U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________________
Commission File Number 000-22925
AmericasBank Corp.
(Name of small business issuer in its charter)
Maryland 52-1948980
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3621 East Lombard Street, Baltimore, Maryland 21224
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(Address of principal executive offices)
Issuer's telephone number: 410-342-8303
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $0.01 per share
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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $810,000.
The aggregate market value of the common equity held by non-affiliates
was $1,898,520 as of March 22, 1999 based on a sales price of $10.00 per share
of Common Stock, which is the sales price at which the Common Stock was
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last traded on March 22, 1999 as reported by Bloomberg Financial Markets, L.P.
There is no active public trading market for the Common Stock and the $10.00 per
share price may not be indicative of present value.
The number of shares outstanding of the issuer's Common Stock was
426,946 as of March 25, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of
Stockholders of AmericasBank Corp. to be filed with the Securities and Exchange
Commission on or before April 29, 1999, are incorporated herein by reference in
Part I of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes X No
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS OF THE COMPANY.
AmericasBank Corp. (the "Company") was incorporated under
the laws of the State of Maryland on June 4, 1996, primarily to own all of the
outstanding shares of capital stock of a federal stock savings bank to be named
AmericasBank (the "Bank"). On April 15, 1997, the Office of Thrift Supervision
(the "OTS") granted the Company the necessary approvals to acquire the capital
stock of the Bank and to become a savings and loan holding company of the Bank.
The Company acquired all of the Bank's capital stock and the Bank opened on
December 1, 1997. The Bank currently has one branch in Baltimore, Maryland.
In order to facilitate the opening of a branch of the Bank
in Towson, Maryland and to acquire the capital necessary to obtain regulatory
approval to convert the Bank from a federal stock savings bank to a Maryland
commercial bank, the Company commenced a public offering (the "Offering") on
October 9, 1998, of a minimum of 125,000 units and a maximum of 312,500 units at
a price of $12.00 per unit (the "Units"), pursuant to the Company's Registration
Statement on Form SB-1 (No. 333-61335). Each Unit consists of one share of the
Company's Common Stock and one Common Stock purchase warrant (the "Purchase
Warrants"). Each Purchase Warrant entitles the holder thereof to purchase one
share of Common Stock at an exercise price of $13.00 per share, subject to
adjustment for certain events, beginning any time after April 8, 2000, until the
Purchase Warrant's expiration at 5:00 p.m. EST, on October 8, 2001.
The Offering was ongoing as of December 31, 1998. By its terms, the
Offering will expire on March 31, 1999. On January 12, 1999, the Company
completed the sale of the minimum number of Units in the Offering and, after
payment of all expenses associated with the Offering, will receive approximately
$1,285,000 of net proceeds from such sale. Management has used approximately
$1,250,000 of these proceeds to make additional capital contributions to the
Bank. It is anticipated that the Bank will use approximately $205,000 of the
additional capital for expenses associated with the Towson branch. The Bank's
remaining additional capital may be used to further the Bank's branch expansion
strategy, for loan originations, investments and general banking purposes.
Management believes that the approximately $1,250,000 of additional
capital provided to the Bank by the Company will enable the Bank to receive
regulatory approval to open a Towson branch, although there can be no assurance
that this will be the case. Management also believes that if maximum number of
Units are sold in the Offering, the resulting additional capital that the
Company will be able to provide the Bank will enable the Bank to receive
regulatory approval to convert from a federal stock savings bank to a Maryland
commercial bank, also named AmericasBank (the "Proposed Conversion"). The
purpose of the Proposed Conversion is to provide the Bank with additional
operating flexibility and to enhance its ability to provide a broader range of
banking products and services to its community. There can be no assurance that
the Company will sell the maximum number of Units in the Offering, and there can
be no assurance that the Company and the Bank will obtain the necessary
regulatory approval to consummate the Proposed Conversion even
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if the maximum number of Units is sold in the Offering. See "BUSINESS OF THE
BANK - Business Conducted and to be Conducted by the Bank," below.
The Company has no significant assets other than its interests in the Bank
and AmericasBank Holdings Corporation, a subsidiary formed to hold real
property. Accordingly, the Company's earnings are primarily dependent upon
dividends received by the Company from the Bank, which dividends are dependent
on the Bank's profitability and the Bank's compliance with certain regulatory
requirements.
At the present time, the Company does not have and does not intend to have
any employees.
BUSINESS OF THE BANK.
General.
On June 5, 1996, the organizers of the Company and the Bank (the
"Organizers") filed an application with the OTS to organize the Bank as a
federal stock savings bank. On April 15, 1997, the OTS conditionally approved
the application, and the Bank obtained all necessary regulatory approvals to
commence banking operations as of December 1, 1997. Effective as of December 1,
1997, the Bank commenced banking operations. The Bank's deposit accounts are
insured by the Federal Deposit Insurance Corporation (the "FDIC") and the Bank
is a member of the Federal Home Loan Bank System.
Effective as of December 1, 1997, the Bank also purchased certain assets
and assumed certain deposit liabilities primarily related to the Baltimore,
Maryland branch office of Rushmore Trust and Savings, FSB ("Rushmore"), located
at 3621 East Lombard Street, Baltimore, Maryland 21224 (the "Baltimore Branch").
Business Conducted and to be Conducted by the Bank.
The Bank is a community-oriented financial institution. During 1998, its
business primarily consisted of attracting retail deposits and seeking to invest
those deposits, together with funds generated from operations and borrowings, in
one-to four-family mortgage loans. To a lesser extent, during 1998, the Bank
sought to invest in home equity and second trust loans, multi-family loans,
commercial real estate loans, commercial business loans, construction and lot
loans (primarily for one- to four-family home construction for the borrower) and
consumer loans. The Bank's deposit base is comprised of various deposit products
including checking accounts, insured investment accounts, statement savings
accounts, passbook deposit accounts, money market accounts, certificates of
deposit and individual retirement accounts. See "RESULTS OF OPERATIONS," below.
The Bank offers direct deposit of payroll and social security checks and
automatic drafts for various accounts to its customers. To provide additional
convenience to its customers, the Bank intends to participate in the HONOR
Automatic Teller Machine Network at locations throughout the United States,
through which Bank customers can gain access to their accounts at any time. The
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Bank currently owns one automatic teller machine, in Towson, Maryland. As of
December 31, 1998, approximately 20 automatic teller machines owned by Network
Processing, LLC ("Network") were branded with the Bank's name through an
agreement between the Bank and Network. Director Baldev Singh is a member of
Network. Although the Bank receives no revenues from the branded machines, Bank
customers may use the branded machines for no charge. The Bank also intends to
offer its customers cash management services, safe deposit boxes and travelers
checks.
Management has determined that as a result of recent consolidations of
financial institutions, the Bank's current and potential market areas are not
being adequately served by existing financial institutions and that there is an
increasing local demand for commercial real estate, commercial business,
construction and consumer loans offered by a truly community-oriented financial
institution. As a result, the Bank will seek to convert from a federal stock
savings bank to a Maryland commercial bank and management will refocus the
Bank's lending strategy. Pursuant to this strategy, while continuing to pursue
its existing business of seeking to originate mortgage loans for the purpose of
financing and refinancing one-to-four family residential properties, the Bank
intends to expand gradually its commercial real estate, commercial business,
construction and consumer lending.
On August 27, 1998, the Board of Directors of the Bank and the Board of
Directors of the Company adopted a plan for the Proposed Conversion (the
"Conversion Plan"). The Conversion Plan requires the prior approval of the
Commissioner of Financial Regulation of the State of Maryland (the
"Commissioner") for the Bank to become a Maryland commercial bank, and the Board
of Governors of the Federal Reserve for the Company to become a bank holding
company. Management believes that to obtain the necessary regulatory approvals,
the Company must, among other things, raise additional capital. There can be no
assurance that the Company will be able to raise the necessary additional
capital from the Offering or otherwise, or that the necessary regulatory
approvals will be obtained.
In order to implement the Bank's refocused lending strategy and to enhance
the Bank's management in connection with the Proposed Conversion, management
believes that the Bank's president must have substantial experience in
commercial banking. On September 24, 1998, the Bank hired Richard J. Hunt, Jr.
to serve as president of the Bank. Mr. Hunt has over nine years of commercial
banking experience, having served in numerous capacities with several Maryland
and Washington, D.C. based banks. On December 9, 1998, the OTS approved Mr.
Hunt's appointment as President of the Bank. There can be no assurance that Mr.
Hunt will be able to successfully implement the Bank' refocused lending
strategy.
Strategy.
The Bank's objective is to create a customer-driven financial institution
focused on providing value to customers by delivering products and services
matched to the customers' needs. Management believes that customers will be
drawn to a locally owned and managed institution that demonstrates an active
interest in its customers and their business and personal financial needs.
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The banking industry in the Bank's market area has experienced substantial
consolidation in recent years. Many of the area's locally owned or managed
financial institutions have either been acquired by large regional bank holding
companies or have been consolidated into branches. This consolidation has been
accompanied by increasing fees for bank services, the dissolution of local
boards of directors, management and personnel changes and, in the perception of
management, a decline in the level of customer service. With recent changes in
interstate banking regulation, this type of consolidation is expected to
continue.
The Bank intends to pursue a strategy of long term growth by competing for
loans and deposits in its market area, establishing a new branch office in
Towson, Maryland and by opening additional branches, either through internal
growth or through acquisitions of existing financial institutions or branches
thereof. The Bank's ability to expand internally by establishing new branch
offices will be dependent on the ability to identify advantageous locations for
such branches and to fund the development of new branches. The ability to grow
through selective acquisitions of other financial institutions or branches of
such institutions will be dependent on successfully identifying, acquiring and
integrating such institutions or branches. Furthermore, the success of the
branch expansion strategy will be dependent upon the Bank's access to capital,
its ability to attract and train or retain qualified employees and its ability
to obtain regulatory approvals. The branch expansion strategy anticipates losses
from branch operations until such time as branch deposits and the volume of
other banking business reach the levels necessary to support profitable branch
operations. At this time, other than the plan to open a Towson branch, the
Company and the Bank have no specific plans regarding new branch offices or
acquisitions of existing financial institutions or branches thereof.
There can be no assurance that the Bank will be able to generate internal
growth or identify attractive acquisition candidates, acquire such candidates on
favorable terms, or successfully integrate any acquired institutions or branches
into its operations. In addition, the Bank's inability to implement the branch
expansion strategy could negatively impact the Bank's long term ability to
successfully compete in the marketplace.
Locations and Service Area.
Currently, the Bank's sole branch is located at 3621 East Lombard Street,
Baltimore, Maryland 21224. Management intends, subject to regulatory approval,
to open a branch of the Bank at 500 York Road, Towson, Maryland 21204. Upon
opening a Towson branch, the Bank's executive offices will move to the Towson
branch. The 500 York Road property is owned by the Company's wholly owned
subsidiary, AmericasBank Holdings Corporation.
Management anticipates that the Bank will draw most of its customer
deposits and conduct most of its lending transactions from within the area
surrounding its branch offices as well as from within the Baltimore metropolitan
area.
Competition.
The Baltimore metropolitan area is a highly competitive market for
financial services and the Bank faces intense competition both in making loans
and in attracting deposits. The Bank faces
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direct competition from a significant number of financial institutions operating
in the Bank's market area, many with a state-wide or regional presence and in
some cases a national presence. In addition, the Bank competes with other
community banks in its market area that have substantially the same business
philosophy and strategy as the Bank. Many of these financial institutions have
been in business for many years, have established customer bases, are
significantly larger and have greater financial resources than the Bank has and
are able to offer certain services that the Bank is not able to offer.
In addition, the Bank faces competition for deposits and loans from non-bank
institutions such as brokerage firms, credit unions, insurance companies, money
market mutual funds and private lenders.
Any change in governmental economic and monetary policy, banking and
credit regulations and general economic conditions, which changes are beyond the
control of the Bank, also can affect the demand for the Bank's services. The
rates of interest payable on deposits and chargeable on loans will be affected
by fiscal policy as determined by various governmental and regulatory
authorities, in particular the Federal Reserve, as well as by national, state
and local economic conditions. Through open market transactions, variations in
the discount rate and the establishment of reserve requirements, the Federal
Reserve exerts considerable influence over the cost and availability of funds
obtainable for lending or investing. These actions may at times result in
significant fluctuations in interest rates, which could have adverse effects on
the operations of the Bank. The nature or extent of any effects which monetary
policies or economic conditions might have on the business and earnings of the
Bank cannot be predicted.
Employees.
As of December 31, 1998, the Bank had five full-time employees. It is
anticipated that the Towson branch will have four full-time and one part-time
employee.
Year 2000 Compliance.
The much publicized Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define an applicable year.
Computer programs with date-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. With respect to software used for
bank operations, mistakes of this nature could cause disruptions of operations,
including, among other things, the temporary inability to process transactions
or engage in similar normal business activities. In addition, the Year 2000
Issue increases transaction risk with third parties, including customers.
The Bank contracts with an outside firm to provide data and transaction
processing services. The Bank's contract with this firm is scheduled to expire
on December 1, 2000. In February 1999, the Bank and the data processing firm
tested the Bank's data and transaction processing for Year 2000 compliance using
a January 3, 2000 transaction date. During the test, the Bank's data and
transaction processing successfully performed all processing functions. On March
1, 1999, the data processing firm advised the Bank that all of the data
processing firm's hardware, system and application code changes related to the
Year 2000 Issue had been made, and that the data processing firms's systems and
operations had been tested to determine that date sensitive calculations and
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functions can be accurately performed using 20th and 21st century dates. In
April 1999, the Bank and the data processing firm will retest the Bank's data
and transaction processing for Year 2000 compliance. The Bank does not
anticipate incurring any extra costs from the data processing firm in connection
with the Year 2000 Issue.
In light of the foregoing, the Bank does not believe that its operations
will be materially impacted by the Year 2000 Issue. However, there can be no
assurance that the data and transaction processing system will be Year 2000
compliant, and such failure may have a material adverse effect on the Company
and the Bank's earnings, cash flows and overall financial condition. If the data
and transaction processing system failed, the Bank would process its
transactions manually, until a new system could be placed online. Although the
Bank has not estimated the cost of manually processing transactions, the Bank
has successfully tested its ability to process transactions manually.
In addition to risks relating to internal Year 2000 compliance, the Bank
may be vulnerable to the failure of customers or other third parties with which
the Bank conducts business to remedy their own Year 2000 issues. For example, a
customer's failure to remedy its Year 2000 issues could impact the customer's
ability to pay its obligations to the Bank, which failure could have a material
adverse effect on the Company and the Bank's earnings, cash flows and overall
financial condition.
In accordance with OTS requirements, the Bank has appointed a Year 2000
Committee and has adopted a written plan detailing the procedures to be followed
by management to identify and solve potential problems and to monitor the
progress made by the Bank and the data processing firm to avoid Year 2000
problems. As of December 31, 1998, the Year 2000 Committee had completed the
evaluation phase but has not completed the assessment and implementation phases
of the plan. It is expected that the remaining phases will be completed by June
1999.
FACTORS AFFECTING FUTURE RESULTS.
In addition to the historical information contained in this Annual Report
on Form 10-KSB, this Annual Report on Form 10-KSB contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Annual Report on Form 10-KSB should be read
as being applicable to all related forward-looking statements wherever they
appear in this Annual Report on Form 10-KSB. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include those discussed below.
Limited Operating History; History of Losses. Both the Company and the
Bank are recently formed and have limited operating histories. Because the
Company's primary asset is the capital stock of the Bank, the Company's
operating results and financial position are dependent upon the operating
results and financial position of the Bank. For the years ended December 31,
1998 and 1997, the Company incurred net losses of $432,000 and $41,000,
respectively, and management expects that the Bank will continue to incur losses
as the Bank attempts to implement its branch expansion strategy. Many factors
could adversely affect the Company's short and long term operating performance,
including the failure to implement the branch expansion strategy, the failure to
implement the
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branch expansion strategy, the failure to implement the new lending strategy,
unfavorable economic conditions, increased competition, loss of key personnel
and government regulation.
No Assurance of Ability to Open New Branch. The Bank's ability to open a
new branch in Towson, Maryland is dependent upon the prior approval of the
Commissioner, if the Proposed Conversion is consummated and the Bank becomes a
Maryland commercial bank, or the OTS, if the Conversion is not consummated and
the Bank continues to operate as a federal stock savings bank. There can be no
assurance that the necessary approvals will be received or upon what terms and
conditions, if any, such approvals will be issued. The failure to obtain
regulatory approval to open a Towson branch would significantly impair the
branch expansion strategy and would, absent the opening of other branches,
render the Company and the Bank's success dependent on the Bank's Lombard Street
branch operations, which have not been profitable to date.
Potential Delay in Completion or Denial of Conversion Plan. The Conversion
Plan requires the prior approval of the Commissioner for the Bank to become a
Maryland commercial bank, and the Federal Reserve for the Company to become a
bank holding company. There can be no assurance that such approvals will be
received or upon what terms and conditions, if any, such approvals will be
issued.
If the Conversion Plan is not approved or consummation of the Proposed
Conversion is otherwise delayed, the Bank would be limited to those activities
permitted under the thrift charter, which would generally limit the Bank's
ability to satisfy what it believes is an increasing local demand for commercial
real estate, commercial business, construction and consumer loans offered by a
community-oriented financial institution, and therefore limit the Bank's ability
to grow.
If the Company is unable to provide the Bank with the necessary additional
capital from the Offering to facilitate the Proposed Conversion, the Company may
seek additional funds to enable the Company to provide the Bank with the
necessary additional capital. Any equity or debt financings, if available at
all, may be on terms which are not as favorable as this Offering and, in the
case of equity financings, could result in dilution to the Company's
stockholders. With respect to debt financings, the Company may seek to create,
subject to regulatory approval, a subsidiary business trust to issue preferred
securities, which would be guaranteed in certain respects by the Company.
Risks Related to Commercial, Construction and Consumer Lending. The Bank's
loan portfolio is principally comprised of long-term fixed-rate mortgage loans
for owner occupied and non-owner occupied (investor) residential properties.
Management has determined that as a result of recent consolidations of financial
institutions, the Bank's current and potential market areas are not being
adequately served by existing financial institutions and that there is an
increasing local demand for commercial real estate, commercial business,
construction and consumer loans offered by a truly community-oriented financial
institution. As a result, management has determined to refocus the Bank's
lending strategy. Pursuant to this strategy, while continuing to pursue its
existing business of seeking to originate mortgage loans for the purpose of
financing and refinancing one-to-four family residential properties, the Bank
intends to expand gradually its commercial real estate, commercial business,
construction and consumer lending.
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While commercial real estate, commercial business, construction and
consumer loans are generally more interest rate sensitive and carry higher
yields than do residential mortgage loans, they generally carry a higher degree
of credit risk than residential mortgage loans. Consequently, the
diversification of the Bank's loan portfolio may adversely alter its risk
profile. Moreover, provisions for loan losses may increase in the future as
management implements the strategy of continuing existing lines of business
while expanding gradually its commercial real estate, commercial business,
construction and consumer lending.
Commercial real estate loans are generally larger and present a greater
degree of risk than residential mortgage loans. Because payments on loans
secured by commercial real estate are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
in the economy.
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
Construction loans generally are considered to involve a higher degree of
credit risk than residential mortgage loans. 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 or development compared to the estimated
cost (including interest) of construction. If the estimate of value proves to be
inaccurate, the Bank would be confronted with a project, when completed, having
a value which is insufficient to ensure full repayment.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or that are
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer 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. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
therefore are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.
Risks Related to New Management. Management believes that the Bank's
President must have substantial experience in commercial banking in order to
implement the Bank's refocused lending strategy and to enhance the Bank's
management in connection with the Conversion. On September 24, 1998, the Bank
hired Richard J. Hunt, Jr. to serve as President of the Bank. Mr. Hunt has over
nine years of commercial banking experience, having served in numerous
capacities with several Maryland and Washington, D.C. based banks. There can be
no assurance that Mr. Hunt will be able to successfully implement the refocused
lending strategy.
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Impact of Interest Rate Volatility on Deposits. The results of operations
of the Bank depend to a large extent on the Bank's "net interest income," which
is the difference between the interest expense incurred in connection with the
Bank's interest-bearing liabilities, such as interest on deposit accounts, and
the interest income received from its interest-earning assets, such as loans and
investment securities. Volatility in interest rates can result in the flow of
funds away from financial institutions of the type similar to the Bank and into
direct investments, such as corporate securities and other investment vehicles
which, because of among other things the absence of federal deposit insurance,
generally pay higher rates of return. Such volatility could cause the Bank to
pay increased interest rates to obtain deposits, and if the Bank was not able to
increase the interest rates on its loans and the rate of return on its
investment portfolio, its net interest income would suffer.
Interest Rate, Lending and Other Risks Associated with the Loans Acquired
from Rushmore. The Bank's loans, which are comprised primarily of the loans
acquired from Rushmore, consist for the most part of fixed rate, long-term,
single family residential mortgage loans while the Bank's deposits consist
primarily of variable rate short-term accounts. Since the loans will mature more
slowly than the deposits, the net portfolio value and net interest income will
tend to decrease during periods of rising interest rates, but will tend to
increase during periods of falling interest rates. During the past several
years, market interest rates have been relatively lower than in prior years.
There is no assurance that such favorable conditions will continue. However,
lower market interest rates also have the effect of causing borrowers to
refinance their mortgage loans. The refinancing of the Bank's loans into loans
with lower interest rates would negatively impact the Bank's net interest income
as it would be unlikely that the Bank would be able to make new loans at or
above the interest rates of the refinanced loans. In addition, many of the loans
acquired from Rushmore were made prior to the current documentation requirements
of GNMA, FNMA or FHLMC and, therefore, they may not be able to be resold in the
traditional secondary market. During periods of rising interest rates, the
Bank's inability to resell certain of its loans in the secondary market could
have a material adverse effect on the Bank's net portfolio value and its net
interest income.
The growth of the Bank depends on, among other things, the Bank's ability
to limit the reduction of deposits acquired from Rushmore, its success in
deploying cash to invest in assets bearing sufficiently high yields without
incurring unacceptable credit or interest rate risk and its ability to service
the loans purchased from Rushmore. There can be no assurance that the Bank will
be successful in performing these tasks.
Risk of Loan Losses. Like all financial institutions, the Bank maintains
an allowance for loan losses to provide for loan defaults and nonperformance.
The allowance is based on, among other things, prior experience with loan losses
and an evaluation of the risks in the current portfolio, and is maintained at a
level considered adequate by management to absorb anticipated losses. Because
approximately 73% of the Bank's loans consist of loans acquired from Rushmore,
which loans were originated by Rushmore, the Bank's management made an estimate
of what was believed to be a reasonable initial allowance for loan losses. There
can be no assurance that the allowance for loan losses required in the future
will not be materially higher than the reserve established as of December 31,
1998.
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Although management believes it uses the best information available to
make determinations with respect to the allowances for loan losses and believes
such allowances are adequate, future adjustments may be necessary if there are
additional loan losses or if economic, operating and other conditions differ
substantially from the assumptions used in making the determinations. In
addition, management anticipates that the Bank's provisions for loan losses will
increase in the future as it implements the strategy of continuing existing
lines of business while expanding gradually its commercial real estate,
commercial business, construction and consumer lending, which loans generally
entail greater risks than residential mortgage loans. Also, regulatory agencies
may require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examinations.
Future provisions for loan losses could materially and adversely affect results
of operations of the Company and the Bank.
Risk of Branch Expansion Strategy. Management intends to expand the
business of the Bank by opening branches, either through internal growth or
through acquisitions of existing financial institutions or branches thereof. The
Bank's ability to expand internally by establishing new branch offices will be
dependent on the ability to identify advantageous locations for such branches
and to fund the development of new branches. The ability to grow through
selective acquisitions of other financial institutions or branches of such
institutions will be dependent on successfully identifying, acquiring and
integrating such institutions or branches. Furthermore, the success of the
branch expansion strategy will be dependent upon the Bank's access to capital,
its ability to attract and train or retain qualified employees and its ability
to obtain regulatory approvals. The branch expansion strategy anticipates losses
from branch operations until such time as branch deposits and the volume of
other banking business reach the levels necessary to support profitable branch
operations.
There can be no assurance that the Bank will be able to generate internal
growth or identify attractive acquisition candidates, acquire such candidates on
favorable terms, or successfully integrate any acquired institutions or branches
into its operations. In addition, the Bank's inability to implement the branch
expansion strategy could negatively impact the Bank's long term ability to
successfully compete in the marketplace. Except with respect to the Towson
branch, the Company and the Bank currently have no specific plans regarding new
branch offices or acquisitions of existing financial institutions or branches
thereof.
Impact of Government Regulation on Operating Results. The Company and the
Bank operate in a highly regulated environment and are subject to examination,
supervision and comprehensive regulation by several federal and state regulatory
agencies. Currently, the Bank primarily is subject to supervision and regulation
by the OTS and the FDIC, and the Company currently is subject to supervision and
regulation by the OTS. Assuming the consummation of the Proposed Conversion, the
Bank will be subject to supervision and regulation by the Commissioner, the
Federal Reserve and the FDIC, and the Company will be subject to supervision and
regulation by the Federal Reserve and the Commissioner. Banking regulations,
designed primarily for the safety of depositors, may limit the growth of
financial institutions like the Bank and the return to investors by restricting
activities such as the payment of dividends, mergers with or acquisitions by
other institutions, investments, loans and interest rates, interest rates paid
on deposits and the creation of branch offices. Financial institutions like the
Bank also are subject to capitalization guidelines set forth in federal
legislation, and could be subject to enforcement actions to the extent the Bank
is found by
10
<PAGE>
regulatory examiners to be undercapitalized. Laws and regulations
applicable to the Company and the Bank could change at any time, and there can
be no assurance that such changes would not adversely affect the business of the
Company and/or the Bank. In addition, the cost of compliance with regulatory
requirements could adversely affect the Company's and the Bank's ability to
operate profitably.
Risks of Competitive Market. The Company and the Bank operate in a
competitive market for financial services and the Bank faces intense competition
both in making loans and in attracting deposits. The Bank faces direct
competition from a significant number of financial institutions operating in the
Bank's market area, many with a state-wide or regional presence and in some
cases a national presence. In addition, the Bank competes with other community
banks in its market area that have substantially the same business philosophy
and strategy as the Bank. Many of these financial institutions have been in
business for many years, have established customer bases, are significantly
larger and have greater financial resources than the Bank and are able to offer
certain services that the Bank is not able to offer. In addition, the Bank faces
competition for deposits and loans from non-bank institutions such as brokerage
firms, credit unions, insurance companies, money market mutual funds and private
lenders.
Impact of Monetary Policy and Other Economic Factors on Operating Results.
Changes in governmental economic and monetary policy and banking and credit
regulations also affect the demand for the Bank's services. The rates of
interest payable on deposits and chargeable on loans is affected by fiscal
policy as determined by various governmental and regulatory authorities, in
particular the Federal Reserve, as well as by national, state and local economic
conditions. Through open market transactions, variations in the discount rate
and the establishment of reserve requirements, the Federal Reserve exerts
considerable influence over the cost and availability of funds obtainable for
lending or investing. These actions may at times result in significant
fluctuations in interest rates, which could have adverse effects on the
operations of the Bank.
General economic conditions can affect the credit quality of the Bank's
assets. During periods of adverse economic conditions and depending on the
extent to which the income and assets of the borrowers are affected by the
declining economic conditions, the ability of the Bank's borrowers to repay
loans may be affected. Adverse economic conditions particularly affect
commercial real estate, commercial business, construction and consumer loans.
Uncertainty as to Effects of Proposed Federal Legislation. Legislation
relating to banking and other financial services has been introduced from time
to time in Congress and is likely to be introduced in the future. Recently,
several legislative proposals for reforming the financial services industry have
been submitted before Congress, including the Financial Services Act of 1999.
The Financial Services Act of 1999 would expand the financial services industry
by, among other things, allowing banks to engage in securities underwriting,
insurance and other activities that are "financial" in nature. The legislation
also would repeal Glass-Steagall prohibitions on bank holding companies owning
firms that engage in securities underwriting, and would allow bank holding
companies to engage in a broad range of insurance activities. The legislation
would preserve the federal thrift charter.
11
<PAGE>
It is not currently possible to predict whether or when the Financial
Services Act of 1999 will be enacted into law, or if it is enacted into law,
whether it will remain in its current form. It also is not possible to predict
what impact the legislation, if enacted, would have on the Company or the Bank.
One consequence may be increased competition from large financial services
companies that, under the legislation, would be permitted to provide many types
of financial services to customers. Neither the Company nor the Bank currently
conduct any nonfinancial activities. Certain provisions of the legislation also
may affect the Bank assuming the consummation of the Proposed Conversion due to
a Maryland law that gives, with the approval of the Commissioner, Maryland
commercial banks the authority to engage in activities in which national banks
may engage.
Developments in Technology. The market for financial services, including
banking services and consumer finance services, is increasingly affected by
advances in technology, including developments in telecommunications, data
processing, computers, automation, Internet-based banking, telebanking, debit
cards and so-called "smart" cards. The ability of the Company and the Bank to
compete successfully in its markets may depend on the extent to which it is able
to exploit such technological changes. However, there can be no assurance that
the development of these or any other new technologies, or the Company and the
Bank's success or failure in anticipating or responding to such developments,
will materially affect the Company's business, financial condition or operating
results. Currently, the Bank does not offer Internet-based banking, telebanking,
debit or smart cards or other similar technical banking products which are
offered by many of the Bank's competitors, although the Bank intends to offer
such services in the future.
Year 2000 Issues. The much publicized Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define an
applicable year. Computer programs with date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. With respect to
software used for bank operations, mistakes of this nature could cause
disruptions of operations, including, among other things, the temporary
inability to process transactions or engage in similar normal business
activities. In addition, the Year 2000 Issue increases transaction risk with
third parties, including customers.
The Bank contracts with an outside firm to provide data and transaction
processing services. The Bank's contract with this firm is scheduled to expire
on December 1, 2000. In February 1999, the Bank and the Bank's outside data
processing firm tested the Bank's data and transaction processing for Year 2000
compliance using a January 3, 2000 transaction date. During the test, the Bank's
data and transaction processing successfully performed all processing functions.
On March 1, 1999, the data processing firm advised the Bank that all of the data
processing firm's hardware, system and application code changes related to the
Year 2000 Issue had been made, and that the data processing firms's systems and
operations had been tested to determine that date sensitive calculations and
functions can be accurately performed using 20th and 21st century dates. In
April 1999, the Bank and the data processing firm will retest the Bank's data
and transaction processing for Year 2000 compliance. The Bank does not
anticipate incurring any extra costs from the data processing firm in connection
with the Year 2000 Issue.
In light of the foregoing, the Bank does not believe that its operations
will be materially impacted by the Year 2000 Issue. However, there can be no
assurance that the data and transaction
12
<PAGE>
processing system will be Year 2000 compliant, and such failure may have a
material adverse effect on the Company and the Bank's earnings, cash flows and
overall financial condition. In addition to risks relating to internal Year 2000
compliance, the Bank may be vulnerable to the failure of customers or other
third parties with which the Bank conducts business to remedy their own
Year 2000 issues.
RESULTS OF OPERATIONS.
General.
The Bank commenced operations as of December 1, 1997, and its activities
have primarily consisted of drawing deposits, making loans and servicing the
deposits and loans acquired from Rushmore.
As of December 31, 1998, the Company had total assets of approximately
$12,077,000, total loans of approximately $6,688,000 and total deposits of
approximately $9,262,000. As of December 31, 1997, the Company had total assets
of approximately $11,420,000, total loans of approximately $6,303,000 and total
deposits of approximately $8,396,000. The Company experienced a loss of
approximately $432,000 for the year ended December 31, 1998 and $41,000 for the
year ended December 31, 1997.
For the year ended December 31, 1998, the Company's return on assets (net
loss divided by average total assets) was (3.76%), its return on equity (net
loss divided by average equity) was (16.05%), and its equity to assets ratio
(average equity divided by average total assets) was 23.43%. For the year ended
December 31, 1997, the Company's return on assets was (0.37%), its return on
equity was (1.45%), and its equity to assets ratio was 25.60%.
Liquidity, Capital Resources and Write-Off of Capitalized Amounts.
The Company principal sources of liquidity are cash and assets that can be
readily converted into cash, including investment securities maturing within one
year and available for sale securities. As of December 31, 1998, the Company had
$3,088,000 in cash and short term investments and $586,000 in available for sale
securities. As of December 31, 1997, the Company had $3,337,000 in cash and
short term investments and $569,000 in available for sale securities.
Fluctuations in the deposit levels of the Bank's customers would result in
corresponding fluctuations in the Company and the Bank's liquidity position. In
addition, although the Bank has not done so to date, the Bank is eligible to
borrow funds from the Federal Home Loan Bank of Atlanta, which serves as a
reserve credit capacity for its members.
The Company's consolidated stockholders' equity was $2,379,000 as of
December 31, 1998 and $2,811,000 as of December 31, 1997, primarily as a result
of the Company's 1997 initial public offering of 300,000 shares of Common Stock
at an offering price of $10.00 per share.
On October 9, 1998, the Company commenced its second public offering (the
"Offering"). The Offering was ongoing as of December 31, 1998 and will expire by
its terms on March 31, 1999. On
13
<PAGE>
January 12, 1999, the Company completed the sale of the minimum number of Units
in the Offering and, after payment of all expenses associated with the Offering,
will receive approximately $1,285,000 of net proceeds from such sale.
Management believes that the sale of the minimum number of Units in the
Offering will enable the Bank to open a branch in Towson, Maryland and that the
sale of the maximum number of Units in the Offering will enable the Proposed
Conversion to be consummated. If the Company is unable to sell the maximum
number of Units in the Offering, or such lesser amount as may be sufficient to
enable the Proposed Conversion to be consummated, the Company may seek
additional funds to enable the Proposed Conversion to be consummated. Any equity
or debt financings, if available at all, may be on terms which are not as
favorable as Offering and, in the case of equity financings, could result in
dilution to the Company's stockholders.
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5 (the "SOP") regarding financial reporting on the costs of start-up
activities. Under the SOP, organizational costs are considered start-up costs
and, commencing no later than fiscal years beginning after December 15, 1998,
entities must expense these costs as they are incurred. As a result of the SOP,
the Company was required to write-off its unamortized organizational costs no
later than the first quarter of 1999, as a cumulative change in an accounting
principle. Management decided to early adopt this SOP and to write-off the
Company and the Bank's organizational costs in 1998. This early adoption will
require the Company to restate its interim financial statements for the first
three quarters of 1998.
Net Interest Income/Margins.
The operations of the Bank are substantially dependent on its net interest
income, which is the difference between the interest expense incurred in
connection with the Bank's interest-bearing liabilities, such as interest on
deposit accounts, and the interest income received from its interest-earning
assets, such as loans and investment securities. Volatility in interest rates
can result in the flow of funds away from banks of the type similar to the Bank
and into direct investments, such as corporate securities and other investment
vehicles which, because of among other things the absence of federal deposit
insurance, generally pay higher rates of return. Such volatility could cause the
Bank to pay increased interest rates to obtain deposits and, if the Bank is not
able to increase the interest rates on its loans and the rate of return on its
investment portfolio, the Bank's net interest income will suffer.
The level of net interest income is determined primarily by the average
balances ("volume") and the rate spreads between the Bank's interest-earning
assets and the Bank's funding sources. The Bank's ability to maximize its net
interest income depends on increases or decreases in the volume of its
interest-earning assets and interest-bearing liabilities, increases or decreases
in the average
14
<PAGE>
rates earned and paid on such assets and liabilities, the ability to manage the
earning-asset portfolio, and the availability of particular sources of funds,
such as non-interest earning deposits.
The following table indicates the average volume of interest-earning
assets and interest-bearing liabilities and average yields and rates for the
Company and the Bank for the periods indicated, which are the operating periods
of the Bank.
Average Balances -- Yields and Rates (1)
<TABLE>
<CAPTION>
Year Ended December 1,1997 to
December 31,1998 December 31,1997
----------------- -----------------
Average Income/ Yield/ Average Income/ Yield/
Assets: Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (net of unearned
income) (2) $6,573,000 $597,000 9.08% $6,399,000 $47,000 8.81%
Mortgage backed securities 72,000 5,000 6.94 -- -- --
Money market accounts 548,000 26,000 4.74 893,000 4,000 5.38
Federal funds sold 2,899,000 159,000 5.48 2,681,000 12,000 5.37
Interest bearing bank balances 0 0 -- 31,000 --(3) --
Other earning assets (FHLB stock) 54,000 4,000 7.41 27,000 --(3) --
---------- ------- ---- ---------- ------ ----
Total earning assets (4) 10,146,000 791,000 7.79% 10,031,000 63,000 7.54%
---------- ------- ---- ---------- ------ ----
Allowance for loan losses (69,000) (51,000)
Cash and due from banks 185,000 198,000
Property and equipment, net 744,000 414,000
Other assets 478,000 454,000
------- -------
Total assets $11,484,000 $11,046,000
=========== ===========
Liabilities and stockholders' equity:
Statement savings $1,328,000 33,000 2.50% $1,452,000 3,000 2.50%
Money market 62,000 1,000 2.33 3,000 --(3) 3.00
Certificates of deposit 1,027,000 57,000 5.54 578,000 3,000 5.31
IRA 459,000 22,000 4.83 496,000 2,000 4.76
Insured investment 5,036,000 254,000 5.03 4,844,000 24,000 5.36
Passbook deposit 158,000 5,000 2.92 35,000 --(3) 3.00
-------- -------- ------- -------- -------- ----
Total interest-bearing liabilities 8,070,000 372,000 4.61% 7,408,000 32,000 5.18%
-------- ----- ------- ----
Checking accounts 479,000 632,000
Other liabilities 244,000 178,000
Stockholders' equity 2,691,000 2,828,000
--------- ---------
Total liabilities and stockholders'
equity $11,484,000 $11,046,000
Interest rate spread (Average rate =========== ===========
earned less average rate paid) 3.18% 2.36%
Net interest income (Interest earned
less interest paid) $419,000 $31,000
Net interest margin (Net interest ========= =======
income/total earning assets) 4.12% 3.71%
</TABLE>
(1) Average balances were calculated using December 1, 1997 and month end
balances (which approximate daily averages), as daily averages were not
available for the periods presented.
(2) Loans on non-accrual status are included in the calculation of average
balances.
(3) No interest income or de minimus interest income.
15
<PAGE>
(4) From inception through December 31, 1998, the Bank made no loans or
investments that qualify for tax-exempt treatment and, accordingly, had no
tax-exempt income.
Liquidity and Interest Rate Sensitivity.
The primary objective of asset/liability management is to ensure the
steady growth of the Company and the Bank's primary earnings component, net
interest income. Net interest income can fluctuate with significant interest
rate movements. To lessen the impact of these rate swings, management will
endeavor to structure the Company and the Bank's balance sheet so that repricing
opportunities exist for both assets and liabilities in roughly equivalent
amounts at approximately the same time intervals. Imbalances in these repricing
opportunities at any point in time constitutes interest rate sensitivity.
The measurement of the Company's and the Bank's interest rate sensitivity,
or "gap," is one of the principal techniques used in asset/liability management.
The interest sensitive gap is the dollar difference between assets and
liabilities which are subject to interest-rate pricing within a given time
period, including both floating rate or adjustable rate instruments and
instruments which are approaching maturity.
The following table sets forth the amount of the Company and the Bank's
interest-earning assets and interest-bearing liabilities as of December 31, 1998
which are expected to mature or reprice in each of the time periods shown:
Maturity and Rate Sensitivity Analysis
<TABLE>
<CAPTION>
Maturity or Maturity or Maturity or Maturity or
Repricing Repricing Repricing Repricing
Percent Within Within Within Over
Amount of Total 0-3 Months 4-12 Months 1-5 years 5 Years
------ -------- ---------- ----------- --------- -------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $6,688,000 65.36% $3,000 $675,000 $1,546,000 $4,464,000
Mortgage backed securities 442,000 4.32 --- --- 442,000 ---
Money market accounts 586,000 5.72 586,000 --- --- ---
Federal funds sold 2,463,000 24.07 2,463,000 --- --- ---
Other earning assets (FHLB
Stock) 54,000 0.53 --- --- --- 54,000
--------- ---- --------- -------- --------- ---------
Total interest-earning assets $10,233,000 100.00% $3,052,000 $675,000 $1,988,000 $4,518,000
=========== ====== ========== ======== ========== ==========
Interest-Bearing Liabilities:
Statement savings $1,184,000 13.46% $1,184,000 --- --- ---
Money market 243,000 2.76 243,000 --- --- ---
Certificates of deposit &
IRAs 2,225,000 25.29 35,000 660,000 1,530,000 ---
Insured investment 4,910,000 55.80 4,910,000 --- --- ---
Passbook deposits 237,000 2.69 237,000 --- --- ---
---------- ----- --------- --------- --------- ----------
Total interest-bearing
liabilities $8,799,000 100.00% $6,609,000 $660,000 $1,530,000 $ ---
========== ====== ========== ======== ========== ==========
Periodic repricing differences
(periodic gap) $(3,557,000) $15,000 $458,000 $4,518,000
=========== ======= ======== ==========
Cumulative repricing differences
(cumulative gap) $(3,557,000 $(3,542,000) $(3,084,000) $1,434,000
=========== =========== =========== ==========
Ratio of rate sensitive assets
to rate sensitive liabilities 46.18% 102.27% 129.93%
</TABLE>
Since all interest rates and yields do not adjust at the same velocity,
the gap is only a general indicator of interest rate sensitivity. The analysis
of the Bank's interest-earning assets and interest-
16
<PAGE>
bearing liabilities presents only a static view of the timing of maturities
and repricing opportunities, without taking into consideration the fact that
changes in interest rates do not affect all assets and liabilities equally. Net
interest income may be impacted by other significant factors in a given interest
rate environment, including changes in the volume and mix of interest-earning
assets and interest-bearing liabilities.
As indicated by the above table, the Bank's interest-earning assets
consist primarily of fixed rate, long-term loans while the Bank's
interest-bearing liabilities consist primarily of variable rate short-term
accounts. Since the interest-earning assets will mature more slowly than the
interest-bearing liabilities, the net portfolio value and net interest income
will tend to decrease during periods of rising interest rates, but will tend to
increase during periods of falling interest rates. In addition, many of the
Bank's loans which were acquired from Rushmore were made prior to the current
documentation requirements of GNMA, FNMA or FHLMC and, therefore, such loans may
not be able to be resold in the secondary market. During periods of rising
interest rates, the Bank's inability to resell certain of the loans acquired
from Rushmore in the secondary market could have a material adverse effect on
the Bank's net portfolio value and its net interest income.
Bank management will seek to improve the interest rate sensitivity of the
Bank's loan portfolio. Bank management meets periodically to monitor and manage
the structure of the Bank's balance sheet, control interest rate exposure, and
evaluate pricing strategies for the Bank. Strategies to better match maturities
of interest-earning assets and interest-bearing liabilities could include call
provisions, adjustable rate mortgages, residential construction lending and
other short term products. The Bank intends to sell originations of fixed rate
mortgages that are not subject to at least a five year call provision in the
secondary market and portfolio rate sensitive products. All fixed rate mortgages
will be underwritten in accordance with GNMA, FNMA or FHLMC requirements.
In theory, interest rate risk can be diminished by maintaining a nominal
level of interest rate sensitivity. In practice, this is made difficult by a
number of factors, including cyclical variation in loan demand, different
impacts on interest-sensitive assets and liabilities when interest rates change,
and the availability of funding sources. Bank management will generally attempt
to maintain a balance between rate-sensitive assets and liabilities as the
exposure period is lengthened to minimize the overall interest rate risk to the
Bank.
Lending Activities.
General. As a federal stock savings bank, the Bank lending activities are
primarily comprised of seeking to originate mortgage loans for the purpose of
financing and refinancing one-to-four family residential properties. To a lesser
extent, the Bank seeks to originate home equity and second trust loans,
commercial real estate loans, multi-family real estate loans (five units or
more), commercial business loans, construction and lot loans (primarily for
one-to-four family home construction for the borrower) and consumer loans. The
types of loans the Bank originates generally are subject to federal and state
laws and regulations.
In connection with and assuming the consummation of the Proposed
Conversion, the Bank will refocus its lending strategy. Pursuant to this
refocused strategy, while continuing to pursue its
17
<PAGE>
existing business of seeking to originate mortgage loans for the purpose of
financing and refinancing one-to-four family residential properties, the Bank
intends to expand gradually its commercial real estate, commercial business,
construction and consumer lending.
The Bank's ability to originate loans is dependent upon the relative
customer demand, which is affected by the current and expected future level of
interest rates. Interest rates are affected by the demand for loans and the
supply of money available for lending purposes and the rates offered by
competitors. Among other things, these factors are, in turn, affected by
economic conditions, monetary policies of the federal government, including the
Federal Reserve, and legislative tax policies.
During 1998, the Bank disbursed approximately $2,200,000 in new loans.
Loan Portfolio Composition. The Bank's loan portfolio as of December 31,
1998 and December 31, 1997 was principally comprised of long-term fixed-rate
mortgage loans for owner occupied and non-owner occupied (investor) residential
properties.
As of December 31, 1998, the Bank's loans totaled $6,688,000, of which
$4,863,000 were one-to-four-family mortgage loans, or approximately 73% of the
Bank's loan portfolio. At the same date, second trust mortgage loans were
$389,000, or approximately 6% of the Bank's loan portfolio. As of December 31,
1998, commercial real estate loans were $912,000, or approximately 14% of the
Bank's loan portfolio, construction and lot loans were $280,000, or
approximately 4%, and consumer loans were $244,000, or approximately 3% of the
Bank's loan portfolio. As of December 31, 1998, $4,858,000 or approximately 73%
of the Bank's loan portfolio constituted loans purchased from Rushmore.
As of December 31, 1997, the Bank's loans totaled $6,303,000, of which
$5,210,000 were one-to-four-family mortgage loans, or approximately 83% of the
Bank's loan portfolio. At the same date, second trust mortgage loans were
$69,000, or approximately 1% of the Bank's loan portfolio. As of December 31,
1997, commercial real estate loans were $808,000, or approximately 13% of the
Bank's loan portfolio, and consumer loans were $216,000, or approximately 3% of
the Bank's loan portfolio. As of December 31, 1997, $6,115,000 or 97% of the
Bank's loan portfolio constituted loans purchased from Rushmore.
As of December 31, 1998, none of the Bank's loans had an adjustable
interest rate. As of December 31, 1997, one of the Bank's loans, with a balance
on such date of $90,000, had an adjustable interest rate. Since all of the
Bank's loans are fixed-rate, the Bank does not have the flexibility to adjust
the rates of these loans to the current interest rate environment. Adjustable
rate loans allow this flexibility.
The following table sets forth the composition of the Bank's loans in
dollar amounts and in percentage of the respective portfolio as of the dates
indicated.
18
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Percentage Percentage
Type of Loans Amount of Total Amount of Total
------------- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Commercial--real estate $912,000 13.63% $ 808,000 12.82%
Residential real estate
Owner occupied 3,811,000 56.98 3,886,000 61.65
Investor 1,052,000 15.73 1,324,000 21.01
Second trust 389,000 5.82 69,000 1.09
Construction & Lot 280,000 4.19 -- --
Consumer
Deposit secured 234,000 3.50 189,000 3.00
Unsecured 10,000 0.15% 27,000 0.43
--------- ------- --------- ------
Total loans 6,688,000 100.00% 6,303,000 100.00%
======= ======
Less:
Allowance for loan losses (85,000) (52,000)
---------- ----------
Net loans $6,603,000 $6,251,000
========== ==========
</TABLE>
The following table sets forth the contractual maturity of the Bank's
fixed rate loans and the period to repricing of the Bank's adjustable rate loan
as of the dates indicated. Some of the loans may be renewed or repaid prior to
maturity. Therefore, the following table should not be used as a forecast of
future cash collections:
<TABLE>
<CAPTION>
More Than More Than
Up to 1 1 Year to 10+ Up to 1 1 Year to
Year 10 Years Years Total Year 10 Years 10+ Years Total
---- -------- ----- ----- ---- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
(commercial and
residential) $364,000 $3,132,000 $2,668,000 $6,164,000 $16,000 $2,841,000 $3,230,000 $6,087,000
Consumer 34,000 210,000 -- 244,000 5,000 102,000 109,000 216,000
Construction & Lot 280,000 -- -- 280,000 -- -- -- --
-------- ---------- ---------- ---------- ------- ---------- ---------- ----------
Total $678,000 $3,342,000 $2,668,000 $6,688,000 $21,000 $2,943,000 $3,339,000 $6,303,000
======== ========== ========== ========== ======= ========== ========== ==========
Fixed interest rate $678,000 $3,342,000 $2,668,000 $6,688,000 $21,000 $2,853,000 $3,339,000 $6,213,000
Variable interest
rate -- -- -- -- -- 90,000 -- 90,000
-------- ---------- ---------- ---------- ------- ---------- ---------- ----------
Total $678,000 $3,342,000 $2,668,000 $6,688,000 $21,000 $2,943,000 $3,339,000 $6,303,000
======== ========== ========== ========== ======= ========== ========== ==========
</TABLE>
The scheduled repayments as shown above are reported in the maturity category in
which the payment is due, except for the adjustable rate loan, which is reported
in the period to repricing.
Secured Residential Real Estate Loans. The Bank offers fixed-rate and
adjustable-rate mortgage loans primarily secured by one- to four-family
residences, with maturities up to 30 years. All one-to-four family loans
originated by the Bank are underwritten in accordance with GNMA, FNMA or FHLMC
standards. The Bank originates loans for both owner occupied and non-owner
occupied (investor) residential properties. Non-owner occupied residential
mortgage loans generally carry a higher degree of credit risk than owner
occupied residential mortgage loans.
19
<PAGE>
The Bank also offers fixed-rate and adjustable-rate home equity and second
trust loans, primarily secured by one- to-four family, owner-occupied
residences. The Bank employs similar underwriting standards in making home
equity and second trust loans as those utilized in making residential mortgage
loans.
Although the Bank had not done so as of December 31, 1998, the Bank
intends from time to time to purchase or participate in adjustable-rate mortgage
loans.
As of December 31, 1998, of the $6,688,000 of the Bank's loans, $4,863,000
were one-to-four family mortgage loans, or approximately 73% of the Bank's loan
portfolio, and $389,000 were second trust mortgage loans, or 6% of the Bank's
loan portfolio. Of the $4,863,000 in one-to-four family mortgage loans,
$4,138,000 or approximately 85% of such loans constituted loans purchased from
Rushmore. Of the $389,000 in second trust mortgage loans, $66,000 or
approximately 17% of such loans constituted loans purchased from Rushmore.
As of December 31, 1997, of the $6,303,000 of the Bank's loans, $5,210,000
were one-to-four family mortgage loans, or approximately 83% of the Bank's loan
portfolio, and $69,000 were second trust mortgage loans, or 1% of the Bank's
loan portfolio. Of the $5,210,000 in one-to-four family mortgage loans,
$5,022,000 or approximately 96% of such loans constituted loans purchased from
Rushmore. All of the second trust mortgage loans were purchased from Rushmore.
Commercial and Multi-Family Real Estate Loans. The Bank offers commercial
and multi-family real estate loans (five units or more) generally secured by
property located in the Bank's market area. Although the Bank had not done so as
of December 31, 1998, the Bank intends from time to time to purchase or
participate in commercial and multi-family loans. In reaching a decision on
whether to make a commercial real estate or multi-family loan, the Bank
considers a number of factors, including market conditions, the net operating
income of the mortgaged premises before debt service and depreciation, the debt
service ratio (the ratio of net operating income to debt service) and the ratio
of loan amount to appraised value.
Commercial real estate and multi-family loans are generally larger and
present a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate and multi-family properties
are often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to adverse conditions
in the real estate market or in the economy. The Bank seeks to minimize these
risks through its underwriting standards.
As of December 31, 1998, of the $6,688,000 of the Bank's loans, $912,000
were commercial real estate loans, or approximately 14% of the Bank's loan
portfolio. Of the $912,000 in commercial real estate loans, $512,000, or
approximately 56% of such loans constituted loans purchased from Rushmore. As of
December 31, 1997, of the $6,303,000 of the Bank's loans, $808,000 were
commercial real estate loans, or approximately 13% of the Bank's loan portfolio.
All of such loans were purchased from Rushmore. The commercial real estate loans
are primarily concentrated in loans secured by restaurants and taverns. The Bank
has no multi-family loans in its portfolio. The
20
<PAGE>
Bank intends to expand its commercial real estate lending assuming the
consummation of the Proposed Conversion.
Commercial Business Loans. Although it had not done so as of December 31,
1998, the Bank intends to pursue opportunities to offer commercial business
loans, primarily to businesses located in the Bank's market area. While
federally chartered savings institutions are limited to holding a maximum of 20%
of their total assets in secured or unsecured loans and letters of credit for
commercial, corporate, business and agricultural purposes and in certain
commercial leases, Maryland commercial banks are not so limited.
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. The Bank will seek to minimize these risks
through its underwriting standards.
As of December 31, 1998 and December 31, 1997, the Bank had no commercial
business loans in its portfolio.
Construction and Lot Loans. The Bank seeks to originate, on a case by case
basis, loans for the development of property to customers in its market area and
loans secured by real property located in its market area. The Bank's
construction loans primarily will be made to finance the construction of
one-to-four family, owner-occupied residential properties.
Construction and lot loans generally are considered to involve a higher
degree of credit risk than residential mortgage loans. 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 or development compared to
the estimated cost (including interest) of construction. If the estimate of
value proves to be inaccurate, the Bank would be confronted with a project, when
completed, having a value which is insufficient to ensure full repayment. Risk
of loss on a lot loan is dependent on the borrower's continuing financial
stability and the accuracy of the appraisal of the real property. The Bank will
seek to minimize these risks through its underwriting standards.
As of December 31, 1998, of the $6,688,000 of the Bank's loans, $280,000
were construction and lot loans, or approximately 4% of the Bank's loan
portfolio. None of these loans were purchased from Rushmore. As of December 31,
1997, the Bank had no construction or lot loans in its portfolio. The Bank
intends to expand its construction lending assuming the consummation of the
Proposed Conversion.
Consumer Loans. The Bank offers a variety of consumer loans, primarily
consisting of fixed rate installment loans secured by automobiles or by deposits
at the Bank.
21
<PAGE>
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or that are
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer 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. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
therefore are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. The Bank seeks to minimize these risks through its underwriting
standards.
As of December 31, 1998, of the $6,688,000 of the Bank's loans, $244,000
were consumer loans, or approximately 3% of the Bank's loan portfolio. Of the
$244,000 of such consumer loans, $142,000, or approximately 58% constituted
loans purchased from Rushmore. As of December 31, 1997, of the $6,303,000 of the
Bank's loans, $216,000 were consumer loans, or approximately 3% of the Bank's
loan portfolio. All of such loans were purchased from Rushmore. The Bank intends
to expand its consumer lending assuming the consummation of the Proposed
Conversion.
Marketing and Procedures for Loan Approvals. The Bank's lending activity
currently is conducted primarily from its one branch office, primarily through
contacts with existing and past customers of the Baltimore Branch of Rushmore,
advertising, customer calls and contacts by the Bank's and the Company's
employees, officers and directors, and solicitations to local real estate
brokers, builders and real estate developers. Upon opening a Towson branch and
upon opening additional branches in connection with the branch expansion
strategy, the Bank's lending activity also will be conducted from these
additional branches, although there can be no assurance that the Bank will be
able to open a Towson branch or at any other location or that the branch
expansion strategy will be successful.
The Bank's lending is subject to written underwriting standards and to
loan origination procedures. Decisions on loan applications are made on the
basis of detailed applications and, where applicable, property valuations. The
loan applications are designed primarily to determine the borrower's ability to
repay and the more significant items on the applications are verified through
use of credit reports, financial statements, tax returns and/or confirmations.
The Bank intends to sell originations of fixed rate mortgage loans that are not
subject to at least a five year call provision in the secondary market and will
retain in its portfolio rate sensitive products.
The Bank generally requires title insurance on its secured real estate
loans as well as fire and extended coverage casualty insurance in amounts at
least equal to the principal amount of the loan or the value of improvements on
the property, depending on the type of loan. The Bank requires flood insurance
to protect the property securing its interest when the property is located in a
flood plain. The Bank generally will not lend more than 90% of the appraised
value on its secured real estate loans, and requires private mortgage insurance
on residential mortgage loans with loan-to-value ratios in excess of 80%.
Nonperforming Loans and Other Delinquent Assets. Management of the Bank
performs reviews of all delinquent loans. The procedures taken by the Bank with
respect to delinquencies
22
<PAGE>
vary depending on the nature of the loan and period of delinquency. The Bank
generally requires that delinquent mortgage loans be reviewed and that a written
late charge notice be mailed shortly after the date of delinquency. The Bank's
policies provide that telephone contact be attempted to ascertain the reasons
for delinquency and the prospects of repayment. The Bank's policies provide that
when contact is made with the borrower at any time prior to foreclosure, the
Bank will attempt to obtain full payment or work out a repayment schedule with
the borrower to avoid foreclosure.
The Bank generally classifies loans as non-accrual when collection of full
principal and interest under the original terms of the loan is not expected or
payment of principal or interest has become ninety days past due. Classifying a
loan as non-accrual results in the Bank no longer accruing interest on such loan
and reversing any interest previously accrued but not collected. A non-accrual
loan may be restored to accrual status when delinquent principal and interest
payments are brought current and future monthly principal and interest payments
are expected to be collected. The Bank recognizes interest on non-accrual loans
only when received.
Any property acquired by the Bank as a result of foreclosure on a mortgage
loan will be classified as "real estate owned" and will be recorded at the lower
of the unpaid principal balance or fair value at the date of acquisition and
subsequently carried at the lower of cost or net realizable value. Any required
write-down of the loan to its net realizable value will be charged against the
allowance for loan losses. Upon foreclosure, the Bank generally will require an
appraisal of the property and, thereafter, appraisals of the property on at
least an annual basis and external inspections on at least a quarterly basis. As
of December 31, 1998, the Bank held no real estate acquired as a result of
foreclosure.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. At the dates shown, the Bank had
no loans which are "troubled debt restructurings" as defined in Statement of
Financial Accounting Standards No.
15.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Loans accounted for on a non-accrual basis $93,000 $41,000
Accruing loans delinquent 90 days or more as to
principal or interest -- --
------- -------
Total non-performing loans $93,000 $41,000
======= =======
Non-performing loans to total loans 1.39% 0.65%
</TABLE>
For the year ended December 31, 1998 and the year ended December 31, 1997,
gross interest income of $4,000 and $1,000, respectively, would have been
recorded by the Bank on loans accounted for on a non-accrual basis if the loans
had been current throughout the respective periods. There was no interest on
such loans included in income during the respective periods.
As of December 31, 1998, the Bank did not have any loans in its portfolio
which were not accounted for on a non-accrual basis or as accruing loans
delinquent 90 days or more as to principal or interest with respect to which
known information about the possible credit problems of the borrowers or the
cash flow of the security has caused management of the Bank to have some doubts
23
<PAGE>
as to the ability of the borrowers to comply with present loan repayment terms
and which may result in the future inclusion of the loans in the non-performing
asset categories.
The Bank has adopted the provisions of Statements of Financial Accounting
Standards No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of
Loan," as amended by Statements of Financial Accounting Standards No. 118 ("SFAS
118"), "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure," effective January 1, 1995. SFAS 114 and SFAS 118 require that
impaired loans, which consist of all modified loans and other loans for which
collection of all contractual principal and interest is not probable, 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. The Bank
considers payments which are less than 60 days late to be a minimum delay in the
payment terms. The Bank considers consumer loans as homogenous loans and thus
does not apply the SFAS 114 impairment test to these loans. Impaired loans will
be written off when collection of the loan is doubtful. As of December 31, 1998,
an analysis of the Bank's loan portfolio revealed that the Bank did not have any
loans that needed to be classified as impaired under SFAS 114 or SFAS 118.
Classified Assets and Allowance for Loan Losses. Federal regulations
require and the Bank's policy requires that the Bank utilize an internal asset
classification system as a means of reporting problem and potential problem
assets. The Bank classifies problem and potential problem assets 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
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the distinct possibility that the Bank 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 allowance is not warranted. Assets
which do not expose the Bank to sufficient risk to warrant classification in one
of the aforementioned categories but posses weaknesses are designated "Special
Mention."
When the Bank determines that an asset should be classified, it generally
will not establish a specific allowance for such asset unless it determines that
such asset should be classified as "Loss." When the Bank classifies one or more
assets, or portions thereof, as "Substandard" or "Doubtful," it will establish a
general valuation allowance for loan losses in an amount deemed prudent by
management. General valuation 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 the Bank classifies one or more of its assets,
or portions thereof, as "Loss," it will either establish a specific allowance
for losses equal to 100% of the amount of the asset so classified or will charge
off such amount. A savings institution's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the OTS, which can order the establishment of additional general or specific
loss allowances. The Bank regularly reviews its assets to determine whether any
assets require classification or reclassification.
24
<PAGE>
As of December 31, 1998, $37,000 of the Bank's assets were classified as
"Substandard" and none of the Bank's assets were classified as "Doubtful,"
"Loss" or "Special Mention."
The Bank's policy is to establish reserves for estimated losses on
delinquent loans when it determines that losses are expected to be incurred on
such loans. The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the portfolio.
Because approximately 73% of the Bank's loans consist of loans purchased
from Rushmore, which loans were originated by Rushmore, the Bank's management
made an estimate of what was believed to be a reasonable initial allowance for
loan losses. In establishing the Bank's initial allowance for loan losses,
management relied on, among other things, conversations with Rushmore, a review
of the payment history of the loans acquired from Rushmore and economic
conditions. Currently, management's determination of the adequacy of the
allowance is based on an evaluation of the loan portfolio, past loss experience,
current economic conditions, volume, growth and composition of the portfolio,
and other relevant factors. The allowance is increased by provisions for loan
losses which are charged against income.
Although management believes it uses the best information available to
make determinations with respect to the allowances for loan losses and believes
such allowances are adequate, future adjustments may be necessary if there are
additional loan losses or if economic, operating and other conditions differ
substantially from the assumptions used in making the determinations. Thus,
there can be no assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the loan loss
allowance will not be required. In addition, management anticipates that the
Bank's provisions for loan losses will increase in the future as it implements
the strategy of continuing existing lines of business while gradually expanding
its commercial real estate, commercial business, construction and consumer
lending, which loans generally entail greater risks than residential mortgage
loans.
Banking regulatory agencies, including the OTS, which currently regulates
the Bank, and the Federal Reserve, which will regulate the Bank assuming the
consummation of the Proposed Conversion, have adopted a policy statement
regarding maintenance of an adequate allowance for loan and lease losses and an
effective loan review system. This policy includes an arithmetic formula for
checking the reasonableness of an institution's allowance for loan loss estimate
compared to the average loss experience of the industry as a whole. Examiners
will review an institution's allowance for loan losses and compare it against
the sum of: (i) 50% of the portfolio that is classified as "Doubtful"; (ii) 15%
of the portfolio that is classified as "Substandard"; and (iii) for the portions
of the portfolio that have not been classified (including those loans designated
as "Special Mention"), estimated credit losses over the upcoming 12 months given
the facts and circumstances as of the evaluation date. This amount is considered
neither a "floor" nor a "safe harbor" of the level of allowance for loan losses
an institution should maintain, but examiners will view a shortfall relative to
the amount as an indication that they should review management's policy on
allocating these allowances to determine whether it is reasonable based on all
relevant factors.
25
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Period from
Year Ended December 1, 1997 to
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Allowance for loan losses, beginning of period $52,000 $ 50,000(1)
Loans charged off --- --
Recoveries --- --
Net loans charged off --- --
Provision for loan losses 33,000 2,000
-------- -----------
Allowance for loan losses, end of period $85,000 $ 52,000
======= ===========
Loans (net of premiums and discounts):
Period-end balance $6,688,000 $6,303,000
Average balance during period $6,573,000 $6,399,000
Allowance as percentage of period-end loan balance 1.27% 0.83%
Percent of average loans:
Provision for loan losses 0.50% 0.03%
Net charge-offs --- --
</TABLE>
(1) Purchased from Rushmore.
The following table summarizes the allocation of allowance by loan type at
the dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
As of December 31, 1998 As of December 31, 1997
----------------------- -----------------------
Percent of Percent of
Amount Total Amount Total
------ ----- ------ -----
Commercial Real Estate $12,000 14.00% $ 8,000 15.38%
Residential Real Estate 67,000 78.00 42,000 80.77
Consumer 3,000 4.00 2,000 3.85
Construction and Lot 3,000 4.00 -- --
------- ------ ------- ------
Total $85,000 100.00% $52,000 100.00%
======= ====== ======= ======
26
<PAGE>
Securities Portfolio.
The Bank has the authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements,
mortgage-backed and related securities and federal funds. Subject to various
restrictions, the Bank also may invest in commercial paper, corporate debt
securities and mutual funds. Additionally, the Bank is required to maintain
minimum levels of investments that qualify as liquid assets under OTS
regulations. Assuming the consummation of the Proposed Conversion, the Bank will
be subject to the liquidity requirements imposed upon Maryland commercial banks
by Maryland law.
While mortgage-backed and related securities carry a reduced credit risk
as compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect the value of such
securities. Specifically, investments in mortgage-backed and related securities
involve risks that actual prepayments may exceed prepayments estimated over the
life of the security that may result in a loss of any premiums paid for such
securities thereby reducing their net yield. Conversely, if interest rates
increase, the market value of such securities may be adversely affected. As of
December 31, 1998, the Bank had investments of $442,000 in mortgage-backed or
related securities.
The Board of Directors of the Bank sets the investment policy of the Bank.
The Board's policy is for investments to be made based on the safety of the
principal, the liquidity requirements of the Bank and the return on the
investment and capital appreciation. All investment decisions are made by the
Bank's investment committee.
The following table sets forth information regarding the book value of the
Bank's investment securities and other investments as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31, 1998 As of December 31, 1997
----------------------- -----------------------
<S> <C> <C>
Securities available for sale: $ 586,000 $ 569,000
Money market accounts
Investment Securities:
Federal funds sold 2,463,000 3,151,000
Interest-earning deposits --- 31,000
FHLB stock 54,000 54,000
Mortgage backed securities 442,000 ---
------------ ----------
Total $3,545,000 $3,805,000
============ ==========
</TABLE>
27
<PAGE>
The following table sets forth information regarding the scheduled maturities,
market value and weighted average yields for the Bank's investment securities
and certain other investments as of December 31, 1998:
Carrying Value Average Yield
-------------- -------------
Securities available for sale: $ 586,000 4.56%
Money market accounts (within one year)
Investment securities:
Federal funds sold (within one year) 2,463,000 5.48
Mortgage backed securities (after one,
but within five years) 442,000 6.94
FHLB stock 54,000 7.41
---------- ----
Total $3,545,000 5.54%
========== =====
Sources of Funds.
Deposits are the primary source of the Bank's funds for use in lending,
investment activities and other general business purposes. In addition to
deposits, the Bank may obtain funds from advances from the Federal Home Loan
Bank of Atlanta and other borrowings. Assuming the consummation of the Proposed
Conversion, the Bank will continue to have access to advances from the Federal
Home Loan Bank of Atlanta.
Deposits. The Banks offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of checking accounts,
insured investment accounts, statement savings accounts, passbook deposit
accounts, money market accounts, certificates of deposit and individual
retirement accounts. The Bank relies, and will continue to rely in connection
with the branch expansion strategy, on advertising and customer calls and
contacts by the Bank's and the Company's employees, officers and directors to
attract and retain deposits. With respect to its current branch office, the Bank
also relies on relationships with past customers of the Baltimore Branch of
Rushmore. Most of the Bank's deposits currently come from customers residing in
the community surrounding the Bank's office. The Bank does not use brokers to
obtain deposits. The Bank's management believes that the Bank pays competitive
interest rates on deposits, but other institutions in its area may offer higher
interest rates. All deposits are insured by the Savings Account Insurance Fund
("SAIF") administered by the FDIC up to the maximum amount allowed by law
(generally, $100,000 per depositor subject to aggregation rules).
The Bank believes that the variety of deposit accounts that it offers
allows the Bank to be competitive in its market area in obtaining funds and
enables the Bank to respond with flexibility to changes in customer demand. The
ability of the Bank to attract and maintain deposit accounts is affected by
market conditions.
The following table details the average amount and the average rate paid
on the following deposit categories of the Bank for the periods indicated. The
average balances were calculated using
28
<PAGE>
December 1, 1997 and month end balances (which approximate daily averages), as
daily averages were not available for the periods presented.
<TABLE>
<CAPTION>
Year Ended December 1, 1997 to
December 31, 1998 December 31, 1997
----------------- -----------------
Average Average Percent Average Average Percent
Composition of Deposits Balance Rate of Total Balance Rate of Total
- ----------------------- ------- ---- -------- ------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Checking $ 479,000 ---% 5.60% $ 632,000 --% 7.85%
---------- ----------
Statement savings 1,328,000 2.50 15.53 1,452,000 2.50 18.06
Money market 62,000 2.33 0.73 3,000 3.00 0.04
Certificates of deposit 1,027,000 5.54 12.01 578,000 5.31 7.19
IRA 459,000 4.83 5.37 496,000 4.76 6.17
Insured investment 5,036,000 5.03 58.91 4,844,000 5.36 60.25
Passbook deposit 158,000 2.92 1.85 35,000 3.00 0.44
---------- ---- ------ ---------- ---- ------
Total interest bearing
deposits 8,070,000 4.61% 94.40% 7,408,000 5.18% 92.15%
---------- ---- ------ ---------- ---- ------
Total $8,549,000 4.35% 100.00% $8,040,000 4.78% 100.00%
========== ==== ====== ========== ==== ======
</TABLE>
As of December 31, 1998, the Bank had no time deposits of $100,000 or
more.
Borrowing. The Federal Home Loan Bank System (the "FHLB System") functions
as a reserve credit capacity for savings associations and certain other member
financial institutions. Members of the FHLB System are required to own capital
stock in a Federal Home Loan Bank (a "FHLB"). The Bank is a member of the FHLB
System and owns stock in the FHLB of Atlanta.
The Bank is able to obtain advances from the FHLB of Atlanta upon the
security of its capital stock in the FHLB of Atlanta and other eligible assets.
Such advances may be made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. The FHLB of Atlanta
will limit the advances it makes to the Bank based upon its review and analysis
of the Bank. The Bank may use FHLB advances as an alternative source of funds to
deposits in order to fund its lending activities when it determines that it can
profitably invest the borrowed funds over their term.
As of December 31, 1998 and December 31, 1997, the Bank had no advances
outstanding from the FHLB of Atlanta. Assuming the consummation of the Proposed
Conversion, the Bank will continue as a member of the FHLB of Atlanta.
29
<PAGE>
SUPERVISION AND REGULATION
General.
As a federal stock savings bank, the Bank is subject to examination,
supervision and regulation by the OTS, as its chartering agency, and the FDIC,
as the deposit insurer. With respect to certain consumer credit laws, the Bank
is subject to regulation by the Commissioner. The Bank is a member of the FHLB
of Atlanta and its deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") administered by the FDIC. The Bank
is required to file reports with the OTS and the FDIC concerning its activities
and financial condition and must obtain the approval of the OTS prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. The OTS and the FDIC perform periodic examinations
to test the Bank's compliance with various regulatory requirements.
Assuming the consummation of the Proposed Conversion, the Bank will be a
Maryland commercial bank and its deposit accounts will continue to be insured by
the SAIF. The Bank also will become a member of the Federal Reserve (a member
bank). The Bank will be subject to examination, supervision and regulation by
the Commissioner (rather than the OTS) and the Federal Reserve, and will remain
subject to periodic examination by the FDIC. The Bank will be required to file
reports with the Commissioner and the Federal Reserve concerning its activities
and financial condition and will be required to obtain regulatory approvals from
the Commissioner and the Federal Reserve prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions.
As a federally insured depository institution, the Bank is, and assuming
the consummation of the Proposed Conversion will continue to be, subject to
various regulations promulgated by the FDIC.
This supervision and regulation establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and 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. Changes in the regulatory
framework could have a material adverse effect on the Bank and its operations
that, in turn, could have a material adverse effect on the Company.
The Company, as a savings and loan holding company, is required to file
certain reports with and otherwise comply with the rules and regulations of the
OTS. Assuming the consummation of the Proposed Conversion, the Company will
become a bank holding company registered with the Federal Reserve under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"), and the Commissioner
under the Maryland Bank Holding Company Act of 1995, as amended (the "Maryland
Act"). As such, the Company will be subject to the supervision, examination and
reporting requirements contained in the BHC Act and the Maryland Act and the
regulations of the
30
<PAGE>
Federal Reserve and the Commissioner. The Company also is required to file
certain reports with and otherwise comply with the rules and regulations of the
SEC under the federal securities laws.
The following is intended only as a summary of governmental supervision
and regulation of the Bank (as a federal stock savings bank and a Maryland
commercial bank) and the Company (as a savings and loan holding company and a
bank holding company), and does not purport to be a complete analysis of the
laws and regulations that govern or will govern, assuming the consummation of
the Proposed Conversion, the operations of the Bank and the Company.
Depository Institution Regulation.
Loans-to-One Borrower. Under the Home Owners' Loan Act, as amended (the
"HOLA"), savings institutions are generally required to comply with the loans to
one borrower limitations applicable to national banks. National banks generally
may make loans to one borrower in amounts up to 15% of the bank's unimpaired
capital and surplus, plus an additional 10% of unimpaired capital and surplus,
if such loan is secured by readily-marketable collateral.
The HOLA provides exceptions under which a savings institution may make
loans to one borrower in excess of the generally applicable national bank
limits. A savings institution may make loans to one borrower in excess of such
limits under one of the following circumstances: (i) for any purpose, in any
amount not to exceed $500,000; or (ii) to develop domestic residential housing
units, in an amount not to exceed the lesser of $30,000,000 or 30% of the
savings institution's unimpaired capital and surplus, provided other conditions
are satisfied. In addition, the Federal Institutions Reform, Recovery, and
Enforcement Act of 1989 provided that a savings institution could make loans to
one borrower to finance the sale of real property acquired in satisfaction of
debts previously contracted in good faith in amounts up to 50% of the savings
institution's unimpaired capital and surplus. The OTS, however, has modified
this third standard by limiting loans to one borrower to finance the sale of
real property acquired in satisfaction of debts to 15% of unimpaired capital and
surplus. The OTS rule provides, however, that purchase money mortgages received
by a savings institution to finance the sale of such real property do not
constitute "loans" (provided no new funds are advanced and the savings
institution is not placed in a more detrimental position holding the note than
holding the real estate) and, therefore, are not subject to the loans to one
borrower limitations.
As of December 31, 1998, the maximum amount that the Bank could have
loaned to any one borrower was $500,000. At such date, the largest aggregate
amount of loans that the Bank had outstanding to any one borrower or group of
affiliated borrowers was $400,000. As of December 31, 1997, the maximum amount
that the Bank could have lent to any one borrower was $500,000. At such date,
the largest aggregate amount of loans that the Bank had outstanding to any one
borrower or group of affiliated borrowers was $290,000. Notwithstanding the
Bank's ability to lend $500,000 to one borrower, current Bank policy is limit
the aggregate amount of loans to any one borrower to $400,000.
Assuming the consummation of the Proposed Conversion, the Bank will be
subject to Maryland statutory law with respect to limits on loans to one
borrower. Generally, under Maryland law, the maximum amount that a commercial
bank may loan to one borrower at one time may not exceed:
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(i) 10% of the unimpaired capital and surplus of the commercial bank; or (ii)
30% of the unimpaired capital and surplus of the commercial bank if the excess
over 10% is approved by a two-thirds vote of the board of directors and is
secured by currency or obligations of the United States or obligations of the
State of Maryland or any political subdivision.
QTL Test. The HOLA requires savings institutions to meet a qualified
thrift lender ("QTL") test. A savings institution that fails the QTL test must
either convert to a bank charter or operate under certain restrictions on its
activities. To meet the QTL test, a savings institution is required to maintain
at least 65% of its "portfolio assets" (generally, total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities) on a
monthly average basis in at least 9 months out of each 12 month period.
The Bank currently is in compliance with the QTL test, although in July
and August 1998 the Bank did not maintain at least 65% of its portfolio assets
in qualified thrift investments.
Assuming the consummation of the Proposed Conversion, the QTL test, and
the penalties for failure to maintain QTL status, will not be applicable to the
Bank.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital.
The regulations establish three tiers of institutions, which are based
primarily on an institution's capital level. An institution that exceeds all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution (a "Tier 1 Association") and has not been advised by the
OTS that it is in need of more than normal supervision, could, after prior
notice to, but without the approval of the OTS, make capital distributions
during a calendar year equal to the greater of: (i) up to 100% of its net
earnings to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year or (ii)
75% of its net earnings for the previous four quarters. Any additional capital
distributions would require prior OTS approval. The Bank currently meets the
criteria to be designated a Tier 1 Association.
In the event an institution's capital falls below its capital requirements
or the OTS notifies the institution that it was in need of more than normal
supervision, the institution's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by an institution, which would otherwise be permitted by the regulations, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
The OTS has proposed amendments to its capital distribution regulations
which would conform OTS regulations to the existing requirements of other
banking agencies, as well as simplify the existing OTS regulations. These
proposed rules generally would eliminate the requirement of
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notifying the OTS when cash dividends of a certain amount are to be paid for
institutions that will remain at least adequately capitalized. However,
applications for capital distributions would be required for all distributions
over a specified amount. See "- Prompt Corrective Regulatory Action."
Assuming the consummation of the Proposed Conversion, the Bank's ability
to pay dividends will not be subject to the limitations in the OTS regulations
but instead will be governed by the Maryland General Corporation Law (the
"MGCL"), Maryland law relating to financial institutions, and the regulations of
the Federal Reserve. Under the MGCL, dividends may not be paid if, after giving
effect to the dividend: (i) the corporation would not be able to pay the
indebtedness of the corporation as the indebtedness becomes due in the normal
course of business; or (ii) the corporation's total assets would be less than
the sum of the corporation's total liabilities plus, unless the charter permits
otherwise, the amount needed, if the corporation were to be dissolved at the
time of distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
dividend. Under Maryland law relating to financial institutions, if the surplus
of a commercial bank at any time is less than 100% of its capital stock, then,
until the surplus is 100% of the capital stock, the commercial bank: (i) must
transfer to its surplus annually at least 10% of its net earnings; and (ii) may
not declare or pay any cash dividends that exceed 90% of its net earnings.
As a member of the Federal Reserve, the Bank's payment of dividends also
will be subject to the Federal Reserve's Regulation H, which limits the
dividends payable by a state member bank to the net profits of the Bank then on
hand, less the bank's losses and bad debts. Additionally, the Federal Reserve
has the authority to prohibit the payment of dividends by a member bank when it
determines such payment to be an unsafe and unsound banking practice.
Liquidity. Under OTS regulations, savings institutions are required to
maintain an average daily balance of specified liquid assets (generally cash,
certain time deposits and savings accounts, bankers' acceptances, specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4%) of the savings association's net withdrawable deposit accounts plus
short-term borrowings. Monetary penalties may be imposed for failure to meet the
liquidity requirements.
The average daily liquidity ratio of the Bank for the year ended December
31, 1998 was approximately 41.31%. The average daily liquidity ratio of the Bank
for the month of December 1997 was approximately 46.69%.
Assuming the consummation of the Proposed Conversion, the Bank will be
subject to the reserve requirements imposed by the State of Maryland. A Maryland
commercial bank is required to have at all times a reserve equal to at least 15%
of its demand deposits. The board of directors of a Maryland commercial bank
must by resolution direct the commercial bank to maintain this reserve ratio in:
(i) cash on hand; (ii) demand deposits in a bank of good standing in any state;
or (iii) as to 5% of its demand deposits, on approval of the Commissioner: (a)
registered or coupon bonds, or (b) general obligations guaranteed by the United
States government, an agency of the United States government, the State of
Maryland or any political subdivision. Additionally, a Maryland commercial bank
must have at all times a reserve equal to at least 3% of all time deposits. Time
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<PAGE>
deposit reserves must be kept in: (i) cash on hand; (ii) deposits in a bank of
good standing in any state or (iii) direct obligations of the United States
government or of the State of Maryland. For purposes of Maryland law, "demand
deposits" are defined as deposits payable within 30 days and "time deposits" are
defined to be deposits that are payable after 30 days, including a savings
account or certificate of deposit that requires at least a 30-day notice before
payment.
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment
is paid on a semi-annual basis and is computed upon the savings institution's
total assets, including consolidated subsidiaries, as reported in the
institution's latest quarterly Thrift Financial Report.
Assuming the consummation of the Proposed Conversion, the Bank, as a
Maryland commercial bank, will pay an annual assessment to the Commissioner to
fund its expenses of regulating state banking institutions. The assessment will
be based upon the Bank's assets for the previous calendar year.
Branching. OTS regulations permit savings institutions to branch
nationwide under certain conditions. Generally, savings institutions may
establish interstate networks and geographically diversify their loan portfolios
and lines of business. The OTS' authority preempts any state law purporting to
regulate branching by federal savings institutions.
For a discussion of branching assuming the consummation of the Proposed
Conversion, see "-Holding Company Regulation Assuming the Consummation of the
Proposed Conversion Interstate Banking Legislation."
Transactions with Related Parties. Transactions engaged in by a savings
institution or a state member bank with a related party or an "affiliate" (i.e.,
any company that controls or is under common control with the savings
institution) are subject to the restrictions contained in Sections 23A and 23B
of the Federal Reserve Act (the "FRA"). Section 23A of the FRA limits the
aggregate amount of "covered transactions" with any individual affiliate to 10%
of the capital and surplus of the savings institution or state member bank and
also limits the aggregate amount of transactions with all affiliates to 20% of
the savings institution's or state member bank's capital and surplus. In
addition, certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally requires that "covered transactions" be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. The term "covered
transactions" includes the making of loans, purchase of assets, issuance of a
guarantee and similar types of transactions. Notwithstanding Sections 23A and
23B, savings institutions and state member banks are prohibited from lending to
any affiliate that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act. Further, a savings
institution or state member bank may not purchase the securities of any
affiliate other than a subsidiary.
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<PAGE>
In addition, the authority of savings institutions and state member bank's
to extend credit to their executive officers, directors and 10% stockholders, as
well as entities controlled by such persons, is governed by Sections 22(g) and
22(h) of the FRA, and Regulation O thereunder. Among other things, these laws
and regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and may not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans that a savings
institution or state member bank may make to such persons based, in part, on the
institution's capital position, and requires that certain board approval
procedures be followed.
Maryland law imposes restrictions on certain transactions with affiliates
of Maryland commercial banks. Generally, under Maryland law, a director, officer
or employee of a commercial bank may not borrow, directly or indirectly, any
money from the bank, unless the loan has been approved by a resolution adopted
by and recorded in the minutes of the board of directors of the bank, or the
executive committee of the bank, if that committee is authorized to make loans.
If such a loan is approved by the executive committee, the loan approval must be
reported to the board of directors at its next meeting. Certain commercial loans
made to directors of a bank and certain consumer loans made to non-officer
employees of the bank are exempt from the law's coverage.
Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS
has primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders who participate in the conduct of the affairs of a
savings institution, and any attorneys, appraisers and accountants who knowingly
or recklessly participate in wrongful action likely to have an adverse effect on
the institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors
to institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1,000,000 per day in especially egregious cases. Under
the FDI Act, the FDIC has the authority to recommend to the Director of the OTS
that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
Assuming the consummation of the Proposed Conversion, the Federal Reserve
will have primary enforcement responsibility over the Bank regarding the above
since it will be a state member bank.
Capital Requirements. OTS regulations require that savings institutions
maintain (i) "tangible capital" in an amount of not less than 1.5% of adjusted
total assets; (ii) "core capital" in an amount not less than 3.0% of adjusted
total assets; and (iii) a level of risk-based (or "total") capital equal to at
least 8% of "risk-weighted" assets.
Under OTS regulations, the term "core capital" generally includes common
stockholders' equity, noncumulative perpetual preferred stock and related
surplus, minority interests in the equity accounts of consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits and "qualifying
supervisory goodwill." "Core capital" is generally reduced by the amount of the
savings
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<PAGE>
institution's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights ("PMSRs") and purchased credit card relationships (subject to
certain conditions). "Tangible capital" generally is defined as core capital
minus intangible assets, with only a limited exception for PMSRs and purchased
credit card relationships.
Both "core" and "tangible capital" are further reduced by an amount equal
to a percentage of the savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible for national banks, other
than subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or holding
companies therefor. As of December 31, 1998, the Bank had no such investments.
In calculating adjusted total assets, adjustments are made to the savings
institution's total assets to give effect to the inclusion and exclusion of
certain assets from capital and to account for the institution's investment in
subsidiaries that must be netted against capital under the capital rules.
"Total capital," for purposes of the risk-based capital requirement,
equals the sum of core capital plus supplementary capital (which, as defined,
includes the sum of, among other items, perpetual preferred stock not counted as
core capital, limited life preferred stock, subordinated debt and a portion of
the savings institution's general loss allowances) less certain deductions. The
amount of supplementary capital that may be counted towards satisfaction of the
total capital requirement may not exceed 100% of core capital, and OTS
regulations require the maintenance of a minimum ratio of core capital to total
risk-weighted assets of 4%.
In determining total "risk-weighted" assets for purposes of the risk-based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of each
such item by a credit conversion factor ranging from 0% to 100% (depending upon
the nature of the asset); (ii) the credit equivalent amount of each off-balance
sheet asset and each on-balance sheet asset must be multiplied by a risk factor
ranging from 0% to 100% (again depending upon the nature of the asset); and
(iii) the resulting amounts are added together and constitute total
risk-weighted assets.
The risk-based capital requirements of the OTS also require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional "total" capital. A savings institution's interest rate risk is
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 is 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. A savings 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 requirement, an amount (the "interest rate
risk component") equal to one-half
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<PAGE>
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 OTS calculates the sensitivity of a savings 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 OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital is 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 OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis and may subject the
institution to an additional capital requirement based upon its level of
interest rate risk as compared to its peers.
Capital requirements higher than the generally applicable minimum may be
established for a particular savings institution if the OTS determines that the
institution's capital was or may become inadequate in view of its particular
circumstances.
As of December 31, 1998 and December 31, 1997, the Bank exceeded all
regulatory minimum capital requirements. The following tables sets forth the
Bank's regulatory capital as of December 31, 1998 and December 31, 1997.
As of December 31, 1998:
- ------------------------
<TABLE>
<CAPTION>
Actual Capital Required Capital Excess Capital
-------------- ---------------- --------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Tangible $ 1,535,000 13.9% $ 166,000 1.5% $ 1,369,000 12.4%
Core $ 1,535,000 13.9% $ 332,000 3.0% $ 1,203,000 10.9%
Risk-based $ 1,620,000 34.8% $ 372,000 8.0% $ 1,248,000 26.8%
As of December 31, 1997:
- ------------------------
Actual Capital Required Capital Excess Capital
-------------- ---------------- --------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Tangible $1,700,000 16.6% $154,000 1.5% $1,546,000 15.1%
Core $1,700,000 16.6% $308,000 3.0% $1,392,000 13.6%
Risk-based $1,752,000 40.4% $347,000 8.0% $1,405,000 32.4%
</TABLE>
Assuming the consummation of the Proposed Conversion, the Bank will no
longer be subject to OTS capital regulations, but will be subject to the Federal
Reserve guidelines regarding capital requirements as well as statutory capital
requirements imposed under Maryland law. Federal Reserve regulations establish
two capital standards for state-chartered banks that are members of the Federal
Reserve: a leverage requirement and a risk-based capital requirement. In
addition, the
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Federal Reserve may, on a case-by-case basis, establish individual minimum
capital requirements for a bank that vary from the requirements which would
otherwise apply under Federal Reserve regulations. A bank that fails to satisfy
the capital requirements established under the Federal Reserve's regulations
will be subject to such administrative action or sanctions as the Federal
Reserve deems appropriate.
The leverage ratio adopted by the Federal Reserve requires a minimum ratio
of "Tier 1 capital" to adjusted total assets of 3% for banks rated composite 1
under the CAMEL rating system for banks. Banks not rated composite 1 under the
CAMEL rating system for banks are required to maintain a minimum ratio of Tier 1
capital to adjusted total assets of 4% to 5%, depending upon the level and
nature of risks of their operations. For purposes of the Federal Reserve's
leverage requirement, Tier 1 capital generally consists of the same components
as core capital under the OTS's capital regulations, except that no intangibles
except certain PMSRs and purchased credit card relationships may be included in
capital. The Federal Reserve has noted that most expansion-oriented banking
organizations have maintained leverage capital ratios of between 4% and 5% of
adjusted total assets, and it is likely that these ratios will be applied to the
Company assuming the consummation of the Proposed Conversion.
The risk-based capital requirements established by the Federal Reserve's
regulations require state member banks to maintain "total capital" equal to at
least 8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital" (as described below), provided that the amount of Tier 2
capital may not exceed the amount of Tier 1 capital, less certain assets. The
components of Tier 2 capital under the Federal Reserve's regulations generally
correspond to the components of supplementary capital under OTS regulations.
Total risk-weighted assets generally are determined under the Federal Reserve's
regulations in the same manner as under the OTS's regulations.
The Federal Reserve has indicated a desire to raise capital requirements
beyond their current levels. In this regard, the Federal Reserve has proposed an
amendment to the risk-based capital standards that would calculate the change in
a financial institution's net economic value attributable to increases and
decreases in market interest rates and would require banks with excessive
interest risk exposure to hold additional amounts of capital against such
exposures. As described above, the OTS has an interest-rate risk component in
its risk-based capital guidelines.
Under Maryland law, if the surplus of a Maryland commercial bank at any
time is less than 100% of its capital stock, then, until the surplus is 100% of
the capital stock, the commercial bank: (i) must transfer to its surplus
annually at least 10% of its net earnings; and (ii) may not declare or pay any
cash dividends that exceed 90% of its net earnings.
Prompt Corrective Regulatory Action. Pursuant to the FDI Act, the federal
banking agencies established for each capital measure levels at which an insured
institution is deemed to be well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Federal banking agencies are required to take prompt
corrective action with respect to insured institutions that fall below minimum
capital standards. The degree of required regulatory intervention for
institutions that are not at least adequately capitalized is tied to an insured
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<PAGE>
institution's capital category, with increasing scrutiny and more stringent
restrictions being imposed as an institution's capital declines.
The prompt corrective action regulations generally are based upon an
institution's capital ratios. Under the prompt corrective action regulations
adopted by the OTS, an institution will be considered (i) "well capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
or core capital to risk-weighted assets ratio of 6% or greater, and a leverage
ratio of 5% or greater (provided that the institution is not subject to an
order, written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any capital
measure); (ii) "adequately capitalized" if the institution has a total
risk-based capital ratio of 8% or greater, a Tier 1 or core capital to
risk-weighted assets ratio of 4% or greater, and a leverage ratio of 4% or
grater (3% or greater if the institution is rated composite 1 in its most recent
report of examination); (iii) "undercapitalized" if the institution has a total
risk-based capital ratio that is less than 8%, a Tier 1 or core capital to
risk-weighted assets ratio of less than 4%, or a leverage ratio that is less
than 4% (3% if the institution is rated composite 1 in its most recent report of
examination); (iv) "significantly undercapitalized" if the institution has a
total risk-based capital ratio that is less than 6%, a Tier 1 or core capital to
risk-weighted assets ratio that is less than 3%, or a leverage ratio that is
less than 3%; and (v) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets that is less than or equal to 2%. The
regulations also permit the OTS to determine that a savings institution should
be classified in a lower category based on other information, such as the
institution's examination report, after written notice and an opportunity for a
hearing.
Subject to a narrow exception, the regulations require the OTS to appoint
a receiver or conservator for an institution that is "critically
undercapitalized." The regulations also provide that a capital restoration plan
must be filed with the OTS within 45 days of the date an institution receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
may become immediately applicable to the institution depending upon its
category, including, but not limited to, increased monitoring by regulators,
restrictions on growth and capital distributions and limitations on expansion.
The OTS also could take any one of a number of discretionary supervisory
actions, including the issuance of a capital directive and the replacement of
senior executive officers and directors.
As of December 31, 1998, the Bank was "well capitalized."
Management of the Bank believes that the Bank will, assuming the
consummation of the Proposed Conversion, also be classified as
"well-capitalized" under the Federal Reserve's regulations, which are similar to
those of the OTS.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to establish safety and soundness standards for institutions
under its authority. In 1995, the federal banking agencies released Interagency
Guidelines Establishing Standards for Safety and Soundness (the "Guidelines") to
implement safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines require institutions to maintain
internal controls and information systems
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<PAGE>
and internal audit systems that are appropriate for the size, nature and scope
of the institution's business. The Guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure, and asset growth. The Guidelines further provide that institutions
should maintain safeguards to prevent the payment of compensation, fees and
benefits that are excessive or that could lead to material financial loss, and
institutions should take into account factors such as comparable compensation
practices at comparable institutions.
In addition, under the Guidelines, an institution is required to establish
and maintain a system to identify problem assets and prevent deterioration of
those assets in a manner commensurate with its size and the nature and scope of
its operations. An institution also must establish and maintain a system to
evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves in a manner commensurate with the
institution's size and the nature and scope of its operations.
If the appropriate federal banking agency determines that an institution
fails to meet any standard prescribed by the Guidelines, the agency may require
the institution to submit to the agency an acceptable plan to achieve compliance
with the standard.
Management believes that the Bank currently meets the standards adopted in
the Guidelines and that, assuming the consummation of the Proposed Conversion,
the Bank will continue to meet the standards adopted in the Guidelines.
Community Reinvestment Act. Under the Community Reinvestment Act (the
"CRA") and the implementing OTS regulations, the Bank has a continuing and
affirmative obligation to help meet the credit needs of its local community,
including low and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution. The CRA requires the board of directors of
financial institutions, such as the Bank, to adopt a CRA statement for each
assessment area that, among other things, describes its efforts to help meet the
community's credit needs and the specific types of credit that the institution
is willing to extend. The Bank's Board of Directors is required to review the
appropriateness of the delineation of its community at least annually.
Assuming the consummation of the Proposed Conversion, the Bank's
obligation to meet the credit needs of its local community will continue;
however, the Bank will be subject to the implementing regulations of the Federal
Reserve as its federal supervisory agency.
Insurance of Deposit Accounts. Federal deposit insurance is required for
all federally chartered savings institutions. Deposits at the Bank are insured
up to a maximum of $100,000 for each depositor by the SAIF, which is
administered by the FDIC and which currently provides deposit insurance for
federally chartered savings institutions. The FDIC also administers the Bank
Insurance Fund ("BIF"), which is the insurance fund which insures most
commercial bank deposits. Currently, in general, the deposit insurance
assessment rate for institutions insured by BIF is slightly less than the rate
for institutions insured by SAIF.
Under either SAIF or BIF, to evaluate a financial institution's deposit
insurance assessment, the FDIC has adopted a risk-based insurance assessment
system. Based on the institution's financial
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<PAGE>
condition, the FDIC assigns an institution to one of three capital categories:
(i) well capitalized; (ii) adequately capitalized; or (iii) undercapitalized, as
such terms are defined under the prompt corrective regulatory action regulations
(discussed above), except that "undercapitalized" includes any institution that
is not well capitalized or adequately capitalized. Within each capital category,
institutions are assigned to one of three supervisory subgroups - "healthy"
(institutions that are financially sound with only a few minor weaknesses),
"supervisory concern" (institutions with weaknesses which, if not corrected,
could result in significant deterioration of the institution and increased risk
to the deposit insurer), or "substantial supervisory concern" (institutions that
pose a substantial probability to the deposit insurer unless corrective action
is taken). An institution's assessment rate depends on the capital category and
supervisory subgroup to which it is assigned. The FDIC has raised deposit
insurance premiums several times in the past and may raise insurance premiums in
the future. If such action is taken by the FDIC, it could have an adverse effect
on the earnings of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS.
Assuming the consummation of the Proposed Conversion, although the Bank,
as a Maryland commercial bank, would qualify for insurance of deposits by the
BIF, substantial entrance and exit fees apply to conversions from SAIF to BIF
insurance. Accordingly, assuming the consummation of the Proposed Conversion,
the Bank will remain a member of the SAIF, which will insure deposits of the
Bank up to a maximum of $100,000 for each depositor. Because the Bank, assuming
the consummation of the Proposed Conversion, will continue to be a SAIF member,
its deposit insurance assessments will be determined on the same basis as the
deposit insurance assessments currently paid by the Bank.
Uniform Real Estate Lending Standards. Under OTS regulations, savings
institutions must adopt and maintain written policies that establish appropriate
limits and standards for extensions of credit that are secured by liens or
interests in real estate or are made for the purpose of financing permanent
improvements to real estate. These policies must establish loan portfolio
diversification standards, prudent underwriting standards, including
loan-to-value limits that are clear and measurable, loan administration
procedures and documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the Interagency Guidelines
for Real Estate Lending Policies (the "Interagency Guidelines") that have been
adopted by the federal bank agencies.
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for loans for the construction of one-to-four family properties, the supervisory
limit is
41
<PAGE>
85%; and (v) for loans secured by other improved property (e.g., farmland,
completed commercial property and other income-producing property including
non-owner-occupied, one-to-four family property), the limit is 85%. Although no
supervisory loan-to-value limit has been established for owner-occupied,
one-to-four family and home equity loans, the Interagency Guidelines state that
for any such loan with a loan-to-value ratio that equals or exceeds 90% at
origination, an institution should require appropriate credit enhancement in the
form of either mortgage insurance or readily marketable collateral.
The Interagency Guidelines state that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits, based on the support provided by other credit
factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multifamily and other
non-one-to-four family residential properties should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to certain categories
of loans, including loans insured or guaranteed by the U.S. government and its
agencies or by financially capable state, local or municipal governments or
agencies; loans backed by the full faith and credit of a state government; loans
that are to be sold promptly after origination without recourse to a financially
responsible party; loans that are renewed, refinanced or restructured without
the advancement of new funds; loans that are renewed, refinanced or restructured
in connection with a workout; loans to facilitate sales of real estate acquired
by the institution in the ordinary course of collecting a debt previously
contracted; and loans where the real estate is not the primary collateral.
Assuming the consummation of the Proposed Conversion, the Bank will be
subject to the real estate lending guidelines promulgated by the Federal
Reserve. In general, the Federal Reserve requires that a member bank's real
estate lending policies should reflect consideration of the Interagency
Guidelines. The Bank also will be subject to certain Maryland laws concerning
real estate lending.
Management believes that the Bank's current lending policies comply with
OTS' regulations and that, assuming the consummation of the Proposed Conversion,
the Bank's real estate lending policies will comply with applicable Federal
Reserve regulations and Maryland law.
Federal Home Loan Bank System. The Bank is a member of the FHLB System,
which consists of twelve regional FHLBs subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). In particular, the Bank is a member
of the FHLB of Atlanta. Each FHLB provides a central credit facility primarily
for member institutions. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It offers advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of which the institution is a member. As of
December 31, 1998, the Bank had no advances outstanding with the FHLB of
Atlanta.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to at
least 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year,
42
<PAGE>
0.3% of its total assets at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB of Atlanta, whichever is greater. The Bank was in
compliance with this requirement with an investment in FHLB of Atlanta stock as
of December 31, 1998 of approximately $54,000. For additional information, see
Note 1 of the Notes to the Company's Consolidated Financial Statements.
Assuming the consummation of the Proposed Conversion, the Bank will
continue to be a member of the FHLB of Atlanta.
Federal Reserve System. Pursuant to regulations of the Federal Reserve,
all FDIC-insured institutions must maintain non-interest-earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts). During fiscal 1998, the Federal Reserve regulations require that
reserves be maintained against aggregate transaction accounts as follows: for
accounts aggregating $47.3 million or less (subject to adjustment by the Federal
Reserve), the reserve requirement is 3%; and for accounts greater than $47.3
million, the reserve requirement is $1,419,000 plus 10% (subject to adjustment
by the Federal Reserve between 8% and 14%) against that portion of total
transaction accounts in excess of $47.3 million. The first $4,700,000 of
otherwise reservable balances (subject to adjustments by the Federal Reserve)
are exempted from the reserve requirements. Because required reserves must be
maintained in the form of either vault cash, a non-interest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. As of December 31, 1998, the Bank met its reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve may be used to satisfy liquidity requirements imposed by
the OTS.
Assuming the consummation of the Proposed Conversion, the Bank will become
a member of the Federal Reserve and will subscribe for stock in the Federal
Reserve Bank of Richmond in an amount equal to 6% of the Bank's common stock and
paid-in surplus. Assuming the consummation of the Proposed Conversion, the Bank
will continue to be subject to the reserve requirements described above.
Holding Company Regulation Prior to the Proposed Conversion.
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA. As such, the Company is required to be
registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings association.
The Bank is required to notify the OTS thirty days before declaring any dividend
to the Company.
As a unitary savings and loan holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank is a QTL. Upon any non-supervisory
acquisition by the Company of another savings institution, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would become subject to extensive
limitations on the types of
43
<PAGE>
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the BHC Act, subject to the prior approval of the OTS,
and to other activities authorized by OTS regulation.
The HOLA prohibits a savings and loan holding company from acquiring
control of another savings institution, or holding company thereof, without
prior written approval of the OTS. Control includes acquisition of more than 25%
of any class of voting stock or 5% of any class of voting stock if certain OTS
defined control criteria are present. In evaluating applications by holding
companies to acquire savings institutions, the OTS must consider the financial
and managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors. Except in
certain circumstances, the OTS is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state.
Holding Company Regulation Assuming the Consummation of the Proposed
Conversion.
General. Assuming the consummation of the Proposed Conversion, the
Company, as the sole stockholder of the Bank, will become a bank holding company
and will register as such with the Federal Reserve Board. Bank holding companies
of state commercial banks are subject to comprehensive regulation by the Federal
Reserve under the BHC Act. As a bank holding company, the Company will be
required to file with the Federal Reserve reports and such additional
information as the Federal Reserve may require, and will be subject to regular
examinations by the Federal Reserve. The Federal Reserve also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries
(including its bank subsidiaries). In general, enforcement actions may be
initiated for violations of law and regulations and unsafe or unsound practices.
Under the BHC Act, a bank holding company must obtain Federal Reserve
approval before: (i) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
includes, among other things, operating a savings institution, mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing
44
<PAGE>
certain investment and financial advice; underwriting and acting as an insurance
agent for certain types of credit-related insurance; leasing property on a
full-payout, non-operating basis; selling money orders, travelers' checks and
United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers. The Company
has no present plans to engage in any of these activities.
In addition to Federal Reserve approval, Maryland law requires a bank
holding company to obtain prior approval of the Commissioner when acquiring a
Maryland bank holding company or bank. Maryland law defines "acquiring" or
"acquisition" as (i) one bank holding company merging or consolidating with
another bank holding company; (ii) a bank holding company assuming direct or
indirect ownership or control of either more than 5% of any class of voting
shares of another bank holding company or bank or all or substantially all the
assets of another bank holding company or bank; and (iii) taking any other
action that results in direct or indirect control by a bank holding company of
another bank holding company or bank. The Commissioner may deny approval of any
such acquisition if the Commissioner determines that the acquisition is
anti-competitive or threatens the safety or soundness of a banking institution.
Any voting stock acquired without the approval required under the statute may
not be voted for a period of 5 years. This restriction is not applicable to
certain acquisitions by bank holding companies of the stock of Maryland banks or
Maryland bank holding companies which are governed by the Maryland Act.
Dividends. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the company's capital needs, asset quality and overall financial condition. The
Federal Reserve also has indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the
Federal Reserve pursuant to the FDI Act, the Federal Reserve may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized."
Bank holding companies are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
retained earnings. The Federal Reserve may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve order, or
any condition imposed by, or written agreement with, the Federal Reserve. Bank
holding companies whose capital ratios exceed the threshold for "well
capitalized" banks on a consolidated basis are exempt from the foregoing
requirement if they were rated composite 1 or 2 in their most recent inspection
and are not the subject of any unresolved supervisory issues.
Interstate Banking Legislation. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Act") was enacted to ease restrictions on
interstate banking. Effective September
45
<PAGE>
29, 1995, the Act allows the Federal Reserve to approve an application of an
adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than such holding company's home state, without regard to
whether the transaction is prohibited by the laws of any state. The Federal
Reserve may not approve the acquisition of a bank that has not been in existence
for the minimum time period (not exceeding five years) specified by the
statutory law of the host state. The Act also prohibits the Federal Reserve from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank or bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act. Under Maryland law, a bank holding
company is prohibited from acquiring control of any bank if the bank holding
company would control more than 30% of the total deposits of all depository
institutions in the State of Maryland unless waived by the Commissioner.
Pursuant to the Act, the Federal Reserve Board may approve an application
of an adequately capitalized and adequately managed non-Maryland bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a Maryland bank, as long as certain requirements of the Act are met.
Additionally, the Act authorizes the federal banking agencies, effective
June 1, 1997, to approve interstate merger transactions of banks without regard
to whether such transaction is prohibited by the law of any state, unless the
home state of one of the banks opts out of the Act by adopting a law after the
date of enactment of the Act and prior to June 1, 1997 that applies equally to
all out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. The State of Maryland has enacted legislation, effective
September 29, 1995, that authorizes interstate mergers involving Maryland banks.
The Maryland statute also authorizes out-of-state banks to establish branch
offices in Maryland by means of merger, branch acquisition or de novo branching,
provided that the home state of the out-of-state bank provides reciprocal
interstate branching authority to Maryland banks.
Financial Services Modernization Legislation.
Recently, several legislative proposals for reforming the financial
services industry have been submitted before Congress, including the Financial
Services Act of 1999. The Financial Services Act of 1999 would expand the
financial services industry by, among other things, allowing banks to engage in
securities underwriting, insurance and other activities that are "financial" in
nature. The legislation also would repeal Glass-Steagall prohibitions on bank
holding companies owning firms that engage in securities underwriting, and would
allow bank holding companies to engage in a broad range of insurance activities.
The legislation would preserve the federal thrift charter.
It is not currently possible to predict whether or when the Financial
Services Act of 1999 will be enacted into law, or if it is enacted into law,
whether it will remain in its current form. It also is
46
<PAGE>
not possible to predict what impact the legislation, if enacted, would have on
the Company or the Bank. One consequence may be increased competition from large
financial services companies that, under the legislation, would be permitted to
provide many types of financial services to customers. Neither the Company nor
the Bank currently conduct any nonfinancial activities. Certain provisions of
the legislation also may affect the Bank assuming the consummation of the
Proposed Conversion due to a Maryland law that gives, with the approval of the
Commissioner, Maryland commercial banks the authority to engage in activities in
which national banks may engage.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices are located at 3621 East Lombard Street,
Baltimore, Maryland 21224, and its telephone number is (410) 342-8303. Upon
opening a Towson branch of the Bank, the Company's executive offices will be
moved to the Towson branch, which is located at 500 York Road, Towson, Maryland
21204, and its telephone number will be (410) 823-0500. Towson, Maryland is the
county seat of Baltimore County, Maryland.
The East Lombard Street property contains approximately 2,000 square feet
in a converted two-story rowhome that has been utilized as a bank since 1927.
The property is owned by the Company.
The 500 York Road property contains approximately 2,700 square feet of
retail banking space on the first floor, approximately 1,800 square feet of
office space on the second floor and approximately 2,500 square feet of retail
office space on the basement level. Until July 1997, the property had been
utilized as a branch of NationsBank. The 500 York Road property currently is
owned by the Company's wholly owned subsidiary, AmericasBank Holdings
Corporation. Prior to utilizing the property as a branch of the Bank, the
Company may determine to transfer ownership of the property from AmericasBank
Holdings Corporation to the Bank.
ITEM 3. INCORPORATION BY REFERENCE.
Information concerning Directors, Executive Officers and Significant
Employees; Remuneration of Directors and Officers; Security Ownership of
Management and Certain Securityholders; and Interest of Management and Others in
Certain Transactions, is incorporated herein by reference to the Registrant's
definitive Proxy Statement for the 1999 Annual Meeting of Stockholders to be
filed within 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-KSB.
47
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
(a) To date, there has been no established active public trading market
for the Company's Common Stock, although the Common Stock is quoted
on the OTC Bulletin Board and reported in the National Daily
Quotation Bureau "Pink Sheets" under the symbol "AMBB." There can be
no assurance that an active public trading market will develop in the
future.
The following table shows, for the periods indicated, the high and
low bid quotations per share of transactions in the Company's Common
Stock as reported by Bloomberg Financial Markets, LP. The following
prices represent inter-dealer prices without retail markups,
markdowns or commissions and may not represent actual transactions.
Calendar Quarter Ended Bid Prices of Common Stock
High Low
March 31, 1997 N/A N/A
June 30, 1997 N/A N/A
September 30, 1997 N/A N/A
December 31, 1997 N/A N/A
March 31, 1998 N/A N/A
June 30, 1998 $10.00 $10.00
September 30, 1998 $10.00 $10.00
December 31, 1998 $10.00 $ 7.50
(b) The Company's Common Stock was held by approximately 222 holders of
record as of March 25, 1999.
(c) The Company has never declared cash dividends on its Common Stock.
The Company initially expects to follow a policy of retaining any
earnings to provide funds to operate and expand the Company.
Consequently, there are no plans for any cash dividends to be paid on
the Common Stock in the near future. The Company's ability to pay any
cash dividends to its shareholders in the future will depend
primarily on the Bank's ability to pay cash dividends to the Company.
The payment of dividends may be made only if the Bank and the Company
are in compliance with certain applicable regulatory requirements
governing the payment of dividends by each of them. See "Item 1 -
SUPERVISION AND REGULATION - Depository Institution Regulation -
Limitation on Capital
48
<PAGE>
Distributions" and "- Holding Company Regulation Assuming the
Consummation of the Proposed Conversion - Dividends."
ITEM 2. LEGAL PROCEEDINGS.
None.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Based on the Company's review of copies of reporting forms received
by it, each of the following persons who, during 1998, was a director,
officer or beneficial owner of more than ten percent of any class of
equity securities of the Company (a "reporting person"), failed to file on
a timely basis reports required by Section 16(a) of the Securities
Exchange Act of 1934, as amended:
Former Director Michael W. Mekalian failed to file on a timely basis
one report on Form 3. Mr. Mekalian also failed to file on a timely basis
one report on Form 4 describing one transaction and failed to file on a
timely basis one report on Form 5 describing 3 transactions.
Directors Melanie R. Sabelhaus, Marc J. Atas and Carl A.J. Wright
each failed to file on a timely basis one report on Form 3.
Richard J. Hunt, Jr., the President of the Company's wholly owned
subsidiary, AmericasBank, failed to file on a timely basis one report on
Form 3.
Director and President J. Clarence Jameson, III failed to file on a
timely basis two reports on Form 4, describing two transactions.
Former Director George E. Rayme, Jr. failed to file on a timely basis
one report on Form 4, describing one transaction.
In addition, Director and Treasurer Larry D. Ohler, Former Director
King V. Cheek and Director William A. Fogle Jr. each amended one report on
Form 4, each correcting one transaction.
The Company is not aware of any known failure by a reporting person
to file a required form.
49
<PAGE>
ITEM 6. REPORTS ON FORM 8-K.
None.
50
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of AmericasBank Corp.:
We have audited the accompanying consolidated balance sheet of AmericasBank
Corp. (a Maryland corporation) and subsidiaries (the Company) as of December 31,
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1998 and 1997. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 financial position of AmericasBank Corp.
and subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the years ended December 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
Baltimore, Maryland,
March 5, 1999
51
<PAGE>
AMERICASBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
ASSETS
Cash and cash equivalents:
On-hand and due from banks $ 625,000
Federal funds sold 2,463,000
Investment securities, available-for-sale 586,000
Mortgage-backed securities, held-to-maturity 442,000
Loans receivable, net 6,603,000
Investment in Federal Home Loan Bank stock, at cost 54,000
Accrued interest receivable 49,000
Property and equipment, net 755,000
Organizational costs, net -
Other assets, net 500,000
------------
Total assets $ 12,077,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 463,000
Interest-bearing 8,799,000
Mortgage escrow deposits 95,000
Accounts payable and accrued expenses 341,000
------------
Total liabilities 9,698,000
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Peferred stock, par value $0.01 per share, 5,000,000 shares
authorized, 0 shares issued and outstanding -
Common stock, par value $0.01 per share, 5,000,000 shares
authorized, 300,000 shares issued and outstanding 3,000
Additional paid-in capital 2,847,000
Accumulated deficit (471,000)
------------
Total stockholders' equity 2,379,000
------------
Total liabilities and stockholders' equity $ 12,077,000
============
The accompanying notes are an integral part of this consolidated balance
sheet.
52
<PAGE>
AMERICASBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
INTEREST INCOME:
Interest income on loans $ 597,000 $ 47,000
Interest income on investment securities 194,000 63,000
------------ ------------
Total interest income 791,000 110,000
INTEREST EXPENSE ON DEPOSITS 372,000 32,000
------------ ------------
Net interest income 419,000 78,000
PROVISION FOR LOAN LOSSES 33,000 2,000
------------ ------------
Net interest income after provision for loan losses 386,000 76,000
SERVICE FEES AND CHARGES 19,000 -
------------ -----------
Net interest income after services fees and charges 405,000 76,000
----------- -----------
OTHER OPERATING EXPENSES:
Salaries and benefits 145,000 11,000
Depreciation and amortization 112,000 10,000
Occupancy expense 32,000 1,000
Data processing 56,000 11,000
Professional fees 206,000 38,000
Office supplies 17,000 11,000
Other operating expenses 136,000 35,000
------------ ------------
Total other operating expenses 704,000 117,000
------------ ------------
Loss before provision for income taxes (299,000) (41,000)
PROVISION FOR INCOME TAXES - -
------------ -----------
Net loss before cumulative effect of change
in accounting principle (299,000) (41,000)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Note 2) (133,000) -
------------ -----------
Net loss $ (432,000) $ (41,000)
=========== ===========
NET LOSS PER SHARE - BOTH BASIC AND DILUTIVE:
LOSS BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ (1.00) $ (.77)
LOSS FROM CHANGE IN ACCOUNTING PRINCIPAL (0.44) -
------------ -----------
NET LOSS PER SHARE $ (1.44) $ (.77)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 300,000 53,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
53
<PAGE>
AMERICASBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit
----- ----- ------- -------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 $ - $ - $ - $ 2,000
Net proceeds from issuance of
common stock - 3,000 2,847,000 -
Net loss - - - (41,000)
----------- ----------- ----------- -----------
BALANCE, December 31, 1997 - 3,000 2,847,000 (39,000)
Net loss - - - (432,000)
----------- ----------- ----------- -----------
BALANCE, December 31, 1998 $ - $ 3,000 $ 2,847,000 $ (471,000)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
54
<PAGE>
AMERICASBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (432,000) $ (41,000)
Adjustments to reconcile net loss to net cash from
operating activities-
Provision for loan losses 33,000 2,000
Depreciation and amortization 245,000 10,000
Effect of change in-
Accrued interest receivable 2,000 8,000
Other assets (39,000) (4,000)
Accrued interest on deposits (32,000) 32,000
Accounts payable and accrued expenses 72,000 36,000
------------ ------------
Net cash from operating activities (151,000) 43,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities (17,000) (569,000)
Purchase of mortgage-backed securities (500,000) -
Principal payments on mortgage-backed securities 57,000 -
Purchase of Federal Home Loan Bank stock - (54,000)
Net cash acquired from acquisition of Rushmore - 982,000
Refundable deposit - (100,000)
Return of refundable deposit - 120,000
Branch acquisition costs - (40,000)
Loan principal disbursements (2,202,000) (188,000)
Principal repayments on loans receivable 1,809,000 379,000
Purchase of property and equipment (55,000) (667,000)
Cash paid for organizational costs - (77,000)
------------ ------------
Net cash from investing activities (908,000) (214,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in savings deposits, net of assumed balance 866,000 715,000
(Decrease) increase in mortgage escrow deposits,
net of assumed balance (24,000) 19,000
Proceeds from common stock offering - 3,000,000
Stock offering costs (32,000) (150,000)
Repayments of related party advances - (374,000)
------------ ------------
Net cash from financing activities 810,000 3,210,000
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (249,000) 3,039,000
CASH AND CASH EQUIVALENTS, beginning of period 3,337,000 298,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,088,000 $ 3,337,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
55
<PAGE>
AMERICASBANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
AmericasBank Corp. (the Company) was incorporated under the laws of the State of
Maryland on June 4, 1996, primarily to hold all the outstanding shares of
capital stock of a federal stock savings bank.
Effective November 30, 1997, the Company completed an initial public offering
(the Offering) in which it sold 300,000 shares of common stock for $10.00 per
share, less offering costs. During 1997, the Company received net proceeds from
the Offering of $2,850,000.
During 1998, the Company filed a Registration Statement on Form SB-1 with the
Securities and Exchange Commission, which became effective on October 9, 1998.
In connection with this secondary offering by the Company, a minimum of 125,000
units and a maximum of 312,500 units were offered with each unit consisting of
one share of common stock and one common stock purchase warrant, at a price of
$12.00 per unit. By its terms, the offering will expire on March 31, 1999.
On December 1, 1997, the Company acquired certain assets and assumed certain
deposit liabilities primarily related to the Baltimore Branch of Rushmore Trust
and Savings, FSB (Rushmore). Concurrent with the acquisition, the branch
commenced banking operations under the name AmericasBank (the Bank) as a
wholly-owned subsidiary of the Company. The acquisition was recorded using the
purchase method of accounting, and the results of operations of the Bank for the
period from December 1, 1997 to December 31, 1997, are included in the
accompanying statement of operations for the year ended December 31, 1997. The
Bank is a member of the Federal Home Loan Bank System, and its deposits are
insured by the Federal Deposit Insurance Corporation (FDIC).
The assets purchased and liabilities assumed in the acquisition were as follows:
Assets:
Loans receivable, net $ 6,444,000
Property and equipment 81,000
Covenant not to compete 50,000
Core deposit premiums 164,000
Other assets 61,000
-----------
Total assets purchased 6,800,000
Liabilities:
Deposits 7,680,000
Accounts payable 2,000
------------
Net liabilities assumed 7,682,000
------------
882,000
Refundable deposits returned 120,000
------------
Cash 1,002,000
Mortgage escrow deposits assumed 100,000
Refundable deposits returned (120,000)
------------
Net cash received from acquisition $ 982,000
===========
The unaudited pro forma results of operations for the year ended December 31,
1997, as if the assets and liabilities of Rushmore had been acquired on January
1, 1997, were as follows:
Interest income $ 700,000
Interest expense on deposits 360,000
------------
Net interest income 340,000
Other operating expenses (640,000)
------------
Net loss $ (300,000)
=============
56
<PAGE>
As the Bank is a start-up operation, there can be no assurance that the Bank can
attract sufficient depositors or issue sufficient quality loans to operate at a
profit. The Bank is subject to other risks and uncertainties, including interest
rate risk. The interest rate risk related to interest rates is significant to
the Bank as its deposits have relatively short maturities, while its loans have
much longer maturities at fixed rates. Without a significant change in the
Bank's investment, deposit or loan portfolio, an increase in interest rates
could have a significant negative effect on the Bank's net interest income and
results of operations.
In addition to interest rate risk, the Company is currently operating at a loss.
Growth of operations will be necessary for the Company to be able to cover
overhead and other operational costs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying consolidated financial statements include the activity of
AmericasBank Corp. and its wholly-owned subsidiaries, AmericasBank and
AmericasBank Holdings Corporation. All intercompany transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and conform to general
practices within the banking industry. The Company's primary operations are
conducted by the Bank, which operates one branch in Baltimore, Maryland. The
Bank is principally engaged in the business of investing in mortgage and
consumer loans and attracting deposits.
Cash and Cash Equivalents
Cash and cash equivalents includes interest-bearing deposits in other banks with
original maturities of less than three months and Federal funds sold. Generally,
Federal funds are purchased and sold for one-day periods.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is carried at cost. The cost of securities sold is
determined using the specific identification method.
Investment Securities and Mortgage-Backed Securities
Debt securities that the Bank has the positive intent and ability to hold to
maturity are classified as held-to-maturity and recorded at amortized cost. Debt
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
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of tax effects. 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 by using the specific identification
method. Gains and losses on sales of securities are recognized at the time of
sale.
57
<PAGE>
Premiums and discounts on investment and mortgage-backed securities are
amortized over the term of the security using methods that approximate the
interest method.
The amortized cost and fair value of mortgage-backed securities held-to-maturity
were approximately $442,000 as of December 31, 1998.
Loans Receivable and Allowance for Loan Losses
Loans receivable are stated at the amount of unpaid principal, reduced by an
allowance for loan losses and deferred loan fees. Interest on loans is
calculated using the simple-interest method on principal amounts outstanding
each month.
The allowance for losses on loans is determined based on management's review of
the loan portfolio and analysis of the borrowers' ability to repay, past
collection experience, risk characteristics of individual loans or groups of
similar loans and underlying collateral, current and prospective economic
conditions and status of nonperforming loans. Loans are charged off when
considered, in the opinion of management, uncollectible.
Interest on potential problem loans is not accrued when, in the opinion of
management, full collection of principal or interest is in doubt, or payment of
principal or interest has become 90 days past due. Such interest is considered
in management's determination of the allowance for loan losses. Any interest
received in excess of the amount previously accrued on such loans is recorded in
income in the period of recovery.
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS No. 114) addresses the accounting by
creditors for impairment of certain loans. It is generally applicable to all
loans, except large groups of smaller balance homogenous loans. It also applies
to loans that are restructured in a troubled debt restructuring involving a
modification of terms, with limited exceptions.
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. SFAS No. 114 requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loans' effective interest rate, or at the loans'
observable market price or the fair value of the collateral if the loan is
collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, an impairment is recognized through a valuation
allowance.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the respective assets. Building and improvements are
depreciated over 15-25 years. Furniture and equipment are depreciated over 5
years.
58
<PAGE>
Other Assets
Other assets as of December 31, 1998, consist of the following:
Covenants not-to-compete $ 50,000
Premium on deposits 164,000
Goodwill 40,000
Stock offering costs 239,000
Prepaid expenses 69,000
-----------
562,000
Less: Accumulated amortization (62,000)
-----------
Total other assets, net $ 500,000
===========
Amortization is calculated using the straight-line method over the following
periods:
Covenants not-to-compete 3 years
Premium on deposits 5 years
Goodwill 5 years
Amortization expense on other assets during the years ended December 31, 1998
and 1997, was $56,000 and $6,000, respectively.
Organizational Costs
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5 (the
"SOP") regarding financial reporting on the costs of start-up activities. Under
the SOP, organizational costs are considered start-up costs and, commencing with
fiscal years beginning after December 15, 1998, entities are required to expense
such costs as they are incurred. As a result of the SOP, the Company will be
required to write off its unamortized organizational costs as a cumulative
change in an accounting principal.
On December 31, 1998, the Company elected to adopt the SOP, effective January
1, 1998, resulting in the write-off of $133,000 of organizational costs as a
cumulative effect of a change in accounting principal. Prior to January 1, 1998,
organizational costs were being amortized over a five-year period using the
straight-line method, commencing upon the purchase of the Bank.
New Accounting Standards
During 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), which is effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. The
Company adopted this standard effective January 1, 1998. The Company does not
have any adjustment for comprehensive income for 1998. Comprehensive income is
the same as income reported in the accompanying statements of operations.
59
<PAGE>
During 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" (SFAS No. 131), which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 introduces a new
model for segment reporting, called the "management approach." The management
approach is based on the way the chief operating decision maker organizes
segments within a company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure -- any manner in which management
desegregates a company. The management approach replaces the notion of industry
and geographic segments in current FASB standards. The Bank has only one
reportable segment and, accordingly, no additional disclosure pursuant to SFAS
No. 131 is necessary.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999 and cannot
be applied retroactively. The Bank will adopt SFAS No. 133 effective January 1,
2000. The Bank anticipates that the adoption of SFAS No. 133 will not have a
material effect on its financial condition or results of operations.
Loan Origination Fees
Loan origination fees, net of certain direct loan origination costs, are
deferred and recognized as an adjustment to interest income over the life of the
loans.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
60
<PAGE>
3. LOANS RECEIVABLE:
As of December 31, 1998, loans receivable consist of:
Real estate first mortgage loans-
Residential $ 4,863,000
Commercial 912,000
Real estate second mortgage loans 389,000
Loans secured by deposits 234,000
Construction 280,000
Unsecured consumer loans 10,000
-----------
6,688,000
Less: Allowance for loan losses 85,000
-----------
Loans receivable, net $ 6,603,000
===========
Most of the 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 and loan committee 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%.
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 loan repayments are generally dependent on the operations of the
related properties or the financial condition of the borrowers or guarantors.
Accordingly, repayment of such loans can be more susceptible to adverse
conditions in the real estate market and the regional economy.
Nonperforming loans amounted to approximately $93,000 as of December 31, 1998;
these loans were not considered impaired. The amount of interest income that
would have been recorded on loans in nonaccrual status as of December 31, 1998,
had such loans performed in accordance with their terms, was $4,000.
A summary of the changes in the allowance for loan losses is as follows:
Balance, January 1, 1997 $ -
Balance acquired with Rushmore purchase 50,000
Provision charged to operations 2,000
-----------
Balance, December 31, 1997 52,000
Provision charged to operations 33,000
-----------
Balance, December 31, 1998 $ 85,000
===========
Outstanding loan commitments, which primarily represent undisbursed proceeds on
construction loans, were $505,000 and $0 as of December 31, 1998 and 1997,
outstanding respectively.
61
<PAGE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 1998:
Land $ 148,000
Buildings and improvements 483,000
Furniture and equipment 172,000
-----------
803,000
Less: Accumulated depreciation 48,000
-----------
Property and equipment, net $ 755,000
===========
Depreciation expense for the years ended December 31, 1998 and 1997, was $46,000
and $2,000, respectively.
5. DEPOSITS:
As of December 31, 1998, deposits consisted of:
Weighted
Average
Rate at
December 31,
1998 Amount Percent
---- ------ -------
Checking accounts - % 463,000 5.0%
Statement savings 2.50% 1,184,000 12.8%
Money market accounts 2.33% 243,000 2.6%
Certificates of deposit 5.54% 1,747,000 18.9%
IRA plans 4.83% 478,000 5.2%
Insured investment 5.03% $ 4,910,000 53.0%
Passbook deposits 2.92% 237,000 2.5%
----------- ---------
$ 9,262,000 100.0%
=========== =========
A schedule of maturities of deposits as of December 31, 1998, is as follows:
No contractual maturity $ 7,072,000
Maturity within one year 660,000
Maturity in one to five years 1,530,000
-----------
$ 9,262,000
===========
The aggregate amount of deposits, each with a minimum denomination of $100,000
or more, was approximately $748,000 as of December 31, 1998.
62
<PAGE>
6. INCOME TAXES:
The reconciliation of the federal statutory to the actual income tax rate is as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Statutory federal income tax rate (35%) $ 151,000 $ 14,000
State income tax benefit, net of federal income tax effect 20,000 2,000
Valuation allowance (171,000) (16,000)
----------- -----------
Total $ - $ -
=========== ===========
</TABLE>
The Company has recorded a 100% valuation allowance against its deferred tax
asset as the Company is a start-up operation and it is more likely than not that
the deferred tax asset will not be realized.
The tax effect of temporary differences between the financial reporting basis
and income tax basis of assets and liabilities relates to the following as of
December 31, 1998:
Deferred tax assets:
Allowance for loan losses $ 14,000
Intangible assets 55,000
Net operating loss carryforwards 118,000
-----------
Total gross deferred tax assets 187,000
Less: Valuation allowance (187,000)
-----------
Net deferred tax asset $ -
===========
7. RELATED PARTY TRANSACTIONS:
Two directors of the Company are principals in a law firm and a public
accounting firm, respectively. These firms provide legal and accounting services
to the Company. As a result of these services, these firms were each paid $2,000
and $12,500 during the years ended December 31, 1998 and 1997, respectively.
In addition, the two directors were each paid $25,000 as consulting fees for
services performed on behalf of the Company and the Bank during the year ended
December 31, 1997.
One director was paid approximately $10,000 for providing pre-opening assistance
to the Bank during the year ended December 31, 1997.
During the year ended December 31, 1997, the Company purchased approximately
$111,000 of the loans from Rushmore which were made to the Company's officers,
directors or their affiliates. The balance on these loans was $105,000 and
$111,000 as of December 31, 1998 and 1997, respectively.
63
<PAGE>
8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of cash and cash equivalents and accounts payable approximates
the carrying amount. For investment securities, fair value is determined using
quoted market prices.
Fair value of loans receivable is estimated by discounting future cash flows,
taking into consideration future loan losses, using current rates at which
similar loans would be made to borrowers with similar credit ratings for the
same remaining maturities. For commitments to extend credit, the carrying amount
is a reasonable estimate of fair value. Management estimates that the fair value
of loans receivable is approximately $6,933,000 as of December 31, 1998.
With respect to deposits, fair value of passbook deposits, money market accounts
and NOW accounts is the amount payable on demand at the reporting date. Fair
value of fixed maturity term accounts and individual retirement accounts is
estimated using rates currently offered for accounts of similar remaining
maturities. Management estimates that the fair value of deposits approximates
the carrying amount as of December 31, 1998.
9. STOCKHOLDERS' EQUITY:
Stock Option Plan
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company measures compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and provides pro
forma disclosures of net income and earnings per share as if the fair
value-based method prescribed by SFAS No. 123 has been applied in measuring
compensation expense.
On June 1, 1998, the Company adopted a stock option plan for the granting of
stock options to employees and nonemployee directors. The options are vested
immediately and may be exercised six months after the grant date. For employees,
in the event of termination without cause, the stock options expire in three
months from the date of termination. Options granted to directors expire on the
first anniversary of the effective date of termination as a director. All
options expire on the 10th anniversary of the grant date.
During the year ended December 31, 1998, approximately 42,000 stock options were
granted at option prices ranging from $10 to $12. No options have been
exercised, cancelled or expired as of December 31, 1998.
64
<PAGE>
Had compensation cost for the Company's 1998 grants for stock-based compensation
plans been determined consistent with SFAS No. 123, the Company's net loss
applicable to common shares before the cumulative effect of change in accounting
principle and net loss per common share would approximate the pro forma amounts
below for 1998:
<TABLE>
<CAPTION>
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Loss before cumulative effect of change in accounting
principle $ (299,000) $ (412,000)
========== ==========
Net loss $ (432,000) $ (545,000)
========== ==========
Basic and dilutive loss per share-
Net loss per share before cumulative
effect of change in accounting principle $ (1.00) $ (1.37)
---------- ----------
Net loss per share $ (1.44) $ (1.82)
---------- ----------
</TABLE>
The Company has computed for pro forma disclosure purposes the value of all
options granted during 1998 using the Black-Scholes option pricing model as
prescribed by SFAS No. 123 and the following weighted average assumptions:
Risk-free interest rate 4.55%
Expected lives 6 years
Expected volatility 17.6%
The weighted average value of the options granted during 1998 using the
Black-Scholes model was $2.74 per share.
Stock Warrants
On September 2, 1998, the Company issued to the holders of record of its common
stock on September 1, 1998, a dividend of one common stock purchase warrant for
each share of common stock then held by the stockholders (the "Dividend
Warrants"). Each Dividend Warrant entitles the holder thereof to purchase one
share of common stock at an exercise price of $10.00 per share, subject to
adjustment for certain events, beginning any time after April 1, 2000, until the
Dividend Warrant's expiration on September 1, 2008. As of December 31, 1998,
there were 300,000 warrants outstanding.
10. REGULATORY MATTERS:
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 action, the Bank must meet specific
capital guidelines that involve quantative 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
weighting and other factors.
65
<PAGE>
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 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
Due to the Bank's recent formation, as of December 31, 1998, the Bank has not
been categorized by the Office of Thrift Supervision (OTS) under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized,
the Bank must maintain minimum total risk-based, Tier 1 Risk-based, Tier 1
leverage ratios as set forth in the table. There are no conditions or events
that management believes would prevent the Bank from being categorized as
well-capitalized. The table below shows the regulatory capital as of December
31, 1998.
<TABLE>
<CAPTION>
To Be
Well-Capitalized
Under Prompt
Actual For Capital Adequacy Corrective Action
Purposes Provisions
-------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets) $1,620,000 34.8% $372,000 8.0% $465,000 10.0%
Tier I Capital
(to risk-weighted assets) 1,535,000 33.0% 186,000 4.0% 279,000 6.0%
Tier I Capital
(to ending assets) 1,535,000 13.9% 442,000 4.0% 553,000 5.0%
</TABLE>
11. SUBSEQUENT EVENT:
As of December 31, 1998, commitments to purchase 111,500 units for the stated
price of $1,338,000 had been received under the secondary offering discussed in
Note 1. As of December 31, 1998, these proceeds were held in interest-bearing
escrow accounts and are not included in these financial statements.
66
<PAGE>
As of January 12, 1999, the Company sold approximately 127,000 units at $12.00
per unit which were more than the minimum number of units needed to close the
offering. The Company is continuing to sell units under this offering. The
Company's unaudited pro forma stockholders' equity, assuming the transaction had
closed as of December 31, 1998, is as follows:
Pro-forma
Actual Unaudited
---------- ----------
Common stock $ 3,000 $ 4,000
Additional paid-in capital 2,847,000 4,131,000
Accumulated deficit (471,000) (471,000)
----------- -----------
$ 2,379,000 $ 3,664,000
=========== ===========
12. PRO FORMA EFFECTS OF SOP 98-5 ADOPTION (UNAUDITED):
As of December 31, 1998, the Company adopted SOP 98-5 which requires that the
adoption be reported as if it was effective January 1, 1998 and requires the
restatement of quarterly results for 1998 as if SOP 98-5 had been adopted as of
January 1, 1998. Listed below is condensed results as previously reported and as
restated for the adoption of SOP 98-5.
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter
-------------------------------------------------------------------
As As As
As Filed Restated As Filed Restated As Filed Restated
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CONDENSED STATEMENT OF
OPERATIONS:
Net interest income after
service fees and
charges $ 95,000 $ 95,000 $ 109,000 $ 109,000 $ 104,000 $ 104,000
--------- -------- --------- ---------- --------- ----------
Operating expenses
excluding depreciation
and amortization 101,000 101,000 124,000 124,000 131,000 131,000
Depreciation and
amortization 34,000 27,000 37,000 30,000 35,000 28,000
--------- -------- --------- --------- --------- ----------
Other operating expenses 135,000 128,000 161,000 154,000 166,000 159,000
--------- -------- --------- ---------- --------- ----------
Net loss before cumulative
effect of change in
accounting principle (40,000) (33,000) (52,000) (45,000) (62,000) (55,000)
Cumulative effect of change
accounting principle - (133,000) - - - -
--------- -------- --------- ------- --------- ---------
Net loss $ (40,000) $(166,000) $ (52,000) $ (45,000) $ (62,000) $ (55,000)
========= ========= ========= ========= ========= =========
Net loss per share -- both
basic and dilutive
Loss before
cummulative effect of
change in accounting
principle (.13) (.11) (.17) (.15) (.21) (.18)
==== ==== ==== ==== ==== ====
Net loss per share (.13) (.55) (.17) (.15) (.21) (.18)
==== ==== ==== ==== ==== ====
CONDENSED BALANCE SHEET DATA:
Total assets $11,014,000 $10,888,000 $11,385,000 $11,266,000 $11,970,000 $11,858,000
Total liabilities 8,243,000 8,243,000 8,666,000 8,666,000 9,313,000 9,313,000
Total stockholders'
equity 2,771,000 2,645,000 2,719,000 2,600,000 2,657,000 2,545,000
</TABLE>
This restatement has no effect on the statement of cash flows as filed for each
of the three quarters listed above.
67
<PAGE>
Part III
ITEM 1 AND ITEM 2. INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS.
2A Articles of Incorporation of the Registrant**
2B Amended and Restated Bylaws of the Registrant*
3A Form of Purchase Warrant*
3B Form of Dividend Warrant*
3C AmericasBank Corp. Stock Option Plan*
3D Form of Stock Certificate**
6A Form of Founder Loan Agreement by and among the
Registrant, the organizers of the Registrant and certain
other parties regarding organizational loans to the
Registrant**
6B Indemnity Agreement by and among the Registrant,
AmericasBank (in organization) and Rushmore Trust
and Savings, FSB**
6C Agreement of Lease by and between the AmericasBank
Holdings Corporation and Network Processing, LLC*
6D Employment Agreement between AmericasBank and
Richard J. Hunt, Jr.*
6E Amendment to Employment Agreement between
AmericasBank and Richard J. Hunt
8A(i) Branch Purchase and Assumption Agreement by and between
AmericasBank (in organization) and Rushmore Trust &
Savings, FSB**
8A(ii) Modification to Branch Purchase and Assumption Agreement
by and between AmericasBank and Rushmore Trust & Savings,
FSB**
8A(iii) Second Modification to Branch Purchase and Assumption
Agreement by and between AmericasBank and Rushmore Trust
& Savings, FSB**
8A(iv) Third Modification to Branch Purchase and Assumption
Agreement by and between AmericasBank and Rushmore Trust
& Savings, FSB***
68
<PAGE>
8B(i) Loan Purchase and Assumption Agreement by and between
AmericasBank (in organization) and Rushmore Trust &
Savings, FSB**
8B(ii) Modification to Purchase and Assumption Agreement by
and between AmericasBank and Rushmore Trust &
Savings, FSB**
8B(iii) Second Modification to Loan Purchase and Assumption
Agreement by and between AmericasBank and Rushmore Trust
& Savings, FSB**
8B(iv) Third Modification to Loan Purchase and Assumption
Agreement by and between AmericasBank and Rushmore Trust
& Savings, FSB***
8C Purchase and Sale Agreement by and between
NationsBank, N.A. and AmericasBank Holdings
Corporation***
21 Subsidiaries of the Registrant*
27A Financial Data Schedule for the 12 months ended
December 31, 1997*
27B Financial Data Schedule for the 12 months ended
December 31, 1998
* Items 2B, 3A, 3B, 3C, 6C, 6D, 21 and 27A, as listed above, were previously
filed by the Company as Exhibits (with the same respective Exhibit Numbers as
indicated herein) to the Company's Registration Statement on Form SB-1, as
amended, filed on August 13, 1998 (SEC File No. 333-61335, and such documents
are incorporated herein by reference.
** Items 2A, 3D, 6A and 6B, 8A(i) through 8A(iii) and 8B(i) through 8B(iii), as
listed above, were previously filed by the Company as Exhibits (with the same
respective Exhibit Numbers as indicated herein, except for Exhibit 3D, which was
previously filed as Exhibit 12B) to the Company's Registration Statement on Form
SB-1, as amended, filed on June 10, 1997 (SEC File No. 333-28881), and such
documents are incorporated herein by reference.
*** Item 8A(iv), Item 8B(iv) and Item 8C, as listed above, were previously filed
by the Company as Exhibits (with the same respective Exhibit Numbers as
indicated herein) to the Company's Annual Report on Form 10-KSB, filed on March
31, 1998, and such documents are incorporated herein by reference.
69
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICASBANK CORP.
Date: March 25, 1999 By: /s/ J. Clarence Jameson, III
--------------------------------
J. Clarence Jameson, III,
President and Chairman of the
Board of Directors
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/Mark Atas Director March 25, 1999
- ---------------------------------
Mark Atas
/s/Garbis Baklayan Director March 25, 1999
- ---------------------------------
Garbis Baklayan
/s/Nicholas J. Belitsos, M.D. Director March 25, 1999
- ---------------------------------
Nicholas J. Belitsos, M.D.
/s/Cynthia B. Conklin Director March 25, 1999
- ---------------------------------
Cynthia B. Conklin
/s/William A. Fogle Director March 25, 1999
- ---------------------------------
William A. Fogle
Director
- ---------------------------------
Constantine Frank
Director
- ---------------------------------
Leonard Frenkil
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/J. Clarence Jameson, III President March 25, 1999
- --------------------------------- (Principal Executive Officer)
J. Clarence Jameson, III & Chairman of the Board of
Directors
/s/Kemp Jayadeva Director March 25, 1999
- ---------------------------------
Kemp Jayadeva
/s/Norman H. Katz Director March 25, 1999
- ---------------------------------
Norman H. Katz
/s/Shawki N. Malek, M.D. Director March 25, 1999
- ---------------------------------
Shawki N. Malek, M.D.
/s/Mark D. Noar, M.D. Director March 25, 1999
- --------------------------------- Treasurer
Mark D. Noar, M.D. (Principal Financial Officer & March 25, 1999
/s/Larry D. Ohler Principal Accounting Officer)
- ------------------------------------- and Director
Larry D. Ohler
/s/Kenneth D. Pezzulla Director March 25, 1999
- ---------------------------------
Kenneth D. Pezzulla
/s/Ramon F. Roig, M.D. Director March 25, 1999
- ---------------------------------
Ramon F. Roig, M.D.
- --------------------------------- Director
Russell A. Rourke
- --------------------------------- Director
Melanie R. Sabelhaus
/s/Baldev Singh Director March 25, 1999
- ---------------------------------
Baldev Singh
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
- --------------------------------- Director
Michael Stern
- --------------------------------- Director
Lee W. Warner
- --------------------------------- Director
Carl Wright
</TABLE>
72
<PAGE>
EXHIBIT 6E
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment (this "First Amendment") to that certain Employment
Agreement (the "Agreement") dated as of September 1998 by and between
AmericasBank, a federally chartered savings bank (the "Bank"), and Richard J.
Hunt, Jr. ("Employee"), is made as of the 12th day of February, 1999.
In consideration of the terms and conditions set forth in this First
Amendment, for the payment of $10.00 from the Bank to the Employee, and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties agree as follows:
1. CONFLICT. In the event any conflict between the provisions of this First
Amendment and the provisions of the Agreement, the provisions of this First
Amendment shall prevail.
2. AMENDMENT TO EMPLOYMENT AGREEMENT. Section 9.02 of the Agreement is hereby
amended by deleting the first three sentences of said Section.
3. AMENDMENT AND MODIFICATION ONLY. This First Amendment is only an agreement
amending certain provisions of the Agreement. All of the provisions of the
Agreement are incorporated herein by reference and shall remain and continue in
full force and effect as amended by this First Amendment.
IN WITNESS WHEREOF, this First Amendment has been executed by the parties
as of the 11th day of February, 1999.
AMERICASBANK
By:/s/ J. Clarence Jameson, III
-------------------------------
J. Clarence Jameson, III,
Chairman of the Board
/s/ Richard J. Hunt, Jr.
-------------------------------
Richard J. Hunt, Jr.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 625,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,463,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 586,000
<INVESTMENTS-CARRYING> 442,000
<INVESTMENTS-MARKET> 586,000
<LOANS> 6,688,000
<ALLOWANCE> 85,000
<TOTAL-ASSETS> 12,077,000
<DEPOSITS> 9,262,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 436,000
<LONG-TERM> 0
0
0
<COMMON> 3,000
<OTHER-SE> 2,376,000
<TOTAL-LIABILITIES-AND-EQUITY> 12,077,000
<INTEREST-LOAN> 597,000
<INTEREST-INVEST> 194,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 791,000
<INTEREST-DEPOSIT> 372,000
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 419,000
<LOAN-LOSSES> 33,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 704,000
<INCOME-PRETAX> (299,000)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> (133,000)
<NET-INCOME> (432,000)
<EPS-PRIMARY> (1.44)
<EPS-DILUTED> (1.44)
<YIELD-ACTUAL> 4.12
<LOANS-NON> 93,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 52,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 85,000
<ALLOWANCE-DOMESTIC> 85,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
