<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended JUNE 30, 1999
/ / Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from
to
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Commission file number 0-24887
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PATAPSCO VALLEY BANCSHARES, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
MARYLAND 52-1996620
- -------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8593 BALTIMORE NATIONAL PIKE, ELLICOTT CITY, MARYLAND 21043
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(Address of Principal Executive Offices)
410-465-0900
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,365,969 AS OF JULY
31,1999
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
PATAPSCO VALLEY BANCSHARES, INC. AND SUBSIDIARIES
CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGES
-----
<S> <C>
Item 1 - Financial Statements
Consolidated statements of financial condition at June 30, 1999 (unaudited) and
December 31, 1998 3
Consolidated statements of operations (unaudited) for six months and three months ended
June 30, 1999 and 1998 4
Consolidated statements of cash flows (unaudited) for six months
ended June 30, 1999 and 1998 5-6
Notes to financial statements 7-8
Item 2 - Management's Discussion and Analysis or Plan of Operation 9-16
PART II - OTHER INFORMATION
Item 6 - Exhibits
(a) Exhibit 10.1 Patapsco Valley Bancshares, Inc.
Incentive Stock Option Plan, as amended
Exhibit 10.2 Patapsco Valley Bancshares, Inc.
Employee Stock Purchase Plan, as amended
Exhibit 27 - Financial Data Schedule
Signatures 18
</TABLE>
2
<PAGE>
PART I- FINANCIAL INFORMATION
PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $7,359,295 $6,933,961
Interest bearing assets in other banks 948,313 1,221,174
Federal funds sold 6,389,999 17,304,000
Securities available for sale 35,083,716 14,726,362
Loans held for sale 16,739,045 23,718,740
Net loans, less allowance for credit losses of
$1,401,136 and $1,424,047 99,057,981 98,590,827
Premises and equipment 4,926,508 5,029,296
Deferred income taxes 533,282 348,806
Accrued interest receivable 878,330 704,649
Prepaid income taxes 301,278 331,818
Intangibles 744,724 423,099
Other assets 673,137 510,710
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$173,635,608 $169,843,442
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------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Deposits
Non-interest-bearing $35,990,404 $38,003,939
Interest-bearing 113,045,624 109,063,004
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Total deposits 149,036,028 147,066,943
Securities sold under repurchase agreements 5,590,729 3,800,623
Accrued interest payable 699,995 787,102
Other liabilities 1,638,644 1,366,336
----------- -----------
7,929,368 5,954,061
Total liabilities 156,965,396 153,021,004
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share; authorized 50,000,000 shares;
issued and outstanding 1,365,969 shares June 30, 1999 and
1,359,990 shares December 31, 1998 13,660 13,600
Surplus 11,976,657 11,817,719
Retained earnings 4,809,628 4,933,506
Accumulated other comprehensive income (129,733) 57,613
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Total stockholders equity 16,670,212 16,822,438
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$173,635,608 $169,843,442
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------------ ------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE>
PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For Six Months Ended For Three Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans, including fees $5,004,443 $5,190,077 $2,468,803 $2,676,724
U.S. Treasury securities 227,137 247,447 102,012 116,761
U.S Government agency securities 261,073 71,294 232,890 33,189
State and municipal securities 4,900 24,743 2,450 11,628
Federal funds sold 465,777 202,203 210,275 94,755
Other investments 106,205 30,173 49,549 15,112
------- ------ ------ ------
Total interest income 6,069,535 5,765,937 3,065,979 2,948,169
INTEREST EXPENSE
Deposits 1,907,507 1,609,490 961,070 799,153
Other short-term borrowings 96,834 165,575 54,634 126,916
------ ------- ------ -------
Total interest expense 2,004,341 1,775,065 1,015,704 926,069
Net interest income 4,065,194 3,990,872 2,050,275 2,022,100
Provision for credit losses 0 0 0 0
------ ------- ------ -------
Net interest income after provision for
credit losses 4,065,194 3,990,872 2,050,275 2,022,100
NON-INTEREST INCOME
Service charges on deposit accounts 431,847 393,647 227,314 204,431
Mortgage banking fees and gains 870,008 1,012,866 396,081 480,507
Other fees and commissions 272,255 127,892 136,181 62,757
------- ------- ------- ------
Total non-interest income 1,574,110 1,534,405 759,576 747,695
NON-INTEREST EXPENSES
Salaries 2,516,116 2,084,767 1,231,089 1,080,041
Employee benefits 547,950 468,596 250,771 214,871
Occupancy 438,820 430,229 211,413 260,773
Furniture and equipment 435,990 372,504 219,718 204,741
Other 1,362,740 1,006,805 740,467 512,839
--------- --------- ------- -------
Total non-interest expenses 5,301,616 4,362,901 2,653,458 2,273,265
Income before taxes 337,688 1,162,376 156,393 496,530
Income taxes 106,817 420,694 47,630 178,569
------- ------- -------- -------
Net income 230,871 741,682 108,763 317,961
Change in unrealized gain (loss) on securities
available for sale (187,346) (13,021) (179,399) 9,364
-------- ------- -------- -------
Comprehensive income $43,525 $728,661 $(70,636) $327,325
-------- ------- -------- -------
-------- ------- -------- -------
Basic and diluted earnings per share $0.17 $0.55 $0.08 $ 0.24
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE>
PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Interest received $5,679,631 $5,699,060
Fees and commissions received 704,102 521,539
Proceeds from sales of loans held for sale 77,782,724 75,440,705
Originations of loans held for sale (69,933,021) (91,243,953)
Interest paid (2,091,448) (1,867,015)
Cash paid to suppliers and employees (4,750,743) (3,888,712)
Income taxes paid (142,876) (175,451)
--------- ---------
7,248,369 (15,513,827)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 18,182,016 14,259,894
Purchases of securities available for sale (38,844,593) (13,065,662)
Loans made, net of principal collected (250,931) (564,025)
Payments of intangibles (287,398) 196
Purchases of premises, equipment, and software (372,431) (1,434,723)
--------- -----------
(21,573,337) (804,320)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in time deposits 4,073,297 (4,622,711)
Net increase (decrease) in other deposits (2,104,212) 8,315,118
Net increase in other borrowed funds 1,790,106 6,154,031
Dividends paid (354,749) (613,768)
Dividends reinvested 158,998 271,904
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3,563,440 9,504,574
Net increase (decrease) in cash and cash equivalents (10,761,528) (6,813,573)
Cash and equivalents at beginning of year 25,459,135 18,266,542
---------- ----------
Cash and equivalents at end of year $14,697,607 $11,452,969
---------- -----------
---------- -----------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
5
<PAGE>
PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1999 1998
------ ------
RECONCILIATION OF NET INCOME TO NET CASH FLOWS PROVIDED
BY OPERATING ACTIVITIES
<S> <C> <C>
Net income $230,871 $741,682
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation, amortization and losses 440,992 331,757
Deferred taxes (66,599) (1,208)
Increase (decrease) in;
Deferred loan fees (216,223) (61,303)
Accrued interest payable (87,107) (91,950)
Income taxes payable 0 (87,811)
Other liabilities 272,308 196,190
Loans held for sale 6,979,695 (16,816,114)
Decrease (increase) in;
Accrued interest receivable (173,681) (5,920)
Prepaid taxes 30,540 334,262
Other assets (162,427) (53,412)
--------- --------
$7,248,369 $(15,513,827)
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS
6
<PAGE>
PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Patapsco Valley Bancshares, Inc., ( the Company) , The Central Maryland
Service Corporation (CMSC), Commercial and Farmers Bank ( the Bank) and
its subsidiaries, Founders Mortgage Company, Inc., C&F Insurance
Agency, Inc. and Rogers Avenue Realty, Inc. All inter-company accounts
and transactions have been eliminated in the accompanying consolidated
financial statements.
Note 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
instructions to form 10-QSB. Accordingly, they do not include all of
the disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments necessary for a fair presentation of the results of
operations for the interim periods have been made. Such adjustments
were normal and recurring in nature. The results of operations for the
six months ended June 30, 1999 do not necessarily reflect the results
that may be expected for the entire fiscal year December 31, 1999 or
any other interim period. The consolidated financial statements should
be read in conjunction with the consolidated financial statements and
related notes which are incorporated in the Company's Annual Report for
the year ended December 31, 1998.
Note 3 - EARNINGS PER SHARE
Earnings per share is presented in accordance with Statement of
Financial Accounting Standards No. 128. This Statement requires dual
presentation of basic and diluted earnings per share ( EPS ) with a
reconciliation of the numerator and denominator of the EPS
computations. Basic per share amounts are based on weighted average
shares of common stock outstanding. Diluted earnings per share assume
the conversion, exercise or issuance of all potential common stock
instruments unless the effect is to reduce a loss or increase earnings
per share. Average shares outstanding for the six and three months
ending June 30, 1998 is adjusted giving retroactive effect of a 100%
stock dividend declared on September 15,1998. No adjustments were made
to net income for all periods presented. The basic and diluted average
shares outstanding for the six and three month periods are as follows:
<TABLE>
<CAPTION>
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income $ 230,871 $741,682 $ 108,763 $ 317,961
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted Average Shares Outstanding - $ 1,362,475 $1,346,721 $ 1,363,952 $ 1,348,830
Basic
Diluted Securities:
Options 7,300 0 7,300 0
----- ------------- ------------- -------------
Adjusted Weighted Average Shares -
Diluted 1,369,775 1,346,721 1,371,252 1,348,830
Basic and Diluted EPS $ 0.17 $ 0.55 $ 0.08 $ 0.24
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
7
<PAGE>
PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
ELLICOTT CITY, MARYLAND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4 - SEGMENTS
The Company's reportable segments are strategic business units that
offer complimentary products and services to the core business of banking. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Segment information follows:
JUNE 30, 1999
<TABLE>
<CAPTION>
Holding Mortgage Data Consolidated
Company Bank Banking Processing Insurance Elimination Totals
------- ---- ------- ---------- --------- ----------- ------
REVENUE
<S> <C> <C> <C> <C> <C> <C>
Revenue From External $ 4,284 $ 6,068,415 $ 1,420,484 $ 3,860 $ 146,602 - $ 7,643,645
Customers
Intersegment Service 1,494 383,448 - 386,397 - 771,339 -
revenue
Segment profit (loss) (81,285) 406,924 (103,005) 27,334 (34,348) - 215,620
Total Assets 783,048 171,563,269 17,618,282 379,051 351,075 17,074,368 173,620,357
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
Holding Mortgage Data Consolidated
Company Bank Banking Processing Insurance Elimination Totals
------- ---- ------- ---------- --------- ----------- ------
REVENUE
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue from
External $ 2,526 $ 5,738,816 $ 1,559,000 - - - $ 7,300,342
Customers
Intersegment
Service 1,850 547,956 - 358,736 - 908,542 -
Revenues
Segment profit (loss) (29,532) 784,246 (30,279) 17,247 - - 741,682
Total assets 546,882 148,751,189 22,760,163 327,794 909 21,908,126 150,478,811
</TABLE>
8
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to the historical information contained herein, the discussion
in this Form 10- QSB contains certain forward-looking statements that involve
risks and uncertainties, such as statements of the Company's plans, strategies,
objectives, expectations and intentions, including, among other statements,
statements involving the Bank's projected loan and deposit growth, loan
collateral values, collectability of loans, anticipated changes in non-interest
income, payroll and branching expenses, branch and office expansion of the Bank
and its affiliates, year 2000 issue, and liquidity and capital levels. These
statements may be identified by such forward-looking terminology as "expect,"
"believe," "anticipate," or by expressions of confidence such as "continuing,"
or "strong," or similar statements or variations of such terms. The Company's
actual results could differ materially from those discussed herein and involve
certain risks and uncertainties. These risks and uncertainties include, but are
not limited to, general economic conditions and competition in the geographic
and business areas in which the Company and its subsidiaries operate, inflation,
fluctuations in interest rates, legislation, and government regulation. The
cautionary statements made in this Form 10-QSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Form 10-QSB.
FINANCIAL CONDITION
Total assets of the Company were $173,636,000 as of June 30, 1999, compared
to $169,843,000 as of December 31, 1998, an increase of $3,793,000 or 2.23
percent. The increase was primarily allocated to increases in securities
available for sale of $20,357,000, net loans of $467,000 and cash and due from
banks of $425,000 as a result of increases in deposits and securities sold under
repurchase agreements. These increases were slightly offset by declines in
federal funds sold of $10,914,000, and loans held for sale of $6,980,000. The
increase in securities available for sale was the result of excess cash and
federal funds sold invested in higher yielding investments in order to increase
profitability in the investment portfolio. The increase in net loans is due to
the emphasis on services to small and medium size businesses and professional
practices. While retail loan demand is currently soft, management plans to grow
this portfolio in the future by additional product promotions. In addition, the
Bank's subsidiary C&F Insurance Agency, Inc. acquired the assets of the Ellicott
City branch of Fowler & Seidl, Inc. and Center for Insurance and Related
Services. The increase in total assets is part of management's strategy to
diversify the Company's services to the community and to increase profitability.
Total Liabilities were $156,965,000 as of June 30, 1999 compared to
$153,021,000 as of December, 1998, an increase of $3,944,000 or 2.58 percent.
The increase was primarily due to an increase in deposits of $1,969,000 and an
increase in securities sold under repurchase agreements of $1,790,000. The
increase in deposits was the result of the Bank opening a branch during the
first quarter of 1999 and aggressively marketing for new deposits. Primarily as
a result of the advertising campaign, all branch locations have exceeded
projections in deposit growth. The Bank is continuing its branch expansion with
the signing of a lease for a new free standing branch pad in the Waverly Woods
Shopping Center. This branch is expected to open in the year 2000 and is located
in a new shopping center, anchored by a grocery store, in Woodstock, Maryland.
With the current branch expansion, the deposit growth is expected to continue.
Stockholders' equity was $16,670,000 as of June 30, 1999, compared to
$16,822,000 as of December 31, 1998, a decrease of $152,000. The decrease was
due to cash dividends of $355,000. This decrease was partially offset by
comprehensive income for the period of $44,000 and dividends reinvested in the
amount of $159,000.
9
<PAGE>
RESULTS OF OPERATIONS
GENERAL
Net income for the six and three months ended June 30, 1999 was $231,000 and
$109,000 respectively, as compared to $742,000 and $318,000 for the same periods
in 1998. The decreases in net income of $511,000 and $209,000 for the six and
three months ended June 30, 1999 respectively as compared to the same periods in
1998 was primarily due to an increase in non-interest expenses. These increases
were slightly offset by increases in net interest income and non-interest
income.
INTEREST INCOME
Total interest income for the six and three months ended June 30, 1999 was
$6,070,000 and $3,066,000 respectively, compared to $5,766,000 and $2,948,000
for the same periods in 1998, an increase of $304,000 or 5.27% and $118,000 or
4.00% respectively. The increases were primarily due to an increase of
$18,809,000 and $24,055,000 in the average dollar amount of investments and
federal funds sold for the six and three months ended in June 30, 1999. In
addition, the weighted average yields on investment securities increased to
5.50% and 5.71% for the six and three months ended June 30, 1999 as compared to
5.42% and 5.66% for the same periods in 1998. The growth in investment
securities and federal funds sold were the result of deposit growth and the high
volume of loans sold to investors during the periods. Management's strategy has
been to invest the funds from the inflow of deposits into higher yielding
investments to improve profitability in the investment portfolio. These
increases were primarily offset by a decline in the average balances in net
loans and loans held for sale by $363,000 and $5,177,000 for the six and three
months ended June 30,1999, respectively, as compared to the same periods in
1998. In addition the weighted yields on loans and loans held for sale declined
to 8.76% and 8.71% for the six and three months ended June 30,1999,
respectively, as compared to 9.05% and 9.03% for the same periods in 1998.
During 1999, the Bank has experienced higher than normal principal
repayments due to the decline in interest rates, causing higher rate loans to
either pay-off or refinance at a lower rate. Also, production in the Bank's
mortgage banking subsidiary, Founders, has declined due to a drop in residential
mortgage loan demand. The volume of loan originations is expected to improve in
the second half of 1999 as the Bank's number of commercial loan applications has
increased toward the end of the second quarter of 1999.
INTEREST EXPENSE
Total interest expense for the six and three months ended June 30, 1999 was
$2,004,000 and $1,016,000 respectively, compared to $1,775,000 and $926,000 for
the same periods in 1998, an increase of $229,000 or 12.90% and $90,000 or 9.72%
respectively. The increases resulted primarily from increases in the average
dollar amount of deposits of $21,880,000 and $22,940,000 respectively as the
Bank conducted an aggressive marketing campaign, advertising the Bank and its
various new deposit products. In addition, the Bank has opened two new branches
since June, 1998, which have contributed to the deposit growth. The average
rates paid on deposits were 3.46% for the six and three months ended June
30,1999 as compared to 3.64% and 3.56% for the same periods in 1998.
The increases were partially offset by decreases of $2,544,000 and
$4,521,000 in the average dollar amount of borrowings for the six and three
month periods in 1999, as compared to the same periods in 1998. The decrease was
due to the Bank borrowing from the Federal Home Loan Bank during 1998 in order
to fund new loan originations at Founders. There was $5,214,000 in outstanding
Federal Home Loan Bank borrowings as of June 30, 1998. The weighted average
rates paid on interest-bearing liabilities were 3.48% and 3.44% for the six and
three months ended June 30, 1999, respectively as compared to 3.70% and 3.71%
for the same periods in 1998.
10
<PAGE>
PROVISION FOR LOAN LOSSES
For the six and three months ended June 30, 1999 and 1998 no provision for
loan losses was charged to expense. The Bank recorded $23,000 and $36,000 in net
charge-offs for the six and three months ended June 30,1999 as compared to
$157,000 and $156,000 for the same periods in 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 losses 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 Company continues to experience a decline in principal balances of loans
past 90 days due and on non-accrual status. As of June 30, 1999, the loans
delinquent greater than 90 days or on non-accrual status totaled $769,000, a
delinquency ratio of 1.03%. Included in these loans is one commercial loan
totaling $330,000 and one mortgage loan totaling $146,000 which management
believes are subject to little risk of loss based on collateral values. However,
management cannot be certain that collateral values will be maintained. The
commercial loan is a purchased participation from another local commercial bank.
The bank is currently in negotiations with the bankruptcy court that could lead
to a refinancing of the existing obligations to be supported by a multi year
lease by a well-known oil company. The mortgage loan has an active purchaser
that is currently waiting for financing approval from an independent third
party. During the second quarter of 1999, the Bank experienced a $50,000 loss on
a commercial loan that was under contract as of March 1999.
NON-INTEREST INCOME
Non-interest income for the six and three months ended June 30, 1999 was
$1,574,000 and $760,000, respectively as compared to $1,534,000 and $748,000 for
the same period in 1998. The Bank has experienced an increase in service charges
on deposit accounts. 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. In addition, the Bank's subsidiary, C&F Insurance Agency, Inc. had
commissions totaling $147,000 in the first half of 1999. These increases were
partially off-set by a decline in mortgage banking fees and gains due to
decrease in Founders' loan origination volume and an increase in the cost to
originate a loan. With the continued expansion of the Bank's branch network and
the continued expansion of C&F Insurance, management expects to see increased
levels of non-interest income.
11
<PAGE>
NON-INTEREST EXPENSE
Total non-interest expense for the six and three months ended June 30, 1999
was $5,302,000 and $2,653,000 as compared to $4,363,000 and $2,273,000 for the
same periods in 1998.
A significant portion of the increase in non-interest expense is related to
the increases in salaries and related benefits of $511,000 and $187,000 for the
six and three month periods in 1999 as compared to the same periods in 1998. The
Company has added a significant number of employees to the payroll as a result
of the expansion in the Bank, Founders, C&F Insurance, and CMSC. Salaries and
benefits also include cost of living increases and benefit cost increases.
Employee expenses continue to increase as the reflection of the full year
salaries for the employees added in 1998 and 1999, as the Company continues to
expand.
Occupancy and furniture and equipment expense increased by $72,000 for the
six months and decreased by $34,000 for the three months ended in 1999 as
compared to the same periods in 1998. The increases are due to the Company
expanding its facilities, making improvements to existing facilities and
upgrading equipment. Although occupancy and furniture and equipment expense
declined in the three months ended June 30, 1999, these expenses are expected to
continue to increase 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.
Other expenses increased by $356,000 and $228,000 for the six and three
months ended June 30, 1999 as compared to the same periods in 1998. Increases
were noted in marketing, telephone, professional services, and stationery and
supplies. These areas of increased expense include costs associated with the
promotion and establishment of new locations for Founders, C&F Insurance, 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 than 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, 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.
Given the increases in non-interest expense, management is exploring
additional alternatives to decrease these expenses in order to maximize income.
INCOME TAX
The Company's income tax expense was $107,000 and $48,000 for the six and
three months ended June 30, 1999 as compared to $421,000 and $179,000 for the
same periods in 1998. The changes were primarily the result of the variations in
pre-tax income. The effective tax rate for the six and three months ended June
30, 1999 was 31.63% and 30.46% as compared to 36.19% and 35.96% in the same
periods in 1998.
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 borrower 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. 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
12
<PAGE>
marketable securities that could be converted to cash. 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 $32,300,000 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 decrease in federal funds sold of $10,914,000 or 63.07%
from December 31, 1998 to June 30, 1999 was primarily the result of the funds
being invested in securities available for sale. In addition, these purchases
were funded by an increase in growth in Deposits of 1.34% and a reduction in
loans held for sale of 29.43 %. 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.
CAPITAL RESOURCES AND ADEQUACY
One measure of capital adequacy is the leverage ratio, which is calculated
by dividing average total assets for the most recent quarter into Tier l
capital. The regulatory minimum for this ratio is 4%, with 6% being the
regulatory minimum for well-capitalized companies. The leverage capital ratio as
of June 30, 1999 was 8.62%.
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 l) 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
risk-based capital ratio of 8 percent. As of June 30, 1999, the total risk-based
capital ratio was 13.90%. According to FDIC capital guidelines, the Bank is
considered to be "well capitalized"
The Bank opened a new branch in January 1999 and the Bank's subsidiary, C&F
Insurance Agency, Inc. purchased the assets of a local insurance agency in
February 1999. Founders is also planning 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
THIS IS A YEAR 2000 READINESS DISCLOSURE UNDER THE YEAR 2000 INFORMATION AND
READINESS DISCLOSURE ACT OF 1998
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 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 currently believes that, with the completed 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 Year 2000 issue
could disrupt the Company's normal business operations. The most likely worst
case Year 2000 scenario foreseeable at this time includes the inability to
systematically process various types of customer transactions. This could affect
the Company's ability to accept deposits or process withdrawals, originate new
loans or accept loan payments. This could have a
13
<PAGE>
material adverse effect on the Company. The contingency plan addresses
alternative methods to enable the Company to continue to offer basic services to
the Company's customers.
The Company developed a Year 2000 implementation and testing plan (the
"Plan") in accordance with guidelines set forth by the Federal Financial
Institutions Examination Council (the "FFIEC"). The Company expects that its
Year 2000 activities will continue during 1999 and that all phases of its Plan
will be completed by the deadlines established by the FFIEC in its eight
interagency statements concerning Year 2000. The Plan has five primary phases:
1. AWARENESS - This phase is ongoing and is designed to inform the
Company's Board of Directors and management, employees, customers and
vendors of the impact of the Year 2000 Issue. 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.
2. ASSESSMENT - During this phase an inventory was conducted of all known
Company processes that could reasonably be expected to be
impacted by the Year 2000 problem. 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 postage
meters. The assessment phase of the Plan was completed by September
30, 1997.
3. RENOVATION AND/ OR REPLACEMENT - This phase includes programming code
enhancements, hardware and software upgrades, system replacements,
vendor certification and any other changes necessary to make any
hardware, software and other equipment Year 2000 compliant. The Company
is actively working with vendors and suppliers to determine that their
operation, products and services are Year 2000 capable or to monitor
their progress toward Year 2000 capability. The Company has obtained
written assurances of current Year 2000 compliance from 14% of its
vendors and service providers which have long term written contracts
with the Company. 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 was able to
substantially complete the validation for the Year 2000 compliance of
the products and services supplied by its material vendors by March 31,
1999. Any material vendors that are determined not to be Year 2000
compliant, the Company will enter into new relationships with other
vendors who have achieved Year 2000 readiness prior to January 1, 2000.
The renovation phase of the Plan was largely completed by December 31,
1998, and was fully complete by June 30, 1999.
4. VALIDATION AND TESTING - The next phase of the Plan is to complete a
comprehensive testing of all known processes. The Company has met the
following key milestones:
June 30, 1998 - completion 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 was substantially complete.
March 31, 1999 - validation of service providers for mission
critical systems was substantially completed. External testing
with material third parties was started.
14
<PAGE>
June 30, 1999 - validation of mission-critical systems was
completed and implementation was substantially completed.
5. IMPLEMENTATION - This phase will occur when Year 2000 processing
commences. On some applications the Company is already entering
dates greater than December 31, 1999 into its systems. In these
situations no adverse events have been noted. The significant part
of the implementation phase will occur after December 31, 1999.
CONTINGENCY PLANS
The Plan calls for the development of contingency plans for at-risk
systems. The Company has completed its business resumption contingency planning
process by June 30, 1999. This effort will be made in conjunction with the
Company's disaster recovery initiatives. The Contingency Plans are being
developed to provide continuity of business in the event some, or all, of the
applications, hardware, or software is not year 2000 ready by the year 2000 or
an unexpected failure occurs. The contingency plan identifies workarounds for
processing business should a failure occur.
CUSTOMER RISK
The Company's credit risk associated with borrowers may increase to the
extent borrowers fail to adequately address Year 2000 issues. The Company may be
subject to increased liquidity risk to the extent of deposit withdrawals. It is
not possible to quantify the potential impact of such risks or losses at this
time and there is no assurance that the failure of customers to achieve Year
2000 compliance would not have a material adverse affect on the Company.
The Company implemented a due diligence process which identifies,
assesses, and establishes controls for Year 2000 risk posed by customers as
funds takers, funds providers and capital market/asset management counter
parties. The process included identifying material customers (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's method of assessing its material customers' Year 2000
preparedness included one or more of the following: mailing surveys, telephone
calls and/or personal interviews with appropriate staff at the borrower's
location. Each material customer's assessment was reviewed to determine the
level of Year 2000 preparedness and the risk posed to the Company. Based on this
review, each customer will receive the appropriate type and level of
reassessment using similar techniques. Each customer was reassessed either
monthly, quarterly, or at least once prior to March 31, 1999, depending on the
level of preparedness and level of risk posed to the Company. The Company
expects to continue to reassess material customers throughout the rest of 1999,
using similar techniques, to ensure the level of Year 2000 preparedness and risk
posed to the Company remains acceptable. As part of the continued monitoring
process, another assessment of material customers was begun in May. The
reassessment of 35% of these customers was completed by June 30,1999. The
Company expects to complete the reassessment by September and expects the risk
posed to the Company to remain acceptable.
The Company has completed its customer assessment. 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 also has changed
its lending process to include in its evaluation of a borrower's risk an
assessment of the borrower's Year 2000 preparedness. Customers and potential
customers are required to sign a Year 2000 Disclosure & Acknowledgment
agreement. This agreement states that the customer is aware of the Year 2000
issue, that the customer has a comprehensive business plan appropriate for the
business to address all Year 2000 issues, and that the customer must provide the
Company with copies of its Year 2000 program and report on its progress upon
request. In addition, a Year 2000 addendum has been added to all commercial
15
<PAGE>
loan agreements whereby the borrower agrees to become Year 2000 compliant, that
the borrower has a Year 2000 business plan, that the borrower will inform the
Company about the borrower's Year 2000 status and that non-compliance with the
borrower's Year 2000 plan shall be deemed non-compliance with the borrower's
loan agreement.
YEAR 2000 COSTS
The Company spent approximately $45,000 in the first half of 1999 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. For the six months ended June 30,
1999, the Company did not incur additional expenses for upgrades, training and
testing. The Company's ongoing data processing and information technology budget
has been sufficient to fund the Company's Year 2000 costs, and the Company
expects that Year 2000 costs will continue to be covered by its ongoing data
processing and information technology budget. The Company plans to fund these
budget items and 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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO.
10.1 Patapsco Valley Bancshares, Inc. Incentive Stock option
Plan, as Amended on June 15, 1999.
10.2 Patapsco Valley Bancshares, Inc. Employee Stock
Purchase Plan, As amended on June 15, 1999.
27 Financial Data Schedule
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PATAPSCO VALLEY BANCSHARES, INC.
8/10/99 /s/ John S. Whiteside
- -------------- -------------------------------------
Date John S. Whiteside
President and Chief Executive Officer
8/10/99 /s/ Barbara M. Broczkowski
- -------------- -------------------------------------
Date Barbara M. Broczkowski,
Vice President and Chief
Financial Officer
18
<PAGE>
EXHIBIT 10.1
PATAPSCO VALLEY BANCSHARES, INC.
INCENTIVE STOCK OPTION PLAN
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
INCENTIVE STOCK OPTION PLAN
----------------------------
AMENDMENT NO. 1
----------------------------
WHEREAS, the Board of Directors and Stockholders of Patapsco Valley
Bancshares, Inc. ("Patapsco") adopted and approved the Incentive Stock Option
Plan (the "Plan");
WHEREAS, Section Sixteen of the Plan authorizes the President of
Patapsco to amend the Plan at any time, provided that no amendment shall affect
or impair any of the rights of a participant under any option heretofore granted
under the Plan; and
WHEREAS, the President of Patapsco has found that it is in the best
interests of Patapsco to amend the Plan in the manner set forth herein;
NOW, THEREFORE, the President of Patapsco hereby amends the Plan,
effective as of June 15, 1999, in accordance with Section Sixteen of the Plan:
1. Section Nine of the Plan is amended to add new Paragraph 6 as
follows:
6. Notwithstanding anything to the contrary in the
Plan or in any agreement upon which an option is granted
pursuant to the Plan, in the event of the commencement of a
tender offer (other than by the Corporation) for any shares of
the Corporation, or a sale or transfer, in one or a series of
transactions, of assets having a fair market value of 50% or
more of the fair market value of all assets of the
Corporation, or a merger, consolidation or share exchange
pursuant to which the shares of the Corporation are or may be
exchanged for or converted into cash, property or securities
of another issuer, or the liquidation of the Corporation (an
"Extraordinary Event"), then regardless of whether any option
granted pursuant to the Plan has vested or become fully
exercisable, all options granted pursuant to the Plan, whether
granted before, on, or after June 15, 1999, shall immediately
vest and become fully exercisable for the full number of
shares subject to any such option.
The accelerated exercise right pursuant to this
Paragraph 6 shall be effective on and at all times after the
"Event Date" of the Extraordinary Event. The "Event Date" is
the date of the commencement of a tender offer, if the
Extraordinary Event is a tender offer, and in the case of any
other Extraordinary Event, the
<PAGE>
day preceding the record date in respect of such Extraordinary
Event, or if no record date is fixed, the day preceding the
date as of which shareholders of record become entitled to the
consideration payable in respect of such Extraordinary Event.
If in the case of an Extraordinary Event other than a
tender offer, notice that is given by an Optionee of the
exercise of an option pursuant to this Paragraph 6 prior to
the Event Date shall be effective on and as of the Event Date.
Upon the exercise of an option after the occurrence of an
Extraordinary Event, the Corporation shall issue, on and as of
the effective date of such exercise, all shares with respect
to which the option shall have been exercised.
If an Optionee fails to exercise his or her option,
in whole or in part, pursuant to this Paragraph 6 upon an
Extraordinary Event, or if there shall be any capital
reorganization or reclassification of the shares, the
Corporation shall take such action as may be necessary to
enable each Optionee to receive such options upon any
subsequent exercise of his or her options, in whole or in
part, in lieu of shares, securities or other assets as were
issuable or payable upon such Extraordinary Event in respect
of, or in exchange for, such shares.
2. Nothing contained herein shall be held to alter, vary, or affect any
of the terms, provisions, or conditions of the Plan other than as stated above.
IN WITNESS WHEREOF, the President of Patapsco has executed this
Amendment No. 1 to the Incentive Stock Option Plan on this 15th day of June,
1999.
/s/ John S. Whiteside
-----------------------------
John S. Whiteside, President
Patapsco Valley Bancshares, Inc.
The Board of Directors of Patapsco Valley Bancshares, Inc. duly
approved and ratified Amendment No. 1 to the Incentive Stock Option Plan on
June 15, 1999.
/s/ Edwin B. McKee
-----------------------------
Edwin B. McKee, Secretary
Patapsco Valley Bancshares, Inc.
<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.
<PAGE>
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 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.
<PAGE>
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.
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
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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 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
<PAGE>
EXHIBIT 10.2
PATAPSCO VALLEY BANCSHARES, INC.
EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
PATAPSCO VALLEY BANCSHARES, INC.
EMPLOYEE STOCK PURCHASE PLAN
----------------------------
AMENDMENT NO. 1
----------------------------
WHEREAS, the Board of Directors and Stockholders of Patapsco
Valley Bancshares, Inc. ("Patapsco") adopted and approved the Employee Stock
Purchase Plan (the "Plan");
WHEREAS, Section Sixteen of the Plan authorizes the President, Chief
Operating Officer, and Chief Financial Officer of Patapsco, as the
Administrators of the Plan (the "Administrators"), to amend the Plan at any
time, provided that no amendment shall affect or impair any of the rights of an
optionee under any option heretofore granted under the Plan;
WHEREAS, the Administrators have found that it is in the best interests
of Patapsco to amend the Plan in the manner set forth herein;
NOW, THEREFORE, the Administrators hereby amend the Plan, effective as
of June 15, 1999, in accordance with Section Sixteen of the Plan:
1. Section Nine of the Plan is amended to add new Paragraph 6 as
follows:
6. Notwithstanding anything to the contrary in the
Plan or in any agreement upon which an option is granted
pursuant to the Plan, in the event of the commencement of a
tender offer (other than by the Corporation) for any shares of
the Corporation, or a sale or transfer, in one or a series of
transactions, of assets having a fair market value of 50% or
more of the fair market value of all assets of the
Corporation, or a merger, consolidation or share exchange
pursuant to which the shares of the Corporation are or may be
exchanged for or converted into cash, property or securities
of another issuer, or the liquidation of the Corporation (an
"Extraordinary Event"), then regardless of whether any option
granted pursuant to the Plan has vested or become fully
exercisable, all options granted pursuant to the Plan, whether
granted before, on, or after June 15, 1999, shall immediately
vest and become fully exercisable for the full number of
shares subject to any such option.
The accelerated exercise right pursuant to this
Paragraph 6 shall be effective on and at all times after the
"Event Date" of the Extraordinary Event. The "Event Date" is
the date of the
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commencement of a tender offer, if the Extraordinary Event is
a tender offer, and in the case of any other Extraordinary
Event, the day preceding the record date in respect of such
Extraordinary Event, or if no record date is fixed, the day
preceding the date as of which shareholders of record become
entitled to the consideration payable in respect of such
Extraordinary Event.
If in the case of an Extraordinary Event other than a
tender offer, notice that is given by an Optionee of the
exercise of an option pursuant to this Paragraph 6 prior to
the Event Date shall be effective on and as of the Event Date.
Upon the exercise of an option after the occurrence of an
Extraordinary Event, the Corporation shall issue, on and as of
the effective date of such exercise, all shares with respect
to which the option shall have been exercised.
If an Optionee fails to exercise his or her option,
in whole or in part, pursuant to this Paragraph 6 upon an
Extraordinary Event, or if there shall be any capital
reorganization or reclassification of the shares, the
Corporation shall take such action as may be necessary to
enable each Optionee to receive such options upon any
subsequent exercise of his or her options, in whole or in
part, in lieu of shares, securities or other assets as were
issuable or payable upon such Extraordinary Event in respect
of, or in exchange for, such shares.
2. Nothing contained herein shall be held to alter, vary, or affect any
of the terms, provisions, or conditions of the Plan other than as stated above.
IN WITNESS WHEREOF, the Administrators of the Plan have executed this
Amendment No. 1 to the Employee Stock Purchase Plan on this 15th day of June,
1999.
/s/ John S. Whiteside
--------------------------
John S. Whiteside, President
Patapsco Valley Bancshares, Inc.
/s/ Kevin P. Huffman
---------------------------
Kevin P. Huffman, COO
Patapsco Valley Bancshares, Inc.
/s/ Barbara M. Boczkowski
---------------------------
Barbara M. Broczkowski, CFO
Patapsco Valley Bancshares, Inc.
<PAGE>
The Board of Directors of Patapsco Valley Bancshares, Inc. duly
approved and ratified Amendment No. 1 to the Employee Stock Purchase Plan on
June 15, 1999.
/s/ Edwin B. McKee
-----------------------------
Edwin B. McKee, Secretary
Patapsco Valley Bancshares, Inc.
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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").
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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 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
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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 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
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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 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
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<PAGE>
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<PERIOD-START> JAN-01-1999
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