employee of the Company or any
Company Subsidiary any increase in annual compensation, any award under any
Employee Plan or Benefit Arrangement or any bonus type payment except
increases in compensation, bonus or benefits in the ordinary course of
business to non-officer employees; (v) adopt any new or amend (except for any
amendments required by law) or terminate any existing Employee Plans or
Benefit Arrangements of any type except as contemplated herein and in
compliance with applicable law or make any payment or contribution to any
Employee Plans or Benefit Arrangements except for the Employee Plans or
Benefit Arrangements
set forth in Section 2.13 of Schedule I; (vi) authorize severance pay or other
benefits for any officer, director or employee of Company or any Company
Subsidiary; (vii) incur any material indebtedness or obligation or enter into
or extend or amend any material agreement or lease, which cannot be canceled
upon one month notice or which involves annual payments in excess of $5,000,
except that Savings may obtain FHLB advances for the purposes of maintaining
liquidity or funding loan demand, with such advances not to exceed an
aggregate outstanding amount of $1.0 million at any given time; (viii) engage
in any lending activities other than in the ordinary course of business
consistent with past practices; (ix) form any new subsidiary or cause or
permit a material change in the activities presently conducted by any Company
Subsidiary or
make additional investments in subsidiaries; (x) purchase any
investments or debt securities, except that Company and the Company
Subsidiaries may purchase federal funds or make overnight deposits with the
Federal Home Loan Bank of Atlanta and may purchase securities pursuant to any
contractual obligation in existence as of the date of this Agreement, all of
which contractual obligations are set forth in Section 4.2(c) of Schedule I
hereto; (xi) purchase any equity securities
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<PAGE>
other than Federal Home Loan Bank stock; (xii) make any investment which would
cause Savings not to be a qualified thrift lender under Section 10(m) of the
HOLA, or not to
be a "domestic building and loan association" as defined in Section
7701(a)(19) of the Code; (xiii) make any loan, except that Company or a
Company Subsidiary may, without the prior written consent of Patapsco, in the
ordinary course consistent with past practices, make (A) single-family
residential mortgage loans and construction loans with principal balances of
no more than $252,700, (B) any other loans secured by real estate with
principal balances of no more than $50,000, except that Savings may without
the prior written consent of Patapsco purchase a participation interest a loan
to be secured by a property located at 14002-5 Beaver Dam Road, or (C) any
unsecured loans of no more than $25,000; (xiv) authorize capital expenditures
other than in the ordinary course of business or in excess of $5,000 in the
aggregate; or (xv) adopt or implement any change in its accounting principles,
practices or methods other than as may be required by generally accepted
accounting principles or by a regulatory authority or adopt or implement any
change in its methods of accounting for Federal income tax purposes. The
limitations contained in this Section 4.2(c) shall also be deemed to
constitute limitations as to the
making of any commitment with respect to any of the matters set
forth in this Section 4.2(c). Notwithstanding the foregoing,
Savings may engage in any of the foregoing activities exclusively with the
Bank.
(d) From and after the date of this Agreement, the Company and
Savings, on the one hand, and Patapsco and the Bank, on the other hand, shall
in good faith coordinate policies with respect to their respective investment
securities portfolios.
4.3 No Solicitation. From the date of this Agreement until
---------------
the Effective Time or the termination of this Agreement pursuant
to its terms, whichever occurs earlier, the Company agrees that it will not
authorize, and will not authorize any of its Subsidiaries, or any of its or
their officers, directors, employees, agents or other representatives
("Representatives") to, directly or indirectly, (A) initiate, solicit,
encourage or otherwise facilitate (including by way of furnishing
information), any inquiries or the making of any proposal or offer that
constitutes, or may reasonably be expected to lead to, a Takeover Proposal, or
(B) enter into or maintain or continue discussions or negotiate with any
person in furtherance of such inquiries or to obtain a Takeover Proposal, or
(C) agree to, approve, recommend, or endorse any Takeover Proposal, or
authorize or permit any of its or their Subsidiaries or Representatives to
take any such action; provided, however, that nothing contained in this
Agreement shall prohibit the Company Board of Directors from (i) furnishing
information to, or engaging in discussions or negotiations with, any person in
response to an unsolicited bona fide written Takeover Proposal,
(ii) recommending such an unsolicited bona fide written Takeover
Proposal to the stockholders of the Company or (iii) entering into any
agreement or letter of intent with any person with respect to a Takeover
Proposal, if and only to the extent in each case that (a) the Company Board of
Directors concludes in good faith (after consultation with its financial
advisors) that such Takeover Proposal would constitute a Superior Proposal,
and (b) immediately (but not less than one day) after furnishing such
information to, or entering into discussions or negotiations with, such
person, the Company provides prompt written notice to Patapsco to the effect
that it is furnishing information to, or entering into discussions or
negotiations with, such person (which notice shall identify the nature
32
<PAGE>
and material terms of the proposal). The Company agrees that it will
immediately cease and cause to be terminated any activities, discussions, or
negotiations with any parties regarding any Takeover Proposal existing as of
the date of this Agreement. The Company agrees to keep Patapsco fully and
timely informed of the status of any inquiries, proposals, discussions,
negotiations, furnishing of non-public information, or other activities
relating to a Takeover Proposal. As used in this Agreement with respect to
the Company, (i) "Takeover Proposal" shall mean any proposal, other than as
contemplated by this Agreement, for a merger or other business combination
involving the Company or any Company Subsidiary or for the acquisition of a
twenty-five percent (25%) or greater equity interest in Company or any Company
Subsidiary, or for the purchase, lease or other acquisition of a substantial
portion of the assets of Company or any Company Subsidiary (other than loans
or securities sold in the ordinary course), and (ii) "Superior Proposal" means
a bona fide Takeover Proposal made by a
third party that the Company Board of Directors determines in its good faith
judgment to be more favorable to the Company's
stockholders than the Company Merger (based on the written advice of the
Company's independent financial advisor) and for which financing, to the
extent required, is then committed or which, in the good faith judgment of the
Company Board of Directors (following consultation with the Company's
independent financial advisor), is reasonably capable of being obtained by
such third person.
4.4 Shareholder Approvals. The Company shall call the
---------------------
meeting of its shareholders to be held for the purpose of voting
upon the Company Merger and related matters, as referred to in
Section 1.8 hereof, as soon as practicable, but in no event later than sixty
(60) days after the Registration Statement has been declared effective by the
SEC. In connection with such meeting, the Company's Board of Directors shall
recommend approval of the Company Merger, except as the fiduciary duties of
the Company's Board of Directors may otherwise require. The Company shall use
its best efforts to solicit from its shareholders proxies in favor of approval
and to take all other action necessary or helpful to secure a vote of the
holders of the shares of Company Common Stock in favor of the Company Merger,
except as the fiduciary duties of the Board of Directors may otherwise
require. Notwithstanding the foregoing, the Company's Board of Directors need
take no action pursuant to this Section 4.4 where prior to taking such action,
the Company shall have entered into a written agreement or a binding
letter of intent to engage in a Takeover Proposal that would
constitute a Superior Proposal.
4.5 Filing of Applications for the Governmental Approvals.
-----------------------------------------------------
Patapsco shall use its best efforts to promptly prepare, submit and file as
soon as practicable after the date hereof all applications necessary to
receive the Governmental Approvals in connection with the transactions
contemplated by this Agreement.
4.6 Consents. Company and Savings will use their best
--------
efforts to obtain the consent or approval of each person whose
consent or approval shall be required in order to permit Company
or Savings, as the case may be, to consummate the Company Merger
and the Bank Merger.
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4.7 Publicity. Between the date of this Agreement and the
---------
Effective Time, neither Patapsco, Company or any of their
subsidiaries shall, without the prior approval of the other, issue or make, or
authorize any of its directors, employees, officers or agents to issue or
make, any press release, disclosure or statement to the press or any third
party with respect to the Company Merger or the transactions contemplated
hereto, except as required by law, provided, however, each party shall provide
the other with a copy of any such release prior to issuance, if permitted by
law. The parties shall cooperate when issuing or making any press release,
disclosure or statement with respect to Company Merger or the transactions
contemplated hereby, except as required by law.
4.8 Cooperation Generally. Between the date of this
---------------------
Agreement and the Effective Time, Patapsco, Company and their
subsidiaries shall use their best efforts, and take all actions
necessary or appropriate, to consummate the Company Merger and the other
transactions contemplated by this Agreement at the earliest practicable date.
Except as contemplated by this Agreement, as required by applicable law or as
the fiduciary duties of the Board of Directors of the applicable entity may
otherwise require, Patapsco, the Bank and New Sub, on one hand, and the
Company and Savings, on the other hand, agree not to knowingly take any action
that would (i) adversely effect their respective ability to obtain the
Governmental Approvals or (ii) adversely affect their respective ability to
perform their obligations under this Agreement. Each of the parties will
promptly furnish each other with copies of written communications received by
them or any of their respective subsidiaries from, or delivered by any of the
foregoing to any governmental entity in respect of the transactions
contemplated hereby. If, at any time after the Effective Time, the Surviving
Corporation or Bank shall consider or be advised that any
further deeds, assignments or assurances or any other acts are
necessary or desirable to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation or Bank its right, title
or interest in, to or under any of the rights, properties or assets of Company
or Savings or otherwise carry out the purposes of this Agreement, Company and
Savings and each of their respective officers and directors shall be deemed to
have granted to the Surviving Corporation and Bank an irrevocable power of
attorney to execute and deliver all such deeds, assignments or assurances and
to do all acts necessary or desirable to vest, perfect or confirm title and
possession to such rights, properties or assets in the Surviving Corporation
or Bank and otherwise to carry out the purposes of this Agreement, and the
officers and directors of the Surviving Corporation and Bank are authorized in
the name of Company, Savings or otherwise to take any and all such action.
4.9 Additional Financial Statements and Reports. As soon
-------------------------------------------
as reasonably practicable after they become publicly available,
each party shall furnish to the other its statement of financial
condition and related statements of operations, cash flows and
stockholders' equity for all periods prior to the Closing. Such
financial statements will be prepared in conformity with generally accepted
accounting principles applied on a consistent basis and fairly present the
financial condition, results of operations and cash flows of the party
(subject, in the case of unaudited financial statements, to (a) normal
year-end audit adjustments, (b) any other adjustments described therein and
(c) the absence of notes which, if presented, would not differ materially from
those included in its most recent audited consolidated balance sheet), and all
of such financial statements
34
<PAGE>
will be prepared in conformity with the requirements of Form 10-QSB or Form
10-KSB, as the case may be, under the 1934 Act. Each party shall also furnish
to the other within two days after the meeting at which they are distributed
to that party's directors, such internal monthly financial statements as are
furnished to the directors and executive officers of that party.
4.10 Reserved.
4.11 D&O Indemnification and Insurance. (a) For a
---------------------------------
period of six (6) years following the Effective Time, each of Patapsco and
Bank shall indemnify, defend and hold harmless each present and former
director and officer of the Company and each Company Subsidiary (each, an
"Indemnitee") from and against, and pay or reimburse the Indemnitee for,
costs, judgments, fines, losses, obligations, claims, damages, liabilities or
expenses (including interest, penalties, out-of-pocket expenses and reasonable
attorneys' fees incurred in the investigation or defense of any of the same or
in asserting any of their rights under this Section 4.11(a) (collectively,
"Costs") incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative (each
a "Claim and collectively the "Claims") arising out of, resulting from, or
pertaining to matters existing or occurring at or prior to the Effective Time
(including, but not limited to, the transactions contemplated by this
Agreement), regardless of whether such Claim is asserted before, at or after
the Effective Time, in accordance with and subject to the requirements and
other provisions of the
Articles of Incorporation and Bylaws of Patapsco and Bank in effect on the
date of this Agreement and applicable provisions of law to the same extent as
Patapsco is obligated thereunder to indemnify and advance expenses to its own
directors and officers with respect to liabilities and claims made against
them resulting from their service for Patapsco and Bank. To the extent a
Claim is asserted before the Effective Time, Patapsco and the Bank shall have
no obligations under this Section 4.11(a) unless appropriate notice was given
to the Company's or the Company's Subsidiaries director's and officer's
liability insurer as required by the insurance policy prior to the Effective
Time.
(b) Patapsco shall cause the persons serving as officers
or directors of the Company immediately prior to the Effective Time to be
covered for a period of six (6) years from the Effective Time by the
directors' and officers' liability insurance policy maintained by the Company
(provided that Patapsco may substitute therefor policies of at least the same
coverage and amounts containing terms and conditions which are not materially
less advantageous than such policy) with respect to acts or omissions
occurring prior to the Effective Time which were committed by such officers
and directors in their capacity as such; provided, however, that in no event
shall Patapsco be required to expend more than $10,000 to maintain or procure
insurance coverage for such three-year period pursuant hereto.
(c) Any Indemnitee wishing to claim indemnification under
Section 4.11(a), upon learning of any Claim shall promptly notify Patapsco and
the Bank thereof; provided that the failure to so notify shall not affect the
obligations of Patapsco or the Bank under Section 4.11(a) unless and to the
extent that such failure materially prejudices Patapsco or the Bank. In the
event of any such Claim (whether arising before or after the Effective Time)
(i) Patapsco shall have the
35
<PAGE>
right to assume the defense thereof, with counsel selected by Patapsco and
reasonably acceptable to the Indemnitee, and Patapsco shall not be liable to
such Indemnitee for any legal expenses of other counsel or any other expenses
subsequently incurred by such Indemnitee in connection with the defense
thereof, except that if Patapsco elects not to assume such defense or counsel
for the Indemnitee advises that there are issues which raise conflicts of
interest between Patapsco and the Indemnitee, the Indemnitee may retain
counsel satisfactory to him, and Patapsco shall pay all reasonable fees and
expenses of such counsel for the Indemnitee promptly as statements therefor
are received, provided, however, that Patapsco shall be obligated pursuant to
this paragraph (c) to pay for only one firm of counsel for all Indemnitees in
any jurisdiction unless the use of one counsel for such Indemnitees would
present such counsel with a conflict of interest, (ii) the Indemnitee will
cooperate in the defense of any such matter and (iii) Patapsco shall not have
any obligation hereunder to any Indemnitee when and if a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final and unappealable, that the indemnification of such Indemnitee in
the manner contemplated hereby is prohibited by applicable law. Patapsco
shall not, in the defense of any claim or litigation, except with the consent
of the Indemnitee (which consent shall not be unreasonably withheld,
conditioned or delayed), consent to entry of judgment or enter into any
settlement that provides for injunctive or other nonmonetary relief affecting
the Indemnitee or that does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnitee of a release from all
liability with respect to
such claim or litigation.
(d) This Section 4.11 shall be construed as an agreement
as to which the directors and officers of Company and Savings
referred to herein are intended to be third party beneficiaries and shall be
enforceable by such persons and their heirs and
representatives.
4.12 Update Disclosure. (a) From and after the date hereof
-----------------
until the Effective Time, the Company shall promptly, but not less frequently
than monthly, update Schedule I hereto by notice to Patapsco to reflect any
matters which have occurred from and after the date hereof which, if existing
on the date hereof, would have been required to be described therein and/or
which, in the case of all such updates other than the last such update prior
to the Effective Time, reflect a material change from the information provided
in Schedule I as of the date hereof; provided, however, that no such update
shall affect the conditions to the obligation of Company and Savings to
consummate the transactions contemplated hereby, and any and all changes
reflected in any such update shall be considered in determining whether such
conditions have been satisfied.
(b) From and after the date hereof until the Effective Time, Patapsco
shall promptly, but not less frequently than monthly, update Schedule II
hereto by notice to Company to reflect any matters which have occurred from
and after the date hereof which, if existing on the date hereof, would have
been required to be described therein and/or which, in the case of all such
updates other than the last such update prior to the Effective Time, reflect a
material change from the information provided in Schedule II as of the date
hereof; provided, however, that no such update shall affect the conditions to
the obligation of Patapsco and Bank to consummate the transactions
36
<PAGE>
contemplated hereby, and any and all changes reflected in any such update
shall be considered in determining whether such conditions have been
satisfied.
4.13 Company's Employee Plans and Benefit Arrangements.
-------------------------------------------------
(a) Between the date of this Agreement and the
Effective Time, neither the Company nor any Company Subsidiary will make any
contribution, or undertake any obligation to contribute any amount to any
Employee Plan or Benefit Arrangement other than as set forth in Section 2.13
of Schedule I to this Agreement or as otherwise contemplated by this Agreement
or required under the terms of the plan or arrangement.
(b) On or before 15 days after execution hereof, the
Company will provide Patapsco with true and complete copies of the following
documents where applicable to any Employee Plan or
Benefit Arrangement: (i) each plan document or agreement, and any amendments
thereto, and related trust agreements, insurance
contracts and policies, annuity contracts, and any other funding
arrangement; (ii) the most recent summary plan description and
summary of material modifications; (iii) for the three most recent plan years,
Form 5500 Annual Return/Report and all actuarial and financial reports and
appraisals prepared in connection with such reports; (iv) the most recent
determination letter received from the Internal Revenue Service ("IRS"), plus
any open requests and all other rulings received from the IRS, Department of
Labor or Pension Benefit Guaranty Corporation; and (v) with respect to any
action taken within the current and three preceding plan years, a certified
copy of all Board of Directors resolutions.
(c) Except as otherwise provided in this Section, if
Patapsco so requests, the Company and any Company Subsidiary shall develop a
plan and timetable for terminating each Employee Plan and Benefit Arrangement
as of the date of Closing or the immediately preceding day and, with the
advance written consent of Patapsco, which consent shall not be unreasonably
withheld, shall proceed with the implementation of said termination plan and
timetable. The Company shall be solely responsible for all costs, expenses,
and other obligations whatsoever arising out of or resulting from termination
of any Employee Plan or Benefit Arrangement. Neither the Company nor any
Company Subsidiary nor any trust in their direct or indirect control will
establish any new benefit plan or arrangement for directors, officers, or
employees, or amend or commit to distribute any assets from any Employee Plan
or Benefit Arrangement without Patapsco's prior written approval, except that
the Company or a Company Subsidiary may make such distribution as may be
required under the terms of any existing Employee Plan or Benefit Arrangement
in connection with the retirement or other termination of an employee and
except as contemplated by this Agreement or as described in Schedule I.
(d) With respect to any benefit plan that provides
for vesting of benefits, there shall be no discretionary
acceleration of vesting, provided that vesting shall accelerate as of the
Effective Time in accordance with the terms of any Employee Plan or Benefit
Arrangement that provides for an automatic acceleration of vesting upon a
change in control transaction such as the one contemplated hereby.
37
<PAGE>
(e) As of the Effective Time, Patapsco and the Bank
agree that the employment of and the Employment Agreement between G. Ronald
Jobson and Savings (as disclosed in Section 2.12 of Schedule I to this
Agreement) shall be terminated by Savings. In connection with such
termination, Mr. Jobson shall be entitled to receive payment as contemplated
in Section 12 of such Employment Agreement, subject to the limitations set
forth therein to be paid by Savings, with such payment to be made immediately
prior to the Effective Time.
(f)(i) Company and Savings are authorized to
commence termination of the Company ESOP and to file as soon as
possible an Application for Determination with the IRS regarding
tax qualification upon termination. No additional contribution
shall be made to the Company ESOP by Patapsco, Bank, Company or
Savings except as necessary to make the minimum required payment
under the current exempt loan (the "Loan") between Company and the Company
ESOP or as otherwise required by law, provided, however, that all such
contributions shall only be made if deductible by Company and Savings under
Section 404 of the Code and the allocations of such contributions shall
otherwise be in compliance with Section 415 of the Code. All shares of
Company Common Stock held by the Trustee of the Company ESOP at the Effective
Time shall be exchanged by the Trustee for the Merger Consideration in
accordance with this Agreement, and the cash proceeds paid to the Company ESOP
with respect to the unallocated shares of Company Common Stock owned by the
Company ESOP shall be applied against the Loan. To the extent that such cash
proceeds together with other cash owned by the Company ESOP are insufficient
to retire the Loan, the Trustee for the Company ESOP shall dispose of shares
held in the suspense account of the Company ESOP for the purpose of retiring
the Loan. Any shares and other assets remaining in the suspense account
following repayment of the Loan in full including interest will be available
for allocation and distribution as promptly as possible to participants (as
defined in the Company ESOP) in accordance with the provisions of the Company
ESOP and applicable law. It is the intent of the parties that the Company ESOP
be terminated and distributions made concurrently with the Closing to the extent
possible but not prior to the receipt of a favorable determination of the
ESOP's qualification from the IRS.
(ii) In the event that the allocation of assets remaining in the
suspense account following repayment of the Loan in full is subject to the
limits on annual additions pursuant to Section 415 of the Code, then Patapsco
will make all reasonable efforts, to the extent permissible under applicable
provisions of the Code and related Treasury Regulations, to continue the
Company ESOP trust through the last day of the Company ESOP plan
year following the Company ESOP plan year during which the Effective Time
occurs, solely for the benefit of those individuals who are participants in
the Company ESOP immediately before the Effective Time, and to allocate such
remaining assets to Company ESOP participants in accordance with the terms of
the Company ESOP to the full extent permissible under Section 415 of the Code
between the Effective Time and the last day of the Company ESOP plan year
following the Company ESOP plan year during which the Effective Time occurs.
In the event that all assets held by the Company ESOP trust are allocated
prior to the last day of the Company ESOP plan year during which the Effective
Time occurs, the Company ESOP trust will be immediately terminated and
participants' accounts will be distributed as soon as practicable thereafter.
38
<PAGE>
(iii) The provisions in paragraph 4.13(f)(i) and
4.13(f)(ii) are expressly subject to (x) Savings and the Company
making all necessary amendments to the Company ESOP for an IRS
determination that the ESOP is tax-qualified and which amendments are in
effect at the Effective Time; (y) such amendments include, without limitation,
the amendment of Section 17.3 of the Company ESOP to eliminate the provisions
of such section that could require Company, Savings, Patapsco, Bank or any
affiliate thereof to make any payment to Company ESOP participants in the
event that Code section 415 or a participant's employment status limits
allocations to participant accounts under the Company ESOP and any other
amendments necessary to make all provisions of the Plan consistent with this
Agreement; and (z) all amendments are satisfactory to Patapsco.
(g) Neither the Company nor any Company Subsidiary
will approve or implement the Stock Option Plan or Management
Recognition Plan currently under consideration, or any similar plan providing
for grants of options to acquire Company Common Stock or awards of Company
Stock, whether restricted or otherwise. In lieu thereof, immediately prior to
the transactions contemplated by Section 7.3 hereof, Savings will credit the
sum of $150,000 under Savings' Deferred Compensation Plan, with such sum to be
allocated equally among the participants in such plan. Such sum shall not
earn any investment return.
(h) Within 60 days of the date of this Agreement,
Company and Savings shall develop a written description and
timetable for the termination of Savings' 401(k) plan, which
description and timetable will be provided to and subject to the
approval of Patapsco's counsel, which approval shall not be
unreasonably withheld. Such description and timetable shall
provide that Savings' 401(k) plan shall be terminated no later than the day
prior to the Effective Time. Following the Effective Time, Patapsco shall
file an application with the Internal Revenue Service for an advance
determination as to whether Savings' 401(k) plan meets the qualification
requirements of Section 401 of the Code with respect to such plan's
termination. No distribution shall be made from Savings' 401(k) Plan prior to
the receipt of a favorable determination on such plan's qualification from the
IRS.
(i) Prior to the Effective Time, the Company and
Patapsco shall take all such steps as may be required to cause any
dispositions of Company Common Stock (including derivative
securities with respect to Company Common Stock) or acquisitions
of cash and/or Preferred Stock resulting from the transactions
contemplated by this Agreement by each individual who is subject
to the reporting requirements of Section 16(a) of the Exchange Act with
respect to the Company to be exempt under Rule 16b-3
promulgated under the Exchange Act. The Company agrees to promptly furnish
Patapsco with all requisite information necessary for Provident to take the
actions contemplated by this Section 4.13(i).
4.14 Payments. No later than thirty (30) days following the
--------
date of this Agreement, the Company shall furnish Patapsco for its review (i)
a computation of the amounts expected to be payable under the employment
agreement disclosed in Section 2.12 of Schedule I as a result of the Company
Merger, and (ii) a schedule reasonably satisfactory to Patapsco demonstrating
that no
39
<PAGE>
"disqualified individual" within the meaning of Section 280G of the Code will
be receiving payments in contravention of the
representation set forth in the second sentence to Section 2.12
herein.
4.15 Environmental Reports. The Company shall undertake
---------------------
within 15 days of the date hereof to order, and shall use its best efforts to
receive (from a qualified environmental consultant engaged by the Company or
Savings and reasonably satisfactory to Patapsco) within 40 days (subject to
extension with the consent of Patapsco) after ordering a Phase I Environmental
Risk Report (as contemplated in OTS Thrift Bulletin #16) ("Report") on (i) all
commercial real estate owned by, (ii) all offices and premises used as
facilities as of the date hereof by, and (iii) all properties which serve as
security for any commercial real estate loan having a principal balance as of
the date hereof of $500,000 or more of, the Company or Savings. In the event
that Patapsco believes in good faith that such Reports indicate a reasonable
likelihood there will be material costs associated with bringing any such
property or properties into material compliance with applicable
environmental laws, Patapsco shall, within 15 days of its receipt of such
Reports, provide Company with written notice to that effect. Failure of
Patapsco to provide such written notice with respect to a property within such
15 days period shall constitute waiver of its right to terminate this
Agreement pursuant to Section 5.4(f) herein with respect to such property
only. The Company shall thereafter undertake to order (from a qualified
environmental consultant engaged by the Company or Savings and reasonably
satisfactory to Patapsco) a Phase II Environmental Risk Report (as
contemplated in OTS Thrift Bulletin #16) on any property as directed by
Patapsco. Patapsco and the Bank agree that they shall pay fifty (50) percent
of the expenses incurred with respect to procuring the Phase I Reports and
Patapsco will pay all of the expenses incurred with respect to procuring the
Phase II Reports. Patapsco and the Bank agree to keep confidential the
contents and results of these Phase I and Phase II Environmental Risk Reports.
4.16 Conduct of Business of Patapsco and the Patapsco
------------------------------------------------
Subsidiaries. Between the date of this Agreement and the
------------
earlier of the Effective Time or the date this Agreement is terminated in
accordance with its terms, Patapsco and the Bank agree that Patapsco and the
Patapsco Subsidiaries shall not take any action that would (i) materially
adversely affect the ability to obtain the Governmental Approvals or (ii)
materially adversely affect Patapsco's ability to perform its obligations
under this Agreement.
4.17 Resale Letter Agreements. After execution of this
------------------------
Agreement, Company shall use its best efforts to cause to be
delivered to Patapsco from each person who may be deemed to be an "affiliate"
of Company within the meaning of Rule 145 under the 1933 Act, a written letter
agreement regarding restrictions on resale of the shares of Preferred Stock
received by such persons in the Company Merger to ensure compliance with
applicable resale restrictions imposed under the federal securities laws.
4.18 Employee Benefit Schedules. Within 15 days following
--------------------------
the date of this Agreement, the Company shall prepare and furnish to Patapsco
a schedule that sets forth, as of the date of this
40
<PAGE>
Agreement (i) the actuarial present value, determined and prepared in
accordance with GAAP (based, where applicable, on the same actuarial
assumptions as those previously used for funding purposes, other than turnover
assumptions, and computed on the basis of a terminated plan), of any accrued
benefits or other obligations under a defined benefit pension plan not listed
elsewhere in this schedule, including without limitation, premiums and
contributions for which the Company or any Company Subsidiary is or may be
directly or indirectly liable to present or former employees, officers,
directors, and their beneficiaries, (ii) the net fair market value of the
assets held in any fund, policy, or other arrangement as of April 30, 2000,
and (iii) the amount of any contribution or other obligation paid, accrued,
or payable, or reasonably expected to be payable, between the date of this
Agreement and the Closing, including but not limited to contributions by
Company or Savings to Company's Employee Stock Ownership Plan (the "Company
ESOP") to repay its loan in accordance with the ESOP loan documents, subject
to applicable tax law
limitations.
4.19 Articles Supplementary. Prior to the Closing,
----------------------
Patapsco's Board of Directors shall have approved the Articles
Supplementary in all material respects in the form attached hereto as Exhibit
A.
4.20 Conduct of Business of Patapsco and the Patapsco
------------------------------------------------
Subsidiaries. Between the date of this Agreement and the
------------
earlier of the Effective Time or the date this Agreement is terminated in
accordance with its terms, Patapsco and the Bank agree not to take any action
that would materially (i) adversely affect the ability to obtain the
Governmental Approvals or (ii) adversely affect Patapsco's ability to perform
its obligations under this Agreement;
ARTICLE V
CONDITIONS TO THE COMPANY MERGER; TERMINATION OF AGREEMENT
5.1 General Conditions. The obligations of Patapsco, the
------------------
Bank and New Sub and the Company and Savings to effect the Company Merger and
the Bank Merger shall be subject to the following conditions:
(a) Stockholder Approval. The holders of the
--------------------
outstanding shares of Company Common Stock shall have approved this Agreement
and the Company Merger as specified in Section 1.8 hereof and as otherwise
required by applicable law and the Company's Articles of Incorporation.
(b) No Proceedings. No order, decree or injunction
--------------
shall have been entered and remain in force restraining or
prohibiting the Company Merger, the Liquidation or the Bank Merger in any
legal, administrative, arbitration, investigatory or other proceedings
(collectively, "Proceedings").
41
<PAGE>
(c) Government Approvals. To the extent required by
--------------------
applicable law or regulation, all approvals of or filings with any
governmental authority (collectively, "Governmental Approvals"), including
without limitation those of the OTS, the FDIC, FRB, the Commissioner, the
Federal Trade Commission, DOJ, the SEC, and any state securities or Blue Sky
authorities, as applicable, shall have been obtained or made and any waiting
periods shall have expired in connection with the consummation of the Company
Merger, the Liquidation and the Bank Merger. All other statutory or
regulatory requirements for the valid consummation of the Company Merger, the
Liquidation and the Bank Merger and related transactions shall have been
satisfied.
(d) Registration Statement. The Registration
----------------------
Statement shall have been declared effective and shall not be
subject to a stop order of the SEC and, if the offer and sale of
the Preferred Stock in the Company Merger pursuant to this
Agreement is subject to the Blue Sky laws of any state, shall not be subject
to a stop order of any state securities commissioner.
5.2 Conditions to Obligations of Patapsco, Bank and New
---------------------------------------------------
Sub. The obligations of Patapsco, Bank and New Sub to effect
---
the Company Merger, the Liquidation, the Bank Merger and the
transactions contemplated herein shall be subject to the following additional
conditions to the extent not waived:
(a) Required Consents. In addition to Governmental
-----------------
Approvals, Company and Savings shall have obtained all necessary
third party consents or approvals in connection with the Company
Merger, the Liquidation and the Bank Merger, the absence of which would
materially and adversely affect Company and the Company Subsidiaries, taken as
a whole.
(b) No Material Adverse Change. Between the date of
--------------------------
this Agreement and the date of Closing, there shall not have
occurred any material adverse change in the financial condition,
business, results of operations or assets of Company and the
Company Subsidiaries, taken as a whole. For purposes of this
Section 5.2(b), the term "material adverse change" or "material
adverse effect" or words of similar import, shall not include the impact of:
(i) changes, after the date hereof, in laws of general applicability or
interpretations thereof by courts or governmental authorities; (ii) changes,
after the date hereof, in generally accepted accounting principles or
regulatory principles generally applicable to the banking and thrift
industries; (iii) actions or omissions by a party hereto (or any of its
subsidiaries), after the date hereof, taken or failed to be taken with the
prior informed written consent of the other party, or at the express written
request of the other party, in contemplation of the transaction contemplated
hereby; or (iv) the Company Merger and compliance with the provisions of this
Agreement on the operating performance of the parties. No payments made or
expenses incurred in accordance with Section 4.13 herein shall be deemed to
constitute a material adverse change under this Section 5.2(b).
(c) Representations and Warranties to be True;
------------------------------------------
Fulfillment of Covenants and Conditions. The representations
---------------------------------------
and warranties of the Company and Savings shall be true in all material
respects at the Effective Time
42
<PAGE>
with the same effect as though made at the Effective Time (or on the date when
made in the case of any representation or warranty which specifically relates
to an earlier date); Company and Savings shall have performed all obligations
and complied with each covenant, in all material respects, and all conditions
under this Agreement on their parts to be performed or complied with at or
prior to the Effective Time; and Company shall
have delivered to Patapsco a certificate, dated the Effective Time and signed
by its chief executive officer and chief financial officer, to such effect.
(d) No Litigation. Neither the Company nor any
-------------
Company Subsidiary shall be a party to any pending litigation,
reasonably probable of being determined adversely to the Company
or any Company Subsidiary, which would have a material adverse
effect on the business, financial condition or results of
operations of the Company and the Company Subsidiaries, taken as
a whole.
(e) Governmental Approval. All Governmental
---------------------
Approvals required hereunder to consummate the transactions
contemplated hereby shall have been obtained without the imposition of any
conditions which Patapsco, the Bank and New Sub reasonably and in good faith
determine to be unduly burdensome upon the conduct of the business of
Patapsco, the Bank or New Sub and, in the reasonable judgment of Patapsco,
substantially diminish the benefits expected to be received by Patapsco from
the transactions contemplated hereby.
(f) Environmental Reports. Patapsco shall have
---------------------
received, to its reasonable satisfaction, any Phase II
Environmental Reports as is contemplated in Section 4.15 herein
subject to Patapsco's rights under Section 5.4(g) herein.
(g) Objecting Shares. No greater than 5% of the
----------------
outstanding shares of Company Common Stock entitled to vote at the meeting of
Company's shareholders, excluding shares owned by
Patapsco, as is contemplated in Section 1.9 herein shall have
delivered the written notice of intent to demand payment pursuant to Title 3
Subtitle 2 of the MGCL and shall have voted against the Company Merger at the
Shareholders' Meeting.
(h) Tax Opinion. Patapsco and the Company shall have
-----------
received an opinion of Patapsco's tax counsel or tax accountants
substantially to the effect that (i) Patapsco, New Sub and the
Company will not recognize any gain or loss upon the acquisition
of the Company Common Stock in the Company Merger, (ii) the Company will not
recognize any gain or loss upon its distribution of all its assets to, and the
assumption of all its liabilities by, Patapsco in the Liquidation; (iii)
Patapsco will not recognize any gain or loss upon receipt of all the assets
and assumption of all the liabilities of the Company in the Liquidation; and
(iv) Patapsco, the Bank and Savings will not recognize any gain or loss as a
result of the Bank Merger.
(i) Resignation of Directors and Officers. Each of
-------------------------------------
the persons serving as a director or officer of Company and Savings or any
subsidiary of either shall, at the Closing, submit his/her written
resignation, effective as of the Effective Time.
43
<PAGE>
(j) Legal and Financial Advisory Fees. The legal
---------------------------------
fees and fees to the advisor or advisors referred to in Section 2.7 of
Schedule I payable or paid in connection with the Company Merger and the
transactions contemplated by this Agreement shall not have exceeded $125,000
in the aggregate.
(k) Affiliates Letters. Patapsco shall have received
------------------
the letter agreements from all affiliates of the Company as
contemplated in Section 4.17 herein.
5.3 Conditions to Obligations of Company and Savings. The
------------------------------------------------
obligations of Company and Savings to effect the Company Merger and the
transactions contemplated herein shall be subject to the
following additional conditions to the extent not waived.
(a) Representations and Warranties to be True;
-----------------------------------------
Fulfillment of Covenants and Conditions. The representations
---------------------------------------
and warranties of Patapsco and the Bank shall be true in all material respects
at the Effective Time with the same effect as though made at the Effective
Time (or on the date when made in the case of any representation or warranty
which specifically relates to an earlier date); Patapsco, the Bank and New Sub
shall have performed all obligations and complied with each covenant, in all
material respects, and all conditions under this Agreement on their parts to
be performed or complied with at or prior to the Effective Time; and Patapsco
shall have delivered to Company a certificate, dated the Effective Time and
signed by its chief executive officer and chief financial officer, to such
effect.
(b) Receipt of Merger Consideration. The Exchange
-------------------------------
Agent in its fiduciary capacity shall have certified receipt of the aggregate
Merger Consideration for all shares of Company Common Stock to be acquired
hereunder, and a certificate to that effect shall have been delivered to the
Company.
(c) Required Consents. In addition to Governmental
-----------------
Approvals, Patapsco, the Bank and New Sub shall have obtained all necessary
third party consents or approvals in connection with the Company Merger, the
absence of which would materially and adversely affect Patapsco and the
Patapsco Subsidiaries, taken as a whole.
(d) Patapsco shall have reserved for issuance the
number of shares of Preferred Stock issuable pursuant to the terms of this
Agreement and the number of shares of Patapsco common stock into which such
shares of Preferred Stock may be converted pursuant to the Articles
Supplementary governing such Preferred Stock.
(e) The average of the highest bid and lowest asked
price for the Patapsco common stock during the 30 trading days
ending five business days before the Closing shall exceed $15.00
per share.
(f) No Material Adverse Change. Between the date of
--------------------------
this Agreement and the date of Closing, there shall not have
occurred any material adverse change in the financial
44
<PAGE>
condition, business, results of operations or assets of Patapsco and the
Patapsco Subsidiaries, taken as a whole. For purposes of this Section 5.3(f),
the term "material adverse change" or "material adverse effect" or words of
similar import, shall not include the impact of: (i) changes, after the date
hereof, in laws of general applicability or interpretations thereof by courts
or governmental authorities; (ii) changes, after the date hereof, in generally
accepted accounting principles or regulatory principles generally applicable
to the banking and thrift industries; (iii) actions or omissions by a party
hereto (or any of its subsidiaries), after the date hereof, taken or failed to
be taken with the prior informed written consent of the other party, or at the
express written request of the other party, in contemplation of the
transaction contemplated hereby; or (iv) the Company Merger and compliance
with the provisions of this Agreement on the operating performance of the
parties.
(g) No Litigation. Neither Patapsco nor any Patapsco
-------------
Subsidiary shall be a party to any pending litigation, reasonably probable of
being determined adversely to Patapsco or any Patapsco Subsidiary, which would
have a material adverse effect on the business, financial condition or results
of operations of Patapsco and the Patapsco Subsidiaries, taken as a whole.
5.4 Termination of Agreement and Abandonment of Company
---------------------------------------------------
Merger. This Agreement and the Company Merger and the Bank
------
Merger may be terminated at any time before the Effective Time, whether before
or after approval thereof by shareholders of the Company, as provided below:
(a) Mutual Consent. By mutual consent of the
--------------
parties, evidenced by their written agreement.
(b) Reserved.
(c) Conditions to Patapsco Performance Not Met. By
------------------------------------------
Patapsco upon delivery of written notice of termination to Company if any
event occurs which renders impossible the satisfaction in any material respect
one or more of the conditions to the obligations of Patapsco, the Bank and New
Sub to effect the Company Merger or the Bank Merger set forth in Sections 5.1
and 5.2 and noncompliance is not waived by Patapsco, provided, however, that
such notice shall include a statement of the grounds thereof and the Company
and Savings shall have thirty (30) days thereafter to cure the event or
conditions cited in such notice (to the extent curable) and if the Company or
Savings cures the events or conditions giving the rise to such grounds to the
reasonable satisfaction of Patapsco, Patapsco shall not have any right to
terminate this Agreement based upon such specified events or conditions, and
provided, however, that the right to terminate under this Section 5.4(c) shall
not be available to Patapsco where Patapsco's, Bank's or New Sub's failure to
perform an obligation hereunder has been the cause of, or has resulted in, the
failure of the Closing to occur on or before such date.
(d) Conditions to Company Performance Not Met. By
-----------------------------------------
the Company upon delivery of written notice of termination to
Patapsco if any event occurs which renders impossible
45
<PAGE>
of satisfaction in any material respect one or more of the conditions to the
obligations of Company and Savings to effect the Company Merger set forth in
Sections 5.1 and 5.3 and noncompliance is not waived by Company, provided,
however, that such notice shall include a statement of the grounds thereof and
Patapsco, the Bank, and New Sub shall have thirty (30) days thereafter to cure
the events or conditions cited in such notice (to the extent curable) and if
Patapsco, the Bank, or New Sub cures the events or conditions giving the rise
to such grounds to the reasonable satisfaction of the Company, the Company
shall not have any right to terminate this Agreement based upon such specified
events or conditions, and provided, however, that the right to terminate
under this Section 5.4(d) shall not be available to the Company where the
Company's or Savings' failure to perform an obligation hereunder has been the
cause of, or has resulted in, the failure of the Closing to occur on or before
such date.
(e) Other Agreements. By Company in connection with
----------------
entering into a definitive agreement or letter of intent with any person with
respect to a Takeover Proposal in accordance with Section 4.3 herein, provided
it has complied with all provisions thereof, in which case Patapsco shall be
entitled to the fee specified in Section 6.2(b) hereof.
(f) Patapsco Board. At any time prior to the
Effective Time, by Patapsco, if (i) the Company Board of Directors withdraws
or modifies its recommendation of this Agreement or the Company Merger in a
manner materially adverse to Patapsco or shall have resolved or publicly
announced or disclosed to any third party its intention to do any of the
foregoing or the Company Board of Directors shall have recommended to the
stockholders of the Company any Takeover Proposal or resolved to do so; (ii) a
tender offer or exchange offer for 10 percent or more of the outstanding shares
of Company Common Stock is commenced or a registration statement with respect
thereto shall have been filed and the Company Board of Directors, within 10 days
after such tender offer or exchange offer is so commenced, either fails to
recommend against acceptance of such tender or exchange offer by its
stockholders or takes no position with respect to the acceptance of such
tender or exchange offer by its stockholders; or (iii) the Company enters
into a definitive agreement or letter of intent with respect to a Takeover
Proposal.
(g) Environmental Reports. By Patapsco at any time
---------------------
within 10 days of receipt of the last Phase II Report to be
delivered as contemplated in Section 4.16 herein if the costs to
bring the properties (either singularly or together with other
properties) which are the subject of such Phase II Reports into
material compliance with applicable environmental laws is projected by the
environmental consultant to exceed $50,000.
46
<PAGE>
ARTICLE VI
TERMINATION OF OBLIGATIONS; PAYMENT OF EXPENSES
6.1 Termination; Lack of Survival of Representations and
----------------------------------------------------
Warranties. In the event of the termination and abandonment of
----------
this Agreement pursuant to Section 5.4 of this Agreement, this
Agreement shall become void and have no effect and no party shall have any
further liability to the other party except as otherwise expressly provided
herein and except that (i) the provisions of this Section 6.1, and Sections
2.7 and 3.6 (Brokers and Finders), 4.7 (Publicity), 6.2 (Expenses) and 8.2
(Confidentiality) of this Agreement shall survive any such termination and
abandonment, and (ii) in the event this Agreement is terminated pursuant to
Sections 5.4 (c) or (d) and the nonterminating party has willfully and
materially breached this Agreement, the terminating party shall be entitled to
receive as liquidated damages the sum of $250,000 payable within 30 days of
the effective date of termination. The parties agree that such amount is not
a penalty and is a reasonable estimate of the damages that would be sustained
by the terminating party, as it would be difficult to determine the extent of
damages at the time of termination. Nothing contained herein shall limit or
alter the rights of Patapsco to receive the $500,000 amount (less $250,000 if
such amount is already paid to Patapsco pursuant to this Section 6.1)
contemplated in Section 6.2(b) herein if it is later determined that such
amount is owed to Patapsco.
The representations, warranties and agreements of the parties set forth in
this Agreement shall not survive the Effective Time, and shall be terminated
and extinguished at the Effective Time, and from and after the Effective Time
none of the parties hereto shall have any liability to the other on account of
any breach or failure of any of those representations, warranties and
agreement; provided, however, that the foregoing clause shall not (i) apply to
agreements of the parties which by their terms are intended to be performed
after the Effective Time, and (ii) shall not relieve any person for liability
for fraud, deception or intentional misrepresentation.
6.2 Payment of Expenses.
-------------------
(a) Except as set forth in Section 6.1 and Section
6.2(b) herein, each of the parties hereto shall bear and pay all
costs and expenses incurred by it or on its behalf in connection
with the transactions contemplated hereunder.
(b) In order to induce Patapsco, the Bank and New Sub
to enter into this Agreement and as a means of compensating
Patapsco, the Bank and New Sub for the substantial direct and
indirect monetary and other costs incurred and to be incurred in
connection with this Agreement and the transactions contemplated
hereby, the Company and Savings agree that if this Agreement is
terminated for any reason, and prior to or within 24 months from
the date of termination a Termination Event, as defined in
paragraph (c) of this Section 6.2, shall have occurred, the Company or Savings
will upon demand pay to Patapsco or the Bank in immediately available funds
$500,000 (less $250,000 if such amount has previously been paid pursuant to
Section 6.1 herein).
47
<PAGE>
(c) For purposes of this Agreement, a Termination
Event shall mean the entering into by Company and Savings of a
written definitive agreement or binding letter of intent with a
third party with respect to a Takeover Proposal or any third-party person or
entity shall have acquired 25% or more of the Company's outstanding Common
Stock.
ARTICLE VII
CERTAIN POST-MERGER AGREEMENTS
7.1 Employees. (i) Patapsco and the Bank shall on and
---------
after the Effective Time, subject to the exercise of their business judgment
in their sole discretion, use reasonable efforts to continue the employment of
the employees of Company and Savings as of the Effective Time at comparable
positions and at comparable compensation levels as employed prior to the
Effective Time. Except as set forth in paragraphs (ii), (iii) and (iv) of
this Section 7.1, employees of the Company or Savings who become employees of
Patapsco or the Bank after the Effective Time (the "Continuing Employees")
shall be eligible to participate in all benefit plans sponsored by Patapsco or
the Bank to the same extent as other similarly situated Patapsco or Bank
employees, and for purposes of participation, vesting and accrual of benefits,
service with the Company or Savings shall be treated under any benefit plan
(other than the plans referred to in paragraph (iv) of this Section 7.1)
sponsored by Patapsco or the Bank as service with Patapsco or the Bank.
(ii) Following the Effective Time, Patapsco and Bank
shall maintain Company's and Savings' existing health plan for the benefit of
the Continuing Employees through December 31, 2000. Thereafter, Company's and
Savings' health plan shall be discontinued, and the Continuing Employees shall
participate in the health plan sponsored by Patapsco and Bank to the same
extent as other similarly situated Patapsco and Bank employee, provided however,
that if Company's and Savings' health plan does not permit coverage for the
Continuing Employees following the Effective Time then the Continuing Employees
shall participate in the health plan sponsored by Patapsco and Bank to the same
extent as other similarly situated Patapsco and Bank employees immediately
following the Effective Time.
(iii) Following the Effective Time, with respect to the
Continuing Employees, for the calendar year ending December 31, 2000, Patapsco
and Bank shall continue in effect Company's and Savings policies with respect
to vacation days and sick leave. Beginning on January 1, 2000, the Continuing
Employees shall become subject to Patapsco's and Bank's policies regarding
vacation days and sick leave, with service with the Company or Savings being
treated as service with Patapsco or the Bank, and the Continuing Employees
shall not be entitled to carry over following December 31, 2000 any unused
vacation time or sick leave.
(iv) The Continuing Employees shall be eligible to
participate in Patapsco's Employee Stock Ownership Plan ("Patapsco ESOP") no
later than July 1, 2002, with service with the Company or Savings being
treated as service with Patapsco or the Bank.
48
<PAGE>
7.2 Directors. As of the Effective Time, Gary R. Bozel and
---------
J. Thomas Hoffman shall become Directors of Patapsco and the Bank. In
addition, as of the Effective Time, David G. Rittenhouse shall be named as a
honorary director to the Bank to advise and assist the Bank with respect to
the communities served by Savings.
7.3 Deferred Compensation Plan. As of the Effective Time,
--------------------------
Savings and Patapsco will take the appropriate actions to merge
Savings' Deferred Compensation Plan into Patapsco's Deferred
Compensation Plan with the effect being that Savings' Deferred
Compensation Plan as of the date of such merger will cease to exist and all
"Benefits" as that term is defined in Savings' Deferred Compensation Plan
allocable to the participants of Savings' Deferred Compensation Plan shall
become benefits under Patapsco's Deferred Compensation Plan, subject to the
following terms and conditions:
1. Benefits allocable to G. Ronald Jobson, William R.
Rush and E. Thomas Lawrence, Jr. will not be merged
into Patapsco's Deferred Compensation Plan and
instead, Benefits payable to such individuals will be
paid immediately prior to the Effective Time.
2. Prior to the assumption by Patapsco of the Benefits
allocable to the participants of Savings' Deferred
Compensation Plan, other than the participants
described in (1) above, each such participant will
execute a deferral compensation agreement in a form
reasonably satisfactory to Patapsco and the
participant.
3. Benefits allocated to Savings' Deferred Compensation
Plan as a result of the transactions contemplated by
Section 4.13(g) hereof shall not be merged into
Patapsco's Deferred Compensation Plan and instead,
Benefits payable to plan participants as a result of
such transactions will be paid immediately prior to
the Effective Time.
4. Immediately prior to the Effective Time, Savings'
Deferred Compensation Plan will be amended to provide
that, with respect to appreciation or depreciation of
Benefits credited to the accounts of participants in
Savings' Deferred Compensation Plan, the return on the
Company's Common Stock shall be calculated as if the
Common Stock had a value as of such date of $18.50.
5. Savings will direct the trustee of the grantor trust
associated with Savings' Deferred Compensation Plan to
utilize the trust assets to satisfy all obligations to
participants who are entitled to payments immediately
prior to the Effective Time to the extent of trust
assets.
6. Company and Savings and Patapsco agree to use their
best efforts to take such actions as may be necessary
to effect the foregoing actions and to obtain the
49
<PAGE>
consents of the individuals affected thereby,
including, but not limited to, making any necessary
amendments to the applicable deferred compensation
plans.
7.4 Reports to the SEC. Patapsco shall continue to file
------------------
all reports and data with the SEC necessary to permit each person who may be
deemed to be an "affiliate" of Patapsco within the meaning of Rule 145 under
the 1933 Act to sell the Preferred Stock received by them in connection with
the Company Merger pursuant to Rules 144 or 145(d) under such Act if they
would otherwise be entitled to sell the Preferred Stock under such rules.
7.5 Appraisal of Preferred Stock. Patapsco shall obtain
----------------------------
an appraisal, from a qualified and experienced appraiser, of the
fair market value of the Preferred Stock as of the Effective Time and as of
any such dates it is required pursuant to the regulations of the IRS under
Section 4975 to offer to the participants in the Company ESOP a put option
permitting them to put their shares of Preferred Stock received in connection
with the termination of the Company ESOP as contemplated in Section 4.13(f)
herein to Patapsco in exchange for the fair market value of such shares of
Preferred Stock.
ARTICLE VIII
GENERAL
8.1 Amendments. Subject to applicable law, this Agreement
----------
may be amended, whether before or after any relevant approval of
shareholders, by an agreement in writing executed in the same
manner as this Agreement and authorized or ratified by the Boards of Directors
of the parties hereto, provided that, after the adoption of the Agreement by
the shareholders of the Company, no such amendment without further shareholder
approval may reduce the amount or change the form of the consideration to be
received by the Company shareholders in the Company Merger.
8.2 Confidentiality. All information disclosed hereafter
---------------
by any party to this Agreement to any other party to this
Agreement, including, without limitation, any information obtained pursuant to
Section 4.1 hereof, shall be kept confidential by such other party and shall
not be used by such other party otherwise than as herein contemplated except
to the extent that (i) it was known by such other party when received, (ii) it
is or hereafter becomes lawfully obtainable from other sources, (iii) it is
necessary or appropriate to disclose to the OTS, the FDIC, the FRB, the
Commissioner or any other regulatory authority having jurisdiction over the
parties or their subsidiaries or as may otherwise be required by law, or (iv)
to the extent such duty as to confidentiality is waived by the other party.
In the event of the termination of this Agreement, each party shall use all
reasonable efforts to return upon request to the other parties all documents
(and reproductions thereof) received from such other parties (and, in the case
of reproductions, all such reproductions made by the receiving party) that
include information not within the exceptions contained in the first sentence
of this Section 8.2.
50
<PAGE>
8.3 Governing Law. This Agreement and the legal relations
-------------
between the parties shall be governed by and construed in
accordance with the laws of the State of Maryland without taking
into account a provision regarding choice of law, except to the
extent certain matters may be governed by federal law by reason of preemption.
8.4 Notices. Any notices or other communications required
-------
or permitted hereunder shall be sufficiently given if sent by
registered mail or certified mail, postage prepaid, addressed, if to Patapsco
or Bank, to
Patapsco Bancorp, Inc.
1301 Merritt Boulevard
Dundalk, Maryland 21222-2194
Attention: Joseph J. Bouffard, President
with a copy to:
Stradley Ronon Housley Kantarian & Bronstein, LLP
Suite 700
1220 19th Street, N.W.
Washington, DC 20036
Attention: Gary R. Bronstein, Esquire
and if to Company or Savings, to
Northfield Bancorp, Inc.
8005 Harford Road
Baltimore, Maryland 21234
Attention: G. Ronald Jobson, President
with a copy to:
Ober Kaler Grimes & Shriver
120 E. Baltimore Street
Baltimore, Maryland 21202
Attention: Frank C. Bonaventure, Jr.
or such other address as shall be furnished in writing by any such party, and
any such notice or communication shall be deemed to have been given two
business days after the date of such mailing (except that the notice of change
of address shall not be deemed to have been given until received by the
addressee). Notices may also be sent by telegram, telex, facsimile
transmission or hand delivery and in such event shall be deemed to have been
given as of the date received.
8.5 No Assignment. Except as expressly provided in this
-------------
Agreement, this Agreement may not be assigned by any of the parties hereto, by
operation of law or otherwise, without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
51
<PAGE>
8.6 Headings. The description heading of the several
--------
Articles and Sections of this Agreement are inserted for
convenience only and do not constitute a part of this Agreement.
8.7 Counterparts. This Agreement may be extended in one
------------
or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more
counterparts have been signed by each of the parties hereto and
delivered to each of the other parties hereto.
8.8 Construction and Interpretation. Except as the context
-------------------------------
otherwise requires, (a) all references herein to any state or
federal regulatory agency shall also be deemed to refer to any
predecessor or successor agency, and (b) all references to state
and federal statutes or regulations shall also be deemed to refer to any
successor statute or regulation.
8.9 Entire Agreement. This Agreement, together with the
----------------
schedules, lists, exhibits and certificates required to be
delivered hereunder, and any amendment hereafter executed and
delivered in accordance with Section 8.1, constitutes the entire
agreement of the parties, and supersedes any prior written or oral agreement
or understanding among any of the parties hereto
pertaining to the Company Merger. This Agreement is not intended to confer
upon any other persons any rights or remedies hereunder except as expressly
set forth herein.
8.10 Severability. Whenever possible, each provision of
------------
this Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this
Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of the Agreement.
8.11 No Third Party Beneficiaries. Nothing in this
----------------------------
Agreement shall entitle any person (other than the Company,
Savings, Patapsco, the Bank or New Sub and their respective
successors and assigns permitted hereby) to any claim, cause of
action, remedy or right of any kind, except as otherwise expressly provided
herein, including the Indemnities described in Section 4.11 of this Agreement.
8.12 Enforcement of Agreement. The parties hereto agree
------------------------
that irreparable damage would occur in the event that any of the
provisions of this Agreement was not performed in accordance with its specific
terms or was otherwise breached. It is accordingly agreed that the parties
shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
8.13 Extension; Waiver. At any time prior to the Effective
-----------------
Date, the parties hereto, by action taken or authorized by their
respective Board of Directors, may, to the extent legally allowed, (i) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (ii) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the
52
<PAGE>
agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extensions or waiver shall be valid only if set forth
in a written instrument signed on behalf of such party, but such extension or
waiver or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
53
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be executed on its behalf by its officers thereunder duly
authorized, all as of the date set forth above.
PATAPSCO BANCORP, INC. NORTHFIELD BANCORP, INC.
By:/s/ Thomas P. O'Neill By:/s/ Gary R. Bozel
--------------------------- --------------------------
Name: Thomas P. O'Neill Name: Gary R. Bozel
Title: Chairman of the Board Title: Chairman of the Board
THE PATAPSCO BANK NORTHFIELD FEDERAL SAVINGS
BANK
By:/s/ Thomas P. O'Neill By:/s/ Gary R. Bozel
------------------------- ------------------------
Name: Thomas P. O'Neill Name: Gary R. Bozel
Title: Chairman of the Board Title: Chairman of the Board
PN FINANCIAL, INC.
By: /s/ Joseph J. Bouffard
-------------------------
Name: Joseph J. Bouffard
Title: President
54
<PAGE>
ANNEX B
MARYLAND GENERAL CORPORATION LAW
SUBTITLE 2. RIGHTS OF OBJECTING STOCKHOLDERS
3-201 DEFINITION.---(a) In this subtitle, except as provided in
subsection (b) of this section, "successor" includes a corporation which amends
its charter in a way which alters the contract rights, as expressly set forth in
the charter, of any outstanding stock, unless the right to do so is reserved by
the charter of the corporation.
(b) When used with reference to a share exchange, "successor" means the
corporation the stock of which was acquired in the share exchange.
3-202 RIGHT TO FAIR VALUE OF STOCK.---(a) Except as provided in
subsection (c) of this section, a stockholder of a Maryland corporation has the
right to demand and receive payment of the fair value of the stockholder's stock
from the successor if:
(1) The corporation consolidates or merges with another corporation;
(2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring action
under Section 3-105(e) of this title;
(4) The corporation amends its charter in a way which alters the
contract rights, as expressly set forth in the charter, of any outstanding
stock and substantially adversely affects the stockholder's rights, unless the
right to do so is reserved by the charter of the corporation; or
(5) The transaction is governed by Section 3-602 of this title or
exempted by Section 3-603(b) of this title.
(b)(1) Fair value is determined as of the close of business:
(i) With respect to a merger under Section 3-106 of this title
of a 90 percent or more owned subsidiary with or into its parent corporation,
on the day notice is given or waived under Section 3-106; or
(ii) With respect to any other transaction, on the day the
stockholders voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair
value may not include any appreciation or depreciation
which directly or indirectly results from the transaction objected to or from
its proposal.
(3) In any transaction governed by Section 3-602 of this title or
exempted by Section 3-603(b) of this title, fair value shall be value determined
in accordance with the requirements of Section 3-603(b) of this title.
(c) Unless the transaction is governed by Section 3-602 of this title
or is exempted by Section 3-603(b) of this title, a stockholder may not demand
the fair value of the stockholder's stock and is bound by the terms of the
transaction if:
(1) The stock is listed on a national securities exchange, is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., or is designated
for trading on the NASDAQ small cap market:
(i) With respect to a merger under Section 3-106 of this title of a 90
percent or more owned subsidiary with or into its parent corporation, on the
date notice is given or waived under Section 3-106; or
(i) With respect to any other transaction, on the record date for
determining stockholders entitled to vote on the transaction objected to;
(2) The stock is that of the successor in a merger; unless:
<PAGE>
(i) The merger alters the contract rights of the stock as expressly
set forth in the charter, and the charter does not reserve the right to do so;
or
(ii) The stock is to be changed or converted in whole or in part in the
merger into something other than either stock in the successor or cash, scrip,
or other rights or interests arising out of provisions for the treatment of
fractional shares of stock in the successor;
(3) The stock is not entitled to be voted on the transaction or the
stockholder did not own the shares of stock on the record date for determining
stockholders entitled to vote on the transaction;
(4) The charter provides that the holders of the stock are not entitled
to exercise the rights of an objecting stockholder under this subtitle; or
(5) The stock is that of an open-end investment company registered with
the Securities and Exchange Commission under the Investment Company Act of 1940
and the value placed on the stock in the transaction is its net asset value.
3-203 PROCEDURE BY STOCKHOLDER.---(a) A stockholder of a corporation
who desires to receive payment of the fair value of the stockholder's stock
under this subtitle:
(1) Shall file with the corporation a written objection to the
proposed transaction:
(i) With respect to a merger under Section 3-106 of this title of a 90
percent or more owned subsidiary with or into its parent corporation, within 30
days after notice is given or waived under Section 3-106; or
(ii) With respect to any other transaction, at or before the
stockholder's meeting at which the transaction will be considered or, in the
case of action taken under Section 2-505(b) of this article, within 10 days
after the corporation gives the notice required by Section 2-505(b) of this
article;
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for
record, shall make a written demand on the successor for payment for the
stockholder's stock, stating the number and class of shares for which the
stockholder demands payment.
(b) A stockholder who fails to comply with this section is bound by the
terms of the consolidation, merger, share exchange, transfer of assets, or
charter amendment.
3-204 EFFECT OF DEMAND ON DIVIDEND AND OTHER RIGHTS.---A stockholder
who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to
holders of record of that stock on a record date after the close of business on
the day as at which fair value is to be determined under Section 3-202 of
this subtitle; and
(2) Ceases to have any rights of a stockholder with respect to that
stock, except the right to receive payment of its fair value.
3-205 WITHDRAWAL OF DEMAND.---A demand for payment may be withdrawn
only with the consent of the successor.
3-206 RESTORATION OF DIVIDEND AND OTHER RIGHTS.---(a) The rights of a
stockholder who demands payment are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required
by this subtitle;
<PAGE>
(3) A court determines that the stockholder is not entitled to
relief; or
(4) The transaction objected to is abandoned or
rescinded.
(b) The restoration of a stockholder's rights entitles him to receive
the dividends, distributions, and other rights he would have received if he had
not demanded payment for his stock. However, the restoration does not prejudice
any corporate proceedings taken before the restoration.
3-207 PROCEDURE BY SUCCESSOR.---(a)(1) The successor promptly shall
notify each objecting stockholder in writing of the date the articles are
accepted for record by the Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each offer
shall be accompanied by the following information relating to the corporation
which issued the stock:
(i) A balance sheet as of a date not more than six months before the
date of the offer;
(ii) A profit and loss statement for the 12 months ending on the
date of the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) The successor shall deliver the notice and offer to each objecting
stockholder personally or mail them to him by registered mail at the address he
gives the successor in writing, or, if none, at his address as it appears on the
records of the corporation which issued the stock.
3-208 PETITION FOR APPRAISAL; CONSOLIDATION OF PROCEEDINGS; JOINDER OF
OBJECTORS.---(a) Within 50 days after the Department accepts the articles for
record, the successor or an objecting stockholder who has not received payment
for his stock may petition a court of equity in the county where the principal
office of the successor is located or, if it does not have a principal office in
this State, where the resident agent of the successor is located, for an
appraisal to determine the fair value of the stock.
(b)(1) If more than one appraisal proceeding is instituted, the court
shall direct the consolidation of all the proceedings on terms and conditions it
considers proper.
(2) Two or more objecting stockholders may join or be joined in an
appraisal proceeding.
3-209 CERTIFICATE MAY BE NOTED.---(a) At any time after a petition for
appraisal is filed, the court may require the objecting stockholders parties to
the proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) If any stock represented by a certificate which bears a notation is
subsequently transferred, the new certificate issued for the stock shall bear a
similar notation and the name of the original objecting stockholder. The
transferee of this stock does not acquire rights of any character with respect
to the stock other than the rights of the original objecting stockholder.
3-210 APPRAISAL OF FAIR VALUE.---(a) If the court finds that the
objecting stockholder is entitled to an appraisal of his stock, it shall appoint
three disinterested appraisers to determine the fair value of the stock on terms
and conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
<PAGE>
(b) Within 60 days after their appointment, unless the court sets a
longer time, the appraisers shall determine the fair value of the stock as of
the appropriate date and file a report stating the conclusion of the majority as
to the fair value of the stock.
(c) The report shall state the reasons for the conclusion and shall
include a transcript of all testimony and exhibits offered.
(d)(1) On the same day that the report is filed, the appraisers shall
mail a copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may
object to it and request a hearing.
3-211 CONSIDERATION BY COURT OF APPRAISERS' REPORT.---(a) The court
shall consider the report and, on motion of any party to the proceeding, enter
an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b)(1) If the appraisers' report is confirmed or modified by the order,
judgment shall be entered against the successor and in favor of each objecting
stockholder party to the proceeding for the appraised fair value of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter judgment for the
stockholder; or
(ii) Remit the proceedings to the same or other appraisers on
terms and conditions it considers proper.
(c)(1) Except as provided in paragraph (2) of this subsection,
a judgment for the stockholder shall award the value of the and interest
from the date as to which fair value is to be determined under Section 3-202
of this subtitle, and
(2) The court may not allow interest if it finds that the failure of
the stockholder to accept an offer for the stock made Section 3-207 of this
subtitle was arbitrary and vexatious or not in good In making this finding,
the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and (iii) Any other circumstances it considers relevant.
(d)(1) The costs of the proceedings, including reasonable compensation
and expenses of the appraisers, shall be set by the court and assessed against
the successor. However, the court may direct the costs to be apportioned and
assessed against any objecting stockholder if the court finds that the failure
of the stockholder to accept an offer for the stock made under Section 3-207 of
this subtitle was arbitrary and vexatious or not in good faith. In making this
finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and (iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The reasonable
fees and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under Section
3-207 of this subtitle; or
(ii) The value of the stock determined in the proceeding materially
exceeds the amount offered by the successor.
<PAGE>
(e) The judgment is final and conclusive on all parties and has the
same force and effect as other decrees in equity. The judgment constitutes a
lien on the assets of the successor with priority over any mortgage or
other lien attaching on or after the effective date of the consolidation,
merger, transfer, or charter amendment.
3-212 SURRENDER OF STOCK.---The successor is not required to pay for
the stock of an objecting stockholder or to pay a judgment rendered against it
in a proceeding for an appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to it,
indorsed in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss of destruction of the
certificates and sufficient indemnity bond are furnished.
3-213 RIGHTS OF SUCCESSOR WITH RESPECT TO STOCK.---(a) A successor
which acquires the stock of an objecting stockholder is entitled to any
dividends or distributions payable to holders of record of that stock on a
record date after the close of business on the day as at which fair value is to
be determined under Section 3-202 of this subtitle.
(b) After acquiring the stock of an objecting stockholder, a successor
in a transfer of assets may exercise all the rights of an owner of the stock.
(c) Unless the articles provide otherwise stock in the successor of a
consolidation merger, or share exchange otherwise deliverable in exchange for
the stock of an objecting stockholder has the status of authorized but unissued
stock of the successor. However, a proceeding for reduction of the capital of
the successor is not necessary to retire the stock or to reduce the capital of
the successor represented by the stock.
<PAGE>
ANNEX C
PATAPSCO BANCORP, INC.
[LOGO]
1999 ANNUAL REPORT
<PAGE>
PATAPSCO BANCORP, INC.
================================================================================
Patapsco Bancorp, Inc. (the "Company") is the holding company for The
Patapsco Bank (the "Bank"). The Bank is a Maryland commercial bank operating
through a single office located in Dundalk, Maryland and serving eastern
Baltimore County. The principal business of the Bank consists of attracting
deposits from the general public and investing these deposits in loans secured
by residential and commercial real estate, construction loans, commercial
business loans and consumer loans. The Bank derives its income principally from
interest earned on loans and, to a lesser extent, interest earned on mortgage-
backed securities and investment securities and noninterest income. Principally
operating revenues, deposits and repayments of outstanding loans and investment
securities and mortgage-backed securities provide funds for these activities.
MARKET INFORMATION
================================================================================
The Company's common stock trades under the symbol "PATD" on the OTC
Bulletin Board. There are currently 344,426 shares of the common stock
outstanding and approximately 395 holders of record of the common stock.
Following are the high and low closing sale prices, by fiscal quarter, as
reported on the Bulletin Board during the periods indicated, as well as the
dividends paid during such quarters.
<TABLE>
<CAPTION>
High Low Dividends Per Share
---- --- -------------------
<S> <C> <C> <C>
Fiscal 1999:
First Quarter $ 34.25 $ 28.125 $ .12
Second Quarter 30.00 26.50 .12
Third Quarter 31.50 28.25 .12
Fourth Quarter 30.125 28.75 .12
Fiscal 1998:
First Quarter $ 30.00 $ 26.00 $ -
Second Quarter 32.00 27.00 .10
Third Quarter 32.063 30.00 .10
Fourth Quarter 33.50 32.00 .10
</TABLE>
The stated high and low closing sale prices reflect inter-dealer prices,
without retail mark-up, markdown or commission, and may not represent actual
transactions.
TABLE OF CONTENTS
================================================================================
Patapsco Bancorp, Inc. (i)
Market Information (i)
Letter to Stockholders..................................................... 1
Selected Consolidated Financial and Other Data............................. 3
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 5
Consolidated Financial Statements.......................................... 21
Corporate Information...................................................... 48
(i)
<PAGE>
Dear Stockholder:
The Directors, officers and staff of Patapsco Bancorp, Inc. and The
Patapsco Bank proudly present you with our fourth Annual Report.
During fiscal year 1999 we continued to grow and diversify our assets,
increase our loan loss reserves and control our expenses.
In the past twelve months our shareholders received four quarterly
dividends of $.12 per share. For eight consecutive quarters the Company has paid
a quarterly dividend in addition to the return of capital distribution in June
1997. In September the Company's Board of Directors declared a $.14 per share
dividend payable in October 1999, representing a 17% increase over the previous
quarterly dividend.
As a result of the recent bear market for small cap stocks and,
particularly for small bank stocks, your Board of Directors considered Patapsco
Bancorp shares to be an attractive investment. Therefore, in November 1998 the
Company announced the first of two stock repurchase programs. The initial
program was completed in May 1999. A total of 18,000 shares, or 5% of Company's
outstanding stock, was repurchased at an average price of $28.87. In July 1999
the Board of Directors approved a second stock repurchase program to acquire an
additional 5% of the Company's outstanding shares. These programs will increase
the Company's earnings per share and return on equity. Any shareholders
interested in selling their stock as part of this repurchase program, are
encouraged to contact their brokers or the Company directly.
Our transformation into a commercial bank continues. This was most
dramatically shown by increases in our higher yielding loan business. Consumer
loans increased by 27% and business related loans increased by 43%. At year end
our loans to deposits ratio stood at 113%, a statistic made more remarkable by
the fact that the bank experienced record payoffs in the residential portfolio.
Most importantly we continued our expansion into new areas with the
creation of Prime Business Leasing. This new venture, which is off to a very
successful start, invests in small equipment leases in our continued effort to
expand our presence in the small and medium size business markets.
Despite the expansion in the number and types of loans, asset quality
remained extremely high with non-performing loans at .23% of total loans. In
addition the Company continued to increase the loan loss reserve, this year by
14% to .80% of total loans.
Along with good news, there was some bad news; at the very end of our
fiscal year we concluded it was necessary to terminate our agreement to complete
a merger conversion with Belmar Federal Savings and Loan Association. Despite
our considerable efforts over a period that exceeded one year, it became
apparent that the federal regulators would not approve a transaction involving
the merger of a mutual organization (Belmar) with a stock Company (Patapsco) on
terms that would make the transaction economically viable.
The termination resulted in an $89,000 charge against earnings. Had it not
been for these expenses the Company would have earned $716,000 for the year, an
increase of 5.6% over the $678,000 we earned the previous the previous year.
Return on Assets and Return on Equity adjusted for this expense were .79% and
7.64%, respectively.
Also in July 1999 we lost our Chairman S. Robert Kinghorn to cancer. Bob
was our champion in many ways and was very instrumental in steering the company
towards its present course. Most of all he was our friend and we will miss him
tremendously.
Our new Chairman is Thomas P. O'Neill, the former Vice Chairman and a
member of the Board since 1995. He is also chairman of the Company's Investor
Relations committee and serves on its Asset Liability and Compensation
committees. Tom is a CPA and a Managing Director of American Express Tax and
Business Services, Inc., in Baltimore. We look forward to continued growth and
diversification under his guidance.
The Company also announced the appointment of William R. Waters as a
Director of the Company. He is an owner of Scott Pontiac in Bel Air, Maryland
and a former director of the company's predecessor, Patapsco Federal Savings and
Loan Association. Bill is also an original shareholder and a long term customer
of the Company.
Fiscal year 2000 will present new challenges. The concern about the
possible Y2K computer problem at year end has eased tremendously as we continue
to test and fine tune our contingency plans. Nevertheless it is an event that we
continue to address. The industry as a whole continues to change rapidly with
mega mergers, Internet banking, and sweeping legislation. Competition for
deposit dollars and quality loans continues to intensify. Nevertheless, your
Company is prepared to work within this environment in its quest to become a
leading provider of independent financial services throughout the Baltimore
marketplace.
On behalf of our Directors, Officers and staff we would like to express our
collective appreciation to our stockholders and customers for their confidence
and support during the year. We are confident of our future and look forward to
another successful year.
Joseph J. Bouffard
President and Chief Executive Officer
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
==============================================================================
Selected Consolidated Financial Condition Data
<TABLE>
<CAPTION>
At June 30,
--------------------
1999 1998
-------- -------
(In thousands)
<S> <C> <C>
Total assets................................. $95,328 $92,371
Loans receivable, net........................ 77,777 75,871
Cash, federal funds sold and other interest
bearing deposits............................ 9,352 8,538
Investment securities........................ 214 5,119
Mortgage-backed securities................... 4,879 --
Deposits..................................... 69,671 70,327
Borrowings................................... 14,056 10,200
Stockholders' equity......................... 9,218 9,123
</TABLE>
------------------------------------------------------------------------------
Selected Consolidated Income Data
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1999 1998
------- -----
(In thousands)
<S> <C> <C>
Interest income........................................ $ 7,240 $ 7,038
Interest expense....................................... 3,306 3,444
------- -------
Net interest income before provision
for loan losses....................................... 3,934 3,594
Provision for loan losses.............................. 245 240
------- -------
Net interest income after provision
for loan losses........................................ 3,689 3,354
Noninterest income...................................... 246 274
Noninterest expenses:
Compensation and employee benefits..................... 1,797 1,597
Insurance.............................................. 67 72
Professional fees...................................... 94 134
Equipment expenses..................................... 115 117
Net occupancy costs.................................... 81 90
Advertising............................................ 45 53
Data processing........................................ 122 114
Merger-related expenses................................ 89 -
Net loss on disposal of fixed assets................... 23 -
Other.................................................. 443 372
------- -------
Total noninterest expenses............................ 2,876 2,549
Income before provision (benefit) for income taxes...... 1,059 1,079
Income tax provision (benefit).......................... 399 401
------- -------
Net income.............................................. $ 660 $ 678
======= =======
</TABLE>
3
<PAGE>
Key Operating Ratios
<TABLE>
<CAPTION>
At or for the
Year Ended June 30,
--------------------
1999 1998
----- -----
<S> <C> <C>
Performance Ratios:
Return on average assets (net income divided by
average total assets.................................. 0.73% 0.76%
Return on average stockholders' equity (net income
divided by average stockholders' equity).............. 7.05 7.88
Interest rate spread (combined weighted average
interest rate earned less combined weighted
average interest rate cost)........................... 3.93 3.54
Net interest margin (net interest income
divided by average interest-earning assets)........... 4.46 4.10
Ratio of average interest-earning assets to
average interest-bearing liabilities.................. 114.08 114.12
Ratio of noninterest expense to average total assets... 3.17 2.85
Asset Quality Ratios:
Nonperforming assets to total assets at
end of period......................................... 0.22 0.53
Nonperforming (nonaccrual) loans to loans
receivable, net at end of period...................... 0.23 0.61
Allowance for loan losses to total loans
at end of period...................................... 0.80 0.72
Allowance for loan losses to nonperforming
loans at end of period................................ 347.19 119.81
Net charge-offs to average loans outstanding........... 0.21 0.11
Capital Ratios:
Stockholders' equity to total assets at end of period.. 9.67 9.88
Average stockholders' equity to average assets......... 10.33 9.62
</TABLE>
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
===============================================================================
General
The Company's results of operations depend primarily on its level of net
interest income, which is the difference between interest earned on interest-
earning assets, consisting primarily of loans, investment securities, mortgage-
backed securities and other investments, and the interest paid on interest-
bearing liabilities, consisting primarily of deposits and advances from the
Federal Home Loan Bank of Atlanta. The net interest income earned on interest-
earning assets ("net interest margin") and the ratio of interest-earning assets
to interest-bearing liabilities significantly impact net interest income. The
Company's net interest margin is affected by regulatory, economic and
competitive factors that influence interest rates, loan and deposit flows. The
Company, like other financial institutions, is subject to interest rate risk to
the degree that its interest-earning assets mature or reprice at different
times, or on a different basis, than its interest-bearing liabilities. To a
lesser extent, the Company's results of operations are also affected by the
amount of its noninterest income, including loan fees and service charges, and
levels of noninterest expense, which consists principally of compensation and
employee benefits, insurance premiums, professional fees, equipment expense,
occupancy, costs, advertising, data processing and other operating expenses.
The Company's operating results are significantly affected by general
economic and competitive conditions, in particular, changes in market interest
rates, government policies and actions taken by regulatory authorities. Lending
activities are influenced by the demand for and supply of housing, competition
among lenders, the level of interest rates and the availability of funds.
Deposit flows and costs of funds are influenced by prevailing market rates of
interest, primarily on competing investments, account maturities and the level
of personal income and savings in the Company's market area.
Forward-Looking Statements
When used in this Annual Report, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions that may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
Year 2000 Readiness Disclosure
The following information constitutes "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act.
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common
5
<PAGE>
programming practice in earlier years) are expected to read entries for the year
2000 as the year 1900 and compute payment, interest or delinquency based on the
wrong date or are expected to be unable to compute payment, interest or
delinquency. Rapid and accurate data processing is essential to the operations
of the Company. Data processing is also essential to most other financial
institutions and many other companies.
All of the material data processing of the Company that could be affected
by this problem is provided by a third party service bureau. Management closely
monitors the progress of the service bureau in resolving this potential problem
and reports the status of the service bureau's progress to the Company's Audit
Committee on a quarterly basis. This service bureau has advised the Company that
testing of internal mission-critical systems was substantially complete as of
December 31, 1998 and it is currently developing and testing contingency plans.
However, if the service bureau were unable to resolve this potential problem in
time, the Company would seek to retain a replacement service bureau and would
likely experience significant data processing delays, mistakes or failures.
These delays, mistakes or failures could have a significant adverse impact on
the financial condition and results of operation of the Company. Our
contingency plan will address alternative methods to provide basic services to
our customers. The Company estimates costs related to the year 2000 are less
than $25,000.
6
<PAGE>
Average Balance, Interest and Average Yields and Rates
The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods and at the date indicated. Dividing income or expense by the average
daily balance of assets or liabilities, respectively, derives such yields and
costs for the periods presented. Average balances are derived from daily
balances.
The table also presents information for the periods indicated with respect
to the institution's net interest margin, which is net interest income divided
by the average balance of interest earning assets. This is an important
indicator of commercial bank profitability. The net interest margin is affected
by yields on interest earning assets, the costs of interest bearing liabilities
and the relative amounts of interest earning assets and interest bearing
liabilities. Another indicator of an institution's net interest income is the
interest rate spread or the difference between the average yield on interest
earning assets and the average rate paid on interest bearing liabilities.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1999 1998
---------------------------- --------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)...................................... $78,779 $ 6,690 8.49% $73,476 $ 6,153 8.37%
Investment securities..................................... 3,272 201 6.13 5,911 412 6.97
Mortgage-backed securities................................ 963 64 6.70 1,881 104 5.48
Short-term investments and other interest-earning assets.. 5,286 285 5.39 6,435 370 5.75
------- -------- ------- --------
Total interest-earning assets............................ 88,300 7,240 8.20 87,703 7,038 8.02
Non-interest-earning assets................................ 2,449 1,666
------- -------
Total assets............................................. $90,749 $89,369
======= =======
Interest-bearing liabilities:
Deposits (2).............................................. $67,087 2,696 4.02 $66,952 2,840 4.24
Borrowings................................................ 10,315 610 5.91 9,902 604 6.10
------- -------- ------- --------
Total interest-bearing liabilities....................... 77,402 3,306 4.27 76,854 3,444 4.48
-------- ---- -------- ----
Non-interest-bearing liabilities........................... 3,975 3,914
------- -------
Total liabilities........................................ 81,377 80,768
Retained earnings.......................................... 9,372 8,601
------- -------
Total liabilities and retained earnings.................. $90,749 $89,369
======= =======
Net interest income........................................ $ 3,934 $ 3,594
======== ========
Interest rate spread....................................... 3.93% 3.54%
==== ====
Net interest margin........................................ 4.46% 4.10%
==== ====
Ratio of average interest-earning assets to average
interest-bearing liabilities.............................. 114.08% 114.12%
======== ========
<FN>
______________
(1) Includes nonaccrual loans.
(2) Includes interest-bearing escrow accounts.
</FN>
</TABLE>
7
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by prior year's rate); (ii) changes in rate
(changes in rate multiplied by prior year's volume).
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1999 vs. 1998
------------------------------------
Increase (Decrease) Due to
------------------------------------
Volume Rate Total
---------- -------- ------------
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans receivable...................... $ 469 $ 68 $ 537
Investment securities................. (169) (42) (211)
Mortgage-backed securities............ (70) 31 (39)
Short-term investments and other
interest-earning assets.............. (63) (22) (85)
----- ----- -----
Total interest-earning assets....... 167 35 202
----- ----- -----
Interest expense:
Deposits (1).......................... (17) (128) (145)
Borrowings............................ 20 (13) 7
----- ----- -----
Total interest-bearing liabilities.. 3 (141) (138)
----- ----- -----
Change in net interest income.......... $ 164 $ 176 $ 340
===== ===== =====
<FN>
_______________
(1) Includes interest-bearing escrow accounts.
(2) Combined Rate/volume variances, a third element of the calculation, are
allocated to the volume and rate variances based on their relative size.
</FN>
</TABLE>
Comparison of Financial Condition at June 30, 1999 and 1998
General. Total assets increased by $2.9 million or 3.2% to $95.3 million at
June 30, 1999 from $92.4 million at June 30, 1998. The increase was primarily
due to increases of $1.9 million and $813 thousand in loans receivable and cash
and cash equivalents, respectively.
Loans Receivable. Total loans receivable increased by $1.9 million or 2.6%
to $78.5 million at June 30, 1999 from $76.6 million at June 30, 1998. Increases
in commercial loans and leases of $3.2 million, commercial real estate loans of
$2.8 million and consumer loans of $2.5 million were partially offset by a $6.6
million decrease in the residential mortgage portfolio. Since the conversion of
the Company's primary subsidiary from a mutual savings and loan association to a
stock savings bank and later into a commercial bank, the Company has continued
to diversify its lending away from the traditional single family mortgage
market.
8
<PAGE>
The following table sets forth selected data relating to the composition of
the Company's loan portfolio by type of loan at the dates indicated. At June 30,
1999, the Company had no concentrations of loans exceeding 10% of gross loans
other than as disclosed below.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------
1999 1998
-------------------------- -----------------------
Amount % Amount %
------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential................................... $48,549 61.83% $55,212 72.08%
Commercial.................................... 7,870 10.02 5,106 6.67
Construction (1).............................. 2,351 2.99 2,204 2.88
Consumer loans:
Home improvement.............................. 8,770 11.17 6,726 8.78
Home equity loans............................. 1,698 2.16 1,227 1.60
Loans secured by deposits..................... 285 0.36 385 0.50
Other consumer loans.......................... 668 0.85 649 0.85
Commercial loans:
Commercial loans.............................. 6,849 8.72 4,775 6.23
Commercial leases............................. 1,495 1.90 313 0.41
------- ------ ------- ------
78,535 100.00% 76,597 100.00%
====== ======
Less:
Deferred loan origination fees, net of costs.. 73 172
Unearned Interest............................. 54 -
Allowance for loan losses..................... 631 554
------- -------
Total........................................ $77,777 $75,871
======= =======
<FN>
_______________
(1) Less loans in process.
</FN>
</TABLE>
The following table sets forth certain information at June 30, 1999
regarding the dollar amount of loans maturing or repricing in the Company's
portfolio. Demand loans, loans having no stated schedule of repayments and any
stated maturity, and overdrafts are reported as due in one year or less.
Adjustable-rate and floating-rate loans are included in the period in which
interest rates are next scheduled to adjust rather than the periods in which
they mature, and fixed-rate loans are included in the period in which the final
contractual repayment is due. The table does not include any estimate of
prepayments that significantly shorten the average life of all mortgage loans
and may cause the Company's repayment experience to differ from that shown
below.
<TABLE>
<CAPTION>
Due after
Due during 1 through Due after
the year ending 5 years after 5 years after
June 30, 2000 June 30, 1999 June 30, 1999 Total
--------------- ------------- ------------- -------
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential........ $14,107 $ 5,039 $29,403 $48,549
Commercial......... 7,175 - 695 7,870
Construction....... 2,351 - - 2,351
Consumer loans...... 2,122 4,060 5,239 11,421
Commercial loans.... 4,461 3,309 574 8,344
------- ------- ------- -------
Total............... $30,216 $12,408 $35,911 $78,535
======= ======= ======= =======
</TABLE>
9
<PAGE>
The following table sets forth at June 30, 1999 the dollar amount of all
loans which may reprice or are due one year or more after June 30, 1999 which
have predetermined interest rates and have floating or adjustable interest
rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rates Adjustable Rates Total
------------- ---------------- -------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
Residential...... $29,870 $4,501 $34,371
Commercial....... 378 317 695
Consumer............ 9,369 - 9,369
Commercial.......... 3,884 - 3,884
------- ------ -------
Total............ $43,501 $4,818 $48,319
======= ====== =======
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Company the right to declare a loan immediately due
and payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
Investment Securities and Mortgage-Backed Securities. U.S. government and
agency securities decreased by $4.6 million in the year ended June 30, 1999 as a
result of the FHLB note being called. During the year, the Company purchased a
$5.1 million mortgage-backed security funded with the proceeds from a $5.0
million FHLB advance and scheduled to mature at the same time as the FHLB
advance.
The following table sets forth the carrying value of the Company's
investments at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------
1999 1998
------ ------
(Dollars in thousands)
<S> <C> <C>
Securities available for sale, at fair value:
U.S. government and agency securities........ $ -- $5,014
Equity securities............................ 214 105
Mortgage-backed securities................... 4,879 --
------ ------
Total securities available for sale........ 5,093 5,119
------ ------
Investments required by law, at cost:
FHLB of Atlanta stock......................... 695 570
FRB of Richmond stock......................... 106 106
------ ------
Total investments required by law, at cost.. 801 676
------ ------
Total investments........................... $5,894 $5,795
====== ======
</TABLE>
10
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Company's investment portfolio at June
30, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
------------------ ------------------ ------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Mortgage-backed securities..... $ -- --% $ -- --% $ -- --%
Investments required by law.... -- -- -- -- -- --
Equity securities.............. 214 1.47 -- -- -- --
-------- -------- --------
Total......................... $ 214 1.47 $ -- -- $ -- --
======== ======== ========
<CAPTION>
More than Ten Years Total Investment Portfolio
-------------------- -------------------------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------- ---------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
Mortgage-backed securities..... $ 4,879 6.68% $ 4,879 $4,879 6.68%
Investments required by law.... 801 7.30 801 801 7.30
Equity securities.............. -- -- 214 214 1.47
-------- -------- ------
Total......................... $ 5,680 6.77 $ 5,894 $5,894 6.58
======== ======== ======
</TABLE>
11
<PAGE>
Deposits. Deposits decreased by $656,000 or .9% to $69.7million at June 30,
1999 from $70.3 million at June 30, 1998. A $945,000 decrease in interest
bearing deposits was somewhat offset by a $289,000 increase in noninterest
bearing deposits. Within the interest bearing deposit category, a $466,000
decrease in certificates of deposit and a $572,000 decrease in savings and money
market accounts was somewhat offset by a $94,000 increase in interest checking.
The following tables set forth the average balances based on daily balances
and interest rates for various types of deposits as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1999 1998
---------------- ----------------
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook, statement savings
and Christmas Club........... $20,035 2.84% $20,061 2.88%
NOW checking.................. 3,837 1.63 3,398 1.82
Money market.................. 4,789 3.07 4,696 3.25
Certificates of deposit....... 37,682 5.08 38,797 5.28
Noninterest-bearing checking.. 2,933 -- 2,351 --
------- -------
Total....................... $69,276 $69,303
======= =======
</TABLE>
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1999. At such date, such deposits represented 4.87% of total deposits and had a
weighted average rate of 5.28%.
Certificates
Maturity Period of Deposits
--------------- --------------
(In thousands)
Three months or less............... $ 957
Over three through 12 months....... 2,124
Over 12 months..................... 298
--------------
Total.......................... $ 3,379
==============
Borrowings. The Company's borrowings increased by $3.8 million to $14.1
million at June 30, 1999 from June 30, 1998. During the year, the Company paid
down $2,300,000 in borrowings from the Federal Home Loan Bank of Atlanta and
borrowed $6.0 million to fund loan demand and the purchase of a $5.1 million
mortgage-backed security.
The following table sets forth certain information regarding short-term
borrowings by the Company at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At June 30,
----------------------
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances.................................. $ 13,900 $ 10,200
Other borrowings............................... 156 --
Weighted average rate paid on:
FHLB advances.................................. 5.71% 6.12%
Other borrowings............................... --% --%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
FHLB advances................................. $ 13,900 $ 10,200
Other borrowings.............................. 156 --
<CAPTION>
At June 30,
----------------------
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances.................................. $ -- $ 9,902
Other borrowings............................... -- --
Approximate weighted average rate paid on: (1)
FHLB advances.................................. --% 6.10%
Other borrowings............................... --% --%
<FN>
_________________
(1) Weighted average rate paid is derived from dividing the actual interest
expense by the average daily short-term borrowings outstanding.
</FN>
</TABLE>
Comparison of Operating Results for the Years Ended June 30, 1999 and 1998
General. The Company had net income of $660,000 for the year ended June 30,
1999 as compared to net income of $678,000 for the year ended June 30, 1998. The
$18,000 decrease in net income was significantly influenced by two events in
June 1999. First, the Company recognized $89,000 in expenses incurred as a
result of the terminated merger agreement with Belmar Federal Savings and Loan
Association. Second, the Company took a loss on the disposal of fixed assets of
$23,000, primarily in computer equipment, after the installation of new personal
computers throughout the Company.
Net Interest Income. The Company's net interest income increased by
$340,000 or 9.5% to $3.9 million in the year ended June 30, 1999 from $3.6
million in the year ended June 30, 1998.
The increase in net interest income is attributable to loan growth,
continued diversification to higher yielding loan products such as commercial
real estate, commercial business, commercial leasing and consumer loans and a
decrease in the cost of funds. As shown in the Rate/Volume Analysis above,
changing interest rates, primarily the decreased cost of funds, was responsible
for $176,000 of the increase in net interest income and changes in volume,
primarily the increase in loans, was responsible for $164,000 of the increase in
net interest income.
The Company's net interest margin increased to 4.46% for the year ended
June 30, 1999 from 4.10% for the year ended June 30, 1998. Of this 36 basis
point increase in the net interest margin, approximately 59% is due to higher
yields on earning assets and 41% is a result of a lower cost of funds.
Interest Income. The Company's total interest income increased by $202,000,
or 2.9% to $7.2 million in the year ended June 30, 1999 from $7.0 million in the
year ended June 30, 1998. The increase in the volume of interest earning assets
is responsible for $167,000 of the increase in interest income and increased
yields is responsible for $35,000 of the increase in interest income.
13
<PAGE>
Interest income on loans increased $537,000, or 8.7% during fiscal year
1999. The increase is attributable to the $5.3 million increase in the average
balance of loans receivable to $78.8 million in fiscal 1999 from $73.5 million
in fiscal 1998 and the 12 basis point increase in average yield to 8.49% in
fiscal 1999 from 8.37% in fiscal 1998.
Interest income on investment securities decreased by $211,000 or 51.3% to
$201,000 in fiscal year 1999 as compared to $412,000 in fiscal year 1998. The
decrease was primarily the result of a decrease in the average balance to $3.3
million during fiscal year 1999 from $5.9 million in fiscal year 1998. The
decrease in the average yield on investment securities from 6.97% in fiscal 1998
to 6.13 % also contributed to the decrease in interest income.
Interest income on mortgage-backed securities decreased $39,000 or 37.5% to
$65,000 in fiscal 1999 from $104,000 in the fiscal year ended June 30, 1998. The
average balance in mortgage-backed securities decreased $918,000 from $1.9
million during fiscal year 1998 to $963,000 in fiscal year 1999. This decrease
in average balance was somewhat offset by an increased in yield to 6.70% in the
fiscal year ended June 30, 1999 from 5.48% in fiscal 1998.
Interest income on short-term investments and other interest earning assets
decreased $85,000 or 23.1% to $285,000 in the fiscal year ended June 30, 1999
from $370,000 in the fiscal year ended June 30, 1998. The decrease in interest
income is primarily the result of lower average balances; however, the decreased
yield also contributed to the decline.
The increase in loan interest income and the decrease in interest income on
other, lower-yielding investments reflect management's concerted effort to
invest the Company's resources in higher yielding loans.
Interest Expense. The Company's interest expense decreased by $138,000 or
4.0% to $3.3 million in fiscal year 1999 from $3.4 million during the fiscal
year ended June 30, 1998. As shown in the rate/volume table above, changing
interest rates were responsible for a decrease in interest expense of $141,000
and the increase in average borrowings resulted in an increase in interest
expense of $3,000.
Interest expense on deposits decreased $145,000 or 5.1% to $2.7 million in
fiscal year 1999 from $2.8 million in fiscal 1998. Lower interest rates are
responsible for $128,000 of the decrease and lower average deposits are
responsible for $17,000 of the decrease.
Interest expense on borrowed money increased $7,000 or 1.0 % to $610,000 in
the year ended June 30, 1999 from $604,000 in the year ended June 30, 1999. The
$20,000 increase in interest expense due to higher average balances was somewhat
offset by a decrease in interest expense on borrowed money of $13,000 due to
lower interest rates.
Provision for Loan losses. The allowance for loan losses is a valuation
reserve established by management in an amount it deems adequate to provide for
losses in the loan portfolio. Provisions for loan losses are charged to earnings
in order to maintain the total allowance for loan losses at a level considered
adequate by management to provide for probable loan losses. Management assesses
the adequacy of the allowance for loan losses based on a number of factors
including, among others: lending risks associated with new products and markets,
loss allocations for specific problem credits, the level of the allowance to
nonperforming loans, historical loss experience, economic conditions, portfolio
trends and credit concentrations and management's judgment with respect to
current and expected economic conditions and their impact on the existing loan
portfolio.
The provision for loan losses was $245,000 in fiscal year 1999, an increase
of $5,000 or 2.1% over the fiscal year 1998 provision of $240,000. The Company
has increased the allowance for loan losses as a percentage of total loans
outstanding to 0.80% at June 30, 1999 from 0.72% at June 30, 1998 as a result of
the greater inherent risk in the loan portfolio caused by the shifts to higher
yielding loans as discussed earlier. The Company's allowance for loan losses as
a percentage of nonperforming loans was 347.2% at June 30, 1999 as compared to
119.8% at June 30, 1998.
14
<PAGE>
Noninterest Income. The Company's noninterest income consists of loan fees
and service charges and net gains and losses on sales of investment securities,
mortgage-backed securities and loans. Noninterest income decreased by $28,000 or
10.1% to $246,000 in fiscal year 1999 as compared to $274,000 in fiscal year
1998. The decrease is primarily attributable to the closing of a high-risk
commercial deposit account. The lost fees from this account were somewhat offset
by additional fees from the increased number of interest and noninterest bearing
checking accounts. In the year ended June 30, 1999, there were no gains on sale
of investment securities as compared to a $5,000 gain in fiscal year 1998.
Noninterest Expense. The Company's total noninterest expense increased by
$326,000, or 12.8%, to $2.9 million during fiscal 1999, as compared to $2.6
million in fiscal 1998. The Company experienced a $200,000, or 12.5% increase in
compensation and employee benefits expense during fiscal 1999 primarily a result
of higher staffing levels and normal salary increases. Additionally, as
previously noted, the company recognized $89,000 in expenses incurred as a
result of the terminated merger agreement with Belmar Federal Savings and Loan
Association as well as a $23,000 loss on disposal of obsolete equipment. Without
these two items, the Company's noninterest expense would have increased
$214,000, or 8.4% for the year.
Asset/Liability Management
The Company's net income is largely dependent on the Bank's net interest
income. Net interest income is susceptible to interest rate risk to the degree
that interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest bearing liabilities, falling interest rates could result in a decrease
in net interest income. Net interest income is also affected by changes in the
portion of interest-earning assets that are funded by interest-bearing
liabilities rather than by other sources of funds, such as noninterest bearing
deposits and stockholders' equity.
The Bank's interest rate sensitivity, as measured by the repricing of its
interest sensitive assets and liabilities at June 30, 1999, is presented in the
following table. The table was derived using assumptions which management
believes to be reasonable. The table indicates a moderate amount of interest
rate risk based on the Bank's having approximately equal amounts of rate
sensitive assets and rate sensitive liabilities subject to maturity or repricing
within a one-year period from June 30, 1999.
The Company has established an Asset/Liability Management Committee "ALCO"
that currently is comprised of three non-employee directors, the President and
the Controller. This Committee meets on a monthly basis and reviews the
maturities of the Company's assets and liabilities and establishes policies and
strategies designed to regulate the Company's flow of funds and to coordinate
the sources, uses and pricing of such funds. The first priority in structuring
and pricing the Company's assets and liabilities is to maintain an acceptable
net interest margin while reducing the net effects of changes in interest rates.
Management's principal strategy in managing the Company's interest rate
risk has been to maintain short- and intermediate-term assets in portfolio,
including locally originated adjustable-rate mortgage loans. In addition, the
Company has available for sale investment securities, carried at fair value,
totaling $5.1 million as of June 30, 1999. The Company is holding these
investment securities as available for sale because it may sell these securities
prior to maturity should it need to do so for liquidity or asset and liability
management purposes.
In addition to shortening the average repricing period of its assets, the
Company has sought to lengthen the average maturity of its liabilities by
offering higher rates of interest on its longer-term certificates and utilizing
long-term borrowings from the Federal Home Loan Bank of Atlanta.
15
<PAGE>
The Company's Board of Directors is responsible for reviewing the Company's
asset and liability management policies. The Asset/Liability Management
Committee reports to the Board monthly on interest rate risk and trends, as well
as liquidity and capital ratios and requirements. The Company's management is
responsible for administering the policies of the Board of Directors with
respect to the Company's asset and liability goals and strategies.
16
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999 that are expected to
mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
Three Over Three Over One Over Five Over Ten Over
Months Months Through Through Through Through Twenty
or Less One Year Five Years Ten Years Twenty Years Years Total
-------- --------------- ----------- ---------- ------------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Loans receivable........................ $ 8,726 $17,221 $27,425 $16,691 $7,619 $ 853 $78,535
Mortgage-Backed & Inv. securities....... 1,359 898 2,154 819 559 107 5,894
Short-term investments and other
Interest-earning assets................ 5,580 2,170 0 0 0 0 7,750
------- ------- ------- ------- ------ ------ -------
Total................................. 15,665 20,288 29,580 17,510 8,178 959 92,180
------- ------- ------- ------- ------ ------ -------
Rate sensitive liabilities:
Deposits (1)............................ 9,444 27,938 18,973 13,721 0 0 70,076
Borrowings.............................. 0 0 13,900 0 0 0 13,900
------- ------- ------- ------- ------ ------ -------
Total.................................. 9,444 27,938 32,873 13,721 0 0 83,976
------- ------- ------- ------- ------ ------ -------
Interest sensitivity gap................. $ 6,221 $(7,650) $(3,292) $ 3,789 $8,178 $ 959 $ 8,204
======= ======= ======= ======= ====== ====== =======
Cumulative interest sensitivity gap...... $ 6,221 $(1,429) $(4,721) $ (933) $7,245 $8,204
Ratio of cumulative gap to total assets.. 6.53% (1.50)% (4.95)% (0.98)% 7.60% 8.61%
======= ======= ======= ======= ====== ======
<FN>
-------------------------
(1) Includes $405,000 of interest-bearing escrows.
</FN>
</TABLE>
17
<PAGE>
The interest rate-sensitivity of the Company's assets and liabilities
illustrated in the table above could vary substantially if different assumptions
were used or actual experience differs from the assumptions used. If passbook
and NOW accounts were assumed to mature in one year or less, the Company's one-
year negative gap would have increased.
Certain shortcomings are inherent in the method of analysis presented in
the above table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. In the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. The ability of many borrowers to
service their adjustable-rate debt may decrease in the event of an interest rate
increase.
The Company utilizes two additional measures of risk. These are
quantitative measures of the percentage change in net interest income and equity
capital resulting from a hypothetical change of plus or minus 200 basis points
in market interest rates for maturities from one day to thirty years. As of June
30, 1999, the Bank had the following estimated sensitivity profile for net
interest income and fair value of equity:
<TABLE>
<CAPTION>
+ 200 basis points -200 basis points Policy Limit
------------------- ------------------ -------------------
<S> <C> <C> <C>
% Change in Net Interest Income 5.0% -8.0% plus or minus 10.0%
% Change in Fair Value of Equity -5.0% -3.0% plus or minus 25.0%
</TABLE>
Liquidity and Capital Resources
An important component of the Company's asset/liability structure is the
level of liquidity available to meet the needs of customers and creditors.
Patapsco's Asset/Liability Management Committee has established general
guidelines for the maintenance of prudent levels of liquidity. The Committee
continually monitors the amount and source of available liquidity, the time to
acquire it and its cost.
The Company's most liquid assets are cash on hand, interest-bearing
deposits and Federal funds sold, which are short-term, highly liquid investments
with original maturities of less than three months that are readily convertible
to known amounts of cash. The levels of these assets are dependent on the
Company's operating, financing and investing activities during any given period.
At June 30, 1999, the Company's cash on hand, interest bearing deposits and
Federal funds sold totaled $9.2 million.
The Company anticipates that it will have sufficient funds available to
meet its current loan origination, and unused lines-of-credit commitments of
approximately $1.5 million and $1.8 million, respectively. Certificates of
deposit that are scheduled to mature in less than one year at June 30, 1999
totaled $33.6 million. Historically, a high percentage of maturing deposits have
remained with the Company.
The Company's primary sources of funds are deposits, borrowings and
proceeds from maturing investment securities and mortgage-backed securities and
principal and interest payments on loans. While maturities and scheduled
amortization of mortgage-backed securities and loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, competition and other factors.
18
<PAGE>
At June 30, 1999, the Bank exceeded all regulatory minimum capital
requirements. The table below presents certain information relating to the
Bank's regulatory compliance at June 30, 1999.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)... $9,120 15.35% $4,752 8.0% $5,941 10.0%
Tier 1 Capital (to Risk Weighted Assets).. 8,489 14.29 2,376 4.0 3,564 6.0
Tier 1 Capital (to Average Assets)........ 8,489 9.35 3,630 4.0 4,537 5.0
</TABLE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Accounting Pronouncements with future effective dates
SFAS no. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits" was issued in February 1998. This statement
standardizes the disclosure requirements for pensions and other postretirement
benefits r to the extent practicable. The Statement, which is effective for
fiscal years beginning after July 1, 1998 will not effect the Company's
financial position or its results of operations.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
was issued in June 1998.. The Statement standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize these items as assets or
liabilities in the statement of financial position and measure them at fair
value. This Statement generally provides for matching the timing of gain or loss
recognition on the hedging instrument which the recognition of the changes in
the fair value of the hedged asset or liability that are attributable to the
hedged risk or the earnings effect of the hedged forecasted transaction. The
Statement, which is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, will not affect the Company's financial position
or its results of operations.
Statement of Position ("SOP") 98-5, "Reporting the Costs of Start-Up
Activities." This Statement provides guidance on the financial reporting of
start-up cost and organizational cost. It requires costs of start-up activities
and organization cost to be expensed as incurred. The "SOP" also requires that
initial application to be reported as a cumulative effect of a change in
accounting principals. This "SOP" which is effective for fiscal years beginning
after December 15, 1998 will not affect the Company's financial position or
results of operations.
Appointment of Auditor
On March 11, 1998, the Company, with the approval of its Board of
Directors, dismissed its independent public auditors, KPMG Peat Marwick L.L.P.
("KPMG") and engaged Anderson effective March 11, 1998 to perform such function.
During the fiscal year ended June 30, 1997 and the interim period through March
11, 1998 (the date of dismissal), there were not any disagreements between the
Company and KPMG on any matter of accounting principles or practices,
consolidated financial statement disclosure or audit scope or procedure.
19
<PAGE>
PATAPSCO BANCORP, INC.
[LOGO]
[LETTERHEAD OF ANDERSON ASSOCIATES, LLP]
Independent Auditors' Report
The Stockholders and The Board of Directors
Patapsco Bancorp, Inc.
Dundalk, Maryland
We have audited the consolidated statements of financial condition of
Patapsco Bancorp, Inc. and Subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the two years in the two year period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Patapsco Bancorp, Inc. and Subsidiaries as of June 30, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the two
years in the two year period ended June 30, 1999, in conformity with generally
accepted accounting principles.
/s/ Anderson Associates LLP
August 25, 1999
21
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1999 and 1998
<TABLE>
<CAPTION>
===========================================================================================================
1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash:
On hand and due from banks $ 1,601,598 970,218
Interest bearing deposits 2,170,254 419,583
Federal funds sold 5,580,098 7,148,619
Investment securities at fair value (note 2) 213,761 5,118,910
Mortgage-backed securities at fair value (note 3) 4,879,359 -
Loans receivable, net (note 4) 77,777,163 75,870,779
Investment required by law, at cost (note 9) 800,850 675,650
Property and equipment, net (note 5) 1,052,618 1,095,621
Deferred taxes (note 8) 441,000 336,000
Accrued interest, prepaid expenses and other assets 811,660 735,576
-----------------------------------------------------------------------------------------------------------
$ 95,328,361 92,370,956
===========================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Interest bearing deposits $ 66,792,156 67,736,810
Non-interest bearing deposits 2,879,263 2,590,571
Borrowings (note 7) 13,900,000 10,200,000
Checks written in excess of bank balance 156,276 -
Accrued expenses and other liabilities 2,357,570 2,378,936
Income taxes payable 25,236 341,799
-----------------------------------------------------------------------------------------------------------
Total liabilities 86,110,501 83,248,116
Stockholders' equity (notes 9, 10 and 11):
Common stock $0.01 par value; authorized 4,000,000 shares;
issued and outstanding 344,426 shares at June 30, 1999 and
362,553 shares at June 30, 1998 3,445 3,626
Additional paid-in capital 1,888,962 2,330,681
Contra equity - Employee Stock Option Plan (ESOP) (325,100) (396,341)
Contra equity - Management Recognition Plan (MRP) (257,095) (339,225)
Retained earnings, substantially restricted 8,017,059 7,525,501
Unrealized net holding losses on available-for-sale portfolios,
net of taxes (109,411) (1,402)
-----------------------------------------------------------------------------------------------------------
9,217,860 9,122,840
Commitments (notes 4, 10 and 11)
-----------------------------------------------------------------------------------------------------------
$ 95,328,361 92,370,956
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans receivable $ 6,689,710 6,152,735
Mortgage-backed securities 64,546 103,517
Investment securities 200,549 411,551
Federal funds sold and other investments 284,860 370,327
-----------------------------------------------------------------------------------------------------------
Total interest income 7,239,665 7,038,130
-----------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 2,691,024 2,836,124
Interest on short term borrowing 5,328 47,959
Interest on long term debt 609,183 559,555
-----------------------------------------------------------------------------------------------------------
Total interest expense 3,305,535 3,443,638
-----------------------------------------------------------------------------------------------------------
Net interest income 3,934,130 3,594,492
Provision for losses on loans (note 4) 245,000 240,000
-----------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 3,689,130 3,354,492
-----------------------------------------------------------------------------------------------------------
Noninterest income:
Fees and service charges 229,134 251,791
Net gain on sales of securities - 5,015
Other 17,029 17,162
-----------------------------------------------------------------------------------------------------------
Total noninterest income 246,163 273,968
-----------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee benefits 1,797,183 1,597,100
Insurance 67,285 72,488
Professional fees 93,966 133,956
Equipment expenses 115,026 117,417
Net occupancy costs 81,615 89,890
Advertising 44,671 52,550
Data processing 121,703 113,801
Merger-related expenses 89,000 -
Net loss on disposal of fixed assets 22,606 -
Other 443,008 372,451
-----------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,876,063 2,549,653
-----------------------------------------------------------------------------------------------------------
Income before income taxes 1,059,230 1,078,807
Income tax provision (note 8) 399,000 401,000
-----------------------------------------------------------------------------------------------------------
Net income $ 660,230 677,807
-----------------------------------------------------------------------------------------------------------
Net income per share of common stock (note 1):
Basic $ 2.03 2.05
Diluted 1.87 1.95
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
=================================================================================================================================
Additional
Common Paid-In Contra- Contra-
Stock Capital Equity ESOP Equity MRP
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $ 3,626 2,249,725 (464,064) (423,724)
Comprehensive income
Net income - - - -
Adjustment to unrealized net holding losses on
available-for-sale portfolios, net (note 1) - - - -
Comprehensive income - -
- -
Compensation under stock-based benefit plans - 80,956 67,723 84,499
Cash dividends declared ($0.40 per share) - - - -
----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 3,626 2,330,681 (396,341) (339,225)
Comprehensive income
Net income - - - -
Adjustment to unrealized net holding losses on
available-for-sale portfolios, net (note 1) - - - -
Comprehensive income - - - -
Compensation under stock-based benefit plans - 81,480 71,241 82,130
Cash dividends declared ($.48 per share) - - - -
Purchase of common stock (181) (523,199) - -
---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 3,445 1,888,962 (325,100) (257,095)
=================================================================================================================================
<CAPTION>
Accumulated
Other
Comprehensive Total
Retained Income, Net Stockholders'
Earnings of Taxes Equity
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1997 6,992,716 (24,276) 8,334,003
Comprehensive income
Net income 677,807 - -
Adjustment to unrealized net holding losses on - 22,874 -
available-for-sale portfolios, net (note 1)
Comprehensive income - - 700,681
Compensation under stock-based benefit plans - - 233,178
Cash dividends declared ($0.40 per share) (145,022) - (145,022)
----------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 7,525,501 (1,402) 9,122,840
Comprehensive income
Net income 660,230 - -
Adjustment to unrealized net holding losses on
available-for-sale portfolios, net (note 1) - (108,009) -
Comprehensive income - - 552,221
Compensation under stock-based benefit plans - - 234,851
Cash dividends declared ($.48 per share) (168,672) - (168,672)
Purchase of common stock - - (523,380)
----------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 8,017,059 (109,411) 9,217,860
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
===========================================================================================================
1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 660,230 677,807
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 119,384 118,169
Provision for losses on loans 245,000 240,000
Non-cash compensation under stock-based benefit plans 234,851 233,178
Amortization of premiums and discounts, net 10,406 6,362
Deferred loan origination fees, net of costs 16,266 148,969
Gain on sales of investment securities and
mortgage-backed securities - (5,015)
Loss on disposal of fixed assets 22,606 -
Increase (decrease) in income taxes payable (316,563) 117,799
Change in deferred taxes (37,000) (114,000)
Increase in accrued interest on investments,
prepaid expenses and other assets (76,084) (79,173)
Increase (decrease) in accrued expenses and other liabilities (21,367) 103,463
-----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 857,729 1,447,559
-----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investment securities (133,406) (5,134,610)
Maturities of investment securities 5,000,000 2,000,000
Purchase of mortgage-backed security (5,063,556) -
Principal repayments on mortgage-backed securities 36,377 2,651,087
Sales of mortgage-backed securities - 5,068,433
Loan principal disbursements, net of repayments (1,830,344) (7,542,267)
Purchase of loans (337,345) (2,481,355)
Purchase of investment required by law (125,200) (53,600)
Purchases of property and equipment (98,987) (96,336)
-----------------------------------------------------------------------------------------------------------
Net cash used in investing activities $(2,552,461) (5,588,648)
-----------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
25
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
===========================================================================================================
1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ (655,962) 175,088
Purchase of common stock (523,380) -
Additional borrowings 6,000,000 10,200,000
Repayments of borrowings (2,300,000) (2,700,000)
Increase in checks written in excess of bank balance 156,276 -
Dividends paid (168,672) (108,766)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,508,262 7,566,322
-----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 813,530 3,425,233
Cash and cash equivalents at beginning of year 8,538,420 5,113,187
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,351,950 8,538,420
===========================================================================================================
Supplemental information:
Interest paid on savings deposits and borrowed funds $ 3,273,716 3,457,723
Income taxes paid 672,200 395,000
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(1) Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
Patapsco Bancorp, Inc. (the Company) is the holding company of The Patapsco
Bank (Patapsco). Patapsco owns 100% of Prime Business Leasing, Inc. (Prime
Leasing). The primary business of Patapsco is to attract deposits from
individual and corporate customers and to originate residential and
commercial mortgage loans, commercial loans and consumer loans. Patapsco is
subject to competition from other financial and mortgage institutions in
attracting and retaining deposits and in making loans. Patapsco is subject
to the regulations of certain agencies of the federal government and
undergoes periodic examination by those agencies. The primary business of
Prime Leasing is the origination and servicing of commercial leases. The
company has not yet commenced operations.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Patapsco and Prime Leasing. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the statements of financial
condition and income and expenses for the periods then ended. Actual
results could differ significantly from those estimates. Material estimates
that are particularly susceptible to significant change in the near-term
relate to the determination of the allowance for loan losses. In connection
with this determination, management obtains independent appraisals for
significant properties and prepares fair value analyses as appropriate.
Management believes that the allowance for loan losses is adequate. While
management uses and considers available information in making the required
estimates, additional provisions for losses may be necessary based on
changes in economic conditions, particularly in Baltimore and the State of
Maryland. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review Patapsco's allowance for
loan losses. Such agencies may require Patapsco to recognize additions to
the allowance based on their judgments about information available to them
at the time of their examination.
Cash and Cash Equivalents
Cash equivalents include short-term investments, which consists of Federal
funds sold. Cash equivalents and other liquidity and short-term investments
are carried at cost, which approximates market value.
(Continued)
27
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(1) Continued
Investment and Mortgage-Backed Securities
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and recorded at
amortized cost. Debt and equity securities not classified as held-to-
maturity and equity securities with readily determinable fair values are
classified as trading securities if bought and held principally for the
purpose of selling them in the near term. Trading securities are reported
at fair value, with unrealized gains and losses included in earnings.
Investments not classified as held-to-maturity or trading are considered
available-for-sale and are reported at fair value, with unrealized holding
gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of tax effects.
If a decline in value of an individual security classified as held-to-
maturity or available-for-sale is judged to be other than temporary, the
cost basis of that security is reduced to its fair value and the amount of
the write-down is included in earnings. Fair value is determined based on
bid prices published in financial newspapers or bid quotations received
from securities dealers. For purposes of computing realized gains or losses
on the sales of investments, cost is determined using the specific
identification method. Premiums and discounts on investment and mortgage-
backed securities are amortized over the term of the security using methods
that approximate the interest method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
computed by use of straight-line and accelerated methods over the estimated
useful lives of the related assets. Additions and betterments are
capitalized and costs of repairs and maintenance are expensed when
incurred. The related costs and accumulated depreciation are eliminated
from the accounts when an asset is sold or retired and the resultant gain
or loss is credited or charged to income.
Loan Fees
Loan origination fees are deferred and amortized to income over the
contractual lives of the related loans using the interest method. Certain
incremental direct loan origination costs are deferred and recognized over
the contractual lives of the related loans using the interest method as a
reduction of the loan yield. Deferred fees and costs are combined where
applicable and the net amount is amortized.
(Continued)
28
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(1) Continued
Provision for Losses on Loans
Provisions for losses on loans receivable are charged to income, based on
management's judgment with respect to the risks inherent in the portfolio.
Such judgment considers a number of factors including historical loss
experience, the present and prospective financial condition of borrowers,
the estimated value of underlying collateral, geographic concentrations,
current and prospective economic conditions, delinquency experience and
status of non performing assets. Additionally, accrual of interest on
potential problem loans is excluded from income when, in the opinion of
management, the full collection of principal or interest is in doubt, or
payment of principal or interest has become 90 days past due, unless the
obligation is well secured and in the process of collection. Interest
collected on non-accrual loans is generally recorded in income in the
period received.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 114, Accounting for Creditors for Impairment of a Loan, as
amended by Statement 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures (collectively referred to as
"Statement 114"), Patapsco determines and recognizes impairment of certain
loans. A loan is determined to be impaired when, based on current
information and events, it is probable that Patapsco will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. A loan is not considered impaired during a period of delay in
payment if Patapsco expects to collect all amounts due, including past-due
interest. Patapsco generally considers a period of delay in payment to
include delinquency up to and including 90 days. Statement 114 requires
that impaired loans be measured at the present value of its expected future
cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price or the fair value of the collateral if the
loan is collateral dependent.
Statement 114 is generally applicable for all loans except large groups or
smaller-balance homogeneous loans that are evaluated collectively for
impairment, including residential first and second mortgage loans and
consumer installment loans. Impaired loans are therefore generally
comprised of commercial mortgage, real estate development, and certain
restructured residential loans. In addition, impaired loans are generally
loans which management has placed in non accrual status since loans are
placed in non accrual status on the earlier of the date that management
determines that the collection of principal and/or interest is in doubt or
the date that principal or interest is 90 days or more past-due.
Patapsco recognized interest income for impaired loans consistent with its
method for non-accrual loans. Specifically, interest payments received are
recognized as interest income or, if the ultimate collectibility of
principal is in doubt, are applied to principal.
(Continued)
29
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(1) Continued
Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is initially recorded at the lower
of cost or estimated fair value and subsequently at the lower of book value
or fair value less estimated costs to sell. Costs relating to holding such
real estate are charged against income in the current period, while costs
relating to improving such real estate are capitalized until a salable
condition is reached.
Sales of Mortgage Loans
Loans originated for sale are carried at the lower of aggregate cost or
market value. Market value is determined based on outstanding investor
commitments or, in the absence of such commitments, based on current
investor yield requirements. Gains and losses on loan sales are determined
using the specific identification method.
Income Taxes
Deferred income taxes are recognized, with certain exceptions, for
temporary differences between the financial reporting basis and income tax
basis of assets and liabilities based on enacted tax rates expected to be
in effect when such amounts are realized or settled. Deferred tax assets
(including tax loss carry forwards) are recognized only to the extent that
it is more likely than not that such amounts will be realized based on
consideration of available evidence, including tax planning strategies and
other factors.
The effects of changes in tax laws or rates on deferred tax assets and
liabilities are recognized in the period that includes the enactment date.
Net Income per Share of Common Stock
As required, the Company adopted Statement of Financial Accounting
Standards No. 128 during the year ended June 30, 1998. This Statement
requires dual presentation of basic and diluted earnings per share ("EPS")
with a reconciliation of the numerator and denominator of the EPS
computations. Basics per share amounts are based on the weighted average
shares of common stock outstanding. Diluted earnings per share assume the
conversion, exercise or issuance of all potential common stock instruments
such as options, warrants and convertible securities, unless the effect is
to reduce a loss or increase earnings per share. No adjustments were made
to net income (numerator) for all periods presented. Accordingly, this
presentation has been adopted for all periods presented. The basic and
diluted weighted average shares outstanding are as follows:
(Continued)
30
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(1) Continued
<TABLE>
<CAPTION>
Year ended
--------------------------------------------------------------
June 30, 1999 June 30, 1998
Basic Diluted Basic Diluted
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $660,230 660,230 677,807 677,807
Weighted average shares outstanding 325,300 325,300 331,125 331,125
Diluted securities:
MRP shares - 11,319 - 16,155
Options - 15,554 - 432
---------------------------------------------------------------------------------------------------------
Adjusted weighted average shares 325,300 352,173 331,125 347,712
---------------------------------------------------------------------------------------------------------
Per share amount $ 2.03 1.87 2.05 1.95
=========================================================================================================
</TABLE>
Stock-Based Compensation
In October 1995, the FASB issued Statement of Financial Standards No. 123
(Statement 123), Accounting for Stock-Based Compensation. Statement 123,
which is effective for fiscal years beginning after December 15, 1995,
establishes financial accounting and reporting standards for stock-based
employee compensation plans and for transactions in which an entity issues
its equity instruments to acquire goods and services from nonemployees.
Statement 123 allows companies to account for stock-based compensation
either under the new provisions of SFAS 123 or under the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees, but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of Statement 123
had been adopted. The Company has continued to account for its stock-based
compensation in accordance with APB 25. Information required by Statement
123 regarding the Company's stock-based compensation plans is provided in
note 11.
Merger Conversion
On May 22, 1998 the Bancorp entered into a merger conversion agreement with
Belmar Federal Savings and Loan Association. The transaction was terminated
in June 1999. All expenses associated with the merger have been included in
the current year and amounted to $89,000.
Reclassification and Restatement
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
31
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(2) Investment Securities
Investment securities, classified as available-for-sale, are summarized as
follows as of June 30:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------
Amortized Unrealized Unrealized Fair Carrying
Cost gains losses value Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities $ 246,410 - 32,649 213,761 213,761
==========================================================================================================
1998
--------------------------------------------------------------------
Equity securities $ 106,487 - 1,642 104,845 104,845
U.S. Government and Agency
obligations due 5 through 10 years 5,014,704 - 639 5,014,065 5,014,065
----------------------------------------------------------------------------------------------------------
$5,121,191 - 2,281 5,118,910 5,118,910
==========================================================================================================
</TABLE>
Accrued interest receivable at June 30, 1999 and 1998 was $-0- and $2,908,
respectively.
Proceeds from redemption of investment securities was $5,000,000 and
$2,000,000 in 1999 and 1998, respectively.
(3) Mortgage-backed securities, classified as available-for-sale, are
summarized as follows as of June 30, 1999:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair Carrying
Cost gains losses value Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government National Mortgage
Association (GNMA) $5,024,962 - 145,603 - 4,879,359
==========================================================================================================
</TABLE>
Accrued interest receivable at June 30, 1999 was $28,952.
In 1998, the Company sold mortgage-backed securities classified available-
for-sale with an amortized cost of $5,063,418 and realized a net gain of
$5,015. There were no sales in 1999.
32
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(4) Loans Receivable
Loans receivable and accrued interest receivable thereon are summarized as
follows as of June 30:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate secured by first mortgage:
Residential $48,548,487 55,212,243
Commercial 7,870,045 5,106,188
Construction, net of loans in process 2,351,161 2,203,407
-------------------------------------------------------------------------------------------
58,769,693 62,521,838
Home improvement loans 8,769,816 6,726,365
Commercial loan 6,849,368 4,774,645
Home equity loans 1,698,066 1,227,088
Commercial leases 1,495,358 313,163
Loans secured by deposits 284,813 384,975
Consumer loans 668,307 649,011
-------------------------------------------------------------------------------------------
78,535,421 76,597,085
Less:
Deferred loan origination fees, net of costs 73,090 172,793
Unearned interest 53,929 -
Allowance for loan losses 631,239 553,513
-------------------------------------------------------------------------------------------
Loans receivable, net $77,777,163 75,870,779
===========================================================================================
</TABLE>
Accrued interest receivable on loans was $480,785 and $419,310 at June 30,
1999 and 1998, respectively.
A substantial portion of the Company's loans receivable are mortgage loans
secured by residential real estate properties. Loans are extended only
after evaluation by management of customers' creditworthiness and other
relevant factors on a case-by-case basis. On first mortgage loans, the
Company does not lend more than 95% of the appraised value of an owner
occupied residential property and in instances where the Company lends more
than 80% of the appraised value, private mortgage insurance is required.
For investor loans on residential property (not owner occupied) the Company
does not lend more than 70% of the appraised value.
The Company's residential lending operations are focused in the State of
Maryland, primarily the Baltimore Metropolitan area. While residential
lending is generally considered to involve less risk than other forms of
lending, payment experience on these loans is dependent to some extent on
economic and market conditions in the Company's primary lending area.
(Continued)
33
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(4) Continued
Impairment of loans having recorded investments of $9,300 and $194,000 at
June 30, 1999 and 1998, respectively has been recognized in conformity with
SFAS No. 114. The average recorded investment in impaired loans during 1999
and 1998, respectively was $9,200 and $190,000. There was no allowance for
losses related to those loans as of June 30, 1999. The total allowance for
loan losses related to these loans at June 30, 1998 was $38,900. The amount
of interest that would have been recorded on impaired loans at June 30,
1999 and 1998, respectively had the loans performed in accordance with
their terms was approximately $500 and $16,000, respectively. The actual
interest income recorded on these loans during 1999 and 1998 was $ -0- and
$12,000, respectively.
Nonaccrual loans amounted to approximately $182,000 and $268,000 at June
30, 1999 and 1998, respectively. The amount of interest income that would
have been recorded on loans in nonaccrual status at June 30, 1999 and 1998
had such loans performed in accordance with their terms, was approximately
$17,200 and $6,300, respectively. The actual interest income recorded on
these loans during 1999 and 1998 was approximately $ -0- and $13,400,
respectively.
The Company, through its normal asset review process, classifies certain
loans which management believes involve a degree of risk warranting
additional attention. These classifications are special mention,
substandard, doubtful and loss. At June 30, 1999, loans classified special
mention and substandard totaled approximately $2,116,665 and $181,800. No
loans were classified doubtful or loss at June 30, 1999.
The activity in the allowance for loan losses is summarized as follows for
the years ended June 30:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 553,513 397,012
Provision for losses on loans 245,000 240,000
Charge-offs (173,888) (91,935)
Recoveries 6,614 8,436
-------------------------------------------------------------------------
Balance at end of year $ 631,239 553,513
=========================================================================
</TABLE>
Commitments to extend credit are agreements to lend to customers, provided
that terms and conditions of the commitment are met. Commitments are
generally funded from loan principal repayments, excess liquidity and
savings deposits. Since certain of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Substantially all of the Company's outstanding commitments at June 30, 1999
and 1998 are for loans, which would be secured by real estate with
appraised values in excess of the commitment amounts. The Company's
exposure to credit loss under these contracts in the event of non-
performance by the other parties, assuming that the collateral proves to be
of no value, is represented by the commitment amounts.
(Continued)
34
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(4) Continued
Outstanding commitments to extend credit, which generally expire within 60
days, are as follows at June 30, 1999:
<TABLE>
<CAPTION>
Fixed rate Floating rate
-------------------------------------------------------------------------------
<S> <C> <C>
Residential mortgage loans $ 433,500 205,400
Commercial business and lease loans - 879,000
Undisbursed lines of credit 1,670,878 97,000
================================================================================
</TABLE>
As of June 30, 1999 and 1998, Patapsco was servicing loans for the benefit
of others, approximately $2,193,646 and $2,570,632, respectively.
(5) Property and Equipment
Property and equipment are summarized as follows at June 30:
<TABLE>
<CAPTION>
Estimated
1999 1998 useful lives
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 92,684 92,684 -
Building and improvements 988,807 982,653 40 years
Furniture, fixtures and equipment 1,166,002 1,141,957 5 - 10 years
----------------------------------------------------------------------- -------------
Total, at cost 2,247,493 2,217,294
Less accumulated depreciation 1,194,875 1,121,673
-----------------------------------------------------------------------
Property and equipment, net $1,052,618 1,095,621
=======================================================================
</TABLE>
The Company has no obligations under long-term operating leases.
(6) Deposits
The aggregate amount of short-term jumbo certificates, each with a minimum
denomination of $100,000, was approximately $3,379,000 and $2,601,000 in
1999 and 1998, respectively.
At June 30, 1999, the scheduled maturities of certificates are as follows:
Under 12 months $33,517,465
12 months to 24 months 3,457,979
24 months to 36 months 1,113,830
36 months to 48 months 84,461
48 months to 60 months 171,129
------------------------------------------------------------------------
$38,344,864
========================================================================
35
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(7) Borrowings
At June 30, 1999 and 1998, the Company had an agreement under a blanket-
floating lien with the Federal Home Loan Bank of Atlanta providing the
Company a line of credit of $20 million.
At June 30, the scheduled maturities of borrowings are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------------
Weighted Weighted
Balance Average Rate Balance Average Rate
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Under 12 months $ - - $ 1,800,000 5.99
12 months to 24 900,000
months 5.47 - -
24 months to 36
months 1,000,000 6.55 400,000 6.15
36 months to 48
months 7,000,000 6.27 1,000,000 6.55
48 months to 60
months 5,000,000 5.01 7,000,000 6.02
--------------------------------------------------------------------------------------
$13,900,000 5.71 $10,200,000 6.12
======================================================================================
</TABLE>
(8) Income Taxes
The provision for income taxes is composed of the following for the years
ended June 30:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------
<S> <C> <C>
Current:
Federal $ 367,000 442,000
State 69,000 73,000
-----------------------------------------------------------------------------
436,000 515,000
-----------------------------------------------------------------------------
Deferred:
Federal (30,000) (93,000)
State (7,000) (21,000)
-----------------------------------------------------------------------------
(37,000) (114,000)
-----------------------------------------------------------------------------
$ 399,000 401,000
=============================================================================
</TABLE>
(Continued)
36
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(8) Continued
The net deferred tax assets consist of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Allowance for losses on loans $ 244,000 214,000
Unrealized holding gains 69,000 1,000
Deferred compensation 248,000 253,000
Deferred loan fees 37,000 37,000
Other, net 8,000 9,000
-------------------------------
Total deferred tax assets 606,000 514,000
Tax bad debt reserve (39,000) (52,000)
Federal home Loan Bank stock dividends (101,000) (101,000)
Accumulated depreciation (25,000) (25,000)
-------------------------------
Total deferred tax liabilities (165,000) (178,000)
----------------------------------------------------------------------
Net deferred tax assets $ 441,000 336,000
========================================================================
</TABLE>
A reconciliation of the income tax provision and the amount computed by
multiplying income before income taxes by the statutory Federal income tax
rate of 34% is as follows for the years ended June 30:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------
<S> <C> <C>
Tax at statutory rate $360,000 367,000
State income taxes, net of Federal
income tax benefit 41,000 34,000
Other (2,000) -
---------------------------------------------------------------------
Income tax provision $399,000 401,000
=====================================================================
</TABLE>
The Company has qualified under provisions of the Federal Internal Revenue
Code which permit it to deduct from taxable income a provision for bad
debts based on actual bad debt experience. Therefore, the provision for
bad debts deducted from taxable income for Federal income tax purposes was
based on the experience method.
The Company's Federal income tax returns have been audited through June
30, 1995.
(9) Regulatory Matters
The Federal Deposit Insurance Corporation (FDIC) insures deposits of
account holders up to $100,000. Patapsco pays an annual premium to provide
for this insurance. Patapsco is also a member of the Federal Home Loan
Bank System and is required to maintain an investment in the stock of the
Federal Home Loan Bank of Atlanta equal to at least 1% of the unpaid
principal balances of its residential mortgage loans, .3% of its total
assets or 5% of its outstanding advances to Patapsco, whichever is
greater. Purchases and sales of stock are made directly with Patapsco at
par value.
(Continued)
37
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(9) Continued
Pursuant to regulations of the Federal Reserve Board, all FDIC-insured
depository institutions must maintain average daily reserves against their
transaction accounts. No reserves are required to be maintained on the
first $4.7 million of transaction accounts, reserves equal to 3% must be
maintained on the next $47.8 million of transaction accounts, and a
reserve of 10% plus $1,434,000 must be maintained against all remaining
transaction accounts. These reserve requirements are subject to
adjustments by the Federal Reserve Board. Because required reserves must
be maintained in the form of vault cash or in a noninterest bearing
account at a Federal Reserve Bank, the effect of the reserve requirement
is to reduce the amount of the institution's interest-earning assets. At
June 30, 1999, the Bank met its reserve requirements.
Patapsco is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on Patapsco's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Patapsco must meet specific capital guidelines that
involve quantitative measures of Patapsco's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Patapsco's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Patapsco to maintain minimum amounts and ratios (as defined in the
regulations and as set forth in the table below, as defined) of total and
Tier I capital (as defined) to risk-weighted assets (as defined), and of
Tier I capital to average assets (as defined). Management believes, as of
June 30, 1999, that Patapsco meets all capital adequacy requirements to
which it is subject.
As of June 30, 1999, the most recent notification from banking regulators
categorized Patapsco as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as adequately capitalized
Patapsco must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
(Continued)
38
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(9) Continued
Patapsco's actual capital amounts and ratios are also presented in the
table (in thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total Capital (to Risk
Weighted Assets) $9,120 15.35% $4,752 8.00% $5,941 10.00%
Tier I Capital (to Risk
Weighted Assets) 8,489 14.29% 2,376 4.00% 3,564 6.00%
Tier I Capital (to Average
Assets) 8,489 9.35% 3,630 4.00% 4,537 5.00%
As of June 30, 1998:
Total Capital (to Risk
Weighted Assets) 8,947 16.40% 4,365 8.00% 5,457 10.00%
Tier I Capital (to Risk
Weighted Assets) 8,393 15.38% 2,183 4.00% 3,274 6.00%
Tier I Capital (to Average
Assets) 8,393 9.20% 3,650 4.00% 4,563 5.00%
=======================================================================================
</TABLE>
(10) Stockholders' Equity and Related Matters
On September 14, 1995, the Board of Directors approved a plan of
reorganization from a mutual savings association to a capital stock
savings bank and the concurrent formation of a holding company. The
conversion was accomplished through amendment of Patapsco's charter and
the sale of the Company's common stock in an amount equal to the
consolidated pro forma market value of the Company and Patapsco after
giving effect to the conversion. A subscription offering of the shares of
common stock was offered initially to employee benefit plans of the
Company, depositors, borrowers, directors, officers and employees of the
Company and to certain other eligible subscribers. In connection with the
Conversion, the Company publicly issued 362,553 shares of its common
stock, par value $.01 per share (the "Common Stock"), for gross proceeds
of $7,251,060 and net proceeds of $6,745,810, of which $3,372,905 was
contributed to Patapsco in exchange for all of its outstanding common
stock.
Federal regulations require that, upon conversion from mutual to stock
form of ownership, a "liquidation account" be established by restricting a
portion of net worth for the benefit of eligible savings account holders
who maintain their savings accounts with Patapsco after conversion. In the
event of complete liquidation (and only in such event), each savings
account holder who continues to maintain his savings account shall be
entitled to receive a distribution from the liquidation account after
payment to all creditors, but before any liquidation distribution with
respect to capital stock. This account will be proportionately reduced for
any subsequent reduction in the eligible holders' savings accounts. At
conversion the liquidation account totaled approximately $6,088,000.
(Continued)
39
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Junes 30, 1999 and 1998
________________________________________________________________________________
(10) Continued
In addition to the foregoing, certain bad debt reserves deducted from
income for federal income tax purposes and included in retained income of
Patapsco, are not available for the payment of cash dividends or other
distributions to stockholders without payment of taxes at the then-current
tax rate by Patapsco, on the amount removed from the reserves for such
distributions.
(11) Benefit Plans
Employee Stock Ownership Plan
Patapsco has established an Employee Stock Ownership Plan (ESOP) for its
employees. On April 1, 1996 the ESOP acquired 29,004 shares of the
Company's common stock in connection with Patapsco's conversion to a
capital stock form of organization. The ESOP purchased an additional
12,861 shares as a result of the return of capital distribution paid by
the Company in June 1997. The ESOP holds the common stock in a trust for
allocation among participating employees, in trust or allocated to the
participants' accounts and an annual contribution from Patapsco to the
ESOP and earnings thereon.
All employees of Patapsco who attain the age of 21 and complete six months
of service with Patapsco will be eligible to participate in the ESOP.
Participants will become 100% vested in their accounts after three years
of service with Patapsco or, if earlier, upon death, disability or
attainments of normal retirement age. Participants receive credit for
service with Patapsco prior to the establishment of the ESOP.
Patapsco recognizes the cost of the ESOP in accordance with AICPA
Statement of Position 93-6 Employers' Accounting for Employee Stock
Ownership Plans. As shares are released from collateral, Patapsco reports
compensation expense equal to the current market price of the shares and
the shares become outstanding for earnings-per-share computations.
Dividends on allocated shares are recorded as a reduction of retained
earnings; dividends on unallocated shares are recorded as a reduction of
debt. For the years ended June 30, 1999 and 1998 compensation expense
recognized related to the ESOP and Patapsco's contribution to the ESOP was
$134,237 and $148,679, respectively.
The ESOP shares were as follows as of June 30:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------
<S> <C> <C>
Shares released and allocated 18,268 13,098
Unearned shares 23,597 28,767
------------------------------------------------------------------
41,865 41,865
==================================================================
Fair value of unearned shares $697,055 960,099
==================================================================
</TABLE>
Directors Retirement Plan
Effective September 28, 1995, Patapsco adopted a deferred compensation
plan covering all non-employee directors. The plan provides benefits based
upon certain vesting requirements. Compensation expense recognized in
connection with the Plan during the year ended June 30, 1999 and 1998 was
$21,959 and $44,446, respectively.
(Continued)
40
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(11) Continued
Stock Options
The Company's 1996 Stock Options and Incentive Plan (Plan) was approved by
the stockholders at the 1996 annual meeting. The Plan provides for the
granting of options to acquire common stock to directors and key employees.
Option prices are equal or greater than the estimated fair market value of
the common stock at the date of the grant. In October 1996 the Company
granted options to purchase 34,474 shares at $27.50 per share. Such shares
and fair value have been adjusted to 43,093 shares at $18.91 per share for
the effect of the return of capital distribution paid by the Company in
June 1997. The Plan provides for one-fifth of the options granted to be
exercisable on each of the first five anniversaries of the date of grant.
If a participant in the Plan terminates employment for reasons other than
death, disability, retirement at age 65 or change in control, he or she
forfeits all rights to unvested shares.
The following table summarizes the status of and changes in the Company's
stock option plan during the past two years, as retroactively adjusted for
the Company's return of capital.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Options Exercise
Options Price Exercisable Price
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at end of 1997 43,093 $18.91 - -
Granted -
Exercised -
------------------------------------------------------------------------------------
Outstanding at end of 1998 43,093 18.91 6,895 18.91
Granted -
Exercised -
------------------------------------------------------------------------------------
Outstanding at end of 1999 43,093 $18.91 15,514 18.91
====================================================================================
</TABLE>
Stock Award Plan
During the year ended June 30, 1998, the Company approved a Stock Award
Plan to one of its officers. The Plan provides for 1,247 shares to be
vested at 25% per year beginning in October, 1998. The fair value of the
shares was $39,904 at date of grant.
(Continued)
41
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(11) Continued
Management Recognition Plan
Effective October 11, 1996, the Company established a Management
Recognition Plan (MRP) to retain personnel of experience and ability in key
positions of responsibility. Members of the Board of Directors and certain
executive officers were awarded a total of 14,502 shares of stock, which
are held in a separate trust that manages the MRP. The Company funded the
MRP in 1997 by purchasing 14,502 shares of common stock in the open market.
On October 11, 1997, 2,892 shares vested and were distributed to
participants. On May 4, 1998, the MRP purchased 1,084 shares with cash
received from the return of capital distribution paid by the Company in
June 1997. At June 30, 1998 the MRP had 12,694 shares. Shares awarded to
participants in the MRP vest at a rate of 20% per year on each anniversary
of the effective date of the MRP. If a participant terminates employment
for reasons other than death, disability, change in control or retirement
he or she forfeits all rights to unvested shares. For the years ended June
30, 1999 and 1998, compensation expense related to the MRP was $92,049 and
$129,924, respectively.
401(K) Retirement Savings Plan
The Company has a 401(k) Retirement Savings Plan. Employees may contribute
a percentage of their salary up to a maximum of 5%. The Company is
obligated to contribute 50% of the employee's contribution, not to exceed
6% of the employee's annual salary. All employees who have completed one
month of service with the Company and are 21 years old are eligible to
participate. The Company's contribution to this plan was $27,800 and
$23,500 for the years ended June 30, 1999 and 1998, respectively.
(12) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments (SFAS 107) requires the Company to disclose
estimated fair values for certain on- and off-balance sheet financial
instruments. Fair value estimates, methods, and assumptions are set forth
below the Company's financial instruments as of June 30, 1999 and 1998.
(Continued)
42
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(12) Continued
The carrying value and estimated fair value of financial instruments is
summarized as follows at June 30:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
Carrying Carrying
value Fair value Value Fair value
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest-bearing deposits $ 3,771,852 3,772,000 1,389,801 1,390,000
Federal funds sold 5,580,098 5,580,000 7,148,619 7,149,000
Investment securities 213,761 214,000 5,118,910 5,119,000
Mortgage-backed securities 4,879,359 4,879,000 - -
Loans receivable, net 77,777,164 79,468,000 75,870,779 74,363,000
Liabilities:
Deposits 69,671,419 69,780,000 70,327,381 70,459,000
Borrowings 13,900,000 13,900,000 10,200,000 10,200,000
Advance payments by borrowers for
taxes, insurance and ground rents 1,210,651 1,211,000 1,403,884 1,404,000
Off balance sheet instruments:
Commitments to extend credit - - - -
==========================================================================================================
</TABLE>
Cash on Hand and in Banks
The carrying amount for cash on hand and in banks approximates fair value
due to the short maturity of these instruments.
Short-term Investments
The carrying amount for short-term investments which consists of Federal
funds sold, approximates fair value due to the overnight maturity of these
instruments.
Investment Securities and Mortgage-Backed Securities
The fair value of investment securities and mortgage-backed securities is
based on bid prices received from an external pricing service or bid
quotations received from securities dealers.
Loans
Loans were segmented into portfolios with similar financial
characteristics. Loans were also segmented by type such as residential,
multifamily and nonresidential, construction and land, second mortgage
loans, commercial, and consumer. Each loan category was further segmented
by fixed and adjustable rate interest terms and performing and
nonperforming categories.
(Continued)
43
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(12) Continued
The fair value of residential loans was calculated by discounting
anticipated cash flows based on weighted-average contractual maturity,
weighted-average coupon, prepayment assumptions and discount rate.
Prepayment speed estimates were derived from published historical
prepayment experience in the mortgage pass-through market and recent
issuance activity in the primary and secondary mortgage markets. The
discount rate for residential loans was calculated by adding to the
Treasury yield for the corresponding weighted average maturity associated
with each prepayment assumption a market spread as observed for mortgage-
backed securities with similar characteristics. The fair values of
multifamily and nonresidential loans were calculated by discounting the
contractual cash flows at Patapsco's current nonresidential loan
origination rate. Construction, land and commercial loans, loans secured by
savings accounts and mortgage lines of credit were determined to be at fair
value due to their adjustable rate nature. The fair value of second
mortgage loans was calculated by discounting scheduled cash flows through
the estimated maturity using estimated market discount rates that reflected
the credit and interest rate risk inherent in the portfolio. The fair value
of consumer loans was calculated by discounting the contractual cash flows
at the Company's current consumer loan origination rate.
The fair value for nonperforming loans was determined by reducing the
carrying value of nonperforming loans by the Company's historical loss
percentage for each specific loan category.
Accrued Interest Receivable
The carrying amount of accrued interest receivable approximates its fair
value.
Savings Accounts
Under SFAS 107, the fair value of deposits with no stated maturity, such as
noninterest bearing deposits, interest bearing NOW accounts, money market
and statement savings accounts, is equal to the carrying amounts. The fair
value of certificates of deposit was based on the discounted value of
contractual cash flows. The discount rate for certificates of deposit was
estimated using the rate currently offered for deposits of similar
remaining maturities.
Borrowed Funds
Borrowed funds, which are advances from the Federal Home Loan Bank of
Atlanta, are considered to be at fair value.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair
value.
Advance Payments by Borrowers for Taxes, Insurance and Ground Rents
The carrying amount of advance payments by borrowers for taxes, insurance
and ground rents approximates its fair value.
(Continued)
44
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(12) Continued
Off-Balance Sheet Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business, including mortgage loan commitments and
undisbursed lines of credit on commercial business loans. These instruments
involve, to various degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated statements of financial
condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument is represented by the contract
amount of the financial instrument.
The Company uses the same credit policies in making commitments for off-
balance-sheet financial instruments as it does for on-balance-sheet
financial instruments. The fair values of such commitments are immaterial.
The disclosure of fair value amounts does not include the fair values of
any intangibles, including core deposit intangibles. Core deposit
intangibles represent the value attributable to total deposits based on an
expected duration of customer relationships.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about financial instruments.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect estimates.
(13) Condensed Financial Information (Parent Company Only)
Summarized financial information for the Company are as follows as of and
for the years ended June 30:
<TABLE>
<CAPTION>
Statements of Financial Condition 1999 1998
--------------------------------------------------------------------------
<S> <C> <C>
Cash $ 245,699 258,484
Investment securities 195,227 92,810
Equity in net assets of the bank 8,449,011 8,392,960
Note receivable - bank 325,100 396,341
Other assets 46,225 12,000
--------------------------------------------------------------------------
$9,261,262 9,152,595
==========================================================================
Accrued expenses and other liabilities $ 43,401 29,755
Stockholders' equity 9,217,861 9,122,840
--------------------------------------------------------------------------
$9,261,262 9,152,595
==========================================================================
</TABLE>
(Continued)
45
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(13) Continued
<TABLE>
<CAPTION>
Statements of Income 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Loans receivable $ 33,689 39,445
Cash deposits 814 123
Investments 1,715 -
--------------------------------------------------------------------------------------
Net income before equity in net income
of subsidiary and income taxes 36,218 39,568
Net income of subsidiary 624,012 638,239
--------------------------------------------------------------------------------------
Income before income tax provision 660,230 677,807
Income tax provision - -
--------------------------------------------------------------------------------------
Net income $ 660,230 677,807
======================================================================================
Statements of Cash Flows 1999 1998
--------------------------------------------------------------------------------------
Operating activities:
Net income 660,230 677,807
Adjustments to reconcile net income to netsh
provided by operating activities:
Equity in net income of subsidiary (624,012) (638,239)
Other, net (44,769) (26,247)
--------------------------------------------------------------------------------------
Net cash provided by operating activities (8,551) 13,321
--------------------------------------------------------------------------------------
Investing activities:
Purchase of equity security (133,423) (94,453)
Dividends received 750,000 3,000,000
Loan repayment 71,241 67,723
--------------------------------------------------------------------------------------
Net cash used in investing activities 687,818 2,973,270
--------------------------------------------------------------------------------------
Financing activities:
Decrease in borrowings - (2,700,000)
Purchase of common stock (523,380) -
Cash dividend paid (168,672) (108,766)
--------------------------------------------------------------------------------------
Net cash used in financing activities (692,052) (2,808,766)
--------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents (12,785) 177,825
Cash and equivalents, beginning of year 258,484 80,659
--------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 245,699 258,484
======================================================================================
</TABLE>
46
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 1998
________________________________________________________________________________
(14) Accounting Pronouncements With Future Effective Dates
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June, 1998. This Statement standardizes the
accounting for derivative instruments including certain derivative
instruments embedded in other contracts, by requiring that an entity
recognize these items as assets or liabilities in the statement of
financial position and measure them at fair value. This Statement generally
provides for matching the timing of gain or loss recognition on the hedging
instrument with the recognition of the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or the
earnings effect of the hedged forecasted transaction. The Statement, which
is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, will not affect the Company's financial position or its
results of operations.
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities". This Statement provides guidance on the financial reporting of
start-up cost and organization cost. It requires costs of start-up
activities and organization cost to be expensed as incurred. The "SOP" also
requires that initial application to be reported as a cumulative effect of
a change in accounting principles. This "SOP" which is effective for fiscal
years beginning after December 15, 1998 will not affect the Company's
financial position or results of operations.
47
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C> <C>
Thomas P. O'Neill Nicole N. Glaeser Dr. Theodore C. Patterson
Chairman of the Board Budget Director for Baltimore County Retired Physician
Managing Director of American Police Department Secretary of the Company
Express Tax and Business Services
Douglas H. Ludwig
Joseph J. Bouffard Retired Principal of the Baltimore
President and Chief Executive County Public School System
Officer of the Company and the Bank
EXECUTIVE OFFICERS
Joseph J. Bouffard Debra L. Penczek Frank J. Duchacek, Jr.
President and Chief Executive Officer Vice President - Operations; Vice President - Commercial Lending
Assistant Secretary
Michael J. Dee John W. McClean Joseph R. Sallese
Chief Financial Officer and Controller Vice President - Real Estate Lending Vice President - Consumer Lending
OFFICE LOCATION
1301 Merritt Boulevard
Dundalk, Maryland 21222-2194
Website:http:\\www.parapscobank.com
Telephone: (410) 285-1010
CORPORATE INFORMATION
Independent Certified Accountant Special Counsel Annual Report on Form 10-KSB
Anderson Associates, LLP Housley Kantarian & Bronstein, P.C.
7621 Fitch Lane 1220 19th Street, N.W., Suite 700 A copy of the Company's Annual
Baltimore, Maryland 21236 Washington, D.C. 20036 Report on Form 10-KSB for the
fiscal year ended June 30, 1999 as
General Counsel Annual Meeting filed with the Securities and
Nolan Plumhoff & Williams The 1999 Annual Meeting of Stockholders Exchange Commission, will be
Suite 700, Nottingham Centre will be held on October 28, 1999 at furnished without charge to
502 Washington Avenue 4:00 p.m. at the office of The Patapsco stockholders as of the record date
Towson, MD 21204-4528 Bank located at 1301 Merritt Boulevard, for the 1999 Annual Meeting upon
Dundalk, Maryland 21222. written request to: Corporate
Transfer Agent and Registrar Secretary, Patapsco Bancorp, Inc.,
Registrar and Transfer Co. 1301 Merritt Boulevard, Dundalk,
10 Commerce Drive Maryland 21222-21942
Cranford, New Jersey 07016-3572
1 (800) 368-5948
</TABLE>
48
<PAGE>
ANNEX D
United States Securities and Exchange Commission
Washington, D. C. 20549
FORM 10 - QSB
(Mark One)
[ X ] Quarterly Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the quarterly
period ended March 31, 2000
[ ] Transition Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ________ to _________
Commission File Number: 0-28032
PATAPSCO BANCORP, INC.
(Exact Name of Small Business Issuer as Specified
in its Charter)
MARYLAND 52-1951797
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1301 MERRITT BOULEVARD, DUNDALK, MARYLAND 21222-2194
-----------------------------------------------------
(Address of Principal Executive Offices)
(410) 285-1010
Registrant's Telephone Number, Including Area Code
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
As of May 8, 2000, the issuer had 327,390 shares of Common
Stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
CONTENTS
--------
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at March 31, 2000 and June 30, 1999 3
Consolidated Statements of Operations for the
Three and Nine-Month Periods Ended March
31, 2000 and 1999 4
Consolidated Statements of Comprehensive Income for
the Three and Nine-Month Periods Ended
March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended March 31, 2000 and
1999 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of
Operations 8
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of
Security-Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARY
DUNDALK, MARYLAND
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
Assets 2000 (UNAUDITED) 1999
------ --------------- --------------
<S> <C> <C>
Cash:
On hand and due from banks $ 954,651 $ 1,601,598
Interest bearing deposits in other banks 1,148,170 2,170,254
Federal funds sold 2,789,475 5,580,098
Equity securities, at fair value 447,328 213,761
Mortgage Backed securities, at fair value 4,522,624 4,879,359
Loans receivable, net 87,901,208 77,777,163
Investment in securities required by law, at cost 950,850 800,850
Property and equipment, net 1,029,855 1,052,618
Deferred income taxes 433,501 441,000
Accrued interest, prepaid expenses and other assets 1,145,051 811,660
------------ -----------
Total assets $101,322,713 $95,328,361
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings deposits:
Interest bearing deposits $ 71,599,950 $66,792,156
Non interest bearing deposits 3,586,783 2,879,263
Borrowings 14,900,000 13,900,000
Accrued expenses and other liabilities 1,945,992 2,539,082
------------ -----------
Total liabilities 92,032,725 86,110,501
Stockholders' equity:
Common stock $0.01 par value: authorized 4,000,000
shares: issued and outstanding 328,891 and
344,426 shares, respectively 3,289 3,445
Additional paid-in capital 1,463,218 1,888,962
Contra equity - Employee stock ownership plan (325,100) (325,100)
Contra equity - Management recognition plan (154,761) (257,095)
Retained income, substantially restricted 8,451,162 8,017,059
Unrealized net holding losses on available-for-sale
portfolios, net of taxes (147,819) (109,411)
------------ -----------
Total stockholders' equity 9,289,988 9,217,860
------------ -----------
Total liabilities and stockholders'
equity $101,322,713 $95,328,361
============ ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARY
DUNDALK, MARYLAND
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
FOR NINE MONTHS ENDED FOR THREE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $5,335,449 $ 4,997,609 $1,850,076 $1,684,066
Investment & Mortgage-backed securities 250,129 188,357 82,060 29,599
Federal funds sold and other investments 209,254 193,593 69,136 66,954
---------- ---------- ---------- ----------
Total interest income 5,794,833 5,379,559 2,001,272 1,780,619
---------- ---------- ---------- ----------
Interest expense:
Savings deposits 2,011,983 2,043,305 699,591 658,755
Borrowings 645,991 433,827 235,055 134,651
---------- ---------- ---------- ----------
Total interest expense 2,657,974 2,477,132 934,646 793,406
---------- ---------- ---------- ----------
Net interest income 3,136,859 2,902,427 1,066,626 987,213
Provision for losses on loans 255,000 170,000 115,000 60,000
---------- ---------- ---------- ----------
Net interest income after provision
for losses on loans 2,881,859 2,732,427 951,626 927,213
Noninterest income:
Fees and service charges 193,887 168,044 67,986 58,468
Net gain (loss) on sales of real estate
owned 50,000 -- 50,000
Other 10,379 13,378 3,145 8,293
---------- ---------- ---------- ----------
Total noninterest income 254,266 181,422 121,131 66,761
---------- ---------- ---------- ----------
Noninterest expenses:
Compensation and employee benefits 1,381,067 1,301,352 475,601 440,815
Insurance premiums 44,749 51,021 10,687 16,556
Professional fees 99,753 87,191 32,694 22,865
Equipment expense 124,227 82,726 37,848 28,588
Occupancy Expense 58,868 63,080 18,836 17,750
Advertising 29,400 31,144 10,933 10,242
Data processing 118,458 85,716 36,939 24,458
Other 337,618 323,099 115,580 103,074
---------- ---------- ---------- ----------
Total noninterest expense 2,194,139 2,025,329 739,118 664,348
---------- ---------- ---------- ----------
Income before provision for
income taxes 941,986 888,520 333,639 329,626
Provision for income taxes 365,680 333,711 128,860 125,541
---------- ---------- ---------- ----------
Net Income $ 576,306 $ 554,809 $ 204,779 $ 204,085
========== ========== ========== ==========
Basic earnings per share $ 1.84 $ 1.69 $ 0.66 $ 0.63
========== ========== ========== ==========
Diluted earnings per share 1.75 1.62 0.63 0.60
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARY
DUNDALK, MARYLAND
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
FOR NINE MONTHS ENDED FOR THREE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 576,306 $ 554,809 $ 204,779 $204,085
Other comprehensive income, net of tax:
Unrealized net holding (losses)/gains on
available-for-sale portfolios (147,819) (26,625) (147,819) (6,793)
--------- --------- --------- --------
Comprehensive income $ 428,487 $ 528,184 $ 56,960 $197,292
========= ========= ========= ========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARY
DUNDALK, MARYLAND
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
FOR NINE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 576,306 $ 554,809
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 105,929 88,657
Provision for losses on loans 255,000 170,000
Gain on sale of real estate owned (50,000) -
Non-cash compensation under stock-based benefit
plans 134,216 82,130
Amortization of premiums and discounts, net 3,332 12,196
Deferred loan origination fees, net of costs (4,945) 86,730
Gain on sales of mortgage-backed securities
and investment securities - -
Change in deferred income taxes 7,499 -
(Increase) in accrued interest on investments,
prepaid expenses and other assets (332,908) (234,147)
Decrease in accrued expenses and other liabilities (399,268) (608,548)
------------ -----------
Net cash used in operating activities 295,161 151,827
------------ -----------
Cash flows from investing activities:
Loan principal disbursements, net of repayments (10,589,240) (2,120,034)
Purchase of loans 0 (1,794,554)
Proceeds from the sale of repossessed real estate 93,433 -
Purchase of property and equipment (83,166) (46,546)
Purchase of stock in Federal Home Loan Bank of Atlanta (150,000) -
Purchase of investment security available-for-sale (184,062) (204,173)
Principal repayment on mortgage-backed securities
available-for-sale 242,888 -
Principal repayment on investment securities
available-for-sale - 3,967,295
------------ -----------
Net cash used in investing activities (10,670,147) (198,012)
Cash flows from financing activities:
Net increase (decrease) in deposits 5,515,314 (321,568)
Net increase (decrease) in borrowings 1,000,000 (1,300,000)
Stock repurchase (457,784) (523,380)
Dividends paid (142,198) (127,342)
------------ -----------
Net cash (used in) provided by financing
activities 5,915,332 (2,272,290)
Net (decrease) increase in cash and cash equivalents $ (4,459,654) $(2,318,475)
Cash and cash equivalents at beginning of period 9,351,950 8,538,420
Cash and cash equivalents end of period $ 4,892,296 $ 6,219,945
Supplemental information:
Interest paid on deposits and borrowed funds 2,657,974 2,480,797
Income taxes paid 393,625 627,750
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Principles of Consolidation
The consolidated financial statements include the accounts of
Patapsco Bancorp, Inc. ("the Company") and its wholly-owned
subsidiary, The Patapsco Bank ("the Bank"). All intercompany
accounts and transactions have been eliminated in the
accompanying consolidated financial statements.
Note 2: The Patapsco Bank
The Bank is regulated by The Federal Reserve Bank of Richmond
("the Federal Reserve Bank") and The State of Maryland. The
primary business of the Bank is to attract deposits from
individual and corporate customers and to originate residential
and commercial mortgage loans, consumer loans and commercial
business loans. The Bank competes with other financial and
mortgage institutions in attracting and retaining deposits and
originating loans. In October, 1998 the Bank created a leasing
company called Prime Business Leasing, Inc. The Bank conducts
operations through one office located at 1301 Merritt Boulevard,
Dundalk, Maryland 21222.
Note 3: Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with instructions for Form
10-QSB and therefore, do not include all disclosures necessary
for a complete presentation of the statements of condition,
statements of operations and statements of cash flows in
conformity with generally accepted accounting principles.
However, all adjustments, which are, in the opinion of
management, necessary for the fair presentation of the interim
financial statements have been included. Such adjustments were
of a normal recurring nature. The results of operations for the
nine and three months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the entire
year.
Note 4: Cash and Cash Equivalents
Cash equivalents include short-term investments, which consists
of Federal funds sold. Cash equivalents and other liquidity and
short-term investments are carried at cost, which approximates
market value.
7
<PAGE>
Note 5: Regulatory Capital Requirements
At March 31 2000, the Bank met each of the three minimum
regulatory capital requirements. The following table summarizes
the Bank's regulatory capital position at March 31, 2000 (in
thousands).
<TABLE>
<CAPTION>
Well Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
----------------- ------------------- --------------------
Amount % Amount % Amount %
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets) $ 9,486 14.27% $ 5,317 8.00% $ 6,647 10%
Tier 1 Capital (to Risk
Weighted Assets) $ 8,761 13.18% $ 2,659 4.00% $ 3,988 6%
Tier 1 Capital (to
Average Assets) $ 8,761 8.87% $ 3,951 4.00% $ 4,938 5%
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, the words or phrases "will
likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market
area, and competition that could cause actual results to differ
materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers
not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could
affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future
periods in any current statements.
The Company does not undertake, and specifically disclaims
any obligation, to publicly release the result of any revisions,
which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND JUNE 30,
1999
The Company's assets increased by $5.9 million or 6.3% to
$101.3 million at March 31, 2000 from $95.3 million at June 30,
1999. The increase in the Company's assets during the nine
months ended March 31, 1999 was primarily due to the Company
utilizing cash, deposit growth and borrowed money to fund loan
growth. The Company's net loans receivable increased by $10.2
million or 13.0% to $87.9 million at March 31, 2000 from $77.8
million at June 30, 1999. The increase in net loans receivable
was comprised of $4.7 million in balloon mortgages, $3.5 million
in commercial equipment leases, $2.6 million in commercial real
estate loans $1.3 million in commercial term loans and $600,000
in consumer loans somewhat offset by decreases of $1.9 million
in other residential mortgages and $600,000 in construction
loans. The Company's mortgage-backed securities portfolio
decreased by $400,000 million to $4.5 million at March 31, 2000
from $4.9 million at June 30, 1999 due to amortization and
prepayments.
The Company's borrowings increased by $1,000,000 or 7.1%
to $14.9 million at March 31, 2000 from $13.9 million at June
30, 1999. Deposits increased by $5.5 million or by 7.9% to $75.2
million at March 31, 2000 from $69.7 million at June 30, 1999.
The increase in deposits was largely attributable to the
increase of $4.8 million in interest-bearing deposits consisting
primarily of certificate of deposit accounts. In February 2000,
the Bank acquired $1.0 million in retail brokered deposits in
denominations less than $100,000. Noninterest-bearing deposits
increased by $708,000 or 24.6% during the nine months ended
March 31, 2000.
8
<PAGE>
The Company's stockholders' equity increased by $72,000 to
$9.3 million at March 31, 2000 from $9.2 million at June 30,
1999. In July 1999, the Company initiated a 5% (17,221 shares)
stock repurchase program. This was completed in November 1999
at a total cost of $457,788.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS AND NINE MONTHS
ENDED MARCH 31, 2000 AND MARCH 31, 1999
Net Income
----------
The Company's net income increased by $1,000 or 0.3% to $205,000
for the quarter ended March 31, 2000 from $204,000 for the
quarter ended March 31, 1999. The Company's net income increased
by $21,000 or 3.9% to $576,000 for the nine months ended March
31, 2000 from $555,000 for the nine months ended March 31, 1999.
The increase in the Company's net income during the comparable
three-month period is a result of higher net interest income
before the provision for loan loss and higher noninterest income
slightly offsetting higher operating expenses. The increase in
the Company's net income in the comparable nine-month period was
primarily due to increases in net interest and noninterest
income offsetting higher compensation, equipment and data
processing expenses.
Interest Income
---------------
Total interest income increased by $221,000 or 12.4% to $2.0
million for the quarter ended March 31, 2000 from $1.8 million
for the quarter ended March 31, 1999. Total interest income
increased by $415,000 or 7.7% to $5.8 million for the nine
months ended March 31, 2000 from $5.4 million for the nine
months ended March 31, 1999. The increases in interest income
resulted primarily from the growth in the Company's loan
portfolio that was funded with deposit growth, additional
borrowings from the Federal Home Loan Bank of Atlanta as well as
cash from lower yielding investments in overnight federal funds.
The Company's average yield on assets increased by 9 basis
points to 8.27% from 8.18% during the three-month period ended
March 31, 2000. For the comparative nine-month period, the
Company's average yield on assets increased 7 basis points to
8.26%. The Company's average balance of interest-earning assets
increased by $8.9 million and $5.6 million during the comparable
three and nine-month periods ended March 31, 1999.
Interest income on loans receivable increased by $166,000 or
9.9% to $1.9 million for the quarter ended March 31, 2000 from
$1.7 million for the quarter ended March 31, 1999. Interest
income on loans receivable increased by $338,000 or 6.8% to $5.3
million for the nine months ended March 31, 2000 from $5.0
million for the nine months ended March 31, 1999. The increase
in interest income on loans receivable during the three-month
period is primarily due to an increase in the average balance of
loans receivable. During the three months ended March 31, 2000
as compared to the same period ended March 31, 1999 the average
loans receivable balance increased by $7.0 million or 8.8% to
$86.7 million from $79.7 million and the average yield increased
by 1 basis point to 8.46% from 8.45%. During the nine months
ended March 31, 2000 as compared to the same period ended March
31, 1999 the average balance of loans receivable increased by
$4.4 million or 5.6% to $83.1 million from $78.7 million and the
average yield increased by 6 basis points to 8.52% from 8.46%.
Interest income on investment and mortgage-backed securities
increased by $52,000 and $62,000 for the three and nine-month
periods ended March 31, 2000 as compared to the three and none
month periods ended March 31, 1999.
Interest income on federal funds sold and other investments
increased by $2,000 or 3.3% to $69,000 for the quarter ended
March 31, 2000 from $67,000 for the quarter ended March 31,
1999. Interest income on federal funds sold and other
investments increased by $16,000 or 8.1% to $209,000 for the
nine months ended March 31, 2000 from $193,000 for the nine
months ended March 31, 1999.
Interest Expense
----------------
Total interest expense increased by $141,000 or 17.8% to
$935,000 for the quarter ended March 31, 2000 from $793,000 for
the quarter ended March 31, 1999. Total interest expense
increased by $181,000 or 7.3% to $2.7 million for the nine
months ended March 31, 2000 from $2.5 million at March 31, 1999.
The increases in interest expense during the comparable periods
were primarily due to increases in the average balances of
Federal Home Loan Bank Advances and deposits used to fund loan
growth. During the quarter ended March 31, 2000 as compared to
the quarter ended March 31, 1999 the average balance of
interest-bearing liabilities increased by $9.9 million to $85.8
million from $75.9 million of which $7.0 million is attributable
to increases in borrowings from the Federal Home Loan Bank of
Atlanta. The average rate
9
<PAGE>
on interest-bearing liabilities increased by 8 basis points to
4.26% from 4.18% in the quarterly period. During the nine months
ended March 31, 2000 as compared to the nine months ended March
31, 1999 the average balance of interest-bearing liabilities in
increased by $6.4 million to $82.5 million from $76.1 million
and the average rate decreased 6 basis points to 4.28% from
4.34%.
Interest expense on deposits increased by $41,000 or 6.2%
to $700,000 for the quarter ended March 31, 2000 from $659,000
for the quarter ended March 31, 1999. Interest expense on
deposits decreased by $31,000 or 1.6% to $2.0 million from $2.0
million for the nine months ended March 31, 1999. The increase
in interest expense on deposits during the comparable quarters
was attributable to an increase in the average rate balance of
interest-bearing deposits $2.8 million or 4.2%.The average rate
decreased by 2 basis points to 3.93% from 3.95%. The decrease in
interest expense on deposits during the comparable nine-month
period was primarily due to a 14 basis point decrease in the
average rate to 3.95% from 4.09% offsetting a $1.0 million
increase in the average balance.
Interest expense on borrowings increased by $100,000 or 74.6%
to $235,000 for the quarter ended March 31, 2000 from $135,000
for the quarter ended March 31, 1999. Interest expense on
borrowings increased by $212,000 or 48.9% to $646,000 during the
nine months ended March 31, 2000 from $434,000 during the nine
months ended March 31, 1999. The increase for the comparable
quarters was primarily attributable to an increase of $7.0
million in the average balance offsetting a decrease of 17 basis
points in the average rate. For the nine-month comparable
periods the increase was attributable to a $5.3 million increase
in the average balance. The average rate decreased 32 basis
points to 5.78% from 6.10%.
Net Interest Income
-------------------
The Company's net interest income before the provision for
loan losses increased by $79,000 or 8.0% to $1.1million for the
quarter ended March 31, 2000 from $987,000 for the quarter ended
March 31, 1999. Net interest income before the provision for
loan losses increased by $234,000 or 8.1% to $3.1 million for
the nine months ended March 31, 2000 from $2.9 million during
the nine months ended March 31, 1999. The increase in net
interest income during the comparable quarter is primarily due
to higher volumes. The increase in net interest income in the
comparable nine month period is due to both higher volumes and a
higher net interest margin.
Average Balance Sheet
---------------------
The following tables sets forth certain information relating to
the Company's average balance sheet and reflects the average
yield on assets and cost of liabilities for the periods
indicated and the average yields earned and rates paid. Dividing
income or expense by the average balance of assets or
liabilities, respectively, for the periods presented derives
these yield and costs. Average balances are daily balances.
The table presents information for the periods indicated
with respect to the net interest margin, which is its net
interest income divided by the average balance of
interest-earning assets. Also presented is the difference
between the average yield earned on interest-earning assets and
average rate paid on interest-bearing liabilities, or interest
rate spread ,which is also used to measure the earnings power of
financial institutions.
10
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
2000 1999
--------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE(1) BALANCE INTEREST RATE(1)
------- -------- ------ ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (2) $83,134 $5,336 8.52% $78,747 $4,998 8.46%
Investment securities -- -- -- 3,631 188 6.90%
Mortgage-backed securities 4,758 250 6.98% -- -- --
Federal funds sold and other
interest-earning assets 5,260 209 5.28% 5,161 194 5.01%
------- ----- ------- -----
Total interest earning assets 93,152 5,795 8.26% 87,539 5,380 8.19%
-----
Noninterest-earning assets 2,880 2,157
------- -------
Total Average Assets $96,032 $89,696
======= =======
Interest-bearing liabilities:
Savings deposits (3) $67,632 $2,012 3.95% $66,621 $2,043 4.09%
Borrowings 14,842 646 5.78% 9,480 434 6.10%
------- ------ ------- ------
Total interest-bearing liabilities 82,474 2,658 4.28% 76,101 2,477 4.34%
------ ------
Noninterest-bearing liabilities 4,212 4,319
------- -------
Total liabilities 86,686 80,420
Stockholders' equity 9,346 9,276
------- -------
Total liabilities and stockholders'
equity $96,032 $80,696
======= =======
Net interest income $3,137 $2,903
====== ======
Interest rate spread 3.98% 3.85%
====== ======
Net Interest Margin 4.47% 4.42%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.95% 115.03%
====== ======
<FN>
___________
(1) Yields and rates are annualized.
(2) Includes nonaccrual loans.
(3) Includes interest-bearing escrow accounts.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
2000 1999
--------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE(1) BALANCE INTEREST RATE(1)
------- -------- ------ ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (2) $86,697 $1,850 8.46% $79,674 $1,684 8.45%
Investment securities -- -- -- 1,894 30 6.34%
Mortgage-backed securities 4,615 82 6.96% -- -- --
Federal funds sold and other
interest-earning assets 4,749 69 5.50% 5,553 67 4.83%
------- ----- ------- -----
Total interest earning assets 96,061 2,001 8.27% 87,121 1,781 8.18%
----- -----
Noninterest-earning assets 3,174 2,407
------- -------
Total assets $99,235 $89,528
======= =======
Interest-bearing liabilities:
Savings deposits (3) $69,639 $ 700 3.93% $66,766 $ 659 3.95%
Borrowings 16,197 235 5.73% 9,150 135 5.90%
------- ------ ------- ------
Total interest-bearing liabilities 85,836 935 4.26% 75,916 794 4.18%
------ ------
Noninterest-bearing liabilities 4,083 4,333
------- -------
Total liabilities 89,919 81,249
Stockholders' equity 9,316 9,249
------- -------
Total liabilities and stockholders'
equity $99,235 $89,528
======= =======
Net interest income $1,066 $ 987
====== ======
Interest rate spread 3.98% 4.00%
====== ======
Net interest margin 4.45% 4.53%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 111.91% 114.76%
====== ======
<FN>
___________
(1) Yields and rates are annualized.
(2) Includes nonaccrual loans.
(3) Includes interest-bearing escrow accounts.
</FN>
</TABLE>
Provision For Loan Losses
-------------------------
Provisions for loan losses are charged to earnings to maintain
the total allowance for loan losses at a level considered
adequate by management to provide for probable loan losses,
based on prior loss experience, volume and type of collateral by
the Company, industry standards and past due loans in the
Company's loan portfolio. The Company's management periodically
monitors and adjusts its allowance for loan losses based upon
its analysis of the loan portfolio. The Company provided
$115,000 for loan losses during the quarter ended March 31, 2000
and $60,000 in the quarter ended March 31, 1999. The Company
provided $255,000 and $170,000 for loan losses during each of
the nine-month periods ended March 31, 2000 and March 31, 1999.
The provision for loan losses were made due to the Company's
higher levels of consumer, construction and commercial loans,
which generally entail a greater risk than single-family
residential loans. Additionally, fiscal year-to-date
charge-offs of $176,000 are 135% higher than March 1999 fiscal
year-to-date charge-offs of $75,000. The Company's allowance
for loan losses as a percentage of total loans outstanding, net
of unearned origination fees of 0.82% at March 31, 2000 is up
slightly from March 31, 1999 when the ratio was 0.81%. The
Company's ratio of net charge-offs to average loans outstanding
was 0.24% and 0.39% for the quarter and nine-month periods ended
March 31, 2000 on an annualized basis.
12
<PAGE>
Activity in the allowance for loan losses is as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Nine Months Three Months
Ended March 31, Ended March 31,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Allowance for loan losses, beginning of period $631 $554 $662 $618
Provision for loan losses 255 170 115 60
Loans Charged Off:
Consumer 153 73 38 26
Real Estate 0 2 0 2
Commercial 23 0 18 0
---- ---- ---- ----
Total Charge-Offs 176 75 56 28
Recoveries:
Consumer 14 3 2 2
Real Estate 0 0 1 0
Commercial 1 0 0 0
---- ---- ---- ----
Total Recoveries 15 3 3 2
---- ---- ---- ----
Allowance for loan losses, end of period $725 $652 $725 $652
==== ==== ==== ====
</TABLE>
Noninterest Income
------------------
The Company's noninterest income consists of deposit fees,
service charges, late fees and gains and losses on sales of
securities, loans and repossessed real estate and other assets.
Total noninterest income increased by $54,000 or 81.4% to
$121,000 for the quarter ended March 31, 2000 from $67,000 for
the quarter ended March 31, 1999. Total noninterest income
increased by $73,000 or 40.1% to $254,000 during the nine months
ended March 31, 2000 from $181,000 during the nine months ended
March 31, 1999. The majority of the increase in noninterest
income in the three and nine month periods was due to the
recognition of a $50,000 gain on the sale of foreclosed real
estate. The remainder of the increase in noninterest income in
the two comparable periods is primarily due to higher fees on
deposit accounts.
Noninterest Expenses
--------------------
Total noninterest expenses increased by $75,000 or 11.2%
to $739,000 for the quarter ended March 31, 2000 from $664,000
for the quarter ended March 31, 1999. Total noninterest expense
increased by $169,000 to $2.2 million during the nine months
ended March 31, 2000 from $2.0 million during the nine months
ended March 31, 1999. Compensation and employee benefits expense
increased by $35,000 or 7.9% and $80,000 or 6.1% to $476,000 and
$1.4 million for the quarter and nine month periods ended March
31, 2000 from $441,000 and $1.3 million for the quarter and nine
months ended March 31, 1999, respectively. The increase was
largely attributable to expenses relating to the hiring of
additional personnel and the higher cost of employee benefits,
particularly health insurance. Equipment expenses, consisting
primarily of depreciation and maintenance of the Company's
internal computer systems increased by $9,000 or 32.4% and
$41,000 or 50.1% in the three and nine-month periods ended March
31, 2000 compared to the comparable periods ended March 31,
1999. Data processing expenses increased $12,000 or 51.0% and
$33,000 or 38.2% in the three and nine-month periods ended March
31, 2000 compared to the comparable periods ended March 31,
1999.
Liquidity and Capital Resources
-------------------------------
An important component of the Company's asset/liability
structure is the level of liquidity available to meet the needs
of customers and creditors. The Company's Asset/Liability
Management Committee has established general guidelines for the
maintenance of prudent levels of liquidity. The Committee
continually monitors the amount and source of available
liquidity, the time to acquire it and its cost. Management of
the Company seeks to maintain an
13
<PAGE>
adequate level of liquidity in order to retain flexibility in
terms of investment opportunities and deposit pricing. Because
liquid assets generally provide lower rates of return, a high
level of liquidity will, to a certain extent, result in lower
net interest margins and lower net income.
The Company's most liquid assets are cash on hand,
interest-bearing deposits and Federal funds sold, which are
short-term. The levels of these assets are dependent on the
Company's operating, financing and investing activities during
any given period. At March 31, 2000, the Company's cash on hand,
interest-bearing deposits and Federal funds sold totaled $4.9
million. In addition, the Company has approximately $5.0 million
of mortgage-backed and equity securities classified as
available-for-sale.
The Company anticipates that it will have sufficient funds
available to meet its current loan commitments of $4.9 million.
These funds will be internally generated, raised through deposit
operations, or borrowed. Certificates of deposits that are
scheduled to mature in less than one year at March 31, 2000
totaled $38.3 million. Historically, a high percentage of
maturing deposits have remained with the Company.
The Company's primary sources of funds are deposits and
proceeds from maturing investment securities and mortgage-backed
securities and principal and interest payments on loans. While
maturities and scheduled amortization of mortgage-backed
securities and loans are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, competition and other
factors.
The Company's primary uses of cash in investing activities
during the nine months ended March 31, 2000 were loan principal
disbursements, net of repayments, of $10.6 million. The
Company's primary sources of cash provided from financing
activities during the nine months ended March 31, 2000 was a
$5.5 million increase in deposits and the increase of $1.0
million in outstanding borrowings from the Federal Home Loan
Bank of Atlanta.
The Company's primary use of cash in financing activities
during the nine months ended March 31, 2000 consisted of the
repurchase of stock and payment of cash dividends of $600,000.
As discussed in Note 5 - Regulatory Capital Requirements,
the Company and the Bank exceeded all regulatory minimum capital
requirements.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and use of proceeds.
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a vote of securities holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed herewith:
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
ended March 31, 2000.
15
<PAGE>
Signatures
In accordance with the requirements of the Securities
Exchange Act of 1934, the registrant caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
PATAPSCO BANCORP, INC.
Date: May 9, 2000 /s/ Joseph J. Bouffard
------------------------------
Joseph J. Bouffard
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 9, 2000 /s/ Michael J. Dee
------------------------------
Michael J. Dee
Chief Financial Officer & Controller
(Principal Financial Officer)
16
<PAGE>
ANNEX E
MAY 16, 2000
BOARD OF DIRECTORS
NORTHFIELD BANCORP, INC.
8005 HARFORD ROAD
BALTIMORE, MARYLAND 21234
FAIRNESS OPINION RELATIVE TO AGREEMENT OF PATAPSCO
BANCORP, INC., DUNDALK, MARYLAND TO ACQUIRE
NORTHFIELD BANCORP, INC., BALTIMORE, MARYLAND
----------------------------------------------
DEAR DIRECTORS:
We have reviewed the Agreement of Merger (the "Agreement") dated May
16, 2000, between (1) Northfield Bancorp, Inc., Baltimore, Maryland
("Northfield"), and its wholly-owned subsidiary, Northfield Federal Savings
Bank, Baltimore, Maryland ("Savings"); and (2) Patapsco Bancorp, Inc., Dundalk,
Maryland ("Patapsco") and its wholly-owned subsidiary, The Patapsco Bank,
Dundalk, Maryland ("Bank"), and PN Financial, Inc., Dundalk, Maryland ("New
Sub"), wholly-owned subsidiary of Bank. Under the terms of the Agreement,
Patapsco will form a new wholly-owned subsidiary, New Sub, which will acquire
Northfield and consolidate with it. Ultimately, Northfield will be liquidated
into Patapsco and Savings will be merged into Bank. As is set forth in the
Agreement, all of the 475,442 issued and outstanding Shares of Northfield (other
than Objecting Shares) shall be converted into the right to receive EIGHTEEN
DOLLARS AND FIFTY CENTS ($18.50) per share for each share of Northfield's Common
Stock issued and outstanding being so converted (consisting of $12.50 cash for
each share and 0.24 shares of Patapsco Bancorp, Inc. Preferred Stock having a
stated value of $25.00 per share), for a total value of EIGHT MILLION, SEVEN
HUNDRED NINETY-FIVE THOUSAND, SIX HUNDRED SEVENTY-SEVEN DOLLARS ($8,795,677).
Ferguson & Company ("F&C") is a financial consulting firm experienced
in the valuation of business enterprises with considerable experience in the
valuations of financial institutions. F&C is not affiliated with Northfield or
Patapsco. The Board of Directors of Northfield Bancorp, Inc., Baltimore,
Maryland, has retained F&C, in its capacity as a financial valuation and
consulting firm, to render its opinion on the fairness, from a financial
viewpoint, of the pending merger of Northfield with and into Patapsco. We
previously prepared appraisals in connection with Northfield's mutual-to-stock
conversion and public offering in 1998 and we have prepared appraisals for
Northfield's ESOP stock holdings. Other than the aforementioned engagements, we
have no present, past, or contemplated future business interest with either
Northfield or Patapsco.
During the course of the engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of Northfield including,
among other things: (1) the Agreement; (2) Northfield's audited financial
statements as of December 31, 1999 and 1998 and the years then ended; (3)
certain other internal information, primarily financial in nature, concerning
the business and operations of Northfield furnished to us by Northfield for
purposes of our analysis; (4) certain publicly available information with
respect to other thrifts or companies that we believe to be comparable to
Northfield; and (5) certain publicly available information concerning the nature
and terms of other transactions that we
<PAGE>
BOARD OF DIRECTORS
MAY 16, 2000
PAGE 2
consider relevant. We have also spoken to certain officers and outside
representatives of Northfield, to discuss the foregoing as well as other
matters we believe relevant to our inquiry.
In our review and analysis and in arriving at our opinion as expressed
herein, we have assumed and relied upon the accuracy and completeness of all of
the financial and other information provided to us or publicly available and
have not attempted independently to verify any such information. We did not
perform a review of the loan portfolio, and we did not assess the adequacy of
Northfield's or Patapsco's loan loss allowance. We have not conducted a physical
inspection of the properties or facilities of Northfield or Patapsco, nor have
we made or obtained any independent evaluations or appraisals of any of such
properties or facilities.
In conducting our analysis and arriving at our opinion as expressed
herein, we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (1)
the historical and current financial condition and results of operations of
Northfield, including interest income, interest expense, net interest income,
net interest margin, interest sensitivity, non-interest income and expense,
capitalization, the amount and type of non-performing assets and the allowance
for loan losses; (2) the business prospects for Northfield; (3) the economy of
Northfield's market area; and (4) the nature and terms of certain other merger
transactions that we believe to be relevant. We have also taken into account our
assessment of the general economic, market, financial and regulatory conditions
and trends, as well as our knowledge of the financial services industry, our
experience in connection with similar transactions, and our knowledge of
securities valuation generally. Our opinion necessarily is based upon conditions
as they exist and can be evaluated on the date hereof. Our opinion is, in any
event, limited to the fairness, from a financial point of view, of the
consideration to be received by the Shareholders of Northfield in the merger and
does not address Northfield 's business decision to accomplish the merger.
Based upon and subject to the foregoing, we are of the opinion that the
consideration to be received by Northfield in the merger is fair, as of the date
hereof, from a financial point of view, to the shareholders of Northfield Common
Stock.
This opinion is being delivered to the Board of Directors of Northfield
for its use and is not to be reproduced, disseminated or delivered to any third
party without the express written consent of F&C. Our opinion is as of the date
set forth above, and events or circumstances occurring after this date may
adversely affect the validity of the bases of our opinion. We consent to the
reproduction of this opinion in the proxy materials to be mailed to the holders
of Northfield Bancorp, Inc. Common Stock.
Very truly yours,
/s/ Ferguson & Company
Ferguson & Company
Robin L. Fussell
Principal
<PAGE>
ANNEX F
ARTICLES SUPPLEMENTARY
TO THE
ARTICLES OF INCORPORATION
OF
PATAPSCO BANCORP, INC.
WHEREAS, by the Articles of Incorporation (the "Articles") of Patapsco
Bancorp, Inc. (the "Corporation"), 1,000,000 shares of serial preferred stock,
with $0.01 par value per share (the "Preferred Stock") are authorized; and
WHEREAS, in and by Article VI of the Articles, the Board of Directors
of the Corporation, pursuant to Section 2-208 of the Maryland General
Corporation Law (the "Act"), is expressly authorized, by resolution or
resolutions from time to time adopted, to provide for the issuance of Preferred
Stock in series and to fix and state the powers, designations, preferences, and
relative, participating, optional or other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof; and
WHEREAS, the Board of Directors now desires to fix and determine the
terms of the Preferred Stock with respect to the issuance of certain shares of
Preferred Stock.
NOW, THEREFORE, BE IT RESOLVED, as follows:
A. Issuance and Designation Thereof.
--------------------------------
There is hereby created a series of such Preferred Stock to be
designated as the Series A Non-cumulative, Perpetual Convertible Preferred Stock
(the "Series A Shares"). The Series A Shares shall be a closed series consisting
of _____________ Series A Shares, each Series A Share having a Liquidation
Preference (as defined in Section C.1) of $25.00. The number of Series A Shares
may not be increased, but may be decreased, but not below the number of Series A
Shares then outstanding. Each Series A Share shall have the same relative
powers, preferences and rights as, and shall be identical in all respects with
the other Series A Shares.
B. Dividends.
---------
(1) The holders of Series A Shares shall be entitled to receive when,
as and if declared by the Board of Directors, but only out of funds legally
available therefor, from the date of issue of such shares to and including the
last day of the calendar quarter (March 31, June 30, September 30 or December
31, as the case may be) which includes the date of issue (the "Initial Dividend
Period") and for each dividend period commencing on the first day of each
calendar quarter (January 1, April 1, July 1 or October 1, as the case may be)
commencing after the Initial Dividend Period and ending on and including the
last day of each such calendar quarter (the Initial Dividend Period and each
such other dividend periods herein referred to as a "Dividend Period"), cash
dividends at the fixed annual rate per share of 7.5% of its Liquidation
Preference per annum ($25.00 per annum per Series A Share), as adjusted for
stock splits, stock dividends, recapitalizations, reclassifications and similar
events that affect the number of outstanding Series A Shares. Dividends shall be
payable to holders of record of the Series A Shares on any date fixed for that
purpose by the Board of Directors, provided, however, that such record date
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shall
<PAGE>
not exceed 30 days prior to the Payment Date. The dividends accruing
hereunder shall be computed on the basis of a three hundred sixty (360) day year
composed of twelve (12) months of thirty (30) days each.
(2) When dividends are not paid in full upon the Series A Shares and
any other series of Preferred Stock ranking on a parity as to dividends with the
Series A Shares, all dividends declared upon the Series A Shares and any other
series of Preferred Stock ranking on a parity as to dividends with the Series A
Shares shall be declared pro rata so that the amount of dividends declared per
share on the Series A Shares and such other Preferred Stock shall in all cases
bear to each other the same ratio that accrued dividends per share on the Series
A Shares and such other Preferred Stock bear to each other. No interest or sum
of money in lieu of interest shall be payable in respect of any dividend payment
or payments on the Series A Shares which may be in arrears.
(3) The rights of holders of Series A Shares to receive dividends is
non-cumulative. Accordingly, if the Board of Directors of the Corporation fails
to declare a dividend on the Series A Shares for any Dividend Period, the
Corporation shall have no obligation to pay a dividend for such Dividend Period,
whether or not dividends on the Series A Shares or any other class or series of
capital stock of the Corporation are declared for any future Dividend Period.
(4) If dividends at the rate per share set forth in Paragraph B(1) for
the then-current Dividend Period shall not have been declared and paid or set
apart for payment on all outstanding shares of Series A Shares for such Dividend
Period then, if the deficiency shall not be declared and fully paid or set apart
for payment prior to the next Dividend Period, the Corporation shall not, with
respect to the then-current Dividend Period, (i) declare or pay or set apart for
payment any dividends or make any other distribution on Junior Stock, other than
dividends or distributions paid in shares of, or options, warrants or rights to
subscribe for or purchase shares of, Junior Stock, or (ii) make any payment on
account of the repurchase, redemption or other retirement of any Junior Stock.
(5) If and whenever the Corporation fails to pay in whole or in part
three quarterly dividends (whether or not consecutive) payable on the Series A
Shares as provided for in this Section B, the Corporation, in connection with
the declaration and payment of any dividend upon Junior Stock which is otherwise
permissible as provided in this Section B, shall not declare and pay a quarterly
dividend in an amount in excess of the last quarterly dividend declared and paid
upon such Junior Stock.
C. Liquidation Rights.
------------------
(1) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, then, before any
distribution or payment shall be made to the holders of any Junior Stock, the
holders of Series A Shares shall be entitled to be paid in full an amount equal
to $25.00 per share (which amount is referred to hereafter as the "Liquidation
Preference"), as adjusted for stock splits, stock dividends, recapitalizations,
reclassifications and similar events that affect the number of outstanding
Series A Shares, without accumulation of unpaid dividends for prior Dividend
Periods, or such lesser amount remaining after the claims of all creditors have
been satisfied. If such payment shall have been made in full to all holders of
shares of Preferred Stock, the remaining assets of the Corporation shall be
distributed among the
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<PAGE>
holders of Junior Stock, according to their respective rights and preferences
and in each case according to their respective number of shares, but in no
event shall the holders of the Series A Shares be entitled to
any further participation in any distribution of assets by the Corporation. In
the event that, upon any voluntary or involuntary liquidation, dissolution or
winding up, the available assets of the Corporation are insufficient to pay such
Liquidation Preference on all outstanding Series A Shares and the liquidation
preferences payable on all shares of other classes or series of stock of the
Corporation ranking on a parity with the Series A Shares in the distribution of
assets, then the holders of Series A Shares and of all other such classes or
series shall share ratably in any distribution of assets in proportion to the
full amounts to which they would otherwise be respectively entitled.
(2) Nothing herein contained shall be deemed to prevent redemption of
Series A Shares by the Corporation in the manner provided in Section D hereof.
Any (i) sale, lease or other disposition of all or substantially all of the
assets of the Corporation, (ii) consolidation or merger of the Corporation with
or into any other corporation or other entity or person, or any other corporate
reorganization, in which the stockholders of the Corporation immediately prior
to such consolidation, merger or reorganization, own less than 50% of the
outstanding voting power of the surviving entity (or its parent) following the
consolidation, merger or reorganization, or (iii) transaction (or series of
related transactions involving a person or entity, or a group of affiliated
persons or entities) in which in excess of 50% of the Corporation's outstanding
voting power is transferred, shall be deemed to be a dissolution, liquidation or
winding up of the Corporation within the meaning of this Section C.
D. Redemption.
----------
(1) Subject to Section D(4) hereof and the prior approval of the Board
of Governors of the Federal Reserve System, the Corporation, at the option of
the Board of Directors, may redeem the whole or any part of the Series A Shares
at the time outstanding, at any time or from time to time, after five years from
the date of its issuance, or prior thereto upon the approval of at least a
majority of the outstanding Series A Shares, upon notice given as hereinafter
specified, at $25.00 per share together with all accrued and unpaid dividends as
of the redemption date for the then-current Dividend Period (without
accumulation of unpaid dividends for prior Dividend Periods). The Corporation
shall not be required to establish a sinking or retirement fund with respect to
the Series A Shares.
(2) Notice of every redemption of Series A Shares shall be given by
first class mail, postage prepaid, addressed to the holders of record of the
shares to be redeemed at their respective last addresses as they shall appear on
the books of the Corporation. Such mailing shall be at least 40 days and not
more than 70 days prior to the date fixed for redemption.
(3) In case of redemption of only a portion of the Series A Shares at
the time outstanding, the redemption may be either pro rata or by lot, at the
option of the Board of Directors of the Corporation. The Board of Directors
shall have full power and authority, subject to the provisions herein contained
and applicable regulatory approval, to prescribe the terms and conditions upon
which any or all of the Series A Shares shall be redeemed from time to time.
(4) If notice of redemption shall have been duly given, or if the
Corporation shall have given to a bank or trust company designated to act as
redemption agent irrevocable and
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<PAGE>
unconditional authorization and direction to give such notice, at least 40
days and not more than 70 days prior to the date fixed for redemption
(which date shall not be more than 70 days after the date of such authorization
and direction), and if on or before the redemption date specified therein the
cash funds necessary for such redemption shall have been deposited by the
Corporation with such bank or trust company in trust with irrevocable
instruction and authority, subject to Section D(5), to pay the redemption
price to the holders of the Series A Shares called for redemption
upon surrender of the certificate therefor, then, notwithstanding that any
certificate for such Series A Shares called for redemption shall not have been
surrendered for cancellation, from and after the time of such deposit, all such
Series A Shares so called for redemption shall no longer be deemed to be
outstanding and all rights with respect to such shares shall forthwith cease and
terminate, except only the right of the holders thereof to receive from such
bank or trust company at any time after the close of business on the date fixed
for redemption the funds so deposited, without interest. Any bank or trust
company selected by the Corporation to act as redemption agent shall be
organized and in good standing under the laws of the United States of America or
any State thereof, and shall be identified in the notice of redemption. Any
interest accrued on such funds shall be paid to the Corporation from time to
time. In case fewer than all the Series A Shares represented by a stock
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof; provided, however, that
such replacement certificate shall be issuable only in denominations of whole
shares and cash will be payable in respect of fractional interests.
(5) Any funds so set aside or deposited, as the case may be, and
unclaimed at the end of three years from such redemption date shall, to the
extent permitted by law, be released or repaid to the Corporation, after which
repayment the holders of the shares so called for redemption shall look only to
the Corporation for payment thereof.
(6) No sinking fund shall be established for the retirement or
redemption of the Series A Shares.
E. Voting Rights.
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(1) The holders of Series A Shares shall not have any voting rights
except as may be provided for in this Section E or except as may be required by
law.
(2) If and whenever the Corporation fails to pay in whole or in part
eight quarterly dividends (whether or not consecutive) payable on the Series A
Shares as provided for in Section B herein, the number of directors then
constituting the Board of Directors shall be increased by one director (such
additional director being referred to herein as the "Representative Director")
and the holders of Series A Shares, together with the holders of shares of every
other series of Preferred Stock ranking on a parity with the Series A Shares
with respect to the payment of dividends or distribution on liquidation
similarly entitled to vote for the Representative Director, voting separately as
a class, regardless of series, shall be entitled to elect the Representative
Director at any annual meeting of shareholders or special meeting held in place
thereof, or at a special meeting of the holders of such series of the Preferred
Shares called as hereinafter provided and at each annual meeting thereafter with
respect to the election of the Representative Director.
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<PAGE>
(a) At any time after the voting power shall have been so
vested in the holders of Series A Shares and of any other such series of the
Preferred Stock, the secretary of the Corporation shall call a special meeting
of the holders of the Series A Shares and of such other series of the Preferred
Stock entitled to vote for the election of the Representative Director to be
elected by them as herein provided, the call to be made by notice similar to
that provided in the by-laws for a special meeting of the shareholders or as
required by law.
(b) The Representative Director elected at any such special
meeting shall hold office for the balance of the term of the class or classes to
which such Representative Director was elected, and until his or her successor
shall have been elected and qualified. In case any vacancy shall occur in the
Representative Director elected by the holders of shares of such series of the
Preferred Stock, a successor shall be elected by the holders of such series,
such successor Representative Director to serve until the earlier of the: (i)
next annual meeting of shareholders or special meeting held in place thereof and
until his successor shall have been elected and qualified; or (ii) such
successor Representative Director's removal pursuant to the next sentence
hereof. The Representative Director may be removed from office only upon the
direction and order of applicable regulatory authorities or upon the vote of the
holders of the Preferred Stock which elected such Representative Director.
(c) At any meeting of shareholders held while holders of
Preferred Stock have the voting power to elect the Representative Director, the
holders of a majority of the voting power of the outstanding shares of Preferred
Stock so entitled to vote who are present in person or by proxy shall be
sufficient to constitute a quorum for the election of the Representative
Director as herein provided.
(d) Any new series of Preferred Stock other than any Junior
Stock shall be entitled to participate with the Series A Shares and any other
series so entitled in voting for the election of the Representative Director to
the extent and under the conditions set forth in the resolutions creating such
class or series, provided that the relative voting power of such series in such
election shall be as set forth in Section E(2) hereof.
(3) So long as any Series A Shares are outstanding, in addition to any
other vote of shareholders required by law or by the Corporation's Articles of
Incorporation, the affirmative vote of the holders of at least a majority of the
Series A Shares and of all other series of the Preferred Stock similarly
entitled to vote upon the matter then being considered, acting as a single class
regardless of series, given in person or by proxy, at any meeting called for the
purpose, shall be necessary for effecting or validating:
(a) Any amendment, alteration or repeal of any of the
provisions of these Articles Supplementary which affects materially or adversely
the voting rights, designations, Liquidation Preferences and other preferences,
qualifications, privileges, limitations, or other special rights or that would
reduce the redemption price or alter the redemption rights, of the holders of
the Series A Shares; provided, however, that for purposes of this subparagraph
(a), the amendment of the provisions of these Articles Supplementary so as to
authorize or create, or to increase the authorized amount of, any shares of any
class ranking junior to the Series A Shares with respect to both the payment of
dividends and distribution on liquidation shall not be deemed to affect
adversely the voting rights, designations, preferences, qualifications,
privileges, limitations, conversion rights or other special rights, if any, of
the holders of the Series A Shares,
-5-
<PAGE>
and provided further that if any such amendment, alteration or repeal would
affect materially or adversely any voting rights, designations, preferences,
qualifications, privileges, limitations or other special rights, if any, of
the holders of the Series A Shares which are not enjoyed by some or all of the
other series otherwise entitled to vote in accordance with this
Section E(3), the affirmative vote of the holders of at least a majority
of the Series A Shares and of all other series, if any, similarly
affected, similarly given, shall be required in lieu of the
affirmative vote of the holders of at least a majority of the Series A Shares
and of all other series of the Preferred Stock otherwise entitled to vote in
accordance with this Subsection (3); or
(b) The creation or authorization of any shares of any class
or series, or any security convertible into shares of any class or series,
ranking prior to or on a parity with the Series A Shares in the distribution of
assets on any liquidation, dissolution, or winding up of the Corporation or in
the payment of dividends.
provided, however, no such consent of the holders of the Series A Shares
pursuant to subparagraphs (a) and (b) of this Section E(3) above shall be
required if, at or prior to the time when any such action is to take effect or
when the issuance of any such securities is to be made, as the case may be, all
Series A Shares shall have been redeemed (payment having been made to the
holders of Series A Shares) or converted into Common Stock.
F. Conversion.
----------
At any time after the issuance of the Series A Shares (hereinafter in
this Section F only called the "Shares"), the Shares shall be convertible into
Common Stock on the following terms and conditions:
(1) Subject to and upon compliance with the provisions of this Section
F, the holder of any Shares may at such holder's option convert any such Shares
into such number of fully paid and non-assessable shares of Common Stock as are
issuable pursuant to subsection (3) of this Section F based on the Conversion
Rate, as such Rate may be adjusted in accordance with the provisions of this
Section F. No adjustment shall be made for dividends unpaid on any Shares that
shall be converted or for dividends on any Common Stock that shall be issuable
upon the conversion of such shares.
(2) The surrender of any Shares for conversion shall be made by the
holder thereof at the office of any bank or trust company in this state
including the Corporation itself or an affiliate thereof, which is appointed by
the Corporation as the conversion agent for the Series A Shares ("Conversion
Agent"), and such holder shall give written notice to the Corporation at said
office that such holder elects to convert such Shares in accordance with the
provisions of this Section F. Such notice also shall state name or names (with
addresses) in which the certificate or certificates for Common Stock which shall
be issuable on such conversion shall be issued. Subject to the provisions of
subsection (1) of this Section F, every notice of election to convert shall
constitute a contract between the holder of such Shares and the Corporation,
whereby such holder shall be deemed to subscribe for the number of shares of
Common Stock which such holder will be entitled to receive upon such conversion,
and in payment and satisfaction of such subscription, to surrender such Shares
and to release the Corporation from all obligations thereon, and whereby the
Corporation shall be deemed to agree that the surrender of such
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<PAGE>
Shares and the extinguishment of its obligations thereon shall constitute
full payment for the Common Stock so subscribed for and to be issued upon
such conversion.
As soon as practicable after the receipt of such notice and Shares, the
Corporation shall issue and shall deliver at said office of the Conversion Agent
to the person for whose account such Shares were so surrendered, a certificate
or certificates for the number of full shares of Common Stock issuable upon the
conversion of such Shares, and a check or cash for the payment (if any) to which
such person is entitled pursuant to subsection (5) of this Section F, together
with a certificate or certificates representing the Shares, if any, which are
not to be converted, but which constituted a portion of the Shares represented
by the certificate or certificates surrendered by such person. Such conversion
shall be deemed to have been effected on the date on which the Corporation shall
have received such notice, and the person or persons in whose name or names any
certificate or certificates for Common Stock shall be issuable upon such
conversion and surrender of Shares for the purpose shall be deemed to have
become on said date the holder or holders or record of the shares represented
thereby.
(3) The Conversion Rate shall be one share of Common
Stock for each Share surrendered for conversion.
(4) The Conversion Rate shall be subject to adjustment from time
to time as follows:
(a) If the Corporation shall (i) pay a dividend in shares of
its Common Stock, or effect a subdivision of its outstanding shares of Common
Stock (otherwise than by a payment of a dividend in Common Stock), (ii) combine
its outstanding shares of Common Stock into a smaller number of shares or (iii)
issue by reclassification of its shares of its Common Stock any shares of
capital stock, then the Conversion Rate in effect immediately prior thereto
shall be adjusted so that the holder of a Share surrendered for conversion after
the record date fixing stockholders to be affected by such event shall be
entitled to receive upon conversion the number of such shares of the Corporation
which such holder would have been entitled to receive after the happening of
such event had such Shares been converted immediately prior to such record date.
Such adjustment shall be made whenever any of such events shall happen, and
shall also be effective retroactively as to Shares converted between such record
date and the date of the happening of such event.
(b) In the event of any consolidation of the Corporation with
or merger of the Corporation into another corporation, or in the event of any
sale, conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of the property or assets of
the Corporation to another corporation, or in the case of any reorganization of
the Corporation, the holder of each Share then outstanding shall have the right
thereafter to convert such Shares into the kind and amount of shares of stock
and other securities and property, including cash, which would have been
deliverable to such holder upon such consolidation, merger, sale, conveyance,
exchange, transfer or reorganization if such holder had converted such holder's
Shares into Common Stock immediately prior to such consolidation, merger, sale,
conveyance, exchange, transfer or reorganization. In any such event, effective
provision shall be made in the instrument effecting or providing for such
consolidation, merger, sale, conveyance, exchange, transfer or reorganization so
that that provisions set forth herein for the protection of the conversion
rights of the Shares shall thereafter be applicable, as nearly as may be
practicable, in relation to any shares of stock or other securities or property,
including
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<PAGE>
cash, deliverable after such consolidation, merger, sale, conveyance,
exchange, transfer or reorganization upon the conversion of the Shares, or such
other securities as shall have been issued to the holders thereof in lieu
thereof or in exchange therefor. The provisions of this subsection (4)(b) shall
similarly apply to successive consolidations, mergers, sales, conveyances,
exchanges, transfers and reorganizations.
(c) No adjustment in the Conversion Rate shall be required
unless such adjustment would require an increase or decrease of at least two
percent (2%) in such Rate; provided, however, that any adjustments which by
reason of this subsection (4)(c) are not required to be, and are not, made shall
be carried forward and taken into account in any subsequent adjustment. All
calculations under this subsection (4)(c) shall be made to the nearest one
hundredth of a share.
(d) Whenever the Conversion Rate shall be adjusted as provided
in this Section F, the Corporation shall forthwith file at the office of the
Conversion Agent maintained by the Corporation pursuant to subsection (2) of
this Section F a statement signed by the Chairman of the Board or the President
of the Corporation and by its Treasurer stating the adjusted Conversion Rate
determined as provided herein. Such statement shall show in detail the facts
requiring such adjustment. Whenever the Conversion Rate is adjusted, the
Corporation shall cause a notice stating the adjustment and the new Conversion
Rate to be mailed to each holder of record Shares.
(5) No fractional shares or scrip representing fractional shares shall
be issued upon the conversion of any Shares. If more than one Share shall be
surrendered for conversion at one time by the same holder, the number of full
shares issuable upon conversion thereof shall be computed on the basis of the
aggregate number of such Shares so surrendered. If the conversion of any Shares
results in a fraction, an amount equal to such fraction multiplied by the
Closing Price of the Common Stock on the business day next preceding the date of
conversion shall be paid to such holder in cash by the Corporation. The Closing
Price of the Common Stock for each day shall be the last reported sales price,
regular way, on the principal national securities exchange upon which the Common
Stock is listed, or in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices, regular way, on such
national securities exchange, or if the Common Stock is not then listed on a
national securities exchange, the average of the closing prices or, if
applicable, closing bid and asked prices, in the over-the-counter market as
furnished by the nationally recognized securities firm or association selected
from time to time by the Corporation for that purpose. If no such prices are
available, the value of a share of Common Stock for purposes of this Section
F(5) shall be determined in good faith by the Board of Directors of the
Corporation.
(6) If any Share shall be called for redemption, the right to convert
such Share shall terminate and expire at the close of business on the business
day next preceding the date fixed for said redemption pursuant to Paragraph D
hereof.
(7) The issuance of stock certificates on conversion of Shares shall be
made free of any tax in respect of such issue. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of stock in a name other than that
of the holder of the Shares converted, and the Corporation shall not be required
to issue or deliver any such stock certificates unless and until the person or
persons
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<PAGE>
requesting the issuance thereof shall have paid to the Corporation the
amount of any such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
(8) If in any case a state of facts occurs where in the opinion of the
Board of Directors of the Corporation the other provisions of this Section F are
not strictly applicable, or if strictly applicable, would not fairly protect the
conversion rights of the Shares in accordance with the essential intent and
principles of such provisions, then the Board of Directors shall make an
adjustment in the application of such provisions in accordance with such
essential intent and principles as to protect such conversion rights as
aforesaid.
(9) The Corporation shall, at all times reserve and keep available out
of its authorized Common Stock the full number of shares of Common Stock
deliverable upon the conversion of all outstanding Shares and shall take all
such corporate action as may be required from time to time in order that it may
validly and legally issue fully paid and non-assessable shares of Common Stock
upon conversion of the Shares.
(10) Shares converted shall not be reissued as Series A Shares but
assume the status of authorized but unissued shares of Preferred Stock of the
Corporation.
(11) For purposes of this Section F:
(a) "Conversion Rate" at any time shall mean the amount of
Common Stock of the Corporation into which at such time one Share shall be
convertible in accordance with the provisions of this Section F. Subject to
adjustment as provided in this Section F, the Conversion Rate shall be as
provided in Section F(3).
(b) "Common Stock" shall mean stock of the Corporation of any
class, whether now or hereafter authorized, which has the right to participate
in the distribution of either earnings or assets of the Corporation without
limit or preferences as to the amount or percentage. If by reason of the
operation of subsection (4)(b) of this Section F the Shares shall be convertible
into any other shares of stock or other securities or property of the
Corporation, any reference herein to the conversion of Shares pursuant to this
Section F shall be deemed to refer to and include the conversion of Shares into
such other shares of stock or other securities or property.
G. Notice of Record Date.
---------------------
In the event:
------------
(1) that the Corporation takes a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a cash dividend) or any other distribution,
any right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right;
(2) that the Corporation subdivides or combines its outstanding
shares of Common Stock;
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<PAGE>
(3) of any reclassification of the Common Stock of the Corporation
(other than a subdivision or combination of its outstanding shares of Common
Stock or a stock dividend or stock distribution thereon), or of any
consolidation or merger of the Corporation into or with another corporation, or
of the sale of all or substantially all of the assets of the Corporation; or
(4) of the involuntary or voluntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Series A Preferred, and shall cause to be
mailed to the holders of the Series A Preferred at their last addresses as shown
on the records of the Corporation or such transfer agent, at least ten days
prior to the record date specified in (A) below or twenty days before the date
specified in (B) below, a notice stating
(A) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to such dividend,
distribution, subdivision or combination are to be determined, or
(B) the date on which such reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, sale, dissolution or winding up.
H. Definitions. As used herein with respect to the Series A Shares, the
-----------
term "Junior Stock" shall mean the common stock and any other class or series
of shares of the Corporation hereafter authorized over which Series A
Shares have preference or priority in the payment of dividends or in
the distribution of assets on any liquidation, dissolution or winding up of
the Corporation.
I. No Other Rights. Except as required by law, the Series A
------------------
Shares shall not have any relative, participating, optional or other
special rights and powers other than as set forth herein.
The Board of Directors of Patapsco Bancorp, Inc. (the "Corporation"),
pursuant to the express authority of the Corporation's Board of Directors which
authority was granted pursuant to resolutions adopted at meetings of the Board
of Directors on May __, 2000, duly adopted the Resolution contained in these
Articles Supplementary on ____________, 2000.
<PAGE>
IN WITNESS WHEREOF, Joseph J. Bouffard, its President, has executed
this instrument and its secretary, Theodore C. Patterson, has affixed the
corporate seal hereto and attested said seal on the ____ day of ________, 2000.
PATAPSCO BANCORP, INC.
SEAL President
ATTEST:
__________________________________
Secretary
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification of directors and officers of Patapsco Bancorp is
provided under Article XVII of the Articles of Incorporation of Patapsco Bancorp
for judgments, fines, settlements, and expenses, including attorney fees
incurred in connection with any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative, or investigative to the
fullest extent permitted by the General Corporation Law of the State of
Maryland.
Patapsco Bancorp has purchased director and officer liability insurance
that insures directors and officers against certain liabilities in connection
with the performance of their duties as directors and officers, including
liabilities under the Securities Act of 1933, as amended, and provides for
payment to Patapsco Bancorp of costs incurred by it in indemnifying its
directors and officers.
Under Maryland law, indemnification of directors and officers may be
provided for judgments, fines, settlements, and expenses, including attorney's
fees, incurred in connection with any threatened, pending, or completed action,
suit, or proceeding other than an action by or in the right of Patapsco Bancorp.
This applies to any civil, criminal, investigative or administrative action
provided that the director or officer involved acted in good faith, in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Indemnification of directors and officers may be also provided for
judgments, fines, settlements, and expenses, including attorney's fees, incurred
in connection with any threatened, pending, or completed action, or suit by or
in the right of the corporation if such director or officer acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. However, no indemnification shall be made in
respect of any claim, issue or matter in which such person is adjudged to be
liable for negligence or misconduct in the performance of his duties to the
corporation unless the court in which the action is brought deems indemnity
proper.
The grant of indemnification to a director or officer shall be
determined by a majority of a quorum of disinterested directors, by a written
opinion from independent legal counsel, or by the stockholders.
Indemnification shall be provided to any directors and officers for
expenses, including attorney's fees, actually and reasonably incurred in the
defense of any action, suit or proceeding to the extent that he or she has been
successful on the merits.
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following are filed as exhibits to this registration
statement:
Exhibit No. Description
----------- -----------
2/1/ Agreement of Merger by and among Patapsco Bancorp, Inc.,
The Patapsco Bank and PN Financial, Inc., and Northfield
Bancorp, Inc. and Northfield Federal Savings Bank dated May
16, 2000
3.1/2/ Articles of Incorporation of Patapsco Bancorp, Inc., including
proposed Articles Supplementary
3.2/3/ Bylaws of Patapsco Bancorp, Inc.
4.1/4/ Form of Certificate of Common Stock of Patapsco Bancorp, Inc.
4.2 Form of Certificate of Series A Noncumulative Convertible
Perpetual Preferred Stock of Patapsco Bancorp, Inc.
5 Opinion of Stradley Ronon Stevens & Young, LLP regarding the
legality of the securities being registered hereby (with
consent)
8 Form of Opinion of Stradley Ronon Stevens & Young, LLP
regarding certain federal tax matters
10.1/5/ Patapsco Bancorp, Inc. 1996 Stock Option and Incentive Plan
10.2/5/ Patapsco Bancorp, Inc. Management Recognition Plan
10.3(a)/3/Employment Agreement between Patapsco Federal Savings
and Loan Association and Joseph J. Bouffard
10.3(b)/3/Employment Agreement between Patapsco Bancorp, Inc. and
Joseph J. Bouffard
10.4(a)/3/Severance Agreements between Patapsco Federal Savings
and Loan Association and Debra Brockschmidt, Timothy King,
John McClean and Joseph Sallese
10.4(b)/3/Severance Agreements between Patapsco Bancorp, Inc. and
Debra Brockschmidt, Timothy King, John McClean and Joseph
Sallese for the year ended June 30, 1999.
10.5/3/ Patapsco Federal Savings and Loan Association Retirement Plan
for Non-Employee Directors
10.6/3/ Patapsco Federal Savings and Loan Association Incentive
Compensation Plan
10.7/3/ Deferred Compensation Agreements between Patapsco Federal
Savings and Loan Association and each of Directors McGowan
and Patterson
10.8(a)/3/Severance Agreement between Patapsco Federal Savings and
Loan Association and Frank J. Duchacek
10.8(b)/3/Severance Agreement between Patapsco Bancorp, Inc. and Frank
J. Duchacek
10.9/6/ The Patapsco Bank Retirement Plan for Non-Employee Directors
<PAGE>
23.1 Consent of Anderson & Associates, LLP (with respect to
Patapsco Bancorp)
23.2 Consent of Anderson & Associates, LLP (with respect to
Northfield Bancorp)
23.3 Consent of Stradley Ronon Stevens & Young, LLP (included in
opinions filed as Exhibits 5 and 8)
23.4 Consent of Ferguson & Company
24 Power of Attorney (see signature page)
99.1 Form of proxy
99.2 Voting Agreement dated May 16, 2000 by and between Patapsco
Bancorp, Inc. and the stockholders of Northfield Bancorp,
Inc.
-------------
1 Incorporated by reference to Annex A to the Proxy Statement/Prospectus
included herein.
2 Articles of Incorporation are incorporated by reference to Registrant's
Registration Statement on Form SB-2 (File No. 33-99734), and proposed
Articles Supplementary are incorporated by reference to Annex F to the Proxy
Statement/Prospectus included herein.
3 Incorporated by reference to Registrant's Registration Statement on Form SB-2
(File No. 33-99734)
4 Incorporated herein by reference from the Company's Registration
Statement on Form 8-A (File No. 0-28032).
5 Incorporated herein by reference from the Company's Annual Report on
Form 10-KSB for the year ended June 30, 1996 (File No. 0-28032)
6 Incorporated herein by reference from the Company's Annual Report on Form
10-KSB for the year ended June 30, 1998 (File No. 0-28032).
The Exhibit Index immediately precedes the attached exhibits.
<PAGE>
ITEM 22. UNDERTAKINGS
(a) ITEM 512 OF REGULATION S-B.
Rule 415 Offering. The undersigned small business issuer hereby
undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement: to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To file post-effective amendment to remove from registration any of
the securities that remain unsold at the termination of the offering.
Request for Acceleration of Effective Date. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 (the "Act") may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person of the
small business issuer in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question to whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first-class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this registration statement through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this registration statement when it became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Baltimore, Maryland as
of August 4, 2000.
PATAPSCO BANCORP, INC.
By: /s/ Joseph J. Bouffard
----------------------------------------
Joseph J. Bouffard
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Patapsco Bancorp, Inc.,
do hereby severally constitute and appoint Joseph J. Bouffard, our true and
lawful attorney and agent, to do any and all things and acts in our names in the
capacities indicated below and to execute any and all instruments for us and in
our names in the capacities indicated below which said Joseph J. Bouffard may
deem necessary or advisable to enable Patapsco Bancorp, Inc. to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with the registration
statement on Form S-4 relating to the offering of Patapsco Bancorp, Inc.'s
Series A Noncumulative Convertible Perpetual Preferred Stock, par value $.01 per
share (the "Preferred Stock"), which may be issued under the Agreement of
Merger, and Patapsco Bancorp, Inc.'s common stock which may be issued upon the
conversion of shares of Preferred Stock into common stock, including
specifically, but not limited to, power and authority to sign for us in our
names in the capacities indicated below the registration statement and any and
all amendments (including post-effective amendments) thereto; and we hereby
ratify and confirm all that said Joseph J. Bouffard shall do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Joseph J. Bouffard Director, President and Chief August 4, 2000
----------------------------------------
Joseph J. Bouffard Executive Officer
(Principal Executive Officer)
/s/ Michael J. Dee Vice President, Treasurer and August 4, 2000
----------------------------------------
Michael J. Dee Chief Financial Officer
(Principal Financial and Accounting
Officer)
/s/ Thomas P. O'Neill Chairman of the Board August 4, 2000
----------------------------------------
Thomas P. O'Neill
----------------------------------------- Secretary and Director
Theodore C. Patterson
/s/ Douglas H. Ludwig. Director August 4, 2000
----------------------------------------
Douglas H. Ludwig
/s/ Nicole N. Glaeser Director August 4, 2000
----------------------------------------
Nicole N. Glaeser
/s/ William R. Waters Director August 4, 2000
----------------------------------------
William R. Waters
</TABLE>
<PAGE>
PATAPSCO BANCORP, INC.
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2/1/ Agreement of Merger by and among Patapsco Bancorp, Inc.,
The Patapsco Bank and PN Financial, Inc., and Northfield
Bancorp, Inc. and Northfield Federal Savings Bank dated May
16, 2000
3.1/2/ Articles of Incorporation of Patapsco Bancorp, Inc., including
proposed Articles Supplementary
3.2/3/ Bylaws of Patapsco Bancorp, Inc.
4.1/4/ Form of Certificate of Common Stock of Patapsco Bancorp, Inc.
4.2 Form of Certificate of Series A Noncumulative Convertible
Perpetual Preferred Stock of Patapsco Bancorp, Inc.
5 Opinion of Stradley Ronon Stevens & Young, LLP regarding the
legality of the securities being registered hereby (with
consent)
8 Form of Opinion of Stradley Ronon Stevens & Young, LLP
regarding certain federal tax matters
10.1/5/ Patapsco Bancorp, Inc. 1996 Stock Option and Incentive Plan
10.2/5/ Patapsco Bancorp, Inc. Management Recognition Plan
10.3(a)/3/Employment Agreement between Patapsco Federal Savings
and Loan Association and Joseph J. Bouffard
10.3(b)/3/Employment Agreement between Patapsco Bancorp, Inc. and
Joseph J. Bouffard
10.4(a)/3/Severance Agreements between Patapsco Federal Savings
and Loan Association and Debra Brockschmidt, Timothy King,
John McClean and Joseph Sallese
10.4(b)/3/Severance Agreements between Patapsco Bancorp, Inc. and
Debra Brockschmidt, Timothy King, John McClean and Joseph
Sallese for the year ended June 30, 1999.
10.5/3/ Patapsco Federal Savings and Loan Association Retirement Plan
for Non-Employee Directors
10.6/3/ Patapsco Federal Savings and Loan Association Incentive
Compensation Plan
10.7/3/ Deferred Compensation Agreements between Patapsco Federal
Savings and Loan Association and each of Directors McGowan
and Patterson
10.8(a)/3/Severance Agreement between Patapsco Federal Savings and
Loan Association and Frank J. Duchacek
10.8(b)/3/Severance Agreement between Patapsco Bancorp, Inc. and Frank
J. Duchacek
10.9/6/ The Patapsco Bank Retirement Plan for Non-Employee Directors
<PAGE>
23.1 Consent of Anderson & Associates, LLP (with respect to
Patapsco Bancorp)
23.2 Consent of Anderson & Associates, LLP (with respect to
Northfield Bancorp)
23.3 Consent of Stradley Ronon Stevens & Young, LLP (included in
opinions filed as Exhibits 5 and 8)
23.4 Consent of Ferguson & Company
24 Power of Attorney (see signature page)
99.1 Form of proxy
99.2 Voting Agreement dated May 16, 2000 by and between Patapsco
Bancorp, Inc. and the stockholders of Northfield Bancorp,
Inc.
-------------
1 Incorporated by reference to Annex A to the Proxy Statement/Prospectus
included herein.
2 Articles of Incorporation are incorporated by reference to Registrant's
Registration Statement on Form SB-2 (File No. 33-99734), and proposed
Articles Supplementary are incorporated by reference to Annex F to the Proxy
Statement/Prospectus included herein.
3 Incorporated by reference to Registrant's Registration Statement on Form SB-2
(File No. 33-99734)
4 Incorporated herein by reference from the Company's Registration
Statement on Form 8-A (File No. 0-28032).
5 Incorporated herein by reference from the Company's Annual Report on
Form 10-KSB for the year ended June 30, 1996 (File No. 0-28032)
6 Incorporated herein by reference from the Company's Annual Report on Form
10-KSB for the year ended June 30, 1998 (File No. 0-28032).
