SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
PATAPSCO VALLEY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1996620
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8593 Baltimore National Pike, Ellicott City, Maryland 21043
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code 410-465-0900
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
General
Patapsco Valley Bancshares, Inc. (the "Company"), a Maryland
corporation and a registered bank holding company under the Federal Bank Holding
Company Act of 1956, as amended, was incorporated on August 22, 1996 to acquire
all of the outstanding shares of common stock of Commercial and Farmers Bank
(the "Bank"). The Company engages in its business through the Bank, a Maryland
state-chartered bank, the Bank's subsidiaries, as well as through Central
Maryland Service Corporation, a Maryland corporation and data processing
company. The Company has issued and outstanding 676,370 shares of common stock,
par value $.01 per share ("Shares"), held by 418 holders of record on June 30,
1998. The Bank was chartered in November, 1934, and is engaged in a general
commercial and retail banking business.
The Bank has five full service branches located in the Maryland
communities of Historic Ellicott City, Catonsville, Dorsey Search, West
Friendship and Hickory Ridge, in addition to the main office branch located in
Ellicott City, Maryland. The Bank has two additional branches under construction
in the Elkridge and Long Reach/Gateway communities. The executive offices of the
Company and the main office of the Bank are located at 8593 Baltimore National
Pike, Ellicott City, Maryland 21043.
The Bank
The Bank's general market area consists principally of Howard County,
which is located between the cities of Baltimore and Washington, D.C.
Geographically, all but one of the Bank's six branch offices are located in
Howard County. The Bank has one office in Catonsville, which is located in
Baltimore County, Maryland.
The Bank attracts deposits and generates loan activity through its
branch network. This year, the Bank expects to open a 3,000 square foot
freestanding branch office with three drive-thru lanes and two ATMs at Columbia
Crossing, on Route 175 and Snowden River Parkway in Columbia, Maryland, serving
the Long Reach/Gateway communities. The Bank also will be opening a 2,600 square
foot freestanding branch with three drive-thru lanes and two ATMs at the
intersection of Route 1 and Montgomery Road in Elkridge, Maryland. These
offices, along with the existing branches, will provide convenience and service
to the various communities that the Bank serves.
The Bank's Howard County market area is growing and expanding
(population growth is currently 12.91%) and contains numerous banks and other
financial institutions. The Bank experiences substantial competition in
attracting and retaining deposits and making loans. A number of the Bank's
customers both live and work in the Baltimore/Washington corridor. The
marketplace is sophisticated and demanding.
1
<PAGE>
Bank Deposits and Lending Activities
As of June 30, 1998, the Bank has deposits of $123.2 million, and
approximately 10,428 deposit customers. No material portion of the Bank's
deposits has been obtained from an individual or a few individuals (including
federal, state and local governments and agencies), the loss of any one or more
of which would have a materially adverse effect on the Bank.
As of June 30, 1998, the Bank had approximately $119.8 million in loans,
representing 79.6% of its total assets of $150.5 million. No material portion of
the Bank's loans is concentrated within a single industry or group of related
industries. The Bank is not dependant to any material degree upon any single
borrower or a few principal borrowers. The loss of any individual borrower or of
a few principal borrowers would not have a material adverse effect on the
operations or earnings of the Bank.
Banking Products and Services
The Bank has been doing business in Maryland since 1934 and is engaged
in both the commercial and consumer banking business. The Bank services its
customers through a branch network, including the main office. The Bank provides
a wide range of personal banking services designed to meet the needs of local
consumers. Among the services provided are checking accounts, savings and time
accounts, safe deposit boxes, IRA, and minor and holiday club accounts. It also
offers relationship savings accounts, as well as money market accounts. The Bank
offers Advantage checking, Value checking and no-fee checking as a service for
those requiring less activity at a more modest cost. The Bank continues its
community affiliations by offering Collegiate checking for customers in their
secondary education and Prime Time checking for seniors.
The Bank also grants available credit for installment, unsecured and
secured personal loans, residential mortgages and home equity loans, as well as
automobile and other consumer financing.
As a convenience to its customers, the Bank offers at each branch
location Saturday banking hours, drive-thru teller windows, Just Press One
access telephone banking service and 24-hour automated teller machines.
The Bank also is engaged in financing commerce and industry by
providing credit and deposit services for small to medium size businesses and
the agricultural community in the Bank's market area. The Bank offers many forms
of commercial lending, including lines of credit, revolving credit, term loans,
accounts receivable financing, commercial construction loans, commercial real
estate mortgage lending, as well as many Small Business Administration
guaranteed loans. The Bank offers a Zero Balance Account, as well as sweep
accounts, in order for companies to better utilize their investible cash; in
addition, commercial depositors may take advantage of many different services
and have the expense included in their monthly analysis. The Bank provides small
ticket leasing opportunities for its customers through a strategic alliance with
a local equipment leasing company.
2
<PAGE>
Additional types of real estate loans, credit card and related services
are also offered through the Bank and its subsidiaries. The Bank does not offer
trust services and does not engage in municipal trading services.
Consumer and non-mortgage loans entail greater risk than do residential
mortgage loans, particularly in the case of loans that are unsecured or secured
by rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans.
Commercial loans and loans secured by commercial and multi-family real
estate properties are generally larger and involve greater degree of credit risk
than one- to four-family residential mortgage loans. Because payments on these
loans are often dependent on the successful operation of the business or
management of the property, repayment of such loans may be subject to adverse
conditions in the economy or real estate markets. It has been the Company's
practice to underwrite such loans based on its analysis of the amount of cash
flow generated by the business and the resulting ability of the borrower to meet
its payment obligations. In addition, the Company in general seeks to obtain a
personal guarantee of the loan by the owner of the business and under certain
circumstances, seeks additional collateral.
Construction loans are generally considered to involve a higher degree
of credit risk than residential mortgage loans. Risk of loss on a construction
loan is dependent largely upon the accuracy of the initial estimate of the
security property's value upon completion of construction as compared to the
estimated costs of construction, including interest. Also the Company assumes
certain risks associated with the borrowers' ability to complete construction in
a timely and workmanlike manner. If the estimate of value proves to be
inaccurate, or if construction is not performed timely or accurately, the
Company may be confronted with a project which, when completed, has a value
insufficient to assure full repayment or to advance funds beyond the amount
originally committed to permit completion of the project.
The Bank provides a broad range of consumer and commercial banking
products and services to individuals, businesses, professionals and governments.
Bank Subsidiaries
The Company wholly owns three subsidiaries: Founders Mortgage Company, Inc.
("Founders"), a Maryland corporation formed in 1997; C&F Insurance Agency, Inc.,
a Maryland corporation formed in 1992; and Rogers Avenue Realty, Inc., a
Maryland corporation formed in 1993. Founders contributed 0.97% and the other
two subsidiaries contributed 0.00% to the Company's total fiscal 1997
consolidated revenues.
The Company formed Founders, a mortgage banking company, as a
wholly-owned subsidiary of the Bank. Founders is in the business of originating
residential first mortgage loans and construction loans in Howard and
surrounding counties, as well as in other states, including Delaware,
Pennsylvania, Virginia and West Virginia, and selling the mortgage and
construction loans to unaffiliated financial institutions and other mortgage
purchasers. Founders currently has Maryland offices in Columbia, Bel Air, North
East and Frederick. Outstanding product offerings are an important factor in
continued expansion of Founders. All of Founders' representatives are equipped
with laptop computers so as to accommodate customer needs in any location
at any time. Direct underwriting also gives the customers answers quickly.
Founders' executive office is located at 8818 Centre Park Drive, Suite 100,
Columbia, Maryland 21045.
C&F Insurance Agency, Inc. is a Maryland insurance agency. C&F
Insurance Agency, Inc.'s address is P.O. Box 347, West Friendship, Maryland
21794. Currently, C&F Insurance Agency is not actively engaging in insurance
business. Rogers Avenue Realty, Inc., holds properties foreclosed upon by the
Bank, and is located at 8593 Baltimore National Pike, Ellicott City, Maryland
21043.
Central Maryland Service Corporation
Central Maryland Service Corporation ("CMSC") became a wholly-owned
subsidiary of the Company in June, 1997. Previously, the Bank was a stockholder
with two other community banks. CMSC provides account processing, item
processing, check imaging and ATM processing services to the Bank. CMSC also
just began providing loan portfolio accounting services for a financial
institution in Pennsylvania. The goal of CMSC is to market its services to other
clients in Maryland and adjoining states. CMSC's executive office is located at
3290 Pine Orchard Lane, Ellicott City, Maryland 21042. For the six months ending
June 30, 1998, CMSC contributed less than one percent to the total consolidated
revenues for the Company.
Environmental Liabilities
Management of the Company is not aware of any environmental
liabilities which would have a material adverse effect on the operations or
earnings of the Company.
Seasonal Aspects
Management does not believe that the deposits or the business of the
Bank or its subsidiaries in general are seasonal in nature. The deposits may,
however, vary with local and
3
<PAGE>
national economic conditions but should not have a material effect on planning
and policy making.
Employees
As of June 30, 1998, the Company had 2 full-time employees. As of that
date, the Bank had 102 employees, Founders had 38 employees, and CMSC had 6
employees. A total of 148 persons work for the Company and its direct and
indirect subsidiaries.
Competition
The Company and the Bank operate in a competitive environment,
competing for deposits and loans with commercial banks, thrifts and other
financial entities. Principal competitors include other community commercial
banks and larger institutions with branches in the Bank's market area. Numerous
mergers and consolidations involving banks in the Bank's market area have
occurred recently, requiring the Bank to compete with banks with greater
resources.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries. The Bank also competes
with money market mutual funds for deposits. Many of the financial institutions
operating in the Bank's market area offer services such as trust, investment and
international banking, which the Bank does not offer, and have greater financial
resources or have substantially higher lending limits than does the Bank.
To compete with other financial services providers, the Bank
principally relies upon local promotional activities, personal relationships
established by officers, directors and employees with its customers, and
specialized services tailored to meet its customers' needs.
The Company believes that many individuals and businesses in its market
area feel as though they have been disenfranchised by the large out-of-state
banking institutions which have acquired local banks. Management believes that
the Bank has an opportunity to establish business ties with customers who have
been displaced by the consolidations and who are anxious to forge banking
relationships with locally owned and managed institutions.
The Bank offers many personalized services and attracts customers by
being responsive and sensitive to the needs of the community. The Bank relies
not only on the goodwill and referrals of satisfied customers, as well as
traditional media advertising to attract new customers, but also on individuals
who develop new relationships to build the customer base of the Bank. To enhance
the Bank's image in the community, the Bank supports and participates in many
local
4
<PAGE>
events. Employees, officers and directors represent the Bank on many boards and
local civic and charitable organizations.
Investment Activities
The Bank maintains a portfolio of investment securities to provide
liquidity and income. The current portfolio amounts to about 9.2% of the total
assets and is invested primarily in U.S. Treasury, U.S. Government Agency, state
and municipal bonds, as well as several structured notes. These structured notes
include step-up bonds, dual index bonds and inverse floaters. The step-up bonds
have already stepped-up and are now considered fixed-coupon bonds. Management
currently does not plan to make additional investments in structured notes.
A key objective of the investment portfolio is to provide a balance in
the Bank's asset mix of loans and investments consistent with its liability
structure, and to assist in management of interest rate risk. The investments
augment the Bank's capital position in the risk-based capital formula, providing
the necessary liquidity to meet fluctuations in credit demands of the community
and fluctuations in deposit levels. In addition, the portfolio provides
collateral for pledging against public funds and a reasonable allowance for
control of tax liabilities. Finally, the investment portfolio is designed to
provide income for the Bank. In view of the above objectives, the portfolio is
treated conservatively by management, and only securities that meet conservative
investment criteria are purchased.
Supervision and Regulation
General. The Company and the Bank are extensively regulated under
federal and state law. Generally, these laws and regulations are intended to
protect depositors, not stockholders. The following is a summary description of
certain provisions of certain laws which affect the regulation of bank holding
companies and banks. The discussion is qualified in its entirety by reference to
applicable laws and regulations. Changes in such laws and regulations may have a
material effect on the business and prospects of the Company and the Bank.
Federal Bank Holding Company Regulation and Structure. The Company is a
bank holding company within the meaning of the Bank Holding Company Act of 1956,
as amended, and, as such, it is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve (the "FRB"). The
Company is required to file annual and quarterly reports with the FRB and to
provide the FRB with such additional information as the FRB may require. The FRB
may conduct examinations of the Company and its subsidiaries.
With certain limited exceptions, the Company is required to obtain
prior approval from the FRB before acquiring direct or indirect ownership or
control of more than 5% of any voting securities or substantially all of the
assets of a bank or bank holding company, or before merging or consolidating
with another bank holding company. Additionally, with certain exceptions, any
person proposing to acquire control through direct or indirect ownership of 25%
or more of any
5
<PAGE>
voting securities of the Company is required to give 60 days' written notice of
the acquisition to the FRB, which may prohibit the transaction, and to publish
notice to the public.
Generally, a bank holding company may not engage in any activities
other than banking, managing or controlling its bank and other authorized
subsidiaries, and providing services to these subsidiaries. With prior approval
of the FRB, the Company may acquire more than 5% of the assets or outstanding
shares of a company engaging in non-bank activities determined by the FRB to be
closely related to the business of banking, managing or controlling banks. The
FRB permits expedited approval or notice procedures for expansion into approved
categories of non-bank activities for certain well-capitalized bank holding
companies.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions on extensions of credit to the bank
holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. For example, the Bank may not generally require a customer to
obtain other services from it or the Company, and may not require that a
customer promise not to obtain other services from a competitor as a condition
to and extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source
of financial strength to its subsidiary banks and to make capital injections
into a troubled subsidiary bank, and the FRB may charge the bank holding company
with engaging in unsafe and unsound practices for failure to commit resources to
a subsidiary bank when required. A required capital injection may be called for
at a time when the holding company does not have the resources to provide it. In
addition, depository institutions insured by the FDIC can be held liable for any
losses incurred by, or reasonably anticipated to be incurred by, the FDIC in
connection with the default of, or assistance provided to, a commonly controlled
FDIC-insured depository institution. Accordingly, in the event that any insured
subsidiary of the Company causes a loss to the FDIC, other insured subsidiaries
of the Company could be required to compensate the FDIC by reimbursing it for
the estimated amount of such loss. Such cross-guaranty liabilities generally are
superior in priority to the obligations of the depository institution to its
stockholders due solely to their status as stockholders and obligations to other
affiliates.
State Bank Holding Company Regulation. As a Maryland bank holding
company, the Company is subject to various restrictions on its activities as set
forth in Maryland law, in addition to those federal law restrictions that were
already described. Under Maryland law, a bank holding company that desires to
acquire a bank or bank holding company that has its principal place of business
in Maryland must obtain approval from the Maryland Commissioner of Financial
Regulation (the "Commissioner"). Also, a bank holding company and its Maryland
state-chartered bank or trust company cannot directly
6
<PAGE>
or indirectly acquire banking or non-banking subsidiaries or affiliates until
the bank or trust company receives the approval of the Commissioner.
Federal and State Bank Regulation. The Company's banking subsidiary is
a Maryland state-chartered bank, with all the powers of a commercial bank,
regulated and examined by the Commissioner and the FRB. The Commissioner and the
FRB have extensive enforcement authority over the institutions they regulate to
prohibit or correct activities which violate law, regulations or written
agreements with the regulator, or which are deemed to constitute unsafe or
unsound practices. Enforcement actions may include the appointment of a
conservator or receiver, the issuance of a cease and desist order, the
termination of deposit insurance, the imposition of civil money penalties on the
institution, its directors, officers, employees and institution-affiliated
parties, the issuance of directives to increase capital, the issuance of formal
and informal agreements, the removal of, or restrictions on directors, officers,
employees and institution-affiliated parties, and the enforcement of any such
mechanisms through restraining orders or other court actions.
In its lending activities, the maximum legal rate of interest, fees and
charges which a financial institution may charge on a particular loan depends on
a variety of factors such as the type of borrower, the purpose of the loan, the
amount of the loan and the date the loan is made. Other laws tie the maximum
amount which may be loaned to any one customer and its related interests to
capital levels. The Bank is also subject to certain restrictions on extensions
of credit to executive officers, directors, principal stockholders or any
related interest of such persons which generally require that such credit
extensions be made on substantially the same terms as are available to third
persons dealing with the Bank and not involve more than the normal risk of
repayment.
The Community Reinvestment Act ("CRA") requires that, in connection
with the examination of financial institutions within their jurisdictions, the
FDIC evaluate the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered by all regulatory agencies in evaluating
mergers, acquisitions and applications to open a branch or facility. As of the
date of its most recent examination report, the Bank has a CRA rating of
"Satisfactory."
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the FDIC, have adopted standards
covering internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits. An institution which fails to meet those
standards may be required by the agency to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. The Company, on behalf of the Bank,
believes that
7
<PAGE>
it meets substantially all standards which have been adopted. FDICIA also
imposed new capital standards on insured depository institutions described under
the caption, "Capital Requirements."
Before establishing new branch offices, the Bank must meet certain
minimum capital stock and surplus requirements. With each new branch located
outside the municipal area of the Bank's principal banking office, these minimal
levels increase by $120,000 to $900,000, based on the population size of the
municipal area in which the branch will be located. Prior to establishment of
the branch, the Bank must obtain Commissioner and FDIC approval. If
establishment of the branch involves the purchase of a bank building or
furnishings, the total investment in bank buildings and furnishings cannot
exceed, with certain exceptions, 50% of the Bank's unimpaired capital and
surplus.
Deposit Insurance. As a FDIC insured institution, deposits of the Bank
are currently insured to a maximum of $100,000 per depositor through the Bank
Insurance Fund ("BIF"). The FDIC is required to establish the semi-annual
assessments for BIF-insured depository institutions at a rate determined to be
appropriate to maintain or increase the reserve ratio of the respective deposit
insurance funds at or above 1.25 percent of estimated insured deposits or at
such higher percentage that the FDIC determines to be justified for that year by
circumstances raising significant risk of substantial future losses to the fund.
The Bank currently pays a de minimus semi-annual assessment.
Limits on Dividends and Other Payments. The Company's current ability
to pay dividends is largely dependent upon the receipt of dividends from its
banking subsidiary, the Bank and, indirectly, through its subsidiaries. Both
federal and state laws impose restrictions on the ability of the Bank to pay
dividends. The FRB has issued a policy statement which provides that, as a
general matter, insured banks and bank holding companies may pay dividends only
out of prior operating earnings. For a Maryland state-chartered bank or trust
company, dividends may be paid out of undivided profits or, with the prior
approval of the Commissioner, from surplus in excess of 100% of required capital
stock. If, however, the surplus of a Maryland bank is less than 100% of its
required capital stock, cash dividends may not be paid in excess of 90% of net
earnings. In addition to these specific restrictions, bank regulatory agencies,
in general, also have the ability to prohibit proposed dividends by a financial
institution which would otherwise be permitted under applicable regulations if
the regulatory body determines that such distribution would constitute an unsafe
or unsound practice.
Capital Requirements. The FRB and FDIC have adopted certain risk-based
capital guidelines to assist in the assessment of the capital adequacy of a
banking organization's operations for both transactions reported as assets on
the balance sheet and transactions, such as letters of credit and recourse
arrangements, which are recorded as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as business loans.
8
<PAGE>
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. "Tier 1", or core capital,
includes common equity, perpetual preferred stock (excluding auction rate
issues) and minority interest in equity accounts of consolidated subsidiaries,
less goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes, among other things, limited-life preferred
stock, hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less required deductions. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant.
In August, 1995 and May, 1996, the federal banking agencies adopted
final regulations specifying that the agencies will include, in their
evaluations of a bank's capital adequacy, an assessment of the bank's interest
rate risk exposure. The standards for measuring the adequacy and effectiveness
of a banking organization's interest rate risk management include a measurement
of board of director and senior management oversight, and a determination of
whether a banking organization's procedures for comprehensive risk management
are appropriate to the circumstances of the specific banking organization. The
Bank has internal IRR models that are used to measure and monitor IRR.
Additionally, the regulatory agencies have been assessing IRR on an informal
basis for several years. For these reasons, the addition of IRR evaluation to
the agencies' capital guidelines does not result in significant changes in
capital requirements for the Bank.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under the caption, "Federal Deposit Insurance Corporation
Improvement Act of 1991" below, as applicable to undercapitalized institutions.
In addition, future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends to the Company.
Federal Deposit Insurance Corporation Improvement Act of 1991. In
December, 1991, Congress enacted the FDICIA, which substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
made significant revisions to several other federal banking statutes. FDICIA
provides for, among other things, (i) publicly available annual financial
condition and management reports for financial institutions, including audits by
independent accountants, (ii) the establishment of uniform accounting standards
by federal
9
<PAGE>
banking agencies, (iii) the establishment of a "prompt corrective action" system
of regulatory supervision and intervention, based on capitalization levels, with
more scrutiny and restrictions placed on depository institutions with lower
levels of capital, (iv) additional grounds for the appointment of a conservator
or receiver, and (v) restrictions or prohibitions on accepting brokered
deposits, except for institutions which significantly exceed minimum capital
requirements. FDICIA also provides for increased funding of the FDIC insurance
funds and the implementation of risk-based premiums, described further under
the caption "Deposit Insurance."
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." The Bank is currently classified as "well
capitalized." An institution may be deemed by the regulators to be in a
capitalization category that is lower than is indicated by its actual capital
position if, among other things, it receives an unsatisfactory examination
rating with respect to asset quality, management, earnings or liquidity.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a cash dividend) or paying any
management fees to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to growth limitations and are required to submit capital restoration
plans. If a depository institution fails to submit an acceptable plan, it is
treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of other
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and stop
accepting deposits from correspondent banks. Critically undercapitalized
institutions are subject to the appointment of a receiver or conservator,
generally within 90 days of the date such institution is determined to be
critically undercapitalized.
FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution. FDICIA also limits the circumstances under which the FDIC
is permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
Interstate Banking Legislation. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 was enacted into law on September 29, 1994. The
law eliminated, among other things, substantially all state law barriers to the
acquisition of banks by out-of-state bank holding companies, effective September
29, 1995. The law also permits interstate branching by banks effective as of
June 1, 1997, subject to the ability of states to opt-out completely or to set
10
<PAGE>
an earlier effective date. Maryland generally established an earlier effective
date of September 29, 1995. A supervisory pact signed by Maryland and states
that border Maryland established uniform rules for the supervision of
state-chartered banks and trust companies that operate branches across state
lines. Under the agreement, home-state regulators have primary responsibility
for banks chartered in the home state, including those that branch into other
jurisdictions, although such branches may be subject to the other jurisdiction's
regulatory authorities in certain circumstances. The effect of the new law and
the supervisory compact increases competition within the markets in which the
Company now operates because it permits out-of-state banks to branch or operate
in the Bank's market area.
Monetary Policy. The earnings of a bank holding company are affected by
the policies of regulatory authorities, including the FRB, in connection with
the FRB's regulation of the money supply. Various methods employed by the FRB
are open market operations in United States Government securities, changes in
the discount rate on member bank borrowings and changes in reserve requirements
against member bank deposits. These methods are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. The money policies of the FRB have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
The following discussion is qualified in its entirety by the more
detailed information and the financial statements and notes thereto appearing
elsewhere in this Form 10-SB. In addition to the historical information
contained herein, the discussion in this Form 10-SB contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions,
including, among other statements, statements involving net interest income,
Bank branching, costs for Bank expansion, liquidity, loan loss allowances, loan
collateral values, collectability of loans, and the Year 2000 issue. The
cautionary statements made in this Form 10-SB should be read as being applicable
to all related forward-looking statements wherever they appear in this Form
10-SB. The Company's actual results could differ materially from those discussed
herein.
Summary
The Company had year-to-date net income through second quarter 1998 of
$741,682, or $1.10 a share, a 27.83% decrease over 1997, in which earnings were
$1,027,750, or $1.55 per share. Net income for 1997 was $1,547,610, or $2.33 per
share, compared to $1,502,330, or $2.31 per share, in 1996, a 3.01% increase.
With the average net loan growth of 31.10%, the interest revenue from loans,
including fees, has increased 21.8% for the six months ended June 30, 1997 to
1998. In addition the Company's non-interest income increased by 258.93% or
$1,106,912. This increase was primarily attributed to Founders, but service
charges, fees and
11
<PAGE>
commissions also increased by 22.0 percent. These increases in revenue were
offset by a 69.6% increase in Total Other Expenses, which was caused by the new
Founders operation and the branching activities. This higher level of Total
Other Expenses is expected to be maintained due to those investments and may
continue to grow as additional expansions occur.
Net Interest Income
Net Interest Income increased 14.88% in 1997 compared to 1996, and this
increase in Net Interest Income continued for the first six months of 1998
compared to the first six months of 1997 at 6.34 percent. Loans, less allowance
of credit losses have increased by 4.35% for the first six months of 1998
compared to the first six months of 1997, $97,421,156 from $93,358,005. In
addition, Loans Held for Sale have increased by $16,816,114 or 303.5% from
December 31,1997 to June 30, 1998, which is attributed to the new Founders
operation. This growth in net loans has resulted in increases in net interest
income, which is illustrated in the volume growth on the Interest Rate and
Volume Variance Analysis.
Net interest margin is calculated as tax equivalent net interest income
divided by average earning assets and represents the Company's net yield on its
earning assets. For the first six months ended June 30, 1998, the net interest
margin had decreased to 5.90% from the 6.26% net interest margin for 1997. As
shown in the Interest Rate and Volume Analysis in 1997 compared to 1996, the
Company realized an increase in net interest income from both rates and volume.
Interest earned increased $84,624 due to rates and $756,105 due to volumes,
while interest expense decreased $138,810 due to rates and $10,469 due to
volumes in the 1997 compared to 1996 analysis. This has changed in the 6/30/98
compared to 6/30/97 analysis, where the Company saw interest expense increase by
$511,796 because of both rates and volume and interest earned increase by
$580,871, but the increase because of volume was offset by a decrease because of
rates. With the current competitive environment, management believes that this
trend will most likely continue, where interest earned will increase due to
volume offset by a decrease due to rates, but management can provide no
assurances.
Non-Interest Income
Total other operating revenue has increased by 258.9%, from $427,493
for the six months ending June 30, 1997 to $1,534,405 for the six months ending
June 30, 1998. This increase can be attributed to a $1,012,866 in Mortgage
banking fees and gains, which has been generated at the Founders operation. The
Company has also seen an increase of 22.0% in service charges, fees and
commissions in the comparison of results for the six months ended June 30, 1998
and June 30, 1997. This follows the 21.1% increase realized between years ended
December 31, 1997 and December 31, 1996. These increases follow an increased
level of fees collected for checks drawn against insufficient funds, because of
increases in deposit accounts and due to the introduction of new checking
account programs that have monthly fees. With the continued expansion of the
Bank's branch network and the continued expansion of Founders, management
expects to see increased levels of Non-interest Income.
Interest Rate Sensitivity
It is the Company's policy to maintain total rate sensitive assets
(RSA) divided by total rate sensitive liabilities (RSL) between 90% and 110% in
the any twelve-month period. As of June 30, 1998, RSA/RSL was 99.78%. Generally,
during periods of increasing interest rates the Company's RSL would reprice
faster then the RSA causing a decline in the interest rate spread and margin in
the short term. In the long term the Company might experience an increase in
interest rate spread and margin, but such an increase might significantly reduce
the demand for loans in the Company's market, thus diminishing the prospects for
improved earnings. During periods of decreasing rates the Company could
experience a short term increase in interest margin but may have difficulty in
retaining deposits without having to pay above market rates. If the Company paid
above market rates to retain deposits then, there could be a reduction in the
margins as RSA repriced. This reduction in rate, however, should stimulate the
demand for loans in the market thus helping the net margins.
12
<PAGE>
Non-Interest Expense
Non-Interest expense has increased 69.6% to $4,362,901 for the six
months ending June 30, 1998, from $2,571,959 for the six months ending June 30,
1997. This increase can primarily be attributed to the expansion activities of
the Company. In June, the Company acquired all the outstanding shares of CMSC;
in August of 1997 the Bank opened the Hickory Ridge branch; in October of 1997
the Company formed Founders; and the Bank, absent unforeseen circumstances, is
planning to open two new Howard County branches in 1998, one at Columbia
Crossing and one in Elkridge.
CMSC was originally formed by the Bank and two other banks to provide
data processing services on a cooperative basis to the owner-banks. Its
acquisition by the Company is accounted for as a purchase. The Bank's payments
to CMSC during the six months ended June 30, 1997 are reported as data
processing expense (a component of other operating expense). Conversely, the
Bank's payment to CMSC for the six months ended June 30, 1998, is eliminated in
consolidation, and the operating expenses of CMSC are included in the
consolidated balances for the Company.
A significant portion of the increase in Non-interest Expense is
related to the $1,193,146 or 87.7% increase in salaries and benefits expense
from the six months ended June 30, 1998 compared to June 30, 1997. The Company
has added a significant number of employees to the payroll as a result of the
expansion in the Bank and Founders. The Company had 82 full time equivalent
(FTE) positions on June 30, 1997, 100 FTE positions on December 31, 1997, and
had 140 FTE positions on June 30, 1998. Salaries and benefits also include cost
of living increases and benefit cost increases. Management expects employee
expenses to continue to increase as the reflection of the full year salaries for
the employees added in 1997 and as the Company continues to open new branches.
As the Company continues to expand its facilities, there have been
increases in occupancy, furniture and equipment expense. New facilities,
improvements to existing facilities and equipment upgrades resulted in the
increase from $460,053 for the six months ended June 30, 1997 to $802,733 for
the six months ended June 30, 1998. Absent unforeseen circumstances, these
increases are expected to continue as new branches are opened and a full year of
depreciation costs and equipment service contracts are realized. With more
facilities and equipment, the Company will also require more maintenance, and
the additional investment will be depreciated over the estimated useful life of
the asset.
Increases were noted in marketing and stationery and supplies. These
areas of increased expense include costs associated with the promotion and
establishment of Founders and the new branches. In addition, the Company had
adopted a full-scale marketing program including direct mail, cable television
commercials, newspaper advertising and product promotion. Marketing plays a
significant role in banking today, more so then in the past. As the banking
industry continues to consolidate, both banking and non-banking companies are
competing much more aggressively. Direct competition for deposits comes from
other commercial banks, savings banks,
13
<PAGE>
savings and loan associations, and credit unions as well as brokerage houses,
mutual funds and the securities market. The Company also competes with the same
banking entities for loans as well as with mortgage banking companies and
institutional lenders.
Income Tax
For 1997, the effective tax rate for the Company decreased to 36.0%
from 36.4% in 1996. This reduction in the effective tax rate in 1997 was
primarily the result of an Affordable Housing tax benefit. The Bank is a limited
partner in a partnership that builds and owns affordable housing projects. The
Bank receives tax credits and loss deductions resulting from depreciation of the
housing projects. Note 15 of the audited Consolidated Financial Statements
includes a reconciliation of the Federal tax expense computed using the Federal
Statutory rate of 34% and provides additional detail. The Company noted a
decrease in State income taxes beginning in 1996 as the Maryland legislature
exempted a portion of the interest from securities issued by the United States
Treasury, bank-qualified Maryland Municipals, and some United States Government
Agencies. This change in State income taxes has not had a material impact on
liquidity, financial condition or operations.
Liquidity Management
Liquidity describes the ability of the Company to meet financial
obligations that arise out of the ordinary course of business. Liquidity is
primarily needed to meet borrowers and depositor withdrawal requirements and to
fund current and planned expenditures. The Company maintains its asset liquidity
position internally through short-term investments, the maturity distribution of
the investment portfolio, loan repayments, proceeds from the sale of loans held
for sale and income from earning assets. As indicated in the Consolidated
Statement of Cash Flows, a primary source of cash is from the proceeds from the
sale of loans held for sale. In addition, the Company relies on the proceeds
from maturity of securities available for sale and the investment portfolio
contains readily marketable securities that could be converted to cash. Refer to
the Consolidated Financial Statement for a table showing the maturity
distribution of the Company's securities portfolio and the related estimated
fair value. On the liability side of the balance sheet, liquidity is affected by
the timing of maturing liabilities and the ability to generate new deposits or
borrowings as needed. The Company may borrow up to $33,000,000 under secured
lines of credit with the Federal Home Loan Bank of Atlanta and has available
lines of credit of $2,500,000 in overnight federal funds and $1,000,000 in
short-term credit from other correspondent banks. The increase in loans held for
sale of $16,816,114 or 303.5% from December 31, 1997 to June 30, 1998 was
primarily funded by an increase in short-term borrowings of 215.1%, growth in
deposits of 3.1% and a reduction in federal funds sold of 58.4%. The Company
believes that it has adequate liquidity sources to meet all anticipated
liquidity needs over the next twelve months. While management plans to continue
to rely on the secured lines of credit from the Federal Home Loan Bank of
Atlanta, management knows of no trend or event which will have a material impact
on the Company's ability to maintain liquidity at satisfactory levels.
14
<PAGE>
Allowance for Loan Losses
For year ended December 31, 1997, the Bank recorded net recoveries of
$52,155 and net recoveries for 1996 were $784,241. For the six months ending
June 30, 1998, the Bank recorded net charge-offs of $156,670. No Provision for
Loan Losses was charged to expense in 1996, 1997, or the first six months of
1998. While management believes that, based on information currently available,
the Bank's allowance for loan losses is sufficient to cover losses inherent in
its loan portfolio at this time, no assurances can be given that the Bank's
level of allowance for loan losses will be sufficient to cover future loan
losses incurred by the Bank or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions at the time management
determined the current level of the allowance for loan losses.
The Bank's allowance for loan losses is established through a provision
for loan losses based on management's evaluation of the risks inherent in its
loan portfolio and the general economy. The allowance for loan losses is
maintained at the amount management considers adequate to cover estimated losses
in loans receivable that are deemed probable and estimable based on information
currently known to management. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience, diversification
and size of the portfolio, adequacy of the collateral, the amount of
non-performing loans and industry trends. In addition, various 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 make
additional provision for estimated loan losses based upon judgments different
from those of management. The allowance for loan losses of $1.4 million as of
June 30, 1998 represented 1.47% of gross loans (exclusive of loans held for
sale). The allowance of $1.6 million as of December 31, 1997 amounted to 1.64%
of loans.
The Company has seen a rise in principal balances of loans past due 90
days or more and non-accrual loans as seen in the Risk Elements table. Included
in these loans are one Commercial and one Mortgage totaling $856,430 which
management believes are subject to little risk of loss based on collateral
values, although management cannot be certain that collateral values will be
maintained.
Investment Securities
Investment securities classified as available for sale are held for an
indefinite period of time and may be sold in response to changing market and
interest rate conditions as part of the asset/liability management strategy.
Available for sale securities are carried at market value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
shareholders' equity net of income taxes. The Company does not have, and does
not currently plan to purchase, securities to be classified as held to maturity,
although management may find a benefit in the future and purchase such
securities. If securities were classified as held to maturity, then management
would have both the positive intent and ability to hold them to maturity, and
they would be reported at cost. The Company does not currently follow a strategy
15
<PAGE>
of making security purchases with a view to near-term sales, and, therefore,
does not own trading securities. The Company manages the investment portfolio
within policies that seek to achieve desired levels of liquidity, manage
interest rate sensitivity risk, meet earnings objectives and provide required
collateral support for deposit and borrowing activities.
Total investment securities amounted to $13,944,540 and $19,318,259 as
of June 30, 1998 and 1997, respectively. Excluding the U.S. Government and U.S.
Government sponsored agencies, the Company had no concentration of investment
securities from any single issues that exceeded 10% of shareholders' equity. The
Investment Portfolio table provides detail by type as of June 30, 1998 and 1997
and December 31, 1997, and by contractual maturity as of June 30, 1998.
Loan Portfolio
The Company is actively engaged in originating loans to customers in
Howard and surrounding counties in the State of Maryland, and it is engaged in
originating residential first mortgage loans throughout the State of Maryland
and the mid-Atlantic corridor. The mid-Atlantic corridor includes the following
states: Delaware, Maryland, New Jersey, North Carolina, Pennsylvania, Virginia,
and West Virginia. Management generally originates these mortgage loans in
conformity with Federal National Mortgage Association ("FNMA"). The majority of
residential mortgage loans which are originated by the Company have been sold on
the secondary market. The increase of $16,816,114 in loans held for sale from
December 31, 1997 to June 30, 1998 can be attributed to the origination of
residential first mortgages through the Founders operation. While this portfolio
will continue to increase, the pace will not be at the 303.5% level, but will
more likely be tied to Founders expansion activities. In addition, loans, less
allowance for credit losses, have increased by $625,328 from December 31, 1997
to June 30, 1998, due to the emphasis on services to small and medium sized
businesses and professional practices. While retail loan demand continues to be
soft, management plans to grow this portfolio in the future by additional
product promotions.
The Company has policies and procedures designed to mitigate credit
risk and to maintain the quality of the loan portfolio. These policies include
underwriting standards for new credits as well as the continuous monitoring and
reporting of asset quality and the adequacy of the allowance for loan losses.
These policies, coupled with continuous training efforts, have provided
effective checks and balance for the risk associated with the lending process.
Lending authority is based on the level of risk, size of the loan and the
experience of the lending officer.
The Company policy is to make the majority of its loan commitments in
the market area it serves. This tends to reduce risk because management is
familiar with the credit histories of loan applicants and has in-depth knowledge
of the risk to which a given credit is subject. Although the loan portfolio is
diversified, its performance will be influenced by the economy of the region.
It is the policy of the Company to place a loan in non-accrual status
whenever there is substantial doubt about the ability of the borrower to pay
principal or interest on any outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan and
the overall economic situation of the borrower when making a non-accrual
decision. Management closely monitors non-accrual loans. A non-accruing loan is
restored to
16
<PAGE>
current status when the prospects of future contractual payments are
not in doubt. As of June 30, 1998, the Company had $1,119,537 in non-accrual
loans, all of which management believes, although it cannot be certain, to be
collectable. As of June 30, 1998, the Company had $6,677,762 on the Watch List
for which the borrower had the potential for experiencing financial
difficulties. These loans are subject to ongoing management attention and their
classifications are reviewed regularly.
Capital Resources and Adequacy
Total stockholders' equity was $16,556,342 as of June 30, 1998, which
corresponded to an increase of 5.89% from June 30, 1997. In 1997, equity
increased by 8.14%, from $14,697,769 to $15,893,859 on December 31, 1997 to 1996
respectfully. The primary reasons for these increases are due to earnings.
One measure of capital adequacy is the leverage ratio, which is
calculated by dividing average total assets for the most recent quarter into
Tier 1 capital. The regulatory minimum for this ratio is 4%, with 6% being the
regulatory minimum for well-capitalized companies. The leverage capital ratio as
for December 31, 1997 was 11.3%.
Another measure of capital adequacy is the risk-based capital ratio, or
the ratio of total capital to risk adjusted assets. Total capital is composed of
both core capital (Tier 1) and supplemental capital (Tier 2), including
adjustments for off balance sheet items, such as letters of credit, and the
different degrees of risk among various assets. Regulators require a minimum
total risk-based capital ratio of 8%. As of December 31, 1997, the total
risk-based capital ratio was 15.4%. According to FDIC capital guidelines, the
Bank is considered to be "well capitalized".
The Company continues to expand; in June 1997, the Company purchased
the outstanding shares of CMSC for $50,000; in August 1997, the Bank opened the
Hickory Ridge Branch; and in October 1997, the Founders Mortgage Company Inc.
was started. The Bank will be opening the two new branches in 1998, and Founders
is planning to continue to expand. The funding sources for these projects are
primarily cash, federal funds and maturities of investment securities.
Management knows of no other trend or event, that will have a material impact on
capital.
Year 2000 Conversion and Compliance
The Company has conducted a comprehensive review of all known Company
processes that could reasonably be expected to be impacted by the Year 2000
Issue and has developed an implementation and testing plan (the "Plan") to
resolve the issue. The review included information technology and communication
systems such as personal computers, local area networks and servers, ATM modems,
printers, copy machines, facsimile machines, telephones and the operating
systems and software for these systems. It also included non- information
technology systems, such as heating, air conditioning and vault controls, alarm
systems, surveillance systems, time clocks, coin and currency counters, and
17
<PAGE>
postage meters. The Year 2000 problem is the result of computer programs being
written and microcontrollers using two digits (rather than four) to define the
applicable year. Any of the Company's programs that have time-sensitive software
or embedded technology such as microcontrollers may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations. The Company presently believes that, with modifications to
existing information technology ("IT") and non-IT systems and converting to new
IT and non-IT software or systems, the Year 2000 problem will not pose a
significant operational problem for the Company's computer systems. There can be
no assurance that the systems of other companies or governments will be timely
converted or that any such failure to convert by another company or government
would not have a material adverse effect on the Company.
The Company will spend approximately $153,000 in 1998 on annual
software maintenance agreements. These agreements include periodic software
upgrades, which have or will ensure that the processing of dates up to and
beyond the year 2000 is handled properly. In addition the Company plans to spend
approximately an additional $79,000 for upgrades, training and testing. The
Company plans to fund these costs from operations. Based on current analysis and
projections, management believes that the cost to ensure compliance with the
Plan will not have a material impact on the Company's consolidated financial
statements. While the Company has incurred an opportunity cost for implementing
the Plan, the Company has not deferred any specific projects as a result of this
implementation.
The Company's Year 2000 Plan addresses awareness, assessment,
renovations, validation, and implementation. The Company is actively working
with vendors, suppliers, and significant customers to determine that their
operation, products and services are Year 2000 capable or to monitor their
progress toward Year 2000 capability. The Company has reviewed the products and
services supplied by all of its material vendors and has been informed that
these products and services either are or are expected to be Year 2000 compliant
prior to January 1, 2000. The Company has not determined whether damages are
legally recoverable under the Year 2000 assurances of its existing vendors. The
Company expects to validate the Year 2000 compliance of the products and
services supplied by its material vendors prior to March 31, 1999. Should the
products and services supplied by its material vendors be determined through the
Company's testing process not to be Year 2000 compliant, the Company expects to
enter into new relationships with vendors who have achieved Year 2000 readiness
prior to January 1, 2000. The Company expects that its Year
<PAGE>
2000 activities will continue throughout 1998 and 1999 and that all phases of
its Year 2000 Plan will be completed by the deadlines established by the Federal
Financial Institutions Examination Council in its eight interagency statements
concerning Year 2000.
As directed by the FFIEC, the Assessment Phase of the Company's Year 2000 plan
was completed by September 30, 1997. The Company expects that the Renovation
Phase will be largely completed by December 31, 1998.
The Company implemented by June 30, 1998, a due diligence process which
identifies, assesses, and establishes controls for Year 2000 risk posed by
customers such as funds takers, funds providers and capital market/asset
management counter parties. The process included identifying material customers
(i.e., commercial customers with outstanding credit over $100,000 (over 44% of
the Bank's loan portfolio) or deposits over $1,000,000; evaluating their Year
2000 readiness; assessing their Year 2000 risk to the Company; and implementing
appropriate controls to manage and mitigate their Year 2000-related risk to the
Company.
The Company has completed an assessment of individual material customers' Year
2000 preparedness and the impact on the Company. While the Company believes that
close to 90% of the customers reviewed require continued monitoring of their
Year 2000 readiness, the Company also believes that no customer presents a
material risk to the Company.
The Company has met or expects to meet the following key milestones in its Year
2000 Plan Validation Phase:
June 30, 1998 - completion of development of written validation
strategies and plans.
September 1, 1998 - commence validation of internal mission critical
systems, including those programmed in-house and those purchased from
software vendors.
December 31, 1998 - validation of internal mission-critical systems
will be substantially complete.
March 31, 1999 - validation of service providers for mission critical
systems will be substantially complete. External testing with material
third-parties should have begun.
June 30, 1999 - validation of mission-critical systems should be
complete and implementation should be substantially complete.
The Company implemented by September 30, 1998, its customer awareness program
that includes appropriate communications channels to effectively respond to
customer inquiries. Customer awareness will be ongoing.
The Company has completed the first phase of its business resumption contingency
planning process and expects the remaining phases to be completed by December
31, 1998.
18
<PAGE>
The Company's Plan calls for the development of contingency plans for
at-risk systems. Because the Company has not completed all of its testing,
including integration testing, the assessment of at-risk systems is not
complete. The Company will fully develop such contingency plans if testing
indicates a system is at risk. The Company, however, in the normal course of
business, maintains and deploys contingency plans designed to address various
other potential business interruptions. These plans may be applicable to address
the interruption of support provided by others resulting from their failure to
be Year 2000 ready.
Table 1
Patapsco Valley Bancshares, Inc.
Financial Highlights
Increase
At year end 1997 1996 (decrease)
---- ---- ----------
Assets $140,229,147 $133,899,764 4.73%
Deposits 119,495,004 114,587,515 4.28%
Loans, net 96,795,828 83,841,354 15.45%
Stockholders' equity 15,893,859 14,697,769 8.14%
Average balances
Assets $132,260,038 $128,882,018 2.62%
Deposits 111,826,069 110,622,714 1.09%
Loans, net 91,907,505 78,760,184 16.69%
Stockholders' equity 15,819,273 14,217,070 11.27%
For the year
Net interest income $ 7,592,050 $ 6,608,922 14.88%
Non-interest income 1,002,288 751,603 33.35%
Net income 1,547,610 1,502,330 3.01%
Cash dividends declared 720,391 626,305 15.02%
Per share data
Net income $ 2.33 2.31 0.87%
Cash dividends declared 1.08 0.96 12.50%
Book value 23.81 22.36 6.48%
Ratios
Return on average assets 1.17% 1.17% 0.38%
Return on average equity 9.78% 10.57% -7.42%
Dividend payout ratio 46.35% 41.56% 11.53%
Average equity to average assets 11.96% 11.03% 8.43%
19
<PAGE>
Table 2
Patapsco Valley Bancshares, Inc.
Comparison of Financial Condition at June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
June 30, December 31, Increase
1998 1997 (decrease) %
------------- ------------- ------------- -------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 5,966,969 $ 5,085,542 $ 881,427 17.3%
Federal funds sold 5,486,000 13,181,000 (7,695,000) -58.4%
Securities available for sale 13,944,540 15,160,333 (1,215,793) -8.0%
Loans held for sale 22,356,699 5,540,585 16,816,114 303.5%
Loans, less allowance for credit losses 97,421,156 96,795,828 625,328 0.6%
Premises and equipment 3,246,690 2,108,434 1,138,256 54.0%
Other assets 2,056,757 2,357,425 (300,668) -12.8%
------------- ------------- -------------
$ 150,478,811 $ 140,229,147 $ 10,249,664 7.3%
============= ============= ============
Liabilities and Stockholders' Equity
Noninterest-bearing deposits $ 34,812,998 $ 31,006,823 $ 3,806,175 12.3%
Interest-bearing deposits 88,374,413 88,488,181 (113,768) -0.1%
------------- ------------- ------------
Total deposits 123,187,411 119,495,004 3,692,407 3.1%
Short-term borrowings 9,015,355 2,861,324 6,154,031 215.1%
Other liabilities 1,719,703 1,978,960 (259,257) -13.1%
------------- ------------- ------------
133,922,469 124,335,288 9,587,181 7.7%
Stockholders' equity 16,556,342 15,893,859 662,483 4.2%
------------- ------------- ------------
$ 150,478,811 $ 140,229,147 $ 10,249,664 7.3%
============= ============= ============
</TABLE>
20
<PAGE>
Table 3
Patapsco Valley Bancshares, Inc.
Comparison of Operating Results for the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Increase
1998 1997 (decrease) %
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend revenue
Loans, including fees $ 5,190,077 $ 4,262,140 $ 927,939 21.8%
Investment securities 373,657 641,166 (267,509) -41.7%
Federal funds sold 202,203 275,238 (73,035) -26.5%
------------- ------------ -----------
Total interest and dividend revenue 5,765,937 5,178,544 587,393 11.3%
------------- ------------ -----------
Interest expense
Deposits 1,609,490 1,353,592 255,898 18.9%
Other 165,575 72,103 93,472 129.6%
------------- ------------ -----------
Total interest expense 1,775,065 1,425,695 349,370 24.5%
------------- ------------ -----------
Net interest income 3,990,872 3,752,849 238,023 6.3%
------------- ------------ -----------
Other operating revenue
Mortgage banking fees and gains 1,012,866 ---- 1,012,866 nm
Service charges, fees and commissions 521,539 427,493 94,046 22.0%
------------- ------------ -----------
Total other operating revenue 1,534,405 427,493 1,106,912 258.9%
------------- ------------ -----------
Other expenses
Salaries and benefits 2,553,363 1,360,217 1,193,146 87.7%
Occupancy, furniture and equipment 802,733 460,053 342,680 74.5%
Other 1,006,805 751,689 255,116 33.9%
------------- ------------ -----------
Total other expenses 4,362,901 2,571,959 1,790,942 69.6%
------------- ------------ -----------
Income before income taxes 1,162,376 1,608,383 (446,007) -27.7%
Income taxes 420,694 580,633 (159,939) -27.5%
------------- ------------ -----------
Net Income $ 741,682 $ 1,027,750 $ (286,068) -27.8%
============= ============ ===========
Weighted-average shares outstanding 673,300 662,569 10,731 1.6%
Earnings per share $ 1.10 $ 1.55 $ (0.45) -29.0%
============= ============ ===========
</TABLE>
21
<PAGE>
Table 4
Patapsco Valley Bancshares, Inc.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Increase
1997 1996 (decrease) %
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend revenue
Loans, including fees $ 8,855,753 $ 7,521,415 $ 1,334,338 17.7%
Investment securities 1,060,065 1,551,149 (491,084) -31.7%
Federal funds sold 671,736 681,141 (9,405) -1.4%
------------- ------------ ------------
Total interest and dividend revenue 10,587,554 9,753,705 833,849 8.5%
------------- ------------ ------------
Interest expense
Deposits 2,852,320 3,029,782 (177,462) -5.9%
Other 143,184 115,001 28,183 24.5%
------------- ------------ ------------
Total interest expense 2,995,504 3,144,783 (149,279) -4.7%
------------- ------------ ------------
Net interest income 7,592,050 6,608,922 983,128 14.9%
------------- ------------ ------------
Other operating revenue
Mortgage banking fees and gains 92,265 ---- 92,265 nm
Service charges, fees and commissions 910,023 751,603 158,420 21.1%
------------- ------------ ------------
Total other operating revenue 1,002,288 751,603 250,685 33.4%
------------- ------------ ------------
Other expenses
Salaries and benefits 3,229,809 2,693,906 535,903 19.9%
Occupancy, furniture and equipment 1,058,678 854,319 204,359 23.9%
Other 1,889,507 1,448,557 440,950 30.4%
------------- ------------ ------------
Total other expenses 6,177,994 4,996,782 1,181,212 23.6%
------------- ------------ ------------
Income before income taxes 2,416,344 2,363,743 52,601 2.2%
Income taxes 868,734 861,413 7,321 0.8%
------------- ------------ ------------
Net Income $ 1,547,610 $ 1,502,330 $ 45,280 3.0%
============= ============ ============
Weighted-average shares outstanding 664,505 649,070 15,435 2.4%
Earnings per share $ 2.33 $ 2.31 $ 0.01 0.6%
============= ============ ============
</TABLE>
22
<PAGE>
Table 5
Patapsco Valley Bancshares, Inc.
Major Categories of Loans
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------- ------------------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Real Estate
Residential $ 10,910,628 $ 12,342,156 $ 11,816,400 $ 12,203,279
Commercial 29,657,418 28,168,901 29,376,631 25,363,764
Construction and land development 8,406,338 6,114,783 6,752,244 2,205,656
Lease Financing 19,257,912 18,259,889 20,428,755 16,166,804
Commercial 24,646,594 24,525,338 24,143,558 22,784,968
Consumer 6,000,528 5,570,808 5,893,248 6,679,736
------------- ------------- ------------- -------------
98,879,418 94,981,875 98,410,836 85,404,207
Allowances for credit losses 1,458,262 1,623,870 1,615,008 1,562,853
------------- ------------- ------------- -------------
$ 97,421,156 $ 93,358,005 $ 96,795,828 $ 83,841,354
============= ============= ============= =============
</TABLE>
Table 6
Patapsco Valley Bancshares, Inc.
Loan Maturity and Rate Repricing Distribution
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------- ------------------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Variable rate immediately $ 48,523,704 $ 44,603,171 $ 41,521,332 $ 36,557,108
Due within one year 18,836,944 18,301,821 23,029,056 19,274,415
Due over one to five years 24,528,481 26,343,951 27,448,251 26,367,186
Due over five years 7,066,204 5,780,013 6,473,500 3,233,284
------------- ------------- ------------- -------------
98,955,333 95,028,956 98,472,139 85,431,993
Deferred origination fees 75,915 47,081 61,303 27,786
------------- ------------- ------------- -------------
$ 98,879,418 $ 94,981,875 $ 98,410,836 $ 85,404,207
============= ============= ============= =============
Fixed rate loans due after one year $ 31,594,685 $ 32,123,964 $ 33,921,751 $ 29,600,473
</TABLE>
The scheduled repayments are reported based on when the payment is due
and demand loans and overdrafts are reported as due in one year.
23
<PAGE>
Table 7
Patapsco Valley Bancshares, Inc.
Transactions in the Allowance for Credit Losses
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------- ----------------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balance $ 1,615,008 $ 1,562,853 $ 1,562,853 $ 778,612
Loans charged off
Residential real estate - - - 11,692
Commercial real estate - 25,000 29,818 -
Construction and land development - - - -
Lease financing 9,662 - - 12,386
Commercial 143,142 25,896 51,749 382,189
Consumer 28,866 10,034 48,237 30,783
----------- ----------- ----------- -----------
181,670 60,930 129,804 437,050
----------- ----------- ----------- -----------
Recoveries
Residential real estate - - - -
Commercial real estate - 3,053 9,637 8,000
Construction and land development - - - -
Lease financing - - 1,202 -
Commercial 9,595 108,303 143,197 1,178,248
Consumer 15,329 10,591 27,923 35,043
----------- ----------- ----------- -----------
24,924 121,947 181,959 1,221,291
----------- ----------- ----------- -----------
Net charge-offs (recoveries) 156,746 (61,017) (52,155) (784,241)
Provision charged to operations - - - -
Ending Balance $ 1,458,262 $ 1,623,870 $ 1,615,008 $ 1,562,853
=========== =========== =========== ===========
Net loans charged off as a percentage
of average loans outstanding 0.14% -0.07% -0.06% -1.00%
</TABLE>
The allowance for loan losses has not been allocated to the various types of
loans originated by the Bank. It is management's policy to provide for loan
losses based on an evaluation of the risks inherent in the loan portfolio and in
the general economy. Such evaluation includes a review of all loans that full
collectibility of principal and interest may not be assusred, past loan losses,
estimated value of the underlying collateral, the financial condition of the
borrower, and current economic conditions.
24
<PAGE>
TABLE 8
Patapsco Valley Bancshares, Inc.
and Subsidiaries
Loan Portfolio - Risk Elements - Nonaccrual
and Past Due Loans
Principal balances of loans past due 90 days or more and accruing interest and
nonaccrual loans are as follows:
<TABLE>
<CAPTION>
Unaudited Unaudited
June 30, 1998 June 30, 1997 December 31, 1997
Past due Nonaccrual Past due Nonaccrual Past due Nonaccrual
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 63,556 $ 587,121 $ 685,113 $ 81,515 $ 50,000 $ 682,504
Lease financing 5,632 62,417 27 - - 45,683
Mortgage 38,971 448,513 36,750 - - 448,513
Consumer 30,665 21,486 152 62 27,752 20,531
---------- ----------- ----------- --------- ---------- ------------
$ 138,824 $ 1,119,537 $ 722,042 $ 81,577 $ 77,752 $ 1,197,231
========== =========== =========== ========= ========== ============
Interest not accrued $ 126,382 $ 23,923 $ 80,913
=========== ========= ============
Management has not classified any loans as "troubled debt restructurings" at
June 30, 1998 and 1997, and December 31, 1997, as defined in Statement of
Accounting Standards No. 15, "Accounting By Debtors and Creditors for Troubled
Debt Restructurings."
</TABLE>
26
<PAGE>
Table 9
Patapsco Valley Bancshares, Inc.
Interest Rate and Volume Variance Analysis
<TABLE>
<CAPTION>
6/30/98 compared to 6/30/97 1997 compared to 1996 1996 compared to 1995
Change Due To Variance In Change Due To Variance In Change Due To Variance In
Rates Volumes Total Rates Volumes Total Rates Volumes Total
--------- --------- -------- -------- --------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on
Federal funds sold $ 10,457 $ (83,492) $(73,035) $ 21,339 $ (30,744) $ (9,405) $(63,874) $(49,201) $(113,075)
Interest bearing deposits (1,460) 1,893 433 103 (814) (711) 65 1,264 1,329
Investment securities
U.S. Treasury (3,600) (214,976) (218,576) 26,743 (439,815) (413,072) (55,304) 680,453 625,149
U.S. agency (7,974) (42,141) (50,115) (11,791) (70,472) (82,263) 12,061 (49,531) (37,470)
State and municipal (2,133) (4,684) (6,817) 268 (124) 144 89 (163) (74)
Equity securities (1,995) 8,243 6,248 (5,522) 11,409 5,887 1,796 12,021 13,817
--------- --------- ------- -------- --------- --------- -------- -------- ---------
(15,702) (253,558) (269,260) 9,698 (499,002) (489,304) (41,358) 642,780 601,422
--------- --------- ------- -------- --------- --------- -------- -------- ---------
Loans
Demand and time (55,165) (56,288) (111,453) 3,285 425,236 428,521 (76,087) 27,390 (48,697)
Lease financing (11,600) 137,651 126,051 16,473 434,750 451,223 60,429 209,834 270,263
Mortgage and construction (272,602) 1,204,999 932,397 69,036 422,316 491,352 (52,654) (173,383) (226,037)
Installment (35,893) 11,631 (24,262) (35,310) 4,363 (30,947) 56,132 (46,250) 9,882
--------- --------- ------- -------- --------- --------- -------- -------- ---------
(375,260) 1,297,993 922,733 53,484 1,286,665 1,340,149 (12,180) 17,591 5,411
--------- --------- ------- -------- --------- --------- -------- -------- ---------
Total interest earned (381,965) 962,836 580,871 84,624 756,105 840,729 (117,347) 612,434 495,087
--------- --------- ------- -------- --------- --------- -------- -------- ---------
Interest expense on
Deposits
Savings and NOW (5,334) 30,641 25,307 (46,270) 12,926 (33,344) (77,969) 232,959 154,990
Money market 400 (12,012) (11,612) (49,895) (19,905) (69,800) (19,039) (121,733) (140,772)
Other time 44,408 197,795 242,203 (48,162) (26,156) (74,318) 51,475 305,488 356,963
Borrowed funds 95,209 160,689 255,898 5,517 22,666 28,183 (13,938) 47,843 33,905
--------- ---------- ------- -------- -------- --------- -------- -------- ---------
Total interest expense 134,683 377,113 511,796 (138,810) (10,469) (149,279) (59,471) 464,557 405,086
--------- ---------- ------- -------- -------- --------- -------- -------- ---------
Net interest income $(516,648) $ 585,723 $69,075 $223,434 $766,574 $ 990,008 $(57,876) $147,877 $ 90,001
========= ========== ======= ======== ======== ========= ======== ======== =========
</TABLE>
Interest on loans and investments is presented on a 34%
fully taxable equivalent basis.
The change in interest due to combined rate and volume changes is
allocated entirely to the change in rates.
27
<PAGE>
Table 10
Patapsco Valley Bancshares, Inc.
Average Balances, Interest, and Yields
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997 1997
----------------------------- ----------------------------- ------------------------------
Average % Average % Average %
balance Interest Yield balance Interest Yield balance Interest Yield
------------ ---------- ----- ------------ ---------- ----- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal Funds sold $ 7,005,941 $ 202,203 5.77 $ 10,056,559 $ 275,238 5.47 $ 12,011,554 $ 671,736 5.59
Interest bearing deposits 106,171 1,775 3.34 44,046 1,342 6.09 44,384 2,355 5.31
Investment securities
U.S. Treasury 8,987,329 247,447 5.51 16,683,310 466,023 5.59 13,090,710 735,626 5.62
U.S. Government agency 2,973,204 71,294 4.80 4,553,848 121,409 5.53 4,056,245 212,317 5.23
State and municipal 916,773 30,288 6.61 1,049,223 37,105 7.07 1,049,197 74,260 7.08
Equity securities 1,069,794 29,624 5.54 790,910 23,376 5.91 848,452 52,016 6.13
------------ ---------- ------------ ---------- ------------ -----------
13,947,100 378,653 5.43 23,077,291 647,913 5.62 19,044,604 1,074,219 5.64
------------ ---------- ------------ ---------- ------------ -----------
Loans
Demand and time 26,330,769 1,169,764 8.89 27,540,717 1,281,217 9.30 29,530,703 2,740,308 9.28
Lease financing 19,634,329 921,682 9.39 16,738,433 795,631 9.51 17,939,837 1,702,573 9.49
Mortgage and construction 65,752,573 2,857,044 8.69 40,436,044 1,924,647 9.52 41,836,310 3,912,898 9.35
Installment and credit card 4,524,154 249,108 11.01 4,339,522 273,370 12.60 4,223,214 525,201 12.44
------------ ---------- ------------ ---------- ------------ ----------
116,241,825 5,197,598 8.94 89,054,716 4,274,865 9.60 93,530,064 8,880,980 9.50
Allowance for credit losses 1,583,937 -- 1,595,796 -- 1,622,559 --
------------ ---------- ------------ ---------- ------------ ----------
114,657,888 5,197,598 9.07 87,458,920 4,274,865 9.78 91,907,505 8,880,980 9.66
------------ ---------- ------------ ---------- ------------ -----------
Total interest earning assets 135,717,100 5,780,229 8.52 120,636,816 5,199,358 8.62 123,008,047 10,629,290 8.64
Noninterest-bearing cash 5,438,154 5,256,440 5,392,956
Premises and equipment 3,277,471 1,522,831 1,747,081
Other assets 1,855,779 1,716,019 2,111,954
------------ ------------ ------------
Total assets $146,288,504 $5,780,229 7.90 $129,132,106 $5,199,358 8.05 $132,260,038 $10,629,290 8.04
============ ========== ============ ========== ============ ===========
Liabilities & stockholders' equity
Deposits
Savings and NOW $ 40,636,171 $ 522,236 2.57 $ 38,276,053 $ 496,929 2.60 $ 38,744,167 $ 1,014,139 2.62
Money market 16,093,972 242,774 3.02 16,891,604 254,386 3.01 18,394,104 504,850 2.74
Other time 31,589,570 844,480 5.35 23,779,947 602,277 5.07 25,540,675 1,333,331 5.22
------------ ---------- ------------ ---------- ------------ -----------
Total interest bearing 88,319,713 1,609,490 3.64 78,947,604 1,353,592 3.43 82,678,946 2,852,320 3.45
Noninterest bearing deposits 32,396,084 -- 30,266,098 -- 29,147,123 --
------------ ---------- ------------ ---------- ------------ -----------
120,715,797 1,609,490 2.67 109,213,702 1,353,592 2.48 111,826,069 2,852,320 2.55
Borrowed funds 7,559,187 165,575 4.38 3,198,116 72,103 4.51 3,070,489 143,184 4.66
Other liabilities 1,710,502 1,145,312 1,544,207
Stockholders' equity 16,303,018 -- 15,574,976 -- 15,819,273 --
------------ ---------- ------------ ---------- ------------ -----------
Total liabilities and equity $146,288,504 $1,775,065 2.43 $129,132,106 $1,425,695 2.21 $132,260,038 $ 2,995,504 2.26
============ ========== ============ ========== ============ ===========
Net margin on interest-earning
assets $135,717,100 $4,005,164 5.90 $120,636,816 $3,773,663 6.26 $123,008,047 $ 7,633,786 6.21
============ ========== ============ ========== ============ ===========
1996 1995
----------------------------- ------------------------------
Average % Average %
balance Interest Yield balance Interest Yield
------------ ---------- ----- ------------ ---------- -----
Assets $ 12,579,343 $ 681,141 5.41 $ 13,410,081 $ 794,216 5.92
Federal Funds sold 60,418 3,066 5.07 34,975 1,737 4.97
Interest bearing deposits
Investment securities 21,212,636 1,148,698 5.42 9,224,113 523,549 5.68
U.S. Treasury 5,331,762 294,580 5.53 6,266,527 332,050 5.30
U.S. Government agency 1,050,957 74,116 7.05 1,053,269 74,190 7.04
State and municipal 680,218 46,129 6.78 495,771 32,312 6.52
Equity securities ------------ ---------- ------------ ----------
28,275,573 1,563,523 5.53 17,039,680 962,101 5.65
------------ ---------- ------------ ----------
Loans 24,942,684 2,311,787 9.27 24,656,582 2,360,484 9.57
Demand and time 13,314,167 1,251,350 9.40 10,968,280 981,087 8.94
Lease financing 37,239,852 3,421,546 9.19 39,098,334 3,647,583 9.33
Mortgage and construction 4,190,338 556,148 13.27 4,577,935 546,266 11.93
Installment and credit card ------------ ---------- ------------ ----------
79,687,041 7,540,831 9.46 79,301,131 7,535,420 9.50
926,857 -- 801,743 --
Allowance for credit losses ------------ ---------- ------------ ----------
78,760,184 7,540,831 9.57 78,499,388 7,535,420 9.60
------------ ---------- ------------ ----------
119,675,518 9,788,561 8.18 108,984,124 9,293,474 8.53
Total interest earning assets
5,146,792 4,522,432
Noninterest-bearing cash 1,480,874 1,404,545
Premises and equipment 2,578,834 2,236,412
Other assets ------------ ------------
$128,882,018 $9,788,561 7.59 $117,147,513 $9,293,474 7.93
Total assets ============ ========== ============ ==========
Liabilities & stockholders' equity
Deposits $ 38,271,907 $1,047,483 2.74 $ 30,349,950 $ 892,493 2.94
Savings and NOW 19,054,113 574,650 3.02 22,961,048 715,422 3.12
Money market 26,024,247 1,407,649 5.41 20,162,094 1,050,686 5.21
Other time ------------ ---------- ------------ ----------
83,350,267 3,029,782 3.63 73,473,092 2,658,601 3.62
Total interest bearing 27,272,447 -- 26,768,699 --
Noninterest bearing deposits ------------ ---------- ------------ ----------
110,622,714 3,029,782 2.74 100,241,791 2,658,601 2.65
2,564,945 115,001 4.48 1,613,221 81,096 5.03
Borrowed funds 1,477,289 1,410,903
Other liabilities 14,217,070 -- 13,881,598 --
Stockholders' equity ------------ ---------- ------------ ----------
$128,882,018 $3,144,783 2.44 $117,147,513 $2,739,697 2.34
Total liabilities and equity ============ ========== ============ ==========
Net margin on interest-earning $119,675,518 $6,643,778 5.55 $108,984,124 $6,553,777 6.01
assets ============ ========== ============ ==========
</TABLE>
Interest on loans and investments is presented on a 34% fully taxable equivalent
basis.
Loan fees included in interest income amounted to $47,621, $66,817, $104,839,
$12,120, and $12,100 for the six months ended June 30, 1998 and 1997 and for the
years ended December 31, 1997, 1996 and 1995 respectively. Loans include
balances on nonaccrual status with a zero yield.
28
<PAGE>
Table 11
Patapsco Valley Bancshares, Inc.
Investment Portfolio - Carrying Value
The following table sets forth the carrying value of the Company's
investment portfolio:
<TABLE>
<CAPTION>
Unaudited
June 30 December 31
1998 1997 1997
---------- ---------- -----------
<S> <C> <C> <C>
U.S. Treasury $ 9,891,264 $12,928,584 $ 9,968,222
U.S. Government agency 1,946,447 4,440,650 3,127,875
State and municipal 849,870 1,056,873 1,053,260
----------- ----------- -----------
Total debt securities 12,687,581 18,426,107 14,149,357
Equity securities 1,256,959 892,152 1,010,976
----------- ----------- -----------
Total $13,944,540 $19,318,259 $15,160,333
=========== =========== ===========
</TABLE>
All securities are classified as available for sale securities.
Table 12
Patapsco Valley Bancshares, Inc.
Investment Portfolio -
Amortized Cost, Weighted Average Yields & Maturities
The following table sets forth certain information regarding the
amortized cost, weighted average yields, and maturities of the Company's
investment securities portfolio at June 30, 1998:
<TABLE>
<CAPTION>
After One Year But
Within One Year Within Five Years
--------------- -----------------
Amount Yield Amount Yield
------ ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 8,874,696 5.15% $ 998,408 6.57%
U.S. Government agency 1,950,000 5.23% - 0.00%
State and municipal 646,181 5.66% 200,000 4.90%
----------- ------ --------- -------
Total $11,470,877 5.19% $1,198,408 6.29%
=========== ====== ========== =======
</TABLE>
As of June 30, 1998, the Company did not own securities other then U.S.
Government and U.S. Government agencies which aggregate book values exceed 10
percent of stockholders' equity.
Table 13
Short Term Borrowings
The following table sets forth certain information regarding short term
borrowings:
<TABLE>
<CAPTION>
At June 30, At December,
------------------------- -------------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Amount of borrowings outstanding $9,015,355 $2,972,950 $2,861,324 $3,236,572
Weighted average rate paid on:
Repurchase agreements 4.39% 4.44% 4.80% 4.42%
Advances from Federal Home Loan Bank 6.60% - - -
</TABLE>
<TABLE>
<CAPTION>
During the six months ended During the year ended
June 30, December 31,
--------------------------- -------------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
Repurchase agreements $ 5,505,806 $3,510,037 $3,575,213 $3,957,006
Advances from Federal Home Loan Bank $13,302,003 - - -
</TABLE>
<TABLE>
<CAPTION>
For the six months ended For the year ended
June 30, December 31,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Approximate average short term borrowings
outstanding with respect to:
Repurchase agreements $3,687,024 $3,198,116 $3,070,489 $1,477,289
Advances from Federal Home Loan Bank $3,869,230 - - -
Approximate weighted average rate paid on:
Repurchase agreements 4.64% 4.51% 4.66% 4.48%
Advances from Federal Home Loan Bank 4.14% - - -
</TABLE>
29
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY
The Bank owns properties and operates branches at the following
locations. Other than as described below, there are no encumbrances on any of
these properties or leases:
8137 Main Street
Ellicott City, MD
(Historic Ellicott City Branch)
6130 Columbia Crossing Cir.
Columbia, MD
(Columbia Crossing Branch)
6245 Washington Blvd.
Elkridge, MD
(branch to be opened)
The Bank, Founders, and CSMC operate under leases at the following
properties:
<TABLE>
<CAPTION>
Current
Location Square Feet Annual Rental Lease Expiration Renewal Options
- -------- ----------- ------------- ---------------- ---------------
The Bank
- --------
<S> <C> <C> <C> <C>
8593 Baltimore National Pike 10,706 Min. Ground July, 2064 --
Ellicott City, MD Rent Only
(Main Office)
611 Frederick Road 1,524 $36,164 Dec., 2000 One 5-yr. term
Catonsville, MD
(Catonsville Branch)
9501 Old Annapolis Road 1,686 $65,212 Nov., 2001 --
Ellicott City, MD
(Dorsey Search Branch)
12800 Route 144 1,100 $14,700 July, 2001 One 5-yr. term
West Friendship, MD
(West Friendship Branch)
6430 Freetown Road 2,400 $72,000 July, 2007 --
Columbia, MD
(Hickory Ridge Branch)
3290 Pine Orchard Lane 10,200 $87,347 Aug., 1999 One 5-yr. term
Ellicott City, MD
(Operations Center)
30
<PAGE>
Founders
- --------
8818 Centre Park Drive 4,197 $64,550 May, 2001 --
Suite 100
Columbia, MD
211-B South Jefferson Street 2,583 $27,192 March, 1999 1 year
Frederick, MD
139 North Main Street 2,098 $35,666 Monthly --
Suite 101
Bel Air, MD
120-B Cecil Avenue * $4,800 April, 1999 6 months
North East, MD
</TABLE>
* Small "back-office" room.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Shares of common stock (rounded to the nearest whole share) as
of July 31, 1998 by directors and executive officers and by each person who, to
the best of the Company's knowledge, beneficially owns more than 5% of the
Company's outstanding Shares of common stock. Except as otherwise indicated and
except for Shares held by members of an individual's family or in trust, all
Shares are held with sole dispositive and voting power. The address of each
person listed below is the address of the Company. The term "beneficial
ownership" includes Shares of common stock that may be acquired within 60 days
upon the exercise of options, warrants and other rights.
31
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Shares Percent
Beneficially of Class
Owned (1) Beneficially
Name Owned
- --------------------------------------------------------------------------------
<S> <C> <C>
W. William Cookson 2,425 .35%
Ronald L. Eyre 1,393 .20%
John F. Feezer, III (2) 18,000 2.63%
Howard E. Harrison, III (3) 4,541 .66%
Kevin P. Huffman (4) 160 .02%
Eugene William Iager, Sr. (5) 32,704 4.79%
Fred T. Lewis 8,756 1.28%
Richard H. Pettingill 50 .01%
John S. Whiteside 17,996 2.63%
Frances F. Wire (6) 4,924 .72%
All Directors and Executive Officers as
a Group (13 persons) 97,996 14.34%
5% Beneficial Owners (7)
John F. Feezer, Jr. & Beulah Feezer 43,624 6.38%
- --------------------------------------------------------------------------------
<FN>
(1) Shares are rounded to the nearest whole Share. Because of rounding, group
total may not be equal to the total number of Shares for each beneficial owner.
(2) Includes Shares held jointly, as custodian, as trustee for a profit sharing
trust, and indirectly through two companies in which Mr. Feezer is affiliated.
(3) Includes Shares held jointly.
(4) All Shares are held jointly.
(5) Includes Shares held as custodian, and shares held jointly.
(6) Includes Shares held jointly. Ms. Wire retired from the Board of Directors
effective September 15, 1998.
(7) Carrollton Bancorp, the bank holding company for Carrollton Bank, a Maryland
state-chartered bank, applied with the Federal Reserve Bank of Richmond and the
Maryland Commissioner of Financial Regulation, in December, 1997, for approval
to acquire an additional 26,677 Shares of common stock up to a total of 49,295
Shares representing not in excess of 9.9% of the Shares. At the time of
application, Carrollton Bancorp owned 22,618 Shares, or approximately 3.35% of
the Shares. To the best of the Company's knowledge, Carrollton Bancorp does not
hold more than 5% of the Company's Shares.
</FN>
</TABLE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
General
The Directors and Executive Officers of the Company and the Bank, as
of September 16, 1998, are as follows:
32
<PAGE>
<TABLE>
<CAPTION>
Name Age Business Experience
<S> <C> <C>
W. William Cookson 61 Director of the Company since October, 1996, Director
of the Bank since July, 1986, and Chairman of the Bank
Board since April, 1998. He had served as Chairman of
Records Research from October, 1991 through March,
1998 and since March, 1998 as President of W. William
Cookson & Associates.
Ronald L. Eyre 52 Director of the Company since October, 1996, and a
Director of the Bank since February, 1989. He has
served as President of Eyre Bus Service, Inc. since
January, 1990.
John F. Feezer, III 42 Director of the Company since October, 1996, Director
of the Bank since January, 1995, and Vice Chairman of
the Bank Board since April, 1998. He has served as
Vice President of John F. Feezer Company, a paving and
excavation company, since July, 1979.
Howard E. Harrison, III 57 Director of the Company and Chairman of the Company
Board since October, 1996 and a Director of the Bank
since June, 1991. He has served as Chairman of the
Board of Marina Development Corp. since December, 1986.
Eugene W. Iager, Sr. 52 Director of the Company since October, 1996 and a
Director of the Bank since June, 1995. He has served as
President of Maple Lawn Farms, Inc. since August,
1987.
Fred T. Lewis 71 Director of the Company since October, 1996 and a
Director of the Bank since October, 1966. He has been
an independent veterinarian since 1953.
Richard H. Pettingill 63 Director of the Company since June, 1998 and a Director
of the Bank since June, 1998. He has served as Senior
Vice President of Casey & Associates/ONCOR
International, a commercial real estate company, since
March, 1992.
33
<PAGE>
John S. Whiteside 60 Director of the Company since October, 1996, Vice
Chairman of the Company Board since April, 1998, and
Director of the Bank since January, 1978; President and
CEO of the Bank since January, 1978 and the Company
since its formation in October, 1996.
Kevin P. Huffman 38 Director of the Company since March, 1998 and a
Director of the Bank since March, 1998; Executive Vice
President of the Company and the Bank since March,
1998. He had served as Senior Vice President of the
Bank since June, 1994 and of the Company since its
formation in October, 1996.
Bernard G. Malinowski 60 Senior Vice President/CFO of the Company since
October, 1996 and the Bank since March, 1993. He
had served as Executive Vice President/CFO of the Bank
from February, 1976 to March, 1993.
Edwin B. McKee 48 Senior Vice President of the Company and the Bank
since March, 1998. He has served as Vice President of
the Company since its formation in October, 1996 and
the Bank since March, 1986.
Dennis W. Miller 33 Senior Vice President of the Company and the Bank
since March, 1998. He has served as Vice President of
the Company since its formation in October, 1996 and
the Bank since May, 1993.
</TABLE>
Committees of the Board of Directors
All of the members on the Company's Board of Directors also serve on
the Board of Directors of the Bank. The Company's Board of Directors and the
Bank's Board of Directors each met 14 times during 1997. The Company and the
Bank have four committees. The Chairman and Vice Chairman of the Company's Board
of Directors are ex-officio members on all committees.
The Executive Committee met 11 times in 1997. The function of the
Executive Committee is to direct and transact any business which may properly
come before the Board of Directors, except for such business that the Board of
Directors only, by law, is authorized to perform. Members of the Executive
Committee are W. William Cookson, Chairman, John F. Feezer, III, Vice Chairman,
John S. Whiteside, and two additional directors rotating on a quarterly basis.
The Audit Committee met 3 times in 1997. The Bank's Audit Committee
reviews the audit policy and program, recommending any policy changes to the
Board of Directors, and
34
<PAGE>
recommends the independent certified public accountant to the Board of
Directors. The committee meets with the internal and external auditors, reports
to the Board of Directors on the findings and oversees the internal control
structure of the Bank. Members of the Audit Committee are W. William Cookson,
Chairman, Eugene W. Iager, Sr., Fred T. Lewis, and Richard H. Pettingill.
The Strategic Planning Committee met 1 time in 1997. The Strategic
Planning Committee meets with management to review the annual operating plans
developed by management, and to formulate, along with management, long-term
strategies and business plans designed to enhance stockholder value. Members of
the Strategic Planning Committee are John F. Feezer, III, Chairman, W. William
Cookson, Ronald L. Eyre, Howard E. Harrison, III, Kevin P. Huffman, Eugene W.
Iager, Sr., and John S. Whiteside.
The Nominating Committee met 1 time in 1997. The Nominating Committee
recommends candidates to serve as Directors of the Company and the Bank. The
members of the Nominating Committee are Ronald L. Eyre, Eugene W. Iager, Sr.,
and John S. Whiteside.
The Bank also has four subcommittees: the Branching Subcommittee (which
met 4 times in 1997); the Compensation Subcommittee (which met 1 time in 1997);
the Global Matters Subcommittee (which met 1 time in 1997); and the AdHoc
Building Subcommittee (which did not meet in 1997).
No Director during the last full fiscal year attended fewer than 75% of
the aggregate of (1) the total number of meetings of the Board of Directors
(held during the period for which that person has been Director) and (2) the
total number of meetings held by all committees of the Board on which that
person served (during the period served).
Director Compensation
No fees are paid for service on the Company's Board of Directors. The
Chairman of the Board of the Company receives $685 for each Bank Board of
Directors meeting. The Chairman of the Board of the Bank receives $1,185 for
each Bank Board of Directors meeting. All other Directors receive $485 for each
Bank Board of Directors meeting. Directors receive a fee of $150 for each
committee meeting attended. Directors may elect to receive compensation for
their services to the Company and the Bank in stock or cash. During 1997,
Directors purchased 163 shares, at an average price of $33.45 per share, as
restated to give retroactive effect to stock dividends declared as of December
31, 1997.
35
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation for each of the
three preceding fiscal years paid to or accrued for the Company's most highly
compensated executive officers whose cash compensation exceeds $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name and Principal Fiscal Annual Compensation
Position Year
----------------------------------------------------------
Other Annual
Salary Bonus* Compensation
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John S. Whiteside 1997 $140,823 $61,480 $3,072
President/CEO
1996 137,120 --- 3,821
1995 133,120 4,228 4,516
Kevin P. Huffman 1997 70,952 41,480 ---
Executive Vice President/
COO 1996 75,952 --- ---
1995 65,803 --- ---
</TABLE>
*Part of the 1997 Bonus was paid as a result of a Senior Management Bonus
Program, which ties payments to senior management to a level of net income above
Company projections. The bonuses under the program accrued in 1997 and were paid
in 1998.
Defined Benefit Plan and Contributory Thrift Plan
The Bank has a defined benefit pension plan covering substantially all
of the employees. Benefits are based on years of service and the employee's
highest average rate of earnings for the five consecutive years during the last
ten years before retirement. The Bank makes contributions to the plan in amounts
sufficient to satisfy minimum funding standards determined using the frozen
entry age actuarial method. Assets of the plan are held in trust and invested in
listed stocks and bonds. The Bank also has a contributory thrift plan qualifying
under Section 401(k) of the Internal Revenue Code of 1986, as amended. All
employees who are at least 21 years old with 1 year of service are eligible for
participation in the plan.
Employment Contract
On June 11, 1987, John S. Whiteside, President and CEO, entered into an
employment contract ("Agreement") with the Bank that becomes effective on the
date on which a "Change in Control," as defined in the Agreement, of the Bank
occurs. Under the Agreement, Mr. Whiteside will remain as President of the Bank
for a term of either five years from the effective date of the Agreement or the
date of his sixty-fifth birthday, whichever occurs first.
36
<PAGE>
During the term of the Agreement, Mr. Whiteside will receive an annual salary
that is at least equal to the annual salary he received immediately prior to the
effective date of the Agreement. The Agreement further provides that if the Bank
thereafter terminates Mr. Whiteside for any reason other than for cause or
because of death, disability, physical or mental incapacity, or if Mr. Whiteside
resigns due to a breach by the Bank of the Agreement, he will, for the remainder
of the contract period, receive his benefits and be paid, on a monthly basis,
his then-current salary, including estimated bonuses or other incentives to
which he would have been entitled had no termination or resignation occurred
("Termination Payments"). In addition, Mr. Whiteside may resign and receive
Termination Payments if he reasonably believes that the Change in Control,
coupled with a material change in circumstances, significantly affects his
capacity to perform his duties as President of the Bank. The Agreement further
provides that, in the event of his termination or resignation, Mr. Whiteside
may, within ninety days after his resignation, elect to be paid a lump sum
severance allowance ("Severance Allowance") in lieu of Termination Payments.
This Severance Allowance includes two years' salary, including a pro rata share
of the estimated amount of any bonus that would have been payable, the value of
benefits for two years, and the reasonable, two-year value of any stock option
plan in which Mr. Whiteside was participating.
Stock Option Plans
General. The Company administers three stock plans, which include the
Company Incentive Stock Option Plan (the "Incentive Plan"), Director's Stock
Option Plan (the "Director's Plan"), and the Employee Stock Purchase Plan (the
"Employee Plan"). The plans were approved by the Company's Board of Directors on
February 25, 1998, and by its stockholders on April 21, 1998, and will continue
in effect for no more than 10 years.
Up to 50,000 Shares are reserved for issuance under the three plans.
The number of Shares reserved for the grant of options and the number of Shares
that are subject to outstanding options under the plans are subject to
adjustment in the event of a merger, consolidation, reorganization,
recapitalization, reclassification of stock, stock dividend, split-up, or other
change in the corporate structure or capitalization of the Company affecting the
Shares.
Incentive Plan. The Incentive Plan is administered by the Company's
President. Options granted under the Incentive Plan are incentive stock options
within the meaning of Section 422(b) of the Internal Revenue Code of 1986 (the
"Code"), as amended. The purchase price of the Shares under each option granted
pursuant to the Incentive Plan cannot be less than 100% of the fair market
value of the stock on the date the option is granted.
The total number of Shares that may be issued under the Incentive Plan
cannot exceed 18,450 Shares. An option to purchase 1,950 Shares will be granted
to the President during each year of the first 3 years of the Incentive Plan.
Options to purchase the remaining 12,600 Shares may be granted only to other
officers or key employees and must, if granted, be granted during the first 3
years of the Incentive Plan. The Incentive Plan requires the President to
consider the accomplishments of individuals as his primary guide in apportioning
the number of shares underlying options to be granted to other officers and key
employees, and permits the President to take into consideration the position
held by the officer or key employee, his or her compensation, and other factors
which the President deems to be pertinent. An option may not be exercised unless
the optionee remains employed with the Company for 36 months from the date the
option was granted, except
37
<PAGE>
in certain circumstances upon the death or retirement of the optionee. Options
granted under the Incentive Plan expire on the 10th anniversary of the date the
option was granted.
Director's Plan. The Director's Plan is administered by the President
of the Company, and options granted under the plan may be granted only to
Directors of the Company. Options granted to Directors under the Director's Plan
are "non-qualified" options under the Code. The purchase price of the Shares
under each option granted may not be less than 100% of the fair market value of
the stock on the date the option is granted.
The total number of Shares that may be issued under the Director's
Plan cannot exceed 21,000 Shares. The Director's Plan provides that Directors
will receive equal treatment with respect to options. Options to purchase 7,000
Shares will be granted each year during the first 3 years of the Director's
Plan, and may be exercised at any time. In April, 1998, seven outside directors
who serve on the Company and Bank Board of Directors each received options to
purchase 1,000 Shares.
Unless otherwise specified by the President in the option agreement,
each option granted under the Director's Plan will expire on the 10th
anniversary of the date the option was granted. In the event of termination as a
Director for any cause, other than death or mandatory retirement because of age,
each option granted to the optionee terminates immediately prior to termination.
Each option granted an optionee terminates 12 months from the date of the
optionee's death, provided the optionee at the time of his death was a Director
of the Company.
Employee Plan. The Employee Plan is administered by the President,
Chief Operating Officer, and Chief Financial Officer of the Company. Options
granted under the Employee Plan are "qualified" options within the meaning of
Section 423 of the Code. The purchase price of the Shares under each option
granted pursuant to the Employee Plan will be 85% of the fair market value of
the stock on the date the option is granted.
The total number of Shares that may be issued under the Employee Plan
may not exceed 20,550 Shares, and the options, if granted, must be granted
during the first 3 years of the Employee Plan. Options to purchase Shares will
be granted to each Employee at the rate of one share per $1,000 of the
employee's total compensation. The Company anticipates that employees will be
granted options on a nondiscriminatory basis during each of the next three
years, although the number of Shares underlying options will be subject to the
employee turnover rate, the level of total employee compensation, and other
unknown variables. An option may not be exercised unless the optionee is
employed for 12 months from the date the option was granted and the optionee is
an employee of the Company at the time of exercise, except under certain
circumstances upon the death or retirement of the optionee.
Each option granted under the Employee Plan expires 27 months from the
date the option was granted. In the event of termination of employment of the
optionee for any cause, other than death, disability resulting in coverage under
the long-term disability plan of the Company, or retirement of the optionee,
whether by reason of resignation or discharge, an option granted the optionee
terminates immediately prior to termination. Each option granted an optionee
terminates 12 months from the date of the optionee's death, provided the
optionee at the time of his death was an employee of the Company.
38
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past year, the Bank, as the Company's subsidiary, has had
banking transactions in the ordinary course of its business with its directors
and officers and with their associates on substantially the same terms,
including interest rates, collateral, and repayment terms on loans, as those
prevailing at the same time for comparable transactions with others. The
extensions of credit by the Bank to these persons have not and do not currently
involve more than the normal risk of collectability or present other unfavorable
features. As of June 30, 1998, the aggregate principal amount of indebtedness to
the Bank owed by directors and executive officers of the Company is
approximately $4,497,000.
ITEM 8. DESCRIPTION OF SECURITIES
The Company was formed to effect a share exchange (the "Share
Exchange") with the Bank, with its common stock. The Share Exchange was
effective as of September 30, 1996. As a result of the Share Exchange, Shares
were issued in exchange for each share of Bank common stock then outstanding.
The common stock issued by the Company in the Share Exchange was exempt from
registration pursuant to Section 3(a)(12) of the Securities Act of 1933, as
amended.
Shares of Common Stock
The Company has 50,000,000 Shares of common stock authorized, par value
$0.01 per share. At June 30, 1998, the Company had 418 stockholders and 676,370
Shares were issued and outstanding. The outstanding Shares are fully paid and
nonassessable. In the event of voluntary or any involuntary liquidation,
dissolution, or winding-up of the affairs of the Company, the assets of the
Company available for distribution to its stockholders shall be distributed pro
rata to the holders of the Shares.
Voting Rights
Each of the Shares is entitled to one vote per share owned by the
stockholder. Holders of the Shares generally have voting rights in mergers. In a
merger in which the Company is the survivor, no stockholder vote is required if,
in connection with the merger, the Company does not issue shares of stock of a
class amounting to more than 20% of the number of shares of such class then
outstanding and if the merger does not reclassify or change the outstanding
stock of the Company or otherwise amend its charter. Holders of the Shares have
appraisal rights only in mergers where the Company is not the surviving
corporation or in certain cases where their contract rights are changed, the
number of shares to be issued in the merger equals or exceeds 20% of the shares
outstanding prior to the merger, or Shares are converted into something other
than stock of the surviving corporation.
With certain exceptions, the Maryland General Corporation Law provides
holders of Shares a right to demand and receive payment of the fair value of the
stockholder's Shares from
39
<PAGE>
a successor corporation under certain circumstances. These circumstances include
the Company's consolidation or merger with another corporation, the acquisition
of the stockholder's Shares in a share exchange, the transfer of the Company's
assets in a manner requiring special corporate action, or the amendment of the
charter in a way which alters the stockholder's contract rights, unless
otherwise authorized in the charter.
The Company's Articles of Incorporation (its charter) does not grant
preemptive rights to stockholders. As a result, a stockholder's percentage
ownership of Company Shares may be reduced if and when new shares of that class
are issued.
Options
As of June 30, 1998, the Company has granted options to seven of its
directors for the purchase of 7,000 Shares pursuant to the Director Plan, at an
exercise price of $38.00. The options must be exercised within 10 years. No
options have been issued under the Incentive Plan, which reserves 18,450 Shares.
No rights have been granted to Company and subsidiary employees under the
Employee Plan, which reserves 20,550 Shares. The number of Shares that may be
purchased upon the exercise of options or pursuant to the Employee Plan will be
adjusted equitably to prevent the substantial dissolution or enlargement of
rights granted to, or available for, participants in the Plan. The exercise of
any options or rights will result in a dilution of the percentage of the Shares
of the Company's Shares owned by the Company's stockholders.
Dividend Reinvestment
The Company has a Dividend Reinvestment Plan that permits stockholders
to choose whether to receive their entire dividend in stock or cash.
Stockholders who elect to receive their dividends in stock receive the number of
Shares equal to the amount of the dividend, divided by the value of the market
value of the Shares based on the price at which the Company's Shares were last
traded in bona fide sales in the previous year. A stockholder's election not to
participate in the plan results in a dilution of the percentage of Shares held
by the nonparticipating stockholder.
Dividend Rights
Stockholders of Shares are entitled to dividends when, as, and if
declared by the Board of Directors of the Company, subject to the restrictions
imposed by the Maryland General Corporation Law, the Maryland Financial
Institutions Article, and FRB regulations. Dividends may not be paid if the
Company is insolvent or if the dividend would cause the Company to become
insolvent. However, unless the Company expands its activities, its only source
of income will be through the Bank subsidiary. Therefore, dividend restrictions
applicable to Maryland state-chartered banks impact the Company's ability to pay
dividends.
A board of directors of a Maryland state-chartered bank may declare a
cash dividend only from its undivided profits, or with the prior approval of the
Maryland Commissioner of Financial
40
<PAGE>
Regulation, from the bank's surplus in excess of 100% of its required capital
stock. To declare a stock dividend, the bank's surplus, after the increase in
capital stock, must be equal to at least 20% of the outstanding capital stock as
increased. It is the policy of the Bank's Board of Directors to have at least an
equal amount of surplus as in capital stock. Additional federal banking law
restrictions are described under the caption, "Description of
Business--Supervision and Regulation--Limits on Dividends and Other Payments."
Voting Requirements
Generally, the affirmative vote of the holders of a majority of the
Shares of common stock entitled to vote is required to approve any action for
which stockholder approval is required. A sale or transfer of substantially all
of the Company's assets, merger, consolidation, reorganization, or similar
extraordinary corporate action, including charter amendments, requires the
affirmative vote of two-thirds of the Shares entitled to vote thereon.
Anti-Takeover Measures
General. The Company's charter and Bylaws contain provisions designed
to enhance the ability of the Board of Directors to address attempts to acquire
control for the Company. These provisions may be deemed to have an anti-takeover
effect and may discourage takeover attempts which have not been approved by the
Board of Directors. These provisions also could discourage or make more
difficult a merger, tender offer or proxy contest, even though such transaction
may be favorable to the interests of shareholders, and could potentially
adversely affect the market price.
The following briefly summarizes protective provisions contained in the
charter and Bylaws. This summary is general and is not intended to be a
complete description of all the features and consequences of these provisions,
and is qualified in its entirety by reference to the charter and Bylaws.
Staggered Board Terms. The Board of Directors of the Company currently
is comprised of 10 members, divided into three classes, each serving for a three
year term so that the term of office of one class of directors shall expire in
each year. Initially, however, the Class I Directors will serve for a one year
term, Class II Directors will serve for a two year term, and the Class III
Directors will serve for a three year term. The exact number of Directors will
be fixed from time to time by the Board of Directors of the Company pursuant to
a resolution adopted by a majority of the entire Board of Directors. The Bylaws
of the Company, however, limits the total number of Directors to 30. The
inability to change the composition of the Board of Directors immediately even
if such change and composition were determined by the stockholders to be
beneficial to them may tend to discourage a tender offer or takeover bid for the
Company's Shares.
Director Residency Requirement. Directors shall have been residents for
at least one year of a county (or a county contiguous to such county) in which
the Company or any subsidiary maintains its principal office or principal
banking office.
41
<PAGE>
This provision ensures local management of the Company, and could discourage
individuals who are not local residents from taking control of the Company.
Factors for Consideration of Tender Offer or Change in Control. The
charter provides further that, with respect to a tender offer or proposal of
acquisition, merger, consolidation, or sale of assets, the Board of Directors
must consider the effects of the action on the Company's employees, customers,
suppliers, creditors or other constituencies, the effects of the action on the
community in which the Company does business, and the long-term and short-term
interests of the Company and its stockholders.
Director Vacancies. The Bylaws provide that any directorships resulting
from any increase in the number of directors and any vacancies on the Company's
Board of Directors resulting from death, resignation, disqualification, or
removal or other cause, may be filled by the Board of Directors, acting by a
majority of the directors then in office, even though less than a quorum, and
any director so chosen shall hold office until the next election of the class
for which such director shall have been chosen and until his or her successor
shall be elected and qualified. At each annual meeting of stockholders the
successors to the class of directors whose term shall then expire shall be
elected to hold office for a term expiring at the third succeeding annual
meeting. In addition, any director may be removed from office with or without
cause by the affirmative vote of the holders of a majority of the stock of the
Company entitled to vote on such matter, at any special meeting of stockholders
duly called for such purpose.
Notice for Director Nominations. Nominations for director positions of
the Company must be made in writing by notice delivered to the Company's
President not fewer than 150 days nor more than 180 days before the annual
stockholder meeting in which the terms of directors expire.
Business Combinations
Under the Maryland General Corporation Law, certain "business
combinations" (including any merger or similar transaction subject to a
statutory stockholder vote and additional transactions involving transfers of
assets or securities in specific amounts) between a Maryland corporation and any
person who, after the date on which the corporation has 100 or more beneficial
owners of its stock, beneficially owns 10% or more of the voting power of the
corporation's shares or any affiliate of the corporation who, at any time within
the two-year period prior to the date in question and after the date on which
the corporation has 100 or more beneficial owners of its stock, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder"), or an affiliate
thereof, are prohibited for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder unless an exemption is
available. Thereafter, any such business combination must be recommended by the
board of directors of the corporation and approved by the affirmative vote of at
least: (i) 80% of the votes entitled to be cast by holders of outstanding voting
shares of the corporation; and (ii) two-thirds of the votes entitled to be cast
42
<PAGE>
by holders of outstanding voting shares of the corporation other than shares
held by the Interested Stockholder with whom the business combination is to be
effected, unless the corporation's stockholders receive a minimum price (as
described in the Maryland General Corporation Law) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder for its shares. These provisions of Maryland law do not
apply, however, to business combinations that are approved or exempted by the
board of directors prior to the time that the Interested Stockholder becomes an
Interested Stockholder. In order to amend the Company's charter to elect not to
be subject to the foregoing requirements with respect to Interested
Stockholders, an affirmative vote of at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and two-thirds of the
votes entitled to be cast by holders of outstanding shares of voting stock who
are not Interested Stockholders is required under the Maryland General
Corporation Law.
Control Shares Acquisitions
The Maryland General Corporation Law provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the shares
entitled to be voted on the matter, excluding shares of stock owned by the
acquiror or by officers or directors who are employees of the corporation.
"Control shares" are voting shares of stock which, if aggregated with all other
such shares of stock previously acquired by the acquiror, or in respect of which
the acquiror is able to exercise or direct the exercise of voting power except
solely by virtue of a revocable proxy, would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third; (ii) one-third or more but
less than a majority; or (iii) a majority of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses and delivery of an "acquiring person statement"), may compel the
corporation's board of directors to call a special meeting of stockholders to be
held within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the corporation may itself present the question
at any stockholders' meeting.
Unless the charter or bylaws provide otherwise, if voting rights are
not approved at the meeting or if the acquiring person does not deliver an
acquiring person statement within 10 days following a control share acquisition,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. Moreover, unless the
charter or bylaws provide otherwise, if voting rights for control shares are
43
<PAGE>
approved at a stockholders' meeting and the acquiror becomes entitled to
exercise or direct the exercise of a majority or more of all voting power, other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
Transfer Agent
The Bank serves as the Company's transfer agent.
44
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS
Market Information
There is no organized trading market for the Company's Shares.
However, the Company is aware of 35,280 Shares traded in 1996; 67,680 Shares
traded in 1997; and 48,520 Shares traded through June 30, 1998. In 1996 there
were 39 days with trading activity, with an average of 905 Shares trading per
day and 5,300 Shares trading in one day. In 1997 there were 25 days with trading
activity, with an average of 2,707 Shares trading per day and 7,200 Shares
trading in one day. Through June 30, 1998 there were 19 days with trading
activity, with an average of 2,554 Shares trading per day and 22,320 Shares
trading in one day. The number of Shares traded has not been adjusted to reflect
a 20% stock dividend declared on November 18, 1997, and distributed April 1,
1998. The high and low prices reported to the Company, or the Bank, as the
Company's transfer agent (which may or may not include all prices) for each
quarterly period during the past two years for each Share of $.01 par value
common stock of the Company are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
July 1, 1997 through June 30, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9/30/97 12/31/97 3/31/98 6/30/98
High Low High Low High Low High Low
----------- ----------- ----------- -----------
$42.00 $38.00 $43.00 $38.50 $43.00 $38.50 $43.00 $36.25
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
July 1, 1996 through June 30, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9/30/96 12/31/96 3/31/97 6/30/97
High Low High Low High Low High Low
----------- ----------- ----------- -----------
$42.00 $37.00 $41.50 $38.00 $42.75 $39.25 $42.50 $39.00
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Because the activity in the Company's common stock has been limited,
the prices in the table may not reflect the actual value or the trading price
that would be determined in a liquid market.
Holders
As of June 30, 1998 there were 418 holders of record of the Bank's
Shares.
Dividends
On November 18, 1997, the Company declared a 20% stock dividend, that
was distributed April 1, 1998. In addition, the Company declared and paid the
following cash dividends in the following quarters of the past two years:
45
<PAGE>
Quarter Ended Dividend Per Restated to Give Effect
Share to 20% Stock Dividend
- --------------------------------------------------------------------------------
12/31/96 $.80 $.67
6/30/97 $.50 $.42
12/31/97 $.80 $.67
3/31/98 $.25 $.25
6/30/98 $.25 $.25
There are no contractual restrictions that currently limit the
Company's ability to pay such dividends or that the Company reasonably believes
are likely to limit materially the future payment of dividends on the Company's
Shares.
As a depository institution whose deposits are insured by the FDIC, the
Bank may not pay dividends or distribute any of its capital assets to its parent
company while it remains in default on any assessment due the FDIC. The Bank
currently is not in default of any of its obligations to the FDIC. In addition,
FDIC regulations also impose certain minimum capital requirements which affect
the amount of cash available for the payment of dividends by a regulated banking
institution such as the Bank. As a commercial bank under the Maryland Financial
Institutions Article, the Bank may declare cash dividends from undivided profits
or, with the prior approval of the Commissioner, out of surplus in excess of
100% of its required capital stock, and (in either case) after providing for due
or accrued expenses, losses, interest and taxes.
Distributions paid by the Company to stockholders will be taxable to
the stockholders as dividends, to the extent of the Company's accumulated or
current earnings and profits. There can be no assurance that the Company will
declare or pay cash dividends at any particular time.
The Company has a Dividend Reinvestment Plan which permits stockholders
to choose whether to receive their entire dividend in stock or cash.
Stockholders who elect to receive their dividends in stock receive the number of
Shares equal to the amount of the dividend, divided by the value of the market
value of the Shares based on the price at which the Company's Shares were last
traded in bona fide sales in the previous year.
ITEM 2. LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the business to which the Bank or its
subsidiaries is a party or of which any of their properties is subject. There
are also no material proceedings to which any director, officer or affiliate of
the Bank, any person holding beneficially in excess of 5% of the Bank's Shares,
or any
46
<PAGE>
associate of any such director, officer, or securing holder is a party, or has a
material interest adverse to the Bank or its subsidiaries.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The Company was formed for the purpose of becoming the Bank's holding
company. Pursuant to the Plan of Reorganization and Share Exchange, dated
September 17, 1996, by and between the Company and the Bank, the stockholders of
the Bank exchanged their shares for Company Shares. The Company's Shares issued
pursuant to the plan were not registered under the 1933 Act, in reliance upon an
exemption from registration provided by Section 3(a)(12) of the Securities Act
of 1933, as amended (the "Securities Act").
Directors may elect to receive compensation for their services to the
Company and the Bank in Shares or cash. During 1997 and 1996, Directors
purchased 163 Shares and 272 Shares respectively, at average prices of $33.45
and $32.95 per Share, as restated to give retroactive effect to stock dividends
declared as of December 31, 1997. Currently, no Director is electing to receive
compensation in stock. The sale of the Shares was exempt from registration under
the Securities Act, pursuant to Section 4(2) thereof, as a transaction not
involving a public offering.
Options to purchase up to 1,000 Shares to each of seven outside
directors have been granted pursuant to the Company Director's Stock Option
Plan, at an exercise price of $38.00. To date, there have been no exercise of
the options. Options to purchase shares under the Company Incentive Stock Option
Plan and Employee Stock Purchase Plan have not yet been granted. The Company
believes that the grant of options and the exercise pursuant to the terms of the
plans was exempt from registration under Section 4(2) of the Securities Act, and
Rule 701 promulgated under the Securities Act.
The above does not include unregistered issuances of the Company's
common stock that did not involve a sale, consisting of issuances of Shares
under the Company's Dividend Reinvestment Plan and a stock dividend declared in
1998.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Maryland law, a corporation may indemnify a director or officer
against liability, including reasonable expenses, incurred in a proceeding
because the person was a director or officer of a corporation if the person
conducted himself in good faith and reasonably believed, in the case of conduct
in an official capacity with the corporation, that his conduct was in the
47
<PAGE>
corporation's best interests, and, in all other cases, the person had no
reasonable cause to believe that his conduct was at least not opposed to the
corporation's best interests; and in the case of criminal proceedings, the
corporation may not indemnify a director or officer in connection with a
proceeding in which the person was adjudged liable to the corporation or derived
an improper personal benefit.
To the maximum extent permitted by Maryland law in effect from time to
time, the Company's bylaws provide that the Company must indemnify, and without
requiring a preliminary determination as to the ultimate entitlement of the
individual to be indemnified, must pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (i) any individual who is a
present or former director, officer, employee or agent of the Company or (ii)
any individual who serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan (at the request of the Company). The
Company has the power to purchase and maintain insurance on behalf of any person
for whom indemnification is permitted as stated above, against any liability
asserted against him or her in such capacity arising out of his or her status as
such, whether or not the Company would have the power to indemnify him or her
against such liability. The indemnification provision stated in the Company's
Bylaws are not deemed exclusive of any other rights to which any person may be
otherwise entitled, and the provisions of the Company's charter and Bylaws do
not prohibit the Company from extending its indemnification to cover other
persons and activities to the extent permitted by law.
In addition, the Company's charter provides that no director or officer
of the Company is liable to the Company or to its stockholders for money damages
except (i) to the extent that it is proved that such director or officer
actually received an improper benefit or profit in money, property or services,
for the amount of the benefit or profit in money, property or services actually
received, or (ii) to the extent that a judgment or other final adjudication
adverse to such director or officer is entered in a proceeding based on a
finding in the proceeding that such director's or officer's action, or failure
to act, was the result of active and deliberate dishonesty and was material to
the cause of action adjudicated in the proceeding.
PART F-S
FINANCIAL STATEMENTS
Reference is made to the Unaudited Consolidated Financial Statements
for the Six Months Ended June 30, 1998 and 1997, commencing on page F-1 of this
Form 10-SB, and the Report on Audit of Consolidated Financial Statements for the
Year Ended December 31, 1997, and the notes thereto, commencing on page F-8 of
this Form 10-SB, which financial statements, report, and notes and data are
incorporated by reference. Because the Company was organized in 1996 to become
the Bank's holding company, and because the Company acquired the Bank on
September 30, 1996, financial information for periods before that date is of the
Bank only.
48
<PAGE>
Page
F-1 Unaudited Consolidated Financial Statements for the Six Months
Ended June 30, 1998 and 1997
F-2 Financial Highlights (unaudited)
F-3 Consolidated Statements of Income (unaudited)
F-4 Consolidated Balance Sheets (unaudited)
F-5 Consolidated Statements of Cash Flows (unaudited)
F-7 Notes to Interim Financial Statements
F-8 Report on Audit of Consolidated Financial Statements for the
Year Ended December 31, 1997
F-9 Report of Independent Auditors
F-10 Consolidated Balance Sheets
F-11 Consolidated Statements of Income
F-12 Consolidated Statements of Changes in Stockholders'
Equity
F-13 Consolidated Statements of Cash Flows
F-15 Notes to Financial Statements
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibit
Number
3.1 Company Articles of Amendment
3.2 Company Articles of Incorporation
3.3 Company Amended and Restated Bylaws
10.1 Employment Agreement by and between the Bank and John S.
Whiteside
10.2 Company Incentive Stock Option Plan
49
<PAGE>
10.3 Company Director Stock Option Plan
10.4 Company Employee Stock Purchase Plan
21.1 Subsidiaries of the Company
23.1 Consent from Rowles & Company LLP
27 Financial Data Schedule
50
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
PATAPSCO VALLEY BANCSHARES, INC.
Dated: October 28, 1998 By: /s/ John S. Whiteside
----------------------------
John S. Whiteside, President
F5454b.600 R:5
51
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997
F-1
<PAGE>
Patapsco Valley Bancshares, Inc.
Financial Highlights
<TABLE>
<CAPTION>
June 30, Increase December 31, Increase
1998 1997 (decrease) 1997 1996 (decrease)
------------- ------------- ---------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
At mid-year or year end
Assets $ 150,478,811 $ 129,926,125 15.82% $ 140,229,147 $ 133,899,764 4.73%
Deposits 123,187,411 109,889,501 12.10% 119,495,004 114,587,515 4.28%
Loans, net 119,777,855 93,358,005 28.30% 102,336,413 83,841,354 22.06%
Stockholders' equity 16,556,342 15,635,857 5.89% 15,893,859 14,697,769 8.14%
Average balances
Assets $ 146,288,504 $ 129,132,106 13.29% $ 132,260,038 $ 128,882,018 2.62%
Deposits 120,715,797 109,213,702 10.53% 111,826,069 110,622,714 1.09%
Loans, net 114,657,888 87,458,920 31.10% 91,907,505 78,760,184 16.69%
Stockholders' equity 16,303,018 15,574,976 4.67% 15,819,273 14,217,070 11.27%
For the half-year or year
Net interest income $ 3,990,872 $ 3,752,849 6.34% $ 7,592,050 $ 6,608,922 14.88%
Non-interest income 1,534,405 427,493 258.93% 1,002,288 751,603 33.35%
Net income 741,682 1,027,750 -27.83% 1,547,610 1,502,330 3.01%
Cash dividends declared 338,082 276,104 22.45% 720,391 626,305 15.02%
Per share data
Net income $ 1.10 $ 1.55 -29.03% $ 2.33 $ 2.31 0.87%
Cash dividends declared 0.50 0.42 19.05% 1.08 0.96 12.50%
Book value 24.55 23.59 4.05% 23.81 22.36 6.48%
Ratios (annualized)
Return on average assets 1.01% 1.59% -36.30% 1.17% 1.17% 0.38%
Return on average equity 9.10% 13.20% -31.06% 9.78% 10.57% -7.42%
Dividend payout ratio 45.45% 27.10% 67.75% 46.35% 41.56% 11.53%
Average equity to assets 11.14% 12.06% -7.60% 11.96% 11.03% 8.43%
</TABLE>
F-2
<PAGE>
Patapsco Valley Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Unaudited
Six Months Ended June 30,
1998 1997
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend revenue
Loans, including fees $ 5,190,077 $ 4,262,140
U.S. Treasury securities 247,447 466,023
U.S. Government agency securities 71,294 121,409
State and municipal securities 24,743 29,338
Federal funds sold 202,203 275,238
Other investments 30,173 24,396
----------- -----------
Total interest and dividend revenue 5,765,937 5,178,544
----------- -----------
Interest expense
Deposits 1,609,490 1,353,592
Other 165,575 72,103
Total interest expense 1,775,065 1,425,695
----------- -----------
Net interest income 3,990,872 3,752,849
Provision for credit losses - -
----------- -----------
Net interest income after provision for credit losses 3,990,872 3,752,849
----------- -----------
Other operating revenue
Service charges on deposit accounts 393,647 297,484
Mortgage banking fees and gains 1,012,866 -
Other fees and commissions 127,892 130,009
----------- -----------
Total other operating revenue 1,534,405 427,493
----------- -----------
Other expenses
Salaries 2,084,767 1,101,528
Employee benefits 468,596 258,689
Occupancy 430,229 232,915
Furniture and equipment 372,504 227,138
Other 1,006,805 751,689
----------- -----------
Total other expenses 4,362,901 2,571,959
Income before income taxes 1,162,376 1,608,383
Income taxes 420,694 580,633
----------- -----------
Net income 741,682 1,027,750
Change in unrealized gain (loss) on securities
available for sale, net of tax (13,021) 2,722
----------- -----------
Comprehensive income $ 728,661 $ 1,030,472
=========== ===========
Basic and diluted net income per share $ 1.10 $ 1.55
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-3
<PAGE>
Patapsco Valley Bancshares, Inc.
and Subsidiaires
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Unaudited
June 30,
1998 1997
------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 5,966,969 $ 6,841,793
Federal funds sold 5,486,000 6,891,000
------------- ------------
Total cash and cash equivalents 11,452,969 13,732,793
Securities available for sale 13,944,540 19,318,259
Loans held for sale 22,356,699 -
Loans, less allowance for credit losses 97,421,156 93,358,005
Premises and equipment 3,246,690 1,735,306
Foreclosed real estate 23,581 194,000
Deferred income taxes 293,615 280,897
Accrued interest receivable 712,824 767,679
Prepaid income taxes 162,501 -
Intangibles 371,252 208,054
Other assets 492,984 331,132
------------- ------------
$ 150,478,811 $129,926,125
============= ============
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 34,812,998 $ 30,566,752
Interest-bearing 88,374,413 79,322,749
------------- ------------
Total deposits 123,187,411 109,889,501
Short-term borrowings 9,015,355 2,972,950
Dividend payable 168,601 276,104
Accrued interest payable 456,555 339,946
Other liabilities 1,094,547 811,767
------------- ------------
133,922,469 114,290,268
------------- ------------
Stockholders' equity
Common stock, par value $0.01 per share 6,744 5,523
Surplus 11,579,823 11,183,730
Retained earnings 4,950,205 4,472,152
Accumulated other comprehensive income 19,570 (25,548)
------------- ------------
16,556,342 15,635,857
------------- ------------
$ 150,478,811 $129,926,125
============= ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-4
<PAGE>
Patapsco Valley Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Unaudited
Six Months Ended June 30,
1998 1997
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Interest received $ 5,699,060 $ 5,102,979
Fees and commissions received 521,539 427,493
Proceeds from sales of loans held for sale 75,440,705 -
Originations of loans held for sale (91,243,953) -
Interest paid (1,867,015) (1,444,167)
Cash paid to suppliers and employees (3,888,712) (2,164,913)
Income taxes paid (175,451) (574,271)
-------------- -------------
15,513,827 1,347,121
Cash flows from investing activities
Proceeds from maturity of securities
available for sale 14,259,894 19,203,243
Purchases of securities available for sale (13,065,662) (9,960,141)
Loans made, net of principal collected (564,025) (9,535,946)
Payments of organization costs 196 -
Proceeds from sales of other real estate - -
Purchases of premises, equipment, and software (1,434,723) (679,049)
-------------- -------------
(804,320) (971,893)
-------------- -------------
Cash flows from financing activities
Net increase (decrease) in time deposits (4,622,711) (3,155,280)
Net increase (decrease) in other deposits 8,315,118 (1,542,734)
Net increase (decrease) in other borrowed funds 6,154,031 (263,622)
Dividends paid (613,768) (436,251)
Dividends reinvested 271,904 178,261
Stock options exercised - 5,459
-------------- -------------
9,504,574 (5,214,167)
-------------- -------------
Net increase (decrease) in cash and cash equivalents (6,813,573) (4,838,939)
Cash and equivalents at beginning of year 18,266,542 18,571,732
-------------- -------------
Cash and equivalents at end of year $ 11,452,969 $ 13,732,793
============== =============
</TABLE>
The accompanying notes are an integral part of
these financial statements
F-5
<PAGE>
Patapsco Valley Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Cash flows
(Continued)
<TABLE>
<CAPTION>
Unaudited
Six Months Ended June 30,
1998 1997
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of net income to net
cash provided by operating activities
Net income $741,682 $1,027,750
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation, amortization and losses 331,411 215,834
Provision for credit loses - -
Loss on foreclosed real estate - -
Deferred income taxes (1,208) 2
Amortization of premiums and discounts, net 346 (783)
Increase (decrease) in
Deferred loan fees (61,303) 19,295
Accrued interest payable (91,950) (18,472)
Income taxes payable (87,811) (50,380)
Other liabilities 196,190 278,908
Decrease (increase) in
Loans held for sale (16,816,114) -
Accrued interest receivable (5,920) (94,077)
Prepaid income taxes 334,262 56,740
Other assets (53,412) (87,696)
------------ -----------
$(15,513,827) $1,347,121
============= ===========
</TABLE>
F-6
<PAGE>
Patapsco Valley Bancshares, Inc.
and Subsidiaries
Notes to Interim Financial Statements
June 30, 1998 and 1997
The accompanying unaudited consolidated financial statements do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
financial statements and footnotes thereto for the year ended December 31, 1997
appearing on pages F-9 through F-30.
The interim financial statements reflect all adjustments, which are normal and
recurring, and in the opinion of management, necessary for a fair presentation
of the results for the periods presented. Operating results for the six months
ended June 30, 1998 and 1997 are not necessarily indicative of the results that
may be expected for the years ending December 31, 1998 and 1997.
F-7
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC
REPORT ON AUDIT OF
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1997
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Patapsco Valley Bancshares, Inc. and Subsidiaries
Ellicott City, Maryland
We have audited the accompanying consolidated balance sheets of Patapsco Valley
Bancshares, Inc. and Subsidiaries as of December 31, 1997, 1996, and 1995, 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 Company's 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 consolidated financial position of
Patapsco Valley Bancshares, Inc. and Subsidiaries as of December 31, 1997, 1996,
and 1995, and the consolidated results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Rowles & Company LLP
Baltimore, Maryland
January 16, 1998
F-9
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks.................................................... $ 5,085,542 $ 7,727,741 $ 4,764,831
Federal funds sold......................................................... 13,181,000 10,843,991 10,030,000
------------ ------------ ------------
Total cash and cash equivalents......................................... 18,266,542 18,571,732 14,794,831
Securities available for sale.............................................. 15,160,333 28,556,145 27,361,334
Loans held for sale........................................................ 5,540,585 - -
Loans, less allowance for credit losses of $1,615,008,
$1,562,853, and $778,612................................................ 96,795,828 83,841,354 77,669,107
Premises and equipment..................................................... 2,108,434 1,396,815 1,444,603
Foreclosed real estate..................................................... 23,581 194,000 616,053
Deferred income taxes...................................................... 284,213 282,610 307,545
Accrued interest receivable................................................ 706,904 673,602 739,273
Prepaid income taxes....................................................... 496,763 56,740 774,340
Intangibles................................................................ 406,392 83,330 68,224
Other assets............................................................... 439,572 243,436 299,934
------------ ------------ ------------
$140,229,147 $133,899,764 $124,075,244
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Deposits
Noninterest-bearing..................................................... $ 31,006,823 $ 30,871,980 $ 30,033,542
Interest-bearing........................................................ 88,488,181 83,715,535 77,954,897
------------ ------------ ------------
Total deposits....................................................... 119,495,004 114,587,515 107,988,439
Securities sold under repurchase agreements................................ 2,861,324 3,236,572 1,387,237
Dividend payable........................................................... 444,287 436,251 341,023
Accrued interest payable................................................... 548,505 358,418 366,256
Other liabilities.......................................................... 986,168 583,239 568,350
------------ ------------ ------------
124,335,288 119,201,995 110,651,305
------------ ------------ ------------
Stockholders' equity
Common stock, par value $0.01 per share in 1997 and 1996,
and $10.00 per share in 1995; authorized 50,000,000 shares
in 1997 and 1996, and 1,000,000 shares in 1995; issued and
outstanding 667,408 shares in 1997, 547,726 shares in 1996,
and 536,326 shares in 1995............................................ 6,674 5,477 5,363,260
Surplus................................................................. 11,307,989 11,000,055 5,003,341
Retained earnings....................................................... 4,546,605 3,720,507 3,102,160
Unrealized gain (loss) on securities available for sale, net of
income taxes......................................................... 32,591 (28,270) (44,822)
------------ ------------ ------------
15,893,859 14,697,769 13,423,939
------------ ------------ ------------
$140,229,147 $133,899,764 $124,075,244
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<S> <C> <C> <C> <C> <C> <C>
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND REVENUE
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, including fees............................................................. $8,855,753 $7,521,415 $7,528,500
U.S. Treasury securities.......................................................... 735,626 1,148,698 523,549
U.S. Government agency securities................................................. 212,317 294,580 332,050
State and municipal securities.................................................... 58,676 58,676 58,676
Federal funds sold................................................................ 671,736 681,141 794,216
Other investments................................................................. 53,446 49,195 34,049
---------- ---------- ----------
Total interest and dividend revenue......................................... 10,587,554 9,753,705 9,271,040
---------- ---------- ----------
INTEREST EXPENSE
- ----------------------------------------------------------------------------------------------------------------------------------
Deposits.......................................................................... 2,852,320 3,029,782 2,658,601
Other............................................................................. 143,184 115,001 81,096
---------- ---------- ----------
Total interest expense...................................................... 2,995,504 3,144,783 2,739,697
---------- ---------- ----------
Net interest income......................................................... 7,592,050 6,608,922 6,531,343
Provision for credit losses....................................................... - - 1,710,000
---------- ---------- ----------
Net interest income after provision for credit losses....................... 7,592,050 6,608,922 4,821,343
---------- ---------- ----------
OTHER OPERATING REVENUE
- ----------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts............................................... 668,785 519,848 539,603
Mortgage banking fees and gains................................................... 92,265 - -
Other fees and commissions........................................................ 241,238 231,755 240,941
---------- ---------- ----------
Total other operating revenue............................................... 1,002,288 751,603 780,544
---------- ---------- ----------
OTHER EXPENSES
- ----------------------------------------------------------------------------------------------------------------------------------
Salaries.......................................................................... 2,700,796 2,157,309 2,021,447
Employee benefits................................................................. 529,013 536,597 446,802
Occupancy......................................................................... 525,165 481,825 448,765
Furniture and equipment........................................................... 533,513 372,494 260,448
Other............................................................................. 1,889,507 1,448,557 1,509,456
---------- ---------- ----------
Total other expenses........................................................ 6,177,994 4,996,782 4,686,918
---------- ---------- ----------
Income before income taxes........................................................ 2,416,344 2,363,743 914,969
Income taxes...................................................................... 868,734 861,413 304,957
---------- ---------- ----------
Net income........................................................................ $1,547,610 $1,502,330 $ 610,012
========== ========== ==========
Basic and diluted earnings per share.............................................. $ 2.33 $ 2.31 $ 0.95
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized
Retained gain (loss)
Shares Par value Surplus earnings on securities
Common stock
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994......................... 476,174 $4,761,742 $4,795,712 $3,494,070 $(222,802)
Net income......................................... - - - 610,012 -
Exercise of stock options.......................... 2,178 21,780 35,220 - -
Cash dividends, $.79 per share..................... - - - (510,421) -
Dividends reinvested............................... 8,824 88,237 172,409 - -
10% stock dividend 49,150 491,501 - (491,501) -
Change in unrealized loss on securities
available for sale.............................. - - - - 177,980
------- ---------- ---------- ---------- ---------
Balance, December 31, 1995......................... 536,326 5,363,260 5,003,341 3,102,160 (44,822)
Exchange of $.01 par value shares for $10
par value shares................................ - (5,357,897) 5,357,897 - -
Net income......................................... - - - 1,502,330 -
Exercise of stock options.......................... 5,018 50 116,913 - -
Cash dividends, $.96 per share..................... - - - (626,305) -
Dividends reinvested............................... 6,382 64 264,226 - -
Transfer to surplus................................ - - 257,678 (257,678) -
Change in unrealized loss on securities
available for sale.............................. - - - - 16,552
------- ---------- ---------- ---------- ---------
Balance, December 31, 1996......................... 547,726 5,477 11,000,055 3,720,507 (28,270)
Net income......................................... - - - 1,547,610 -
Exercise of stock options.......................... 136 1 5,458 - -
Cash dividends, $1.08 per share.................... - - - (720,391) -
Dividends reinvested............................... 7,496 75 302,476 - -
Stock split effected in the form of a 20%
stock dividend.................................. 112,050 1,121 - (1,121) -
Change in unrealized gain (loss) on
securities available for sale................... - - - - 60,861
------- ---------- ----------- ---------- ---------
Balance, December 31, 1997......................... 667,408 $6,674 $11,307,989 $4,546,605 $32,591
======= ========== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------------------
Interest received...................................................... $10,586,933 $9,800,556 $9,184,699
Fees and commissions received.......................................... 910,023 751,603 780,544
Proceeds from sales of loans held for sale............................. 1,865,446 - -
Originations of loans held for sale.................................... (7,313,766) - -
Interest paid.......................................................... (2,805,417) (3,152,621) (2,540,258)
Cash paid to suppliers and employees................................... (5,318,559) (4,610,489) (4,393,532)
Income taxes paid...................................................... (1,340,640) (49,494) (1,086,383)
----------- ---------- ----------
(3,415,980) 2,739,555 1,945,070
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------------------
Proceeds from maturity of securities
Available for sale.................................................. 30,407,220 44,096,612 14,866,750
Held to maturity.................................................... - - 500,000
Purchases of securities available for sale............................. (16,911,419) (45,247,510) (24,884,540)
Loans made, net of principal collected................................. (12,987,991) (6,364,373) (5,057,929)
Payments of organization costs......................................... (27,445) (28,849) -
Proceeds from sales of other real estate............................... 125,419 583,133 233,291
Purchases of premises, equipment, and software......................... (1,622,890) (300,254) (372,566)
----------- ---------- -----------
(1,017,106) (7,261,241) (14,714,994)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in time deposits............................... 6,467,431 (171,627) 12,243,542
Net increase (decrease) in other deposits.............................. (1,559,942) 6,770,703 (3,458,117)
Net increase (decrease) in other borrowed funds........................ (375,248) 1,849,335 (490,737)
Dividends paid......................................................... (712,355) (531,077) (502,720)
Dividends reinvested................................................... 302,551 264,290 260,646
Stock options exercised................................................ 5,459 116,963 57,000
----------- ---------- -----------
4,127,896 8,298,587 8,109,614
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents................... (305,190) 3,776,901 (4,660,310)
Cash and equivalents at beginning of year.............................. 18,571,732 14,794,831 19,455,141
----------- ---------- -----------
Cash and equivalents at end of year.................................... $18,266,542 $18,571,732 $14,794,831
=========== =========== ===========
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------------------
Net income............................................................. $1,547,610 $1,502,330 $610,012
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation, amortization and losses.................................. 615,655 361,786 250,768
Provision for credit losses............................................ - - 1,710,000
Loss on foreclosed real estate......................................... 45,000 32,919 21,575
Deferred income taxes.................................................. (39,896) 14,520 116,062
Amortization of premiums and accretion of discounts, net............... (836) (16,946) (17,837)
Increase (decrease) in
Deferred loan fees.................................................. 33,517 (1,874) 7,585
Accrued interest payable............................................ 190,087 (7,838) 199,439
Income taxes payable................................................ 8,012 79,799 (123,148)
Other liabilities................................................... 394,917 (64,910) 73,462
Loans held for sale................................................. (5,540,585) - -
Decrease (increase) in
Accrued interest receivable......................................... (33,302) 65,671 (76,089)
Prepaid income taxes................................................ (440,023) 717,600 (774,340)
Other assets........................................................ (196,136) 56,498 (52,419)
----------- ---------- ----------
$(3,415,980) $2,739,555 $1,945,070
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
NOTE 1. Summary of Significant Accounting Policies
THE ACCOUNTING AND REPORTING POLICIES REFLECTED IN THE FINANCIAL STATEMENTS
CONFORM TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND TO GENERAL PRACTICES
WITHIN THE BANKING INDUSTRY. MANAGEMENT MAKES ESTIMATES AND ASSUMPTIONS THAT
AFFECT THE REPORTED AMOUNTS OF ASSETS, LIABILITIES AND DISCLOSURES OF
COMMITMENTS AND CONTINGENT LIABILITIES AT THE BALANCE SHEET DATE, AND REVENUES
AND EXPENSES DURING THE YEAR. ACTUAL RESULTS COULD DIFFER FROM THOSE ESTIMATES.
Holding company formation - On August 22, 1996, Patapsco Valley Bancshares, Inc.
(the Company) was incorporated in the State of Maryland to acquire the stock of
Commercial and Farmers Bank (the Bank) and to engage in such other business
activities permitted for bank holding companies by law. The Bank's stockholders
approved an agreement for the exchange of shares on September 30, 1996, and each
outstanding share of Bank common stock was exchanged for one share of the
Company's common stock.
THE BANK CONTINUES ITS BANKING BUSINESS UNDER THE SAME NAME, AS A WHOLLY- OWNED
SUBSIDIARY OF THE HOLDING COMPANY. COMPARATIVE DATA IN THE ACCOMPANYING
CONSOLIDATED FINANCIAL STATEMENTS FOR 1995 ARE THOSE OF THE BANK AND ITS
SUBSIDIARIES AS PREDECESSOR OF THE COMPANY.
Principles of consolidation - The consolidated financial statements include the
accounts of the Company, The Central Maryland Service Corporation, and the Bank
and its subsidiaries, Founders Mortgage Company, Inc., C&F Insurance Agency,
Inc. and Rogers Avenue Realty, Inc. Intercompany balances and transactions have
been eliminated.
ON JULY 1, 1997, THE COMPANY ACQUIRED ALL OF THE OUTSTANDING SHARES OF THE
CENTRAL MARYLAND SERVICE CORPORATION (CMSC), AN ORGANIZATION ORIGINALLY FORMED
BY THE BANK AND TWO OTHER BANKS TO PROVIDE DATA PROCESSING SERVICES ON A
COOPERATIVE BASIS TO THE OWNER-BANKS. THE ACQUISITION IS ACCOUNTED FOR AS A
PURCHASE. THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDE BALANCE SHEET ACCOUNTS
OF CMSC AS OF DECEMBER 31, 1997, AND INCOME STATEMENT ACCOUNTS SINCE JULY 1,
1997, WITH INTERCOMPANY TRANSACTIONS ELIMINATED. CONSEQUENTLY, THE COMPANY'S
PAYMENTS TO CMSC PRIOR TO JULY 1, 1997 ARE REPORTED AS DATA PROCESSING EXPENSE
(A COMPONENT OF OTHER OPERATING EXPENSE); AND AFTERWARD THESE PAYMENTS ARE
ELIMINATED IN CONSOLIDATION.
Business - Through its subsidiaries, the Company provides banking services to
customers located in Howard County and surrounding areas of central Maryland.
Cash equivalents - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
Investment securities - As securities are purchased, management determines if
the securities should be classified as held to maturity or available for sale.
Securities which management has the intent and ability to hold to maturity are
recorded at amortized cost which is cost adjusted for amortization of premiums
and accretion of discounts to maturity. Securities held to meet liquidity needs
or which may be sold before maturity are classified as available for sale and
carried at fair value with unrealized gains and losses included in stockholders'
equity on an after tax basis.
Loans held for sale - Mortgage loans originated and intended for sale are
carried at the lower of aggregate cost or estimated market value. The Company
has contracts to sell all loans held for sale at prices that are not lower than
cost.
Loans - Loans are stated at the current amount of unpaid principal, less
deferred origination fees and the allowance for credit losses.
F-15
<PAGE>
INTEREST ON LOANS IS ACCRUED BASED ON THE PRINCIPAL AMOUNTS OUTSTANDING.
ORIGINATION FEES ARE AMORTIZED TO INCOME OVER THE TERMS OF LOANS. THE ACCRUAL OF
INTEREST IS DISCONTINUED WHEN ANY PORTION OF THE PRINCIPAL OR INTEREST IS NINETY
DAYS PAST DUE AND COLLATERAL IS INSUFFICIENT TO DISCHARGE THE DEBT IN FULL.
LOANS ARE CONSIDERED IMPAIRED WHEN, BASED ON CURRENT INFORMATION, MANAGEMENT
CONSIDERS IT UNLIKELY THAT THE COLLECTION OF PRINCIPAL AND INTEREST PAYMENTS
WILL BE MADE ACCORDING TO CONTRACTUAL TERMS. GENERALLY, LOANS ARE NOT REVIEWED
FOR IMPAIRMENT UNTIL THE ACCRUAL OF INTEREST HAS BEEN DISCONTINUED. IF
COLLECTION OF PRINCIPAL IS EVALUATED AS DOUBTFUL, ALL PAYMENTS ARE APPLIED TO
PRINCIPAL.
Allowance for credit losses - The allowance for credit losses represents an
amount which, in management's judgment, will be adequate to absorb possible
losses on existing loans and other extensions of credit that may become
uncollectible. Management's judgment in determining the adequacy of the
allowance is based on evaluations of the collectibility of loans. These
evaluations take into consideration such factors as the volume and quality of
the loan portfolio and current economic conditions that may affect the
borrowers' ability to pay. The amounts ultimately collected on these loans could
differ materially from the estimated collections.
Premises and equipment - Premises and equipment are recorded at cost less
accumulated depreciation. Depreciation is computed over the estimated useful
lives of the assets using the straight-line and accelerated methods.
Intangibles - Computer software and organization costs are recorded at cost less
accumulated amortization. Amortization is computed over estimated useful lives
of three to five years using the straight-line method.
Foreclosed real estate - Real estate acquired through foreclosure is recorded at
the lower of cost or fair market value on the date acquired. Losses incurred at
the time of acquisition of the property are charged to the allowance for credit
losses. Subsequent reductions in the estimated carrying value of the property
and other expenses of owning the property are included in other operating
expense.
Income taxes - The provision for income taxes includes income taxes payable for
the current year and deferred income taxes. Deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Per share data - Basic earnings per share are determined by dividing net income
by the weighted average number of shares of common stock outstanding, giving
retroactive effect to stock dividends declared. Diluted earnings per share are
determined using weighted average shares adjusted for the dilutive effect of
outstanding stock options. The basic and diluted weighted average shares
outstanding were as follows:
1997 1996 1995
------- ------- -------
Weighted average shares outstanding 664,505 649,070 640,159
Effect of dilutive stock options - 1,535 1,642
------- ------- -------
Adjusted weighted average shares 664,505 650,605 641,801
Dividends per share are restated giving retroactive effect to stock dividends
declared.
NOTE 2. Cash and Equivalents
CASH AND DUE FROM BANKS INCLUDES INTEREST-BEARING DEPOSITS OF $40,937, $66,931
AND $65,189 AT DECEMBER 31, 1997, 1996, AND 1995, RESPECTIVELY.
THE BANK NORMALLY CARRIES BALANCES WITH OTHER BANKS THAT EXCEED THE FEDERALLY
INSURED LIMIT. AVERAGE BALANCES CARRIED IN EXCESS OF THE LIMIT WERE $337,013 FOR
1997, $227,337 FOR 1996, AND $145,703 FOR 1995. THE BANK SOLD FEDERAL FUNDS TO
OTHER BANKS, ON AN UNSECURED BASIS, THAT AVERAGED $12,011,554 FOR 1997,
$12,579,343 FOR 1996, AND $13,410,081 FOR 1995.
BANKS ARE REQUIRED TO CARRY NONINTEREST-BEARING CASH RESERVES OF SPECIFIED
PERCENTAGES OF DEPOSIT BALANCES. THE BANK'S NORMAL BALANCES OF CASH ON HAND AND
ON DEPOSIT WITH OTHER BANKS ARE SUFFICIENT TO SATISFY THE RESERVE REQUIREMENTS.
NOTE 3. Investment Securities
F-16
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES ARE SUMMARIZED AS FOLLOWS:
Amortized Unrealized Unrealized Fair
December 31, 1997 cost gains losses value
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Available for sale
U. S. Treasury.......................................... $9,950,524 $31,037 $13,339 $9,968,222
U. S. Government agency................................. 3,150,000 1,141 23,265 3,127,876
State and municipal..................................... 1,047,402 6,749 892 1,053,259
---------- ------ ------ -----------
Total debt securities........................ 14,147,926 38,927 37,496 14,149,357
Equity securities....................................... 959,310 52,662 996 1,010,976
----------- ------- ------- -----------
$15,107,236 $91,589 $38,492 $15,160,333
=========== ======= ======= ===========
Amortized Unrealized Unrealized Fair
December 31, 1996 cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale
U. S. Treasury.......................................... $21,818,295 $46,832 $34,830 $21,830,297
U. S. Government agency................................. 4,998,436 8,926 78,865 4,928,497
State and municipal..................................... 1,049,719 13,847 1,966 1,061,600
----------- -------- ------- -----------
Total debt securities........................ 27,866,450 69,605 115,661 27,820,394
Equity securities....................................... 735,751 - - 735,751
----------- -------- -------- -----------
$28,602,201 $69,605 $115,661 $28,556,145
=========== ======== ======== ===========
Amortized Unrealized Unrealized Fair
December 31, 1995 cost gains losses value
- --------------------------------------------------------------------------------------------------------------------------
Available for sale
U. S. Treasury.......................................... $19,773,943 $24,962 $21,828 $19,777,077
U. S. Government agency................................. 5,932,326 30,926 129,941 5,833,311
State and municipal..................................... 1,052,037 24,440 1,582 1,074,895
----------- ------- -------- -----------
Total debt securities........................ 26,758,306 80,328 153,351 26,685,283
Equity securities....................................... 676,051 - - 676,051
----------- ------- -------- -----------
$27,434,357 $80,328 $153,351 $27,361,334
=========== ======= ======== ===========
</TABLE>
F-17
<PAGE>
U.S. GOVERNMENT AGENCY SECURITIES INCLUDE VARIABLE RATE NOTES WITH AN AMORTIZED
COST OF $1,250,000 AND FAIR VALUE OF $1,230,688 AS OF DECEMBER 31, 1997.
IN 1995, THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) GRANTED A ONE- TIME
OPPORTUNITY TO RECLASSIFY SECURITIES. THE BANK RECLASSIFIED ALL OF ITS
HELD-TO-MATURITY SECURITIES, HAVING AN AMORTIZED COST OF $4,879,609, TO
AVAILABLE-FOR-SALE.
CONTRACTUAL MATURITIES, SHOWN BELOW, WILL DIFFER FROM ACTUAL MATURITIES BECAUSE
BORROWERS MAY HAVE THE RIGHT TO CALL OR PREPAY OBLIGATIONS WITH OR WITHOUT CALL
OR PREPAYMENT PENALTIES.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
Maturing
Within one year...................................... $12,652,590 $12,626,838 $18,672,682 $18,643,836
Over one to five years............................... 1,495,336 1,522,519 9,193,768 9,176,558
----------- ----------- ----------- -----------
$14,147,926 $14,149,357 $27,866,450 $27,820,394
=========== =========== =========== ===========
</TABLE>
SECURITIES WITH AN AMORTIZED COST OF $9,702,317, $13,551,164, AND $10,272,946,
RESPECTIVELY, WERE PLEDGED AS COLLATERAL FOR GOVERNMENT DEPOSITS AND REPURCHASE
AGREEMENTS.
NOTE 4. Loans
<TABLE>
<CAPTION>
MAJOR CATEGORIES OF LOANS ARE AS FOLLOWS:
<S> <C> <C> <C>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Mortgage
Residential.................................................... $11,816,400 $12,203,279 $12,690,080
Commercial..................................................... 29,376,631 25,363,764 20,142,199
Construction and land development.............................. 6,752,244 2,205,656 2,601,000
Lease financing........................................................ 20,428,755 16,166,804 12,320,217
Commercial............................................................. 24,143,558 22,784,968 22,496,034
Consumer............................................................... 5,893,248 6,679,736 8,198,189
----------- ----------- -----------
98,410,836 85,404,207 78,447,719
Allowance for credit losses............................................ 1,615,008 1,562,853 778,612
----------- ----------- -----------
$96,795,828 $83,841,354 $77,669,107
=========== =========== ===========
</TABLE>
F-18
<PAGE>
THE BANK MAKES LOANS TO CUSTOMERS LOCATED PRIMARILY IN HOWARD COUNTY AND
SURROUNDING AREAS OF CENTRAL MARYLAND. ALTHOUGH THE LOAN PORTFOLIO IS
DIVERSIFIED, ITS PERFORMANCE WILL BE INFLUENCED BY THE ECONOMY OF THE REGION.
<TABLE>
<CAPTION>
THE MATURITY AND RATE REPRICING DISTRIBUTION OF THE LOAN PORTFOLIO ARE AS
FOLLOWS:
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Variable rate immediately.............................................. $41,521,332 $36,557,108 $22,029,712
Due within one year.................................................... 23,029,056 19,274,415 25,600,580
Due over one to five years............................................. 27,448,251 26,367,186 29,288,719
Due over five years.................................................... 6,473,500 3,233,284 1,558,368
----------- ----------- -----------
98,472,139 85,431,993 78,477,379
Deferred origination fees.............................................. 61,303 27,786 29,660
----------- ----------- -----------
$98,410,836 $85,404,207 $78,447,719
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
TRANSACTIONS IN THE ALLOWANCE FOR CREDIT LOSSES WERE AS FOLLOWS:
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Beginning balance..................................................... $1,562,853 $778,612 $757,031
Provision charged to operations....................................... - - 1,710,000
Recoveries............................................................ 181,959 1,221,291 43,311
---------- ---------- ----------
1,744,812 1,999,903 2,510,342
Loans charged off..................................................... 129,804 437,050 1,731,730
---------- ---------- ----------
Ending balance....................................................... $1,615,008 $1,562,853 $778,612
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF LOANS PAST DUE 90 DAYS OR MORE AND ACCRUING INTEREST, AND
NONACCRUUAL LOANS ARE AS FOLLOWS:
December 31, 1997 December 31, 1996 December 31, 1995
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Past due Nonaccrual Past due Nonaccrual Past due Nonaccrual
Commercial........................ $50,000 $682,504 $- $78,925 $35,866 $344,043
Lease financing................... - 45,683 47,766 13,751 - 106,866
Mortgage.......................... - 448,513 - 274,903 417,330 205,692
Consumer.......................... 27,752 20,531 202 9,480 31,575 15,987
------- ---------- -------- -------- -------- --------
$77,752 $1,197,231 $47,968 $377,059 $484,771 $672,588
======= ========== ======= ======== ======== ========
Interest not accrued.............. $80,913 $37,978 $54,037
========== ======== ========
</TABLE>
MANAGEMENT HAS NOT CLASSIFIED ANY LOANS AS IMPAIRED AT DECEMBER 31, 1997, 1996,
OR 1995.
F-19
<PAGE>
NOTE 5. Related Party Transactions
THE EXECUTIVE OFFICERS AND DIRECTORS OF THE BANK ENTER INTO LOAN TRANSACTIONS
WITH THE BANK IN THE ORDINARY COURSE OF BUSINESS. THESE LOANS WERE MADE ON THE
SAME TERMS, INCLUDING INTEREST RATES AND COLLATERAL, AS THOSE PREVAILING AT THE
TIME FOR COMPARABLE LOANS WITH UNRELATED BORROWERS. AT DECEMBER 31, 1997, 1996,
AND 1995, THE AMOUNTS OF SUCH LOANS OUTSTANDING WERE $4,868,770, $4,481,021, AND
$4,256,212, RESPECTIVELY.
NOTE 6. Credit Commitments
<TABLE>
<CAPTION>
OUTSTANDING LOAN AND INVESTMENT COMMITMENTS, UNUSED LINES OF CREDIT, AND LETTERS
OF CREDIT ARE AS FOLLOWS:
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Loan commitments
Construction and land development............................... $4,761,851 $1,940,747 $1,414,560
Other mortgage loans............................................ 2,389,000 919,450 1,399,105
Lease financing................................................. 5,686,841 2,571,464 550,842
Other commercial loans.......................................... 1,494,988 311,244 229,681
----------- ---------- ----------
$14,332,680 $5,742,905 $3,594,188
=========== ========== ==========
Investment commitment................................................... $230,739 $296,440 $365,393
=========== ========== ==========
Unused lines of credit
Home-equity lines............................................... $2,599,090 $2,417,674 $2,467,737
Commercial lines................................................ 7,892,471 6,047,438 8,039,915
Unsecured consumer lines........................................ 1,414,067 1,286,077 1,218,090
----------- ---------- -----------
$11,905,628 $9,751,189 $11,725,742
----------- ---------- -----------
Letters of credit....................................................... $1,563,259 $1,555,036 $3,800,241
=========== ========== ===========
</TABLE>
LOAN COMMITMENTS AND LINES OF CREDIT ARE AGREEMENTS TO LEND TO A CUSTOMER AS
LONG AS THERE IS NO VIOLATION OF ANY CONDITION TO THE CONTRACT. LOAN COMMITMENTS
GENERALLY HAVE INTEREST RATES AT CURRENT MARKET AMOUNTS, FIXED EXPIRATION DATES,
AND MAY REQUIRE PAYMENT OF A FEE. LINES OF CREDIT GENERALLY HAVE VARIABLE
INTEREST RATES. SUCH LINES DO NOT REPRESENT FUTURE CASH REQUIREMENTS BECAUSE IT
IS UNLIKELY THAT ALL CUSTOMERS WILL DRAW UPON THEIR LINES IN FULL AT ANY TIME.
LETTERS OF CREDIT ARE COMMITMENTS ISSUED TO GUARANTEE THE PERFORMANCE OF A
CUSTOMER TO A THIRD PARTY.
THE MAXIMUM EXPOSURE TO CREDIT LOSS IN THE EVENT OF NONPERFORMANCE BY THE
CUSTOMER IS THE CONTRACTUAL AMOUNT OF THE COMMITMENT. LOAN COMMITMENTS, LINES OF
CREDIT AND LETTERS OF CREDIT ARE MADE ON THE SAME TERMS, INCLUDING COLLATERAL,
AS OUTSTANDING LOANS. MANAGEMENT IS NOT AWARE OF ANY ACCOUNTING LOSS IT WOULD
INCUR BY FUNDING ITS CREDIT COMMITMENTS.
THE BANK HAS ALSO COMMITTED TO INVEST IN A LIMITED PARTNERSHIP THAT OWNS
AFFORDABLE HOUSING PROJECTS.
F-20
<PAGE>
NOTE 7. Foreclosed Real Estate
<TABLE>
<CAPTION>
ACTIVITY IN THE ALLOWANCE FOR LOSSES ON FORECLOSED REAL ESTATE IS AS FOLLOWS:
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Beginning balance.............................................................. $- $89,488 $123,732
Provision charged to operations................................................ 45,000 32,919 21,575
Charge-offs, net of recoveries................................................. (40,191) (122,407) (55,819)
------- ------- --------
Ending balance................................................................. $4,809 $- $89,488
======= ======= ========
</TABLE>
NOTE 8. Premises and Equipment
<TABLE>
<CAPTION>
A SUMMARY OF PREMISES AND EQUIPMENT IS AS FOLLOWS:
Useful
lives 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Land and improvements...................................... 15 years $248,031 $248,031 $238,541
Buildings and improvements................................. 5-40 years 1,457,021 1,269,889 1,261,120
Furniture and equipment.................................... 3-33 years 3,368,767 2,124,786 2,095,705
---------- ---------- ----------
5,073,819 3,642,706 3,595,366
Accumulated depreciation................................... 2,965,385 2,245,891 2,150,763
---------- ---------- ----------
$2,108,434 $1,396,815 $1,444,603
========== ========== ==========
</TABLE>
DEPRECIATION EXPENSE WAS $464,343, $322,341, AND $225,106 FOR 1997, 1996, AND
1995, RESPECTIVELY. THE BANK HAS COMMITTED TO BUILD TWO BRANCHES IN 1998, AT A
TOTAL COST OF ABOUT $2.8 MILLION.
NOTE 9. Intangibles
<TABLE>
<CAPTION>
A SUMMARY OF INTANGIBLES IS AS FOLLOWS:
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Computer software.................................................................. $867,633 $148,861 $138,501
Organization costs................................................................. 90,172 28,849 -
-------- -------- --------
957,805 177,710 138,501
Accumulated amortization........................................................... 551,413 94,380 70,277
-------- -------- --------
$406,392 $83,330 $68,224
======== ======== ========
</TABLE>
AMORTIZATION OF COMPUTER SOFTWARE WAS $115,583, $34,816, AND $22,221 FOR 1997,
1996, AND 1995, RESPECTIVELY. AMORTIZATION OF ORGANIZATION COSTS WAS $8,972 AND
$1,422 FOR 1997 AND 1996 RESPECTIVELY.
F-21
<PAGE>
NOTE 10. Deposits
<TABLE>
<CAPTION>
MAJOR CLASSIFICATIONS OF INTEREST-BEARING DEPOSITS ARE AS FOLLOWS:
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NOW.................................................................... $16,201,755 $14,812,423 $14,094,719
Money market........................................................... 16,082,492 19,204,708 18,993,389
Savings................................................................ 24,084,510 24,046,411 19,043,169
Certificates of deposit, $100,000 or more.............................. 6,575,623 3,919,868 4,473,276
Other time deposits.................................................... 25,543,801 21,732,125 21,350,344
----------- ----------- -----------
$88,488,181 $83,715,535 $77,954,897
=========== =========== ===========
CERTIFICATES OF DEPOSIT $100,000 OR MORE MATURE AS FOLLOWS:
Three months or less................................................... 3,506,396 $2,173,555 $2,170,842
Three through 12 months................................................ 2,424,546 1,615,839 1,500,879
Over 12 months......................................................... 644,681 130,474 801,555
---------- ---------- ----------
$6,575,623 $3,919,868 $4,473,276
========== ========== ==========
</TABLE>
INTEREST EXPENSE ASSOCIATED WITH CERTIFICATES OF DEPOSIT OF $100,000 OR MORE WAS
$214,630, $196,898, AND $164,818 FOR THE YEARS ENDED DECEMBER 31, 1997, 1996,
AND 1995, RESPECTIVELY.
NOTE 11. Borrowings
The Bank sells securities under repurchase agreements as a form of cash
management service to commercial account customers. The Bank pays interest on
these overnight borrowings at a slight discount to the current three month
Treasury Bill rate. The average balances outstanding were $3,021,190 in 1997,
$2,564,945 in 1996, and $1,613,221 in 1995.
THE BANK MAY BORROW UP TO $33,000,000 UNDER SECURED LINES OF CREDIT WITH THE
FEDERAL HOME LOAN BANK. THE BANK ALSO HAS AVAILABLE LINES OF CREDIT OF
$2,500,000 IN OVERNIGHT FEDERAL FUNDS AND $1,000,000 IN SHORT-TERM SECURED
CREDIT FROM OTHER BANKS.
NOTE 12. Retirement Plans
THE BANK HAS A DEFINED BENEFIT PENSION PLAN COVERING SUBSTANTIALLY ALL OF THE
EMPLOYEES, AND A SUPPLEMENTAL PLAN COVERING CERTAIN EXECUTIVES. BENEFITS ARE
BASED ON YEARS OF SERVICE AND THE EMPLOYEE'S HIGHEST AVERAGE RATE OF EARNINGS
FOR THE FIVE CONSECUTIVE YEARS DURING THE LAST TEN YEARS BEFORE RETIREMENT. THE
BANK MAKES CONTRIBUTIONS TO THE EMPLOYEES' PLAN IN AMOUNTS SUFFICIENT TO SATISFY
MINIMUM FUNDING STANDARDS DETERMINED USING THE FROZEN ENTRY AGE ACTUARIAL
METHOD. ASSETS OF THE EMPLOYEES' PLAN ARE HELD IN TRUST AND INVESTED IN LISTED
STOCKS AND BONDS.
F-22
<PAGE>
<TABLE>
<CAPTION>
THE FOLLOWING TABLE SETS FORTH THE FINANCIAL STATUS OF THE PLANS:
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation
Vested............................................................. $1,348,477 $1,258,415 $992,291
Nonvested.......................................................... 52,711 40,847 36,858
---------- ---------- ----------
$1,401,188 $1,299,262 $1,029,149
========== ========== ==========
Plan assets at fair value.................................................. $1,186,949 $1,114,222 $1,112,975
Projected benefit obligation............................................... 1,629,910 1,505,339 1,136,937
---------- ---------- ----------
Plan assets less than projected benefit obligation......................... (442,961) (391,117) (23,962)
Unrecognized prior service cost............................................ (134,382) (149,687) (164,992)
Unrecognized net (gain).................................................... (83,989) (36,679) (71,566)
Unamortized net obligation (asset) from transition......................... 184,565 197,149 (13,986)
---------- --------- ----------
Accrued pension expense included in other liabilities...................... $(476,767) $(380,334) $(274,506)
========== ========= ==========
NET PENSION EXPENSE INCLUDES THE FOLLOWING:
Service cost............................................................... $88,823 $96,294 $61,446
Interest cost.............................................................. 100,598 95,489 70,300
Expected return on assets.................................................. (88,830) (83,208) (77,274)
Net amortization and deferral.............................................. (4,158) (2,747) (30,710)
---------- --------- ---------
Net pension expense........................................................ $96,433 $105,828 $23,762
========== ========= =========
ASSUMPTIONS USED IN THE ACCOUNTING FOR NET PENSION EXPENSE WERE:
Discount rates............................................................. 7.25% 7.25% 8.50%
Rate of increase in compensation levels.................................... 5.00% 5.00% 5.50%
Long-term rate of return on assets......................................... 8.00% 7.50% 7.50%
</TABLE>
THE COMPANY ALSO HAS CONTRIBUTORY THRIFT PLANS QUALIFYING UNDER SECTION 401(K)
OF THE INTERNAL REVENUE CODE. ALL EMPLOYEES AGE 21 OR MORE WITH ONE YEAR OF
SERVICE ARE ELIGIBLE FOR PARTICIPATION IN THE PLANS. THE COMPANY'S CONTRIBUTIONS
TO THESE PLANS, INCLUDED IN EXPENSES, WERE $36,335, $48,121, AND $54,828 FOR
1997, 1996, AND 1995, RESPECTIVELY.
F-23
<PAGE>
NOTE 13. Other Operating Expenses
<TABLE>
<CAPTION>
OTHER OPERATING EXPENSES INCLUDE THE FOLLOWING:
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Data processing............................................................ $314,046 $373,927 $350,545
Professional services...................................................... 328,521 158,832 193,410
Stationery, printing, and supplies......................................... 225,049 157,464 103,381
Advertising................................................................ 168,210 122,017 90,885
Postage and delivery....................................................... 136,476 114,261 104,965
Liability insurance........................................................ 110,167 110,098 109,907
Correspondent bank services................................................ 106,178 81,501 55,260
Telephone.................................................................. 107,025 60,447 55,760
Directors fees............................................................. 63,495 59,490 62,485
Losses and expenses on foreclosed real estate.............................. 65,448 33,883 71,854
FDIC assessment............................................................ 13,095 2,000 111,022
Other...................................................................... 251,797 174,637 199,982
---------- ---------- ----------
$1,889,507 $1,448,557 $1,509,456
========== ========== ==========
</TABLE>
NOTE 14. Lease Commitments
THE COMPANY IS OBLIGATED UNDER NONCANCELABLE LEASE AGREEMENTS FOR CERTAIN
PREMISES AND EQUIPMENT. THE LEASES GENERALLY CONTAIN RENEWAL OPTIONS AND PROVIDE
THAT THE COMPANY WILL PAY PROPERTY TAXES, INSURANCE AND MAINTENANCE COSTS. RENT
EXPENSE WAS $267,453, $218,774, AND $213,981 FOR 1997, 1996, AND 1995,
RESPECTIVELY.
FUTURE MINIMUM LEASE PAYMENTS ARE AS FOLLOWS.
1998................................................................. $419,779
1999................................................................. 337,471
2000................................................................. 266,407
2001................................................................. 223,140
2002................................................................. 115,314
Thereafter........................................................... 1,335,550
----------
$2,697,661
==========
F-24
<PAGE>
NOTE 15. Income Taxes
<TABLE>
<CAPTION>
THE COMPONENTS OF INCOME TAX EXPENSE ARE AS FOLLOWS:
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Current
Federal.................................................................... $765,766 $728,671 $152,939
State...................................................................... 142,864 118,222 35,955
-------- -------- --------
908,630 846,893 188,894
Deferred........................................................................... (39,896) 14,520 116,063
-------- -------- --------
$868,734 $861,413 $304,957
======== ======== ========
THE COMPONENTS OF THE DEFERRED TAX EXPENSE (BENEFITS) ARE AS FOLLOWS:
- ----------------------------------------------------------------------------------------------------------------------------
Depreciation....................................................................... $10,967 $(18,309) $(11,758)
Discount accretion................................................................. (1,894) (1,348) 3,115
Provisions for credit losses....................................................... (8,028) 33,303 138,413
Loan origination fees.............................................................. 8,526 - -
Accrued vacation and pension....................................................... (49,467) 874 (13,707)
-------- ------- --------
$(39,896) $14,520 $116,063
======== ======= ========
THE COMPONENTS OF THE NET DEFERRED TAX ASSETS ARE AS FOLLOWS:
- ----------------------------------------------------------------------------------------------------------------------------
Deferred tax assets
Allowances for credit losses............................................... $94,836 $86,808 $120,111
Deferred loan origination fees............................................. - 8,526 8,526
Unrealized loss on securities available for sale........................... - 17,787 28,202
Accrued vacation and pension liabilities................................... 211,753 162,286 163,160
Depreciation............................................................... - 10,761 -
-------- -------- --------
306,589 286,168 319,999
-------- -------- --------
Deferred tax liabilities
Depreciation............................................................... 206 - 7,548
Discount accretion......................................................... 1,664 3,558 4,906
Unrealized gain on securities available for sale........................... 20,506 - -
-------- -------- --------
22,376 3,558 12,454
-------- -------- --------
Net deferred tax asset............................................................. $284,213 $282,610 $307,545
======== ======== ========
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
THE DIFFERENCES BETWEEN THE FEDERAL INCOME TAX RATE OF 34 PERCENT AND THE
EFFECTIVE TAX RATE FOR THE COMPANY ARE RECONCILED AS FOLLOWS:
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
34.0 34.0 34.0
Statutory federal income tax rate................................................................... % % %
Increase (decrease) resulting from:
Federal tax-exempt income................................................................... (1.1) (0.9) (1.6)
State income taxes, net of federal income tax benefit....................................... 3.7 3.3 4.6
Affordable housing tax benefits and other, net.............................................. (0.6) - (3.7)
---- ---- ----
36.0 36.4 33.3
% % %
==== ==== ====
</TABLE>
THE BANK IS A LIMITED PARTNER IN A PARTNERSHIP THAT BUILDS AND OWNS AFFORDABLE
HOUSING PROJECTS. THE BANK RECEIVES TAX CREDITS AND LOSS DEDUCTIONS RESULTING
FROM DEPRECIATION OF THE HOUSING PROJECTS. THESE TAX BENEFITS ARE ACCOUNTED FOR
AS A REDUCTION OF INCOME TAX EXPENSES OVER THE EXPECTED LIFE OF THE PARTNERSHIP
USING THE LEVEL-YIELD METHOD.
NOTE 16. Stockholders' Equity
THE COMPANY'S INCENTIVE STOCK OPTION PLAN, WHICH EXPIRED IN 1996, PROVIDED
OPTIONS TO KEY EMPLOYEES TO BUY STOCK AT NOT LESS THAN THE FAIR MARKET VALUE ON
THE DATE THE OPTIONS WERE GRANTED. OPTIONS WERE EXERCISABLE FROM THREE TO SIX
YEARS FROM THE DATE OF GRANT. DURING 1996, OPTIONS TO BUY 5,750 SHARES WERE
EXERCISED AT PRICES OF $17.74 TO $19.83 PER SHARE. DURING 1995, OPTIONS TO BUY
2,875 SHARES WERE EXERCISED AT $19.83 PER SHARE.
DIRECTORS MAY ELECT TO RECEIVE COMPENSATION FOR THEIR SERVICES TO THE COMPANY
AND THE BANK IN STOCK OR CASH. DURING 1997 AND 1996, DIRECTORS PURCHASED 163 AND
272 SHARES, RESPECTIVELY, AT AVERAGE PRICES OF $33.45 AND $32.95 PER SHARE.
THE NUMBER OF SHARES AND PRICES PER SHARE HAVE BEEN RESTATED TO GIVE RETROACTIVE
EFFECT TO STOCK DIVIDENDS DECLARED.
NOTE 17. Litigation
THE BANK IS PARTY TO VARIOUS LEGAL ACTIONS NORMALLY ASSOCIATED WITH A FINANCIAL
INSTITUTION. IN MANAGEMENT'S OPINION, THE EFFECT OF THESE ACTIONS WILL NOT BE
MATERIAL TO THE FINANCIAL CONDITION OF THE COMPANY.
NOTE 18. Capital Standards
THE FEDERAL RESERVE BOARD AND THE FEDERAL DEPOSIT INSURANCE CORPORATION HAVE
ADOPTED CAPITAL STANDARDS FOR BANKING ORGANIZATIONS. THESE STANDARDS REQUIRE
RATIOS OF CAPITAL TO ASSETS FOR MINIMUM CAPITAL ADEQUACY AND TO BE CLASSIFIED AS
WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS.
TIER 1 CAPITAL CONSISTS OF COMMON STOCK, SURPLUS, AND RETAINED EARNINGS. TOTAL
CAPITAL INCLUDES A LIMITED AMOUNT OF THE ALLOWANCE FOR CREDIT LOSSES. IN
CALCULATING RISK-WEIGHTED ASSETS, SPECIFIED RISK PERCENTAGES ARE APPLIED TO EACH
CATEGORY OF ASSET AND OFF-BALANCE SHEET ITEMS.
THE CONSOLIDATED CAPITAL RATIOS, CAPITAL BALANCES, AND RISK-WEIGHTED ASSETS AT
DECEMBER 31, WERE AS FOLLOWS:
F-26
<PAGE>
<TABLE>
<CAPTION>
Regulatory requirements
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Capital Well
adequacy capitalized 1997 1996 1995
Risk-based ratios
Tier 1 capital................ 4.0% 6.0% 14.1% 16.0% 15.1%
Total risk-based capital...... 8.0% 10.0% 15.4% 17.3% 16.0%
Leverage ratio (Tier 1 capital to
average assets).................... 4.0% 5.0% 11.3% 11.1% 10.9%
Capital balances
Tier 1........................ $15,861,268 $14,726,039 $13,468,761
Total......................... 17,266,984 15,879,891 14,247,373
Risk-weighted assets.................. $112,248,003 $91,899,175 $88,911,630
</TABLE>
FAILURE TO SATISFY THE CAPITAL STANDARDS COULD IMPAIR THE COMPANY'S ABILITY TO
PAY DIVIDENDS, ACCEPT DEPOSITS, OR CONTINUE IN BUSINESS.
NOTE 19. Parent Company Financial Information
<TABLE>
<CAPTION>
THE BALANCE SHEET AND STATEMENTS OF INCOME AND CASH FLOWS FOR PATAPSCO VALLEY
BANCSHARES, INC. (PARENT ONLY) AT DECEMBER 31, 1997 AND 1996, AND FOR THE YEARS
THEN ENDED ARE PRESENTED BELOW:
1997 1996
Balance Sheets
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Assets
Cash..................................................................................... $128,185 $51,877
Dividend receivable...................................................................... 250,000 280,000
Investment in the Bank................................................................... 15,570,141 14,803,433
Investment in CMSC....................................................................... 110,664 -
Other investments........................................................................ 245,575 -
Other assets............................................................................. 53,535 28,557
----------- -----------
$16,358,100 $15,163,867
=========== ===========
Liabilities and Stockholders' Equity
Dividend payable......................................................................... $444,287 $436,251
Other liabilities........................................................................ 19,954 29,847
-------- --------
464,241 466,098
-------- --------
F-27
<PAGE>
Stockholders' equity
Common stock..................................................................... 6,674 5,477
Surplus.......................................................................... 11,307,989 11,000,055
Retained earnings................................................................ 4,546,605 3,720,507
Unrealized gain (loss) on securities available for sale.......................... 32,591 (28,270)
----------- -----------
15,893,859 14,697,769
----------- -----------
$16,358,100 $15,163,867
=========== ===========
1997 1996
Statements of Income
- -----------------------------------------------------------------------------------------------------------------------
Dividends from the Bank.................................................................. $835,000 $280,000
Equity in undistributed income of the Bank............................................... 737,560 1,224,563
Equity in undistributed income of CMSC................................................... 35,664 -
---------- ----------
1,608,224 1,504,563
Interest and dividends on other investments.............................................. 5,198 -
Operating expenses....................................................................... (97,710) (3,383)
Income tax benefit....................................................................... 31,898 1,150
---------- ----------
Net income............................................................................... $1,547,610 $1,502,330
========== ==========
1997 1996
Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Dividends received from the Bank................................................. $865,000 $-
Other interest and dividends received............................................ 5,198 -
Cash paid to suppliers and employees............................................. (121,787) (943)
Income tax benefit received...................................................... 1,150 -
---------- ----------
749,561 (943)
---------- ----------
Cash flows from investing activities
Acquisition of CMSC stock........................................................ (75,000) -
Acquisition of other investments................................................. (193,908) -
--------- ----------
(268,908) -
--------- ----------
Cash flows from financing activities
Dividends paid................................................................... (712,355) -
Dividends reinvested............................................................. 302,551
Stock options exercised.......................................................... 5,459 52,820
--------- ----------
(404,345) 52,820
--------- ----------
Net increase in cash and cash equivalents................................................ 76,308 51,877
Cash and equivalents at beginning of year................................................ 51,877 -
--------- ----------
Cash and equivalents at end of year...................................................... $128,185 $51,877
========= ==========
F-28
<PAGE>
Reconciliation of net income to net cash provided by operating activities
Net income.......................................................................$1,547,610 $1,502,330
Adjustments to reconcile net income to net cash provided by operating
activities
Amortization of organization costs............................................... 5,770 1,442
(Increase) decrease in dividend receivable....................................... 30,000 (280,000)
(Increase) in other assets....................................................... (30,748) (29,999)
Increase (decrease) in other liabilities......................................... (29,847) 29,847
Equity in undistributed income of subsidiaries................................... (773,224) (1,224,563)
-------- ----------
$749,561 $(943)
======== ===========
</TABLE>
NOTE 20. Fair Value of Financial Instruments
<TABLE>
<CAPTION>
THE ESTIMATED FAIR VALUES OF THE COMPANY'S FINANCIAL INSTRUMENTS ARE AS FOLLOWS:
December 31, 1997 December 31, 1996 December 31, 1995
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
Financial assets
Cash and due from
banks............... $5,085,542 $5,085,542 $7,727,741 $7,727,741 $4,764,831 $4,764,831
Federal funds sold..... 13,181,000 13,181,000 10,843,991 10,843,991 10,030,000 10,030,000
Investment
securities.......... 15,160,333 15,160,333 28,556,145 28,556,145 27,361,334 27,361,334
Loans held for sale.... 5,540,585 5,540,585 - - - -
Variable rate loans.... 41,521,332 41,521,332 36,557,108 36,557,108 22,029,712 22,029,712
Accrued interest
receivable.......... 706,904 706,904 673,602 673,602 739,273 739,273
Financial liabilities
Noninterest-bearin
g deposits.......... $31,006,823 $31,006,823 $30,871,980 $30,871,980 $30,033,542 $30,033,542
Variable rate
deposits............ 56,368,757 56,368,757 58,082,449 58,082,449 52,392,010 52,392,010
Securities sold
under
repurchase
agreements.......... 2,861,324 2,861,324 3,236,572 3,236,572 1,387,237 1,387,237
Interest and
dividend
payable............. 992,792 992,792 794,669 794,669 707,279 707,279
</TABLE>
THE FAIR VALUES OF INVESTMENT SECURITIES ARE ESTIMATED USING A MATRIX THAT
CONSIDERS YIELD TO MATURITY, CREDIT QUALITY, AND MARKETABILITY. THIS METHOD OF
VALUATION IS PERMITTED BY THE FASB, BUT MAY NOT BE INDICATIVE OF NET REALIZABLE
OR LIQUIDATION VALUES.
F-29
<PAGE>
IT IS NOT PRACTICABLE TO ESTIMATE THE FAIR VALUE OF LOANS WITH FIXED MATURITIES,
DEPOSIT LIABILITIES WITH FIXED MATURITIES, OR OUTSTANDING CREDIT COMMITMENTS.
THE COMPANY DOES NOT HAVE AVAILABLE RESOURCES TO ESTIMATE FAIR VALUES BASED ON
QUOTED PRICES OR DISCOUNTED CASH FLOWS FOR INDIVIDUAL ACCOUNTS OR GROUPS OF
ACCOUNTS.
<TABLE>
<CAPTION>
MATURITIES AND WEIGHTED-AVERAGE INTEREST RATES ON LOANS AND DEPOSITS WITH FIXED
MATURITIES ARE AS FOLLOWS:
December 31, 1997 December 31, 1996 December 31, 1995
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
Loans
Maturing within one year.............. $23,029,056 9.2% $19,274,415 9.3% $25,600,580 9.6%
Maturing over one to five years....... 27,448,251 9.5% 26,367,186 9.3% 29,288,719 9.4%
Maturing over five years.............. 6,473,500 9.5% 3,233,284 9.6% 1,558,368 8.2%
Deposits
Maturing within three months.......... $13,227,308 5.7% $10,501,542 5.4% $7,535,133 5.4%
Maturing over three to six
months............................. 8,670,525 5.5% 6,922,356 5.0% 5,302,372 5.4%
Maturing over six months to one
year............................... 4,428,344 5.2% 4,865,607 5.2% 3,375,529 5.9%
Maturing over one to eight
years.............................. 5,657,773 4.1% 3,208,107 5.4% 9,349,853 6.0%
Maturing over eight years............. 135,474 4.8% 135,474 4.8% - -
</TABLE>
F-30
<PAGE>
EXHIBIT 3.1
PATAPSCO VALLEY BANCSHARES, INC.
ARTICLES OF AMENDMENT
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
ARTICLES OF AMENDMENT
Patapsco Valley Bancshares, Inc., a Maryland corporation (hereinafter
called the "Corporation"), having it's principal office located at 8593
Baltimore National Pike, Ellicott City, Maryland 21043 in Ellicott City,
Maryland, hereby certifies to the State Department of Assessments and Taxation
of Maryland that:
SECTION I.: The Charter of the Corporation is hereby amended by
striking in its entirety Article SIXTH and by substituting in lieu thereof the
following:
"SIXTH: (a) The Directors shall be divided into three classes,
as nearly equal in number as possible, with respect to the time for which they
shall severally hold office. Directors of Class I first chosen shall hold office
for one year, except as otherwise stated in the Bylaws, and thereafter until his
or her successor has been elected and qualified; Directors of Class II first
chosen shall hold office for two years, except as otherwise stated in the
Bylaws, and thereafter until his or her successor has been elected and
qualified; and Directors of Class III first chosen shall hold office for three
years, except as otherwise stated in the Bylaws, and thereafter until his or her
successor has been elected and qualified. At each future annual meeting of the
stockholders, the successors to the Class of Directors whose term shall expire
at that time shall be elected to hold office for a term of three years, so that
the term of office of one class of Directors shall expire in each year. Each
Director elected shall hold office until his or her successor has been elected
and qualified;
(b) The names of the Directors who shall serve in each
class are as follows:
CLASS I: John F. Feezer, III
Kevin P. Huffman
Eugene William Iager, Sr.
CLASS II: Ronald L. Eyre
Fred T. Lewis
Frances F. Wire
CLASS III: W. William Cookson
Howard E. Harrison, III
John S. Whiteside
(c) Directors shall have been residents for at least
one year of a county (or a county contiguous to such county) in which the
Corporation or any subsidiary of the Corporation maintains its principal office
or principal banking office.
(d) An individual may not serve as a Director of the
Corporation if such individual also serves as a director or employee of any
financial institution (other than a subsidiary of the Corporation), or
corporation which maintains as a principal subsidiary one or more financial
institutions, or if such service otherwise would violate the federal Depository
Institution Management
<PAGE>
Interlocks Act. The term "principal subsidiary" is defined to mean one or more
financial institutions whose total assets constitute twenty-five percent (25%)
or more of such corporation's consolidated total assets. The term "financial
institution" means a credit union, savings and loan, or commercial bank."
SECTION II.: The Charter is hereby amended by adding thereto the
following Article NINTH:
"NINTH: In addition to any other considerations which the
Board of Directors may lawfully take into account, in determining what is in the
best interest of the Corporation when considering whether to take or to refrain
from taking any action, including, but not limited to, proposing any matter to
stockholders, and any action with respect to a tender offer or proposal of
acquisition, merger, consolidation or sale of assets, the Board of Directors
shall consider (a) the effects of the action on the Corporation's and its
subsidiaries' employees, customers, suppliers, creditors or other
constituencies, (b) the effects of the action on the communities in which the
Corporation or any of its subsidiaries do business or in which the employees,
customers, suppliers or creditors do business and/or reside, and (c) the
long-term as well as short-term interests of the Corporation and its
stockholders (including the possibility that these interests may be best served
by the continued independence of the Corporation). The Board of Directors may
act in accordance with the conclusion it reaches based on the factors it may
lawfully consider under this Article and any applicable law."
SECTION III. (a) The Board of Directors of the Corporation at a meeting
held on February 25, 1998, adopted a resolution in which was set forth the
foregoing complete amendments to the Charter, declaring that said amendments are
advisable, and directing that they be submitted to the stockholders of the
Corporation for their consideration and approval.
(b) The stockholders of the Corporation approved the
foregoing amendments as hereinabove set forth at a meeting of the stockholders
held on April 21, 1998.
2
<PAGE>
IN WITNESS WHEREOF, Patapsco Valley Bancshares, Inc. has caused these
Articles of Amendment to be signed and acknowledged in its name and on its
behalf by its President of the Corporation and witnessed and attested by its
Secretary on this 19th day of May, 1998, and they acknowledged the same to be
the act of said Corporation, and that to the best of their knowledge,
information and belief, all matters and facts stated herein are true in all
material respects and that this statement is made under the penalties of
perjury.
ATTEST: PATAPSCO VALLEY BANCSHARES, INC.
/s/ Edwin B. McKee By:/s/ John S. Whiteside (SEAL)
Edwin B. McKee, Secretary John S. Whiteside, President
3
<PAGE>
EXHIBIT 3.2
PATAPSCO VALLEY BANCSHARES, INC.
ARTICLES OF INCORPORATION
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
ARTICLES OF INCORPORATION
FIRST: I, Michael A. Refolo, whose post office address is 233
East Redwood Street, Baltimore, Maryland 21202, being at least eighteen (18)
years of age, do hereby form a corporation under and by virtue of the General
Laws of the State of Maryland.
SECOND: The name of the corporation (which is hereinafter
called the "Corporation") is
Patapsco Valley Bancshares, Inc.
THIRD: The purposes for which the Corporation is formed are to
engage in any lawful act or activities permitted by a corporation organized
under the laws of the State of Maryland.
FOURTH: The post office address of the principal office of the
Corporation in this State is 8593 Baltimore National Pike, Ellicott City,
Maryland 21043. The name and post office address of the resident agent of the
Corporation in this State are Edwin B. McKee, 8593 Baltimore National Pike,
Ellicott City, Maryland 21043. Said resident agent is an individual actually
residing in this State.
FIFTH: The total number of shares of stock which the
Corporation has authority to issue is Fifty Million (50,000,000) shares of
common stock with a par value of One Cent ($.01) per share, for an aggregate par
value of $500,000.
SIXTH: The number of Directors of the Corporation which shall
constitute the whole Board shall be not less than three directors. The exact
number of Directors shall be fixed from time to time by the Board of Directors
pursuant to a resolution adopted by a majority of the entire Board of Directors.
The names of the Directors who shall act until the first annual meeting and
until their successors are duly elected and qualify are W. William Cookson,
Ronald L. Eyre, John F. Feezer, III, Howard E. Harrison, III, Eugene W. Iager,
Fred T. Lewis, Bernard G. Malinowski, John S. Whiteside, and Frances F. Wire.
SEVENTH: The rights and powers of the Corporation and of the
Directors and Stockholders are as follows:
(a) The Board of Directors of the Corporation is
empowered to authorize the issuance from time to time of shares of stock of any
class and securities convertible into shares of its stock of any class for such
consideration as the Board of Directors may deem advisable, subject to such
limitations and restrictions, if any, as may be set forth in the By-laws of the
Corporation.
(b) The Board of Directors of the Corporation may
classify or reclassify any unissued shares by fixing or altering, from time to
time before issuance, the preferences, rights, voting powers, restrictions and
qualifications of, the dividends on, the times and prices of redemption of, and
the conversion rights of, such shares.
(c) The Corporation reserves the right to amend its
Charter, including amendments which alter the contract rights of any outstanding
stock, and stockholders whose rights may be affected thereby will not be
entitled to demand payment of the fair value of the stock.
<PAGE>
The enumeration of a particular power of the Board of
Directors is for descriptive purposes only and shall not limit or restrict any
other term of this or any other Article of these Articles of Incorporation, or
in any manner exclude or limit any powers conferred upon the Board of Directors
under the Maryland General Corporation Law now or hereafter in force.
EIGHTH: No director or officer of the Corporation shall be
liable to the Corporation or to its Stockholders for money damages except (i) to
the extent that it is proved that such director or officer actually received an
improper benefit or profit in money, property or services, for the amount of the
benefit or profit in money, property or services actually received, or (ii) to
the extent that a judgment or other final adjudication adverse to such director
or officer is entered in a proceeding based on a finding in the proceeding that
such director's or officer's action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding.
IN WITNESS WHEREOF, I have signed these Articles of
Incorporation on this 22nd day of August, 1996, and I acknowledge the same to be
my act.
/s/ Michael A. Refolo
---------------------
Michael A. Refolo
2
<PAGE>
EXHIBIT 3.3
PATAPSCO VALLEY BANCSHARES, INC.
AMENDED AND RESTATED BYLAWS
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
BYLAWS
AS AMENDED AND RESTATED
May 19, 1998
ARTICLE I
Stockholders
------------
SECTION 1. Annual Meeting. The annual meeting of the
stockholders of the Corporation shall be held on a day designated by the Board
of Directors ("Board") or on the third Tuesday in April of each year, for the
purpose of electing directors to succeed those whose terms shall have expired as
of the date of such annual meeting, and for the transaction of such other
corporate business as may come before the meeting.
SECTION 2. Special Meetings. Special meetings of the
stockholders may be called at any time for any purpose or purposes by the
Chairman, the President, by a Vice President, or by a majority of the Board, and
shall be called promptly by the Chairman, the President, by a Vice President, or
Secretary, or any director of the Corporation upon the request in writing of the
holders of a majority of all the shares outstanding and entitled to vote on the
business to be transacted at such meeting. Such request shall state the purpose
or purposes of the meeting.
If the person to whom such request in writing is made fails to
issue a call for such meeting within ten (10) days after receipt of such
request, then a majority of the Board or the stockholders owning of record a
majority in amount of the stock of the Corporation, issued, outstanding and
entitled to vote, may do so by giving ten (10) days' prior written notice of the
time, place and object of the meeting in the manner set forth in Article I,
Section 4. Business transacted at all special meetings of stockholders shall be
confined to the purpose or purposes stated in the notice of the meeting.
SECTION 3. Place of Holding Meetings. All meetings of
stockholders shall be held at the principal office of the Corporation or
elsewhere in the United States as designated by the Board.
SECTION 4. Notice of Meetings. Written notice of each meeting
of the stockholders shall be mailed, postage pre-paid by the Secretary, to each
stockholder entitled to vote thereat at the stockholder's post office address,
as it appears upon the books of the Corporation, at least ten (10) days but not
more than ninety (90) days, before the meeting. Each notice shall state the
place, day, and hour at which the meeting is to be held and, in the case of any
special meeting, shall state briefly the purpose or purposes thereof.
SECTION 5. Quorum. The presence in person or by proxy of the
holders of record of a majority of the shares of the capital stock of the
Corporation issued and outstanding and entitled to vote thereat shall constitute
a quorum at all meetings of the stockholders, except as otherwise provided by
law, by the Articles of Incorporation or by these Bylaws. If less than a quorum
is in attendance at the time for which the meeting shall have been called, the
meeting may be adjourned from time to time by a majority vote of the
stockholders present or represented, without any notice other than by
announcement at the meeting, until a quorum shall attend. At any adjourned
meeting at which a quorum shall attend,
<PAGE>
any business may be transacted which might have been transacted if the meeting
had been held as originally called.
SECTION 6. Organization. Meetings of stockholders shall be
presided over by the Chairman of the Board or, if the Chairman is not present,
the President of the Corporation, or if the President is not present, by a Vice
President, or, if none of these officers is present, by a chairman to be elected
at the meeting. The Secretary of the Corporation, or if the Secretary is not
present, any Assistant Secretary, shall act as Secretary of such meetings; in
the absence of the Secretary and any Assistant Secretary, the presiding officer
may appoint a person to act as Secretary of the meeting.
SECTION 7. Voting. At all meetings of stockholders, every
stockholder entitled to vote thereat shall have one (l) vote for each share of
stock standing in the stockholder's name on the books of the Corporation on the
date for the determination of stockholders entitled to vote at such meeting.
Such vote may be either in person or by proxy appointed by an instrument in
writing subscribed by the stockholder or the stockholder's duly authorized
attorney, bearing a date not more than eleven (11) months prior to the meeting,
unless the instrument provides for a longer period. The proxy shall be dated,
but need not be sealed, witnessed or acknowledged. All elections shall be had
and all questions shall be decided by a majority of the votes cast unless the
Articles of Incorporation or these Bylaws provide otherwise.
If the chairman of the meeting determines, a vote by ballot
may be taken upon any election or matter, and the vote shall be so taken upon
request of the holders of ten percent (10%) of the stock entitled to vote on
such election or matter. In either of such events, the proxies and ballots shall
be received and be taken in charge and all questions touching the qualification
of voters and the validity of proxies and the acceptance or rejection of votes
shall be decided by the tellers. The tellers shall be appointed by said meeting.
SECTION 8. Nomination of Directors. Nominations for election
to the Board of Directors may be made by any member of the Board of Directors or
by any stockholder of any outstanding class of capital stock of the Corporation
entitled to vote for the election of directors. These nominations must be
approved for submission to the stockholders by majority vote of the Board of
Directors prior to the annual stockholders' meeting. Nominations, other than
those made by or on behalf of the existing management of the Corporation, shall
be made in writing by notice delivered to the President of the Corporation not
fewer than 150 days nor more than 180 days prior to the date of the meeting of
stockholders called for the election of Directors which, for purposes of this
provision, shall be deemed to be on the same date as the annual meeting of
stockholders for the preceding year. Such notification shall contain the
following information: (a) the name and address of each proposed nominee; (b)
the principal occupation of each proposed nominee; (c) the number of shares of
capital stock of the Corporation owned beneficially and of record by each
proposed nominee; (d) the name and residence address of the notifying
stockholder; (e) the number of shares of capital stock of the Corporation owned
by the notifying stockholder; (f) the consent in writing of the proposed nominee
as to the proposed nominee's name being placed in nomination for Director and a
statement by the nominee that the nominee will serve if elected; and (g) all
information relating to such proposed nominee that would be required to be
disclosed by Regulation 14A under the Securities Exchange Act of 1934, as
amended, and Rule 14a-11 promulgated thereunder, assuming such provisions would
be applicable to the solicitation of proxies for such proposed nominee.
Nominations not made in accordance herewith shall be disregarded and, upon the
chairman's instructions, the tellers shall disregard all votes cast for each
such nominee.
2
<PAGE>
SECTION 9. Stockholder Proposals. For any stockholder proposal
to be presented in connection with an annual meeting of stockholders of the
Corporation (other than proposals made under Rule 14a-8 of the Securities
Exchange Act of 1934, as amended, and proposals relating to nominations for
election to the Board of Directors), the stockholder shall give timely notice of
the proposal in writing to the President of the Corporation. To be timely, a
stockholder's notice shall be delivered to the President at the principal
executive offices of the Corporation not less than 90 nor more than 120 days
prior to the date of the annual meeting of stockholders, which, for purposes of
this provision, shall be deemed to be on the same date as the annual meeting of
stockholders for the preceding year. Such notice of the stockholder's proposal
shall contain the following information: (a) a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of the
notifying stockholder; (b) the name and address of the notifying stockholder;
(c) the number of shares of capital stock of the Corporation owned by the
notifying stockholder; (d) a description of all oral or written arrangements or
understandings related to such proposal or notice between the notifying
stockholder and any other person; and (e) a representation that such notifying
stockholder intends to appear in person or by proxy at the annual meeting to
bring such business before the meeting.
ARTICLE II
Board of Directors
------------------
SECTION 1. General Powers. The property and business of the
Corporation shall be managed by the Board.
SECTION 2. Number and Term of Office. The Board shall consist
of not less than five (5) nor more than thirty (30) members, the exact number of
which shall be fixed from time to time by the Board pursuant to a resolution
adopted by a majority of the Board. The current number of directors shall be
nine (9). The directors shall be elected each year at the annual meeting of
stockholders, except as hereinafter provided, and each director shall serve
until his successor shall be elected and shall qualify. The Board of Directors
shall be divided into classes as described in the Corporation's Articles of
Incorporation. Each Director shall hold office until the expiration of the term
for which the Director is elected, except as otherwise stated in these Bylaws,
and thereafter until his or her successor has been elected and qualifies.
SECTION 3. Vacancies. In the case of any vacancy in the Board
through death, resignation, disqualification, removal or other cause, the
remaining directors, by affirmative vote of the majority, may elect a successor
to hold office for the unexpired portion of the term of a director whose place
is vacant, and until the election of his or her successor.
If the number of directors is increased as provided in these
Bylaws, the additional directors shall be elected by the directors already in
office, and shall hold office until the next annual meeting of stockholders and
thereafter until his or their successors shall be elected.
Any director may be removed from office with or without cause
by the affirmative vote of the holders of the majority of the stock issued and
outstanding and entitled to vote at any special meeting of stockholders called
for the purpose.
3
<PAGE>
SECTION 4. Place of Meeting. The Board may hold their meetings
and have one or more offices, and keep the books of the Corporation, either
within or outside the State of Maryland, at such place or places as they may
from time to time determine. The Board may hold their meetings by conference
telephone or other similar electronic communications equipment in accordance
with the provisions of Maryland Corporate Law.
SECTION 5. Regular Meetings. Regular meetings of the Board may
be held without notice at such time and place as shall be determined from time
to time by the Board, provided that notice of every resolution of the Board
fixing or changing the time or place for the holding of regular meetings of the
Board shall be mailed to each director at least three (3) days before the first
meeting held in pursuance thereof. The annual meeting of the Board shall be held
immediately following the annual stockholders' meeting at which a Board is
elected. Any business may be transacted at any regular meeting of the Board.
SECTION 6. Special Meetings. Special meetings of the Board
shall be held whenever called by direction of the Chairman of the Board or the
President of the Corporation, or at the request of three (3) or more directors,
by mailing the same at least two (2) days prior to the meeting, or by personal
delivery, facsimile transmission, telegraphing or telephoning the same on the
day before the meeting, to each director. Notice may be waived by any director.
Unless otherwise indicated in the notice, any business may be transacted at any
special meeting. At any meeting at which every director is present, even though
without notice, any business may be transacted and any director may waive notice
of the time, place and objects of any special meeting in writing.
SECTION 7. Quorum. A majority of the whole number of directors
shall constitute a quorum for the transaction of business at all meetings of the
Board, but if less than a quorum is present, a majority of those present may
adjourn the meeting from time to time. The act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board,
unless law or the Corporation's Articles of Incorporation or these Bylaws
provide otherwise.
SECTION 8. Compensation of Directors. Directors may receive a
fixed sum and expenses for attendance at regular and special meetings and
committee meetings, or any combination of the foregoing as may be determined
from time to time by resolution adopted by a majority of the whole Board. Any
director may serve the Corporation in another capacity for additional
compensation.
SECTION 9. Committees. By resolution adopted by a majority of
the entire Board, the Board may designate and name one or more committees of two
or more directors, which, to the extent provided by the Board, shall have and
may exercise the powers of the Board, and may authorize the seal of the
Corporation to be affixed to all papers which may require it.
SECTION 10. Director Emeritus. A director who has reached the
age of 75 shall retire from the Board effective on the date of the first Board
meeting following the annual meeting of stockholders. Such director shall serve
thereafter as Director Emeritus if the director had served a minimum of 15 years
on the Board, inclusive of service on the board of any subsidiary of the
Corporation prior to the formation of the Corporation. If a director retires
prior to reaching 75 years of age, such director shall not serve as a Director
Emeritus until such director reaches 75 years of age. A Director Emeritus shall
be invited to conventions and other affairs of the Corporation, however, will
not receive notice of meetings of the Board, nor have the right to vote nor be
compensated for any service.
4
<PAGE>
SECTION 11. Chairman Emeritus. A director who has served as
Chairman of the Board of Directors and who retires from the Board may be granted
the title of Chairman Emeritus upon a vote approval of the Board of Directors.
This is an honorary title and carries with it the same benefits and privileges
accorded to a Director Emeritus.
ARTICLE III
Officers
--------
SECTION 1. Election, Tenure, and Compensation. The officers of
the Corporation shall be a Chairman, a President, one or more Vice-Presidents
(if so elected by the Board), a Secretary, and a Treasurer, and such other
officers as the Board or the President from time to time may consider necessary
for the proper conduct of the business of the Corporation. The officers shall be
elected annually by the Board at its first meeting following the annual meeting
of the stockholders. All promotions to Vice President and above must be
presented to the Board by the President of the Corporation for approval. The
Chairman and the President shall be directors and the other officers may, but
need not, be directors. Any two or more of the above officers, except those of
President and Vice President, may be held by the same person, but no officer
shall execute, acknowledge or verify any instrument in more than one capacity if
such instrument is required by law or by these Bylaws to be executed,
acknowledged or verified by any two or more officers. The compensation or salary
paid all officers of the Corporation shall be fixed by resolutions adopted by
the Board.
Except where otherwise expressly provided in a contract duly
authorized by the Board, all officers and agents of the Corporation shall be
subject to removal at any time by the affirmative vote of a majority of the
whole Board, and all officers, agents, and employees, other than officers
appointed by the Board, shall hold office at the discretion of the Board or of
the officers appointing them.
SECTION 2. Powers and Duties of the Chairman. The Board shall
elect one of its members to be Chairman of the Board to serve at the pleasure of
the Board. The Chairman of the Board shall preside at all meetings of the Board.
He or she shall have and may exercise such further powers and duties as from
time to time may be conferred upon or assigned to him or her by the Board, as
well as the specific powers conferred by these Bylaws. The Board may elect one
of its members to be Vice Chairman of the Board to perform the duties of the
Chairman in his or her absence or inability to act.
SECTION 3. Powers and Duties of the President. The Board shall
elect one of its members to be President of the Corporation. The President shall
be the Chief Executive Officer of the Corporation and shall be an ex-officio
member of all committees of the Corporation except the Audit Committee. He or
she shall supervise the carrying out of the policies adopted or approved by the
Board. He or she shall have general executive powers, and shall have and may
exercise any and all other powers and duties conferred by law or regulation, to
the office of the President, or imposed by these Bylaws. He or she shall also
exercise such other and further powers and perform duties as may from time to
time be prescribed by the Board. The President shall hold his or her office for
the current year, for which he or she is elected, unless he or she shall resign,
become disqualified, or be removed. Any vacancy occurring in the office of the
President shall be filled promptly by the Board.
SECTION 4. Powers and Duties of the Vice President. The Board
shall appoint an Executive Vice President and one or more Vice Presidents. In
the case of the absence or the disability
5
<PAGE>
of the President, the duties of that office shall be performed by the Executive
Vice President. Each vice president shall have such powers and shall perform
such duties as may, from time to time, be assigned by the Board or by the
President.
SECTION 5. Secretary. The Board shall appoint a Secretary, or
other designated officer who shall be Secretary of the Board and of the
Corporation and shall keep accurate minutes of all meetings. Such person shall
attend to the giving of all notice required by these Bylaws to be given. Such
person shall be custodian of the corporate seal, records, documents, and papers
of the Corporation and shall also perform such other duties as may be assigned,
from time to time by the President and the Board.
SECTION 6. Treasurer. The Treasurer shall provide for the
keeping of proper records of all transactions of the Corporation. Such person
shall have and may exercise any and all powers and duties conferred by law,
regulation or practice, to the office of treasurer or imposed by these Bylaws.
Such person shall also perform such other duties as may be assigned, from time
to time, by the President or the Board of Directors.
SECTION 7. Assistant Secretary. The Board may appoint an
Assistant Secretary or more than one Assistant Secretary, except as otherwise
provided by resolution of the Board, each Assistant Secretary shall have power
to perform all duties of the Secretary in the absence or disability of the
Secretary and shall have such other powers and shall perform such other duties
as may be assigned by the Board, the Chairman, or the President. In case of the
absence or disability of the Secretary, the duties of the office shall be
performed by any Assistant Secretary, and the taking of any action by any
Assistant Secretary in place of the Secretary shall be conclusive evidence of
the absence or disability of the Secretary.
SECTION 8. Assistant Treasurer. The Board may appoint an
Assistant Treasurer or more than one Assistant Treasurer, except as otherwise
provided by resolution of the Board, each Assistant Treasurer shall have power
to perform all duties of the Treasurer in the absence or disability of the
Treasurer and shall have such other powers and shall perform such other duties
as may be assigned by the Board, the Chairman or the President. In case of the
absence or disability of the Treasurer, the duties of the office shall be
performed by any Assistant Treasurer, and the taking of any action by any such
Assistant Treasurer in place of the Treasurer shall be conclusive evidence of
the absence or disability of the Treasurer.
ARTICLE IV
Capital Stock
-------------
SECTION 1. Issue of Certificates of Stock. The certificates
for shares of the stock of the Corporation shall be in the form not inconsistent
with the Certificate of Incorporation, or its amendments, as approved by the
Board. All certificates shall be signed by the Chairman, the President or by any
Vice-President and counter-signed by the Secretary, an Assistant Secretary,
Treasurer or Assistant Treasurer, and sealed with the seal of the Corporation.
All certificates for each class of stock shall be consecutively numbered. The
name of the person owning the shares issued and the address of the holder shall
be entered in the Corporation's books. All certificates surrendered to the
Corporation for transfer shall be canceled and no new certificates representing
the same number of shares shall be issued
6
<PAGE>
until the former certificate or certificates for the same number of shares have
been surrendered and canceled, unless a certificate of stock is lost or
destroyed, in which event another may be issued in its stead upon proof of loss
or destruction and the giving of a satisfactory bond of indemnity not exceeding
an amount double the value of the stock. Both the proof and the bond shall be in
a form approved by the general counsel of the Corporation and by the Transfer
Agent of the Corporation and by the Registrar of the stock.
SECTION 2. Transfer of Shares. Shares of the capital stock of
the Corporation shall be transferred on the books of the Corporation only by the
holder thereof in person or by the holder's attorney upon surrender and
cancellation of certificates for a like number of shares.
SECTION 3. Registered Stockholders. The Corporation is
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and is not obligated to recognize any other equitable or
other claim to or interest in a share or shares, whether or not it has express
or other notice thereof, save as expressly provided by the Laws of Maryland.
SECTION 4. Closing Transfer Books. The Board may fix the
period, not exceeding twenty (20) days, during which time the books of the
Corporation shall be closed against transfers of stock, or, in lieu thereof, the
Board may fix a date not less than ten (10) days nor more than sixty (60) days
preceding the date of any meeting of stockholders or any dividend payment date
or any date for the allotment of rights, as a record date for the determination
of the stockholders entitled to notice of and to vote at such meeting or to
receive such dividends or rights as the case may be; and only stockholders of
record on such date shall be entitled to notice of and to vote at such meeting
or to receive such dividends or rights.
ARTICLE V
Bank Accounts and Loans
-----------------------
SECTION 1. Bank Accounts. Such officers or agents of the
Corporation as from time to time shall be designated by the Board shall have
authority to deposit any funds of the Corporation in such banks or trust
companies as shall from time to time be designated by the Board and such
officers or agents as from time to time authorized by the Board may withdraw any
or all of the funds of the Corporation so deposited in any bank or trust or
trust company, upon checks, drafts or other instruments or orders for the
payment of money, drawn against the account or in the name or behalf of this
Corporation, and made or signed by such officers or agents; and each bank or
trust company with which funds of the Corporation are so deposited is authorized
to accept, honor, cash and pay, without limit as to amount, all checks, drafts
or other instruments or orders for the payment of money, when drawn, made or
signed by officers or agents so designated by the Board until written notice of
the revocation of the authority of such officers or agents by the Board is
received by such bank or trust company. There shall from time to time be
certified to the banks or trust companies in which funds of the Corporation are
deposited, the signature of the officers or agents of the Corporation so
authorized to draw against the same. If the Board fails to designate the persons
by whom checks, drafts and other instruments or orders for the payment of money
shall be signed, all of such checks, drafts and other instruments or orders for
the payment of money shall be signed by the Chairman, the President or a Vice
President and counter-signed by the Secretary or Treasurer or an Assistant
Secretary or an Assistant Treasurer of the Corporation.
7
<PAGE>
SECTION 2. Loans. Such officers or agents of the Corporation
as from time to time shall be designated by the Board shall have authority to
effect loans, advances or other forms of credit at any time or times for the
Corporation from such banks, trust companies, institutions, corporations, firms
or persons as the Board shall from time to time designate, and as security for
the repayment of such loans, advances, or other forms of credit to assign,
transfer, endorse, and deliver, either originally or in addition or
substitution, any or all stock, bonds, rights, and interests of any kind in or
to stocks or bonds, certificates of such rights or interests, deposits,
accounts, documents covering merchandise, bills and accounts receivable and
other commercial paper and evidences or debt at any time held by the
Corporation; and for such loans, advances, or other forms of credit to make,
execute and deliver one or more notes, acceptances or written obligations of the
Corporation on such terms, and with such provisions as to the security or sale
or disposition thereof as such officers or agents shall deem proper; and also to
sell to, or discount or rediscount with, such banks, trust companies,
institutions, corporations, firms or persons any and all commercial paper, bills
receivable, acceptances and other instruments and evidences of debt at any time
held by the Corporation, and to that end to endorse, transfer and deliver the
same. There shall from time to time be certified to each bank, trust company,
institution, corporation, firm or person so designated the signature of the
officers or agents so authorized; and each bank, trust company, institution,
corporation, firm or person is authorized to rely upon such certification until
written notice of the revocation by the Board of the authority of such officers
or agents shall be delivered to such bank, trust company, institution,
corporation, firm or person.
ARTICLE VI
Miscellaneous Provisions
------------------------
SECTION 1. Fiscal Year. The fiscal year of the Corporation
shall begin on the first day of January of each year.
SECTION 2. Notices. Whenever, under the provisions of these
Bylaws, notice is required to be given to any director, officer or stockholder,
unless otherwise provided in these Bylaws, such notice shall be deemed given if
in writing, and personally delivered, or sent by telefax, or telegram, or by
mail, by depositing the same in a post office or letter box, in a postpaid
sealed wrapper, addressed to each stockholder, officer or director, as the case
may be, at such address as appears on the books of the Corporation, or in
default of any other address, to such director, officer or stockholder, at the
general post office in Ellicott City, Maryland, and such notice shall be deemed
to be given at the time the same is so personally delivered, telefaxed,
telegraphed or so mailed. Any stockholder, director or officer may waive any
notice required to be given under these Bylaws.
SECTION 3. Voting Upon Stocks. Unless otherwise ordered by the
Board, the Chairman, the President and the Vice President, or any of them, shall
have full power and authority on behalf of the Corporation to attend and to vote
and to grant proxies to be used at any meetings of stockholders of any
corporation in which the Corporation may hold stock.
8
<PAGE>
ARTICLE VII
Amendment of Bylaws
-------------------
The Board and the stockholders shall each have full power to
amend, alter or repeal these Bylaws, or any provision thereof, and may from time
to time make additional Bylaws. Any amendment to the Bylaws by the stockholders
shall be made at any annual meeting as part of the general business of such
meeting, or at any special meeting provided there was stated in the notice of
such meeting given to the stockholders the substance of such proposed alteration
or repeal. Any amendment to the Bylaws by the Board shall be made only at the
subsequent special or regular Board meeting which follows the meeting in which
the amendment was first presented by first and second motion to the Board.
ARTICLE VIII
Indemnification
---------------
To the maximum extent permitted by Maryland law in effect
from time to time, the Corporation shall indemnify and without requiring a
preliminary determination as to the ultimate entitlement of the individual to be
indemnified, shall pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to, (i) any individual who is a present or former
director, officer, employee or agent of the Corporation or (ii) any individual
who serves or has served another corporation, partnership, joint venture, trust,
employee benefit plan (at the request of the Corporation). Neither the amendment
nor repeal of this Article, nor the adoption or amendment of any other provision
of the Charter or Bylaws of the Corporation inconsistent with this Article,
shall apply to or affect in any respect the applicability of the preceding
sentence with respect to any act or failure to act which occurred prior to such
amendment, repeal or adoption. The Corporation shall have the power to purchase
and maintain insurance on behalf of any person for whom indemnification is
permitted as stated above, against any liability asserted against him or her in
such capacity arising out of his or her status as such, whether or not the
Corporation would have the power to indemnify him or her against such liability.
This Article shall not be deemed to be exclusive of any other rights to which
any person may be otherwise entitled, nor shall the provisions of the Charter
and this Article be deemed to prohibit the Corporation from extending its
indemnification to cover other persons and activities to the extent permitted by
law.
END OF BYLAWS
9
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
BY AND BETWEEN
COMMERCIAL & FARMERS BANK
AND
JOHN S. WHITESIDE
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is made on this llth day of June, in
the year one thousand nine hundred and eighty seven, by and between the
COMMERCIAL & FARMERS BANK,a Maryland corporation, hereinafter referred to as the
"Bank," and John S. Whiteside, hereinafter referred to as the "Executive."
EXPLANATORY STATEMENT
---------------------
The recent easing of prohibitions against interstate and
regional banks coupled with this Bank's location and reputation make it an
attractive acquisition target for large regional banks. The Board of Directors
anticipates invitations, from time to time, to enter into negotiations aimed at
a merger or acquisition, and it believes such events may cause uneasiness among
and distract the Bank's key executives from their duties. The Bank must attract
and retain competent and dedicated executives and other key personnel to assure
itself of continuing growth and continuity of management in the event of any
threatened or actual change in control of the Bank, and its key executives wish
to be assured of stability of employment in such events. The purpose of this
Employment Agreement is to achieve those objectives, the Directors believing
them to be in the best interests of the stockholders.
NOW, THEREFORE, THIS EMPLOYMENT AGREEMENT WITNESSETH That for
and in consideration of the mutual promises and covenants hereinafter expressed,
the Bank and John S. Whiteside whose title is President (hereinafter
"Executive"), mutually agree as follows.
1. Effective Date of Agreement.
----------------------------
This Employment Agreement shall become effective on the date
on which a Change of Control, as hereinafter defined, of the Bank shall occur.
<PAGE>
2. Change of Control.
------------------
The term "Change of Control" shall mean (1) any event, arising
out of a merger, consolidation, sale or share exchange, which vests the power to
direct or cause the direction of the management and policies of the Bank in
individuals who do not constitute a majority of the Bank's Board of Directors
immediately prior to the said event, or (2) the sale of all or substantially all
of the assets of the Bank to another financial institution.
3. Term of Employment.
-------------------
The term of employment shall be that period of time beginning
on the Effective Date of this Employment Agreement and ending either on the
fifth anniversary of the said Effective Date or on the 65th birthday of the
Executive, whichever shall first occur.
4. Employment.
-----------
The Bank hereby agrees to continue the Executive in its
employ, and the Executive hereby agrees to remain in the employ of the Bank, for
the Term of Employment hereinabove described. The Executive shall exercise such
authority and perform such duties as are commensurate with the authority being
exercised and duties being performed by him immediately prior to the Effective
Date of this Employment Agreement, which services shall be performed at the
location where the Executive was employed immediately prior to the Effective
Date hereof or at such other location as the Bank may reasonably require
provided that the Executive shall not be required to accept any location for
employment which is unreasonable in the light of the Executive's personal
circumstances or unduly disadvantageous to his career opportunities with the
Bank. During the Term of Employment, the Executive shall devote his full
business time exclusively to his executive duties and shall perform them
faithfully and effectively.
2
<PAGE>
5. Compensation.
-------------
During the Term of Employment, the Executive shall be
compensated with an annual salary which is not less than his annual salary
immediately prior to the Effective Date of this Agreement with the opportunity
for salary increases, from time to time, which are in accordance with the Bank's
normal practice. The Executive shall be entitled to receive the normal fringe
benefits of employment, including, but not limited to, medical, group life
insurance, disability, retirement, pension, and profit sharing, which are the
greater of the employee benefits provided by the Bank to executives with
comparable duties or the employee benefits he was entitled to immediately prior
to the Effective Date of this Agreement. The Executive shall also be eligible to
participate on a reasonable basis in bonus, stock option or other incentive
compensation plans which are the greater of the opportunities provided by the
Bank to executives with comparable duties or the opportunities provided under
any such plans in which he was participating immediately prior to the Effective
Date of this Agreement.
6. Termination.
------------
"Termination" shall mean termination prior to the end of the
Term of Employment (1) by the Bank of the employment of the Executive with the
Bank for any reason other than death, disability, physical or mental incapacity,
or for Cause as "Cause" is hereinafter defined, or (2) by the Executive's
resignation upon the occurrence of any of the following events:
(a) a significant and material change in the nature and scope
of the Executive's authority or duties with the Bank from those described in
Paragraph 4 of this Agreement; or
(b) a reduction in the Executive's total compensation from
that provided in Paragraph 5 of this Agreement; or (c) the breach by the Bank of
any other provision of this Agreement; or
3
<PAGE>
(d) a reasonable determination by the Executive that, as a
result of the change of control of the Bank and a material change in
circumstances thereafter significantly affecting his position, he can no longer
exercise the authority, power, responsibilities, functions and duties attached
to his position as contemplated in Paragraph 4 of this Agreement.
7. Cause and Disability.
---------------------
The term "Cause" in this Agreement shall mean:
(a) gross misconduct amounting to acts which constitute a
felony under applicable Federal or State law;
(b) a willful and material breach of this Agreement by the
Executive;
(c) any act of dishonesty;
(d) any act which results in or is intended to result in the
improper personal enrichment of the Executive at the expense of the Bank;
(e) any misappropriation of property or funds;
(f) the immoderate use of alcoholic beverages; or
(g) the abuse of narcotic drugs.
The terms "disability or mental or physical incapacity" in
this Agreement shall mean that the Executive is unable for physical or mental
reasons as a result of illness or accident properly to perform his regular
duties and discharge his regular responsibilities for a consecutive period of
six months in any one employment year or for an aggregate period of eight months
in any one employment year.
8. Termination Payments.
----------------------
In the event of a Termination of the Executive, the Bank
shall, subject to the provisions of Paragraphs 9 and 10 of this Agreement, pay
to the Executive and provide him with the following:
(a) During the remainder of the Term of Employment, the Bank
shall continue to pay the Executive his salary on a monthly basis at the rate as
immediately prior to the date of Termination plus
4
<PAGE>
the estimated amount of any bonuses or other incentives to which he would have
been entitled had Termination not occurred.
(b) During the remainder of the Term of Employment, the
Executive shall continue to receive the benefits under any medical, pension,
group life insurance, disability, retirement, pension and profit sharing plan or
program ordinarily offered other officers of the Bank. If the said employee
benefits shall not be provided under any plan or program because he is no longer
an employee of the Bank, the Bank shall, to the extent necessary, pay or provide
for payment of such benefits to the Executive, his dependents, beneficiaries or
estate.
PROVIDED, HOWEVER, should the Executive resign for the reasons
described in Paragraph 6 (2) (d), the payments and benefits provided by this
Paragraph or Paragraph 11 hereinafter, or pursuant to any other provisions of
this Agreement, shall not exceed the amount allowable as a deduction to the Bank
under the applicable Internal Revenue Service laws or regulations.
9. Non-Competition and Confidentiality.
------------------------------------
The Bank shall not be obliged to provide any further payments
or benefits, except those already earned or accrued, if, during the Term of
Employment, the Executive shall be employed by or otherwise engage or be
interested in any business which competes directly with the Bank and if, and
only if, such employment or activity causes, or is more likely than not to
cause, material damage to the Bank.
The Executive shall not, during or after the Term of
Employment, divulge or appropriate to his own use or the uses of others any
secret or confidential information or knowledge pertaining to the operation of
the Bank obtained during his employment by the Bank.
10. Mitigation of Expenses.
-----------------------
In the event of Termination, the Executive shall make
reasonable efforts to obtain other employment; provided, however, he shall not
be obliged to accept a position of substantially different character than the
highest position held by him with the Bank or a position which would require him
to
5
<PAGE>
violate the non-competition and confidentiality provision of this Agreement. To
the extent that the Executive receives salary, compensation, and benefits from
such other employment, the payments to be made pursuant to Paragraph 5 of this
Agreement shall be correspondingly reduced.
11. Severance Allowance.
--------------------
In the event of Termination during the Term of Employment, the
Executive may elect, within ninety (90) days after such Termination, to be paid
a lump sum severance allowance in lieu of termination payments in an amount
equal to the sum of the amounts determined in accordance with the following
sub-paragraphs:
(a) An amount equal to salary payments described in Paragraph
5 for 24 calendar months plus a pro rata share of the estimated amount of any
bonus which would have been payable for the bonus period, which includes his
termination date.
(b) An amount equal to the sum of any employee benefits
described in Paragraph 5 for a period of 24 calendar months, including any
medical, group life insurance, disability, retirement, pension or profit
sharing, which benefits shall be provided at the same rate as he was receiving
on the termination date.
(c) An amount equal to the reasonable value of any stock
option plan for a period of 24 calendar months in which the Executive was
participating at the termination date.
The sum of the above amounts shall be determined and shall be
paid by the Bank as soon as reasonably possible after the Executive shall have
given notice of his election. The payments under this Paragraph shall not be
subject to reduction under Paragraph 10, nor shall the Executive making this
election be restricted by the provisions of Paragraph 9.
12. Assignability.
--------------
The Executive shall not have any right to pledge, hypothecate,
anticipate or in any way create a lien upon any amounts provided under this
Agreement, and no benefits hereunder may be
6
<PAGE>
assigned by the Executive in anticipation of payment either by voluntary or
involuntary acts or by operation of law. The provisions of this Agreement shall
inure to the benefit of and shall be binding on the Bank and its successors and
upon its assigns should the Change of Control described in Paragraph 2 occur by
assignment of all or substantially all of the assets of the Bank.
13. Notices.
--------
Any notice, claim, request, demand or other communication
arising out of or provided for in this Agreement shall be sufficient if in
writing and mailed by certified mail to the Bank at its principal office or to
the Executive at the last address he has filed in writing with the Bank.
14. Amendment and Severability.
---------------------------
This Agreement constitutes the entire understanding and
undertaking of the parties hereto and no modification or amendment hereof shall
be effective unless reduced to writing and duly executed by the parties; it may
be amended or cancelled by mutual agreement of the parties in writing. Should
any provision or portion of this Agreement be determined invalid or
unenforceable for any reason by a Court of competent jurisdiction, the remaining
provisions of this Agreement shall be unaffected thereby and shall remain in
full force and effect.
This Employment Agreement shall be governed and construed by
the Law of the State of Maryland.
7
<PAGE>
IN WITNESS WHEREOF, The Executive has hereunto set his hand
and seal and, pursuant to a certain Resolution of its Board of Directors dated
June llth, 1987, the Commercial & Farmers Bank has caused this Agreement to be
executed in its name and on its behalf, and its corporate seal to be affixed
hereunto and attested by its Secretary, as of this 15th day of June in the year
one thousand nine hundred and eighty-seven:
/s/ John S. Whiteside [SEAL]
---------------------------------------------
Executive
COMMERCIAL & FARMERS BANK
By: /s/ C. Ellsworth Iager
------------------------------------------
Its Chairman of the Board
ATTEST:
/s/ Edwin B. McKee
- -------------------------------
Secretary
(SEAL)
8
<PAGE>
EXHIBIT 10.2
PATAPSCO VALLEY BANCSHARES, INC.
INCENTIVE STOCK OPTION PLAN
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
INCENTIVE STOCK OPTION PLAN
SECTION ONE
DEFINITIONS
As used herein:
1. The word "Corporation" means Patapsco Valley Bancshares, Inc., a
Maryland corporation and, collectively, Patapsco Valley Bancshares, Inc. and its
subsidiaries.
2. The word "Plan" means the Patapsco Valley Bancshares, Inc. Incentive
Stock Option Plan, as herein set forth.
3. The words "Officer/Key Employees" means the President of the Corporation
and those officers who are selected by the President of the Corporation to
receive stock options as provided in Section Three hereof.
4. The word "Optionee" means an Officer/Key Employee holding a stock option
under the Plan.
SECTION TWO
PURPOSES
The purposes of the Plan are:
1. To encourage the sense of proprietorship on the part of Officer/Key
Employees who will be largely responsible for the continued growth of the
Corporation;
2. To recognize past valuable services of such Officer/Key Employees;
3. To furnish such Officer/Key Employees with further incentive to develop
and promote the business and financial success of the Corporation;
4. To induce such Officer/Key Employees to continue in the service of the
Corporation, by providing a means whereby such Officer/Key Employees of the
Corporation may be given an opportunity to purchase stock in the Corporation.
SECTION THREE
ADMINISTRATION
1. The Incentive Stock Option Plan shall be administered by the President
of the Corporation.
2. Subject to the express provisions of the Plan, the President of the
Corporation shall have full power and authority, in his discretion, to determine
initially and from time to time those Officer/Key Employees to whom options are
to be granted and, subject to the limitations imposed by Section Five hereof,
the times when such options shall be granted and the number of shares to be
covered
<PAGE>
by each option. An option to purchase one thousand nine hundred fifty (1,950)
shares shall be granted to the President during each year of the first three (3)
years of the Plan. Options to purchase the remaining twelve thousand six hundred
(12,600) shares under the Plan may be granted only to Officer/Key Employees
other than the President and shall, if granted, be granted during the first
three (3) years of the Plan. Accomplishments of individuals in furthering the
interests of the Corporation shall be the primary guide of the President in
apportioning the number of shares to be optioned to Officer/Key Employees, but
the President may take into consideration the position held by an Officer/Key
Employee, his compensation, and other factors that the President may deem
pertinent.
3. Subject to the express provisions of the Plan, the President of the
Corporation shall also have the power and authority to construe and interpret
the Plan and the respective option agreements entered into thereunder, and to
make all other determinations necessary or advisable for administering the Plan.
SECTION FOUR
ELIGIBILITY
Options may be granted only to the President of the Corporation, and
Officer/Key Employees selected in accordance with the provisions of this Plan by
the President of the Corporation, and who at the time the option is granted does
not own stock possessing more than ten percent (10%) of the total combined
voting power of all classes of the outstanding stock of the Corporation. For
this purpose the attribution of stock ownership rules provided in section 424(d)
of the Internal Revenue Code of 1986 shall apply.
SECTION FIVE
SHARES SUBJECT TO PLAN
The stock to be sold pursuant to options granted under this Plan shall be
authorized but unissued shares of the common stock of the Corporation. Subject
to adjustment made in accordance with Section Thirteen hereof, the total number
of shares which may be issued under this Plan shall not exceed eighteen thousand
four hundred fifty (18,450) shares, and the aggregate fair market value of
shares as to which an option or options may be exercised by any one individual
during any single calendar year under all plans of the Corporation shall not
have an aggregate fair market value in excess of the sum of $100,000 determined
as of the time the option(s) with respect to such stock is granted. In the event
any unexercised options lapse or terminate for any reason, the shares covered
thereby may be optioned to other persons, and such lapsed or terminated options
shall not be considered in computing the total number of shares optioned.
SECTION SIX
OPTION PRICE
The purchase price of the shares under each option granted pursuant to the
Plan shall be not less than one hundred percent (100%) of the fair market value
of the stock on the date such option is granted. If the stock is listed or has
trading privileges on a national securities exchange, the fair market
2
<PAGE>
value shall be the mean between the high and low selling prices on the date of
the granting of such option, or if there are no sales on that date, the mean
between the high and low selling prices on the last day prior thereto on which
sales were made. If the stock is not listed on any exchange, the fair market
value of the stock on the date such option is granted shall be determined by the
President of the Corporation.
SECTION SEVEN
DURATION OF OPTIONS
Each option granted hereunder shall expire on the 10th anniversary of the
date the option was granted, unless sooner terminated under the provisions of
Section Eight hereof.
SECTION EIGHT
TERMINATION OF OPTIONS
1. In the event of termination of the employment of an Optionee for any
cause, other than death, disability resulting in coverage under the long-term
disability plan of the Corporation, or retirement of the Optionee, whether by
reason of resignation or discharge, each option granted such Optionee shall
terminate immediately prior to such termination.
2. Each option granted an Optionee shall terminate twelve (12) months from
the date of such Optionee's death, provided such Optionee at the time of his
death was in the employ of the Corporation.
SECTION NINE
EXERCISE OF OPTIONS
1. Subject to the terms and conditions of the Plan, options shall be
exercised by written notice to the President of the Corporation, at the
Corporation's principal office, 8593 Baltimore National Pike, Ellicott City,
Maryland, 21043, as provided in the option agreements entered into hereunder.
2. No option may be exercised unless and until the Optionee shall have
remained in the continuous employ of the Corporation for thirty-six (36) months
from the date such option was granted and the Optionee is an employee of the
Corporation at the time of exercise; except, however, that in the event of the
death of such Optionee while in the employ of the Corporation, or retirement of
such Optionee under the Corporation's retirement plan within twenty-four (24)
months from the date such option was granted, such option shall become
exercisable immediately on the date of such death or retirement.
3. An option may be exercised either at one time as to the total number of
shares covered thereby, or from time to time as to any portion thereof in units
of one hundred (100) shares or multiples thereof.
3
<PAGE>
4. On the exercise of an option, a certificate or certificates evidencing
the shares as to which the option is exercised shall be delivered to the person
exercising the option.
5. Subject to the limitations imposed by Sections Seven and Eight hereof,
in the event of the death of an Optionee, the option or options theretofore
granted to him may be exercised by the legal representatives of the estate of
the Optionee or by the person or persons to whom his rights under the option or
options shall pass by will or the laws of descent and distribution.
SECTION TEN
PAYMENT
Payment of the purchase price for shares purchased under options granted
under the Plan may be made in cash, by check made payable to the order of the
Corporation, with shares of the Corporation to the extent of the fair market
value of such shares, or a combination thereof, at the time of the exercise of
the option in the manner provided in Section Nine hereof.
SECTION ELEVEN
NONTRANSFERABILITY OF OPTIONS
An option granted under the Plan may not be transferred except by will or
the laws of descent and distribution and, during the lifetime of the Optionee,
may be exercised only by him.
SECTION TWELVE
PURCHASE OF SHARES FOR INVESTMENT
Each Optionee and each other person who shall exercise an option shall
represent and agree that all shares purchased pursuant to such option will be
purchased for investment and not for distribution or resale thereof.
SECTION THIRTEEN
ADJUSTMENT OF SHARES
In the event of a merger, consolidation, reorganization, recapitalization,
reclassification of stock, stock dividend, split-up, or other change in the
Corporate structure or capitalization of the Corporation affecting the
Corporation's common stock as presently constituted, appropriate adjustments
shall be made by the President of the Corporation in the aggregate number and
kind of shares subject to the Plan, the maximum number and kind of shares for
which options may be granted in any calendar year, the maximum number and kind
of shares for which options may be granted to any one Officer/Key Employee, and
the number and kind of shares and the price per share subject to outstanding
options.
4
<PAGE>
SECTION FOURTEEN
REGISTRATION OR QUALIFICATION OF SHARES
Each option shall be subject to the condition that, if at any time the
President of the Corporation shall determine in his discretion that the
registration or qualification of the shares covered thereby under any state or
federal law is necessary or desirable as a condition of or in connection with
the granting of such option or the delivery of shares on the exercise thereof,
no such option may be granted or, if granted, delivery of shares on the exercise
thereof shall be deferred, until such registration or qualification shall have
been effected. In the event the President determines that registration or
qualification of shares is necessary or desirable, the Corporation shall, at its
expense, take such action as may be required to effect such registration or
qualification.
SECTION FIFTEEN
FORM OF OPTION
The form of option to be granted pursuant to the Plan shall be approved by
the President of the Corporation.
SECTION SIXTEEN
SUSPENSION, AMENDMENT, OR TERMINATION OF PLAN
Unless the Plan shall theretofore have been terminated by the President of
the Corporation, the Plan shall terminate on February 25, 2008. The President of
the Corporation shall have the right, at any time, to suspend, amend, or
terminate the Plan; provided, however, that unless duly approved by the holders
of a majority of the common stock of the Corporation no amendment shall increase
the total number of shares that shall be the subject of the Plan or change the
formula for determining the purchase price for the optioned shares, and provided
further that no termination of the Plan or action by the President in amending
or suspending the Plan shall affect or impair the rights of an Optionee under
any option previously granted under the Plan.
No option may be granted under the Plan during any suspension thereof or
after the termination thereof.
5
<PAGE>
SECTION SEVENTEEN
EFFECTIVE DATE OF PLAN
This Plan shall be submitted to the shareholders of the Corporation at the
annual meeting to be held on the 21st day of April, 1998, and shall become
operative and effective on its adoption by the shareholders of the Corporation
at such meeting.
ATTEST: PATAPSCO VALLEY BANCSHARES, INC.
/s/ Edwin B. McKee By /s/ Howard E. Harrison, III
- --------------------------------- -----------------------------
Chairman of the Board
of Directors
APPROVAL BY BOARD OF DIRECTORS
------------------------------
The Board of Directors of Patapsco Valley Bancshares, Inc. duly approved
the within Incentive Stock Option Plan on February 25, 1998, subject to the
further approval of the shareholders of Patapsco Valley Bancshares, Inc.
/s/ Edwin B. McKee
-----------------------------
Secretary of the
Board of Directors
APPROVAL OF SHAREHOLDERS
------------------------
The Shareholders of Patapsco Valley Bancshares, Inc., after due notice,
duly approved the within Incentive Stock Option Plan on April 21, 1998, at the
annual meeting.
/s/ Edwin B. McKee
----------------------------
Secretary of Shareholders
Meeting
6
<PAGE>
EXHIBIT 10.3
PATAPSCO VALLEY BANCSHARES, INC.
DIRECTOR STOCK OPTION PLAN
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
DIRECTOR'S STOCK OPTION PLAN
SECTION ONE
DEFINITIONS
As used herein:
1. The word "Corporation" means Patapsco Valley Bancshares, Inc., a
Maryland corporation.
2. The word "Plan" means the Patapsco Valley Bancshares, Inc. Director's
Stock Option Plan, as herein set forth.
3. The word "Directors" means those individuals who are non-employee
members of the Board of Directors of the Corporation.
4. The word "Optionee" means a Director holding a stock option under the
Plan.
SECTION TWO
PURPOSES
The purposes of the Plan are:
1. To encourage the sense of proprietorship on the part of Directors;
2. To recognize past valuable services of such Directors;
3. To furnish such Directors with further incentive to develop and promote
the business and financial success of the Corporation;
4. To induce such Directors to continue in the service of the Corporation,
by providing a means whereby such Directors of the Corporation may be given an
opportunity to purchase stock in the Corporation.
SECTION THREE
ADMINISTRATION
1. The Plan shall be administered by the President of the Corporation.
Options to purchase seven thousand (7,000) shares of the common stock of the
Corporation shall be granted each year during the first three years of the Plan.
Each Director shall receive equal treatment with respect to the option grants.
2. Subject to the express provisions of the Plan, the President of the
Corporation shall also have the power and authority to construe and interpret
the Plan and the respective option agreements
<PAGE>
entered into thereunder, and to make all other determinations necessary or
advisable for administering the Plan.
SECTION FOUR
ELIGIBILITY
Options may be granted only to Directors.
SECTION FIVE
SHARES SUBJECT TO PLAN
The stock to be sold pursuant to options granted under this Plan shall be
authorized but unissued shares of the common stock of the Corporation. Subject
to adjustment made in accordance with Section Thirteen hereof, the total number
of shares which may be issued under this Plan shall not exceed twenty-one
thousand (21,000) shares. In the event any unexercised options lapse or
terminate for any reason, the shares covered thereby may be optioned to other
persons, and such lapsed or terminated options shall not be considered in
computing the total number of shares optioned.
SECTION SIX
OPTION PRICE
The purchase price of the shares under each option granted pursuant to the
Plan shall be not less than one hundred percent (100%) of the fair market value
of the stock on the date such option is granted. If the stock is listed or has
trading privileges on a national securities exchange, the fair market value
shall be the mean between the high and low selling prices on the date of the
granting of such option, or if there are no sales on that date, the mean between
the high and low selling prices on the last day prior thereto on which sales
were made. If the stock is not listed on any exchange, the fair market value of
the stock on the date such option is granted shall be determined by the
President of the Corporation, but at no time shall the option price be less than
the book value per share on the date the option is issued.
SECTION SEVEN
DURATION OF OPTIONS
Each option granted hereunder shall expire on the 10th anniversary of the
date the option was granted, unless sooner terminated under the provisions of
Section Eight hereof.
SECTION EIGHT
TERMINATION OF OPTIONS
1. In the event of termination as a Director for any cause, other than
death or mandatory retirement because of age, each option granted such Optionee
shall terminate immediately prior to such termination.
2
<PAGE>
2. Each option granted an Optionee shall terminate twelve (12) months from
the date of such Optionee's death, provided such Optionee at the time of his
death was a Director of the Corporation.
SECTION NINE
EXERCISE OF OPTIONS
1. Subject to the terms and conditions of the Plan, options shall be
exercised by written notice to the President of the Corporation, at the
Corporation's principal office, 8593 Baltimore National Pike, Ellicott City,
Maryland, 21043, as provided in the option agreements entered into hereunder.
2. An Optionee may exercise his options immediately upon receipt thereof.
3. An option may be exercised either at one time as to the total number of
shares covered thereby, or from time to time as to any portion thereof in units
of one hundred (100) shares or multiples thereof.
4. On the exercise of an option, a certificate or certificates evidencing
the shares as to which the option is exercised shall be delivered to the person
exercising the option.
5. Subject to the limitations imposed by Sections Seven and Eight hereof,
in the event of the death of an Optionee, the option or options theretofore
granted to him may be exercised by the legal representatives of the estate of
the Optionee or by the person or persons to whom his rights under the option or
options shall pass by will or the laws of descent and distribution.
SECTION TEN
PAYMENT
Payment of the purchase price for shares purchased under options granted
under the Plan may be made in cash, by check made payable to the order of the
Corporation, with shares of the Corporation to the extent of the fair market
value of such shares, or a combination thereof, at the time of the exercise of
the option in the manner provided in Section Nine hereof.
SECTION ELEVEN
NONTRANSFERABILITY OF OPTIONS
An option granted under the Plan may not be transferred except by will or
the laws of descent and distribution and, during the lifetime of the Optionee,
may be exercised only by him.
3
<PAGE>
SECTION TWELVE
PURCHASE OF SHARES FOR INVESTMENT
Each Optionee and each other person who shall exercise an option shall
represent and agree that all shares purchased pursuant to such option will be
purchased for investment and not for distribution or resale thereof.
SECTION THIRTEEN
ADJUSTMENT OF SHARES
In the event of a merger, consolidation, reorganization, recapitalization,
reclassification of stock, stock dividend, split-up, or other change in the
corporate structure or capitalization of the Corporation affecting the
Corporation's common stock as presently constituted, appropriate adjustments
shall be made by the President of the Corporation in the aggregate number and
kind of shares subject to the Plan, the maximum number and kind of shares for
which options may be granted in any calendar year, the maximum number and kind
of shares for which options may be granted to any one Director, and the number
and kind of shares and the price per share subject to outstanding options.
SECTION FOURTEEN
REGISTRATION OR QUALIFICATION OF SHARES
Each option shall be subject to the condition that, if at any time the
President of the Corporation shall determine in his discretion that the
registration or qualification of the shares covered thereby under any state or
federal law is necessary or desirable as a condition of or in connection with
the granting of such option or the delivery of shares on the exercise thereof,
no such option may be granted or, if granted, delivery of shares on the exercise
thereof shall be deferred, until such registration or qualification shall have
been effected. In the event the President determines that registration or
qualification of shares is necessary or desirable, the Corporation shall, at its
expense, take such action as may be required to effect such registration or
qualification.
SECTION FIFTEEN
FORM OF OPTION
The form of option to be granted pursuant to the Plan shall be approved by
the President of the Corporation.
SECTION SIXTEEN
SUSPENSION, AMENDMENT, OR TERMINATION OF PLAN
Unless the Plan shall theretofore have been terminated by a simple majority
of the Board of Directors of the Corporation, the Plan shall terminate on
February 25, 2008. A simple majority of the Board of Directors of the
Corporation shall have the right, at any time, to suspend, amend, or terminate
the Plan; provided, however, that unless duly approved by the holders of a
majority of the common stock
4
<PAGE>
of the Corporation no amendment shall increase the total number of shares that
shall be the subject of the Plan or change the formula for determining the
purchase price for the optioned shares, and provided further that no termination
of the Plan or action by a simple majority of the Board of Directors in amending
or suspending the Plan shall affect or impair the rights of an optionee under
any option previously granted under the Plan.
No option may be granted under the Plan during any suspension thereof or
after the termination thereof.
SECTION SEVENTEEN
EFFECTIVE DATE OF PLAN
This Plan shall be submitted to the shareholders of the Corporation at the
annual meeting to be held on the 21st day of April, 1998, and shall become
operative and effective on its adoption by the shareholders of the Corporation
at such meeting.
ATTEST: PATAPSCO VALLEY BANCSHARES, INC.
/s/ Edwin B. McKee By /s/ Howard E. Harrison, III
- ------------------------------------ ---------------------------------
Chairman of the Board
of Directors
APPROVAL BY BOARD OF DIRECTORS
------------------------------
The Board of Directors of Patapsco Valley Bancshares, Inc. duly approved
the within Director's Stock Option Plan on February 25, 1998, subject to the
further approval of the shareholders of Patapsco Valley Bancshares, Inc.
/s/ Edwin B. McKee
-------------------------------
Secretary of the
Board of Directors
APPROVAL OF SHAREHOLDERS
------------------------
The Shareholders of Patapsco Valley Bancshares, Inc., after due notice,
duly approved the within Director's Stock Option Plan on April 21, 1998, at the
annual meeting.
/s/ Edwin B. McKee
-------------------------------
Secretary of Shareholders
Meeting
5
<PAGE>
EXHIBIT 10.4
PATAPSCO VALLEY BANCSHARES, INC.
EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
EMPLOYEE STOCK PURCHASE PLAN
SECTION ONE
DEFINITIONS
As used herein:
1. The word "Corporation" means Patapsco Valley Bancshares, Inc., a
Maryland corporation and, collectively, Patapsco Valley Bancshares, Inc. and its
subsidiaries.
2. The word "Plan" means the Patapsco Valley Bancshares, Inc. Employee
Stock Purchase Plan, as herein set forth.
3. The word "Employee" means an Employee of the Corporation.
4. The word "Optionee" means an Employee holding a stock option under the
Plan.
SECTION TWO
PURPOSES
The purposes of the Plan are:
1. To encourage the sense of proprietorship on the part of Employees;
2. To recognize past valuable services of such Employees;
3. To furnish such Employees with further incentive to develop and promote
the business and financial success of the Corporation;
4. To induce such Employees to continue in the service of the Corporation,
by providing a means whereby such Employees of the Corporation may be given an
opportunity to purchase stock in the Corporation.
SECTION THREE
ADMINISTRATION
1. The Employee Stock Purchase Plan shall be administered by the
Corporation's President, Chief Operating Officer, and Chief Financial Officer
(the "Administrators").
2. Options to purchase twenty thousand five hundred fifty (20,550) shares
may be granted to Employees during the first three (3) years of the Plan. All
employees shall be granted options subject to Section Four of the Plan. All
Employees granted options shall have the same rights and
<PAGE>
privileges except that the amount of stock which will be purchased by any
Employee under such option will bear a uniform relationship to the total
compensation of Employees and no Employee may purchase more than a maximum
amount of stock as provided below:
Options to purchase shares shall be granted to each Employee at the rate of
one (1) share per one thousand dollars ($1,000) of the total compensation of the
Employee as reported on such Employee's Internal Revenue Service Form W-2 for
the year of the grant, subject, however, to the limitation that no one grant to
any one Employee may allow more than fifty (50) shares to be purchased by that
Employee. Each grant of options shall be effective on the date of such grant
notwithstanding that the number of shares included in the grant is subsequently
determined.
3. Subject to the express provisions of the Plan, the Administrators shall
also have the power and authority to construe and interpret the Plan and the
respective option agreements entered into thereunder, and to make all other
determinations necessary or advisable for administering the Plan.
SECTION FOUR
ELIGIBILITY
Options may be granted only to Employees who immediately after the option
is granted do not own stock possessing more than five percent (5%) of the total
combined voting power of all classes of the outstanding stock of the
Corporation. For this purpose the stock attribution rules in Section 424(d) of
the Internal Revenue Code of 1986 shall apply and stock which the Employee may
purchase under outstanding options shall be treated as stock owned by the
Employee. No Employee is permitted to purchase stock under all the employee
stock purchase plans of the Corporation at a rate which exceeds $25,000 in fair
market value of such stock (determined at the time the option is granted) for
each calendar year in which any such option granted to such individual is
outstanding at any time.
SECTION FIVE
SHARES SUBJECT TO PLAN
The stock to be sold pursuant to options granted under this Plan shall be
authorized but unissued shares of the common stock of the Corporation. Subject
to adjustment made in accordance with Section Thirteen hereof, the total number
of shares which may be issued under this Plan shall not exceed twenty thousand
five hundred and fifty (20,550) shares. In the event any unexercised options
lapse or terminate for any reason, the shares covered thereby may be optioned to
other persons, and such lapsed or terminated options shall not be considered in
computing the total number of shares optioned. No Employee is permitted to
purchase stock under all the employee stock purchase plans of the Corporation at
a rate which exceeds $25,000 in fair market value of such stock (determined at
the time the option is granted) for each calendar year in which any such option
granted to such individual is outstanding at any time.
2
<PAGE>
SECTION SIX
OPTION PRICE
The purchase price of the shares under each option granted pursuant to the
Plan shall be eighty-five percent (85%) of the fair market value of the stock on
the date such option is granted. If the stock is listed or has trading
privileges on a national securities exchange, the fair market value shall be the
mean between the high and low selling prices on the date of the granting of such
option, or if there are no sales on that date, the mean between the high and low
selling prices on the last day prior thereto on which sales were made. If the
stock is not listed on any exchange, the fair market value of the stock on the
date such option is granted shall be determined by the Administrators.
SECTION SEVEN
DURATION OF OPTIONS
Each option granted hereunder shall expire twenty-seven (27) months from
the date the option was granted, unless sooner terminated under the provisions
of Section Eight hereof.
SECTION EIGHT
TERMINATION OF OPTIONS
1. In the event of termination of the employment of an Optionee for any
cause, other than death, disability resulting in coverage under the long-term
disability Plan of the Corporation, or retirement of the Optionee, whether by
reason of resignation or discharge, each option granted such Optionee shall
terminate immediately prior to such termination.
2. Each option granted an Optionee shall terminate twelve (12) months from
the date of such Optionee's death, provided such Optionee at the time of his
death was in the employ of the Corporation.
SECTION NINE
EXERCISE OF OPTIONS
1. Subject to the terms and conditions of the Plan, options shall be
exercised by written notice to the President of the Corporation, at the
corporation's principal office, 8593 Baltimore National Pike, Ellicott City,
Maryland, 21043, as provided in the option agreements entered into hereunder.
2. No option may be exercised unless and until the Optionee shall have
remained in the continuous employ of the Corporation for twelve (12) months from
the date such option was granted and the Optionee is an employee of the
Corporation at the time of exercise; except, however, that in the event of the
death of such Optionee while in the employ of the Corporation, or retirement of
such Optionee under the Corporation's retirement Plan within twenty-four (24)
months from the date such
3
<PAGE>
option was granted, such option shall become exercisable immediately on the date
of such death or retirement.
3. An option may be exercised either at one time as to the total number of
shares covered thereby, or from time to time as to any portion thereof in units
of ten (10) shares or multiples thereof.
4. On the exercise of an option, a certificate or certificates evidencing
the shares as to which the option is exercised shall be delivered to the person
exercising the option.
5. Subject to the limitations imposed by Sections Seven and Eight hereof,
in the event of the death of an Optionee, the option or options theretofore
granted to him may be exercised by the legal representatives of the estate of
the Optionee or by the person or persons to whom his rights under the option or
options shall pass by will or the laws of descent and distribution.
SECTION TEN
PAYMENT
Payment of the purchase price for shares purchased under options granted
under the Plan may be made in cash, by check made payable to the order of the
Corporation, with shares of the Corporation to the extent of the fair market
value of such shares, or a combination thereof, at the time of the exercise of
the option in the manner provided in Section Nine hereof.
SECTION ELEVEN
NONTRANSFERABILITY OF OPTIONS
An option granted under the Plan may not be transferred except by will or
the laws of descent and distribution and, during the lifetime of the Optionee,
may be exercised only by him.
SECTION TWELVE
PURCHASE OF SHARES FOR INVESTMENT
Each Optionee and each other person who shall exercise an option shall
represent and agree that all shares purchased pursuant to such option will be
purchased for investment and not for distribution or resale thereof.
SECTION THIRTEEN
ADJUSTMENT OF SHARES
In the event of a merger, consolidation, reorganization, recapitalization,
reclassification of stock, stock dividend, split-up, or other change in the
corporate structure or capitalization of the Corporation affecting the
Corporation's common stock as presently constituted, appropriate adjustments
shall be made by the President of the Corporation in the aggregate number and
kind of shares subject to the Plan, the maximum number and kind of shares for
which options may be granted in any calendar year,
4
<PAGE>
the maximum number and kind of shares for which options may be granted to any
one Employee, and the number and kind of shares and the price per share subject
to outstanding options.
SECTION FOURTEEN
REGISTRATION OR QUALIFICATION OF SHARES
Each option shall be subject to the condition that, if at any time the
Administrators shall determine in their discretion that the registration or
qualification of the shares covered thereby under any state or federal law is
necessary or desirable as a condition of or in connection with the granting of
such option or the delivery of shares on the exercise thereof, no such option
may be granted or, if granted, delivery of shares on the exercise thereof shall
be deferred, until such registration or qualification shall have been effected.
In the event the Administrators determine that registration or qualification of
shares is necessary or desirable, the Corporation shall, at its expense, take
such action as may be required to effect such registration or qualification.
SECTION FIFTEEN
FORM OF OPTION
The form of option to be granted pursuant to the Plan shall be approved by
the Administrators.
SECTION SIXTEEN
SUSPENSION, AMENDMENT, OR TERMINATION OF PLAN
Unless the Plan shall theretofore have been terminated by the
Administrators, the Plan shall terminate on February 17, 2008. The
Administrators shall have the right, at any time, to suspend, amend, or
terminate the Plan; provided, however, that unless duly approved by the holders
of a majority of the common stock of the Corporation no amendment shall increase
the total number of shares that shall be the subject of the Plan or change the
formula for determining the purchase price for the optioned shares, and provided
further that no termination of the Plan or action by the Administrators in
amending or suspending the Plan shall affect or impair the rights of an Optionee
under any option previously granted under the Plan.
No option may be granted under the Plan during any suspension thereof or
after the termination thereof.
5
<PAGE>
SECTION SEVENTEEN
EFFECTIVE DATE OF PLAN
This Plan shall be submitted to the shareholders of the Corporation at the
annual meeting to be held on the 21st day of April, 1998, and shall become
operative and effective on its adoption by the shareholders of the Corporation
at such meeting.
ATTEST: PATAPSCO VALLEY BANCSHARES, INC.
/s/ Edwin B. McKee By /s/ Howard E. Harrison, III
- ----------------------------------- ----------------------------------
Chairman of the Board
of Directors
APPROVAL BY BOARD OF DIRECTORS
------------------------------
The Board of Directors of Patapsco Valley Bancshares, Inc.
duly approved the within Employee Stock Purchase Plan on February 25, 1998,
subject to the further approval of the shareholders of Patapsco Valley
Bancshares, Inc.
/s/ Edwin B. McKee
---------------------------------
Secretary of the
Board of Directors
APPROVAL OF SHAREHOLDERS
------------------------
The Shareholders of Patapsco Valley Bancshares, Inc., after
due notice, duly approved the within Employee Stock Purchase Plan on April 21,
1998, at the annual meeting.
/s/ Edwin B. McKee
---------------------------------
Secretary of Shareholders
Meeting
6
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
OF
PATAPSCO VALLEY BANCSHARES, INC.
<PAGE>
Patapsco Valley Bancshares, Inc. wholly owns Central Maryland Service
Corporation, a Maryland corporation located in Ellicott City, Maryland, and
Commercial & Farmers Bank (the "Bank"), a Maryland state-chartered bank. The
Bank wholly owns three Maryland corporations: Founders Mortgage Company, Inc., a
mortgage banking company located in Columbia, Frederick, North East and Bel Air,
Maryland; C&F Insurance Agency, Inc., a Maryland insurance agency located in
West Friendship, Maryland; and Rogers Avenue Realty, Inc., a real estate owned
company, located in Ellicott City, Maryland.
<PAGE>
EXHIBIT 23.1
CONSENT FROM ROWLES & COMPANY, LLP
<PAGE>
Board of Directors
Patapsco Valley Bancshares, Inc.
We hereby consent to the incorporation by reference of our report on
the consolidated financial statements of Patapsco Valley Bancshares, Inc. as of
December 31, 1997 and for the two years then ended and to the references to our
firm under the heading "Experts" in the Company's Registration Statement on Form
10-SB/A.
/s/ Rowles & Company, LLP
Baltimore, Maryland
October 27, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 1069855
<NAME> Patapsco Valley Bancshares, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> Dec-31-1997 Dec-31-1997 Dec-31-1997 Dec-31-1996
<PERIOD-START> Jan-1-1998 Jan-1-1997 Jan-1-1997 Jan-1-1996
<PERIOD-END> Jun-30-1998 Jun-30-1997 Dec-31-1997 Dec-31-1996
<EXCHANGE-RATE> 1 1 1 1
<CASH> 5,966,969 6,841,793 5,085,542 7,727,741
<INT-BEARING-DEPOSITS> 88,374,413 79,322,749 88,488,181 83,715,535
<FED-FUNDS-SOLD> 5,486,000 6,891,000 13,181,000 10,843,991
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 13,944,540 19,318,259 15,160,333 28,556,145
<INVESTMENTS-CARRYING> 0 0 0 0
<INVESTMENTS-MARKET> 0 0 0 0
<LOANS> 121,361,117 94,981,875 103,951,421 85,404,207
<ALLOWANCE> 1,458,262 1,623,870 1,615,008 1,562,853
<TOTAL-ASSETS> 150,478,811 129,926,125 140,229,147 133,899,764
<DEPOSITS> 123,187,411 109,889,501 119,495,004 114,587,515
<SHORT-TERM> 9,015,355 2,972,950 2,861,324 3,236,572
<LIABILITIES-OTHER> 1,719,703 1,427,817 1,978,960 1,377,908
<LONG-TERM> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 6,744 5,523 6,674 5,477
<OTHER-SE> 16,549,598 15,630,334 15,887,185 14,692,292
<TOTAL-LIABILITIES-AND-EQUITY> 150,478,811 129,926,125 140,229,147 133,899,764
<INTEREST-LOAN> 5,190,077 4,262,140 8,855,753 7,521,415
<INTEREST-INVEST> 343,484 616,770 1,006,619 1,501,954
<INTEREST-OTHER> 232,376 299,634 725,182 730,336
<INTEREST-TOTAL> 5,765,937 5,178,544 10,587,554 9,753,705
<INTEREST-DEPOSIT> 1,609,490 1,353,592 2,852,320 3,029,782
<INTEREST-EXPENSE> 1,775,065 1,425,695 2,995,504 3,144,783
<INTEREST-INCOME-NET> 3,990,872 3,752,849 7,592,050 6,608,922
<LOAN-LOSSES> 0 0 0 0
<SECURITIES-GAINS> (13,021) 2,722 60,861 16,552
<EXPENSE-OTHER> 4,362,901 2,571,959 6,177,994 4,996,782
<INCOME-PRETAX> 1,162,376 1,608,383 2,416,344 2,363,743
<INCOME-PRE-EXTRAORDINARY> 1,162,376 1,608,383 2,416,344 2,363,743
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 741,682 1,027,750 1,547,610 1,502,330
<EPS-PRIMARY> 1.10 1.55 2.33 2.31
<EPS-DILUTED> 1.10 1.55 2.33 2.31
<YIELD-ACTUAL> 5.90 6.26 6.21 5.55
<LOANS-NON> 1,119,537 81,577 1,197,231 377,059
<LOANS-PAST> 138,824 722,042 77,752 47,968
<LOANS-TROUBLED> 1,119,537 81,577 1,197,231 377,059
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 1,615,008 1,562,853 1,562,853 778,612
<CHARGE-OFFS> 181,670 60,930 129,804 437,050
<RECOVERIES> 24,924 121,947 181,959 1,221,291
<ALLOWANCE-CLOSE> 1,458,262 1,623,870 1,615,008 1,562,853
<ALLOWANCE-DOMESTIC> 1,458,262 1,623,870 1,615,008 1,562,853
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 1,458,262 1,623,870 1,615,008 1,562,853
</TABLE>
