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1 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to _____.
COMMISSION FILE NUMBER: 0-24887
PATAPSCO VALLEY BANCSHARES, INC.
(Exact name of Small Business Issuer In Its Charter)
MARYLAND 52-1996620
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
8593 BALTIMORE NATIONAL PIKE, ELLICOTT CITY, MARYLAND 21043
(Address of Principal Executive Offices) (Zip Code)
(410) 465-0900
Issuer's Telephone Number, Including
Area Code Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
COMMON STOCK, $.01 PAR VALUE
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/
Issuer's revenues for its most recent fiscal year are: $14,839,493.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 8, 1999 was 31.5 million.
The number of shares of common stock outstanding as of March 8, 1999 was
1,362,023.83 .
Transitional Small Business Disclosure Format
Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
To the extent specified, Parts I and II of this Form 10-KSB incorporates
information by reference to the Registrant's Annual Report, attached as Exhibit
13 hereto, and Part III of this Form 10-KSB incorporates information by
reference to the Registrant's definitive proxy statement for its 1999
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Annual Meeting of Shareholders (to be filed).
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PATAPSCO VALLEY BANCSHARES, INC.
FORM 10-KSB
TABLE OF CONTENTS
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PAGE
PART I
<S> <C> <C>
Item 1. Description of Business 4
Item 2. Description of Property 19
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 21
Item 6. Management's Discussion and Analysis or Plan of Operations 22
Item 7. Financial Statements 22
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 22
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 22
Item 10. Executive Compensation 23
Item 11. Security Ownership of Certain Beneficial Owners and Management 23
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits, List and Reports on Form 8-K 24
</TABLE>
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PART I
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 1,359,990 shares of common
stock, par value $.01 per share ("Shares"), held by 436 holders of record on
December 31, 1998. The Bank was chartered in November, 1934, and is engaged in a
general commercial and retail banking business.
The Bank has six full service branches located in the Maryland
communities of Historic Ellicott City, Catonsville, Dorsey Search, Columbia
Crossing, West Friendship and Hickory Ridge, in addition to the main office
branch located in Ellicott City, Maryland. The Bank has one additional branch
under construction in the Elkridge community. 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 seven 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. In 1998, the Bank opened 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, and 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, 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.
BANK DEPOSITS AND LENDING ACTIVITIES
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As of December 31, 1998, the Bank has deposits of $147 million, and
approximately 27,400 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 December 31, 1998, the Bank had approximately $99 million in
loans, representing 58% of its total assets of $170 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 most branch
locations, 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.
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,
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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 a 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 Bank 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 21% to the Company's
total fiscal 1998 consolidated revenues; Rogers Avenue Realty, Inc., has
contributed a total of $9,362 since 1993, with no more than $4,617 in any one
year, to the Company's total consolidated revenues. C&F Insurance has
contributed a total of $15,849 since 1992, with no more than $8,597 in any one
year, to the Company's total consolidated revenues.
Rogers Avenue Realty, Inc., holds properties foreclosed upon by the
Bank, and is located at 8593 Baltimore National Pike, Ellicott City, Maryland
21043. This corporation was established to help facilitate the liquidation of
these foreclosed properties as expeditiously as possible. The Company has no
plans to develop this subsidiary.
The Company formed Founders, a mortgage banking company, as a
wholly-owned
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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. As of December 31, 1998, C&F Insurance Agency was not actively engaged in
the insurance business and provided no services to the Company. On Novenber 24,
1998, C&F Insurance Agency, Inc. entered into a letter of intent to acquire the
Ellicott City branch of Fowler & Seidl, Inc. and Center for Insurance and
Related services, a full line independent insurance agency. An agreement was
signed, and the acquisition was consummated during the first quarter of 1999.
The Company plans to grow this subsidiary further by purchasing another existing
agency or agencies. The Company expects C&F Insurance Agency, Inc. will generate
revenues in 1999.
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 year ended
December 31, 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 national economic conditions but should not have a
material effect on planning and policy making.
EMPLOYEES
As of December 31, 1998, the Company had 1 full-time employee. As of
that date, the Bank had 93 employees, Founders had 49 employees, and CMSC had 6
employees. A total of 149 persons work for the Company and its direct and
indirect subsidiaries.
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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 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 8.7% 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
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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 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
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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 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.
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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 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 an 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
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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.
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,
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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 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
13
<PAGE>
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
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.
RISK FACTORS
The following factors should be considered carefully in evaluating
an investment in the company shares. These risk factors are cautionary
statements identifying important factors that could cause actual results to
differ from any forward-looking statement made by the company.
REGULATORY RISKS. The banking industry is subject to many laws and
regulations. Regulations protect depositors, not shareholders. The Office of the
Commissioner of Financial Regulation of Maryland and the Board of Governors of
the Federal Reserve System regulate the Bank. Regulations and laws increase the
Bank's operating expenses and hurt the Bank's earnings and also put the Bank at
a disadvantage with less regulated competitors, such as finance companies,
mortgage banking companies, and leasing companies.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS. Most of the Bank's loans are
made to Maryland borrowers. A decline in local economic conditions would hurt
the Bank's earnings.
CREDIT RISKS AND INADEQUACY OF LOAN LOSS RESERVE. When borrowers
default and do not repay the loans made to them by the Bank, the Bank loses
money. Experience shows that some borrowers either will not pay on time or will
not pay at all. Then, the Bank will charge off the defaulted loan or loans. A
charge-off reduces the Bank's assets and earnings. The allowance for credit
losses is an accounting estimate of losses inherent in the Bank's loan portfolio
that have been incurred as of each balance sheet date. Management is responsible
for estimating credit losses and the allowance. Estimating the amounts is
inherently subjective. The amounts ultimately collected on loans could differ
materially from the estimated collections.
14
<PAGE>
INTEREST RATE RISK. The Bank's earnings depend greatly on its net
interest income, the difference between the interest earned on loans and
investments and the interest paid on deposits. If the interest rate paid on
deposits is high and the interest rate earned on loans and investments is low,
net interest income is small and the Bank earns less. Because interest rates are
established by competition, the Bank cannot control what its net interest income
will be.
RISKS ASSOCIATED WITH REAL ESTATE LENDING. The Bank makes many real
estate secured loans. Real estate loans are in demand when interest rates are
low and economic conditions are good. Even when economic conditions are good and
interest rates are low, these conditions may not continue. The Bank may lose
money if the borrower does not pay a real estate loan. If real estate values
decrease, then the Bank may lose more money when borrowers default.
NO ASSURANCE OF GROWTH. The Bank's ability to increase assets and
earnings depends upon many factors, including competition for deposits and
loans, the Bank's branch locations, avoidance of credit losses, and hiring and
training of personnel. Many of these factors are beyond the Bank's control.
COMPETITION. Other banks and non-banks, including savings and loan
associations, credit unions, insurance companies, leasing companies, small loan
companies, finance companies, and mortgage companies, compete with the Bank.
Some of the Bank's competitors offer services and products that the Bank does
not offer. Larger banks and non-bank lenders can make larger loans and service
larger customers. Law changes now permit interstate banks which may increase
competition. Increased competition may decrease the Bank's earnings.
NO ASSURANCE OF CASH OR STOCK DIVIDENDS. Whether dividends may be paid
to shareholders depends on the Bank's earnings, its capital needs, law and
regulations, and other factors. The Bank's payment of dividends in the past does
not mean that the Bank will be able to pay dividends in the future.
STOCK NOT INSURED. Investments in the shares of the Company's common
stock are not deposits that are insured against loss by the government.
RISK INVOLVED IN ACQUISITIONS. Part of the Bank's growth may come from
buying other banks and companies. A newly purchased bank or company may not be
profitable after the Bank buys it and may lose money, particularly at first. The
new bank or company may bring with it unexpected liabilities or bad loans, bad
employee relations, or the new bank or company may lose customers.
RISK OF CLAIMS. Customers may sue the Bank for losses due to the Bank's
alleged breach of fiduciary duties, errors and omissions of employees, officers
and agents, incomplete documentation, the Bank's failure to comply with
applicable laws and regulations, or many other reasons. Also, employees of the
Bank conduct all of the Bank's business. The employees may knowingly or
unknowingly violate laws and regulations. Bank management may not be aware of
any violations until after their occurrence. This lack of knowledge will not
insulate the Bank from liability. Claims and legal actions may result in legal
expenses and liabilities that may reduce the Bank's profitability and hurt its
financial condition.
15
<PAGE>
DEVELOPMENTS IN TECHNOLOGY. Financial services use technology,
including telecommunications, data processing, computers, automation,
Internet-based banking, debit cards, and "smart" cards. Technology changes
rapidly. The Bank's ability to compete successfully with other banks and
non-banks may depend on whether it can exploit technological changes. The Bank
may not be able to exploit technological changes and expensive new technology
may not make the Bank more profitable.
YEAR 2000. The "Year 2000 Issue" describes the problems that may result
from the improper processing of dates and date-sensitive calculations beginning
in the Year 2000. Many existing computer programs use only two digits to
identify the year in the date field of a program. These programs could
experience serious malfunctions when the last two digits of the year change to
"00" as a result of identifying a year designated "00" as the Year 1900 rather
than the Year 2000. A system failure or other disruptions of operations could
occur if the Bank's computer programs and other equipment identify a year
designated "00" as the Year 1900 rather than the Year 2000. The Bank cannot be
certain that its computer programs and other equipment, and the computer
programs and other equipment of its customers, vendors, suppliers and even the
government will be Year 2000 compliant. Any systems failure, disruption, or
other losses could hurt the Bank's earnings.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS. The
Company's Articles of Incorporation and Bylaws break the Bank's Board of
Directors into three classes and each class serves for a staggered three-year
term. No director may be removed except for cause, and then only by a vote of at
least two-thirds of the total eligible shareholder votes. In addition, Maryland
law contains anti-takeover provisions that apply to the Company. These
provisions may discourage or make it more difficult for another company to buy
the Bank or may reduce the market price of the Company's common stock.
STATISTICAL INFORMATION
The following supplementary information required under Guide 3 for the
respective periods and at the respective dates is set forth on the pages
indicated below. The information should be read in conjunction with the related
Consolidated Financial Statements and Notes thereto for the year ended December
31, 1998:
<TABLE>
<CAPTION>
Table of Contents: PAGE
<S> <C>
Nonaccrual, Past Due and Restructured Loans 17
Summary of Loan Loss Experience 18
</TABLE>
16
<PAGE>
Non-accrual, Past Due and Restructured Loans
The following table sets forth information regarding non-accrual loans,
foreclosed real estate and certain other repossessed assets and loans. As of the
dates indicated, management has not classified any loan as "troubled debt
restructurings" as defined in SFAS no. 15.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Loans accounted for on non-accrual basis:
Real estate $ 766,514 $ 448,513 $ 274,903
Lease financing 12,644 45,683 13,751
Commercial 567,117 682,504 78,925
Consumer 1,423 20,531 9,480
---------- ---------- ----------
Total non-accrual loans 1,347,698 1,197,231 377,059
Accruing loans which are past due
Real estate 145,308 -- --
Lease financing 5,085 -- 47,766
Commercial 224,760 50,000 --
Consumer 4,898 27,752 202
---------- ---------- ----------
Total accruing loans which are past due 380,051 77,752 47,968
Total non-performing loans 1,727,749 1,274,983 425,027
Foreclosed real estate 0 0 0
---------- ---------- ----------
Total non-performing loans $1,727,749 $1,274,983 $ 425,027
---------- ---------- ----------
---------- ---------- ----------
Total non-performing loans to loans receivable 1.73% 1.29% 0.50%
Allowance for loan losses to total non-performing
Loans 82.42% 126.67% 367.77%
Total non-performing loans to total assets 1.02% 0.91% 0.32%
Total non-performing assets to total assets 1.02% 0.91% 0.32%
</TABLE>
17
<PAGE>
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Beginning Balance $1,615,008 $1,562,853 $ 778,612
Loans charged off:
Real Estate
Residential real estate -- -- 11,692
Commercial real estate -- 29,818 --
Construction and land development -- -- --
Lease financing 57,510 -- 12,386
Commercial 201,452 51,749 382,189
Consumer 83,464 48,237 30,783
---------- ---------- ---------
342,426 129,804 437,050
Recoveries:
Real Estate
Residential real estate -- -- --
Commercial real estate -- 9,637 8,000
Construction and land development -- -- --
Lease financing 12,016 1,202 --
Commercial 119,302 143,197 1,178,248
Consumer 20,147 27,923 35,043
---------- ---------- ---------
151,465 181,959 1,221,291
Net charge-offs (recoveries) 190,961 (52,155) (784,241)
Provision for loan losses 0 0 0
---------- ---------- ----------
Ending balance $1,424,047 $1,615,008 $1,562,853
---------- ---------- ----------
---------- ---------- ----------
Allowance for loan losses as a % of
total loans outstanding 1.44% 1.67% 1.86%
Net loans charged-off as a % average loans
Outstanding 0.19% -0.06% -1.00%
</TABLE>
18
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
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
(Elkridge Branch)
19
<PAGE>
The Bank, Founders, and CMSC operate under leases at the following
properties:
<TABLE>
<CAPTION>
Current
Location Square Feet Annual Rental Lease Expiration Renewal Options
- -------- ----------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
THE BANK
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 and CMSC)
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
11 N. Carlisle Street 1762 $975 Monthly --
Suite B1
Greencastle, Pa.
</TABLE>
* Small "back-office" room.
20
<PAGE>
ITEM 3. 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Reference is made to the Market Price Analysis and the Discussion on
Dividends which is incorporated by reference from the Company's Annual Report,
attached as Exhibit 13.
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, Directors purchased 163
Shares, at average prices of $16.11, as restated to give retroactive effect to
stock dividends declared as of September 15, 1998. 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.
In 1998, options to purchase up to 2,000 Shares to each of six outside
directors were granted pursuant to the Company Director's Stock Option Plan, at
an exercise price of $19.00. As of December 31, 1998 options to purchase shares
under the Company Incentive Stock Option Plan totaled 12,275 shares, at an
exercise price of $23.00 and under the Employee Stock Purchase Plan totaled
6,980 shares, at an exercise price of $19.55. As of December 31, 1998, there has
been no exercise of options. The Company believes that any 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 foregoing discussion does not include unregistered issuances of the
Company's
21
<PAGE>
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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
The Management's Discussion and Analysis of Financial Condition is
incorporated by reference from the Company's Annual Report, attached as Exhibit
13. Additional financial information is set forth under Item I, under the
heading "Statistical Information." 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.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Report on Audit of Consolidated Financial
Statements for the Year ended December 31, 1998, and the notes thereto, which
financial statements, report, and notes and data are incorporated by reference
from the Company's Annual Report, attached as Exhibit 13. 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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information with respect to the identity and business experience of the
directors of the Company and their remuneration, and compliance with respect to
Section 16(a) of the Securities Exchange Act of 1934 in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A and issued in conjunction
with the 1999 Annual Meeting of Shareholders, is incorporated herein by
reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a listing of the executive officers of the Company as
of December 31, 1998. There are no family relationships between any Directors
and Officers of the Company.
<TABLE>
<S> <C> <C>
John S. Whiteside 61 Director of the Company since
October, 1996, Vice Chairman of the
Company Board since April, 1998,
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
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 of the
Company since October, 1996 and
the Bank since March, 1993. He had
served as CFO of the Company until
September, 1998, and 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.
Barbara M. Broczkowski 42 Vice President and Chief Financial
Officer of the Company and the Bank
since September, 1998. Prior to her
current position, Ms. Broczkowski
served as a Partner of Anderson
Associates LLP, since January, 1996,
and as an Audit Manager for the same
firm since December, 1986.
</TABLE>
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the Company's definitive Proxy Statement to be issued in conjunction with the
1999 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the Company's definitive Proxy Statement to be issued in conjunction with the
1999 Annual Meeting of Shareholders.
23
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the Company's definitive Proxy Statement to be issued in conjunction with the
1999 Annual Meeting of Shareholders.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
3.1 Company Articles of Amendment (incorporated by reference from
Amendment Number 1 of the Company's Form 10-SB/A, filed with
the Commission on November 23, 1998, Registration Number
0-24887).
3.2 Company Articles of Incorporation (incorporated by reference
from Amendment Number 1 of the Company's Form 10-SB/A, filed
with the Commission on November 23, 1998, Registration Number
0-24887).
3.3 Company Amended and Restated Bylaws (incorporated by reference
from Amendment Number 1 of the Company's Form 10-SB/A, filed
with the Commission on November 23, 1998, Registration Number
0-24887).
10.1 Employment Agreement by and between the Bank and John S.
Whiteside (incorporated by reference from Amendment Number 1
of the Company's Form 10-SB/A, filed with the Commission on
November 23, 1998, Registration Number 0-24887).
10.2 Company Incentive Stock Option Plan (incorporated by reference
from Amendment Number 1 of the Company's Form 10-SB/A, filed
with the Commission on November 23, 1998, Registration Number
0-24887).
10.3 Company Director Stock Option Plan (incorporated by reference
from Amendment Number 1 of the Company's Form 10-SB/A, filed
with the Commission on November 23, 1998, Registration Number
0-24887).
10.4 Company Employee Stock Purchase Plan (incorporated by
reference from Amendment Number 1 of the Company's Form
10-SB/A, filed with the Commission on November 23, 1998,
Registration Number 0-24887).
13 Annual Report, including, as attached to the Annual Report, a
Report on Audit of Consolidated Financial Statements for the
Year Ended December 31, 1998, Consolidated Balance Sheets,
Consolidated Statements of Income, Consolidated Statements of
Changes in Stockholders' Equity, Consolidated Statements of
Cash Flows, and Notes to Financial Statements, filed herewith.
</TABLE>
24
<PAGE>
<TABLE>
<S> <C>
21.1 Subsidiaries of the Company (incorporated by reference from
Amendment Number 1 of the Company's Form 10-SB/A, filed with
the Commission on November 23, 1998, Registration Number
0-24887).
23 Consent from Rowles & Company LLP filed herewith.
27 Financial Data Schedule is filed electronically herewith via
EDGAR.
</TABLE>
(b) REPORTS ON FORM 8-K
On November 24, 1998, the Company filed a Current Report on Form 8-K to
announce that C&F Insurance Agency, Inc., a Bank subsidiary, signed a letter of
intent to acquire the assets of the Ellicott City branch of Fowler & Seidl, Inc.
and Center for Insurance and Related Services, a full line independent insurance
agency.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
PATAPSCO VALLEY BANCSHARES, INC.
Date: March 16, 1999 By: /s/ John S. Whiteside
----------------------------
John S. Whiteside
President
By: /s/ Barbara M. Broczkowski
----------------------------
Barbara M. Broczkowski
Vice President and CFO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Ronald L. Eyre Director 3/16/99
- ---------------------------
Ronald L. Eyre
/s/ John F. Feezer, III Director 3/16/99
- ---------------------------
John F. Feezer, III
/s/ Howard E. Harrison, III Director, Chairman of the Board 3/16/99
- ---------------------------
Howard E. Harrison, III
/s/ Kevin P. Huffman Director, Executive Vice President 3/16/99
- ---------------------------
Kevin P. Huffman
/s/ Eugene W. Iager, Sr. Director 3/16/99
- ---------------------------
Eugene W. Iager, Sr.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Fred T. Lewis Director 3/16/99
- ---------------------------
Fred T. Lewis
/s/ Richard H. Pettingill Director 3/16/99
- ---------------------------
Richard H. Pettingill
/s/ John S. Whiteside Director, Vice Chairman of the Board, 3/16/99
- --------------------------- President and CEO
John S. Whiteside
</TABLE>
27
<PAGE>
Exhibit 23
[LOGO]
The 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, 1998, 1997, and 1996, and for the years then ended, and to
the references to our firm under the heading "Experts" in the Company's
annual report on Form 10-KSB.
/s/ Rowles & Company, LLP
Baltimore, Maryland
March 20, 1999
101 E. Chesapeake Avenue, Suite 300, Baltimore, Maryland 21286
410-583-6990 FAX 410-583-7061
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,934
<INT-BEARING-DEPOSITS> 1,221
<FED-FUNDS-SOLD> 17,304
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,726
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 122,310
<ALLOWANCE> 1,424
<TOTAL-ASSETS> 169,843
<DEPOSITS> 147,067
<SHORT-TERM> 3,801
<LIABILITIES-OTHER> 2,153
<LONG-TERM> 0
0
0
<COMMON> 14
<OTHER-SE> 16,808
<TOTAL-LIABILITIES-AND-EQUITY> 169,843
<INTEREST-LOAN> 10,477
<INTEREST-INVEST> 684
<INTEREST-OTHER> 641
<INTEREST-TOTAL> 11,802
<INTEREST-DEPOSIT> 3,468
<INTEREST-EXPENSE> 281
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<EPS-PRIMARY> .80
<EPS-DILUTED> .80
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</TABLE>
