As filed with Securities and Exchange Commission on October 2, 1998.
Registration Statement No. 333-62061
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
Pre-Effective Amendment No. 1
to
Form SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------------
COMMUNITY BANKSHARES OF MARYLAND, INC.
(Name of Small Business Issuer in its Charter)
Maryland 6023 52-1542839
(State or Other (Primary Standard (IRS Employer
Jurisdiction of Industrial Classification I.D. Number)
Incorporation or Code Number)
Organization)
16410 Heritage Blvd.
Bowie, Maryland 20716
(301) 464-6300
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
Thomas G. Moore
President and Chief Operating Officer
COMMUNITY BANKSHARES OF MARYLAND, INC.
16410 Heritage Blvd.
Bowie, Maryland 20716
(301) 464-6300
(Name, Address and Telephone Number of Agent for Service)
Copies to:
David H. Baris, Esq.
Kennedy, Baris & Lundy, L.L.P.
4719 Hampden Lane, Suite 300
Bethesda, Maryland 20814
(301) 654-6040
-----------------------------------
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following line. X
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. o ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. o
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
ii
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC.
100,000 Shares of Common Stock
$17.50 per share Offering Price
-----------------------------------------------------
Community Bankshares of Maryland, Inc. a Maryland corporation (the
"Company"), is hereby offering up to 100,000 shares of its common stock, par
value $10.00 per share ("Common Stock") to the general public (the "Offering")
at a price of $17.50 per share (the "Offering Price"). The Company is the
holding company for Community Bank of Maryland (the "Bank").
The Offering is being made directly by the Company through its Directors
and Officers, with the limited assistance of John Kovacevich, a registered
securities agent (the "Agent"), in order to comply with the securities laws of
the jurisdictions in which the Common Stock will be offered. The minimum number
of shares of Common Stock for which any investor may subscribe is 100, for a
minimum investment of $1,750. The maximum number of shares of Common Stock for
which any investor may subscribe is 1,000, for a maximum investment of $17,500.
The Company intends to consummate the Offering if any valid subscriptions are
received before the Expiration Date, unless the Board of Directors terminates
the Offering. Subject to the foregoing and the Company's right to reject any
subscription in whole or in part, all subscriptions, once delivered to the
Company, are irrevocable by the subscriber.
The Offering will expire November 30, 1998, unless terminated earlier or
extended by the Company in its sole discretion; however, under no circumstances
will the Offering be extended beyond December 31, 1998. (See "THE OFFERING --
Expiration Time"). Subscribers will be unable to obtain a refund of their funds
during the Offering period, and will not be entitled to receive interest on
funds held in escrow. (See "THE OFFERING -- Procedure for Subscribing for Common
Stock in the Offering").
There is no active market for the Company's Common Stock, and the Company
has no plans to qualify the Common Stock for trading on any securities exchange,
Nasdaq or other organized market.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSIT ACCOUNTS OR OTHER
OBLIGATIONS OF THE COMPANY'S WHOLLY-OWNED SUBSIDIARY, COMMUNITY BANK OF
MARYLAND, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
SEE "RISK FACTORS" AT PAGE 8 FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE
CAREFULLY CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMPANY'S COMMON
STOCK.
<TABLE>
<CAPTION>
Underwriting Discounts Proceeds to the
Price to Public and Commissions(1) Company(1)
---------------- ----------------------- -----------------
<S> <C> <C> <C>
Per Share $17.50 $ -- $17.50
Total $1,750,000 $ -- $1,750,000
</TABLE>
- ------------
(1) The Offering is not being underwritten. The Common Stock is being offered
by certain directors and officers of the Company, or when required by state
law, through the Agent. The Company's directors and officers will receive
no special compensation in connection with the Offering, but will be
reimbursed for reasonable expenses, if any, incurred in connection
therewith. The Agent will receive no compensation for his services in the
Offering, but will be reimbursed for his reasonable out-of-pocket expenses
and filing fees incurred in connection with the Offering.
(2) In the event all shares of Common Stock offered in the Offering are sold,
the Proceeds to the Company will be $1,750,000, before deduction of
estimated expenses of $50,000. See "Use of Proceeds" and "Capitalization."
The date of this Prospectus is ________, 1998.
<PAGE>
AVAILABLE INFORMATION
This Prospectus constitutes part of the Registration Statement on Form SB-2
filed with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act"), in connection with
the Offering. The summaries or description of documents or statutes and
regulations in the Prospectus do not purport to be complete. Reference is made
to the copies of such documents filed as a part of the Registration Statement
and to such statutes and regulations for a full and complete statement of their
provisions, and such summaries and descriptions are qualified in their entirety
by such reference. This Prospectus does not contain all of the information set
forth in the Registration Statement and all exhibits relating thereto, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC. Copies of the Registration Statement and the exhibits thereto are on file
at the offices of the SEC and may be examined without charge at the public
reference facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549; copies of such material can be obtained from the
Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain fees prescribed by the SEC. The
registration statement and exhibits thereto are also available at the Internet
web site maintained by the Commission. The address of that site is
http://www.sec.gov.
The Company's principal offices are located at 16410 Heritage Blvd., Bowie,
Maryland 20716. Its telephone number is (301) 464-6300.
The Company distributes annual reports containing audited financial
statements to the Company's stockholders. As of the date hereof, the Company is
not a reporting company under the Securities Exchange Act of 1934, as amended.
- 2 -
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information, including the audited
consolidated financial statements for the years ended December 31, 1997 and 1996
(the "Consolidated Financial Statements) and related notes, and the unaudited
consolidated interim financial statements for the six months ended June 30, 1998
and 1997 (the "Interim Financial Statements") and related notes, appearing
elsewhere herein.
THE COMPANY
Community Bankshares of Maryland, Inc., formerly Financial Institutions
Holding Corporation, was incorporated on April 3, 1987, under Maryland law, for
the purpose of acquiring and holding all of the outstanding stock of the Bank,
formerly Bank of Bowie. The Company is a registered bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended ("BHCA") and is
subject to the supervision of and regulation by the Board of Governors of the
Federal Reserve System ("Federal Reserve"). The Company's primary activity is
the operation of the Bank. On a consolidated basis at June 30, 1998, the Company
had total assets of $62.8 million, total liabilities of $55.5 million, and
stockholders' equity of $7.3 million.
The Bank is a commercial bank organized under the laws of the State of
Maryland. The Bank is a community oriented bank and the only commercial bank
headquartered in Bowie, Maryland. As the Company's principal subsidiary, the
Bank currently operates as a full service commercial bank through its main
office and one branch located in Bowie, Maryland and one branch located in
Annapolis, Maryland. The Bank's principal business consists of a traditional
commercial and consumer oriented banking business.
The Bank is subject to the supervision of and regulation by the Federal
Deposit Insurance Corporation ("FDIC") and the Maryland Commissioner of
Financial Regulation ("Commissioner"). The Bank's savings and deposit accounts
are insured by the Bank Insurance Fund administered by the FDIC to the maximum
extent permitted by law.
The Bank offers services to businesses, professionals and their firms,
trade associations, investors and individuals in its primary market area of
Prince George's County and Anne Arundel County. The Bank provides businesses
with a full range of deposit accounts, merchant bankcard services, electronic
funds transfer services, lines of credit for working capital, term loans and
commercial real estate loans, and provides consumers with a wide array of
deposit products, home equity and revolving lines of credit, installment loans
and home mortgage loans. The Bank also issues treasurer's checks and money
orders, sells traveler's checks and provides safe deposit boxes and other
customary banking services. The Bank is not authorized to offer trust services
nor does it offer international services but makes these services available to
its customers through financial institutions with which the Bank has
correspondent banking relationships. All of the Bank's deposits are attracted
from individuals and business-related sources. No material portion of the Bank's
deposits has been obtained from a single person or a few persons. The loss of
any one or more of the Bank's depositors would not have a materially adverse
effect on the business of the Bank. The Bank's loans are not concentrated within
a single industry or group of related industries.
The banking business in Maryland generally, and in the Bank's primary
service area specifically, is highly competitive. The Bank competes for deposits
and lendable funds with other commercial banks, thrift institutions, credit
unions and other governmental and corporate entities which raise operating
capital through the issuance of debt and equity securities. The Bank also
competes for available investment dollars with non-bank financial institutions,
such as brokerage firms, insurance companies and mutual funds. With respect to
loans, the Bank competes with other commercial banks, thrift institutions,
consumer finance companies, mortgage companies, credit unions and other lending
institutions. Additionally, as a result of enactment of federal and Maryland
interstate banking legislation, additional competitors which are not currently
operating in Maryland may enter the Bank's market and compete directly with the
Bank.
- 3 -
<PAGE>
The Bank has achieved consistent growth in assets, loans, deposits, and net
income over the last five years. In light of the high degree of competition in
its primary service area, though, there is no guaranty that this growth will
continue.
The Company and the Bank own 43.61% and 56.39%, respectively, of the
Community Bankshares of Maryland, Inc./Community Bank of Maryland Partnership
(the "Partnership") which is engaged in real estate activities related to the
operation of the Bank, which has included the acquisition of land and the
construction of a headquarters building for the Bank.
The Bank has a wholly-owned subsidiary, Community Bank of Maryland
Investment Services, Inc. (the "Investment Company"), which offers investment
planning and brokerage services to the Bank's customers and general public
through UVEST Investment Services ("UVest"), a registered broker-dealer and
member of both the National Association of Securities Dealers (the "NASD") and
the Securities Investment Protection Corporation (the "SIPC").
RISK FACTORS
A purchase of shares of Common Stock involves certain investment risks.
Accordingly, prospective investors should carefully consider the matters set
forth under "Risk Factors."
THE OFFERING
SHARES OFFERED HEREBY Up to 100,000 shares of Common Stock.
OFFERING PRICE $17.50 per share of the Common Stock. The
Offering Price was established by the
Company's Board of Directors after
consideration of a number of factors. See
"The Offering -- Determination of Offering
Price."
EXPIRATION TIME The Offering will expire at 5:00 p.m.,
Eastern Time, on November 30, 1998, unless
that time (the "Expiration Time") is
extended at the discretion of the Board of
Directors of the Company to a date not later
than December 31, 1998. See "The Offering --
Expiration Time."
MINIMUM SUBSCRIPTION A minimum of 100 shares ($1,750) must be
purchased in the Offering.
MAXIMUM SUBSCRIPTION A maximum of 1,000 shares ($17,500) may be
purchased in the Offering.
RIGHT TO REJECT SUBSCRIPTIONS The Company shall have the right to reject
any subscription in whole or in part in its
sole, absolute, and unlimited discretion.
The Offering will be consummated if any
valid subscriptions are received before the
Expiration Time, or any extension thereof,
unless the Board of Directors terminates the
Offering. See "The Offering -- Minimum
Offering."
PROCEDURE FOR SUBSCRIBING
FOR SHARES OF COMMON STOCK
IN THE OFFERING To subscribe for shares of Common Stock in
the Offering, the Order Form, which
accompanies this Prospectus, must be
completed and forwarded with payment of the
aggregate Offering Price, to the
Subscription Agent so that it is received
prior to the Expiration Time. Such funds
will be held in an escrow account at the
Bank until consummation or termination of
the Offering. If the mail is used to forward
Order Forms, it is recommended that
registered mail,
- 4 -
<PAGE>
return receipt requested, be used. See "The
Offering -- Procedure for Subscribing for
Common Stock in the Offering." Subscription
funds will not be released to or for the use
of the Company or commingled with the
Company's funds unless the Offering is
consummated.
PARTICIPATION BY DIRECTORS
AND OFFICERS IN THE OFFERING In light of the Company's desire to increase
the size of the Company's shareholder base,
through the Offering, the directors and
officers of the Company have indicated that
they do not intend to subscribe for shares
in the Offering unless the Offering is
undersubscribed.
ISSUANCE OF COMMON
STOCK Certificates representing shares of Common
Stock purchased in the Offering will be
delivered as soon as practicable after the
Expiration Time. See "The Offering --
Issuance of Common Stock."
USE OF PROCEEDS The amount of the net proceeds from the
Offering depends on the number of shares of
Common Stock sold in the Offering and the
amount of actual expenses incurred in the
Offering which may differ from the estimates
thereof. The proceeds of the Offering will
strengthen the Company's capital base and
position the Company to continue to remain a
"well-capitalized" institution under federal
banking regulations, and to allow the
Company to pursue future growth
opportunities through expansion of its
existing businesses or possible
acquisitions. The Company proposes to use
the net proceeds for general corporate
purposes, including branch expansion. On an
interim basis, the Company expects to invest
the net proceeds received in the Offering in
investment securities. See "Use of
Proceeds."
REGULATORY LIMITATIONS The Company will not be required to issue
shares of Common Stock pursuant to the
Offering to any person who, in the opinion
of the Company, would be required to obtain
prior clearance or approval from any state
or federal bank regulatory authority to own
or control such shares if, at the Expiration
Time, such clearance or approval has not
been obtained or any required waiting period
has not expired. See "The Offering --
Regulatory Limitation."
SUBSCRIPTION AGENT John Kovacevich, Subscription Agent,
Community Bankshares of Maryland, Inc.,
16410 Heritage Boulevard, Bowie, Maryland
20716
DIVIDEND POLICY
The Company recognizes that an adequate level of capital is paramount to
the strength of the Company and the Bank. The Company is committed to acting as
a source of financial strength for the Bank and, accordingly, will not request a
level of dividends that would place undue strain on the Bank's capital position.
It will seek a consistent level of dividends after determining the Bank's
capital needs. This determination will be based on relevant information
available at the time, including the Bank's:
o Capital position relative to assets
o Risk-based assets
o Total classified assets
o Growth rate
o Earning performance and projections
o Expansion plans
o Legal lending limit
Currently, before the Bank may declare and pay a dividend to the Company,
computations are performed to ensure that the dividend is in compliance with
regulatory requirements and that dividend payments do not reduce the Bank's
capital below 8% of assets.
- 5 -
<PAGE>
DIVIDENDS PAID PER COMMON SHARE
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------- ---------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
Cash $0.12 $0.23 $0.17 $0.11 $0.08
Stock -- 5% -- -- --
</TABLE>
The Company intends to continue to pay cash dividends on the Common Stock
in the foreseeable future based on its dividend policy, but there can be no
assurance that cash dividends will continue to be paid in the future. See
"Market for Common Stock and Dividends -- Dividends."
- 6-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table represents selected financial data for the years ended
December 31, 1997 and 1996 and for the six month periods ended June 30, 1998 and
1997. The data presented for the six month periods is derived from unaudited
financial statements and includes, in the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
data for such periods. The results for the six months ended June 30, 1998 are
not necessarily indicative of the results which may be expected for any other
interim period or for the full year. The selected consolidated financial and
other data of the Company set forth below does not purport to be complete and
should be read in conjunction with, and is qualified in its entirety by, the
more detailed information, including the Interim Financial Statements and the
Consolidated Financial Statements and related notes, appearing elsewhere herein.
<TABLE>
<CAPTION>
June 30, December 31,
------------------------- ------------------------
1998 1997 1997 1996
------ ------ ------ ------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
At Period End:
Total Loans, net $ 33,573 $ 27,731 $ 31,667 $ 27,965
Total Assets 62,806 50,923 53,100 47,205
Total Liabilities 55,503 44,053 45,996 40,556
Total Stockholders' Equity 7,303 6,870 7,104 6,649
For the Period Ended:
Total Interest Income 2,077 1,753 3,669 3,319
Total Interest Expense 874 713 1,485 1,322
Net Interest Income 1,203 1,040 2,184 1,997
Provision for Loan Losses 22 102 140 34
Net Income(1) 269 298 595 428
Other Comprehensive Income (loss) (4) (2) 12 (33)
Comprehensive Income 265 296 607 395
Earnings Per Share, Basic and Diluted $ 0.41 $ 0.46 $ 0.91 $ 0.65
Weighted Average Number of Shares Outstanding 654,451 654,041 654,041 654,041
Weighted Average Number of Shares Outstanding
Assuming Dilution 657,510 654,041 654,041 654,041
Book Value Per Share at End of Period(2) $ 11.15 $ 10.50 $ 10.86 $ 10.17
Cash Dividends Per Share 0.12 0.12 0.23 0.17
Performance Ratios(3):
Return on Average Assets 0.97% 1.28% 1.24% 0.98%
Return on Average Equity 7.51 8.88 9.08 6.68
Net Interest Margin 4.94 5.18 5.17 5.24
Interest Rate Spread 3.77 4.37 4.26 4.36
Ratio of Average Equity to Average Total Assets 12.84 14.47 13.61 14.71
Ratio of Loans, net of unearned income, to Deposits 63.84 63.31 71.99 74.53
Asset Quality Ratios:
Non-performing Assets to Loans net of
unearned income at Period End 0.15 0.10 0.26 0.33
Non-performing Assets to Total Assets at Period End 0.08 0.06 0.16 0.19
Allowance for Loan Losses to Non-Performing
Loans at Period End 6.56 11.10 3.92 3.21
Regulatory Capital Ratios - Bank only(4):
Tier 1 capital to risk-weighted assets 14.42 16.02 15.31 15.96
Total capital to risk-weighted assets 15.26 16.96 16.20 16.85
Leverage ratio to risk-weighted assets 10.35 11.67 11.72 12.17
</TABLE>
- ----------------------------------------------
(1) The Company had a gain of $128,150 on the sale of real estate in June 1997.
Without this unusual item, net income after taxes would have been $215,629
for the six months ended June 30, 1997 and $512,956 for the year ended
December 31, 1997.
(2) Assuming that all 100,000 shares of Common Stock were sold in the Offering,
with estimated offering expenses of $50,000, the book value per share at
each of such periods would have been $11.93, $11.37, $11.68 and $11.07,
respectively. All share and per share information has been restated to
reflect the 5% stock dividend paid on December 31, 1997.
(3) Information for periods ended June 30, 1998 and 1997 annualized for
comparative purposes.
(4) For definitions and further information relating to the regulatory capital
requirements of the Company and the Bank, see "Regulatory Capital
Requirements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." See "Regulatory Capital Requirements"
for the Company's pro forma capital ratios as a result of the Offering.
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<PAGE>
RISK FACTORS
Prospective investors should carefully consider, together with the other
information contained in this Prospectus, the following risk factors in
evaluating the Company and its business before subscribing for the Common Stock
offered hereby. The considerations are not intended to represent a complete list
of the general or specific risks that may affect the Company. It should be
recognized that other risks may be significant, presently or in the future, and
the risks set forth below may affect the Company to a greater extent than
indicated.
ABSENCE OF A PUBLIC MARKET FOR THE COMMON STOCK
There is currently no active market for the Company's Common Stock. There
can be no assurance after the completion of the Offering that (i) an active
market for the Common Stock will develop; (ii) if a market develops, it will
continue; or (iii) the price of the Common Stock will be greater than the
Offering Price. See "Market for Common Stock and Dividends."
NON-UNDERWRITTEN OFFERING
The Common Stock will be offered and sold by certain of the directors and
executive officers of the Company with the assistance of the Agent. Because the
Offering is not being underwritten, there is no commitment by any person or
entity, including the Agent and the broker dealer with whom he is associated, to
purchase all or any part of the securities offered hereby. Consequently, there
is no assurance that all or any portion of the funds sought will be raised.
Applications for subscriptions once made will be irrevocable by
subscribers, and the Company intends to accept subscriptions even if the
Offering has not been fully subscribed to. See "The Offering."
CONSUMMATION OF OFFERING NOT SUBJECT TO MINIMUM SUBSCRIPTION
There is no minimum number of shares that must be sold in the Offering, and
subscriptions, once received, are irrevocable. Accordingly, the Offering may be
consummated even if substantially less than the total number of shares offered
is sold. In such case, the Company's capital would not be increased to the
extent it would be if all shares offered hereby were sold. See "Capitalization."
DISCRETION OF MANAGEMENT IN ALLOCATING PROCEEDS
The Board of Directors of the Company and the Bank will have substantial
discretion in the allocation of all of the proceeds of the Offering, subject to
the requirements of safe and sound banking practices. This discretion could
result in the use of such proceeds for activities or purposes not expressly
contemplated hereby, but which are permissible for banks and bank holding
companies.
DELAY IN CLOSING OF THE OFFERING AND LOSS OF USE OF FUNDS
The Company reserves the right to extend the period for the Offering from
November 30, 1998 to as late as December 31, 1998 or to terminate the Offering
in its entirety. Accordingly, a period of time may elapse between the submission
of an Oder Form and receipt of certificates for Common Stock. NO INTEREST WILL
BE PAID ON FUNDS DELIVERED TO THE SUBSCRIPTION AGENT PURSUANT TO THE OFFERING,
EVEN IF THE OFFERING IS TERMINATED.
Until stock certificates are delivered, subscribers may not be able to sell
the shares of Common Stock that they have purchased in the Offering. A
subscription to Common Stock is irrevocable once received by the Subscription
Agent. Certificates representing shares of Common Stock purchased in the
Offering will be delivered as soon as practicable after the completion of the
Offering. Between the time a subscriber submits an Order Form for Common Stock
and the time that such subscriber is able to sell such shares, there can be no
assurance that the market value of the Common Stock will not fall below the
Offering Price.
DEPENDENCE ON KEY PERSONNEL
The business of the Company and the Bank is service-oriented and the
success of the Company and the Bank, therefore, will depend to a large extent
upon the services of Thomas G. Moore, President and Chief Operating Officer of
the Company and President and Chief Executive Officer of the Bank. The loss of
the services of Mr. Moore could adversely affect the business of the Company and
the Bank. As a result, the Company and the Bank have entered into an employment
agreement with Mr. Moore, and the Company is the beneficiary of a $1 million key
man life insurance policy relating to Mr. Moore. There is no assurance that the
Company or the Bank will be able to attract qualified personnel as the need
arises. See "Management -- Employment Agreement".
-8-
<PAGE>
DETERMINATION OF OFFERING PRICE
The Offering Price for the Common Stock offered hereby has been determined
by the Board of Directors of the Company after considering various factors and
not as a result of negotiations with an independent party or based upon market
activity. See "The Offering -- Determination of Offering Price."
SUBSTANTIAL COMPETITION IN THE BANKING INDUSTRY
The Company faces substantial competition for deposits and loans from major
banking and financial institutions, including many which have substantially
greater resources, name recognition and market presence than the Company. Such
competition comes not only from local institutions but also from out-of-state
financial institutions that extend credit or solicit deposits in its market
areas. Many of the financial institutions operating in the Company's market
areas offer certain services, such as trust and international banking services,
which the Company does not offer directly. Additionally, banks with larger
capitalization and financial institutions not subject to bank regulatory
restrictions have larger lending limits and are thereby able to serve the credit
needs of larger customers. Competitors of the Company include commercial banks,
savings institutions, credit unions, insurance companies, mortgage companies,
money market and mutual funds and other institutions that offer loan and
investment products. Credit unions have the advantage of federal tax exemption,
which provides pricing advantages.
DILUTION OF VOTING INTEREST
Stockholders who do not subscribe for shares of Common Stock will suffer a
dilution in their percentage voting interest in the Company as a result of the
Offering. Voting rights per share of common stock will not change, however, and
all holders of Common Stock will continue to have one vote per share.
Shareholders who own in excess of approximately 6,500 shares will experience a
reduction in their percentage voting interest in the Company even if they
subscribe for and purchase the maximum number of shares permitted in the
Offering. Based on the Offering Price, current stockholders who do not purchase
additional shares of Common Stock will not suffer dilution in book value per
share.
DIVIDEND RESTRICTIONS
The amount of dividends that the Company and Bank may pay is limited by
various federal laws and by the regulations promulgated by federal and state
regulators, which impose certain minimum capital and other requirements. See
"Market for Common Stock and Dividends -- Dividends."
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The Company's success is dependent, in large part, upon the performance of
the economy in its market area in Prince George's County and Anne Arundel
County, Maryland. These counties have experienced significant economic growth in
the past decade. However, no assurance can be given that such growth will
continue. Adverse changes in economic conditions in that market area would
reduce demand for new loans, would impair the Company's ability to collect loans
and would otherwise have a negative effect on the financial condition of the
Company.
INTEREST RATE RISK
The operations of the Company are significantly influenced by general
economic conditions and by the related monetary and fiscal policies of the
federal government. Deposit flows and the cost of funds are influenced by
interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for loans, which in turn is
affected by the interest rates at which such financing may be offered and by
other factors affecting the availability of funds.
The operations of the Company are substantially dependent on its net
interest income, which is the difference between the interest income received
from its interest-earning assets and the interest expense incurred in connection
with its interest-bearing liabilities. To reduce exposure to interest rate
fluctuations, the Company seeks to match its interest sensitive assets and
liabilities and maintain the maturity and repricing of these assets and
liabilities at appropriate levels. A mismatch between the amount of
rate-sensitive assets and rate-sensitive liabilities in any time period is
referred to as a "gap." Generally, if rate-sensitive assets exceed
rate-sensitive liabilities, the net interest margin will be positively affected
during a rising rate environment and negatively affected during a declining rate
environment. When rate-sensitive liabilities exceed rate-sensitive assets, the
net interest margin will generally be positively affected during a declining
rate environment and negatively affected during a rising rate environment.
Increases in the level of interest rates may reduce the amount of loan
demand and, thus, the amount of loan and commitment fees, as well as the value
of the Company's investment securities and other interest-earning assets.
Moreover, changes in interest rates also can result in disintermediation, which
is the flow of funds away from depository institutions into direct investments,
such as corporate securities and other investment vehicles which, because of the
absence of federal deposit insurance, generally pay higher rates of return than
depository institutions.
-9-
<PAGE>
Because a substantial portion of the Company's assets consist of loans with
interest rates which change in accordance with changes in prevailing market
rates, if interest rates were to rise significantly, many of the Company's
borrowers would be required to make higher interest payments on their loans,
which could cause the Company to experience increased delinquencies and defaults
to the extent borrowers were unable to meet their increased debt servicing
obligations. The Company seeks to minimize the effect of increased interest
rates on a borrower's ability to meet increased debt service requirements by
underwriting loans on the basis of the borrower's ability to repay the loan at
an interest rate above the initial rate on the loan at the time of origination.
There can be no assurance, however, that significant increases in interest rates
would not result in increased delinquencies and defaults on the Company's loans.
REGULATORY RISK
The banking industry is heavily regulated. These regulations are primarily
intended to protect the federal insurance funds and depositors, not
stockholders. The Company is subject to regulation and supervision by the
Federal Reserve and the Maryland Commissioner of Financial Regulation. The Bank
is subject to the regulation and supervision by the FDIC and the Maryland
Commissioner of Financial Regulation. The burden imposed by federal and state
regulations puts banks at a competitive disadvantage compared to less regulated
competitors such as finance companies, mortgage banking companies, leasing
companies and credit unions.
The Company reserves the right to extend the period for the Offering from
November 30, 1998 to as late as December 31, 1998 or to terminate the offering
in its entirety. Accordingly, a period of time may elapse between the submission
of an Order Form and receipt of certificates for Common Stock. NO INTEREST WILL
BE PAID ON FUNDS DELIVERED TO THE SUBSCRIPTION AGENT PURSUANT TO THE OFFERING,
EVEN IF THE OFFERING IS TERMINATED.
- 10 -
<PAGE>
THE OFFERING
BACKGROUND OF THE OFFERING
The Offering is being conducted to strengthen the Company's capital base
and position the Company to continue to remain a "well-capitalized" institution
under federal banking regulations, while allowing the Company to pursue future
growth opportunities through expansion of its existing businesses and into
related businesses, and possible acquisitions. The Company, however, does not
have any specific plans, arrangements, agreements or understandings with any
other person for the Company to make any acquisitions at the current time or to
enter into any new businesses. The Company also intends that the Offering will
attract additional stockholders in order to increase the liquidity of the common
stock and to attract additional business for the Bank. The Company proposes to
use the net proceeds for general corporate purposes, including use in the Bank's
branch expansion, lending, and investment activities. On an interim basis, the
Company expects to invest the net proceeds received in the Offering in
investment securities. The Offering is being conducted in order to provide funds
for future operations, and for other purposes. The Board of Directors determined
that the Company's existing stockholders would be best served by the Offering,
as presently structured, because the Offering affords the Company a way to
reasonably grow capital and attract additional stockholders in order to
stimulate community involvement.
SECURITIES OFFERED
The Company is offering up to 100,000 shares of its Common Stock to the
public at the Offering Price of $17.50 per share. The minimum number of shares
of Common Stock that may be purchased is 100 and the maximum number that may be
purchased is 1,000. Current stockholders are entitled to subscribe but will not
be given preemptive rights.
The Company retains the right to reject any subscription, in whole or in
part, for any reason in its sole discretion. Any excess funds paid by a
subscriber for shares not issued will be returned without interest promptly
following the rejection of any subscription in whole or in part.
EXPIRATION TIME
The Offering will expire at 5:00 p.m., Eastern Time, on November 30, 1998,
unless that time (the "Expiration Time") is extended at the discretion of the
Board of Directors of the Company to a date not later than December 31, 1998.
MINIMUM OFFERING
There is no minimum number of shares that must be sold in the Offering. The
Offering will be consummated if any valid subscriptions are received before the
Expiration Date, unless the Board of Directors of the Company has terminated the
Offering.
PROCEDURE FOR SUBSCRIBING FOR COMMON STOCK IN THE OFFERING
To subscribe for shares of Common Stock in the Offering, the Order Form
must be properly completed, and delivered together with payment in full of the
Offering Price for each subscribed share of Common Stock. Such payment must be
by check (cashier's, treasurer's, certified or uncertified) drawn upon a U.S.
bank, in each case payable to "Community Bankshares of Maryland Escrow Account."
The Offering Price will be deemed to have been received by the Subscription
Agent only upon (i) clearance of any uncertified check, or (ii) receipt by the
Subscription Agent of any cashier's, treasurer's or certified check drawn upon a
U.S. bank. Funds paid by uncertified personal check may take at least five
business days to clear. Accordingly, persons who wish to pay the Offering Price
by means of uncertified personal check are urged to make payment sufficiently in
advance of the Expiration Time to ensure that such payment is received and
clears by such date and are urged to consider payment
- 11 -
<PAGE>
by means of certified, treasurer's or cashier's check or money order. All funds
received in payment of the Offering Price shall be promptly deposited into an
escrow account at the Bank subject to the joint control of the President and
Treasurer of the Bank, until consummation or termination of the Offering. Such
escrow account will be invested at the discretion of the Bank in short-term
obligations of the United States or a sweep account collateralized by US
government or agency securities. Earnings on such funds in the escrow account
will be retained by the Bank whether or not the Offering is consummated. The
Subscription Agent will perform the administrative tasks associated with the
Offering.
The Order Form and payment of the Offering Price must be delivered to the
address and in the manner described below:
REGISTERED MAIL, RETURN RECEIPT REQUESTED, OVERNIGHT COURIER, OR HAND
DELIVERY:
John Kovacevich, Subscription Agent
Community Bank of Maryland
16410 Heritage Boulevard
Bowie, Maryland 20716
DELIVERY TO AN ADDRESS AND IN A MANNER OTHER THAN THOSE INDICATED ABOVE
DOES NOT CONSTITUTE GOOD DELIVERY TO THE SUBSCRIPTION AGENT.
If the aggregate Offering Price paid is insufficient to purchase the number
of shares of Common Stock indicated as being subscribed for, or if the
subscription does not specify the number of shares of Common Stock to be
purchased, then the subscription will be used to purchase shares of Common Stock
to the full extent of the payment tendered (subject only to reduction to the
extent necessary to comply with any regulatory limitation or conditions imposed
by the Company in connection with the Offering). If the aggregate Offering Price
paid exceeds the amount necessary to purchase the number of shares of Common
Stock allocated to the subscription, then the difference will be returned to the
full extent of the excess payment tendered.
The Instructions accompanying the Order Form should be read carefully and
followed in detail. ORDER FORMS SHOULD BE SENT WITH PAYMENT TO THE SUBSCRIPTION
AGENT.
THE METHOD OF DELIVERY OF ORDER FORMS AND PAYMENT OF THE OFFERING PRICE TO
THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF SUBSCRIBERS, BUT IF
SENT BY MAIL IT IS RECOMMENDED THAT SUCH ORDER FORMS AND PAYMENTS BE SENT BY
REGISTERED MAIL, WITH RETURN RECEIPT REQUESTED AND THAT A SUFFICIENT NUMBER OF
DAYS BE ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF
PAYMENT PRIOR TO THE EXPIRATION TIME. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY
TAKE FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR
PAYMENT, BY MEANS OF CERTIFIED, TREASURER'S OR CASHIER'S CHECK.
All questions concerning the timeliness, validity, form and eligibility of
Order Forms received will be determined by the Company, whose determinations
will be final and binding. The Company in its sole discretion may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject any purported subscription for
shares of Common Stock. Order Forms will not be deemed to have been received or
accepted until all irregularities have been waived or cured within such time as
the Company determines in its sole discretion. Neither the Company nor the
Subscription Agent will be under any duty to give notification of any defect or
irregularity in connection with the submission of Order Forms or incur any
liability for failure to give such notification.
Subscriptions for the Common Stock which are received by the Subscription
Agent may not be revoked.
- 12 -
<PAGE>
METHOD OF OFFERING
Certain directors and executive officers of the Company will assist the
Company in the Offering. None of such directors and executive officers will
receive compensation for such services. Such directors and officers are not
authorized to make statements about the Company unless such information is set
forth in this Prospectus, nor will they render investment advice. None of such
directors and executive officers are registered as securities brokers or dealers
under the federal or applicable state securities laws, nor are any of such
persons affiliated with any broker or dealer, other than John Kovacevich, the
Agent, who is a registered representative of UVest Investments and an employee
of the Bank. Because such persons are not in the business of either effecting
securities transactions for others or buying and selling securities for their
own account (other than the Agent), they are not required to register as brokers
or dealers under the federal securities laws. In addition, the proposed
activities of such directors and executive officers are excepted from
registration pursuant to a specific safe-harbor provision under Rule 3a4-1 under
the Securities Exchange Act of 1934 as amended (the "Exchange Act").
Substantially similar exemptions from registration are available under
applicable state securities laws.
DETERMINATION OF OFFERING PRICE
The Offering Price has been determined by the Board of Directors of the
Company, upon the advice of Scott & Stringfellow, Inc. (the "Investment
Advisor"). In establishing the Offering Price, the Board of Directors considered
various factors which it deemed relevant including, among other things, the
Investment Advisor's opinion, the Company's current financial condition and
operating performance as presented in its financial statements, the market value
of the common stock of other banking organizations, and the Company's pro forma
financial position after giving effect to the Offering. NEITHER THE BOARD OF
DIRECTORS NOR MANAGEMENT HAS EXPRESSED AN OPINION OR HAS MADE ANY RECOMMENDATION
AS TO WHETHER ANYONE SHOULD PURCHASE SHARES OF COMMON STOCK IN THE OFFERING. ANY
DECISION TO INVEST IN THE COMMON STOCK OF THE COMPANY MUST BE MADE BY EACH
INVESTOR BASED UPON HIS OR HER OWN EVALUATION OF THE OFFERING IN THE CONTEXT OF
HIS OR HER BEST INTERESTS.
There can be no assurance that following completion of the Offering and the
issuance of the Common Stock sold pursuant thereto a stockholder will be able to
sell shares purchased in the Offering at a price equal to or greater than the
Offering Price. Moreover, until certificates for shares of Common Stock are
delivered, stockholders may not be able to sell the shares of Common Stock that
they have purchased in the Offering. See "---Issuance of Common Stock," below.
INTENTION OF DIRECTORS, EXECUTIVE OFFICERS AND OTHERS
Directors and executive officers of the Company and their affiliates have
indicated to the Company that they do not intend to subscribe for shares of
Common Stock unless the Offering is undersubscribed. Any shares purchased by
directors and executive officers are intended to be held as an investment. These
intentions are not commitments and could change based upon individual
circumstances. See "Risk Factors."
REGULATORY LIMITATION
The Company will not be required to issue shares of Common Stock pursuant
to the Offering to any person who, in the opinion of the Company, would be
required to obtain prior clearance or approval from any state or federal bank
regulatory authority to own or control such shares if, at the Expiration Time,
such clearance or approval has not been obtained or any required waiting period
has not expired.
RIGHT TO AMEND OR TERMINATE THE OFFERING
The Company expressly reserves the right to amend the terms and conditions
of the Offering. In the event of a material change to the terms of the Offering,
the Company will file an amendment to its Registration Statement, of which this
Prospectus is a part, and resolicit subscribers to the extent required by the
SEC. In the event of such
- 13 -
<PAGE>
a resolicitation, all proceeds received by the Company will be returned promptly
to any subscriber who does not provide the Subscription Agent with an
affirmative reconfirmation of the subscription. The Company expressly reserves
the right, at any time prior to delivery of shares of Common Stock offered
hereby, to terminate the Offering if the Offering is prohibited by law or
regulation or if the Board of Directors concludes in its judgment, that it is
not in the best interests of the Company to complete the Offering under the
circumstances. The Offering may be terminated by the Company giving oral or
written notice thereof to the Subscription Agent and making a public
announcement thereof. If the Offering is so terminated, all funds received will
be promptly refunded, without interest.
ISSUANCE OF COMMON STOCK
Certificates representing shares of Common Stock purchased pursuant to the
Offering will be delivered to purchasers as soon as practicable after the
Expiration Time and after all prorations and adjustments contemplated by the
Offering have been effected. No fractional shares will be issued in the
Offering.
REQUESTS FOR ADDITIONAL INFORMATION
If you have questions or require additional information concerning the
Offering, contact Thomas G. Moore, President and Chief Operating Officer,
Community Bankshares of Maryland, Inc. (301) 464-6300.
USE OF PROCEEDS
The amount of the net proceeds from the Offering depends on the number of
shares of Common Stock sold in the Offering and the amount of the actual
expenses incurred in the Offering, which may differ from the estimates thereof.
The Company is offering a maximum of 100,000 shares of Common Stock hereby. The
sale of all of the shares offered would result in net proceeds to the Company of
$1,700,000, assuming Offering expenses of $50,000. There is no minimum number of
shares that must be sold in the Offering, and, accordingly, the Offering may be
consummated even though substantially less than the maximum number of shares
offered has been sold. The Company will use the net proceeds from the sale of
the Common Stock offered hereby to increase its regulatory capital, principally
for the purpose of providing additional capital for the increase of the
Company's investment in bank premises as a result of expanded branching activity
by the Bank. A bank's investment in promises is limited to a specified
percentage of the bank's capital. No specific sites for additional branches have
been identified, and no construction, development or acquisition costs have been
calculated. There can be no assurance that any additional branching activity
will be effected. On an interim basis, the Company expects to invest the net
proceeds received in the Offering in investment securities. The proceeds of the
Offering will also be available, prior to expenditure for branching activity,
for contribution to the Bank as additional capital to finance additional lending
and investment activity.
- 14 -
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1998, and the pro forma consolidated capitalization of the
Company at such date after giving effect to the Company's receipt of all of the
estimated net proceeds from the sale of the Common Stock offered hereby, based
on the assumptions set forth in "Use of Proceeds" and in the notes below. There
can be no assurance that all or any portion of the Common Stock offered hereby
will be sold.
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------
Pro Forma
Actual Adjusted(1)
------ -----------
<S> <C> <C>
Stockholders' equity:
Common Stock, $10.00 par value per share
Shares authorized - 10,000,000
Shares issued - 692,291 $ 6,922,910 $ 7,922,910
Surplus 5,250 705,250
Retained earnings 659,770 659,770
Accumulated other comprehensive income:
Net unrealized holding loss on securities
available for sale - net of tax (5,641) (5,641)
Treasury stock, 37,500 shares at cost (279,272) (279,272)
-------------- --------------
Total stockholders' equity $ 7,303,017 $ 9,003,017
============== ==============
Book value per share of common stock(2) $ 11.15 $ 11.93
============== ==============
</TABLE>
- ------------------------------------
(1) Assumes the sale of 100,000 shares in the Offering and payment of $50,000
in Offering related expenses.
(2) Book value per share of Common Stock is determined by dividing the
Company's actual and pro forma adjusted consolidated total stockholders'
equity at June 30, 1998 by 654,791 shares of issued and outstanding Common
Stock, actual, and 754,791 shares of Common Stock, pro forma adjusted.
REGULATORY CAPITAL REQUIREMENTS
For capital adequacy purposes, the Board of Governors of the Federal
Reserve ("Federal Reserve") requires bank holding companies such as the Company
to maintain two separate capital ratios, both of which compare certain capital
account items to total assets and off-balance-sheet instruments, as adjusted to
reflect their relative credit risks ("Total Risk-Weighted Assets"). These are
called "Risk-Based Capital Ratios." The first of these is the "Total Risk-Based
Capital Ratio", which compares the total capital account, which may include a
limited amount of general reserves for loan losses to Total Risk-Weighted
Assets. The minimum level for this ratio is 8.0%. The second of these is the
"Tier 1 Risk-Based Capital Ratio," where "Tier 1 Capital," (which must
constitute at least one-half of total capital) defined as common equity,
retained earnings, non-cumulative perpetual preferred stock and a limited amount
of cumulative perpetual preferred stock, less goodwill, is compared to Total
Risk-Weighted Assets. The minimum level for this ratio is 4.0%.
The Federal Reserve also has established an additional capital adequacy
guideline referred to as the "Leverage Capital Ratio," which measures the ratio
of Tier 1 Capital (as defined above) to total assets, less goodwill. Although
the most highly-rated bank holding companies are required to maintain a minimum
Leverage Capital Ratio of 3.0%, most bank holding companies, such as the
Company, are required to maintain Leverage Capital Ratios of
- 15 -
<PAGE>
4.0% to 5.0%. The actual required ratio is based on the Federal Reserve's
assessment of the individual bank holding company's asset quality, earnings
performance, interest-rate risk and liquidity. There can be no assurance,
however, that the Company will not be required to maintain a higher Leverage
Capital Ratio.
The capital adequacy guidelines discussed above will be applied on a
bank-only basis, and will not be applied to the Company on a consolidated basis,
until such time as the Company has $150,000,000 or more in consolidated assets
or issues a significant amount of publicly held debt. See "Supervision and
Regulation -- The Bank -- Capital Adequacy Guidelines."
The Federal Deposit Insurance Corporation ("FDIC") has promulgated
regulations and adopted a statement of policy regarding the capital adequacy of
state banks that are not members of the Federal Reserve System, such as the
Bank. These requirements are substantially similar to those adopted by the
Federal Reserve regarding bank holding companies, as set forth above.
The following table sets forth the actual regulatory capital ratios of the
Company and the Bank at June 30, 1998, and as adjusted to give effect to the
receipt of the estimated net proceeds from the sale of the Common Stock offered
hereby, based on the assumption set forth in the footnotes and the Company's
retaining $1,700,000 in proceeds from the Offering.
<TABLE>
<CAPTION>
As Regulatory
Actual Adjusted(1) Minimum(2)
------ ----------- ----------
<S> <C> <C> <C>
THE COMPANY:
Total Risk-Based Capital Ratio 18.46% 22.56% 8.0%
Tier 1 Risk-Based Capital Ratio 17.63% 21.73% 4.0%
Leverage Capital Ratio 12.77% 15.74% 4.0-5.0%
THE BANK:
Total Risk-Based Capital Ratio 15.26% 15.26% 8.0%
Tier 1 Risk-Based Capital Ratio 14.42% 14.42% 4.0%
Leverage Capital Ratio 10.35% 10.35% 4.0-5.0%
</TABLE>
- -----------------------------------------------
(1) Assumes the sale of 100,000 shares in the Offering.
(2) The capital adequacy guidelines do not currently apply to the Company on a
consolidated basis.
For additional information about regulatory capital requirements, see "Risk
Factors -- Regulatory Risk," and "Supervision and Regulation".
- 16 -
<PAGE>
MARKET FOR COMMON STOCK AND DIVIDENDS
MARKET FOR COMMON STOCK
The Company currently has 54 stockholders. Accordingly, the Company does
not currently file periodic reports with the SEC and is not subject to the proxy
rules under the Exchange Act. Following consummation of the Offering, the
Company will be required to file reports under the Exchange Act for the fourth
quarter of 1998, and thereafter if the number of stockholders of record exceeds
300. The Common Stock is currently not traded on any exchange or the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") and
historically has not been actively traded. No market makers currently make a
market for the Common Stock. The Company has no present plans to list the Common
Stock on an exchange or NASDAQ and, as such, it is unlikely that an active
trading market for the Common Stock will develop in the foreseeable future. The
Company knows of one trade in the Common Stock in the past two years. Sandy
Spring Bancorp, Inc. recently received regulatory approval for and completed the
purchase of 52,500 shares of Common Stock at $17.50 a share, from Winfield M.
Kelly, Jr., representing 8.02% of the shares outstanding before the Offering.
At June 30, 1998, there were 654,791 shares of Common Stock outstanding,
which were held by approximately 54 holders of record. The number of holders of
record does not reflect the number of persons or entities who or which hold
their stock in nominee or "street" name through various brokerage firms or other
entities.
The shares being offered hereby have been registered pursuant to the
Securities Act of 1933, as amended, and as such will generally be freely
tradeable by persons who are not affiliates of the Company, without any waiting
period or limitations on the number of shares which may be sold. The
registration of these shares does not affect the status of the previously
outstanding shares of the Common Stock as unregistered, or restricted, shares.
Shares outstanding prior to the Offering will continue to be transferable only
pursuant to an effective registration statement or an applicable exemption from
the registration requirements of the federal and state securities laws.
DIVIDENDS
The Company recognizes that an adequate level of capital is paramount to
the strength of the Company and the Bank. The Company is committed to acting as
a source of financial strength for the Bank and, accordingly, will not request a
level of dividends that would place undue strain on the Bank's capital position.
It will seek a consistent level of dividends after determining the Bank's
capital needs. This determination will be based on relevant information
available at the time, including the Bank's:
o Capital position relative to assets
o Risk-based assets
o Total classified assets
o Growth rate
o Earning performance and projections
o Expansion plans
o Legal lending limit
Currently, before the Bank may declare and pay a dividend to the Company,
computations are performed to ensure that the dividend is in compliance with
regulatory requirements and that dividend payments do not reduce the Bank's
capital below 8% of assets.
- 17 -
<PAGE>
<TABLE>
<CAPTION>
DIVIDENDS PAID PER COMMON SHARE
Six Months Ended
June 30, Year Ended December 31,
---------------- -------------------------------------
1998 1997 1996 1995 1994
---------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
Cash $0.12 $0.23 $0.17 $0.11 $0.08
Stock -- 5% -- -- --
</TABLE>
The Company intends to continue to pay cash dividends on the Common Stock
in the foreseeable future based on its dividend policy, but there can be no
assurance that cash dividends will continue to be paid in the future.
Declarations of future cash dividends by the Board of Directors of the
Company will depend on any number of factors, including capital requirements,
regulatory limitations, the Bank's operating results and financial condition and
general economic conditions. As the principal asset of the Company, the Bank
currently provides the primary source of payment of cash dividends by the
Company. Under the rules and regulations of the FDIC, state non-member banks
such as the Bank may pay dividends only out of its "net profits" for the current
year plus, the Bank's retained net profits for the preceding two calendar years,
less required transfers to surplus. Notwithstanding the foregoing, no bank may
pay any dividend where it has a retained earnings deficit. These restrictions on
the ability of the Bank to pay dividends to the Company may restrict the ability
of the Company to pay dividends to the holders of the Common Stock.
In addition, the Company and the Bank are subject to capital ratio
requirements established by the Federal Reserve and the FDIC, respectively. The
effect of the payment of dividends on the capital ratios of the Bank or the
Company, as the case may be, may be a factor in the determination by the Board
of Directors to pay such dividends. To the extent such ratios are inadequate for
regulatory purposes or would be inadequate if dividends were paid by the Bank to
the Company or by the Company to the holders of the Common Stock, the Company
and the Bank may be precluded from paying such dividends. See "Supervision and
Regulation" The Company anticipates paying cash dividends on the Common Stock in
the future, subject to legal and Company policy restrictions, although there can
be no assurance that cash dividends will be paid in the future.
- 18-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the
financial condition and operating results of the Company at the dates and for
the periods indicated. The discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Interim Financial Statements,
and the related notes, appearing herein.
General. During 1997 and the first six months of 1998, the Company
continued to experience sound, stable growth, opening its third branch location,
introducing telephone banking services, launching an investment services
affiliate, and establishing a remote drive-in ATM. Net income for the six months
ended June 30, 1998 of $269,488 ($.41 earnings per share) represented a decrease
of $28,157 or 9.5% from net income of $297,645 ($.46 earnings per share) for the
six months ended June 30, 1997. The Company had a gain of $128,150 on the sale
of a piece of real estate in June 1997. Without this unusual item, net income
after taxes would have been $215,629 for the six months ended June 30, 1997.
Excluding this gain, net income increased $53,859 or 25.0% for the first six
months of 1998 over the similar period in 1997. For 1997, the Company reported
net income of $594,972 ($.91 earnings per share), an increase of $167,373 or
39.1% compared to net income of $427,599 ($.65 earnings per share) for 1996.
Without this unusual item, net income after taxes would have been $512,956 for
the year ended December 31, 1997. Excluding this gain, net income increased
$85,357 or 19.96% for 1997 over 1996.
Financial Condition. Total assets increased $5.9 million or 12.5% from
$47.2 million at December 31, 1996 to $53.1 million at December 31, 1997, and
increased and additional $9.7 million or 18.3% to $62.8 million at June 30,
1998. This increase at December 31, 1997 was primarily attributable to a $3.8
million or 41.0% increase in investment securities and a $3.7 million or 13.2%
increase in net loans. These increases were partially offset by a decrease in
premises and equipment, net of $1.0 million or 22.0%. This increase at June 30,
1998 was primarily attributable to a $4.2 million or 100% increase in cash and
cash equivalents, a $3.3 million or 25.3% increase in investment securities and
a $1.9 million or 6.0% increase in net loans. The growth in cash and cash
equivalents and investment securities was funded by the growth in deposits in
the periods discussed above.
Total liabilities increased $5.4 million or 13.4% from $40.6 million at
December 31, 1996 to $46.0 million at December 31, 1997, and increased an
additional $9.5 million or 20.7% to $55.5 million at June 30, 1998. This
increase at December 31, 1997 was primarily attributable to a $6.5 million or
17.2% increase in deposits, which was partially offset by a decrease in
securities sold under repurchase agreements of $1.2 million or 49.1%. This
increase at June 30, 1998 was primarily attributable to a $8.7 million or 19.5%
increase in deposits and a $0.9 million or 73.9% increase in securities sold
under repurchase agreements.
Total stockholders' equity increased $455,415 or 6.8% from $6.6 million at
December 31, 1996 to $7.1 million at December 31, 1997, and increased an
additional $198,825 or 2.8% to $7.3 million at June 30, 1998. These increases
primarily reflect net income recorded during the periods, which was partially
offset by dividends to stockholders.
The following table provides certain information relating to the Company's
average consolidated statements of financial condition and reflects the interest
income on interest-earning assets and interest expense on interest-bearing
liabilities for the periods indicated and the average yields earned and rates
paid for the periods indicated. These yields and costs are derived by dividing
income or expense by the average daily balance of the related assets or
liabilities, respectively, for the periods presented. Non-accrual loans have
been included in the average balances of loans.
- 19-
<PAGE>
AVERAGE STATEMENTS OF CONDITION AND YIELD MARGIN ANALYSIS
<TABLE>
<CAPTION>
Six Months Ended June, 30
--------------------------------------------------
1998
-----------------------------------------------
Interest Average
Average Income/ Yields/
Balance Expense Rates
---------- ----- ---------- ----- ----------
(dollars in thousands)
ASSETS
<S> <C> <C> <C>
Loans:
Commercial $ 10,722 $ 521 9.80%
Real Estate 19,458 934 9.68
Consumer 2,893 129 8.99
---------- ----------
Total Loans 33,073 1,584 9.66
---------- ----------
Investment Securities:
U.S. Gov't. Agencies 9,651 295 6.08
Other Securities(1) 4,290 134 6.21
---------- ----------
Total Investment Securities 13,941 429 6.12
---------- ----------
Federal Funds Sold 3,815 105 5.47
---------- ----------
Total Interest Earnings Assets 50,829 2,118 8.40
----------
Other Non-Interest Earning Assets(2) 5,401
----------
TOTAL ASSETS $ 56,230
==========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Interest-Bearing Deposits:
NOW Accounts $ 3,894 40 2.07
Money Market Accounts 6,887 130 3.81
Savings Accounts 3,221 44 2.75
Certificates of Deposit 22,633 629 5.60
---------- ----------
Total Int-Bearing Deposits 36,635 843 4.64
Securities sold under
repurchase agreements 1,441 31 4.34
---------- ----------
Total Int-Bearing Liabilities 38,076 874 4.63
----------
Non-Interest Bearing Liabilities 10,935
----------
Total Liabilities 49,011
Stockholders' Equity 7,219
----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 56,230
==========
Interest Spread 3.77%
=========
Net Interest Income/Margin
(Pre-Tax Equivalent) 1,244 4.94%
==========
Less: Pre-Tax Equivalent Adjustment (42)
----------
NET INTEREST INCOME $ 1,202
- --------------------------------------- ==========
<CAPTION>
Six Months Ended June, 30
------------------------------------------------
1997
------------------------------------------------
Interest Average
Average Income/ Yields/
Balance Expense Rates
---------- ----- ---------- ------ -----------
(dollars in thousands)
---------- ----- ---------- ------ -----------
<S> <C> <C> <C>
ASSETS
Loans:
Commercial $ 9,416 $ 454 9.72%
Real Estate 16,147 797 9.95
Consumer 2,929 138 9.50
---------- ----------
Total Loans 28,492 1,389 9.83
---------- ----------
Investment Securities:
U.S. Gov't./Agencies 8,668 268 6.15
Other Securities(1) 1,544 48 6.18
---------- ----------
Total Investment Securities 10,212 316 6.15
---------- ----------
Federal Funds Sold 2,406 65 5.37
---------- ----------
Total Interest Earnings Assets 41,110 1,770 8.68
----------
Other Non-Interest Earning Assets(2) 5,649
----------
TOTAL ASSETS $ 46,759
==========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Interest-Bearing Deposits:
NOW Accounts $ 3,417 31 1.83
Money Market Accounts 7,600 140 3.71
Savings Accounts 3,033 44 2.93
Certificates of Deposit 17,588 462 5.30
---------- ----------
Total Int-Bearing Deposits 31,638 677 4.32
Securities sold under
repurchase agreements 1,696 36 4.28
---------- ----------
Total Int-Bearing Liabilities 33,334 713 4.31
----------
Non-Interest Bearing Liabilities 6,658
----------
Total Liabilities 39,992
Stockholders' Equity 6,767
----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 46,759
==========
Interest Spread 4.37%
===========
Net Interest Income/Margin
(Pre-Tax Equivalent) 1,057 5.18%
===========
Less: Pre-Tax Equivalent Adjustment (16)
----------
NET INTEREST INCOME $ 1,041
==========
</TABLE>
- ---------------------------------------
(1) The income and yields on non-taxable securities are computed on a tax
equivalent basis using the U.S. Statutory rate of 34%.
(2) Includes overdrafts, excluded from average loan balances for yield
purposes.
- 20 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------- -----------------------------------------------
Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates
- ----------- ----- ---------- ------ ---------- ---------- ------ ---------- ----- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
$ 9,626 $ 951 9.88% $ 8,198 $ 794 9.69%
16,521 1,634 9.89 15,102 1,530 10.13
2,945 279 9.47 2,428 241 9.93
- ----------- ---------- ---------- ----------
29,092 2,864 9.84 25,728 2,565 9.97
- ----------- ---------- ---------- ----------
9,433 586 6.21 10,133 628 6.20
1,782 111 6.23 737 45 6.11
- ----------- ---------- ---------- ----------
11,215 697 6.21 10,870 673 6.19
- ----------- ---------- ---------- ----------
2,583 143 5.54 1,728 93 5.38
- ----------- ---------- ---------- ----------
42,890 3,704 8.64 38,326 3,331 8.69
---------- ----------
5,276 5,216
- ----------- ----------
$ 48,166 $ 43,542
=========== ==========
$ 3,518 64 1.82 $ 3,962 78 1.97
7,409 274 3.70 6,412 226 3.52
3,036 89 2.93 2,720 80 2.94
18,373 989 5.38 16,510 899 5.45
- ----------- ---------- ---------- ----------
32,336 1,416 4.38 29,604 1,283 4.33
1,592 69 4.33 938 39 4.16
- ----------- ---------- ---------- ----------
33,928 1,485 4.38 30,542 1,322 4.33
---------- ----------
7,682 6,593
- ----------- ----------
41,610 37,135
6,556 6,407
- ----------- ----------
$ 48,166 $ 43,542
=========== ==========
4.26% 4.36%
========= ==========
2,219 5.17% 2,009 5.24%
========= ==========
(35) (12)
---------- ----------
$ 2,184 $ 1,997
========== ==========
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------
1995
- ------------------------------------------------------
Interest Average
Average Income/ Yields/
Balance Expense Rates
---------- ----- ----------- ------ ----------
(dollars in thousands)
<S> <C> <C>
$ 7,070 $ 718 10.16%
11,824 1,208 10.22
2,732 269 9.85
---------- -----------
21,626 2,195 10.15
---------- -----------
10,067 603 5.99
1,332 78 5.87
---------- -----------
11,399 681 5.97
---------- -----------
1,621 96 5.92
---------- -----------
34,646 2,972 8.58
-----------
3,852
----------
$ 38,498
==========
$ 3,092 74 2.39
6,016 233 3.87
2,341 74 3.16
15,668 864 5.51
---------- -----------
27,117 1,245 4.59
255 11 4.31
---------- -----------
27,372 1,256 4.59
-----------
5,141
----------
32,513
6,185
----------
$ 38,498
==========
3.99%
=========
1,716 4.96%
=========
-----------
$ 1,716
===========
</TABLE>
- 21 -
<PAGE>
Net Interest Income. Net interest income is the excess of interest earned
on loans and other interest-earning assets over the interest paid on deposits
and borrowings. The change in net interest income is a function of the change in
volume and rates on interest-earning assets and interest-bearing liabilities.
For 1997, the Company's net interest income was $2,184,165 compared to
$1,997,091 for 1996, representing an increase of $187,074 or 9.4% from 1996 to
1997. Net interest income for the six months ended June 30, 1998 was $1,202,269,
an increase of $161,529 or 15.5% over the $1,040,740 in net interest income for
the comparable period in 1997. The increase for 1997 was primarily the result of
a $4.6 million or 11.9% increase in the relative amount of interest-earning
assets over interest-bearing liabilities during 1997 versus 1996, which more
than offset a 10 basis point net decrease to 4.26% in the yield on
interest-earning assets over the rate paid on interest-bearing liabilities. The
increase for the six months ended June 30, 1998 was primarily the result of a
$9.7 million or 23.6% increase in the relative amount of interest-earning assets
over interest-bearing liabilities during the six months ended June 30, 1998
versus June 30, 1997, which more than offset a 60 basis point net decrease to
3.77% in the yield on interest-earning assets over the rate paid on
interest-bearing liabilities.
The following table indicates the changes in interest income and interest
expense that are attributable to changes in average volume and average rates, in
comparison with the same period in the preceding year. The change in interest
due to the combined rate-volume variance has been allocated to the change in
rate and the change in volume based upon the respective percentages of their
combined totals.
<TABLE>
<CAPTION>
RATE/VOLUME VARIANCE ANALYSIS
June 30, 1998 Compared to
June 30, 1997 1997 Compared to 1996 1996 Compared to 1995
------------------------------------------------------------------------------------------------------
Due to Due to Due to Due to Due to Due to
Change Volume Rate Change Volume Rate Change Volume Rate
------------------------------- ------------------------------- ------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Commercial Loans $ 67 $ 80 $ (13) $ 157 $ 141 $ 16 $ 76 $ 110 $ (34)
Real Estate Loans 137 220 (83) 104 141 (37) 322 333 (11)
Consumer Loans (9) (4) (5) 38 49 (11) (28) (30) 2
U.S. Govt. Agencies 27 33 (6) (42) (43) 1 25 4 21
Other Securities(1) 86 86 -- 66 65 1 (33) (34) 1
Federal Funds Sold 40 39 1 50 47 3 (3) 6 (9)
------------------------------------------------------------------------------------------------------
TOTAL $ 348 $ 454 $ (106) $ 373 $ 400 $ (27) $ 359 $ 389 $ (30)
------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW Accounts $ 9 $ 5 $ 4 $ (14) $ (4) $ (10) $ 4 $ 19 $ (15)
Money Market Accounts (10) (32) 22 48 36 12 (7) 15 (22)
Savings Accounts -- 5 (5) 9 9 -- 6 11 (5)
Certificates of Deposit 167 139 28 90 102 (12) 35 44 (9)
Securities sold under
repurchase agreements (5) (16) 11 30 28 2 28 28 --
------------------------------------------------------------------------------------------------------
TOTAL $ 161 $ 101 $ 60 $ 163 $ 171 $ (8) $ 66 $ 117 $ (51)
------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 187 $ 353 $ 166) $ 210 $ 229 $ (19) $ 293 $ 272 $ 21
======================================================================================================
</TABLE>
(1) The income and yields on non-taxable securities are computed on a
tax-equivalent basis using the U.S. statutory rate of 34%.
- 22 -
<PAGE>
The following tables set forth certain information regarding the
composition of the Company's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
LOAN PORTFOLIO
December 31,
-------------------------------------------------------------
June 30, 1998 1997 1996 1995 1994 1993
--------------- ---------- ---------- ----------- ----------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 8,913 $ 8,921 $ 7,842 $ 6,439 $ 5,484 $ 4,618
Real Estate - 1-4 family residential 4,482 3,841 3,460 3,325 2,632 2,485
Real Estate - non-farm residential 17,167 16,613 14,275 11,133 9,849 8,262
Real Estate - construction and
development 1,884 1,379 1,241 1,023 934 744
Consumer 1,468 1,243 1,442 991 1,531 802
--------------- ---------- ---------- ----------- ----------- -------------
Total Loans 33,914 31,997 28,260 22,911 20,430 16,911
Less allowance for loan losses 341 330 295 258 230 133
--------------- ---------- ---------- ----------- ----------- -------------
Total $ 33,573 $ 31,667 $ 27,965 $ 22,653 $ 20,200 $ 16,778
=============== ========== ========== =========== =========== =============
<CAPTION>
LOAN PORTFOLIO BY PERCENTAGE
December 31,
-----------------------------------------------------
June 30, 1998 1997 1996 1995 1994 1993
---------------- ------------ ------- ---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial 26.3% 27.9% 27.7% 28.1% 26.8 % 27.3%
Real Estate - 1-4 family residential 13.2 12.0 12.3 14.5 12.9 14.7
Real Estate - non-farm residential 50.6 51.9 50.5 48.6 48.2 48.9
Real Estate - construction and
development 5.6 4.3 4.4 4.5 4.6 4.4
Consumer 4.3 3.9 5.1 4.3 7.5 4.7
---------------- ------------ -------------------------- -- ----------
Total 100.0% 100.0% 100.0% 100.0% 100.0 % 100.0%
================ ============ ========================== == ==========
</TABLE>
The following table presents the maturities or repricing periods of loans,
excluding non-accrual loans, outstanding at June 30, 1998.
<TABLE>
<CAPTION>
MATURITY SCHEDULE OF LOANS
(dollars in thousands)
1 Year or less 1 - 5 years After 5 years Total
-------------- ----------- ------------- -----
Fixed Variable Fixed Variable Fixed Variable Fixed Variable
Rate Rate Rate Rate Rate Rate Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$2,170 $6,457 $13,838 $2,405 $7,908 $1,084 $23,916 $9,946
</TABLE>
-23-
<PAGE>
Provision and Allowance for Loan Losses. The Company makes provisions for
loan losses in amounts deemed necessary to maintain the allowance for loan
losses at an appropriate level. The provision for loan losses is determined
based upon management's estimate of the amount required to maintain an adequate
allowance for loan losses reflective of the risks in the Company's loan
portfolio. The Company generates a monthly analysis of the allowance for loan
losses, with the objective of quantifying portfolio risk into a dollar figure of
potential losses, thereby translating the subjective risk value into an
objective number. Emphasis is placed on monthly internal reviews by the Audit
and Operations Committee and Bank management. The determination of the allowance
for loan losses is based on various qualitative factors, applying appropriate
weight to separate types of categories of loans. These factors include: levels
and trends in delinquencies and non-accruals, trends in volumes and terms of
loans, effects of any changes in lending policies, the experience, ability and
depth of management, national and local economic trends and conditions,
concentrations of credit, quality of the Company's loan review system, and the
effect of external factors (i.e. competition and regulatory requirements).
The provision for loan losses in 1997 was $140,005, compared to a provision
of $34,138 in 1996. The provision for the first six months of 1998 was $22,326,
compared to a provision of $102,347 for the comparable period in 1997. The
increases in the absolute amount of the allowance for loan losses are primarily
a result of the increased size of the loan portfolio. The allowance for loan
losses as a percentage of loans, net of unearned income was 1.03% at December
31, 1997 and 1.05% at December 31, 1996 and 1.01% at June 30, 1998. During 1997,
charge-offs totaled $108,660, compared to $5,854 in 1996. The increase in the
level of charge-offs in 1997 from 1996 was due to recording the actual loss on a
loan provided for at December 31, 1996. Charge-offs for the first six months of
1998 were $12,392. The ratio of charge-offs (recoveries) to average loans
increased to .37% at December 31, 1997 from (.01%) at December 31, 1996, and was
.03% at June 30, 1998.
The following tables set forth certain information regarding the Company's
allowance for loan losses at the dates and for the periods indicated.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
Six Months
Ended June 30, Year Ended December 31,
---------------- --------------------------------------------------
1998 1997 1996 1995 1994 1993
---------------- --------- -------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Period $ 330 $ 295 $ 258 $ 230 $ 133 $ 109
---------------- --------- -------- -------- --------- ---------
Charge-offs:
Commercial Loans -- 105 4 -- 3 65
Real Estate Loans 8 -- -- -- -- --
Consumer Loans 4 4 2 -- 1 4
---------------- --------- -------- -------- --------- ---------
Total Charge-offs 12 109 6 -- 4 69
---------------- --------- -------- -------- --------- ---------
Recoveries:
Commercial Loans -- 1 8 -- -- --
Real Estate Loans -- -- -- -- -- --
Consumer Loans 1 3 1 -- 4 --
---------------- --------- -------- -------- --------- ---------
Total Recoveries 1 4 9 -- 4 --
---------------- --------- -------- -------- --------- ---------
Net Charge-offs (recoveries) 11 105 (3) -- -- 69
Additions Charged to Operations 22 140 34 28 97 93
---------------- --------- -------- -------- --------- ---------
Balance at end of Period $ 341 $ 330 $ 295 $ 258 $ 230 $ 133
================ ========= ======== ======== ========= =========
Average Total Loans $ 33,044 $ 28,473 $ 29,070 $ 21,593 $ 18,409 $ 15,438
Net Charge-offs (Recoveries)/Avg
Total Loans .03% .37% (.01%) --% --% .45%
</TABLE>
- 24 -
<PAGE>
The Company's methodology for allowance for loan losses is composed of
three parts. First, the allowance is compared to the historical loan loss
experience. Second, the allowance is measured for coverage of non-performing
loans. Third, the allowance is allocated for loans internally classified by
management.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1997 1996 1995
---------- --------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses $ 341 $ 322 $ 330 $ 295 $ 258
Allowance Needed on Basis
of Historical Experience 58 48 55 47 69
Non-Performing Loans 52 29 84 92 --
Internally Classified Exposure 63 48 79 66 41
</TABLE>
Management believes that the allowance for loan losses was adequate at June
30, 1998 to cover potential losses in the loan portfolio. Non-performing assets
as a percentage of loans decreased from .33% at December 31, 1996 to .27% at
December 31, 1997 and declined to .15% at June 30, 1998. Notwithstanding the
foregoing, there can be no assurance that the allowance for loan losses will be
sufficient to cover all losses inherent in the loan portfolio now or in the
future or that additional provisions will not be required in respect to loans
currently in the loan portfolio or which may in the future be originated or
acquired by the Company.
Risk Elements and Non-performing Assets. The Company seeks to minimize its
risk and enhance its profitability by focusing on providing community-based
financing and maintaining policies and procedures ensuring safe and sound
banking practices.
Non-performing loans consist of loans 90 days or more delinquent. The total
non-performing loans declined 8.7% from $92,000 at December 31, 1996 to $84,200
at December 31, 1997, and further declined by 38% to $52,000 at June 30, 1998.
The following table sets forth certain information regarding the Company's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
PROBLEM ASSETS
December 31,
---------------------------------------------------------------
June 30, 1998 1997 1996 1995 1994 1993
-------------- -------- ------------ ----------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-performing Assets
Non-accrual Loans $ 52 $ 84 $ 92 $ -- $ -- $ --
Impaired Loans -- -- -- -- -- --
Restructured Loans -- -- -- -- -- --
Foreclosed Properties -- -- -- -- -- --
-------------- ------ -------- ------------ ----------- ------------- -------------
Total Non-performing Assets 52 84 92 -- -- --
Loans Past Due 90 Days
and Still Accruing Interest -- -- -- -- -- --
-------------- ------ -------- ------------ ----------- ------------- -------------
Total Non-performing Assets
and Past Due Loans $ 52 $ 84 $ 92 $ -- $ -- $ --
============== ====== ======== ============ =========== ============= =============
Non-performing Assets to
Total Loans (net of unearned income) .15% .27% .33% --% --% --%
Non-performing Assets to
Total Assets .08% .16% .19% --% --% --%
</TABLE>
- 25 -
<PAGE>
Loans are placed in non-accrual status when in the opinion of management
the collection of additional interest is unlikely or a specific loan meets the
criteria for non-accrual status established by regulatory authorities. No
interest is taken into income on non-accrual loans. A loan remains on
non-accrual status until the loan is current as to both principal and interest
or the borrower demonstrates the ability to pay and remain current, or both.
Loans on non-accrual status totaled $52,000, $84,200, and $92,000 at June 30,
1998, December 31, 1997 and December 31, 1996, respectively. The gross interest
income that would have been recorded during such periods had the loans been
current in accordance with their original terms was $2,000, $4,300 and $5,700,
respectively.
At June 30, 1998, the Company had no concentrations of loans in any one
industry exceeding 10% of its total loan portfolio. An industry for this purpose
is defined as a group of counterparties that are engaged in similar activities
and have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.
Foreclosed properties include properties that have been substantively
repossessed or acquired in complete or partial satisfaction of debt. Such
properties, which are held for resale, are carried at the lower of fair value,
including a reduction for the estimated selling expenses, or principal balance
of the related loan. As of June 30, 1998, December 31, 1997, and December 31,
1996, the Company held no foreclosed properties.
The ratio of non-performing assets to loans is expected to remain near its
current level. This expectation is based on the potential and identified problem
loans at June 30, 1998. At June 30, 1998, the Company had two loans totaling
$52,000, identified as potential problem loans. These are loans as to which
known information about the borrowers' possible credit problems cause management
to have doubts as to their ability to comply with the present loan repayment
terms. Notwithstanding the foregoing, there can be no assurance that the level
of non-performing assets will not increase, due to a decline in asset quality,
deterioration of economic conditions, or otherwise, or that the Company will not
incur losses as a result of existing or future non-performing assets.
Other Income. Other income for the year ended December 31, 1997 increased
to $956,438 from $527,091 for the year ended December 31, 1996, primarily due to
a gain on sale of real estate of $128,150 and increases in service charges and
rental income. Other income for the six months ended June 30, 1998 was $354,533,
a decrease of $176,681 or 33.3% from the comparable period in 1997. This
decrease was primarily due to the gain on sale of real estate recognized during
the six months ended June 30, 1997, and reductions in rental income related
thereto.
Other Expenses. Other expense for the year ended December 31, 1997 was
$2,102,757 compared to $1,799,745 for the year ended December 31, 1996, or an
increase of $303,012 or 16.8%. Other expense for the six months ended June 30,
1998 was $1,128,488, compared to $1,014,578 for the comparable period in 1997,
or an increase of $113,910 or 11.2%. Increases in other expense primarily
reflected increased costs associated with the expansion of the Bank's branch
network and the growth of the loan portfolio and deposit base. Salaries and
benefits accounted for 41.8% and 42.2% of total other expenses for the year
ended December 31, 1997 and 1996 respectively, and 45.4% and 41.0% for the six
months ended June 30, 1998 and 1997, respectively. Data processing costs
associated with the increase in the number of deposit and loan accounts serviced
contributed to a 38.7% increase in data processing systems costs from $154,598
for the year ended December 31, 1996, to $214,978 for the year ended December
31, 1997. Occupancy expense decreased 6.0% from $248,510 in 1996 to $233,811 in
1997, primarily due to the savings in maintenance on the sale of an operations
center in 1997. Occupancy expense for the six months ended June 30, 1998
increased $9,255 or 7.6% over the comparable period in 1997, primarily as a
result of the costs related to a new branch opened in January 1998.
Provision for Income Taxes. The Company's income tax provisions are
adjusted for non-deductible expenses and non-taxable interest after applying the
U.S. federal income tax rate. Provision for income taxes totaled $136,500,
$302,869 and $262,700 for the six months ended June 30, 1998, and years ended
December 31, 1997, and 1996, respectively.
- 26 -
<PAGE>
Capital. The growth in assets was 12.5% in 1997 over 1996. The Company is
subject to various regulatory capital requirements imposed by the federal
banking regulators. Such capital requirements include the maintenance of a Tier
1 capital-to-average assets (leverage) ratio of not less than 4.0%. At June 30,
1998, the Company's leverage ratio was 10.1% compared to 11.2% at December 31,
1997 and 11.9% at December 31, 1996. The decline in the leverage ratio is
directly related to the increase in total assets to $62.8 million at June 30,
1998, from $53.1 million at December 31, 1997 and $47.2 million at December 31,
1996.
Federal regulators have adopted additional capital requirements based on
capital-to-assets after certain risk factors are taken into consideration. At
June 30, 1998, a minimum ratio of qualifying total capital-to-risk weighted
assets of 8.0% was required, at least half of which is required to be Tier 1
capital. At June 30, 1998, the Company's ratio of qualifying total capital,
including the allowable portion of the allowance for loan and lease losses to
total risk weighted assets was 15.3%, compared to 17.0% and 16.2% at December
31, 1997 and 1996, respectively, all well in excess of the minimum requirements.
Interest Rate Sensitivity and Liquidity. Prudent asset and liability
management assures liquidity and maintains balance between rate sensitive assets
and liabilities. Liquidity management involves meeting the cash flow
requirements of the Company's loan customers and depositors. Interest rate
sensitivity management involves maximizing the net interest margin to ensure net
income growth stability and growth through various interest rate cycles and
fluctuations. The Company's senior management monitors the liquidity position
and formulates a strategy to maintain an interest sensitive position that
maximizes the net interest margin.
Interest rate sensitivity analysis reflects the earlier of the maturity or
repricing date for various assets and liabilities. The mismatch of assets and
liabilities repricing within a specific period of time is used to measure
interest rate sensitivity. The Company's goal is to manage interest rate
exposure in order to hedge against interest rate fluctuations. A tool the
Company uses to determine its interest-rate risk is GAP analysis. GAP analysis
attempts to examine the volume of interest-rate-sensitive assets minus
interest-rate-sensitive liabilities. The difference between the two is the
interest-sensitive GAP, and it indicates how future changes in interest rates
may affect net interest income. Regardless of whether interest rates are
expected to increase or fall, the objective is to maintain a GAP position that
will minimize any changes in net interest income. A negative GAP exists when the
Company has more interest-sensitive liabilities maturing within a certain time
period than interest-sensitive assets. Under this scenario, if interest rates
were to increase it would tend to reduce net interest income. A weakness of this
sensitivity analysis is that it provides only a general indication of interest
sensitivity at a specific point in time. Senior management and the Board of
Directors regularly monitor the sensitivity trend. Strategies to manage the
interest rate risk include maintaining a strong balance sheet and adequate
liquidity, generating core deposit growth, and practicing conservative and sound
banking policies.
At June 30, 1998, the Company was liability sensitive in the short term
(one year) by approximately 10% of earning assets. Technically, the Company may
reprice interest checking, savings and insured money markets at any time and,
accordingly, they have been classified in the 1-30 day sensitivity category in
the accompanying table. While these accounts have in the last several years been
somewhat more subject to repricing than in prior years, the degree and frequency
of movement is limited, and they are much less sensitive than contractually
possible. The table below shows the Company's interest-sensitivity position at
June 30, 1998.
- 27 -
<PAGE>
<TABLE>
<CAPTION>
INTEREST-SENSITIVITY ANALYSIS
Beyond One
1 to 30-Day 1 to 90 Day 1 to 180 Day 1 to 365 Day Year or
Sensitivity Sensitivity Sensitivity Sensitivity Nonsensitive Total
------------------------------------------------------------------------ -- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net of unearned income $ 10,215 $ 10,321 $ 10,799 $ 12,167 $ 21,406 $ 33,573
Investment securities 5,391 5,791 6,891 7,609 8,537 16,146
Money market investments 4,642 4,642 4,642 4,642 -- 4,642
Other earning assets -- -- -- -- 194 194
------------------------------------------------------------------------ -- -------------
Total earning assets 20,248 20,754 22,332 24,418 30,137 54,555
------------------------------------------------------------------------ -- -------------
Funding Sources:
Noninterest-bearing demand
deposits -- -- -- -- 14,770 14,770
Interest checking 3,924 3,924 3,924 3,924 -- 3,924
Money market accounts 6,869 6,869 6,869 6,869 -- 6,869
Savings deposits 3,378 3,378 3,378 3,378 -- 3,378
Consumer certificates of deposit 1,607 3,621 5,680 9,728 8,671 18,399
Large denomination certificates
of deposit 308 627 1,415 3,637 2,648 6,285
Short-term borrowings 2,095 2,095 2,095 2,095 -- 2,095
------------------------------------------------------------------------ -- -------------
Total funding sources 18,181 20,514 23,361 29,631 26,089 55,720
------------------------------------------------------------------------ -- -------------
Interest sensitivity gap $ 2,067 $ 240 $ (1,029) $ (5,213) $ 4,048 $ (1,165)
======================================================================== == =============
Interest-sensitivity gap as a
percentage of earning assets 3.79% .44% (1.89)% (9.56)% 7.42 % (2.14)%
Ratio of interest-sensitive assets
to interest-sensitive liabilities 1.11x 1.01x .96x .82x 1.16 x .98x
</TABLE>
Liquidity needs are met with cash on hand, deposits in banks, federal funds
sold and the fair value of securities available for sale. At June 30, 1998,
these liquid assets represented 24.5% of total deposits and other
interest-bearing liabilities. Pay-downs and maturities within the investment
portfolio provide a stable source of funds. The Company minimizes liquidity
needs by maintaining substantial core deposits. As of June 30, 1998 and December
31, 1997, core deposits comprised 63.8% and 67.3% of total deposits,
respectively. Core deposits are all deposit accounts with balances of less than
$100,000. Additional sources of liquidity are asset maturities and repayments
and available lines to purchase overnight funds from correspondent banks.
The following tables set forth certain information regarding the Company's
liquidity position and investment portfolios at the dates indicated.
- 28 -
<PAGE>
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
June 30, 1998 1997 1996
------------------------ ------------------------ -----------------------
Book Weighted Book Weighted Book Weighted
Value Avg. Yield Value Avg. Yield Value Avg. Yield
---------- ------------ ---------- ------------ ---------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities
Maturing in less than one year $ 700 5.6% $ 400 5.5% $ 1,997 6.6%
Maturing in one to five years 2,467 5.9 2,523 5.9 1,201 5.5
Maturing in five to ten years
Maturing after ten years
U.S. Government Agencies
Maturing in less than one year 1,100 5.7 1,400 5.8 1,991 6.5
Maturing in one to five years 4,526 6.1 5,224 6.4 2,784 5.9
Maturing in five to ten years 1,187 6.6 996 6.7
Maturing after ten years
Obligations of States and Local Govts.
Maturing in less than one year 667 6.0 251 5.8
Maturing in one to five years 3,622 6.4 2,092 6.4 1,270 5.9
Maturing in five to ten years 1,877 6.4
Maturing after ten years
---------- ---------- ----------
$ 16,146 6.1% $ 12,886 6.2% $ 9,243 6.1%
========== ========== ==========
<CAPTION>
INVESTMENT PORTFOLIO
DECEMBER 31
-------------------------
1995
------------------------
Book Weighted
Value Avg. Yield
---------- ------------
U.S. Treasury Securities
Maturing in less than one year $ 2,006 5.3%
Maturing in one to five years 3,318 6.3
Maturing in five to ten years
Maturing after ten years
U.S. Government Agencies
Maturing in less than one year 1,604 5.7
Maturing in one to five years 3,974 6.2
Maturing in five to ten years
Maturing after ten years
Obligations of States and Local Govts.
Maturing in less than one year 726 6.3
Maturing in one to five years 322 6.2
Maturing in five to ten years
Maturing after ten years
----------
$ 11,950 6.1%
==========
</TABLE>
The Company had no investments that were obligations of the issuer, or
payable from or secured by a source of revenue or taxing authority of the
issuer, and whose aggregate book value exceeded 10% of stockholders' equity at
June 30, 1998.
LIQUIDITY
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996 1995
------------ ----------- ----- ------------ ------ --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and Due from Banks $ 3,846 $ 2,950 $ 2,540 $ 1,797
Securities Available for Sale 5,141 3,062 2,900 2,990
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
Held to Maturity and Maturing
Within 1 Year 968 251 3,988 3,611
Loans Maturing in Less Than 1 Year 15,890 14,528 16,287 14,534
Federal Funds Sold 4,642 1,295 2,404 1,080
------------ ----------- ------------ --------------
Total Liquid Assets $ 30,487 $ 22,086 $ 28,119 $ 24,012
============ =========== ============ ==============
============ =========== ============ ==============
Total Liabilities $ 55,720 $ 46,123 $ 40,420 $ 35,688
============ =========== ============ ==============
Liquidity 54.7% 47.9% 69.6% 67.3%
</TABLE>
- 29 -
<PAGE>
Deposits. The principal sources of funds for the Company are core deposits
(demand deposits, interest-bearing transaction accounts, money market accounts,
savings deposits and certificates of deposit of less than $100,000) from the
Company's market area. The Company's deposit base includes transaction accounts,
time and savings accounts and accounts which customers use for cash management
and which provide the Company with a source of fee income and cross-marketing
opportunities as well as a low-cost source of funds. Time and savings accounts,
including money market deposit accounts, also provide a relatively stable and
low-cost source of funding. The largest source of funds for the Company remains
certificates of deposit.
The following table is a summary of the maturity distribution of
certificates of deposit of $100,000 or more at of June 30, 1998.
MATURITIES OF CDS OF $100,000 OR MORE
<TABLE>
<CAPTION>
June 30, 1998
----------------------
Amount Percent
----------------------
(dollars in thousands)
<S> <C> <C>
Three Months or Less $ 627 5.2%
Over Three Months to One Year 3,010 5.5
Over One Year to Five Years 2,648 6.2
----------
Total $ 6,285 5.8%
==========
</TABLE>
For liquidity purposes, the Company also utilizes short term borrowing,
principally securities sold under agreements to repurchase, and has lines to
purchase overnight funds from correspondent banks. The following tables set
forth certain information regarding the Company's short term borrowings at the
dates indicated.
SHORT TERM BORROWINGS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
June 30, 1998 1997 1996 1995 1994 1993
--------------- -----------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Securities Sold under Agreement to Repurchase:
Total Outstanding at End of Period $ 2,095 $ 1,205 $ 2,365 $ 96$ 179$ 565
Average Amount Outstanding
During the Period 1,441 1,592 938 255 130 18
Maximum Amount Outstanding
at any Month End 2,132 1,898 2,826 1,022 503 565
Weighted Average Interest Rate
at End of Period 5.21% 5.41% 5.16% 3.69% 4.90% 2.06%
Average Interest Rate During the Period 4.38% 4.34% 4.16% 4.50% 3.70% 2.30%
</TABLE>
At June 30, 1998, the Company had $4.1 million in approved loan and letter
of credit commitments. Many of these commitments are in the form of lines of
credit and letters of credit that are available for use by the borrower, but
generally not drawn upon. Certificates of deposit scheduled to mature in one
year or less totaled $13.4 million at June 30, 1998. The Company expects to have
sufficient funds available to meet the short-term liquidity needs of its
customers for deposit repayments and loan funding.
During the year ended December 31, 1997, the Company experienced a net cash
inflow from financing activities of $5.2 million, consisting primarily of a net
increase in deposits of $6.5 million. The Company's investing
- 30 -
<PAGE>
activities during the year ended December 31, 1997 resulted in a net cash
outflow of $6.7 million, which was primarily due to the purchase of $8.0 million
of investment securities and the net increase in loans of $3.8 million. These
cash outflows were partially offset by the maturities of investment securities
of $4.2 million and the proceeds from the sales of premises and equipment of
$1.0 million. In addition, the Company experienced positive cash flows from
operating activities during the year ended December 31, 1997 of $836,446.
During the six months ended June 30, 1998, the Company experienced a net
cash inflow from financing activities of $9.5 million, consisting primarily of a
net increase in deposits of $8.7 million. The Company's investing activities
during the six months ended June 30, 1998 resulted in a net cash outflow of $5.5
million, which was primarily due to the purchase of investment securities of
$6.4 million and the net increase in loans of $1.9 million. These cash outflows
were partially offset by the maturities of investment securities of $2.2
million. In addition, the Company experienced positive cash flows from operating
activities during the six months ended June 30, 1998 of $267,432.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated and interim financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which typically require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Virtually all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a more significant impact
on the Company's performance than the general level of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the
prices of goods and services.
YEAR 2000 ISSUE
The Year 2000 (Y2K) issue is the result of computer programs using two
digits to define the year, rather than four. Therefore, any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Timely and accurate data
processing is essential to the operations of the Company.
In 1997, the Company initiated a review and assessment of its hardware and
software to confirm that it will function properly in processing dates
pertaining to the Year 2000. Electronic Data Systems ("EDS"), the Company's main
provider of loan, deposit, general ledger and other data processing
applications, and the majority of its other vendors, have represented to the
Company that their hardware and software are Year 2000 compliant. EDS has
advised the Company that it is currently in the testing phase of its Y2K
compliance. The Company receives weekly testing updates and has been assured by
EDS that it will be Y2K complaint by the end of 1998. Internally, the Company
has tested all of its desk-top PCs and applicable software. All necessary
replacements of PCs and software are expected to be in place and tested by July
1999. There can be no assurance that the Company's compliance goals will be
totally achieved. The Company is planning to implement manual processing of
banking transactions in the event that the Y2K compliance efforts of the Company
or its vendors are not sucessful. Compliance with Year 2000 requirements may
disrupt the ability of the Company to conduct its business or otherwise service
its customers. Management does not currently expect that the costs related to
Year 2000 requirements will be material to the Company's financial condition or
results of operation. The identified costs of Y2K compliance are expected to be
minimal. However, the Company has budgeted $25,000 to cover the costs of
replacement for, and associated writeoffs of, desktop PCs identified as
noncompliant. However, the Company's ability to predict the costs associated
with Year 2000 compliance is subject to some uncertainties, and the Company may
incur additional unexpected expenditures in connection with Year 2000
compliance.
The risks identified by the Company in connection with its Y2K readiness
efforts principally relate to outside vendors which provide services to the
Company and the compliance status of its loan customers. Failure of these groups
to achieve compliance could result in the Company's inability to provide
services to its customers, and to properly track and identify items internally.
It could also disrupt the Company's cash flow and loan collection processes, as
a result of the failure of accounting and payment systems, in loan customers'
certification of Y2K planning. The Bank has provided its customer base with
information regarding its Y2K readiness, and will continue to provide up dates.
The efforts also seek to make customers aware of the Y2K compliance issues faced
in their own businesses and affairs.
- 31 -
<PAGE>
BUSINESS
GENERAL
Community Bankshares of Maryland, Inc. was incorporated under the laws of
the State of Maryland in 1987 and has one wholly-owned subsidiary, Community
Bank of Maryland, a Maryland chartered commercial bank. The Bank is the 21st
largest of 24 financial institutions in the Prince George's County market, and
one of 2 independent commercial banks in that market. The 20 larger institutions
in the Prince George's County market are 15 banks and 5 federal savings banks.
The Bank commenced operations in 1989, and currently operates out of its main
office and two branch offices. The Bank seeks to provide a high level of
personal service and a sophisticated menu of products to individuals and small
businesses. While the Bank offers a full range of services to a wide array of
depositors and borrowers, it has chosen the small business and the individual
retail customer as its primary target market. The Bank believes that as
financial institutions grow and are merged with or acquired by larger
institutions with headquarters that are far away from the local customer base,
the local business and individual is further removed from the point of decision
making. The Bank's primary attention is directed toward placing the customer
contact and the ultimate decision on products and credits as close together as
possible.
LENDING ACTIVITIES
The Bank offers a full spectrum of lending services to its customers,
including commercial loans, lines of credit, residential mortgages, home equity
loans, personal loans, auto loans and financing arrangements for personal
equipment and business equipment. Loan terms, including interest rates, loan to
value ratios, and maturities, are tailored as much as possible to meet the needs
of the borrower. A special effort is made to keep loan products as flexible as
possible within the guidelines of prudent banking practices in terms of interest
rate risk and credit risk.
When considering loan requests, the primary factors taken into
consideration by the Bank are the cash flow and financial condition of the
borrower, the value of the underlying collateral, if any, and the character and
integrity of the borrower. These factors are evaluated in a number of ways
including an analysis of financial statements, credit reviews, trade reviews,
and visits to the borrower's place of business. All unsecured loans over
$125,000, all loans over $250,000 secured by real estate, and all other loans
over $400,000 secured by marketable collateral are required to be reviewed by
either the full Board of Directors or the Bank's Executive Committee, comprised
of 5 outside directors, whichever is the first to meet. Generally, the Bank
requires personal guarantees from one or more of the principals of any entity
borrowing money on an unsecured basis from the Bank.
Loan business is generated primarily through referrals and direct-calling
efforts. Referrals of loan business come from the Bank's directors, stockholders
of the Company, present clients of the Bank and professionals such as lawyers,
accountants and financial intermediaries.
At June 30, 1998, the Bank's statutory lending limit to any single borrower
was $923,000, subject to certain exceptions provided under applicable law. As of
June 30, 1998, the Bank had credit exposure to its largest borrower of no
greater than that amount. The Bank only extends loans to directors of the Bank
and the Company on the same terms on which it extends loans to unaffiliated
persons, and has a policy of limiting the aggregate principal amount of loans to
all executive officers, directors, principal stockholders, and employees (the
"Insiders") of the Bank and the Company to 100% of capital. Insiders are not
present when their loans are discussed. At June 30, 1998, the aggregate
principal amount of all loans to Insiders was $2,785,282.
Commercial Loans. Commercial loans are written for any business purpose,
including the financing of plant and equipment, the carrying of accounts
receivable, contract administration, and the acquisition and construction of
rental real estate projects. Special attention is paid to the commercial real
estate market which is particularly stable and active in the Prince George's
County and Anne Arundel County area. The Bank's commercial loan portfolio
reflects a diverse group of borrowers with no concentration in any borrower,
group of borrowers, or industry.
- 32 -
<PAGE>
As part of its internal loan review process, the Company's Loan Review
Committee, comprised of loan officers and staff, reviews all loans 60-day
delinquent, loans on the Company's Watch List, loans rated special mention,
substandard, or doubtful, and other loans of concern at least quarterly. Loan
reviews are reported to the Company's Executive Committee with any adversely
rated changes specifically mentioned. All other loans with their respective risk
ratings are reported monthly to the Company's Board of Directors. The Company's
Audit and Operations Committee performs periodic documentation and internal
control reviews to complement loan reviews.
Residential Mortgage and Home Equity Loans. The strong local economy
provides for a large and active real estate market for the construction and sale
of new residential property and sale of existing housing. The Company provides
financing for the construction and acquisition of residential property
throughout its market area. The Company has availed itself of the services of
mortgage brokers, and programs offered by the Federal Home Loan Bank of Atlanta
in an effort to offer as many long-term and low interest rate mortgage products
as possible. In addition, the Bank has developed a competitive home equity line
of credit product for the use of its customers. This product offers the customer
the ability to use the line of credit flexibility features to manage their own
credit needs on an on-going basis. The Company does not currently sell loans
which it originates into the secondary market, and does not document such loans
for sale.
Other Loans. Loans are considered for any worthwhile personal or business
purpose on a case-by-case basis, such as the financing of equipment,
receivables, contract administration expenses, land acquisition and development,
and automobile financing.
INVESTMENT ACTIVITIES
The investment policy of the Company is an integral part of its overall
asset/liability management program. The Company's investment policy is to
establish a portfolio which will provide liquidity necessary to facilitate
funding of loans and to cover deposit fluctuations while at the same time
achieving a satisfactory return on the funds invested. The Company seeks to
maximize earnings from its investment portfolio consistent with the safety and
liquidity of those investment assets.
The securities in which the Company may invest are subject to regulation
and, for the most part, are limited to securities which are considered
investment grade securities. In addition, the Company has an internal investment
policy which restricts investments to the following categories: U.S. Treasury
securities; obligations of U.S. government agencies and corporations;
mortgage-backed securities, including securities issued by Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation; and
securities of states and political subdivisions, all of which must be considered
investment grade by a recognized rating service. See Note 2 to the Consolidated
Financial Statements included herein for further information.
BROKERAGE ACTIVITIES
The Bank, through its subsidiary, Community Bank of Maryland Investment
Services Corp., offers brokerage services through a third party vendor, UVest
Investment Services ("UVest"). Services provided by UVest include a full line of
investment products, including the purchase and sale of mutual funds, annuities,
stocks, options, and corporate and government bonds.
The manager of brokerage services for the Bank is a licensed securities
representative and is a dual employee of both UVest and the Bank. In such
capacity, he must comply with all applicable rules and regulations of the FDIC,
the SEC and the National Association of Securities Dealers. Fees and commissions
earned by the brokerage services department are paid monthly by UVest directly
to Community Bank of Maryland Investment Services, Inc., a wholly-owned
subsidiary of the Bank.
- 33 -
<PAGE>
The customer base of the brokerage department is made up of approximately
96 percent individuals, with the remainder consisting of investment clubs and
other accounts. As of June 30, 1998, there were approximately 75 open brokerage
accounts, 16 of which were IRA accounts. Based on the number of transactions,
approximately 25 percent of business consists of the purchase and sale of
stocks, bonds and options, with the remaining 75 percent involving mutual funds
and annuities.
SOURCES OF FUNDS
Deposits. Deposits obtained through the Bank's office have traditionally
been the principal source of the Bank's funds for use in lending and for other
general business purposes. At June 30, 1998, total deposits in the Bank amounted
to $53,624,858. Certificates of deposit and savings deposits are the Bank's
primary source of deposit funds, representing over 52.3% of the deposit base.
In order to better serve the needs of its customers, the Bank offers
several types of deposit accounts in addition to standard savings, checking, and
NOW accounts. Special deposit accounts include Free Personal Checking and Small
Business Checking. Free Personal Checking requires no minimum balance and has no
monthly fee, per check charge, or activity limit. Small Business Checking allows
a small business to pay a flat monthly service charge of $10 when the
accumulated checks and deposited items for that month do not exceed 100; items
over that amount are charged at $0.25 each.
Borrowing. While the Bank has not traditionally placed significant reliance
on borrowings as a source of liquidity, it has established various borrowing
arrangements in order to provide management with additional sources of liquidity
and funding thereby increasing flexibility. Management believes that the Bank
currently has adequate liquidity available to respond to current liquidity
demands.
COMMUNITY REINVESTMENT ACT
The Bank is committed to serving the banking needs of the entire community,
including low and moderate income areas, and is a supporter of the Community
Reinvestment Act ("CRA"). There are several ways in which the Bank attempts to
fulfill this commitment, including working with economic development agencies,
undertaking special projects, and becoming involved with neighborhood outreach
programs.
The Bank has contacts with state and city agencies that assist in the
financing of affordable housing developments as well as with groups which
promote the economic development of low and moderate income individuals. The
Bank has developed computer software to geographically code all types of
accounts to track business development and performance by census tract, to
assess market penetration in low and moderate income neighborhoods within the
primary service area. The Bank is an SBA lender in response to its community's
small business credit needs which can be particularly helpful in its CRA
assessment.
The Bank encourages its directors and officers to participate in community,
civic and charitable organizations. Management and members of the Bank's Board
of Directors frequently review the various CRA activities of the Bank, including
its advertising program and geo-coding of accounts by census tract data which
specifically focuses on low income neighborhoods, its credit granting process
with respect to business prospects generated in these areas, and its involvement
with community leaders on a personal level. See "Regulation -- Community
Reinvestment Act."
OFFICE PROPERTIES
The Bank has leased offices occupied for banking facilities, and has
purchased leasehold improvements, fixtures and equipment with respect thereto.
- 34 -
<PAGE>
The Company and the Bank own 43.61% and 56.39%, respectively, of Community
Bankshares of Maryland, Inc./Community Bank of Maryland Partnership (the
"Partnership"), which owns the office building in which the main office of the
Bank is located, and is authorized to engage in real estate activities related
to the operation of the Bank. The main office of the Bank is located in a
building owned by the Partnership at 16410 Heritage Boulevard, Bowie, Maryland.
This building is 99% leased and is occupied by four tenants:
<TABLE>
<CAPTION>
Tenant Square Footage Lease Expiration Date
- -------------------------------- ------------------------ -------------------------
<S> <C> <C> <C>
Nationwide Insurance Corporation 13,472 August 31, 2001
Associates Corporation 4,522 December 31, 2002
Maryland Clock Company 552 December 31, 2001
Community Bank of Maryland:
Bank Lobby 3,000 August 31, 2000
Administration 5,038 August 31, 2000
Storage 2,658 August 31, 2000
</TABLE>
Management believes the existing facilities are adequate to conduct the
Company's business.
LEGAL PROCEEDINGS
The Company is involved from time to time in routine legal proceedings
occurring in the ordinary course of business. In the opinion of management,
final disposition of these matters will not have a material adverse effect on
the financial condition or result of operations of the Company.
COMPETITION
In attracting deposits and making loans, the Bank encounters competition
from other institutions, including larger commercial banking organizations,
savings banks, credit unions, other financial institutions and non-bank
financial service companies serving Prince George's County and Anne Arundel
County, Maryland and adjoining areas. Financial and non-financial institutions
not located in the market are also able to reach persons and entities based in
the market through mass marketing, the internet, telemarketing, and other means.
The principal methods of competition include the level of loan interest rates,
interest rates paid on deposits, efforts to obtain deposits, range of services
provided and the quality of these services. The Bank's competitors include
several major financial companies whose substantially greater resources may
afford them a marketplace advantage by enabling them to maintain numerous
banking locations and mount extensive promotional and advertising campaigns. In
light of the deregulation of the financial service industry and the absence of
interest rate controls on deposits, the Bank anticipates that it will face
continuing competition from all of these institutions in the future.
Additionally, as a result of recently enacted legislation regarding reduced
restrictions on interstate banking, the Bank may face additional competition
from institutions outside the Maryland market which may take advantage of such
legislation to acquire or establish banks or branches in Maryland. There can be
no assurance that the Bank will be able to successfully meet these competitive
challenges. See "Risk Factors -- Competition" and "Regulation -- The Company."
In addition to offering competitive rates for its banking products and
services, the Bank's strategy for meeting competition has been to concentrate on
discrete segments of the market for financial services, particularly small
business and individuals, by offering such customers customized and personalized
banking services. Although there are other small banks offering personalized
banking services in the Bank's primary service area, the Bank believes that it
is one of few such banks offering flexible credit accommodations to small
businesses.
- 35 -
<PAGE>
The Bank believes that its active participation in civic and community
affairs is an important factor in building its reputation and, thereby,
attracting customers.
EMPLOYEES
As of June 30, 1998, the Bank had 24 full-time and 6 part-time employees.
The Company has no employees who are not also employees of the Bank. Such
employees are not represented by any collective bargaining unit, and the Company
believes its employee relations are good. The Company maintains a benefit
program which includes health and dental insurance, life and long-term
disability insurance, and a 401(k) plan for substantially all employees of the
Company.
The Bank has established an incentive plan for 1998 for all employees who
work more than 22 hours per week. If the Bank has net income of $640,000, and
meets certain operating guidelines exclusive of any gains on the sale of assets,
7.5% of net income will be paid out as incentive income. If the $640,000 is
exceeded by more than 20%, an additional 5% of income will be added to the
incentive pool.
SUPERVISION AND REGULATION
THE COMPANY
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "Act"), and is subject to supervision by
the Federal Reserve. As a bank holding company, the Company is required to file
with the Federal Reserve an annual report and such other additional information
as the Federal Reserve may require pursuant to the Act. The Federal Reserve may
also make examinations of the Company and each of its subsidiaries.
The Act requires approval of the Federal Reserve for, among other things,
the acquisition by a proposed bank holding company of control of more than five
percent (5%) of the voting shares, or substantially all the assets, of any bank
or the merger or consolidation by a bank holding company with another bank
holding company. The Act also generally permits the acquisition by a bank
holding company of control or substantially all the assets of any bank located
in a state other than the home state of the bank holding company, except where
the bank has not been in existence for the minimum period of time required by
state law, but if the bank is at least 5 years old, the Federal Reserve may
approve the acquisition.
With certain limited exceptions, a bank holding company is prohibited from
acquiring control of any voting shares of any company which is not a bank or
bank holding company and from engaging directly or indirectly in any activity
other than banking or managing or controlling banks or furnishing services to or
performing service for its authorized subsidiaries. A bank holding company may,
however, engage in or acquire an interest in, a company that engages in
activities which the Federal Reserve has determined by order or regulation to be
so closely related to banking or managing or controlling banks as to be properly
incident thereto. In making such a determination, the Federal Reserve is
required to consider whether the performance of such activities can reasonably
be expected to produce benefits to the public, such as convenience, increased
competition or gains in efficiency, which outweigh possible adverse effects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal Reserve Board is
also empowered to differentiate between activities commenced de novo and
activities commenced by the acquisition, in whole or in part, of a going
concern. Some of the activities that the Federal Reserve Board has determined by
regulation to be closely related to banking include making or servicing loans,
performing certain data processing services, acting as a fiduciary or investment
or financial advisor, and making investments in corporations or projects
designed primarily to promote community welfare.
- 36 -
<PAGE>
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, or investments in the stock
or other securities thereof, and on the taking of such stock or securities as
collateral for loans to any borrower. Further, a holding company and any
subsidiary bank are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit. A subsidiary bank may not extend
credit, lease or sell property, or furnish any services, or fix or vary the
consideration for any of the foregoing on the condition that: (i) the customer
obtain or provide some additional credit, property or services from or to such
bank other than a loan, discount or deposit or trust service; (ii) the customer
obtain or provide some additional credit, property or service from or to the
Company or any other subsidiary of the Company; or (iii) the customer not obtain
some other credit, property or service from competitors, except for reasonable
requirements to assure the soundness of credit extended.
THE BANK
The Bank is a Maryland chartered commercial bank which is not a member of
the Federal Reserve System, and its accounts are insured by the Bank Insurance
Fund of the FDIC up to the maximum legal limits of the FDIC. It is subject to
regulation, supervision and regular examination by the Commissioner and the
FDIC. The regulations of FDIC and the Commissioner govern most aspects of the
Bank's business, including required reserves against deposits, loans,
investments, mergers and acquisitions, borrowing, dividends and location and
number of branch offices. The laws and regulations governing the Bank generally
have been promulgated to protect depositors and the deposit insurance funds, and
not for the purpose of protecting stockholders.
Competition among commercial banks, savings and loan associations, and
credit unions has increased following enactment of legislation which greatly
expanded the ability of banks and bank holding companies to engage in interstate
banking or acquisition activities. As a result of federal and state legislation,
banks in the Washington D.C./Maryland/Virginia area can, subject to limited
restrictions, acquire or merge with a bank in another of the jurisdictions, and
can branch de novo in any of the jurisdictions. Additionally, legislation has
been proposed which may result in non-banking companies being authorized to own
banks, which could result in companies with resources substantially in excess of
the Company's entering into competition with the Company and the Bank.
Banking is a business which depends on interest rate differentials. In
general, the differences between the interest paid by a bank on its deposits and
its other borrowings and the interest received by a bank on loans extended to
its customers and securities held in its investment portfolio constitute the
major portion of the bank's earnings. Thus, the earnings and growth of the Bank
are subject to the influence of economic conditions generally, both domestic and
foreign, and also to the monetary and fiscal policies of the United States and
its agencies, particularly the Federal Reserve Board, which regulates the supply
of money through various means including open market dealings in United States
government securities. The nature and timing of changes in such policies and
their impact on the Bank cannot be predicted.
Branching and Interstate Banking. The federal banking agencies are
authorized to approve interstate bank merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks has opted out of the interstate bank merger provisions
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act") by adopting a law after the date of the enactment of the
Riegle-Neal Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.
Such interstate bank mergers and branch acquisitions are also subject to the
nationwide and statewide insured deposit concentration limitations described in
the Riegle-Neal Act.
The Riegle-Neal Act authorizes the federal banking agencies to approve
interstate branching de novo by national and state banks in states which
specifically allow for such branching. The District of Columbia, Maryland
- 37 -
<PAGE>
and Virginia have all enacted laws which permit interstate acquisitions of banks
and bank branches and permit out-of- state banks to establish de novo branches.
Capital Adequacy Guidelines. The Federal Reserve and the FDIC have adopted
risk based capital adequacy guidelines pursuant to which they assess the
adequacy of capital in examining and supervising banks and bank holding
companies and in analyzing bank regulatory applications. Risk-based capital
requirements determine the adequacy of capital based on the risk inherent in
various classes of assets and off-balance sheet items.
State non-member banks are expected to meet a minimum ratio of total
qualifying capital (the sum of core capital (Tier 1) and supplementary capital
(Tier 2)) to risk weighted assets of 8%. At least half of this amount (4%)
should be in the form of core capital. These requirements apply to the Bank and
will apply to the Company (a bank holding company) once its total assets equal
$150,000,000 or more, it engages in certain highly leveraged activities or it
has publicly held debt securities.
Tier 1 Capital generally consists of the sum of common stockholders' equity
and perpetual preferred stock (subject in the case of the latter to limitations
on the kind and amount of such stock which may be included as Tier 1 Capital),
less goodwill, without adjustment for changes in the market value of securities
classified as "available for sale" in accordance with SFAS 115. Tier 2 Capital
consists of the following: hybrid capital instruments; perpetual preferred stock
which is not otherwise eligible to be included as Tier 1 Capital; term
subordinated debt and intermediate-term preferred stock; and, subject to
limitations, general allowances for loan losses. Assets are adjusted under the
risk-based guidelines to take into account different risk characteristics, with
the categories ranging from 0% (requiring no risk-based capital) for assets such
as cash, to 100% for the bulk of assets which are typically held by a bank
holding company, including certain multi-family residential and commercial real
estate loans, commercial business loans and consumer loans. Residential first
mortgage loans on one to four family residential real estate and certain
seasoned multi-family residential real estate loans, which are not 90 days or
more past-due or non-performing and which have been made in accordance with
prudent underwriting standards are assigned a 50% level in the risk- weighing
system, as are certain privately issued mortgage-backed securities representing
indirect ownership of such loans. Off-balance sheet items also are adjusted to
take into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board has established a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to
total adjusted assets) requirement for the most highly-rated banks, with an
additional cushion of at least 100 to 200 basis points for all other banks,
which effectively increases the minimum Leverage Capital Ratio for such other
banks to 4.0% - 5.0% or more. The highest-rated banks are those that are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, those which are considered a strong
banking organization. A bank having less than the minimum Leverage Capital Ratio
requirement shall, within 60 days of the date as of which it fails to comply
with such requirement, submit a reasonable plan describing the means and timing
by which the bank shall achieve its minimum Leverage Capital Ratio requirement.
A bank which fails to file such plan is deemed to be operating in an unsafe and
unsound manner, and could subject the bank to a cease-and-desist order. Any
insured depository institution with a Leverage Capital Ratio that is less than
2.0% is deemed to be operating in an unsafe or unsound condition pursuant to
Section 8(a) of the Federal Deposit Insurance Act (the "FDIA") and is subject to
potential termination of deposit insurance. However, such an institution will
not be subject to an enforcement proceeding solely on account of its capital
ratios, if it has entered into and is in compliance with a written agreement to
increase its Leverage Capital Ratio and to take such other action as may be
necessary for the institution to be operated in a safe and sound manner. The
capital regulations also provide, among other things, for the issuance of a
capital directive, which is a final order issued to a bank that fails to
maintain a minimum capital or to restore its capital to the minimum capital
requirement within a specified time period. Such directive is enforceable in the
same manner as a final cease-and-desist order.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal
banking agency is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies
- 38 -
<PAGE>
have promulgated substantially similar regulations to implement the system of
prompt corrective action established by Section 38 of the FDIA. Under the
regulations, a bank shall be deemed to be: (i) "well capitalized" if it has a
Total Risk Based Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital
Ratio of 6.0% or more, a Leverage Capital Ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a Total Risk Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based
Capital Ratio of 4.0% or more and a Tier 1 Leverage Capital Ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "under capitalized" if it has a Total Risk Based
Capital Ratio that is less than 8.0%, a Tier 1 Risk based Capital Ratio that is
less than 4.0% or a Leverage Capital Ratio that is less than 4.0% (3.0% under
certain circumstances); (iv) "significantly undercapitalized" if it has a Total
Risk Based Capital Ratio that is less than 6.0%, a Tier 1 Risk Based Capital
Ratio that is less than 3.0% or a Leverage Capital Ratio that is less than 3.0%;
and (v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized, or critically
capitalized. A federal banking agency must provide the institution with written
notice of approval or disapproval within 60 days after receiving a capital
restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount equal
to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guaranty shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guaranty, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership. The general
rule is that the FDIC will be appointed as receiver within 90 days after a bank
becomes critically undercapitalized unless extremely good cause is shown and an
extension is agreed to by the federal regulators. In general, good cause is
defined as capital which has been raised and is imminently available for
infusion into the Bank except for certain technical requirements which may delay
the infusion for a period of time beyond the 90 day time period.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include: requiring
the institution to raise additional capital; restricting transactions with
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems
- 39 -
<PAGE>
appropriate. These and additional mandatory and permissive supervisory actions
may be taken with respect to significantly undercapitalized and critically
undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver
may be appointed for an institution where: (i) an institution's obligations
exceed its assets; (ii) there is substantial dissipation of the institution's
assets or earnings as a result of any violation of law or any unsafe or unsound
practice; (iii) the institution is in an unsafe or unsound condition; (iv) there
is a willful violation of a cease-and-desist order; (v) the institution is
unable to pay its obligations in the ordinary course of business; (vi) losses or
threatened losses deplete all or substantially all of an institution's capital,
and there is no reasonable prospect of becoming "adequately capitalized" without
assistance; (vii) there is any violation of law or unsafe or unsound practice or
condition that is likely to cause insolvency or substantial dissipation of
assets or earnings, weaken the institution's condition, or otherwise seriously
prejudice the interest of depositors or the insurance fund; (viii) an
institution ceases to be insured; (ix) the institution is undercapitalized and
has no reasonable prospect that it will become adequately capitalized, fails to
become adequately capitalized when required to do so, or fails to submit or
materially implement a capital restoration plan; or (x) the institution is
critically undercapitalized or otherwise has substantially insufficient capital.
Regulatory Enforcement Authority. Federal banking law grants substantial
enforcement powers to federal banking regulators. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions
against banking organizations and institution affiliated parties. In general,
these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with regulatory authorities.
- 40 -
<PAGE>
MANAGEMENT
CURRENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name and age of each person who is
currently a Director or Executive Officer of the Company. Directors of the
Company are elected annually by the stockholders for a one-year term. Also set
forth below is certain information as of June 30, 1998, with respect to the
Company's Common Stock beneficially owned by each Company Director and Executive
Officer, by Directors and Executive Officers of the Company as a group and by
Directors and Executive Officers of the Company and the Bank as a group. Except
as indicated in the notes following the table below, the beneficial owners have
sole voting and investment power with respect to the shares listed.
<TABLE>
<CAPTION>
Shares of
Common Stock
Age on Beneficially Percent of
Name June 30, 1998 Owned Class(1)
- ---- ------------- ------------ ---------
<S> <C> <C> <C>
DIRECTORS:
William V. Meyers 58 14,311 2.19%
Chairman and CEO
Andrew O. Mothershead 71 53,103 8.11%
Vice Chairman
Luci M. Baldi 71 27,447 4.19%
Secretary
Lance Billingsley 58 14,248 2.18%
Vaseleos Colevas 70 57,634 8.80%
Hugh O. Lowe 69 53,397 8.15%
Treasurer
Glenn A. Turner 44 22,102 3.38%
EXECUTIVE OFFICERS:
Thomas G. Moore 58 14,800(2) 2.26%
President and COO
All directors and executive officers of
Company as a group (8 persons) 257,042 38.44%
All directors and executive officers of
the Company and the Bank as a group 290,955 42.45%
(12 persons)
</TABLE>
- -----------------------------------
(1) Represents percentage of 654,791 shares issued and outstanding as of June
30, 1998, except with respect to individuals holding immediately
exercisable options to acquire shares of Common Stock, and with respect to
all directors and officers of the Company/Company and the Bank as a group,
in which event represents percentage of shares issued and outstanding as of
June 30, 1998 plus the number of shares with respect to which such
individual or group holds immediately exercisable options. All of the
outstanding options ("Options") to purchase shares of Common Stock are
immediately exercisable at $14.29 per share and $17.50 per share and expire
in February 2002 and February 2003.
(2) Includes options to purchase 10,500 shares at $14.29 per share and 3,250
shares at $17.50 per share.
The principal occupation and business experience during the last five years
of each of the Directors and Executive Officers of the Company and the Bank are
as follows.
William V. Meyers. Mr. Meyers is the managing principal in the law firm of
Meyers, Billingsley, Rodbell & Rosenbaum, P.A., located in Riverdale, Maryland.
The firm was founded in 1975. He has been a director of the Company and the Bank
since their inception and has served as Chairman of the Board of Directors of
the Company and Bank since November 1995.
- 41 -
<PAGE>
Andrew O. Mothershead. Mr. Mothershead is the founder and owner of Sonny's
Building Supply Co., Inc., located in College Park, Maryland. The firm was
founded in 1962. He has been a director of the Company and Bank since their
inception and has served as Vice Chairman of the Board of Directors of the
Company and Bank since November 1995.
Thomas G. Moore. Mr. Moore was elected President and Chief Executive
Officer of the Bank on May 15, 1990. He previously served as President and CEO
of Farmers National Bank of Maryland from 1986 to 1989 and President and CEO of
Central National Bank of Maryland from 1975 to 1986. All three banks achieved
record results in assets, loans, deposits, and net income in each year that he
served as President and Chief Executive Officer. There can be no assurances,
however, that this financial success will continue.
Luci M. Baldi. Mrs. Baldi is retired, having served as President of the
Baldi Construction Engineering, Inc. from 1981 to 1989. She has been a director
of the Company and Bank since 1989 and has served as Secretary of the Company
and Bank since May 1990.
Jay G. Baldwin. Mr. Baldwin is Assistant Secretary of Reliable Contracting
Co., Inc., located in Millersville, Maryland. The firm was founded in 1930. He
has been a director of the Bank since 1994.
Lance W. Billingsley. Mr. Billingsley is a partner in the law firm of
Meyers, Billingsley, Rodbell & Rosenbaum, P.A., located in Riverdale, Maryland.
He has been a director of the Company and Bank since their inception.
Charles A. Bryer. Mr. Bryer has served as Vice President and Treasurer of
the Bank since October 1991. In this capacity, he is primarily responsible for
accounting, operations, and the investment portfolio. He previously served as
Vice President and Controller at United Bank and Trust Company.
Vaseleos Colevas. Mr. Colevas is the founder and President of Arundel
Asphalt, which was sold in 1989 to Genstar, division of Redland PCL. He has been
a director of the Company and Bank since their inception.
Hubert O. Lowe. Mr. Lowe is the founder and owner of Lowe's Chevrolet,
located in Upper Marlboro, Maryland, which was sold in September 1995. He has
been a director of the Company and Bank since their inception.
Nicholas D. Mandrich. Mr. Mandrich has been Senior Vice President, Chief
Lending Officer, and Compliance Officer of the Bank since 1990. In this
capacity, he is primarily responsible for all areas of the Bank's lending
functions, including origination, servicing, and credit quality. He previously
worked in similar roles with Jefferson Bank and Peoples Security Bank of
Maryland.
Daniel H. Melvin. Mr. Melvin is President and Chief Executive Officer of
Melvin Motors, Inc., a firm founded by his father, in Bowie, in 1946. Mr. Melvin
has been a director of the Bank since 1991.
Edward F. Mullen, Jr. Mr. Mullen is a senior partner in the accounting firm
of Mullen, Sondberg, Wimbish & Stone, P.A., located in Annapolis, Maryland. The
firm was founded in 1955. He has been a director of the Bank since February
1998.
J. Alan Richardson. Mr. Richardson is President of Potomac Valley Brick, a
firm founded by his father in 1976 and located in Rockville, Maryland. He has
been a director of the Bank since its inception.
Glenn A. Turner. Mr. Turner is General Partner of Carrolton Enterprises. He
has been a director of the Bank since 1989, and a director of the Company since
November 1995.
- 42 -
<PAGE>
COMPENSATION OF DIRECTORS
The Chairman of the Board of Directors of the Company receives a salary of
$20,000 per year. Directors of the Company and the Bank receive a fee of $150
per board meeting and $100 per committee meeting. The President of the Company
and the Bank is not paid director fees.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, on an accrual basis, for the three fiscal
years ended December 31, 1997, the compensation paid to the Bank's Chief
Executive Officer. No other officer or employee of the Company or the Bank
earned in excess of $100,000 during the last fiscal year.
Annual Compensation(1)
----------------------
Name and Other Annual
Principal Position Year Salary Bonus Compensation(2)(3)
- ------------------ ---- ------ ----- ------------------
Thomas G. Moore 1997 $117,404 $ 5,506 $3,596
President and CEO 1996 $113,654 $ 6,198 $3,703
1995 $110,000 $13,443 $3,647
- ----------------
(1) For 1997, 1996 and 1995, there were no perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the years;
payments of above market preferential earnings on deferred compensation;
payments of earnings with respect to long term incentive plans prior to
settlement or maturation; tax payment reimbursements; or preferential
discounts on stock.
(2) The Company or Bank does not maintain a long term incentive plan and,
therefore, there were no payouts or awards under such plan.
(3) Included in Other Annual Compensation is a tax deferred contribution for
Mr. Moore to the Company's 401(k) Profit Sharing Plan. The amount reflects
only contributions made during each of the calendar years that vested
during the year.
INSURANCE PLANS
All full-time employees are covered as a group for comprehensive
hospitalization, including major medical, long-term disability, accidental death
and dismemberment insurance and group term life insurance.
STOCK OPTION PLAN AND GRANTS
The Company maintains an Employee Stock Option Plan (the "Option Plan"),
which provides for discretionary awards of up to an aggregate of 43,050 options
to purchase Company Common Stock to officers and key employees of the Company
and Bank as determined by the Company's Board of Directors based on a valuation
of the Common Stock on the date of grant. The Option Plan is not qualified under
Section 401(a) of the Internal Revenue Code and is not subject to any provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
In connection with the adoption of this Option Plan, the Company awarded
32,300 stock options at $14.29 per share on February 1, 1997 and 14,750 stock
options at $17.50 per share on March 10, 1998, to officers and key employees of
the Bank; 5,000 stock options awarded on February 1, 1997 were forfeited. The
term of each option granted is five (5) years.
- 43 -
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning the exercise
of stock options, the number of unexercised options and the value of unexercised
options at the end of 1994 for the executive officer whose compensation is
reported in the Summary Compensation Table. Value is considered to be, in the
case of exercised options, the difference between exercise price and market
price on the date of exercise, and, in the case of unexercised options, the
difference between exercise price and market price at December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND 1997 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying "In-the-Money" Options
Shares Unexercised Options or or Warrants at Dec. 31,
Acquired Value Warrants At Dec. 31, 1997 1997 (Exercisable/Un-
Name on Exercise Realized (Exercisable/Unexercisable) exercisable)(1)(2)
- ---- ----------- -------- --------------------------- ---------------------
<S> <C> <C>
Thomas G. Moore N/A N/A 10,500 33,705
</TABLE>
- -----------------
(1) An "In-the-Money" option is an option for which the option price of the
underlying stock is less than the market price at December 31, 1997.
(2) Due to an extremely illiquid market for the Common Stock, the absence of
any market makers and the lack of trades, the Company decided to obtain a
third party appraisal of the fair market value of the Common Stock. An
appraisal of the common stock performed by Scott & Stringfellow as of June
30, 1998, reflected a fair market value of $17.50 per share.
401(K) PROFIT SHARING PLAN
The Bank has a defined contribution 401(k) retirement plan which covers
employees that meet certain age and length of service requirements. Under this
plan, the Bank will annually contribute a discretionary amount as approved by
the Board of Directors. For the years ended December 31, 1997 and 1996, the
Bank's contribution amounted to $13,293 and $13,721, respectively.
EMPLOYMENT AGREEMENTS
On July 14, 1998, the Bank and Mr. Moore entered into a three-year
employment agreement (the "Employment Agreement"), beginning January 1, 1999.
Pursuant to the Employment Agreement, Mr. Moore receives a base salary of
$127,500 per year beginning January 1, 1999, and salary increases on January 1,
2000 to $130,000 per year, and on January 1, 2001 to $132,500 per year. Mr.
Moore had similar agreements covering employment from May 15, 1990 to May 15,
1993, from January 1, 1993 to January 1, 1996, and from January 1, 1996 to
January 1, 1999.
The Employment Agreement provides certain benefits to Mr. Moore not
provided to other employees of the Company or Bank. These include an automobile
and all costs associated with obtaining, maintaining, and operating such
automobile; an expense account for reasonable expenses incurred by him for
travel and entertainment in connection with the performance of his duties and
promotion of the Bank's business; country club membership dues at any area
country club; life insurance in the amount of $300,000, including cash value,
assignable to him on his termination of employment; and comprehensive medical
insurance covering Mr. Moore and his wife.
The Employment Agreement also provides that in the event of a change in
control of the Bank, the Bank shall have the right to terminate Mr. Moore's
employment without cause and in such event, he shall become entitled to a
termination payment equal to twice his then applicable annual salary payable, at
the election of Mr. Moore, in
- 44 -
<PAGE>
a lump sum or as an annuity over five years with interest on the principal at
8%. The Employment Agreement provides six-months salary and benefits to Mr.
Moore or his beneficiary in the event of disability or death, respectively; no
salary or benefits will be paid if his employment is terminated for good and
adequate cause. The Bank has purchased a "key-man" level-term insurance policy
in the amount of $1,000,000 on Mr. Moore. The Bank is the beneficiary under this
policy.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of business with some of its and the Company's directors,
officers, employees and promoters, and their associates. In the past,
substantially all of such transactions have been on the same terms, including
interest rates, maturities and collateral requirements as those prevailing at
the time for comparable transactions with non-affiliated persons and did not
involve more than the normal risk of collectibility or present other unfavorable
features.
Loans to officers, directors and affiliates of the Company and the Bank
represented 27.7% of the Company's total stockholders' equity at December 31,
1997. In the opinion of the Company's Board of Directors, the terms of these
loans are no less favorable to the Bank than terms of loans from the Bank to
unaffiliated parties. On June 30, 1998, $2,785,282 of loans were outstanding to
individuals who were officers, directors and affiliated parties of the Company
and the Bank. At the time each loan was made, management believed the loan
involved no more than the normal risk of collectibility nor presented other
unfavorable features. None of such outstanding loans are classified as
Substandard, Doubtful or Loss. At June 30, 1998, directors, executive officers
and their related interests maintained an aggregate of $1,866,565 of deposits
with the Bank.
Legal fees were paid to the law firm of Meyers, Billingsley, Rodbell, &
Rosenbaum, P.A. in which two of the principals are stockholders and directors of
the Company and the Bank. These fees totaled $20,076 in 1996, $17,476 in 1997,
and $4,312 for the six months ended June 30, 1998.
- 45 -
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows the number and percentage of shares of Common
Stock beneficially owned as of June 30, 1998 by each person known by the Company
to own beneficially more than 5% of the Company's outstanding shares of Common
Stock:
<TABLE>
<CAPTION>
Name and Address Number of Beneficially Percent
of Beneficial Owner Owned Shares of Class(1)
------------------- ------------ -----------
<S> <C> <C>
Vaseleos Colevas 57,634 8.80%
P.O. Box 564
Upper Marlboro, MD 20773
Irving L. Kidwell 158,597 24.22%
2925 Conne Mara Dr.
Davidsonville, MD 21035
Hugh O. Lowe 53,397 8.15%
4937 Hine Dr.
Shady Side, MD 20764
Andrew Mothershead 53,103 8.11%
Sonny's Building Supply Co., Inc.
5127 Berwyn Rd.
College Park, MD 20741
Sandy Spring Bancorp, Inc. 52,500 8.02%
17801 Georgia Avenue
Olney, Maryland 20832
Albert W. Turner(2) 52,500 8.02%
4009 Enterprise Rd.
Mitchellville, MD 20716
</TABLE>
- ----------------------------
(1) Represents percentage of 654,791 shares issued and outstanding as of June
30, 1998.
(2) Albert W. Turner is the father of Glenn A. Turner, a member of the Board of
Directors of the Company and the Bank.
- 46 -
<PAGE>
RESTRICTIONS ON ACQUISITION OF THE COMPANY
GENERAL
The Articles of Incorporation, as amended ("Articles") and Bylaws of the
Company, as amended, and the Maryland Corporations law (the "Maryland law")
contain certain provisions which may be deemed to have a potential anti-takeover
effect. Such provisions may have the effect of discouraging a future takeover
attempt which is not approved by the Board of Directors, but which the Company's
stockholders may deem to be in their best interest or in which stockholders may
receive a substantial premium for their shares over then current market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have an opportunity to do so. Certain of such provisions also may make
it more difficult for stockholders of the Company to remove members of its Board
of Directors and management. The Company is not aware of any existing or
threatened effort to acquire control of the Company.
The following descriptions of certain of the material provisions of the
Articles and Bylaws of the Company and certain provisions of the Maryland law
are necessarily general and are qualified by reference to such Articles and
Bylaws of the Company and the Maryland law. For a description of all other
material provisions of the Articles and Bylaws of the Company, see "Description
of Common Stock -- Common Stock." For a description of certain federal and state
banking laws which govern acquisitions of the Company and shares of its Common
Stock, see "Supervision and Regulation."
ARTICLES AND BYLAWS
Meetings of Stockholders. The Bylaws of the Company provide that a special
meeting of stockholders of the Company may only be called by the Chairman of the
Board, the President, a majority of the entire Board of Directors at the written
request of stockholders holding at least 25% in interest of the Common Stock
entitled to vote at the meeting.
Prohibition of written consent. The Bylaws provide that any action required
or permitted to be taken by the stockholders of the Company may be taken only at
an annual or special meeting and prohibits action by written consent in lieu of
a meeting.
STATUTORY BUSINESS COMBINATION PROVISION
Restrictions on Acquisition and Voting of Securities. Under Maryland law,
the voting rights of "control shares" acquired in a "control share acquisition"
are eliminated unless such acquisition is exempt or is approved by at least
two-thirds of all of the votes (other than shares held by the person making the
"control share acquisition," an officer of the corporation and an employee who
is also a director of the corporation) entitled to be cast at a meeting called
in accordance with specified procedures. A "control share acquisition" is the
direct or indirect acquisition by any person of ownership or control of "control
shares," which are shares of stock that would, if aggregated with all other
voting stock owned by such person, entitle such person to exercise at least 20%
of the voting power of the corporation. Unless the charter or by laws provide
otherwise, the corporation has the option to redeem any or all "control shares"
(except "control shares" for which voting rights have previously been approved
by the shareholders) at their fair value during a certain time period.
Special Voting Requirements for Certain Business Combinations. Maryland law
provides that, unless exempted, a corporation may not engage in any "business
combination" (as defined therein) with any "interested shareholder" (i.e., a
person that owns beneficially, directly or indirectly, 10% or more of the
outstanding voting stock of a Maryland corporation) or any affiliate of an
interested shareholder for a period of five years following the most recent date
on which the interested shareholder became an interested shareholder. Maryland
law further provides that, unless exempted, in addition to any vote otherwise
required by law or the charter of the corporation, a business
- 47 -
<PAGE>
combination that is not so prohibited must be recommended by the board of
directors and approved by (a) at least 80% of the outstanding shares of voting
stock of the corporation and (b) at least two-thirds of the outstanding shares
of voting stock (other than voting stock held by an interested shareholder or an
affiliate thereof), unless certain value and other standards are met or an
exemption is available. The higher voting requirements do not apply at any time
to business combinations with an interested shareholder or its affiliates if
approved by the board of directors of the corporation prior to the time the
interested shareholder first became an interested shareholder. Additionally, if
the business combination involves the receipt of consideration by the
shareholders in exchanges for the corporation's stock, the higher voting
requirements do not apply if certain "fair price" conditions are met.
As of the date hereof, neither of the foregoing statutory provisions is
applicable to the Company, although as a result of the Offering or otherwise,
either or both provisions may become applicable to the Company. In general, the
control share acquisition and business combination provisions are not applicable
to corporations with fewer than 100 beneficial holders of its capital stock.
INDEMNIFICATION
The Company's Bylaws contain a provision that any director, officer,
employee or agent of the Company, or any person serving at the Company's request
in such capacity with any other entity, will be indemnified to the fullest
extent permitted by law for any judgments, fines or other amounts incurred by
such person in connection with claims arising against such person by reason of
the fact that such person is or was a director, officer, employee or agent of
the Company, or was serving at the Company's request in such capacity with any
other entity.
DESCRIPTION OF COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock,
$10.00 par value per share, of which 654,791 shares were issued and outstanding
on June 30, 1998. The outstanding shares of Common Stock currently are, and the
shares of Common Stock to be issued in this Offering will be (when issued and
delivered in accordance with the terms and conditions of this Offering), validly
issued, fully paid and non-assessable. The capital stock of the Company does not
represent or constitute a deposit account and is not insured by the FDIC.
COMMON STOCK
General. Each share of Common Stock has the same relative rights and is
identical in all respects with each other share of Common Stock. The Common
Stock is not subject to call for redemption.
Voting Rights. The holders of Common Stock possess exclusive voting rights
in the Company. Each holder of Common Stock is entitled to one vote for each
share held, and a proportionate vote for any fractional share held, on all
matters voted upon by stockholders. Stockholders are not permitted to cumulate
their votes in the election of directors.
Dividends. The holders of the Common Stock are entitled to such dividends
as may be declared from time to time by the Board of Directors of the Company
out of funds legally available therefor. See "Market Price for Common Stock and
Dividends -- Dividends."
Preemptive Rights. Holders of the Common Stock do not have preemptive
rights to acquire unissued or treasury shares of common stock.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, the holders of the Common Stock would be entitled to receive, after
payment of all debts and liabilities of the Company, all assets of the Company
available for distribution, subject to the rights of the holder of any preferred
stock which may be issued
- 48 -
<PAGE>
with a priority in liquidation or dissolution over the holders of Common Stock.
No shares of preferred stock are currently authorized by the Articles.
REPORTS TO STOCKHOLDERS
The Company currently furnishes its stockholders with annual reports
containing audited financial information and such quarterly or interim reports
containing unaudited financial information as it considers appropriate. The
Company anticipates that it may become obligated to file certain periodic
reports or other information with the Securities and Exchange Commission under
the Exchange Act as a consequence of the Offering.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is the Company.
LEGAL OPINION
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Kennedy, Baris & Lundy, L.L.P., Bethesda,
Maryland.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the years in the two-year period ended December
31, 1997, included in the Prospectus have been audited by Stoy, Malone &
Company, P.C., independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
- 49 -
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
- ----
<S> <C>
Audited Consolidated Financial Statements
-----------------------------------------
F-1 Independent Auditors' Report
F-2 Consolidated Statements of Condition as of December 31, 1997 and 1996
F-3 Consolidated Statements of Income for the Years Ended December 31, 1997 and 1996
F-4 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997
and 1996
F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996
F-6 Notes to Consolidated Financial Statements
Unaudited Consolidated Financial Statements
-------------------------------------------
F-21 Unaudited Consolidated Statements of Condition as of June 30, 1998 and 1997
F-22 Unaudited Consolidated Statements of Income for the Six Months Ended June 30, 1998 and 1997
F-23 Unaudited Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30,
1998 and 1997
F-24 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997
F-25 Unaudited Notes to Consolidated Financial Statements
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are omitted because they are not
applicable or because the required information is included in the Consolidated
Financial Statements and related notes thereto.
- 50 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders of
Community Bankshares of Maryland, Inc.
We have audited the accompanying consolidated statements of condition of
Community Bankshares of Maryland, Inc., formerly Financial Institutions Holding
Corporation, and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Corporations' management. Our responsibility is to express
an opinion on these 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 Community Bankshares
of Maryland, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
STOY, MALONE & COMPANY, P.C.
Bethesda, Maryland
January 16, 1998
(Except for Note 19, as to which
the date is May 12, 1998)
F-1
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
-------------------------------------------------------
CONSOLIDATED STATEMENTS OF CONDITION
------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------------- -----------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,949,983 $ 2,539,671
Federal Funds sold 1,294,715 2,404,318
------------ ------------
Cash and cash equivalents 4,244,698 4,943,989
Investment securities 13,035,644 9,243,089
Loans, net 31,667,458 27,964,839
Premises and equipment, net 3,418,513 4,381,294
Accrued interest receivable 387,499 307,648
Other assets 346,248 364,290
------------ ------------
Total assets $ 53,100,060 $ 47,205,149
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 10,968,144 $ 8,088,847
NOW accounts 3,575,819 3,281,401
Savings 10,480,196 9,685,166
Time, $100,000 and over 3,950,513 3,207,406
Other time 15,471,169 13,657,387
------------ -----------
Total deposits 44,445,841 37,920,207
Securities sold under repurchase agreements 1,204,505 2,365,233
Accrued interest and other liabilities 345,522 270,932
------------ -----------
Total liabilities 45,995,868 40,556,372
------------ -----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 14)
STOCKHOLDERS' EQUITY:
Common stock, $10 par value, 10,000,000
shares authorized, 691,541 and 660,405 shares issued,
at December 31, 1997 and 1996, respectively 6,915,410 6,604,050
Retained earnings 468,856 336,609
Net unrealized holding loss, net of tax (802) (12,610)
Treasury stock, 37,500 shares at cost (279,272) (279,272)
----------- ----------
Total stockholders' equity 7,104,192 6,648,777
----------- ----------
Total liabilities and stockholders' equity $ 53,100,060 $47,205,149
============ ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-2
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
----------------- ----------------
<S> <C> <C>
Interest income:
Interest and fees on loans $2,863,655 $2,565,348
Interest on investment securities 662,568 660,913
Interest on Federal Funds sold 142,533 93,226
---------- ----------
Total interest income 3,668,756 3,319,487
---------- ----------
Interest expense:
Interest on deposits 1,415,475 1,283,428
Interest on securities sold under repurchase agreements 69,116 38,968
---------- ----------
Total interest expense 1,484,591 1,322,396
---------- ----------
Net interest income 2,184,165 1,997,091
Provision for loan losses 140,005 34,138
---------- ----------
Net interest income after provision for loan losses 2,044,160 1,962,953
---------- ----------
Other income:
Service charges on deposit accounts 304,732 245,953
Rental income 394,598 202,237
Gain on sales of investment securities -- 2,911
Gain on sales of premises and equipment 123,740 --
Other 133,368 75,990
Total other income 956,438 527,091
Other expenses:
Salaries and employee benefits 878,595 759,257
Occupancy expense 233,811 248,510
Furniture and equipment expenses 140,923 111,948
Rental expenses 215,921 193,372
Other operating expenses 633,507 486,658
---------- ----------
Total other expenses 2,102,757 1,799,745
---------- ----------
Income before income taxes 897,841 690,299
Income taxes 302,869 262,700
---------- ----------
NET INCOME $ 594,972 $ 427,599
========== ==========
Earnings per share, basic $ .91 $ .65
========== ==========
Earnings per share assuming dilution $ .91 $ .65
========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
F-3
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Net
Unrealized Total
Holding Stock-
Common Retained Gain (Loss), Treasury holders'
Stock Earnings Net of Tax Stock Equity
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 6,604,050 $ 21,133 $ 20,829 $ (279,272) $ 6,366,740
Net income -- 427,599 -- -- 427,599
Cash dividends - $.17 per share -- (112,123) -- -- (112,123)
Net change in unrealized holding
gain (loss), net of tax -- -- (33,439) -- (33,439)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 6,604,050 336,609 (12,610) (279,272) 6,648,777
Net income -- 594,972 -- -- 594,972
Cash dividends - $.23 per share -- (151,365) -- -- (151,365)
Stock dividend, 31,136 shares at
$10.00 per share 311,360 (311,360) -- -- --
Net change in unrealized holding
gain (loss), net of tax -- -- 11,808 -- 11,808
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 6,915,410 $ 468,856 $ (802) $ (279,272) $ 7,104,192
=========== =========== =========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
F-4
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
------------ ------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 594,972 $ 427,599
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sales of investment securities available-for-sale -- (2,911)
Gain on sales of premises and equipment (123,740) --
Premium amortization, net of discount accretion 29,673 37,934
Provision for loan losses 140,005 34,138
Depreciation and amortization on premises and equipment 225,298 197,168
Loss on scrapped assets -- 11,801
Amortization of deferred leasing commissions 20,868 12,063
Deferred income taxes (16,827) (16,670)
Decrease (increase) in accrued interest receivable (79,851) 16,952
Increase in other assets (28,542) (7,732)
Increase (decrease) in accrued interest and other liabilities 74,590 (57,528)
----------- -----------
Net cash provided by operating activities 836,446 652,814
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities held-to-maturity (7,859,562) (2,041,689)
Proceeds from maturities of investment securities held-to-maturity 4,205,000 4,425,000
Principal collected on investment securities held-to-maturity -- 203,628
Purchases of investment securities available-for-sale (149,500) (1,123,537)
Proceeds from sales of investment securities available-for-sale -- 1,157,025
Proceeds from sales of premises and equipment 1,048,670 --
Net increase in loans (3,842,624) (5,345,525)
Purchases of premises and equipment (151,262) (490,598)
----------- -----------
Net cash used in investing activities (6,749,278) (3,215,696)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 6,525,634 2,473,346
Net increase (decrease) in securities sold under repurchase
agreements (1,160,728) 2,269,292
Cash dividends paid (151,365) (112,123)
----------- -----------
Net cash provided by financing activities 5,213,541 4,630,515
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (699,291) 2,067,633
CASH AND CASH EQUIVALENTS:
Beginning of year 4,943,989 2,876,356
----------- -----------
End of year $ 4,244,698 $ 4,943,989
=========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
F-5
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
A summary of significant accounting policies of Community Bankshares of
Maryland, Inc. and Subsidiaries (the "Corporations") is as follows:
BASIS OF ACCOUNTING:
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles and conform to
general practices within the banking industry.
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Community Bankshares of Maryland, Inc. (the "Parent"), its wholly-owned
subsidiary, Community Bank of Maryland (the "Bank"), Community Bank of
Maryland Investment Services, Inc. (the "Investment Company") and Community
Bankshares of Maryland, Inc.-Community Bank of Maryland Partnership (the
"Partnership"). On October 14, 1997, the Board of Directors amended the
articles of incorporation to change the name of the bank to Community Bank
of Maryland from Bank of Bowie. All significant intercompany transactions
and balances have been eliminated.
NATURE OF OPERATIONS:
The Parent was organized under the laws of the State of Maryland to serve
as a bank holding company. The Bank operates as a commercial bank in
Maryland. Its primary deposit base and principal real estate lending
markets include Prince George's and Anne Arundel Counties.
The Partnership is engaged in real estate activities, which has included
the acquisition of land and the construction of a headquarters building for
the Bank. The Partnership's primary tenant, other than the Bank, is an
insurance company.
The Investment Company is engaged in the business of providing
comprehensive investment products and services to the public.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
F-6
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: (Cont'd.)
USE OF ESTIMATES: (Cont'd.)
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for loan losses. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in local
economic conditions. Service industries and Federal, state and local
governments employ a significant portion of the Maryland labor force.
Adverse changes in economic conditions could have a direct impact on the
collectibility of the Bank's loan portfolio. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such 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 examination. Because of
these factors, it is reasonably possible that the allowance for loan losses
may change materially in the near term.
CASH AND CASH EQUIVALENTS:
For financial reporting purposes, cash and cash equivalents includes cash
on hand, amounts due from banks (including cash items in process of
clearing), and Federal Funds sold. Cash flows from loans, deposits and
securities sold under repurchase agreements are reported net.
INVESTMENT SECURITIES:
Held-to-maturity securities are those securities which the Bank has the
ability and intent to hold until maturity and are stated at amortized cost.
Available-for-sale securities represent those securities not classified as
held-to-maturity and are stated at fair value. Unrealized holding gains and
losses, net of the related deferred tax effect, are reported as a separate
component of stockholders' equity.
Premiums and discounts on investments in debt securities are amortized over
their contractual lives. The method of amortization results in a constant
effective yield on those securities which approximates the interest method.
Realized gains and losses are included in income and are determined by the
specific-identification method.
LOANS:
Loans are stated at the amount of unpaid principal reduced by unearned
discounts, unearned fees and an allowance for loan losses.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. The allowance for loan losses is
increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
Unearned interest on discounted loans is amortized to income over the life
of the related loans, using the interest method. For all other loans,
interest is accrued daily on the outstanding balances. Accrual of interest
is discontinued on a loan when management believes, after considering
collection efforts and other factors, that the borrower's financial
condition is such that collection of interest is doubtful.
F-7
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: (Cont'd.)
LOANS: (Cont'd.)
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield on the related loans.
PREMISES AND EQUIPMENT:
Premises and equipment is stated at cost less accumulated depreciation and
amortization. Building and improvements and furniture and equipment are
depreciated on the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized on the straight-line
method over the shorter of the estimated useful lives of the improvements
or the terms of the related leases.
DEFERRED LEASING COMMISSIONS:
Deferred leasing commissions are being amortized on the straight-line
method over the terms of the related leases.
ADVERTISING:
Advertising expenses are expensed as incurred. These expenses amounted to
$50,104 and $41,640 for the years ended December 31, 1997 and 1996,
respectively, and are included in other operating expenses in the
consolidated statements of income.
INCOME TAXES:
The Corporations file a consolidated Federal income tax return. Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Management has adopted a policy to maintain a valuation allowance to
completely offset any deferred tax resulting from possible future
realization of net operating loss carryovers for state income tax purposes.
F-8
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: (Cont'd.)
EARNINGS PER SHARE:
In 1997, the Corporation adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". All earnings per share data for
prior periods have been restated to be comparable. Basic earnings per share
is calculated by dividing net income by the weighted average number of
shares outstanding during the period. Diluted earnings per share is
computed as net income divided by the weighted average number of
outstanding common shares used to derive basic earnings per share, plus the
dilutive effect of common stock equivalents relating to outstanding stock
options, as determined under the treasury stock method. Options for 27,300
shares of common stock were not included in computing diluted earnings per
share because their effects were antidilutive. All earnings per share data
and weighted average share amounts have been adjusted retroactively for the
5% stock dividend.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS:
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they become payable.
F-9
<PAGE>
NOTE 2 - INVESTMENT SECURITIES:
A summary of investment securities is as follows:
<TABLE>
<CAPTION>
GROSS GROSS AGGREGATE
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
-------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Available-for-sale:
Debt securities:
U.S. Treasury securities $ 700,540 $ -- $ 4,478 $ 696,062 $ 696,062
U.S. Government agencies
and corporations 2,213,100 4,735 1,490 2,216,345 2,216,345
----------- ------- ------- ----------- -----------
2,913,640 4,735 5,968 2,912,407 2,912,407
Federal Home Loan Bank of
Atlanta stock 149,500 -- -- 149,500 149,500
----------- ------- ------- ----------- -----------
3,063,140 4,735 5,968 3,061,907 3,061,907
----------- ------- ------- ----------- -----------
Held-to-maturity:
Debt securities:
U.S. Treasury securities 2,222,454 21,981 -- 2,244,435 2,222,454
U.S. Government agencies
and corporations 5,408,763 21,748 10,814 5,419,697 5,408,763
State and political subdivi-
sions 2,342,520 9,986 907 2,351,599 2,342,520
----------- ------- ------- ----------- -----------
9,973,737 53,715 11,721 10,015,731 9,973,737
----------- ------- ------- ----------- -----------
Total $13,036,877 $58,450 $17,689 $13,077,638 $13,035,644
=========== ======= ======= =========== ===========
DECEMBER 31, 1997
Available-for-sale:
Debt securities:
U.S. Treasury securities $ 700,750 $ -- $12,875 $ 687,875 $ 687,875
U.S. Government agencies
and corporations 2,218,616 773 7,297 2,212,092 2,212,092
----------- ------- ------- ----------- -----------
2,919,366 773 20,172 2,899,967 2,899,967
----------- ------- ------- ----------- -----------
Held-to-maturity:
Debt securities:
U.S. Treasury securities 2,510,160 13,146 2,153 2,521,153 2,510,160
U.S. Government agencies
and corporations 2,563,095 10,180 8,983 2,564,292 2,563,095
State and political subdivi-
sions 1,269,867 -- 3,093 1,266,774 1,269,867
----------- ------- ------- ----------- -----------
6,343,122 23,326 14,229 6,352,219 6,343,122
----------- ------- ------- ----------- -----------
Total $ 9,262,488 $24,099 $34,401 $ 9,252,186 $ 9,243,089
=========== ======= ======= =========== ===========
</TABLE>
F-10
<PAGE>
NOTE 2 - INVESTMENT SECURITIES: (Cont'd.)
The amortized cost and aggregate fair value of debt securities at December 31,
1997 by contractual maturity, are shown below. Maturities may differ from
contractual maturities because the underlying securities may be called or repaid
without any penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
-------------------------------------------------------------------
Amortized Aggregate Amortized Aggregate
Cost Fair Value Cost Fair Value
----------------- -------------------------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,800,205 $ 1,798,439 $ 250,986 $ 251,184
Due from one to five years 1,113,435 1,113,968 8,726,471 8,772,362
Due from five to ten years - - 996,280 992,185
----------- ----------- ----------- -----------
$ 2,913,640 $ 2,912,407 $ 9,973,737 $10,015,731
=========== =========== =========== ===========
</TABLE>
Gross realized gains and gross realized losses on available-for-sale investment
securities were $3,706 and $795, respectively, for the year ended December 31,
1996. There were no sales of investment securities for the year ended December
31, 1997.
The change in unrealized holding gain (loss) during the years ended December 31,
1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balance, beginning of year $(12,610) $ 20,829
Unrealized gain (loss) on available-for-sale securities 18,166 (51,443)
Related deferred taxes (6,358) 18,004
-------- --------
Balance, end of year $ (802) $(12,610)
======== ========
</TABLE>
At December 31, 1997, investment securities with a carrying value of
approximately $4,045,000 were pledged to secure securities sold under repurchase
agreements and public deposits as required or permitted by law.
F-11
<PAGE>
NOTE 3 - LOANS:
The composition of net loans is as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commercial $10,198,010 $ 9,076,205
Real estate 19,093,355 16,500,730
Installment 2,734,097 2,701,971
Credit card and other consumer 40,061 43,668
----------- -----------
32,065,523 28,322,574
Less: Unearned discounts 5,110 11,343
Unearned fees 62,955 50,971
Allowance for loan losses 330,000 295,421
----------- -----------
Loans, net $31,667,458 $27,964,839
=========== ===========
</TABLE>
Loans with fixed interest rates totaled approximately $20,773,000 and
$15,603,000 at December 31, 1997 and 1996, respectively, while variable
rate loans amounted to approximately $11,293,000 and $12,720,000 at
December 31, 1997 and 1996, respectively.
The Bank had nonaccrual loans of approximately $84,200 and $92,000 at
December 31, 1997 and 1996, respectively. Nonaccrual loans had the effect
of reducing interest income by approximately $4,300 and $5,700 for the
years ended December 31, 1997 and 1996, respectively. There was no interest
received on these loans for the years ended December 31, 1997 and 1996.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES:
Changes in the allowance for loan losses were as follows during the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Balance, beginning of year $ 295,421 $ 258,000
Provision charged to expense 140,005 34,138
--------- ---------
435,426 292,138
Losses charged to allowance (108,660) (5,854)
Recoveries of loans previously charged off 3,234 9,137
--------- ---------
Balance, end of year $ 330,000 $ 295,421
========= =========
</TABLE>
F-12
<PAGE>
NOTE 5 - PREMISES AND EQUIPMENT:
The major classes of premises and equipment and the total accumulated
depreciation and amortization are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 648,640 $1,417,483
Building and improvements 2,008,003 2,136,140
Furniture and equipment 907,408 813,437
Leasehold improvements 653,552 615,883
---------- ----------
4,217,603 4,982,943
Less accumulated depreciation and
amortization 799,090 601,649
---------- ----------
Premises and equipment, net $3,418,513 $4,381,294
========== ==========
</TABLE>
NOTE 6 - DEPOSITS:
The scheduled maturities of time deposits are as follows at December 31,
1997:
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1998 $11,831,984
1999 1,401,005
2000 2,238,880
2001 1,967,638
2002 1,982,175
-----------
$19,421,682
===========
</TABLE>
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Securities sold under repurchase agreements generally mature within one to
four days from the transaction date and totaled $1,204,505 and $2,365,233
at December 31, 1997 and 1996, respectively. The maximum amount of
outstanding agreements at any month end during the years ended December 31,
1997 and 1996 was $1,898,297 and $2,825,937, respectively. The average end
of month outstanding agreements were $1,612,743 and $1,130,402 during the
years ended December 31, 1997 and 1996, respectively. All investment
securities underlying these agreements were under the Bank's control. As
described in Note 2, certain investment securities are pledged to secure
these agreements.
F-13
<PAGE>
NOTE 8 - RENTAL INCOME:
The Partnership leases space in its building under various operating leases
which expire in 2001. In addition to minimum rentals, the leases provide
for annual increases as well as additional payments to cover lessee's
proportionate share of increases in real estate taxes and operating
expenses over a base year amount. The leases also contain renewal options.
Future minimum rentals to be received under these leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1998 $ 340,059
1999 350,262
2000 360,764
2001 270,631
----------
$1,321,716
==========
</TABLE>
Rental income under these leases was $394,598 and $202,237 for the years
ended December 31, 1997 and 1996, respectively, and included contingent
rentals of $18,668 and $30,817, respectively.
NOTE 9 - OPERATING LEASES:
The Bank has an operating lease for office space. This lease is
noncancelable and expires 2003. In addition to minimum rentals, this lease
requires annual rental increases based on the Consumer Price Index. The
lease also requires additional payments to cover the Bank's proportionate
share of real estate taxes and operating expenses.
Future minimum rental payments under this lease are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1998 $ 85,768
1999 69,315
2000 68,388
2001 55,415
2002 57,078
Thereafter 19,212
--------
$355,176
========
</TABLE>
The Bank has subleased a portion of the office space described above and is
due future minimum rental payments of $12,000 in 1998.
F-14
<PAGE>
NOTE 9 - OPERATING LEASES: (Cont'd.)
The following schedule indicates the composition of total rent expense for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Minimum rentals $107,884 $105,134
Contingent rentals 22,551 18,006
-------- --------
130,435 123,140
Less sublease rentals 34,000 17,500
-------- --------
$ 96,435 $105,640
======== ========
</TABLE>
NOTE 10 - INCOME TAXES:
The components of income tax expense for the years ended December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current $ 319,696 $ 279,370
Deferred (16,827) (16,670)
--------- ---------
$ 302,869 $ 262,700
========= =========
</TABLE>
Components of the Corporations' net deferred tax assets are as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Unearned fees $ 3,639 $ 5,406
Allowance for loan losses 127,446 112,384
Accumulated depreciationand amortization 16,413 12,881
Net unrealized holding loss 431 6,789
Net operating loss carryovers 767 10,001
-------- --------
Total deferred tax assets 148,696 147,461
Less valuation allowance 767 10,001
-------- --------
Net deferred tax assets $147,929 $137,460
======== ========
</TABLE>
The net deferred tax assets are included in other assets in the consolidated
statements of condition.
F-15
<PAGE>
NOTE 11 - RETIREMENT PLAN:
The Bank has a defined contribution 401(k) retirement plan which covers
employees that meet certain age and length of service requirements. Under
this plan, the Bank will annually contribute a discretionary amount as
approved by the Board of Directors. For the years ended December 31, 1997
and 1996, the Bank's contribution amounted to $13,293 and $13,721,
respectively.
NOTE 12 - EMPLOYEE INCENTIVE PLAN:
The Bank has an incentive plan which provides for a bonus equal to a
specified percentage of pretax income to all eligible employees if certain
operating guidelines are met. For the year ended December 31, 1997, this
bonus totaled $31,460. No bonus was accrued for the year ended December 31,
1996.
NOTE 13 - STOCK OPTION PLAN:
Effective February 1, 1997, the Parent adopted the 1996 Non-Incentive Stock
Plan (the "Plan"). Options may be granted to purchase up to an aggregate of
43,050 shares of the Parent's common stock. Options may be granted to
officers and key employees of the Parent or the Parent's subsidiaries, and
may not be granted at less than the fair market value of the Parent's
common stock. The term of each option granted pursuant to the Plan shall be
five years from the effective date.
In connection with the adoption of this Plan, the Parent awarded 32,300
stock options for the purchase of common stock to officers and key
employees of the Bank, at an option price of $14.29 per share. These
options vested immediately. During the year ended December 31, 1997, 5,000
options were forfeited.
The Parent applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock issued to Employees" as allowed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation expense has been recognized for its stock
based compensation plan. Had compensation expense been determined on the
basis of fair value pursuant to SFAS 123, no compensation expense would
have been recognized, since the options had no fair value at the date of
grant, using the Black-Scholes option-pricing model. The significant
assumptions used were a risk-free interest rate of 5.0%, expected life of
five years, no expected volatility, and expected dividends of 2.0%
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Bank is a party to financial instruments with off balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk not recognized in the consolidated statements of
condition. The contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on balance sheet
instruments.
F-16
<PAGE>
NOTE 14 - COMMITMENTS AND CONTINGENCIES: (Cont'd.)
A summary of the Bank's commitments as of December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Commitments to extend credit $3,923,941 $3,425,940
Standby letters of credit 251,717 126,472
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since commitments frequently
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the party. Collateral held
varies, but may include deposit accounts, accounts receivable, marketable
securities, inventory, property and equipment, residential real estate and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements
and generally expire within one year from issuance. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Bank deems
necessary.
CONCENTRATION OF CREDIT RISK:
The Corporations have funds on deposit with other banks in excess of
$100,000 which are not insured by the Federal Deposit Insurance
Corporation.
OTHER:
The Corporations have an ongoing program designed to ensure that their
operational and financial systems will not be adversely affected by year
2000 software failures due to processing errors arising from calculations
using the year 2000 data. While the Corporations believe they are doing
everything technologically possible to assure year 2000 compliance, it is
to some extent dependent upon vendor cooperation. The Corporations are
requiring vendors of their computer systems and software to represent that
the products provided are or will be year 2000 compliant and have planned a
program of testing for compliance. It is recognized that any year 2000
compliance failures could result in additional expense to the Corporations.
The Bank has a contract with an entity, whereby such entity will perform
certain processing work necessary to the Bank's operations for a period of
five years expiring in 1999. There are no minimum annual fees.
F-17
<PAGE>
NOTE 15 RELATED PARTY TRANSACTIONS:
The Corporations have had, and may be expected to have in the future,
transactions in the ordinary course of business with stockholders,
directors, officers and affiliated entities in which they are principal
owners, all of which have been, in the opinion of management, on the same
terms as those prevailing at the time for comparable transactions with
others.
Loans to related parties totaled approximately $2,933,000 and $2,497,000 at
December 31, 1997 and 1996, respectively. Advances and repayments amounted
to approximately $4,245,000 and $3,809,000, respectively, for the year
ended December 31, 1997, and approximately $4,239,000 and $3,203,000,
respectively, for the year ended December 31, 1996.
Legal fees were paid to a law firm in which two of the partners are
stockholders and directors of the Parent. These fees totaled $17,476 and
$20,076 for the years ended December 31, 1997 and 1996, respectively.
Leasing commissions of $27,091 and $77,247 were paid to a stockholder of
the Parent during the years ended December 31, 1997 and 1996, respectively.
NOTE 16 STOCKHOLDERS' EQUITY:
STOCK DIVIDEND:
On December 9, 1997, the Board of Directors declared a 5% stock dividend
payable on December 31, 1997 to stockholders of record on December 23,
1997. Per share amounts in the accompanying consolidated financial
statements have been restated for the stock dividend.
DIVIDEND RESTRICTIONS:
Banking regulations limit the amount of dividends that may be paid by the
Bank without prior regulatory approval. Under these regulations, the Bank
may declare dividends from retained earnings or, with prior regulatory
approval, out of surplus in excess of 100% of the aggregate of the par
value of its common stock. The Bank had retained earnings in the amount of
$647,183 and $297,938, at December 31, 1997 and 1996, respectively, that
were available for the payment of dividends without prior regulatory
approval. Future dividend payments of the Parent are dependent upon the
receipt of cash dividends from the Bank.
NOTE 17 - REGULATORY MATTERS:
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
F-18
<PAGE>
NOTE 17 - REGULATORY MATTERS: (Cont'd.)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is
subject.
The most recent notification from the Board of Governors of the Federal
Reserve System categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes:
----------------- ------------------------------------------------------------------
Amount Ratio Amount Ratio
--------- ----- --------------------------------- -------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk-
weighted assets) $5,977,000 16.2% greater than or equal to $2,952,000 greater than or equal to 8.00%
Tier I capital (to risk-
weighted assets) 5,647,000 15.3% greater than or equal to 1,476,000 greater than or equal to 4.00%
Tier I capital (to average
assets) 5,647,000 11.18% greater than or equal to 2,020,000 greater than or equal to 4.00%
As of December 31, 1996:
Total capital (to risk-
weighted assets) $5,593,000 16.8% greater than or equal to $2,655,000 greater than or equal to 8.00%
Tier I capital (to risk-
weighted assets) 5,298,000 15.9% greater than or equal to 1,327,000 greater than or equal to 4.00%
Tier I capital (to average
assets) 5,298,000 11.86% greater than or equal to 1,787,000 greater than or equal to 4.00%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
------------------------------------------------------------------
Amount Ratio
--------------------------------- -------------------------------
<S> <C> <C>
As of December 31, 1997:
Total capital (to risk- greater than or equal to $3,689,000 greater than or equal to 10.00%
weighted assets)
Tier I capital (to risk- greater than or equal to 2,214,000 greater than or equal to 6.00%
weighted assets)
Tier I capital (to average greater than or equal to 2,526,000 greater than or equal to 5.00%
assets)
As of December 31, 1996:
Total capital (to risk- greater than or equal to $3,319,000 greater than or equal to 10.00%
weighted assets)
Tier I capital (to risk- greater than or equal to 1,991,000 greater than or equal to 6.00%
weighted assets)
Tier I capital (to average greater than or equal to 2,233,000 greater than or equal to 5.00%
assets)
</TABLE>
F-19
<PAGE>
NOTE 18 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Cash paid for:
Interest on deposits $ 1,404,150 $ 1,297,698
Interest on securities sold under
repurchase agreements 69,116 38,987
Income taxes 311,112 263,300
</TABLE>
NOTE 19 - SUBSEQUENT EVENT:
On May 12, 1998, the stockholders approved a change in the Parent's name to
Community Bankshares of Maryland, Inc. from Financial Institutions Holding
Corporation. In connection with this name change, the name of the
Partnership was changed to Community Bankshares of Maryland, Inc.-Community
Bank of Maryland Partnership, from FIHC-Bank of Bowie Partnership.
F-20
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
----------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,845,670 $ 2,577,288
Federal Funds sold 4,642,493 4,591,933
----------------- ----------------
Cash and cash equivalents 8,488,163 7,169,221
Investment securities 16,339,970 10,983,749
Loans, net 33,572,935 27,731,214
Premises and equipment, net 3,567,779 3,445,945
Accrued interest receivable 436,054 326,457
Other assets 401,110 1,266,744
----------------- ----------------
Total assets $ 62,806,011 $ 50,923,330
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 14,267,225 $ 8,788,921
NOW accounts 3,923,587 4,367,842
Saving 10,247,518 10,273,682
Time, $100,000 and over 5,752,963 4,451,529
Other time 18,930,858 14,423,723
----------------- ----------------
Total deposits 53,122,151 42,305,697
Securities sold under repurchase agreements 2,094,669 1,433,357
Accrued interest and other liabilities 286,174 314,192
----------------- ----------------
Total liabilities 55,502,994 44,053,246
----------------- ----------------
STOCKHOLDERS' EQUITY:
Common stock, $10 par value, 10,000,000
shares authorized, 692,291and 660,405 shares issued,
at June 30, 1998 and 1997, respectively 6,922,910 6,604,050
Surplus 5,250
Retained earnings 659,770 559,506
Accumulated other comprehensive income:
Net unrealized holding loss, net of tax (5,641) (14,200)
Treasury stock, 37,500 shares at cost (279,272) (279,272)
----------------- ----------------
Total stockholders' equity 7,303,017 6,870,084
----------------- ----------------
Total liabilities and stockholders' equity $ 62,806,011 $ 50,923,330
================= ================
</TABLE>
See Unaudited Notes to Consolidated Financial Statements.
F-21
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, June 30,
1998 1997
------------------ -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Interest income:
Interest and fees on loans $ 1,584,455 $ 1,389,141
Interest on investment securities 386,803 299,348
Interest on Federal Funds sold 105,310 64,960
------------------ -------------------
Total interest income 2,076,568 1,753,449
------------------ -------------------
Interest expense:
Interest on deposits 843,006 676,562
Interest on securities sold under repurchase agreements 31,293 36,147
------------------ -------------------
Total interest expense 874,299 712,709
------------------ -------------------
Net interest income 1,202,269 1,040,740
Provision for loan losses 22,326 102,347
------------------ -------------------
Net interest income after provision for loan losses 1,179,943 938,393
------------------ -------------------
Other income:
Service charges on deposit accounts 150,081 150,732
Rental income 168,641 228,403
Gain on sales of investment securities 6,666
Gain on sales of premises and equipment 128,150
Other 29,145 23,929
------------------ -------------------
Total other income 354,533 531,214
------------------ -------------------
Other expenses:
Salaries and employee benefits 512,474 415,985
Occupancy expense 131,308 122,053
Furniture and equipment expenses 79,113 67,738
Rental expenses 73,117 120,506
Other operating expenses 332,476 288,296
------------------ -------------------
Total other expenses 1,128,488 1,014,578
------------------ -------------------
Income before income taxes 405,988 455,029
Income taxes 136,500 157,384
------------------ -------------------
NET INCOME $ 269,488 $ 297,645
================== ===================
Earnings per share $ 0.41 $ 0.46
================== ===================
Earnings per share assuming dilution $ 0.41 $ 0.46
================== ===================
</TABLE>
See Unaudited Notes to Consolidated Financial Statements.
F-22
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated Total
Other Stock- Compre-
Common Retained Comprehensive Treasury holders' hensive
Stock Surplus Earnings Income Stock Equity Income
------------- ------------- ------------- ------------- ------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 6,604,050 $ - $ 336,609 $ (12,610) $ (279,272) $ 6,648,777
Comprehensive income:
Net incomme 297,645 297,645 $ 297,645
Other comprehensive income
(loss):
Unrealized holding loss, net
income taxes (1,590) (1,590) (1,590)
---------
Total comprehensive income $ 296,055
==========
Cash dividends - $.12 per share (74,748) (74,748)
------------- ------------- ------------- ------------- ------------- ------------ -----------
Balance, June 30, 1997 $ 6,604,050 $ - $ 559,506 $ (14,200) $ (279,272) $ 6,870,084
============== =============== ============= ============ ============= ===========
Balance, January 1, 1998 $ 6,915,410 $ - $ 468,856 $ (802) $ (279,272) $ 7,104,192
Comprehensive income:
Net income 269,488 269,488 $ 269,488
----------
Other comprehensive income (loss):
Unrealized holding loss, net
of income taxes (746)
Reclassification adjustment
for gains included in net
income (4,093)
-----------
Total other comprehensive
income (loss) (4,839) (4,839) (4,839)
-----------
Total comprehensive income $ 264,649
===========
Issuance of 750 shares of
common stock
7,500 5,250 12,750
Cash dividends - $.12 per share (78,574) (78,574)
------------- --------------- ------------- ------------ ------------- -----------
Balance, June 30, 1998 $ 6,922,910 $ 5,250 $ 659,770 $ (5,641) $ (279,272) $7,303,017
============== =============== ============= ============ ============= ===========
</TABLE>
See Unaudited Notes to Consolidated Financial Statements.
F-23
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
------------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 269,488 $ 297,645
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sales of investment securities available-for-sale (6,666)
Premium amortization, net of discount accretion 11,842 15,625
Provision for loan losses 22,326 102,347
Depreciation and amortization on premises and equipment 130,601 112,610
Gain on sales of premises and equipment (123,740)
Amortization of deferred leasing commissions 10,453 12,902
Deferred income taxes 6,898 2,271
Increase in accrued interest receivable (48,555) (18,809)
Decrease (increase) in other assets (62,640) 95,715
Increase (decrease) in accrued interest and other (66,315) 43,260
liabilities
------------------- -----------------
Net cash provided by operating 267,432 539,826
activities
------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities held-to-maturity (3,751,836) (4,058,732)
Proceeds from maturities of investment 1,900,000 2,300,000
securities held-to-maturity
Principal collected on investment securities held-to-maturity 25,193
Purchases of investment securities available-for-sale (2,609,320)
Proceeds from maturities of investment
securities available-for-sale 300,000
Proceeds from sales of investment securities available-for-sale 819,016
Net (increase) decrease in loans (1,927,803) 131,278
Purchases of premises and equipment (279,867) (66,006)
------------------- -----------------
Net cash used in investing activities (5,524,617) (1,693,460)
------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 8,676,310 4,385,490
Net increase (decrease) in securities sold under repurchase
agreements 890,164 (931,876)
Issuance of common stock 12,750
Cash dividends paid (78,574) (74,748)
------------------- -----------------
Net cash provided by financing activities 9,500,650 3,378,866
------------------- -----------------
INCREASE IN CASH AND CASH EQUIVALENTS 4,243,465 2,225,232
CASH AND CASH EQUIVALENTS:
Beginning of period 4,244,698 4,943,989
------------------- -----------------
End of period $ 8,488,163 $ 7,169,221
=================== =================
</TABLE>
See Unaudited Notes to Consolidated Financial Statements.
F-24
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments (which include normal
recurring adjustments) necessary to present fairly the financial position
as of June 30, 1998 and 1997, and the results of operations and cash flows
for the six months ended June 30, 1998 and 1997. These unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes for the year ended December 31,
1997. The results of operations for the six months ended June 30, 1998, are
not necessarily indicative of the operating results which may be achieved
for the full fiscal year.
NOTE 2 - EARNINGS PER SHARE:
Earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding during the period. Diluted earnings
per share is computed as net income divided by the weighted average number
of outstanding common shares used to derive earnings per share, plus the
dilutive effect of common stock equivalents relating to outstanding stock
options, as determined under the treasury stock method. Options on 14,750
and 27,300 shares of common stock were not included in computing diluted
earnings per share for the six months ended June 30, 1998 and 1997,
respectively, because their effects were antidilutive.
The weighted average number of outstanding shares used in the computation
of earnings per share was 654,451 and 654,041 for the six months ended June
30, 1998 and 1997, respectively. The weighted average number of common
shares used in the computation of diluted earnings per share was 657,510
and 654,041 for the six months ended June 30, 1998 and1997, respectively.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" was issued in June 1997. This statement is effective
for fiscal years beginning after December 15, 1997 and reclassification of
financial statements for earlier periods provided for comparative purposes
is required. This statement establishes standards for reporting and display
of comprehensive income and its components in the financial statements. The
objective of the statement is to report a measure of all changes in equity
of an enterprise that results from transactions and other economic events
of the period other than transactions with owners. The Company adopted this
statement effective January 1, 1998, and has included its comprehensive
income in the statement of changes in stockholders' equity.
The Company adopted Statement of Financial Accounting Standards No. 131 and
132, effective January 1, 1998. The adoption of these statements did not
have a material impact on the unaudited consolidated financial statements.
F-25
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1997
--------- ---------
<S> <C> <C>
Cash Paid For:
Interest on deposits $803,892 $668,764
Interest on securities sold
under repurchase agreements 31,293 36,147
Income taxes 199,594 174,372
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
====================================================== ====================================================
No person has been authorized to give any information
or to make any representation other than those
contained in this Prospectus and, if given or made,
such information or representations must not be relied
upon as having been authorized by the Company. Neither
the delivery of this Prospectus nor any sale made 100,000 Shares
hereunder shall, under any circumstances, create any
implication that there has been no change in the
affairs of the Company or the Bank since the date of
this Prospectus. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy COMMUNITY BANKSHARES
any securities offered hereby in any jurisdiction in OF MARYLAND, INC.
which such offer or solicitation is not authorized or
in which the person making such offer or solicitation
is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation.
-------------------------------
TABLE OF CONTENTS
COMMON STOCK
Available Information................................
Prospectus Summary...................................
Selected Consolidated Financial
and Other Data.....................................
Risk Factors......................................... ---------------
The Offering.........................................
Use of Proceeds...................................... PROSPECTUS
Capitalization.......................................
Regulatory Capital Requirements...................... ---------------
Market for Common Stock
and Dividends......................................
Management's Discussion and
Analysis of Financial Condition
and Results of Operations..........................
Business............................................. OFFERING
Supervision and Regulation...........................
Management...........................................
Security Ownership of Certain
Beneficial Owners..................................
Restrictions on Acquisition of the Company........... __________, 1998
Description of Common Stock..........................
Legal Opinion........................................
Experts..............................................
Index to Consolidated
Financial Statements...............................
-------------------------------
UNTIL ______________________ (FORTY DAYS AFTER THE
DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR
NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
====================================================== ====================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Bylaws of the Company, as amended, provide that the Company may
indemnify officers, directors, employees and agents of the Company to the
fullest extent permitted by the Maryland law (the "Maryland law"). Pursuant to
the Maryland law, the Company generally has the power to indemnify its present
and former directors, officers, agents and employees, or persons serving as such
in another entity at the Company's request, against expenses (including
attorneys' fees) and liabilities incurred by them in any action, suit, or
proceeding to which they are, or are threatened to be made, a party by reason of
their serving in such positions, so long as they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the Company, or in the case of a criminal proceeding, had no reasonable cause to
believe their conduct was unlawful. In respect of suits by or in the right of
the Company, the indemnification is generally limited to expenses (including
attorneys' fees) and is not available in respect of any claim where such person
is adjudged liable to the Company, unless the court determines that
indemnification is appropriate. To the extent such person is successful in the
defense of any suit, action or proceeding, indemnification against expenses
(including attorneys' fees) is mandatory. The Company has the power to purchase
and maintain insurance for such persons and indemnification. The indemnification
provided by the Maryland law is not exclusive of other rights to indemnification
which any person may otherwise be entitled under any bylaw, agreement,
shareholder or disinterested director vote, or otherwise.
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses payable by the Company in connection with the
Offering described in this Registration Statement (other than underwriting
discounts and commissions) are as follows:
SEC registration fee $ 517
Blue Sky qualification fees and expenses 2,500
Printing, engraving & Edgar expenses 7,500
Legal fees and expenses 25,000
Accounting fees and expenses 10,000
Other 4,483
-----------
Total $ 50,000
===========
Item 26. Recent Sales of Unregistered Securities.
None.
Item 27. Exhibits.
Number Description
------ -----------
3(a) Articles of Incorporation of the Company, as amended (1)
3(b) Bylaws of the Company (1)
5(a) Opinion of Kennedy, Baris & Lundy, L.L.P. (1)
21 Subsidiaries of the Registrant (1)
II-1
<PAGE>
Number Description
------ -----------
23(a) Consent of Stoy, Malone & Company, P.C., Independent Auditors
23(b) Consent of Kennedy, Baris & Lundy, L.L.P.,included in Exhibit 5 (1)
99(a) Form of Order Form for Offering (1)
- -----------------
(1) Previously filed.
Item 28. Undertakings. The Registrant hereby undertakes that it will:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by section 10(a)(3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together represent a
fundamental change in the information in the registration statement; and
notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) (ss. 230.424(b) of this
chapter) if, in the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and (iii) include any additional or changed material information on the plan of
distribution.
(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-2
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bowie, State of Maryland on October 1, 1998.
COMMUNITY BANKSHARES OF MARYLAND, INC.
By: /s/ Thomas G. Moore
----------------------------------------
Thomas G. Moore, President
and Chief Operating Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ Lance W. Billingsley Director October 1, 1998
- -------------------------------
Lance W. Billingsley
/s/ Vaseleos Colevas Director October 1, 1998
- -------------------------------
Vaseleos Colevas
/s/ Hugh O. Lowe Director October 1, 1998
- -------------------------------
Hugh O. Lowe
/s/ William V. Meyers Chairman of the Board October 1, 1998
- ------------------------------- of Directors and Chief
William V. Meyers Executive Officer
/s/ Thomas G. Moore President and Chief October 1, 1998
- ------------------------------- Operating Officer
Thomas G. Moore
/s/ Andrew O. Mothershead Director October 1, 1998
- -------------------------------
Andrew O. Mothershead
/s/ Glenn A. Turner Director October 1, 1998
- -------------------------------
Glenn A. Turner
/s/ Lucie M. Baldi Director October 1, 1998
- -------------------------------
Lucie M. Baldi
<PAGE>
INDEX TO EXHIBITS
Number Description
------ -----------
3(a) Articles of Incorporation of the Company, as amended (1)
3(b) Bylaws of the Company (1)
5(a) Opinion of Kennedy, Baris & Lundy, L.L.P. (1)
21 Subsidiaries of the Registrant (1)
23(a) Consent of Stoy, Malone & Company, P.C., Independent Auditors
23(b) Consent of Kennedy, Baris & Lundy, L.L.P., included in Exhibit 5 (1)
99(a) Form of Order Form for Offering (1)
- -----------------
(1) Previously filed.
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 1 to Registration
Statement No. 333-62061 of Community Bankshares of Maryland, Inc. on Form SB-2
of our report dated January 16, 1998 (except for Note 19, as to which the date
is May 12, 1998), appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
STOY, MALONE & COMPANY, P.C.
Bethesda, Maryland
October 2, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
SB-2 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001067599
<NAME> COMMUNITY BANKSHARES OF MARYLAND, INC.
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 2,950 3,846
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 1,295 4,642
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 3,062 5,141
<INVESTMENTS-CARRYING> 9,974 11,199
<INVESTMENTS-MARKET> 10,016 11,243
<LOANS> 31,667 33,573
<ALLOWANCE> 330 341
<TOTAL-ASSETS> 53,100 62,806
<DEPOSITS> 44,446 53,122
<SHORT-TERM> 1,205 2,095
<LIABILITIES-OTHER> 345 286
<LONG-TERM> 0 0
6,915 6,922
0 0
<COMMON> 0 0
<OTHER-SE> 189 380
<TOTAL-LIABILITIES-AND-EQUITY> 53,100 62,806
<INTEREST-LOAN> 2,864 1,584
<INTEREST-INVEST> 663 387
<INTEREST-OTHER> 143 105
<INTEREST-TOTAL> 3,669 2,076
<INTEREST-DEPOSIT> 1,415 843
<INTEREST-EXPENSE> 1,485 874
<INTEREST-INCOME-NET> 2,184 1,202
<LOAN-LOSSES> 140 22
<SECURITIES-GAINS> 0 7
<EXPENSE-OTHER> 2,103 1,128
<INCOME-PRETAX> 897 406
<INCOME-PRE-EXTRAORDINARY> 897 406
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 595 269
<EPS-PRIMARY> 0.91 0.41
<EPS-DILUTED> 0.91 0.41
<YIELD-ACTUAL> 5.17 4.94
<LOANS-NON> 84 52
<LOANS-PAST> 295 330
<LOANS-TROUBLED> 109 12
<LOANS-PROBLEM> 4 1
<ALLOWANCE-OPEN> 330 341
<CHARGE-OFFS> 330 341
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 330 341
<ALLOWANCE-DOMESTIC> 330 341
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 330 341
</TABLE>
EXHIBIT 99
Form of Order Form for Offering
<PAGE>
COMMUNITY BANKSHARES OF MARYLAND, INC.
Subscription Agreement for Offering of Shares of Common Stock
THE TERMS AND CONDITIONS OF THE OFFERING ARE SET FORTH IN THE ACCOMPANYING
PROSPECTUS. PERSONS WHO WISH TO PURCHASE SHARES OF COMMON STOCK IN THE OFFERING
ARE URGED TO CAREFULLY READ THE PROSPECTUS IN ITS ENTIRETY PRIOR TO SUBMITTING
THIS SUBSCRIPTION AGREEMENT. ALL SUBSCRIPTIONS, ONCE SUBMITTED, ARE IRREVOCABLE
BY THE SUBSCRIBER.
1. Subscription for Shares of Common Stock. The undersigned hereby irrevocably
subscribes for _______________________________ shares of Common Stock of
Community Bankshares of Maryland, Inc. at the purchase price of $17.50 per
Share.1
2. Purchase Price and Manner of Payment. The undersigned submits herewith, by
means of a check, bank draft or money order in the amount of
$_______________________ ($17.50 multiplied by the total number of Shares
subscribed for in 1 above), payable to "Community Bankshares of Maryland Escrow
Account"
3. (a) Registration Instructions. This Part must be completed with respect to
all Shares purchased. If Shares subscribed for are to be registered in more than
one manner, complete as many Subscription Agreements as there are registrations,
or attach separate sheets providing all of the information required below with
respect to each registration, and indicating number of Shares subject to each
registration.
- --------------------------------------------------------------------------------
(Names(s) in which securities are to be registered)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Address, including Street, City, County, State and ZIP Code)
Taxpayer identification or Social Security Number: ___________________
Manner in which securities are to be owned:
[ ] Individual [ ] Tenants in Common [ ] Joint Tenants
[ ] Tenants by the Entirety (Husband and Wife) [ ] Uniform Transfer to Minors
[ ] Other (for example, corporation, trust or estate. If shares are purchased
for a trust, the date of the trust agreements and trust title must be
included).
- ----------
1 Subject to a minimum subscription of 100 Shares and a maximum
subscription of 1,000 Shares. Acceptance of all or part of the subscriptions
subject to the sole discretion of the Company.
<PAGE>
(b) Special Delivery Instructions: If certificate(s) representing the
Shares subscribed for is to be delivered to an address other than as indicated
on the face of this Agreement.
- --------------------------------------------------------------------------------
(Name)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Address, including Street, City, County, State and ZIP Code)
4. Deadline. This Subscription Agreement and payment in full of the purchase
price must be actually received by John Kovacevich, Subscription Agent,
Community Bank of Maryland, 16410 Heritage Boulevard, Bowie, Maryland 20716, NO
LATER THAN 5:00 P.M., EASTERN TIME, ON NOVEMBER 30, 1998, (the "Expiration
Time") subject to extension or earlier termination as set forth in the
Prospectus.
Name of Subscriber:
- --------------------------------------------------------------------------------
SIGNATURE:
- --------------------------------------------------------------------------------
(Signature(s) of subscriber(s) exactly as name(s) appear above)
Dated: ___________________, 1998
If signature is by trustee(s), executor(s), administrator(s), guardian(s),
attorney(s)-in-fact, agent(s), officer(s) of a corporation or another acting in
a fiduciary or representative capacity, please provide the following information
as to such person.
Name (please print): ___________________________________________________________
Capacity (Full title): _________________________________________________________
Address (including ZIP Code): __________________________________________________
Business Telephone Number including area code): ________________________________
Taxpayer identification or Social Security Number: _____________________________
IN DETERMINING WHETHER TO ACCEPT ANY SUBSCRIPTION, IN WHOLE OR IN PART, THE
COMPANY MAY, IN ITS SOLE DISCRETION, TAKE INTO ACCOUNT ANY FACTOR NOT PROHIBITED
BY LAW INCLUDING THE ORDER IN WHICH SUBSCRIPTIONS ARE RECEIVED, A SUBSCRIBER'S
POTENTIAL TO DO BUSINESS WITH, OR TO DIRECT CUSTOMERS TO, THE BANK AND THE
COMPANY'S DESIRE TO HAVE A BROAD DISTRIBUTION OF STOCK OWNERSHIP, AS WELL AS
LEGAL OR REGULATORY RESTRICTIONS.
